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    MOSCOW, August 28 (RIA Novosti) Russia to spend almost half of its budget on new arms race / President Medvedev fails to secure even allies' support / Moscow wants new rules on international stage / Russia may deploy three military bases in Abkhazia, South Ossetia / EU considers two sets of sanctions against Russia

    Vedomosti

    Russia to spend almost half of its budget on new arms race

    Weapons of the future on display in Moscow. Video

    What will happen to the Russian economy if the country really enters an era of isolation and Cold War? That would first hurt budget policy: The arms race requires very serious money. The consolidated budget currently earmarks 2.5% of GDP, or 8% of total spending, for national defense programs. A return to the Soviet era means that 12-13% of GDP, or almost one half of the budget, will go on war.
    Add here spending on our allies i.e., discounts on oil and natural gas prices, and loans. By 1990, the socialist and developing countries owed the U.S.S.R. a total of $123.3 bln it should be noted. The bulk of the debt was subsequently canceled or restructured.
    That would entail cuts in other budget expenditure. To maintain pensions and wages at their current levels, the government will have to dip into the $165 bln hedge fund for "future generations" i.e., the reserve fund and the national wealth fund, therefore fueling inflation. True, inflation could be easily chalked up to the war. However, in three to four years non-military spending will have to be slashed all the same, affecting pensioners, first and foremost.
    Confrontation with the West also encourages capital flight, which affects capital investment, mostly coming from abroad. If capital inflow falls three to four times, GDP growth can lose 8-9 percentage points i.e., stop growing completely.
    In the meantime, the state is attempting to compensate for the capital flight through increased budget spending, which further fuels inflation. At the same time, foreign borrowing is being replaced by domestic borrowing. Because domestic financial resources are limited, interest rates are rising, causing a liquidity problem in the real sector of the economy. It cannot be ruled out that the state will also start actively borrowing money on the market to maintain its military spending levels, which will push interest rates and inflation to new highs.

    Kommersant

    President Medvedev fails to secure even allies' support

    Russia failed to secure support for its policy in the Caucasus from participants in yesterday's summit of the Shanghai Cooperation Organization in Dushanbe, Tajikistan. The leaders of the SCO member states expressed verbal support for Moscow to President Dmitry Medvedev, but in a final statement following the summit they highlighted respect for countries' territorial integrity and spoke out against use of force in international affairs. This means Russia was left virtually alone in its growing confrontation with the West.
    According to sources in the Russian delegation at the summit, Medvedev energetically raised the Georgia issue at all of his bilateral meetings and at a closed session of SCO heads of state on Thursday. All of those he spoke to said they approved of Russia's moves, but refused to declare this in formal statements.
    "All SCO members have their own troubled regions. If any of them recognized the Caucasus republics' independence, claims to their territory would be reinvigorated immediately," a member of the Russian delegation told Kommersant. "China, for example, would face problems in Tibet and the Xinjiang autonomy."
    Another high-ranking source said the partners told Medvedev at the talks that they sympathized with Russia's recognition of Abkhazia and South Ossetia's independence, and apologized for being unable to voice their position in public.
    "Friendship is one thing and business is another... I cannot imagine [the SCO countries in] Dushanbe condemning anyone," said Alexei Malashenko from the Carnegie Moscow Center. "But there were some nuances too. The word 'genocide' was removed from the resolution at China's request. This is a draw, an absolutely expected result."
    Kazakhstan's Communist Party leader, Serikmolsyn Abdildin, said now is not the time for Russia's neighbors and partners to be making strong statements: "[President Nursultan] Nazarbayev looks both to the United States and Russia. He will eventually pick the stronger ally."
    A short thesis that the SCO states "welcome Moscow's approval on August 12 of six principles for resolving the conflict in South Ossetia and back Russia's proactive role in promoting peace and cooperation in the region" was the only consolation to Russia. However, the phrase does not contain a direct approval of Russia's moves.
    The failure to secure the SCO's support in the conflict surrounding Georgia leaves Moscow face to face with the West.

    Gazeta.Ru

    Moscow wants new rules on international stage

    Russia's recognition of the independence of Abkhazia and South Ossetia goes far beyond the regional crisis that has been spreading there since early August. Now it is not all about Georgia and its leader. The stakes have been dramatically raised.
    Moscow seems to have decided to stake everything and play the role of an undertaker of the weird and in many aspects perverted system of international relations, which has shaped up in the world nearly 20 years on from the Cold War.
    The Russian leadership as well as the overwhelming majority of Russian society is openly shocked by the scale and unanimity of support granted to Mikheil Saakashvili in the West. Moscow can genuinely not understand how Europe and the U.S. could be so united in backing a man who overseeing war crimes and scorning everything so tirelessly proclaimed by the "civilized world."
    The conflict of perception seems never to have been as acute as now. Russia sees the Western stance as uncovered cynicism going beyond normal political relations, let alone double standards.
    The emotional environment and the feeling that it is "no use talking" to Western capitals have certainly made the Russian position more radical.
    The domestic factor, most probably, has played its role. Given the public environment set around the war, it was hard to make diplomatic concessions and explain them to the people even though you have TV under control.
    In short, the feeling that Russia yet again is being deprived of the victory that has been won both in moral and military-political terms has caused a sharp change. It seems that the decision to recognize the rebel provinces was taken to cut escape routes and make the situation with Abkhazia and South Ossetia irreversible. It does not show self-confidence, but readiness to take a big risk.
    It is clear that the verdict can be now reversed only by unconditional surrender. Russia has decisively changed course by giving up attempts for its steps to be legitimized by other countries, and is finally refusing to act within the legal framework. Russia relies only on its own power (there is nobody else to lean on) and on the hope that neighboring countries think hard to understand who the real "boss" in the region is. And if the pendulum swings towards Russia on the post-Soviet territory, the matter of working out new international game rules, in which Russia will be an equitable participant, will become practical.
    Fyodor Kulyanov, chief editor of the "Russia in global politics" magazine.

    Vedomosti

    Russia may deploy three military bases in Abkhazia, South Ossetia

    Military experts along with specialists from other departments are evaluating the expediency of deploying Russian military bases, particularly in the Abkhazian towns of Gudaut and Ochamchir and in the South Ossetian town of Dzhava. According to preliminary estimates, some 15,000 Russian military servicemen could be deployed there.
    Konstantin Zatulin, who heads the State Duma committee for CIS affairs, said the town of Gudaut could be used for the deployment of assault troops, air force and air defense detachments, as it already has a military airport, while Ochamchir could host a naval base and allow the relocation of Russian Black Sea Fleet vessels from Ukraine's Sevastopol, and Dzhava could be used as a location for deploying a motorized infantry brigade.
    Meanwhile, Igor Barinov, a first deputy of the State Duma's Defense Committee, said there is no hurry to conclude the relevant agreements as the Russian troops may remain in the conflict zone until Georgia fulfils its obligations on the withdrawal of its troops back to their positions of permanent dislocation.
    The agreements on the bases, Abkhazian Foreign Minister Sergei Shamba said, could be prepared within a month and Abkhazia can offer two former Soviet military bases for the deployment of the new ones.
    Zatulin said the previous number of peacekeepers in South Ossetia is unacceptable and Russia should establish military presence there by placing some 4,000-5,000 soldiers in Abkhazia and around 3,000-4,000 in South Ossetia.
    He also said the government could allocate this year finances for this purpose from reserve funds and to introduce amendments to the budget by 2009, which the State Duma may start discussing next week.

    Kommersant

    EU considers two sets of sanctions against Russia

    On Monday, the EU will meet for an emergency session on Georgia in Brussels, where the 27 heads of government will come up with a joint stance on Russia, including sanctions to force it to pull out its troops from the Caucasus state. Two draft resolutions are currently under discussion - one proposed by Poland, calling for tough measures, and the other sponsored by Italy, which only contains mild criticism.
    A source close to the Kremlin said that Moscow is expecting EU sanctions. Two measures that are not subject to debate by EU countries include putting on hold negotiations on a new partnership and cooperation agreement, and EU efforts to diversify energy supplies to Europe.
    The first is of no real concern to Moscow: PCA negotiations were in any event delayed by a Polish and Lithuanian veto and are but of marginal importance to Russia. They only play a symbolic role, indicating that Russia-EU relations are on track, which currently is under question considering the events on the ground. The second measure, however, appears to be rather dangerous. It could impede the implementation of the Russian-backed Nord and South Stream gas pipeline projects. Furthermore, the Europeans are bound to push for a swifter implementation of the Nabucco project which will pump Caspian oil and gas directly to Europe skirting Russia.
    In the remaining days before the summit, Moscow hopes to be able to persuade some of its EU partners to go for the milder option and stop short of sanctions. Russia's traditional way of dealing with the EU is to split it so that at the summit, the EU leaders get bogged down in recriminations and fail to hammer out a common stance. "Any resolution lacking teeth will be our victory. If we stall the West, we will be free to play according to our own rules," the source said.
    Moscow is likely to target its main potential allies - Germany, Italy, Spain, France and Finland. As a trade-off for their support, it could offer a change in Russia's stance on Iran, as well as economic privileges.

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