Industrial Policy as a Driver of Homecoming
Built in 2009-10, the car exchange platform in Rustavi is an excellent example of an effective industrial policy that helps Georgia make good on its promise as a gateway to Central Asian markets. Having weathered the storm of regional economic crises and trade policy reversals in 2013-2016, it is at the core of a thriving industrial cluster, adding significant value and contributing to Georgia’s export earnings.
CHAPTER I: BRAIN DRAIN
Levan Surguladze’s illustrious career could serve as a case study in reinventing oneself. A theoretical physicist by education, Levan moved from Soviet Georgia to Russia and from Russia (which had by then become “independent”) to the US, studying, researching and teaching nuclear physics. Everything went according to plan, except that in the late 1990s, Levan did the unthinkable. While still a physics professor in the US, he decided to get a finance degree from his own university. The physical distance to the business school was less than a hundred meters, but traveling to it required a radical mental adjustment and even a quick change of Levan’s professorial attire to something more appropriate for an MBA student.
In 1999, Professor Levan Surguladze embarked on a completely new path, that of a Wall Street trader and risk manager. Quickly progressing through the ranks, Levan reached senior VP and risk director positions with the Deutsche Bank in London, and Barclays Capital and UBS Investment Bank in New York.
Levan had never had to look back, and, by 2007, could have declared his mission accomplished. Except that his two sons had entered their teenage years, and the idea of bringing his family back home and starting his own business in Georgia gradually started taking shape in his head. There was only one problem: Georgia’s finance industry was still in its infancy, not offering many opportunities to people of Levan’s caliber.
Oleg Mzhavanadze grew up in a tiny Imeretian village in Vani. In 1989, the year Oleg returned home after two years of Soviet military service, Georgia began asserting its national sovereignty. But, rather than going to the barricades, Oleg’s first instinct was to establish a family. In early 1991, in the midst of Georgia’s struggle for independence, he “stole” and consequently married his wife, Marina Ketsadze. Their first child, Gio, was born soon after, in October 1991.
To fend for his small family, Oleg apprenticed in a local car repair shop, specializing in bodywork repair (“zhestianka”). Soon after, he and his friend opened their own shop. Yet, Georgia was not a good place to do business in the chaos of the early 1990s. The civil war created a lot of demand for Oleg’s services, but most people could only promise to pay…
In June 1994, after 3 years of chasing his impoverished clients, Oleg received an offer he could not refuse: to move to Moscow and start working in a large all-Georgian car repair business. Oleg’s family quickly settled in one of Moscow’s suburbs, Krasnogorsk. The local Georgian community, some 80 families, provided a support network. The Georgian mafia provided protection (“krysha”). The Russian mafia appreciated Oleg’s professionalism, trusting him with the repair of their black SUVs.
Oleg and Marina stayed connected to their homeland, supporting their families in return for a regular supply of traditional Georgian goodies: wine, soft Imeretian cheese, churchkhelas, corn flour, and even a roasted piglet (“gochi”). They also visited Georgia every other summer, making sure that Gio and his younger sister Tatia did not forget Georgian and stayed in touch with their cousins and other relatives. Life was too good to seriously consider the option of coming back. Yes, there had always been the idea that the kids should eventually get a Georgian education, but Oleg could not give up on his Moscow business without a decent alternative in sight.
CHAPTER II. INDUSTRIAL POLICY
Georgia is perfectly located to function as a trade hub serving its land-locked neighbors to the east. Yet, it is not uncommon to see well-endowed but poorly organized countries (and individuals) wasting their potential. The Georgian auto restoration and trade industry is an example of how one can get it right with a relatively simple government intervention. When I was shopping for my first Georgian car back in 2007, most auto trades happened in Dighomi, Tbilisi’s western-most neighborhood. Hundreds of new and second-hand cars were on display on a multitude of parking lots strewn across a very large area. No banking or technical inspection services. No government offices to register trade transactions. An oriental bazaar at its worst.
Despite the mess of Dighomi, car trades happened because Georgia had a sea port serving Azerbaijani, Armenian and Kazakh buyers. With the basic law & order conditions restored after the Rose Revolution of 2004, Georgia quickly saw the emergence of a large contingent of small-time importers/traders, and a network of auto repair shops that could cheaply restore damaged cars. As a result, Georgia’s car re-export industry grew from close to 0 in 2004 to about $100 mln in export volume in 2007.
Things changed quite dramatically in 2009. Vano Merabishvili, the all-powerful Minister of Interior in Misha Saakashvili’s government, pushed for a coordinated effort to relocate the car market from Dighomi to a newly built compound in Rustavi, in convenient proximity to Armenia and Azerbaijan.
Vano’s initiative took the shape of an informal public-private partnership. The Ministry of Interior arranged for the existing marketplace in Dighomi to be shut down and provided the land in Rustavi. It also built a brand-new service center right in the middle of the new compound: a one-stop shop for any services related to car trade transactions, from banking to notary, to licensing and issuance of new number plates. The government also amended the national legislation, extending the period during which cars could be kept in Georgia without customs clearance.
The initial private investment in the new car market (“autobazroba”) came from Ukraine’s PrivatBank. But other companies, including Bank of Georgia and Iberia, quickly followed suit, creating a competitive environment. Rustavi’s car exchange platform is currently the largest of its kind in the Caucasus. According to some estimates, it serves close to 20,000 traders. Many more Georgians are working in the related car repair industry and other services. At its peak in 2013, Georgia’s car re-exports reached 700mln USD. Not a small amount.
In 2014-2016, Georgia’s auto re-export industry went into a sharp recession, triggered by a regional economic crisis and unfavorable trade policy changes in Azerbaijan, Armenia and a number of Central Asian countries that joined the Russia-led Eurasian Economic Union. In 2015, Georgian and international media outlets were running headlines such as Eurasianet’s “Georgia: Once an Economic Driver, Used Car Market Turning Into a Lemon”. It took three difficult years for the industry to recover but it is now back with a vengeance, nearly doubling in size compared to the low point of 2015 and 2016.
By coordinating the actions of independent market actors and the state, smart industrial policy can do wonders. It can be used to create new, and enhance the competitiveness of, existing industries, helping them expand and become more resilient to a crisis. Relying on private sector investment, it is also relatively inexpensive.
CHAPTER III. BRAIN GAIN
Levan Surguladze and Oleg Mzhavanadze are now back to Georgia. Professor Surguladze returned in 2007 in order to found the Caucasus Business Group (CBG), a set of vertically integrated companies handling every element of the car trade value chain, the largest player in the Georgian market.
Oleg Mzhavanadze came back in 2009. His business is part of an auto repair cluster, TLS Motors. Every company in the cluster is a small shop (a “box” in the Georgian lingo), but taken together they can solve any problem – from small dents to serious frame damage. “Nothing is impossible in our business,” says Oleg, and I have every reason to believe him.
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I got to know Levan and Oleg because their talented sons, Revaz and Gio, graduated from the International School of Economics at TSU, which I helped establish in 2006/7. Which brings me to a traditional Tbilinomics Tamada Toast – let Georgia become a place that nobody would ever want to leave!
About the author:
Eric Livny is Founder and President at Tbilinomics Policy Advisors. In 2007-2018, he served as President with the International School of Economics at Tbilisi State University (ISET) and ISET Policy Institute. His current advisees include the Caucasus University and the Finnish International School project.
By Eric Livny, Tbilinomics Policy Advisors
