GEORGIA BI-WEEKLY UPDATE AUGUST 17

UNCLAS SECTION 01 OF 02 TBILISI 002076

SIPDIS

SIPDIS

E.O 12958: N/A
TAGS: PREL PGOV PHUM ECON ENRG GG
SUBJECT: GEORGIA BI-WEEKLY UPDATE AUGUST 17



1. This cable contains current items of political,
economic, and social interest concerning Georgia during the
weeks of August 4-17.

Saakashvili Visits Upper Abkhazia
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2. On August 11, President Saakashvili visited the
Upper Kodori Gorge (or Upper Abkhazia) for what he
described as several days vacation. He toured a new
Patriot youth camp and gave an interview to CNN while
there. Addressing the campers, Saakashvili stressed
that restoration of GeorgiaQs jurisdiction in Kodori and
nearby areas was carried out not through violence and
confrontation, but through construction of hospitals,
roads, movie theaters and disco clubs. He said "Our peace
policy is, yes, you may call it, a policy of discos.
This is a policy of youth camps, this is a policy of
theaters, this is a policy of civilization, education and
enlightenment which denounces the logic of violence and
weapons...If they bomb us here, we will respond by
building new discos, news hospitals and schools."
Saakashvili told CNN that there can be no purely military
solution to Georgia's separatist conflicts, adding that
"We have just sent our best brigade to Iraq. That is not
done by countries that are looking forward to a military
confrontation."

Georgia Complains about Russian Medals for South Ossetians
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3. Georgian officials have responded angrily to a decree
by Russian President Putin, posted on the Kremlin website
August 14, to award Russian state medals to 12 residents of
breakaway South Ossetia for a meritorious service in the education
sphere. "One recipient of the "Honored Teacher of the Russian
Federation" award was de facto education minister Ella Jioeva,
identified in the decree as "Minister of Education of the
Republic of South Ossetia." Georgian State Minister for Conflict
Resolution David Bakradze described the award, given without
Georgia's consent, and the use of the phrase "Republic of
South Ossetia" for the unrecognized regime as violations of
international legal principles. Georgia demanded an
explanation in a protest note delivered to the Russian
Ambassador.

Negotiations Underway for Iranian Gas
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4. KazTransGaz-Tbilisi, a Tbilisi gas distribution company
owned by the Kazakh state-owned company KazTransGaz, has
announced it is negotiating with Iran, as well as with Russia
and Azerbaijan, about gas supplies for the coming winter.
The company's director told a news conference that the high
price of Russian gas had prompted the search for alternative
suppliers, although he added that this did not rule out
Russian gas. Russia increased the price from USD 110 to
USD 235 per 1,000 cubic meters of gas at the beginning of

2007. In 2006, the main gas supplier to Georgia was
Gazexport, a subsidiary of Gazprom. It supplied 1.2 billion
cubic meters, of which almost half was used by the Tbilisi gas
distributing company. Reportedly, Russia has negotiated
gas prices for the coming year with all of its partners
except Georgian consumers. Georgia allows gas consumers to
negotiate their own deals with Gazprom and other suppliers.

Growing Interest in GeorgiaQs Banking Sector
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5. The National Bank of Georgia (NBG) has issued HSBC, one
of the world's largest banks, a license to start banking
operations in the country. HSBC's Tbilisi branch is slated
to start serving its first customers in November. HSBC is
the second major Western bank to enter the Georgian market
after Societe Generale, which bought Bank Republic in 2006.
NBG president Roman Gotsiridze said after meeting with HSBC
officials on July 30 that the London-based banking group's
entry into Georgia is evidence of growing interest from
investors around the world in the country. HSBC Bank's Georgia
director, Steven Bennett, publicly praised GeorgiaQs structural
reforms as well as the improvement of the business environment
in Georgia. Tbilisi expects that the domestic banking sector
will attract USD 700 million in foreign investment by
the end of the year, predicting that even more foreign banks
will step into the market before long.

Bank of Georgia Acquires Cascade Bank
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6. The Bank of Georgia (BOG),Georgia's largest commercial
bank, has announced it will acquire the American-owned
Cascade Bank of Georgia. BOG intends to change its name to Galt &
Taggart Bank by October. Cascade Capital Holdings, owned by the
U.S.-based Cafesjian Family Foundation, purchased Cascade Bank in
January 2006, when it was known as Emporiki Bank. Separately,
a wholly owned subsidiary of the BOG, Georgian Leasing Company
(GLC),recently received a loan of USD 7.5 million from an
OPIC-backed company, Worldwidebusiness Capital. The loan is

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designed to finance small and medium leasing operations.
Presently GLC has 35 percent of the leasing market in Georgia.
About 23 percent in BOG is owned by U.S. shareholders,
including the New York-based Firebird Fund. BOG is the first,
and so far, the only Georgian bank to issue stock on the
London Stock Exchange.
PERRY