Georgia’s key positives lie in its economic and trade diversification, the success of implemented reforms, its macroeconomic resilience, low public debt level and strong banking sector. These factors insure economic resilience in the face of upcoming Russian sanctions on Georgia’s tourism and possibly on wine industry. Dealing with Russian sanctions is not a new challenge for Georgia. The 2006 Russian embargo forced Georgia to redirect its focus from Russian market, which expanded export destinations and improved quality of Georgian products. This also deepened economic ties with the rest of the world, with EU-Georgia free trade agreement signed in 2014, followed by free trade deals with China and other countries. We believe that upcoming Russian sanctions will further intensify Georgia’s economic diversification, use potential of new large markets – EU and China, and enhance its institutions.

Georgia’s exposure (as defined by combination of four channels: exports, tourism, remittances and FDI) to Russia accounted for 9.3% of GDP in 2018. Notably, since 2013 Georgian exports to Russian market increased significantly as trade was restored. Georgia also gained popularity among Russian visitors. Dependence on remittances from Russia has been reduced in recent years as EU became another alternative of Georgian migrants, while FDI from Russia is generally low.

In short,  recent Russian sanctions expected to weigh on Georgian economy, but unlike 2006 Russian embargo, the country is better placed to deal with negative shocks.  Summing up:
 

  • We forecast sanctions to reduce Russian arrivals by 47% y/y in 2H19, while we forecast visitors from other countries to increase by 15% y/y in the same period, fully compensating reduced Russian visitors as well as sector revenues.
  • We expect tourism revenues to be flat y/y in 2H19 at US$ 1.9bn in contrast of our initial growth projection of 12.3% y/y at US$ 2.1bn in 2H. Overall, we estimate tourism revenue loss of US$ 200mn in 2019 from reduced Russian arrivals. Therefore, we revise tourism revenues forecast for the full 2019 year at US$ 3.4bn (+6.9% y/y) from our initial projection of US$ 3.6bn.  
  • Georgian wine export to Russia stood at US$ 114.5mn (3.4% of total exports) in 2018 and exports reached US$ 51.2mn in 5M19. We estimate revenue loss from possible Russian embargo on Georgian wine at US$ 58mn in 2H19. Notably, wine makers expected to adjust to market conditions quickly and redirect their product to  other destination markets, as Georgian wine is popular worldwide, unlike 2006.
  • We expect real GDP growth at 4.3% in 2H19 as Russian sanctions expected to subtract 0.7ppts (US$ 260mn revenue loss or 1.6% of GDP) from Georgia’s real GDP growth. We expect 2019 full year growth at 4.5%, as economy expanded at an estimated 4.8% in 1H19.
  • We  expect average GEL/US$ to remain close  2.7-2.75 in 2H19 and GEL to strengthen at 2.6 in 2020 as we do not expect additional pressure on GEL from Russian sanctions, but short term volatility due to uncertainty. Importantly, GEL remained undervalued by 7% vs US$ in 1H19 despite significant improvement in external balance. GEL weakness was mostly related to NBG’s FX purchases (US$ 216mn in 1H19) as well as other factors (FX reserve requirement, negative expectations from TRY depreciation, etc.). Our exchange rate projection considers different factors, including adequate international reserves and no FX purchases needed from NBG currently to comply with IMF program target, as well as external inflows from recent corporate Eurobond placements and trade balance in check.