March – April 2015

A Skeptical NATO Makes A Powerful Russia

After meeting with NATO Secretary General Jens Stoltenberg in Paris on March 02, 2015, French President Francois Hollande announced, “at present, France maintains the position that countries aspiring to become NATO members should be declined.” The NATO Secretary General’s visit was intended to discuss security challenges facing the Alliance both in the east and south.

The statement triggered a wave of heated discussion in Georgia, from alerts of red lights on Georgia’s integration process, to pro-Russian forces swiftly building upon the statement, to valid concerns regarding NATO’s adaptability to handle current security threats.

Statements like the one of President Hollande or previous statements by US President Barack Obama[1], have been used as convenient levers by some camps in Georgia to advocate a different trajectory for the country. For example, by Nino Burjanadze’s Democratic Movement party, which has ties with Putin’s United Russia party and describes Georgia’s European and Euro-Atlantic integration course as a pack of lies used by government to fool the electorate. There is also an increasing number of Russia funded NGOs, who use these kind of messages to orchestrate a powerful chorus of propaganda against the EU and NATO.

Albeit the public’s unwavering support for European and Euro-Atlantic integration, public support should not be taken for granted against the backdrop of this activated Russian soft power.

On the other front of the security landscape, the statement of President Hollande unveils the West’s divided stance on what former NATO Secretary General Anders Fogh Rasmussen called “the most serious crisis in Europe since the fall of the Berlin Wall.”

The statement raised a key question as to whether NATO has managed to adapt its strategy to the new security realities, and whether leaders in Europe apprehend the actual risks of such statements. Presumably, President Hollande intended to decrease tensions with Russia, or was following the logic of NATO enlargement risks amidst heated relations in the region. Or one could suppose that President Hollande was trying to please the French electorate against the backdrop of the increasing popularity of the far right in France.

Should either be the rationale behind the statement, trepidations over the Alliance’s strategic vision to the crisis persist. The major cause for alert is the radical difference in vision and goals and consequently the nature of actions between the West and Russia. What the West considers prudence, Russia sees as the weakness of the West and therefore a window of opportunity to push further. Pausing the enlargement processes in order to avoid further escalation with Russia may in fact cause the escalation and be counterproductive to NATO’s intentions.

Previously, supporting NATO enlargement was at the center of U.S. policy regardless of Russia’s stern opposition, which was present at previous enlargements as well. And each enlargement was justly concurrent to security adjustments. Washington was a leading force encouraging the admission of Poland, Hungary, and the Czech Republic in 1999; Romania, Bulgaria, Estonia, Latvia, Lithuania, Slovenia, and Slovakia in 2004; and Albania and Croatia in 2009. The persistence of NATO principles signaled Moscow the uncompromising nature of red lines for the Alliance. Consequently, it was after receiving NATO membership that former Soviet satellites stabilized their relations with Russia. The enlargements proved to contribute to the development of a broader European security architecture, enhancing stability and security for all. The success of previous enlargements further justified ‘open door policy.’

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In contrast, what we see today is a lessened leadership over the enlargement process and differed statements from leaders warranted by vigilance towards Russia’s vision of NATO and its enlargement. This has, first and foremost, jeopardized the fundamental principle that no third country has a veto over NATO enlargement. Making decisions in line with the Russian power parade makes the crisis a handy tool for Moscow to stop ‘unwanted’ developments.

The first such message was received in 2008, when Georgia and Ukraine were denied a Membership Action Plan (MAP) in order not to provoke Russia. Moscow took advantage of the mindfulness of the West and engaged in a war with Georgia, where it occupied Georgian territories and recognized the independence of Abkhazia, Georgia and South Ossetia, Georgia.

NATO’s gaffe was further aggravated by considering the 2008 Russo-Georgian war as an isolated case and re-launching business as usual with Russia shortly. Western attempts to engage Russia in constructing the European security architecture and launching a “re-set policy” did not prevent Russia’s aggression in Ukraine.

Notwithstanding the 2014 sanctions on Russia for the Ukraine war, which by no means should be underestimated or discounted, the West clearly shows a slow reaction in contrast to Russian movements.

Current security threats and the Ukrainian crisis have been at the center of discussions of the Brussels Forum of German Marshal Fund, where there have been varied responses -- between calls for providing Ukraine with heavy weapons without which it is impossible for Ukraine to defend itself, to calls for accommodating Russia. As the debates continue, and until there is yet no unified response with regards to enlargement, and as long as there has not been a pronounced leadership, Russia continues to receive the dangerous message that Europe is divided. Russia interprets this message as room to push further.

From recent history, and judging from recent statements, the West has not drawn the lesson that by appeasing Russia, they risk empowering Russia.

 

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[1] On March 26, 2014, President Obama stated that “neither Ukraine nor Georgia “are currently on a path to NATO membership.”

What Will Be The Consequences Of The Lari Deprecation

The national currency of Georgia, the Lari (GEL), depreciated by 24% with respect to the U.S. Dollar (USD) in the last four months, from November 2014 to March 2015. Even members of the Georgian government referred to such a depreciation of the currency as a “currency crisis.”

 

The dollarization of Georgia’s economy is very high -- therefore the depreciation of the GEL compared to the USD strongly affects various economic processes and public welfare.

Loans in USD account for 61% of the loans disbursed by the banking sector in Georgia. The volume of overdue loans increased by 43 million GEL (17%) in January 2015, with 32.5 million GEL falling on loans issued in USD. Debtors now find it difficult to serve their liabilities since their loans are in USD, whereas their income is in GEL. To mitigate the impact of the currency crisis, individuals and legal persons began to transfer the loans from USD to GEL. However, this process is accompanied by a tightened monetary policy that causes the interest rates of GEL loans to increase.

Real estate and cars are traded in USD in Georgia, as people trust USD more than GEL when it comes to long-term assets sales. As the main income of the population is in GEL, the depreciation of the exchange rate led to a decrease in real estate and car sales.

Product and service imports in Georgia constitute 65% of the GDP and 70% of domestic consumption. In January-February 2015, the inflation rate (0.4%) was not high, however since March the GEL exchange rate depreciation has begun to reflect on imported products. According to unofficial data, the prices of imported products grew by at least 10%. The price of natural gas was supposed to increase for legal entities in March 2015, however the government decided to partially subsidize natural gas or two months, delaying the price increase until May. These subsidies will cost the government 15 million GEL.

Foreign debt accounts for 73% (USD 4.1 billion) of Georgia’s foreign debt. Therefore, the GEL depreciation increases the burden of the foreign debt. The state foreign debt of Georgia in USD did not increase from November 2014 to the end of February 2015, but the state foreign debt in GEL increased by 1.4 billion GEL, and amounted to 30% of the GDP due to the currency depreciation. The state budget income is in GEL, therefore handling foreign debt requires the purchase of USD. As the GEL depreciates, the foreign debt burden increases in direct proportion with the depreciation.

 

Graph 1. Georgia’s State Foreign Debt

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Data Source: Ministry of Finance of Georgia

 

Apart from this, the extreme fluctuations in the national currency exchange rate led to an increase in currency risks that negatively affects the country’s macroeconomic environment and puts the inflow of investments under threat. It is also noteworthy that to stop the GEL exchange rate depreciation, the reserves of the National Bank of Georgia were cut by 200 million USD. The decrease in reserves negatively affects the macroeconomic stability of the country as well. Moreover, the tightened monetary policy, aimed at stopping the exchange rate depreciation and inflation, negatively affects Georgia’s economic growth rate, which decreased to 0.5% in January 2015. The government decreased the 2015 economic growth forecast from 5% to 2%.

Graph 2. Official Foreign Currency Reserves of the National Bank of Georgia

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To sum up: The GEL’s depreciation increased inflation, made the handling of loans of individuals, legal persons, as well as state foreign debt more expensive. In addition, it shrank the general population’s incomes and harmed macroeconomic stability. The government called it a “currency crisis” and started to develop a plan for overcoming the crisis that involves shrinking state expenditures, accelerating privatization, encouraging export, and improving the investment environment in the coming months.

Changes In The Law On Broadcasting: EU Requirement, Or Pressure On The Media?

On April 1 2015, the amendments to the Georgian law on Broadcasting entered into force. The amendments significantly change the norms regulating commercial advertising and product placement on television.

Even though both the parliamentarian minority and TV broadcasters criticized the changes as a threat to the media’s editorial independence through financial pressure, the parliamentarian majority passed the law, claiming that the Association Agreement with the EU required such a legal framework. The amendments mostly copy restrictions envisaged by the EU directive, such as setting precise intervals when TV companies are allowed to air telemarketing and commercials and the total duration of advertising time. However, it imposes additional restrictions that could undermine the financial stability of certain broadcasters. What is critical is the issue of timing: The legal changes coerce media holders to amend their financial plans in the middle of the year. According to the EU Association Agreement, Georgia has a 3-5 year period in which to amend the laws in the field of audio-visual cooperation. Such harsh changes do not need to be implemented immediately. A gradual transition to the new regulations would have mitigated the financial losses of TV broadcasting companies.

Many assumed that the swift changes to the law targeted one specific TV channel, Rustavi 2, which is the most popular TV broadcaster in Georgia. Rustavi 2 is led by former United National Movement member. Members of the Georgian Dream coalition parliamentary majority party often accuse the company of being biased for the UNM. Rustavi 2’s revenues from commercials far exceed the advertising revenues of other companies in Georgia, and so Rustavi 2 is expected to suffer most. Members of the Georgian Dream parliamentary majority have even singled out Rustavi 2 while talking about the new law, fuelling the beliefs of the UNM parliamentary minority that the law is of a politicized nature.

It is not the first time that there have been concerns about pressure on the media. The media’s independence was also undermined by changes in media ownership and the dismissal of the Georgian Public Broadcaster’s Board of Trustees. Former Prime Minister Bidzina Ivanishvili and also other members of the Georgian Dream have made statements directly targeting several broadcasters. Representatives of regional media outlets have also accused the Ministry of Internal Affairs about their involvement and pressure on local newspapers. Recently, statements by two popular journalists of Imedi TV about the pressure from the government created the sense that the Georgian Dream parliamentary majority is involved in the broadcaster’s editorial policy. These allegations remain uninvestigated.caricature

The members of parliament deny the accusations that the law creates pressure on the media, and argue again that the requirements of the Association Agreement are the reason behind the changes in the law. The requirements of the Association Agreement have become a common excuse in recent months to justify unpleasant and rough legal changes, such as the changes to the visa policy or the increased excise tax on alcohol. This practice, of falling on the Association Agreement as a justification for unpopular changes, politicizes the meaning of the document.

It is widely believed that editorial independence increased after the parliamentary elections of October 2012. Yet the issue of media freedom should not fall off the radar screen, especially as new parliamentary elections in 2016 are approaching, and the political situation in Georgia is highly polarized. Controversial changes to the Law on Broadcasting, statements from members of the parliamentary ruling majority party, attacking the media, as well as allegations of government interference in media independence raise the fear that the ruling party is targeting specific broadcasters in order to curb their financial independence and influence their editorial freedom. Indirect discrimination against certain media holders and attempts to influence editorial independence through the law needs special attention as a potential threat to the freedom of the media.