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Investors Return to Georgia Despite Russian Threat

October 12, 2010

Thursday afternoon, October 7, Georgian Prime Minister Nika Gilauri spoke at The Atlantic Council in Washington. As was to be expected, Gilauri ran through an impressive list of achievements notched by the embattled country before taking questions. The following is my summary of his talk with some added background text:

Georgia’s economic recovery from the 2008 war, first seen in the last quarter of 2009, continued thru 2010. There is every expectation that a return to eight percent growth will be seen in a few years. Tourism and investment led the growth. International financial institutions played a significant role in keeping the economy going through the second half of 2008 through much of 2009 with much funding directed to needed infrastructure projects which also attract private investment. Foreign direct investment has decreased from a 2007 high but private foreign investors are returning to Georgia especially for energy and infrastructure projects. One example is hydroelectric power generation and transmission. There are five new hydroelectric plants under construction along with high tension lines to supply power to Turkey.

Significant reforms passed into law and rigorously enforced over the past few years have buoyed investor confidence. Georgia is now an exemplar to other states in region. The lack of corruption is a beacon to peoples in other post-Soviet states. The government’s highest priority is unemployment, hence the push for foreign investments which are an avenue to job creation. The question is, what is Georgia’s niche? The answer is a strong, unfettered private sector. To that end, the government has cut the number of taxes to six from 26 all of which are flat taxes. The license regime has been greatly simplified. The labor code is now simple.

The World Bank currently ranks Georgia 11 out of 183 countries for “ease of doing business.” There is a goal to crack top 10.  To do so, there is an emphasis on further diversification of trade. Russia no longer dominates the market for Georgian exports. Today, Georgia’s largest market is the EU, which  accounts for 24 percent and the next highest is Turkey.

The energy sector shows the most promise for continued growth. The Trans-Caspian pipeline, which will run through Georgia carrying natural gas from Turkmenistan and other pipelines carrying oil and natural gas from Azerbaijan, will be able to tie in to the Nabucco pipeline running from Turkey to Austria. There is also interest in Georgia supplying electricity to Iraq via Turkey. Also under consideration is a liquid natural gas project with Hungary and Romania and Azerbaijan whereby Azeri gas would be liquified in Georgia and then shipped to Romania and Bulgaria and possibly on to central Europe. Oil refining shows potential.

[From the Q&A session]
Demands that Russian forces occupying Georgian territory must leave in order for Russia to joint the World Trade Organization are very helpful to ending the ongoing issue as they put the credibility of the international organization committed to the rules of trade between nations on the line which is far more powerful than Georgia alone versus Russia in the court of world opinion. The WTO is very clear on the issue of transparency at borders and checkpoints and Russian occupation prevents this as many countries, not least the United States, see it.

Despite Russian occupation of 20 percent of Georgian territory, the security problem is being viewed in a better light as evidenced by rising visitor rates seen from 2009 thru 2010.

There is a movement to make changes to the Georgian constitution that would place more power in hands of the prime minister. That so much power was put into the hands of the president was necessary in 2007 but now, with reforms in place and corruption nearly eliminated, a move for greater checks and balances can be enacted though skeptics believe it is so that President Saakashvili, barred from running for a third term, can become prime minister and still run country.

NATO Secretary General Anders Fogh Rasmussen just visited Georgia which means that NATO accession is still in play.

Georgia desires to play a role in resolving the Armenia-Azerbaijan conflict.

Despite all the security tensions with Moscow, many leading Russian businesses continue to operate in Georgia including Lukoil and leading telecom operators.

There is hope that Russia’s occupation of Georgian territory will be put under the international microscope because of the 2012 Sochi Olympics. Sochi is close to Georgia. Furthermore, grave environmental damage is being done in preparing the Sochi area for the games.

A diversity of political opinion can be seen on Georgian television despite opposition complaints that Saakashvili’s ruling party dominates the airwaves.

There is a possibility that a major American university will open a branch in Georgia as a regional center for learning.

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