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TITLE:  GEORGIA ECONOMIC POLICY AND TRADE PRACTICES
DATE:  FEBRUARY 1994
AUTHOR:  U.S. DEPARTMENT OF STATE

                       REPUBLIC OF GEORGIA

                     Key Economic Indicators
       (Billions of Russian rubles unless otherwise noted)


                                  1991      1992      1993
Income, Production,
 and Employment

Real NMP (1985 prices)             11.9      11.5       n/a
Real NMP Growth (pct.)              n/a      -4         n/a
NMP (at current prices)            19.1     113.6       n/a
By Sector:
  Agriculture                       5.1       n/a       n/a
  Energy and Water                  5.1       n/a       n/a
  Manufacturing and Construction    1.5       n/a       n/a
  Rents                             n/a       n/a       n/a
  Financial Services                0.03      n/a       n/a
  Other Services                    n/a       n/a       n/a
  Government, Health,
   and Education                    2.2       n/a       n/a
Net Exports of
  Goods and Services                5.3       n/a       n/a
Real Per Capita GDP                 2.2       n/a       n/a
(at current prices)
Labor Force (millions)              3.2       3.2       3.2
Unemployment Rate (pct.)            0.05      0.7       4.4


Money and Prices

Money Supply (M2)                   n/a       n/a       n/a
Money Supply Growth                 n/a       n/a       n/a
Base Interest Rate                  n/a       n/a       n/a
Personal Savings Rat                n/a       n/a       n/a
Retail Inflation (pct.)             175.3     868     1,426
Wholesale Inflation                 n/a       n/a       n/a
Consumer Price Index                n/a       846     2,695
Exchange Rate (ruble/$)             n/a       4.14      913.7
Exchange Rate (C/$)                 n/a       n/a     40,000


Balance of Payments and Trade

Total Exports                       5.3      15.4       n/a
  Exports to U.S.                   n/a       n/a       n/a
Total Imports                      53.7      26.0       n/a
  Imports from U.S. (mill rub.)     0.5       0.4       n/a
Aid from U.S.                       n/a       n/a       n/a
Aid from Other Countries            n/a       n/a       n/a
External Public Debt                n/a       n/a       n/a
Debt Service Payments (paid)        n/a      13.2      12.6
Gold and FOREX Reserves             n/a       n/a       n/a
Trade Balance (mill rub.)          -0.04     -9.5     -25.4
  Balance with U.S.                -0.5      -0.4      0.18


1.  General Policy Framework

    In 1993, Georgia continued a sharp three-year economic
decline precipitated by the end of the former Soviet Union's
(FSU) command-administrative system and the resulting
dissolution of traditional trade links with other FSU
countries.  These countries had provided Georgia with the bulk
of its industrial raw materials, including cotton, timber, and
metals, as well as 80-85 percent of its energy supplies.  Price
rises for these products led to a sharp deterioration in
Georgia's terms of trade, the effects of which continued to be
felt in 1993.  Russia's decision to end remittance provisions
for Georgian enterprises through its banks compounded Georgia's
inability to obtain needed inputs.  The crisis was further
aggravated by civil wars in Abkhazia and in the western
Mengrelia region, which shut down industry in affected areas
and blocked key railways and roads.  

    Following a 60 percent drop in net material production
(NMP) in 1991-1992, the rate of decline in NMP hardly appeared
to be slowing in 1993, despite Georgia's vastly reduced
economic base.  For example, in the first six months of 1993,
industrial output dropped 29 percent compared to the same
period the year before, and by the latter part of the year,
most enterprises were functioning at less than 20 percent of
capacity.  Metallurgy, machine building and energy were among
the hardest hit sectors.  Official agricultural output was
reportedly down a full 54 percent in the first nine months,
although this figure probably did not take account of private
production, which by the beginning of November occupied 42
percent of agricultural land.  Livestock herds were being
drastically reduced due mainly to shortages of grain feed.

    The Russian Central Bank's reluctance to provide Georgia
with requested cash rubles during the first three months of
1993 prompted the Georgian government in April 1993 to
introduce a parallel currency, the coupon, in order to
alleviate resulting shortages of cash.  In July 1993, after
Russia removed pre-1993 rubles from circulation, Georgia banned
the ruble and made the coupon the sole legal tender.  The fall
of 1993 was marked by a dramatic weakening of the coupon, due
to Georgia's expansive monetary policies and high rates of
inflation.  For example, while in April the coupon had started
out at roughly 1,000 coupons to the U.S. dollar, by
mid-November it was trading at around 40,000/dollar.  Georgia's
decision in late 1993 to rejoin the Commonwealth of Independent
States left open the possibility of a return to the ruble zone.

    The introduction of the coupon did little to alleviate
Georgia's fiscal and monetary difficulties.  During 1993, the
Georgian National Bank undertook a massive expansion in
credits, in part to allow state enterprises to import needed
raw materials.  Credits were also provided to the government to
cover its deficit and to purchase foodstuffs.  Between December
1992 and March 1993, 70 billion rubles were created on account
(compared to stock outstanding of 100 billion rubles at the
beginning of November 1992), and after introduction of the
coupon, an unknown amount of coupons, but certainly in the
trillions, were emitted.  National Bank lending rates were also
virtually nominal, making commercial banks dependent on these
loans, rather than on private deposits, and this contributed to
stagnation in the banking sector.  Credit emissions led to a
significant increase in inflation, which at the end of 1993 was
estimated at a minimum of 30-40 percent a month.  In October
1993, a new National Bank chairman indicated he would reverse
previous policies by instituting sharp restrictions on credit
emissions and by raising interbank lending rates.

    The Georgian government's budget deficit for 1993 was
projected at 66 percent of GDP in November of that year, up
from 35 percent at the end of 1992.  The increase was fueled
mostly by large wage increases in September and November,
costly rises in subsidies for bread and electricity -- which
make up a quarter of total expenditures -- and the reduction of
the economic base.  With no other significant financing
recourse than drawing credits from the Georgian National Bank,
the deficit contributed to the unprecedented burgeoning of the
money supply.


2.  Exchange Rate Policy

    Upon introducing the coupon in early April, the Georgian
National Bank established a fixed exchange rate mechanism with
the ruble which was adjusted several times to reflect the
declining value of the coupon.  However, after Russia removed
pre-1993 rubles from circulation, the Bank of Georgia abandoned
this system in favor of a floating exchange rate.  Under this
system, the National Bank publishes every week an official
exchange rate of the coupon against major currencies, and
undertakes no action to shore up the value of the coupon.  The
most important foreign exchange controls date to late March,
when the National Bank promulgated a series of decrees designed
to curtail speculation in foreign exchange trading.  These
measures include a prohibition on exchanging cash foreign
currency for non-cash coupons, a requirement that foreign
exchange purchased locally must be resold locally and not used
to buy goods, and a prohibition against selling foreign
exchange at more than a ten percent mark-up on the purchase
price.  

    Neither Georgia's foreign exchange system nor exchange
controls have any impact on the price competitiveness of U.S.
exports.


3.  Structural Policies

    Little structural change took place in the Georgian economy
in 1993, following wide-scale reforms a year earlier. 
Political instability and civil war in Western parts of the
country were the focus of policy-makers' attention and this
prevented initiatives in the economic area.

    Most prices were freed in February 1992.  The only
exceptions include those for bread, utilities and
transportation, which remain heavily subsidized.  In
mid-November, Georgian authorities increased bread prices from
70 coupons (less than one cent) per kilogram to 700 coupons,
and allowed ten percent of state bread supplies to be sold at
the production price of 7,000 coupons per kilogram.  
   
    In March 1992, Georgia accomplished its transition to a new
tax structure by abolishing the old turnover tax and adopting a
system which relies heavily on a 14 percent VAT tax, a variable
enterprise profit tax and excise taxes levied especially on
wine products.  Toward the end of 1993, the Georgian government
was contemplating only minor adjustments to the system,
including an initiative to exclude exports and include imports
in the coverage of VAT taxes, as well as to establish a more
transparent division of rates for the enterprise profit tax.

    Beginning in early 1992, the Georgian government began the
free distribution of small plots of land to both rural and city
residents.  By late 1993, more than 40 percent of cultivated
land had been turned over to private hands.  An industrial
privatization program begun in March 1993 had led to the
selling off of less than one percent of state property by the
end of October.  More extensive privatization was being held up
by delays in distributing investment vouchers to the
population.  Nevertheless, private business was growing, and
towards the latter part of 1993, it accounted for an estimated
seven to eight percent of employment in the country.


4.  Debt Management Policies

    Towards the latter part of 1993, Georgia was contending
with levels of debt with other countries of the FSU that
appeared unmanageable -- given Georgia's minimal export
capacity -- and raised the specter of resource cutoffs.  This
was especially the case with energy imports, for which Georgia
owes considerable sums.  It is estimated that Georgia owes
Turkmenistan between $80 and $100 million for natural gas
deliveries, and another $15 million to Azerbaijan, Russia,
Kazakhstan and Uzbekistan for natural gas transit fees. 
Georgia's electricity debt to Russia, Turkey and Azerbaijan is
$37 million dollars.

    Discussions with Russia were at the center of Georgia's
debt management policies in 1993.  The Georgians agreed to
Russia's "zero option," under which Russia assumed Georgia's
share of the debt owed by the old USSR in exchange for Georgia
releasing all claims against Russia for all-Union property. 
Problems continued with regard to an undetermined amount of
cash credits owed by Georgia to Russia according to clearing
house agreements, which Georgian enterprises fully utilized but
which Russian enterprises did not.  It is estimated that
Georgia owes Russia 25 billion rubles for unutilized credits
from 1992.  Georgia has signed only one agreement recognizing
its debt to another CIS state, Azerbaijan, for three billion
rubles.

Georgia's level of debt to countries outside the CIS grew in
1993.  In 1993, the country assumed trade credits worth $10
million dollars from the EC, and $50 million from Turkey.  In
addition, in late 1993, Tbilisi was also expecting to receive
40 million ECU from the EC, 40 million DM from Germany, and
about $5 million from China.  Georgia has received no loans
from multilateral organizations, aside from humanitarian aid
donations.
    

5.  Significant Barriers to U.S. Exports

    Georgia's policy of encouraging imports has meant few
established barriers to U.S. products.  Georgia maintains
import licenses on a number of goods whose unrestricted sale
and use could be considered dangerous.  These items include
medicines, medical equipment, chemicals, industrial vestiges,
drugs, weapons and ammunition.  However, obtaining the
necessary license does not appear to pose substantial
difficulties.  The effect of any Georgian barrier on US trade
and investment is minimal.  A U.S.-Georgia trade agreement
providing for reciprocal most-favored-nation status was signed
and entered into force during 1993.


6.  Export Subsidies Policies

    Georgia does not provide any type of significant export
subsidy.  In fact, government policy in 1993 was to discourage
exports, mostly through licensing requirements that are not
required for imports.  Furthermore, it is importers, not
exporters who receive preferential financing.  At most, a small
number of exporters may receive discounts in purchases of
imported raw materials such as cotton from government reserves,
but this does not seem to be a systematic practice.  Georgia is
not a GATT contracting party.


7.  Protection of U.S. Intellectual Property

    Laws on patent and trademark protection are adequate, but
copyright protection is nonexistent.  In accordance with
decrees issued in March 1992, a Patent office under the
Committee of Science and New Technologies administers and
approves patents and trademarks, utilizing the classic system
of patent inspection.  Georgia is a member of the Patent
Cooperation Treaty and the Madrid Agreement of 1929 on
Trademarks.  There is currently no law on copyrights in effect,
and the Georgian government, while working on one, does not
expect to issue it before May 1994.  The Union of Writers
regulates disputes regarding book authorship and honoraria, but
its decisions are legally unenforceable.  Georgia is not listed
on any Special 301 Watch Lists, nor is it identified as a
Priority Foreign Country.

    Patent and trademark protection do not appear to pose
special problems.  We are not aware of any systematic cases of
patent infringement, but brand counterfeiting is known to have
taken place, although not on a large scale.  Patent terms are
for the standard twenty years, although after four years there
is compulsory licensing to domestic firms of rights held by
foreigners.  No important sector is excluded from the
availability of a patent.  Registering a trademark costs only
$520 and this can be renewed every five years.  There are no
procedural barriers to obtaining a trademark, although Georgia
operates on the "first come, first serve system," where the
first to register the trademark in Georgia obtains the right,
unless the trademark is internationally known, or registered
under the Madrid Agreement.
    
    The absence of any legal protection on copyrights has
allowed for some pirating of U.S. motion pictures, although not
on a large scale.  Due to the very low levels of U.S. trade and
investment with Georgia, we assess the impact of any of
Georgia's intellectual property practices on U.S. trade and
investment as minimal.


8.  Worker Rights

    Georgia relies on Soviet-era legislation which guarantees
most major labor rights, although efforts to refine these laws
were underway in late 1993.  Resources devoted to investigation
and enforcement of complaints, centered in the Labor Ministry,
are slim.  In 1993 there was little interest in labor activism,
due to the profound economic crisis Georgia was undergoing.  

    a.   Right of Association

    The Soviet-era Labor Code allows workers to freely form
unions and associations.  These associations must be registered
with the Ministry of Justice.  In late 1993, the Georgian
government was looking to implement specific legislation that
would allow for strikes and prohibit management retribution
against striking workers.  A single confederation of trade
unions, made up of about 30 sectoral organizations, is active
in Georgia, and was steadily losing membership throughout 1993.

    b.   Right to Organize and Bargain Collectively

    The Labor Code also grants the right to workers to organize
and bargain collectively, and this right is freely practiced in
the country.  Anti-union discrimination is prohibited.

    c.   Prohibition of Forced or Compulsory Labor

    Forced or compulsory labor is prohibited under the Labor
Code.  Instances of this practice are rare.

    d.   Minimum Age of Employment for Children

    According to the Labor Code, the minimum age for employment
of children is 14 years, and those between 14 and 16 years are
allowed to work at most 30 hours per week.  The minimum age is
widely respected, and officials know of no sectors where the
rule is systematically violated.  

    e.   Acceptable Conditions of Work

    Acceptable conditions for work generally follow the old
Soviet pattern.  A nationally mandated minimum wage applies to
the government sector.  In November 1993, it was revised to
23,000 coupons a month.  The labor week is 41 hours, although
the government was considering adopting a standard 40-hour
week.  The Labor Code permits higher wages for hazardous work
and allows a worker to refuse to perform if the work could
become a danger to his life, but otherwise has insufficient
safeguards for worker well-being.
    
    f.   Rights in Sectors with U.S. Investment

    Conditions in sectors where there is US investment do not
differ from those in other sectors of the economy.

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