Trapped in Tbilisi

By Paul M. Barrett on February 24, 2011, Bloomberg Businessweek

Last October an oil trader and would-be pipeline mogul named Rony Fuchs received an unusual invitation from Nika Gilauri, the Prime Minister of Georgia. Gilauri asked Fuchs to visit Batumi, a resort on the Black Sea, "to finalize the settlement" of a $100 million commercial dispute—money that Fuchs had been demanding from the Georgian government for almost 15 years. "Such a meeting will avail us of the opportunity to discuss all the details and will undoubtedly positively affect amicable solution of the matter," the Prime Minister wrote in English. The stationery bore the official seal and letterhead of the former Soviet republic, and Gilauri had signed it with a looping flourish.

Fuchs decided to make the trip. The Israeli businessman has investments in Turkey and serves as a Turkish honorary consul, a position combining economic development with off-the-record diplomacy. He worked as an energy trader in New York for 15 years and counts Israeli President Shimon Peres as a friend. Based on decades of experience at the murky crossroads of trade and politics, Fuchs interpreted Gilauri's letter as a signal that Georgia was finally prepared to resolve a controversy that traces that country's chaotic history since its separation from Moscow in 1991.

Going into the meeting in Batumi, the Israeli thought he had a strong hand. In March 2010 an arbitration panel in London had ruled that the Tbilisi government owed Fuchs and a Greek investing partner $98 million, plus interest, for an oil project Georgia had expropriated in the mid-1990s. Georgia, unsurprisingly, wasn't eager to pay up and sought to appeal the binding judgment. In September 2010, Fuchs met with Georgian representatives in a luxury hotel room in Istanbul to discuss a settlement. After nearly four hours of bluster and copious consumption of cognac, they reached a verbal deal: Rather than continue the legal fight, Georgia would pay a reduced sum of $72 million—on one critical condition. Fuchs agreed to return $7 million out of the $72 million to Georgian officials in an under-the-table side payment. Call it a sweetener or a kickback or baksheesh—whatever the terminology, this is not the ethics taught at Harvard Business School. That did not stop Fuchs. And now he had the Prime Minister's personal invitation to close the deal. All he had to do was travel to Batumi, shake hands in front of Georgian TV cameras, and sign a few pieces of paper to make it all official.

It would not be that simple. When Fuchs and an Israeli colleague, Ze'ev Frenkiel, arrived in Batumi on Oct. 14, they were toasted at an elaborate supra, or feast, organized by the Georgian Finance Ministry. Just as the signing ceremony was to begin, a deputy minister asked Fuchs to speak privately upstairs in the restaurant, purportedly to clarify details of the press announcement. While his attorneys were distracted by other government officials in the downstairs dining room, Fuchs and Frenkiel were told they were under arrest. The letter from Gilauri had been bait—part of a three-month Georgian sting operation. The liquor-fueled meeting in Istanbul had been recorded on a video camera hidden in an innocent-looking hanging plant.

Fuchs and Frenkiel were escorted to separate rooms, searched, relieved of their passports, and interrogated on videotape. The tape shows Fuchs, a bulky man in a dapper gray suit, glaring at a Georgian prosecutor going through his wallet, counting out bills in various currencies. The prosecutor methodically transfers Fuchs's belongings to a clear plastic evidence pouch. Two grim- looking security agents crowd the defendant. Mopping his brow with a folded white linen napkin, Fuchs turns to his right to stare bleakly out a window.

Since its brief, disastrous war against Russia in 2008—a conflict sparked by rivalry over two breakaway Georgian regions—the Tbilisi government has redoubled efforts to woo outside business. It is not an easy sell. The country, slightly smaller in area than South Carolina, has a population of 4.6 million, including about 200,000 people displaced by the Russian conflict. Its per-capita gross domestic product of $4,400 ranks 149th in the world, having contracted 7 percent in 2009. In the last two years, Georgia has staved off economic devastation as a result of postwar international aid that will ultimately total $4.6 billion, including $1 billion from the U.S.

Given its size, the country commands what might seem like a disproportionate amount of attention in Washington and other Western capitals. That is explained, in large part, by its location. Georgia controls strategically important ports on the Black Sea and much of the Caucasus Mountains, which form part of Russia's southern border. Tbilisi's government is as democratic as any in its region and is more pro-American than its neighbors'. The main road to the Tbilisi airport is named President George W. Bush Street.

Although much of the Georgian country- side is poor, hilly Tbilisi boasts thriving residential enclaves, broad commercial boulevards, charming restaurants and galleries, and stolid Orthodox Christian churches that never entirely knuckled under to the Communists. Tbilisi also has a florid tradition of cronyism and graft. In the past year it has spent heavily on advertising on CNN (TWX) and the BBC to promote its reform attempts. An ad campaign running in The Wall Street Journal describes Georgia as "the world's number 1 in fighting corruption."

Others are not so sanguine about the Georgian business climate. A May 2010 report from the nonprofit Transparency International accused the Tbilisi government of practicing "tax terrorism": using its Financial Police to intimidate businesses and even throw employees in jail as a way of collecting additional revenue and fines. "The government is too quick to resort to incarceration for what would be seen in the West as minor civil and tax matters," says David Lee during a conversation in the ornate lobby of the Tbilisi Marriott (MAR). The president of the American Chamber of Commerce in Georgia, Lee is also the general director of Magticom, a privately held, American-owned company that is the largest telecommunications operator in Georgia. He describes "several cases" in just the past year in which employees of foreign-owned companies have been jailed without trial for periods of up to several months. Locally owned businesses are even more vulnerable, he says.

Worried about irritating Georgian officials, Lee hastens to accentuate the positive: "Compared to many of its neighbors in the region," he says, "this country has been remarkably successful in cleaning up corruption." Asked what message the Fuchs episode sends, Lee sighs. "That case," he responds, "isn't doing anyone any good."

After their arrest on Oct. 14, Fuchs and Frenkiel were driven to jail cells in downtown Tbilisi. Denied bail, they have remained behind bars for more than five months. Each is allowed three 15-minute phone calls to family a month. The two spend Mondays, Wednesdays, and Fridays in a chilly, dimly lit Tbilisi courtroom on trial for bribery. If convicted, they face up to eight years in prison.

Fuchs has impressive legal talent on retainer: In addition to a prominent Georgian law firm, his team includes President Barack Obama's former White House counsel Gregory B. Craig, now a partner in Washington, D.C., with Skadden, Arps, Slate, Meagher & Flom, and Geoffrey Robertson, a Queen's Counsel in London simultaneously representing Julian Assange in the WikiLeaks founder's effort to resist extradition to Sweden. Still, the odds are not with Fuchs and Frenkiel. In 2010, 99.96 percent of defendants prosecuted in the Tbilisi courts were convicted, according to statistics analyzed by, a Georgian news website.

There is one way Fuchs could get out of jail immediately: renounce the arbitration judgment. According to his lawyers, a Georgian Justice Ministry official privately told the Israeli ambassador to Georgia in October that all Fuchs had to do to win his freedom was relinquish the $100 million claim.

Fuchs refused. "We are being held hostage here, and the Georgian government wants a $100 million ransom. We will not pay it," he told a reporter attending court in Tbilisi last month. Barred from talking to journalists, Fuchs conveyed the message via his lead local lawyer, Archil Kbilashvili. A knowledgeable diplomat in Tbilisi confirmed the Georgian offer to free Fuchs in exchange for nullification of the award; this person requested anonymity to avoid angering the government.

Whatever the result of Fuchs's trial and a potential appeal, his story illustrates the unpredictable danger of commerce in Georgia and the rest of the former Soviet empire. Fuchs claims he was entrapped by a government determined to evade an expensive legal judgment. "Anyone thinking about doing business in Georgia should be forewarned," his attorney Craig says. "You do so at your peril."

Georgian prosecutors, in stark contrast, describe the case in terms of routine law enforcement. "It is not true that a government representative has asked for the waiver of the award," says Davit Sakvarelidze, Georgia's first deputy chief prosecutor. Instead, he says, the Office of the Chief Prosecutor has identified "the preconditions for any settlement: guilty plea, cooperation with the investigation, and rectification of the damage incurred to the state"—a reference to a financial penalty that presumably would be covered by dropping the arbitration claim. "These are regular preconditions provided by the criminal legislation of Georgia," Sakvarelidze adds. He portrays the Fuchs prosecution as part of a larger initiative to clean up the hard-knock country and make it more appealing to honest foreign investors. "We have very strong evidence supporting the charges," he says. "We believe this case, the true facts of the case, not the speculations of Mr. Fuchs, shows once again that Georgian government takes fight against corruption very seriously."
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