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Last Updated: Thursday, 8 November 2007, 23:36 GMT
Tension in Georgia may harm economy
By Konstantin Rozhnov
Business reporter, BBC News

Camouflaged police patrol a street in Tbilisi
Anti-government protests has led to clashes with the police

The recent unrest in Georgia, which has led to a state of emergency being imposed, has come at a time when the former Soviet republic's economy was reported to be expanding quite remarkably.

According to International Monetary Fund estimates, Georgia's economy will grow 11% this year and 9% in 2008.

Some experts fear that the latest political developments could slow Georgian President Mikhail Saakashvili's reforms and undermine the country's economic performance.

Mr Saakashvili won the 2004 presidential election after what has become known as the "rose revolution" in November 2003.

Eduard Shevardnadze
Mr Shevardnadze had to resign after street protests

He replaced Eduard Shevardnadze, Georgia's long-time president, whose unpopularity stemmed largely from the serious problems in the economy.

The new government had to try to solve the problems related to some of the worst corruption in the former Soviet Union, lack of investment and poverty.

In an attempt to boost the country's development, Kakha Bendukidze, a Russian tycoon, was given a post as Georgia's state minister for economic reforms.

Some welcomed the appointment, but others were concerned that it could lead to strengthening Russian influence in Georgia, which is an energy importer and one of the smaller countries in the former Soviet Union.

Mr Bendukidze pledged to "remove all the obstacles that are holding back investment" and open the whole economy to privatisation.

'Committed to reforms'

In 2006, Georgia was named the leading global reformer in a report by the World Bank and the International Finance Corporation, called Doing Business.

Georgian President Mikhail Saakashvili. File photo
Mr Saakashvili has been running the country for almost 4 years

"Georgia made enormous improvements to many areas of its business regulations," said Caralee McLiesh, a co-founder of the Doing Business project.

The country "improved its business start-up procedures, dramatically improved its customs procedures, introduced specialised courts, streamlined labour regulations, introduced a credit bureau, and cut the number of licences enormously", she said.

Despite the praise for Georgia's commitment to reforms, the report highlighted several areas with huge space for improvement, including tax reform.


But there are those who do not share the optimism shown by the Georgian government and those international organisations.

Gia Khukhashvili, head of the Association for Economic Security of Georgia, says there is only an "imitation of growth" in the economy and all the businesses are connected to Georgian officials.

He says the international organisations rely on Georgian government data, which does not show the whole picture - including extremely high inflation, unremarkable industrial output and high unemployment.

Georgia street scene
Years of unrest have shattered Georgia's economy

In Mr Khukhashvili's opinion, business in the country is virtually non-existent as the economy is in oligarchs' hands, and most foreign investments is in the form of state capital from Russia and Kazakhstan.

Nevertheless, about 60 Georgian businessmen signed a statement this week urging the authorities to "preserve stability" in the country.

They are sure the Georgian economy has developed rapidly in recent years and business regulations have improved significantly.

Relations with Moscow

In Soviet times, Georgia supplied other Soviet republics with wine, mineral water and food, and it was also a popular holiday destination.

But for several reasons, including continuing strains in Tbilisi's relations with its breakaway regions of Abkhazia and South Ossetia - which used to be attractive holiday-spots - tourism cannot be a source of economic expansion.

Until 2006, Georgian exports mostly went to Russia, including 90% of Georgia's wine production.

But relations with Russia have been worsening since pro-Western President Saakashvili came to power in Georgia in 2004.

In 2006, Moscow banned imports of Georgian wine and mineral water, citing health fears, and imposed an air, sea and postal blockade of Georgia after Georgian officials arrested several Russian officers for alleged spying.

Russia, which is Georgia's main energy supplier, also dramatically raised gas prices for the country.

But Mr Khukhashvili says the "rhetorical war" between Moscow and Tbilisi has not prevented Russian businesses from owning at least 50% of Georgia's economy, mostly in energy and infrastructure monopolies.

Despite that, Moscow maintains its air blockade of Georgia, saying the country owes money for air traffic services, as well as the ban on Georgian wines.

There are already enough internal and external factors which can undermine the country's economic development. Now it is up to politicians not to hurt Georgia's economy further.

Profile: Mikhail Saakashvili
08 Nov 07 |  Europe
Country profile: Georgia
03 Nov 07 |  Country profiles
Q&A: Russian-Georgian ties
07 Aug 07 |  Europe

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