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Tefken/Associated Press
Baku-Tbilisi-Ceyhan Pipeline in Ceyhan, southern Turkey

How Will Battle over South Ossetia Affect Foreign Investments?

August 12, 2008 03:08 PM
by Anne Szustek
The outbreak of war in the Caucasus casts a shadow on Georgia’s viability as an energy partner for the West. But is Georgia’s loss Russia’s gain?

A Game of Oil and Borders

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Georgia, until very recently, was considered a strategic safe haven for oil transport—one that would help the European Union remain independent from Russian oil. The 27-country economic bloc currently sources some 25 percent of its oil from Russia.

“The EU grand strategy is to develop Georgia as an alternative route for Caspian oil and gas by bypassing Russia,” journalist and author Michael Klare told the Associated Press. “But if Georgia is no longer a safe passageway, then all of these schemes for diminished dependency on Russia go up in smoke.”

On Monday, a Russian bombing raid nearly hit the BTC pipeline in Georgia—which could add to questions about Georgia’s viability as a strategic energy option.
Adding to Georgia’s economic woes is last Friday’s blast on the Baku-Tbilisi-Ceyhan pipeline, which transports crude oil from the Caspian Sea basin to Turkey’s Mediterranean coast without crossing Russian or Iranian territory, moving roughly 1 million barrels of non-OPEC, non-Russian oil a year.

The PKK, a Kurdish separatist organization classified as a terrorist group by the United States and Turkey, claimed responsibility for the attack, which took place in eastern Turkey. 

BP then announced it was diverting supplies to the Georgian port of Supsa, the terminus of another line beginning in the Azeri capital of Baku.

No major disruptions to oil supply have been reported. Oil prices were actually down at the close of New York trading on Monday, although a stronger dollar could have helped mitigate Caucasus supply concerns.

At least at the clash’s outset, Russia’s financials seem resilient. Moscow’s RTS stock index tumbled 6.5 percent upon news of the fighting, however the market pared 1.2 percent of its losses on Monday, influenced by a statement made by Russian President Dmitry Medvedev that the army had finished a “significant” portion of its incursion in the Caucasus.

Elena Shaftan, a manager at Jupiter Emerging European Opportunities Fund, told the Associated Press that she believes behavioral economics will work to Russia’s advantage in the long term. The war “has no significant impact on Russia’s economic fundamentals and corporate earnings and at the end of the day we firmly believe this is what ultimately drives the markets, rather then emotions and swings in investor sentiment,” Shaftan said.

But the Russian market had been on a downturn for two and a half months prior to the military intervention of this past weekend—especially in terms of foreign direct investment, which has been suffering in part because of the row between BP and Russian oil firm TNK over ownership of their joint venture. The likelihood that the war is going to spark a diplomatic stalemate between Russia and the West also translates into a political risk that some venture capitalists would be more than hesitant to take.

German asset manager Cominvest’s Oliver Stönner-Venkatarama said on the August 11 edition of CNBC’s Squawk Box Europe that the outbreak of war “comes at a very critical point in time because the Russian market has already started to correct before the conflict …Therefore, there is uncertainty in the markets, which is being aggravated by this conflict, and there is definitely more speculation about the overall investment environment.” 

JPMorgan reaffirmed its “underweight” recommendation for Russian stocks. Peter Westin, a strategist for the brokerage, wrote in a letter to investors Monday, “While the fighting continues, we expect the market to remain under pressure as investors seek safer opportunities.” 

But shares in Russian fossil fuel commodities Gazprom, Lukoil and Rosneft, as well as hydropower company RusHydro, are a better prospect for long-term resilience if Georgia’s call for a cease fire holds, as Russia’s stock market could take a rebound, argued Credit Suisse.

Background: Conflict between Georgia and Russia

Related Topic: ‘TNK-BP Wracked by Government Intervention’

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