War rattles Georgia's budding economy

By bne IntelliNews August 26, 2008

Roman Olearchyk in Tbilisi -

Before Georgia's six-day war with Russia, its small but booming economy had everything going for it. Post-war, Georgia now has to absorb what Economy Minister Eka Sharashidze estimates is more than $1.5bn worth of direct and indirect losses.

Radical economic reforms implemented by President Mikheil Saakashvili since 2004 have made up for years of economic collapse and turf wars. The new Georgia flaunted its remarkable economic turnaround to post-Soviet neighbours. However, since the conflict with Russia in August, "We are just beginning to grasp the damage," says Sharashidze

The country's capital is largely unscathed, with most of the damage by targeted Russian bombings centred on a radar complex, nearby military airports and facilities. Outside Tbilisi, little damage is noticeable even in the town of Gori, a centre of military operations by Russian and Georgian troops. Tanks, however, have scrapped up roads, while residential buildings and bridges are destroyed. Some looting was reported. Factories and ports have been damaged to varying degrees. Hardest hit was Tskhinvali, capital of the separatist enclave of South Ossetia. It's uncertain which army is to blame, but much of the small city is rubble. In Georgia proper, most damage is to the country's military, the recent recipient of $2bn in modernization freed up by robust economic growth. Russian bombing has destroyed much of it.

When fighting erupted, international rating agencies downgraded Georgia to negative. Fearful that citizens would cause a run on the banks, triggering financial collapse of a budding bank sector, the government closed banks for one day. Some $100m has been withdrawn, which equals 5% of the $2.1bn in pre-war deposits. Bankers hope the storm has passed with the peace agreement and arrival of assistance from the US, which has pledged billions of dollars in support. "People were nervous, but the currency remained stable and there was no panic," says Nicholas Enukidze, chairman of Bank of Georgia, the country's largest bank. "We can easily survive two weeks and be sure the economy goes back to normal," but added that the ramifications of a prolonged stalemate or renewed escalation is uncertain.

Michael Davey, regional director for the European Bank for Reconstruction and Development (EBRD), which has invested some $150m into Georgia's banking sector, said the major impact on business has been logistical headaches caused by road closures and other war-connected obstructions. "Overall, the economy is resilient. The substantial foreign investment inflows in recent years and reforms helped absorb this shock," he said adding that the major effect on Georgia's economy will be "a probable reduction in foreign investment."

Suing for peace

Since taking over, Saakashvili has cut the bureaucracy and corruption, raising Georgia up to the 18th spot on the World Bank's "Ease of Doing Business" study, far above Russia at 106. Since 2004, net FDI has quadrupled to $2bn, and GDP/capita doubled to $2,315. GDP grew by 12.4% in 2007.

But a week of war forced many citizens to flee their homes. These refugees will weigh in on existing aid programmes that were designed for the more than 200,000 refugees that fled fighting in Abkhazia and South Ossetia the last time these two breakaway regions came to blows with the Georgian state in the 1990s.

Officials said some factories hit by bombings could sue Russia for damages. It's an option some officials said was being considered by RAK Investment Authority, of the Ras Al Khaimah group from the United Arab Emirates, which this year paid $90m for 51% of Poti Port in a privatisation tender. Despite noticeable bombing damage, the port is still operational.

The Georgian government, humiliated and chastened by the whole affair, is trying to put a positive spin on the undoubted damage that 24-hour television scenes showing Georgia as a treacherous battlefield had done to its image as feisty emerging market. "If Georgia's economy withstood Russia's embargo for two years and this war, its shows how strong our foundation is."

The EBRD's Davey cautioned that much will depend on the timing and form of the final peace settlement with Russia, suggesting that a long-drawn-out standoff or escalation could further hit the country's growth prospects.

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