The Russian-Georgian conflict ... a threat to the future of the Georgian economy

It seems that the Russian-Georgian conflict, which erupted last Wednesday because of the separatist territory of South Ossetia, loyal to Russia, will have a significant impact on the future of the Georgian economy, and may end a period of prosperity and economic growth.

After the difficult years the country had faced since its independence in 1991 from the former Soviet Union and until the "revolution of Roses" in 2003, which led to the resignation of former Georgian President Eduard Shevardnadze and the arrival of current President Mikhail Saakashvili, Georgia's economy showed a momentum that had impressed the international financial institutions, in particularly the World Bank.

Thanks to the reform policies adopted by Georgia since 2003, the country has become one of the most dynamic economies in the former Soviet Union and the economic growth rate has reached 10% in 2006 and 2007, and is expected to reach 8% this year despite the crisis of the global economy and the serious disruptions on the international markets.

Although Georgian economy depends on agriculture, which accounts for 30% of total GDP, the field of construction and telecommunications have a big jump. The distinguished geographical situation of Georgia between the Caspian and Black Seas, has made this country a strategic corridor for oil and natural gas from Central Asia far from Iran, rich in oil, and Russia, Which monopolizes most of the energy supply in this region.

The Western oil companies have invested in that state for the development of exports of oil and gas coming from Azerbaijan on the shores of the Caspian Sea. Thus, ten western oil groups led by the British "British Petroleum (BP), have established the pipeline" Baku- Tbilisi- Ceyhan", Known as the "BTC" and whose investments amounted to astronomical numbers, some three billion dollars to transport 1.2 million barrels of oil per day.

On the other hand, "BP" has modernized the pipeline "Baku-Soupsa", which dates back to Soviet times and leads to the coast of Georgia on the Black Sea. The western companies have also a potential pipeline "Baku-Tbilisi-Erzeroum", with 692 kilometers long, to transfer some 8 billion cubic meters of gas per year from the offshore "Shah Deniz" in Azerbaijan to the borderes between Georgia and Turkey. These projects provide to Georgia an income which can not be ignored and they help Tbilisi to reduce its dependence on Russian oil and gas.

The tension in the Georgian-Russian relations began with the arrival of Saakashvili, who is in favour of rapprochement between Tbilisi and the western countries. The Georgian ambitions to join NATO, an idea completely rejected by Moscow, added to the crisis between the two countries. Therefore, Moscow has suspended air, sea and land transportation with Tbilisi. The kremlin has also banned the import of many Georgian products.

Despite the success of Georgia to overcome Russian sanctions, the fighting that erupted late last week threaten the Georgian economy, which suffers a high rate of inflation (8% over one year), the increase of public expenditure and the growth of corruption when the vast majority of the population is poor. For this, "Standard and Poors" has lowered its estimates of the profitability of investing in Georgia since last Friday.

Trevor Paulino, an analyst at Standard and Poors sees that "the Russian-Georgian conflict is likely to increase fears of foreign investors in Georgia who played a very important role in the strong economic performance of the country". He added that the rising of military spending was one of the factors that led to reduce projected profitability of investment in Georgia. He explain that these military expenditures have exceeded analysts expectations, which raises doubts about the achievement of objectives set by the government to control its budget.

For Isabelle Facon, a researcher at the Foundation for Strategic Research, she believes that the strategic geographical location of Georgia, as a passage for transporting oil from Central Asia, could lose its relevance because of this conflict. She emphasizes the fact that Russia could use the current crisis to prove that this region is not safe for the establishment of pipelines in the future.

Facon says that Russian aviation struck Boley, on the Black Sea, the largest port of Georgia, without damage. She also focuses on statements made by the Georgian Prime Minister Addo Georjennitsais last Saturday in which he says that Russians had bombed areas near to the pipeline "Baku-Tbilisi-Ceyhan.

The conflict between Moscow and Tbilisi has already begun to affect the transport of oil through Georgia, where the company BP announced today the suspension of operation of the "Baku-Soupsa" pipeline on a temporary basis for security reasons. Azerbaijan has announced last Saturday the suspension of oil exports via the Georgian ports of Batumi and Kulevi on the Black Sea due to the conflict.

But Natalia Levchenko, economic analyst at "Global Insight" does not believe that the conflict between Russia and Georgia will affect pipelines. She says that the task of Russian troops is currently secure control of South Ossetia. Levechenko believes that oil and gas will not be jeopardized unless there is an escalation of the situation and Russia decided to impose a total economic embargo on Georgia.

For his part, Michael Denison, an analyst at the Chatham House, believes that this possibility is low, explaining that it would be an extremist act from the part of Russia to control pipelines, specially that NATO will take this act For a genuine threat to its security, which will require a military response.

Despite this, analysts agree that the battles in Georgia will push the investors, on long-term basis, to avoid investing in oil and gas in the Caspian Sea, which was until recently considered as alternatives to Middle Eastern and Russian oil and gas.

However, the Georgian economy will not be the only loser in this conflict, Russia is also likely to deteriorate further its image among foreign investors, particularly at a time when there are many criticisms to Moscow because of its investment laws, specially in the field of oil.

In addition, Moscow risk the future of its economic ties with the USA and the European Union. These relations will undoubtedly be affected in case of continuation of the conflict even though Moscow has enormous stocks of energy required by the European Union and the USA.

The question now is "Will the decision of Russian President Dmitri Medvedev to stop military operations in Georgia help stabilizing the economy of both countries?"