GEORGIA: INVESTMENT CLIMATE STATEMENT FOR 2008

UNCLAS SECTION 01 OF 12 TBILISI 000199

SIPDIS

SIPDIS

STATE FOR EUR/CARC, EEB/CBA, EEB/IFD/OIA AND EEB/TPP/BTA
COMMERCE FOR 4231 DANICA STARKS
STATE PASS USTR

E.O. 12958: N/A
TAGS: EINV PGOV OPIC KTDB USTR GG
SUBJECT: GEORGIA: INVESTMENT CLIMATE STATEMENT FOR 2008

REF: STATE 158802


1. Per reftel, Embassy Tbilisi submits its Investment Climate
Statement for Georgia for 2008.

Introduction

The dramatic change of government swept in by the 2003 peaceful
"Rose Revolution" marked the start of serious political and economic
reform in Georgia. Before 2003, Georgia's economic development
suffered from a reputation for instability, violence, corruption,
and unreliable supplies of energy. The picture has significantly
changed for the better. Since 2004, the Georgian government has
undertaken institutional reforms including the restructuring and
downsizing of government ministries, privatizing large state-owned
entities, increasing the pay of public servants and prosecuting
corruption, reducing the number and rates of taxes and improving tax
and fiscal administration, streamlining licensing requirements,
deregulating, simplifying customs and border formalities, and
undertaking many other efforts to make it easier to do business in
Georgia.

The World Bank recognized Georgia as the world's fastest reforming
economy in its 2007 "Doing Business" report, and its 2008 report
ranks it as the world's 18th easiest place to do business, in league
with countries such as Switzerland, Estonia and Belgium. Georgia is
ranked ahead of France, Germany and the Netherlands. The World
Bank's "Anti-Corruption in Transition 3" report places Georgia among
the countries showing the most dramatic improvement in the fight
against corruption, due to implementation of a strong program of
economic and institutional reform. The report indicates that the
amount of money companies spend on bribes fell substantially in the
period covered. NATO granted Georgia "Intensified Dialogue" in
2006, an important step on the path to membership in that
organization. The Georgian government is firmly committed to a
peaceful resolution of its differences with the separatist regions
of Abkhazia and South Ossetia. Reforms have increased tax revenues,
facilitating public investment and social sector expenditure to
address poverty. Electricity distribution has become much more
reliable. Paying customers in most parts of Georgia can count on
consistent 24-hour a day service, although service can still be a
problem in some remote rural areas.

The World Bank "Doing Business - 2008" report provides objective
measures of business regulations and their enforcement across 178
countries and is a guide for evaluating regulations that directly
impact economic growth. In terms of the pace of economic reform
over 2007, The World Bank ranks Georgia fifth after Egypt, Croatia,
Ghana, and FYR Macedonia. This is Georgia's third straight year in
the top five in this category. Last year Georgia ranked as the top
reformer, and it was number two in 2005. Georgia moved up
significantly in the overall ranking of countries for ease of doing
business, leaping from thirty seventh in 2006 to eighteenth place in

2007. Estonia, ranked seventeenth, is the only former Soviet
country ahead of Georgia. For comparison, Latvia is number 22,
Lithuania number 26, Armenia number 39, Azerbaijan number 156 and
Russia number 166.

Among the specific achievements for which the IFC credits Georgia is
strengthening investor protections by amendments to its securities
law that eliminate loopholes that had allowed corporate insiders to
expropriate minority investors. Georgia adopted a new insolvency
law that shortens timelines for reorganization of a distressed
company or disposition of a debtor's assets. It sped up the
approval process for construction permits and simplified procedures
for registering property. It made starting a business easier by
eliminating the paid-in capital requirement. In addition, the
country's private credit bureau added payment information from
retailers, utilities, and trade creditors to the data it collects
and distributes.

The World Bank report also credits Georgia for easing the entry of
new firms. Georgia now has 15 registered businesses per 100 people
(the same ratio as Malaysia). Georgia increased disclosure
requirements for directors' conflicts of interest, detailed stricter
duties to firms by directors, and heightened penalties for
self-dealing. Georgia also improved in regard to licensing
practices.

Georgia scored high in Economic Freedom Report jointly undertaken by
the Heritage Foundation and the Wall Street Journal. The 2008 Index
of Economic Freedom measures 162 countries across 10 specific
factors of economic freedom, such as Business Freedom, Trade
Freedom, Fiscal Freedom, Freedom from Government, Monetary Freedom,
Investment Freedom, Financial Freedom, Property Rights, Freedom from
Corruption, and Labor Freedom. Georgia's economy is above average

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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, Slovak Republic,
and Czech Republic. Georgia is ranked 18th out of 41 countries in
the European regions, and its overall score is equal to the European
regional average. According to the report, Georgia scores highly in
business freedom, fiscal freedom, freedom from government,
investment freedom and labor freedom, but needs improvement in the
areas of property rights protection and corruption.

Prudent fiscal and monetary policies have supported a relatively
stable macro-economic environment and permitted the government to
pay attention to further reform. The economy grew by 9.3 percent in
2005, and 9.4 percent in 2006 despite economic sanctions imposed by
Russia, normally Georgia's most important export market. Growth in
2007 is estimated at about 12%. GDP per capita in 2006 was USD 1763
and at purchasing power parity is estimated to be USD 4176 in 2007.
Inflation for 2006 was about 8.8%, and increased in 2007 to around
11.0%. The government is committed to keeping inflation under 10%
in 2008.

The Georgian Lari strengthened from 1.7 to about 1.6 per U.S. dollar
over the course of 2007, influenced by global weakness of the
dollar, inflows of foreign investment and increased focus on
inflation by the Central Bank. Based on the economy's overall
performance and the Georgian government's strong commitment to
structural changes, Georgia received its first sovereign credit
rating in late 2005 from Standard and Poors -- a B+ long term, and B
short term rating. Fitch rating service has given Georgia a BB-
rating.

Despite the foregoing improvements in the economy, more than 25
percent of the population lives below the poverty line, and many
people still rely on subsistence agriculture. Greater familiarity
with Western business practices and legal norms is required.
Physical infrastructure, such as the road network, saw considerable
improvement over 2005-2007, though it still needs upgrading,
especially in rural areas. Since most natural gas for heating and
electricity generation is imported, Georgia needs to plan its use of
energy carefully, diversify sources, and improve the efficiency of
systems. Rehabilitation of existing hydroelectric power plants and
construction of new ones is gradually reducing Georgia's dependence
on imported energy.

The main source of sustained future growth that reduces poverty and
increases employment will have to be private investment, both
domestic and foreign. The most useful investment will have an
emphasis on exports to new and more diverse markets. The
government's challenge is to implement existing legislation,
continue the fight against corruption, defuse tensions in the
separatist regions and undertake new reforms, especially to improve
the judicial system, in order to increase investor confidence.

Georgia receives large amounts of assistance from the United States,
the European Union and international institutions. U.S. assistance
has focused on the goals of improving the rule of law, governance
and the administration of government economic and financial
institutions, improving critical physical infrastructure, enhancing
private sector competitiveness and promoting the growth of a free
market economy. In 2006, Georgia's clear-cut commitment to reform
earned it one of the first compacts with the U.S. Millennium
Challenge Corporation, which will supply $295 million in
infrastructure investments and investments in small and medium
enterprises engaged in tourism and agriculture.

President Saakashvili and his government have strengthened Georgia's
bilateral relations with many countries, reaching out to Ukraine,
Turkey, Italy, Poland, Latvia, Lithuania, Estonia, Japan,
Kazakhstan, the UK, Germany, the Netherlands, and of course, the
United States. Georgia has a partnership agreement with the
European Union, and an action plan for reform to allow a closer
relationship. Georgia maintains the goal of eventual membership in
the European Union. Georgia is one of only fifteen countries in the
world that benefit from GSP+ access to the EU market, allowing
duty-free access for more than 7000 products. It is making an
effort to harmonize its regulatory environment with international
standards, particularly those established by the EU. Georgia enjoys
duty-free trade with other former Soviet Union countries. It
benefits from preferential trading relationship with the United
States, Turkey, Canada, Switzerland and Japan. In 2007 Georgia
signed a free trade agreement with Turkey and a Trade and Investment
Framework Agreement and an Open Skies Agreement with the United
States. Discussion of a free trade agreement with the European
Union is under way.

Georgia is located at the crossroad between Europe and Asia. It is

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the shortest route from Central Asia to Europe, and could be a
North-South Bridge between Turkey and the Russian Federation.
Georgia has two deep-water ports on its Black Sea coast. Labor
costs in Georgia are comparable to the Far East, while transit time
for shipment of goods to Europe is far less. The new government has
launched an extensive road rehabilitation project aimed at upgrading
the road quality and constructing new facilities to improve
communication infrastructure. The governments of Turkey, Azerbaijan
and Georgia have agreed to construct a rail link from Kars, Turkey
through Georgia to Baku, Azerbaijan. Freight from Europe will be
able to be transported through Turkey to Baku via Tbilisi and then
to Central Asia from Baku by ferry. Ongoing construction of a
tunnel under the Bosporus at Istanbul means freight will soon be
able to travel from Georgia directly into Europe. In addition,
Georgia is improving its network of rail ferry connections with
Black Sea countries, including Russia, Ukraine, Romania and Turkey,
which will further increase transportation and trade turnover with
these countries.

Georgia's relations with its northern neighbor Russia have been
problematic since 2004, principally because of Georgia's pro-Western
orientation. In 2005 and 2006, Russia banned imports of Georgian
agricultural products, mineral water and wine, for which Russia was
Georgia's largest market. These restrictions continued into 2008,
but there are signs they may be lifted in the near future. In
September 2006, Russia cut all direct transport links with Georgia.
Gazprom, the Russian gas monopoly, quadrupled the price of natural
gas supplied to Georgia over two years. Despite these actions, the
Georgian economy has continued to grow. Georgian businesses are
actively seeking new markets for Georgian products and new sources
of imports, especially in Ukraine, the Baltics and Central Europe.
New supplies of natural gas from Azerbaijan and increased
hydroelectric generating capacity are making Georgia less dependent
on Russian energy sources. Once normal trading relations with
Russia are resumed, the return of its traditional market in addition
to the newly developed ones will create significant opportunities
for companies based in Georgia.

Openness to Foreign Investment

Georgia is extremely open to foreign investment and is eager to
welcome new investors. The country is developing a regulatory
framework intended to foster competition. Legislation governing
foreign investment establishes favorable conditions, but not
preferential treatment, for foreign investors. The Law on Promotion
and Guarantees of Investment Activity protects foreign investors
from subsequent legislation that alters the condition of their
investments for a period of ten years.

The U.S.-Georgia Bilateral Investment Treaty, in force since 1994,
guarantees U.S. investors national treatment or most favored nation
treatment, whichever is better, in the establishment, operation and
sale of their investments. Exceptions to national treatment may be
made by Georgia for investments in maritime fisheries; air and
maritime transport, and related activities; ownership of broadcast,
common carrier, or aeronautical radio stations; communications
satellites; government-supported loans, guarantees, and insurance;
and landing of submarine cables.

Legislation governing foreign investment includes the Constitution,
the Civil Code, the Tax Code, and the Customs Code. Other
legislation includes the Law on Entrepreneurs, the Law on Promotion
and Guarantees of Investment Activity, the Bankruptcy Law, the Law
on Courts and General Jurisdiction, the Law on Limitation of
Monopolistic Activity, the Accounting Law, and the Securities Market
Law.

Georgia has negotiated 34 agreements for avoidance of double
taxation, of which 22 have entered into force. The active
agreements are with Uzbekistan, Azerbaijan, Ukraine, Romania,
Bulgaria, Turkmenistan, Armenia, Kazakhstan, Iran, the Netherlands,
Greece, Italy, Belgium, Lithuania, Latvia, United Kingdom, China,
Austria, Poland, Czech Republic and Estonia. Until treaties with
France and Germany enter into force, a similar agreement signed by
the USSR governs the issue. An agreement with Russia was signed in
1999 and ratified by the Georgian parliament in 2000. It has not
been ratified by the Russian Duma, but the Russian side regards it
as an active agreement. Treaties with Germany, France, Denmark,
Finland and Turkey have been ratified by Georgian parliament and are
awaiting ratification by the respective countries in order to enter
into force.

The legal framework governing ownership and privatization of
property is established by the following acts: the Civil Code, the
Law on Ownership of Agricultural Land, the Law on Private Ownership
of Non-Agricultural Land, the Law on Management of State-Owned

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

Georgia does not screen foreign investment in the country, other
than imposing a registration requirement and certain licensing
requirements as outlined below. Foreign investors have participated
in most of the major privatizations of state-owned property.
Transparency of such privatizations has at times been an issue,
however. No law specifically authorizes private firms to adopt
articles of incorporation which limit or prohibit foreign
investment.

In 2005, registration of businesses was simplified. Paperwork and
fees were reduced and processing time shortened to about 8-10 days
from the submission of documents. All companies are required to
register with the Ministry of Finance, providing founder's and firm
principals' names, dates and places of birth, occupations and places
of residence; incorporation documents; area of activity; and charter
capital. This information is made public and any person may request
and review such information. Business registration and tax
registration are separate procedures handled by the same department
within the Ministry of Finance.
The Government of Georgia has privatized most of the largest
formerly state-owned enterprises in the country. A list of entities
still available to be privatized can be found on the website
www.privatization.ge. Information on investment conditions and
opportunities can be obtained from the Georgia National Investment
and Export Promotion Agency, e-mail: info@investingeorgia.org,
www.investingeorgia.org. Further information is available at a
website maintained by the American Chamber of Commerce in Georgia,
www.investmentguide.ge. The World Bank's evaluation of business
conditions in Georgia is available at
www.doingbusiness.org/documents/
countryprofiles/geo.pdf.

In 2005, 84% of existing licensing requirements were eliminated and
a "one stop shop" for licenses was created. By law, the government
has 30 days to make a decision, and if no reasonable ground for
rejection is stated by the licensing authority within that time, the
license or permit is deemed to be issued. Construction permits can
be obtained within 90 days, according to research published by the
European Union. Licenses are only required for activities that
affect public health, national security and the financial sector.
Licensing currently is required in the following areas: weapons and
explosives production, narcotic, poisonous and pharmaceutical
substances, exploration and exploitation of renewable or
non-renewable substances, exploitation of natural resource deposits,
establishment of casinos and gambling houses and the organization of
games and lotteries, banking, insurance, trading in securities,
wireless communication services, and the establishment of radio and
television channels. The law requires the state to retain a
controlling interest in air traffic control, shipping traffic
control, railroad control systems, defense and weapons industries,
and nuclear energy. Only the state may issue currency, banknotes
and certificates for goods made from precious metals, import
narcotics for medical purposes, and produce control systems for the
energy sector.

Conversion and Transfer Policies

Georgian law guarantees the right of an investor to convert and
repatriate income after payment of all required taxes. The investor
is also entitled to convert and repatriate any compensation received
for expropriated property. Moreover, Georgia has accepted the
obligations of Article VIII, Sections 2, 3, and 4 of the IMF
Articles of Agreement, with effect from December 20, 1996. IMF
members accepting the obligations of Article VIII undertake to
refrain from imposing restrictions on payments and transfers for
current international transactions and from engaging in
discriminatory currency arrangements or multiple currency practices
without IMF approval. By accepting the obligations of Article VIII,
Georgia gives confidence to the international community that it will
pursue sound economic policies that will obviate the need to use
restrictions on the making of payments and transfers for current
international transactions.

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


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Foreign investors have the right to hold foreign currency accounts
with authorized local banks. The sole legal tender in Georgia is
the Lari (GEL),which is traded on the Tbilisi Interbank Currency
Exchange and in the foreign exchange bureau market. There is no
difficulty in obtaining foreign exchange or significant delays in
remitting funds overseas through normal channels. Several Georgian
banks participate in the SWIFT and Western Union interbank
communication networks. Businesses report that it takes a maximum
of three days to transfer money abroad. There are no known plans to
change remittance policies. Travelers must declare at the border
currency and securities in their possession valued at more than GEL
30,000 (USD 18,750).

Expropriation and Compensation

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

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

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

Dispute Settlement

The Georgian investment law allows disputes between a foreign
investor and a governmental body to be resolved in Georgian courts
or at the International Center for the Settlement of Investment
Disputes (ICSID),unless a different method of dispute settlement is
agreed upon between the parties. If the dispute is not considered
at ICSID, the foreign investor has the right to submit the dispute
to any international arbitration body which has been set up by the
United Nations Commission for International Trade Law (UNCITRAL) to
resolve the dispute in accordance with the rules established under
the arbitration and international agreement. Under the U.S.-Georgia
Bilateral Investment Treaty, investors have additional rights.

Georgia is party to the International Convention on the Recognition
and Enforcement of Foreign Arbitration Awards. As a result, the
Government agrees to accept binding international arbitration of
investment disputes between foreign investors and the state. The
Ministry of Justice was designated in December 2005 to oversee the
government's interests in arbitrations between the state and private
investors.

It is recommended that contracts between private parties include a
provision for international arbitration of disputes because of
deficiencies in the Georgian court system. Litigation can take
excessively long periods of time. There is concern about the
adequacy of training of judges and about their susceptibility to
pressure from the government or other outside influences.

Performance Requirements and Incentives

Performance requirements are not a condition of establishing,
maintaining or expanding an investment, but have been imposed on a
case-by-case basis in some privatizations, for example, commitments
to maintain employment levels or to make additional investments
within a specified period of time. While many privatizations have
proceeded smoothly and regularly, the current government has used
non-fulfillment of performance requirements to justify rescinding
privatizations and re-selling enterprises, usually for higher

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prices, sometimes to the benefit of other interested parties.

Most types of performance requirements are prohibited by the
U.S.-Georgia Bilateral Investment Treaty.

The Government of Georgia does not offer incentives to foreign
investors, but relies on the many improvements it has made in the
overall business climate to attract them to invest in the country.

Right to Private Ownership and Establishment

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

Foreign individuals and companies may buy non-agricultural land in
Georgia. Only Georgian citizens or companies may buy agricultural
land in their own name, but even agricultural land can be purchased
by forming a Georgian corporation that may be up to 100%
foreign-owned.

Investors should exercise extreme caution in purchasing property in
Abkhazia. Land for sale rightfully may belong to internally
displaced persons forced to leave Abkhazia in the early 1990s and
may have improperly been placed on the market by the de facto
authorities in Abkhazia. The government of Georgia considers the
sale of property in Abkhazia illegal under Georgian law and property
could be reclaimed by original owners at a future date.

Protection of Property Rights

Secured interests in both real and personal property are recognized
and recorded. However, deficiencies in the operation of the court
system can hamper investors from realizing their rights in property
offered as security. Foreign investors' interests have sometimes
been harmed by biased court proceedings, and by legislation and
decrees that clearly favor a Georgian entity or partner involved in
the enterprise. Judicial reform has been identified as a top
priority for the Georgian government since late 2005, but it will
take some time for court and legal reforms to bear fruit. It is
recommended that contracts between private parties include a
provision for international arbitration of disputes.

Disputes over property rights made headlines in 2005-2007. These
cases have tended to undermine confidence in the impartiality of the
Georgian judicial system and rule of law, and by extension,
Georgia's investment climate. Both foreign and Georgian investors
have expressed reservations about the competence, independence and
impartiality of court decisions. In a few cases lower court
decisions have changed control of property or of entire enterprises
on questionable legal grounds or on the basis of forged documents.
In some cases these decisions have been reversed by higher courts or
government action, in others not.


Protection of Intellectual Property Rights

Georgia acceded to the WTO and the TRIPS agreement in 2000. In
2004, the Georgian parliament ratified the Rome Convention for
Protection of the Rights of Performers, Producers of Phonograms and
Broadcasting Organization, and the Lisbon Agreement on Denomination
of Origin. In 2005, Georgia joined WIPO International Convention
for the Protection of New Varieties of Plants. Georgia is a party
to the Bern Convention, member of the two WIPO digital treaties -
Copyright Treaty and Performance and Phonograms Treaty, the Hague
Agreement, and Budapest Treaty Concerning the International
Recognition of the Deposit of Microorganisms for the Purpose of
Patent Procedures.

Six laws regulate intellectual property rights. These include: the
Law on Patents, Law on Trademarks, Law on Copyrights and Neighboring
Rights, Law on Appellation of Origin and Geographic Indication of
Goods, Law on Topographies of Integrated Circuits, and Law on IP
Related Border Measures. Georgian law now provides retroactive
protection for works of literature, art and science or sound
recordings for 50 years.

While Georgia has brought its legislation into line with
international standards, enforcement remains problematic. Pirated
video and audio recordings, electronic games and computer software
are freely sold in Georgia. Use of unlicensed software in
government offices and businesses is common. Internet service

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providers host websites loaded with unlicensed content.
Responsibility for WTO compliance was recently been transferred to
the Ministry of Economic Development, which still needs to develop
its capacity in this regard. The Customs Department is developing a
new Intellectual Property Objects Register to assist in
identification of counterfeit goods at the border. Nevertheless,
IPR awareness in the Department is low and hampered by frequent
personnel changes. Further clarification of responsibilities
between the Ministry of Internal Affairs and the Ministry of Finance
is needed, as the MOIA has authority over some types of property
rights protection, and the Ministry of Finance over others. Judges
and lawyers lack training in IPR issues. Georgia's Patent and
Trademark Agency needs greater familiarity with emerging
technologies.

Transparency of Regulatory System

The Georgian government has made a commitment to greater
transparency and simplicity of regulation. Laws and regulations are
published in Georgian in the official gazette, the Legislative
Messenger. The tax on corporate profits is 20% and the tax on
personal income is a flat 25% after a 2007 law increased the
personal income tax and eliminated the employer-paid social tax on
wages. The Value Added Tax is 18%. The number of taxes has been
reduced from twenty-two to six. There are excise taxes on
cigarettes, alcohol, and fuel. Only three rates of import duties
exist, zero, 5% and 12%, and nearly all goods, except for some
agricultural products, are taxed at the zero rate.

The Georgian National Investment and Export Promotion Agency has
established Business Information Centers in Tbilisi and other
Georgian cities. These centers are intended to provide domestic and
foreign businesses with a standard package of information relevant
to doing business in Georgia, and specific information according to
the needs of individual businesses. The Business Information
Centers are also conducting an ongoing public-private dialog to
facilitate communication between regulators and the business
community.

International accounting standards became binding for joint stock
companies in Georgia from January 1, 2000. For other institutions,
such as banking institutions, insurance companies and companies
operating in the field of insurance, as well as limited liability
companies, limited partnerships, joint liability companies, and
cooperatives the standards became binding on January 1, 2001.
Private companies (excluding sole entrepreneurs, small businesses
and non-commercial legal entities) are required to perform
accounting and financial reporting in accordance with international
accounting standards. Sole entrepreneurs, small businesses and
non-commercial legal entities perform accounting and financial
reporting following simplified interim standards approved by the
Parliamentary Accounting Commission. Despite the legal requirement,
the conversion to international accounting standards is going
slowly, in part because many businesses have operated in the shadow
economy, or maintained two sets of books. Qualified accounting
personnel are in short supply.

Efficient Capital Markets and Portfolio Investment

The Georgian banking system is growing quickly. Currently, the
banking system consists of regional small- and medium-sized banks, a
handful of large banking institutions based in Tbilisi with branch
networks, and three foreign banks (American, Turkish, and
Azerbaijani). In 2007, commercial bank assets grew by 70% and the
profit of commercial banks grew by 65%. Total assets of the
country's 19 banks (13 of which have foreign capital) were $4.5
billion at the end of 2006, 45% of GDP.

Credit from commercial banks is available to foreign investors as
well as domestic clients. Banks offer credit cards and a variety of
loans including mortgage loans. In addition, the International
Finance Corporation, European Bank for Reconstruction and
Development, the U.S. Overseas Private Investment Corporation, the
Millennium Challenge Corporation and other international development
agencies have a variety of lending programs that make credit
available to large and small businesses in Georgia.

The limited number of foreign banks operating in Georgia reflects in
part the small size of Georgia's financial market. However, foreign
investment in the sector is significant, accounting for 67.6% of
total bank capital in 2007. In 2005 Russian, Kazakh, U.S., and
German capital was invested in Georgian banks. In September 2006,
the French bank Societe Generale acquired 60% of one of the leading
Georgian banks, Bank Republic. In 2007 growing interest towards
Georgia's banking sector was demonstrated by the entrance of the
British bank HSBC into Georgia.

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Domestic credit to the private sector rose by more than 70 percent
in real terms during 2007. The law on commercial bank activities has
been amended to improve the transparency of ownership and corporate
governance of banks. In March 2006 the restriction under which one
shareholder or a group of joint shareholders could hold no more than
25 percent of voting shares in a bank was abolished. A new law
regulating the activity of microfinance organizations came into
force in August 2006.

The National Securities Commission of Georgia regulates the
securities market. All joint stock companies with more than 50
shareholders -- currently about 1800 companies in Georgia -- are
required to submit annual, semi-annual and current reports prepared
in accordance with internationally accepted accounting standards.

The small Georgian Stock Exchange was established with assistance
from USAID in 1999. The stock market organizes public trading of
securities and disseminates information on trading results and
prices. The GSE has a Memorandum of Cooperation with the
Thessaloniki Stock Exchange Center for harmonization of trading
platforms. Shares of 57 companies were traded on the GSE in 2007,
down from 90 in 2006. In 2007, the GSE executed 6,908 trades, with
a total value of GEL 38.8 million (around $23.5 million)

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

Political Violence

Georgia suffered considerable instability in the immediate
post-Soviet period. After independence in 1991, civil war and
separatist conflicts flared up in the areas of Abkhazia and South
Ossetia. The status of each region remains unresolved and the
central government does not have effective control over these areas.
However, neither Abkhazia nor South Ossetia has gained
international recognition. The United States supports the
territorial integrity of Georgia within its
internationally-recognized borders. Small scale acts of violence
between Georgians and Ossetians within South Ossetia, and Georgians
and Abkhaz within the ethnic-Georgian Gali District inside Abkhazia,
sometimes raise tensions. Other parts of Georgia, including
Tbilisi, are not affected by such violence.


Corruption

Corruption in Georgia, both official and otherwise, can distort
business transactions in Georgia. However, under President
Saakashvili, Georgia has taken action to reduce corruption.
Anti-corruption efforts have resulted in the arrests of former
officials, the radical downsizing of state bureaucracies, effective
crackdowns on smuggling and have contributed to an increase of about
50 percent in state revenue collections. The notoriously corrupt
traffic police were completely disbanded in mid-2004.

Articles 332-342 of the Criminal Code criminalize bribery. Georgian
legislation provides for civil forfeiture of undocumented assets
from public officials who are charged with corruption offenses.
Bribery is a criminal act under Georgian law, and Parliament
recently accepted a package of constitutional amendments that make
abuse of public office a criminal offense with a maximum penalty of
fifteen years imprisonment and confiscation of property. Penalties
for accepting a bribe start at 6 years in prison and can be up to 15
years depending on aggravating circumstances accompanying the
offense. Penalties for giving a bribe can include a fine or a
prison sentence from up to 2 years or both. In aggravating
circumstances when a bribe is given to commit an illegal act, the
penalty can be from 4 to 7 years. The definition of a public
official includes foreign public officials and employees of
International Organizations and Courts for purposes of such offenses
as accepting a bribe, giving a bribe and trading in influence.
Georgia's legislation does not allow a local company to deduct a
bribe to a foreign official from taxes. White collar crimes such as
bribery fall under the investigative jurisdiction of the
Prosecutor's Office.

The Government's September 2005 Anti-Corruption Strategy calls for
an effective state management system and legal and public feedback
mechanisms to prevent corruption. Among the goals of the strategy

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are the identification and analysis of conditions conducive to
corruption as well as elaboration of mechanisms for their
eradication, strengthening of principles of accountability and
public disclosure in the public sector, prosecution of lawbreakers
and facilitation of competitive development of the business sector.

According to the World Bank's "Anti-Corruption in Transition 3"
report, Georgia topped the list of transitional countries in terms
of anticorruption efforts. The report reviewed the 2002-2005 time
period and concludes that Georgia saw the largest reduction in
corruption among all transition countries. The World Bank points
out that strong leadership in Georgia was the driving force behind
the swift and thorough reforms that significantly reduced corruption
after 2002. The leadership has taken bold actions to lessen the
burden of the state on the economy, improve fiscal transparency, and
strengthen oversight of institutions, all of which has contributed
to the decline in corruption.

Georgia also significantly improved in Transparency International's
annual Corruption Perceptions Index, moving up from 99th place in
2006 to 79th in 2007, out of 180 countries. The Index ranks
countries in terms of the degree to which resident and non-resident
businesspeople and country analysts perceive corruption to exist in
the public and political sectors. Since the Rose Revolution,
Georgia's score has steadily improved. This year's gain means that
Georgia has moved out of the group of countries considered to have a
"rampant corruption problem" (those under 3.0). In comparison with
countries of the former Soviet Union, Georgia ranks well ahead of
Azerbaijan and Armenia, and is in fourth place, behind Latvia,
Lithuania and Estonia out of 15 countries listed in this category.

Georgia reasserted central control over the Black Sea region of
Adjara in May 2004, reducing illicit economic activity there.
Control of contraband smuggled through South Ossetia has improved,
however the Georgian government has raised concerns with Russia and
with the international community about continued high levels of
smuggling, money laundering, and even counterfeiting of U.S. dollars
in the areas outside its control.

Georgia is not a signatory to the OECD 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
with the UN convention. Georgia is expected to join the UN
convention earlier than the OECD Convention.

Georgia's cooperates with GRECO (Group of States Against Corruption)
and the OECD's Anti-Corruption Network for Transition Economies
(ACN). GRECO concluded in 2006 that Georgia had successfully
implemented reforms to implement the first round of its
anti-corruption recommendations. In 2003 ACN proposed an
anti-corruption action plan and 21 recommendations for Georgia. In
2006, the OECD positively assessed the progress of anti-corruption
measures, and considered all but four of its recommendations
implemented.

Bilateral Investment Agreements

Georgia has negotiated bilateral agreements on investment promotion
and mutual protection with 26 countries, including the U.S.,
Armenia, Austria, Azerbaijan, Belgium, Bulgaria, China, Egypt,
France, Germany, Greece, Iran, Israel, Italy, Kazakhstan,
Kyrgyzstan, Latvia, Moldova, Netherlands, Romania, Turkey,
Turkmenistan, Uzbekistan, the United Kingdom, Ukraine, Lithuania and
Finland. Internal procedures have been completed and drafts are
being negotiated with the governments of India, Bangladesh, Croatia,
Denmark, Norway, Philippines, Cyprus, Indonesia, Malta, Czech
Republic, and Iceland. Ongoing consultations are held with Belarus,
Tajikistan, Slovenia, Estonia, Slovakia, Bosnia-Herzegovina,
Switzerland and Jordan.

A free trade agreement is in force with the Commonwealth of
Independent States, and others exist bilaterally with Ukraine,
Russia, Kazakhstan, Azerbaijan, Armenia, Moldova and Turkey.
Agreements are signed but not ratified with Turkmenistan and
Uzbekistan. Ongoing consultations are being held with the European
Union, Belarus, Kyrgyzstan, Cooperation Council of Gulf Arab States
and Tajikistan.

OPIC and Other Investment Insurance Programs

Since 1993, OPIC has committed over $104 million in financing and
political risk insurance to projects in Georgia. Projects supported
include the development of hotel and office space, production of

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pharmaceuticals, food processing and farming, cold storage, banking,
mortgage lending, and financial leasing services. In FY 2007, there
were two new OPIC loan commitments in Georgia, amounting to $11.3
million.

Labor

Georgia offers an abundant supply of skilled and unskilled labor at
attractive costs compared not only to Western European and American
standards, but also to Eastern European. The labor force is among
the best educated and most highly trained in the former Soviet
Union. While some of the best qualified professionals and
technicians emigrated from Georgia (mostly to Russia, the U.S., and
Europe) after the Soviet Union's collapse, many have remained in the
country or returned from abroad and are attempting to find a new
role in a market economy. Unemployment remains high and job
creation has been a particular challenge.

The labor market in Georgia is one of the world's freest. Wage
negotiations take place between employees and employers, and trade
unions are not powerful. Labor, health and safety laws are not
considered an impediment to investment. A new labor code which
entered into force in June 2006 considerably liberalized labor
regulations. The code defines the minimum age for employment (16),
work hours (41 per week),annual leave (24 calendar days) and leaves
the rest to be regulated by agreement between the employer and
employee.

Payment of at least one month's salary is required if the employer
initiates a dismissal. Employees must give one month's notice of
intention to quit. No notice requirement is imposed on the employer
prior to dismissal. Employees are entitled to up to 126 days (4
months) of maternity leave, and together with unpaid leave, up to 16
months. Under the new Labor Code, a contract of employment may
bar an employee from using the knowledge and qualifications obtained
while performing his duties with another employer. This provision
may remain in force even after the termination of labor relations.

Starting from January 1, 2008, employers are no longer required to
pay social security contributions for employees. The former 12
percent income tax paid by employees and 20 percent social security
tax paid by employers on their employees' wages was merged into a
unified personal income tax at the rate of 25 percent in 2008,
shifting the employer's tax burden to the employee. The overall
effective tax rate paid by both self-employed persons and employees
has been reduced to 25 percent. The state social security system
provides modest pension and maternity benefits. The minimum monthly
pension is USD 35, and the government is proposing to increase it to
USD 100 by the end of 2008. The average monthly salary in the
third quarter of 2007 was GEL 576 (USD 360) for government employees
and GEL 385 (USD 240) for private sector employees. The minimum
wage for government employees is GEL 115 (USD 72) per month. The
minimum wage in the private sector has not changed in many years at
GEL 20 (USD 13) per month, but few if any workers earn so little.

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

Foreign Trade Zones/Free Ports

In June 2007 the Parliament of Georgia adopted a law on free
industrial zones, which sets forth the terms for forming and
functioning of free industrial/economic zones in the country.
Financial operations in such zones may be performed in any currency,
and foreign companies operating there will be exempt from taxes on
profit, property and VAT. Georgia's Ministry of Economic
Development has allocated a 400 hectare area adjacent to the Black
Sea Port of Poti for the first such zone. A tender for a 49 year
lease of the zone for private development of its infrastructure and
operation is under way.

Foreign Direct Investment Statistics

Foreign Direct Investment (FDI) in Georgia peaked several times. In
1997-1998 and 2003-2004 peaks were related to the construction of
pipelines, Baku-Supsa and Baku-Tbilisi-Ceyhan respectively.
However, despite completion of the pipelines, foreign investment
inflows in 2006 -2007 were larger than ever before, due to
privatization of state owned enterprises and the impact of economic
reforms. The total volume of FDI in Georgia in 2006 USD 1.1 billion

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(13% of GDP) and it increased 197% over the 2005 figure. FDI
inflows were estimated at USD 1.4-1.5 billion in 2007. Much of the
recent investment has been in the real estate and banking sectors.

Official statistics on Foreign Direct Investment (FDI) inflows
during recent years are as follows:

2000 - USD 131,232,000
2001 - USD 109,840,000
2002 - USD 167,362,000
2003 - USD 339,393,000
2004 - USD 497,827,000
2005 - USD 449,786,000
2006 - USD 1,091,100,000
2007(Q1-3) - USD 1,063,500,000

Breakdown of investments by major countries (USD 1,000's):

Countries 2002 2003 2004 2005

Total 167,362 339,393 497,786 1,091,140
UK 17,530 37,670 83,944 132,952
USA 82,271 72,132 77,550 15,033
Kazakhstan 0 0 0 0
Turkey 8,848 17,275 28,569 21,817
Norway 2,994 11,262 34,466 23,626
Azerbaijan 0 29,698 66,008 66,940
Italy 9,864 15,896 28,728 2,838
Cyprus 1,063 676 22,330 47,537
Russia 7,810 42,686 73,712 38,754
France 6,287 16,709 20,940 14,383

Countries 2006 2007
1-3Q

Total 1,091,140 1,046,267
UK 186,824 50,601
USA 182,651 80,095
Kazakhstan 152,310 74,475
Turkey 129,728 89,554
Norway 77,895 21,900
Azerbaijan 77,804 27,672
Italy 47,219 10,765
Cyprus 40,071 51,075
Russia 34,210 55,959
France 17,221 22,169

[Source: Georgian Ministry of Economic Development. Note: Russian
investments for 2004 are overstated, as they include investment
deals that were later annulled.]

Breakdown of investments by economic sector (USD 1,000's):

2002 2003 2004 2005

Total 167,362 339,393 497,827 449,785
Agriculture 890 784 965 5,042
Industry 29,523 49,204 66,013 110,175
Services 136,949 289,404 430,848 334,568

2006 2007
Total n/a 357,313
Agriculture n/a 9,700
Industry n/a 255,844
Services n/a 91,759

The U.S. has been one of the largest foreign investors in Georgia
since 1999. In 2000, the United States accounted for 30 percent of
FDI in Georgia; in 2001 for 25.7 percent of FDI, in 2002 -- 49
percent, in 2003 and 2004 these indicators were 21 percent and 16
percent respectively. In 2005 it accounted for only 4.1 percent and
went up to 16.7 percent in 2006.

The U.K., the U.S. and Kazakhstan were the top three investors in
2006 with USD 182 million, USD 181.9 million and USD 152 million
respectively, followed by Turkey, Norway and Azerbaijan. Russia,
with USD 27.8 million (USD 38.7 million in 2005) holds 11th place on
the list of investor countries, while its ranking was much higher in
previous years. According to 9 month data of 2007, the Netherlands
were topping the list of investors (16.6%),followed by the British
Virgin Islands (11.6%),Denmark (8.8%),Turkey (8.6%),the United
States (7.7%),Kazakhstan (7.1%) and Czech Republic (7.0%).
(Source: Ministry of Economic Development.)

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