By Michael Cecire of bne in Tbilisi

As Georgia’s October parliamentary elections draw closer, the increasingly hostile contest between the ruling United National Movement (UNM) and the billionaire-led opposition is seriously testing the country’s carefully-crafted reputation as a liberal economy open to foreign investment.

Only four years on from the war with Russia, Georgia has aggressively sought to overcome international perceptions as a warzone. With an economy highly dependent on foreign direct investment, which rose 37 per cent in 2011 to $1.1bn, the Georgian government promotes the country’s business-friendly legislation, the rising GDP – 6.8 per cent in the first quarter – and plaudits from multilateral institutions such as the World Bank.

A crackdown on corruption has turned the country from one of the worst-affected in the former Soviet Union to the best in less than a decade. The highlight of this fight was president Mikheil Saakashvili’s order to sack the entire traffic police force on a single day in 2005, replacing officers with some of the best university graduates. “Georgia ranks alongside Finland as having the least corrupt police force in the world,” Plamen Monovski, CEO of Renaissance Asset Managers, says.

Michael Taylor, a senior Eastern Europe analyst with Oxford Analytica, a political risk consultancy, agrees that the government deserves credit for its crackdown on low-level corruption, pointing out that today’s Georgia functions much better than the country the government inherited following the 2003 Rose Revolution.

But that’s not the whole story. While the Saakashvili administration is praised for its assault on low-level corruption its critics accuse it of autocratic excesses and corruption at the highest levels. Michael Taylor, a senior Eastern Europe analyst with Oxford Analytica, a political risk consultancy, says: “What happens at the big end, at the senior level? I don’t think much has improved there.”

The coming elections have prompted angry protests from the government’s political opponents, who sense that victories for Saakashvili in the coming autumn parliamentary election and next year’s presidential poll and his allies are no longer a forgone conclusion.

In October 2011, Georgia’s political landscape was radically altered when billionaire Bidzina Ivanishvili, Georgia’s richest man and a well-known philanthropist, announced his entrance into politics against the UNM, throwing the electoral contests wide open.

Almost immediately, Ivanishvili, who made his fortune in Russia, was stripped of his Georgian citizenship on a rarely-used technicality and branded a Kremlin proxy.

In late June, following a string of financial penalties imposed on Ivanishvili and his political allies over numerous allegations of party-funding violations, Georgia’s National Bureau of Enforcement impounded 100 per cent of Ivanishvili’s shares in Cartu Bank and 21.7 per cent in Progress Bank. Finding no buyers, the state took control of Cartu and installed new management. No members of the government were willing to talk about the case.

By using such heavy-handed tactics against its political opponents, Georgia could be undermining its reputation as a hands-off, pro-investment technocratic state. “It doesn’t look good,” says Taylor. “It sends a message that one needs good friends in Georgia to do business there.”

Yet Taylor believes that the bank seizures, while bad for the Georgian government’s international image, are mostly a distraction from a more serious problem. “A small group of people in Saakashvili’s circle control most major private enterprises in the country,” he says. “You can invest in Georgia only if you make friends with those people.”

He adds: “In the West, there’s this idea that Saakashvili has introduced competition” but this is an “illusion.”

This view is echoed in multiple studies conducted by the anti-graft NGO Transparency International Georgia. One study of competition policy in Georgia used fuel and food market segments as case studies and found both to be oligopolistic.

In a report on Georgia’s political future, Tom de Waal of the Carnegie Endowment for International Peace comes to the same conclusions, arguing that “Georgia’s economy has some shadowy places that merit deeper investigation.”

The claims that the government is using administrative and legal rulings for political purposes, go well beyond the Ivanishvili cases.

Related reading
Eurobond boost for Georgia, FT

Georgia needs a level playing field in run-up to poll, FT letters

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