Published: July 18, 2008
By
It caused a certain amount of surprise in financial circles when Lado Gurgenidze was made prime minister of Georgia in November 2007.
Gurgenidze is a well-known figure in east European finance – a former head of CIS corporate finance at ABN Amro, who then re-located from London to Tbilisi in 2004 to become CEO of the Bank of Georgia, which he turned into the country’s leading private bank and the only Georgian company to list on the LSE. The company is the pride of Georgia, having attracted over 200 institutional investors, and appreciated over 1000% since flotation.
The move to the job of prime minister caused surprise because, firstly, Gurgenidze has no experience of politics. And secondly, the job of prime minister is something of a poisoned chalice in Georgia. President Saakashvili’s first prime minister, Zurab Zhvania, died in mysterious circumstances in 2004, apparently of a gas leak, though members of Zhvania’s family claimed he had been assassinated.
His successor, Zurab Nogaideli, resigned because of ‘ill-health’ in November 2007. His ill-health may have had something to do with the enormous anti-government demonstrations of November 7, when around 50,000 demonstrators flooded the main streets of Tbilisi in protest against the government’s perceived authoritarianism.
The government’s response was heavy-handed, with riot police using tear gas and water cannons to break up the protests, and wading into the crowds with truncheons. The government also sent 200 riot police to close down Imedi, the country’s most popular TV station, which they accused of inciting a revolution. The police smashed the station’s broadcasting equipment and forced the channel’s CEO, at gunpoint, to take it off the air.
The move attracted loud criticism from the TV station’s minority shareholder, Rupert Murdoch, whose News Corporation owns 49% of Imedi. Murdoch said: “We're horrified that something like this could happen in a supposedly democratic nation. We took control of this station only last week and we have instructed the staff to make every news broadcast absolutely fair and balanced. Apparently the government was not watching and instead sent its goons to hurt people and smash the place up.”
But president Saakashvili said the moves were necessary because the station was being used by its majority shareholder, billionaire businessman Badri Patarkashvili, as an instrument to incite revolution and bring down the government. Badri had publicly declared: “Let no one have doubts that all my forces, all my financial resources until the last tetri will be used to liberate Georgia from this fascist regime.”
The government tried to arrest Badri for these comments, but he fled to London, where he made dark warnings of Georgian death squads being dispatched from Tbilisi to kill him. He was found dead in his mansion in Leatherhead in February, apparently having died of a heart attack according to the British coroner’s report.
It was in these inauspicious circumstances that Gurgenidze decided to make his debut in Georgian politics, accepting the offer of the number two job in Georgia on November 22, eight days after Nogaideli ‘resigned’. What, I wondered, persuaded him to leave the bank he had built up into a regional leader, and take on such an unlucky and thankless job?
I catch up with the prime minister in Tallinn, where he is pitching to a group of Estonian investors at a private lunch at the exclusive Vertigo restaurant. He’s been doing a lot of that since he came to office: travelling from capital to capital, from Dubai to Brussels to Baku, pitching to foreign investors.
This sort of activity seems to come more naturally to him than the dirty world of Tbilisi politicking. He tells the appreciative audience: “You have no idea how much I enjoy being back in my element, pitching to investors rather than having to get involved with politics.”
He pitches well. As the owner of an Estonian brewery says to me, leaning over his food, “he is a persuasive salesman, eh?” Gurgenidze is proud that, since he came to office in November, Georgia has attracted $700 million in FDI, more than half the government’s annual target of $1.2 billion. “FDI is off the chart at the moment”, he says.
A lot of that is down to his hard work, on his never-ending roadshow around the world. For example, in February he travelled to the UAE, and held meetings with some of the biggest local investors and dignitaries there. His visit brought immediate results – in March, he announced that the Poti port was being privatized and sold to RAK Investments, the real estate arm of the Ras Al-Khamein region of UAE.
RAK has committed $200 million over the next three years, and potentially will invest a further $1.2 billion into tourism, real estate and other sectors in Georgia. Meanwhile, Gurgenidze says the state, which still owns 49% of the Poti port, plans to float this stake on the Georgian Stock Exchange in the coming weeks. This will be one of the last acts of the government’s ambitious privatization programme. “We’ve pretty much privatized everything there is to privatize”, he says.
Next stop on the never-ending roadshow was London, where Gurgenidze promoted the government’s debut Eurobond to fixed income investors. The issue was arranged by JP Morgan and UBS, and was three times oversubscribed, getting a coupon of 7.5%. The issue was a triumph, and had no better promoter than Gurgenidze, who arranged the first ever Eurobond from Georgia, for the Bank of Georgia, in January 2007. As one fixed income investor says: “He’s a smooth operator. He knows how to speak to western investors.”
That’s no surprise, when Gurgenidze has spent a large amount of his life living in London and working in the City. He still has dual British and Georgian passports, and he says of his old home: “London is central to Georgia’s financing plans. It’s crucial to attract the institutional investors based there.”
In other words, Gurgenidze is nothing if not investor friendly. He describes Georgia as if it were an oasis of liberal reforms amid the chicanery and dirigisme of the former Soviet Union: “We’ve dramatically simplified the tax code, abolished most taxes, and reduced those that remained. Lo and behold, our budget revenues have tripled.” But that’s just the start of it: “We’ve de-regulated and liberalized, then de-regulated and liberalized again. We’re libertarians, we believe in small government and getting out of the way of business.” You can almost hear the Estonian investors purring over their lemon soufflé.
There’s no arguing with the country’s credentials as a hardcore liberal reformer. Where economic reforms in neighbouring countries like Russia and Ukraine have slowed to a crawl, Georgia keeps on trucking. In 2006, it was voted the number one reformer in the world by the World Bank.
And the liberal reforms show no sign of stopping. Gurgenidze says the government has just passed a new ‘financial package’ which requires the government to have a fiscal surplus as of next year, which should provide a lot of comfort to foreign bond holders. The package also makes it illegal for the central bank to have double-digit inflation targets. If the economy overshoots the target by more than 2%, a no confidence vote in the government is automatically called.
The government keeps on cutting taxes as well. “We’re in the process of abolishing taxes on all financial instruments, on interest income from securities, on dividends, and on capital gains from financial products”. A Russian investor to my right is slightly sceptical. “If they have abolished all these taxes…where exactly do they get their revenue?” he wonders.
These bold liberal measures are bearing fruit, Gurgenidze says. “We’re seeing a Schumpeterian boom in entrepreneurial activity”, he says proudly, referring to the theories of the Austrian liberal economist Joseph Schumpeter. “Gross loans rose by 27% in 2007 and the number of registered business rose by around 10,000 in the same year”, he says. “The middle class has risen from almost nothing a few years ago to around 2 million today” – almost half of Georgia’s population of 4.5 million.
So presumably the middle classes are generally welcoming of the government’s liberal reforms. And foreign portfolio investors are also happy. Peter Elam Haakanson, chairman of East Capital, says: “We were one of the first institutional investors to invest in Bank of Georgia [in 2004], and Gurgenidze did a fantastic job there.” East Capital and other foreign investors should be happy, says Gurgenidze. “They’ve made an obscene amount of money in Georgia.”
The only ones who seem less happy in Georgia at the moment are the million or so people – around a quarter of the population – who live at or below the poverty line, according to government statistics. Gurgenidze says it is this group, who have been the worst hurt by the government’s reforms, who were behind the huge demonstrations in November.
He says the government has now “re-orientated budget spending to target this group”, raising social spending from 29% of the budget to 31%. “We’re not doing this out of the goodness of our hearts but to get this group to buy into our liberal reforms so as to ensure their irreversibility. It would be truly tragic to lose ground through populist measures if the country moved leftwards.”
It was to save the country from socialism that Gurgenidze agreed to the thankless job of prime minister. He says: “It looked like it could go either way in November, and I’d regret it for the rest of my life if I felt I could have done something and didn’t. I’m a man in a hurry. The public sector isn’t a particularly enjoyable place to work.”
Gurgenidze has also been making efforts to sell his policies of ‘compassionate libertarianism’ to the Georgian population. But he seems to find it harder to connect with working class Georgians than he does with foreign investors. “It’s a monumental task to communicate with them”, he says. “They’re basically peasants.”
The Georgian working class, for their part, remain equally sceptical of a government which has to enforce its ‘compassionate libertarianism’ with tear gas and water cannons. Demonstrations and hunger strikes continue outside the parliament in Tbilisi, as they have continued ever since the Rose Revolution in 2003, and Georgia remains a deeply divided country politically and economically.
But out in Tallinn, the never-ending roadshow is a hit once more, and the foreign investors raise their champagne glasses and toast the prime minister and his unwavering dedication to liberal reforms.