Georgia, the former Soviet republic, has made a dramatic comeback in the past two years from economic turmoil so severe that the government closed 80% of the banks.

In fact the move was crucial to recovery for this nation of 5.5 million people.

A series of economic reform, combined with oil deposits, is causing Western business interests to look closely at Georgia. Although foreign financial services companies have yet to open any offices there, some, such as Merrill Lynch and Salomon Brothers, have been studying the country's banking legislation.

Last year representatives from Midland Bank, the British commercial banking unit of banking giant HSBC Holdings, were here exploring the possibility of opening a bank.

Midland officials acknowledge they've looked at Georgia, but say it's still too early to decide about a presence there. Other foreign banks are waiting to see how things develop.

Change has been rapid since 1991, when the country was engulfed in a civil war and overrun by rifle-toting paramilitary forces.

In 1991 Georgia's independence meant that all Soviet funding dried up overnight, while the country's means of industrial production, already outmoded, ground to a halt. By 1994 inflation was 15,000%. People burned currency for fuel.

Now, thanks to economic reform and political stability under President Eduard Shevardnadze, the former Soviet foreign minister, the economy has turned the corner. Inflation is expected to be running about 10% by yearend. Gross domestic product is estimated at 8% to 10%-a vast improvement over the 2.4% in 1995, the year the recovery began.

"Nobody believed that this small country could have made progress so fast," said Hunter Monroe, the local International Monetary Fund representative.

Georgian banks are beginning again to coax private capital from a populace that still remembers how it lost its money with these very banks when hyperinflation took hold three years ago.

Over the past 18 months, cumulative deposits have grown to roughly $77.5 million.

Leigh Durland, an American who is president of Absolute Bank, one of Georgia's largest, says that in years gone by most companies were able to set up a bank of their own through an affiliate if they needed to raise some money.

"You had very little to lose setting it up. Many had no office," he said. "Those are the types of banks that Georgia's central bank has eliminated."

Mr. Durland, 65, who arrived in Tbilisi at the end of 1996, says one of the biggest challenges facing even Georgia's healthiest banks is the pervasive shortage of capital.

Many banks are still unable to issue funds when borrowers need large payments up front. Sometimes it can take a week before funds are available. And if companies or individuals want to borrow money, it is almost always short-term and at exorbitant rates of 40% to 60%.

On the other hand, banks like Absolute are so anxious to attract deposits from new customers that they offer rates more typical of money market instruments than of ordinary bank accounts. That is just as well in a country that has only just launched the first phase of a capital markets system. In August the government issued $775,193 of debt in its first-ever Treasury auction; it is expected that $7.752 million will have been issued by yearend.

There are also plans under way to launch a stock market sometime in 1998. But in the meantime, while investment alternatives remain as scarce as capital, Absolute will continue to pay a smacking 18% interest for 6- month time deposit accounts. "We pay that so people take notice," Mr. Durland said.

While Absolute tries to modernize its own operations, the country's central bank president-Nodari Javakhishvili of the Georgian National Bank- is dealing with the much bigger backyard of the nation's banks.

Over the past two years, Mr. Javakhishvili has almost singlehandedly brought the country's banks to heel. Last year, he carried out a certification of the banking system, and issued a list of guidelines on matters such as risk assessment. Now, he believes that the 48 banks that managed to survive the purge are still too many.

By 2001, when the country's banks will be forced to meet minimum statutory capital requirements of $3.9 million, the number of accredited banks will be whittled to just 15, Mr. Javakhishvili says . Some banks have only about $230,000 in statutory capital.

"Not everyone should survive. Those that do would strengthen the concentration of bank capital," the central bank president said.

All of this has made Mr. Javakhisvili far from popular. "Certainly this very strict attitude to monetary policy is not favored by every bank," he acknowledged. But Mr. Javakhisvili, seen as a threat by those banks that are struggling to meet stricter standards, may become an inadvertent friend of the West in the process.

George Bazgade, a co-founder of Georgian Consulting, a group that advises some 70% of Georgia's foreign investors, thinks foreign banks will have a chance to pick off Georgian banks that fail to meet the new capital requirements.

"I think many of these banks will need to merge," Mr. Bazgade predicted. "And given the Georgian character, this will be hard. They will prefer bankruptcy rather than be owned by another Georgian bank. So foreigners will come."

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