July 26, 2007

Russian Expulsions Raise The Stakes

When Russia announced the expulsion of four British diplomats, some hoped that the Putin government had exercised some restraint in the diplomatic row between Russia and Britain. The British had expelled four low-level Russian diplomats as a consequence of Vladimir Putin's refusal to extradite suspected assassin Andrei Lugovoi in the Alexander Litvinenko murder, and the matching number appeared to indicate a willingness to stop an escalation.

However, the Russians expelled a senior British diplomat seen as key to international investment in Russia, a choice that will definitely be seen as an escalation:

Concerns that the Kremlin could target Britain's vast investments in Russia mounted today after it emerged that the British embassy's top trade representative had been ordered to leave the country.

Andrew Levi, who as counsellor for economic affairs is regarded as the third most senior official at the British embassy in Moscow, was among four diplomats expelled last week, according to the Moscow Times newspaper. ...

It is understood that the Russian diplomats ordered to leave Britain held middle ranking and junior positions. ... Given his seniority, Mr Levi's alleged departure has come as an unwelcome surprise to the British business community in Russia.

Britain's investment stake in Russia is very significant. In the first quarter of this year, the UK has put over two billion pounds into the Russian economy, as investors followed the government's lead of engagement. Those investments appear at risk now. The Moscow Times reports that the Putin government will start to cut British-backed firms off from government contracts -- and warned that tax authorities might start giving "tougher scrutiny" to British investors.

Putin has decided on some real brinksmanship here. He apparently wants to extort a retreat from the British government, which will have to face the ire of investors who followed their lead in Russia if they lose their shirts over this diplomatic breach. However, Putin is playing with fire himself. Other investors will not rush to fill the gap left by a British withdrawal from their markets, especially given the mercurial treatment of said investors by a government dominated by the increasingly megalomaniacal Putin. He may wind up wrecking his own economy while only inconveniencing the Brits.

How will Britain react? It seems that the ball is in their court now. They could halt the economic engagement that has helped float the Russian economy, essentially calling Putin's bluff. They could also start expelling senior diplomatic figures from Britain, overtly escalating the row and threatening a complete diplomatic and economic break. The British could, as an even more stinging rebuke, work to get Russia tossed out of the G-8, membership in which Putin has prized.

The only point on which the world can rest assured is that this is not over.

UPDATE: The New York Times blog, The Lede, also picks up this story.


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Comments (2)

Posted by LarryD | July 26, 2007 9:50 AM

If I were invested in Russia, I'd cash out and reinvest elsewhere. Investing in countries where the government can go after your investment on a whim is extra risky, the returns have to be really high to justify the investment.

Posted by sue | July 26, 2007 10:19 AM

They could any of those things, but they won't! They will cave, as always.