Issue 5, 2013. October-November

   

NEW RESTRICTIONS ON FOREIGNER OWNERSHIP OF AGRICULTURAL LAND NEGATIVELY IMPACTING INVESTORS

A new amendment that bans the sale of agricultural land to foreigners until 2014 is already costing Georgia valuable investment in the wine industry, as well as other sectors. While the government might offer a half measure - the possibility of long term leases - investors and business associations like the American Chamber of Commerce remain concerned the ban could create long lasting negative repercussions.

Molly Corso

Foreign investors might be offered a temporary reprieve from a restrictive ban on acquiring agricultural land with a last minute decision by the government to allow long-term leasing of land. But will that be enough to convince investors the sector is safe?

The temporary ban, which is part of a parliament-led effort to tackle land reform, went into effect in July after months of speculation and a growing number of media reports highlighting conflicts between foreign land owners and their Georgian neighbors.

The amendment banned foreigners acquiring or inheriting agricultural land until the end of 2014. It also stops current foreign owners from expanding their holdings or selling their property to other foreigners.

Extremely restrictive for foreign investors, the amendments were a shock for businesses spanning from small private investors to major projects.


David Lee, the general director of Magticom and a private investor in Georgian agriculture, stressed that the law causes investors to pause and reconsider investing in property they already own.

Lee, who also co-chairs AmCham's Agribusiness Commitee, noted that the amendment has "very wide implications" for foreign investors in many sectors.

Jacques Fleury, the CEO of Georgian Wines & Spirits Company (GWS) and the director of Ch√Ęteau Mukhrani, told Investor.ge that GWS has halted plans for a 10 million euro investment program in new vineyards until "this issue is solved."

"The recent amendment that suspends the possibility for foreigners or foreign entities to own agricultural lands in Georgia will have a very negative effect on foreign investments in the wine sector. In the last fifty years the development of the wine industry in Chile, Argentina and California has been driven by the acquisition and the development of new vineyards owned by foreign investors," he told Investor.ge.

"In order to develop the international awareness of Georgian wines, it is most necessary to attract in Georgia some very famous names in the wine sector, same names who have invested in California and South America. I doubt that those companies will put a foot in Georgia if they cannot valorize their investment."

But Davit Onoprishvili, the head of the budget committee in the Georgian parliament and a member of the ruling Georgian Dream coalition, told Investor.ge the amendment is not trying to frighten off investors - or harm businesses. He noted there is a fundamental issue facing the government: the new administration claims it is unclear how much agricultural land is owned by foreigners today in Georgia.

While preliminary reports put the number at around two percent of the total agricultural land in the country, the perception that it is much higher has added urgency to the issue of land reform - and creating a better cadaster system.


Long term leases, an idea supported by Onoprishvili and Prime Minister BidzinaIvanishvili, are being discussed as a possible measure to ease investors' concerns.

For some industries, like the wine industry, however, a long term lease falls short of the guarantees investors need to have before entering - or expanding - in a market, noted Fleury.

"In our industry the value of the business after years is essentially translated in a price per hectare of the property according to the Appellation zone it is located in, or the international value of the wine brand," he said.

"I doubt that a long term lease of 30 years as suggested by some members of the government will solve the issue. It may work for annual crops such as cereals or vegetables, but not for wine projects, which have long term perspectives."

Passed by the Georgian Dream-controlled parliament in June, the amendment seeks to circumvent a 2012 Constitutional Court decision that opened up direct ownership of agricultural land to foreigners. The changes ban foreigners from acquiring, selling to other foreigners, and inheriting agricultural land until the end of 2014. Previous to the ruling, foreigners could only own land in Georgia by establishing a company registered in Georgia.

Under the newly amended legislation, noted Ketti Kvartskhava, a partner at BLC Law Office in Tbilisi, investors from a range of businesses could run into problems.

"We are talking about the status of the land, rather than the purpose of the land," she said, adding that distinction has immediate implications. For instance, Kvartskhava noted that "a lot" of land around Tbilisi has agricultural status even if it is not used for agricultural purposes.

"The implication of this law goes way beyond the scope of pure agricultural land."

For Esben Emborg, a managing principal of SEAF's Georgia Regional Development Fund (GDRF), the amendments represent a threat for investments - and for the future development of the sector.

"For a fund like us [it is a problem]. We were encouraged to invest in agriculture, like everyone else who was encouraged to invest ...," he said.

"It affects our investment because we cannot sell or divest or exit any of our investments unless it to a 100 percent Georgian business or person. And it is highly unlikely that is going to happen."

Emborg noted there is also a "psychological" impact of the amendment.

"The idea that you are not wanted is one thing but the idea is if they can do this, what will they do next?" he said.

But PavleMgeladze, a spokesperson for the Ministry of Agriculture, stressed the change is merely a temporary measure designed to give the government time to study the situation and create a modern land use policy.

Even if the government views the measure as short term, however, there is still a question of the amendment's constitutionality.

Mathias Huter, an analyst for Transparency International Georgia, has applied to the Constitutional Court to overturn the new amendment since it violates the 2012 decision, but the review process could take several months.

In the meantime, however, some investors are concerned the amendment will adversely impact a struggling part of the economy. Agriculture, once an engine for the Georgian economy, has dropped below 10% of the country's GDP even though 46.8% of the population still lives in rural communities.

AmCham, working through its AgriBusiness and Commercial Law and Tax Committees, is actively following the government's response to the amendment. In a detailed analysis of the amendment's possible repercussions for investors, the committees found that it could negatively impact foreign and local landowners by limiting the potential pool of purchasers. In addition, it makes direct investment into the agriculture sector "much more unlikely."

"Foreigners literally cannot buy equity in agriculture companies and they are unlikely to make green-field investment based on leases," the committees found, noting that the potential problems created for the finance and investment sectors seem to be particularly problematic.

"Banks and international financial institutions may not be able to use agricultural land as collateral for new loans and collateralon existing loans may have to be devalued. Investment funds, government funds, and even Prime Minister Ivanishvili himself, as a French citizen, will be restricted in their activities."