From rubble to rubles in Georgia

By bne IntelliNews May 25, 2012

Molly Corso in Tbilisi -

Despite a Russian embargo and the 2008 war with its overbearing neighbour, Georgia wants Russians to know their business - and their rubles - are still welcome.

Since Georgian President Mikheil Saakashvili launched a visa-free policy for Russians in February with the undisputed logic that "Russia is and always will be Georgia's neighbour", a growing number are visiting. According to the national tourism agency, some 50,000 Russians crossed into Georgia during the first three months of the year, which was three times the number for the same period last year. They are also investing: Shota Abkhazava, a Russian businessman of Georgian descent, funded the new $20m racetrack in Rustavi.

For Georgia, attracting foreign direct investment is more important than politics, according to Interior Minister Vano Merabishvili. During a question and answer period in front of parliament on April 26, Merabishvili said that, "despite the fact we expect a threat from Russia on a daily basis" and "80%" of the Russian businesses in Georgia are owned by the Kremlin, "money has no smell - any investment in Georgia is welcomed."

While Russia might not be the largest investor in Georgia, it is in the top 10, notes economist Davit Narmania. Russian investment in Georgia has even increased since the war, according to GeoStat, the official statistics body: investments doubled from 2008 to 2011, from $26.2m to $52.3m.

Narmania, executive director for the Caucasian Institute for Economic and Social Research, says that the Georgian authorities are focused on attracting investment even at the cost of dealing with a political enemy, pointing out that the government has traditionally drawn a line between political policy and economic policy. While relations with Moscow are tense politically, there is no problem with dealing with Russian business to help the Georgian economy.

Familiar territory

Professor Alexander Tvalchrelidze, executive director of the International Foundation for Sustainable Development who works with Russian investors as well as investors those from the West, says the country's natural resources are particularly attractive to Russian investors, such as hydroelectric power and mining - anything that can be extracted and manufactured because that is the sector where they are "internationally competitive," he says.

Investment consultant Stephanie Komsa explains that one of the hardest parts about attracting American investment to Georgia is familiarizing US companies about Georgia; with Russians that is not necessary. "Historically, [Russians] have always seen Georgia as an attractive place and a place for opportunities... I think Georgians are also really comfortable with Russians, in terms of personally and as tourists and as business partners. There is just a historical understanding and connection with each other," she says. "In that sense, Russian [investment] is very, very practical."

Tvalchrelidze, agrees that historic relations play an "essential" role in business relations between the two countries, but warns that while western businesses are legally required to be transparent due to the laws in their home countries, Russian businesses are allowed to be more "flexible."

In 2005, when Georgia started its radical privatisation process, that "flexibility" was at the core of concerns about Russian investment. Civil society protested the possible sales of strategic assets to Russian companies with opaque ownership. There were also concerns that Moscow would try to control the country economically, if not politically.

Today, however, for several those concerns have fallen second to the government's priority to increase economic growth and decrease unemployment.

Komsa notes that proper tenders and open processes are making investments from Russia - or anywhere - more transparent. Also, Russia's 2006 embargo on Georgian goods forced Tbilisi to diversify its trade partners, a development that puts the economy in a much stronger position to be more choosy about which companies it chooses as business partners. "Georgia can be a little bit picky about who invests because there are such a diverse set of investors. There are not a lot of investors yet, but it's not going to be stuck in a situation where it will be at the mercy of a situation in one country," she says. "So now it seems to be a good time to embrace Russian trade and Russian investment and Russian tourism, because it is not the only thing."

Komsa, who works with Georgian businesses who are looking for investment partners, noted that while money has no scent, acquiring a good investment partner still requires a strong nose. "Investment always requires analysis and consideration of every factor. Who the person is, whether they are trustworthy, what their personality is, whether they are a good manager, whether they think strategically, what their financial situation is," she says. "Money has no smell but you need a nose for investment... to sniff out everything."

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