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Over , ethnic Georgians were forcibly displaced in the fighting; some 50, have since returned. Today, Abkhazia has about , people and little industry besides tourism. It also borders Russia, but most of its 4, sq km territory is landlocked high in the mountains, at a strategic juncture of the North and South Caucasus.

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Those of working age among its 30, inhabitants are employed mainly in agriculture and in support of the Russian military presence there. Hide Footnote Long-festering ethnic tensions turned violent as the Soviet Union disintegrated in the early s. Wars erupted in in South Ossetia and the following year in Abkhazia. In , amid an escalation of political and military tensions between Tbilisi and Tskhinvali, and against the backdrop of a diplomatic crisis between Tbilisi and Moscow, Russia deployed its army into the breakaway regions, as well as parts of Georgia, and recognised the independence of both Abkhazia and South Ossetia.

The Abkhaz and South Ossetians, along with the Russians, see this as a result of Georgian aggression, while most Georgians blame Moscow for its military intervention. Hide Footnote. A truce, though often uneasy, has held since then. Tbilisi sees the lines as administrative boundaries within Georgia; Sukhumi, Tskhinvali and Moscow insist they are international borders.

Abkhaz and Ossetians disagree, citing the need for security guarantees from Moscow against Tbilisi. Links between Georgia proper and the breakaway regions are limited. Ethnic Georgians, who inhabit a pocket in each of the entities — the Gali district in Abkhazia and the Akhalgori district in South Ossetia — account for most such cooperation. Ossetians refer to Akhalgori as Leningor. De facto officials and residents of the entities criticise what they see as their international isolation.

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Hide Footnote In the past two years, the conditions for ethnic Georgians in both breakaway republics have greatly deteriorated. Talks to resolve the conflicts are stalled. But these meetings function to manage rather than resolve the conflicts; they are not mandated to deal with issues related to the status of the breakaway regions and in practice discussions often fail to address even issues such as international security arrangements or the return of displaced people.

There are no formal talks between Tbilisi and the seats of Abkhaz and South Ossetian self-rule. Conversations that do take place are ad hoc and usually unofficial. Since , it has pursued a so-called engagement policy to support those living in the breakaway regions with medical and education assistance. But in practice its efforts in these areas often collide with or are sidelined by actions it takes to further its non-recognition policy. For years Western allies have encouraged Georgian leaders to soften the law, in order to afford international humanitarian organisations greater access to the breakaway areas and encourage trade and freedom of movement, but Georgians from across the political spectrum have resisted making any such changes.

For its part, Moscow insists its role is to act mainly as a security guarantor and mediator. Both Sukhumi and Tskhinvali depend on Russian security and financial aid. The triangular dynamic among Georgia, Russia and the breakaway regions hinders cooperation. Tbilisi blames Moscow for the conflict, though some in Georgia admit the Georgian-Abkhaz and Georgian-Ossetian conflicts would not go away even were Tbilisi and Moscow to find common ground.

Tbilisi is loath to put itself on a par with the de facto authorities in Sukhumi and Tskhinvali, whom it views as Russian puppets. Hide Footnote Moscow, while saying that Georgians, Abkhaz and South Ossetians must work out their differences among themselves, eyes any actual exchanges warily. Notwithstanding the political gridlock, openings may exist for increased trade between Georgia and the breakaway regions and between those regions and the outside world. For years, goods have trickled over the conflict divides between Georgia-controlled territory and the breakaway regions.

At the same time, and despite occasional violent outbursts and regular exchanges of hostile rhetoric, fears of major bloodshed have greatly subsided over the past decade.

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Notwithstanding the distrust among the conflict parties, the relative quiet has prompted thinking about increased cooperation, with trade first on the agenda. This report examines and offers ideas on how to advance these initiatives. Research involved interviews with officials, diplomats and analysts, as well as businessmen and consumers, between May May in Georgia-controlled territory, in South Ossetia and Abkhazia, as well as in Brussels and Moscow.

According to Georgian law, there can be no trade between Georgian-controlled territory and the breakaway republics — or between those republics and the outside world. Since the wars of the early s, Tbilisi has denied the legitimacy of the de facto authorities in Sukhumi and Tskhinvali and refused to recognise their regulations. It rejects the customs declarations, certificates of origin and other paperwork issued by those authorities. Hide Footnote But it bans products with Abkhaz and South Ossetian labels from the shelves of Georgian shops because they lack proper documentation, including certificates of origin.

Hide Footnote It also fines anyone selling Russian products that have arrived via the breakaway territories, on the grounds that those goods have bypassed Georgian customs. In one case in March , Georgian officials fined a villager from Tserovani named Olga Pavliashvili for carrying Russian-produced sour cream, candies, canned beef and fruit drink mix from Akhalgori into Georgian-controlled territory. The officials apparently suspected her of intent to sell these products without paying duties.

The charges were dropped after media reports prompted higher-level officials to intervene. Locals spoke of other instances when Georgian police summarily confiscated goods. Tbilisi is likewise tough on efforts by Abkhaz and South Ossetian businesses to make deals with foreign companies, fearing a slippery slope toward recognition of the breakaway entities.

Russia and other CIS states adopted the sanctions to pressure the Abkhaz side into implementing political agreements, foremost among them the return of displaced ethnic Georgians to the breakaway region. Russia in effect sustained the sanctions until the early s.

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It resumed official trade in the spring of , five months before the war with Georgia, claiming the Abkhaz side had fulfilled its obligations. Hide Footnote Its Law on Occupied Territories tightened existing trade restrictions and introduced new ones, stipulating, among other things, that any foreign company wishing to do business in Abkhazia and South Ossetia must obtain a special permit from the Georgian government. Prospective investors in the breakaway regions must also get the permit, as must anyone seeking to transport goods by sea or overland through the de facto entities to Russia.

Tbilisi does not see these requirements as onerous. Hide Footnote But according to official data, not a single company engaged in trade has applied for the permit. The majority related to the Enguri hydropower plant, the only joint enterprise of the Georgian and Abkhaz sides.

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Hide Footnote Meanwhile, the Georgian government has sanctioned foreign companies opening offices in the breakaway regions without the permit and sought to prevent businesses in those regions from conducting outreach abroad. Abkhaz and South Ossetian regulations are similarly restrictive. Officially, goods are also banned from moving in the opposite direction. The only exception is Abkhaz hazelnut exports, which the de facto leadership authorised in Sukhumi banned this trade in after clashes with Georgian forces in the Kodori gorge, but informally locals continued to export hazelnuts to Georgia-controlled territory.

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In August , the de facto president signed a decree authorising collection of fees on hazelnut shipments crossing the checkpoint on the Inguri bridge. Despite these constraints, trade between the breakaway regions and both Georgia and the outside world is growing.

The uptick is largely due to rising demand for cheap consumer goods amid the economic downturn in Russia. Abkhazia and South Ossetia use the Russian ruble, which has declined in value with the fall in oil prices and the sanctions imposed on Russia in due to its intervention in Ukraine, thus diminishing the purchasing power of Abkhaz and South Ossetians. The breakaway regions traditionally have relied on locally produced goods or Russian imports, both of which are more expensive than commodities from elsewhere.

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The increased trade supports links between individuals and communities in Abkhazia and South Ossetia and Georgia-controlled areas. But because it is all informal, it has fuelled corruption and strengthened grey economy networks. Ten years ago, no one wanted to marry Vato. Hide Footnote Back then he was hauling firewood in an old truck, the sole breadwinner for his elderly parents and siblings, poor ethnic Georgians living in South Ossetia.

Today, he is one of the wealthiest people in the settlement of internally displaced persons IDPs where he lives. Every day, the year-old climbs into his van and delivers some three tonnes of food from markets in Georgia to customers in South Ossetia. In one day he can earn twice what his friends make in a month. He and his wife have two sons and a savings account; they own two apartments in a fashionable Tbilisi district and a small house in the IDP settlement. He made his fortune in trade that, officially, does not exist.