Lessons of de-oligarchization: Main achievements and failures of changes in Georgia

Author : Oleksandr Kupatadze

Source : 112 Ukraine

The gap in state-business relations of the post-Soviet countries is impossible without a complete change of political elite
17:52, 23 March 2017

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What should a post-Soviet country do to break the cycle of corruption, nepotism and impunity?

The example of Estonia in the early 1990s and more recent Georgian experience shows that this requires a radical reform of "big bang" type.

These two examples also suggests that gap close relationship between government and business (at least temporarily) is necessary but not sufficient condition for successful reforms in post-Soviet Eurasia.

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Particularly significant is the experience of Georgia, where the most radical reforms took place in the years 2004-2008, when relations between government and business was particularly weak.

Equally important in the Georgian example were subsequent events, when new officials developed their own selfish interests.

This was evident in the period from 2008 to 2012, when state-business relations were restored, and the state apparatus increasingly manipulated in favor of private and group interests. These interests violated market competition, and the ruling elite from government of Saakashvili has used state power in order to control the economic and political structures.

To understand the interaction between government and business in times of Mikheil Saakashvili, we should consider the situation to the Rose Revolution. On the eve of the revolution, Georgian oligarchic class consisted of the richest businessmen, vitally related with the then president Eduard Shevardnadze.

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Counter-elite, headed by Saakashvili, has been linked with big business only peripherally and had only one or two financial donors, such as natural gas trader David Bezuashvili. This meant that

future elite had less economic interests related to the period of the most radical reforms (2004-2007 years).

Parliament, elected in 2004, mostly comprised of young activists of United National Movement (UNM). Only a few businessmen could be seen in the ranks of the ruling party UNM.

However, most oligarchs of Shevardnadze times were prosecuted. To preserve freedom, they had to pay large sums of money in the state treasury (eg, Gia Dzhohaberidze, the owner of the biggest Georgian mobile operator and Shevardnadze son-in-law was released only after paying $ 15.5 million) and implement "voluntary transfer of shares ownership" or state or person affiliated with the team power.

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In the years 2004-2012, according to the prosecutor's office, 9500 objects of private property were donated to the state, which naturally makes to think about how "voluntary" was this transfer.

There was no unified policy or statute that would apply to all oligarchs, and each case was considered separately.

Some oligarchs of Shevardnadze times have lost much of their assets (for example, Nugzar Shevardnadze, the nephew of the former president), but others (such as Gia Dzhohaberidze, son Shevardnadze whether Vakhtang Rcheushvili, former deputy speaker and owner of construction business) remained afloat.

This process is commonly called "state extortion." But it differed from simple rading or corruption schemes with one important feature - instead of having to go to private pockets, money went in favor of the impoverished country and helped pay the salaries of officials and provide large infrastructure projects.

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However, it went in favor of UNM, the political party in power, and helped strengthen its influence on the state. Some of the companies, previously owned by oligarchs, went into the hands of insiders after re-privatization.

Companies often paid large sums to the treasures of a political party in exchange for favorable treatment from the state.

When the process of redistribution expired in 2007-2008, Saakashvili and the government could not implement effective institutions capable of ensuring separation of business and politics.

Indeed, a small economy like Georgia cannot accommodate many oligarchs. It was not the usual enrichment of a number of officials, since it involved the creation of permanent monopolies in different markets and misappropriation of enterprises through blackmail and abuse of the criminal justice system.

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Although some individuals won litigation against the Georgian prosecutor's office in 2014-2015 years (e.g. Kezerashvili, former Defense Minister), nothing could explain their sudden appearance among large business owners. Thus, the court decisions in their favor says more about the bad study of cases and the failure of law enforcement system of Georgia than the absence of corruption.

In general, we can confidently say that Saakashvili's policy was aimed at attracting business to build a stronger state, not on breaking the link between the state and the business.

"The new oligarchs" coexisted with some "old" oligarchs in order to finance UNM after the Rose Revolution. Unlike parliament, elected in 2004, in 2008 UNM already included a number of wealthy businessmen. It is believed that the state government had signed agreements with "friendly" companies in exchange for political support.

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Owners of these companies could be seen among the key financial donors of ruling UNM.

And despite the fact that corruption has declined sharply in sectors where government interacts with citizens (receiving documents issued by the state patrol police, licensing, regulation and monitoring of tax small businesses), state-business relations that recovered, negated some of the key developments of transparency, such as e-procurement, public procurement.

In 2012, Transparency International Georgia has determined that the number of secret collusion between politicians and businessmen, who were a major problem of Saakashvili’s government, significantly decreased.

Extortion of money in business is not necessary for the practice of the current government, because "Georgian Dream", the ruling party, was funded by Bidzina Ivanishvili, Georgia's richest man. Ivanishvili, who amassed his fortune in Russia in the early post-Soviet period, financed Saakashvili administration management reform in the aftermath of the Rose Revolution. He declared his political ambitions after a conflict with Mikheil Saakashvili in 2012. This is an example of a personal vendetta of businessman against the political ruler.

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One important consequence of the concentration of political power in the hands of the rich is that the authorities do not need to create corrupted schemes, as it did their predecessors for redistribution of public resources.

However secret negotiations between politics and business continues to be a significant problem; the companies often win public tenders and provide government treasury funds of a political party "Georgian Dream". However, today corruption is more "privatized": some companies and networks influence the behavior of the state to obtain personal gain.

In addition, the anti-corruption fight of "Georgian Dream" mainly affects members of Saakashvili’s government. Since October 2012, there was no loud litigation regarding corruption in the ranks of the current government.

The question is: what does it mean for Ukraine?

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The gap in state-business relations in the post-Soviet context is unlikely without a complete change of political elite (which was included in the literature on corruption called "Big Bang").

The example of Estonia and Georgia shows that a radical break with the past is necessary. It cannot be carried by fragmented elite and corrupt remnants of previous regimes.

In Ukraine, it is not a realistic option. The declared goal of "decentralization" does not help because local government can easily be undermined by corrupt networks.

Yet Ukraine has good chances thanks to the effective civil society, which could provide the necessary impetus to reform.

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Agreement with the EU alone will not lead to change. Moreover, examples of Georgia and Estonia show that the Western advices are often contradictory to what actually works (e.g., West advised Saakashvili to be less radical).

But civil society can be indispensable in carrying out pressure on elites and maintenance of such necessary changes. This pressure, combined with regulatory and structural strength of the EU can be transformational.

However, be aware that Ukrainian slow reform gives opponents more chances to change.

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