Georgia: Backsliding on Rule of Law Is Damaging Investment Climate
A recent wave of confiscatory moves against foreign investors in Georgia – which investors blame on “corrupt courts” and rival local companies – has diplomats and the international business community concerned about a deterioration of the country’s investment climate.
The affected businesses include energy, banking, real estate, and trading firms, and the situation is threatening Georgia’s reputation as a foreign investor darling. Government officials regularly tout their business-friendly credentials, like high placement on the World Bank’s Ease of Doing Business rankings.
The largest foreign business organization in the country, the Georgian chapter of the International Chamber of Commerce, recently issued a warning about the worsening environment. “We don’t remember any period in the past 20 years when so many foreign businesses were attacked simultaneously and this worries us A LOT,” the organization wrote in a June 12 release. The organization laid the blame on powerful local vested interests who wield considerable influence with law enforcement agencies and judges.
In one case, in February, a court fined the local subsidiary of tobacco giant Philip Morris International $38 million as a result of a complaint from a Georgian cigarette company, which alleged that the multinational was dumping cigarettes at below cost in order to stamp out competition. The global corruption watchdog Transparency International identified Ivane Chkhartishvili, one of Georgia’s most controversial business figures, as a beneficiary of the questionable decision. The group noted a number of irregularities in the case, and concluded that “[t]he issuance by the Court of an unjustified decision expressly damages the investment environment and image of the country.” In a similar case, heard by the same judge in March, another local tobacco company won a $112 million judgment against British-American Tobacco.
In another case, an Egyptian investor had bought land in Tbilisi’s Vake district, valued at $15 million, on which he had planned to build a mixed-use development. He then discovered that, unbeknownst to him, the land had been sold and then resold – to major donors to the ruling Georgian Dream Party. In May, a judge sided with the new owner in a case the head of the Georgian Bar Association called “scandalous.”
Also in May, a Tbilisi court appointed a “special administrator” to a local subsidiary of a Ukrainian- American mining company that had been accused of labor abuses and damaging the environment, raising concerns that the government was carrying out a stealth expropriation of the firm.
In apportioning blame for the trend, the ICC pointed the finger at “‘uncontrolled elements’ both in and out of state structures who do not report to the Head of Government, and on whom the government has no control.” It praised, however, Prime Minister Giorgi Kvirikashvili and the majority of his cabinet as representing a “positive and constructive power” with respect to business.
The “uncontrolled elements” are seen by many in Tbilisi as connected to Bidzina Ivanishvili, billionaire businessman, former prime minister and widely considered to be the de facto leader of the ruling Georgia Dream party.
“We have a prime minister who is constitutionally the top guy, the most important person formally, but in reality we all know that it is Bidzina Ivanishvili who is the most important person,” said political analyst Ghia Nodia. “There are certain people directly linked to Bidzina, but not in any way under control of the government, beyond control of the prime minister, who have their business interests and they want to take advantage of the situation. ... And it is because of them that foreign investors have problems.”
The court system, which has been the beneficiary of tens of millions of dollars in Western aid, has come under particular criticism. The director of Transparency International Georgia, Eka Gigauri, said the courts have been taken over by a “clan... with the support of specific individuals and groups who are also in the ruling party and in government.”
Foreign embassies say that when they complain about irregular court rulings, Georgian officials generally respond by saying their hands are tied and the judiciary is independent.
But political pressure has on occasion proven to act in foreign businesses’ favor. The two tobacco decisions were simply vacated by an appeals court; but it took several months of protests, including a threat from Philip Morris to leave the market altogether and to loudly protest on the way out, a source close to the company told EurasiaNet.org. “That’s the right outcome, but that’s not something you really want to take credit for,” another foreign executive working in Georgia told EurasiaNet.org on condition of anonymity.
Some in the international community have suggested that a solution could be found in establishing an entirely new separate commercial court system. Such a proposal was adopted at a June meeting of the Georgian Investors Council, a group that includes government officials (including the prime minister) and local and foreign business organizations. The proposal was put forward by Justice Minister Tea Tsulukiani, and now experts at the European Bank for Reconstruction and Development are putting together a detailed plan. Such a blueprint would need parliamentary approval to be adopted, said Bruno Balvanera, the EBRD’s Caucasus director, in an interview with EurasiaNet.org.
Critics, though, say it would take time and millions more dollars in aid, while avoiding the root of the problem – the lack of political will to weed out corrupt judges. It would also, they say, create a two-tiered legal system: a clean, well-functioning system for high-value business disputes and a second-class system for everything else.
“The specialized business courts seem like a decoy,” said Zaza Bibilashvili, a lawyer who has worked on high-profile business cases. The new courts “will distract everyone’s attention from the real problem, which is political influence on courts, create an illusion of good-faith cooperation from the government and a false expectation that after this 7389th wave of reforms, the courts will finally flourish.”