I. Commercial Overview (Executive Summary) Georgia, located in the Southern Caucasus Region, is a mountainous and temperate country slightly larger than the state of West Virginia with 70,000 sq kilometers of land. The high Caucasus mountain range forms the northern border with Russia, while the southern boundaries of Turkey, Armenia and the Eastern boundary with Azerbaijan are formed along the summit of the Lesser Caucasus mountains. The Western boundary is the Black Sea with several ports, Batumi and Poti prominent among them. The lowlands of the West are the centers of tea and citrus production, while grapes and deciduous fruit grow abundantly in the uplands. Eastern Georgia is drier, with grape production in the low ridges. Georgia has natural resources for production of building materials and deposits of manganese and other non- ferrous minerals, but the potential of these industries has not been well developed. Mineral water is also abundant and an important export product, along with agricultural commodities. Georgia's Black Sea coast was a popular resort area among Eastern Bloc tourists before being engulfed in separatist and factional violence. Georgia has an ethnically-mixed population of 5.2 million people. About 70% are ethnic Georgian, 8% Armenian, 6% Russian, 6% Azeri and the balance a mix of other nationalities. Urban population is about 56% of the total. The Georgian Orthodox Church dominates religious life and has enjoyed a modest revival since independence. The Republic of Georgia broke away early from the Soviet Union, declaring its independence on April 9, 1991, following a referendum in which nearly 90% of the Georgian population voted to secede. Soviet retaliation for this act -- a blockade of many essential imports, especially oil and electricity -- began an economic deterioration in Georgia that continues today. Later, in December 1993, Georgia entered the Russian-dominated Commonwealth of Independent States (CIS) organization. The collapse of the Soviet Union itself, the legacy of long-standing economic mismanagement under a command economy, and internal political and ethnic conflict have all taken their toll on Georgian output, employment and living standards. Building a healthy market economy and democratic society will be even more challenging in Georgia than in most of the other Newly Independent States, and by early 1994 the task had barely begun. Nonetheless, Georgia enjoys certain comparative advantages that suggest a brighter economic future if her immediate and daunting constraints -- both exogenous and self-inflicted -- can be effectively removed. -- Overview of Import Market The value of Georgian imports in 1993 was estimated at 538 billion coupons. (Note: the coupon was introduced in April 1993. Initially the rate was USD 1 - 1,500 coupons; by the end of the year the rate was USD 1 - 70,000 coupons; and by June 1994, it was as high as USD 1 - 1,000,000 coupons. This inexorable inflation makes it difficult to estimate import volume in USD. End note.). Imports in 1993 included energy products (83 percent of total import expenditures), sugar (5 percent, primarily from Ukraine), dairy products (4 percent, primarily from Turkey, Ukraine, and Russia), wheat (1 percent, from Turkey, USA, Kazakhstan), flour (1 percent, from Kazakhstan, Turkey, USA) and others (6 percent). In the past, heavy machinery was imported on a large scale. Practically all the pharmaceutical products consumed in Georgia are imported. Goods were imported mainly from Turkmenistan (52 percent of import expenditures), Kazakhstan (11 percent), Turkey (8 percent), Azerbaijan (8 percent), Russia (5 percent), Ukraine (1 percent), and others (15 percent). Eighty percent of imports were purchased by Government organizations and twenty percent by private companies. This is the highest share of imports by the private sector during the whole socialist and post-socialist periods. Imports from the United States rose from 16.4 million during 1992 to 47.4 million during 1993. The chief import items were wheat and other food products. -- Brief Synopsis of Commercial Environment The Georgian consumer enjoyed one of the highest standards of living among the states of the Soviet Union during the Soviet era. However, the population has suffered from a drastic drop in purchasing power over the last few years. Industrial companies are also severely strapped financially and unable to meet their requirements for raw materials, energy products and machinery. As a result, consignment sales and medium- or long-term investments are the most realistic forms of business in Georgia. -- Host Country Business Attitude Toward the U.S. and Major Business Opportunities The Georgian Government (GOG) and business have very positive attitudes toward the U.S. The chief industry sectors of interest to U.S. companies include: transportation (port development), mining (manganese, gold, copper), agribusiness (wine and citrus fruits), energy management, and tourism. U.S. interest in Georgia has chiefly come from small and medium- sized firms. Project Development D.C. (PDDC) has negotiated two major projects with Georgia on behalf of two clients. PDDC put together Nissho Iwai America Corporation and the Rustavi Metallurgical Combine for a project worth USD 36 million for slag heap reclamation. PDDC also negotiated an agreement between Shelter International Inc. (New Jersey) and the Adjarian Regional Administration for the construction of 200 modular homes (approximate value USD 46 million). Two U.S. companies, Makoil and Tramex Inc., have reached agreements with the Georgian State Department "Saknaftobi" to exploit oil deposits in Georgia. Large corporations have shown minimal interest. The Coca-Cola Corporation established a fully Georgian-owned production facility in mid-1993. There are a number of other foreign companies starting business in the country, representing Australia, Turkey, Germany, China, and others in telecommunications, oil, copper and gold exploitation, transportation, and the mining of stones for building construction. Under USAID's Hospital Partnership Program, an agreement between Tbilissi and Atlanta, Georgia hospitals for modernizing the former's facilities should lay the basis for expanded cooperation in healthcare. Foreign investors can participate in tenders and in privatization of state property. About four thousand entities are slated for privatization, including ports and natural resources. -- Major Roadblocks to Doing Business Official economic policy is aimed at creating favorable conditions for business development and foreign investment in Georgia. However, lack of experience in running and regulating business in a market economy, an outmoded and inefficient bureaucratic structure, and poorly functioning infrastructure may require extra effort to develop business in the country. -- Nature of Local and Third Country Competition A sharply reduced market creates a degree of competition among local retailers of agricultural food products and alcohol, apparel, used cars, gasoline and travel agencies. However, true market-economy competition, buttressed by laws and regulations, remains elusive. There is no significant third-country competition.