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Diplomacy in Action

2013 Investment Climate Statement - Georgia


2013 Investment Climate Statement
Bureau of Economic and Business Affairs
April 2013
Report
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Openness to, and Restrictions Upon, Foreign Investment

Georgia has made sweeping economic reforms since the “Rose Revolution,” moving from a near-failed state in 2003 to a relatively well-functioning market economy in 2012. Through dramatic police and institutional reforms, the government has all but eradicated low-level corruption with, according to a 2012 poll, less than one percent of the population reporting having to pay a bribe in the previous year to get a government service or decision. The government eliminated 84 percent of licensing requirements in 2005, and Georgia ranks 9th in the World Bank’s Ease of Doing Business Index. Fiscal and monetary policy is focused on low fiscal deficits, low inflation, and a stable real exchange rate.

Parliamentary elections in October 2012 ushered in Georgia’s first ever democratic transfer of power. Bidzina Ivanishvili’s Georgian Dream coalition won a parliamentary majority and has formed its own government, while President Saakashvili of the United National Movement continues to be hold office until October 2013. While the cohabitation between President Saakashvili and the Georgian Dream-led government has been difficult, Georgia has burnished its democratic credentials with a democratic election resulting in a strong multi-party system for the first time since independence.

The Ivanishvili Government has pledged to continue Georgia’s low-regulation, low-tax, free market policies, while modestly increasing social spending, strengthening anti-trust policy, amending the labor code to make it more worker-friendly, and formalizing the government/business relationship to avoid improper government pressure on companies. They are also trying to re-open the Russian market for Georgian wine, mineral water, and agricultural exports. As of the end of 2012, with just over a month in office, the new government was still formulating its policies and it is too early to judge their full effect on the investment climate.

While the election produced little reaction on the currency market, risk spreads, or bank deposits, many companies have opted to wait on new investments until the willingness and ability of the President, Opposition, and new Government to cooperate on business and other issues becomes clearer. This uncertainty over political developments may lead to a slowdown in private sector borrowing and investment in the last quarter of 2012 and beginning of 2013.

Companies in past years reported occasional issues arising from a lack of judicial independence, lack of intellectual property rights enforcement, lack of effective anti-trust policies, selective enforcement of economic laws, and difficulties resolving disputes over property rights. Georgia’s new government has pledged to address these issues. Despite these remaining challenges, Georgia stands far ahead of its post-Soviet peers as a good place to do business.

On January 30, 2012, President Obama announced after an Oval Office meeting with Georgian President Saakashvili that the two countries had agreed to create a high-level dialogue to strengthen trade relations, including the possibility of a free trade agreement. Since this meeting, the U.S. and Georgia have established a High-Level Dialogue on Trade and Investment to identify measures to increase bilateral trade and investment. The U.S. and Georgia signed a Bilateral Investment Treaty in 1994, and Georgia can export many products duty-free to the U.S. under the Generalized System of Preferences (GSP) program.

Georgia is open to foreign investment, and the Georgia National Investment Agency (www.investingeorgia.org) is implementing an aggressive marketing campaign to encourage more foreign investors to come to Georgia. Legislation establishes favorable conditions for foreign investment, but not preferential treatment for foreign investors. The Law on Promotion and Guarantee 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 Guarantee 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 40 countries. These countries are Armenia, Austria, Azerbaijan, Bahrain, Belgium, Bulgaria, China, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, India, Iran, Ireland, Italy, Israel, Kazakhstan, Latvia, Lithuania, Luxemburg, Malta, Netherlands, Norway, Poland, Qatar, Romania, Singapore, Slovakia, Spain, Switzerland, Turkey, Turkmenistan, UAE, Ukraine, UK, and Uzbekistan. Double taxation avoidance treaties have been ratified but have not yet entered into force with Kuwait, Egypt and Cyprus. Treaties have been negotiated but are awaiting signing or ratification with Slovenia, Portugal, Croatia, Serbia, and Sweden. Georgia and Russia signed a double taxation avoidance treaty in 1999, which the Georgian Parliament ratified in 2000. Although it has not been ratified by the Russian Duma, Russia regards it as an active agreement.

Ownership and privatization of property is governed 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 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 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 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.

Legal overhauls in 2005 simplified the business registration process, reducing paperwork and fees and shortening the processing time. The government proudly advertises 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. . 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. Further information is available at a website maintained by the American Chamber of Commerce in Georgia, www.investmentguide.ge, and the Chamber’s website, www.amcham.ge.

In 2005, the government eliminated 84 percent of existing licensing requirements and created a “one stop shop” for licenses. By law, the government has 30 days to make a decision on licenses, and if the licensing authority does not state a reasonable ground for rejection within that time, the license or permit is deemed to be issued. The government only requires licenses for activities that affect public health, national security, and the financial sector. The government currently requires licenses 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, securities trading, 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.

Georgia’s rankings in terms of economic performance were as follows:

Measure

Year

Index/Ranking

TI Corruption Perceptions Index

2012

51 out of 176

World Bank Doing Business

2013

9 out of 185

MCC Government Effectiveness

2013

0.99 (97%)

MCC Rule of Law

2013

0.30 (72%)

MCC Control of Corruption

2013

0.50 (84%)

MCC Fiscal Policy

2013

-4.1(40%)

MCC Trade Policy

2013

89.2 (100%)

MCC Regulatory Quality

2013

1.00 (100%)

MCC Business Start UP

2013

0.993 (100%)

MCC Land Rights Access

2013

0.92 (93%)

MCC Natural Resource Mgmt

2013

20.7 (38%)

Note: MCC is the Millennium Challenge Corporation; TI is Transparency International. The MCC rankings show Georgia’s score and percentile ranking in its income peer group (0% is worst; 50% is the peer group median; 100% is best). For TI and the World Bank, it is Georgia’s rank among the countries covered by the respective surveys, with the #1 rank being best.

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. 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, undertaking 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. The Act of Economic Freedom that Parliament adopted in 2011 further reinforced this provision.

Under the U.S.-Georgia Bilateral Investment Treaty, the Georgian government guarantees that all transfers relating to a covered investment by a U.S. investor 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, nor are there 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 30,000 lari (approximately US$18,200).

Expropriation and Compensation

The Georgian Constitution protects property ownership rights, including ownership, acquisition, disposal, and 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 and 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 Law on Procedures for Forfeiture of Property for Public Needs 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 seek review of 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, however, to certain enumerated properties. While expropriation disputes in Georgia are not common, some reputable NGOs associated the creation of tourist zones by the previous government with illegal revocation of historic ownership rights in Svaneti, Anaklia, Gonio, and Black Sea-adjacent territories. There were also reports that the previous government improperly used eminent domain to seize property in Tbilisi at unfairly low prices, particularly associated with the Tbilisi Railway Bypass Project.

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 set up by the United Nations Commission for International Trade Law (UNCITRAL) to resolve the dispute in accordance with the rules set forth by the treaty with the investor’s host country. The right to use ICSID or UNCITRAL arbitration is also guaranteed in the U.S.–Georgia Bilateral Investment Treaty.

Georgia is party to the International Convention on the Recognition and Enforcement of Foreign Arbitration Awards. As a result, the government in principle agrees to accept binding international arbitration of investment disputes between foreign investors and the state, although in at least one instance investors claimed the government attempted to evade its obligation. The Ministry of Justice oversees 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 weaknesses in the Georgian court system. Litigation can take excessively long periods of time. Disputes over property rights have at times undermined confidence in the impartiality of the Georgian judicial system and rule of law, and, by extension, Georgia’s investment climate. The new government has identified judicial reform as one of its top priorities, although it is too early to assess progress toward that goal.

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 such as commitments to maintain employment levels or to make additional investments within a specified period of time. The scope and time limit on licenses to extract natural resources have been a topic of dispute, and the Ministry of Energy has pulled several mining licenses then re-auctioned them. While many privatizations have proceeded smoothly and regularly, the previous government 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 Georgian government actively seeks U.S. investment and in 2011 established a Partnership Fund (www.partnershipfund.ge), capitalized with shares of state-owned companies. The fund contributes capital or loans for new foreign investment projects, in partnership with private foreign companies. The government aggressively promotes foreign investment in targeted areas that hold growth potential, including hydro-electric power, agriculture, tourism, and apparel manufacturing. Georgia promotes itself as a transit and logistics hub for trade throughout the region. As part of this, the government may offer investors state-owned land and structures at concessional prices, provide utility connections, construct/repair roads, and fund worker training. The government has invested significant resources into infrastructure development since 2004, building new roads, railroads, utilities, and airports.

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 so on the basis of equality.

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

The United States government (and the majority of the international community) does not recognize the jurisdiction of the de facto authorities in either the Abkhazia or South Ossetia regions, and warns American citizens against undertaking business ventures in those Russian-occupied regions. Furthermore, due to the volatility of the political situation, reported high levels of crime, and the inability of embassy personnel to travel to the Abkhazia or South Ossetia regions to assist American citizens in distress, the U.S. embassy also strongly discourages travel to these areas for any purpose. Land for sale in those regions may rightfully belong to internally displaced persons forced to leave the breakaway regions in the early 1990s and may have been placed improperly on the market. In such cases, the government of Georgia considers the sale of property in Abkhazia and South Ossetia illegal and the 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 by the former government that clearly favor a Georgian entity or partner involved in the enterprise. It is recommended that contracts between private parties include a provision for international arbitration of disputes. Additionally, some observers believe economic regulations were inconsistently enforced under the previous government based on the company’s relationship with the government. The new government has pledged to enforce rules in an even-handed manner.

Georgia acceded to the World Trade Organization (WTO) and the Trade-Related Aspects of Intellectual Property Rights (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 the World Intellectual Property Organization (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) in Georgia: 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, and sound recordings for 50 years.

Georgia has brought its intellectual property legislation into line with international standards, but enforcement remains extremely weak and judges and lawyers lack sufficient knowledge of IPR laws and IPR issues. Pirated video and audio recordings, electronic games, and computer software are freely sold in Georgia. Although some government ministries have begun to purchase legal software, use of unlicensed software in government offices, private organizations, and businesses is widespread. Internet service providers host websites loaded with unlicensed content free for users to download or stream. The Ministry of Economy and Sustainable Development is responsible for WTO compliance. The Customs Department has developed an Intellectual Property Objects Register to assist in identification of counterfeit goods at the border, but the Register does not work as effectively as it could. IPR awareness is low and until now enforcement has been hampered by a lack of political will.

Transparency of the Regulatory System

The Georgian government has made a commitment to greater transparency and simplicity of regulation. The government publishes laws and regulations in Georgian in the official gazette, the Legislative Messenger. Since 2004, the government has reduced the number of taxes from 22 to 6. 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, but further planned reduction to 18% in 2013 and 15% in 2014 has been postponed to ensure adequate government revenue. The dividend income tax rate dropped in 2009 from ten to five percent; however its planned reduction to three percent in 2013 and zero percent in 2014 has also been postponed. 2008 legislation abolished social taxes and set dividend and capital gains tax rates at zero with respect to publicly traded equities (defined as having a free float in excess of 25 percent). There are excise taxes on cigarettes, alcohol and fuel. In 2010, the government levied an excise tax on mobile telecommunication. Nearly all goods, except for some agricultural products, have no import tariff. For those with tariffs, the rates are five or twelve percent.

In 2010, the Georgian Parliament passed a new Tax Code aimed at increasing transparency in both policy and implementation. The Revenue Service began implementing the Code in early 2011. The Code introduced several new concepts into Georgian tax law including giving the Ministry of Finance the authority to issue legally binding advance rulings to companies on tax questions. Additionally, the Revenue Service will now consider the intent of a company when a tax mistake is made, 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. In 2011 the Revenue Service took further steps to ease relations with businesses, including introducing a program of “alternative audits,” to allow companies to choose to outsource their tax inspection to private auditing companies, allowing declaration of technical losses, and regulating the process of writing down fuel expenses. The new government plans to phase out the “alternative audit” program over the next few years, as the Revenue Service develops sufficient capacity to conduct all audits itself.

The new Tax Code established the Office of the Business Ombudsman as an independent body accountable to the Prime Minister, authorized to investigate complaints filed by taxpayers with his office. The website www.businessombudsman.ge was launched in November 2011 to publish information on business registration, amendments to tax legislation, liabilities on cash counters’ use, rules of litigation, etc. Although the Business Ombudsman’s Office has assisted numerous companies since 2010, some businesses continued to complain of government pressure and selective treatment based on political affiliation under the previous government. The new government has indicated that it may dissolve the Office of the Business Ombudsman, but had not taken any action to do so as of the end of 2012.

In July 2011 the Parliament passed the Act of Economic Liberty, which imposes fiscal constraints on the government to reinforce the confidence of local and foreign businesses in the stability of Georgia’s economy. This law prohibits the executive branch from moving away from its current fiscally conservative policies. It mandates that the budget deficit stay below three percent of GDP, total public debt below 60 percent of GDP, and budgetary expenditures below 30 percent of GDP. The Liberty Act bans introduction of new state taxes or increases in existing taxes (excise tax being an exception) by means other than a nationwide referendum. The Act also reiterated the Georgian government’s commitment to free movement of capital by banning limitations on repatriation of money or exchange control for residents and non-residents, except in cases involving criminal liability or other instances defined by Georgian legislation.

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 about doing business in Georgia. They also provide specific information tailored 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 operated in the shadow economy, or maintained two sets of books. Qualified accounting personnel are also in short supply.

Efficient Capital Markets and Portfolio Investment

Banking is one of the fastest growing sectors in the Georgian economy. As of January 2013, 19 commercial banks were registered in Georgia. HSBC withdrew from Georgia in 2011-2012 as part of a global restructuring.

The banking system currently consists of domestically-based small- and medium-sized banks, a handful of large banking institutions based in Tbilisi with subsidiaries (e.g., Societe Generale, Vneshtorgbank, Privat Bank), and two foreign banks with branches (Turkish Bank Ziraat and the International Bank of Azerbaijan). As of November 2012, total assets of the country’s 19 commercial banks (16 of which have foreign capital) were around US$8.5 billion. 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.

The International Finance Corporation (IFC), European Bank for Reconstruction and Development (EBRD), U.S. Overseas Private Investment Corporation (OPIC), Millennium Challenge Corporation (MCC), Asian Development Bank (ABD) and other international development agencies have a variety of lending programs that make credit available to large and small businesses in Georgia. In the beginning of 2011 there were 62 microfinance organizations operating in Georgia making small credits available to businesses.

The limited number of foreign banks operating in Georgia reflects, in part, the small size of Georgia’s financial market. Foreign investment in the sector, however, is significant, and is present in 16 out of 19 banks. More specifically, Russian, Kazakh, U.S., German, French, and UAE capital was invested in Georgian banks in 2011. A private Chinese company, Xinjiang Hauling Industry and Trade Group, purchased a 90 percent equity stake of JSC BasisBank from the European Bank for Reconstruction and Development and other Georgian shareholders. With this move, Basis Bank became the first Chinese-owned bank in Georgia.

Georgian banks remained solvent during the current global credit crisis largely due to the central bank-mandated 13 percent capital reserve requirement and conservative lending practices. The National Bank of Georgia (central bank) relaxed the capital 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. In order to promote development of the interbank money market and restore the relationship between interest rates, the NBG increased the reserve requirements for lari-denominated funds to 10% starting from April 2010. Legislation entering into force in January-February 2011 gradually increased reserve requirements for foreign liabilities from 5% to 15%.

The National Bank of Georgia regulates the securities market. All market participants submit their reports in line with international standards, bringing market participants closer to international investors and partners. All listed companies must make public filings, which are then uploaded on the National Bank’s website, allowing users to evaluate a company’s financial standing. The Georgian securities market includes the following licensed participants: a Stock Exchange, a Central Securities Depository, nine brokerage companies, and six registrars.

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, the GSE complies with global best practices in securities trading and offers an efficient investment facility to both local and foreign investors. The GSE’s 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. As of January 2013, 133 companies were traded on the GSE. In 2012, a total of 59.1 million securities were traded at a value of GEL 735 million (approx. US$443 million). The value of transactions made at the stock exchange trading sessions amounted to GEL 8.8 million (approximately US$5.3 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.

Competition from State-Owned Enterprises

After the fall of the Soviet Union, the new Georgian government privatized most state-owned companies. As of the end of 2012, the major state-owned companies were Georgian Railways, Georgian Oil and Gas Corporation (GOGC), Georgian State Electrosystem (GSE), Electricity System Commercial Operator (ESCO), and Enguri Hydro power plant. Of these companies, only Georgian Railways is a major market player – the energy-related companies largely implement the government’s energy policies and help manage the electricity market. There are also a number of Legal Entities of Public Law (LEPLs) - independent bodies that carry out government functions, such as the Public Service Halls. On June 27, 2012 Georgian Railway floated Eurobonds of US$500 million with a 7.750% coupon, maturing in 2022. As part of its Eurobond issuance, it does regular financial reporting. In 2012, the government was considering an Initial Public Offering (IPO) for a minority stake in Georgian Railway, but decided against it, citing unfavorable market conditions. The company has been criticized at times for charging expensive rates on rail transit, but does not compete directly with other rail companies, given its monopoly position. During 2012, 100% of the assets of Georgian Railways, Georgian Oil and Gas Corporation, Georgian State Electrosystem and Electricity System Commercial Operator LLC, were put into the Partnership Fund, a government fund to help facilitate foreign investment in new projects. In addition, the fund also controls 25% of shares in TELASI electricity distribution company.

Corporate Social Responsibility

While the concept of Corporate Social Responsibility (CSR) is not highly developed in Georgia, most large companies engage in charity projects and public outreach as part of their marketing strategy. The American Chamber of Commerce in Georgia has a Corporate Social Responsibility committee that works with member companies on CSR issues. The Global Compact, a worldwide grouping of UN agencies, private businesses and civil society groups promoting responsible corporate citizenship is active in Georgia. The Eurasia Partnership Foundation has sponsored CSR classes at five Georgian universities and Global Compact Georgia is currently focused on educating Georgian companies on the benefits of such policies. Civil society organizations working on labor and environmental issues have become increasingly strong and vocal over the past few years, pushing to ensure companies conduct business in a socially-responsible manner.

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 contested, 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 in the region of South Ossetia culminated 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 – where Russian troops and border guards have established a long-term presence -- have declared independence, thus far only Russia, Venezuela, Nicaragua, and the small island nations of Nauru, Tuvalu and Vanuatu have recognized them. Tensions still exist and there are occasional reports of limited violence both inside the breakaway regions and near the administrative boundary lines, but other parts of Georgia, including Tbilisi, are not directly affected.

While violent street protests in Georgia are rare, police have used excessive force to disperse protests in the past. Leading up to strongly contested parliamentary elections on October 1, 2012 there were isolated cases of political violence at campaign rallies.

Corruption

Under the leadership of President Saakashvili, Georgia took dramatic action to reduce petty corruption. Saakashvili’s 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 since 2004. The government completely disbanded the notoriously corrupt traffic police in mid-2004 and citizens’ service agencies have been reformed into Public Service Halls where citizens can efficiently obtain numerous government services in a single building. They are considered a showcase of Georgia’s successful reforms.

The new Prime Minister, Bidzina Ivanishvili, has pledged to strengthen Georgia’s anti-corruption stance. Alleging widespread elite corruption under the previous government, the new government launched a number of investigations against former officials. As of the end of 2012, these cases had not yet gone through the court system.

Articles 332-342 of the Criminal Code criminalize bribery. Senior public officials must file financial disclosure forms which are posted on-line and Georgian legislation provides for civil forfeiture of undocumented assets of public officials who are charged with corruption offenses. 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. Abuse of authority and exceeding authority by public servants are criminal acts under Articles 332 and 333 of the criminal code and carry a maximum penalty of 8 years imprisonment. The definition of a public official includes foreign public officials and employees of international organizations and courts. White collar crimes such as bribery fall under the investigative jurisdiction of the Prosecutor's Office.

Georgia is not a signatory to the Organization for Economic Cooperation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Georgia has, however, ratified the UN Convention against Corruption. Georgia cooperates with the Group of States Against Corruption (GRECO) and the OECD’s Anti-Corruption Network for Transition Economies (ACN). The OECD conducted an assessment of Georgia in October 2009, releasing a report in March 2010 that concluded Georgia had significantly reduced corruption levels 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.

Since 2003, Georgia has significantly improved its ranking in Transparency International’s Corruption Perceptions Index (CPI) report. In 2012, Georgia ranked 51st out of 176 countries surveyed in the Corruption Perception Index, ahead of several EU members states, including the Czech Republic, Latvia, Slovakia, Romania, and Bulgaria, and slightly below Rwanda, Lithuania, Costa Rica, and Hungary. Georgia ranked 64th in the 2011 CPI. The October 1, 2012 parliamentary election and the subsequent democratic transfer of power represented a political milestone, strengthening Georgia’s democratic trajectory. It remains too early, however, to assess whether a multiparty system with strong checks and balances will emerge from the current political environment.

Bilateral Investment Agreements

Georgia has bilateral agreements on investment promotion and mutual protection with 32 countries, including the United States, 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, Saudi Arabia, Slovakia, Slovenia, 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. In December 2011, Georgia and the European Union agreed to begin negotiations on a Deep and Comprehensive Free Trade Agreement. Georgia has ongoing free trade agreement consultations with Belarus, Kyrgyzstan, the Cooperation Council of Gulf Arab States, and Tajikistan.

On January 30, 2012, President Obama announced after an Oval Office meeting with Georgian President Saakashvili that the United States and Georgia had agreed to initiate a high-level dialogue between the two countries with the goal of strengthening trade relations, including the possibility of a free trade agreement. Since this meeting, the U.S. and Georgia have established a High-Level Dialogue on Trade and Investment to identify measures to increase bilateral trade and investment

OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) is the U.S. Government’s development finance institution. Since 1993, OPIC has committed US$418 million in financing and political risk insurance for 39 projects in Georgia. OPIC investment in Georgia has focused on the following sectors: credit for small and medium-sized enterprises, and projects in the education, manufacturing, tourism, agriculture and financial services sectors. A recent example is OPIC’s US$3.5 million commitment to finance the first permanent campus for Georgian American University. In the agriculture sector, OPIC has made a US$625,000 loan to a cheese producer, an US$8 million loan to expand a winery operation, and US$3.9 million to build a cold storage facility that will have a significant impact on logistics for food products in the region.

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 (official indicators stood at15.1 percent in 2011, however, unofficial unemployment is considerably higher, especially in rural regions, where subsistence farmers are considered employed for statistical purposes) 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. The 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.

The government failed to enforce a number of minimum ILO standards, and the relationship between the government and labor organizations has historically been contentious. Organized labor has complained that the government interfered in dues collection and in workers’ ability to organize and bargain collectively. On September 10, 2010, the AFL-CIO registered a petition against the government requesting Georgia’s removal from the Generalized System of Preferences (GSP) program that gives duty-free treatment to most Georgian goods due to the government’s unwillingness to enforce Labor Code standards as required by ILO conventions. After the U.S. Trade Representative accepted the petition and held a hearing in Washington on January 24, 2012, the Georgian government pledged to make changes to its labor laws and Parliament enacted limited changes to the Labor Code in the summer of 2012. Discussions between the new Georgian government and USTR on the GSP petition are ongoing.

As of the end of 2012, Parliament and the executive branch were considering a range of options to amend the Labor Code to improve worker protections, and interested ministries were consulting with labor organizations, business groups, civil society, and the ILO to this end.

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 (four months) of paid maternity leave and, together with unpaid leave, up to 16 months. Leave taken for reasons of pregnancy, childbirth, childcare, and adoption of a newborn are subsidized by the state. An employer and employee may agree on additional compensation. 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.

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 20 percent in 2009, shifting the employer's tax burden to the employee. The state social security system provides modest pension and maternity benefits. The minimum monthly pension is 100 lari (US$61), although the new government announced plans to increase it to 150 lari (US$91) as of January 2013. The average monthly salary in Georgia in 2011 was 636 lari (US$388). The average monthly salary for state sector employees was 589 lari (US$360) and for the private sector 670 lari (US$408). In Q2 of 2012, employees (as distinct from self-employed workers) were earning average 723 lari (US$438). The minimum wage for government employees is 115 lari (US$70) per month. The official minimum wage in the private sector has not changed since the early 1990’s and stands at 20 lari (US$12) per month, but is not applied in practice.

Georgia has signed multiple International Labor Organization 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.

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. UAE-based RAK Investment Authority (Rakia) purchased 100 percent of the shares of LLC Poti Sea Port in 2008 and began development of a free economic zone on 300 hectares of land adjacent to the port. Rakia sold 80% of the Port to APM Terminals, based in the Netherlands but part of the Danish A.P. Moller-Maersk group, in 2011, but maintains the largely undeveloped free industrial zone.

Georgia’s second free industrial zone is a 27 hectare plot in the city of Kutaisi. The Egyptian company Fresh Electric constructed a kitchen appliances factory in 2009 in the free industrial zone. The company has committed to build about one dozen textile, ceramics, and home appliances factories in the zone, and announced its intent to invest over US$2 billion. Information on Georgia’s free industrial zones is available at 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 bring Caspian oil and gas to European markets. FDI inflows in 2006-2007 hit historic highs due to the privatization of many state-owned enterprises and the impact of economic reforms. FDI totaled US$1.1 billion (15.3 percent of GDP) in 2006, more than doubling the 2005 total of US$0.4 billion. In 2007, FDI almost doubled again to US$2.0 billion. The August 2008 conflict with Russia, however, undermined investor confidence and the subsequent global financial crisis further restricted FDI. 2008 and 2009 saw sharp decreases in FDI. In 2010, FDI rose to 814 million, and rose again to 1.12 billion in 2011.

FDI by countries of origin (thousands of USD):

Country

2009

2010

2011

2012 (Q1-3)

Total

658,400

814,497

1,117,244

684,177

Azerbaijan

29,824

57,962

138,016

38,508

Cyprus

-1,612

40,388

10,359

26,981

Czech Republic

45,679

24,213

46,598

- 34,534

Denmark

-427

18

97,107

3,219

Egypt

55,750

18,000

11,788

 

India

271

14,887

16,27

6,139

Kazakhstan

-31,972

-16,574

5,175

13,831

Netherlands

32,586

73,362

241,8

25,9

Russia

10,253

47,881

55,435

19,687

Turkey

97,939

91,787

75,5

75,8

UAE

162,756

55,531

-52,358

8,355

UK

72,313

58,964

55

54,3

USA

-10,026

135,818

28,106

39,861

Virgin Is(Brit)

35,434

40,236

42,120

11,471

FDI by Sector (thousands of USD):

Sectors

2009

2010

2011

2012 (Q1-3)

Total

658,400

814,497

1,117,244

684,177

Agric/fishing

22,327

8,632

14,908

19,685

Industry

139,805

228,771

160,56

139,075

Energy

-2,131

21,878

203,952

133,453

Construction

105,219

4,706

48,112

1,124

Hotels/restaurants

37,542

17,122

22,706

15,29

Transpt/cmnc

98,432

215,116

126,517

128,775

Real estate

147,410

199,253

222,776

44,764

Financial

49,663

107,406

167,702

127,236

Health

289

1,182

16,827

10,036



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