VZCZCXRO7574
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHSI #1420/01 2380440
ZNR UUUUU ZZH
R 250440Z AUG 08
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC 9951
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 TBILISI 001420 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR/CARC, EUR/ACE, EEB/IFD/OMA AND E - U/S JEFFERY 
TREASURY FOR OIA 
 
E.O. 12958: N/A 
TAGS: ECON PREL GG
SUBJECT: PM GURGENIDZE URGES SENATOR BIDEN TO SUPPORT 
ECONOMIC HELP FOR GEORGIA 
 
REF: TBILISI 1367 
 
¶1.  (SBU) Summary:  In an August 17 meeting with U.S. Senator 
Joseph Biden, Georgian Prime Minister Lado Gurgenidze 
outlined the economic cost of the Russian invasion of his 
country.  He stressed the importance of continued existence 
of the reform-minded government of Georgia to continuing U.S. 
influence in Azerbaijan and Central Asia.  Georgia is 
experiencing a serious decline in the flow of investment to 
offset its significant current account deficit.   Without 
international assistance, Georgia will have a serious 
economic crisis and social and political unrest that will 
threaten the GOG.  Georgia needs an emergency IMF program 
funded at up to 300 percent of its quota.  Additionally, 
Gurgenidze asked Biden and the USG to create an 
internationally supervised, locally-managed fund for 
reconstruction of the billion dollars in damage caused by 
Russian troops.  In the PM's view, U.S. leadership in 
creating a fund, ideally with USD 1 billion in capital, is 
essential to securing other needed donations by European 
nations and the international financial institutions.  End 
Summary. 
 
GEORGIA'S FAILURE A THREAT TO U.S. INTERESTS IN THE REGION 
--------------------------------------------- ------------- 
 
¶2. (SBU) Biden told Gurgenidze that if the Russian invasion 
of Georgia is allowed to stand, it will mean that the last 18 
years of progress toward a secure, democratic Europe has been 
wasted.  Biden said he has heard from many world leaders who 
are concerned and who agree with him that Russia must pay a 
price for its actions.  Gurgenidze agreed, and noted that 
Russia's acts threaten the process of change in Azerbaijan 
and the Central Asian countries.  If the Georgian government 
falls, he said, Azerbaijan will re-enter the Russian orbit 
and there will be no chance of competing for influence in 
Turkmenistan. Already, Gurgenidze said, Kazakhstan has gone 
cold to Georgia and politicians in Ukraine, including 
Tymoshenko, are beginning to distance themselves with calls 
for neutrality.  The Russians should leave Georgia as soon as 
possible.  Biden said that a strong and solid response from 
the Europeans is needed, and simply likening the Russian 
occupation to Munich is not enough. 
 
GEORGIA'S SUCCESS BEFORE THE INVASION... 
---------------------------------------- 
 
¶3. (SBU) Gurgenidze told Biden that before the Russian 
attack, Georgia was expecting a 2008 GDP of USD 13.5 billion, 
up from USD 10 billion in 2007.  At the same time, because of 
growth that stimulates imports of both capital equipment and 
domestic consumption, Georgia's current account deficit was 
20 percent of GDP.  Such a large gap was sustainable, 
Gurgenidze said, so long as it was offset by inflows of 
foreign investment.  Georgia has been receiving not only 
direct investment but also an unusually large amount of 
portfolio investment by private equity firms, amounting to 22 
percent of GDP altogether.  This was because Georgia is "a 
shining light" and a "textbook case" of liberal economic 
reform that makes it a darling of the investment community. 
Gurgenidze has been predicting that Georgia would have caught 
up with the poorest EU country, Bulgaria, within a mere three 
years.  Russia's attack has destroyed investor confidence and 
the outlook is for no such income at all during the rest of 
¶2008.  Russia's intentions are to destabilize the Georgian 
government economically and replace it with a weak, unstable 
and subservient regime such as exists in Moldova, he said. 
AND URGENT NEEDS AFTER IT 
------------------------- 
 
¶4. (SBU) Gurgenidze, a former banker, told Biden that 
Georgian banks have held up well after the Russian attack. 
They lost 12 percent of deposits in the first few days. 
However, he said, the National Bank of Georgia (NBG) expended 
11 percent of its reserves to preserve liquidity and keep the 
exchange rate stable.  Gurgenidze predicts that even if there 
are no more shocks, foreign currency reserves will erode 
another 3-4 percent over the next week, and will be 
sufficient to cover only half of the usual three months of 
imports.  Such losses simply cannot be sustained, he said. 
 
¶5. (SBU) Gurgenidze said the GOG would like for the IMF to 
offer it a program funded at 300 percent of Georgia's quota 
in order to keep the banking system stable.  An emergency 
mission is coming to Georgia soon from the IMF to assess the 
situation.  Gurgenidze hopes that the facility will never 
have to be used.  But without confidence building measures, 
 
TBILISI 00001420  002 OF 002 
 
 
he estimates that only USD 500 million in investment will 
come to Georgia in 2009.  If that happens, and no other help 
is received, Russia's objective of regime change will likely 
be accomplished by the ensuing social and political 
discontent. 
 
¶6. (SBU) Besides the IMF program, Gurgenidze is thinking of 
direct contributions to a reconstruction fund composed of 
U.S., European and international financial institution money, 
which would be internationally supervised and locally managed 
in Georgia.  He hopes that the U.S. will contribute as much 
as USD 1 billion, and that other donors could be persuaded to 
match that amount.  He says an "attention getting number", 
one billion dollars, is needed, and that sum matches the 
extent of the damage to private and public infrastructure. 
The highway system has suffered as much as USD 300 million in 
damage.  A concerted effort to privatize and develop 
hydropower assets, which could have produced USD 1.5 billion 
a year in exports of power, is stymied.  Plans to privatize 
the 49 percent of Poti port still in government hands are 
useless.  Government revenues will decline by 30 percent, 
according to Gurgenidze, and the exchange rate could slip 
from 1.4 lari to the dollar to 1.7.  The government's 
borrowing power for private capital will be far less than 
before. 
 
¶7. (SBU) U.S. leadership in setting up the fund and 
persuading European governments to help is essential, 
Gurgenidze said.  Senator Biden concluded by noting that 
people in the United States are concerned about the new, ugly 
face that Russia has presented to the world through its 
invasion of Georgia. 
 
¶8. (U) Senator Biden's office has cleared this message. 
TEFFT