Not so long ago, Georgia’s economic narrative was simple and clear. Under president Mikheil Saakashvili, who took power in 2003 after a bloodless revolution, the Caucasus country slowly grew into its skin.
Saakashvili was brash and ambitious, sometimes gratingly so, but he slashed taxes, weeded out corruption and turned a dissolute former Soviet state with an empty treasury into a modern, services based economy.
Investors quickly took note. Georgia’s economy was and is tiny — smaller than, say, Afghanistan’s or Gabon’s — but it quickly became a byword for openness, honesty and transparency.
By the time Saakashvili left office a decade later, an ultra-low tax regime had transformed Georgia into a transshipment hub, serving regional economies from Azerbaijan to Dagestan and Uzbekistan to Chechnya. Former finance minister Dimitri Gvindadze describes the country as “the business and financial centre of the region”, thanks to a “small, pro-business government that is free of corruption and a simple tax administration that has little bureaucratic overhang”.
Saakashvili’s attempts to slim the state suggested the thinking of a libertarian. In July 2011 his government passed the Economic Liberty Act, committing the state to never controlling more than 30% of total economic output. That bill remained firmly in place following a bruising electoral defeat for the ruling United National Movement (UNM) party in 2012, and Saakashvili’s own departure a year later.
Many fretted about his replacement as president, Bidzina Ivanishvili, whose hastily assembled Georgian Dream coalition was a curious composite of six diverse political groups, ranging from radical nationalists to pro-business, Western-leaning liberals. Some feared his wealth: the country’s richest man, Ivanishvili made his fortune in Russia, knotting together a fortune based on banking and metals following the collapse of the Soviet Union. Others feared his background, viewing him as a stooge of the Kremlin.
Business as usual
Yet most of these concerns have been assuaged. Ivanishvili remains a prominent voice in both economic and political terms. After serving as premier for 13 months, he stood aside in November 2013 to make way for a long-time ally and business associate, Irakli Garibashvili.
If there is a schism between previous and current governments in ideological or economic terms, it’s hard to see. If anything,
the mantra of leading Georgian Dream officials remains ‘business as usual’. Since Saakashvili was hounded first out of office, then out of the country, very little appears to have changed. The former president is persona non grata in Georgia, thanks to the August 2014 issuance of an official arrest warrant for alleged abuse of power — allegations the UNM dismisses as politically motivated. Yet his longstanding adherence to a reformist economy devoted to serving the people lives on.
Nowhere is this easier to see in operation than in the World Bank’s Doing Business report. Between 2005 and 2015, Georgia’s ranking in the annual survey jumped more than 60 rungs, to 15th place, squeezing it between Germany and Canada. Over the past decade, the time taken to start a new business has been cut to four days from 19. No other country in the world makes it easier to register property, while just two make it simpler to secure construction permits — a perennial problem across the rest of the former Soviet Union.
It is Georgia’s success in these rankings, and the kudos it generates in the global development community, that has encouraged regional leaders such as Kazakhstan president Nursultan Nazarbayev to ease domestic business processes radically. “Georgia is a unique place in the region,” says Baris Efe, director, Turkey and central Asia, at Barclays. “It’s open and in economic terms very liberal-minded. It’s an investor-friendly destination, and it’s perfectly placed geographically, a natural gateway west to Europe and east to the rest of the region.”
Radical economic thinking
So far, Georgia’s radical approach to economic thinking is working. Gross domestic product expanded by 3.2% year-on-year in the first quarter of 2015, according to central statistics agency Geostat, with inflation remaining at a manageable rate of around 2.5%. In its annual Regional Economic Prospects report, issued in January, the European Bank for Reconstruction and Development tipped the economy to grow by 4.2% in 2015 (against a regional average contraction of 0.3%), having expanded by 5% in 2014 and 4.2% in 2013.
In some ways, Georgia’s progress has been fortuitous. Its ultra-low tax burden ensures that it retains a core group of loyal investors. As an energy-scarce economy, it benefits when oil prices tumble, as they did in the final months of last year, remaining relatively low through the first four months of 2015.
The private sector has taken rather longer to develop, in large part due to the lack of sizeable corporates. A few deals have trickled through to the capital markets. In June 2014 the country’s largest retail lender, TBC Bank, whose shareholders include JP Morgan, Germany’s DEG, the EBRD and investment manager Ashmore, raised $238.7m by selling 18.4m global depositary receipts in its London initial public offering.
Julian Macedo, co-head of equity capital markets, CEEMEA, at Barclays, which underwrote the IPO with UBS, said the sale “helped clearly establish in the minds of investors that Georgia was an investable entity distinct from Russia, Ukraine and the wider central Asian region. The success also reflected the country’s ongoing attempts to diversify the economy and look more towards the United States and the West.”
The deal could not have been timed at a more inopportune moment. Russia had recently invaded and annexed Crimea, fomenting a frozen conflict in eastern Ukraine, and investors were shying away from regional assets. Yet investors still flocked to the sale, attracted by a bank with a loan-to-deposit ratio of 106%, a non-performing loan ratio of 1% and a capital adequacy ratio that easily complies with Basel III guidelines. TBC became the second domestic lender to list in London, joining FTSE 250-listed Bank of Georgia, which raised $126m from its own London stock sale nine years ago.
Three-pronged growth plan
Growth is being targeted in three other key areas: financial services, a chunky new private equity-style sovereign fund and a
privatisation programme modelled on successful programmes rolled out in other parts of central and eastern Europe, such as Romania and Poland.
The first two are likely to be tough sells. Georgia has long coveted the creation of a thriving financial services centre in its capital, Tbilisi. When the European Investment Bank opened its first regional representative office in the city in April, finance minister Nodar Khaduri jumped at the chance to describe it as a “regional hub, including in the financial sector”. It isn’t quite there yet — indeed, that ambition, while laudable, may prove unachievable. Georgia’s ambitious banks remain stapled to a tiny economy. The banking sector also faces its own perils. In February Giorgi Tsutskiridze, executive director at the Association of Banks of Georgia, warned of a turbulent time ahead, with industry profits set to shrink in 2015.
Then there is the $6bn Georgian Co-Investment Fund, launched two years ago to much fanfare. The brainchild of former premier Ivanishvili, it was designed to suck capital from foreign pension funds and sovereign wealth funds before deploying it in local projects spanning the energy, manufacturing, tourism, agriculture and infrastructure sectors. Its backers include heavyweight investors from UAE-based buyout firm Abu Dhabi United Group to Turkish conglomerate Çalık Holding to Shanghai-based buyout group Milestone Capital. The fund also included $1bn of Ivanishvili’s own money.
Yet it got off to a slow start. Smallish investments have focused on construction projects in the heart of the capital. Some of the lustre surrounding the fund has faded, not least because private equity-style deals remain thin on the ground. “There is no problem with the funding,” says a leading domestic businessman, who declined to be named. “The fund means well, but $6bn isn’t easy to spend when a country’s entire GDP is $16bn.”
Privatisation is likely to prove key to Georgia’s future. The country contains a wealth of sizeable potential deals. In February, the country’s economy minister Giorgi Kvirikashvili laid out a list of assets the government planned to sell, including apartment blocks in downtown Tbilisi, 70% of the Georgian Lottery Co, and a 230MW thermal power plant in the southeastern region of Kvemo Kartli. Kvirikashvili said the government hoped to raise up to $350m a year by privatising choice state-owned assets.
Russian threat
Georgia’s economy isn’t entirely in the clear. Growth is likely to tick along nicely this year and next, but storm clouds are growing to the north. A recession-hit Russian economy, hollowed out by flagging oil prices and Western sanctions, will hit domestic firms, says Piroska Nagy, the EBRD’s director for country strategy and policy. She warns of a “huge decline in [inward] remittances” from Georgians living and working in Russia, a country that remains “a key source of [domestic] consumption as well as foreign direct investment”.
Finally there is the great unresolved and answered question: Russia’s long term designs on the country and the region. Ever since a 2008 diplomatic crisis led to Russia taking control over two breakaway states, Abkhazia and South Ossetia, the two nations have been locked in an uneasy truce. Domestic agricultural producers often find themselves the target of random Russian crackdowns on Georgian produce, ranging from nuts and spirits to wine and mineral water.
And there is always the potential for greater upheaval, should Russian president Vladimir Putin grow tired of the conflict in eastern Ukraine or seek a new way to assert greater domination over the region. In February, Russia and South Ossetia signed a border agreement handing the former greater control over the territory’s borders, military and security apparatus, mirroring a deal signed in December with Abkhazia. In early May, Georgian premier Garibashvili reacted by appointing a staunchly pro-Western politician, Tinatin Khidasheli, as his new defence minister, in a move viewed by many as an attempt to boost the country’s prospects of joining Nato.
Having the US-led military alliance present on Russia’s very doorstep would be anathema to Putin and would likely lead to renewed conflict between Russia and Georgia. And while it remains only a distant prospect, it remains an ever-present threat to this tiny Caucasus economy, which has come so far since the dark days of the early 2000s, yet which often remains an onlooker, subject to the whims and wiles of its more powerful and belligerent neighbour.