Emerging Europe Spring 2018 by Emerging-Europe

Spring 2018

No More Low Cost: Emerging Europe Needs a Pay Rise Electric Dreams: The Future of Automobiles Made in Emerging Europe: Innovation for the World Emerging Flavours: New Estonian Cuisine Outlook on Georgia: Leading Europeâ&#x20AC;&#x2122;s Second Wave

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INBRIEF Mikheil Saakashvili was arrested in Ukraine and deported to Poland. Ukrainian border officers detained the former Georgian president while he was eating lunch in a Kyiv restaurant. Still wanted on charges of corruption in Georgia, Mr Saakashvili later surfaced in the Netherlands, from where he said he would “continue the fight.”

Moldovan Purcari Wineries raised 186.2 million Romanian lei (40 million euros) through an initial public offering (IPO) of a 49 per cent stake at the Bucharest Stock Exchange (BVB). The final price of the IPO was 19 lei per share. In Poland, a new law will see almost all shops closed on Sundays from the spring. The only exception will be shops attached to petrol stations. By complete coincidence, the state-owned petrol retailer Orlen recently began a huge expansion of its convenience store network. Macedonia appeared to soften its stance on changing the name of the country in order to end a long and often bitter dispute with Greece. Among the new names being considered are Upper Macedonia, New Macedonia, Northern Macedonia and Macedonia (Skopje). The country’s Skopje Alexander the Great airport would become Skopje International Airport, and the main road to Greece would be known as the Friendship Highway.

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Voters in the Czech Republic re-elected Miloš Zeman president for a second term in office. One of the first tasks of the president’s new mandate will be to install a government: the country has been without one since an indecisive general election in November made the right-wing ANO party of Andrej Babiš the largest party, but left it short of both a majority and coalition partners.

Viorica Dancila was appointed Romania’s first female prime minister, head of the country’s third government in just over a year. Meanwhile, protests continued against proposed changes to the country’s justice system, which critics claim would weaken the power of the anti-corruption agency, the DNA, and lead to charges against a number of leading politicians being dropped.

Central and Eastern Europe does not have a single, full democracy according to the 2017 Democracy Index released in early February by the Economist Intelligence Unit. Azerbaijan and Belarus are still classed as authoritarian regimes; seven countries are considered hybrid (Armenia, Macedonia, Montenegro, Ukraine, Georgia, Moldova and Albania); the rest are still characterised as flawed democracies.

The European Commission published a Strategy for the Western Balkans which could see Serbia and Montenegro ready to join the European Union by 2025. In Serbia’s case, this almost certainly means recognising the independence of Kosovo.

The World Bank released its third volume of beyond GDP wealth accounting, The Changing Wealth of Nations 2018. In it, Slovenia was declared Emerging Europe’s wealthiest country, with total wealth per capita of 351,776 US dollars: higher than Spain. Slovenia is also emerging Europe’s highest ranking country in terms of human capital, at 225,046 US dollars per capita. Estonia, with 258,903 US dollars per capita, and Latvia (236,906 US dollars per capita) also rank highly, while at the other end of the scale the region’s poorest country, by far, is Moldova, which having zero subsoil assets can total wealth per capita of just 35,380 US dollars. Armenia by comparison can boast wealth of 52,894 US dollars per capita. In a new edition of the Open Budget Survey (OBS), which assesses budget accountability and transparency in 115 countries across the world, Georgia emerged as central and eastern Europe’s champion of open government. Georgia now ranks 5th in the world, having climbed 11 places since the last OBS was published in 2016.

Bulgaria assumed the rotating presidency of the European Council on January 1. The event was marked by new protests in the capital Sofia against the proposed extension of a ski resort located in a wildlife preservation area.

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FROM THE EDITOR Emerging Europe Needs a Pay Rise

Not a week went by last year without one media outlet or another – including, whisper it, a few which should have known better – claiming that a major multinational company was ready to quit emerging Europe due to rising wage costs. As we demonstrate in our cover story, No More Low Cost, the truth is in fact rather different: what emerging Europe needs is a pay rise. This is not the whimsical, utopian notion of idealistic dreamers: across the board, those with any kind of stake in emerging Europe are aware of the need for the region to retain its best people. And the only way that can happen is by paying them more. We have spoken to investors, business owners, workers, recruitment specialists and even trade unions. Nobody is scared of rising costs, but everyone is scared of emigration: if emerging Europe really does mean business, it’s time that its workers were paid what they are worth. Either that, or they will vote with their feet and head west, as millions already have. Something which kept coming up in conversation with all of those we spoke to about cost, was the need to reiterate time and again that just as a worker in emerging Europe need not be cheap, neither does a product Made in Emerging Europe have to be cheap. One business owner explained how he is often told to reduce his wholesale prices because “people will not buy expensive goods made in emerging Europe.” Wrong, they will. If they are good enough. There are countless examples of emerging European brands which

have already broken out of the strictly low cost bracket to become household names people will buy for the value and quality they represent. Reserved fashion, Skoda cars. This is the other side of the low cost coin: value and quality. In her in-depth look at the automotive industry in central Europe Claudia Patricolo focuses on just this issue. Automotive manufacturers have struck innovation gold in our region in the field of self-driving and electric vehicles. While major players may have initially entered the emerging European market for the low cost of doing business, they are staying for the ideas. The challenge now for emerging Europe is to ensure that as wages increase - as they undoubtedly will continue to do so - the current ratios of value and quality are maintained. Emerging Europe could be said to be at a crossroads in its transition. Later this year at least one of the region’s economies, Poland, will no longer be considered an emerging market: it will be mature. Poland’s economic transition will be complete, which makes it all the more ironic that country’s government – just like that of Hungary - has taken such an authoritarian path over the past 18 months. What can stop them? It could be nothing more complicated than running out of money, as we reveal on page 14. Finally, if there is one country in emerging Europe about which everybody currently has nothing but gushing praise, then that country is Georgia. Few nations in history have taken such giant strides forward in such

a short space of time. One of the most business-friendly places on earth, with a simple, predictable tax system and an energetic, young team of administrators all pulling together to achieve a brighter future for a country history has not always been kind to, Georgia is the focus of our Outlook, in which we dive deep into every facet of the country’s transition, from business to finance, culture to tourism. We have spoken to the people who are making it all happen, many of whom have returned to Georgia after years away in order to be part of the country’s impressive new start.

CRAIG TURP

EBRD HEADQUARTERS, LONDON 22 JUNE 2018

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PUBLISHED BY Emerging Europe Limited 86-90 Paul Street, London EC2A 4NE United Kingdom T +44 20 3808 8558 W emerging-europe.com E newsroom@emerging-europe.com Head of Content Strategy & Publishing Andrew Wrobel a.wrobel@emerging-europe.com Editor-in-Chief Craig Turp c.turp@emerging-europe.com Editorial team Claudia Patricolo c.patricolo@emerging-europe.com Shakhil Shak s.shak@emerging-europe.com Tamara Karelidze t.karelidze@emerging-europe.com Contributors Linas Jegelevičius Frédéric Schneider Nikodem Chinowski Graphic Designer Andrei Grosu Tomasz Gilewski Video Editor Piotr Dobroniak

All intellectual property rights are owned either by Emerging Europe or by the licensors of the services and are protected by copyright, trademark and other intellectual property laws. The magazine and the portal are designed for personal, non-commercial use only. No part of the magazine and the portal may be downloaded, republished, retransmitted or reproduced without our prior written consent of the owner. The views expressed in all opinion editorials published in this special report are the authors’ own and do not necessarily reflect Emerging Europe’s editorial policy. Emerging Europe adheres to the Standards Code adopted by IMPRESS. For complains scheme see http:// emerging-europe.com/complaints/

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ISSN 2399-7605 Photographs: BigStockPhoto.com unless stated otherwise.

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TABLE OF CONTENTS FOR STARTERS CURRENT AFFAIRS

BUSINESS

Emerging Europe needs a pay rise. We discuss why on page 32.

OUTLOOK ON GEORGIA

Food for thought

A Chance to Shine: The Emerging Europe Awards

Hungary & Poland: Real Friends, Imaginary Enemies

Emerging Politicians

A view from…

Moscow Calling

It’s Time for a Universal Basic Income

No More Low Cost: Emerging Europe Needs a Pay Rise

CEE Convergence Success Is Not All That it Seems

Is Emerging Europe Prepared for GDPR?

Destination Outsourcing

The Future of the Automotive Industry: Emerging Europe’s Self-Driving, Electric Dreams

Doing Business: Beyond the Data

Notes from the Boardroom

Made in Emerging Europe

Outlook on Georgia

After its significant rise the Georgian economy may now fall

Georgia: Leader of Europe’s Second Wave

Georgia Still on the World Bank’s Mind

Georgia’s China Factor

Georgia Makes Waves With Anaklia Deep Sea Port

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The Lady of the Fields

Georgia’s Tourist Boom: Ready or Not?

Sustainable Rooms

Homeland of Ancient Wine

102 Bank on Georgia Everything you always wanted to know about Georgia is in our outlook, pages 58-123

104 Georgia Eyes Future Role as Caucasus Bond Hub 106 The Rise and Rise of the Georgian Banking Sector 108 Georgia on Location 109 Education Reform: Key to Continued Georgian Success 112 The EU & Georgia: What Comes Next? 114 Georgian-Russian Relations: Past, Present & Future 115 Young, Skilled and Competitive: Georgia’s Labour Market 116 The Sights and Smells of Georgian food 118 My Wife’s Friends 121 My Discovery of Georgia

AFTER HOURS

124 Arts 126 Art for the People 132 Romania’s Changing Revolution 138 The Velvet Divorce 146 Foraging for Flavour: New Estonian Cuisine 150 Ljubljana City Guide: 48 Hours in Europe’s Green Capital

How to spend 48 hours in the magnificent Slovenian capital of Ljubljana. See page 150.

154 Plovdiv City Guide: 48 Hours in Bulgaria’s Cultural Capital 158 Is Zagreb the New Prague? Why Film Producers Shouldn’t Take Viewers for Fools 9

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FOOD FOR THOUGHT Scaling-up, But Must Do More, Faster

Photo: EBRD

By Sir Suma Chakrabarti EBRD President When the EBRD was created in 1991 to help the shattered economies of the former Soviet bloc, it was well known that these economies were massively inefficient in their use of energy, with significant negative impacts both on their economic competitiveness and on

the environment. As we expanded to countries like Turkey and the southern and eastern Mediterranean region, we saw the same expansion of our work to promote resource efficiency and assist our clients to deal with the rising impact of climate change. Today, we work under the umbrella of our very successful Green Economy Transition approach which accounted for 43 per cent of our 2017 financing with cumulative investments so far reaching over 26 billion euros. We are using an EBRD model of blended finance including funds from the Bank, international donors such as the European Union and the Green Climate Fund, and from the private sector, without which the fight against climate change would be lost. Today, climate change is perhaps the number one global challenge. In December 2017, I led a senior EBRD team to the One Planet Summit in Paris. Global leaders used that conference to make clear that climate finance would determine whether we were up to this task. At this summit, the EBRD was called upon to scale up its climate action. While we are the top sustainable energy financier in our regions, we are expected to do more. So, how hard is it to finance sustainable energy? We used to say that it is difficult to change old attitudes. Old habits die hard. But these old answers are no longer valid. The renewables revolution and the availability of a broad range of energy efficiency technologies ready to be deployed make countries see their energy

sectors from a new vantage point. Despite much noise about the US’ position on the Paris Agreement, it doesn’t determine whether or not a private investor will apply for an EBRD loan to build a solar plant in Kazakhstan. If it makes financial sense – and it does, thanks to policy dialogue and project finance structuring by our banking teams – it will happen. The EBRD is now supporting a massive increase in renewables capacity in Egypt and Jordan. With the help of our programmes, Ukraine is reducing its energy dependency and slashing CO2 emissions at the same time. Our Green Energy Financing Facilities now operate in 25 countries. Governments work with us as well: progressive regulation on renewables, energy and water efficiency is crucial for investments. For example, with the support of EBRD and the European Commission, Turkey has developed its first National Energy Efficiency Action Plan. Things may not move as quickly as we would like, but our climate finance and policy engagement are needed and wanted in the region. We must do more, together, now.

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The Economic Logic for the New Containment Line

Photo: Geopolitical Futures

By George Friedman Founder and chairman of Geopolitical Futures Since 2014, the security situation in the borderland between Russia and the European Peninsula has deteriorated. Expectations of an extended period of normalised relations reached a breaking point with the uprising in Kyiv that replaced a pro-Russian government with a pro-Western government. The Russians saw this as a direct threat to their national security. They saw the Western, and particularly American, interest in re-orienting Ukraine as intended to strip Russia of its strategic depth. The Russians inferred a broader, hostile intent. The Americans saw the Russian response to the events in Kyiv as potentially leading to the positioning of a substantial Russian force along the western Ukrainian border. This in turn would create a threat to Romania and Hungary, that would complement the existing Russian threat to Poland and the Baltic States. The United States focused on Romania and Poland as primary bases for troops and supplies designed to contain a potential Russian threat. This has recreated the former pro-Soviet bloc as a pro-Western bloc. Although each country pursues its own

national strategy, they all work toward the grand strategy of retaining national sovereignty and room for manoeuvre. A common economic strategy has also emerged, although not a joint strategy outside the framework of the EU. Each nation has, to a greater or lesser degree, a fundamental opportunity. They have a well-educated and highly creative tech sector, with the added advantage of relatively low wages. This gives them an opportunity most other European countries lack. This commonality could create competition, but it will most likely create a broad economic strengthening of the region, which will reinforce any potential containment strategy by creating ties to the United States, a major consumer of low cost technical skill.

Europe Needs to Shift Gears: From Elites to the People

Photo: European Parliament

By Danuta Hübner Chair of the European Parliament’s Committee on Constitutional Affairs There is no denying that the European Union, at the moment of its inception, was an elite project. People like Robert Schuman, Alcide de Gasperi or Altiero Spinelli were determined to break the cycle of war in European history, once and for all. They instituted a model of cooperation that was successful because officials at the top of the governments,

captains of industry and leaders of the particular social segments in the six founding countries were in agreement that this is what was really needed to keep post-war Europe free from the danger of devastating conflict. Over the years, societies accepted the EU as a viable way of organising the European political and economic space, mainly due to its output in the form of a continent-wide peace, stable economic growth, broad industrial base ensuring full employment and rising income levels. As such, an elite-driven process had the implicit agreement of the general population. The situation began to change when the EU became a more expansive project that demanded a higher level of commitment on the part of the people and of particular governments. The Eurozone, in order to become successful, needed to discipline economic profligacy in some countries, and the political institutionalisation of common policies was not easy for some countries, such as the United Kingdom. The enlargement of 2004 was seen by some as going beyond the comfort zone. Then came the economic crisis, which gave an impetus to various grievances at a national level in member countries. More often than not, their causes were local in origin, but it was easier for politicians to blame Brussels - either its bureaucracy or its perceived insensitivity to national concerns – rather than their own poor policies. Slowly, output-based legitimacy was dissipating. We have seen the visible signs of this since at least 2005. Now, when populists of an illiberal bent all over Europe raise their heads, we have to be prepared to reclaim our future once more. We cannot do it as a project by selective elites for the people – this will no longer work. Europe of the future, if it is to become locally and globally relevant, needs to shift gears from concentrating on the output side of economic performance toward constructing a generous space for input legitimacy in order to allow citizens to become the main architects of a new, more transparent and more participatory European Union.

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A Chance to Shine: The Emerging Europe Awards Craig Turp speaks to Andrew Wrobel (right), Emerging Europe’s head of content strategy and publishing, and Richard Stephens (left), director of the Emerging Europe Awards.

Craig Turp: Why do we need the Emerging Europe Awards in the first place?

about the region is low. That is why we believe they need to emerge into the public consciousness.

Andrew: Well, I would start by defining the word ‘emerging’, which is very often linked to economic development and fast-growing markets. Our understanding is far broader and refers to other aspects such as heritage, history, society and the region’s image.

Emerging Europe’s mission is to contribute to the social, economic and democratic growth of our 23 countries. What we want to achieve with the awards is to recognise excellence and best practices and encourage organisations to reach out for more.

When we look at where the majority of countries are now, less than three decades since the fall of the Iron Curtain, we see enormous potential going forward. At the same time, awareness

Craig Turp: So how about the categories? Andrew: There are twelve categories divided into three groups: image building, social and economic growth.

We also have two special categories for individuals who have contributed to the region’s growth; one originating from the region and one from outside the region. We strongly believe in the region and we know it deserves more attention. Craig: Is this also why you are bringing journalists from across CEE to London for the event? Richard: This is certainly one of the major reasons. The awards are, ultimately, about rewarding excellence and highlighting best practice across the region. We want

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to show the best of CEE and we want to help raise standards, and inviting leading journalists from major titles is an effective way of doing this. We also want to generate discussion about where the CEE region is heading, and well-informed journalists are great for discussions of this type — and then spreading the word afterwards. It’s also great for our contacts across the region.

foreign investors; then enquiry handling, and finally, investors’ feedback.

Craig: One category stands out — the investment promotion agency of the year. Why did you decide to include it?

Craig: So organisations from across the region can apply in nine different categories?

Andrew: We hear governments across the region inviting foreign investors and assuring them that they can count on their assistance. We decided to check that. We have developed a methodology based on the World Bank’s best practices and we have looked at three major aspects: communications, as the website is the first point of contact with potential

Richard: Correct. The application process, which is free of charge, has already started and will last for several weeks, for everyone to take as much time as they need to apply. We will announce nominees in April and the Awards ceremony will take place on June 22 at the European Bank for Reconstruction and Development’s headquarters in London. There is a

There will be one winner in the category but we are going to announce the Top 10 investment promotion agencies. We are also going to release a white paper, highlighting best practices in the region.

larger programme planned before the ceremony. Also, on the evening before, June 21, we are organising a reception at the Houses of Parliament, with a special guest, Greg Hands, UK Minister for Trade and Investment and Minister for London. We have a large and varied jury from a range of countries and professions; our jurors are the most senior people in their companies and are experts in the category in question. Because of this, it would be difficult to get everyone to meet in one place. But we find it rather positive, because voting by yourself encourages independence. When people get in a room together, they can influence each other. This isn’t necessarily wrong, but we want everyone to make up their own mind.

CURRENT AFFAIRS F E A T U R E D

Hungary & Poland: Real Friends, Imaginary Enemies Craig Turp

Voters in both Hungary and Poland go to the polls this year: a parliamentary election will be held in Hungary in April, local elections in Poland later in the year. In both countries the populist ruling parties, in the absence of any real opposition, are likely to do very well. What chance then, of their governments mending their errant ways?

udapest had woken up to fog, so thick that many flights into the Hungarian capital’s Ferihegy airport had been delayed, or cancelled. Mine, fortunately, had made it through: a Wizz Air service from Bucharest. It had been a long time since I had been in Budapest. Imperial, majestic and one of Europe’s finest cities I know it well: I once authored a guide to the city and spent weeks many years ago pounding its streets in search of hidden gems. This time though I

wasn’t sightseeing, and there was only while threats to close the prestigious one thing in particular I wanted to see: Central European University (CEU; the face of a man not far short of his founded with a generous donation from 90th birthday, laughing at me from an Mr Soros) have placed a cloud over the institution’s future. Most controversialadvertising hoarding. George Soros will be 88 this August. ly, Mr Orban also launched an expenHe remains remarkably busy. Accord- sive country-wide media campaign, ing to Viktor Orban, prime minister of criticised in a number of circles as anHungary, Mr Soros has been working ti-Semitic, to warn good Hungarians of tirelessly to undermine his government the dangers posed by Mr Soros and his for years, so much so that Mr Orban felt ‘octopus-like’ network. “The billboard campaign did not set the need to pass laws in 2017 limiting the financial independence of NGOs out to be specifically anti-Semitic,” says (be they linked to Mr Soros or not) Ádám Schönberger of Marom Budapest,

CURRENT AFFAIRS a Jewish cultural organisation. “But it quickly stirred anti-Semitic feelings: anti-Jewish slogans were painted on some of the billboards. To then continue the campaign once it became clear what was happening, that could be considered anti-Semitic.” I did not have long to wait to see the evidence. Hardly had the overpriced taxi driving me to the city centre (Mr Orban kicked those nasty foreigners from Uber out of Hungary in 2016) left the airport slip road than the first billboard appeared, featuring a smiling Mr Soros next to the slogan: “Don’t let Soros have the last laugh.” Another 500 metres and another billboard appeared. Then another. It was relentless. Later, while driving in the Hungarian countryside, there were more. There was no escape. “Don’t let Soros have the last laugh” is a reference both to government

Soros will be 88 this year. He remains remarkably busy claims that the philanthropist wants to force Hungary to allow in migrants, and to its ‘consultation’, in which questionnaires asking Hungarians if they agreed with Mr Soros’ alleged policies were sent to every home in the country. The government announced in December that more than 2.3 million of the questionnaires had been returned. Its findings have been used to justify a ‘Stop Soros’ law which could see the philanthropist barred from entering “The anti-Soros campaign distracts Hungary and NGOs which defend him attention from the most pressing isforced to pay a so-called ‘Soros tax.’ With no truly liberal domestic op- sues, such as the disastrous situation position to challenge him – Jobbik, an of the public health service, education extreme right-wing party, is likely to and poverty in rural areas,” says Csabe the second largest parliamentary ba Csontos, communications officer party after April’s elections - Mr Orban and spokesperson for the Open Society has named Mr Soros as his main adver- Foundations in Hungary. “For that reasary ahead of the poll. NGOs support- son the government needs ‘enemies’ so ed by Mr Soros will act like political it can galvanise its electorate. The govparties during the electoral campaign, ernment first planted an atavistic fear of migrants, and then accused George he claims. 15

Soros of intending to settle migrants in Hungary. So works the government’s propaganda,” Mr Csontos told Emerging Europe. While Mr Soros has been mentioned in dispatches in Poland - last summer Krystyna Pawlowicz, a lawmaker with the ruling Law and Justic Party (PiS), called him “the most dangerous man in the world” on Radio Maryja, a Catholic broadcaster, and claimed that his foundations “finance anti-Christian and

CURRENT AFFAIRS anti-national activities,” – it is the European Union which remains the government’s bête noire, not least as the current president of the EU’s decision making body the European Council is a former Polish prime minister, Donald Tusk, a member of the Civic Alliance (PO), Poland’s largest opposition party. So detested is Mr Tusk in PiS circles that it was the Polish government which last summer tried (unsuccessfully) to nobble his otherwise formality of a re-election to a second two-year stint as Council president. According to Christopher Hartwell, president of the Centre for Social and Economic Research in Warsaw, attacking Mr Tusk backfired. “The one time PiS took a small, brief dive in the polls was when they tried to stop Tusk being re-elected as Council president,” Mr Hartwell told Emerging Europe. “Regardless of Tusk’s popularity it was seen as a betrayal of a fellow Pole. Otherwise their support is holding up. Why wouldn’t it? They have done everything they said they would. They have lowered the pension age, they are paying people to have babies, they have taxed the financial institutions. If you voted PiS you have no reason to be disappointed. If an election were held today they might well get a bigger share of the vote.” That has not stopped large sections of Polish civil society from protesting against changes PiS wants to make to the legal system. The changes could force up to 40 per cent of Polish Supreme Court judges to step down and would hand politicians full control over the body that appoints judges. PiS has also passed laws giving it greater control over state media and is pushing through changes to the electoral system that have drawn criticism from the head of the country’s own electoral commission. Reforms reducing foreign media ownership have also been proposed. Poland’s political and parliamentary opposition is not as weak as Hungary’s, but it is far from popular. The Civic Alliance is still seen as being tainted by scandal in many circles, and – PiS will insist – too friendly with Germany and the EU as a whole. “PiS portrays PO as not looking out for Poland first,” says Mr Hartwell. “’Look at Tusk’ they say, ‘he went straight to Brussels.’” The challenge for the Polish opposition now is to find somebody around whom it can coalesce. Mr Tusk need not apply. “His credibility is not good,” says Christopher Hartwell. “And this is 16

CURRENT AFFAIRS the problem the Polish opposition has. No figure has yet emerged to forge a coalition. Until somebody does, PiS gets a free ride from the electorate.” The European Union on the other hand does not intend to give Poland anything like a free ride. On December 20 it took what has been termed the nuclear option and recommended invoking Article 7.1 of the EU treaty against Poland, a procedure which could eventually lead to Poland losing its right to vote at the European Council. That is unlikely to happen: Viktor Orban has vowed to veto any such action. Indeed, there are few spirits more kindred these days than Mr Orban and Jarosław Kaczyński, leader of PiS and de facto ruler of Poland. “Hungary can represent Poland,” said Prime Minister Mateusz Morawiecki when leaving the last EU summit of 2017 early. A further example of the strong ties binding the two countries came on January 3 when Mr Morawiecki’s first act of the new year was to pay Mr Orban a high-profile visit. Creation of a Visegrad Investment Bank (which would include all four members of the Visegrad Group: Poland, Hungary, Slovakia and the Czech Republic) has been mooted. Later in January however came signs that Poland was ready to hand an albeit small olive branch to Brussels. A major cabinet reshuffle saw a number of controversial ministers replaced, including Jan Szyszko, the infamous minister of the environment who allowed increased logging in the primeval Białowieża Forest, drawing fierce international criticism. The hardline Minister of Justice Zbigniew Ziobro kept his job, however. Nor will Poland be leaving the European Union in either the short or the long term. There will be no Polexit. Just a fortnight after the European Commission recommended the triggering of the EU treaty’s Article 7.1, a poll showed that support for EU membership in Poland was higher than at any time in history: 92 per cent of the Polish population wants to remain in the EU, up three per cent on the last poll in December 2017. Neither will Hungary be leaving the EU. Indeed, Mr Orban – who is likely to be re-elected prime minister by a wide margin - has claimed that central and eastern Europe represent the Union’s future. “The Hungarian opposition is weak and divided,” says Csaba Csontos. “More importantly they are visibly weak, so 17

even their possible electorate can’t imagine them as a possible ‘government-changing’ force. The opposition exists, but with very limited capacity and gravitas. Meanwhile the polls show that there are one million people who want a change in government and are still undecided how to vote. Since it creates uncertainty, the governing party will keep its noisy scaremongering campaign at the highest possible volume and go on attacking Hungarian civil society.” Can the governments of Hungary and Poland change their ways? The real question is: Why would they? Until a real opposition emerges in either country they have no reason to play to anyone’s rules except their own. But as Christopher Hartwell warns, the populist (he uses the term ‘socialist’) policies keeping the electorates of both countries happy are expensive. “When the lower pension age kicks in this year in Poland the government will lose out on two fronts: they will have to pay these people their pensions, but they will lose the social contributions they had been paying,” he says. What saves both Hungary and Poland from authoritarian populism may well end up being nothing more complicated than a failure to pay their mounting bills. With Brussels now reportedly drawing up proposals to ensure that member states which benefit from its new long-term budget have independent judiciaries, that may happen sooner rather than later.

Why would Hungary and Poland change their ways?

CURRENT AFFAIRS

Emerging Politicians Kinga Gajewska

Kinga Gajewska is a Polish MP who sits on the parliamentary committees for Education, Science and Youth, as well Justice and Human Rights. She is the secretary of the Civic Platform’s programming council. Kinga is a PhD candidate at the Faculty of Political Science at the University of Warsaw.

In a region of the world where so many politicians are still carrying the baggage of pre-transition times, it is becoming ever more clear that emerging Europe’s future is in the hands of a younger, more dynamic generation. These twenty- and thirtysomethings grew up in free societies, where tolerance and the principles of the enlightenment and of progress were paramount. Many were educated at the finest schools and colleges in the world. Their role is increasingly important given the way that a number of emerging European countries are currently led by nationalist leaders who appear to have turned their backs on the freedom and European ideal. We asked two young opposition politicians from central Europe’s most populist countries, Hungary and Poland, to tell us about the emerging Europe they want to craft. Poland is currently undergoing significant political change. It has been almost 30 years since the systematic transformation of 1989, but as Polish politicians, we are still faced with a lot of contemporary challenges for the continuous prosperity of our society. As a Polish member of parliament, my main focus is on creating a new and sustainable education policy. In order to do so, I have established a parliamentary group of experts that works tirelessly to prepare a sustainable modern educational system in Poland. In the next parliamentary elections, I will then look to present a fully developed education policy that can take on future challenges and bring about a new stage of modernity to the Polish educational system. The parliamentary group will look

to promote an education policy that supports a much-needed transformation of school culture – one which will be focused on establishing an educational foundation founded upon the latest theories in upbringing and general education and from which we can develop, ensure and appropriate quality teaching standards across the board. It will furthermore seek to highlight and promote a selection of proposals, developmental ideas and implementation of new educational methods, which all aims to bring about a new modern understanding of the function of education in Poland – an educational system built on the ideas of progressive education. These progressive theories are often aimed at maximising the potential of young citizens. Focus lies herein on teaching young citizens a wide array of skills that will enable them to face the challenges of tomorrow and improve their international readiness, which will let them thrive in this fast-paced competitive globalised world of ours. The idea of a progressive educational system can be traced back to the works of John Locke and JeanJacques Rousseau, both of whom are widely recognised as the fathers of progressive education. Their past thoughts have been taken up by the likes of theorist such as Dewey. The idea of progressive education arises from the notion that “truth and knowledge… arise out of observation and experience rather than manipulation of accepted or given ideas”

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András Fekete Győr After studying law in Budapest and in Heidelberg, Andras worked in the German Bundestag and in the European Parliament. Currently, he is the president of a new political movement, Momentum.

Over the past eight years Hungarian democracy suffered a lot under the Orban-regime. Before 2010 Hungary was a young, but relatively stable democracy with independent democratic institutions, relatively independent media and a moderate level of corruption. Now Viktor Orban is building a country where all institutions are under strong state control, and the level of corruption is rising higher and higher every day. Hundreds of thousands of young Hungarians are fleeing from the country to western and northern Europe to stay alive both economically and spiritually. With his warlike rhetoric, Orbán divides the whole nation and therefore prevents Hungarians from achieving the dream of a prosperous, peaceful and progressive democracy that we all embraced in 1989. After more than two decades of squandered opportunities, many have lost faith in politics. Momentum was founded by the first free Hungarians who belong to the Y and Z generation and who have not been represented by the current political elite. The movement was created because we realised that we urgently needed to do something against the current political culture and we can only do it together in a strong political community. We know that the only way we can make our country a modern and liveable place that meets the expectations of our generation is by offering sustainable, long-term solutions. Our goal is to provide everyone with an opportunity to unfold their talents and achieve a decent standard of living so that we can not only be proud of our past but our present, as well. We believe that the age of ideological division has expired, this is the 21st century. Our three main principles are: solidarity, performance and patriotism. The left must accept national consciousness, and the right must learn solidarity. We offer solutions, not ideology. Unfortunately both the opposition parties and the governing party refuses to admit it, creating battles over unimportant questions instead of the real issues - healthcare, the education system, or how to stop the government demolishing democracy in Hungary. Our common generational experi-

ence is globalisation, which should be utilised, not denied. We grew up in a democracy whose main goal was European integration and to catch up with western European countries. After more than 10 years of membership, Hungary is still far behind because of the institutionalised corruption and the misusage of EU funds that feeds the political elite’s wealth instead of contributing to economic growth. During his last two terms as prime minister, Viktor Orbán created a feudal system where only people who are loyal to him can succeed. This created a brotherhood of oligarchs who only care about their own wealth and not about the development of Hungary. We believe in a modern, performance-based and fair system where everyone can prosper. Therefore, we want to create a well-governed, functioning state that is predictable and rational, unlike today. We are strongly pro-European, but also patriotic and we truly think that central and eastern Europe has the potential to be a driving force of the European community. However, with the emergence of demagogue, populist leaders like Orbán, the basics of our democracies are being undermined and transformed into illiberal autocratic systems that only function to maintain the elite’s well-being. We need to act before it’s too late. What’s important today isn’t leftright division, but the choice between East and West. We need to choose progress rather than falling behind. We need to remain a part of Europe rather than fall under Putinesque autocrats. We need to embrace the European values of free thinking and plural democracy, while recognising our part in solving the European Union’s problems together. We want to finally lead Hungary into the 21st century and build a country not divided by ideological battles, but united by common goals.

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A VIEW FROM... ANDERS Ă&#x2026;SLUND

Anders Ă&#x2026;slund is a senior fellow at the Atlantic Council in Washington and an Adjunct Professor at Georgetown University.

Washington

wo big differences divide the eleven central European countries which joined the European Union from the twelve post-Soviet countries that were left out. Those two differences are democracy and the rule of law. The European Union knows how to build democracy and the rule of law, while hardly anybody else does. Both regions have managed to establish macroeconomic stability, but central Europe is surging ahead with an annual growth rate of about 4 per cent, while Russia can be happy if it reached a growth rate of 2 per cent. The divide between these two groups of countries does not lie in culture or religion but in the strength of the rule of law, or property rights. In the former Soviet Union, with the ex-

ception of Georgia, the rulers can lay hands on any enterprise and claim it for themselves or their friends. Domestic as well as foreign investors see this all too clearly. Central Europe can take pride in many economic virtues, but it suffers from two shortcomings. One is little research and development and poor quality of higher education and research. The other is a low investment ratio: for example, only 20 per cent of GDP in Poland in 2015, when it should be 25-30 per cent of GDP. Poland stands out as highly entrepreneurial with plenty of skilled workers. The ordinary business environment is decent and most claim that their returns on investments in the region are excellent. The problem is real business investment. Investors must feel safe in order to go ahead, but today

neither domestic nor foreign investors feel safe in central Europe. They are afraid that favoured partners of the government or state companies will be allowed to take over their companies in the region. The apparent intention of the current governments in Hungary and Poland is to seize control of the judiciary. This ambition has undermined the confidence in the rule of law in these two countries. If the courts are dependent on the current governments, they will surely rule in favour of the friends of the incumbent rulers, which is rarely to the benefit of foreign investors, and certainly not benefiting competition. The big question today for Central Europe is whether it can maintain the level of rule of law that it has achieved.

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Beijing

ould a pan-European demand-driven immigration system – a standardised approach consistently applied across the entire Schengen area – be the answer to Europe’s immigration challenges? I believe it could. This approach would focus on the economics of immigration, seeking to find solutions to problems such as an ageing Europe’s need to access enough labour to maintain economic development. Europe needs roughly half a million immigrants a year to keep its economy on track; but there is currently no systematic method in place across the EU to effectively meet this demand. A pan-European demand-driven immigration system, at its core, would

DING YUAN

be fuelled by demand from receiving countries. The basic idea is that countries would welcome all skill levels as long as there are specific job opportunities. Local communities, who are in the best position to know what is needed on the ground, would be the ones to decide what jobs to make available to migrants who would only be hired for positions that cannot be filled locally. This would return some level of border control to sovereign countries, make for the much smoother integration of migrants into society and, ultimately, mean less animosity from locals. Public education and acceptance are vital to this project’s success and it would have to be gradually implemented. The initial goal could be set at 20 to 50 thousand immigrants a year,

with specific job offers, for Europe as a whole. Their success stories and successful integration into society would help change existing negative perceptions of immigrants and demonstrate the benefits of a systematic approach. Once this cultural change occurs, the numbers may be gradually increased in line with economic growth forecasts and the job market. This approach would clarify the current mixed signals and confusing messages about immigration now emanating from Europe. But let me stress that to be effective, it would need to be applied in parallel with another system that addresses the needs of refugees or those seeking asylum.

Ding Yuan is Vice President and dean, as well as Cathay Capital Chair Professor in Accounting, at China Europe International Business School (CEIBS), and a member of the World Economic Forum’s think tank exploring the topic of “New Concept for Europe Initiative: Renew Europe.”

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GILES MERRITT

Giles Merritt founded Friends of Europe in 1999, and its policy journal Europe’s World in 2005. His latest book is “Slippery Slope: Europe’s Troubled Future.”

Brussels

he first casualty of war, goes the old saying, is truth. Much the same can be said of Europe’s heated and ill-tempered debate on immigration. Peoples’ fears of being ‘swamped’ by Arab and African immigrants has swept mainly right-wing populists to the forefront of European politics, and in some cases into power. Against this sea-change, the truths presented by Europe’s more clear-headed economists have scarcely been heard. The plain fact is though that ageing, shrinking Europe’s future will depend on more immigrants rather than fewer if today’s living standards are to be maintained. The comfortable lives enjoyed by many Europeans are already beginning to succumb to the pressures of globalisation, and will decline even faster unless migrant labour is allowed

to compensate for the way the active workforce is being reduced by retirement. Unemployment is still a problem, of course, but the greater challenge is increasingly labour shortages. Voters know that these are difficult times, but have yet to appreciate why. A World Bank survey found not long ago that two-thirds of people living in the planet’s 25 richest countries - and no prizes for guessing that EU members make up the bulk of these - are now poorer than at the turn of the century. Curbing immigration would most certainly accelerate this trend, yet European public opinion stubbornly resists the hard facts that explain why. On the contrary, the emotional refusal to accept more immigrants has been growing. When Gallup pollsters surveyed attitudes worldwide, they found 52 per cent of people in Europe to be strongly anti-immigrant, the highest proportion anywhere.

There is no description.

So how can European opinion be persuaded that what’s needed is an influx of 100 million newcomers by mid-century? That figure was calculated a decade ago by Spain’s former prime minister, the charismatic Felipe Gonzalez, who was asked to study the economic implications of Europe’s ageing population, early retirement, rising pension entitlements and soaring healthcare costs. With Africa’s population due to double to 2.5 billion by 2050, there’s clearly room for a ‘Grand Bargain’ involving more migrants to the EU. The snag is that immigration is so toxic politically in Europe that it costs many votes for any politician with the courage to make the case for it. Instead, it wins votes for the populists - perhaps we could say racists - who want to build ‘Fortress Europe.’

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Vienna

een from Vienna, the strong economic upswing currently evident across much of CEE is particularly welcome. Austria is a small, open economy in the middle of Europe, and is heavily integrated with countries to the east. Over 50 per cent of Austrian GDP is exported, well above the EU and Eurozone averages, and a large share of this heads to CEE. Eight countries in the region are represented in the list of Austria’s 20 most important merchandise trading partners. Austria and CEE share a long and intimate history, epitomised most obviously by the Habsburg Empire (this year marks the 100th anniversary of its collapse and the founding of the Austrian Republic). Economic crises, world war, and the Cold War saw economic ties between Austria and CEE suffer during the 20th century. However, some connections appear to have

RICHARD GRIEVESON

endured. People from many parts of CEE are still more likely than those in other parts of the EU to speak German as a foreign language, for example. These ties, as well as proximity, have helped to pave the way for economic reintegration over the past 30 years. Austria’s economic ties with CEE go much further than trade. It is among the most important sources of FDI in most CEE countries, while as of 2016, 14 per cent of the Austrian labour force came from EU-CEE, the Western Balkans and Turkey. Geographically, Austria is part of the region; Vienna is east of Prague, Ljubljana and Zagreb, and Bratislava is only a short train ride away. A quick glance at the departures board at Vienna airport reinforces the idea that the city is the business and finance capital of CEE. Recent political developments in Poland and Hungary are therefore a particular concern here in Vienna. Any

serious break with Brussels on the part of countries in EU-CEE, including a potential reduction in EU funds heading east (which account for 2-5 per cent of GDP per year in the region), would have big implications for Austria. In many ways, the current east-west tensions within the EU put Austria in the eye of the storm. It has a major incentive to smooth them, and may take the opportunity to do so during its EU presidency in the second half of 2018. More generally, a rapprochement between Russia and the EU would greatly benefit the Austrian economy, as would a proper recovery in Ukraine (Austrian firms remain notably present in the two countries, at a time when many other Western companies have chosen to leave). However, seen from Vienna, it looks like we might be waiting for a long time for those things to happen.

Richard Grieveson is an economist at the Vienna Institute for International Economic Studies — wiiw.

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Moscow Calling Andrey Kortunov

Vladimir Putin is about to be re-elected Russian president. Four scenarios regarding EU-Russia relations are possible for his next term in office. Which is the most likely?

our years after the outbreak of the Ukrainian crisis EU – Russia relations remain in a poor state. With no business as usual approach on either side, many bilateral mechanisms of cooperation have been halted or abandoned. Ambitious projects of the previous period aimed at creating multiple common spaces between the EU and Russia, moving toward a Greater Europe are on hold, if not completely abandoned. The information war between Moscow and Brussels is in full swing. A number of European governments directly accuse the Kremlin of subversive interference in their domestic political affairs by supporting euroscepticism, populism and separatism. At the same time, this relationship, with all its setbacks and mutual disappointments notwithstanding, has demonstrated real resilience. After experiencing a sharp decline, EU – Russia trade has bounced back. The EU is still by far the largest single economic partner for Russia, accounting for more than two fifths of the county’s overall trade. Russia continues to apply for and to receive more Schengen visas than any other country in the world. The EU remains the main point of destination for Russian students seeking education abroad. Cross-border cooperation has clearly survived the no business as usual pattern. In sum, it seems that European-Russian divergence since 2014 has not yet reached the point of no return. Today both the European Union and Russia appear to be moving targets, with many uncertainties about their respective development trajectories. The challenge for the EU is to overcome the multiple crises it confronts today – repercussions of Brexit, the rise of right populism, the decay of public trust in European institutions, deep divisions 24

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over the sensitive matter of migration, continuous troubles in the Eurozone, and so on. It would not be an over-exaggeration to argue that Europe has to reinvent itself to play a significant and legitimate role in the emerging world, which is likely to be less and less Europe-centred in the foreseeable future. Above all, Europe has to be united, strong and coherent; whether all EU member states are fully committed to these goals in 2018 and beyond remains to be seen. Russia’s challenges are no less formidable. First, it has to shift to a new economic development model. The old one that emerged in the early 2000s is

essentially a resource-based, state-controlled rent-seeking model; it has definitely depleted its potential and looks antiquated, if not completely dysfunctional today. Second, Russia has to strengthen its institutions. Today, the institutional skeleton of the country looks inadmissibly weak and inefficient; without a stronger institutional foundation, it will be increasingly difficult to maintain social and political stability in the country. Third, Moscow will have to address in a serious way multiple foreign policy problems accumulated since the be-

ginning of the century – from almost completely ruined relations with the West to bitter disputes with many of its post-Soviet neighbours. Out of these three challenges the need for economic reforms looks the least controversial and least politically sensitive today; however, even moderate structural changes in the Russian economy are saturated with many political risks and uncertainties for the Kremlin. Where do all these independent variables get us, once we start thinking about the future of EU – Russian relations? Let us limit ourselves to the new six-year political cycle in Russia (2018 -2024), though this cycle does not necessarily coincide with much more controversial and less definable political cycles in Europe. Let us also reduce the future trajectories of Europe and Russia to just one dimension for each of the actors. For Europe, it will be an axis with a very weak, fragmented and incoherent EU on the one hand, and a very strong, coherent and well-managed EU on the other. For Russia, it will be an axis stretching from a rent-seeking, state-controlled, and mostly self-reliant model (no reforms) and a more innovative, less state-controlled, foreign markets focused model (radical reforms). Using these two axes as horizontal and vertical, we end up with a matrix containing four quadrants; each of them stands for a scenario of the future EU – Russia relationship. Each of the scenarios has its logic, its driving forces, its limitations and its likely implications for both sides. No Man’s Land (A Weak Europe, No Reforms in Russia) Under this scenario neither the European Union nor Russia is able to rise to the occasion and address its respective challenges in a serious way. The EU remains fragmented, torn apart by multifaceted crises, unable to pursue a consistent development strategy or a coherent European policy. Russia avoids any substantive economic reforms counting on global oil prices going up, on a slow recovery of the national economy and on the traditional resilience of the Russian population. The EU and Russia’s interests in each other are limited and they gradually diminish further. This scenario results in a “balance of mutual weakness.” Both sides avoid far-reaching initiatives, considering the

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status quo to be not an ideal, but generally acceptable option. Russia tries to undermine EU sanctions incrementally, but the European Union sticks to sanctions as one of the few remaining symbols of European integrity. Ukraine is a mess with a low intensity conflict continuing in Donbass and with major European counties demonstrating little appetite for a new Marshall Plan to assist Kyiv, while Russia tries to isolate itself from an unstable and hostile neighbour. The EU has no visible role to play in European security; NATO remains the only game in town. Russia relies more and more on China; the asymmetry of this relationship grows over time. More generally, the international influence and stature of both the European Union and Russia go down.

A New Cold War (A Strong Europe, No Reforms in Russia)

The Kremlin positions Russia as a fortress 26

This scenario implies a steady change of balance between the two sides in favour of Europe. The turning point will be European development in 2018 or 2019; the German-French backbone of the European Union survives Brexit and helps other European nations to overcome current disagreements, to defeat populists and to resolve burning Eurozone problems. The European Union pursues its goal of achieving strategic autonomy from the United States. The European economies become more innovative, vibrant and competitive. Russia follows the path outlined in the first scenario. This scenario is likely to result in

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stronger European pressure on Russia. The policy of containment develops into the policy of rollback. Ukraine, firmly backed by the EU, becomes a success story, and the option of EU membership for Ukraine is back on the table. Moreover, practically all the nations ‘in between’ gravitate to the European Union and away from Russia. The ‘Russian world’ shrinks to the borders of the Russian Federation. Moscow gets more and more concerned about European influence on the Russian population and attempts to pull down a new Iron Curtain across Europe. Domestically, the Kremlin positions Russia as a besieged fortress and tries to prevent political changes inside the country by promoting nationalistic, anti-Western movements and parties. On a larger scale, the 27

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European Union becomes a major provider of global commons, while Moscow is widely accused of being a ‘global spoiler’. Eurasian Melting Pot (A Weak Europe, Reform in Russia) Europe remains weak, fragmented and indecisive, while Russia demonstrates an ability to reinvent itself, above all, in the economic domain. The quality of governance goes up, the level of corruption and abuse of power by the state go down, the country finally gets an independent judiciary, and -most importantly – a fully independent and respectful court system. The structure of the Russian economy changes in the direction of innovative, high value-added sectors, small and medium-sized enterprises increase significantly their share in the gross national product. Political reforms may continue to lag behind the economic transformation, but civil society is booming and the political system slowly, but steadily evolves in the direction of stronger institutions and more pluralism. In this case, the balance of power inevitably shifts in Russia’s favour. The new Russia’s economic model looks more attractive to its neighbours, while continuous crises in the European Union discourage even the most consistent champions of the European project within Russia and within the countries along

its borders. Moscow manages to stabilise its uneasy relations with Ukraine, consolidates the Eurasian Economic Union, and makes full use of the disagreements and conflicts within the European Union. However, since Europe is in the process of long-term decay, Moscow continues to pursue its pivot to Asia as a more promising direction of economic and political expansion. Instead of a common European space stretching from Lisbon to Vladivostok, Russia aims at a common Eurasian space stretching from Shanghai to St. Petersburg. The Eurasian advance to the West incrementally absorbs bits and pieces of Europe in various forms (for example, the One Belt, One Road project). Russia’s international influence is on rise, the influence of the European Union is on decline. Double-Headed Greater Europe (A Strong Europe, Reforms in Russia) Finally, what do we see in the fourth quadrant, with both the European Union and Russia demonstrating equal capacity to address their problems and to find solutions to difficult questions without further hesitations and procrastinations? What is likely to happen if Brussels and Moscow get stronger at the same time? Conventional wisdom suggests that if two international actors increase their capacities simultaneously, if their aspirations and ambitions grow

in parallel with the other side, a clash between them is practically unavoidable. However, this assumption is true for closed systems with limited resources available. This is not the case with the contemporary international system. One can imagine a stronger European Union and a reformed Russia (together with other members of the Eurasian Economic Union) constituting two interdependent pillars of a Greater Europe. These two entities continue to be asymmetrical in many ways for a long time, but any visible progress in structural economic reforms in Russia is likely to make these asymmetries less significant and less disturbing for the EU. Moscow states its fundamental interest in a stronger EU, Brussels recognises the EAEU as a strategic partner. At the end of the day, relations between the EU and the EAEU become similar to those between the EU and ASEAN. However, given the geographical proximity, cultural closeness and common history, the EU and the EAEU together go beyond cooperation between two integration projects; their concerted efforts help to complete an ambitious task of uniting and cultivating vast spaces of Europe and North Eurasia. Ukraine becomes a natural bridge linking the EU and the EAEU; Kyiv might still entertain the idea of joining the EU at some point in the future, but for a long anticipated transition period, it can benefit from its special position within the emerging European architecture. Even under the best circumstances, this ‘double-headed Greater Europe’ is not going to emerge by 2024. However, a slow but steady movement in this direction changes dramatically the atmosphere between Moscow and Brussels. The combined political and economic weight of the EU and Russia in the international system increases dramatically. When trying to predict the likely future of EU – Russia relations one should keep in mind that this relationship has always been and will continue to be influenced by many external factors. For the European Union the most important factor is arguably the dynamics of the transatlantic alliance with the United States. If this alliance survives the Trump administration without major complications and crises, the incentives for the European Union to work towards a more active and less US-dependent pattern of the European foreign and defence policies will be lower. If Trump is a symptom of a long-term readjustment of the American role in international relations, European politicians will face

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a compelling need to advance the EU as a global player separate from Washington. This shift will create both new opportunities and new challenges for EU relations with Russia. For Moscow, the single most important external factor will be its relations with Beijing and, in a more general sense, the future of China itself. Will China continue its seemingly endless economic rise, or will we see it slowing down? How stable is the Chinese political system going to be a couple of years from now? Have Russian-Chinese relations reached their climax or will the two countries move to an even closer political, military and economic partnership? It would be tempting to argue that a booming and vibrant China as a Russian strategic partner makes Europe less important for Russia by offering Moscow a viable alternative. However, if China enters a new stage in its economic and political development, it might need Russia less than it does now and the asymmetries in this relationship might significantly increase. Thus, a stronger China might generate more incentives for Moscow to look for new opportunities in Brussels.

In a more general sense, relations between the European Union will depend on the evolution of the international system at large or, more precisely, on the future of the liberal world order. If the world is indeed entering an extended period of instability and conflict, if nationalism, populism and protectionism continue to gain momentum

The choice between the scenarios will not be clear across the globe, if international institutions are increasingly marginalised and international law becomes immaterial, relations between Brussels and 29

Moscow are likely to follow the general trend. If the global liberal order overcomes the current crisis, international institutions are successfully reformed and re-energised, if globalisation really is back with a vengeance, the European Union and Russia will be pushed towards closer cooperation with each other in various fields. Of course, there might be a number of black swans affecting this relationship â&#x20AC;&#x201C; from a global natural disaster to a new generation of international terrorism. The odds are that the choice between the four above-mentioned scenarios will not be clear and finite. More likely, each side will try to combine elements of various scenarios to serve its immediate interests. The inertia of the previous period will have a profound impact of any strategy that Brussels and Moscow can consider. However, some important decisions on both sides will be taken soon enough, maybe as early as this year.

Andrey Kortunov is the director general of the Russian International Affairs Council

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It’s time for a Universal Basic Income Guy Standing, professorial research associate at SOAS University of London, and a co-founder of the Basic Income Earth Network (BIEN), spoke to Andrew Wrobel about the approaching precariat revolt. Photo: Guy Standing

men walking. In the French presidential election, the socialist party candidate got 6 per cent, whereas previously the socialists won the presidency. We’re seeing it everywhere. We’re seeing it in Britain. We saw it with the Democrats in the United States. We also have a politically unstable situation in central and eastern Europe. Poland has its own problems, with an authoritarian streak, a very illiberal set of tendencies. I worry about the norm-driven religious influence. I’m not religious myself, but I’ve always thought one should be tolerant of all religions. If you become doctrinaire and dogmatic with your religious views and that translates into dogmatic social policies, then that becomes very worrisome.

Andrew Wrobel: What is happening in Europe now? Guy Standing: That’s a big question. For some years I’ve been analysing the growth of the precariat, a social class formed by people suffering from precarity, which is a condition of existence without predictability or security, affecting material and psychological welfare. In 2011, I predicted that, unless the insecurities of the precariat were addressed, and given priority by politicians and political parties, we would see the emergence of a political monster. It doesn’t give me any pleasure that today, sure enough, we’re seeing a drift to a neo-fascist, right-wing, authoritarian, nationalistic, reactionary politics. But it is what you would expect if you leave too many of your people in chronic insecurity, in a precariat in which they don’t feel that they’re going anywhere and are being reduced to “supplicants.” They don’t have

any rights; they have to ask for favours all the time. They worry about their debts, worry about their future, their present, and that of their families. We do have these authoritarian movements now and they are being backed by the plutocrats and financiers who want to preserve the gains that they’ve been making in economic terms. But at the same time, I’m not pessimistic. We’ve learned from our histories, from what happened in Europe in the 1930s. We never want to see that again, nor the nasty state socialism or whatever you want to call it of the Stalinist era. None of us should want to go back to either of those dystopias. AW: So there is nothing to worry about? GW: Well, I think we have a vacuum in our political structures at the moment where the old left responses are dead

We have to have a new progressive politics, and for it to have any chance of success, it must be based in the emerging mass class, the precariat. This is the emerging majority of people in terms of how they have to live, how they’re trying to live, and the insecurities that they are facing. The new progressive politics must not be like the old left politics. In each era, each period of history, you have to have a new agenda for what it means to be a progressive. I think we are at a very interesting stage when the old so-called “left” is being pushed off the stage. The new precariat politics is just taking shape. AW: What is shaping up in front of us? GW: In my book A Precariat Charter: From Denizens to Citizens I have 29 policies, which I think would amount to a set of policies that would suit the precariat. It includes recognising that the work we want to do, the work that we need to do to develop ourselves as citizens, as caring people, is different

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from what’s been happening in the labour market. We need more control of our time in order to pursue that sense of work, which is developing ourselves. AW: Doesn’t it sound a bit utopian? GW: I don’t think it is a utopian ideal. It’s a matter of having policies which reduce the chronic income losses that people in the precariat are experiencing. This is the theme of my other book The Corruption of Capitalism. The old income distribution system has broken down. What that means is that the share of national income going to capital is rising. The share of national income going to labour is falling. That’s happening in China, in the United States, in Britain, elsewhere in Europe, everywhere, because the system is automatically tending to give more and more income to capital and to property owners. If that’s the case, then it’s not a matter of calling for higher minimum wages or more power for trade unions. They’re desirable, but they’re not going to fundamentally change the distribution of income. There has to be a new system and a part of the new system should be a basic income for everybody. A basic income would give people basic security and people who have basic security have more mental stability, more control over their mental development. Psychologists have taught us that. We don’t need more evidence; if you have chronic insecurity, mental health deteriorates.

revolt is when the group grows in number and says, “You make the changes. We’ll make the changes. We will stand. We will do it.” I think that will happen in the next five to 10 years. I hope so. We’ll see, but I’ve got a sneaking feeling that there’s a lot of energy out there. AW: We have seen large numbers protesting recently in Poland, Romania. GW: The demonstrations that you’re referring to in Romania have been mirrored in Spain. They’ve had a lot of demonstrations against the “casta.” The demonstrations have been mirrored in the United States. They’ve been mirrored in various other places. I call these sorts of demonstrations the protests of primitive rebels. A primitive rebel, in my imagery, is someone who knows what they’re against, but they don’t know what they’re for. Now you always need a stage in a transformation when primitive rebels start to stand up. It’s the Robin Hood type thing. I think that is a necessary phase in leading more people to understand the structures that they’re existing in and understand their own sense of where they are, or where they aren’t. What’s happened with many of these demonstrations — the Arab Spring, the Indignados, the Occupy Movement — is a growing sense of what sociologists call agency that’s also been developing a sense of identity. Instead of feeling sorry for themselves, people are starting to say, “I’m

We have to start by dismantling rentier capitalism, which is giving more and more income to owners of property, including intellectual property and financial assets. This is not producing more goods and wealth and happiness for people. We must therefore take some of that income and share it around society. Also, it is not healthy to have these plutocrats, oligarchs, billionaires and multi-billionaires because excessive money leads to excessive corruption. AW: I am not sure those who benefit from the current situation would like to have that taken away from them. GW: We have a crisis of inequality and the precariat. But I have strong, optimistic feelings that we can encourage and participate in a precariat revolt. Note that I use the term “revolt” not “revolution.” I’m not calling for a revolution. A Photo: Guy Standing

part of the precariat. I need to stand up. This is a structural thing that’s creating these conditions and we need to oppose these structures.” We. So you have the development of a “we.” AW: A sense of a community? A common goal? GW: A sort of class consciousness. You don’t have to use a pure Marxist interpretation. But a sense of, “I belong to a social group and that social group is a big one.” The demonstrations that we’re seeing, it’s partly resisting cultural erosion, an ugly, countercultural movement, but underneath it also has economic and political dimensions. I think that’s an important part of what’s taking place. There have been hundreds of protests, elective protests, since 2008 all over Europe. British journalist Paul Mason said they’ve all been failures. I’ve said to him, “No, they haven’t been failures.” They haven’t been failures, because this group consciousness is developing and people are realising that we need to go further than just protest against corrupt and greedy individuals, or whatever it might be. We have to oppose the structures that allow people to behave in this way.

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S T O R Y

No More Low Cost: Emerging Europe Needs a Pay Rise Craig Turp

Reports that big increases in wages are threatening jobs in emerging Europe have been greatly exaggerated. In fact, the region needs a pay rise.

osef Stredula, the boss of the Czech-Moravian Confederation of Trade Unions (CMKOS), the largest trade union in the Czech Republic, does not believe that rising wages pose a threat to jobs in emerging Europe. Far from it. A leading campaigner to end what he calls “the wage Iron Curtain,” he had a simple message for delegates at a conference organised in Brussels in January by the European Trades Union Institute (ETUI): Europe needs a pay rise. “For us, CMKOS, the wage Iron Curtain between the old and new EU countries is unacceptable,” he says. He has a point. While the west-east wage gap narrowed, at least in nominal terms, in the years leading up to

2008, the global international financial crisis, while not bringing convergence to an abrupt end, certainly slowed it down. It has only begun to show signs of revival over the past 12 months. The Czech Republic currently has the fifth lowest monthly minimum wage in the European Union, at just 407 euros. Only Latvia and Lithuania (380 euros), Romania (321 euros) and Bulgaria (235 euros) offer lower minimum salaries. The highest minimum wage in Emerging Europe is in Slovenia, at 805 euros per month: higher than Greece, Malta and Portugal, but still far less than Spain and the rest of western Europe. Lucie Studničná is CMKOS’s international secretary. She dismisses the idea – oft reported – that multination-

als plan on leaving Emerging Europe because of rising wages. In fact, she feels that there is still room for wages to rise. “It’s not wages that pose a threat to jobs,” she told Emerging Europe, “but digitalisation. Nobody has actually even raised the issue of labour costs being too high. Wages, compared to productivity, are low. We are always comparing wages with those in western Europe, particularly minimum salaries: if the wages of Skoda workers in the Czech Republic – for example - are not at least equal to the minimum wage in Germany, then something is wrong. The trade unions are well aware that at some point the low cost model needs to be transformed to a high added-value model, so there is still room for wages to increase.”

BUSINESS Race to the bottom? While Mrs Studničná is - with good reason - optimistic, some workers in emerging Europe remain concerned that what they view as a race to the bottom will eventually cost them their jobs. One example is Dacia, the Romanian car maker. Trades unions in the country are amongst the weakest in the European Union. Dacia had a very good year in 2017. Sales of its various models increased by more than 12 per cent, with more than 655,000 cars being sold globally. The brand, owned by Renault, now has a 2.5 per cent share of the European automobile market. Dacia’s biggest seller is its budget Sandero model, followed by the increasingly popular Duster, an SUV. Prices for the Sandero begin at 5995 pounds in the UK, while a top-of-the-range Duster costs 16,395 pounds. The western European market now accounts for 70 per cent of sales of a brand which was once sold almost exclusively in Romania. Last year was also however the first in Dacia’s history when a majority of its cars were manufactured outside of Romania: in this case, at Dacia’s two plants in Morocco. Dacia’s factory at Mioveni, near Pitesti in southern Romania, produced 313,883 cars: a five-year low. Staff at the plant are concerned. New rumours that Renault plans to ditch Romania altogether – always flatly denied by the French company – “circulate almost every few weeks.”

Average salaries Albania Armenia* Azerbaijan* Belarus Bosnia Bulgaria Croatia Czech Republic Estonia Georgia* Hungary Kosovo Latvia Lithuania Macedonia Moldova* Montenegro Poland Romania Serbia Slovakia Slovenia Ukraine

334 408 252 328 665 492 1029 1020 1146 359 845 453 859 774 533 284 751 928 626 516 912 1585 183

Gross average monthly wages 2016. Source: wiiiw (except*. Source: Trading Economics).

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Since 2010, salaries in Romania have climbed 142 per cent. The average salary for a Romanian Dacia worker is in the region of 1070 euros. Dacia’s workers in Morocco earn, on average, approximately half that. It’s all about value Matei Paun, one of five partners at BAC, an investment bank with interests across emerging Europe, is reassuring. He believes that any increase in wages is unlikely to deter investors as long as value stays high. “It would be a problem if wages were going up and productivity wasn’t,” he told Emerging Europe. “But this is not the case. As long as wages and productivity continue to increase together – and there is still great scope for both to grow – then I do not see any issues. There is plenty of low-hanging fruit still to be grabbed.” According to the National Bank of

Romania, in 2016 Romanian productivity was 31 per cent of the EU average. However, wages were just 22 per cent of the EU average, making Romania the most cost-effective manufacturing base in the union, and proof, the bank suggests, that wage increases have not eroded the country’s competitiveness. Romania is not alone in being able to boast higher relative productivity value. All of the emerging European EU member states (Bulgaria, Czech Republic, Estonia, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia) have higher relative productivity than Germany. “Production in manufacturing is more profitable in CEE than in western Europe,” wrote Martin Myant in his recent study of why wages are still lower in central and eastern Europe. Mr Myant, senior researcher and head of European economic, employment and social policy at the ETUI, claims that the share of personnel costs, pre-

dominantly wages, in value added is substantially lower in CEE than in Germany and than the EU-28 average.

Emerging Europe boasts higher relative productivity than Germany “Wage increases are a result of graduates and employees acquiring new skills and improving productivity while creating more value for their clients,” says Mark Robinson, a CEE research specialist at Colliers, a major real estate agency, who at the close of 2017 authored a major report on the availability of qualified workers throughout the CEE region. What will keep Dacia in Romania for the foreseeable future is precisely that value Mr Robinson refers to: it is not a coincidence that the Duster – not only Dacia’s most expensive but also most advanced automobile - is produced in Romania, not Morocco. More money, or we leave Of the almost 2.3 million Poles who have emigrated to western Europe since 2004, more than a third have cited the higher salaries on offer as their primary motivation for leaving. The percentage is even higher for Bulgarian and Romanian migrants. While their departure has undoubtedly had a positive impact on wage growth, this has more often than not been limited to the public sector: doctors, nurses, teachers. Most of CEE’s governments have tried to counter emigration of these skilled professionals with large, across-the-board pay increases, usually without any great success. The only emerging European countries which appear to have prevented a haemorrhage of doctors are the Baltic States and the Czech Republic, where a deal on higher salaries was reached in 2011, but only after a quarter of the country’s doctors threatened

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to quit the Czech health system and emigrate. More than 15,000 doctors have left Romania since 2007, when the country joined the EU. Despite increases the average salary in the health care sector remains low, below 500 euros. If things are dire in the public sector, in parts of the private sector emigration has been little short of devastating. Secuiana, which makes trousers for a number of high-end foreign customers, was founded in Transylvania in 1968 and was one of the first Romanian companies to be privatised after 1989’s revolution. It’s owner, Laszlo Dobra, says that finding staff is increasingly difficult. “We currently employ 460 people,” he tells Emerging Europe, “but our workforce is decreasing year by year. People are moving abroad for better salaries. Unfortunately, our industry is at the bottom of salary levels. Therefore in recent times we have been facing serious problems in finding a workforce. And I do not mean qualified people, but anyone, even unqualified people we would need to train ourselves.”

Unemployment Rate Albania Armenia* Azerbaijan* Belarus Bosnia Bulgaria Croatia Czech Republic Estonia Georgia* Hungary Kosovo Latvia Lithuania Macedonia Moldova* Montenegro Poland Romania Serbia Slovakia Slovenia Ukraine

15.2 18.1 5.1 0.8 2 10.4 13.1 6.8 4 11.8 5.1 27.5 9.6 7.9 23.7 3.8 17.4 6.2 5.9 15.3 9.7 8 9.3

Gross average monthly wages 2016. Source: wiiiw (except*. Source: Trading Economics).

Public or private, the conclusions are the same: higher wages are not driving jobs away as much as low wages are driving workers away. Mr Dobra sees the future in commerce, not production. “The future for us is our own brand, which is well positioned on the market.” At the higher end of the employment spectrum, wages are barely increasing. Paul Wood runs Apple Search, an executive recruitment consultancy which places people in senior jobs across central and eastern Europe. “Salary expectations are growing a bit,” he tells Emerging Europe, “but this is certainly not 2006. And while I am not really struggling to find candidates, it must be said that millennials are very highfalutin and engineers can have absurd ideas about what they should earn.” 35

Beyond the EU Outside of the EU, in Belarus, where workers cannot so easily up sticks and head west, low cost is still crucial to driving growth and attracting investment. Salaries, which averaged 340 euros per month in 2017, have actually fallen sharply since peaking at around 480 euros in 2013, a result of the commodity market - on which the country’s economy relies heavily - currently being at the bottom of its cycle. Even here though, finding the right mix of cost, productivity and value is crucial. “Belarus is unique in that it is one of very few countries which transitioned without dismantling its manufacturing base,” says Matei Paun. “This of course has both advantages and disadvantages. Many of the huge conglomerates from

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the Soviet-era survive, but even in their case some have managed to transform themselves into leaders in a particular niche or price segment. Take MAZ, the manufacturer of heavy duty mining trucks, or Belarus tractors. They are very competitive because they give you 80 per cent of Caterpillar quality at half the price. And no, you will not find a Belarus tractor in Germany or Kansas, but you will see them all over BRICS countries.” Far from seeing jobs threatened by rising wages, much of emerging Europe is in fact currently in the sweetest of spots combining relatively low cost with relatively high standards; at least from an investor’s point of view. But the days of low cost need to end. If they do not,

then emigration, and a lack of investment in skills and training may see the paradigm shift once more. As the cost of doing business in emerging Europe rises, there will still be opportunities for companies ready to invest in know-how, in training, in their workers, and able take the step up from low cost to high quality, or - as with Belarus - outstanding value. And that investment must include higher wages. “Without an increase in wages, accompanied by a more general shift in economic strategy, the countries of central and eastern Europe will remain in a ‘middle-income trap’, never able to converge to western European levels,” concludes Martyn Myant in his recent

study. “Full convergence of wage levels can only be achieved if increases in pay levels are accompanied by measures to create the basis for higher levels of economic activity. That would include investment in skills, education and research and the creation of an institutional structure appropriate for innovation-led growth. This implies a greater strategic role for an active state, both to encourage domestic economic activity and to encourage FDI in the kinds of activities that can support higher pay levels. That would be a big change from policies that have sought to generate economic activity only through keeping wages in check and keeping tax levels below those of western Europe.”

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CEE Convergence Success Is Not All That it Seems Richard Grieveson

While the headline numbers are good, the current pace of convergence - particularly rapid in Poland and Slovakia - is unlikely to last.

ooking at the headline numbers, most of EU-CEE, including the Visegrád countries (V4) have done well since the fall of the Berlin Wall. At purchasing power parity, per capita GDP stands at 88 per cent of the EU average in the Czech Republic, 77 per cent in Slovakia, 68 per cent in Poland, and 67 per cent in Hungary. Parts of all four countries, notably the capitals, are wealthier than large swathes of Western Europe on this measure. Poland and Slovakia have undergone particularly rapid convergence over the past three decades. The growth model pursued in the region since the early 1990s has contributed to this. Early opening of the capital account and major reforms of the economy have sucked in foreign direct investment (FDI), particularly into the tradeable sector. This brought valuable know-how, allowed for a rapid increase in the size of the export sector, and drove productivity growth. In 2016 exports of goods and services accounted for 94.6 per cent of GDP in Slovakia, 89.5 per cent in Hungary and 79.5 per cent in the Czech Republic, all among the highest in the EU, and compared with just 26.5 per cent, 31.1 per cent and 45.2 per cent, respectively, in 1990. Although the export share in in GDP in Poland is lower, at 52.3 per cent, this is nevertheless high for an economy of Poland’s size in the EU context. Despite this, many in the region are unhappy. The victory for Law and Justice in Poland in 2015, and the continuing popularity of Viktor Orbán in Hungary, reflect in part cultural factors, but are also indicative of economic disenchantment. Recently, a range of prominent experts such as Paul Krugman, Martin Sandbu, and Simon Tilford have drawn attention to the economic aspects of unhappiness in the V4. It appears that, thanks to higher

inequality, many people in the V4 do not feel they have gained from the growth model pursued in CEE over the past three decades, and are disappointed with the pace of convergence achieved. One key area highlighted is the difference between GDP and GNP in these countries, and the implications of having a high share of the economy owned by foreigners. Mr Krugman notes that national income has lagged growth in overall GDP in the Czech Republic, because so much of the gains have gone to foreign owners

Despite growth, many people in the region are unhappy of capital. As a result, workers have not felt all of the benefits of the strong convergence growth achieved. Convergence in terms of workers’ compensation has been much less significant than headline GDP per capita numbers would suggest. On this measure, the V4 had only reached 50-59% of the EU average level as of 2016. Despite this, in the near term the picture is quite encouraging. According to wiiw forecasts, during the next few years V4 convergence with wealthier countries in Western Europe will continue at a fairly rapid rate. All four countries grew at well above the German level in 2017, and we expect this to remain the case in 201837

20. Wage convergence should be even stronger, propelled by increasingly acute labour shortages. In the third quarter of 2017, nominal hourly labour costs rose by 12.6 per cent year on year in Hungary, 7.3 per cent in Slovakia, 7 per cent in the Czech Republic, and 4.8 per cent in Poland (the equivalent level for the Eurozone was just 1.9 per cent). However, this pace of convergence is unlikely to last. As my colleague Leon Podkaminer recently explained in relation to CEE, as catching up countries get closer to the frontier, their growth rates will slow. This has already happened in the Czech Republic, the current strong cyclical upswing notwithstanding. Convergence from low levels is relatively easy, particularly for countries like the V4 which share borders with much wealthier countries; achieving the last jump is the hardest part. The most recent World Bank forecasts assessed potential growth in Europe and Central Asia at 2.3 per cent, 1.4 percentage points below the pre-crisis level. For the wealthier parts of CEE, including the V4, the rate will be lower than this. While negative demographic trends were seen as part of the explanation, the World Bank highlighted a slowdown in productivity growth as the most important factor. Separately, Sergei Guriev, the Chief Economist of the EBRD, has argued that the old drivers of expansion in CEE are mostly exhausted, and that the region needs a new growth model, with a focus on increased productivity. Yet finding this new model will not be easy, and it is unlikely the people like Mr Orban and Mr Kaczyński have the answers. Richard Grieveson is an economist at the Vienna Institute for International Economic Studies — wiiw.

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Is Emerging Europe Prepared for GDPR? Andrew Wrobel After four years of preparation and debate the GDPR was finally approved by the European Parliament in April 2016. It comes into force in May this year. Is Emerging Europe ready?

iving control over their personal data back to people, and simplifying and unifying regulations within the European Union are the two primary objectives of the General Data Protection Regulation (GDPR), which comes into force on May 25, 2018. “We want to set the global standard,” Věra Jourová, the European commissioner for justice, said in an interview. “Privacy is a high priority for us.” But EU member states might not share the commissioner’s sense of priority. Three months before the introduction of the new, wide-ranging data protection rules only two EU member states — Ger-

many and Austria — have passed all the necessary legislation needed to bring national laws into step with the new EUwide regulations. Children of the fog Michele Daryanani, a cyber thought-leader, who has helped a fair number of companies both within and outside the European Union to prepare for GDPR, says that for every company that has an in-house GDPR programme, an equal amount of companies that he speaks to do not. “Sadly, there is a lot of misinformation on what GDPR is and what it is not. Just recently I spoke to a chief information security officer for a multinational who was under the 38

impression that GDPR ‘banned’ cloud services,” he says. “Businesses are already aware of the regulations but they are not yet prepared enough on whether and how it directly affects them,” says Istvan Lam, co-founder and CEO at Tresorit, an end-to-end encrypted cloud company. “For example, GDPR applies to companies that manage personal data but the definition of that is very broad and includes things from email addresses to medical records or IP addresses. Often, companies think that the new regulations don’t affect to them.” And statistics prove that. A survey carried out in Q4 2017 by the UK government found that 80 per cent of large firms and some 66 per cent of medium-sized busi-

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nesses were aware of GDPR. In contrast, just 31 per cent of micro firms (two to nine staff) and 49 per cent of small businesses (10-49 staff) had heard of the new rules. Of those that were aware of GDPR, 27 per cent had made changes to the way they operate. And again, larger firms were more likely to have done so, with 55 per cent having taken some form of action. According to another survey commissioned by email service provider Mailjet, the average GDPR-readiness score was 4.1 out of 10, with the banking and insurance sector scoring the highest (4.4) and construction and real estate scoring the lowest (3.2). The survey also revealed a lack of responsibility by startups in terms of personal data protection. Only 29 per cent of startups polled encrypt the personal data they collect, and only 34 per cent said they had a data breach notification plan in place. “It is practically impossible, it is too expensive and time consuming, and requires the help of specialised advisors,” Professor Paolo Balboni, founding partner at ICT Legal Consulting and the chairman of the European Privacy Association, tells Emerging Europe. “Hence it is not feasible for SMEs to convincingly comply and therefore they will suffer a de facto competitive disadvantage to big companies. This is a very serious side effect of the GDPR.” Data protection is a must John Clelland, managing director, founding partner and owner of Proteus-Cyber, a provider of integrated risk management software that has developed a product called GDPReady, says that in 2017, there were 143 million breaches. For example, Uber concealed a hack that affected 57 million customers and drivers. “Attaining the highest levels of data privacy and security is accomplishable by startups and small to medium-sized businesses, not just the big guys,” says Pierre Puchois, chief technology officer at Mailjet. “If somebody designs a product, technology or service, then it needs to be the most privacy-friendly product,” says Jan Philipp Albrecht, a member of the European Parliament who also serves as rapporteur for GDPR. “And when you are starting to use it, then the privacy-friendly setting – privacy by default – is on, and you have to decide if you want to give your data, if you want to change the setting to a less privacy-friendly setting.” According to Eurobarometer, more than 90 per cent of Europeans say they

want the same data protection rights across all EU countries and eight out of 10 people feel they do not have complete control of their personal data.

Most people feel that they do not control their data “Our digital future can only be built on trust. Everyone’s privacy has to be protected,” says Andrus Ansip, European commissioner for digital single market and the Commission’s vice president. “[GDPR] is a major step forward and we are committed to making it a success for everyone.” Mr. Daryanani explains that GDPR

aims to address a gap between our basic human rights, and the legal implementation of these rights. “We need to understand that GDPR isn’t a “fundamental change” in ethics or morality which is at the end of the day what the legal system attempts to enforce but a refinement and a harmonisation of multiple implementations of European legislation. Ensuring that an organisation’s systems, processes and staff are aligned to individual privacy will help reduce these risks. Going forward, these may even form a differentiator — I know I would prefer to buy from an organisation that takes my privacy seriously,” he adds. Understanding the goal “The key aspect is the philosophy to limit data collection to the extent where it’s absolutely necessary for the purpose of processing and the ‘privacy by design’ concept that has been our guiding light since day one,” Roman Flepp, head of marketing and sales at Threema, a proprietary encrypted instant messaging application, tells Emerging Europe.

PROTECT THE RIGHTS OF PEOPLE GIVING YOU THEIR DATA BY: • saying who you are when you request the data, why you are processing their data, how long it will be stored and who receives it • getting their clear consent to process the data • letting them access their data • informing them of data breaches if there is a serious risk to them • giving them the ‘right to be forgotten’ • informing them if you use profiling to process applications for legally-binding agreements such as loans • giving people the right to opt out of direct marketing that uses their data • using extra safeguards for information on health, race, sexual orientation, religion and political beliefs • making legal arrangements when you transfer data to countries that have not been approved by the EU Data protection by design: build data protection safeguards into your products and services from the earliest stages of development. Check if you need a data protection officer: this is not always obligatory and depends on the type and amount of data you collect. SMEs only have to keep records if data processing is regular, a threat to people’s rights and freedoms, dealing with sensitive data or criminal records. Source: EU Commission

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HOW MUCH CONTROL DO YOU FEEL YOU HAVE OVER THE INFORMATION YOU PROVIDE ONLINE, E.G. THE ABILITY TO CORRECT, CHANGE OR DELETE THIS INFORMATION? Privacy by Design is an approach to systems engineering which takes privacy into account throughout the whole engineering process. Matthias Pfau, the founder of the encrypted email service, says that a lot of companies handle a lot of our personal information, from our address, to payment information, to online browsing habits — lots of online services have access to our most private information. “With GDPR companies need to make sure that this personal data cannot be abused,” he says. “Businesses may find they have more data than they need,” Proteus-Cyber’s Mr Clelland says. “They may be collecting 20 pieces of data, but actually, to deliver the service, only need 10. The important thing is not to start from the data – begin with the business and the people who run it.” “We believe GDPR will drive the adoption of better security practices, such as using end-to-end encryption for storing sensitive user data, shifting to private email solutions, hiring data security specialists and so on,” says Andy Yen, the founder and CEO at ProtonMail Communications. “The increased adoption of technologies that provide privacy and security by design will represent a key aspect of GDPR compliance and will help both consumers and businesses in the long run. Companies will be more careful and transparent about the amount of data they collect, meaning they will be less susceptible to cyber threats, and consumers will have more control over their data,” he says.

complete control

18.91%

partial control

51.09%

no control at all

24.27%

don’t know or it depends on the website or application

5.73%

Source: EU Commission (respondents from emerging Europe EU-11 member states)

to secure their customers’ and employees’ data. At first sight, this might seem like a big hassle to most companies while in fact it is a huge opportunity: By protecting their customers’ data, companies will gain a competitive edge because already today more and more people realise that their data is valuable and that it must be protected,” he adds. Tresorit’s Mr Lam says that GDPR is highly complex, so businesses need to start preparing now, at least by identifying their top priorities regarding compliance. “To achieve GDPR compliance, businesses have to take technical measures to ensure

Changing the mindset “We see GDPR as a chance for businesses to join the privacy movement,” Tutanota’s Mr Pfau says. ”We see by the influx of new users that the privacy movement is growing fast. More and more people are looking for ways to secure their email communication. With GDPR companies who do business in Europe will be obliged 40

the security of this data and prevent any leaks or exposure. One of those measures recommended by the GDPR is encryption. Encryption makes personal data unreadable for unauthorised people and thus helps to mitigate the risks in case of a data breach or a leak,” he says. “Does the business encrypt the data? Is it stored on a mobile device? Is it secured at rest? Is it encrypted at rest? Is it encrypted in transit? How do they back up the data?,” Proteus-Cyber’s Mr Clelland asks. “All these questions relate to Article 30. If you haven’t done this mapping, everything else will be compromised. The right way

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is to have a multi-phased plan. Step one is to establish your data register, in keeping with Article 30, which focusses on records of processing activities. You need to be sure of the information and processes that you hold. We have a process mapping and

Some organisations consider data to be their property collaborative approach that enables us to get Article 30 reports within one to two months, sometimes even faster,” he adds. In other words, organisations will have to secure all communication channels with customers. Emailing, file sharing, messaging and voice calls should be protected by the same high standards.

“Any tool that takes ‘privacy by design’ seriously and only collects as little personal data as technically possible is commendable. True end-to-end encryption with a transparent and secure key management is a safe bet but for privacy, metadata restraint is equally important,” says Threema’s Mr Flepp. Prevention over inspection Mr Daryanani says that organisations that consider personal data their property rather than the property of the individual will face some challenges — both in terms of time and cost. “If we look at fines from a risk perspective, you compare the fine vs the cost of implementation of the safeguards. If the fine is substantially less than the cost of the safeguards, a risk management approach will suggest paying the fine over implementing the safeguards. Fines of 4 per cent [of the global annual turnover for the preceding financial year] are only the cap — fines will be proportional to the digression. If an organisation is endemically and systematically flaunting the law, then the full fine may be applied,” he says.

Technologies that help comply with GDPR: ENCRYPTION DATA MASKING/ PSEUDONYMISATION DATA MAPPING AND CLASSIFICATION COMPLIANCE MANAGEMENT TOOLS CONSENT MANAGEMENT TOOLS

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Destination Outsourcing Andrew Wrobel Emerging Europe is the new darling of the outsourcing world, but its countries, regions and cities need to make sure that they sell themselves to investors as effectively as possible.

isten first, then sell,” writes Timi Nadela, in her book, Get To The Top: It’s About The Heart Sell, Not The Hard Sell. And bearing in mind her experience as a senior business development professional working with Fortune 100 companies such as American Express, JP Morgan Chase, Delta Air Lines, she seems to know her subject. Do emerging Europe locations listen to the needs of prospective investors? My observation is that they more frequently talk at those business people than they talk to them. Just imagine a location pitch at a conference — the same power point presentation regardless of the sector discussed or of the country those investors represent, always emphasising the strategic location as one of the country’s strengths. A bit confused David Haigh, the founder and CEO of Brand Finance, tells me that audiences from other geographies often

lack clarity on what differentiates emerging Europe’s nation brands from each other. “Governments, agencies, and trade bodies in charge of managing nation brands from the region need to rigorously evaluate their countries’ strengths and weaknesses as well as the resources they have available to market their nations’ unique selling propositions effectively,” he says. On top of that comes confusion regarding whether to promote a region, a city or the entire country. I spoke to Elias van Herwaarden, EMEA service leader for global location strategies at Deloitte’s Brussels-based Centre of Excellence for Corporate Site Selection and Foreign Direct Investment Services. He says that from an investment promotion agency’s perspective, each investment project counts and individual regions are as crucial as the entire country. “But of course, there might be huge differences between the cities, and their value propositions should reflect that,” he tells me, citing the examples of Bratislava and Košice or Prague and Brno. “There are cases when the potential 42

investor is interested in getting an analysis of up to three countries in the CEE cluster and then select cities. There is also an approach, which is becoming more popular, to start the location analysis with a selection of cities within the CEE cluster or even compare cities from the global selection. The main driver though, is the overall strategy on target operating model considered,” says Violetta Małek, managing partner at Gekko advisoryNOW and formerly director, Management Consulting at KPMG Poland. What really matters Globalisation and advancements in technology are making it less of an issue (in terms of geography) in which country the work is placed, as communication channels are ever-improving — as long as the primary safety factors such as the lack of earthquakes or military conflicts are ticked. “What is critical is access to ongoing resources like graduates or ably-qualified people, the steady supply of future skills like IT, design-thinking, pro-

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gramming etc. On top of that, considerations like how easy it is to do business in the country, how supportive is the local municipality — even looking at capabilities like do they have an international airport with regular daily flights, or fast broadband,” says Tom Quigley, director of outsourcing at Emerging Europe. Till Hahndorf, managing director at German BW Business Bridge, which identifies and certifies high-quality ICT product and service offerings for the German market, shares Tom’s view. “For a potential buyer, it generates little value to meet a group of companies whose only common capacity is that they all came from the same country. Let’s value domain focus over geographical focus or the actual solutions’ content over where the solution comes from,” he tells me. Still on the rise Interestingly, emerging Europe keeps on strengthening its position on the outsourcing map. “Our clients are still very bullish on CEE,” says Charlie Aird, global leader at PwC Shared Services and Outsourcing Advisory and Business Services Transformation. Avinash Vashistha, the founder and board member at Tholons, admits that the region might not be the cheapest but its strength is the talent and the quality delivered. And increasingly more countries see their potential as an outsourcing destination, as far as business process outsourcing and shared services or research and development centres and ICT are concerned. Over the last six months, I have spoken to at least half a dozen government representatives

who tried to convince me that their location is excellent for business services. “The main part is advertising and making people understand that the capability is there,” Charlie tells me. “Perception is key because people don’t like what they don’t know,” Elias says, and gives an example of Poznan in Poland, which was unknown several years and is now one of the leading BPO/SSC destinations in the country. Consistency needed “But that requires work. You need to take part in conferences and seminars, and before you can sell your location, you need to elicit from potential investors and consultants what they know about it, what their concerns are and what they are looking for. Most importantly, listen to them. Then you need to sit down and look at your strengths — how you can use them for your benefit, and at your weaknesses and see how you can mitigate them,” Elias adds. David tells me that the recipe is simple: work out what you can promote, who you want to target, and how to do it cost-effectively. “The difficulty, however, lies in garnering the universal support of different political, social, and business stakeholders within the country to ensure that all identify with the strategy and adhere to it in their marketing and communications activities,” he adds. And if you are service providers, join your efforts with other vendors to change the perception or raise awareness about your capabilities. Kerry Hallard, president of the Global Sourcing Association, shows Ukraine and Romania as examples.

“Few people know that Ukraine is a significant player, the potential it has as a destination to set up in, nor the strength of Ukrainian service providers. There are some key service providers, all battling one by one to raise the profile of Ukraine. Certainly, there is a general awareness of Romania as an outsourcing destination, amongst the most critical section of the sourcing community — the buyers, but the fact is that the country lacks real presence in the UK in this area on a macro level,” she tells me. Better together Avinash advices taking this joint approach to another level. “There would be a lot of power of having a more regional collaboration,” he tells me. Tom Quigley thinks it makes sense as buyers or investors will typically look at a region first, and then country and then city. the reason for this is that they want to understand the political, economic, social and technological environment of the broader region. “The region is stronger together and countries can complement one another, thus serving buyers and investors better with your service or location,” he tells me. “I was at the World Economic Forum in Davos this year and the region is not visible there”, Olga Grygier-Siddons, CEO at PWC Central and East Europe, adds. “We do need to come together to be visible.” As Farshad Asl, the author of The “No Excuses” Mindset: A Life of Purpose, Passion, and Clarity, wrote, “selling is serving, helping others find solutions, impacting lives positively with passion and integrity.”

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The Future of the Automotive Industry: Emerging Europe’s Self-Driving, Electric Dreams Claudia Patricolo The father of the electric car was a Hungarian inventor. His successors throughout emerging Europe are ensuring that the future of driving looks increasingly as though it has found a home.

ometimes it only needs the right idea to change the world. People can invent extraordinary things not realising the extent of what they have in their hands. This happened to the Hungarian inventor Ányos Istvan Jedlik, who invented the first rotary machine with electromagnets and a commutator, becoming in 1828 the father of electric vehicles. Unfortunately, the device had no influence on the further development of electric machines. However, thanks to bigger players, such as Germany, the US and the UK, electric vehicles are spreading all over

the world. According to the European Environment Agency, in 2010 only 700 fully-electric battery-operated vehicles (BEV) were sold in the European Union. In 2015, sales topped 150,000. Since Mr Jedlik’s big idea, Hungary has come a long way: thanks to a 2 billion HUF investment made by the government in 2016, nearly 30,000 electric vehicles are planned to be in use in Hungary by 2020. Hungary Vehicle manufacturing is today one of the strongest industrial sectors in Hungary. But what makes Hungary 44

such an ideal destination for the automotive industry? “Cheap and flexible labour, the proximity of outbound markets, ideal market regulation, low-cost industrial sites and favourable tax incentives can be listed as factors,” Csaba Killián, CEO of the Association of the Hungarian Automotive Industry (AHAI), tells Emerging Europe. “The easy accessibility of Hungary is often cited as one of its main advantages: it is at the crossroads of four main European transport corridors. Hungary has one of the highest motorway densities in Europe and has five international airports. The country’s

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location enables companies to have morning calls with Asian countries and afternoon calls with the US, which makes Hungary a preferred location for shared service centres as well,” he continues. “On top of that, Hungary provides its workforce at an advantageous cost. The labour force totals 4.6 million (in 2017, Q1) and the unemployment rate is 4.5 per cent (in 2017, Q1) with a guaranteed monthly minimum wage for skilled workers of 161,000 forints (518 euros),” he says. A competitive workforce however cannot be viewed without the disadvantage of low labour productivity. However, according to Mr Killián, differences in production are caused by a lack of capital intensity, and not because of the quality of the workforce. “Moreover, players in domestic industry occupy low positions in the value chain,” he says. “The micro, small and medium-sized companies have almost the same productivity, which is half of the efficiency of larger companies. The degree of lag has considerably fallen over the 10-year-period between 2005 and 2015, the SME sector productivity level approaching large corporations with stagnant productivity.” Foreign companies, including Audi and Mercedes, continue to invest in the country, forecasting strong growth for the vehicle production industry over the coming years. “Within a couple of years, five trends will undermine the automotive industry, and Hungarian suppliers will have to adapt to these too,” Mr Killián explains. “Expected trends include the spread of electric and hybrid-driven vehicles, the emergence of self-propelled cars, shared car usage, ongoing communication between cars and other objects, and the fact that new models will appear more frequently or year by year,” he says. Poland & the Czech Republic Hungary is not the only emerging European country playing an important role in the sector. Poland and the Czech Republic are currently considered two of the hottest hubs for the automotive industry. According to the European Automotive Industry Association (ACEA), of 230 assembly plants in Europe, 16 are located in Poland. The Czech Republic registers the

AeroMobil: The Flying Car

Every child’s dream to own a flying car has become a reality thanks to AeroMobil. The company was founded in 2010 and has spent over seven years on R&D. AeroMobil is a STOL (short take-off and landing) vehicle, which is already compliant with existing regulation and infrastructure, this means that clients do not need to wait for changes in airspace regulations or city infrastructure to use it. “We are doing this through pioneering product design and development to create a fully feasible platform for both initial and future generations of our flying cars. We believe that we have a first-to-market advantage because we have already demonstrated the capacity to develop a fully functional flying car with limited engineering staff,” says Stefan Vadocz, CCO, AeroMobil.. The AeroMobil offers full travel flexibility, compliant with existing regulations and infrastructures. It is not limited by weather conditions

and can reduce costs and travel times — this is not the case with most drones, which are grounded in the bad weather. At present the AeroMobil has a capacity for two people, however Mr Vadocz has confirmed that as the AeroMobil is built on a vehicle platform it will be possible to increase the number of seats. There will only be a maximum of 500 units available, at a price of 1.21.5 million euros depending on individual specific needs. Mr Vadocz also adds “that the first 25 units will be special Founders Editions and will contain series specific product content along with an expanded benefits package, details to be announced separately.” “We like to say, it is a better car because it is an airplane, and it is a better airplane because it is a car. It combines the two functions in perfect harmony as no other vehicle before.” Mr Vadocz, concludes.

Photo: AeroMobil

highest employment rate in the sector (3.24 per cent), above Germany (2.17 per cent) and the EU average (1.14 per cent). On the other hand, the Baltics are not showing the same trends, and Estonia has the lowest motor vehicle registration rate (only 22,429 per year) while Lithuania has no production of passenger cars. As such, FDI is mostly concentrated in Poland and the Czech Republic. The latest investment comes from the BMW group which is building a new proving ground facility in the Czech Republic. The site will be located in

Sokolov in the Karlovy Vary region, for a total amount in the three-digit million-euro range. “It will be the company’s first development location in Eastern Europe,” Johannes Maierhofer, head of the project in Sokolov, tells Emerging Europe. “And the BMW Group found the ideal conditions and grounds we need for vehicle testing in Sokolov.” “As an innovation driver, we aim to offer customers the best, most emotional mobility experience and create digital connections between people, vehicles and services. At the planned

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EMV: Futuristic Style While Elon Musk sends the first car into space, ElectroMobility Poland (EMP) is concentrating on more earthly projects, namely getting one million electric vehicles on Polish roads by 2025. “Our goals are to develop the concept of an urban electric car and promote development of an electro mobility system in Poland,” says EMP’s mission statement on its website. The consortium of four energy companies, together with the Polish Ministry of Energy, aims to create a better quality of life, lower air pollution, a reduction in noise pollution as well as increased accessibility to, and comfort of, public transport. To achieve this, the company launched a competition for the design of the car’s body. “When initiating the project of

development of electro mobility, we primarily wanted the Polish electric car to be adapted to the needs of Poles. Today, we see the fruits of all the efforts made by participants in the competition and the jury. Congratulations to the winners, and I am glad that Polish designers showed their skills and potential,” Minister of Energy, Krzysztof Tchórzewski said during the awards ceremony. The winners (Łukasz Myszyński, Mateusz Tomiczek, Damian Woliński, and Sebastian Nowak) are all new graduates, and their cars are designed in futuristic style. This year will be decisive for the automotive industry in Poland: not only a first prototype of the car will be built but regulations are also changing in order stimulate this new industry.

proving facility in Sokolov, we will continue to advance ground-breaking topics like electrification, digitalisation and automated driving – for example, through safety-testing for assistance systems,” he adds. Charging Ahead With electric vehicles spreading all over central and eastern Europe, there is also a growing need for more charging stations. So far the number of charging stations in the region is tiny. A new project wants to change that: the NEXT-E consortium will receive 18.84 million euros under the Connecting Europe Facility (CEF) to build 252 fast and ultra-fast electric vehicle charging stations in central and eastern Europe. The network will comprise 222 multi-standard (50 kW) and 30 ultra-fast (150-350 kW) charging stations for electric vehicles along the main European transport corridors and the trans-European transport network (TEN-T ), and it will connect six countries on main routes through the Czech Republic, Slovakia, Hungary,

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Slovenia, Croatia and Romania. The installation of fast charging stations will begin in 2018, while the installation of ultra-fast stations is planned for 2019, anticipating the new generation of extended range electric vehicles. The overall completion of the project is estimated for the end of 2020. In the meantime, Slovak company Greenway has started to build the first ever electric vehicle fast-charging station at Bratislava’s Avion Shopping Mall. This new installation, GridBooster system, is a fast charger with an attached battery pack and energy management system which today unlocks a lot of potential: it can charge up to five vehicles; an energy management system distributes energy to all vehicles based on the capacity they can handle and their needs; and the associated battery pack stores energy onsite meaning more affordable energy consumption and more balance for the grid. “Back in 2011, my co-founder and I had recently left the solar industry and were looking for our next project,” Greenway co-founder Peter Badik tells Emerging Europe.

“We wanted to continue focusing on clean tech/energy, which we had experience in and saw a lot of potential in, both for a company and to make a positive impact on our planet and region. We saw the automotive sector as ripe for change and began to focus on electric vehicles, particularly 2-3.5 ton vans, which were the most polluting. We developed batteries and a battery swapping method and found customers among various logistics companies in Slovakia,” he says, explaining where the idea came from. “We actually got into infrastructure as a bit of a side project, since we had the experience from our battery swap stations and interest in the topic. In 2015 Nissan wanted to install Chademo fast chargers around the countries of CEE and were looking for a partner in Slovakia. We volunteered, and that began our foray into infrastructure, which has become the largest portion of our business,” he adds. Unfortunately, attitudes can still represent an obstacle. “The idea of driving electric is still very foreign to most people and so it;s

challenging building a charging network when the drivers/cars aren’t there yet,” Mr Badik says. And overall, the Slovak environment is not very promising. “Slovakia as the leading per capita vehicle producer and exporter in the world and should have leading public figures very involved in any major topic touching the automotive sector, since it could heavily impact the jobs here, but they aren’t. There is no public leadership in Slovakia on this topic and that hurts us. There are only 10 total EV models available in Slovakia right now. More are set to come – even Skoda is launching an electric vehicle – but as far as I know it will not to be manufactured here in Slovakia. Overall, it’s a huge, huge asset to have such an automotive sector in Slovakia, but we are not taking full advantage of it, especially as concerns the future of automobiles – electric, autonomous,” Mr Badik adds. “Now that electric vehicles are on their way to becoming a mass market product, there is a great need for the corresponding infrastructure to pow-

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er those vehicles. Currently, we have plans to build nearly 200 chargers in Poland and 30 more in Slovakia. These include top of the line technology GridBoosters and Ultrafast Chargers, capable of distributing 350Kw of power. We see this network continuing to grow and we plan to expand into new countries and markets,” he says. Dropping the Hydrogen Bomb At the same time, several researchers are assuming that sooner or later electric vehicles could themselves be replaced by hydrogen vehicles. What still concerns many people is cost. So far, hydrogen has involved much higher costs compared to other renewable sources, being made by methane. Besides, it pollutes more, replacing CO2 in the atmosphere. Nevertheless, hydrogen’s costs are dropping and car makers see potential in hydrogen fuel cells. Batteries are expensive, take a long time to charge, and have limitations when it comes to driving range. Hydrogen-powered vehicles, on the other hand, more closely resemble combustion engines when it comes to user experience, offering shorter refill time and a longer range. Greenway doesn’t think so. “We’re focused on fully electric and have no plans to do anything with hydrogen. We do not see it as having much future or being a good idea.

Simply building the infrastructure to transport it will be a huge and costly undertaking. The electricity grid already exists,” Mr Badik explains. No Limits What alternatives do we have? As the home of the first electric motor, the answer again comes from Hungary: AImotive has developed new tools for self-driving cars, evolving what was only a dream for Ányos Istvan Jedlik. Founded by László Kishonti in 2015, AImotive is the leading global provider of AI-powered self-driving technology. Using cameras as primary sensors AImotive solutions mimic the visual capabilities of human drivers. “We are developing technologies which are not limited or restricted to a given use-case, or a limited geographical area, or to a very expensive sensor setup. The artificial intelligence-based solutions we develop that primarily use cameras can be successfully applied to any other sensor combination, as well as radar, lidar and many different use cases such as autonomous highway driving, automated parking or a self-driving city cab. All this is heavily supported by our simulation based-development methodology. This is unique,” Gergely Debreczeni, chief scientist at AImotive tells Emerging Europe. AiDrive, AImotive’s autonomous

Photo: promotional image

driving software suite, accommodates different driving cultures and climates, approaching the driving experience from a global perspective. AiSim, its photo-realistic simulator, recreates diverse real-life scenarios to develop necessary systems. And to handle the complex process behind self-driving technology they have created aiWare, a unique neural network accelerator for computer vision. “AImotive was born as a spin-off company of Kishont Ltd., the previous company of our CEO and founder, which specialised in embedded and mobile benchmarking, graphics, parallel and high-performance programming, computer vision and artificial intelligence. Having all that expertise in the company with the new trends in AI it was immediately obvious that we could meaningfully participate in the development of one of the biggest adventures of artificial intelligence: the realisation of self-driving cars,” Mr Debreczeni explains. Three years on, AImotive has more than 180 staff and public road testing capabilities in three continents. “It was a big challenge growing a company from 20 to 180 without changing the company culture too much and ensuring continuous effectiveness, motivating everyone and, as a result, becoming the largest independent self-driving AI tech company in the world,” Mr Debreczeni says.

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“But at different stages in the lifetime of a company there are always different challenges. When you have an idea, a plan, the first big challenge is to convince yourself that you can make it happen. After that you have to gather a small team and create a concept, build a prototype, outline a plan and convince investors to fund your vision. Then you have to convince others, hire the best people and build a proper company which will create your dream,” he continues. Despite this massive growth all over the world, everything started in Hungary. “Hungary, where education in mathematics, physics and computer sciences is traditionally strong, is an ideal place

to start a technology-oriented, innovation-based company. Both the abundance of talented young and experienced engineers and scientists, as well as the healthy competitive environment provide any company like ours a good backing,” Mr Debreczeni says. But still, there is huge scepticism surrounding self-driving cars. In fact, according to the Vienna Convention on Road Traffic, a driver must always be ready to take control of the vehicle at any point. How can driverless cars overcome this? “When the first steam locomotives started to circulate, some required a mounted steward to ride in front of the locomotive and loudly notify people about the arrival of the train,” Mr

Debreczeni says. “Today, driverless trains circulate at high speeds every day without problem. A very similar but much quicker change will happen in the self-driving industry. The first regulations will require the presence of a safety driver in the vehicle or the ability for the passenger to take control in some case. Then later, as the technology becomes more mature and safer, gradually these regulations will be relaxed, then dismissed. Finally, at some point in the future it will be forbidden for humans to drive, simply because it will be much less safe than automated solutions.”

RIMAC AUTOMOBILI: THE CONCEPT ONE Croatian electric vehicle manufacturer Rimac Automobili recently closed a 30 million euro deal with China-based investor Camel Group Ltd. “This investment will help us further accelerate growth, introduce new products to the market and expand our global presence. Two key areas are building a new, state-ofthe-art production facility for our technology business and launching our next-generation electric supercar which will be shown to the world next year,” said Mate Rimac, founder and CEO of the company Rimac. Rimac Automobili was founded in 2009 with the vision to create the

sports car of the 21st century. Today, it is unleashing the full potential of Nikola Tesla’s invention, the alternating current electric motor, in many ways and industries. Its Concept One is the world’s fastest accelerating electric vehicle. Rimac All Wheel Torque Vectoring is a unique system that creates a new driving experience by utilising the advantages of the independent wheel drive of the Concept One’s four-motor powertrain system. The system provides unseen flexibility and grip by controlling each wheel individually one hundred times per second. Drivers can choose between

various modes and settings to perfectly match their preferences, skills and the given situation. “The Concept One achieves today what many wouldn’t consider achievable even in the future. It shows that the future of transportation is not boring or slow but fun and better in every way. It takes the fear of the future away and makes us excited and eager. Now think about all that technology applied in many other products and applications across different industries, driving the change towards a time beyond fossil fuels,” Mr Rimac added.

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Doing Business: Beyond the Data Santiago Croci, acting manager of the Doing Business Unit at the World Bank, talks to Shakhil Shah about the bank’s 2018 Doing Business report, and how its results translate into economic conditions across emerging Europe. Photo: World Bank

Research shows that countries with business-friendly regulations tend to attract more foreign investment and have lower levels of income inequality. SS: When we look at the most recent results of the Doing Business report, we see two emerging Europe countries — Georgia and Macedonia — in the Top 15. Neither of them is an EU member state. What has helped them rank so high? SC: Georgia and Macedonia do indeed perform well on the Doing Business measures. According to our ease of doing business metrics, Georgia is ranked in ninth place and Macedonia in 11th. Indeed, among the top 15 performers, Georgia and Macedonia are the only countries not classified as ’high-income’ by the World Bank. An ambitious reform agenda has helped the two countries achieve success on Doing Business measures. In the 15 years since the inception of the Doing Business report, Georgia has implemented a total of 47 reforms, second only to Rwanda which implemented 52 reforms over the past 15 years. Macedonia tied with Kazakhstan in third place, with 41 reforms.

Shakhil Shah: In the newest ranking we see two thirds of the emerging European countries represented in the top 50. At the same time, a few countries, for example Poland, fell. What progress have countries in the region made as far as regulatory performance over time is concerned? Santiago Croci: Given that rankings are relative in nature, it is normal to see both positive and negative movements when

looking at the standings of emerging Europe countries. The overall trend of the region, however, is certainly positive on the absolute measure of progress. In the past year, nearly all emerging Europe countries saw an improvement in their distance to frontier (DTF) score. And in the past five years, all the economies in the region recorded reforms that benefitted entrepreneurs. Looking ahead, there is no reason to believe that the pace of reform will subside. This is good news. 50

Beyond these numbers, what each reform has done is make life easier for local entrepreneurs. For instance, in 2016, Georgia made customs documentary compliance easier by improving its electronic document processing system. This means that it takes less time to import or export today in Georgia. Another example can be drawn from Macedonia, in 2015 they made starting a business easier by making online registration free of charge. Owing to such initiatives, by and large, Georgia and Macedonia perform well on all Doing Business indicators. Moreover, they set some of the best practices worldwide in areas like Protecting Minority Investors, Getting Credit or Starting a Busi-

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ness. For example, it takes only two days for an entrepreneur in Tbilisi to start a new business, compared to the global average of 20 days. And in Skopje, no minimum capital is required to incorporate a new business. SS: When discussing reform, what more should countries do, to improve or maintain their ranking? SC: Doing Business benchmarks business regulations based on precise case study assumptions. Therefore, when discussing their reform agendas, countries should first look at case studies and undertake reforms that benefit the business community at large. Doing Business data can serve as a useful roadmap to determine where local entrepreneurs face considerable challenges and prioritise those areas for reform. In the case of Georgia, for example, the country performs well in several areas – yet complying with tax regulations is still quite burdensome. It takes nearly 70 per cent longer to pay taxes in Tbilisi compared to the OECD average. So, this is one area for local authorities to consider improving. SS: Based on the data collected, do countries in emerging Europe face the same challenges? Do regulations and reforms vary drastically in the region? SC: Each economy has its unique sets of challenges when it comes to the local business regulatory framework. For instance, it takes less than 300 days to resolve a commercial dispute in Azerbaijan compared to over two years in Slovakia. Similarly, it takes only a few days to complete a property transfer in Lithuania, compared to a couple of months in Montenegro. As the challenges countries face differ, the reforms they implement vary. Nonetheless, we observe some commonalities in emerging Europe; countries have considerable room for improvement in the area of dealing with construction permits and getting electricity. For example, it takes an average of 119 days to connect to the grid in emerging Europe, compared to 79 days in OECD high-income economies. This is, in large part, because more interactions are required between government agencies and domestic firms. SS: What advice can you offer countries in emerging Europe, in order for them

to continue to attract FDI and boost their economy? The reforms that have been suggested in the report are a starting point, but what other areas of law or practice should they change to improve? SC: As the question implies, Doing Business is limited in scope. It does not measure many areas that are important to local firms, for example intellectual property laws. Similarly, our benchmarks only look at the administrative efficiencies of a few agencies such as business registry, customs or cadaster, while others, such as telecommunications companies are not considered. To spur growth and investment, it is highly advisable for countries to adopt a ho-

Countries should look at case studies and carry out reforms listic approach going beyond the Doing Business indicator sets. Human capital and macroeconomic stability, for example, are often cited as big concerns for firms. The World Bank’s Enterprise Survey’s datasets could also help policymakers identify the main obstacles firms face. SS: Two areas of reform that really stick out for me are those of ease of starting a business and the cost associated with starting a business. Does making both more easily accessible drastically increase foreign investment? SC: It’s important to stress that Doing Business promotes fair, efficient and transparent rules for the domestic private sector, particularly small and medium enterprises which really are the engine of growth in any country. Therefore, improvements in the Starting a Business indicator – or any other DB measurement for that matter – would benefit domestic enterprises. And while there is a correlation between local and foreign investment, there is no causation between the two; FDI depends on many factors that are exogenous to 51

business regulation (such as market size). Looking at historical data, what we find is that the countries that reform the most often see an increase in business density. Georgia, for instance, has implemented 47 reforms since 2005. During this period, output per capita increased by 66 per cent and business density more than tripled. Many factors contributed to this improvement in economic outcomes, and the effort to make it easier for local entrepreneurs to do business is likely to have been one of them. SS: My final question: Is it possible that countries could be implementing reform just prior to the data collection process in order to be ranked higher? If this is the case, are there checks carried out that the reforms enacted are working to benefit investors? SC: Doing Business aims to lend a voice to the private sector, so our measurements were designed to capture what matters for firms - from incorporation to bankruptcy. Each indicator’s methodology was developed in close collaboration with experts and academics, and then laid out in a background paper. In terms of our data collection, all the reforms highlighted by Doing Business are vetted by many private sector practitioners with expertise in the areas we measure. The analysis we carry out – as with all as our datasets – are then peer reviewed by colleagues in other departments and in the World Bank country offices. In the end, we make sure that improvements in our measurements reflect on the ground improvements for entrepreneurs. For example, this past year, Lithuania strengthened minority investor protections by increasing corporate transparency. This was confirmed by many lawyers in the country. This also matters because studies show that, in economies with stronger investor protections, investment in firms leads to greater growth in revenue and profitability.

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THE BOARDROOM FDI IN KOSOVO

By Robert Wright CEO Raiffeisen Bank Kosovo Who has been to Kosovo? This is often the first question I ask when I am presenting at conferences or forums around Europe. The show of hands is usually very limited, if any. Who has been to the Balkans is my next question. There are usually many more hands – quite often because of trips to Croatia, increasingly Albania and then a debate usually starts about the definition of the Balkans and whether it includes Romania and/or Slovenia. Some may jump up and say they have been to Latvia or Estonia and I have to politely correct them that those countries are in the Baltics, not the Balkans. And maybe this illustrates a key challenge for Kosovo – people have

heard of the country but very few have visited it for either business or pleasure. Many have an opinion about it – often misguided and sometimes negative – and at times Kosovo only has itself to blame for this. The country does need to raise its profile, increase positive awareness and sell itself harder to the foreign business community. There is strong local competition for the scarce foreign resources that are available for investment in the country. Macedonia, Albania and Serbia all have a strong case for an FDI considering their future in the Balkans. And, as a new and developing country Kosovo certainly has some significant challenges ahead. But after 15 successful years as the biggest foreign investor in Kosovo and the number one bank in the country we at Raiffeisen Bank are very happy with our experience in the country and the impressive returns we have made on our investment. My advice to po-

tential investors is to come and see the country for themselves. Don’t Google it or watch a video on line. Come and see it first hand. Fly into the new modern award winning airport and drive into the capital Prishtina on the new two lane highway. Stay at a 5-star hotel in the city centre and shop and eat at one of the biggest and most modern shopping malls in the region. The next day I can take you to our award-winning clients in technology, construction, mining and agriculture and introduce you to a wide range of intelligent, motivated well educated and young Kosovars who have been the key factor in our success in the country and who have such huge untapped potential. I can also show you our new head office in the centre of Prishtina, which we are in the process of acquiring, a truly visible and significant endorsement of our optimism and commitment to the future of Kosovo.

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IMPATIENCE IN UKRAINE

Mohammad Zahoor Founder of the ISTIL Group and publisher of the Kyiv Post The fourth anniversary of the Euromaidan Revolution approaches and President Poroshenko’s government finds itself confronted with impatience, both from the Ukrainian public, international allies and donors. The administration can pride itself on having tackled fundamental challenges, such as the restructuring of the Ukrainian banking sector and the overhaul of Ukraine’s gas industry (including a reboot of Naftogaz). Long-term projects have begun with regard to the health system, pension provision and tax reform. However, the momentum of reform has all but ceased now that the Ukrainian leadership is preoccupied by the forthcoming 2019 presidential elections. Candidates are positioning themselves on increasingly populist tickets. They are consolidating their powerbases by delaying reforms that might negatively affect parliamentary allies. Significant delays concern the removal of parliamentary immunity from criminal prosecution and the setting up of an independent anti-corruption court in compliance with the Venice Commission. This has had a tangible impact on the way that both internal and external forces work in Ukraine. The IMF is withholding consolidation funds for the continuation of reforms. There has been widespread criticism from the EU and individual donor countries. A less positive economic outlook has dampened inward investment. This has resulted in a disappointing growth rate; only indi-

vidual regions and the industry sectors show robust growth. It is worth remembering that all significant reforms were imposed on Ukraine by international donors. Activists in Ukrainian civil society have not been able to build a power base. This constellation and the way in which the West has given President Poroshenko a long leash in the implementation of reforms has resulted in continued hegemony of a deeply corrupt political class. Yet many Ukrainians now have the option to vote with their feet. Since 2014 over one million Ukrainians, availing themselves of EU Association Agreement opportunities, have left the country (largely to Poland). This brain drain is a serious issue. However, the Ukrainian diaspora will shortly become the biggest international investor in the country and financial clout always equates to power. Nevertheless, Ukraine’s Western allies must continue to pressure the Poroshenko administration to carry out crucial root and branch reforms.

DIGITAL BULGARIA

Boriana Manolova CEO of Siemens Bulgaria Our world is more connected than ever. Billions of intelligent devices, machines and tools are communicating with each other, generating massive amounts of data and bridging the real and virtual worlds. New digital technologies are driving a paradigm shift. Data creates new insights and new business opportuni-

ties but also provokes new business models. In the future, successful companies will be those who know how not just to leverage their Big Data but to transform it into Smart Data. But as well as creating challenges, the digital transformation also serves as the technology driver for new competitive benefits, enabling smarter products and solutions, higher efficiency and flexibility, as well as reduced time to market for new products. At the same time, it acts as an accelerator of business processes. The result is tremendous competitive advantages. Doing more with less. Creating better quality outcomes. Generating less waste. Learning from every situation and applying that learning to improve subsequent build and performance. Technologies such as cloud computing, self-learning machines and devices, digital simulation, automation and data analytics promise greater productivity across the whole value chain from design and engineering, to operational functionality and manufacturing and to service and maintenance. The components, tools, machines, and conveyor systems in today’s advanced, automated factories are already equipped with sensors and communication systems that share and analyse a huge amount of data every single second in order to manufacture mass-produced products quickly, flexibly and efficiently. Over the next 15 to 20 years, this process is expected to further expand and gain speed all over the world, driven by the increased need of digitalization and automatisation of production. As digital transformation accelerates across market sectors, and customers feel the pressure to act, Siemens can offer its domain know-how and industry expertise to help them take the first steps into a new and exciting future. But the necessary technological preconditions for the ultimate penetration of digitalization could not be created ad-hoc. This could only become a reality step-by-step with the consistent effort of all us – manufacturers, researchers and users.

BUSINESS

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Emerging Europe

Photo: promotional image

THE SEEDiA ROUTE TO SMART CITIES SEEDiA is a Polish company focused on manufacturing eco-friendly smart furniture with the aim of developing and implementing them into smart cities. SEEDiA is committed to continuous development, both in terms of functionality and new product lines, such as smart bus stops. Artur Racicki and Piotr Hołubowicz, the founders of SEEDiA, combined their knowledge and experience to develop what they like to call the “bench of the future.” Mr Racicki also founded Social WiFi which provides smart WiFi hotspots with a marketing analytics tool, which they have implemented into their smart benches. It is that functionality which

sets SEEDiA’s benches apart from their competitors, providing free internet as an integral part of the benches. “For our competitors access to free internet is a goal in itself, here it is only the beginning of our adventures with smart cities, marketing of places and promotional offers,” Mr Racicki says. SEEDiA’s benches offer their users a variety of options such as USB chargers, contactless charging, solar panels, internet access, display screens. “Smart WiFi is a modern tool which makes it possible to build behavioural profiles of smartphone users, and to target them though marketing actions, mailings, or individualised forms of communication,” Mr Racicki adds. The benches can also collect data based on users who log into their network, they are also capable of providing analytical data that can be used to marketing actions and building customer loyalty. “In addition to the features above the

benches can be equipped with smog sensors, automated sources of information, detecting traffic density in particular regions of a city, providing details allowing for creating plans for city climate protection through identifying heat zones, displaying bus or flight schedules on an OLED panel or warning about incoming storms - those are only a few of the unique possibilities offered by SEEDiA,” Mr Hołubowicz explains. At present SEEDiA have four collections of benches; SEEDiA Future, SEEDiA City, SEEDiA Urban and SEEDiA Invention. The benches and various models can be found all over Poland, in Warsaw as well as a number of other cities, most recently in the city of Ustka in the Pomerania region. SEEDiA’s smart benches are generally targeted towards local governments, however they can be used in a commercial environment too, for example at large venues or hotels, airports or office buildings.

BUSINESS

XGLU: DIABETES MONITORING FOR THE FUTURE Marek Novák is the designer and one of the founders behind XGLU, a Czech company specialising in manufacturing an affordable and smart glucometre. No bigger than a credit card, XGLU has been developed with cloud-enabled software solutions, implemented Bluetooth and several innovative features in a mobile app solution to provide additional comfort to diabetes patients. The XGLU’s small form factor, which means that it can fit in your wallet, removes the need to carry an additional case containing a glucometre, strips and lancing device. Add to that the technology going in to the device and the smartphone application which offers a huge amount of data, and this is without a doubt the future of diabetic monitoring. “Our solution is the one of the first (if not the first) which provides active

family and caregiver involvement in the treatment process,” says Marek Novák. “With our glucometer and our cloud solution, family members and caregivers can have real-time data and notification of alerts. Education of the family is as important as professional medical care. Diabetes mellitus is a disease in which successful outcomes are directly dependent on the discipline of the patient.” By providing a solution whereby the patient’s family can be directly involved and can monitor what is happening, they will be better informed, enabling them to be proactive in ensuring their diabetic family member is safe at all times. “There are Bluetooth-enabled glucometres on the market, there are smartphone apps for diabetes patients which can be downloaded but this psychosocial aspect of diabetes care has been totally forgotten. This is something we would like to improve,” Mr Novák concludes. The XGLU glucometer is expected to be available in the EU sometime in 2019. Photo: promotional image

BUSINESS

Photo: promotional image

ROO BRANDS In 2010, in search of healthy treats for her children, Anita Klasanova invented a delicious recipe of raw snack bars. These tasty bars soon became a favourite dessert in Kalin, and in Klasanov’s (husband and wife) organic store. Inspired to share their creation with the rest of the world, the couple joined forces with Yani Dragov, founder of the biggest organic food distributor in Bulgaria. And the Roobar was born in 2012. “Roo Brands is a trendsetter of organic, vegan and gluten free desserts,” says Mrs Klasanova. “It has become a market leader in Europe and can now be found in 50 countries across the world. Since conception the primary product lines Roobar and our award-winning Kookie Cat cookies have became the favorite choice of many. In our state-of-the-art factory, we make close to 1 million bars and cookies monthly.” “We have a team of 90 professionals dedicated to creating food awareness worldwide through simple desserts and strong family values. The team invests

their heart in Roobar every day, because it is easy to unlock your inner superhero when you know your mission is good,” she adds. Roobar is internationally acclaimed yet their recipe for success remains the same – simple, healthy and delicious products with few ingredients. “Our best-selling products are more or less the same in each country – these are the Roobar Coconut and Chia and Roobar Cacao nibs,” says Mrs Klasanova. Over the last year they have also seen an increased interest in their vegan cookie brand – Kookie Cat. Their products won several awards in 2017, including the Great Taste Award. In order to ensure the quality and integrity of their products, the company hand-selects the finest organic ingredients from around the world and works directly with farmers to ensure that the raw ingredients are ethically sourced and contribute to local communities. Their aim is to source as much as they can locally, however some of the raw ingredients need to be imported as they grow in special climates, such as dates.

Roobar have a very simple recipe using no more than four or five organic ingredients, and using those ingredients to sweeten their bars, without using processed sugars. They also do not use any form of heat treatment, thus ensuring that all the nutrients from their products are not compromised. “The secret of our success is that we create brands, not just products. We all know brands need to be brave, bold, sexy and emotional to get the attention of the over-stimulated consumer. The market is becoming more and more competitive. Consumers expect engagement, transparency, connection, authenticity from a brand. Building a community, allowing people to be part of something big and showing that it is not just a trend, but a sincere attempt to create food awareness worldwide by simple desserts and strong family values: these are the elements that form the strategy of every progressive brand,” Mrs Klasanova concludes.

BUSINESS

AMPLER BIKES: ELECTRIC COMMUTING Electric bicycles are not new, but Ampler Bikes from Estonia have taken the trend a step further. They make light electric bikes for urban commuters that take you further without breaking sweat. “Riding the electric bike is as simple as a regular bicycle – you simply cycle. The bikes have no thumb throttles, complex screens or other clutter, and the battery is hidden deep within the frame. The company sees the electrified Ampler as evolution of the bicycle as we know it –

people keep on cycling but with a new generation of bicycles, says,” Ardo Kaurit, CEO and co-founder. Mr Kaurit also adds that the aim of the company is to build bikes that commuters have a need for. Not only do they want their bikes to be practical but they want them to look and feel like traditional bikes. “For example, the battery is inside the frame not just because of looks. It’s the best use of the empty space, keeping the weight down and the battery safe, hiding the important bits from outside elements like the rain and cold,” Mr Kaurit says. The company was launched in April 2016 via an Indiegogo campaign, where they successfully raised 158,000 US dollars, kickstarting its international

operations. The team is made up of cyclists, technologists and engineers, who cleverly designed their own battery and electronics. All Ampler bikes are hand-assembled in Tallinn, and shipped all over in Europe. In 2018, Ampler Bikes wants to expand its operations internationally, opening a flagship store in Berlin in the spring. “Electric bikes are a fantastic solution to the commuting problem – heavy congestion and stress, lack of parking spaces and physical barriers such as wind and hills that cause sweat. We are on a quest to solve it, and we can celebrate our progress with winning the Cyclingworld Best E-Bike Award last year,” Mr Kaurit concludes. Photo: promotional image

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GEORGIA January

March

Georgian state-owned TV gets a new general director — Vasil Maglapareidze, previously employed by a network owned by former Prime Minister Bidzina Ivanishvili’s family. Transparency International (TI) is not happy: “The public broadcaster has failed to appoint a politically neutral director.” Fast forward 12 months and most staff at state-owned TV are also former employees of the Ivanishvili Family. The channel is now accused of failing to report a number of important news items.

A disagreement over a parking fine leads to violent riots in the seaside town of Batumi. The protests are marked by civil disobedience designed to show public contempt for the new chief of the local police force, who had reportedly tightened parking rules in the city. Soon after the demonstrations began, people started throwing stones at the police, and special forces were called in to contain the situation: tear gas is used against the protesters. Chants of ‘Adjara for Adjarans’, ‘Batumi, Batumi’, ‘go sell apples in Gori’, and ‘the government hates Adjarans,’ could be heard during the protests.

February The European Parliament votes to allow Georgians visa-free travel to Iceland, Liechtenstein, Norway, Switzerland and all EU member states (except the UK). The new regulations come into force on March 28. According to the Ministry of Internal Affairs, as many as 165,000 Georgians take advantage within the first eight months. Georgian prosecutors charge a high-ranking priest, Deacon Giorgi Mamaladze, with a conspiracy to murder the ageing Georgian Orthodox patriarch, Ilia II, while he was recuperating from gall-bladder surgery in Berlin. Cyanidr was found in the deacon’s baggase as he left Georgia to visit the patriarch. Police also reportedly found firearms at the priest’s home. Georgian Prime Minister Giorgi Kvirikashvili calls the scandal a perfidious attack on the Church.

April The government comes up with a reform package decriminalising some economic crimes and liberalising the tax code in order to further develop the economy. Mr Kvirikashvili says implementing the measures is one of the key promises of the government’s four-point reform plan. The new rules abolish criminal liability for tax offences related to waybills, excise stamps, and also include significant incentives for individual sectors, particularly, aviation. The package comes into force in June.

May Georgia and China strike a free-trade deal which gives the country access to one of the largest markets in the world. “We are looking forward to becoming a trade platform. This agreement is of paramount importance and we will be

looking to sign similar agreements with other countries,” said the then Minister of Finance Giorgi Gakharia. The Georgian Parliament hosts the NATO Parliamentary Assembly’s Spring Session, bringing together some 300 parliamentarians from the then 28 NATO member countries from North America and Europe as well as delegates from partner countries and observers to discuss current international security issues and the reports prepared by the Assembly’s Committees. In NATO’s history, similar sessions have been held only four times in a non-member country and today all of those four are already NATO members.

June Police arrest two members of the satirical hip-hop group Birja Mafia on charges of purchasing and possessing large amounts of the drug MDMA. After a massive demonstration on Tbilisi’s Rustaveli Avenue, the two men are eventually released. Protesters claimed the men were arrested over the content of a music video, which showed a policeman on the floor with a leash around his neck. Prime Minister Giorgi Kvirikashvili spoke publically about the need to change the country’s drug policies. In December, the Prosecutor’s Office drops the charges.

July US Vice President Mike Pence visits Georgia and is greeted by thousands of people on the streets. Mr Pence attends joint

OUTLOOK ON GEORGIA

NATO military exercises being conducted in Georgia where about 800 Georgian and 1,600 US troops are taking part in the Noble Partner 2017 drills. “The vice president’s presence here demonstrates that this is not only about military exercises, but it is also showing unification with our values, with our foreign policy targets, and showing a clear message that we are together,” Giorgia’s President Giorgi Margvelashvili says.

August A massive forest fire breaks out in Borjomi Gorge, South-Central Georgia. It takes several thousand people a week to extinguish the blaze. In total, more than 30 hectares of grass and wild land are burnt. The disaster unites the entire Caucasus region. Apart from the Georgian armed forces and special task groups, the disaster is contained by some 1,500 Georgian, Armenian and Azerbaijani firefighters, rescuers and rangers, supported by 10 other countries.

September Parliament approves amendments to the Constitution in its final, third reading. One hundred and seventeen

lawmakers—mostly from Georgian Dream–Democratic Georgia (GDDG)— voted in favour and two against. Parliamentarians from opposition parties United National Movement (UNM) and European Georgia (EG) walk out in protest before the vote. The main bone of contention was the electoral system for parliamentary elections. The opposition demanded the current mixed electoral system to be abolished. The amended constitution also reduces the executive scope of the presidency while strengthening the position of the prime minister.

October Georgians vote in local and municipal elections, an important test for the ruling Georgian Dream coalition ahead of next year’s presidential election. They cast ballots to elect 58 municipal and district heads, as well as mayors, in Tbilisi, Batumi, Kutaisi, Poti, and Rustavi. Voters also chose 2058 members for 64 local councils. Kakha Kaladze, a former defender for AC Milan, is elected mayor of Tbilisi, as the country’s ruling Georgian Dream party wins a majority of seats on local councils.

November Prime Minister Giorgi Kvirikashvili announces a government reshuffle and cuts the number of ministries from 18 to 14. “The upcoming changes will serve the purpose of further progress, of shaping an even more modern state, which greatly reduces administrative expense,” the PM stresses, and adds that the time has come to build a modern state, when changes must apply to governmental institutions, so that a more flexible state apparatus may emerge, maximal optimisation may be put in place and bureaucracy may be reduced.

December Georgia makes its mark on the New Silk Road. Less than a month after the Tbilisi Belt and Road Forum, construction works on the Anaklia Deep Sea Port begin. “With no exaggeration, today we’re starting the biggest project of the 21st century Georgia,” says the PM. In October, Azerbaijan, Georgia, and Turkey launch a rail link connecting the three countries, establishing a freight and passenger link between Europe and China that bypasses Russia and Armenia.

OUTLOOK ON GEORGIA

Investing in Georgia Tamara Karelidze There has never been a better time to invest in Georgia, and the country is more open to new business, new ideas and new investors than ever before.

ccording to the Georgian National Statistics Office, between January and September 2017 Georgia received 1,346 million US dollars in foreign direct investment, more than 38 million US dollars higher than 2016. The most common investment sectors are transport, communication and construction. A lot of things have improved in Georgia since 2003. The ease of doing business, a supportive environment for investment and government cooperation are the main advantages. According to Mercy Tambon, country manager of the World Bank in Georgia, reformist tendencies are the main factor which distinguishes Georgia from its neighbours. “The business environment in Georgia is very conducive for investors to come here,” Mrs Tambon told Emerging Europe. “It’s straightforward to open a business; it’s effortless to get your documents or process them. If you go to the justice house, it’s like a one-stop shop where you submit your documents at one end, and in less than a day, in a couple of hours, they come out of the other end.” Last September the World Bank and Georgia celebrated 25 years of cooperation. The organisation was one of the

first, in 1992, to start working in Georgia. During this period more than 4.3 billion US dollars has been invested by the organisation. “We’ve supported the government in carrying out reforms that have improved the business environment. As you can see, Georgia is one of the leaders of doing business in the world rankings because it’s a very reformist gov-

Georgia has implemented reforms that attract investors ernment. It has put in place the reforms that attract investors to come,” said Mrs Tambon. Besides the World Bank, EBRD-Georgia cooperation is also 25 years old. Areas of cooperation include not only agriculture, banking or infrastructur60

al projects but policy reforms and legislative improvement. In this sense, a significant initiative was ‘The Investors Council,’ which brings together the most representative local and foreign business associations. “The investment and the activities of the EBRD in Georgia are one of the largest per capita in the whole of the EBRD countries of operation,” Bruno Balvanera, director of EBRD in South Caucasus, told Emerging Europe. Many investors consider the banking sector in Georgia as one of the most stable areas of the country’s economy. It is more than 22 years since the International Financial Organisation (IFO) began supporting banking in Georgia. Jan von Bilsen, the IFO regional manager for the South Caucasus considers that the efficient banking sector in Georgia is a vital support network for the region as. International organisations are not the only support networks in Georgia. There are companies and business people, working in Georgia since very early periods of its independence. One of them is British Petroleum (BP), which started operating in Georgia 21 years ago and has implemented such crucial projects as the Baku-Tbilisi-Ceyhan or Baku-Supsa pipelines. “We don’t produce any oil and gas in

OUTLOOK ON GEORGIA

Georgia to put into these pipelines. We just operate the pipelines through Georgia. Gas is one of the benefits for Georgia,’ said Chris Schlueter, BP’s general manager in Georgia. “A significant portion of the gas that Georgia uses comes from our pipelines,” he told Emerging Europe. Besides companies there are individual businessmen in Georgia who saw the potential of the early 1990s. Fady Asly, chairman of the International Chamber of Commerce in Georgia, arrived in 1996. Despite difficulties in his first years, he is now happy to talk about the considerable improvement of the business environment. He said that Arabs are very interested in Georgia, both for tourist and investment reasons. “The investment climate has improved a lot in the past couple of years,” he told Emerging Europe. “The main challenge remains the judiciary, which still lacks credibility; of course everything is not perfect, the same as for any other country, but there is no doubt that Georgia is one of the very best places to do business.” Tourism, hospitality, infrastructure and manufacturing are the best areas in which to invest, says Fady Asly, and all the major donors agree. A sign of the country’s enormous potential is the number of tourists, which increases year by year and reached seven million in 2017. Despite levels of service, which still need improvement, with the help of the World Bank, the government now has a clear tourism strategy, creating infrastructure, not least better roads. Several museums and resorts have been restored, and advertisements have run on international media. “Tourism is huge and growing like mad here,” said Chris Schlueter, “it’s one of the main areas of investment, like agriculture.” Agriculture remains a priority for the Georgian government, especially since it signed an association agreement and DCFTA with the EU. Agriculture is an area which continues to see huge investment. The government has several projects up and running in conjunction with the EBRD and World Bank, which supports irrigation, agro-business, greenhouses and horticulture. The government also has funds for small and medium-sized farmers, but there is still not enough cooperation. Donors feel that the country should concentrate on improving the level of exports. Paul Clark, a consultant and the founder of the consulting firm TBSC,

and who has lived in Georgia for more than 20 years, believes that problem-solving in agriculture is connected to farming. He does not believe in funds for cooperation or small farms, and thinks that the government should have a long-term plan and invest heavily in large-scale farming. “The future is in big agriculture,” he says. “Do everything that is necessary to create 500 hectare farms all over Georgia. As many as you can. As fast as you can. This requires government intervention. The largest farms here have maybe 200 cows.” Mr Clark believes that DCFTA will improve the quality of products on the domestic market as well. “I think the EU commission and probably the Georgian government have oversold it. They haven’t explained to people how radically things need to change domestically first before you

Stop thinking about tomorrow: think about 30 years time get the export benefit later. In food, for instance: it is not only food for export which needs to meet certain standards. That’s not that the way it works. All food sold in Georgia must be suitable for the EU before they can export it.” Investors are getting involved in changing the make-up of the labour force as well. One of the most significant challenges for the country remains a lack of qualified people, or at least people with the right qualifications. “If an investor is coming to spend their money, you want to make sure that you can hire locals who have the skills you need,” says the World Bank’s Mercy Tambon. “It is true that there are plenty of university graduates, but the skills that these graduates have are not necessarily the skills that today’s labour market needs.” However, she and other interviewees pointed out that the government has understood what the challenges are, and is trying to deal with market 63

demands. As the 21st century’s main focus is on technology, the government should use young people’s potential in the field of technology. To help achieve this, technical parks have been created in the big cities of Georgia. Bruno Balvanera believes that the Georgian government has adapted quickly to technology. As the country was one of the first to begin using blockchain technology, the EBRD has been involved in creating a mining policy for Georgia. “The outlook on Georgia is positive,” says Mercy Tembon. “Exports are increasing, foreign direct investment and the private sector are expanding. They are doing everything possible to develop skills. They’re integrating into the global economy. They have all the right ingredients in place. All that is left is just to continue to maintain prudent macro-fiscal policies and open up the private sector a lot more.” “My advice to the government is to stop thinking about tomorrow. Think about 30 years from now. People do look ahead: they look at immediate problems which need to be solved, but this does not necessarily get you to where you want to be in 30 years time. This is true in every sector,” says Paul Clark, founder of TBSC. Besides its progress and western-looking outlook, Georgia also has significant geographical advantages. Investors see the country as having an excellent opportunity to become a corridor between the East and the West, while also assisting regional countries with integration and setting itself up as a regional hub for South Caucasus countries. This is a strength which has to be used. Despite a number of challenges, donors and investors appreciate the desire of the government and society to transform Georgia into a western country. The proof of this willingness is that while governments change the direction of the country does not; this is not always the case with a young democracy, and is a sign that all stakeholders can collaborate, and must continue to do so.

OUTLOOK ON GEORGIA

After its significant rise the Georgian economy may now fall Maximilien Lambertson

Georgia has been the darling of the former Soviet Union for quite some time. The outlook for 2018 and beyond however is mixed, however.

ince the 2003 “Rose Revolution,” Georgia has been the darling of the former Soviet region, shooting up the business environment and anti-corruption rankings. This has done wonders for its international reputation, attracting significant foreign direct investment which underpinned robust economic growth in the years up to the 2008 global financial crisis. Since then, its sensational progress has inevitably slowed, and the structural barriers to growth including a sharp urban-rural divide, a limited natural resource endowment, a narrow manufacturing base and a heavy dependence on remittances have reasserted themselves. The economy slowed significantly in 2015-16, to an average of 2.8 per cent real GDP growth, compared to averages of 5.6 per cent in 2010-14 and 9.6 per cent in 2003-07. The slowdown was caused primarily by the recession in Russia which depressed the value of remittances to Georgia. Fixed investment also fell, despite FDI recovering to 2007-08 levels. In 2017, the Georgian economy rebounded, due to a recovery in the Russian economy, which has boosted remittance inflows. Consumption is also supported by loose fiscal policy and the stabilisation of the lari. The tourism sector has also performed extremely well. Georgia has seen a boost in tourists from the Middle East and the total passenger flow at Georgian airports grew by almost 50 per cent year on year in January-July, with tourism revenue soaring by 43 per cent

year on year in July. Exports to China are growing rapidly and could reach new heights, following the signing of the China-Georgia Free Trade Agreement in May 2017. As a result, real GDP growth in 2017 is likely to exceed 4 per cent. However, the outlook after 2017 is mixed. Given the recent trade agreements with China and the EU, the prospect for export-led growth in the coming years has improved. However, Georgia’s potential will be limited by the small size of its manufacturing sector, and outside the agricultural sector, its exports are of little-added value (used cars and scrap metal make up a large share of foreign sales). Merchandise exports currently account for less than 25 per cent of GDP. Although Georgia’s business environment is relatively benign compared with those of its neighbours, foreign investment and integration into global manufacturing chains may be constrained by perceptions of high political risk. This may limit regional interconnectivity and skill mismatches in the labour market. In 2018, the Chinese economy is likely to experience a growth slowdown as it grapples with its oversized debt burden, which will depress global commodity prices. This, in turn, could weaken the economic recovery in Russia and the recent pickup in remittances to Georgia. In addition, the outlook for investor and household confidence in Georgia remains uncertain, given recent policy uncertainty related to the upcoming constitutional amendments and the renewed ban on foreign ownership of agricultural land.

The authorities are rightly trying to stimulate the major sectors of the economy, including agriculture, hydropower, tourism and transport. However, they are challenged in their efforts by more urgent issues such as reducing high levels of poverty and unemployment and improving the sustainability of the country’s public finances (public debt has more than doubled since the financial crisis, reaching 45 per cent of GDP in 2016). In addition, the weakening of the lari in 2015-16 led to a sharp rise in the external debt/GDP ratio, which increased to an average of 102 per cent in 2015-16, from 85 per cent in 2014. In addition, Georgia is reliant on high levels of investment and lending to cover its large current-account deficits. If, in the medium term, Georgia sees higher interest rates brought on by a change in investor sentiment vis-à-vis emerging markets, this could potentially lead to external financing problems for the corporate sector and to higher currency volatility. Given the downside risks ahead, the economy is unlikely to post pre2008 growth rates in the coming years. However, in the longer term, if Georgia is successful in maintaining in policy credibility and supporting its sectors with growth potential (agriculture, hydropower and tourism), there is room for an investment and export-led growth acceleration.

Maximilien Lambertson is an analyst in the Europe team at the Economist Intelligence Unit

OUTLOOK ON GEORGIA

Georgia: Leader of Europe’s Second Wave Growing economy and increasing political stability make Bruno Balvanera, the EBRD’s director for Caucasus, Moldova and Belarus, confident that Georgia is heading in the right direction. He met Andrew Wrobel in the Georgian capital, Tbilisi.

Andrew Wrobel: So Europe’s Second Wave? Bruno Balvanera: Yes, late last year Suma Chakrabarti, the EBRD President, was here in Tbilisi. He said, “Georgia is leading the second wave of countries moving into the western economy.” What he meant is that if the first wave comprised the nations of central Europe, like Poland, the Czech Republic and Slovakia, countries which are all now well advanced, then the second wave is those who are trying right now to insert themselves into the market economy. And Georgia is clearly a country that is ahead of the rest.

The EBRD’s investments and activities in Georgia are, per capita, amongst the largest of all the countries in which we operate. We have committed around three billion euros for a country of 3.7 million people. So we’re talking about 850-900 euros per person. It’s one of the highest, if not the highest, in the region. AW: And where’s the money going? BB: Our activities are divided across all sectors, but I want to highlight in particular the banking sector, where we have really helped the creation of the two largest banks, TBC and Bank of Georgia. We helped them significantly

Photo: EBRD

through the combined crises of 2008, the August war in Georgia and the Lehman Brothers bankruptcy in September. The banks required rapid capitalisation, and we helped them with that. We have of course been working with other banks, but these are the two largest banks in the country and we have supported them with equity and credit lines to support SMEs, women in business, energy efficiency and, more recently adaptation, of Deep and Comprehensive Free Trade Agreement (DCFTA) standards. The second big sector is energy, and

OUTLOOK ON GEORGIA

we have been supporting many hydropower plants in the country. Whether they are small, medium or large, we’re basically the biggest player in hydro and we have also expanded into wind. We’re now moving into solar power as well.

Most recently, we have started to engage on preparing a mining policy for Georgia. There are large copper mines in Georgia that can contribute to the GDP of the country. We are also very supportive of the reform of the judicial

The third key area is dealing directly with major Georgian companies, whether in steel or in retail, or, more recently, in health, pharmacy and hospitals.

There was a very strong consensus in society for reform

Finally, in infrastructure, we have so far perhaps not been as important as other IFIs — such as the ADB or EIB or the World Bank — but we have supported some infrastructure in the area of wastewater, solid waste, and more recently in public transportation. Anyone visiting Tbilisi can see the new blue buses all over the city: these are part of the energy efficiency programme we are working on, part of a wider programme called Green Cities, where we want to adopt more sustainable development of the cities. AW: It’s more than just money though, isn’t it? Part of the EBRD’s remit is structural. BB: The Investors’ Council, for example, is a platform where we have put together the representatives of the business associations, local and foreign. We have also brought together the key Government ministers, headed by Prime Minister Giorgi Kvirikashvili, and the local representatives of the international financial institutions — including the World Bank, IFC, and Asian Development Bank, and us — and this is a structured way for the private sector to get together to discuss key issues with the public sector. We have also been very actively involved in energy efficiency, most recently coming up with an Energy Efficiency Action Plan that is going to lay the groundwork for reductions in the consumption of energy. We have been very much involved in agribusiness and agricultural production, focusing on dairy, meat and horticulture. In addition, we have been leading efforts to create a new concession law, the PPP laws and now we’re moving towards proposing some different strategies on how to charge for the use of the roads. We have been at the forefront of capital market development, particularly issuing local bonds.

sector; we have facilitated the establishment of the competition agency, worked public procurement policy; while probably the most creative innovation in this area is Blockchain. Georgia is one of the first countries in the world to use Blockchain technology to register property. AW: If Georgia is indeed the leader of the Second Wave, what is it that is driving that leadership? What makes Georgia stand out? BB: I think the most important things are the commitment, the vision and the strategy of the government, and that the government is elected democratically in a transparent way. The current government won a big majority in the last elections. This size of the majority was an endorsement of what the same government did during its first term in office. For historic reasons, Georgia is more closely linked to Europe, and you can see that in the people. Georgia is clear about its orientation: European and North Atlantic. The country has very strong ties with Europe, very strong ties with the US and clearly has a vision of its future lying very much in that direction. Georgia has been exposed to several different cultural influences, and has been able to develop its own distinct identity and has chosen its own path. In the 1990s, Georgia, immediately after the collapse of the Soviet Union, 67

was in trouble. It was basically a failed state. There was no rule of law, not even any electricity. I think this created a lot of unhappiness amongst the population, and at some time they took the opportunity to look for a leader who was ready to say, “We’re going to change this.” And he did. He got everybody around him, and there was a very strong determination to clean up, starting with the police. He sacked 40,000 policemen overnight and said, “We may be without police for a while, but we don’t want these policemen.” The same thing happened in other areas. I think there was a very strong consensus in society about where they wanted to go. This is what led to the reform process that started at that time. The current government is now continuing that, creating institutions for the long term. Georgia is a country under construction. Whatever ministry you visit you will see that they are creating the foundations of the future, and the changes are dramatic. It’s such an overwhelming agenda of change that you end up feeling a little bit worried that they may have too many things on their plate. AW: What are the main challenges facing Georgia right now? BB: First and foremost, skills. At government level, you see a high standard of individuals in top positions, but as you move down the levels in the ministries, you do not always find skilled people, determined to change. So one of the key areas to develop is skills within government, but also in business. I think that what needs to be done is to adapt education and training to focus on what is needed. Not everybody can – or, for the matter, has to – be a lawyer, an engineer or an economist. Georgia, like any other country, needs many different skills and you need to adapt education to meet these needs. Secondly, this is a small country, and it is difficult to attract a large investor for a country the size of Georgia, with a very low GDP per capita and with a very marginal disposable income. If you think about the market here, it’s probably half the size of the market in one of the states in the US. It is a challenging task to attract large companies to such a small market, and the country knows that. That is why the country has

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been agreeing free trade facilities with its neighbours and even its extended neighbours. The CIS, the DCFTA with Europe, China, and now India. Georgia is going to have access to all the big markets around the world. However, you can’t have access to these markets if you don’t have decent infrastructure. So, the second big challenge is to finish the transportation corridors. You need to finish the EastWest Corridor, the South and North Corridor, and you need also to have a chain of warehouses and areas where you can add value to products that are passing through the region. The third challenge is government. Its agenda is overwhelming, and obviously, it needs to continue improving the investment climate. But more important is governance, and I think that public services need to be transformed to be more user-friendly. Georgia could take this opportunity to become much more high tech, like Estonia or the other Baltic countries, where you can do everything on your computer or your iPad, or phone. Georgia has the potential to adapt quickly to a service or a technology-based economy. Yes, you need some industry to produce some local goods, but I don’t think the size of the market will justify Capex driven investment for steel or cement or glass. Light industry is a better investment. AW: Do you think there’s this potential here for technology-based industries? BB: I think there is, but it is dependent on training. Not just in skills and technology, but also to instil a more entrepreneurial spirit. You can see some of that already if you take a look around. Hotels like the Rooms Hotels or like Fabrika, or like the Innovation Centre. You can see that the youth is already pushing the boundaries of creativity and is already driving change. I am amazed when I go to these places and see such innovative concepts. AW: What more needs to be done to boost that entrepreneurial spirit further? Why is it lacking here? BB: I believe it’s cultural. I think that during the Soviet era Georgians understood that the country was a place for others to come to have a rest, to heal,

to go to a sauna, to enjoy good food or good wine or good weather, beautiful landscapes. It was not a country that was meant to produce anything, not in the industrial or innovative sense, so they did not inherit a sense of innovation. But I see this changing amongst the younger generation. I see a young generation hungry for change. I think we should not underestimate the fact that

This is going to be a good year for Georgia Georgians can now travel visa-free to Europe. It is going to enhance communication and let Georgians see what is happening in Europe, and to bring home ideas. Georgians have a lot of creativity. It’s a country with a very deep culture, with arts and crafts, with traditions, and the younger generations are trying to bring that into what they are doing. AW: Visa-free travel is certainly a real boon, and it works both ways. We see tourism as one of three key areas for growth in Georgia, along with finance and infrastructure. Would you agree? BB: Last year more than seven million people visited Georgia, and this year there will be even more tourists. It’s an area that has been growing significantly. You’re talking about 20 to 30 per cent growth per year. These people need places to stay, things to do. They want to eat, drink. There are some real opportunities here, especially for smaller-scale investors and service providers. As for finance, I don’t think that there is a lot of space for much more competition. The market is already competitive. I think it would be difficult for any bank to try to challenge the position 68

that the two leading banks currently occupy. But the non-banking financial sector is not yet developed and here there is a lot of room for development, in insurance, in leasing, for example. Possibly also in microfinance. In infrastructure, most of the investment is going to be undertaken by the government because this is not yet ready to go out to the private sector. There is going to be a huge amount of work done between now and 2020. The government is talking about 800 kilometres of new roads, which is a stretch for Georgia. It’s a stretch in technology, a stretch in machinery, in building materials, and in terms of the people who will actually build these roads. AW: Finally, growth. Economic growth. How does the EBRD see that? BB: We publish our official economic numbers twice a year. We do it in November when we issue the Transition Report, and then when we have our updated figures during the EBRD’s annual meeting in April/May. All the indications so far suggest that this is going to be a good year for Georgia, and that next year is going to be even better. And when I say a good year, that means growth of above 4 per cent. That kind of growth is felt by the population: one which is so eager to see improvement after so many years of sacrifice.

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Photo: EBRD

OUTLOOK ON GEORGIA

Georgia Still on the World Bank’s Mind As the World Bank racks up 25 years in Georgia, Mercy Tembon, the bank’s regional director for the South Caucasus, Europe and Central Asia, tells Andrew Wrobel that her organisation is as committed to the country’s future as ever.

Andrew Wrobel: Let’s start with the anniversary. What has the World Bank been doing here for the last quarter of a century? Mercy Tembon: Yes, Georgia, along with the other countries in the region, joined the bank in 1992. Those were very turbulent years for Georgia. It was a difficult time because they had just broken away from the Soviet Union, and Russia. It was a low-income country, a developing country. There was very little infrastructure, and what infrastructure did exist was in a very poor state. The first thing we did here was to help the country set up all the institutions that they needed to function as a country. The bank’s first loan, of 10 million US dollars, was designed to expand the government’s capacity to move Georgia to a market economy. Since then, we’ve made investments of up to 3.4 billion US dollars in this country, money which has gone into infrastructure like roads, energy, water, buildings and housing, agriculture and regional development. We have also supported Georgia in the social sector: education, health and social protection, given that more than 50 per cent of the population lived below the poverty line when they joined the World Bank. Since then the percentage has fallen significantly to about 20 per cent. It’s still high. But it’s a dramatic and significant drop in the number of people who are poor. The country has grown from a low-income country with a GDP per capita of less than 400 US dollars, to a GDP per capita of around 3,800 US dollars. It’s now a middle-income country. AW: What are current projects focused on?

MT: We’re still investing a great deal in transport. We were the pioneers of financing the East-West Highway and we still have about two or three projects along that particular highway: it is a long route. We build the portions of the road which require many bridges and present other challenges. We are also involved in energy transmission, making sure it gets from the site of its production to the consumers who need it, via reliable distribution lines.

We are working to make sure the law is favourable Then there is irrigation. Agriculture is extremely important in this country and we are supporting Georgia with irrigation networks so that agricultural production can continue all year round. We have the Georgia National Innovation Ecosystem (GENIE) project, which is responding to the needs of the global market. It’s a project that is helping increase knowledge, ICT, and providing the skills for people to start their own businesses. This project is fascinating because it’s more about technology. It’s more about tooling young people, school graduates, to be able to design and then actually launch products in the labour market. 70

You will have no doubt heard that Georgia welcomed a record number of tourists last year. This is because the government has worked very carefully at revamping the infrastructure in the regions, making the environment conducive for tourist visits. Visitors have somewhere to stay, they have restaurants, they have hotels. Right now, we’re doing some work in extending the road in Kazbegi up to the Holy Trinity Church, as well as some other projects. I have been to Telavi and Kakheti and seen for myself just how the communities have changed because of our regional development projects. As I said, we do not only carry out investments in infrastructure, we also help with policy development, reforms. We’ve supported the government in carrying out reforms which have improved the business environment. We are also working on making sure that the law is favourable for investors. And remember that Georgia is an outgoing country. They have free trade agreements with quite a number of countries. Georgia recently concluded new agreements with China, Japan, and Turkey amongst others. AW: And what of the role of the EU? MT: Being part of the Deep and Comprehensive Free Trade Area (DCFTA) has opened up markets for Georgia. This is a small country, so integrating itself into the global food chain is the way to go, and they’re doing that. We have just undertaken a systematic country diagnosis (SCD). The growth model that the country now has is good, the government just needs to continue doing what it’s doing. Our portfolio is robust because, within the context of development policy operations, we look at the education

OUTLOOK ON GEORGIA Photo: World Bank

sector, universal healthcare, at social protection, and areas in which the public sector really has to have a presence. Of course, the private sector can help build roads and other infrastructure sites, but when it comes to human capital and the social sector of this country, you first need investment from the government which the private sector will complement. And so the government’s reforms supported by us have been in this direction. That’s the third aspect of our support, in addition to investment loans and development policy: we’ve also been very, very active in producing knowledge. We’ve undertaken a number of studies which have served as underpinnings for investment. For example, we just produced an energy policy note which is looking at the investments that Georgia is making in hydro, thermal, and other forms of energy, in order to stratify that investment to see which areas give the best return. We’ve also done studies on jobs and skills. Because if you look at one of the issues that came up in the SCD it is that human capital is not quite aligned with the requirements of the job market. There are plenty of university graduates, but they do not always have the skills that today’s labour market requires. I am happy to report, however, that the Ministry of Education and Science understands the need to develop these skills. The labour market today is more about thinking, it’s more about designing things, with less need for the labour-intensive activities that we have been used to. Not that Georgia doesn’t have these skills, it does, just not always where they are needed. But change is coming. AW: Circling back to the Doing Business Report, it is clear Georgia is one of the leaders in the region. What do you think Georgia has done to become so much more successful than Armenia, Azerbaijan or even countries like Ukraine or Moldova? MT: Georgia has distinguished itself from the others because of its reformist tendencies. Let’s start with the banking sector, which in this country is very robust. Georgia has a very highly capitalised banking sector, and it has the lowest amount of non-performing loans. Over the past 10 years, 71

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they’ve put in place policies that have liberalised the economy. Georgia was one of the first countries to float its currency. So when you had all of these regional shifts and shocks, they didn’t quite affect Georgia as much as they did the neighbours, stuck on a fixed exchange rate. But Georgia’s exchange rate had been liberated, and reforms had been put in place. It is the capacity to change, the political will to pass tough constitutional reforms through parliament, that has put Georgia ahead of the others. The other aspect that I see in all of this is that success breeds success. The fact that they have opened up, that they allowed foreign direct investors to enter the market: this led to growth. And this growth keeps attracting more investment. AW: What do you think are the biggest challenges right now, both for the economy and on the political stage? MT: Besides the mismatch of skills and jobs, which I have touched on, I think one of Georgia’s greatest challenges now is its demography. The population is ageing and it’s declining. A couple of years ago it was 4 million. Now we’re at 3.7 million. It’s not so much because of emigration, it’s the ageing that is happening within the country, the birthrate is low. That presents many challenges. As people age, their need for social care, healthcare and social protection increases. Georgia has a universal healthcare policy, but the

cost of that is increasing exponentially. Why? Because you need to take care of these people. AW: From the perspective of foreign investors, is that the only concern or is there anything else that foreign investors should be worried about when it comes to doing business here?

The political will to make tough reforms has put Georgia ahead MT: During our discussions with the private sector, when we were doing the SCD, two issues came up. The first was the need for the right kind of skills, which I have already talked about at length. The other issue was making sure that more women get involved in the economy, especially in rural areas. Remember, women represent half of the population. Their active participation in the economy is extremely important. Just getting the numbers up from the female side. Because when women know how to do something, they often do it better than men. 72

AW: My final question is about the economic growth and the prospects for the years to come. How do you see things? MT: Our outlook for Georgia is positive. It has gone through some shocks over the past couple of years, but the outlook is great. At present, the economy is growing at 4.5 per cent, which is good. But, remember, before the crisis, growth was almost in double digits. Then the crisis hit and everything went up in smoke. But right now the economy is on an upward trend, and our advice to the government has been to prepare for the shocks, which it knows are coming. These things are cyclical; you better prepare. It makes you more resilient. Exports are increasing, foreign direct investment is on the up and the private sector is expanding. They are doing everything possible to develop the skills they need. They’re integrating into the global economy. They have all the right ingredients in place. All that is left is to maintain prudent macro-fiscal policies and open up the private sector a lot more. Invest where they need to invest and let the private sector take over in the areas where it does things best. Once all of that happens, the future for Georgia is bright.

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Interview with the Minister of Finance Mamuka Bakhtadze, the Georgian minister of finance, spoke to Andrew Wrobel about prospects for his country’s economy.

Andrew Wrobel: If we look at Georgia’s economy, a decade ago the growth was truly robust — over 12 per cent in 2007. In 2006, it grew again at 6.2 per cent in 2010 but since then the growth has slowed. In 2018, the forecast is over 4 per cent — better, but there is still a lot of room for improvement? Mamuka Bakhtadze: Well, the growth rate of real GDP is estimated to be at 4.8 per cent in 2017. This is decent, but longer term projections are much more impressive. Our estimate on potential growth is around 5 per cent. The International Monetary Fund (IMF) forecast is 5.5-6 per cent in the medium term, attributed to our very intensive economic reform programme. The IMF also says that Georgia will be the best performing economy in the region, unlike the years 2004-2012, when many of our neighbours were growing faster. At that time we had lowest growth rate in the south Caucasus region. The most important achievement of our economy growth over last several years is its inclusiveness. Unemployment is on a downward trend and poverty is also falling, unlike in the past, especially between 2004 and 2007. I also want to underline that the quality of economic growth is much better. Economic growth is export driven and the current account deficit is shrinking. AW: So tell me what has stopped the economy from going back to that robust growth in the last years? MB: We have to bear in mind that the years between 2014 and 2016 were unfavourable globally, especially 2016 which was the slowest year of growth since the global financial crisis. So this slowdown is attributable to the external environment. Development in the region was very hard. Countries in the

region were experiencing recession or were growing at close to zero rates. In these circumstances 2.8 per cent growth looks quite decent. We became the leading country in south Caucasus region in GDP per capita terms and also in terms of GDP growth potential in the medium term. As I said earlier, our economic performance is determined significantly by the external sector. Slowdown in the global economy was the main cause of our growth. Besides this, ongoing and planned reforms guarantee less vulnerability and more inclusive growth.

Ongoing reforms guarantee more growth AW: How would you like to leverage that going forward? MB: Our response to these challenges is structural reform. The government has elaborated the Four Point Reform Programme plan aiming at promoting savings, productivity and export growth, diminishing vulnerabilities and guaranteeing more robust, healthy and inclusive economic growth. The reform programme has been positively assessed by international organisations. The clearest evidence is the new programme with the IMF which was signed in 2017 and saw our credit rating upgraded by Moody’s to Ba2. Also, all the international financial 74

organisations and credit rating agencies underline the importance of our reforms. AW: We see the situation in Russia has improved, the free trade agreement with the EU is in place, another free trade agreement with China has just come into force. How much will these help? MB: From 2017 we have been observing a global economic recovery. This pick-up in growth is expected to be trade driven. In these circumstances countries open to international trade will benefit more. Therefore, free trade agreements will be especially important in coming years. Improved access to new markets is important not only for export promotion, but also for attracting more foreign investment. We are a country with a business friendly tax policy and an attractive business climate: we are ranked ninth in the World Bank Ease of Doing Business report. AW: How do you see the public finances, given that public debt has more than doubled since the financial crisis, close to 45 per cent of GDP in 2016? MB: These statistics are not fully correct. Our debt is at an affordable level of 43 per cent. The major part of the debt is concessional, making the weighted average interest rate as low as 2 per cent. Our average —over the last 15 years — is around 32 per cent. So 43 per cent is not a very big deviation. We acknowledge, of course, that a big portion of government debt is in foreign currency and therefore we have initiated a comprehensive long-term plan to decrease it. We are planning to gradually switch on domestic debt, which has the double objective of diminishing exchange rate sensitivity, and developing the domestic capital market.

OUTLOOK ON GEORGIA AW: What other challenges do you see on the horizon? MB: The main challenges for the Georgian economy are the vulnerabilities in the external sector. We are running a high current account deficit, the countryâ&#x20AC;&#x2122;s foreign debt is around 95 per cent and the rate of dollarisation is high. We acknowledge this, and the aim of our reforms package is to address these vulnerabilities. Our reforms are targeted to promote productivity and savings, which will lead to a sustainable reduction of the account deficit. We have already seen significant results. The current account deficit came down to 2.9 per cent in the third quarter of 2017 from 12.8 per cent in 2016. We have very tangible results in the de-dollarisation process, which began 2017. The dollarisation rate has decreased by about 7-8 percentage

points. This is a very good start, however we know from international experience that de-dollarisation is a long term process.

is important that FDI is the source of innovation and technology and results in productivity growth and export expansion.

AW: If we look at the World Investment Report 2017, between 2014 and 2016 the country attracted about 1.6 billion US dollars of FDI on average which is more than the pre-crisis annual average of 1.1 billion US dollars. How dependent on FDI is Georgian economy?

AW: When we look at the emerging Europe countries, Georgia is the leader when it comes to the ease of doing business. What reform would you see necessary to further strengthen the countryâ&#x20AC;&#x2122;s position and attract FDI?

MB: FDI is an important driver of economic growth in emerging countries like Georgia. We have very positive developments in this respect. With a persistently improving business environment in the country we expect strong FDI performance for the coming years. With a decreasing current account deficit, however, our dependence on FDI is small. For us it is not quantity that matters but the quality of FDI. It

Photo: Ministry of Finance

MB: Of course, the ninth place we have is very decent but hard to defend. However, with the reforms that we have in the pipeline we are optimistic and we expect to move even further ahead. An automatic VAT credit refund system, and insolvency reform are coming soon, as well as several important reforms that will ease tax administration.

OUTLOOK ON GEORGIA

Georgia’s China Factor Emil Avdaliani

China has so far not invested as much in Georgia as it has in Central Asia, but with the development of the Belt and Road Initiative, more can be expected.

eorgia has historically been at the edge of empires. This has been both an asset and a hindrance to the development of the country. An asset because Georgia’s difficult geography and a distant location from global centres prevented major powers from invading and keeping the country permanently under their rule. Hindrance because Georgia’s geography requires major investments to override its mountains, gorges and rivers. This geographic paradigm has been well in play in shaping Georgia’s geopolitical position since the breakup of the Soviet Union in 1991. Ever since, Georgia has been playing a rebalancing

game through turning to other regional powers to counter the resurgent Russia. Turkey, Azerbaijan, Iran – partly and bigger players such as the EU and the US are those which have their own share of interest in the south Caucasus. However, over the past several years yet another power – China with its still evolving Belt and Road Initiative (BRI) – has been slowly emerging in the South Caucasus. But despite the fact that China is rapidly increasing its economic presence in Georgia, which ultimately could turn into larger Chinese security involvement, Beijing’s investment and interests in the region still lag behind what China has been doing in Central Asia, Pakistan or other regions upon

which the BRI initiative has an impact. Another interesting aspect is Georgia’s balancing act, whereby Tbilisi wants to use growing Chinese influence to further balance Moscow’s military power. However, here too not everything is that clear-cut, as Moscow and Beijing could also cooperate in the south Caucasus as they currently do in other regions, for example in Central Asia. China has close trade contacts with all the south Caucasus countries and has invested extensively in the region. Among those relationships the Georgian-Chinese cooperation does indeed stand out but is not a particularly recent phenomenon. After the collapse of the Soviet Union, Chinese immigrants to Georgia were driven by Chinese stateowned investment activities in the region. In the early 2000s, the majority of the migrants were involved in corner shop and market vendors’ businesses, as well as restaurants, whereas after 2010, construction workers accounted for the most Chinese migrants. For Georgia, China is now its third-largest trade partner (the first two places are held by Turkey and Azerbaijan; Russia is fourth). Trade between the two countries has significantly increased over the past 10 years. If in 2002 bilateral trade was a mere 10 million US dollars, in 2014-2015 it reached 823 million US dollars. Moreover, in 2017 China and Georgia finally signed a free trade agreement. The country also hopes that its position at the Black Sea with several ports such as Batumi, Poti and Anaklia will make it a logistics hub for the entire region and particularly for China’s BRI initiative. Within the BRI context China only recently set its eye on the transit potential of the South Caucasus and its valuable infrastructure. This

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interest is largely conditioned by China’s BRI initiative, which is a multi-billion-dollar project, according to which the country’s east will be reconnected (as in ancient times) to Europe via the shortest distance, be it through southern Russian, Central Asia, or the South Caucasus and the Black Sea (although that is not the only corridor the Chinese are working on). Georgia can boast Black Sea ports, an east-west highway which essentially connects Azerbaijan and the Black Sea coast and existing and upcoming railway projects (Baku-Tbilisi-Kars). Indeed, from the Chinese perspective the two most valuable projects Beijing is eyeing in the South Caucasus are related to Georgia: 1) The upcoming opening of the Baku-Tbilisi-Kars railroad which will allow 45 per cent faster delivery of containers, freight and passengers from Asia to Europe; 2) Expanding the EastWest Highway, Georgia’s main land road, in cooperation with the World Bank, the

Asian Development Bank, and other organisations. China has been testing the South Caucasus route since the announcement of the Belt and Road Initiative in 2013. For example, in 2015 the efficacy of the connection between Xinjiang province in China to the port of Poti in Georgia, via Kazakhstan and Azerbaijan was tested. Railway cargo loaded in China on January 29 arrived in Georgia on February 6 of the same year. However, almost a third of the time in transit was spent handling administrative obstacles. Several other tests too were carried out to prove the possibility of the trade and transit route through the South Caucasus. However, despite the advantages Georgia has as a transit country there are still numerous questions. It could be said that overall China still remains ambivalent about the Caucasian stretch of the Silk Road. It is true that Beijing is interested in the strategic relevance of 77

the region, but it nevertheless recognises that commercial engagement remains tentative. The South Caucasus route still remains out of major transit and trade routes China is heavily investing in. Analysts do forget that the South Caucasus route does not feature much in the following corridors anticipated under the BRI initiative — China to Europe through a New Eurasian Land Bridge; the China-Mongolia-Russian Corridor and the Central and West Asian countries. The 21st Century Maritime Silk Road mainly relies on Chinese coastal ports: the China-Indochina Peninsula Corridor and China’s links with the South Pacific Ocean through the South China Sea; China-Pakistan trade corridor and the Bangladesh-China-India-Myanmar trade route. Compared to major Chinese-financed infrastructure and energy works completed in Russia, Kazakhstan, and Uzbekistan over the past two years, state-owned Chinese companies have

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yet to secure any similar scale projects in the Caucasus region. Indeed, the Chinese are building major road and railway infrastructure in Uzbekistan and are extensively investing in Kazakhstan and Kyrgyzstan. In Georgia, for the moment, Beijing is largely interested in existing and upcoming infrastructure and is investing into construction in Tbilisi, Kutaisi and other major cities. Possible wider geopolitical ramifications for Georgia Tbilisi sees intensive relations with China as yet another tool to somehow diminish Russian resurgence. With its pro-Western course maintained the country dearly needs Chinese investment as it will foster the creation of jobs and other economic opportunities. So far the Chinese have built a new city on the outskirts of Tbilisi, have invested in Kutaisi – the second-largest city in the country, and own three quarters of the shares in Poti’s Free Industrial Zone. Although it is difficult to see the importance of investments in Tbilisi and Kutaisi, in-

vestment in Poti is significant. An ordinary observer could see a clear eastwest line to the Black Sea dotted with Chinese presence all along the route. Surely it is for the moment difficult to ascertain what Chinese moves will be in the future, but it is also clear that as Russian forces move the demarcation line of the breakaway South Ossetia to the south, closer to the east-west highway, China will be more worried as it endangers its economic interconnection with Europe. Beijing will either have to find a consensus with Russia or get more involved security-wise. And there is already a precedent for China getting involved militarily in the territories important to its BRI project. For example, in Central Asia China has made some steps which potentially could challenge Russia’s economic and political influence in the region. We know that China is already the largest trade partner of each of the Central Asian states and that Beijing has deepened its military and security ties with Tajikistan and partly with Kyrgyzstan mainly by holding military exercises and building military infrastructure on the Tajik-Afghan border.

For Tbilisi it will be a boon to its security if China is more involved in the South Caucasus. However, for the moment it might only be wishful thinking that China will openly confront Russia anytime soon. Even in Central Asia, despite inroads, Moscow still does not openly say that Beijing is compromising the existing order. Another reason to think that Georgia will not so easily become a place of confrontation between China and Russia is the fact that the country is only a small piece in China’s BRI. Also, although Beijing will pay more attention to the region it may not actively invest resources into Georgian security beyond law enforcement and counterterrorism cooperations, as in Tajikistan and Kyrgyzstan. This would be the case especially if its actions would clash with Russia’s. There are several other transit routes in China’s grand BRI project. As such the situation for the moment could be characterised as mixed. Beijing is definitely increasing its economic influence in Georgia. However, the level of investment is below that of Chinese investment in Central Asia or Pakistan. Beijing is more interested in existing and upcoming infrastructure, while its relations with Russia are unlikely to be compromised if Russia does not threaten the major East-West highway.

Emil Avdaliani teaches history and international relations at Tbilisi State University and Ilia State University. He has worked for various international consulting companies and currently publishes articles focused on military and political developments across the Eurasian continent.

OUTLOOK ON GEORGIA

Georgia Makes Waves With Anaklia Deep Sea Port Shakhil Shah Anaklia Deep Sea Port is the biggest infrastructure investment in Georgia's history. It will consolidate and strengthen the country's position as a transit hub, and boost its own exports.

his is where Europe meets Asia, and that is what matters most. […] It is here and now that a new Georgia is being born. […] This place today lays the foundation of a new Georgia,” said Prime Minister Giorgi Kvirikashvili on December 24, 2017, launching construction work on Anaklia Deep-Sea Port. “Anaklia port is very important for Georgia as it will position the route via the Caucasus on the radar of China and Europe,” Bruno Balvanera, director for the Caucasus, Moldova and Belarus at the European Bank for Reconstruction and Development (EBRD), tells Emerging Europe. “It will attract the further interest of foreign investors to develop a value chain route. It will consolidate Georgia as the logistics centre for the Caucasus. It will also consolidate its ties with both Europe and China as well as its immediate neighbours. All in all, it’s a very strategic project that can be a game changer in the medium term.” This 2.5 billion US dollar project, the largest in the country’s history, marks the beginning of the country’s transformation from a transit country into a logistics and industrial development hub. “The Anaklia Deep Sea Port is a long awaited project in Georgia,” Levan Akhvlediani, CEO at the Anaklia Development Consortium (ADC), a consortium of Georgia’s TBC Holding and Conti International — a US-based construction and development company which has been in business since 1906 and runs a number of large scale ventures worldwide. “There have been multiple initiatives and attempts to develop and construct a deep-sea port in Anaklia. However, none of them had been realised until 2016 when the ADC started developing this project.”

The first phase, estimated to cost 540 million US dollars and scheduled for completion within four years, will include construction of a 1.6-kilometre breakwater and a 625-metre quay. By 2021, Georgia is expected to handle 10,000 twenty-foot equivalent unit (TEU) as the port will have a depth of 16m and will be able to accommodate larger vessels. This will be a huge step as currently the Georgian ports can only handle a maximum of 1500 TEU vessels. “The Anaklia Deep Sea Port will receive its first vessels by 2021 and will fully change the transportation and logistics landscape in Georgia by offering state of the art, reliable infrastructure and competitive costs,” said Ketevan Bochorishvili, CEO at Anaklia City and a former deputy minister of economy. “Complemented by the 3.5 billion US dollars to be spent by the government to upgrade the country’s road and rail infrastructure, Anaklia port will become a key transportation node between western Europe, the Caucasus, central Asia and north-western Iran,” Ms Bochorishvili adds. In July 2017, the ADC appointed Seattle-headquartered SSA Marine, one of the largest terminal operators in the world, as the operator for Anaklia Deep Sea Port. The company oversees more than 250 strategic operations across five continents, servicing 27.2 million containers and managing terminals in nine different countries. “We are proud to be a partner in such a promising and ambitious project such as Anaklia Deep Sea Port. A modern deep-sea, all weather port is exactly what Georgia requires to become a true logistics hub,” says Bob Watters, senior vice-president at SSA Marine. “The prospects for cargo growth in Georgia and central Asia 80

OUTLOOK ON GEORGIA

along the Southern Corridor are very exciting.” “The fact that such a powerful American company as SSA Marine is investing in Georgia is itself a strategic and important precedent for our country,” says Mamuka Khazaradze, founder of the ADC. The Anaklia Deep-Sea Port might also be an interesting investment opportunity for the Chinese. “China is now mulling pulling its subsidy support covering 40-50 per cent of the cost of shipping via the Trans-Siberian due to a shortage of capacity on the Russian rail network and incredibly slow train speeds,” states Global Risk Insights’ Belt and Road Initiative report, published in January 2018. “Russia has failed to convince China to commit financing for its modernisation plan for the Trans-Siberian and Baikal-Amur Mainline rail routes, and Russia’s Ministry of Transport is leaning towards ceasing Belt and Road cooperation with China unless financing needs are met by Beijing.” With this in mind there is additional pressure and potential for increased trade through the Anaklia Deep-Sea Port via the Trans-Caspian Trade route, especially with the recent completion of the Baku-Tbilisi-Kars railway. China will be looking at this as a potential

opportunity to increase trade and deliver cargo to Europe as well as other destinations more efficiently. This also explains China’s interest in investing in the port. Shanghai Zhenhua Heavy Industries (ZPMC) has committed to investing 50 million US dollars to the project. They will provide the project with various equipment needed to control a modern container terminal. At the same time, the Georgian government is counting on a further development of the area around the port. “This port will offer the populations of both the region and Georgia with opportunities to start their own businesses and brand new endeavours. […] Thousands of hectares around this port will be developed to house production, warehouses, logistics, and residential areas,” Prime Minister Kvirikashvili said in December 2017. “The ASC is investing in the development of the hinterland territory to transform it into city-scale special economic zone (SEZ), whose special status is defined in Georgia’s Constitution,” Ms Bochorishvili tells Emerging Europe. “It is to become the regional logistics and business hub. In the frames of the initial stage we plan to develop the logistics and industrial parks within the territory of about 400 hectares, positioned as regional logistics, dis-

Photo: ADC

tribution and transportation centres. The Anaklia SEZ will become the frontier business centre for international companies to serve the consumer markets of the Caucasus, central Asia and north-western Iran.” With the development of the SEZ the local economy is expected to experience major growth through the port and all other infrastructural developments that the government have been making in recent years. Ms Bochorishvili says that the economy will grow based on three major pillars of demand: the demand from newly arrived Anaklia-citizens, the demand from port-related activity, including hinterland transport, and the demand from the special economic zone, which will be a driver for employment generation, export development, foreign direct investment, technology transfer, economy transformation from agriculture to manufacturing, experimental environment for countrywide reforms and maximisation of value addition in Georgia. “With low labour costs, a business friendly environment, a growing economy, a suitable location, government incentives and favourable living conditions, the SEZ in Anaklia will have a compelling argument to draw foreign companies to Georgia,” she concludes.

OUTLOOK ON GEORGIA

Georgia’s Energy Sector Levan Pavlenishvili and Norberto Pignatti

Attracting more investment is key to the further development of the Georgian energy sector, and that will require further reform, especially in the electricity market.

he development of Georgia’s energy markets over the past several years has been influenced by a number of factors. Relatively mild economic growth (3-5 per cent annual growth in 20132016) influenced energy consumption and supply patterns. The main drivers of structural and regulatory changes in Georgia’s energy markets were the EU-Georgia Association Agreement signed in June 2014, and Georgia’s membership of the European Energy Community, which began in October 2016. These developments will lead to changes in the electricity, natural gas, and crude oil markets, as well as energy efficiency and environmental regulations. Most of these regulatory changes are expected to be implemented by 2023. Furthermore, key EU directives for the electricity market will be implemented by the end of 2018, and for natural gas by the end of 2020. Focusing on the electricity market, in 2017 Georgia had an 8 per cent growth in total consumption (reaching 11,876 millon. kWh), with a minor decrease in total generation (reaching 11,531 million kWh – Figure 1). Season-

ality in electricity generation remains one of the key challenges for the market. Specifically, due to a large amount of hydro generation (79 per cent of total supply in 2017), and higher electricity demand in winter months, every year there is a gap between generation and consumption from September to April. In 2017, this gap ranged between 66 and 279 million kWh. During this period, the primary sources of electricity imports for Georgia (Georgia imported 1,497 million kWh in 2017) are Azerbaijan and Russia. In contrast, most of Georgia’s electricity exports (in 2017 Georgia exported 686 million kWh) go to Turkey, Armenia and Russia. In 2017, electricity import prices varied between 5.2¢/kWh and 3.5 ¢/kWh, while export prices were between 4.5¢/ kWh and 1.1¢/kWh. Interestingly, since February 2016, Georgia started playing an active role as a regional electricity hub, transiting electricity from Azerbaijan to Turkey, Russia to Armenia and Russia to Turkey. In 2017 Georgia transited (254 million Kwh) less than a third of 2016’s transit capacity (850 million kWh). Since 2012, 23 new power plants have been brought into operation,

Figure 1: Electricity generation and consumption 14,000

mln. kWh

12,000 10,000

9,698 9,379

10,059 9,690

10,370 10,170 10,833 10,382

11,574

11,027

11,531 11,876

8,000 6,000 4,000 2,000 0

2012

2013

2014

2015

2016

Source: Electricity System Commercial Operator

2017

with 777 MW of installed capacity; not yet enough to cover the country’s consumption-generation gap. Most of these investments were based on power purchase agreements between generators and state-owned market operators. An International Monetary Fund mission in 2015 highlighted these government guarantees as potential ‘fiscal risks’ for the country. Attracting more investment in generation remains vital for Georgia. One possible way to increase the attractiveness of the Georgian electricity sector to foreign investors lies in reforming its electricity market. The upcoming market reforms associated with the implementation of the Association Agreement with the EU (for example, unbundling vertically integrated electricity distributors and generators) are expected to help create a competitive electricity market, and hopefully will attract more investments in power generation. In 2017, the Georgian National Energy and Water Supply Regulatory Commission (GNERC) recalculated new tariffs for all retailers operating in the natural gas market. Natural gas tariffs increased for most regulated retail customers in July 2017. As for unregulated retail customers (some households and businesses), tariffs are set by the retailers themselves. This is frequently one of the reasons for cross-subsidisation between customer groups, which is one of the most challenging aspects of Georgia’s natural gas market. This type of structural problem is expected to be resolved by the end of 2020, when Georgia will implement EU directives on natural gas market regulations. Furthermore, in 2016, Georgia signed an agreement with Russian giant Gazprom, setting new conditions for natural gas transit. Instead of receiving a share of transited natural gas, Georgia will receive a monetary payment for the transit service. This creates an

OUTLOOK ON GEORGIA

Levan Pavlenishvili is a senior researcher at the Energy and Environment Policy Research Centre and Norberto Pignatti is Centre's head.

Figure 2: Natural Gas Imports

450 400 300

mln. USD

expectation that from 2018, when the agreement goes into full force, Georgia will start importing all its natural gas from Azerbaijan. In 2017, Georgia imported natural gas worth 345 million US dollars; that is, 11 per cent more than the year before (Figure 2). Another important challenge for Georgiaâ&#x20AC;&#x2122;s natural gas sector in the coming years remains the diversification of suppliers. Some of the positive changes in this direction are: (i) the development of Shah Deniz 2 Field in Azerbaijan, and (ii) the extension of the South Caucasus pipeline under the Southern Corridor project supplying natural gas from Azerbaijan to Europe through Georgia. Some new possibilities, such as the development of the Trans-Caspian pipeline might emerge, potentially creating alternative import sources.

303.9

304.2

2012

2013

355.9

409.5 310.4

344.7

2016

2017

250 200 150 100 50 0

Source: Geostat

2014

2015

OUTLOOK ON GEORGIA

The Lady of the Fields “There is no shame in being a farmer,” says Nino Zambakhidze, the CEO of the Georgian Farmers’ Association (GFA). Georgia’s Young Global Leader for 2017, named by the World Economic Forum and honourable country coordinator of the US State Department’s Invest for the Future Programme, empowering women entrepreneurs and business owners across Europe and Eurasia, she talks to Andrew Wrobel about the potential of Georgian agriculture and the need to invest in young farmers.

ith her businesses, the association, and her television show, Nino Zambakhidze is a busy woman. She’s forced to cancel on me when we first set up a meeting during my stay in Tbilisi. Fortunately, we manage to catch up before my departure and schedule a follow-up when she’s in the UK a few weeks later, to speak about women’s economic empowerment. Her story is both eccentric and inspiring. “I had a business partner in my tea and coffee business, which I still own. He got drunk and called me to announce that he wanted to buy two cows. Two weeks earlier, my two boys had suffered from food poisoning be-

cause of dairy products they had consumed and my mother was drilling the idea into my brain to find a good cow that can produce milk for my family. So without much thinking, I agreed, and that’s how I got involved in farming.” Nino is now the owner of a cheese factory, a 100-milking-cow farm, an apple orchard, a cold storage facility, an artificial lake and a training centre for farmers. “I need to tell you a secret: I hate dairy products,” she almost whispers. Is it an obstacle for her to make farming her passion? Clearly not. She also overcame quite a few challenges when she needed a loan and the bank asked her to come back with her husband to prove she was able to pay it off. “I am proud to call myself a farmer. I am a farmer who moved from a city to the village, and one of the biggest

Photo: Nino Zambakhidze

farmers in the country. When I did that I quickly realised that farmers faced a lot of challenges that they could not solve themselves. There were three of us and in 2012, we decided to set up the Georgian Farmers’ Association. Right now we’re uniting 4,000 members all over Georgia, all business-oriented.” They first started by advocating for farmers’ rights and linking them to the market, but these were not as challenging as the stereotypes were. “Farmers were ashamed of being farmers. After the collapse of the Soviet Union, young people tried to hide the fact that their parents and grandparents were farmers. They didn’t want to be called peasants, which historically refers to people with hardly any education living in villages. We had to destroy that stereotype.” So the term ‘farmer’ was reinvented, by explaining to people that farmers were patriots who fed every single person and that they should be proud of doing so. Migration from villages to cities was another challenge. With the help of donor organisations, they started the GFA Junior programme. “We created a mobile application for them, Agronavti, which provided them with all possible information about where they could sell their products online, market research and sectoral news.” They had also promised to help them find sustainable buyers. “We reached out to Adjara Group Hospitality — the biggest hotel chain in the country — and they agreed. They said that in the hospitality business quality and artisan food is a critical element and they also help them understand how to achieve that good quality.” This has helped farmers not only to sell but also to acquire funding in order to develop, because their busi-

OUTLOOK ON GEORGIA Photo: Nino Zambakhidze

nesses were more transparent — they eventually had bank accounts and a credit score. “We’ve now contracted around 300 farmers and as Adjara Group expands their hotels, we’ll increase the number of contracts.” Over the years, the association has grown exponentially but there is still room for growth. According to estimates, there about about 800,000 farmers in Georgia, about 47 per cent of the entire rural population, contributing 9 per cent of the country’s economy. “Following the collapse of the USSR, most people in Georgia received small plots of land from the then president of Georgia, Eduard Shevardnadze. Most farmers become so not because they wanted to be farmers and peasants but because they were forced to do so. This

has to change. What is now needed is rural development. Then those smallscale farmers, or just households with a small plot of land, will be able to switch to different activities.” In February 2017, in the framework of the European Neighbourhood Programme for Agriculture and Rural Development (ENPARD), the EU launched a new phase of training programme for managers and members of agricultural cooperatives. “We have very good, successful outcomes - and a few failures too - but I think that there is development of business-oriented and smart climate agriculture through those agricultural cooperatives. We have a huge challenge in terms of education. That’s missing because after 20 years of stagnation a qualified agronomist or veterinarian is 85

very hard to find. Another challenge is road infrastructure, while yet another is flexible insurance, as hardly anything now is insured. Finally, access to finance needs to improve. To the banks we are still high-risk clients, especially people living in villages.” But challenges are Nino’s speciality. Now a renowned business woman, she was penniless two decades ago after her first jeans business had failed and she still had to pay back the 20,000 US dollar loan she had taken in the United States. Then, in her early twenties, she promised she’d never start her own business ever again. Georgian farmers are happy she changed her mind.

OUTLOOK ON GEORGIA

Georgia’s Tourist Boom: Ready or Not? Craig Turp

More than 8 million people will visit Georgia this year, making tourism one of the largest sectors of the economy. Making sure that as many Georgians as possible benefit from the tourism boom is crucial.

t was the high heels which first aroused suspicion. Most tour guides in my experience eschew them: they are not conducive to long hours of walking from cathedral to café, museum to monument, often over cobbles and up endless flights of stairs. The large black Mercedes– complete with tinted windows – to which the young lady in the high heels led me confirmed what I had begun to suspect. This would be no walking tour of Tbilisi. We would be seeing the Georgian capital from the back of a car. That was 10 years ago. A tour of Tbilisi had been arranged for me by the city council, which was proudly

launching its new urban brand: The City That Loves You – a slogan which evolved over the years to become today’s City Full of Life. Truth is, there simply weren’t many visitors to Tbilisi – or to Georgia as a whole – a decade ago. And those who did venture this far were often business people with little time, who wanted just what I had been provided with: a whistle-stop tour of the capital complete with elegant companion. Georgian tourism first took off in 2012, jumping from 2.8 million visitors to 4.4 million in the space of 12 months. But it was 2017 which really placed the country on the map: more than 7.5 million people visited Geor-

gia, an increase of 18 per cent on 2016. The number of visitors from Western Europe increased by almost 30 per cent. “Yes, Georgia is a relatively new travel destination for western European tourists,” says Rusudan Mamatsashvili, the impressive young deputy head of the Georgian National Tourism Association (GNTA). “We are focusing on this market more and more, and have seen considerable growth from several important countries, such as Germany, the Netherlands and France with overall numbers from western Europe increasing 28 per cent this year.” “The total income from international tourism amounted to about 2.7

OUTLOOK ON GEORGIA

billion US dollars in 2017,” adds Giorgi Chogovadze, boss of the GNTA. “We have even greater expectations for this year. We expect more than 8 million international visitors to arrive, spending over 3 billion US dollars.” An increase in the number of flights serving Georgia’s two main airports, at Tbilisi and Kutaisi, has helped. But whereas Tbilisi International has benefited from highly visible investment in recent years, Kutaisi retains a rather provincial feel. “It’s awful,” said one Italian visitor I spoke to in December. “There is nothing to do. Nowhere to eat, nowhere to drink, and the shuttle buses to and from Tbilisi are small, filled with smoke and almost certainly highly dangerous.” Fortunately, a new terminal is planned to open in 2020, which will be served by direct trains from Tbilisi. It is at Kutaisi that Wizz Air, Emerging Europe’s largest airline, has based itself. The Hungarian company now serves 19 destinations from Kutaisi – capacity expanded by 77 per cent in

2017 - and plans to add more routes in 2018. From May it will fly to Barcelona, Paris, Prague and Rome. Flag carrier Georgian Airways – based in Tbilisi will also be adding a number of routes this year, including Barcelona, Berlin, Brussels, Cologne and Paris. Altogether, Georgia’s three international airports – the third is on the Black Sea coast at Batumi – served 4.03 passengers in 2017, an increase of 43 per cent on the previous year. News network CNN has hailed Tbilisi as “an almost overnight mustsee destination, the city increasingly becoming one of the world’s most coveted hubs for fashion, arts and creativity.” But there is far more to Georgia than Tbilisi. In fact, those in the know insist that the best of Georgia is to be found outside the capital. “There’s Ushguli, a community of four villages located at the head of the Enguri gorge in Svaneti. Recognised as the Upper Svaneti UNESCO World Heritage Site, Ushguli is one of the highest continuously inhabited settlements in Europe,” 87

says Rusudan Mamatsashvili “and don’t forget Tusheti - the most picturesque and mesmerising region of the country, tucked away at the foothills of the Caucasus Mountains.” Ms Mamatsashvili is keen to underline the opportunities tourism can offer to many of these remote and rural communities in Georgia. “The country’s relatively small size and strong historical ties with agriculture mean that the development of rural, agro and eco-tourism is highly beneficial. Overall, I strongly believe that a number of regions in Georgia can become highly competitive offering exactly this kind of holiday.” Private enterprise has not been slow to seize upon these opportunities. Nino Kvernadze is project manager at the environmentally-conscious Adjara Group, which currently operates four hotels across Georgia, including one at Stepantsminda, about a dozen kilometres from the Russian border and the Kazbegi National Park. “Our main focus isn’t the quanti-

OUTLOOK ON GEORGIA

ty of tourists but the quality of each person’s stay. We want people to visit Georgia for our hospitality, culture, traditions, history, various beautiful sites and of course food and wine,” said Ms Kvernadze, who has worked hard to cultivate productive relationships with local farmers. “We are very proud of our partnership with the Georgian Farmers’ Association,” she tells Emerging Europe. “We don’t just strive to deliver the highest quality of food and service to our guests, but we also work rigorously behind the scenes to ensure our food and wine is grown and produced by local farmers. By working alongside the Farmers’ Association, we provide a consistent demand for locally grown produce. We believe the most important aspect of farming is supporting it. We want to aid continuous growth in quantity, quality and consistency. We encourage our chefs to discover local produce and to incorporate it into our

restaurants’ menus. Within our restaurants we look to recognise individual farmers who contribute to the various dishes served, by providing quality produce. Cuisine is a high driver in modern tourism and by improving the quality of food and wine served, it will benefit not only our business, but the local community as well. By supporting farming, we hope to encourage other establishments within the Georgian hospitality industry to join us and help develop local agriculture.” One of Adjara’s next projects will be a property in Gudauri, Georgia’s leading ski resort (indeed, we named it Emerging Europe’s best ski resort in December 2017). Georgians have been skiing here for decades, but, with a few exceptions - it has only recently fallen onto the radar of international skiers, not least as it offers one of Europe’s cheapest lift passes: just over 50 US dollars for a week on the slopes. One of those exceptions is Marc

Openshaw, a former British ski instructor who has skied in more than 30 countries across the world. “It was in either 1988 or 1989 that I first heard of Gudauri,” he tells Emerging Europe. “I used to avidly wait for the release of the new season’s ski holiday brochures, and one year in the UK the big story was that skiing was now possible in the Soviet Union. The resort was Gudauri I think they had just built the first gondola lift. It was exciting, so I went, and remember heli-skiing out of a specially-chartered Red Army helicopter. Unfortunately, few others ventured that far, and by the next year Gudauri had gone from the brochures, as quickly as it had appeared.” The resort has developed since then, but according to Piotrek Rząca, a Polish investor who runs a hostel in the resort, more needs to be done. “It’s a great resort,” he says, “but there are some problems. There is little common infrastructure, no ski bus, and maintenance of the slopes is not the best. There is also very little apres ski. But the resort is still developing, and next year new lifts and another 20 kilometres of pistes will open.” As a foreigner who invested in Georgian tourism – he also runs a hostel in Tbilisi and publishes maps to the city - Mr Rząca has witnessed great changes since arriving in 2011. “What brought me here initially was curiosity, as well as freedom and flexibility,” he says. “I soon discovered that Georgia is a very easy place to do business.” As for the increase in visitor numbers, Mr Rząca says it is “highly visible.” “Georgia is diverse by nature, friendly to tourists and safe. There is a lot to see. Sometimes, however, I do get the impression that Georgia isn’t fully ready for so many tourists.” Ready or not, what Georgia can guarantee is a warm welcome. “I have yet to meet a person who didn’t enjoy their trip to Georgia,” says Nino Kvernadze. “Visitors can’t get enough of the country and want to come back for more. Georgians are very hospitable people so we make sure our guests have the best time and get to fully experience our country. There are still so many people that haven’t had the pleasure of discovering Georgia, but in some way that just makes it an even more exotic place to travel.”

OUTLOOK ON GEORGIA

Tourism: Driving Real Estate Growth Shakhil Shah

The increasing number of tourists visiting Georgia need places to stay. That is creating a boom in real estate development, especially hotels.

he recent boom in the hospitality and real estate sector in Georgia has been attributed to the investments made by multinational companies across the country, and in particular to areas where tourism once flourished, sparking a revival in these regions. Tourism throughout Georgia has boomed over the past 18 months, something we look at in depth on page 86. “Borjomi — a historical destination for the entire Soviet Union had been long forgotten,” said Leah Rusia Beselidze, head of valuation and advisory at Cushman and Wakefield Georgia. “There was nothing there, no hotels, only guest houses, family hotels, hostels, and families renting out their apartments. When Rixos Borjomi opened in 2015, development really accelerated only a year and a half or two years later — the Crowne Plaza and the Golden Tulip opened. The locals are now converting their family houses and homes into guest houses, which are better served and better facilitated.”

A lot of the developments like those mentioned by Mrs Beselidze are made possible by the incentives and support that the Georgian government have in place. Programmes such as the JSC Partnership Fund (PF), Georgian Co-investment Fund (GCF) and Free Tourism Zones. The Tsinandali Radisson Project in the Kakheti region is another project carried out in partnership with PF, which has had a domino effect on development in neighbouring Telavi. Following on from what has happened in Borjomi, the Golden Tulip also began construction of a hotel in Tsinandali. “Telavi had been interesting previously as well with all the chateaus, and Lopota, for example, when Lopota started off, it had only 17 rooms. Now, they have over a hundred, and they are continuing to expand. The fact is that it only takes one well-thought investment into a new region, and then others follow very quickly,” Mrs Beselidze adds. Cushman and Wakefield are expecting the same trend to follow into Abastu-

mani and across Georgia as a whole. All that is really needed to drive investments further is a well-thought out plan and potential risk investing in an area where at present nothing exists. However, at the end of the day those risks paid off as more people and companies are investing in those areas. Whilst there have been many developments of luxury hotels in Georgia, Rusudan Mamatsashvili, first deputy head of the Georgian National Tourism Administration believes that there are great investment opportunities for budget – three, three and a half star hotels, as it is less saturated with key development locations being in Tbilisi, Kutaisi, and Batumi. She also added that over 200 new accommodation units have opened (or will open) in Georgia in 2017 and 2018 across the full spectrum of luxury, boutique, budget and hostels. “Regions of Georgia are becoming highly popular destinations as well, exposing a segment for quality and good value accommodation needs. We have

OUTLOOK ON GEORGIA

also witnessed an expansion of chain hotels, with Holiday Inn and Radisson planning to open hotels in the Kakheti region, Crown Plaza is already present in Borjomi and Best Western having several projects in the pipeline,” says Ms Mamatsashvili. Cushman and Wakefield’s Mrs Beselidze says that they have seen an increase in the number of requests and visibility studies in the three and four star hotel segment. Quite a few of these projects are already being developed and some completed. “We just had Ibis open near Freedom Square, with another in the pipeline. We have two Ramada hotels. We have a Moxy hotel being built, the three-star segment is also coming on really quickly,” Mrs Beselidze adds. One other area that requires further development when it comes to hospitality is creating better conference facilities, and as such new build hotels are taking advantage of the lack of conference facilities to attract the Meetings, Incentives, Conferencing, and Exhibition (MICE) segment. “A number of new upscale hotels are being planned and implemented with larger than usual conference, meeting and banqueting facilities. The reason behind this is the increased demand evident in recent years. Numerous international public and private events have been deferred to unusual facilities due to the lack of supply. As an example the EBRD Annual Meeting and Business Forum as well as the Belt and Road Forum had been previously held in the Parliament building, because of non-existence of the venue in 2015. In 2017, however, the Belt and Road Forum was hosted by the recently opened Biltmore, Mrs Beselidze tells Emerging Europe. According to Mrs Beselidze, there is another untapped market developing in Georgia, that being the hostel market: only 10.8 per cent of the entire hospitality market is hostel-based. Millennials would be the ideal target market, as they travel more than any other generation. A great example of targeting and developing around this client base can be seen at Fabrika Hostel. “Basically, a majority have tapped into this and they have supplied Fabrika Hostel, which is not only a hostel with great amenities and services, but also something local and something special, sought after by any visitor. Basically anyone, for leisure, pleasure, or for business. This is an example of a well thought out product that you would deliver on to the market. That would be the niche that we would

be looking at now and expecting to be developing in the nearest future,” says Mrs Beselidze. This is another area where there is potential for investment and development. According to Mrs Beselidze, Georgia suffered from a lack of office space. However, in recent years there have been a few developments in Tbilisi, such as the King David Business Centre which has 10,000 square metres, a second development on Freedom Square (offering 5,000 square metres of space) and a new build set to be completed in 2018, Axis Towers (twin towers), offering 15,000 square metres each. Unfortunately, even with these new builds, prices are still quite high. “It’s expensive, quite expensive. Any classes, what we had, tended to be expensive because there was a lack of them. Now we have a huge supply coming online and people don’t want to spend on it. We would project that the rents in A-class spaces would go on a downward trend for a while and then stabilise at a reasonable price,” Mrs Beselidze says.

The classifications and pricing of these office spaces has been largely exaggerated as there was no demand for them in the past. However due to the influx of international organisations as well as the strict regulations for diplomatic offices, class A buildings had to be constructed, the high pricing at present is due to the fact that there has been increasing demand with little availability of such space. At present prices are still high, 25 to 30 US dollars per square metre plus service charges and VAT. Mrs Beselidze says that things are now returning to a state or normalcy according to her, “the highest price should be 25 US dollars per square metre.” However, in her opinion she would not recommend investing in business centres, as the capital needed is high and very risky. With the Ministry of Economy and Sustainable Development having started promoting Georgia as an outsourcing destination, the demand for quality office space might soon grow.

OUTLOOK ON GEORGIA

Sustainable Rooms Andrew Wrobel meets Valeri Chekheria, one of Georgia’s most forward-thinking entrepreneurs, whose hospitality group is making changes to a number of industries, not merely travel and tourism.

hen I first entered the Rooms Hotel in Tbilisi, I wasn’t sure I was actually in a hotel — an old fireplace, wornout, cosy and comfortable sofas surrounded by large bookshelves and a table full of books and a beautiful orangery behind a glass wall. I sat down, looked around, grabbed and flicked through one of the books which were lying on the table: Ivan Doig’s The House of Sky: Landscapes of a Western Mind while waiting for Valeri Chekheria, the CEO of Adjara Group Hospitality (AGH). In his memoir, Mr Doig writes of his adolescence in the rugged rims of the Rocky Mountains in the US state of Montana, but his story has a universal meaning of an inextricable connection between the land we come from, us, our values and our future decisions. Valeri was born in Tbilisi, in 1980. In late 2008, after the fall of Lehman Brothers, he found himself working

in investment banking in New York having graduated from Columbia University. “It wasn’t clear how the financial crisis would affect travel and hospitality, but we were seeing some po-

At Rooms, I wasn't sure that I was actually in a hotel tential in the industry,” he tells me. “I love travelling myself. I love hotels and restaurants. I love food and wine. This has always been my passion. Back

Photo: AGH

then, in 2008, I randomly met Teimuraz Ugulava, who had his own funds — and a loan — and wanted to invest in hotels back home in Georgia.” A challenging choice That quickly became reality and in 2009, soon after the Georgian-Russian war, Valeri and Teimuraz opened a Holiday Inn hotel in Tbilisi. “We really wanted to have our own brand in order to tell Georgia’s unique story, but we knew that people who were coming to Georgia needed an established brand that they could trust. So we decided to do that and put a lot of emphasis on service. We combined international standards with quality experience and service, which gave us trust.” And the confidence to start their own brand. The second project was not, however, an easy one. It was ambitious and risky. Not only did they create a new brand but also chose a challenging location — an existing building in Stepantsminda, about a dozen kilometres from the Russian border and the Kazbegi National Park. “I remember the day we arrived there having taken the traditional Caucasus military route. The old Soviet sanatorium was completely destroyed but it was surrounded by unbelievable nature, which was the soul of the place, and we had this amazing 5000-metre high mountain in front of us. We kept the structure but we built it anew. We used lots of wood and all the design is based on the traditional materials historically used in Georgian houses. It’s rustic, and it’s not meant to be super comfortable because you don’t build a super comfortable place in the middle of nowhere. We wanted every guest that stays with us to experience what Kazbegi is like.” It took Valeri two years to complete the 156-room hotel, and once launched in 2012 the AGH project triggered more public and private investment in both

Photo: AGH

OUTLOOK ON GEORGIA

OUTLOOK ON GEORGIA Photo: AGH

hospitality — new small hotels and restaurants as well as sewage and road infrastructure which mobilised the community. “We trained and offered jobs to the locals. It wasn’t easy as the mountain people had their own mindset but the young generation was more open. We also asked the locals to produce organic agricultural products and promised to buy them. Khinkali dumplings are the most traditional Kazbegi dish and when we opened the hotel, the vast majority of restaurant guests ordered them. But we quickly changed our minds and stopped serving them, thereby motivating the locals to set up their own shops and sell them to our guests. Cooking khinkali is in their genes and we felt responsible for developing the village.” Setting a new trend Back in the capital, the success

of the first Rooms Hotel made Valeri think of opening another. This time they chose an old printing house, where the Soviet Komunisti newspaper was published and again, this time in a 135-room facility, they merged Georgian traditions with the demands of a modern traveller. Currently, the daily occupancy rate in both Rooms hotels ranges from 76 per cent in Kazbegi to 90 per cent in Tbilisi. The average daily price amounts to some 115 US dollars in Kazbegi and 156 US dollars in the country’s capital. But Valeri is aware that not all travellers, especially the young, can afford that so he has come up with a different option for them. “Fabrika, which used to be a textile factory is known as the place of happiness, and is our latest project which we believe has enormous potential going forward. Young Georgians need more contacts with their international peers and we see that without developing our 94

nation, our new generation, it will be impossible to do business. That is one of the reasons why we set up this affordable space where they get a bunk bed for 10 US dollars. With an enormous courtyard, various cafes, restaurants and concept stores and a co-working space we have also created an experience for our domestic and international young guests,” Valeri says. A year after the launch, the 390-bed facility, which runs its own smartphone app helping people make friends before they even arrive, has an average occupancy of 62 per cent. “We don’t really see that much potential for five-star hotels in this country. I see more Fabrikas. I see more three- and four-star facilities which are of interest to travellers who come to Georgia to discover the country.” In Tbilisi, Valeri has another venue which he wants to transform into a hotel, just around the corner from the Rooms Hotel. The Stamba Hotel will

OUTLOOK ON GEORGIA

have 160 rooms, an amphitheatre, conference facilities, an art gallery, cafes and a chocolaterie and restaurant run by a three Michelin-star chef, Eneko Atxa from Bilbao, Spain. In the pipeline is a Rooms hotel in Batumi on the Black Sea close to the botanical garden, and a family ski resort at Bakuriani Mitarbi, halfway between Tbilisi and Batumi. “There might be one more hotel in Tbilisi, where I would like to have a large public space, an independent cinema and an area where we could showcase fantastic Georgian fashion,” Valeri adds When I ask him how many Rooms Hotels there might be in the future he

smirks and says that one day he’d like to have hotels in European cities such as Lisbon and Berlin, but his biggest dream is to have one in Abkhazia, a disputed territory on the Black Sea, claimed by Georgia. It’s all about sharing “Abkhazia is a real diamond, completely untouched for the last two decades and I would love to have a Rooms Hotel there within 10 years or so. In the meantime, we have an agricultural project. We already have 500 hectares of almond trees in the wine region of Kakheti, but our ambitious plan is to have 3000

Photo: AGH

hectares. We will also have a farm where we will also produce our wine. We’re going to open the first part in the next year already. I believe that without the growing and developing our food and wine, it’s impossible to do more in the hospitality sector in Georgia,” Valeri says. In the summer season, the food served in restaurants was high quality as it came from organic Georgian farmers. In the winter, however, fruit and vegetables were mainly imported and the same dishes tasted different. “We realised that without helping local farmers this wouldn’t improve. We are educating them about quality and supporting them by buying their pro-

OUTLOOK ON GEORGIA

duce. We needed consistency in quality. We invested in cold storage and we have been working on that project for three years. It is starting to work. We have a huge list of farmers now and our tomatoes are of great quality throughout the year. I believe that doing business is all about sharing, and when as a business you share it makes you stronger and makes your business more sustainable.”

And the entire hospitality sector with it. In 2011, 2.8 million international tourists came to Georgia. Between January and September 2017, the number exceeded 5.8 million, which is almost as many as the whole of 2016. For years Georgia has been synonymous with a culture of hospitality and warmth, where visitors are said to be “gifts from God.” In his memoir, Ivan Doig writes: “It

Photo: AGH

is said it takes a good storyteller to turn ears into eyes, but luckily life itself sometimes performs that trick on us.” “Georgia is a great story to tell. I came back to Georgia to give back what I had received and learned from my country,” Valeri concludes.

OUTLOOK ON GEORGIA

Unlocking Georgia to the world

OUTLOOK ON GEORGIA

Homeland of Ancient Wine Tamara Karelidze

Recent archaeological finds suggest that Georgia may be home to the earliest example of grape-growing, winemaking culture anywhere in the world.

ate in 2017 earthenware jugs were found 30 miles south of Tbilisi, capital of Georgia. Researchers later announced that fragments of the jugs, 8000 years old, contained images of grapes and dancing men: signs of wine. This is now claimed to be the earliest evidence of a grape-growing, winemaking culture anywhere in the world. Winemaking in earthenware vessels (qvevri) is an ancient Georgian tradition. The method has been recognised by UNESCO since 2013. A lot of Georgian winemakers use the qvevri method, especially in the Kakheti region, which can be said to be the homeland of Georgian wine. The popularity of Georgian wine is increasing year by year and can now be found in stores the world over: the US, the EU, China, Japan. According to the Georgian Wine Agency, 2017 was a record year for wine export. More than 76.7 million bottles of wine were exported to 53 countries, an increase of 54 per cent compared to 2016. “Today, the average price of Georgian wine is 2.27 US dollars per bottle,” says Giorgi Samanishvili, head of the National Wine Agency. “Our goal is to increase it to more than 3 US dollars. To achieve this we have created highly effective quality control systems. All exported wine passes through a certification process. Through private companies we have maintained quality but increased exports,” Mr Samanishvili told Emerging Europe that he believes the main priorities of 2018 are “to improve quality and find new markets.” Work to increase the quality of Georgian wine started around 2006. At that time the Russian market was closed to Georgian products, and the number of small and medium-size wineries on the Georgian market began to increase. They started making

natural, high-quality wine and exported it to EU and Asian markets at a high price. Today, these often family-owned wineries account for about 3 per cent of all Georgian wine production, and they have a significant role in growing the popularity of Georgian wine around the world. One of the winemakers is Iago Bitarishvili. He produces about 5000 bottles of dry white wine, called Chardakhi, each year. Almost 100 per cent of his wine goes for export, to 11 countries. “Wine is not only business. I love what I am doing,” Mr Bitarishvili told Emerging Europe. “As a painter is concentrated on the quality of painting and not quantity, and feels pleasure in the process of creating, winemaking is the same for me. We produce a limited amount of only the highest quality wine. That’s why the Italians call us natural winemakers guerrillas.” The technology of natural winemaking is ancient. The winemakers pay significant attention to the vineyard and grapes, which should be organic. According to Iago Bitarishvili, the philosophy of natural winemaking means that there should be minimal chemical and technological intervention during the process. “The only thing we use in wine production is wild yeast,” said Zurab Mgvdliashvili, founder of Nikalas Marani. “There are risks involved because there are times when challenges appear in the process. However, we refuse to use chemical and technological interventions, such as wine acid, tannins or other substances. The only thing we allow is a minimal amount of sulphur.” Mr Mgvdliashvili started wine production in 2013 and produces around 2000-5000 bottles of wine. Part of it is sold on the local market, and some is exported to the EU, Japan and the US. His best-selling wines are Sapheravi, Kisi and Mtsvane. Like Iago Bitarishvili, Mr Mgvdliashvili 98

OUTLOOK ON GEORGIA

does not see any need to considerably increase the amount of wine he produces. “In general, the bestselling Georgian wines are Sapheravi, Mukuzani and Kindzmarauli (all red wines). The dry red wine is the most popular in Asia, while Europeans love dry whites. In the US the favourites are earthenware vessel wines, while in the post-Soviet countries they prefer semi-sweet wines,” Said Giorgi Samanishvili. Wine plays a significant role in Georgian tourism. The project Wine Route began in 2011 and brought tourists to the wineries of Georgia. Lots of small and medium-sized wineries now host local or foreign tourists. One of the most popular wineries is Iago Winery Chardakhi, around 35 kilometres from Tbilisi. Iago Bitarishvili says that last year was the busiest ever for his winery. So much so that the wine ran out, and he could not manage to export to three countries where demand was high. It is worth mentioning that one of the most significant drivers of growth

in the Georgian wine industry is the Wine Festival, which began in 2010 and takes place every second Saturday of May in Tbilisi. Mr Bitarishvili is one of the founders of the festival and says that the event provides optimism to small and medium-sized wineries, who can connect with current and future customers. Foreign tourists also play a prominent role in the popularity of Georgian wine. Some of them already know about local wine before arriving, while many try it for the first time while they are in the country. Besides wineries, part of the enotourism boom has been in wine bars. The first opened in 2011 and the number of natural wine bars is increasing every year. The bars are favourites not only among foreign tourists but increasingly with locals as well. Giorgi Samanishvili believes that cultivating a wine drinking culture is crucial. “It is worth remembering that consumption of wine on the local market is important for the international im-

age of Georgian wine,” he says. “To achieve this, we arrange different types of events which support winemaking and make it more popular. As the local population consumes dozens of litres of wine, one of our priorities is to increase the quality of wine not only for export but for the domestic market as well.” At the beginning of 2018, a free trade agreement took effect between China and Georgia, which is another possibility for Georgian wine export. According to Giorgi Samanishvili, head of the National Wine Agency, in 2017 more than 7.5 million bottles of wine were exported to China, and expectations for this year are considerably higher. The five-year goal for the agency is to increase wine exports to 100 million bottles while preserving quality. There are reasons to believe that they will succeed. A new generation of winemakers are providing many reasons to be optimistic about the future of Georgian.

OUTLOOK ON GEORGIA

Getting to Georgia: It’s still not easy, but things are improving Tamara Karelidze

Airlines are making it easier and easier to reach Georgia, with more connections to more cities. But more investment in the country's secondary airport is crucial.

ver the past 10 years Georgia has become a far more attractive place for tourists and investors. There are currently several advertisements running on various international TV stations advertising Georgia’s resorts or boasting of the country’s latest achievements. However, reaching the country is still complicated. The number of cities connected by direct flights to Tbilisi is tiny. Additionally, most routes only offer two or so direct flights per week. Transit flights are expensive and time-consuming. However, the Georgian aviation market is, finally developing. New airlines are emerging, offering new routes and

increasing frequency on existing ones. In Georgia, there are three main airports: Tbilisi, Kutaisi and Batumi. As the boss of the Georgian Civil Aviation Agency told Emerging Europe, more than four million people travelled to and from Georgian airports in 2017. This was more than 40 per cent higher than 2016. Additionally, the number of companies on the Georgian aviation market is also increasing. In 2017, there were 42 airlines on the market, six of which started operation last summer. “The most interest is in the direction of the EU,” said Aleksandre Gachechiladze, head of the Air Transportation Department of the Georgian Civil Aviation Agency (GCAA). “In 2017 direct flights

100

from Georgia served 21 cities across 13 EU member states, which double the number of cities served in 2016. The number of passengers flying with Georgian Airlines rose by 56 per cent, and the company is the leader on the Georgian market, along with Turkish Airlines and Wizz Air.” The popularity of flights has increased enormously since March 2017, when the EU began allowing visa-free travel for Georgian citizens. The most popular flights are operated by Wizz Air, the Hungarian company which began flying to and from Georgia in 2012, and which operates out of Kutaisi. “Within the framework of the government’s four-point plan, we are going to expand Kutaisi airport and add new terminals. We suppose that this will help to increase the number of passengers and flights,” says Aleksandre Gachechiladze. “The demand for cheap flights is very high. The number of travellers from Kutaisi airport increased by 50 per cent in 2017.” Kutaisi is not the only airport which has a direct flight to EU member states. From Tbilisi, passengers can fly to 10 cities, including London, Munich, Prague and Vienna. From March 2017, Georgian Airlines is going to add flights to Barcelona, Berlin, Cologne, Bologna and Paris. As at Kutaisi, Tbilisi airport will also offer low-cost flights. According to the Civil Aviation Agency the most significant share of the Georgian market is currently held by Turkish Airlines (12 per cent) and Georgian Airlines (10 per cent). Turkish Airlines share is actually falling: it was 20 per cent as recently as 2015. However, new companies have emerged, increasing competition. The government

OUTLOOK ON GEORGIA

continues to negotiate with different airlines, to attract even more. “Georgia continues its liberal course in the aviation sector,” said Aleksandre Gachechiladze. “Agreements, memorandums, legislative framework and the open-sky agreement between the EU-Georgia are all about promoting free market principles. The Ministry of Economy and Sustainable Development, as well as the aviation department, are in permanent negotiations and consultations with new airlines.” However, the flight price is excep-

tionally high. Some companies consider that on the Georgian market a few dominant companies exist and that there is little competition. The Civil Aviation Agency explains that every airline has its own interest, set their own prices and that the government does not intervene. Compared to other companies, Turkish Airlines has a significant part on Georgian market. Not least as an agreement between the Georgian Government and TAV-Georgia, a Turkish company, has seen TAV operate Tbili101

si and Batumi airports since 2005. According to the agreement, the company has a concession to operate the airports until 2027.

OUTLOOK ON GEORGIA

Bank on Georgia The boss of Georgiaâ&#x20AC;&#x2122;s National Bank (NBG), Koba Gvenetadze, is in reassuring, even bullish mood, as he speaks to Andrew Wrobel, suggesting that the economic future is bright for a country which has managed to absorb many a regional shock. Photo: NBG

by economic problems suffered by our main trading partners. This put pressure on the exchange rate. For small open economies with floating exchange rates like Georgia, the shock absorber role of the exchange rate is important as it helps to restore an equilibrium. After the depreciation of the currency, we noticed that the external sector began to adjust as demand for imports declined and the economy gradually started to recover. AW: What are the current risks to financial stability?

Andrew Wrobel: Georgia is expected to have the highest growth in the region? What strengthens that growth? Koba Gvenetadze: The Georgian economy is currently in a phase of recovery following the external shocks of 201415. Economic growth accelerated in 2017 and exceeded 4 per cent for the year, higher than previously estimated. An improved external sector, extensive infrastructure projects and an increase in consumer confidence have contributed considerably to the growth of both investments and consumption. A positive trend in the export of goods has been accompanied by a strong service account largely due to a big rise

in the number of tourists. Increased government capital spending on basic infrastructure is also stimulating economic activity. The outlook for economic growth is even more favourable for the next few years. AW: The country has overcome several regional crises quite well. How has it managed to do that? KG: The Georgian economy operates under a flexible exchange rate. This has proven to be an important adjustment mechanism during periods of crisis. In 2015, for example, the Georgian economy faced significant external shocks: global appreciation of the US dollar and a drop in external demand caused 102

KG: The Georgian financial sector is sound and has continued to perform well even during recent regional turbulence. Georgian banks remain well capitalised, with a high level of liquidity and a low share of non-performing loans. Most banks maintain capital buffers well above the regulatory minimum, and the National Bank of Georgia (NBG) preserves prudent supervisory requirements and insists on high standards of credit. The household and corporate debt burden is moderate in relation to similar economies and government debt remains at a sustainable level. Georgia is a small, open economy but a turbulent regional environment has exposed it to external shocks. Persistent current account deficit and high dollarisation remain major challenges for financial stability. However, strong macroeconomic fundamentals, sound macro-prudential, monetary and fiscal policies allied with an adequate level of foreign reserves have successfully safeguarded the countryâ&#x20AC;&#x2122;s financial stability. AW: How is the high dollarisation issue currently being tackled? KG: Dollarisation is still the main challenge for Georgiaâ&#x20AC;&#x2122;s economy and for

OUTLOOK ON GEORGIA

its financial system. In recent years, the NBG has actively worked to promote de-dollarisation or, as we call it larisation. Maintaining low and stable inflation as well as a floating exchange rate regime are essential for enhancing confidence in a national currency. Additionally, in 2016, the NBG and government of Georgia came up with various measures to help the process of de-dollarisation, all of which took into account the best-practice experience of several other countries. A number of policy instruments offer favourable treatment to the lari and place certain restrictions on foreign currency in as market-friendly a way as possible. However, we do understand that building trust in a national currency obviously needs time, and we view de-dollarisation as a long-term process. That said, the level of dollarisation has seen a sharp decline since the end of 2016, which makes us believe that we have chosen the right course. We now expect dollarisation levels to decline even further. AW: What is the bankâ&#x20AC;&#x2122;s inflation target for this and next year? KG: We believe that in the long-term the optimal level of inflation for Georgia is 3 per cent. When we introduced inflation-targeting back in 2010, we began with a higher target because inflation forecasts were higher at that time, and the instruments of monetary policy available to us were simply not developed enough. Since then the NBG has been gradually lowering the inflation target, which for this year is set at 4 per cent. Next year we will reduce it again to the long-term optimal level of 3 per cent. Currently, inflation is above the target, mainly because of a series of one-off factors, not the least of which was an increase in excise tax on a number of consumer goods applied at the end of 2016. This has only a temporary impact on inflation and will fade out by the end of this year. We, therefore, expect inflation to return to its target level by the beginning of 2018. AW: What are the challenges for the Georgian banking sector going forward?

KG: Similar to other developing countries, Georgians do not currently save sufficiently. This, combined with high investment demand, drives interest rates up, making borrowing expensive. A shortage in local funding is compensated by external borrowing in foreign currencies, including the deposits of non-residents. The development of other components of the financial system, including the insurance sector and the capital markets, is also lagging at the moment. The local stock market is almost non-existent, fuelling further expansion in bank lending. To address this, the NBG is implementing a capital market development strategy, prepared jointly with the government. We hope that the upcoming Pillar II pension reform, as well as a number of other initiatives, will help boost those markets.

We now expect levels of dollarisation to decline even further AW: How do you see the capital markets developing in Georgia? KG: Capital market development is one of the priorities for the country in general and the NBG in particular. We want to create a well-functioning financial market to help improve economic growth in Georgia. We understand that these markets canâ&#x20AC;&#x2122;t develop overnight, but we do aim to move forward, albeit gradually and at a steady pace. We believe that markets should develop from simpler to more complicated instruments, with the former providing the foundations on which the latter can be built. We have created an intergovernmental working group which published a strategy paper on the issue, and which is also in charge of implementation. The NBG is playing an active role in this process. The reforms are complex 103

and they affect every aspect of the financial markets including legal foundations, the drafting of new laws and regulations and the updating of existing ones; upgrading infrastructure for trading, settlement, risk management and reporting; building supervisory capacity; educating players on the market. Our efforts are delivering results already. The government bond market is growing and improving consistently, with Moodyâ&#x20AC;&#x2122;s recently having upgraded our sovereign rating to BA2 from BA3. Corporate bonds are likewise picking up momentum (for example, the NBG recently issued lari-denominated euro bonds of 500 million lari), while the IFIs have been active in issuing local currency-denominated bonds both on and offshore. The interbank repo market has become increasingly active. The International Capital Market Association published a positive legal opinion about Georgia last year and Clearstream now offers Georgian government papers and IFI bonds to its vast client base. The Georgian market is open and welcomes non-resident investors. To support further growth we are completely overhauling post-trade infrastructure, capitalising on an already state-ofthe-art system used for government papers. All the reforms are aimed at making Georgia more familiar and bringing international markets and investors closer to us. AW: What are your FDI expectations for this and next year? KG: We are expecting FDI inflows to be around 9-11 per cent of GDP both this year and next. For the Georgian economy, FDI is the major source of external funding. Over the last year, FDI has been concentrated in transport, communication, energy, construction and real estate. FDI inflows in Georgia are strong and should continue to increase as macroeconomic stability and an improved business climate attracts foreign investors.

OUTLOOK ON GEORGIA

Georgia Eyes Future Role as Caucasus Bond Hub Otar Sharikadze, managing director of Galt and Taggart, leading investment banking and investment management services company in Georgia, spoke to Andrew Wrobel about the prospects for the Georgian capital market. Photo: G&T

Andrew Wrobel: The Georgian financial market started evolving in 2009. What triggered that evolution? Otar Sharikadze: In reality, the market has been developing since 2014. Then, to spur the development of the International Finance Institution (IFI) bond market, the National Bank of Georgia (NGB) established a list of “acceptable” IFI issuers (mainly AAA-rated institutions) who could issue bonds in Georgian lari, simplified IFI bond issuance procedures, and made these bonds eligible for repo transactions. Largely as a result of these measures, since 2014, the Asian Development Bank, the European Bank for Reconstruction and Development, the International Finance Corporation and Black Sea Development Bank have issued 10 lari-denominated bonds totalling around 724 million lari. Government support has also been reflected in the corporate bond market. Since January 2014, there have been 21 successful offerings of corporate bonds, totalling approximately 230 million US dollars, of which nine placements were in the national currency. Another major milestone which triggered this new era was the NBG’s decision to allow issuance of securities

and payment of coupons in foreign currency. This was an important message for investors. In 2014, due to the high dollarisation rate of the Georgian economy investors preferred to invest in US dollars. Decreasing rates on US dollar deposits also positively impacted the development of the corporate bond market, creating an incentive for investors to search for alternative dollar investments. The third and most important factor was the readiness of a number of big Georgian corporates to diversify their financing sources through bond issuances.

a new tax regime concerning public equity or bonds. Investors will not pay capital gains tax. Moreover, interest tax will be zero until 2023. The only tax that remains on equity is dividend tax of 5 per cent.

AW: So where do you see the capital market now? What are the bottlenecks?

AW: What regulations do you think should be introduced to foster further development?

The key direction to be developed is local currency-denominated bonds, which are more favourable for Georgian companies with revenues in lari. There is significant demand for lari financing on the market. Up until now, most of the lari financing was completed through bank loans at high interest rates.

This year we expect the introduction of a few reforms that will boost capital market development: a new law regulating investment funds in quarter two, then another on securitisation in quarter three and a pension reform in quarter four.

In 2016, the NBG established a set of regulations aimed at supporting lari bond market development. These regulations enable banks to use lari corporate bonds (these issuers should have a rating from at least one international rating agency) as collateral for repo transactions. Eligibility for repo transactions gives a significant boost to lari bond market development, enabling commercial banks to use lari bonds as a liquidity management instrument and incentivising them to become active investors on this market. Furthermore, companies can benefit from alternative lari funding, which enables them to reduce their exposure to foreign currency risk Moreover, since January 2018 there is 104

As for bottlenecks, I see this more from the supply side rather than the demand side. Issuers need time to get ready to tap capital markets. In the case of lari bonds they also require an international rating. However, from our experience, once one bond has been issued, more tend to follow.

AW: Do you see potential for equity capital markets development? Yes, and there are a certain number of reasons for this. On the issuer side – they are quite leveraged and understand that the only way for growth is raising capital. We are in discussion with a number of issuers who plan to tap capital markets to raise equity. On the investor side – a number of local and foreign investors are willing to take equity risks. AW: How do you see the capital markets in the Caucasus region and do you think that Georgia could act as a regional financial hub? I do believe that Georgia could and should strive to become a regional financial service hub for the region. His-

OUTLOOK ON GEORGIA

torically Georgia has always acted as a trading centre for the Caucasus region. Today, Georgia has a leading position in various international rankings, such as 9th position in easy of doing business 2018 by World Bank and 19th position in economic freedom index by heritage foundation. If the government continues implementing pro-business regulations and supporting capital market development in Georgia, we could become a financial service hub for the region. Throughout history, Georgia has proven to be a place where foreign institutional investors are welcome. Georgia and leading Georgian corporates have been actively issuing Eurobonds that have been

In coming years we may see Azeri and Armenian companies issuing bonds in Georgia

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successfully subscribed by international investors. Last year investors subscribed Bank of Georgiaâ&#x20AC;&#x2122;s first ever lari denominated 500 million Eurobond. This was a significant milestone for the country, when international investors bought lari risk. Moreover, there are already three Georgian companies successfully trading on the London Stock Exchange. Two of them have been included in the FTSE 250 index. I think that the regulations which will be implemented next year will strengthen Georgiaâ&#x20AC;&#x2122;s position as a financial service hub and I hope that in coming years we could see number of Azeri and Armenian companies willing to issue bonds in Georgia.

OUTLOOK ON GEORGIA

The Rise and Rise of the Georgian Banking Sector Givi Adeishvili The Georgian banking system is the most robust in the region, with its two largest banks now listed on the London Stock Exchange and included in the FTSE 250.

eorgia is located at the crossroads between Europe and Central Asia. Free Trade Agreements enable the country to export its goods and services to the EU, Turkey, CIS countries and China. On both the Index of Economic Freedom and The Ease of Doing Business report Georgia is ranked in the Top 20. Georgia is the one of the least-taxed countries in the world. Personal income tax is 20 per cent, VAT is 18 per cent and corporate profit tax 15 per cent. The financial sector is one of the most developed areas of the Georgian economy. The National Bank of Georgia (NBG) is the supervisor and regulator of a financial system which actively cooperates with international financial institutions to adopt international best-practice standards on banking regulation. In total, the financial sector currently consists of: 16 privately owned commercial banks, 75 microfinance organisations, six brokerage companies, private pension funds (owned by insurance companies), deposit insurance fund The financial system is biased towards the banking system, with banking assets accounting for nearly 90 per cent of all financial sector assets. Currently 16 commercial banks operate on the market, with a total of 14 billion US dollars in assets. Among them TBC and Bank of Georgia (BOG) are the biggest commercial banks, both of which are listed on the London Stock Exchange and included in the FTSE 250 index. Their market share (by total assets) increased to 65 per cent in 2017 when TBC bank purchased one of the smaller local banks (Bank Republic), previously owned by Societe Generale. TBC and BOG are not only the biggest players but they are owned by the two biggest investment holdings: TBC Group and BGEO Group. FDI share in the financial sector is 12 per cent of total FDI and average ROA and ROE of the banking sector account to 3 per cent and almost 19 per cent respectively.

The role of microfinance organisations is important at this stage, a period when consumers are beginning to emerge from the shadow economy, are startups, or are operating in economic sectors with higher risks and need funding to grow further. Currently, 75 microfinance organisations are operating on the market. Their number is expected to decrease in future, because of a new NBG law which restricts credit organisations to funding no more than 100,000 lari (around 40,000 US dollars), while interest rates on loans should not exceed 100 per cent APR. This will force small credit institutions to merge and continue operating on a larger scale with reduced costs or exit the market. To prevent financial pyramid schemes and make the market more transparent the NBG has also introduced a law by which financial organisations which are not registered with it will be unable to collect financial resources from more than 20 customers. As Georgia’s level of savings is low, FDI is considered an important source of growth. Financial institutions and corporations place a high demand on funds and capital market development could support fundraising in the future. However, at this stage the capital market is underdeveloped and only a few issuances of securities occur each year, all small in value. Among the rare exceptions we could underline was the 500 million lari bond issued by the BGEO group in 2017. The NBG is working actively with the commercial banks to develop the Georgian securities exchange market. At the current time market capitalisation of the Georgian stock exchange accounts to nearly 7 per cent of GDP and 120 companies are allowed to trade. In 2015 a number of international institutions (the EBRD, ADB, IFC) issued 100 million lari corporate bonds in local currency, after which several Georgian corporates (M2 Real Estate, GWP, Georgian Leasing Companies, EVEX, Silknet) showed that there is potential for issuances. In the past 106

year several reforms were introduced and there are a number of ongoing initiatives. Most important among these are: • A tax law that gives cost advantages to institutions involved in the IPO process (Costs associated with listing could be deducted from gross income). • The government has implemented the Estonian tax model which enables it to exempt reinvestment from profit tax (This law does not currently apply to financial institutions). • A new and obligatory Deposit Insurance System scheme which will start operating in 2018. • The government has said that by mid2018 a new pension system and pension fund will be introduced. The pension fund will operate locally and participate in capital market operations. Ongoing challenges of the financial sector include high dollarisation and the unavailability of long-term financial resources in the domestic currency. Central Bank policy, which prohibits household lending in foreign currencies of amounts less than 40,000 US dollars, had a deep effect on dollarisation. From the beginning of 2017 dollarisation levels in loans and deposits decreased by 7 per cent and 6 per cent and amounted to 59 per cent and 65 per cent respectively. However, it increased demand on the national currency and together with 7 per cent inflation (a 3 per cent deviation from the target) increased interest rates on loans. The economic growth outlook from the World Bank is 5 per cent for next couple of years, which together with decreased risks in the region could stimulate the entrance of new players in the market, which is important to increase competition in the financial sector.

Givi Adeishvili is an economic analyst at Society and Banks.

OUTLOOK ON GEORGIA

Only Innovative Evolution Will Achieve Revolutionary Growth Avtandil Kasradze Georgia currently has around 100 start-ups, mostly early stage. They need an environment in which they can grow and become successful.

he government of Georgia’s inclusive growth agenda foresees the need to strengthen human capital, improve private sector competitiveness and productivity through a focus on micro, small and medium enterprises (MSMEs). It also plans on increasing access to finance, supporting measures to increase firms’ capacity to innovate and to export, including the upgrading of broadband internet services and strengthening the investment climate. The government is keen to develop the capacity, services, and infrastructure for Georgia to create an innovative, knowledge-based economy, while reducing individuals’ and businesses’ perception on the risks associated with innovation. Georgia’s Innovation and Technology Agency (GITA) is in charge of innovation policy elaboration and implementation and aims to promote entrepreneurship by improving the regulatory environment, access to finance, entrepreneurial learning, consultancy services and R&D commercialisation. Many locals were sceptical. Many believed that Georgia - with very small economy - cannot afford to support innovation and that the government should focus on supporting traditional businesses, where the risks are much lower. Innovation is something that only developed countries should focus on. We should also take into consideration our Soviet past, where people used to work only for the government and entrepreneurship wasn’t allowed. This past somehow still reflects in our society, especially amongst the older generation. Even though the young generation is free from the Soviet past, their parents are still expecting them to find jobs in government or in big corporations, and if their children are working on startups they assume that they are just playing:

a startup is not a serious endeavour. Therefore, our main agenda from the beginning was to create a big innovative community, where people could work on new ideas and products. Currently we have around 100 startups in Georgia, most of them early stage. They need an environment to grow and become successful entrepreneurs. They need success stories in Georgia to attract newcomers to the ecosystem. This will bring new people into business and we estimate that by 2020 we will have five times more startups than now, and

The level of Georgian start-ups is equal to Silicon Valley hopefully a few of them will be wellknown internationally. To support these startups one of the pillars that is needed is access to finance. But it was clear from the beginning that the private sector was not ready to take big risks to finance these early stage startups. Within the Startup Georgia programme, GITA finances high-tech, globally scalable innovative startups and the Partnership Fund supports innovative startups for the Georgian market. For the initial stage, the government allocated the equivalent of 3 million UK pounds with the potential to increase this to 10 107

million UK pounds. In total, 65 startups were financed in 2016 in both components. GITA also partnered with experienced Silicon Valley specialists, who reviewed up to 150 applications. The 50 shortlisted candidates received oneweek intensive training from Silicon Valley experts, and prepared them for a final pitching session with investors. The 20 winners were identified and received the equivalent of up to 30,000 UK pounds venture financing, with a 5 per-cent equity composition and mentorship from Silicon Valley. This was the first chance for Georgian startups to receive major investment, and the results clearly show Georgia’s potential for innovation. I remember Silicon Valley venture capitalists telling me that Georgia should be very proud: the level of its start-ups is equal to that of Silicon Valley’s own early stage firms. And we can now see some results: one startup was accepted by a well-known international accelerator, Techstars, while another began sales in the US. Further startups have received additional private investment and are growing significantly. Now is the time when the private sector should start playing a major role in the innovation ecosystem by creating private equity incubators/accelerators and establishing venture funds. We are expecting more involvement from the private sector, because their participation is an important gateway to success. With a joint effort we will revolutionise our country’s economy.

Avtandil Kasradze is the deputy chairman of Georgia’s Innovation and Technology Agency (GITA).

OUTLOOK ON GEORGIA

Georgia on location Thanks to a government incentive to attract foreign filmmakers, Georgia is quickly becoming a key movie location for European, Asian and even American studios.

n increase in the country’s visibility around the world is a crucial thing for Georgia. In order to achieve this, the government is currently working in several directions. One of these has been the prime minister’s incentive to create the “Film in Georgia” campaign, a project which began in 2016, encouraging international moviemakers to use Georgia as a film location. The programme is implemented jointly by the ministries of economic and culture, and the main idea is to promote Georgia as an Eastern European filming destination as well as to support Georgia’s own film industry by attracting more international production houses to the country. Film in Georgia offers a number of benefits to film producers. One of these is a 20-25 per cent cash rebate on qualified expenses for international and local production companies, while others include a business-friendly environment, modern infrastructure, diverse climate zones and landscapes, where you can shoot snow-capped mountains and sunny beaches in the same day. A unique mixture of different architectural styles is a bonus. “Georgia offers foreign producers a business-friendly and safe environment, with a flexible labour market, low taxes and lower prices across the board compared with similar locations in Western Europe,” says Lika Mezvrishvili, head of Film in Georgia. “The country has a modern infrastructure with a well-developed road and rail system, several local airports connecting different parts of the country and three international airports with flights from major European cities. Georgia’s efforts to become one of the easiest places to work, do business, travel and of course make films have been achieved and reflected in major international rankings – we are ranked ninth in the ease of doing business report published by the World Bank. We

are also the third safest country in Europe according to Numbeo.” According to Mrs Mezvrishvili, the primary target markets of the campaign are the US, Europe and India. The latter is very interested in Georgia, and films already shot in Georgia include productions from both India and the US. To increase the visibility of the project, Film in Georgia representatives have been meeting major production companies around the world, setting out the potential of filming in Georgia. Among the companies they have met are NBC Universal, Fox, Sony, HBO and Netflix. “The development of our creative industries and in particular the film industry is high on the agenda of the government,” Lika Mezvrishvili told Emerging-Europe. “We believe that the film industry is an engine that creates a ripple effect on jobs and innovation in other sectors of the economy, not only at the time of the production 108

but also after the film is released, in the form of Film Tourism – a growing phenomenon worldwide. Moreover, we see Georgia as an emerging, highly attractive filming location and strive to establish culturally diverse and economically sustainable environment for filmmaking.” As Mrs Mezvrishvili points out, filming in Georgia is a perfect opportunity to establish the country’s reputation as an ideal shooting location. In this case, besides a 20 per cent cash rebate, producers can receive an additional discount of up to 5 per cent. There are several criteria to be met to obtain each percentage. The main idea is to promote Georgia. Besides international projects, Georgian film directors are shooting big movies themselves, some of which have enjoyed significant success at different international film festivals. While the Film In Georgia programme is mostly focused on international projects, the vast majority have bee made with the cooperation Georgian companies and have offered Georgian directors opportunities to get involved. According to Lika Mezvrishvili, ten films have so far been shot in Georgia. Four of them are Indian. Some are European and American, and part of the movies are mixed productions featuring European, American and Georgian moviemakers. Georgia has attracted more than 10 million lari in investment as a direct result of the programme. The project is going to continue actively promoting its advantages to international producers, and will include several new ideas, including familiarisation tours to Georgia to introduce filming locations and existing infrastructure to key players in the UK and US film industries.

Tamara Karelidze

OUTLOOK ON GEORGIA

Education Reform: Key to Continued Georgian Success Irakli Aslanishvili The major factor that will greatly determine Georgia's ongoing success in both the short and the long-term is timely and proper education reform.

n less than 20 years Georgia has managed to drag itself out of a state of near-collapse to become a rising star of the region: years of robust economic growth, liberal tax legislation, a safe, business-friendly, corruption-free environment paint a promising and impressive picture. And we — the private sector — like what we see. Expectations are high and the country is on the right track. However, there are still challenges which could stand in the way of the country’s continued and sustainable development if not addressed in a timely and proper manner. Despite impressive results and positive trends, there is still a distance to cover to reach a point where development is stable and irrevocable. I want to use this opportunity to speak about the issues that all major actors in the private sector consider as threats to Georgia becoming a competitive investment destination. My estimations are backed up by BAG’s recently finalised research: The Business Environment Evaluated by the Private Sector. As part of this research, BAG carried out interviews with representatives of major, large corporations operating in Georgia. Based on these interviews, we designed a survey and quantified the findings from the interviews. The research revealed that education, a changing legislative environment and a lack of infrastructure are among the major challenges the private sector faces in terms of growth and development. Lack of infrastructure is a challenge, especially in the regions. However, infrastructure projects, either current or planned, are robust and we have high expectations that in the medium term a major part of Georgia will be covered with all necessary hard and soft infrastructure. As for the legislative environment,

the private sector welcomes changes of legislation as they are both necessary for development and inevitable, given that Georgia has the obligation under the EU Association Agreement to harmonise its legislation with the EU. What the private sector is concerned about is the pace and process of introducing new regulations or making changes to the existing legislative framework. The investment environment would benefit greatly if Georgia introduced RIA into its legislative process and allowed all stakeholders to review changes before final decisions are made. The biggest problem facing Georgia, however, is a lack of qualified workers. Both the private and state sectors face difficulties in finding qualified employees with the appropriate skills and training. In some sectors, such as civil engineering, agriculture, and food technology, it is almost impossible to find and employ local professionals. The national education system fails to produce highly qualified professionals and there is a significant mismatch of skills and market demand. For this reason, a large part of the private sector’s resources is spent on hiring foreign consultants. On the plus side, Georgia is making significant progress in vocational education 109

and we hope to see the results of these efforts in the coming years. However, we believe that a comprehensive education reform programme covering all levels of the education system to be of the utmost importance. Only major reform can ensure that the country creates the capacity to continue its social and economic development. I will end my short review of the Georgian investment climate on a positive note. The outlook for Georgia is promising. Again, this is a statement backed-up not only by macro parameters but by our latest research, where a majority of businesses confirmed that their expectations are positive and that they intend to grow within a five-year period. The country has all the necessary preconditions to move to a higher level of development. The major factor that will greatly determine success in both the short and long-term is timely and proper education reform.

Irakli Aslanishvili is the executive director of the Business Association of Georgia (BAG)

OUTLOOK ON GEORGIA

Stuck in Neutral: Georgia’s Constitutional Reforms Lincoln Mitchell The Georgian banking system is the most robust in the region, with its two largest banks now listed on the London Stock Exchange and included in the FTSE 250.

t has been almost five years since the Georgian Dream’s (GD) substantial and unexpected victory in the parliamentary elections in Georgia. During these five years, the frenetic pace of events that defined much of the previous nine years, when the United National Movement (UNM) was in power, has ebbed. Georgian politics is no longer characterised by frequent widespread demonstrations, prison abuse scandals, the peripatetic and unpredictable behaviour of a president, threats of war and a manic energy, which both brought rapid reforms but just as rapidly rationalised away undemocratic excesses. The slower pace and lack of drama that we see under the current government does not mean that nothing is happening in Georgia. The GD has had some major successes during its time in power. It has consolidated the country’s pro-Western course; has reversed, or at least stopped, Georgia’s slide towards authoritarianism during the later years of UNM rule, has avoided a shooting war with Russia and has improved Georgia’s reputation as a tourist destination with an exciting food, wine and fashion culture. As concerns democracy, the story is more complex. In most respects, Georgia is freer than it was at the tail end of the UNM period, but significant problems remain. The challenge that frames all of these problems is that Georgia is still struggling to institutionalise pluralism while simultaneously avoiding being mired once again in one-party rule. That last sentence could have been written at almost any point during this century, demonstrating the nagging difficulty of the problem. Last year, a much anticipated par-

liamentary election resulted not in a more multi-partisan or contested national legislature but in a resounding victory for GD. The primary reasons for this were not election fraud or a high approval rating for the governing party, but an opposition that was disunified and an UNM that foolishly used the election to advocate for regime change, something for which the Georgian electorate had little appetite. The result was that the GD, despite not being beloved by the electorate, won 115

Some of the proposed changes are reactionary, others petty of the 150 seats and was handed a constitutional majority in the parliament. Since winning that constitutional majority the GD has proposed a series of constitutional reforms. Some, such as defining marriage as something between a man and a woman, are reactionary. Others such as abolishing the direct election of the president may seem petty, while the way amendments will change how parliament is elected will make it more difficult for opposition parties. Collectively, these reforms are likely to strengthen one-party rule in Georgia and will create more barriers to the establishment of a strongly pluralist system. These proposals raise

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the spectre of one-party rule returning to Georgia, but the process also demonstrates that, in Georgia, the constitution continues to be used as yet another tool for the ruling party to stay in power, rather than a document that establishes the ground rules for a democratic polity. In this respect, little has changed in Georgia. It should be remembered that the UNM frequently engaged in constitutional machinations, when they were in power, to ensure that they would remain so. Over the last five years, the GD has demonstrated that it has not been able to solve all of Georgia’s problems, nor to consolidate democracy throughout the country or entirely shake off the influence of its founder Bidzina Ivanishvili, who has wielded extraordinary power as a private citizen, since leaving office in late 2013. However, the GD has also shown little interest in returning Georgia to the chronic low level instability, democratic rollback and human rights abuses of the late UNM era. There is plenty to be concerned about in the constitutional reforms, but there is a fair amount of truth to the notion that if the GD wanted to either make Georgia a much less democratic country, or move it closer to Russia, it would have done so by now. Die hard UNM supporters and their most hard-line supporters, in the west, might believe this has occurred, but nobody else does anymore. Unfortunately, it is likely that the constitutional reforms will pass. The amendments will make Georgia more illiberal, particularly in regard to LGBT rights and they will help entrench the GD as the ruling party. They will also ensure that politics remains characterised largely by the issue of democracy itself with elections that are rarely more than referenda on the ruling party. Thus, while much of the criticism

OUTLOOK ON GEORGIA of the current constitutional processes suggests that democracy is being lost in Georgia, the more accurate way to see this is that democracy has stalled in Georgia. That is not exactly good news, but it is also a reason to not give up hope and a reminder that while much has changed in Georgian politics over the last decade, much has stayed the same. Constitutional processes and Georgian politics, in general, are made more complicated by another factor. Georgian politics have always occurred within an international context. That is still true but that context is now in a period of significant uncertainty. For the years from roughly 2008-2016, Georgia was caught between a Russian regime that had annexed a portion of Georgia, was opposed to Georgia becoming a member of NATO and in important ways never fully recognised Georgia as a genuinely independent state, and a group of western allies that saw Georgian independence as unequivocal and, with varying degrees of enthusi-

asm, generally wanted to see Georgia move closer to the EU and NATO. That dynamic often left Georgia in the maw of geopolitical rivalry between Russia and the West, but it was unambiguous and Georgia knew who its allies were. That has changed a lot in the last year or so. Russiaâ&#x20AC;&#x2122;s position remains the same, but conditions in the West, particularly the US, are different. The relationship between the Trump administration and Russia are complex and remain somewhat vague, but they are a departure from the hawkish posture of the mainstream of both the Democratic and Republican Parties. Similarly, the democratic rollback that is occurring in the US and parts of Eastern Europe, as well as a battery of issues within the EU ranging from Brexit to refugee related crises, has cost the West a lot of leverage in places such as Europe. Earnest protestations about constitutional reform, from places such as the Venice Commission, or statements of concern from western NGOs are even easier to ignore, given

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these developments. For Georgia, constitutional reforms and changing global dynamics mean that the danger, and path of least resistance, is not an authoritarian regime like the ones in Moscow or Baku. Rather, it is being stalled in a semi-democratic limbo where elections are pretty good, every decade or so power changes hands and rhetoric is always heated, but politics remains a game for the elite dominated by accusations and re-litigation of the past rather than interests competing for political outcomes.

Lincoln Mitchell

Lincoln Mitchell is a writer, pundit and specialist in political development having worked on democracy and governance related issues in the former Soviet Union, Eastern Europe, the Caribbean, the Middle East, Africa and Asia.

OUTLOOK ON GEORGIA

The EU & Georgia: What Comes Next? Ivane Chkhikvadze Georgia must decide if it wants to push for EU membership on its own, or part of a larger, regional enlargement, says Ivane Chkhikvadze of the Open Society Georgia Foundation.

U-Georgia relations reached a crucial milestone in March 2017, when the EU decided to lift short term visa requirements for the citizens of Georgia. This decision was, on the one hand, a strong political signal for the Georgian political elite and on the other huge relief for citizens, who no longer had to collect dozens of papers and stand in queues at the consulates of EU member states in order to obtain visas. Abolishing the need for visas, and the signing of an Association Agreement (AA) between the EU and Georgia has kept Georgia high up on the EU’s agenda. Now, however, EU-Georgia relations have got to the point where it is fair to ask: What comes next? It is a question with no clear answer and neither the EU and its member states, nor the Georgian authorities appear able to elaborate. Brexit, the migration crisis, terrorism and challenges to democracy in some of the EU’s member states have caused the EU to become ever more inward looking, and as such less clear on relations with Georgia. Consequently, the EU (and in particularly those member states which are sceptical about enlargement) stress

that the next stage in bilateral relations should be implementation of the Association Agreement. The AA does not have a clearly defined end date and theoretically, its implementation could be continued endlessly. At this stage, the European Union does not have the interest, appetite and resources to reach out and think about its immediate neighbours, potentially harming the Union. Unlike NATO, the EU has never given Georgia the promise that the country would eventually become a member state. The last summit of the Eastern Partnership (EaP), held in Brussels on November 2017, clearly demonstrated that the EaP has either reached its limits or is very close to them. The European Union has no clear-cut view on what the programme’s end game is. The EaP partner states all have diverse aims towards integration, varying from limited ties, as with the case of Belarus, to full EU membership in the case of Georgia. Georgian officials stress that eventual membership of the European Union is Georgia’s foreign policy priority. Moreover, in 2017 the government of Georgia adopted an official communication strategy for 2017-2020 to explain costs and

benefits of Georgia’s EU membership to the local population and to formulate some external messages. However, despite the document, the Georgian authorities also do not have answer to the question as to what should be the next step in EU-Georgia relations, as implementation of the Association Agreement is not a prerequisite of EU membership. Whilst the ultimate goal is clear, there is lack of clarity on how to achieve it. At the end of 2017, the Georgian Prime Minister Giorgi Kvirikashvili pledged that the ultimate goal of Georgia is full membership of the EU and tasked the Georgian authorities to elaborate a strategic road map, a document which is intended to be much wider than the Association Agreement and which will formally set Georgia on the path to membership. The Georgian authorities still have to reflect on several issues. Among them is whether to seek an EU membership perspective from the European Union itself (similar to what the EU granted the Western Balkan states at the Thessaloniki EU summit in 2003) or press for eventual membership without a membership perspective. Georgia also needs to think about when will be the right time - a window of opportunity - to submit its membership application to the European Council. Then there is the question of what Georgia should do internally to get ready for submitting its application, and what kind of communication it should have with the European Union, especially with those member states which are largely sceptical of enlargement. Finally, Georgia must decide if it will push for regional enlargement – together with Moldova and Ukraine – or if it will pursue membership on its own, without being linked to the other EaP countries. The views expressed in this opinion editorial are the author’s own and do not necessarily reflect position of Open Society Georgia Foundation

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OUTLOOK ON GEORGIA

NATO integration is getting a boost—but still lacks an end game Joseph Larsen The Trump administration has so far provided Georgia with a great deal of military support, although NATO membership still looks to be a long way off.

pril 3 marks one decade since NATO issued the Bucharest Declaration, a document that promised eventual membership for Georgia and Ukraine. Since then, Georgia has made major progress in functionally integrating its military with NATO, largely due to support provided by the US. However, full membership is still not on offer. Georgia’s pathway to NATO remains unclear, but it’s not for lack of trying. Despite an uneven record on democratisation and human rights, former President Mikheil Saakashvili and his United National Movement (UNM) undertook major efforts to set Georgia on the path toward NATO. In 2004, the country began contributing to the International Security Assistance Force in Afghanistan; in 2005 it agreed to facilitate the transit of NATO forces. Also in 2005, Georgia’s National Security Concept called for “fully-fledged integration into Europe’s political, economic and security systems.” Due largely to UNM’s dogged lobbying in Washington, Georgia became a cause célèbre for the Bush administration’s “Freedom Agenda.” In 2005, Bush called Georgia a “beacon of liberty for this region and the world”—expressing hope that the Rose Revolution would serve as a model for other countries in Eurasia. The Bush administration was convinced that Georgia and Ukraine—then led by pro-Western President Viktor Yushchenko—were ready to start moving toward membership. It pushed to extend Membership Action Plans (MAPs) to both countries at the 2008 NATO Summit in Bucharest. Germany disagreed, arguing such a step would needlessly antagonise Russia. With the support of several other Western European NATO members, Germany succeeded in blocking extension of the MAPs. The result was a compromise we now refer to as the Bucharest Declaration—a

document that satisfied no one and was ultimately used by Russia to justify later invasions of its neighbours. Just one week after the summit, Russian General Yuri Baluyevsky stated that Russia would consider military action if it felt threatened by developments in neighbouring countries. Four months later it did exactly that, invading Georgia following the latter’s attempt to forcibly regain control over the breakaway territory of South Ossetia. The war served Russia’s main objective, rattling NATO and effectively taking enlargement off the table. Nonetheless, Washington remained Georgia’s biggest cheerleader. Now on its third administration since the August 2008 war, US support for Georgia has ebbed and flowed but never run dry. Surprisingly to some, support has remained firm under the Trump administration. The State Department recently agreed to sell 75 million US dollars worth of Javelin anti-tank missiles to Georgia— something the Bush and Obama administrations regarded as a step too far. This spring will bring the launch of the Georgia Defense Readiness Programme— in contrast to previous US military aid programs which focused on interoperability with NATO forces, the new initiative will train Georgian troops to defend their own territory against invasion. Given Georgia’s current security situation, that couldn’t be more relevant. Vice President Mike Pence also made a powerful symbolic gesture when he visited Georgia last July. During the visit, Pence stated that “President Trump and the United States stand firmly behind the 2008 NATO Bucharest statement which made it clear that Georgia will, someday, become a member.” Those are just words, but his strong affirmation of the Bucharest Declaration contrasted sharply with the guardedness of Obama administration officials. The US Congress has also stepped up its support for Georgia. On July 24, 2017, 113

Congress passed the Countering America’s Adversaries Through Sanctions Act. The Act codified existing sanctions against Russia while imposing some new ones, directly referring to its “illegal annexation of Crimea in 2014, its illegal occupation of South Ossetia and Abkhazia in Georgia in 2008, and its ongoing destabilising activities in eastern Ukraine.” The Trump administration isn’t oriented by anything resembling the Freedom Agenda. Rather than shared values, it appears to be supporting allies out of rational calculations of interest. Nonetheless, it’s providing Georgia with a great degree of support, especially of the military kind. That reveals something big—despite changing administrations and shifting foreign policy priorities, Georgia’s strategic importance endures. The country is no longer a beacon of democracy. Instead, it’s an important part of the European security architecture. That may prove a better formula for lasting strategic cooperation. Does that mean NATO membership will happen under the Trump administration? Not likely. Despite labeling Russia a major threat to its interests, the US recognises that bringing Georgia into the Alliance would come with tremendous risk. Perhaps more importantly, there’s very little appetite for NATO enlargement on the part of the Western European members. Montenegro was recently accepted into the Alliance, but that country doesn’t share a border with Russia. Ten years after Bucharest, Georgia doesn’t appear to be any closer to NATO membership. It will have to settle for functional integration for the time being. However, given the strong support provided by the US—even under a president known to be fond of Vladimir Putin—that isn’t such a bad thing.

Joseph Larsen is an affiliated analyst at the Georgian Institute of Politics.

OUTLOOK ON GEORGIA

Georgian-Russian Relations: Past, Present & Future Revaz Koiava Despite some progress on a number of minor issues, neither Georgia nor Russia appears ready to cross any red lines anytime soon.

he history of Georgian-Russian relations is the history of Georgia since the fall of the Soviet Union. Russia has played the major role in the creation and development of the modern Georgian state. It was directly connected with all the important events in Georgia’s recent history. For Georgian political elites, the relationship with Russia does not only relate to the Russian Federation, but also towards the independence and the freedom of the country, towards political values and the Soviet past. Georgian-Russian relations were reset in 2012 when the Georgian Dream coalition took office in Tbilisi. The new government revised Mikheil Saakashvili’s policy towards Russia, aiming at improving the mistakes made by the previous government. The need for the restoration of relations was due to the permanent threat of war, which was morally and physically destructive for Georgia. The demand for a normalisation policy with Russia was high on the agenda of Georgian society and the policy was supported by the West. At the same time, Georgia had to keep some distance because of Russia’s aggressive policy and so called red lines. The normalisation policy reflects the ambivalent attitude towards Russia that exists in Georgian society: on the one hand, supporting cooperation with Russia in economic and social-cultural issues, and on the other, the necessity to distance from it. Such attitudes have historical roots. Georgian-Russian relations are discussed in two formats on the political level. Talks in Geneva have been ongoing for 10 years without a political breakthrough. The positions of both parties are pre-determined and they are not likely to change in the foreseeable future. The situation is complicated by Russia not recognising its responsibility for the conflicts in Geor-

gia, and positions itself as a neutral actor. Nevertheless, this is currently the only multi-lateral format and source of communication between the two countries, and it might become more important in the future. The Abashidze-Karasin negotiation format was created after the new Georgian government took over in 2012 and it often represents the subject of internal discussions. The opposition accuses the government of making concessions to Russia and believes that the format can’t solve the

GeorgianRussian relations were reset in 2012 problem of territorial integrity. However, the format was not created to discuss the conflict, or related security issues; these issues are discussed during the Geneva talks. During five years of existence of the Abashidze-Karasin format, the two sides have achieved significant success in the areas of trade, humanitarian aid and transport. Meanwhile, Georgia has not compromised any principal issue, as was feared by the opposition parties and the government’s critics. In the absence of diplomatic relations, this platform is important for cooperation in areas where the interests of two countries do not contradict each other. Recently, discussions about Russian soft power became one of the major topics on the Georgian political agenda. Certainly, Russia is interested in the existence of a 114

loyal political class and public attitudes in Georgia. However, contemporary Russia lacks sufficient material and ideological resources to pursue an effective soft power policy in the region. Outside its territory, including the post-Soviet space and Georgia, Russia cannot legitimise its policies and ensure prestige. Russia cannot provide an attractive model of development to neighboring countries. In the nearest future, it is expected that the two countries will cooperate in the spheres of transit routes and combating terrorism. After the defeat of Islamic State in Syria and Iraq, former combatants from Georgia and Russia might return to their homelands: that will force the pragmatic cooperation between two states in security issues. At the end of 2017, Georgia signed a contract with the Swiss testing and inspection company SGS on carrying out cargo monitoring through three trade corridors between Georgia and the Russian Federation. Now it is Russia’s turn, which will probably sign a contract with SGS in 2018. Nevertheless, enactment of agreements is hard to imagine as the de facto authorities of Abkhazia and South Ossetia firmly oppose them. In conclusion, we can say that a particular breakthrough in Georgian-Russian relations or sharp deterioration is not expected in the near future. The normalisation policy will continue in the economic and humanitarian fields but the limitations of the Abashidze-Karasin format mean that they will not go any further. Agreements in the economic, cultural and humanitarian fields were reached soon after the launch of the format: soon afterwards, dialogue became deadlocked. In the nearest future neither of the two sides will be ready to cross its red lines, especially when, for Georgia, those lines relate to fundamental issues of statehood. Revaz Koiava is a researcher at Caucasian House.

OUTLOOK ON GEORGIA

Young, Skilled and Competitive: Georgia’s Labour Market Irina Guruli Much of Georgia’s two million-strong labour force is young, highly skilled, and competitive: average monthly earnings stand at 940 lari, around 380 US dollars.

he labour force in Georgia is equally distributed between rural and urban areas, slightly more than half - 57 per cent - resides in rural areas. The unemployment rate stands at 12 per cent with prevalent self-employment rates – 57 per cent of those employed are self-employed. The labour force activity rate stands at 67.5 per cent with a gap between the urban (58 per cent) and rural (78.2 per cent) populations. The latter is mainly due to the economic structure: namely, self-employment mainly prevails in rural areas and represents engagement in low-value added generic activities, primarily subsistence agriculture. A lack of formal jobs accounts for significant underemployment in the country. Employment opportunities are particularly low in rural areas, where only 22 per cent of those employed are formally employed, the rest are considered as either self-employed or unemployed. While the average monthly salary as of 2016 is 940 lari, there is a significant gender wage gap with a female-to-male earnings ratio of 0.62. Salary gaps are significant by industry as well. Among the highest paid jobs are in construction and financial consulting, while the lowest paid industries include the manufacturing, transport and communication sectors. Georgia has a flexible labour code, and one of the most liberal labour environments in the region means that the country ranks high in the Labour Freedom Index. Hiring and firing regulations are quite liberal and there is no minimum wage requirement. Education Education determines and shapes a country’s labour force. Georgia prioritises education and continuously imple-

ments reforms upgrading the education system, improving access and quality of the country’s educational institutions. According to the OECD, the country is the region’s top performer for primary school enrolment and length of schooling. The Georgian population is well educated with 33 per cent of all adults having post-secondary education, and there is a high level of educational attainment amongst the labour force. Enrolment statistics for higher educational institutions show that the most popular subjects are social sciences, including business and law, followed by health and social care. The latest graduate data

More than 33 per cent of all adults have post-secondary education from secondary professional schools by specialisation illustrates that public health, physical training and sports are the most popular specialisations, while industry and construction are amongst the least popular. Labour Market Challenges A number of challenges also need to be mentioned. These include structural unemployment, skill mismatch and high informal employment rates. Unemployment is especially high among young people with higher education. 115

Unemployment rates amongst the 2029 age group are as high as 37 per cent. International organisations frequently quote skill mismatch as the major cause of high unemployment rates. Transition from school to work is particularly difficult, resulting in the underutilisation of the high potential of young workers. A World Bank report from 2013 states that over 50 per cent of the unemployed have a secondary school diploma, while 40 per cent have a higher education degree. Many of the jobs that require vocational skills are occupied by workers with tertiary education, hence the country faces the challenge of what is known as overeducation. The phenomena also referred to as a vertical skill mismatch is due to two interrelated reasons. On the one hand, people investing in acquiring higher education and on the other, low demand for a highly skilled workforce due to the structure of the economy. Overeducation of course does not imply a limiting of education, but rather putting the workforce into productive use through identification of the right investment opportunities. To conclude on a positive note, given the characteristics of the Georgian labour force paired with the favorable investment and business climate of the country, there is a potential to expand and create new sectors in the country with high value-added activities. The creation of new job opportunities will motivate a highly educated workforce to further invest in upgrading their skills and acquiring new knowledge. Currently, a lack of job opportunities is partially responsible for the low motivation of the workforce to attain additional knowledge through training and professional development programmes.

Irina Guruli is the deputy director of the Economic Policy Research Centre (EPRC)

OUTLOOK ON GEORGIA

The Sights and Smells of Georgian food Carla Capalbo

The author of Tasting Georgia explains what first drew her to Georgia, the country's food, its wine and its amazing hospitality.

giant clay pot helped me fall in love with Georgia. I was immediately seduced by the majesty of the eggshaped terracotta qvevri with their swollen bellies and pointed bottoms designed for natural winemaking. When you enter a traditional wine cellar in Georgia you walk into a seemingly empty room. Unlike most of the rest of the world, Georgians place their crushed grapes into qvevri that are buried in the ground, so in a Georgian cellar the wine is being made and stored below your feet, safe in the earth’s or ‘mother’s embrace’. It’s been done this way for at least 8000 years, and qvevri are now recognised by UNESCO as an intrinsic part of Georgia’s intangible cultural heritage. “Making qvevri is an unbroken tradition that’s been passed from generation to generation through the millennia, just as I’m now passing it to my children,” says Zaliko Bodzhadze, one of only a handful of potters whose families still have the inherited know-how to keep the qvevri-making going. The orange wines made in qvevri from white, macerated grapes are unlike others I’ve tasted. They combine the structure and tannins of a well-made red wine with the flavours of exotic teas and dried apricots that are more associated with aromatic whites. Feast By the end of my first week in Georgia I had decided to write what turned out to be a large book about the culture of the country’s foods and wines. I travelled often to Georgia over the next three years, visiting small houses in tiny villages where the women cook local specialities in their uniquely generous way, often

from kitchens without running water. In Meskheti, southern Georgia, for instance, a few miles from the monumental 12th century cave city of Vardzia, a woman produced one of the finest and most complex meals of my life cooking over a wood-burning stove in her bedroom. She made an array of dishes from just a handful of dried stinging nettles, cracked wheat, fermented blossoms, sun-dried plums, courtyard chicken, home-made cheese, flour and clarified butter. The food at such a supra – or feast – is varied and abundant, with at least eight to 10 different dishes being served during the course of the meal. The flavours range from earthy to spicy, from sharp to sweet, so it takes an unusual wine to accompany them all. That’s where the macerated whites come in: they complement this articulated range of tastes much better than the reds or whites we’re used to. In the course of my research, I listened to – and then retold – stories of courage and resistance, with all the detail of a battle freshly fought. One of my favourites has to do with wine. In past centuries it’s said that the men would leave their villages to go to war with a few clippings of their favourite grapevines tucked safely under their chain mail. I assumed this was in case they were killed in battle, so that from the remains of their bodies new vines would grow. But is seems I had it the wrong way around. “As they left their homes, the men took the most precious thing they had – cuttings from their many local varieties of grapevine – in case they might return home to find their villages razed and their vineyards destroyed,” explains

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Giorgi Barisashvili, a wine historian. “This way they could start their patrimony again, like a phoenix rising from the ashes.” The story of the last 20 years in Georgian winemaking is not far from that kind of resurrection. At the start of the 20th century, Georgia could boast 525 native grape varieties. By the 1970s, due to the collective Soviet winemaking regimes that favoured quantity over quality, wines were being produced in bulk from just four of these varieties. Now, thanks to painstaking work from many individual winemakers, the national collection is back up to about 460. For the Georgians, wine has become a symbol of the reclamation of their country’s rich cultural heritage: it’s been threatened many times but, luckily, not lost.

OUTLOOK ON GEORGIA Photo: Carla Capalbo

Photo: Carla Capalbo

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OUTLOOK ON GEORGIA

My Wife’s Friends Now totaling more than 500 episodes spread over a dozen seasons, the prime-time My Wife’s Friends remains one of the most popular television shows in Georgia. Why? Probably because it talks about the country’s desires and dreams – not least integration with Europe - and, naturally, the social changes these might bring. Keti Devdariani, the show’s script writer, spoke to Tamara Karelidze about how important it is to trigger discussion about taboos and stereotypes.

Tamara Karelidze: The show is focused on social issues that are quite sensitive for Georgians. It strengthens typically Georgian values and habits but it also promotes open-mindedness. Does bringing these issues up on television help increase awareness? Keti Devdariani: Unfortunately, I don’t have the exact answer to this question.

Unlike television ratings, which can be measured, nobody has checked for an increase or decrease in public awareness. So I don’t know how this television show works. We produce what we want to say and because it is broadcast, it gets heard. We don’t have the aim of changing someone’s position and attitude but of course, everything might have an impact on an individual’s life. It doesn’t

matter whether it is a bird which flies from one tree to another, some philosophical work or an old legend from a grandmother’s stories. TK: But you do deal with issues that are controversial in Georgian society: for example male nannies, sexual minorities, domestic violence, religion, etc. Does the audience’s response meet your expectations? KD: When a discussion starts it is already very good. Talking about taboos starts from a discussion. It does not matter how intensive, sensitive and hard a debate it is. Of course, we have had cases when the audience has loved a particularly odious character, but it does not start and end with ‘Friends of my Wife’. TK: Let’s look at the sexual minorities issue, which is very sensitive to society. The character of a transgender lady you brought in one season made a big impact. In general, people took to Nino – which of course is one of the most popular female names in Georgia, a Christian saint. Why do you think such a character was important? KD: We have almost every kind of character in our show. Transgender women and men are part of our society and the fact that somebody does not want to accept their existence does not mean that they do not exist and that we should not say anything about them. Simply being different from others can make some people so aggressive that they are ready to kill them. That was what we wanted to show with the story of Nino. TK: Is it effective to discuss myths about the West on television? Does it help the process of integration? KD: Integration is a complex issue from geopolitics to media or music. Everything supports or disturbs this process. Even prohibition of jeans and Kraftwerk did not

Photo: Giorgi Dadiani

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OUTLOOK ON GEORGIA

happen by chance in the Soviet Union. TK: In Georgia, there are a lot of projects whose goal is to increase awareness, especially in the regions, for example one involving celebrities who often go to the regions and have a conversation regarding the West, the EU and the importance of western integration. You were part of one of these projects. What do these people expect from the West? KD: The main problem in the regions is poverty. I often heard people saying "I do

not care about NATO, the EU or the UN when I canâ&#x20AC;&#x2122;t sell my crop." We try to explain that there is a direct connection between EU integration and the increase of welfare in the country and in the regions as well. TK: How possible is it to use TV shows or movies in order to bring Georgia closer to the West? KD: I think that very pro-Western people have to do this. From western movies, we know that the West is good. Now, itâ&#x20AC;&#x2122;s time to believe that we can also be part of this world. We have to stop talking about the

Photo: Giorgi Dadiani

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glories of the past and start working hard to build the future. Of course, it is possible to produce a product for western countries, which spreads information about Georgia, but it needs a lot of money, great desire and round-the-clock work. TK: What are the most pressing social issues that need to be processed and understood by Georgians? KD: People have to realise that while the EU and the West is oriented towards human beings, Russia is regressing to the days of totalitarianism.

OUTLOOK ON GEORGIA

‘I LOVED GEORGIA SO MUCH, I ORDERED A SINISTER GEORGIAN PHRASEBOOK’ Tim Ogder

I first visited Georgia for a period of three weeks in 2007, and moved here on a permanent basis in 2011. My attraction was instant, although what it was I found so appealing was initially difficult to define – I eventually concluded that it was the people, or their national spirit, and the way in which they had experienced hardships beyond my comprehension. I was fortunate enough to be raised in a privileged household and sent to an expensive private school, and as a 16-yearold on my first visit to Georgia, meeting people of a similar age who had seen war, poverty and political turmoil was eye-opening. To put it another way, it did not compare with my other experiences abroad, in which I had infested some of the nicest and most scenic parts of Europe, the United States and Japan. I returned to England and school a changed youth, feeling nothing but a desire to go back to what I decided was the ‘real’ world, and no doubt behaving like an American war veteran back from Vietnam. I lost interest in the trivia of adolescent life at my posh school and spent my evenings reading whatever I could find about Georgia, and even ordered an outdated Georgian phrasebook from an obscure American website, at certain risk (I felt) of having my bank details and identity stolen. Nothing deterred me from my dream to return to Tbilisi: not my parents’ scepticism, nor my friends’ bemusement, nor the Russian war of 2008, nor the sinister phrases in my Georgian language book (it seemed to recommend I learn: “Help me, I have been raped” and “Are there landmines in this area?” which suggested that Georgia wasn’t Tuscany, exactly). My correspondence with the few friends I made in 2007 became more frequent with the advent of Facebook, and I moved in 2011, finally able to start my life in Tbilisi. What little I had learnt and seen in my brief visits in 2007 and 2010 had ap-

Tim Ogder first visited Georgia in 2007. Since then he has learnt to love the country and believes that its future, despite ongoing problems, is bright. pealed to me greatly, especially as I was exacerbated and frustrated with matters in my own country. Georgians were proud of their history and knew it well; my fellow Britons, especially those of my enlightened generation, knew little of our nation’s history but still apparently felt compelled to feel ashamed of it. Georgians had apparently all but eradicated street violence – I barely felt safe walking to my local corner shop. Georgians were friendly; Britons were cold. I had it in my head at this point that Georgia was a little nation that, against the odds and under the radar, had somehow managed to get it all right. It took me some time to notice the cracks: the streets might not be dangerous, but domestic violence against women was (and is) a major issue; their friendliness and much-vaunted hospitality lasted until the point of disagreement; and their knowledge of their history and traditions was used to justify discrimination against sexual minorities. It was clearly not the social utopia that I had initially believed it was. But nowhere is perfect, as I came to realise, and there was still much to like about Georgia, not least because for Western foreigners it was a land in which one could do anything. During my years here I have worked as a teacher of English (conversation classes, mostly, which is like being a poorly paid chatshow host), boxing coach, university lecturer, actor (for a soap opera nobody saw and a product that turned out to be a hoax, both roles given due to nobody else wanting the job), and – best of all – a journalist, which I describe as my main career. My work in media has led my name to being published in newspapers in England and America, as well as being invited to discuss politics on Georgian television, and I also had the honour to be an invited speaker at a conference last year attended by a member of our own House of Lords. I have met 120

both the Georgian President and Prime Minister, both of whom were gentlemen whose conduct contrasted nicely with my experiences of dealing with my MP in Britain, who would barely give me the time of day. This, I suppose, is one of my main (and most selfish) reasons for living in Georgia – there is the chance to do things and live a life that would be inconceivable in my own country. But I believe it is still a land of great opportunity, and not just for me – my parents remark on their annual visit that the country changes for the better every time they see it. It is, of course, regrettable that so much of Georgia’s future is dependent on foreign powers; coveted EU and NATO membership are yet to be granted, and Russia is becoming increasingly aggressive in its foreign policy. Domestically, I predict that Georgia will undergo a fracturing of its society, as its vocal minority of young, Western-looking liberals clash with the traditionalist majority. In truth, this has started to happen already, with the populist March of Georgians movement gaining a modicum of traction and the pro-Russia Alliance of Patriots party winning six seats in Parliament. However, it is important to remember that this sort of social division will not make Georgia much different from its Western allies, especially while Donald Trump occupies the White House. What Georgia needs now is patience – its Western aspirations may still take time, but it is becoming increasingly popular as a tourist destination, and its location on the New Silk Road could see it reap major economic benefits. The future is bright and will remain so – providing Russia does not turn its eyes and armies south.

OUTLOOK ON GEORGIA

MY DISCOVERY OF GEORGIA John Wurdeman

I came to Georgia first in 1995, inspired by a recording of traditional Georgian music I stumbled upon in 1991. In 1996 I was a painting major at the Surikov Institute of Art in Moscow, and had studied a bit of Georgian history, language and culture in preparation for my visit. The very first night in Georgia my gracious hosts invited me for a supra (feast) and amongst the gorgeous food, amber flowing wine accompanying toasts and merriment, singers were invited in, they turned out to be the same group I had bought in a used record shop in Richmond, VA when I was 16. I knew at once my life would be intertwined with Georgia. I came back in 1996 and bought a home in Sighnaghi, Kakheti, a lively hillside town overlooking the Alazani Valley and the great Caucasus. Georgia had a romantic and wild appeal, it still felt like a very real place, a place for real tears, real laughter, and genuine hospitality. As an artist there was plenty of inspiring imagery, dynamic and various landscapes, evocative architecture, colourful people, and a culture both ancient and in a state of rediscovery after the Soviet experience. I finished by degree in Moscow in 1998 and moved permanently to my adopted homeland, Georgia. In autumn of 1998 I met my wife Ketevan Mindorashvili, who was singing with family and friends outside at night and I followed them as a lover of traditional songs. We married in August of 1999, and I spent my time painting and doing field recordings, tours and workshops in Georgia and abroad with Ketevan and her group Zedashe. Sighnaghi back then like most of rural Georgia had little to no electrical supply, water mains didnâ&#x20AC;&#x2122;t function and there was no natural gas. This was exceedingly frustrating to my Georgian neighbours who were used to all amenities in Soviet times, but for me it was delightfully

John Wurdeman fell in love with Georgia the moment he arrived, in 1995. He has never once regretted his decision to make the country his home. romantic, and helped me focus on the basics in life. In 2006, the year Russia created an embargo on Georgian wines I met Gela Patalishvili, a young and passionate grape grower who made beautiful traditional wines. Gela was concerned that mass production of Georgian wine was taking over and many of the original varieties were being lost to the practicality of large scale farming and production, and he asked if I would join him on a quest to celebrate and share the authentic and unique qualities of artisanal Georgian wine. In 2007 Pheasantâ&#x20AC;&#x2122;s Tears Winery was founded with three principles: use only Georgian varieties, and try to bring back and study lesser known ones, farm organically, and use qvevri - the clay vessels for fermenting and storing wine until bottling. We poured our first vintage 2007 Saperavi in spring 2008, and since we have expanded to own seven small plots spanned across Georgia and grow many lesser known varieties such has Tetri Tskhenis Dzudzu, Kahkhuri Mtsvivana, and Shavkapito. Very soon though we realised it was not only the wine scene that needed to find new life and reassessment but the culinary scene as well. As great as the blockbuster standard Georgian dishes are, 99 per cent of the menus in Tbilisi restaurants had the same Soviet standardised Georgian restaurant menu, and when travelling collecting songs and looking for rare grape varieties we realised the cheese, bread, fermented vegetables and variety of dishes in the rural regions boosted much greater diversity, and better ingredients. Many visitors would seek advice on where to find authentic polyphonic music, wine, and food and so many started to come Ia Tabagari and I founded Living Roots, a small inbound travel company trying to help guests find rare wine, music and culinary 121

experiences while using the profits to help foster indigenous traditions in the villages. These food and wine expeditions helped give birth to a book written and researched by Carla Capalbo, called Tasting Georgia, published last year in the UK (see page 114). Itâ&#x20AC;&#x2122;s been some 22 years since I first came to Georgia. Today you see a country with flourishing tourism, a cutting edge culinary scene in Tbilisi, while young Tbilisi is leaving the city to become winemakers, mushroom foragers, or grow heirloom wheat varieties. There is a generation of young Georgians not marred in the least by the dark years of the succession of Georgia from the Soviet system that bore great violence, poverty, and managed to create a civil war, one of the most dreadful experiences for any nation. Georgia is still trying to hold on to its ancient roots but is also open minded, forward thinking and wanting to rediscover itself in the modern age. This dichotomy of being both very young and ancient at the same time, keeps Georgia full of surprises, and I have never for a moment regretted my decision to come here to live, feel, sing, paint, cook, and make wine. It is forever changing and now is a beautiful time to experience, one of the last ancient living cultures on earth.

Lublin, the capital city of the Lubelskie Region, is a driving force of Eastern Poland and a growing BPO/SSC/IT hub, boasting more than 60 R&D centres

Lublin has one of the highest office-space growth dynamics in eastern Poland, with a current office stock of 180,000 m2, planned to rise to 300,000 m2 by 2020. Costs are competitive: 8-12 euro per m2

Lublin Airport is only 8 miles form the city centre with flights to many cities including London and Munich

Over 50% of Lublin’s residents are under 40, and almost two-thirds of the 350,000 population is of working age. One in five of Lublin’s population is a student

Lublin was named the “Emerging City of the Year in Poland 2018” at the CEE Shared Services and Outsourcing Awards

Marshal Office of the Lubelskie Region Department of Economy and International Cooperation Trade and Investment Promotion Section Artura Grottgera 4 St., 20-029 Lublin Investors and Exporters Assistance Centre +48 81 537 16 15 / +48 81 537 16 21 coie@lubelskie.pl Find us on: invest.lubelskie.pl/en

AFTER HOURS

ARTS

BOOK: Red Famine: Stalin’s War on Ukraine Anne Applebaum

Photo: Amazon.com

From 1932-33, four and a half million Ukrainians died of starvation, having been deliberately deprived of food by the Soviet Union. It is one of the most devastating episodes in the history of the 20th century and yet at the time it went unreported. To this day neither the Soviet Union nor Russia has acknowledged its responsibility for the famine.

Man-made famine, usually a consequence of poor government or economic mismanagement is not uncommon in history. It is only relatively recently that the world has by and large managed to escape its unforgiving clutches. What makes the famine in Ukraine so uniquely appalling is that while it was beget by the disastrous Soviet agricultural policies of the late 1920s, it later became a potent political weapon to be used against the people of Ukraine. It was genocide, and Anne Applebaum is not shy to say as much. Indeed, until the Holocaust, the famine was the largest act of mass killing in Europe in the 20th century. Soviet Ukraine’s harvest of 1932 was far worse than expected, and yet requisition targets had been set in anticipation of a better harvest than usual. The Ukrainian branch of the Soviet Communist Party attempted to explain to the central authorities in Moscow that fulfilling those targets would leave vast areas of the country without any food at all, and lead to mass starvation. Moscow wasn’t interested. Moscow wanted grain to fuel the industrialisation of Russian cities. The Ukrainian party was denounced as chauvinist, and hundreds of thousands of its members arrested, sent to the gulag or simply executed. Those who were shot could be considered the lucky ones. The end was

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quick. Applebaum relates stories of anthropophagi kidnapping children, of entire families wandering from village to village in search of anything to eat until they gave up and simply lie down to die. Human suffering at its most acute, all told in prose that while superbly detailed is never overly lurid, sensationalist or grotesque. Applebaum is a historian, a quite brilliant writer and never afraid to point the blame at those who her impeccable research demonstrate as being the guilty, in this case a Soviet leadership which wanted to kill the very idea of Ukraine, to bury it alongside the millions who died. Applebaum began writing this remarkable book long before Russia’s most recent invasion of Ukraine in 2014, but given that it reminds us how Stalin wanted to eliminate Ukraine because he feared that it could undermine his own rule, it feels eerily relevant to the present. As Applebaum said herself in a radio interview in October 2017, there are many similarities to the way in which Vladimir Putin views Ukraine. He sees any Ukraine that is pro-democracy, any Ukraine which is close to Europe politically and economically as a challenge to his political system. The present has never felt more like the past.

AFTER HOURS

BOARD GAME: Kolejka! Trefl

surplus goods you do not need at the Bazar (where there are more products available, but at a higher price). It sounds rather dull, but is in fact very addictive. It gets very tactical, and knowing how and when to best use your queuing cards to get the best possible position in a queue takes some mastering. Initially meant to be little more than a worthy yet small-scale project, the game has been a bit of a smash: more than 100,000 copies have been sold so far and it can be purchased in a number of translations: English, German, Spanish, Japanese, Russian and Romanian. You will find it on Amazon or similar resellers.

FILM: Loving Vincent Dorota Kobiela, Hugh Welchman Photo: Wikipedia

Photo: IMDB.com

A board game about standing in queues? Sounds at first like a rather British invention. Far from it. It was in fact designed and first launched in Poland, in 2011 by Karol Madaj, who wanted to show young Poles how difficult it was to buy everyday supplies such as sugar, bread or furniture during Poland’s bleak 1980s. His idea was then picked up and developed by the IPN, Poland’s Institute of National Remembrance, which funded its release. Polish historian Andrzej Zawistowski supervised the game’s design for historical accuracy. “Some young Poles don’t believe there were queues in those days,” said Madaj. “You can see it written on the internet forums. They think queues only started when department stores began the sales.” The premise of the game is simple: each of the (up to five) players is handed a shopping list, and the winner is the first person to gets their hands on all the goods on their list. Each round comprises three stages: strategically placing your family members in queues at the various shops (and you never know which shops will have any goods that day), jostling for position in the queues once goods have been delivered, then trading any

Winner of Best Animated Feature Film at the European Film Awards and nominated for many other awards (including a Golden Globe, BAFTA and an Oscar), Loving Vincent tells the story of the troubled artist's final days, beautifully depicted in oil painted animation. Each of the film’s 65,000 frames is an

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oil painting on canvas, using the same technique as Van Gogh, created by a team of 125 painters who travelled from all across the world to studios in Poland and Greece to be a part of the production. The film’s director, Dorota Kobiela – a Pole – is a painter herself and wanted to tell the artist’s story after studying his techniques. The paintings are very cinematic; they reflect so much of his life and surroundings,” Kobiela says. “They work together to create a story.” Kobiela, who studied at the Warsaw Academy of Fine Arts and Painting, features in Variety magazine’s latest ‘10 Animators to Watch’ list, has been a hot property for some time. She had previously directed one live action short film, The Hart in Hand (2006) and five animated shorts - The Letter (2004), Love Me (2004), Mr Bear (2005), Chopin’s Drawings (2011) and Little Postman (2011). Little Postman was the world’s first, and to Kobiela’s knowledge still only, stereoscopic painting animation film. It won Stereoscopic Best Short Film at the LA 3D Film Festival, the 3D Stereo Media (Liege) and 3D Film & Music Fest (Barcelona). Like much of Kobiela’s previous work, Loving Vincent also started out as a short, funded by a Kickstarter campaign and later with the help of the Polski Instytut Sztuki Filmowej. The film has received the stamp of approval from the Van Gogh Museum, which offered advice regarding content, while Axel Rüger, the director of the museum, officially approved the concept and the script. “Loving Vincent will contribute to further raising public awareness of Vincent van Gogh’s work, his letters, and his turbulent life,” he said. The film has so far grossed almost 20 million US dollars worldwide. This seven-year, painstaking production, which began with Kobiela and her co-director Hugh Welchman spending four weeks shooting 60 minutes of live-action footage with their actors in period costume and makeup in front of green or blue screens (two weeks with the principals in London and two weeks in Poland for backdrops with body doubles) is likely to be one of the most talked-about films of the spring.

AFTER HOURS

Art for the People Craig Turp Photos: Courtesy Art Safari

A successful artist in her own right Ioana Ciocan has lately become best known as a curator of some merit: she is currently the managing director of Art Safari, one of emerging Europe’s biggest and most successful public art events.

knew that Ioana Ciocan was the perfect artist to feature in the first edition of Emerging Europe magazine when she told me, in answer to my question about her background in the art world, that her path in the arts has always been about passion, and her ambition to put Romania on the European (and, why not) global art map. “I know it sounds idealistic, but it’s my biggest desire,” she says. “Art is my biggest passion, my everyday job and my hobby. I can’t imagine going into another field. In kindergarten, my parents spotted my passion for art and supported me every step of the way: Tonitza Art School, National Art University. After that I was lucky to have a scholarship at Central St. Martins in the UK, at Denmark’s Design Skole and then back in the UK at Ravensbourne College of Art.”

Project 1990 Ms Ciocan – whose name translates in English as hammer - first came to public attention with her (quite literally) ground-breaking Project 1990, which for a time – an all too short period of time – gave new life to a magnificent granite plinth on which for a number of decades had stood a monumental statue of Lenin, removed in 1990. “It was the summer of 2009, and almost every day I would pass through the Free Press Square in Bucharest, wondering why nobody wants to put a sculpture on that beautiful granite plinth,” she tells Emerging Europe. “I waited and waited for something to happen until I had a revelation: unless I do this myself, then nothing is going to happen, and that plinth will remain empty forever. So I said to myself that 126

maybe I should take the responsibility. Somehow, that piece of plinth chose me.” And so began the first public space art programme ever launched in Romania. “It was my personal ambition to transform a plinth that had been abandoned since Gigi Macaragiu, a priest, and thousands of people took down the statue of Lenin, in March 1990. Proiect 1990 was initiated in January 2010, without any kind of sponsorship, when I had a replica of the statue of V. I. Lenin, by Boris Caragea, installed on the empty plinth. Proiect 1990 highlighted my focus on the art of propaganda and also my desire to revitalise an area of Bucharest with a tumultuous history, that has largely been ignored since the advent of democracy. Artists invited to exhibit there succeeded in creating a new identity and gave a new vibe to the

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Photos: Courtesy Art Safari

former location. All the works exhibited there made critical artistic statements about Romanian socio-political life. Proiect 1990 ran for four years, included 20 projects, and created a huge buzz in the national and international press, an international exhibition at the Beelden aan Zee Museum in The Hague and a volume in Vellant. This is the pragmatic history of a passion.

Passion for art.” Art Safari Since then Ms Ciocan has initiated an impressive number of public art projects across Europe. She lectures on a regular basis at various conferences regarding the importance of art in public spaces. She was the ideal choice to take

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on a challenge as big as Art Safari. “It really was a challenge,” she says. “The former general manager of Art Safari Diana Dochia invited me, in the summer of 2014, immediately after Proiect 1990 had ended, to take over Art Safari Bucharest. I knew at that time that the Romanian art market was rather small, but I also knew that it was animated by good galleries and enthusi-

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astic artists willing to sell, but also by a ‘virgin’ public, with no tradition of visiting exhibitions.” “In that context, when we announced that we will hold Art Safari in May 2015, in Ciclop, a former multi-storey car park - at the time out of use - nobody believed us. It seemed impossible back then to hold a large exhibition in a garage! The huge success we had in 2015 – 20,000 visitors – gave us the courage and energy to organise, in May 2016, the largest exhibition dedicated to the Dada Centenary in Romania, with patrimonial artworks from 16 museums and 21 Romanian and international private collections.” “We also succeeded in attracting 25,000 visitors to the Dacia-Romania Palace, another forgotten Bucharest gem of a building, and personalities from local museums and international institutions came to study the Romanian contemporary art market. We had visitors from the Tate Modern, Beelden aan Zee, the Parliamentary Culture Committee of Bavaria, the European Curatorium for the European Capital of Culture 2021, as well as specialists from art museums from all over the world.”

This spring, Art Safari celebrates five years on the emerging European art scene, during which time it has become the most popular art event in Romania. “This year, we are returning to our roots,” Ms Ciocan tells me. “We are coming back to George Enescu Square in central Bucharest, the place where Art Safari was born. The 2018 edition will be conceived as a temporary museum, which will host many exhibitions under the same roof: a contemporary art exhibition curated by Hervé Mikaeloff (a consultant of the Louis Vuitton Moët Hennessy Group), a Romanian art exhibition dedicated to heritage Romanian art, curated by Alina Șerban, an international programme in partnership with foreign embassies comprising a public art installation created by the German artist Clemens Bahr, and the traditional educational programme. We estimate that this year we will welcome 50,000 visitors, and 2500 children as part of educational initiatives.” Art for Everyone Alongside her ambition of making Art Safari Bucharest the most appreciat128

ed and prestigious art event in Europe, education – art education in particular – is another of Ms Ciocan’s passions. She teaches at the Bucharest National Arts University and would love to have a bigger role in the way that art is taught to Romania’s young people. “I want a piece of the action when it comes to art education,” she says. “We need to see a radical change. In schools, everything needs to be changed. It is essential to make children friends with art while they are in school and it is essential to reformulate the art curricula. An education in art should be correlated with the active art scene and art market. Collectors also have a huge role to play in promoting art. They contribute to the development of the artists and the entire art market. We really do need to thank those collectors who exhibit their collections, making art accessible for everyone.” Art Safari 2018 takes place from May 11-20 in Piata George Enescu, Bucharest, Romania. More details: artsafari.ro

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R E P O R T A G E

ROMANIA’S CHANGING

REVOLUTION B Craig Turp

ucharest’s metro system can often be notoriously, even dangerously overcrowded. During the weekday morning rush, which can last from 7am to 10am, the M2 line serving the northern business districts of Aurel Vlaicu and Pipera regularly reaches breaking point, with station entrances closed until the crowds have dissipated. A shortage of rolling stock, which makes the gap between services far longer than ideal, is usually to blame. The over-crowding which took place on the evening of January 20 this year however, a Saturday, had an entirely different root cause. Romania’s jandarmerie, a militarised branch of the police force which carries out crowd control duties amongst much else, was deliberately preventing passengers from exiting the Universitate metro station. As the number of people trapped in the station grew, panic began to set in, and the situation was tense. There were

scuffles. Only when it became clear that the situation posed a real threat to the well-being of passengers, after half an hour or so, did the gendarmes relent. The crowds were heading for Bucharest’s University Square, served by the Universitate metro station. They were on their way to the latest mass protest against changes to the Romanian justice system proposed by the ruling coalition of Social Democrats (PSD) and centre-right ALDE party. The gendarmes appeared set on making it as difficult as possible for people to get to the protest No place for young men “The atmosphere changed that night,” says Teodor Tita, news editor at radio station Europa FM. “When the protests began this time last year it was completely different: it was almost a party atmosphere. Whole families came with their children, some even brought babies. I would not recommend bringing children to a protest now,” he tells 132

Emerging Europe. In his role as a journalist, Mr Tita has attended many protests since they began in January 2017 as a response to an emergency ordinance (OUG) issued by the Romanian government which decriminalised corruption involving sums of less than 200,000 lei and amnestied several incarcerated senior politicians and businessmen previously convicted of corruption. After a week of protests, which at their height saw more than 600,000 people on the streets of Bucharest and other major cities around the country, the government backtracked and annulled the ordinance. As the government changed tactics and sought to change the justice system piecemeal, drip-feeding various pieces of legislation through parliament, the protests continued throughout the spring and summer, albeit much smaller. Usually held on Sunday evenings, they would often gather together no more than a few hundred people. What was important to those who attended

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however was not the size of the protests, but the fact that they continued, that they kept up the pressure on the government. “I did not go to every protest, every Sunday,” says Maria Coman, a student. “But I went to many of them. We had to show that we had not given up. Sometimes it felt futile, but when I saw how many people came to the demonstration in January it all seemed worthwhile. I do not think so many people would have come if we had not kept the protest movement active throughout the year.” It’s about the economy As many as 70,000 people attended the protest in Bucharest on January 20, by far the largest for many months, and a warning for the government that ordinary Romanians were still prepared to brave freezing temperatures and heavy snow in order to defend the rule of law. Not everybody is still protesting, however. Razvan Ion is in his early forties and owns three companies in Bucharest, operating in areas as diverse as interior design and apartment renovations to coffee distribution. “Go and ask people what they are protesting

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for, and you will quickly discover that many have no idea whatsoever,” he tells Emerging Europe. “They go simply to feel part of something.” Last year he protested against the OUG. But since then he feels that things have changed. “Back then, everything was wrong about the changes to the justice law, especially the way they did it: at night, via an emergency ordinance. This time last year we had something tangible to protest about. Now I am not so sure. Besides, it is the economy which is of more concern to me than the justice system. Romania is heading for trouble: inflation and the exchange rate in particular. We need to protest against the government’s fiscal changes first and foremost.” Mr Ion is also angry that many people protesting did not bother to vote in the last parliamentary elections, in which the PSD-ALDE coalition won a comfortable majority. “It’s naïve to think that protest will change what an

election couldn’t,” he says. “I have five people in my office, all under 30. Not one of them voted in the election. One even told me ‘It does not affect me.’ Now he regrets it: some of the recent changes that the government has made to the way people are taxed will affect him directly.” The politician While the protests are by and large civic in spirit and non-politically aligned, right from the start large numbers of opposition politicians joined the protests. Siegfried Muresan, a Romanian MEP and spokesperson for the European People’s Party is one of them. “I have stood together with the protesters since the beginning of last year,” he tells Emerging Europe. “In January 2017, when the ruling coalition was first trying to weaken the judiciary and put the rule of law in danger I was among the 600,000 who took the 134

streets. Afterwards, whenever protests were organised I did what I felt was my civic duty and participated: in August, November and most recently on January 20.” Mr Muresan did not always protest in Bucharest: sometimes it would be in front of the Romanian Embassy in Brussels, or the European Commission. He was not alone. Romania’s protests have taken on an international dimension, with parallel events being held in a number of towns and cities across Europe with large Romanian populations. The Romanian diaspora is particularly vehement in its criticism of the PSD, whose policies over the past 25 years it blames for the continued precarious state of the Romanian economy, from low wages to a lack of development in rural areas. Nicolae Staniloiu, a paramedic, left Fagaras, a town at the feet of the Carpathian Mountains in central Romania, for London in 2008. He spent many

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Sunday evenings last year outside Romania’s Embassy in plush Kensington. In January he flew to Romania specifically to attend the protest in Bucharest. “I felt that this was the last chance we had to show that the protest movement is still in business,” he told Emerging Europe. “This particular protest had been planned and advertised for weeks. If only a few thousand people had bothered to come then the government would have shrugged its shoulders and moved on. This protest had to be big, and that’s why I felt the need to come and be part of it.” Many others came from far and wide. One group of protesters spent 10 days walking from the Transylvanian city of Cluj to Bucharest. Their aim was to raise awareness about the protest and to gently nudge the notoriously fickle residents of the capital into feeling compelled to follow their lead. It appeared to work: turnout was larger than anyone expected.

Imminent threat “At the beginning on 2017, there was a sense of imminent threat to the judiciary from the ruling coalition,” says Mr Muresan. “The hasty manner in which they tried to modify the judicial laws prompted people to take to the streets and protest. The message was channelled towards protecting the independence of the judiciary and against the ruling politicians. Later in 2017, when the government’s bad political decisions had implications on the economy as well as the judiciary, the message of the protests became more divergent, less unified. However, the discontent of the people was still there. The good news is that the beginning of this year has shown that there is again more coherence in the message of the protesters.” What comes next is anyone’s guess. Much depends on how Romania’s new government (the third in a year) sets about implementing the changes to the 135

justice system it still apparently needs to enact in order to keep the PSD’s leader Liviu Dragnea – and many other high-profile politicans – out of prison. The new prime minister Viorica Dancila is a close ally of Mr Dragnea. A convicted criminal currently serving a two-year suspended prison sentence for attempting to rig an election – Mr Dragnea is barred from taking the job himself, although he remains and MP and is speaker of the country’s lower house. Last November Romania’s powerful anti-corruption agency, the DNA, acting on an investigation by the EU’s own anti-fraud body OLAF, charged him with setting up an “organised criminal group” in order to siphon off EU funds. Mr Dragnea also faces charges relating to an uninhabited island on the Danube, the administration of which was transferred to a company to which he is allegedly connected. If found guilty on either charge he will almost certainly receive a long custodial sentence.

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The need for legislation that would either pardon Mr Dragnea or render charges against him obsolete therefore remains pressing. Endgame Siegfried Muresan remains optimistic that the European Union will eventually force the Romanian government to see sense. In a joint statement the President of the European Commission JeanClaude Juncker and the Commission’s First Vice-President Frans Timmermans warned Romania’s government on January 24 – just four days after the latest protest - that the independence of Romania’s judicial system and its capacity to fight corruption effectively are essential cornerstones of a strong Romania in the European Union. The statement refers to the Cooperation and Verification Mechanism (MCV), set up by the Commission in 2007 when Romania and Bulgaria joined the EU as a transitional measure to assist the two countries to remedy shortcomings in the fields of judicial reform and corruption: “In its latest report under the MCV in November 2017, the Commission

highlighted that the government and the parliament should ensure full transparency and take proper account of consultations in the legislative process on the justice laws. The Commission also made clear that a process in which judicial independence and the opinion of the judiciary is valued and given due account, also drawing on the opinion of the Venice Commission, is a prerequisite for sustainability of the reforms and an important element in fulfilling the CVM benchmarks. The latest CVM Report identified the justice laws as an important test of the extent to which the legitimate interests of judicial and other stakeholders are given an opportunity to be voiced, and are taken sufficiently into account in the final decisions. Events since then have done nothing to address these concerns.” The statement ended with a warning which suggests that Romania could well face disciplinary measures similar to those launched against Poland in December 2017: “The Commission calls on the Romanian parliament to rethink the course of action proposed, to open up the debate in line with the Commission’s recommendations and to build a

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broad consensus on the way forward. The Commission reiterates its readiness to cooperate with and support the Romanian authorities in this process. The Commission again warns against backtracking and will look thoroughly at the final amendments to the justice law, the criminal codes and laws on conflict of interest and corruption to determine the impact on efforts to safeguard the independence of the judiciary and combat corruption.” Says Mr Muresan: “I expect the European institutions to play a very active role in the near future. The recent statement is the first step in this direction. The matter will stay high on the agenda of all the European institutions until the ruling coalition withdraws the bills which weaken the judiciary.” Teodor Tita is less sanguine. “I think that we will see more public gatherings,” he says. “This time, there might be trouble. The PSD will not back down as long as Dragnea is in charge. They will push ahead as much as they can. But watch out for opinion polls. If they start to look bad for the PSD, there will be a revolt inside the party to get rid of Dragnea.”

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New Yearâ&#x20AC;&#x2122;s Eve 1992 was rather different for the people of Czechoslovakia. As the clock struck midnight to signal the arrival of 1993, Czechs and Slovaks celebrated not just a new year but the birth of two new countries: the Czech Republic and Slovakia. At least some people celebrated. In fact, a majority of people in both countries favoured keeping the two nations together. Czechoslovak president VĂĄclav Havel resigned rather than oversee the dissolution of the country. Opposition notwithstanding, the Velvet Divorce was as peaceful as the Velvet Revolution of 1989. Czechoslovakia remains the only former socialist state to have enjoyed a peaceful break-up.

THE VELVET DIVORCE

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Foraging for Flavour: New Estonian Cuisine Smoked salmon ballotine with cucumber, potato, homemade mayonnaise and sour cream, and plenty of herbs from Pavel’s garden.

Photo: promotional image

Pavel Gurjanov is one of Estonia’s most dynamic chefs and a leading light in the country’s food revolution. He talks to Craig Turp about his career, his restaurants and where he thinks new Estonian cuisine is heading.

allinn has been on the radar of weekend break travellers for more than two decades. The city’s picture postcard Old Town is one of the most immaculate in Europe, packed with medieval buildings and delightful both in winter, when snow frames every view, and in summer, when the long, northern white nights keep people on the streets until way past midnight.

For all its charms however, few people used to claim that one of Tallinn’s main attractions was its amazing food. That has changed over the past few years, as a number of high quality restaurants have opened their doors, serving inventive food made using fresh, local ingredients from sustainable supply chains. Pavel Gurjanov has been one of the key people who has made Tallinn’s transition from foodie hell to foodie heaven possible, at the restaurants Bordoo and DOM.

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“The changes we have witnessed over the past 10 years have been enormous,” he says. “People have become much more educated about food, and about the importance of local produce. They realise how much better it is when we use Estonian apples, for example, as opposed to apples imported from Poland. People are interested in locally-sourced food now, especially fish and game.” Gurjanov’s own connection to local produce goes back to his child-

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at the Hotel Ülemiste, in the Ö restaurant. It was already the best restaurant in Estonia and the head chef Roman Zastserinsk and his team had begun to use different, expensive ingredients. I fell in love with cooking on the spot. To see 10 chefs in one kitchen preparing dishes such as halibut, pigeon or crab was quite something.” After serving in the army (conscription remains compulsory in Estonia) Gurjanov had the opportunity to do an internship in Copenhagen, Denmark, ground zero of new Nordic cooking. “It was in Copenhagen, at the Michelin-starred Kanalen restaurant that I really saw for the first time what Nordic cuisine was: fresh local produce. It was a revolution, and I decided there and then that is what I want to do.” During the course of the following few years Gurjonov travelled to as many new destinations as possible to learn about food. The US, Germany, Sweden and Switzerland, where he lived and worked for a year. He returned to Estonia as a sous chef at Cru, still one of the country’s best restaurants, and for his work there he was named Estonia’s Chef of the Year in 2013. Then he was named as one of the 200 best young chefs in the world. “I have been the head chef at Bordoo and DOM for two years now,” he says. “DOM is located on Town Hall Square in the Old Town. and has been in business for four years. It’s a wonderful place, not least in December, when the Christmas Market is in full swing and the view from the window is simply fantastic. DOM’s slogan is simple: Food Inspired by Local Nature. It’s not always easy, but we try to use only ingredients from the Baltic Sea. We have been nominated for awards, we must be doing something right.” Bordoo is an older establishment, operating for 13 years now in the historic Three Sisters Hotel. “Bordoo is a small restaurant with just a few tables, and the prices are not what you might expect for a 5-star hotel. I like to call it ‘Fine dining for honest money.’” This year Gurjanov’s career will take another step forward

hood. “Every summer would be spent in the village where my grandparents live,” he says. “There was a garden all around the house and they would grow as much of their own food as possible.” Even today Gurjanov still has a passion for foraging for flavour. “Each autumn I take my chefs to the forest, to pick berries and mushrooms.” His love for cooking only came after he began to work in a restaurant. “Most chefs start training at 16,” he says. “I was 21 when I got my first job

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AFTER HOURS Halva cream, praline, сhocolate branches, fresh berries and berry sorbet.

Photo: promotional image

when he represents Estonia at the Bucose d’Or, perhaps the most prestigious cooking competition in the world, named for Paul Bucose, the father of nouvelle cuisine who sadly died in January at the age of 91. It was Bucose who moved the popular palette away from classic fare steeped in heavy sauces toward lighter dishes elevated by regional ingredients. An inspiration to entire generations of chefs, including Pavel Gurjanov. “These competitions are important

because they offer me the opportunity to show that Estonia is a culinary country,” he says. “This is something which is good for the development of restaurants, tourism and the economy of the country in general. Everything changes in Estonia, and I want to be the person who makes sure those changes are for the better.”

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Cured ostrich from Muhu island, confit chicken egg yolk, pickled chanterelles, grilled onion. There is an ostrich farm on Muhu Island. Pavelâ&#x20AC;&#x2122;s team cure the meat for a month with 14 different spices.

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Ljubljana City Guide: 48 Hours in Europe’s Green Capital Craig Turp

t’s not the biggest capital city in Emerging Europe, but Ljubljana punches well above its weight. A mix of Italian style and Hapsburg elegance, it’s one of the greenest cities in Europe and boasts one of the most happening nightlife scenes on the continent. Why Visit Now? Because there is never a bad time to visit. Charming in winter when snow gives the Old Town a chocolate-box look, it

keeps cool – in every sense of the word – even in high summer. Beginnings Ljubljana sits slap bang in the centre of Slovenia. The city’s airport is 26 kilometres to the north, near Brnik. A taxi will cost around 40 euros, and the journey should take no more than 35 minutes. There’s a bus too, which takes about an hour. Tickets cost a bargain 4.10 euros. As you head into the city it will not take you long to see why Lju150

bljana was Europe’s Green Capital in 2016. Parks and green spaces abound, and even the castle, which dominates the city centre, appears to have been set down in the middle of some enchanted green forest. Directly below the castle is the Old Town, which straddles the river Ljubljanica. Look for a hotel in this area. The gorgeous Vander (Krojaska Ulica 6–8; vanderhotel.com) stands on the river bank and comes complete with infinity pool on the roof and one of Slovenia’s best collections of wines in the cellar. Slightly less plush but no

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less comfortable is the charming Allegro (Gornji trg 6; allegrohotel.si) which boasts a rather lovely courtyard where you can take breakfast in good weather.

Day 1 The Old Town Let’s be honest, the Old Town is what you’ve come for. Start at the castle (ljubljanskigrad.si), built in its current form by Hapsburg Emperor Frederick III in the second half of the 15th century. These days reached by a funicular, it has served as both a fortress and roy-

al residence over the centuries and is today the city’s most visited attraction. There are various tours and attractions within its walls, of which the pick is the view from the top of the well-named Outlook Tower. Below, Ljubljana’s cathedral may have a modest exterior, but its Baroque interior is stunning. Building Bridges Almost as iconic as the castle and more photographed than the cathedral is the Triple Bridge (Tromostovje), originally a road bridge constructed in the late 1800s, but much embellished in the 1930s by Jože

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Plečnik, a local architect who added two pedestrian walkways and gave the whole ensemble its panache. Plečnik in fact designed much of today’s central Ljubljana, including the central market next to the cathedral. The market is the starting point for a walking tour of Plečnik’s Ljubljana: incredibly popular, you will need to book a spot in advance at the Tourist Information Centre next to the market. Local Hero On the far side of the Triple Bridge is a magnificent statue of France Prešeren, an early 19th century romantic poet

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widely regarded as the founding father of Slovenian literature. You’ll find his name given to squares across the country – including this one - and his face can be seen on the Slovenian 2 euro coin. Cafes line the square and river, not a few of which are tourist traps. Head for Cacao (Petkovškovo Nabrežje 3; cacao.si) which besides fantastic coffee, cakes and sandwiches is also home to Ljubljana’s best ice cream. Its enormous terrace is the best people-watching spot in the city. Evening Pleasures Ljubljaners eat late, then stay out partying even later. Gostilna As (Čopova ulica 5; gostilnaas.si) is the city’s best restaurant (probably), offering up a contemporary twist on classic seafood. Choose the cellar in winter, or the courtyard in summer. The food is great year-round. Less extravagant but equally tasty is Kuhna (Trubarjeva 56; skuhna.so) established by a Slovenian NGO to help integrate the country's migrant community. It serves fantastic food from around the world for next to nothing. For drinks, Kolibri (Židovska 2; kolibri-bar.com) is a cracking cocktail bar so well-hidden it might just as well be a speakeasy. There’s live music at the weekend. Klub K4 (Kersnikova 4; klub-k4.si) is central Ljubljana’s liveliest club.

Day 2 Tivoli Joggers, bikers, strollers and just about everyone in Ljubljana makes a beeline for Tivoli Park when the weather is remotely good. It’s a glorious mix of lawns, landscaped gardens, nature reserve and forests, all set across a whopping site just two blocks from the heart of the Old Town. Bring a packed lunch and picnic on the grass or head for the Hot Horse stand (hot-horse.si) and grab one of their infamous horseburgers. Yes, they are made of precisely what the name suggests. On the park’s eastern fringes is the Slovenian National Gallery (Prešernova 24; ng-slo. si), a fabulous neo-Renaissance palace now complemented by a striking glass and steel modern wing. The main exhibition focuses on Slovene art from medieval times to the present day and is well worth the modest entrance fee. Slovenia’s rather good Museum of Contemporary History (muzej-nz.si) is also found within the park. Reinventing the Wheel Those of who are suckers for quirky bits and pieces should head for the Museum of Ljubljana (Gosposka 15; mgml.si), where – amongst much else – you can get your eyes on what is claimed to be the oldest wooden wheel in the world. Head next for the squatters’ district of Metelkova, a former Yugoslav army barracks which since 1993

has been occupied by artists, musicians and bohemians of all colours and stripes. Its street art is legendary. More or less opposite is the newest section of the Slovenian National Museum (Maistrova 1; nms. si), opened in 2008: the National Gallery of Contemporary Art is found inside. Retail Therapy Shopping in Ljubljana is a pleasure, not least as the unearthly malls have all been banished the city’s outskirts, leaving the city centre free for small, independent retailers. Pick up wine at Dekanter (Gornji Trg 10), local handicrafts at Slovenika (Gornji Trg 4) and Slovenian delicacies such as Kranjska sausages at Krasevka (Vodnikov Trg 4). The Last Supper Bazilika (Prešernova 15; bazilika.si) opposite the Presidential Palace offers modern European food in an elegant 19th century setting, making use of local, organic ingredients. Druga Violina (Stari Trg 21) has a similar to policy, serving seasonal Slovenian cuisine in a classic Old Town setting complete with small terrace out on the street.

Craig Turp

LJUBLJANA

IN ONE PARAGRAPH You’ll need a head for heights but the views from the top of the castle’s Outlook Tower are worth the effort. On your way down, grab a Slovenian craft beer at Daktari, next to the castle funicular station. Peek inside Europe’s most successful urban squat at Metelkova, take a leisurely stroll around Tivoli and – if you have the stomach for it – feast on a horseburger from Hot Horse. 152

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Plovdiv City Guide: 48 Hours in Bulgaria’s Cultural Capital

ulgaria’s second-largest city is one of the oldest in Europe: people have lived here since at least 6000 BCE. It is also one of the most contemporary: a pedestrian-friendly city with a cultural scene as cutting edge as anywhere in the Balkans. During the warmer months the sight of what can often appear to be the entire city taking its evening constitutional promenade can make the city feel positively Mediterranean. Why Visit Now? Multicultural Plovdiv is currently getting on its glad rags ahead of 2019, when it assumes the title of European City of

Culture. As such, it has seldom looked better. Street art covers every vacant wall.

Day 1 Get Your Bearings Plovdiv – the part you want to visit at least – is small. You can get around on foot and will not need to use the city’s (reasonably efficient) public transport system. A taxi from the airport will cost no more than 30 leva. The city centre is focused on the main thoroughfare, Knyaz Alexander I, closed to traffic, and the Old Town directly to the east. Try and book accommodation in or around this area; we can recommend the Ode-

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on Hotel (Otets Paisiy Street 40; hotelodeon.net) for its cosy charm. Dzhumaya Square Plovdiv’s largest mosque towers above the square below and is as much a symbol of the city as any other building, and a reminder that this was for centuries part of the Ottoman Empire. It’s not open to the public (unless you are heading inside to pray) but you can admire it from outside. Just a few steps away are the remains of the Roman Stadium, which sometimes hosts concerts. A short film attempts to recreate the atmosphere of a chariot race or mock sea battle (like the Colosseum in Rome, Plovdiv’s stadium could be filled with water). You can also

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see well-preserved bits of the stadium in the basement of H&M and the Excelsior shopping centre. Trap Lunch The Kapana area north of the mosque is Plovdiv’s bohemian district. The name means trap, so-called because it used to be easy to get lost in its myriad streets (the area was once much larger,

but much of it was destroyed by fire in the 19th century). Young Plovdiv comes here to party and many artists and artisans have set up shop: finding gifts to take home is not difficult, and much of what is on sale is the real deal. It’s easy to find somewhere for lunch, although if you want to eat at Pavaj (Zlatarska Street 7; tel; +359 87 811 1876), one of the most famous eateries in the city, you will need a reservation.

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Up the Hill Plovdiv, like Rome, was built on seven hills. Follow Saborna Street up to the top of Nebet Tepe, the most famous. Allow yourself the whole afternoon to visit the many small museums along the way: almost every house on Saborna Street is open to the public, either as a museum or a memorial house. The style – National Revival, note the overhanging balco-

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nies – was popular during the early 19th century when Bulgaria began to reassert its national identity. You can end the day with a meal at Rahat Tepe (Dr. Komachkov Street 18; tel: +359 87 845 0259): huge portions of Bulgarian classics served for next to nothing. The terrace is splendid in the right weather. Then head back into the city centre for an evening stroll along Knyaz Alexander I.

Day 2 Inside Info The Free Plovdiv Walking Tour is a great way to find out a bit more about the city. The tours – which last a couple of hours - are indeed completely free (although you should leave a tip) and the young, local guides really do know their city. Tours start in front of the Town Hall on Stefan Stambalov Square. Miljo You can’t leave Plovdiv without whispering a secret in the ear of Miljo, the city’s unofficial mascot. An eccentric and gossip, though perennially penniless and somewhat ragged in appearance he was allegedly so well-endowed that the local ladies adored him. Indeed, so popular was Miljo that the city has honoured him with a statue halfway along Knyaz Alexander I — complete with a bulge in his trousers that may or may not just

be his hand. It’s an unusual attraction to say the least, but it does rather sum Plovdiv up: a city that likes to have fun. Lost & Found It’s amazing to think that Plovdiv’s now iconic Roman Theatre, which hosts theatre and musical performances during the spring and summer, lie buried for more than a thousand years. It was known that Plovdiv had once boasted one of the most spectacular amphitheatres in the Roman Empire, but nobody knew exactly where it was. Then, in the 1970s, an owner of a house up on Dzambas Tepe struck stone while digging in his garden: he had found the amphitheatre. Close by is Plovdiv’s idiosyncratic Orthodox cathedral, built in the 1840s and at the time a hotbed of nationalism as the Bulgarian church began its quest for independence from Greek dominance. Its elegant, three-layered, wedding cake-like belfry was added later. Assenovgrad & Bachkovo It is well worth hiring a car for the afternoon so that you can head out to a couple of Bulgaria’s most spectacular sights: the fortress at Assenovgrad and the Bachkovo Monastery. Both are on the main road leading south from Plovdiv, and the drive takes no longer than 40 minutes. The fortress is built on a cliff high over the Asenitsa river, and was used a military

redoubt since Thracian times, around 500 BCE. The Romans, Byzantines, Crusaders and Ottomans all left their mark, although little now remains: the Turks destroyed it in the 15th century. They left the fortress church intact however, and it remains one of the finest examples of Byzantine architecture in Bulgaria, and perhaps the most photographed church in the country. Bachkovo Monastery – while it lacks the jaw-dropping exterior of the more famous Rila Monastery – is nevertheless quite superb and features a number of unique exterior frescoes and icons. Founded in 1083 the monastery’s sublime ossuary is Georgian in style and reveals the eastern origins of its founders. Last Supper For a final meal in Plovdiv make reservations at Smokini (Otets Paisiy Street 12; tel: +359 999 000 996), widely recognised as the best restaurant in the city. Besides fine food and a wonderful roof terrace the selection of good Bulgarian wines is exemplary.

Craig Turp

PLOVDIV

IN ONE PARAGRAPH Nicer than Sofia. Take the free walking tour that starts in front of the Town Hall. Go see the old stadium terracing underneath the Excelsior shopping centre. Look out for street art. Take a walk at sundown along Knyaz Alexander Street. Whisper something in Miljo’s ear for good luck. Visit the museums on Saborna Street. If you have the time, take a half-day trip to Assenovgrad Fortress and Bachkovo Monastery. 156

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A LAST WORD

Is Zagreb the New Prague? Why Film Producers Shouldn’t Take Viewers for Fools

Central and eastern Europe capital cities are clearly still all the same to some people

hen a Russian mafia boss, Vadim Kalyagin — one of the villains in the BBC’s latest global crime thriller McMafia — realises something is wrong with one of his businesses in the Czech Republic he immediately sets off to Prague and reluctantly takes his daughter Natasha with him. It’s no wonder. Prague is one of the most visited cities in Europe. More than 6.5 million foreigners crossed the Charles Bridge in 2017 and Castle Hill, which rises above it, is one of central and eastern Europe’s most immediately recognisable landmarks, often shown in international film productions. In the second episode of the series, when we first see the city in McMafia, Vadim’s nemesis, Semiyon Kleiman, who, by all appearances, is a legitimate businessman, travels to Prague to offer better terms to Vadim’s partners and

put him out of business. “Prague is the gateway to the Russian market,” we hear Semiyon say, and it is indeed true that Russians comprise the third largest immigrant community in the country. This is when we see the most recognisable part of the Czech capital — Hradčany, complete with Prague Castle and St. Vitus Cathedral. When Alex Godman, a young, second-generation Russian and the main character of the series, joins Mr Kleiman in Prague, what we see of the city is an unrecognisable industrial area. When both leave the city, they head to mezinárodní odlety (international departures) at the Czech capital’s airport. In the same episode, we also see Jan Reznik, who stole 5 million pounds from Semiyon and now works for Vadim, get out of his car with a Czech registration plate before he is killed. Fast forward to the third episode. Vadim and Natasha arrive in Prague and take a horse-drawn carriage ride in the 158

Old Town. Next day, while Vadim tries to unearth the reasons for the hold-ups in his previously smooth-running system in the Czech Republic, his daughter goes sightseeing and street shopping. All this happens in Prague. When Vadim is done with his brutal business, they reunite. This is where I found myself at a loss and had to rewatch the entire scene. Vadim and Natasha lit a candle for her late mother in a chapel but they’re clearly no longer in Prague. In fact, they are in another city entirely. The chapel they visit is the Shrine of Our Lady of the Stone inside the Stone Gate, one of the most recognisable symbols of Zagreb, the capital city of Croatia. Is the Czech capital short of chapels? Do they not allow film crews inside? Or did the producers think no one would notice? Andrew Wrobel

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