The headlines about the conflict in the Caucasus in August 2008 have been replaced by news about collapsing financial markets. But the questions raised by the Georgia-Russia war remain high on the agenda of diplomats and international organisations. The European Union has deployed 300 observers to monitor the scheduled withdrawal of Russian troops from the buffer-zones within Georgia proper after 1 October 2008. But for the EU, the fallout of the war of 8-12 August is much greater - which Russian forces have occupied since the end of the main hostilities - is an opportunity to examine the role of the EU in this critical region. What kind of role can and should the union play to contribute to stability and growth in this volatile region just beyond its borders? And what must it do to be taken seriously by a newly assertive Russia?

Katinka Barysch is deputy director of the Centre for European Reform

Also by Katinka Barysch in openDemocracy:

"Ukraine should not be part of a ‘great game'" (7 December 2004) - with Charles Grant

"Turkey and the European Union: don't despair" (27 November 2006)

"Europe's ‘reform treaty': ends and beginnings" (18 October 2007) - with Hugo Brady

"Turkey: the constitutional frontline" (14 April 2008)

The policy toolbox

These questions in turn raise the issue of the European Union's performance during and immediately after the war itself. The judgments about the EU's reaction to the flare-up of conflict, Russia's incursion into Georgia, and its unilateral recognition of South Ossetia and Abkhazia, have varied - from the illustration of a wobbly jelly on the cover of the Economist (4 September 2008) to the earlier assessment of Jean-Dominique Giuliani (president of the Robert Schuman Foundation): "Without the European Union's intervention and rapid reaction on the part of the French president the Russians would already have made Tbilisi theirs".

The reference here is to the diplomatic initiative of Nicolas Sarkozy, who as holder of the EU's current (July-December 2008) presidency visited Moscow and Tbilisi, brokered the initial ceasefire on 12 August 2008, and then pushed hard for Russia to follow the terms. The European Union as a whole followed up at its emergency summit on 1 September - only the third in its history - by sticking together in an unprecedented condemnation of Russian aggression. To signal their willingness to act, they froze negotiations on the EU's new partnership agreement with Russia.

True, the EU's criticism and the threat of stalled treaty negotiations did not sway Russia. It was in any case in Moscow's own interest to withdraw its forces from the self-declared buffer-zone in Georgia and start a programme of damage-limitation in international relations. But Moscow is also used to a squabbling and uncritical EU - and will thus have taken note of the Europeans' relatively strong reaction - relative, because compared with the tough rhetoric of some United States politicians the EU's reaction still looked feeble.

However, those who criticise the EU for this are wrong. The EU cannot at the same time be a mediator in the conflict and take sides. Moreover, its mediating role was all the more effective because it was backed by a growling America that openly backed Georgia's president, Mikheil Saakashvili. The Americans found it easier to be firm and critical precisely because they could rely on the EU to do the actual negotiations.

The European Union has supplemented its high-level diplomacy by attempting to mitigate the consequences of the war on the ground. At their meeting on 15 September, EU foreign ministers authorised the 300-strong observer mission to replace Russian troops in the buffer-zone, and pledged €500 million in aid to help the reconstruction of the devastated Georgian economy.

Among openDemocracy's articles on the fallout of the Georgia-Russia war of August 2008:

Donald Rayfield, "The Georgia-Russia conflict: lost territory, found nation" (13 August 2008)

Neal Ascherson, "After the war: recognising reality in Abkhazia and Georgia" (15 August 2008)

George Hewitt, "Abkhazia and South Ossetia: heart of conflict, key to solution" (18 August 2008)

Ivan Krastev, "Russia and the Georgia war: the great-power trap" (19 August 2008)

Ghia Nodia, "Russian war and Georgian democracy" (22 August 2008)

Fred Halliday, "The miscalculation of small nations" (24 August 2008)

Robert Parsons, "Georgia after war: the political landscape" (26 August 2008)

Mary Kaldor, "Sovereignty, status and the humanitarian perspective" (26 August 2008)

Vicken Cheterian, "Georgia's forgotten legacy" (3 September 2008)

Rein Müllerson, "The world after the Russia-Georgia war" (5 September 2008)

Paul Gillespie, ""The European Union and Russia after Georgia" (10 September 2008)

Krzysztof Bobinski, "Europe's post-war promise" (15 September 2008)

Martin Shaw, "After the Georgia war: the challenge to citizen action" (16 September 2008)

Aviel Roshwald, "Nato, the west and Russia: from peril to progress" (23 September 2008)

Plus: openDemocracy's Russia section reports, debates and blogs the Georgia war.

However, tension and bitterness persist, not only within the region, but between Russia and the west. There are disagreements about where exactly the EU observers will be allowed to go, and how many Russian soldiers will remain in Abkhazia and South Ossetia. More widely, many people both inside and outside the European Union look anxiously eastwards in the belief that Russian efforts to control its "near abroad" will not stop at the border of South Ossetia.

This means that the EU needs to continue its debate about what kind of tools it has available to resolve the Caucasus and other other potential conflicts, including increasing the pressure on Russia if necessary.

What not to do

Since the Georgia-Russia war broke out on 8 August 2008, many politicians and commentators have suggested hardline measures against Russia that if implemented would harm European interests without making Russia change its ways. The danger of ill-judged over-reaction or misplaced symbolic gestures is that Russia will end up looking scarier and Europe weaker than is actually the case. The challenge is to act firmly but in ways designed to have a real effect.

To clarify the point, it is worth considering what the European Union should not do. First, economic sanctions are a virtual non-starter, mainly because of a situation of mutual energy-dependence: almost 30% of the gas consumed in the EU comes from Russia, making the EU Russia's biggest and most lucrative market (it is notable in this respect that Moscow has been careful not to mention energy in its angry exchanges with the west). In principle, the EU could try to limit Russian sales of non-energy goods or keep Russian investments out; but in the absence of a United Nations mandate, such steps would violate the EU's own rules for openness and non-discrimination.

The EU cannot completely discard the option of using economic sanctions - in the event of Russian tanks trundling into another neighbouring country, for example. But these would be a means of last resort. Meanwhile, talk of preventing Russia companies from operating in EU countries will only undermine the EU's credibility as a rules-based and open market.

Second, a veto of Russia's World Trade Organisation (WTO) application would contravene the EU's strong interest in persuading Russia to respect international trade rules and submit to the WTO's dispute-settlement procedures. Thus, it should not contemplate using the WTO to make a political point at a time when the organisation is already gravely weakened through the breakdown of the Doha talks. Russia's accession is in any case not an immediate prospect - because of Moscow's increasingly erratic trade policy, the United States's refusal to repeal the Jackson-Vanik amendment (1974), and vetoes from Georgia and perhaps Ukraine (both now WTO members).

Third, to ban Russians from visiting or working in EU countries is a bad idea. If Russian citizens cannot travel, they may be more prone to believing their government's propaganda about a hostile and hypocritical west. But the EU needs to think carefully too about targeted visa sanctions, for a ban on Russian leaders and top officials would signal a new world in which the Europeans no longer believe that engagement can achieve anything.

The EU could make it harder for Russia's big businessmen to holiday at the Cote d'Azur or do business in London, hoping that they would in turn put pressure on their leaders to change their ways. But many rich Russians have acquired foreign passports, and few will risk falling out with a regime that seems to enjoy a bit of oligarch-bashing from time to time.

In brief, the resort to economic sanctions and visa-bans could slow the modernisation and diversification of Russia's economy and turn its emerging middle class further against the west. These measures may well hurt the possibility of a more liberal camp emerging around the new president, Dmitry Medvedev. The chances of Russia becoming more open and democratic over the medium-to-long-term could diminish further.

The three priorities

It does not have to be "business as usual", however. There are other things the European Union could do that would be effective without being counterproductive. The EU could freeze several of its newer initiatives if Russia proves recalcitrant (over, for example, reducing troop numbers in South Ossetia and Georgia).

The EU could stop preparations for a trade agreement on nuclear-fuels, something the Russians want badly in order to grab a bigger market-share in Europe's (reviving) nuclear sector. It could also suspend Russia's participation in EU research projects and other cooperation programmes. Indeed, a slimming down of the EU's bloated and unfocused Russia agenda could even become a welcome side-product of the current climate.

More fundamentally, however, the EU's reaction to the Georgia war should focus less on punishing Russia and more on seeking to make it change its ways. This effort should start within the EU itself, with a set of well-defined objectives. The tricky part then is to figure out how to achieve these objectives in case of Russian opposition or obstruction.

After Georgia, the EU can no longer pretend that its goals and Russia's are in harmony. That is good - because it forces the Europeans to have a more open and realistic debate about its ties with Russia and to set clearer priorities. These priorities should be:

* stability beyond the EU's eastern borders

* energy security

* international tasks that require Russian help (such as preventing Iran from building a nuclear bomb).

It is in retrospect remarkable that many people claim to have anticipated the war and witnessed preparations for it, yet that it appears to have taken the west by surprise. The implication is that the EU needs to keep a much closer eye on its neighbourhood and get more involved in an effort to forestall further turmoil. This requires it (as my colleague Tomas Valasek has written) to do much more to help resolve the other frozen conflicts that smoulder in the region. It should also intensify its efforts to draw neighbouring countries, notably Ukraine and Moldova, closer to the union.

The test of unity

Many analysts now predict that Russia will try to escalate other "frozen conflicts" in its neighbourhood. That is not inevitable. The chances of making some progress over Nagorno-Karabakh may even have improved now that Turkey and Armenia have used the opportunity of a football match to talk to each other (see Krzysztof Bobinski, "Europe's post-war promise", 15 September 2008). The presidents of these two countries have also just met their Azerbaijani counterpart in New York.

Russia may well step up its efforts to broker a solution between Moldova and the breakaway region of Transdnistria. This would help it to salvage whatever is left of its own "soft power" in the aftermath of the Georgia war. The EU should demand a bigger role in these negotiations, despite Russia's likely attempt to dictate the rules of any EU engagement in the region.

But while these longstanding conflicts may be edging a bit closer towards a solution, new hotspots could emerge, most notably Ukraine's Crimea peninsula. This is but one of a number of Ukraine-Russia disagreements which the EU can do little directly to resolve: over the stationing of the Black Sea fleet in Sevastopol, gas prices, mutual travel-bans for politicians, or Moscow handing out passports to Russian-speaking Ukrainian citizens. The risk of such disagreements destabilising Ukraine would be less if the country had a functioning and forward-looking government. But if the EU should not overestimate its impact on Ukraine, it can contribute to political stability and economic reform there by giving the country a "membership perspective".

The EU's decision not to do so at the EU-Ukraine summit on 9 September has attracted fire. But to reaffirm the point about effective action, the EU would have been wrong to use the offer of membership - one of its most powerful tools - in a purely symbolic reaction to the Georgia war. The EU's real objective (and Russia's real fear) is a Ukraine that is more democratic, richer and more stable - and better able to withstand Russian meddling. This objective is better served if the EU makes progress towards membership dependent on Kyiv (Kiev) actually implementing political and economic reforms. At present, Ukraine has no effective government, and its leading politicians use ties to the EU and Russia as cards in domestic political games. There is thus little reason to reward Ukraine just yet. The EU's offer to Ukraine needs to be more attractive (more help now, membership later) - but remain conditional.

Another way in which the EU could have a great impact on Russia is if it developed a coherent and effective energy policy. The ingredients of such a policy are well known: internal market liberalisation, more connections between national power and gas markets, clear rules for investment from outside the EU, and a more systematic approach to pipelines and external suppliers. The EU has already stepped up its energy diplomacy in reaction to the Georgia war, for example by sending energy commissioner Andris Piebalgs to Nigeria.

The EU's "strategic energy review" is due in November 2008. This should include some forward-looking proposals: new transparency requirements (it is not acceptable that the European commission and other EU governments learn about new bilateral pipeline deals from the media); better planning for energy emergencies (including plans for improving Europe's strategic gas storage); new financing options for critical infrastructure (in particular the Nabucco pipeline); and allowing the EU to coordinate negotiations with outside suppliers.

The Caucasus conflict may be the shock that the Europeans needed to get their act together on neighbourhood policy, energy and a coherent foreign-policy strategy. But the real test of the EU's effectiveness will come at the level of the individual member-states. A union that is divided, and where the biggest countries seek their own selfish bilateral deals with Russia while smaller ones stubbornly block EU business to draw attention to their concerns will achieve little but derision in Russia. A European Union that unites around clearly defined objectives will stand a much better chance of playing a stabilising role in the neighbourhood and being taken seriously by Russia.

European Union leaders meet in Lisbon on 18-19 October 2007 to reach final agreement on the EU's new "reform treaty". A deal is within reach, provided a prickly Polish government - which faces a national election on 21 October - does not create a last-minute obstacle. Some countries have been thinking about holding a referendum on the new treaty. But with the exception of Ireland (which it is mandatory by law), they are likely to decide against it.