The tensions in Crimea and the possibility of a marked deterioration in Ukraine-Russia relations raise a number of questions about the impact on the Georgian economy. Georgia’s advantage lies in the relative diversification of trade flows and other external channels, partly thanks to the Russian-imposed trade embargo in 2006. With the exception of wine, Georgian exports are more geared towards Azerbaijan, Armenia, and the EU rather than Ukraine and Russia, and imports can be substituted relatively easily. The wine industry could be hit, although the effect won’t be substantial for the economy as wines account for just 4% of total exports. Russian and Ukrainian FDI accounted for less than 5% of the total over 2006-2012. FDI inflows are diversified, with Netherlands being the largest investor at 10% of the share followed by the UK, Turkey and the UAE, each accounting for 9% of total FDI over 2006-2012. We believe FDI from the EU will continue to grow as Georgia prepares to sign an Association Agreement that includes provisions to establish Deep and Comprehensive Free Trade Areas (DCFTAs) in 2014. Money transfers seem like one of the more likely items to be impacted and Russia and Ukraine account for 57% and 1.7% respectively of total money transfer net inflows. Money transfers are, however, resilient to trade and outright conflicts – money transfers from Russia continued to grow even after the Georgia-Russia armed conflict in 2008.
Limited export exposure. In 2013, Ukraine accounted for 6.6%, or US$ 193mn, and Russia for 6.5%, or US$ 190mn, of Georgian exports. Ukraine’s share has remained largely stable around 7% over the last 8 years, while Russia has been effectively closed to Georgian companies since 2006 as a result of a Russian trade embargo. Exports to Russia did rise in 2013, mainly as Russia opened its borders to Georgian wines, but Georgia’s export exposure to Russia remains limited. Importantly, the 22% y/y growth in exports in 2013 was broad-based; the EU was the real engine of growth, while Russia and Ukraine accounted for just 6% and 1% of the increase, respectively.
