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 Rondeli speculated that serious criticism of the government would resume once the Russians have withdrawn.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 TBILISI 00001525 002 OF 003 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 TBILISI 00001525 003 OF 003 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