Ben Aris in Tbilisi -

"Invest in Georgia, a market with access to over 900m people." That's one of the straplines for the state investment agency of the small Caucasus republic. It's an enormous number, and it includes not only the rest of the Caucasus, but also all of Western Europe, some of the Middle East and, most surprisingly of all, Russia.

Georgia fought a short, sharp war with Russia in August 2008 and has suffered a trade embargo for much of the intervening years, but the state investment agency still lists Georgia's proximity to its bellicose northern neighbour as one of its main selling points. Russia is simply too large, too rich and too close to ignore.

"The trouble with Russia is it is an important market, but it is not a free market – rather it is a political market. Companies have to be very careful because political statements can quickly turn into trade bans," says Giorgi Pertaia, director of Invest in Georgia, in an interview with bne. "It limits the amount of investment because if companies go to Russia and invest heavily, they expose themselves to large risks."

Damned if you do, damned if you don't, Georgian businesses have re-started exporting to Russia, but almost all are limiting the amount of their exposure by using brokers and not doing the obvious follow-through investments into logistics and marketing inside Russia.

The country has used its run-in with Russia to focus on diversifying its export markets and in the intervening years has moved a lot closer to Ukraine, Azerbaijan and Turkey. The country is hoping to capitalise on its geopolitical position as a nexus between the three worlds and its good trade (if not always political) ties with its surrounding neighbours. In July it signed off on a free trade and association pact with the EU. The country also has a free trade agreements with Turkey and the Commonwealth of Independent States (CIS) – hence the enormous number of people it claims for its hinterland.

The problem with countries is that you can't move them or change their neighbours, but Pertaia points to Cyprus and Israel as examples that have done well economically despite intractable "frozen conflicts."

Investment returns

Georgia's small size has been a blessing in disguise, as it has largely avoided being pulled down by the economic pall hanging over the globe.

A textbook example of successful reform – indeed, Kyiv mayor and former world heavyweight boxing champion Vitali Klitschko said in July that he wants to copy Georgia when setting up his administration – the country is ranked at number eight in the most recent World Bank's "Doing Business" survey – well ahead of all its Western European peers, except Denmark.

GDP growth hit 7.1% in the first quarter of this year, up from 6.0% in the previous quarter. The government forecasts 5% economic growth in 2014. This compares with the 2% growth in 2008 following the conflict with Russia, and the contraction of nearly 5% in 2009.

The story with foreign direct investment (FDI) is similar. In the boom years Georgia was attracting $2bn a year in FDI – partly due to a very aggressive privatisation programme. But in 2008 the country was hit by a triple whammy, says Pertaia: the global financial crisis, the war with Russia, and political unrest and riots within the country.

"The investment volume suffered significantly at this time, and FDI and the economy both slowed. However, Georgia is resilient compared to other countries in the region and today is growing fast," says Pertaia. "Last year FDI recovered to some $900m. It is less than we wanted but the trend is rising. In just the first quarter of this year we attracted $260m, which is a 14% increase on  the same period last year, so things are going in the right direction."

A river runs through it

The government is promoting four main sectors to spur growth: hydroelectric power, tourism, manufacturing and agriculture. Georgia has very few natural resources, unlike many of its energy-rich neighbours, but the one thing it does have in abundance is water and mountains.

"Our main export market [for power] is Turkey, where the seasonal demand matches the seasonal supply of Georgian hydropower. The summers in Turkey are hot and dry, and they have a big energy supply deficit, as everybody is using air conditioning and TVs. In Georgia the maximum water flow comes in the spring and the summer, which is when we produce the most electricity," says Pertaia.

The government is actively pursuing and promoting investment into hydropower. The state-owned Partnership Fund was set up to "close the equity gap" between startups and money, and has been given control of some of the country's most valuable assets, using their dividend payments to finance the $1.5bn fund. Its biggest investment is the Neskra hydropower plant with a total capacity of 210 megawatts (MW), worth $570m. Construction has already begun and the fund is in talks with Korean company K Water, amongst others, as a potential co-investor.

At the same time, the privately owned Georgian Co-investment Fund (GCF) has $6bn under management and is focusing on the same sectors as the state. Former prime minister and billionaire businessman Bidzina Ivanishvili seeded the fund with his own cash – but only owns 15% of the total to ensure it remains apolitical – and this was added to by other investors like the Azerbaijan State Oil fund, the Abu Dhabi sovereign wealth fund, Kazakhstan's KazMunaiGas and other private investors, all of whom are looking to make a return on their capital. GCF has an even larger hydropower project in the works – a 350MW four-stage cascade hydropower plant that will cost $700m to complete.

"We are on the verge of signing a deal with global top three private equity funds to co-invest in one of our projects. If the deal goes ahead – and we hope to announce a success soon – it will be one of the biggest investments in Georgia’s history," says the GCF's CEO, George Bachiashvili, in an interview with bne.

This means several huge new hydropower plants are due to come on line over the next four to five years, after which Georgia should become a net exporter of electricity.

Tourism blossoms

With tourism things have gone even faster. Tbilisi is an ancient city with more churches per square kilometre of all denominations than any other capital in the world. The woods that run down the city's steep hills to the Mtkvari River cast a dappled light over the small streets where cafes and restaurants nestle under the wooden porches of traditional Georgian architecture. Georgian food is famous throughout the former Soviet Union and the wine plentiful, excellent and cheap.

Last year over 5.4m people visited a country with a population of only 4.5m. Five-star hotel rooms are already at a premium and need to be booked six months in advance to be certain of a reservation.

The Partnership Fund has five hotel projects in the works, of which the Rixos Borjormi Spa Resort, near the source of the mineral water spring of the same name, is the biggest. "This was a famous resort even in Tsarist times, as the Romanovs had one of their holiday houses here. We have invested into renovating the buildings and creating a five-star hotel," says Nino Cholokashvili, senior investment officer of the Partnership Fund.

GCF has even bigger, if more controversial, plans. The $500m Panorama Tbilisi project will add several flagship hotels and high-end serviced apartments to the capital. Bachiashvili says that after public meetings to address environmental concerns, the project has been resubmitted to the city authorities and hopes to get approval soon.

Food for thought

Agriculture is the last of the potentially interesting sectors. Georgia boasts nine different climate zones and in addition to its famous wine is also the world's biggest nut exporter. But privatisation left land ownership mostly in the hands of small farmers, so it has been difficult to consolidate farms to a size that would attract significant investment.

The Partnership Fund has a plan to grow blueberries. "The European harvest mostly comes in May and there is another harvest of blueberries in Poland in October. However the Georgian harvest is right in the middle," says Cholokashvili of the Partnership Fund.


The GCF also has a few small projects in agriculture on the go. The fund is already building 5ha of greenhouses to grow tomatoes, which will be expanded to 9ha and then eventually 50ha. It is also planning to invest to a dairy farm with a herd of 1,000 cows that will produce 25 tonnes of milk a day, as well as a dairy processing plant that can handle up to 400 tonnes of milk and will collect milk from other farms. "The problem is Georgia currently imports about 80% of its food products. The plan is to replace the imports and start exporting instead," says Bachiashvili.