Political risk in Georgia

Georgia is rapidly transforming economy in the South Caucasus. Plagued by civil wars, frozen conflicts, rampant corruption and mismanagement in the 1990s, the Georgian economy was in ruins when the current Saakashvili administration came to power in the peaceful Rose Revolution in 2003, starting the process of rebuilding Georgia, and reorienting the country westwards. Reforms have been carried through: A battle against corruption has been launched; the power sector has been reorganized; and taxes have been simplified and reduced. The legal framework for foreign investment has been much improved.

On the domestic scene, the regime is stable. Polls show the mood of the nation improving, after having fallen from the euphoric levels shortly after the Rose Revolution. And reforms are working: the economy is growing; the power shortages that plagued the economy are gone; petty corruption is significantly reduced; and foreign investors are coming to the country.

The main elements of the Rose Revolution, market economic principles, better macroeconomic management, and approximation to the West are largely unchallenged by the major opposition parties. Their attacks on the Government have more to do with shortcomings in tackling question like corruption or poverty than with disagreements about the direction of reform. The opposition parties do, however, complain that the Government has grown increasingly prone to cronyism and authoritarianism. Thus, when it comes to corruption and democratization, the regime still has some way to go, even though major progress has been made over the last four years.

The major political threat to the current Georgian leadership and to current policies comes from outside: Georgian relations to Russia, and to its two break-away regions, Abkhazia and South Ossetia. The Saakashvili administration has placed great importance on regaining these territories. The goal has been to convince them to accept autonomy within a sovereign Georgian state, and the means have included a mixture of threats, negotiation, a military build-up and promise of economic opportunities. A quick success in Adjara has strengthened the Governments belief that Georgian sovereignty is possible, and that the policies are working.

However, the conflicts in South Ossetia and Abkhazia are more difficult by their nature: Both are ethnic conflicts, and both have a history of violence which has hardened both sides. Abkhaz speaking population seems particularly hostile to Georgian rule. Both areas are backed by Russia. As of today, no solution is in sight in either of them, although there is more reason to be optimistic about the prospects for South Ossetia than for Abkhazia.

The frozen conflicts create a threat to Georgian political stability at three levels: First, it allows for the establishment of a domestic opposition which is hawkish, populist and confrontationist. The potential for such opposition was made crystal clear by the announcement of the establishment of an opposition party by former defence minister Irakli Okruashvili, who amongst other claims touted the government for not having regained sovereignty. Thus, the government can either be pressured to behave more bullish than it otherwise would, or they could lose power. Both prospects would entail increased, and possibly irresponsible, military spending, in addition to risking escalating the conflict. Second, it contributes to a vicious cycle in the Russo-Georgian relationship. Finally, the unresolved nature of conflict hampers discussions about Georgian accession to NATO.

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