Seven Questions: Russia Plays ‘Realpolitik with Bare Knuckles’

Foreign Policy: What has Russia been trying to achieve in Georgia the last few days?

Clifford Kupchan: I think Russia was pursuing multiple objectives. The first was a reaction to the Georgian attack on Tskhinvali, the capital of South Ossetia, and a determination to drive Georgia out.

After that, a torrent of Russian anger flowed forward, motivated by the pursuit of several goals. First, to send a strong message that neighboring post-Soviet states will face serious consequences for seeking membership accession plans with NATO. Second, and relatedly, that the Caucasus is an area that Russia will ultimately in the end control. In the NATO and sphere of influence arena, they were settling scores for 18 years of Western policy designed to pry those states away and into the national system. Thirdly, to increase the circle of risk around the trans-Caucaus energy corridor and increase the likelihood of future (especially) oil and (even) gas lines passing through Russia. In that order.

FP: Oil markets have barely blinked the past few days, though, even as the Baku-Tbilisi-Ceyhan (BTC) pipeline has gone offline. Whats going on?

CK: The first point is that investors and markets, for many reasons, are in a bearish frame of mind. They are going to pay much more attention to bearish signals than bullish signals, period.

Secondly, markets know that the PKK [Kurdish guerrillas in Turkey], not the Russians, took BTC and its 850,000 barrels a day offline. I think that they are betting that BTC will come back online sooner rather than later and, correctly or incorrectly, dont perceive major risk from this war to that line.

So, for a combination of reasons, this war has not exerted significant upward pressure on oil markets. But you cant prove a counterfactual. If the war had not happened, oil could be a few dollars lower right now. So, we dont know what the hidden price support from the war has been.

What I think is more important about the Russo-Georgian war for regional energy flows is not the present but the future. Multinationals and large investors will draw a big, bright red circle of risk around the South Caucasus energy corridor that the United States for over a decade now has gone to such great lengths to construct, and be more reluctant to ship new volumes through that corridor.

For example, the giant Kashagan field in Kazakhstan is just coming online. Instead ofas is being consideredbarging significant volumes across the Caspian to Azerbaijan and into Baku-Ceyhan, or some supplemental South Caucasus line, I think the Kazakhs are much more likely to send that oil on a safer path, either through Russia or off to China.

FP: And thats what Russia wanted?

CK: I dont think it was the primary objectivethats why I listed it fourth. But certainly, Russia has vocally objected to the stated U.S. policy of the construction of multiple pipelines. Implicit within that, in my view, and thinly veiled in U.S. policy, has been construction of a line that guarantees access for Central Asian and Caucasus hydrocarbons to world markets.

In English, that means construction of a line that doesnt go through Russia. And so, I think a second-level reason for this invasion was to say, OK, enough. Were going to be playing realpolitik with bare knuckles from here on out, both with Georgia and in the great energy game.

FP: What does this mean for the Trans-Caspian gas pipeline? Is it effectively dead now?

CK: The chances before were slim to none. Now theyre nudging toward none. From economic to producer-country to environmental reasons, thereve been tremendous problems over a decade in getting that line built. This does drive another nail into the chances for that line.

FP: Do you see any likelihood that Russia would try to use its newfound increased leverage in Georgia to somehow get control of the existing BTC pipeline?

CK: My instinct is no, that theres still just so far Russias going to go here. Now, there have been unconfirmed reports that Russia targeted the line in recent fighting and missed. I dont know if thats true or not.

The wild card here is: Where are the Russians going to stop? They seem to be kind of on a bender right now, so its hard to rule anything out. But since Medvedev did announce an end to hostilities (except for cleaning out pockets of hostility, and thats a big except) and since theyve worked with [French Foreign Minister Bernard] Kouchner and the crisis has been somewhat internationalized, my instinctthough not my convictionis that they wont interfere with or bring down a crown jewel like Baku-Tbilisi-Ceyhan.

FP: Whats the impact of this war on the Russian market? Is it hurting the Russian image among investors?

CK: Politics and markets, over the last two to four years, have spoken to Russia with very different voices; politics with a harsh voice, and markets with a very attracted voice. The Russian stock market has been in a dive over the last month or so. During the war, there was great volatility, and the market has dropped heavily when the prospects for piece seemed dimmer.

As far as portfolio investors and the Russian stock market are concerned, the main tipping point was the four days following July 24, when TNK-BPs Robert Dudley left the country, and shortly after that, Putin went after the steel company Mechal and took about $6 billion off its capitalization. Those behaviors really rattled investors and caused a steep dip in the Russian stock market. The wars effect has been less dramatic.

More broadly, I think Russia as an island of stability and a safe haven from the credit crunchthat perception of Russia is on life support. Essentially over. Theres been four reasons: TNK-BP, Mechal, the Russian governments willingness to use administrative means to break up cartels and implement de facto price controls (which means theres more strategic risk in consumer sectors as well as strategic sectors), and fourth is the war. When you add those four together, the investment climate has taken a real, real hit over the last month.

FP: Are there any means with which Europe and the United States can punish Russia economically and politically now? Do you see that happening?

CK: We have very little leverage. The headline measures that you read aboutthrowing them out of the G-8, denying membership to the OECD, stopping WTO negotiationswont be very effective. Frankly, I dont think the Russians really care about the G-8, and the WTO requires a bilateral agreement with Georgia, so thats not likely.

There are steps we can take to push back, though. The Russians have a very proud elite. I think that over time the U.S. will curtail the number of bilateral meetings and some European countries will go along. Ostracism is too strong [a word] [its more like] selective avoidance. No more military exercises. I think the strongest measure, which could and maybe should be on the table, is a sober discussion of the run-up to the 2014 Sochi Olympics, which are a crown jewel in Russias planning.

Were still in the early days, and the Untied States will, I think, help reconstruct Georgia will help reconstruct the Georgian security forces. We dont know what the endgame is going to be yet, so I think jumping to conclusions on what the United States can and should is premature. But are there things we will do? Yes? Are there things we can do? Yes? Can we punish Russia economically? No. Are there things that would make Russia chafe at least somewhat? Yes. Thats my best answer.

Clifford Kupchan, a fluent Russian speaker, is director for Europe and Eurasia at the Eurasia Group, a private political risk advisory and consulting firm.