Georgia Stands at Crossroads Between Autocratic Russia and Democratic West

Executive Summary:

• Georgia, by changing its geopolitical vector in favor of Russia, risks losing not only the West’s political and economic support but also Western investment.
• The Georgian Dream government is considering Chinese investment and the “dirty money” of Russian oligarchs as alternatives to Western investment.
• The US Congress has introduced a draft bill stipulating that if Tbilisi stops its anti-democratic moves, Washington will introduce visa liberalization with Georgia, a free-trade agreement, and a comprehensive defense package.

On May 18, Georgian President Salome Zourabichvili vetoed the controversial “foreign agents” law reintroduced by the ruling Georgian Dream (GD) party in April (see EDM, April 24, May 13; Civil.ge, May 18). GD leaders hope to overcome the veto by a parliamentary vote, needing 76 votes to do so and currently controlling 84 members of parliament. Fears are growing in Georgia that formal passage of the law will lead to an economic collapse. Local businesses are already sounding the alarm that real estate sales and investments have been suspended (Bpn.ge, May 17). The tourism sector has already felt the adverse effects of the foreign agents law. Tens of millions of dollars’ worth of bookings have already been canceled for the summer tourist season. This massive loss in revenue is expected to hurt the lari’s exchange rate (Bm.ge, May 16). Additionally, the shares of several Georgian companies listed on the London Stock Exchange have fallen significantly (Euronews Georgia, May 15). Thus, Georgia has a choice: drop the foreign agents law to pursue further integration with the democratic West or continue cozying up to Moscow, potentially suffering severe economic consequences.   

More problems will likely arise for the financial sector even if the expected Western sanctions affect only the highest government officials. Reputable international financial institutions will avoid cooperating with sanctioned entities. On May 13, CEE Bankwatch Network Executive Director Mark Martin indicated that if escalation around the law on foreign agents continues, the European Bank for Reconstruction and Development (EBRD), Asian Development Bank, and World Bank may suspend funding for government projects in Georgia (CEE Bankwatch Network, May 13). The EBRD has already warned that the foreign agents law could damage Georgia’s economy and investor confidence (Bm.ge, May 7). Georgia could lose billions of dollars from international donors as a result. Tbilisi had already planned to use much of that money to fund the country’s state budget for infrastructure projects from 2024 to 2027 (Forbes.ge, April 25).

The potential loss of Western investment has pushed China to demonstrate increased interest in Georgia (see EDM, August 10, 2023, February 6, March 5). On May 17, the Chinese ambassador to Georgia, Zhou Qian, announced that a Chinese car market would soon be opened in the Georgian city of Kutaisi (1tv.ge, May 17). The Chinese ambassador also stated that Beijing is exploring other opportunities in Georgia. Rather than investing, Beijing hopes to expand its share of the Georgian market by selling more Chinese products. For now, the hopes of some GD officials that Chinese investment would fully compensate for the loss of Western investment seem naive.

In Georgia, financial experts fear that the current political crisis and the possibility that GD will strengthen its position in the upcoming parliamentary elections will increasingly isolate the country from the global financial system. Financiers remind observers that 80 percent of the Georgian economy is made up of foreign trade that is carried out through international banking channels. According to local experts, only two US banks and one European bank connect the Georgian banking system with the global system, leaving Tbilisi vulnerable (YouTube, May 17).

GD officials say they are not afraid of the expected sanctions. In reality, they understand that Western sanctions will affect them personally and the country’s economy and are taking some preventive steps in advance. For example, efforts are underway to de-dollarize the Georgian economy. In early May, when tensions were mounting over the foreign agents law, presumably in anticipation of Western sanctions, National Bank of Georgia President Natela Turnava met with a colleague from Cambodia, and they agreed to cooperate in the de-dollarization process (Tabula.ge, May 7).  For many years, international financial organizations have recommended that Georgia reduce its economy’s reliance on the US dollar.

The current context, however, has led to suspicions over the timing of de-dollarization. GD officials in Tbilisi are increasingly acting in sync with Moscow. After the introduction of sanctions against Russia due to its expanded invasion of Ukraine, the Kremlin announced the de-dollarization of the economy as a top priority (see EDM, September 27, 2022). In this spirit, on May 17, it became known that a meeting of the Russian-Georgian Business Council in Moscow proposed switching payments with Georgia to Russian rubles and Georgian laris (see EDM, July 3, 2023). Vladimir Padalko, vice president of the Russian Chamber of Commerce and Industry of the Russian Federation, asserted that Georgia and Russia should switch to mutual settlements in national currencies “so that both the ruble and the lari would be means of payment … without intermediaries” (Ekhokavkaza.com, May 17). 

Additionally, on April 19, the Georgian parliament approved amendments to the tax code, according to which the transfer of assets from offshore companies to Georgia is temporarily exempt from taxation until 2028 (Parliament.ge, April 19). Although Zourabichvili vetoed the bill, the GD’s parliamentary majority will have the opportunity to easily override it. The initiative was quietly introduced as the country was predominantly focused on the Russian law, and the ruling elite almost quietly approved the amendments to the code. The Georgian opposition and some members of the European Parliament are convinced that the measure is intended for Georgian oligarch Bidzina Ivanishvili, who hopes to protect his offshore wealth and assets from international sanctions by transferring them to Georgia. Transparency International Georgia says Ivanishvili owns about 20 offshore companies (Radiotavisupleba.ge, May 20).  

The tax regime amendments will also ease Russian oligarchs’ money-laundering efforts (Ekhokavkaza.com, May 3). The ruling GD party justifies these legislative changes as calls for more “transparency” and “openness” have increased scrutiny of offshore entities, and now these foreign financial resources should be attracted to Georgia (Facebook.com/publika.ge, April 18). The Georgian ruling elite does not even hide that they want to construct a less transparent system to attract more financial resources, including “dirty money.” As a result, many Georgians fear that criminal money will subsequently flow into the country from Russia and beyond, destabilizing the domestic economy.

On May 20, the US Congress presented a so-called “Act of Friendship” for discussion. According to the draft bill, if the Georgian government stops its anti-democratic moves, holds free and fair elections, and protects human rights, the United States will introduce visa liberalization with Georgia, a new free-trade agreement, and a comprehensive defense package (Politico.eu, May 20). Thus, the ruling party has two choices: either follow the path of self-isolation, autocracy, and poverty with Russia or continue pursuing EU accession and receive tangible benefits from Washington. Now, with so much at stake, the overwhelmingly pro-Western population of Georgia is unlikely to allow Moscow to destroy the country’s future, especially without a fight (see EDM, May 13).