Georgia’s continuing quest for international investment
By M. Alkhazashvili
The Messenger, Georgia
Aug 30 2005
In recent weeks the existing investment climate in Georgia has become
a topic of heated discussion. The authorities’ declarations that
the country is attracting large amounts of foreign investment are
contrasted by the contentions of opposition forces and independent
experts that the investment climate has deteriorated.
The issue of foreign investments in Georgia will by high on the agenda
at two upcoming business conferences dedicated to Georgia. The first,
the America-Georgia Business Council’s 8th annual conference in Chicago
this October is headlined, “Georgia: Potential for Growth.” The second,
the Georgia Business and Investment Summit in Tbilisi this November,
is being organized by the European Finance Convention together with
the Federation of Georgian Businessmen and AmCham Georgia. A major
question facing participants is whether the investment environment
is improving in Georgia and what can be done for future improvement
of the investment environment.
One indicator is the Index of Economic Freedom published by the
conservative U.S. think tank the Heritage Foundation that drops
Georgia’s rank in the list of nations from 91st place to 100th
since last year. The report ranks 161 countries and lower scores are
considered better; this year Georgia scored 3.34, 0.15 points worse
than in 2004.
A statement made by the Heritage Foundation explains that the most
negative aspects of Georgia’s economy are the country’s investment
climate and the recent increase in the informal market. “Based on
increasing evidence of informal barriers to foreign investment,
Georgia’s capital flows and foreign investment is 1 point worse
this year,” the country report on Georgia states. It is noteworthy
that the report, basically a survey of surveys, does not taken into
consideration new legislation on taxes, financial amnesty and the
even more recent reform of licenses and permits.
Another way of measuring the pros and cons of the local investment
climate has been to observe the dynamics of investment over the
years and compare them to those of neighboring countries. Foreign
investments in Georgia have shown a tendency for growth since 2001.
That year USD 109 million entered the country in foreign investments.
In 2002, this indicator totaled USD 176 million; 2003 – 339 million;
2004 -500 million and in the first six months of this year – USD
245 million.
However, the influx of foreign investment into Georgia cannot hope
to compete with that of neighboring Azerbaijan. In 2002 two billion
dollars in investment entered that country; 2003 – 3 billion and 2004 –
4.192 billion. Obviously, the vast majority of this sum was directed
toward the petroleum and gas business.
It is precisely Azerbaijani oil that is responsible for much of the
foreign investment in Georgia as well. For example, in the first six
months of 2004, 81 percent of foreign investments in Georgia came
from BP, the oil company operating the Baku-Tbilisi-Ceyhan pipeline
project. After the completion of construction on this project, now
the natural gas pipeline Baku-Tbilisi-Erzrum – which will transport
Azerbaijani gas through Georgia and Turkey to the Mediterranean Sea –
takes on key importance.
Construction on the Baku-Tbilisi-Erzrum pipeline, the Kulev energy
terminal and the Tbilisi International Airport are the projects that
will bring in the bulk of foreign investment this year and in 2006.
As far as Armenia is concerned, clearly the “Azerbaijani projects”
will not influence investment into this country. Key players in
foreign investment there are Russia and the vast Armenian Diaspora.
Foreign investment is overall on the rise, not counting a sharp
drop-off in 2001, though the total amount of investment is lower
than that of Georgia. The statistics look as follows: 2000 – USD 124
million; 2001 – 76 million; 2002 – 152 million, 2003 – 152 million
and 2004 – USD 183 million.
Finally, another way to look at foreign investments, their growth
or decline, is to look at activity on the ground. It is undeniable
that this year has seen several prominent international companies take
interest in Georgia. The U.S. insurer AIG opened its first office here,
the Russian bank Vneshtorgbank bought a large share in United Georgian
Bank and the Kazakh BankTuranAlem bought a large stake in the Silk
Road Group. Many others have taken an interest in privatization and
government tenders.
Still there is much to be done to improve the investment climate and
promote business activity – both foreign and domestic – in Georgia
and it is encouraging that this is a stated goal of the current
government. The big question is how the government will follow through
on this goal.