Issue 2, 2014. April-May

   

15 YEARS AND COUNTING

Investor.ge's Heather Yundt interviews three investors and long-time expats on what brought them to Georgia, how the business environment has changed, and how their investments have fared.

Betsy Haskell

The unfinished, unsigned outer walls of the nondescript Tbilisi building gave little indication of the thriving seven-room hotel inside. Despite limited electricity and infrastructure, the hotel was booked solid. Business was good — but it was far from easy.

Betsy Haskell, an American businesswoman, opened Betsy's Place in 1994 at the request of the US Embassy. The only other hotel for foreigners had been taken over by a paramilitary group, and the embassy needed a safe place for officials and humanitarians to stay. "I didn't know when I came how dangerous it was," Haskell said. "Who could have imagined what it was really like?"

As the country recovered from war in the years that followed, corruption thrived. Every month men came to Haskell's door demanding payment for supposed infractions to various laws and regulations.

"It was impossible to conform in those days, and they knew it." Haskell said. "The corruption was so petty, and it was so pervasive, that it just made me furious."

At one point, business was going so well that Haskell wanted to expand. She picked out a piece of land, but after paying multiple people all claiming to be its owner, she gave up.

The tipping point came in 1999. When the government brought a tax case against Haskell, she called it quits. Haskell sold the business to Stephen Johnson, the owner of Prospero's Book Shop, and left Georgia. "Most businesses wanted to pay the taxes they owed. It's much easier to be clean and pay your taxes," she said. "And they always set it up so that it was impossible."

Haskell didn't stay away from Georgia for long. Soon she was back to start up a small gardening company. That's when she saw the business environment change. "[Georgia] became a regular place. They fixed the streets, they fixed the lights, they fixed the electricity, they installed gas. They made life normal. The police were not corrupt. It was a place where it was normal to interact with the government and do business."

The impossible-to-follow rules and corruption that proved too much for Haskell were now gone. "Everything became easy and straight," she said. "Everything worked and the relief was immense."

Today, Betsy's is a 57-room boutique hotel overlooking central Tbilisi, and Haskell has just started up her latest business providing logistical services to representatives of the US Treasury. Opening her business last fall, Haskell saw how far things have come. "It was easy as pie," she said, thanks largely to the House of Justice, a one-stop public service center. Instead of running around for weeks to collect all of the necessary papers, the entire process took about an hour.

But there's more to be done to improve the business environment, Haskell said. "The challenge is to acknowledge what was done during [former president Mikheil Saakashvili's] term and build on it."

Ruslan Khoroshvili

After studying at an American high school for a year, Ruslan Khoroshvili returned to Georgia with a plan for his future. He wanted to earn a good living, and he was ready to work for it.

He enrolled at ESM Tbilisi, now Free University of Tbilisi, which unlike some other universities, rewarded studying rather than bribes. He worked hard, and in 1999, during his third year, a lecturer recruited him for an internship with Georgian Consulting Group, a company that later became EY Georgia.

At a time when it was common practice for companies to pay auditing firms to sign the papers rather than do the work, Georgian Consulting Group stood out, Khoroshvili said. "There was no real responsibility in other auditing firms. That was not the case in this company. It was run objectively and with professionalism."

"There was a lot of corruption; however. there was more or less a level playing field for businesses to develop," Khoroshvili said. "You knew that you could bribe somebody to get the same benefits that others got. There were opportunities for business to work."

Khoroshvili watched the economy grow in the years following the Rose Revolution. He saw improved rule of law, a reduction of corruption, and high foreign investment in Georgia. Former economy minister Kakha Bendukidze played a role by eliminating unnecessary licenses and regulations. "Although some regulation is necessary, it comes at a cost. To do regulation you need experienced people, which we did not have. So the approach was taken to not do what we couldn't do." Khoroshvili said. "A lot of red-tape was removed, and I think that had a significant boost to the development of businesses."

Undermining these reforms, however, was the insecurity of property rights. Allegations began to emerge of businesses being expropriated by the government. The perception of insecurity that followed negatively affected business, Khoroshvili said. "If you're not sure if your business will be yours after 10 years, after it's successful, then there's not much incentive to invest in your business."

Despite recent improvements to property rights, there have been setbacks, Khoroshvili said, such as a recent law banning foreigners from buying agricultural land. Khoroshvili himself owns a vineyard with foreign partners. Though the activity is mainly for fun, the new law has put a damper on hopes of expansion.

Today, EY Georgia's business comes more from local clients than in the past, its largest client being the Bank of Georgia. Though Georgia remains a small market affected by economic and political events beyond its borders, Khoroshvili, now the firm's Managing Country Partner, has a positive outlook on the future.

"Maybe I'm optimistic, but I think that the situation is improving. Today is much better than it was five years ago," Khoroshvili said. "It's a level playing field, there are no artificial hurdles to developing your business, there are laws that work, and the judiciary is freer than it ever was in our recent history. Therefore, it is a good environment to develop a business."

Ted Jonas

In August 2007, Ted Jonas, an American lawyer with DLA Piper, got a call from a prominent American law firm. Their client, a major Kazakh bank, was planning to open in Georgia, and they wanted Jonas to represent them. With business at an all-time high and a more-than-full workload already, Jonas tried to politely turn them down. The American partner refused to take no for an answer. "He would not stop calling me day in and day out." Jonas said. "That's what it was like back then. You couldn't beat them off with a stick."

Jonas, who first came to Georgia with the National Democratic Institute, helped found Georgian Consulting Group in 1996. In the midst of the country's corruption, Jonas noticed a sense of opportunity amongst international investors. "Georgia was very, very underdeveloped, but they were on a very good trend. It was very democratic and things were going the right way."

Jonas moved back to the United States in 2000 as Georgia took a turn for the worse, becoming more corrupt and more politically polarized. "Most businesses couldn't do their taxes honestly if they wanted to," he said. "The authorities didn't want you to pay your taxes honestly. The system was run by people who wanted to take a cut personally."

Five years later, Jonas returned to Georgia to join DLA Piper as its managing partner and observed a striking change. During the move, Jonas cleared his belongings past customs, bought a house, and registered his car locally - all without encountering a single demand for a bribe.

And the economy was booming once again, something Jonas contributes to the good international business climate, the government's spending on infrastructure, and the marketing of Georgia to international investors.

But the growth was short-lived. In 2008, Georgia and Russia went to war and an economic crisis struck the world. "The on-going perception of instability in the region is a major impediment to investment," Jonas said.

Despite former economy minister Kakha Bendukidze's reduction of red-tape, which made transactions like setting up a business much easier, Jonas says investors suffered from poor rule of law. "The fact was that you were always at risk of choking on inflated tax claims and having your property expropriated. The judiciary wasn't independent, so there was no protection whatsoever. Everyone was at risk of being arrested on trumped up criminal charges."

Throughout his career, Jonas saw this government pressure on business firsthand through the defense cases of foreign investors his firm was involved in.

Despite some improvements in recent months, DLA Piper has yet to return to its peak levels. The firm has fewer attorneys and lower revenue than it did prior to the 2008 war and financial crisis, attributable as much to the lower prices clients are willing to pay as to the decrease in the volume of business.

Despite improvements in the political and legal environment, Jonas said, Georgia's economy remains on a "downward slide," in part due to the instability in Ukraine.

"This government has got to put in place strong, centralized mechanisms for economic policy and development. There isn't the time to keep drifting."

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