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Diplomacy in Action

2011 Investment Climate Statement - Georgia


2011 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2011
Report
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Introduction

Since 2004 the Georgian Government has undertaken an ambitious program to modernize and liberalize its economy. Institutional reforms have included restructuring and downsizing government ministries, privatizing large state-owned entities, increasing pay for public servants, reducing the number of taxes and tax rates, improving tax and fiscal administration, streamlining licensing requirements, simplifying customs and border formalities, and generally undertaking efforts to make it easier to do business in Georgia. The current Georgian leadership views liberal market economies like Singapore and Dubai as models for economic growth policies. Georgia’s economy, which had been on a path of steady double digit growth since early 2004, suffered a considerable shock due to the Russian invasion in 2008 and subsequent global financial crisis. Nevertheless, Georgia still managed to achieve modest economic growth in 2008. In 2009, the Georgian economy contracted by four percent, but in 2010 it started to recover and grew by 6 percent.

Georgia’s reforms continue to help it move up in international economic and business ratings, especially when compared to other countries in the region. In Forbes “Best Countries for Business 2010” report, Georgia improved its position by three places and now ranks 61 among 128 countries; The World Economic Forum’s “The Global Competitiveness Report 2010–2011” ranks Georgia 93rd out of 139 countries. In the Frazer Institute’s 2010 Economic Freedom report, Georgia’s rating jumped 22 spots, compared to its 2009 score, to 23rd among the 141 countries surveyed. However, The Economic Freedom Report overall score is the sum of five sub-scores – size of government, legal system and property rights, sound money, freedom of trade internationally, and economic regulations. Within the sub-scores, Georgia’s scores lower than its overall ranking on its legal system and protection of property rights, ranking 88th out of 141 countries reviewed. Georgia scores highest on trade freedom at 16.

According to the IFC/World Bank “Doing Business Report” for 2011, Georgia was the most active country globally in business regulation reform, improving its business environment most among the world’s 174 economies in the last five years. In 2010, Georgia rose from 13th to 12th in the IFC/World Bank “Doing Business Report” and remains the only Eastern European country in the top fifteen. Georgia’s reforms focused on the following areas: closing a business, enforcing contracts, obtaining credit (legal rights), and protecting investors. In particular, Georgia improved insolvency proceedings by streamlining auction regulations. It simplified the enforcement of contracts by streamlining the procedures for public auctions, introducing private enforcement officers, and modernizing dispute resolution system. In addition, the government improved access to credit by implementing a centralized collateral registry, with an electronic database accessible online. Georgia also strengthened investor protections by allowing greater access to corporate information during a trial. In comparison the IFC/World Bank report ranked Russia as 123, Kazakhstan as 59, Azerbaijan as 54, and Armenia as 48.

In 2007, Georgia adopted a new insolvency law that shortens timelines for reorganization of a distressed company or disposition of a debtor's assets. It sped up the approval process for construction permits and simplified procedures for registering property. It made starting a business easier by eliminating the paid-in capital requirement. In addition, the country's private credit bureau added payment information from retailers, utilities, and trade creditors to the data it collects and distributes.

The 2010 “Index of Economic Freedom Report” conducted by the Heritage Foundation and the Wall Street Journal ranked Georgia as the 26th most free economy out of the 183 countries it evaluated across ten specific factors of economic freedom, such as Business Freedom, Trade Freedom, Fiscal Freedom, Freedom from Government, Monetary Freedom, Investment Freedom, Financial Freedom, Property Rights, Freedom from Corruption, and Labor Freedom. Georgia's economy is above average at 70.4 percent free (68.7 in 2007), which puts it in the category of “mostly free” and in the company of Sweden, Germany, Austria, Japan, Macau and Cyprus. Georgia is ranked 15th out of 41 countries in the European region, and its overall score is slightly above the European regional average. According to the report, Georgia scored well in business freedom, fiscal freedom, freedom from government, investment freedom, and labor freedom, but scored below average in areas of property rights protection and corruption.

Lack of trust in the judicial system remains a significant problem despite substantial improvements in efficiency and an increase in public confidence in both the competence and fairness of the courts. Doubts about the judicial system's ability to protect private property and contracts persist. The new Criminal Procedure Code, implemented in 2010, has started to be used in criminal commercial cases; however it is too early to accurately access the long-term impact. Enforcement of intellectual property rights is largely non-existent.

The World Bank’s “Anti-Corruption in Transition 3” report (2006) places Georgia among the countries showing the most dramatic improvement in the fight against corruption, due to implementation of a strong program of economic and institutional reform. Over the years Georgia has also significantly improved in Transparency International's (TI) annual “Corruption Perceptions Index (CPI),” ranking 68th out of 178 countries in 2010. Georgia’s score of 3.8 on a scale from 10 (very clean) to 0 (highly corrupt) worsened slightly as opposed to 2009’s ranking of 66th with a score of 4.1. Noted areas of concern in Georgia remained the need for judicial reform, increased protection of property rights, a lack of transparency in public spending (including the Reserve Funds for the President, the Mayor of Tbilisi and the Government), corruption among top-level officials, opaque media ownership and financing, as well as a general low level of civil society involvement in the planning and execution of public policy. On the positive side, TI noted that an electronic procurement system introduced on January 1, 2011 will serve to address a number of problems and improve transparency of state contracts. The ”Corruption Perception Index” shows that Georgia has significantly lower levels of perceived corruption than its neighbors, such as Armenia (123rd), Azerbaijan (134th) and Russia (154th).

The Georgian Government’s fiscal and monetary policies have created a relatively stable macro-economic environment. However, in 2009, the realities of the global financial crisis and the aftermath of the 2008 conflict meant the government had to focus on job creation and economic stimulus. In 2009 the economy contracted by four percent, following growth of 2.1 percent (2008) and 12.4 percent (2007). Growth estimates for 2010 stands at 6 percent, with final numbers expected in March 2011.

Inflation for 2009 totaled three percent, a significant drop from ten percent inflation in 2008 although this drop is largely attributed to the general economic slowdown. Commensurate with economic recovery, the Government has projected inflation for all of 2010 at six percent; however the actual inflation rate is estimated to be as high as 10.5 percent

The Georgian lari has remained relatively stable despite multiple economic shocks over the past two to three years. Following the August 2008 conflict, the lari moved from 1.4 lari to the dollar to 1.65 lari to the dollar. Though it fluctuated slightly, the lari has remained at approximately 1.78 lari to the dollar throughout 2009 and 2010. The Georgian Government maintains a managed float within a band, and has intervened, for example after the 2008 conflict, to stop the currency from devaluing.

Based on the economy’s overall performance and the Georgian government’s commitment to structural changes, Georgia received its first sovereign credit rating in late 2005 from Standard and Poor’s (S&P) - a ‘B+’ long term and a ‘B’ short term. In September 2009, the S&P long-term/short-term credit rating for the Government of Georgia were ‘B/B’ with a “stable” ratings forecast. The estimated risk of transfer and converting of currency for Georgian non-sovereign borrowers is ‘B/B-’. In its analysis, S&P notes a potential risk to the economy once assistance pledged following the 2008 conflict (estimated at USD 4.5 billion) has been disbursed. In April 2010, Standard and Poors restored Georgia’s ‘B+’ in long term and ‘B’ in short term ratings.

Fitch currently rates Georgia, which launched its debut $500 million Eurobond in spring 2008, as ‘B+’ with a stable outlook. In upgrading Georgia, Fitch noted Georgia’s GDP per capita and level of human development is significantly higher than the ‘B’ range median. It has a favorable business climate and record of structural reforms, underscored by its ranking in the World Bank’s Doing Business Survey. Over the medium term, Georgia has a promising growth model with its favorable business climate, based on low tax rates, light regulation, and low corruption; its investment in infrastructure and transport links; and its high human capital-to-wage ratio. As for the Moody’s Investor’s Service, it assigned ‘Ba3’ to Georgia with a stable outlook.

In November 2009, President Saakashvili addressed Parliament outlining his vision for an ‘Act on Economic Freedom.’ The aim of this act was to codify Georgia’s economic reforms, and the government’s commitment to a liberal economy, in the country’s constitution. The act envisaged a minimal state role in the economy, created legislative guarantees for business, and banned the introduction of new licenses and permits. The act also aimed to amend the constitution to limit the maximum ratio of budgetary expenditures to GDP at 30 percent, the budget deficit as a percent of GDP at 3 percent, and debt-to-GDP ratio at 60 percent. It also specified that taxes would only be increased if approved through a public referendum. Draft legislation introduced by the Government has been discussed in Parliament and amended, but after concerns by international financial institutions that the legislation would fiscally hamstring Georgia, there has been no movement to enact the document into law. The Georgian Government has now declared it is embarking on a new economic course aimed at further improving Georgia’s business environment. The new economic orientation focused on creating public-private partnerships between the government and the private sector through a fair, simple and reliable taxation system that includes four major components: a new tax code (that came into effect on January 1, 2011), reliable service, fair and transparent administration, and public outreach

Georgia became a member of the World Trade Organization in 2000. The WTO’s first report on the trade policies and practices of Georgia, published in December 2009, noted the success of the country’s economic policies. The WTO particularly highlighted Georgia’s pace of reform and the country’s reliance on the private sector to spur development. According to the report, continuing structural reforms will be the key to strengthening Georgia’s resilience to shocks, sustaining growth, attracting investment into export activities, and improving productivity.

Despite improvements to the economy, Georgia still lags in many areas important to investors. More than 25 percent of the population lives below the poverty line and many families still rely on subsistence agriculture for survival. Local entrepreneurs often lack familiarity with western business practices and legal norms. Physical infrastructure, such as road networks, has improved significantly from 2005 to 2010, but work remains, especially in rural areas to facilitate the efficient movement of goods across the country. Most natural gas for heating and electricity generation is imported. In a relatively short period, however, Georgia has become a net exporter of electricity, selling power in Turkey, Russia and throughout the Caucasus. The rehabilitation of existing hydropower plants and the development of new ones, together with the construction of new high voltage electricity lines to connect Georgia to Turkey, should ensure Georgia remains a key player in regional electricity trade.

The government sees its main source of sustained future economic growth as coming from domestic and foreign private investment. In this regard, the government is focused on taking steps to increase investor confidence such as updating legislation, improving the professionalism of the judiciary, continuing to battle corruption and defusing tensions in the separatist regions.

Georgia receives assistance from the United States, the European Union, other bilateral donors and a range of international financial institutions. U.S. assistance has focused on promoting democratic development and free media, developing rule of law, good governance and the administration of government economic and financial institutions, improving critical physical infrastructure, enhancing private sector competitiveness, promoting educational and health reform, and promoting the growth of a free market economy. In 2006, Georgia was awarded one of the first compacts with the U.S. Millennium Challenge Corporation, which provided investments in infrastructure, tourism, and agriculture and will conclude in April 2011. In January 2011, the MCC board approved Georgia’s eligibility to compete for a second compact.

After the August 2008 conflict with Russia, foreign donors committed USD 4.5 billion to help Georgia recover from direct and indirect war damage. According to the World Bank-led international needs assessment for Georgia, the major impact of the conflict was on the investment and consumer climate, which led to a sharp economic drop in FDI and GDP. The United States committed USD 1 billion in assistance to assist in repairing damaged infrastructure and help the Georgian economy recover from the economic shock of the war. The U.S. pledge was fully implemented as of September 2010.

President Saakashvili and his government have strengthened Georgia’s bilateral relations with many countries, reaching out to neighbors Azerbaijan, Armenia, Turkey and Iran, as well as Ukraine, Italy, Poland, Latvia, Lithuania, Estonia, Japan, Kazakhstan, the UK, Germany, the Netherlands, and the United States. Georgia has a partnership agreement with the European Union and an action plan for reform to allow a closer relationship. Georgia maintains the goal of eventual membership in the European Union and work began on an association agreement with the EU in July 2010. Georgia is one of only fifteen countries in the world that benefit from GSP+ access to the EU market, allowing duty-free access for more than 7,000 products. It is making an effort to harmonize its regulatory environment with international standards, particularly those established by the EU, and is pursuing a free trade agreement with the EU. Georgia enjoys duty-free trade with other former Soviet Union countries except Russia, which imposed a unilateral trade embargo on many Georgian products in 2006. Georgia benefits from preferential trading relationships with the United States, Turkey, Canada, Switzerland, and Japan. In 2007, Georgia signed a free trade agreement with Turkey, as well as a Trade and Investment Framework Agreement and an Open Skies Agreement with the United States.

Georgia is located at the crossroads between Europe and Asia. It is the shortest route from Central Asia to Europe, and could be a north-south bridge between Turkey and the Russian Federation. Georgia has two deep-water ports on its Black Sea coast, Poti and Batumi. Labor costs in Georgia are comparable to the Far East, while transit time for shipment of goods to Europe is far less. The government has launched an extensive road rehabilitation project aimed at upgrading the road quality and constructing new facilities to improve communication infrastructure. The government allocated USD 310 million for road rehabilitation projects in 2009 and USD 290 million in 2010. The governments of Turkey, Azerbaijan, and Georgia have agreed to construct a rail link from Kars, Turkey through Georgia to Baku, Azerbaijan. Freight from Europe will then be transported through Turkey to Baku via Tbilisi and then to Central Asia from Baku by ferry. Ongoing construction of a tunnel under the Bosporus in Istanbul will allow freight to travel from Georgia directly into Europe. In addition, Georgia is improving its network of rail-ferry connections with Black Sea countries, including Ukraine, Romania, and Turkey, which will further increase transportation and trade turnover with these countries.

Georgia’s relations with Russia have long been problematic. In 2005 and 2006, Russia banned imports of Georgian agricultural products, mineral water, and wine. At the time, Russia was the largest importer of Georgian goods. These restrictions continued in 2010. In September 2006, Russia cut all direct transport links with Georgia. In 2010, several charter flights flew between Georgia and Russia, but regularly scheduled flights between the two countries have yet to resume. Gazprom, the Russian gas monopoly, quadrupled the price of natural gas supplied to Georgia over two years. Despite these actions, the Georgian economy has continued to grow. Georgian businesses have diversified markets and continue to actively seeking new markets for Georgian products and new sources of imports, especially in Ukraine, the Baltics and Central Europe. Georgia has diversified its energy supplies, purchasing natural gas from Azerbaijan and increasing its own hydroelectric generating capacity.

Openness to Foreign Investment

Georgia is open to foreign investment and is eager to welcome new investors. The country is currently implementing an aggressive marketing campaign to encourage foreign investment, and is developing a regulatory framework intended to foster competition. Legislation governing foreign investment establishes favorable conditions, but not preferential treatment, for foreign investors. The Law on Promotion and Guarantees of Investment Activity protects foreign investors from subsequent legislation that alters the condition of their investments for a period of ten years.

The U.S.-Georgia Bilateral Investment Treaty, in force since 1994, guarantees U.S. investors national treatment or most favored nation treatment, whichever is better, in the establishment, operation and sale of their investments. Exceptions to national treatment may be made by Georgia for investments in maritime fisheries; air and maritime transport and related activities; ownership of broadcast, common carrier, or aeronautical radio stations; communications satellites; government-supported loans, guarantees, and insurance; and landing of submarine cables.

Legislation governing foreign investment includes the Constitution, the Civil Code, the Tax Code, and the Customs Code. Other relevant legislation includes the Law on Entrepreneurs, the Law on Promotion and Guarantees of Investment Activity, the Bankruptcy Law, the Law on Courts and General Jurisdiction, the Law on Limitation of Monopolistic Activity, the Accounting Law, and the Securities Market Law.

Georgia has concluded agreements for avoidance of double taxation with 36 countries. These are Armenia, Austria, Azerbaijan, Belgium, Bulgaria, China, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Iran, Italy, Japan, Kazakhstan, Latvia, Lithuania, Netherlands, Poland, Romania, Switzerland, Turkmenistan, Ukraine, UK, Uzbekistan, Kuwait, Malta, Singapore, Israel, Spain, Egypt, Ireland, Turkey, and Luxemburg. Negotiations have been launched to conclude double taxation treaties with the following countries: UAE, Bahrain, Cyprus, Hungary, Qatar, Slovenia, India, Slovakia, Belarus and Slovakia. An agreement with Russia was signed in 1999 and ratified by the Georgian parliament in 2000. Although it has not been ratified by the Russian Duma, Russia regards it as an active agreement.

The legal framework governing the ownership and privatization of property is established by the following acts: the Civil Code, the Law on Ownership of Agricultural Land, the Law on Private Ownership of Non-Agricultural Land, the Law on Management of State-Owned Non-Agricultural Land, and the Law on Privatization of State Property. Property rights in the extractive industries are governed by the Law on Concessions, the Law on Deposits, and the Law on Oil and Gas. Intellectual property rights are protected under the Civil Code and by the Law on Patents and Trademarks. Financial sector legislation includes the Law on Commercial Banks, the Law on National Banks, and the Law on Insurance Activities.

Georgia does not screen foreign investment in the country, other than imposing a registration requirement and certain licensing requirements as outlined below. Foreign investors have participated in most major privatizations of state-owned property. Transparency of such privatizations has at times been an issue, however. No law specifically authorizes private firms to adopt articles of incorporation which limit or prohibit foreign investment.

In 2005, registration of businesses was simplified. Paperwork and fees were reduced and processing time shortened. The government proudly promotes that an entrepreneur can start a business in three days. All companies are required to register with the Ministry of Finance, providing founders’ and firm principals' names, dates and places of birth, occupations, and places of residence; incorporation documents; area(s) of activity; and charter capital. This information is made public and any person may request and review such information. Business registration and tax registration are separate procedures handled by the same department within the Ministry of Finance.

The Government of Georgia has privatized the majority of the largest formerly state-owned enterprises in the country. Successful privatization projects include major deals in energy generation and distribution, telecommunications, water utilities, port facilities and real estate assets. By the end of 2009, the government announced a new wave of privatization, which included railway, telecommunication and utilities projects. A list of entities available to be privatized can be found on the website www.privatization.ge. Information on investment conditions and opportunities can be obtained from the Georgia National Investment and Export Promotion Agency, e-mail: info@investingeorgia.org, www.investingeorgia.org. Further information is available at a website maintained by the American Chamber of Commerce in Georgia, www.investmentguide.ge.

In 2005, 84 percent of existing licensing requirements were eliminated and a “one stop shop” for licenses was created. By law, the government has 30 days to make a decision, and if no reasonable ground for rejection is stated by the licensing authority within that time, the license or permit is deemed to be issued. Licenses are only required for activities that affect public health, national security and the financial sector. Licensing currently is required in the following areas: weapons and explosives production, narcotics, poisonous and pharmaceutical substances, exploration and exploitation of renewable or non-renewable substances, exploitation of natural resource deposits, establishment of casinos and gambling houses and the organization of games and lotteries, banking, insurance, trading in securities, wireless communication services, and the establishment of radio and television channels. The law requires the state to retain a controlling interest in air traffic control, shipping traffic control, railroad control systems, defense and weapons industries, and nuclear energy. Only the state may issue currency, banknotes, and certificates for goods made from precious metals, import narcotics for medical purposes, and produce control systems for the energy sector.

Conversion and Transfer Policies

Georgian law guarantees the right of an investor to convert and repatriate income after payment of all required taxes. The investor is also entitled to convert and repatriate any compensation received for expropriated property. Moreover, Georgia has accepted the obligations of Article VIII, Sections 2, 3, and 4 of the IMF Articles of Agreement, effective as of December 20, 1996. IMF members accepting the obligations of Article VIII undertake to refrain from imposing restrictions on payments and transfers for current international transactions and from engaging in discriminatory currency arrangements or multiple currency practices without IMF approval. By accepting the obligations of Article VIII, Georgia has indicated to the international community that it will pursue sound economic policies that will obviate the need to use restrictions on the making of payments and transfers for current international transactions.

Under the U.S.-Georgia Bilateral Investment Treaty, the Georgian government guarantees that all transfers relating to a covered investment by U.S. investors can be made freely and without delay into and out of Georgia.

Foreign investors have the right to hold foreign currency accounts with authorized local banks. The sole legal tender in Georgia is the lari (GEL), which is traded on the Tbilisi Interbank Currency Exchange and in the foreign exchange bureau market. There is no difficulty in obtaining foreign exchange or significant delays in remitting funds overseas through normal channels. Several Georgian banks participate in the SWIFT and Western Union interbank communication networks. Businesses report that it takes a maximum of three days for money transferred abroad from Georgia to reach a beneficiary’s account, unless otherwise provided by a customer’s order. There are no known plans to change remittance policies. Travelers must declare at the border currency and securities in their possession valued at more than GEL 30,000 (USD 16,593).

Expropriation and Compensation

The Georgian Constitution protects ownership rights, including ownership, acquisition, disposal, or inheritance of property. Foreign citizens living in Georgia possess rights and obligations equal to those of the citizens of Georgia. The Constitution allows restriction or revocation of property rights only in cases of extreme public necessity, and then only as allowed by law.

The Law on Procedures for Forfeiture of Property for Public Needs establishes the rules for expropriation in Georgia. The law allows expropriation for certain enumerated public needs. It provides a mechanism for valuation and payment of compensation, and for court review of the valuation at the option of any party. The Georgian law on investment allows expropriation of foreign investments only with appropriate compensation. Recent amendments to the expropriation law allow payment of compensation with property of equal value as well as money. Compensation includes all expenses associated with the valuation and delivery of expropriated property. Compensation must be paid without delay and must include both the value of the expropriated property as well as the loss suffered by the foreign investor as a result of expropriation. The foreign investor has a right to review an expropriation in a Georgian court. In 2007, Parliament passed a law generally prohibiting the government from contesting the privatization of real estate sold by the government before August 2007. The law is not applicable to certain enumerated properties.

The U.S.-Georgia Bilateral Investment Treaty permits expropriation of covered investments only for a public purpose, in a non-discriminatory manner, upon payment of prompt, adequate and effective compensation, and in accordance with due process of law and general principles of fair treatment.

Dispute Settlement

Georgian investment law allows disputes between a foreign investor and a governmental body to be resolved in Georgian courts or at the International Center for the Settlement of Investment Disputes (ICSID), unless a different method of dispute settlement is agreed upon between the parties. If the dispute is not considered at ICSID, the foreign investor has the right to submit the dispute to any international arbitration body which has been set up by the United Nations Commission for International Trade Law (UNCITRAL) to resolve the dispute in accordance with the rules established under the arbitration and international agreement. Under the U.S.–Georgia Bilateral Investment Treaty, investors have additional rights.

Georgia is party to the International Convention on the Recognition and Enforcement of Foreign Arbitration Awards. As a result, the Government agrees to accept binding international arbitration of investment disputes between foreign investors and the state. The Ministry of Justice was designated in December 2005 to oversee the government’s interests in arbitrations between the state and private investors.

It is recommended that contracts between private parties include a provision for international arbitration of disputes because of deficiencies in the Georgian court system. Litigation can take excessively long periods of time. There is a continuing concern about the adequacy of training of judges and about their susceptibility to pressure from the government or other outside influences.

Performance Requirements and Incentives

Performance requirements are not a condition of establishing, maintaining, or expanding an investment, but have been imposed on a case-by-case basis in some privatizations, for example, commitments to maintain employment levels or to make additional investments within a specified period of time. While many privatizations have proceeded smoothly and regularly, the current government has used non-fulfillment of performance requirements to justify rescinding privatizations and re-selling enterprises, usually for higher prices, sometimes to the benefit of other interested parties. Most types of performance requirements are prohibited by the U.S.-Georgia Bilateral Investment Treaty.

The Government of Georgia does not offer incentives to foreign investors, but relies on the many improvements it has made in the overall business climate to attract them to invest in the country.

Right to Private Ownership and Establishment

Foreign and domestic private entities may freely establish, acquire and dispose of interests in companies and business enterprises, and engage in all forms of remunerative activity. Some specific laws regulate business activity in the banking, agribusiness, energy, transport and tourism sectors. To the extent that public enterprises compete with private enterprises, they do on the basis of equality.

Foreign individuals and companies may buy non-agricultural land in Georgia. Only Georgian citizens or companies may buy agricultural land in their own name, but even agricultural land can be purchased by forming a Georgian corporation that may be up to 100 percent foreign-owned.

Investors should exercise extreme caution in purchasing property in Abkhazia and South Ossetia. Land for sale rightfully may belong to internally displaced persons forced to leave Abkhazia and South Ossetia in the early 1990s or 2008 and may have improperly been placed on the market by the de facto authorities of Georgia’s breakaway regions. The government of Georgia considers the sale of property in those regions illegal under Georgian law and property could be reclaimed by original owners at a future date.

Protection of Property Rights

Secured interests in both real and personal property are recognized and recorded. However, deficiencies in the operation of the court system can hamper investors from realizing their rights in property offered as security. Foreign investors' interests have sometimes been harmed by biased court proceedings and by legislation and decrees that clearly favor a Georgian entity or partner involved in the enterprise. Judicial reform has been identified as a top priority for the Georgian government since late 2005, but it will take some time for court and legal reforms to bear fruit. It is recommended that contracts between private parties include a provision for international arbitration of disputes.

Disputes over property rights have undermined confidence in the impartiality of the Georgian judicial system and rule of law, and, by extension, Georgia’s investment climate. Both foreign and Georgian investors have expressed reservations about the competence, independence and impartiality of court decisions. In a few cases, lower court decisions have changed control of property or of entire enterprises on questionable legal grounds or on the basis of forged documents. In some cases these decisions have been reversed by higher courts or government action, in others not.

Protection of Intellectual Property Rights

Georgia acceded to the WTO and the TRIPS agreement in 2000. In 2004, the Georgian parliament ratified the Rome Convention for Protection of the Rights of Performers, Producers of Phonograms and Broadcasting Organization, and the Lisbon Agreement on Denomination of Origin. In 2005, Georgia joined WIPO International Convention for the Protection of New Varieties of Plants. Georgia is a party to the Bern Convention, member of two WIPO digital treaties – the Copyright Treaty and the Performance and Phonograms Treaty, The Hague Agreement and the Budapest Treaty Concerning the International Recognition of the Deposit of Microorganisms for the Purpose of Patent Procedures.

Six laws regulate intellectual property rights (IPR): the Law on Patents, Law on Trademarks, Law on Copyrights and Neighboring Rights, Law on Appellation of Origin and Geographic Indication of Goods, Law on Topographies of Integrated Circuits, and Law on IP-Related Border Measures. Georgian law now provides retroactive protection for works of literature, art and science, or sound recordings for 50 years.

Georgia has brought its legislation into line with international standards, but enforcement remains weak. Pirated video and audio recordings, electronic games, and computer software are freely sold in Georgia. Use of unlicensed software in government offices, private organizations and businesses is common. Internet service providers host websites loaded with unlicensed content. Responsibility for WTO compliance was recently been transferred to the Ministry of Economic and Sustainable Development, which still needs to develop its capacity in this regard. The Customs Department is developing a new Intellectual Property Objects Register to assist in identification of counterfeit goods at the border. Nevertheless, IPR awareness is low and hampered by frequent personnel changes. Further clarification of responsibilities between the Ministry of Internal Affairs (MOIA) and the Ministry of Finance is needed, as the MOIA has authority over some types of property rights protection and the Ministry of Finance over others. Although the existing laws regarding IPR protections are good, judges and lawyers lack knowledge of IPR laws and understanding of IPR issues. Georgia’s Patent and Trademark Agency needs greater familiarity with emerging technologies.

Transparency of Regulatory System

The Georgian government has made a commitment to greater transparency and simplicity of regulation. Laws and regulations are published in Georgian in the official gazette, the Legislative Messenger. The number of taxes has been reduced from 22 to six. The tax on corporate profits is 15 percent. The Value Added Tax is 18 percent. The tax on personal income has been reduced from 25 percent to 20 percent and the dividend income tax rate from ten to five percent. Both reductions took effect on January 1, 2009. This new initiative is an acceleration of legally binding commitments, made earlier, to reduce the personal income tax rate to 18 percent by 2013 and to further reduce the dividend income tax rate to zero by 2012. Legislation was passed in 2008 that abolished social taxes and set dividend and capital gains tax rates at zero with respect to publicly traded equities (defined as having free float in excess of 25 percent). There are excise taxes on cigarettes, alcohol and fuel. In 2010, an excise tax was levied on mobile telecommunication. Imports are taxed at rates of zero, five and 12 percent. Nearly all goods, except for some agricultural products, are taxed at zero.

In 2010, the Georgian government passed a new tax code aimed at increasing transparency in both policy and implementation. The code introduces several new concepts into Georgia tax law including giving the Ministry of Finance the authority to issue legally binding rulings to companies on tax questions. In addition, the intent of a company when a tax mistake is made is also now a consideration, and if the mistake is deemed to have been innocent, fines can be reduced or removed. The new tax code also includes tax benefits for micro and small business. The code came into force on January 1, 2011.

The Georgian National Investment and Export Promotion Agency has established Business Information Centers in Tbilisi and other Georgian cities. These centers are intended to provide domestic and foreign businesses with a standard package of information relevant to doing business in Georgia. They also provide specific information according to the needs of individual businesses. The Business Information Centers are also conducting an ongoing public-private dialog to facilitate communication between regulators and the business community.

International accounting standards became binding for joint stock companies in Georgia as of January 1, 2000. For other institutions, such as banks, insurance companies and companies operating in the field of insurance, as well as limited liability companies, limited partnerships, joint liability companies, and cooperatives, the standards became binding on January 1, 2001. Private companies (excluding sole entrepreneurs, small businesses and non-commercial legal entities) are required to perform accounting and financial reporting in accordance with international accounting standards. Sole entrepreneurs, small businesses, and non-commercial legal entities perform accounting and financial reporting according to simplified interim standards approved by the Parliamentary Accounting Commission. Despite the legal requirement, the conversion to international accounting standards is going slowly, in part because in the past, many businesses have operated in the shadow economy, or maintained two sets of books. Qualified accounting personnel are in short supply.

Efficient Capital Markets and Portfolio Investment

Banking was one of the fastest growing sectors in the Georgian economy from 2003-2008. However, growth slowed in 2008-2009 due to the Russia-Georgia conflict and the world financial crisis. Currently, the banking system consists of domestically-based small- and medium-sized banks, a handful of large banking institutions based in Tbilisi with subsidiaries (e.g. HSBC, Societe Generale, Vneshtorgbank, Privat Bank), and two foreign banks with branches (Turkish Bank Ziraat and the International Bank of Azerbaijan). In 2007, commercial bank assets grew by 70 percent with a profit growth of 65 percent. Total assets of the country’s 19 commercial banks (16 of which have foreign capital) were $4.7 billion at the end of third quarter of 2009. By the end of 2009 commercial bank assets declined by around $0.4 billion as a result of the global financial crisis. However, 2010 marked significant improvement: Georgia’s National Bank reported 11.3 percent increase in commercial banks profit and retained earnings in the period ofJanuary-October,2010 reaching $577 million. Total assets also increased during the same period by 18 percent reaching $5.6 billion, constituting almost 53 percent of GDP in 2009.

Credit from commercial banks is available to foreign investors as well as domestic clients, although interest rates are high. Banks continue offering business, consumer, and mortgage loans. By the end of Q2 2010 39% of loans were made to individuals and the remaining 61% to legal entities (companies and organizations). The total outstanding credit by commercial banks equaled 5.588 billion lari (approximately USD 3.131 billion).

In addition, the International Finance Corporation (IFC), European Bank for Reconstruction and Development (EBRD), U.S. Overseas Private Investment Corporation (OPIC), Millennium Challenge Corporation (MCC), and other international development agencies have a variety of lending programs that make credit available to large and small businesses in Georgia.

The limited number of foreign banks operating in Georgia reflects, in part, the small size of Georgia’s financial market. However, foreign investment in the sector is significant, accounting for 78 percent of total bank capital as of November 2010, per National Bank data. In 2005, Russian, Kazakhstani, U.S. and German capital was invested in Georgian banks. In September 2006 the French bank Societe Generale acquired 60 percent of one of the leading Georgian banks, Bank Republic. In 2007, British bank HSBC entered the Georgian market. UAE Dhabi Group acquired Standard Bank in 2008.

Georgian banks have remained solvent during the current global credit crisis largely due to the mandated 13 percent central bank reserve requirement and conservative lending practices. The Georgian central bank relaxed the reserve requirement to five percent in the aftermath of the war and in response to the global credit crisis to try to inject liquidity into the market and spur new lending. The reserve requirement remains at five percent.

The law on commercial bank activities has been amended to improve the transparency of ownership and corporate governance of banks. In March 2006, the restriction under which one shareholder or a group of joint shareholders could hold no more than 25 percent of voting shares in a bank was abolished. A new law regulating the activity of microfinance organizations came into force in August 2006.

The National Securities Commission of Georgia regulates the securities market. All joint stock companies with more than 50 shareholders -- currently about 1800 companies in Georgia -- are required to submit annual, semi-annual, and current reports prepared in accordance with internationally accepted accounting standards. By the end of June 2010, 146 joint stock companies were listed on the Georgian Stock Exchange.

The Georgian Stock Exchange (GSE) is the only organized securities market in Georgia. Designed and established with the help of USAID and operating under a legal framework drafted with the assistance of American experts, GSE complies with global best practices in securities trading and offers an efficient investment facility to both local and foreign investors. The GSE automated trading system can accommodate thousands of securities that can be traded by brokers from workstations on the GSE floor or remotely from their offices. During the first 11 months of 2010, GSE executed 3035 trades worth $57 million. In comparison, the corresponding figure for 2008 was $160.3 million.

No law or regulation authorizes private firms to adopt articles of incorporation or association that limit or prohibit foreign investment, participation or control. “Cross-shareholder" or "stable-shareholder" arrangements are not used by private firms in Georgia. Georgian legislation does not protect private firms from takeovers. There are no regulations authorizing private firms to restrict foreign partners' investment activity or limit foreign partners' ability to gain control over domestic enterprises.

Political Violence

Georgia suffered considerable instability in the immediate post-Soviet period. After independence in 1991, civil war and separatist conflicts flared up in the areas of Abkhazia and South Ossetia. The status of each region remains unresolved and the central government does not have effective control over these areas. The United States supports the territorial integrity of Georgia within its internationally-recognized borders. In August 2008, tensions boiled over culminating in a brief war between Georgia and Russia. Russia invaded and occupied portions of undisputed Georgian territory, destroyed portions of vital infrastructure, blocked the main east-west highway and blockaded the Georgian port of Poti. Nearly all damaged infrastructure has been repaired and commerce has returned to normal. While the separatist regions of South Ossetia and Abkhazia have declared independence, thus far only Russia, Venezuela, Nicaragua, and the small island country of Nauru have recognized them. Tensions still exist and there are occasional reports of violence both inside the breakaway republics and near the administrative boundary lines, but other parts of Georgia, including Tbilisi, are not directly affected.

Corruption

Under the leadership of President Saakashvili, Georgia has taken action to reduce corruption. Anti-corruption efforts have resulted in the arrests of former officials, the radical downsizing of state bureaucracies, and effective crackdowns on smuggling. Consequently, state revenue collections have increased several fold. The notoriously corrupt traffic police were completely disbanded in mid-2004.

Articles 332-342 of the Criminal Code criminalize bribery. Georgian legislation provides for civil forfeiture of undocumented assets from public officials who are charged with corruption offenses. Bribery is a criminal act under Georgian law, and Parliament recently accepted a package of constitutional amendments that make abuse of public office a criminal offense with a maximum penalty of 15 years imprisonment and confiscation of property. Penalties for accepting a bribe start at six years in prison and can extend up to 15 years depending on the circumstances accompanying the offense. Penalties for giving a bribe can include a fine, a minimum prison sentence of two years or both. In aggravated circumstances, when a bribe is given to commit an illegal act, the penalty can be from four to seven years. The definition of a public official includes foreign public officials and employees of international organizations and courts for purposes of such offenses as accepting a bribe, giving a bribe and trading in influence. White collar crimes such as bribery fall under the investigative jurisdiction of the Prosecutor's Office.

The Government’s Anti-Corruption Strategy calls for an effective state management system and legal and public feedback mechanisms to prevent corruption. Among the goals of the strategy are the identification and analysis of conditions conducive to corruption as well as elaboration of mechanisms for their eradication, strengthening of principles of accountability and public disclosure in the public sector, prosecution of lawbreakers, and facilitation of competitive development of the business sector.

Georgia reasserted central control over the Black Sea region of Adjara in May 2004, reducing illicit economic activity there. However, the lack of central government control and international access to Abkhazia and South Ossetia since the 2008 conflict has left smuggling levels unmonitored and un-estimated. The Georgian government has raised concerns with Russia and with the international community about continued high levels of smuggling, money laundering, and counterfeiting of U.S. dollars in the areas outside its control.

Georgia is not a signatory to the Organization for Economic Co-operation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Georgia has ratified the UN Convention against Corruption, however. Georgia cooperates with the Group of States Against Corruption (GRECO) and the OECD’s Anti-Corruption Network for Transition Economies (ACN). GRECO concluded in 2006 that Georgia had successfully implemented the first round of its anti-corruption recommendations. In 2003, ACN proposed an anti-corruption action plan and 21 recommendations for Georgia. In 2006, the OECD positively assessed the progress of anti-corruption measures and considered all but four of its recommendations implemented. OECD conducted an assessment of Georgia in October 2009 and released the respective report in March 2010. According to the report, Georgia has significantly reduced its levels of corruption over the past four years. However, the report suggests that reforms should continue in order to strengthen the Anti-Corruption Interagency Council and improve judicial integrity. Georgia has made significant progress in criminalizing corruption in accordance with relevant international standards. Georgia is among the first countries to introduce criminal liability of legal persons for a number of crimes, including corruption, even if acting on behalf of a corporate entity. Georgia has made important progress to establish the legal and institutional basis for transparent and merit-based recruitment, remuneration and promotion of public servants. However, recent civil service reform efforts still lack a clear overall approach and coherent strategy. Principles of impartiality and political neutrality will need to be properly grounded in the reform. One of the main achievements in the area of prevention of corruption is the adoption in June 2009, by parliament of amendments to the Law on Conflict of Interest and Corruption in the Public Service. A system of public financial control and audit is being put into place in Georgia.

The OECD also concluded that integrity and trust in the judiciary are considered issues of concern in Georgia and should be further addressed by the government. More transparency in the judiciary should be introduced, including through disclosing information about criteria for selection and reasons for dismissal of judges and ensuring transparent and speedy trial of corruption and human rights cases. Measures to prevent corruption should also involve the private sector. The Georgian government should encourage businesses to develop and adopt internal control and ethical measures to prevent and expose bribery, including encouraging business associations to provide assistance in this area, in particular to small and medium size enterprises.

Bilateral Investment Agreements

Georgia has negotiated bilateral agreements on investment promotion and mutual protection with 32 countries, including the U.S., Armenia, Austria, Azerbaijan, Belgium, Bulgaria, China, Czech Republic, Estonia, Egypt, Finland, France, Germany, Greece, Iran, Israel, Italy, Kazakhstan, Kyrgyzstan, Kuwait, Latvia, Lithuania, Luxemburg, Moldova, Netherlands, Romania, Sweden, Turkey, Turkmenistan, Uzbekistan, the United Kingdom, and Ukraine. Negotiations are underway with the governments of 24 countries: Bangladesh, Belarus, Bosnia and Herzegovina, Croatia, Cyprus, Denmark, Iceland, India, Indonesia, Jordan, Korea, Lebanon, Malta, Norway, Philippines, Portugal, Saudis Arabia, Slovakia, Spain, Switzerland, Syria, Tajikistan, and Qatar. In 2007, Georgia signed a Trade and Investment Framework Agreement (TIFA) with the United States.

A free trade agreement is in force with the Commonwealth of Independent States, and others exist bilaterally with Ukraine, Russia (though trade is restricted by the Russian Government), Kazakhstan, Azerbaijan, Armenia, Moldova, Turkmenistan, and Turkey. An agreement is signed, but not yet ratified, with Uzbekistan. Ongoing consultations on free trade are being held with the European Union, Belarus, Kyrgyzstan, Cooperation Council of Gulf Arab States, and Tajikistan.

OPIC and Other Investment Insurance Programs

From 1993 through 2009, OPIC committed over USD 217 million in financing and political risk insurance to projects in Georgia. These projects include the development of hotel and office space, production of pharmaceuticals, food processing and farming, cold storage, banking, mortgage lending and financial leasing services. As part of the United States’ $1 billion pledge to help Georgia recover from the conflict with Russia in 2008, OPIC financed ten new projects at a value of $159 which included. 155.3 million in direct financing of eight projects and 4.4 million for two risk insurance projects. A large portion of OPIC’s assistance has been used to underwrite mortgages aimed at allowing Georgian banks to offer smaller more affordable mortgages to the Georgian public. Other funding will support commercial and residential property development projects.

Labor

Georgia offers an abundant supply of skilled and unskilled labor at attractive costs compared not only to Western European and American standards, but also to Eastern European standards. The labor force is among the best educated and most highly trained in the former Soviet Union. While some of the best qualified professionals and technicians emigrated from Georgia (mostly to Russia, the United States and Europe) after the Soviet Union's collapse, many have remained in the country or returned from abroad and are attempting to find a new role in Georgia’s market economy. Unemployment remains high and job creation has been a particular challenge.

The labor market in Georgia is one of the world's freest. Wage negotiations take place between employees and employers and trade unions are not powerful. Labor, health, and safety laws are not considered an impediment to investment. A new labor code which entered into force in June 2006 considerably liberalized labor regulations. The code defines the minimum age for employment (16), work hours (41 per week), annual leave (24 calendar days) and leaves the rest to be regulated by agreement between the employer and employee.

Payment of at least one month’s salary is required if the employer initiates a dismissal. Employees must give one month’s notice of intention to quit. No notice requirement is imposed on the employer prior to dismissal. Employees are entitled to up to 126 days (4 months) of maternity leave and, together with unpaid leave, up to 16 months. Under the Labor Code, a contract of employment may bar an employee from using the knowledge and qualifications obtained while performing his duties with another employer. This provision may remain in force even after the termination of labor relations.

Since January 2008, employers are not required to pay social security contributions for employees. The former 12 percent income tax paid by employees and 20 percent social security tax paid by employers on their employees' wages was merged into a unified personal income tax at the rate of 25 percent in 2008, shifting the employer's tax burden to the employee. From January 2009, the overall effective tax rate paid by both self-employed persons and employees has been further reduced from 25 to 20 percent. The state social security system provides modest pension and maternity benefits. The minimum monthly pension is GEL 85 (USD 48). The average monthly salary in Georgia for 2009 was GEL 556 (USD 333). The average monthly salary for state sector employees was GEL 512.6 (USD 305) and for the private sector – GEL 608.5 (USD 362). The minimum wage for government employees is GEL 115 (USD 69) per month. The minimum wage in the private sector has not changed in many years and stands at GEL 20 (USD 12) per month, but few, if any, workers earn so little.

Georgia has signed multiple ILO agreements, including the Forced Labor Convention of 1930; the Paid Holiday Convention of 1936; the Anti-Discrimination (employment and occupation) Convention of 1951; the Human Resources Development Convention of 1975; the Right to Organize and Collective Bargaining Convention of 1949; the Equal Remuneration Convention of 1951; the Abolition of Forced Labor Convention of 1957; the Employment Policy Convention of 1964; and the Minimum Age Convention of 1973. The government has not brought its Labor Code into line with ILO minimum standards, and the relationship between the government and labor organizations is unproductive. Organized labor complains of Government interference in collecting dues and in its ability to organize and bargain collectively. On September 10, 2010, the AFL-CIO registered a petition against the Government of Georgia requesting Georgia’s removal from the GSP program due to the Government’s unwillingness to bring the Labor Code into line with ILO minimum standards.

Foreign Trade Zones/Free Ports

In June 2007, the Parliament of Georgia adopted a Law on Free Industrial Zones, which defined the form and function of free industrial/economic zones. Financial operations in such zones may be performed in any currency and foreign companies operating in free industrial zones will be exempt from taxes on profit, property and VAT. Georgia’s Ministry of Economic and Sustainable Development has allocated a 400 hectare area adjacent to the Black Sea Port of Poti for the first such zone. RAK Investment Authority (Rakia group, which is based in the UAE) purchased 100 percent of the shares of LLC Poti Sea Port, and pledged to develop a free economic zone on 300 hectares of land in Poti and to build a new port terminal on a 100 hectare site. Construction of the new port terminal in Poti started in the second half of 2010 and is expected to be finished by 2015. The first phase of construction should be finished by 2013, and will turn Poti Seaport into an international industrial zone with port, railroad and other facilities. A second free economic zone has begun to function in the western Georgian city of Kutaisi. The Egyptian company Fresh Electric has established a factory in 2009 as a part of the 27 hectare zone in which they are producing kitchen appliances. The company committed to build about one dozen textile-, ceramics-, and home appliance-producing factories in the zone, and announced its intent to invest over USD 2 billion. Information on Georgia’s free industrial zones is available on www.georgia.gov.ge.

Foreign Direct Investment Statistics

Foreign Direct Investment (FDI) in Georgia dramatically increased during the periods of 1997-1998, 2003-2004, and 2006-2008. The first two peaks were related to the construction of the Baku–Supsa and Baku-Tbilisi-Ceyhan oil pipelines that help bring Caspian oil and gas to European markets. FDI inflows in 2006-2007 hit historical highs due to the privatization of many state-owned enterprises and the impact of economic reforms. FDI totaled USD 1.1 billion (15.3 percent of GDP) in 2006, more than doubling the 2005 total of USD 0.4 billion. FDI inflow in 2007 almost doubled again to USD 2.0 billion. Large FDI inflow in the first half of 2008 showed that investor interest in Georgia remained high; however, the August 2008 conflict with Russia undermined investor confidence and the subsequent global financial crisis further restricted FDI. Accordingly, total FDI in 2008 decreased to USD 1.3 billion. Despite Government hopes that FDI would rebound, FDI growth in 2010 has remained minimal.

Official statistics on FDI inflow from 2000-Q3 2010 are as follows:

Annual FDI

Year

FDI Inflow(USD)

2003

339,400,000.00

2004

499,100,000.00

2005

449,800,000.00

2006

1,190,400,000.00

2007

2,014,800,000.00

2008

1,564,000,000.00

2009

658,400,000.00

2010(Q1-3)

433,000,000.00

FDI by Country of Investment

Country

2007

2008

2009

2010 Q1-3

Armenia

-4,895

-15,016

-5,378

-14,759

Azerbaijan

41,368

23,943

29,824

37,283

China

6,877

-2,271

-2,237

-2,693

Cyprus

148,644

26,166

-1,612

-3,614

Czech Republic

227,926

34,858

45,679

25,384

Denmark

158,126

256

-427

20

Egypt

NA

NA

55,750

NA

Kazakhstan

88,486

65,942

-31,972

-19,665

Netherlands

299,277

135,870

32,586

113,169

Panama

6,178

-2,470

74,742

-354

Russia

88,997

26,212

10,253

41,580

Turkey

93,871

164,526

97,939

29,898

UAE

130,859

306,576

162,756

25,850

UK

145,475

148,908

72,313

1,396

USA

84,412

167,921

-10,026

62,861

Virgin Is(Brit)

187,816

156,847

35,434

19,861

FDI by Sector

Sectors

2007

2008

2009

2010 Q1-3

Total

2,014,841.60

1,563,962.40

658,400.60

433,036.10

Agric/fishing

15,527.90

7,844.30

22,326.90

5,856.50

Industry

398,240.90

207,327.90

139,805.10

69,425.70

Energy Sector

362,581.10

294,864.80

-2,130.60

32,763.00

Construction

171,891.80

56,725.30

105,218.80

-5,359.90

Hotels/restaurants

242,075.90

181,939.20

37,542.30

-1,971.50

Transport/communications

416,694.70

422,690.00

98,432.00

129,235.40

Real estate

30,543.90

277,837.70

147,410.30

69,576.90

Other services

140,730.70

101,225.50

51,580.20

60,012.10

Financial sector

136,914.50

8,519.40

49,663.40

72,280.00

Not stated

99,640.20

4,988.20

8,552.20

1,217.90



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