Abkhazia: getting rich without Russia

It probably crossed Raul Khajinba’s mind that he should leave things the way they are, especially since the Abkhaz community is rather conservative and finds it difficult to make any changes.

And even if they did, that was then and this is now. In 2016, the Abkhaz leader no longer has such a luxury. In 2015, Sukhum received just 7% of the 4 billion RUB ($57 million US) promised from Moscow.

In 2009-2014, over 15 billion RUB [$211 million US] was transferred from the Russian budget as part of its complex assistance plan to Abkhazia for socio-economic development purposes. Of course, these funds were spent on the construction of hospitals, schools, cultural places and stadiums.

New stadium in Sukhum

However, what the republic is left with is an economy that strongly depends on Russian aid, as well as a lackadaisical officialdom, which is unwilling to make any changes.

The amount of Russian financial aid seems to be shrinking now, and Abkhazia will have to find a way out on its own.

In the beginning of 2016, Raul Khajimba announced the launch of radical reforms, which were aimed at “making Abkhazia self-reliant and the country’s budget unsubsidized

How is he going to achieve this?

                                                      1. By increasing taxes

The first step was to change the tax system, which had already been approved by the Parliament. Earlier, imported goods were levied only by a customs duty, whereas now, business men also have to pay a 10% Value Added Tax (VAT).

The government believes that this is going to protect Abkhaz manufacturers against cheap imports, will enable local products to compete and be developed, as well as will increase tax revenues by 1 billion RUB.

According to 2015 statistical data, the volume of import in Abkhazia almost six times exceeds the export volume and therefore, the development of local production is a very topical issue.

Something new is expected, first of all, to better the lot of foodstuffs producing enterprises, such as the Sukhum dairy factory.

Having been reconstructed and re-equipped with modern technologies at the expense of Russian financial assistance, this enterprise was pompously launched two years ago. However, having failed to compete with imported dairy products, the factory ceased operation a few months later.

Introduction of VAT on imports will also help the producers of building materials to regain their feet. Until present, these had been Russian and Turkish goods, holding a lion’s share of the market, and similar local products were unable to compete with them. Whereas now, the Economic Ministry promises to change this imbalance.

Another reason for the introduction of VAT on imports (which the government prefers not to discuss in public) is the impossible situation of controlling the turnover of trade enterprises. For so many years only large shops had the practice of using cash registers. Whereas in the rest of shops, goods are sold unregistered and the taxes in no way correspond to the actual turnover.

Naturally, trade companies were not over-enthusiastic about these new business rules. Protest rallies were organized outside the Parliament building, demanding the abolition of a VAT on import. However, the only thing that the picketers managed to achieve was cutting down the list of goods subject to VAT.

2. By increasing the revenue budget

For the first time ever, Abkhazia has an ambitious budget this year, 2016 – the share of independant funds (excluding Russian subsidies) is expected to double in comparison to the past few years.

The country’s revenues in the past three years did not exceed 3 billion RUB [$43million US], whereas now the bar has been raised up to 6 billion RUB.

The government is going to reach that marker through quality administration, and, most importantly, through the legalization of the ‘shadow’ economy, which makes 50% of the economy in the republic.

“It’s a very hard but achievable task to ensure that it is more beneficial for business to pay taxes rather than to spoon-feed officials, says Beslan Tsvinaria, Head of the Parliament’s Budget Committee.

Tax code amendments (described above) and radical reform of the accounting system (that is going to be announced in the near future) are named by the government as the key steps that need to be taken in order to achieve this goal.

Another measure taken will be the adoption of a law on mandatory public tenders for government contracts.

At the end of last year, the government of Abkhazia approved the Socio-economic Development Strategy and pledged to soon adopt the development program which had plans for action in various spheres.

3. By imposing control over expenditure budget

The State Treasury was established in Abkhazia in February this year with the aim of controlling budget expenditures.

The Economy Ministry confirms that the funds from the budget are too often spent based on official’s preferences, rather than according to an approved estimate and are sometimes ‘lost’ in different schemes. The Treasury is expected to impose control over this process, which will be a tough task, making it transparent for the public.

4. By downsizing the number of officials

The staff of Abkhazia’s budgetary organizations was downsized by almost 15 percent as early as last year. However, in the situation, where there are still two managers per employee in the real sector of economy, such downsizing looks like a band-aid solution.

“Raul Khajimba actually has no other choice but to limit official’s appetites, and, at the same time, to lead the economy out of the “shade, especially as signatures to hold a referendum on the president’s early resignation are already being collected. Without a tangible progress for replenishing the country’s budget and without effective measures against corruption, the President’s chances are scarce that he will remain in his post,’- says Ibrahim Chkadua, a publicist.

For Raul Khajimba, the year 2016 will be the toughest and most tense period in his presidency.

Politicians and businessmen, who have gotten used to living under the legal radar, can resist his innovations by portraying him as an unpopular leader.

However, the successful implementation of the economic reforms seems to be the only means through which the Abkhaz President can remain in power.

The opinions expressed in the article convey the author’s terminology and visions and not necessarily reflect the editorial staff’s position

Published: 24.03.2016