After half a decade of turmoil in Georgia, the light at the end of the tunnel may come in the form of electricity exports, reports Finbarr Bermingham.
They’ve been producing wine from the arable soils of Georgia since 8,000BC. The mountainous country’s long Black Sea coastline is the envy of its landlocked neighbour Armenia, while Russia and Turkey, to the north and south respectively, have traditionally been offtakers of Georgian produce, viticultural or otherwise. The consensus is that Georgia has the potential resources and trade routes to be a net exporter, but having registered a trade deficit of US$471mn for December 2012, all is clearly not well.
In 2006, Russia slapped a ban on the import of Georgian wines in response to Georgia’s President Mikheil Saakashvili’s courting of the west (although the Russians officially cited health and safety reasons). A ban on most other Georgian exports followed when the countries then fought a short territorial war in 2008. Georgia found it difficult to source new export routes, given that the likely destinations – Ukraine, Moldova, etc – were reluctant to import rival produce for fear of putting a squeeze on their own producers.
Five years on, diplomatic relationships are still icy, but with Bidzina Ivanishvili’s election as prime minister in October last year, came hope of a thaw. “The embassy is still closed,” Irakli Mekvabishvili, a senior banker at the European Bank of Reconstruction and Development (EBRD) tells GTR. “But the new government is working very hard.”
Its hard work is already bearing fruit. In February, Moscow agreed to allow Russian retailers to stock Georgian wines and mineral waters. Russians were so taken by the prospect of renewing ties with Georgia’s distinctively salty natural mineral water that Alfa Group bought its main producer, Borjomi, for US$300mn in the days leading up the announcement.
Pre-2006, Russia accounted for 70% of Georgian wine exports. But while the end to the embargo is welcome news, it alone won’t reverse the negative trade balance. Georgia is a country that prides itself on its agricultural traditions, yet imports up to 75% of its food. “We import powdered milk,” says Mekvabishvili. “There’s a lack of natural milk, but there’s plenty of land. Not only should Georgia be feeding its own people, it should be exporting food to the countries around it too.”
It would be reductive, then, to blame the entire problem on diplomatic trouble with Russia – it seems more systemic. One Georgian analyst tells GTR that he hopes to make a killing by opening a potato wholesale business in Tbilisi, since most restaurateurs currently source their produce directly from the farmers. Given the fact that the International Finance Corporation (IFC) ranks Georgia among the easiest places on earth to do business, it’s strange that nobody beat him to the punch. According to our source, though, corruption is still a major issue. It’s easy to start a business, but growing one is tougher. It’s unsurprising that the new government came to office on a ticket of judicial and agricultural reform.
The sea, the sea
The EBRD’s Mekvabishvili feels that the country should be making more of its natural fecundity, but also points to the potential of Georgia’s Black Sea coastline and fast-flowing mountain rivers. The ports of Poti and Batumi give the country access to the Eastern European markets of Bulgaria, Romania and Moldova. While the previous government is widely derided for facilitating corruption and nepotism, it should be credited for refurbishing transport links between Batumi, Tbilisi, Moscow and Baku. As one banker tells GTR: “Their main policy was to get things working.”
Despite this, there’s frustration among the finance community at Georgia’s failure to make more of its internal and coastal water facilities. It’s estimated that just 20 to 25% of the country’s hydropower resources are being utilised and while production and exports have been rising steadily – on energy terms, Georgia is a net exporter – the consensus is that more needs to be done.
Neighbouring Turkey’s energy imports are expected to top US$60bn in 2013. Its electricity consumption alone will rise by 3% a year for the next decade. Even throughout the 2008 war, Georgian electricity exports to southern Russia kept flowing – one of the few commodities not to fall foul of Moscow’s sweeping embargo. Georgia exports electricity to both Russia and Turkey through the high waters of spring and summer – which is exactly when both markets experience a trough in production. In the winter months, though, Georgian production falls away too, something that could be reversed with greater investment in facilities. “There’s huge room for development in terms of the construction of hydroplants,” says the EBRD’s Mekvabishvili.
Last June the German development bank KfW and the Austrian Development Bank agreed a loan of US$32mn with the Bank of Georgia, to be used to construct small hydropower projects. KfW also worked with the EBRD and the European Investment Bank to fund the €290mn Black Sea transmission line connecting the Georgian and Turkish power networks – Georgia’s largest power project. Enrico Spiller, KfW’s director sector co-ordination and energy and transport in Tbilisi, tells GTR that KfW is working “on behalf of the German government to fulfil the development obligations Germany has according to international agreements”, rather than the promotion of German firms.
International energy companies have been on the scene for a while and new Georgian energy minister, Kakha Kaladze (a former footballer who twice won the Champions League with AC Milan and who captained the Georgian national team 50 times) has been actively trying to court more. Inter RAO of Russia owns three plants, while Turkey’s Anadolu established a subsidiary, Georgia Urban Energy (GUE) to construct the Paravani hydroplant close to the border. The latter received a senior loan of US$44mn from the EBRD, of a total project cost of US160mn. Korea Electric Power Corporation, a state-owned utility, signed a US$1bn memorandum of understanding with the Georgian energy department in 2009, but it’s thought that they never started construction.
Where are all the bankers?
Yet despite the heavy involvement of international financial institutions (IFIs) and national development banks, commercial trade financiers are thin on the ground. Caucasus Energy & Infrastructure (CEI) is a private equity vehicle, currently seeking US$100mn investment for the development of the 48MW Mtkvari hydro project, for which it holds the licence. Executive chairman Bidzina Bejuashvili tells GTR: “If the project is good, you can always find a buyer for electricity.” Finding funding, however, is another matter entirely.
The two local banks most active in the trade finance market are the Bank of Georgia and TBC Bank – both of whom are believed to have credit lines of around US$60mn. The EBRD has been active in Georgia since 1999.
Every year, it has available credit lines totalling US$150mn for Georgian banks, which is to be on-lent to Georgian businesses. The annual utilisation rate is 60 to 70% and 75 to 80% of the funds are snapped up by Bank of Georgia and TBC Bank.
“You can forget about local banks,” says Bejuashvili. “They issue loans at a rate of over 10% – sometimes 14%. In our country, it makes no sense to borrow money at those rates. If you want to build a hydropower plant, you definitely have to raise money internationally and talk to western banks or IFIs. They provide longer terms and better opportunities than local banks, but talking to them takes a lot of time and usually requires having a big balance sheet in order to get a loan. That’s why developing hydro is so difficult – you need to be a strategic player to bring the project to successful completion.”
CEI has a commitment letter signed by the Overseas Private Investment Corporation (Opic), which states that a loan of US$58mn will be released should CEI find investors. Bejuashvili says: “The project itself has a licence, but it needs a bigger corporate to enter the equation. We are in advanced negotiations with Kazakh, Russian and Turkish investors for Mtkvari. If they come on board, I’m sure they can bring Opic to disburse the loan.”
GTR understands that most trade finance in Georgia covers imports, rather than exports. Oil and gas comes from Armenia and Azerbaijan and from Russia, Turkey and Europe, comes everything else. Given the fact that there is more than US$4bn worth of hydropower projects underway and the seemingly ready supply of offtakers, the lack of export financing involving foreign banks and western companies is perhaps surprising.
One suggestion is to take Georgia on the road: host events in Paris, Frankfurt, London and Washington similar to those organised by the Belarusian government, which helped raise awareness of the country as an investment opportunity. Another is to work with western companies on a power purchase basis, whereby the Georgian government would be a guaranteed offtaker if another isn’t available. It’s a scheme Tbilisi has trialled through the winter months.
With more investment, it’s thought that interest rates may start to come down too, at which point local banks may become more active in funding electricity exporters. But until then, the Georgian exports conversation seems destined to continue in the conditional tense.