Energy Sector and Georgia’s Function as a Transit State after the Russian-Georgian Armed Conflict in August - საერთაშორისო გამჭვირვალობა - საქართველო

Energy Sector and Georgia’s Function as a Transit State after the Russian-Georgian Armed Conflict in August

11 January, 2010

The war that took place between Russia and Georgia in August, 2008 caused severe damage to Georgian economic and financial systems, a total collapse of military infrastructure, stopped direct investment flow into the country and significantly undermined the status of Georgia as safe and stable transit country. International Rating Institutions lowered its rating of Georgia and its financial system. Standard & Poors lowered the sovereign credit rating from “positive” to “stable” and Fitch Rating’s evaluation went down from BB to B+. Fitch Rating also lowered its ratings of four commercial banks of Georgia. Georgia’s energy system continued working uninterruptedly during the military operations. With a few exceptions, during the Russian bombing campaign, energy infrastructure was not damaged and the population was provided with electricity and gas 4 without interruption. Although the Azot chemical plant and metallurgical factory in Rustavi temporarily stopped functioning. The majority of the Georgian energy sector is privatized, mostly to Russian-Georgian business groups (Telasi the Tbilisi electric power distribution company and Mtkvari Energy belong to Inter- RAO, a foreign trade branch of huge Russian electricity distribution RAO UES and Itera- Georgian -Russian business group supply the regions with gas, Ros/GruzEnergo is responsible for high- voltage power lines). Many members of the public and experts were against the privatization of energy infrastructure to Russian-Georgian business groups, as they feared that companies established with Russian capital would act against Georgia’s interests in critical situations. This argument was strengthened by the generally acknowledged opinion that in reality profit-oriented, independent businesses do not exist in Russia and that all Russian businesses act according to Russian government policy, regardless of the location of such businesses either based in Russia or outside its borders. In addition to the fact that international transit pipelines were stopped during the conflict the part of railway transportation moved from Azerbaijan to the direction of Russia and Iran. During the conflict, Georgia did not stop supplying Russia with 100 million kWh electricity, which was established by agreement. The opposite situation occurred in 1994, when after an unsuccessful attempt to resolve the Abkhazian conflict some energy units were totally destroyed, big shield of Engurhess was exploded, #9 and 10 Gardabani energy blocks were set on fire and the fire destroyed everything. Despite the possible danger during and after the military conflict between Russia and Georgia, Russian-Georgian business groups stayed in business and did not stop supplying the population with electricity and gas 5 . Had such problems occurred, the Georgian government would of course have negatively assessed their activities and perhaps even revoked the results of the privatization process. The proper and measured actions of these business groups gave no chance for the above mentioned events to develop. After the military conflict was over, the Georgian government positively evaluated the activities of energy companies during the conflict and expressed readiness to continue receiving investment from Russia.