COMPETITION IN THE CAUCASUS: THREE'S COMPANY
By Justin Keay
Armenia, Azerbaijan and Georgia are competing to attract
foreign investment. With much of Central and Eastern Europe still
mired in a post recession slump, the Caucasian trio may all
benefit.
Over the past few months, international business magazines have
carried full-page advertisements urging people to invest in Georgia
and extolling the former Soviet Republic's achievements in facing
down corruption and improving the business environment. Georgia's
transformation from a post-Soviet basket case economy to a shining
example of what determination and focused, far-reaching free-market
reform can do is tough to beat. In 2003, before the Rose
Revolution, living standards and expectations were low, corruption
was rife, and foreign investment negligible. Today, despite the
August 2008 conflict with Russia, Georgia has one of the most
progressive and liberal economies in the world, with the World
Bank's Doing Business survey and Transparency International both
giving it favorable marks. The World Bank placed Georgia 12th out
of 183 countries for overall ease of doing business, up one point
from 2009.
"The World Bank says we are the Number One reformer over the past
five years, having successfully pursued structural reform and
large-scale privatization, largely eliminated corruption and
massively improved tax collection," says Giorgi Badridze, Georgia's
ambassador to the UK.
With Central and Eastern Europe increasingly resembling Western
European countries with their rising real wages and costs, do
Georgia and its South Caucasus neighbors Armenia and energy-rich
Azerbaijan represent a viable new frontier for multinationals?
"This is an exciting region, very different from the likes of
Poland and Hungary-and relatively unknown," says Alice Mummery, a
Caucasus analyst at the Economist Intelligence Unit.
Mummery cautions, however, that investing in the Caucasus can be
difficult, citing high levels of corruption and bureaucracy. "The
need for reform is still quite considerable, and the three
economies are very different and so will attract a very different
sort of investor," she adds. According to Jean-Louis Lavroff, head
of operations at the EU Commission in Baku, Azerbaijan, doing
business-except in Georgia-is also often a far-from-transparent
activity. "It's easy to set up here (Azerbaijan, like Georgia and
Armenia, has a one-stop shop for investors), but you may end up
working in a situation very different from the West, where
decisions take a very long time," he says.
The continuing recovery from the global economic downturn should
reinforce the region's appeal, as should the substantial
investments all three countries have made in infrastructure in
recent years. The economies have also benefited from tough
financial regulation and the local banks' lack of integration into
the global banking system, which helped them sidestep the crisis.
The banks' relative isolation from the global financial system does
mean, however, that there is also a lack of competition and
sophistication.
Relative Merits
While all three countries in the region are competing for the same
international investment, each country has different strengths.
Armenia's economy is relatively diversified, with competitiveness
boosted by the 22% depreciation of the dram in March 2009, but for
investors the main appeal remains the metals industry, made more
attractive by the 2010 recovery in commodity prices. Economic
recovery has been underpinned by the construction of a new airport
terminal, as well as by concessional finance packages from Russia,
the IMF and the World Bank.
Azerbaijan has also generated tremendous investor interest in
recent years but appears to be faltering. Until last year it was
one of the world's fastest-growing economies, largely because of
its vast oil wealth, but in the first 11 months of 2010, the main
contributor to growth was the nonoil economy, which grew by more
than 5%. Beyond 2012 this picture will change on the back of
significant planned investments in the vast Shah Deniz gas field
and the exploitation of 200 billion cubic meters of gas and more
than 30 million tons of condensate recently discovered at the Umid
field in he Caspian Sea. Concerns remain about Azerbaijan's heavy
dependence on the energy sector, but, says James Nixey, a Caucasus
specialist at London's Chatham House economic think tank, "Baku has
made undoubted progress in opening up to Western markets and
putting its energy wealth to good use."
Neighboring Georgia has also faced considerable turmoil recently in
the wake of its brief war with Russia over South Ossetia. But while
Georgia's long-term recovery remains dependent on foreign direct
investment (
FDI
) inflows, there are reasons for confidence. Investors have been
active, particularly in the tourism sector, and the economy has
bounced back impressively, with manufacturing output up 8.3%,
financial services up 12.3%, trade rising 11% and hospitality
businesses seeing 15% growth over the first 10 months of 2010.
Until recently an energy importer dependent on Russian gas,
Georgia, by virtue of its hydroelectricity investments, has become
an exporter of electricity. have made Georgia an exporter of
electricity. New gas contracts with Azerbaijan should safeguard
future supplies.
"I'm confident the figures will show Georgia grew 6.5% last year.
The challenge now is to maintain this momentum," says Badridze.
Time then to consider investing? All three countries are very
different, yet there are opportunities across the board, notably in
construction, tourism and financial services. In Azerbaijan, for
example, only 10-15% of the population have a bank account. The use
of credit cards and more modern innovations is in its infancy,
which suggests considerable opportunities for proactive foreign
banks. With global FDI flows yet to recover to precrisis levels,
liberal Georgia, with its key energy transport role and close
affinity with the West, also presents interesting possibilities for
adventurous multinationals. The laggard is Armenia, whose economy
was hit hard by fallout from the global crisis, but with the
prospect of a 4%-plus growth rate in the coming years, that country
too will most likely see a reassuring surge in investment.