Russian economy to remain strong despite military action in South Ossetia

As the military conflict in South Ossetia evolves, experts and economists are considering the economic outcome for the sides involved. Most say Russia's economy won't face major problems.

Any military conflict usually deters investment. Uncertainty and instability are the worst factors for any investor. The conflict in South Ossetia was no exception and inevitably had an impact on the Russian financial system.

The immediate reaction was panic and a meltdown on the stock market. The Russian rouble fell. Experts admit that Russia's investment image has been tarnished, and time and effort will be needed to restore it. Evgeny Nadorshin, Chief economist at Trust Bank says foreign direct investment will be lower.

“Definitely Russia is to face the smaller inflow of foreign direct investments and actually the interest of foreign investors to Russian local market will be significantly lower after these events.”

However, it's not only the military operation in South Ossetia that is influencing the investment climate now. Scott Semet, Managing Director of Kapital Investment Group says it comes when the markets have other factors to deal with.

“The declines in Russia's stock prices, bond prices and the rouble I think are more the effect of  problems that have been going for a year like the credit crunch, it's just more difficult for Russian companies to borrow money abroad. I think it's more of a general tendency in the market than anything specifically related to Georgia.”

Some funds from Russia's budget have already been allocated for restoration of the devastated republic.

But experts say the situation is not critical for Russia's economy – unlike Georgia, which may face really tough times in the near future. Evgeny Nadorshin says Russia’s strong economic fundamentals will limit any downside.

“Oil is still high, so currency inflow is there, most of the budget indicators are extremely good, other economy indicators also pretty good – so this may cause a slight deceleration of economic growth in Russia but it will be not statistically significant.”

But for the economy much will depend on how far the conflict will continue and whether it is quickly resolved.