Molly Corso in Tbilisi -

On April 1, two Israeli businessmen were found guilty of attempted bribery in Tbilisi - a case that threatens to undermine Georgia's image as a country primed for investment by raising concerns over its commitment toward business when its own interests are at stake.

Ron Fuchs and his associate Ze'ev Frenkiel were found guilty of attempting to bribe Deputy Finance Minister Avtandil Kharaidze - a widely anticipated verdict after months of hearings and high-level political statements against the two men. Fuchs received a seven-year sentence; Frenkiel received six months less. The sentences are slightly lower than the eight-year maximum allowed by law.

The two men were arrested in October as part of an organised police operation - seven months after Fuchs and his Greek partner won an arbitration settlement against the Georgian government in the International Centre for Settlement of Investment Disputes (ICSID). Fuchs, an oil and gas trader, and his partner Ioannis Kardassopoulos, won the award - worth over $100m - after a 14-year dispute with the Georgian government over rights to the country's strategic oil and gas pipelines.

According to the prosecution, Fuchs and Frenkiel attempted to bribe Kharaidze in an attempt to stop the government from plans to appeal the award. Both have denied the charges and plan to appeal the Tbilisi City Court verdict in May.

While the bribery case in Tbilisi does not have a direct impact on the arbitration award - currently under review by ICSID - the verdict dovetails with the ruling party's position that Fuchs resorted to bribery and underhand deals to illegally secure the pipeline rights. The arbitration case is currently under review and a decision on Georgia's appeal for annulment of the award is anticipated later this year.

Backlash

Gigi Tsereteli, a member of the ruling party and a deputy parliament speaker, tells bne that the case has "corrupt roots" that "cannot be accepted as legal." But observers warn the potential fallout from the bribery case - and the government's handling of the Israelis' arrest - could cost the country a lot more than the roughly $100m settlement.

Backlash against the arrests and the criminal sting operation started in October, right after the men were arrested, when Israeli government officials disputed the charges. Rumours that bilateral relations were tense increased after Parliament Speaker Davit Bakradze delayed a trip to Israeli in March. While the Georgian Ministry of Economic Development and Sustainability and the National Investment Agency assert Israeli investment interest in Georgia remains high, the perception that Georgia has sacrificed potential investment to settle a score persists.

This verdict, according to Archil Kbilashvili, the lawyer who defended Fuchs and Frenkiel, will have a "chilling" effect on business. "If this could happen to Fuchs, it could happen to anyone," he tells bne after the verdict was announced.

Lincoln Mitchell, an associate at Columbia University's Harriman Institute, says, however, that the trial will not "single-handedly" damage Georgia's international reputation, though admits it has the potential to detract investors from Georgia's pro-business message.

Georgia is trying to build on successes, like its rank on the World Bank's "Doing Business" survey and the planned Trump brand resort in Batumi, to aggressively market the country to potential investors. Foreign direct investment, the lifeblood of the Georgian economy, was down to $533m, just 16% of 2009 inflows.

Incidents like the Fuchs trial could undermine efforts to increase investment by distracting potential businesses, Mitchell says. Currently, investors hear two conflicting messages about Georgia: the government's pro-business, reform winning policy and the Fuchs trial. "There are a lot of appealing reasons to invest in Georgia - and a lot of reasons not to invest," he says, noting market size and location.

Tsereteli, however, insists that Georgia is still open for business. "I don't think it will have a serious effect on bilateral or business investments in Georgia, because everybody who wants to understand what happened can also see all the facts of why it happened," he says, underscoring that the government will be "as helpful as they can be" for companies staring a "legal business."

But Mitchell noted the juxtaposition of the Israeli arrests against Georgia's drive for more investment creates a more "complicated" image for potential investors to digest. Instead of driving home its moral high ground in the region - ally to the US, supporter of the Nato mission to Afghanistan - the trial raises questions about Georgia's orientation. "One of the appeals to investment in Georgia was that it is the [morally] right thing to do. In many ways, that is still true... but the Fuchs case... creates a more complicated picture," Mitchell says.