Georgia is increasingly economically dependent on Russia, which generates security risks for Tbilisi. There are also concerns that Moscow is circumventing Western sanctions through Georgia.
Georgia's economy's dependence on Russia has reached record levels
In February 2023, Transparency International Georgia published a report stating that, in 2022, Georgia's economic dependence on Russia reached a record level. According to the NGO's data, Georgia received around $3.6 billion from Russia through remittances, tourism, and exports, which was three times higher than the same indicators in 2021.
Additionally, during the first half of 2022, imports from Russia increased by 51%, reaching $706 million. The share of imports from Russia accounted for 11.9% of Georgia's total import volume, marking the highest level in the past 15 years. In the same context, Georgian exports to Russia in 2022 increased by 6.8% to reach $652 million. Since the start of the Russian-Ukrainian war, from March to December, exports grew by 3.2%, mainly due to a fivefold increase in the re-export of passenger cars. Traditional Georgian wine exports to Russia also contributed to the dependence. In 2022, wine exports from Georgia to Russia increased by 23%, totaling $161 million. Russian imports accounted for 64% of Georgian wine exports, the highest level since 2013, when the embargo was lifted.
Transparency International Georgia expresses particular concern over this fact. Given that diversifying the wine export market is a complex task that cannot be accomplished quickly, the organization notes that the government should have a strategy for reducing dependence on the Russian market in the coming years.
The fact that Georgia's economic dependence on Russia has reached a record level is also confirmed by data from the Georgian National Statistics Service ("Sakstat"): in January 2023, the trade turnover between the countries amounted to $263.6 million. Based on this indicator, Russia surpassed Turkey (which stood at $196.1 million) for the first time in many years.
The revival of direct air communication further contributed to Georgia's increasing economic dependence on Russia. Vladimir Putin signed the relevant decree on May 10th. On the 19th of the same month, the first direct flight from Moscow to Tbilisi landed, marking the resumption of such flights since 2019.
Georgia's Minister of Economy and Sustainable
Development, Levan Davitashvili, said that resuming air communication will lead to an increase of tourism revenues:
"We expect an effect of around $300-400 million in the tourism sector, which can be termed as the 'flight effect.' In 2019, tourism revenue from Russia amounted to about a billion dollars."
Against this backdrop, Georgia has become the second most popular tourist destination among Russians. This is the result of an analysis of internal data from the flight booking service "Aviasales." The top three destinations are Turkey, Georgia, and Thailand.
The fact that the main economic impact of the resumption of air communication will boost the tourism sector is confirmed by economist and co-founder of the Center for Economic Transformation, Nodar Sirbiladze. However, according to Sirbiladze, the benefits for the economy in general will be less than what the government predicts.
In the near future, the restoration of direct air communication could be complemented by the potential resumption of railway transit from Georgia through Abkhazia. President of the Russian Chamber of Commerce and Industry, Sergey Katyrin, shared plans for cooperation in an interview with the "Rossiyskaya Gazeta" on May 12th.
He also added that railway transit would help relieve the border crossing at "Upper Lars" and reduce the cost of delivered goods, increasing their volume. Given the situation with the transit of Russian goods through Turkey, such a scheme is vital for Russia, Katyrin emphasized.
The risk of strengthening economic ties: Russia has always used economic leverage to exert political pressure
Economist Nodar Sirbiladze believes that if Georgia strengthens its economic ties with Russia, the country will face more risks than benefits. "Putin's decision is politically motivated. It harms us because Russia made this decision while waging war in Ukraine and being under the sanctions of the civilized world. When such a Russia praises you and starts restoring flights, it means that Georgia is moving away from Europe. These are significant costs for the country, more than the increase in tourism revenue," noted the economist.
However, the Georgian government does not see risks in developing trade and economic ties with Russia. Prime Minister Irakli Garibashvili stated that the resumption of direct air communication aligns with the goals of national policy and is in Georgia's interests.
"There is nothing new or strange about this. It's an integral part of economic and trade relations. Those who do not want the country to overcome poverty, unemployment, to have trade and economy... you can directly say that they are enemies of our country."
In response to criticism from the EU, the Prime Minister pointed out that Georgia's trade turnover with Russia amounts to about $1 billion per year, while the European Union itself, in his words, trades with Russia "in four days what we trade in a year." The head of the government also stated that after the 2008 war, the West continued business as usual with Russia.
However, according to the report by Transparency International Georgia, after the start of the war in Ukraine, the EU’s trade with Russia decreased threefold and it continues to decrease, while Georgia's increased. Georgia's trade turnover with Russia in 2022 didn’t amount to $1 billion as stated by Garibashvili, but to $2.5 billion, which is 52% higher than the 2021 figure.
"It should be noted from the very beginning that the European Union does not call on Georgia to cease economic relations with Russia. The European Union calls on Georgia to join the existing sanctions against Russia in the aviation sector, so that Georgia does not become a place for circumventing sanctions imposed on Russia, which are likely to be strengthened in case of flight resumption," the Transparency International Georgia report states.
The report by Transparency International Georgia highlights that Tbilisi’s growing economic dependence on Russia poses a threat to the country, as Russia has repeatedly used economic leverage for political pressure on independent nations. Furthermore, the increasing economic dependence on Russia also poses a macroeconomic threat to Georgia due to the Western sanctions and the ongoing war causing an economic crisis in Russia, which is expected to continue into 2023.
Against this backdrop, many experts point out that Russia traditionally uses economic relations as a tool for political pressure on neighboring countries. Georgia was the first country in the CIS for which Moscow unilaterally imposed a visa regime in 2000.
In January 2006, two sections of the Mozdok-Tbilisi gas pipeline exploded in North Ossetia and power transmission line towers were blown up in Karachay-Cherkessia. As a result of these acts of sabotage, Georgia was left without Russian gas, and the amount of electricity entering the country was significantly reduced. The then-president of Georgia, Mikhail Saakashvili, referred to the pipeline diversions as "acts of vandalism and sabotage," essentially accusing Russia of "provoking an energy crisis in Georgia."
In October of that same year, Russia suspended air, road, maritime, and rail communication with Georgia. That year also saw a collective deportation – thousands of citizens were expelled from Russia by cargo planes.
Furthermore, Georgia was one of the first countries in the post-Soviet space to experience Russian trade embargoes. In 2006, Moscow initially banned the import of wine and later mineral water, including the well-known brand "Borjomi."
In 2008, Georgia became the first country after the collapse of the USSR to face overt Russian aggression. Following the five-day August war, diplomatic relations between the two countries were severed.
However, experts note that in recent years Tbilisi has clearly prioritized its economy over politics and has maintained this approach even after the large-scale Russian invasion of Ukraine.
Georgia's Western partners are concerned that the country may be used by Russia to bypass sanctions
US officials are increasingly expressing concerns about the potential for Russia to bypass sanctions through Georgia and the growth of Georgia's economic dependence on Russia. The topic was approached at a late July meeting of the Senate Foreign Relations Committee with the head of the State Department's sanctions coordination office, Jim O’Brien.
"I find it very encouraging that Georgian customs services are taking real steps to limit the import of items from the battlefield into Russia. We want to make sure they are fully controlling movement across the Georgian border, whether it's airports or land borders. This is an ongoing effort, and we're assisting in this direction. The question is whether we can get more quality data in the future and whether we can have a clearer picture of what's happening with the recently resumed air routes between Georgia and Russia."
When Senator Jeanne Shaheen asked if the resumption of flights could help Moscow circumvent sanctions, O'Brien responded:
"That's certainly possible. That's why we want to make sure we know what's loaded on these planes when they return to Russia."
As early as June, O'Brien asserted that European companies were selling certain goods to countries that subsequently resell these materials to Russia, including microchips and electronics that are necessary for Russia's military capabilities. The issue of equipment became particularly relevant after the discovery of state-of-the-art electronic chips of American origin in the debris of missiles that exploded over Ukraine. At that time, O'Brien listed Georgia among five countries posing a problem in terms of Russia evading sanctions.
"Our main goal is to prevent Russia from obtaining weapons it uses to wage aggressive wars and kill people. We—the United States, the United Kingdom, and the European Union—are paying attention to the type of electronic devices used for these purposes. Our cooperation with Georgia involves precisely this direction."
Daniel Fried, a senior fellow at the Atlantic Council, noted that the authorities in Tbilisi are not only failing to reduce their dependence on Russia but are also strengthening their ties with the country.
"I have said many times that Georgia has every right to pursue a cautious policy towards Moscow. I have never said that Georgia should become the main supplier of weapons to Ukraine. I understand Georgia's weaknesses, but the issue is whether the Georgian government is trying to do what Moldova is doing—reduce its dependence on Russia. It seems that Georgia is taking opposite steps, unlike Moldova."
In January, The New York Times published an article by Ivan Nechepurenko about Western goods being imported into Russia. The influential American publication stated that after Russia invaded Ukraine and Europe severed trade ties with the occupying country due to sanctions, Russia soon found alternative routes. The author noted that queues of trucks are formed every day on the border between Georgia and Russia. The article highlighted that Georgia had become a convenient logistical channel between Russia and the outside world. According to the journalist, the purchase of goods through Georgia and neighboring countries (Armenia and Azerbaijan) helped Russia weather the economic storm caused by the invasion of Ukraine.
On July 1, the German publication Deutsche Welle published an investigation titled "Loopholes in the Caucasus: The Failure of EU Sanctions." A film crew led by journalist Miodrag Sorich traveled to Georgia, which Western partners had repeatedly referred to as a "black hole" for bypassing anti-Russian sanctions. Journalists decided to investigate whether large volumes of exports continue to flow through Georgia after restrictions were imposed against Russia.
At the end of June, representatives of the EU, the US State Department's sanctions coordination office, and the UK's Foreign, Commonwealth & Development Office visited Tbilisi. The visit of the sanctions commission was related to the issue of Georgia's compliance with international sanctions against Russia. The sanction trio attempted to convey to the Georgian authorities the risks of cooperation with Moscow. Following the meetings in Tbilisi, they announced that the Georgian authorities are making "active efforts" to establish a comprehensive system for detecting prohibited goods in order to prevent their sale to Russia. The chairman of the ruling party, Irakli Kobakhidze, said in late June that "We are not imposing sanctions against the Russian Federation, but we also won't allow anyone to use this territory to bypass sanctions."
Since last year, Georgia has joined international sanctions while refraining from imposing any additional restrictions of its own. The topic of sanctions gained renewed attention in Georgia against the backdrop of Russia's decision to lift visa requirements for Georgian citizens and remove restrictions on direct flights. Before this, Moscow had stated several times that it appreciates Georgia's official position, which maintains a restrained stance on sanctions and the war in Ukraine.
As a result of Georgia's adherence to international sanctions, it was announced in July that Georgia has introduced a ban on the export and re-export of automobiles to Russia and Belarus. Starting from August 1, this restriction applies to cars imported from the United States, and from September 26, it will extend to cars imported from Europe, in accordance with the 11th package of EU sanctions imposed against Russia due to the invasion of Ukraine. The 11th package of sanctions is aimed at preventing Russia from circumventing international sanctions. It includes a ban on the export of all new and used luxury cars with engines over 1.9 liters to Russia, as well as the export of electric and hybrid vehicles.
Interestingly, passenger cars were the third-largest export commodity from Georgia to Russia. In the first five months of 2023, Georgia sent about 3,000 cars worth a total of $41 million to Russia. The export of this category grew by 458% over the year. In early July, the Minister of Economy of Georgia, Levan Davitashvili, told the media that since trade in passenger cars is an important source of revenue for Georgia, the Georgian authorities are in negotiations with the European Union and hope that the export of cars from Georgia to Russia will not be terminated.
Georgia's aspirations to join the EU and NATO remain its stated goals, but the economic and political rapprochement with Russia, which waged war in Ukraine, could hinder its integration into the EU, as the European Union expects candidate countries to coordinate in sanction policies.