The FINANCIAL — The Georgian population has been concerned recently by the sharp rise in price of the locally produced potato. Retailers claimed that Azerbaijan started to import huge amounts of potato from Georgia which caused the change on the local market. This raised questions about how the growing demand from Azerbaijan and invasion of large state-owned corporations may influence low-income Georgia in the nearest future.
“The fear of foreign capital is one of the phobias which we must overcome. If we want to get economic growth and civilized development of the country, if we want to become European, one of the first things we need to do is to overcome our fear of strangers, especially foreign capital and business,” said Aleksi Aleksishvili, Chairman of the Board at Policy and Management Consulting Group (PMCG).
“A civilized country does not mean the development of business only by residents. Businesses need to develop in any country, with any power, any capital and here we do not need to see anything dangerous. The market economy does not mean such a process. The main thing is that the competition should not be limited. It needs to be open. The European Union will not allow the limiting of foreign investment in the country if you want to become integrated with it,” said Avtandil Silagadze, Doctor of Economic Science at TSU.
Against the background of reducing FDI in Georgia, there have been Iranian, Chinese and Kazakh businessmen that have all faced difficulties in the country. In 2012 FDI was around 4% of GDP and this low figure tells us that Georgia is now not in a position to choose amongst investors. In 2013, the country banned the purchase of agricultural land by foreigners.
“Georgia should further improve the business environment and institutions to enhance the benefit from cooperation with Azerbaijan. This applies to the juridical system, property rights and human rights protection, tax and customs system, sustainability of the banking system and improvement of financial services. More openness, greater integration into the regional and world economies, reaching a free trade agreement with the EU and other partners are significant issues for Georgia,” said Aleksishvili.
However, experts see some risks in having a predominance of one nationality among investors. “First of all, it is risky to rely on only one country for investment – this makes Georgia vulnerable to sudden changes in the economy of the investor country. Say, if Azerbaijan dominates on the Georgian investment market, then Georgia would be exposed to the world’s oil price fluctuations. A decrease of the oil reserves in Azerbaijan could also affect Georgian markets,” Olga Azhgibetseva, Researcher at ISET, told The FINANCIAL.
Azhgibetseva discussed another risk that may come in the form of strong national preferences in hiring. “For example, even now we can observe how Socar, which is an Azerbaijani company, hires mainly native Azerbaijanis. Although in this case the company employs Azerbaijanis who are already part of the Georgian population. If, however, a foreign company decides to import labour from their native country this may not have the desired direct effect on national employment levels,” she said.
In 2013, Azerbaijan was the main trading partner of Georgia, accounting for 24% of total Georgian export. While comparing the impact that Azerbaijan has on its neighbours, experts name Georgia as the main beneficiary of the growing economy of Azerbaijan.
“One way to use the ongoing prosperity of Azerbaijan is to implement different kinds of projects which would benefit both countries. Such projects could be financed with the help of Azerbaijan, as it was with the Baku-Tbilisi-Kars railway project. These projects could be related to a common interest: Agriculture, Tourism or to renewable energy sources, like Hydroelectricity. With the expansion of the economy, demand is also increasing and Georgia can benefit by increasing the export of goods to Azerbaijan,” said Azhgibetseva.
“In the short run local entrepreneurs may feel squeezed out by foreign investors, as they will surely increase the level of competition. However, in the long run this competition will bring its benefits. Competition will lead to the improvement of the quality of produced goods, increased productivity and declining costs of its production. Georgia as a country could only benefit from foreign direct investments, provided they also lead to the transfers of know-how and technology,” Olga Azhgibetseva, Researcher at ISET, told The FINANCIAL.
According to Aleksishvili, the neighbouring, economically rich country facilitates the movement of capital and enhances access to financial resources. In his words, developing the solvency of the market means creating a favourable environment for exporters.
“The business environment and political stability of Azerbaijan is another important issue. Institutional development, customs and taxation and normal operation of the court system and power structures, as well as low level of corruption are all necessary conditions for Georgia and other countries to benefit from economic cooperation with Azerbaijan,” said Aleksishvili.
“The fact that Azerbaijan is a resource-rich country in the Caucasus and has growing financial influence does not raise any problems. The model of the Georgian economy should be a hub of finance and trade in the region. Georgia should serve trade and financial relations with Azerbaijan and other countries,” Aleksishvili told The FINANCIAL.
“Although Azerbaijan has a large and growing economy, the oil-rich country could not avoid the so called ‘resource curse’ – a situation in which the abundance of natural resources leads to a decline of competitiveness of other economic sectors and to the persistence of weak and corrupt institutions in the country. While Azerbaijan’s economic strategy is mainly based on the oil and gas industry, resource-poor Georgia managed to develop in a more diversified way. A few things to mention: Georgia has largely managed to eliminate corruption, while Azerbaijan is still suffering from it. In the World Bank’s report on doing business indicators of 2014, Georgia is in 8th place in the world while Azerbaijan is far behind and stands in just 70th place,” said Azhgibetseva.
“Georgia’s geo-political location allows the country to serve as a transit area. Currently Georgia is a part of TRACECA (“Transport Corridor Europe-Caucasus-Asia”) connecting Central Asia, the Caucasus and the European Union. Along with that, Georgia became a transit way for two main commodities in the world – oil and gas. And the latter fact is the direct impact of being a neighbour of Azerbaijan. In 1994, Azerbaijan signed the so called “Contract of the Century” with leading global oil companies which led to the further accelerated development of the mining industry. Now Azerbaijan has the largest growing economy in the Caucasus and Georgia is part of the Baku-Tbilisi-Ceyhan (BTC) oil pipeline as well as the Baku-Tbilisi-Erzurum (BTE) gas pipeline opened in 2006. These pipelines had a significant economic impact on Georgia. The direct effect is the transportation tariff revenues which Georgia receives per tonne of oil and per cubic meter of gas transferred through BTC and BTE pipelines,” she said.
According to Azhgibetseva there are also benefits in the form of discount tariffs for acquiring oil and gas. She underlined the indirect effects of these projects as: construction and maintenance of the pipelines provided new jobs for a significant number of Georgians. “Economists predicted that the construction of a pipeline could bring negative effects, e.g. “Dutch disease” to Georgia. However, as of yet there has been no evidence to support this claim.”
The Baku-Tbilisi-Kars railway is another project which is still in progress and will have a significant effect on the economic development of the Southern part of Georgia (the Samstkhe-Javakheti region). “This railway link will help to overcome the economic isolation of this region. The railway construction is being financed through a low-interest loan provided by Azerbaijan,” Azhgibetseva told The FINANCIAL.
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