Prime Minister Vladimir Putin, the de facto leader of Russia, with his handpicked successor, President Dimitri Medvedev

A World Bank delegation has arrived in Georgia to assess the damage in the aftermath of the invasion by Russian forces. Meanwhile, investors are pulling funds out of Russia - an economy that is largely dependent on energy exports and state-run large enterprises.

Central Bank figures show reserves were sharply down in the week ending 15 August, marking a fall of $16.4bn from $597.5bn a week earlier.

Tensions with the West have also been strained by Russia's objection to the US placing a missile defence system in Poland while Georgia has urged the west to invest in the region as it seeks to rebuild.

"We, the G-7, stand ready to support Georgia in order to promote the continued health of the Georgian economy, maintain confidence in Georgia's financial system and support economic reconstruction," the Group of Seven industrialised countries, said in a statement issued by the US Treasury.

Theodore Ahlers, World Bank acting vice president for Europe and Central Asia said in Washington on Thursday: "At the invitation of the Georgian government, a World Bank economic assessment team will leave for Tbilisi tomorrow. The World Bank remains committed to improving people’s lives in Georgia, and will continue with its ongoing support to economic reform and development in the country.  In the coming days we will work with the Georgian government to assess the economic impact of recent events and to recommend policy measures directed at fostering growth and protecting against poverty. Georgia has strong economic fundamentals, the result of a committed reform program and prudent fiscal management by the government. These factors will help the economy to weather the impact of the conflict. The economy is, however, dependant on external investment, and growth is likely to be temporarily dampened as investors adopt a wait and see attitude.

The World Bank is in close discussions with the government on measures to minimize the impact of disruptions on peoples’ lives. At the government's request the Bank will assist the authorities in assessing the toll of the damage and reconstruction needs with international partners and other stakeholders through a follow up mission. In this task, the Bank will focus on the infrastructure, environment, and agriculture sectors and on the needs of the internally displaced population. It will also assist the authorities in setting up a multi-donor trust fund for reconstruction investment to ensure a speedy recovery from the conflict and to ease the suffering of all of its victims.

The World Bank notes with grave concern the reports of forest fires in the Borjomi area of Georgia. As a long-standing international partner which has been supporting improved environmental and forestry management throughout the South Caucasus region, the World Bank sincerely hopes that arrangements can be made urgently to facilitate access to the area of the necessary equipment and other resources to bring these fires under control as soon as possible.

The Bank will remain in close consultation with the authorities as needs evolve and will respond flexibly and speedily with policy advice and financing in the present difficult circumstances facing the Georgian people."

The Russian economy - state guided and dependent on oil exports

In recent years, the Russian economy has grown at an average pace of 7 percent annually. Whether this pace can be maintained if the economy continues to be regulated by the state and dependent on exports of raw materials is questionable in the opinion of Philip Hanson, Royal Institute of International Affairs in London.

In a recent issue of CESifo Forum he points out the possible risks. The strong dependency on oil, especially at the currently high prices, can hamper the diversification of the economy and slow down economic growth in the long term. A further retarding factor to economic development Hanson sees in R&D policies, which are concentrated on state-run large enterprises. Technology co-operations and technology transfers of foreign firms with Russian enterprises are limited.

This stands in contradiction to the intention of the Russian government to transform Russia into a modern and broadly diversified economy. In terms of patent applications, which are very modest in an international comparison, Russia is also not reaching this goal.

The complete article can be downloaded here.

Vladimir's Secret

Why are some leaders adept at seizing a window of opportunity to successfully catalyse large-scale change while others fail? This, in a nutshell, is what CESifo Network researcherSharun Mukand and his colleague Sumon Majumdar wanted to elucidate, given that, as they put it, economists have paid relatively little attention to analysing the role of leaders in bringing about broad-based institutional or organisational change. Their findings are reported in their latest CESifo Working Paper.

To research the matter, they set up a framework which emphasises the nature of the two-way relationship between a leader and his/her potential followers in having a transformational impact on the prospects for change. As they point out, Mahatma Gandhi’s effectiveness in transforming a novel form of protest—his famous defiance of the British monopoly on the collection of salt by simply picking up a lump of natural sea salt—into a broad movement for change relied on his ability to draw on a cadre of committed followers.

There are many other examples of this synergy between a leader and his followers: think of Apple’s Steve Jobs, who brought back the company not only to profitability but to cult status after taking over the reins once again in 1997 (ten years earlier he had been elbowed out from the company, which he had co-founded). Despite having been described variously as aggressive, temperamental, terrorising, and egomaniac, Jobs manages to attract a devout followership. His yearly presentations of new products are legendary.

Or Silvio Berlusconi who, despite his conflicts of interest and his not-so-sterling record the first time around, has been re-elected as Italy’s president. Or Vladimir Putin, whose words can send the Moscow stock exchange tumbling and those who cross him to face the tax police or worse, but who still manages to be hugely popular.

As the authors note and these examples show, such transformational leadership can be for the better or worse.“For every leader such as Nelson Mandela,” they point out, “there is a Robert Mugabe.”

Given this, the authors ask whether individuals may prefer to become followers of a leader who is ambitious and unscrupulous or one with whom they have congruent preferences. Does followership empower or handicap attempts by such leaders at change, either for good or bad?

Examining a wide range of cases, the authors show that the change in status-quo occurs only through the voluntary and coordinated switch of actions by a large number of individuals. Indeed, they assert, it is in resolving this mass coordination problem across followers that the leader plays a crucial role: not only spotting a right window of opportunity for change, but also in communicating it to the population.

The leader’s effectiveness is best understood by dissecting the two-way relationship between the leader and his followers. On the one hand, good leaders attract a cadre of committed followers. Conversely, having a cadre of committed followers empowers the leader: as one researcher quoted in the study puts it, “he has a most malleable instrument to use at will.”

So, the authors built a model in which people choose to become followers, which is costly for them so that they will only become followers if they expect gains from following the leader. This creates a demand for leadership and, by empowering the leader, it affects the supply of leadership by the leader. These two forces together determine the probability of successful change.

They show that only if a combination of the leader’s ability and the underlying structural conditions satisfy a certain threshold is change possible. In particular, if the leader’s ability is higher than the threshold, he attracts a core group of committed followers which is of sufficient size to even encourage participation by non-followers. This explains the critical role that the Bolshevik party had in boosting Lenin’s effectiveness and the Nazi Stormtroopers in transforming Hitler’s political prospects.

The model shows that, under a broad set of conditions, the people may prefer to follow an ambitious leader whose interests may not always be congruent with theirs, throwing light on why “good” as well as “bad” leaders may both have a sizable following.

In any case, after digesting the paper, it is claimed that you cannot but feel a certain "aha" when you read, for instance, on Fidel Castro's revolution in Cuba or Deng Xiao-Ping's swerve towards capitalism. Or Vladimir Putin's nearly omnipotent position in his country.

We at Finfacts wouldn't share the same admiration for Putin as journalist Tom McGurk, a Northern Ireland nationalist, who bizarrely wrote in The Sunday Business Post that Georgia invaded a recognised part of itself.After a pean to Fidel Castro earlier this year, it is an illustration of the blindspot of Anti-Americanism:"After all, it was Georgia who invaded South Ossetia and then the Russians, having quickly established military superiority, accepted a ceasefire, while Moscow went to enormous lengths using all its English-speaking government officials to mount a media offensive explaining its actions.

Seemingly there is nothing Russia can do to satisfy some in the West; Vladimir Putin’s clean-up of the mafia-dominated mess he inherited from Boris Yeltsin is merely characterised as ex-KGB man authoritarianism. Ironically, as Russia has become more and more stable and economically prosperous under his hand, the level of criticism aimed at him has only increased."

The Economist says: "South Ossetia is a tiny patchwork of villages—Georgian and South Ossetian—which was much easier to drag into a war. It is headed by a thuggish former Soviet official, Eduard Kokoity, and run by the Russian security services. It lives off smuggling and Russian money. As Yulia Latynina, a Russian journalist, puts it, “South Ossetia is a joint venture between KGB generals and an Ossetian gangster, who jointly utilise the money disbursed by Moscow for fighting with Georgia.”"