EurasiaNet Business & Economics - Crime and Political Instability Obscure Georgia's Investment Prospects

BUSINESS & ECONOMICS

CRIME AND POLITICAL INSTABILITY OBSCURE GEORGIA’S INVESTMENT PROSPECTS

Mark Berniker 2/28/03

The impression is growing among foreign investors that Georgia is a difficult, even dangerous place to do business. With the government unable to contain rampant crime and corruption, international financial institutions, including the World Bank and the International Monetary Fund, have raised the possibility of a cut-off in operations in Georgia.

The head of an IMF mission to Tbilisi, Paulo Neuhaus, expressed concern over Georgian government economic policies during a meeting with Minister of State Avtandil Jorbenadze, the Iprinda news agency reported February 21. Specifically, Neuhaus criticized the government’s decision to lower electricity tariffs and its failure to collect taxes. [For background, see the EurasiaNet Business and Economics archives]. The IMF representative indicated that the fund may opt not to continue its programs in Georgia if existing problems remain unaddressed.

The remarks by Neuhaus came only weeks after a top World Bank official reportedly voiced harsh criticism over the government’s management of the economy. Georgia’s Rustavi-2 TV broadcast a report January 26 saying Donna Dowsett-Coirolo, the bank’s regional director, had sent a letter to Jorbenadze concerning the country’s economic trends.

"Management and governance [in Georgia] are deteriorating compared with other countries of Europe and Central Asia. Corruption remains one of the main problems," the letter said, according to the Rustavi-2 report. "According to the Business Environment and Enterprise Performance Survey, in 2002 the number of firms saying that they often have to pay bribes increased compared with 1993. That happened at a time when in Armenia and Azerbaijan, the corresponding figure halved over the same period."

Jorbenadze has denied the existence of the World Bank letter. Nevertheless, Rustavi-2 reports that the Bank has decided against making a $40 million loan available to Georgia in 2003 under the auspices of its fourth structural adjustment credit.

"The IMF and World Bank have gotten severely disillusioned in the Georgian government," says Jaba Devdariani, editor-in-chief of Civil Georgia, an online magazine based in Tbilisi.

Many corporate investors share the World Bank and IMF view. "The laws of Georgia are often not implemented. Misinterpretation of laws and regulations sometimes leads foreign investors into legal battles with their local partners. On top of this, the legal system is not considered to be fair and unbiased, which has a negative impact on the overall investment climate," says Amy Denman, executive director of the American Chamber of Commerce in Georgia.

Georgian President Eduard Shevardnadze, speaking in his weekly radio interview February 24, admitted that crime, including kidnapping and attacks against businessmen, was deterring investment. The president ordered law-enforcement agencies to increase efforts at promoting security. [For background see the Eurasia Insight archives].

"If we do not launch an uncompromising fight against criminals � investors will be reluctant to come to Georgia and our citizens’ aspiration to work will disappear," Shevardnadze said in the radio interview.

Political observers in Tbilisi take a skeptical view of Shevardnadze’s comment to crime-fighting. They point out that the Georgian president has announced several campaigns to reduce corruption in recent years. None of those campaigns have had a tangible impact on reducing graft. [For background see the Eurasia Insight archives].

Even if authorities make strides in reducing crime, Georgia faces daunting political challenges that threaten the country’s stability, and, correspondingly, its investment attractiveness. Conflicts abound in Georgia with much of the current international focus on the Pankisi Gorge. The use by Chechen fighters of the gorge as a safe-haven has helped stoke tension between Georgia and Russia. [For background see the Eurasia Insight archive].

Tbilisi and Moscow have also sparred over the separatist region of Abkhazia. Some international observers have expressed fear that fighting in the region may flare again. [For additional information see the Eurasia Insight archives].

The Economist Intelligence Unit, in a 2002 report, said Georgia’s antagonistic relationship with Russia "provides foreign investors with yet another reason not to invest in Georgia � that is, if corruption, arbitrary enforcement of laws and regulations, and the occasional kidnapping of Western executives had not already deterred them."

Of all the factors that can offset this instability, Georgia’s relative proximity to natural resources may be the most important. Georgian officials have been working to make the 1,760-kilometer Baku-Tbilisi-Ceyhan (BTC) pipeline become a reality. [For additional information see the Eurasia Insight archives].

According to the Economist Intelligence Unit, pipelines represent Georgia’s best hope for economic development, both in creating jobs and in generating badly needed revenue for the government through transit fees. But optimism over the BTC project has been tempered in recent months by environmental and security concerns. British Petroleum, which is leading the construction of the BTC pipeline, has been criticized by Georgia’s Green Party for failing to consider the environmental impact on Georgia’s Borjomi Valley, which is the source of famed mineral water springs. [For additional information see the Eurasia Insight archives].

Editor�s Note: Mark Berniker is a freelance journalist specializing in Central Asia and the Caucasus. This is the third in an eight-part series on political risk in the region.

The Central Eurasia Project aims, through its website, meetings, papers, and grants, to foster a more informed debate about the social, political and economic developments of the Caucasus and Central Asia. It is a program of the Open Society Institute-New York. The Open Society Institute-New York is a private operating and grantmaking foundation that promotes the development of open societies around the world by supporting educational, social, and legal reform, and by encouraging alternative approaches to complex and controversial issues.

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