Georgia: The Black Sea Hub for China’s ‘Belt and Road’

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Georgia: The Black Sea Hub for China’s ‘Belt and Road’

New investments (some not even involving China) make Georgia an attractive link between Asia and Europe.

Georgia: The Black Sea Hub for China’s ‘Belt and Road’

A general view shows a sea port in Batumi, Georgia (May 2, 2016).

Credit: REUTERS/David Mdzinarishvili

Ask anyone about the South Caucasus country of Georgia, and you’re certain to hear about its quixotic quest to join the European Union (EU) and NATO or the security threat posed by its not-so friendly neighbor to the north, Russia. Those things do matter, but if you really want to get to know Georgia, pay attention to its deepening relationship with China.

As pointed out by Revaz Topuria in an article for The Diplomat, when Chinese President Xi Jinping first announced the Silk Road Economic Belt and Maritime Silk Road project (often referred to as “One Belt, One Road”) in 2013, Georgia was barely on China’s radar. Since then, the two countries’ economic relationship has flourished.

In 2014, China accounted for $217.94 million in foreign direct investment into the Caucasus country. Among non-EU member countries, only Azerbaijan provided a higher volume. A number of Chinese companies now have major operations in Georgia, including the Hualing Group, Georgia’s single largest foreign investor.

Trade is important, too. Exports of wine — one of Georgia’s leading export products — to China amounted to 5,299,820 bottles in 2016, nearly double the amount exported in the previous year.

In October 2016, China and Georgia agreed to finalize negotiations on a bilateral free trade agreement, with plans to sign the final deal in May 2017.* Combine that with Georgia’s Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU — signed in 2014 and effective since 2016 — and there is ample potential for Georgia to become a logistics hub linking China to the EU and beyond.

However, the project that may have the most importance for China’s economic interests doesn’t involve a single Chinese investor: the Anaklia Black Sea Deep Water Port Project. Once home to part of the Soviet Union’s Black Sea Fleet, the town of Anaklia now boasts fewer than 2,000 inhabitants. The port project aims to change that, making Anaklia a focal point of Georgia’s import and export trade.

Later this year, a group of American and Georgian investors — the Anaklia Development Consortium — will break ground on the Anaklia port, the country’s largest current infrastructure project and one that could involve a total investment of $2.5 billion.

For Levan Akhvlediani, CEO of Anaklia Development Consortium, the new port will restore Georgia to its rightful place. “We believe that the Anaklia port is the first step in re-establishing Georgia as a logistics hub,” he said during an interview with The Diplomat.

Once finished, the new port will be Georgia’s largest — dwarfing the existing ports in the Black Sea cities of Poti and Batumi. As Georgia’s only deep water port, it will receive ships much larger than the 1,500 Twenty-foot Equivalent Unit (TEU) ships that are currently handled at Poti.

During the first phase of the operation scheduled to begin in 2020, the port will be able to handle 900,000 TEU annually, 50 percent more than Poti’s capacity, which is 600,000 TEU.

Anaklia’s geography — both its depth and relative proximity to European markets — make it uniquely suited to serve large vessels. That’s why the CEO is confident the Anaklia port will be a success. Akhvlediani expects the new port to eventually capture 60 percent of the Georgian container market. By loading container ships bound for Europe as well as unloading vessels coming from the west, the port can make Georgia part of the fabric of “One Belt, One Road.”

Anaklia will be more than just the site of Georgia’s largest port, however. The project also includes a 600-hectare Free Industrial Zone (FIZ). There, companies from around the world will able to produce goods and services for export, free from corporate and value-added taxes.

Akhvlediani is confident that the DCFTA signed between Georgian and EU in 2014 will help incentivize investment in the Anaklia FIZ: “Georgia has a unique position, whereby we are the only country in the region with free trade agreements with the EU, CIS countries, Turkey, and China.”

If plans succeed and Anaklia becomes a major logistics hub, Akhvlediani and his partners hope to also turn it into a regional financial center. “Our vision is to eventually transform Anaklia into a special administrative zone, into a chartered city, which, would not only host the port and the FIZ but would be a financial and banking center for the region and potentially beyond,” the CEO explains.

Georgia’s web of free trade agreements — the DCFTA with the EU being one of many — were also highlighted as a key advantage by Dong Yan, a doctoral candidate at the University of California, Los Angeles who focuses on Chinese interests in the South Caucasus and Central Asia.

In an interview with The Diplomat, Yan said that Georgia’s business-friendly environment is also important for attracting Chinese companies. “In terms of business-friendly institutions, Georgia is doing much better than Iran, Russia, or Turkey, and for that matter China as well,” Yan said. “[…]Although large-scale state-owned entities might admittedly overlook Georgia at times, private Chinese businesses represent quite another matter.”

The new port in Anaklia is expected to divert some traffic away from Poti, which lies about 70 kilometers down the coast. Poti still aims to help drive Georgia’s economic growth, however. The town is the site of another major infrastructure deal currently being negotiated.

This January, the China Energy Company Limited (CEFC) became the latest Chinese company to make a major investment in Georgia when it agreed to purchase 75 percent of shares in the Poti Free Industrial Zone.

“We’re planning some big investments in the Poti FIZ. It’s one of our key projects in Georgia,” said Tina Pichkaia, assistant to CEFC’s chief representative in Georgia. Pichkaia declined to comment on the company’s big picture for the country, but said that numerous other initiatives are under consideration.

Located on Georgia’s Black Sea coast — a place that promises easy access to European shipping lanes — the Poti FIZ provides another base for tax-free production. The 300-hectare zone opened in 2011 and has housed companies producing everything from wood products to IT services.

CEFC signed a memorandum of understanding with Georgia’s Ministry of Economy and Sustainable Development on January 19. Under the agreement, CEFC will further develop the FIZ by sharing its practices and technologies, and it will work to attract investments in processing, modern technology, warehouse management, and logistics.

CEFC has offices in 11 countries and its total 2015 revenue topped RMB 263.1 billion ($38.1 billion). Government officials gush about its potential to spur new production at the FIZ.

“Given its experience, performance, and expertise, CEFC China Energy Company Limited can make a tremendous contribution not only to the development of the Poti Free Industrial Zone, but to the strengthening of Georgia as a transport and logistics hub,” read a statement from the Georgian prime minister’s office.

The government made its plans clear with regard to the project: the goal is to “encourage the realization of the potential of the New Silk Road through implementation of joint initiatives.”

From 2009 to 2016, the FIZ was 100 percent owned and operated by RAKIA Georgia Free Industrial Zone LLC, a subsidiary of the United Arab Emirates-based RAK Investment Authority. RAKIA divested from the FIZ in October 2016, returning 85 percent of its shares to the government in exchange for being released from its investment obligations.

When contacted by The Diplomat, RAKIA confirmed that it still owned 15 percent of shares in the FIZ. Its representative declined to comment on whether that would continue once the deal is finalized between CEFC and the government.

Building a new port at Anaklia and injecting new blood into the Poti FIZ should boost Georgia’s economy. But as Yan made clear, the country still has a lot of work to do. “Georgia needs to make its institutional advantages more widely known in Chinese business circles. It might be a good time to launch a publicity campaign aimed at private Chinese businesses.”

This year is shaping up to be a milestone for Georgia’s quest to become a key component of China’s “One Belt, One Road” initiative. Major investments in its port infrastructure and industrial capacity will make the country more attractive as a gateway between East and West.

That isn’t enough, however. Georgia needs to put its name out there, as well.

*A previous version of this article incorrectly stated that the China-Georgia FTA has already been signed.

Joseph Larsen is an analyst at the Georgian Institute of Politics in Tbilisi. He focuses on political and economic trends in the South Caucasus and the wider Black Sea region.