Various research centers and international organizations, including Transparency International Georgia (TI Georgia), Institute for Development of Freedom of Information (IDFI), ISET Policy Institute and Policy and Management Consulting Group (PMCG) declare that Russia's aggression in Ukraine and the international sanctions imposed on it in response to this will hurt the Georgian economy, however, at this stage, the current situation in Georgia will not lead to an economic crisis. According to them, the Georgian economy will grow in 2022, however, the economic growth rate will be lower than projected at the beginning of the year.
How hard the Georgian economy will suffer due to the reality created by the Russian aggression in Ukraine also depends on the steps taken by the Georgian government. At the same time, strategic opportunities are being created, in particular - to reduce Georgia's economic dependence on Russia, use the country's transit function more efficiently, and accelerate Georgia's economic integration with Western countries.
To respond to the existing challenges and take advantage of the opportunities created we think the following recommendations should be taken into recommendation:
To maintain the potential for economic development:
1. The Government of Georgia should state clearly that Georgia will not be used to circumvent sanctions against Russia. Although sanctions are primarily a political issue, the current expectation that Georgia might be used to circumvent sanctions is damaging the country's reputation, which will significantly hamper the country's economic development in the long run.
Against price increase and for macroeconomic stability:
2. As price stability is one of the most painful issues today, import duties should be abolished for the countries with which we do not have a free trade agreement and which are alternative suppliers of products that come mainly from Russia. First, this decision will help to maintain stable prices and, second, to diversify imports;
3. The Government of Georgia should reduce budget expenses. First of all, it should concern the current expenses and the financing of projects the effectiveness of which has not been studied. Due to the high inflation in the country and the increased debt of the government, the unified budget deficit should not exceed the current planned rate of 4.2% of GDP. The government should continue its economic spending in the coming years, which will contribute to the effectiveness of monetary policy and price stability.
To take advantage of new opportunities:
4. It is important to assess what negative impact the sanctions on Russia will have on the Georgian economy, and based on this analysis, negotiations should be initiated with Western partners and international financial institutions to attract additional financial resources. With Western support, we will have more access to Western financial resources that could be used to alleviate the economic losses caused by the Russia-Ukraine war;
5.The Government of Georgia needs to take into account that due to the created geopolitical reality, the role of Georgia as a transit country is growing and this potential should be fully utilized. It is realistic that the demand for transit of Azerbaijani oil and gas to Europe via Georgia as well as the cargo from Central Asian countries will be increased. Therefore, it is important to enhance transport (road, rail, maritime) potential by accelerating infrastructure development and modernization as well as promoting the construction and development of regional, telecommunication, and information technology centers, and tourist facilities;
6. Reforms aimed at strengthening the rule of law and reducing bureaucratic barriers to promote the investment and business environment should be accelerated. This is important because Georgia has a unique opportunity to attract at least a small number of Western companies that have left Russia. The products of Western companies made in Russia were supplied to Russia as well as to other countries in the region. To attract these companies, it is also necessary that Georgia is not used for undermining the sanctions;
7.Georgia can strategically use medium and highly qualified personnel among the Ukrainian refugees entering the country in those sectors of the economy (for example, information technology) where there is a lack of local professional skills. This will be beneficial both for the Georgian economy and for the creation of stable living conditions for Ukrainian refugees. This will require the government to soften bureaucratic barriers that will help long-term Ukrainian migrants integrate into the Georgian labor market.
To reduce economic dependence on Russia:
8. The Government of Georgia should start working more actively and expeditiously on concluding free trade agreements with all strategic partners with whom we do not yet have such an agreement. Although such agreements will have positive effects in the long term, given the current situation, Georgia can more actively demand to accelerate the process of signing them. Increasing the geographical area of free trade will reduce Georgia's dependence on imports of Russian products and exports of Georgian products to the Russian market;
9. The Government of Georgia and municipalities should not subsidize entrepreneurial activities that increase Georgia's economic dependence on Russia. This approach should apply to both business grants and concessional loans, as well as price subsidies. The introduction of this rule will play an important role in reducing the Georgian economy's dependence on Russia, which will increase the economic and political security of the country;
10. Georgia should develop a strategy to reduce its energy dependence on Russia. Although electricity and natural gas imported from Russia have not accounted for a large share of Georgia's domestic consumption in recent years, it is important to further reduce it. Recent events have reminded us once again that Russia is using its energy resources and electricity exports as leverage for political pressure, which is detrimental to the country's energy security and poses significant risks to sustainable economic development.
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