The FINANCIAL — A Georgian law which limits agro land acquisition by foreigners has angered many investors and forced them to change their plans in Georgia. LTD Jiveli, co-owned by Polish investors, is one of those companies and was planning to invest EUR 30 million in wine production. The company was denied the possibility to register purchase of the land. “Georgia is sending the message that it’s not open to foreign investment,” American businessmen told The FINANCIAL.
In Spring 2013, two Members of Parliament, Gigla Agulashvili, Chair of the Agricultural Issues Committee, and Zurab Tkemaladze, Chair of the Sector Economy and Economic Policy Committee, drafted a ban on all non-Georgian citizens (including Georgian entities with foreign minority shareholders – foreigners) from purchasing or inheriting agricultural land. The ban has been in effect since June 2013 and is planned to expire in December 2014. Prior to this decision, there were several minor protests made by Georgian farmers against foreign landowners.
The moratorium expired on 20 September but the Georgian Government added new restrictions for foreigners.
Foreigners can purchase agricultural land only if they have experience in agricultural activities in the country of at least 5 years. Individuals are also required to have a Georgian residential permit.
“We purchased 5,336 square meters in May in Telavi, in the Kakheti region. 50% of our company is owned by Polish investor Jurek Marian Berdz. We planned to develop wine-making. However, the Public Registry did not issue permission due to the participation of our foreign partner,” Avtandil Tcharbadze, owner of LTD Jiveli, told The FINANCIAL.
Avtandil owns 25% of the company, while the remaining 25% is owned by his father Zurab Tcharbadze.
“In the first stage the investor planned to make a EUR 1 million investment. The total volume of planned investments was EUR 30 million spread over the coming 5 years. Georgia is hardy saturated with investments of such a scale. If the jurisdiction hampers the inflow of this investment it will firstly impact on our economy,” said Tcharbadze.
Zurab Tcharbadze has been involved in business since 1992. In his words, it is the first time that he has faced such a problem. “Our foreign partner was ready to leave here,” he said.
“I have been cooperating with our Polish partner for four years. During this time I have been assuring him that the tourism and wine business is the most profitable in Georgia. We had hoped to export our products to the European market,” said Tcharbadze.
Tcharbadze does not plan to give up but instead plans to “fight to restore justice”. With the assistance of Transparency International Georgia the company has appealed to the Constitutional Court.
“How properly the Public Registry decided to link the 50% ownership by a foreigner as proof that it was an LTD registered by a foreign alien entity in Georgia – is really questionable,” said Oliko Shermadini, Assistant Lawyer at Transparency International Georgia.
In June 2014, the Constitutional Court upheld Transparency International Georgia’s constitutional appeal in the case of Mathias Huter vs. The Georgian Parliament. The Constitutional Court ruled the Georgian Parliament’s moratorium on the acquisition of agricultural land by foreign citizens until 31 December, 2014, to be unconstitutional as it contradicted Article 21 of the Georgian Constitution whereby the right of property and inheritance is recognized and inalienable and it is also prohibited to abolish the universal right of holding, acquiring, selling or inheriting property.
“Some Georgians seem to blame the real problems in Georgian agriculture on a supposed influx of foreigners to Georgia to buy agricultural land,” said Ted Jonas, Partner at DLA Piper Georgia, who has spent many years in Georgia. “This is totally false – the problems in Georgian agriculture are a lot more complicated than that. Unfortunately, neither the former government nor the current government — if their policy is just to limit or ban foreign ownership of agricultural land — have addressed those problems adequately,” said Jonas.
“The fears of some people about foreign ownership of Georgia’s natural resources are understandable,” Amy Denman, Executive Director at the American Chamber of Commerce in Georgia (AmCham), told The FINANCIAL. But she says that these fears are misplaced.
Denman is well aware of Georgia’s political and economic changes, having spent more than ten years in Georgia.
“Foreign investment in Georgian agriculture is a win-win for the investors and the Georgian people. It will help stimulate employment, reduce poverty, grow the economy and provide opportunities and should be encouraged,” said Denman.
“All investment is policed by Georgian law and that law is designed to avoid negative consequences from any investments, whether those investments come from Georgians or foreigners. If there are problems with some investments then the laws governing land-use should be corrected. However, these laws should be applied equally to Georgians and foreigners, as both groups of investments bring the same challenges and the same opportunities,” said Denman.
According to Jonas, the correct policy is to allow foreign investment in agriculture – and it can be under certain reasonable regulations, like requiring that the land be used for agriculture, a certain amount be invested in it, etc – and at the same time, support Georgia’s rural population and small farmers, through intelligent government programmes.
“For example encouraging the formation of cooperative processing, transportation and marketing enterprises, and agricultural extension (field education services) such as the United States deployed in the 1930s, when U.S. small farmers and agriculture were in a similar crisis. These programmes saved American agriculture and helped build it into one of the American economy’s strongest performing sectors. The problem in Georgia is that the former government gave us foreign investment, with no support to Georgian farmers, and the current government is just banning foreign investors while not doing enough to help Georgian farmers either, which is arguably worse,” said Jonas.
In Denman’s words, the Government is misunderstanding foreign investors in two ways. “First, new restrictions like these, even if they are manageable by a determined investor, increase the costs and risks of investment and so make that investment less likely. Second, these new laws seem to be based on the concern that there are dramatic volumes of international investors in the sector. At the current time, international investment in agriculture in Georgia remains small and, while there are great hopes for its development, small changes may make Georgia significantly less appealing.”
According to Transparency International Georgia, foreigners currently own approximately 18,500 hectares of agricultural land – about 0.7 per cent of all agricultural lands.
Jonas warns that Georgia is sending a message that it is not open to foreign investment in one of the areas where it is needed most.
“Any law that is directed against foreign investors will create the perception that Georgia is less welcoming to investors. This could have a broader impact than the agricultural sector. The law also negatively affects Georgian owners and investors in agricultural land. The pool of potential buyers is reduced by this law – thus artificially driving down market price,” said Denman.
Supporters of the existing regulation stated that such jurisdiction is well approved in many western countries. Denman reiterated that “developed countries often have laws that are very different to developing countries because they do not need foreign investment in the same way”.
“Therefore, it is irrelevant to list what happens in the West, in this instance. What is important is that Georgia wants and needs foreign investment in agriculture. This law reduces the likelihood of that investment. Therefore it is contrary to the stated goals of the Georgian Government and people,” Denman said.
“In Denmark, for example, foreigners are not allowed to buy agricultural land. Denmark specifically made this a condition to its accession to the EU. If you visit a farm in Denmark, and compare it to the average farm in Georgia, you will see exactly the difference between the two countries, and why the policy is not harmful to Denmark. Denmark, and most other European countries that have such a ban, have extremely strong domestic agricultural sectors: smart, competitive, high-tech, modern, producing and exporting huge amounts of agricultural products and supporting whole families and communities on the land. That is not the case in Georgia,” said Jonas, DLA Piper.
“Georgian agriculture is practically subsistence level and is not producing for export. Rural communities are sinking in poverty and social problems. Georgia needs foreign investment in its agriculture to grow it; to transfer knowhow and technology from foreign investors to Georgians. Denmark or Switzerland do not need agricultural investment or technology from Germans, for example, which happen to be the people they are most worried about buying up their land. There is very little risk that foreign investors will buy all the land or crowd out Georgian farmers. This can be controlled and regulated anyway. The risk of this is minimal. The harm that is done by banning foreign investment in Georgian agriculture – and let’s be clear that ownership of the land is necessary for the investment – far outweighs the very controllable risk of foreigners buying up all of Georgia’s land,” Jonas told The FINANCIAL.
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