DAILY REPORT ON RUSSIA

AND THE FORMER SOVIET REPUBLICS

INTERCON INTERNATIONAL USA, INC., 725 15th STREET, N.W., SUITE 903,

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Daily intelligence briefing on the former Soviet Union

Published every business day since 1993

Tuesday, June 8, 1999

Remarks of His Excellency

President of Georgia Eduard Shevardnadze

American-Georgian Business Development

Council

April 23, 1999 Washington, DC

I am happy that the American-Georgian business development council has been established and is currently functioning in the United States. We place great hopes on its activities, and I am certain that it will evolve into an important institute for attracting major American investment and introducing new technologies in Georgia. It is for this purpose that the Council was created, and I am delighted that it began to pursue these goals from its inception. It is reassuring that the decision to found the Council came as a result of mounting interest among American businessmen toward Georgia. Members of the Council include corporations like Chevron, BP Amoco, Arco, Unocal, Frontera Resource, Northrop Grumman, Coca Cola, Phillip Morris, RJ Reynolds, Merlot Wines and other American Giants. Georgia's longtime friends, Mr. Enders Wimbush and James Baker, the President and Honorary Chairman of the Council, respectively, I offer my heartfelt thanks to these individuals for their commitment and support of Georgia. With such friends, and such a powerful nation and such companies by your side, it is not surprising that we have overcome the crisis and put the country successfully on the road of democratic and economic transformation.

Since regaining national independence in 1991, Georgia has found itself in difficult circumstances. Determined by political instability, separatist military conflicts largely imposed from the outside, and all the complexities characteristic to the transition to a market economy. All this was compounded by a severe energy crisis and as a result, in 1991-93 we found ourselves in virtual economic disarray. With the help of IMF and World Bank, and the Anti-Crisis

Program was developed, and in 1994 comprehensive reform began. It embraced all spheres and sectors of the economy. Reforming fiscal policy and the banking system, speeding up privatization, liberalizing prices, improving the tax system, liberalizing foreign trade, and last but not least legal framework. In a relatively short time the situation radically improved. Political stabilization was achieved.

Today, Georgia's major accomplishment include excellent political and economic relations with our neighbors. This underpins stability and peaceful development of the country. These successes, along with vigorous effort, along with the government and people of Georgia, is due also to the assistance offered by international organizations and developed nations. The role that the US has played in providing financial, technical and humanitarian support has been vital. Since 1992, the United States has allocated more than $700 million in government assistance. Georgia has received medication, children immunizations, medical equipment, wheat, mazut and other vital products in humanitarian assistance. Your country is providing technical assistance in the restructuring of the energy sector, health reform, institution building, training and retraining, democratic nation building, border protection and other areas. We attach great importance to US assistance in the current year aimed at expediting structural reforms and will target normalizing the fiscal policy, eliminating corruption, distribution and titling of agricultural land, accelerating privatization, small and medium sized business development. The support given by IMF and the World Bank deserves special mention, since the US is the largest contributor to these international organizations. These two organizations have allocated around $550 million to fund various programs. The size of joint World Bank-Georgian projects is $293 million, and IMF is $256 million.

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Initial results of economic reform are fairly impressive. Hyper-inflation was curbed and financial stability was achieved. The monthly inflation rate, which was in 1994 66 percent, was brought down to 3 percent every three months for the first three quarters of 1995. This allowed us to introduce the national currency, the Lari, in September 1995. In 1996, the inflation rate was 13 percent, and in 1997 this figure was only 7.5 percent. In 1995, the economy began to grow. The GDP grew by 2.4 percent in 1995, and in 1996-1997, this figure reached 12 percent. In 1998, however, macro economic indicators relatively worsened, due mainly to the global financial crisis - particularly the Russian economic crisis. We have nevertheless been able to avert the devastating impact of the Russian crisis, and managed to maintain some growth. In 1998, GDP increased 3 percent and inflation was 10.7 percent.

It is common knowledge that integration with the world market depends on the decentralization and liberalization of trade. To this end, much has been done in close cooperation with IMF and the World Bank. This has been reflected in the intensification on foreign trade. The geography of the latter expanded, and in 1998 Georgia traded with 110 different countries. The US is one of our leading partners. During the 1994-1998 period, the turnover increased 8 times. In 1998, trade with the US accounted for 6.8 percent of all foreign trade, and the US was ranked fifth in our list of trade partners.

A number of countries such as Japan, EU nations, Czech Republic, Slovakia, Switzerland and Canada have granted Georgia General System of Preferences Status (GSP). This means that they levy reduced tariffs on Georgian imports.Intensive work is underway to prepare for Georgia's accession to the World Trade Organization.

The process of privatization is being carried out in a country where at the beginning of the 1990s there was not a single private enterprise. Today, more than 80 percent of budget revenues are generated in the private sector. A new phase of privatization of state assets - selling medium and large size enterprises at zero bid and special options - is the hallmark of the current state of economic reform.

Georgia's two-tiered banking sphere is functioning according to international norms. Recommendations of the IMF and the World Bank were given full

consideration during the course of banking reform. The reliability of Georgian Commercial Banks has strengthened so much that the World Bank, EBRD, the European Union and other multilateral bodies, as well as governments of individual donor states carry out their projects by means of Georgian banks. Also joint banks are being actively created. I must note in addition that we have been able to preserve our banking system, intact in the aftermath of the Russian crisis. The Parliament has passed the basic laws regulating relations in the economic sphere. Some of them deserve special mention, such are the ones on entrepreneurial activity, the National Bank, Commercial banks, leasing, promotion and guarantees for investment, collateral, monopolies and competition, advertising, land ownership, electricity, civil, customs and tax codes as well as others.

Georgia has formalized legal contractual framework for foreign economic relations. Intergovernmental bilateral agreements on protection and encouragement of investment, on co-operation to foster humanitarian and technical assistance, on trade and economic relations have been signed between Georgia and the US. In April 1996, Georgia signed a co-operation and partnership agreement between the EU and its member states. Under the agreement, Georgia is regarded a full trade and economic partner of the developed Western European nations. Our co-operation with EBRD is gaining momentum. Projects in energy, transport, industrial and banking sectors are being implemented in Georgia, with the participation and funding of this bank. EBRD assistance in the development of small and medium businesses must be especially noted.

My task as President has always been to facilitate the creation of conditions conducive to foreign investment in Georgia. I personally act as Chairman of the State Investment Council of Georgia, and I assure you that I will support your projects in every way possible. Under our legislation, foreign investments are unconditionally protected, and any discrimination against them is ruled out. Foreign investors independently determine the size and direction of investment, and they enjoy the right of unimpeded and immediate repatriation of their profits, capital,and property. Although violations still occur, and all this is because the judicial system is still inadequate. This is the focal point of ongoing judicial reform. For all these reasons, many joint ventures have been

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and production in Eastern Georgia. The AT&T, SPRINT, Metromedia Int'l, Citadel Company, and TOKPLAN Holding have invested substantial capital in communications and are having success with their Georgian partners. There are many similar examples in tourism, health care and other sectors, but the potential for co-operation is far greater than what we have so far utilized. Both the US and Georgia sides must promote dialogue and raise awareness of these prospects to foster wider co-operation.

The spheres where investments are brightest are energy, transport, agriculture and food processing, communications, tourism and industry...Agriculture and food processing are vital to our economy. Georgia is rich in potable, mineral and sparkling water with medicinal qualities and has the necessary bottling capabilities. Many of you must be aware that Georgia has a millennia-long tradition of wine making...Huge opportunities await the foreign investor in this area. Georgian industry and agriculture require today major investment in order to technically upgrade and modernize. I would be remiss if I did not mention Georgia's most advantageous geopolitical location and our prospects as a transit country. Georgia is a key link on the Eurasian Transport corridor. It acquires new meaning for Georgia as development of this corridor, whose focal point is Georgia and its Black Sea Ports have attracted the European Union attention. This is the 5th year that the TRACECA Program has been functioning, and we have great hopes on this. Investing in construction of rail and motorway routes and the Black Sea Ports is important and will be profitable for investors - especially if we consider prospects for the transport of oil and gas via Georgia which require development of advanced infrastructures. All this is not only great economics, but smart politicians as well. This is the recognition of the ongoing peace process in Georgia. and a major factor for the peace and stability of the region. I hope that the ongoing process of positive transformations in Georgia will come to be a convincing arguments for American investors and encourage them to boldly invest in Georgia.

established and are successfully functioning in almost all spheres. From 1996-1998, firms from 37 foreign countries have invested their capital in Georgia. We attach great importance to establishing contacts and undertaking joint projects with US companies. As I have said, the US government has been very generous with assistance. I am satisfied with the way things proceed in this direction. Joint ventures with the participation of US businesses are already functioning in the areas of energy, communications, construction, food industry, tourism and banking. In 1998 the share of US private investment was the highest of all countries, amounting to 23.5 percent of all foreign investment in Georgia this year.

I am glad that OPIC has ensured projects in communications and banking, as well as American investment in privatization process. We were looking forward to the opening of the Caucasus fund - OPIC's regional office in the South Caucasus. It is now functioning, and will doubtlessly bring about an increase in US foreign direct investment in Georgia.

Following the OPIC example, other large insurance companies such as the German Hermes and French Kofas began to insure individual projects...As you well know, the US companies UNOCAL, EXXON, Penzoil and BP Amoco are part of the AIOC. The consortium has completed construction of the Western export route for early Azeri-Caspian oil which is already operating. This consortium has also built an oil export terminal in Supsa. On April 17th we officially opened the pipeline....The projects of building an oil refinery and related export terminal and rail infrastructure are being developed. The feasibility study for this project was funded by the USTDA. The study is being carried out by the American company OTS Capital, a consortium of US firms. The preliminary results indicate that the project is technically and economically viable. OTS Capital will finance and construct the refinery and export infrastructure after the results of feasibility study is available, and agreements can be made with the Georgian side. The joint venture with the participation of the American Frontera Resource is working on exploration

Paul M. Joyal, President, Editor in Chief Clifton F. von Kann, Publisher Jennifer M. Rhodes, Principal Editor

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