To Secure Future, Georgia Banks on Russian Business

Russia's loss is Georgia's gain: that's how Russian President Vladimir Putin's administration is officially framing the recent appointment of Kakha Bendukidze as Georgian economic minister. At the same time, many analysts in Moscow are casting the move as a "win-win" situation, as Bendukidze is widely expected to encourage the expansion of Georgian-Russian trade.

Bendukidze's appointment June 1 came as a surprise. Though educated in Tbilisi, Bendukidze has lived and worked in Russia since 1990 and does not yet have Georgian citizenship. The 48-year-old tycoon built his business reputation by heading Russia's largest manufacturing company, United Heavy Machinery, a conglomerate that includes the UralMash plant, a Soviet-era industrial giant involved in the production of equipment for the oil and gas industry. Bendukidze's conglomerate also had interests in mining, shipbuilding and nuclear power stations, among other concerns.

In announcing the appointment, Georgian Prime Minister Zurab Zhvania hailed Bendukidze as a "world-class economist." Russian officials welcomed the move, while professing to be pained over losing a top-flight manager. "Without a doubt this is a great gain for Georgia and a fairly serious loss for Russia," the RIA news agency quoted Putin aide Andrei Illarionov as saying June 2. "He is a very substantial and serious public figure in Russia who has done a great deal to ensure that our economy and society becomes freer and more effective."

Opening up Georgia's economy to competition and investment, Bendukidze stated, is first objective. "Deregulating the economy should be a priority of any economic policy, and in Georgia, it is ultra-liberalism," the Interfax news agency quoted him as saying. Bendukidze indicated that he wants to sell off as many state assets as possible, aiming to bring in much needed revenue and attract foreign investment.

That certainly appears to be good news for Russian corporations in the energy and transport spheres, many of which are aggressively pursuing opportunities in Georgia. In 2003, United Energy Systems obtained a large stake in Georgia's electricity network. [For background see the Eurasia Insight archive]. Now, giant Gazprom plans to ship 1 billion cubic meters of gas to Georgia this year amid reports of its interest in Tbiligaz, the capital city's gas network. Oil and natural gas company Itera has announced plans to supply 350 million cubic meters of gas to Georgia this year as well as to invest $250 million in the construction of a chemical plant outside of either Poti or Batumi. In return for writing off a $46 million debt held by Georgia, the Russian company wants to secure 90 percent of the Georgian chemical plant Azoti. Meanwhile, Aeroflot has confirmed talks to buy out the Georgian national carrier Airzena.

Bendukidze is well positioned to facilitate Russian-Georgian deals. His experience at United Heavy Machinery appears to dovetail neatly with the specifications provided in a draft economic cooperation agreement announced in Moscow on May 25 by Zhvania and Russian Prime Minister Mikhail Fradkov. Under the terms of the agreement, Russia will increase its electricity supplies to Georgia, invest in the country's transport and oil sectors as well as help it rebuild its crumbling power facilities. Georgia is currently enduring severe shortages of electricity.

The decision to appoint the Georgian businessman reportedly was made during a May 28-29 conference in Tbilisi to discuss investment opportunities in Georgia. Among the participants were executives from Russian corporate heavyweights including United Energy Systems, LUKOil, Aeroflot, and TransNeftGaz. Vladimir Chkhikvishvili, Russia's ambassador to Georgia, described the forum as an "historic event" in relations between the two countries.

In a move apparently designed to encourage Russian investors' interest further, Zhvania announced on May 28 that advisers from the Russian Ministry of Economic Development and Trade would help Georgia rewrite its tax code. According to Economics Minister German Gref, the changes would encourage Russian businesses to invest in Georgia. "There will be no investments in Georgia, if there is no transparent and liberal tax code," Gref told the Tbilisi conference.

Russian leaders largely concur in the Georgian expectation that Bendukidze will boost bilateral trade. "Bendukidze knows very well the way the Russian economy works," Russian Deputy Prime Minister Alexander Zhukov told journalists June 1. "This knowledge will be very useful to him in establishing mutually advantageous relations between Georgia and Russia."

Some Georgian experts view Russia's investment interest as politically motivated, believing Putin is encouraging an acquisition binge as a means of counteracting US influence in the region. [For background see the Eurasia Insight archive]. Some Russian analysts indicate that allowing large-scale Russian investment is the price the Saakashvili administration may have to pay in return for Moscow's cooperation in Tbilisi's effort to restore its authority in the break-away regions of Abkhazia and South Ossetia. [For background see the Eurasia Insight archive].

"It [Georgian-Russian relations] is not a disinterested love relationship," commented Dmitri Trenin, deputy director of the Carnegie Moscow Center, in an earlier interview with EurasiaNet about Russian policy toward Georgia. "If you want something, you have to pay."