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Reference ID Created Released Classification Origin
09TBILISI365 2009-02-24 12:58 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Tbilisi


DE RUEHSI #0365/01 0551258
R 241258Z FEB 09

E.O. 12958: N/A 
REF: 08 STATE 123907 
1.  Per reftel, Embassy Tbilisi submits its Investment 
Climate Statement for Georgia for 2009. 
Since 2004 when the Saakashvili Government came to power, the 
Georgian Government has undertaken an ambitious program to 
modernize and liberalize its economy.  Institutional reforms 
include the restructuring and downsizing of government 
ministries, the privatization of large state-owned entities, 
increasing the pay of public servants, reducing the number 
and rates of taxes, improving tax and fiscal administration, 
streamlining licensing requirements, simplifying customs and 
border formalities, and generally undertaking efforts to make 
it easier to do business in Georgia.  The current Georgian 
leadership views liberal market economies like Singapore and 
Dubai as models for its economic growth policies.  Georgia,s 
economy, which was on the path of steady double digit growth 
since early 2004, suffered a considerable shock due to the 
Russian invasion in 2008 and subsequent global credit crisis. 
 Nevertheless, Georgia still managed to achieve modest GDP 
growth in 2008; it is unclear what the final numbers will be 
in 2009. 
The World Bank recognized Georgia as the world,s fastest 
reforming economy in IFC,s 2007 &Doing Business8 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.  Georgia further 
improved its rating in IFC,s &Doing Business 20098 moving 
up from 18th to 15th place.  For comparison, Russia ranks as 
120, Kazakhstan 70, Azerbaijan 33, and Armenia 44. 
The World Bank,s &Anti-Corruption in Transition 38 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.  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/IFC "Doing Business - 2009" report provides 
objective measures of business regulations and their 
enforcement across 181 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 
Among the specifi achievements for which the IFC credited 
Georgia in the 2008 report were strengthening investor 
protections by amendments to its securities law that 
eliminate loopholes which 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. 
Qand trade creditors to the data it collects and distributes. 
IFC,s 2009 report singled out areas of Starting a Business, 
Registering Property, Getting Credit and Paying Taxes, as 
Georgia,s priority achievements in 2008.  The report reads: 
&Georgia,s private credit bureau now distributes a full 
range of information, including on-time repayment patterns 
and outstanding loan amounts. Coverage increased 20-fold, and 
banks can now have a better understanding of the payment 
patterns of potential borrowers. In addition, new regulations 
guarantee the right of borrowers to inspect their data at the 
private credit bureau, helping to improve the quality and 
accuracy of credit information. Amendments to the civil code, 
effective in December 2007, address secured transactions, 
allowing parties to a security agreement to agree to 
out-of-court enforcement of the creditor,s security right at 
the time the parties sign the security agreement. The 
corporate income tax rate was reduced from 20 percent to 15 
percent, and the social tax abolished. A new online business 
registry makes it easier to register property by eliminating 
the requirement for legal entities to obtain several 
pre-registration documents. This reform reduced the number of 
procedures required to transfer a title from five to two, and 
the time from five days to three. Registration fees were also 
reduced. Finally, amendments to the Law on Entrepreneurs made 
it easier to start a
company by eliminating the requirements 
for a minimum capital, a company seal, and a company charter 
and by making the use of notaries optional.8 
Georgia scored high in the 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 at 69.2 percent 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, the Slovak Republic, and the Czech Republic. 
 Georgia is ranked 18th out of 41 countries in the European 
region, and its overall score is equal to the European 
regional average.  According to the report, Georgia scores 
high in business freedom, fiscal freedom, freedom from 
government, investment freedom and labor freedom, but needs 
improvement in the areas of property rights protection and 
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, traditionally 
Georgia,s most important export market.  Growth in 2007 was 
12,4 percent and 8.5 percent in the first half of 2008. 
However, due to the August conflict with Russia and ensuing 
global credit crisis, the overall estimated growth rate for 
2008 is expected to be roughly 2 percent.  Initial 
projections for 2009 GDP growth are around 2 percent.  Annual 
inflation for 2006 was 8.8 percent.  It increased in 2007 to 
9.2 percent and increased again to 10 percent in 2008.  The 
government is committed to keeping inflation at the 7 percent 
rate in 2009. 
The Georgian Lari strengthened from 1.7 to about 1.6 per U.S. 
dollar over the course of 2007, and further appreciated 
against the dollar to 1.4 to 1 in the summer of 2008.  The 
lari subsequently dropped to 1.65 to 1 versus the dollar by 
the end of 2008, affected both by the Georgia-Russia war and 
the global credit crunch.  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 Poor,s -- a B 
long term, and B short term rating.  Standard & Poor's cut 
Georgia's outlook to stable from positive in the beginning of 
May 2008, citing worsening relations with Russia, but kept 
its rating at B . The rating agency put Georgia on 
CreditWatch on August 8, when fighting broke out in the 
Georgian separatist regions, but removed Georgia,s ratings 
from CreditWatch negative in September, 2008, citing the end 
of fighting with Russia over South Ossetia and the provision 
of foreign aid to Georgia.  Currently Georgia,s long-term 
Qof foreign aid to Georgia.  Currently Georgia,s long-term 
debt is rated B by S&P, and the outlook is now stable. 
Fellow ratings agency Fitch currently rates Georgia, which 
launched its debut $500 million Eurobond in spring 2008, as 
BB- with a stable outlook. 
Despite the 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 legalnorms 
is required.  Physical infrastructure, such as the road 
network, saw considerable improvement over 2005-2008, 
although much remains to be done, especially in rural areas. 
Government has allocated USD 310 million (need USD 
equivalent) for road rehabilitation projects in 2009.  Most 
natural gas for heating and electricity generation is 
imported.  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 economic growth will be 
private investment, both domestic and foreign.  The 
government,s challenge is to implement existing legislation, 
continue the fight against corruption, defuse tensions in the 
separatist regions and undertake new reforms, in order to 
increase investor confidence. 
Georgia receives assistance from the United States, the 
European Union and a range of 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 has provided investments in 
infrastructure, tourism and agriculture. 
After the August 2008 conflict with Russia, foreign donors 
committed USD 4.5 billion to help Georgia recover from direct 
and indirect war damage.  According to the World Bank-led 
international needs assessment for Georgia, the major impact 
of the conflict was on the investment and consumer climate, 
which led to a sharp economic drop in FDI and GDP.  With this 
in mind, the USG committed to a USD 1 billion assistance 
package for Georgia dedicated to repair its damaged 
infrastructure and help the Georgian economy recover from the 
economic shock from the reduction in FDI immediately 
following the August conflict. 
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 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 compa
rable 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 
Qimproving 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.  In 2005 and 2006, Russia banned imports of 
Georgian agricultural products, mineral water and wine.  At 
the time, Russia was the largest importer of those products. 
These restrictions continued into 2008.  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.  The return of normal trading relations with Russia 
could create significant opportunities for companies based in 
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 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. 
Qwhich 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, 
In 2005, 84 percent of existing licensing requirements were 
eliminated and a &one stop shop8 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 hoses 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. 
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 
Qincluding 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 
It is recommended that contracts between private parties 
include a provision for international arbitration of disputes 
because of deficienciesin 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 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 
Qthe banking, agribusiness, energy, transport and tourism 
sectors.  To the extent that public enterprises compete with 
private enterprises, they do on the 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 percent 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 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 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 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 
QNevertheless, 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 
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 number of taxes has 
been reduced from twenty-two to six. The tax on corporate 
profits is 20 percent. The tax on personal income  was set at 
a flat rate of 25 percent after a 2007 law increased the 
personal income tax and eliminated the employer-paid social 
tax on wages.  The Value Added Tax is 18 percent.  Despite 
the duel economic shocks of the August conflict and the 
credit crisis, the Government of Georgia further reduced the 
personal income tax rate from 25 percent to 20 percent and 
reduced the dividend income tax rate from 10 percent to 5 
percent. Both reductions took effect on January 1, 2009. 
This new initiative is an acceleration of legally binding 
commitments, made earlier, to reduce the personal income tax 
rate to 15 percent by 2013 and to further reduce the dividend 
income tax rate to 0 percent by 2012.  Legislation was passed 
earlier in 2008 setting zero dividend and capital gains tax 
rate with respect to publicly traded equities (defined as 
having free float in excess of 25 percent).  There are excise 
taxes on cigarettes, alcohol, and fuel.  Only three rates of 
import duties exist, zero, 5 percent and 12 percent, 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 
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 percent and the profit of 
commercial banks grew by 65 percent.  Total assets of the 
country,s 19 banks (13 of which have foreign capital) were 
$4.5 billion at the end of 2006, 45 percent 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 
Qaddition, 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 percent of total bank 
capital in 2007.  In 2005, Russian, Kazakhstani, U.S., and 
German capital was invested in Georgian banks.  In September 
2006, the French bank Societe Generale acquired 60 percent of 
one of the leading Georgian banks, Bank Republic.  In 2007, 
growing interest towards Georgia,s banking sector was 
demonstrated by the entrance of the British bank HSBC into 
Georgia.  Dabi Group acquired Standard Bank. 
Georgian banks have remained solvent during the current 
global credit crisis largely due to the mandated 13 percent 
central bank reserve requirement and conservative lending 
practices.  The Georgian central bank relaxed the reserve 
requirement to 5 percent in the aftermath of the war and in 
response to the global credit crisis to try to inject 
liquidity into the market and spur new lending.  The reserve 
requirement remains at 5 percent. 
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 82 companies 
were traded on the GSE in 2008, up from 57 in 2007).   In 
2008, the GSE executed 3,180 trades compared to 7,313 in 
2007, with a total value of GEL 256.5 million (around $160.3 
million) compared to GEL 97 million (around $54 million) in 
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.  The United States supports the 
territorial integrity of Georgia within its 
internationally-recognized borders.  In August 2008, tensions 
boiled over culminating in the brief war between Georgia and 
Russia.  Russia proceeded to invade and occupy portions of 
undisputed Georgian territory and destroyed portions of vital 
infrastructure, cut the main east-west highway and blockaded 
the Georgian port of Poti.  Nearly all the destroyed 
infrastructure has been repaired and commerce has returned to 
normal.  While the separatist regions of South Ossetia and 
Abkhazia have declared independence, thus far, only Russia 
and Nicaragua have recognized them.  Tensions still exist and 
reports of violence both inside the breakaway republics and 
near the administrative boundary lines are common, but other 
parts of Georgia, including Tbilisi, are not directly 
Under President Saakashvili, Georgia has taken action to 
reduce corruption.  Anti-corruption efforts have resulted in 
Qreduce 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 mi
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 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-Corruptin in 
Transition 38 report, Georgia topped the list of 
transitional countries in terms of anticorruption efforts. 
The report reviewed the 2002-2005 time period and concluded 
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 
Georgia also significantly improved in Transparency 
International's annual Corruption Perceptions Index, moving 
up from 99th place in 2006 to 79th in 2007, and to 67th in 
2008 out of 180 countries surveyed.  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. Current ranking means that Georgia (3.9 score) 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 neighboring Azerbaijan (158) and Armenia 
(109), Russia (147), as well as  Ukraine (134) and Kazakhstan 
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 Convention 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 
QGeorgian 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 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 being held with Belarus, 
Tajikistan, Slovenia, Estonia, Slovakia, Sweden, 
Bosnia-Herzegovina, Switzerland and Jordan.  In 2007, Georgia 
signed a Trade and Investment Framework Agreement (TIFA)with 
the United States. 
A free trade agreement is in force with the Commonwealth of 
Independent States, and others exist bilaterally with 
Ukraine, Russia, Kazakhstan, Azerbaijan, Armenia, Moldova, 
Turkmenistan and Turkey.  An agreement is signed, but not yet 
ratified, with 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 
From 1993 through 2007, 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 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.  However, in 2008, as part of the USG response 
to help Georgia recover from the August conflict with Russia, 
OPIC committed USD 176 million in financing.  A large portion 
of OPIC,s assistance will be used to underwrite mortgages 
aimed at allowing Georgian banks to offer smaller more 
affordable mortgages to the Georgian public.  Other funding 
will support commercial and residential property development 
Georgia offers an abundant supply of skilled and unskilled 
labor at attractive costs compared not only t
o 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 
QLabor 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 
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.  From January 2009, 
the overall effective tax rate paid by both self-employed 
persons and employees has been further reduced from 25 
percent to 20 percent. The state social security system 
provides modest pension and maternity benefits.  The minimum 
monthly pension is USD 52, and the government is planning to 
increase it.  The average monthly salary in the third quarter 
of 2008 was GEL 854 (USD 520) for government employees and 
GEL 560 (USD 337) for private sector employees.  The minimum 
wage for government employees is GEL 115 (USD 69) per month. 
 The minimum wage in the private sector has not changed in 
many years at GEL 20 (USD 12) 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 in free industrial 
zones 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.  RAK Investment Authority (Rakeen group) 
became the owner of 100 percent share of LLC Poti Sea Port. 
The UAE-based company pledged to develop a free economic zone 
on 300 hectares of land in Poti and to build a new port 
terminal on a 100 hectare site.  Rakeen plans to accomplish 
its ambitious project within four years and turn Poti Seaport 
into an international industrial zone with port, railroad and 
other facilities. 
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 the Baku)Supsa and Baku-Tbilisi-Ceyhan 
pipelines.  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 (13 percent of GDP) and it 
increased 197 percent over the 2005 figure.  FDI inflows in 
2007 were $2,014,842,000. FDI flow in the first half of 2008 
once again proved the viability of Georgia,s economic 
potential.  However, the August 2008 conflict with Russia 
undermined investor confidence, and the subsequent world 
credit crisis further restricted the inflows of FDI. Despite 
these challenges, more than USD 3 billion flowed into Georgia 
in first three quarters of 2008 (81 percent more than in 
2007), but in the fourth quarter, FDI inflows slowed to a 
trickle. 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  )   USD 2,014,842,000 
2008 (Q1-3) ) USD 3,655,001,000 
Breakdown of investments by major countries (USD 1,000,s): 
-     2005  2006  2007  2008 (1-3 Q) 
Total       449,785     1,190,375   2,014,842   3,655,001 
UK    132,925.8   186,824.1   145,474.8   465,224.7 
USA   15,025.6    182,651.5   84,412.2    282,089.3 
Kazakhstan  0.0   152,310.5   88,486.2    240,796.7 
QKazakhstan  0.0   152,310.5   88,486.2    240,796.7 
Turkey      21,812.5    129,727.8   93,871.1    245,411.4 
Norway      23,620.9    77,894.8    34,200.1    135,715.8 
Azerbaijan  66,920.2    77,804.5    41,368.1    186,092.8 
Italy       22,833.5    47,219.1    15,228.1    85,280.7 
Cyprus      47,537.3    40,071.2    148,643.6   236,252.2 
Russia      38,737.6    34,210.0    88,996.5    161,944.2 
France      14,383.3    17,221.7    43,726.0    75,331.0 
UAE   280.5 422.6 130,858.7   131,561.9 
Denmark     319.0 42,477.8    158,126.2   200,923.0 
Netherlands 492.0 18,530.2    299,277.2   318,299.3 
Czech 1,279.6     15,032.2    227,926.4   244,238.2 
Japan 16,610.1    34,433.1    34,368.3    85,411.5 
Virgin Isle 4,900.2     129,727.8   187,815.5   322,443.6 
Breakdown of investments by economic sectors (USD 1,000,s): 
-     2007  2008 (I-III Q) 
Total       2,014,842   1,105,420 
Agriculture/Fishing     15,527.9    13,256.8 
Industry    398,240
,9   150,868.3 
Energy      362,581.1   165,290.8 
Construction      171,891.8   51,998.1 
Transport/Communication 416,694.7   312,813.4 
Real Estate 30,543.9    149,757.0 
Financial Intermediation      136,914.5   73,578.0 
Other Services    382,806.6   182,924.2 
Other 99,640.2    4,933.2 
The UK tops the list of foreign investor countries.  Its 
share in total investments of 2008 three quarters was up to 
12.7 percent compared to 7 percent in 2007.  The next largest 
investors were the Netherlands (USD 318 million), the USA 
(USD 282 million), Turkey (245 million)and Czech Republic 
(244 million). 
The U.S. has been one of the largest foreign investors in 
Georgia since 1999.  In 2000, U.S. investors accounted for 30 
percent of FDI in Georgia; in 2001 for 25.7 percent of FDI, 
which increased in 2002 to 49 percent.  In 2003 and 2004 the 
U.S. share decreased to 21 and 16 percent respectively and 
dropped to 4.1 percent in 2005.  The decline can be 
attributed to the completion of large pipeline projects as 
well as increased inflow of capital from other countries.  In 
2006, U.S investment still accounted for 16.7 percent of the 
total, but was only 4.1 percent in 2007, and 7 percent in the 
first 3 quarters of 2008. 
Other notable trends include increase in United Arab 
Emirate,s interest in Georgia, evident in the investments of 
the Rakeen and Dabi Groups in the port, real estate, banking 
and other sectors.  Source: Statistics Department of Georgia.) 
End Text. 


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