Armenia

Executive Summary

Over the past several years, Armenia has received respectable rankings in international indices that review country business environments and investment climates.  Significant U.S. investments are increasingly present in Armenia, most notably ContourGlobal’s acquisition of the Vorotan Hydroelectric Cascade and Lydian International’s efforts to develop a major gold mine.  New U.S. investors in the banking, energy, pharmaceutical, information technology, and mining sectors have entered or acquired assets in Armenia. Armenia presents a variety of opportunities for investors, and the country’s legal framework and government policy aim to attract investment, but the investment climate is not without challenges.  Obstacles include Armenia’s small market size, relative geographic isolation due to closed borders with Turkey and Azerbaijan, weaknesses in the rule of law, and legacy of corruption. Armenia is a member of the Eurasian Economic Union, an association that brings Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia together in an integrated single market.  In May 2015, Armenia signed a Trade and Investment Framework Agreement (TIFA) with the United States. The TIFA establishes a United States-Armenia Council on Trade and Investment to discuss bilateral trade and investment and related issues. In November 2017, Armenia signed a Comprehensive and Enhanced Partnership Agreement with the European Union, which aims in part to improve Armenia’s investment climate and business environment.

Armenia imposes few restrictions on foreign control and rights to private ownership and establishment.  There are no restrictions on the rights of foreign nationals to acquire, establish, or dispose of business interests in Armenia.  Business registration procedures are straightforward. According to foreign companies, regulations, policies, and laws that are otherwise sound are sometimes undermined by problems such as the lack of independence, capacity, or professionalism in key institutions, most critically the judiciary.  Armenia does not limit the conversion and transfer of money or the repatriation of capital and earnings, including branch profits, dividends, interest, royalties, and management or technical service fees. The banking system in Armenia is sound and well-regulated, but investors have notes that Armenia’s financial sector is not highly developed.  The U.S.–Armenia Bilateral Investment Treaty provides U.S. investors with a variety of protections. Although Armenian legislation complies with the Trade Related Aspects of Intellectual Properties Agreement and offers protection for intellectual property, enforcement efforts and recourse through the courts require improvement.

Armenia experienced a dramatic change of government in April/May 2018.  Parliamentary elections in December 2018 led to the exit from power of numerous parliamentarians known to hold significant business holdings in Armenia and exercise outsized sway over large sections of the economy.  A massive anti-corruption campaign is underway as part of efforts to eliminate systemic corruption. Overall, the competitive environment in Armenia is improving, but several businesses have reported that broader reforms across the judiciary, tax and customs, health, education, military, and law enforcement sectors will be necessary to shore up these gains.  Despite progress in the fight against corruption and improvements in some areas that influence the attractiveness of Armenia’s investment climate, investors claim that numerous concerns remain and must be addressed to ensure a transparent, fair, and predictable business climate. The emergence of a dispute in June 2018 connected with the actions of protestors to halt Lydian International’s mining project has attracted significant attention from international investors as they evaluate Armenia as an investment destination.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 105 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 41 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 68 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2018 $7 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $3,990 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The government of Armenia officially welcomes foreign investment.  The Ministry of Economic Development and Investments is the main government body responsible for the development of investment policy in Armenia.  Armenia has achieved respectable rankings on some global indices measuring the country’s business climate. Armenia’s investment and trade policy is relatively open; foreign companies are entitled by law to the same treatment as Armenian companies.  Armenia has strong human capital and a well-educated population, particularly in the science, technology, engineering, and mathematics fields, leading to significant investment in the high-tech and information technology sectors. Many international companies have established branches or subsidiaries in Armenia to take advantage of the country’s pool of qualified specialists and trade preferences with Russia and the Eurasian Economic Union (EAEU).  However, many businesses have identified the challenges to Armenia’s investment climate as the country’s small market (with a population of less than three million), relative geographic isolation due to closed borders with Turkey and Azerbaijan, per capita gross national income of USD 3,990, and concerns related to weaknesses in the rule of law.

After a dramatic change in government in April/May 2018, major sectors of Armenia’s economy have presumably become more open to competition.  According to third parties, large businesses backed by oligarchic interests are less able to draw on government support to prop up their market positions.  A massive anti-corruption campaign was launched after the 2018 change of government, and a series of high-profile cases have resulted as part of efforts to eliminate systemic corruption.  These developments serve to improve Armenia’s investment climate and competitive environment; however, some report that the fight against corruption needs to be ongoing and institutionalized in the long term in critical areas such as the judiciary, tax and customs operations, health, education, military, and law enforcement sectors.  Moreover, foreign investors are still concerned about the rule of law and equal treatment. U.S companies have also reported that the investment climate is tainted by a failure to protect intellectual property rights. There have been concerns of lack of an independent and strong judiciary, which have undermined the government’s assurances of equal treatment and transparency and reduced businesses’ recourse in the instances of contract or tax disputes.

Limits on Foreign Control and Right to Private Ownership and Establishment

There are no limitations on foreign ownership or control of commercial enterprises.  There are also no sector-specific restrictions.

The Armenian government does not screen foreign direct investment.

Other Investment Policy Reviews

As of the end of 2018, Armenia has not undergone investment policy reviews by either the Organization of Economic Cooperation and Development (OECD) or U.N. Conference on Trade and Development (UNCTAD).  The World Trade Organization (WTO) conducted a Trade Policy Review in 2018, which can be found at https://www.wto.org/english/tratop_e/tpr_e/tp479_e.htm.

Business Facilitation

Armenia has traditionally fared well in the World Bank’s Ease of Doing Business report.  Companies can register electronically at http://www.e-register.am/en/  .  This single window service was launched in 2011 and allows individual entrepreneurs and companies to complete name reservation, business registration, and tax identification processes all at once.  The legal time limit for the process is two working days, but the application may be completed in one day. However, an electronic signature is needed in order to be able to register online. Foreign citizens can obtain an e-signature and more detailed information from the e-signature portal at https://www.ekeng.am/en/  .  A foreign partner is not required to obtain approval to invest.

Outward Investment

The Armenian government does not restrict domestic investors from investing abroad.

2. Bilateral Investment Agreements and Taxation Treaties

Basic provisions covering U.S. investments are set by the U.S.-Armenia Bilateral Investment Treaty (BIT), in force since 1996.  The U.S.–Armenia BIT stipulates that conditions for investors of each party be no less favorable than for the party’s own national investors or for investors from any third state.  It provides for the option of international arbitration in the case of investment disputes. Armenia has BITs in force with the following additional countries: Argentina, Austria, Belarus, Belgium, Bulgaria, Canada, China, Cyprus, Egypt, Finland, France, Georgia, Germany, Greece, Iran, Israel, Kuwait, Kyrgyzstan, Latvia, Lebanon, Lithuania, the Netherlands, Luxembourg, Romania, Russia, Spain, Sweden, Switzerland, Syria, Ukraine, the United Kingdom, Uruguay, and Vietnam.  According to UNCTAD, Armenia has also signed BITs with Iraq, Japan, Jordan, Kazakhstan, Qatar, Tajikistan, Turkmenistan, and the United Arab Emirates, but these agreements have not yet entered into force. Armenia is signatory to the Commonwealth of Independent States Multilateral Convention on the Protection of Investor Rights.

Armenia became a member of the EAEU in January 2015, together with Russia, Belarus, Kyrgyzstan, and Kazakhstan.  Armenia also entered into a Comprehensive and Enhanced Partnership Agreement (CEPA) with the EU in November 2017.  While CEPA will not affect customs or tax rates, it will, over time, align Armenia’s regulatory system and standards with those of the EU, as much as is possible under Armenia’s EAEU obligations.

There is no free trade agreement between the United States and Armenia, through Armenian exports to the United States may be eligible for preferential treatment under the Generalized System of Preferences program.  In May 2015, Armenia signed a Trade and Investment Framework Agreement (TIFA) with the United States. The TIFA establishes a United States-Armenia Council on Trade and Investment to discuss bilateral trade, investment, and related issues and examine ways to strengthen the trade and investment relationship between the two countries.

Armenia does not issue foreign tax credits and does not recognize the existing 1973 double taxation treaty signed by the Union of Soviet Socialist Republics (USSR) and the United States.  The United States considers Armenia to be party to this treaty by virtue of state succession to treaties and Armenia’s declaration of its commitment to fulfill the international treaty obligations of the former USSR as expressed in the Alma Ata Declaration of 1991.  The government of Armenia has expressed interest in negotiating a new double taxation treaty with the United States, but there is no strong evidence at this time that the lack of such an agreement deters new investments.

3. Legal Regime

Transparency of the Regulatory System

The Armenian government nominally uses transparent policies and laws to foster competition.  Some report that Armenia’s new government has pursued a more consistent execution of these laws and policies in an effort to improve market competition and remove informal barriers to market entry, especially for small- and medium-sized businesses.  Armenia’s legislation on the protection of competition has been improved with clear definitions and newly introduced concepts on issues such as price manipulation, imposition of fines as a percentage of revenue versus fixed amounts, and penalties for state officials.  This has generated a gradual improvement of Armenia’s ranking according to international indices. However, companies regard the efforts of the State Commission for the Protection of Economic Competition (SCPEC) alone not to be enough to ensure a level playing field. They indicate that improvements in other state institutions and authorities that support competition, like the courts, tax and customs, public procurement, and law enforcement, are necessary.  Banking supervision is relatively well developed and largely consistent with the Basel Core Principles. The Central Bank of Armenia is the primary regulator of the financial sector and exercises oversight over banking, securities, insurance, and pensions. Data on Armenia’s public finances and debt obligations are broadly transparent, and the Ministry of Finance publishes periodic reports that are available online.

Safety and health requirements, most of them holdovers from the Soviet period, generally do not impede investment activities.  Nevertheless, investors consider bureaucratic procedures to be sometime burdensome, and discretionary decisions by individual officials may present opportunities for petty corruption.  A unified online platform for publishing draft legislation was launched in March 2017, and is available at https://www.e-draft.am/eng  .  Proposed legislation is available for the public to view.  Registered users can submit feedback and see a summary of comments on draft legislation.  However, the time period devoted to public comments is often regarded not sufficient to solicit proper feedback.  The results of consultations have not been reported by the government in the past. The government maintains other portals, including http://www.e-gov.am   and http://www.arlis.am  ,that make legislation and regulations available to the public.

International Regulatory Considerations

Armenia is a member of the EAEU and adheres to relevant technical regulations.  Armenia’s entry into CEPA will lead it to pursue harmonization efforts with the EU on laws, regulations, and policies relevant to economic affairs.  Armenia is also a member of the WTO, and the Armenian government notifies draft technical regulations to the WTO Committee on Technical Barriers to Trade.  Armenia is a signatory to the Trade Facilitation Agreement and had already sent category “A”, “B,” and “C” notifications to the WTO.

Legal System and Judicial Independence

Armenia has a hybrid legal system that includes elements of both civil and common law.  Although Armenia is developing an international commercial code, the laws regarding commercial and contractual matters are currently set forth in the civil code.  Thus, because Armenia lacks a commercial court, all disputes involving contracts, ownership of property, or commercial matters are resolved by litigants in courts of general jurisdiction, which handle both civil and criminal cases.  However, some report that the courts that handle civil matters are overwhelmed by the volume of cases before them and are frequently seen by the public as corrupt.  Despite the ability of courts to use the precedential authority of the Court of Cassation and the European Court of Human Rights, many judges do not do so, making civil court decisions that investors consider as unpredictable.

According to several businesses, many Armenian courts suffer from low levels of efficiency, independence, and professionalism, which drives a need to strengthen the judiciary.  Very often in proceedings when additional forensic expertise is requested, the court may suspend a case until the forensic opinion is received, which it has been reported to take months.  Litigants are feeling distrustful aboutturning to Armenian courts for redress because of the lack of judicial independence.  Companies have noted that many judges at courts of general jurisdiction are reluctant to make decisions without getting advice from higher court judges.  Thus, the public opinion is that decisions may be influenced by factors other than the law and merits of cases at hand.  In general, the government honors judgments from both arbitration and Armenian national courts.

Due to the nature and complexity of commercial and contractual issues and the caseload of the civil courts, many matters involving investment or commercial disputes take months or years to work their way through the civil courts.  In addition, companies have complained of the inherent inefficiencies and institutional corruption of the courts, which lead to matters to be often delayed and outcomes not to be predictable. Even though the Armenian constitution provides investors the tools to enforce awards and their property rights, investors claim that there is little predictability in what a court may do.

Laws and Regulations on Foreign Direct Investment

Basic legal provisions covering foreign investment are specified in the 1994 Law on Foreign Investment.  Foreign companies are entitled by law to the same treatment as Armenian companies (national treatment). The Armenian government has submitted to parliament a new draft Law on Foreign Investment, to replace the 1994 law.  This new law would strengthen protections for foreign investors. A Law on Public-Private Partnership (PPP) has been drafted and is awaiting approval by the parliament. The PPP law establishes the framework for the government to attract private capital for joint projects focused on infrastructure.

Business Armenia is Armenia’s national authority for investment and export promotion.  It provides information to foreign investors on Armenia’s business climate, investment opportunities, and legislation; supports investor visits; and serves as a liaison for government institutions.  More information is available via Business Armenia’s website (https://www.businessarmenia.am/).

Competition and Anti-Trust Laws

SCPEC reviews transactions for competition-related concerns.  Relevant laws, regulations, commission decisions, and more information can be found on SCPEC’s website (http://www.competition.am/?lng=2  ).  Concentrations, including mergers, acquisitions of shares or assets, amalgamations, and incorporations are subject to ex ante control by SCPEC under conditions established by law.  Whenever a concentration gives rise to concerns about harm to competition, including the creation of a dominant position or strengthening the dominant position, SCPEC can prohibit such a transaction or impose certain remedies.  However, SCPEC’s investigative powers have been reported to be limited, forcing SCPEC to rely primarily on document studies. Armenia’s Law on Protection of Economic Competition has been amended several times in recent years to bring Armenia’s competition legal framework into alignment with EAEU and CEPA requirements.

Expropriation and Compensation

Under Armenian law, foreign investments cannot be confiscated or expropriated except in extreme cases of natural or state emergency, upon obtaining an order from a domestic court.  According to the Armenian constitution, equivalent compensation is owed prior to expropriation.

Dispute Settlement

ICSID Convention and New York Convention

Armenia is party to the ICSID Convention and Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).

Under Article 5 of the Armenian constitution, international treaties are a constituent part of Armenia’s legal system.  When an international treaty is ratified, if it stipulates norms other than those present in domestic law, the guidelines of the treaty shall prevail.

Investor-State Dispute Settlement

According to the 1994 Foreign Investment Law, all disputes that arise between a foreign investor and the Republic of Armenia must be settled in Armenian courts.  A Law on Commercial Arbitration was enacted in 2007, which provides a wider range of options for resolving commercial disputes. The U.S.–Armenia BIT provides that in the event of a dispute between an American investor and the Republic of Armenia, the investor may take the case to international arbitration.  As an international treaty, the BIT supersedes Armenian law, a point which Armenia’s constitution acknowledges and which holds in actual practice. As of January 2019, two investment disputes brought against Armenia under the U.S.–Armenia BIT were pending with the International Center for Settlement of Investment Disputes.

International Commercial Arbitration and Foreign Courts

Commercial disputes may be brought before an Armenian or any other competent court, as provided by law or in accordance with party agreements.  Commercial disputes are heard in courts of general jurisdiction.  Specialized administrative courts adjudicate cases brought against state entities.  Final judgments may be appealed to the Court of Appeal and Court of Cassation, the highest judicial authority in Armenia.

The Law on Arbitration Courts and Arbitration Procedures provides rules governing the settlement of disputes by arbitration.  In accordance with the New York Convention and Article 5 of the Armenian constitution, domestic courts must recognize foreign arbitral awards.

Armenia intends to develop an alternative dispute resolution (ADR) mechanism that will include mediation and arbitration.  ADR could be used not only in commercial matters, including those involving mobile property and secured transactions, but also in cases involving family and labor disputes.   While ADR options are available to those who seek alternatives to litigation, they currently are not widely used or trusted.  

Bankruptcy Regulations

According to the Law on Bankruptcy adopted in 2006, creditors, equity, and contract holders (including foreign entities) have the right to participate and defend their interests in bankruptcy cases.  Armenia decided in 2018 to adopt a new, specialized bankruptcy court to begin operations in 2019.  Creditors have the right to access all materials relevant to cases, submit claims to court, participate in meetings of creditors, and nominate candidates to administer cases.  Monetary judgments are usually made in local currency.  The Armenian Criminal Code defines penalties for false and deliberate bankruptcy, concealment of property or other assets of the bankrupt party, or other illegal activities during the bankruptcy process.  Armenia amended its bankruptcy law in 2012 to clarify procedures for appointing insolvency administrators, reducing the processing time for bankruptcy proceedings, and conducting asset sales by auction.

According to the World Bank’s 2019 Ease of Doing Business Index, Armenia stands at 95 in the ranking of 190 economies on the ease of resolving insolvency (http://www.doingbusiness.org/rankings  ; http://www.doingbusiness.org/data/exploreeconomies/armenia#resolving-insolvency  ).  Resolving insolvency takes 1.9 years on average and costs 11 percent of the debtor’s estate, with the most likely outcome being that the company will be broken up and sold.  The average recovery rate is 38.2 cents on the dollar.

4. Industrial Policies

Investment Incentives

Armenia offers incentives for exporters (e.g. no export duty, VAT refund on goods and services exported) and foreign investors (e.g. income tax holidays, the ability to carry forward losses indefinitely, VAT deferral, and exemptions from customs duties for investment projects).    Starting from January 1, 2018, the Armenian government exempted imports of capital investment-related goods from VAT payments at the border. In 2015, the Armenian government exempted from customs duties investment-related import of equipment and raw materials from non-EAEU member countries.  VAT and customs duties exemptions are implemented based on government decisions made on a case-by-case basis. Also, in accordance with the Law on Foreign Investment, several ad hoc incentives may be negotiated on a case-by-case basis for investments that are targeted at certain sectors of the economy or are of strategic interest.

Foreign Trade Zones/Free Ports/Trade Facilitation

In June 2011, Armenia adopted a Law on Free Economic Zones (FEZ), amended in October 2018, and developed several key regulations to attract foreign investments into FEZs:  exemptions from VAT, profit tax, customs duties, and property tax. The Alliance FEZ was opened in August 2013 and currently hosts sixteen businesses taking advantage of its facilities. The focus of Alliance FEZ is on high-tech industries, which include information and communication technologies, electronics, pharmaceuticals and biotechnology, architecture and engineering, industrial design, and alternative energy.  In 2014, the government expanded operations in the Alliance FEZ to include industrial production. In 2015, the Meridian FEZ, focused on jewelry production, watchmaking, and diamond cutting, opened in Yerevan, with six businesses operating in it. The Meghri FEZ, located on Armenia’s border with Iran, opened in 2017. A new FEZ, located in Hrazdan, opened in late 2018 and is focused on the high-tech and information technology sectors.

Performance and Data Localization Requirements

There are no performance requirements for investment in terms of mandating local employment.  The processes for obtaining visas, residence, or work permits are straightforward. There are no government-imposed conditions on permission to invest, including tariff and non-tariff barriers.

Armenia does not follow any policy that would force foreign investors to use domestic content in goods and technology.  There are no requirements for foreign information technology providers to turn over source code or provide keys for encryption.  There are no requirements to store data within the country.

5. Protection of Property Rights

Real Property

Armenian law protects secured interests in property, both personal and real.  Armenian legislation provides a basic framework for secured lending, collateral, and pledges and provides a mechanism to support modern lending practices and title registration.  According to Armenia’s constitution, foreign citizens are prohibited from owning land, though they may take out long-term leases. In the World Bank’s 2019 Ease of Doing Business report, Armenia ranked 14th among 190 economies for the ease of registering property.  Lack of clear title to land is not an issue in Armenia.

Intellectual Property Rights

Armenia has a strong intellectual property rights (IPR) framework.  Domestic legislation, including the 2006 Law on Copyright and Related Rights, provides for the protection of IPR on literary, scientific, and artistic works (including computer programs and databases), patents and other rights of invention, industrial design, know-how, trade secrets, trademarks, and service marks.  The Intellectual Property Agency (IPA) in the Ministry of Economic Development and Investments is responsible for granting patents and overseeing other IPR-related matters. Armenia requires no state registration for copyright. The collective management organization ARMAUTHOR manages authors’ economic rights. Trademarks and patents require state registration by the IPA.  There is no special trade secret law in Armenia, but protection of trade secrets is partially covered by patent registration. Formal registration is easy and transparent, the database of IPR registrations is public, and applications to register intellectual property are published online for two months for comment by third parties.

Armenia’s legislation is in compliance with the Trade Related Aspects of Intellectual Properties Agreement.  In 2005, Armenia created an IPR Enforcement Unit in the Organized Crime Department of the Armenian Police, which does not, however, exercise ex-officio powers and acts only based on complaints from right holders.

Despite the existence of relevant legislation and executive government structures, the concept of IPR remains unrecognized by a large part of the local population. The onus for IPR complaints remains with the offended party.  The police assert that the majority of cases are settled through out-of-court proceedings. While the Armenian government has made some progress on IPR issues, strengthening enforcement mechanisms remains necessary.

A new Law on Copyright has been drafted and submitted to the government.  It includes provisions from new international agreements and provides additional detail on many of the provisions in the current law.  Copyright contract rights are better defined and examples of contracts between the user and the rights-holder are included. Phonogram producers’ rights are harmonized with copyright holders’ rights and are extended to 70 years.  The new legislation includes specific provisions from the Marrakesh and Beijing Treaties that regulate the rights of disabled artists and orphan works. Two new laws, the Law on Patents and Law on Industrial Design, have also been drafted by the IPA and submitted to the government.

The Armenian customs authorities track statistics related to the seizure of counterfeit goods, but the reports are not regularly updated.  The latest relevant information can be found at http://www.petekamutner.am/Content.aspx?itn=csVLDepFightAgainstSmug  .

Armenia is not listed in USTR’s Special 301 Report or Notorious Markets List.

6. Financial Sector

Capital Markets and Portfolio Investment

The banking system in Armenia is sound and well-regulated, but the financial sector is not highly developed, according to investors.  IMF estimates suggest that banking sector assets account for about 90 percent of total financial sector assets, however, financial intermediation is poor. Nearly all banks require collateral located in Armenia, and large collateral requirements often prevent potential borrowers from entering the market.  U.S. businesses have noted that this creates a significant barrier for small- and medium-sized enterprises and start-up companies.

The Armenian government welcomes foreign portfolio investment and there is a supporting system and legal framework in place. Armenia’s securities market is not well developed and has only minimal trading activity through the NASDAQ-OMX exchange, though efforts to develop capital markets are underway.  Liquidity sufficient for the entry and exit of sizeable positions is often difficult to achieve due to the small size of the Armenian market. The Armenian government hopes that as a result of pension reforms in 2014, which brought two international asset managers to Armenia, capital markets will play a more prominent role in the financial sector of the country.  Armenia adheres to its IMF Article VIII commitments by refraining from restrictions on payments and transfers for current international transactions. Credit is allocated on market terms and foreign investors are able to access credit locally.

Money and Banking System

The banking sector is healthy and indicators of financial soundness have increased in recent years.  The sector is well capitalized and liquid, though dollarization is high. Non-performing loans have fallen to below 10 percent of total loans.  There are 17 commercial banks in Armenia and 13 universal credit organizations, and there are extensive branch networks throughout Armenia. As of the end of 2018, the top three Armenian banks by assets are Ameriabank (779.7 billion AMD, or USD 1.59 billion), Ardshinbank (678.6 billion AMD, or USD 1.38 billion,) and Armbusinessbank (642.8 billion AMD, or USD 1.31 billion).  The minimum capital requirement for banks is 30 billion AMD (62.5 million USD). There are no restrictions on foreigners to open bank accounts. Residents and foreign nationals can hold foreign currency accounts and import, export, and exchange foreign currency relatively freely in accordance with the Law on Currency Regulation and Currency Control. Foreign banks may establish a subsidiary, a branch, or representative office, and subsidiaries of foreign banks are allowed to provide the same types of services as domestically-owned banks.

The Central Bank of Armenia (CBA) is responsible for the regulation and supervision of the financial sector.  The authority and responsibilities of the CBA are established under the Law on Central Bank of Armenia. Numerous other articles of legislation and supporting regulations provide for financial sector oversight and supervision.

Foreign Exchange and Remittances

Foreign Exchange

Armenia has no limitations on the conversion and transfer of money or the repatriation of capital and earnings, including branch profits, dividends, interest, royalties, or management or technical service fees.  Most banks can transfer funds internationally within two to four days. Armenia maintains the Armenian dram (AMD) as a freely convertible currency under a managed float. The AMD/USD exchange rate has proven generally stable in recent years, though it has not been without occasional sharp movements.

According to the Law on Currency Regulation and Currency Control, prices for all goods and services, property, and wages must be set in AMD.  There are exceptions in the law, however, for transactions between resident and non-resident businesses and for certain transactions involving goods traded at world market prices.  The law requires that interest on foreign currency accounts be calculated in that currency, but paid in AMD.

Remittance Policies

Armenia has no limitations on the conversion and transfer of money or the repatriation of capital and earnings, including branch profits, dividends, interest, royalties, lease payments, private foreign debt, or management or technical service fees.

Sovereign Wealth Funds

Armenia does not have a sovereign wealth fund, though the government is considering plans to create one.

7. State-Owned Enterprises

Most of Armenia’s state-owned enterprises (SOEs) were privatized in the 1990s and early 2000s, yet SOEs are still active in a number of sectors.  SOEs in Armenia operate as state-owned closed joint stock companies that are managed by the Department of State Property and state non-commercial organizations.  There are no laws or rules that ensure a primary or leading role for SOEs in any specific industry. Armenia is a party to the WTO’s Government Procurement Agreement and SOEs are covered under that agreement.  SOEs in Armenia are subject to the same tax regime as their private competitors, and private enterprises in Armenia can compete with SOEs under the same terms and conditions. A public list of state-owned closed joint stock companies can be found on the website of the Department of State Property (http://spm.am/am/projects/  ).

Privatization Program

Most of Armenia’s state owned enterprises were privatized in the 1990s and early 2000s.  Many of the privatization processes for Armenia’s large assets were reported to be neither competitive nor transparent, and political considerations in some instances prevailed over fair tender processes.  The current law on privatization, the fifth, is the Law on the 2017–2020 Program for State Property Privatization, which lists 47 entities for privatization, of which 24 are new additions and 23 were noted in earlier laws but not privatized.  The Department of State Property Management is responsible for managing the state’s share of the entities in the privatization program.

8. Responsible Business Conduct

There is not a widespread understanding of responsible business conduct (RBC) in Armenia, but several larger companies with foreign ownership or management are introducing the concept.  It is rare to see examples of Armenian companies that contribute to local communities through charity, employee service days, or other similar programs. However, RBC programs that do exist are viewed favorably.  Some NGOs, notably business associations, are playing a more active role to promote responsible business conduct. Armenia joined the Extractive Industries Transparency Initiative (EITI) in March 2017 as a candidate country.  The first EITI national report for Armenia was published in January 2019. As part of its EITI membership aspirations, the government in March 2018 adopted a roadmap to disclose beneficial owners in the metal ore mining industry.  Armenia is not an adherent to the OECD Guidelines for Multi-National Enterprises or the UN Guiding Principles for Business and Human Rights.

Some information is available regarding corporate governance, accounting, and internal controls to protect shareholders.  Major pillars of corporate governance in Armenia include the Law on Joint Stock Companies, the Law on Banks and Banking Activity, the Law on Securities Market, and a Corporate Governance Code.  International observers note inconsistencies in this legislation and generally rate corporate governance practices as weak to fair.

Domestic laws related to labor, employment rights, consumer protection, and environmental protection are not always enforced effectively.  These laws and regulations cannot be waived to attract foreign investments.

9. Corruption

Resources to Report Corruption

Armenia experienced a peaceful revolution in April/May 2018 that led to the arrival of a new government with an explicit anti-corruption mandate.  The current government released a new official plan in January 2019 that includes a section on combatting corruption. The government has increased corruption investigations against mid- to high-level government officials since the revolution.  Numerous high-ranking officials have stated publicly that corruption within their respective institutions will no longer be tolerated. Though some report that the government has mainly targeted ex-government officials in corruption investigations, there is no indication that Armenia’s anti-corruption laws are being applied by the post-revolutionary government in a discriminatory manner.  Armenia’s anti-corruption laws extend to all Armenian citizens.

Corruption, particularly in areas that have been reported to be critical such as the justice system, as well as concerns related to the rule of law, enforcement of existing legislation, and equal treatment, remain a significant obstacle to U.S. investment in Armenia.  Investors claim that the health, education, military, corrections, and law enforcement sectors lack transparency in procurement and have in the past used selective enforcement to elicit bribes. Civil courts are still widely perceived to be corrupt by the general public.  Although bribery is illegal in Armenia for all citizens, the government does not actively encourage private companies to establish internal codes of conduct. Several multinational companies, select local companies, and foreign and local companies working with international financial institutions have implemented corporate governance mechanisms to tackle corruption internally.  However, such corporate governance principles are not widely implemented among local companies.

According to Transparency International’s 2018 Corruption Perceptions Index, Armenia received a score of 35 out of 100, ranking it 105th among 180 countries.

Armenia’s ability to counter, deter, and prosecute corruption is noted to be hindered by the lack of robust enforcement of official disclosure laws to prevent the entrance and retention of corrupt officials in positions of authority and influence.  The objective and systematic scrutiny of declarations by government officials is generally considered to be lacking. According to international evaluations, Armenian authorities have limited capacities to investigate money laundering and bring such cases to prosecution.

The Law on Civil Service, in force since 2002, as well as the Laws on Municipal Service (2005) and on Local Self-Government (2002), prohibit the participation of civil and municipal servants, as well as local government elected officials such as mayors and councilors, in commercial activities.  However, powerful officials at the national, district, or local levels often acquire direct, partial, or indirect control over private firms. Such control is exercised through a hidden partner or through majority ownership of fully private parent companies. This involvement can also be indirect, including through close relatives and friends. According to foreign investors, these practices reinforce protectionism, encourage the creation of monopolies or oligopolies, hinder competition, and undermine the image of the government as a facilitator of private sector growth.  Because of the strong interconnectedness of the political and economic spheres, Armenia has historically struggled to introduce legislation to encourage strict ethical codes of conduct and the prevention of bribery in the business field. In 2016, the Armenia adopted legislation on criminal penalties for noncompliance or filing of false declarations and illicit enrichment.

Armenia is a member of the UN Anticorruption Convention.  While not a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, Armenia is a member of the OECD Anti-Corruption Network for Eastern Europe and Central Asia and has signed the Istanbul Action Plan.  A monitoring report released by the OECD in 2018 cited Armenia’s lack of enforcement of anti-corruption laws, together with continued presence of oligopolistic interests in the economy, as points of serious concern. The report contained a series of recommendations, including to take bold measures to ensure judicial and prosecutorial independence and integrity, introduce corporate liability for corruption offenses, investigate and prosecute high-profile and complex corruption cases, and increase transparency and strengthen monitoring in public procurement.  Armenia has also joined the global Open Government Partnership initiative.

No specific law exists to protect NGOs dealing with anti-corruption investigations.  The government, in close coordination with civil society, approved new legislation on public organizations in December 2016.  The new law gives NGOs the right to engage in economic activities.

Resources to Report Corruption

For investigating corruption:

Investigation Department of Corruption, Organized and Official Crimes
Special Investigation Service of Armenia
13A Vagharsh Vagharshyan Street
Yerevan, Armenia
[+374 11] 900 002
press@investigatory.am

For prosecuting corruption:

Arsen Simonyan
Head of Department for Combating Corruption
and Economic Crimes
RA Prosecutor General’s Office
5 V. Sargsyan Street
Yerevan, Armenia
(37410) 511-655
info@prosecutor.am

For financial and asset declarations of high level officials:

Armen Khudaverdyan
Deputy Chairperson
Ethics Commission
26 Baghramyan Street
Yerevan, Armenia
374 10 524689
siranush.sahakyan@president.am

Watchdog organization:

Varuzhan Hoktanyan
Executive Director
Transparency International (Armenia)
164/1 Antarayin Street
Yerevan, Armenia
374 10 569589
varuzh@transparency.am

10. Political and Security Environment

Armenia has a history of political demonstrations, some of which have turned into violent confrontations between the police and protesters.  However, the frequency of violent protests has significantly decreased. The last major violent protest occurred in July 2016, when an armed group, Sasna Tsrer, stormed and occupied a police compound in Yerevan.  Three police officers were killed as a result. During the two-week standoff that followed, Sasna Tsrer took hostage additional police and medical personnel, demanding political changes.  During the standoff, demonstrations in support of Sasna Tsrer took place in Yerevan and clashes between law enforcement officers and protesters occurred.  These clashes did not pose any damage to businesses. In 2018, Armenia experienced a peaceful revolution that led to a change of government.  Acts of peaceful civic disobedience in Yerevan and some other cities led to street closures, including on the road to Yerevan’s international airport, but did not impede the ordinary functioning of business or harm the country’s macroeconomic stability.  These actions did not result in any damage to projects or installations.

The state of conflict between Armenia and Azerbaijan, including the regular exchanges of fire along the international border and the disputed territory of Nagorno-Karabakh, presents some potential political risk, according to investors and businesses.  A cease-fire with Azerbaijan has been in effect since 1994 for the conflict surrounding the disputed region of Nagorno-Karabakh.  However, intermittent gunfire along the cease-fire line and along the border with Azerbaijan continues, often resulting in injuries and/or deaths.  There was an increase in violence along the Line of Contact and Armenian-Azerbaijan international border on April 2-5, 2016.  The heavy clashes led to the highest death toll since the signing of the 1994 cease-fire agreement. There have been no threats to commercial enterprises from skirmishes in the border areas.  It is unlikely that civil disturbances, should they occur, would be directed against U.S. businesses or the U.S. community.  The government of Azerbaijan has suspended the importation and operations of U.S. companies in Azerbaijan if the companies’ products or services are provided in Nagorno-Karabakh and has banned the entry into Azerbaijan of some persons who have visited Nagorno-Karabakh.  Due to the existing state of hostilities, consular services are not available to U.S. citizens in Nagorno-Karabakh.

11. Labor Policies and Practices

Armenia’s human capital is one of its strongest resources.  The labor force is generally well educated, particularly in the science, technology, engineering, and mathematics fields.  Almost one hundred percent of Armenia’s population is literate.  According to official information, enrollment in secondary school is over 90 percent, and enrollment in senior school (essentially equivalent to American high school) is about 85 percent.  Despite this, official statistics indicate a high rate of unemployment, at around 18 percent.  Unemployment is particularly pronounced among women and youth, and significant underemployment is also a problem.

Considerable foreign investment in Armenia has occurred in the high-tech sector.  High-tech companies have established branches or subsidiaries in Armenia to take advantage of the country’s pool of qualified specialists in electrical and computer engineering, optical engineering, and software design.  There is a shortage of workers with vocational educations.  About 20 percent of the non-agricultural workforce is employed in the informal economy, primarily in the services sector.  Armenian law protects the rights of workers to form and to join independent unions, with exceptions for personnel of the armed forces and law enforcement agencies.  The law also provides for the right to strike, with the same exceptions, and permits collective bargaining.  The law stipulates that workers’ rights cannot be restricted because of membership in a union.  It also differentiates between layoffs and firing with severance. According to some reports, labor organizations remain weak because of employer resistance, high unemployment, and poor economic conditions; collective bargaining is not common in Armenia.  However, since the 2018 change of government, there have been consistent reports of grassroots movements to create unions in various spheres, including for doctors, teachers, and academics. Still, traditional labor unions are generally inactive with the exception of those connected with the mining and chemical industries.  Labor laws are not waived to retain or attract investments.

The current Labor Code is considered to be largely consistent with international standards.  The law sets a standard 40-hour work week, with 20 days of mandatory annual paid leave.  However, there are consistent reports that many private sector employees, particularly in the service sector, are unable to obtain paid leave and are required to work more than eight hours a day without additional compensation.  The treatment of labor in free economic zones is no different than elsewhere in the country.  Employers are generally able to adjust employment in light of fluctuating market conditions.  Severance in general does not exceed 60 working days.  Benefits for workers laid off for economic reasons are mostly limited to offering qualification trainings to the unemployed and job search assistance.

Individual labor disputes can usually be resolved through courts; however, the courts are often overburdened, causing significant delays.  Collective labor disputes should be resolved through collective bargaining.  Armenia’s Health and Labor Inspection Body (HLIB) has a mandate to monitor health and occupational safety issues, but its enforcement powers have been undermined by continuous restructuring of the body and the absence of a legal framework and regulations to guide HLIB functions.  No labor inspections have been completed since 2015.

Amendments to the Labor Code of Armenia that entered into force in 2015 clarified the procedures for making changes in labor contracts and further specified the provisions required in labor contracts, notably those relating to probationary periods, vacation, and wage calculations.

The current legal minimum wage is AMD 55,000 (USD 115) per month.  Most companies pay an unofficial extra-month bonus for the New Year’s holiday.  Wages in the public sector are often significantly lower than those in the private sector.

12. OPIC and Other Investment Insurance Programs

Armenia has an agreement with the Overseas Private Investment Corporation (OPIC), signed in 1992. OPIC mobilizes private capital to help solve critical development challenges, providing investors with financing, guarantees, political risk insurance, and support for private equity investment funds.  OPIC has been involved in several projects in Armenia, including the expansion of the Yerevan Marriott and lending operations at several financial institutions. In 2019, OPIC concluded a deal to extend USD 10 million in financing to First Mortgage Company to expand the origination of long-term home mortgage loans.  Armenia is a member of the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA).

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2017 $11,537 2017 $11,537 www.worldbank.org/en/country   
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2017 $247.7 2017 $7 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2017 $3 BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP 2017 42.3% 2016 44.1% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  

* Source for Host Country Data:  Statistical Committee of the Republic of Armenia


Table 3: Sources and Destination of FDI

Direct Investment From/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $4,323 100% Total Outward $161 100%
Russia $1,374 31.8% Latvia $56 34.8%
Cyprus $410 9.5% Bulgaria $36 22.3%
Jersey $329 7.6% United States $3 1.8%
United Kingdom $295 6.8%
United States $250 5.8%

Source:  IMF Coordinated Direct Investment Survey (CDIS), 2017

A significant portion of outward investment is not disaggregated by destination in the CDIS.


Table 4: Sources of Portfolio Investment

Data not available.

14. Contact for More Information

Economic & Commercial Officer
U.S. Embassy, American Avenue 1, Yerevan 0082, Armenia
+374-10-49-42-00
YerevanBusiness@state.gov

 

Azerbaijan

Executive Summary

The overall investment climate in Azerbaijan continues to improve, although significant challenges remain.  Over the past few years, the Government of Azerbaijan has sought to integrate the country more fully into the global marketplace, attract foreign investment, diversify its economy, undertake needed market economic reforms, and stimulate growth.  However, the Azerbaijani economy is heavily dependent on oil and gas output, which account for roughly 91 percent of export revenue. Real GDP grew 1.4 percent in 2018 as oil prices increased.

While the oil and gas sector has historically attracted the majority of foreign investment, the Azerbaijani government has targeted four non-oil sectors to diversify the economy:  agriculture, tourism, information and communications technology (ICT), and transportation. Measures taken in recent years to improve the business climate and reform the overall economy include eliminating redundant business license categories, empowering the popular “ASAN” government service centers with licensing authority, simplifying customs procedures, suspending certain business inspections, and reforming the tax regime.  These measures helped Azerbaijan rise from 57 to 25 in the World Bank’s Doing Business Report. However, progress on structural reforms required to create a diversified and competitive private sector is mixed. A small group of government-connected holding companies dominate the economy, intellectual property protections are insufficient, and judicial transparency is lacking.

Under Azerbaijani law, foreign investments enjoy complete and unreserved legal protection and may not be nationalized or appropriated, except under specific circumstances.   Private entities may freely establish, acquire, and dispose of interests in business enterprises. Foreign citizens, organizations, and enterprises may lease, but not own, land.  Azerbaijan’s government has not shown any pattern of discriminating against U.S. persons or entities through illegal expropriation. The Bilateral Investment Treaty (BIT) between the United States and Azerbaijan provides U.S. investors with recourse to settle investment disputes using the International Center for the Settlement of Investment Disputes (ICSID).  The average time needed to resolve international business disputes through domestic courts or alternative dispute resolution varies widely.

Azerbaijan considers travel to the region of Nagorno-Karabakh and the surrounding territories unlawful.  Engaging in any commercial activities in Nagorno-Karabakh and the surrounding territories, whether directly or through business subsidiaries, can result in criminal prosecution and/or other legal action against individuals and/or businesses in Azerbaijan; it may also affect the ability to travel to Azerbaijan in the future.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 152 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 25 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 82 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2018 N/A http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $4,080 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Over the past few years, the Azerbaijani government has sought to integrate the country more fully into the global economic marketplace and attract foreign investment.  Flows of foreign direct investment to Azerbaijan have risen steadily in recent years, primarily in the energy sector.  Foreign investment in the government’s priority sectors for economic diversification (agriculture, transportation, tourism, and ICT) has thus far been limited.

Foreign investments enjoy complete and unreserved legal protection under the Law on the Protection of Foreign Investment, the Law on Investment Activity, and guarantees contained within international agreements and treaties.  In accordance with these laws, Azerbaijan will treat foreign investors, including foreign partners in joint ventures, in a manner no less favorable than the treatment accorded to national investors. Azerbaijan’s Law on the Protection of Foreign Investments protects foreign investors against nationalization and requisition, except under specific circumstances.  The Azerbaijani government has not shown any pattern of discriminating against U.S. persons or entities through illegal expropriation.

Azerbaijan’s primary body responsible for investment promotion is the Azerbaijan Export and Investment Promotion Foundation (AzPromo).  AzPromo is a joint public-private initiative, established by the Ministry of Economy and Industry in 2003 to foster the country’s economic development and diversification by attracting foreign investment into the non-oil sector and stimulating non-oil exports.  A January 2018 decree called for new legislation, which has not yet been introduced, to ensure Azerbaijan conforms to international standards to protect foreign investor rights. The Azerbaijani government meets regularly with the American Chamber of Commerce (AmCham) to solicit the input from the business community, particularly as part of AmCham’s biennial white paper process.  AmCham completed the 2018 edition and is waiting to present the paper to President Aliyev.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreigners are allowed to register business entities by opening a fully-owned subsidiary, acquiring shares of an existing company, or creating a joint venture with a local partner.  Foreign companies are also permitted to operate in Azerbaijan without creating a local legal entity by registering a representative or branch office with the Taxes Ministry.

Foreigners are not permitted to own land in Azerbaijan, but are permitted to lease land and own real estate.  Under Azerbaijani laws, the state must retain a controlling stake in companies operating in the mining, oil and gas, satellite communication, and military arms sectors, limiting foreign or domestic private ownership to a 49 percent share of companies in these industries.  Foreign ownership in the media sector is also strictly limited. Unless there is an international agreement with Azerbaijan providing otherwise, foreign shareholding in media companies is limited to 33 percent in newspaper publishing and is prohibited in TV broadcasting companies.  Restrictions on foreign equity ownership in the financial services sectors (banking and insurance) have been abolished; however, there are still limits within these sectors for how much total foreign capital participation is permitted.  Furthermore, a special license to conduct business is required for foreign or domestic companies operating in telecommunications, sea and air transportation, insurance, and other regulated industries.  Azerbaijan does not screen inbound foreign investment and U.S. investors are not specifically disadvantaged by any existing control mechanisms.

Other Investment Policy Reviews

Azerbaijan has not conducted an Organization for Economic Cooperation and Development (OECD) investment policy review, a United Nations Conference on Trade and Development (UNCTAD) investment policy review, nor a WTO Trade Policy Review.

Business Facilitation

Azerbaijani law requires all companies operating in the country to register.  Without formal registration, a company may not maintain a bank account, or clear goods through customs.  As part of the ongoing business law reforms, a “Single Window” principle was introduced January 1, 2008, significantly streamlining the registration process.  Businesses must now only register with the Taxes Ministry, which takes approximately three days for commercial organizations. Since 2011, companies have also been able to e-register at http://taxes.gov.az/modul.php?lang=_eng&name=birpencere&bolme=registration  .

Azerbaijan ranks 25th in the World Bank’s Doing Business Report (rankings are available at: http://www.doingbusiness.org/rankings  ).  Azerbaijan’s improvement in the Doing Business Report ranking was largely due to the creation of a credit registry, the opening of a single window for construction permits, and streamlining the process of connecting to the electricity grid.

Outward Investment

Azerbaijan does not actively promote or incentivize outward investment, though Azerbaijani entities, particularly the State Oil Company of Azerbaijan (SOCAR) and the State Oil Fund of Azerbaijan (SOFAZ), have invested in various countries, including the United States.  SOFAZ investment is typically limited to real estate, precious metals, and low-yield government securities.  SOCAR has invested heavily in oil and gas infrastructure and petrochemicals processing in Turkey and Georgia.  The government does not restrict domestic investors from investing overseas.

2. Bilateral Investment Agreements and Taxation Treaties

Azerbaijan has signed 51 Bilateral Investment Treaties (BIT).  The 2001 BIT in force between the United States and Azerbaijan encourages the reciprocal protection of investment.  Azerbaijan also has bilateral investment treaties currently in force with: Austria, Belgium-Luxembourg Economic Union, China, Croatia, Czech Republic, Finland, France, Georgia, Germany, Greece, Hungary, Iran, Israel, Jordan, Kazakhstan, South Korea, Kuwait, Kyrgyzstan, Latvia, Lithuania, Moldova, Montenegro, Poland, Romania, Russia, San Marino, Serbia, Spain, Switzerland, Syria, Tajikistan, Turkey, Ukraine, UAE, the United Kingdom, and Uzbekistan.

Azerbaijan has free trade agreements (FTAs) with: Russia, Ukraine, Georgia, Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, Moldova, and Belarus.  Under the FTAs, goods can be imported from those countries free of customs duties.

The United States signed a tax treaty with the USSR, to which Azerbaijan is considered a successor state.  The United States and Azerbaijan do not have a separate bilateral taxation treaty. The United States and Azerbaijan are parties to the OECD Convention on Mutual Administrative Assistance in Tax Matters.  Azerbaijan signed an intergovernmental agreement with the United States to implement the Foreign Account Tax Compliance Act (FATCA) on October 9, 2015, based on the “IGA Model 1a” form.

Azerbaijan also has double taxation treaties with: Austria, Belarus, Belgium, Bosnia & Herzegovina, Bulgaria, Canada, China, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Georgia, Germany, Great Britain, Greece, Hungary, Iran, Italy, Japan, Jordan, Kazakhstan, Kuwait, Latvia, Lithuania, Luxembourg, Macedonia, Malta, Moldova, Montenegro, Netherlands, Norway, Pakistan, Poland, Romania, Russia, San Marino, Saudi Arabia, Serbia, Slovenia, South Korea, Spain, Sweden, Switzerland, Tajikistan, Turkey, UAE, Ukraine, Uzbekistan, and Vietnam.  Treaties with Jordan, Spain, Sweden, Malta and Denmark are pending ratification by the parliament of Azerbaijan.

3. Legal Regime

Transparency of the Regulatory System

The Azerbaijani central government is the primary source of regulations relevant to foreign businesses.  Azerbaijan’s regulatory system has improved in recent years, although enforcement is inconsistent and decision-making opaque.  Private sector associations do not play a significant role in regulatory processes. Draft legislation is neither made available for public comment nor usually involves a public consultation process.  However, the government has engaged business organizations, such as the American Chamber of Commerce in Azerbaijan (AmCham), and consulting firms on various draft laws. The website of Azerbaijan’s National Parliament, http://meclis.gov.az/  , lists all the country’s laws, but only in the Azerbaijani language.

Legal entities in Azerbaijan must adhere to the International Financial Reporting Standards (IFRS).  These are only obligatory for large companies. Medium-sized companies can chose between reporting based on IFRS or IFRS-SME standards, which are specially designed for large and medium enterprises.  Small and micro enterprises can chose between reporting based on IFRS, IFRS-SME, or simplified accounting procedures established by the Finance Ministry.

Several U.S. companies with operations and investments in Azerbaijan previously reported they had been subject to repeated tax audits, requests for prepayment of taxes, and court-imposed fines for violations of the tax code.  These allegations have decreased since 2017.

On October 19, 2015, Azerbaijan suspended inspections of entrepreneurs for two years.  This suspension was subsequently extended through January 1, 2021. Food and pharmaceutical products are not subject to this suspension order and are inspected for quality and safety.

The government has also simplified its licensing regime.  All licenses are now issued with indefinite validity through the ASAN service centers and must be issued within 10 days of application.  The Economy Ministry also reduced the number of activities requiring a license from 60 to 32.

International Regulatory Considerations

Azerbaijan has had observer status at the World Trade Organization (WTO) since 1997, but has not made significant progress toward joining the WTO for the past several years.  A working party on Azerbaijan’s succession to the WTO was established on July 16, 1997, and Azerbaijan began negotiations with WTO members in 2004. The WTO Secretariat reports Azerbaijan is less than a quarter of the way to full membership.  In 2016, Azerbaijan imposed higher tariffs on a number of imported goods, including agricultural products, to promote domestic production and reduce imports.  Currently, Azerbaijan is negotiating bilateral market access with 19 economies.

Legal System and Judicial Independence

Azerbaijan’s legal system is based on Civil Law.  Disputes or disagreements arising between foreign investors and enterprises with foreign investment, Azerbaijani state bodies and/or enterprises, and other Azerbaijani legal entities, are to be settled in the Azerbaijani court system or, upon agreement between the parties, in a court of arbitration, including international arbitration bodies.  The judiciary consists of the Constitutional Court of the Republic of Azerbaijan, the Supreme Court of the Republic of Azerbaijan, the appellate courts of the Republic of Azerbaijan, trial courts, and other specialized courts. Trial court judgments may be appealed in appellate courts and the judgments of appellate courts can be appealed in the Supreme Court.  The Supreme Court is the highest court in the country. Under the Civil Procedure Code of Azerbaijan, appellate court judgments are published within three days of issuance, or within ten days in exceptional circumstances. The Constitutional Court has the authority to review laws and court judgments for compliance with the Constitution. In February 2016, Azerbaijan also established a Board of Appeal to address complaints filed by entrepreneurs against local executive authorities.

Businesses report problems with the reliability and independence of judicial processes in Azerbaijan.  While the government promotes foreign investment and the law guarantees national treatment, in practice investment disputes can arise when a foreign investor or trader’s success threatens well-connected or favored local interests.  According to Freedom House’s 2017 report, Azerbaijan’s court system is “subservient to the executive.” The U.S. business community has complained about inconsistent application of regulations and non-transparent decision-making.

Laws and Regulations on Foreign Direct Investment

Foreign investment in Azerbaijan is regulated by a number of international treaties and agreements, as well as domestic legislation.  These include the Bilateral Investment Treaty (BIT) between the United States and Azerbaijan, the Azerbaijan-European Commission Cooperation Agreement, the Law on Protection of Foreign Investment, the Law on Investment Activity, the Law on Investment Funds, the Law on Privatization of State Property, the Second Program for Privatization of State Property, and sector-specific legislation.  Azerbaijani law permits foreign direct investment in any activity in which a national investor may also invest, unless otherwise prohibited (see “Limits on Foreign Control and Right to Private Ownership and Establishment” for further information).

A January 2018 Presidential decree called for drafting a new law on investment activities to conform with international standards.  The decree also established mechanisms to protect investor rights and regulate damages, including lost profit caused to investors. The details of the proposed new law had not been publicized as of April 2019.

Competition and Anti-Trust Laws

The State Service for Antimonopoly Policy and Consumer Protection under the Economy Ministry is responsible for implementing competition-related policy.  The law on Antimonopoly Activity was amended in April 2016 to introduce regulations on price fixing and other anti-competitive behavior. Parliament began revising a new version of the Competition Code in late 2014, but it has not yet been adopted.  Azerbaijan’s antimonopoly legislation does not constrain the size or scope of the handful of large holding companies that dominate the non-oil economy.

Expropriation and Compensation

The Law on the Protection of Foreign Investments forbids nationalization and requisition of foreign investment, except under certain circumstances.  Nationalization of property can occur when authorized by parliamentary resolution, although there have been no known cases of official nationalization or requisition against foreign firms in Azerbaijan.  Requisition – by a decision of the Cabinet of Ministers – is possible in the event of natural disaster, an epidemic, or other extraordinary situation. In the event of nationalization or requisition, foreign investors are legally entitled to prompt, effective, and adequate compensation.  Amendments made to Azerbaijan’s Constitution in September 2016 enabled authorities to expropriate private property when necessary for social justice and effective use of land.  According to Freedom House’s 2016 report, “[p]roperty rights and free choice of residence are affected by government-backed development projects that often entail forced evictions, unlawful expropriations, and demolitions with little or no notice.”  The Azerbaijani government has not shown any pattern of discriminating against U.S. persons by way of direct expropriations.

Dispute Settlement

ICSID Convention and New York Convention

Azerbaijan is a member of the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID convention) as well as the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.  The Supreme Court of Azerbaijan is responsible for recognizing and enforcing arbitral awards rendered pursuant to the Conventions. While there are no specialized commercial courts in Azerbaijan, the Azerbaijan International Commercial Arbitration Court (AICAC) was established by a non-governmental organization in 2003 as an independent arbitral institution.  The AICAC, a third-party tribunal, is the only arbitration institution functioning in Azerbaijan, but public information on the case load of the AICAC is not available.

Investor-State Dispute Settlement

Azerbaijan has also ratified the European Convention on Foreign Commercial Arbitration dated April 21, 1961.  The Bilateral Investment Treaty (BIT) between the United States and Azerbaijan, which went into force in 2001, provides U.S. investors recourse to settle any investment dispute using the ICSID convention.  Azerbaijan has been a party to three ICSID cases, two of which (Barmek v. Azerbaijan and Fondel Metal Participations and B.V. v. Azerbaijan) were settled and one of which (Azpetrol v. Azerbaijan) was decided in favor of the State.  Thus far, the ICSID has not issued arbitral awards against the government of Azerbaijan. Over the past 10 years, the U.S. Embassy in Baku has been notified of three investment dispute cases regarding U.S. citizens. None of these cases, however, have been resolved.

International Commercial Arbitration and Foreign Courts

International arbitration in Azerbaijan is regulated by the Law on International Commercial Arbitration, based on the UNCITRAL model law.  Parties may select arbitrators of any nationality, the language of the proceedings, the national law to be applied, and the arbitration procedure to be used.  In cases in which parties did not stipulate the terms of the proceedings, the Supreme Court of the Republic of Azerbaijan will resolve the omission. Azerbaijan has incorporated the provisions of the New York Convention into the Law on International Commercial Arbitration.  The Supreme Court may refuse to enforce a foreign arbitral award on specific grounds contained in Article 476 of the Civil Code.

Bankruptcy Regulations

Azerbaijan’s Bankruptcy Law applies only to legal entities and entrepreneurs, not to private individuals.  Bankruptcy proceedings may be initiated by either a debtor facing insolvency or by any creditor. In general, the legislation focuses on liquidation procedures.  Bankruptcy law in Azerbaijan is under-developed, which restricts economic development by deterring entrepreneurship. Amendments to Azerbaijan’s bankruptcy law adopted in 2017 extended the obligations of bankruptcy administrators and defined new rights for creditors.  In the World Bank’s Doing Business Report’s section on resolving insolvency, Azerbaijan’s ranking advanced from 47 in 2018 to 45 in 2019.

4. Industrial Policies

Investment Incentives

Since early 2016, the government has introduced tax and investment incentives for entrepreneurs and legal entities in non-oil export sectors as part of the overall economic reform/diversification effort.  These measures include certain partial, temporary exemptions from corporate and property taxes; favorable tax treatment for manufacturing facilities and imports of manufacturing equipment; and subsidies for certain exports.  Investment certificate holders are exempt from paying 50 percent of the assessed income tax; 100 percent of the land tax; and 100 percent of customs duties on imported machinery, equipment, and devices.  Certificates are issued for seven years to projects in priority non-oil sectors.

Foreign Trade Zones/Free Ports/Trade Facilitation

A government decree established a free trade zone (FTZ) next to the Port of Alat, located approximately 50 miles south of Baku in March 2016.  President Aliyev signed legislation setting forth the incentives and regulations governing the Alat FTZ in June 2018. The law exempts all businesses in the FTZ from taxes and customs; charges the FTZ’s administration with setting up its own employment, migration, dispute resolution, and arbitration regulations; provides protections from nationalization; and guarantees the free flow of funds in and out of the FTA.  While the legal framework is in place, implementing regulations are still pending.

The Ministry of Transport, Communications, and High Technologies has discussed plans to create other special economic zones, including a petrochemical complex and regional innovation zones to boost telecommunications sector development.

Performance and Data Localization Requirements

The Azerbaijani government does not mandate local employment, although some energy sector Production Sharing Agreements (PSAs) in the oil sector include localization provisions.  While performance requirements are not generally imposed on new investments, the government is seeking to increase the number of value-added services and processes performed in Azerbaijan.  American companies have reported that government-connected companies often pressure current or potential partners to establish joint ventures, initiate local production of certain components, or otherwise invest in Azerbaijan in order to maintain or expand cooperation.

Azerbaijan does not have any data localization requirements.

5. Protection of Property Rights

Real Property

International organizations, foreign citizens, and foreign legal entities may not own land or be granted a purchase option on a lease, but are permitted to lease land.  Following independence, the government implemented land reforms that divided state-owned farms into privately-held small plots. Due to poor record keeping and titling in rural areas, it is often difficult to determine definitively who owns a particular plot.  Amendments made to Azerbaijan’s Constitution in September 2016 enabled authorities to expropriate private property with compensation in instances where necessary for “social justice and efficient use of the land.”

Azerbaijan’s State Real Estate Registry Service at the Committee for Property Issues registers real estate.  April 2016 amendments to the Law on Immovable Property Register cut the time to register property from 20 to 10 working days.  The World Bank’s Doing Business Report ranked Azerbaijan 17 out of 190 countries in 2018 in its country rankings on the Ease of Registering Property.

Intellectual Property Rights

The legal structure covering intellectual property protections in Azerbaijan is relatively strong, but experts and business people report the level of enforcement within the country is weak.  Piracy and blatant infringements on intellectual property rights (IPR) of both digital and physical goods are commonplace and stifle foreign investment and local entrepreneurship. The Business Software Alliance estimated the prevalence of software piracy at 84 percent in 2015.  U.S. companies routinely list weak IPR protections as a key concern. Intellectual property rights in Azerbaijan are regulated by the Law on Copyrights and Related Rights, the Law on Trademarks and Geographic Designations, the Law on Patents, the Law on the Topology of Integrated Microcircuits, the Law on Unfair Competition, and the Law on Securing Intellectual Property Rights and Combating Piracy.

Azerbaijan is a party to the Convention Establishing the World Intellectual Property Organization (WIPO), the Paris Convention for Protection of Industrial Property, and the Berne Convention for the Protection of Literary and Artistic Works.  Azerbaijan is also a party to the Geneva Phonograms Convention and acceded to the two WIPO Internet treaties in 2005. Violation of IPR can result in civil, criminal, and administrative charges. Azerbaijan tracks and reports on seizures of counterfeit goods but does not publish statistics on this effort.  Azerbaijan is not listed in USTR’s Special 301 report, nor is it listed in the Notorious Markets report. For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/  .

6. Financial Sector

Capital Markets and Portfolio Investment

Access to capital is a critical impediment to business development in Azerbaijan.  An effective regulatory system that encourages and facilitates portfolio investment, foreign or domestic, is not fully in place.  Though the Baku Stock Exchange opened in 2000, there is insufficient liquidity in the markets to enter or exit sizeable positions.  In February 2016, the government established the Financial Market Supervisory Authority (FMSA) to combine the Azerbaijan State Committee for Securities, the State Insurance Supervision Service, and the Financial Monitoring Service.  The FMSA aims to license, regulate and control the securities market, investment funds, insurance, credit organizations (banks, non-banking credit organizations and operator of postal communication), and payment systems.  It also aims to improve the oversight system to combat money laundering and prevent the financing of terrorism as well as to provide transparency and efficiency in this sphere.

Non-bank financial sector staples such as capital markets, insurance, and private equity are in the early stages of development.  The Capital Market Modernization Project is an attempt by the government to build the foundation for a modern financial capital market, including developing market infrastructure and automation systems, and strengthening the legal and market frameworks for capital transactions.  One major hindrance to the stock market’s growth is the difficulty in encouraging established Azerbaijani businesses to adapt to standard investor-friendly disclosure practices, which are generally required for publicly listed companies.

Azerbaijan’s government and Central Bank do not restrict payments and transfers for  international transactions. Although foreign investors are permitted to obtain credit on the local market, bank lending remains extremely limited following the 2015 currency devaluations and heavy dollarization of deposits.  Limited access to capital remains a barrier to development, particularly for small and medium enterprises.

Money and Banking System

The country’s financial services sector – of which banking comprises more than 90 percent – is underdeveloped, which constrains economic growth and diversification.  The drop in world oil prices in 2014/2015 and the resulting strain on Azerbaijan’s foreign currency earnings and the state budget exacerbated existing problems in the country’s banking sector and led to rising non-performing loans (NPLs) and high dollarization NPLs accounted for 12 percent of all outstanding loans as of January 2019.  President Aliyev signed a decree in February 2019 to provide partial relief to retail borrowers on foreign-currency denominated loans that meet certain criteria.

As of December 2018, 30 banks were registered in Azerbaijan, including 15 banks with foreign capital and two state-owned banks.  These banks employ 17,415 people and have a combined 508 branches and 2,502 ATMs nationwide.  Total banking sector assets stood at approximately USD 17.3 billion as of December 2018, with the top five banks holding almost 58 percent of this amount.

The banking sector is still recovering from the drop in world oil prices which began in in 2014/2015 and the resulting devaluations.  The Financial Markets Supervisory Agency closed 10 insolvent banks in 2016. The government subsequently bailed-out the International Bank of Azerbaijan (IBA) which held approximately 40 percent of the country’s banking assets.  In January 2017, the Finance Ministry increased the government’s stake in the IBA from 54.96 percent to 76.73 percent.  The government undertook a substantial cleanup of IBA assets, transferring IBA’s non-performing assets at book value to AgrarKredit, a government-owned non-financial enterprise funded by the Central Bank.  The amount of transferred assets totaled USD 6 billion in 2015-2016 and a further USD 3 billion was transferred in 2017 (25 percent of 2016 GDP in total).  In May 2017, IBA entered formal restructuring, similar to U.S. Chapter 11 bankruptcy, and completed its restructuring process in September 2017.  IBA is still updating its commercial strategy.

Foreign banks are permitted in Azerbaijan and may take the form of representative offices, branches, joint ventures, and wholly-owned subsidiaries.  These banks are subject to the same regulations as domestic banks, with certain additional restrictions. Foreign individuals and entities are also permitted to open accounts with domestic or foreign banks in Azerbaijan.

Foreign Exchange and Remittances

Foreign Exchange

Azerbaijan’s Central Bank officially adopted a floating exchange rate in 2016, but continues to operate under an “interim regime” that effectively pegs the exchange rate at AZN 1.7 per USD.  Azerbaijan’s foreign currency reserves are based on the reserves of the Central Bank, those of the State Oil Fund of Azerbaijan (SOFAZ), and the assets of the State Treasury Agency under the Finance Ministry.  Foreign currency reserves of the Central Bank increased by 5 percent during 2018 and totaled USD 5.6 billion. Between January 2018 and January 2019, SOFAZ assets increased by 7 percent to reach USD 38.5 billion.

Foreign exchange transactions are governed by the Law on Currency Regulation.  The Central Bank administers the overall enforcement of currency regulation. Currency conversion is carried out through the Baku Interbank Currency Exchange Market and the Organized Interbank Currency Market.

There are no statutory restrictions on converting or transferring funds associated with an investment into freely usable currency at a legal, market-clearing rate.  The average time for remitting investment returns is two to three business days. Some requirements on disclosure of the source of currency transfers have been imposed in an effort to reduce illicit transactions.

Remittance Policies

Corporate branches of foreign investors are subject to a remittance tax of 10 percent on all profits derived from its business activities in Azerbaijan.  There have not been any recent changes or plans to change investment remittance policies that either tighten or relax access to foreign exchange for investment remittances.  There do not appear to be time limitations on remittances, including dividends, return on investment, interest and principal on private foreign debt, lease payments, royalties, and management fees.  Nor does there appear to be limits on the inflow or outflow of funds for remittances of profits or revenue.

Sovereign Wealth Funds

Azerbaijan’s sovereign wealth fund is the State Oil Fund of Azerbaijan (SOFAZ).  Its mission is to transform hydrocarbon reserves into financial assets generating perpetual income for current and future generations and to finance strategically important infrastructure and social projects of national scale.  Since it was established in 1999, SOFAZ has financed several projects relating to infrastructure, housing, energy infrastructure, and education. According to its bylaws, SOFAZ is not permitted to invest domestically.  A newly adopted fiscal rule aims to limit pro-cyclical spending and increase hydrocarbon revenue savings.  SOFAZ publishes an annual report which it submits for independent audit. The fund’s assets totaled USD 38.5 billion as of January 1, 2019. More information is available at http://oilfund.az  .

7. State-Owned Enterprises

In Azerbaijan, state-owned enterprises (SOEs) are active in the oil and gas, power generation, communications, water supply, railway, and air passenger and cargo sectors, among others.  There is no published list of SOEs. While there are no SOEs that officially have been delegated governmental powers, companies such as the State Oil Company of Azerbaijan (SOCAR), Azerenerji (the national electricity utility), and Azersu (the national water utility) – all of which are closed joint-stock companies with majority state ownership and limited private investment – enjoy quasi-governmental or near-monopoly status in their respective sectors.

SOCAR is wholly-owned by the government of Azerbaijan and takes part in all oil and gas activities in the country.  It publishes regular reports on production volumes, the value of its exports, estimates of investments in exploration and development, production costs, the names of foreign companies operating in the country, production data by company, quasi-fiscal activities, and the government’s portion of production-sharing contracts.  SOCAR’s annual financial reports are audited by an independent external auditor and include the consolidated accounts of all SOCAR’s subsidiaries, although revenue data is incomplete.

There have been instances where state-owned enterprises have used their regulatory authority to block new entrants into the market.  SOEs are, in principle, subject to the same tax burden and tax rebate policies as their private sector competitors.  However, in sectors that are open to both the private and foreign competition, SOEs generally receive a larger percentage of government contracts or business than their private sector competitors.  While SOEs regularly purchase or supply goods or services from private sector firms, domestic and foreign private enterprises have reported problems competing with SOEs under the same terms and conditions with respect to market share, information, products and services, and incentives.  Private enterprises do not have the same access (including terms) to financing as SOEs. SOEs are also afforded material advantages such as preferential access to land and raw materials, advantages that are not available to private enterprises. There is little information available on Azerbaijani SOEs’ budget constraints, due to the limited transparency in their financial accounts.

Privatization Program

A renewed privatization process started with the May 2016 presidential decree implementing additional measures to improve the process of state property privatization and the July 2016 decree on measures to accelerate privatization and improve the management efficiency of state property.  The State Committee on Property Issues launched a portal to provide privatization information, privatization.az  , in July 2016.  The portal contains information about the properties, their addresses, location, and initial costs with the aim of facilitating privatization.  Azerbaijan’s current privatization efforts focus on smaller state-owned properties and there are no active plans to privatize large SOEs.

8. Responsible Business Conduct

Responsible business conduct (RBC) is a relatively new concept in Azerbaijan.  Producers and consumers tend not to prioritize responsible business conduct, including environmental, social, and governance issues.  No information is available on legal corporate governance, accounting, and executive compensation standards to protect shareholders in Azerbaijan.  Larger foreign entities tend to follow generally accepted RBC principles consistent with parent company guidelines and aim to educate their local partners, who generally consider basic charitable donations and paying taxes as acts of social responsibility.

The American Chamber of Commerce in Azerbaijan (AmCham) established a Corporate Social Responsibility (CSR) Committee in October 2011 to encourage companies to embrace social responsibility and encourage a positive impact through activities and dialogue with relevant stakeholders.  AmCham also published a guide on CSR for businesses in Azerbaijan.  In 2011, the Economy Ministry established standards for corporate governance, which included an evaluation methodology for these standards and a code of ethical behavior.  The Economy Ministry has been tasked with explaining the importance of corporate governance standards to entrepreneurs. Some companies report that government restrictions on NGO registration have complicated CSR efforts.

Azerbaijan’s Extractive Industries Transparency Initiative (EITI) status was downgraded from “compliant” to “candidate” in April 2015, due to concerns about Azerbaijani civil society’s ability to engage critically in the EITI process.  Following the EITI Secretariat’s evaluation in March 2017 that Azerbaijan had not sufficiently implemented required “corrective actions,” Azerbaijan withdrew from the EITI and established a domestic Extractive Industries Transparency Commission in April 2017 to ensure transparency and accountability in the extractive industries of the country.  The Commission has published two Reports on Transparency in the Extractive Industries.

9. Corruption

Pervasive corruption is a major challenge for firms operating in Azerbaijan and is a barrier to foreign investment, despite government efforts to reduce low-level corruption.  Azerbaijan does not require that private companies establish internal codes of conduct to prohibit bribery of public officials, nor does it provide protections to NGO’s involved in investigating corruption.  U.S. firms have identified corruption in government procurement, licensing, dispute settlement, regulation, customs, and taxation as significant obstacles to investment.

The Azerbaijani government publicly acknowledges problems with corruption, but has neither effectively nor consistently enforced anti-corruption laws and regulations.  Azerbaijan has made modest progress in implementing a 2005 Anticorruption Law, which created a commission with the authority to require full financial disclosure from government officials.  The government has achieved a degree of success reducing red tape and opportunities for bribery through a focus on e-government and government service delivery through centralized ASAN service centers, which first opened in February 2013.  ASAN centers provide more transparent, efficient, and accountable services through a “one window” model that reduces opportunities for rent-seeking and petty government corruption and have become a model for other initiatives aimed at improving government service delivery.

Despite progress in reducing corruption in public services delivery, the civil service, public procurement apparatus, and the judiciary still suffer from corruption.  Tax reforms announced in January 2019 are partially aimed at reducing corruption in tax administration.

Azerbaijan signed and ratified the UN Anticorruption Convention and is a signatory to the Council of Europe Criminal and Civil Law Conventions.  Azerbaijan is not currently a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Resources to Report Corruption

Kamal Jafarov
Acting Executive Secretary
Commission on Combating Corruption
Baku, Azerbaijan
(+994 12) 492-04-65
Email: kamal.jafarov@antikorrupsiya.gov.az

10. Political and Security Environment

There have been no known acts of political violence against U.S. businesses or assets, nor against any foreign owned entity.

A cease-fire with Armenia has been in effect since 1994 for the conflict surrounding the disputed region of Nagorno-Karabakh.  However, intermittent gunfire along the cease-fire line and along the border with Armenia continues, often resulting in injuries and/or deaths.  There have been no threats to commercial enterprises from skirmishes in the border areas. It is unlikely that civil disturbances, should they occur, would be directed against U.S. businesses or the U.S. community.  The Azerbaijani government has suspended or threatened to suspend the operations of U.S. companies in Azerbaijan if the companies’ products or services are provided in Nagorno-Karabakh. Azerbaijan considers travel to the region of Nagorno-Karabakh and the surrounding occupied territories unlawful.  Engaging in any commercial activities in Nagorno-Karabakh and the surrounding occupied territories, whether directly or through business subsidiaries, can result in criminal prosecution and/or other legal action being taken against individuals and/or businesses in Azerbaijan; it may also affect the ability to travel to Azerbaijan in the future.  Due to the existing state of hostilities, consular services are not available to U.S. citizens in Nagorno-Karabakh.

11. Labor Policies and Practices

The 1999 Labor Code regulates overall labor relations and recognizes international labor rights.  The work-week generally is considered to be 40 hours. The right to strike exists, though industrial strikes are rare.  Azerbaijan is a member of the International Labor Organization (ILO) and has ratified more than 57 ILO Conventions. In practice, labor unions are strongly tied to political interests.  Collective bargaining is not practiced. Azerbaijan has regulations to monitor labor abuses, health, and safety standards in low-wage assembly operations, but enforcement is less effective.

Employment relations are established by an employment contract, which, in most cases, does not necessarily indicate a fixed term of employment.  An employer must give an employee two months’ notice of termination, with certain exceptions. An employee can terminate his/her employment contract at any time, but must give one month’s notice.  Upon termination of formally registered employment, employers must pay departing employees monetary compensation for unused vacation leave. A formally registered employee who becomes unemployed is entitled to 70 percent of his/her average monthly wage, calculated over the past 12 months at the last place of work.  An employee must have worked under a valid labor contract in order to obtain unemployment benefits. The law “On Unemployment Insurance” signed in August 2017 allows for payments to unemployed individuals registered with the State Employment Fund.

Azerbaijan has an abundant supply of semi-skilled and unskilled laborers.  An estimated 40 percent of the Azerbaijani population works in agriculture, although this sector only contributes 6 percent of the country’s GDP.  The construction sector tends to use temporary and contract workers; reportedly many of these workers’ agreements are not formally registered with the government.  The relatively limited supply of highly skilled labor is one of the biggest challenges in Azerbaijan’s labor market. As of 2018, government sources reported 5 percent unemployment, but other sources estimate the figure at 15 percent or higher, with significant underemployment.  The average monthly wage as of December 2018 was AZN 545 (USD 320), and the official minimum wage increased in 2019 to AZN 180 (USD 106) per month, compared to the previous level of AZN 130 (USD 76) per month.

12. OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) and the U.S. Export-Import (Ex-Im) Bank provide political risk insurance and financing and loan guarantees in Azerbaijan.  Azerbaijan is also a member of the Multilateral Investment Guarantee Agency (MIGA) and the European Bank for Reconstruction and Development (EBRD). The World Bank, Asian Development Bank, and other third-country institutions are active in providing financing and insurance for investment in Azerbaijan.

Over the past two decades, OPIC has invested around USD 230 million in Azerbaijan across 24 business projects.  While Azerbaijan’s financial services sector has been a major area for investments, OPIC-funded projects have included investments in the energy (such as the BTC oil pipeline completed in 2006), franchising, banking, microfinance, and hotel and hospitality sectors of Azerbaijan.  OPIC has repeatedly provided funds for numerous banks operating in Azerbaijan in order to expand their SME lending portfolios, including USD 4.8 million to Rabita Bank in 2008 and USD 7.3 million to Turan Bank in 2009.  In 2011, OPIC provided MuganBank a loan guarantee for USD 10 million to expand its operations, targeting SME borrowers. OPIC has also provided USD 1 million and USD 3 million to FinDev and CredAgro for microfinance lending, respectively.  In 2012, OPIC provided loan insurance to Viator Microcredit Azerbaijan LLC (USD 500,000), NBCO Vision Fund Azercredit LLC (USD 2 million), and FinDev again (USD 1 million). In 2013, OPIC signed a memorandum with Turan Bank for a loan in the amount of USD 7 million with a term of seven years for SME financing.  As of 2015, OPIC has active loan projects with two non-banking credit organizations, KredAgro and TBC Kredit.

In its 2014 annual report, Ex-Im Bank reported outstanding insurance and loan guarantees for Azerbaijan in the amount of USD 211.9 million, primarily in support of aviation sales.  In 2011, Ex-Im Bank closed a USD 116.6 million loan with a ten-year repayment period to finance the Azerbaijan space agency’s purchase of the AzerSat-1 satellite from Orbital Sciences.  In June 2015, Ex-Im Bank finalized a USD 211.9 million loan to finance Azerbaijan Airline’s purchase of Boeing commercial aircraft.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2018 $46,939 2017 $40,748 https://data.worldbank.org/country/azerbaijan  
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) No reliable data BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) No reliable data BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP No reliable data 2017 76.6% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx    

* Source for Host Country Data:  Azerbaijan State Statistical Committee


Table 3: Sources and Destination of FDI

Direct Investment From/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward $29,314 100% Total Outward $20,461 100%
United Kingdom $6,317 22% Turkey $10,761 53%
Turkey $5,797 20% Georgia $2,984 15%
Norway $3,063 10% Switzerland $1,237 6%
Iran $2,523 9% United Kingdom $1,013 5%
Cyprus $1,907 7% United States $594 3%
“0” reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

Data not available.

14. Contact for More Information

Phil Guthrie
Commercial Officer
U.S. Embassy in Baku, Azerbaijan
+994-12-488-3300
Email: BakuCommercial@state.gov

Georgia

Executive Summary

Georgia is located at the crossroads of Western Asia and Eastern Europe.  Georgia has made sweeping economic reforms since 1991 that have produced a relatively well-functioning market economy.  Through dramatic police and institutional reforms, the government has mostly eradicated low-level corruption. Georgia ranks 6th in the 2019 World Bank’s Ease of Doing Business index, 16th in the Heritage Foundations’ 2019 Economic Freedom Index, and 66th in the World Economic Forum’s Global Competitiveness Report.  Fiscal and monetary policy are focused on low deficits, low inflation, and a floating real exchange rate, although the latter has been affected by regional developments, including sanctions on Russia and other external factors such as a stronger dollar and weaker regional economies.  Public debt and budget deficits remain under control.

The Georgian government’s “Georgia 2020” economic strategy, initially published in 2014, outlines economic policy priorities.  It stresses the government’s commitment to business-friendly policies such as low taxes, but also pledges to invest in human capital and to strive for inclusive growth across the country, not just in Tbilisi.  The strategy also emphasizes Georgia’s geographic potential as a trade and logistics hub along the New Silk Road linking Asia and Europe via the Caucasus.

Overall, business and investment conditions are sound.  However, some companies have expressed an increasing lack of confidence in the judicial sector’s ability to adjudicate commercial cases independently or in a timely, competent manner, with business dispute cases languishing in the court system for years.  Other companies complain of inefficient decision-making processes at the municipal level, occasional shortcomings in the enforcement of intellectual property rights, lack of effective anti-trust policies, selective enforcement of economic laws, and difficulties resolving disputes over property rights.  Georgia’s government continues to work to address these issues and, despite these remaining challenges, Georgia stands far ahead of its post-Soviet peers as a good place to do business.

The United States and Georgia work to increase bilateral trade and investment through a High-Level Dialogue on Trade and Investment and through the Strategic Partnership Commission’s Economic Working Group.  Both countries signed a Bilateral Investment Treaty in 1994, and Georgia is eligible to export many products duty-free to the United States under the Generalized System of Preferences (GSP) program.

Georgia suffered considerable instability in the immediate post-Soviet period.  After independence in 1991, civil war and separatist conflicts flared up along the Russian border in the areas of Abkhazia and South Ossetia.  The status of each region remains contested, and the central government in Tbilisi does not have 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 undisputed Georgian territory and continues to occupy South Ossetia and Abkhazia. Tensions still exist both inside the occupied regions and near the administrative boundary lines, but other parts of Georgia, including Tbilisi, are not directly affected.

Transit and logistics are a priority sector as Georgia seeks to benefit from increased East/West trade through the country.  Georgia’s transit prospects have been boosted by the Baku-Tbilisi-Kars railroad. The Anaklia Deep Sea Port project, involving two U.S. companies, the Conti Group and SSA Marine, faced multiple delays and extensions, but the lead investor is still working towards meeting the 2020 completion date.  The port would add additional shipping and berthing options for larger vessels, such as Panamax sized vessels. Agriculture and tourism are also attractive areas for investment to respond to the increased inflow of international visitors and demands of local food processing industry.

Table 1: Key Metrics and Rankings

Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2018 41of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report 2019 6 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2018 59 of 126 https://www.globalinnovationindex.org/analysis-indicator 
U.S. FDI in partner country ($M USD, stock positions) 2018 $22 http://www.bea.gov/international/factsheet/ 
World Bank GNI per capita 2017 $3,780 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Georgia is open to foreign investment.  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.  Investment promotion authority is vested in the Investment Division of Enterprise Georgia, a legal entity of public law under the Ministry of Economic and Sustainable Development. The Investment Division’s primary role is to attract, promote, and develop direct foreign investment in Georgia.  For this purpose, it acts as the moderator between foreign investors and the Georgian government, ensures access to updated information, provides a means of communication with government bodies, and serves as a “one-stop-shop” to support investors throughout the investment process. (http://www.enterprisegeorgia.gov.ge/en/about  ).

To enhance relations with investors, Georgia’s then-Prime Minister created the Investors Council in 2015, an independent advisory body, with the objective of promoting dialogue among the private business community, international organizations, donors and the Georgian government for the development of a favorable, non-discriminatory, transparent, and fair business and investment climate in Georgia. (http://ics.ge  ).  The Business Ombudsman, who is a member of the Investors Council, is another tool for protecting investors’ rights in Georgia.  (http://businessombudsman.ge  )

Limits on Foreign Control and Right to Private Ownership and Establishment

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 privatization has been an issue at times. 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.

There are no specific licensing requirements for foreign investment other than those that apply to all companies.  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 period, the government will approve the license or permit for issuance.  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.

Other Investment Policy Reviews

In January 2016, the World Trade Organization (WTO) concluded its second Trade Policy Review of Georgia.  In this review, WTO members reiterated their approval of Georgia’s broadly open, transparent, and predictable trade and investment regimes.  During the review period, Members noted that Georgia had undertaken an impressive range of reform initiatives aimed at streamlining, liberalizing, and simplifying trade regulations and their implementation.  The review lauded Georgia’s trade openness and its commitment to the multilateral system through its responsible contribution to the work of the WTO.

WTO members commended Georgia for the ratification of the Trade Facilitation Agreement, which would benefit Georgia’s role as a trade transit corridor in the region, and the related notification to the WTO of Category A, B and C commitments.  Members also noted that Georgia was an observer to the Government Procurement Agreement and was currently assessing the prospects for joining the Agreement. Members welcomed the announcement that Georgia was considering joining the expanded Information Technology Agreement, which would constitute a significant step forward for attracting further investment.  See more at https://www.wto.org/english/tratop_e/tpr_e/tp428_crc_e.htm  

Business Facilitation

Registering a business in Georgia is relatively quick and streamlined, and Georgia ranks fourth in registering property among countries assessed in the World Bank’s 2019 Doing Business Report.  Registration takes one day to complete and Georgia has a single window registration process. Registration of companies is carried out by the National Agency of Public Registry   (NAPR) (www.napr.gov.ge   – webpage is in Georgian only), located in the Public Service Halls (PSH) under the Ministry of Justice of Georgia.  The web page of the PSH (http://www.psh.gov.ge/main/page/2/85  ) outlines procedures and requirements for business registration in English.  For registration purposes, the law does not require a document verifying the amount or existence of charter capital.  A company is not required to complete a separate tax registration. The initial registration includes both the state and tax registration.

The following information is required to register a business in Georgia:  personal information of the founder and principal officers, articles of incorporation, and the company’s area of business activity.  Other required documents depend on the type of entity to be established.

To register a business, the potential owner must first pay the registration fee, register the company with the Entrepreneurial Register and obtain an identification number and certificate of state and tax registration.  Registration fees are: GEL100 (around USD35) for regular registration, GEL200 (USD70) for expedited registration, plus GEL1 (bank fees). Second, the owner must open a bank account (free).

Georgia’s business facilitation mechanism provides equitable treatment of women and men.  There are a variety of state-run and donor-supported projects that aim to promote women entrepreneurs through specific training or other programs, including access to financing and business training.

Outward Investment

The Georgian government does not have any specific policy on promoting or restricting domestic investors from investing abroad and Georgia’s outward investment is insignificant.

2. Bilateral Investment Agreements and Taxation Treaties

Bilateral Investment Treaties

Georgia has bilateral agreements on investment promotion and mutual protection enforced with 31 countries, including:  the United States, Armenia, Austria, Azerbaijan, Belgium-Luxembourg Economic Union, Bulgaria, China, the Czech Republic, Estonia, Finland, France, Germany, Greece, Iran, Israel, Kazakhstan, Kuwait, Kyrgyzstan, Latvia, Lithuania, Moldova, the Netherlands, Romania, Spain, Sweden, Switzerland, Turkmenistan, Ukraine, the United Kingdom, and Uzbekistan.  Concluded agreements awaiting signing are with Egypt, Turkey, and the United Arab Emirates (UAE). Negotiations are underway with the governments of Canada, Hungary, Iceland, Italy, Japan, Qatar, and Slovenia.  Additionally, in 2007, Georgia signed a Trade and Investment Framework Agreement (TIFA) with the United States.

On June 27, 2014, Georgia signed an Association Agreement (AA) and a Deep and Comprehensive Free Trade Area (DCFTA) with the European Union.  In 2016, the government signed a free trade agreement with the European Free Trade Association (EFTA) countries of Iceland, Liechtenstein, Norway, and Switzerland.  Georgia’s free trade agreement with China entered into force in January 2018. 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, Uzbekistan, Turkmenistan, and Turkey.  Georgia has ongoing free trade agreement consultations with Belarus, Kyrgyzstan, the Cooperation Council of Gulf Arab States, India, and Tajikistan. Georgia and Hong Kong signed an agreement in 2018, which is awaiting ratification by Parliament.

The United States and Georgia established a High-Level Dialogue on Trade and Investment in 2012, a bilateral dialogue aimed toward identifying measures to increase bilateral trade and investment.  The United States and Georgia have shared a Bilateral Investment Treaty (BIT) since 1997, and Georgia can export many of its products duty-free to the United States under the Generalized System of Preferences (GSP) program.

Bilateral Taxation Treaties

The United States and Georgia are beneficiaries of the U.S.-Georgia Bilateral Taxation Treaty as Georgia is one of the former Soviet Republics, which is covered under the U.S. treaty with the former Union of Soviet Socialist Republics (USSR).  Double taxation issues are covered under the Convention with the Union of Soviet Socialist Republics on Matters of Taxation of 1973 (http://www.irs.gov/pub/irs-trty/ussr.pdf ).

Georgia has concluded agreements for avoidance of double taxation with 55 countries:  Armenia, Austria, Azerbaijan, Bahrain, Belarus, Belgium, Bulgaria, China, Cyprus, the Czech Republic, Croatia, Denmark, Estonia, Egypt, Finland, France, Germany, Greece, Hungary, Iceland, India, Iran, Ireland, Italy, Israel, Japan, Kazakhstan, Kuwait, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Moldova, the Netherlands, Norway, Poland, Portugal, Qatar, Romania, San Marino, Serbia, Singapore, Slovakia, Slovenia, South Korea, Spain, Sweden, Switzerland, Turkey, Turkmenistan, UAE, Ukraine, the United Kingdom (UK), and Uzbekistan.  Treaties have been negotiated but are waiting to be ratified with Lebanon and Oman, and treaty negotiations have started with Jordan, Montenegro, Saudi Arabia, Vietnam, Iraq, Argentina, Indonesia, Malaysia, Mexico, Albania, Colombia, Mongolia, Morocco, New Zealand, Peru, the Philippines, Tajikistan, Uruguay, Brazil, Cuba, Ecuador, Canada, and South Africa. Georgia and Russia signed a double taxation avoidance treaty in 1999, which the Georgian Parliament ratified in 2000; although the Russian Duma has not ratified it, Russia regards it as an active agreement.

3. Legal Regime

The Georgian government has committed to greater transparency and simplicity of regulation.  The government publishes laws and regulations in Georgian in the official online legislative herald gazette, the Legislative Messenger, ‘Matsne’ (www.matsne.gov.ge   ).  Another online tool to research Georgian legislation is www.codex.ge  , or webpage of the Parliament of Georgia www.parliament.ge  .

Draft bills or regulations are available for public comment.  NGOs, professional associations, and business chambers actively participate in public hearings on legislation.

Georgia has six types of taxes:  corporate profit, value added tax (VAT), property, income, excise, and dividend.  The tax on corporate profits is 15 percent. However, in January 2017, the government adopted a corporate profit tax scheme that exempts undistributed, reinvested, or retained corporate profits from income taxation.  The VAT is 18 percent. The tax on personal income is 20 percent. The dividend income tax rate is five percent. There are no dividend or capital gains taxes for publicly traded equities (a free float in excess of 25 percent).  There are excise taxes on cigarettes, alcohol, fuel, and mobile telecommunication. Most goods, except for some agricultural products, have no import tariffs. For goods with tariffs, the rates are five or 12 percent unless excluded by an FTA.

In 2019, the Georgian government introduced new regulations to simplify the tax regime and provide a more streamlined business environment for small businesses.  The new legislation decreased turnover tax from five percent to one percent for small businesses; defined small business as a business with below GEL 0.5 million annual turnover (USD 185 thousand), a five fold increase from the previous GEL 0.1 million threshold.  In addition, the new regulations allow small businesses to pay taxes by the end of month, instead of by advance payments. Regarding medium and large businesses, the reform introduces an automatic system of value-added tax (VAT) returns, and activated a special system wherein entrepreneurs are able to pay VAT returns in five to seven business days by filling out an electronic application without any additional bureaucracy-related challenges.  The government also announced it planned to implement new tax policies to encourage multinational companies to establish regional offices in Georgia. Respective legislation, which, inter alia, provides for reduced corporate income tax and property tax, has been submitted to Parliament and is expected to be adopted in 2019.

Enterprise Georgia, the state agency under the Ministry of Economic and Sustainable Development, operates the Business Service Center in Tbilisi intended to provide domestic and foreign businesses with a standard package of information about doing business in Georgia.  It also provides specific information for individual businesses. The Business Service Center also facilitates an on-line chat tool for interested individuals (http://www.enterprisegeorgia.gov.ge/en/SERVICE-CENTER  ).  Additionally, the government has institutionalized engagement with the private sector through an independent Investors Council, which discusses legislative reforms, the government’s economic development plan, and actions that would help spur economic growth.  Different commercial chambers, such as the American Chamber of Commerce (www.amcham.ge  ), International Chamber of Commerce (www.icc.ge  ), Business Association of Georgia (www.bag.ge  ), Georgian Chamber of Commerce and Industry (www.gcci.ge  ), and EU-Georgia Business Council (http://eugbc.net  ) remain important tools for facilitating ongoing dialogue between domestic and foreign business communities and the government.

International accounting standards are binding for joint stock companies, banks, insurance companies, and other companies operating in the insurance field, limited liability companies, limited partnerships, joint liability companies, and cooperatives.  Private companies 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.  Shortcomings in the use of international accounting standards persist, and qualified accounting personnel are in short supply.

The Law of Georgia on Free Trade and Competition provides for the establishment of an independent structure, the Competition Agency, to exercise effective state supervision over a free, fair, and competitive market environment.  Nonetheless, certain companies have dominant positions in pharmaceutical, petroleum, and other sectors.

Public finances and debt obligations are transparent, and Georgia’s budget and information on debt obligations were widely and easily accessible to the public through the governmental websites, for example through the Ministry of Finance’s site www.mof.gov.ge  .  Georgia’s State Audit Office (www.sao.ge  ) reviews the government’s accounts and makes its reports publicly available.

International Regulatory Considerations

Georgia’s Association Agreement of 2014 with the European Union introduced a preferential trade regime – the Deep and Comprehensive Free Trade Area (DCFTA), which increased market access between the EU and Georgia based on having better-aligned regulations.  The agreement is designed to gradually introduce European standards in all spheres of Georgia’s economy and sectoral policy: infrastructure, energy, the environment, agriculture, tourism, technological development, employment and social policy, health protection, education, culture, civil society, and regional development.  It also provides for the approximation of Georgian laws with nearly 300 separate European legislative acts.

The DCFTA should promote a gradual approximation with European standards for food safety; establish a transparent and stable business environment in Georgia; increase Georgia’s potential to attract investment; introduce innovative approaches and new technologies; stimulate economic growth; and support the country’s economic development.

Georgia has been a member of the World Trade Organization (WTO) since 2000 and consistently meets the Agreement on Trade Related Investment Measures’ (TRIMs) requirements and obligations.  Since WTO accession, Georgia has not introduced any Technical Barriers to Trade. In January 2016, Georgia ratified the WTO Trade Facilitation Agreement (TFA).

Legal System and Judicial Independence

Georgia’s legal system is based on civil law and the country has a three-tier court system.  The first tier consists of twenty-five trial courts throughout the country that hear criminal, civil, and administrative cases at the lowest level.  Two appellate courts, Tbilisi Appeal Court (East Georgia) and Kutaisi Appeal Court (West Georgia), represent the second tier.  The Supreme Court of Georgia occupies the third, or the highest, instance and acts as the highest appellate court.  In addition, there is a separate Constitutional Court for arbitrating constitutional disputes between branches of government and ruling on individual claims concerning human rights violations stemming from the Constitution.

Georgia does not have an integrated commercial code.  There are a number of different laws and codes (Tax Code, Law on Entrepreneurs, and Law on Insolvency) that constitute the legislative body for regulating commercial activity in Georgia.  There are no specialized courts, such as a commercial court, to handle commercial disputes. The Ministry of Justice’s Public Service Halls provide property registration.

According to Freedom House’s 2018 Freedom in the World Report, “despite ongoing judicial reforms, executive and legislative interference in the courts remains a substantial problem, as does corruption and a lack of transparency and professionalism surrounding judicial proceedings.”  The law guarantees due process, but this protection is not always respected in practice.

Regulations and enforcement actions are appealable and are adjudicated in the national court system.

Laws and Regulations on Foreign Direct Investment

The U.S.-Georgia BIT guarantees U.S. investors national treatment and most favored nation treatment.  Exceptions to national treatment have been carved out for Georgia in certain sectors such as 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.

Georgia’s legal system is based on civil law.  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.

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.

There is no one-stop-shop website for investment that provides relevant laws in English.

Competition and Anti-Trust Laws

The Georgian Law “On Free Trade and Competition” of 2005 that governs competition is in line with the Georgian Constitution and international agreements.

The agency in charge of reviewing transactions for competition-related concerns is the Competition Agency, an independent legal entity of public law, subordinated to the Prime Minister of Georgia.  The agency aims to promote market liberalization, free trade, and competition (see www.competition.ge  ).  Georgia has also signed a number of international agreements containing competition provisions including the EU-Georgia Association Agreement.  The DCFTA within the AA goes further than most FTAs, with elimination of non-tariff barriers and regulatory alignment, as well as binding rules on investments and services.

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, 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. Amendments made 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 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, however, to certain enumerated properties.

The U.S.-Georgia BIT 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.

Expropriation disputes are not common in Georgia, although under the previous government (before 2012), reputable NGOs raised cases of illegal revocation of historic ownership rights in Svaneti, Anaklia, Gonio, and Black Sea-adjacent territories. There were cases of transfer of property under the previous government, which lacked transparency and allegedly were implemented under coercion.  One U.S. company recently alleged their assets were expropriated through government actions, but the government settled the issue by providing compensation to the company.

Dispute Settlement

ICSID Convention and New York Convention

Since 1992, Georgia has been a member of the International Centre for Settlement of Investment Disputes (ICSID Convention), and a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).

As a result of these international obligations, Georgia is bound to accept international arbitration and recognize arbitral awards.  The Ministry of Justice oversees the government’s interests in arbitrations between the state and private investors.

Investor-State Dispute Settlement

Georgia has signed bilateral investments treaties (BITs) with over 30 countries including the United States.  Georgian investment law allows disputes between a foreign investor and a government body to be resolved in Georgian courts or at ICSID, unless a different method of dispute settlement is agreed upon between the parties.  If the dispute cannot be heard at ICSID, the foreign investor can also submit the dispute to ad-hoc international arbitration under United Nations Commission for International Trade Law (UNCITRAL model law) rules. The right to use ICSID or UNCITRAL arbitration is reflected in the U.S.-Georgia BIT.

There were reports of lack of due process and respect for rule of law in a number of property rights cases.  NGOs also reported several cases in which groups claimed the government improperly used taxes on property to pressure organizations.

Although the constitution and law provide for an independent judiciary, there remains indications of interference in judicial independence and impartiality.  Judges are vulnerable to political pressure from within and outside of the judiciary.

Disputes over property rights at times have undermined confidence in the impartiality of the Georgian judicial system and rule of law, and by extension, Georgia’s investment climate.  The government identified judicial reform as one of its top priorities, and Parliament has passed a series of reforms aimed at strengthening judicial independence.  While reforms have improved the independence of the judiciary, politically sensitive cases are still vulnerable to political pressure.  The High Council of Justice is currently dominated by a group of anti-reform judges.  Civil society asserts this group applies pressure on judges in politically sensitive cases. The government is currently in the process of passing additional judicial reforms that focus on judicial discipline and regulating the operations of the High School of Justice and High Council of Justice.

Over the past ten years, there have been five investment disputes involving U.S. citizens, and all of them have been resolved through arbitral awards or out-of-court settlements.

Local courts recognize and enforce foreign arbitral awards issued against the government.

There is no substantial history of extrajudicial action against foreign investors.

International Commercial Arbitration and Foreign Courts

Georgia’s arbitration law went into force on January 1, 2010.  Georgia has enacted legislation based on the UNCITRAL Model Law.  Domestic private arbitration firms, such as the International Arbitration Center (www.giec.ge  ), operate in dispute resolution between two private parties.

Bankruptcy Regulations

The Law of Georgia on Insolvency Proceedings regulates rehabilitation and bankruptcy.  The law defines two types of creditors: secured and non-secured.  Creditors can file a court claim for opening an insolvency proceeding, given certain conditions are satisfied (conditions vary, depending on the outstanding debt amount and the delayed days of repayment).

Creditor meetings are held in court and chaired by a judge.  The creditor meeting can decide several issues, including the appointment of a supervisor of the bankruptcy or rehabilitation proceedings, and the appointment of a member of the facilitation council.

Secured creditors:  Secured creditors must make unanimous decisions on approving a debtor’s new debts, the encumbrance of the debtor’s property, and suretyship.  If there are no secured creditors, the creditor’s meeting is authorized to make the same decisions. The secured creditors may suspend enforcement of the following resolutions made in the creditor’s meeting on the material conditions of the agreement with the bankruptcy or rehabilitation supervisor or on the definition of the terms of the rehabilitation.  After the debtor’s property is sold on auction, secured creditors have first priority for being repaid. All secured creditors must approve the rehabilitation plan and plan amendments. New equity investment in the debtor’s company is only possible if there are prior consents from all secured creditors and the rehabilitation supervisor.

Non-secured creditors:  Non-secured creditors are satisfied only after all secured creditors are satisfied (unless otherwise agreed by all creditors unanimously).  Non-secured creditors do not have voting rights for the rehabilitation plan approval.

The priority system shall not apply to creditors whose claim is secured by financial collateral.

Foreign creditors: The law provides additional time for foreign creditors to file claims. Creditors may file claims to the court and request to declare the agreements made by the insolvent debtor voidable and/or request reimbursement of damages, if such agreements inflicted damages to the creditor.

The Law of Georgia on Insolvency Proceedings only incurs criminal liabilities in case the debtor does not provide, or provides but with intentional delay, or provides falsified  information about its obligations, assets, financial situation and activities, or ongoing disputes in which the debtor is involved.

The Debt Registry of the National Agency of the Public Register is Georgia’s credit monitoring authority.

According to the “Resolving Insolvency” section of the World Bank’s 2018 Doing Business Report, the Law of Georgia on Insolvency Proceedings made insolvency proceedings more accessible for debtors and creditors, improved provisions on treatment of contracts during insolvency, and granted creditors greater participation in important decisions during the proceedings. The report assigned Georgia a higher insolvency score, increasing from 55.59 in 2018 to 56.03 in 2019.

4. Industrial Policies

Investment Incentives

The Georgian government has created several tools to support investment in the country’s economy.  JSC Partnership Fund (PF) is a state owned investment fund, established in 2011. The fund owns the largest Georgian state owned enterprises operating in transportation, energy and infrastructure sectors.  PF’s main objective is to promote domestic and foreign investment in Georgia by providing co-financing (equity, mezzanine, etc.) in projects at their initial stage of development, with a focus on tourism, manufacturing, energy, and agriculture. (www.fund.ge  )

In 2013, the Georgian Co-Investment Fund (GCF) was launched to promote foreign and domestic investments.  GCF was announced as a reported six billion USD private investment fund, with the mandate of providing investors with unique access, through a private equity structure, to opportunities in Georgia’s fastest growing industries and sectors. (www.gcfund.ge   )

The government’s ‘Produce in Georgia’ program is another tool for jointly financing foreign investment, given that the investor sets up a limited liability company in Georgia.  The program aims to develop and support entrepreneurship, encourage creation of new enterprises, and increase export potential and investment in the country. Coordinated by the Ministry of Economy and Sustainable Development through its Entrepreneurship Development Agency, National Agency of State Property, and Technology and Innovation Agency of Georgia, the project provides the following support:

  • Access to finance
  • Access to real property
  • Technical assistance

For more information please visit:  http://enterprisegeorgia.gov.ge/en/home  

The National Agency of State Property is in charge of the Physical Infrastructure Transfer Component, i.e., free-of-charge transfer of government-owned real property to an entrepreneur under certain investment obligations.

Low labor costs contribute to the attractiveness of Georgia as a foreign investment destination.  It is also increasingly recognized as a regional transportation hub that provides access to the New Silk Road trade corridor linking Asia and Europe.

Georgia’s free trade regimes provide easy access for goods produced in Georgia to foreign markets.  In some cases, foreign investors can benefit from these agreements by producing goods targeting these markets.

In October 2018, Georgia’s Prime Minister introduced the concept of electronic residency, allowing citizens of 34 countries to register their companies electronically and open bank accounts in Georgia while not having a physical presence in the country.  Furthermore, the Prime Minister announced that as part of the government’s efforts to establish Georgia as a regional financial hub, the government will grant international companies significant tax benefits to open regional offices in Georgia. The government plans to launch the initiative in 2019.

Foreign Trade Zones/Free Ports/Trade Facilitation

In June 2007, the Parliament of Georgia adopted the 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. Foreign companies operating in free industrial zones are exempt from taxes on profit, property, and VAT.  Currently, there are four free industrial zones (FIZ) in Georgia:

Poti Free Industrial Zone (FIZ):  This is the first free industrial zone in the Caucasus Region, established in 2008.  UAE-based RAK Investment Authority (Rakia) initially developed it, but in 2017, CEFC China Energy Company Limited purchased 75 percent of shares, and the Georgian government holds the remaining 25 percent.  Poti FIZ, a 300-hectare area, benefits from its close proximity to the Poti Sea Port. www.potifreezone.ge.

A 27-hectare plot in Kutaisi is home to the Egyptian company Fresh Electric, which constructed a kitchen appliances factory in 2009.  The company has committed to building about one dozen textile, ceramics, and home appliances factories in the zone, and announced its intention to invest over USD 2billion.

Chinese private corporation “Hualing Group,” based in Urumqi, China, developed another FIZ in Kutaisi in 2015.  This FIZ is a 36-hectare area that houses businesses focused on sales of wood, furniture, stone, building materials, pharmaceuticals, auto spare parts, and beverages:  www.hualingfiz.ge.

The Tbilisi Free Zone (TFZ) in Tbilisi and occupies 17 hectares divided into 28 plots. TFZ has access to the main cargo transportation highway, Tbilisi International Airport (30 km), and the Tbilisi city center (17 km).  For more information, visit: https://www.tfz.ge/en/510/  .

Performance and Data Localization Requirements

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.  Performance requirements such as the scope and time limit on licenses to extract natural resources or production sharing agreements have triggered complaints from some companies that transactions lacked transparency. Most types of performance requirements are prohibited by the U.S.-Georgia BIT.

The government does not follow a forced localization policy; foreign investors have no obligation to use domestic content in goods or technology.  In addition, there are no requirements for foreign IT providers to turn over source codes and/or provide access to surveillance.

The Data Exchange Agency (DEA), under the Ministry of Justice, coordinates e-governance development, data exchange infrastructure, unified governmental networks, informational and communication standards, and cybersecurity policy.  The DEA requires any company managing critical data to implement a number of security protocols to protect that information (see www.dea.gov.ge  ).

5. Protection of Property Rights

Real Property

Georgia ranks high in World Bank’s Doing Business 2019 report in general, but especially in the category of “registering property.”  Processes are streamlined and transparent, and takes minimal time. It takes one day and is conducted at Public Service Halls.

In June 2017, the Parliament adopted a legislative amendment that placed a moratorium on the sale of agricultural land to foreign citizens and stateless persons.  Under the amendment, foreigners, legal entities registered abroad, and legal entities registered by foreigners in Georgia were not able to purchase agricultural land in Georgia.  Furthermore, the new Constitution that came into force in December 2018, imposed restrictions on the sale of agricultural land. Currently the parliament is considering a draft law that would allow foreigners to purchase land under a relevant investment plan and other preconditions.

Mortgages and liens are registered through the public registry and information can be obtained from the webpage www.napr.gov.ge  .

The government has taken multiple steps to regulate land titling, including facilitating simplified procedures, free registration campaigns, and mediation services.  The National Public Registration Agency reported that from August 2016 through February 2019, 300 thousand hectares of land were registered under the land reform project, increasing the share of titled land to 45 percent.  Unclear or unregistered titling bears the potential to hamper investment projects.

Property ownership cannot revert to other owners when legally purchased property stays unoccupied.

Intellectual Property Rights

Georgia acceded to the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) in 2000.  The Ministry of Economy and Sustainable Development is responsible for WTO compliance.

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

The National Intellectual Property Center of Georgia (Sakpatenti) provides legal protection for IPR in Georgia:  it issues protective documents on invention, utility model, trademark, design, geographical indication and appellation of origin, new animal breeds and plant varieties, and ensures the deposit of copyrighted work.  The Revenue Service, which is part of the Ministry of Finance, is responsible for enforcing IPR listed in the Register of Intellectual Property Subject-Matter. The Revenue Service is responsible for border control and can halt import or export of items based on the register data.  After the registration procedure is complete, the Revenue Service is able to suspend the movement of counterfeit goods for up to 10 working days, which may be extended by the Revenue Service for an additional 10 working days. The Law of Georgia on Border Measures Related to Intellectual Property provides for the possibility of destruction of counterfeit goods on the basis of a court decision.

IPR infringement of industrial property rights, copyrights, performers’ rights, rights of makers of databases, trademarks or other illegal use of commercial indications can incur civil, criminal, and administrative penalties.  Depending on the type and extent of the violation, penalties include fines, corrective labor, social work, or imprisonment.

Sakpatenti is an active and engaged partner of the United States in training to educate the public on IPR issues.  Sakpatenti coordinates the government’s approach to IPR enforcement under the Interagency Coordination Council (Council) for IPR Enforcement.  The Council is an efficient platform for government institutions to exchange their views on IPR enforcement issues. Georgia is improving IPR enforcement, but some problems persist, especially software licensing and pirated content available online.  Many judges and lawyers lack sufficient knowledge of IPR laws and issues; pirated video and audio recordings, electronic games, and computer software are sometimes available; and unlicensed content free for users to download or stream is available on some websites. The U.S. government Commercial Law Development Program continues to provide assistance to Sakpatenti and other governmental entities to build capacity to effectively deal with IPR-related issues.

In line with Georgia’s commitments under the Deep and Comprehensive Free Trade Area (DCFTA) agreement with the EU, to prevent and suppress IPR infringement and to ensure the implementation of appropriate sanctions, Sakpatenti drafted a package of amendments to the IP legislation, which the Parliament adopted on December 23, 2017, and entered into force on January 11, 2018.  The amendments apply to the following legislative acts regulating intellectual property: the Patent Law of Georgia, the Law of Georgia on Copyright and Related Rights, the Law of Georgia on Design, the Trademark Law of Georgia, the Code of Civil Procedure of Georgia, the Law of Georgia on Pesticides and Agrochemicals, and the Law of Georgia on Drugs and Pharmaceutical Activity.

According to the new amendments, in the case of IPR infringement, the rights holder is endowed with authority to demand that infringing objects be removed from circulation or destroyed, any images related to the objects are destroyed and any related material published online that infringes on exclusive rights be deleted, and any technical devices used to make the infringing objects also be destroyed.  According to the amendments, the rights holder is entitled to define, at their discretion, the caused damage and received benefit, and can demand a lump sum compensation payment. The amendments also stipulate provisional measures to preserve relevant evidence related to protection of IPR subject-matter, which is especially important in terms of effective enforcement of rights.

Georgia also approximated laws on “border measures related to IPR” with the EU regulation N608/2013.  Amendments were introduced in 2017 and identify intellectual property objects to be protected at the border, including: design, patent, utility model, topographies of integrated circuits, new breeds of animals, and varieties of plants.  Under these new amendments, customs authorities are entitled to take ex-officio actions at the border and detain suspected IPR infringing goods. Parliament approved the amendments on December 13, 2017, and they entered into force on February 7, 2018.

Development of an effective system of Internet Service Providers (ISP) Liability is also an obligation under the DCFTA.  In order to implement an ISP Liability in Georgian legislation, in 2017, Sakpatenti drafted amendments to the Law of Georgia “On Copyright and Related Rights” that include ISP-related provisions.  The amendments were drafted on the basis of the draft Law of Georgia “On Electronic Commerce,” prepared by the Ministry of Economy and Sustainable Development of Georgia.

In 2018, the Ministry of Finance’s Investigation Service initiated 16 cases under Article 196 of the Criminal Code of Georgia (unlawful use of trademark, service marks, or other commercial designations).  Out of 16 cases, 12 were initiated ex-officio. As a result, 40,268 counterfeit goods were seized, with the total value of USD 45,000.

In 2018, the Revenue Service’s Customs Department issued 119 orders to suspend products.  In 82 of these cases the rights holder and the owner of the products agreed to destroy the products, with a total value of USD 30,500.  In 16 cases, the rights holder filed a lawsuit, and in 21 cases the goods were released, either because it was not proven that the goods were counterfeit or the rights holder did not file a lawsuit.

Georgia is not listed in USTR’s Special 301 Report.  Similarly, Georgia is not included in the Notorious Markets List.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at:  http://www.wipo.int/directory/en/ .

For a list of lawyers in Georgia, please visit: https://ge.usembassy.gov/u-s-citizen-services/attorneys/.

6. Financial Sector

Capital Markets and Portfolio Investment

The National Bank of Georgia regulates the securities market.  All market participants submit their reports in line with international standards.  All listed companies must make public filings, which are then uploaded to 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: https://gse.ge/en/ 

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 the investment activity of foreign partners or to limit the ability of foreign partners to gain control over domestic enterprises.

The government and Central Bank (National Bank of Georgia) respect IMF Article VIII and impose no restrictions on payments and transfers in current international transactions.

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 government adopted a new law in 2018, that introduced an accumulative pension scheme, which became effective on January 1, 2019.  The government expects that that the new system will boost domestic capital market, as the pension funds will be invested within Georgia.

Money and Banking System

Banking is one of the fastest growing sectors in the Georgian economy.  The banking sector is well-regulated and capitalized despite regional and global challenges faced in many neighboring countries.  As of January 1, 2019, 15 commercial banks, including 14 foreign-controlled banks, made up the banking sector in Georgia, with 135 commercial bank branches and 794 service centers throughout the country.  In January 2019, the total assets of Georgian commercial banks were GEL38.8 billion (around USD14.4 billion).  As of early 2019, there were 17 insurance companies and 65 microfinance (MFI) organizations operating in Georgia.  The total assets of MFIs stood at USD 0.5 billion as of January 1, 2019. Two Georgian banks are listed on the London Stock Exchange:  TBC Bank (listed in 2014) and the Bank of Georgia (2006).

The National Bank of Georgia (NBG) is the central bank of Georgia, as defined by the Constitution.  The rights and obligations of the NBG as the central bank, the principles of its activity, and the guarantee of its independence are defined in the Organic Law of Georgia on the National Bank of Georgia.  The National Bank supervises the financial sector in order to facilitate the financial stability and transparency of the financial system, as well as to protect the rights of the sector’s consumers and investors.  Through the Financial Monitoring Service of Georgia, a separate legal entity, the NBG undertakes measures against illicit income legalization and the financing of terrorism. In addition, the NBG is the banker and fiscal agent of the government. (www.nbg.gov.ge  ).

The International Finance Corporation (IFC), the European Bank for Reconstruction and Development (EBRD), the U.S. Overseas Private Investment Corporation (OPIC), the Millennium Challenge Corporation (MCC), the 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.  Georgia’s two largest banks – TBC and Bank of Georgia – have correspondent banking relationships with the United States through Citibank, N.A.

Foreign Exchange and Remittances

Foreign Exchange

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.  Parliament’s 2011 adoption of the Act of Economic Freedom further reinforced this provision.

Under the U.S.-Georgia BIT, the Georgian government guarantees that all money 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.

The official exchange rate of the GEL is calculated based on transactions secured on the Interbank Foreign Exchange Market.  Interbank trading with foreign currencies is organized in an international trading system (Bloomberg). Taking into consideration secured transactions, the weighted average exchange rate of the GEL against the USD is calculated and announced as the official exchange rate for the next day.  The official exchange rate of the GEL against other foreign currencies is determined according to the rate on international markets or the issuer country’s domestic interbank currency market on the basis of cross-currency exchange rates. The cross-currency rates are acquired from the Reuters and Bloomberg information systems, and the corresponding webpages of central banks.  The information is automatically received, calculated, and disseminated from these systems.

Georgia has a floating exchange rate.  The National Bank of Georgia has said it does not intend to fix the exchange rate regime and does not generally intervene in the foreign exchange market, except under certain circumstances when the fluctuation has a high magnitude.

Remittance Policies

There is no difficulty in obtaining foreign currency, 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 GEL30,000 (around USD15,000).

Sovereign Wealth Funds

Georgia does not have a Sovereign Wealth Fund.

7. State-Owned Enterprises

After the fall of the Soviet Union, the new Georgian government privatized most state-owned enterprises (SOEs).  At the end of 2013, the major remaining SOEs were Georgian Railways, Georgian Oil and Gas Corporation (GOGC), Georgian State Electrosystem (GSE), Electricity System Commercial Operator (ESCO), and Enguri Hydropower 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.

During 2012, Georgian Railways, Georgian Oil and Gas Corporation (GOGC), Georgian State Electrosystem, and Electricity System Commercial Operator LLC assets were placed under the Partnership Fund, a state-run fund to facilitate foreign investment into new projects.  In addition, the fund controls 25 percent of shares in TELASI Electricity Distribution Company, but has stated its intention to sell those shares. The fund has not yet sold its shares, but still plans to do so: www.fund.ge  .

Despite state ownership, SOEs act under the general terms of the Entrepreneurial Law.  Georgian Railway and GOGC have supervisory boards, while GSE and ESCO do not. Major procedures and policies are described in the charters of respective SOEs.  Georgia particularly encourages its SOEs to adhere to the OECD’s Guidelines on Corporate Governance for SOEs.

The senior management of SOEs report to Supervisory Boards where they exist (GRW, GOGC); in other cases they report to the line ministries.  Governmental officials can be on the supervisory board of the SOEs and the Partnership Fund has five key governmental officials on its board.  SOEs explicitly are not obligated to consult with government officials before making business decisions, but informal consultations take place depending on the scale and importance of the issue.

To ensure the transparency and accountability of state business decisions and operations, regular outside audits are conducted and annual reports are published.  SOEs with more than 50 percent state ownership are obliged to follow the State Procurement Law and make procurements via public tenders. The Partnership Fund, GRW and GOGC are subject to valuation by international rating agencies.  There is no legal requirement for SOEs to publish an annual report or to submit their books for independent audit, but this is still practiced. In addition, GRW and GOGC are Eurobonds issuer companies and therefore are required to publish reports.

SOEs are subject to the same domestic accounting standards and rules and these standards are comparable to international financial reporting standards.  There are no SOEs that exercise delegated governmental powers.

Privatization Program

Georgia’s government has privatized most large SOEs.  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 following website: www.privatization.ge  .  Foreign investors are welcome to participate in privatization programs.  Further information is also available at a website maintained by the American Chamber of Commerce in Georgia at:  www.amcham.ge  .

8. Responsible Business Conduct

While the concept of Corporate Social Responsibility (CSR) is not highly developed in Georgia, it is growing.  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 CSR committee that works with member companies on CSR issues.  The Global Compact, a worldwide group of UN agencies, private businesses, and civil society groups promoting responsible corporate citizenship, is active in Georgia. The Eurasia Partnership Foundation launched a program on corporate social investment, promoting greater engagement of private companies in addressing Georgia’s development needs.

The Georgian government undertook an OECD CSR policy review in 2016, based on the OECD Policy Framework for Investment: (http://www.oecd.org/countries/georgia/  ).  The report states that Georgia engages regularly with the OECD.  It participates in the OECD Eurasia Competitiveness Program, which works with countries in the region to help unleash their economic and employment potential through boosting country and regional competitiveness, capturing more and better investment, and developing SMEs.  It participates in the OECD Anti-Corruption Network for Eastern Europe and Central Asia, which provides a regional forum for promotion of anti-corruption activities, exchange of information, elaboration of best practices and donor coordination. It is a member of the Task Force for the Implementation of the Environmental Action Program (EAP Task Force), which aims to address the heavy environmental legacy of the Soviet model of development.  Additionally, the Support for Improvement in Governance and Management (SIGMA) program, a joint initiative of the EU and the OECD, has provided assistance to Georgia since 2008, to strengthen public governance systems and public administration capacities. Georgia participates in the OECD Committee on Fiscal Affairs’ Base Erosion and Profit Sharing (BEPS) Project.

Georgia has extractive industries as it operates manganese, gold, and copper ores, but it is not a party to the Extractive Industries Transparency Initiative (EITI) and/or Voluntary Principles on Security and Human Rights.  Among the local tools that promote CSR principles and policies in such industries are commercial chambers, the Public Defender’s office, and trade unions.

9. Corruption

Articles 332-342 of the Criminal Code criminalize bribery.  Senior public officials must file financial disclosure forms which are posted online, and Georgian legislation provides for civil forfeiture of the 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 case’s circumstances. 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 eight 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 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).

Following its assessment of Georgia in June 2016, the OECD released a report in September 2016, that concluded Georgia had achieved remarkable progress in eliminating petty corruption in public administration and should now focus on combating high-level and complex corruption. The report commends Georgia’s mechanism for monitoring and evaluating the implementation of its Anti-Corruption Strategy and Action Plan as well as the important role given to civil society in this process.  It also welcomes the adoption of a new Law on Civil Service and recommends that the remaining legislation necessary for the implementation of civil service reforms is adopted without delay. The Civil Service Bureau and Human Resources units in state bodies should be strengthened in order to ensure the implementation of the required reforms. The report highlights Georgia’s good track record in prosecuting corruption crimes and in using modern methods to confiscate criminal proceeds.  It recommends that Georgia step up enforcement of corporate liability and the prosecution of foreign bribery in order to address the perception of alleged corruption among local government officials as well as at the political level. The full report is available at: http://www.oecd.org/corruption/anti-bribery/Georgia-Round-4-Monitoring-Report-ENG.pdf .

Since 2003, Georgia has significantly improved its ranking in Transparency International’s (TI) Corruption Perceptions Index (CPI) report.  In 2018, Georgia’s CPI score was 58, improving two points over its 2017 score, and it ranked 41st out of 180 countries surveyed in the Corruption Perception Index.  Georgia is ahead of its regional and Eastern European peers in this regard, as it outscores the Czech Republic, Malta, Croatia, Slovakia, Greece, Romania, Italy, Turkey, Russia, Armenia, and Azerbaijan.

While Georgia has been successful in fighting visible, low-level corruption, Georgia remains vulnerable to what Transparency International calls “elite” corruption:  high-level officials exploiting legal loopholes for personal enrichment, status, or retribution.  Although evidence is mostly anecdotal, this form of corruption, or the perception of its existence, has the potential to erode public and investor confidence in Georgia’s institutions and the investment environment. Institutions most vulnerable to corruption in Georgia include government at the federal and local level, parliament, the judiciary, political parties, law enforcement, media, and private business.  Corruption remains a potential problem in public procurement processes, public administration practices, and the judicial system due to unclear laws and ethical standards.

 Resources to Report Corruption

Government agency responsible for combating corruption:

Mr. Zurab Sanikidze
Head of Analytical Department
Ministry of Justice of Georgia
24 A Gorgasali Street, Tbilisi, Georgia
Email: zsanikidze@justice.gov.ge

Non-governmental organization:

Ms. Eka Gigauri
Director, Transparency International
26, Rustaveli Ave, 0108, Tbilisi, Georgia
Telephone: +995-32-292-14-03
Email: ekag@transparency.ge

10. Political and Security Environment

The United States established diplomatic relations with Georgia in 1992, following Georgia’s 1991 independence from the Soviet Union.  Since 1991, Georgia has made impressive progress fighting corruption, developing modern state institutions, and enhancing global security.  The United States is committed to helping Georgia deepen Euro-Atlantic ties and strengthen its democratic institutions. The United States supports Georgia’s sovereignty and territorial integrity within its internationally recognized borders, and does not recognize the Abkhazia and South Ossetia regions of Georgia, currently occupied by Russia, as independent.  The status of each region remains contested, and the Georgian central government does not have effective control over these areas.  In August 2008, tensions in the region of South Ossetia culminated in a brief war between Georgia and Russia. Russia invaded and occupied areas of undisputed Georgian territory.

While the separatist regions of South Ossetia and Abkhazia –which Russian troops and border guards have long occupied without Georgia’s consent – have declared independence, only Russia, Venezuela, Nicaragua, Syria, and Nauru recognize them as independent states.  Tensions still exist both inside the breakaway regions and near the administrative boundary lines (ABL), but other parts of Georgia, including Tbilisi, are not directly affected.  A number of attacks, criminal incidents, and kidnappings have occurred in and around the ABL. While none of the activity has been anti-American in nature, there is a high risk of travelers finding themselves in a wrong place/wrong time situation.  In addition, unexploded ordnance from previous conflicts poses a danger near the ABL of South Ossetia.

Violent street protests in Georgia are rare, though some smaller political skirmishes have occurred.  In recent years, police have fulfilled their duty to maintain order even in cases of unannounced protests.

11. Labor Policies and Practices

Georgia offers skilled and unskilled labor at attractive costs compared not only to Western European and American standards, but also to Eastern European standards.  Skilled labor availability in the engineering fields remains underdeveloped. The official unemployment rate was 12.7 percent in 2018, according to State Department of Statistics, but actual unemployment is considerably higher given significant underemployment in the working population, especially in rural regions where subsistence farmers are considered employed for statistical purposes and job creation has remained a particular challenge.  Some investment agreements between the Georgian government and private parties have included mandates for the contracting of local labor for positions below the management or executive level.

Georgia’s Labor Code defines the minimum age for employment (16), standard work hours (40 per week), and annual leave (24 calendar days).  Other wage and hour issues are to be agreed between the employer and employee. Amendments to the Labor Code in July 2013, defined grounds for termination; the code defines severance pay for an employee at the time of termination of a labor relation, including the payment term.  An employer is obliged to give compensation of not less than a month’s salary to an employee within thirty (30) days. An employer is obliged to give the dismissed employee a written description of the grounds for termination within seven days after an employee’s request. The labor code also prescribes rules for paying overtime labor (over 40 hours), which must be paid at an increased hourly rate.

The amended Labor Code specified essential terms for labor contracts, including:  the starting date and the duration of labor relations, working hours and holiday time, location of workplace, position and type of work, amount of salary and its payment, overtime work and its payment, the duration of paid and unpaid vacation and leave, and rules for granting leave.  The code states that the duration of a business day for an underage person (ages 16 to 18) should not exceed 36 hours per week. Regulations prohibit interference in union activities and discrimination of an employee due to union membership. The amendments also mandated that the government reestablish a labor inspectorate to ensure adherence to labor safety standards.  The labor inspection program under the Ministry of Labor, Health, and Social Affairs, employs 40 labor inspectors. On March 7, 2018, Parliament passed the Occupational Safety, and Health (OSH) Law that gives the government power to make unannounced inspections in some circumstances in companies operating among “hard, harmful, hazardous, and increased danger” occupations.

Employees are entitled to up to 183 days (six months) of paid maternity leave, which can be up to 24 months when combined with unpaid leave.  Leave taken for pregnancy, childbirth, childcare, and adoption of a newborn is subsidized by the state. An employer and employee may agree on additional compensation.  Under the Labor Code, non-competition clauses are permitted and sometimes used in contracts. This provision may remain in force even after the termination of labor relations.

The government adopted a new law in 2018, an accumulative pension scheme, which came into effect as of January 1, 2019.  The pension scheme is mandatory for legally employed people under 40; while for the self-employed and those above the age of 40 enrollment in the program is voluntary.  Each employee, employer, and the government must make a contribution of two percent of the employee’s gross income to an individual retirement account.  As for the self-employed, they will make a deposit of four percent of their income, and the state will match another two per cent.  Employees pay a flat 20 percent income tax.  The state social security system provides modest pension and maternity benefits.  The minimum monthly pension is GEL200 (USD75). The average monthly salary across the economy in Georgia in 2018 was GEL1,468 (around USD 545).  The minimum wage requirement for state sector employees is GEL115 (USD43) per month. Legislation on the official minimum wage in the private sector has not changed since the early 1990s and stands at GEL20 (USD8) per month, but is not applied in practice and is not being used for reference.

The law generally provides for the right of most workers, including government employees, to form and join independent unions, to legally strike, and to bargain collectively.  Employers are not obliged, however, to engage in collective bargaining, even if a trade union or a group of employees wishes to do so.  The law permits strikes only in cases of disputes where a collective agreement is already in place. While strikes are not limited in length, the law limits lockouts to 90 days. A court may determine the legality of a strike, and violators of strike rules can face up to two years in prison. Although the law prohibits employers from discriminating against union members or union-organizing activities in general terms, it does not explicitly require reinstatement of workers dismissed for union activity.  Certain categories of workers related to “human life and health,” as defined by the government, were not allowed to strike.  The International Labor Organization noted the government’s list of such services included some it did not believe constituted essential services directed related to human life and health. Workers generally exercised their right to strike in accordance with the law.

Georgia has ratified some ILO conventions, 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.

Information on labor related issues is also available in the State Department’s annual reports:

12. OPIC and Other Investment Insurance Programs

The Overseas Private Investment Corporation (OPIC) is the U.S. Government’s development finance institution.  OPIC finance and political risk insurance programs assist U.S. companies with investing overseas. Since 1993, OPIC has committed over USD600 million in financing and political risk insurance for more than 60 projects in Georgia.  OPIC investment in Georgia has focused on the following sectors: credit for small and medium-sized enterprises, and projects in the infrastructure, franchising, education, manufacturing, tourism, agriculture, and health care sectors.  Some recent examples of OPIC projects include a USD50 million loan commitment to finance the development, construction, and operation of a multifunctional general cargo, dry bulk, and container port terminal at the Port of Poti–Pace Terminal, a USD18 million loan commitment to finance a new Marriott hotel in Tbilisi, and a USD21 million loan commitment to an investment fund for investments in small and medium high-growth businesses in Georgia.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2018 $16,200  2018 $15.5 bln www.worldbank.org/en/country   
Foreign Direct Investment Host Country Statistical Source* USG or International Statistical Source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2018 $103.7 2018 N/A BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A N/A N/A BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data  
Total inbound stock of FDI as % host GDP N/A N/A  2018 108% UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx  

* Source for Host Country Data: GeoStat (Georgia National Statistics Office)


Table 3: Sources and Destination of FDI

Direct Investment From/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment N/A
Total Inward 17,266 100% Total Outward N/A 100%
Azerbaijan 3,760 21.8% N/A N/A N/A
UK 2,746 15.9% N/A N/A N/A
Netherlands 2,575 14.9% N/A N/A N/A
Turkey 1,140 6.6% N/A N/A N/A
China 644 3.7% N/A N/A N/A
“0” reflects amounts rounded to +/- USD 500,000.

Source: IMF Coordinated Direct Investment Survey


Table 4: Sources of Portfolio Investment

IMF Coordinated Portfolio Investment Survey data is not available for Georgia.

14. Contact for More Information

Mackenzie Rowe
Economic Unit Chief
U.S. Embassy Tbilisi, Georgia
Telephone: +995322277173
Email: RoweML2@state.gov

Investment Climate Statements
Edit Your Custom Report

01 / Select a Year

02 / Select Sections

03 / Select Countries You can add more than one country or area.

U.S. Department of State

The Lessons of 1989: Freedom and Our Future