Russian markets have been hit by the armed conflict with Georgia, adding to recent worries that the Russian government is willing to annoy foreign investors by its seizure of overseas-owned assets, but in the long run the impact on the economy is likely to be modest, according to Capital Economics, a UK consultancy.

“While the near-term situation remains uncertain, we see good reasons not to be too pessimistic on the prospects for these markets over the medium-term,” Capital Economics said in a note.

“Against this backdrop, the sharp sell-off in financial markets is unsurprising. CDS [credit defeault swap] spreads have widened by 15 basis points, the RTS Index has fallen 30 per cent from its May high and the rouble has plunged by 3 per cent against its dollar/euro basket since Thursday,” the note said.

Capital Economics predicts that further falls in the currency and stock market are possible over the next few weeks. But it said there were reasons to avoid “undue pessimism”.  To begin with, the impact on gross domestic product will be small, as the North Ossetia region accounts for just 0.2 per cent of Russian GDP.

The consultancy said that any talk of economic sanctions by the West against Russia looks mistaken given its heavy dependence on Russian energy.