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ethnic groups 
Georgians 68.8%
Armenians 9% 
Russians 7.4%



Eduard Shevardnadze

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Georgia was absorbed into the Russian Empire in the 19th century. Independent for three years (1918-1921) following the Russian revolution, it was forcibly incorporated into the USSR until the Soviet Union dissolved in 1991. Russian troops remain garrisoned at four military bases and as peacekeepers in the separatist regions of Abkhazia and South Ossetia (but are scheduled to withdraw from two of the bases by July 2001). Despite a badly degraded transportation network - brought on by ethnic conflict, criminal activities, and fuel shortages - the country continues to move toward a market economy and greater integration with Western institutions. 

Update No: 264 - (01/01/03)

The Georgian republic is making progress on the geopolitical front, becoming the US's favoured ally in the Caucasus. The Americans are extending military aid, 10 helicopters and the like, while 200 US special forces are training Georgian troops in anti-terrorist operations. Several al-Qaeda operatives have been apprehended in the Chechnya border zone, Pankisi Gorge and handed over to US custody. This was confirmed on October 22nd. 

Tilt to Washington away from Moscow
The Russian authorities are not best pleased. They have been saying for months that the Pankisi Gorge was home to terrorists from Chechnya, whom they want handed over to them. The intrusion of the US in their former backyard in Central Asia is galling enough. Now Georgia is slipping out of their sights and hence, they fear, the whole Caucasus with which the Russians have long had a love affair, understandably since the Black Sea coast there is the best bit of real estate in the entire FSU.
Moscow still has military bases in Georgia. But it is not being asked for co-operation in the same manner as Washington and in the light of the unsuccessful assassination attempt on President Shervardnaze, mounted from Russia, this cannot be surprising. 
Tbilisi has in fact, handed over to Russia a number of Chechen rebel fighters whom they have captured in the last few months, although not all of them. The al-Qaeda captives are being extradited to the US. 
Georgia is now a frontline state in the US's campaign against terrorism, which is a major geopolitical development not only for itself, but for the whole of the region and for Russia. With Georgia also the key transit country for oil and gas from the Caspian Sea its importance in world affairs is decidedly growing.

The al-Qaeda menace
The al-Qaeda fighters apprehended by Georgia include one believed to be a senior operative with previous links to Osama bin Laden himself. They were detained during dawn raids in the past two months inside the Pankisi Gorge. The prisoners are now thought to be in the US military prison at Guantanamo Bay, Cuba.
Two of them are middle-ranking al-Qaeda operatives; but one is Saif al Islam el Masry, a member of al Qaeda's high council, the Shura.
The links between al-Qaeda and the Chechens have been suspected for a long time. The Hamburg connection has led in recent German court cases to revelations that Arab and other sympathisers with al-Qaeda were being trained in bases near Kandahar, close to one of Osama bin Laden's haunts, in 2000 and early 2001 with the intention of their going to help the Chechen cause. Some were redirected in mid-2001 to more pressing anti-US activities, including 9:11.
Naturally the Georgian and US authorities are concerned about their appearance in Pankisi, as indeed are the Russians. The coalescence of Islamicist fighters prepared to use terror to pursue their ends is undoubtedly occurring, even if their goals are widely divergent, hurting the US and its interests in the one case, repelling Russia from Chechnya in the other.
The Georgian authorities alleged recently that Arab detainees in Pankisi had been plotting chemical attacks on Westerners in Central Asia, primarily Americans, and similar acts against them in Russia. Official concern from the US is at fever pitch.
Khakha Imnadze, the spokesman for the Georgian president, Eduard Shevardnadze, was quoted by the Washington Post as confirming that several extraditions had taken place. He also conceded to the UK newspaper, the Guardian, that US and Georgian relations were "good enough that the extraditions could have occurred." If Iraq, Iran and North Korea are partners in 'an axis of evil' Washington and Tbilisi are in their own eyes in "an axis of good."

Growth of GDP is positive
At home things are improving in that the economy is not suffering overmuch from the general downturn of the global economy. GDP is growing at 4% on an annual basis, albeit after growing at 10% last year, a clearly unsustainable rate.
Agriculture accounts for 19.5% and industry for 12.6% of GDP. Added-value growth for the first nine months of 2002 on a year-to-year basis was 15.9% in construction and 9.9% in the transport sector, indicating a dynamic private economy.
Much of this activity is in the underground or 'grey' economy, which accounts for one third of the total economy, according to the State Statistics Department. It is difficult to see on what obscure criteria their exact calculations are based.
The opposition in Georgia, disarmed by the government's geopolitical initiatives, is mustering its strength in countering the state budget shortfall, which is the black spot in the country's economic performance. Five factions in parliament, the New Rightists, the Democrats, the Union of Traditionalists, the Movement for Democratic Reforms and New Abkhazia-Christian Democrats have drafted a resolution blaming the finance and economic ministers for a likely budget deficit of US$120m this year.
If in opposition, one is obliged to oppose. The budget shortfall, the finance minister was able to point out, was due partly to "the EU's suspension of grants in the wake of the abduction four months ago in Tbilisi of banking consultant, Peter Shaw." All Georgia's problems would go away, is the implication, if only security matters were tightened up. And that is being addressed by the government by its pro-US line. Such a defence is of course simplistic, but is holding the line for now. 
The government's claims that Georgia would be invited to join NATO at its Prague meeting in November turned out to be premature. President Bush's attention span is wide; but he did not realise that his gratitude expressed to President Shevardnadze for Georgia's handing over of al-Qaeda elements could have been misinterpreted as an imminent invitation to join up in NATO. An alliance spokesman soon indicated that Georgian entry would be a long-term project.

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Russian energy firm takes over Georgian chemical plant

Rustavi chemical engineering factory, Azoti, was sold on 3rd November to Itera, a Russian energy company, for US$500,000. Accordingly, 90 per cent of the factory's shares have been transferred to Itera's ownership, Kavkasia-Press News Agency has reported. 
At a second meeting of the state privatisation commission held at the Ministry of State Property, a business plan submitted by Itera was approved and it was agreed to sell the Azoti factory through direct sale for US$500,000. The decision was taken speedily following the visit to Tbilisi by the president of the Itera group of companies, Igor Makarov, who raised the issue with the president. 
Through this deal, Georgia will secure the rescheduling of the US$100m debt repayment for gas already received from Russia, as well as a permanent supply of gas in the future.
As a result of the deal, Itera is to pay Azoti's debts within three years in accordance with its business plan. Azoti's debts top US$100m, of which 33m lari is owed to the budget, 11m lari to the energy market, 20m lari to other creditors and so on. The agreement is to be drawn up within a month and the issue is to be discussed at a government meeting.
According to Itera, the Azoti factory products, including Ammonia synthesis, will be sold to Georgian farmers at half price. Itera also pledges to take care of the employment issue.
At the first meeting of the state privatisation commission on 29th November, Itera's plan for Azoti's rehabilitation was rejected. Itera was denied the right to buy the factory through direct sale and a decision was made to sell Azoti through an international tender. However, the decision was revised following the visit by Itera's management.

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Georgia agrees to lay Baku-Ceyhan pipeline through Borzhomi Gorge

Georgia has agreed to lay the Baku-Tbilisi-Ceyhan main oil pipeline through the Borzhomi Gorge, having received guarantees of the ecological safety of the region, which is famous for its unique mineral water, Georgian Radio quoted President Eduard Sheverdnadze, in an interview on December 2nd.
The president said that on the previous day he wound up a meeting with all participants in the project, at which some important details were cleared up and an optimal decision was reached. According to Sheverdnadze, guarantees of ecological safety for the construction of the Baku-Tbilisi-Ceyhan pipeline "have been doubled and tripled." A total of US$9m is already being earmarked to maintain the biosphere in Borzhomi Gorge alone. According to experts, the pipeline is so protected "it can withstand not only landslides and earth-quakes, but also attacks from fighter planes," the Georgian leader said.
The president described the steps taken to ensure the security of the pipeline as unprecedented in world practice. He also noted that if necessary the possibility of correcting the route of the pipeline is not ruled out. Sheverdnadze drew attention to a point in the agreement with the operator of the project - British Petroleum - in accordance with which the Georgian side has the right to take steps, right up to dissolving the agreement, should the operator not meet its obligations to ensure ecological safety. He said, "the sooner construction of the Baku-Tbilisi-Ceyhan begins, the sooner the laying of the Baku-Tbilisi-Erzurum gas pipeline will begin." This should fully resolve problems with gas supplies in Georgia, he said.
According to the project for the pipeline, laying of pipes should begin in Azerbaijan in the first quarter of 2003 and be completed in 2004. The future pipeline will stretch 1,740 kilometres, have a capacity of 50 million tonnes of oil per year and should be launched in 2005.
However, the cost of the pipeline, which is currently estimated at US$2.95bn, will cost the investors several dozens of millions of dollars more. To address environmental concerns, the pipeline could be several kilometres longer than was initially planned, which will call for extra expenses. On the other hand, this will "absolutely rule out the violation of the ecological balance in the region even in theory," Minister of Natural Resources, Nino Chkhobadze, said.

Itera agrees to sell Russian gas to Georgian capital without middlemen

Russian natural gas will cost Tbilisi 20 lari less [per 1,000 cu.m.]. After a month of intensive talks, the Georgian government has finally persuaded the Itera holding company to accept a simplified scheme for supplying gas to Georgia, Georgian Television has reported. The direct sale of gas by Itera to Tbilgazi [Tbilisi gas distribution company] leaves Itera's subsidiary Sakgazi out in the cold. It will lose its status as an intermediary.
As of 15th December, Tbilgazi will receive gas from Itera under a direct sale contract. The government has managed to put an end to a six-year-old scheme which designated Sakgazi, Itera's subsidiary, as the supplier of gas to Tbilisi. The Sakgazi exclusion plan emerged a month ago. From the start, the government began discussing the plan at the Itera head office and made good progress. The fuel and energy minister, Davit Mirtskhulava, secured the Itera vice-president's preliminary consent in Moscow. The final deal was done at a meeting on 3rd December between President Shevardnadze and Itera President Igor Makarov.
Mirtskhulava said in an interview with the television station: "The gas supply scheme will change. It will probably happen later in December. A contract will be signed directly by Tbilgazi and Itera, which will provide for appropriate payment guarantees."
Makarov said: "Sakgazi still has work to do. As they say, the ball is in Georgia's court. If Georgia wants us to have a contract directly with Tbilisi, that is all right, we have nothing against it."
Despite its exclusion from the Itera-Tbilgazi scheme, Sakgazi will remain the intermediary for gas supplies to other gas distribution companies. Meanwhile, the distribution network in the capital, according to Sakgazi estimates, will pay 20 lari less for every 1,000 cu.m. it receives. The government is yet to decide on whether this difference should be reflected in the tariff or the money should be spent on the rehabilitation of Tbilgazi. However, the authorities say that whatever the decision, it will be good for the economy.
The government has also agreed with the Itera president on the rescheduling of old debts over a seven-year period.

KfW loan plan for Baku, Yerevan, Tbilisi

Kreditanstalt fur Wiederaufbau (KfW) plans to grant a 17m Euro loan to Georgia, Armenia and Azerbaijan next year for energy industry development programmes. According to Interfax News Agency, the head of the German Economic Cooperation Ministry's Eastern Europe and Asia Department, Rainer Goerdeller, announced the deal at a recent international conference held in Tbilisi on creating a unified energy system in South Caucuses. KfW plans to allocate an additional 8m Euro credit to Georgia to develop reforms in the energy sector.

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IMF urges that Georgia must honour PRGF commitments

While on a working visit to Tbilisi, the International Monetary Fund's (IMF) message to the Georgian government was that it must honour its commitments under the three-year Poverty Reduction and Growth (PRGF) programme, according to Interfax News Agency. 
"IMF's proposals embraced a whole range of issues on which additional Fund credit resources will be dependent upon," Deputy State Minister, Gregory Isakadze, was quoted as saying. In the event that Georgia does not heed this advice, its ties with other global creditors and the Paris Club in restructuring the state's foreign debt may worsen, the deputy minister said. Georgia must comply with the parameters set in agreements with the Fund for its budgetary and monetary policy, the IMF mission said. 
"They want the taxation and treasury systems to work efficiently; they insist that the country take steps to prevent money laundering," Isakadze said. "They also want the privatisation of large industrial and transportation enterprises to be accelerated.

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