Economy in Focus: Georgia

Waves of migration from Russia brought capital to Georgia and boosted domestic demand in 2022, and sanctions on Russia have increased the prominence of Georgia’s location on the Middle Corridor. Still, growth is expected to slow in 2023. 

A small nation of 3.7 million people in the mountains of the South Caucasus, Georgia was home to ancient kingdoms and is the oldest wine producing region in the world. Its location between the Black and Caspian Seas—and between Russia, Turkey, and Iran—has long positioned at the heart of regional and global trade routes and imbued its politics with outsized geostrategic import.

The last year has shown that some things never change. 

Two years after Soviet troops violently put down pro-independence demonstrations in Tbilisi in 1989, Georgia became the fourth Soviet republic—after the three Baltic states—to organise a referendum for and subsequently declare its independence from the Soviet Union in 1991. 

The country was engulfed in two years of civil war that saw its first democratically-elected president, Zviad Gamsakhurdia, overthrown in a military coup that installed Eduard Shevardnadze, the final Soviet minister of foreign affairs, as president. Forces loyal to Gamsakhurdia and Shevardnadze battled until the former’s killing in 1993, even as separatists in the regions of South Ossetia and Abkhazia declared their independence.  

Shevardnadze was overthrown in the Rose Revolution of 2003, and Mikheil Saakashvili, the revolutionary movement’s charismatic leader, was elected president in 2004. Saakashvili presided over economic liberalisation, rapid privatisation, and a bid for membership in the North Atlantic Treaty Organisation (NATO)—which contributed to a deterioration in relations with Russia that culminated in the five-day Russo-Georgian War of 2008 and Moscow’s recognition of Abkhaz and South Ossetian independence. 

Georgia’s economic reforms over the last two decades have contributed to large growth and the halving of its poverty rate even as over a third of its workforce remains in low-productivity agriculture. Its high reliance on tourism made it vulnerable to the external shock of the Covid-19 pandemic, but it has recovered speedily and proven remarkably resilient to the negative effects of the war in Ukraine. 

Georgia ranked nineteenth out of 23 countries in Emerging Europe’s 2023 IT Competitiveness Index but ranked third for economic impact and ninth in business environment. 

Georgia currently has a BB+ long term issuer default rating from Fitch

Slowing growth 

According to the Asian Development Outlook (ADO) April 2023 released by the Asian Development Bank (ADB), Georgia’s inflation is estimated to fall to six per cent in 2023 from worryingly high 11.9 per cent in 2022.  The ADB’s report finds demand-side factors raised inflation despite tight monetary policy and a smaller fiscal deficit but says that slowing domestic demand and tighter macroeconomic policies should trim inflation. 

The ADO April 2023 also says gross domestic product (GDP) growth in 2023 is expected to be only 4.5 per cent—a considerable drop from 2022’s 10.2 per cent growth, but still healthy. Industry growth in 2022 accelerated from 3.2 per cent in 2021 to 15.4 per cent from gains in mining at 21.2 per cent, construction at 6.2 per cent, and utilities at 48.9 per cent. 

In 2024, growth will increase slightly to five per cent.  

“Having benefited from double-digit growth last year, Georgia must now seek ways to secure more sustainable development,” said Kamel Bouhmad, officer-in-charge of the ADB’s Resident Mission in Georgia. “To strengthen its position in tourism and services and maintain steady progress in building out key infrastructure, Georgia would benefit from increasing renewable energy production, continuing to support innovation, and accelerating environmental policy action.” 

Climate change

Georgia is especially vulnerable to the effects of climate change.

Worsening floods, droughts, and forest fires in different regions of the country have damaged crops and threaten food security. Tourism accounts for between a fifth and a quarter of Georgia’s GDP and supported more than one in every four jobs as of 2019, but reduced snowfall in the mountains hurts winter tourism and hospitality. 

While Georgia has worked to reduce emissions through recycling and improved waste management, strengthen forest management in support of a clean ecosystem, and promote green tourism, the ADO April 2023 calls for Georgia to go further and trade carbon emissions through global markets to incentivise efficient energy use and increase revenue for low-emitting firms. 

Shifting geopolitics 

Russia’s full-scale invasion of Ukraine spurred an outpouring of solidarity from Georgians—many of whom fought against Russia in the 2008 war and consider the presence of Russia troops in the breakaway states of Abkhazia and South Ossetia akin to occupation.

Days after the start of the war in Ukraine, Tbilisi joined Kyiv and Chișinău in formally applying for European Union (EU) membership.  

While the EU advanced Ukraine and Moldova’s applications to candidate status, it returned a list of requested economic and political reforms to Georgia as prerequisites for the approval of its application.  

EU membership would bring an inflow of Western investment into Georgia, and a poll taken in late 2022 shows 85 per cent of Georgians support membership. Working towards EU accession is also a constitutional obligation. 

However, politicians aligned with the ruling Georgian Dream party of prime minister Irakli Gharibashvili have repeatedly taken subsequent actions against the wishes of Brussels.

A bill to designate media entities and civil society organisations that receive over 20 per cent of their funding from international sources as ‘agents of foreign influence’ drew condemnation from the EU, United States, and United Nations.  

Although supported by Georgian Dream, the bill was eventually shelved after widespread protests by Georgians.  

On May 19, direct flights between Georgia and Russia resumed after receiving the support of Georgian Dream despite the urgings of EU officials to join EU sanctions against the Russian aviation industry. Companies at Georgian airports that service Russian aircraft could now be subject to Western sanctions.  

On May 30, Garibashvili said “one of the main reasons” for Russia’s invasion of Ukraine “was NATO expansion … the desire of Ukraine to become a member of NATO.” Georgia has itself sought to join NATO.  

Middle Corridor development

Garibashvili’s rejection of Western requests to join sanctions on Russia comes as he increasingly seeks to capitalise on Georgia’s strategic location along both the Middle Corridor and Persian Gulf to Black Sea trade routes. His government has resurrected the Anaklia port project in the hope that Georgia can profit from Middle Corridor trade circumventing Russia, even as Georgia itself increases trade with Russia. 

Russia is Georgia’s second largest trading partner. Trade turnover between the two countries reached 2.5 billion US dollars in 2022, and Georgia has seen the volume of its trade with Russia increase almost 22 percent in the year since the war in Ukraine started. 

Georgia also received a large influx of Russian migrants and their capital. Nearly 800,000 Russians came to Georgia from March through August 2022 as sanctions took their toll on the Russian economy, and another wave came amid autumn mass mobilisation orders sent many more Russians to the frontlines.

Many only transited through Georgia, but estimates suggest the number of Russians living in Georgia is closer to 100,000. This sudden influx created a housing crisis, and Georgian rents jumped 210 per cent

The ADO April 2023 says that 9.7 per cent growth in private consumption in 2022—which contributed to elevated inflation and growth—was largely driven by an influx of Russian migrants. 

As the European Commission considers new sanctions on third countries that refuse to comply with sanctions on Moscow—and thus allow Russia to bypass EU sanctions, it remains to be seen whether the Georgian government’s efforts to court the economic benefits of trade with both the EU and Russia will prove sustainable in the long-run. 

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