Georgia on My Mind
Having recently returned from summer vacation, the adventure is fresh on my mind. No, I did not travel to the southern U.S. state iconic for pecan pie and the Ray Charles hit, but rather the Republic of Georgia, or Sakartvelo, as the locals refer to it. Georgia, a sovereign state with 4.5 million inhabitants, is in the Caucasus region of Eurasia, situated at the crossroads of Western Asia and Eastern Europe, and can be considered Asia or Europe, depending on whose classification one uses. Georgia is bounded to the west by the Black Sea, to the north by Russia, to the southwest by Turkey, to the south by Armenia and to the southeast by Azerbaijan. Its land mass – over half which is wooded – is slightly smaller than that of Austria or Ireland and under half the size of the U.S. state.
Georgia’s dominant feature is the high Caucasus range forming the northern border and Europe’s highest peak, Elbrus, at 18,510’, thus attracting me to the region. The trip was surely not for the faint of heart or for those yearning for a chaise lounge. On the contrary, it entailed hiking and camping at over 11,000 feet in the Caucuses Mountains where as recently as 2008 fighter planes flew overhead in Russia’s attempt to usurp Georgia. Here, along the jagged, steep border cliffs with Chechnya and Daghestan, we were surrounded by majestic, snow capped mountains, migrating herds of cattle, territorial sheepdogs and stoic border guards. To complement the mix are the Georgian people, who display a venerable mix of passion, patriotism and piousness.
Hiking along the Georgia / Chechnya border Queen Tamar of Georgia
From King David IV (the “Builder”) to Eduard Shevardnadze
Georgia’s history can be traced back to the kingdoms of Colchis and Iberia. In the 4th Century, it became the second Christian state preceeded only by Armenia. Georgia reached the peak of its political and economic strength in the 11th-12th Century during the reign of King David IV – who succeeded in driving out the Sejuk Turks – and Queen Tamar – referred to as “king” despite her gender. The 18th Century saw the rise of Russia who claimed to protect the Orthodox from Islamic oppression, and who, under Peter the Great, began conquering the Northern Caucuses in 1722. After the 1917 Russian Revolution, Georgia briefly regained independence but found itself a pawn of larger countries competing for access to the Caspian oil fields. In 1921 Georgia was annexed by Soviet Russia and from 1922-91 was one of the 15 Soviet federal republics. In 1972, Eduard Shevardnadze, then interior minister, was appointed First Secretary of the Georgian Communist party and by 1985 became Mikhail Gorbachev’s foreign minister. In 1991, shortly before the collapse of the Soviet Union, Georgia declared independence. Like many post-communist countries, for most of the 1990s, Georgia suffered from civil unrest, economic crises and a wave of political assassinations. The Rose Revolution of 2003, funded by George Soros, resulted in a change of power. Shevardnadze was forced to resign after which the new government, under Mikheil Saakashvili, introduced democratic and economic reforms.
“Misha” Saakashvili
Mikheil Saakashvili, or ‘Misha’, the third and current President of Georgia and the leader of the United National Movement Party, has been involved in international politics since 1995. I grew to admire and respect the deft turn-around tactics of Saakashvili, to the extent that my travel companions referred to me as Shelley-Kashvili. He does, however, have his foes, particularly those longing for the old communist ways. Saakashvili succeeded Shevardnadze in 2004 as Europe’s youngest president, after having served as Mayor of Tbilisi, and was reelected in 2008, but by law cannot serve a third term. Once president, he immediately replaced the country’s flag and set out to vigorously tackle corruption. Tax collection rates rose sharply while tariffs were cut from a maximum of 30% to 5-12%. In 2006 and 2008 Saaskashvili earned the country the position of top reformer in the world by the World Bank which, together with the International Finance Corporation, named Georgia one of the top countries in their annual Ease of Doing Business report, ranking it 12th out of 183 economies. Educated in law at Columbia University and George Washington University, Saakashvili is regarded as pro-USA, pro-EU and pro-NATO, an organization which supports Georgia’s inclusion. His offices in Tbilisi include photos with Presidents Obama, Clinton and W. Bush (who has a highway in his name). While at times Saakashvili’s tendentious populism has tipped him into demagoguery, he still held a 67% approval rating by 2010 year end.
Despite Saakashvili’s efforts to move toward the West, politics is still largely dominated by relations with Russia. Since the outbreak of the 1999 Chechen war, Russia has tried even harder to control Georgia, and since 2000, has required visas for Georgians but not for its other neighbors. The collapse of the Russian market meant that much of Georgia’s industry closed down with production virtually halving in 1992. About 50% of the Georgian economy went underground and the tax base fell from 40% of GDP to under 10%, leading to Georgia applying for IMF help. Economic turnaround was fast; by committing to the required IMF reforms, 1995 marked the beginning of privatization of utilities, telecom, land and sea ports, and by 1997, 90.4% of retail turnover was private. Georgia thus became the fastest growing economy in the newly Independent States, doubling in size in six years.
Natural Gas Trade Wars
Trade is growing with turkey and Western Europe, having increased by 40% with the EU in 2010, to US$ 293m. Russia is still a major trade partner due to rising gas prices. In 2000, Russia doubled the price of natural gas supplied to Georgia due to Georgia’s ‘lack of co-operation on Chechnya.’ In January 2006, Russia doubled the price again, and later that month, during a particularly cold spell, cut the gas pipeline. In 2007 Gazprom announced that the price of gas would again double, but days later proposed leaving prices unchanged if Georgia instead sold them the pipeline. Seeing this as blackmail, Georgia agreed to pay the higher price only to buy a larger percent of its gas from Azerbaijan. Trade wars are not limited to natural gas, as Russia has banned imports of Georgian wine, mineral water and fruit.
The Khachapuri Index (Kh)
Georgia’s interest rates paint a revealing picture with respect to risk. While deposit rates are 9+% and current money markets pay 8%, lending rates are a hefty 26+%. Since 2000, Y/Y inflation has averaged 6.4%. An alternative to the CPI for tracking inflation is via a traditional basket methodology – the Khachapuri index. The most common meal in Georgia – the khachapuri – is consumed by practically every family regardless of its ethnicity. (I consumed them daily and they are deliciously decadent.) Changes in its price are a good indicator of inflation and are used to reflect the differences in the cost of living in Georgia’s cities and regions. The basket consists solely of the ingredients needed to cook one Imeretian (provincial) khachapuri – flour, cheese, yeast, eggs butter along with input costs of gas or electricity. After seeing the absolute high recorded in January 2011, the index bottomed out in June, and then started on an upward swing of its 6-month seasonal cycle, characteristic of agricultural production. Another important sector affected by seasonal fluctuations is tourism in the ski season and the summer.
Source: ISET.ge (The Kh Index is not seasonally adjusted while the CPI Index is.)
Guamajos! – When in Rome…
After camping in the Caucuses, we headed to the ‘Napa Valley’ of Georgia for wine tasting. Georgia is rich with history, culture, art and hospitality, where carnivores and carb lovers can rejoice as the cuisine is abundant with meats, breads and cheeses – and always, wine. Convivial Georgians are known to toast throughout a meal, with multiply pronouncements of ‘Guamajos’, or cheers which sounds a bit like ‘cows marching.’ Typically someone takes on the role of toastmaster; whenever a toast is made, which seems like every 5 minutes, its bottoms up and refill time. When your wine glass (or bowl, or traditional horn) is topped off, don’t refuse it. Just be appreciative. Wine has been in Georgia almost as long as there have been Georgians, around 7,000 years, and is central to the Georgian lifestyle. There are at least 500 varieties of grape in Georgia and more or less every village produces it own as do most families, storing it in large sealed clay vessels in the floor of a room. Effectively semi-organic, draught wine accounts for about 85% of the domestic market. The saperavi grape has a deep color and rich plumy flavors with crisp natural acidity. Tsinandali is a popular white, maturing in oak barrels, whereas Gurdjanni is a light-gold wine with a unique subtle taste. Sparkling wine is produced throughout. Georgia has great potential for producing wine for export, yet due to the Russian import ban, much of ‘Georgian’ wine outside the country is not authentic, and produced in Russia. As such, a successful export business will require stricter regulation in the industry. Real Georgian wine exports so far this year, produced revenues of US$60m.
Real Estate Momentum
In 2001 Saakashvili, then the Justice Minister, proposed confiscating luxury houses built by ministers and senior officials unless they could prove they were built with legitimate funds. Many at the time were worth US$200,000 or more while cabinet ministers earned only US$200/month. Today the market is more appealing. Donald Trump, for one, sees opportunity, having announced in March a $300m investment in luxury residential and hotel property along the Black Sea. Yet such opportunities come with challenges, where patriotism has its drawbacks. Residents of many regions are quite possessive and protective of their villages. We hiked to one of many small, picturesque villages in the Tusheti region north east of Tbilisi, where a well-off American decided to buy a plot of land, subsequently building the largest home with the best view in town, despite warnings to the contrary. Lacking any roots or familial ties to the village, he is notably unwelcome by his neighbors. I was informed that the same situation would apply to a denizen or even a Georgian from another province.
Ho, Ho, Ho – Investing in Georgia Today
‘Ho, ho, ho,’ in this context, is not a Santa Claus calling but a Georgian expression of the affirmative, or “yes,” with an added layer of enthusiasm. While the economy has seen its share of volatility in the last few decades, opportunities abound for investors with emerging market risk tolerance. Georgia’s economy grew 6.7% in 2010, while partnerships with the EU, China, the US and Turkey offer new opportunities. One of the best sources of growth is in tourism. A new high-speed train will open in 2013 connecting Tbilisi with the seaside city of Batumi and will serve as a gateway to Turkey and European nations. Vera Kobalia, Minster of the Economy and Sustainable Development, has set an ambitious goal of 3 million visitors in 2011, compared with 2 million in 2010 and plans to promote a Free Tourist Zone in the Black Sea coastal town of Anaklia. Investors already include Ritz-Carlton and Kempinski Hotels. Another potential source of revenue is its natural mineral springs, numbering over 2,000, and producing over 130m liters per day, much of it currently wasted. Georgia is encouraging environmentalism by launching electric cars throughout the country, and is progressing in hydroelectric energy, having recently attained financing from the European Investment Bank to upgrade two major plants.
Today Georgia has a nominal GDP of US$ 15.49 b (PPP US $25.01b) and growing and close to balanced budget, at -3.1% of GDP as of 2010 year end. Agriculture as a percent of GDP has halved in 10 years to 9.8% while industry to GDP has been rising to a current 29.9%. The services to GDP ratio is 60.3%, while government consumption to GDP is 19.4%. Public debt as a percent of GDP is 33% and falling. The new currency, the Lari, was introduced in 1995 and has been fairly stable compared to major global currencies. The government recently issued $500m in government-backed Eurobonds on the international credit markets with demand five times higher than expectations.
Today, Georgia is still quite a poor nation and faces 16+% unemployment. The new administration, after Shaakashvili’s term, needs to continue to create an image of stability and permanent economic growth to attract foreign investment. Serving as a hub for Asia and Europe, Georgia plays an important role both for business and in geopolitical stability. To its credit, Transparency International recently named Georgia the most transparent and accountable country in Eastern Europe and post-Soviet Union Countries. Replete with promise, the President in June vowed at a live televised meeting that 2013 will become ‘a historic year for Georgia,’ claiming, ‘the best roads will be everywhere and there will be water supplies in all major areas.’ He expects the unemployment rate to fall to 10%. The year 2013 will mark a decade after the Rose Revolution.
One Response to “Georgia on My Mind”
Mitchell Teplitsky • August 23rd, 2011 at 6:55 pm
You are becoming my go-to source for global economic news with a uniquely personal twist! Keep it up.
