On October 31th, Parliamentary elections are coming up in Georgia, with the ruling “Georgian Dream” party, founded in 2012 by oligarch Bidzina Ivanishvili, trying to hold on to power, something made less certain due to the Covid crisis. The country really is at a cross-roads, having lost some of its luster as a world-class champion of democratic and economic reform. A recent decision to block a foreign investment into upgrading its internet connection may now not only erode its competitiveness, but also hurt relations with the EU, as it may violate the EU-Georgia Association Agreement.
Once belonging to the Soviet Union, Georgia went through a successful transition, achieving massive economic growth during the last fifteen years, following a series of free market reforms, introduced by Economy Minister Kakha Bendukidze from 2004 on, which included tax cuts, slashing customs tariffs as well as scrapping almost 800 government licenses and permits, while at the same time refusing development aid. An interesting side effect was enormous success in the fight against corruption, with Transparency International (TI) even dubbing Georgia “the best corruption-buster in the world”, as previously, virtually any government transaction required some kind of bribe. The free market reforms meant there were less government permits, so there simply were also fewer opportunities for corruption.
Since Russia’s invasion of Georgia in 2008, the first signs of backsliding became apparent, and later, constitutional restrictions on expansive fiscal policy were removed. In its evaluation report in 2016, the Council of Europe noted that despite all the progress, “a ‘clientelist system’ has emerged where the country’s leadership ‘allocates resources in order to generate the loyalty and support it needs to stay in power’.”
2012 witnessed the electoral defeat of Mikheil Saakashvili, who had been succeeding Soviet creature Eduard Shevardnadze after the Rose revolution, and should be credited for delivering many of the free market reforms that he since has also tried to introduce in Ukraine, before he fell out badly with the current leadership of Georgia.
A series of mass anti-government protests, which enjoyed EU and U.S. support, took place last year, resulting in Georgia’s ruling party agreeing to electoral reform that should empower the opposition. Nevertheless, the new system would still benefit the strongman behind the scenes, Bidzina Ivanishvili, at least according to Georgian law professor Davit Zedelashvili, who calls Georgia an “illiberal regime”, noting that “Georgian Dream used its dominance to push through unilateral constitutional reforms in October 2017”, which were the subject of “scathing criticism by the Venice Commission”.
Furthermore, human rights groups have slammed the government over a lack of progress on judicial reform and for putting pressure on independent media. Georgian opposition MP Giorgi Kandelaki even spoke of a “point of no return”, after the leader of one of the opposition parties, Gigi Ugulava, a former mayor of Tbilisi, the capital, was jailed for three years, in February, on what he considers to be a politicised judicial action. The erection of new statues of murderous Soviet dictator Joseph Stalin, who grew up in Georgia, should perhaps serve as the writing on the wall.
A recent state decision provides more evidence that Georgia’s free market reforms, which were so instrumental to fighting corruption and embedding democracy, may be under threat.
What happened? NEQSOL Holding, from neighbouring Azerbaijan, was all but expropriated by Georgia’s government after attempting to purchase Caucasus Online, Georgia’s largest internet service provider and the sole owner a 1,200-km submarine fiber-optic cable, which transits Internet traffic from Europe to the Caucasus. After first having approved the transaction, the Georgian government pushed through legislation allowing it to appoint an external manager to the company.
This does not only impact Georgia or the investor. Writing about the issue, Ido Aharoni, a Professor in international relations at NYU, explains how this undermines the project to interconnect the shaky Caucasian region through a digital highway. He notes NEQSOL intended to upgrade the existing fiber optic network in the South Caucasus and Central Asia, “to bring faster internet to millions through the building of submarine cables connecting Europe, the Caucasus, and Central Asia” and could “transform [Georgia] into a regional mega-hub for digital commerce”.
As also Kazakhstan, Turkmenistan, and Afghanistan would be connected, he points out that this would “provide better internet and faster connection speeds to former Soviet countries, for the first time bypassing Russia and ultimately decoupling Georgia from the Kremlin’s influence.”
These kind of considerations, once reserved to the energy realm, now come into play for internet connectivity.
A cumbersome arbitration process has now started in Georgia to resolve the issue. Interestingly, this may reveal a violation of the EU-Georgia Association Agreement.
This because the EU-Georgia deal contains provisions protecting investors, including an obligation “to avoid unnecessary or discriminatory burdens on economic operators” and to facilitate “trade and investment”, in particular by removing “non-tariff barriers”. Other grounds that could be invoked include the commitment for “regulatory authorities” to be “impartial” and “transparent”, which may be an issue here, given the sudden u-turn made by Georgia’s authorities. The Agreement also contains a whole chapter dedicated to opening up electronic communication services and a number of restrictions on establishing state monopolies.
If Georgia would not comply with the EU-Georgia association agreement, this would mean another step in the wrong direction, with negative implications for the whole region. Perhaps a surprise loss of the governing Georgian Dream party may alter the balance.
Pieter Cleppe is a research fellow at the Property Rights Alliance, based in Brussels