A zeal for reform pays dividends

it was a very bleak picture. In many ways people believed that corruption was part of the culture. Corruption is considered to be an incurable disease in this part of the world, but we believed it was changeable,” President Saakashvili says.

He points to tax collection, govern-ment revenues and perceptions of corruption. “This is an index of the legal-ization of our economy. We are dealing with a comprehensive cultural change, in a way a mental transformation.”

Four years on, Georgia has pro-gressed further still with Transparency International (TI) and the World Bank’s Doing Business survey suggesting it is one of the most progressive and liberal economies in the world.

Some 77% of companies inter-viewed by TI feel the government has been effective in tackling corruption. The World Bank meanwhile places Georgia 12th out of 183 countries for overall ease of doing business, up one place from 2010, with Tbilisi aiming to get into the top 10 by 2015.

“The World Bank says we are the No. 1 reformer over the past five years, having successfully pursued structural reform and large-scale privatisation, largely eliminated corruption and mas-sively improved tax collection. Georgia deserves its reputation as one of the world’s most liberal economies,” says

The drive for transparency has brought about a comprehensive cultural change in Georgia. It has proved good for business, writes Justin Keay.

E ight years ago, Georgia’s Rose Revolution bought about the departure of old-style Presi-dent Eduard Shevardnadze

and the accession of a dynamic young elite headed by Mikheil Saakashvili, who first became president in January 2004. For the country’s 4.5 million people, life has been something of a rollercoaster ride ever since.

They have enjoyed the highs of see-ing almost every vestige of the Soviet system dumped. The corruption and organised crime that made this one of its least transparent countries is no more, with the government operating a zero-tolerance policy at all levels: the notorious traffic police were fired over-night. Opening and running a business, paying taxes and dealing with official-dom are all now akin to a developed Western economy. In 2007, Robert Christiansen, the IMF representative in Georgia, admitted he was astounded by the extent of the transformation.

“When I arrived this was almost a failed state, but today there are improvements everywhere. The Rose Revolution was essentially a governance revolution that has become manifest in reduced corruption, a massively im-proved business climate and substantial inflows of foreign investment.”

It required a wholesale cultural shift. “If you look at where Georgia was,

GEORGIA Business, energy, culture and wine in the fast-growing Caucasus Saturday, July 16, 2011 1

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Giorgi Badridze, Georgia’s Ambassador to the UK.

But along with the highs, there have also been the lows.

Chief among these was the August 2008 war with Russia which, with Russian occupation, put South Ossetia and Abkhazia (together some 20% of Georgia’s territory) beyond Tbilisi’s reach. Moscow’s failure to honour any of the five conditions drawn up by the EU suggests this dispute is unlikely to be resolved soon.

Moscow’s economic blockade also exacerbated the impact of the global downturn on Georgia, which resulted in a drastic slowing of FDI – pre-Lehman, the life-blood of growth – and a sharp rise in inflation, unemployment and the budget deficit. In 2009, the economy contracted 3.9%.

Despite continued economic hard-ship Georgians remain upbeat: trust in institutions is high and optimism about the future is well above the 34-country average in an EBRD survey published in June.

Mindful of this can-do attitude, the government has looked to bolster tradi-tional industries – such as winemaking,

agribusiness and tourism – alongside the development of relatively new ones including IT and energy. Work is under way to improve infrastructure and communications – the long-term aim is to turn Georgia into a regional business hub, along the lines of Singapore.

Conscious of the bad publicity generated by anti-government dem-onstrations in May – and weaknesses in Georgia’s political system – the gov-ernment is pressing ahead with politi-cal reforms, as well as an overhaul of the legal and education systems.

Last year, the economy bounced back. GDP grew 6.4% with 5.5% projected this year (the government is more ambitious still) and the deficit shrank to around 3.7%. Prime Minister Nika Gilauri says robust growth is an answer to those with worries about the Georgian economy.

“There was a very fast recovery, that growth continues and we see very good interest from international inves-tors in Georgia. Growth of 6.4% last year and strong growth so far this year shows the resilience and drive of the Georgian economy.”

Aid flows from the EU and other

institutions certainly helped. But prior to the downturn Georgia had put in place a dynamic, investor-friendly economic structure coupled with a flexible exchange rate that allowed it to bounce back quickly.

The fact that no Georgian bank failed was also a plus, attributable to the tough regulation pursued by the central bank. Capital adequacy ratios of around 20% have encouraged confidence and today banking assets, deposits and loans are at record highs.

But other initiatives have been taken to restore and build up confidence.

Among these are the Prime Minis-ter’s plans, launched last November, to set a “new course” for the economy with an even more simplified, low and flat tax system aimed at encourag-ing and maintaining investment, and further reducing bureaucracy.

But in the short term the big ques-tion is whether investors will come.

Many concerns about Georgia’s economy were dispelled by the suc-cess of a $500m Eurobond launch in April, priced at 7.1% over 10 years. The issue, Gilauri notes, was five times oversubscribed.

President Mikheil Saakashvili has adopted a zero-tolerance approach to corruption. Indices

now rank Georgia among the world’s most transparent and progressive economies.

This supplement has been produced by Archimedia. It did not involve the reporting or editorial staff of The Times and no endorsement is implied. Contact: hello@archimedia.uk.com

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2 GEORGIA

Long a trade route connecting Europe and Asia, Georgia is building a reputation as

a trustworthy transit corridor for oil and gas – and a strategic partner in the West’s energy security.

The strategy underlines Tbilisi’s bid to use the pipelines that traverse the country to tie its future to Europe’s, and un-derpin its own energy security.

Millions of barrels of Caspian oil and billions of cubic meters of gas travel across the mountain-ous Caucasus country, carried by the intricate system of interna-tional pipelines and railways that stretch across it. The network connects oil and gas reserves in the energy-rich Caspian to Europe via Turkey, as well trans-porting Russian gas to isolated Armenia in the south.

For Georgia, a country that aspires to join NATO and the EU, they also represent a pow-erful tie that binds it – and the region – to Europe.

“The Caucasus is part of Europe, this has become reality thanks to Georgia which is the link between east and west,” notes Zurab Janjgava, general director of the Georgian Oil and Gas Corporation, the entity that represents national interests in energy projects, including cross-border energy transit.

The pipelines that move oil and gas to Turkey – and across the Black Sea to the EU – pro-vide energy security as an al-ternative to Russian-controlled networks.

Two pipelines run from Baku to Turkey: the Baku-Tbilisi-Ceyhan (BTC) Pipeline and the South Caucasus Pipeline, two parallel networks that transport

crude oil and gas respectively from BP-led developments in Azerbaijan. A third, the Western Route Export Pipeline, brings oil from the Caspian Sea to Geor-gia’s Black Sea port of Supsa.

The BTC pipeline carried its one billionth barrel of Caspian crude to world markets in Sep-tember.

New projects that propose to extend the pipelines to Europe through Romania and Ukraine promise to increase Georgia’s significance as an alternative energy corridor.

“It is a fact that the Cas-pian region is rich in energy resources and there is a great and stable demand for energy in Europe. Everyone remembers the ‘Russian winter’ of 2009

when Russia drastically reduced overnight gas deliveries to Eu-rope,” Janjgava says. “Georgia can serve as an effective corri-dor for energy transit to Europe bypassing Russia.”

The race to meet the de-mand from European markets inspired a pipeline “cold war,” according to Mahir Mammedov, the director general of SOCAR Energy Georgia.

“In the 1990s, there was a tendency from certain powerful countries to influence [these] projects in such a way as to block the passage of oil from Azerbaijan to the world energy market, but we managed to do this with Georgia.”

Azerbaijan has no direct access to the world’s oceans,

ENERGY For a country with few hydrocarbons, Georgia is a strategic partner in the West’s energy security, writes Molly Corso.

Pipelines promise a tie that binds

Wine enthusiasts are always search-ing for something special, for wines that combine character, place and substance, ideally at a price that won’t break the bank. Georgian wines are an ideal candidate. One of the world’s first Christian countries was arguably the earliest producer of wine: winemaking here has been traced back some 8,000 years.

The good news is that many of its unique traditions survive with a num-ber winemakers still making wines

in large clay pots (known as kvevri) and burying them neck-deep in the ground to ensure a constant temperature, before extracting the wine with a giant syringe. The result is typically a fresh, layered and complex wine with lots liquorice, black fruit and spice on the palate.

Although Georgia has around 520 grape varieties, many indigenous, only 40 are produced today with the main focus on its celebrated Saperavi, Georgia’s full-bodied and character-full

Mammedov says. “It was fortu-nate that a historical friend like Georgia does.”

Azerbaijan’s state oil and gas company, SOCAR is part of the international consortium of energy companies that own the pipelines that run from the Caspian Sea to Turkey.

Five years ago, SOCAR opened a holding company in Georgia to oversee its signifi-cant interests in the country – including the Kulevi Terminal on Georgia’s Black Sea coast, a network of petrol stations,

gas distribution and pipelines.

“We consider our energy resources to [be] creating the di-versification of energy supplies to Europe,” Mammedov says. “We put a lot of effort and attention into supply-ing Europe safely with energy resources.”

And Georgia is eager to demonstrate it is a safe and stable environment for invest-ments. Energy Minister Alexandre Khetaguri notes that fulfilling agreements on the transit of energy takes precedent even during times of war.

During the 2008 conflict with Russia – when Russian troops had taken control of Poti port and were bombing Georgian

towns – the government con-tinued to honour its obligations to Moscow, exporting electric-ity to Russia and ensuring the safe transit of Russian gas to Armenia.

“Nothing stopped,” he says. “There was a contract and we fulfilled all our contractual obligations.”

Janjgava underscores the ef-fort the government has made to modernize the system and infrastructure inside the country so that investors feel confident – and Georgia can market itself

as a serious player for energy transit as well as a base for energy-intensive industries.

“This country patterns its behavior on Western policy and has successfully dealt with its internal challenges,” he says. “It is very attractive for investors and of course it is a good place for the development of energy projects of regional importance.”

Investors like BP and SOCAR have commended the govern-ment’s efforts to make energy transit seamless and secure.

BP Operations in Georgia notes “Georgia has embarked on a new level of business-favorable fiscal, legal and legislative re-forms… making steps towards a healthier investment climate.”

For SOCAR, Georgia is key to plans to deliver oil and gas sup-plies to European markets.

SOCAR Georgia partici-pates, alongside GOGC, in the Azerbaijan-Georgia-Romania Interconnector (AGRI), a project that would move gas supplies from Baku to Romania, Hungary and other European markets via Georgia and the Black Sea. A feasibility study is due later this year.

The South Caucasus Pipeline would also feed into the Na-bucco Pipeline project that aims to carry natural gas from central Turkey to Austria.

“Being the central country in this region and involved in all the energy projects… Georgia is a country blessed by God for being in such a position,” Mammedov says.

A LITTLE KNOWN WINE GOES TO MARKET WITH BIG AMBITIONS

answer to Malbec. Depending on the production, this grape has various incarnations: Satrapezo is fermented in clay amphoras before being put into conventional barrels, while Mukuzani is oak-aged for longer than other Saperavis.

Leading white varietals are Rkatsiteli – zesty and fruity on the nose and palate – and the more subdued, Chenin Blanc-like Mtsvane.

Yet despite this welcome variety in grapes and styles, and the unwelcome incentive of Moscow’s economic blockade (Russia used to consume some 85% of Georgian wine exports prior to the 2006 ban) getting Georgian wines onto Western shelves has proved no easy matter.

Britons are preoccupied with price – the overwhelming majority of wines sell in British supermarkets for less than £5. Although Georgia makes some excellent wines at good prices, trying to compete with mass-produced, branded wines from South Africa or Australia is not an option. The problem is not one of low volume but rather high fragmentation. Picturesque Kakheti may be Georgia’s principal wine region,

The Western Route Export Pipeline carries crude oil from the resource-rich Caspian, to Georgia’s Black Sea coast.

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INVESTMENT A meteoric rise through the rankings of the World Bank’s Doing Business index is testament to the government’s open-door policy.

but within it are many producers, and Georgian wine companies produce a huge range of wines, according to Helen Smith of Gaumarjos, a UK importer of Georgian wines, making it hard for beginners to know where to start.

“Winemakers need to work together to pro-mote Georgian wine as a product,” she argues. “Nine or 10 pounds is not expensive for wines of such character and quality. But consumers used to paying £5 a bottle need to be convinced it is worth paying the extra,” she says.

Recognising wine’s potential importance to the economy, Georgian Wine Association direc-tor Tinatin Kezeli says Georgia is determined to promote wines with tourism, and stresses the ad-vances in quality since the industry moved away from servicing the Russian market. However, the push will be at the high end.

“We need a niche market for people who know wine,” she says, pointing out that Georgian wines were well received – for the fifth time – at this year’s London International Wine Fair.

Some wines have made it on to British shelves. One high-quality Georgian producer is Chateau Mukhrani, whose respected chief winemaker Lado Uzunashvili makes Orovela, an upmarket Saperavi made for the UK market and sold by

selected Waitrose stores and Waitrose Wine Direct (£15.19).

“The Soviet years, and the aftermath, dealt a serious blow to both the quality and credibility of Georgian winemaking. Our aim is to try and resurrect its former glory,” says CEO Petter Svae-tichin, who as well as focusing on quality wines is restoring the historic Chateau, including the splendid cellars, gardens and vineyards. Founded in 1878, it is just a few miles from the oldest known archaeological proof of winemaking.

Uzunashvili echoes this saying that Chateau Mukhrani’s terroir, as well as its heritage and quality, are what make its wines so distinctive and expressive.

“The purity of taste and freshness of the white wines, and the complex, deep structural expression of the reds make our wines capable of challenging leading world brands,” he says.

Kezeli’s strategy is to encourage oenophiles to visit the country for wine tours of the kind popular in France, South Africa and California. With scenery reminiscent of Switzerland and a climate similar to the Mediterranean, the country that even its president describes as ‘Europe’s best-kept secret’ is unlikely to stay hidden for long. —By Justin Keay

In the years following the 2003 Rose Revolution, foreign direct invest-ment (FDI) was Georgia’s

lifeblood, increasing from a paltry $160m that year to around $1.75bn in 2007. As in most other countries, there has been a major fallback since the global financial crisis with in-flows reaching $658m in 2009 and less last year. Although foreign aid flows worth some $4.5bn since mid 2008 have helped mitigate the loss, Tbilisi is aware that this is not a long-term proposition.

Potential investors will be en-couraged by the World Bank’s latest Doing Business report. This showed Georgia is rising rapidly through the rankings (of 183 countries), moving from 112th in 2005, to 16th in 2009 and to 12th this year. It scores particularly highly in ease

of doing business, transpar-ency and lack of corruption. Tbilisi is working too to improve infrastructure with the aim of transforming Georgia into a regional business, energy and transport hub, with Dubai and Singapore as models. It is also looking at new tax breaks and free zones with tourism, energy, ICT, construction, manufactur-ing and food/beverages the priority sectors. Already first quarter FDI inflows were more than twice those of 2010, with $1bn expected over the year.

Despite having virtually no hydrocarbon resources (for many years Georgia was depen-dent on Russia for its electric-ity), it does have a mountainous and river-rich terrain, making it ideal for hydropower. Georgia is now a net exporter of elec-tricity, with Russia one of its customers; 88% of production

now comes from hydropower. Korean and Turkish companies have been driving investment, strongly supported by the EBRD, which in June extended a $115m credit to Georgia Urban Energy (a subsidiary of Turkey’s Anadolu Endustri Holding) to construct the Paravani plant in southwest Georgia. As much as $3.5bn could be invested over the long term.

“Hydropower is in its infancy in Georgia. We have utilised just 18% of our hydro-resources so the potential is enormous,” says Giorgi Badridze, Georgia’s Ambassador to the UK.

Pipelines and energy transit bring in much-needed revenue, especially since expansion work on the Baku-Tbilisi-Ceyhan oil pipeline this year that increased throughput 20% to 1.2mbd. “However, Georgia’s sustain-able development will come

via diversification, with energy underpinning a wide range of other activities,” says Riccardo Puliti, MD energy and natural resources at the EBRD.

Tourism is one and the Silk Road Group (SRG) has emerged as a major investor, last year investing $25m on top of the $400m it has pumped into its

home market. Recent projects include Radisson Blu hotels in Tbilisi and Batumi, as well as in-vestments in telecoms company Silknet and BTA Bank Georgia.

In March, it unveiled ambi-tious plans to develop new luxury residence and hotel proj-ects in Tbilisi and Batumi with Donald Trump, which should boost the appeal of both cities. Operating across borders, SRG says Georgia lies at the heart of its strategy to build business in the former Soviet Union, invest-ing in a broad range of sectors.

But it is improving infrastruc-ture that is key to Georgia’s future. That is why the decision in April of APM Terminals – a subsidiary of Denmark’s Moller-Maersk – to take control of the Black Sea port of Poti from the UAE’s Rakia Holdings was so welcomed in Tbilisi. APM will in-vest at least $100m into boost-ing the infrastructure of the port and its terminals, increas-ing volume by 40%. Poti has special economic zone status and efficiency gains at the port will boost its appeal. Joseph Crowley, MD of APM Terminals Poti, says that cars arriving at its new dedicated terminal clear customs within 15 minutes,

quicker than in New York. “It’s a good example of how

business can be done here. A lot of the issues that the gov-ernment has tackled in terms of corruption and ease of flow make a very good advertise-ment for investors, for compa-nies doing business here, for shipping goods into the region.”

Historically, he says, Georgia “has always been a corridor. Our goal here is to just make that work more efficiently. It’s an exciting emerging market; the region is growing and becoming more integrated economically. Strategically, obviously, it’s very important in terms of resources, so it makes economic, strategic, political and geopolitical sense to be here.”

Mako Abashidze, head of the British-Georgian Chamber of Commerce, agrees adding that Georgia’s size, strategic location and commitment to attracting and retaining FDI makes it an ideal destination for investors seeking new frontiers.

“Almost every sector has de-velopment potential and there are plenty of opportunities, for big companies of course, but particularly for SMEs.” —By Justin Keay

Inviting in investors

APM Terminals will invest at least $100m to secure efficiency

gains at Poti Sea Port.

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