Georgia: Paying the price of integrity


Guy Norton
Published on:

Georgia’s ill-fated attempt to prevent the secession of South Ossetia and Abkhazia is set to cost the country billions of dollars, but financial backing from western Europe and the US should help to ensure that the country’s economy remains one of the most open and business-friendly of the states that were formerly part of the Soviet Union.

Georgia lost to Russia militarily but in public relations terms the country has come out on top and looks set to receive substantial overseas funding to help pay the $1 billion repair bill for damage to its civilian infrastructure. On the economic front, the achievements since the Rose Revolution in 2003, which brought pro-western president Mikheil Saak’ashvili into power, have been impressive. Foreign direct investment has quadrupled to $2 billion and GDP per capita has doubled to $2,315. However, whether or not Georgia can maintain its economic progress in the face of outright Russian hostility and the loss of South Ossetia and Abkhazia remains open to question.

Economy minister Eka Sharashidze estimates that the Georgian economy has sustained $1.5 billion-worth of direct and indirect losses as a result of the conflict, roughly equivalent to 12% of GDP. Most of the immediate disruption to business has come from road closures and the destruction of bridges. Some $100 million has been withdrawn from the banking system, roughly 5% of pre-conflict deposits.

Strong financial position

The currency has remained stable, however, with the Georgian lari trading around the pre-conflict level of GeL1.41 to the dollar, thanks to a healthy level of foreign-currency reserves and pledges of financial support from the US and other members of the G7 group of industrialized nations. The Georgian central bank has about $1.4 billion of reserves, with an additional $270 million in two recently established sovereign wealth funds. Nicholas Enukidze, chairman of the country’s biggest financial institution, Bank of Georgia, admits that during the conflict withdrawals of more than GeL165 million were made, roughly 8% of its deposit base. But he says that since the end of hostilities, inflows have resumed. Enukidze adds that only two of the bank’s 142 branches sustained any physical damage.

Enukidze says that transport disruptions will inevitably adversely affect the bank’s corporate clients, and that thousands of its retail customers were forced to flee their homes, at least temporarily. Enukidze says that it is still too early to tell what effect recent events will have on its ability to tap the international capital markets, However, he adds: "We are very encouraged by the level of support expressed by international governments and international financial institutions such as Opic, the EBRD and the IFC, which should help to partly replace funding we would have hoped to raise in the international markets."