Oil and Gas

Russian markets paying price for Georgia action: U.S.

WASHINGTON (Reuters) - Russian markets are paying a big price for Moscow’s “reckless” decision to invade Georgia, which spurred capital to flee Russia and weakened its currency, a senior U.S. official said on Wednesday.

A trader looks into a screen at Alfa Bank in Moscow September 17, 2008. Russian stocks plumbed new lows on Wednesday in the worst decline in at least a decade, as first anti-crisis measures by the government and a salvage plan for a brokerage failed to ease the crisis of confidence on the market. REUTERS/Thomas Peter

“At least in part because of the Georgia crisis, Russian financial markets have lost nearly a third of their value, with losses in market capitalization of hundreds of billions of dollars,” William Burns, undersecretary of state for political affairs, told a Senate hearing.

The Russian rouble has depreciated nearly 10 percent since Russia crushed an attempt last month by its pro-Western neighbor Georgia to retake the separatist region of South Ossetia, Burns told the Senate Foreign Relations Committee.

“Capital is fleeing Russia, with $7 billion leaving on August 8 alone,” he said. Opportunity costs for Russia are even greater, with its plans to diversify the economy and rebuild infrastructure at risk, Burns said.

“Russia and the Russian people are paying a considerable price for their country’s disproportionate military action,” he said.

“Russia’s actions in Georgia, particularly its reckless decisions to invade Georgia and recognize South Ossetia and Abkhazia, are deplorable,” he said, referring to two breakaway regions of Georgia.

The August war between Russia and Georgia erupted after Tbilisi tried to retake the breakaway province of South Ossetia. Russian troops entered South Ossetia and another rebel region, Abkhazia, and then moved into Georgia proper, drawing criticism from the West that Moscow had gone too far.

Russia recognized both regions as independent states despite having been a party to past U.N. resolutions recognizing Georgia’s international borders.

Russian President Dmitry Medvedev signed treaties with South Ossetia and Abkhazia on Wednesday that committed Moscow to defend the breakaway regions from any Georgian attack.

“I think that agreement just makes a bad situation worse,” Burns told reporters after the hearing.


Russian bourses halted stock and bond trading on Wednesday amid the worst falls since the country’s 1998 financial collapse, and the Finance Ministry pledged $60 billion to help local banks.

Investors were dumping Russian assets amid a global financial crisis sparked by turmoil on Wall Street. The crisis combined with falling oil prices and Moscow’s war with Georgia to form an especially toxic cocktail for local markets.

Sen. Chris Dodd, presiding over the Senate hearing, agreed Russia was paying some real costs” for its behavior in Georgia although global economic problems had a “huge effect as well.”

“If Russia does not re-establish a reputation as a country that abides by the rules at home and abroad, it may sacrifice ... its economic success,” said Dodd, a Connecticut Democrat who is also chairman of the banking committee.

Burns repeated the Bush administration’s stance that there could be no “business as usual” with Russia until it keeps commitments to withdraw troops from Georgia to pre-conflict positions.

He said Washington already had withdrawn a civilian nuclear agreement with Russia and suspended U.S.-Russian bilateral military programs and “we continue to review other options.”

Bush administration officials have said the civilian nuclear deal likely would have been killed by Congress had it not been withdrawn, and their decision to do so saved it for possible resubmission at a later date.

Washington has an interest in working with Russia on some issues, including joining other major powers to press Iran to suspend its nuclear work, Burns said. Washington suspects Iran is developing civilian nuclear power to build a bomb, although Iran denies it.

“On some critically important issues, like combating nuclear terrorism and nonproliferation, we have a hard-headed interest in working with Russia, as we will be doing when my Russian counterpart joins the rest of our ... colleagues in another round of discussions on Iran the day after tomorrow in Washington,” Burns said.

Reporting by Susan Cornwell; Editing by David Alexander and Bill Trott