Today we put the focus on Georgia. Not the wonderful ‘Peach State’ that Ray Charles so profoundly eternalized in his eponymous ballad, but rather on what we believe to be one of the most compelling countries located in Central Asia.If you want a textbook Silk Road Frontier market, look no further than Georgia. Most of its attraction has to do with its geographic location. The Country is situated at the juncture of Eastern Europe, the Middle East and Central Asia.
Georgia has a population of more than 4.6 million; its constitution is that of a representative democracy, organized as a unitary, semi-presidential republic. It is currently a member of the United Nations, the Council of Europe, the World Trade Organization, the Organization of the Black Sea Economic Cooperation, the Organization for Security and Cooperation in Europe, the Community of Democratic Choice, the GUAM Organization for Democracy and Economic Development, and the Asian Development Bank. The country aspires to join NATO and the European Union.
The history of Georgia can be traced back to the ancient kingdoms of Colchis and Iberia, and it was one of the first countries to adopt Christianity, in the 4th century. Georgia reached the peak of its political and economic strength during the reign of King David and Queen Tamar in 11th and 12th century. At the beginning of the 19th century, Georgia was annexed by the Russian Empire.
After a brief period of independence following the Russian Revolution of 1917, Georgia was again taken back by the Red Army in the early 1920’s and became part of the Soviet Union, which lasted until its breakup in 1991. Like many post-communist countries, Georgia suffered from the economic crisis and civil unrest during the 1990s. After the Rose Revolution, the new political leadership introduced democratic reforms but the foreign investment and economic growth which followed initially have slackened substantially since. We believe there are a few enormous opportunities for investors in Georgia.
Georgia finds itself at the epicenter of the development and industrialization of one of the major growing trade routes on the planet. Its turbulent history has punished it with a back seat on the road to international financial investor recognition, yet its strategic location, increasingly ordered political circumstances and sound economic metrics provide it with undeniable value as a crossroads territory. Moreover, Georgia represents an emerging economy pivotal to the bigger picture of intensifying trade flows between East and West.
To the West Georgia contains the European bordered waters of the Black Sea and the Mediterranean basin. The East of the country opens onto the Central Asian gateway and the Caspian Sea. The Baku-Tbilisi-Ceyhan (BTC) pipeline and the Baku-Tblisi-Kars Railroad (BTK) pass through Georgia and are these are “jugular” trade routes in the procession of trade between East and West.
Georgia’s tactically pivotal credentials are only just being considered by international investors. This is partly because of the development cycle of the investible universe there, but moreover it is a reflection of the of the world’s comprehension of the shift of economic ascendancy from the West to the East.
Growing out of adolescence
Georgia is now 19 years old as a nation and it is moving on from her thorny adolescent years. After the collapse of the Soviet Union in 1991, the newly independent republics of the southern Caucasus (the mountainous region which separates the Caspian Sea in the East and the Black Sea in the West) became immediately important.
East-West trade channels became compressed, especially due to the fact that there are no open trade routes across Armenia as a result of longstanding differences between the landlocked republic and it neighbors, Turkey and Azerbaijan. This created a natural routing of goods from the Caspian via Azerbaijan through Georgia, then into Turkey.
Today Georgia’s rail network forms a key section of the Transport Corridor Europe Caucasus Asia (“TRACEA”), forming the link which remains the shortest route between the Caspian and Black Seas. This strategic geopolitical advantage is particularly relevant when referring to the haulage of bulk commodities, in particular oil.
Alongside Armenia and Azerbaijan, Georgia’s independence from Russia came at the time when vast oil and natural gas reserves were being discovered beneath the Caspian Sea to the East. Oil from Kazakhstan, with its production now in excess of 1.6mn barrels per day and with over 30bn barrels of reserves, is just begging to flow.
The final leg of the Baku-Tbilisi-Kars (BTK) railroad is currently under construction and is due for completion in 2012. The benefits of the railroad will be clear: to send European goods east and petroleum west. The railroad broadly follows the Baku-Tbilisi-Ceyhan (BTC) pipeline which opened in 2005. The route avoids Russia to the North and Iran/Armenia to the south.
Investing in Georgia
For most investors, Georgia and its GSE stock exchange is still a very small and unknown market but we believe it is certainly a place to watch for the future growth. Given its obvious regional logistics value proposition, one of the key investments that embody the case is Georgian Rail. This summer, they came to London to market its debut Eurobond issue, The Prime Minister was in attendance to support the deal and underpin the strategic importance of the company.
With relatively little other issuance in dollars available to investors, we knew the deal would we extremely well-received when it launched in July earlier this year. The 5yr bond pays a 9.875% coupon and currently trading at a yield to maturity of around 8.25%. Quite a good premium for a risk of such high strategic value, isn’t it?
Welcome to the frontier markets, there is more where that came from…
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