By Eka Janashia (03/18/2015 issue of the CACI Analyst)

Georgia’s national currency, GEL (Lari) has lost 29 percent of its value against the US$ since November last year and, after a brief recovery, has continued depreciation until present. On February 24, the GEL saw its largest drop reflected in a single-day 3 percent fall. The Government pledged to present a “currency stabilization plan” for March 5 but failed to match the vow.

The implications of Georgia’s currency devaluation have become a major provenance for political speculation, public discontent, and concerns among domestic and foreign businesses.

Until the end of February, the government’s economic team kept calm regarding the depreciation of the GEL, largely echoing former Prime Minister Bidzina Ivanishvili’s assertion that he was completely satisfied with the work of the government and the National Bank of Georgia (NBG), instead linking the currency devaluation to external factors. “Nothing special is happening, the Lari is doing very well,” he claimed in January.

However, in response to public concerns after the GEL lost 3 percent of its value in a single day on February 24, Ivanishvili blamed the head of NBG Giorgi Kadagidze for idleness. “Kadagidze, who was appointed by the United National Movement [in 2009], led us to the crisis of the national currency with his inaction and wrong decisions” since under the constitution, the president of NBG is responsible for preventing undesirable developments, Ivanishvili said. After this statement, some ministers and the GD ruling coalition representatives also began disparaging the NBG’s work.

Kadagidze refused to engage in political debates but in response termed the GD attacks a “deliberate slanderous campaign against NBG” and reminded the public about the chronology of the events.

In 2013, Kadagidze warned the government that the projected 6 percent growth was overoptimistic and suggested a downward revision. Indeed, economic growth that year amounted to only 3.1 percent, half of what the government intended to achieve.

Kadagidze insisted that he also advised the government to avoid uneven spending from the state budget as it would increase pressure on the currency’s exchange rate, which in late 2013 resulted in an NBG intervention by selling several hundred million US$ at the exchange market, resulting in a decline of the country’s foreign reserves from US$ 3.1 billion in October, 2013, to US$ 2.82 billion by the end of 2013.

At that time, the intervention was justified as a one-time measure, whereas the current GEL depreciation is caused by the economy’s overall failure as foreign currency inflows have plunged since 2013, Kadagidze claimed.

Georgian exports fell by 30 percent and remittances by 23 percent year on year in January. In addition, the number of tourists shrunk by 7.8 percent in January-February compared to the same period last year. In effect, the account deficit reached 9.5 percent of GDP in 2014. Kadagidze argues that filling the deficit with foreign currency reserves is “counterproductive and fruitless.”

In cooperation with the Government and the NBG, the Analytic Mission of the International Monetary Fund (IMF) studied Georgia’s macroeconomic indicators in light of the recent economic hardship. A concluding statement lists a set of external factors such as the ongoing crisis in Ukraine; the growing recession in Russia; and currency devaluations in trading partner countries as reasons for Georgia’s slowing economy. Economic growth for this year could reach only 2 percent, instead of the previously estimated 5 percent, and even this projection is under the risk, the mission said.

As a countermeasure, the IMF suggested restrictions in administrative spending and increases of specific taxes in order to eschew a further upsurge of the budget deficit. At the same time, the IMF fully supported NBG’s policy of limited intervention in the foreign exchange market, arguing that its primary task is to maintain price stability in the country and while fulfilling this mission the independence of NBG “should be preserved and respected.”

In the wake of this statement, the Georgian government vowed to reduce administrative costs and pursue a so called “tighten belts” policy. Moreover, it declared its intention to ramp up the privatization process with an aim to raise US$ 300-350 million within the next two-three months.

To this end, the government plans to sell state assets – the historical buildings of the Economy Ministry and NBG in downtown Tbilisi, government residences in Adjara and near the capital city, and shares in thermal power plants and the National Lottery Company.

Nevertheless, some economic experts and opposition political parties argue that one-time investments cannot recover the ailing economy. The former president of NBG, Roman Gotsiridze, argues that enlarged social expenses, agricultural loans, and healthcare projects make the state budget inflexible. The budget expenditure should be reduced by at least GEL 300 million, otherwise the national currency will continue to depreciate and prices will rise, which will completely destroy the country’s economy.

The United National Movement (UNM) and Free Democrats, two parliamentary opposition parties, blamed the government for lacking a clear vision how to get the country out of the crisis. UNM plans to organize a protest rally in Tbilisi on March 21 to demand the government’s resignation.

It is obvious that, after GD came into power, the country’s economic policy has been less resilient to external shocks and the government has been unable to elaborate timely and cogent policies to mitigate the adversary external impact on the economy. The government’s poor economic performance encourages protest actions from opposition parties though the anticipated political turbulence could well be exploited also by radical pro-Russian parties. 

By Eka Janashia (03/04/2015 issue of the CACI Analyst)

The Kremlin continues Russia's annexation of Georgia's breakaway regions and at the same time warns Tbilisi to cease its effort to integrate with NATO. On February 18, breakaway South Ossetia signed a "border treaty" with the Russian Federation, and declared its intention to strike an "Alliance and Integration" deal with Moscow shortly.

The agreement mirrors the "Alliance and Strategic Partnership" agreement inked between Moscow and Sokhumi in November, though envisions a deeper integration of the South Ossetia's defense, security, and customs agencies with those of Russia. An already signed border agreement dictates the abolishment of the border crossing point at the Roki tunnel connecting the South Ossetia to Russia.

The border eradication initiative was first aired by Vladislav Surkov, the Russian president's aide in charge of supervising Moscow's relations with the two de facto republics, on February 17, during a meeting with Abkhazia's de-facto president Raul Khajimba. "There must not be a border between us," Surkov said and added that Russia's financial support for the two breakaway regions would be upheld in the face of Russia's current economic troubles.

The border agreement between Moscow and Tskhinvali is a swift implementation of this initiative. After signing the border treaty, Russia's Foreign Minister Sergey Lavrov expressed the Kremlin's readiness to avert the "negative effect" of "never-ending attempts to drag Tbilisi into NATO."

The Kremlin's apprehension is directed towards the establishment of NATO's "Training and Evaluation Center" (TAEC) in Georgia which, in the words of Russia's permanent representative in NATO Alexander Grushko, provokes Moscow, escalates tension and worsens regional security.

At the recent NATO summit in Wales, Georgia obtained a "substantial package," which along with other supportive tools, aims to enhance Georgia's defense capabilities through launching the TAEC, which could obtain a regional dimension in the future.

As part of this policy, NATO's Deputy Secretary General Alexander Vershbow visited Georgia in January 2015. Vershbow assured that despite the Kremlin's nervous reaction towards the planned NATO-Georgia training center, the alliance will make a resolute effort to create the facility before the end of this year.

He underlined that the TAEC will be "the most visible element of a NATO presence in Georgia." While it will primarily focus on command post exercises, field exercises with participation of foreign troops as well as live and simulated trainings for allied military units committed to the NATO Response Force and Connected Forces initiative might also take place, Vershbow said. He also announced that periodic military exercises involving NATO allies and partner countries will start in Georgia this year.

The Kremlin's reaction to the high NATO official's statement was soon reflected in the border removal initiative and strict declarations on Russia's counter-measures to deal with the undesirable implications of NATO-Georgia cooperation. Zurab Abashidze, the Georgian Prime Minister's special representative for relations with Russia, commented that Moscow, Brussels and Tbilisi all are well-aware "that Georgia's membership to NATO today and tomorrow is not on the agenda" and that Georgia-NATO cooperation "in no way aims at deploying NATO military infrastructure in Georgia."

Later, Defense Minister Mindia Janelidze restated that Georgia has no plans to host a NATO military base and that only the TAEC, aiming to enhance the professionalism of Georgian servicemen and with no additional military functions, will be established. The parliamentary minority immediately slammed these official remarks. The former state minister for European and Euro-Atlantic integration issues, Free Democrat Alexi Petriashvili dubbed Abashidze's statement another proof that the country's Euro-Atlantic course is under threat. The Free Democrats, led by former Defense Minister Irakli Alasania, quit the ruling coalition Georgian Dream (GD) in November with the same motivation.

The United National Movement (UNM) party, in turn, argued that Abashidze had voiced the government's position. The party's leader David Bakradze said that instead of distancing himself from Abashidze's statement, the defense minister had justified it.

Abashidze's statement came a few days before his meeting with Russia's Deputy Foreign Minister Grigory Karasin in Prague. The Karasin-Abashidze format is the only channel for direct communication between Tbilisi and Moscow, established by former PM Bidzina Ivanishvili. The previous government led by Mikheil Saakashvili government did not engage in direct negotiations with the Kremlin and preferred dialogue in an international format with the participation of representatives from partner countries.

While Russia's anti-NATO policy hardly surprised anyone, Abashidze's statement, which the opposition interpreted as appeasing to Moscow, was unexpected and triggered doubts about the consistency of Georgia's Euro-Atlantic aspirations.

Through the border removal initiative as well as the "amalgamation agreements" with South Ossetia and Abkhazia, Russia signals that the establishment of a training center where the troops of NATO partners may hold military exercises is totally unacceptable to Kremlin. Georgia's incumbent government clearly seeks to avoid irritating Moscow, but it yet uncertain to what extent this stance will slow Georgia's NATO integration pace. However, ambiguous moves with regard to Euro-Atlantic policy not only cast doubt on Georgia's achievements at the Wales Summit, but also minimize its chances to reach any tangible success at the Warsaw Summit scheduled for next year.

By Eka Janashia (02/18/2015 issue of the CACI Analyst)

On February 4, Tbilisi City Court ordered pre-trail detention for eleven former and incumbent police officers in connection with the death of two young men in the so called “tennis court special operation” taking place in 2006.

According to the then-official version, spread by the Ministry of Internal Affairs (MIA), on May 2, 2006, Zurab Vazagashvili, Aleksandre Khubulov and Bondo Puturidze were on their way to commit armed robbery in a Tbilisi district and the police prevented the crime through a special operation. When law enforcement officers tried to stop the suspects’ car nearby a tennis court in downtown Tbilisi, the suspects opened fire, which was returned by the police officers. Vazagashvili and Khubulov were shot dead whereas Puturidze was wounded.

The Public Defender’s Office commissioned an alternative ballistic investigation, detecting that no shots were fired from the car. Nevertheless, in 2007 the case was closed. Zurab’s father, Yuri Vazagashvili has accused the authorities of fabricating evidence to clear the offenders. The case was even brought to the Strasbourg-based European Court of Human Rights.

After coming to power in 2012, Georgian Dream (GD) coalition reopened the investigation into the Vazagashvili case though could not reach any tangible results. Yuri Vazagashvili then asked former Prime Minister Bidzina Ivanishvili to help in dismissing the suspected officials who were still working in law enforcement.

In a recent interview to newspaper Kviris Palitra, Vazagashvili criticized the lack of government efforts to determine the truth and accused the then interior minister Alexander Tchikaidze of protecting the culprits. On the next day, Vazagashvili was killed in an explosion at the grave of his son in the village of Karapila located near the South Ossetian conflict zone.

The murder gave rise to widespread speculation regarding the links between the explosion and Vazagashvili’s continued efforts to penalize his son’s murderers. PM Irakli Gharibashvili said the incident “shocked” him and urged the law enforcement agencies to investigate the case immediately, and to complete the investigation of the 2006 special operation “in the shortest period of time.” Almost immediately, Interior Minister Tchikaidze resigned. Tchikaidze’s written statement reads, “Though Yuri Vazagashvili’s allegations are far from reality, I feel the moral responsibility to quit the post.”

In two weeks, the Prosecutor’s office (PO) indicted Irakli Pirtskhalava, former deputy head of the Criminal Police Department, for the premeditated murder of Khubulov. The prosecutor’s motion states that Khubulov tipped off police regarding Pirtskhalava’s brother, Levan, drug-related crimes resulting in his arrest in April, 2006. Pirtskhalava then decided to take revenge on Khubulov, plotting a special operation by inventing the false story of a robbery, resulting in the shooting of Khubulov and Vazagashvili. By eliminating the witnesses, Pirtskhalava was able to avenge his brother while keeping his “official influence and reputation,” the PO’s motion said. The Tbilisi City Court rejected the defense lawyer’s petitions to release the former and active detained officers on bail.

On February 8, Gia Sosanashvili, another policeman and allegedly a friend of Pirtskhalava, was detained as a suspect of Yuri Vazagashvili’s murder. According to PO, he was identified through a DNA sample detected on part of a hand grenade that went off at the grave. The PO said that Sosanashvili installed the explosive device while someone else gave the order. The detained policeman denies guilt. His lawyer said that at the moment of the explosion, Sosanashvili was at a public place and that dozens of witnesses can prove it.

The recent developments taking place in about two weeks had an immense resonance among the public. From the very beginning, the “tennis court special operation” involved inconsistencies and controversies but the investigation has focused only on the possible use of excessive force by the police. The PO’s new charges, however, turned previous findings upside down and raised several additional questions. For example, how the deputy head of the department was able to mastermind a murder of this scale and involve so many subordinates in it. Moreover, if Pirtskhalava aimed to liquidate witnesses, why did Puturidze survive?

Another striking feature is the timing of the crimes’ resolution. After the investigation was idle for two years, the PO was able to solve both cases in two weeks, while other baffling murders occurring during the GD’s term in power remain unsolved. Most significantly, the assassination of the politician and media tycoon Erosi Kitsmarishvili and the murder of 10 month-old baby-girl Barbare Raphaliants, who was allegedly killed for political reasons.

GD supporters have welcomed the PO’s move, labeling it a “restoration of justice” – one of the prominent pre-election promises of the coalition. Others suspect political motives behind the events and perceive them as an attempt by the government to divert public attention from simmering social discontent.

By Eka Janashia (01/22/2015 issue of the CACI Analyst)

At the beginning of 2015, Russia’s state-owned oil producer Rosneft entered Georgia’s oil retail market by purchasing a 49 percent stake of Petrocas Energy Ltd. Petrocas’ affluent assets include an oil terminal in Georgia’s Black Sea port of Poti with a capacity of 1.9 million tons per year as well as a network of 140 gas stations in Georgia under the Gulf brand.

By launching a joint venture with Pertocas, Rosneft will gain high-quality storage capacity in one of the major oil and oil products hubs in the region, enrich supply routes options and enhance its operations in the Central Asia and South Caucasus oil market. “[It] is a new milestone that will highlight the strategic importance of the South Caucasian energy corridor,” the main shareholder of Petrocas, Russian businessman David Iakobashvili said.

The opposition United National Movement (UNM) party insisted that Rosneft plans to acquire a controlling interest in Petrocas and called on the government to revoke a deal damaging to state interests. The government responded that it was during UNM’s term in power that Russian investments penetrated strategic areas of Georgia’s economy such as finances, electricity, chemicals, ore industry, food and dairy products. For example, at that time, the Russian state-owned electricity trader, Inter RAO, obtained 75 percent of Tbilisi’s electricity distribution company Telasi, thermal power generating plants, as well as the management right of two hydro power plants; Khrami I and Khrami II. The government also lamented that it has no right to influence private business, especially the decisions of Petrocas, which is registered in Cyprus and manages its operations from there.

UNM counter-argued that Rosneft operations in Abkhazia breach the Law on Occupied Territories and that the government is obliged to cancel the agreement granting the Russian company “the most important communications on the country’s Black Sea shore.”

Indeed, in 2009 Rosneft started offshore explorations and development of oil and gas fields in Abkhazia under an agreement signed between the company and Abkhazia’s de facto government. Against this background, three of Georgia’s government agencies began to study the legitimacy of the Rosneft-Petrocas deal. The results are yet unknown. 

The recent deal reflects Russia’s strategy to strengthen its infrastructure capabilities in the South Caucasus to ensure an uninterrupted delivery of oil as well as other products to Armenia, which recently became a member of Eurasian Economic Union (EEU) but lacks land access to other EEU members in the absence of common borders. The reconstruction of the railway through Abkhazia and the planned Avro-Kakheti highway from Dagestan to eastern Georgia and then to Armenia, can be understood in this light.

While improving Armenia’s situation is Moscow’s key rationale, the Kremlin is also interested in consolidating its position in the Georgian market. UNM asserts that the Rosneft-Petrocas deal is only the beginning of “a big process” and unless countervailing measures are taken, “Moscow will have no obstacles at all.”

On January 17, Iase Zautashvili, the General Director of Airzena, Georgia’s national airlines, disclosed correspondence between Georgian and Russian state agencies regarding the prospect of restoring flights between the two countries. These clandestine negotiations aim to grant Russian companies a monopolistic position in Georgian airspace, Zautashvili said.

Referring to other covert correspondence taking place between the Russian and Georgian sides via the Swiss Embassy, UNM claims that 11 Russian companies, including Vladimir Putin’s Private Company, will enter Georgia’s airspace by dumping prices and eliminating the competition, including the national airlines, in order to obtain a monopolistic position in the Georgian market. The UNM also claims that some of these companies fall under the international sanctions against Russia while others have violated the Law on Occupied Territories.

The Enguri hydropower plant with a total capacity of 1,300 megawatts could become another target of Russian strategic interest. Russia allegedly intends to register Georgia’s most powerful hydroelectric station in the region in Abkhazia. Although Georgia’s Ministry of Energy categorically denies that the plant’s ownership is under discussion, Aslan Basaria, Director of Abkhazia’s power company Chernomorenergo, claims that negotiations have already been launched with participation of the Georgian side. “The plant is located on Georgian territory and belongs to the Georgian state. The Chernomorenergo Director General’s statement is far from reality,” the Ministry of Energy says. Despite the denial, Sokhumi in fact raised the question of the Enguri hydropower plant’s ownership a month ago when Abkhazia’s de facto leader Raul Khajimba said “what is located on our territory should be owned by the Abkhaz people.”

In fact, the Enguri generators are located on the territory of occupied Abkhazia while its arch dam is in the Georgian-controlled area. According to the informal agreement reached between Tbilisi and Sokhumi in the 1990s, Abkhazia gets 40 percent of the electricity generated by the plant free of charge while the rest goes to Georgia. The fact that the agreement terms are rather favorable to the Abkhaz side suggests that the questions raised over the plant’s ownership comes from Moscow, rather than Sukhumi.  

Taken together, signs are emerging of several steps taken by Russia to make inroads into vitally important sectors of Georgia’s economy.