Will Russian economic slowdown affect Georgia significantly?
30 October, 2014
Will Russian economic slowdown affect Georgia significantly?
The international economic sanctions against Russia and the significant drop in oil prices have already squeezed the Russian economy and put it on the brink of crisis. Oil prices fell by 20 percent since their peak in mid-June and crossed the critical price line of 90-95 USD per barrel for Russia. The prices slid down to 80-84 USD per barrel at end of the past week.

This three-month drop already cost Russia 60-75 billion US dollars in losses. In spite
of more than 13 billion USD of capital injections, the Russian national currency, the ruble, depreciated by 20 percent this year. And 6.5 percent of this depreciation occurred in this month alone.
If the price keeps falling it means the Russian economy will plunge even more heavily. It will have a deficit in its budget next year and face stagnation or recession. This will have a significant impact on its neighbors and trade partners (like the Eurasian Union) for sure.
Georgia as an immediate neighbor of Russia also has some apprehensions. However as a small country it expects a smaller impact compared to Germany, France and Italy whose trade balance with Russia amounts to tens of billions of the US dollars. Russia is the number fourth top trade partner of Georgia and the #3 export market particularly for wine and mineral water. In nine months 163 million bottles of Georgian wine were exported, and two-third of these went to Russia.
Accordingly, if the Russian economy suffers then the purchase power of Russian population will also shrink. This will affect Georgia’s export potential, Georgian economic analysts worry.
Also there are hundreds of Georgian citizens who work in Russia and send money to their families in Georgia. Soso Archvadze, an economic analyst, fears that if economic crisis deepens in Russia, Georgian migrants could be put under pressure and lose their jobs. Reduction of their incomes will automatically affect money transfers to Georgia while money coming from Russia makes up almost 60 percent of total money transfers to Georgia. Out of 1.4 billion US dollars in total transfers to Georgia more than 800 million came from Russia last year while the FDIs total inflow barley exceeded 900 million US dollars.
Money transfers exceed the inflow of Foreign Direct Investments (FDIs) to Georgia. Transfers from Russia did not stop even during the August War with Russia in 2008 and it exceeded the volume of FDIs during the two years after the August War.
“Money transfers make one-third of the Georgian population’s revenues and roughly 14-15 percent of GDP. And 60 percent of this volume comes from Russia. Therefore I believe we should make a very serious analysis and shift our focus to Asian markets. China for example is a very interesting wine market. Although it consumes relatively less per capita, totally it is a huge consumer due to its massive population,” Archvadze said.
Lia Eliava, a financial market analyst, believes the drop in oil prices is based on political rather than economic factors. Therefore, it cannot continue too long and that Russia is able to resist this shock.
“Russia has absolutely huge foreign currency reserves [the third largest in the world] of hundreds of billions that enables Russia to resist the current situation. Besides, Russia is no longer the state it was 20 years ago. Its economy is based on free market principles and such economies can resist such economic shocks. Plus, Russia has already found alternative export markets for its energy in the east in China and India and is no longer as dependent on OPEC (Organization of the Petroleum Exporting Countries) prices,” she explained.
“It will require 2-3 years for Russian businesses and the population to feel the negative impact of the sanctions. So far the Russian economy has not slowed down to the extent that it may affect the Russian population. Big cities are particularly safer while Georgians are congregated in big cities as a rule,” Eliava explains.
Besides the recently activated free trade agreement with the EU may provide a cushion for Georgian economy if exports to Russia dwindle. Georgia is a small country with just a 20 percent production capacity and an 80 percent dependence on imports.
“To replace such a small portion of production is easy. We can divert our exports to Europe and Georgia may not feel any harm from the crisis in Russia if the EU has the political will to help Georgia,” Eliava concludes.

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