By Maria Ahmed
In an attempt to rid itself of Russian influence, Georgia is keen to remake itself as a fast-paced and dynamic economy – and as a bargain for investors. Zurab Nogaideli, the country’s prime minister, tells Emerging Markets what’s driving reform
Georgian prime minister Zurab Nogaideli is on a mission to put history behind him and replace his country’s reputation as a fractious remnant of the Soviet Union with the dynamic investor-friendly image of a modern economy. The prize he is seeking is a doubling of foreign direct investment by around 2013.
“Georgia is on the move,” 42-year-old Nogaideli tells Emerging Markets in an exclusive interview. Economic growth in this country of 4.7 million people runs at over 6% a year, although per capita GDP is low: $1,480. Speaking after a morning of presentations to investors in London that highlighted the transformation of the economy over the past year, the prime minister is adamant that Georgia “will move even faster going forward”.
Nogaideli and his young cabinet – the average age of its members is 38 – wants to restructure or privatize many industries within the country, whose $1.4 billion exports consist mainly of scrap metal, machinery, fuel re-exports, fruit and wine. His goal, as he puts it, is “minimum state involvement in business”.
Georgia is a bargain for foreign investors, he points out. In the power sector, for instance, his government has won praise for transforming the electricity grid after 15 years of regular blackouts following independence from the Soviet Union in 1991. Now it is for sale. At an asking price of $200,000, plus $100,000 of investment for each megawatt of electricity, Nogaideli says that Georgian power is “among the cheapest in the world”.
Driving the government’s reform bid is a realization that, on the one hand, unlike some of its resource-rich neighbours, Georgia has relatively few natural resources to entice American and western European investors, according to George Khelashvili, head of international relations at Tbilisi State University.
“The government is willing to sell everything,” says Khelashvili, praising the “professionalism and courage” of Georgia’s new leadership for rejecting populist policies and instead ploughing ahead with a sincere and far-reaching reform effort. “They have been hyper-liberal,” he says.
Russian thorn
But the thorn in Georgia’s side is Russia. Rhetoric between the two has become alarmingly bellicose, especially since the explosions that cut off Georgia’s gas supply in January, which president Mikhail Saakashvili appeared to blame on Russia.
Strained relations with its large neighbour pose several risks for Georgia, says Farouk Soussa, director of Middle East and Africa sovereign ratings, citing the recent Russian ban on Georgian wine – and more recently water – imports. Russia is Georgia’s biggest trading partner.
The Caucasian nation is also almost wholly dependent on Russian gas for its energy needs, and recent price hikes will impact its “already sensitive” inflationary outlook.
Thankfully for Georgia, alternative energy supply routes are in construction. The Baku-Tbilisi-Ceyhan oil pipeline and the Baku-Tbilisi-Erzerum gas route will reduce Georgia’s energy dependence on Russia.
Georgia’s reluctance to grant Russia more influence over its economy also accounts for the fervour with which Nogaideli and his team are seeking alternative investors.
“Ultimately it is the Russians that are interested in Georgia,” says Khelashvili. “And that leads to serious national security concerns.” He points to Russia’s sudden demand, earlier this year, that Ukraine quadruple the price it pays for Russian gas. “By allowing Russia to control our resources and infrastructure, a large part of our sovereignty and independent decision-making will be lost,” he says.
In 2003 American energy firm AES quit Georgia because of corruption. The Russian firm that took over, state-run RAO UES, “has been raising electricity prices rapidly the last three years, causing ... unease in a country where half the population lives below the poverty line”, says Khelashvili.
Tensions between the two former soviet states still flare up over two breakaway regions of South Ossetia and Abkhazia. President Saakashvili put forward a peace plan for the former, but it foundered when Russian peacekeepers were accused by the Georgian parliament of trying to annex the region in March. Also this year a Georgian peace proposal for Abkhazia ran aground when Moscow withdrew support.
Nogaideli says Tbilisi has made efforts to resolve its problems with the Kremlin, but claims all attempts have been rebuffed by its northern neighbour. “The Russian authorities have continuously declined these approaches,” he says. Despite Moscow’s “negative response”, however, he is confident that the saga will reach a peaceful conclusion. “We don’t have any choice other than to sit down and discuss these issues. It will take time but I have no doubts,” he says.
Khelashvili, however, is less optimistic. He describes the conflict over the breakaway states as “hardly under control”, and apt to flare up at any time. “It’s rumoured that money extorted from businessmen in the last three years has been devoted to a military build-up, which is necessary for national security, but not that helpful for the economy,” he says.
Drastic improvements
Nevetheless, in less than two years in office the government has transformed the macroeconomic environment, bringing inflation down from 10% in 2004 to less than 5% last year, and setting debt on a declining path. It has improved tax collection, cutting rates while at the same time doubling government receipts.
Simeon Djankov, manager at the IFC’s monitoring and analysis unit, says of 26 transition economies, only Slovakia, Estonia and Lithuania match Georgia’s sustained pace of growth.
“We have achieved both goals: a reduction in the tax burden while addressing our fiscal needs,” Nogaideli boasts. There has been investment in roads, rail and power plants. However, he says, he cannot guarantee that taxes will remain this low in the future: the flat income tax rate of 12% is one of the lowest in the world.
“There are opportunities to privatize and restructure in every sector,” says Nogaideli, who also emphasizes Georgia’s comparative advantage in its geographic location: the South Caucasus is an age-old conduit between the Middle East and central Asia, and Europe.
Khelashvili, however, is unsure whether Nogaideli’s reforms will succeed. While opposition to the privatization programme is now “disorganized and weak”, privatization of key sectors like water and forest could lead to a dramatic backlash, he says.
The government’s zeal for applying the rule of law has also hurt the democratic process, with an investigation underway into the murder of the head of a “major” Georgian bank and complaints of extortion by the beefed up financial police: “Business people continuously complain about the pressures applied by the government.”
Still, says Soussa: “In 2003 Georgia was riddled with corruption, an inefficient tax system, poor economic management and a volatile macroeconomy. Today it is the opposite.” Standard and Poor’s rates Georgia B+, with a positive outlook.