Molly Corso in Tbilisi -

As international sanctions take their toll on Iran's economy, businessmen from that country appear to be increasingly interested in doing business with Georgia. But with Washington stepping up pressure on countries doing business with Iran, Georgia could face a difficult balancing act between its allegiance to the US and its economic interest in its southern neighbour.

Tbilisi raised eyebrows in 2010 when it lifted visa requirements for Iranians, a move that appeared to fall foul of its strategic partnership with Washington even as the US invested $1bn to prop up the economy following the 2008 war with Russia. Slowly, the overture has turned into concrete investments in joint ventures and real estate, and increased the number of Iranians visiting Georgia, helping its anaemic tourism sector to recover; according to official statistics, 9,000 Iranians visited in the first half of 2012, twice the number during the same period last year.

Much of the increase in trade is largely anecdotal, like groups of Iranians photographing monuments and the opening of new Iranian restaurants in Tbilisi, but business groups too are now reporting an up-tick in investment. Giorgi Isakadze, president of the Georgian Small & Medium Enterprises Association (GSMEA), tells bne he had three groups of Iranian businessmen visit in the first week of June alone - and he fielded over a half a dozen calls from Georgian businesses seeking out Iranian investors. The Iranians, he says, are largely focused on "due diligence" in specific sectors like retail and real estate.

Isakadze stresses that Iranians have been investing in Georgia for years, but interest has definitely increased this year. Official statistics show Iranians invested $246,800 in the first quarter of 2012, far below that of Georgia's main investment partners like Germany ($131m), but already more than Iran invested over all four quarters last year. "[Iranians] are looking to Turkey, they are looking to Azerbaijan, they are looking to Armenia. They have very specific relations with all our neighbours," he says. "I think more or less these business guys analyzed this situation and made this business decision, 'why not Georgia?'"

Sidestepping sanctions

But with new sanctions hitting major parts of the Iranian economy, including the banking and energy sectors, there has been mounting concern that Iranian businesses are looking to Georgia for possible loopholes around the restrictions they face at home.

There are also fears that close relations with Iran could bring security risks: in February, Georgian police uncovered a plot to bomb an Israeli diplomat the same week as a similar attack was carried out in India. Georgian officials have been quick to quash concerns that its open policy with Tehran was equivalent to leaving the country open to terrorist attacks. Instead, the government has stressed the need to foster good relations with its southern neighbour, to improve tourism links and trade. In May, the Georgian Chamber of Commerce welcomed a large Iranian trade mission that promised new investments in transport, food, agriculture, banking and the insurance sector, according to media reports.

Maintaining good relations with Iran is a prudent strategy, according to political scientists like Dr Alexander Rondeli, founder of the Georgian Foundation for Strategic and International Studies. Georgia has to "balance" its need for good relations with Iran with its international obligations to the US and Europe, as Iran is among the three most important neighbours for Georgia (the other two being Russia and Turkey), Rondeli says, adding that the South Caucasus is also strategically valuable to Iran as a "buffer zone" and a potential sphere of influence.

The sanctions, however, are "grey areas" for bilateral relations, a "sensitive point" between the two countries, Rondeli notes.

Nevertheless, Isakadze shrugs off concerns that Georgian businesspeople will be lured into playing the role of an unwitting accessory to violating international law. "I am more than sure that, in general, businesspeople are aware about this international problems and sanctions. But what they can see is that regarding businesses, so far nothing has happened, nothing has been stated," Isakadze says.

"Did anyone sanction such private relations?" Isakadze asks. "I think not. [Businesspeople] consider it a green light. So the risks of these relations are calculated personally by private people, not public [officials]."

Rondeli, however, warns that Georgia - like any small country - has to be acutely aware of turmoil that could shift the balance. "Georgia has to balance. It is a small country, and for small countries the only real instrument of foreign policy is internal unity, social and political cohesion, which is still not Georgia's strong [suit], and it is skillful diplomacy," he says. "You have to be very diplomatic; you have to go always on the edge of the knife - especially when you live in the South Caucasus."