Table of Contents:

Georgia & the Oil Industry

Georgia is an oil transit country (albeit for only 1% of global demand).   Its the "Baku-Tbilsi-Ceyhan" (BTC) pipeline which carries oil from Azerbaijan to Turkey's Mediterranean coast (through Georgia).  But, the BTC is often closed because of disruption (for example because in the Turkish territory after suffering attacks from Kurdish militants). All of which makes it clear that attempts to diversify energy sources from the Middle East or Russia for that matter may be limited. The more countries through which a pipelines passes – the more chance for disruption and higher costs.  Both Russian and Georgian forces depend on energy supply lines remaining in tact, Russia for its export revenues and Georgia for transit fees, so deliberate disruption of the pipeline seeks unlikely.  Source:  http://www.rgemonitor.com/econo-monitor/253319/conflict_in_georgia_economic_and_financial_fallout

Georgia & FDI

Sustained interest in Georgia from Western countries and international financial institutions helped cover its current-account deficit, one of the widest in Europe at almost 20% of gross domestic product and financing budgetary spending. If the conflict drags on the results could be painful as foreign investment could slow, the banking system could be badly damaged and already double-digit inflation could skyrocket.  A prolonged military conflict would carry economic costs, adding to government expenditure and widening the budget deficit.

Georgia & Trade:

Georgian exporters are only now recovering from Russian sanctions imposed early in 2007, a feat achieved by diversifying trading partners. If Russia imposes additional sanctions against Georgia, the economic situation could become more fragile.

Private Equity in Georgia:

It’s a very small market with just a few real sectors for private equity. There’s some energy with hydroelectric you could do, and maybe something in food.

Aprivate equity firm with an office in Georgia (the country, not the state). It's called Salford Capital – www.salfordcapital.com – and its portfolio includes Georgia-based Agro Business Bank.

2008 war with Russia: 

Long simmering dispute:

The unthawing of conflict in South Ossetia has arguably been long in coming with tensions gradually heightened in recent months with Russia augmenting its decades old peacekeeping force in the province and increasing ties to the provinces of Abkhazia and South Ossetia, both of which have been de facto independent since the 1990s

Language and Culture differences:

Different langages , cultures:   South Ossetians have coexisted with Georgians for many centuries, but that did not make it any easier. Ossetians speak a language related to Farsi; Georgians speak a language whose closest relative, some linguists say, is Basque.  About 40 indigenous tongues are spoken in the region - more than any other area in the world aside from Papua New Guinea and parts of the Amazon, where the jungles are so thick that small tribes rarely encounter one another. In the Caucasus, mountains serve the same purpose, offering small ethnicities a natural refuge against more powerful or aggressive ones.  As a result, there is a dense collection of ethnic groups.  The riddle of the Caucasian ethnicities became suddenly relevant this summer, when local hatreds in South Ossetia opened into the biggest rift between Russia and the West since the Cold War. The Georgians and the Ossetians both claim to have arrived first in South Ossetia. Ossetians regard the valley around Tskhinvali as their homeland; Georgians disparage them as "guests." 

In the Caucasus, great powers have tried again and again to expand their reach.

Conflict in 2008

This particular conflict was sparked by a Georgian offensive to reclaim the province launched last week - so much for an Olympic peace. Russia responded by bombing targets in Georgia and sending more troops into South Ossetia and subsequently into Abkhazia.

Georgia attacked break away region called South Osseita: On its own, South Ossetia is unlikely to last long. It is a tiny territory run by Russia’s security forces and a small and nasty clique of local thugs who live off smuggling goods and pocketing Russian aid money. According to a Georgian television channel, some 70% of Tskhinvali had been taken by government forces by the end of Friday morning.\

The quarrel in South Ossetia follows an escalation of tension in the other breakaway region of Georgia, Abkhazia. Russia has reinforced its military presence there, which is nominally part of a UN-monitored peacekeeping effort.

The latest fighting in South Ossetia may have been triggered by the Georgians, but it was largely engineered by the Russians, who have, over the years, fanned the flames of the conflict.

The Kremlin’s immediate aim seems to be to force Georgia to return to the Joint Control Commission in South Ossetia. This body comprises Georgia, Russia, South Ossetia and the Russian republic of North Ossetia, just across the border, with the Organisation for Security and Co-operation in Europe (OSCE), a Vienna-based multilateral body, as an observer. Georgia thinks that this is intolerably unbalanced and has walked out.

Background:

Russia’s failed attempts to shape the outcome of Ukraine’s presidential election in 2004, followed by the orange revolution there (after Georgia’s rose revolution in 2003), hit a nerve with Mr Putin. Resentment that simmered at the continued expansion of NATO, and America’s plans to site parts of its missile defences in the Czech Republic and Poland, then boiled over after the announcement at NATO’s summit in Bucharest in April that both Georgia and Ukraine could one day join the alliance, albeit only when they were ready. Both Russia and Georgia were left itching for a fight.

What does Russias victory mean?

This brutal and efficient move (see article) was a victory for Vladimir Putin, Russia's president-turned-prime-minister, not just over Georgia but also over the West, which has been trying to prise away countries on Russia's western borders and turn them democratic, market-oriented and friendly. Now that Russia has shown what can happen to those that distance themselves from it, doing so will be harder in future.

Russia's real concerns:

The NATO summit in Bucharest gave an (undated) promise of future membership to Ukraine and Georgia and endorsed America's plans for a limited missile-defence system in Poland and the Czech Republic.  Russia’s broader aim may be to try to roll back the advance of pro-Western forces in its “near abroad” by highlighting the West’s inability to help Georgia. The hotting up of Georgia’s conflicts coincided with Kosovo’s declaration of independence, recognised by much of the West, and American pressure for the expansion of NATO to Georgia and Ukraine.

NATO?

A military conflict in Georgia will also derail for a long time Georgia’s aspiration to join NATO—something that Russian finds deeply unpalatable.

OIL

Georgia has become a vital corridor for oil and gas exports to Europe

US elections:

Many Georgians hope that if John McCain gets elected in the US, that his strong support for Georgia may help to change their fortunes.