Georgia: Election was just as much about the economy

Closer ties to Europe have not helped Tbilisi on the fiscal front, just look at the numbers

Ian Proud

Oct 28, 2024

https://responsiblestatecraft.org/georgia-elections-eu/

Indignant western armchair pundits and politicians have fallen into collective rage, signallng that the general election result in Georgia equated to the theft of a European choice.

The opposition to the apparent winner, the ruling Georgia Dream party, is now being joined by international voices, including the U.S., calling for an investigation into claims of election violations.

But Western politicians, journalists, and NGOs have cynically, and in a way, willfully ignored the wider economic picture, and have instead spun up the election as an existential struggle between Europe (European Union) and Russia. There is so much nuance here that needs to be examined and is not.

For one, study the vast amount of credible economic data and you’ll uncover the unpalatable truth that Georgia has been a net loser from closer EU economic ties thus far. And that the war in Ukraine, which the EU is helping to bankroll, has halted progress on key economic priorities in Georgia, including reducing unemployment.

Taking a step back, Georgia has become an economic dynamo since 2012 through its sovereign endeavors. This small, proud nation with a population of 3.1 million, ranks number 7 in the World Bank’s ease of doing business index, ahead of the UK and every EU country except Denmark.

Average economic growth has been a throaty 5.2%, 6.2% percent if you subtract the pandemic contraction in 2020. GDP per capita has increased by 79%. According to the World Bank, poverty reduced from 70.6% to 40.1% between 2010 and 2023, through sound macroeconomic management. There’s still more work to do to get it lower.

Georgia’s economic growth performance has largely been driven by domestic investment. As a percentage of GDP, investment has averaged a brisk 26.6% per year since 1996, compared to the EU (21.8%) and the UK (18.8%).

Yet signing the EU Deep and Comprehensive Free Trade Agreement (DCFTA) in 2014 didn’t unleash a tidal wave of new European investment into Georgia.

EU foreign direct investment in 2024 was only $65k higher than in 2014, at an average 29.6% of total FDI in Georgia over that period. Russia is a significant but not key investment player, accounting for just 5.4% of FDI in 2023.

If we look at trade, the signing of the DCFTA, in theory at least, should have driven a mutually beneficial surge in trade. But that simply hasn’t happened.

The European Commission website proudly announces that Europe is Georgia’s biggest trade partner. But EU trade with Georgia accounts for just 20.9% of the total. And that is only because Georgia has been flooded with European exports since 2016.

In fact, western European states have been eating Georgia’s lunch when it comes to trade. On average, Georgia’s eight largest western European trade partners (including the UK) now export four times as much to Georgia than they import. The biggest culprit is Germany which in 2022 exported 7.8 times more ($673 million) to Georgia than it received in imports ($86 million). European exports to Georgia had quadrupled to 3.6 billion Euros by 2023 and are still rising.

Yet, Georgian exports to the EU have stood still. Why?

Look on the EU website and you will find 58 separate trade defense investigations by Europe against Georgia since 2021, looking to restrict imports of everything from tires to tinplate and tableware. Europe actively places barriers against Georgian imports. Georgia has been accused of helping Russia evade export sanctions, but the evidence for that is weak.

Look East and you will see a different picture. Bulgaria exports as much to Georgia as the powerful western EU nations combined, yet is the only EU trading nation that imports more from Georgia than it exports.

Because trade is all about gravity. Sofia is much closer to Tbilisi than Strasbourg. Countries trade more with those countries closer to their borders because the cost of trade is lower.

Through a mix of gravity and history, 62.2% of Georgia’s exports go to its eight biggest Eurasian trade partners (former Soviet states, Turkey, China and India). And the trade balance is more even than it is with Europe, as Eurasian states export 1.8 times more to Georgia than they import. Russia exported 2.9 times more than Georgia in 2022 because of a surge in fuel exports. However, Georgian exports to Russia have also increased by 56% since 2017 and now make up 9.4% of the total.

The major economic shock Georgia has had to confront has been the war in Ukraine. A net 87,200 people from Russia, Ukraine and Belarus emigrated to Georgia between 2022 and 2023, two thirds of them Russian. Historically, Georgia had fairly even net migration, but the war-induced influx prompted unprecedented house price inflation of around 35% with rents up by as much as 50%.

High inflation during the first two years of the Ukraine war appears to have been tamed by the National Bank of Georgia which hiked interest rates to their highest level since the Global Financial Crisis.

An economic flip side, is that Georgia saw a much needed boost in its current account which recorded its only significant surplus since the Soviet period in the third quarter of 2022. This was driven by surging service exports, that is, foreign money spent by migrants in Georgia. Foreign Exchange reserves also rose to a post-Soviet high.

But the influx of Russians fleeing the draft undoubtedly increased resentment and social tension in part driven by historical enmity, including around the 2008 Georgian war. But it runs deeper. Georgia’s impressive reduction in unemployment has also flat-lined, having dropped from 20.6% in 2009 to 11.6% in 2020. Worryingly, 26.7% of Georgia’s young people are unemployed, and have seen young, digitally nomadic, middle class Russians crowding out opportunities in high-valued-added sectors.

The West has framed the election and its results in almost Manichean terms, a battle of light and dark, between Europe and Russia. They have positioned Georgia Dream’s founder Bidzina Ivanishvili, as a Kremlin stooge. Yes, Ivanishvili, like many oligarchs, gained his wealth during the chaos of Soviet collapse. His nationalism is rooted in a conservatism that has echoes of Putin’s Russia and Orban’s Hungary.

But his economic approach in Georgia has been driven by specifically Georgian considerations. And elections always, ultimately, get tipped by domestic issues.

By today’s election count, it would seem a majority of Georgian people chose prosperity over war. It’s time to let Georgia’s government get back to the task of strengthening their wonderful country still further.

Ian Proud

Ian Proud was a member of His Britannic Majesty's Diplomatic Service from 1999 to 2023. He served as the Economic Counsellor at the British Embassy in Moscow from July 2014 to February 2019. Prior to Moscow, he organized the 2013 G8 Summit in Lough Erne, Northern Ireland, working out of 10 Downing Street. He recently published his memoir, "A Misfit in Moscow: How British diplomacy in Russia failed, 2014-2019."