Georgian FDI tumbles as inflation soars

Amid growing concern over the state of the world economy on the back of soaring oil prices, Georgia announced two pieces of bad financial news recently. Inflation is growing rapidly, and flows of foreign direct investment (FDI) fell sharply in 2010, continuing a slump that began with the war with Russia in August 2008.

Annual inflation hit 13.7 per cent in February, continuing a trend of rapidly rising prices: year-on-year inflation has climbed almost 1 per cent every month since October, and has soared since June 2010 figure of 3.7 per cent.

Most concerning for Georgian politicians is the fact that food and non-alcoholic beverages is the biggest contributor to inflation, making up almost all of the 2.8 per cent jump from January's figures. Taken alone, inflation on these products is running at 28.4 per cent. The social and political impact of such a sharp rise in food prices is – as governments around the globe are finding – potentially very serious indeed.

The administration of President Mikheil Saakashvili responded in typically populist fashion, by distributing one-off food vouchers of 30 lari (around US$17) to poor households, following a one-off electricity subsidy in February. Although these might be effective at alleviating immediate concerns, economists have warned that in the long term these could distort the economy and actually contribute to galloping inflation.

Saakashvili's long-term solution – rapid economic development – will not be made easier by news that in 2010 FDI fell 16 per cent year-on-year, to US$553 million. This is only around a quarter of the FDI high-water mark, US$2.01 billion in 2007, and was far below the government's original 2010 target of US$1 billion. The decline in FDI is officially attributed to the ongoing impact of the global recession; however, investors are also cautious due to the political climate and Russia's military build-up in the breakaway provinces of Abkhazia and South Ossetia.

Although the IMF has said recently that FDI “remains quite respectable by international standards”, the decline is a blow to Saakashvili's high-profile campaign to attract outside investment. A troubling fact for the government is that, according to Georgian media reports, remittances from migrants back to Georgia now exceed FDI flows.

Amid this sobering economic climate, even the fact that American property tycoon Donald Trump has formally announced his empire's expansion into Georgia may not be enough to start a new wave of foreign investment.

Sources: Geostat, Eurasianet, Civil Georgia, Messenger.ge

For more news and expert analysis about the Caspian region, please see Caspian Focus.

Azerbaijan criticises Armenia-Georgia ties

Georgia has found itself in a rather uncomfortable position recently, as its efforts to improve economic ties with Armenia have come under fire from Azerbaijan, Armenia's arch-rival and Georgia's strategic ally.

In a tough neighbourhood Tbilisi needs all the friends it can get; as well as its close energy partnership with Azerbaijan, it has sought to cultivate ties with Armenia. Outreach to Yerevan is for its own merits, but also in order to draw Armenia away from its economic and strategic partner Russia. The hostility between Armenia and Azerbaijan over the Nagorno-Karabakh conflict, therefore, requires a careful balance from Tbilisi.

For some time rumours have circulated that Tbilisi, as part of its privatisation drive, was seeking to sell off its section of a pipeline which sells Russian gas to Armenia (isolated by Azerbaijani and Turkish blockades, Armenia relies on Russian and Iranian gas). Fears arose in Armenia that Azerbaijan's state energy firm State Oil Company of Azerbaijan Republic (SOCAR) would seek to acquire the pipeline, effectively giving it control of Armenia's gas supply. This now seems unlikely, with Georgian officials insisting that the pipeline will remain in government hands. The battle of influence between Armenia and Azerbaijan in Georgia continues.

In mid-February, Armenia and Georgia agreed to jointly operate their three border crossings in order to smooth travel and trade between them. Conflicting regulations have inhibited trade, partly explaining why Armenian President Serzh Sarkisian declared on February 17th that trade was “insufficient” despite the fact that total trade turnover more than doubled between 2005 and 2008.

One successfully developing area of integration has been a boom in Armenians holidaying on Georgia's Black Sea coast, buying property there, and setting up import/export businesses in Georgian ports. According to Yerevan, in 2010, around 300,000 Armenian tourists visited Georgia.

Responding to this rise in Armenian-Georgian contact, but without any discernible immediate trigger, Baku's ambassador to Tbilisi Namig Aliyev declared on February 24th that Armenia “means to occupy these territories [in Georgia] both through military way [sic] and migration.” He said that Armenians working and living in Georgia attempted to create mono-ethnic enclaves in order to realise the concept of a 'Greater Armenia' stretching from the Black Sea to the Caspian, and that Azerbaijan and Georgia must unite to prevent this “great threat.”

Exactly why the ambassador made these comments at this juncture is unclear: the Georgian government will take claims of colonisation with a large pinch of salt, especially given its recent efforts to improve cooperation with Armenia. Ironically, given his denunciation of mono-ethnic areas in Georgia, the following day Amb. Aliyev paid a visit to Marneuli – a Georgian district which is 83 per cent ethnically Azerbaijani.

Sources: Radio Free Europe/Radio Liberty, News.az, Armenia Now

For more news and expert analysis about the Caspian region, please see Caspian Focus.