Capital Flight Fears Lead Georgia to Halt Lending

The Georgian economy suffered a major blow Monday as banks were told to stop issuing loans and investors voiced concern that a military conflict spilling over into the country from two rebel provinces could disrupt energy supplies.

The Bank of Georgia, the country's largest lender, said it halted all loans and its online banking service until August 18, after Georgian financial regulators ordered a freeze to prevent capital flight.

"We understand that we may face a massive money withdrawal, so it seems logical to keep the assets in the banks," said Macca Ekizashvili, head of investor relations at the bank. "But we haven't seen any kind of panic so far."

Online banking was suspended over fears of attacks by Russian hackers, Bank of Georgia chairman Nicholas Enukidze told investors during a conference call late Monday. He said didn't expect dramatic foreign-capital flight.

"Much of the foreign money is invested in the infrastructure — road, railway and pipeline construction, so it will be hard to withdraw," Enukidze said, adding that investment in resorts could decrease, hurting the tourism sector.

Zurab Katabadze, president of the Association of Business Consulting Organizations of Georgia, which works with small and medium-sized businesses, said entrepreneurs were "now more concerned about our lives than our money."

He said he hoped that Russian and Georgia would resume trading once the hostilities end but that because of sanctions imposed by Russia last year, it was no longer a major trading partner.

"We try to export our wine and fruit to Europe and the United States, but they have very high standards, so we would prefer Russia," Katabadze added.

The Georgian Chamber of Commerce and Industry, which represents big business, declined to comment Monday.

"The situation in Georgia highlights the greatly increased risks related to energy transits through the country," Troika Dialog said in a note, estimating the volume of potential disruptions at around 1.6 million barrels per day.

Russia's military sought to ease concerns that it was targeting Georgian energy infrastructure, including several key pipelines supplying oil and gas to Europe, and denied claims that it had bombed an export route to the Turkish Mediterranean port of Ceyhan.

"We are not bombing oil pipelines," said Colonel-General Anatoly Nogovitsyn, deputy head of the General Staff, Reuters reported.

The Georgian Energy Ministry said Saturday that Russian jets dropped around 30 bombs 5 meters from an oil transit line near Tbilisi on Friday night, although no damage was done.

Several pipelines run through Georgia, primarily delivering Caspian Sea oil to Europe. The lines include the BP-led Baku-Tbilisi-Ceyhan, which has been disrupted since a bomb blast hit it in Turkey earlier this month. A spokesperson for the pipeline said the fire was contained Monday, Bloomberg reported.

At least one foreign investor started pulling out staff Monday. British mining and exploration firm Templar Minerals removed most of its personnel "due to the current security situation," the company said in a statement.