The Eurasian Union – Risks and Benefits for the Georgian Economy
16 January, 2015
The Eurasian Union – Risks and Benefits for the Georgian Economy
Whether or not the EEU activation hurts the Georgian economy depends on whether or not free trade agreements will be canceled with the EEU member countries.

The Russian-initiated Eurasian Economic Union including important trade partners and neighbors of Georgia entered into effect on January 1st of 2015. Georgia has to weigh possible risks and benefits it may have from the emerging united economic space near its borders.

The Kremlin initiated EEU took its start three years ago as a unified
customs space of Russia, Belarus and Kazakhstan. After the Ukrainian-Russian crisis of 2014, it blended into the common economic space resembling the European Union and offered similar benefits to its member states such as a tariff-free customs zone, common labor market and infrastructure. A single currency is also a target point.

Before Georgia signed the agreement on EU association membership in June of 2014, there was a threat that Moscow might seduce Tbilisi by either economic benefits or blackmail to join the EEU space. But once Georgia inked the agreement with the EU theoretically this threat has passed. But Tbilisi may face economic challenges: Almost all its key trade partners such as Russia, Kazakhstan and Armenia [that enrolled the EEU just recently] are part of the common economic space that may cancel the free trade Georgia enjoys with the said countries and create setbacks to Georgian exports.

Kirgizstan and Tajikistan appear intent on joining. Turkmenistan is still pondering while Turkey, rejected by the EU for a long time, has already sent hints on its possible enrolment with the emerging EEU. Israel, India, China and Vietnam are also are considering this union.

So it looks like Georgia together with Azerbaijan will be closely surrounded by the EEU while statistics of the last decade show that the CIS makes up a major export market for Georgia at 50 percent, whereas the EU countries make less than 30 percent. In the meantime, out of the total imports to Georgia, roughly 30 percent comes from the EU and less than 23 percent comes from the CIS space.

Russia is the #3 trade partner of Georgia, and Russia is crucial to Georgia’s wine export market, which sends around 60-70 percent to Russia. Although Georgia is no car-producing country, car exports lead Georgia’s exports by roughly 19 percent according to the latest statistics. And one of the key markets is Armenia. Georgia already lost the Kazakh market in 2011 when Kazakhstan joined the United Customs Union [the forerunner of the EEU]. So Armenia may be next.

But Georgian analysts as well as the transit sector feels safe so long as the EEU members appear not interested in cancelation of free trade. According to Kakha Gogolashvili, Director of the European Research Center, whether or not the EEU activation hurt the Georgian economy depends on whether or not free trade agreements will be canceled with the EEU member countries. However, the EEU may give a blow to Georgia’s transit potential, as far as cargo from Central Asia may be shifted to the EEU corridor that lies as an alternative route to Georgia’s much touted Silk Road Route connecting the East with the West by the shortest way.

Lia Eliava, a financial market analyst, believes the Russian-led EEU will not allow banned countries to use Georgia as a platform for sending imports to the EEU. According to her, Russia will not create problems for exports from Georgian itself because it is too insignificant, but it will ban re-exports via Georgia. The point is that Russia created this EEU space to protect its market from imports. However, the recently activated free trade between the EU and Georgia creates a loophole for European products to sneak back into the EEU via Georgia.

“The Russian led EEU will not increase barriers on Georgian exports unless Georgia starts sending European products there. And even in this case, I think Russia will stop only the re-exported European goods. Pure Georgian exports will remain untouched because they are too small to do any harm,” she elaborated.

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