Georgia’s double-digit economic growth promised rich rewards for foreign investors. But when war broke out a year ago, the risks were brought home very starkly to Rakia. Three of its employees were killed when the Russians bombed the Black Sea port of Poti.

Today, the state-owned investor from the Gulf emirate of Ras al-Khaimah is back at work building grain and container terminals at the battle-scarred port.

“The war was a difficult problem for us,” says Zaza Mikadze, the general director of an affiliated company, Rakeen, investing in property and agriculture. “In the end, we decided to stay on, but slowed down some of our projects.”

Battered by the war and the global financial crisis, foreign investors might have been forgiven for leaving Georgia en masse.

But a quick end to last year’s fighting, tight macro-economic policies and a $4.5bn (€3.1bn, £2.7bn) injection of foreign aid – worth $1,000 for each of Georgia’s 4.5m people – has given foreign companies enough of an incentive to stay on.

Russian troops may have occupied the breakaway territories of Abkhazia and South Ossetia, but Tbilisi has managed to keep the rest of the country stable for business. “There’s no reason why an investor should not get a good return now in Georgia,” says Christopher Granville, the managing director of Trusted Sources, an emerging markets consultancy.

Georgia GDP

Georgia was one of the world’s fastest-growing economies after the “Rose Revolution” in 2004. In spite of growing difficulties with Russia, $2bn of foreign investment – worth 20 per cent of gross domestic product – flowed into the country in 2007, fuelling growth of more than 12 per cent.

The war and the global financial meltdown, followed this year by political unrest against the rule of Mikheil Saakashvili, president, have shocked investors and damaged confidence – but not irreparably.

“The war was very hard for business, no question,” said David Lee, the president of the American Chamber of Commerce in Georgia. “But no foreign investors fled.”

The attractions of Georgia’s cheap labour, low taxes and plentiful development opportunities have been boosted by the prospects of aid-financed projects, particularly in transport and energy.

Nika Gilauri, prime minister, forecasts a fall in GDP of at least 1.9 per cent in 2009. In an interview with the Financial Times, he ruled out state intervention in the economy, saying liberal policies were essential to Georgia’s revival.

Georgia FDI

“There are only six taxes and they are flat and very easy to administer. Investors love it,” said Mr Gilauri.

Russia targeted Georgian military bases during the war, leaving most civilian infrastructure undamaged. But much of it still requires modernisation – not least the crumbling roads.

Russia, formerly Georgia’s biggest trading partner, had already closed its borders with the country in 2006 after a spying dispute. Georgia has successfully diversified trade since then, notably with Kazakhstan, Turkey and Azerbaijan.

Investors think another war with Russia is unlikely. A Russian bomb blast in northern Georgia last August, near a pipeline built by BP to carry Caspian oil to the Black Sea, exposed the vulnerability of oil and gas transit routes across the south Caucasus to the west. But European companies are still pursuing the Nabucco pipeline project to bring additional Caspian gas across Georgia to Turkey and Europe.

MagtiCom, a US-owned telecommunications company operating Georgia’s biggest mobile telephone network, lost a fifth of its licence area after Russia occupied South Ossetia and Abkhazia and expropriated local telecoms equipment. The company is planning to invest $100m in modernisation this year.

International financial institutions have stepped in to boost investor confidence. The International Finance Corporation, part of the World Bank, agreed last November to help fund the development of Tbilisi’s first big shopping and office centre in a partnership with Rakeen and Uptown Tbilisi, a Georgian property company.

Confidence remains fragile, however. Georgia’s property market was booming until last August when the bubble burst. International hotels in Tbilisi are half empty and several new hotel projects have been shelved. Retail in the city was dealt a fresh blow by recent opposition protests, when demonstrators camping in mock prison cells blocked off Rustaveli, the capital’s main street, for three months.

Veneera, who works at a bakery on Rustaveli, says the shop is up for rent following a 50 per cent drop in sales. “I have worked here for 30 years and never seen anything so unsanitary before,” she said.

Corruption, meanwhile, particularly within the judiciary, remains a concern, despite a sweeping anti-graft campaign.

While Tbilisi’s hopes of early entry into the Nato military alliance are regarded as dead, Georgia is still working hard on its economic ties with the US and the European Union and is negotiating large trade agreements with both partners.

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