Georgia's Economic Dependence on Russia Continues to Grow - Transparency International Georgia

In 2022, Georgia's economic dependence on Russia increased. The increase in dependence continued in the first half of 2023. From January to June, Georgia received 2 billion USD in income from Russia through remittances, tourism, and the export of goods which is 1.6 times more than the income received from Russia in January-June 2022 from the same sources. In the first half of 2023, income received from Russia accounted for 14.2% of Georgia's GDP, whereas in the first half of 2022, this figure was 11.7%.

Georgia's growing economic dependence on Russia represents a threat, as Russia traditionally uses economic relations to exert political pressure on other countries.

Among the specific findings of the research, the following should be underscored:

In the first six months of 2023, 6,539 Russian companies registered in Georgia, and a total of 21,326 companies have been registered since the start of the war in Ukraine. Since March 2022, the number of Russian companies registered in Georgia has tripled compared to the period from 1995 to 2021;

In 2022-2023, 95% of the registered companies are sole proprietors, indicating that a part of Russian citizens moved to Georgia to live and do business for a long time;

In January-June 2023, 578,000 visitors came from Russia, which is 2 times more than the rate of January-June 2022, but it is still 16% lower than the pre-pandemic rate of 2019. The share of Russian visitors in the total number of visitors to Georgia is 20%. Until 2022, the share of Russian citizens never reached 20%;

Some Russian visitors are actually immigrants who have settled in Georgia for a long time. According to GeoStat, 62,300 Russian citizens stayed in Georgia in 2022;

The settlement of Russian migrants in Georgia led to a significant increase in remittances. In 6 months of 2023, remittances from Russia to Georgia increased by 50% and amounted to 1.1 billion USD;

In January-June 2023, Georgian exports to Russia increased by 34% and amounted to 344 million USD.

The share of Russia in the total export of Georgia was 11.3%. The increase in exports was primarily caused by the increase in the re-export of passenger cars;

Georgia’s wine exports are highly dependent on the Russian market. In the 6 months of 2023, wine exports to Russia increased by 41% and amounted to 82 million USD. The Russian market holds 65% of Georgian wine exports, which is the highest figure since 2005;

In January-June 2023, imports from Russia increased by 31% and amounted to 927 million USD. The share of imports from Russia in total imports of Georgia is 12.9%. Russia's share in imports has not been that high since 2007;

In 6 months of 2023, the import of oil products (fuel) from Russia increased the most - by 75%. If compared to the period before the Russia-Ukraine war, the import of oil products has increased 5 times;

In January-June 2023, natural gas import from Russia increased by 119%, and the share of Russian natural gas in Georgia's domestic consumption amounted to 24%, while it was 11.6% in January-June 2022. The share of Russian electricity in Georgia's domestic consumption was 0.1% as in January-June, Georgia did not actually consume imported electricity;

A record annual amount of 108 million USD in foreign direct investment flowed into Georgia from Russia in 2022. In

January-June 2023, investments from Russia surged sevenfold, reaching a total of 56 million USD. Of this amount, 27 million USD was directed towards financial and insurance activities, while 18 million USD was allocated to real estate investments.

The goal of the Government of Georgia should be the reduction of economic dependence on Russia to a minimum.

To reduce the trade with Russia, the Government of Georgia should start working more actively and expeditiously on concluding free trade agreements (FTA) 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 request strategic partners to accelerate the process of signing FTAs.

As diversifying the wine export market is a challenging task that cannot be swiftly accomplished, the Government should have a strategic plan on how to reduce dependence on the Russian market in the upcoming years.

State budget aid should not be given to businesses that contribute to the growing economic dependence on Russia. The implementation of this rule will be pivotal in reducing Georgian economy's dependence on the Russian economy, thereby enhancing both its economic and political security.

I.       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.

Therefore, it is important to know the level and the trend of dependence of the Georgian economy on Russia. The ongoing Russian-Ukraine war made the monitoring of Georgia's economic dependence on Russia even more relevant.

Transparency International Georgia published its latest study on economic dependence on Russia in February 2023, which focused on analyzing the situation in 2022. [1] The current study primarily encompasses indicators and trends observed during the period of January to June 2023.

II.     Key Indicators of Georgia’s Economic Dependence on Russia

1.       Foreign Trade

In the first half of 2023, compared to the same period in 2022, Georgia's trade with Russia increased by 32% and reached 1.3 billion USD. The share of Russia in Georgia's total trade has risen to 12.4%, marking the highest in the last 16 years.

In January-June 2023, the export of Georgian products to Russia increased by 34%, reaching 344 million USD (see Figure 1). Russia's share in Georgia's total exports stood at 11.3%, marking a 1.3 percentage point increase compared to the January-June 2022 indicator.

In 2022, Georgia's economic dependence on Russia increased. The increase in dependence continued in the first half of 2023. From January to June, Georgia received 2 billion USD in income from Russia through remittances, tourism, and the export of goods which is 1.6 times more than the income received from Russia in January-June 2022 from the same sources. In the first half of 2023, income received from Russia accounted for 14.2% of Georgia's GDP, whereas in the first half of 2022, this figure was 11.7%.

Georgia's growing economic dependence on Russia represents a threat, as Russia traditionally uses economic relations to exert political pressure on other countries.

Among the specific findings of the research, the following should be underscored:

In the first six months of 2023, 6,539 Russian companies registered in Georgia, and a total of 21,326 companies have been registered since the start of the war in Ukraine. Since

March 2022, the number of Russian companies registered in Georgia has tripled compared to the period from 1995 to 2021;

In 2022-2023, 95% of the registered companies are sole proprietors, indicating that a part of Russian citizens moved to Georgia to live and do business for a long time;

In January-June 2023, 578,000 visitors came from Russia, which is 2 times more than the rate of January-June 2022, but it is still 16% lower than the pre-pandemic rate of 2019. The share of Russian visitors in the total number of visitors to Georgia is 20%. Until 2022, the share of Russian citizens never reached 20%;

Some Russian visitors are actually immigrants who have settled in Georgia for a long time. According to GeoStat, 62,300 Russian citizens stayed in Georgia in 2022;

The settlement of Russian migrants in Georgia led to a significant increase in remittances. In 6 months of 2023, remittances from Russia to Georgia increased by 50% and amounted to 1.1 billion USD;

In January-June 2023, Georgian exports to Russia increased by 34% and amounted to 344 million USD. The share of Russia in the total export of Georgia was 11.3%. The increase in exports was primarily caused by the increase in the re-export of passenger cars;

Georgia’s wine exports are highly dependent on the Russian market. In the 6 months of 2023, wine exports to Russia increased by 41% and amounted to 82 million USD. The Russian market holds 65% of Georgian wine exports, which is the highest figure since 2005;

In January-June 2023, imports from Russia increased by 31% and amounted to 927 million USD. The share of imports from Russia in total imports of Georgia is 12.9%. Russia's share in imports has not been that high since 2007;

In 6 months of 2023, the import of oil products (fuel) from Russia increased the most - by 75%. If compared to the period before the Russia-Ukraine war, the import of oil products has increased 5 times;

In January-June 2023, natural gas import from Russia increased by 119%, and the share of Russian natural gas in Georgia's domestic consumption amounted to 24%, while it was 11.6% in January-June 2022. The share of Russian electricity in Georgia's domestic consumption was 0.1% as in January-June, Georgia did not actually consume imported electricity;

A record annual amount of 108 million USD in foreign direct investment flowed into Georgia from Russia in 2022. In January-June 2023, investments from Russia surged sevenfold, reaching a total of 56 million USD. Of this amount, 27 million USD was directed towards financial and insurance activities, while 18 million USD was allocated to real estate investments.

Recommendations

The goal of the Government of Georgia should be the reduction of economic dependence on Russia to a minimum.

To reduce the trade with Russia, the Government of Georgia should start working more actively and expeditiously on concluding free trade agreements (FTA) 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 request strategic partners to accelerate the process of signing FTAs.

As diversifying the wine export market is a challenging task that cannot be swiftly accomplished, the Government should have a strategic plan on how to reduce dependence on the Russian market in the upcoming years.

State budget aid should not be given to businesses that contribute to the growing economic dependence on Russia. The implementation of this rule will be pivotal in reducing Georgian economy's dependence on the Russian economy, thereby enhancing both its economic and political security.

In January-June 2023, the export of Georgian products to Russia increased by 34%, reaching 344 million USD (see Figure 1). Russia's share in Georgia's total exports stood at 11.3%, marking a 1.3 percentage point increase compared to the January-June 2022 indicator.

In the 6 months of 2023, the export of passenger cars from Georgia to Russia increased by 38 million USD (by 275%). Export of non-alcoholic beverages increased by 35 million USD (by 113%). Export of wine increased by 24 million USD (by 41%), and of spirits by 11 million USD (by 82%). Only the export of ferroalloys decreased significantly - by 41 million USD (by 47%). Since March 2023, Russia has imposed an anti-dumping duty on the import of ferroalloys, which has halted the import of ferroalloys from Georgia to Russia.

From August 1, 2023, the Government of Georgia has banned the re-export of cars imported from the USA to Russia. From September 26, a similar ban will apply to the re-export of cars imported from EU countries.[2] This decision stems from the tightening of the sanctions imposed on Russia by both the USA and the EU.

In the first six months of the current year, wine held the top position in the export of Georgian products to the Russian market, reaching 82 million USD. Non-alcoholic beverages secured the second spot with 66 million USD, followed by the export of passenger cars at 53 million USD.

In January-June 2023, imports of Russian goods into Georgia increased by 31%, totaling 927 million USD (see Figure 3). Russia's share in Georgia's total imports reached 12.9%, which is 1.1 percentage points higher than the figure for January-June 2022. This marks the highest share of Russian imports into Georgia since 2007. Compared to the first six months of 2021, imports from Russia have doubled.

During January-June 2023, imports of Russian goods into Georgia increased by 31%, reaching a total of 927 million USD (see Figure 3). Russia's share in Georgia's total imports reached 12.9%, which is 1.1 percentage points higher than the figure for January-June 2022. This represents the highest share of Russian imports into Georgia since 2007. In comparison to the first half of 2021, imports from Russia have doubled.

In the first six months of 2023, the import of oil products (fuel) from Russia saw the most significant increase, rising by 137 million USD (by 75%). Compared to the first six months of 2021, the import of oil products has surged fivefold. of natural gas increased by 45 million USD (by 138%), import of ferrous metals by 20 million USD (by 71%). Imports of margarine decreased significantly by 22 million USD (by 87%), electricity by 15 million USD (by 96%) and telephone sets by 8 million USD (by 96%).

In the first six months of the current year, oil products led Russian imports at 321 million USD, with natural gas following at 78 million USD.

Traditionally, Georgian wine exports heavily depend on the Russian market. In the first half of 2023, Georgian wine worth 82 million USD was sold in Russia, which is a 41% increase compared to the same period of the previous year. The share of the Russian market in the total export of Georgian wine also increased, reaching 65%, the highest level since 2013, following the return of Georgian wine to the Russian market.

Georgia's dependence on Russian wheat and wheat flour has been also typically high. In 2022, Georgia imported wheat and flour from Russia worth 129 million USD, which constituted 97% of the total wheat imports. During January-June 2023, the volume of wheat and flour imported from Russia increased by 26 thousand tons, representing a 21% rise. The share of Russian wheat and wheat flour in food consumption in Georgia now make up to 75%.

In recent years, the import of Russian electricity does not have a significant share in the electricity consumption in Georgia. In 2022, the share of electricity imported from Russia in the electricity consumed in Georgia was only 2.6%.[3] In January-June 2023, the share of Russian electricity in Georgia's domestic consumption was 0.1%[4] as Georgia did not actually consume imported electricity.

There is a different situation in the import of natural gas. In 2019, the proportion of natural gas imported from Russia made up 6.5% of Georgia's domestic consumption. From 2020, the volume of natural gas imported from Russia witnessed an annual increase, and in 2022, the consumption of Russian natural gas surged to three times the 2019 level (520 million cubic meters). During the period of January to June 2023, in comparison to the same timeframe in 2022, the import of natural gas from Russia experienced a surge, registering 119% increase and reaching a total of 422 million cubic meters.

The share of Russian natural gas in Georgia's domestic consumption increased to 24%, it was 11.6% in January-June last year. The portion of Georgia's domestic consumption supplied by Russian natural gas has climbed to 24%, marking an uptick from the 11.6% figure observed in the January-June period of the prior year.[5]

To sum up, since the beginning of the Russia-Ukraine war, Georgia's export dependence on the Russian market reduced, as Georgian exports to other countries increased more compared to the Russian one. However, the dependence on the Russian market in terms of wine exports increased which bears high political risks. Dependence on the import of Russian goods has risen significantly, mainly due to the increase in the import of motor fuel, natural gas and ferrous metals.

2.       Tourism and Remittances

Before the Covid-19 pandemic, Georgia was the most dependent on Russia in terms of tourism. Due to the pandemic, the number of visitors from Russia decreased by 85% in 2020-2021.

As a result of the end of the pandemic and the Russia-Ukraine war in 2022, the influx of visitors from Russia saw a significant increase. In 2022, there were 1.1 million visitors from Russia, which marked a fivefold increase compared to 2021, though it remained 26% lower than the 2019 figures.

In January-June 2023, 578 thousand visitors arrived from Russia, marking more than twofold increase compared to the same period in 2022 although it is still 16% lower than the figure of 2019.

In 2022, Russian visitors accounted for 20% of the total number of visitors to Georgia. During the first half of 2023, the share of Russian visitors increased slightly to 20.2%. Visitor statistics are available since 2011 and clearly, the share of Russian citizens among visitors to Georgia has never reached 20% before.

The precise statistics regarding the number of Russian visitors who chose to establish long-term residence in Georgia became available only in 2022. According to GeoStat, last year 62,300 Russian citizens stayed in Georgia, that is, they were registered as immigrants.

According to the information of the National Bank of Georgia, in the first half of 2023, Russian visitors spent 482 million USD in Georgia, marking a two-fold increase compared to the corresponding figure from 2022.

The share of income from Russian visitors in the total income received from visitors was 19.1% in January-June 2022, and increased to 26.7% in the first 6 months of 2023.

Starting on May 15, 2023, the Russian authorities decided to reinstate direct flights with Georgia, which had been suspended since July 2019. This resumption of flights contributed to an influx of Russian visitors to Georgia. However, accurately determining the extent of this increase is challenging, as the number of Russian visitors to Georgia was already on the rise.

Funds transferred by Georgians employed in Russia have been a crucial source of income for Georgia. In 2015-2021, the share of remittances received from Russia in Georgia’s total remittances tended to decrease. In 2022, the situation changed significantly due to the Russia-Ukraine war. In that year, 2.1 billion USD were transferred from Russia to Georgia, a fivefold increase compared to 2021. This significant surge can be attributed primarily to Russian citizens who have relocated to Georgia and are remitting funds from Russia.

In the first half of 2023, remittances from Russia surged by 50%, totaling 1.1 billion USD when compared to the corresponding period in 2022 (see Figure 8). However, during the months of May and June this year, remittances from Russia experienced decline, with a reduction of 259 million USD compared to the same period in 2022.

In January-June 2023, remittances transferred from Russia accounted for 47.5% of the overall total remittance amount.

3.       Foreign Direct Investments

In 2017-2021, the share of Russian investments in the total foreign investments attracted by Georgia was 5%. However, approximately 38% of foreign investments in Georgia come from offshore[6] and in some cases, it is also associated with money of Russian origin.[7] In 2022, Georgia received a record-breaking 108 million USD in direct foreign investments from Russia, marking the highest annual influx of Russian capital into Georgia.

During the period of January to June 2023, Georgia received 56 million USD in direct investments from Russia, representing a sevenfold increase compared to the same timeframe in 2022. Out of this investment, 27 million USD were directed towards financial and insurance activities, 18 million USD into real estate, 7 million USD into information technologies, and 4 million USD into the trade.

III.    Russian Companies in Georgia

Following the review of Georgian business register databases, we have identified companies whose full or partial shareholders are legal or natural persons (citizens) of Russia. Namely, these types of companies are referred to as Russian companies. However, this list may not be exhaustive, as there are instances where the owner of a company registered in Georgia is registered in the offshores, creating challenges in disclosing beneficial (final) ownership.

As of December 31, 2022, about 29,000 companies are registered in Georgia whose owners are legal entities and/or citizens of the Russian Federation. 74% of these companies (up to 21,326) were registered in the period from March 2022 to June 2023 after the start of the war in Ukraine. In 2022, Russian citizens registered 14,977 companies in Georgia, marking a sixteenfold increase compared to the number of companies registered in 2021. During the first half of 2023, 6,539 Russian companies were registered.

In 2022-2023, 96% of Russian companies registered are sole proprietors (individual entrepreneurs), compared to 51% in 2021. 99% of sole proprietors have non-Georgian surnames.

When registering a company in Georgia, the specific field of operation is not initially required. However, as the company commences its operations and a certain period elapse, GeoStat becomes aware of the company's field of activity. At present, the field of activity for 2,362 Russian companies registered in 2022 is known. Among these, 1,884 companies (comprising 80% of the total), are engaged in the information technology sector. 99% of these entrepreneurs operate as sole proprietors. Following information technology, design and advertising activities represent the next category, with 1,126 identified companies. Additionally, there are 110 companies in the sectors of education, art, and entertainment, along with 82 companies operating in the fields of trade, restaurants, and hotels.