SCENESETTER FOR COMMERCE SECRETARY GUTIERREZ'S

UNCLAS SECTION 01 OF 03 TBILISI 000077 SIPDIS SENSITIVE SIPDIS COMMERCE FOR SECRETARY GUTIERREZ STATE FOR EUR/CARC E.O. 12958: N/A TAGS: PREL PGOV ECON GG SUBJECT: SCENESETTER FOR COMMERCE SECRETARY GUTIERREZ'S JANUARY 20 VISIT TO TBILISI ¶1. (SBU) Your visit to Tbilisi comes during the most significant period of political uncertainty in Georgia since the 2003 Rose Revolution brought Mikheil Saakashvili to power. The January 5 presidential election was judged by the U.S. Embassy, the Organization for Security and Cooperation in Europe and the Council of Europe to be the most competitive in Georgia's history and in essence consistent with most international standards for democratic elections. None of these observers found the election to be problem-free, however, and Saakashvili's inauguration for his second term as President takes place against the wishes of a vocal and increasingly powerful opposition that accuses him of stealing the January 5 presidential election. ¶2. (SBU) The opposition contend that Saakashvili's 53 percent share of the votes cast was inflated by: - unfair use of government resources in campaigning, - intimidation of voters and opposition activists, - vote tally falsification in the Armenian and Azerbaijani minority regions of the country. To some extent, the uncovering of such problems is due to the higher level of transparency in the election process that Saakashvili has introduced. Although there are signs that a compromise is in the offing that will allow Saakashvili to hold office without further controversy, and permit the opposition to focus on parliamentary elections coming up in the Spring, such a resolution of the current political problems is not entirely assured. Nevertheless, the opposition's ability to campaign, to gain a significant share of the vote in the election and to express its concerns afterward is evidence that Georgia's progress toward Western-style democracy, however flawed, far outstrips that in other countries of the former Soviet Union outside the Baltics. ¶3. (SBU) When Saakashvili took office in 2004, Georgia was nearly a failed state, but it is much changed now. Georgia is a strategically significant country to the United States because of its government's commitment to democracy, independence from Russia, free market economic reform and control of corruption, NATO and EU membership, and support for the War on Terrorism, most notably by the contribution of 2000 troops to Iraq coalition forces. Georgia has the third largest contingent of troops in Iraq. Its success or failure sends a distinct message to other countries of the former Soviet Union, and in the Middle East as well, about the wisdom of a Western-oriented, democratic, free market orientation. Additionally, Georgia sits astride the main alternative corridor for trade in oil, gas and other goods to Europe from Central Asia and farther East. Without Georgia's cooperation, no strategy for bringing additional Azeri, Kazakh or Turkmen oil and gas to the world market without passing through Russia can succeed. These facts begin to explain as well why Russia is openly hostile to Saakashvili's vision of an independent Georgia. ¶4. (SBU) Since Saakashvili took office, Georgia has substantially reduced the corruption that was bleeding its treasury dry under his predecessor. Saakashvili famously fired the entire Georgian police force in 2004, but he has also made arrests for corruption among all levels of government common news as well. As a result, government revenues are up and government investment in repairing and replacing infrastructure that had badly deteriorated since the fall of the Soviet Union has increased. With few natural resources to rely on other than manganese and agricultural products, Saakashvili and his economic team have begun to fashion a Georgia that seeks to attract investment by cutting taxes, eliminating tariffs and reducing red tape and corruption. Their express models are Singapore and Hong Kong. ¶5. (SBU) The World Bank has named Georgia the 18th easiest place in the world to do business. Prior to the political turmoil that began in November, reform and the optimism generated by the young, personable government attracted USD 1.1 billion in investment in 2006 and a predicted USD 1.5 billion in 2007. The economy grew 9.4 percent in 2006 and 12 percent in 2007. Growth will likely slow in 2008 as political turmoil causes investors to hesitate. Saakashvili intends to continue reforms in his second term, and work is needed to create a truly independent judiciary, establish effective intellectual property rights protections and reduce poverty. The emphasis in government spending is expected to shift from infrastructure and defense to education and public TBILISI 00000077 002 OF 003 health. ¶6. (SBU) Saakashvili's recent political problems have their roots in the fact that the payoff in jobs from the boom in foreign investment has not been quick in coming. Most of the investment so far has been focused on financial services and real estate, not large producers of employment, and many Georgians are not educated to take advantage of those jobs that are created. Many members of the so-called Tbilisi intelligentsia profited from or held high positions in the Shevardnadze regime and are disadvantaged in the new administration, with its emphasis on egalitarian competition. Inflation has made many staple food and consumer items more expensive for all Georgians, and only a few are wealthy enough to take advantage of the glittery developments they see across Tbilisi. At the same time, property owners were disturbed in 2007 by the government's willingness to evict long-term tenants from state-owned buildings, challenge corruptly procured ownership rights in privatized property and even to destroy some buildings in Tbilisi that were allegedly built illegally. Saakashvili's own unshakable belief in the rightness of his cause contributed to a widespread perception of aloofness and unwillingness to listen to outside voices. ¶7. (SBU) Georgia's long-simmering problems with its separatist regions of South Ossetia and Abkhazia could erupt in controversy in February when Kosovo will likely declare independence. Russia has threatened to recognize the independence of Abkhazia and South Ossetia if the U.S. and Europeans recognize Kosovo. Such a move by Russia, which has long supported the separatist regimes, will be extremely destabilizing to the government of Georgia. We believe the government is sufficiently committed to its NATO membership drive that it would not jeopardize that goal by taking military action. It will, however, have to resist internal pressure to do so. ¶8. (SBU) Whatever happens, solving the Abkhazia and South Ossetia disputes will take a long time. Unfortunately, their existence is probably the one thing that most discourages investors from coming to Georgia. Even so, regaining the separatist regions lost in the early 1990's during intense internal conflicts is the dream of every single Georgian. The political leadership's focus on this goal reflects that fact. Moreover, official U.S. policy supports Georgia's sovereignty and independence within its internationally recognized borders, which includes Abkhazia and South Ossetia. We reject any parallels with Kosovo, as well. ¶9. (SBU) Georgia hosts a major gas pipeline from Azerbaijan's Shah Deniz field to Turkey. It also facilitates transit of millions of barrels of Azeri and Kazakh oil via pipelines and rail transport. Where Georgia was subject to frequent blackouts in 2003, it has greatly increased output of hydroelectric power and is now supplying paying customers with reliable 24 hour electricity. It still needs large amounts of expensive Russian gas, especially in winter, but in 2007 it began receiving significant amounts of gas from Azerbaijan. Over time Georgia will be less and less dependent on Russian supplies. Domestic production of gas and oil is negligible, but American companies (Canargo, Frontera) are active in exploration and production. ¶10. (SBU) We estimate U.S. investment in Georgia at about USD 770 million since 2000. Some of the largest investors are Metromedia, which owns part of a cellular telephone company, and GMT, which owns the Tbilisi Marriott hotels and other properties. According to Georgian figures, U.S. exports to Georgia in 2007 were USD 179 million from January to November. In the same period Georgia exported USD 127 million in goods to the United States. The United States and Georgia signed a Trade and Investment Framework Agreement in June 2007. U.S. assistance to Georgia in 2008 will be more than 50 million dollars, directed to strengthening democracy, rule of law, free markets, and energy security, among other objectives. Georgian officials would welcome a free trade agreement with the United States, which would attract investment and support jobs, stability, and growth in this friendly and strategic country. ¶11. (SBU) While you are in Tbilisi, you should congratulate President Saakashvili on his winning the January 5 election. You will want to urge him to take immediate action to prevent the recurrence of the election irregularities that were noted by international observers and dulled the brilliance of his victory. You will want to recognize the undeniable progress TBILISI 00000077 003 OF 003 toward reform that the government has achieved. At the same time, you should emphasize the importance of an independent, fair and well-trained judiciary to attracting foreign investment. ¶12. (SBU) Georgia is woefully deficient in protecting intellectual property rights and you could usefully emphasize to PM Gurgenidze the need for better enforcement. This could include requiring Internet service providers to remove websites offering illegal content and implementation of a regulation requiring use of legal software by all government offices. Finally, Georgia has been a reliable partner for transit of oil and gas from Azerbaijan and Kazakhstan. You may want to thank Saakashvili and PM Gurgenidze for that and seek their advice and assistance in convincing Turkmenistan to open development of its gas and oil reserves to Western companies and utilize the Caucasus pipelines to Europe for their export. TEFFT