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Georgia, Tbilisi

CBW Blog: Doing Business By Unwritten Rules

Dr. Andrei Maximov

Successful reforms, great institutional environment for business, large-scale support by the state—all these are real starting points that foreigners experience in Georgia.

Yet, if all of that is so rosy, where are the hordes of happy investors from all around the world? Why do so many leave the country only after a year or two, with a feeling of deep disappointment and feeling lucky if they can still get back some of their invested funds?

This is especially true for small- and medium-scale business people who do not get enough attention from the state because it concentrates its attention on large strategic investors—which is, by the way, fully reasonable. In my opinion, the main reason for such a condition is the fact that doing business “by unwritten rules” is prevalent in Georgia’s traditional economy.

In Georgia, especially in rural and/or far-off touristic regions, an external investor is too often seen as a “money purse with feet”—as someone who must be immediately relieved of his heavy burden, whatever it takes… (Well, even in Tbilisi one can quite often encounter such a phenomenon.)

An investor is, however, someone who has a lot of expertise, knows a lot about technology, management and marketing. Unfortunately, the goal of getting practical results together—maybe not tomorrow, but after a reasonable period of time for a given business project—is not always predominant.

A newcomer to Georgia is usually not ready to deal with an obvious contradiction: Georgians are phenomenal, fantastic friends and hosts and yet that goes together with a low level of contractual and legal culture. There is too much here of doing business “by unwritten rules” of accepting business as a friendly gesture or a favor for a relative. If best friends or close relatives verbally agree on a joint deal without making clear all of its details, you can rest assured that they will become worst enemies in no time at all. Needless to say that this is even worse for someone who came along from far away bringing his money with him.

It is understandable from where such a phenomenon evolved. On one side, most of private business in the Soviet Union (including that in Georgia) could function only outside of the regimented Soviet legal framework. So, any business disputes which always arise among partners were invariably resolved by “people of authority”, that it “top dogs”.

In the 2000s the successful process of driving organized crime (“mob bosses”) out of Georgia was a great achievement of the state on its path to building democratic society and creating successful market economy. At the same time, this has brought about a vacuum in the resolution of existing business conflicts. Both judicial and legal system remained ineffective and sluggish, and it could not respond adequately to the challenges and needs of the new times.

On top of that, business “by unwritten rules” was enhanced by prevalent lack of or disregard for business planning and marketing. Not only in Georgia, but in all post-Soviet realm that is a real heritage of the Soviet model since the main issue for the economy of overall shortages was to produce rather than to sell.

Producers, especially those in Georgia, were never concerned with the issue of selling their goods: Georgia had, in practical terms, a monopoly for citrus cultures and other fruits that were universally craved for in the USSR. Besides, there existed guaranteed mass market for tourism and medical services in the huge Soviet trade-union sanatoriums built in Georgia. Older-generation Georgians can still relate with a lot of nostalgia how closer to New Year’s Eve a truckful of tangerines could be sold in any larger Russian city in no time at all, so that one could bring back to Georgia a coveted Volga automobile and thus only within a few weeks get the top item in the Soviet consumption model.

In the market economy, however, everything works in quite the opposite way—which is great for consumers and very unfortunate for producers. After tangerines from Georgia had made their way back to the Russian market in 2013 they found there tangerines from China, Morocco, Israel, Spain and many more countries plus featuring better prices, better packaging, larger volumes and an option for an impressive payment delay. Same was true for other items of Georgian agricultural products.

Now try to imagine just what would happen to any business project if it existed is not only outside of the legal environment, in the sphere of business “done per unwritten rules”, but also was never calculated, had no business plan, nor any idea re how and where to sell its product or service. Do not even start guessing: partners will go fiercely against each other trying to save at least some of the invested capital.

As the Russian saying goes, “there’s more joy in anticipation than in realization”… In most cases, by the way, there is no ill will involved. Dishonest entrepreneurs or even crooks exist in any country, and Georgia is not an exception in this respect. On the contrary, my own experience in my recent business activities tells me that the possibilities of encountering indubitable fraud when doing business in some neighboring countries are much higher than in Georgia.

Still, uncalculated business ventures result in ubiquitous payment defaults or considerable payment delays as compared with deadlines that were agreed upon when the covenants of the parties had been made verbally. The result is this: it is not customary in Georgia to settle on schedule! It is not considered shameful to default on an obligation to pay for delivered goods or provided services… As a result, the acute problem for the Georgian economy is the issue of payment arrearage which negatively affects, first of all, the real, non-financial sector of the economy plus construction and logistics.

But no only these latter ones. Payment default gets distributed as blood clots throughout the country’s whole economic system actively slowing down both entrepreneurial effort and economic growth.

You may ask just what should be done? In theory, things should straighten out with time: free market and competition should force out of the field dishonest and/or ineffective business people. Well, if one condition is certainly met: there can be no competitive advantage to those who default on or delay payments, who breach the terms of agreement.

Any contractual delinquency, any dishonest or fraudulent action should be quickly, effectively and inevitably punished within the framework of the legal environment, i.e. via the existing judicial and legal system. Only in that case will the situation immediately change for the better. In other words, the state must assure the inevitability of punishment.

In his turn, outside (foreign) investors should not take the bait and agree to doing business “by unwritten rules”: he must go with the existing contractual and legal norms of the Georgian legislation, run his business in a transparent manner, always stay within the legal boundaries, accurately pay taxes and, finally, try not saving money on lawyers and auditors if he wants to be able to defend his interests in due course. It will be late calling for help if the foreigner did already position himself outside the law and legal protection while trespassing against Georgia’s laws.