ECONOMIC DEVELOPMENT MINISTER ARVELADZE ON

C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 001320

SIPDIS

SIPDIS

DEPT FOR EUR DAS BRYZA AND EUR/CARC

E.O. 12958: DECL: 06/04/2017
TAGS: PREL PGOV ECON GG
SUBJECT: ECONOMIC DEVELOPMENT MINISTER ARVELADZE ON
STIMULATING INVESTMENT


Classified By: Ambassador John F. Tefft for reasons 1.4(b)&(d).

Summary
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1. (C) In a May 28 meeting, Georgian Minister of Economic
Development Giorgi Arveladze described to Joseph Wood, Deputy
National Security Advisor to the Vice President, Georgia's
efforts and successes in attracting foreign investors in a
broad range of sectors. Arveladze said the government's
philosophy was to try to create opportunities and to stay out
of the economy as much as possible. He said the government
was seeking to lower interest rates, which at their current
high levels are preventing many Georgians from starting their
own family businesses. Arveladze said Georgia was taking a
technical approach to negotiations over Russia's WTO
accession, concentrating on Russia's unfulfilled commitments
in its bilateral WTO agreement with Georgia to legalize the
economic border, i.e., to allow customs checkpoints where
Russia borders Georgia's separatist regions of Abkhazia and
South Ossetia. End Summary.

Investment on the Rise
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2. (C) Arveladze began the breakfast meeting with Wood and
the Ambassador by recounting a recent privatization auction
for property around Lisi Lake in Tbilisi. Arveladze said he
had expected the land to go for around USD 50 million; in the
end, it was bought by a Georgian company for USD 182 million,
beating out several foreign investors. Arveladze said this
exemplified the trend in investment in Georgia. Using Israel
as an example, Arveladze said Israeli investment in Georgia
topped the rankings in the mid-1990s, primarily because of
Georgian-Israeli businesspeople. As international investment
in Georgia has broadened, Israel has moved down the list, but
a large number of Israelis have purchased real estate in
Georgia in recent years. Arveladze said a recent Georgian
economic forum in Israel had been a huge success, revealing
serious interest from many firms that had no previous
connections to Georgia. Arveladze said a number of Israeli
investors in Georgian real estate were beginning to show an
interest in manufacturing as well.


3. (C) Arveladze said his goal was to keep the government out
of the economy as far as possible, while trying to create
opportunities. He said Georgia today had some advantages
over eastern European economies of 15 years ago, many of
which were still suffering from corruption and bad management
at that time. He noted that Georgia had an attractive labor
force that was low-cost, educated, and hard-working, and that
Georgia had moved up dramatically in the most recent World
Bank survey on the ease of doing business. Arveladze noted
that the banking sector in Georgia was booming, a consequence
of the legalization of the economy after the Rose Revolution.
Unfortunately, he added, there were now so many businesses
seeking loans that the banking system could not meet the
demand except with a very high interest rate. He said the
government had a plan to use commercial banks for government
funds, and thereby ensure lower interest rates while also
taking care to deal with the challenge of inflation.
Arveladze said that if interest rates were lower, practically
every family in Georgia would be ready to start a business of
its own.

A Low-Key Approach to Russia's WTO Negotiations
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4. (C) Asked about Russia's WTO aspirations, Arveladze said
Georgia was treating it as a technical issue. He noted that
in 2004 Georgia and Russia signed a WTO bilateral agreement
in which Russia accepted responsibility for "legalizing the
economic border" through customs checkpoints, which were
especially needed on the parts of the border controlled by
the separatist authorities. (Note: These areas are
uncontrolled by Georgian authorities and are a source of
smuggled goods, people, and potentially WMD into Georgia.)
This commitment has not been fulfilled, Arveladze said,
adding that the agreement is explicit despite Russian claims
that this is not a WTO issue. Arveladze said Georgia saw no
reason to emphasize its other trade issues with Russia --
such as the bans on export of Georgian wine, mineral water,
and agricultural products -- in the WTO context, because
Georgia did not want to "look like a whiny country creating
problems" for Russia's WTO accession.


5. (C) Arveladze said a Free Trade Agreement (FTA) with the
U.S. would be a strong signal of U.S. political confidence in
Georgia, and he expressed hope that the Trade and Investment
Framework Agreement (TIFA) that Arveladze would sign during
his upcoming trip to Washington might lay the groundwork for
additional steps later. He noted that Europe gave an FTA to
Estonia when it was in a similar situation in 1990s, when

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Estonia successfully re-oriented its economy after a Russian
embargo and undertook reforms to defeat internal corruption.
Touching on the recent cyber-attacks against Estonia,
Arveladze conceded that Georgia was probably vulnerable to a
similar assault.

TEFFT