GEORGIAN GOVERNMENT STABLE BUT THREATS LOOM

C O N F I D E N T I A L SECTION 01 OF 03 TBILISI 001525

SIPDIS

E.O. 12958: DECL: 08/25/2018
TAGS: PGOV ECON PREL GG
SUBJECT: GEORGIAN GOVERNMENT STABLE BUT THREATS LOOM

Classified By: AMBASSADOR JOHN F. TEFFT. REASONS: 1.4 (B) AND (D).


1. (C) Summary and Comment. Russia's public push to force
regime change in Georgia may have failed in the short term,
but judging by continued public statements critical of
President Saakashvili, a longer-term strategy of eroding
support for Saakashvili by weakening the economy appears to
be in place. Government and opposition officials have
acknowledged the window of widespread public support for
Saakashvili in the wake of the conflict may be limited to the
period in which Russian soldiers remain in Georgia proper and
depends largely on sustaining economic growth. Saakashvili
and Speaker Bakradze have reached out to opposition leaders
and called for unity, but, following the million-participant
"Stop Russia" rally, opposition leaders appeared to be
planning to increase their public criticism. In the short
term, the Saakashvili government appears stable and the
opposition, many of whom were discredited during recent
presidential and parliamentary elections as having no
platform or new ideas, lacks a cohesive message. In recent
years, Saakashvili's government has built its reputation on
being able to provide strong economic growth. With 27
percent of Georgia's population already under the poverty
line, any economic downturn could quickly turn into
widespread discontent. The government is focused on
providing basic needs and services to the most vulnerable
segments of the population, but fiscal and monetary
constraints coupled with looming expenditures may present
obstacles. The announcement of the USG's USD 1 billion
assistance commitment has gone a long way toward reassuring
both the Governemnt and investors, but how the money is
allocated and spent will be important too. End Summary and
Comment.

Opposition Cautious And Not Quite Supportive
--------------


2. (C) Opposition leaders have maintained a low profile
during the crisis due to either patriotism or political
expediency. Highly respected political commentator and
president of GFSIS Alex Rondeli said the opposition has
remained silent because Russian occupation is a risky
political proposition. Rondeli speculated that serious
criticism of the government would resume once the Russians
have withdrawn. Republican Party leader David Usupashvili
and New Rights Leader David Gamkrelidze said at a joint news
conference on August 18 that they would observe a moratorium
on criticizing the government, but said questions would be
asked and analysis would be forthcoming on the government's
actions once the crisis receded. Levan Gachechiladze,
co-leader of the opposition coalition (UNC),and Kakha Kukava
(Conservative Party) have already made remarks critical of
Saakashvili to the foreign press. Gachechiladze was quoted
by the Financial Times as calling for pre-term elections at
"the earliest opportunity." Kukava said the opposition would
wait until the situation cooled down and then call for a mass
demonstration aimed at bringing down the government. When
the quotes hit the Russian news wires, a backlash ensued and
both quickly backtracked announcing their remarks had somehow
been taken out of context.


3. (C) Signs are appearing again that the opposition has
grown sour on shows of national unity. Gachechiladze,
Gamkrelidze, and Usupashvili declined to participate in the
September 1, "Stop Russia" human chain rally which attracted
over 1 million people nationwide. Although none of them
commented on the event, various opposition members expressed
subtle criticism of the rally. The most pointed comments
came from Shalva Natelashvili (Labor Party),who said "I did
not participate in this PR stunt staged by Saakashvili;" and
Levan Berdzenishvili (Republican Party),who said "I do not
believe in ordered festivities, besides I myself have to
understand the reasons for such." (Comment: Even where
warranted, the general consensus among all political players
is that criticism of the GOG now is "playing Russia's game"
and tantamount to political suicide. End Comment.)


4. (C) Former Speaker Nino Burjanadze hinted at a political
comeback in an interview on August 18 with Reuters. She told
us she was also surprised at the backlash she received for
her comments which questioned Saakashvili's crisis managment.
Burjanadze has said repeatedly that the government will face
tough questions but only after Russian withdrawal.
Burjanadze was surprised by the criticism because she had
publicly called for unity and support for the current
government. Burjanadze told us privately that Saakashvili
has terribly mismanaged the crisis and she believed her
return to the political stage would likely be sooner rather
than later. It was unclear what role Burjanadze would play,
as she lacks a wide grass-roots base among either current
opposition or government supporters. In fact, after
lackluster showings in both the presidential and

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parliamentary elections earlier this year, the opposition
leaders also have little popular support among the public and
no one sees them as coming up with new ideas or approaches to
the serious challenges facing the country.


5. (C) Nevertheless, the GOG is cognizant of the need to
engage the opposition, even if only symbolically, and
throughout late August, President Saakashvili told visiting
U.S. senior officials that his government planned to reach
out in this time of crisis. Speaker Bakradze held a first
meeting with opposition leaders on September 2. Notably
absent were Gamkrelidze and Usupashvili. Those present
generally agreed that all political players should, and do,
support: 1) Georgia's territorial integrity; 2) Georgia's
NATO and EU aspirations; and 3) peaceful protests as long as
they are via constitutional means. The parties signed the
memorandum of understanding on the above three points and the
creation of an "anti-crisis commission" on September 5.
Those parties which sign the MOU within three days will be
invited to participate in the anti-crisis commission.
Gachechiladze, the Republicans, the New Rightists and the
Conservatives did not participate in the September 5 meeting
and did not sign the MOU. Burjanadze's representative told
the gathering that she would make her own statement when she
returned to Georgia. (Embassy note. Burjanadze is currently
in the U.S. to attend the political conventions and meet USG
policymakers in Washington. End note.)

An Economy on the Edge
--------------


6. (C) In multiple meetings with visiting USG officials, PM
Gurgenidze and Minister of Finance Nikoloz Gilauri have
expressed repeatedly the view that Georgia's biggest economic
threat was the erosion of investor and consumer confidence.
Most specifically, Georgia's 9-10 percent GDP growth over the
last few years has been fueled by large foreign direct
investment (FDI). Georgia has been running a current account
deficit of approximately 20 percent of GDP. The sudden drop
in FDI coupled with the flight of currency out of the
country, has put deflationary pressures on the lari. The GOG
continues to intervene in open market operations daily to
support the lari (at the cost of approximately $2 million per
day) but cannot do so indefinitely. If investor confidence
is not restored, the lari will depreciate significantly,
squeezing an already tight credit market and suffocating
growth. Because Georgia is a country heavily dependent on
imports, a falling lari will constrict buying power and lower
the standard of living for most Georgians. Furthermore, a
depreciating lari will make it difficult for private
individuals and businesses to pay back loans, 60 percent of
which are held in dollars. The effect of a weak lari and
subsequent economic slowdown could spell doom for the GOG who
has staked its political future in large part on the ability
to create robust, sustained growth.


7. (C) In addition to the short-term currency crunch, the
government is facing serious fiscal challenges. Government
spending has increased substantially since the crisis began,
while revenues have shrunk significantly. According to
Gilauri, revenues for August are down by 20 to 25 percent
with a similar, if not larger, decrease expected in September
due to the near zeroing out of VAT collections. Gilauri said
that the presence of Russian forces just outside the Poti
port has been especially damaging. Although the port is
open, many shippers either cannot get insurance or insurance
costs have increased dramatically, which has hindered imports
and cut tax revenues. Batumi is being used as an alternative
port, but it is more suited to exporting oil products and is
of marginal use as a dry goods port. Russian withdrawal from
the area around Poti would alleviate much of the strain, but
neither Gurgenidze nor Gilauri expect it to be quick or easy.
Gurgenidze expects increased shipping and logistical costs
in August-December of US$100 million. Many banks and
commercial enterprises appear to be unable to pay their
taxes, further decreasing budget intake. Banks continue to
restrict consumer credit, fearing defaults. According to
sources close to the government, at least one bank is in
receivership due to significant commercial exposure in Gori,
with two other large banks facing general solvency issues.


8. (C) Gurgenidze and Gilauri both describe themselves as
hard core followers of economic liberalism. That said, both
have stressed to us on numerous occasions that they realize
the practical political effects of such economic policies
often do not trickle down as fast as they would like, and
that large GDP gains are not necessarily equally distributed
throughout the population. Both are acutely aware that
support for the government may depend on providing support
for the lowest income families and IDPs. Gurgenidze and
Gilauri are already spending down sovereign wealth funds and
diverting budget outlays from infrastructure to meet

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immediate consumption needs. Mishandling the economics of
the crisis, especially by choosing long term growth
strategies over short term needs, could hand the opposition a
golden opportunity. The GOG appears aware of this political
reality and is doing its best to avoid it.
TEFFT