Recession? War? Gulf developer continues massive Georgia luxury project.

Despite a war and global financial crisis, Rakeen, an Arab real estate developer in Georgia, is pressing ahead with building hundreds of luxury villas in a gated community, complete with equestrian and falconry clubs.

Since 2006, Rakeen has invested $2 billion in Georgia, which amounts to almost 20 percent of the country's prewar gross domestic product. The development company is indirectly owned by Ras al-Khaimah, one of the United Arab Emirates. Like the other emirates, Ras al-Kaimah has attempted to diversify its petroleum economy with overseas investment.

Rakeen says it has not been deterred by plunging crude oil prices or the August war between Russia and Georgia, despite the deaths of three employees and three contractors when the port city of Poti was bombed.

"Our construction work hasn't stopped," says Zaza Mikadze, Rakeen's general director in Georgia. Rakeen became sole owner of Poti's port in December; it opened a cement plant near Tbilisi in October to support construction.

The brief war with Russia in August over the breakaway region of South Ossetia hasn't stopped Rakeen's work, including two 40-story office buildings, several thousand apartments, 300 luxury villas, three five-star hotels, and a tax free industrial park at Poti, Georgia's major Black Sea port, which Rakeen owns.

Until the economy was chilled by the war, foreign direct investment had fueled robust growth in Georgia. Although the United States and European Union have been Georgia's largest political supporters, most foreign direct investment in Georgia comes from the Middle East, Russia, and Kazakhstan.

In 2007, foreign direct investment accounted for more than 15 percent of Georgia's GDP. After the war, projected foreign investment dropped by nearly half to $1.2 billion. Economic growth also hit the skids, plunging from 12 percent the year before the war to less than 2 percent.

Not surprisingly, the war halted most construction in Georgia – cranes and equipment now sit untouched beside gaping holes in the ground and naked building frames.

Mr. Mikadze says the slowdown raises the specter of domestic political instability or renewed conflict with Russia, not to mention separatists in Abkhazia and South Ossetia.

The global economic crisis has hurt developers in the UAE and across the world, but will not seriously affect Rakeen's projects, Mikadze added. The company expects to invest $2 billion in the country in the next five years, according to Bahrain's Gulf Daily News newspaper.

Flooded with high oil profits and surrounded by emerging markets, UAE investors in recent years eagerly poured money into projects in Central Asia, India, Africa, and even Latin America. But many UAE investors were hard hit by the economic crisis, says Kaleil Isaza Tuzman, a venture capitalist in Dubai.

"The post-Lehman Brothers demise world ... has brought with it a massive and almost overnight retrenchment of credit in the UAE," Mr. Tuzman wrote in an e-mail message.

Indeed, many projects have been canceled in Georgia, says Givi Korinteli, a developer with Tbilisi-based Green Development. "Companies are making sure of maintaining their liquidity."

Cheap government loans aimed at helping banks during the war are now producing a bank crisis and inflation, says Vladimer Papava, an economist at the Georgian Foundation for Strategic and International Studies.

A $4.5 billion international aid package, including $1 billion from the US, could restore confidence in the banking system, he says.

Georgia will enact further liberal economic reforms to attract more foreign investment, said Ekaterine Sharashidze, the country's economic minister.

Since the Rose Revolution of 2003, when president Eduard A. Shevardnadze was displaced in a bloodless coup, the government has attracted foreign money by slashing regulations, eliminating corruption, and developing a reputation as accommodating to businesses.

The government has given almost "too much support" to Rakeen, Mikadze admits. "When we have a problem they always help us."

Before the war, Georgia had focused on building its service industries, notably transport and tourism. Its greatest significance to the world economy in recent years has been its oil and gas pipelines, including the Baku-Tbilisi-Ceyhan pipeline, which carries about 1 percent of the world's oil needs to the Mediterranean Sea.

"Georgia doesn't have much to offer besides services," says Fady Asly, head of the International Chamber of Commerce in Georgia, adding that Rakeen's plans will help the country meet its seemingly lofty goal of serving as "the five-star hotel of the region."

Rakeen's marketing campaign is selling the country as much as the houses it builds, according to Lasha Machavarioni, a Rakeen marketing executive. "Georgia's culture is very rich, but nobody knows it."

The company's $1.3 million luxury villas are targeted at primary buyers – those who actually plan to occupy the dwellings – which it hopes will prevent the speculation that artificially drove up prices in investment hotspots such as Dubai. Georgia's comparatively cool climate and two-hour flight distance from much of the Gulf region is expected to appeal to buyers from the Middle East.

Investors are still worried, though, about the resumption of fighting, and the country has systemic economic problems, Mr. Papava says.

Georgia's leaders tout its ranking as number 35 on the World Bank's Ease of Doing Business Index, but this is the result of smart government public relations, not real reform, Papava insists.

"We have two economies – a virtual economy and the real economy. In the virtual economy, we are the best, because everything is the best in Georgia according to public relations," Papava says.

The real economy has weak property rights and lacks an independent judiciary, according to analysts.

In both economies, Rakeen's cranes and cement trucks are still building luxury villas.