Repeatedly ranked as one of the world’s top economic reformers, Georgia is accustomed to accolades for its pro-business attitude. But the trial of two Israeli businessmen on bribery charges is stoking fresh concerns about the impartiality of Georgian courts, at least in cases that pit the government against foreign investors.

Oil trader Ron Fuchs and his associate, Ze'ev Frenkiel, were involved in a 14-year dispute with the Georgian government over the lease of an oil pipeline in which Fuchs and his Greek partner, Ioannis Kardassopoulos, had invested. In March 2010, the International Centre for Settlement of Investment Disputes (ICSID), a Washington, DC-based arbitration tribunal, ordered the Georgian government to pay $98 million to Fuchs and Kardassopoulos for reneging on the lease.

But the matter did not end there. In October 2010, three months after the Georgian government called for the ruling to be thrown out, Fuchs and Frenkiel were in jail in Tbilisi on charges of allegedly offering Georgian Deputy Finance Minister Avtandil Kharaidze a $7-million bribe for the government to drop its opposition to the award.

Fuchs’ co-partner in the pipeline, Kardassopoulos, was similarly charged, but in absentia.

The case initially sparked avid opposition interest, with sympathetic media outlets suggesting that the government had entrapped Fuchs and Frenkiel in a bid to duck out of paying the arbitration award. The pair was arrested during a meeting in Batumi with Deputy Finance Minister Kharaidze.

The government maintains that the ICSID’s ruling has no bearing on its bribery charges. Its case against the two men rests largely on hours of secretly recorded video and audio footage of meetings in Turkey and Georgia involving Fuchs, Frenkiel and Georgian government officials.

The defendants, who both pled not guilty to the charges, claim that they traveled in good faith to Georgia after receiving a written invitation from Prime Minister Nika Gilauri to discuss a “mutually acceptable solution” to undefined “ongoing negotiations” with the Georgian Ministry of Finance.

Defense attorney Archil Kbilashvili asserts that, partly on the strength of Gilauri’s alleged letter, the two men understood that Prime Minister Gilauri had sanctioned Deputy Finance Minister Kharaidze to negotiate a $7 million “investment” with Fuchs and Frenkiel in exchange for the government paying the pipeline partnership a reduced compensation of $72 million

The Tbilisi City Court, the court trying Fuchs and Frenkiel, has admitted Gilauri’s alleged letter as evidence, but has denied as “irrelevant” a defense motion to call the prime minister or Finance Minister Kakha Baindurashvili to testify about the government’s negotiations with the two men.

An affidavit that the government’s covert recordings of meetings in Istanbul with Fuchs and Frenkiel were illegal under Turkish law has also been excluded.

The court’s decision to exclude testimony from Gilauri and Finance Minister Baindurashvili – and its slow pace of work, a frequent complaint among civil society activists -- has raised questions about its impartiality.

Instead of hearing witness testimony, the court, which convened in January, has spent the past month listening to live, simultaneous translations into Georgian of the footage of Fuchs and Frenkiel’s discussions with officials.

Zaza Bibiliashvili, an investment lawyer and founding partner of BGI Advisory Services Georgia, which works with foreign investors in Georgia, cautioned that it is too early to comment on the case. But he noted that investors often perceive Georgian judges to be wary of ruling against the government.
“The judiciary system today is much more competent, much more impartial, much better managed … than ever before,” Bibiliashvili said. “But at the same time, in cases where there is an expressed or implied government interest, the judiciary is subject to either pressure, or they self-censor themselves.”

Judicial reform is “crucial for … investors, foreign or domestic alike,” agreed Mamuka Tsereteli, president of the Washington, DC,-based America-Georgia Business Council, in an email interview.

Regardless of how the bribery case is resolved, the trial could cast a shadow on Georgia’s attractiveness for investors, Tsereteli added. “In general, any negative publicity, with or without merits, is damaging for the attraction of … FDI [foreign direct investment] to Georgia,” he said.

Bibiliashvili differed slightly. “If Singapore arrests a person and charges him/her with a crime, does it make Singapore less attractive for investors? Clearly, the answer is ‘no’,” he said. “The thing is, if the charges are fabricated, if there is a set-up, that is another issue.”

Citing the ongoing trial, a representative of the prime minister’s office declined to comment to EurasiaNet.org on Gilauri’s alleged involvement in the negotiations with Fuchs and Frenkiel. The government in January 2011 petitioned the ICSID to “revise” the award payable to the Fuchs- Kardassopoulos partnership.

The Israeli Foreign Ministry has warned that the case could harm investment relations with Georgia, but also declined to comment on the case to EurasiaNet.org.

Whatever the trial’s outcome, after years of praise from various groups that monitor the global business climate, the Georgian government is keen to maintain its international reputation as a business-friendly environment for investors. With that goal in mind, steps have been taken recently to smooth over tensions with the local business community.

In early December 2010, to address unease about Georgia’s ever-aggressive tax police, President Mikheil Saakashvili threw his support behind the creation of a “business ombudsman,” as well as an amendment to the tax code that would ensure businesses would not be penalized for honest mistakes.

The office of the business ombudsman, though, will not have any role in monitoring court cases involving businesses, said newly appointed business ombudsman Giorgi Pertaia, a former adviser to Prime Minister Gilauri.

Nonetheless, Pertaia, who is still lodged in the prime minister’s office pending the assignment of new office space, maintains that the creation of the business ombudsman’s post is a sign that the government wants to hear investors’ concerns – whatever they might be. “The government really wants to solve the problems of the business [sector],” Pertaia said.