Ben Aris in Kyiv
October 8, 2010
Gurgenidze seems to have the Midas touch. He was brought in by the European Bank for Reconstruction and Development (EBRD) to rescue the failing Bank of Georgia (BoG) and within a few years not only turned it around, but floated it on the London Stock Exchange. The bank had a market capitalisation of over $1bn at its peak and is still today the largest bank in the Caucasian country. More importantly, it is a role model for all the other banks in the region who are hoping to "do a BoG" at some point.
But as a thoroughbred investment banker, after a brief stint as prime minister of Georgia for President Mikheil Saakashvili, Gurgenidze decided to go into partnership with Romanian businessman Dinu Patriciu and set up a fund they hope will repeat the BoG story.
Their first project has been to take over Georgia's all-but-bust Liberty Bank and put it back on its feet. "Despite the crisis, Liberty is now fast growing nimble universal banking institution. It grew several times faster than the banking sector last year and this year the prospects are even better as the economy starts to recovery," says Gurgenidze, who is also the executive chairman of Liberty.
Georgia was one of the best places in the world for bankers who wanted to shelter from the financial storm that broke after the collapse of Lehman Brothers in the US on September 15, 2008. "The Georgian banking sector was hurt [by the crisis] like everyone else, but if you compare it to the other countries of the CIS, it was a very, very different picture," says Gurgenidze. "Not a dime of state money was used to help the sector or spent on recapitalising banks; nor was a single state guarantee offered to prop up struggling banks. None of that happened in Georgia."
About $200m of investment from the EBRD and International Finance Corporation, arranged before the crisis, proved very timely, but otherwise the worst that happened was a 12% drop from peak to trough in deposits - painful but well within the means of all the banks to absorb from their own resources. Kazakhstan had to stump up $4bn to prop up its banks, while Prime Minister Vladimir Putin said in September that Russia spent over RUB2 trillion ($66.6bn) on bailing out its banks.
More surprisingly, Georgia doesn't have a deposit guarantee system and has no plans to introduce one; in most of the countries of the region, the minimum amounts guaranteed by the state-backed fund were drastically increased at the height of the crisis to reassure depositors and prevent runs on the banks. (And almost none of the deposit insurance funds in the CIS have anything like enough money in them to cover the collapse of just the biggest bank in their countries, which means that if a bank did collapse, the state would be left carrying the can.)
The fact that Georgia doesn't have this fund and still only saw a 12% fall in deposits speaks volumes about the trust the population have in their banking sector.
Gurgenidze puts the confidence in, and strength of, Georgia's banks down to "effective" regulation. The main requirement to ensure banks' health is that they hold a minimum 12% capital adequacy buffer. By regional standards this is not a particularly high number and, moreover, the banks are fairly lightly regulated after they meet this requirement, but the difference is in the way the 12% is calculated. "The capital adequacy ratio is calculated in a very strict way and the risk weighting is very draconian by regional standards. If you were to translate this ratio into other countries, then you'd be talking about capital adequacy ratios on the order of 16% to 18%," says Gurgenidze.
This regime is very unusual, but carries obvious benefits. The fact the ratio is high enough and that it effectively means banks have to provision properly for their riskiest assets, was amply demonstrated by the lack of real damage the worst crisis in a decade did to the sector.
Further, the light touch of the regulator once this benchmark is reached also leaves the banks free to concentrate on business rather than reporting. The knee-jerk reaction of all most all central banks in the region has been to load even more reporting requirements on bankers who are expanding their back offices to cope with the extra (and unprofitable) work. This is ultimately counterproductive - as banks come out of the crisis, reducing risks is good, but the key to growth is boosting profitability. Increased reporting reduces risks, but it also reduces profits.
Georgia is emerging from the crisis well, but like others it is still having a hard time. Prior to the crisis, the little Caucasus republic was taking in $2bn a year of foreign direct investment (FDI). Last year, it managed to attract $800m of FDI, which was a good result, but this year it will probably remain flat at $800m, which is less good. Like everyone else in the CIS, Georgia is waiting for the rest of the world to go back to work. "Still, this is still 7% of GDP, which means we are doing better than any other country in the CIS and there many finance ministers across the world that would love to be at that level," says Gurgenidze. "And the total stock of FDI is equivalent to 60% of GDP, which gives Georgia the highest stock of FDI of any country in Europe. If we stay the course, with no deviation from our commitment to free market principles - and we will - then the FDI and portfolio investment will all come back. And pretty soon."