Policies Toward Foreign Direct Investment

The Armenian Government officially welcomes foreign investment; the country has achieved respectable rankings on some global indices measuring the business climate. Armenia’s investment and trade policy is relatively open; foreign companies are entitled by law to the same treatment as Armenian companies (national treatment). Armenia has strong human capital and a well-educated population, particularly in the Science, Technology, Engineering and Math (STEM) fields. The high-tech and information technology (IT) sectors have particularly attracted foreign investment. Many international companies have established branches or subsidiaries in Armenia to take advantage of the country’s pool of qualified specialists and trade preferences with Russia and the Eurasian Economic Union. However, Armenia’s investment climate poses several challenges as a result of its small market (Armenia has a population of less than three million), its relative geographic isolation due to closed borders with Turkey and Azerbaijan, its per capita gross national income (GNI) of about USD 3,800, and high levels of corruption.

Major sectors of Armenia’s economy are controlled by well-connected businessmen enjoying government-protected market dominance, creating barriers to new entrants and preventing a level playing field for all businesses. The Armenian government has also on occasion deployed government agencies, including the tax and customs services, for political motives. Foreign businesses, especially SMEs, may encounter non-transparent tax and customs procedures that increase costs and business risks. The open legislative framework and the government’s visible effort to attract more foreign investment are complicated by instances of unfair tender / procurement processes and practices and preferential treatment. The investment climate is also tainted by the failure to properly enforce or to selectively enforce intellectual property rights. The lack of an independent and strong judiciary has undermined the government’s assurances of equal treatment and transparency and reduced businesses’ recourse in the instances of contract or tax disputes. However, in 2011, the Republic of Armenia became the first country among the Commonwealth of Independent States (CIS) to accede to the WTO’s Government Procurement Agreement (GPA 1994). Armenia joined the GPA 2012 version in June 2015. Currently, the Armenian Government has submitted to Parliament a new draft Law on Foreign Investment, which would strengthen protections for foreign investors.

The Development Foundation of Armenia (DFA) is Armenia’s national authority for investment and export promotion; the DFA provides services and information to foreign investors related to the business climate, investment opportunities and legislation. It also provides support for investors’ visits as well as a liaison with governmental institutions. More information about the legislation, procedures and registrations can be obtained from the DFA (E-mail: info@dfa.am; www.dfa.am ; https://www.facebook.com/DFArmenia/ ). The Armenian Government established the Center for Strategic Initiatives to advance essential reforms, increase exports, and attract long-term and sustainable foreign investments into Armenia through public-private partnership (http://www.reforms.am/en ). Investment projects promoted by the Armenian Government could be found at http://investmentprojects.am/ .

Limits on Foreign Control and Right to Private Ownership and Establishment

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

The Armenian government does not screen foreign direct investments.

Other Investment Policy Reviews

Armenia has not undergone Investment Policy Reviews by either the Organization of Economic Cooperation and Development (OECD) or U.N Conference on Trade and Development (UNCTAD). The World Trade Organization (WTO) conducted a Trade Policy Review in 2010, which can be found at http://www.wto.org/english/tratop_e/tpr_e/tp328_e.htm .

Business Facilitation

Armenia has traditionally ranked well in the World Bank’s Ease of Doing Business report. Companies can register businesses electronically at http://www.e-register.am/en/ . This single window service was launched in 2011 and allows individual entrepreneurs and companies to obtain name reservation, business registration, and tax identification services at a single location and at the same time. The legal time limit for the process is two working days, but the application may be dealt with in one day. However, an electronic signature is needed in order to be able to register online. Foreign citizens can obtain an e-signature and more detailed information from the e-signature portal at https://www.ekeng.am/en/ . A foreign company is not required to seek investment approval. Companies in Armenia are free to open and maintain bank accounts in foreign currency and there are no minimum capital requirements for foreign or domestic companies.

Outward Investment

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

Basic provisions regulating American investments are set by the U.S.-Armenia Bilateral Investment Treaty (BIT), which has been in force since 1996, and by the 1994 Law on Foreign Investment. The U.S.-Armenia BIT sets forth conditions for investors of each party to be no less favorable than for national investors (national treatment) or for investors from any third state (most favored nation) and also provides the option of international arbitration in the case of investment disputes. Armenia has BITs in force with 36 countries: the U.S., Argentina, Austria, Belarus, Belgium, Bulgaria, Canada, China, Cyprus, Egypt, Finland, France, Georgia, Germany, Greece, India, Iran, Italy, Israel, Kuwait, Kyrgyzstan, Latvia, Lebanon, Lithuania, The Netherlands, Luxembourg, Romania, Russia, Spain, Sweden, Switzerland, Syria, Ukraine, the United Kingdom, Uruguay, and Vietnam. According to the U.N. Conference on Trade and Development (UNCTAD), Armenia has also signed BITs with Iraq, Jordan, Kazakhstan, Qatar, Tajikistan, Turkmenistan, and United Arab Emirates, but these agreements have not yet entered into force. Armenia is a signatory of the CIS Multilateral Convention on the Protection of Investor Rights.

Armenia became a member of the Russia-led Eurasian Economic Union (EAEU) in January 2015, together with Russia, Belarus, Kyrgyzstan and Kazakhstan. As an EAEU member, Armenia is currently engaged in negotiations on temporary free trade agreement between the EAEU and Iran, as well as a trade agreement between the EAEU and China. Armenia also entered into a Comprehensive and Enhanced Partnership Agreement with the EU in November 2017; while it will not affect customs or tax rates, it will, over time, align Armenia’s regulatory system and standards with that of the EU’s, as much as is possible under Armenia’s EAEU obligations.

There is no free trade agreement between the U.S and Armenia; however, the U.S. includes Armenia in its Generalized System of Preferences program. Also, in May 2015, Armenia signed a Trade and Investment Framework Agreement (TIFA) with the United States. The TIFA established a United States-Armenia Council on Trade and Investment to discuss bilateral trade and investment and related issues and examined ways to strengthen the trade and investment relationship between the two countries.

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

According to Armenia’s new Tax Code, starting from January 1, 2017 foreign individual investors will pay a higher dividend tax of 10 percent compared to 5 percent dividend tax for local individual investors, which became effective in January 2018.

Transparency of the Regulatory System

The Armenian regulatory system is still not implemented in a sufficiently transparent manner. A small cadre of businesses dominates particular sectors and utilize government assistance to suppress full competition. Despite some improvements in customs with regard to import procedures and the application of reference prices, the inconsistent application of tax, customs (especially with respect to valuation and classification), and regulatory rules (especially in the area of trade) undermines fair competition and adds risk for less politically-connected businesses, particularly small-and medium-sized businesses and new market entrants. Armenia’s legislation on protection of competition has recently been improved with clear definitions of limitation of competition and newly introduced concepts on price manipulation, imposition of fines on economic agents as a percentage of revenue vs. previous fixed amounts, and penalties for state officials for fixing tenders. However, the State Commission for the Protection of Economic Competition (SCPEC) lacks investigative powers and operates based on document studies, often provided by competing claimants. The efforts of the SCPEC alone are not enough to ensure a level playing field because of the roles of other state institutions, which affect competition, like courts, tax and customs agencies, and law enforcement agencies. Banking supervision is relatively well developed and largely consistent with the Basel Core Principles. The Central Bank of Armenia is the primary regulator for all segments of the financial sector, including banking, securities, insurance and pensions.

Safety and health requirements, most of them holdovers from the Soviet period, generally do not impede investment activities. Bureaucratic procedures can nevertheless be burdensome, and discretionary decisions by individual officials still provide opportunities for petty corruption. Despite persistent problems with corrupt officials, both local and foreign businesses assert that a sound knowledge of tax and customs law and regulations enables business owners to deflect the majority of unlawful bribe requests, which is easier for big companies than for SMEs. The unified online platform for publishing draft legislation was launched in March 2017, available at https://www.e-draft.am/ . The proposed legislation is available for everybody to view and the registered users can send feedback and get a summary of comments on draft legislation. However, the time period devoted to public comments in Armenia is often not sufficient for proper feedback. The results of consultations have not been reported by the government in the past.

International Regulatory Considerations

Armenia is a member of the Eurasian Economic Union (EAEU) and adheres to the technical regulations adopted within the EAEU. Armenia is also a member of the WTO and the Armenian Government notifies draft technical regulations to the WTO Committee on Technical Barriers to Trade. Armenia is a signatory to the Trade Facilitation Agreement and had already implemented all category A requirements. Notification on implementation of category B requirements will be submitted to the WTO in April 2018 and the Armenian Government is working with international donors on potential assistance for the implementation of category C requirements.

Legal System and Judicial Independence

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

Many Armenian courts suffer from low levels of efficiency, independence, and professionalism, creating a need to strengthen the Armenian judiciary. Very often in cases when additional forensic expertise is requested during the judicial proceedings, the court may suspend the process until the forensic opinion is received, which may take months. Litigants are wary of turning to Armenian courts for redress because of the lack of judicial independence. Many judges at the court of general jurisdiction are reluctant to make a decision without getting advice from high court judges. Thus, decisions may be influenced by factors other than the law and merits of the cases. In general, the government honors judgments from both arbitration and Armenian national courts.

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

Laws and Regulations on Foreign Direct Investment

The Development Foundation of Armenia (DFA) is Armenia’s national authority for investment, and export promotion that provides services and information to foreign investors on business climate, investment opportunities and the legislation, support for investors’ visits, as well as liaison with governmental institutions. More information about the legislation, procedures and registrations can be obtained from DFA (E-mail: info@dfa.am; www.dfa.am ).

Competition and Anti-Trust Laws

The State Commission for the Protection of Economic Competition reviews transactions for competition related concerns. The law, regulations, commission decisions, and more information can be found at http://www.competition.am/?lng=2 .

Expropriation and Compensation

Under Armenian law, foreign investments cannot be confiscated or expropriated except in extreme cases of natural or state emergency, upon obtaining an order from a domestic court. In all cases, proper and fair compensation is owed to the property owner. The U.S. Government is not aware of any confirmed cases of expropriation.

Dispute Settlement

ICSID Convention and New York Convention

Armenia is a state member of the ICSID convention and a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).

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

Investor-State Dispute Settlement

According to the 1994 Foreign Investment Law, all disputes that arise between a foreign investor and the Republic of Armenia must be settled in Armenian courts. A law on Commercial Arbitration was enacted in 2007, which provides investors with a wider range of options for resolving their commercial disputes. The U.S.-Armenia BIT provides that in the event of a dispute between an American investor and the Republic of Armenia, the investor may take the case to international arbitration. As an international treaty, the BIT supersedes Armenian law, a point which Armenia’s constitution acknowledges and which holds in actual practice. While there have been a few investment disputes involving U.S. and other foreign investors, there is no evidence of a pattern of discrimination against foreign investors in these cases.

International Commercial Arbitration and Foreign Courts

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

The Law on Arbitration Courts and Arbitration Procedures provides rules governing the settlement of disputes by arbitration. Armenia is a member state to the International Center for Settlement of Investment Disputes (ICSID Convention) and convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). The stipulations of the New York convention have been incorporated into Article 5 of the Armenian Constitution which requires domestic courts to recognize foreign arbitral awards.

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

Bankruptcy Regulations

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

According to the World Bank’s 2018 Doing Business Index, resolving insolvency takes 1.9 years on average and costs 11 percent of the debtor’s estate, with the most likely outcome being that the company will be broken up and sold. The average recovery rate is 36.4 cents on the dollar. Globally, Armenia stands at 97 in the ranking of 190 economies on the ease of resolving insolvency in the World Bank’s Doing Business 2018 Report (http://www.doingbusiness.org/rankings ; http://www.doingbusiness.org/data/exploreeconomies/
armenia#resolving-insolvency ).

Investment Incentives

Armenia currently offers incentives for exporters (no export duty, VAT refund on goods and services exported) and foreign investors (income tax holidays, the ability to carry forward losses indefinitely, VAT deferral and exemptions from customs duties for investment projects). On January 1, 2018, the Armenian Government started to exempt the imports of capital investment-related goods from VAT payments at the border. In 2015, the Armenian Government exempted from customs duties investment-related import of equipment and raw materials from non-Eurasian Economic Union member countries. VAT and customs duties exemptions are implemented based on Government’s decision made on a case-by-case basis. Also, in accordance with the Law on Foreign Investment, several ad hocincentives may be negotiated on a case-by-case basis for investments targeted at certain sectors of the economy and/or of strategic importance to the economy.

Foreign Trade Zones/Free Ports/Trade Facilitation

In June 2011, Armenia adopted a Law on Free Economic Zones (FEZ), and developed several key regulations at the end of 2011 to attract foreign investments into FEZs; these regulations include exemptions from VAT (value added tax), profit tax, customs duties, and property tax. The Alliance FEZ was opened in August 2013, and currently has thirteen businesses taking advantage of its facilities. The focus of Alliance FEZ is on high-tech industries which include information and communication technologies, electronics, pharmaceuticals and biotechnology, architecture and engineering, industrial design and alternative energy. In 2014, the government expanded operations in the Alliance FEZ to include industrial production as long as there is no similar production already occurring in Armenia. In 2015, another Meridian FEZ, focused on jewelry production, watch-making, and diamond-cutting, opened in Yerevan, with seven businesses operating in it. The investment programs for these companies must still be approved by the government. The Armenian Government approved the program to construct the Meghri free economic zone at the border with Iran, which was formally opened in 2017. A revision of legislation on free economic zones, which simplifies and brings more transparency in customs procedures, is currently in the Parliament pending approval.

Performance and Data Localization Requirements

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

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

Real Property

Armenian law protects secured interests in property, both personal and real. Armenian legislation provides a basic framework for secured lending, collateral and pledges, and provides a mechanism to support modern lending practices and title registration. In the World Bank’s Doing Business 2018 report Armenia ranked 13th among 190 economies on the ease of registering property. Lack of clear title to land in Armenia is not an issue.

Intellectual Property Rights

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

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

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

A new Law on Copyright has been drafted and circulated within the Government. It includes provisions from new international agreements and provides additional detail on many of the provisions in the current law. Copyright contract rights are better defined and examples of contracts between the user and the right-holder are included. Phonogram producers’ rights are harmonized with copyright holders’ rights and are extended to 70 years. The new legislation also includes specific provisions from the Marrakesh and Beijing Treaty, regulating the rights of disabled artists and orphan works. In 2017, Ministry of Justice initiated a review of the Chapter of the Civil Code on IPR by including the main provisions on IP rights, eliminating redundancies with other IPR legislation, as well as highlighting provisions on trade secrets. This new legislation was submitted to the Parliament for approval in March 2018.

The Armenian customs authorities track statistics related to the seizure of counterfeit goods, but the reports are not periodically updated. The latest relevant information can be found at: http://www.petekamutner.am/Content.aspx?itn=csCIMethodologicalClarifications&pt=parent  and the descriptions of smuggling cases can be found in Armenian at: http://www.petekamutner.am/Content.aspx?itn=csVLDepFightAgainstSmug .

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

The American Chamber of Commerce in Armenia can be contacted at info@amcham.am. A list of local lawyers can be found at U.S. Embassy Yerevan’s web-page at: https://am.usembassy.gov/u-s-citizen-services/attorneys/.

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/ .

Capital Markets and Portfolio Investment

The banking system in Armenia is sound and well-regulated, but Armenia’s financial sector is not highly developed. IMF estimates suggest that banking sector assets account for about 90 percent of total financial sector assets. Financial intermediation is poor. Because Armenian banks charge service and other fees, the actual interest rate paid by the customer may be higher than the nominal interest rate quoted by the banks. Nearly all banks require collateral located in Armenia, and large collateral requirements often prevent potential borrowers from entering the market. This remains the main barrier for SMEs and start-up companies.

The Armenian Government welcomes foreign portfolio investments and there is a system in place and legal framework for investments. However, Armenia’s securities market is not well developed and has only minimal trading activity through the NASDAQ-OMS exchange. Liquidity for the transfer of large sums can be difficult due to the small size of Armenia’s financial market and overall economy. The Armenian Government is hoping that as a result of the 2014 pension reform, which brought two international asset managers (Amundi and C-Quadrat) to Armenia, the capital market will play a more prominent role in the financial sector of the country. Armenia respects IMF Article VIII by refraining from restrictions on payments and transfers for current international transactions. Credit is allocated on market terms and foreign investors are able to access credit locally.

Money and Banking System

The banking sector is healthy; non-performing loans are less than 10 percent which is within acceptable international standards. The top three Armenian banks by assets are Ameriabank – 677.7 billion AMD (1.4 billion USD), Armbusinessbank – 574.9 billion AMD (1.2 billion USD) and Ardshinbank – 568.2 billion AMD (1.1 billion USD) and. The Central Bank of Armenia has initiated consolidation in the banking system; as of January 1, 2017 the minimum capital requirements for banks increased from the 5 billion AMD (10.4 million USD) to 30 billion AMD (62.5 million USD). This is intended to allow the banks to issue bigger loans at lower interest rates and will further strengthen the Armenian banking system. There are no restrictions for foreigners to open bank accounts. Foreign banks and branches are allowed to establish operations in the country, being subjected to the same prudential measures and regulations as local banks.

Foreign Exchange and Remittances

Foreign Exchange Policies

Armenia has no limitations on the conversion and transfer of money or the repatriation of capital and earnings, including branch profits, dividends, interest, royalties, or management or technical service fees. Most banks can transfer funds internationally within two to four days. Armenia maintains the Armenian dram (AMD) as a freely convertible currency under a managed float. The Central Bank of Armenia (CBA) sought to maintain the AMD through intervention in the foreign exchange market and through administrative measures in November– December 2014 to prevent market panic and drastic devaluation in the currency market. As a result, a 17 percent depreciation of the Armenian dram was roughly on par with the widespread decline of many currencies against the dollar over the same period. The AMD/USD exchange rate as of March 2018 fluctuated around 480 AMD to the USD.

According to the 2005 law on Currency Regulation and Currency Control, prices for all goods and services, property and wages must be set in AMD. There are exceptions in the law, however, for transactions between resident and non-resident businesses and for certain transactions involving goods traded at world market prices. The law requires that interest on foreign currency accounts be calculated in that currency, but be paid in AMD.

Remittance Policies

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

Sovereign Wealth Funds

Armenia does not have a sovereign wealth fund.

Most of Armenia’s state owned enterprises (SOEs) were privatized in the 1990s and early 2000s; yet SOEs are still active in geodesy/cartography and the energy sector. SOEs in Armenia operate as state-owned closed joint stock companies that are managed by the Department of State Property of the Armenian Government and state non-commercial organizations (schools, universities, forest enterprises). There are no laws or rules that ensure a primary or leading role for SOEs in any specific industry. Armenia is a party to the WTO’s Government Procurement Agreement (GPA) and SOEs are covered under that agreement. SOEs in Armenia are subjected to the same tax regime as their private competitors, and private enterprises in Armenia can compete with SOEs under the same terms and conditions. A public list of state-owned closed joint stock companies can be found at: (http://spm.am/am/projects/%D4%B8%D5%B6%D5%AF%D5%A5%D6%80%D5%B8%D6%82%D5%
A9%D5%B5%D5%B8%D6%82%D5%B6%D5%B6%D5%A5%D6%80/ ).

Armenian state owned enterprises adhere to the OECD Guidelines on Corporate Governance for SOEs. The enterprises owned by the state are providing public services, like geodesy or nuclear power generation, and hence do not impact the competitive environment in the country.

Privatization Program

Most of Armenia’s state owned enterprises were privatized in the 1990s and early 2000s. Many of the privatization processes for Armenia’s large assets were reported to be neither competitive nor transparent, and political considerations in some instances prevailed over a fair tender processes.

The Department of State Property Management publishes the announcements on tenders and auctions on its web-page. In the past, there have been reports that the process of privatization tenders and auctions is not always competitive and transparent enough.

There is not a widespread understanding of responsible business conduct (RBC) in Armenia, but several larger companies with foreign ownership or management are introducing the concept. It is rare to see examples of Armenian companies that contribute to their local community through charity, employee service days, or other similar programs, but those RBC programs which do exist are viewed favorably. There are no NGOs that actively promote or monitor responsible business conduct. Armenia joined the Extractive Industries Transparency Initiative (EITI) in March 2017 as a candidate country. Armenia does not adhere to the OECD Guidelines for Multi-National Enterprises (MNEs) or the UN Guiding Principles for Business and Human Rights, which address generally-accepted CSR principles.

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

Corruption remains a significant obstacle to U.S. investment in Armenia, particularly for SMEs. The government introduced a number of legislative reforms over the last few years, including simplification of licensing procedures and civil service reform amendments to the Criminal and Criminal Procedural Codes to criminalize illicit enrichment, a law on whistleblower protection, and the introduction of a national anti-corruption strategy. Many of these laws are in their initial stages of implementation and have not yet been tested through enforcement or prosecution. Nevertheless, corruption remains a problem in critical areas such as the judiciary, tax and customs operations. The health, education, military, corrections and law enforcement sectors lack transparency in procurement and often use selective enforcement to elicit bribes. The Special Investigative Service is responsible for carrying out preliminary investigation of alleged criminal conduct, including corruption cases, by government officials of all branches of government, with the Prosecutor General’s Office responsible for prosecution. While market capture and petty corruption remain widespread, neither is routinely prosecuted. The new Corruption Prevention Body, to take effect in spring 2018 in place of the Commission on Ethics of High Ranking Officials, will be vested with broader powers of scrutinizing asset declarations, but lacks any investigative power. Armenia’s ability to counter, deter, and prosecute corruption is hindered by the lack of independent, empowered anti-corruption body with both investigative and prosecutorial powers, the lack of a strong and independent judiciary, and the lack of robust enforcement of official disclosure laws to prevent the entrance and retention of corrupted officials in positions of authority and influence. Anti-corruption legislation is limited in scope and not applied consistently, does not address beneficial ownership, and permits family members to hide allegedly corrupt officials’ assets and income. As part of its Extractive Industries Transparency Initiative (EITI) membership aspirations, the Government of Armenia adopted the roadmap to disclose beneficial ownership in the metal ore mining industry in March 2018.

In 2016, the Armenian government initiated legislation on criminal penalties for noncompliance or filing of false declarations and illicit enrichment, which were approved and enacted by the Parliament in late 2016. A new law adopted in June 2017 set up the Corruption Prevention Commission which is set to take full force in the spring of 2018. The new body will replace the Commission on Ethics of High Ranking Officials and will have a separate budget and support staff to perform corruption prevention and public education functions. While the new body does not have prosecutorial functions, it is empowered to institute administrative proceedings against officials violating reporting requirements and to refer prima facie cases of corruption to the Prosecutor General’s Office for investigation. According to the new legislation, a larger number of public officials are subject to the Commissions scrutiny of financial and interest disclosures.

According to current practice, income, gifts or assets from undisclosed sources are not considered evidence of corruption, nor do they represent sufficient grounds for launching an investigation, although the law allows for it.

The Government of Armenia adopted the Unified Tax Code in late 2016, which became effective in January 2018. This document vouches for a unified approach to taxpayers and more simplified tax administration procedures. Also, both the Ministry of Finance and State Revenue Committee have established public-private dialog councils that include representatives of civil society organizations (CSOs), professional organizations, private sector and academia. These fora allow engaging public into tax related legal, administrative and operational issues discussions. Together with the passage of the Unified Tax Code, the creation of councils and automated electronic filing and e-services allowed for improved transparency and reduced opportunities for corruption.

The State Revenue Committee (SRC) opened a monitoring center in April 2017 equipped with a state-of-the-art electronic control system, which is supposed to improve and upgrade the process of identification and risk analysis carried out by the SRC to trigger audits or closer investigation of customs and tax filings. The center is expected to implement expanded and centralized analysis, monitoring of turnover declarations, payment processing and products, import, transport and so on, facilitating the process of identification of risks and improve surveillance. The targeted monitoring will allow the SRC to conduct fewer inspections and minimize the interaction of tax officers with the taxpayers. This has the potential of reducing opportunities for corruption. With increased capacities of risk management, the SRC is planning to move focus from pre-clearance customs verification process to post clearance control, which implies that the management of risks at the border, not linked to security, should be gradually moved to a post-clearance control phase, expectedly bringing to simplification of the operations at the border. An advance decision on classification of goods is possible under Eurasian Economic Union regulations for a fee of $63 USD and valid for three years.

The Law on Civil Service, in force since 2002, as well as the Laws on Municipal Service (2005) and on Local Self-government (2002), prohibits participation of civil and municipal servants, as well as local government elected officials (mayors and councilors) in commercial activities. However, powerful officials at the national, district, or local levels often acquire direct, partial, or indirect control over private firms. Such control is exercised through a hidden partner or through majority ownership of fully private parent companies. This involvement can also be indirect, e.g., through close relatives and friends. These practices promote protectionism, encourage the creation of monopolies or oligopolies, hinder competition, and undermine the image of the government as a facilitator of private sector growth. Because of the strong interconnectedness of political and economic spheres, Armenia is unable to differentiate between the two and introduce legislation to encourage strict ethical codes of conduct and the prevention of bribery in the business field.

According to the 2017 Transparency International (TI) 2017 Corruption Perception Index (CPI) report, Armenia with a score of 35 out of 100 ranked 107th among 180 countries.

No specific law on NGOs dealing with anti-corruption investigation exists. The government, in close coordination with civil society, approved new legislation on Public Organizations in December 2016. The new law gives NGOs the right to engage in economic activities, providing these organizations with mechanisms for sustainability. The law replaced the 2001 law on NGOs that covered all aspects of the relationship between the GOA and non-governmental organizations

Western companies seeking to invest in Armenia are typically large enough that they do not, to our knowledge, need to get involved in corruption or bribe officials to facilitate their business. They follow the rule of law and are transparent in their dealings and demand the same of the government.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

Armenia is a member of the UN Anticorruption Convention. While not a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, Armenia is, however, a member of the OECD Anti-Corruption Network for Eastern Europe and Central Asia, and has signed the Istanbul Action Plan. Armenia was included in the third round monitoring mission in 2014 and the report that came out in 2015 highlighted the absence of a truly independent body responsible for anti-corruption policy implementation with the power to prosecute. A round of monitoring is ongoing in the spring of 2018 with a report expected out by August 2018. Armenia has also joined the global Open Government Partnership initiative.

Resources to Report Corruption

For investigating corruption:

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

For prosecuting corruption:

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

For financial and asset declarations of high level officials:

Siranush Sahakyan
Chairperson
Ethics Commission
26 Baghramyan Street
Yerevan, Armenia
374 10 524689
siranush.sahakyan@president.am

Watchdog organization:

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

Armenia has a history of political demonstrations, with some that have turned into violent confrontations between the police and protesters; however, the frequency of protests has decreased in recent years. In the fall of 2014 and early 2015, violence against civic and political activists resulted in detentions and injuries. None of these incidents caused any damage to projects or installations nor did they impede the functioning of businesses in the country. On July 17, 2016, the armed group Sasna Tsrer stormed and occupied a police compound in Yerevan, killing three officers and taking police personnel hostage. During the two-week standoff that followed, Sasna Tsrer took additional police and medical personnel hostage, demanding political changes. During the standoff, numerous protests and demonstrations in support of Sasna Tsrer took place in Yerevan and other parts of the country. Law enforcement officers engaged in illegal detentions, disproportionate and excessive use of force toward peaceful demonstrators, abusive treatment of journalists, and other serious human rights abuses, especially on the night of July 29, when police forcefully dispersed a protest supporting Sasna Tsrer’s political demands. These clashes did not pose any damage to businesses and generally do not increase Armenia’s political risk.

The Armenian Government has been known to use tax audits, money laundering investigations, and other official mechanisms to retaliate against business people who support the political opposition, including members of Parliament. At the same time, the Armenian Government has used economic and administrative resources to reward political loyalists, provide them with political protection, and keep them above the law. This, in turn, has led to monopolies in many areas and a strong interconnection between the political and business spheres.

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

Armenia’s human capital is one of its strongest resources. The labor force is generally well educated, particularly in the Science, Technology, Engineering and Math (STEM) fields. Almost one hundred percent of Armenia’s population is literate. According to official information, enrollment in secondary school is over 90 percent, and enrollment in senior school (essentially equivalent to American high school) is about 85 percent. The official unemployment level is about 18 percent, but according to various expert estimations, the real unemployment level is closer to 30 percent.

Much of the new foreign investment in Armenia has occurred in the high-tech sector. High-tech companies have established branches or subsidiaries in Armenia to take advantage of the country’s pool of qualified specialists in electrical and computer engineering, optical engineering, and software design. There is a shortage of workers with vocational educations qualified in professions like welders and plumbers. About 20 percent of the non-agricultural workforce is employed in the informal economy, primarily in the services sector. Armenian law protects the rights of workers to form and to join independent unions, with exceptions for personnel of the armed forces and law enforcement agencies. The law also provides for the right to strike, with the same exceptions, and permits collective bargaining. The law stipulates that workers’ rights cannot be restricted because of membership in a union. It also differentiates between layoffs and firing with severance. Labor organizations remain weak because of employer resistance, high unemployment, and poor economic conditions; collective bargaining is not common in Armenia. Labor unions are generally inactive with the exception of those connected with the mining and chemical industries. Unions are tied closely to the government. Labor laws are not waived to retain or attract investments.

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

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. The newly formed Health Inspection Body (HIB) under the Ministry of Health has a mandate to monitor health and occupational safety issues, but the enforcement has been halted by continuous restructuring of the body and absence of a legal framework and regulations in support of the HIB functions.

Amendments into Labor Code of Armenia entered into force in 2015 clarified the procedures of making changes in labor contracts, and the content of labor contracts, including the requirement to reflect probation period and duration of vacation in labor contracts, introduced the order of calculation of average hourly wage.

The current legal minimum wage is AMD 55,000 (USD 115) per month. Most companies also 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.

Since 1992, Armenia has had in place an agreement with the Overseas Private Investment Corporation (OPIC). OPIC mobilizes private capital to help solve critical development challenges, providing investors with financing, guarantees, political risk insurance, and support for private equity investment funds. OPIC has been involved in several projects in Armenia, including expansion of the Yerevan Marriott, expansion of operations of First Mortgage Company and loans to FINCA Universal Credit Organization which is part of a multi-country, seven-year USD 45 million loan to FINCA Microfinance Holding for micro-lending. Armenia is also a member of the World Bank Group’s Multilateral Investment Guarantee Agency (MIGA).

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

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

Portfolio investment data is not available for Armenia.

ECONOMIC OFFICER
U.S. Embassy, American Avenue 1, Yerevan 0082, Armenia
+374-10-49-42-00
YerevanBusiness@state.gov

Policies Toward Foreign Direct Investment

Over the past few years, the Azerbaijani government has worked to integrate the country more fully into the global economic marketplace and attempted to attract foreign investment in order to diversify its economy and boost economic growth and employment. The flows of foreign direct investment to Azerbaijan have risen steadily in recent years, primarily in the energy sector. The government continues to seek to attract FDI to the agriculture, transportation, tourism, and information and communication technology (ICT) sectors in an effort to diversify the economy, but foreign investments in these areas have 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 not 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 government has not shown any pattern of discriminating against U.S. persons or entities through illegal expropriation.

Azerbaijan’s primary body responsible for investment promotion is the Azerbaijan Export and Investment Promotion Foundation (AzPromo). AzPromo is a joint public-private-initiative, established by the Ministry of Economy and Industry in 2003 to foster the country’s economic development and diversification by attracting foreign investment into the non-oil sectors of the economy and stimulating expansion of Azerbaijan’s exports of non-oil goods to overseas markets. In January 2018, President Aliyev issued a decree promoting foreign investment and protecting foreign investors’ rights. The decree called for the drafting of a new law on investment activities that will conform with international standards and establishes mechanisms to protect investors’ rights and regulate damages. The draft law has not yet been released. Additionally, the government regularly meets with the American Chamber of Commerce (AmCham) to solicit the input of the business community, particularly as part of AmCham’s biennial white paper process. AmCham is currently finalizing the 2018 edition and preparing for consultations with appropriate government officials.

Limits on Foreign Control and Right to Private Ownership and Establishment

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

Foreigners are not permitted to own land in Azerbaijan, but are permitted to lease land and own real estate. Foreigners are also restricted from holding a majority share in certain sectors.

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

Other Investment Policy Reviews

Azerbaijan has not conducted an Organization for Economic Cooperation and Development (OECD) investment policy review, a United Nations Conference on Trade and Development (UNCTAD) investment policy review, or a WTO Trade Policy Review.

Business Facilitation

Azerbaijan ranks 57^th in Ease of Doing Business and 5th in Starting a Business out of 190 countries in the World Bank’s 2017 Doing Business Report (rankings are available at: http://www.doingbusiness.org/rankings ). In 2017, the Doing Business Report highlighted reforms that simplified the process of obtaining a new electricity connection, eliminated the vehicle tax for residents, and introduced an electronic system for submitting import and export declarations. The 2018 Doing Business Report noted reforms related to the establishment of credit bureaus, protection of minority investors, electronic payment of court fees, and processes for resolving insolvency.

Azerbaijani law requires all companies operating in the country to register. Without formal registration, a company may not do business in Azerbaijan (e.g., maintain a bank account, or clear goods through customs). As part of the ongoing business law reforms, a “One Window” principle was introduced January 1, 2008. The registration procedures involving several government bodies (Ministry of Justice, Social Insurance Fund, and State Statistics Committee) have been eliminated, and businesses must register onlywith the Ministry of Taxes. The established period for registration with the Ministry of Taxes is officially set at three days for commercial organizations. Since 2011, companies have been able to e-register, reducing the number of procedures required from six to two and the number of days from eight to three. Online registration is available at http://taxes.gov.az/modul.php?lang=_eng&name=birpencere&bolme=registration .

Outward Investment

Azerbaijan does not actively promote or incentivize outward investment, though Azerbaijani entities, particularly the State Oil Company of Azerbaijan (SOCAR) and the State Oil Fund of Azerbaijan (SOFAZ), have invested in various countries, including the United States. The government does not restrict domestic investors from investing overseas.

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

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

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

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

Several U.S. companies with operations and investments in Azerbaijan report they have been subject to repeated tax audits, requests for prepayment of taxes, and court-imposed fines for violations of the tax code.

Transparency of the Regulatory System

The Azerbaijani government has worked to improve its regulatory system over the past several years, and legal, regulatory, and accounting systems are approaching international norms. However, continued limited transparency and allegations of corruption in regulatory matters remain a problem. Tender procedures remain opaque and a small number of businesses dominate certain sectors of the economy.

The Azerbaijani legal system is based on civil law and the central government is the primary source of regulations relevant to foreign businesses. Azerbaijan’s regulatory system remains opaque, despite efforts to foster competition and establish clear rules. U.S. companies have complained about a lack of transparency and consistency in the application of regulations. Azerbaijan has yet to develop informal regulatory processes managed by private sector associations. Limited transparency and inconsistent enforcement of rules to foster competition are serious impediments to foreign direct investment. Draft legislation is neither made available for public comment nor usually run through a public consultation process. However, the government has begun engaging business organizations, such as the American Chamber of Commerce in Azerbaijan (AmCham) and consulting firms on various proposed 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 National Accounting Standards (NAS), which are based on the International Financial Reporting Standards (IFRS) with some modifications. “Publicly important” businesses, such as insurers, banks, and other large commercial entities, must adhere to IFRS. Certain small businesses can be registered as simplified taxpayers and are not obliged to maintain accounts in accordance with IFRS or NAS.

On October 19, 2015, the President of Azerbaijan approved a law suspending inspections of entrepreneurs for two years. This suspension was extended on October 31, 2017 to last until January 1, 2021. The suspension includes an exception to allow for inspections of food and pharmaceutical products for quality and safety control purposes, as well as inspections in certain other areas. The government has also simplified its licensing regime. All licenses are now issued with indefinite validity through the ASAN service centers and must be issued within 10 days of application. The Ministry of Economy also reduced the number of activities requiring a license from 60 to 32.

International Regulatory Considerations

Azerbaijan has had observer status at the World Trade Organization (WTO) since 1997. 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 that Azerbaijan is less than a quarter of the way to full membership. In 2016, Azerbaijan imposed higher tariffs on a number of imported goods, including agricultural products, to promote domestic production and reduce imports. Currently, Azerbaijan is negotiating bilateral market access with 19 economies.

Legal System and Judicial Independence

Azerbaijan’s legal system is based on Civil Law. Disputes or disagreements arising between foreign investors and enterprises with foreign investment, Azerbaijani state bodies and/or enterprises, and other Azerbaijani legal entities, are to be settled in the Azerbaijani court system or, upon agreement between the parties, in a court of arbitration, including international arbitration bodies. The judiciary consists of the Constitutional Court of the Republic of Azerbaijan, the Supreme Court of the Republic of Azerbaijan, the appellate courts of the Republic of Azerbaijan, trial courts, and other specialized courts. Trial court judgments may be appealed in appellate courts and the judgments of appellate courts can be appealed in the Supreme Court. The Supreme Court is the highest court in the country. Under the Civil Procedure Code of Azerbaijan, appellate court judgments are published within three days of issuance, or within ten days in exceptional circumstances. The Constitutional Court has the authority to review laws and court judgments for compliance with the Constitution. On February 3, 2016, President Aliyev signed the Decree on Establishment of the Board of Appeal in the Central and Local Executive Authorities for the investigation of recurring complaints by entrepreneurs regarding the executive authorities or their local organizations.

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

Laws and Regulations on Foreign Direct Investment

Foreign investment in Azerbaijan is regulated by a number of international treaties and agreements, as well as domestic legislation. These include the Bilateral Investment Treaty (BIT) between the United States and Azerbaijan, the Azerbaijan-EC 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, and the Second Program for Privatization of State Property, as well as by laws regulating specific sectors of the Azerbaijani economy. This legislation permits foreign direct investment in any activity in which a national investor may also invest, unless otherwise prohibited by law.

On January 2018, President Aliyev issued a decree on promoting foreign investment and protecting foreign investors’ rights. The decree called for the drafting of a new law on investment activities that is in conformance with international standards and establishes mechanisms to protect investors’ rights and regulate for damages, including lost profit caused to investors. The details of this law have not yet been made public.

Competition and Anti-Trust Laws

The State Service for Antimonopoly Policy and Consumer Protection under the Ministry of Economy is responsible for implementing competition-related policy. On April 28, 2016, President Aliyev signed an amendment to the law on Antimonopoly Activity and an Amendment to the Criminal Code. The amendments introduced the concept of cartel agreements, which are identified as anti-competitive arrangements that may include increasing or decreasing prices; maintaining prices at the same level; implementing privileges, rebates or bonuses; or other methods of restraining competition. A new version of the Competition Code began undergoing revision in Parliament in late 2014, but has not yet been passed.

Expropriation and Compensation

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

Dispute Settlement

ICSID Convention and New York Convention

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

Investor-State Dispute Settlement

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

International Commercial Arbitration and Foreign Courts

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

Bankruptcy Regulations

Azerbaijan’s Bankruptcy Law continues to restrict economic development. Azerbaijan’s Bankruptcy Law applies only to legal entities and entrepreneurs, not to private individuals. Bankruptcy proceedings may be initiated by either a debtor facing insolvency or by any creditor. In general, the legislation focuses on liquidation procedures. Amendments to Azerbaijan’s bankruptcy law adopted in 2017 extended the obligations of bankruptcy administrators and defined new rights for creditors. In the World Bank’s 2017 Doing Business Report’s section on resolving insolvency, Azerbaijan’s ranking advanced from 84 in 2017 to 47 in 2018.

Investment Incentives

Since early 2016, the government has introduced tax and investment incentives for entrepreneurs and legal entities in non-oil export sectors as part of the overall economic reform/diversification effort. These measures include certain partial, temporary exemptions from corporate and property taxes, and favorable tax treatment for manufacturing facilities and imports of manufacturing equipment, and subsidies for certain exports. In 2016, a presidential decree introduced an investment promotion certificate that provided additional incentives for investment promotion. Investment certificate holders are exempt from paying 50 percent of income tax and land tax owed, and from paying customs duties on machinery, equipment, and devices imported for investment purposes in priority industries of the economy for up to 7 years. The priority projects include work in industrial parks, creation of manufacturing plants, and research work.

Foreign Trade Zones/Free Ports/Trade Facilitation

President Aliyev signed a decree in March 2016 establishing a free trade zone next to the Port of Alat (approximately 80 km south of Baku) and Parliament passed implementing legislation in February 2018. According to the bill, the Alat free trade zone authority, administrative enterprises, legal entities and their employees, and residents will be exempt from all taxes and no customs duties or taxes will be paid for goods and services imported to Free Zone.

The Ministry of Transport, Communications, and High Technologies has discussed plans to create other special economic zones, including a petrochemical complex and regional innovation zones to boost development of the telecommunications sector and to turn Azerbaijan into a regional information and communications technologies hub. The government has also discussed establishing a special zone to encourage the production of renewable energy. Such projects represent consulting, engineering, and other potential commercial opportunities for international firms.

Performance and Data Localization Requirements

The Government of Azerbaijan does not mandate local employment, although some Production Sharing Agreements (PSAs) 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 local production of certain components in order to maintain or expand cooperation.

Real Property

Azerbaijani law recognizes equal rights to land ownership by state and municipal governments and private individuals and entities. The Law on the Protection of Foreign Investments protects foreign investors against nationalization and requisition, except under certain specified circumstances. International organizations, foreign citizens, and foreign legal entities may not own land or be granted a purchase option on a lease, but are permitted to lease land. Following independence, the government of Azerbaijan implemented land reforms that divided state-owned farms into privately-held small plots. Due to poor record keeping and titling in rural areas, it is often difficult to determine definitively who the owner of a plot is. Amendments made to Azerbaijan’s Constitution in September 2016 enable authorities to expropriate private property with compensation in instances when necessary for social justice and effective use of the land.

Since 2013, Azerbaijan’s State Real Estate Registry Service at the Committee for Property Issues has been the lead agency managing the real estate registration system. In April 2016, Azerbaijan’s President approved amendments to the Law on Immovable Property Register. The amendments cut the period of registration of property rights and the provision of extracts from the Register from 20 to 10 working days. The Azerbaijan Mortgage Fund has issued 19,601 mortgages as August 2017. The total sum of mortgage loans has amounted USD 488.2 million. As of August 2017, the government of Azerbaijan also launched issuance of mortgage loans in electronic format.

The World Bank’s Doing Business Report ranked Azerbaijan 21 out of 190 countries in 2017 in its country rankings on the Ease of Registering Property.

Intellectual Property Rights

Intellectual property rights (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. The legal structure covering intellectual property protections in Azerbaijan is relatively strong, but experts note the level of enforcement within the country is weak. Piracy and blatant infringements on intellectual property rights, such as fake international computer shops openly doing business in the capital, are commonplace. The Business Software Alliance put the software piracy figure at 84 percent in 2015, though Azerbaijan’s Copyright Agency announced in January 2018 that software piracy in Azerbaijan was less than 75 percent, unlicensed printing of books accounted for 28 percent of the total market, and 65 percent of audio and video products were pirated.

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 intellectual property rights can result in civil, criminal, and administrative charges. Azerbaijan tracks and reports on seizures of counterfeit goods but does not publish statistics on this effort. Azerbaijan is not listed in USTR’s Special 301 report, nor is it listed in the notorious markets report. For additional information about national laws and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

Capital Markets and Portfolio Investment

Azerbaijan’s stock market, the Baku Stock Exchange, opened in 2000. An effective regulatory system that encourages and facilitates portfolio investment, foreign or domestic, is not fully in place. There is not sufficient liquidity in the markets to enter or exit sizeable positions, and existing policies limit the free flow of financial resources into the product and factor markets. In February 2016, the government established the Financial Market Supervisory Authority (FMSA), a new financial supervisory authority, to take over all functions of the Azerbaijan State Committee for Securities, the State Insurance Supervision Service under the country’s Ministry of Finance, and the Financial Monitoring Service under the Central Bank of Azerbaijan. The FMSA aims to license, regulate and control the securities market, investment funds, insurance, credit organizations (banks, non-banking credit organizations and operator of postal communication) and payment systems. It also aims to improve the oversight system for combatting money laundering and preventing the financing of terrorism as well as to provide transparency and efficiency in this sphere.

Non-bank financial sector staples such as capital markets, insurance, and private equity are in the early stages of development. Several recent projects designed to strengthen Azerbaijan’s financial services sector, including the Capital Market Modernization Project (CMMP), the diversification of the State Oil Fund’s (SOFAZ) investment strategy, and pension reform represent opportunities for U.S. firms that provide asset management and global custodian services. The CMMP 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 practices that are generally required for publicly listed companies.

The Government of Azerbaijan and Azerbaijan’s Central Bank respect IMF Article VIII by refraining from restrictions on payments and transfers for current international transactions, and credit is allocated on market terms. Foreign investors are able to obtain credit on the local market, and the private sector has access to a variety of credit instruments. However, two currency devaluations in 2015 led to further dollarization of the economy, weakened bank balance sheets, and raised concerns about the country’s financial stability. Lending has still not recovered and limited access to capital remains a barrier to development, particularly for small and medium enterprises.

Money and Banking System

The country’s financial services sector – of which banking comprises more than 90 percent – remains underdeveloped, a factor that 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. Furthermore, the resulting depreciation generated challenges for banks, given the high proportion of foreign currency loans to residents with local currency earnings. One of the banking sector’s main problems is the continuing growth in non-performing loans. According to the country’s Financial Market Supervisory Authority, about 19 percent of all consumer loans in Azerbaijan account for non-performing loans of over USD1 billion. According to other reports , the current volume of non-performing loans exceeds one-third of the capital in the country’s banks. The Institution of Banking Ombudsman was established in Azerbaijan in September 2017. The ombudsman considers appeals on disputes that amount to about USD 2,000.

As of December 2017, there were 30 banks registered in Azerbaijan, including 15 banks with foreign capital and two state-owned. As of December 31, 2017, there are 509 branches, 142 sub-branches, 2,431 ATMs of 30 banks throughout the country. A total of 16,171 people are employed in the banking sector. Bank regulator FMSA closed 10 banks in 2016 and completed restructuring of the country’s largest bank, the International Bank of Azerbaijan (IBA) in 2017. As of January 1, 2018, 47 non-bank credit organizations and 109 credit unions operate in the country. Lending by global banks to Azerbaijan’s financial sector has been minimal.

Total banking sector assets stood at approximately USD16.5 billion as of December 2017, with the top five banks holding almost 58 percent of this amount. The state-owned International Bank of Azerbaijan (IBA) accounts for approximately 40 percent of the country’s banking assets and has received several large cash infusions over the past several years from the government. In January 2017, the Ministry of Finance increased the government’s stake in the IBA from 54.96 percent to 76.73 percent. The government undertook a substantial cleanup of the assets of IBA, including transferring IBA’s non-performing assets at book value to Agrarkredit, a government-owned non-financial enterprise funded by the Central Bank. The amount of transferred assets totaled USD 6 billion in 2015-2016 and a further USD 3 billion transfer in 2017 (25 percent of 2016 GDP in total). In May 2017, IBA entered formal restructuring, similar to U.S. Chapter 11 Bankruptcy, and completed its restructuring process in September 2017.

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.

In December 2017, the Central Bank of Azerbaijan announced plans for a pilot project to create a digital identification system for transactions between banks and customers based on blockchain technology.

Foreign Exchange and Remittances

Foreign Exchange Policies

There are no statutory restrictions on converting or transferring funds associated with an investment into freely usable currency at a legal, market-clearing rate. Foreign exchange transactions are governed by the Law on Currency Regulation. The Central Bank administers the overall enforcement of currency regulation. Among those regulations is a requirement that local cash sales be conducted in Azerbaijani manats (AZN), in accordance with the country’s constitution. Foreign companies and individuals may have both manat and foreign currency accounts at a local bank. Currency conversion is carried out through the Baku Interbank Currency Exchange Market (BICEX) and the Organized Interbank Currency Market.

The average time for remitting investment returns is two to three business days. Some requirements on disclosure of the source of currency transfers have been imposed in an effort to reduce illicit transactions. Azerbaijan’s foreign currency reserves are based on the reserves of the Central Bank of Azerbaijan, those of the State Oil Fund of Azerbaijan (SOFAZ), and the assets of the State Treasury Agency under the Ministry of Finance. Foreign currency reserves of the Central Bank) increased by USD 1.3 billion (34.2 percent) during 2017 and totaled USD 5.3 billion. As of January 1, 2018, SOFAZ assets increased by 8.02 percent to reach USD 35.8 million compared to the beginning of 2017 (USD 33.1 million).

The Central Bank of Azerbaijan officially adopted a floating exchange rate in 2016, but continues to operate under an “interim regime” which appears more like a managed float in practice, as it transitions to a full float.

Remittance Policies

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

Azerbaijan is a permanent member of the international Financial Action Task Force (FATF) and is listed as a country of concern. (The continuum of FATF lists countries as being of primary concern, concern, or monitored.) The main obstacle Azerbaijan faces is the endemic level of corruption, but other generators of illicit funds include robbery, tax evasion, smuggling, trafficking, and organized crime.

Sovereign Wealth Funds

Azerbaijan’s sovereign wealth fund is the State Oil Fund of Azerbaijan (SOFAZ). Its mission is to transform hydrocarbon reserves into financial assets generating perpetual income for current and future generations and to finance strategically important infrastructure and social projects of national scale. Since it was established in 1999, SOFAZ has financed several projects relating to infrastructure, housing, energy infrastructure, and education. According to its bylaws, SOFAZ is not permitted to invest domestically. The State Oil Fund publishes an annual report which it submits for independent audit. The fund’s assets totaled USD 35.8 billion as of January 1, 2018. More information is available at oilfund.az .

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. Statistics are not available on the percentage of resources SOEs allocate to research and development (R&D). While there are no SOEs that officially have been delegated governmental powers, companies such as the State Oil Company of Azerbaijan (SOCAR), Azerenerji (the national electricity utility), and Azersu (the national water utility) – all of which are closed joint-stock companies with majority state ownership and limited private investment – enjoy quasi-governmental or near-monopoly status in their respective sectors.

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

There have been cases where many powerful state-owned enterprises have used their regulatory authority to block new entrants into the market. In sectors that are open to both the private and foreign competition, SOEs generally receive a larger percentage of government contracts or business than their private sector competitors. While SOEs regularly purchase or supply goods or services from private sector firms, domestic and foreign private enterprises have reported facing 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. However, SOEs are in principle subject to the same tax burden and tax rebate policies as their private sector competitors. The SOEs are also afforded material advantages such as preferential access to land and raw materials, advantages that are not available to private enterprises. There is little information available on Azerbaijani SOEs’ budget constraints due to the limited transparency in their financial accounts.

Privatization Program

A renewed privatization process started with the May 19, 2016 presidential decree implementing additional measures to improve the process of state property privatization and the July 19, 2016 decree on measures to accelerate privatization and improve the management efficiency of state property. The State Committee on Property Issues launched the portal providing information on privatization, http://www.privatization.az/index.php/en /, in July 2016. It contains information about the facilities, their addresses, location, and initial costs with an aim facilitating the process. In addition, the State Committee on Property Issues has developed a draft of the Third State Privatization Program (the “Privatization Program”). The main objectives of the Privatization Program are to attract foreign investment, increase efficiency and transparency in respective sectors, particularly the oil, metallurgy, light industry, sports, tourism, and other sectors. Bidding and tender processes in Azerbaijan, however, are generally considered non-transparent.

Responsible business conduct (RBC) is a relatively new concept in Azerbaijan. Producers and consumers do not have a general awareness of 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 – mainly in line with their international corporate ethos – and aim to educate their local partners, who generally consider basic charitable donations and paying taxes as acts of social responsibility.

The American Chamber of Commerce in Azerbaijan (AmCham) established a Corporate Social Responsibility (CSR) Committee in October 2011 to encourage companies to embrace the concept of social responsibility and encourage a positive impact through activities and dialogue with relevant stakeholders. In addition, AmCham published a guide on RBC/corporate social responsibility for businesses in Azerbaijan. In 2011, the Ministry of Economy established standards for corporate governance, which included an evaluation methodology for these standards and a code of ethical behavior. The Ministry has been tasked to meet with entrepreneurs and explain the importance of using corporate governance standards. Restrictions on registration of NGOs have complicated the efforts of some corporations to implement their CSR plans.

Azerbaijan’s Extractive Industries Transparency Initiative (EITI) status was downgraded from “compliant” to “candidate” on April 14, 2015, due to concerns about the ability of civil society to engage critically in the EITI process in Azerbaijan. Following a review in October 2016, and the EITI Secretariat’s subsequent evaluation in March 2017 that Azerbaijan had not sufficiently implemented required so-called “corrective actions,” Azerbaijan withdrew from the EITI, but stated it remained committed to continuing to provide transparency and accountability in the extractive industries. In April 2017, Azerbaijan established its own national body, the Extractive Industries Transparency Commission (EITC); since then, it has held multiple meetings and published a 2016 report.

Pervasive corruption continues to be a major challenge for firms operating in Azerbaijan. Although anti-corruption legislation is in place and the government has acted to tackle low-level corruption, corrupt practices remain a barrier to greater foreign investment. Azerbaijan does not require private companies to establish internal codes of conduct that, among other things, prohibit bribery of public officials, nor does it provide protections to NGO’s involved in investigating corruption. Nevertheless, some private companies use internal controls, ethics, and compliance programs to detect and prevent bribery of government officials. U.S. firms have identified pervasive corruption as an obstacle to FDI and cite its prevalence in the following areas: government procurement, awarding of licenses or concessions, dispute settlement, the regulatory system, customs, and taxation.

The Azerbaijani government recognizes that corruption is a problem and has been a participant in regional anti-corruption initiatives, but to date laws and regulations to combat corruption have not been effectively or consistently enforced. Azerbaijan has made modest progress in implementing a 2005 Anticorruption Law, which created a commission with the authority to require full financial disclosure from government officials.

Anti-corruption reforms to reduce red tape and promote open government started in licensing regulations, tax, and customs sectors. Azerbaijan continues to focus on e-government, service delivery, and simplification of regulations to prevent corruption, particularly through the ASAN service centers opened in February 2013. Eleven centers across Azerbaijan provide 30 government services from nine state entities, including the registration of commercial legal entities and taxpayers, notary services, state registration of civil status acts, and the renewal of identity cards/passports of citizens. ASAN centers have been regarded as successful in providing more transparent and accountable services through a “one window” model that reduces opportunities for rent-seeking and petty government corruption, and as such ASAN is expanding the number of services provided and state entities engaged.

Despite the progress made in reducing corruption in public services delivery, other serious and complex challenges have yet to be tackled, particularly in reducing corruption in the civil service, public procurement, and the judiciary. Popular opinion identifies the Ministry of Taxes and the judiciary as difficult barriers to business in Azerbaijan. The business community has welcomed improvements in customs procedures in 2016, though some contacts have begun to report instances of backsliding. Since late 2016, there have been extensive reforms in the tax regime, but these remain to be fully understood and analyzed by the business community. Local and foreign business leaders have also welcomed the appointment of the new Minister of Taxation as a sign the government recognizes the need for further reforms.

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

Resources to Report Corruption

Contact at government agency or agencies are responsible for combating corruption:

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

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

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

The 1999 Labor Code regulates overall labor relations and recognizes international labor rights. The work-week generally is considered to be 40 hours. The right to strike exists, though industrial strikes are rare. Azerbaijan is a member of the International Labor Organization (ILO) and has ratified more than 57 ILO Conventions. In practice, labor unions are strongly tied to political interests. Collective bargaining is not practiced. Azerbaijan has regulations to monitor labor abuses, health, and safety standards in low-wage assembly operations, but enforcement is less effective. A labor contract between employer and employee technically may be written or oral, but in order to be official there must be a signed agreement. This employment agreement is required for the employee to receive any unemployment or other employment related benefits.

Employment relations are established by an employment contract, which, in most cases, does not necessarily indicate a fixed term of employment. An employer must give an employee two months’ notice of termination, with certain exceptions. An employee can terminate his/her employment contract at any time, but must give one month’s notice. Upon termination of formally registered employment, employers must pay departing employees monetary compensation for unused vacation leave. A formally registered employee who becomes unemployed is entitled to 70 percent of his/her average monthly wage, calculated over the past 12 months at the last place of work.

The Law On Unemployment Insurance signed in August 2017 allows for payments to be made to unemployed individuals registered within the State Employment Fund. The amount of payments will depend on the length of employment insurance records and past average monthly salary. Benefits can be paid for up to 26 weeks within a 12-month period, with the possibility of extending payments if a jobseeker is unable to find work within 12 months. In this case, unemployment benefits are set at the minimum level approved by law, which is USD 50. Azerbaijan is currently working with the World Bank and the European Union to reform the state pension system.

Azerbaijan has an abundant supply of semi-skilled and unskilled laborers. An estimated 40 percent of the Azerbaijani population works in agriculture, although this sector only contributes 6 percent of the country’s GDP. The construction sector tends to use temporary and contractual workers; reportedly many of these workers’ agreements are not formally registered with the government. The relatively limited supply of highly skilled labor remains one of the biggest challenges in Azerbaijan’s labor market. As of 2017, government sources estimate the rate of unemployment at 5 percent, but other sources estimate the figure at 15 percent or higher, with underemployment being much higher. The average monthly wage as of December 2017 was USD 310, and the official minimum wage increased in 2017 to approximately USD 76 (130 AZN) per month, compared to the previous level of approximately USD 68 (116 AZN) per month.

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

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

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

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

Table 3: Sources and Destination of FDI

Source: IMF

Table 4: Sources of Portfolio Investment

Data not available.

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

Policies Towards Foreign Direct Investment

The GOB states attracting FDI is one of the priorities of the country’s foreign policy, and net inflows of FDI have been included in the list of government performance targets since December 2015. The GOB also does not have any specific requirements for foreigners wishing to establish a business in Belarus. Investors, whether Belarusian or foreign, reportedly benefit from equal legal treatment and have the same right to conduct business operations in Belarus by incorporating separate legal entities. However, the existing laws and practices often discriminate against the private sector, including foreign investors regardless of the country of their origin.

Limits on Foreign Control and Right to Private Ownership and Establishment

The GOB asserts foreign and domestic private entities have the right to establish and own business enterprises and engage in all forms of remunerative activity. The GOB also states there are no general limits (statutory, de facto, or otherwise) on foreign ownership or control. In reality, however, the GOB establishes such limits on a case-by-case basis. The limits on foreign equity participation in Belarus are above the average for the 20 countries covered by the World Bank Group’s Investing Across Borders indicators for Eastern Europe and the Central Asia region. Belarus, in particular, limits foreign equity ownership in service industries. Sectors such as fixed-line telecommunications services, electricity transmission and distribution, and railway freight transportation are closed to foreign equity ownership. In addition, a comparatively large number of sectors are dominated by government monopolies, including, but not limited to, those mentioned above. Those monopolies, together with a high-perceived difficulty of obtaining required operating licenses, make it difficult for foreign companies to invest in Belarus. Another example is that under local law, foreign ownership cannot exceed 30 percent in charter funds of Belarusian insurance companies. Finally, the government may restrict investments in the interests of national security (including environmental protection, historical and cultural values), public order, morality protection, public health, as well as rights and freedoms of people.

Although the GOB claims that it does not screen, review, or approve FDI, the above practices suggest the opposite. Belarus retains elements of a Soviet-style command economy, which prescreens and approves all significant foreign investment.

Belarus’s Ministry of Antimonopoly Regulation and Trade is responsible for reviewing transactions for competition-related concerns (whether domestic or international).

Other Investment Policy Reviews

The UN Conference on Trade and Development reviewed Belarus’s investment policy in 2009 and made recommendations regarding the improvement of its investment climate. http://unctad.org/en/Docs/diaepcb200910_en.pdf 

Business Facilitation

Individuals and legal persons can apply for business registration via the web portal of the Single State Register (http://egr.gov.by/egrn/index.jsp?language=en ) – a resource which includes all relevant information on establishing a business.

Belarus has a regime allowing for a simplified taxation system for small and medium-sized, and foreign-owned businesses.

Belarus defines enterprises as follows:

• Micro enterprises – less than 15 employees;
• Small enterprises – from 16 to 100 employees;
• Medium-sized enterprises – from 101 to 250 employees.

Belarus’s investment promotion agency is the National Agency of Investments and Privatization (NAIP). NAIP is tasked with representing the interests of Belarus as it seeks to attract FDI into the country. The Agency states it is a one-stop shop with services available to all investors for:

• organizing fact-finding missions to Belarus, including assisting with visa formalities;
• providing information on investment opportunities, special regimes and benefits, state programs, and procedures necessary for making investment decisions;
• selecting investment projects; and
• providing solutions and post-project support, i.e. aftercare.

To maintain an ongoing dialog with investors, Belarus also has the Foreign Investment Advisory Council (FIAC). Its activities include, but are not limited to:

• developing proposals to improve investment legislation;
• participating in examining corresponding regulatory and legal acts;
• approaching government agencies for the purpose of adopting, repealing or modifying the regulatory and legal acts which restrict the rights of investors. The FIAC is chaired by the Prime Minister of Belarus and includes the heads of government agencies and other state organizations subordinate to the GOB, heads of international organizations, foreign companies and corporations.

Outward Investment

The government does not promote or incentivize outward investment, nor does it restrict domestic investors from investing abroad. According to government statistics, Belarusian businesses’ outward investments in 2017 totaled $5.2 billion.

BITs or FTAs

The GOB maintains foreign entities have the same investment opportunities as Belarusian ones.

Belarus has signed 66 bilateral investment agreements (BITs) with the following states: Armenia, Austria, Azerbaijan, Bahrein, Bangladesh, Belgium, Bosnia and Herzegovina, Bulgaria, Cambodia, China, Croatia, Cuba, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Great Britain, India (terminated 24 March, 2017), Iran, Iraq, Israel, Italy, Jordan, Korea, Democratic People’s Republic of Korea, Republic of Kuwait, Kyrgyzstan, Laos, Latvia, Lebanon, Libya, Lithuania, Luxemburg, Macedonia, Mexico, Moldova, Mongolia, Netherlands, Oman, Pakistan, Poland, Qatar, Romania, Saudi Arabia, Serbia, Singapore, Slovakia, Slovenia, Sudan, Sweden, Switzerland, Syria, Tajikistan, Turkey, Turkmenistan, Ukraine, United Arab Emirates, United States, Venezuela, Vietnam, and Yemen

Such agreements routinely provide for:

• national or most-favored treatment;
• minimum standards; and
• no expropriation for reasons other than for the public benefit on a nondiscriminatory basis and according to the appropriate legal procedure and on conditions of fair compensation.

Currently Belarus is negotiating or renegotiating BITs with several countries, including the Czech Republic, Hungary, India, Slovenia and Sri Lanka.

Belarus is a party to two regional investment agreements within the framework of the Commonwealth of Independent States (CIS): the Agreement on Cooperation in the Field of Investment Activities of December 24, 1993 and the Convention on Protection of the Rights of the Investor of March 28, 1997. Belarus is also a party to the Agreement on Promotion and Reciprocal Protection of Investments in the Member States of the Eurasian Economic Community of December 12, 2008 (other parties are Kazakhstan, Kyrgyzstan, Russia and Tajikistan). Foreign investments among the members of the Eurasian Economic Union (Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia) are governed by Annex 16 to the Treaty on the Eurasian Economic Union signed on May 29, 2014.

According to the GOB, Belarus is also a party to the following agreements:

• Free Trade Agreement between the Eurasian Economic Union and its Member States, and the Socialist Republic of Vietnam;
• Treaty on Eurasian Economic Union;
• Agreement on Trade in Services and Investment in the Member States of the Common Economic Space of Belarus-Kazakhstan-Russia;
• Agreement on Promotion and Reciprocal Protection of Investments in the Member States of the Eurasian Economic Community;
• Convention on Protection of Investor Rights;
• Partnership and Cooperation Agreement Establishing a Partnership between the European Communities and Their Member States, of the One Part, and Belarus, of the Other Part; and
• The Energy Charter Treaty.

Belarus is a party to the Agreement between the Government of Republic of Belarus and the Government of the United States of America on Promotion of Capital Investment (24 June 1992). Belarus and the United States also signed the Agreement between the Republic of Belarus and the United States of America on Stimulation and Protection of Investments (Minsk, 15 January, 1994). That agreement, however, did not enter into force.

Belarus has been a member of the Multilateral Investment Guarantee Agency (MIGA) of the World Bank since December 1992. In July 2011, Belarus ratified amendments to the Convention on Establishing MIGA and concluded agreements on the legal protection of guaranteed foreign investment and the use of local currency. According to Belarus’s Economy Ministry, these agreements finalized procedures for Belarus to become a full member of MIGA.

Bilateral Taxation Treaties

Belarus is the successor of the USSR in the Convention between the Union of Soviet Socialist Republics and the United States of America on Matters of Taxation (Washington, June 20, 1973). In addition, Belarus has 65 such agreements with other countries.

Transparency of the Regulatory System

The government states that its policies are transparent and the implementation of laws is consistent with international norms to foster competition and establish clear rules of the game. However, independent economic experts note that private sector businesses are often discriminated against in relation to public sector businesses. In particular, SOEs often receive government subsidies, benefits and exemptions, including cheaper loans and debt forgiveness. Such beneficial treatment is generally unavailable to private sector companies.

According to Belarusian legislation, drafts of laws and regulations pertaining to investment and doing business are subject to public discussion. Draft legislation is published on government agencies’ websites.

International Financial Reporting Standards (IFRS) have been a part of Belarus legislative framework since 2016. Public-interest entities, which include banks, insurance companies and public corporations with subsidiary companies, are required to publish their financial statements, which comply with IFRS. Such statements are subject to statutory audit.

IFRS in Belarus can be accessed through the Ministry of Finance at the following links:

• http://www.minfin.gov.by/accounting/inter_standards/docs/71f9f73c3eb44bb2.html ;
• http://www.minfin.gov.by/accounting/inter_standards/docs/fa70d11e0cb14c56.html ;
• http://www.minfin.gov.by/accounting/inter_standards/docs/f8f75f4fd1e848df.html ;
• http://www.minfin.gov.by/accounting/inter_standards/docs/eb7753f40f6f49f0.html ;
• http://www.minfin.gov.by/accounting/inter_standards/docs/9d4e40da559e40d4.html .

Belarus has no informal regulatory processes managed by nongovernmental organizations or private sector associations.

International Regulatory Considerations

Belarus is not a WTO member but announced in April 2016 it will step up efforts to join the organization. Belarus has previously committed to hasten efforts to join the WTO without taking corresponding decisions to speed up its possible entry into the WTO. After a 12-year break between meetings of the Working Party on Belarus’s Accession to the WTO, the group met for the eighth time in Washington in January 2017 and the ninth time in September in Geneva. A Belarusian delegation also attended WTO Ministerial conference in Buenos Aires in December 2017 at which time the MFA announced that Belarus still needed to conclude bilateral negotiations on market access for goods and services with 11 WTO members, including the United States, before it can accede to the organization.

Legal System and Judicial Independence

The Belarusian legal system is a civil law system with a legal separation of branches and institutions and with the main source of law being legal act, not precedent. Presidential edicts and decrees, however, typically carry more force than legal acts adopted by the legislature, which risks weakening investor protections and incentives previously passed into law. There is sometimes a public comment process during drafting of presidential decrees, but the process is often not transparent or sufficiently inclusive of investors’ concerns. There are also questions about the judiciary’s independence, which could limit investors’ recourse against the government and SOEs. Article 44 of Belarus’s Constitution guarantees the inviolability of property. Article 11 of the Civil Code safeguards property rights. Belarus has a written and consistently applied commercial law, which is broadly codified. The law, however, contains many inconsistencies and is not always considered to be business friendly.

Each of Belarus’s six regions and the capital city of Minsk have economic courts to address commercial and economic issues. In addition, the Supreme Court has a judicial panel on economic issues. In 2000, Belarus established a judicial panel on intellectual property rights (IPR) protection. Under the Labor Code any claims of unfair labor practices are heard by regular civil courts or commissions on labor issues. However, the judiciary’s lack of independence from the executive branch impedes its role as a reliable and impartial mechanism for resolving disputes, whether labor, economic, commercial, or otherwise.

Laws and Regulations on Foreign Direct Investment

Foreign investment in Belarus is governed by the July 12, 2013 laws On Investments, and On Concessions as well as Presidential Decree No. 10 On the Creation of Additional Conditions for Investment Activity in Belarus which was signed on August 6, 2009) and other legislation as well as international and investment agreements signed and ratified by Belarus. The GOB declares there is no executive or any other interference in the court system that could affect foreign investors. In reality, however, there have been instances of executive interference in the judiciary that have harmed foreign investors’ operations in Belarus.

The GOB regularly updates the following websites with the latest in laws, rules, procedures and reporting requirements for foreign investors:

• http://www.investinbelarus.by/en/ 
• http://www.economy.gov.by/ 
• http://president.gov.by/en/official_documents_en/ 

Competition and Anti-Trust Laws

The June 3, 2016 presidential edict number 188 authorized the Ministry of Antimonopoly Regulation and Trade to counteract monopolistic activities and promote competition in Belarus’s markets.

Expropriation and Compensation

According to Article 12 of the Investment Code, neither Party may expropriate or nationalize investments both directly and indirectly by means of measures similar to expropriation or nationalization, for other purposes than: for the public benefit; on nondiscriminatory basis; according to the appropriate legal procedure; and on conditions of compensation payment,

Belarus has signed 66 bilateral agreements on the mutual protection and encouragement of investments. According to such agreements, neither party may expropriate or nationalize investments either directly or indirectly by means or measures similar to expropriation or nationalization, for purposes other than public benefit or according to the appropriate legal procedure.

Expropriation of private property sometimes occurs in Belarus in the form of de-privatization. That is, the government sometimes seeks to secure majority share in some joint stock companies under various pretexts, e.g. securing the interests of workers, long record of profit-loss, etc. Some successful local businessmen have been forced out of business through bureaucratic methods. In the past there have been instances of confiscation of business property as a penalty for violations of law. Although under the Investment Code, fair compensation for the expropriated property should be offered, the government usually refers to breaches of domestic laws and offers no compensation.

Confiscations are not usually related to any particular industry and are not targeted exclusively at international firms. Both foreign and domestic assets sometimes become subject to expropriation.

Dispute Settlement

There were no known investment disputes with American investors in 2017.

ICSID Convention and New York Convention

Belarus is a party of the Conventions on the Settlement of Investment Disputes between States and Nationals of Other States of March 18, 1965 (ICSID Convention) and of August 9, 1992, and Conventions on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958 and February 13, 1961.

The GOB states that local courts recognize and enforce foreign arbitral awards in compliance with the above conventions, national laws and regulations. The enforcement of arbitral awards in Belarus is governed by Chapter 28 of the Code of Commercial Procedure.

Most of the BITs concluded by Belarus include a provision on international investment arbitration as a mechanism for settling investor-state disputes and recognize the binding force of the awards issued in investment arbitrations.

Under Belarusian law, if an international treaty signed by Belarus establishes rules other than those established by local law, the rules of the international treaty shall prevail.

Investor-State Dispute Settlement

Local economic court proceedings normally do not exceed two months. The term of such proceedings with the participation of foreign persons is normally no longer than seven months, unless established otherwise by the international agreement signed by Belarus.

International Commercial Arbitration and Foreign Courts

Judgments of foreign courts are accepted and enforced if there is a relevant international agreement signed by Belarus. Courts recognize and enforce foreign arbitral awards. International arbitration is accepted as a means for settling investment disputes between private parties. In principle, the GOB accepts binding international arbitration of investment disputes between foreign investors and the state, although the Embassy is not aware of any cases where this has been put to the test. The Belarusian Chamber of Commerce and Industry has an International Arbitration Court. The July 12, 2013 law on mediation, as well as codes of civil and economic procedures, established various alternative ways of addressing investment disputes.

Bankruptcy Regulations

Belarus has a written bankruptcy law adopted on July 13, 2012 and several additional presidential edicts, which are not always consistently applied, especially with regard to SOEs. Some other legal acts, such as the Civil Code, also include certain regulations on bankruptcy-related issues.

Under the bankruptcy law, foreign creditors have the same rights as Belarusian creditors. Belarusian law criminalizes false and intentional insolvency as well as concealing insolvency. According to the World Bank’s 2018 Doing Business Report, Belarus was ranked 68 in Resolving Insolvency, up from 69 in 2017 and 95 in 2016 (rankings available at: http://www.doingbusiness.org/data/exploreeconomies/belarus ).

Investment Incentives

According to the GOB’s Strategy for Attracting FDI, the priority sectors, which need FDI include pharmaceuticals; biotechnology; nanotechnologies and nanomaterials; metallurgy; mechanical engineering industry; production of machines, electrical equipment, home appliances and electronics; transport and related infrastructure; agriculture and food industry; information and communication technologies; creation and development of logistics systems; and tourism. NAIP maintains a database of investment proposals at http://www.investinbelarus.by/en/invest/base/ . The GOB offers various incentives and programs for FDI depending on the sector and industry. The below incentives outline the specific incentives, usually preferential tax rates.

Investment Agreement with the Republic of Belarus

The list of major incentives and benefits under an investment agreement includes but is not limited to:

• Allocation of a land plot without auctioning the right to lease it.
• Removal of vegetation without compensation during construction.
• Full VAT deduction for the purchase of goods, services (works) or property rights.
• Exemption from import tariffs and VAT on the imports of production equipment.
• Exemption from fees for the right to conclude a land lease.
• Exemption from duties for employing of foreign nationals.
• Exemption from compensation for losses sustained by the agriculture and/or forestry industries due to the use of a land plot under the investment agreement.
• Exemption from land tax on land plots in government or private ownership, and from rent on land plots in government ownership, for a period starting from the first day of the month in which the investment agreement came into effect until 31 December of the year following the year in which the last of the facilities scheduled under the investment agreement started operations.
• Investment agreements concluded under the decision of the Belarusian Council of Ministers and with the permission of the President of Belarus may offer additional incentives and benefits not expressly provided for in legislation. Such incentives are provided on a case-by-case basis.

Free Economic Zones

Each of Belarus’s six regions has its own free economic zone (FEZ): Minsk, Brest, Gomel-Raton, Mogilev, Grodno Invest, and Vitebsk. The tax and regulatory pattern applicable to businesses in these zones is simpler and lower than elsewhere in Belarus. To become a FEZ resident, an investor needs to meet the following criteria:

• minimal investment of EUR 1 million, or at least EUR 500,000 provided that this lesser amount is invested in full within a three-year period;
• production of import-substituting products or goods for export.

In October 2005, the President of Belarus signed the edict that established uniform rules for all FEZs. The list of main tax benefits for FEZ residents was revised in December 2016 to include:

• Exemption from corporate profit tax (CPT) for 10 years from the date when the gross profit was declared. That applies to FEZ residents registered after 31 December 2011. Subsequently, CPT is paid at a standard rate as reduced by 50 percent (i.e. equal to 9 percent).
• Exemption from real estate tax on property located on the territory of a FEZ if a resident’s operations are covered under the FEZ tax regime.
• Exemption from land tax and rent on government-owned land plots located within the boundaries of the FEZ and provided for executing construction projects, The exemption is provided for the whole period of construction but for no longer than five years following the registration as a FEZ resident.
• Other exemption from land tax.

FEZs provide some customs benefits too. Starting From January 6, 2017, FEZ residents are exempt from VAT charged by the customs office in regard to goods manufactured (obtained) from foreign goods placed under the customs procedure of a free customs zone, and placed by FEZ residents under the customs procedure for release for domestic consumption.

Otherwise, FEZ residents pay VAT, excise duties, ecological tax, natural resource extraction tax, state duty, patent duties, offshore duty, stamp duty, customs duties and fees, local taxes and duties, and contributions to the Social Security Fund according to the general procedure.

Great Stone Industrial Park

The Great Stone Industrial park is a territorial entity with a special legal status of approximately 91.5 sq. km. The industrial park neighbors the Minsk International Airport and international highway M1 which extends north to Moscow and south to Berlin. Also, Great Stone has access to Klaipeda seaport on the Baltic Sea. According to the GOB’s master plan approved in June 2013, the Park will include production and living areas, offices and shopping malls, financial and research centers.

Great Stone is a joint Belarus-China project though any company – regardless of the company’s country of origin – can apply for residence in the industrial park. To apply, a company has to submit a business project worth at least USD 500,000 that needs to be invested within three years from the moment of the business’s registration; or submit a business project worth at least USD 5 million without any time limit for investment; or submit a business project worth at least USD 500,000 for research and development business projects.

According to the presidential edict dated June 5, 2012, which was updated in 2014 as well as in May 2017, residents are granted with the following preferences for being part of Great Stone:

• exemption from income tax during the first 10 years from the moment of receiving first income and reduction of current income tax rate by 50 percent until 2062;
• exemption from real estate and land taxes for a period until 2062;
• regime of a free customs zone that gives the right to import goods (raw materials) without payment of customs duties (import tariffs, VAT, excise duties) subject to further processing and export outside the countries of the Eurasian Economic Union; VAT exemption also stays for any exports outside the Eurasian Economic Union;
• benefits for employees of companies operating in the Industrial Park: flat personal income tax rates of 9 percent;
• full VAT deduction paid for acquisition of goods (works, services, property rights) used for design, building and equipping buildings and facilities in the Park;
• exemption from tax on dividend income accrued during 5 years starting from the year a Park resident receives its first gross income;
• permission to use foreign currency, securities and/or foreign-currency payment instruments while settling accounts between the Park residents and residents of the Republic of Belarus in terms of currency transactions aimed at the design and construction of Park buildings;
• exemption from recovery of agricultural and/or forestry production losses caused by withdrawal or permanent use of agricultural land and forest land in the Park borders; from compensatory planting and compensation payment for extraction and transfer of flora resources, compensation payment for negative impact on fauna resources and/or its habitat;
• foreign citizens can be employed by the Park residents and can come and stay the Republic of Belarus without entry visa for a period of up to 180 days;
• other preferences.

When new taxes and fees are established in Belarus, the obligation to pay such taxes and fees for Great Stone residents will not be applied. Also investors can rent plots of land on the territory of theIndustrial Park for a period of 99 years or can purchase land plots on the territory.

High Technology Park (HTP)

The HTP, an area in the eastern part of Minsk with a special legal regime, was created in 2005 to foster development of the IT and software development industry. It provides HTP residents beneficial tax preferences, and it has seen tremendous growth since its inception. In 2017, exports of HTP residents jumped 25 percent and totaled USD 1.025 billion. Over 90 percent of its output is export-oriented, predominantly to U.S. and European clients.

The HTP and IT sector underwent modifications in 2017 with the December 21 signing of Presidential Decree No. 8 On the Development of the Digital Economy. The decree came into effect on March 28, 2018, and extends the HTP regime, initially approved until 2022, until 2049. It also significantly expands the list of activities in which HTP residents may engage.

Belarusian companies may apply for the HTP residence regardless of their location, provided that they are engaged in business activities as listed in Decree No. 8, including:

• Analysis, design and software support of IT systems, including their development and deployment, as well as implementation, maintenance and database creation services;
• Data processing using software;
• Technical and/or cryptography systems for data protection;
• Development and deployment of IT for finance/financial technologies;
• Software publishing and promotion;
• Online advertising and intermediary services using software developed by the HTP resident;
• Development, maintenance and deployment of software and hardware using blockchain technology;
• Cryptocurrency exchange and cryptocurrency converter activities, mining, creation of tokens, coin/token;
• offerings and other activities involving the use of tokens;
• Data center services;
• Development and deployment of unmanned vehicle driving systems;
• Development, implementation and deployment of Internet of Things technologies;
• Education programs in ICT and cybersports;
• Other business activities as set forth in legislation.

Tax benefits

HTP residents are required to pay 1 percent of their revenue to the HTP Administration, they are exempt from corporate profit tax and VAT on the sale of goods, services (works) or property rights in Belarus.

HTP residents are exempt from customs duty and VAT on certain kinds of equipment imported into Belarus for use in investment projects. They may also qualify for immovable property tax and land tax benefits with regard to buildings and land within the boundaries of the HTP.

Personal income tax for employees of HTP residents is set at 9 percent. Mandatory social security contributions are calculated and paid not on an employee’s actual pay, but on the national average, which is several times less than in the Belarusian IT industry.

HTP residents are also exempt from offshore duty on dividends paid to their founders/participants registered in offshore jurisdictions.

Pursuant to changes introduced by Decree No. 8, tax on dividends paid by HTP residents will be imposed at 9 percent for individuals and at 5 percent for foreign companies, unless they can benefit from more favorable provisions of the relevant double tax treaty.

In addition, Decree No. 8 exempts HTP residents from Belarusian VAT on licenses and some services of Importance to IT business, including advertising, marketing, consulting and database creation in cases when they are acquired from foreign providers.

Decree No. 8 also enables HTP residents to enter into convertible loan agreements, option contracts and an agreement on providing option to enter into contracts, issue an irrevocable power of attorney and take advantage of certain legal mechanisms, including indemnity and warranties, and representations provisions. For the purpose of regulating relationships between shareholders/ participants, HTP residents will be entitled to enter into shareholders’ agreements governed by laws of a foreign jurisdiction and refer disputes arising under such agreements to courts and arbitration in foreign jurisdictions.

HTP residents will also be entitled to enter into non-competition agreements with their employees and non-solicitation of employees agreements with third parties.

Foreign nationals who are hired by HTP residents under employment contracts or are founders of HTP residents or are employed by such founders will be eligible for visa-free entry into Belarus for a stay of up to 180 days during a year. Foreigners employed by HTP residents will not be required to have working permit in Belarus and will be entitled to apply for a temporary residence permit for the duration of the contract.

HTP residents will be eligible to use a simplified document management procedure when accounting for transactions with nonresidents. Foreign currency surrender requirement does not apply to HTP residents.

After entry into force of Decree No. 8, HTP residents will only be required to notify the competent authorities of their capital currency transactions that normally would require authorization of the National Bank.

Government agencies will not be allowed to inspect operations of HTP residents without prior consent of the HTP Administration.

Investment activities in small towns

Since July 1, 2012, companies and individual entrepreneurs operating in all rural areas and towns enjoy the following benefits in the seven years after registration:

• exemption from profit tax on the sale of goods, work, and services of a company’s own production;
• exemption from other taxes and duties, except for VAT, excise tax, offshore duty, land tax, ecological tax, natural resources tax, customs duties and fees, state duties, patent duties, and stamp duty;
• exemption from mandatory sale of foreign currency received from sale of goods, work, and services of a company’s own production, and from leasing property; and
• no restrictions on insuring risks with foreign insurers.

The special legal regime does not apply to banks, insurance companies, investment funds, professional participants in the securities market, businesses operating under other preferential legal regimes (e.g. FEZ or HTP) and certain other businesses.

Performance and Data Localization Requirements

The host government does not mandate local employment. Foreign investors have the right to invite foreign citizens and stateless persons, including those without permanent residence permit, to work in Belarus provided their labor contracts comply with Belarusian law. The GOB often imposes various conditions on permission to invest, and pursues forced localization policies on a case-by-case basis. Other performance requirements are often applied uniformly to both domestic and foreign investors.

According to official Belarusian information, data storage is not subject to licensing. Law enforcement regulations governing electronic communications do not include any requirements with regard to foreign IT providers. Beginning in 2016, IT providers are required, by law, to maintain all electronic communications for a one-year period.

Real Property

Property rights are enforced by the Civil Code. Mortgages and liens are available, and the property registry system is reliable. Investors and/or duly established commercial organizations with the participation of a foreign investor (investors) have the right to rent plots of land for up to 99 years. According to the Belarusian Land Code, foreign legal persons and individuals are denied land ownership.

For information on the ease of property registration see the World Bank’s Doing Business Report rankings available at: http://www.doingbusiness.org/rankings .

Intellectual Property Rights

Belarus continued to work to improve IPR protections, including through enforcement of its legislation, in 2017. Two years after the U.S. decision to remove Belarus from the Special 301 Watch List, Belarus continues to experience challenges in adequately enforcinging its IPR laws. Enforcement agencies either lack sufficient qualifications to investigate and counter IPR violations or remain focused on areas that have a greater impact on the GoB’s economic model. Despite this, the GoB increasingly understands the need to protect IPR, both to attract and protect foreign investment and also to create a legal framework to protect its own burgeoning IT sector.

According to Belarus’s National Center of Intellectual Property, Belarus, along with fellow Eurasian Economic Union (EAEU) member states Armenia, Kazakhstan, Kyrgyzstan and Russia, signed the Agreement on Management of Copyright and Related Rights on a Collective Basis in December 2017 in order to harmonize various copyright regulations across the EAEU. Also in December 2017, Belarus amended its Law on Patents for Inventions, Utility Models, and Industrial Designs for the purpose of bringing its provisions into compliance with the 2002 Patent Law Treaty which is administered by the World Intellectual Property Organization. The updated Belarusian law expanded validity of a utility model patent from eight to ten years and also provides a mechanism for verifying utility model’s patentability if it is brought before the Board of Appeals of the Patent Office.

In 2015, Belarus was taken off the USTR’s Special 301 Report Watch List. The U.S. remains concerned, however, about the prevalence of counterfeits and continued obstacles to effective enforcement of IPR and expects Belarus to continue improving its IPR regime as part of its WTO accession negotiations. The United States will continue to assist Belarus with technical consultations to that end. Belarus does not appear in the USTR’s Out-of-Cycle Review of Notorious Markets.

The World Intellectual Property Organization (WIPO) provides 186 Country Profiles, including Belarus. These profiles are available at: http://www.wipo.int/directory/en .

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/ .

Resources for Rights Holders

Monica Sendor
Economic Officer
tel.+375 (17) 210-1283
e-mail: usembassyminsk@state.gov

Capital Markets and Portfolio Investment

The Belarusian government welcomes portfolio investment and has taken steps to safeguard such investment and ensure a free flow of financial instruments. The Belarusian Currency and Stock Exchange is open to foreign investors, but it is still largely undeveloped because the government only allows companies to trade stocks if they meet certain criteria, which are often burdensome for many companies, especially private ones. Private companies must be profitable and have net assets of at least 1 million Euro. In addition, any income from resulting operations is taxed at 24 percent. Finally, the state owns more than 70 percent of all stocks in the country, and the government appears hesitant and unwilling to trade in them freely. Bonds are the predominant financial instrument on Belarus’s corporate securities market.

In 2001, Belarus joined Article VIII of the IMF’s Articles of Agreement, undertaking to refrain from restrictions on payments and transfers under current international transactions. Loans are allocated on market terms and foreign investors are able to get them. However, the discount rate of 11 percent (as of October 2017) makes it too expensive for many private businesses, which, unlike many SOEs, do not receive subsidized, reduced interest loans.

Starting in March 2016, Belarus’s National Bank allowed businesses to buy and sell foreign exchange at the Belarusian Currency and Stock Exchange through their banks. Previously they could only buy or sell foreign currencies from or to banks. As part of its liberalizing monetary policy, the National Bank reduced the mandatory sale requirement for businesses from 20 to 10 percent in October 2017, saying at the time “the reduction of the mandatory sale requirement for foreign currency proceeds will contribute to the development of the export potential of economic entities of the Republic of Belarus and will become a consistent step aimed at harmonizing currency regulations within the framework of the Eurasian Economic Union.” The National Bank is said to be poised to abolish mandatory sales by businesses of foreign currency revenues altogether in the first half of 2018.

Money and Banking System

Belarus has a central banking system. The country’s main bank, the National Bank of the Republic of Belarus, represents the interest of the state. It is the main regulator of the country’s banking system. The President of Belarus appoints the Chairperson and Members of the Board of the National Bank, designates auditing organizations to examine its activities, and approves its annual report.

As of January 1, 2018, the banking system of Belarus included 24 commercial banks and three non-banking credit and finance organizations. According to the National Bank, the share of troubled loans in the banking sector was 12.9 percent as of January 1, 2018. The country’s five largest commercial banks, one of which is fully private, account for 77 percent of the total assets of the country’s banking sector, totaling the equivalent of some USD26 billion. To the best of the Embassy’s knowledge, rules on hostile take-overs are clear, and applied on a non-discriminatory basis.

Foreign Exchange and Remittances

Foreign Exchange Policies

According to the GOB, Belarus’s foreign exchange regulations do not include any restrictions or limitations regarding converting, transferring, or repatriating funds associated with investment. Foreign exchange transactions related to FDI, portfolio investments, real estate purchasing, and opening bank accounts are carried out without any restrictions. Foreign exchange is freely traded in the domestic foreign exchange market. Foreign investors can purchase foreign exchange from their Belarusian accounts in Belarusian banks for repaying investments and transferring it outside Belarus without any restrictions.

Since June 1, 2015, the Belarusian Currency and Stock Exchange has traded the U.S. dollar, the euro, and the Russian ruble in a continuous double auction regime. Local banks submit their bids for buying and selling foreign currency into the trading system during the entire period of the trading session. During the trades the bids are honored if and when the specified exchange rates are met. The average weighted exchange rate of the U.S. dollar, the euro, and the Russian ruble set during the trading session is used by the National Bank as the official exchange rate of the Belarusian ruble versus the above-mentioned currencies from the day on which the trades are made. The cross rates versus other foreign currencies are calculated based on the data provided by other countries’ central banks or information from Reuters and Bloomberg. The stated quotation becomes effective on the next calendar day and is valid till the new official exchange rate of the Belarusian ruble versus these foreign currencies comes into force. The IMF has listed Belarus’s exchange rate regime in the floating exchange rate category.

Remittance Policies

There have not been reports of problems exchanging currency and/or remitting revenues earned abroad.

Sovereign Wealth Funds

Belarus has the State Budget Fund of National Development, which is used for implementing major economic and social projects in the country.

Although the number of SOEs is smaller than that of private businesses, SOEs dominate the economy in terms of assets. According to independent economic experts, the share of Belarus’s GDP derived from SOEs is at least 75 percent. Belarus does not consider joint stock companies, even those with 100 percent government ownership of the stocks, to be state-owned and generally refers to them as part of the non-state sector, rendering official government statistics regarding the role of SOEs in the economy as misleading.

According to independent economic media reports, private businesses are often discriminated against compared to SOEs in terms of access to government contracts, subsidized credits, and debt forgiveness. SOEs are allowed to purchase from or supply goods or services to private sector/foreign firms. SOEs are also generally subject to the same tax burden and tax rebate policies as their private sector competitors. Private enterprises are generally disadvantaged against SOEs in terms of preferential access to land and raw materials. Since Belarus is not a WTO member, it is not a party to the Government Procurement Agreement (GPA).

Privatization Program

Belarus’s privatization program is in practice extremely limited. According to the State Property Committee, just one SOE was bought by private investors in 2017, and there were zero privatizations in 2016. The president of Belarus has noted on several occasions that any SOE in the country could be privatized partially or completely, provided an investor offers a good price. It is believed, however, that what the government assesses as a good price and what a potential investor assesses are often vastly different. The country does have a list of open-joint stock companies the stocks of which are available for privatization. The list http://www.gki.gov.by/ru/auction-auinf-auishares/  includes basic information on privatization conditions, and sometimes a brief description of assets listed for privatization.

Interested investors are encouraged to forward a brief letter of interest to the State Property Committee. Letters are reviewed by a special commission that decides on the feasibility of preparing a decision of the President on privatization of shares via tender, auction, or direct sale. The investor may also send a letter of interest regarding assets that are not on the State Property Committee list and the government will examine such offers.

The State Property Committee occasionally organizes and holds privatization auctions. Many of the auctions organized by the State Property Committee have low demand as the government conditions privatizations with strict requirements, including preserving or creating jobs, launching a successful business project within a limited period of time, etc.

In 2016, Belarusian joint stocks were allowed trans-border placement of their stocks via issuing depositary receipts. However, to the Embassy’s knowledge, this instrument of attracting investments has not been put to test in Belarus.

Post continues to develop resources and information on the current state and development of responsible business conduct.

Belarus has effective and non-discriminatory anti-corruption legislation, which includes certain provisions of the Criminal Code and Administrative Code as well as the Law on Public Service and the Law on Combating Corruption. The latter is the country’s main anti-corruption document and was adopted in July 2015. Government organizations directly engaged in anti-corruption efforts are prosecutors’ offices, internal affairs and state security agencies.

Belarusian anti-corruption law covers family members of government officials and political figures. The country’s regulations require addressing any potential conflict of interests of parties seeking to win a government procurement contract. The list of such regulations include the July 13, 2012 law On public procurement of goods (works, services), the December 31, 2013 presidential decree On conducting procurement procedures, and the March 15, 2012 Council of Ministers resolution on the procurement of goods (works, services). Some of the same concerns with the independence of the judiciary also apply in the context of corruption. The lack of an independent judiciary means investors have little recourse to deal with corruption concerns.

Bribery is considered a form of corruption and is punishable with a maximum punishment of 10 years in jail and confiscation of property. Belarus is a party to a number of international anti-corruption conventions and agreements. The Republic of Belarus has consistently ratified and complied with requirements of main international anti-corruption acts, such as the Convention of the Council of Europe 173 On criminal liability for corruption (S 173) (concluded in Strasbourg on 27 January, 1999); The United Nations Convention Against Transnational Organized Crime, signed by Belarus in Palermo on 24 December, 2000, and the United Nations Convention Against Corruption (concluded in New York on 31 October, 2003); the Civil Law Convention on Corruption (concluded in Strasbourg on 4 November, 1999) (ratified in 2005). Belarus also signed a number of the intergovernmental agreements to address this problem.

In December 2017, the Council of Europe’s Group of States against Corruption (GRECO) published summaries of new corruption monitoring reports on Belarus. According to GRECO, the ratification by Belarus of the Council of Europe’s Criminal Law Convention against Corruption has yet triggered a proper revision of the country’s Criminal Code. GRECO notes that in Belarus some developments, such as the adoption of a new anti-crime and anti-corruption program are welcome, yet they are insufficient to ensure compliance which remains globally unsatisfactory.

According to the GOB, Belarus provides protection to NGOs involved in investigations of corruption crimes. According to Belarus’s General Prosecutor’s Office, the greatest number of corruption crimes in 2016 stemmed from government officials as well as individuals in healthcare, trade, industry, agriculture and construction. The Office claims the share of corruption crimes among all registered crimes did not exceed 1.5-2 percent.

Belarus signed and ratified in November 2004 the United Nations Convention against Corruption. Belarus has not joined the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions but is currently considering joining the Convention.

In the Embassy’s estimation, the potential for widespread, politically-inspired violence that would adversely affect foreign property interests is low.

Belarus has a highly skilled and well-educated work force, due to its advanced system of higher and specialized education. Wages are much lower than in Western Europe, the United States, and even Russia.

Belarus has been a member of the International Labor Organisation (ILO) since 1954 and is a party to almost 50 ILO conventions. In 2004, the ILO made several recommendations regarding workers’ rights to organize and freedom of association. Belarus has not adequately responded to those recommendations by the 2004 ILO Commission of Inquiry.

Belarus’s Labor Code regulates all labor issues. Businesses are allowed to offer unlimited short-term contracts. Dismissals of redundant workers are legally allowed without notice to the government. Severance pay in the case of reduction in force is 13 weeks of salary, and 8 weeks’ notice is required for dismissal. Normal work hours in Belarus are 8 hours per day and 40 hours per week. Belarusian law is stringent in limiting overtime hours. Nevertheless, it is allowed to establish a non-standard work hour regime without fixing the number of work hours. In that case an employee must be provided with up to 7 days of additional annual leave. In general, employees must be granted at least 24 calendar days of paid leave a year.

There are special provisions on employing foreign citizens who have no permanent residence permit. Such citizens have to secure a work permit, which can be usually granted only if an unemployed Belarusian citizen cannot perform the required work. To date, the Embassy has not heard of discriminatory or excessively onerous visa, residence or work permit requirements inhibiting foreign investors, nor of restrictions placed on the numbers or duration of employment of foreign managers brought in to supervise foreign investment projects. In practice, however, few firms employ significant numbers of foreigners, apart from Russian citizens, who benefit from Russia’s and Belarus’s common employment regulations streamlined under the Eurasian Economic Union arrangement of Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan.

In July 2000, President Clinton signed a proclamation withdrawing benefits under the Generalized System of Preferences (GSP) for Belarus. This decision was based on a 1997 American Federation of Labor-Congress of Industrial Organizations (AFL-CIO) petition to the United States Trade Representative (USTR). The petition alleged that Belarus was not acting in accordance with the Trade Act of 1974, as amended, regarding internationally recognized worker rights. These include the freedom to form independent trade unions and the right to organize and bargain collectively. The rights of independent trade unions are often subject to government attack, as documented in the Department of State’s Report on Human Rights Practices for 2017. According to the Report, “the government severely restricted independent unions. The government-controlled Federation of Trade Unions of Belarus is the largest union, claiming more than four million members. It largely resembled its Soviet predecessors and served as a control mechanism and distributor of benefits. The Belarusian Congress of Democratic Trade Unions (BCDTU), with four constituent unions and approximately 10,600 members of independent trade unions, was the largest independent union umbrella organization, but tight government control over registration requirements and public demonstrations made it difficult for the Congress to organize, expand, and strike.”

Under Section 5 (Sense of Congress Relating to Sanctions Against Belarus), paragraph C (Prohibition on Loans and Investment) of the Belarus Democracy Act signed by the president on October 20, 2004, No loan, credit guarantee, insurance, financing, or other similar financial assistance should be extended by any agency of the United States Government (including the Export-Import Bank and the Overseas Private Investment Corporation) to the Government of Belarus, except with respect to the provision of humanitarian goods and agricultural or medical products.

According to official statistics, Belarus received $1.24 billion in FDI in 2017, just below the $1.3 billion it received in 2016. Russia, Cyprus, and the United Kingdom are considered the top foreign investors in Belarus. For detailed statistics on foreign direct investments in and outside Belarus for 2010-2016 see the website of Belarus’s National Bank: http://www.nbrb.by/engl/statistics/ForeignDirectInvestments/ .

For the latest available statistics on foreign portfolio investments in Belarus see the website of Belarus’s National Bank: http://www.nbrb.by/engl/statistics/PortfolioInvestment .

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

Data not available.

Table 3: Sources and Destination of FDI

Data not available.

Table 4: Sources of Portfolio Investment

Data not available.

Monica Sendor
Economic Officer
46, Starovilenskaya St., Minsk, 220002, Belarus
tel. +375 (17) 210-1283
email: usembassyminsk@state.gov

Policies Towards Foreign Direct Investment

Georgia is open to foreign investment, and the Georgia National Investment Agency (GNIA) (www.investingeorgia.org ) has an aggressive marketing campaign to encourage more foreign investors to come to Georgia. GNIA is under the Ministry of Economic and Social Development. 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.

Limits on Foreign Control and Right to Private Ownership and Establishment

Georgia does not formally screen foreign investment in the country, other than imposing a registration requirement and certain licensing requirements as outlined below. Foreign investors have participated in most major privatizations of state-owned property. Transparency of privatization has, at times, been an issue. No law or regulation authorizes private firms to adopt articles of incorporation or association that limit or prohibit foreign investment, participation, or control. Cross-shareholder or stable-shareholder arrangements are not used by private firms in Georgia. Georgian legislation does not protect private firms from takeovers. There are no regulations authorizing private firms to restrict foreign partners’ investment activity or limit foreign partners’ ability to gain control over domestic enterprises.

There are no specific licensing requirements for foreign investment other than those that apply to all companies. By law, the government has 30 days to make a decision on licenses, and if the licensing authority does not state a reasonable ground for rejection within that time frame, the license or permit is deemed to be issued. The government only requires licenses for activities that affect public health, national security, and the financial sector. The government currently requires licenses in the following areas: weapons and explosives production, narcotics, poisonous and pharmaceutical substances, exploration and exploitation of renewable or non-renewable substances, exploitation of natural resource deposits, establishment of casinos and gambling houses and the organization of games and lotteries, banking, insurance, securities trading, wireless communication services, and the establishment of radio and television channels. The law requires the state to retain a controlling interest in air traffic control, shipping traffic control, railroad control systems, defense and weapons industries, and nuclear energy. Only the state may issue currency, banknotes, and certificates for goods made from precious metals, import narcotics for medical purposes, and produce control systems for the energy sector.

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) conducted an abbreviated Investment Policy Review most recently in 2014, based on its Policy Framework for Investment.

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

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

Business Facilitation

The GNIA is a governmental institution within the Ministry of Economy and Economic Development. Previously an independent entity under the Prime Minister, GNIA aims to streamline processes for foreign investors and at times play the role of moderator between foreign investors and the government to ensure the investors receive updated information and access to relevant government bodies. GNIA’s services are free of charge. More information can be found at http://www.investingeorgia.org/en/ .

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

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

To register a business, the potential owner must first pay the registration fee, register the company with the Entrepreneurial Register and obtain an identification number and certificate of state and tax registration. Registration fees are: GEL 100 (around USD 45) for regular registration, GEL 200 (USD 90) for expedited registration, plus GEL 1 (bank fees). Second, the owner must open a bank account (free).

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

Outward Investment

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

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

On June 27, 2014, Georgia signed an Association Agreement (AA) and a Deep and Comprehensive Free Trade Area (DCFTA) with the European Union. In 2016, the government signed a free trade agreement with the European Free Trade Association (EFTA) countries of Iceland, Liechtenstein, Norway, and Switzerland. Georgia’s free trade agreement with China entered into force in January 2018. A free trade agreement is in force with the Commonwealth of Independent States and others exist bilaterally with Ukraine, Russia (though trade is restricted by the Russian Government), Kazakhstan, Azerbaijan, Armenia, Moldova, Uzbekistan, Turkmenistan, and Turkey. Georgia has ongoing free trade agreement consultations with Belarus, Kyrgyzstan, the Cooperation Council of Gulf Arab States, and Tajikistan.

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

Bilateral Taxation Treaties

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

Georgia has concluded agreements for avoidance of double taxation with 54 countries: Armenia, Austria, Azerbaijan, Bahrain, Belarus, Belgium, Bulgaria, China, Cyprus, the Czech Republic, Croatia, Denmark, Estonia, Egypt, Finland, France, Germany, Greece, Hungary, Iceland, India, Iran, Ireland, Italy, Israel, Japan, Kazakhstan, Kuwait, Latvia, Liechtenstein, Lithuania, Luxemburg, Malta, the Netherlands, Norway, Poland, Portugal, Qatar, Romania, San Marino, Serbia, Singapore, Slovakia, Slovenia, South Korea, Spain, Sweden, Switzerland, Turkey, Turkmenistan, UAE, Ukraine, the United Kingdom (UK), and Uzbekistan. Treaties have been negotiated but are waiting to be ratified with Lebanon, and Oman, and treaty negotiations have started with Jordan, Montenegro, Saudi Arabia, Vietnam, Iraq, Argentina, Indonesia, Malaysia, Mexico, Albania, Colombia, Moldova, Mongolia, Morocco, New Zealand, Peru, the Philippines, Tajikistan, Uruguay, Brazil, Cuba, Ecuador, Canada, and South Africa. Georgia and Russia signed a double taxation avoidance treaty in 1999, which the Georgian Parliament ratified in 2000; although it has not been ratified by the Russian Duma, Russia regards it as an active agreement.

Transparency of the Regulatory System

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

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

Georgia has six types of tax: corporate profit, value added tax (VAT), property, income, excise, and dividend. The tax on corporate profits is 15 percent. However, in January 2017, the government adopted a corporate profit tax scheme that exempts from income taxation undistributed, reinvested, or retained corporate profits. The VAT is 18 percent. The tax on personal income is 20 percent. The dividend income tax rate is 5 percent. There are no dividend and capital gains taxes for publicly traded equities (a free float in excess of 25 percent). There are excise taxes on cigarettes, alcohol, fuel, and mobile telecommunication. Most goods, except for some agricultural products, have no import tariffs. For goods with tariffs, the rates are five or 12 percent unless excluded by an FTA.

The Georgian National Investment and Export Promotion Agency has Business Information Centers in Tbilisi and other cities intended to provide domestic and foreign businesses with a standard package of information about doing business in Georgia. They also provide specific information for individual businesses. Business Information Centers also facilitate a public-private dialogue to improve communication between regulators and businesses. The government has, additionally, institutionalized engagement with the private sector through an independent Investors Council, which discusses legislative reforms, the government’s economic development plan, and actions that would help grow the economy.

International accounting standards are binding for joint stock companies, banks, insurance companies, and other companies operating in the insurance field, limited liability companies, limited partnerships, joint liability companies, and cooperatives. Private companies are required to perform accounting and financial reporting in accordance with international accounting standards. Sole entrepreneurs, small businesses, and non-commercial legal entities perform accounting and financial reporting according to simplified interim standards approved by the Parliamentary Accounting Commission. Shortcomings in the use of international accounting standards persist, and qualified accounting personnel are in short supply.

The Law of Georgia on Free Trade and Competition provides for the establishment of an independent structure, named 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.

International Regulatory Considerations

Georgia’s AA with the European Union includes provisions for the establishment of the DCFTA. The agreement is designed to gradually introduce European standards in all spheres of Georgia’s economy and sectoral policy: infrastructure, energy, the environment, agriculture, tourism, technological development, employment and social policy, health protection, education, culture, civil society, and regional development. It also provides for the approximation of Georgian laws with nearly 300 items of European legislation.

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

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

Legal System and Judicial Independence

Georgia’s legal system is based on civil law. The Ministry of Justice’s Public Service Halls provide property registration.

Georgia does not have an integrated commercial code. There are, however, a number of different laws and codes (Tax Code, Law on Entrepreneurs, and Law on Insolvency) that constitute the legislative body for regulating commercial activity in Georgia.

According to Freedom House’s 2017 Freedom in the World Report, “judicial independence continues to be stymied by executive and legislative interests,” although judicial transparency and accountability have improved in recent years, in part due to increased media access to courtrooms.” In 2016-17, several commercial disputes raised questions about the ability of the courts to hear commercial cases independently and competently within a reasonable time frame.

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

Laws and Regulations on Foreign Direct Investment

The U.S.-Georgia BIT guarantees U.S. investors national treatment and most favored nation treatment. Exceptions to national treatment have been carved out for Georgia in certain sectors such as maritime fisheries, air and maritime transport and related activities, ownership of broadcast, common carrier, or aeronautical radio stations, communications satellites, government-supported loans, guarantees, and insurance, and landing of submarine cables.

Georgia’s legal system is based on civil law. Legislation governing foreign investment includes the Constitution, the Civil Code, the Tax Code, and the Customs Code. Other relevant legislation includes the Law on Entrepreneurs, the Law on Promotion and Guarantee of Investment Activity, the Bankruptcy Law, the Law on Courts and General Jurisdiction, the Law on Limitation of Monopolistic Activity, the Accounting Law, and the Securities Market Law.

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

Competition and Anti-Trust Laws

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

Expropriation and Compensation

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

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

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

Expropriation disputes are not common in Georgia, although under the previous government (before 2012) reputable NGOs raised cases of illegal revocation of historic ownership rights in Svaneti, Anaklia, Gonio, and Black Sea-adjacent territories. There were cases of transfer of property under the previous government, which lacked transparency and allegedly were implemented under cohesion, and two U.S. companies have recently alleged their assets are being expropriated through government actions.

Dispute Settlement

ICSID Convention and New York Convention

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

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

Investor-State Dispute Settlement

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

Disputes over property rights have, at times, undermined confidence in the impartiality of the Georgian judicial system and rule of law, and by extension, Georgia’s investment climate. The government identified judicial reform as one of its top priorities and Parliament has passed reforms aimed at strengthening judicial independence. In May 2013, parliament reorganized the High Council of Justice, the institution charged with overseeing the administration of the judiciary, to make it more independent and free from political considerations.

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

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

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

International Commercial Arbitration and Foreign Courts

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

Bankruptcy Regulations

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

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

Secured creditors

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

Non secured creditors

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

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

Foreign creditors

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

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

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

According to the “Resolving Insolvency” section of the World Bank’s 2018 Doing Business Report, the Law of Georgia on Insolvency Proceedings made insolvency proceedings more accessible for debtors and creditors, improved provisions on treatment of contracts during insolvency, and granted creditors greater participation in important decisions during the proceedings.

Investment Incentives

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

Approximately 80 percent of the GCF will be invested in Georgia over a period of five years (2013-2018). The remaining 20 percent will be invested internationally. Priority areas with estimated expenditures announced at the launch of the fund are:

• Energy – up to USD 3 billion;
• Hospitality and Real Estate – up to USD 1 billion;
• Agriculture and Logistics – up to USD 0.5 billion;
• Manufacturing – up to USD 1.5 billion;
• Other – up to USD 0.5 billion.

GCF’s minimum internal rate of return (IRR) threshold for investment in projects is 17 percent and it intends to invest 25 to 75 percent of the total equity investment, with a minimum investment of USD 5 million. GCF is expected to retain its ownership interest in the Portfolio Companies for up to seven years, extendable to a maximum of nine. During that period the Fund will exit from its investments by selling its ownership interest through:

• Sale to existing co-owners or partners of the project;
• Sale to external third parties;
• IPO on local and international stock exchanges.

The government’s ‘Produce in Georgia’ 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 of Georgia through its Entrepreneurship Development Agency, National Agency of State Property, and Technology and Innovation Agency of Georgia, the project provides the following support:

• Access to finance;
• Access to real property;
• Technical assistance;
• For more information please visit: http://enterprisegeorgia.gov.ge/en/home .

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

Low labor costs contribute to the attractiveness of Georgia as a foreign investment destination. It is also increasingly recognized as a regional transportation hub that provides access to the New Silk Road trade corridor linking Asia and Europe. However, legislation in 2018 will begin to enforce internationally-recognized labor standards for hard and hazardous industries, which may cause labor costs to increase.

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

Foreign Trade Zones/Free Ports/Trade Facilitation

In June 2007, the Parliament of Georgia adopted the Law on Free Industrial Zones, which defined the form and function of free industrial/economic zones. Financial operations in such zones may be performed in any currency. Foreign companies operating in free industrial zones are exempt from taxes on profit, property, and VAT. Currently, there are four free industrial zones (FIZ) in Georgia:

UAE-based RAK Investment Authority (Rakia) purchased LLC Poti Sea Port in 2008 and began development of a free industrial zone on 300 hectares of land adjacent to the port. In 2011, Rakia sold 80 percent of the Port to APM Terminals, based in the Netherlands and part of the Danish A.P. Moller-Maersk group, but maintains 100 percent ownership of the Poti Free Industrial Zone, the first of its kind in Georgia and the whole Caucasus region. CEFC China Energy Company Limited has reportedly purchased 75 percent of shares of the Poti Free Industrial Zone from Rakia and was in negotiations in November 2017.

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

Another FIZ in Kutaisi is being developed by the Chinese private corporation “Hualing Group,” based in Urumqi, China. The Hualing Group launched its investment in Georgia in 2007 and has invested around USD 500 million in eight large infrastructure and hospitality projects. (http://hualing.ge/language/en/hualing-georgia/ ).

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

Performance and Data Localization Requirements

Performance requirements are not a condition of establishing, maintaining, or expanding an investment, but have been imposed on a case-by-case basis in some privatizations, such as commitments to maintain employment levels or to make additional investments within a specified period of time. Performance requirements such as the scope and time limit on licenses to extract natural resources or production sharing agreements have triggered complaints from some companies that transactions lacked transparency. Most types of performance requirements are prohibited by the U.S.-Georgia BIT.

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

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

Real Property

Secured interests in both real and personal property are recognized and recorded. However, deficiencies in the operation of the court system can hamper investors from realizing their rights in property offered as security. It is recommended that contracts between private parties include a provision for international arbitration of disputes. Mortgages and liens do exists and they are recorded in the National Electronic Registry System.

Foreign individuals and companies may buy non-agricultural land in Georgia. However, Parliament has amended legislation to place some new restrictions for non-Georgian citizens (including Georgian entities with foreign minority shareholders) from purchasing or inheriting agricultural land. According to the new bill, foreigners may own agricultural land if they: inherit the land; co-own the land through marriage to a Georgian citizen or by being a member of a Georgian citizen household; or hold a residence permit. If foreign agricultural land owners can no longer meet the requirements for agricultural land ownership, the alien must sell the agricultural land within six months or the government could seize the land. Also, agricultural plots owned by foreigners must be no larger than 20 hectares. For entities founded by foreigners, the land plot is limited to 200 hectares. Restrictions on land plot size do not apply to international financial institutions, commercial banks, or microfinance organizations. Lastly, the bill stipulates that all agricultural land sales to foreigners require a notarized contract. The notary must check if the alien or the entity registered by an alien under Georgian jurisdiction meets all the legal requirements for agricultural land ownership.

The U.S. government (together with the vast majority of the international community) does not recognize the jurisdiction of the de facto authorities in either the breakaway Abkhazia or South Ossetia regions, and warns American citizens against undertaking business ventures in those Russian-occupied regions. Furthermore, due to the volatility of the political situation, reported high levels of crime, and the limited ability of U.S. Embassy personnel to travel to the Abkhazia or South Ossetia regions to assist American citizens in distress, the Embassy also strongly discourages travel to these areas for any purpose. Land for sale in those regions may rightfully belong to internally displaced persons forced to leave the breakaway regions in the early 1990s and may have been placed improperly on the market. In such cases, the government of Georgia considers the sale of property in Abkhazia and South Ossetia illegal and the property could be reclaimed by original owners at a future date.

The government has developed an electronic registry system for recording land titles and is cooperating with international donors to improve the land cadaster in order to promote the development of Georgia’s land market. Only 25 percent of privatized land in Georgia has a clear title, and the government has suggested a set of measures to simplify land registration and title clarification processes. Although the process for registering land has been simplified, it does not completely mitigate the potential for future land title disputes.

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

Intellectual Property Rights

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 National Intellectual Property Center of Georgia (Sakpatenti) provides legal protection of 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. 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 on the basis of a court decision.

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

Sakpatenti is an active and engaged partner of the United States in training to educate the public on IPR issues. Sakpatenti coordinates the government’s approach to IPR enforcement under the Interagency Coordination Council (Council) for IPR Enforcement. The Council is an efficient platform for government institutions to exchange their views on IPR enforcement issues. According to a 2015 BSA Global Software survey, pirated software penetration decreased from 94 percent to 84 percent in 2015, and the downward trend continued in 2016. Georgia is improving IPR enforcement, but some problems persist. Many judges and lawyers lack sufficient knowledge of IPR laws and issues; pirated video and audio recordings, electronic games, and computer software are sometimes available; and unlicensed content free for users to download or stream is available on some websites.

Legislative Changes

In line with Georgia’s commitments under the DCFTA, to prevent and suppress infringements of IPR and to ensure the implementation of appropriate sanctions, the National Intellectual Property Center of Georgia (SAKPATENTI) drafted a package of amendments to the IP legislation, which was adopted by the Parliament of Georgia on December 23, 2017 and entered into force on 11th of January, 2018. The amendments were made to the following legislative acts regulating intellectual property: the Patent Law of Georgia, the Law of Georgia on Copyright and Related Rights, the Law of Georgia on Design, the Trademark Law of Georgia, the Code of Civil Procedure of Georgia, the Law of Georgia on Pesticides and Agrochemicals, and the Law of Georgia on Drugs and Pharmaceutical Activity.

According to the new amendments, in case of intellectual property rights infringement, the holder is endowed with authority to demand removal from circulation of infringing objects, their destruction, destruction of any images related to them and deletion of the material published online that infringes on exclusive rights, and the destruction of any technical devices, which is used to make these objects. According to the amendments, the holder of exclusive rights is entitled to define, at their discretion, the caused damage and received benefit, and can demand lump sum compensation payment. The new amendments also stipulate provisional measures to preserve relevant evidence and restrain measures related to protection of intellectual property subject-matters, which is especially important in terms of effective enforcement of rights.

Georgia is also approximating laws on “border measures related to IPR” with the EU regulation N608/2013. Amendments were introduced in 2017, which included additional intellectual property objects to be protected at the border, including: design, patent, utility model, topographies of integrated circuits, new breeds of animals, and varieties of plants. Under the new amendments, customs authorities are entitled to take Ex-officio actions at the border and detain suspected IP rights infringing goods.

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

In 2017, Investigation Service of the Ministry of Finance of Georgia initiated 21 cases under Article 189 of the Criminal Code of Georgia (infringement of rights of owners of copyright, related rights or database makers) and Article 196 (unlawful use of trademark (service marks) or other commercial designations). As a result, 42,876 items of counterfeit goods were seized, with the total value of GEL 148,323 (USD 60,000).

The Customs Department issued 120 orders on suspension of goods during the same period. Of these, in 53 cases the rights holder and the owner of the goods agreed on destruction of the goods. In 13 cases, the rights holder filed a lawsuit, and in 49 cases, the goods were released, because the goods were not proven to be counterfeit. In five cases, the goods are currently suspended as of the time of this report’s publication. The total value of the counterfeit goods destroyed on the basis of agreement between the rights holder and the owner of the goods (53 cases) is GEL 120,940.

The Tax Monitoring Department of the Revenue Service opened 14 cases related to infringements of rights on intellectual property subject-matters. As a result, 7,851 items of counterfeit goods were seized, with the total value of GEL 24,465 (USD 62,000).

Georgia is not listed in USTR’s Special 301 report. Similarly, Georgia is not listed in the notorious market report. 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/ .

Resources for Rights Holders

Charles F. Seten
Economic Officer
(995) 32 227 7629
SetenCF@state.gov

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

American Chamber of Commerce in Georgia
36a Lado Asatiani St., 0105, Tbilisi, Georgia
Tel: (995) 32 222 6907
E-mail: amcham@amcham.ge

Capital Markets and Portfolio Investment

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

The Georgian Stock Exchange (GSE) is the only organized securities market in Georgia. Designed and established with the help of USAID and operating under a legal framework drafted with the assistance of American experts, the GSE complies with global best practices in securities trading and offers an efficient investment facility to both local and foreign investors. The GSE’s automated trading system can accommodate thousands of securities that can be traded by brokers from workstations on the GSE floor or remotely from their offices.

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

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

Credit from commercial banks is available to foreign investors as well as domestic clients, although interest rates are high. Banks continue offering business, consumer, and mortgage loans.

Money and Banking System

Banking is one of the fastest growing sectors in the Georgian economy. The banking sector is well-regulated and capitalized despite regional and global challenges faced in many neighboring countries. As of January 1, 2018, 16 commercial banks, including 15 foreign-controlled banks made up the banking sector in Georgia. In January 2018, the total assets of Georgian commercial banks were GEL 33.7 billion (around USD 13.5 billion). In the beginning of 2017, there were 73 microfinance organizations operating in Georgia, with total assets of USD 1.5 billion.

Two Georgian banks are listed on the London Stock Exchange: TBC Bank (listed in 2014) and the Bank of Georgia (2006).

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

The International Finance Corporation (IFC), the European Bank for Reconstruction and Development (EBRD), the U.S. Overseas Private Investment Corporation (OPIC), the Millennium Challenge Corporation (MCC), the Asian Development Bank (ABD), and other international development agencies have a variety of lending programs that make credit available to large and small businesses in Georgia. Georgia’s two largest banks – TBC and Bank of Georgia have correspondent banking relationships with the United States through Citibank, N.A.

Foreign Exchange and Remittances

Foreign Exchange

Georgian law guarantees the right of an investor to convert and repatriate income after payment of all required taxes. The investor is also entitled to convert and repatriate any compensation received for expropriated property. Georgia has accepted the obligations of Article VIII, Sections 2, 3, and 4 of the IMF Articles of Agreement, effective as of December 20, 1996, undertaking to refrain from imposing restrictions on payments and transfers for current international transactions and from engaging in discriminatory currency arrangements or multiple currency practices without IMF approval. Parliament’s 2011 adoption of the Act of Economic Freedom further reinforced this provision.

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

Foreign investors have the right to hold foreign currency accounts with authorized local banks. The sole legal tender in Georgia is the lari (GEL), which is traded on the Tbilisi Interbank Currency Exchange and in the foreign exchange bureau market.

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

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

Remittances

There is no difficulty in obtaining foreign currency, nor are there significant delays in remitting funds overseas through normal channels. Several Georgian banks participate in the SWIFT and Western Union interbank communication networks. Businesses report that it takes a maximum of three days for money transferred abroad from Georgia to reach a beneficiary’s account, unless otherwise provided by a customer’s order. There are no known plans to change remittance policies. Travelers must declare at the border currency and securities in their possession valued at more than GEL 30,000 (around USD 15,000).

After the fall of the Soviet Union, the new Georgian government privatized most state-owned enterprises (SOEs). At the end of 2013, the major remaining SOEs were Georgian Railways, Georgian Oil and Gas Corporation (GOGC), Georgian State Electrosystem (GSE), Electricity System Commercial Operator (ESCO), and Enguri Hydropower plant. Of these companies, only Georgian Railways is a major market player. The energy-related companies largely implement the government’s energy policies and help manage the electricity market. There are also a number of Legal Entities of Public Law (LEPLs), independent bodies that carry out government functions, such as the Public Service Halls.

During 2012, Georgian Railways, Georgian Oil and Gas Corporation (GOGC), Georgian State Electrosystem, and Electricity System Commercial Operator LLC assets were placed under the Partnership Fund, a state-run fund to facilitate foreign investment into new projects. In addition, the fund controls 25 percent of shares in TELASI Electricity Distribution Company, but has stated its intention to sell those shares.

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

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

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

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

Privatization Program

Georgia’s government has privatized most large SOEs. Successful privatization projects include major deals in energy generation and distribution, telecommunications, water utilities, port facilities, and real estate assets. A list of entities available to be privatized can be found on the following website: www.privatization.ge . Foreign investors are welcome to participate in privatization programs. Information on investment conditions and opportunities can be obtained from the Georgia National Investment and Export Promotion Agency. Further information is also available at a website maintained by the American Chamber of Commerce in Georgia at: www.amcham.ge .

While the concept of Corporate Social Responsibility (CSR) is not highly developed in Georgia, it is growing. Most large companies engage in charity projects and public outreach as part of their marketing strategy. The American Chamber of Commerce in Georgia has a Corporate CSR committee that works with member companies on CSR issues. The Global Compact, a worldwide group of UN agencies, private businesses, and civil society groups promoting responsible corporate citizenship, is active in Georgia. The Eurasia Partnership Foundation launched a program on corporate social investment, promoting greater engagement of private companies in addressing Georgia’s development needs.

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

Articles 332-342 of the Criminal Code criminalize bribery. Senior public officials must file financial disclosure forms which are posted online, and Georgian legislation provides for civil forfeiture of the undocumented assets of public officials who are charged with corruption offenses. Penalties for accepting a bribe start at six years in prison and can extend up to 15 years depending on the case’s circumstances. Penalties for giving a bribe can include a fine, a minimum prison sentence of two years, or both. In aggravated circumstances, when a bribe is given to commit an illegal act, the penalty can be from four to seven years. Abuse of authority and exceeding authority by public servants are criminal acts under Articles 332 and 333 of the criminal code and carry a maximum penalty of 8 years imprisonment. The definition of a public official includes foreign public officials and employees of international organizations and courts. White collar crimes such as bribery fall under the investigative jurisdiction of the Prosecutor’s Office.

Georgia is not a signatory to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Georgia has, however, ratified the UN Convention against Corruption. Georgia cooperates with the Group of States against Corruption (GRECO) and the OECD’s Anti-Corruption Network for Transition Economies (ACN).

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

Since 2003, Georgia has significantly improved its ranking in Transparency International’s Corruption Perceptions Index (CPI) report. In 2017, Georgia’s CPI score was 56 and it ranked 46th out of 180 countries surveyed in the Corruption Perception Index. Georgia is ahead of its regional and Eastern European peers in this regard, as it outscores the Czech Republic, Malta, Croatia, Slovakia, Greece, Romania, Italy, Turkey, Russia, Armenia, and Azerbaijan.

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

Resources to Report Corruption

Government agency responsible for combating corruption:

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

Non-governmental organization:

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

Georgia suffered considerable instability in the immediate post-Soviet period. After independence in 1991, civil war and separatist conflicts flared up along the Russian border in the areas of Abkhazia and South Ossetia. The status of each region remains contested, and the central government does not have effective control over these areas. The United States supports the territorial integrity of Georgia within its internationally-recognized borders. In August 2008, tensions in the region of South Ossetia culminated in a brief war between Georgia and Russia. Russia invaded and occupied areas of undisputed Georgian territory. While the separatist regions of South Ossetia and Abkhazia – where Russian troops and border guards have established a long-term presence – have declared independence, only Russia, Venezuela, Nicaragua, and Nauru recognize them. Tensions still exist both inside the breakaway regions and near the administrative boundary lines, but other parts of Georgia, including Tbilisi, are not directly affected.

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

Georgia offers skilled and unskilled labor at attractive costs compared not only to Western European and American standards, but also to Eastern European standards. Skilled labor availability in the engineering fields remains underdeveloped. The official unemployment rate was 11.8 percent in 2016 according to State Department of Statistics, but actual unemployment is considerably higher given significant underemployment in the working population, especially in rural regions where subsistence farmers are considered employed for statistical purposes and job creation has remained a particular challenge. Recently, 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 (41 per week), and annual leave (24 calendar days). Other wage and hour issues are to be agreed between the employer and employee. Amendments to the Labor Code in July 2013 defined grounds for termination; the code defines severance pay for an employee at the time of termination of a labor relation, including the payment term. An employer is obliged to give compensation of not less than a month’s salary to an employee within thirty (30) days. According to the amendments, 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 41 hours), which must be paid at an increased hourly rate.

The amended Labor Code specified essential terms for labor contracts, including: the starting date and the duration of labor relations, working hours and holiday time, location of workplace, position and type of work, amount of salary and its payment, overtime work and its payment, the duration of paid and unpaid vacation and leave, and rules for granting leave. The code states that the duration of a business day for an underage person (ages 16 to 18) should not exceed 36 hours per week. Regulations prohibit interference in union activities and discrimination of an employee due to union membership. The amendments also mandated that the government reestablish a labor inspectorate to ensure adherence to labor safety standards. The government established a labor inspection program under the Ministry of Labor, Health, and Social Affairs, created a chief labor inspector position, and hired 25 labor inspectors. On March 7, 2018, Parliament passed the Occupational Safety, and Health (OSH) Law that gives the government power to make unannounced inspections in some circumstances in companies operating among “hard, harmful, hazardous, and increased danger” occupations. The list of hazardous industries has not yet been enumerated, but will likely include construction, mining, metallurgy, energy, oil, gas, and others.

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

Employers are not required to pay social security contributions for employees. Employees pay a flat 20 percent income tax. The state social security system provides modest pension and maternity benefits. The minimum monthly pension is GEL 180 (USD 70). The average monthly salary across the economy in Georgia in 2016 was GEL 950 (around USD 380). The minimum wage requirement for state sector employees is GEL 115 (USD 46) per month. Legislation on the official minimum wage in the private sector has not changed since the early 1990s and stands at GEL 20 (USD 8) per month, but is not applied in practice and is not being used for reference.

Georgia has ratified some ILO conventions, including the Forced Labor Convention of 1930; the Paid Holiday Convention of 1936; the Anti-Discrimination (Employment and Occupation) Convention of 1951; the Human Resources Development Convention of 1975; the Right to Organize and Collective Bargaining Convention of 1949; the Equal Remuneration Convention of 1951; the Abolition of Forced Labor Convention of 1957; the Employment Policy Convention of 1964; and the Minimum Age Convention of 1973.

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

• Human Rights Report: https://www.state.gov/j/drl/rls/hrrpt/humanrightsreport/index.htm;
• Child Labor Report: http://www.dol.gov/ilab/reports/child-labor/georgia.htm .

The Overseas Private Investment Corporation (OPIC) is the U.S. Government’s development finance institution. OPIC finance and political risk insurance programs assist U.S. companies with investing overseas. Since 1993, OPIC has committed over USD 500 million in financing and political risk insurance for more than 50 projects in Georgia. OPIC investment in Georgia has focused on the following sectors: credit for small and medium-sized enterprises, and projects in the franchising, education, manufacturing, tourism, agriculture and health care sectors. Some recent examples are OPIC’s USD 18 million loan commitment to finance a Marriott hotel in Tbilisi, a USD 10 million loan commitment to finance a Radisson hotel in Kakheti, and an USD 18 million loan commitment to finance a hospital in Tbilisi.

American companies in Georgia face severe competition from Chinese companies; those companies are often state owned, or could be private, and in both cases are supported by Chinese ExIm bank or other trade/investment tools.

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

* GeoStat (Georgia National Statistics Office)

Table 3: Sources and Destination of FDI

The IMF’s calculations of foreign direct investment (FDI) in Georgia differ from the Georgian government’s official calculations. The most recent IMF statistics available regarding Georgia’s FDI are from 2016.

Source: IMF Coordinated Direct Investment Survey

Table 4: Sources of Portfolio Investment

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

Charlie Seten
Economic Officer
U.S. Embassy Tbilisi
Georgia
Telephone: +995-32-227-7629
Email: setenCF@state.gov

Policies Toward Foreign Direct Investment

Moldova, one of the poorest countries in Europe, relies heavily on foreign trade and remittances from its workers abroad for its economic growth. Under Moldovan law, foreign companies enjoy national treatment in most respects. In principle, the government views FDI as vital for sustainable economic growth and poverty reduction. In the last year, the government has sought to attract more foreign investors into the country. However, the amount of FDI received is far below what Moldova needs to create jobs and promote economic growth.

Moldova enjoyed a period of increased FDI with eastward expansion of the EU into Romania on January 1, 2007. However, the 2008 global financial crisis significantly decreased FDI in Moldova, which has yet to return to pre-crisis levels. Remittances have also not regained their 2008 levels and have been falling further in recent years, reflecting slower growth in the region and the falling value of the Russian ruble (most remittances are from workers paid in Russian rubles.)

Moldova’s development path in recent years has been guided by agreements with the EU for reforms in trade policy and the judiciary. Following the expiration of a Moldova-EU Action Plan in 2008, Moldova negotiated its AA with the EU, which was signed in June 2014 and ratified on July 1, 2016. Moldova hopes the AA will bring closer political association and economic integration with the EU. The DCFTA, a component of the AA, provides for mutual elimination of customs duties on industrial and most agricultural products and for further liberalization of the services market. It also addresses other barriers to trade and reforms in economic governance, with the goal of strengthening transparency and competition and adopting EU product standards. Moldova hopes to eventually join the common EU market.

As a country with a small economy, Moldova hopes a liberalized trade and investment strategy will increase the export of its goods and services.

A member of the WTO (World Trade Organization) since 2001, Moldova has signed free trade agreements with countries of the former Soviet Union. In December 2006, Moldova joined the Central European Free Trade Agreement. In 2008, Moldova moved from the extended generalized system of preferences (GSP-plus) with the EU to Autonomous Trade Preferences (ATP), which expanded the duty-free access of Moldovan goods to EU markets. The EU is the country’s largest export destination, absorbing more than half of all Moldovan exports. The EU extended ATP to Moldova in 2008. In September 2014, the DCFTA supplanted the ATP regime.

Since September 2013, Moldova has faced a Russian ban on its alcoholic beverage exports. After signing of the AA and DCFTA by Moldova in 2014, Russia imposed additional trade bans seriously affecting Moldova’s exports of fruit, canned products, and fresh and processed meat.

The government has approved an activity program for 2016-2018 that centers on EU integration. The program also sets economic development, creation of well-paid jobs, elimination of corruption, and rule of law among key objectives. The government also approved an Action Plan for the implementation of the Moldova-EU AA and DCFTA for the period 2017-2019. The government has identified in its national development strategy “Moldova 2020” seven priority areas for development and reform: education, access to financing, road infrastructure, business regulation, energy efficiency, justice system, and social insurance. The government has made a formal commitment to accelerate the country’s development by making the economy more capital-intensive, sustainable, and knowledge-driven.

Limits on Foreign Control and Right to Private Ownership and Establishment

Under Moldovan law, foreign companies enjoy national treatment in most respects. The Law on Investment in Entrepreneurship prohibits discrimination against investments based on citizenship, domicile, residence, place of registration, place of activity, state of origin, or any other grounds. The law provides for equitable and level-field conditions for all investors and rules out discriminatory measures hindering management, operation, maintenance, utilization, acquisition, extension, or disposal of investments. Local companies and foreigners are to be treated equally with regard to licensing, approval, and procurement. Companies registered in questionable jurisdictions like Northern Cyprus, Kenya or Nigeria are prohibited from holding shares in commercial banks.

By statute, special forms of legal organizations and certain activities require a minimum of capital to be invested (e.g., MDL 20,000 (USD 1,200) for joint stock companies, MDL 15 million (USD 910,000) for insurance companies, and MDL 100 million (USD 6.1 million) for banks).

Moldovan law restricts the right to purchase agricultural and forest land to Moldovan citizens. Foreigners may become owners of such land only through inheritance and may only transfer the land to Moldovan citizens. In 2006, Parliament further restricted the right of sale and purchase of agricultural land to the state, Moldovan citizens, and legal entities without foreign capital. However, foreigners are permitted to buy all other forms of property in Moldova, including land plots under privatized enterprises and land designated for construction. There are reportedly Moldovan-registered companies with foreign capital known to own agricultural land by means of loopholes in the previous law. The only straightforward option available to foreigners who wish to use agricultural land in Moldova is to lease the land.

Other Investment Policy Reviews

The latest Investment Policy Review of Moldova was conducted the United Nations Conference on Trade and Development (UNCTAD) in 2013 and can be accessed here: http://unctad.org/en/Pages/DIAE/Investment percent20Policy percent20Reviews/Investment-Policy-Reviews.aspx .

Moldova was last subject to a trade policy review by the WTO published in October 2015 and can be accessed here: https://www.wto.org/english/tratop_e/tpr_e/tp423_e.htm .

Business Facilitation

The government has taken steps over the years to simplify and streamline the process of business registration and licensing, lower tax rates, strengthen tax administration and increase transparency.

Business registration is overseen by the Public Services Agency, created in 2017 as a result of the merger of the State Registration Chamber, Licensing Chamber, Land Registry, Civil Records Service, and the Center for State Information Resources “Registru”.

By law, registration should take five days for a standard procedure or four hours for an expedited procedure and is done in two stages. The first stage involves submission of an application and a set of documents, the range of which may vary depending on the legal form of the business (LLC, joint-stock company, sole proprietorship, etc.). At the second stage, the agency issues a registration certificate and a unique identification number for the business, conferring full legal capacity to the entity. In 2010, the government introduced the “one-stop-shop” principle, under which businesses are relieved of the requirement to register separately with fiscal, statistical, social security, or health insurance authorities. There are currently no procedures for online business registration.

Certain types of activity listed in the law on licensing entrepreneurial activity require businesses to be first licensed by public authorities. A business license may also be obtained through the online platform www.servicii.gov.md .

In March 2006, the Moldovan Parliament ratified the 1961 Hague Convention on Abolishing the Requirement for Legalization for Foreign Public Documents. Acceptance of U.S. apostilles applied on official documents simplifies the legalization of official documents issued in the U.S. that are required in the process of business registration.

Moldova has an investment promotion agency called Moldovan Investment and Export Promotion Organization (MIEPO) to assist prospective investors with information about business registration or industrial sectors, facilitate contact with relevant authorities, and organize study visits. MIEPO has an investment guide available on its website  www.miepo.md . In 2018, the Government passed a decision to set up a new Investment Agency that incorporates MIEPO and the Tourism Agency.

The government set up a special council for promoting investment projects of national importance to tackle red tape stifling the launch of large business investments.

Outward Investment

Moldova does not have an official policy or mechanism for promoting or incentivizing outward investment.

Moldova has signed bilateral investment protection and promotion agreements with 42 countries. In addition to the U.S., these include Albania, Austria, Azerbaijan, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, China, Croatia, the Czech Republic, Cyprus, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, Iran, Israel, Italy, Kuwait, Kyrgyzstan, Latvia, Lithuania, Luxembourg, Montenegro, the Netherlands, Poland, Qatar, Romania, Russia, Slovakia, Slovenia, Spain, Switzerland, Tajikistan, Turkey, Ukraine, the United Kingdom (U.K.) and Uzbekistan.

Moldova has a bilateral treaty with the U.S. on the Encouragement and Reciprocal Protection of Investment. Moldova has not signed a separate bilateral taxation treaty with the U.S.; however, the U.S. Government applies the Convention on Matters of Taxation signed with the USSR on June 20, 1973, which also deals with avoidance of double taxation, to former Soviet republics, including Moldova.

Moldova has signed free trade agreements with 43 countries, among them member states of the Commonwealth of Independent States (CIS) and the Central European Free Trade Agreement (CEFTA). In 2008, Moldova moved from the extended generalized system of preferences (GSP-plus) with the EU to ATP, which expanded the duty-free access of Moldovan goods to EU markets. In September 2014, the DFCTA supplanted the ATP regime.

Transparency of the Regulatory System

Bureaucratic procedures are not always transparent, and red tape often makes processing registrations, ownership, etc. unnecessarily long, costly, and burdensome. Discretionary decisions by government officials provide room for abuse and corruption. While the government has adopted a number of laws to improve the business environment and reduce excessive state controls and regulation, effective implementation of these laws is often lacking. The inconsistent application of laws and regulations undermines fair competition and adds uncertainty for less politically-connected businesses, particularly small- and medium-sized businesses as well as new entrants.

The Moldovan government publishes significant laws in draft form for public comment. Draft laws are also available online on the website of the Moldovan Parliament. Business and trade associations provide other opportunities for comment. The working group of the State Commission for Regulation of Entrepreneurial Activity, which was established as a filter to eliminate excessive business regulations, meets to vet draft governmental regulations dealing with entrepreneurship. The working group’s meetings are open to interested businesses and the agenda is published online. Laws and regulations are published in the official gazette called Monitorul Oficial, while a database of laws and regulations is available online at lex.justice.md . The Economic Council under the Prime Minister is another platform for discussion of government-proposed business initiatives.

Moldova made a commitment to implement International Financial Reporting Standards (IFRS) in 2008. Since January 1, 2015, Moldova has been applying new national accounting standards based on IFRS and EU directives. Use of IFRS has been required by law for all public interest entities since 2011. Public interest entities are defined as financial entities, investment funds, insurance companies, private pension funds, and publicly listed entities.

The Foreign Investors Association (FIA) was established in 2004 with the support of the Organization for Economic Cooperation and Development (OECD). The FIA engages in a dialogue with the government on topics related to the investment climate and produces an annual publication of concerns and recommendations for the improvement of the investment climate. In 2006, the American Chamber of Commerce (AmCham) registered in Moldova, representing another voice for the business community. In 2011, a group of ten large EU investors founded the European Business Association (EBA.) The three largest foreign business associations – AmCham, FIA and EBA – handed the government a list of business constraints and recommendations to improve the investment climate.

Since 2008, the National Business Agenda supported by the U.S. Center for International Private Enterprise (CIPE) has organized 30 domestic business associations, putting forth an annual list of priorities in their dialogue with the authorities. These priorities deal with the general business environment and regulatory framework.

Since 2004, the government has been taking steps to reduce excessive government regulation of business activity. The government approved a 2018-2020 action plan to implement the strategy to reform the business regulatory framework for 2013-2020. The plan aims to further streamline the regulatory framework and administrative procedures.

All regulations and governmental decisions related to business activity have been published in a special business registry “Register of Regulations on Business Activity” in order to raise businessmen’s awareness of their rights, increase the transparency of business regulations and help fight corruption. The Law on Basic Principles Regulating Entrepreneurial Activity was passed in August 2007. The government has started applying a regulatory impact assessment (RIA) to draft laws bearing on business activity to enhance transparency in the drafting of laws and regulatory acts.

As part of a USAID-backed program, the Ministry of Economy reviewed the number of permits and authorizations issued to businesses as well as the number of authorities issuing such documents. As a result, the government approved a list of business permits and authorizations, and banned governmental agencies and inspections from issuing or requesting any form of documents not included in the list.

In 2012, parliament passed a law to introduce clear and uniform rules for the release of information and standardized documents through a “one-stop window.”

A law simplifying the system of inspectorates and various inspection bodies was adopted in 2017 to increase efficiency and reduce regulatory burden, however relevant secondary legislation aimed to guarantee its implementation is not yet in place. Through the reformation of inspection bodies, the government wants to reorganize the state inspection registry for better planning and monitoring of inspectors’ activity.

The World Bank’s Cost of Doing Business 2017 survey shows that the time spent by companies dealing with regulatory authorities saw no change in 2017 from the year before. Despite reported improvements, the survey notes that only 20 percent of business managers consider that the business climate really improved in 2017. While 57 percent of managers do not see any change, 23 percent believe it has worsened.

In 2016, the government made a decision to merge several agencies – the State Registry, Cadastral Office, the Licensing Chamber, State Registration Chamber and Civil Status Archive – into a Public Service Agency as a one-stop shop for business registration and licensing.

International Regulatory Considerations

European integration is a fundamental priority for Moldova’s current government. The AA including the DCFTA significantly strengthens Moldova’s political association and economic integration with the European Union. The AA/DCFTA has binding regulatory provisions committing Moldova to a reform agenda and to approximating domestic legislation to EU standards in a range of areas including corporate law, labor, consumer protection, competition and market surveillance, general product safety, tax, energy, customs duties, public procurement, etc. Under the DCFTA, Moldova will gradually abolish duties and quotas in mutual trade in goods and services, and will eliminate non-tariff barriers by adopting EU rules on health and safety standards, as well as intellectual property rights, among others. The agreement contains a timeframe for implementation of provisions with deadlines of up to ten years.

Moldova has been a member of the WTO since 2001 and, as such, is a signatory to the General Agreement on Trade in Services (GATS), the Agreement on Trade Related Investment Measures (TRIMs) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). These agreements contain major investment-related provisions, such as opening to the establishment of foreign service providers, prohibition of local-content, trade-balancing and domestic-sales requirements (TRIMs), and protection of intellectual property of investors (TRIPS). No major inconsistencies with WTO TRIMS have been reported.

As a WTO member, Moldova has to notify draft technical regulations to the WTO Committee on Technical Barriers to Trade. Also, in 2016 Moldova ratified the WTO Trade Facilitation Agreement and adopted a 2018-2020 Trade Facilitation Action Plan on November 30, 2017. The plan comprises 91 actions, with an estimated budget of over EUR 137.1 million and will be implemented by 14 government agencies in cooperation with the private sector under the guidance of the Economic Council under the Prime Minister, which acts as the National Trade Facilitation Committee. While an estimated 80 percent of measures focus on customs performance, the plan also provides for the setup of information points; discussion of relevant drafts with the business community and civil society; strengthening of the capacities of the National Food Safety Agency (ANSA) with integrated management information system for streamlining and standardizing the issuance of permissive documents; management of food safety registries; and supporting automated exchange of data with the European Union and Commonwealth of Independent States. It also involves expanding the capacities of the National Accreditation Center (MOLDAC) in new areas of accreditation, so that it can join the European Cooperation for Accreditation (EA) Multilateral Recognition Arrangement (MLA) and International Laboratory Accreditation Cooperation (ILAC) mutual recognition agreement (MRA). The action plan aims to eliminate border-crossing costs for companies engaged in foreign trade.

Also, the government announced a new draft of the Customs Code for public consultations, which merges existing separate laws on customs procedures and goods crossing national borders and approximates national customs rules to the EU Customs Code. In 2017, the government changed customs rules to align with the EU Authorized Economic Operator requirements and Approved Exporter conditions.

As a result of negotiations linked to Moldova’s accession to the WTO, modern commercial legislation was adopted in accordance with WTO rules. The main challenges to the business climate remain the lack of effective and equitable implementation of laws and regulations, and arbitrary, non-transparent decisions by government officials who may apply measures that put domestic producers at an advantage in relation to foreign competitors in certain areas. For example, an environmental tax is applied on bottles and other packaging of imported goods, while such a tax is not levied on bottles and packaging produced in Moldova. Additionally, the government may cite public security or general social welfare as reasons to intervene in the economy in contravention of its declared respect for market principles. There are reports of problems with customs valuation of goods.

Legal System and Judicial Independence

Moldova has a civil law legal system with codified laws that govern different aspects of life, including business, trade, and the economy. The country’s legal framework consists of its constitution, organic, and ordinary laws passed by the parliament and normative acts issued by the government and other public authorities. Moldovan courts are nominally independent from government and political interference, but suffer from low efficiency and lack of popular trust.

Starting in 2003, the court system has undergone several changes that eliminated economic courts, which were seen as fertile soil for corruption, and currently consists of lower courts (i.e. trial courts), four courts of appeal, and the Supreme Court of Justice.

Moldova is preparing a new justice reform strategy after extending the implementation period for a current reform strategy ending in 2016 due to delays during the implementation period. Parliament passed amendments in 2016 optimizing the country’s court system as part of the larger justice sector reforms, which reduces the number of trial courts in Moldova. All specialized courts such as the Commercial Circumscription Court and Military Court ceased their activities. Five trial courts from Chisinau were merged into one court – the Chisinau trial court, while the Chisinau court’s jurisdiction will also include adjudication of commercial disputes. In 2017, Moldova’s judiciary continued to implement the optimization of courts. According to the government’s initial plan the court optimization process will be implemented by 2027.

In 2016, two specialized independent prosecution offices were created. The Anti-Corruption Prosecution Office of Moldova is responsible for investigating and prosecuting corruption, bribery, and abuse of power by public officials. The Prosecutor’s Office on Combating Organized Crime and Special Cases investigates and prosecutes organized crime, including tax evasions, smuggling, intellectual property crimes, trafficking in persons, drugs, etc. In 2017, the Moldovan Prosecution Service continued the implementation of reforms under a new law on prosecution service passed in 2016. The Prosecutor General’s Office guided and led the drafting of new regulations for the specialized prosecution offices and regional ones. The Superior Council of Prosecutors organized competitions to appoint over 90 chief and deputy chief prosecutors in most of the prosecutors’ offices from Moldova.

The government has also reformed the public integrity system by creating the National Integrity Authority (NIA) – the successor to the National Integrity Commission. The new agency will be staffed with 46 investigators who will be in charge of checking public officials’ financial disclosures, properties and conflicts of interests. However, due to the lack of funding and burdensome administrative planning, the Agency has yet to start functioning.

Also, in 2016 parliament passed a new law on disclosure of assets and conflicts of interest by public officials. This law, long-awaited by Moldovan civil society, will broaden and improve the competencies of integrity-checking authorities to oversee public officials’ integrity. Parliament has also introduced new statutes in the Criminal Code criminalizing the misuse of international assistance funds. This statute will help identify and investigate any corruption or misuse of international donors’ assistance by Moldovan public officials in public acquisitions, technical assistance programs, and grants.

Laws and Regulations on Foreign Direct Investment

In addition to its international agreements, Moldovan laws affecting FDI include the Civil Code, the Law on Property, the Law on Investment in Entrepreneurship, the Law on Entrepreneurship and Enterprises, the Law on Joint Stock Companies, the Law on Small Business Support, the Law on Financial Institutions, the Law on Franchising, the Tax Code, the Customs Code, the Law on Licensing Certain Activities, and the Law on Insolvency.

The current Law on Investment in Entrepreneurship came into effect in 2004. It was designed to be compatible with European standards in its definitions of types of local and foreign investment. It provides guarantees of investors’ rights, non-application of expropriation or similar actions, and for payment of damages if investors’ rights are violated. The law permits FDI in all sectors of the economy, while certain activities require a business license.

Competition and Anti-Trust Laws

The government established a National Competition Agency in 2007. However, foreign investors accused the agency of abuse, lack of experience, and flawed antitrust legislation after they were singled-out for investigations. As a result, in 2012, Parliament passed a new law on competition that was consistent with EU practice and legislation. The National Competition Agency was subsequently renamed the Competition Council. The Competition Council oversees compliance with competition and state-aid provisions, and initiates examination of alleged violation of competition laws. The Competition Council may request cessation of action, prescribe behavioral or structural remedies, and apply fines. Questions remain about the independence of the council and its efficiency in dealing with obstacles to competition.

Expropriation and Compensation

The Law on Investment in Entrepreneurship states that investments cannot be subject to expropriation or to measures with a similar effect. However, an investment may be expropriated if the expropriation is done for purposes of public utility, is not discriminatory, and is done with just compensation. If a public authority violates an investor’s rights, the investor is entitled to compensation equivalent to the actual damages at the time of occurrence, including any lost profits. Compensation must be paid in the currency in which the original investment was made or in any other convertible currency.

The government has given no indication of intent to discriminate against U.S. investments, companies or representatives by expropriation, or of intent to expropriate property owned by citizens of other countries. No particular sectors are at greater risk of expropriation or similar actions in Moldova.

Since 2001, the government has cancelled several privatizations, citing the failure of investors to meet investment schedules or irregularities committed during privatization. While the government agreed to repay investors in such disputes, investors have had to apply to the European Court of Human Rights (ECHR) to enforce compensation payments. The government has been compliant with the ECHR rulings involving foreign businesses.

In the past, the limit on foreign ownership of agricultural land was reportedly used in lawsuits as an argument against foreign companies.

Dispute Settlement

ICSID Convention and New York Convention

In 2011, Moldova ratified the Convention on the International Center for the Settlement of Investment Disputes (ICSID – Washington Convention). The country also ratified the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Moldova is also a party to the Geneva European Convention on International Commercial Arbitration of April 21, 1961, and the Paris Agreement relating to the application of the European Convention on International Commercial Arbitration of December 17, 1962.

Investor-State Dispute Settlement

Moldova is signatory to a number of bilateral investment treaties (see chapter 3 above), including the U.S.-Moldovan Treaty Concerning the Encouragement and Reciprocal Protection of Investment, which make binding international arbitration of investment disputes.

Local courts recognize and enforce foreign arbitral awards against the government. There are no known cases when the Moldovan government denied voluntary payment under an arbitral award rendered against it.

The government has had a history of depriving investors, both national and foreign, of their businesses in various forms. Most of them sued the government at the European Court for Human Rights for violation of the right to fair trial and of the respect for property. A case currently pending at the International Center for the Settlement of Investment Disputes (ICSID) involves a dispute by a U.S. investor and local government authorities, which in 2011 terminated a farmland lease over U.S. investor’s alleged failure to fulfill contractual obligations of planting the fields. After Moldovan courts ruled against the U.S. investor’s claims of compensation, in 2016 the investor filed suit with ICSID under the US-Moldova bilateral investment treaty seeking USD 10 million in compensation for damages from Moldova.

International Commercial Arbitration and Foreign Courts

Private parties may choose alternative dispute resolution mechanisms instead of going to courts. Moldovan law provides the options of mediation and arbitration. The arbitration legislation is modeled after UNCITRAL rules. There are a number of arbitration bodies available in Moldova, among them the most popular is the arbitration court of the Moldovan Chamber of Commerce and Industry. The American Chamber of Commerce in Moldova (AmCham Moldova) has recently set up the Chisinau Court of International Commercial Arbitration (CACIC) under its aegis.

Moldova is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Domestic courts recognize and enforce foreign arbitral awards.

Recognition and enforcement of foreign judgments are regulated by a complex framework of documents, including the Code for Civil Procedures, international conventions and bilateral treaties. Therefore, depending on the nationality of the court, Moldovan courts may apply different legal norms in examining the enforcement of foreign judgments. However, as a rule, foreign judgments are enforceable in Moldova on a reciprocity basis.

Moldova’s court system generally enjoys a low level of public trust and is perceived to be vulnerable to acts of corruption, while court processes lack transparency. The overall expectation in court hearings involving representatives of public authorities, including economic entities, is that final court rulings will be in favor of state representatives.

Bankruptcy Regulations

In terms of resolving insolvency, the World Bank ranks Moldova 65th out of 190 economies in the 2018 Doing Business survey. Moldova scores below the regional average and trails EU members in Central and Eastern Europe. According to the survey, it takes creditors on average 2.8 years to recover their credit. The country has changed its insolvency law to grant priority to secured creditors and to ease insolvency proceedings by introducing new restructuring mechanisms, reducing opportunities for appeals, adding moratorium provisions, establishing strict statutory periods in the proceedings and enhancing the role of insolvency administrators. The law has also introduced expedited insolvency proceedings.

The country has two credit bureaus: Biroul de Credit, set up by commercial banks, and Infodebit Credit Report, founded by private shareholders.

Investment Incentives

Investment incentives are applicable on all Moldovan-registered businesses irrespective of the country of origin of the investment. Certain incentives apply only in specially-designated areas such as free economic zones and industrial parks (see below: Foreign Trade Zones/Free Ports/Trade Facilitation). Until 2020, Moldovan legislation will allow employees of information technology (IT) companies to benefit from incentives on personal income tax and social security contributions. Also, starting January 1, 2017 a new law sets a single tax for residents of IT parks, calculated as the maximum between 7 percent from sales and 30 percent from the national average forecasted salary multiplied by the number of employees. There is also a range of tax incentives applicable if businesses meet certain requirements. Among those incentives are the following: value-added tax (VAT) and customs exemptions on long-term assets included in share capital; deferment of VAT liabilities on imports of materials used in manufacturing export-bound products; and lower social contributions and VAT rates for agricultural businesses.

Foreign Trade Zones/Free Ports/Trade Facilitation

At present, seven free economic zones (FEZs), one international free port – Giurgiulesti – and one international free airport – Marculesti – are registered in Moldova. According to Moldovan law, job creation, attraction of foreign and domestic investments, and export-oriented production are the main goals of such zones. The Law on Free Economic Zones regulates FEZ activity. Foreigners have the same investment opportunities as local entities. FEZ commercial entities enjoy the following advantages: 25 percent exemption from income tax; 50 percent exemption from tax on income from exports; for investments of more than USD 1 million, a three-year exemption from tax on income resulting from exports; and for investments of more than USD 5 million, a five-year exemption from tax on income from exports; zero VAT; exemption from excises; and protection of residents against any new changes in the law for 10 years. Furthermore, residents investing at least USD 200 million in the FEZ are protected against new changes in the law for the entire period of operation in the FEZ, but such protection cannot extend beyond 20 years.

The government also passed a law creating nine industrial parks in 2008 with the goal of attracting investments in industrial projects. Businesses operating in those parks do not receive any special tax treatment, but typically have access to ready-to-use production facilities, offices and lower office rent fees for 25-30 years. Typically, these are idle premises of former large scale industrial enterprises.

Similar to the FEZs, the Giurgiulesti Free International Port, Moldova’s only port accessible to sea-going vessels, was established in 2005 for 25 years. Commercial residents of the port enjoy the following advantages: 25 percent exemption from income tax for the first 10 years following the first year when taxable income is reported; 50 percent exemption from tax on income for the remaining years; exemption from VAT and excises on imports and exports outside Moldova’s customs territory; zero VAT on imports from Moldova; and protection of commercial residents against any changes in the law until February 17, 2030.

The Marculesti International Free Airport, a former military air base, was established in 2008 as a free enterprise zone for a 25-year period to develop cargo air transport. Airport management is also interested in turning Marculesti into a regional hub for low-cost passenger airlines

Performance and Data Localization Requirements

All incentives are applied uniformly to both domestic and foreign investors. The Law on Investment in Entrepreneurship, in effect since 2004, does not protect new investors from legislative changes.

No formal requirements exist for investors to purchase from local sources or to export a certain percentage of their output.

No limitations exist on access to foreign exchange in relation to a company’s exports. There are no special requirements that nationals own shares of a company. Both joint ventures and wholly foreign-owned companies may be established in Moldova.

While not an official policy, in sectors of the economy that require large investments, experienced management, and technical expertise such as energy or telecommunications, the government has showed preference for experienced foreign investors over local investors. In other sectors, foreign and local investors formally receive equal treatment.

The government does not impose “offset” requirements on procurements. Moldovan law allows investments in any area of the country in any sector, provided that national security interests, anti-monopoly legislation, environmental protection, public health, and public order are respected.

Enforcement procedures for performance requirements to enjoy tax incentives are described in the Tax Code and related governmental decisions and instructions. Foreign investors are required to disclose the same information as local ones. Moldova has no discriminatory visa, residence, or work-permit requirements inhibiting foreign investors’ mobility in Moldova. The government has established a one-stop shop for foreigners applying for Moldovan residence and work permits in a bid to streamline a complicated procedure.

Moldova has a liberal commercial regime with more than 100 countries. According to the Tax Code, Moldovan exports are exempt from VAT. Although there are no formal import price controls, there are reports that Moldovan Customs Service may make arbitrary price assessments on certain types of imported goods for taxation purposes.

Post is not aware of any reports of forced data localization or special requirements targeting foreign IT providers. The Ministry of Information Technology and Communication is responsible for developing strategies and policies on electronic communication, while the National Regulatory Agency for Electronic Communications and Information Technology (ANRCETI) has functions of regulations and oversight.

Real Property

Moldova has laws that formally protect all property rights. A system for recording property titles and mortgages is in place. There is a national cadastral office, which registers all ownership titles in the real estate registry. However, the mortgage market is still underdeveloped.

In the World Bank’s Doing Business 2018 report Moldova ranked 20th among 190 economies on the ease of registering property.

The judicial sector remains weak and does not always fully guarantee the rights of citizens and foreign investors. Instances of judicial malfeasance in recent years have involved dubious proceedings in lower courts that resulted in illegal dispossessions of local and foreign investors of shares in Moldovan financial institutions.

Intellectual Property Rights

Despite efforts to improve intellectual property protection and establish relevant executive structures in the government, Moldova does not fully enforce its IPR laws due to conflicts of interest, lack of resources, and a low level of awareness and training among law enforcement agencies. The concept of IPR is largely unrecognized by the local population. The country has an agency for the protection of copyrights, the State Agency on Intellectual Property (AGEPI), which continues to work on improving the legal framework and adjusting it to EU norms, increasing public awareness, and building capacity in law enforcement. Following Moldova’s adoption of AA/DCFTA with the EU in June 2014, AGEPI participated in implementation of the IPR chapter of the agreement with the objective of ensuring a level of protection for intellectual property rights in Moldova similar to that in the EU, including effective enforcement.

Moldova is party to the majority international treaties in IPR field, including the WTO/TRIPs and 23 WIPO agreements, a list of which, including other international and regional agreements and IPR conventions, is available at http://www.agepi.gov.md/en/legislation/international.php .

Along with other public institutions, AGEPI works on fulfilling Moldova’s IPR obligations as provided by the 2017-2019 National Action Plan for the implementation of the AA. In 2015, Moldova adopted the second Action Plan on the implementation of the National Strategy on Intellectual Property through 2020 for IPR enforcement. While some progress is being reported, there are still issues with Geographical Indications (GIs) that remain to be addressed.

For consolidating the institutional capacities of intellectual property system, a law regulating the activity of the State Agency on Intellectual Property (AGEPI) was approved in July 2014. Continuous efforts are made to improve the access and quality of IPR services. AGEPI made the IPR data base publicly available online and free of charge on its webpage (www.db.agepi.md) and launched an online filing application system, with over 40 percent of national IPR applications reported to be filed online.

The time required to obtain IPR protection in Moldova varies depending upon the type of protection sought. For a copyright it takes 15-30 days, patent for plants 1.5-3 years, short-term patent for invention 7-8 months, patent for invention 17-18 months, geographical indications, appellations of origin, or traditional specialties guaranteed 10-12 months, industrial design 10-12 months, and trademark 10-12 months.

Moldova has specific laws dealing with trade secrets, while the criminal code prohibits unauthorized disclosure of trade secrets.

Moldovan authorities, including Customs, Ministry of Interior and General Prosecutor’s Office, keep track of statistics related to IPR violations, but such reports are not readily available online and are updated only at the end of the year.

Moldova is not listed in USTR’s Special 301 report; nor is it listed in the notorious market report.

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

Capital Markets and Portfolio Investment

Moldova’s securities market is underdeveloped. Official National Bank of Moldova (NBM) statistics include data on portfolio investments, yet there is a lack of sufficient open-source information to fully reflect the trends and relevance of this form of investment in Moldova. NBM data shows that most portfolio investments target banks, while the National Statistics Bureau does not differentiate between FDI and portfolio investments of less than 10 percent in the equity of a company. The National Commission for Financial Markets (NCFM) is currently looking into ways to bolster capital markets with the support of independent experts.

Laws, governmental decisions, NBM regulations, and Stock Exchange regulations provide the framework for capital markets and portfolio investment in Moldova. The government began regulatory reform in this area in 2007 with the goal of progressing the weak non-bank financial market. In particular, since 2008 only two bodies – the NBM and the National Commission for Financial Markets – regulate financial and capital markets.

Credit is allocated on market terms with banks being the only reliable source of business financing. The government regulates credit policy via the NBM, auctions through commercial banks, mandatory reserves, credit secured through collateral, open market operations, and T-bill auctions on the primary market. Foreign investors may obtain credit on the local market. Local commercial banks provide mostly short-term, high-interest loans and require large amounts of collateral, reflecting the country’s perceived high economic risk. Progress in lending activity suffered a sharp reversal in 2015 in the wake of the late-2014 banking crisis, triggered by a massive bank fraud, which severely weakened the banking system. Extreme monetary tightening by the NBM in the wake of large currency emissions connected to the resulting bank bailouts led to prohibitively high interest rates. As a result, in early 2016, yields on one-year government bonds shot up to 25 percent, with commercial rates following close. In 2017, the situation has been improving with average interest rates on bank loans hovering around 10 percent.

Several large banks were affected by ownership scandals and hostile takeovers that damaged their reputation. Three banks at the center of the scandal were liquidated in October 2015. The banking sector has not yet fully recovered from the fallout of the large banking fraud of 2014, while the Government committed to enhance regulation in the financial and banking sectors.

Large investments can rarely be financed through a single bank and require a bank consortium. Recent years have seen growth in leasing and micro-financing, leading to calls for clear regulation of the non-bank financial sector. As a result, Parliament passed a new law on non-bank financial sector, which enters into effect on July 1, 2018. Raiffeisen Leasing remains the only international leasing company to have opened a representative office in Moldova.

The private sector’s access to credit instruments is difficult because of the insufficiency of long-term funding and extremely high interest rates. Financing through local private investment funds is virtually non-existent. A few U.S. investment funds have been active on the Moldovan market, notably NCH Advisors, Western NIS Enterprise Fund, and Emerging Europe Growth Fund, the latter two managed by Horizon Capital equity fund managers.

Furthermore, according to the World Bank and IMF, a lack of ownership transparency, and poor record on the rule of law represent significant challenges to a potential investor. Weaknesses in the share registry system have contributed to “raider attacks” over the past few years when securities were fraudulently transferred from their rightful owners to others.

Acting as an independent regulatory agency, the National Commission for Financial Markets (NCFM) supervises the securities market, insurance sector and non-bank financing. The NCFM adopted a Corporate Governance Code and passed new regulations intended to simplify the issuance of corporate securities and to increase the transparency of transactions on the Moldovan Stock Exchange. In 2011, the government adopted a new strategy for the development of the non-bank financial sector through 2014 that focused on adopting European standards in financial market regulation and supervision. Amendments were passed in 2011 to the law on joint-stock companies to strengthen minority shareholder rights and to improve disclosure obligations for transactions involving conflicts of interest. A capital markets law adopting European Union regulations came into effect in 2013. It was designed to expose capital markets to foreign investors, to strengthen NCFM’s powers as an independent regulator, and to set higher capital requirements on market participants. Following several takeover scandals in recent years, the government has passed amendments to strengthen the integrity of shareholder rights. A new single central depository is being established under the supervision of NBM. The government is also currently considering a new 2018-2022 strategy for the development of the non-bank financial sector aimed at bolstering capital markets combined with prudential monitoring.

Money and Banking System

According to official statistics, Moldovan banks are the main source of business financing. Non-bank financing, albeit growing, still plays a minor role. Bank assets account for about 55 percent of GDP. Banks are also the largest financier of the Moldovan economy with loans amounting to about MDL 34 billion (USD 2.1 billion), well above the amount provided by microfinance or leasing companies of MDL 5.5 billion (USD 305 million).

The banking system has two tiers: the NBM and 11 commercial banks. The NBM regulates the commercial banking sector and reports to parliament. Foreign bank branches have to register in Moldova and operate under the local banking legislation. Moldova has five foreign banks; among them Societe Generale’s Mobiasbanca, Erste Bank’s BCR and most recently Victoriabank, acquired by Romania’s Banca Transilvania, are the most well-known.

Foreign investors’ share in Moldovan banks’ capital is approximately 81 percent, according to NBM. Yet, questions remain as to the legitimate bank owners who are represented as foreign investors in official statistics. A crisis at three Moldovan banks, two of them being among the country’s top five, in late 2014 called into question the soundness of the banking system, which has yet to recover from the fallout. The banking crisis has had an impact on the whole banking system, causing some foreign banks to call off their correspondent relationships with Moldovan banks. As a result, the banking sector has been facing problems with a high level of non-performing loans and declining lending activity. Since 2015, significant efforts have been made to reform the banking sector and restore trust. Moldova has been following an IMF program focused on the financial sector since late 2016.

Over recent decades, there was a lack of transparency on ultimate beneficial ownership, large exposures to some clients, significant related-party lending in banks’ portfolios, and resulting high non-performing loans. This contributed to a small number of individuals concentrating control over most of the banking assets. Both regulating bodies, the NCFM and NBM, were seen as having weak enforcement powers, at times undercut by questionable court rulings. In response, the Moldovan parliament adopted legislation that would strengthen the independence of decision making at the two regulating bodies. In order to strengthen the weak system of tracking shares and shareholders, authorities also put in place a law to set up a central share depository with the help of international financial institutions.

NBM has been conducting a reform in the banking sector to identify a transparent shareholder structure in order to attract new fit and proper investors, assess bank managements, spot transactions with related parties and identify non-performing loans in timely manner. A new law on banks activity based on Basel III principles came into effect on January 1, 2018. The application of the law will bring banking regulations in line with those of the EU and will be phased in between 2018 and 2020 to give time to banks to adjust. Also, NBM required banks to increase their credit loss provisioning and take urgent action to reinforce internal risk management as well as procedures on related-party financing.

As of December 31, 2017, total bank assets were MDL 79.5billion (USD 4.3 billion), according to NBM. Moldova’s three largest commercial banks account for around 65 percent of the total bank assets, as follows: Moldova Agroindbank: MDL 22.2 billion (USD 1.2 billion); Moldindconbank: MDL 15.2 billion (USD 819.5 million); and Victoriabank: MDL 14.5 billion (USD 783.7 million). In a bid to prevent another bank crisis, the NBM instituted the procedure of special monitoring of these top three banks over concerns about the transparency of bank shareholders.

Moldovan legislation does not have a definition for hostile takeovers. There have been instances of what are coined as “raider attacks” in the banking sector, in which individuals illegally acquired shares through corrupt application of the law.

Local authorities have not announced any intentions to implement blockchain technologies in banking transactions. In 2017, the NBM warned domestic investors of the highly speculative nature of virtual currencies and their use as means of payment. Authorities in the breakaway region of Transnistria recently passed a law encouraging the use of blockchain technologies for mining cryptocurrencies in specially created economic zones.

Foreign Exchange and Remittances

Foreign Exchange Policies

Moldova accepted Article VIII of the IMF Charter in 1995, which required liberalization of foreign exchange operations. There are no restrictions on the conversion or transfer of funds associated with foreign investment in Moldova. After the payment of taxes, foreign investors are permitted to repatriate residual funds. Residual fund transfers are not subject to any other duties or taxes, and do not require special permission. The country’s central bank uses a floating exchange rate regime and intervenes only to smooth sharp fluctuations.

After a tumultuous period of inflation and devaluation of the 1990s, the local currency has entered a period of relative stability punctuated by periods of volatility and depreciation due to domestic and foreign economic shocks.

Between late 2014 and early 2016, the national currency, the leu (plural lei), depreciated due to economic and political difficulties along with Russian bans on Moldovan food exports and falling remittances from Russia, which impacted Moldova’s balance of payments. A massive banking fraud and a subsequent bailout program further undermined the leu, which depreciated by 36 percent. Since 2016, the National Bank has been pursuing a tight monetary policy that helped stabilize the currency in the aftermath of the bank bailout and has led to a strengthening of the leu, which appreciated by 16.8 percent by the end of 2017, according to NBM data.

Remittance Policies

No significant delays in the remittances of investment returns have been reported, while domestic commercial banks have accounts in leading multinational banks. Foreign investors have the right to repatriate their earnings.

The Moldovan leu is the only accepted legal tender in the retail and service sectors in Moldova. The foreign exchange regulation of the NBM allows foreigners and residents to use foreign currencies in some current and capital transactions on the territory of Moldova. Generally, there are no difficulties associated with the exchange of foreign or local currency in Moldova.

Sovereign Wealth Funds

Post is not aware of any sovereign wealth fund run by the government of Moldova.

Since gaining independence in 1992, Moldova privatized most state-owned enterprises, and most sectors of the economy are almost entirely in private hands. However, the government still controls fully or partially some enterprises. The major government-owned enterprises are two northern electrical distribution companies, the Chisinau heating companies, fixed-line telephone operator Moldtelecom, state airline Air Moldova, the country’s largest tobacco company, and the state railway company. The government keeps a registry of state-owned assets, which is available on the website of the Public Property Agency: http://www.app.gov.md/ro/advanced-page-type/registrul-patrimoniului-public .

State-owned enterprises (SOE) are governed by the law on stock companies and the law on state enterprises as well as a number of governmental decisions. SOEs have boards of directors usually made up of representatives of the line ministry, the Ministry of Economy and Infrastructure and the Ministry of Finance. As a rule, SOEs report to the respective ministries, with those registered as joint stock companies being required to make their financial reports public. Moldova does not incorporate references to the OECD Guidelines on Corporate Governance for SOEs in its normative acts.

Moldovan legislation does not formally discriminate between SOEs and private-run businesses. By law, governmental authorities must provide a level legal and economic playing field to all enterprises.

The Law on Entrepreneurship and Enterprises has a list of activities restricted solely to SOEs, which includes, among others, human and animal medical research, manufacture of orders and medals, postal services (except express mail), sale and production of combat equipment and weapons, minting and real estate registration.

There are reports of SOEs having an advantage over privately-run businesses in Moldova. Either from government representatives sitting on their boards or from their dominant positions in their industry, SOEs are generally seen as being better positioned to influence decision-makers than their private sector competitors, and use this perceived competitive advantage to prevent open competition in their individual sectors.

Privatization Program

Moldova launched the first of several waves of privatization in 1994. In 2007, Parliament passed a new law governing management and privatization of state-owned assets. Two major privatizations in 2013 – of the then-largest bank, Banca de Economii, and the 49-year concession of the Chisinau Airport – subsequently proved highly controversial. Privatization efforts in 2014 and 2015 emphasized public-private partnerships as means for companies to gain access to state-owned resources in infrastructure-related projects. In 2017, the government held three big rounds of privatization for state assets selling its stake in 16 companies, including the Glass Container Company and Floare Carpet.

Moldova conducts privatizations through open tenders organized at the stock exchange that are open to any interested investor. The government may also use open outcry auctions for some properties, the so-called investment or commercial tenders to sell entire companies to those who take on investment commitments or to the highest bidders as well as public-private partnerships for infrastructure related projects. The government publishes privatization announcements on the website of the Public Property Agency (www.app.gov.md ) and in the official journal Monitorul Oficial. Some investors complained in the past that privatizations are unfair and lack transparency.

While Moldovan legislation deals with issues pertaining to environment, workers’ rights, social fairness or governance, there is little awareness of the concept of responsible business conduct. The country’s corporate culture and private sector are still at an early stage of development and still seeking to define the nature of interactions between private business and the authorities and the public at large. There is no governmental policy to encourage enterprises to follow OECD Guidelines for Multinational Enterprises.

Foreign companies operating in Moldova are gradually introducing the concept of corporate social responsibility as an aspect of responsible business conduct. However, the Soviet-era notion of a paternalistic government responsible for maintaining the social welfare for all citizens remains quite widespread. AmCham Moldova has set a leading example, with its corporate members engaging in a forestation project, in the rehabilitation of medical facilities, and in Christmas collection projects for orphanages.

While Moldova is taking steps to adopt European and international standards to combat corruption and organized crime, corruption remains a major problem. The wider Moldovan society also has a general perception of prevalent corruption among high level officials.

The government developed and enacted a series of laws designed to address legislative gaps such as the Law on Preventing and Combating Corruption, the Law on Conflict of Interests and the Law on the Code of Conduct for Public Servants. The Criminal Code criminalizes public corruption through two specific statutes – passive and active corruption. These statutes apply only to corruption actions and bribery committed by public officials. In 2016, Moldova started the reform of the prosecution system and created two specialized prosecution agencies – The Anticorruption Prosecution Office and the Prosecution Office for Combating Organized Crime and Special Cases. In 2017, the new prosecution agencies prosecuted a series of high-profile bribery and corruption cases and tax evasion cases. However, these offices faced multiple challenges such as the lack of budgets, personnel and high workload. Therefore, these specialized prosecution agencies are yet to prove their full effectiveness in combating corruption and organized crime, including in a non-discriminatory manner.

In 2016, parliament passed in the first reading the Law on the National Integrity Authority and the Law on Disclosure of Assets and Conflict of Interest by public officials. According to the first draft law, the National Integrity Center is to replace the National Integrity Commission. The new agency will be staffed with 45 integrity inspectors and have the power to apply fines on delinquent officials. The director and deputy director would be hired in a competitive process. The second draft law provides for clearer procedures and mechanisms for disclosing assets, properties, and conflicts of interest by Moldovan public officials. In 2017, National Integrity Council, a board type entity empowered with the procedure of appointment of the NIA’s director and deputy director did not advance in launching the new agency. Throughout 2017, the Council drafted regulations for NIA’s functioning, appointment of director and deputy directors and job descriptions for integrity inspectors. However, the civil society organizations (CSOs) criticized the Council’s activities as being slow and non-transparent. In September 2017, 9 CSOs sent a public appeal to the Integrity Council requesting transparency in the process of reviewing the dossiers of the candidates running for NIA’s management positions. After almost a year of deadlock and several failed attempts, the NIA director was selected and appointed in late December 2017.

A 2012 law reorganized the Center for Combating Economic Crimes and Corruption (CCECC) into the National Anticorruption Center (NAC). The NAC focuses solely on investigating public corruption and bribery crimes, and is subordinated to the parliament (CCECC was under the executive branch). Moldovan judges, who had previously enjoyed full immunity from corruption investigations, can now be prosecuted for crimes of corruption without a prior sanction from their highest self-governing body, the Superior Council of Magistrates, which nevertheless keeps its powers to approve any search or arrest warrant against a judge.

On June 30, 2017, Moldova published its National Integrity and Anticorruption Strategy for 2017-2020. The Strategy was drafted and passed through participatory mechanisms and inclusive public consultations. Following an evaluation by Transparency International in 2014, this strategy is structured upon the integrity pillars approach. It aims at strengthening the integrity climate among civil servants at all levels, but also at including the civil society organizations (CSOs) through alternative monitoring reports and promoting integrity standards in the private sector. The document also addresses the complexity of the corruption phenomenon in an innovative manner, by employing the assistance of sector-based experts to evaluate specific integrity problems encountered by different vulnerable domains of the public administration.

Moldova’s Criminal Code includes articles on public and private sector corruption, combating economic crimes, criminal responsibility of public officials, active and passive corruption and trade of influence, which put the legislation further in line with international, anti-bribery standards by criminalizing the act of promising, offering or giving a bribe to a public official. Anti-corruption laws extend culpability to family members; however due to the presumption of legally acquired assets provided for by the Moldovan Constitution, the effective presumption is that of a legal acquirement. The statute of illicit enrichment that was introduced in 2013 is yet to be used effectively by law enforcement in cases of public officials. In 2017, the Anticorruption Prosecution Office has started an illicit enrichment case against a notorious judge involved in construction of private apartments.

Moldovan laws require private companies to establish internal codes of conduct that prohibit corruption and corrupt behavior. The Moldovan Criminal Code criminalizes separately corruption and bribery in the private sector.

In 2016, Parliament passed two new statutes to the Criminal Code criminalizing the misuse of international assistance funds. This statute will help identify and prosecute any misuse of international donors’ assistance by Moldovan public officials in public acquisitions, technical assistance programs, and grants areas.

In November 2012, as part of the Justice Sector Reform Action Plan, the Ministry of Justice drafted a series of amendments in the anti-corruption area. This package of anti-corruption amendments include: new legislation on integrity testing of justice sector officials, the introduction of extended confiscation and illicit enrichment statutes in the Moldovan Criminal Code as per the United Nations Convention against Corruption (UNCAC). The new Criminal Code statutes and new laws on integrity testing of public officials and disciplinary liability law for judges were passed in late 2013.

In summer of 2014, four Moldovan deputies representing the communist faction filed a petition with the Moldovan Constitutional Court asking it to rule on the constitutionality of the Law on Integrity testing. As a safeguard, the Constitutional Court has officially requested an amicus curie from the Venice Commission – the Council of Europe institution responsible for reviewing constitutional matters of its member states. Among other comments, the Venice Commission has stated that the integrity testing law raises concerns in respect of a number of important rule of law and fair trial principles. These include the presumption of innocence; the right to an effective and efficient defense, including the right to full disclosure of and full access to the evidence; the examination of witnesses; the legal requirements for the use of undercover agents, including the consequential non-admittance of evidence gathered by agents provocateurs who are themselves committing an offence; the principles of foreseeability and of narrow interpretation of statutory offences; the principle of proportionality between offences and sanctions and finally, the right to an effective appeal to an independent court of law. In 2015, the Constitutional Court delivered its judgment. Its reasoning mirrored the findings and recommendations provided by the Venice Commission. In an attempt to address all the concerns, the NAC drafted a series of amendments to the Law on Integrity testing. In 2016, the amendments were accepted by parliament and passed. Parliament also passed a law in 2016 providing for a gradual increase of prosecutors’ salaries in the framework of the prosecutorial reform.

The country has laws regulating the conflict of interests in awarding contracts and the overall government procurement process; however laws are not effectively enforced. For instance, in 2016, anti-corruption prosecutors initiated five criminal cases dealing with public officials involved in procurements for the public health and education.

In 2017, the Anticorruption Prosecution Office prosecuted two ministers, 19 judges, four prosecutors, 36 law enforcement and 24 customs officials for corruption, bribery and abuse of powers-related crimes.

Despite the established anti-corruption framework, the number of cases involving prosecution of corruption did not meet international expectations (given corruption perceptions), and enforcement of existing legislation is widely deemed insufficient. The dismissal, in April 2013, of the government on corruption allegations worsened the Moldovan society’s perception of corruption. After dropping to 103rd place in 2014, Moldova’s ranking in the 2015 Transparency International Corruption Perception Index remained unchanged, while the country’s score dropped to 33 out of 100 from 35 a year earlier. In the 2016 Transparency International Corruption Perception Index, Moldova scored 30 points and ranked 123^rd.

In the 2017 Transparency International Corruption Perception Index, Moldova scored 31st and was ranked 123^rd, along with Azerbaijan and Kazakhstan.

The Freedom House Moldova “Nations in Transit Report” 2018 revealed that the government focused more on improving the legal framework and less on implementing it. The anti-corruption initiatives undertaken during the year did not contribute to tackling endemic corruption as no initiative directly targeted the de-politicization of public institutions and regulatory agencies. The public competitions organized in 2017 were mostly nontransparent and based on controversial regulations or political loyalty to, or membership of, the ruling political group, rather than on the grounds of merit. Also, the investigation into the “billion-dollar theft” in Moldova’s banking sector has failed to recover the stolen sum. According to official data, by mid-2017 around EUR 50 million (USD 59.5 million) has been returned. However, this revenue was obtained mainly from taxes, credits, and the three banks selling assets. According to experts, there is no guarantee that the remaining funds will be recovered.

According to the Heritage Foundation’s Index of Economic Freedom (IEF), in 2017 Moldova’s economic freedom score was 58.4, making its economy the 105th. Its overall score has increased by 0.4 point, with improvements in property rights and judicial effectiveness outweighing declines in government integrity and trade freedom. Regionally, Moldova is ranked 40th among 44 countries in Europe, and its overall score is below regional and world averages. With regard to the rule of law area, the IEF indicated that the judicial sector remained weak and did not always fully guarantee the rights of citizens and foreign investors.

A Transparency International Global Corruption Barometer (GCB) survey published in 2017 shows that 84 percent of Moldovans think that the government is doing poorly in fighting corruption. Globally, Moldova is among the top countries where people perceive public authorities to be most corrupt. Almost seven in 10 people say that people working in public sector institutions (the president’s office, parliament, central government, tax inspection, police, the judiciary and local government) are highly corrupt. Almost 50 percent of Moldovans said they had to pay bribes over the past 12 months when coming in contact with public authorities. The latest GCB survey concludes that Moldova needs genuine and urgent measures to address the issue of corruption. Negative ratings of the government’s efforts to curb corruption suggest that more must be done to reduce public sector graft and clean up political institutions so that it acts in the interests of citizens rather than in its own.

Opinion surveys conducted by reputable pollsters like the International Republican Institute (IRI) consistently show that over 95 percent of Moldovans see corruption as a big problem for the country. Moldovans name the top corrupt institutions as follows: 1) parliament; 2) public servants, including the police; 3) the judiciary; 4) top government officials; 5) political parties and their leaders.

Post has received many reports from foreign investors of serious problems with corruption and bribery. For example, when a foreign investor discovered that he had underpaid his taxes and wished to remedy the situation, the tax inspector assigned to the company attempted to extort money. The tax service later lauded the investor for his self-reporting and negotiated a reduced payment.

Post has also received reports of “informal” hostile takeovers of profitable businesses. In these cases, business owners were approached by politically-connected individuals who wished to acquire parts of the businesses. When business owners refused, they were pressured to close.

In 2007, Moldova ratified the United Nations Convention against Corruption, subsequently adopting amendments to its domestic anti-corruption legislation.

Moldova is not a signatory of the OECD Convention on Combating Bribery. However, Moldova is part of two regional anti-corruption initiatives: the Stability Pact Anti-Corruption Initiative for South East Europe (SPAI) and the Group of States against Corruption (GRECO) of the Council of Europe. Moldova cooperates closely with the OECD through SPAI and with GRECO, especially on country evaluations. In 1999, Moldova signed the Council of Europe’s Criminal Law Convention on Corruption and Civil Law Convention on Corruption. Moldova ratified both conventions in 2003.

Resources to Report Corruption

Bogdan Zumbreanu
Director
National Anti-Corruption Center
Bul. Stefan cel Mare si Sfant 168, Chisinau MD2004, Moldova
Tel. +373 22-257 257 (secretariat)/800-55555 (hotline)/22-257 333 (special line)
secretariat@cna.md

Lilia Carasciuc
Executive Director
Transparency International Moldova
Strada 31August 1989 nr. 98, of.205, Chisinau MD2004, Moldova
Tel. +373-22 203-484(office)/800-10 000 (hotline)
office@transparency.md

Post has received no reports over the past ten years of politically-motivated damage to business projects or installations in Moldova. In 2015 and early 2016, the political scene witnessed a public outcry amid perceptions of a corrupt political class that failed to prevent, if not potentially condone or support, a massive bank fraud resulting in the disappearance of nearly 15 percent of GDP from the country’s then-three largest banks. Round-the-clock anti-government protests culminated in January 2016 in clashes with riot police when protesters tried to prevent parliament from voting in a new government. The clashes were limited and did not turn into full-blown violence or cause extensive damage that would affect businesses in any way and the government remained in power.

Separatists control the Transnistrian region of Moldova, located between the Nistru River and the eastern border with Ukraine. Although a brief armed conflict took place in 1991-1992, both sides signed a ceasefire in July 1992, which has generally been observed. Local authorities in Transnistria maintain a separate monetary unit, the Transnistrian ruble (approximately 16.10 rubles per U.S. dollar), and a separate customs system. Despite the political separation, economic cooperation takes place in various sectors. The government has implemented measures requiring businesses in Transnistria to register with Moldovan authorities (see Expropriation and Compensation). The Organization for Security and Cooperation in Europe (OSCE), with Russia, and Ukraine acting as guarantors/mediators and the U.S. and EU as observers, continues to support negotiations between Moldova and the separatist region Transnistria (known as the “5+2” format). Throughout the years, negotiations have been piecemeal, with talks stalling in 2006 and formally resuming in late November 2011. An important achievement of the talks in the past few years has been the resumption of rail freight traffic through Transnistria and the opening of a bridge across the Nistru River in 2017. However, progress on other issues has been limited.

For years, Moldova prided itself on its skilled labor force, including numerous workers with specialized and technical skills. However, with economic turmoil, many skilled workers left Moldova for better paying jobs in other countries. This led to shortages of skilled workers in Moldova. There are imbalances in the labor market arising from a general lack of workers with vocational training that employers need on one hand, and lack of job opportunities for academically educated people on the other. Labor shortages are reported in manufacturing and engineering, while language (Moldovans are usually bilingual in Russian and Romanian) and IT skills are thought to be in ample supply. However, low birth rates and an aging population represent a challenge to Moldova’s labor pool.

Official unemployment was 4.1 percent in 2017, which is misleading given the low labor participation rate of 42.2 percent, owing to large numbers of Moldovans migrating abroad that reduces the number of job seekers at home, and to informal work. Youth unemployment is more than double the national average at 11.8 percent. Employment in Moldova is largely based on agriculture, low productivity sectors and crafts. Approximately one-third of the working population is employed in the informal economy. Around one-fifth of the labor force works abroad (around 800,000).

Moldova’s Constitution guarantees the right to establish or join a trade union. Trade unions have influence in the large and mostly SOEs and have historically negotiated for strong labor relations, minimum wage and basic worker rights. Unions can also negotiate collective labor agreements in various industries. Unions are less active and effective in small private companies. Moldova is a signatory to numerous conventions on the protection of workers’ rights. The country has moved toward adopting international standards in labor laws and regulations. In recent years, changes were made to labor legislation in favor of employers, somewhat reducing the unions’ influence on hiring and firing personnel. Nevertheless, labor legislation is stringent on dealing with severance pay or maternity leave – regulations that some foreign investors view as impediments to labor flexibility and placing heavy burden on employers.

The government is drafting a new Labor Code to incorporate EU directives in the field with the hope to make the legislative framework better equipped for modernization of the labor market, skills development, and vocational education training reform.

The Moldovan General Federation of Trade Unions has been a member of the International Labour Organization (ILO) since 1992, and has been affiliated with the International Confederation of Free Unions (ICFU) since 1997. The federation split into two separate unions in 2000, but merged in 2007, forming the National Trade Union Confederation (CNSM). After attempts of the previous communist-led government to interfere in the activity of unions, the CNSM was isolated from the international trade unions movement. With a change in government in 2009 and the election of new trade union leaders, CNSM was given membership in the International Trade Union Confederation in 2010.

In 1992, the Moldovan and U.S. governments signed an investment incentive agreement that exempts Overseas Private Investment Corporation (OPIC) from Moldovan taxes on loan interest and fees. OPIC became active in Moldova in September 1997, providing political-risk insurance to a U.S. company investing in an agribusiness. Since then, OPIC has provided a number of financial and insurance products to U.S. businesses operating in Moldova in such fields as agribusiness, telecommunications, banking, consulting, transportation logistics, and mortgage financing.

The U.S. Export-Import Bank (Ex-Im) provides U.S. companies investing in Moldova short- and medium-term financing in the private sector under its insurance, loan, and guarantee programs. In 2000, Ex-Im and Moldova signed the Framework Guarantee Agreement setting the terms for it to issue sovereign guarantees to facilitate Ex-Im financing of U.S. exports to Moldova. Also in 2000, Ex-Im and Moldova signed the Project Incentive Agreement that enabled the Ex-Im to finance U.S. exports for creditworthy private sector projects in Moldova on a non-sovereign risk basis which required host-government support such as permit and license approvals. Under the agreement, repayment of Ex-Im financing is based on the capture of financed projects’ revenue streams in special escrow accounts held in banks approved by Ex-Im.

In 2002, Ex-Im signed a memorandum of cooperation with the Black Sea Trade and Development Bank. Under the memorandum, Ex-Im’s financing can be used to support exports of U.S. goods and services to any country located in the Black Sea region, including Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Moldova, Romania, Russia, Turkey, and Ukraine. The agreement enables the Black Sea Trade Development Bank to act as a guarantor of specific transactions and also provides for parallel financing arrangements.

Moldova is eligible for U.S. Trade and Development Agency (USTDA) funding for feasibility studies, orientation visits, specialized training grants, business workshops, and other forms of technical assistance with U.S. export potential.

Institutions such as the European Bank for Reconstruction and Development and the World Bank are very active in Moldova in both the private and public sectors, offering various financial tools for both insurance and credit. Moldova is a member of the Multilateral Investment Guarantee Agency (MIGA) and a member of the World Bank group. MIGA promotes FDI into developing countries by insuring investors against political risk, advising governments on attracting investment, sharing information through online investment information services and mediating disputes between investors and governments. Moldova is also eligible for project and trade financing from the Black Sea Trade and Development Bank. The country also benefits from loans extended by the EU’s European Investment Bank and the Council of Europe Development Bank.

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

*National Bureau of Statistics and National Bank of Moldova are the primary source of the information. The FDI figure is preliminary.

Table 3: Sources and Destination of FDI

* Note: IMF statistics from 2016

Table 4: Sources of Portfolio Investment

No data available.

Note: Moldova does not submit data for the IMF’s Coordinated Portfolio Investment Survey (CPIS). However, according to the National Bank of Moldova, total portfolio investment in 2017 amounted to USD 104.67 million. A breakdown by country for all portfolio investments is not available, but among the top five sources of investment in the banking sector were Ukraine, Russia, the U.K., Cyprus and Liechtenstein.

U.S. Embassy Chisinau, Moldova
Str. Alexei Mateevici 103,
Chisinau MD 2009, Moldova
Main switchboard +373 (22) 40 83 00
Fax: +373 (22) 23 30 74/40 84 10
chisinaucommerce@state.gov

Policies toward Foreign Direct Investment

The government of Ukraine actively seeks FDI. In 2014, the president established the National Investment Council as consultative and advisory body under the President, and in 2016 the Ukrainian government also established the Ukraine Investment Promotion Office (UkraineInvest) as an independent advisory body with a mandate to attract and support FDI. Ukraine also established a Business Ombudsman in 2015 to provide a forum for domestic or foreign businesses to file complaints about unjust treatment by state or municipal authorities, state-owned or controlled companies or their officials.

Ukrainian legislation provides for national treatment of foreign investors, in line with its World Trade Organization (WTO) commitments. Due in part to conflicts in the body of laws that govern investment and commercial activity in Ukraine, and persistent issues with corruption, however, foreign investors have found it difficult to pursue cases in Ukrainian courts and often seek arbitration outside of the country.

Limits on Foreign Control and Right to Private Ownership and Establishment

The regulatory framework for the establishment and operation of business in Ukraine by foreign investors is generally similar to that for domestic investors. However, accreditation of representative offices of foreign companies and their branches significantly lags behind the simplified registration procedures for Ukrainian businesses. Accreditation by the Ministry of Economic Development and Trade takes 60 days and typically costs USD 2,000. Non-Ukrainian citizens establishing a business are required to receive a registration through the Office of Immigration in the Ministry of Foreign Affairs and to receive a taxpayer identification number through the State Fiscal Service. Registering a foreign investment is governed by “The Law on Foreign Investments” (2013). Foreign and domestic private entities can establish and own business enterprises and engage in all forms of remunerative activity, with the exceptions that foreign companies are restricted from owning agricultural land, manufacturing carrier rockets, producing bio-ethanol, and some publishing activities. In addition, Ukrainian law authorizes the government to set limits on foreign participation in strategically important areas, although the definition is vague and the law is rarely used in practice. Generally, these restrictions limit the maximum permissible percentage of foreign investment in Ukrainian firms in the defense and energy sectors.

Other Investment Policy Reviews

The Organization for Economic Cooperation and Development (OECD) and the WTO conducted formal reviews in 2016, and can be found at OECD: http://www.oecd.org/investment/oecd-investment-policy-reviews-ukraine-2016-9789264257368-en.htm; WTO: https://www.wto.org/english/tratop_e/tpr_e/tp434_e.htm . The United Nations Conference on Trade and Development (UNCTAD) so far has not conducted a formal review of Ukraine’s investment policy.

Business Facilitation

The Ukrainian government has taken several steps over the past year to facilitate the ease of doing business. Some of these actions included: a new law on limited liability companies (LLCs) that liberalized corporate regulations for LLCs and increased protection of minority shareholders’ rights; a new privatization law designed to streamline the process of selling 3,000 state companies, and better protect investors’ rights; simplified procedures from the National Bank of Ukraine for companies to open and manage bank accounts; eased payment of dividends to foreign investors by allowing payment of a maximum amount of USD 7 million per month; and a new law to stop abusive practices by law enforcement agencies, including the State Fiscal Service’s tax police, Prosecutor General’s Office, and State Security Service, during investigations of businesses.

A website for registration of private entrepreneurs and legal entities is available at https://poslugy.gov.ua/  and https://online.minjust.gov.ua/dokumenty/choise/ . Usually, it can take up to six days to register. Companies are able to submit documents online while the Registrar shares the data with the State Committee of Statistics of Ukraine, the State Pension Fund, State Fiscal Service, the Employment Insurance Fund, the Social Security Fund, and the Fund for Social Insurance.

Outward Investment

As of December 31, 2017 Ukraine’s investments in foreign countries totaled more than USD 8.156 billion, according to the National Bank of Ukraine (NBU).

Ukraine has signed more than 70 bilateral investment treaties. The Bilateral Investment Treaty between the United States and Ukraine has been in force since 1996. A list of Ukraine’s bilateral investment treaties can be found at https://feao.org.ua/news/ukraines-bilateral-treaties-investments/?lang=en . Ukraine has over 60 bilateral taxation treaties, including with the United States. A list of Ukraine’s bilateral taxation treaties can be found at http://sfs.gov.ua/en/sts-activity/international-tax-relations/international-treaties–conventions–on-taxation/ . Ukraine also has a number of free trade agreements (FTAs), and information on these treaties is available at http://mfa.gov.ua/en/about-ukraine/economic-cooperation/trade-agreements . Ukraine is currently negotiating FTAs with Turkey and Israel.

Transparency of the Regulatory System

Ukraine is struggling to build a transparent, consistent regulatory environment. Regulatory institutions are characterized by outdated, contradictory, and burdensome regulations, a high degree of favoritism in decisions by government officials, weak protection of property rights and minority shareholders’ interests, and irregular payments and other bribes. The country, however, is generally moving in the right direction toward clearer rules and fairer competition. Ukraine’s efforts to implement its EU Association Agreement (AA), including the Deep and Comprehensive Free Trade Area (DCFTA), should help boost overall transparency and legal certainty as Ukraine strives to meet EU standards. Continued deregulation is also one of Ukraine’s key commitments under its IMF program.

Information on existing and draft legislation is available on the Verkhovna Rada and Cabinet of Ministers websites. Proposed legislation may be published on the corresponding Ministry website for public commentary, but often draft legislative initiatives are not publicly available or they reappear in dramatically different form. In a sign of increased openness, the government in the past few years has consulted with NGOs and business associations such as the American Chamber of Commerce and the European Business Association when drafting business- or finance-related regulations and legislation. These organizations have provided feedback and proposed amendments during the review and approval process.

Proposed regulations are required by law to be publicly available for review and comment for at least one month, but not more than three months. The draft text is published on the website of the relevant ministry or regulatory agency. Comments are received online, at public meetings, and through targeted outreach to stakeholders. At the end of the consultation period, the relevant ministry or regulator must publish the results on its website.

Post is not aware of any informal regulatory processes managed by non-governmental organizations or private sector associations. Such processes fall under the purview of the government.

International Regulatory Considerations

Ukraine is not a member of the EU, but it is working to harmonize many of its standards to meet EU requirements and facilitate access to EU markets. As Ukraine drafts laws, it often incorporates or references EU norms and standards. Ukraine is a member of the WTO and a signatory to the WTO Trade Facilitation Agreement.

Legal System and Judicial Independence

The legal system in Ukraine is based on a civil system of codified laws passed by the parliamentary body, the Verkhovna Rada. In the event of a commercial dispute, a foreign investor may seek recourse through a number of institutions. Generally, the Foreign Investment Law provides that a dispute between a foreign investor and the state of Ukraine must be settled in the Ukrainian courts, unless otherwise provided for by international treaties.

Courts of general jurisdiction are organized by territory and specialty and include: local courts; appellate courts; specialized high courts for civil and criminal cases; and supreme courts. Local courts are either courts of general jurisdiction (including military courts) or specialized courts (i.e. commercial and administrative courts). Local commercial courts exercise jurisdiction over commercial and corporate disputes, while local administrative courts administer justice in legal disputes connected with state government and municipalities, with the exception of military disputes.

The judicial system is independent of the executive branch; however, extensive corruption exists throughout the court system, and the judiciary provides an opening for outside influence. Among the major problems of the Ukrainian judicial system are its overall lack of capacity and the existence of prosecutorial influence on judges. Ukraine is ranked 129 out of 140 countries with regard to judicial independence by the Global Competitiveness Index 2016-2017 (up three spots since the 2015-2016 report) (https://www.weforum.org/reports/the-global-competitiveness-report-2016-2017-1 ).

In general, regulations are appealable, but it depends on the nature and origin of the regulation to determine whether it is appealable in the national court system.

Laws and Regulations on Foreign Direct Investment

The Law of Ukraine on Investment Activity (1991) establishes the general principles for investment and was subsequently followed by additional legislative acts, most recently the Law of Ukraine #2058-YIII of May 2017 “On Amendments to Some Laws to Remove Obstacles for Attracting Foreign Investments.”

Competition and Anti-Trust Laws

The Antimonopoly Committee of Ukraine (AMCU) is the Ukrainian state authority for protection of economic competition. AMCU’s functions include investigating and prosecuting anticompetitive conduct, granting permissions for mergers, considering applications regarding violations of public procurement as an appeal body, monitoring and control of the state aid system, competition advocacy within the government, and forming competition policy.

Expropriation and Compensation

Current legislation permits legal expropriation of property in certain criminal proceedings or in cases of failure to fulfill investment obligations during privatization procedures. Additionally, the Law on Legal Regime of Martial Law and the Law on Confiscation of Property During Legal Regime of Martial Law allow for voluntary or forced expropriations for military purposes with compensation to be provided either immediately or following cancellation of the “special regime/martial law” in place due to military operations in eastern Ukraine.

Post has not received any expropriation claims from U.S. companies, and is not aware of any particularly high-risk sectors prone to expropriation actions.

Dispute Settlement

ICSID Convention and New York Convention

Ukraine is a Party to both the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. On October 20, 2015, the Government of Ukraine submitted a formal UN communication, noting that Ukraine’s ability to implement its obligations under the New York Convention in the occupied territories of Crimea, Donetsk, and Luhansk is limited and not guaranteed until Ukraine regains effective control from the Russian Federation. The full text of the communication is available at: https://treaties.un.org/doc/Publication/CN/2015/CN.597.2015-Eng.pdf .

The procedure for recognition and enforcement of foreign arbitral awards in Ukraine is regulated by the following legislative acts:

• The Law on International Commercial Arbitration (ICAL, 1994). ICAL is almost a literal translation of the UNCITRAL Model Law.
• The Code of Civil Procedure of Ukraine (CPC, 2004). Pursuant to Article 390 of the CPC, Ukrainian courts shall enforce foreign court decisions provided that: recognition and enforcement are stipulated under an international treaty ratified by the Verkhovna Rada; or on the basis of the reciprocity principle under an ad hoc agreement with a foreign country, whose court decision shall be enforced in Ukraine.

Investor-State Dispute Settlement

American investors continue to make claims under the Bilateral Investment Treaty between the United States and Ukraine, but this is rare, with two known filings since 2016. The Embassy only tracks disputes at the request of U.S. businesses or individuals involved in the case, and cannot provide a comprehensive number for all investment disputes involving U.S. or other foreign investors in Ukraine. Such disputes are a significant problem, however, both in fact and in terms of public perception. As of early 2018, the Embassy was tracking approximately 20 active disputes, some very protracted. Going back 10 years, the Embassy has tracked almost 100 disputes involving a U.S. business or individual. The majority of disputes are related to customs and tax issues, or corporate raids.

ICAL limits the jurisdiction of international arbitration tribunals to civil law disputes arising from international economic operations (provided that the commercial enterprise of at least one party exists outside of Ukraine), disputes between international organizations and enterprises with foreign investments in Ukraine, and intracompany disputes of these enterprises. ICAL does not address foreign arbitral awards issued against the government.

Extrajudicial action against foreign investors in the form of official acts of government (e.g. unwarranted inspections, investigations, fines) and illegitimate acts by private parties (e.g. corporate raiding) has been and remains fairly common in Ukraine. The current Ukrainian government has made it a stated priority to improve the business environment and attract more foreign investment, but progress has been uneven.

International Commercial Arbitration and Foreign Courts

The Law on Arbitration Courts (2004) stipulates that parties can now refer most of their commercial or civil law disputes to courts of arbitration, which are non-state bodies. Article 51 stipulates that awards of the aforementioned courts of arbitration are final, and Article 57 stipulates that they can be subject to mandatory enforcement via a competent state court. The Embassy, however, is not aware to what extent arbitration is used by the business community.

Ukraine’s International Commercial Arbitration Court (ICAC) and Maritime Arbitration Commission at the Ukrainian Chamber of Commerce and Industry are both annexed to the ICAL, which itself is a near-direct translation of the UNCITRAL model law. ICAL distributes the functions of arbitration assistance and supervision between the district courts and the President of the Chamber of Commerce and Industry of Ukraine for both ad hoc and institutional arbitrations. Local courts are obliged to recognize and enforce foreign arbitral awards under ICAL and the CPC, per Ukraine’s obligations under the ICSID and the New York Convention of 1958. However, the reliability, consistency, and timeliness of implementation are unknown.

The Embassy is not aware of any investment disputes that have involved state-owned enterprises (SOEs).

Bankruptcy Regulations

The Law on Bankruptcy (1992) does not require approval by creditors for selection or appointment of an insolvency representative, nor does it require approval by creditors for sale of substantial assets of the debtor. The creditor does not have the right to request information from the insolvency representative, and provides that a debtor has the right to object to decisions accepting or rejecting creditors’ claims. The Verkhovna Rada is considering a draft law to reform the bankruptcy system.

In February 2018, the Verkhovna Rada passed legislation to create a national credit registry administered by the National Bank of Ukraine. This EU-mandated legislation seeks to reduce lending risks through publication of credit history, including bankruptcies.

Investment Incentives

Foreign investors are exempt from customs duties for any in-kind contribution imported into Ukraine for the company’s charter fund. Some restrictions do apply and import duties must be paid if the enterprise sells, transfers, or otherwise disposes of the property. Ukraine also offers generous depreciation rates for most fixed assets, including property, plant, and equipment for both foreign and domestic investors.

Foreign Trade Zones/Free Ports/Trade Facilitation

Ukraine does not maintain special or free economic zones (SEZs-FEZs).

Performance and Data Localization Requirements

In most cases, Ukrainian laws regulating employment apply to foreign nationals in Ukraine. There are a few exceptions to this rule related to foreign nationals working for other foreign organizations, such as diplomatic missions or international organizations. In other cases, a Ukrainian employer and a foreign national employee cannot choose a foreign law to govern the employment contract.

Citizens of EU countries, the United States, Canada, Japan and some other countries do not require a visa to enter Ukraine for a stay up to 90 days within a 180-day period. The list of countries and respective visa requirements are available on the website of the Ministry of Foreign Affairs of Ukraine (http://mfa.gov.ua/en ). Citizens of other countries wishing to formalize their employment relations in Ukraine must obtain a long-term type D visa.

An employer wishing to employ a foreign national must obtain a work permit for this person. Authorities issue work permits on a case-by-case basis, for a particular applicant and a particular position in a company. A work permit is normally issued for the period of employment indicated in the employment contract, but for not more than one year. A work permit can be renewed for the same term, for an unlimited number of times and free of charge.

A foreign citizen with a valid work permit must normally spend more than 90 days within a 180-day period in Ukraine. When this occurs, the foreign national can obtain a temporary residence certificate. The temporary residence certificate is issued for a term of one year and can be renewed for consecutive terms.

There are no age or nationality restrictions on who can be a manager or company director in the private sector.

Ukraine has no forced localization policies or requirements for foreign IT providers to turn over any source code or provide backdoors into hardware or software applications. Ukraine’s overall regulation of IT infrastructure and Internet Service Providers is largely free and unregulated.

The regulatory framework for processing personal data in Ukraine is generally aligned with the Convention for the Protection of Individuals with Regard to Automated Processing of Personal Data of 1981 adopted by the Council of Europe. Ukraine adopted a law in 2011 on protection of personal data, which is based on the framework EU Directive 95/46/EC. The EU–Ukraine AA requires Ukraine to revise legislation on personal data protection to bring it in compliance with the EU’s General Data Protection Regulation (GDPR). The adoption of regulations harmonized with the EU’s GDPR in Ukraine is expected by the end of 2018.

Government Agencies involved in personal data protection are:

• The Ukrainian Parliament’s Commissioner for Human Rights (regarding control over processing of personal data);
• The State Service of Ukraine for Special Communications and Information Protection (regarding protection of e-signatures and other encrypted information);
• The National Commission for State Regulation of Communications and Information (regarding issues related to regulation of internet access).

Under Article II, clause 6 of the Bilateral Investment Treaty between the United States and Ukraine, neither Party shall impose performance requirements as a condition of establishment, expansion or maintenance of investments, which require or enforce commitments to export goods produced, or which specify that goods or services must be purchased locally, or which impose any other similar requirements.

Real Property

Ukraine has a regulatory framework protecting property interests, as well as mortgages and liens. The record system is generally reliable and maintained by the Ministry of Justice. Still, judicial reform is needed to ensure efficient enforcement of property rights. Ukrainian media estimates that 5 percent of land in Ukraine does not have clear title. The government in 2017 ordered the transfer of the State Land Cadaster to blockchain technology in order to allow for reliable data synchronization, which will prevent data manipulation and improve control over the system.

Intellectual Property Rights

While the Government of Ukraine has demonstrated some limited progress in IPR reforms to date, Ukraine continues to have serious IPR challenges. The U.S. Trade Representative has placed Ukraine on the Priority Watch List since 2017. Three main IPR concerns are: nontransparent administration of colleting and distributing royalties to U.S. and other rights holders; widespread use of unlicensed software by government institutions; and failure to combat widespread online copyright infringement. In 2017, the USG announced a partial suspension of Generalized System of Preferences benefits due to Ukraine’s inability to address IP issues.

Large internet pirate sites are still operating in Ukraine, though cyber police investigators opened 18 criminal digital piracy investigations in 2017, and 45 pirate sites were closed by the police or sites’ owners. Police investigators told post that courts dismissed many of their cases, and the sites reopened. There was not a single online piracy-related conviction in Ukraine in 2017. Ukraine improved its anti-piracy legislative framework in 2017. In particular, the Law on State Support of Cinematography criminalized unauthorized recording of copyrighted works, as well as the financing of pirating operations. The new law also established detailed procedures and timelines for takedown notices and responses. Its proper enforcement would considerably improve regulation of the online environment in Ukraine.

In the area of software piracy, the Government of Ukraine continued limited efforts to license the business software it uses. The government plans to allocate USD 28 million for legalization measures, up from USD 5.6 million in 2017. The government admits that 35 percent of software in government ministries and enterprises in 2017 was unlicensed, although this is down from 40 percent in 2016.

In addition to digital piracy, Ukraine’s many open-air markets continue to sell illegally copied music, films, and entertainment software. Other counterfeit goods, including products containing protected trademarks, also remain readily available. Industry experts reported that criminal prosecution for selling counterfeit goods are stalled and ineffective, and that seized goods are not disposed of or released in a timely manner. The government does not provide public statistics on seizures of counterfeit goods.

A number of rogue collective management organizations (CMOs), out of 19 total, continue to operate freely in Ukraine, collecting royalties but not distributing those royalties to any legitimate rights holders. Industry representatives estimate that the majority of broadcast and public performance market places are unlicensed. As of April 2018, parliamentarians were close to passing a CMO reform law.

Civil IPR lawsuits remain rare because of a general lack of confidence in Ukraine’s legal system, and because few judges are properly trained in IPR law. In October 2017, the Verkhovna Rada established a dedicated high court for intellectual property cases. Once the court is fully functioning, it should provide a forum for IPR cases heard by specially selected and trained judges. Appeals will be considered by the Appellate Chamber of the IP court, while the Commercial Cassation Court of the Supreme Court will consider appeals from the IP Appellate Chamber.

Capital Markets and Portfolio Investment

The capital market for portfolio investment is small and lacks liquidity. The local institutional investment sector, including private pension investment, is weak. A foreign investor may open an account in a bank operating in Ukraine and transfer in funds for further investment, or invest directly to an account of a Ukrainian resident company. In 2017, the National Bank of Ukraine began allowing foreign investors to use escrow accounts to make investments in Ukraine. Only Ukrainian-licensed securities traders may handle securities transactions (subject to certain exceptions). In 2014, the National Bank temporarily banned the transfer of receipts from the sale of securities of Ukrainian issuers into foreign currency, with the exception of securities traded at stock exchanges. The measure was set to expire in June 2016, but remains in place.

Ukraine’s capital market includes nine operational privately-owned stock exchanges, including five licensed exchanges, hundreds of commodity exchanges, two central securities depositaries, and one settlement center. In addition, some of the exchanges offer clearing services for derivatives.

Credit is largely allocated on market terms and foreign investors are able to get credit on the local market, utilizing a variety of credit instruments, though interest rates remain high. The market environment has long lacked transparency; enforcement of key laws and regulations has been weak; and investors, both domestic and foreign, continue to face significant uncertainty.

Money and Banking System

Ukraine’s banking sector has seen remarkable progress following the 2014-2015 crisis thanks in large part to the authorities’ banking sector cleanup, resulting in the closure of 90 banks for insolvency or for money laundering activities. The banking sector’s recovered net assets grew by 6.4 percent to USD 50 billion in 2017, with nearly all key performance indicators of financial institutions improving. In 2017, 14 banks left the market, of which four became non-bank financial companies and one merged with another bank. Concentration in the banking sector increased by 1.3 percent, with the top 20 banks accounting for 90.7 percent of net assets.

The market share of state-owned banks (Privatbank, Ukreximbank, Ukrgasbank and Oshchadbank) in terms of net assets rose by 3.6 percent to nearly 55 percent. Due to significant provisioning, the banking sector booked losses of USD 920 million in 2017. The number of loss-making banks decreased from 33 in 2016 to 18 in 2017. The losses were mostly generated by PrivatBank, which was nationalized in December 2016, and two banks with Russian capital that faced sanctions from the government. In 2015, the government impose sanctions on five Ukrainian banks with Russian state capital: Sberbank PJSC, VS Bank PJSC, Prominvestbank PJSC, VTB Bank PJSC, and BM Bank PJSC. The sanctions prohibit these banks from transferring capital outside the territory of Ukraine in favor of any affiliated entities.

Since July 2017, the share of non-performing loans (NPLs) has been decreasing in all groups of banks, apart from PrivatBank. As of the reporting period, the shares of NPLs stood at 55.6 percent in state-owned banks (apart from PrivatBank, where it has increased sharply to 87.6 percent), 41 percent in foreign banks, and 27.2 percent in privately owned banks. In 2017, the banks’ total liabilities increased by 3.6 percent to USD 44 billion.

Foreign-licensed banks may carry out all activities conducted by domestic banks, and there is no ceiling on participation in the banking system, including operating via subsidiaries. A foreign company can open a bank account in Ukraine for the purposes of investment operations, otherwise it needs to register a representative office in Ukraine. A nonresident private person can open a bank account in Ukraine.

Foreign Exchange and Remittances

The National Bank in 2017 continued to liberalize currency controls and restrictions on dividend repatriation, which were put in place to stabilize the Ukrainian foreign exchange market during the 2014 economic crisis. In particular, the National Bank relaxed some restrictions on repatriation of investment proceeds, cross-border lending, and restrictions on individuals transferring money from Ukraine for non-trading operations. In addition, the National Bank amended the rules for registering cross-border loans of Ukrainian borrowers such that a Ukrainian bank, responsible for the registration of a cross-border loan with the National Bank, will be required to establish the ultimate beneficial owners of each foreign lender under such loan before submitting the documents for registration. The National Bank also decreased the mandatory foreign currency sales share from 65 to 50 percent, originally imposed to safeguard the stability of the foreign exchange market. Certain restrictions are likely to remain in place until the Ukrainian economy further strengthens, allowing the National Bank to further liberalize currency controls.

The National Bank in early 2018 revised its methodology for calculating remittances, factoring in the new data on labor migration and estimates by the central banks of Poland and Russia —the two largest sources of remittances to Ukraine. The improved methodology revealed an average USD 2 billion more in remittances inflows each year, in particular: USD 7 million in 2015, USD 7.5 billion in 2016 and USD 9.3 billion in 2017.

Sovereign Wealth Funds

Ukraine does not maintain or operate a sovereign wealth fund.

The Government of Ukraine operates 1,833 SOEs out of 3,350 registered SOEs, with an economic output of approximately 10 percent of GDP. SOEs, which are defined as companies in which the state owns at least 50 percent +1 share, employ 900,000 people. SOEs are active in areas such as energy, machine-building, and infrastructure. There is no common public list of all SOEs in Ukraine. Each Ministry publishes a list of SOEs under its management.

The corporate governance law, which entered into force in 2016, requires SOEs to publicize their annual financial reports on their official websites, including information on financial indicators, officials, transactions, etc. SOEs must also publish their annual financial statements and audits.

The majority of SOEs rely on government subsidies to function and cannot directly compete with private firms. Most of the SOEs capable of making a profit have already been privatized, leaving mainly inefficient firms in government hands. The Government of Ukraine heavily subsidized its SOEs (especially in the coal mining, rail transportation, gas, and communal heating sectors) and has supported debts of many SOEs with sovereign loan guarantees. SOE access to extensions of tax payment deadlines remains nontransparent, especially where SOEs are directed to sell their products at below-market prices.

SOE senior managers traditionally report directly to the relevant ministry. Ukrainian law specifies that ministries are not permitted to interfere with the daily economic activities of an SOE, but anecdotal reports indicate that this restriction is often ignored. Ministries have the power to decide on the creation, reorganization, and liquidation of SOEs; adopt and enforce SOE charters; conclude and cancel contracts with SOE executives; grant permission to the State Property Fund to create joint ventures with state property; and prepare proposals to divide state property between the national and municipal levels. Amendments from 2015 to the Law on Joint-Stock Companies enabled owners of 50 percent +1 share in a company to call shareholder meetings.

Privatization Program

On March 7, 2018 a new law on privatization of state property, aimed at attracting more investors, came into force in Ukraine. The legislation allows investors to settle disputes under international law, makes it obligatory to employ international advisers for the sale of larger firms, and also bans Russian and offshore companies from participating in privatizations.

In addition to the sale of large SOEs, Ukraine plans to privatize about 600 small SOEs in 2018. Assets assessed at less than USD 10 million—generally real estate and small businesses—will be sold at electronic auction, using the ProZorro Sales platform.

The State Property Fund oversees privatizations. Privatization rules generally apply to both foreign and domestic investors and, on paper, a relatively level playing field exists. Observers note numerous instances of past privatizations adjusted to fit a pre-selected bidder. The government has stated that there will be no revisions of past privatizations. Still, some court cases have surfaced wherein private companies are challenging earlier privatizations. In 2017 the budget received approximately USD 125 million from privatizations, which was 20 percent of the original plan, but still the best result in recent years.

There is limited but growing awareness in Ukraine of internationally accepted standards for responsible business conduct, including corporate social responsibility (CSR). Primary drivers for the introduction of these standards have been Ukraine’s vibrant civil society, international companies and investors, and efforts by business associations such as the American Chamber of Commerce and the European Business Association. The Government of Ukraine has put in place corporate governance standards to protect shareholders, however, these are voluntary.

On March 15, 2017, Ukraine became the 47th country to adhere to the OECD Declaration and Decisions on International Investment and Multinational Enterprises . Ukraine established its National Contact Point in 2016 under the Ministry of Economic Development and Trade, with an official website due to launch in April 2018.

There are independent NGOs, investment funds, worker organizations/unions, and business associations promoting or monitoring responsible business conduct. Post is aware of the NGO Center “Development of Corporate Social Responsibility” (CSR, http://csr-ukraine.org/ ) along with joint projects on development of corporate social responsibility involving NGOs and charity organizations. The Embassy is not aware of cases of sanctions or restrictions on such activities.

Ukraine has been a member of the Extractive Industries Transparency Initiative (EITI) since 2013. Participation by companies in Ukraine, however, is still voluntary. Ukraine has not joined the Voluntary Principles on Security and Human Rights.

Ukraine has numerous laws to combat corruption by public officials, and following the Revolution of Dignity in 2014 the government launched new anti-corruption institutions, including the National Anti-Corruption Bureau (NABU) to investigate corruption by public officials, the Special Anti-Corruption Prosecutor’s Office (SAP), and the National Agency for Prevention of Corruption (NAPC). In addition, a law mandated that public officials declare their assets on a publicly viewable online system. These new institutions, however, have had an uneven track record. After the successful 2016 launch of the asset declaration system for public officials, the NAPC failed to fulfill its mandate to verify officials’ declarations and to fairly manage political party finance reporting. NABU and SAP have taken 107 corruption cases to court since 2015, including indictments of high-level officials, but have failed to obtain a single conviction as cases became mired in court proceedings. The Verkhovna Rada at the time of this report was considering draft legislation to establish a specialized anti-corruption court, which is an IMF program condition.

Foreign businesses, including U.S. companies, continue to identify corruption in many sectors as a significant obstacle to FDI. Reform of public procurement has been a success story, with the introduction of the online ProZorro system providing transparency for most procurement, except in the defense sector, which remains non-transparent and a continuing source of corruption. The energy sector has seen some improvements, including on-going reforms at the large oil and gas SOE Naftogaz, but participants in the sector continue to complain of significant corruption. There are also allegations of corruption at SOEs in a variety of sectors.

There are a number of NGOs actively involved in investigating corruption and advocating for anti-corruption measures. In 2017, the Verkhovna Rada passed a law with broad requirements for non-governmental individuals engaged in anti-corruption activities to file public asset declarations, which activists fear could undermine their advocacy and be used to increase law enforcement harassment of their activities. The declaration requirements for anti-corruption activists went into effect in early 2018, despite calls from the international community for the Verkhovna Rada to scrap the requirement.

Resources to Report Corruption

NABU, established in October 2014, is the appropriate resource for the reporting of high-level corruption.

Government of Ukraine contact for combating corruption:

Mr. Artem Sytnyk, Director
National Anti-Corruption Bureau
3, Vasyl Surikov St, Kyiv, Ukraine 03035
Hot-line: 0-800-503-200
info@nabu.gov.ua
Corruption Reporting eForm:
http://nabu.gov.ua/povidomlennya-pro-kryminalne-pravoporushennya 

Contact at Transparency International:

Mr. Yaroslav Yuchyshyn
Executive Director
Transparency International Ukraine
2A provulok Kostia Hordiienka, 1st floor, Kyiv, Ukraine 01024
+38(044) 360-52-42
office@ti-ukraine.org

The military conflict continues in parts of Donetsk and Luhansk oblasts between Ukrainian government troops and forces that Russia leads, arms, and funds. Residents of Russia-controlled areas are subject to political violence at the hands of Russia’s proxy authorities. Civilian casualties occur regularly due to landmines and shelling, as fighting occurs in and around major population centers. Infrastructure for water, gas, and electricity are also frequently damaged by fighting. Ukraine lacks control over 500 km of its border in Donetsk and Luhansk, allowing Russia to freely supply its proxies with equipment, weapons, and soldiers. Russia continues its illegal occupation of the Autonomous Republic of Crimea and the City of Sevastopol.

There were several protests and demonstrations during 2017 against the government, mainly evoking populist messaging against economic conditions in the country and perceptions of the government failing to fight corruption. These protests, however, have generally been peaceful with few instances of violence. Politically, the country’s ruling coalition remains in power, albeit legislatively the coalition often needs support from opposition parties to pass important legislation. Political campaigns are beginning to increase in preparation for the 2019 presidential and parliamentary elections.

Ukraine has a well-educated and skilled labor force of about 26 million people with a nearly 100 percent literacy rate. As of December 2017, the unemployment rate of the population aged 15-70 (ILO methodology) averaged 9.5 percent, and the unemployment rate of the population of working age individuals averaged 9.9 percent, although unemployment in some regions, particularly in western Ukraine and central Ukraine, was significantly higher. In December 2017, the unemployment insurance allotted to each worker amounted to USD 85 per month. Unemployment increased in 2017 in the industrial eastern regions, and many big enterprises faced lay-offs due to severe economic challenges, including the loss of access to Russian and CIS markets. In addition, some enterprises were destroyed, robbed, dismantled, and shipped to Russian territory.

Wages in Ukraine remain low by Western standards. As of January 1, 2018, the minimum monthly wage for private-sector workers was USD 140. In December 2017, the nominal average monthly wage increased by 35.5 percent year-on-year to USD 328, while the real average wage increased by 11.6 percent year-on-year during the same period. The highest wages are traditionally in the financial and aviation sectors; the lowest wages are paid to agricultural and public health workers.

Ukrainian law allows workers to organize, and unions are prevalent in most industries. The law provides most workers with the right to form and join independent unions and to bargain collectively without previous authorization. By law, trade unions are equal, and a union’s establishment does not require government permission. Within classic sectors of the economy, sector-specific collective bargaining agreements involve representative employers’ associations (e.g., chemical employers), sector trade unions, and some participation of the government through the Ministry of Social Policy. Such agreements can also take place at the regional level.

The independence of unions from government or employer control, however, has been disputed by certain labor groups. Independent trade unions alleged that the country’s largest trade union confederation, the Federation of Trade Unions of Ukraine (FPU), enjoyed a cozy relationship with employers and members of some political parties. Unions not affiliated with the FPU were denied a share of disputed trade union assets inherited by the FPU from Soviet-era unions. There were cases of workers, who renounced membership in an FPU-affiliated union and joined a new union, facing loss of pay, undesirable work assignments, and dismissal.

During 2017, the State Labor Service and its predecessor, the State Labor Inspectorate, was responsible for enforcing labor laws. Inspectors were limited in number and funding. Although the Government of Ukraine renewed planned and unplanned labor inspections in 2016, the number of completed inspections continued to fall, and experts assessed the number to be inadequate relative to the size of the Ukrainian economy.

The law provides for the right to strike “to defend one’s economic and social interests,” as long as strikes do not jeopardize national security, public health, or the rights and liberties of others; the government generally respects this right. It does not extend the right to strike to personnel of the Prosecutor General’s Office, the judiciary, armed forces, security services, law enforcement agencies, the transportation sector, or public servants. Workers who strike in prohibited sectors may receive prison terms of up to three years. A new law established the National Mediation and Reconciliation Service (NMRS) to mediate labor disputes. According to official Ukrainian statistics, during 2017 the NMRS resolved 216 labor disputes, which involved 1.5 million employees and 6,767 economic entities.

The U.S.-Ukraine Overseas Private Investment Corporation (OPIC) Agreement was signed in Washington in 1992. OPIC currently provides political risk insurance to several U.S. companies operating in Ukraine and has the capacity to insure other U.S. eligible investors if such coverage is sought. Ukraine is a member of the Multilateral Investment Guarantee Agency (MIGA). OPIC has an active pipeline of projects in Ukraine across various sectors. OPIC’s projects through FY 2016 and 2017 totaled USD 865 million, with a number of potential projects in the early stages.

In previous years, Ukraine’s FDI growth was driven partly by recapitalization of domestic banks when banks conducted operations of converting debt into equity. According to the National Bank of Ukraine, net inflow of FDI to Ukraine in 2017 was USD 2.3 billion or 2.1 percent of GDP (USD 1.8 billion excluding banks recapitalization), falling from USD 3.4 billion in 2016 and bringing the total FDI stock to USD 39.1 billion.

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

Table 3: Sources and Destination of FDI

*Inward investment data are from the IMF, but is far less than the National Bank of Ukraine (NBU)’s inward investment calculation of USD 48.858 billion in 2016 and USD 51.653 billion in 2017 (which is closer to the USD 47.777 billion figure cited in the 2017 ICS. The IMF’s CDIS data do not include information on outward direct investment from Ukraine.
Table 4: Sources of Portfolio Investment

*IMF data match those provided by the National Bank of Ukraine (NBU), though NBU indicates information is current as of December 31, 2017. Ukrainian nationals and firms may be the ultimate beneficial owners of a large percentage of the assets, nearly all of which held by non-financial corporations and households in Cyprus and UK.

Michael Latham
Economic Officer
U.S. Embassy Kyiv, Ukraine
+380-44-521-5000
LathamME@state.gov