Ukraine take note. This might be how you do it.
Of the three ex-Soviet countries facing territorial disputes with the Russians, which include Moldova and Ukraine, Georgia is in the best shape by far. Some people say that what recent government’s did to Georgia post-Soviet Union was like what Rudolph Giuliani did to 42nd Street. Okay, an over-simplification by local Georgians here in the U.S.. But over the last four years, nearly 500,000 people rose above the national poverty line, according to the World Bank.
Investors, consider this: finding growth in Europe is like looking for a needle in a haystack. For years the biggest growth stories were the ex-Soviet states in the Baltics, now fully incorporated into the euro zone and growing at around 3%. For corporate investors looking for a bit more upside, what’s left over there? Georgia?
It’s on the outskirts of euro land, which these days might actually be a good thing. It’s growing at 5% on average since vacating the Soviet Union, and if the government is right this small state on the border of Turkey and the Black Sea, should continue on the same trajectory over the next several years regardless of what happens in this weekend’s elections.
Georgia has a free trade deal with the European Union. Exports to the E.U. account for a third of Georgia’s international trade, and are up 19% in four years. It’s ranked 24 in the 2016 Doing Business Report, which is better than Poland, Switzerland, France and The Netherlands.
In the political realm, Georgia is up 82 spots in Transparency International’s Corruption Perception Index since 2005 to 48 out of 168 countries, meaning it is less corrupt than Italy and every single country in southeastern Europe (not to mention the BRICs).
“We’re small, but we’re a good country and foreign companies that I talk with are quite optimistic about it,” says Giorgi Mirotadze, CFO of FINCA Bank, a subsidiary of Washington DC based micro-lender FINCA International. “Foreign companies get a lot of support and are protected even more than a local businessman at times. It is a lot like Estonia in a way they do business,” Finca’s CFO tells me in a Skype call from Tbilisi. Estonia is ranked 14 in the Doing Business report, next door to Germany. “There’s not a lot of red tape for international companies to set up shop,” he says.
Georgia is a corporate investor story, not an investment portfolio story. However, its BB rated credit brings in around 6.87% yield on its 2021 dollar bonds. External debt-to-GDP is around 100% and its current account deficit is around 9% of GDP, according to the IMF.
Giorgi Kvirikashvili, the country’s relatively new prime minister, was in New York during the United Nations General Assembly last month. He met with Estonia’s leaders to discuss its e-government and digital residency program for businesses, something Georgia is trying to model.
“The U.S. is still our largest cumulative investor since regaining independence,” he says of life post-Russia in 1992. “I was in New York in April too and we meet with institutional investors who have money at work in Georgia and companies who are either investing already or looking to invest in financial, healthcare, real estate, manufacturing,” he goes on.
Russia also re-opened its doors to Georgia in 2013, mainly for agricultural goods following Moscow’s retaliatory sanctions against Western food exporters. Georgia was not included in those sanctions, but was eventually turned to as a supplier after Russia did the same against Turkey for shooting down a Russian military jet over Syria.
The Russians are still a political nuisance, though the leadership in Georgia at least is willing to talk with the Russians one-on-one, while Ukraine, for example, needs European moderators. Deeper E.U. integration won’t be easy for Georgia because Russia retains control over two breakaway regions in the country.
“Russia continues with its illegal occupations of Abkhazia and South Ossetia,” says Kvirikashvili. “The human rights situation there is worsening.”
The part of Georgia that’s not trapped in political battles with the Russians is doing well by comparison. For foreign firms, there’s no payroll tax or social contribution tax to deal with, and the corporate tax rate is 15%, half that of the U.S. The biggest problem for business isn’t Russia’s antics in South Ossetia and Abkhazia regions, but contending with a small domestic market. Georgia has less people than Connecticut, with a lot less money. Politics aside, there is money to be made here.
On February 8, 2016, a consortium of two U.S. and Georgian companies won a bid to build and operate a $2.5 billion deep sea part in Ankalia. The group breaks ground next month. The port is supposed to be operational by 2020. New Jersey based Conti International won the rights to run the port with local partner TBC Holding.
In 2014, Texas-based Frontera Resources entered the country’s natural gas market. Over the last several years, China developer Hualing Group has been building up entire residential and commercial blocks outside of the capital city of Tbilisi, making them one of the biggest foreign investors in Georgia, according to Invest in Georgia, a government agency.
Georgia: Little Engine That Could?
Here’s an example, which was not all that hard to find. George Arison runs Shift Technologies, a San Francisco-based company that is Airbnb meets your local car dealership. It’s only available in a few cities. People sell their used cars through Shift instead of the local niche classifieds. He opened a research office in Georgia in 2013. In August 2014, they went from 15 people conducting product research to test exactly how the site will work, to a little over 100 people now doing the back office work. He’s Georgian, so he had connections and the country holds some sentimental value. He’s been living in the U.S. for over 20 years. But Georgia was on his short list for back-office hubs, and it won.
“I remember going to Georgia in 2015 to register Shift Georgia as a company. I filled out one form. I paid $100. An hour later, I had a company,” he tells me from his offices in San Fran. “I looked at the Philippines. I looked at Costa Rica. But the Georgians were more flexible and they could adjust to changes quickly. The Philippines were good, but they wanted you to be more process oriented, more steady. We weren’t there yet because we were still growing our business. And Costa Rica cost basis was too high,” Arison says. “I’d double down on Georgia.”
Viewed from above, Georgia is the niche player in a region full of ex-Soviet states that are either one-trick ponies with nothing but commodities, or battling state corruption at such high levels that political risk scares investors away.
Per capita income has gone from just $6,000 in 2010 to a little over $12,000 expected by 2018, based on Geostat figures from the government. World Bank figures are a lot less.
Even though incomes are going in the right direction, there’s not a lot of people with spending power to sell to. Companies like Shift are not going to launch their business in Georgia. What a lot of corporations tell me is that Georgians are as tech savvy as the Baltics, but about 25% cheaper. They’re at least 75% cheaper than Americans.
One firm told me off the record that their total cost including overhead, real estate and food was around $3 an hour.
–That teeny tiny dark blue nation on the Black Sea near Turkey is Georgia; better than its neighbors.
Georgia’s export structure is mixed, with the three biggest exports being copper, iron and steel alloys and cars. Today, Russia accounts for 7% of Georgia’s exports while the U.S. accounts for 5%. It’s total tax rate is on par with Singapore, or actually slightly better, putting it in the top 10 countries with the lowest tax burden, a ranking usually granted only to oil countries like the UAE.
Georgia’s problems are as big as its opportunities, a Center for Strategic & International Studies report published in July stated. The government needs to build on existing successes and manufacture new solutions to these problems in the face of geopolitical headwinds over which Georgia itself exerts little control, report authors led by Andrew Kuchins warn.
Kvirikashvili listed the opportunities: free tourism zones giving investors free land, with property tax and profits exempt for 15 years. There’s the usual government roll-outs, of course: public private partnership deals, start-up support, and for the frontier market bond investor, a new pension system and development of a local capital market is in the works.
The problems are well known: corruption, poverty. The Russians.
In May, celebrity chef and world traveling foodie Anthony Bourdain visited put Georgia on the map for most Americans who, when thinking of Georgia, are thinking Atlanta.
In between wolfing down shots of grappa-style liquor known as chacha, Bourdain didn’t miss a chance to take pop shots at the Russians. His takeaway, though, was predictable if not glowing: Georgia food is great. The country is beautiful. Viewers should visit.
Lev Janashvili, a colleague of mine from Georgia who lives in New York says Bourdain got one thing wrong.
“Bourdain is crazy not to like our hangover broth,” he says of this thing called ‘khashi’. “It’s not a dish…like Georgia, it’s an experience.”