Georgia’s Agricultural Sector Feels the Pinch of Russia’s Foreign Policy
May 11, 2022
In the initial days of Russia’s war in Ukraine, the Georgian government’s refusal to implement bilateral sanctions against Russia sparked controversy. Even as thousands of Georgians rallied in the streets, drawing parallels between the situation in Ukraine and Georgia’s own experience of Russian invasion and occupation, the government remained firm, stating bilateral economic sanctions would harm Georgia’s economy more than Russia’s. Importantly, though, Georgia has complied with international sanctions against Russia, even if declining to implement additional bilateral sanctions.
Like many other post-Soviet countries, Georgia has maintained close trade ties to Russia with agricultural product exports to Russia, for example, equaling 8.3 percent of the country’s GDP in 2020. Georgia also relies on imports from Russia. In 2019, 52.5 percent of total imports came from just three sources: Russia, Ukraine, and Turkey. Total volume of Russia-Georgia trade topped $1 billion that same year. Over 75 percent of Georgian wheat imports were from Russia in 2021 and over 50 percent of wine exports went to Russia. Services trade is also important to Georgia’s economy and the expected drop in tourism from Russia and Ukraine because of the war is expected to have an extremely severe impact. At the beginning of the year, the World Bank had forecast Georgia’s economy would grow 5.5% in 2022 and another 5.0% in 2023. However, with the direct and indirect impacts of Russia’s invasion of Ukraine, including the expected drops in Russia’s and Ukraine’s GDPs, Georgia’s real GDP, as the IMF reported at the beginning of April, is likely to grow 3.2%. (Economists suggest Ukraine’s GDP could contract 45% or more in 2022, while Russia’s economy could contract 10-15% in real terms and Russia could default on its foreign currency obligations.)
Georgia’s agricultural sector has historically felt the sting of Russia’s foreign policy tantrums. President Mikheil Saakashvili’s pro-EU, pro-NATO policies became a point of contention between the two countries, culminating in the 2008 Russo-Georgian War. Throughout this period, Russia frequently targeted Georgia’s agricultural products. Following Georgia’s reluctance to ratify Russia’s membership in the World Trade Organization (WTO) in 2006, Russia imposed a ban on Georgian fruits, vegetables, wine, and other agricultural products, officially citing health concerns. The ban on Georgian wines was a particularly difficult blow, given that, at the time, almost 90 percent of wine exports went to Russian markets.
Since coming to power in 2012, the Georgian Dream party has attempted to build a less confrontational relationship with Russia. However, Russia has continued to coerce the Georgian government through economic pressure. Russia threatened a blockade of Georgian wines again in 2019 following an incident in which a visiting Russian lawmaker addressed the Georgian parliament from the speaker’s chair, sparking violent protests in Tbilisi against perceived Russian influence in the country.
This history of economic engagement and retaliation has made export diversification a high priority for the Georgian government. The country has made some progress, with great emphasis placed on finding new wine export markets. Currently, around $13 million is annually allocated to diversification projects through the National Wine Agency. These projects have started to pay off. Georgia’s agriculture minister recently noted that Georgia’s dependence on wine exports to Russia fell from 80 percent to 57 percent. The United States, Poland, Germany, China and the Baltic states now rank in the top ten export destinations for Georgian wine.
Nevertheless, agricultural markets have yet to develop broad resilience to shocks in trade with Russia. Coupled with lingering effects from the COVID-19 pandemic, the war in Ukraine has increased inflationary pressures on the economy, which are highly visible in increased food costs. Leading year-on-year increases in the price of staple goods include a 27-percent increase in the cost of vegetables, 23-percent in bread and cereals, and 13-percent in fats and oils. Tbilisi State University’s “Khachapuri Index” measuring the consumer basket needed to make the common bread and cheese dish jumped 31 percent in March 2022 compared to March 2021.
While Georgia’s desire to seek greater integration with the West, along with a basic realization that it is not wise to over rely on one or two particular markets, has led to increased diversification of import and export markets over the past 10 years, it will not be enough to insulate the country from broader economic pressures resulting from Russia’s war in Ukraine. Agricultural markets will be particularly vulnerable, given their outsized reliance on Russia.