Russia invades Georgia -- Threatens gas transport?

August 11, 2008

On August 8, Georgia's military tried to retake South Ossetia, a semi-autonomous state along Georgia's border with Russia. In response, Russian extended its armored invasion inside Georgia to capture the city of Gori, and is moving on Abkhazia, another Georgian breakaway state. (See map at end of article)

What Russia's invasion of Georgia means:

Russia may be trying to take over Georgia altogether. At the very least, it is trying to influence the election of its leadership, which has become more pro-Western.

Georgia is in a strategic location between Europe and Asia. It has become an important transit point for gas, oil and other goods by building the Baku-T'bilisi-Erzerum gas pipeline, and the Kars-Akhalkalaki Railroad. In fact, Russia attacked the area that contains the important Baku-Tbilisi-Ceyhan oil pipeline, owned by British Petroleum. (Source: The Economist, Georgia and Russia rattle sabers, April 20, 3008; IHT, Fighting escalates in Caucasus, August 9, 2008; CIA World Factbook)

Georgian President Mikheil Saakashvili been courting U.S. alliances, even sending troops to Iraq, which he has now called back. Georgia and Ukraine, both WTO members, are threatening to block Russia's WTO nomination later this year.

Last April, Germany and other EU members blocked U.S. attempts to give Georgia and Ukraine NATO membership. This lack of support may have emboldened Russia to attack its one-time province.

Abkhazia and South Ossetia are break-away Georgian states that want independence, much like Kosovo did earlier this year. Georgia has only offered autonomy, constitutional changes and veto power on legislation. Russia has peace-keeping troops in both regions, which are more loyal to Russia than Georgia.In fact, Saakashvili has been cracking down on opposition that calls him corrupt. (See Kosovo independence, February 23, 2008)

Georgia Facts:

• GDP is $20.5 billion (PPP), 1% the size of Russia.
• GDP growth rate is 12.4%, 10th fastest in the world.
• GDP per capita is $4,700, slightly less than China
• High FDI in financial sectors.
• Robust agricultural economy.
• Imports most gas and oil, but building hydropower to reduce dependency.

Action steps:
Talk to your financial planner to make sure you have a healthy allocation of gas, oil and other commodities mutual funds in your portfolio. If Russia is successful in regaining control of this strategic area, it will put upward pressure long-term on these commodity prices.

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Map of Georgia, Russia, Abkhazia and South Ossetia

Source: CIA World Factbook