While Georgia’s influence in the South Caucasus region is largely dwarfed by that of its energy-rich neighbor, Azerbaijan, positive relations between the two countries have ensured that Georgia has benefitted from significant inflows of foreign investment. Owing to recent political and military conflicts with Russia, however, levels of FDI in Georgia remain significantly below what they should be.
For the past 9 years, Georgia has been led by President Mikhail Saakashvili—Georgia’s charismatic and combative President. Saakashvili won in 2004 with 96 percent of the vote and even his most ardent opponents would be hard-pressed to say that Georgia has not benefitted from his leadership, with GDP growing from $14 billion to $26.2 billion. Nevertheless, his eagerness to raise tensions with Russia and his unwillingness to combat corruption have eroded popular support for his Presidency over this time.
As a result, Bidzina Ivanishivili’s Georgia Dream Party won the 2012 Parliamentary elections, on a platform which emphasized the need to end the endemic corruption of the Saaskashvili government and improve relations with Russia. From an outsider’s standpoint, the maturity with which the original transition was handled was more important than the election results. By handing over power peacefully to the opposition, Saakashvili assuaged one of the greatest fears of foreign governments and investors—whether stability could be maintained while respecting the democratic wishes of the Georgian people. If Georgia does continue along its positive path towards development, it is likely that this will be Saakashvili’s most valuable contribution to his country.
Georgia’s Investment Environment
Georgia currently ranks 9th out of 185 countries in the World Bank’s Ease of Doing Business rankings—ahead of all but 3 members of the G20. This is a remarkable achievement for a country which emerged from the state-run economy of the Soviet Union less than 22 years ago.
What makes Georgia particularly attractive to foreign investors, however, is its high ranking on the criteria of ‘Protecting Investors’—ahead of many of the success stories for international investors such as Chile, Saudi Arabia, and Taiwan. Perhaps more surprisingly, it ranks above many major developed countries such as Japan, Norway, and Sweden in this category.
Investment under Georgia Dream
Having made his billions in post-Communist Russia, questions were raised about Ivanishvili’s commitment to maintaining a free market economy underpinned by the rule of law. In addition, Saakashvili has attempted to characterize his eagerness to rebuild economic and political ties with Russia as a potential threat to the Georgian people. As we have seen over his short time in power, however, such statements are a flagrant misrepresentation of Ivanishvili’s intentions. Economic best practices have continued unabated and he has spent more time courting western governments and investors than those in Russia.
There is little reason to doubt Ivanishvili’s motives for attempting to thaw relations with Russia. Given the size of its economy, developing bilateral trade with Russia is a no-brainer and will bring substantial benefits for the Georgian economy. Georgians are not in a position to choose their neighbors and would be foolish not to establish trade links with the major economic power in their region.
Moreover, a major reason for the positive political and economic climate in Georgia is the desire of the Georgian people to emulate the systems of their Western allies. Were any government to reverse this progress, they could expect to be sharply rebuked for it by the electorate in subsequent elections.
In Georgia's Past, a Vision of their Future
The current government showed its commitment to developing foreign investment by establishing a national investment authority, charged with doubling Georgia's FDI this year, to $2 billion. While this is an ambitious goal, it is by no means unrealistic with a number of investors already taking a significant interest. Moreover, the focus of this investment will largely be within sectors where Georgia has a proven track record of success: energy, agriculture, and transportation.
Hydroelectric Energy
Despite significant government investment in hydropower since its independence, Georgia still only utilizes only a small proportion of its potential.
With significant domestic demand, as well as persistent energy shortages in neighboring Turkey, the privatization of this sector has caught the interest of a number of major foreign investors. At this year's Davos forum, India’s Tata Group agreed to invest in the $600 million Adjaristskali hydropower plant. They are unlikely to be alone.
Traditional Energy
At its peak, Georgia produced 20,000 barrels of oil per day, mostly drilled from the upper Jurassic formation. Owing to mismanagement under the Soviet Union, however, this level has been almost entirely drained. As such, any new drills would need to target other levels.
Georgia's complex geological formations have in the past discouraged large-scale investment in its energy sector. Successful attempts at drilling similar geological formations in the Baltics, however, have emboldened would-be investors. Moreover, with the potential to sell the resulting oil into European markets at over $100 per barrel, there are substantial incentives with which to offset any perceived risk.
Agriculture
The Georgian government has put the agricultural sector at the top of its list of areas for investment and has accompanied its rhetoric with financial incentives for investors.
Beyond the need for increased domestic meat production, the agricultural product with the best potential for export is wine. Georgia first started producing wine around 8000 years ago, making it the longest known producer in the world. The quality of its Saperavi and Tsinandali wines, in particular, has lead to a significant growth in regional and international exports. With Ivanishvili having also secured approval for exports to Russia there is substantial room for growth in Georgia’s wine production.
Transportation
Georgia's greatest inheritance from its Soviet days was a comprehensive modern system of roads and railways. Moreover, Georgia’s location at the axis of East and West makes it an ideal hub for the transit of goods from Asia to Europe. While the maintenance of this infrastructure has suffered a little from under investment over recent years, rising levels of trade between Europe and Asia are providing the necessary incentives for investment. With more pipelines from Azerbaijan to Europe also being planned, Georgia looks set to establish itself as a major regional hub.
Alexander Botting works for a Washington, DC-based international government affairs firm, where he provides political and business consultancy services to clients from the Europe and Eurasia regions. Prior to this, Mr. Botting worked as a Political Risk Analyst for a private investment fund and as an Equity Research Intern for Fidelity Worldwide Investment. Mr. Botting received his B.A. in Politics and International Studies from the University of Warwick and is studying for a Master’s in Political Management at George Washington University, where he has been awarded an Academic Fellowship.
This article was originally published in the 2013 special annual APEC CEO Summit Magazine. Published with permission.
Photo: Vladimer Shioshvili (cc).
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Foreign Investment in Georgia: Opportunities Abound
October 25, 2013
While Georgia’s influence in the South Caucasus region is largely dwarfed by that of its energy-rich neighbor, Azerbaijan, positive relations between the two countries have ensured that Georgia has benefitted from significant inflows of foreign investment. Owing to recent political and military conflicts with Russia, however, levels of FDI in Georgia remain significantly below what they should be.
For the past 9 years, Georgia has been led by President Mikhail Saakashvili—Georgia’s charismatic and combative President. Saakashvili won in 2004 with 96 percent of the vote and even his most ardent opponents would be hard-pressed to say that Georgia has not benefitted from his leadership, with GDP growing from $14 billion to $26.2 billion. Nevertheless, his eagerness to raise tensions with Russia and his unwillingness to combat corruption have eroded popular support for his Presidency over this time.
As a result, Bidzina Ivanishivili’s Georgia Dream Party won the 2012 Parliamentary elections, on a platform which emphasized the need to end the endemic corruption of the Saaskashvili government and improve relations with Russia. From an outsider’s standpoint, the maturity with which the original transition was handled was more important than the election results. By handing over power peacefully to the opposition, Saakashvili assuaged one of the greatest fears of foreign governments and investors—whether stability could be maintained while respecting the democratic wishes of the Georgian people. If Georgia does continue along its positive path towards development, it is likely that this will be Saakashvili’s most valuable contribution to his country.
Georgia’s Investment Environment
Georgia currently ranks 9th out of 185 countries in the World Bank’s Ease of Doing Business rankings—ahead of all but 3 members of the G20. This is a remarkable achievement for a country which emerged from the state-run economy of the Soviet Union less than 22 years ago.
What makes Georgia particularly attractive to foreign investors, however, is its high ranking on the criteria of ‘Protecting Investors’—ahead of many of the success stories for international investors such as Chile, Saudi Arabia, and Taiwan. Perhaps more surprisingly, it ranks above many major developed countries such as Japan, Norway, and Sweden in this category.
Investment under Georgia Dream
Having made his billions in post-Communist Russia, questions were raised about Ivanishvili’s commitment to maintaining a free market economy underpinned by the rule of law. In addition, Saakashvili has attempted to characterize his eagerness to rebuild economic and political ties with Russia as a potential threat to the Georgian people. As we have seen over his short time in power, however, such statements are a flagrant misrepresentation of Ivanishvili’s intentions. Economic best practices have continued unabated and he has spent more time courting western governments and investors than those in Russia.
There is little reason to doubt Ivanishvili’s motives for attempting to thaw relations with Russia. Given the size of its economy, developing bilateral trade with Russia is a no-brainer and will bring substantial benefits for the Georgian economy. Georgians are not in a position to choose their neighbors and would be foolish not to establish trade links with the major economic power in their region.
Moreover, a major reason for the positive political and economic climate in Georgia is the desire of the Georgian people to emulate the systems of their Western allies. Were any government to reverse this progress, they could expect to be sharply rebuked for it by the electorate in subsequent elections.
In Georgia's Past, a Vision of their Future
The current government showed its commitment to developing foreign investment by establishing a national investment authority, charged with doubling Georgia's FDI this year, to $2 billion. While this is an ambitious goal, it is by no means unrealistic with a number of investors already taking a significant interest. Moreover, the focus of this investment will largely be within sectors where Georgia has a proven track record of success: energy, agriculture, and transportation.
Hydroelectric Energy
Despite significant government investment in hydropower since its independence, Georgia still only utilizes only a small proportion of its potential.
With significant domestic demand, as well as persistent energy shortages in neighboring Turkey, the privatization of this sector has caught the interest of a number of major foreign investors. At this year's Davos forum, India’s Tata Group agreed to invest in the $600 million Adjaristskali hydropower plant. They are unlikely to be alone.
Traditional Energy
At its peak, Georgia produced 20,000 barrels of oil per day, mostly drilled from the upper Jurassic formation. Owing to mismanagement under the Soviet Union, however, this level has been almost entirely drained. As such, any new drills would need to target other levels.
Georgia's complex geological formations have in the past discouraged large-scale investment in its energy sector. Successful attempts at drilling similar geological formations in the Baltics, however, have emboldened would-be investors. Moreover, with the potential to sell the resulting oil into European markets at over $100 per barrel, there are substantial incentives with which to offset any perceived risk.
Agriculture
The Georgian government has put the agricultural sector at the top of its list of areas for investment and has accompanied its rhetoric with financial incentives for investors.
Beyond the need for increased domestic meat production, the agricultural product with the best potential for export is wine. Georgia first started producing wine around 8000 years ago, making it the longest known producer in the world. The quality of its Saperavi and Tsinandali wines, in particular, has lead to a significant growth in regional and international exports. With Ivanishvili having also secured approval for exports to Russia there is substantial room for growth in Georgia’s wine production.
Transportation
Georgia's greatest inheritance from its Soviet days was a comprehensive modern system of roads and railways. Moreover, Georgia’s location at the axis of East and West makes it an ideal hub for the transit of goods from Asia to Europe. While the maintenance of this infrastructure has suffered a little from under investment over recent years, rising levels of trade between Europe and Asia are providing the necessary incentives for investment. With more pipelines from Azerbaijan to Europe also being planned, Georgia looks set to establish itself as a major regional hub.
Alexander Botting works for a Washington, DC-based international government affairs firm, where he provides political and business consultancy services to clients from the Europe and Eurasia regions. Prior to this, Mr. Botting worked as a Political Risk Analyst for a private investment fund and as an Equity Research Intern for Fidelity Worldwide Investment. Mr. Botting received his B.A. in Politics and International Studies from the University of Warwick and is studying for a Master’s in Political Management at George Washington University, where he has been awarded an Academic Fellowship.
This article was originally published in the 2013 special annual APEC CEO Summit Magazine. Published with permission.
Photo: Vladimer Shioshvili (cc).
