Until 1991 Georgia's price system and inflation rate generally
coincided with those of the other Soviet republics. Under central
planning, prices of state enterprise products were fixed by direct
regulation, fixed markup rates, or negotiation at the wholesale level
with subsequent sanction by state authority. The prices of agricultural
products from the private sector fluctuated freely in the Soviet system.
Once it forsook the artificial conditions of the Soviet system,
Georgia faced the necessity for major changes in its pricing policy.
Following the political upheaval of late 1991, which delayed price
adjustments, the Georgian government raised the prices of basic
commodities substantially in early 1992, to match adjustments made in
most of the other former Soviet republics. The price of bread, for
example, rose from 0.4 ruble to 4.8 rubles per kilogram. By the end of
1992, all prices except those for bread, fuel, and transportation had
been liberalized in order to avoid distortions and shortages. This
policy brought steep inflation rates throughout 1993.
Beginning in 1991, a severe shortage of ruble notes restricted
enterprises from acquiring enough currency to prevent a significant drop
in real wages. In early 1992, public-sector wages were doubled, and
every Georgian received an additional 40 rubles per month to compensate
for the rising cost of living. Such compensatory increases were far
below those in other former Soviet republics, however. In 1992 the
Shevardnadze government considered wage indexing or regular adjustment
of benefits to the lowest wage groups as ways of improving the public's
buying power.
In mid-1993 the majority of Georgians still depended on state
enterprises for their salaries, but in most cases some form of private
income was necessary to live above the poverty level. Private jobs paid
substantially more than state jobs, and the discrepancy grew larger in
1993. For example, in 1993 a secretary in a private company earned the
equivalent of US$30 per month while a state university professor made
the equivalent of US$4 per month.
Georgia - Banking, the Budget, and the Currency
In the spring of 1991, Georgian banks ended their relationship with
parent banks in Moscow. The National Bank of Georgia was created in
mid-1991 as an independent central national bank; its main function was
to ensure the stability of the national currency, and it was not
responsible for obligations incurred by the government. The National
Bank also assumed all debts of Georgian banks to the state banks in
Moscow.
In 1992 the national system also included five specialized government
commercial banks and sixty private commercial banks. The five
government-owned commercial banks provided 95 percent of bank credit
going to the economy. They included the Agricultural and Industrial Bank
of Georgia, the Housing Bank of Georgia, and the Bank for Industry and
Construction, which were the main sources of financing for state
enterprises during this period. Private commercial banks, which began
operation in 1989, grew rapidly in 1991-92 because of favorable interest
rates; new banking laws were passed in 1991 to cover their activity.
Under communist rule, transfers from the Soviet national budget had
enabled Georgia to show a budget surplus in most years. When the Soviet
contribution of 751 million rubles--over 5 percent of Georgia's gross
domestic product ( GDP) became unavailable in 1991, the Georgian
government ran a budget deficit estimated at around 2 billion rubles.
The destruction of government records during the Tbilisi hostilities of
late 1991 left the new government lacking reliable information on which
to base financial policy for 1992 and beyond.
In 1992 the government assumed an additional 2 billion to 3 billion
rubles of unpaid debts from state enterprises, raising the deficit to
between 17 and 21 percent of GDP. By May 1992, when the State Council
approved a new tax system, the budget deficit was estimated at 6 billion
to 7 billion rubles. The deficit was exacerbated by military
expenditures associated with the conflicts in South Ossetia and Abkhazia
and by the cost of dealing with natural disasters.
The 1992 budget was restricted by a delay in the broadening of the
country's tax base, the cost of assuming defense and security expenses
formerly paid by the Soviet Union, the doubling of state wages, and the
cost of earthquake relief in the north. When the 1993 budget was
proposed, only 11 billion of the prescribed 43.6 billion rubles of
expenditures were covered by revenues.
Tax reform in early 1992 added an excise tax on selected luxury items
and a flat-rate value-added tax ( VAT) on most goods and services, while
abolishing the turnover and sales taxes of the communist system. In 1992
tax revenues fell below the expected level, however, because of
noncompliance with new tax requirements; a government study showed that
80 percent of businesses underpaid their taxes in 1992.
In early 1993, Georgia remained in the "ruble zone," still
using the Russian ruble as the official national currency. Efforts begun
in 1991 to establish a separate currency convertible on world markets
were frustrated by political and economic instability. Beginning in
August 1993, the Central Bank of Russia began withdrawing ruble
banknotes; a new unit, designated the coupon, became the official
national currency after several months of provisional status. Rubles and
United States dollars continued to circulate widely, however, especially
in large transactions. After the National Bank of Georgia had been
establishing weekly exchange rates for two months, the coupon's exchange
rate against the United States dollar inflated from 5,569 to 12,629. In
September all salaries were doubled, setting off a new round of
inflation. By October the rate had reached 42,000 coupons to the dollar.
Georgia - Industry
In 1990 about 20 percent of Georgia's 1,029 industrial enterprises,
including the largest, were directly administered by the central
ministries of the Soviet Union. Until 1991 Georgian industry was
integrated with the rest of the Soviet economy. About 90 percent of the
raw materials used by Georgian light industry came from outside the
republic. The Transcaucasian Metallurgical Plant at Rustavi and the
Kutaisi Automotive Works, as well as other centers of heavy industry,
depended heavily on commercial agreements with the other Soviet
republics. The Rustavi plant, for example, could not operate without
importing iron ore, most of which it received (and continues to receive)
from Azerbaijan. The Kutaisi works depended on other republics for raw
materials, machinery, and spare parts. Georgia contributed significantly
to Soviet mineral output, particularly of manganese (a component of
steel alloy found in the Chiatura and Kutaisi regions in west-central
Georgia) and copper.
In the late 1980s, Georgia's main industrial products were machine
tools, prefabricated building structures, cast iron, steel pipe,
synthetic ammonia, and silk thread. Georgian refineries also processed
gasoline and diesel fuel from imported crude oil. Georgian industry made
its largest contributions to the Soviet Union's total industrial
production in wool fabric, chemical fibers, rolled ferrous metals, and
metal-cutting machine tools.
Georgia - Energy
The lack of significant domestic fuel reserves made the Georgian
economy extremely dependent on neighboring republics, especially Russia,
to meet its energy needs. Under the fuel supply conditions of 1994, only
further exploitation of hydroelectric power could enhance energy
self-sufficiency. In 1990 over 95 percent of Georgia's fuel was
imported. For that reason, the collapse of the Soviet Union in 1991
caused an energy crisis and stimulated a search for alternative
suppliers.
The harsh winter of 1991-92 increased fuel demand at a time when
supply was especially limited. Oil imports were reduced by the conflict
between Armenia and Azerbaijan, cold weather curtailed domestic
hydroelectric production, and the price of fuel and energy imports from
other former Soviet republics rose drastically because of Georgia's
independent political stance and the new economic realities throughout
the former union. Beginning in December 1991, industries received only
about one-third of the energy needed for full-scale operation, and most
operated far below capacity throughout 1992.
Small amounts of oil were discovered in the Samgori region (southern
Georgia) in the 1930s and in eastern Georgia in the 1970s, but no oil
exploration has occurred in most of the republic. In 1993 some 96
percent of Georgia's oil came from Azerbaijan and Russia, although new
supply agreements had been reached with Iran and Turkey. Oil and gas
pipelines connect Georgia with Azerbaijan, Armenia, Russia, and
Turkmenistan. Refinery and storage facilities in Batumi receive oil
through a long pipeline from Baku in Azerbaijan.
Coal is mined in Abkhazia and near Kutaisi, but between 1976 and 1991
output fell nearly 50 percent, to about 1 million tons. The largest
deposits, both in Abkhazia, are estimated to contain 250 million tons
and 80 million tons, respectively. Domestic coal provides half the
Rustavi plant's needs and fuels some electrical power generation. In
1993 natural gas, nearly all of which was imported, accounted for 44
percent of fuel consumption.
Georgia has substantial hydroelectric potential, only 14 percent of
which was in use in 1993 in a network of small hydroelectric stations.
In 1993 all but eight of Georgia's seventy-two power stations were
hydroelectric, but together they provided only half the republic's
energy needs. In the early 1990s, Georgia's total consumption of
electrical energy exceeded domestic generation by as much as 30 percent.
Georgian planners see further hydroelectric development as the best
domestic solution to the country's power shortage.
Georgia - Agriculture
In 1993 about 85 percent of cultivated land, excluding orchards,
vineyards, and tea plantations, was dedicated to grains. Within that
category, corn grew on 40 percent of the land, and winter wheat on 37
percent. The second most important agricultural product is wine. Georgia
has one of the world's oldest and finest winemaking traditions;
archeological findings indicate that wine was being made in Georgia as
early as 300 B.C. Some forty major wineries were operating in 1990, and
about 500 types of local wines are made. The center of the wine industry
is Kakhetia in eastern Georgia. Georgia is also known for the high
quality of its mineral waters.
Other important crops are tea, citrus fruits, and noncitrus fruits,
which account for 18.3 percent, 7.7 percent, and 8.4 percent of
Georgia's agricultural output, respectively. Cultivation of tea and
citrus fruit is confined to the western coastal area. Tea accounts for
36 percent of the output of the large food-processing industry, although
the quality of Georgian tea dropped perceptibly under Soviet management
in the 1970s and 1980s. Animal husbandry, mainly the keeping of cattle,
pigs, and sheep, accounts for about 25 percent of Georgia's agricultural
output, although high density and low mechanization have hindered
efficiency.
Until 1991 other Soviet republics bought 95 percent of Georgia's
processed tea, 62 percent of its wine, and 70 percent of its canned
goods. In turn, Georgia depended on Russia for 75 percent of its grain.
One-third of Georgia's meat and 60 percent of its dairy products were
supplied from outside the republic. Failure to adjust these
relationships contributed to Georgia's food crises in the early 1990s.
Georgia - Transportation and Telecommunications
Georgia's location makes it an important commercial transit route,
and the country inherited a well-developed transportation system when it
became independent in 1991. However, lack of money and political unrest
have cut into the system's maintenance and allowed it to deteriorate
somewhat since independence. Fighting in and around the secessionist
Abkhazian Autonomous Republic in the northwest has isolated that area
and also has cut some of the principal rail and highway links between
Georgia and Russia.
In 1990 Georgia had 35,100 kilometers of roads, 31,200 kilometers of
which were paved. Since the nineteenth century, Tbilisi has been the center of
the Caucasus region's highway system, a position reinforced during the
Soviet era. The country's four principal highways radiate from Tbilisi
roughly in the four cardinal directions. Route M27 extends west from the
capital through the broad valley between the country's two main mountain
ranges and reaches the Black Sea south of Sukhumi. The highway then
turns northwest along the Black Sea to the Russian border. A secondary
road, Route A305, branches off Route M27 and carries traffic to the port
of Poti. Another secondary road runs south along the Black Sea coast
from Poti to the port of Batumi. From Batumi a short spur of about ten
kilometers is Georgia's only paved connection with Turkey.
Route A301, more commonly known as the Georgian Military Highway,
runs north for almost 200 kilometers from Tbilisi across the Greater
Caucasus range to Russia. The route was first described by Greek
geographers in the first century B.C. and was the only land route north
into Russia until the late 1800s. The route contains many hairpin turns
and winds through several passes higher than 2,000 meters in elevation
before reaching the Russian border. Heavy snows in winter often close
the road for short periods. The country's other two main highways
connect Tbilisi with the neighboring Transcaucasian countries. Route
A310 runs south to Erevan, and Route A302 extends east across a lower
portion of the Greater Caucasus range to Azerbaijan. All major routes
have regular and frequent bus transport.
Georgia had 1,421 kilometers of rail lines in 1993, excluding several
small industrial lines. In the early 1990s, most lines were 1.520-meter
broad gauge, and the principal routes were electrified. The tsarist
government built the first rail links in the region from Baku on the
Caspian Sea through Tbilisi to Poti on the Black Sea in 1883; this route
remains the principal rail route of Transcaucasia. Along the Black Sea,
a rail route extends from the main east-west line into Russia, and two
lines run south from Tbilisi--one to Armenia and the other to
Azerbaijan. Spurs link these main routes with smaller towns in Georgia's
broad central valley. Principal classification yards and rail repair
services are in Batumi and Tbilisi. Most rail lines provide passenger
service, but in 1994 international passenger service was limited to the
Tbilisi-to-Baku train. Because of fighting in Abkhazia, freight and
passenger service to Russia has been suspended, with only the section
from Tbilisi to the port of Poti still operative. Service on the
Tbilisi-to-Erevan line has also been disrupted because the tracks pass
through the area of armed conflict between Armenia and Azerbaijan.
Tbilisi was one of the first cities of the Soviet Union to have a
subway system. The system consists of twenty-three kilometers of heavy
rail lines, most of which are underground. Three lines with twenty
stations radiate from downtown, with extensions either planned or under
construction in 1994. The system is heavily used, and trains run at
least every four minutes throughout the day. In 1985, the last year of
available statistics, 145 million passengers were carried, about the
same number of passengers that used Washington's Metrorail system in
1992.
Georgia's principal airport, Novoalekseyevka, is about eighteen
kilometers northeast of downtown Tbilisi. With a runway approximately
2,500 meters long, the airport can accommodate airplanes as large as the
Russian Tu-154, the Boeing 727, and the McDonnell Douglas DC-9. In 1993
the airport handled about 26,000 tons of freight. Orbis, the new
state-run airline, provides service to neighboring countries, flights to
several destinations throughout Russia, and direct service to some
European capitals. Between 1991 and 1993, fuel shortages severely
curtailed air passenger and cargo service, however. Eighteen other
airports throughout the country have paved runways, but most are used
for minor freight transport.
Georgia's Black Sea ports provide access to the Mediterranean Sea via
the Bosporus. Georgia has two principal ports, at Poti and Batumi, and a
minor port at Sukhumi. Although Batumi has a natural harbor, Poti's
man-made harbor carries more cargo because of that city's rail links to
Tbilisi. The port at Poti can handle ships having up to ten meters
draught and 30,000 tons in weight. Altogether, nine berths can process
as much as 100,000 tons of general cargo, 4 million tons of bulk cargo,
and 1 million tons of grain per year. Facilities include tugboats,
equipment for unloading tankers, a grain elevator, 22,000 square meters
of covered storage area, and 57,000 square meters of open storage area.
Direct onloading of containers to rail cars is available. The port
primarily handles exports of grain, coal, and ores and imports of
general cargo. Poti is ice-free, but in winter strong west winds can
make entry into the port hazardous.
Batumi's natural port is located on a bay just northeast of the city.
Eight alongside berths have a total capacity of 100,000 tons of general
cargo, 800,000 tons of bulk cargo, and 6 million tons of petroleum
products. Facilities include portal cranes, loaders for moving
containers onto rail cars, 5,400 square meters of covered storage, and
13,700 square meters of open storage. The port lies at the end of the
Transcaucasian pipeline from Baku and is used primarily for the export
of petroleum and petroleum products. The port's location provides some
protection from the winds that buffet Poti. However, strong winds can
cause dangerous currents in the port area, forcing ships to remain
offshore until conditions improve.
Sukhumi, capital of the Abkhazian Autonomous Republic, is a small
port that handles limited amounts of cargo, passenger ferries, and
cruise ships. Imports consist mostly of building materials, and the port
handles exports of local agricultural products, mostly fruit. Strong
westerly and southwesterly winds make the port virtually unusable for
long periods in the autumn and winter. Sukhumi has been unavailable to
Georgia since Georgian forces abandoned the city during the conflict of
the autumn of 1993.
In 1992 Georgia had 370 kilometers of crude oil pipeline, 300
kilometers of pipeline for refined petroleum products, and 440
kilometers of natural gas pipeline. Batumi is the terminus of a major
oil pipeline that transports petroleum from Baku across the Caucasus for
export. Two natural gas pipelines roughly parallel the route of the oil
pipeline from Baku to Tbilisi before veering north along the Georgian
Military Highway to Russia. Pipelines are generally high-capacity lines
and have a diameter of either 1,020 or 1,220 millimeters.
Historically, Georgia was an important point on the Silk Road linking
China with Europe. Since independence Georgians have discussed resuming
this role by turning the republic into a modern transportation and
communications hub. Such a plan might also make the republic a "dry
Suez" for the transshipment of Iranian oil west across the
Caucasus.
In 1991 about 672,000 telephone lines were in use, providing twelve
lines per 100 persons. The waiting list for telephone installation was
quite long in the early 1990s. Georgia is linked to the CIS countries
and Turkey by overland lines, and one lowcapacity satellite earth
station is in operation. Three television stations, including the
independent Iberia Television, and numerous radio stations broadcast in
Georgian and Russian.
Georgia - Economic Reform
Like all the former Soviet republics, Georgia recognized the need to
restructure its economic system in the early 1990s, using national
economic strengths to accommodate its own needs rather than the needs of
central planners in Moscow. The road to reform has been full of
obstacles, however: poor political leadership, the economic decline that
began in the 1980s, civil war, and a well-established underground
economy that is difficult to control.
Price Policy
Gamsakhurdia understood little about economics, and he postponed
major economic reforms to avoid weakening his political position. In an
effort to maintain popular support, he stabilized fares for public
transportation and prices for basic consumer goods in state retail
outlets. In March 1991, a new rationing system bound local residents to
neighborhood shops. In April 1991, price controls were imposed in state
stores. Price liberalization began only after Gamsakhurdia's departure
as president, and it did not cover several basic consumer goods and
services. Continued food subsidies were an additional factor
contributing to the national budget deficit. In the interest of
stimulating competition, a government decree removed restrictions on
trade in May 1992, and at the same time taxes were eliminated on goods
brought into Georgia. Persistent shortages of bread led the government
to introduce ration cards for bread in December 1992. Under these
conditions, inflation soared in private markets in 1991-92, although
prices remained substantially lower than in Moscow for similar items.
In 1993 wholesale prices increased especially quickly under the
influence of falling productivity. In the second half of 1993, the
construction industry was hit hard by increases in the cost of materials
of up to thirty times, although gasoline prices rose only gradually. The
prices of heavy engineering and ferrousmetallurgy products rose by three
to five times in the second half of 1993.
Georgia - Enterprise Privatization
In the Soviet period, Georgian trade with the world outside the
Soviet Union was severely restricted by Moscow's foreign economic
policy. Almost all of Georgian foreign economic activity was conducted
by fourteen central enterprises, most of which operated under the direct
management of Moscow. Bulgaria, Czechoslovakia, Germany, Japan, and
Poland were among the most important of Georgia's trading partners.
Gamsakhurdia, suspicious of businessmen who sought to export Georgian
goods, banned all export activity. The Shevardnadze government, however,
created conditions for significant improvement of international
investment and trade. In May 1992, licensing requirements for import or
export activities were dropped except for the import of goods in the
military and medical categories. This change represented a significant
expansion of the rights of enterprises to engage in foreign economic
activity. Export of twelve commodities, mostly foodstuffs, was still
prohibited at the end of 1992. Fees and other restrictions on the
registration of joint ventures were removed, and the state tax on all
imports was canceled. Import duties ranged from 5 to 55 percent, and
export duties from 5 to 90 percent, with an exemption for former Soviet
republics; the VAT on exports dropped to 14 percent in late 1992. The
National Bank of Georgia imposed a tax of 12 percent of exporters'
hardcurrency earnings. In early 1993, new trade policies had not led to
major increases in foreign trade and investment. Continued political
instability, ethnic warfare, and extremely poor transportation and
telecommunications facilities continued to discourage foreign investors
in 1993.
In the second half of 1993, continued military upheaval did not
entirely deter progress in foreign investment. The Renault automobile
company of France, the German Tee Kanes tea company, and British and
Dutch liquor companies signed contracts in August, and officials of
Mitsubishi and an American shipbuilder visited Georgia to assess
investment conditions.
