Publication: Eurasia Daily Monitor Volume: 3 Issue: 202

On October 23 Russian Foreign Minister Sergei Lavrov announced that Russia “is not planning” to restore air, land, sea, postal, and banking communications with Georgia, which were cut October 3 in connection with a spy scandal (RIA-Novosti, October 23; EDM October 2, 4). Russia also plans to demand that Tbilisi repay debts owed to Russia, estimated by Russian sources at $147 million (Newsinfo, October 10).

Deportations of ethnic Georgians from Russia are increasing. Over 1,000 Georgians have been deported in the past four weeks, and about 5,000 since the beginning of the year, according to the Russian Federal Migration Service. Knowledgeable sources say that all Georgians without Russian citizenship and legal residence risk expulsion (Radio Liberty, October 23; Kavkaz Press, October 24). The Georgian government is trying to cobble together an aid program for the deportees in order to prevent anti-government protests, which the Russian sanctions evidently aim to trigger. Job placement and housing will be the most difficult issues, given the rampant unemployment and social hardships in Georgia.

Commenting on statements by some Georgian officials that downplayed the consequences of the Russian sanctions, Giorgi Isakadze, director of Georgian Businessmen’s Federation, said, “It is naive to argue that cutting economic relations with Russia would not affect the Georgian economy” (Kviris Palitra, October 23).

The Georgian Ministry for Economic Development released a preliminary report about the possible effects of suspending economic relations with Russia, noting that Russia still has been Georgia’s main trade partner in 2006 despite restrictions on imports of Georgian wine, mineral water, and other agricultural products (see EDM, April 20). According to the Ministry, Georgian exports to Russia totaled $10 million in the second quarter of 2006, which is 71% less than in 2005 (Kavkaz Press, October 24).

The report says that energy supplies would suffer most if economic contacts with Russia cease. In 2005-2006, imports from Russia constituted 95% of the natural gas consumed in Georgia, and 53% of imported electric power came from Russia. Georgia gets enormous amounts of foodstuffs from Russia, including more than 86.7% of its imported grain, more than 46.3% of imported flour and cereals, 44% of sugar, and 40.5% of macaroni. About 80% of all mail from Georgia, including postal orders, travels through Russia. Analysts say that Georgia can eventually replace Russian imports with goods from Azerbaijan, Kazakhstan, Turkey, Iran, Ukraine, Romania, Germany and Bulgaria, while Ukraine, Turkey, Germany, and Israel offer alternative — but more expensive — routes for postal services.

Georgian aviation has been particularly hard-hit. Airzena and National Airlines reported losses of $1.2 million and $600,000, respectively. According to Alexander Chikvaidze, head of the United Transport Regulating Commission, losses from surface and sea transport have yet to be determined. Georgian authorities denounced the recent Russian naval exercises on the Black Sea as a de facto blockade, because they hinder the operation of Georgia’s ports at Batumi, Poti, and Supsa (TV-Rustavi-2, October 13; Kavkaz Press, October 16; Civil Georgia, October 18).

The Georgian National Bank (GNB) predicted that Russian economic sanctions will increase consumer prices in Georgia by 2-4% (Regnum, October 17), while Georgian Finance Minister Alex Alexishvili notes that the exact impact of Russian sanctions will not be known until final price of natural gas from Russia and natural gas from alternative suppliers is calculated. He conceded that there have been considerable economic losses from the Russian economic sanctions imposed since March, but said that the maximum damage the sanctions could inflict is a 0.5-3% slowdown of in economic growth. He said that consumer prices should increase in the short-term, and indeed the basic consumer price index increased almost 50% in the past week (Kviris Palitra, October 23; Kavkaz Press, October 24). It is difficult to say when, if ever, prices will go down, because that depends on a lengthy process of arranging similar imports from other countries.

On October 5, the Gazprom announced it would raise the price of natural gas for Georgia from the current $110 to either $221 or $250 per 1,000 cubic meters beginning in 2007. Russian economic pundits argue that energy costs will be far more painful for Georgia than price hikes on easily replaceable Russian goods. Beginning September 1, 2006, Georgia has exempted about 90% of all imported goods from customs duties. Russian analysts say that Georgia cannot buy energy supplies from other countries at a cheaper price (RIA-Novosti, Obshchaya gazeta, October 5).

To prevent an energy crisis, Tbilisi is again turning to Tehran (see EDM, January 25). On October 23, Georgian Energy Minister Nika Gilauri and his Iranian counterpart, Parviz Fatah, signed an agreement for Iran to transfer some 50 megawatts of electricity via Armenia to Georgia starting in late November. Negotiations about possible exports of Iranian gas to Georgia are also underway (IRNA, October 23).

Tbilisi has brushed aside some alarming statements about the problems awaiting Georgians due to restrictions on bank transfers from Russia. Georgia has received about $1 million per day from Russia through legal transfers (24 Saati, October 16). However, Georgian National Bank President Roman Gotsiridze said that despite restrictions on money transfers from Russia to Georgia, the amount of money transferred from Russia in October is almost the same as in September 2006. “Money will still find its way through alternative bank systems and even illegal transfers,” he said (Reuters, October 4; Kavkaz Press, October 24).

The Ministry for Economic Development argues that even if all economic relations are suspended, the effects will be no more than those currently felt. Georgian pundits, however, forecast that negative consequences of Russian sanctions for Georgia, including defaults, will only be displayed fully next year. Revenue for 2007 is budgeted at 3.4 billion laris, which is 94.4 million laris less than revenue in 2006 (Messenger, October 26). But unlike independent analysts, Georgian officials do not link the predicted shortfall directly to the Russian economic sanctions.