Caucasus Report: September 22, 2006

GEORGIAN INTEGRATION MINISTER COMMENTS ON GEORGIAN INTEGRATION WITH NATO AND THE EU. Former Georgian Defense and Interior Minister Giorgi Baramidze, currently Georgia's State Minister on European and Euro-Atlantic Integration was in RFE/RL's Prague headquarters and spoke to correspondent Rob Parsons on September 21 about Georgia's prospects for further integration with the EU and NATO as NATO foreign ministers gathered in New York prepared to offer Georgia a step forward in its membership talks.

RFE/RL: NATO is offering Georgia Intensified Dialogue status in its bid to join the alliance. How important a step is that for Georgia?

Giorgi Baramidze: It's crucially important because it is recognition of Georgia's reforms, not only in the military sphere but also in the sphere of strengthening the rule of law and fighting against corruption, strengthening our democracy and improving the situation in the economy. In parallel, the World Bank granted Georgia the world's best reformer status. It's a great achievement for us. And on conflict resolution, every step toward NATO gives us a better chance to solve those conflicts peacefully.

RFE/RL: But you had hoped for more, hadn't you? Because there had been talk of a Membership Action Plan of the type granted to Albania and Macedonia and you didn't get that.

Baramidze: Certainly, we are always ambitious but we try to be patient. And we know that it is not enough just to do good homework. Twenty-six NATO countries have to agree with each other and there has to be consensus. So we learn by moving forward. Certainly we are now anticipating another step, which would be a Membership Action Plan and anyway we will very soon start to behave as if we already had a Membership Action Plan.

RFE/RL: If I can interrupt, the view in NATO appears to be that while Georgia is doing well as far as military progress is concerned, that there are still some doubts about its progress on the democratic front, particularly judicial reform. There was the recent report about the state of Georgia's prisons and there are questions about what direction the media are moving in. Is Georgia ready to accept these criticisms and do something about them?

Baramidze: We certainly accept these criticisms, because we know the situation in the penitentiary [system] is quite bad. That's why we put the issue of the rule of law as a first priority for us in the [EU] New Neighborhood Policy action plan and this is one of our major tasks -- to change the judiciary system, to reform the judiciary system. This is the weakness of our system and we certainly recognize this. We are doing our best to achieve results, although it takes time, certainly. We are proud to have a free press. We have certainly a press which has sympathy toward the government, [but we also have] those who are criticizing us every day, and on that regard we don't have a problem. But certainly democracy is something which should always be exercised and fought for, and we welcome the activities of the European Union to strengthen our civil society.

RFE/RL: Russia is not going to be happy about you getting Intensified Dialogue status. Does it make sense, do you think, for Georgia to be constantly poking Russia in the eye? Isn't it time for Georgian foreign policy to start improving relations with Russia?

Baramidze: Actually, we are trying to engage Russia positively. Nothing we do objectively contradicts Russia's security or any other interests. We offer a win-win solution rather than a zero-sum game. We think that we have lots of common interests, including Georgia's NATO membership. It's not really, if we talk sincerely, a threat to Russia, because Russia itself has a strategic partnership with NATO and after the end of the Cold War has never considered NATO a threat. So why should Georgia in NATO should be considered by Russia a threat?

RFE/RL: At the heart of the problem is the issue of the frozen conflicts. Why is it that Georgia is so opposed to Russian mediation?

Baramidze: Well, unfortunately for us, Russia cannot be already a mediator because it was clear from the beginning that it was initiated by old Soviet rulers. After the dissolution of the Soviet Union the conflict was instigated by the early Russian leaders and now they still have the policy of divide and conquer. They have granted more than 90 percent of the population in the conflict areas -- Abkhazia and Tskhinvali region -- Russian citizenship. They provide all kinds of assistance, including military, economic, financial, political, and propagandistic, so Russia has there not peacekeeping forces but, in fact, police forces. So Russia cannot be neutral in this regard. We don't want to push Russia out of the negotiation process, but we don't want Russia to dominate this process.

We want the European Union, the United States, and international organizations such as the OSCE and the United Nations to be equal partners during the negotiation process and the negotiating format with Russia. And we request the withdrawal of the so-called Russian peacekeepers from the territory of Georgia.

RFE/RL: You mention those organizations but there is no sign, for instance, that the EU is ready to take on that role, and while the OSCE might be willing, Russia is not prepared to let the OSCE take on that role.

Baramidze: We have in fact presented a peace plan on South Ossetia and that was endorsed by the OSCE, including Russia, including the [Russian] Foreign Ministry, last year in December in Ljubljana. All we request is to do what we have endorsed together.

RFE/RL: Why is Georgia's relationship with Russia so complicated? What do you think lies at the heart of the problem?

Baramidze: It's better to ask President Putin why President Putin and the Russian leadership doesn't see the benefit to Russia of a stable, united and democratic neighbor on its southern flank, to use NATO terminology. Why don't they see the benefit of cooperation to fight against terrorism, to fight against aggressive separatism together, to fight against drug and weapons proliferation and organized crime and, on the other hand, to establish better economic cooperation and the benefits of economic cooperation: cooperation on energy issues, transportation, culture and so on and so forth. So, as I have said, we offer a win-win solution rather than a zero-sum game.

RFE/RL: The EU's external relations commissioner, Benita Ferrero-Waldner, complained recently that defense expenditure in the South Caucasus is going through the roof. Georgia's defense spending, as a proportion of the total budget, is huge at the moment. How can Georgia justify spending so much on defense when it has all these other problems?

Baramidze: Very easily. Because I think you know that for decades or more, the Georgian military was not being paid and it was more of a threat for national security than a guarantee of security in the nation. Georgia has the smallest army in the South Caucasus. If you just compare it with Azerbaijan and Armenia, they have more than 90,000 [troops]. We have reduced our army from 35,000 to 26,000 as a ceiling. De facto we have 21,000. So certainly it's not a threat to anybody. But we need to have a NATO-capable army. Therefore we need to immediately repair barracks, improve the conditions for our military -- our soldiers, officers. It requires, certainly, a lot of money. And it's been more than a decade since we bought any new military equipment. So we need to re-equip our army. It's true that it takes resources. But it's important, in parallel, to look at how much Georgia spends on other issues. For example, we spent this year eight times more money for education than we did in 2003; five times more money for health care and social security. Ten times more money on road construction; and we're going to spend two times more than that in the next year. This is due to the fact that Georgia has significantly lowered the shadow economy from 80 percent down to 15 percent. By the way, the EBRD declared Georgia the first among the European transition economies with the lowest levels of corruption. So that means the money we already have in the budget this year is five times more than the budget we had three years ago. We have to spend this money properly, and according to our reform agenda -- the agenda of the IPAP with NATO, the Individual Partnership Action Plan, and with the European Union New Neighborhood policy.

RFE/RL: I just wanted to get onto that. Georgia has negotiated a Neighborhood Policy action plan with the EU and frequently proclaims its desire for integration with Europe. What does this mean in practice? Does Georgia see itself one day as a member of the European Union, bearing in mind all the problems of resistance to further expansion within the EU?

Baramidze: First of all, I have to tell you that at this stage we are not even talking about membership, because we are realistic. We know that we are not ready, Europe is not ready. We don't want to be anybody's headache. We want to be good neighbors and good partners of Europe. Therefore, we are happy about the new [European] Neighborhood Policy. Moreover, Germany is planning to strengthen the new ENP, have it as a kind of "ENP-Plus," or enhance the ENP. So we will be concentrated on the ENP, and building our relationship with the European Union based on ENP and then on the new structural document that will define our relationship.

So we're taking our time, particularly because we know that we need to keep our economy as liberal as possible, without too many regulations that the EU already has. So we need to keep the speed of our economic growth intact, because last year we had 9.3 percent real GDP growth, this year we anticipate at least 11 percent. So we need to keep going in that direction and have an open economy as much as possible. And therefore we think we have to be concentrated on the new Neighborhood Policy. Now we are concentrated on trade issues. A free trade agreement is a priority with the European Union. Before that, we hope that the EU allows Turkey to sign with Georgia a free trade agreement alongside the one, by the way, with Syria -- Turkey has signed this agreement with Syria, but now we're requesting the same status, and I hope it won't be a big problem. So we are concentrated on the economy. And through strengthening our economy we hope we can move forward on democratic reforms, and it greatly contributes to the peaceful conflict resolution as well. (Rob Parsons)

AZERBAIJANI HYDROCARBON BOOM SPARKS FEARS OF 'DUTCH DISEASE.' Twelve years ago, against a background of euphoric predictions of booming national wealth, Azerbaijan signed its first major oil contract with a Western company. But 12 years later, alarm bells are sounding that energy-rich Azerbaijan may be falling victim to "Dutch disease," a term coined to describe the decline of the manufacturing sector in the Netherlands in the 1960s after the discovery of natural gas in its waters.

What could possibly be wrong? With oil now pouring through the multibillion-dollar Baku-Tbilisi-Ceyhan pipeline and the Baku-Tbilisi-Erzerum gas pipeline just weeks from inauguration, Azerbaijan stands on the brink of colossal wealth.

President Ilham Aliyev says he expects the pipelines to generate $140 billion over the course of the next 20 years. Even if energy prices do fall from their present dizzying heights, few would contest the figures.

Yet this week, the International Monetary Fund (IMF) issued a distinctly downbeat appraisal of the country's economic performance. Vitali Kramarenko, a senior economist in its Middle East and Central Asia Department, warned that the economy was in danger of overheating. "The problem is that the government is increasing expenditure at exceptionally high rates. For the first half of 2006, expenditure increased by more than 70 percent in nominal terms compared with the first half of 2005. This causes overheating because the supply side of the economy cannot respond to the increased demand," Kramarenko said.

And that in turn is driving inflation. "The inflation rate predictably increased from about 5.5 percent in December 2005 to about 10.2 percent in August 2006 and our forecast is that the inflation rate will continue to climb," Kramarenko added.

Inglab Akhmadov of Azerbaijan's independent Public Finances Monitoring Center agrees. He believes the oil wealth is inducing a dangerous sense of complacency -- and providing fertile ground for the further spread of corruption. He questions whether the boom has provided any jobs outside the energy sector and warns that Azerbaijan stands on the brink of Dutch disease.

"We are at the beginning of Dutch disease's negative impact on Azerbaijan's economy because we observe trends in our national currency. We're observing a very big inflation process in Azerbaijan," Akhmadov says. "And we observe a lot of problems in the non-oil sector and business climate for all other sectors in Azerbaijan. It means we have all of the classical attributes of Dutch disease, but unfortunately it is just the beginning of this process."

Dutch disease is something Laurent Rusekas, a leading expert on Caspian Sea economies, knows all about. Fail to keep it under control, fail to use the oil to spread wealth evenly throughout the economy, and Azerbaijan's dreams of economic transformation could turn into nightmares.

"The Dutch disease refers to a situation when all of a sudden a country begins exporting a huge amount of natural resources relative to the size of its economy. This produces pressure on the currency. If you don't take steps to combat this, as oil exports start to boom your currency, in this case the manat, will rise against the dollar," Rusekas says. "If that happens, anything else that anyone else in your country is hoping to export becomes uncompetitive and all of your imports all of a sudden become twice as expensive in dollar terms. The only thing that the country can possibly export is the natural resource that led to the problem to begin with."

The government of Azerbaijan is playing down the problem. It is hardly surprising, it says, that it is facing these problems now as the revenues from oil and gas start to boom.

But Azerbaijan's is not a one-branch economy, it insists, and it is taking measures to ensure transparency in the energy sector and to ease the threat of inflation. It cites, for instance, the creation of the State Oil Fund (SOFAR) in 2001, which puts aside a share of the energy profits for long-term investment in public infrastructure and social-welfare projects.

Akhmadov welcomes SOFAR, whose coffers now contain around $1.6 billion, but complains of a lack of public accountability -- a problem that he says is symptomatic of the government's handling of the entire economy. "This is a very big challenge for the government to demonstrate transparency of its activities and transparency of vision of the situation and to insure some relevant infrastructure in society, especially to ensure some control of government -- both domestic control and of course extra control from other governments' bodies and especially from civil society of these very big investment projects," Akhmadov says.

For the moment, though, Akhmadov says he sees no sign of this happening. He's not alone. The IMF is also calling for better governance and measures to improve the business climate, but Kramarenko says he is optimistic that Azerbaijan is still well-placed to benefit from its natural resources. The key, though, to future prosperity, he says, is to increase productivity now in the non-energy sector.

"To solve this problem one needs to increase the productivity of domestic producers so as to make it possible for them to withstand greater competition," Kramarenko says. "But also, one might think whether the speed of spending should be adjusted because it is the source of real exchange-rate appreciation and by reducing a little bit the speed of increase in spending the government could make it easier for local producers to adjust."

Easier said than done, of course. And at a time when so many in Azerbaijan are still hell-bent on cashing in on the oil boom perhaps a bit like whistling in the wind. (Robert Parsons)

QUOTATION OF THE WEEK. "We are not even talking about [NATO] membership.... We know that we are not ready, Europe is not ready. We don't want to be anybody's headache." Georgian State Minister on European and Euro-Atlantic Integration Giorgi Baramidze in an interview at RFE/RL's Prague headquarters on September 21, 2006.