From: GeorgAssoc@aol.com
Date: Thu, 30 Jan 1997 16:34:42 -0500 (EST)
From: GeorgAssoc@aol.com
To: ...
Subject: Fwd: GEORGIA- Investment Climate
Forwarded from the Georgian Association in the USA
---------------------
Forwarded message:
From: LEVSEN@USITA.GOV (Shawn Levsen)
Date: 97-01-29 13:41:29 EST
SUBJECT: GEORGIA: INVESTMENT CLIMATE STATEMENT
-------
SUMMARY
-------
-- ALTHOUGH FOREIGN INVESTMENT IN GEORGIA IS STILL MODEST, INVESTORS
ARE SHOWING INCREASING INTEREST BECAUSE OF SHARP GAINS IN SECURITY AND
STABILITY, AND *BIG BANG* DEMOCRATIC AND ECONOMIC REFORMS. TOGETHER,
THESE FACTORS ARE SPURRING VIGOROUS ECONOMIC RECOVERY, ESPECIALLY IN
AGRICULTURE, TRADE, AND TRANSPORT. GAINS ARE, HOWEVER, UNEVEN.
STATE-OWNED SECTORS, SUCH AS ELECTRICITY AND OTHER INFRASTRUCTURE,
CONTINUE TO DETERIORATE, AND ACT AS A MAJOR IMPEDIMENT TO PRIVATE
INVESTMENT. EXCESSIVE GOVERNMENT ECONOMIC CONTROLS, CORRUPTION, AND
LIMITATIONS ON LAND OWNERSHIP ALSO HARM THE INVESTMENT CLIMATE.
-- THE REMARKABLE ACHIEVEMENTS OF THE REFORM PROGRAM IN CREATING A
STABLE MACROECONOMIC SITUATION ARE AN IMPORTANT BASIS FOR ATTRACTING
FOREIGN INVESTORS. GEORGIA HAS ALSO TAKEN OTHER STEPS TO CREATE BETTER
CONDITIONS FOR INVESTMENT. MUCH KEY LEGISLATION NEEDED TO CREATE A STABLE
AND PREDICTABLE LEGAL AND INSTITUTIONAL FRAMEWORK FOR BUSINESS HAS BEEN
ADOPTED. TAX REFORM IS VITAL, AND LIKELY TO COME IN THE FIRST HALF OF
1997. GEORGIA'S OPEN TRADING REGIME, WITH LOW TARIFFS, IS COMING UNDER
CRITICISM BY GEORGIAN INDUSTRIAL REPRESENTATIVES.
-- THE LAW ON PROMOTION AND GUARANTEES OF INVESTMENT ACTIVITY (PASSED
IN NOVEMBER 1996) AND THE LAW ON ENTREPRENEURSHIP ARE THE TWO MOST
IMPORTANT PIECES OF LEGISLATION APPLYING TO FOREIGN INVESTMENT. BOTH ARE
MAJOR STEPS FORWARD OVER PREVIOUS LEGISLATION. NEW LEGISLATION HAS
ELIMINATED THE LICENSING OF FOREIGN INVESTMENTS AND REPLACED IT WITH MORE
AUTOMATIC REGISTRATION PROCEDURE. THE PRIVATIZATION PROGRAM OFFERS
OPPORTUNITIES FOR FOREIGN INVESTORS. GEORGIA AND THE UNITED STATES HAVE
SIGNED AND RATIFIED A BILATERAL INVESTMENT TREATY.
-- UNDER EXISTING LAW, THE GOVERNMENT MUST RETAIN A MAJORITY INTEREST
IN SEVERAL IMPORTANT INFRASTRUCTURE SECTORS, SUCH AS TELECOMMUNICATIONS,
ELECTRIC POWER TRANSMISSION, ROADS, RAILWAYS, PORTS AND AIRPORTS. THESE
LIMITS CONSTRAIN PARTICIPATION BY BOTH DOMESTIC AND FOREIGN PRIVATE
CAPITAL. THE NEED FOR SUBSTANTIAL INVESTMENT IN MODERNIZING
INFRASTRUCTURE CONSTITUTES A CONSTRAINT ON ATTRACTING INVESTMENT IN OTHER
SECTORS.
-- GEORGIA ASPIRES TO BE A KEY PART OF A NEW "EURASIAN CORRIDOR" OF
TRANSPORTATION AND COMMERCE LINKING EUROPE AND ASIA. TO DO SO MOST
EFFECTIVELY, GEORGIA WILL NEED TO OPEN TRANSPORT AND COMMUNICATIONS TO
PRIVATE INVESTMENT. ONLY FROM THIS SOURCE CAN COME LARGE VOLUMES OF
INVESTMENT CAPITAL NEEDED FOR MODERNIZATION AND EXPANSION OF DECAYING
INFRASTRUCTURE.
-------------------------------------
A. 1. OPENNESS TO FOREIGN INVESTMENT
-------------------------------------
THE LEGAL FRAMEWORK WHICH RELATES TO FOREIGN INVESTMENT INCLUDES THE
CONSTITUTION, INTERGOVERNMENTAL AGREEMENTS, THE LAW ON PROMOTION AND
GUARANTEES OF INVESTMENT ACTIVITY (PASSED IN NOVEMBER 1996), THE LAW ON
ENTREPRENEURSHIP, THE LEASE LAW, THE CIVIL CODE, AND SECTOR LAWS AND
RELEVANT PRESIDENTIAL DECREES. THIS LEGISLATION, ALONG WITH THE
GOVERNMENT'S ECONOMIC STRATEGY, AIMS TO ESTABLISH FAVORABLE CONDITIONS FOR
FOREIGN INVESTORS. IN GENERAL, LAWS DO NOT DISCRIMINATE BETWEEN FOREIGN
AND LOCAL INVESTORS. AN EXCEPTION IS AGRICULTURAL LAND OWNERSHIP. LAW
DOES NOT ALLOW FOREIGNERS TO OWN AGRICULTURAL LAND, AND PERMITS A MAXIMUM
49-YEAR LEASE. LAW ALLOWS UNLIMITED FOREIGN OWNERSHIP IN SOME SECTORS,
BUT SHARPLY LIMITS FOREIGN INVESTMENT IN INFRASTRUCTURE AND BANS FOREIGN
OWNERSHIP OF AGRICULTURAL LAND. NO LAW PERMITS PRIVATE OWNERSHIP OF
NON-AGRICULTURAL LAND. OWNERSHIP OF PROPERTY CAN BE GAINED THROUGH
ACQUISITIONS, MERGERS, TAKEOVERS, AND GREENFIELD INVESTMENTS. THE
GOVERNMENT MUST RETAIN A CONTROLLING BLOCK OF SHARES IN: INFRASTRUCTURE,
SUCH AS GAS AND OIL PIPELINES, COMMUNICATIONS, ELECTRIC POWER
TRANSMISSION, ROADS, RAILWAYS, PORTS, AND AIRPORTS; ISSUING OF BANKNOTES
AND SECURITIES; TREATMENT OF DANGEROUS DISEASES IN HUMANS AND ANIMALS; AND
RAW ALCOHOL PRODUCTION. THE LAW ON PROMOTION AND GUARANTEES OF INVESTMENT
ACTIVITY PROHIBITS FOREIGN INVESTMENT IN THE DEFENSE AND SECURITY SECTOR.
THE LAW ON ENTREPRENEURSHIP, BASED ON A GERMAN MODEL, PROVIDES A GOOD
FRAMEWORK FOR ECONOMIC ACTIVITY. SOME ISSUES WITH RESPECT TO THE
DEFINITIONS OF ENTREPRENEURSHIP, HOWEVER, MUST BE RESOLVED. THERE IS, AS
WELL, A LACK OF CLARITY ON SOME OF THE PROVISIONS RELATED TO COMPANY
MANAGEMENT BY FOREIGN INVESTORS.
THE GOVERNMENT SCREENS FOREIGN INVESTMENTS THROUGH A REGISTRATION
PROCEDURE:
-- FOREIGN INVESTORS HAVE TO REGISTER IN THE FOREIGN INVESTMENT
AGENCY AT THE MINISTRY OF TRADE AND FOREIGN ECONOMIC RELATIONS IF THE
PROPOSED INVESTMENT EXCEEDS USD 100,000 (OR ITS EQUIVALENT). FOREIGN
INVESTORS ARE OBLIGED TO SUPPLY INFORMATION REGARDING ADDITIONAL
INVESTMENTS ONCE A YEAR. THE STATED PURPOSE OF REGISTRATION IS TO IMPROVE
STATISTICS ON FOREIGN INVESTMENTS IN GEORGIA.
-- THE REGISTRATION PROCEDURE REQUIRES SUBMISSION OF THE FOLLOWING
INFORMATION: THE FULL NAME OF THE INVESTMENT OBJECT; SHORT DESCRIPTION OF
THE MAIN LINES OF INVESTMENT ACTIVITY; COPY OF THE DOCUMENT CONFIRMING
REGISTRATION OF THE ENTERPRISE; DOCUMENTS CONFIRMING THE VALUE OF
INVESTMENT AND ANY NECESSARY SPECIAL PERMISSION, INCLUDING LICENSE FOR
SELECTED ACTIVITIES.
-- LICENSING APPLIES TO FOREIGN AND DOMESTIC INVESTORS IN SELECTED
AREAS, THE LIST OF WHICH IS SUBJECT TO CHANGE. AT PRESENT, THESE INCLUDE:
GAMBLING, LOTTERIES, CASINOS, PRODUCTION OR SALE OF MEDICAL PREPARATIONS
AND SUBSTANCES SUBJECT TO SPECIAL CONTROL; PRODUCTION OR SALE OF ARMS AND
EXPLOSIVES; FORESTRY AND NATURAL RESOURCES; CELLULAR COMMUNICATION SERVICE
AND ESTABLISHMENT OF TV AND RADIO CHANNELS; BANKING; INSURANCE; AND THE
ISSUANCE OF SECURITIES, WHERE ISSUANCE CONSTITUTES A PUBLIC DISTRIBUTION.
SECTOR-RELATED MINISTRIES ISSUE LICENSES IN THEIR SPHERES.
FOREIGN INVESTORS MUST REGISTER BUSINESSES IN A COURT. THE LAW ON
ENTREPRENEURSHIP STIPULATES THE FOLLOWING REQUIREMENTS FOR THE
REGISTRATION OF A COMPANY: FOUNDER AND FIRM PRINCIPALS' NAMES, DATES AND
PLACES OF BIRTH, OCCUPATIONS, AND PLACES OF RESIDENCE; INCORPORATION
DOCUMENTS; AREA OF ACTIVITY; AND CHARTER CAPITAL. THIS INFORMATION,
STATED ON A REGISTRATION CARD, IS SUBJECT TO PUBLICATION. ANY PERSON MAY
REQUEST AND REVIEW ENTERPRISE REGISTER EXTRACTS.
THE STATE TAX SERVICE IS THE ONLY BODY LEGALLY EMPOWERED TO INSPECT THE
TAX-PAYMENT STATUS OF AN ENTERPRISE. THE TAX SERVICE'S REGULATIONS DO NOT
DISCRIMINATE BETWEEN FOREIGN AND LOCAL ENTERPRISES. TAX INSPECTORS
SOMETIMES EXCEED THEIR AUTHORITY, HOWEVER, AND ACT ARBITRARILY. MOREOVER,
INVESTORS REPORT DIFFICULTIES IN ASCERTAINING EXACTLY WHAT TAX RATES APPLY
TO A GIVEN ACTIVITY. SOME HAVE ENCOUNTERED DIFFICULTIES WITH CHANGING TAX
RATES AND TAX-PAYMENT INSTRUCTIONS.
ALTHOUGH THE BUSINESS ENVIRONMENT IS IMPROVING, IT REMAINS BURDENED BY
GOVERNMENT INFLUENCE AND BUREAUCRACY. PERSONAL CONTACTS PLAY A
SIGNIFICANT ROLE IN THE SUCCESSFUL ESTABLISHMENT OF A BUSINESS. ALTHOUGH
THE LEGAL FRAMEWORK FOR PRIVATE BUSINESS IS IN PLACE, THE ENFORCEABILITY
OF CONTRACTS DEPENDS ON THE INDEPENDENCE OF COURTS. THIS IS NOT FULLY
ESTABLISHED IN GEORGIA.
DILAPIDATED INFRASTRUCTURE PRESENTS ONE OF THE MOST DAUNTING CONSTRAINTS
TO POTENTIAL FOREIGN INVESTORS. SUBSTANTIAL PROGRESS MUST BE MADE IN
ORDER TO PROVIDE BASIC INFRASTRUCTURE ON WHICH BUSINESS DEPENDS. FOREIGN
INVESTORS HAVE TO SUPPLY BACK-UP ELECTRICITY GENERATION CAPACITY TO ENSURE
THAT THEIR BUSINESSES CAN FUNCTION WITHOUT INTERRUPTION. THIS ADDS LARGE
COSTS TO DOING BUSINESS. SOME SMALLER, PRIVATE INVESTMENTS IN DOMESTIC
ENERGY HAVE SHOWN ENCOURAGING RESULTS. SEGMENTATION AND PRIVATIZATION OF
THE STATE ELECTRIC MONOPOLY, AND KEEPING BARRIERS LOW FOR NEW PRIVATE
INVESTMENT IN THIS SECTOR, ARE WAYS GEORGIA CAN BRING AN END TO THE
PERSISTENT ELECTRICAL ENERGY CRISIS AND ATTRACT THE INVESTMENT NEEDED FOR
MODERNIZATION.
GEORGIA HOPES TO SEE ITS TERRITORY BECOME A VITAL LINK IN THE "EURASIAN
CORRIDOR," A NETWORK OF TRANSPORT AND COMMUNICATIONS ROUTES STRETCHING
FROM TURKEY AND THE BLACK SEA EASTWARD TO SIBERIA AND CHINA. THE WESTERN
PIPELINE PROJECT TO TRANSPORT CASPIAN "EARLY" OIL FROM THE AZERBAIJAN
INTERNATIONAL OIL CONSORTIUM (AIOC) PROJECT TO A GEORGIAN BLACK SEA PORT
WILL BE A PIONEERING STEP IN DEVELOPING THE CORRIDOR. THE SURGE OF
TRUCKING FROM TURKEY AND EUROPE ACROSS GEORGIA TO ARMENIA AND AZERBAIJAN,
AND ACROSS THE CASPIAN SEA BY BARGE TO CENTRAL ASIA AND KAZAKSTAN WAS THE
FIRST DIMENSION OF THE EMERGENCE OF THE CORRIDOR. SHIPPERS MUST CONTEND
WITH LIMITED AND DETERIORATING PORT, ROAD, AND RAIL INFRASTRUCTURE, ALL
STATE-OWNED. INFRASTRUCTURE MODERNIZATION AND EXPANSION WILL DEPEND ON
CREATING A CLIMATE WHICH ALLOWS PRIVATE INVESTMENT IN THE SECTOR.
GEORGIA HAS AN ONGOING PRIVATIZATION PROGRAM. LEGISLATION PROVIDES FOR
NATIONAL TREATMENT OF BOTH FOREIGN AND LOCAL INVESTORS. AS OF SEPTEMBER
1, 1996, SIX FOREIGN INVESTORS HAVE PARTICIPATED IN THE VOUCHER
PRIVATIZATION PROCESS, INCLUDING ONE AMERICAN FIRM.
AS OF SEPTEMBER 9, 1996, 8,158 SMALL ENTERPRISES OUT OF 9,300 ORIGINALLY
TARGETED FOR PRIVATIZATION HAVE BEEN PRIVATIZED. AMONG MEDIUM-SIZED AND
LARGE ENTERPRISES 976 OF 1,138 WHICH ARE TO BE PRIVATIZED HAVE BEEN SET UP
AS JOINT STOCK COMPANIES. APPROXIMATELY 550 OF THESE JOINT STOCK
COMPANIES HAVE BEEN PRIVATIZED TO DATE. WEAK CORPORATE GOVERNANCE AND THE
ABSENCE OF AN EFFECTIVE SECURITIES MARKET INHIBIT RESTRUCTURING OF
INEFFICIENT PRIVATIZED ENTERPRISES.
AS OF SEPTEMBER 1996 PRIVATE ENTERPRISES ACCOUNTED FOR 74 PERCENT OF THE
GOVERNMENT'S TOTAL TAX PROCEEDS.
THE GOVERNMENT STILL RETAINS VERY LARGE SHAREHOLDINGS. A PRESIDENTIAL
DECREE IDENTIFIES 51 STRATEGIC ENTERPRISES, NEARLY ALL OF WHICH ARE IN
SERIOUS FINANCIAL STRAITS, WHERE THE GOVERNMENT WILL "TEMPORARILY" RETAIN
A CONTROLLING STAKE.
THE GOVERNMENT HAS NOT GENERALLY UNDERTAKEN DISCRIMINATORY ACTIONS AGAINST
FOREIGN INVESTORS. HOWEVER, SEVERAL EXCEPTIONS HAVE OCCURRED IN
COMMUNICATIONS. THE MINISTRY OF COMMUNICATIONS SUSPENDED, AND LATER
RESTORED, A U.S.- GEORGIAN COMMUNICATION COMPANY'S CONNECTION TO THE CITY
COMMUNICATION NETWORK. ANOTHER CONFLICT BETWEEN AMERICAN INVESTORS AND
THE MINISTRY OF COMMUNICATIONS WAS CAUSED WHEN THE MINISTRY REVOKED
EXCLUSIVE RIGHTS IT HAD PREVIOUSLY GRANTED TO A GROUP OF AMERICAN
COMPANIES. RECEPTIVENESS BY THIS POWERFUL MINISTRY TO FOREIGN INVESTMENT
IS LOW, AND THE "UALITY OF TELECOMMUNICATIONS IN GEORGIA IS POOR, EVEN BY
NIS STANDARDS. THEORETICALLY, FOREIGN AND DOMESTIC FIRMS HAVE EQUAL
TREATMENT IN GOVERNMENT FINANCED/SUBSIDIZED RESEARCH AND DEVELOPMENT
PROGRAMS. HOWEVER, THE PROGRAMS DO NOT OFFER ADEQUATE FINANCING TO
ATTRACT FOREIGN INVESTORS. RESEARCH AND DEVELOPMENT PROGRAMS THAT HAVE
ATTRACTED FOREIGN COMPANIES ARE FUNDED BY INTERNATIONAL ORGANIZATIONS
THROUGH TECHNICAL ASSISTANCE PROGRAMS.
THERE ARE NO DISCRIMINATORY OR EXCESSIVELY ONEROUS VISA, RESIDENCE, WORK
PERMIT REQUIREMENTS, OR SIMILAR REQUIREMENTS INHIBITING FOREIGN INVESTORS.
A FOREIGNER MAY OBTAIN A VISA FROM THE GEORGIAN EMBASSY IN WASHINGTON OR
OBTAIN A ONE MONTH SINGLE ENTRY VISA AT A PORT OF ENTRY IN TBILISI
AIRPORT. IT IS POSSIBLE TO EXTEND A VISA AT THE CONSULAR DEPARTMENT UNDER
THE GEORGIAN MINISTRY OF FOREIGN AFFAIRS. THE LEGISLATION DOES NOT
STIPULATE ANY SPECIAL PERMISSION FROM FOREIGNERS TO LIVE OR WORK IN THE
COUNTRY.
THE GEORGIAN GOVERNMENT IS ATTEMPTING TO PROMOTE EXPORTS. THERE ARE NO
EXPORT TAXES. HOWEVER, ALL OTHER TAXES, SUCH AS EXCISE, VAT, AND
CORPORATE TAXES, APPLY TO FOREIGN- OWNED COMMERCIAL ACTIVITIES. THE
LEGISLATION EXEMPTS WHEAT, BABY PRODUCTS, MILK POWDER, INVALID
WHEELCHAIRS, AND SELECTED MEDICINES FROM IMPORT TARIFFS. SOME RAW
MATERIAL INPUTS FOR LOCAL MANUFACTURING, AND GOODS THAT ARE IN TRANSIT,
ARE ALSO FREE FROM IMPORT TARIFFS. THE GOVERNMENT DOES NOT IMPOSE PRICE
CONTROLS ON IMPORTED GOODS.
---------------------------------------
A. 2. CONVERSION AND TRANSFER POLICIES
---------------------------------------
FOREIGN INVESTORS MAY CONVERT OR TRANSFER ANY AMOUNT OF FUNDS ASSOCIATED
WITH AN INVESTMENT INTO HARD CURRENCY. FOREIGN INVESTORS HAVE A RIGHT TO
HOLD FOREIGN CURRENCY ACCOUNTS WITH AUTHORIZED LOCAL BANKS. THE SOLE
LEGAL TENDER IN GEORGIA IS LARI. ANY AMOUNT OF LARI GENERATED BY FOREIGN
INVESTORS CAN BE SOLD FOR HARD CURRENCY THROUGH INTERBANK AUCTION AT A
LEGAL MARKET-CLEARING RATE, OR CONVERTED IN BANKS THAT HAVE A HARD
CURRENCY OPERATION LICENSE. FOREIGN EXCHANGE IS ALSO AVAILABLE ON THE
LOCAL MARKET. THE NEW LAW ON GUARANTEES AND PROMOTION OF INVESTMENT
ACTIVITY (PASSED IN NOVEMBER 1996) DOES NOT IMPOSE ANY DUTIES FOR PROFIT
OR CAPITAL REPATRIATION FROM GEORGIA. (THE PREVIOUS LEGISLATION ON
FOREIGN INVESTMENT STIPULATED A TEN PERCENT TAX ON CAPITAL AND PROFIT
REPATRIATION.) NO CHANGE IN REMITTANCE POLICY IS CURRENTLY PLANNED.
FOREIGN INVESTORS SOMETIMES FACE DELAYS WHILE WITHDRAWING FUNDS FROM
COMMERCIAL BANKS. DELAYS SHOULD ALSO BE ANTICIPATED IN BANKING TRANSFERS,
BECAUSE OF POOR INTERBANK COMMUNICATION. SEVERAL GEORGIAN BANKS ARE
OBTAINING ACCESS TO "SWIFT" AND WESTERN UNION INTERBANK COMMUNICATION
NETWORKS, WHICH ELIMINATE TRANSFER DELAYS AND GUARANTEE IMMEDIATE
WITHDRAWALS. DELAYS OF OVER 60 DAYS IN GEORGIA ARE VERY UNCOMMON.
FOREIGN INVESTORS CANNOT LEGALLY USE THE PARALLEL MARKET (FOREIGN CURRENCY
EXCHANGE BOOTHS) TO CONDUCT TRANSACTIONS IN CONVERTIBLE NEGOTIABLE
INSTRUMENTS SUCH AS DOLLAR- DENOMINATED GOVERNMENT BONDS IN LIEU OF
IMMEDIATE PAYMENTS IN DOLLARS. SUCH INSTRUMENTS ARE NOT TRADED.
AFTER PAYING ALL APPLICABLE TAXES, THERE IS NO LIMIT ON THE INFLOW OR
OUTFLOW OF FUNDS FOR REMITTANCES OF PROFITS, DEBT SERVICE, CAPITAL,
CAPITAL GAINS, RETURNS ON INTELLECTUAL PROPERTY, OR IMPORTED INPUTS.
IN 1993 AND 1994 THE INFLATION RATE REACHED AND EXCEEDED 50 PERCENT PER
MONTH, THE CONVENTIONAL THRESHOLD OF HYPERINFLATION. INFLATION REMAINED
IN THE HYPERINFLATIONARY RANGE UNTIL THE SECOND QUARTER OF 1994. SINCE
THE IMPLEMENTATION OF THE STABILIZATION PROGRAM IN THE THIRD QUARTER OF
1994, THE RATE OF INFLATION HAS SLOWED SIGNIFICANTLY. THE PRICE LEVEL
MEASURED IN COUPONS ROSE BY 23 PERCENT IN THE NINE MONTHS TO SEPTEMBER
1995, COMPARED WITH NEARLY 7,600 PERCENT IN THE 9 MONTHS TO SEPTEMBER
1994. THE LARI, INTRODUCED IN SEPTEMBER-OCTOBER 1995, HAS HELD ITS VALUE
IN A MANAGED FLOAT. IT HAS DISPLACED THE DOLLAR AND THE RUSSIAN RUBLE IN
MOST COMMERCIAL TRANSACTIONS, ALTHOUGH PRIVATE ENTITIES HOLD SUBSTANTIAL
AMOUNTS OF DOLLARS AS A STORE OF VALUE. THE EXCHANGE RATE HAS FLUCTUATED
IN THE RANGE OF 1.23 - 1.27 LARI PER USD 1 SINCE THE LARI WAS INTRODUCED.
THE LARI HAS NO INFORMAL OR PARALLEL EXCHANGE RATES, THOUGH IT IS NOT
FREELY CONVERTIBLE OUTSIDE THE COUNTRY. THE U.S. EMBASSY IN GEORGIA
PURCHASES LARIS AT THE MARKET EXCHANGE RATE. THE GEORGIAN NATIONAL BANK
(GNB) PREDICTS THAT THE LARI WILL REMAIN STABLE AGAINST THE DOLLAR FOR THE
NEXT 2-3 YEARS.
GEORGIA HAS A SUBSTANTIAL FOREIGN DEBT, MORE THAN USD 1 BILLION. MOST OF
IT DERIVES FROM ENERGY PURCHASES FROM TURKMENISTAN AND RUSSIA IN THE
EARLY, POST-INDEPENDENCE YEARS. MUCH OF THIS DEBT HAS BEEN RESTRUCTURED,
EXCEPT FOR A DEBT TO AUSTRIA.
-------------------------------------
A. 3. EXPROPRIATION AND COMPENSATION
-------------------------------------
GEORGIAN LAW PROHIBITS EXPROPRIATION OF FOREIGN INVESTMENTS, EXCEPT FOR
CASES INVOLVING NATURAL DISASTERS AND ACTS OF GOD (FORCE MAJEURE) AND
EPIDEMIC EMERGENCIES. IN ANY CASE OF EXPROPRIATION, THE GEORGIAN
GOVERNMENT OFFERS FULL COMPENSATION PURSUANT TO THE COURT'S DECISION.
COMPENSATION WOULD BE PAID WITHOUT DELAY AND INCLUDE BOTH THE VALUE OF
EXPROPRIATED PROPERTY AS WELL AS THE LOSS, SUFFERED BY A FOREIGN INVESTOR
BY THE EXPROPRIATORY ACTION. THE LEGISLATION DOES NOT DEFINE THE CURRENCY
IN WHICH COMPENSATION IS GIVEN, BUT INVESTORS HAVE A RIGHT TO CONVERT
FUNDS RECEIVED IN COMPENSATION INTO HARD CURRENCY AT THE MARKET EXCHANGE
RATE AND FREELY TRANSFER ABROAD WITHOUT ANY LIMITATION.
GEORGIA HAS NO HISTORY OF EXPROPRIATORY ACTIONS. THE U.S. EMBASSY HAS NO
REASON TO BELIEVE THAT SUCH ACTIONS WILL OCCUR IN THE NEAR FUTURE.
--------------------------
A. 4. DISPUTE SETTLEMENT
--------------------------
THERE HAVE BEEN SEVERAL INVESTMENT DISPUTES OVER THE LAST FOUR YEARS IN
GEORGIA. IN THE CASES INVOLVING LOCAL INVESTORS, DISPUTES TYPICALLY
CENTER ON ALLEGED ILLEGAL PRIVATIZATION, IMPROPERLY REGISTERED DOCUMENTS,
OR SQUABBLES AMONG ORGANIZED CRIME ELEMENTS AND CORRUPT OFFICIALS.
DISPUTES WITH FOREIGN INVESTORS INVOLVED BUSINESS DOCUMENTS, LIABILITY FOR
DEBTS INCURRED BEFORE PRIVATIZATION, AND VIOLATION OF CONTRACT PROVISIONS.
THE LEGAL SYSTEM FOR ENFORCING PROPERTY AND CONTRACTUAL RIGHTS IS IN AN
EARLY STAGE OF DEVELOPMENT AND NEEDS CONSIDERABLE IMPROVEMENT. THE LAW ON
OWNERSHIP RECOGNIZES AND GUARANTEES OWNERSHIP RIGHTS OF ALL TYPES OF
TANGIBLE AND INTANGIBLE ASSETS, INCLUDING BUILDINGS AND OTHER ASSETS. THE
CONSTITUTION PROTECTS THE RIGHT TO PRIVATE PROPERTY AND RECOGNIZES THE
INVIOLABILITY OF PROPERTY, AND RIGHTS TO INHERITANCE AND COMPENSATION.
FOREIGN INVESTORS MAY ENCOUNTER INFORMAL INTERFERENCE BY THE AUTHORITIES
IN THE COURT SYSTEM. THE ABILITY OF THE COURTS TO ADJUDICATE WITHOUT
ALLOWING A ROLE FOR POLITICAL INFLUENCE HAS NOT BEEN WELL ESTABLISHED,
ALTHOUGH JUDICIAL OBJECTIVITY MAY BE MORE LIKELY IN THE SUPREME AND
CONSTITUTIONAL COURTS THAN IN LOWER COURTS. GEORGIA HAS NO SIGNIFICANT
EXPERIENCE IN DEALING WITH JUDGMENTS BY FOREIGN COURTS. ON FEBRUARY 3,
1994 PARLIAMENT RATIFIED A DECREE ON ACCESSION TO THE INTERNATIONAL
CONVENTION ON THE RECOGNITION AND ENFORCEMENT OF FOREIGN ARBITRAL AWARDS.
IN ADDITION, GEORGIA HAS A NUMBER OF OTHER DECREES ON ACCESSION TO THE UN
INTERNATIONAL SELLING/PURCHASING 1980 VIENNA CONVENTION, THE INTERNATIONAL
PACT ON ECONOMIC, SOCIAL, AND CULTURAL RIGHTS, AND ON ACCESSION TO OTHER
RELATED INTERNATIONAL CONVENTIONS, WHICH CREATE A LEGAL BASIS FOR THE
COUNTRY TO MEET INTERNATIONAL BUSINESS REQUIREMENTS. THE GOVERNMENT
ACCEPTS BINDING INTERNATIONAL ARBITRATION OF INVESTMENT DISPUTES BETWEEN
FOREIGN INVESTORS AND THE STATE, ALTHOUGH NO RELEVANT CASES HAVE BEEN
REGISTERED TO DATE.
THE BODY OF LEGISLATION PASSED SINCE GEORGIA'S INDEPENDENCE CONSTITUTES A
BASIC FRAMEWORK FOR PRIVATE INVESTMENT. HOWEVER, SOME PIECES OF THE
FRAMEWORK SUFFER FROM LACK OF TRANSPARENCY, INCONSISTENCY, AND
CONTRADICTION. GEORGIA HAS BASIC COMMERCIAL LAWS, SUCH AS THE LAWS ON
ENTREPRENEURSHIP, COMMERCIAL BANKING, FOREIGN INVESTMENT, OWNERSHIP,
ANTI-MONOPOLY, AND BANKRUPTCY.
GEORGIA HAS NO COMMERCIAL CODE, BUT THE SOVIET-ERA CIVIL CODE AND
SECTOR-RELATED LAWS REGULATE COMMERCIAL ACTIVITY. THE OLD CIVIL CODE,
WHICH IS STILL IN FORCE, DOES NOT CONFORM TO THE REALITIES OF THE MARKET
ECONOMY AND IS BEING REPLACED. THE MINISTRY OF JUSTICE HAS PREPARED A NEW
DRAFT CIVIL CODE, BASED ON A GERMAN MODEL. THIS DRAFT IS CURRENTLY BEING
DEBATED IN PARLIAMENT.
IN JULY 1996 THE GEORGIAN PARLIAMENT ADOPTED A BANKRUPTCY LAW, WHICH TOOK
EFFECT ON JANUARY 1. UNDER THIS LAW, CREDITORS HAVE A RIGHT TO INITIATE
BANKRUPTCY SUITS AGAINST DEBTORS, AND RECEIVE REIMBURSEMENT FROM THE
BANKRUPTED COMPANY (AFTER MEETING THE MINIMAL NEEDS OF THE BANKRUPTED
COMPANY, THE AMOUNT OF WHICH IS DEFINED BY THE COURT). THE LAW DOES NOT
DEFINE THE CURRENCY IN WHICH THE FOREIGN CREDITOR WILL RECEIVE
REIMBURSEMENT.
THE LAW ON PROMOTION AND GUARANTEES OF INVESTMENT ACTIVITY PROVIDES FOR
REIMBURSEMENT IN LARI, ALTHOUGH FOREIGN FIRMS MAY FREELY CONVERT THIS INTO
HARD CURRENCY AND TRANSFER IT ABROAD WITHOUT ANY LIMITATIONS.
ALL DISPUTES BETWEEN THE FOREIGN INVESTOR AND THE LOCAL ENTITY SHOULD BE
RESOLVED ACCORDING TO THE RULES AGREED ON BY THE PARTIES OR THROUGH
GEORGIAN COURTS. DISPUTES BETWEEN A FOREIGN INVESTOR AND A GOVERNMENTAL
BODY SHOULD BE RESOLVED IN GEORGIAN COURTS OR AT THE INTERNATIONAL CENTER
FOR THE SETTLEMENT OF INVESTMENT DISPUTES (ICSID), UNLESS A DIFFERENT
METHOD OF DISPUTE SETTLEMENT HAS ALREADY BEEN AGREED BETWEEN THE PARTIES.
IF THE DISPUTE IS NOT CONSIDERED AT ICSID, THE FOREIGN INVESTOR HAS A
RIGHT TO SUBMIT THE DISPUTE TO A SUPPLEMENTARY INSTITUTION OF THE CENTER
OR TO ANY ARBITRATION AGENCY FOUNDED IN ACCORDANCE WITH ARBITRATION RULES
OF THE COMMISSION OF THE UNITED NATIONS FOR INTERNATIONAL TRADE LAW
(UNICTRAL).
DECISIONS OF INTERNATIONAL ARBITRARY BODIES ARE FINAL AND BINDING, AND
APPEALS MAY NOT BE LODGED AGAINST SUCH DECISIONS. THEIR ENFORCEMENT IS
GUARANTEED BY THE STATE.
THERE IS NO EXPERIENCE OF JUDGMENTS UNDER THIS LAW; IT WAS ADOPTED ONLY
RECENTLY.
GEORGIA IS NOT A MEMBER OF ICSID OR THE NEW YORK CONVENTION OF 1958 ON THE
RECOGNITION AND ENFORCEMENT OF FOREIGN ARBITRAL AWARDS.
------------------------------------------
A. 5. PERFORMANCE REQUIREMENTS/INCENTIVES
------------------------------------------
BEGINNING ON JANUARY 1, 1997 CORPORATE TAX IS 20 PERCENT FOR ALL TYPES OF
BUSINESS. PREVIOUS LEGISLATION PROVIDED FOR 20 PERCENT CORPORATE TAX FOR
MANUFACTURING ENTERPRISES, 10 PERCENT -- FOR COMMERCIAL ENTITIES, AND 35
PERCENT -- FOR BANKING INSTITUTIONS.
THE ENTREPRENEURSHIP LAW PROVIDES FOR TAX INCENTIVES TO ENCOURAGE NEW
INVESTMENT. THE PRINCIPAL INCENTIVE IS AN INITIAL TAX HOLIDAY, FOLLOWED
BY PAYMENT AT 50 PERCENT OF THE NORMAL RATE FOR AN ADDITIONAL PERIOD, AND
DUTY EXEMPTION ON CAPITAL EQUIPMENT.
THE PREVIOUS LAW ON FOREIGN INVESTMENT ACTIVITY (ADOPTED IN SEPTEMBER
1995) PROVIDED FOR SEVERAL INCENTIVES FOR FOREIGN INVESTORS. THESE
INCENTIVES WERE GRANDFATHERED FOR THOSE FOREIGN COMPANIES GRANTED
INVESTMENT LICENSES BEFORE THE ADOPTION OF THE NEW LAW ON FOREIGN
INVESTMENT IN NOVEMBER 1996. THESE INCENTIVES WILL REMAIN EFFECTIVE UNTIL
THE FIVE YEAR TERM FOR THEM HAS LAPSED. THE INCENTIVES ENJOYED BY THE
"GRANDFATHERED" COMPANIES ARE AS FOLLOWS:
A. FOR JOINT VENTURES: WITH MORE THAN 20 PERCENT AND LESS THAN 80
PERCENT FOREIGN EQUITY; AND INVESTMENT OVER USD 100,000:
-- FOR PROFIT TAX: 2 YEARS (IF RETAIL TRADE AND INTERMEDIARY
SERVICES - 1 YEAR) TAX HOLIDAY; 50 PERCENT OF PREVAILING RATE FOR NEXT 4
YEARS (IF RETAIL TRADE 2 YEARS).
-- FOR PROPERTY TAX: 2 YEARS TAX HOLIDAY; 50 PERCENT OF
PREVAILING RATE FOR NEXT 4 YEARS.
-- FOR IMPORT DUTIES: IMPORTS OF CAPITAL GOODS FREE OF CUSTOMS
DUTIES AND VAT; UP TO USD 50,000 VALUE GOODS DESIGNATED FOR THE FOREIGN
INVESTORS' AND THEIR FAMILY MEMBERS' PERSONAL CONSUMPTION FREE OF CUSTOMS
DUTIES.
B. FOR JOINT VENTURES WITH LESS THAN 20 PERCENT LOCAL EQUITY:
-- FOR PROFIT TAX: 2 YEARS TAX HOLIDAY.
-- FOR PROPERTY TAX: 2 YEARS TAX HOLIDAY; 50 PERCENT OF
PREVAILING RATE FOR NEXT 4 YEARS.
-- FOR IMPORT DUTIES: IMPORTS OF CAPITAL GOODS FREE OF CUSTOMS
DUTIES AND VAT; UP TO USD 50,000 VALUE GOODS DESIGNATED FOR THE FOREIGN
INVESTORS' AND THEIR FAMILY MEMBERS' PERSONAL USE FREE OF CUSTOMS DUTIES.
C. 100 PERCENT FOREIGN OWNERSHIP:
-- FOR PROFIT TAX: 2 YEAR TAX HOLIDAY; INVESTMENT ALLOWANCE OF
100 PERCENT AGAINST TAXABLE INCOME
-- FOR PROPERTY TAX: 2 YEAR TAX HOLIDAY; 50 PERCENT OF
PREVAILING RATE FOR NEXT 4 YEARS
-- FOR IMPORT DUTIES: IMPORTS OF CAPITAL GOODS FREE OF CUSTOMS
DUTIES AND VAT; UP TO USD 50,000 VALUE GOODS DESIGNATED FOR THE FOREIGN
INVESTORS' AND THEIR FAMILY MEMBERS' PERSONAL CONSUMPTION FREE OF CUSTOMS
DUTIES
D. FOREIGN FIRMS OPERATING UNDER CONTRACT; NO LOCAL LEGAL ENTITY:
-- FOR PROFIT TAX: 50 PERCENT OF ALL APPLICABLE TAX NORMALLY
APPLIED
-- FOR PROPERTY TAX: 50 PERCENT OF ALL APPLICABLE TAX NORMALLY
APPLIED
-- DUTY FREE IMPORTS FOR THE CONTRACT PERIOD.
THE 1996 LAW ON PROMOTION AND GUARANTEES OF INVESTMENT ACTIVITY STIPULATES
SEVERAL AREAS WHERE THE STATE RETAINS THE SOLE RIGHT TO FUNCTION. THE
LIST OF THESE AREAS IS DETERMINED BY THE GEORGIAN PRESIDENT AND APPROVED
BY THE GEORGIAN PARLIAMENT.
GEORGIAN LEGISLATION DOES NOT REQUIRE FOREIGN INVESTORS TO RE-INVEST
PROFITS LOCALLY.
FOREIGN INVESTORS ARE REQUIRED TO DISCLOSE COMMERCIAL INFORMATION UNDER
THE LICENSING PROCEDURE. FOREIGN INVESTORS ARE ALSO RESPONSIBLE FOR
SUBMITTING INCOME REPORTS TO THE TAX INSPECTION SERVICE.
---------------------------------------------------
A. 6. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT
---------------------------------------------------
THE LAW ON ENTREPRENEURSHIP GRANTS FOREIGN AND DOMESTIC PRIVATE ENTITIES A
RIGHT TO ESTABLISH AND OWN BUSINESS ENTERPRISES AND TO ENGAGE IN
REMUNERATIVE ACTIVITY. IN ADDITION, A NUMBER OF SECTOR-RELATED LAWS
REGULATE BUSINESS ACTIVITY IN THE BANKING, AGRIBUSINESS, ENERGY, TRANSPORT
AND TOURISM SECTORS.
THE LAWS ON ENTREPRENEURSHIP, ON PROMOTION AND GUARANTEES OF INVESTMENT
ACTIVITY, AND ON OWNERSHIP AUTHORIZE PRIVATE ENTITIES FREELY TO ESTABLISH,
ACQUIRE, AND DISPOSE OF INTERESTS IN BUSINESS ENTERPRISES. PRIVATE AND
PUBLIC ENTERPRISES ENJOY EQUAL RIGHTS IN COMPETITION WITH RESPECT TO
ACCESS TO MARKETS, CREDIT, AND OTHER BUSINESS OPERATIONS. IN PRACTICE,
HOWEVER, GOVERNMENT ENTITIES AND PRIVATE ENTITIES OWNED BY FORMER OR
CURRENT GOVERNMENT FIGURES OFTEN ENJOY OFFICIAL FAVORITISM IN LICENSING
AND ACCESS TO STATE PRIVILEGES.
------------------------------------
A. 7. PROTECTION OF PROPERTY RIGHTS
------------------------------------
GEORGIA'S INTERNATIONAL AGREEMENTS, CONSTITUTION, OWNERSHIP LAW, AND THE
LAW ON PROMOTION AND GUARANTEES OF INVESTMENT ACTIVITY SECURE PROPERTY
RIGHTS ON CHATTEL AND REAL PROPERTY. GEORGIA HAS AS YET LITTLE EXPERIENCE
IN THE PROTECTION OF FOREIGN PROPERTY. NO DISPUTES RELATED TO
EXPROPRIATION HAVE YET OCCURRED.
ACCORDING TO THE LAW ON PROMOTION AND GUARANTEES OF INVESTMENT ACTIVITY,
IF CONDITIONS OF INVESTMENT PROTECTION ARE ALTERED BY LEGISLATION, SUCH
LEGISLATIVE ACTS WILL NOT HAVE RETROACTIVE EFFECT FOR INVESTMENTS UNTIL
TEN YEARS AFTER THE DATE OF THE ACT'S ADOPTION.
THE STATE GUARANTEES FOREIGN OWNERSHIP PROTECTION. THE TERMINATION OF A
GIVEN PROPRIETOR'S OWNERSHIP RIGHTS COULD, HOWEVER, BY DECIDED BY A COURT.
THE OWNERSHIP LAW AND MORTGAGE LAW FACILITATE ACQUISITION AND DISPOSITION
OF ALL PROPERTY RIGHTS BY FOREIGNERS, EXCEPT FOR AGRICULTURAL LAND,
NATURAL RESOURCES, THE CONTINENTAL SHELF, CULTURAL AND HISTORICAL
MONUMENTS, AND MILITARY PROPERTY.
IN JANUARY 1994 GEORGIA JOINED THE PARIS INDUSTRIAL PROPERTY CONVENTION
AND BECAME A MEMBER OF THE WORLD INTELLECTUAL PROPERTY ORGANIZATION AND A
PARTY TO THE PATENT COOPERATION TREATY. THE IMPLEMENTING DOMESTIC
LEGISLATION HAS NOT, HOWEVER, BEEN COMPLETED. GEORGIA IS CONSIDERING
JOINING THE MADRID AGREEMENT PERTAINING TO INTERNATIONAL REGISTRATION OF
TRADEMARKS.
EXISTING INTELLECTUAL PROPERTY RIGHTS LEGISLATION APPLIES TO COPYRIGHT
PROVISIONS FOR LITERARY, MUSICAL, ARTISTIC, PHOTOGRAPHIC, AND AUDIOVISUAL
WORKS. INDUSTRIAL PROPERTY RIGHTS PROTECT INVENTIONS, TRADEMARKS,
INDUSTRIAL DESIGNS AND APPELLATIONS OF ORIGIN. AS A PRACTICAL MATTER,
ENFORCEMENT OF INTELLECTUAL AND INDUSTRIAL PROPERTY RIGHTS IN GEORGIA IS
EXTREMELY WEAK.
PATENTS ARE AVAILABLE FOR ALL AREAS OF TECHNOLOGY, INCLUDING PRODUCT, AS
WELL AS PROCESS, PROTECTION FOR PHARMACEUTICALS. COMPULSORY LICENSES ARE
NOT REQUIRED. THE LAW DEFINES THE PATENT PROTECTION PERIOD AS TWENTY
YEARS.
NEW PATENT, TRADEMARK AND DESIGN APPLICATIONS ARE FILED WITH THE GEORGIAN
PATENT SERVICE. FOREIGN COMPANIES MAY APPLY ONLY THROUGH LOCAL PATENT
ATTORNEYS. A SPECIAL PATENT COURT IN TBILISI REVIEWS APPLICATIONS.
THE COPYRIGHT LEGISLATION IS OUTDATED AND BASED ON THE SOVIET-ERA CIVIL
CODE OF 1978. IT DOES NOT CORRESPOND TO INTERNATIONAL NORMS. THE
ORGANIZATIONS RESPONSIBLE FOR OVERSIGHT ARE THE AGENCY OF AUTHORS' RIGHTS
AND THE GEORGIAN UNION OF WRITERS. THE PROTECTION APPLIES ONLY TO
LITERARY COPYRIGHTS.
GEORGIAN LEGISLATION PROTECTS TRADEMARKS FOR TEN YEARS WITH ANOTHER
FIVE-YEAR EXTENSION POSSIBLE.
THE WORLD TRADE ORGANIZATION (WTO) GENERAL COUNCIL APPROVED A MEMO ON
GEORGIA'S FOREIGN TRADE REGIME AND GRANTED GEORGIA OBSERVER STATUS IN THE
WTO ON JUNE 26, 1996. USAID, THE EUROPEAN UNION, AND THE WORLD BANK ARE
PROVIDING TECHNICAL ASSISTANCE TO GEORGIA IN PREPARING APPLICATION FOR
FULL MEMBERSHIP. THE WTO GENERAL COUNCIL SET UP A WORKING GROUP TO
NEGOTIATE FULL MEMBERSHIP WITH THE GOVERNMENT OF GEORGIA.
THE ENTREPRENEURSHIP LAW AND THE COMMERCIAL BANKING LAW GUARANTEE
PROTECTION OF COMMERCIALLY VALUABLE PROPRIETARY INFORMATION, EXCEPT FOR
THAT SUBJECT TO OPEN PUBLICATION.
GEORGIA HAS ITS OWN BARCODE SYSTEM. THE COUNTRY JOINED THE "EUROPEAN
ARTICLE NUMBERING, INTERNATIONAL" (EAN, INT.) ON MAY 10, 1996. "EAN
GEORGIA" WAS ESTABLISHED AT THE GEORGIAN CHAMBER OF COMMERCE, WHICH
REPRESENTS THE COUNTRY IN EAN, INT. GEORGIA'S BAR-CODE IS 486.
---------------------------------------------
A. 8. REGULATORY SYSTEM: LAWS AND PROCEDURES
---------------------------------------------
GEORGIA IS BEGINNING TO DEVELOP A LEGAL AND REGULATORY FRAMEWORK INTENDED
TO FOSTER COMPETITION. IN FALL 1996 AN ANTIMONOPOLY LAW WAS ADOPTED BY
PARLIAMENT. ACCORDING TO THE LAW, THE HEAD OF THE ANTIMONOPOLY AGENCY IS
APPROVED BY THE PRESIDENT AND IS SUBORDINATED TO THE MINISTRY OF ECONOMY.
LEGISLATION REQUIRES ALL PRIVATE COMPANIES TO REGISTER IN DISTRICT COURTS.
----------------------------------------------
A. 9. EFFICIENT CAPITAL MARKETS AND PORTFOLIO
INVESTMENT.
----------------------------------------------
GEORGIAN LAW DOES NOT LIMIT THE FREE FLOW OF FINANCIAL RESOURCES. BUT IN
PRACTICE, THE FLOW IS RESTRAINED BECAUSE OF POOR AND UNRELIABLE INTERBANK
COMMUNICATION (REGULAR BANKING TRANSACTIONS WITHIN GEORGIA TAKE 3-7 DAYS),
A LACK OF FINANCIAL RESOURCES IN COMMERCIAL BANKS, WIDESPREAD CASH
SETTLEMENTS, AND LACK OF TRUST DUE TO SCANDALS OF THE EARLY 1990'S
INVOLVING LOCAL FINANCIAL COMPANIES.
MOST BANKS ISSUE 3-6 MONTH CREDITS, WHICH ARE USED FOR COMMERCIAL
OPERATIONS. THE INTEREST RATE IS 5-8 PERCENT PER MONTH. THE EUROPEAN
PARTNERSHIP FUND, IBRD, AND EBRD, PLAN TO ISSUE SPECIAL PURPOSE SIX-MONTH
CREDITS AT ELEVEN PERCENT INTEREST AND ONE-YEAR CREDITS AT 14 PERCENT.
EXISTING LEGAL, REGULATORY AND ACCOUNTING SYSTEMS WHICH APPLY TO THE
FINANCIAL SECTOR GENERALLY STILL DERIVE FROM THE SOVIET ERA AND ARE NOT
CONSISTENT WITH INTERNATIONAL NORMS. THE GEORGIAN NATIONAL BANK (GNB) IS
ELABORATING A NEW NATIONAL ACCOUNTING SYSTEM TO CONFORM TO INTERNATIONAL
STANDARDS.
A CAPITAL MARKET, WHICH WOULD ALLOW THE DEVELOPMENT OF PORTFOLIO
INVESTMENT, IS IN A VERY EARLY STAGE OF DEVELOPMENT. AVAILABLE MONEY
MARKET INSTRUMENTS ARE THE NATIONAL BANK'S CREDIT FACILITIES AND
INTER-BANK FUNDS.
A PORTFOLIO INVESTMENT REGULATORY SYSTEM IS UNDEVELOPED. SOME REGULATIONS
HAVE BEEN ADOPTED, SUCH AS A PRESIDENTIAL DECREE ON SPECIALIZED INVESTMENT
FUNDS, A LICENSING PROCEDURE FOR PARTICIPANTS OF SECURITIES MARKETS, AND
CENTRAL BANK REGULATION ON FUTURES TRADING.
SPECIAL INVESTMENT FUNDS ESTABLISHED IN CONNECTION WITH THE VOUCHER
PRIVATIZATION PROGRAM WERE INTENDED TO PROMOTE THE DEVELOPMENT OF AN
EQUITIES MARKET. THEY FAILED TO PERFORM. ONLY FOUR PERCENT OF VOUCHERS
WERE INVESTED IN THE FUNDS. CURRENTLY, TEN SPECIALIZED INVESTMENT FUNDS
OPERATE. USD 19.5 MILLION WORTH OF SHARES ARE OWNED BY OVER 150,000
PERSONS, AND USD 120 MILLION OF SHARES -- BY 61,000 LARGE SHAREHOLDERS,
ACCORDING TO THE MINISTRY OF STATE PROPERTY MANAGEMENT.
THE GNB HOPES TO ISSUE TREASURY BONDS IN 1997, AND THUS TO ENLARGE CAPITAL
MARKET INSTRUMENTS IN GEORGIA.
THE ASSETS OF THE THREE LARGEST COMMERCIAL BANKS TOTAL USD 133.7 MILLION,
MAKING UP 54 PERCENT OF COMMERCIAL BANK ASSETS. ALL THREE BANKS ARE
PRIVATIZED, FORMER STATE- OWNED COMMERCIAL BANKS.
THE BANKING SYSTEM IS IN AN EARLY STAGE OF DEVELOPMENT. THE RECENTLY
ADOPTED LAW ON THE CENTRAL BANK INTRODUCED A TWO-TIER BANKING SYSTEM. ALL
COMMERCIAL BANKS MUST BECOME JOINT-STOCK OR LIMITED LIABILITY COMPANIES.
TO IMPROVE THE BANKING SYSTEM, THE GNB CERTIFIES COMMERCIAL BANKS AND
ISSUES LICENSES FOR THE CONDUCT OF SPECIFIC BANKING ACTIVITIES. ONLY
THOSE BANKS THAT HAVE LICENSES ARE PERMITTED TO CONDUCT HARD CURRENCY
TRANSACTIONS.
AS A RESULT OF THE GNB ROLE IN BANK OVERSIGHT, THE NUMBER OF BANKS HAS
DECLINED FROM 247 IN 1995 TO AROUND 70, AND IS STILL FALLING. THE
COMMERCIAL BANKING LAW ALLOWS THE GNB TO REGULATE AGAINST MONOPOLISTIC
PRACTICES AND INSTITUTE PROCEEDINGS TO LIQUIDATE BANKS THAT DO NOT COMPLY
WITH PRESCRIBED PRUDENTIAL LIMITS.
INDIVIDUAL AND COMPANY ACCOUNT INFORMATION IS INACCESSIBLE TO REGULATORY
BODIES. ONLY A COURT DECISION CAN MAKE PUBLIC INFORMATION ON A BANK'S
CLIENTS.
THE GNB REQUIRED COMMERCIAL BANKS TO INCREASE THEIR CHARTER CAPITAL UP TO
USD 100,000 BEFORE JUNE 1, 1996, AND THIS LEVEL RISES TO USD 500,000 ON
JUNE 1, 1998. IF BANKS DO NOT COMPLY WITH GNB LIMITS, THEY WILL LOSE
THEIR LICENSE. AS OF JANUARY 1, 1996, THE CHARTER FUND OF ALL COMMERCIAL
BANKS OPERATING IN GEORGIA AMOUNTED TO USD 24 MILLION, WHILE DEPOSITS CAME
TO USD 227 MILLION. ACCORDING TO THE GNB, UNDER 9 PERCENT OF THE TOTAL
ASSET BASE IS THOUGHT TO BE NON-PERFORMING.
THERE ARE NO "CROSS-SHAREHOLDING" OR "STABLE SHAREHOLDER" ARRANGEMENTS
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.
NO LAW OR REGULATION AUTHORIZES PRIVATE FIRMS TO ADOPT ARTICLES OF
INCORPORATION OR ASSOCIATION THAT LIMIT OR PROHIBIT FOREIGN INVESTMENT,
PARTICIPATION, OR CONTROL. PRACTICES WHICH RESTRICT FOREIGN INVESTMENT,
PARTICIPATION, OR CONTROL OF DOMESTIC ENTERPRISES ARE USUALLY INFORMAL,
SOMETIMES INVOLVING CRIMINAL PRESSURES WHICH CAUSE FOREIGN OWNERS TO SELL
OUT THEIR OWNERSHIP.
---------------------------
A. 10. POLITICAL VIOLENCE
---------------------------
THE PERVASIVE POLITICAL VIOLENCE OF THE EARLY 1990-S DISCOURAGED FOREIGN
INVESTMENT. CASES HAVE BEEN RECORDED OF CRIMINALLY-MOTIVATED, BUT NOT
POLITICALLY-MOTIVATED, DAMAGE TO FOREIGN-OWNED PROJECTS OR INSTALLATIONS.
O CURRENTLY GEORGIA FACES NO INSURRECTIONS OR SIGNIFICANT CIVIL
DISTURBANCES, BUT GEORGIAN AND ABKHAZ ARMED BANDS ARE ACTIVE IN SOUTHERN
ABKHAZIA, A SEPARATIST AREA. THE GOVERNMENT HAS MANAGED TO NEUTRALIZE THE
PARAMILITARY GROUPS THAT TERRORIZED THE COUNTRY FROM 1991 TO 1994. ARMED
FORCES IN OPPOSITION TO THE GOVERNMENT ARE FUNCTIONING IN THE
SEPARATIST-CONTROLLED AREAS OF ABKHAZIA AND SOUTH OSSETIA. LAW
ENFORCEMENT AGENCIES MAINTAIN PUBLIC ORDER, ALTHOUGH THEY ARE OFTEN
CORRUPT AND SOMETIMES ACT ARBITRARILY AND WITHOUT RESPECT FOR HUMAN
RIGHTS.
O GEORGIA MAINTAINS FRIENDLY RELATIONS WITH NEIGHBORING COUNTRIES,
INCLUDING TURKEY AND RUSSIA. THESE RELATIONS SERVE AS AN ADDITIONAL
INCENTIVE FOR FOREIGN BUSINESSES INTENDING TO COME TO THE REGION. THE
POLITICAL CUT-OFF OF RAILWAY AND ROAD TIES THROUGH ABKHAZIA TO RUSSIA, AND
THE ABSENCE OF A RAILWAY CONNECTION TO TURKEY, ARE SEVERE IMPEDIMENTS TO
LAND TRANSPORT TO AND FROM GEORGIA. GEORGIA ENJOYS GOOD RELATIONS WITH
AZERBAIJAN AND ARMENIA.
B. GEORGIA HAS A BILATERAL INVESTMENT TREATY (BIT) WITH THE U.S. AND
SIMILAR AGREEMENTS WITH 15 OTHER COUNTRIES: ARMENIA, AZERBAIJAN, BELGIUM,
BULGARIA, CHINA, GERMANY, GREECE, IRAN, ISRAEL, LUXEMBOURG, TURKEY,
TURKMENISTAN, UK, UKRAINE, AND UZBEKISTAN. THE GEORGIAN PARLIAMENT
RATIFIED THE BILATERAL INVESTMENT AGREEMENT WITH THE U.S. IN DECEMBER
1996.
C. TWO INVESTMENTS ARE INSURED BY OPIC. GEORGIA HAS BEEN A MEMBER OF THE
MULTILATERAL INVESTMENT GUARANTEE AGENCY (MIGA) SINCE DECEMBER 1992.
D. OUTWARD MIGRATION SPURRED BY CIVIL CONFLICT AND ECONOMIC DEVASTATION
IN THE EARLY 1990'S LED TO REDUCTIONS IN THE LABOR FORCE, WHICH CURRENTLY
AMOUNTS TO ABOUT 3.1 MILLION PERSONS. SOME 1.7 MILLION PEOPLE ARE
EMPLOYED. WAGES IN GOVERNMENT EMPLOYMENT, INCLUDING STATE AGENCIES, DO
NOT EXCEED 15-20 PERCENT OF THE GOVERNMENT'S ESTIMATED MINIMAL COST OF
LIVING.
O UNEMPLOYMENT ESPECIALLY AFFECTS YOUTH, WOMEN, AND SPECIALISTS WITH
UNIVERSITY OR TECHNICAL EDUCATION WHO WERE WORKING IN STATE-SUPPORTED
SECTORS. FOREIGN BUSINESSES CAN BENEFIT FROM THE HIGH LEVEL OF EDUCATION
OF THE LABOR FORCE. DURING THE SOVIET PERIOD A NUMBER OF DEFENSE-RELATED
ENTERPRISES OPERATED IN GEORGIA AND EMPLOYED A SKILLED LABOR FORCE OF
90,000 PEOPLE, INCLUDING 10,000 SCIENTISTS. AFTER THE USSR COLLAPSED,
MANY EMIGRATED FROM GEORGIA (MOSTLY TO RUSSIA), WHILE OTHERS REMAINED IN
GEORGIA AND CHANGED THEIR PROFESSIONS.
O THE OUT-DATED SOVIET EMPLOYMENT CODE REGULATES LABOR-MANAGEMENT
RELATIONS. A NEW CIVIL CODE WHICH WILL REGULATE MANAGEMENT-LABOR
RELATIONS IS SCHEDULED FOR ADOPTION IN 1997.
O THE GEORGIAN GOVERNMENT ADHERES TO THE ILO CONVENTION. GEORGIA HAS
SIGNED SEVERAL 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.
O THE STATE SOCIAL SECURITY SYSTEM PROVIDES PENSION, UNEMPLOYMENT AND
MATERNITY BENEFITS. THESE BENEFITS ARE NEGLIGIBLE, AND THE SYSTEM IS
BANKRUPT. EMPLOYERS ARE LEGALLY REQUIRED TO MAKE SOCIAL SECURITY
CONTRIBUTIONS FOR EMPLOYEES, BUT COMPLIANCE IS UNEVEN.
E. PROPOSALS TO ESTABLISH FOREIGN TRADE ZONES/FREE PORTS ARE BEING
DISCUSSED, BUT ARE CONTROVERSIAL. THE GOVERNMENT HAS GIVEN TENTATIVE
APPROVAL TO THREE PROPOSALS RELATED TO SETTING UP FREE TRADE ZONES. THE
FIRST PROVIDES FOR ESTABLISHING A WORKING GROUP TO "DEVELOP UNIFIED
CONCEPTION FOR THE RUSTAVI FREE ECONOMIC ZONE DEVELOPMENT AND OPERATION."
THE SECOND WOULD GRANT ADDITIONAL RIGHTS TO THE POTI CITY MAYORALTY TO
CREATE AN OFFSHORE ZONE AT POTI. THE LAST WOULD CREATE A FREE ECONOMIC
ZONE IN BATUMI IN THE AREA OF THE CHOROKHI RIVER DELTA AND ON TWO DOCKS IN
THE BATUMI SEA PORT.
F. THE GOVERNMENT HAS NO STRICT POLICY TOWARD EXPORT OF CAPITAL AND OR
OUTWARD DIRECT INVESTMENT.
G. AS OF DECEMBER 15, 1996, THE MINISTRY OF TRADE AND FOREIGN ECONOMIC
RELATIONS HAD ISSUED 159 INVESTMENT LICENSES FOR COMPANIES FROM 35
COUNTRIES. GERMAN COMPANIES ARE IN THE LEAD AND MAKE UP 24 JOINT VENTURE
COMPANIES WITH GEORGIA. GERMANY IS FOLLOWED BY THE U.S. AND RUSSIA (EACH
19 COMPANIES), GREAT BRITAIN (16 COMPANIES), AND THE TURKEY (12
COMPANIES). THE MINISTRY STATES THAT USD 48 MILLION HAS BEEN INVESTED BY
FOREIGN FIRMS, WHILE INVESTMENT OF ANOTHER USD 50 MILLION IS AGREED UNDER
CONTRACT TERMS. NO STATISTICS ARE AVAILABLE ON GEORGIAN DIRECT INVESTMENT
ABROAD, BUT HUNDREDS OF MILLIONS OF DOLLARS IN FINANCIAL ASSETS OF VARIOUS
KINDS ARE THOUGHT TO BE HELD BY GEORGIANS ABROAD. NOW THAT GEORGIA IS
STABILIZING, INTEREST AMONG GEORGIANS IN BRINGING HOME THESE RESOURCES IS
GROWING, AND THIS MAY BECOME A PRINCIPAL SOURCE OF NEW INVESTMENT IN
GEORGIA.
TO DATE, DIRECT FOREIGN DIRECT INVESTMENT MAKES UP ONLY A SMALL PORTION OF
GDP.
H. THE FOLLOWING IS A LIST OF FOREIGN DIRECT INVESTMENTS BY DIFFERENT
COUNTRIES IN GEORGIA:
INVESTING COUNTRY NUMBER OF TOTAL INVESTMENTS -- PERCENTAGE OF
COMMITTED OR
OF INVESTMENTS COMPANIES DISBURSED (IN USD)
================= ============ ================
USA -- 10.41 19 10,220,434
AUSTRALIA -- 2.75 1 2,700,000
AUSTRIA -- 0.55 3 534,164
BAHAMA ISLANDS -- 0.41 1 400,000
BELGIUM -- 0.1 1 102,000
BERMUDA ISLANDS -- 4.2 2 4,120,190
BULGARIA -- 0.5 2 487,650
CYPRUS -- 1.67 3 1,643,429
FRANCE -- 0.11 1 104,612
GERMANY -- 8.13 24 7,983,221
GREAT BRITAIN -- 6.75 15 6,629,424
GREECE -- 0.86 3 848,257
HONG-KONG -- 0.36 1 350,000
HUNGARY -- 0.13 1 131,012
IRELAND -- 15.27 5 14,984,530
ISRAEL -- 16.47 6 16,166,165
ITALY -- 2.29 6 743,136
CANADA -- 0.15 1 150,000
KOREA -- 9.29 2 9,120,500
LATVIA -- 0.11 1 108,500
LEBANON -- 0.12 1 117,300
LITHUANIA -- 0.12 1 113,084
LIECHTENSTEIN -- 0.47 1 462,159
LUXEMBOURG -- 0.11 1 103,000
MALTA -- 0.12 1 120,650
MONACO -- 0.28 1 270,000
NETHERLANDS -- 6.64 9 6,516,770
PANAMA -- 0.16 2 160,000
POLAND -- 0.1 1 100,000
RUSSIA -- 4.69 19 4,600,773
SEYCHELLES -- 0.12 1 114,724
SINGAPORE -- 0.10 1 100,000
SWITZERLAND -- 2.17 9 2,127,745
TURKEY -- 3.99 12 3,916,734
VENEZUELA -- 0.31 1 302,378
(SOURCE: THE MINISTRY OF TRADE AND FOREIGN ECONOMIC
RELATIONS)
--------------------
A. 11. CORRUPTION
--------------------
ANTICORRUPTION ACTIVITY IS REGULATED BY THE OLD CRIMINAL
LAW ADOPTED DURING SOVIET TIMES. SEVERAL AMENDMENTS HAVE
BEEN ADDED TO UPDATE THE LAW, BUT IT IS STILL VERY
INADEQUATE. FOR EXAMPLE, CONFLICT OF INTEREST LAWS FOR
GOVERNMENT EMPLOYEES ARE NEEDED. THE PARLIAMENT'S LEGAL
COMMITTEE IS DRAFTING A LAW ON CORRUPTION. A NEW
PARLIAMENTARY ANTICORRUPTION COMMITTEE IS PLAYING AN
IMPORTANT AND POSITIVE ROLE, BUT THE PROBLEM IS VAST.
GEORGIAN AND FOREIGN BUSINESSPERSONS ROUTINELY CITE
CORRUPTION A SERIOUS IMPEDIMENT TO THE CONDUCT OF
BUSINESS. OFFICIALS FREQUENTLY SEEK BRIBES. THE
GOVERNMENT IS CONSIDERING MEANS TO COMBAT CORRUPTION, BUT
SUBSTANTIAL LAW ENFORCEMENT REFORM WILL BE NECESSARY TO
WAGE AN EFFECTIVE ANTICORRUPTION EFFORT. THE
PROSECUTOR'S
OFFICE AND THE MINISTRIES OF INTERNAL AFFAIRS AND STATE
SECURITY HAVE ANTICORRUPTION RESPONSIBILITIES, BUT THESE
BODIES THEMSELVES ARE KNOWN FOR CORRUPTION.
THE CRIMINAL CODE TREATS BRIBERY AS A CRIMINAL ACT. THE
PENALTY IS UP TO FIFTEEN YEARS IMPRISONMENT, WITH
CONFISCATION OF PROPERTY. FEW CASES OF SUBSTANTIAL
CORRUPTION ARE SUCCESSFULLY PROSECUTED UNDER THIS LAW.
THE FORMER HEAD OF THE STATE RAILWAY MONOPOLY AND THE
LARGEST THERMAL ELECTRIC GENERATING PLANT WERE FIRED FOR
ALLEGED CORRUPTION. THEY MAY BE SCAPEGOATS, HOWEVER, FOR
A MUCH WIDER PROBLEM. OVER THE PAST YEAR, NO HIGH-LEVEL
OFFICIAL HAS BEEN PROSECUTED FOR CORRUPTION. NO FOREIGN
INVESTOR HAS BEEN FOUND GUILTY OF CORRUPTION.
Back to Sakartvelo - Former Republic of Georgia