Election wrangles test Georgia's investor-friendly brand

By bne IntelliNews August 31, 2012

Michael Cecire in Tbilisi -

As Georgia's October parliamentary elections loom, the increasingly hostile contest between the ruling United National Movement (UNM) and the billionaire-led opposition is seriously testing the country's carefully crafted brand as a libertarian model economy and a foreign investment destination.

Only four years on from the war with Russia, Georgia has aggressively sought to overcome international perceptions as a warzone. With an economy highly dependent on foreign direct investment, which rose 37% in 2011 to $1.1bn, the Georgian government heavily promotes the country's bevy of business-friendly legislation, improving GDP growth - 6.8% in the first quarter - and impressive 34th ranking on the Heritage Foundation's "Index of Economic Freedom".

Alongside this has been the crackdown on corruption, which has turned the country from one of the worst in the former Soviet Union to the best in less than a decade. The highlight of this fight was President Mikheil Saakashvili's order to sack the entire traffic police force on a single day in 2005, replacing them with some of the best university graduates. "Georgia ranks alongside Finland as having the least corrupt police force in the world," Plamen Monovski, CEO of Renaissance Asset Managers, says.

Michael Taylor, a senior Eastern Europe analyst with Oxford Analytica, a political risk consultancy, agrees that the government deserves credit for its crackdown on low-level corruption, pointing out that today's Georgia is a visibly better-working place than the country the government inherited following the 2003 Rose Revolution. "But what happens at the big end, at the senior level? I don't think much has improved there," Taylor says.

Indeed, the surprisingly uncertain election season is exposing some of the Georgian government's worst autocratic excesses and corruption at the highest levels, which are raising some red flags for would-be investors.

Rich pickings

In October 2011, Georgia's political landscape was radically altered when billionaire Bidzina Ivanishvili, Georgia's richest man and a well-known philanthropist, announced his entrance into politics against the UNM, which was then expected to coast through the 2012 parliamentary and 2013 presidential elections. Almost immediately, Ivanishvili, who made his fortune in Russia, was stripped of his Georgian citizenship on a rarely-used technicality and branded a Kremlin proxy.

In late June, following a lengthy string of financial penalties imposed on Ivanishvili and his political allies over numerous allegations of party-funding violations, Georgia's National Bureau of Enforcement impounded 100% of Ivanishvili's shares in Cartu Bank and 21.7% in Progress Bank. Finding no buyers, the state took control of Cartu and installed new management. No members of the government were willing to talk to bne about the issues.

Laura Linderman, an assistant director at the Atlantic Council's Dinu Patriciu Eurasia Center, says that the arrival of Ivanishvili on the political scene has already forced a face-lift to Georgia's "libertarian" brand due to the demands of electoral politics. Spending on seemingly redundant new ministries like the employment ministry and high priced social programmes, for example, is directly at odds with that brand. "It is hard [for the government] to maintain [libertarian] ideals in the face of political pressure," she says.

However, by using heavy-handed tactics against its political opponents, Georgia is also undermining its brand as a hands-off, pro-investment technocratic state. "It doesn't look good," says Oxford Analytica's Taylor. "It sends a message that one needs good friends in Georgia to do business there."

Yet Taylor believes that the bank seizures, while bad for the Georgian government's international image, are mostly a distraction from a more serious problem. "A small group of people in Saakashvili's circle control most major private enterprise in the country," he says, citing contacts on the ground. "You can invest in Georgia only if you make friends with those people."

This view is echoed in multiple studies conducted by the anti-graft NGO Transparency International Georgia. One study of competition policy in Georgia used fuel and food market segments as case studies and found both to be oligopolistic. Another report found the Georgian advertising market to be dominated by friends and business partners of ex-defense minister Davit Kezerashvili. Research on the media and pharmaceutical sectors yielded similar results. "In the West, there's this idea that Saakashvili has introduced competition,' notes analyst Taylor, but calls this notion an "illusion."

In a report on Georgia's political future, Tom de Waal of the Carnegie Endowment for International Peace comes to the same conclusions, arguing that "Georgia's economy has some shadowy places that merit deeper investigation."

Indeed, the seemingly politically motivated adverse judicial rulings and government actions extend well beyond Ivanishvili.

In October 2010, Israeli oil trader Rony Fuchs and his business associate were arrested by Georgian authorities over a dispute regarding an internationally-arbitrated $100m settlement owed to Fuchs by the Georgian government. After secretly videotaping negotiations in Istanbul between Fuchs and an undercover official, which included a $7m kickback, Fuchs and his associate were arrested in Batumi after being invited to finalize the deal. Charged with bribery, they were sentenced to lengthy jail terms only to be pardoned in late 2011, coinciding with a revised $37m settlement -- a steep reduction from the $100m-plus interest that Fuchs was originally owed.

The Fuchs and Ivanishvili cases are only a couple of higher profile incidents of controversy. In April 2011, Georgian businessman Anzor Kokoladze was jailed and his Elit Electronics retail chain seized and transferred to Tbilisi-based TBC Bank over a tax dispute with the Georgian Revenue Service. And following the mysterious death of Georgian tycoon and opposition leader Badri Patarkatsishvili - whose Imedi television station was violently shuttered during a government crackdown on opposition protests in November 2007 - ownership of the station transferred to a distant relative under debatable circumstances. Imedi is now considered by Transparency International Georgia to be a reliably pro-government outlet.

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