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. -------------- Political Situation -------------- ¶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. -------------- Economic Situation -------------- ¶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. -------------- Donors, Conference -------------- ¶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 STATE 00112584 002 OF 002 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. -------------- Pressure on Russia -------------- ¶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