Were's the Money?
30 May, 2013
Were's the Money?
There is lots of talk about the economy and money and there doesn't seem to be much money circulating around. Orders are down, and some say there is little foreign investment. The main problem is not that there is little foreign investment, it is that those businesses with money in Georgia aren't spending it or putting it in the economy by expanding or establishing new businesses. The reason they aren't doing this is fear.
They are worried to show that
they have money. And the reason they are worried to show that they have money is because increasingly over the last several years, capital in the Georgian economy was tied in with government contracts. After elections these contracts stopped, but they were often very strange contracts. I'm not talking about regularly bidder contracts according to the government tender procedures, but the large contracts that were not publicly bid. There were many.

The way it worked was complicated and ad hoc. The government wanted something to happen so they would tell somebody with capital to do it. That person or business would be rewarded with someway to make money out of the deal or a way to make money out of some other deal to compensate. Those who did this didn't normally work for the government, they often didn't like to do this but they were told that was the way it was going to be.

Some of those businesspeople who were asked to participate by the government, refused. Of those some lost their businesses some simply didn't get the contracts. Of those who went along with the government plans, some made quite a bit of money. Those are the ones who are not spending it now, because they made money not through the government but along side it. They have been taking it out of Georgia or generally playing it safe. The question they have is if I show that I have money by investing it, will somebody show up and take it from me?

Of those who did participate, if they built some new infrastructure or made money from the deal, sometimes the government would send in tax inspection and take the extra capital saying they only had it because of the government contract. Some times there were criminal investigations. Those who did make money and were allowed to keep it would often park it in real estate, some times registered under the name of a family member or friend. This was a good way to take money off the table, but does little for employment or economic growth.

The new authorities need to worry about this because the lack of domestic investment in new business is starting to be a problem. And the solution is not so easy. If an individual benefited somewhat indirectly from state collusion, are they responsible? Jail responsible or give-back-the-money responsible? The easiest thing to say in a case like this is that justice should be served because of course that is correct, if cases need to go to court, then they will. If somebody had money stolen from them, then somebody, perhaps the courts, needs to say what happens. But this can take a very long time, a very very long time, and there is unlikely to be much domestic investment until all that is finished and investors know they can invest without fear.

In many cases the British Virgin Islands or Panama or other offshore locations were the top foreign investors to Georgia. So the money that comes from there is actually from somewhere else. Sometimes in Georgia's case that was Russia, Georgians from Russia or Russians from Russia who didn't want to be seen to be investing in Georgia. Sometimes that money was from Georgia and would come back to Georgia via several shell companies so nobody knew who it was. So much of that wasn't true foreign investment which implies that it is actually foreign and from some real person or company who decided it was a good idea to invest in Georgia. Of that type of funds, there has been no real change, up or down since the election. Also a couple of years go, the government changed the definition of foreign investment to include domestic profits of foreign owned companies. This was to make the foreign investment look bigger but made keeping track over time more difficult.

Plenty of questions remain that will keep investors waiting for some time. The labor law for a while looked very anti-investment. It is great that it moved fairly slowly through parliament with plenty of time to discuss, but investors want to see what it will look like. For years there was no competition law in Georgia and that is also a consideration, a good competition law would improve investment. The parliamentary elections showed that Georgia can handle political transformation but many investors will want to wait until after the presidential elections in six month or even the local elections in a year to be sure things are moving smoothly. And people are not sure what will happen with PM Ivanishvili's funds. Some say he will invest perhaps in agricultural investments, but what about the competitors? Will they be treated the same way by the police and tax inspection as the investments of the prime minister?

It will take a while for all this to shake out. We are in the middle of Georgia's first peaceful electoral transfer of executive power. After the Presidential elections in October the transition will be complete, so far it is going quite well. Investors, both foreign and domestic, are looking to see if the transition is smooth, that the rule of law is in force and is dominated by both the rules but also by a sense of stability. Neither vengeance nor selective justice go well with perceptions of a positive investment climate.

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