By Isabel Gorst

Georgia plans to take the bold step of listing its state railway monopoly on the London Stock Exchange next month. Georgian Railways, part of the strategic east-west corridor ferrying oil between the Caspian and Black Seas, should be attractive to investors. But it’s also a risky buy. Russia blew up some of its assets during the 2008 war with Georgia that ended in a ceasefire.

Georgia’s economy ministry announced plans on Monday to list up to 25 per cent of Georgian Railways in an initial public offering on the LSE in May. Shares in the company will be offered in the form of Global Depositary Receipts. Citigroup and Goldman Sachs have been appointed joint global coordinators and book runners for the IPO.

Georgia plans to retain a majority stake and management rights at Georgian Railways to ensure control over the company that bolsters the country’s geostrategic role as a transport hub between Europe and Asia. In addition to ferrying Caspian oil to Black Sea ports, the railway company serves as a transit route for freight shipped from Europe to central Asia.

Georgian Railways posted a profit of 145m Lari ($88.30m) in 2011, up 43 per cent on the previous year. But the company has struggled to find investment to modernise its 1,612km network. Introduction of a faster passenger service could help promote Georgia’s goal to attract more tourists to its beach and ski resorts.

Azerbaijan has offered help, agreeing to lend Georgia $575m to rebuild a railway link to Kars on the Turkish frontier that was closed in the Soviet era. Scheduled for completion next year, the new line will open a new freight and passenger route between Europe and Asia.

The IPO will not be the first attempt to privatise Georgian Railways. In 2007 Georgia agreed to hand management rights of the railways to Parkfield Investments, a UK-registered investment company, in a murky deal that fell through within a few months. Reports at the time claimed that Parkfield was a front for Badri Patarkatsishvili, the late Georgian media tycoon, or even for a Russian investor. Other competitors were said to be waiting in the wings including the state oil companies of Azerbaijan and Kazakhstan.

Georgia has now opted for a more transparent approach by taking the railways monopoly to the LSE.

An international listing could give some cover to Georgian Railways which, like other areas of Georgia’s economy is susceptible to sabotage by Russia.

Russia attacked a rail bridge and oil pipeline in Georgia during a short war in 2008 that underscored the vulnerability of the east west transport corridor.

Relations between Moscow and Tbilisi have remained tense since the two sides agreed a ceasefire that ended the conflict. Only last week Gennady Onishchenko, the head of Russia’s state consumer protection agency, accused Georgia of spreading swine fever to southern Russia in an act of “economic sabotage.” There were signs, he said, that swine fever had been “artificially injected” into Russia’s Krasnodar and Stavropol regions where large numbers of pigs have been stricken with the incurable virus in the last three years.

Foreign investors fled Georgia after the war but have begun to return attracted by the country’s strategic location and liberal business climate. Georgian officials say FDI, which surged by 20 per cent year on year to total $981m in 2011, could rise to $1bn this year.

That said, there’s some uncertainty about the timing of the Georgian Railways IPO. Emerging markets stocks have fallen off after a rally in the first quarter of this year, suggesting that the share offering could have missed the wave.
Investors may also be wary that Georgia, which was rocked by street protests in 2009, could face fresh unrest in the run up to parliamentary elections in October this year.

Georgian Railways will be the second Georgian company to list on the LSE following Bank of Georgia which raised $160m in an offering in 2006.

Despite the war, and the continuing disputes between Georgia and Russia, the market value of Bank of Georgia has risen to $460m from $440m at the time of the IPO. So Georgian Railways could also get a friendly reception when it comes to market next month.

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