Kazakh invests in Georgian market

By Dinara Salieva, Asset Matayev
Brosse Street Journal
Wednesday, May 30 2007

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In the first three quarters of 2006, Kazakh investors put about USD142 million into the Georgian economy, according to the Georgian Department of Statistics, making Kazakhstan the biggest foreign investor in Georgia in 2006.
The total amount in the past few years is higher than that, though. Nursultan Nazarbayev, the President of Kazakhstan, put the amount at USD 300 million during a meeting in March last year with President Mikhael Saakashvili.
Why are Kazakh investors so interested in Georgia?
Georgia’s geographic location, predictable government and transparent tax system are attracting business investment from Kazakhstan, particularly in the areas of communication, tourism, the financial sector and transportation, according to several business people and experts interviewed for this story.
Archil Gegeshidze, senior expert of the Georgian Foundation for Strategic and International Affairs in Tbilisi, who studies foreign affairs and relations between former Soviet countries, said that Georgia is a friendly country for Kazakhstan, and also a bridge between Europe and Kazakhstan. Small, transit countries such as Georgia must have an international role and Saakashvili is making it possible for Kazakhstan to invest here.
At the same time, Kazakhs have capital to invest in perspective markets.
After 15 years of independence, Kazakhstan began to develop its economy by producing locally competitive products and looking to other markets for investment or for export. As prices for oil and gas are extremely high, the capital is available.
The recent bond between Georgia and Kazakhstan represents a change from the past relationship of two countries, which largely ignored each other, according to Giorgi Ciklauri, a Georgian journalist and Caucasus correspondent for a Kazakhstan business newspaper, Capital. He began to write about Georgia and the Caucasus region in early 2005. That was when Danial Akhmetov, prime minister of Kazakhstan, visited Georgia to assess the market for possible projects.
During that visit, Georgian Prime Minister Zurab Nogaideli and his Kazakh colleague visited Poti and Batumi, Georgia’s trade harbors on the Black Sea.
“Before that visit we didn’t have any relationships between Kazakhstan and Georgia,” Ciklauri said. He says that Kazakh investment began coming quickly to Georgia after Kazakhstan’s president, Nazarbayev, visited the country in October 2005 and made a statement about Georgia’s future.
Nazarbayev said at the time that Kazakhstan realized that Georgia had a big future and also said that Kazakhstan wants to be one of the 10 most developed countries in transportation, with Georgian support, Ciklauri said.
But there had been at least one previous attempt to join forces, according to one observer.
“Few people remember that the idea of transporting Kazakh natural resources through Georgia to the Black Sea and border countries of Georgia was raised in the mid-1990s and was alive till end of 1990s. The name of this project was ‘south energetic corridor,’” said Gegeshidze. “But, unfortunately, it was just words, maybe because Nazarbayev and Eduard Shevardnadze (ex-president of Georgia) had different ideas,” he said.
Several of those interviewed said that before Georgia’s Rose Revolution in 2003, it was difficult to put in money into Georgia because the government system was unclear and corrupt.
“Everywhere you felt bribery in the air” and “bandits” were in the police force,” said Gegeshidze. There also was a high risk of local conflicts in some areas of Georgia, making the political climate unstable.
One of the most visible of the Kazakh projects is the reconstruction of the Iveria hotel in the center of Tbilisi. Radisson SAS will operate the hotel. Kazakh investor Development Solutions (DS) is implementing the project, due to be completed by April 2008.
According to the CEO of Development Solution, Daulet Orazaliyev, about $100 million will be invested in the reconstruction of this hotel. The Radisson SAS hotel is among several projects that are financially backed by one of the biggest banks in Kazakhstan, Turan Alem Bank.
In 2005 Turan Alem Bank (BTA) bought 49 percent of Georgian Silk Road Bank, forming BTA Silk Road Bank in Tbilisi. It provides banking services and plans to be one of the leading banks in Georgia by the end of this year, said Zurab Gelenidze, the combined bank’s commercial director. The bank will open a chain of branches in Georgia, new service centers in Tbilisi and increase the number of employees in the bank. The number of employees will double this year from the current 70, Gelenidze said.
Turan Alem Bank was the first Kazakh investor in Georgia. Most investments are in real estate (hotels, business centers), telecommunications and tourism. Turan Alem Bank has also funded more than 10 companies in Georgia, mostly related to the development business, communication sector, trade and energy, said Gelenidze.
According to Aman Tentiev, a member of the board of Development Solutions, when BTA merged with Silk Road Bank, many other banks and business people from Kazakhstan began considering developing business here. That’s because Georgia is hospitable to business, he said.
“The procedure of legalizing and opening a new business is not difficult, there aren’t major barriers,” said Tentiev. “Now the system of relationships is clear, local government doesn’t interfere in our business. That is already help for us, and we feel comfortable here, as in another country such as Ukraine, Russia or Kyrgyzstan,” he said. “Sure we feel comfortable, because our presidents and governments understand each other... we know that our business is predictable,” he said.
Orazaliyev, of Development Solutions, agreed with that assessment. “Georgia has an attractive investment climate and economically, it is developing well. In my opinion, that makes Georgia attractive for foreign investors,” he said.
Another project of Development Solutions, who opened its office in Tbilisi six months ago, is the reconstruction of resorts and hotels in Adjara. About $200 million was invested in this project. Development Solutions also holds 80 percent of the fixed communication system in Georgia. Twenty-five people work in the company; two are from Kazakhstan.
After it achieved independence from the Soviet Union, Kazakhstan immediately opened its market to foreign investors in the areas of oil and gas, mining and steel. Now the country’s energy companies are branching out to invest in other markets.
A Kazakh company, KazTransGas, won a tender in 2006 and paid $12.5 million for Tbilisi’s gas distribution company, now called KazTransGas-Tbilisi (KTG-Tbilisi). KazTransGas is a gas transportation company that is 100 percent owned by the Kazakhstan national company KazMunaiGas.
Manasbek Sariyev is executive director of KTG - Tbilisi, which provides gas for the capital of Georgia, with a population of 1.3 million people and a gas network of over 2,400 kilometers.
“A favorable tax climate attracts foreign investors,” he said. “Georgia has a lot of opportunity to make business and a very transparent system for direct foreign investment.
“KazTransGas in Georgia is the result of a good relationship between the two presidents and their decision to bring KazTransGas to Tbilisi, a kind of social project because we are well experienced in city gas service,” he continued.
Today, the company is reconstructing the city gas system, installing new meters and changing the gas lines.
For this work, it will spend an estimated $80 million through 2011.
Sariyev said that KazTransGas’s entry to the Georgian market was interpreted in two ways.
“Some people thought that it was a mistake for Georgia to sell a ‘strategic’ asset to foreign companies, but on the other hand, we also sold in Kazakhstan gas service companies to private or foreign companies, and after they reconstructed gas distribution networks, we bought these back from companies to state-owned. It’s normal practice, “ he said.
One day, this could be the case in Georgia, said Sariyev.
KTG-Tbilisi provides medical insurance and a stable salary for 1,800 staff employees. After KazTransGas bought Tbilisi Gas Distribution Company in May of 2006, “the minimum salary growth was 20 percent,” said Eka Sariya, head of press service of KazTransGas-Tbilisi.
“I think it’s not bad when a company from a friendly country comes to the Georgian market,” said Sariyev.
The most recent Kazakh player in Georgia is a sister of KazTransGas, KazTransOil (KTO), which deals with oil transportation. In December 2006, KTO bought 50 percent of the Batumi oil terminal port in the Adjara region, which belongs to GreenOak Company. The cost of that 50 percent share is a trade secret, according to KazTransOil.
Kazakhstan intends to deliver oil from the Aktau port in the Caspian Sea (Western Kazakhstan region) to the port of Baku, Azerbaijan, and then to the Black Sea and then to Georgian border countries and Europe market outlets.
It is the first foreign oil transportation asset and outlet to the sea for Kazakhstan. For 2007, the annual capacity of trans-shipment through Batumi oil terminals is estimated at 12 million tons of oil.
This year, the Georgian government will put up for sale the last state assets that are proposed for privatization.
That means that major privatization is coming to an end, and eventually the Georgian government will want to demonstrate the benefits and effect of privatization, and answer the question of whether it was a good idea to sell state property to private or foreign owners, including Kazakh investors.

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