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Caucasus Report: June 9, 2006

June 9, 2006, Volume 9, Number 20

FORMER ESTONIAN PREMIER ASSESSES GEORGIA'S PROSPECTS. Mart Laar, 45, a former Estonian prime minister credited with turning around his country's fortunes after the collapse of the Soviet Union, was named last month as a special adviser to Georgian President Mikheil Saakashvili. Laar was hired for a year to coordinate economic reforms and offer wider transition advice. In an interview with RFE/RL on June 7, Laar said Georgia has arrived at a decisive juncture -- the current Russian pressure could lead to either massive economic collapse, or the country could emerge as another post-Soviet success story.

RFE/RL: When you started working in Georgia last month, how familiar were you with the situation in the country?

Laar: There's always a case for knowing a situation better, but I think I'm well enough acquainted with it to risk taking on the job. All the more so given that the more time I spend in Georgia, the more I'm overcome by a feeling of deja vu, in other words, a lot of what I see reminds me powerfully of the situation in Estonia round about 1993-1994. There's a lot that's different, but also a very great deal that's similar.

Also, looking at it from a different angle, my task is to try and coordinate the work of Georgia's governmental authorities. Political decisions are inevitably for the Georgians to take, no adviser can dictate that, the adviser's task is to map out where a given choice may lead.

RFE/RL: This seems a good time to ask, what exactly makes Estonia in 1993 and Georgia today alike?

Laar: The overall situation is very similar. The economy has all but collapsed, the entire strategy of producing low- quality, energy-intensive goods for Eastern markets must be replaced in extremely short order with an approach oriented at producing relatively higher quality goods for Western markets. And on the other hand, there's the same very intense pressure from Russia seeking to thwart this turn towards the West.

RFE/RL: To continue the analogy, what are Georgia's chances of reproducing Estonia's relative success?

Laar: In one sense they are very good. Looking at the Georgian government, its policies, Georgia's young civil servants, I am very vividly reminded of those very similar people who entered Estonia's civil service [in the early 1990s]. This is a very positive image. And the course taken, the will to do things, is all very good.

Where there's a problem perhaps, is that in a sense Georgia is in an even worse situation than Estonia in 1993-1994. In other words, the lost 15 years have caused a singularly difficult set of circumstances to emerge -- which was not the case in such an extreme form in Estonia. The extent to which Georgia's economic infrastructure has collapsed is an entire order of magnitude worse than what Estonia was faced with in its time.

Another factor is that Russia has become significantly stronger. Russia's capacity to pursue its intentions is incomparably greater now than with regard to Estonia in 1993- 1995. These two factors, when combined, create a very difficult situation. Looking at predictions made by various international analysts about developments in Georgia over the coming years, what stands out is that they are extremely contradictory. The optimists say Georgia will do very well while the pessimists say Georgia will do very badly. One of the two camps has got it right, I think there'll be no halfway house. A lot of course will depend on Georgia itself.

RFE/RL: What are the factors that will determine the outcome?

Laar: At one level it'll simply be down to sheer luck. There's the Georgian economy, which has been showing the first positive signs, and the reforms which have been carried out are starting to bear fruit. But there's no telling yet at least for a year to a year and a half. And then there's the fact that for the changes to take root, Georgia needs to undertake very clear, very committed reforms to improve the investment climate. Georgia is in desperate need of foreign investment, in massive amounts. Without them, things will turn out very badly.

RFE/RL: The European Union presumably will have a key role to play here -- the more closely it gets involved, the higher the confidence of investors...

Laar: Yes, this brings me to my third consideration. Georgia will need in the course of the next two years the unambiguous support of Europe and the whole Western world -- and not just in words, but in very clear deeds.

RFE/RL: How far will this support need to go? An EU membership prospect?

Laar: No, I don't think this would be useful to Georgia at this point, and it would also be a utopian goal. It is good to see that Georgia's own leadership has assumed a more realistic stance on this issue and is fully cognizant of the fact that EU membership cannot be Georgia's mark in the short run -- which is not to say that Georgia will stop integrating with Europe, working on linked programs, or adopting EU law. This more general goal clearly remains in place, but Georgia is also fully aware that aiming for membership now would be tantamount to self-delusion.

RFE/RL: Georgia's leadership sometimes gives the impression that without some kind of clear EU membership prospect public support for the country's transition remains at risk.

Laar: It's not outside the boundaries of the possible that if this situation had gone on a little longer, that if Georgia had kept on insisting on membership and the EU had kept on refusing, there could have been some kind of collapse of support. But that danger has passed now, Georgia is not that keen any longer. In other words, there's a recognition of the fact that there will be no membership. Which again does not imply that the overall direction was in any way at risk, or that the importance of continuing with European integration was underestimated in any sense. Simply put -- and I'd like to think I've had a hand in this -- Georgia's foreign policy has become more realistic.

RFE/RL: This is perhaps a little outside your job description -- but where Georgia has not let up is its desire join to enter NATO.

Laar: Yes, indeed, and I think Georgia's chances here are much greater than in respect to the EU. It's not directly related to my responsibilities -- but what I do is not limited to economic reforms, I am after all a special adviser to the president, and looking at the range of questions I've had to deal with already since taking office it could safely be said I've dealt with everything. NATO does seem a more realistic prospect. But again, in the first instance, everything depends on Georgia itself, how they will manage to move on from one preparatory accession program to another.

I've also told the Georgian leadership quite frankly that in order to make progress towards NATO, the country will first need to meet a large number of the same criteria which are necessary for integration with the European Union. These are two sides of the same coin. In other words, if Georgia is successful in its political, economic, and social reforms, then this will lay as strong a foundation for its bid to join NATO as military reforms or the building up of an army.

RFE/RL: What about the political side of it all -- the unwillingness of Germany, France, and others to antagonize Russia?

Laar: We'll get there, too. It's another thing Georgia will need to consider very carefully, what is the message it's sending to the West, how it chooses to portray itself -- as a country able to undertake successful reforms, or as a country that at every turn considers it necessary to say something disparaging about Russia. This is another choice Georgia needs to make, and I would like to hope that here, too, Georgia will acquire a more realistic and pragmatic posture which would really enable it to move closer to [Western] structures.

RFE/RL: Coming back briefly to your role in Georgia -- how does it distinguish itself from that of Kakha Bendukidze, whose title is "state minister for reform coordination?"

Laar: Kakha Bendukidze is my closest point of contact in the Georgian government, and according to a decree signed by the Georgian president, he is also responsible for passing on my suggestions and ideas to the government. We belong together in this sense. However, in a number of ways my tasks are wider, as I've already given advice to the president on a number of very different issues.

And secondly, my tasks involve issues that it would be difficult for one single minister to deal with -- how to coordinate the reforms as a whole, how to coordinate the work of the different authorities. Here, by the way, currently lies the biggest problem with reforms. Often, a task is entrusted to more than one minister or ministry, and the resultant parallel activity -- or in worst cases, working at cross purposes -- causes great confusion and is a drain on already meager resources.

RFE/RL: This working at cross purposes among ministers and ministries, does it derive from inexperience or does it tend to be, as before, a function of personal tensions?

Laar: No, I think it's inexperience. In every government there may be ministers who appear sympathetic or less sympathetic to others, but in terms of naked power struggles, there's amazingly little of it in Georgia compared to some other governments I've known. The Georgian temperament does sometimes tend to be fairly enthusiastic, and establishing a strict chain of command in the management of the economy is not always very easy. But I've seen reputedly Nordic countries in Estonia's own neighborhood have similar problems. (Ahto Lobjakas)

ARMENIAN GOVERNMENT PREDICTS CONTINUED ECONOMIC GROWTH. Armenia's economy will continue its robust economic growth and enable a further increase in public spending on education and social programs in the next few years, according to the Armenian government's mid-term economic outlook made public on June 8. The document, presented by Deputy Finance and Economy Minister Pavel Safarian, forecasts that gross domestic product will rise at an annual rate of at least 6 percent from 2007 through 2009.

Official statistics show that the Armenian economy expanded by 12 percent in the first four months of this year, putting it on track to register double-digit growth in 2006 for the sixth consecutive year. Safarian said continued growth is expected to raise the country's per capita GDP, a key indicator of living standards, from the current $1,600 to $2,300 by 2009.

Armenia's macroeconomic performance in recent years has been repeatedly praised by the International Monetary Fund and the World Bank (see "RFE/RL Caucasus Report," December 10, 2005). Both financial institutions have endorsed the government's assertions, challenged by some local economists, that the growth has considerably reduced widespread poverty.

The Armenian macroeconomic figures also drew praise this week from Fitch, a Western credit rating agency. It gave Armenia the first-ever "sovereign credit rating" of BB- and offered a "stable outlook" for its economy. "Impressive economic performance has been underpinned by a robust and coherent macroeconomic policy framework and wide-ranging structural reforms that have enhanced the capacity of the economy to absorb adverse shocks," the private agency said in a statement.

The BB- rating, which puts Armenia on a par with Turkey and Brazil, indicates a relatively high risk of doing business in a country. Still, the chairman of the Armenian Central Bank, Tigran Sarkisian, insisted on June 6 that it will boost potential foreign investors' interest in Armenia.

Fitch argued that the Armenian economy remains "vulnerable to shocks" due to its low level of monetization and financial intermediation. It said that in order to reduce that risk the authorities in Yerevan should do more to "strengthen governance and the still relatively immature political system, as well as reduce the high level of corruption."

Speaking to journalists, Safarian said the anticipated growth will enable the Armenian government to raise the average salary of civil servants and school teachers by 40 percent to 124,000 drams ($295) and 82,500 drams respectively in the next three years. He said the government will also raise monthly pensions and poverty benefits by 2,000 drams each year.

The Armenian military will be another major beneficiary of growing public expenditures. The government plans to increase its budget by almost 22 percent to 90 billion drams ($212 million) next year. "Defense is a high priority area for us for obvious reasons," Safarian said, referring to Azerbaijan's skyrocketing defense spending. The Azerbaijani defense budget is due to total $600 million this year and may well reach $1 billion in 2007 thanks to Baku's soaring oil revenues. (Atom Markarian and Shakeh Avoyan)

QUOTATION OF THE WEEK. "No one who has not been here can understand the value of freedom." -- Inscription dated June 3, 2003, on the walls of a recently discovered secret prison in Grozny, signed by Raisa, Zaynal, Rasia and Kolsum (see "RFE/RL Newsline," June 8 and 9, 2006).