Global investors with Georgia on their minds

Ask most people to guess where Georgia comes in the World Bank’s Ease of Doing Business Index 2014 and chances are few would place it as high as 15th. Yet there it sits, sandwiched between Germany and Canada, way ahead of its regional neighbours and a good deal higher than many West European countries. 

“We were one of the more corrupt and criminal countries when the Soviet Union broke down,” explains Bank of Georgia’s (BoG) Archil Gachechiladze, deputy CEO in charge of investment management, which encompasses the wealth management operations. 

But in November 2003 Georgia experienced the ‘Rose Revolution’, which forced President Eduard Shevardnadze to resign and saw a new government under Mikheil Saakashvili formed in early 2004, one which was determined to introduce democratic and economic reforms. “Organised crime was eliminated, bureaucracy cut and taxes halved and the country has gone through a tremendous transformation over the last 10 years,” says Mr Gachechiladze.  

“Georgia is blessed not to have any oil and we have to work for our money. You can look at us as a service economy for the region – servicing eastern Turkey, parts of Russia, Azerbaijan, Armenia and less intensely in the wider region.”

Comparisons with Ukraine are easy to make. Both countries experienced revolutions promising pro-Western leanings, and both suffered from Russian aggression not long after, in Georgia’s case the 2008 armed conflict between Georgia, Russia and the Russian-backed self-proclaimed breakaway republics of South Ossetia and Abkhazia. 

But while the Ukrainian situation is still very much ongoing, Mr Gachechiladze insists Georgia has managed to successfully break away from the influence of its giant neighbour.

“During the era of the Soviet Union and in the aftermath of its collapse we were very dependent on Russia and had strong economic ties,” he explains. But as the political situation heated up in 2006-2007 Russia put embargoes on Georgian exports and “played games” by cutting gas supplies. “So the country diversified. For example, we now get most of our gas from Azerbaijan. Most of the risks that might worry investors have already materialised.”

As Georgia underwent this transformation, so did its banking sector. Mr Gachechiladze claims Bank of Georgia was one of the first to introduce Western-style management, helped by the return of Western-educated Georgians who had worked in the UK and Europe. He himself took his MBA at Ivy-league Cornell University in the US before working at Lehman Brothers in London in private equity. He returned home in 2008 planning to set up his own private equity operation, right in the middle of the crisis with Russia. “It was a very good idea but very bad timing,” he admits, and as a result he ended up in banking rather than private equity.

Bank of Georgia started its wealth management operation in 2005 and now serves approximately 1000 clients from more than 60 countries, with around $500m (€440m) in assets under management, including deposits. “Unlike in Europe where you have money and assets that have been accumulated over generations, in Georgia this is first generation money,” says Mr Gachechiladze. “So rather than wealth preservation, most of our clients are interested in wealth multiplication.”

Along with an expanding domestic operation, BoG puts a heavy focus on attracting overseas clients. “The first overseas clients we got for our wealth management operation were mainly Israelis,” he explains. “They tend to be very active in looking around for mispriced opportunities and they saw that the risk/reward return in Georgia was very attractive and they started to pour in.”

In 2008 a representative office in Tel Aviv was established, followed by a Hungarian office in 2012. There are also BoG operations in the UK and Azerbaijan. 

The bank does not pretend to be doing anything sophisticated; rather the interest offered on deposits appears very attractive to Western investors living in a low-yield environment. “This is smart money that sees the under-leveraged banks, good corporate structure, a good economy and prudent polices in the country. So rather than getting zero interest on their money at home, why not get 4 to 5 per cent here?”

New products are in the pipeline, however, as the wealth management arm looks to utilise the wider bank’s capabilities. JSC Galt & Taggart, a BoG subsidiary which Mr  Gachechiladze chairs, has launched local currency bonds which have been offered to wealth management clients and were three times oversubscribed, while there are plans for hydro funds and commercial real estate funds.

“For us private banking is a big operation and as wealth in the country and wider region continues to grow, so will our operation.”

Globally, there is a growing importance in the services and capabilities offered by local banks, which provides a big opportunity for banks such as BoG, says Seb Dovey, co-founder of wealth management think-tank Scorpio Partnership. 

“The challenge they face is mostly to transition from being a retail-focused deposit taking bank into a fuller service wealth manager,” he says. “In the past local banks have often felt they could not compete in this area with the international franchises. This is less of a factor now.”