The gas issue is highly political after a year of increasingly tense relations with Russia. Last year started off with a tense standoff between the two neighbors after mysterious explosions cut off gas supplies from Russia to both Georgia and Armenia, a staunch Russian ally in the region.

According to Prime Minister Zurab Noghaideli, the deal with Baku represents a “political and economic achievement” although that did not stop the Kremlin-backed Gazprom from gloating over the contracts it signed with Georgian natural gas providers and businesses. Georgian media reported that three one-year contracts were signed, as well as one three-month contract, guarantying supplies for 80 percent of Georgia’s natural gas demands.

The remaining 20 percent will be supplied by Georgia’s original agreement with Azerbaijan and Turkey over its share of the Shah-Deniz pipeline and the gas imported from Azerbaijan.

Just a few weeks ago, the situation looked much brighter for Tbilisi: an all-out diplomatic campaign in Tehran, Baku and Ankara had the president gloating that Georgia had finally broken free of Russia’s last hold on the economy. However unforeseen delays with the highly anticipated Shah-Deniz pipeline brought the government’s plans to a sudden halt. According to reports, the anticipated date of the pipeline’s opening will not even be announced until mid January.

The biggest concern right now is the impact the gas prices will have on Georgians and Georgian businesses. According to representatives of Mina, a glass production plant, the combination of the Russian wine embargo and the higher gas prices equal a near fatal blow for their business. Others are facing similar problems, although the government has taken steps to buffer consumers: according to the newly passed 2007 budget, the Ministry of Energy received a boost in funding to pass on to gas distributors as a credit in the hopes that will stall price hikes for consumers.

However, according to a report published by Civil.ge, at least one gas distribution company has requested that the Georgian Energy Regulation Commission raise gas tariffs. New tariffs are expected to be announced this month.

Another potential spot of tension concerns Georgia’s transportation rates for Russian gas heading to Armenia. Currently the only pipeline bringing natural gas into Armenia is through Georgia, so it is likely that Tbilisi will pass some of Moscow’s “political prices” onto Kremlin-friendly Yerevan.

According to the IMF, if Georgia receives the Shah-Deniz gas, the blow to consumers – and the overall economy – will be much less than originally feared when Gazprom announced the 2007 Georgian prices. However since the on-line date of the pipeline is still unknown, it is unclear how much difference it will make this year.

The fact that Georgia must still relay on Russian gas is a real setback for the Saakashvili administration, especially in light of the growing anti-Georgian rhetoric coming from the Kremlin and the president’s earlier promises. However the fact that the administration appears to have finally developed a coherent strategy for seeking out new partners – and has had moderate success at diversifying its sources – could be an optimistic sign for a future solution to Georgia’s energy woes.