Georgia's economic dependence on Russia: Impact of the Russia-Ukraine war - საერთაშორისო გამჭვირვალობა - საქართველო
GEO

Georgia's economic dependence on Russia: Impact of the Russia-Ukraine war

03 August, 2022

Transparency International Georgia studied the issue of Georgia's economic dependence on Russia, as it poses a threat to the country. In particular, the data as of June 2022, on trade between Georgia and Russia, tourists, remittances, foreign direct investments from Russia, and registration of Russian companies in Georgia were analyzed.

In January-June 2022, Georgia received about USD 1.2 billion in income from Russia through remittances, tourism, and commodity exports, which is 2.5 times more than the income received from Russia in January-June 2021 from the same sources. Moreover, this year’s receipts are 36% more than the income received from Russia before Covid-19 - in January-June 2019. This means that compared to previous years, Georgia's economic dependence on Russia has been increasing. This growth is mainly due to the soaring remittances. Exports of goods taken separately decreased.

Among the specific findings of the study, the following should be noted:

  • Only in March, April, May, and June of this year, about 6,400 Russian companies were registered in Georgia, which is 7 times more than the annual number of 2021. A total of 13,500 Russian companies are registered in Georgia, and half of them were registered after the start of the war in Ukraine;
  • In January-June 2022, Georgian exports to Russia decreased by 2.8% and amounted to USD 256 million. After the start of the Russia-Ukraine war, in March-June, the export decreased by 16%, which was mainly caused by the reduced export of wine and non-alcoholic beverages;
  • Traditionally, Georgia’s wine exports are highly dependent on the Russian market. In January-June 2022, USD 58 million worth of wine exported to Russia was 58% of Georgia's total wine exports;
  • In January-June 2022, imports from Russia increased by 51% and amounted to USD 706 million. The share of imports from Russia was 11.9% of the total imports of Georgia, which is the highest in the last 15 years;
  • After the start of the Russia-Ukraine war, the import of petroleum products (fuel) from Russia increased the most - by 280% (by USD 118 million). Electricity imports increased 4 times (by USD 9 million). Import of coal and coke increased 3 times and totaled USD 23 million;
  • Despite the increase in imports, Russian electricity accounts for only 3.5% of Georgia's domestic consumption. Russia's share in the domestic consumption of natural gas in Georgia is up to 8%;
  • Georgia's dependence on Russian wheat and wheat flour remains high. In January-June 2022, the share of Russian wheat and wheat flour in Georgia’s total import of these products was 95%;
  • In 2022, the growth rate of the arrival of visitors from Russia accelerated significantly, and 247 thousand visitors arrived in January-June. However, compared to January-June 2019, the number of visitors from Russia is still 3 times less. In January-June 2022, the share of Russian visitors in the total number of visitors to Georgia was 15.2%, which was lower than in 2018-2019;
  • In April-June 2022, remittances from Russia to Georgia increased 6.5 times and amounted to USD 678 million. The main reason for such high growth is the Russian citizens moving to Georgia, who are sending money from Russia;
  • In the first quarter of 2022, direct foreign investments from Russia decreased by USD 11.2 million;
  • Significantly increased imports of Russian goods, remittances, and establishment of companies by Russian citizens in Georgia raise the risk that Georgia will be used to circumvent sanctions imposed on Russia. Regardless of whether or not Georgia is used by a specific sanctioned individual or company for circumventing the sanctions, the increased economic ties mean that Russian businesses and citizens, in general, can use Georgia to escape the economic hardship created by the sanctions imposed on Russia.

I.Recommendations

The goal of the Georgian government should be to minimize economic dependence on Russia. With the participation of Transparency International Georgia in April of this year, we already made public the recommendations[i] on what should be done to reduce economic dependence on Russia:

  • To reduce the trade with Russia the Government of Georgia should start working more actively and expeditiously on concluding free trade agreements with all strategic partners with whom we do not yet have such an agreement. Although such agreements will have positive effects in the long term, given the current situation, Georgia can more actively demand to accelerate the process of signing them;
  • Subsidies from the state budget (grants, concessional credit, etc.) should not be given to businesses that increase economic dependence on Russia. The introduction of this rule will play an important role in reducing the Georgian economy's dependence on Russia, which will increase the economic and political security of the country;
  • Georgia should develop a strategy to reduce its energy dependence on Russia. Although electricity and natural gas imported from Russia have not accounted for a large share of Georgia's domestic consumption in recent years, it is important to further reduce it.

II.Introduction

Georgia's economic dependence on Russia is threatening, as Russia has repeatedly used economic leverage against Georgia, Ukraine, Moldova, and other countries since the collapse of the Soviet Union. For example, in 2006 Russia first cut off natural gas and electricity supplies to Georgia, then virtually banned the export of products from Georgia to Russia, and at the end of the same year began deporting Georgian citizens. Russia also decided to "punish" Georgia after the events of June 20, 2019[ii] and banned flights to Georgia.

Therefore, it is important to know the level of dependence of the Georgian economy on Russia and the tendency to strengthen resilience in the face of possible threats. Transparency International Georgia has been studying this issue for years and periodically publishes the research results. The last study[iii] was published in March of this year, which showed how Georgia was dependent on Russia for trade, tourism, and money transferred by emigrants, and also highlighted large Russian companies operating in Georgia.[iv]

The war that started in Ukraine at the end of February 2022 made the monitoring of Georgia's economic dependence on Russia even more relevant. The harsh sanctions imposed on Russia are leading to a decrease in its economy, which also affects the countries that have close economic relations with it. That’s why Transparency International Georgia is more actively monitoring this issue and in the next 8 months will present 3 updated publications on the impact of the Russia-Ukraine war on Georgia's economic dependence on Russia.

This is the first publication that analyses data on trade between Georgia and Russia, tourists and remittances from Russia, and registration of Russian companies in Georgia as of June 2022. The next two publications are scheduled to be published in October this year and February 2023.

III.The main indicators of Georgia’s economic dependence on Russia

1.Foreign trade

In January-June 2022, the export of Georgian products to Russia decreased by 2.8% and amounted to USD 256 million, while the import increased by 51% and reached USD 706 million. Despite such an increase, the share of trade with Russia in the total trade balance of Georgia decreased from 11.8% to 11.4%. The reason for this was the greater growth of Georgia's foreign trade with other countries. However, the share of imports from Russia taken separately was 11.9% of total imports, which is the highest in the last 15 years.

Data source: GeoStat

Data source: GeoStat

In January-June 2022, ferroalloys were Georgia’s largest export to the Russian market with USD 86 million. Ferroalloys were followed by the exports of wine with USD 58 million, non-alcoholic beverages – with USD 31 million, and alcoholic beverages – with USD 14 million. As for the import from Russia, petroleum products were the largest with USD 184 million followed by the imports of natural gas with USD 40 million, coal and coke - with USD 30 million, wheat flour - with USD 29 million, and margarine - with USD 26 million.

Data source: GeoStat

Data source: GeoStat

Traditionally, Georgian wine exports heavily depend on the Russian market. In 2021, 55% of wine exported from Georgia (worth USD 131 million) went to Russia. In January-June 2022, the wine exported to Russia (worth USD 58 million) amounted to 58% of Georgia's total wine exports. Although wine exports to Russia decreased by 3% in January-June 2022, compared to the same period of the previous year Russia's share in wine exports eventually increased. This was due to a significant decrease in Georgia’s total exports (by 4.2%). The decrease in total Georgian wine exports was mainly because of the suspension of wine exports to the Ukrainian market in March.

Data source: GeoStat

Georgia's dependence on Russian wheat and wheat flour has been also traditionally high. In 2021, 319,000 tonnes of wheat worth USD 87 million were imported from Russia, which was 94% of Georgia’s wheat imports. Since 2022, wheat imports have been replaced by wheat flour imports. Due to Russia's increased tax on wheat exports, importers have chosen to import wheat flour instead, which was ultimately cheaper. In January-June 2022, the import of wheat flour from Russia to Georgia increased 14 times, while the import of wheat was halved. In total, the share of Russian wheat and wheat flour in Georgia's total import of the same goods was 95%.

In recent years, the import of Russian electricity does not have a significant share in the electricity consumed in Georgia. In 2021, the share of electricity imported from Russia was only 1.8% of Georgia’s electricity consumption.[v] However, Russian electricity accounted for 25% of Georgia’s total electricity imports.[vi] In January-June 2022, the electricity imported from Russia was 3.5%[vii] of Georgia’s total electricity consumption and 49% of Georgia’s total electricity imports.

The situation is different in the import of natural gas.[viii] For example, in 2018, natural gas imported from Russia accounted for 2.8% of Georgia's total natural gas imports (by value). In 2020, this indicator increased to 12.2%, and in 2021 it reached 23.1%. In January-June 2022, USD 40 million worth of natural gas entered Georgia from Russia, which was 17% of Georgia's total natural gas imports. Azerbaijan remains the main supplier of natural gas to Georgia, from which natural gas worth USD 192 million was imported in January-June 2022.[ix] This was 83% of the total natural gas imports of Georgia.

After the start of the Russia-Ukraine war, in March-June 2022, Georgian exports to Russia decreased by 16% and amounted to USD 163 million. In March-June, the share of the Russian market in the total exports of Georgia was 9.1%, while the figure for the same months of 2021 was 14%. In the same period, imports from Russia increased by 57% and amounted to USD 524 million. The share of Russia in the total imports of Georgia was 12.8%, while it was 10.6% in March-June of the last year.

After the start of the war, the decrease in Georgian exports to Russia was mainly caused by the reduction in sales of wine and non-alcoholic beverages. In particular, the export of wine decreased by 17% (by USD 7.6 million), and the export of mineral and other non-alcoholic beverages - by 46% (by USD 15 million). A significant increase was observed in the export of passenger cars, which doubled and amounted to USD 12 million.

As for imports, in March-June 2022, the import of Russian petroleum products (fuel) increased the most - 4 times (by USD 118 million). The import of Russian margarine increased 7 times (by USD 16 million). The electricity import increased 4 times (by USD 9 million). The import of coal and coke increased 3 times and totaled USD 23 million. The import of telephone devices from Russia was stopped, and the decrease was USD million 13. The import of sunflower oil from Russia decreased by 55% (by USD 10 million), and the import of natural gas decreased by 28% (by USD 8 million).

To sum up, after the start of the Russia-Ukraine war, Georgia's export dependence on the Russian market decreased, while its dependence on Russian goods imports increased. The current economic crisis in Russia caused a decrease in Georgia’s dependence on the Russian market.

2.Tourism and remittances

Before the Covid-19 pandemic, Georgia was most dependent on Russia for its income from tourism. According to the information from the National Tourism Administration of Georgia, in 2019, up to 1.5 million Russian visitors came to Georgia, as a result of which Georgia received approximately USD 776 million in income.[x]

Due to the pandemic, the number of visitors from Russia decreased by 85% in 2020-2021. In 2021, 213 thousand visitors came from Russia and spent about USD 152 million in the country.

The year 2022 began with an increase in visitors from Russia. Since March of this year, due to the complete lifting of restrictions related to the pandemic in Georgia and the Russia-Ukraine war, the growth rate of the arrival of visitors from Russia has increased. In January-June, 247 thousand visitors came from Russia. However, compared to January-June 2019, the number of visitors from Russia in the same months of 2022 was 2.8 times less. Since tourism was greatly reduced in 2020-2021 due to the pandemic, a comparison with 2019 is more appropriate to assess the growth rate of tourism this year.

In January-June 2022, the share of Russian visitors in the total number of visitors to Georgia was 15.2%, which is higher than the figure for 2020-2021, but lower than the figure for 2018-2019.

Data source: National Tourism Administration of Georgia

According to the information of the National Bank of Georgia, in January-June of the current year, Georgia received USD 219 million in income from Russian visitors, which is 2 times less than the similar figure of 2019. The share of income from Russian visitors in the total income from visitors to Georgia was 19.1% in the 6 months of 2022. A similar figure in 2019 was 30%.

Data source: National Bank of Georgia

Traditionally, funds transferred by Georgians employed in Russia have been an important source of income for Georgia. In recent years, the share of remittances received from Russia in Georgia’s total remittances tended to decrease. For example, in 2012, the share of Russia in the total foreign remittances of Georgia was 56%, and in 2021 it was only 17.5%. This was caused by two circumstances: the amount of money transferred from Russia to Georgia has been decreasing from year to year, while the transfers from other countries have increased.

In 2022, the situation related to remittances changed significantly, which is a result of the Russia-Ukraine war. In January-March, an average of USD 24 million per month was transferred from Russia to Georgia. The remittances began to grow rapidly from April when USD 133 million were transferred. In May this figure stood at USD 314 million, and in June it was USD 231 million.

In total, USD 750 million were sent from Russia to Georgia in 6 months, which is even more than the annual figure of previous years. As a result, the share of Russia in Georgia’s total remittances increased to 42%. The last time such a high figure was in 2015. If we compare the April-June 2022 transfers from Russia with the same figure of April-June 2021, it increased 6.5 times. The main reason for such high growth is the increased flow of Russian citizens moving to Georgia, who send money from Russia and/or transfer their savings. It seems that Russian citizens are fleeing the difficult situation created in their country and the imposed sanctions after the start of the war in Ukraine. Some of them decided to stay in Georgia for a long time.

Data source: National Bank of Georgia

3.Foreign Direct Investment

In recent years, direct investments from Russia to Georgia were not large-scale. For example, in 2017-2021, the share of Russian investments in the total foreign investments of Georgia was 4.4%. During the mentioned period, a total of USD 307 million of investment came from Russia to Georgia. However, approximately 38% of foreign investment in Georgia has been coming from offshore[xi], and in some cases, it has also been associated with money of Russian origin.[xii] In the first quarter of 2022, foreign direct investments from Russia decreased by USD 11.2 million.

Data source: GeoStat

IV.Russian companies in Georgia

Large Russian companies do business in Georgia mainly through their subsidiaries. Medium and small-sized Russian companies are founded in Georgia mainly by Russian citizens. Some of the companies registered in Georgia by Russian citizens are registered by persons with Georgian surnames who have only Russian or Georgian-Russian dual citizenship.

After examining the databases of the Georgian Business Register, we have found those companies, all or part of which are owned by Russian legal or natural persons (citizens). We call such companies Russian companies. However, this may not be a complete list, as a company registered in Georgia may belong to a Russian legal entity or an individual through a company in another country. There are also frequent cases when the owner of a Georgian company is registered offshore, which makes it difficult to determine the real owners of the company.

As of June 30, 2022, about 13,500 companies were registered in Georgia, the owners of which are legal entities and/or citizens of the Russian Federation. 74% of the mentioned companies were registered in 2018-2022.[xiii] The maximum number in one year until 2022 - 1,180 companies were registered in 2018. In 2020-2021, the registration of Russian companies decreased due to the pandemic, in 2021 a total of 920 Russian companies were registered.

From 2022, the registration of Russian companies in Georgia has increased significantly, which is exclusively related to the Russia-Ukraine war. Part of Russian citizens moved to Georgia to live and do business. In January-February of this year, 190 Russian companies were registered in Georgia, in March - 2,140 companies, in April - 1,563, in May - 1,351, and in June - 1,175. In total, 6,419 Russian companies were registered in Georgia from March to June 2022. Thus, only in March-June 2022, 7 times more companies were registered than in the whole year 2021.

As of March 2022, 93% (5,990 units) of registered Russian companies were sole proprietors. For comparison, the share of sole proprietors among Russian companies registered in 2021 was 51%. 98% of sole proprietors have non-Georgian names and surnames.

Data source: Business Register of Georgia

 


[i] 10 Recommendations to the Government of Georgia on Economic Issues, https://cutt.ly/DZEyOOe

[ii] Georgia protests: Thousands storm parliament over Russian MP's speech, BBC, 21 June 2019: https://www.bbc.com/news/world-europe-48710042

[iii] Georgia's economic dependence on Russia: Trade, tourism, remittances, and Russian companies in Georgia, Transparency international Georgia, 10 March 2022, https://cutt.ly/4ZEuNwg  

[iv] Russian companies are companies operating in Georgia, all or part of which are owned by legal entities and individuals of the Russian Federation.

[v]  Electricity Market Operator, Electricity Balance 2021, https://cutt.ly/eATmLlv

[vi] The figure of electricity imported from Russia does not include Russian electricity supplied to the occupied territory of Abkhazia, which passes through the territory controlled by Georgia.

[vii] Electricity Market Operator, Electricity Balance 2022, https://cutt.ly/pZEobRB

[viii] Natural gas means natural gas in gaseous state (Commodity Code 271121).

[ix] Geostat, external trade portal, http://ex-trade.geostat.ge/en

[x] According to the National Bank of Georgia's statistics on international travel income

[xi] An offshore zone also called a tax haven, is a country or a specific territory of a country where companies enjoy special concessional terms. Lower tax rates, the secrecy of company owner, simpler financial reporting rules and ease of company registration and operations can be among such terms.

[xii] Offshore companies in Georgia: Business interests and corruption risks, Transarency International Georgia, 29 June 2021, https://cutt.ly/hZEpxqD

[xiii] Until June 2022.

Publication of this report was made possible with the support of the Open Society Foundations. The views expressed in this publication are those of Transparency International Georgia and do not necessarily reflect the views of the donors.

 

 

 

 

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