MOSCOW, August 12 (RIA Novosti)
Russian parliament considers recognizing independence of South Ossetia and Abkhazia / Independent peacekeepers should monitor Georgian conflict / South Ossetian campaign to cost Russia $440 million / Russian army needs overhauling / International energy projects involving Georgia too risky / Gazprom subsidiary eyes Kazakh oil market
RBC Daily, Nezavisimaya Gazeta
Russian parliament considers recognizing independence of South Ossetia and Abkhazia
It is quite possible that both houses of the Russian parliament will interrupt their vacation this week to pass a law on recognizing independence of the two self-proclaimed republics in the Caucasus, South Ossetia and Abkhazia, RBC Daily reported quoting State Duma sources.
Analysts believe that would de facto cancel the problem of Georgia's territorial integrity.
"It is highly probable that this time the Duma will recognize South Ossetia's and Abkhazia's independence," said Konstantin Zatulin, first deputy chairman of the Duma committee for the CIS and contacts with compatriots, and a United Russia member. According to him, Russia has good reasons to go ahead with it now.
Gennady Gudkov, deputy chairman of the Duma security committee, said: "Legally, both Abkhazia and South Ossetia have more of a basis than Kosovo to claim independence."
It is equally possible that further developments in South Ossetia and Abkhazia will go along the Cyprus scenario.
"Turkey has the Turkish Republic of Northern Cyprus, not officially recognized by the international community, so Russia will have two of them, said Alexei Makarkin, vice president of the Center of Political Technologies, a Moscow think tank. That republic has existed since 1974, and the international community has gotten used to the fact, he added.
Vyacheslav Nikonov, president of the Polity Foundation (another think tank), said the current military operation coupled with Russia's recognition of South Ossetia's and Abkhazia's independence, "will mean that the two republics will never again be a part of Georgia, which would eliminate the very problem of its territorial integrity."
Alexei Arbatov, head of the Russian Academy of Sciences Center for International Security and a scientific council member at the Carnegie Moscow Center, holds the opposite view. He said that recognizing the two republic's independence would be similar to lighting a fire in one's own backyard.
"Russia's recognition of South Ossetia's and Abkhazia's independence would open NATO's doors to Georgia, and foreign troops will be deployed there. In addition, Georgia could provide all-out support to any terrorists, separatists and extremists who made a request," he told Nezavisimaya Gazeta.
"While Russia was sending humanitarian aid packages, making efforts to prevent a humanitarian catastrophe and trying to oust Georgian forces from South Ossetia, it kept to international law and its international commitments, and cannot be blamed for it now. But further shelling of Georgia's territory and recognizing the two self-proclaimed republics would strip Russia of its current moral superiority, at least within the CIS," Arbatov explained.
Independent peacekeepers should monitor Georgian conflict
Russia, which is well-known for its blistering rhetoric, has now demonstrated a strong hand in Ossetia, writes Alexei Malashenko, a Moscow Carnegie Center analyst. It is not ruled out that sides in the conflict will be forced to allow authoritative and independent intermediaries, if not peacekeepers, to step in, because their own efforts are proving unsuccessful in solving the existing conflict.
Early on August 8, the situation appeared threatening. It was ineffective to make grandstanding calls while doing nothing. It was time make a decision, and promptly. But neither one of the Putin-Medvedev duo showed any signs of activity. The premier continued enjoying the opening of the Olympic Games, while the president had been trained only to follow agreed steps.
The turning point, if any, occurred when Europe and the United States clearly called for a ceasefire, which in general implied their displeasure with over-active Saakashvili, who, while calling for a ceasefire, continued the fighting.
Moscow found the moment right to use loaded words, which if had not been done, Russians would have perceived such inaction for cowardice: you have abandoned Serbia and Kosovo and are now South Ossetia, would have been the implication. The blow would have been particularly painful for the prestige of authority in the North Caucasus. Russia was destined to clash with Georgia.
What could be its results? To begin with, this is the first time a very basic fact has emerged: it appears that war is an allowable means of reintegrating broken-up countries despite long years of talks and peacekeeping efforts. The negotiating process has showed its volatility by co-existing alongside military readiness.
Secondly, this new post-Soviet war means a split in the Commonwealth of Independent States. Relationships between Georgia and Russia have started to look increasingly similar to those between Azerbaijan and Armenia. Yes, many will fear Russia. But isn't this the kind of fear that makes former Soviet republics keep their distance from Russia and seek powerful patrons?
Thirdly, the Georgian-Russian war has dealt a blow to President Medvedev, who, with the prime minister absent, had to make far from easy decisions. The increased stature of Moscow hawks in the current military situation need not be mentioned.
Fourthly, the badly chequered Sochi Olympic Games are hanging in the air. If they were held next year, I doubt that anybody would come to them.
Our Western opponents, in condemning Russia (they could not do otherwise), are clearly exasperated at the failure of their peacemaking efforts. Germany, for one, fondly hoped that with time (no matter how long) it would fulfill its mission of being a dove of peace. Now these efforts have been wasted.
South Ossetian campaign to cost Russia $440 million
The Russian government presidium has approved the allocation of 10.5 billion rubles (around $440 million) for the restoration of South Ossetia and assistance for the victims of the conflict. Russia could certainly afford to pay more, but it will still be incomparable to the economic ramifications of the war for Georgia.
"10 or 15 billion rubles is a negligible amount for the Russian budget, Russia won't even notice," said Agvan Mikaelyan, director general of the FinExpertiza consultancy.
The South Ossetian campaign won't even mean additional financing of the army this year, said Finance Minister Alexei Kudrin.
Analysts expect a slowdown in the influx of foreign capital into Russia. "CNN, the BBC and other major news channels have direct influence on the size of that influx, and these channels are not presenting a very good image of Russia," said Yevgeny Nadorshin of Moscow's Trust Investment Bank, adding that this year's shortfall in investment could reach $40 billion.
The South Ossetian conflict is also affecting the Russian ruble exchange rate, as speculators started selling Russian currency sending the euro and the dollar sharply up.
On the other hand, market experts do not see these fluctuations as critical. "Fluctuations following unexpected major events are typical of any market," Mikaelyan said. Lower ruble rates are even good for domestic manufacturers, while a decline in foreign capital inflow may slow down inflation.
But Georgia's economic losses could be much higher. "A war is always more costly for a small economy, said Ruslan Pukhov, director of the Center for Analysis of Strategies and Technologies think tank.
Georgia's military budget is nearly 10% of its GDP, which is three times what Russia spends. Georgia's defense spending amounts to 25% of its national income, which does not exceed $4 billion.
International rating agencies have already downgraded Georgia's IDR from 'BB-' to 'B+' (Fitch) and from 'B+' to 'B' (Standard & Poor's), due to increasing risks of transporting fuel across its territory, Troika Dialog analysts said.
Georgia is having problems with some of the investors. British Templar Minerals decided to evacuate most of its employees involved in a gold mining project in Adzharia and in the development of non-ferrous metals in Georgia.
"Even before the war flared up, Russia's economic blockade was costing Georgia a lot. Ordinary Georgians whose salaries are not paid by the government were hardest hit. The war is yet another blow to the economy. It will require a rise in government expenditure, and compensation to the families of those killed or injured in the conflict," Pukhov added.
Russian army needs overhauling
The Georgian army has not yet tried many of its state-of-the-art weapons in the South Ossetian conflict, but is ready to do so at a decisive moment, Israeli media reported.
Russia could block the weapon deliveries to Georgia by destroying runways at its all airfields, but two key factors are lacking: the Kremlin's political will and modern means of targeting.
"In armaments our army is as good as Georgia's, but we are woefully inadequate in technical command and control equipment," said a source on Russia's General Staff. "Night-vision devices and high-quality communication facilities are things we do not have."
"Only the Su-24 is capable of flying at night, the rest of our aircraft are totally blind in the dark," said Alexander Khramchikhin, an analyst at the Institute of Political and Military Analysis. "Unmanned aerial vehicles remain our unfulfilled dream."
Experts say the crash of a Russian Tu-22 bomber in the conflict area was due to a Russian technical deficiency. The bomber is designed to deliver nuclear strikes from great heights, and its bombs are allowed to stray by as much as 1.5 kilometers. To make conventional bombs effective in these conditions, the plane must either be equipped with high-precision weapons, which Russia lacks, or descend and risk exposure to anti-aircraft fire.
Even Georgia's Soviet-made T-72 tanks are better equipped than their Russian counterparts. Georgia has re-engineered its inventory of 165 T-72 tanks by fitting them out with the GPS navigation system, identification systems, thermal imagery systems for targeting fire, and up-to-date Falcon communication systems. The Georgian version of the tank, the T-72-SIM-1, is capable of night fighting and in adverse weather conditions, which is beyond the capability of Russian tanks.
The course of the war has shown that the Russian army needs overhauling. Meanwhile yesterday Finance Minister Alexei Kudrin refused to back a proposal by key security ministries to increase defense spending.
"The expenditure in the military industrial sector was set in line with the requirements of the 2007-2015 state program for weapons development, and all extra programs suggested by the siloviki have been turned down by the Finance Ministry," the minister said.
International energy projects involving Georgia too risky
The complete destruction of fuel transit routes across Georgia could lead to an interruption of supplies. The Troika Dialog brokerage estimates losses could reach 1.6 million bbl of oil equivalent per day, or around $170 million in dollar terms.
However, experts believe that the problems plaguing international oil and gas projects in Georgia will benefit Russian projects instead.
Azerbaijan, who had until recently transported over 800 bbl per day of oil across Georgia, began shrinking production, while Kazakhstan opted for reorienting its export flows to domestic use.
"The Batumi port has shut and is only accepting freight for storage, but we have evacuated all our tankers and dry cargo ships from it," said Ilya Pustogachev, director for information policy at KazMunaiGaz. "We decided to halt exports along this route until the situation stabilizes."
Georgia's image could be damaged beyond redemption by the reversed export flows, analysts say.
"Georgia has been playing an increasingly important role in transiting crude oil and petroleum products, mainly to Europe, in the past 5-10 years. That country is considered by several major international oil and gas projects as one of the possible routes to transit fuels from Central Asia to international markets, including to the Black Sea states," Troika Dialog analysts said.
The current conflict is increasing the risks for using Georgia's territory for international oil and gas projects. These concerns could be of help in lobbying for Russian energy transportation projects.
"The geopolitical instability in the Caucasus could push producers to use other oil transportation routes," said Alexander Shtok, head of Due Diligence at 2K-Business Consulting. "It is also true of Russian gas shipments across the Black Sea, South Stream and Blue Stream."
Vitaly Kryukov from the Kapital Investment Group does not share this opinion: "Most of the pipeline projects considered by the international community, including those involving Georgia, had political motives rather than economic ones. Final decisions will therefore be made based on political practicalities, which haven't changed," he said.
Gazprom subsidiary eyes Kazakh oil market
Gazprom Neft has set its sights on Kazakhstan's consumer oil market. Aside from a 49% stake in MangistauMunaiGaz, which is the owner of the country's largest chain of filling stations, Gazprom's subsidiary wants to buy another chain and diversify into aviation fuel sales.
Gazprom Neft is already operating in Kyrgyzstan and Belarus. Boris Zilbermints, its deputy head for exploration and mining, believes that the company should aim at "something bigger" on the Kazakh market, although, he said, the market is full of proposals from smaller Kazakh companies.
Zilbermints said "the best thing for Gazprom Neft would be a vertically integrated structure for the delivery of oil products, which could be secured by buying a stake in the MMG, but we are also considering the option of purchasing individual filling stations to form a chain."
Kazakhstan has 4,000 gasoline stations, with 30% of them owned by the MMG.
Gazprom Neft is looking to supply not only gasoline but also aviation fuel to consumers. Its sales are handled by a subsidiary, Gazpromneft-Aero, which runs a number of refueling centers at Russian airports. According to Zilbermints, everything will depend on a decision by airport owners in Kazakhstan, but some of them have already announced they would like to have their own refueling centers. One is the managing company at Aktau airport.
Denis Borisov, a Solid brokerage analyst, said it would be better for Gazprom Neft to buy a stake in the MMG rather than purchase individual filling stations. "When a company is assessed, the focus is usually placed on output and current oil prices. Besides, in buying a complete chain, Gazprom Neft will also get an up-and-running logistic base," the analyst said. He said the 49% stake in the MMG is estimated at $2-$2.5 billion.
Vitaly Kryukov from Kapital Investment Group said Gazprom Neft had a good chance of becoming an MMG shareholder. He said other would-be members were LUKoil and Rosneft.
As calculated by Kryukov, on the condition that MangistauMunaiGaz has 30% of Kazakhstan's fuel market, Gazprom Neft, if it buys a 45% stake in the company, could corner 10% to 15% of the market. He said Gazprom Neft was unlikely to meet any obstacles from Kazakhstan's authorities in entering the market.
If the company joins the MMG, it will lease the MMG's Pavlodar refinery to run at full capacity and invest in its renovation. If the company merely buys a chain of filling stations, it will increase oil product sales on Kazakhstan's domestic market anyway, keeping down fuel prices.
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