2012 Investment Climate Statement - Georgia

2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012

Georgia is a low-regulation, low-tax, free market country that has made sweeping economic reforms since the 2003 “Rose Revolution.” Georgia’s progress from a near-failed state in 2003 to a relatively well-functioning market economy in 2012 is noteworthy. Through dramatic police and institutional reforms, the government has all but eradicated low level corruption with, according to one poll, less than one percent of the population reporting having to pay a bribe in the past year to get a government service or decision. The government eliminated 84 percent of licensing requirements in 2005, and Georgia ranks 16th in the World Bank’s Ease of Doing Business Index. Fiscal and monetary policy is focused on low fiscal deficits, low inflation, and a stable real exchange rate. Key reform measures in 2011 included the implementation of a new tax code and establishment of the Office of the Business Ombudsman to help resolve disputes between businesses and the Georgian government. In a year of warnings and downgrades in the U.S. and Europe, both Standard and Poor’s and Fitch Ratings upgraded Georgia’s credit rating from B+ to BB-, reflecting increasing market confidence in Georgia. There is still work to be done, however. Companies report occasional issues arising from a lack of judicial independence, lack of intellectual property rights enforcement, lack of effective anti-trust policies, selective enforcement of economic laws, and difficulties resolving disputes over property rights. Despite these remaining challenges, Georgia stands ahead of its post-Soviet peers as a good place to do business.

On January 30, 2012, President Obama announced after an Oval Office meeting with Georgian President Saakashvili that the two countries had agreed to create a high-level dialogue to strengthen trade relations, including the possibility of a free trade agreement. The U.S. and Georgia signed a Bilateral Investment Treaty in 1994, and Georgia can export many products duty-free to the U.S. under the Generalized System of Preferences (GSP) program.

Openness to Foreign Investment

Georgia is open to foreign investment, and the Georgia National Investment Agency (www.investingeorgia.org) is implementing an aggressive marketing campaign to encourage more foreign investors to come to Georgia. Many senior Georgian government officials make a personal effort to attract investment, and potential major investors have excellent access to senior officials. Legislation establishes favorable conditions for foreign investment, but not preferential treatment for foreign investors. The Law on Promotion and Guarantee of Investment Activity protects foreign investors from subsequent legislation that alters the condition of their investments for a period of ten years.

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 relevant legislation includes the Law on Entrepreneurs, the Law on Promotion and Guarantee of Investment Activity, the Bankruptcy Law, the Law on Courts and General Jurisdiction, the Law on Limitation of Monopolistic Activity, the Accounting Law, and the Securities Market Law.

Georgia has concluded agreements for avoidance of double taxation with 34 countries. These countries are Armenia, Austria, Azerbaijan, Belgium, Bulgaria, China, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Iran, Ireland, Italy, Kazakhstan, Latvia, Lithuania, Luxemburg, Malta, Netherlands, Poland, Qatar, Romania, Singapore, Spain, Switzerland, Turkey, Turkmenistan, UAE, Ukraine, UK, and Uzbekistan. Double taxation avoidance treaties have been ratified but have not yet entered into force with Kuwait, Israel, Egypt and Bahrain. Treaties have been negotiated but are awaiting signing or ratification with Cyprus, Hungary, Slovenia, India, Slovakia, Norway, Portugal, and Croatia. Georgia and Russia signed a double taxation avoidance treaty in 1999, which the Georgian Parliament ratified in 2000. Although it has not been ratified by the Russian Duma, Russia regards it as an active agreement.

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

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 major privatizations of state-owned property. Transparency of 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.

Legal overhauls in 2005 simplified the business registration process, reducing paperwork and fees and shortening the processing time. The Government proudly advertises that an entrepreneur can start a business in three days. All companies are required to register with the Ministry of Finance, providing founders’ and firm principals' names, dates and places of birth, occupations, and places of residence; incorporation documents; area(s) 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 the majority of the largest formerly state-owned enterprises in the country. Successful privatization projects include major deals in energy generation and distribution, telecommunications, water utilities, port facilities, and real estate assets. In late 2009, the Government announced a new wave of privatization, which included railway, telecommunication and utilities projects. A list of entities 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. Further information is available at a website maintained by the American Chamber of Commerce in Georgia, www.investmentguide.ge, and the Chamber’s website, www.amcham.ge.

In 2005, the government eliminated 84 percent of existing licensing requirements and created a “one stop shop” for licenses. By law, the Government has 30 days to make a decision on licenses, and if the licensing authority does not state a reasonable ground for rejection within that time, the license or permit is deemed to be issued. The government only requires licenses for activities that affect public health, national security, and the financial sector. The government currently requires licenses in the following areas: weapons and explosives production, narcotics, poisonous and pharmaceutical substances, exploration and exploitation of renewable or non-renewable substances, exploitation of natural resource deposits, establishment of casinos and gambling houses and the organization of games and lotteries, banking, insurance, securities trading, wireless communication services, and the establishment of radio and television channels. The law requires the state to retain a controlling interest in air traffic control, shipping traffic control, railroad control systems, defense and weapons industries, and nuclear energy. Only the state may issue currency, banknotes, and certificates for goods made from precious metals, import narcotics for medical purposes, and produce control systems for the energy sector.

Georgia’s rankings in terms of economic performance were as follows:




TI Corruption Perceptions Index


64 out of 183

World Bank Doing Business


16 out of 183

MCC Government Effectiveness


0.76 (97%)

MCC Rule of Law


0.26 (62%)

MCC Control of Corruption


0.32 (76%)

MCC Fiscal Policy


-4.4 (35%)

MCC Trade Policy


89.2 (100%)

MCC Regulatory Quality


1.12 (100%)

MCC Business Start UP


0.995 (100%)

MCC Land Rights Access


0.929 (95%)

MCC Natural Resource Mgmt


35.2 (54%)

Note: MCC is the Millennium Challenge Corporation; TI is Transparency International. The MCC rankings show Georgia’s score and percentile ranking in its income peer group (0% is worst; 50% is the peer group median; 100% is best). For TI and the World Bank, it is Georgia’s rank among the countries covered by the respective surveys, with the #1 rank being best.

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. Georgia has accepted the obligations of Article VIII, Sections 2, 3, and 4 of the IMF Articles of Agreement, effective as of December 20, 1996, undertaking to refrain from imposing restrictions on payments and transfers for current international transactions and from engaging in discriminatory currency arrangements or multiple currency practices without IMF approval. By accepting the obligations of Article VIII, Georgia has indicated 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. The Act of Economic Freedom that Parliament adopted in 2011 further reinforced this provision.

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

Foreign investors have the right to hold foreign currency accounts with authorized local banks. The sole legal tender in Georgia is the lari (GEL), which is traded on the Tbilisi Interbank Currency Exchange and in the foreign exchange bureau market. There is no difficulty in obtaining foreign exchange, nor are there significant delays in remitting funds overseas through normal channels. Several Georgian banks participate in the SWIFT and Western Union interbank communication networks. Businesses report that it takes a maximum of three days for money transferred abroad from Georgia to reach a beneficiary’s account, unless otherwise provided by a customer’s order. There are no known plans to change remittance policies. Travelers must declare at the border currency and securities in their possession valued at more than 30,000 lari (approximately $18,200).

Expropriation and Compensation

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

The Law on Procedures for Forfeiture of Property for Public Needs establishes the rules for expropriation in Georgia. The law allows expropriation for certain enumerated public needs and provides a mechanism for valuation and payment of compensation, and for court review of the valuation at the option of any party. The Georgian Law on Investment allows expropriation of foreign investments only with appropriate compensation. Recent amendments to the Law on Procedures for Forfeiture of Property for Public Needs allow payment of compensation with property of equal value as well as money. Compensation includes all expenses associated with the valuation and delivery of expropriated property. Compensation must be paid without delay and must include both the value of the expropriated property as well as the loss suffered by the foreign investor as a result of expropriation. The foreign investor has a right to review an expropriation in a Georgian court. In 2007, Parliament passed a law generally prohibiting the Government from contesting the privatization of real estate sold by the government before August 2007. The law is not applicable, however, to certain enumerated properties. While expropriation disputes in Georgia are not common, some NGOs associated the creation of tourist zones with illegal revocation of historic ownership rights in Svaneti, Anaklia, Gonio, and Black Sea-adjacent territories. There were also reports that the government improperly used eminent domain to seize property in Tbilisi at unfairly low prices, particularly associated with the Tbilisi Railway Bypass Project.

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

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 set up by the United Nations Commission for International Trade Law (UNCITRAL) to resolve the dispute in accordance with the rules set forth by the treaty with the investor’s host country. The right to use ICSID or UNCITRAL arbitration is also guaranteed in the U.S.–Georgia Bilateral Investment Treaty.

Georgia is party to the International Convention on the Recognition and Enforcement of Foreign Arbitration Awards. As a result, the Government in principle agrees to accept binding international arbitration of investment disputes between foreign investors and the state, although in at least one instance investors claimed the government attempted to evade its obligation. The Ministry of Justice oversees the Government’s interests in arbitrations between the state and private investors.

It is recommended that contracts between private parties include a provision for international arbitration of disputes because of deficiencies in the Georgian court system. Litigation can take excessively long periods of time. Disputes over property rights have undermined 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.

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 such as commitments to maintain employment levels or to make additional investments within a specified period of time. The scope and time limit on licenses to extract natural resources have been a topic of dispute, and the Ministry of Energy has pulled several mining licenses then re-auctioned them. While many privatizations have proceeded smoothly and regularly, the 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 Georgian Government actively seeks U.S. investment and in 2011 established a Partnership Fund (www.partnershipfund.ge) that will float minority shares of state-owned companies on international markets and use the proceeds to incentivize foreign investment. The Government aggressively promotes foreign investment in targeted areas that hold growth potential, including hydro-electric power, agriculture, tourism, and apparel manufacturing. Georgia promotes itself as a transit and logistics hub for trade throughout the region. As part of this, the Government may offer investors state-owned land and structures at concessional prices; provide utility connections, construct/repair roads, and fund worker training. The Government has invested significant resources into infrastructure development since 2004, building new roads, railroads, utilities, and airports.

Right to Private Ownership and Establishment

Foreign and domestic private entities may freely establish, acquire, and dispose of interests in companies and business enterprises, and engage in all forms of remunerative activity. Some specific laws regulate business activity in the banking, agribusiness, energy, transport, and tourism sectors. To the extent that public enterprises compete with private enterprises, they do so on the basis of equality.

Foreign individuals and companies may buy non-agricultural land in Georgia. Agricultural land may only be purchased by Georgian citizens or companies in their own name. Foreign individuals may, however, purchase agricultural land by forming a Georgian corporation that may be up to 100 percent foreign-owned.

The U.S. Embassy strongly discourages the purchase of property in the Abkhazia or South Ossetia regions of Georgia. Land for sale in those regions may rightfully belong to internally displaced persons forced to leave the breakaway regions in the early 1990s and may have been placed improperly on the market. In such cases, the Government of Georgia considers the sale of property in Abkhazia and South Ossetia illegal and the property could be reclaimed by original owners at a future date.

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 fully bear fruit. It is recommended that contracts between private parties include a provision for international arbitration of disputes. November 2011 amendments to the Tax Code and the Law on Enforcement Proceedings made tax liens superior to all secured mortgages held by banks or financial institutions. As these changes are new, it is yet to be seen what impact this will have on the banking, legal, and audit sectors. There are concerns it could cause uncertainty for banks when evaluating their own balance sheets, since previously-unknown tax liabilities could surface and have priority over bank loans. Additionally, some observers hold the perception that economic regulations are selectively enforced against certain companies based on the company’s relationship with the government.

Protection of Intellectual Property Rights

Georgia acceded to the World Trade Organization (WTO) and the Trade-Related Aspects of Intellectual Property Rights (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 the World Intellectual Property Organization (WIPO) International Convention for the Protection of New Varieties of Plants. Georgia is a party to the Bern Convention, member of two WIPO digital treaties – the Copyright Treaty and the Performance and Phonograms Treaty - The Hague Agreement, and the Budapest Treaty Concerning the International Recognition of the Deposit of Microorganisms for the Purpose of Patent Procedures.

Six laws regulate intellectual property rights (IPR): 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, and sound recordings for 50 years.

Georgia has brought its legislation into line with international standards, but enforcement remains extremely weak and judges and lawyers lack sufficient knowledge of IPR laws and IPR issues. Pirated video and audio recordings, electronic games, and computer software are freely sold in Georgia. Although some government ministries have begun to purchase legal software, use of unlicensed software in government offices, private organizations, and businesses is common. Internet service providers host websites loaded with unlicensed content. The Ministry of Economy and Sustainable Development is responsible for WTO compliance. The Customs Department has developed an Intellectual Property Objects Register to assist in identification of counterfeit goods at the border, but the Register does not work as effectively as it could. IPR awareness is low and enforcement is hampered by frequent personnel changes. Georgia’s Patent and Trademark Agency (Sakpatenti) is responsible for coordinating IPR efforts country-wide, but does not exercise much of a coordinating role in practice.

Transparency of Regulatory System

The Georgian government has made a commitment to greater transparency and simplicity of regulation. The government publishes laws and regulations in Georgian in the official gazette, the Legislative Messenger. Since 2004, the government has reduced the number of taxes from 22 to 6. The tax on corporate profits is 15 percent. The Value Added Tax is 18 percent. The tax on personal income has been reduced from 25 percent to 20 percent and will further go down to 18% in 2013 and 15% in 2014. The dividend income tax rate dropped in 2009 from ten to five percent and is planned to be reduced to three percent in 2013 and zero percent in 2014. 2008 legislation abolished social taxes and set dividend and capital gains tax rates at zero with respect to publicly traded equities (defined as having a free float in excess of 25 percent). There are excise taxes on cigarettes, alcohol and fuel. In 2010, the government levied an excise tax on mobile telecommunication. Nearly all goods, except for some agricultural products, have no import tariff. For those with tariffs, the rates are five or twelve percent.

In 2010, the Georgian Parliament passed a new Tax Code aimed at increasing transparency in both policy and implementation. The Revenue Service began implementing the Code in early 2011. The Code introduced several new concepts into Georgian tax law including giving the Ministry of Finance the authority to issue legally binding advance rulings to companies on tax questions. Additionally, the Revenue Service will now consider the intent of a company when a tax mistake is made, and if the mistake is deemed to have been innocent, fines can be reduced or removed. The new Tax Code also includes tax benefits for micro and small business. In 2011 the Revenue Service took further steps to ease relations with businesses, including introducing a pilot program to outsource tax inspection to private auditing companies, allowing declaration of technical losses, and regulating the process of writing down fuel expenses.

The new Tax Code established the Office of the Business Ombudsman as an independent body accountable to the Parliament. The Business Ombudsman can investigate complaints filed by taxpayers with his office, and he has direct access to the Prime Minister, so he can elevate complaints quickly for resolution. The website www.businessombudsman.ge was launched in November 2011 to publish information on business registration, amendments to tax legislation, liabilities on cash counters’ use, rules of litigation, etc. Entrepreneurs may bring complaints to the Business Ombudsmen through this site as well. While the primary role of the Ombudsman is to help resolve tax matters, he also helps businesses with a variety of other complaints against the government. This new office has been popular with the business community.

In July 2011 the Parliament passed the Act of Economic Liberty, which imposes fiscal constraints on the government to reinforce the confidence of local and foreign businesses in the stability of Georgia’s economy. This law constitutionally prohibits the executive branch from moving away from its current fiscally conservative policies. It mandates that the budget deficit stay below three percent of GDP, total public debt below 60 percent of GDP, and budgetary expenditures below 30 percent of GDP. The Liberty Act bans introduction of new state taxes or increases in existing taxes (excise tax being an exception) by means other than a nationwide referendum. The Act also reiterated the Georgian Government’s commitment to free movement of capital by banning limitations on repatriation of money or exchange control for residents and non-residents, except in cases involving criminal liability or other instances defined by Georgian legislation.

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 about doing business in Georgia. They also provide specific information tailored to the needs of individual businesses. The Business Information Centers are also conducting an ongoing public-private dialog to facilitate communication between regulators and the business community.

International accounting standards became binding for joint stock companies in Georgia as of January 1, 2000. For other institutions, such as banks, 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 according to 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 in the past, many businesses operated in the shadow economy, or maintained two sets of books. Qualified accounting personnel are also in short supply.

Efficient Capital Markets and Portfolio Investment

Banking is one of the fastest growing sectors in the Georgian economy. As of January 2012, 19 commercial banks were registered in Georgia. HSBC, however, announced in September 2011 that it will withdraw from Georgia by early 2012 as part of a global restructuring.

The banking system currently consists of domestically-based small- and medium-sized banks, a handful of large banking institutions based in Tbilisi with subsidiaries (e.g., Societe Generale, Vneshtorgbank, Privat Bank), and two foreign banks with branches (Turkish Bank Ziraat and the International Bank of Azerbaijan). In the beginning of 2011, total assets of the country’s 19 commercial banks (16 of which have foreign capital) were around $6.4 billion. Credit from commercial banks is available to foreign investors as well as domestic clients, although interest rates are high. Banks continue offering business, consumer, and mortgage loans.

The International Finance Corporation (IFC), European Bank for Reconstruction and Development (EBRD), U.S. Overseas Private Investment Corporation (OPIC), Millennium Challenge Corporation (MCC), Asian Development Bank (ABD) and other international development agencies have a variety of lending programs that make credit available to large and small businesses in Georgia. In the beginning of 2011 there were 49 microfinance organizations operating in Georgia making small credits available to businesses.

The limited number of foreign banks operating in Georgia reflects, in part, the small size of Georgia’s financial market. Foreign investment in the sector, however, is significant, and is present in 16 out of 19 banks. More specifically, Russian, Kazakhstani, U.S., German, French, and UAE capital was invested in Georgian banks in 2011. Georgian banks remained solvent during the current global credit crisis largely due to the central bank-mandated 13 percent capital reserve requirement and conservative lending practices. The National Bank of Georgia (central bank) relaxed the capital reserve requirement to five 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. In order to promote development of the interbank money market and restore the relationship between interest rates, the NBG increased the reserve requirements for lari-denominated funds to 10% starting from April 2010. Legislation entering into force in January-February 2011 gradually increased reserve requirements for foreign liabilities from 5% to 15%.

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

The Georgian Stock Exchange (GSE) is the only organized securities market in Georgia. Designed and established with the help of USAID and operating under a legal framework drafted with the assistance of American experts, the GSE complies with global best practices in securities trading and offers an efficient investment facility to both local and foreign investors. The GSE’s automated trading system can accommodate thousands of securities that can be traded by brokers from workstations on the GSE floor or remotely from their offices. As of January 2011, 128 companies were traded on the GSE. In 2010, a total of 1.7 billion securities were traded at a value of 101.2 million lari (approx $58 million). The value of transactions made at the stock exchange amounted to 5.1 million lari (approximately $2.9 million). No law or regulation authorizes private firms to adopt articles of incorporation or association that limit or prohibit foreign investment, participation or control. “Cross-shareholder" or "stable-shareholder" arrangements are not used by private firms in Georgia. Georgian legislation does not protect private firms from takeovers. There are no regulations authorizing private firms to restrict foreign partners' investment activity or limit foreign partners' ability to gain control over domestic enterprises.

Political Violence

Georgia suffered considerable instability in the immediate post-Soviet period. After independence in 1991, civil war and separatist conflicts flared up in the areas of Abkhazia and South Ossetia. The status of each region remains contested, and the central government does not have effective control over these areas. The United States supports the territorial integrity of Georgia within its internationally-recognized borders. In August 2008, tensions in the region of South Ossetia culminated in a brief war between Georgia and Russia. Russia invaded and occupied portions of undisputed Georgian territory, destroyed portions of vital infrastructure, blocked the main east-west highway and blockaded the Georgian port of Poti. Nearly all damaged infrastructure has been repaired and commerce has returned to normal. While the separatist regions of South Ossetia and Abkhazia – where Russian troops and border guards have established a long-term presence -- have declared independence, thus far only Russia, Venezuela, Nicaragua, and the small island nations of Nauru and Tuvalu have recognized them. Tensions still exist and there are occasional reports of limited violence both inside the breakaway regions and near the administrative boundary lines, but other parts of Georgia, including Tbilisi, are not directly affected.

While violent street protests in Georgia are rare, police used excessive force to disperse a protest held on May 26, 2011. Dozens of people were injured and two people were killed by a swiftly-moving vehicle exiting the protest.


Under the leadership of President Saakashvili, Georgia has taken dramatic action to reduce corruption. Anti-corruption efforts have resulted in the arrests of former officials, the radical downsizing of state bureaucracies, and effective crackdowns on smuggling. Consequently, state revenue collections have increased several fold. The government completely disbanded the notoriously corrupt traffic police in mid-2004 and citizens’ service agencies have been reformed into one-stop-shops called Public Service Halls, now considered a showcase of Georgia’s successful reforms.

Articles 332-342 of the Criminal Code criminalize bribery. Senior public officials must file financial disclosure forms and Georgian legislation provides for civil forfeiture of undocumented assets of 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 15 years imprisonment and confiscation of property. Penalties for accepting a bribe start at six years in prison and can extend up to 15 years depending on the circumstances accompanying the offense. Penalties for giving a bribe can include a fine, a minimum prison sentence of two years, or both. In aggravated circumstances, when a bribe is given to commit an illegal act, the penalty can be from four to seven years. The definition of a public official includes foreign public officials and employees of international organizations and courts. White collar crimes such as bribery fall under the investigative jurisdiction of the Prosecutor's Office.

Georgia is not a signatory to the Organization for Economic Cooperation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Georgia has, however, ratified the UN Convention against Corruption. Georgia cooperates with the Group of States Against Corruption (GRECO) and the OECD’s Anti-Corruption Network for Transition Economies (ACN). The OECD conducted an assessment of Georgia in October 2009, releasing a report in March 2010 that concluded Georgia had significantly reduced corruption levels over the past four years. However, the report suggests that reforms should continue in order to strengthen the Anti-Corruption Interagency Council and improve judicial integrity.

Since 2003, Georgia has significantly improved its ranking in Transparency International’s Corruption Perceptions Index (CPI) report. The 2011 CPI ranked Georgia 64th out of 183 countries, improving on its 2010 ranking of 68 out of 178 countries. Transparency International credited Georgia for successful introduction of a transparent e-procurement system that makes government tender data accessible online to citizens and promotes e-governance. Transparency International concluded that perceived corruption in Georgia is lower than in several European Union member states, including Slovakia, Italy, Greece, Romania and Bulgaria, and much lower than in neighboring Armenia, Russia and Azerbaijan. In spite of this progress, TI’s recently published National Integrity System analysis shows that Georgia’s system of democratic checks and balances remains weak. The report found the judiciary, the media, and civil society to be too weak to serve as effective checks on the power of the executive branch, whose power remains largely secured by the ruling party’s constitutional majority in Parliament.

Bilateral Investment Agreements

Georgia has bilateral agreements on investment promotion and mutual protection with 32 countries, including the United States, Armenia, Austria, Azerbaijan, Belgium, Bulgaria, China, Czech Republic, Estonia, Egypt, Finland, France, Germany, Greece, Iran, Israel, Italy, Kazakhstan, Kyrgyzstan, Kuwait, Latvia, Lithuania, Luxemburg, Moldova, Netherlands, Romania, Sweden, Turkey, Turkmenistan, Uzbekistan, the United Kingdom, and Ukraine. Negotiations are underway with the governments of 24 countries: Bangladesh, Belarus, Bosnia and Herzegovina, Croatia, Cyprus, Denmark, Iceland, India, Indonesia, Jordan, Korea, Lebanon, Malta, Norway, Philippines, Portugal, Saudi Arabia, Slovakia, Slovenia, Spain, Switzerland, Syria, Tajikistan, and Qatar. 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 (though trade is restricted by the Russian Government), Kazakhstan, Azerbaijan, Armenia, Moldova, Turkmenistan, and Turkey. An agreement is signed, but not yet ratified, with Uzbekistan. In December 2011, Georgia and the European Union agreed to begin negotiations on a Deep and Comprehensive Free Trade Agreement. Georgia has ongoing free trade agreement consultations with Belarus, Kyrgyzstan, the Cooperation Council of Gulf Arab States, and Tajikistan.

On January 30, 2012, President Obama announced after an Oval Office meeting with Georgian President Saakashvili that the United States and Georgia had agreed to initiate a high-level dialogue between the two countries with the goal of strengthening trade relations, including the possibility of a free trade agreement.

OPIC and Other Investment Insurance Programs

Since 1993, OPIC, the U.S. Government’s development finance institution, has committed $406 million in financing and political risk insurance for 33 projects in Georgia. OPIC investment in Georgia has traditionally focused on the following sectors: credit for small and medium-sized enterprises, renewable energy, housing, manufacturing, tourism, agriculture and financial services. A recent example is OPIC’s $58 million commitment to finance the construction of a 46-megawatt hydropower plant that will export electricity to Turkey. OPIC also committed an $8 million loan to expand a winery operation, and $3.9 million to build a cold storage facility.


Georgia offers an abundant supply of skilled and unskilled labor at attractive costs compared not only to Western European and American standards, but also to Eastern European standards. 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 United States, 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 Georgia’s market economy. Unemployment remains high (16.3 percent in 2010) 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. The 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 (four months) of paid maternity leave and, together with unpaid leave, up to 16 months. Under the Labor Code, a contract of employment may bar an employee from using the knowledge and qualifications obtained while performing his duties with another employer. This provision may remain in force even after the termination of labor relations.

Employers are not 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 20 percent in 2009, shifting the employer's tax burden to the employee. The state social security system provides modest pension and maternity benefits. The minimum monthly pension is 100 lari ($61), although the government announced plans to increase it to 140 lari ($84) as of September 2012. The average monthly salary in Georgia in 2011 was 598 lari ($365). The average monthly salary for state sector employees was 539 lari ($329) and for the private sector 661 lari ($403). The minimum wage for government employees is 115 lari ($70) per month. The official minimum wage in the private sector has not changed since the early 1990’s and stands at 20 lari ($12) per month, but is not applied in practice.

Georgia has signed multiple International Labor Organization 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.

The Government has failed to enforce a number of minimum ILO standards, and the relationship between the Government and labor organizations is contentious. Organized labor complains that the government interferes in dues collection and in workers’ ability to organize and bargain collectively. On September 10, 2010, the AFL-CIO registered a petition against the Government of Georgia requesting Georgia’s removal from the Generalized System of Preferences (GSP) program that gives duty-free treatment to most Georgian goods due to the Government’s unwillingness to enforce Labor Code standards as required by the ILO treaty convention. The U.S. Trade Representative accepted the petition and a hearing took place in Washington on January 24, 2012. The Georgian government pledged to make changes to its labor laws at the hearing.

Foreign Trade Zones/Free Ports

In June 2007, the Parliament of Georgia adopted a Law on Free Industrial Zones, which defined the form and function of free industrial/economic zones. Financial operations in such zones may be performed in any currency and foreign companies operating in free industrial zones will be exempt from taxes on profit, property and VAT. UAE-based RAK Investment Authority (Rakia) purchased 100 percent of the shares of LLC Poti Sea Port in 2008 and began development of a free economic zone on 300 hectares of land adjacent to the port. Rakia sold 80% of the Port to APM Terminals, based in the Netherlands but part of the Danish A.P. Moller-Maersk group, in 2011, but maintains the largely undeveloped free industrial zone.

Georgia’s second free industrial zone is a 27 hectare plot in the city of Kutaisi. The Egyptian company Fresh Electric constructed a kitchen appliances factory in 2009 in the free industrial zone. The company has committed to build about one dozen textile, ceramics, and home appliances factories in the zone, and announced its intent to invest over $2 billion. Information on Georgia’s free industrial zones is available at www.georgia.gov.ge.

Foreign Direct Investment Statistics

Foreign Direct Investment (FDI) in Georgia dramatically increased during the periods of 1997-1998, 2003-2004, and 2006-2008. The first two peaks were related to the construction of the Baku–Supsa and Baku-Tbilisi-Ceyhan oil pipelines that bring Caspian oil and gas to European markets. FDI inflows in 2006-2007 hit historical highs due to the privatization of many state-owned enterprises and the impact of economic reforms. FDI totaled $1.1 billion (15.3 percent of GDP) in 2006, more than doubling the 2005 total of $0.4 billion. In 2007, FDI almost doubled again to $2.0 billion. The August 2008 conflict with Russia, however, undermined investor confidence and the subsequent global financial crisis further restricted FDI. 2008 and 2009 saw sharp decreases in FDI and 2010 saw a modest increase. Although official 2011 data will not be released until March 2012, the Government projects 2011 FDI to be $984 million. Netherlands topped the list of 2011 FDI due to the Dutch-based APM Terminals’ purchase of Poti Port.

Official statistics on FDI inflow from 2008 to-Q3 2011 are as follows:



FDI Inflows in USD, thousands

















2011 (Q1-3)


2011 Projection


FDI by Country of Investment in USD, thousands





2011 Q1-3











Czech Republic























































Virgin Is(Brit)





FDI by Sector in USD, thousands





2011 (Q1-3)




































Real estate





Other services















Not stated