Georgia’s export problems

FROM THE REDACTION

On July 25, the Georgian Chamber of Commerce and Industry, “Sakartvelos Ekonomika” magazine and nongovernmental organization “The Institute of Free Economy and Business” held a conference on Georgia’s export problems in “Sheraton Metekhi Palace” hotel.

The trends of Georgia’s export policy were considered at it in details. Unfortunately, a deplorable result was revealed – export policy does not exist in Georgia as such, there is not a single bank working on export projects.
The President of the Georgian Chamber of Commerce and Industry, Jemal Inaishvili said in his welcoming speech that the conference is very important, since Georgia has a great export potential, but it is a fact that a lot of problems emerged in this sector after the Russian market, on which almost 80% of the export fell, had been closed. Proceeding from this, it is necessary for us to look for a way out of this difficult situation. Jemal Inaishvili pointed out that it is not the problem of business only and it needs a serious support, especially taking into account the fact that in the US and the EU countries there are a lot of programs aimed at promotion, assistance and search of new export markets. Representatives of business and the government, particularly the economic bloc, should jointly work on the existing problems. He pointed out with regret that the conference was not attended by the Minister of Economy and his deputies. The President of the Chamber of Commerce and Industry believes that we shall not be able to overcome difficulties only by adopting liberal Customs and Tax Codes, first of all this concerned the taxes on import. In his opinion, that liberal tax policy, which is imperfect and requires serious changes in the Tax Code, will not be sufficient, the Georgian business needs assistance. The situation is quite difficult, wine-making, which is under threat now, was the only successful sector of agriculture, but during the soviet period there were other successful sectors as well – tea and citrus growing., the share of which is minimal in our economy now. Mr. Inaishvili pointed out once more that Georgia has export potential and it needs utilization. From this point of view, serious work should be carried out, investments should be attracted, local factories should be reequipped and it is necessary that consumers should get finished products. Mr. Jemal Inaishvili emphasized that tobacco growing is also a serious sector in Georgia, but no attention is paid to it at all. If the Russian market is closed, we should make use of the preferences granted to us by the EU that give our importers an opportunity of entering the European market that is attractive to everybody, but till then work should be carried out so that our products would become acceptable for Europe, that is why it should be outlined today what problems the business has and in what it needs the government’s assistance.
Badri Japaridze, the Director General of Georgian Glass and Mineral Waters Company: – I believe that Georgia’s export potential is an important subject. We should understand it well what diversification of markets means. Unfortunately, incompetent views and nonrealistic expectations are frequent in this regard, which, in the final analysis, contributes to taking of inadequate decisions. Our export has been reduced because of closing of the Russian market, but our company still remains a large exporter. During the past 10 years the dynamics has been absolutely unprecedented, since we started in 1995 by producing 5 million bottles and completed the last year with 180 million. In April our company became the leader of the Russian market and for the first time excelled such large producers as “Pepsi-Cola”, “Coca-Cola” and “Aquaminerale”. The market is measured from the viewpoint of amount and cost, the mentioned producers remain the leaders from the viewpoint of amount, but we excelled them from the viewpoint of cost. I say nothing about the producers of Russian mineral waters, such as “Narzan” and “Essentuki”, which work aggressively on the market. The market analysis has shown us that after prohibition of “Borjomi’s” import this segment was not redistributed to “Narzan” and “Essentuki”, but was filled by low mineralization waters, i.e. the Russian market was a market of high mineralization, but it changes its nature and becomes orientated for low mineralization waters, which should be taken into account by us, since there is hope that we shall return to the Russian market. Speaking about diversification, I should tell you that we manage to export our products to 24 countries, our areal includes Thailand, Australia and South Africa, but the former soviet republics used to be the largest market. This year we shall probably become the leaders in the Baltic countries, we have particularly good situation in Latvia and Lithuania; we shall also become the leaders in Kazakhstan as well, though there will be a keen competition with the local waters. Interesting work is in store for us in Azerbaijan, and in Ukraine our portfolio occupies 25% of the market, which is an unprecedented figure – none of Georgian products have a similar share in Ukraine. Our company is fully export oriented, 80% of output falls on export. In view of the Russian crisis this indicator has decreased, though, I believe that it will be possible to overcome this shock in 3-4 years. From the conceptual point of view, it is most important how we can place Georgian products on the export market, i.e. what should be our niche on the export market – we should have cheap products or premium products, which have a limited niche, but give producers an opportunity of allocation of considerable sums for marketing, advertising or communication activities by means of a large margin. I think that the second direction has much better prospects, since, in case of mineral waters or wine, there are countries with longstanding traditions, which manage to retain low primary cost and, correspondingly, it is impossible to compete with, since their proportion of quality and prices is very high, accordingly, entering of the EU market, even our traditional market is possible only by means of selling the traditional history – it is the product from the country having the oldest traditions and made of grapes grown without any pesticides, and this is the way by means of which Georgian wine should take the elite niche. It should be implemented perfectly well from the viewpoint of marketing, which cannot by done by a producer only. If we consider our case, during the period of 10 years we have been competing not only with the local waters, but also with absolutely unhealthy competition on the part of Georgian producers, which illegally used the brand of “Borjomi”. That is why it is very important for everybody to know that one cannot speak of success on the export market if consolidation of producers does not take place. Otherwise, it is impossible to achieve success in conditions of the keenest competition of the EU market; here I also imply the market of the former Soviet Union, where the standards and requirements have changed considerably. The Soviet Union did Georgia a bad favor, since Georgian products got used to noncompetitive environment, the most important thing was their production. Now the situation is absolutely different – it is impossible to sell low-quality products and high-quality ones are not sold by themselves, it is necessary to advertise them. In my opinion, taking out of any products under the guise of Georgian wine or mineral water should be limited, since this can completely ruin Georgia’s export potential. I would like to cite some figures having to do with market diversification. In total the Russian market made up 65% of our output, which is a huge indicator. The situation is being complicated since production and the company’s structure was based on this dynamics and amount of output. We do not demonstrate the difficulties caused by the Russian crisis, but it was really a considerable blow. If we were not well represented in Ukraine and Baltic countries, it would be impossible for us to stand this crisis, though before the Russian ban we were among the five leading companies producing mineral water in Eastern Europe. In 1998, when there was a crisis in Russia, we sold less excluding Russia than we sell now excluding it, but then the company was smaller, i.e. we have a real potential now. In difficult conditions we should not lose a huge infrastructure made on the Russian territory, since its creation anew is related to expenses and time. It is necessary that a local product should be on the export market along with Georgian a product, since we better penetrate into the market by means of it, there is also a product of lower cost in the portfolio and it is more attractive for distribution. In the final analysis, an expert strategy should be elaborated with the purpose of increasing of the export potential, which will be oriented for the premium segment, high quality and originality, only in this way we can take a niche and work on the market of the CIS and Europe. We started our work in the US by unshipping 10 000 bottles, and last year we sold 3 million bottles of “Borjomi”. Of course, it is not a big figure, but we have gone along way from 10 000 to 3 million bottles. There is a strict regulation in relation to high mineralization waters in the EU, from the viewpoint of market protection, the situation is limited there, but we manage to carry out registration related to considerable expenses. I will add that the issue of tourism is also very important from the viewpoint of export potential, here the strategy should also be oriented for elite type tourism. It is true that it is difficult to compete with Turkish resorts, since they have an excessively attractive price policy, on the other hand, the fact that Georgia has ethno-cultural and historical elements gives us a possibility of thinking of resort export. The main thing is to elaborate the right strategy. As to the Russian crisis, I would add say that there is a wrong idea of its results, since even today we pay a tax on the resource intended for Russia, which requires no comments. As to promotion, an entrepreneur needs assistance from the viewpoint of the right policy, but when there is a force majeure situation, it requires a nonordinary reaction in order to retain the potential. Georgian Glass and Mineral Waters Company is the leader of the Georgian export and the largest exporter. I would say without false modesty that it is a model company. 65% of the market was closed for us, but we pay a tax on the natural resource, in our case it is a deposit of mineral water, i.e. a tax on the water which we should have sold in Russia. Correspondingly, along with the losses from closing of the Russian market, we daily pay a tax on the resource, selling of which is impossible. Incompetent people do not see a big problem in it, but it is a fact that extra losses are being added to the existing ones.
The participants of the conference had many questions after the speech of the representative of the Investment Agency under the Ministry of Economy – Merab Lominadze.
Mikheil Jibuti: – Mr. Merab, you have not spoken about the government’s document that is called “export policy”. In other words, is there a document adopted by the government, which you are guided by in your actions? I have another question – do you, as the Investment Agency, have resources, and if you do, what investment projects have you implemented?
Merab Lominadze: – Economic policy in Georgia is directed at liberalization, that is why the following approach is applied to any issue – if the subject is interesting to private business and it shows initiative and interest to some concrete issue, such as wine export to Turkey, tea export to China, etc, we, as the agency, are obliged to promote it at the most. Answering the following question, I will say that the Investment Agency has no objective of investing its own means in the economic sector. At the beginning the agency was the body carried out administration of the grants attracted to the country. At the current stage the program of such grants has been practically ceased, and the work on the remaining grants is underway. It is not written in the agency’s statute that it should make its own outlay, we promote investments in a different way, we help investors to facilitate their activities in Georgia. We have taken part in many projects. We are closely cooperating with “Silkroad Group” that is carrying out active work in Georgia. Now Kazakhstan is making the largest investments in Georgia, there are representatives and companies from other countries. Our budget makes up 10 000 USD and I hope that this sum will increase still more next year, but it is difficult to speak of investment projects within the limits of these sums. I would like to point out the state is carrying out a liberal economic policy and does not interfere with the private sector’s activities. We should provide for the legal base and the environment so that investors would have a wish to make investments in this country’s economy.
Koki Tsetskhladze, “Martin Bauer” company: – In all countries there are export promotion programs and projects. If we compare the agricultural projects implemented in Europe, the US and our country, we shall see a great difference. It can be clearly seen from the conversation that we want to make a 100% copy of American and European social life, but we should understand that this, first of all, has to do with the level of the economy.
Mikheil Jibuti: – There are no plots of land in Singapore and Hong-Kong , correspondingly, there is no agrarian policy there either. That is why Singapore’s agricultural experience will not prove useful to Georgia.
Merab Kakulia: – The subject of credit resources is a very serious one. In spite if the fact that the Georgian banking system is developing at high rates, I would say without exaggeration that a credit boom is to the fore, which is expressed in a very high growth rate of credit investments. There are sectors, unfortunately they are the ones related to export, that have a very low specific share in the total volume of these investments. I have big doubts that in the near future Georgian banks will create products that will be oriented for export production’s promotion. For this purpose there are approved mechanisms in the world, which has been pointed out here more than once, this is the system of eximbanks that are controllable by the state, and the state implements a serious export policy by means of them. What was said by the representative of the Investment Agency, Mr. Merab Lominadze, is necessary and important to the state, but more effective mechanisms are needed for the export policy and they it is necessary that they should be related to credits and credit support. Only the state can subsidize the interest rate and not production; interest rates in or country, after the long-term reduction trend, acquired the opposite trend in view of inflation related risks, and I do not think that this trend will change in the near future. Now, taking of efficient steps by the state and creation credit institutions is particularly relevant. We had an eximbank, but we lost it because of the state’s wrong approach. I have always opposed creation of specialized bank institutions, but it did not concern this aspect. It is the sphere, where existence of state credit institutions is necessary. The conceptual issue is important as well. We have heard here that we shall not be able to compete and produce the amount necessary for taking a special place on the market. I believe that this kind of approach is wrong, since if we are guided by it, we can say that the trend of the nominal wage growth that has been observed of late, with the level of Georgian wages approaching that of the neighboring countries, is insignificant and will not have a great effect. To a certain extent, strengthening of GEL brings down the wage calculated in USD, and gives us some advantages from the viewpoint of utilizing of labor force, but in the recent years the nominal wage has been growing fast because of inflation and strengthening of GEL will not surpass it, that is why regulation of processes by application of GEL’s exchange rate is a wrong approach. The structure of export has changed as well, scrap metal has lost its leading position, according to the data of 2005, scrap metal’s specific share reduced sharply in comparison with the previous years. The Russian embargo had no effect on the first quarter’s data. We should take into account that, unlike scrap metal, ferroalloys and nuts are, in fact, the spheres where there is no big difference between the domestic and foreign prices. Unfortunately, the signs of a catastrophe are to the fore; according to the latest data, in the first quarter, in comparison with the corresponding period of the last year, the deficit of trade balance has doubled, which shows us that we should act very fast.
George Kakabadze, the Director General of the Georgian Chamber of Commerce and Industry: – It is a regrettable fact that the subject of export is not recognized in the discussions. Speaking about subsidies, it is clear the current budget will not be able to implement them. However, there are tax privileges, when we gave up differentiation of taxes, and I think that this decision was not right in relation to export. Before taking this decision it was necessary to study what kind of tax regime this or that sector has. In many countries, for instance in Lithuania where there is 9 billion euro export, there are a lot of different regimes, large investors hold negotiations with the government by means of a special tax regime. Two free economic zones have been created as well, and a large share of the 9 billion euro falls on these zones. I want to say that they are taking certain measures from this pint of view and are thinking a lot in this direction. Our discussion should start with determination of who will be in charge of elaboration of the export strategy, so that we would elaborate a special program for export development.
Merab Lomidze: – Let us not make comparisons with the Lithuania’s economy, at least at this stage. I agree with you that it is necessary to elaborate an effective policy for rendering assistance to export and we are ready for cooperation with you. As to the credit regime in general, I want to point out that banks’ clients in Georgia are the ones that are the worst informed about the bank product. Speaking about the eximbank, I would say that at this stage it is impossible to establish a bank with participation of the state in Georgia. The share of documental operations that are directly aimed at export operations in commercial banks is scanty. That is why important banks will not grant a 20% loan, but a 3% letter of guarantee, which will be acceptable for a foreign partner.
Mikheil Jibuti: – The point is that many categories have not become a part of politics. For instance, the report on Georgia’s condition is not handed in by means of the payment balance, no one says what is going on with it. The main thing is whether we have a policy or not. As to me, it is important whether the country has a document, an idea and vision, and whether it has the export-import policy and where it is written in order to discourse on further actions, then we can say if this or that correspond to this policy or not. When import is fully exempt from taxes, it is impossible to speak of export policy. Export policy is stimulation of import substituting production inside the country. Existence of an enterprise is not the main thing, the point is that whether we have products sufficient for us, and if we do, why are we exporting them from other countries? In other words, there arises the issue of the policy’s existence, which we do not have. The Central Bank has two bridles – the policy of exchange rate and the policy of interest rates. How does this is related to the export-import policy? There are two aspects having to do with the export-import policy – the stimulation mechanism inside the country and the issue of the import tax. Reducing these tariffs we assume more obligations in the World Trade Organization, i.e. no policy is seen here. It would be good if it existed. The state does not have economic policy in the form of a document at all. The policy should be based on three aspects – the theory, the experience of other countries and own experience. If some of them does not exist – this cannot be called a policy any more. When the matter concerns the policy, the objective should be designated, the ways of reaching it and what its calculations are based on. The main shortcoming of our country is that we have no strategic vision of any directions in the economic sphere, correspondingly, our tactics is not good either. Liberalism needs protection, we delivered a major blow to the price liberalization policy with liquidation of the Law on Prices. The discussion will not be a concentrated one without a policy, we have no indicator as to what is bad and what is right.