RONDELI BLOG

Is Georgia’s Export Growth Sustainable?

2017 / 12 / 14

Author: Amb. Valeri Chechelashvili, Senior Fellow at Rondeli Foundation

The stable developing character of involvement in the international division of labor is an important component of security and sustainable economic progress for any country. The trade turnover of many developed countries either comes close to or exceeds the volume of gross domestic product. In other words, more than half of nationally produced merchandise and services are directed to foreign markets. In the table below, the respective figures demonstrate this tendency.

Gross Domestic Product and export volume of selected countries ($ millions, 2014 - 2016 est.)

Source: Source: https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal); https://en.wikipedia.org/wiki/List_of_countries_by_exports

Although the figures for GDP and export volumes are available for the years 2016 and 2015 respectively, we can draw some conclusions from the table.

First - the smaller the country is, the more limited is their consumption and respectively, the market volume. As a result, the given country is more dependent on external markets. As the economy develops, this dependence inevitably increases. This is an objective reality that is impossible to ignore. Otherwise a country is doomed to isolation. If we want our country to demonstrate rapid growth, we have to take this tendency into account.

One of the important advantages of our country is our comparatively stable macroeconomic environment. Currently the most vulnerable macroeconomic component is an impressive trade deficit. It has an objective character and has its own historic preconditions and economic reasons, which are important enough to be researched separately. The reality is that Georgia’s trade balance exhibits a sustainable deficit, which is compensated by several components (e.g. services, transit, tourism, foreign direct investments, remittance), leading to a more or less stable payment balance. The continued negative trade balance is main challenge for Georgian economy. In the last few years, this figure is in the range of around 50%.

Trade deficit of Georgia ($ millions)

Source: http://geostat.ge/?action=page&p_id=133&lang=geo

In this light, some positive changes were recorded this year thanks to impressively accelerating exports. Provided that Georgia maintains this positive tendency and reduce the volume of its trade deficit to even 25%-30% of trade turnover, the macroeconomic environment’s stability will be guaranteed with all the respective consequences, including the stability of the national currency – the lari exchange rate.

Actually, there are two ways to improve the trade balance – substituting imports and accelerating exports. Georgia has good potential for both, although this article is a humble effort to analyze export developments, their character, nature and possible forthcoming challenges.

What is the reason for such an acceleration in exports? Is this sustainable?

The best development to result from this is that the EU has become Georgia’s most important trade partner.

Georgia’s main trade partners (2017, $ million, 10 months)

Source: http://geostat.ge/cms/site_images/_files/georgian/bop/FTrade__10_2017_GEO-with%20cover.pdf

In the table above, instead of the CIS, which traditionally appears in Georgian statistics, the Eurasian Custom Union is presented, which more adequately reflects current regional economic realities. A CIS single market never existed, but its prospects were finally demolished by the war between Russia and Ukraine. In addition, CIS trade rules, having lost relevance in general, no longer influence any trade relations between Georgia and Azerbaijan, Moldova, Uzbekistan and Tajikistan, which are legally or formally still CIS members. As for Ukraine and Turkmenistan, they haven’t signed or ratified the CIS Charter, so legally these countries are not members of the CIS. Georgia’s trade relations with Ukraine and Turkmenistan are regulated by bilateral free trade agreements. Another important component of Georgia’s foreign trade arrangements is the GUAM (Georgia, Ukraine, Azerbaijan, Moldova) Free Trade Area, which entered into force on 10 December 2003 (See: https://guam-organization.org/en/agreement-on-establishment-of-free-trade-area-between-the-guuam-participating-states/ ).

The fact is that both the main successes and challenges of Georgia’s foreign trade entail the impressive growth of exports to the Russian market. Institutions in Russia are weak, subject to political pressure and respectively rubber stamping politically charged decisions. This was vividly demonstrated in March 2006 with the Russian embargo, despite the existing bilateral Free Trade Agreement, ratified both by the Russian State Duma and the Georgian Parliament. This particular Agreement contained dispute regulation mechanisms that accord to international legal practice. (See: http://base.spinform.ru/show_doc.fwx?rgn=23995). Nevertheless, the Russian Government, without hesitation, unilaterally introduced politically charged embargo decision. It is worth mentioning that Georgia is not a sole example of such Russian treatment. Violating political treaties and economic agreements demonstrates the Russian authorities’ routine attitude towards signed and ratified international documents. In this respect, any neighbor of the Russian Federation, from Belarus to Japan, can provide examples from its own experience.

Nobody can argue that the Russian market is not lucrative. But it should be kept in mind that it is, at the same time, dangerous, non-sustainable and poses many risks, predominantly of a political nature.

As a result of the Georgian Government’s efforts to normalize the climate of bilateral relations in recent years, Russian-Georgian trade relations have accelerated remarkably.

Georgian – Russian trade dynamics ($ millions)

Source: http://www.geostat.ge/?action=page&p_id=133&lang=geo

Most likely, Russian-Georgian trade turnover will pass the $1 billion threshold in the current year. Russia became the biggest export market for Georgia with 14,3% ($314 million of $2203 million), and Azerbaijan occupies second place with only 8.8%. In some export sectors of the Georgian economy, this dominance is more dramatic. In the first ten months of 2017, Georgian entrepreneurs exported 61million bottles of wine, valued at $134,6 mln. The Russian market was the largest at more than 38,3 mln bottles (62,7%, $84,6 mln), and Ukraine ranked second with only 6.2 million bottles (10,1%). This clearly demonstrates how dramatically dependent Georgian wine-making industry is on the Russian market. As an outcome of Russia’s expansionistic policy in the region, most vividly manifested in the creeping occupation of Georgia’s territories, there is very narrow capacity, if any, for two states to improve the bilateral political climate. This also does not contribute to the sustainability of bilateral economic cooperation (See: http://reginfo.ge/economic/item/3540-saqartvelodan-gvinis-eqsporti-59-%E2%80%93it-gaizarda,-chachis-198-%E2%80%93it).

The other side of the coin is that average contract price of Georgian wine is only $2.2. According to current tendencies, a total of 73-75 million bottles will be exported this year. One has to keep in mind that extensive growth has natural limits. It is time to start thinking about repositioning Georgian wine on the international market based on the idea that Georgian wine should move to a higher segment – fewer in quantity, higher in price. In the case that this tendency becomes a reality, our future markets are predominantly not Russia, but the EU, China, the USA, Japan, etc. This doesn’t mean that Georgian wine should surrender its already achieved positions on friendly markets in Ukraine, Belarus, Azerbaijan, Kazakhstan, etc., or even the market in non-friendly Russia. But the strategic trajectory of increasing quality and respectively, the price, as well as decreasing dependence on lucrative but risky markets should be carefully crafted and followed.

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Is Georgia’s Export Growth Sustainable?

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