Samantha Shields in Sukhumi -

The small, but strategic, Black Sea region of Abkhazia, whose economy was devastated by a bitter war in the early 1990s, is hoping Russia's recognition of its declaration of independence after 2008's war between Russia and Georgia will start it on the long road to recovery and pique the interest of investors.

Russia was quick to recognize the breakaway subtropical territory, whose lush coastline and warm climate once made it the "Soviet Riviera", after the end of the war in August 2008. Only Nicaragua, Venezuela and the tiny Pacific island nation of Nauru have followed in recognizing Abkhazia as a separate state from Georgia.

Sergei Bagapsh, Abkhazia's de facto president who won a second term on a pro-Russian platform last December in an election ignored by most of the world, says it needs to start building an economy from scratch. "The world financial crisis affected everyone, but we have an advantage because we don't owe anybody money and nobody owes money to us. So what we start to build today, we build based on our own reserves," he tells bne in an interview in the capital Sukhumi.

Bagapsh says tourism, agriculture and food processing are the main priorities for investment, adding that the region also needs to create order in customs, taxes and communications. It can do none of these things without massive Russian sponsorship - sponsorship given because Abkhazia borders key oil and gas transit routes, and is just 20 kilometres from Russia's Black Sea resort of Sochi where the 2014 Winter Olympics will be held. Both sides refute Georgian accusations that Russia is annexing Abkhazia by stealth, and Bagapsh says he's confident independence will be respected because it was his decision to ask for financial help after Russia's recognition.

Russian in

So far, Russia is the only investor showing any interest in Abkhazia. Its government contributed RUB2bn (€47.5m) to Abkhazia's budget in 2009, 57% of the total, and will match that figure this year, says Kristina Ozgan, Abkhazia's economy minister. Over 80% of current investment comes from Russia and has gone into timber processing, brewing and wine making, and fruit processing and packaging. Abkhazia imports over 90% of its food from Russia, and recently changed its international dialing code from a Georgian prefix to a Russian one.

Potential investors won't be able to see GDP figures until 2011 because statistical bodies have only just started to collect them. "We had a war in the early 90s and everything was completely destroyed. We need huge amounts of investment and we would welcome it from anywhere," Ozgan says.

Kristina Ozgan

Up until the 1991-92 war, when Abkhazia first broke away from Georgia in a bitter ethnic war, it was a thriving tropical paradise for sun-starved Russian holidaymakers, who would flock there to see palm trees and taste mandarins for the first time. Every Soviet leader from Stalin to Gorbachev had a dacha on its coast.

Today, most of the hotels are derelict, and along the potholed road from the Georgian border to Sukhumi fruit rots on trees and litters the ground in the deserted areas the Georgian population fled from. Once-cheery cafes on Sukhumi's seafront promenade are deserted and the hulk of an abandoned ship rusts on its beach, but Ozgan says that with investment Abkhazia could recapture its glory days. "We have no really good hotels, and a fraction of the total number that we had in the Soviet period, but we still get around a million Russian tourists at the height of the summer season," she says.

Russia's biggest oil company Rosneft has already signed a cooperation agreement with Abkhazia and began gasoline deliveries last year, says Russia's ambassador to Abkhazia, Semyon Grigoriev. He says Russian state gas monopoly Gazprom or one of its subsidiaries might be interested in expanding to the region in the future.

On a surprise trip to Abkhazia on the first anniversary of the August war, Russian Prime Minister Vladimir Putin pledged $500m in 2010 to strengthen Abkhazia's defences and encouraged Russian businesses to invest there. The Winter Olympics should provide a boost to Abkhazia. Its riverbeds are already supplying gravel for new stadiums and construction workers will be housed in the territory.

Sukhumi's residents have no illusions that Abkhazia could survive without Russian help. "We shouldn't be isolated, but we are. Without the Russians we'd be going hungry," says Nikolai Sakidi, a 76-year-old pensioner playing backgammon on the seafront.