Within hours of the ceasefire in Georgia, Heidelberg Cement reopened its cement factories near Tblisi.
The German company’s three cement plants supply about 60 per cent of the country’s market and are one of Georgia’s biggest foreign investments. They have flourished thanks to a construction boom in Georgia and neighbouring Azerbaijan and could be set to cash in on reconstruction.
Brigitte Fickel, a spokeswoman for Heidelberg Cement, said a plant warehouse was damaged during Russian air raids but production had not been affected.
Damage to Georgia’s civilian and business infrastructure has been minimal, but the brief conflict may have done serious harm to the outlook for future foreign investment not just here but in other former Soviet states that clash with Moscow.
“Georgia’s economic growth will be much reduced and foreign investment that has been so important to Georgia’s fundamentals could be revised,” says Olivier Descamps, a managing director at the European Bank for Reconstruction and Development. “We cannot say Georgia’s economy has been physically damaged. But there is the matter of risk and the impairment of confidence.”
Ratings agencies Fitch and Standard & Poor’s both downgraded Georgia after fighting broke out and warned that the end of combat operations would not shield the country from the longer-term economic impact.
FDI flows are crucial to financing Georgia’s current account deficit and have been a key driver of growth.
Foreign investment stood at 19.8 per cent of GDP in 2007 compared with 13.9 per cent in 2006, according to the Tbilisi government. Georgia attracted more than $2bn (€1.3bn, £1.06bn) in FDI last year mainly in banking, real estate, mining and agriculture.
The conflict will have a macroeconomic impact in the short to medium term but analysts say there is unlikely to be a clear-cut resolution to the conflict between Georgia and Russia and political uncertainty could cloud investment prospects.
While established projects will not be affected by the conflict, new investors are likely to shy away from Georgia and other countries such as Ukraine, which are seen as standing in Russia’s line of fire.
“We think that Ukraine may be the next investment casualty because it was asked in a veiled fashion if it wants to join Nato and Russia’s actions hark back to the cold war and the desire to retain spheres of influence on its borders,” said Elizabeth Stephens, head of credit and political risk analysis at Jardine Lloyd Thompson.
In Ukraine, FDI has also been a significant part of growth. Net FDI stood at 7 per cent of GDP in 2007 up from 5.2 per cent in 2006, according to the Kiev government.
The Baltic states have tighter trade links with Russia and export large amounts of food as well as being a corridor for Russian exports to western Europe, so are likely to be less affected by the conflict in Georgia, analysts say.
Estonian exports to Russia doubled between 2005 and 2007 and as the share of exports flowing east rose from 6.5 per cent to 8.9 per cent over the period.
“I don’t think there will be a knock-on effect to the Baltic states. They have had tense relations with Russia for some time but that is unlikely to weigh heavily on investors decisions,” said Edward Parker at Fitch Ratings.
