- Tensions between Russia and its neighbor Georgia have been mounting in recent weeks
- There have been a series of spats and violent anti-Russian protests in the capital Tbilisi
- Lawmakers in Russia's parliament, the Duma, unanimously backed a resolution on Tuesday calling for sanctions to be imposed on Georgia, but President Putin rejected the call
Tensions between Russia and its neighbor Georgia have been mounting in recent weeks amid a series of spats and sometimes violent anti-Russian protests in the capital Tbilisi.
Lawmakers in Russia's parliament, the Duma, unanimously backed a resolution on Tuesday calling for sanctions to be imposed on Georgia.
Somewhat surprisingly, President Vladimir Putin rejected that call, saying that repairing strained relations with Russia's smaller neighbor was more important than reacting to provocations by "scumbags." He also said he was against imposing sanctions on Georgia, "out of respect for the Georgian people."
Given tense relations between Russia and Georgia following a military conflict between the two nations in 2008, and continued bitterness over breakaway pro-Russian regions in Georgia – South Ossetia and Abkhazia – analysts are now questioning how the situation could develop in the unpredictable southern Caucasus region.
CNBC has a simple guide to what's going on in the region, and why it matters.
Russia has accused Georgia's opposition of stirring up anti-Russian demonstrations in its capital Tbilisi, namely on June 20. The protests were sparked by public outrage at a Russian lawmaker's address in the Georgian parliament from the speaker's chair.
Thousands of Georgians took to the streets of the capital Tbilisi to protest and demonstrations ended with protestors trying to storm the parliament building. A reported 240 people were hurt in the clashes. Tensions have ratcheted up since then and protests have continued.
Anti-Russian sentiment is strong in Georgia given a 2008 military conflict with Russia that it fought and lost. Russia angered Georgia further by recognizing the breakaway (and pro-Russian) self-proclaimed republics of South Ossetia and Abkhazia.
As such the parliamentary address by a Russian State Duma deputy in June was widely seen as giving Russia a platform in the Georgian parliament – not a popular move in a country that is still bitter about what is widely seen as Russia's occupation of 20% of Georgia's sovereign territory in South Ossetia and Abkhazia. Things got worse when a Georgian TV presenter went on an expletive-laden rant against President Putin on Sunday, calling him a "stinking invader" and a "dog."
Unsurprisingly, Russia was not very happy about the rant. On Monday, the Kremlin said that the Georgian authorities were failing to "pacify anti-Russian forces" in the country.
Kremlin spokesman Dmitry Peskov said the Georgian TV presenter's "insults" as "totally unacceptable" in his daily press briefing Monday. Georgia's Prime Minister Mamuka Bakhtadze also rushed to smooth tensions, saying "this is a war by provocateurs against their country, a dirty and disgusting game with the security of the state and citizens."
Russia has already made some moves to suspend commercial relations with Georgia, a country that has ambitions to join NATO and the European Union (like Ukraine). Flights between Russia and Georgia ceased Monday after Putin signed a decree temporarily banning all flights between the countries in order "to provide security for the Russian citizens," Russian news agency Tass reported.
The flight ban is already hitting the Georgia's tourism industry and Black Sea resorts where thousands of Russians flock annually. The head of the Georgian Hotel and Restaurant Federation told news agency Tass Monday that 80% of the hotel bookings made by Russians had been cancelled. Georgia's National Tourism Administration believes that the probable loss for the country's economy from a reduced tourism flow from Russia will stand at about $710 million.
The economic hit could be significant for Georgia if tensions worsen, according to William Jackson, chief emerging markets economist at Capital Economics.
"Georgia's economy had been doing well until recently – growing by about 5% a year. But Russia is a major export market and source of tourists, so these tensions will weigh on economic growth," Jackson noted.
Declining export and tourism revenues will also cause Georgia's current account deficit, which is already large at about 8% of GDP, to widen further, Jackson said, making the economy more dependent on foreign capital inflows. "That could put the currency under pressure and raise inflation," he warned.
A possible ban on Georgian wine imports and restrictions on cross-border money transfers have also been mooted as possible punitive measures. But Putin's decision to hold back on sanctions has proved interesting to analysts.
Zachary Witlin, a senior analyst at Eurasia Group specializing in Russia and the South Caucasus region, said "the Kremlin appears to be deciding what to do next."
"The Duma wants to sound tough, but the fact that neither the legislature nor consumer watchdog Rospotrebnadzor has acted on earlier threats against wine imports implies that they are looking to the top for direction," he said in a note Monday.
Agathe Demarais, global forecasting director of The Economist Intelligence Unit (EIU), told CNBC that Russia's foreign policy actions are guided by two principles: "Re-asserting Russia's role on the global stage" and preventing countries that Russia believes are part of the U.S.' sphere of influence, like former Soviet states Ukraine and Georgia, from joining Western institutions like NATO or the EU.
"Keeping the situation tense, but also de facto frozen with only occasional flare-ups, serves Russia's strategic interests well. This places Russia on the world scene, and undermines Georgia's efforts to become closer to the EU and NATO," she told CNBC Wednesday.
The 2008 conflict between Russia and Georgia has echoes of a more recent conflict between Russia and another one of its neighbors, Ukraine, which was precipitated in 2014 after Russia annexed Crimea and supported a pro-Russian uprising in east Ukraine.
Similarly to South Ossetia and Abkhazia in Georgia, Russia prompted outrage in Ukraine when it recognized the status of two pro-Russian, self-proclaimed republics in Ukraine, in Donetsk and Luhansk. Analysts CNBC spoke to thought that a military escalation of tensions was unlikely at this point.
Capital Economics' Witlin noted that the Kremlin would be keen to use economic measures first and foremost.
"The Kremlin likely wants to retain the threat of further economic measures, but sees less need to act quickly than it did at the outset of the protests," he said, adding that Russian authorities will likely use the threat of an import ban on wine or other economic measures, as continued leverage on Georgia.
Analysts note that a tentative restoration of diplomatic relations and "tenuous dialogue" with Georgia's ruling administration, led by the Georgian Dream-Democratic Georgia (GDDG) party which was founded and is chaired by billionaire businessman Bidzina Ivanishvili, is likely to be stopping Russia from escalating tensions.
Timothy Ash, a senior emerging markets strategist at Bluebay Asset Management, agreed, telling CNBC Wednesday that "Moscow will be mindful that the Georgia Dream/Ivanishvili administration is probably as good as it gets in Georgia in terms of their Russia orientation. "Putin's intervention is an attempt not to inflame things to the advantage of the opposition, which are much less 'friendly' towards Moscow," he said, believing that the current tensions would calm down.
"The best that Moscow can do is to not inflame further anti-Russian tensions, as they are likely to be the losers therein given the outstanding issues over Abkhazia and South Ossetia." The EIU's Agathe Demerais said that Putin's de-escalating rhetoric was part of a re-branding exercise on the global stage and his "willingness … to brand himself as a rational, sensible world leader."