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Making Sense of Georgia’s Elections: Politics and Global Energy

You will have to forgive me for a more foreign policy-focused piece here, but I promise I will tie it into the issue I seem to be discussing the most on Policies of Scale these days: energy economics. You see, one of the many reasons the election held Monday in the Republic of Georgia is interesting is that Georgia serves as an important energy transit state between the East and the West. Because of its geographical position and strategic importance to the West, it requires a significant amount of political and military support from the US and Europe, and complicates efforts to improve relations with Russia. Therefore, the future of Georgian political leadership is a small but important event for the West in terms of global energy supply, our relations with Russia, and stability in the Caucusus.

The current president of Georgia, Mikheil Saakashvili, has been incredibly supportive of the US. He sent one of the largest contingents of troops to Iraq (2,000 by 2007) while the amount of Georgian troops in Afghanistan will hit 1,685 this month, the largest non-NATO contingent to Afghanistan. However, some of his policy decisions, namely his decision to engage with Russia in a war in 2008, Russian-style tactics of suppressing political opposition, corrupting the judiciary, and allowing massive abuses in the penitentiary system, have led some in the US and Western governments and foreign policy circles to question whether the West ought to be supporting the opposition.

In March of this year, US ambassador to the Republic of Georgia, Richard Norland, said that the conduct of future elections in Georgia would be a “litmus test” for its readiness to join NATO. NATO’s Secretary General used the same term himself on Monday. The worry, shared by many, was that Saakashvili would copy a tactic of his most hated enemy, Vladimir Putin, and through constitutional reforms his party already put in place in parliament, serve out his term-limited presidency and then become prime minister, a position empowered as the prime political leader of the government by the recent legislation.

This week’s parliamentary election results, and Saakashvili’s acknowledgement of his party’s defeat, hopefully mean this worry has been avoided. Saakashvili conceded power on Tuesday to the rival coalition led by billionaire Bidzina Ivanishvili called Georgia Dream in parliamentary elections held on Monday.

One of the strikes Saakashvili leveled on Ivanishvili during the election was that Ivanishvili’s wealth, equivalent to roughly half of Georgia’s gross domestic product, was made in Russia, and that this strong tie with Russia means Ivanishvili would turn Georgia into a Russian proxy state while turning Georgia away from future NATO and EU membership, which are dreams of most Georgians. This potentialities concern many Westerners as well who for a number of reasons believe an alliance with Georgia is crucial.

This is the appropriate place to discuss the merits of Georgia’s relations with the West and Russia, respectfully. I would love to launch into that, but most of what I would say would not be necessary for this post. Regarding this dynamic, I will simply say that Georgia needs better relations with Russia, and that should not upset or worry anyone in and of itself. Russia has had crippling economic sanctions on Georgia for years now, and this has hurt investment and limited the transfer of remittances from Georgians in Russia, the largest potential source of remittances for a country who depends on remittances as an income source for the middle and lower classes.

On this dynamic, what people ought to consider is Ivanishvili’s political and negotiating acumen and the support and strategy of the United States in pursing relations with both countries. Putin will assuredly demande measures of Ivanishvili that would turn Georgia away from the West, and Putin will likely focus on potential Georgian NATO membership, his biggest worry vis-à-vis Georgia. If Ivanishvili is able to navigate these difficult waters, and America avoids some of the mistakes it made in the run-up to the 2008 war when we underestimated Georgia and Russia’s respective resolves to achieve goals we did not fully grasp the importance of, the worry that our interests in Georgia will be hurt will be largely avoided.

One of the most important considerations about the future of Western-Georgian relations, as I mentioned earlier, is Georgia’s role in transiting energy from the East to the West. The Baku-Tbilisi-Ceyhan, or BTC, pipeline is the second longest pipeline in the former USSR, and is Georgia’s most important energy feature for the global energy supply. It transports natural gas, and its deliveries are increasing from 400 million cubic meters in its inaugural 2008 year to an expected 830 million cubic meters in 2012.

These delivery numbers are not huge; in fact, at current levels they represent about 1% of global natural gas consumption. The BTC is not Georgia’s only transit opportunity, however. Currently they are working with the Azeris and Romanians to build a pipeline to transport liquified natural gas from Azerbaijan to Europe after an agreement between the three was signed in early September. There is also the Baku-Supsa pipeline, which carries about one-eighth the capacity of the BTC, the Baku-Batumi railroad that carries about one-sixteenth the capacity, and the Baku-Tbilisi-Erzurum pipeline that went online in 2011 and will increase its volume to 65 billion cubic meters of natural gas per year by some unspecified date. Further, beyond the transit fees, Georgia is promised a percentage of gas from each route, ensuring its own stable supply.

Georgia’s geographic location is its most advantageous feature for the West. To put Georgia’s position in context, take a look at this map:

There are massive amounts of natural gas in and surrounding the Caspian Sea that Europe would like to get its hands on. Right now there are three transit routes: through Russia, through Azerbaijan, Georgia, and Turkey, or through Iran and/or Iraq and/or Syria. The last is clearly not a desirable option, at least not any time soon. And neither, really, is the first. Russia’s main source of income is energy, and it has a lot of it: the world’s largest natural gas reserves and the ninth largest crude reserves. It supplies 34% of Europe’s natural gas, making it Europe’s largest supplier. This amount scares Europe as it neither trusts Russia to not use energy as a political tool (as it has done with several former Soviet countries, especially Ukraine, which in itself affected gas prices in Europe), nor does it feel secure getting a third of its gas from any single source. Therefore, Europe would like to buy more of its gas from other sources, and the only route through which it can access non-Russian gas from the East is one that includes Georgia.

America supports this effort, and with the other interests it has with Georgia vis-à-vis Russia, many are indeed nervous that Ivanishvili will give in to Russian demands that necessitate decreasing the amount Georgia takes the interests of the West into consideration. These worries, depending on how much validity one attributes to Realist considerations, may be overstated.

The transit business is important for Georgia’s economy. Energy brings in a substantial amount of foreign direct investment. In 2011, FDI related to energy accounted for $158.3 million of Georgia’s total $981 million. The BTC pipeline provides an annual average of $62.5 million in transit fees for Georgia between 2007 and 2016, and even large fees after that based on one projection, a substantial amount for an economy with a GDP of $14.37 billion (in 2011), and that’s just the BTC pipeline.

Russia would like to make Georgia a client state, as it was during the Soviet days. This means keeping the country politically unstable and economically dependent. Georgia, conversely, seeks political stability and economic independence. The West offers Georgia opportunities to achieve these two goals. Even if Ivanishvili needs to cozy up to Putin and make some concessions for Russia to drop the economic sanctions, he will not give away Georgia’s transit business. And since Russian has no incentives, political or economic, to send its own gas through Georgia’s pipelines, Georgia will still need Caspian gas to supply its own needs and earn transit fees.

The other area where Ivanishvili may want to improve relations with Russia is over the breakaway provinces of Abkhazia and South Ossetia, over which Georgia lost effective control to Russia during the 2008 war. Territorial integrity ranks somewhere in the top-three concerns of the Georgian people depending on which survey one reads, so Ivanishvili cannot acquiesce to Russia solidifying its control over the two regions without a public reaction likely to bring down his government.

Ivanishvili may also roll back the successful Western-style economic reforms initiated by Saakshvili, and replace them with Russian-style policies. Saakashvili cleaned up a significant amount of corruption, deregulated the economy, and lowered trade barriers, taxes, and government involvement in business. Some fear Ivanishvili will go the other way, but it is far too soon to have a good idea whether this concern is warranted.

Ivanishvili will likely aim for better relations with Russia than did Saakashvili, though the interests of Georgia are still as much in conflict with Russia under Ivanishvilli as they were with Saakashvili, and this should be kept in mind when thinking about global energy supply. Georgian pipelines will still carry Caspian and non-Russian gas to Europe, and Europe (with support from the US) will still push the Nabucco pipeline project and other transit routes to diversify their natural gas sourcing. Georgia could have an important role in these plans if it so choosed, and no matter how much Ivanishvili may try to cozy up to Putin, he will have outsized incentives to pursue policies embraced by the West and opposed by Russia.

4 Responses to “Making Sense of Georgia’s Elections: Politics and Global Energy”

ElshanOctober 3rd, 2012 at 6:01 pm

The Existing system of checks and balance in georgia does not allow Russia to return Georgia to its areal.

PDR VetOctober 3rd, 2012 at 8:20 pm

I think you overstate the importance of Caspian gas and thus Georgia as a transit state. BTC was based on 1990s forecasts of Russian gas market share in Europe continuing to grow unchecked. What these forecasts missed was the unconventional gas boom which has already made the European gas market more competitive because the U.S. no longer needs to buy LNG supplies from the rest of the world. Add the potential for actual unconventional production in Europe (not to mention that the North Sea reserves continue to surprise on the upside) and the whole Caspian gas strategy is clearly not as important as it was even 5 years ago.

DevasaOctober 13th, 2012 at 4:37 pm

The amounts received from energy seem to be pathetically small compared to the billions it can expect from forging good relations with Russia.

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Aaron Menenberg Policies of Scale

Aaron Menenberg is Foreign Policy and Energy analyst, and a Future Leader with Foreign Policy Initiative. He also co-hosts Podlitical Risk (@podliticalrisk). He is a graduate student in international relations at The Maxwell School of Syracuse University. Previously he has worked at Praescient Analytics, The Hudson Institute, for the Israeli Ministry of Defense, and at the IBM Corporation. The views expressed are his own, and you can follow him on Twitter @AaronMenenberg. He welcomes questions and comments at [email protected]