The FINANCIAL — Russia’s statement about responding to the countries that had joined the sanctions against it caused fresh panic among Georgian exporters, afraid at the prospect of losing the country’s fifth biggest export partner. Russia then decided not to impose the threatened sanctions on Georgian products, explaining the decision due to some vague reasons. However, the instability of this country raises the importance of securing Georgia against potential Russian sanctions in the future. Finding alternative markets and offering goods and services the world is interested in remain the key economic problems of Georgia.
Russia took action against all countries that supported the EU’s sanctions that were imposed on Russia on 31 July, 2014, in response to Russia’s involvement in the conflict in Ukraine that started in early 2014. However, Georgia has not been counter sanctioned by Russia for joining the sanctions. According to Russian reports, Russia did not take measures against Georgia, as the Georgian portions of the sanctions were insignificant. On its side, Georgian Prime Minister Irakli Garibashvili opposed the sanctions his own government has joined along with the EU against Russia. Russia first stated an embargo on Georgian products in 2006. The embargo was lifted in 2013 under the rule of the new Georgian government, lead by billionaire Bidzina Ivanishvili. The two countries still do not have diplomatic relations, which were severed after the 2008 war. Meanwhile, Russia still controls the separatist-minded Abkhazia and South Ossetia regions, and Georgia has witnessed Russia’s “creeping invasion” along the border of the breakaway South Ossetia.
“Despite earlier talks of an embargo, Georgia has not been included in the list of countries affected by the latest Russian sanctions. However, in today’s volatile world, it is important to limit dependence on any particular market, including Russia, but in doing so, I do not mean imposing any bureaucratic restrictions or sanctions on a trade partner. The Government’s and Georgian producers’ efforts and resources should be directed toward tapping new international markets, expanding their presence on existing markets, and producing more sophisticated export products to compete successfully. In this endeavour, the signing and successful implementation of the EU DCFTA are of the utmost importance and can vastly simplify Georgia’s access to the EU market, a common-customs zone of circa 500 million customers,” Eva Bochorishvili, Economist at Galt & Taggart, told The FINANCIAL.
“Georgian business and the state should prepare for declining trade with Russia and other major partner countries in the region,” said Irina Guruli, Program Manager at EPRC. Like Bochorishvili, Guruli thinks that both relevant state institutions and private companies should pay more attention to and take full advantage of the opportunities created by the free trade agreement with the European Union.
The only way to secure Georgia against potential Russian sanctions is to find alternative markets for Georgia’s traditional agricultural exports, said Eric Livny, President of the International School of Economics at TSU (ISET) and ISET-PI. However, Livny finds it “important” but “unrealistic” in the short-to-medium term, with the Association Agreement and without it.
“There is no other way to ‘limit’ dependence on Russia. One cannot tell Georgian exporters (or Kakhetian farmers, for that matter) to stop exporting to Russia. It is like telling people not to drive in order to avoid getting into a car accident. There were indeed no car accidents in the stone age, but most people prefer driving (and flying), even if travelling at faster speeds implies taking some risks,” said Livny.
According to Livny, instead of trying to “limit” trade with Russia, the Government could do more to encourage exports to new markets. “This is equivalent to building new roads and in this way reducing congestion and the risk of accidents. Trade diversification would most likely require investment in new agricultural products, such as kiwis or berries. While very good for the Georgian economy, this would not solve the problem of traditional grape growers and their households, who are a very influential social and political group in Georgia.”
Facing colossal economic problems, Georgia is not in the position to hold up moral principles, believes Florian Biermann, Assistant Professor at ISET. “To the contrary, Georgia should try to benefit from Russia’s current vulnerability and its severed ties with Western countries in order to expand the share of Georgian produce on the Russian market.”
Biermann thinks that Georgia should expand its trade with Russia up to the point where the West starts complaining about such a faithless ally. “With USD 4,000 per capita income, Georgia should leave the fight for a better world to richer countries,” he added.
Trying to exploit Russian trade potential to the maximum does not mean that one has to reduce trade with the West or other countries, said Biermann. He believes that Georgian trade flows should be guided not by political considerations but by profitability. “If Georgian companies can make the best money in Russia, they should go there, otherwise they should bring their produce to other markets. Politics should abstain from interventions in these matters.”
“Georgia’s only chance to thrive economically is to keep both trade routes open: to Europe and to Eurasia. Joining the EU sanctions against Russia would be equivalent to committing economic and political suicide,” said Livny.
Currently, dependence on the Russian market is limited as Russia accounted for only 6.7% of Georgia’s exports in 7M15, which is far below the levels ten years ago when Russia’s share of Georgia’s total exports was almost 20%. The 2006 Russian embargo forced Georgian producers to redirect exports to other CIS countries, the EU, and the Middle East, one of the biggest changes in Georgia’s export structure of recent years. After the embargo Georgia’s exports to Russia decreased from 18% of total Georgian exports in 2005 to 8% in 2006 and 2% in 2008-2012. Exports to Russia picked up in 2013 as Russia opened its borders to Georgian wine, but accounted for only 6 percentage points in the 22% total export growth in 2013. Even without Russia, Georgian exports have more than tripled since 2005 to USD 2.9 billion in 2013.
“Imports from Russia are mainly commodity imports and in case of any disruption in trade flows, they can easily be obtained from other countries, due to Georgia’s developed supply chains and trade infrastructure. In the past, the major challenge for Georgia was securing stable energy supply, mainly natural gas, for which there is limited opportunity for diversification in the near term. Before 2006 Georgia imported natural gas mainly from Russia, but after a series of incidents, Georgia changed its key supplier to Azerbaijan. Currently, the diversified energy supply limits Russia’s potential energy leverage against Georgia,” said Bochorishvili, Galt & Taggart.
Two sectors that are dependent on the Russian market the most are wine and mineral water. “Already in 2014 exports to Russia reached 9.6 percent of the total and brought the highest ever annual wine export income for Georgia. The wines and mineral waters have quickly regained their leading positions as the main exports to Russia. However, it needs to be stressed that the importance of the Russian market for these sectors of the Georgian economy is not as high as it used to be. Due to the embargo the overall quality of Georgian wines have increased significantly and have more capacity to penetrate other markets, meeting stricter quality controls. Georgian mineral water producers have also started to target markets other than Russia. Today, without the Russian market, Georgian wine exports are pretty much stable at around 2.5 percent. The mineral water exports have demonstrated more steady increase independently from the Russian market. Therefore, it is quite realistic to gain independence from the Russian market at least for these two sectors,” said Guruli, EPRC.
In Guruli’s words, prolonged economic recession in Russia holds much more danger for Georgia than any embargo Moscow could impose. “The recession affects not only certain Georgian products and producers, but all export products, investments, the financial sector, and more importantly, it affects Georgian emigrants in Russia, who are one of the major sources of remittances to Georgia.”
According to the preliminary data of the National Statistics Office of Georgia, In January-July of 2015 external merchandise trade (excluding non-organized trade) in Georgia amounted to USD 5,573 million, 14 percent decreased year-on-year. The exports equalled USD 1,269 million (24 percent lower), while the imports stood at USD 4,305 million (11 percent lower). The negative trade balance was USD 3,036 million in January-July of 2015 and its share in external trade turnover constituted 54 percent.
Georgia continues to run trade deficits with all countries in the world. “The fact that Georgia is not offering goods and services the world is interested in is the mother lode of economic problems of this country,” Biermann, ISET, told The FINANCIAL.
“Signing the AA and DCFTA were crucial for the economy. First, the trade-enhancing reforms to be implemented under the EU DCFTA can be particularly important for producing high quality products and increasing Georgia’s exports. Second, the EU DCFTA can be seen as a vehicle to attract FDI in Georgia’s export-generating sectors, as we lack capital and knowledge to produce and export more sophisticated and expensive products. Since 2004, Georgia has demonstrated remarkable improvements in the business environment, progress in trade liberalization, enhancement of trade-related infrastructure, and streamlining of customs procedures. Continuation of this trend, with the help of the EU DCFTA, will greatly enhance Georgia’s ability to tap international markets,” said Bochorishvili, Galt & Taggart.