The visitor to the nation of Georgia continually encounters images by Niko Pirosmanashvili (1862-1918), known as Pirosmani and considered a master of naïve painting. His portraits of Georgians enjoying daily life a century ago—peasants, fishermen, musicians, even millionaires—pop up everywhere as restaurant murals and tourist mementos. And even occasionally as the original artwork.

It is noteworthy, then, that Pirsomani’s sense of the ordinary extended to a man in oriental costume holding the tether of a Bactrian camel. Tartar Cameleer evokes the Silk Road, suggesting that the commonplace extended to caravans passing through Tiflis (now Tbilisi). In view of the painting’s 1914 date, the cameleer image may have been nostalgic, but it is a vivid, if rustic, indication of Georgia’s longstanding role as trade junction between Central Asia and Europe.

From the perspective of global investment strategy, Pirosmani’s portrait of the camel driver conveys the cosmopolitan nature of the Georgian economy. His worldview prevails into the present day as Georgia looks both East and West to affirm its progressive identity.

Georgian Economy in International Context

The Republic of Georgia is the western anchor to the land bridge that connects the Black Sea with the Caspian Sea (see map below). Armenia and Azerbaijan are neighbors to the southeast. Farther afield, the country has active diplomatic and economic agendas with the nations east of the Caspian Sea, including Kazakhstan, Uzbekistan, and Turkmenistan. In the other direction, Georgia has a dynamic relationship with Turkey. The Caucasus Mountains to the north not only separate Georgia from Russia, but also serve as a bulwark against the situation in Chechnya and Dagestan.

Key Statistical Comparison

Note: We compare Georgia with Singapore because of its favorable comparison in the World Bank’s Doing Business survey and similar population size.

Source: See www.doingbusiness.org and www.transparency.org. Other data obtained from most recently available CIA World Factbook, typically based on 2008 estimates. PPP (purchasing power parities) are currency conversion rates that also equalize purchasing power. Gini Index measures income distribution among citizens, ranging from 0 (perfect equality) to 100.

As a former Soviet republic, Georgia is often lumped together analytically with Eastern Europe. Actually, the similarity may end with its Orthodox-Christian heritage. In practice, Georgia’s position at the corner of the Black Sea has hosted a confluence of many traditions. The architecture of Tbilisi exemplifies the blend of Western and Eastern cultures. The 1851 Tbilisi Opera House, for instance, is a somewhat fantastical blend of Moorish embellishment and classic Western design.

Georgia thrust itself onto the world stage in 1991 as the first Soviet satellite to assert its sovereignty. As the nation weaned from central economic planning, it saw a sharp collapse in output, consistent with the experience in Eastern Europe. Multilateral organizations helped stabilize the economy during the 1990s. Unfortunately, under the stewardship of Eduard Shevardnadze, the country’s second president, Georgia was better known for cronyism than capitalism. A seismic shift occurred with the so-called Rose Revolution in November 2003, which up-ended the country’s power structure.

In 2004, the economy took a turn toward rapid growth as Mikheil Saakashvili became president. His administration—currently in its second term—is pinning the economy’s long-term potential on a deregulation and anti-corruption platform. Posters at the country’s two international airports remind visitors that official bribery is a criminal offense. The free-market policies of the Saakashvili administration appear to have succeeded: Georgia is now ranked 11th in the Ease of Doing Business Survey by the World Bank, sandwiched between Norway and Thailand. Russia, by comparison, is ranked 120th. See www.doingbusiness.org for further background.

Georgia Forecasts Economic Turnaround (Real GDP Growth)

Source: World Bank, National Bank of Georgia for 2009-10 estimates.

With the global credit crisis, Georgian economic activity declined dramatically in 2008-09 from the double-digit growth seen in 2007. The IMF has identified five causes of this collapse: contraction of export markets, lower remittances from citizens working abroad, the freeze in international credit-markets, falling commodity prices, and capital repatriation back to major economies. Importantly, these factors largely fell outside domestic developments. The Russian invasion of August 2008 may simply have been a caustic addition to an already volatile mix of international macro-events.

Despite the near-term set-back, the outlook for the Georgian economy remains attractive. The economy is heavily oriented toward agriculture (accounting for more than 50% of employment), with generous water resources to sustain above-average growth in the sector. Global macro themes such as hunger alleviation and food security bode well for Georgia. Meanwhile, its role as a trans-shipment corridor for nations to the east—especially in the hydrocarbon and mining sectors—will help national growth percolate upward as the global economy improves. Low labor costs make Georgia attractive for foreign direct investment. For perspective, real annual GDP growth averaged an impressive 6.6% in the 10 years prior to the credit crisis (1998-2007).

Access to the Hinterland

While Xian and Istanbul are known as the eastern and western terminals of the Silk Road, intermediate stops such as Tbilisi may be less commonly appreciated. This city lies on the Eurasian Steppe route that ran around the northern end of the Caspian Sea. The trade route helped forge a society deeply influenced by its diffusion of craftspeople, scholars, and emissaries over the centuries.

Source: Yahoo! Maps.

The Black Sea Coast of Georgia, stretching some 325 kilometers between the Turkish and Russian borders, has long been a preferred transit point to larger markets. This route steers clear of Iran and Turkey, which can be desirable for geopolitical as well as logistical reasons, depending on the state of regional and international diplomacy.

We focus on the potential for five markets that export and import through Georgia:

• Azerbaijan, though not an OPEC member, is a major oil exporter at an expected rate of about 1.2 million barrels per day in 2010, roughly half of what we will likely see from Norway. A decade ago the number was perhaps one-fifth the size. This growth results from of billions of dollars in investment from a range of international names, helping to diversify Azerbaijan away from Russia in both economics and geopolitics. For context, as long as China’s oil import requirement remains about the current 4.5-to-5.0 million barrels per day, Azerbaijan alone could satisfy one-quarter of Chinese demand. Yet Azerbaijan faces a de facto ceiling on oil exports imposed by the capacity of existing pipelines and non-captive transit routes. The country has long been flush with oil, especially in its Caspian Sea wells. When the first Baku oil gusher was struck in 1873, it took four months to cap because of its strength.
• Armenia is slightly smaller than Georgia geographically and about one-quarter the size of Azerbaijan in GDP terms. The country is in self-declared transition from a resource-driven to a knowledge-based economy. Its success will likely derive from its ability to attract foreign investment, in which it benefits from a large overseas population of Armenian descent. At maybe 10 million, the diaspora is about three times the population of the country itself. Meanwhile, mining and related industries will continue to play a key part in economic activity, with the government working aggressively to attract overseas firms that will raise standards to international levels of competitiveness. The Armenian Ministry of the Economy now heralds external investment in the mining sector from an array of North American and European companies.
• Kazakhstan, Uzbekistan, and Turkmenistan are the largest of the Central Asian Republics, with a combined GDP of some $280 billion. As a group, these nations comprise roughly the 40th largest economy in the world, slightly smaller than Hong Kong and roughly 13 times the size of the Georgia. Vibrant hydrocarbon industries define all three, but Uzbekistan and Turkmenistan also have important cotton export businesses. The Kazakh economy—despite credit-crisis-induced challenges faced by the banking system—is the most evolved because of its well-diversified resource base and relative political stability. Meanwhile, Uzbekistan and Turkmenistan have been working hard in recent years to integrate better into the regional economy. These two smaller economies face material governance hurdles, as indicated by their poor rankings in Transparency International’s Corruption Perceptions Index.

The South Caucasus states of Azerbaijan and Armenia, along with the larger Central Asian Republics, have in common a renewed orientation toward Georgia for improving access to international markets. These economies have traditionally relied mainly on trade with Russia—a relationship that periodically goes askew. There are countless examples of such turbulence, ranging from the recent pipeline spat between Turkmenistan and Russia to longstanding differences over Caspian Sea rights, whether resource ownership or naval protocol. Certainly the Georgian role in linking these hinterland economies with international markets helps to keep multi-lateral relations within the region as constructive as possible.

GDP per Capita

Note: Based on PPP (purchasing power parities) estimates, typically 2008 data for comparison purposes. Source: CIA World Factbook.

Understanding Development Issues

Like many developing countries, Georgia faces challenges both under and outside its control. The most critical issue may well be the outlook for global economic momentum. Within the context of local and regional affairs, however, we identify three issues with which Georgia will likely continue to wrestle:

• Relationship with Major Powers. Georgia has increasing aligned itself with the West under the leadership of President Saakashvili. While clearly benefiting the government in technical and developmental assistance, this alignment has heightened animosity with neighboring Russia, perhaps reaching a high watermark with the August 2008 invasion. Georgia is caught somewhat awkwardly between its Cold War heritage and its modern-day vision.
• Foreign Aid and Fiscal Exit Strategies. The double-barreled impact of credit crisis and Russian invasion led to significant foreign financing in the form of grants and concessionary loans. The Georgian government has shifted spending dramatically from defense toward social expenditure, with some 35% of the 2009 budget going to health, education, and the like. In the future, Georgia will have to rely more on the private-sector to sustain its desired growth trajectory.
• Hydrocarbon Management. The ongoing success of Georgia as an oil and gas transit corridor depends on the government’s ability to negotiate favorable agreements. Both the Baku-Tbilisi-Ceyhan oil pipeline and Baku-Tbilisi-Erzurum gas pipeline, for example, fit into this framework, but the arrangements need to be nursed carefully. Ongoing improvements in the road and rail infrastructure will further support transit channels. In general, Georgia needs to demonstrate strong engagement in the hydrocarbon transit businesses, reinforcing the confidence of international players.

We find Georgia to be a resilient and progressive country. Its deep track record of pro-growth reforms and aggressive external alignment with major liberal economies should give investors confidence in the business backdrop, especially as a center for regional activity.

Black Sea Coastal Trade

While exotic in its particulars, Tartar Cameleer typifies Pirosmani’s subject matter of people at work and play. Another work relevant to our topic, entitled Batumi, is one of the relatively few landscapes he executed. The painting shows a steam train chugging up the coast from the port, perhaps toward the village of Supsa on its way to the Samtredi junction, where it would turn toward Tbilisi and other points in the Southern Caucasus.

The painting also shows some eight ships moored in the harbor. They may be taking on goods for markets elsewhere, given the wind direction away from shore and the oarsman apparently maneuvering his pram to upload cargo to one of the waiting freighters. The density of traffic suggests a high volume of coastal trade.

In this landscape, there are no camels, only then-modern conveyances. Such features emphasize Georgia’s potential as a regional entrepot. That vision is now fast becoming a reality as Georgia asserts itself as an East-West trade bridge.

Acknowledgment

We acknowledge the contribution, to our observations, of the book Pirosmani: A Legend in Naïve Art, published in conjunction with an art exhibition by the Pera Museum of Istanbul in 2007.

Notice to Readers

This research commentary was prepared under the sponsorship of Black Sea Product Ltd. of Tbilisi, Georgia. Codexa Capital received compensation for the preparation of this article, in relation to its role as investment banker for the Seaport of Supsa development project.

Codexa Capital is a specialized investment banking firm concentrating on Islamic finance, serving institutions outside the United States. Codexa is not registered as a securities broker-dealer or an investment advisor either with the SEC or with any state securities regulatory agencies. The information, opinions, or recommendations in this article are submitted solely for informational purposes.

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