Why the agreement on Russian investments is a disaster for Abkhazia
Russian investments in Abkhazia
President Aslan Bzhania submitted a draft agreement on Russian investments in Abkhazia to the parliament for consideration. However, even with a magnifying glass, it’s impossible to identify any Abkhazian interests in the agreement. The authors of the project appear to have set two main objectives:
- “On one hand, to create an unlimited tax haven in Abkhazia for large Russian companies, ensuring that all invested money is returned to the investor in full.
- On the other, to ensure that the republic’s own budget gains nothing from this influx of investment. According to the agreement, an investment is considered to be an amount of two billion rubles or more.”
The harmful impact of this project on Abkhazia and the reasons for its rejection are being discussed by the editor of “Chegemskaya Pravda” and JAMnews editor in Abkhazia, Inal Khashig, and economist Akhra Aristava.
Text of the interview:
Inal Hashig: Good day. This is “Chegemskaya Pravda”. Today we will discuss the economy, specifically investments in Abkhazia. A draft agreement on investments into the Abkhaz economy by Russian businesses has been submitted to parliament. This draft agreement is currently being discussed and reviewed by the relevant budget committee. Despite being in the initial stages of review by the budget committee, we have had the opportunity to familiarize ourselves with it. Frankly, this document raises significant concerns for us. If this document is approved in its current form, in my opinion it will be a tremendous detriment to the Abkhaz state, not just economically. Today we will discuss this draft agreement with our resident economic expert, Akhra Aristava. Hello, Akhra.
Akhra Aristava: Hello.
Inal Hashig: Let’s start with the basics. We have an investment law, if I’m not mistaken, that has been in place for about 20 years. It provides various incentives for foreign businessmen intending to invest in the Abkhaz economy. But now we have this draft agreement. I remind our viewers that after the scandal surrounding the Pitsunda dacha, parliament decided that all international agreements, intergovernmental, inter-state, interdepartmental, and so forth, must undergo parliamentary expertise before being signed. Parliamentary hearings are currently underway regarding this agreement; it has not yet been signed and is in the draft stage. We have an investment law and other acts which were signed during the time of Vladislav Ardzinba that provide incentives. Why do we need this new agreement? This raises many questions and concerns.
In this situation, knowing that our country and people need money, I consider providing incentives to be damaging to our people and state.
Akhra Aristava: We have discussed these situations several times already. Once again, thank you for the invitation. I think we should start with a signed document on harmonization. Aslan Bzhania signed it in December 2020, Alexander Ankvab. All these points are listed there, which means the Abkhaz side committed to implementing them in our national legislation in one form or another. Initially, they attempted to include all foreseeable and unforeseeable privileges for Russian foreign investors directly in the investment law you mentioned. The draft law was presented by the president’s administration, but the deputies rejected it. The second attempt was from the Ministry of Economy too. Remember the 25-year privileges? And exemption from all kinds of taxes. Deputies rejected that too. They did the right thing.
This is already the third attempt, but legislation can’t be changed. They went through international agreements, of course. I believe that first and foremost, we should know the needs of our people. Today, our pension provision practically doesn’t exist. Taking into account various citizens’ difficulties, war veterans, distinguished figures of science, culture, and art, up to 9,000,000,000 rubles are needed just for pensions. For the Ministry of Defense, due to changes in the world situation, a minimum of additional funds is needed in every direction, health care, education, at least 1,000,000,000. Even our peasants need more than 1,000,000,000 in annual investments. This means that our state budget should already exceed 25 billion rubles.
In this situation, knowing that your country, your people need money, distributing privileges, I believe this is detrimental to our people, our state. It’s very good that you remembered this law. It was adopted in 2013 on investment activities,it concerned foreign investors specifically. There were no such requirements as 1,000,000,000 rubles. This was 2013. These are privileges for super wealthy foreign oligarchs. So for our beginners in business, for example, there are no privileges. So you have to have 1,000,000,000 rubles. Then, if you invest, they will give you privileges. But that’s not the point. The point is that 11 years have passed, the law is ineffective. So there’s already a real conclusion that privileges give nothing to our country. And what’s the point of continuing to proliferate these privileges when there is no effect? In Parliament, about 10 companies have been mentioned, and only 10 took up the offer.
So, instead of concluding that privileges are ineffective, that they do not attract investors, we must find other reasons, we must carry out reforms. We have also discussed all this in previous broadcasts. Once again we are being forced to offer privileges, and specifically to Russian investors, at the expense of our national business. Meanwhile, apart from privileges already for this, already, in my opinion, there is an agreement where responsibilities are imposed on our budget. That is, we still have to compensate. Can you imagine? That is, a poor country with poor citizens who are in need.
I can’t understand signing such agreements, I can’t understand the logic of those who propose such agreements to Abkhazia.
The question arises: what is the point of such investments? They only bring problems and additional expenses, without any benefit.
Inal Hashig: Hold on, let me explain in more detail, as not everyone is familiar with this agreement project. It states that investors who invest at least 2 billion rubles are registered in a special registry and receive incentives. All building materials and equipment imported into Abkhazia are exempt from customs duties and profit tax for eight years. VAT, although paid, will be refunded from the Abkhaz budget in case the enterprise remains unprofitable. Additionally, a separate Russian bank is established for these funds, ensuring that money does not directly enter the Abkhaz economy. Russian investors will control these funds and import construction materials and equipment into Abkhazia. Russian investors also receive quotas for importing foreign labor, meaning local residents will not work in these enterprises. The legal entity established in Abkhazia must be a branch of a Russian company, not an independent legal entity.
This means that if the subsidiary earns money, taxes will be paid in Russia, not Abkhazia. According to the double taxation law, if taxes are paid in one country, they are not levied in another. Naturally, this investor will pay taxes in Russia. Moreover, an eight-year tax exemption period is excessive. Even after this period ends, there is no guarantee that we will receive any taxes from this activity. Imagine a huge factory is built on our territory, you provide all your resources to it, electricity, water supply, and other utilities as required by the agreement. The factory operates, but pays no taxes, and if it incurs losses, the Abkhaz budget will be forced to compensate them.
The question arises, what is the point of such investments? They only bring problems and additional expenses, without any benefit. This draft law affects all sectors of the Abkhaz economy: agriculture, tourism, energy, and others. For example, in tourism, many people build mini-hotels and develop their businesses at their own risk, without state support and incentives, taking loans at high interest rates. Nevertheless, they work successfully and live off their earnings. However, if a major investor with huge capital comes into this sector, paying no taxes or duties, they can crush local businesses with their low prices. Such agreements, if signed, will simply kill the local economy and businesses. Local entrepreneurs will not be able to compete with large players enjoying such incentives, and many of them will be forced to close down. Not only will our budget fail to gain any revenue from this activity, but the money our budget earns may also be lost due to the destruction of Abkhaz businesses.
Akhra, over to you.
We’re not such a wealthy country as to be helping Russia.
Akhra Aristava: I fully agree with you, Inal. Looking at this agreement, the first thing that comes to mind is the desire to develop Abkhazia without involving its citizens. From the text of the agreement, it’s clear that if bank branches come in, then insurance companies will come in, but where does Abkhaz business fit into this picture? It simply won’t exist. There’s no talk of parity either. If Russian businesses are granted such preferences and incentives, why isn’t there a similar agreement where Abkhaz businesses in Russia also receive incentives and VAT refunds from the budget? It creates the impression that we must subsidize Russia: Russian businesses earn here, repatriate capital to Russia, and pay taxes there. We’re not such a wealthy country to be helping Russia. The agreement completely ignores the history of our people, including war and blockade, and the colossal sacrifices we’ve made. We’re told we won’t receive any taxes or other income, and instead — we’ll be paying out. It feels like we’re being seen as a “guilty people” again.
Moreover, those who defend the interests of the Republic of Abkhazia and its citizens, who will suffer from such agreements, are portrayed as anti-Russian. Since the adoption of the incentives law in 2013, much time has passed, but it has proven ineffective. Production remains at the level of 7 billion rubles, exports aren’t growing. The economy is in poor shape. The main reason is the lack of access to rubles. We’re in the ruble zone, but these issues aren’t being resolved. Based on gross domestic product indicators, our National Bank should have 30 billion rubles, but it only has 6.6 billion. Last year, loans were issued totaling only 3.4 billion rubles, though it should have been 30 billion. Why does the agreement only feature Russian investors who will take loans from Russian banks, not pay taxes, and repatriate profits from Abkhazia? Where is Abkhaz business, where are our entrepreneurs? What will they do? Who will give them loans? Why is there no balance and fair competition? These questions remain unanswered.
Reading this document, I don’t get the feeling that we’re friends, friends don’t suggest such things. We are friendly countries, we are allies. I quote Vladimir Vladimirovich Putin. He always says that all countries are equal, all peoples are equal, and that we should communicate without snobbery; he even used that word, that some communicate with snobbery with small countries, which is unacceptable. But it turns out some Russian officials allow themselves to do just that. And we have a question — why is this being done?
Such agreements only foster anti-Russian sentiment. Russia is our only real partner in this world.
Inal Hashig: I have no questions for Russian officials. Russian officials included in the document everything that was in their interests. These points didn’t just fall from the sky; they were discussed and approved from the Abkhaz side as well. But the question arises: why did our representatives agree to such conditions? If the Abkhaz side remains silent and agrees, then representatives, whether the president, the minister of economy, or anyone else, simply listen to one-sided monologues. I get the impression that it’s truly a monologue. People from there [Russia], along with the Kremlin, dictate demands, and our representatives just nod along. But they represent the Abkhaz state, not a Russian governorate. We are a separate state.
This agreement should take into account Abkhaz interests. But if it lacks Abkhaz interests, why does the president’s administration present this document and submit it to parliament? The Abkhaz authorities themselves should stop and say, “Guys, friends don’t treat each other like this, are we the ones with whom you’re at war?” There’s no need to bring it to parliament if the president’s administration sees no benefit. Such agreements only foster anti-Russian sentiment. Russia is our only real partner in this world. We see them as friends. And yet some officials try to turn their personal interests into state interests, creating unnecessary problems. Why create anti-Russian sentiments in a country where there’s goodwill towards Russia? If you deprive a person of business and prospects, they’ll look at the one who deprived them and see a Russian oligarch. They’ll think, “What did I gain from such friendship?”
Thus, agreements of this kind are in fact anti-Russian policies that will lead to anti-Russian sentiment. I think we shouldn’t stay silent and muzzle those who start criticizing such agreements. For a long time we remained silent, but now we see points in the agreement that imply obligations solely from our government to the detriment of Abkhazia’s interests. And I have a question for our government. How long will you continue this behavior?
This will harm the citizens of Abkhazia. Our budget already doesn’t receive up to 8,000,000,000 rubles.
If Russian companies are provided with benefits and loans, national companies should receive an equal amount.
Akhra Aristava: I want to draw attention once again: the executive branch, led by the head of state, signed commitments on 45 issues, effectively narrowing the maneuvering room. These commitments include simplifying employment for Russian citizens, easing business operations, and energy issues. The previous parliament actively opposed and criticized this agreement on harmonization. Now that it’s signed, I address Russian officials. Our executive authority signed this, what’s the point in addressing them? Therefore, I address Russia. Why create such an agreement to the detriment of the interests of the citizens of the Republic of Abkhazia? If our citizens cannot get loans, benefits, or quickly connect to energy networks due to the lack of corresponding commitments from our government, this creates unfair and dishonest competition.
Today, any citizen of the Russian Federation can easily do business in Abkhazia, obtaining permits according to our legislation, just as Abkhaz citizens can work in Russia under Russian laws. Why impose a parallel economy now, where Abkhaz citizens are absent and only large Russian capital is present? This will harm the citizens of Abkhazia. Our budget already does not receive up to 8,000,000,000 rubles. Imagine how these funds could help children, veterans, peasants, the army. This is 8 billion now, and the losses will only continue to grow. Tax breaks are already causing real harm to our citizens today. Production hasn’t increased, the quantity of manufactured goods hasn’t increased, sales haven’t increased. There are confirmed facts to support this. The Statistics Office confirms this. There’s no arguing with this. Why continue to introduce new tax breaks?
This also applies to Russian investments in the Republic of Abkhazia. Russian investments are present in small, medium, and large businesses, and there are no obstacles to investing in Abkhazia. Some activities, such as apartments, may harm the national interests of the Republic of Abkhazia, but we don’t oppose it when Russian citizens come, build hotels, and no one interferes with them. This misrepresents us in Russia, as if we are against something. I have always advocated for fair competition and equal conditions for all companies. If Russian companies are provided with benefits and loans, then national companies should receive the same amount. This would be friendship and fair competition. We don’t mind Russian companies making a profit in Abkhazia, but we oppose 100% of the profits going to Russia. Why are we left without money? What have we done to deserve this?
As for strategic partnership and alliance, the Republic of Abkhazia fulfills all its commitments honestly. We stand alongside the Russian Federation. Depriving us of business, siphoning away income, depriving our citizens, children, elderly, and veterans of funds through these tax breaks and VAT refund schemes, I believe this is offensive and damaging to our friendly relations with Russia. I can’t imagine, for example, the company Akvafon deciding to open its office in Russia. Will they be provided with a preferential program for 25 or even 8 years? Will VAT on imported equipment be compensated or other permits issued quickly? I find it hard to imagine. Yes, we are not asking for such privileges. I don’t recall the Republic of Abkhazia ever making such requests to Russia, because it would be interference in internal affairs. Against the backdrop of tax increases in Russia, such as personal income tax and corporate tax (18% in Russia before, 20% now), we cannot afford it.
We have many young families without housing, citizens in poverty, many sick children, and citizens in need. Our veterans also need assistance. We cannot afford such tax breaks. Why do we need this? This is an unbalanced decision. If our executive authority couldn’t protect us, then the entire Russian leadership should know that we are a friendly country. Energy issues should also be considered, as should the issue of privatization access. The increase in tariffs in our country means increased costs for businesses and our citizens. If everyone paid their bills, it would be almost 6 trillion rubles. Given that the average income is 15 billion, which includes income from all salaries and other sources, it is spent on energy. However, I and many others do not support such a policy, as shown by public opinion polls. Trust in the executive branch is extremely low—around 10%, especially on current issues. I believe these issues should be postponed.
If a candidate wants to include it in their program, promising to fight for privileges for Russian citizens, for the construction of apartments, they can turn to the public. Personally, I am sure that deputies will not support these initiatives, as they have not supported other proposals for tax breaks before. If a candidate who advocates for the interests of Russian oligarchs and privileges for them wins, I swear I will be silent like a fish, if that is the will of our citizens. I believe we are at an impasse on economic issues, and we need to review economic relations with the Russian Federation. This should be done after the elections, considering the people’s opinion expressed in the presidential elections in seven to eight months. Accordingly, it is important to determine the program that the people will support and to resolve issues of mutual trade, investments, and the Russian ruble, issues necessary for the development of the Republic of Abkhazia and ensuring the possibility of citizens taking out long-term loans.
Without this, there will be no development of agriculture and production. As Vladimir Putin noted, Abkhazians are our fraternal people, and this should be reflected in documents and agreements that translate into real action. I believe it is better to consider these issues after the elections, when it becomes clear which program and team will win. For now, it’s better to avoid societal unrest and postpone these issues until after the election period.
Inal Hashig: However, if we see a threat to Abkhazia’s sovereignty and a situation where our Abkhaz project is beginning to collapse, we should not sit by silently. The state authority of Abkhazia should not be limited to simply executing another state’s agenda, even if it is friendly. The main task of the Abkhaz state is to protect the interests and security of its own citizens.
The Prime Minister of Georgia declares that “Abkhazia will be part of [Georgia] by 2030.” Are we prepared for this?
Akhra Aristava: Considering the results of the polls, I am confident that such a policy will not garner support from the people. I hope a reasonable state, oriented towards national interests, will emerge. However, Inal, your remarks about undermining sovereignty and statehood are valid because these are the ideals we fought for, defending the interests of our people. If we cannot provide for the army, pensions, and basic justice, then the state collapses and loses sovereignty and stability. Practice shows that tax breaks often do not yield the desired results. Let me return to the issue of efficiency and provide an example. In 1992-1993, there was a government actively addressing the need for 20,000 rifles, 1,000,000 rounds of ammunition, and 100,000 shells. People went and found solutions. I mentioned the need for a budget of 24 billion not as fantasy, but as a task we must solve so people can live safely, have prospects, and feel comfortable in a socially just society. These are all soluble issues. The country’s cash flow has tripled, exceeding 150 billion rubles, thanks to Russian tourists, which opens up prospects for us. Instead of solving these problems and increasing the budget by 1 billion rubles per year, presenting it as an achievement, we need to seek more effective solutions, adding not 1 billion, but 10 billion or 15 billion.
For example, we see changes in wars and the current situation, including Georgia’s approach to China, the transfer of the port of Anaklia thereto, and signing a strategic partnership with the United States. Right now, there is a question: the Prime Minister of Georgia declares that “Abkhazia will be part of Georgia by 2030.” Are we prepared for this? Are we prepared to finance our army with more than 2 billion rubles annually? And yet the authorities are handing out tax breaks. How do we understand this? It’s as if your children were hungry at home, and you were giving millions to your neighbors. It’s senseless. Abkhazia cannot afford to give so many privileges to Russian business. Abkhazia is too poor to afford such expenses.
I am in favor of reducing some taxes, for example, the corporate tax from 20% to 10%. But why does the government do 0%? If you come to the Ministry of Finance, they give you a gift amount for business. I am sure these tax breaks will exceed 10 billion rubles. If you are giving a gift of 10 billion rubles, ask for at least 10 billion for 10-15 years for your people to protect them. The question of the ruble is not worth it, the question of loans is not worth it. How did you feel reading the document? Except for Russian interests and Abkhaz losses, there is nothing there. If someone behind Abkhazia tries to determine our fate, we must know this. Or through the Russian Ministry of Foreign Affairs, we have an agreement on a coordinated policy. We must be prepared for any scenario.
Inal Hashig: I hope our legislators will say “no” to this agreement. This document clearly harms the Abkhaz side. I hope the legislation we have on investments will be sufficient. Now, in my opinion, there is no reason to introduce any benefits for investors given the current economic situation. We should probably strive to equalize the situation in the economy and in rights. We should also focus on effective management of our own resources.
Let’s wrap up. Remember, you can watch our show on the “Chegem Truth” channel. Also, subscribe to our Facebook pages and read us on the “Chegem Truth” website. Also check out my Telegram channel. You can read my comments on my personal blog “Inal Hashig. Chegem Truth”. Again, Akhra Aristava has been our guest.
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