08TBILISI199, GEORGIA: INVESTMENT CLIMATE STATEMENT FOR 2008

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Reference ID Created Released Classification Origin
08TBILISI199 2008-02-07 05:52 2011-08-30 01:44 UNCLASSIFIED Embassy Tbilisi

VZCZCXRO1364
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHSI #0199/01 0380552
ZNR UUUUU ZZH
R 070552Z FEB 08
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC 8825
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPCIM/CIMS NTDB WASHDC
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 12 TBILISI 000199 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/CARC, EEB/CBA, EEB/IFD/OIA AND EEB/TPP/BTA 
COMMERCE FOR 4231 DANICA STARKS 
STATE PASS USTR 
 
E.O. 12958: N/A 
TAGS: EINV PGOV OPIC KTDB USTR GG
SUBJECT: GEORGIA: INVESTMENT CLIMATE STATEMENT FOR 2008 
 
REF: STATE 158802 
 
1.  Per reftel, Embassy Tbilisi submits its Investment Climate 
Statement for Georgia for 2008. 
 
Introduction 
 
The dramatic change of government swept in by the 2003 peaceful 
"Rose Revolution" marked the start of serious political and economic 
reform in Georgia.  Before 2003, Georgia's economic development 
suffered from a reputation for instability, violence, corruption, 
and unreliable supplies of energy.  The picture has significantly 
changed for the better.  Since 2004, the Georgian government has 
undertaken institutional reforms including the restructuring and 
downsizing of government ministries, privatizing large state-owned 
entities, increasing the pay of public servants and prosecuting 
corruption, reducing the number and rates of taxes and improving tax 
and fiscal administration, streamlining licensing requirements, 
deregulating, simplifying customs and border formalities, and 
undertaking many other efforts to make it easier to do business in 
Georgia. 
 
The World Bank recognized Georgia as the world's fastest reforming 
economy in its 2007 "Doing Business" report, and its 2008 report 
ranks it as the world's 18th easiest place to do business, in league 
with countries such as Switzerland, Estonia and Belgium.  Georgia is 
ranked ahead of France, Germany and the Netherlands.  The World 
Bank's "Anti-Corruption in Transition 3" report places Georgia among 
the countries showing the most dramatic improvement in the fight 
against corruption, due to implementation of a strong program of 
economic and institutional reform.  The report indicates that the 
amount of money companies spend on bribes fell substantially in the 
period covered.  NATO granted Georgia "Intensified Dialogue" in 
2006, an important step on the path to membership in that 
organization.  The Georgian government is firmly committed to a 
peaceful resolution of its differences with the separatist regions 
of Abkhazia and South Ossetia.  Reforms have increased tax revenues, 
facilitating public investment and social sector expenditure to 
address poverty.  Electricity distribution has become much more 
reliable.  Paying customers in most parts of Georgia can count on 
consistent 24-hour a day service, although service can still be a 
problem in some remote rural areas. 
 
The World Bank "Doing Business - 2008" report provides objective 
measures of business regulations and their enforcement across 178 
countries and is a guide for evaluating regulations that directly 
impact economic growth.  In terms of the pace of economic reform 
over 2007, The World Bank ranks Georgia fifth after Egypt, Croatia, 
Ghana, and FYR Macedonia.  This is Georgia's third straight year in 
the top five in this category.  Last year Georgia ranked as the top 
reformer, and it was number two in 2005.  Georgia moved up 
significantly in the overall ranking of countries for ease of doing 
business, leaping from thirty seventh in 2006 to eighteenth place in 
2007.  Estonia, ranked seventeenth, is the only former Soviet 
country ahead of Georgia.  For comparison, Latvia is number 22, 
Lithuania number 26, Armenia number 39, Azerbaijan number 156 and 
Russia number 166. 
 
Among the specific achievements for which the IFC credits Georgia is 
strengthening investor protections by amendments to its securities 
law that eliminate loopholes that had allowed corporate insiders to 
expropriate minority investors.  Georgia adopted a new insolvency 
law that shortens timelines for reorganization of a distressed 
company or disposition of a debtor's assets.  It sped up the 
approval process for construction permits and simplified procedures 
for registering property.  It made starting a business easier by 
eliminating the paid-in capital requirement.  In addition, the 
country's private credit bureau added payment information from 
retailers, utilities, and trade creditors to the data it collects 
and distributes. 
 
The World Bank report also credits Georgia for easing the entry of 
new firms.  Georgia now has 15 registered businesses per 100 people 
(the same ratio as Malaysia).  Georgia increased disclosure 
requirements for directors' conflicts of interest, detailed stricter 
duties to firms by directors, and heightened penalties for 
self-dealing.  Georgia also improved in regard to licensing 
practices. 
 
Georgia scored high in Economic Freedom Report jointly undertaken by 
the Heritage Foundation and the Wall Street Journal.  The 2008 Index 
of Economic Freedom measures 162 countries across 10 specific 
factors of economic freedom, such as Business Freedom, Trade 
Freedom, Fiscal Freedom, Freedom from Government, Monetary Freedom, 
Investment Freedom, Financial Freedom, Property Rights, Freedom from 
Corruption, and Labor Freedom.  Georgia's economy is above average 
 
TBILISI 00000199  002 OF 012 
 
 
at 69.2  perc
ent free (68.7 in 2007), which makes it the world's 
32nd freest economy and qualifies under the category of 'moderately 
free', in the company of Spain, Austria, Norway, Slovak Republic, 
and Czech Republic.  Georgia is ranked 18th out of 41 countries in 
the European regions, and its overall score is equal to the European 
regional average. According to the report, Georgia scores highly in 
business freedom, fiscal freedom, freedom from government, 
investment freedom and labor freedom, but needs improvement in the 
areas of property rights protection and corruption. 
 
Prudent fiscal and monetary policies have supported a relatively 
stable macro-economic environment and permitted the government to 
pay attention to further reform.  The economy grew by 9.3 percent in 
2005, and 9.4 percent in 2006 despite economic sanctions imposed by 
Russia, normally Georgia's most important export market.  Growth in 
2007 is estimated at about 12%.  GDP per capita in 2006 was USD 1763 
and at purchasing power parity is estimated to be USD 4176 in 2007. 
Inflation for 2006 was about 8.8%, and increased in 2007 to around 
11.0%.  The government is committed to keeping inflation under 10% 
in 2008. 
 
The Georgian Lari strengthened from 1.7 to about 1.6 per U.S. dollar 
over the course of 2007, influenced by global weakness of the 
dollar, inflows of foreign investment and increased focus on 
inflation by the Central Bank.  Based on the economy's overall 
performance and the Georgian government's strong commitment to 
structural changes, Georgia received its first sovereign credit 
rating in late 2005 from Standard and Poors -- a B+ long term, and B 
short term rating.  Fitch rating service has given Georgia a BB- 
rating. 
 
Despite the foregoing improvements in the economy, more than 25 
percent of the population lives below the poverty line, and many 
people still rely on subsistence agriculture.  Greater familiarity 
with Western business practices and legal norms is required. 
Physical infrastructure, such as the road network, saw considerable 
improvement over 2005-2007, though it still needs upgrading, 
especially in rural areas.  Since most natural gas for heating and 
electricity generation is imported, Georgia needs to plan its use of 
energy carefully, diversify sources, and improve the efficiency of 
systems.  Rehabilitation of existing hydroelectric power plants and 
construction of new ones is gradually reducing Georgia's dependence 
on imported energy. 
 
The main source of sustained future growth that reduces poverty and 
increases employment will have to be private investment, both 
domestic and foreign.  The most useful investment will have an 
emphasis on exports to new and more diverse markets.  The 
government's challenge is to implement existing legislation, 
continue the fight against corruption, defuse tensions in the 
separatist regions and undertake new reforms, especially to improve 
the judicial system, in order to increase investor confidence. 
 
Georgia receives large amounts of assistance from the United States, 
the European Union and international institutions.  U.S. assistance 
has focused on the goals of improving the rule of law, governance 
and the administration of government economic and financial 
institutions, improving critical physical infrastructure, enhancing 
private sector competitiveness and promoting the growth of a free 
market economy.  In 2006, Georgia's clear-cut commitment to reform 
earned it one of the first compacts with the U.S. Millennium 
Challenge Corporation, which will supply $295 million in 
infrastructure investments and investments in small and medium 
enterprises engaged in tourism and agriculture. 
 
President Saakashvili and his government have strengthened Georgia's 
bilateral relations with many countries, reaching out to Ukraine, 
Turkey, Italy, Poland, Latvia, Lithuania, Estonia, Japan, 
Kazakhstan, the UK, Germany, the Netherlands, and of course, the 
United States.  Georgia has a partnership agreement with the 
European Union, and an action plan for reform to allow a closer 
relationship.  Georgia maintains the goal of eventual membership in 
the European Union.  Georgia is one of only fifteen countries in the 
world that benefit from GSP+ access to the EU market, allowing 
duty-free access for more than 7000 products.  It is making an 
effort to harmonize its regulatory environment with international 
standards, particularly those established by the EU.  Georgia enjoys 
duty-free trade with other former Soviet Union countries.  It 
benefits from preferential trading relationship with the United 
States, Turkey, Canada, Switzerland and Japan.  In 2007 Georgia 
signed a free trade agreement with Turkey and a Trade and Investment 
Framework Agreement and an Open Skies Agreement with the United 
States.  Discussion of a free trade agreement with the European 
Union is under way. 
 
Georgia is located at the crossroad between Europe and Asia.  It is 
 
TBILISI 00000199  003 OF 012 
 
 
the shortest route from Central Asia to Europe, and could be a 
North-South Bridge between Turkey and the Russian Federation. 
Georgia has two deep-water ports on its Black Sea coast.  Labor 
costs in Georgia are comparable to the Far East, while transit time 
for shipment of goods to Europe is far less.  The new government has 
launched an extensive road rehabilitation project aimed at upgrading 
the road quality and constructing new facilities to improve 
communication infrastructure.  The governments of Turkey, Azerbaijan 
and Georgia have agreed to construct a rail link from Kars, Turkey 
through Georgia to Baku, Azerbaijan.  Freight from Europe will be 
able to be transported through Turkey to Baku via Tbilisi and then 
to Central Asia from Baku by ferry.  Ongoing construction of a 
tunnel under the Bosporus at Istanbul means freight will soon be 
able to travel from Georgia directly into Europe.  In addition, 
Georgia is improving its network of rail ferry connections with 
Black Sea countries, including Russia, Ukraine, Romania and Turkey, 
which will further increase transportation and trade turnover with 
these countries. 
 
Georgia's relations with its northern neighbor Russia have been 
problematic since 2004, principally because of Georgia's pro-Western 
orientation.  In 2005 and 2006, Russia banned imports of Georgian 
agricultural products, mineral water and wine, for which Russia was 
Georgia's largest market.  These restrictions continued into 2008, 
but there are signs they may be lifted in the near future.  In 
September 2006, Russia cut all direct transport links with Georgia. 
Gazprom, the Russian gas monopoly, quadrupled the price of natural 
gas supplied to Georgia over two years.  Despite these actions, the 
Georgian economy has continued to grow.  Georgian businesses are 
actively seeking new markets for Georgian products and new sources 
of imports, especially in Ukraine, the Baltics and Central Europe. 
New supplies of natural gas from Azerbaijan and increased 
hydroelectric generating capacity are making Georgia less dependent 
on Russian energy sources.  Once normal trading relations with 
Russia are resumed, the return of its traditional market in addition 
to the newly developed ones will create significant opp
ortunities 
for companies based in Georgia. 
 
Openness to Foreign Investment 
 
Georgia is extremely open to foreign investment and is eager to 
welcome new investors.  The country is developing a regulatory 
framework intended to foster competition.  Legislation governing 
foreign investment establishes favorable conditions, but not 
preferential treatment, for foreign investors.  The Law on Promotion 
and Guarantees of Investment Activity protects foreign investors 
from subsequent legislation that alters the condition of their 
investments for a period of ten years. 
 
The U.S.-Georgia Bilateral Investment Treaty, in force since 1994, 
guarantees U.S. investors national treatment or most favored nation 
treatment, whichever is better, in the establishment, operation and 
sale of their investments.  Exceptions to national treatment may be 
made by Georgia for investments in maritime fisheries; air and 
maritime transport, and related activities; ownership of broadcast, 
common carrier, or aeronautical radio stations; communications 
satellites; government-supported loans, guarantees, and insurance; 
and landing of submarine cables. 
 
Legislation governing foreign investment includes the Constitution, 
the Civil Code, the Tax Code, and the Customs Code.  Other 
legislation includes the Law on Entrepreneurs, the Law on Promotion 
and Guarantees of Investment Activity, the Bankruptcy Law, the Law 
on Courts and General Jurisdiction, the Law on Limitation of 
Monopolistic Activity, the Accounting Law, and the Securities Market 
Law. 
 
Georgia has negotiated 34 agreements for avoidance of double 
taxation, of which 22 have entered into force.  The active 
agreements are with Uzbekistan, Azerbaijan, Ukraine, Romania, 
Bulgaria, Turkmenistan, Armenia, Kazakhstan, Iran, the Netherlands, 
Greece, Italy, Belgium, Lithuania, Latvia, United Kingdom, China, 
Austria, Poland, Czech Republic and Estonia.  Until treaties with 
France and Germany enter into force, a similar agreement signed by 
the USSR governs the issue.  An agreement with Russia was signed in 
1999 and ratified by the Georgian parliament in 2000.  It has not 
been ratified by the Russian Duma, but the Russian side regards it 
as an active agreement. Treaties with Germany, France, Denmark, 
Finland and Turkey have been ratified by Georgian parliament and are 
awaiting ratification by the respective countries in order to enter 
into force. 
 
The legal framework governing ownership and privatization of 
property is established by the following acts: the Civil Code, the 
Law on Ownership of Agricultural Land, the Law on Private Ownership 
of Non-Agricultural Land, the Law on Management of State-Owned 
 
TBILISI 00000199  004 OF 012 
 
 
Non-Agricultural Land, and the Law on Privatization of State 
Property.  Property rights in the extractive industries are governed 
by the Law on Concessions, the Law on Deposits and the Law on Oil 
and Gas.  Intellectual property rights are protected under the Civil 
Code, and by the Law on Patents and Trademarks.  Financial sector 
legislation includes the Law on Commercial Banks, the Law on 
National Banks and the Law on Insurance Activities. 
 
Georgia does not screen foreign investment in the country, other 
than imposing a registration requirement and certain licensing 
requirements as outlined below.  Foreign investors have participated 
in most of the major privatizations of state-owned property. 
Transparency of such privatizations has at times been an issue, 
however.  No law specifically authorizes private firms to adopt 
articles of incorporation which limit or prohibit foreign 
investment. 
 
In 2005, registration of businesses was simplified.  Paperwork and 
fees were reduced and processing time shortened to about 8-10 days 
from the submission of documents.  All companies are required to 
register with the Ministry of Finance, providing founder's and firm 
principals' names, dates and places of birth, occupations and places 
of residence; incorporation documents; area of activity; and charter 
capital.  This information is made public and any person may request 
and review such information.  Business registration and tax 
registration are separate procedures handled by the same department 
within the Ministry of Finance. 
The Government of Georgia has privatized most of the largest 
formerly state-owned enterprises in the country.  A list of entities 
still available to be privatized can be found on the website 
www.privatization.ge.  Information on investment conditions and 
opportunities can be obtained from the Georgia National Investment 
and Export Promotion Agency, e-mail: info@investingeorgia.org, 
www.investingeorgia.org.  Further information is available at a 
website maintained by the American Chamber of Commerce in Georgia, 
www.investmentguide.ge.  The World Bank's evaluation of business 
conditions in Georgia is available at 
www.doingbusiness.org/documents/ 
countryprofiles/geo.pdf. 
 
In 2005, 84% of existing licensing requirements were eliminated and 
a "one stop shop" for licenses was created.  By law, the government 
has 30 days to make a decision, and if no reasonable ground for 
rejection is stated by the licensing authority within that time, the 
license or permit is deemed to be issued.  Construction permits can 
be obtained within 90 days, according to research published by the 
European Union.  Licenses are only required for activities that 
affect public health, national security and the financial sector. 
Licensing currently is required in the following areas: weapons and 
explosives production, narcotic, poisonous and pharmaceutical 
substances, exploration and exploitation of renewable or 
non-renewable substances, exploitation of natural resource deposits, 
establishment of casinos and gambling houses and the organization of 
games and lotteries, banking, insurance, trading in securities, 
wireless communication services, and the establishment of radio and 
television channels.  The law requires the state to retain a 
controlling interest in air traffic control, shipping traffic 
control, railroad control systems, defense and weapons industries, 
and nuclear energy.  Only the state may issue currency, banknotes 
and certificates for goods made from precious metals, import 
narcotics for medical purposes, and produce control systems for the 
energy sector. 
 
Conversion and Transfer Policies 
 
Georgian law guarantees the right of an investor to convert and 
repatriate income after payment of all required taxes.  The investor 
is also entitled to convert and repatriate any compensation received 
for expropriated property.  Moreover, Georgia has accepted the 
obligations of Article VIII, Sections 2, 3, and 4 of the IMF 
Articles of Agreement, with effect from December 20, 1996.  IMF 
members accepting the obligations of Article VIII undertake to 
refrain from imposing restrictions on payments and transfers for 
current international transactions and from engaging in 
discriminatory currency arrangements or multiple currency practices 
without IMF approval.  By accepting the obligations of Article VIII, 
Georgia gives confidence to the international community that it will 
pursue sound economic policies
 that will obviate the need to use 
restrictions on the making of payments and transfers for current 
international transactions. 
 
Under the U.S.-Georgia Bilateral Investment Treaty, the Georgian 
government guarantees that all transfers relating to a covered 
investment by U.S. investors can be made freely and without delay 
into and out of Georgia. 
 
 
TBILISI 00000199  005 OF 012 
 
 
Foreign investors have the right to hold foreign currency accounts 
with authorized local banks.  The sole legal tender in Georgia is 
the Lari (GEL), which is traded on the Tbilisi Interbank Currency 
Exchange and in the foreign exchange bureau market.  There is no 
difficulty in obtaining foreign exchange or significant delays in 
remitting funds overseas through normal channels.  Several Georgian 
banks participate in the SWIFT and Western Union interbank 
communication networks.  Businesses report that it takes a maximum 
of three days to transfer money abroad.  There are no known plans to 
change remittance policies.  Travelers must declare at the border 
currency and securities in their possession valued at more than GEL 
30,000 (USD 18,750). 
 
Expropriation and Compensation 
 
The Georgian Constitution protects ownership rights, including 
ownership, acquisition, disposal or inheritance of property. 
Foreign citizens living in Georgia possess rights and obligations 
equal to those of the citizens of Georgia.  The Constitution allows 
restriction or revocation of property rights only in cases of 
extreme public necessity, and then only as directly allowed by law. 
 
The Law on Procedures for Forfeiture of Property for Public Needs 
establishes the rules for expropriation domain in Georgia.  The law 
allows expropriation for certain enumerated public needs.  It 
provides a mechanism for valuation and payment of compensation, and 
for court review of the valuation at the option of any party.  The 
Georgian law on investment allows expropriation of foreign 
investments only with appropriate compensation.  Recent amendments 
to the expropriation law allow payment of compensation with property 
of equal value as well as money.  Compensation includes all expenses 
associated with the valuation and delivery of expropriated property. 
 Compensation must be paid without delay and must include both the 
value of the expropriated property as well as the loss suffered by 
the foreign investor as a result of expropriation.  The foreign 
investor has a right to review of an expropriation in a Georgian 
court.  In 2007, Parliament passed a law generally prohibiting the 
government from contesting the privatization of real estate sold by 
the government before August 2007.  The law is not applicable to 
certain enumerated properties. 
 
The U.S.-Georgia Bilateral Investment Treaty permits expropriation 
of covered investments only for a public purpose, in a 
non-discriminatory manner, upon payment of prompt, adequate and 
effective compensation, and in accordance with due process of law 
and general principles of fair treatment. 
 
Dispute Settlement 
 
The Georgian investment law allows disputes between a foreign 
investor and a governmental body to be resolved in Georgian courts 
or at the International Center for the Settlement of Investment 
Disputes (ICSID), unless a different method of dispute settlement is 
agreed upon between the parties.  If the dispute is not considered 
at ICSID, the foreign investor has the right to submit the dispute 
to any international arbitration body which has been set up by the 
United Nations Commission for International Trade Law (UNCITRAL) to 
resolve the dispute in accordance with the rules established under 
the arbitration and international agreement.  Under the U.S.-Georgia 
Bilateral Investment Treaty, investors have additional rights. 
 
Georgia is party to the International Convention on the Recognition 
and Enforcement of Foreign Arbitration Awards.  As a result, the 
Government agrees to accept binding international arbitration of 
investment disputes between foreign investors and the state.  The 
Ministry of Justice was designated in December 2005 to oversee the 
government's interests in arbitrations between the state and private 
investors. 
 
It is recommended that contracts between private parties include a 
provision for international arbitration of disputes because of 
deficiencies in the Georgian court system.  Litigation can take 
excessively long periods of time.  There is concern about the 
adequacy of training of judges and about their susceptibility to 
pressure from the government or other outside influences. 
 
Performance Requirements and Incentives 
 
Performance requirements are not a condition of establishing, 
maintaining or expanding an investment, but have been imposed on a 
case-by-case basis in some privatizations, for example, commitments 
to maintain employment levels or to make additional investments 
within a specified period of time.  While many privatizations have 
proceeded smoothly and regularly, the current government has used 
non-fulfillment of performance requirements to justify rescinding 
privatizations and re-selling enterprises, usually for higher 
 
TBILISI 00000199  006 OF 012 
 
 
prices, sometimes to the benefit of other interested parties. 
 
Most types of performance requirements are prohibited by the 
U.S.-Georgia Bilateral Investment Treaty. 
 
The Government of Georgia does not offer incentives to foreign 
investors, but relies on the many improvements it has made in the 
overall business climate to attract them to invest in the country. 
 
Right to Private Ownership and Establishment 
 
Foreign and domestic private entities may freely establish, acquire, 
and dispose of interests in companies and business enterprises, and 
engage in all forms of remunerative activity.  Some specific laws 
regulate business activity in the banking, agribusiness, energy, 
transport and tourism sectors.  To the extent that public 
enterprises compete with private enterprises, they do so on a basis 
of equality. 
 
Foreign individuals and companies may buy non-agricultural land in 
Georgia.  Only Georgian citizens or companies may buy agricultural 
land in their own name, but even agricultural land can be purchased 
by forming a Georgian corporation that may be up to 100% 
foreign-owned. 
 
Investors should exercise extreme caution in purchasing property in 
Abkhazia.  Land for sale rightfully may belong to internally 
displaced persons forced to leave Abkhazia in the early 1990s and 
may have improperly been placed on the market by the de facto 
authorities in Abkhazia.  The government of Georgia considers the 
sale of property in Abkhazia illegal under Georgian law and property 
could be reclaimed by original owners at a future date. 
 
Protection of Property Rights 
 
Secured interests in both real and personal property are recognized 
and recorded.  However, deficiencies in the operation of the court 
system can hamper investors from realizing their rights in property 
offered as security.  Foreign investors' interests have sometimes 
been harmed by biased court proceedings, and by legislation and &#x000
A;decrees that clearly favor a Georgian entity or partner involved in 
the enterprise.  Judicial reform has been identified as a top 
priority for the Georgian government since late 2005, but it will 
take some time for court and legal reforms to bear fruit.  It is 
recommended that contracts between private parties include a 
provision for international arbitration of disputes. 
 
Disputes over property rights made headlines in 2005-2007.  These 
cases have tended to undermine confidence in the impartiality of the 
Georgian judicial system and rule of law, and by extension, 
Georgia's investment climate.  Both foreign and Georgian investors 
have expressed reservations about the competence, independence and 
impartiality of court decisions.  In a few cases lower court 
decisions have changed control of property or of entire enterprises 
on questionable legal grounds or on the basis of forged documents. 
In some cases these decisions have been reversed by higher courts or 
government action, in others not. 
 
 
Protection of Intellectual Property Rights 
 
Georgia acceded to the WTO and the TRIPS agreement in 2000.  In 
2004, the Georgian parliament ratified the Rome Convention for 
Protection of the Rights of Performers, Producers of Phonograms and 
Broadcasting Organization, and the Lisbon Agreement on Denomination 
of Origin.  In 2005, Georgia joined WIPO International Convention 
for the Protection of New Varieties of Plants.  Georgia is a party 
to the Bern Convention, member of the two WIPO digital treaties - 
Copyright Treaty and Performance and Phonograms Treaty, the Hague 
Agreement, and Budapest Treaty Concerning the International 
Recognition of the Deposit of Microorganisms for the Purpose of 
Patent Procedures. 
 
Six laws regulate intellectual property rights.  These include: the 
Law on Patents, Law on Trademarks, Law on Copyrights and Neighboring 
Rights, Law on Appellation of Origin and Geographic Indication of 
Goods, Law on Topographies of Integrated Circuits, and Law on IP 
Related Border Measures.  Georgian law now provides retroactive 
protection for works of literature, art and science or sound 
recordings for 50 years. 
 
While Georgia has brought its legislation into line with 
international standards, enforcement remains problematic.  Pirated 
video and audio recordings, electronic games and computer software 
are freely sold in Georgia.  Use of unlicensed software in 
government offices and businesses is common.  Internet service 
 
TBILISI 00000199  007 OF 012 
 
 
providers host websites loaded with unlicensed content. 
Responsibility for WTO compliance was recently been transferred to 
the Ministry of Economic Development, which still needs to develop 
its capacity in this regard.  The Customs Department is developing a 
new Intellectual Property Objects Register to assist in 
identification of counterfeit goods at the border.  Nevertheless, 
IPR awareness in the Department is low and hampered by frequent 
personnel changes.  Further clarification of responsibilities 
between the Ministry of Internal Affairs and the Ministry of Finance 
is needed, as the MOIA has authority over some types of property 
rights protection, and the Ministry of Finance over others.  Judges 
and lawyers lack training in IPR issues.  Georgia's Patent and 
Trademark Agency needs greater familiarity with emerging 
technologies. 
 
Transparency of Regulatory System 
 
The Georgian government has made a commitment to greater 
transparency and simplicity of regulation.  Laws and regulations are 
published in Georgian in the official gazette, the Legislative 
Messenger.  The tax on corporate profits is 20% and the tax on 
personal income is a flat 25% after a 2007 law increased the 
personal income tax and eliminated the employer-paid social tax on 
wages.  The Value Added Tax is 18%.  The number of taxes has been 
reduced from twenty-two to six.  There are excise taxes on 
cigarettes, alcohol, and fuel.  Only three rates of import duties 
exist, zero, 5% and 12%, and nearly all goods, except for some 
agricultural products, are taxed at the zero rate. 
 
The Georgian National Investment and Export Promotion Agency has 
established Business Information Centers in Tbilisi and other 
Georgian cities.  These centers are intended to provide domestic and 
foreign businesses with a standard package of information relevant 
to doing business in Georgia, and specific information according to 
the needs of individual businesses.  The Business Information 
Centers are also conducting an ongoing public-private dialog to 
facilitate communication between regulators and the business 
community. 
 
International accounting standards became binding for joint stock 
companies in Georgia from January 1, 2000.  For other institutions, 
such as banking institutions, insurance companies and companies 
operating in the field of insurance, as well as limited liability 
companies, limited partnerships, joint liability companies, and 
cooperatives the standards became binding on January 1, 2001. 
Private companies (excluding sole entrepreneurs, small businesses 
and non-commercial legal entities) are required to perform 
accounting and financial reporting in accordance with international 
accounting standards.  Sole entrepreneurs, small businesses and 
non-commercial legal entities perform accounting and financial 
reporting following simplified interim standards approved by the 
Parliamentary Accounting Commission.  Despite the legal requirement, 
the conversion to international accounting standards is going 
slowly, in part because many businesses have operated in the shadow 
economy, or maintained two sets of books.  Qualified accounting 
personnel are in short supply. 
 
Efficient Capital Markets and Portfolio Investment 
 
The Georgian banking system is growing quickly.  Currently, the 
banking system consists of regional small- and medium-sized banks, a 
handful of large banking institutions based in Tbilisi with branch 
networks, and three foreign banks (American, Turkish, and 
Azerbaijani).  In 2007, commercial bank assets grew by 70% and the 
profit of commercial banks grew by 65%.  Total assets of the 
country's 19 banks (13 of which have foreign capital) were $4.5 
billion at the end of 2006, 45% of GDP. 
 
Credit from commercial banks is available to foreign investors as 
well as domestic clients.  Banks offer credit cards and a variety of 
loans including mortgage loans.  In addition, the International 
Finance Corporation, European Bank for Reconstruction and 
Development, the U.S. Overseas Private Investment Corporation, the 
Millennium Challenge Corporation and other international development 
agencies have a variety of lending programs that make credit 
available to large and small businesses in Georgia. 
 
The limited number of foreign banks operating in Georgia reflects in 
part the small size of Georgia's financial market.  However, foreign 
investment in the sector is significant, accounting for 67.6% of 
total bank capital in 2007.  In 2005 Russian, Kazakh, U.S., and 
German capital was invested in Georgian banks.  In September 2006, 
the French bank Societe Generale acquired 60% of one of the leading 
Georgian banks, Bank R
epublic. In 2007 growing interest towards 
Georgia's banking sector was demonstrated by the entrance of the 
British bank HSBC into Georgia. 
 
TBILISI 00000199  008 OF 012 
 
 
 
Domestic credit to the private sector rose by more than 70 percent 
in real terms during 2007. The law on commercial bank activities has 
been amended to improve the transparency of ownership and corporate 
governance of banks.  In March 2006 the restriction under which one 
shareholder or a group of joint shareholders could hold no more than 
25 percent of voting shares in a bank was abolished.  A new law 
regulating the activity of microfinance organizations came into 
force in August 2006. 
 
The National Securities Commission of Georgia regulates the 
securities market.  All joint stock companies with more than 50 
shareholders -- currently about 1800 companies in Georgia -- are 
required to submit annual, semi-annual and current reports prepared 
in accordance with internationally accepted accounting standards. 
 
The small Georgian Stock Exchange was established with assistance 
from USAID in 1999.  The stock market organizes public trading of 
securities and disseminates information on trading results and 
prices.  The GSE has a Memorandum of Cooperation with the 
Thessaloniki Stock Exchange Center for harmonization of trading 
platforms.  Shares of 57 companies were traded on the GSE in 2007, 
down from 90 in 2006.   In 2007, the GSE executed 6,908 trades, with 
a total value of GEL 38.8 million (around $23.5 million) 
 
No law or regulation authorizes private firms to adopt articles of 
incorporation or association that limit or prohibit foreign 
investment, participation, or control. "Cross-shareholder" or 
"stable-shareholder" arrangements are not used by private firms in 
Georgia.  Georgian legislation does not protect private firms from 
takeovers.  There are no regulations authorizing private firms to 
restrict foreign partners' investment activity or limit foreign 
partners' ability to gain control over domestic enterprises. 
 
Political Violence 
 
Georgia suffered considerable instability in the immediate 
post-Soviet period.  After independence in 1991, civil war and 
separatist conflicts flared up in the areas of Abkhazia and South 
Ossetia.  The status of each region remains unresolved and the 
central government does not have effective control over these areas. 
 However, neither Abkhazia nor South Ossetia has gained 
international recognition.  The United States supports the 
territorial integrity of Georgia within its 
internationally-recognized borders.  Small scale acts of violence 
between Georgians and Ossetians within South Ossetia, and Georgians 
and Abkhaz within the ethnic-Georgian Gali District inside Abkhazia, 
sometimes raise tensions.  Other parts of Georgia, including 
Tbilisi, are not affected by such violence. 
 
 
Corruption 
 
Corruption in Georgia, both official and otherwise, can distort 
business transactions in Georgia.   However, under President 
Saakashvili, Georgia has taken action to reduce corruption. 
Anti-corruption efforts have resulted in the arrests of former 
officials, the radical downsizing of state bureaucracies, effective 
crackdowns on smuggling and have contributed to an increase of about 
50 percent in state revenue collections.  The notoriously corrupt 
traffic police were completely disbanded in mid-2004. 
 
Articles 332-342 of the Criminal Code criminalize bribery.  Georgian 
legislation provides for civil forfeiture of undocumented assets 
from public officials who are charged with corruption offenses. 
Bribery is a criminal act under Georgian law, and Parliament 
recently accepted a package of constitutional amendments that make 
abuse of public office a criminal offense with a maximum penalty of 
fifteen years imprisonment and confiscation of property.  Penalties 
for accepting a bribe start at 6 years in prison and can be up to 15 
years depending on aggravating circumstances accompanying the 
offense.  Penalties for giving a bribe can include a fine or a 
prison sentence from up to 2 years or both.  In aggravating 
circumstances when a bribe is given to commit an illegal act, the 
penalty can be from 4 to 7 years.  The definition of a public 
official includes foreign public officials and employees of 
International Organizations and Courts for purposes of such offenses 
as accepting a bribe, giving a bribe and trading in influence. 
Georgia's legislation does not allow a local company to deduct a 
bribe to a foreign official from taxes.  White collar crimes such as 
bribery fall under the investigative jurisdiction of the 
Prosecutor's Office. 
 
The Government's September 2005 Anti-Corruption Strategy calls for 
an effective state management system and legal and public feedback 
mechanisms to prevent corruption.  Among the goals of the strategy 
 
TBILISI 00000199  009 OF 012 
 
 
are the identification and analysis of conditions conducive to 
corruption as well as elaboration of mechanisms for their 
eradication, strengthening of principles of accountability and 
public disclosure in the public sector, prosecution of lawbreakers 
and facilitation of competitive development of the business sector. 
 
According to the World Bank's "Anti-Corruption in Transition 3" 
report, Georgia topped the list of transitional countries in terms 
of anticorruption efforts.  The report reviewed the 2002-2005 time 
period and concludes that Georgia saw the largest reduction in 
corruption among all transition countries.  The World Bank points 
out that strong leadership in Georgia was the driving force behind 
the swift and thorough reforms that significantly reduced corruption 
after 2002.  The leadership has taken bold actions to lessen the 
burden of the state on the economy, improve fiscal transparency, and 
strengthen oversight of institutions, all of which has contributed 
to the decline in corruption. 
 
Georgia also significantly improved in Transparency International's 
annual Corruption Perceptions Index, moving up from 99th place in 
2006 to 79th in 2007, out of 180 countries.  The Index ranks 
countries in terms of the degree to which resident and non-resident 
businesspeople and country analysts perceive corruption to exist in 
the public and political sectors.  Since the Rose Revolution, 
Georgia's score has steadily improved. This year's gain means that 
Georgia has moved out of the group of countries considered to have a 
"rampant corruption problem" (those under 3.0).  In comparison with 
countries of the former Soviet Union, Georgia ranks well ahead of 
Azerbaijan and Armenia, and is in fourth place, behind Latvia, 
Lithuania and Estonia out of 15 countries listed in this category. 
 
Georgia reasserted central control over the Black Sea region of 
Adjara in May 2004, reducing illicit economic activity there. 
Control of contraband smuggled through South Ossetia has improved, 
however the Georgian government has raised concerns with Russia and 
with the international community about continued high levels of 
smuggling, money laundering, and even counterfeiting of U.S. dollars 
in the areas outside its control. 
 
Georgia is not a signatory to the OECD Con
vention on Combating 
Bribery of Foreign Public Officials in International Business 
Transactions.  Georgia has not yet signed the UN Anti Corruption 
Convention.  The latter is on the agenda of the Anti-Corruption 
Action Plan developed by the government.  The Ministry of Justice is 
analyzing Georgian legislation in order to ensure its compatibility 
with the UN convention.  Georgia is expected to join the UN 
convention earlier than the OECD Convention. 
 
Georgia's cooperates with GRECO (Group of States Against Corruption) 
and the OECD's Anti-Corruption Network for Transition Economies 
(ACN).  GRECO concluded in 2006 that Georgia had successfully 
implemented reforms to implement the first round of its 
anti-corruption recommendations.  In 2003 ACN proposed an 
anti-corruption action plan and 21 recommendations for Georgia.  In 
2006, the OECD positively assessed the progress of anti-corruption 
measures, and considered all but four of its recommendations 
implemented. 
 
Bilateral Investment Agreements 
 
Georgia has negotiated bilateral agreements on investment promotion 
and mutual protection with 26 countries, including the U.S., 
Armenia, Austria, Azerbaijan, Belgium, Bulgaria, China, Egypt, 
France, Germany, Greece, Iran, Israel, Italy, Kazakhstan, 
Kyrgyzstan, Latvia, Moldova, Netherlands, Romania, Turkey, 
Turkmenistan, Uzbekistan, the United Kingdom, Ukraine, Lithuania and 
Finland.  Internal procedures have been completed and drafts are 
being negotiated with the governments of India, Bangladesh, Croatia, 
Denmark, Norway, Philippines, Cyprus, Indonesia, Malta, Czech 
Republic, and Iceland.  Ongoing consultations are held with Belarus, 
Tajikistan, Slovenia, Estonia, Slovakia, Bosnia-Herzegovina, 
Switzerland and Jordan. 
 
A free trade agreement is in force with the Commonwealth of 
Independent States, and others exist bilaterally with Ukraine, 
Russia, Kazakhstan, Azerbaijan, Armenia, Moldova and Turkey. 
Agreements are signed but not ratified with Turkmenistan and 
Uzbekistan.  Ongoing consultations are being held with the European 
Union, Belarus, Kyrgyzstan, Cooperation Council of Gulf Arab States 
and Tajikistan. 
 
OPIC and Other Investment Insurance Programs 
 
Since 1993, OPIC has committed over $104 million in financing and 
political risk insurance to projects in Georgia.  Projects supported 
include the development of hotel and office space, production of 
 
TBILISI 00000199  010 OF 012 
 
 
pharmaceuticals, food processing and farming, cold storage, banking, 
mortgage lending, and financial leasing services. In FY 2007, there 
were two new OPIC loan commitments in Georgia, amounting to $11.3 
million. 
 
Labor 
 
Georgia offers an abundant supply of skilled and unskilled labor at 
attractive costs compared not only to Western European and American 
standards, but also to Eastern European.  The labor force is among 
the best educated and most highly trained in the former Soviet 
Union.  While some of the best qualified professionals and 
technicians emigrated from Georgia (mostly to Russia, the U.S., and 
Europe) after the Soviet Union's collapse, many have remained in the 
country or returned from abroad and are attempting to find a new 
role in a market economy.  Unemployment remains high and job 
creation has been a particular challenge. 
 
The labor market in Georgia is one of the world's freest.  Wage 
negotiations take place between employees and employers, and trade 
unions are not powerful.  Labor, health and safety laws are not 
considered an impediment to investment.  A new labor code which 
entered into force in June 2006 considerably liberalized labor 
regulations.  The code defines the minimum age for employment (16), 
work hours (41 per week), annual leave (24 calendar days) and leaves 
the rest to be regulated by agreement between the employer and 
employee. 
 
Payment of at least one month's salary is required if the employer 
initiates a dismissal.  Employees must give one month's notice of 
intention to quit.  No notice requirement is imposed on the employer 
prior to dismissal.  Employees are entitled to up to 126 days (4 
months) of maternity leave, and together with unpaid leave, up to 16 
months.    Under the new Labor Code, a contract of employment may 
bar an employee from using the knowledge and qualifications obtained 
while performing his duties with another employer.  This provision 
may remain in force even after the termination of labor relations. 
 
Starting from January 1, 2008, employers are no longer required to 
pay social security contributions for employees.  The former 12 
percent income tax paid by employees and 20 percent social security 
tax paid by employers on their employees' wages was merged into a 
unified personal income tax at the rate of 25 percent in 2008, 
shifting the employer's tax burden to the employee.  The overall 
effective tax rate paid by both self-employed persons and employees 
has been reduced to 25 percent.  The state social security system 
provides modest pension and maternity benefits.  The minimum monthly 
pension is USD 35, and the government is proposing to increase it to 
USD 100 by the end of 2008.   The average monthly salary in the 
third quarter of 2007 was GEL 576 (USD 360) for government employees 
and GEL 385 (USD 240) for private sector employees.  The minimum 
wage for government employees is GEL 115 (USD 72) per month.   The 
minimum wage in the private sector has not changed in many years at 
GEL 20 (USD 13) per month, but few if any workers earn so little. 
 
Georgia has signed multiple ILO agreements, including the Forced 
Labor Convention of 1930; the Paid Holiday Convention of 1936; the 
Anti-Discrimination (employment and occupation) Convention of 1951; 
the Human Resources Development Convention of 1975; the Right to 
Organize and Collective Bargaining Convention of 1949; the Equal 
Remuneration Convention of 1951; the Abolition of Forced Labor 
Convention of 1957; the Employment Policy Convention of 1964; and 
the Minimum Age Convention of 1973. 
 
Foreign Trade Zones/Free Ports 
 
In June 2007 the Parliament of Georgia adopted a law on free 
industrial zones, which sets forth the terms for forming and 
functioning of free industrial/economic zones in the country. 
Financial operations in such zones may be performed in any currency, 
and foreign companies operating there will be exempt from taxes on 
profit, property and VAT.  Georgia's Ministry of Economic 
Development has allocated a 400 hectare area adjacent to the Black 
Sea Port of Poti for the first such zone.  A tender for a 49 year 
lease of the zone for private development of its infrastructure and 
operation is under way. 
 
Foreign Direct Investment Statistics 
 
Foreign Direct Investment (FDI) in Georgia peaked several times.  In 
1997-1998 and 2003-2004 peaks were related to the construction of 
pipelines, Baku-Supsa and Baku-Tbilisi-Ceyhan respectively. 
However, despite completion of the pipelines, foreign investment 
inflows in 2006 -2007 were larger than ever before, due to 
privatization of state owned enterprises and the impact of economic 
reforms.  The total volume of FDI in Georgia in 2006 USD 1.1 billion 
 &
#x000A;TBILISI 00000199  011 OF 012 
 
 
(13% of GDP) and it increased 197% over the 2005 figure.  FDI 
inflows were estimated at USD 1.4-1.5 billion in 2007.  Much of the 
recent investment has been in the real estate and banking sectors. 
 
Official statistics on Foreign Direct Investment (FDI) inflows 
during recent years are as follows: 
 
2000  -   USD 131,232,000 
2001  -   USD 109,840,000 
2002  -   USD 167,362,000 
2003  -   USD 339,393,000 
2004  -   USD 497,827,000 
2005  -   USD 449,786,000 
2006  -   USD 1,091,100,000 
2007(Q1-3) -  USD 1,063,500,000 
 
Breakdown of investments by major countries (USD 1,000's): 
 
Countries     2002    2003      2004  2005 
 
Total  167,362 339,393 497,786 1,091,140 
UK    17,530  37,670  83,944     132,952 
USA    82,271  72,132  77,550    15,033 
Kazakhstan       0   0   0     0 
Turkey    8,848  17,275  28,569    21,817 
Norway    2,994  11,262  34,466    23,626 
Azerbaijan       0  29,698  66,008    66,940 
Italy    9,864  15,896  28,728     2,838 
Cyprus    1,063     676  22,330    47,537 
Russia    7,810  42,686  73,712    38,754 
France    6,287  16,709  20,940    14,383 
 
Countries     2006      2007 
        1-3Q 
 
Total    1,091,140 1,046,267 
UK       186,824    50,601 
USA   182,651  80,095 
Kazakhstan 152,310  74,475 
Turkey  129,728    89,554 
Norway   77,895    21,900 
Azerbaijan  77,804  27,672 
Italy   47,219    10,765 
Cyprus   40,071  51,075 
Russia   34,210    55,959 
France   17,221    22,169 
 
[Source: Georgian Ministry of Economic Development.  Note: Russian 
investments for 2004 are overstated, as they include investment 
deals that were later annulled.] 
 
Breakdown of investments by economic sector (USD 1,000's): 
 
   2002  2003  2004  2005 
 
Total   167,362   339,393   497,827   449,785 
Agriculture  890       784       965     5,042 
Industry    29,523    49,204    66,013   110,175 
Services   136,949   289,404   430,848   334,568 
 
   2006  2007 
Total   n/a   357,313 
Agriculture  n/a     9,700 
Industry   n/a   255,844 
Services   n/a    91,759 
 
The U.S. has been one of the largest foreign investors in Georgia 
since 1999.  In 2000, the United States accounted for 30 percent of 
FDI in Georgia; in 2001 for 25.7 percent of FDI, in 2002 -- 49 
percent, in 2003 and 2004 these indicators were 21 percent and 16 
percent respectively.  In 2005 it accounted for only 4.1 percent and 
went up to 16.7 percent in 2006. 
 
The U.K., the U.S. and Kazakhstan were the top three investors in 
2006 with USD 182 million, USD 181.9 million and USD 152 million 
respectively, followed by Turkey, Norway and Azerbaijan.  Russia, 
with USD 27.8 million (USD 38.7 million in 2005) holds 11th place on 
the list of investor countries, while its ranking was much higher in 
previous years.  According to 9 month data of 2007, the Netherlands 
were topping the list of investors (16.6%), followed by the British 
Virgin Islands (11.6%), Denmark (8.8%), Turkey (8.6%), the United 
States (7.7%), Kazakhstan (7.1%) and Czech Republic (7.0%). 
(Source: Ministry of Economic Development.) 
 
End Text. 
 
 
TBILISI 00000199  012 OF 012 
 
 
TEFFT 
 
 
 
 
24

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