Have Georgian Exports Diversified? Another Look at the Russian Agricultural Embargo

Even before Russia invaded Georgia in 2008, the overall political rhetoric in Georgia since the collapse of the USSR has centered on integrating with Europe and reducing its historical ties to Russia. Its policymakers have most recently sought after free trade deals in the form of an Association Agreement with the European Union in 2015, stimulus of Western investment in Georgia, and freer labor mobility between Georgia and the West.

In this piece, I argue that Georgia’s economic dependence upon Russia cannot be understated despite its dominant movements toward export diversification and European integration. I draw upon an analysis of Georgian-Russian export flows and the recent Russian embargo on Georgian agriculture to show that the fundamentals of the Georgian economy indicate future integration with Russia. This scenario is not only indicative of weaker Georgian sovereignty, but has worrisome implications for countries such as Moldova and Ukraine that are likewise threatened by Russia’s regional control.

Due to an elaborate political back-and-forth regarding Georgian state attempts to integrate further with the West, Russia imposed a de facto embargo on Georgian agricultural goods (e.g. wine) in 2006. This was a critical attack on the Georgian economy, as agriculture is a central component. Then-Georgian President Mikhail Saakashvili’s narrative, backed by some academic research, argued that the Georgian economy was in some ways better off because it diversified export markets, instead propelling the country to export to other countries, e.g., Ukraine and the European Union. This perspective argues that while Georgians may depend upon Russia for things like remittances or investment, at least in the area of trade, Georgia has made progress on a more healthy diversification path.

Agricultural export data, however, aggregated from UN databases, does not indicate the ‘healthy diversification’ narrative. Take a look at the graph below.

Figure: Georgian agricultural export flows indicates a temporary “substitution effect” during Russian embargo.  

During the embargo period—2006 through 2012—Georgia’s agricultural trade with non-Russian countries in the region grew substantially, but then cut away as soon as the embargo was repealed. “Armenia imports” are included as a control variable to account for overall GDP growth in Georgia, as higher consumption in Georgia means higher imports from its neighbors.

This suggests that Georgian goods were either a) temporarily substituted to non-Russian markets such as Ukraine or b) moved through non-Russian markets on their way to Russia. Most likely, there was some combination of both. A deeper regression analysis I performed further shows that there was an effective 1-for-1 swap of every dollar of agricultural product that would have gone to Russia into a new Eastern European market. This “swap effect” promptly ended when the embargo was repealed, as Georgian wine and other goods flooded into the newly opened Russian market by 2014. Whatever diversification took place for Georgian exports quickly ended as soon as the Russian market re-opened.

The embargo, rather than a catalyst for “creative destruction,” shows that Russia is Georgia’s “natural” trade partner more than ever, to such a degree that producers found new ways of getting around the prohibition to tap into the enormous Russian market for Georgian goods. By themselves, wine and agriculture markets -Georgia’s current areas of comparative advantage - did not and will not limit Georgia’s exposure to Russian hard power. This exposure is fundamentally part and parcel of a liberal market economy.

Why does this point matter? The dominant political tone and policies in Georgia are toward membership in the European Union as a counterweight to Russian economic and political power. Policy can only steer trade integration so much, however, suggesting that despite successful agreements with the EU, the Georgian economy will remain exposed to Russia’s political exertion of hard power in the foreseeable future.

Scholarly Sources:

Gogoladze, Ana. “The Dynamics of the Georgian Mineral Water Market,” Journal of Social Science, accessed April 10, 2016, https://journal.ibsu.edu.ge/index.php/jss/article/view/601

Janison, James. “Examining the International Political Economy of the Firm: The Dynamics of State Aggression in Georgian-Russian Trade, 1996-2014,” Undergraduate Thesis, Brown University, 2016, 81-108.

“The Jobs Challenge in the South Caucasus – Georgia,” Text/HTML, World Bank. Accessed April 10, 2016, http://www.worldbank.org/en/news/feature/2015/01/12/the-jobs-challenge-in-the-south-caucasus---georgia

Rotaru, Vasile. “Russia’s ‘Contribution’ to the Inception of the Eastern Partnership,” Studia Politica: Romanian Political Science Review 14, no. 2 (2014): 221–41.

The views presented in this piece do not reflect the views of other Arbitror contributors or of Arbitror as a whole.

Photo: "Georgian Wine Bottles in Chokha." Originally taken by Tomasz Przechlewski for Flickr with a CC0 license. Use of this photo does not indicate an endorsement from its creator.