09TBILISI750, GEORGIA: ECONOMY 2003 TO 2008 – A CASE STUDY OF

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Reference ID Created Released Classification Origin
09TBILISI750 2009-04-16 13:20 2011-08-30 01:44 CONFIDENTIAL Embassy Tbilisi

VZCZCXRO1491
OO RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR
DE RUEHSI #0750/01 1061320
ZNY CCCCC ZZH
O 161320Z APR 09
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC IMMEDIATE 1404
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 000750 
 
SIPDIS 
 
E.O. 12958: DECL: 04/14/2019 
TAGS: ECON ENRG PGOV PREL RU GG
SUBJECT: GEORGIA: ECONOMY 2003 TO 2008 - A CASE STUDY OF 
PROGRESS 
 
Classified By: Ambassador John F. Tefft for reasons 1.4 (b) and (d). 
 
1.  (C) Summary and comment.  Although often overshadowed by 
political crisis and conflict over the separatist 
territories, the Georgian economy has been reformed and 
developed since the 2003 Rose Revolution.  While the August 
2008 war with Russia and the ongoing financial crisis 
continue to present challenges, the Georgian economy remains 
more robust, more diversified, and less corrupt than the 
economy inherited by President Saakashvili and his team in 
2004.  In five years, the Georgian government has nearly 
eliminated the corruption faced by Georgian citizens on a 
daily basis, ensured stable supplies of electricity and 
natural gas for businesses and consumers, nearly doubled per 
capita GDP, increased tax revenues by USD 2283 million 
annually, and increased FDI from USD 331 million in 2003 to 
USD 2.015 billion in 2007.  The reforms undertaken by the 
government brought Georgia from 112 in 2005 to 15 in 2008 on 
the World Bank,s Ease of Doing Business report.  Of course, 
areas for additional reform remain, including further 
development of commercial law and the judiciary, developing 
export-focused industries and job creation.  However what the 
Saakashvili government has accomplished in the last five 
years has laid a foundation for a free-market based economy 
that can survive well after this administration leaves 
government. End summary and comment. 
 
THE REFORM PLAN ) ADDRESS CORRUPTION, ENERGY ISSUES, FDI 
 
2.  (C) In its first two years in office, the Saakashvili 
administration tackled corruption, public sector reform and 
rule of law.  In 2005, the government implemented a new, more 
business-friendly tax code, undertook a deep liberalization 
of the economy, and began infrastructure improvements, 
including much-needed measures in the energy sector.  In 
order to develop and meet this aggressive strategy to reform 
the economy, attract investment, secure energy availability, 
and fight corruption, Saakashvili called on western-educated 
Georgian technocrats for help, many of whom lived abroad.  In 
bringing these experts into the government, Saakashvili 
created the knowledge base needed to develop and implement 
the necessary reforms to revitalize the Georgian economy. 
Many of these experts remain today within the government.  In 
2006, business reforms began to bear fruit, as foreign direct 
investment (FDI) flowed into the country and GDP growth took 
off.  This happened despite an embargo by Georgia,s biggest 
trading partner at the time, Russia.  Strong economic 
performance continued in 2007 with significant portfolio 
inflows.  However, many economic reforms were put on the back 
burner following the November 2007 protests, and subsequent 
presidential and parliamentary elections in 2008.  The new 
parliament had begun to address additional reforms, when the 
August 2008 conflict with Russia occurred, with the 
international economic crisis on its heels. 
 
WHAT A DIFFERENCE A FEW YEARS MAKE 
 
3.  (C) In 2003, the Georgian economy was rife with 
corruption that affected all aspects of life, especially 
business.  Transparency International ranked Georgia at 124 
with only five countries world-wide rated worse on their 
corruption perception index.  In 2008, Georgia was solidly 
ranked at 67, due in large part to government efforts to 
decrease corruption among the tax and patrol police, among 
others.  While Saakashvili,s wholesale layoff of the patrol 
police remains unpopular in some circles even today, hiring a 
smaller number of police at higher salaries has gone far in 
Qsmaller number of police at higher salaries has gone far in 
combating the every day level of corruption faced by the 
population.  (Note:  Many former patrol police are eager 
participants in protests against the Saakashvili government. 
End note.)  While corruption remains an on-going challenge 
for the government, the steps to address the issue to date 
have been nothing short of remarkable.  IRI polling numbers 
(most recently March 2009) have consistantly shown that 97 
percent of those polled say they do not confront corruption 
on a daily basis. 
 
EVERYTHING WAS DARK, NOW ENERGY ON DEMAND 
 
4.  (C) In 2003, electricity and natural gas were a luxury. 
In many places, including Tbilisi, people did not know how 
many hours of electricity, if any, they would get during 
winter months.  Natural gas supplies were equally 
questionable due to lack of payment by the government and 
overall infrastructure failure.  Now, electricity and gas 
supplies are stable throughout the entire country.  Despite 
challenges to Georgia,s energy security following the August 
conflict, the government was able to meet both electricity 
and gas demands throughout the winter.  In fact, not only was 
the Ministry of Energy able to meet winter demands for gas, 
the Minister signed a five year MOU with the Azerbaijani Oil 
and Gas Company (SOCAR) to meet Georgian social needs at a &#x000A
; 
TBILISI 00000750  002 OF 002 
 
 
pre-negotiated, favorable price.  Despite de facto Abkhaz 
Government control of Georgia,s largest hydropower facility, 
electricity continued unabated. 
 
GDP NEARLY DOUBLES, TAX COLLECTION INCREASES, FDI SOARS 
 
5.  (C) As a result of reforms, the economy continued to 
grow, even after Russia's 2006 embargo on Georgian products. 
In 2003, annual GDP per capita stood at USD 2,966.  As of 
February 2009, annual GDP per capita for 2008 was estimated 
at USD 4,851 -- enough to move Georgia up to a lower middle 
income country on the Millennium Challenge scale.  While it 
is possible GDP might shrink slightly given the international 
financial crisis, early estimates for 2008 by international 
financial institutions put GDP growth at two percent.  The 
Georgians estimate a more conservative one percent. 
 
6.  (C) The success of Georgian reforms in the banking 
sector, tax structures, and overall business practices 
together with a concerted effort to liberalize and privatize 
many parts of the economy led to a sharp increase in foreign 
direct investment (FDI).  In 2003, FDI was USD 331 million. 
In comparison, 2007 FDI stood at 2.015 billion dollars.  The 
economy also began to diversify, as FDI flowed in to nearly 
all sectors.  Fighting corruption in tax collections, while 
at the same time decreasing the tax burden led to a steep 
increase in tax revenue collected.  In 2004, taxes were a 
mere 15.8 percent of GDP at 2,267 million GEL (USD 1183 
million at 2004 exchange rate).  Tax revenues for 2007 (the 
last full year reported) were 5,791 million GEL (USD 3466 
million at 2007 exchange rate) or 25 percent of GDP.  2008 
estimates put tax revenue at 28 percent of GDP. 
 
7.  (C) An independent indictor of Georgia,s economic reform 
success is the World Bank Ease of Doing Business ranking.  In 
2004, Georgia was not ranked and in 2005 the country was 115. 
 In 2008 Georgia was ranked 15 in the world in ease of doing 
business, with special praise for the ease and speed with 
which a company could start operations. 
 
BUSINESS'S CHALLENGES 
 
8.  (C) Across the board, business people say that the 
business climate had improved dramatically from 2003 to 2009. 
 Crime, mafia involvement, and wholesale corruption were 
nearly daily issues for most businesses in 2003.  One 
businessman told of a series of events from the late 1990s 
through 2003 that included the kidnapping of a staff member 
for 77 days by a competitor with government involvement, 
murder of a security guard in an armed robbery, as well as 
RPG and arson attacks on several of his offices.  He said 
that the current government's efforts to combat organized 
crime and corruption, as well as reform the economy had an 
immediate and direct positive impact on his business.  No 
longer does he need personal body guards.  Other long-term 
investors in Georgia have praised the government's success in 
fighting crime as well, noting that this coupled with less 
government interference have made it significantly easier to 
do business. 
 
YET TO BE DONE ) JUDICIAL REFORM, MANUFACTURING, JOB CREATION 
 
9.  (C) While the Saakashvili government's reform policies 
have brought significant improvements in the Georgian 
economy, work still remains, especially in these uncertain 
economic times.  The Georgian judicial system needs to 
increase its understanding and improve its processing of 
commercial disputes, and the court system as a whole needs 
additional transparency for those involved in court cases. 
In addition, the country's focus for the last five years on 
attracting investment has been more focused on hard currency 
Qattracting investment has been more focused on hard currency 
earning ventures and less on overall job creation.  In order 
to increase the number of jobs in the country, as well as 
hard currency inflows now that foreign capital is scarcer, 
the Georgia government has begun to focus on export potential 
as well as import substitution. 
TEFFT

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