OREANDA-NEWS. Standard & Poor's Ratings Services said today that deteriorating relations between the Government of Georgia (B+/Positive/B) and The Russian Federation (foreign currency BBB+/Stable/A-2; local currency A-/Stable/A-2) may threaten the positive ratings outlook on Georgia.

Despite the release of the Russian officers on Oct. 2, 2006, in an attempt to defuse the growing crisis between the two countries, Russia has now imposed a ban on all transport to Georgia, including postal services. Although it remains to be seen how long this ban will be in place, it has the potential to damage economic ties between the two countries severely, and may eventually affect the sovereign credit ratings on Georgia.

Russia is Georgia's largest single trading partner: it was the source of 16.6% of total Georgian imports in January-July 2006, and the destination for 11.2% of Georgian exports. A prolonged suspension in trading links would therefore have negative consequences on the Georgian economy, which was previously expected to grow by 6.2% in real terms in 2006, even after trade disputes with Russia over energy and wine earlier this year.

Georgia's current account deficit, already expected to be fairly high at 11% of GDP by year-end 2006, would also be adversely affected, particularly if remittances from Georgians working in Russia (estimated at about 4.7% of GDP) were significantly reduced.

Standard & Poor's will continue to monitor the situation closely, because it has the potential to curtail the positive momentum behind Georgia's creditworthiness.