GEORGIA: INVESTMENT CLIMATE STATEMENT FOR 2010

UNCLAS TBILISI 000198

DEPT FOR EUR/CARC, EEB/IFD, N. Hatcher, G. Hicks
PLEASE PASS TO USTR P. Burkhead, J. Kallmer

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB PGOV

SUBJECT: GEORGIA: INVESTMENT CLIMATE STATEMENT FOR 2010

REF: 09 STATE 124006


1. Per reftel, below is Embassy TbilisiQs Investment Climate Statement
for submission for 2009.

Introduction

Since 2004,, the Georgian Government has undertaken an ambitious
program to modernize and liberalize its economy. Institutional reforms
include restructuring and downsizing government ministries, privatizing
large state-owned entities, increasing public servant salaries,
reducing the number and rates of taxes, improving tax and fiscal
administration, streamlining licensing requirements, simplifying
customs and border formalities, and generally undertaking efforts to
make it easier to do business in Georgia. The current Georgian
leadership views liberal market economies like Singapore and Dubai as
models for economic growth. Prior to the August 2008 war with Russia
and the global financial crisis, the Georgian economy had experienced
multiple years of double-digit growth. Despite the dual shock, the
Georgian economy grew by 2.1 percent in 2008. In 2009, the Georgian
economy contracted by four percent.

In 2009, Georgia moved from 18 to 16 on the World BankQs QDoing
Business Report.Q In 2010, Georgia moved from 16 to 11. The report
measures business regulations and their enforcement across 183
economies. The report states that QGeorgia eased the process for
dealing with construction permits by introducing simplified, risk-based
approval processes and new time limits. The documentation requirements
for import and export were simplified, and there was a significant
decrease in the cost of trade.Q Georgia tops the rankings for the
region.

IFCQs 2009 report singled out the areas of Starting a Business,
Registering Property, Getting Credit and Paying Taxes as GeorgiaQs
priority achievements. In addition, new regulations guarantee the
right of borrowers to inspect their data at a private credit bureau,
helping to improve the quality and accuracy of credit information.
Amendments to the civil code, effective December 2007, address secured
transactions, allowing parties to a security agreement to agree to
out-of-court enforcement of the creditorQs security rights at the time
the parties sign the security agreement. The corporate income tax rate
was reduced from 20 percent to 15 percent, and the social tax
abolished. A new online business registry makes it easier to register
property by eliminating the requirement for legal entities to obtain
several pre-registration documents. This reform reduced the number of
procedures required to transfer a title from five to two, and the time
from five days to three. Registration fees were also reduced. Finally,
amendments to the Law on Entrepreneurs made it easier to start a
company by eliminating the requirements for minimum capital, a company
seal and a company charter and by making the use of notaries optional.

In the 2008 Report, The World Bank credited Georgia for strengthening
investor protections with amendments to its securities law which
eliminated loopholes allowing corporate insiders to expropriate
minority investors. Georgia adopted a new insolvency law shortening
timelines for reorganization of a distressed company or disposition of
a debtor's assets. The law shortened the approval process for
construction permits and simplified procedures for registering
property. It made starting a business easier by eliminating capital
requirements. In addition, the country's private credit bureau added
payment information from retailers, utilities and trade creditors to
Qpayment information from retailers, utilities and trade creditors to
the data it collects and distributes.

Georgia scored high in the Heritage Foundation/ Wall Street Journal
2009 Economic Freedom Report. This index measures 162 countries across
ten specific factors: 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 economic freedom score is 69.8, making its economy
the 32nd QfreestQ in the 2009 Index. Its overall score is 0.5 points
higher than 2008 due to improvements in business freedom, trade freedom
and freedom from corruption. Georgia's economy is qualified under the
category of 'moderately free', along with Spain, Austria, Norway, the
Slovak Republic, and the Czech Republic. Georgia is ranked 19 out of
43 countries in the European region, and its overall score is equal to
the European regional average. According to the report, Georgia scored
high in business freedom, fiscal freedom, freedom from government,
investment freedom, and labor freedom, but scored below the average in
the areas of property rights protection and corruption.
Judicial corruption remains a problem despite substantial improvement
in efficiency and fairness in the courts. Both foreigners and Georgians
continue to question the judicial system's ability to protect private
property and contracts. The enforcement of laws protecting intellectual
property rights is inadequate. However, the World BankQs
QAnti-Corruption in Transition 3Q 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.
Georgia also significantly improved in Transparency International's
(TI) annual Corruption Perceptions Index. The index scores countries
on a scale from zero (perceived to be highly corrupt) to ten (perceived
to have low levels of corruption). Out of the 180 countries surveyed in
2009, Georgia ranked 66th, moving from 67 in 2008. In its 2009 report,
TI concludes, Qpetty corruption has been reduced significantly in
Georgia. However, concerns remain regarding high-level corruption and
on corrupt practices in the judiciary.Q
The Georgian GovernmentQs fiscal and monetary policies have created a
relatively stable macro-economic environment. However, in 2009, the
realities of the global financial crisis and the aftermath of the 2008
conflict meant the government had to focus on job creation and
stimulating the economy. In 2009 the economy contracted by four
percent, following growth of 2.1 percent (2008) and 12.4 percent
(2007). Estimated growth for 2010 stands at two percent.

Inflation for 2009 totaled three percent, a significant drop from
inflation of ten percent in 2008. This decrease was largely due to the
economic slowdown. Hoping for economic recovery, the Government has
projected inflation for 2010 at six percent.

The Georgian lari has remained relatively stable despite multiple
economic shocks. Following the August 2008 crisis, the lari moved from
1.4 lari to the dollar to 1.65 lari to the dollar. Though it
fluctuated slightly, the lari remained at approximately 1.67 lari to
the dollar throughout 2009. The Georgian Government manages the
currency, and has intervened, for example after the 2008 conflict, to
stop the currency from devaluation.

Based on the economyQs overall performance and the Georgian
governmentQs strong commitment to structural changes, Georgia received
its first sovereign credit rating in late 2005 from Standard and PoorQs
(S&P) - a QB+Q long term and a QBQ short term. In September 2009, the
S&P long-term/short-term credit rating for the Government of Georgia
were QB/BQ with a QstableQ ratings forecast. The estimated risk of
transfer and converting of currency for Georgian non-sovereign
borrowers is "B/B-". In its analysis, S&P notes a potential risk to
the economy once assistance pledged following the 2008 conflict
(estimated at USD 5.7 billion) has been disbursed. Fitch currently
rates Georgia, which launched its debut $500 million Eurobond in spring
2008, as QB/B-Q with a stable outlook. In August 2009, Fitch Ratings
affirmed GeorgiaQs Long-Term Foreign Currency (FC) and Local Currency
(LC) Issuer Default Ratings at QB+Q, removing them from Rating Watch
Negative and assigning stable outlooks. At the same time, Fitch
upgraded GeorgiaQs Country Ceiling to QB/B-Q from QB+Q. In upgrading
Georgia, Fitch noted GeorgiaQs GDP per capita and level of human
development is significantly higher than the QBQ range median. It has a
favorable business climate and record of structural reforms,
underscored by its ranking in the World BankQs Doing Business Survey.
Over the medium term, Georgia has a promising growth model in its
favorable business climate, based on low tax rates, light regulation,
and low corruption; its investment in infrastructure and transport
links; and its high human capital-to-wage ratio.

In November 2009, President Saakashvili presented an QAct on Economic
QIn November 2009, President Saakashvili presented an QAct on Economic
FreedomQ to the parliament. The aim of this act is to codify GeorgiaQs
economic reforms, and the governmentQs commitment to a liberal economy,
in the countryQs constitution. The act envisages a minimal state
role in the economy, creates legislative guarantees for business, and
bans the introduction of new licenses and permits. The act also amends
the constitution to limit the maximum ratio of budgetary expenditures
to GDP at 30 percent, budget deficit as a percent of GDP at 3 percent,
and debt-to-GDP ratio at 60 percent. In addition, taxes will only be
increased if approved through a public referendum.

Georgia became a member of the World Trade Organization in 2000. The
WTOQs first report on the trade policies and practices of Georgia,
published in December 2009, noted the success of the countryQs economic
policies. The WTO particularly highlighted GeorgiaQs pace of reform
and the countryQs reliance on the private sector to spur development.
According to the report, continuing structural reforms will be the key
to strengthening GeorgiaQs resilience to shocks, sustaining growth,
attracting investment into export activities, and improving
productivity.

Despite improvements to the economy, Georgia still lags in many areas
important to investors. More than 25 percent of the population live
below the poverty line and many still rely on subsistence agriculture.
Greater familiarity with western business practices and legal norms is
required. While physical infrastructure, such as road networks,
improved significantly from 2005 to 2009, much remains to be done,
especially in rural areas. Most natural gas for heating and
electricity generation is imported. In a relatively short period,
however, Georgia has become a net exporter of electricity, selling

power in Turkey, Russia and throughout the Caucasus. The
rehabilitation of existing power plants and the development of new
ones, together with the costruction of new high voltage electricity
lines to connected Georgia to Turkey, should ensure Georgia remains a
key player in the regional electricity trade.

The main source of sustained future economic growth will be private
investment, both domestic and foreign. The governmentQs challenge is
to implement existing legislation, continue the fight against
corruption, defuse tensions in the separatist regions, and undertake
new reforms in order to increase investor confidence.

Georgia receives assistance from the United States, the European Union,
and a range of international institutions. U.S. assistance has focused
on promoting democratic development and free media, developing rule of
law, good 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, GeorgiaQs clear-cut commitment to reform
earned it one of the first compacts with the U.S. Millennium Challenge
Corporation, which has provided investments in infrastructure, tourism,
and agriculture.

After the August 2008 conflict with Russia, foreign donors committed
USD 4.5 billion to help Georgia recover from direct and indirect war
damage. According to the World Bank-led international needs assessment
for Georgia, the major impact of the conflict was on the investment and
consumer climate, which led to a sharp economic drop in FDI and GDP.
The United States committed USD 1 billion in assistance to assist in
repairing damaged infrastructure and help the Georgian economy recover
from the economic shock of the war.

President Saakashvili and his government have strengthened GeorgiaQs
bilateral relations with many countries, reaching out to Ukraine,
Turkey, Italy, Poland, Latvia, Lithuania, Estonia, Japan, Kazakhstan,
the UK, Germany, the Netherlands, and 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 7,000 products. It is
making an effort to harmonize its regulatory environment with
international standards, particularly those established by the EU, and
is pursuing a free trade agreement with 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, as well as a Trade and Investment Framework
Agreement and an Open Skies Agreement with the United States.

Georgia is located at the crossroads between Europe and Asia. It is
the shortest route from Central Asia to Europe, and could be a
north-south bridge between Turkey and the Russian Federation. Georgia
has two deep-water ports on its Black Sea coast, Poti and Batumi.
Labor costs in Georgia are comparable to the Far East, while transit
time for shipment of goods to Europe is far less. The government has
launched an extensive road rehabilitation project aimed at upgrading
Qlaunched an extensive road rehabilitation project aimed at upgrading
the road quality and constructing new facilities to improve
communication infrastructure. The government allocated USD 310 million
for road rehabilitation projects in 2009 and projected around USD 420
million in 2010. 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 then be transported
through Turkey to Baku via Tbilisi and then to Central Asia from Baku
by ferry. Ongoing construction of a tunnel under the Bosphorus in
Istanbul will allow freight to travel from Georgia directly into
Europe. In addition, Georgia is improving its network of rail-ferry
connections with Black Sea countries, including Ukraine, Romania, and
Turkey, which will further increase transportation and trade turnover
with these countries.

GeorgiaQs relations with its northern neighbor Russia have been
problematic. In 2005 and 2006, Russia banned imports of Georgian
agricultural products, mineral water, and wine. At the time, Russia
was the largest importer of Georgian products. These restrictions
continue in 2010. 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 have diversified markets and continue to actively seeking
new markets for Georgian products and new sources of imports,
especially in Ukraine, the Baltics, and Central Europe. Georgia has
diversified its energy supplies, purchasing natural gas from Azerbaijan
and increasing its own hydroelectric generating capacity.

Openness to Foreign Investment

Georgia is open to foreign investment and is eager to welcome new
investors. The country is currently implementing an aggressive
marketing campaign to encourage foreign investment, and 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 Bilateal 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
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 39 agreements for avoidance of double taxation,
of which 24 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, Germany, Finland, Denmark, and Estonia. Until the treaty
with France enters into force upon ratification by France, a similar
agreement signed by the USSR governs the issue. Eight treaties
(including the aforementioned with France, Ireland, Kuwait, Luxemburg,
Malta, Russia, Singapore, and Turkey) have been signed and are awaiting
ratification by the parliaments of the respective countries. 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
Russia regards it as an active agreement. Negotiations are ongoing
with Hungary, Israel, Slovenia, Spain, Switzerland, Kyrgyzstan and
Cyprus. Agreements with Israel and Spain are expected to be signed in

2010.

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

Georgia does not screen foreign investment in the country, other than
imposing a registration requirement and certain licensing requirements
Qimposing 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. The government proudly
promotes that an entrepreneur can start a business in three days. All
companies are required to register with the Ministry of Finance,
providing foundersQ 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,
real estate assets, etc. By the end of 2009, the government announced
a new wave of privatization, which includes railway, telecommunication,
and utilities. 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, www.investingeorgia.org. Further information
is available at a website maintained by the American Chamber of
Commerce in Georgia, www.investmentguide.ge.
In 2005, 84 percent of existing licensing requirements were eliminated
and a Qone stop shopQ 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. 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, 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, 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,
effective as of December 20, 1996. IMF members accepting the
obligations of Article VIII undertake to refrain from imposing
restrictions on payments and transfers for current international
transactions and from engaging in discriminatory currency arrangements
or multiple currency practices without IMF approval. By accepting the
obligations of Article VIII, Georgia gives confidence to the
international community that it will pursue sound economic policies
that will obviate the need to use restrictions on the making of
payments and transfers for current international transactions.

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

Foreign investors have the right to hold foreign currency accounts with
authorized local banks. The sole legal tender in Georgia is the lari
(GEL),which is traded on the Tbilisi Interbank Currency Exchange and
in the foreign exchange bureau market. There is no difficulty in
obtaining foreign exchange or significant delays in remitting funds
overseas through normal channels. Several Georgian banks participate
in the SWIFT and Western Union interbank communication networks.
Businesses report that it takes a maximum of three days to transfer
money abroad. There are no known plans to change remittance policies.
Travelers must declare at the border currency and securities in their
possession valued at more than GEL 30,000 (USD 17,341).

Expropriation and Compensation

The Georgian Constitution protects ownership rights, including
QThe 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 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 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

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.QGeorgia 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 governmentQs
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 a continuing concern about
the adquacy of training of judges and about their susceptibility to
pressure from the government or other outside influences.

Performance Requirements and Incentives

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

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

Right to Private Ownership and Establishment

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

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

Investors should exercise extreme caution in purchasing property in
Abkhazia and South Ossetia. Land for sale rightfully may belong to
QAbkhazia and South Ossetia. Land for sale rightfully may belong to
internally displaced persons forced to leave Abkhazia and South Ossetia
in the early 1990s or 2008 and may have improperly been placed on the
market by the de facto authorities of GeorgiaQs breakaway regions. The
government of Georgia considers the sale of property in those regions
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 have undermined confidence in the
impartiality of the Georgian judicial system and rule of law, and, by
extension, GeorgiaQs 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 two WIPO digital treaties Q 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, or sound recordings for 50 years.

While Georgia has brought its legislation into line with international
standards, enforcement remains problematic. Pirated video and audio
recordings, electronic games, and computer software are freely sold in
Georgia. Use of unlicensed software in government offices and
businesses is common. Internet service providers host websites loaded
with unlicensed content. Responsibility for WTO compliance was
recently been transferred to the Ministry of Economic Development,
which still needs to develop its capacity in this regard. The Customs
Department is developing a new Intellectual Property Objects Register
to assist in identification of counterfeit goods at the border.
Nevertheless, IPR awareness in the Department is low and hampered by
frequent personnel changes. Further clarification of responsibilities
between the Ministry of Internal Affairs and the Ministryof 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 knowledge of IPR laws and understanding of IPR issues. GeorgiaQs
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
number of taxes has been reduced from 22 to six. The tax on corporate
profits is 15 percent. The Value Added Tax is 18 percent. The tax on
personal income was set at a flat rate of 25 percent after a 2007 law
increased the personal income tax and eliminated the employer-paid
social tax on wages. In 2008, the Government of Georgia further
Qsocial tax on wages. In 2008, the Government of Georgia further
reduced the personal income tax rate from 25 percent to 20 percent and
reduced the dividend income tax rate from ten to five percent. Both
reductions took effect on January 1, 2009. This new initiative is an
acceleration of legally binding commitments, made earlier, to reduce
the personal income tax rate to 15 percent by 2013 and to further
reduce the dividend income tax rate to zero by 2012. Legislation was
passed in 2008 setting zero dividend and capital gains tax rates with
respect to publicly traded equities (defined as having free float in
excess of 25 percent). There are excise taxes on cigarettes, alcohol,
and fuel. Imports are taxes at rates of zero, five, and 12 percent.
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. They also provide 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 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 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

Banking was one of the fastest growing sectors in the Georgian economy
from 2003-2008. However, growth slowed during 2008-2009 due to the
Russia-Georgia conflict and the world financial crisis. The share of
banking assets amounted to 42 percent of GDP in 2007 and is expected to
reach 60 percent by the end of 2009. Currently, the banking system
consists of domestically-based small- and medium-sized banks, a handful
of large banking institutions based in Tbilisi with subsidiaries (HSBC,
Societe Generale, Vneshtorgbank, Privat Bank, etc),and two foreign
banks with branches (Turkish Bank Ziraat and the International Bank of
Azerbaijan). In 2007, commercial bank assets grew by 70 percent with a
profit growth of 65 percent. Total assets of the countryQs 19
commercial banks (16 of which have foreign capital) were $4.7 billion
at the end of 3rd quarter of 2009. As of Q3 2009, commercial bank
assets decreased by four percent compared to Q3 2008 and the net loss
of commercial banks has doubled from -37m GEL in Q3 2008 to -82m GEL in
Q3 2009.

Credit from commercial banks is available to foreign investors as well
as domestic clients. Banks continue offering business, consumer, and
mortgage loans. By the end of Q3, 2009 loans to individuals (41
percent) and loans to retailers/services (29 percent) had major shares
in the total banking sector loan portfolio. In addition, the
International Finance Corporation (IFC),European Bank for
Reconstruction and Development (EBRD),U.S. Overseas Private Investment
Corporation (OPIC),Millennium Challenge Corporation (MCC),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 GeorgiaQs financial market. However, foreign
investment in the sector is significant, accounting for 80 percent of
total bank capital as of November 2009, per National Bank data. In
2005, Russian, Kazakhstani, U.S., and German capital was invested in
Georgian banks. In September 2006, the French bank Societe Generale
acquired 60 percent of one of the leading Georgian banks, Bank
Republic. In 2007, British bank HSBC entered the Georgian market. UAE
Dhabi Group acquired Standard Bank in 2008.

Georgian banks have remained solvent during the current global credit
crisis largely due to the mandated 13 percent central bank reserve
requirement and conservative lending practices. The Georgian central
bank relaxed the reserve requirement to five percent in the aftermath
Qbank relaxed the 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. The reserve
requirement remains at five percent.

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 Georgian Stock Exchange (GSE) is the only organized securities
market in Georgia. Designed and established with the help of USAID and
operating within the legal framework drafted with the assistance of
American experts, GSE complies with global best practices in securities
trading and offers an efficient investment facility to both local and
foreign investors. The GSE 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 2009, about 150
companies have access to GSE. 1887 trades (total value of
approximately USD 58 million) were executed and reported in 2009
compared to 3180 trades (value of USD 160 million) in 2008.

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

Political Violence

Georgia suffered considerable instability in the immediate post-Soviet
period. After independence in 1991, civil war and separatist conflicts
flared up in the areas of Abkhazia and South Ossetia. The status of
each region remains unresolved and the central government does not have
effective control over these areas. The United States supports the
territorial integrity of Georgia within its internationally-recognized
borders. In August 2008, tensions boiled over culminating in 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 mostly returned to normal. While the
separatist regions of South Ossetia and Abkhazia have declared
independence, thus far only Russia, Venezuela, Nicaragua, and the small
island country of Nauru have recognized them. Tensions still exist and
reports of violence both inside the breakaway republics and near the
administrative boundary lines are common, but other parts of Georgia,
including Tbilisi, are not directly affected.

Corruption

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, and
effective crackdowns on smuggling. Consequently, state revenue
collections have increased about 50 percent. 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 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 aggravating 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 for purposes of
such offenses as accepting a bribe, giving a bribe, and trading in
influence. White collar crimes such as bribery fall under the
investigative jurisdiction of the Prosecutor's Office.

The GovernmentQs Anti-Corruption Strategy calls for an effective state
management system and legal and public feedback mechanisms to prevent
corruption. Among the goals of the strategy are the identification and
Qcorruption. Among the goals of the strategy are the identification and
analysis of conditions conducive to corruption as well as elaboration
of mechanisms for their eradication,strengthening of principles of
accountability and public disclosure in the public sector, prosecution
of lawbreakers, and facilitation of competitive development of the
business sector.
Georgia also significantly improved in Transparency International's
annual Corruption Perceptions Index, ranking 66 in 2009 out of 180
countries surveyed. In 2005, Georgia was ranked 130. 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. In 2003 GeorgiaQs score in the index was
1.8, falling in a category of countries where corruption, according to
TI, was Qperceived to be pervasive.Q In 2009 GeorgiaQs score was 4.1.
This current score 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 neighboring Armenia (120),Kazakhstan
(120),Azerbaijan (143),Russia (146),and Ukraine (146).

Georgia reasserted central control over the Black Sea region of Adjara
in May 2004, reducing illicit economic activity there. However, the
lack of central government control and international access to Abkhazia
and South Ossetia since the 2008 conflict means that smuggling levels
cannot be monitored or estimated. 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 Organization for Economic
Co-operation and Development (OECD) Convention on Combating Bribery of
Foreign Public Officials in International Business Transactions.
Georgia has ratified the UN Convention against Corruption, however.
Georgia cooperates with the Group of States Against Corruption (GRECO)
and the OECDQs Anti-Corruption Network for Transition Economies (ACN).
GRECO concluded in 2006 that Georgia had successfully implemented 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. OECD conducted an assessment of Georgia in
October 2009 and will release the respective report in April 2010.

Bilateral Investment Agreements

Georgia has negotiated bilateral agreements on investment promotion and
mutual protection with 31 countries, including the U.S., Armenia,
Austria, Azerbaijan, Belgium, Bulgaria, China, Czech Republic, Estonia,
Egypt, Finland, France, Germany, Greece, Iran, Israel, Italy,
Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Luxemburg, Moldova,
Netherlands, Romania, Sweden, Turkey, Turkmenistan, Uzbekistan, the
United Kingdom, and Ukraine. Internal procedures have been completed
and drafts are being negotiated with the governments of India,
Bangladesh, Croatia, Denmark, Norway, Philippines, Cyprus, Indonesia,
Malta, and Iceland. Negotiations are underway with Belarus,
Tajikistan, Slovenia, Estonia, Slovakia, Syria, Bosnia-Herzegovina,
Switzerland, Korea, Kuwait, Lebanon, Portugal, Saudi Arabia, and
Jordan. In 2007, Georgia signed a Trade and Investment Framework
Agreement (TIFA) with the United States. Georgia is currently
renegotiating its existing Bilateral Investment Treaty with the United
States.

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

OPIC and Other Investment Insurance Programs

From 1993 through 2007, OPIC has committed over USD 104 million in
financing and political risk insurance to projects in Georgia. These
projects include the development of hotel and office space, production
of pharmaceuticals, food processing and farming, cold storage, banking,
mortgage lending, and financial leasing services. In 2008, as part of
the United StatesQ response to help Georgia recover from the conflict
with Russia, OPIC committed USD 176 million in financing. A large
portion of OPICQs assistance will be used to underwrite mortgages aimed
at allowing Georgian banks to offer smaller more affordable mortgages
to the Georgian public. Other funding will support commercial and
residential property development projects.

Labor

Georgia offers an abundant supply of skilled and unskilled labor at
attractive costs compared not only to Western European and American
Qattractive 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 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 GeorgiaQs
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 monthQs salary is required if the employer
initiates a dismissal. Employees must give one monthQs 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.

Since January 2008, 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 25 percent in 2008, shifting the employer's tax burden to the
employee. From January 2009, the overall effective tax rate paid by
both self-employed persons and employees has been further reduced from
25 to 20 percent. The state social security system provides modest
pension and maternity benefits. The minimum monthly pension is USD 44.
The average monthly salary across the economy in the second quarter of
2009 was GEL 560 (USD 333). The minimum wage for government employees
is GEL 115 (USD 69) per month. The minimum wage in the private sector
has not changed in many years at GEL 20 (USD 12) per month, but few, if
any, workers earn so little.

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

Foreign Trade Zones/Free Ports
In June 2007, the Parliament of Georgia adopted a law on free
industrial zones, which 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. GeorgiaQs Ministry of Economic Development has allocated a 400
hectare area adjacent to the Black Sea Port of Poti for the first such
zone. RAK Investment Authority (Rakeen group Q UAE based) purchased
100 percent of the shares of LLC Poti Sea Port, and pledged to develop
a free economic zone on 300 hectares of land in Poti and to build a new
port terminal on a 100 hectare site. Construction of the new port
terminal in Poti will start in the second half of 2010 and is expected
to be finished by 2025. The first phase of construction should be
finished by 2013, and will turn Poti Seaport into an international
industrial zone with port, railroad, and other facilities. A second
free economic zone has begun to function in the western Georgian city
of Kutaisi. The Egyptian company Fresh Electric has established a
factory as a part of the 27 hectare zone in which they are producing
kitchen appliances. The company committed to build about one dozen
textile-, ceramics-, and home appliance-producing factories in the
zone, and investover USD 2 billion.
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 BakuQSupsa and
Baku-Tbilisi-Ceyhan oil pipelines. FDI inflows in 2006-2007 hit
historical highs due to privatization of state-owned enterprises and
Qhistorical highs due to privatization of state-owned enterprises and
the impact of economic reforms. FDI totaled USD 1.1 billion (15.3
percent of GDP) in 2006, more than doubling the 2005 total of USD 0.4
billion. FDI inflow in 2007 almost doubled again to USD 2.0 billion.
Large FDI inflow in the first half of 2008 showed that investor
interest in Georgia remained high, however, the August 2008 conflict
with Russia undermined investor confidence and the subsequent global
financial crisis further restricted FDI. Accordingly, total FDI in 2008
decreased to USD 1.3 billion.

Official statistics on FDI inflow from 2000-2009 are as follows (USD
1000):

2000 -131,200,000
2001 -109,800,000
2002 -167,400,000
2003 -339,400,000
2004 -499,100,000
2005 -449,800,000
2006 -1,190,400,000
2007 -2,014,800,000
2008 -1,293,700,000
2009* - 505,200,000

Breakdown of FDI by major investor countries (USD 1,000Qs):

2007 2008 2009*
ArmeniaQ -4,895 -15,061 -6,432
Azerbaijan 41,368 23,943 7,827
China 6,877 -2,271 -369
Cyprus 148,644 26,166 12,707
Czech Republic 227,926 34,858 11,431
Denmark 158,126 256 -49
Egypt - - 115,000
Kazakhstan 88,486 65,942 912
Netherlands 299,277 135,870 46,159
Panama 6,178 -2,470 61,116
Russia 88,997 26,212 13,402
Turkey 93,871 164,526 71,542
United Arab Emirates 130,859 306,576 144,938
United Kingdom 145,475 148,908 41,474
USA 84,412 167,921 -46,272
Virgin Islands, British 187,816 156,847 1,280

Breakdown of FDI by economic sectors (USD 1,000s):

2007 2008 2009*
Agriculture 15,528 7,844 4,940
Industry 398,241 207,328 143,886
Energy sector 362,581 294,865 30,146
Construction 171,892 56,725 65,727
Transport and communications 416,695 422,690 29,305
Real estate 30,544 277,838 103,557
Other services 382,807 283,165 117,773
Banking system 136,915 8,519 7,555

* - FDI through the first three quarters of 2009

Source: Statistics Department of Georgia

The United Arab Emirates, the United States, and Turkey topped the
list of foreign investor countries in 2008. The Virgin Islands, the
United Kingdom, and the Netherlands ranked next. For the first three
quarters of 2009, United Arab Emirates was again the top foreign
investor in Georgia at USD 145 million, followed by Egypt (USB 115m),
Turkey (USD 72m),and Panama (USD 61m).

The drop in FDI is tempered by the fact that as of November 2009,
Georgia received or entered into agreements for USD 2.1bn of the USD
4.5bn pledged at the Brussels donor conference in October 2008. The
pledged or received amount corresponds to approximately 19 percent of
2009 estimated GDP, according to goverment data. However, the
government foresaw yet another upward trend in FDI in 2010, expecting
foreign invenstments to top the USD 2 billion target due to interest
expressed by Egyptian and Qatari businesses.

The U.S. has been one of the largest foreign investors in Georgia since

1999. U.S. investors accounted for 30 percent of FDI in Georgia in
2000, 21 percent in 2001, and 49 percent in 2002. In 2003 and 2004, the
U.S. share decresed to 21 and 16 percent, respectively, and dropped to
3 percent in 2005. This decline can be attributed to the completion of
large pipeline projects as well as increased inflow of capital from
other countries. In 2006, U.S. investment accounted for 15 percent of
the total, but only 4 percent in 2007 and 11 percent in 2008.

Of note is the United Arab Emirates' increased interest in Georgia,
evident in the investments of the Rakeen and Dhabi Groups in the port,
real estate, banking, and other sectors.

The Georgian Government is actively promoting investment in Georgia,
and has held a series of investment road shows around the world. End
Text.

BASS