Armenia’s EaCU Membership to Force Revision of Trade Relations with Georgia

Armenia’s EaCU Membership to Force Revision of Trade Relations with Georgia

Armenia’s EaCU Membership to Force Revision of Trade Relations with Georgia

The FINANCIAL -- During the first half of the current year export from Georgia to Armenia reached USD 99 million, down from USD 156 million from the previous year’s data. Following Azerbaijan and Turkey, Armenia is the third top destination for Georgian export, making up 9%. Overall economic conditions in the region are named the main reason contributing to this drop. Meanwhile, Georgian exporters should expect a further decline even if the regional economic shock will be overcome. Armenia, which recently joined the Eurasian Customs Union, backed by Russia, has to produce special tariffs for non ECU members. This will make Georgian products non-competitive.

“Due to the activity of Russia’s ‘creeping occupation’ within post-Soviet states, Georgia may find itself under more political pressure in the future. The country is actually laid siege to by the Eurasian Customs Union. Russia will try to get a direct land connection with Armenia. In this regard, most of the pressure is expected to be on the Abkhazian railway project. Tbilisi should prevent implementation of this project by any means, under its national interests,” Irina Guruli, Program Manager at the Economic Policy Research Center (EPRC), told The FINANCIAL.

Armenia’s EaCU membership results are not as significant today, as they will be further in the future, Guruli believes. “Due to long-term frozen conflicts the South Caucasus has been losing a lot of economic opportunities. Division in incompatible economic blocks will further undermine regional integration. The region will lose many opportunities for development and economic growth, even if the internal conflicts have settled.”

The Eurasian Customs Union consists of the member states of the Eurasian Economic Union. It came into existence on 1 January, 2010. Its founding states were Belarus, Kazakhstan and Russia. On 2 January, 2015, it was expanded to include Armenia. The EaCU envisages common customs space for member states. Trade between the countries is tax free. Members of the Union state a joint tariff for third party countries. Georgia, on the other hand, signed the Association Agreement (AA) and the Deep and Comprehensive Free Trade Area Agreement (DCFTA) with the European Union.

In 2015, the highest volume of exports from Georgia to Armenia have been automobiles, grain, mineral fertilizers, petroleum gases, electricity and corn. Out of them, those that are locally produced include electricity, mineral fertilizers and corn.

“The increased tariff will make Georgian products non-competitive on the Armenian market. The impact will be felt by that contingent of Georgian exporters who export locally-produced goods to Armenia. That being said however, the total value of export of local products to Armenia is small,” said Zaza Chelidze, PMCG Consultant of Statistics, Economy and Public Administration.

“According to preliminary estimates, the membership of Armenia in the Customs Union will be beneficial for the country’s economy. According to IMF estimates, the Eurasian Union membership will bring an additional USD 250 million to Armenia every year, mainly at the expense of third party countries’ increased trade tariffs. Due to the diversified choices of Georgia and Armenia, the countries will have to revise their trade relations. However, there is an FTA between them,” Chelidze said.

Armenia, along with other countries in the region, has been affected by the economic shock deriving from Russia, through the channels of lower trade and remittances. Exports to CIS countries overall declined by 45% on an annual basis in the first six months of this year. Within this, exports to Russia fell by 47%, and exports to Armenia by 36.7%.

“Despite membership of the EEU, it is still in Armenia’s interest to have good trade relations with Georgia. Georgia is a vital transit route for Armenian exports, both to Russia by land, and to other destinations via Black Sea ports,” Alex Muscatelli, Director of Sovereign Group at Fitch Ratings, told The FINANCIAL.

Armenia’s accession to the EEU coincided with the impact of the severe economic downturn in Russia. Fitch downgraded Armenia’s ratings at the end of January from BB- to B+/Stable. The key drivers of the rating action were the expected impact of the downturn in Russia on growth and the balance of payments in Armenia, and the decline in foreign exchange reserves as a result of lower current account receipts, FDI inflows and to a lesser extent market intervention by the Armenian authorities to limit currency depreciation.“That said, more recent indicators suggest that economic prospects in Armenia are better than we had anticipated then. As a result, we have revised upwards our real GDP forecast for 2015 to +1.5% from -0.5%. Growth will be constrained by weak consumption against a lower trend in remittances. Last week, we affirmed Armenia’s ratings at B+/Stable,” said Muscatelli.

In Muscatelli’s words, if trade arrangements between the two countries do deteriorate, that would have some impact on the trade balance. “Encouragingly, export trends to markets outside the CIS have been much more positive this year. Exports to the EU (which account for just over 20% of total exports) were down by just 2% - and there was some growth in trade with specific EU countries - for example, Bulgaria, Italy and the United Kingdom.”

Auto re-export is the main concern for Georgians. For a long time Azerbaijan has been the top destination for Georgian auto re-export, involving thousands of Georgians. Meanwhile, since Azerbaijan implemented Euro 4 standards on imported vehicles, dealers lost that market. Since then Armenia has managed to replace Azerbaijan as the top destination for re-export.

“Yerevan is carrying out active negotiations for releasing over 900 products from fees stated by the ECU. The relief will last for at least 2-3 years. Officially, Yerevan is refraining from naming the exact list of products. However, according to unofficial sources, vehicles are the subject of the negotiations. This does not mean that re-exporting cars from Georgia to Armenia will not be reduced,” said Guruli, EPRC.

“However, the 2-3 year grace period will allow Armenian and Georgian dealers to lower the trade scale gradually and avoid bankruptcy. The situation with car re-exports from Georgia to Kazakhstan developed similarly after the latter joined the ECU. However, export to Kazakhstan was mostly low, with a huge jump in 2011 and equally rapid drop in the next year, whereas car exports to Armenia have been characterized by very steady growth since 2009. Thus, in the case of Armenia, Georgian auto dealers are losing a bigger market,” she added.

Georgia is the most diversified export country for Armenia, both from agricultural and non-agricultural product points of view. Export to Georgia by volume is far less than to Russia. In 2012 export to Georgia from Armenia was worth USD 21 million, and to Russia - USD 143 million. Meanwhile, out of agricultural products, export to Georgia counted 49 different products, and to Russia - 34. The situation is equal in terms of non-agricultural products. Georgia is the fourth export destination for Armenia. 95% of the export is made up of 147 products to Georgia, while to the EU - 13 sorts of products. “This data emphasizes the importance of Georgia to Armenia, both in terms of exports and imports. It encourages us to think that despite different political courses, the economic relations between the two countries will not be eclipsed,” Guruli said.

Historically, Russia is Armenia’s largest direct investor and trading partner. “The expansion of trade-economic relations with Russia suits Armenia’s economic interests. As Georgia is the main corridor for Armenia to connect with Russia, its ECU membership does not carry with it any threat for Georgia’s transit function,” said Chelidze, PMCG.

According to GeoStat, from January-June of 2015 external merchandise trade (excluding non-organized trade) in Georgia amounted to USD 4,761 million, 13 percent decreased year-on-year. The exports equalled USD 1,082 million (24 percent lower), while the imports stood at USD 3,680 million (9 percent lower). The negative trade balance was USD 2,598 million from January-June of 2015 and its share in external trade turnover constituted 55 percent.

The external trade of Georgia with EU countries amounted to USD 1,434 million, up 2 percent compared to the corresponding indicator of the previous year. Exports amounted to USD 293 million (2 percent lower), while imports amounted to USD 1,141 million (3 percent higher). The share of these countries in the external trade of Georgia amounted to 30 percent, 27 percent in exports and 31 percent in imports (from January-June 2014 - 26, 21 and 28 percent correspondingly). 33 percent of the trade deficit came to EU countries (31 percent from January-June 2014).

Meanwhile, the external trade of Georgia with CIS countries totalled USD 1,356 million (21 percent lower compared to January-June 2014). Exports stood at USD 417 million (45 percent lower), while imports equalled USD 939 million (2 percent lower). The share of the CIS countries in the external trade of Georgia constituted 28 percent, 39 percent in exports and 26 percent in imports (from January-June 2014 - 32, 53 and 24 percent, respectively). From January-June 2015, compared to the corresponding period of the previous year, CIS countries accounted for 20 percent of the overall trade deficit (8 percent from January-June 2014).

“We think that easier access to EU markets through the Association Agreement and the DCFTA should help to boost Georgia’s attractiveness as an investment location over the medium to long term. More generally, Georgia’s business environment compares favourably with rating peers,” Muscatelli, Fitch Ratings, told The FINANCIAL.