As Hollywood types debate the merits of boycotting the American state of Georgia, Vladimir Putin is putting into action his own Georgian boycott. Starting July 8, flights to the sovereign nation of Georgia by Russian airlines will be suspended.
Evidently, Putin is miffed at recent anti-Russian protests and believes boycotting the country’s tourist industry will inflict economic pain. Few Georgians are losing sleep over upsetting the Russian dictator, however.
As Georgia’s Prime Minister stressed recently at the Third Annual U.S.-Georgia Strategic Partnership Conference at the United States Institute of Peace here in Washington, DC, his people are focused instead on becoming ever more fully integrated into Europe.
To Georgians, this means joining NATO and the EU. It includes broadening strategic partnerships with the West beyond just defense and security, which are currently quite substantial, to including stronger economic ties as well.
The nation of Georgia, located at the crossroads of Western Asia and Eastern Europe, is on few emerging-market or frontier-market investors’ radar screen. As far as I can tell, the biggest exposure to Georgia by a frontier exchange-traded fund is less than a quarter of one percent of the fund’s assets. A de facto boycott by investors!
This is a pity given the economic and liberalization policies this former Soviet Republic of 3.7 million have instituted since 2003. Georgia is not only aligned with the West militarily, it has entrenched democratic and economic reforms. Freedom House ranks the country 8th out of 65 in its “Net Freedom” list. Importantly for investors, Georgia is perceived as one of the easiest places in the world to do business, currently ranked 6th on the World Bank’s ease of doing business index.
This has resulted in strong economic growth of nearly 5% a year for the past decade and a decline in Georgia’s poverty rate from 32.5 percent in 2006 to 16.3 percent in 2017, according to the World Bank. The Prime Minister stressed his government is particularly focused on economic growth that is inclusive.
As is the case with all emerging markets, Georgia has considerable risks. There remains corruption although, according to Transparency International, it is on a par with Spain. The skillset of its workers and its logistics capabilities need greater improvement, issues the government says it is addressing, along with the private sector. Georgia lacks a meaningful capital market and is too reliant on the dollar.
Then there are the Russians. Putin invaded the country 11 years ago and continues to occupy two provinces. As seen above, however, the occupation has not slowed progress made in areas where most of the Georgians live.
Notwithstanding the risks, some investors are not boycotting Georgia and see great opportunity, including Evan Vanderveer of Vanshap Capital, a globally oriented, deep-value investment management firm, based in Arlington, Virginia.
Says Vanderveer, “Georgia is the most remarkable reform story we have encountered in our careers. We believe the country has an extremely bright future ahead as markets continue to be liberalized, rule of law is improved, and peaceful transfers of political power continue. The Georgian people have a rich culture, show tremendous hospitality and are fiercely independent, all of which contribute to rapidly growing interest from tourists and investors alike.”
There are no easily traded funds that invest in Georgia. So, how can an investor get a diversified exposure to the country? I believe investors should look to Georgia Capital. No, not the city that hosts the Atlanta Braves baseball club, but the roughly $500 million market capitalization London stock exchange-listed holding company (CGEO:LSE) whose US symbol is GRGCF.
Georgia Capital owns and develops public and private high quality, growing businesses with industry-leading market share and high barriers to entry. They own 57% of the largest integrated player in the fast-growing healthcare ecosystem in Georgia and they own 20% of the leading retail bank in the country. Both firms are publicly traded in London.
Other assets include a leading beverage producer and distributor in Georgia and across the Caucasus Region. Their real estate business is substantial and includes a hospitality and commercial real estate firm. Georgia Capital has a renewable energy business platform for developing hydro power plants, wind power plants and solar power plants across the country. They are a leading player in the local P&C insurance market with a 32% market share, and own a water and wastewater services monopoly that represents more than one-third of Georgia’s population.
Vanderveer believes the growth potential of Georgia Capital’s Net Asset Value is significant, as mature and late-stage investments are estimated to grow earnings, on average, at mid-teens rates and earlier-stage investments may develop into sizable businesses. He is impressed by management’s strong track record of growing shareholder value and believes it is well aligned with shareholders, receiving most of the aggregate compensation in long-term vesting shares.
Plus, the shares are a true bargain: valued at 7x current income while earnings are growing 20%, the stock is trading at a 30% discount to current NAV.
As compelling as the above may be, the strongest case for the shares is the fellow at the top, Irakli Gilauri, Chairman & CEO, who has a reputation for insisting on Western business practices. Says Vanderveer, “Irakli is one of the most driven and tenacious managers we have met. He has an astounding ability to attract, motivate and nurture talented young leaders and possesses keen capital allocation abilities. If Irakli can remotely repeat his Bank of Georgia managerial performance, Georgia Capital shareholders will be handsomely rewarded.”
Investors in emerging markets must have a strong tolerance for volatility, as these nations run the risk of reverting to historical script. In Georgia’s case, confiscation of private assets for the “public good” is probably a low risk by emerging market standards, but it is not an inconceivable risk.
Then again, for some countries, history is not destiny and they are able to escape their past by forging a new, successful path. Think Singapore and South Korea as examples. Georgia would like for us to believe they are on the right path with the right set of resources and the right vision for a prosperous future. In short, they aspire to be the “Singapore” of the Caucasus Region.
If you have the stomach for emerging market investing, you should consider ending your boycott of Georgia.