Annals of Russian Barbarity, and Failure, in Georgia

The New York Times reports:

During the recent war between Georgia and Russia, Russian soldiers broke into a tower housing Georgia’s largest Internet provider and blew up its transmission equipment with hand grenades, shutting down television, phone and digital access for two million people across the country.

More than a month later, the company, Caucasus Online, is still struggling with the economic fallout. The company’s managing director, Mamia Sanadiradze, said that having restored Internet access to clients at a cost of $50 million, he now risks defaulting on plans to build a giant telecommunications network stretching to Western Europe.

The project was to be completed by October, but has been set back because American engineers hired to install an underwater cable are said to be too worried about the security risk of returning to Georgia and to the field. Mr. Sanadiradze estimated he would lose $1 million for every month the project was delayed.

“The Russians are still stationed on Georgian territory, and at any time they can paralyze our communications network or blow up the railway and nobody can stop them,” he said. “As long as the Russians are here, it will be impossible to restore business confidence in Georgia, that we spent years trying to build up.”

Before the war, Georgia, a country of 4.6 million people, had fashioned itself as the new economic tiger of the Caucasus, with a telegenic, pro-business president, Mikheil Saakashvili; a savvy work force; 12 percent annual growth; and foreign investment that tripled last year to nearly $2 billion. Now, the economic vitality of Georgia — a Western ally suddenly at the front line of a power struggle with Russia — is being tested.

The fighting rocked Georgia’s economy. After hostilities broke out on Aug. 7, the transport routes between Poti, Georgia’s main Black Sea port, and Tbilisi, the capital, were cut off. That created a bottleneck for many products, including electronic goods and toilet paper, leading dozens of importers to default on contracts. Georgia’s stock market plummeted. Tens of thousands of Georgians withdrew cash from banks, wiping out $165 million in deposits at the Bank of Georgia, the largest bank in the country.

Meanwhile, Georgia’s once-blossoming tourism industry has been severely hit. The country’s pristine forests were burned by Russian incendiary bombs; its scenic resorts on the Black Sea — which have long attracted rich Russians — sit largely empty.

Despite the buffeting, made worse by a global financial crisis, economists and policy makers here say the Georgian economy has proved to be relatively resilient. Nor has the political system been destabilized.

Lado Gurgenidze, Georgia’s prime minister and a former investment banker who worked in London, said Georgia had suffered about $1 billion in infrastructure damage from the war — damage that could be more than offset by $2 billion in combined aid from the United States and the European Union.

Mr. Gurgenidze also emphasized that in a region known for coups and revolutions, Georgia had not been consumed by lawlessness and disorder, even as Russian tanks rolled a mere half-hour from the capital. “We are experiencing the unpleasant consequences of a shock to the system,” he said, “but we have not seen panic buying or hoarding, and we have not seen a widespread investment flight.”

Even so, the confidence of foreign investors was one of the biggest casualties of war. Amy Denman, executive director of the American Chamber of Commerce in Georgia, which represents 130 of the biggest foreign investors in the country, said the presence of Russian troops on Georgian territory would deter foreign investment for a long time.

The Kazakh state oil and natural gas company, KazMunaiGas, announced Wednesday that it had dropped plans to build a $1 billion oil refinery in the Georgian port of Batumi, saying it was not economically viable. The Kazakh government, an important foreign investor in Georgia, has also withdrawn from plans to build a $10 million grain terminal in Poti, citing concerns raised by the war.

Other businesses are retrenching as well. the Ofer Group, an Israeli shipping and property development company, said it would forge ahead with a shopping center project in Tbilisi on which it had already broken ground. But it delayed development of a four-star hotel.

Russia has agreed to withdraw from Georgia within 10 days after an observer mission from the European Union arrives in Georgia, around this Wednesday. But so far there has been only a partial retreat, while the Kremlin is emphatic it will retain a military presence in South Ossetia and Abkhazia, Georgia’s two breakaway regions.

The war may also have stymied Georgia’s aspirations to become an alternative supply route for energy consumed by the European Union, which seeks to offset its vulnerability to Moscow’s pipeline politics. The United States and the European Union have pressed for the construction of a pipeline called Nabucco to bring natural gas to Europe from Central Asian countries like Turkmenistan, with Georgia as an important part of the route.

Borut Grgic, a Slovenia-based specialist on energy in the region, said the war had severely dented Georgia’s credibility as an alternative supply route, potentially denying it hundreds of millions of dollars in future transit fees.

Russia had long been a huge market for Georgia, but it imposed a trade embargo in the fall of 2006 after Georgia arrested four Russian military officers on espionage charges. Executives here cite Georgia’s ability to thrive despite the embargo as evidence of their resilience.

“Everyone said the Russian embargo would be an economic disaster, yet for the last two years Georgia has had double-digit growth,” said Nicholas Enukidze, chairman of the Bank of Georgia.

Perhaps no one knows better the necessity of offsetting dependence on Russia than Badri Japaridze. He is chief executive of Borjomi, the largest Georgian beverage company, whose celebrated spring water was once the preferred refreshment of Russian czars. When Russia embargoed Georgian goods, Borjomi, then the No. 1 bottled water brand in Russia, had to withdraw 180 million bottles of water from 30,000 stores, which Mr. Japaridze said cost the company $50 million in lost sales.

Mr. Japaridze said Borjomi had weaned itself from dependence on Russia by expanding into Ukraine, the Baltic states and Japan, among other countries. “We learned the painful and costly lesson that you should not be so exposed to one market,” he said. “But our comeback also illustrates that Georgian companies can thrive without the Russian market.”

Despite the embargo, Russian businesses have not stopped investing in Georgia, and several said that the war would not alter their plans.

Valeri Pantsulaia, a spokesman for Telasi, a Russian-owned utility that distributes electricity in Tbilisi, said that Telasi had experienced no disruptions during the war and that the Georgian government had assured the company it would not nationalize Russian assets in Georgia.

“I don’t think people think about whether we are Russian or not,” Mr. Pantsulaia said. “Business is business. Georgians want electricity, regardless of whether it is a Russian or Georgian company that is keeping the lights on.” He added that Telasi was nevertheless wondering whether to rehang its Russian flag outside its Tbilisi office.

Mr. Japaridze of Borjomi insisted that the war had paradoxically put little Georgia on the global map, which he said in the long run could help attract investors, especially Americans for whom the name Georgia meant only a peach-growing state in the American South.

“There is better country awareness about Georgia than ever before — with even both U.S. presidential candidates talking about us,” he said. “Now we just need to change our image from a country that hosts Russian tanks to something more peaceful.”