Tensions have been running high between Russia and the EU since Russia invaded Georgia last month.

The two powers have reached an agreement on a draft peace plan, but business ties are a long way from normal. With the EU dependent on Russia for almost half of all it’s energy needs, this dispute could cause serious problems come winter.

Sara Nunnally says the EU’s scramble for alternative energy sources opens up new investment opportunities in frontier markets around the Caspian Sea. Sara says Turkey is also well placed to become a new regional energy hub.

This from Taipan Publishing’s Emerging Markets blog:

An area the size of Rhode Island with a population smaller than Pawtucket has caused Russia a whole lot of trouble. South Ossetia, with only 1,500 square miles of territory and 70,000 ‘citizens,’ claimed independence from Georgia on November 28, 1991. Russia officially recognized the territory’s independence on August 26, 2008, twenty days after Russian troops entered the region to defend South Ossetia’s population from Georgian forces. Less than a week later, investors in Russia were headed for the hills… And they’re still running.

The EU, currently headed by French President Nicolas Sarkozy, is trying to make Russia comply with the ceasefire agreement and withdraw troops. According to a BBC news report, “Some European leaders have already warned there can be ‘no business as usual’ with Russia until the peace plan is fully implemented, and the European Union has suspended talks on a new partnership agreement with Moscow.”

That’s going to be a bit difficult when it comes to Russian energy supplies, however. Russian natural gas accounts for 40% of all EU imports.

And if conflict continues into winter, it truly could be a Cold War between Russia and the EU if the Bear turns off the spigot. That’s why the EU is rushing around the Caspian Sea and the Mediterranean like mad trying to scare up energy supplies and pipeline partners.

Azerbaijan and Hungary held important meetings to expand economic ties in sectors like energy… Specifically the Nabucco Project, a 3,000 km pipeline that will bypass Russia and ship natural gas from the Caspian Sea to the EU.

Oil and energy ministers from Egypt, Jordan, Syria and Lebanon met on Sunday to approve measures to link the 1,000 km Arab gas pipeline to the European network. Once it’s complete, that is. More than $800 million has been invested in the project already.

But the race is on, and Russia’s fighting back.

On Friday, a deputy energy minister from Russia announced it will buy Oman’s 7% stake in the Caspian Pipeline Consortium, a pipeline that will ship crude oil from Kazakhstan and Russia to the Black Sea.

Russia may be losing friends, though, as former Soviet States publically stand against Russia’s aggressions. Places like Azerbaijan, Turkey, Ukraine, and Turkmenistan are still doing business with Russia. How could they not? But they are also starting to compete with Russia now that European investors are building consortiums and alliances for new energy projects.

In the meantime, Russia’s markets are hurting, as is the rouble. Take a look:

Once climbing in value, the rouble took a major hit just when it entered Georgian territory. The Market Vector Russia ETF Trust (RSX:NYSE) isn’t fairing any better, either.

This will be a great opportunity for ex-Soviet States to take center stage. Investors in frontier markets could find some great energy opportunities in the Caspian Sea area, and in the Middle East.

Don’t discount Turkey, either. I think this region will become a major energy hub, particularly with the Nabucco Project. I’m currently working on an in-depth report on the country and its investment opportunities.

Source: Investing in Russia: Money Flows Elsewhere