The FINANCIAL -- Georgian entrepreneurs are preparing to switch to Chinese and Ukrainian markets. Kazakhstan, which recently joined the Eurasian Economic Union (EaEU) treaty endorsed by Russia, is becoming too dangerous for Georgian exporters, as it’s going to limit import from Georgia. Experts predict improvement of Georgia-EU trade due to signing the Association Agreement with the EU and worsening trade with Kazakhstan, Russia and Belarus.
“It is difficult to predict what these countries will do tomorrow,” said Giorgi Kvirikashvili, Minister of Economy.
The presidents of Russia, Belarus and Kazakhstan signed the treaty of the Eurasian Economic Union.
“The just-signed treaty is of epoch-making, historic importance,” Vladimir Putin said. International society has already estimated the EaEU to be akin to the restoration of the USSR.
“A Russian embargo is not expected in the coming months from today’s outlook,” said Besik Namchavadze, Economist at Policy and Management Consulting Group (PMCG). “However, the Eurasian Economic Union will carry a common customs policy for third countries, which includes the protection of the markets of the Union. This argument will be used against Georgia. The export of Georgian (and not only Georgian) products will be complicated in the Eurasian Union,” said Namchavadze.
“It is hard to predict what they will do tomorrow. From our side we remain loyal to being consistent with the current policy. We do have a bilateral free trade agreement with these countries, unless decisions are taken at a political level. We hope that this will not happen,” Giorgi Kvirikashvili, Minister of Economy and Sustainable Development of Georgia, told The FINANCIAL.
The Minister does not see any signs of a repeat of the embargo yet. “However, we must be ready for any scenario. We constantly warn our exporters not to count on the Russian market 100%. We suggest diversifying the export basket. So that in the case of such political steps they would be prepared to switch to alternative markets,” said Kvirikashvili.
On 22 May, Alexander Lukashevich, the spokesman for the Russian Ministry of Foreign Affairs (MFA), grimly declared that there would be consequences for Georgia if it signed the Association Agreement (AA) with the European Union, which is scheduled for 27 June.
Despite Lukashevich’s clear warning, Georgian Prime Minister Irakli Garibashvili somewhat carelessly responded to the verbal threat, stating that “everything would be all right,” following with praise for himself and his government for “normalizing ties with Russia”, Jamestown Foundation reported.
Despite Lukashevich’s clear warnings, like Kvirikashvili, some Georgian experts remain optimistic that the Russian embargo will not be repeated in the near future.
“The Eurasian Economic Union will negatively affect the economic relations between Georgia Belarus, Kazakhstan and Russia, in the event their combined economic policy will be used as a tool against Georgia. The probability of it is high considering the influence Russia has over this union. Therefore, economic relations with these countries will get complicated for Georgia,” said Giorgi Tsimintia, Head of the Board at the Association of Young Economists of Georgia.
In 2013, exports to Russia, Kazakhstan and Belarus totaled USD 334,337.8 thousand. This is 11% of the total share of exports. Import totaled USD 665,512.1 thousand, 8% of the total share. Kazakhstan is an important trading partner in terms of export. Total trade amounted to more than USD 158 million in 2013; positive trade balance valued at USD 48 million. Trade turnover with Belarus amounted to USD 61 million. Out of these three countries the largest share of export, worth USD 190 million, was made up by Russia.
“Hence, the entrepreneurs must be prepared and be careful on the markets of Belarus and Kazakhstan. The risk of economic embargo increases in accordance with the formation of the Eurasian Economic Union. Russia has quite high influence in the formation of the joint economic policy of the Union,” said Tsimintia.
“The Russian Government has already announced that if Georgia signs the AA, then they will review the trade terms with us. However, such radical steps as an embargo are less expected. For Russia, an embargo means stating sanctions for themselves too,” said Namchavadze, PMCG.
During the first four months of 2014, Georgian export to Russia amounted to USD 87 million, while import was at USD 164 million. Russia has a trade advantage over Georgia. Its export is twice larger than ours.
“The NATO Wales summit that will be held in September will have more of an impact on Russia’s decision to change economic policy towards Georgia, than signing the AA. The summit will discuss Georgia’s further integration into NATO. In the case of accepting MAP, Russia will find a pretext to impose a sanction on Georgia,” said Namchavadze, PMCG.
In Namchavadze’s words, signing the AA and deeper integration into NATO is a positive scenario for Georgia, even in terms of economic development. “Deepening integration into NATO and Europe will bring huge results. These results cannot be outweighed by the most complicated economic relations with Russia,” he said.
“The consequences for Georgia if it signs the Association Agreement (AA) will be the interruption of restored export,” said Irina Guruli, Programme Manager at Economic Policy Research Center (EPRC).
“The figures show that, at least at this stage, Russia has not yet managed to get a decisive role in the Georgian economy, including export. So, its sanctions cannot become a counterweight for the AA,” said Guruli.
Against this background, the only suggestion for local entrepreneurs is market diversification. “Georgia’s export growth and diversification strategy should focus on the continued expansion of export products and services along with higher value addition and entry of new markets,” representatives of the World Bank suggested.
“First of all we should consider Ukraine a country that will manage to replace the Russian market. After handling its political problems, Ukraine will have a high rate of economic growth. In general, economies that overcome a crisis are characterized with a high rate of growth in following years. Eastern European countries will offer huge potential after the DCFTA will come into force. Emerging Asia is also very interesting. Its economy has 6-7% annual growth. Asia remains the fastest growing region, both demographically and in terms of the economy,” said Namchavadze, PMCG.
“China is gradually becoming a more and more interesting market. The Government should make a specific focus and spend resources in this direction,” Kvirikashvili told The FINANCIAL.
From January-April 2014, Georgia’s foreign trade turnover (excluding unorganized trade) amounted to USD 3,441 million. The sum is 14% more than the figures of the same period of 2013. Out of it, export was valued at USD 933 million (19% more) and import - USD 2,508 (13% more). The negative trade balance of Georgia was valued at USD 1,576 during the first four months of 2014; 46% of foreign trade turnover.
With USD 194 million, cars make up the leading part of exported products for January-April 2014.
They are 21 percent of the share of all exports. The second leading exporting product is ferroalloy, with USD 102 million its share of total exports is 11 percent. Copper ores and concentrates are in third place in the group. This commodity group exports valued at USD 82 million. It made up 9 percent of all exports. If you look at these commodity groups, it becomes clear that none of the products belong to the top list of traditional goods exported to Russia.
Georgia’s foreign trade turnover with EU countries amounted to USD 897 million in January-April 2014. It is 14 percent higher than the figure for the previous year.
Export made up USD 194 million (50% more) and import valued at USD 703 million (7% more). Georgia’s foreign trade turnover with these countries made up 26 percent. Exports make up 21%, and import - 28%.
By comparison, since 2012, when trade relations with Russia were restored under a politically softened context, trade with Russia amounted to just 7.3%. Out of total export the share of Russia makes up 9.4% and 6.6% is made up by import. This means that exported product capacity in Russia is 2.2 less than the cost of products exported to EU countries.
It is interesting that despite its geographical distance to Georgia, the U.S. is in the top ten list by trade turnover. Georgian export to the U.S. amounted to 7.5% in January-April 2014. It is only 2% less than the export share of Russia. The same share is made up by Turkey. Azerbaijan makes up over 20% and Armenia - 11%.