Books on Georgia
Update No: 308 - (29/08/06)
Relations with Russia sour further
Relations between the former Soviet stable-mates, Georgia and Russia, have been
strained in recent months over the presence of Russian peacekeepers in conflict
zones with two self-proclaimed republics in Georgia and other issues, including
a Russian ban on the import of Georgian mineral water and wine.
Moscow has never accepted the Rose Revolution that ended the career of the old
Soviet war-horse, former president Eduard Shevardnadze, and saw Georgia take a
decisive turn to the West.
Georgia is potentially the best place in the FSU, where the top boys in Moscow
could go for a great holiday in superb dachas on the Black Sea coast both Stalin
and Beria had them, and cheered by the best food and wines in the socialist
camp, other than Hungary. Its independence was one of the bitterest blows for
the men in the Kremlin in 1991; and then came its definitive loss in 2004.
Saakashvili pulls out of CIS summit
The new president, Mikhail Saakashvili, a young Western-educated lawyer, pulled
out of an informal CIS summit in Moscow in July because a separate meeting with
the Russian leader was impossible, Georgia's foreign minister said. Saakashvili
had been due to arrive in the Russian capital for the July 21-22 meeting of
leaders from the Commonwealth of Independent States, a loose union of 11
post-Soviet nations, where he had earlier said he hoped to talk with Putin about
complicated bilateral relations.
"Deputy Foreign Minister Merab Antadze had brought specific proposals from
Georgia but until the last moment we received no answer about whether the
meeting would be held," Gela Bezhuashvili said. "We received an answer
today that there would be no separate meeting but only contacts during the
summit events," the minister said. Putin was clearly wanting to avoid any
discussion of the ban on imports and contentious matters concerning
'peacekeepers,' who would be better termed 'war-enablers.'
Bezhuashvili added that the sides would have had no opportunity to discuss
serious bilateral issues in such circumstances, which is why the Georgian leader
had decided against attending the informal CIS summit. The minister said the
country hoped for understanding from Russia and other former Soviet republics.
The minister said that Georgia would work to arrange a meeting of the two
presidents. "We will continue to work with Russia to arrange a serious
meeting oriented to a result that would lead our bilateral relations out of the
current impasse," the minister said.
Inflationary threat to the embargoed economy
Moscow's recent salvos in an economic skirmish (the banning of certain
Georgian goods in the Russian market, above all wine) have highlighted the
threat posed by inflation. Georgia has already absorbed heavy losses from the
Russian embargo. Now, because the country has seen a drop-off in foreign
currency revenue from exports, the lari is under considerable pressure. Some
experts estimate that by the end of this year, the lari will devalue by almost
20 per cent, which is sure to be felt amongst an already hard-hit population.
Devaluation does not always involve inflation, as is often erroneously said (for
instance, it did not do so in the UK, in the period after it left the ERM of the
EU in 1992). But it certainly can do so under certain circumstances, such as
obtain in Georgia today, a ravaged economy with widespread disruption in
supplies, notably energy in winter and spring.
Inflation is likely to remain an acute problem for Georgia, and the country has
been attempting to tackle it through a number of different means. As a campaign
promise for the upcoming local elections, the Georgian leadership has vowed to
curtail the alarming inflation rate.
Financial expert Giorgi Tsutskiridze, responding to an article in Kviris Palitra,
predicted that if the demand for foreign currency increases, but the influx of
money into the country falls, the lari will be weakened. According to him, until
recently, exports of wine, mineral water, and other relatively lucrative goods
were increasing, bringing in a gradually growing stream of foreign currency.
This has partly dried out as a result of the Russian embargo, raising the
spectre of dramatic effects on Georgia's economy.
Tsutskridize thinks that inflation rates can be brought down through a few
measures: more foreign investment in the country, more allotments from the IMF
or World Bank, and/or the National Bank of Georgia pulling currency from
circulation. The National Bank is preparing to do just that.
Saakashvili Unveils New Economic Initiatives
There is an even more urgent economic problem, mass unemployment. President
Saakashvili announced on August 4 that the country's major economic goal will be
a twofold reduction of unemployment by 2009 through the creation of a more
In his late-night televised address to the nation the Georgian leader unveiled
plans to reform tax administration and to re-introduce a tax arbitration system.
Saakashvili also announced the intention to launch a new government-sponsored
programme involving three-month internships in private businesses for at least
50 000 citizens, which will cost about GEL 22,5 million (roughly US$12,7
Saakashvili said that Georgia has achieved much since the Rose Revolution, but
"these achievements are still fragile." "Now it is time to move
on the next stage of economic development," he added.
The President noted that the major challenge for Georgia is unemployment.
"Our major goal now is to reduce unemployment at least by two-fold before
the expiration of my first presidential term [by 2009] by giving impetus to the
economy," Saakashvili stated. He stressed that new jobs should be created
not only in Tbilisi, but in all regions of Georgia, "even in the most
remote places of the country."
"We have done much that is positive, but of course all these positive
[economic] trends should be of a more irreversible nature. Of course Georgia
needs much more foreign investments. Foreign investments are coming into our
economy, but it needs a much more transparent, much more forecasted
[environment], as well as guarantees for long-term stability," Saakashvili
Reforming Tax Administration
Saakashvili said that the first thing the country needs in order to give the
economy new impetus is "modern and efficient" tax administration and
the "decriminalisation of financial relations" between the state and
"During the first years of the drastic fight against corruption, which
still continues, of course the major part of relations with an entrepreneur was
carried out [by the state] through the tax police. As soon as the tax police
enter into a business entity [for a probe], this business entity is
automatically criminalized because it immediately enters into a relations based
on a criminal code, which means moving into a very unpleasant
relationship," Saakashvili said.
"We should carry out a reform of the tax service, envisaging the
unification of the tax [department] and customs [service], where the tax police
will be only one of the units and where [the tax police] will be the last resort
and last point of relationship with business, and it should only be used in
extremely rare cases. All the rest should be solved based on civil relations
between the state and business."
By "tax police," Saakashvili was referring to the Financial Police -
although he did not mention this term. However, when the text of his speech (in
Georgian) was posted on the President's official web-site, the term "tax
police" was changed to "Financial Police."
The Financial Police was set up in February 2004 to fight economic and financial
crimes and to probe into tax evasion cases. The unit, which is currently part of
the Finance Ministry and is under the direct subordination of the President, has
turned into an extremely influential institution and has often been the target
of fierce criticism for its high-handed tactics. Saakashvili said that this
reform "will need many months" to come into effect.
"A businessman should know that he has relations with a civilized state,
and business should have a feeling that the state is not only a tool for
punishment. Punishment should be the last resort used by the state,"
Re-Introducing Tax Arbitration
President Saakashvili admitted that Georgia needs a "much better
judiciary system" and the re-introduction of tax arbitration, which was
abolished in April, 2005 - less than five months after it was introduced. But
Saakashvili added that new tax arbitration system will be "much
better" and that the state and businesses will be in equal positions.
He said the new arbitration system should be introduced by the beginning of
"We need to create a [tax] arbitration system, but not like the one we
established a year ago. That [previous arbitration system] was the government's
mistake, as some people were businessmen and arbiters at the same time, which
gave no chance for the state to win [disputed cases]. The state will no longer
be a fool," Saakashvili said.
"We are ready to invite foreign arbiters and pay them high salaries, and we
will let them, together with local real arbiters - not like those false arbiters
we had previously - solve disputed cases," he added.
He said that the state is ready to start a microcredit programme from
January 2007 for those willing to launch private businesses, especially in the
"Every person should be able to receive credit. But we should prepare
people for entrepreneurship. I instruct the government to launch the
re-qualification of our citizens to prepare them for entrepreneurship. The
government should assist these re-trained people in launching their businesses.
We are ready to allocate funds for this programme.
Lack of Human Resources
Saakashvili said that although there is unemployment, the country lacks
qualified cadres in various sectors, especially in the fields of construction
"This is a very serious issue, because we had an absolutely dismantled
education system… The Education Ministry is now working on the creation of new
re-training centres. Seven centres of this kind will be opened in September,
including in Kobuleti [Adjara] to train tourism service staff; in Tbilisi we are
going to open [a training centre] for the construction business. But we will
need much more, we might need thirty, forty, or even fifty [re-training centres]
of this kind, and it will take time," Saakashvili said.
State-Funded Internships The Georgian leader announced that starting from
September the government will finance a three-month internship program in
private businesses for at least 50 000 citizens.
"I know there are many people in Georgia who not only can not find a job,
but they are not even looking for jobs… I want to tell you, my dear
compatriots, that the state can no longer serve as an employer… So we urge
both citizens and businesses to show initiative," Saakashvili said.
He said that the government will pay GEL 450 (roughly US$254) to each
participant of the program during the three-month internships in various
"This is important because we will make people come out of their homes,
while the business will be able to meet many skilful people. Of course
businesses will not be obliged to hire these people after three months, but I am
sure after these three months many [participants of the program] will be able to
find jobs, at least in other businesses. We should inspire willingness and work
skills, and we should let them [citizens] get a taste of a modern economy,"
"I want to tell our businessmen that you will not lose anything as a result
of this program; you will have an unpaid employee for three months without any
obligation to recruit them after three months. But through participation in this
program you [businessmen] will take a huge patriotic step," Saakashvili
He said that the government will fund internships for an additional 100 000
citizens for next year "and if there is more interest we will allocate even
more funds for this programme."
"In addition, we are ready to consider a further reduction of taxes after
these 150 000 citizens undergo this programme. And also here I want to remind
our businessmen that starting from this September, we will have zero percent
custom dues for almost 90% of products. And I also want to remind you that we
have one of the lowest taxes among the Eastern European states,"
Vneshtorgbank plans to invest 135 million
Russia's Vneshtorgbank plans to invest 135 million Euro in the Georgian economy
over the next year. The plans were announced at a meeting between VTB officials
and National Bank of Georgia president, Roman Gotsiridze, on July 14, the
National Bank said, Interfax News Agency reported.
VTB has decided to raise loan resources for the Georgian market to 180 million
Euro, he said. It also plans to invest in the energy and chemicals industries
and in the United Georgian Bank (VTB acquired 50 per cent plus one share in the
UGB in January 2005).
The meeting also covered additional investment in the bank's subsidiary in
Georgia - Energy Invest, which owns the chemicals plant Azot in Rustavi and the
gas-powered station in Gardabani, Gotsiridze said.
United Georgian Bank is Georgia's third largest bank by asset volume. UGB assets
on May 1, 2006 totalled 441.4 million laris (245.2 million Euro), liabilities
amounted to 398.3 million laris and share capital - 43.1 million, the National