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Issue no: 842/26

• MAY 10 - 12, 2016

• PUBLISHED TWICE WEEKLY

PRICE: GEL 2.50

In this week’s issue... PM Announces Future State Business Programs and Their Social Benefits

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FOCUS ON TOURISM SECTOR DEVELOPMENT

The Georgian Co-Investment Fund has announced its readiness to hand over eight of its funded projects to investors

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EBRD to Invest 400 Million Euros in Georgia This Year BY EKA KARSAULIDZE

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he European Bank for Reconstruction and Development (EBRD) is currently celebrating its 25-year anniversary and has highlighted its ‘historic investment’ in Georgia. In just a few decades of cooperation, the Bank has carried out 190 projects in Georgia and has invested more than EUR 2.6 billion. Continued on page 2

Helping SMEs Set Sail: EIF Signs InnovFin Guarantee with ProCredit Bank PAGE 4

Electricity Market Watch GALT & TAGGART PAGE 7

New Job Places Increasing by 2.6 Million Annually Thanks to Electronic Payments, says Moody’s PAGE 8

Changing Habits: Kakheti Region Begins to Separate Paper and Plastic Waste PAGE 10

Bruno Balvanera, Regional Director of EBRD in the Caucasus, Moldova and Belarus and Nodar Khaduri, Georgia’s Minister of Finance

IC Group: Insure Today, Pay Tomorrow PAGE 13 Prepared for Georgia Today Business by

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BUSINESS

GEORGIA TODAY

MAY 10 - 12, 2016

EBRD to Invest 400 Million Euros in Georgia This Year

PM Announces Future State Business Programs and Their Social Benefits BY EKA KARSAULIDZE

N Continued from page 1 “We consider Georgia as the best country in terms of reforms, as well as introduction of international standards and accepting the EBRD mandate. Georgia has the best investment environment and a great future and, to reflect this, the investment that the Bank implemented here is one of the largest in our portfolio of projects,” said Bruno Balvanera, Regional Director of EBRD in Caucasus, Moldova and Belarus. Georgia’s Minister of Finance, Nodar Khaduri, noted the importance of the assistance of the EBRD in Georgia and the projects that have already been and are going to be carried out. “The EBRD is the largest and most reputable of investors in our country,” the Minister said. “More than 2.6 billion Euros was invested in the public and private sector, with a focus on the banking sector, energy and infrastructure.” The Minister also highlighted the future projects

and stated that in the near future the EBRD will finance an initiative to introduce 60 new buses in Tbilisi which will run on compressed natural gas. “We plan to invest more than EUR 400 million Euros in Georgia - an unprecedented amount of money,” said Balvanera. “This money could go to various sectors of the economy, like hydropower, banking, municipal infrastructure, and the private sector. Overall, we are positive about the prospects of Georgia's development and look forward to further successful cooperation.” The Regional Director of the EBRD also stated that this year is a jubilee not only for the Bank but for the country as well as this year Georgia will celebrate the 25th anniversary of its independence. “This is a significant date for Georgia, too, and we are very pleased that it has been a member of our big family for such a long time. As a result, we have been able to carry out a large number of projects, attract investments and develop the economy,” Balvanera said.

ew economic initiatives were one of the main topics at the Georgian Prime Minister’s recent meeting with the Government at which he announced the construction of three new factories in the regions, container warehouse buildings near the Black Sea and the start of a new state program to support and finance Start-Ups. GEORGIA TODAY recently reported on PM Kvirikashvili’s new Start-Up funding program which will be available for any citizen with an innovative, exciting business proposal needing funding. The PM stated that, at the first stage, the program’s budget will consist of 11 million GEL, and is expected to increase to 35 million GEL. PM Kvirikashvili actively encourages businesses to get involved in government programs. In the framework of the state program ‘Produce in Georgia,’ the Government approved three projects and said it would invest about 4 million GEL. One of the projects will be a high-tech, modern livestock farming enterprise created in Martkopi village in Georgia’s Kvemo Kartli region. Local company Martkopis Baga will be responsible for implementing the project and around 2.5 million GEL will be invested. More than 1 million GEL will be invested to build

a construction materials manufacturing plant in Khelvachauri, Adjara, while 200,000 GEL will be invested to construct an Askangel Alliance Company factory that produces mineral products, in Guria. The PM highlighted that in total 164 plants have been created within the ‘Produce in Georgia’ program. In total, these factories are worth more than 400 million GEL, and employ 7,500 people. “It is extremely important that our citizens know about these kinds of programs as each of them is not only an impetus to our economy, but creates new jobs,” said PM Kvirikashvili. The country’s leader also claimed that a new container warehouse which is going to be built near Poti by local Iceberg Poti Company, would add to the support of Georgia’s economy. The new container warehouse will receive an investment of 400,000 GEL, but the focus of the discussion was on the job aspect, with the PM stating that each container shipped via Georgia meant more jobs and better use of Georgia’s transit function. “The number of containers being shipped via Georgia is on the up and there is growing demand for new logistics centers,” said the PM. “Georgia’s transit potential is being increasingly utilized. The growth of transit shipments via Georgian territory implies there are more employed people in Georgia, since there is a close correlation between the number of shipped containers and the prosperity of small and medium-sized enterprises.”


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BUSINESS

GEORGIA TODAY

MAY 10 - 12, 2016

Helping SMEs Set Sail: EIF Signs InnovFin Guarantee with ProCredit Bank BY KATIE RUTH DAVIES

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oday the European Investment Fund (EIF) signed an InnovFin Guarantee with ProCredit Bank in Thessaloniki, Greece, with the aim of supporting its financing of SMEs throughout Greece. Pier Luigi Gilibert, CEO of the EIF, spoke openly of the ‘uncertain global prospects’ and ‘important social challenges’ facing many countries of the EU, causing most to turn increasingly to SMES and entrepreneurs as an important source of economic growth. “Against this backdrop, appropriate access to finance is critical to enable these businesses to invest and create jobs,” Gilibert said. “The EIF, as part of the European Investment Bank Group, is pleased to support the active engagement of ProCredit Bank in setting up the foundations of a new entrepreneur-friendly business climate.” ‘InnovFin – EU Finance for Innovators’ is a joint initiative launched by the EIB and EIF in cooperation with the European Commission under Horizon 2020. The Guarantee was signed on behalf of ProCredit Bank by Rena Peicheva, ProCredit Bank EAD, Bulgaria, and Borislav Kostadinov, Member of the Management Board of ProCredit Bank Holding. The Greek branch of ProCredit Bank Bulgaria opened for business in Thessaloniki in November 2015. Borislav Kostadinov, prior to signing the Guarantee, spoke extensively of the need for better access to quality banking and finance for SMEs in

Dimitris Avramopoulos, European Commissioner; Pier Luigi Gilibert, CEO of the EIF, Rena Peicheva, ProCredit Bank EAD, Bulgaria; and Borislav Kostadinov, Member of the Management Board of ProCredit Bank Holding, at the signing ceremony in Thessaloniki today

Thessaloniki and Northern Greece and of his appreciation of the hard work and ‘wisdom’ of the experts in the EU Commission who orchestrated the framework under which the financing facilities function. “Just borrowing more finance is clearly not the answer,” Kostadinov said. “More finance can be detrimental. It is the right amount of debt, with the right purpose and the right structuring, that makes a difference for an SME, and even this not enough. Responsible banking is only possible when delivered by well-trained qualified personnel. Now that the umbrella agreement with the EIF has been signed, we are happy to report that we have both

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the right staff and the right facilities.” The signing and B2B event is being attended by over 500 business people from Greece, Georgia, Ukraine, Moldova, Albania, Kosovo, Romania, Bulgaria, and Bosnia & Herzegovina. Attendance from the Georgian side saw 18 companies and 27 business clients of ProCredit Bank while Greece boasted 109 business persons in attendance, expecting to attend over 600 B2B meetings. “The more than 500 business people present have come here today because they want to find out what is beyond the horizon and whether they can compete there,” said Kostadinov. “To sail beyond

the horizon, one needs to learn first how to build a good ship, and to learn from the successes and failures of others; to learn and share with others; join forces with others. ProCredit will be there to provide the soundest and most pragmatic advice to stretch the financial prospects of SMEs in the most responsible way. But we don’t build the ship, our clients do. That’s what Pro-Credit is here to achieve in order to help the region to fully realize its potential.” In the six months of staff training at the new Greek branch, ProCredit says it has met many a resilient local company. “Only a resilient and focussed, not overly rich, business can withstand the vagaries of the fastchanging climate,” said Kostadinov. “Northern Greece has both successful and confident SMEs and passionate business-people. Greece has survived the difficulties of the past years and has not stopped dreaming. These people have been able to imagine and reimagine; create and recreate and now I hope they’ll benefit immensely from the ProCredit approach.” InnovFin consists of a series of integrated and financing tools and advisory services offered by the EIB Group, covering the entire value chain of research and innovation (R&I) in order to support investments from the smallest to the largest enterprise. Horizon 2020 is the largest EU Research and Innovation program ever. With nearly 77 billion Euros of funding available over 7 years (2014 to 2020), it promises more breakthroughs, discoveries and world-firsts by taking great ideas from the lab to the market. Horizon 2020 is seen as a means to drive economic growth and create jobs.

EBRD Adjusts Economic Growth Forecast for Georgia BY EKA KARSAULIDZE

T Everywhere in a radius of 1500km! 3 hour non-stop flights! Price samples for Your Private VIP Jet:

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he European Bank for Reconstruction and Development’ (EBRD) Director for the Caucasus, Moldova and Belarus, Bruno Balvanera, announced the bank would adjust its forecast for Georgia's economic growth potential upwards. The EBRD did not provide exact numbers, but Balvanera noted that Georgia’s GDP growth potential could amount to more than 3 percent this year. According to the EBRD’s latest forecast from November 2015, Georgia’s GDP growth should amount to 2.6 percent this year. The EBRD’s newly revised forecast contrasts

sharply with the International Monetary Fund’s April prediction that stated the county’s GDP growth potential in 2016 would slip from 3 to 2.5 per cent.

New 5-Star Hotel Intercontinental to Open in Tbilisi by March 2017

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he construction of a new USD 53 million Intercontinental Hotel in Tbilisi will conclude in March next year, Adjara Group announced. The 210-room hotel will include seven different room categories, including a presidential suite. The Bank of Georgia, Adjara Group and the European Bank of Reconstruction and Development have signed a loan agreement worth USD 24 million for the construction of the hotel. The hotel will also include exhibition and conference halls, several cafes and an indoor swimming pool, according to Adjara Group. Adjara Group currently owns Rooms Hotel Tbilisi, Rooms Kazbegi and the Holiday Inn. The company is also building a 140-room Crown Plaza in Batumi, which is slated to open by mid-2017.


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BUSINESS

GEORGIA TODAY

MAY 10 - 12, 2016

Ivanishvili’s GCF Ready to Transfer 8 Tourist Projects to Investors Hotel at Erekle II Square

BY EKA KARSAULIDZE

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he Georgian Co-Investment Fund (GCF), founded by former Prime Minister of Georgia, billionaire Bidzina Ivanishvili, has announced that it is ready to hand over eight projects without any commercial benefit to itself, to those investors who provide successful implementation of said projects within the set deadlines, namely touristic projects in Tbilisi and the regions of a total investment cost of USD 574 million. The Chairman of the Supervisory Board of the Co-investment Fund, Irakli Karseladze, highlighted the profitability of the projects, taking into account the growing tourism potential of Georgia. “In the future, all these projects can become new business cards of Georgia as they provide a unique package of features, as well as contributing to raising tourist flow and tourism sector development throughout the country,” said the Chairman. Of the projects, five are Tbilisi-based hotels and three are hotel complexes in the regions. The construction of the

majority of them started in 2013 and some of them are expected to begin operating in the near future. Hotel Shekvetili, located on Georgia’s Black Sea coast and tagged for completion in late 2016, is the first hotel in Geor-

If investors are able to carry work out under the current conditions, we also agree to concede the 29 hectares of land we acquired this week

Hotel Sololaki

gia to have a swimming pool connected to the sea. The investment sum of this project is USD 77 million. The Magnolia recreational complex, with an investment of USD 80 million, is expected to be completed in 2019, and Hotel Ganmukhuri in Georgia’s Black Sea village of the same name, will open in 2018, having run up a cost of USD 40 million. Two hotels will be built on Erekle II Square in the historic center of Tbilisi

with a total investment cost of USD 49 million. One of the hotels will be opened next year, while the second one won’t open its doors until 2019. The construction of one USD 90 million hotel on Freedom Square and one of a higher scale (USD 200 million), Hotel Sololaki, will be finished in 2018 and 2019, respectively. Within the presented program, the GCF is also ready to hand over the Tabori project, which will be implemented on

Tabori Mountain in Tbilisi, near Mtatsminda. It will cost USD 40 million and should open in 2018. The Fund announced that under the same conditions, 29 hectares of land near the Tbilisi Botanic Garden, purchased under controversy last week, are also ready for transfer. “If investors are able to carry work out under the current conditions or are able to offer a better option, we also agree to concede the 29 hectares of land that we acquired this week. As a gift, they will also get 10 hectares of land owned by the Fineservice Company, which, in due time, was acquired at the investor’s request and with the support of the state budget explicitly without the right to build in order to protect the green space,” said Karseladze. The Chairman also notes that the projects have social value. Approximately 15,000 people are or will be involved in construction works, while the hotels themselves are anticipated to provide employment for around 2,500 employees. USD 216 million of the USD 574 million combined total value of the projects has already been invested. The GCF claim that any of the above projects are can be handed over to investors at any stage of their development if conditions are met.


BUSINESS

GEORGIA TODAY MAY 10 - 12, 2016

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The Galt & Taggart Research team comprises Georgian and Azerbaijani finance and economic experts who have broad experience of covering the macro and corporate sectors of the two countries. Our current product offering includes Georgian and Azerbaijan macroeconomic research, Georgian sector research, and fixed income corporate research. For free access to Galt & Taggart Research, please visit gtresearch.ge or contact us at gt@gt.ge.

Electricity Market Watch FOR GEORGIA TODAY BY TAMARA KURDADZE

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ector research is one of the key directions of Galt & Taggart Research. We currently provide coverage of Energy, Healthcare, Tourism, Agriculture, Real Estate, and Wine sectors in Georgia. As part of our energy sector coverage, we produce a monthly Electricity Market Watch, adapted here for Georgia Today’s readers. Previous reports on the sector can be found on Galt & Taggart’s website - gtresearch.ge.

ANOTHER THERMAL POWER PLANT PROJECT UP FOR OPEN TENDER The construction of a second combinedcycle power plant is expected to commence in 2017. The 240MW power plant will replicate the technical character-

istics of Gardabani CCPP, which commenced operations in September 2015. Gardabani CCPP II construction costs

are estimated at US$ 160.0mn. According to GOGC, the owner of both projects, six international companies par-

ticipated in the Expression of Interest stage for Gardabani CCPP II, but their identities are not public yet. Gardabani

CCPP was built by Turkish Calik Enerji Holding. Continued on page 9


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BUSINESS

GEORGIA TODAY

MAY 10 - 12, 2016

New Job Places Increasing by 2.6 Million Annually Thanks to Electronic Payments, says Moody’s BY MERI TALIASHVILI

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ccording to a Moody’s study commissioned in 2011-2015 by Visa Inc and conducted in 70 countries, which constitute 95 percent of the global GDP, the increased usage of electronic payment products, including credit, debit and prepaid cards has increased while the use of consumption products has risen by 0.18 percent per year. As a result of increased electronic payments over the five-year period, 2.6 million new jobs have been created annually. “Electronic payments represent an important contributor to economic growth and employment creation. In those countries where card usage occurred most, economic growth also increased,” said Mark Zandi, Chief Economist of Moody’s. The report release by Visa Inc shows that payment electrification has benefited governments and contributed to the creation of a more stable and transparent business environment. At the same time, the electronic payments system has minimized the shadow economy, creating a high tax revenue basis for governments. It has also created an additional benefit for low-budget cash expenses and offered a guarantee for trade subjects, says the report. “The study shows that the right public policy can create an open, competitive tax environment which will benefit both economic growth and job creation,” noted Charles W. Scharf, Chief Executive Officer, Visa Inc. “Visa Inc is in partnership with numerous governments, financial institutions, trade and technology companies globally, together with whom we create innovative products,’ he added.

HIGHLIGHTS OF THE GLOBAL STUDY INCLUDE: GROWTH OPPORTUNITIES Card Penetration: Real consumption grew at an average of 2.3 percent from 2011 to 2015, of which 0.01 percent is attributable to increased card penetra-

Source: www.huffingtonpost.com

tion. This implies that card usage accounted for about 0.4 percent of growth in consumption. Since consumption growth is, on average, faster in emerging economies, those countries also have more to gain by increasing card usage. Card Usage: Countries with the largest increases in card usage experienced the biggest contributions in growth. For example, big increases in GDP were recorded in Hungary (0.25%), the United Arab Emirates (0.23%), Chile (0.23%), Ireland (0.2%), Poland (0.19%) and Australia (0.19%). In most countries, card

In those countries where card usage occurred most, economic growth also increased

usage increased regardless of economic performance. In Russia GDP increase was estimated at 0.33%, in Ukraine – 0.07%, while in Azerbaijan and Kazakhstan GDP increase reached 0.03% and 0.02% respectively.

CONTRIBUTION TO EMPLOYMENT Increased card usage added the equivalent of almost 2.6 million jobs on average, per year, across the 70 countries sampled between 2011 and 2015. Notably, the two countries with the greatest average job increases were China (427,000 jobs added) and India (336,000 jobs added), which both had large gains in employment due to the combination of fast growing labor productivity and increased card usage. In the CIS region, 235,000 new jobs were created in Russia, and around 13,520 news jobs were added in Ukraine. In Kazakhstan and Azerbaijan increased card usage added the equivalent of 2,080 and 1,130 jobs respectively.

EMERGING MARKETS AND DEVELOPED COUNTRIES

10 Galaktion Street

Both emerging markets and developed countries experienced gains in consumption due to higher card usage. Increased card usage added 0.2 percent to consumption in emerging markets, compared with 0.14 percent in developed countries between 2011 and 2015. The corresponding figures for GDP were 0.11 percent for emerging economies and 0.08 percent for developed countries, and suggest that all markets, regardless of current card penetration rates, can benefit from increases in consumption due to increases in card usage.

POTENTIAL FUTURE GROWTH Across the 70 countries in the study, Moody’s found that every 1 percent increase in usage of electronic payments could produce, on average, an annual increase of approximately USD 104 billion in the consumption of goods and services. Assuming all future factors remain the same, this could result in an annual average increase of 0.04 percent to GDP attributable to card usage. The study highlights that expanding electronic payments alone will not necessarily increase a country’s prosperity

- it requires the support of a well-developed financial system and healthy economy to have the greatest impact. The report recommends, at a macro-level, in order to encourage the further electrification of payments, countries must promote policies that minimize unneeded regulation, create a robust financial infrastructure, and lead to greater consumption. “Consumers are using cards for payments more and more. In 2011-2015 a stable growth of Visa card usage was seen across the Visa CISSEE markets. As the Moody’s results suggest, migration to electronic payments added nearly USD 460 million to the GDP in Ukraine, USD 70 million in Azerbaijan and USD 210 million in Kazakhstan,” said Dmytro Krepak, Visa Country Manager for Ukraine, Georgia and Armenia. “This is the result of close partnership between all industry stakeholders, including Visa client-banks, regulators, merchants and other players. We’re committed to working further with all interested parties to reach our common goal – accelerated migration to electronic payments for the benefit of national economies.”

Tel: (995 32) 2 45 08 08 E-mail: info@peoplescafe.ge


BUSINESS

GEORGIA TODAY MAY 10 - 12, 2016

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Electricity Market Watch Continued from page 7

INTER RAO INTENDS TO SELL ITS GENERATION ASSETS Inter Rao has declared intent to sell the generation assets under its ownership – Mtkvari Energy, blocks 9 and 10 in Gardabani. Generation unit 9, with an installed capacity of 300MW, is the only one currently functioning. It acts as a guaranteed capacity source and supplies electricity mainly to the greater Tbilisi area (Telasi subscribers). The grid (Telasi) is not up for sale. The news has been confirmed by the Deputy Minister of Energy of Georgia and the Chairman of Inter Rao, Boris Kovalchuk. A likely buyer is GIG, which already owns 362MW of generation assets, including a 300MW natural-gas fired TPP, small hydro plants, and a 13MW coal TPP, for which it mines its own coal. Recently, GIG signed an MoU to construct another coal TPP in Tkibuli, with an installed capacity of 150MW. Successful acquisition of Mtkvari Energy and construction of Tkibuli-150 TPP would make GIG the

owner of one-fifth of Georgia’s total installed capacity.

TURKISH INVESTOR INTEREST IN THE GEORGIAN ENERGY SECTOR REMAINS STRONG Calik Enerji Holding has expressed interest in building another thermal power plant with GE power, the owner of a 110MW TPP. Calik is also considering the potential of wind power plants to be located in Shida Kartli and Imereti regions, where wind towers have already been installed to monitor wind conditions over a 1-year period. Meanwhile, the official agreement between Georgian and Turkish governments was ratified by the Turkish Parliament, further fostering the energy sector cooperation between Georgia and Turkey.

DOMESTIC CONSUMPTION GROWTH DECELERATES IN MARCH Domestic electricity consumption was up 1.0% y/y in March 2016 and 1.8% y/y in 1Q16. Weaker growth was partly due to the high base in March 2015 and warmer

weather compared to March of last year. Distribution network operators are a major consumption group, servicing residential and commercial customers. Their consumption growth rate decelerated to 2.7% y/y in March 2016. Consumption in the greater Tbilisi area grew 5.8% y/y, while growth in the regions was weaker (1.2% y/y). Consumption by eligible consumers (large industrial customers who purchase directly from ESCO and the generation entities) was down 6.7% y/y in March 2016, as Georgian Manganese, representing 81.0% of direct consumption, further reduced its consumption.

CHEAP IMPORTS FROM RUSSIA BRIDGE ELECTRICITY DEFICIT In March 2016, domestic generation was down 9.5% y/y on the back of lower TPP output, leading to higher imports from Russia. The amount of TPP-generated electricity decreased 56.2% y/y. Tbilsresi generation was down 98.7% y/y, while Mtkvari halted production in March 2016, as Inter Rao is negotiating the sale. We expect generation to resume once the

transaction is finalized. HPP output was up 17.1% y/y in March 2016, on the back of increased generation by deregulated HPPs (+41.0% y/y) and regulated seasonal HPPs (+26.5% y/y). Enguri and Vardnili production was down 5.7% y/y due to weather conditions and low water levels in the reservoir. The drop in domestic generation was compensated by Russian electricity imports, up 76.2% y/y in March 2016. As

a result of a short-term deal with Russia for discounted electricity imports in February, the balancing electricity price in Georgia was cut in half to USc 3.4/ kWh compared to last year. The market clearing price of electricity in Turkey was down 21.5% y/y to USc 3.9/kWh, as the downward trend of the past few months persists. The prices are expected to remain low in the short term on the back of lower commodity prices.

Tbilisi City Hall Willing to Reduce Tbilisi Construction Chaos BY EKA KARSAULIDZE

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bilisi Mayor Davit Narmania has announced that Tbilisi City Hall intends to implement regulations prior to the completion of the city’s urbanization Master Plan. The Mayor focused on construction regulation in a number of city districts and the introduction of common standards for roofs and the greening of those roofs.

Narmania noted that the lack of regulations has for a long time been leading to the fact that some parts of the city now appear chaotically constructed. This, he says, mostly concerns the historical area of the city and densely populated zones, including some parts of Saburtalo, Vake, Didube, Isani and Mtatsminda-Krtsanisi districts. The head of City Hall said new regulations would help Tbilisi to retain its unique character and reduce the chaotic building projects in the growing city. The Mayor said that Tbilisi City Hall

would initially impose temporary construction restrictions to regulate the height and size of residential buildings in central Tbilisi. However, most likely, after the city’s urbanization Master Plan is ready and enters into force, the regulation will be made permanent. According to Narmania, the regulations would affect both construction companies and private property owners wanting to remodel or update their homes. The regulations also foresee imposing restrictions on construction in the

city’s ‘green areas,’ (near public squares and gardens). Moreover, Narmania said that common standards for roofs will be introduced, as well as an initiative to create ‘green roofs’ in order to give the city a more eco-friendly and favorable appearance. The Mayor said City Hall had already developed the mentioned regulations and has sent the relevant documentation to the Tbilisi City Assembly (Sakrebulo). He added that all details will be officially made known to the public shortly.


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BUSINESS

GEORGIA TODAY

MAY 10 - 12, 2016

Changing Habits: Kakheti Region Begins to Separate Paper and Plastic Waste Contact: www.edelbrand.ge Phone: 599 461908

BY BARBARA DZAGNIDZE

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aste bins with stickers that identify ‘only plastic’ and ‘only paper’ have recently appeared in five villages of Telavi Municipality, allowing the population of Tsinandali, Kvemo Khodasheni, Busheti, Vanta, and Akura to start to separately collect paper and plastic in order to fulfill the country’s requirement towards the Waste Management Code, which involves implanting a waste collection system from 2019. Aiming to create a waste separation and collection system in each of these areas, the pilot project is initiated by the USAID funded program Waste Management Technologies in the Regions (WMTR), which is implemented by the International City/Country Management Association (ICMA) and the Caucasus Environmental NGO Network (CENN). According to Nino Shavgulidze, the Chief of Party of the Program, the reason the pilot is being implemented in Telavi Municipality was their readiness and desire to be involved in such an initiative. “In December 2014, the municipality addressed us asking for support in the expansion of the waste collection and cleaning services within the municipality,” Shavgulidze explains, adding that the split of the municipality and the creation of a separate self-governed city of Telavi resulted in a division of human and technical resources. The territory of the newly formed Telavi municipality is 1077,65 km2 and covers 26 villages. Today, all of the villages have a waste collection system operated by Service of Welfare and Infrastructure Ltd. However, as Shavgulidze notes, when the pilot project was planned, only 5 villages had the service. Zura Enukidze, representative of the Infrastructure Service of Telavi Municipality, stated that the collection fee in Telavi Municipality for

physical persons is 0.50 GEL; while by law it is determined according to various factors like type of activity, number of beds, tables and square meters, for instance. Despite being such a small amount, the majority of citizens could not pay the waste fee. And to address the issue, they decided to implement manual recording in villages in order to determine who has paid. Unfortunately, as Enukidze notes, this failed, too. The share of service-related fees collected in the total waste management budget is insignificant and provides almost no economic support. As Shavgulidze explains, the villages for the pilot project were selected by the readiness and willingness of both population and trustees of the villages to be involved in the process, the existence of active community groups, community-based organizations and NGOs, and the area’s socio-economic situation. “We bought 75 bins for the pilot project from which each village has fifteen new bins; six are intended for separated waste collection, while the rest are for ordinary waste. The bins are located in the center of the villages, and near shops and public schools in order to be more accessible,” notes Shavgulidze, adding that the waste is collected weekly with a specific truck and is taken to an appropriate warehouse from where it will be collected by a private collection company for recycling. The progress is slow but noticeable as the population begins to change its habit of not only throwing waste on spontaneous dumpsites but also separating waste. Mzia Mdivnishvili, an inhabitant of Tsinandali village, says she had been collecting old books and waste paper for a long time. “It was a pity to just throw them away in a normal waste bin or burn them. So I kept them until I saw the bins for separated waste,” she explains. As a follow up of the pilot project, Shavgulidze explains that the WMTR Program is currently working with the City of Telavi to implement a similar separated waste collection pilot project in the city.


BUSINESS

GEORGIA TODAY MAY 10 - 12, 2016

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RETAIL FOOD PRICE INDEX: Food Prices Down as Turkish and Iranian Floodgates Open increased by a mindboggling 164.6% (in value) compared to January-March 2015. Whereas peach and eggplant are mostly imported from Turkey (and, perhaps, Syria), the main source of cabbage is Iran. Assuming that the thaw in the political and economic relations with Tehran continues in years to come, Georgia is likely to see its trade with Iran increase many times, expanding beyond basic food products to gas and more sophisticated manufactured goods. The situation is quite different as far as Turkey is concerned. Georgia and Turkey have been for many years operating under a free trade agreement, and the current spike in imports from Turkey reflects nothing but a temporary effort by Turkish producers to dump their perishable products in the Georgian market. Sooner or later, this flood will exhaust itself, not before (potentially) devastating Georgia’s nascent greenhouse industry.

FROM THE INTERNATIONAL SCHOOL OF ECONOMICS (ISET)

A

ccording to data from the last two weeks of April, retail food prices are down 4.6% year-on-year (y/y) (compared to April 2015) and 0.6% month-on-month (m/m) (compared to March 2016). During those two weeks we saw the biggest drops in the prices of eggplants (21.4%), buckwheat (9.4%) and tomato (9.0%). Only one (!) product increased in price during this period: greens (up 3.8%).

GEORGIAN CONSUMERS CELEBRATED ALL THE WAY TO THE EASTER TABLE Traditional Georgian households were fasting the last few weeks, which implied Source: Retail FPI

Hard-pressed by their competitors, the most expensive retailers had to make drastic adjustments, leading to a convergence in prices

reduced consumption of sugar, eggs, dairy products, fish, and meat. Lower demand may have been a factor in keeping food prices at bay, however, the downward trend in prices started more than a month before the Great Lent, in February 2016. This trend has little to do with Georgian religious traditions. Rather, it is best explained by the resetting of Georgia’s economic relations with Iran, on the one hand, and its role as a temporary buffer for Russia-banned Turkish products, on the other. For now, Georgian consumers emerge as the clear victors from these external geopolitical developments. A few fresh food prices have been slashed by more than 50% y/y. Even the cheapest networks became slightly cheaper. Hardpressed by their competitors, the most expensive retailers had to make drastic adjustments, leading to a convergence in prices. By mid-April, the gap between

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the priciest and cheapest retail chains reached its historical minimum since FPI’s launch in fall 2014. As shown in the chart, the y/y downward trend in food prices is driven mostly by vegetables and fruits, with some of them losing more than half of their price over the last 12 months. Garlic (up 33.5%) is an interesting outlier. Cabbage (down by 65.7%), peach (by 58.1%) and eggplant (by 54.6%) are the clear leaders in price declines as Georgia is seeing a very significant increase in the supply of these products. During the first three months of 2016, the value of cabbage and eggplant imports increased by 5.8% and 10.9%, respectively, compared to January-March of 2015. Taking into account lower prices, there has been a much higher increase in the quantity (in tons) of cabbage and eggplant imports. The imports of peach

Only one (!) product increased in price during this period: greens (up 3.8%)


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BUSINESS

GEORGIA TODAY

MAY 10 - 12, 2016

Arabian Investors Visit Georgia

Representatives of the Ministry of Economy and Sustainable Development of Georgia with the Arabian business delegation in Georgia to study the local investment potential

BY EKA KARSAULIDZE

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he Ministry of Economy and Sustainable Development of Georgia has announced that an Arabian business delegation was in Georgia on a working visit, with the purpose of studying the local investment potential, in particular future implementation of tourism and real estate projects. The delegation, which included President of the

Annual Investment Meeting, Dawood Al-Shezawi; Managing Director of the Arabic Al Nakheel properties, Abdulrahman al Shezawi; and Chairman of the Board of Directors of Alliance International Investment, Amin Hassan, visited Georgia for the first time. Their visit included meetings with the Ministry of Economy and Sustainable Development of Georgia, investment funds and the real estate sector, as well as a number of private companies. One of their main objectives was also a site visit to Batumi, where the guests discovered the tourist potential and investment opportunities in Adjara.

Reconstruction of Historic Gudiashvili Square BY EKA KARSAULIDZE

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bilisi City Hall and the Tbilisi Development Fund is continuing reconstruction of the Old Town. Following the David the Builder (Agmashenebeli) Avenue and Dry Bridge surrounding area, governors now plan to bring a new look to Gudiashvili Square in Sololaki. In the first phase only two buildings will be reconstructed. However, City Hall says it is ready to restore all the houses there. Two months ago, the Tbilisi Development Fund announced a tender for the restoration of two houses on Abo Tbileli and Gia Abesadze streets adjacent to Gudiashvili Square. As a result, two winners were revealed from 21 projects. According to the winning project, soon the historic city center will get a new two-floor building with office space and a gallery, and a three-floor hotel with a cafe

and bar. Tbilisi Development Fund said that there would also be place for parking near the Square. “One of the main criteria from City Hall was to create a synthesis of old and new for the city,” said Nikolo Mchedlidze, architect of the winning project. “There are a lot of old houses from the 18th and 19th century, a lot of monuments of cultural heritage, so we had to solve a rather complicated task to synthesize a modern house on the site of a demolished one.” Tbilisi City Hall pointed out that the project made sure to involve a large number of institutions and experts – architects, art historians, and restoration experts, so that reconstruction works would not damage the cultural part of the city. On the contrary, City Hall says, it is expected that after completion of the work, Gudiashvili Square will become a lively hotspot for tourists. City Hall and the Tbilisi Development Fund will announce a tender for the restoration of the other houses on the Square in the near future.

Spanish Jamon to Go Georgian? BY EKA KARSAULIDZE

A

delegation of Deraza Iberico Company visited Georgia to study varieties of Georgian pig and to make a potential investment in the local meat industry. A meeting was arranged

with representatives of Georgia’s state Partnership Fund and a concrete proposal was made on May 5. The Deraza Iberico owns an Iberico breed pig farm in Spain and is one of the largest meat producing companies there. The Partnership Fund stated that the Spanish company is interested in Georgia’s Kakheti pork varieties and is considering its commercialization in the international market. The company’s representatives visited the Partnership Fund with specific investment proposals and will tour the regions, meet farmers and purchase a variety of well-known Georgian pigs for scientific purposes. The interest of Deraza Iberico in the Georgian market is the result of the Partnership Fund’s business trip to Spain on April 13-18 in the framework of which representatives of the Partnership Fund visited the company and saw the manufacturing process.


BUSINESS

GEORGIA TODAY MAY 10 - 12, 2016

13

IC Group: Insure Today, Pay Tomorrow will be able to use interest-free payment by installments. This is the purpose of our advertising campaign: “Insure Today, Pay Tomorrow,” under which farmers are given an opportunity to pay their share of the premium not at policy inception, but at the time of harvest.

IC GROUP HAS LONG BEEN IN THE MARKET. WHAT INSURANCE PRODUCTS DO YOU OFFER APART FROM AGRICULTURAL INSURANCE? IC Group Insurance Company has been operating in the market for ten years- in 2016 the Company is celebrating its anniversary. Our main focus is on non-health insurance products, however, we also have well-developed corporate health insurance. We offer all types of insurance and are also known

Giorgi Shengelia, Deputy Director at IC Group Insurance Company

PREPARED BY KATIE RUTH DAVIES

I

C Group is actively involved in a state-subsidized Agricultural Insurance Program. GEORGIA TODAY spoke to Giorgi Shengelia, Deputy Director at IC Group Insurance Company, to find out more.

REGARDING THE STATISTICS FOR THE PREVIOUS YEAR, WHAT WAS THE AMOUNT OF LOSS REIMBURSED BY YOUR COMPANY? On September 1, 2014, the subsidized Agricultural Insurance Program was launched on the initiative of the Ministry of Agriculture and the Agricultural Projects Management Agency of the Ministry of Agriculture. IC Group has been actively involved in this Program and, based on the 2015 data, covered 26.2% of the total market by written premium. Due to the weather and climatic conditions, the 2015 spring-summer season was quite difficult for the whole of Georgia. Beneficiaries insured with IC Group suffered significant losses which were reimbursed by the Company in accordance with the Regulations. The total amount of reimbursement exceeded one million GEL.

DESPITE THOSE SIGNIFICANT LOSSES, IS IC GROUP GOING TO PARTICIPATE IN THE AGRICULTURAL INSURANCE PROGRAM THIS YEAR? Of course! Moreover, based on last years’ experi-

IC Group has significantly improved and simplified its claims handling procedures

ence, IC Group has significantly improved and simplified its claims handling procedures. The second stage of the Project was launched in spring 2016 with improved conditions and a lot of benefits. The interest of the population in this is high. At this stage, the Insurance Project has a budget of GEL 10 million. This year we and the State decided to offer farmers more affordable and flexible payment terms. Now, the farmers’ share of the premium ranges from 20% to 30%. (In case of registered land – 20%).

WHICH CROPS AND WHAT TYPE OF DAMAGE IS COVERED AND WHAT PERCENT OF THE PREMIUM IS SUBSIDIZED UNDER THE AGRICULTURAL INSURANCE PROGRAM? Virtually any food crop produced in Georgia can be insured against the following: hail, storm, excess rainfall and autumn frost (for citrus crops only) – for the period from September 1 to November 30. The Program provides a subsidy for both small and medium-sized farms to an amount of up to 80% of the premium. Last year, farmers’ share was 40%, which, naturally, was quite a heavy burden.

WHAT KIND OF PAYMENT SCHEME IS OFFERED TO FARMERS? On April 26, an Agreement on Mutual Cooperation was signed by IC Group Insurance Company and MFO Crystal, under which any interested person has the possibility to buy an IC Group agricultural insurance policy at the offices of Crystal and enjoy preferential credit terms. In some cases farmers

for such innovative products as low cost insurance for hybrid vehicles, which we offer at the lowest price in order to promote a clean environment; and motor insurance including a video recorder, which enables quick settlement of claims. IC Group was the first in the market to offer online travel insurance services. In addition, we offer property insurance during the rental period, or short term property insurance during the holidays, also various types of motor insurance modified and tailored to all categories of drivers. IC Group always tries to offer products focused on its clients and tailored to their needs. This year, the ten-year anniversary of IC Group, will be very special for us and for our loyal customers, and our Policyholders will see a lot of benefits and gifts coming their way.


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BUSINESS

GEORGIA TODAY

MAY 10 - 12, 2016

Japanese Tokyo UN Development Rope Company Program Promotes Considers Georgian Pastures in Protected Area Market BY TAMAR SVANIDZE

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BY EKA KARSAULIDZE

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BILISI – Tokyo Rope Chairman Shigeto Tanaka met on Thursday with Georgian Prime Minister Giorgi Kvirikashvili to discuss the possibility of building a new manufacturing plant in Georgia. Tokyo Rope is one of Japan’s leading wire rope manufacturers and specializes in the production and sale of wire rope, steel cord and Carbon Fiber Composite Cable. The company also designs and con-

structs road safety devices including avalanche prevention nets as well as environmental protection products that include sound insulation walls and cablesuspended bridges – manufacturing and sales of various industrial machinery and metal fiber. Japanese contingent praised Georgia’s business potential for Tokyo Rope, saying the country’s terrain could significantly contribute to the company’s growth. “Georgia is a mountainous country and we see great potential here. We discussed the possibility of constructing one of our plants in Georgia, as we move towards wider worldwide production.”

he United Nations Development Programme (UNDP), European Union and local government officials initiated a new project to rehabilitate degraded and unused pasture land as well as improve the living standards of shepherds and farmers in eastern Georgia’s remote Vashlovani region. Vashlovani is one of the unique protected areas in the country and home to a traditional area for sheep breeding that provides income to more than 500 indigenous Tush shepherds and their families. Since 2013 two pilot farms have been set up to maximize the best practices for sustainable pasture management. A water supply system is in place that provides water to 15 farms, which signifi-

New 5-Star Hotel Intercontinental to Open in Tbilisi by March 2017

cantly increases the efficiency of local farming and grazing. Two automated meteorological stations have also been constructed and connected to the national weather system to better monitor conditions for herding and grazing. A unified veterinary service for Tush shepherds is being established to meet the needs of the estimated 30,000 sheep in the region. "The initiative in the Vashlovani Protected Areas is an example of how the protection of the environment can contribute to sustainable development, eco-

nomic growth and the well-being of the local people. It was great to see these outstanding results first-hand,” Shombi Sharp, Deputy Head of UNDP Georgia, said. The project also includes rehabilitating 4,000 hectares of unused pastures and 300 hectares of sheep trails by December 2016. The four-year initiative is part of the European Union’s Clima East program to aimed at helping Eastern Partnership governments adapt to the effects of climate change by introducing innovative practices for pasture management.


BUSINESS

GEORGIA TODAY MAY 10 - 12, 2016

15

Dechert OnPoint: Setting Aside the Yukos Award D

Court rejected the Tribunal’s competence and set aside the award, stating that there was no need to discuss any other arguments brought by Russia.

echert Georgia, through the contribution of partners Archil Giorgadze and Nicola Mariani, joined by senior associates Ruslan Akhalaia and Irakli Sokolovski, as well as Ana Kostava and Ana Kochiashvili, is partnering with Georgia Today on a regular section of the paper which will provide updated information regarding significant legal changes and developments in Georgia. In particular, we will highlight significant issues which may impact businesses operating in Georgia.

IV. Results of the setting aside procedure and possible future developments The Claimants have already declared their intent to appeal the Judgement. The recognition and enforcement proceedings of the Award are already commenced in several jurisdictions outside Russia and the Netherlands, namely France, Belgium and the USA. It is expected that the Judgement will have a negative impact on those enforcement proceedings. However, the final say lies with the higher courts in the Netherlands.

THE SETTING ASIDE OF THE “YUKOS AWARD” BY THE HAGUE DISTRICT COURT The biggest story of the month in the global legal and business world was an unexpected judgement issued by The Hague District Court (the “Court”) on 20 April 2016 (the “Judgement”), which set aside the award issued by the Permanent Court of Arbitration (“PCA”) in The Hague on 18 July 2014 to the benefit of Yukos shareholders (the “Award”). The award itself, crowning ten years of arbitral proceedings, is unprecedented in the sphere of international investment law, primarily due to its amount. The Russian Federation was ordered to pay more than USD 50 billion to former shareholders of Yukos, which was at one time the largest oil company in Russia. This week’s edition of OnPoint provides a brief overview of the “Yukos Saga,” as it is commonly known in the legal field, with reference to key facts, legal issues and potential future developments. I. Dismantling Yukos and Khodorkovsky’s arrest Yukos was a leading joint stock company in Russia in the oil and gas sector, listed as one of the world’s top ten companies in the sector in 2002. In 2003, the Russian state launched tax and fraud proceedings against Yukos and Mikhail Khodorkovsky, then the company’s largest ultimate beneficial shareholder. Khodorkovsky was sentenced to serve a ten-year sentence in Siberia before being pardoned by Putin in 2013. Yukos was declared bankrupt in August 2006 and its assets were nationalized by stateowned companies Rosneft and Gazprom. II. The PCA proceedings and the Award Three parallel arbitration proceedings were launched in PCA in 2005 by the majority shareholders of Yukos (Veteran Petroleum Ltd., Yukos Universal Ltd., and Hulley Enterprises Ltd.), which were companies registered in Cyprus and Isle of Man (the “Claimants”). The arbitrations were initiated under the Energy Charter Treaty (“ECT”) and the claimants’ original request was for no less than USD 114 billion. The arbitral tribunal was constituted of qualified international arbitration and investment experts. The Tribunal was chaired by Yves Fortier, with Charles Poncet and Stephen Schwebel serving as his co-arbitrators (the “Tribunal”). Russia brought up several jurisdictional objections.

Firstly, Russia signed but never ratified the ECT. However, the ECT itself in Article 45 provided that signatory states were bound to apply the Treaty provisionally pending its entry into force to the extent that such provisional application is not inconsistent with their constitution, laws or regulations. Because the Tribunal deemed that the ECT was applicable in its entirety, it concluded that such provisional application was not inconsistent with Russia’s constitution, laws or regulations, emphasizing that the termination of the provisional application of the ECT by Russia in 2009 had no impact on any investments made before such termination. As the ECT was applicable in its entirety, the Tribunal ruled that Claimants had the right to bring their case before arbitration under Article 26 of ECT, and thus the Tribunal had full competence to deal with the case. Secondly, Russia claimed that the Tribunal was barred from entertaining the claims because of illegal actions of the Claimants themselves, and third, that tax proceedings, which were at the core of the disputed measures adopted by the Russian state, were carved-out of the ECT by its Article 21. The Tribunal rejected both of these objections. It decided that tax measures were a mere shield to cover the intent of expropriation, and that Russia took a series of measures in 2003-2006 leading to Yukos’s bankruptcy in 2006. The Tribunal found that the expropriation of Yukos was not in the public interest but rather in the interest of the state-owned oil company Rosneft. Russia’s treatment of Yukos was discriminatory and failed the requirements of due process of law. To rule on the matter of contributory fault by the illegal actions of the Claimants, the Tribunal reviewed the causal link between the Claimants acts and the damages, and determined whether their contributions were material and significant. As a result, the quantum awarded to the Claimants was

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Editor-In-Chief: Katie Ruth Davies

reduced by 25 percent. Finally, the Tribunal awarded over USD 50 billion, making it the largest damages award in the history of investment treaty arbitration. III. The court proceedings and setting aside of the Award Arbitral awards cannot be appealed, however, the courts of the jurisdiction where they are issued in generally have the power of limited review of questions related to the jurisdiction of the arbitral tribunal, if the proceedings to set-aside the award are brought before them. This option was used by Russia before the Court. In the Judgement, the Court aligned with Russia’s reading of Article 45 of the

Journalists: Tony Hanmer, Tamar Svanidze, Zviad Adzinbaia, Beqa Kirtava, Meri Taliashvili, Eka Karsaulidze, Zaza Jgharkava, Maka Bibilashvili, Karen Tovmasyan, Dimitri Dolaberidze, Maka Lomadze, Tim Ogden, Ana Akhalaia, Robert Isaf, Joseph Larsen, Will Cathcart, Vazha Tavberidze, Nugzar B. Ruhadze

ECT. Contrary to the Tribunal’s reasoning, the Court ruled that provisional application depends on the compatibility of separate treaty provisions with national laws, rather than providing for the application of the ECT in its entirety. Accordingly, the relevant question for the Court was whether the option for Claimants to go to arbitration, present in Article 26 of ECT, was in accordance with Russian law. The Court reasoned that Russian legislation “limits the option of arbitration to civil law disputes”, disputes related to Russian public law, i.e. tax law, may not be submitted to arbitration and can only be brought in the Russian national courts. On that basis, the

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*** Note: this article does not constitute legal advice. You are responsible for consulting with your own professional legal advisors concerning specific circumstances for your business. Dechert’s Tbilisi office combines local service and full corporate, tax and finance support with the global knowledge that comes with being part of a worldwide legal practice. Dechert Georgia is the Tbilisi branch of Dechert LLP, a global specialist firm that focuses on core transactional and litigation practices, providing world-class services to major corporations, financial institutions and private funds worldwide. With more than 900 Lawyers in our global practice groups working in 27 offices across Europe, the CIS, Asia, the Middle East and the United States, Dechert has the resources to deliver seamless, high quality legal services to clients worldwide. For more information, please visit www. dechert.com or contact Nicola Mariani at nicola.mariani@dechert.com.

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Issue #842 Business  

May 10 - 12, 2016

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