Georgia and Russia do business despite tense relations

Russia and Georgia may have severed diplomatic ties as a result of the armed conflict over South Ossetia in 2008, but when it comes to business dealings the two sides often choose a more pragmatic approach.

Tension between Russia and Georgia culminated in a war in August 2008

Russia's ban on the imports of Georgian wines, introduced several years ago, and a lack of regular direct flights between the two countries have been well publicised.

However - despite many Georgians being sure that Moscow would use any opportunity, including business pressure, to significantly expand its influence in the region - many Russian companies have been operating in Georgia throughout this tense period.

This forms the backdrop to a tense debate in the Georgian parliament about a proposal to re-write the list of state properties that cannot be sold.

According to a draft law, approved by the parliament in first of three readings, a transit pipeline that carries Russian gas to Armenia through Georgia could be privatised.

Russia's gas monopoly Gazprom is seen as the only potential investor interested in and capable of buying a significant stake in the pipeline.

'Politically motivated'

In recent years, there have been several gas conflicts between Russian energy companies and their counterparts in neighbouring countries.

Mrs Clinton visited Georgia last week

Moscow insists the disputes have all been about business, while critics accuse Russia of using its energy supplier status as a political tool.

"The most worrying thing is that under Russian law Gazprom has a right to protect its interests, including the use of military force outside Russia," Nodar Khaduri, an economics professor at the Tbilisi State University, told the BBC Russian Service.

Georgian economist Gia Khukhashvili believes that the pipeline is not commercially viable and it could be bought only by "a politically motivated investor, which Gazprom is".

But Andrei Suzdaltsev of the world economy and international affairs department at the Higher School of Economics in Moscow says that from the business point of view Gazprom would be interested in acquiring the pipeline, as it carries its gas to an important market.

Besides, he told the BBC, Russia has proved many times that it separates business from politics when dealing with Georgia.

Liberal market

Indeed, Telasi, an electricity distribution company of the Georgian capital of Tbilisi, is controlled by the Russian company Inter RAO UES.

Even during the war two years ago it did not stop supplying the region with electricity.

Also, only a few months after the conflict, Inter RAO UES and the Georgian government agreed to work towards collaborating in managing the Inguri hydropower plant on the border with the breakaway territory of Abkhazia.

Among other Russian companies doing business in Georgia are Itera, which owns several regional gas distribution companies there, VTB Bank and mobile operator VimpelCom.

Georgian President Mikheil Saakashvili said last year: "We are not going to hinder Russian companies from coming to Georgia.

"The more business interest we get, the less political pressure there will be," he told Bloomberg.

Mr Suzdaltsev agrees that Georgia is now "an oasis of liberalism" in terms of doing business among former Soviet republics.

He believes, however, that there are no guarantees that Russian investment in Georgia will be protected from government interference in the future.

'Economic interests'

When discussing the future of the gas pipeline from Russia to Armenia, opposition MPs in the Georgian parliament say the country would face an "energetic and economic threat" if a Russian company was to buy the pipeline.

They demand guarantees at the legislative level that the Georgian government would retain a controlling stake.

No such guarantees have been included in the draft legislation so far, although a member of the parliament majority, Pavle Kubashvili, says the pipeline "will not be sold to the Russian Federation".

"We approach this issue from the economic point of view, because such facilities are better managed by private companies," he says.

This is not the first time there are talks about selling the pipeline to Gazprom. Five years ago, such discussions were held.

But instead Georgia and the US signed a five-year agreement, under which Tbilisi was given money to modernise the pipeline, while Georgia promised not to sell it until the deal expires in April 2011.

When the draft law authorising privatisation of the pipeline was discussed in first reading in the parliament, US Secretary of State Hillary Clinton was visiting Georgia.

There have been no reports that the topic of the pipeline was raised at her talks with Mr Saakashvili, however.

Meanwhile, the overwhelming majority of the Georgian MPs voted in favour of the draft legislation.

If the support does not disappear in the final two readings after consultations between the parliament and the government, it could mean that this time Russian business would be able to further advance into Georgia.