Caution in the Caucasus

Slowly but surely, Gulf investors are starting to take an interest in Armenia, Azerbaijan and, most of all, Georgia. Published in The Gulf, October 2014

In the city of Batumi on Georgia’s Black Sea coast, oddly-shaped buildings are rising up into the sky. In some ways the weird, modern skyline - which includes a building with a Ferris wheel 100 metres up - is reminiscent of a Gulf city, with the added lure of casinos. So when the prime minister of Georgia, Irakli Garibashvili, made an official visit to the UAE last month, he could have been forgiven for wondering if he was glimpsing his own country’s future.

Garibashvili’s trip took in Abu Dhabi, Dubai and Ras al Khaimah and was, at least in part, designed to drum up investor interest. At a meeting at the Abu Dhabi chamber of commerce, he called on local businessmen to boost their investments in Georgian industry, agriculture and infrastructure.

Mohammed Thani al Rumaithi, chairman of the chamber, responded by suggesting there was “a strong basis for building a strong and solid economic partnership”. Certainly there are some Emiratis that are already very familiar with the opportunities.

The Dhabi Group and the Ras al Khaimah Investment Authority (Rakia) are shareholders in the $6 billion Georgian Co-Investment Fund. The Dhabi Group also owns Tbilisi-based Kor Standard Bank and is backing a new Kempinski hotel in the city. Meanwhile, Ras al Khaimah’s Rakeen owns the Tbilisi Mall. A few others have also been showing interest recently - executives from the Dubai-based Jumeirah Group were in Tbilisi and Batumi in June, exploring the potential for hotel developments.

According to UNCTAD, the UN’s trade development arm, the UAE is by far the biggest Gulf investor in Georgia, and indeed the Caucasus as a whole. The stock of UAE foreign direct investment in Georgia, Armenia and Azerbaijan stands at more than $1 billion, followed by Iran at $932 million.

But these two don’t have the region entirely to themselves. Since 2009, Bahrain-headquartered Turkcapital Holding has been seeking private equity deals in Azerbaijan. And a Qatari business delegation visited Tbilisi this April looking at projects ranging from a mineral water business to hotels and an exhibition centre. There is already a Qatari presence at one hotel in the capital - on Rustaveli Avenue, the city’s main thoroughfare, the Gulf country’s flag ruffles in the breeze outside the Marriott Tbilisi, home of the Qatari embassy.

But while there are signs of growing interest, not all deals have gone smoothly in the past. In 2011, Rakia offloaded most of its shares in Georgia’s Poti Sea Port to the Dutch company APM Terminals, three years after it had taken on the management contract. In between, the UAE suffered its economic crash and the port itself was briefly occupied by Russian troops during the 2008 Russo-Georgian War.

APM is now planning to expand the port. At the same time, the Georgian government is looking for bidders to develop a new deep-sea port at Anaklia. One reason why the extra capacity is needed, and why the Caucasus matter to the Middle East, is its position on historic trade routes between Europe and the Middle East, particularly Iran. If and when western sanctions against Tehran are lifted, the overland route to the Black Sea would offer a useful route to market for Iranian exports.

As well as containerised goods, there is also plenty of potential for energy exports. Oil pipelines run from Baku (Azerbaijan) to a terminal in Batumi and the network could be extended into Iran in the future. The National Iranian Oil Company already has a stake in Shah Deniz, Azerbaijan’s largest gasfield.

The close links between Iran and Armenia and Azerbaijan are due to their shared history, culture and geography as much as economic interests. The main mosque in Yerevan, the Blue Mosque, was rebuilt with Iranian money in the 1990s and, according to one Azerbaijani oil worker, Iranian cars are a common sight on the streets of Baku in the summer.

Iran also manages to maintain good relations with Georgia. “We have a quite intensive relationship with Iran … quite intensive trade and economic relations,” said Maia Panjikidze, Georgia’s foreign minister, at an event in London on 11 June.

Despite that, the greatest potential for future investment in the Caucasus probably comes from the Gulf Co-operation Council (GCC). Indeed, some of the planned developments seem to actively pay homage to the Gulf. A case in point is the Khazar Islands project in Azerbaijan. The local Avesta Concern is planning to build around 40 artificial islands south of Baku at a cost of up to $100 billion. In the past Haji Ibrahim Ibrahimov, president of Avesta Concern, has suggested Qatari and Emirati investors may get involved, although none have yet been confirmed.

In the meantime, the oil and gas sector provides ways in which the GCC can work with Azerbaijan. Dubai-based Topaz Energy & Marine runs a fleet of vessels on Azerbaijan’s offshore oil and gasfields, and the Azerbaijani oil company Socar operates a large oil storage terminal in Fujairah.

While Georgia and Azerbaijan have attracted the bulk of the Gulf’s attention, Armenia is often overlooked. It is landlocked, has few natural resources and its fractious relations with Turkey and Azerbaijan mean two of its borders are shut. That difficult position means that it could do with Gulf investment even more than its neighbours, particularly in the current climate.

Yerevan has long regarded Moscow as its most important ally, but the sanctions imposed on Moscow in the wake of the war in Ukraine are likely to hurt Yerevan too, given the close economic ties it has with Russia. In September Moody’s scaled back its growth forecasts for Armenia for this year from 3.2 per cent to 2.1 per cent because of this.

While Gulf investment into Armenia has yet to really lift off, the links are at least improving. This summer Etihad and Air Arabia began services to Yerevan, adding to the existing flights to Tbilisi and Baku by Qatar Airways and flydubai.

It is not just tourists or investors who could be using these flights. Some Gulf bankers may also find a market for their expertise, particularly in Baku. The government of Azerbaijan, which unlike the other two countries has a Muslim majority, has expressed an interest in issuing Islamic bonds (sukuk), although Moody’s suggests it is “unlikely to issue in the near term.”

As with many aspects of the relationship between the Gulf and the Caucasus, the potential for the banking sector seems to lie mostly in the future, but it does appear to be getting closer to being realised.