Developments in the South Caucasus and Caspian: A Georgian Perspective

On April 12, 2007, the Carnegie Endowment for International Peace hosted a meeting entitled "Developments in the South Caucasus and Caspian: A Georgian Perspective" with The Honorable Zurab Nogaideli, Prime Minister of Georgia. Mark Medish, Vice President for Studies at the Carnegie Endowment, chaired the discussion. A summary of his remarks are provided below. IMGXYZ682IMGZYX

Georgia’s Economic Performance and Reform

Georgia today is undertaking an intensive program of reforms that began in 2004. Because of that process, our economy has managed to survive and thrive despite the Russian embargo that snatched away seventeen percent of our export market.   In 2005, GDP grew by 9.6 percent, and in 2006, by 9.4 percent.  Forecasts estimate that this year’s growth will be in the double digits.

Georgia’s reforms are aimed at creating sustainable economic development.  We are diversifying the markets for our good, and striving to increase product competitiveness.  When the Russian market closed to Georgian products, those products were immediately diverted to other markets.  It will, however, take some time to find alternative markets for Georgian wine and mineral water.

As part of the reform plan, the tax code has been simplified and now has only 7 taxes down from 22.  This has decreased the tax burden on businesses by almost 5 percent of GDP.   New reform will be introduced in parliament later this year.  The payroll and personal income tax will be merged, and the process simplified.  Corporate tax will decrease from 20 percent to 15 percent. 

Georgia’s customs system is also undergoing reform, which illustrates the logic of our reform plan: to simplify the system enough to root out corruption.  We want to limit the contact between mid level bureaucrats and business managers.  A good example of this in action is the reform of the licensing and permits process. 85 percent of permits have been abolished and the rest of the process has been streamlined: most permits are received within 30 days and most licenses, within 20.

As a result our reform program, inflation has stayed in the single digits, and as mentioned above, GDP has continued to rise.  Forex reserved reached 1 billion this last year, and in 2007, we expect some 2 billion in foreign direct investment.  Reform in 2007 will continue, with major projects focusing on judicial reform, decentralization of governance, and economic liberalization.

IMGXYZ684IMGZYXCaspian-Black Sea Corridor

The Caspian/Black Sea region is finally delivering on its geostrategic potential.  Georgia is a physical and political bridge connecting Europe and the global market to Caspian and Central Asian potential through major energy and transportation projects.  The resources of the Caspian region will allow Europe to diversify its energy supply and help provide energy security. 

Georgia is the host of many pipelines.   When work began on the Baku-Tbilisi-Ceyhan pipeline, the importance that it would play was not clear.  Now it transports 1 million barrels of oil a day to the world market, stabilizing price in the face of skyrocketing global demand.

Gas has also started flowing between Azerbaijan and Georgia, and will eventually flow through Georgia to Turkey and Greece.  There are several Caspian/Black sea transportation projects currently underway that will increase the importance of Georgia as a transit state.

For its part, Georgia wants to offer partner countries with the shortest and most cost-efficient transportation route to Europe.  It feels that market principles should govern the hydrocarbon market, not geostrategy, and as such does not exclude the possibility of cooperation with any country based on these market principles.
 
It is time for the United States to use its diplomatic strength to advance the current transportation projects and help to create new ones.

Georgian-Russian Relations

The tensions since the so-called “espionage scandal” have softened, but now is the time to take practical steps forward to create a lasting relationship.  At the same time, the upcoming elections in Russia create a certain degree of uncertainty.  Georgia hopes not to become an electoral topic, the object of jingoistic populism.

Thus far, there have been no tangible changes in the relationship, and the embargo remains in place.  It doesn’t look like there will be any major developments in the near future.

Conflict resolution continues to represent the most challenging aspect of the relationship.  Russia supports the separatists and obstructs the work of international organizations operating in the region.  

Meanwhile, the bombings in the Khodori Valley on the eleventh and twelfth of March have further destabilized the situation in Abkhazia. Georgia is responding with caution to all such attacks, not wanting to be provoked.  But it is also working to make sure that it doesn’t happen again.

Conversely, changes in South Ossetia make peace seem possible there.  South Ossetia is a small region, and 60 percent of it is under Georgian control.  Only 40 percent remains a conflict zone with about 40 residents. The Georgian government has started a dialogue with Russia and the separatist government of the region.  As a result, the leader of the separatists has agreed to lay down arms.  In short, there is new hope.

IMGXYZ685IMGZYXQ&A:

Q:  About the Nato-Freedom consolidation act, which provides support for Georgia accession to Nato.  How does Georgia feel about this law? Do you see support from the US for Georgia’s Nato aspirations?

Both the US president and Congress support Georgia in its Nato bid, and Georgia views this bill as a seal of approval.  Georgia looks forward to completing the intensified dialogue stage and moving on to a Membership Action Plan. 

Q:  With regards to your idea of a Caspian-Black Sea corridor, how can that be made more of a reality in the face of the Nagorno-Karabakh crisis?   Is there a way to bring that conflict to an end?

The Nagorno-Karabakh conflict is a major impediment to Caspian/Black Sea cooperation.  I want the countries involved to bring the conflict to an end so that everyone can benefit from the potential of the region.  That said, I really can’t offer a plan to move forward.

Q: Could you update us on your WTO negations with Russia?  When do you expect the next round and do you see any obstacles?

In 2004, Georgia signed a protocol of agreement with Russia on accession to the WTO.  The protocol had two parts: Georgia agreed to Russia’s accession to the WTO, and Russia agreed to trade with Georgia only through legal checkpoints.  Georgia feels that both sides of this agreement should be honored, but Russia continues to trade with Georgia through illegal checkpoints.

Georgia stands ready to begin the next round of negotiations at any time, whenever the Russians are ready.

Q: Does Georgia expect additional pressure to solve its frozen conflicts given the progress that is being made in Kosovo? Will it set a precedent for separatist struggles?

There is already plenty of pressure on Georgia to solve its frozen conflicts.  That said, it is clear that there is no Kosovo precedent. Everyone working on the Kosovo says that there is no Kosovo precedent and that each individual conflict requires a unique solution.

If there were such a thing as the Kosovo precedence, it would send a very dangerous message to separatists: in order to achieve independence, all you need to do is ethnically cleanse 80 percent of the population.

Q:  Russia has expelled foreigner workers from its markets, including about 1,700 Georgians.  Is this continuing?  How does Georgia feel about Russian FDI?  What is the status of the Russian bases on Georgian soil?

The process of base closure is going according to the agreed schedule. The base at Akhalkalaki will be closed by the end of this year and the base at Batumi by the end of next year.  There aren’t any foreseeable stumbling blocks, and the process should continue according to the plan.

What has happened to foreign worker in Russia, especially to Georgians, is organized xenophobia.  Everybody recognizes that it is xenophobia, but the situation really hasn’t improved.  Personally, it is disturbing to me that I cannot safely walk around Moscow. 

As for Russian investment, Russia was the 4th largest invest in 2005, but now isn’t even in the top 10. 

Q: I congratulate you on your impressive reform agenda.  But am curious to know what you have done to make the reform not only economically, but also politically viable? Many countries undertake economic reforms that aren’t received well politically.

Smart governments undertake reforms on their own political timetable, not when the World Bank and IMF want them to.  The government of Georgia has done a good job of working around the political cycle in Georgia. 

For example, next year there will be elections in my country.  But instead of trying to implement reforms during the elections, we are implementing them now.  When are trying to time the payoffs of our reforms to coincide with our need for political support. In short, we will implement reform cleverly.

Q: About Georgia’s accession to Nato, when do you expect that to happen?  Secondly, given Russia’s reaction to Nato expansion in the past, how do you think it will react to Georgia’s accession?

It is not worth speculating on a certain date for accession.  Georgia is currently in the intensified dialogue stage, but hopes to enter into a Membership Action Plan at the next Nato summit in 2008, about a year from now.  The rest depends on how Georgia implements its MAP.

As for Russia’s feelings: Georgia’s accession is its own business and that of the 26 member countries of Nato.  I don’t know what the Russian position will be, but it really doesn’t matter.