In an increasingly globalized world when two countries pick a fight with one another the rest will suffer in some way. While I am not suggesting that pressures on supply chains and the oil market can ever be equated with the horrors of war, the fact remains that when two modern national economies pick a fight with one another the effects will be felt worldwide.
Georgia seems to be the more economically damaged of the two countries thus far. Its credit rating has recently been reduced from a B+ to a B by the ratings agency Standard and Poor’s (S&P) immediately after the start of the conflict. An economy that has been averaging 10 percent growth for the past few years also faces high inflation and a much smaller growth in GDP this year. Also, oil and gas companies that were beginning to think of the Caucuses as an alternative route from the Caspian to Western markets are having serious second thoughts about billions of dollars of investments.
On the Russian side of the conflict, foreign investors were already feeling the pressure from Prime Minister Putin when he recently decided to attack the coal company Mechel for “tax evasion”. Russia will have to deal primarily with its image problem and the severe political damage that has the potential to send foreign money running. Europe, which has already invested heavily in alternative energy sources, will likely re-double their efforts in an attempt to wean themselves off Russian oil and gas.
Perhaps the most unsettling outcome of this conflict is the end to Thomas Friedman’s Golden Arches theory of conflict resolution, which stated that no two countries with a McDonald’s have ever gone to war with one another. It seems the Ronald is not the statesman he once was.
Published Date: August 14, 2008