THE ECONOMIC SITUATION IN BLOCKADED ABKHAZIA

Roman GOTSIRIDZE


Roman Gotsiridse, Ph.D. (Econ.), Director, Parliamentary Budget Office (Tbilisi, Georgia)


Area and Population

Abkhazia covers an area of 8.7 thousand sq km, or 12.5% of Georgias total area. According to the 1989 census, the autonomous republic had a population of 525 thousand, or 9.7% of the Georgian total. Its ethnic composition at the time was as follows: Georgians (239.9 thou, or 45.7% of the population), Abkhazians (93.3 thou, or 17.8%), Armenians (76.5 thou, or 14.6%), Russians (74.9 thou, or 14.3%), Greeks (14.7 thou, or 2.8%), Ukrainians (11.6 thou, or 2.2%), and people of other nationalities (14.1 thou, or 2.6%).

As a result of military action in 1992-1993, the demographic structure has changed dramatically. Data for 1998 show that a significant proportion of Abkhazias Russians, Greeks, Armenians and Abkhazians proper had left the republic along with the Georgians.

According to the estimates of the U.N. mission that operated in the region in March 1998, Abkhazia at that time had a population of around 200 thousand, or 38% of the prewar figure. Today there are no precise data on the size of the various ethnic groups, but one can assume that roughly 40% of the population are Abkhazians, 25% Armenians, 15% Georgians (mostly living in the Gali District and the Kodori Gorge), 15% Russians, and 5%, people of other nationalities.

Macroeconomic Situation

Since 1989, the Abkhazian economy has been in a state of deep crisis. In 1994, for example, production was down to less than 5% of the 1989 level, which was due both to the disintegration of the single economic complex and to the military operations. Today Abkhazia has lost its traditional economic structure. It is now something of a closed economic unit with poorly developed foreign economic ties and a totalitarian-type administrative system, with emphasis on a buildup of military capability.

The economy is being run, as in the past, on administrative-bureaucratic lines. The central authorities exert an immense influence on every aspect of social life. The share of the state sector in the economy is over 90%, and state-owned companies are in charge of nearly all the key areas of economic activity. The two predominant sectors today are agriculture and trade, while industry is in a very bad condition. Most enterprises have been at a standstill since the outbreak of the conflict. There is an acute shortage of labor, especially skilled workers; enterprises are strapped for cash, no investments are being made, the financial and banking systems are embryonic, and many of the destroyed enterprises cannot be restored, since they have been wrecked and looted beyond repair. Much of the equipment has been sold abroad as scrap metal.

According to rough estimates, Abkhazias gross domestic product (GDP) in 2001 was around $70-80m, or something like $350 per capita. In terms of this indicator, it is on the level of the less developed African countries and lags far behind Georgia, whose per capita GDP is three times higher. But even this GDP is distributed unevenly, mostly going to serve the interests of the ruling factions.

However, this scanty GDP does not give an adequate idea of the living standards of the population, which has additional sources of livelihood. These include: humanitarian aid from foreign countries and international organizations; material and financial assistance provided by Russian government and commercial structures; family transfers from citizens living outside the country; loans (mostly issued by Russian banks), and electric power received from Georgia and Russia free of charge (whose value far exceeds any other assistance). This kind of humanitarian aid saves the local population from the threat of famine.

Budget

Abkhazian state budget statistics compiled by the separatist authorities themselves do not fully reflect the actual state of affairs, and some data are classified altogether. Thus, the budget shows the sources of only 60% of all revenues, while the remaining 40% are unexplained. For example, the revenue part of the budget for 1995 ($4.9m) did not indicate the source of $2.7m (55% of total revenue), and the budget for 1997 (with a revenue of $6.1m) said nothing about the source of $2.1m (34%). One can assume that the Abkhazian authorities received these amounts from official or unofficial organizations of foreign states (mainly Russia).

The same applies to the expenditure part of the budget, where only 25% of all expenditures are itemized, while 75% are not spelled out. In 1995, for example, expenditures totaled $5.3m, and $4.1m of these (77%) were not specified. In 1997, $4.6m (76%) out of a total of $6m were unaccounted for. One can only guess that such budget items are designed to maintain the administration and to meet military expenditures, i.e., most of the budget is used for militarist purposes.

Despite significant military spending, the budget does not reflect its actual amount, since the maintenance of massive armed forces and the staging of punitive operations, periodically launched by the separatist regime, require much larger outlays than those indicated in the budget.

An analysis of budget revenues and expenditures shows that the Abkhazian authorities have not only been receiving large amounts of financial and material aid from abroad, but are also able to draw on other covert (internal and external) sources of finance used to address militarist tasks.

Types of Budget

The state budget consists of two parts: republican and district. The republican part constitutes around 65-70% of the total, and the rest falls to the share of Sukhumi and local district budgets. The budgets are drawn up in Russian rubles, because the ruble in Abkhazia is the main instrument of payment (budget figures in Russian rubles are converted into dollars at the exchange rate for the respective period).

Fiscal sharing between the republican and district budgets is effected in accordance with established standards. For example, local budgets get 100% of income tax on individuals, 50% of profit and property taxes, 70% of land tax, 50-70% of value-added tax (differentiated by district), 30% of excise taxes, 10% of government duty, etc.

In 2001, revenues came to $7.2m, or more than twice as much as in 1994 ($3.4m).

Customs fees are one of the most significant sources of revenue. In 1994-2000, these yielded 20% of all receipts (in 1997, 23.5%). Whereas in 1994 they amounted to $609 thou, in 1997 the figure was $1.4m. In contrast to international practice, Abkhazia has fairly high export taxes and insignificant import taxes. Thus, exports account for 70% of all revenue obtained from customs fees. Another significant revenue item is payroll tax ($924.4 thou in 1997). Value-added tax remained stable throughout 1994-2001: at an annual level of around $400 thou. The share of taxes on industrial profits is low, rising no more than marginally over a number of years, which is a sign of economic stagnation. In 1994, for example, tax receipts under that item amounted to $391 thou, and in 1997, to $446 thou. Excise tax receipts are also insignificant ($105 thou and $368 thou in 1994 and 2001, respectively).

In 1994 and 1995, nontax revenues did not feature in the budget at all, although in 1996-2001 such revenues did appear in the form of land tax. In 1997, revenue was also received from the privatization of dwelling houses ($60 thou).

As regards state budget expenditures, these can also be divided into two main parts: spending on central and on local government. In 1994, the former amounted to 56.5% of the budget, and in 1997, to 67.4%. Administrative expenses plus spending on the maintenance of military and law enforcement agencies in 1997 added up to 67% of the total budget. Education got 7.9% ($472 thou), health care, 9.8% ($589 thou), and social security, 3.1% ($183 thou). As we noted above, the proportion of outlays on administration and on the power agencies was not specified. In 1998, state budget expenditures totaled $8.6m, and in 2001, $7.7m.

District Budgets

The revenue and expenditure parts of district budgets are so small as to be merely symbolic. In 2001, expenditures were planned at $2.1m. The largest share (41%) went to Sukhumi, whereas the Gali District got less than the rest: just over 2% ($46 thou). That district has a population of close to 40 thousand (ethnic Georgians), so that the figure per capita is under two dollars. In addition, these funds are not being used to meet the needs of the local population, but go to maintain the districts Abkhazian administration.

Analysis shows that in view of its small volume the budget does not play any significant role in Abkhazias social or economic life. In 2001, for example, budget expenditures per capita amounted to only $30. To all intents and purposes, there is no such institution as social welfare, and in the conditions of mass unemployment households live off humanitarian aid and subsistence farming. In 1997 alone international humanitarian organizations provided $17.5m worth of aid, or three times as much as the republics budget for that period. Considering that most Georgians living in Abkhazia do not get any assistance from the separatist authorities (even pensions), it becomes obvious that the main consumer of resources is the Abkhazian bureaucracy. One should also add the huge amounts of military and food aid provided by Russia and distributed by the local authorities in the form of covert extrabudgetary funds.

Special note should also be taken of the great services rendered by Georgia itself to the separatist regime in Abkhazia. I am referring to the supply of electricity from Georgia and Russia (out of resources allocated to Georgia). Without this forced grant the separatist regime would have had a very rough time indeed. Suffice it to say that in 1993-2001 Abkhazia was supplied with electricity to the amount of around $35m from Russia and $110m from the Inguri Hydroelectric Power Station. This comes to a total of $145m, which roughly equals the value of GDP produced in the territory of Abkhazia in two years. Indicatively, its budget revenue in that period was only $28m, which amounts to one-third of the cost of electricity supplied from Georgia.

Humanitarian and other kinds of aid enable the separatist regime to use a sizeable share of the official budget to finance military spending. That is why any kind of future assistance should be provided on condition that Abkhazia increases its social expenditures. Unless this is done, the military spending of the separatists will be financed from foreign sources (including humanitarian aid).

Banking and Currency Circulation

Abkhazia has in operation 15 state and commercial banks with a loan portfolio of around $3m. The lending rate is very high: from 5% to 15% per month. Bank deposits by the population are at a minimum, so that financial support for transactions is provided from foreign sources. Export-import operations cannot be performed solely on the basis of cash settlements. In all probability, cashless payments are made through accounts opened by Abkhazian organizations with foreign banks.

The functions of a central bank are performed by Abkhaziabank, the former Abkhazian branch of the National Bank of Georgia. It has no regulatory or supervisory functions which a central bank must exercise. In particular, it does not issue any money to regulate the national currency, nor does it control or license the work of commercial banks. However, it appears to register credit institutions representing the commercial banks of Abkhazia.

Abkhazia is an integral part of Georgia, so that registration and licensing of commercial banks located in its territory is an immediate responsibility of the National Bank of Georgia. Without these procedures such banks are not entitled to perform any international transactions. But in spite of that and contrary to international rules, branches of Russian banks have been operating in Abkhazia.

The so-called commercial banks of Abkhazia have opened branches in Russian territory, a fact pointed out by the National Bank of Georgia in a letter addressed to the Central Bank of Russia and demanding the closure of branches opened by a bank which has no legal right to open branches abroad without their registration and licensing by the National Bank of Georgia. But the Russian side has not even tried to change the situation, so helping to establish an independent banking system in Abkhazia. In circumvention of the National Bank of Georgia, Abkhazian commercial banks seek to open correspondent accounts with foreign banks and in offshore zones.

Humanitarian and Rehabilitation Aid

Right after the cessation of hostilities in Abkhazia, international and humanitarian organizations focused their attention on saving human lives by providing food aid and emergency medical care. Such organizations as the International Red Cross, Médicins sans Frontières, and other nongovernmental agencies took a particularly active part in these operations. Later on it became possible to expand the scope of their activities, and they got down to rebuilding schools, hospitals and other facilities.

Out of the three U.N. agencies operating in Abkhazia the widest program is being implemented by the Office of the U.N. High Commissioner for Refugees, whose total spending has amounted to $2.5m. Another organization taking part in the process is UNICEF (United Nations International Childrens Emergency Fund), which has been supplying educational institutions with school stationery and materials for vaccination. Its overall outlays come to $250 thousand. Among the other organizations operating in the region are the UNV (United Nations Volunteers) and OCHA (Office for the Coordination of Humanitarian Affairs). The former seeks to create an atmosphere of trust and to set up nongovernmental organizations, and the latter coordinates the supply of humanitarian aid. Their expenditures add up to $200 thousand. In the final count, most of the population has been receiving direct or indirect aid, whose amount in 1997 alone was estimated at $17.5m. Over the next few years, donors can be expected to allocate much larger amounts for these purposes. Six nongovernmental organizations now operating in Abkhazia arrange food supplies, provide assistance to health care and education, and help to clear mines.

The U.N. mission that assesses Abkhazias needs has drawn up short-term (from 2 to 24 months), medium and long-term (from 3 to 5 years) programs providing for the rehabilitation of roads, bridges and water supply systems, repair and supply of schools and hospitals, mine-clearing operations, etc. Most of these programs are to be put into effect only upon the restoration of Georgias territorial integrity.

Privatization and Investment Problem

As we have already noted, the state sector holds a dominant place in Abkhazias economy. Virtually the whole of industry is in the hands of the state. As regards agricultural production, a significant role here belongs to the private sector, but 92% of all arable land is owned by the state. The key export crops (citrus fruit, tea and tobacco) are under the control of state-owned companies (so-called agrofirms). The lease and sharecropping agreements that are practiced in agriculture cannot be seen as the first steps toward privatization.

The state is also in control of the forest industry, fishery, energy, transport, manufacturing and tourism. True, privatization in some areas has got under way. In 1997, for example, the first revenue from privatization of housing went into the budget ($60 thou). Incidentally, on 1 April, 1998, the Georgian parliament made yet another statement on that issue. The main thrust of that statement, just as of earlier decisions and resolutions to that effect, was that it declared null and void any legislative acts and regulations that are contrary to Georgian law and are adopted by structures controlled by separatist groupings or allied with them, and also any decisions and civil law agreements violating state property rights in the territory of Georgia.

One of the causes behind the slump in Abkhazias economy is lack of credit and capital. For example, effective use of tea and citrus plantations is hindered by the lack of funds for the purchase of pesticides, fertilizers and machinery. The infrastructure is in a very poor state. Its rehabilitation requires huge investments, which will only be possible in the distant future. The current level of investments (or, to be more precise, their absence) may prove to be disastrous for some sectors of the economy. For example, without due investments Abkhazias citrus groves and tea plantations could be totally destroyed within a few years. But substantial investments can hardly be expected before a final settlement of the conflict.

Energy and Industry

Industrial enterprises, with very few exceptions, are at a standstill, and those in operation are facing a shutdown. True, in recent years there has been a revival of the timber industry. The Abkhazian authorities have been exporting timber. In 2000, they exported around 50 thousand cubic meters of timber, mostly in the form of logs. Overall, timber worth a total of close to $4m (at around $80 per cubic meter) has been officially exported from the territory of Abkhazia. One can assume that roughly as much has been shipped out illegally. Lack of control in this industry poses a serious environmental threat to the region, where excessive forest felling could lead to deforestation.

The republic is rich in water resources. The water storage reservoir of the Inguri hydropower station lies in territory controlled by the Georgian authorities, while the power station and the distributing transformer are located in territory controlled by the separatist authorities. By agreement between the parties, around 70% of the generated electric power goes to Georgia, and 30%, to Abkhazia. In addition, Abkhazia has been getting electric power from Russia. However, in view of damage caused to electricity networks and distributor systems, some areas do not get any electricity at all. Nor has it been possible to ensure payment for electricity consumption. The Inguri power station and dam are in need of major repairs. In this connection, the European Union and the European Bank for Reconstruction and Development are providing the necessary investment. The power station is run by Georgian workers and employees, whose wages and salaries are paid by Georgia, which also bears the other production costs. Georgia is obliged to supply Abkhazia with electricity free of charge because of threats to bring the power station to a halt, which amounts to payment of a kind of tribute. In other words, the Abkhazian separatist regime has been getting a huge grant in kind. Moreover, Georgia is obliged to pay for additional electric power supplied to Abkhazia from Russia, which is the result of blackmail used by the separatist authorities and jeopardizing the work of the Inguri hydropower station.

Enterprises and organizations located in Abkhazia, including those servicing the railroad infrastructure, and also households do not pay for the electricity they consume, and the Abkhazian authorities have been doing very little about this. The republic itself has eight small power stations (with a total capacity of 9 MW) and other sources of electric power (diesel generators). Some 50% of all electric power is used by households, 15% by district administrations, 33% by commercial structures, and only 2% by railroads.

Agriculture

This sector used to play a leading role in the Abkhazian economy. Tea, citrus fruit and other perennial crops occupied 40% of all agricultural lands.

Military operations and political confrontation have done irreparable damage to regional crop and livestock farming. The breakdown of basic and auxiliary structures, loss of labor power and of sales markets, etc., have reduced agriculture to near subsistence level.

A specific feature of Abkhazian agriculture is its export orientation. With the disintegration of the Soviet Union, Abkhazia and Georgia as a whole lost their virtual Union-wide monopoly in the market of subtropical products that existed in the days of the U.S.S.R. As a result, their cultivation and processing in Georgia declined. In 1996, the difficulties already faced by Abkhazia were compounded by the imposition of restrictions on foreign trade. Nevertheless, citrus fruit is still being exported to Russia and Turkey in various ways, both legal and illegal. In 2001, virtually the entire harvest of citrus fruit (4.5 thou tons) was shipped to these countries.

Compared with 1982, the use of agricultural lands has markedly decreased, while 60% of all ploughland is not being farmed at all. The land reform launched in Georgia in January 1992 has had no effect on Abkhazia. The local authorities have introduced rental payments for the use of land ranging from $25 to $42 per hectare (depending on its location and fertility), which is one of the sources of budget revenue.

Subtropical Crop Farming

Abkhazia has 40% of Georgias citrus plantations. During the conflict and in subsequent years their productivity has fallen sharply, mostly for lack of due care. Unless the situation changes, the whole sector could be ruined or its restoration will require massive investment.

Special mention should be made of tea growing and processing. The regions potential for tea production is 100 thou tons a year. This industry could play a major part in reviving the Abkhazian economy and solve most of the problems connected with employment. In 1989, 111.5 thou tons of tea leaves were gathered from roughly 11.1 thou hectares of plantations, and in 2001, the figure was only 2 thou tons. Only 9 of the 23 tea factories were still in operation, and even these were running below full capacity and with interruptions. In short, the industrys potential was utilized to no more than 1.5%.

Procurement of walnuts has become one of the most profitable lines of business for the Abkhazian ruling clan. Their export (including shipments to Georgia) is one of the main sources of foreign exchange. In many populated localities the separatists have opened procurement stations. In place of the former tea and citrus plantations, the inhabitants of some villages have been planting walnut seedlings. And in the Gali District the Abkhazian administration has obligated every household to deliver a specified share of the harvest to the state. In effect, agriculture is in disarray and things here, as in the economy in general, have been allowed to take their course. The main purpose of farming today is to provide the remaining population with vitally necessary products, so that it has largely assumed a subsistence character.

Foreign Trade

Most trade operations are one-time cash or barter transactions, which prevents the establishment of normal business relations. Regular financial operations are not being performed, while the capital-strapped local banking system is geared to issuing short-term credits at very high interest rates.

Foreign trade is subject to restrictions. Under economic sanctions, Abkhazia is allowed to import staple foods, medicines, fuel and household goods. Other goods may be imported only upon the receipt of a license from the Georgian authorities, but this requirement is not being met.

Unauthorized cargo keeps flowing in and out of Abkhazia. Intensive trade in agricultural products is being carried on with Russia. Thus, Russian purchasing agents have stepped up their activities in the Gali District. In spite of that, exports of citrus fruit, tea and tobacco in 2001 were down to less than 10% of the 1989 figure.

Imports include such goods as grain, flour, sugar, butter and other fats, potatoes, fuel, etc., and exports consist of tea, citrus fruit, tobacco, metal scrap, timber, walnuts and other goods. In 2001, timber supplied to Turkey was the main export item. Turkey accounts for 62% of registered imports, and Russia, for the remaining 38%. At the same time, Russia takes 54% of registered exports, and Turkey, 45%.

The question of Turkish ships calling at Abkhazian ports has not been resolved. According to the Turkish authorities, they are not connected with these ships in any way and so cannot monitor their movements.

Foodstuffs brought in from Russia are usually bartered for local metals, metal scrap and timber, which are then exported (also without authorization) to Turkey, even though Georgian waters are already controlled by the Georgian navy.

Abkhazias trade balance over the past three years has been negative. Import has been growing steadily, and today it is twice as high as export.

Transport and Communications

Abkhazias land and sea transport is of strategic importance, linking together Russia, Georgia, Azerbaijan and Armenia. The trunk railroad running via Sochi is connected with Georgias main ports and constitutes a vitally important transportation system for the whole Caucasus. Ever since the conflict, this system has been in a state of near total disrepair. Roads and bridges were damaged not only during the conflict, but also after it, and no repairs have been carried out. According to preliminary estimates by the Abkhazian side, it will take around $4m to restore this system.

Sea Transport and Ports

Abkhazia has four ports (Sukhumi, Ochamchira, Gagra and Gudauta) capable of servicing heavy-tonnage vessels. In the past, the Sukhumi port mostly specialized in passenger traffic. In the 1980s, it serviced around 1.3m passengers a year. As regards cargo traffic, the annual average was 190 thou tons, or 24 times more than was carried by railroad and 79 times more than by road transport.

Today the Sukhumi port mostly operates as a cargo port, although the depth of its harbor is 3.5-7 meters and it is poorly protected from the sea. Only three hoisting cranes are now in operation at the port, no access railroad has been laid, and there are no container loading and unloading devices, although in view of local commercial demand three warehouses have been built. Despite the trade restrictions, the ports cargo turnover is considerable.

Railroad System

After the conflict virtually the whole railroad system went out of service. Blown up bridges, stolen electric wires, damaged rail tracks and signaling systems still need to be repaired. Transportation of heavy cargo today is impossible, although electric passenger trains and light-cargo trains are now running from Sukhumi to Ochamchira and in the direction of Sochi. According to U.N. experts, the rehabilitation of railroads will require $33m.

Aviation Infrastructure

The main airport is located in Gulripshi and is capable of year-round operation. It has an excellent runway 3,600 meters long. But today the airport is at a standstill.

Communications

In the past, there were 51 international telephone lines in operation between Abkhazia and Russia. By agreement with Russias Ministry of Communications, these have been disconnected and replaced with 60 lines installed between Tbilisi and Sukhumi under a temporary arrangement. Each of these lines is linked to the Tbilisi international telephone network, which enables telephone users in Sukhumi and other cities to get in touch both with the whole of Georgia and with the CIS countries.

Tourism and Health Resorts

Tourism and health resort services have always been one of the main sources of revenue and employment in Abkhazia. In 1988, there were 4 hotels (905 beds) and 11 tourist lodges and campsites (4,363 beds) with a staff of around three thousand. Something like 155 thousand tourists visited the autonomous republic every year. The health resort sector in 1989 had 90 sanatoriums, rest homes and guesthouses with 28,027 beds, which provided medical treatment and rest for 359 thousand people a year.

There was also a so-called quartering office, which helped tourists arriving without holiday vouchers to find accommodation in the private sector. In 1988, 238 thousand people took a vacation in Abkhazia with the help of that agency. During the tourist peak (1987-1989), the overall number of vacationers in Abkhazia was around 750 thousand a year. In fact, the actual figure was even larger, since at that time no record was kept of persons from Union defense and security agencies staying at departmental health centers or of those who rented private flats without registration.

For lack of proper care during and after the conflict, health resort facilities have been damaged and plundered. But the recreation industry is better preserved than other industries. The development of this kind of business, which is now virtually nonexistent, could eventually prove to be profitable. But for the time being the tourist season is disrupted every year because of general instability, although in 2000, for example, the number of vouchers sold was around 25 thousand (only 3% of the preconflict figure). Most of the vacationers are Russian citizens, and many of them are members of the families of persons serving in the peacekeeping army and in the military unit stationed in Gudauta.

Employment, Pensions and Wages

The sharp drop in the size of the population has changed its demographic structure. The share of people of nonworking age is inordinately high. In the 1980s, people of working age constituted 56% of Abkhazias total population, whereas today the figure is estimated at no more than 40%.

Quantitative and qualitative changes in the structure of the labor force have had an adverse effect on the opportunities for economic and social development and on employment. On the one hand, there is an acute shortage of labor and, on the other, mass unemployment. The situation is particularly grave in rural areas. Some increase in employment in agricultural production and personal subsidiary farming has been recorded only in the Gali District (upon the partial return of local inhabitants forced to leave their homes during the conflict). Without assistance from international organizations and Georgia, the local authorities will be unable to regenerate the economy, reduce the number of jobless or resolve other employment problems.

Pensions in Abkhazia amount to $0.4 per person. Moreover, they are paid only to city dwellers with delays of several months. In rural areas, pensions are not paid out at all or are not even awarded. The material status of disabled persons is even worse. The only source of livelihood for them is aid from international nongovernmental organizations.


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