Home / Economy / Russia-Ukraine Conflict Escalation will Bring Direct and Indirect Effects for Georgian Economy

Russia-Ukraine Conflict Escalation will Bring Direct and Indirect Effects for Georgian Economy

On November 25 Russian naval vessels rammed and arrested  two Ukrainian military motorboats and tugboat in Kerch Strait. Kyiv announced 60-day martial law. As a result, the confrontation between two countries reached a new peak. Naturally, new challenges arose before Georgian economy. The reason is clear – Russia and Ukraine are one of the major trade partners. Consequently, developments in Ukraine are reflected on Georgian-Ukraine bilateral economic cooperation too. Ukraine has become Georgia’s key exports market, especially in the years, when Russia closed borders for Georgian product.

Russia-Ukraine confrontation affects economic positions in both countries, as well as on their trade-economic partners, including on Georgia. Effects will become evident later. Consequently, experts only keep supervising political and economic developments in the context of Ukraine-Russian confrontation.

American and British officials appraised the recent Russia-Ukraine sea confrontation in the Azov and Black Sea waters as a hazardous escalation, violation of international norms, regional destabilization, encroachment on territorial integrity of Ukraine, economic expert Rati Abuladze noted. At the same time, Russian officials appraised the situation Ukrainian provocation and hazardous incident. They referred to necessity of de-escalation and dialogue for the problem resolution.

The Region and neighbouring countries, including Georgia, will have to pay serious price in case of the conflict escalation and new aggression. Regretfully, Georgian economy remains vulnerable to regional challenges. Therefore, conflict resolution issues will make direct and indirect effects on Georgian economy.

We can specify the following economic challenges that accompany regional conflicts: downturn in investments, foreign trade turnover, consumer and business activities, tourism and capital flows, fluctuations on financial markets, Rati Abuladze said.

“Today Ukraine and Russia are Georgia’s one of the major trade partner countries (the list also includes Turkey, China, Azerbaijan, Germany, the USA, Armenia, France and Italy). Georgia actively uses exports and imports potential of the mentioned countries.

Actual facts prove that in January-October 2018 Georgia’s trade turnover with Ukraine and Russia constituted 1.675 billion USD. In the same period, imports from Ukraine and Russia made up 1.12 billion USD, while exports to Ukraine and Russia amounted to 486.9 million USD.

It should be noted that 80% of products from Ukraine are exported by sea (through Azov and Black Sea) and escalation and destabilization may become one of the challenges to Georgia’s trade environment.

The volume of foreign direct investments from Russia and Ukraine are also very important. Namely, in 2017 FDI inflows from Russia made up 47.7 million USD, while FDI inflows from Ukraine constituted 5.3 million USD.

Number of visitors arriving in Georgia from Ukraine and Russia has been also growing year to year. Namely, in 2017 their number reached 1.3 million persons, in January-October 2018 the number of visitors exceeded 1.4 million persons from the mentioned countries.

Regretfully, it should be noted that amid the regional conflicts Georgia remains face to face with the country with geostrategic interests. Georgia remains face to face with political challenges, frozen conflicts and border problems, while the country lacks resources for resolving the mentioned challenges.

Ultimately, I would like to note that in short-term perspective, Ukraine-Russia conflict will not be resolved and therefore, amid the expectations of conflict escalation, Georgia should increase its readiness in terms of financial, economic and geopolitical aspects, Rati Abuladze said.

The fact Ukraine has announced martial law signifies economic positions in this region and the neighbouring countries (turnover in the Black Sea basin) may worsen and these developments may effect Georgia too, economic expert Vakhtang Chumburidze noted.

Considering the mentioned circumstances, banking institutions will suspend issuing money resources near the conflict zones. Moreover, the World Bank (WB) abstains from allocating assistance packages to the countries, which announce martial laws, referring to risk factors, until resolution of conflicts and de-escalation of situation, Chumburidze said.

“It is also noteworthy that Ukraine announced the counter-terrorism operation in the conflict regions for a period of only 4 months. This decision was related to assistance that the country has been receiving over the past years and visa liberalization process. We have seen that the 4-month counter-terrorism regime is being continued for 4 years. I think there is jeopardy that the recently announced 30-day martial law may be continued in Ukraine for a longer period”, Chumburidze noted.

As to the effects on Georgia, Chumburidze explained that Ukraine suffers from the same Russia aggression as Georgia. Territories of both countries have been invaded. If the Georgian Authorities passes a resolution in support of Ukraine, Russia may carry out the same attack or take any other aggressive steps against Georgia.

“ I would also recall one fact – when the borderline was shifted in Tusheti and protest rallies erupted in Ingusheti, these developments were related to Russian provocation to a certain degree.

As to economic situation, if Russia starts blocking the Black Sea basin, cargo turnover will decrease in the direction of Georgia too, because Poti and Batumi seaports are related to Odessa seaport to a certain degree, where Odessa and Ilichevich seaports shape a reception and distribution corridor. I believe Georgia should show caution, because we do not have favourable political and economic situation and in case of Russian provocations, our economy will reap disastrous outcomes”, Chumburidze said.

There is a pre-crisis situation in Ukraine, economic expert Vakhtang Khomizurashvili says. Any hostilities and political tension effects economic positions. There may be certain risks in this situation, including for exporters, because Ukraine and Russia are major trade partners for Georgia  and payments may grow risky, Khomizurashvili noted.

 A lot of partners of Ukraine may become unable to fulfil their liabilities, Georgia’s exports to Ukraine may decline and this will make negative effect on money flows, he added.

As to new presumable sanctions against Russia and Georgia’s role in this respect, Khomizurashvili noted that 60-70% of Georgian exports depend on Russian market and similar scenario will bring negative outcomes for our country.

“Prior to taking a political decision, our Authorities should analyse all expected outcomes of this political step. Therefore, I believe we should follow the interests of Georgia. We should comprehensively analyse these expected outcomes. Negative effect implies a decrease in money flows and this fact will naturally effect and stage extra burden on GEL. Therefore, the GEL exchange rate may become uncontrolled”, Khomizurashvili noted.

We remind you that both Russia and Ukraine are Georgia’s major trade partners. Following Azerbaijan, Russia ranks second as Georgia’s trade partner. January-October exports to Russia made up 351 million USD. Trade turnover is growing with Ukraine too. The January-October exports to Ukraine exceeded 135 million USD.

Russia and Ukraine remains major trade partners in terms of imports too. As to key commodity items that Georgia exported to Russia in January-October, ferroalloys rank first, wines rank second and spring water is third.

Imports from Russia is also growing. In the reporting period, oil and oil products ranked first. As to Ukraine, according to Geostat, national statistics service of Georgia, Georgia exported vehicles to Ukraine. Spirits, wines and spring waters are also reported in top five exports items.

Imports from Ukraine mainly consists of cigars and tobacco products. Steel fittings and other solid wastes are also registered in the list of imports items.