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Market Matters: As Conflict Ends, Markets on Road to Recovery
After tumbling to its lowest point in almost two years on Tuesday, Russia's MICEX Index began to slowly claw its way back over the rest of the week, suggesting a possible end to the volatility that has plagued the country's markets since tensions erupted between Russia and Georgia on Aug. 8.

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Thursday, September 04, 2008 Updated at 04 September 2008 0:18 Moscow Time.

The Moscow Times » Issue 3968 » Opinion

The Kremlin's New Containment Policy

18 August 2008By Lilia Shevtsova

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The war between Russia and Georgia is not about disputed territory or the personal animosity between Prime Minister Vladimir Putin and Georgian President Mikheil Saakashvili. Nor is it about Moscow's moral claims to defend the Ossetians -- whether they are South Ossetians or North Ossetians. After all, Russia bears responsibility for not only failing to avert the tragedy in Beslan, located in North Ossetia, but also for the botched rescue attempt that resulted in unnecessary casualties. The current armed conflict between Moscow and Tbilisi is about power and survival.

True, there are other factors that contributed to the conflict, such as Russia's failure to play a stabilizing role in the region after the collapse of the Soviet Union, as well as Saakashvili's reckless provocations. But even if you combine all of these elements, they probably wouldn't have been enough to trigger last week's war.

The deciding factor was Georgia's intention to join NATO and NATO's plans to eventually offer membership to the two countries, which Secretary-General Jaap de Hoop Scheffer reiterated at the April NATO conference in Bucharest. The worst nightmare for the Russian elite would be Georgia (and Ukraine) becoming full NATO members. NATO encirclement would be a serious threat for a state that defines itself through highly personalized power and a constant search for internal and external enemies. Putin and President Dmitry Medvedev cannot control the country without maintaining this image of Russia as a "besieged fortress."

The elite, who have relied on hyped-up anti-Western and especially anti-U.S. rhetoric as a key component of their foreign policy and as a means to mobilize public support, had to strike before they lost their strategic backyard to the West. Ossetians and Georgians were, unfortunately, in the wrong place at the wrong time.

By teaching the Georgians a lesson, Moscow sent Ukraine and other countries it considers within its sphere of influence a warning: It may be dangerous to have such warm relations with the West.

Russia's military response had another purpose as well -- to show that the Medvedev-Putin tandem can be tough. This show of strength was particularly important because the elite had started to fragment and the public was starting to wonder who was really in control of the country.

The war has demonstrated the emergence of the Kremlin's new "containment policy" targeted at the West. The country's elite have turned fiery anti-Western and anti-Georgian rhetoric into military action by attacking beyond Russia's borders. Yet it is the West that has given the Kremlin the justification it needs. Russian propaganda has taken full advantage of the West's double standard and hypocrisy regarding its selective interpretation of "regime change, ethnic cleansing, genocide and humanitarian intervention" in Iraq and Serbia.

Georgia needs to forget about its territorial integrity and accept the loss of Abkhazia and South Ossetia. Further, if Georgia wants to put an end to the conflict, it might need Saakashvili to step down and allow a more pragmatic leader to come to power. Ironically, Moscow, by attempting to oust Saakashvili, may actually facilitate Georgia's NATO membership.

The war has intensified a conservative backlash in Russia. The country is now highly unified against the West -- not unlike the consensus before the second Chechen war, which helped Putin's rise to power.

Even those that have traditionally belonged to the liberal camp quickly switched gears to support the official line and blast the Georgians. The Kremlin has convinced most Russians that the West, under the banner of liberalism and democracy, has been able to carry out color revolutions in Ukraine and Georgia. This helps explain why there is no strong democratic opposition in Russia; no one wants to be considered a U.S. stooge or a fifth column. When the country is so united against its "enemies," there is no need for the Kremlin or the White House to restart reforms. Why rock the boat? If Medvedev had any serious modernization plans before the war started, he has no other choice now but to drop these plans now. His top priority is to show that he is a strong commander-in-chief during a military conflict.

There is evidence, however, that the Russian ruling tandem may also be seeking reconciliation with the West, following Putin's model of "for and against the West at the same time." Some members of the elite feel that its time to mend fences in order to prevent Western ostracism of Russia, which may put their accounts in Western banks at risk. Ukraine will be a test as to whether the Kremlin still feels a need to flex its muscles. If Kiev insists on joining NATO, Crimea could easily become a point of heightened conflict between Russia and Ukraine, particularly if Crimea seeks some kind of union with Russia.

What about the West? It is split between the hawks, such as U.S. presidential candidate John McCain, who has repeatedly called for kicking Russia out of the Group of Eight, and the doves, such as Italian Prime Minister Silvio Berlusconi. Up to this point, the West has not been able to pursue a dual policy of engaging Russia and getting Moscow to abide by the membership rules it has pledged to follow as a member of certain international organizations.

In any case, the drama in the Caucasus continues. It could destroy not only Medvedev's political future, but it could also dampen investor confidence in the country for years and cripple Russia's ability to modernize. Moreover, this conflict could have a long-term negative impact on U.S.-Russian relations and become an important factor in whom the American voters choose in the presidential election in November.

And so much of this mess was caused by the Kremlin's inferiority complex.

Lilia Shevtsova is a senior associate at the Carnegie Moscow Center.