Georgian economy and Ukraine-Russia standoff
13 March, 2014
Georgian economy and Ukraine-Russia standoff
The tensions in Crimea and possibility of further deterioration in Ukraine-Russia relations, both countries being significant trade partners to Georgia, raise questions about severity of ensuing adverse effects on Georgian economy. Some analysts fear the impact will be impressive as both Ukraine and Russia represent two largest export markets for Georgia, especially in case of agricultural products. Moreover, Russia is the major source for money transfers to Georgia which may diminish if Russia’s economy dwindles. Some expect a limited impact
owing to diversified trade channels.
While the West threatens to sanction Russia for the Crimea crisis and the Russian economy is predicted to drop its pace by 3% this year, the Georgian government does not plan to revise the forecasted 5% of economic growth this year. Russia and Ukraine are both among Georgia’s top ten trade partners. In 2013, Ukraine accounted for 6.6%, or USD 193 million, and Russia for 6.5%, or USD 190 million, of Georgia’s export. Ukraine’s share has remained largely stable around 7% over the last eight years, while Russia has been effectively closed to Georgian companies since 2006 as a result of a Russian trade embargo. As a matter of fact, after the Russian trade ban on Georgia during 2006-2013, Ukraine almost completely replaced Russia and featured among the top three trade partners for agricultural products, wine and mineral water. However, export to Russia did rise in 2013 after the trade ban was lifted mainly thanks to Georgian wine but Georgia’s export exposure to Russia remains limited. Importantly, the 22% year-to-year growth in exports in 2013 was broad-based, as calculated by BG Capital, a research group established with the Bank of Georgia. The research believes the EU was the real engine of growth, while Russia and Ukraine accounted for only 6% and 1% of the increase, respectively.
BG Capital expects a limited impact of the Ukraine-Russian conflict on Georgian economy due to its relative diversification of trade flows and other external channels, partly thanks to the Russian-imposed trade embargo in 2006. BG Capital’s research underlines that with the exception of wine, Georgian exports are more geared towards Azerbaijan, Armenia, and the EU rather than Ukraine and Russia and that imports can be substituted relatively easily. “The wine industry could be hit, although the effect won’t be substantial for the economy as wines account for only 4% of total exports,” the research states.
Soso Archvadze, an economic analyst, believes Ukrainian import will not be easily substituted as far as three-fifth of Ukrainian import to Georgia is made of agriculture foodstuff that dominates Georgian family baskets. So, replacing it requires more time and money while during the deficit prices may go high. On the other hand, Georgian export may suffer because Ukraine is the largest export market for Georgian agricultural products (10.4%). The Georgian agro-product volume exported to Ukraine exceeds the total volume exported to the 28 EU states. Besides, Russia became another big export market to Georgian agriculture after the trade ban was lifted last spring. Russia outpaced Ukraine in import and got very close in export covering 9.4% recently particularly for wine. Instead of 10 million bottles of wine forecasted to be exported to Russia in 2013, the export accounted for 21 million thus making roughly 40% of the total wine export and is expected to reach 50% this year.
Money transfers seem one of the more likely items to be impacted as Russia and Ukraine account for 57% and 1.7% respectively of total net inflows. Out of USD 1.5 billion transferred to Georgia in 2013, USD 801 million flowed from Russia. Archvadze fears that if relationships deteriorate between Georgia and Russia too, which is not ruled out since the Georgian conflict regions follow the Crimea sample in expressing the will to hold a referendum to join Russia, Russia may crackdown on Georgians working in Russia and deport them.
BG Capital, in the meantime, is optimistic stating that money transfers are resilient to trade and outright conflicts. “Money transfers from Russia continued to grow even after the Georgia-Russia armed conflict in 2008,” the research states.
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