People gathered within the streets of Tbilisi in May to protest after a Russian passenger plane landed within the Georgian capital, making its first direct flight from Moscow after a four-year hiatus, on May 20, 2023.
Anadolu Agency | Anadolu Agency | Getty’s paintings
The Caucasian countries of Georgia and Armenia, whose economies unexpectedly boomed within the aftermath of the war in Ukraine, now face Western retaliation after a surge in trade with Russia.
Two former Soviet states near Russia’s southern border saw double-digit growth last 12 months because the rise in Russian staff, wealth and trade accelerated their broader post-Covid recovery.
In keeping with data from the International Monetary Fund, the economy of Georgia grew by 10.1% in 2022, and that of Armenia by 12.6%. In 2023, their growth is to slow right down to approx 4% and 5.5%accordingly, reflecting general moderation in the broader Caucasus and Central Asia region, the UN agency said.
Still, analysts say the underlying drivers of growth “haven’t disappeared” and could put these countries within the international highlight.
“The explanation we’ve not slowed down as much as we could is because we took advantage of the proven fact that Russia has been sidelined by the remainder of the world,” Mikheil Kukava, head of economic and social policy at Georgia’s Institute for Development of Freedom think tank he told CNBC via Zoom.
Trade “intermediary” with Russia
Western leaders have raised alarm bells this 12 months, some traders are using countries like Armenia, Georgia, Kazakhstan and Turkey to avoid sanctions against Russia.
In its latest economic forecast, the European Bank for Reconstruction and Development noted that these countries turn into so-called indirect trading partners.
“Export from the European Union, Great Britain and america to Central Asia and the Caucasus [have] increased dramatically, indicating a rise in “indirect trade”, where goods are exported to Central Asian economies and then traded onward to Russia, the EBRD said.
The changing trade patterns within the region are a possibility, but additionally a risk.
Subir Lall
deputy director on the IMF
In keeping with preliminary data from the Georgian National Statistical Office, Geostat, this 12 months Russia has turn into Georgia’s second largest trading partner when it comes to imports and Georgia’s third largest trading partner when it comes to exports. Until 2022, Russian imports into the country increased 79%while exports to Russia increased by 7%.
Meanwhile, Russia belongs to Armenia largest trading partner each when it comes to imports and exports. Kyrgyzstan, Tajikistan and Azerbaijan, in addition to other countries within the region, have also seen a rise in trade with Russia over the past 12 months, based on IMF data.
“The changing trade patterns within the region are a possibility, but additionally a risk,” said Subir Lall, the IMF’s deputy director for the Middle East and Central Asia, at a briefing earlier this month.
Georgian and Armenian government spokesmen didn’t immediately reply to CNBC’s request for comment on the rise, nor did they supply a breakdown of the particular goods traded with Russia.
Nonetheless, Geostat data showed that cars, gasoline and unspecified “other goods” accounted for the overwhelming majority of Georgia’s trade overall. Particularly noteworthy is the variety of vehicles, planes and ships exported to Russia quadrupled in 2022 and is now about double that of 2021.
“I do not remember a time when Russia was Georgia’s leading trading partner – each in imports and exports. Some positions saw a rise of 1000% or 500%. It’s suspicious, is not it?” Kukawa said.
“Although there’s nothing illegal here – they aren’t sanctioned goods – we suspect that it’s dual-use items similar to washing machines that may have so many uses,” he added, noting that parts of such items might be reused in products military and microchips.
A crackdown on sanctions circumvention
Increasing trade flows have prompted calls from the European Union and allied countries to either impose sanctions on such countries or impose secondary sanctions on them.
A spokesperson for the European Commission, the EU’s executive body, told CNBC that it’s currently working to “detect the diversion of trade flows from certain third countries acting as possible gateways to Russia.”
That is from the comments earlier this month from the President of the European Commission Ursula von der Leyen, who said that 11. the sanctions package against Russia will give attention to “combating circumvention” in cooperation with the Group of Seven Nations.
For Armenia, compliance with the sanctions is an absolute priority.
Armen Nurbekyan
Vice-President of the Central Bank of Armenia
The EBRD currently estimates that such “brokering” accounts for around 4-6% of Armenia’s and Kyrgyzstan’s annual gross domestic product. This, in turn, spurs the countries’ “growing logistics industry” and bolsters the appreciation of local currencies, he said.
Nonetheless, Armenia’s central bank deputy governor, Armen Nurbekyan, insisted that authorities watch the country’s trade patterns weekly to make sure that businesses aren’t violating the embargo.
“For Armenia, compliance with the sanctions is an absolute priority,” Nurbekyan told CNBC. “We’re in a region that could be very turbulent, so we all know what it means to be around sanctioned countries, and I believe we’ve got been quite successful in steering our economy in such a way that we avoid problematic cases. “
Nurbekyan noted that the rise in trade was seen “in all areas” – including food processing, agricultural commodities and cars – as domestic firms benefited from the increased demand after the exodus of Western firms from Russia.
He acknowledged that the share increase in demand for high-tech parts particularly was “quite large”, but said that was because the degrees began from a low base.
“Nobody is so naive as to assume that given the dimensions of the sanctions, given the dimensions of the flows, anyone can avoid any risk. It never is. But our way of doing things is all the time that… we ensure compliance in our financial institutions and more generally it’s of a better standard [to other countries]. Briefly, we is not going to be opportunists,” he added.
Threaten relations with the West
Western allies haven’t yet specified what the following round of sanctions will appear like or when they could come into force. Nonetheless, some analysts say their prospect could make affected countries rethink their allegiances.
“We’d like to wean ourselves from this dependence on the Russian economy,” Kukava said.
“It is a country of pariahs and economic dependence on them means we is not going to have the opportunity to trade with the EU, US and Western countries. Growth must come from trade with them, not with Russia,” he added.
This is very true of nations that aspire to hitch the EU and NATO.
We add fuel to the hearth by intensifying trade relations with Russia.
Michal Kukawa
head of economic and social policy on the Institute for the Development of Freedom of Information
Georgia applied for EU membership in March 2022, every week after Russia’s full invasion of Ukraine, and is working towards candidate status. This country, together with Ukraine, has declared its aspirations for NATO membership.
Georgian public support for EU membership has increased in recent months, with four-fifths (81%) of the population now favoring joining the bloc last poll from the American non-profit organization, the National Democratic Institute. Three quarters (73%) still support NATO membership.
Meanwhile, Armenia never applied for membership, and other Central Asian countries wouldn’t be eligible to hitch the EU.
“We’re adding fuel to the hearth by intensifying trade relations with Russia. The geopolitical context wherein we [Georgia] other Central Asian countries are currently being considered. But they haven’t got EU membership as a goal – we do,” Kukava said.
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