Identifier
Created
Classification
Origin
07TBILISI2595
2007-10-17 12:00:00
CONFIDENTIAL
Embassy Tbilisi
Cable title:  

ISOLATED ABKHAZIA GROWS BUT DEVELOPMENT LAGS

Tags:  PREL PGOV GG 
pdf how-to read a cable
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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).

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 said, 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 for 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