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Wednesday, February 16, 2011

Rewriting the Story of Georgia

The FINANCIAL -- Georgia is probably one of the safest places in the world today, says Fady Asly, Lebanese businessman and Georgian citizen, Chairman of the International Chamber of Commerce, who’s assistant Charbel Aoun was kidnapped in Tbilisi in 2001. 9 years ago Asly’s office was attacked with a rocket propelled grenade..

“Why would a foreigner come to Georgia today?” he asked in 2002. “Crime as well as taxes are higher here than elsewhere.”
Today Mr. Asly is sure that Georgia is one of the safest countries in the world, politically stable and one of the friendliest especially to foreign investors. As he says, there are very few taxes that need to be paid in Georgia, what’s more they are very transparent and easy to handle.
The changes to Georgia came since U.S. educated lawyer Mikheil Saakashvili came to power. His government has totally changed the regime of President Shevardnadze, former Minister of Foreign Affairs of the USSR.
Huge U.S. financial assistance made it possible to train Georgian police and the army, guaranteeing the state’s safety. Now Georgia is America’s closest ally in the region. But it still lacks investors.
Asly believes Georgia has to be patient and wait until the markets of developed countries are saturated and investors will be seeking emerging markets again for new opportunities.  Georgia has huge potential in different industries and Asly believes service, agriculture and tourism have the most to offer.
Fady Asly served for 7 years as President of the American Chamber of Commerce. Today he is the President and CEO of Agritechnics Holding, involved in the distribution of food products, agriculture equipment and media, the Group is active in the Caucasus, Central Asia, and the Middle East. He is also Co-Chair of the Georgian Parliament’s Foreign Investment Advisory Board.
Asly graduated from the American University in Beirut in 1982 with an Agricultural Engineering Degree. Since 1985 he has been chairing the Agritechnics Group of companies.
“Service is a booming industry which will help revive Georgia’s economy in the next 10 years. By service I mean banking, insurance. Georgia is a financial place and has a very modern banking system, with very modern and flexible regulations. The Government has offered many facilities for international financial companies to come and do business here in Georgia and to pay very low taxes,” said Asly.
“Then you have certain niche sectors in agriculture like producing fruits and vegetables in greenhouses. To compete with what’s coming from Turkey in the winter, we can produce competitively in Georgia as we have a cheap source of heating for greenhouses. Georgia can also be competitive producing potatoes for seeds, cut flowers etc... This kind of agriculture with added value is definitely where Georgia has good potential,” Fady said.
“Moreover, we all know how much the Georgian Government is pushing for tourism. Georgia definitely has huge potential in tourism, not just Batumi as a summer resort, but the many other things to see and do, so many churches, places like Vardzia, and there is huge potential in the country’s ski resorts. For this you need cheap hotels, infrastructure and security. Georgia is probably one of the safest places in the world today. As for the country’s infrastructure the Georgian Government is really pushing on developing it. If you want to have mass tourism you do not have to rely only on the most affluent travellers. You have to rely on tourists who spend 400 USD over 10 days and then leave,” added Asly.
Q. In your opinion, why should US businesses invest in Georgia?
A. Any business whether it is US or not is looking to expand. When companies have cash to invest in their market or they would like to diversify in risk and enter new markets. In such cases they usually look at emerging markets which are well rated by international institutions.
Georgia is extremely well rated compared to other emerging markets. Georgia is the gateway for the region, which has turned into a financial place. The banking system is the most modern out of all post soviet countries. Therefore any foreign company including American that intends to have serious operations in the region would think of Georgia as a base, not only as a market but as a base for the region. Having a foothold in Georgia ensures any investor of having a presence in the region, so that’s why it is interesting for the average American or foreign investor.
From a legislative point of view there are very few taxes paid in Georgia, which are very transparent and easy to handle. The Government is very business friendly wherever there is any foreign investor involved. The Government is even more aggressive and is faster acting than the private sector; there is nothing impossible to do with the current government when it comes to foreign investment.
We have to think of the region 10 years down the road, not the region today. The region is very wealthy in assets, there is a lot of oil and gas, and this will no doubt affect Georgia in the coming years. It is already affecting Georgia very positively, and it will affect Georgia even more positively in the coming years. Georgia really is a great platform for the region financially, service wise, transportation wise.
Q. How often are issues related to political stability and security raised in negotiations with US investors and businesses interested in dealing with Georgian companies?
A. You have two types of foreign investors: those who know what to deal with outside their countries, and kindergarten investors, who are taking their first steps abroad.
I do not think that Georgia has a politically unstable environment. The political stability is comprised of internal and external stabilities. The internal one relates to the opposition parties, we know that the opposition is business friendly and is following the same policies the Government does. So, there should not be any question mark from foreigners over internal stability.
As for external stability, here we refer to the Russian occupation of Abkhazia and South Ossetia. From our point of view we believe Georgia to be much more politically stable related to those two regions today than it was before the August War. Having said that I do not think that serious investors would be deterred by rumours about the situation in Abkhazia and Ossetia. Look at how much investment is done in Israel and the Middle East. I do think that Georgia is more stable than the Middle East and much more stable than Israel, which has war in its neighbour countries, but despite this fact there are many investments in Israel. Experienced investors can read the situation, kindergarten investors read what is in the book, in Georgia we need both but it will be easier to interact with experienced investors.
Q. What kinds of obstacles do American as well as foreign businesses face in Georgia?
A. I do not think foreign investors are facing more obstacles than those that Georgian businesses do. Quite the opposite, foreign investors are kind of in a greenhouse environment compared to Georgian businesses.
The major obstacle today related to the investment and business climate involves two things. One of them relates to the way Revenue Service is handling the implementation of tax code. Once this issue is solved, there will be little to do to improve, and we will have a perfect business climate.
The second issue relates to the neighbourhood. Georgia is a small market and when you produce, whether you are a foreign or local company, you want to sell in neighbouring markets. Unfortunately we do not have access to those markets, as those neighbour markets are protecting their own businesses and have monopolies. It is very difficult for Georgian businessmen to enter Azerbaijan, Armenia, Kazakhstan, and this is not related only to Georgia, even French and American businesses have problems in entering those markets.
There should be collective and consolidated effort from the international community to put pressure on those neighbour countries to open their borders so they become permeable rather than semi-permeable, which means they can do business in Georgia but Georgians can’t do business in Azerbaijan and Armenia. This is very unfair and undermines the interests of foreign and Georgian businesses which are operating in the country.
The first problem is easy to solve as it depends only on the Georgian Government - their political will to improve the relation. The second requires consolidated effort from the international community to push the neighbouring countries, so they become transparent and part of international open trade.
Q. How have the strategies of US businesses changed in the post-war and post-crisis period?
A. I do not think the strategy has changed. I believe investors are looking for the best opportunities. If I had to think very coldly and without emotions, I would conclude that the war has given considerable advantages to Georgia as it resulted with huge financial support at a critical financial period worldwide and at a time when other countries were seriously struggling to keep their economies afloat. We received more than 3 billion USD in foreign aid, and this was very timely; on top of that our borders with the separatist regions are much more stable due to the Russian occupation of those territories...
There is another pebble that relates to the international financial crisis. Because of the international financial crisis you know many businesses went bankrupt, and many people were unable to pay their mortgages, today all emerging markets have lost their competitive advantage compared to the developed markets. Companies which are based in the US or EU do not want to go to the emerging markets because they have such good deals at home.
The effects of the crisis have started to vanish and the economy is picking up in mature markets, this is going to affect emerging markets. When I speak of emerging markets I speak of smaller emerging markets not China and India that are themselves huge potential investors for Georgia, I am speaking about smaller markets - Armenia, Georgia, Ukraine . Those countries are going to suffer as investors are choosing mature countries instead of coming to developing ones. Georgia has been affected by this. However, do not forget we have wealthy neighbours. This means Azerbaijan, Turkey, Ukraine are investing a lot in the country. We might be in a difficult situation in the short term but I believe that from 2012 and onward we will be in a much more comfortable position.
Q. Georgia is advertised by the IMF, World Bank and some other influential international organizations as the Top Business Friendly country of the world. It’s reported that Georgia is the best choice when it comes to ease of doing business, and a recent report by Grant Thornton says Georgia leads in the Business Optimism rating. Unfortunately this has no significant influence on investment volume. Can you explain why?
A. Today Georgia has good ratings however investors are putting money in their home countries. We should not be surprised that investors are not arriving in the country. There are two reasons why investors come to the country, either they know someone in the country or they come due to the good parameters of the country.
Before 2007 investors were coming to Georgia because they knew someone - an influential businessmen or a politician, they would not come if they didn’t have the security of knowing someone who could protect their interests. Starting from 2007 the trend changed, investors have been coming without even knowing anyone - they see the parameters and realize that Georgia has huge potential. After 2008 investors were slow to come as they had better opportunities in their home countries. So the parameters are extremely good. We have to wait for the mature markets to saturate for good deals before we start seeing investors coming back as good opportunities in their markets have become rare and they start looking for other places to develop.
Q. You have daily contact with your colleagues in the United States and other western countries. What is their perception of Georgia?
A. In the US SMEs are companies with yearly revenues up to 200 million USD. Such companies usually focus internally. Larger businesses, strategic investors have known Georgia for a long time, they are either in Georgia through representative companies or they are themselves presented.
The Georgian Government has advertised Georgia in many international publications, because people need to be made aware of the country. Most of the time when you mention Georgia people think of the American state of Georgia, however now there is increasing awareness about the business friendly country Georgia thanks to the advertisement of the Government in international media. There will be an MTV festival in July this year, which means that for six months Georgia is going to be broadcast on the channel MTV in 160 countries, meaning 1 billion viewers every day will be discovering Georgia and this will have a huge impact on the fame of the country. Little by little a lot of work is being done to expose Georgia to the world and I think we have made a huge step forward in this respect.
Q. What do Americans who are thinking about investment in Georgia need to know beforehand?
A. Foreigners need an open gate in the region, and therefore Georgia is the perfect place to start with if the intention is to cover the region. They need to know that it’s easier to do business in Georgia than in the US. Moreover the Government would be very glad to see American investors and would receive them with opened hands and provide them with all possible assistance.
Q. Which significant deals would you outline from the US side in 2010?
A. From the international side there have been big deals related to terminals on the Black Sea coast and hydropower stations in 2010. There will be more big deals coming through for hydropower stations soon and the business activity will speed up, it’s going to be mainly big operations going on in 2011.
Q. There are rumours about the plans of Donald Trump to build Trump Tower in Batumi. The recent visit of his advisors to Georgia gave some hope to industry players. Do you think that the Georgian real estate market has big potential and can attract American investments in the coming years?  
A. I think that the real estate market is really attractive.  I am basing my assumption on a study that was prepared by Deloitte in 2007 that showed that there is huge demand internally for apartment buildings. Unfortunately due to the international financial crisis and mortgage problems the banks had slowed down financing of the real estate sector, although banks have now started to finance the sector very aggressively.
I believe that it will help if international developers get involved in the sector and give Georgians the credibility of delivery, as the problem before was that some Georgian companies defaulted on delivering apartments, they took down the payments and they could not complete. The buyers are scared of purchasing air. If you have big groups arriving here this who would give serious credibility, whether Americans or Europeans, this would definitely give a boost to the real estate market and when the real estate market starts moving the whole economy moves as everything is related to real estate.
Q. What was the main challenge ICC faced in 2010? And what will be the main challenge for ICC in 2011?
A. The members of ICC have struggled a lot in 2010. Firstly, the cost of credit is high and the members have difficulty in borrowing money to do business. Second, businesses have been very aggressively audited by the Revenue Service and this has kind of scared businesses’ development. We need to build trust again between Georgian authorities and businesses. This has affected ICC as many companies could not even pay their membership fees. But we are getting over this and we do not think this will be a problem in the future.
The major challenge in 2011 will be to build trust between Georgian businesses and the Government. Georgian businesses have been seriously battered in 2010 they are therefore scared to invest because they think that if they boost their activity they will be harassed by the tax authorities.
We are very glad that the Government is well aware now of the apprehension of businesses and serious steps are being undertaken to restore trust and confidence; this was confirmed by the President of Georgia himself while giving his speech on Friday to Parliament. Once Georgian businesses feel confident themselves, they would be seeking to attract foreign partners to grow their businesses.
Q. In your opinion, which American franchises might be successful in Georgia?
A. Starbucks is to open in Tbilisi in Tbilisi Heights mall, maybe Burger King also. There are two conditions for franchises. Firstly, the size of the market, when big groups want to get a franchise they would not give it a small corner. There should be a minimum scale; plus the cost of franchise is very high, in a smaller market franchising has to be evaluated and assessed properly by both parties.
Q. In your opinion, how attractive is Georgia as a tourism destination for US tourists?
A. Georgia is very attractive for neighbouring countries and it’s a matter of advertisement and image. When you speak of Georgia to American and French for example they immediately recall the war as this is the last big image they remember. This is a long term process, six years ago there was no gas, people were kidnapped every day, but look where we are today and the immense progress that happened in the past few years, in 10 years time we would be thinking of today the same way we think now of the early 2000s.
Q. In your opinion, why are Georgian products not widely presented in the US market?
A. This is a matter of the scale of competition and economy. How can a Georgian t-shirt manufacturer compete with a manufacturer in China? Georgia does not have big industries; we lack logistics as well as to send goods to final markets. Before thinking of finding Georgian products on American shelves let us think of finding Georgian products on Azeri shelves, or on Armenian and Ukrainian shelves.
Q. How prospective is Georgian companies exporting to the US market? And which is the most niche market for Georgian goods to be exported? (What have you observed?)
A. I do not think that we have to think about Europe and the United States. Let us speak about Azerbaijan, Armenia, Ukraine , Central Asia and the Baltic States to start with and also Eastern Europe. These are good markets for Georgians and if our goods enter these markets in sufficient quantities then this is enough for us to have a very flourishing economy.
Before meeting the international standards of the EU and US we have to go through the learning curve, we have to start with the neighbouring countries that have less difficult standards. We need to reach a certain mass of production; a cheese factory cannot meet the international standards if the owner has only two cows. You cannot export straight to Europe and to the US, you have to export first to Azerbaijan, Armenia and the Middle East to build volumes and raise your standards and after that you can look towards the West.

Written by Keti Chkhikvadze
14/02/2011 15:37