GEORGIA Country Profile

General Information

The Political Climate


The Rose Revolution in 2003 was a positive turning point in Georgia's political and economic development. Georgia had struggled with years of civil war, unstable institutions and rampant corruption. Lack of good governance resulted in mass popular protests that culminated following a rigged election in late 2003. The protests, which came to be known as the Rose Revolution, forced the resignation of the President in November 2003 and the subsequent landslide election of Mikheil Saakashvili and his United National Movement (UNM) party in January 2004. In September 2007, a newly galvanised opposition encouraged non-violent nationwide anti-government demonstrations, criticising Saakashvili for his alleged autocratic style of rule, his failure to alleviate poverty and to put an end to corruption, and his lack of effort to engage in meaningful dialogue with opposition groups. The government repressed the protests and imposed a two-week state of emergency. The government's handling of the demonstrations dealt a heavy blow to Saakashvili's image as a democratic reformer, and he attempted to ease tensions by announcing that presidential elections would be moved forward to 5 January 2008 from later in the year. Saakashvili was re-elected, but now faces a much more invigorated opposition than he has encountered in the past and a much weakened mandate. This mandate was somewhat strengthened, however, by the parliamentary elections in May 2008 in which the UNM became a clear winner. Once again, international observers gave the elections a mixed review.

Georgia's ongoing conflicts with Abkhazia and South Ossetia, as well as that with Russia based on its support for the two areas' separatist ambitions, date back to the country's independence in 1991. In mid-2008, Russia announced its recognition of South Ossetia and Abkhazia as independent states. Since President Saakashvili came into power, the conflicts with the separatist areas have been so tense that Russia has had so-called peacekeeping troops stationed within them, allegedly in order to protect Russian ethnic minorities. On 7 August 2008, Georgia attempted to forcibly reincorporate South Ossetia leading to a counterattack by Russian military into Georgia proper. The EU eventually brokered a ceasefire plan between Georgia and Russia in which Russia agreed to withdraw its troops to inside the separatist regions. In order to remedy the potential economic setback, a Georgia donor conference was held to decide on an aid package for the country. The conference was heavily criticised by Transparency International Georgia 2008 for the lack of transparency and accountability as well as the lack of consultation with civil society organisations and the opposition party in the Parliament. The fact that the Georgian government wanted to keep secret the Joint Needs Assessment - the basis for the decisions made at the conference - and the conference being held behind closed doors were, in particular, major points of criticism. This is evidence that the crisis with Russia has spurred a political agenda in Georgia which is, at least in the short term, more concerned with security issues than with good governance issues. Concerns have also been raised by Global Integrity 2008 regarding the extent to which anti-corruption work will have to be rebuilt due to the crisis with Russia.

For several years, the Georgian government, led by President Saakashvili, has placed anti-corruption efforts, together with economic reform, at the top of its agenda. Since 2004, Georgia has seen tremendous progress in clamping-down on corruption and reinstating good governance. However, the country is still struggling with problems of high-level corruption and embezzlement. There is some speculation about whether the current government's measures to curb corruption can be sustained after President Saakashvili's term is over. Saakashvili has focused on strengthening presidential powers rather than establishing and stabilising lasting institutional frameworks, an indication that the anti-corruption drive is closely linked to his personal popularity. However, Freedom House 2009 points out that the government has been putting efforts in combating petty corruption at the lowest level of the bureaucracy rather than targeting high-ranking members of the political and business elite. Moreover, many journalists are afraid of reporting high-level corruption due to pressure, thus resulting in self-censorship. According to Transparency International's Global Corruption Barometer 2009, the judiciary is perceived to be the most corrupt institution in Georgia by the general public. Fifty-five percent of the households surveyed perceive the government efforts in fighting corruption as 'effective', showing an improvement compared to the 2007 survey. Two percent of the households surveyed, acknowledged having paid a bribe the previous year. According to the US Department of State 2008, the government's challenge in order to increase investor confidence is to implement existing legislation, continue the fight against corruption, soothe tensions in the separatist regions and carry out new reforms, particularly in relation to customs and the judicial system.

Business and Corruption

Georgia has an open economy with a fully liberalised price system, no subsidies to state companies, and no restrictions on foreign trade. The business environment in Georgia has significantly improved since the 2003 Rose Revolution. Despite a recent economic slowdown, the country has generally enjoyed solid economic growth rates, even though it has had to deal with Russian economic and visa sanctions.

Corruption appears to be on the retreat in Georgia, although companies report that organised crime is hampering the business climate. According to World Economic Forum Global Competitiveness Report 2009-2010, access to financing is the most problematic factor for doing business in Georgia, followed by government and policy instability. The anti-corruption drive that the Saakashvili government has been advocating has meant that cases of smuggling, tax evasion, bribery as well as abuse of power are being punished severely. Based on the same report, corruption is listed among the least problematic factors for doing business in Georgia. This tendency is supported by the World Bank & IFC Enterprise Surveys 2008, in which only a little more than 4% of companies report that they expect to make informal payments to public officials to get things done. It is important to note that the experience level of corruption varies depending on the size of the company surveyed. For instance, 79% of small-sized companies expect to give gifts to obtain import licences, compared to none of the medium-sized and large companies. None, regardless of size, expect to bribe in order to secure a government contract. Except for obtaining import licences, the level of corruption within the business sector in Georgia is considered relatively low compared to the rest of Eastern Europe and the Central Asia region. The EBRD & World Bank BEEPS Georgia 2005, in which the percentage of companies reporting that bribes are frequent decreased from approximately 37% in 2002 to about 7% in 2005, also reveals the diminishing role of corruption since President Saakashvili came into office.

According to the World Bank & IFC Enterprise Surveys 2008, 8% of companies still report that they encounter corruption in meetings with tax officials, most of these are small size companies. In contrast, none have reported bribery in order to secure government contracts, which is a significant improvement. According to the same survey, 14.6% of companies identified tax administration as a problem for doing business. Conversely, several other sources note that anti-corruption measures within the fiscal area have had major effect. For example, according to Global Integrity 2008, tax collection and administration has significantly improved over the past several years. This is perhaps largely due to the passing of a new tax code in 2004 and the merger of the Tax Department, Customs Department and the financial police to form the Department of Revenue in 2007. However, a feature of the Georgian economy which hampers transparency continues to be a large proportion of informal/unregistered companies. According to the World Bank & IFC Enterprise Surveys 2008, 52% of the companies surveyed claim to be competing against unregistered companies. It is recommended that companies develop, implement and strengthen integrity systems and conduct extensive due diligence when planning to invest in or are already doing business in Georgia.

Regulatory Environment

Most government reforms since 2003 have been aimed at improving the business climate by reducing administrative burdens. According to the US Department of State 2008, Georgia has carried out many efforts to improve the country's business environment, including cutting the number and rates of taxes and improving tax and fiscal administration, streamlining licensing requirements, deregulating, and simplifying customs and border formalities. As a result, Georgia was seen as having the largest reduction in corruption and improvement in the business environment among all transition countries from 2002 and 2005, as noted by the World Bank Anticorruption in Transition 3 2006. The World Bank & IFC Enterprise Surveys 2008 reports that senior management can expect to spend an average of only 2% of its time dealing with government requirements and regulations, down from 9% in 2002. However, according to the World Economic Forum Global Competitiveness Report 2009-2010, policy instability now ranks among the largest obstacles for doing business, although business executives identify the burden of government regulation as among the least troubling in the world. Georgia has been widely praised for being able to cut back on red tape in relation to setting up and running a company. Starting a company in Georgia is now relatively simple. According to the World Bank & IFC Doing Business 2010, it requires only 3 procedures and takes 3 days to start a company at a cost of 4% of GNI per capita.

To promote investment in Georgia, the Georgia National Investment Agency (GNIA) was established under the Ministry of Economic Development. GNIA is not only responsible for investment promotion, but also facilitation - it functions as a 'one-stop shop' for investors. GNIA provides information about investment opportunities and relevant regulations and laws. Furthermore, GNIA assists in project implementation and also acts as liaison to the government. The Law on Licences and Permits has introduced new measures to curb corruption and to streamline the process of setting up a company. The number of licences was cut from over 900 to approximately 150. In order to simplify licensing procedures for companies in connection with the Law on Licences and Permits, Georgia has adopted the 'one-window' principle. Under this 'one-stop shop' system, the administrative body issuing the licence has to ensure the approval of additional licensing conditions by the other relevant administrative bodies. Furthermore, the 'silence means consent' principle has been adopted, which means that the administrative body that issues the licences has to make a decision within a set term upon receiving the application. The licence or permit is automatically granted if no notification has been made within the set timeframe. Tax administration has seen major improvements. The structural measures meant to ensure transparency include a simplified 2004 Tax Code that was enacted in 2006 and has reduced the number of taxes and level of corruption and abuse of power in this sector. By strengthening the tax administration and curbing tax evasion, tax revenues have substantially increased since the code's implementation. In 2009, Forbes Tax Misery and Reform Index listed Georgia as one of the most tax friendly countries in the world.

According to Georgian investment law, disputes between a foreign investor and a government office may be resolved in Georgian courts or at the International Centre for Settlement of Investment Disputes (ICSID), unless the parties agree to a different method of settlement. If the dispute is not taken to the ICSID, the foreign investor has the right to take the dispute to an international arbitration authority set up by the UN Commission on International Trade Law (UNCITRAL) to settle the dispute in accordance with the rules of the international arbitration agreement. Due to irregularities in the Georgian court system, companies that enter into contracts with private Georgian companies are advised to include a provision for international arbitration of disputes in their contracts.

Foreign individuals and companies are permitted to buy non-agricultural land, but are restricted from holding agricultural land in Georgia. However, according to the US Department of State 2008, a loophole exists which allows agricultural land to be foreign-purchased and then transferred under the name of a Georgian entity that can be up to 100% foreign-owned. The same source strongly recommends that investors exert extreme caution when looking to purchase property in Abkhazia, as identifying legal title is particularly troublesome in the region and the property may have improperly been placed on the market by the de facto authorities in Abkhazia. The sale of property in Abkhazia is also illegal according to Georgian law and such property could be repossessed in the future. Georgia has been privatising vast areas of agricultural land to spur growth in this sector, and it has also been in the process of privatising its state-owned companies. The government announced that all state-owned companies (more than 1,800) would be privatised before the end of 2007 and, while having fallen short of this goal, has made significant progress in this regard (the Ministry of Economic Development's privatisation website details ongoing privatisation initiatives and sales). The privatisation process under former President Shevardnadze was opaque and he was accused of selling Georgia's energy sector to the Russian Gazprom and RAO EES at drastically reduced prices. Although Saakashvili promised to renationalise the plants sold, this has not yet occurred. The profitability of privatisation has decreased over time, and the government has been looking at other areas for reform, such as changes to legislative, financial, energy and health care sectors.