07TBILISI2595, ISOLATED ABKHAZIA GROWS BUT DEVELOPMENT LAGS

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Reference ID Created Released Classification Origin
07TBILISI2595 2007-10-17 12:00 2011-08-30 01:44 CONFIDENTIAL Embassy Tbilisi

VZCZCXRO1916
RR RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHSI #2595/01 2901200
ZNY CCCCC ZZH
R 171200Z OCT 07
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC 7928
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNDT/USMISSION USUN NEW YORK 4596

C O N F I D E N T I A L SECTION 01 OF 05 TBILISI 002595 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/CARC AND EUR DAS MATT BRYZA 
 
E.O. 12958: DECL: 10/07/2017 
TAGS: PREL PGOV GG
SUBJECT: ISOLATED ABKHAZIA GROWS BUT DEVELOPMENT LAGS 
BEHIND GEORGIA 
 
REF: TBILISI 2375 
 
Classified By: Ambassador John F. Tefft, reasons 1.4(b) and (d). 
 
1. (C) Summary: On a September 4-8 visit to Abkhazia, Embassy 
officers found that the region's economy and its tourism 
industry are growing and that investment in hotels and 
vacation homes, mostly from Russia, is increasing.  The 
overall standard of living is comparable to that in Georgia, 
or perhaps a little better.  However, despite evident growth 
in tourism, the economy is far less dynamic than Georgia's. 
The Abkhaz resent the CIS embargo on their region and blame 
it as well as the uncertainty over their political status for 
retarding growth.  Goods do get through from Russia, although 
they are expensive.  The 2014 Sochi Winter Olympics are 
viewed as a windfall of good fortune that will benefit the 
Abkhaz economy, although there are concerns about too-rapid 
development that may adversely impact the environment.  No 
official we met in Abkhazia is willing to consider anything 
but full independence from Georgia, which they consider to be 
an existing reality that Georgia and the world must recognize 
and to which they must adapt.  End Summary. 
 
MODEST GROWTH IN A DEFIANT REGION 
--------------------------------- 
 
2. (C) The overall mood that Emboffs found among the Abkhaz 
with whom we met was concern about the Russian embargo of all 
fruits and vegetables, guarded optimism based on Russian and 
other investment, growing tourism and the economic impetus 
expected from the Sochi Olympics in 2014, and determination 
to remain independent of Georgia.  Many Abkhaz noted a more 
liberal approach to private business on the part of the 
government under Sergei Bagapsh, who became de facto 
president in 2005, from that of the government under his 
predecessor, Vladislav Ardzinba.  Private businesses such as 
guesthouses and stores are encouraged and financing is being 
made available at concessionary rates from a presidential 
fund.  Continuing bitterness about the 1992-93 war for 
independence is palpable.  This war is what the Abkhaz mean 
when they refer to the "Great Patriotic War", not World War 
II, as it is in Russia.  Many important buildings along the 
Sokhumi seafront are still derelict, including the impressive 
former Intourist hotel.  Building facades along the main 
route through Sokhumi still bear pockmarks from automatic 
weapons fire, apparently sprayed as Georgian forces withdrew 
in September 1993.  However, the town is fairly clean and 
there is at least one Western standard hotel in town, the 
Ritsa, named after the lake which is one of Abkhazia's major 
tourist attractions.  Many small businesses, such as 
groceries, restaurants and bookstores are operating.  Family 
run guesthouses service most of the tourists.  In Pitsunda, 
north of Sokhumi, there are several high rise hotels, 
apparently built in the 1970's.  These hotels seem to have 
been relatively well-maintained and house Russian tourists, 
who were present on the beach in large numbers in early 
September. 
 
3. (C) Reliable statistics about the state of the Abkhaz 
economy are difficult to come by and what Emboffs heard from 
different sources sometimes conflicts.  Growth is occurring, 
but the government does not publish current statistics.  Some 
idea of trends can be found in tourism statistics provided by 
the Committee for Tourism.  According to a booklet the 
Committee provided, 50 major tourist hotels or sanatoria have 
been renovated and put back into operation, where there were 
only 37 in 2004.  These fifty objects offer 11,000 beds, four 
thousand more than in 2004.  The reported number of guests in 
official hotels has doubled in two years, to 92,371, which 
actually is lower than 2005's 99,120.  The leveling off in 
growth is attributed in Sokhumi to increased tensions with 
Georgia.  Tourists from Sochi come to Abkhazia for day trips, 
and the number of paid admissions to the Novy Afon Cave 
increased from 150,313 in 2004 to 224,143 in 2006. 
 
ECONOMY MINISTER WON'T CONSIDER A GEORGIAN PRESENCE 
AT THE BORDER TO HELP RUSSIA INTO THE WTO 
--------------------------------------------- ------ 
 
4. (C) When Emboff visited Kristina Ozgan, the de facto 
minister of economy, she showed a 2005 version of "Abkhazia 
in Figures", but would not offer a copy of the latest, 2006 
version.  She referred us to the bookshops, which told us the 
book had long ago sold out.  Thus all indications of growth 
available to us other than the above tourism figures are 
basically anecdotal.  Ozgan described the Abkhaz tax regime 
to us.  She said the income tax is a flat 10 percent, the 
corporate tax is 18 percent, VAT is 10 percent and social 
taxes on wages are 21 percent, including 18 percent for 
 
TBILISI 00002595  002 OF 005 
 
 
pensions.  Investors who invest more than USD 100,000 can 
receive a "privileged regime", which frees them of corporate 
taxes and property taxes for a period of three years.  Ozgan 
sees Abkhazia's economic future positively.  She sees the 
main obstacle is its status as a conflict area. 
Nevertheless, she sa
id, investment is increasing and it 
proves that Abkhazia can develop under current conditions. 
 
5. (C) Emboff inquired whether Ozgan thinks Abkhazia could 
accept a Georgian customs and immigration presence at its 
border crossing with Russia.  Georgia has made legalization, 
from the Georgian point of view, of the crossing a condition 
of allowing Russia to become a member of the WTO.  Not 
surprisingly, Ozgan said that Abkhazia "can hardly accept 
such conditions".  She said she has received no information 
from Russia on negotiations between Russia and Georgia on 
this obstacle to Russia's WTO membership. 
 
CHAMBER OF COMMERCE: CIS, RUSSIAN BLOCKADES HURT, 
FOREIGN INVESTMENT SLOW 
--------------------------------------------- --- 
 
6. (C) Gennady Gagulia, president of the Abkhazia Chamber of 
Commerce, and a former de facto prime minister of Abkhazia, 
was expansive on the challenges and opportunities faced by 
Abkhazia.  He said his organization was founded in 2002, and 
is a member of the union of Chambers of Commerce of Southern 
Russia.  It originally had 68 members, but 19 were expelled 
since its founding for violating the Chamber's charter.  Its 
priorities are business promotion and advocacy of needed 
laws.  The Chamber has recently been pushing for changes to 
the tax laws.  Improvements are also needed in Abkhazia's law 
on foreign investments, and a new law is being considered, he 
said. 
 
7. (C) Gagulia said that Turkish investment in Abkhazia is 
not as strong as some might believe.  Although there are many 
rich Abkhazian Turks, they have not shown significant 
interest in investing in their ancestral homeland.  They fear 
their investments will not be secure, he said.  Those few 
that have established themselves in Abkhazia find that it is 
difficult to obtain inputs due to the blockades.  The 
government has tightened environmental regulations and 
limited transport by trucks to reduce damage to the road 
system.  If Georgia were more amenable, and would stop 
interdicting ship traffic, Gagulia said, Turkish investment 
might grow.  Georgia simply has to accept that Abkhazia won 
its war for independence and get over it, he said.  He 
suggested the United States should play a role in convincing 
Saakashvili to do so.  As for the Abkhaz, the United States 
will have to show that it is more trustworthy than Russia in 
order to gain influence, he said. 
 
8. (C) Like all the Abkhaz we talked to, Gagulia pointed to 
the CIS economic blockade as the main obstacle to economic 
growth.  Tourism is particularly affected by the lack of air 
and sea transport into Abkhazia, the need for a Russian 
transit visa to facilitate arrivals from third countries, and 
the fact that credit cards are unusable in Abkhazia. 
Similarly, Abkhaz cannot travel easily to other countries. 
Not every Abkhaz can get a Russian passport that allows 
foreign travel, he said.  These passports are valid for five 
years, and there is the possibility that Russia will not 
renew them.  Visas to third countries are difficult to come 
by, even if an Abkhaz has a Russian passport. 
 
9. (C) Gagulia said that the CIS blockade has been 
exacerbated by Russia's cutoff of all agricultural imports 
from Abkhazia due to fears of African Swine Fever.  He 
estimates it has cost Abkhazia 2-3 million rubles in wine 
exports alone.  He said that Russia has explained its action 
as being required by international agreements to which it is 
a party.  The problem will continue, he said, until Georgia 
gets control of ASF on its territory. 
 
TOURISM GROWING 
--------------- 
 
10. (C) Tourism is growing in Abkhazia.  According to the 
Director of the Abkhaz de facto tourism commission, Tengiz 
Laerbaia, 600,000 tourists visited Abkhazia in 2006 and in 
2007 there will be about 25 to 30 percent more.  His figures 
are based on overnight stays in hotels, and he guesses about 
5000 a day make day trips from Sochi in Russia.  Others stay 
overnight in private homes and are not counted.  When they 
stay in hotels, the average stay is 10 days, he said.  All 
hotels in Gagra fill up in July and August, and the overflow 
comes to Sokhumi, he said.  The Commission's role is 
licensing and regulating establishments and advertising 
 
TBILISI 00002595  003 OF 005 
 
 
Abkhazia as a tourist destination.  He has been working on a 
tourism strategy for two years, with lots of things to 
consider and difficulties to overcome.  Tourism contributes 
88 million rubles to the economy, and represents more than 10 
percent of GDP, he said.  He would like to develop year-round 
tourism by investors building one or more ski resorts in 
Abkhazia's mountain areas, where there are five to six meters 
of snow in winter, thirty minutes from the coast. 
 
11. (C) Lakerbaia said he is seeing greater interest than 
ever in investing in tourist infrastructure.  Seventy percent 
of hotels and sanatoria were destroyed in the 1992-93 war, he 
said and are awaiting reconstruction.  The government is 
prepared to rent them, privatize them or joint venture with 
investors.  The recent announcement of the Sochi Olympics has 
caused interest to pick up, he said.  Krasnodar province in 
Russia will get 12-13 million visitors in 2007. 
Accommodations will be limited as construction for the 
Olympics gets underway, and he believes Abkhazia will get the 
benefit.  Abkhazia's ability to absorb the expected increase 
is limited by space for accommodations and by the potential 
impacts on the sea and natural beauty.  He recognizes the 
importance of protecting the latter assets, which are the 
main reasons visitors come to Abkhazia.  New waste treatment 
plants were proposed for Gagra and Sokhumi this year, but 
were not realized in time for the season. 
 
GAGRA: TOURIST CENTER ATTRACTING INTEREST FROM INVESTORS 
--------------------------------------------- ----------- 
 
12. (C) Emboffs traveled to Gagra, Pitsunda and the Russian 
border on September 6.  They met with Gagra mayor Astamur 
Ketsba.  He described Gagra as Abkhazia's most powerful 
region before the 1992-93 war, based on tourism, agriculture 
and industry.  However, nearly all tourist objects were 
destroyed in the war, he said.  Tourists began to return to 
Gagra in 1996 and 1997.  Ketsba claims that Gagra received 
2.6 million tourist visits in 2006, according to a count by 
Russian border guards, but this claim cannot easily be 
reconciled with the Tourism Committee's figures cited in 
paragraph 3 above. Over the past three years, income from 
tourism in Gagra has increased from 980,000 rubles to 3.2 
million rubles, according to Ketsba.  There are 357 
businesses in Gagra, only 23 percent of which are 
state-owned, he said.  Forty five percent of the population 
is involved in trade, thirty-five percent in tourism and five 
percent in industry, he said.  The tourism sector is growing 
faster than the work force, and there is a
 problem finding 
qualified employees for the tourist trade.  Ketsba said that 
Gagra region's population is 37,000, 14,000 of whom live in 
Gagra town.  By his count, seven thousand are employed, of 
whom 1700 work in private businesses.  He sees no place for 
Georgians to fill the gap, however, and he suggested the 
Abkhaz may look as far afield as Malaysia to find workers. 
Russia is growing fast, he said, and so not too many workers 
are available from there. 
 
13. (C) Ketsba attributed some of the improvement in the 
economy to the new government.  Construction is "booming" in 
Ketsba's opinion, and Russians have invested in two 
supermarkets in the town.  Russians are building one new five 
star hotel from scratch and renovating another.  Another 
Russian investor has bought the historic Gagripsh hotel and 
restaurant, a picturesque wooden structure set among gardens 
and overlooking the sea.  Interest by other foreign investors 
is increasing, he said, including some from Spain, France and 
Sweden.  Ketsba traveled to Singapore in April, and a group 
of Singapore businessmen visited Gagra in June.  They plan to 
develop a 25 hectare area into a first-class resort, he said. 
 Right now, he said, Gagra can accommodate 8000 visitors in 
official accommodations.  If private guesthouses are 
included, he thinks the figure rises to 50,000 in peak 
season.  Growth is improving Gagra's budget picture, as its 
revenues increased from 64 million rubles to 171 million 
rubles from 2006 to 2007.  Asked about Russians or other 
foreigners purchasing houses in Abkhazia, Ketsba was evasive 
but left the clear impression that this is happening and that 
he considers such sales to be justifiable and desirable. 
 
14. (C) Ketsba had gathered a number of local business owners 
to meet Emboffs.  They reiterated what we heard repeatedly in 
Abkhazia, that the main problems for the economy are the CIS 
and Russian blockades.  Imported goods manage to get through, 
but are expensive.  Customs duties are high.  The banking 
system is undeveloped and loans are very expensive.  Problems 
remain with the tax system as well. 
 
15. (C) Following the meeting in the Gagra city hall, Emboffs 
traveled with Ketsba to the Russian border to observe its 
 
TBILISI 00002595  004 OF 005 
 
 
operations.  The atmosphere at the border was very calm.  In 
fact, we did not observe a single car cross from the Russian 
side during the twenty minutes we were there, in spite of the 
line waiting on the Russian side of the barrier.  We did not 
see any truck traffic either.  Foot traffic did seem to be 
passing.  We were greeted at the Abkhaz border station by a 
heavy-set man in civilian clothes who, in answer to our 
questions, offered to show us records of the number of border 
crossings.  He changed his mind with a frowned warning from 
the mayor and our foreign ministry escorts.  Asked what his 
official title was at the border, he said he had none, he 
"just helps out".  We also visited a factory near the border 
producing quite acceptable Abkhaz cognac. 
 
UNION OF BUSINESS WOMEN HELPS WITH TRAINING 
------------------------------------------- 
 
16. (C) On September 7, we met in Sokhumi with Julia Gumba, 
Chairman of the Abkhazian Union of Business Women.  Gumba 
said the Union got started after the 1992-93 war, when men 
aged 18-60 were barred from crossing the border into Russia. 
Women took over the job of taking exports to Russia, 
returning with needed goods, and selling them in markets and 
shops.  Gumba and some others organized the Union to help 
women learn business skills and to represent their interests 
to the de facto government.  The Union provides training in 
business planning, taxation, law and marketing.  Gumba and 
the other founders were also the trainers.  They learned 
about business in Moscow and through training provided by 
UNDP.  Now they train and share their expertise with men as 
well as women.  Gumba is a member of the economic committee 
in the de facto parliament and a member of the de facto 
president's economic council. 
 
17. (C) Gumba finds the economic climate much improved under 
the current government.  She said that a presidential fund 
receives part of all privatization revenues and is used to 
fund low interest (6 percent) loans to help new business 
startups.  However, financing a business is difficult. 
Commercial bank lending rates are 45-60 percent, so no one 
uses them, she said.  Deposits earn only 4 percent interest. 
Nevertheless, the Union has helped the owners of new 
businesses to make good business plans and thereby get loans 
from the presidential fund.  These include a factory making 
boxes for mandarins that has begun making furniture, and a 
garment factory. 
 
TKVARCHELI SENDS COAL TO TURKEY 
------------------------------- 
 
18. (C) On September 7 Emboffs traveled to Tkvarcheli, the 
site of a major coal mine opened in 1934.  The underground 
mines were closed after the 1992-93 war due to lack of 
electricity and the CIS blockade.  Equipment rusted from 
disuse.  An open-pit mine was opened in 2002 with USD 22 
million of investment by the Turkish company Tamsas in 
extraction equipment and road construction.  The de facto 
president's website states that Tamsas provides 75 percent of 
the region's budget.  The website states that Tamsas is "the 
only major Turkish company on the Abkhaz market" and that its 
staff are mainly descendants of Abkhaz who migrated to 
Turkey.  Although output of 300,000 metric tons of coal was 
planned, the mine only managed to produce 85,000 tons in the 
seven months of 2006 that weather allowed it to operate.  The 
coal produced is transported to Ochamchira and sold to 
Turkey.   The de facto president's website states that Tamsas 
is "the only major Turkish company on the Abkhaz market" and 
that its staff are mainly descendants of Abkhaz who migrated 
to Turkey.  Nevertheless, Georgians are very concerned about 
Turkish business activity in Abkhazia, including ship visits 
to Abkhaz ports.  The Georgian coast guard is on alert to 
arrest vessels traveling to Abkhazia in violation of Georgian 
law.  Many ships likely evade capture by docking in Sochi 
before traveling down the coast to Abkhazia. 
 
SOCHI OLYMPICS PROVIDE OPTIMISM 
------------------------------- 
 
19. (C) The Abkhaz leadership and many businessmen are 
optimistic about Abkhazia's economic future because of the 
award of the 2014 Winter Olympics to neighboring Sochi, 
Russia.  They believe construction in Sochi and surrounding 
towns will increase demand for basic building materials like 
wood, sand and gravel from Abkhazia.  Jobs will be created 
that Abkhaz can fill, although at the further expense of the 
tourist industry at home.  Gennady Gagulia of the Chamber of 
Commerce sees both pluses and minuses in the advent of the 
Olympics.  He believes that Georgia will not be willing to 
cause trouble and spoil the event, so fo
r the next seven 
 
TBILISI 00002595  005 OF 005 
 
 
years there will be no war.  As noted above, labor and 
materials from Abkhazia will be needed in Sochi.  However, he 
sees adverse impact on the ecology because of mining and wood 
cutting, increased immigration from Russia by workers who are 
attracted to Abkhazia's climate, and inflation as prices rise 
along with those in Sochi. 
 
 
TEFFT

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