EU threatens to eliminate ‘economic boom’ of ‘big winner’ of war in Ukraine

The war in Ukraine has left a trail of economic destruction. The growth of these two contenders was threatened, while the EU was completely damaged by its energy market and the “escalation” of sanctions. According to the World Bank, due to trade disruptions caused by the conflict alone and without taking into account other factors, the event took 0.7% of global GDP. However, there is a big winner in this confrontation: Georgia has been enjoying a real economic holiday for more than two years.

The small republic of the Caucasus faced GDP growth will be 10% in 2022 and 7.5% in 2023. The International Monetary Fund estimates in its latest report that growth will be 5.7% in 2024. However, the war completely changed the reality not only in the policies pursued after Tbilisi. Firstly, a real tsunami of Russian citizens left their country for Georgia. According to the Ministry of Internal Affairs, about 1.45 million Russians crossed the border in 2022, and 110,000 people will remain there. For a country of 3.72 million people, this population boom represents a real economic boom. And not only Russian immigrants and businessmen, Ukrainians and Belarusians also came out on a permanent march.

This influx did not occur on its own, but was accompanied by a parallel influx of income and investment. Not in vain, there are already 30,000 companies formed by Russian capital, will create about 16,000 in 2022 and another 13,000 in 2023, according to Forbes Russia. Other countries bordering the Vladimir Putin-led nation have also seen an influx of Russian immigration and a surge in money, such as Kazakhstan. However, the legal ease of opening new companies and the opportunities offered by Georgia, a country close to the EU (even negotiating its integration), made it a “Mecca” for the Russian exodus.

And while Moscow is stimulating its economy in this way, Brussels has done the same through powerful investment programs. Georgia’s status as a candidate for accession to the European Union has given it access to all types of funds and a very favorable environment for foreign investment. In 2022 alone, foreign direct investment from the EU rose to 809 million, while the Plan for Economic Investment (PEI) 1.7 billion euros guaranteed in subsidies.

It is on this second front that the economic “boom” of the great winner of the Ukrainian war could turn into a crisis. As the influx of Russian population and investment cools, Georgia and the EU have begun to escalate tensions over their law on “foreign agents”. The controversial measure has prompted various EU countries to request Russian-style sanctions. Only this possibility led its currency to a powerful fall and the subsequent intervention of the central bank. Experts fear that if the escalation continues, the country could find itself in a very difficult situation, losing much of what it has gained and seeing a larger threat that seemed defeated: inflation.

Law of Discord

The Georgian Parliament passed a law known as “legislation for foreign agents”. The ruling, greenlit by an overwhelming 84 to 30 vote, has led to mass demonstrations across the country as it is seen as a “Russian law” pushed from Moscow.

Namely, the new regulation requires any organization that receives more than 20% of its funding from abroad to register as an “organization protecting the interests of foreign powers.” This status requires special supervision Ministry of Justice, and also provides confidential information and transfers it to other financial control mechanisms. Protests in the country itself explain that this is a mechanism similar to the one approved by Russia in 2012 and which would later serve to control the media and other types of organizations.

Protesters in Tbilisi against the “foreign agents law” (Reuters)

Upon learning of its publication France and Germany issued a joint statement saying that “we deeply concerned about Georgia’s decision“The European Commission itself stated that this measure was “incompatible with EU integration” and although they did not close the door to its entry, they indicated that it would slow it down and that this would be a very important obstacle.

According to the Financial Times, this “concern” went even further, uniting the common front formed by Estonia, the Netherlands, the Czech Republic and Sweden, who will demand tough sanctions. Some of these measures will include ending the free movement of people between the EU and Georgia, selective sanctions and a freeze on funds held in the EU. These countries consider it important to prevent the Caucasian nation from moving into Russia’s orbit.

This maneuver was precisely what baffled the President of the Republic, Salome Zurabishvili, with the Prime Minister Irakli Kobakhidze. It said it would veto the law to prevent its implementation given its similarity to the “Russian law.” However, his decision will only delay the decision and force a new vote in parliament.

Brussels can change everything

In any case, this situation has raised fears among experts that the Georgian bonanza will suddenly end, and has reminded us of the great dangers that lie in wait for the republic, despite the fact that so far everything has been good news. In the latest Fitch report, due to the powerful fall of its currency, it threatened possible downgrade due to internal and external political chaos. “While the protests themselves are unlikely to have a significant impact in the short term, we are seeing impacts on your creditworthiness,” the agency said.

Fitch remained positive, saying they continue to believe that “the large influx of Russian, Belarusian and Ukrainian immigrants has led to strong growth” which “we expect to continue into 2024 and 2025. Average growth of 5.2% and victory over inflation.” It is this last point that Fitch sees as a big problem. Inflation was the great man-eater of the Georgian economy, and the strength of its currency was the great shield that allowed it to defeat it. , maintain growth and reduce your debt.

“Most of the debt is denominated in foreign currencies,” Fitch noted. This would be a key factor as “the large influx of immigrants caused a strong revaluation of the lari”, allowing its liabilities to be significantly reduced. From 2021 lows currency rose by 40% against the euro.. This allowed its debt to GDP to rise from 63% to 39% in record time. A key virtuous circle in all economic forecasts.

“Georgia is in a very precarious position,” explained Alessio Chiesa, emerging markets economist at Wood & Co., in a statement to Bloomberg. “They have a large current account deficit and They are heavily dependent on the West European capital in the Asian country is key to keeping the currency strong.

All agency forecasts are based on lari retention. “Currency weakness would mean the end of the debt trajectory,” Fitch said. In this sense, the agency was concerned because “The National Bank of Georgia was forced to intervene its currency after a major weakening following the passage of the law.” In one day it fell by 6% against the euro. A trend that could continue if the EU decides to take a tougher path against Tbilisi.

The latest report from the Asian Development Bank (ADB) also showed a very favorable update to its forecasts for Georgia, saying that “inflation is falling and its rise shows that its economy has overcome all obstacles.” However, they made it clear that everything depends on “maintain a relatively stable Georgian lari“which they considered to be the fundamental factor justifying “low debt and sustainable growth.”

“We can forget about new Western investments (if the escalation continues)”

Unlike other regions, Georgia managed to contain inflation at the end of 2024 precisely thanks to this factor and the actions of its central bank, which raised interest rates. Its central bank raised it to 11%. in April 2022 and kept them there until May 2023. Then a continuous decline began until the “price of money” reached the current 8%. Inflation, which reached nearly 14% in 2022, fell below 3% in April last year and continues to fall well below the 2% target. In 2024 it will rise slightly to 1.5%.

This privileged position in a world where major economies continue to struggle to lower the consumer price index is under threat. Former central bank governor Georgiy Kadagidze explained in a recent interview with CNBC that expectations are difficult because although the “Russian boom” may stabilize”you can forget about new Western investments“and the existing ones will also depart.”

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