Dealing with Russia

Following up on yesterday’s post about the costs of Russia’s invasion of Georgia, Richard Hainsworth has a great article in Moscow Times (via The Russia Blog) comparing market reactions to the conflict with the reaction to the American invasion of Iraq (barely a blip):

Whatever the reasons or motivations for Russia’s invasion into the sovereign territory of another country, investors were not prepared for this unpleasant surprise. Their investment models did not include this factor. When U.S. troops go anywhere, they are accompanied by journalists, news conferences and public warnings. Investors may not like a military conflict and they may be severely damaged by it, but they are prepared.

Investors of some sort will return to the Russian market — as long as there is profit to be made in relation to the risk. But first they will want to understand how to predict Russia’s reactions. What matters is the model they build, the economic and political risks that they attach to Russia, and the profit they will need to compensate for these risks.

I argued yesterday that the limited objectives of the invasion mitigated the initial alarm it caused by demonstrating the Russians’ strategic discipline. But Hainsworth’s point about market costs applies to geopolitical costs, as well. Russia decided to play the “strategic surprise” card, which for obvious reasons is an unsettling one, and for the same reasons magnifies the communication impact of the operation.

But the “strategic surprise” card is one that’s only effective once. Played repeatedly and the surprise becomes a reputation. So Russia now has an interest in reassuring the U.S. and the EU about its willingness to cooperate as a stable and predictable partner. Whether or not it does so will depend on the extent to which the U.S. and EU are willing to accomodate Russia’s claims for an immediate sphere of influence and a recalibrated global weight.

So far, the EU has been willing to let Nicolas Sarkozy navigate the conflict, and he seems to be getting commitments (if little follow through) from Moscow. But the commitments are significant (from Le Monde): removal of checkpoints within Georgia this week, withdrawal from Georgian territory beyond Abkhazia and South Ossetia within a month, the acceptance of a 200-strong EU observation mission in the buffer zones around the provinces by October 1, and international talks on the conflict next month in Geneva.

The U.S. has chosen a more confrontational position, sending naval vessels (under cover of a humanitarian aid mission to Georgia) into the Black Sea and freezing a U.S.-Russian civilian nuclear deal. The result is joint Russian-Venezuelan naval exercises (cue the laugh track) come December. The problem with the American approach isn’t the comic spectacle threat of a Russian naval presence in the Western Hemisphere, but rather that a policy of confrontation endangers the many essential issues on which we need Russian cooperation. The nuclear agreement, for instance, was a mutually beneficial deal that had non-proliferation implications (see Richard Weitz’s WPR analysis here).

The American position might be right on the merits (integrity of Georgian territory, defending a young democracy), but as a friend of mine once said, being right is overrated. Russia is back, and it’s not America, which means that its values and interests won’t be identical to ours. There are plenty of ways in which we can orchestrate that into a net gain, but not if we insist on a zero sum approach.

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