How Long Will the Georgian Miracle Last?

How Long Will the Georgian Miracle Last?

In 2012, Georgia took 34th place out of 184 in the Index of Economic Freedom, losing one place from the previous year, while the October elections had foreign investors holding their breaths. Who is investing in Georgia’s economy and what is on Prime Minister Ivanishvili’s agenda?

The biggest investors in Georgia today are the Netherlands, the United States, and Azerbaijan. According to Gruzstat, the national statistics agency, foreign direct investments (FDI) for the first half of 2012 are $488 million, up 29% from the same period last year.

While first-quarter investments were $269.4 million, the second quarter has attracted a bit less, $219.4 million. According to Oleg Dushin, Senior Analyst for Zerich Capital Management, this is mainly because of the crisis in Europe. “The total volume of global foreign investment in the first half of 2012 declined 8%, so Georgia is looking better compared to others,” the expert notes. Nonetheless, year on year investment will inevitably decline in the third quarter and also in the fourth quarter. FDI for the year will be $1-1.2 billion (it was $1,117.2 million in 2011). In addition, Georgia took 34th place out of 184 in the Index of Economic Freedom, losing one place from the previous year.

Whereas previously investors were interested in real estate, energy, the finance sector, transportation, and processing industries, now businessmen are increasingly looking at construction and agriculture.

One of the most talked-about investments in the construction industry was the signing by American investor Donald Trump of a letter of intent at the end of September with the multinational developer Silk Road Group for construction of a residential building in Tbilisi. Now Georgian authorities hope that others will follow the famous billionaire’s example. In order to attract investors to its construction industry, the government is offering plots of land along the Black Sea coast for just $1 to developers who invest a minimum of $1.1 million. Among other benefits, investors will be exempt from sales tax and income tax for 15 years.

Such benefits from Georgia’s government have taken effect. Michael Rasmussen, the cousin of the NATO Secretary General Anders Fogh Rasmussen, announced his intention to invest in the country, in an exclusive interview with the newspaper Kviris Palitra. The investments will be in Georgia’s oil, tourism, energy, and agricultural industries, he said (Palitra Nedeli). Rasmussen noted that he hopes “the newly elected officials’ principles and ways of operating will bring success to Georgia.”

The most ambitious project is the construction of Lazika, a planned city. In December 2011, President Mikheil Saakashvili announced the project, saying it would be the second largest city after Tbilisi, with a special status and separate legislation. Over the next ten years, Georgia plans to attract private investors for Lazika who will develop the infrastructure. The city will have its own laws, but the Georgian Constitution will take precedence. In the event disputes arise, the Constitutional Court will have the final word. Experts’ opinions are mixed on this project – some say it is a utopian idea, while others are convinced of its potential.

Georgia’s new government has big plans for agriculture. The authorities are trying to interest South African Boer farmers in investing in Georgia. In April, Tbilisi held the first conference for South African farmers. As a result, the Boers are now buying land in Adjara and Kakheti.

In addition, the Swiss Agency for Development and Cooperation and the Danish Neighbourhood Programme, together with the Georgian Ministry of Agriculture, have announced a four-year program to develop agriculture and the economy in the south of Georgia. The budget is $11 million. According to the Georgian Ministry of Agriculture, the project will contribute to increasing the potential of farmers, entrepreneurs, and service providers, including for production of potatoes and dairy products, raising their productivity and competitiveness.

In November, Georgian Minister of Agriculture David Kirvalidze met with U.S. Ambassador Richard Norland and USAID representatives to inform them about the priorities of the new Georgian government. These include the creation of agricultural coops, restoration of irrigation canals, land registration, and the creation of in-country consultation centers. At a press conference in Tbilisi, Kirvalidze stressed that the strategic partnership with the U.S. remains a top priority for Georgia.

Oleg Dushin, Senior Analyst for Zerich Capital Management (Russia), notes that agriculture is just a small part of the overall cooperation the U.S. and Georgia have shared for many years. In the second quarter of 2012, 11.3% of foreign investment came from American companies. This is in a wide variety of sectors – real estate, energy, transport, etc. The U.S.-Georgia Bilateral Investment Treaty has been in force since 1994. After the 2008 war, the United States gave Georgia $1 billion for reconstruction of infrastructure and economic growth. But although Georgia has implemented many energy projects, Dushin says that only one of them is Georgian-American: the hydropower project with Dariali Energy on the Russian border. It is aimed at increasing the export potential of Georgian electricity. In addition, an English-American company is constructing a huge fountain in Tbilisi (180 meters high). The main contractor for the Baku-Tbilisi-Ceyhan oil pipeline (2004-2005) was the American company Bechtel, Dushin notes.

Besides the U.S., Georgia is also interested in European investors. Thus, the European Development and Investment Fund for Eastern Europe announced the allocation of funds for developing Georgia’s environmental and energy sectors. The priorities will be infrastructure as well as renewable energy projects. The Fund’s decision to invest in Georgia, as well as in Armenia and Azerbaijan (a total of €470 million), was adopted following successful investment in waste management plants in Moldova.

Among the CIS countries, Georgia has identified Kazakhstan as a promising trade partner with which the country has positive experience. Kazakhstan was the first country to invest seriously in Georgia. The gross amount of direct investment from Kazakhstan in Georgia is more than $200 million. There is a lot of interest in the transit of Kazakhstan’s goods through Georgia to world markets.

Georgia’s relationship with Russia has been uneasy in recent years, but the new government plans to eventually restore trade and subsequently diplomatic cooperation.

Speaking on how to attract investors, Georgian Prime Minister Bidzina Ivanishvili noted that the planned investment fund in Georgia will assist investors in promising projects. If an investor is prepared to invest 25%, the Fund will provide the remaining 75%. The Prime Minister also has plans to create a working group to improve the attractiveness of potential areas of investment and create a database of potential projects. Ivanishvili said that he sees “the development of the Georgian economy as coming from private investors and reforms in anti-monopoly legislation.”

Experts’ opinions vary greatly about how foreign investors in Georgia will respond to the election of Ivanishvili as the new Prime Minister. Some analysts believe that investors will observe the country’s new economic policies for about six months, while others are sure that investors will plunge in at the beginning of 2013. For now, though, the general view is that investors are in stand-by mode.

Text: Anastasia Yakovleva