Emerging Europe: A free market for Georgia?

By the seasoned standards of the world’s finance ministers, Georgia’s Nodar Khaduri, aged 43 and just over a year in the slot, is a relative babe in arms.

Take Euromoney’s last five finance ministers of the year. Our 2008 winner, China’s Xi Xuren, was the oldest, at 61, while, at 51, the 2010 winner, Alexei Kudrin of Russia, was the youngest. Last year’s winner, Singapore’s Tharman Shanmugaratnam, is 56. Globally, the IMF boss, Christine Lagarde, is 57, while 54-year-old Jim Yong Kim runs the World Bank.

The average age of these recent award recipients is an experienced 58, which is arguably part of the reason they warranted our prestigious gong – their vintage suggesting they know their way around the fiscal and political block.

Age is not an issue for Khaduri. “I have a long history of public service,” he tells Euromoney during an interview in his ministerial office in Tbilisi.

But by the urgent measure of Georgia’s newly elected government, Khaduri is virtually a grandee. His prime minister, Irakli Garibashvili, is a fresh-faced 31 year old. His cabinet colleague at defence is 40 and the police minister is a stripling 28. The justice minister is 38 and the energy minister, a former star footballer-cum-businessman, is just 35. Three years younger than David Beckham, he put his boots away as national captain only two years ago. Georgia’s president, Giorgi Margvelashvili, is 44, a year older than finance minister Khaduri.

If that’s a young team, consider that Georgia’s four most recent finance ministers before Khaduri all served in their early to mid-30s. And that the country’s recently departed president, Mikheil Saakashvili, toppled Eduard Shevardnadze during Georgia’s popular 2003 Rose Revolution when he was an impatient 37, stepping down in November after serving eight years and two terms.

All this youthfulness might seem odd, given Georgians’ reputation for extreme longevity, a legend that perhaps had much to do with a famous 1970s American TV commercial for Danone yoghurt that portrayed the then Soviet republic as a bountiful fountain of youth.

But today, 22 years after the collapse of the USSR, the freshness of Georgia’s administrative ranks is mostly about careers not being contaminated by Soviet-era practices, as Khaduri is quick to point out to us.

“I graduated from university after the Soviet era and my career has also been after the Soviet era,” he says. Indeed, if Georgia’s finance minister is ideologically influenced by anything, it’s more likely to be those who inspired the Thatcher era. “I am definitely not a technocrat; that’s not my approach. I try to look for and follow logic, but it’s far from being philosophical even though I have a PhD in economics.

“We all have a legacy of Soviet times, where one institution decided where and what to sell and buy and produce, how many loaves of bread to produce, what kind, and so on.

“Our society was provided for at a basic level, everything was provided, and we see the need of people for the same basic needs to be met. But this needs to be changed – this mentality, these expectations.”

 

 

AFTER A YEAR IN OFFICE, KHADURI and his government colleagues have been characterized by some observers as neo-Thatcherite, as was the economic fashion in many states of the former Soviet orbit after it dissolved in 1991. True to type, one of the ruling centre-right Georgia Dream’s coalition members is the Industry Will Save Georgia Party, led by outspoken industrialist Gogi Topadze.

Khaduri is reluctant to sign up for any defining economic philosophy for his year-old ministry, but he notes that Milton Friedman was an adviser to Thatcher. “He was one of the more successful economists,” he says, admiringly. “I don’t agree with him on everything, but I agree with him absolutely that there should be less government intervention and involvement in business.

“We should do more to make businesses understand and feel that they are free. We are very keen to have open, free markets in our country and it’s very important that the authorities perform. It should not be artificially declared, but genuine and real.”

This would likely be music to the ears of Khaduri’s former boss and political patron, the oligarch Bidzina Ivanishvili. He is Georgia’s richest man, with a $7 billion fortune, equal to about 40% of Georgia’s GDP. Ivanishvili made his money in post-Soviet Russia in telecoms, property and banking, returning to his native Georgia to set up the Georgian Dream coalition of parties to topple Tbilisi’s darling of the west, Mikheil Saakashvili, who had been president since the 2003 revolution.

Ivanishvili’s new Georgian Dream coalition won parliamentary elections in 2012 and the billionaire became prime minister, promptly appointing former executives of his business empire and private foundation in key ministerial posts. Khaduri isn’t one of them – he spent most of the Saakashvili years as an academic and occasional consultant – but Ivanishvili did tap him to be finance minister.

For a year, Ivanishvili’s team governed in an uneasy cohabitation with Saakashvili until the presidential election last October, when constitutional term limits forced Saakashvili to vacate office. The poll was won in a landslide by Giorgi Margvelashvili, an academic who had been Ivanishvili’s education minister.

Ivanishvili spent only a year as prime minister, resigning in favour of Irakli Garibashvili, a young businessman widely regarded as the billionaire’s right-hand man and who had been an executive in Ivanishvili’s Cartu Bank and his private charitable foundation.

Since notionally resigning from power, Ivanishvili has set up the Georgian Co-Investment Fund, with $6 billion of investment from regional heavyweights including the UAE’s royally connected Abu Dhabi Group and Turkey’s Calik Holdings, whose CEO is Berat Albayrak, the son-in-law of Turkish president Recep Tayyip Erdogan.

Ivanishvili will reportedly commit $1 billion to the fund, which has raised worries among civil society campaigners in Georgia about potential political and business conflicts. Some have said that Ivanishvili, who has a reputation for philanthropy in Tbilisi, wants to effectively own Georgia. (Euromoney approached Ivanishvili and his new fund for input but neither responded.)

Khaduri dismisses such concerns, referring to Ivanishvili only as the “former leader” and as a “high-net-worth individual” who has no role in the government.

“I have not seen him since his resignation,” Khaduri claims. “And I have not talked to him on the phone either. But if there is an opportunity, I would be willing to ask for his advice.

“He has very good experience and is a very good manager. He will be monitoring the process as a member of civil society… he’s humanitarian and charitable. He has spent $3 billion on charity.”

He’s referring to an open letter Ivanishvili wrote to Georgia shortly after resigning as prime minister. In the letter, Ivanishvili says: “My business was always exemplary and transparent. My opponents made great efforts, including the foreigners, to find black spots in my business, but I have never violated law, I have never breached a contract. Moreover, I have never broken my word.”

He denies being involved in the selection of the new government. “Each member of my team was absolutely free and I never forced them [to do] anything. Every minister was very free; I respect way of discussions and I respect common sense. This is the way I work. I never control from backstage. It’s a fact that I had never expressed an intention to control them from behind the scene. I had no other interest but the progress and European development of my country.”

Khaduri knows well the details of Ivanishvili’s new fund, which he hopes will be a magnet for much-needed foreign direct investment in Georgia’s sluggish economy. “We are not a government that intends to intervene in private-sector investments. We create the environment to make Georgia attractive.”

Euromoney asks: “Are you your own man? If the president or prime minister calls and says: ‘Do this’ and you don’t agree with that policy, can you say no?”

Khaduri replies: “Of course! That’s what I do. Under the previous PM [Ivanishvili] we actually had great autonomy and we had no need to clear things with him. But we are one team, we have the same ideology, the same vision, so we wouldn’t want any friction within the team.”

 

 

KHADURI FIRST JOINED GEORGIA’S civil service in 1996, after graduating in macroeconomics from Tbilisi’s prestigious State University, a breeding ground for so many of Georgia’s post-Soviet generation of politicians.

A young economist with student ambitions of being a geologist – he has rock samples on his ministerial desk – Khaduri served through the sclerotic Shevardnadze period, rising to become deputy finance minister and manager of the ministry’s official engagement with parliament. He also kept up his links with his alma mater, lecturing in the economics faculty he had once attended.

Critics such as Gia Jandieri of the Tbilisi economic think-tank New Economic School claim his time as a senior civil servant was unremarkable, served as the country descended into corruption and lawlessness under Shevardnadze, who had returned home to Georgia after many years as the Soviet Union’s foreign minister.

“He was invisible,” says Jandieri. “When he was appointed, few Georgians had really heard of him. He had a very low profile.”

The late 1990s were turbulent times in Georgia. Graft was careering out of control, the mafia ruled the economy and Russia, as it often has in Georgian history, glowered covetously from Moscow.

Khaduri remembers it as a “tough period for the country”. The three-year civil war of the early 1990s led to years of instability. “There was a state of emergency, transport blockades, inflation peaking at 17,000%, and a collapsing economy,” he recalls.

Through 1998-2000, Georgia was battered by the knock-on effect from Russia’s economic crisis. The black market overtook the formal economy and, at one point, the state was collecting, at best, about half the revenue it was due. In 2002, the IMF suspended its funding of a Georgia that was unable to meet agreed targets. Impatient young reformers such as Saakashvili, Shevardnadze’s one-time justice minister who broke with him in 2001 over corruption in government ranks, were loudly agitating for change.

By 2003, Shevardnadze, then 75, had run out of puff. In November that year, the old Soviet warhorse and reluctant reformer presided over sham parliamentary elections that led to massive protests across the country. Led by Saakashvili and other breakaways from Shevardnadze’s ranks, such as the parliamentary speaker Nino Burjanadze and the late Zurab Zhvania, Georgians crowded into Tbilisi’s Freedom Square demanding that Shevardnadze step down. As people power gathered, Shevardnadze meekly surrendered the presidency. In the democratic presidential election that followed in February 2004, Saakashvili won 97% of the vote. Tilting strongly to the west, with Saakashvili ruling as national salesman, Georgia suddenly seemed vital and energetic, a Western darling embarking on a massive building boom around the country (the remnants of which can be seen today in Tbilisi, in vainglorious state buildings and the shells of interrupted construction.)

The ousting of Shevardnadze meant uncertain times for Khaduri, as Saakashvili’s reformers swept through ministerial ranks and the civil service. “I was newly married and we were expecting a baby,” Khaduri recalls, “and suddenly my busy schedule of working at the ministry and lecturing at the university went to just a single engagement on Saturday, teaching economics. All other days I was absolutely free.”

Under,Shevardnadze, corruption became was rampant across Georgia. Oligarchs rose and the economy fell into deeper distress. At one point, the IMF withdrew state funding. Now back in office, Khaduri begs to differ.

“I personally did not deal with any case of corruption,” “ I did not even spot anyone in such malpractice. Assumptions of every single civil servant being engaged in corruption, is far from being true.”

“People who were at high positions back in those days have high integrity and I take pleasure in keeping close friendship with them.”

Khaduri says that he kept up his monitoring of the economy after his sacking, publishing papers and reports via NGOs and international monitors, highlighting what he describes as numerous policy mistakes and missteps. For a time, he worked as a consultant with the United Nations Development Programme. He was a lecturer in economics at the Tbilisi State University until August 2012, when he accused the Saakashvili-friendly university administration of sacking him because of his affiliation with Ivanishvili’s new party.

He harshly disses the “appalling” and “authoritarian” Saakashvili administration that he and his Georgian Dream colleagues replaced last year.

“Despite the fact that they claimed to have a libertarian approach, they actually had central management. That was the major mistake they made,” he says.

He claims that various ministry services were deployed as vehicles for state shakedowns on entrepreneurs not to the government’s liking. “They didn’t only shake them down, they would bring them to the point of bankruptcy. The challenge we had was that private property rights were violated.”

This counters one of the great achievements claimed by the Saakashvili administration and its western admirers: that it reined in the mafia and eradicated the rampant official corruption of the immediate post-Soviet Gamsurkhurdia and Shevardnadze governments. Under Saakashvili, Georgia introduced an asset declaration code for senior ministers and civil servants, to help counter official corruption. Khaduri’s declaration lists a modest apartment in Tbilisi, some land in the central Georgian town of Gori, a 2008 Nissan and assorted bank accounts and cash deposits totalling around $20,000, while claiming annual income of around $30,000.

“Before Saakashvili, corruption was widespread and more people were involved,” he says. “When the reforms were carried out, lower and middle levels were eradicated or flattened out, but instead we had a pyramid of elite corruption. There was corruption and racketeering from the government.”

 

 

POLITICIANS PLAY POLITICS AND, OF course, it’s a universal sport for incoming governments to trash those they’ve replaced. But to hear Khaduri tell it the Saakashvili government were Soviets in drag, and it’s his team who are the genuine transitional reformers two decades after the end of the command Soviet economy.

“We ended up with a situation where everything was centralized and management was done at the very centre. We ended up having the same thing as Soviet times but it was packaged and labelled differently. We had a ruling party that controlled everything.”

The Saakashvili era was a boom time for a reborn Georgia. GDP growth averaged 10% through 2004-07, peaking at 12.3% in 2007. Inflation was reined in and unemployment fell steadily as Saakashvili tilted the economy strongly westward.

But in 2008, the Georgian economy was besieged by two crises, Saakashvili’s brief war with Russia over the breakaway Georgian province of South Ossetia and the trans-Atlantic banking crisis, which adversely affected remittances from the Georgian diaspora and foreign investment. Growth was checked in 2008 to just 2.3% and in 2009 it felt the full brunt of the previous year’s drama, receding by a crippling 3.8%. Through 2010/11, GDP rebounded sharply to grow by 6.3% and 7% respectively.

Statistically, Khaduri’s first year in the chair has been unremarkable. After the boom Saakashvili years, Georgia’s vital statistics have dropped off. GDP growth has struggled, the economy expanding by just 1.8% in the first half of 2013, down sharply from 6.1% growth in 2012 before Georgian Dream came to government. Analysts from the World Bank to the European Bank of Reconstruction and Development agree 2014 is looking better, with growth forecasts varying from 4% to 6%.

Eric Livny, executive director of Tblisi State University’s International School of Economics, believes Georgia is on the verge of a boom, as the infrastructure and construction sectors quicken. Khaduri says he is hoping for 6% growth next year.

Foreign direct investment will need to improve. It peaked at $2.01 billion in 2007 and averaged about $1 billion over the seven years of Saakashvili’s government. One year since Georgian Dream took power, FD has, at best, been maintained. This year, Khaduri’s first as finance minister, FDI is expected to come in at between $900 million and $1 billion, about the same as the last Saakashvili years, which were still shaky from drop-off in 2008/09 when investors were spooked by the South Ossetian conflict.

“Although reforms have been made and red tape reduced,” Khaduri says, “we cannot be proud that we yet have high FDI numbers, despite being in the top tier of the global ease-of-doing-business index.

“We are very efficient, we have the one-stop-processing-shop principle, we can incorporate a business within 15 minutes, but this is not having an impact on FDI.”

He rules out a radical privatization programme. There are no plans to sell off strategic assets, such as the railways or Georgia’s share of the critical cross-continental oil and gas pipeline connecting Asia to Europe across the country. “But we cannot own everything, we have to draw a line. We know our limitations.”

He says Georgia’s tax regime is now low and uncomplicated by world standards – and tax revenues are constitutionally restricted from exceeding 27% of GDP, with state expenditure limited to 30%. The economy, he claims, is very liberal on paper. “We will not make any artificial interventions in the market. Pay taxes, be legal and you’ll sleep well at night.”

Tax-wise, he says that the state collects 97% of declared taxation, adding, with a smirk, “that I cannot imagine a person in any country of the world who would be prepared to declare every single penny and who would be accurate in his declarations”.

 

 

ALTHOUGH SITUATED AT THE
eastern extremes of the Black Sea and geographically farther east from Brussels than Jeddah and Beirut, under Saakashvili Georgia became the most ardently pro-European country of the former Soviet republics, arguably more so, rhetorically at least, than even the three Baltic states – Latvia, Lithuania and Estonia – that would become members of the European Union and Nato.

Underlining its western tilt, Georgia became – and remains – the third-largest contributor of troops to the US military campaign in Afghanistan, the highest per capita of the 48 nations with a military presence there and the largest non-Nato contributor.

It wasn’t just the French-, German- and Spanish-speaking Saakashvili stamping his fervour for the west. Post-Soviet Georgia’s nod to Europe began during Shevardnadze’s presidency when, in 2001, Georgia became the G in the pan-regional Guam Organization for Democracy and Economic Development alongside Ukraine, Azerbaijan and Moldova. The Guam group’s stated aim is to deepen integration with Europe.

Saakashvili was desperate for Georgia to become an EU member state. Today, wandering around official Tbilisi through its renovated ministry buildings and parliament, one could be mistaken for being in an enthusiastic European capital. The blue EU flag is unmissable, flying proudly alongside Georgia’s red-and-white ‘five cross’ banner. Saakashvili famously appeared with the EU flag on every possible occasion, most provocatively – to the Kremlin – during the 2008 war with Russia over South Ossetia. The European flag, as once lavished by Saakashvili, “is Georgia’s flag as well, it embodies our civilization, our culture, the essence of our history and perspective, and our vision for the future. Georgia is not just a European country, but one of the most ancient European countries. Our steady course is towards European integration.”

He speaks as hundreds of thousands of people gather in protest in neighbouring Ukraine to press their government to develop closer ties to Europe. Georgians are watching the demonstrations closely, mostly to see how Russian reacts. Although nearly all Georgians speak Russian – and Russia is home to Georgia’s biggest community of expatriates – Cyrillic script is noticeably less evident than English. As, indeed, are Russian diplomats after Tbilisi severed diplomatic relations over the South Ossetia war.

A week earlier, president Margvelashvili was in Vilnius to initial an association agreement with the EU. (It was Ukraine’s failure to sign one that prompted the Kiev protests.) The previous evening, Georgians rallied outside their parliament building in Tbilisi in pro-Europe solidarity with the Kiev demonstration. A few days later, former president Mikheil Saakashvili showed up in Kiev, telling protesters: “I am Georgian, I am Ukrainian, therefore I am European. Georgia’s fate is also being decided here. We can’t remain passive observers.”

Although the post-Saakashvili administration remains as committed to a European destiny, if not as outwardly enthusiastic, some Georgians worry that Georgian Dream has a hidden agenda that will lead the country back to Moscow’s embrace. They note that Ivanishvili, the party’s oligarch financier and éminence grise, made his billions and spent most of his adult life in Russia, where he is known as Boris and is regarded as well networked in Vladimir Putin’s power circle.

Khaduri dismisses such suggestions, confirming that Georgia will complete the technical preparations agreed with the EU in Vilnius and formally sign the association agreement on schedule in September. He points out that in 2008, before the South Ossetian conflict, four out of five Georgians voted yes in a non-binding referendum to join Nato if and when formally asked, a result that infuriated Moscow.

“We went through what Kiev is experiencing already,” he says, referring to Ukraine’s power play with Russia over Europe. “The Georgian economy is less dependent on the Russian economy at present times than Ukraine. In terms of energy we are not at all dependent on Russia. Since 2006, we get our supplies of natural gas from other countries.

“We have different expectations of Europe than Ukraine, in terms of territorial integrity and security. Economically it is vital to be part of Europe.” He says Georgia is “unambigously going to Europe. Absolutely.

“Despite being on the edge of Europe and Asia, Georgians perceive themselves as being Europeans historically. We have very clear expectations. One day we will become part of a huge market.”