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Russia Issues Blockade Against Georgia

By Yuri Mamchur

Russian President Vladimir Putin issued a statement over the weekend, declaring that the Georgian government's arrest of seven Russian officers was provocative, and that "there seem to be some powers which specialize in creating new crisis every day, thinking it will distract attention from the old problems. In the short term it might give some effect, but it absolutely will not help in resolving old and very serious crises around the world". Putin compared the Georgian government's actions to the paranoia of the USSR under Stalin (a Georgian by birth) and Beria. Putin has asked the Russian Parliament to levy economic and travel sanctions against Georgia that would amount to a blockade.

Putin's verbal jab at "you-know-who" prompted a diplomatic phone call from President George W. Bush to President Putin. A few hours after this presidential talk, international observers came to a Georgian prison in Tbilisi to monitor the release of seven jailed Russian officers. The freed Russians were driven first to the Russian Embassy, and then on to the airport for a flight to Moscow.

Moscow views Georgia as a U.S. client state, but it is still unclear if Washington really authorized the arrests of the officers, or if Saakashvili overplayed his hand in a clumsy attempt to force the withdrawal of Russian military outposts. The Georgian government is known for making sensational allegations - last year they accused Russian agents of planting a grenade to assassinate George W. Bush when the American President visited Georgia. Now it looks like the sanctions machine started by Russia cannot be stopped, and the biggest loser in this conflict is Georgia. It is time to ask: What has Georgia gained from this latest confrontation?

Today the Russian Ministry of Transportation cut off all communications with Georgia - via mail, air, trains, roads and the Black Sea. The Russian Embassy in Tbilisi stopped issuing visas on September 29, and has started evacuating all personnel. The Duma is working on a bill to block any financial transactions with Georgia. Given the anti-Georgian mood in Parliament, the bill could easily become law in just a few days. The Georgians have argued that it is impossible to stop financial flows between the two nations, because Russia cannot block transactions sent via international wire services. However, a spokesman for Western Union (one of the largest money wiring services used by Georgian immigrants working in Russia) said that the company will obey the laws of the countries it operates in.

Georgia's economic losses have already reached $35-40 million from the Russian embargo on Georgian wine and mineral water. Russia is Georgia's main trading partner and is responsible for 67.4% of the total amount transferred to Georgia annually. Georgia's second largest "contributor" is the USA, but money from the U.S. government and private sector provide only 9.5% of Georgia's cash flow. For the first half of 2006 alone, Georgians received $220 million in wire transfers from Russia. These transfers equal 20% of the Georgian federal budget, which is $2 billion a year, or roughly 5% of the nation's GDP.

Like so many economies in the former Soviet Republics, official bank transfers only tell part of the story. Officially another $350 million was brought from Russia to Georgia in cash and deposited in banks. The unofficial estimate of money brought into Georgia every year from Russia is over one billion US dollars. In June 2006, President Putin mentioned an even a higher number during his meeting with President Saakashvili. Putin said that according to different statistics "Georgian citizens who live in Russia send 1.5 to 2 billion US dollars to Georgia per year; this is much more help than from any other country in the world." According to the Russian Federal Migration Service, there are 320,000 Georgians working in Russia, but only 4,500 of them are legal immigrants.

Besides the financial and travel blockade, Russians have other ways to influence events in Georgia. According to Gazeta.Ru, the state-owned giant Gazprom is a monopoly importer of natural gas into Georgia. Another Russian company, Itera, owns all the pipelines on Georgian territory. Russians also own a lot of stock in the Georgian energy market. Russian RAO ES owns 75% of Tbilisi based energy company Telasy and 50% of AES-TransEnergy, which exports electricity from Georgia to Turkey. RAO ES also owns parts of Georgian power plants, and its ownership totals to 20% of total electric production and 35% of the energy distribution in Georgia.

Georgia's main exports are wine and mineral water, and its main customer has always been Russia. Given the state of Georgian viniculture, however, it is hard to imagine Georgian wine competing with wines from France, Australia, Chile, or for that matter, California and Washington State. Georgia's second largest trade partner - America - has plenty of spring water as well, and the well-known Georgian mineral water "Borjomi" is probably not going to be seen on the shelves of your local Costco or Safeway anytime soon.

Wealthy Georgian business leaders residing in Russia have no interest in this conflict whatsoever. Their businesses are based in Russia, mainly in Moscow and St Petersburg. This conflict doesn't change anything for them, because there is no problem that they cannot discuss over lunch with their Russian business partners and government officials.

Many policy experts and commentators in Russia doubt that America instigated this conflict, and President Bush's phone call suggests that the White House has no interest in seeing it escalate. While America and Western Europe clearly would be happy to see the Russian peacekeeping troops gone from Georgia so NATO can move in, the Georgian government's actions have failed to benefit anyone. Some think that Saakashvili's administration has been "high" on nationalism since the Rose Revolution's success, and took a discreet White House suggestion to increase pressure in negotiations with Moscow over Russian military outposts in Georgia too far. Given the fact that Georgia has so few economic ties with the rest of the world besides Russia, it is hard to imagine America or any Western European country risking their lucrative business deals with Moscow by supporting Saakashvili's inept administration.

If Gazprom decides to call in Georgian government debts and cuts off the gas early this winter, Saakashvili's government may fall and be replaced by one that wants better relations with Moscow. This is not idle speculation, considering that thousands of people have recently attended anti-government rallies in Tbilisi. These demonstrations have not been taken seriously in Western capitols and have been underreported by the international media.

The average state pension in Georgia is now between $4 and $5 a month. The already desperate poverty in Georgia has been exacerbated by needless confrontation with the great power next door. Just as the Orange government in Kiev discovered earlier this year, Saakashvili may find nationalism and the prospect of NATO membership poor substitutes for money and warmth when winter comes.

Yuri Mamchur is Senior Foreign Policy Fellow of the Discovery Institute, creator and editor of

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