Capital outflow speaks of illegal fortunes
19 December, 2013
Capital outflow speaks of illegal fortunes
The high speed of foreign capital outflow from Georgia is linked with illegal fortunes of former officials and the change of power. In the first three quarter of this year foreign capital has been leaving the country at almost the rate that Foreign Direct Investments (FDIs) are flowing in. According to preliminary statistics released a week ago by Geostat, USD 697 million of FDIs entered Georgia in January-September of 2013, while USD 659 million left. The capital outflow tendency was unprecedentedly
high in the third quarter, when USD 312 million left Georgia, while 239 million came in – so the Lari has begun to depreciate since the end of October.
The Georgian economy stalled during cohabitation, when Georgian Dream and the United National Movement vied for power; not until this October’s presidential elections did the former decisively gain the upper hand. During cohabitation the economy grew at half the rate expected; political instability puzzled businesses and investors. And although the inflow of FDIs in the first three quarters of this year exceeded that of the same period in 2012 by USD 19 million, the amount of capital outflow almost exceeded it.
The tendency started in the first quarter of this year when USD 100 million left the country. The figure more than doubled - to USD 247 million - in the second quarter. But it reached its peak in the third quarter when the capital outflow surpassed its 11 quarters’ record and USD 312 million leaked out. This one quarter figure is almost equivalent to the USD 313 million and USD 338 million that flowed out of Georgia during the entire years of 2011 and 2012, respectively.
Economic analysts link the negative trend with political changes. According to economists, capital outflow is a normal economic trend for three reasons: investments start bringing profit and this profit is repatriated to the investors’ country; very likely Georgian business is investing abroad due to the deteriorating investment climate here; and some businesses are shutting down and moving abroad – but that last may be the main reason why capital is leaving Georgia so quickly.
The power shift scared investors, particularly those from offshore companies who manage the assets of former high ranking Georgian officials. There is reasonable suspicion that many former top officials made fortunes through corruption and embezzlement of state money; and to divert attention they previously invested in Georgia through offshore companies.
“The capital outflow bespeaks that either the profit is repatriated or the investment climate deteriorated in the country,” Ditrikh Muller, a co-founder of Georgian Investment Group +, elaborated. “But the unusually high speed of capital outflow since the power shift [that tripled before October’s presidential elections] indicates that very likely the ex-ruling power related businesses are leaving Georgia.”
Soso Archvadze, an economic analyst, agrees that not only economic factors, but also political factors are relevant to the departure of capital from Georgia at tripled speed. Part of this capital is illegal, he thinks. “Some investments made from offshore zones in Georgia were the capital of former officials, MPs and so forth. Once the situation changed they found it reasonable to leave the market; they fear that the illegal origins of their capital will be questioned and tracked down. The illegal capital fled away,” Archvadze said.

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