FP: What’s the impact of this war on the Russian market? Is it hurting the Russian image among investors?

CK: Politics and markets, over the last two to four years, have spoken to Russia with very different voices; politics with a harsh voice, and markets with a very attracted voice. The Russian stock market has been in a dive over the last month or so. During the war, there was great volatility, and the market has dropped heavily when the prospects for piece seemed dimmer.

As far as portfolio investors and the Russian stock market are concerned, the main tipping point was the four days following July 24, when TNK-BP’s Robert Dudley left the country, and shortly after that, Putin went after the steel company Mechal and took about $6 billion off its capitalization. Those behaviors really rattled investors and caused a steep dip in the Russian stock market. The war’s effect has been less dramatic.

More broadly, I think Russia as an island of stability and a safe haven from the credit crunch—that perception of Russia is on life support. Essentially over. There’s been four reasons: TNK-BP, Mechal, the Russian government’s willingness to use administrative means to break up cartels and implement de facto price controls (which means there’s more strategic risk in consumer sectors as well as strategic sectors), and fourth is the war. When you add those four together, the investment climate has taken a real, real hit over the last month.

FP: Are there any means with which Europe and the United States can punish Russia economically and politically now? Do you see that happening?

CK: We have very little leverage. The headline measures that you read about—throwing them out of the G-8, denying membership to the OECD, stopping WTO negotiations—won’t be very effective. Frankly, I don’t think the Russians really care about the G-8, and the WTO requires a bilateral agreement with Georgia, so that’s not likely.

There are steps we can take to push back, though. The Russians have a very proud elite. I think that over time the U.S. will curtail the number of bilateral meetings and some European countries will go along. “Ostracism” is too strong [a word]… [it’s more like] “selective avoidance.” No more military exercises. I think the strongest measure, which could and maybe should be on the table, is a sober discussion of the run-up to the 2014 Sochi Olympics, which are a crown jewel in Russia’s planning.

We’re still in the early days, and the Untied States will, I think, help reconstruct Georgia will help reconstruct the Georgian security forces. We don’t know what the endgame is going to be yet, so I think jumping to conclusions on what the United States can and should is premature. But are there things we will do? Yes? Are there things we can do? Yes? Can we punish Russia economically? No. Are there things that would make Russia chafe at least somewhat? Yes. That’s my best answer.

Clifford Kupchan, a fluent Russian speaker, is director for Europe and Eurasia at the Eurasia Group, a private political risk advisory and consulting firm.