Foreign Policy Research Institute A Nation Must Think Before it Acts Georgia’s Latest Banking Scandal Tests the Limits of its Democratic Institutions
Georgia’s Latest Banking Scandal Tests the Limits of its Democratic Institutions

Georgia’s Latest Banking Scandal Tests the Limits of its Democratic Institutions

In February 2019, the Government of Georgia hit a new low when news of its “attack” on TBC Bank, one of the biggest banks in the country, became public. The National Bank of Georgia and the Prosecutor’s Office confronted TBC Bank, a member of FTSE 250 and one of the most successful business projects in Georgia since its independence, and its founder Mamuka Khazaradze. Khazaradze is also a founder of the Anaklia Development Consortium, which is constructing the first deep sea port in Georgia. The achievements of the TBC group epitomize the success of market economy in post-Communist Georgia. However, the government accuses the bank of financial misconduct and possible money laundering.

The official allegations date back to one single transaction made in 2008 during the August crisis and the global financial meltdown. Government officials argue that the bank violated established rules of financial conduct and conducted illegal operations. However, the case is 11 years old and the statute of limitations for it expired five years ago. Consequently, the National Bank of Georgia has breached the law by filing the case against the private bank. At the same time, international law firm Dentons conducted an examination of files and ruled out any money laundering allegations. According to Khazaradze himself, PwC did conduct an audit of the bank, and the company did not find any wrongdoing or traces of any misconduct. Alongside breaching the law, the government policies directly threaten one of the most important investment projects in Georgia: the deep sea port in Anaklia.

The Ankalia project has strategic importance for Georgia’s economy and the country’s status as a trade hub between Europe and Asia. Georgian ports currently have the capacity to receive approximately 25% of the world trading fleet, as Poti, the biggest port in the country is only 9 meters in depth. Anaklia (20 meters) will allow Georgia to service cargo ships with capacity of 1400 tons and more. Another benefit of the port could be enhanced interaction between Georgian and Abkhaz communities as the town is next to the Inguri line that divides Georgia and Abkhazia. Considering the economic and political significance of the project, the government’s actions are causing distrust. Such an admonition from the government has wider repercussions for Georgia’s geopolitical status and economic prosperity. Attacking TBC Bank looks and sounds like a political doggerel that endangers Georgia’s economic standings and investment climate.

After filing the case against the bank, the government gradually raised the issue of the Anaklia project. Minister for Infrastructure and Regional Development Maia Tskitishvili addressed the parliament arguing that the state could possibly review the previous decision that granted the project to the Consortium and could look for other potential investors in case the Consortium is unable to successfully complete the project. The government is putting undue pressure on the business, while assuring the public that it supports construction of the new port. Recently, the government hired the law firm White & Case to calculate the risks and costs if it decides to cancel the contract with the Consortium. Notably, it is paying USD 80,000 in taxpayer money to examine the government policy that could have negative economic and political consequences. It could set a harmful precedent allowing the government to shirk its commitments. It could be that the government intends to punish a Georgian business project that has international ambitions and initiatives. But more importantly, the government’s actions show that the rule of law is being threatened in what is supposed to be a liberal democracy by signalling that it wishes to repeal the legally binding agreement.

Georgian Democracy in a Bind

A few weeks ago, Tom De Waal argued that the main threat to Georgia lies within the country itself. Indeed, recent developments prove De Waal’s point because abuse of power is threatening Georgia’s strategic interests and jeopardizing country’s banking system. The government is putting pressure on projects that make Georgia a success story and a reliable partner. It threatens the initiatives that have potential to attract its breakaway regions. By intimidating businesses, the government sends wrong messages to potential investors and endangers economic growth at home.

Such an error of judgment points to the issues related to the rule of law and impoverishing democracy. According to the Economist Intelligence Unit, Georgia’s democratic trajectory has improved, but, at the same time, “oligarchic actors” holding excessive influence limit pluralism. In other words, the line for what is right are blurring. Georgia seems to be sliding toward what Larry Diamond calls “postmodern autocracy”—a regime that leaves the shell of democratic institutions untouched but deprives the country of pluralist essence, making it nearly impossible to defeat the ruling party through normal political process.

The National Bank and the Prosecutor’s Office are breaching the law and tearing down accepted norms. Parliament is dominated by the ruling party, Georgian Dream (GD), and oligarchic actors have predominant access to certain institutions including the judiciary. The lack of rule of law has been rising as the biggest challenge to Georgia’s democracy. The current showdown against TBC leaves many unanswered questions, including the economic and political costs of the case. Hence, as the ruling party concentrates on power, the policy priorities start to change, and the country ends up transforming into a postmodern autocracy where checks and balances exist as a façade and could not serve as guardrails of liberal democracy.

These issues are not necessarily new for Georgia. Diamond argues that democratic problems in Georgia started in 2008 when there were cases of fraud and executive abuse during the elections. The United National Movement (UNM), the ruling party at the time, downplayed the importance of independent institutions, and, as a result, it lost parliamentary elections in 2012 and the presidential election in 2013. Yet, in 2012, the new coalition led by GD and Bidzina Ivanishvili had an opportunity to endorse democratic changes. As Douglas North states, “Institutions establish the cooperative and competitive incentives in society by virtue of their norms, rules and procedures” and are designed to constrain the behaviour of individuals in the interests of social order and well-being of a society. However, instead of strengthening core institutions, the GD continued the UNM’s endless constitutional amendments. It has disenfranchised the public further by abolishing direct presidential elections. The GD mishandled the reform of judiciary and was unable to reduce economic inequality.

With hindsight, one can argue that the GD prioritized the strengthening of power rather than institutions. Instead of building an inclusive society and searching for a consensus, it continued polarizing of the political process. Campaigns promoting restoration of justice and economic prosperity were impossible to bring to fruition due to lack of democracy and political will to implement the next phase of reforms. Despite its promises, the GD continued to set up a strictly hierarchical political party based on unconditional loyalty to its founder. The GD was able to reduce political participation as it vilified the opposition. The lack of political engagement caused the need of further consolidation of power and has resulted in the crisis of governance.

Georgian society has a choice to either plunge into crisis with the GD’s postmodern autocracy or stand up for the values and freedom, for the successes and accomplishments Georgians have achieved in recent decades. They can demand that the financial system be protected and force the government to comply with rules and norms of liberal democracy. The TBC/Anaklia case is a test that has to be passed successfully. Now, society needs to teach a lesson of power-sharing to its government and informal rulers. It has to protect the institutions and improve the rule of law to uphold to principles of freedom and pluralism. Georgia’s society should understand that protecting private businesses from undue pressure is the only guarantee of freedom and rule of law. In other words, if the government is allowed to intervene unlawfully in private business projects, then, tomorrow, it could reach out to other more vulnerable groups.