War Offers Tbilisi a Blessing in Disguise

APU.S. official Henrietta Fore and Nikoloz Gilauri of Georgia signing a cash transfer agreement Wednesday in Brussels.
TBILISI, Georgia -- As billions of dollars in aid are pledged to save Georgia's war-battered economy, some analysts said the war may have partly shielded the country from the worst of the global financial downturn.

While the crisis has buffeted many smaller countries and emerging markets, Georgia may have had at least some good luck -- by being among the first in what is now a long line of countries waiting for bailouts from international organizations.

"In some ways, this crisis that happened in August was a little bit ahead of the curve of the bad news," said Thomas Lubeck, senior investment officer at the International Finance Corporation. "In some ways, it's kind of a blessing in disguise."

Analysts say Georgia might have faced a sharp economic slowdown from the global financial crisis anyway. But because of the timing of the August war, the influx of donor cash could keep the economy here afloat, at least in the short term.

"It's a hard way to luck out, I guess, but there is a silver lining to the cloud," Lubeck said.

The destruction of infrastructure and subsequent investor panic threaten to derail some of the benefits from the liberal economic reforms pushed through by Georgian President Mikheil Saakashvili after the 2003 Rose Revolution mass protests that drove President Eduard Shevardnadze to resign following a discredited parliamentary election. These reforms had fueled a spectacular financial turnaround in what was once a corruption-riddled economy.

Economic growth averaged 10.5 percent per year over the last three years and reached 12.5 percent in 2007, according to World Bank data.

The United States has already pledged $1 billion for reconstruction projects, in addition to a $750 million loan from the International Monetary Fund. International donors in Brussels on Wednesday pledged more than $4.5 billion, a figure that "exceeded expectations," said EU External Relations Commissioner Benita Ferrero-Waldner.

The European Bank of Reconstruction and Development said Thursday that it would provide Georgia with $975 million in loans and investment from 2008 to 2010. Most of the funds will go toward repairing damage caused by the war with Russia and toward restoring the trust of foreign investors in the country, the bank said.

This year, the bank has already provided Georgia with $100 million for the realization of various projects. By year's end, it will provide another $225 million.

An assessment by the United Nations and World Bank paints a sobering picture of the economic costs of the brief August war. According to the document, concerns over the state of the economy appear to be well-founded.

Before the war, Georgia's economy was growing at a rate of 9 percent annually, a report on the Georgia Relief Action web site said. Now, it has dropped to 3.5 percent, according to the document.

Russian warplanes and armored units bombed railroad tracks, bridges and roads, as well as inflicted damage on the key port of Poti.

The assessment praised Georgia's leadership for its handling of the financial fallout from the war. A bank run stripped the system of about $350 million -- 24 percent of total deposits -- between Aug. 6 and Sept. 1, the report said. But the central bank averted a liquidity crisis by injecting cash, the authors said.

The assessment also praised Georgia's decision to ease the rules governing borrowing and lending, including temporarily reducing cash reserves requirements for banks.

But while the international funds will likely provide a short-term cushion, the country's prospects for recovery in the long term are still uncertain, said Ana Jelenkovic, an analyst with The Eurasia Group.

"We still don't even know to the full extent the kind of impact on investment and FDI flows that the conflict itself is going to have," she said, using the acronym for foreign direct investment. "I would be very cautious on the Georgia story."

(AP, Reuters)