Issue 3, 2014. June-July

   

GEORGIA AND UKRAINE: HOW WILL THE CRISIS AFFECT INVESTMENT?

Tourism and wine have been staples of the trade relationship between Georgia and Ukraine for the past several years. While the two countries have been strong partners in the past, the ongoing crisis in Ukraine is raising questions about how business relations between the two will fare this year.

Georgia and Ukraine are more than close political allies - they are strong trade partners. Out of all the CIS states, Ukraine was the second-largest investor in Georgia in 2013 (after Azerbaijan), with businesses and projects worth $25.4 million in the country.

But the fighting in eastern Ukraine and its ongoing political crisis will be a setback for trade between the countries, according to Zurab Abashidze, Georgia's official representative on Russian relations.

"Unfortunately, the dramatic events taking place in Ukraine reflect on our trading relations in a negative way," Abashidze was quoted as saying on agenda.ge.

The data from the first quarter of the year underscore those concerns: Russia has overtaken Ukraine as Georgia's third-largest trading partner (with trade worth $190.3 million) while Ukraine's share of trade has fallen to $167.9 million.

Nick Piazza, founder and CEO of SP Advisors, told Investor.ge, however, that interest in Georgia continues apace.

"Unfortunately, large Ukrainian corporations have generally been skeptical of making large investments in Georgia just because of the small size of the market there. In most cases they have chosen to just directly import their products from Ukraine to Georgia, as this tends to be more cost efficient," he said in an e-mail interview.

"However, we do see a lot of independently wealthy Ukrainian individuals making small private investments in Georgia; this year our company, SP Advisors, helped Ukrainians launch hotel projects in Batumi and a small farming project in Khakheti."

Piazza noted that one of the biggest boosts to business between the two countries could be Russia's annexation of Crimea.

"Georgia over the last two years had already been "rediscovered" by Ukrainian tourists, and with the situation in Crimea, which generally sees around 3 million tourists in the summer season (65% of which are from Ukraine), I think it is logical to assume that places like Batumi will reap a solid windfall in new Ukrainian tourists; we are already seeing that flights between Ukraine and Georgia over the May holidays were fully booked," he said.

The Kazantip Republic, a large Eastern European rock festival that used to be held in Crimea, is reportedly moving to Georgia this year - an event that is anticipated to bring thousands of tourists, many from Ukraine.

The Georgian-Ukrainian Business Club, a group of 28 businesses that works to foster ties between the two countries, is working hard to make sure investors - and potential investors - on both sides are aware of new opportunities.

Before the conflict in Ukraine arose, the club's executive director, Olga Verkhola, and members like Victor Kipiani, a partner in the Mgaloblishvili Kipiani Dzidziguri (MKD) law firm, were actively promoting the possibilities in both economies.

That hasn't changed with the beginning of the conflict: the club continues to highlight trends and opportunities for its members and possible investors on its website and through its monthly report.

While the dip in trade made the report for May, plans for more flights between Ukrainian cities and Batumi were also big news - as was the expectation of more fruit exports to Ukraine.

Kipiani noted that one of the club's main goals is to promote Georgian investment in Ukraine, not just Ukrainian investment in Georgia.

The current trend has been for more Ukrainian investment to flow to Georgia, Piazza said. But that does not mean it will stay that way.

"Georgian investment in Ukraine has been tiny, thus I don't see much change here," he said. "I think the only thing that might be reasonable to expect is that some of the large Georgian diaspora that works in Ukraine might now look to return home as the economy in Ukraine has been on the rocks the last six months."

But, Piazza stressed, there is also optimism that Ukraine could use this crisis - and the promised aid packages - to turn the economy around and improve its investment climate. "We have seen droves of investors visiting Kyiv since March, as sentiment generally seems to be that Ukraine is poised for a big financial rebound. The devaluation of the local currency by over 40% will be a big part of that as Ukraine's two largest components of GDP are wheat and steel exports," he said.

"Ukraine is already receiving about USD 7 billion this month and there are aid packages for about another USD 20 billion lined up for this year. I think much like we saw in Georgia in 2008, while the West was unwilling to support Ukraine military against Russian aggression, it will do its best to put the Ukrainian economy back on its feet following these events."

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