The Russian version is that, emboldened by Washington, Georgia launched an assault on South Ossetia, only the heroic efforts of Russia rescuing the Ossetian people in a ‘peace-enforcement’ mission. But, the Georgians claim, this was carefully orchestrated by Russia and that far from acting against aggression, Moscow’s aims were to openly remove Georgia’s president and its government and control Georgia’s transit routes, ensuring its grip on the region. All this is a flashback to earlier times. Georgia declared independence in May 1918 in the midst of the Russian civil war. When British protection ended in 1920, Georgia was attacked in February 1921 by the Red Army which quickly crushed any opposition and installed a Bolshevik government for 70 years. What is for certain is that, instead of turning the other cheek to continued Russian provocation, and running out of choices, President Saakashvili took the bait, misjudging both the ethnic differences within his own borders and Russian linkages and intent. Why Russia would attack relates not primarily to the status of the Ossetian and Abkhazian minorities in Georgia (indeed, this action might actually promote secessionism inside Russia itself), but resurgent Russian nationalism and a reassertion of its presence in the Caucuses. The outcome today is that an estimated 7,600 Russian forces still operate as ‘peacekeepers’ in so-called buffer zones inside Georgia and the two disputed regions declared ‘independence’ on 26 August, so far recognized only by Russia and Nicaragua. All this sent the Georgian economy into a temporary tailspin. There was a run on the banks as depositors withdrew funds in a panic, some 15 percent of the total. Growth this year is estimated to be just four percent from nearly 13 percent in 2007. The damage to Georgian infrastructure from the conflict is estimated at around $1 billion, the damage to the economy harder to discern. Tourism has slowed, the banking sector has suffered losses while proving resilient overall, and real estate development is troubled. Realising that growth without national security is difficult at best, Tbilisi is hoping that it will acquire Membership Action Plan status for Nato membership this December, which it hopes will act as a security guarantee against further Russian actions. But it should place at least equal stock over the longer-term in economic diplomacy. Harold Wilson also said, ‘I’m an optimist, but an optimist who carries a raincoat’. Georgia’s insurance policy remains its stunning economic progress and pro-Western orientation. For that reason there is a $3+ billion bailout plan by bilateral donors and international financial institutions and including the International Finance Corporation and EBRD substituting the loss in foreign direct investment and shoring up the banking sector. But much of this money will be allocated to infrastructure spending on refurbishing ports, building a new rail links, and investing in hydropower facilities. Georgia is developing into an international transport corridor through its Black Sea ports of Poti and Batumi, an oil pipeline from Baku and Azerbaijan through Tbilisi to Ceyhan in Turkey, and the parallel South Caucuses gas pipeline. These all form part of a strategy to capitalise on Georgia’s strategic location at the cross-roads between Europe and Asia. With abundant water supplies (but no oil or gas), hydro is another cheap advantage Georgia possesses. Every cloud has a silver lining: With donor money funnelled into productive investment, infrastructure which might have taken 5-6 years to complete could now be done in just 3-4. With extraordinarily liberal policy measures covering tax and resident status in place, Georgia is pitching itself as a regional financial services sector hub for the Middle East and Central Asia. But how to deal with Russia and the breakaway republics? While most Georgian political and business leaders would like to see this resolved in their country’s favour, more important to all is clarity and stability from which a new set of relationships can be built with economic reintegration as the tool to deal with differences, not military means. President Saakashvili will also have to remove himself over the medium-term as a figure of Russian opprobrium. No doubt these are tough and uncertain political and economic times. The global financial crisis has had ripples throughout the region. In neighbouring Turkey consumer spending on ‘white goods’ dropped 25 percent this August. Its car industry is reeling from a downturn in European orders. Georgia will also have to wean itself off imports. For example, three-quarters of items carried by the major supermarket chain are imported. This has to go down in the next five years, without which the balance of trade deficit is unsustainable. To do so, the economy has to become more self-sufficient in terms of food and other necessities. This will help to transform Georgia from a very impressive to an amazing story. But there are few options for Georgia – like emerging economies in Africa – to plough on with reforms, the mind focused by its relatively high unemployment rate of nearly 13 percent, absence of significant natural resources apart from water, and low income compared to other East European countries. Georgians have seen the alternative of the Soviet era, and it’s not pretty. As Prime Minister Gurgendize succinctly puts it, ‘There is nowhere else to go.’ This stark realization and the hunger it produces combined with a well-educated and high energy population plus a strengthening infrastructure, means that Georgia will likely weather these political and financial storms. In so doing it teaches others, in Bendukidze’s words, that ‘For poor countries like Georgia and those in Africa, reforms are about going to another league, about profound change. For richer countries, it is only about grades of happiness. We not only should be part of the developed world,’ he muses, ‘we must be.’ Dr Mills heads the Johannesburg-based Brenthurst Foundation; Nielsen is with Bankinvest in Denmark and is an Associate of the Foundation.
