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2009-06-05 09:07:00	09TBILISI1034	Embassy Tbilisi	CONFIDENTIAL	08TBILISI2071	VZCZCXRO1339\
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RUCNDT/USMISSION USUN NEW YORK PRIORITY 4849	C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 001034 \
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SIPDIS \
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DEPT FOR EUR/CARC \
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E.O. 12958: DECL: 06/05/2019 \
TAGS: ECON EPET PREL KBTS RS TU GG
SUBJECT: GEORGIA: RUSSIA MOVES IN ON ABKHAZ ECONOMY \
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REF: 08 TBILISI 2071 \
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Classified By: Ambassador John F. Tefft for Reasons 1.4(b) and (d). \
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¶1. (C) Summary and comment.  Recent moves suggest an \
increasing Russian interest in exploiting economic \
opportunities in Abkhazia. The Georgian Law on Occupied \
Territories stipulates that all business in Abkhazia be \
conducted pursuant to existing Georgian regulations (reftel), \
but Russian entities apparently believe their government's \
recognition of Abkhazia renders the law inoperative.  Rosneft \
secured the rights to explore Abkhaz oil resources, and the \
Russian government has offered millions in loans to Abkhazia \
-- loans that could benefit such companies as Russian \
Railways.  Russia plans to help manage the Abkhaz airport -- \
a move that will likely draw Abkhazia closer into Russia's \
Olympic preparations.  In an illuminating counterexample, \
Benetton Turkey proposed opening a store in Sukhumi, but \
following vocal protests from the Georgian government and \
Benetton's own Georgian stores, apparently backed down.  The \
Georgian government believes highly placed Russians, \
including Prime Minister Putin, stand to benefit directly \
from these deals and is considering its options for a \
response.  End summary and comment. \
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Rosneft and Abkhaz Oil \
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¶2. (SBU) On May 26, the Russian state-owned Rosneft \
reportedly signed a five-year deal to acquire the rights to \
explore for oil and natural gas off Abkhazia's Black Sea \
coast.  Estimates of the recoverable offshore oil reserves \
near Abkhazia range from 80 to 200 million tons. Financial \
details of the agreement have not been released.  In 2005, \
the Abkhaz rejected a bid by LUKOil to develop these same \
offshore reserves.  The key area for exploration is the \
Abkhaz Black Sea coast.  Rosneft plans to build a string of \
gas stations in Abkhazia and sell gasoline, diesel, and \
heating oil.  In response, Minister of Economic Development \
Lasha Zhvania issued a public statement, saying, "Any \
commercial activity of any organization in Abkhazia without \
the permission of the central Georgian government is illegal." \
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Russian Loans and Abkhaz Infrastructure \
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¶3. (SBU) On May 14, Abkhaz de facto "president" Sergey \
Bagapsh announced in Sochi, Russia that Abkhazia asked Russia \
for a long-term loan, worth approximately  USD 31-47 million. \
 Prime Minister Putin reportedly agreed to the long-term \
repayment structure.  Bagapsh was quoted as saying the funds \
would be allocated for the "development of the Abkhaz banking \
system and the capitalization of the National Bank in order \
to finance small and medium business in the republic."  Other \
funds will reportedly go toward the construction of a \
railway, apparently in cooperation with Russian Railways, \
which Bagapsh claimed was critical for the transportation of \
cargo to the facilities for the 2014 Olympic Games in Sochi. \
He added that he is not aware of the role Abkhazia will play \
in the construction itself, but he knows that Turkey is \
prepared to take Abkhaz construction materials.  Russia will \
also reportedly be involved in the management of the Sukhumi \
airport. \
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Benetton in Sukhumi \
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¶4. (SBU) On May 26, four Benetton stores in Tbilisi closed \
their doors to protest the announced intention of Benetton \
Turkey to open a branch in Sukhumi.  Large signs appeared in \
QTurkey to open a branch in Sukhumi.  Large signs appeared in \
the stores' windows, reading "Shop closed in protest of the \
opening of a Benetton shop in Sukhumi."  Government \
representatives reacted swiftly: Economic Development \
Minister Zhvania publicly condemned the move as again being \
outside the requirements of the Law on Occupied Territories. \
Foreign Minister Grigol Vashadze told the press he did not \
oppose the idea of commercial firms conducting business in \
the occupied territories, but insisted that such actions be \
in line with Georgian law (which would require registration, \
tax identification codes, and payment of taxes to Tbilisi) \
and have the explicit permission of the Georgian government. \
He went on to suggest that any violation would be met with \
legal and commercial consequences.  According to the Turkish \
Embassy in Tbilisi, the Foreign Minister also called in the \
Turkish Charge to make a formal complaint about the move. \
Although Zhvania was reportedly scheduled to meet with \
Benetton representatives to discuss the issue, on May 28 \
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TBILISI 00001034  002 OF 002 \
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Benetton Turkey released a statement saying that it no longer \
planned to open a store in Sukhumi. \
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The Government Prepares to Respond \
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¶5. (C) In a May 28 conversation with the Ambassador, Vashadze \
said that Russia made a "big mistake" in entering the Abkhaz \
market with Rosneft and Russian Railways, which he \
characterized as 100 percent state-owned. He noted that \
LUKOil's Alekperov had approached President Saakashvili \
several times in the past about offshore drilling and that \
Saakashvili had always objected until Georgia reclaimed \
control over the Abkhaz territory. Alekperov did not pursue \
the matter further.  Vashadze said that the government is \
currently investigating its legal options and, once they were \
clear, would allocate the appropriate resources and go on the \
attack.  He also noted that Rosneft is part of what he called \
"Kremlin, Inc," as the Swiss company Gunvor -- in which Putin \
has a stake -- holds significant ownership. \
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COMMENT \
 \
¶6. (C) Abkhaz opposition parties have recently publicly \
criticized Bagapsh's regime for giving away too much of the \
country to Russia -- and those reports came before the \
Rosneft announcement (septel).  Of course, investments such \
as Rosneft's could ultimately benefit Abkhazia, but the \
self-declared republic will have little leverage to negotiate \
reasonable terms.  Judging by anecdotal evidence, the Abkhaz \
are increasingly nervous about the growing influence of \
Russia's economic might in Abkhazia.  The question is to what \
extent the Abkhaz will be willing to tolerate Russian \
economic domination before they start seeking alternate \
partners in earnest.  It is likely that realization will come \
too late.  The Georgian government understands this and hopes \
to erect legal obstacles to the activities.  State-affiliated \
Russian companies seem willing so far to brave the potential \
complications -- but both LUKOil (with its international \
structure that is vulnerable to legal challenges in \
international courts) and Benetton realized that the market \
might be more trouble than it's worth.  Nevertheless, even if \
Georgia devises an ingenious strategy to pursue damages \
against Russian companies or their government, it will likely \
need help from its international partners to implement such a \
strategy. \
TEFFT \