1. Openness To, and Restrictions Upon, Foreign Investment
The government of Armenia officially welcomes foreign investment. The Ministry of Economy 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 position within the Eurasian Economic Union (EAEU). However, many businesses have identified challenges with Armenia’s investment climate in terms of the country’s small market (with a population of less than three million), limited consumer buying power, relative geographic isolation due to closed borders with Turkey and Azerbaijan, and concerns related to weaknesses in the rule of law.
Following a peaceful revolution in 2018 fueled in large measure by popular frustration with endemic corruption, Armenia’s government launched a high-profile anti-corruption campaign. The fight against corruption needs to be institutionalized in the long term, especially in critical areas such as the judiciary, tax and customs operations, and health, education, military, and law enforcement sectors. Foreign investors remain concerned about the rule of law, equal treatment, and ethical conduct by government officials. U.S companies have reported that the investment climate is tainted by a failure to enforce intellectual property rights. There have been concerns regarding the lack of an independent and strong judiciary, which undermines the government’s assurances of equal treatment and transparency and reduces access to effective recourse in instances of investment or commercial disputes. Representatives of U.S. entities have raised concerns about the quality of stakeholder consultation by the government with the private sector and government responsiveness in addressing concerns among the business community.
Government officials have publicly responded to private sector concerns about perceptions of slow movement in the government bureaucracy as a function of needing to guard against corruption-related risks. The Armenian National Interests Fund and Investment Support Center (Enterprise Armenia) are responsible for attracting and facilitating foreign direct investment.
There are generally very few restrictions on foreign ownership or control of commercial enterprises. There are some restrictions on foreign ownership within the media and commercial aviation sectors. Local incorporation is required to obtain a license for the provision of auditing services.
The Armenian government does not maintain investment screening mechanisms in general, and for foreign direct investment, in particular. Government approval is required to take advantage of certain tax and customs privileges, and foreign investors are subject to the same requirements as domestic investors where regulatory approvals may be involved.
An Armenian ecological NGO recently published an article claiming that many mines in Armenia do not have corporate social responsibility obligations, which are required by law. However, it was unclear from the article if the mines in question were still actively operating.
Link to conflicts listed on Environmental Justice Atlas, under “basic data,” select country: https://ejatlas.org/
In 2019, the U.N. Conference on Trade and Development (UNCTAD) published its first investment policy review for Armenia. The World Trade Organization (WTO) published a Trade Policy Review for Armenia in 2018.
Companies can register electronically here. 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 application can be completed in one day. 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. In 2019, the government launched an e-regulations platform that provides a step-by-step guide for business and investment procedures. The platform is available at https://armenia.eregulations.org/. According to the latest estimates, it takes four days to complete the company registration process in Armenia.
The Armenian government does not restrict domestic investors from investing abroad.
3. Legal Regime
The Armenian government increasingly makes efforts to uses transparent policies and laws to foster competition. Some contacts have reported that over the last few years the Armenian 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 enterprises. Armenia’s legislation on the protection of competition has been improved with clarifications regarding key concepts. There have been some procedural improvements for delivering conclusions and notifications of potential anti-competitive behavior via electronic means. However, companies regard the efforts of the State Commission for the Protection of Economic Competition (SCPEC) alone as insufficient 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. Numerous studies observe a continuing lack of contestability in local markets, many of which are dominated by a few incumbents. Banking supervision is relatively well developed and largely consistent with the Basel Core Principles. The Central Bank of Armenia (CBA) is the primary regulator of the financial sector and exercises oversight over banking, securities, insurance, and pensions. Armenia has adopted IFRS as the accounting standard for enterprises. 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, many of them holdovers from the Soviet period, generally do not impede investment activities. Nevertheless, investors consider bureaucratic procedures to be sometimes 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. 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 as insufficient to solicit substantive 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. The governmental https://www.aipa.am/en/ portal is a comprehensive platform for a range of services including registering intellectual property, opening a company, or applying for a construction permit. It also provides links to key regulatory institutions and laws and regulations. The government does not require environmental and social disclosures to help investors and consumers distinguish between high- and low-quality investments. Some regulations that affect Armenia are developed within the Eurasian Economic Commission, the executive body for the EAEU.
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 a range of 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 has already sent category “A”, “B,” and “C” notifications to the WTO.
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 other commercial matters are resolved by litigants in courts of general jurisdiction, which handle both civil and criminal cases. Judges that handle civil matters may be 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 who specialize in civil cases do not do so, increasing the unpredictability of court decisions in the eyes of investors.
Businesses tend to perceive that 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, a process that can take several months. Businesses have noted that many judges at courts of general jurisdiction may be 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 individual cases. In general, the government honors judgments from both arbitration proceedings and Armenian national courts.
Due to the nature and complexity of commercial and contractual issues and the caseload of judges who specialize in civil cases, many matters involving investment or commercial disputes take months or years to work their way through the courts. In addition, businesses have complained of the inefficiencies and institutional corruption of the courts. 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.
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. A Law on Public-Private Partnership (PPP), adopted in 2019, establishes a framework for the government to attract investment for projects focused on infrastructure. In 2021, the Law on PPP has been amended to introduce clear criteria for PPP project selection by the Government, as well as enabled investors to apply to the government with PPP project proposals.
The Investment Support Center (Enterprise 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 the Investment Support Center’s website.
SCPEC reviews transactions for competition-related concerns. Relevant laws, regulations, commission decisions, and more information can be found on SCPEC’s website. Concentrations, including mergers, acquisitions of shares or assets, amalgamations, and incorporations, are subject to ex ante control by SCPEC in accordance with the law. Whenever a concentration gives rise to concerns about harm to competition, including the creation or strengthening of a dominant position, SCPEC can prohibit such a transaction or impose certain remedies. Armenia’s Law on Protection of Economic Competition has been amended several times in recent years to bring Armenia’s competition framework into alignment with EAEU and CEPA requirements. The law was changed in 2020 to improve SCPEC’s capabilities to investigate anti-competitive behavior, in collaboration with Armenia’s investigative bodies, whereas before SCPEC had to rely primarily on document studies and request information from other state bodies.
Amendments to the competition law made in 2021 strengthened SCPEC’s preventive measures by allowing private sector representatives to obtain SCPEC’s advisory opinion on market concentration risks prior to a planned transaction or activity (formerly available only to state bodies). The most recent changes to competition law also defined the order to conduct sectoral market studies to identify potential competition violations and enlarged the scope of market transactions that can be assessed as market concentrations.
Under Armenian law, foreign investment 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.
According to the Law on Bankruptcy adopted in 2006, creditors and equity and contract holders (including foreign entities) have the right to participate and defend their interests in bankruptcy cases. Armenia decided with the passage of a new Judicial Code in 2018 to adopt a new, specialized bankruptcy court, which began 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. UNCTAD observes that Armenia’s framework for bankruptcy procedures needs improvement, adding that insolvency cases are expensive and almost always result in liquidation. Armenia amended its bankruptcy law in December 2019 to reduce the cost of bankruptcy proceedings. In addition, premiums have been set for bankruptcy managers for submitting financial recovery plans, as well as for the recovery of a bankrupt person, with the aim of raising rates of financial recovery. In 2020, the debt threshold to launch bankruptcy proceedings was raised to grant companies a greater ability to pay off debts rather than having their assets frozen.
4. Industrial Policies
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 in 2018, the Armenian government began exempting imports of capital investment-related goods from VAT payments at the border. In 2015, the Armenian government began exempting from customs duties investment-related imports of equipment and raw materials from non-EAEU member countries. VAT and customs duties exemptions are implemented by 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. As part of its response to COVID-19, the government launched several economic response and social support measures in 2020, some of them, including several support programs in the agriculture sector, are still active in 2022. In May 2022, the government had initiated changes in energy regulations to allow multiple usage points for solar panel installations. The Law on Licensing was amended in 2021 to simplify the licensing requirements for foreign companies to engage in 13 types of business activities in Armenia, including security/encashment and postal services, railroad and taxi services, urban development and engineering, and technical supervision of construction.
In 2011, Armenia adopted a Law on Free Economic Zones (FEZ), amended in 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 2013 to focus on high-tech industries, including 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. 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. Armenia has signaled an interest in developing logistics hubs, including one in Gyumri, to facilitate goods trade.
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.
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
Armenian law protects secured interests in property, both personal and real. Armenian law 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.
Armenia has a strong legislative and regulatory framework to protect intellectual property rights (IPR). Domestic legislation, including the 2006 Law on Copyright and Related Rights, provides for the protection of copyright with respect to 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 Economy is responsible for granting patents and overseeing other IPR-related matters. The collective management organization ARMAUTHOR manages authors’ economic rights. Trademarks and patents require state registration by the IPA, but copyright does not. There is no special trade secret law in Armenia, but the protection of trade secrets is covered by Armenia’s Civil Code. Formal registration is straightforward, the database of registered IPR is public, and applications to register IPR are published online for two months for comment by third parties. Armenia’s legislation has been harmonized with the World Trade Organization’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). In 2005, Armenia created an IPR Enforcement Unit in the Organized Crime Department of the Armenian Police, which acts only based on complaints from right holders and does not exercise ex-officio powers.
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 rests with the offended party. Law enforcement 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. UNCTAD reports that low awareness and poor monitoring of IPR violations harm the business climate.
A new Law on Copyright has been drafted and submitted for government’s approval. It includes provisions from new international agreements (Marrakesh and Beijing Treaties). A new Law on Patents and Law on Industrial Design entered into force in July 2021. The new Law on Patents strengthens the requirement for substantive examination before rights registration and introduces the concept of a short-term patent. The new Law on Industrial Design includes some procedural changes, including publishing applications for industrial designs and objects during the state registration process.
Armenia is not included in USTR’s Special 301 Report or Notorious Markets List. For additional information about national laws and points of contact at local IP offices, please WIPO’s country profiles at http://www.wipo.int/directory/en/.
6. Financial Sector
The banking system in Armenia is sound and well-regulated, but the financial sector is not highly developed, according to investors. Banking sector assets account for over 80 percent of total financial sector assets. Financial intermediation tends to be 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 Armenia Securities Exchange, though efforts to grow 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 country’s financial sector. 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.
Since 2020, the banking sector has withstood the twin shocks created by COVID-19 and the Nagorno-Karabakh conflict. Indicators of financial soundness, including capital adequacy and non-performing loan ratios, have remained broadly strong. The sector is well capitalized and liquid. Non-performing loans have ticked upward slightly from rates of around five percent of all loans. Dollarization, historically high for deposits and lending, has been falling in recent years. Seventeen commercial banks operate in Armenia. In 2021, all commercial banks in Armenia generated net profits and all had a positive return on average equity (the financial ratio that measures the performance of a bank based on its average shareholders’ equity outstanding). Total bank assets in Armenia at the end of 2021 were $14 billion; Armenia’s 2021 GDP was approximately $13.6 billion. As such, the ratio of banks’ total assets to GDP – approximately one-to-one – is average compared to peer countries. Concentration of banks’ assets is considered to be very low, with the three largest banks holding less than fifty percent of total banking sector assets. Market share of the largest five banks was 56 percent in 2021. Overall, Armenia’s banking sector is viewed by international financial institutions (IFIs) as relatively healthy.
The minimum capital requirement for banks is 30 billion AMD (around $59 million). 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, branch, or representative office, and subsidiaries of foreign banks are allowed to provide the same types of services as domestically owned banks.
The 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 the Central Bank of Armenia. Numerous other articles of legislation and supporting regulations provide for financial sector oversight and supervision.
Armenia does not have a sovereign wealth fund.
7. State-Owned Enterprises
Most of Armenia’s state-owned enterprises (SOEs) were privatized in the 1990s and early 2000s, but 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 Management 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 party to the WTO 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. The Department of State Property Management maintains a public list of state-owned closed joint stock companies on its website.
Most of Armenia’s SOEs 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 most recent law on privatization, the fifth, is the Law on the 2017-2020 Program for State Property Privatization, which lists 48 entities for privatization. The Department of State Property Management oversees the management of the state’s shares in entities slated for privatization. Details of the privatization program are available on the Department of State Property Management website.
8. Responsible Business Conduct
Comprehension of responsible business conduct (RBC) in Armenia is still developing, but several larger companies with foreign ownership or management have been operating under the concept in recent years. Initiatives, where they do exist, are primarily limited to corporate social responsibility efforts. However, RBC programs that do exist are viewed favorably. Some civil society groups and business associations are playing a more active role to promote RBC and develop awareness. 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. Specific areas for potential improvement cited by the local business community include improving internal and external auditing for firms, enhancing the powers of independent directors on company boards, and boosting shareholders’ rights. Armenia has outlined commitments to corporate governance reforms, including with regard to mandatory audit, accounting, and financial reporting, within the context of an ongoing Stand-By Arrangement with the International Monetary Fund.
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. Relevant implementing legislation, including for beneficial ownership disclosure, was adopted in 2019.
Armenia is not a signatory to the Montreux Document on Private Military and Security Companies, and no Armenian party is a member of the International Code of Conduct for Private Security Providers’ Association.
Domestic laws and regulations 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 investment.
Contact at a “watchdog” organization: Sona Ayvazyan Executive Director
Transparency International Anti-Corruption Center 12 Saryan Street Yerevan, Armenia +374 10 569 589 firstname.lastname@example.org
Following 2021 parliamentary elections that international monitors assessed as upholding fundamental rights and freedoms, the Armenian government’s commitment to eradicating corruption continues. Policy action and systemic change remain strong, and the government has pressed forward with legislative actions to establish investigative, prosecutorial and judicial anti-corruption institutions. The government’s anti-corruption agenda is outlined in a 2019–2022 strategy and action plan. These documents establish a new anti-corruption institutional framework with separate entities tasked with preventive, investigative, and prosecutorial functions as well as the Specialized Anti-Corruption Court. Established in 2019, the Corruption Prevention Commission (CPC) is the main entity responsible for preventing corruption and building integrity across government and society. CPC continued to make progress in the areas of asset declaration and integrity checks but has yet to fulfill its mandates for oversight of political party financing and prevention of conflicts of interest. The Anti-Corruption Committee, as an investigative body, was established in September 2021 to lead pre-trial criminal proceedings on alleged corruption crimes by carrying out both investigative and operative intelligence activities. The amendments to the Judicial Code on establishing the Specialized Anti-Corruption Court (SACC) were adopted on April 14, 2021, thus marking the completion of the creation of the government’s new institutional framework to fight corruption. The SACC is the first instance court, and the judges specialized in anti-corruption cases will sit at the Criminal Court of Appeals and the Anti-Corruption Chamber of the Cassation Court. As a follow-up to the passage of the Law “On Civil Forfeiture of Illegal Assets,” the department dealing with cases of civil forfeiture of illegal assets was established in September 2020 within the General Prosecutor’s Office.
Civil society actors are divided in their opinions about the effectiveness of the government’s anti-corruption measures. Some assess the implementation of the anti-corruption program is on track, while others contend that the work of law enforcement and judiciary on corruption cases is not effective enough, citing already opened criminal cases on corruption and embezzlement that do not reach completion.
Corruption remains an obstacle to U.S. investment in Armenia, particularly as it relates to critical areas such as the justice system and concerns related to the rule of law, enforcement of existing legislation and regulations, and equal treatment. 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. Judges who specialize in civil cases are still widely perceived by the public to be corrupt and under the influence of former authorities. The effectiveness and independence of newly formed anti-corruption institutions remains to be seen. Some individuals have voiced concerns around whether certain judicial representatives and law enforcement leaders have been selected objectively. The potential for politically motivated, outside influence on these anti-corruption institutions, as well as law enforcement bodies and prosecutorial services, also remains a concern.
Transparency International released its Corruption Perception Index (CPI) 2021, ranking Armenia 58th among 180 countries. According to the report, Armenia’s CPI score in 2021 remained unchanged compared to 2020 (score of 49). Armenia’s rating is higher than the CPI global average of 43, indicating Armenia’s public sector was perceived by experts and businesspeople to be less corrupt than the global average. Among 19 countries in Eastern Europe and Central Asia, Armenia ranked the second highest. The report cited Armenia as among the countries which has registered significant progress in the last decade. (In his December 2021 Summit for Democracy speech, Prime Minister Pashinyan noted Armenia aims to rise from a score of 49 to 60 in Transparency International’s Corruption Perception Index by 2026.)
Various laws 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, and local levels often acquire direct, partial, or indirect control over private firms. Such control is often exercised through a hidden partner or majority ownership of fully private parent companies. This involvement can occur through close relatives and friends. According to foreign investors, these practices reinforce protectionism, hinder competition, and undermine the image of the government as a facilitator of private sector growth. Because of the historically strong interconnectedness of the political and economic spheres, Armenia has often struggled to introduce legislation to encourage strict ethical codes of conduct and the prevention of bribery in business transactions. In 2016, Armenia adopted legislation on criminal penalties for illicit enrichment and noncompliance or fraud in filing declarations.
Armenia is a member of the UN Convention against Corruption. 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. Armenia is also a member of the global Open Government Partnership initiative.
No specific law exists to protect NGOs dealing with anti-corruption investigations.
10. Political and Security Environment
Armenia has a history of political demonstrations, most of which have remained peaceful. There have been some instances, however, of violent confrontations between police and protesters, or of attacks on government officials. The last major violent protest occurred in November 2020 following the release of a tripartite ceasefire statement by Armenia, Azerbaijan, and Russia, which brought an end to the fall 2020 intensive fighting in and around NK. Individuals and groups displeased with the announcement stormed government buildings and destroyed property. Protestors assaulted the speaker of parliament in the streets of Yerevan and broke into the prime minister’s residence. Since the release of the tripartite statement, groups opposed to the government have organized regular marches and rallies in Yerevan that have remained largely peaceful and caused minimal disruption to ordinary business. Pro-government groups have also organized peaceful rallies, although less frequently. Throughout Armenia, protestors use road blockades as a common tactic to register discontent, most often with the government over community-level issues. The disruption created by such road blockades is usually minimal. Protests have not resulted in any damage to projects of installations of international businesses. It is unlikely that civil disturbances, should they occur, would be directed against U.S. businesses or the U.S. community.
During 44 days of intensive fighting from September 27 to November 10 in 2020 involving Azerbaijan, Armenia, and Armenia-supported separatists, significant casualties and atrocities were reported by all sides. After Azerbaijan, with Turkish support, reestablished control over four surrounding territories controlled by separatists since 1994, a Russian-brokered ceasefire arrangement announced by Azerbaijan and Armenia on November 9 resulted in the peaceful transfer of control over three additional territories to Azerbaijan, as well as the introduction of Russian peacekeepers to the region. The ceasefire has largely held, with frequent but localized violations. Tensions remain high, particularly along the international border, which has not been fully demarcated.
Russian forces have played a role in controlling access along highways near the border and into the Nagorno-Karabakh region from Armenia and Azerbaijan. The Azerbaijani government has suspended or threatened to suspend the operations of U.S. companies in Azerbaijan whose products or services are provided in the area of Nagorno-Karabakh currently under the administration of the Russian peacekeepers and has banned the entry into Azerbaijan of some persons who have visited NK. The U.S. government is unable to provide emergency services to U.S. citizens in and around NK as access is restricted.
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. Nearly 100 percent of Armenia’s adult population is literate. According to official data, enrollment in secondary school is over 90 percent, and enrollment in senior school (essentially equivalent to American high school) is approximately 85 percent. Despite this, official statistics indicate a high rate of unemployment, at around 20 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 training. 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 in the formal sector 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 unfavorable economic conditions; collective bargaining is not common in Armenia. Experts observe that the right to strike, although enshrined in the constitution, is difficult to realize due to mediation and voting requirements. Labor unions are generally inactive with the exception of those connected with the mining and chemical industries, and a few small grassroot movements to create unions in the fields of education and public health have sprung up over the last few years. Labor laws cannot be waived to retain or attract investment.
The current Labor Code is considered to be largely consistent with international standards. The law sets a standard 40-hour workweek, 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 FEZs 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 receiving qualification trainings 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.
Since 2019, Armenia’s Health and Labor Inspection Body (HLIB) has gradually begun to exercise more robust enforcement of labor legislation and fulfill its oversight function. Its full mandate came into force in July 2021. Throughout 2021, the government continued to adopt inspection checklists and risk assessment methodologies in various sectors to enable HLIB to carry out inspections. HLIB also continued to add new inspectors throughout the year.
Amendments to the Labor Code 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 68,000 (approximately $135) 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.
1. Openness To, and Restrictions Upon, Foreign Investment
The Azerbaijani government actively seeks foreign direct 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 Agency (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. In June 2021, AmCham Azerbaijan organized a press conference for publicly presenting subsequent publication of its White Paper on observations and recommendations for improving Azerbaijan’s business climate. The 2021 White Paper covered issues in several fields, including taxation, customs procedures, finance, and information and communications technology.
Foreigners are allowed to register business entities by opening a fully owned subsidiary, acquiring shares of an existing company, or by 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 tax authorities.
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. 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.
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, or a WTO Trade Policy Review.
Azerbaijani law requires all companies operating in the country to register with the tax authorities. Without formal registration, a company may not maintain a bank account or clear goods through customs. Registration takes approximately three days for commercial organizations. Companies may e-register at http://taxes.gov.az.
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, as well as gas pipeline networks in Greece, Albania, and Italy as part of the Southern Gas Corridor that transports Azerbaijani gas to European markets. The government does not restrict domestic investors from investing overseas.
3. Legal Regime
Azerbaijan’s 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 remains opaque. Private sector associations do not play a significant role in regulatory processes. The draft legislation process typically does not include public consultations and draft legislation text is rarely made available for public comment. The government has in some cases engaged business organizations, such as 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 choose between reporting based on IFRS or IFRS-SME standards, which are specially designed for large and medium enterprises. Small and micro enterprises can choose 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 subjected to repeated tax audits, requests for prepayment of taxes, and court-imposed fines for violations of the tax code. These allegations have markedly decreased since 2017.
On October 19, 2015, Azerbaijan suspended inspections of entrepreneurs for two years, but inspections still may occur if a complaint is lodged. This suspension was subsequently extended through January 1, 2023. Medicine quality and safety, taxes, customs, financial markets, food safety, fire safety, construction and safe usage of hazardous facilities, radioactive substances, and mining fields 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 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.
Azerbaijan has held 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. In February 2020, Azerbaijani President Ilham Aliyev made public remarks outlining Azerbaijan’s “cautious” approach to the WTO, saying that “the time [had] not come” for Azerbaijan’s membership. Currently, Azerbaijan is negotiating bilateral market access with 19 economies.
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.
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.
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 to 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 have not been publicized as of April 2022.
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.
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. By a decision of the Cabinet of Ministers, requisition 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. In one recent case U.S. citizen property owners were pressured by local authorities to relinquish property rights at rates perceived to be well below fair market value. The case has not yet been tested in the courts and the owners maintained their property, resisting government communications regarding an imminent takeover and indicating that the attempted expropriation was not being lawfully carried out under the terms of the Bilateral Investment Treaty or Azerbaijani law. The Azerbaijani government has not shown any pattern of discriminating against U.S. persons by way of direct expropriations.
Azerbaijan’s Bankruptcy Law applies only to legal entities and entrepreneurs, not to private individuals. Either a debtor facing insolvency or any creditor may initiate bankruptcy proceedings. In general, the legislation focuses on liquidation procedures. The bankruptcy law in Azerbaijan is underdeveloped, which restricts private sector 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.
4. Industrial Policies
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 and economic diversification efforts. 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.
The Law of Azerbaijan “On the Use of Renewable Energy Sources in the Production of Electricity”, was signed into law by the President and published on July 14, 2021, together with a Presidential Decree on the implementation of the Renewable Energy Law. The Renewable Energy Law addresses guaranteed tariffs, foreign investment and other support mechanisms, such as scientific research and the promotion of active consumers. The law prescribes two methods for selecting investors for the generation of electricity using renewable energy sources (RES): auctions and direct negotiations.
If the selection of an investor is conducted in the form of an auction, the winner of the auction shall be the lowest bidder in relation to the purchase price for electricity subject to guaranteed offtake. The Ministry of Energy is the authorized body to organize RES auctions. In addition, the government is considering other incentives for investors in RES projects in Azerbaijan, including guaranteed offtake, guaranteed connection, priority in transmission and distribution and long-term land leases.
A government decree established the Alat Free Economic Zone (AFEZ) 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 AFEZ in June 2018. The law exempts all businesses in the AFEZ from taxes and customs; charges the AFEZ’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 free trade area. While the legal framework is in place and initial construction has begun, the AFEZ is not yet fully operational.
The Ministry of Digital Development and Transport has discussed plans to create other special economic zones, including a petrochemical complex and regional innovation zones to boost telecommunications sector development. Currently, legal entities and individuals involved in entrepreneurial activities in one of five state-designated industrial or technological parks are exempt from income tax, property tax, land tax, and VAT on imported machinery and equipment until 2023.
The Azerbaijani government does not mandate local employment, although some 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, facilitate technology transfer, 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
International organizations, foreign citizens, and foreign legal entities may not own land or be granted a purchase option on a lease, but they 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 recordkeeping and titling in rural areas, it is often difficult to determine definitively who owns a 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 legal structure covering intellectual property protections in Azerbaijan is relatively strong, but experts and businesspeople 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, including in government ministries. U.S. companies routinely list weak IPR protections as a key concern. With strong Embassy encouragement, the government is taking steps to increase the use of licensed software in government institutions, but progress thus far has been uneven.
IPR 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 included in USTR’s Notorious Markets List. 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
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 market to enter or exit sizeable positions.The Central Bank assumed control over all financial regulation in January 2020, following disbandment of a formerly independent regulator. 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. Foreign investors are permitted to obtain credit on the local market, but smaller companies and firms without an established credit history often struggle to obtain loans on reasonable commercial terms. Limited access to capital remains a barrier to development, particularly for small and medium enterprises.
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. Subsequent reforms have improved overall sector stability. 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 January 1, 2022, 26 banks were registered in Azerbaijan, including 12 banks with foreign capital and two state-owned banks. These banks employ 20,601 people and have a combined 480 branches and 2,920 ATMs nationwide. Total banking sector assets stood at approximately USD 22.3 billion as of January 2022, with the top five banks holding almost 60 percent of this amount.
In December 2019, Azerbaijan carried out a banking management reform that gave the Central Bank of Azerbaijan control over banks and credit institutions, closing the Chamber for Control over Financial Markets, which had held regulatory powers following Azerbaijan’s 2014/2015 economic crisis and resulting currency devaluations. Concurrently, the Central Bank announced “recovery of the banking sector” would be one of the main challenges it would tackle in 2020. The Central Bank closed four insolvent banks (Atabank, AGBank, NBCBank, and Amrah Bank) in April/May 2020, bringing the number of banks in the country down from 30 to 26. Only six banks are able to conduct correspondent banking transactions with the United States.
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.
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. While its main statutory focus is investing in assets outside of the country, since it was established in 1999 SOFAZ has financed several socially beneficial projects in Azerbaijan related to infrastructure, housing, energy, and education. The government’s newly adopted fiscal rule places limits on pro-cyclical spending, with the aim of increasing hydrocarbon revenue savings. SOFAZ publishes an annual report which it submits for independent audit. The fund’s assets totaled USD 45 billion as of January 1, 2022.
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 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 is also responsible for negotiating PSAs with all foreign partners for hydrocarbon development. 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 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.
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 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. While there are no immediate plans to privatize large SOEs, Azerbaijan is moving 21 major government-owned companies to a new state holding company tasked to improve efficiency and corporate governance as well as prepare them for possible privatization. However, the government has no plans to sell stakes in state companies in 2022, including in state oil company SOCAR.
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.
AmCham established a Corporate Social Responsibility (CSR) Committee in October 2011 to encourage companies to embrace social responsibility through activities and dialogue with relevant stakeholders. AmCham also published a corporate social responsibility 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 corporate social responsibility 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 but has not met since 2019 and does not conform with EITI standards.
Azerbaijan has signed and ratified the Paris Climate Agreement. In its 2017 Nationally Determined Contributions, the country outlined climate change mitigation actions in several sectors and set a goal to reduce carbon emissions by 35 percent (from 1990 levels) by 2030.
Azerbaijan has signed and ratified the Paris Climate Agreement. In its 2017 Nationally Determined Contributions, the country outlined climate change mitigation actions in several sectors and set a goal to reduce carbon emissions by 35 percent (from 1990 levels) by 2030.
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 NGOs 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 does not effectively or consistently enforce anticorruption laws and regulations. Azerbaijan has made modest progress in implementing a 2005 Anti-corruption 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 were aimed partially at reducing corruption in tax administration and received praise from the local business community.
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.
10. Political and Security Environment
On multiple occasions in 2019 and 2020, authorities selectively blocked mobile and fixed-line internet access, temporarily restricted access to foreign media and social networking sites and imposed blocks on virtual private network (VPN) services, apparently in response to political protests and as part of national restrictions during and after Azerbaijan’s armed conflict with Armenian forces in September-November 2020. Radio Free Europe/Radio Liberty are among the sites permanently blocked in Azerbaijan. The increase in frequency and lack of transparency regarding internet disruptions raise serious concerns about future Azerbaijani government efforts to control access to information in ways that impede foreign business interests.
There have been no known acts of political violence against U.S. businesses or assets, nor against any foreign owned entity. It is unlikely that civil disturbances, should they occur, would be directed against U.S. businesses or the U.S. community.
During 44 days of intensive fighting from September 27 to November 10, 2020, involving Azerbaijan, Armenia, and Armenia-supported separatists, significant casualties and atrocities were reported by all sides. After Azerbaijan, with Turkish support, reestablished control over four surrounding territories controlled by separatists since 1994, a Russian-brokered ceasefire arrangement announced by Azerbaijan and Armenia on November 9 resulted in the peaceful transfer of control over three additional territories to Azerbaijan, as well as the introduction of Russian peacekeepers to the region. The ceasefire has largely held, but tensions remain high, particularly along the international border, which has not been fully demarcated.
Russian forces have played a role in controlling access along highways near the border and into the Nagorno-Karabakh region from Armenia and Azerbaijan. The Azerbaijani government has suspended or threatened to suspend the operations of U.S. companies in Azerbaijan whose products or services are provided in the area of Nagorno-Karabakh in which Russian peacekeepers are currently deployed and has banned the entry into Azerbaijan of some persons who have visited Nagorno-Karabakh. The U.S. government is unable to provide emergency services to U.S. citizens in and around Nagorno-Karabakh as access is restricted.
11. Labor Policies and Practices
The 1999 Labor Code regulates overall labor relations and recognizes international labor rights. The work week generally is 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 of the government. 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. While a number of workers still work without contracts in Azerbaijan’s informal economy, recent tax and customs reforms have provided incentives for individuals to register their employment to benefit from state financial support. Under national law, 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 35 percent of the Azerbaijani population works in agriculture, although this sector only contributes around 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. The average monthly wage as of January 2022 was AZN 766 (USD 451), and the official minimum wage increased in 2022 to AZN 300 (USD 176) per month, compared to the previous level of AZN 250 (USD 147) per month. The Ministry of Labor and Social Protection took measures to avoid unjustified dismissals, redundancies of employees in a public sector, as well as to preserve salaries of the employees sent on vacation and ensured expansion of unemployment insurance benefits, and the establishment of a proactive support mechanism in this area. Part of the reform program was to expand services to ensure employment, ensure transparency and prevent corruption. The number of legalized labor contracts increased by 30 percent during 2017-2021.
In Azerbaijan, the COVID-19 crisis has deepened socio-economic vulnerabilities and widened disparities across regions, firm sizes, and between the formal and informal sides of the economy. To respond to the pandemic, a Presidential Decree outlining the emergency response package of measures was signed in March 2020, and the COVID-19 Response Action Plan was agreed by the Cabinet of Ministers in April 2020. The government extended and scaled up existing support programs and designed new schemes. The initial size of the support package in 2020 was AZN 3.3 billion (around 4.8 per cent of GDP), later increased to include additional tax benefits and a one-off extension of social assistance. The package included social protection measures such as direct cash transfers and an expansion of unemployment insurance to support the unemployed and informal workers, more targeted social assistance to support low-income households and vulnerable groups, the creation of additional public jobs, and energy and education subsidies. The main interventions to support businesses were cash payments to entrepreneurs and employers in COVID-19-affected areas, interest rate subsidies and guarantees for both new and old loans in affected sectors, as well as support to the transport sector and subsidized government rents.
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
Host Country Gross Domestic Product (GDP) ($M USD)
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)
* 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, Thousands)
Inward Direct Investment
Outward Direct Investment
“0” reflects amounts rounded to +/- USD 500,000.
*Source: Central Bank of Azerbaijan
1. Openness To, and Restrictions Upon, Foreign 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 foreign direct 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). Enterprise Georgia also operated the website for foreign investors: www.investingeorgia.org.
Georgia’s Investors Council, an advisory body operating since 2015, aims to promote 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).
Georgia does not have comprehensive mechanisms in place for screening foreign investment and Georgia does not have FDI thresholds. Governmental reviews of investment projects in Georgia are ad hoc. The Ministry of Economy and Sustainable Development’s Investment Policy and Support Department is responsible for analyzing proposed foreign investment projects at the request of state agencies. Georgia’s State Security Service, National Security Council (NSC), Revenue Service, Ministry of Regional Development and Infrastructure, National Bank, Ministry of Finance, Ministry of Justice, Ministry of Internal Affairs, and Ministry of Defense all have potential equities and could play a role in reviewing a foreign transaction or investment proposal for national security concerns in certain circumstances. Georgia’s NSC is currently drafting critical infrastructure protection legislation that is linked to NSC’s investment screening efforts.
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. The government requires licenses for activities that affect public health, national security, and the financial sector: 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. For investment projects requiring licenses or permits, the relevant government ministries and agencies have the right to review the project for national security concerns. 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 must approve the license or permit for issuance. In the real estate sector, only Georgian nationals or companies, with some exceptions, may own agricultural land.
Per Georgian law, it is illegal to undertake any type of economic activity in Abkhazia or South Ossetia if such activities require permits, licenses, or registration in accordance with Georgian legislation. Laws also ban mineral exploration, money transfers, and international transit via Abkhazia or South Ossetia. 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.
Registering a business in Georgia is relatively quick and streamlined. Registration takes one day to complete through Georgia’s single window registration process. The National Agency of Public Registry (NAPR) (www.napr.gov.ge – webpage is in Georgian only), located in Public Service Halls (PSH) under the Ministry of Justice of Georgia, carries out company registration. The PSH website (https://www.psh.gov.ge/https://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 verification of the amount or existence of charter capital. A company is not required to complete a separate tax registration; the initial registration includes both the revenue service and national business registration. The following information is required to register a business in Georgia: bio data for 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 $30) for a regular registration and GEL200 (around $60) for an expedited registration, plus a GEL1 bank processing fee. The owner must also 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.
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.
According to Georgia’s central bank, the net international investment position of Georgia, which measures the difference between external financial assets and liabilities of a country, totaled negative $26.3 billion as of December 31, 2021.
3. Legal Regime
Georgia’s legal, regulatory, and accounting systems are transparent and consistent with international norms, and the Georgian government has committed to achieving even greater transparency and simplicity of regulations for these systems.
In Georgia, the lawmaking process involves Parliament (drafting and consideration) and the President (signing). Under Georgia’s constitution, the following subjects have the right to initiate legislation: the President, the government, members of Parliament, a committee, faction, the representative bodies of the Autonomous Republics of Abkhazia and Adjara, and groups of at least 30,000 voters.
A subject who does not have the right to launch a legislative initiative does, however, has the right to submit a “legislative proposal,” which should be a well-reasoned address to Parliament advocating for the adoption of a new law or of changes/amendments to existing legislation. According to Article 150 of the Law on Parliament, the following can submit a legislative proposal: citizens of Georgia, state bodies (except the establishments of the executive branch of government), the representative and executive bodies of local self-government, political and public unions registered in Georgia according to the established rule, and other legal entities.
There are no informal regulatory processes managed by nongovernmental organizations or private sector associations, except their entitlement for participating in the law-making process prescribed by the above law. Publicly listed companies are required to prepare financial statements in accordance with IFRS – International Financial Reporting Standards. Draft bills or regulations are available for public comment. NGOs, professional associations, and business chambers actively participate in public hearings on legislation. 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 the webpage of the Parliament of Georgia, www.parliament.ge.
General oversight of the executive branch is vested in the parliament. The new Constitution, which entered into force in December 2018, and subsequently adopted new Parliamentary Rules and Procedures, aims to strengthen Parliament’s oversight role. Under their strengthened roles, public officials are obliged to respond to Parliament’s questions. Government institutions also submit annual reports. However, local watchdog organizations continue to raise concerns that one party controls all branches of government, undermining checks and balances. Independent agencies, such as the State Audit Office the Ombudsman’s office (including the Business Ombudsman), and business associations also provide an oversight function. Georgia maintains an active civil society that frequently reports on government activities.
Georgia has six types of taxes: corporate profit tax (0% or 15%; no corporate income tax on retained and reinvested profit; profit tax applies only to distributed earnings), value added tax (VAT; 18%), property tax (up to 1%), personal income tax (20%), excise (on few selected goods), and import tax (0%, 5% or 12%). Dividend income tax is five percent. There are no dividend or capital gains taxes for publicly traded equities (a free float in excess of 25 percent). Georgia imposes 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.
Detailed information on the types and rates of taxes applicable to businesses and individuals, as well as a payment calendar, is available on the Georgia Revenue Service website: http://www.rs.ge/.
In 2019, the Georgian government introduced new regulations to simplify the tax regime and streamline processes for small businesses. The new legislation decreased turnover tax from five percent to one percent for small businesses and defined small business as those with less than GEL 500,000 ($160,000) annual turnover, a fivefold increase from the previous GEL 100,000 ($30,000) threshold. In addition, the new regulations allow small businesses to pay taxes by the end of month, instead of requiring advance payments. For medium and large businesses, the reform introduced an automatic system of VAT returns and activated a special system whereby entrepreneurs can pay VAT returns in five to seven business days by filling out an electronic application.
Enterprise Georgia operates the Business Service Center in Tbilisi, which provides domestic and foreign businesses with information on doing business in Georgia. The Business Service Center facilitates an online chat tool for interested individuals (http://www.enterprisegeorgia.gov.ge/en/SERVICE-CENTER). Additionally, the Investor’s Council provides an opportunity for the private sector to discuss legislative reforms, economic development plans, and actions to spur economic growth with the government. 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, 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 government websites including 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.
Georgia’s Association Agreement of 2014 with the European Union introduced a preferential trade regime, the DCFTA, which increased market access between the EU and Georgia based on better-aligned regulations. The agreement is designed to introduce European standards gradually 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. The latest progress report, adopted by the European Parliament on September 17, 2020, confirmed Georgia’s continued progress on the implementation of the agreement.
Georgia has been a WTO member since 2000 and consistently meets requirements and obligations included in the Agreement on Trade Related Investment Measures. Since WTO accession, Georgia has not introduced any Technical Barriers to Trade. In January 2016, Georgia ratified the WTO Trade Facilitation Agreement.
Georgia’s legal system is based on civil law and the country has a three-tiered court system. The first tier consists of 25 trial courts throughout the country that hear criminal, civil, and administrative cases. 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 several different laws and codes (Tax Code, Law on Entrepreneurs, and Law on Insolvency) that regulate commercial activity in Georgia. There are no specialized courts, such as a commercial court, to handle commercial disputes; however, in Tbilisi there are specialized court panels that handle high value disputes, including some commercial disputes. The Ministry of Justice’s Public Service Halls provide property registration.
The lack of independence of Georgia’s judiciary and political inference in the judicial system, especially in high-profile cases, is troubling. Concerns regarding the integrity of the judicial appointment process and the capacity of the courts to deliver quality outcomes continue to affect investor confidence in the court system. The Government’s hesitance to conduct a full assessment of the judicial system to ensure full compliance with Venice Commission recommendations further undermines faith in the independence of the judiciary. OECD’s 2020 IPR notes the Georgian government’s efforts to strengthen the judiciary to improve the country’s business and investment environment under its Georgia 2020 strategy. However, the report highlights that “the existing framework for adjudication of civil disputes in Georgian courts nonetheless continues to suffer from several significant problems despite the reforms. Foremost of these are persisting concerns with the independence, accountability, and capacity of the High Council of Justice and the judiciary. Many investors perceive Georgia’s court processes as slow, inefficient, lacking in transparency, and hampered by a lack of technical expertise. All these issues affect public trust in the judicial system. They are among the most pressing concerns for investors in their assessments of the investment climate in Georgia.” The full OECD report is available at https://www.oecd.org/countries/georgia/oecd-investment-policy-reviews-georgia-0d33d7b7-en.htm. Regulations and enforcement actions are appealable and are adjudicated in the national court system.
The U.S.-Georgia Bilateral Investment Treaty (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.
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 (www.competition.ge). Competition Agency decisions can be appealed at court. Georgia has also signed several international agreements containing competition provisions, including the EU-Georgia Association Agreement (AA). The DCFTA within the AA goes further than most FTAs, with regulatory alignment, the elimination of non-tariff barriers, and binding rules on investments and services.
In July 2020, Georgia adopted the Law of Georgia on the Introduction of Anti-dumping Measures in Trade that became effective January 1, 2021. The aim of the law is to protect local industry from price dumping on imports. The Law establishes the basic conditions and rules for the introduction of anti-dumping measures to be implemented when importing goods via the customs territory of Georgia.
In 2022, the Georgian Parliament adopted a bill on Consumer Protection, which is an essential component among the obligations under the EU-Georgia Association Agreement; it establishes rules for consumer protection and prohibits “unfair commercial practices” that violate the values of “trust and good faith.” The National Competition Agency is responsible for executing the Consumer Protection law.
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, except for certain property rights (see Section 5). 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, establishes a mechanism for valuation and payment of compensation, and provides 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 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 because 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 there were cases of property transfers that lacked transparency and allegedly were implemented under coercion.
On 1 April 2021, a new insolvency law, “On Rehabilitation and Collective Satisfaction of Creditors,” entered into force in Georgia. The main aim of the law is to protect the interests of the creditors, promote mechanisms for rehabilitation, strengthen the role of the courts during the insolvency proceedings, and separate and clarify the rights and responsibilities of individuals involved in the process and the creation of fair regulations. This law has eased the process for struggling businesses to return to growth.
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, in a creditor’s meeting, may suspend enforcement of 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 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 Debt Registry of the National Agency of the Public Register is Georgia’s credit monitoring authority.
4. Industrial Policies
The Georgian government has created several tools to support investment in Georgia’s economy. The JSC Partnership Fund is a state-owned investment fund, established in 2011. The fund owns the largest Georgian state-owned enterprises operating in the transportation, energy, and infrastructure sectors. The Fund’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 government launched the Georgian Co-Investment Fund (GCF) to promote foreign and domestic investments. According to the government, the GCF is a $6 billion private investment fund with a 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).
Due to the absence of customs and import tariffs in Georgia, investors can take advantage of access to over 2.3 billion potential customers without customs tariffs. In order to support Georgia’s position as a regional hub for trade and logistics, the government invests heavily to develop infrastructure. Some recent incentives that the Georgian Government has put in place include the following:
International Company Status: “International Company Status” grants IT sector companies a preferential tax regime, which qualifies them for reduced rates of Corporate Tax (5%), Dividends Tax (0%), and Personal Income Tax (5%). More information is available at https://www.rs.ge/LegalEntityPreferentialTax-en?cat=10&tab=1.
The government’s “Produce in Georgia” program is another tool for jointly financing foreign investment under which investors establish limited liability companies in Georgia. This program includes co-financing of the annual interest rate on loans issued by commercial banks, as well as the transfer of state property (both land and buildings) to private ownership at a symbolic price – 1 GEL (approximately $0.30), with a certain investment commitment. 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 Enterprise Georgia, the National Agency of State Property, and the Agriculture and Rural Development Agency, the project provides access to finance, access to real property, and technical assistant to entrepreneurs.
The National Agency of State Property oversees the Physical Infrastructure Transfer Component, the free-of-charge transfer of government-owned real property to an entrepreneur under certain investment obligations.
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.
Incentives for Construction of RES Capacities: Under Article 5 of the Energy Law, one of the general principles of organization, regulation and monitoring of energy activities is promotion of the generation of electricity from renewable energy sources and of the combined generation of electricity and heat. Moreover, Article 7 of the Energy Law states The State Energy Policy shall provide measures aimed at the use of renewable energy sources for the generation of electricity and consumption of electricity produced from such sources, as well as any incentives and support mechanisms applied for the promotion of the use of renewable energy sources.
The new energy legislation promotes domestic and foreign investment in rehabilitation and improving industries such as coal, natural gas, water supply, and using local hydropower and other sustainable and alternative tools. It also emphasizes the value of small power plants with an installed capacity of 15 megawatts (MW) for the effective and environmentally friendly use of renewable energy resources.
Resolution No 403 of the Government of Georgia, On the approval of Support Scheme (Hydroelectric Power Plants) of the Generation and Use energy from Renewable Energy Sources Energy Support and Use Scheme from Renewable Sources, was adopted in 2020 and amended in 2021 (https://matsne.gov.ge/ka/document/view/4914589?publication=0, in Georgian). This resolution outlines support schemes for construction and operation of power plants which are initiated by the private developer and have installed capacity more than 5 MW. These schemes include the following:
A 10-year support period, for eight months during each year after the commissioning starts, according to the applicable law;
Premium tariff of up to 1.5 cents (in USD) per kilowatt-hour (kW/h);
Premium tariff paid in the form of adding to the wholesale price recorded at the organized electricity market for the relevant hour, only in the cases when during the support period for the relevant hour generated by the Power Plant and at the organized electricity market sold wholesale electricity price is lower than 5.5 cents (in USD) per kW/h;
In an organized electricity market, at the relevant hour, the difference between the wholesale price and 5.5 cents (in USD) is lower than 1.5 cents (in USD), the premium tariff is calculated in accordance with the difference.
Low labor costs contribute to the attractiveness of Georgia as a foreign investment destination. Georgia is also increasingly recognized as a regional transportation hub that links Asia and Europe. Georgia’s free trade regimes provide easy access for companies to export goods produced in Georgia to foreign markets. In some cases, foreign investors can benefit from these agreements by producing goods that target these markets.
In June 2007, the Parliament of Georgia adopted the Law on Free Industrial Zones, which defines 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 the zone, but in 2017, CEFC China Energy Company Limited purchased 75 percent of shares, with the Georgian government holding the remaining 25 percent. Poti FIZ (www.potifreezone.ge), a
300-hectare area, benefits from its proximity to the Poti Sea Port.
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 $2 billion.
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, electric vehicles, and beverages (www.hualingfiz.ge).
The Tbilisi Free Zone (TFZ) in Tbilisi 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 requirements are not a condition of establishing, maintaining, or expanding an investment, but the government has imposed requirements on a case-by-case basis in some privatizations of large state assets, such as commitments to maintain employment levels or to make additional investments within a specified time period. Performance requirements such as 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.
Georgia’s Law on Promotion and Guarantees of Investment Activity prohibits setting the required minimum number of Georgian citizens to be elected or appointed in leading bodies of enterprises.
The government does not follow a forced localization policy though recent legislative changes have created difficulties in acquiring residence permits for foreign employees working for VAT exempt entities. 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.
Customer and business-related data transfer is not restricted in Georgia, neither within nor outside the country, unless it concerns personal or national security matters, which are protected by the law.
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 (www.data.gov.ge).
5. Protection of Property Rights
Processes to register property are streamlined, transparent, and take one day to process 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 determined that agricultural land can only be owned by the state, self-governing entities, citizens of Georgia, or a group of Georgian citizens. The Constitution also states that exclusions may be specified in organic law, which requires votes from at least two-thirds of Parliament to pass.
Mortgages and liens are registered through the public registry, and information can be obtained from www.napr.gov.ge.
The government has taken multiple steps to regulate land titling, including facilitating simplified procedures, free registration campaigns, and mediation services. Unclear or unregistered titling, which persists, bears the potential to hamper investment projects.
Property ownership cannot revert to other owners when legally purchased property stays unoccupied.
Georgia acceded to the World Trade Organization (WTO) and the Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement in 2000. The Ministry of Economy and Sustainable Development is responsible for WTO compliance.
The legal framework for protection of intellectual property in Georgia is approximated to international standards. Six laws regulate intellectual property rights (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 Georgian Parliament adopted amendments to the IP legislation in 2017, which entered into force in 2018. These new amendments were intended to further harmonize Georgia’s IP legislation with the EU.
The National Intellectual Property Center of Georgia (Sakpatenti) provides legal protection for intellectual property objects 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. Sakpatenti is an active and engaged partner of the United States in educating the public on IPR issues. Sakpatenti coordinates the government’s approach to IPR enforcement under the Interagency Coordination Council for IPR Enforcement. This Council is an efficient platform for government institutions to exchange their views on IPR enforcement issues. Georgia is improving enforcement, but some problems persist, including the widespread use of unlicensed software and the availability of pirated video and audio recordings and other unlicensed content available online. The U.S. government Commercial Law Development Program continues to provide assistance to Sakpatenti and other government entities to build capacity to deal with IPR-related issues effectively.
The Revenue Service, which is part of the Ministry of Finance, is responsible for enforcing the protection of IPR holders that are listed in the Register of Intellectual Property Subject-Matters of the relevant service. 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 completed, the Revenue Service is liable to suspend counterfeit goods. According to the law, the goods may be suspended for no longer than 10 working days, which may be extended by the Revenue Service for another 10 working days. The Law of Georgia on Border Measures Related to Intellectual Property provides for the possibility of destruction of counterfeit goods based on a court decision.
With the aim of further improving domestic legislation and its harmonization with international standards, Sakpatenti has engaged in adjusting laws or amendments to existing legislation regulating intellectual property. For example, in 2020, Sakpatenti prepared two draft laws – “On Amendments to the Law of Georgia on Appellations of Origin of Goods and Geographical Indications” and “On Amendments to the Patent Law of Georgia” to harmonize Georgian legislation with that of the EU.
Georgia participates in the EU-Georgia Intellectual Property Project, a 2020-2023 EU-funded project that supports Sakpatenti by focusing on specific capacity-building activities, training, technical and legal support, research and data collection, awareness raising, and information sharing.
Georgian legislation covers various types of liability for intellectual property right infringement. The Code of Civil Procedure of Georgia provides for the court’s authority to take provisional measures necessary for securing full and proper execution of the court’s decision.
In 2021, the Ministry of Finance’s Investigation Service initiated 13 cases due to violation of Articles 196 (Unlawful use of trademark or other commercial designations) of the Criminal Code of Georgia. As a result, 62,326 counterfeit items were seized, with the total value of around $80,000. In addition, the Customs Department issued 267 orders on the suspension of goods. Out of these, in 254 cases the right holder and the owner of the goods agreed on the destruction of the goods, with a combined value of approximately $18,300. In 2021, the Tax Monitoring Department of LEPL Revenue Service revealed 20 cases of trademark infringements. The government seized 412 counterfeit items, with the total value of $1,500.
Despite strong legal structure, enforcement of IP generally remains challenging. Civil cases on IPR infringement have not reflected the full extent of the situation regarding counterfeiting and piracy in Georgia, as the private sector has often not used available legal mechanisms for IPR enforcement. 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.
Georgia is not listed in USTR’s Special 301 Report or 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/.
6. Financial Sector
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 investors to evaluate a company’s financial standing. The Georgian securities market includes the following licensed participants: two Stock Exchanges, a Central Securities Depository, eight brokerage companies, and three independent securities registrars. (https://www.nbg.gov.ge/index.php?m=487&lng=eng)
The Georgian Stock Exchange (GSE, https://gse.ge/en/) 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 U.S. 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.
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) follow IMF Article VIII and do not impose any 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 offer 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 pension scheme is mandatory for legally employed people under 40. For the self-employed and those above the age of 40, enrolment in the program is voluntary. The pension savings system applies to Georgian citizens, foreign citizens living in Georgia with permanent residency in the country, and stateless persons who are employed or self-employed and receive an income.
Banking is one of the fastest growing sectors in the Georgian economy. As of March 1, 2022, Georgia’s banking sector consists of 14 commercial banks, including 13 foreign-controlled banks, with 154 commercial bank branches and 756 service centers throughout the country. In March 2022, Georgian commercial banks held GEL 61.7 billion (around $19.6 billion) in total assets. The private sector Credit-to-GDP ratio reached 78%, one of the highest among regional peers. As of early 2022, there were 18 insurance companies and 38 microfinance (MFI) organizations operating in Georgia. MFIs held GEL 1.6 billion ($528 million) in total assets as of January 1, 2022. The two largest Georgian banks are listed on the London Stock Exchange: TBC Bank (listed in 2014) and the Bank of Georgia (2006).
The banking system is stable, well capitalized, liquid, and profitable. The financial sector maintains solid capital and liquidity buffers against potential threats. The share of non-performing loans (5.2% as of January 1, 2022) is declining. As outlined by the 2021 IMF Financial System Stability Assessment (https://www.imf.org/en/Publications/CR/Issues/2021/09/17/Georgia-Financial-System-Stability-Assessment-465911), Georgia’s banking supervision practices and regulations have significantly progressed and are in line with Basel/EU directives. Despite substantial progress, dollarization remains the main challenge for the system, given that around half of the credit portfolio is disbursed in foreign currency, largely to unhedged borrowers.
The National Bank of Georgia (NBG, www.nbg.gov.ge) is Georgia’s central bank, 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 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 terrorism financing. In addition, the NBG is the government’s banker and fiscal agent.
The IMF, credit rating agencies, and other international organizations positively assess the NBG’s macroeconomic framework and inflation targeting regime. In June 2021, the NBG was awarded the Transparency Award by the international publisher Central Banking. The award highlighted the improved communications on monetary policy, financial stability, consumer protection and financial education. The NBG also was nominated for the Risk Manager Award of 2021 by the same group. In 2021, Global Finance named Koba Gvenetadze, Governor of the NBG, among the Best Central Bankers for the fourth time.
The International Finance Corporation (IFC), the European Bank for Reconstruction and Development (EBRD), the U.S. International Development Finance Corporation (DFC), the Asian Development Bank (ABD), and other international development agencies have a variety of lending programs making 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, and some other banks have a relationship with JP Morgan. However, correspondent banking remains a major challenge for small and medium size banks.
Georgia does not restrict foreigners from establishing a bank account in Georgia. Several local banks are subsidiaries of international banking groups and subject to the same regulations.
The NBG and Georgian financial institutions act fully in accordance with the financial sanctions imposed by the United States and others on the Russian Federation. Compliance with international financial sanctions is systematically checked during the onsite inspections of financial institutions.
In 2020, the Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MoneyVal) approved the Fifth Round Evaluation Report of Georgia. The report assessed the NBG’s supervisory process and practices as having effective outcomes. The report also notes that financial institutions generally have a good understanding of risks and are part of large banking or other financial groups that have put in place sophisticated internal systems and controls which effectively mitigate money laundering and terrorism financing risks.
Georgia does not have a Sovereign Wealth Fund.
7. State-Owned Enterprises
After the fall of the Soviet Union, the Georgian government privatized most state-owned enterprises (SOEs). At the end of 2013, Georgian Railways (GRW), Georgian Oil and Gas Corporation (GOGC), Georgian State Electrosystem (GSE), Electricity System Commercial Operator (ESCO), and Enguri Hydropower plant were the major remaining SOEs. 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, GOGC, GSE, and ESCO’s assets were placed under the Partnership Fund (fund.ge), a state-run fund to facilitate foreign investment into new projects. The fund also controlled 25 percent of shares in the TELASI Electricity Distribution Company, which it sold to private investors in 2020.
Despite state ownership, SOEs act under the general terms of the Entrepreneurial Law. Georgian Railways and GOGC have supervisory boards, while GSE and ESCO do not. The SOEs’ individual charters describe their procedures and policies. Georgia 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 (e.g., GRW, GOGC); in other cases, they report to 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, SOEs have regular outside audits and publish annual reports. SOEs with more than 50 percent state ownership are obliged to follow the State Procurement Law and make procurements via public tender. The Partnership Fund, GRW, and GOGC are subject to valuation by international rating agencies. There is no legal requirement for SOEs to publish annual report or to submit their books for independent audit, but this is done in practice. In addition, GRW and GOGC are Eurobond issuer companies and therefore are required to publish reports. SOEs are subject to the same domestic accounting standards and rules. These standards are comparable to international financial reporting standards. No SOEs exercise delegated governmental powers.
In early 2021, the government announced it would start reforming state-owned enterprises and create a new council to develop a strategy to be implemented in 2021-2024. The goal of the reform is to bring the management of SOEs closer to higher standards of corporate governance. The first state-owned enterprise to undergo reforms will be the Georgian State Electrosystem (GSE), an electricity transmission system operator.
Georgia’s government has privatized most large SOEs. Successful privatization projects include major assets in energy generation and distribution, telecommunications, water utilities, port facilities, and real estate sectors. A list of entities available to be privatized can be found at eauction.ge. Foreign investors are welcome to participate in privatization programs. Additional information is also available the American Chamber of Commerce in Georgia website: www.amcham.ge.
In 2019, the government offered mining deposits for privatization in addition to other state-owned assets through the 100 Investment Offers for Business initiative. Within the initiative, the government selected mineral resource deposits from various regions to sell at e-auctions. The mineral deposits include gold and copper-polymetallic, ore, bentonite clay, volcanic slag, peat, diatomite, tuff breccia, zeolite-containing tuff, basalt, marble, limestone, underground fresh water, and carbonated mineral water. Mining license prices vary and depend on the type of mineral resource and its price.
National Agency of State Property, a Legal Entity of Public Law under the Ministry of Economy and Sustainable Development, manages the privatization of state property, the transfer of the right of use, and the management of SOEs. The agency’s website (http://nasp.gov.ge/) contains links to electronic auctions, proposals for investments, and other relevant information.
8. Responsible Business Conduct
While the concept of Corporate Social Responsibility (CSR) is a relatively new phenomenon 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 to promote greater private company engagement in addressing Georgia’s development needs.
Georgia participates in the OECD Eurasia Competitiveness Program, which works with countries in the region to unleash their economic and employment potential. Georgia 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 on best practices, and donor coordination. Georgia 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 development model. Additionally, the Support for Improvement in Governance and Management (SIGMA) program, a joint initiative of the EU and the OECD, has assisted 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’s civil society and workers associations are active in responding to human rights, labor rights, consumer protection, environmental protection, and other concerns, as well as new laws and regulations that intend to protect or have potential adverse effects on citizens.
Georgia is not a party to the Extractive Industries Transparency Initiative and/or Voluntary Principles on Security and Human Rights despite extractive manganese, gold, and copper ore industries operating in Georgia. Among the local tools promoting CSR principles and policies in such industries are commercial chambers, the Public Defender’s office, the Business Ombudsman under the Prime Minister’s Office, sectoral trade unions, and Georgia’s Trade Union Confederation.
Georgia has ratified The Montreux Document on Private Military and Security Companies.
Georgia is committed to reducing its domestic total greenhouse gas emissions by 35% below its 1990 level by 2030. According to Georgian law on the generation and consumption of energy from renewable sources, Georgia’s renewable energy consumption should reach 35% of its total energy consumption by 2030. There are currently no sector- or technology-specific renewable energy targets.
Georgia’s 2030 Climate Change Strategy and 2021-2023 Action Plan includes the following:
By 2030, total greenhouse gas emissions should be lower than 29.25 metric tons of carbon dioxide equivalent; and
Target reduction of emissions in the energy generation and transmission sector is 15%, industry sector is 5%, and transportation sector is 15% by 2030, compared to business-as-usual.
The Law on Public Private Partnerships was enacted in August 2018 in Georgia and provides a legal framework for cooperation between public and private partners, providing flexibility and exemptions for the energy sector.
Support for renewable energy measures include the following:
A Feed-In Premium (FiP) support scheme for all renewable energy installations higher than 5MW. Initially, the policy support scheme only applied to hydropower plants. An amendment at the beginning of 2021 made the FiP support scheme applicable to all renewable energy projects higher than 5 MW, not just hydropower plants.
A net-metering mechanism for self-consumption has been implemented in Georgia since 2016. In summer 2020, the installation limit of the net metering mechanism for micro wind, solar, hydro and/or other renewable energy generators increased from 100 kW to 500 kW.
Policy support for electric vehicles through tax reliefs and provision of free charging.
Georgia has laws, regulations, and penalties to combat corruption. Georgia criminalizes bribery under the Criminal Code of Georgia. Chapter XXXIX of the Criminal Code, titled as Official Misconduct, among other crime, covers many corruption-related offenses committed by public servants including bribery, abuse of official powers, accepting a prohibited gift, forgery of official documentation, etc. Senior public officials must file financial disclosure forms, which are publicly available online, and Georgian legislation provides for the civil forfeiture of undocumented assets of public officials who are charged with corruption-related offenses.
Penalties for accepting a bribe start at six years in prison and can extend to 15 years, depending on the circumstances. Penalties for giving a bribe can include a fine, correctional labor, house arrest, or prison sentence up to three years. In aggravated circumstances, when a bribe is given to commit an illegal act, the penalty is from four to seven years. When bribe-giving is committed by the organized group, the sentence is imprisonment for 5 to 8 years. Abuse of authority by public servants are criminal acts under Articles 332 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. The laws extend to family members of officials.
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.
Following its assessment of Georgia in June 2016, the OECD released a report concluding that 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 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 to implement civil service reforms is adopted without delay. The report notes that the Civil Service Bureau and Human Resources units in state entities should be strengthened 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 increase enforcement of corporate liability and the prosecution of foreign bribery to address the perception of corruption among local government officials. The full report is available at: http://www.oecd.org/corruption/anti-bribery/Georgia-Round-4-Monitoring-Report-ENG.pdf.
In April 2021, GRECO released its Second Compliance Report of Fourth Evaluation Round on Georgia, which deals with corruption prevention with regards to members of parliament (MPs), judges, and prosecutors. According to the report, since 2019 Georgia implemented two additional recommendations – totaling seven of 16 recommendations – for preventing corruption among MPs, judges, and prosecutors. The Compliance Report said Georgia satisfactorily implemented measures to enforce objective criteria for the recruitment and promotion of prosecutors, ensured further updates of the “Code of Ethics for Employees of the Prosecution Service of Georgia,” and introduced measures for enforcing the rules. Out of the nine outstanding recommendations, two remain unaddressed while seven have been partly implemented. The sixteen recommendations were adopted in 2016, in the Fourth Round Evaluation Report on Georgia, by the Council of Europe’s anti-corruption monitoring body.
Since 2003, Georgia has significantly improved its ranking in Transparency International’s (TI) Corruption Perceptions Index (CPI) report. TI ranked Georgia 45th out of 180 countries in the 2021 edition of its CPI.
While Georgia has been successful in fighting visible, low-level corruption, Georgia remains vulnerable to what TI calls “elite” corruption: high-level officials exploiting legal loopholes for personal enrichment, status, or retribution. Although the 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. Corruption remains a potential problem in public procurement processes, public administration practices, and the judicial system due to unclear laws and ethical standards.
Government agencies responsible for combating corruption:
Anti-Corruption Agency at the State Security Service of Georgia Address: 72, Vazha Pshavela Ave.
Prosecutor’s Office of Georgia Mr. Giorgi Gochashvili, Head of Division of Criminal Prosecution of Corruption Crimes
Address: 24, Gorgasali Street, Tbilisi
Government’s Administration of Georgia Secretariat of the Anti-Corruption Council
Address: 7 Ingorokva Street, Tbilisi
Tel: +995-32-299-09-00 (27 00)
Business Ombudsman’s Office Mr. Otar Danelia Ombudsman
Address: 7, Ingorokva street
Hotline: +995 32 2 282828
The United States established diplomatic relations with Georgia in 1992, following Georgia’s independence from the Soviet Union in 1991. Since independence, 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.
In August 2008, tensions in the Georgian region of South Ossetia culminated in a brief war between Russia and Georgia. Russia invaded and occupied the Georgian territories of Abkhazia and South Ossetia. Russia continues to occupy these regions – nearly 20 percent of Georgia’s territory – and the central government in Tbilisi does not have effective control over these areas. 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 as independent. Only Russia, Nauru, Nicaragua, Syria, and Venezuela recognize them as independent states. Tensions still exist both inside the occupied territories and near the administrative boundary lines (ABLs). A Russian military build-up along the South Ossetia ABL dramatically escalated tensions in August 2019. In addition, Russian “border” guards regularly patrol the ABLs and have increasingly detained people trying to cross the ABLs. Several attacks, criminal incidents, and kidnappings have occurred near the ABLs as well. While none of the activity has been anti-American in nature, there is a high risk of travelers finding themselves in a wrong place, at the wrong time, situation. In addition, unexploded ordnance from previous conflicts poses a danger near the South Ossetia ABL. However, other parts of Georgia, including Tbilisi, are not directly affected.
Per Georgian law, it is illegal to undertake any type of economic activity in Abkhazia or South Ossetia if such activities require permits, licenses, or registration in accordance with Georgian legislation. Laws also ban mineral exploration, money transfers, and international transit via Abkhazia or South Ossetia.
While violent street protests are generally uncommon, there have been some recent episodes of politically motivated violence and civil disturbance. In July 2021 far-right groups violently rioted throughout Tbilisi against a planned Tbilisi Pride parade, destroying the offices of two NGOs and attacking over 50 journalists and individuals thought to be members of the LGBTQI+ community. In June 2019, when protesters attempted to enter Parliament during an anti-Russian and anti-government protest, some people were injured with some suffering severe eye injuries due to police use of rubber bullets. Generally, police have fulfilled their duty to maintain order even in cases of unannounced protests. However, in some instances the police have allowed a permissive environment for far-right violence.
In 2021, Turkish company ENKA cancelled its $800 million Namakhvani hydropower plant (HPP), citing violation of the terms of the contract by the Georgian government and force majeure. The decision was preceded by months-long protests – including blocking access to the construction area – by local activists claiming the project was launched without sufficient research and thorough consideration of the risks. Following a series of protests, Georgian authorities started renegotiating with ENKA to improve the terms of the contract and involved protestors in these conversations. However, the protesting groups withdrew from the process, finally leading to the Namakhvani HPP cancelation.
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 field remains underdeveloped. The official unemployment rate was 19 percent by the end of 2021. Georgia’s National Statistics Agency changed its methodology of calculating unemployment in 2020, and subsistence farmers are no longer categorized as employed. The change considerably increased the official unemployment rate. 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). The law allows for other wage and hour issues to be agreed between the employer and employee. The law defines the grounds for termination and severance pay for an employee at the time of termination, including the payment term. An employer is obliged to give compensation of not less than one month’s salary to an employee within thirty (30) days. Additionally, 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 Labor Code specifies essential terms for labor contracts, including the start 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 Labor Code amendments mandate the government to reestablish a labor inspectorate to ensure adherence to labor safety standards. In 2018, Parliament passed the Occupational Safety, and Health Law, giving the government power to make unannounced inspections, in some circumstances, at companies operating among “hard, harmful, hazardous, and increased danger” occupations. Subsequent amendments that passed in September 2020 and came into force January 1, 2021, allowed unannounced inspections across all sectors of the economy.
Employees are entitled to up to 183 days (six months) of paid maternity leave, which can last up to 24 months when combined with unpaid leave. The state subsidizes leave taken for pregnancy, childbirth, childcare, and adoption of a newborn. An employer and employee may agree on additional compensation. The Labor Code permits non-competition clauses in contracts; this provision may remain in force even after the termination of employment.
The government adopted a new law in 2018 establishing an accumulative pension scheme, which came into effect as of January 1, 2019. The pension is mandatory for legally employed persons 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 each contribute 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 a modest pension and maternity benefits. The minimum monthly pension is GEL 250 ($80). The average monthly salary across the economy by the end of 2021 was GEL 1,464 (around $470).
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. 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 directly 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.