Georgia: Post-War Tbilisi Works to Prop Up Investor Confidence

One month after war broke out with Russia, Georgian officials and foreign business executives are maintaining a cautiously upbeat outlook on the investor climate in the country.

Foreign direct investment has fueled Georgia's recent economic boom, and allowed the government to manage its growing trade deficit, and to finance ambitious development programs. In 2007, the country received $1.6 billion in outside investment (more than 40 percent more than in 2006) and posted a 12.4 percent economic growth rate.

Before the conflict with Russia, the government estimated that Georgia would receive close to $2 billion in foreign direct investment for 2008. Now, with economic growth expected to fall by nearly half, officials hope that strong support from Georgia's allies in Washington and Brussels will help contain the damage to investor confidence.

In a country like Georgia, where job growth outside of the capital has been patchy at best, losing a steady inflow of investment would have significant political and economic consequences. Vakhtang Lezhava, Georgia's deputy minister for economic development, reports that, so far, investors have proven resilient. While he noted an investment "pause" in some sectors, like real estate, Lezhava stressed that overall there is little evidence of a mass exodus of Georgian investors. "Investors showed cautiousness, but we cannot say this [investor flight] is a trend," he said.

Convincing investors that Georgia remains a solid business environment is a "big challenge" for the government, he added. To encourage those investors with outstanding projects in Georgia, a recent presidential decree established a governmental commission to help see those initiatives through to completion, he said.

While Lezhava declined to put a dollar amount on investment lost due to the war, at least one real estate deal worth $20-25 million fell victim to the fighting. Burlington Capital Group, an American investment developer based in Omaha, Nebraska, rethought its plans for a real estate development project after fighting between Georgia and Russia broke out on August 8. [For background see the Eurasia Insight archive].

"The war has certainly brought an immediate halt to our investment review of Georgia. However, there have been ongoing concerns within the investment team about the viability of investments in Georgia," Alec Guroff, a senior investment officer with the firm, told EurasiaNet via email. Ongoing tension between Russia and Georgia makes it "difficult" to "project long-term growth" in the country, Guroff added.

Deputy Economic Development Minister Lezhava stressed that "no major investors or big players" have pulled out of projects in Georgia as a direct result of the recent conflict. Burlington Capital Group had not made any financial commitments at the time of the conflict.

One foreign executive believes that the war's impact could have been far worse. "Of course, the conflict has impacted both current and potential investors, but not as negatively as one might have expected," Luc Caltrider, the general director of TBC Broker, a brokerage firm connected with TBC Group, a financial services firm partly owned by the European Bank for Reconstruction and Development, said in an email interview. "I do know of some investments that have been postponed, but, generally, most of the people we have spoken to have not pulled out yet. They are in the 'watch and wait' mode."

Professionals like Caltrider anticipate that investors will continue to be cautious for at least the next six months. A reassuring sign would be the complete pull-out of Russian troops still in Georgia. [For background see the Eurasia Insight archive].

David Lee, the managing director of mobile communications company MagtiCom, noted that foreign companies are apt to follow the lead of Washington and Brussels. If the United States and European Union maintain a strong assistance commitment to Georgia, investor interest in the country is likely to remain strong.

Both Washington and Brussels have pledged to help Georgia rebuild after the war, although details about how the funds will be used remain vague. On September 3, the United States announced a $1 billion economic aid package, and the European Union has pledged assistance that could include trade agreements and new, simplified visa regimes. There are also plans for a EU-sponsored international conference on Georgia's reconstruction in October.

"It is clear that the support from the United States of America is very high. It does appear that the Americans intend to provide all the resources necessary to ensure that the Georgian economy is not affected in the long term," Lee said.

Spelling out plainly Georgia's market connection with the West should be part of the reconstruction plan, he added. "What would be good is if Georgia could show a clear path to its inclusion in European markets," Lee stated.

Deputy Economic Development Minister Lezhava highlighted the importance of international support to boosting investor confidence. The recent displays of support from the United States and Europe are "very difficult to overestimate" in terms of the message it sends to investors, he noted.

The pledges coincide with a proposed 18-month $750 million outlay from the International Monetary Fund to promote economic stability. A mission from the World Bank, Asian Development Bank, European Bank for Reconstruction and Development, the European Investment Bank and the United Nations arrived in Tbilisi on September 8 to assess "the most pressing" recovery needs in areas ranging from agriculture to housing.

"There are [three] things [needed] for investment: you need developed infrastructure, you need business climate and you need confidence," Lezhava continued. "We will continue to invest as much as possible in the infrastructure. ? We need to work on confidence."