GEORGIA PM LAYS OUT ECONOMIC CONCERNS

C O N F I D E N T I A L SECTION 01 OF 02 STATE 112584

SIPDIS

E.O. 12958: DECL: 10/21/2018
TAGS: EAID EFIN EU GG KCRS KMCA PREL RS
SUBJECT: GEORGIA PM LAYS OUT ECONOMIC CONCERNS

Classified By: RDEMARCELLUS for Reasons 1.4 (b) and (d)


1. (C) Summary: Georgian PM Gurgenidze told U/S Jeffery
October 13 that the economic situation in Georgia was still
highly fragile because of the now combined effects of the
August Russian invasion and the possible regional contagion
from the financial crisis. He stated that in light of the
global crisis the Brussels donors, conference had become all
the more important as a means of giving a signal of support
to Georgia, in terms of both pledges and attendance. He did
not expect significant budget support from donors other than
the United States, and he expressed deep gratitude for the
USG pledge of assistance and particularly its increased
front-loading as a result of Congress,s continuing
resolution. He called for targeted economic pressure on the
Russian oligarchy. End Summary.

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Political Situation
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2. (C) In his October 13 breakfast with U/S Reuben Jeffery,
Georgian Prime Minister Gurgenidze, accompanied by Finance
Minister Gilauri, described the Georgian political situation
as reasonably calm in Georgia with a normal political process
going forward, including an active opposition. He noted that
President Saakashvili had announced a package of democracy
reforms involving greater freedom for the media, political
party representation and financing, and greater property
rights.

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Economic Situation
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3. (C) On the economy, Gurgenidze described it as a quiet
calamity in the making. While the GOG is still forecasting a
GDP growth rate of 4% for 2008, he thought there was serious
risk of contagion from regional neighbors, especially
Ukraine, Kazakhstan, and Russia, which he found frustrating
given Georgia,s relative success so far in maintaining
investor confidence and managing the economic impact of the
Russian invasion. He cited the morning,s action by the
Kakakh Central Bank to clamp down on early withdrawals of
deposits as a development that could spook investors in
Georgia. He also thought the troubles in Iceland would scare
off investors from other small countries with their own
currencies, such as Georgia. (He suspected Russia,s motives
in Iceland were related to its geo-strategic location
(&every Tom Clancy novel starts in Iceland8) and its
attractiveness to Russia as a money laundering location.) On
the domestic economic front, Gurgenidze was concerned by
polls indicating that 85% of Georgians are putting off a
major purchase. As to fiscal steps, Gurgenidze planned to
focus on limiting the budget deficit, including by cutting
defense spending by 38%. Once the financial crisis abated in
the United States, Gurgenidze planned to approach the Federal
Reserve about conducting a currency swap with Georgia to
provide added stability.


4. (C) Gurgenidze was not concerned by the recent Kazakh
cancellation of investment in an energy facility in Batumi
and said it was unrelated to the Russian invasion. He
explained the investment had been announced three years ago
as a deliverable for a visit by President Nazarbayev and was
never seriously considered to be economically viable.

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Donors, Conference
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5. (C) The Prime Minister acknowledged that the current
global financial crisis had distracted donors and would
render it more difficult to generate pledges. He was
pessimistic about significant EU member state bilateral
pledges and reported that UK Foreign Secretary Miliband had
told him the UK would not be pledging bilaterally.
Gurgenidze did not expect significant budget support as part
of the EC package, but said he had heard rumor of a
&significant8 pledge from Japan. Gurgenidze stressed that

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attendance by a significant number of relevant countries
would constitute support even if they pledged nothing. He
mentioned China, India, South Africa, and Israel as examples
(the EC recently added the latter two to the invitation list
at Georgia,s request). As to Gulf Arab donors, he held out
the strongest hope that the UAE would pledge, given
significant investments in Georgia by its sovereign wealth
fund.


6. (C) U/S Secretary Jeffery updated Gurgenidze on the USG
assistance package. The Prime Minister was pleasantly
surprised that the recently signed continuing resolution
meant that the US assistance would be even more front-loaded
than expected, with about $750 million available in 2008. He
described the USG budget support as more important than ever
given the apparent lack of significant budget support from
the EU.

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Pressure on Russia
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7. (C) PM Gurgenidze thought Russia would remain in a strong
economic position based on oil revenues for about three years
as long as oil stayed above $60 a barrel. He called for more
targeted economic pressure on Russia, in particular on the
oligarchs, and singled out Yevgeny Chichvarkin, owner of
mobile phone company Euroset, who has opened a store in South
Ossetia and is also vulnerable due to his high level of debt.
More generally he noted that any Russian mobile phone
company operating in the disputed enclaves is violating
Georgian territorial integrity by expropriating spectrum, an
economic crime.


8. (C) Gurgenidze warned that Russia was trying to intimidate
Georgia over the Enguri hydro-electric plant, which provides
40% of Georgia,s electricity. Russia is demanding that
Georgia lease the plant to Russia. Gurgenidze said the GOG
planned to refuse and thus force the Russians to seize it,
which the international community would not view in a
positive light.
RICE