The Russian – Georgian War

While the finance world is concerned with its own problems of writedowns and deflating asset prices, a proxy war of great importance is being fought in the country of Georgia. It has everything to do with both a Russo-American power struggle and oil, with far-reaching implications for geopolitics.

This war started as a clash between the central government of Georgia and the separatist rebels of the largely Russian South Ossetia breakaway province. This ethnically-Russian province of 70,000 first sought to break from Georgia in the early 1990s when the Soviet Union collapsed. With Vladimir Putin in China at the Olympics, Georgia struck to take control of the government there, hoping Russia would not respond as Putin was out of the country.

Russia did strike back and routed the Georgian troops, sending them fleeing south out of South Ossetia. Georgia has since unilaterally offered a cease-fire, but Russia looks to be pressing its advantage. Score this one Russia 1 – Georgia 0.

Meanwhile energy colossus BP has shut down two of the three pipelines that run through Georgia as a precautionary measure. These pipelines, connecting the oil fields of the Caspian Sea to Turkey and collectively called the BTC, are the second largest pipeline in the world. They are of vital importance to Europe for oil supplies. The 1000 miles pipe up to 1 million barrels of oil a day to the west.

So, obviously this is a big problem. Strangely, the reaction in oil markets remains muted, suggesting that demand destruction — as evidenced by the IEA demand forecast cut — remains uppermost in traders’ minds.

Russian concerns about U.S. hegemony
Everyone in the foreign affairs world is buzzing about this because it demonstrates the degree to which US-Russian relations have deteriorated under the Bush Administration. Russia sees the U.S. as a global hegemon, looking to expand its sphere of influence eastward into the Caucasus, and Central Asia, two oil rich regions.

Since the fall of the Soviet Union, Russia has seen its economic and political power shredded. It has witnessed the exiting of Eastern Europe, the Baltics and arguably the former Yugoslavia from its sphere of influence. It has lost oil-rich areas in the Caucasus and Central Asia. It has seen important bilateral nuclear agreements with the U.S. unilaterally disregarded. And it has seen rich Western companies trying to snap up access to vital oil reserves within Russia. With a number of Eastern European countries having entered NATO and/or the EU, Russia has drawn the line at Georgia.

The U.S. looked to bring Georgia into NATO, effectively putting NATO right on Russia’s doorstep. While Bush et al. see no harm in this, Russia sees NATO behavior as a direct military and economic threat and used this opportunity to end this threat. Just last year Russia warned that NATO incursion into its sphere was a threat:

U.S. plans to expand its embryonic missile defence shield to the Czech Republic and Poland are an “an obvious threat”, the Russian military says.

Poland has confirmed the U.S. wants to negotiate the use of its territory to build part of its missile defence base.

On Sunday, the U.S. asked permission from the Czech Republic and received the backing of Czech PM Mirek Topolanek.

Washington says it needs interceptor missiles in Europe to stop attacks by states like Iran or North Korea.

It hopes to build a radar station in the Czech Republic and to site interceptors in Poland.

Poland’s Deputy Foreign Minister Witold Waszczykowski confirmed that Washington has approached Warsaw over the project and said: “We are now waiting for firm proposals.”

But Moscow insists that the installation of U.S. missiles in countries close to its western border would change the strategic balance in Europe.

Lt Gen Vladimir Popovkin, commander of Russia’s space forces, said Moscow would interpret the move as a military threat.
–BBC News, 22 Jan 2007

Why does the Bush Administration think bringing Georgia, a vital hub in oil transportation, does not represent a threat to Russia?

BRIC looks to end U.S. hegemony
From Russia’s point of view, they feel marginalized and disrespected by the US. At every turn, Russia is now seeking to thwart U.S. hegemony. One should see the Georgian conflict as proxy war in which Russia is drawing a line in the sand. Going forward, Russia will be much more aggressive in defending its economic national interest and its sphere of influence in the Caucasus and Central Asia.

Moreover, Russia is not the only nation concerned about U.S. power. China, India and Brazil, together with Russia, make up a group called BRIC which is now forming as a counterbalance to the United States on the world economic and political stage.

This will have important implications regarding the procurement of natural resources in Africa, Latin America, Asia the Middle East and elsewhere. Right now, BRIC nations are going around and rounding up alliances with anyone not currently under the US’s sphere of influence. China’s bold proposed oil contract with Iraq demonstrates how far BRIC nations will go to expand their access to raw materials and thwart U.S. hegemony.

America’s diplomats need to understand the playing field is tilting away from the United States. What the U.S. needs now is less bombast and more diplomacy if it is to continue playing the role as the world’s only superpower. In the end, the world may be moving to a more chaotic multi-polar framework with unforeseeable economic consequences.