Georgia's Complex Economic Relations with Russia: Increased Dependence in A Complicated Geopolitical Context

Abstract

Economic diplomacy is a traditional and integral part of foreign policy, which states actively use to achieve their goals in international politics. In order to influence the target country, economic levers can be used in both positive (incentive) and negative (punishment) forms. In modern international politics, where conventional wars for many reasons, including nuclear deterrence, increasing influence of public opinion on politics, etc., are becoming less and less relevant, and the so-called "Hybrid wars", the economy and the trade relationship or interdependence between states with opposing political interests, acquire special importance. Countries with a small economy like Georgia need to be even more careful about such challenges. All the more so when a part of the country is occupied, the neighborhood is unstable and unpredictable, and as a result of all this, it faces an existential threat every day. This report deals with Georgia's complex economic relations with Russia, the dynamics accompanying these relations since the 2000s, and focuses on the growing dependence of Georgia's economy on its northern neighbor after the start of a full-scale war in Ukraine by the Kremlin in February 2022. The urgency of the issue is due to several reasons. First of all, this is the economic component of dependence on the Russian market and Russian migrants, which makes the Georgian economy and its national currency, which are already quite vulnerable to external factors, even more unstable. And the second and no less important issue is the political price of increased economic dependence, which may have an impact on both the country's domestic and foreign policy. The increased dependence of Georgia's economy on Russia is analyzed based on several studies, data used by the National Statistics Agency of Georgia and political decisions made by the Russian Federation regarding a number of Georgian products, including in March of this year, and at the end of the report, recommendations will be offered to respond to new threats to the country's security. The first data that will be useful for analyzing the above-mentioned issue is the Georgia's Foreign Economic Dependence Index (GFEDI), which was published by the International Chamber of Commerce in March of this year (https://icc.ge/index.php/2023/03/01/icc-georgia- foreign-economic-dependence-index/ ) and which is based on 5 parameters - imports, exports, money flow, foreign direct investments and income from international travel. The results of the mentioned research clearly show the growing dependence of the Georgian economy on Russia over the years, while the same indicator is less growing or decreasing with its strategic partners and largest economic allies - the European Union, the United States of America, and Turkey (see Table 1). Table 1 - Index of foreign economic dependence of Georgia   2003  2012  2022  Russia 16% 9.1% 18.3% EU 21% 23.6% 23% USA 10% 4% 7% Turkey 10% 12.3% 12%   The following data, which draw attention when discussing the issue, are given in the study published by Transparency International in February of this year - "Georgia's economic dependence on Russia: the impact of the Russia-Ukraine war" (https://transparency.ge/ge/post/sakartvelos-ekonomikuri-damokidebuleba-rusetze-ruset-ukrainis-omis-gavlena ) mentioned research is fully based on the official data of the National Statistics Agency of Georgia. According to the research, in 2022, the import of Russian goods to Georgia is at the maximum of the last 17 years and makes up 13.6% of the country's total import. It should be noted that among the commodity groups imported from Russia last year, oil products (fuel) were in the first place with 34%, which is expected to increase even more this year, which is confirmed by the data released by the Union of Oil Products Importers in April of this year - 84.4% of gasoline and diesel imported into the country in the first quarter of 2023 came from Russia (https://businessformula.ge/News/13620 ). At the same time, the Transparency International’s study shows that one of the main export products of Georgia, Georgian wine, is particularly dependent on the Russian export market, the share of which in the total export to the Russian market has increased to 63.8% in 2022. After the war in Ukraine that started in February 2022, the export and re-export of other products from Georgia to Russia increased. The growth was most noticeable by light vehicles, wine and agricultural products (see Table 2). Table 2 - Goods whose export to Russia increased the most after the start of the war in Ukraine, million dollars Name                                                               March – Dec., 2021           March – Dec, 2022         Increase Light vehicles 14.7 73.9 59.2 Wine 116.4  140.8 24.4 Alcoholic beverages 37.1 52.6 15.5 Peach, Apricot, Cherry 26.7 34.4 7.7 Electric water heaters 6.1 12.7 6.5 Data source: GeoStat Another indicator of the increased economic dependence on Russia is the number of Russian companies registered in Georgia in 2022, which is 14,977 and is almost 13 times higher than the same figure in 2018, when this number was the highest in the last two decades. The volume of money transfers from Russia has also increased sharply, which has become the reason for the strengthening of the GEL rate in the short term, however, in this regard, the kindness of the Georgian financial market towards Russian migrants has also increased, because Georgian banks already have more than 2 billion GEL in their savings deposits. The above researches and data show that the dependence of Georgia's economy on Russia is increasing, and this increase is especially noticeable after the start of the war in Ukraine. At the same time, it is important to know that in March of this year, Russia already dealt a small but significant blow to the production of Georgian ferroalloys, when it set an import price only for Georgia, thereby effectively closing the market to Georgian producers. It should be noted that the same decision was made in 2019 against Ukraine, which effectively banned the import of ferroalloys. All this points to only one thing, that the emergence of new economic levers in the hands of Russia represents an increased challenge for the national security and economic stability of Georgia, which may lead to a worse result than the full-scale economic and energy embargo of 2005-2006 brought to the country. In addition, the Kremlin is given additional means of influencing Georgia's domestic and foreign policy, which, based on the experience of the past 20 years, Moscow will not refrain from using if necessary. Within the framework of this report, the context of regional security and stability will be further analyzed and some recommendations will be given.