Updated August 27, 2008

   After Russia's president Dmitry Medvedev recognized South Ossetia and Abkhazia's independence, the confrontation with the West intensified, and it carries either political and economic risks for Russia. Russia can somewhat face the economic isolation from

the West. However, it doesn't go about any termination of the cooperation at all, since it is completely unfavorable for both parties. Even under the worst scenario, Russia can reckon on Asia and the internal resources.

   "There is little direct economic risks, however, there is some indirect ones for sure", as Merrill Lynch's ec onomist

on Russia and the CIS Julia Tseplyaeva says. One of the most important among them is the outflow of the foreign investments and investors from the Russian securities. The political risks turned the Russian stock market into the world's cheapest market – the ratio of the companies' capitalization to their forecasted income is lower now as compared to the crisis of 1998.

According to the calculations of Renaissance Capital, in 2009 the ratio of the market's capitalization to the forecasted income of the issuers (P/E) is at 6,1 level, while in mid-May th

"The statements about the buyback can support the market from the psychological viewpoint and tell the investors that both the stockholders and the companies' management care about the falling dynamics of the quotations", as Alfa Capital asset manager Andrey Kilin is convinced.

   In the opinion of Mrs. Belenkaja, if any problems with the attraction of loans arise, the government will lend the companies using the internal resources (the state funds' facilities) if needed. "On the background of such surplus of the current operations' accounts, the capital outflow from Russia shouldn't level the risks for the Russian economy", as Mrs. Tseplyaeva says. "From the viewpoint of the forecasts for the nearest years, the reduction of the access to the western loans can be solved by means of the stake increase of the Asian and Russian financial institutions in the loan portfolios of the Russian banks", as Finam Management top-economist Alexander Osin says.

"It is better to mark that the period of „the cheap money" in the world economy would obviously be finalized without any influence of the geopolitical changes. In relation to the mortgage crisis and the expected weakening of the world economy, the investors overestimate the risks of investments and inflation towards the increase. On this background, the stabilization of the global investment risks implies the stabilization of the rates of resources' attraction at the already developed and developing markets in the long-term prospect".

As for the direct foreign investments, they were quite small, even until recently – 1% of GDP, and the will hardly be lower.

   "The Russian market, especially the consumer one to which the major part of the direct foreign investments is allocated, continues accelerating, and even quicker than both in Europe and in the USA. So, the foreign investors would hardly want to stop their projects because of the political tensions only, since nobody wants to bear losses", as Mrs. Belenkaja says.

   "The strategic course Russia has chosen for the other industries is directed to the increase of the government's participation in the investment process rather than to the development of the attractive investment climate for the foreign investors, therefore the situation will not change here", as Mrs. Tseplyaeva considers.

   The second risk is a freezing of Russia's entry to the WTO. "The most severe negative effect is the postponed entry to the WTO sine die and the freezing of some Russia's obligations that it has already undertaken", as Mrs. Tseplyaeva says. " The competition would harden the Russian producer and would make it stronger and more competitive in the mid-term and long-term prospect.

The make of Zhiguli didn't become better from the technological viewpoint foremost.

So, now, when inexpensive foreign cars have appeared, AvtoVAZ shows some obvious progress. Moreover, when Russia entered the WTO, it obliged continuing the further liberalization of the economy and limited the government control. So, the revision of the happening is quite possible now". Still, it doesn't frighten the Russian producers. "If we reason pragmatically about the prospects of our business in the new political realities, I don't see any grounds for worrying: PomidorProm is purchasing the primary products either in Russia or in the Asian countries; the holding sells 98% of its produced products in Russia under the national brand Ogorodniki; the entry to the WTO threatens our business with the reduction of taxes on the imported agricultural products, and the going-up ruble has been reducing the competitiveness of all processing enterprises of the country", as the chairman of PomidorProm Holding directors' board Maxim Protasov says.

   In Mr. Osin's opinion, the limitation of the Russian companies' access to the intellectual, technical and production resources of the western countries can become a serious problem.

It is of primary importance for the Russian Federation to keep up the pace with "the technological race", like in the 70th and 80th, during the stagflation", the expert marks. "However, now the Russian economy and

the financial and political system are more flexible despite the drawbacks, and they are targeted at the realization of the internal intellectual potential. The external market of innovations became more flexible as well. In this case, Russia keeps the opportunity of providing its tasks in the area of the economy's technological growth. Thus, it is better to mark that even before the conflict with Georgia, Russia faced considerable problems of the integration into the world's industrial community".

   Another risk Russia can face is the limitation of the Russian companies' access to the West.

"Our opportunities of buying assets abroad are limited now. However, even before the war conflict, the European countries didn't welcome the entry of the Russian investors", as Mr. Protasov considers. Nevertheless, during the military operations in Georgia, the Russian companies announced about two large investments at the market of the USA.

Severstal declared about the completed deal on the purchase of the US steel-making company Esmark Incorporated, and Novolipetsk Steel JSC declared about the purchase of pipes and tubes' producer in the USA – John Maneely Company (JMC).

   Finally, the last risk is the intentions of the West to refuse from Russia's energy resources. In the article published in The Wall Street Journal, the American senators Lindsey Graham and Joe Liberman recommend to establish in the long-term prospect a transatlantic energy alliance not to depend on Russia. However, the Russian experts treat this idea skeptically.

"This idea lacks economical practicality because they don't have the required infrastructure and sufficient resources", as Capital Investment Company analyst Vitaly Kryukov says.

"The key transport routes cross the territory of Russia, and their resource base of gas is too small. Turkmenia has already signed the long-term contracts with Russia,

and Azerbaijan can export maximum 10 bcm. Kazakhstan and Uzbekistan don't want to break relations with Russia. Only Iran is left, but the EU would hardly cooperate with it. The situation with oil is better, but everything depends on pipelines here. However, if the government wishes, it can construct new ones, but it is impractical from the economic viewpoint". So, Russia shouldn't expect the economic catastrophe.