Sunday, May 15, 2011

Georgia: an emerging economy in the heart of the Caucasus, a player of the new Silk Road

I have recently answered the call of a friend of mine that asked me to take a closer look at country system that could benefit some of my existing and new clients: Georgia.

I therefore took the time to study the macroeconomic data available via secondary sources prior of the trip and planned to visit the country first hand to match the data sourced with first hand experience.

Following is a high level summary of findings that I would like to share with the audience of my blog.


Located in the hart of the Caucasus, Georgia is a country with 4.6M people and a size of 70,000 Km2, comparable to the state of South Carolina in the USA. Mostly known to neighbors for its wine production, fine mountains and beautiful seaside, for the past 7 years this country has been undergoing profound legislative and economic changes that de facto make it the most liberal and less corrupted country in the Caucasus.

Georgia borders with Russia to its North side, the Black sea to the West, Turkey and Armenia to the South and Azerbaijan to the South East.

Since 2004 after the victory of the so called Rose Revolution, Georgia was able to jump start the economy by virtue of drastically reduce the red tapes necessary to build infrastructure, start businesses and favor foreign direct investment.
Taxes were reduced, tax law simplified and a strong movement against corruption, including in the judiciary system, initiated.

While the methods adopted by the government led by President Saakashvili have been the object of criticism by a fragmented opposition the results have been very encouraging.
Till the conflict with Russia in 2008 the GDP was growing at an average of 9%. The conflict with Russia: Georgia?s main trading partner and the global economic crises stopped growth and in 2009 Georgia has posted a net decline in its GDP by 4% according to the IMF.
Still at the end of 2009 the same IMF officially declared that Georgian economy was on the verge of restarting its growth: a remarkable result given the circumstances.
Of the same opinion was the report published by the Economist Intelligence Unit of March 2010 and in the same year Standard & Poor's has raised from B to B+ the sovereign debt of the country with an outlook rated "stable" due to its particularly friendly business environment (29th rank globally).

Further, according to surveys promoted by the World Bank, the level of perceived corruption has been reduced to only 1/4 as compared to 2002: 11% of the companies declares to resort to corruption practices as compared to 44% in 2002.

"Business Freedom" Graph in comparison to Italy and Russia:

The country's leadership is maintaining a clever political balance with all partners and neighbors. The visa regime is very liberal and favorable, for example both Europeans and Iranians receive free visa on arrival.

In spite of recent signal of ease the most difficult relationship remains the one with Russia. After the war of 2008 the situation has recently improved: reopening of the of the border pass of Kazbegi-Lari and the reactivation of the Moscow-Tbilisi flights. The government has deployed a new strategy for what are defined as the Occupied Territories of Abkhazia and Ossetia and it includes the re-establishment contacts with individuals and the re-connection of economic ties although at certain determined conditions.

Worth noting is the "Economic Freedom Act" that includes a series of constitutional reforms aimed at:
  • containing public expenses and manage the debt to GPD ratio (debt not to exceed 30% of GDP);
  • regulating the activities of government authorities
  • and try to impede the participation of the state in the banking system.
It is important to note that some foreign institutions, such as the EU, have expressed some doubts with regards to the content and extent of deregulation envisaged.  It is my personal opinion that such foreign organization already suffer of over regulating everything and the results are far from encouraging, I personally hope that the Georgian government will resist these attempts and find its own Georgian way of developing keeping the balance among the so many different parties at play.

The renowned Georgian hospitality and the beautiful landscape made it easy to match business with pleasure.

During my time in Georgia I was able to connect with the country leaders in the political, economic and art fields. 

Spending time on the ground is not only essential to develop workable professional relationships but also to experience first hand what any investor would experience when trying to establish a business or simply live and explore the country: the ease of communicating with taxi drivers to go from location to location, ability to open a business without any institutional help or recommendation, opening of a bank account, ability to feel safe when walking in the streets, access to primary goods, pharmacies, etc.

Since the Rose Revolution the government leadership has been focused on enacting legislative changes to liberalize the economy and reduce ex Soviet style corruption. The end result has been a sweeping generational change that has propelled to power a new generation of young, generally Western educated, politicians and business people.

One of the significant and consistent feelings that I experienced across my entire set of meetings has been the significant desire for progress that animated all parties I came into contact with. 

Walking the streets of Tbilisi felt safe at every time of the day. I walked by myself the entire center city in the morning, afternoon and evening.
While English is still not widely known most of the young generation has a working knowledge of English and it is easy to get by for all basic operations including banking.
Taxi drivers or people over 45 find it easier to communicate in Russian and a basic knowledge of this language is useful to get by in the country.

Over various conversations with government officials and representatives of the economic world I narrowed down the sectors of most interest for foreign investors to:

Energy: hydro electric
In 2005 Georgia exported 122,000 KWh of electricity valued at only $3M USD; in 2010 1B kWh were exported valued at $37M. Hydro electric power supplies 85% of the country?s needs and the ministry has identified approximately 300 rivers around the country powerful enough to generate 15,000 Megawatts. The entire sector has been privatized including the distribution system. In 2007 18% of the total FDI in the country was dedicated to the energy sector.

Note: further opportunities exist in the oil & gas related activities such as logistics and pipelines.

While it employs 50% of the labor force it only contributes to 10% of the country GDP. The ownership is particularly fragmented preventing access to credit and economies of scale. Technology is antiquated and needs additional investment. During Soviet Union time as recently as the 80s agriculture was a sector growing at 10% a year. Foreign direct investment in this sector would benefit from a ready made local market that is currently more and more dependent on expensive goods coming from abroad. While a new strategy by the Minister of Agriculture is about to be drafted there is an untapped resource that looks interesting: 150,000 hectares of state owned agricultural land that is available to investors. Please note that Italian Ferrero S.p.A has already acquired land to grow hazelnut for its Nutella product.

Although Georgia is a relatively small country it has been blessed with access to pristine nature suitable for 5 star tourists: beautiful mountains and seaside. Both represents untapped opportunities to cater to tourists in the region and outside. The combination of nature and the rich history of the country: remember the memorable tales of the Silk Road and the numerous historical sites sprinkled all over the country are able to provide tourists with "smart" vacations where relaxation meets art and history. Particularly worth noting is the focus to develop ski resorts in Mestia and Khulo in the Adjara district. Further, numerous sites on the Black Sea are available to resorts. To favor the development of tourism the private sector and the government have partnered to create the necessary supporting logistics infrastructure: the airports of Mestia and Batumi are fully functioning and able to cater to both national and international traffic.

Foreign investment in these key areas comes with government exemption from taxes for a number of years. And the usage of Georgia as a logistic platform to reach out to other countries can be done using free trade zones that also reduce taxes to zero for foreign investors (1 free zone is available right now, 2 other free zones will be created shortly).

Last but not least the art scene is vibrant and diverse. The theater and the opera have rich programs and the quality of the performers is very high. It is not by chance that many Georgian performers are sought after internationally: they offer high quality at a cheaper price point than Europe and North America.
In consideration of the generational change it is also clear that Tbilisi and Georgia in general are becoming a point of reference in the Caucasus art world with performers and talent from the neighboring countries reaching out to Tbilisi to take advantage of the "scene" and the network that the city is developing internationally.
It is worth noting how the private sector is starting to integrate seamlessly with the arts creating an important example for the neighboring countries.


It means that while the consumer product market is relatively small in consideration of the population and the average income level, this country offers great opportunities for what concerns infrastructure, energy,  logistics, art and agricultural projects.

Further, its location in the heart of the Caucasus in connection with its liberal laws makes it the ideal place to set up a base to reach out to other countries part of the new Silk Road. 


Lastly, please note that detailed reports are available from our company for each of the sector and opportunitie that have been noted in this summary. Don't hesitate to contact me directly if you would like to know more.


A particular thanks goes to ALL that welcomed me to Georgia and went the extra mile to make me feel at home and comfortable, especially:
  • David Sakvarelidze, General Director of Tbilisi State Opera and Ballet Theater;
  • Gianluca Marciano', Director of Orchestra, Tbilisi Opera;
  • Franco Impala', DHoM, Ambasciata d'Italia a Tbilisi;


  1. Thanks for insight into a still relatively unknown market.

    Any thoughts on how well the business climate would be for multi-nationals entering? While I presume it would be by sector it sounds like Georgia may be a potentially more amenable place for establishing a footprint while Russia makes it increasingly more difficult to do so.

    Interested to hear any point of view you have on this?

    Michele Markus

  2. Hi Michele,

    thank you for your post.
    I think that multi national companies would find a much more familiar legal and economic environment in which to set up and operate, which is the entire point behind the reforms enacted by the existing Georgian government.

    Depending on the sector each company would need to evaluate the purpose of its market entry.
    I see potential for re-export and logistics for some multi national companies operating in the region. There is good opportunity in agriculture as the case of Ferrero S.p.A teaches us.

    I am particularly bullish on the energy and the tourism sector.
    Worth noting is the presence of Mr. Trump already active in the country and the Royal family of Abu Dhabi who is investing in the new Kempinski hotel in Tbilisi and took a majority stake in a local bank.
    Tourism offers good opportunities in the mountains, basically untapped for skiing and on the sea side. Existing hotels are fully booked 6 months in advance and hotels opening their doors this August are already 70% booked.

    In the energy sector: site surveys exist for many Caucasus rivers suitable to have hydroelectric plants. The growing needs for energy from Turkey makes it particularly interesting to invest in this sector as the distribution system already connects the two countries and private entities are ALREADY selling energy into Turkey. I have access to approximately 20 of such feasibility studies.

    Certainly the country has a total population of approximately 6M people and therefore the addressable market may lack in certain cases/sectors the economies of scale to justify a large initial investment.

    I hope the above helps in answering your questions. I remain available to provide any additional information if you so require, please feel free to contact me directly at


    1. Luca!

      Thank you for your concise and informative summary of the Georgian business landscape. I am considering a few small business ventures in Georgia that would depend on consistent adherence to the the new tax code by the Georgian government, as outlined in the tax code handbook offered on the Ministry of Finance website. I wonder, have you direct experience with the new Georgian tax code and its enforcement by the Georgian government? The new tax code offers many concessions and benefits to international businesses and small local business owners. However, I've heard from locals that the enforcement of the tax code is still rather arbitrary and off the record fees are still demanded by tax collectors in exchange for protection from more severe fines and impositions made by the tax department. I would very much like to be comforted by experienced business people, local and international, who have benefited from consistent and unfettered adherence to specific tax concessions of the new Georgian tax code.



    2. Hi Shannon,
      I have a company registered in Georgia and I operate an entire office there. I would be more than happy to help you in this matter.
      The situation got a lot better over the past couple of years. There have been significant changes just last year to simplify the auditing process. Please feel free to contact me at

      Best. Luca

  3. I have been to BATUMI couple of times...Beautiful country... Lots of potential