Geopolitics and the Russian-Ukrainian war highlight the potential of the growing economies of Georgia and Armenia.
The annual meeting of the Asian Development Bank (ADB) will be held in Tbilisi, Georgia, in the first week of May. Shortly thereafter, a meeting of the European Bank for Reconstruction and Development (EBRD) will take place in Yerevan, Armenia. The near-convergence of the two multilateral heavyweights comes as both countries experience strong economic growth accompanied by growing interest in the Middle Corridor, the Asia-Europe supply chain route connecting the Caspian Sea through Azerbaijan to the Black Sea through Georgia.
Despite the constant geopolitical storms often associated with neighbors Russia and Turkey, both Caucasus countries are on the rise. Armenia’s GDP growth was 12.6% in 2022 and 7% last year, with the International Monetary Fund (IMF) forecasting further growth of 5% this year. The corresponding figures for Georgia are 10.1%, 6.2% and 4.8%.
This is partly due to the recovery from Covid-19, particularly in tourism, as well as strong fundamentals, including improved government debt control in Georgia and a stronger external balance sheet in Armenia.
But some contributing factors may seem counterintuitive.
Georgia and Armenia “are somewhat unexpected beneficiaries of the consequences of the war in Ukraine,” said Jan Friederich, head of EMEA sovereign ratings at Fitch Ratings, during an online public event organized by the agency, “primarily in terms of large numbers of migrants and large the amount of capital they raised, which in turn improved many of their credit metrics.”
Reliable numbers are difficult to track, but analysts generally agree that a huge influx of migrants from Russia, Ukraine and Belarus arrived in both countries after Russian President Vladimir Putin stepped up attacks on Ukraine in February 2022.
According to various estimates provided by the Italian Institute of International Political Studies (ISPI) in Milan, up to 100,000 Russians have entered Armenia since then. As of October, up to 60 thousand Russians remained. At the same time, capital transfers from Russia jumped to 37.4% of GDP in 2022, up from 15.2% in 2021, according to ADB data.
According to press reports, citing data from the Georgian Ministry of Internal Affairs, by the end of 2022, about 110,000 Russians moved to Georgia. Since then, outflows of repatriates, or people moving to third countries, have outpaced inflows, with a net decline of 31,000 last year. According to the anti-corruption non-governmental organization Transparency International Georgia (TIG), in the first half of 2023, remittances from Russia to Georgia increased by 50% and amounted to $1.1 billion.
Most immigrants are “quite wealthy compared to the standard of living in Georgia,” says Dimitar Bogov, lead regional economist for Eastern Europe and the Caucasus at the EBRD. “Their purchasing power is important.” Although this led to an overheating of the Tbilisi real estate market and the expected discontent of local residents, the economic effect was overall positive.
“Local financial institutions have benefited greatly from increased revenues and increased business volumes,” says Artem Beketov, director of bank ratings for EMEA at Fitch. Banks in the two countries “also earned extremely large profits and received additional liquidity associated with immigration and cash flows from Russia.”
While remittances are still significant, they appear to be declining. Meanwhile, many of the predominantly high-profile and well-educated newcomers are showing signs of putting down roots and investing in the local economy: from the start of the war to September, 21,326 companies were registered in Georgia by Russian immigrants, according to TIG.
Focus on IT
Information technology is the main driver of Armenia’s economic recovery. Since the collapse of the Soviet Union, the landlocked country has emphasized IT and other service sectors, and the influx of foreign, especially Russian, programmers and other IT specialists has helped fill labor shortages in the sector due to brain drain to the rest of the country. countries. world.
Russian companies that have expanded their operations in Armenia include Miro, an online whiteboard tool worth billions, and tech giant Yandex.
“One of the unexpected consequences of the war was that IT companies and IT specialists left for Armenia,” says Bogov. “It was significant for a small economy.”
New or relocated migrant-owned businesses “represent investment and contribute to GDP growth,” says Arvind Ramakrishnan, director of sovereign ratings at Fitch. “It also gives us more confidence that these people will stay here, at least in the medium term.”
Armenia also took in more than 100,000 refugees who fled Nagorno-Karabakh when Azerbaijan took full control of the predominantly ethnic Armenian enclave in September, according to the International Crisis Group in Brussels. Most of these people were either farmers or government officials, Bogov notes.
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Short-term public support for these newcomers has further spurred economic activity, but their ultimate impact has yet to be determined. “In terms of their skills, there may be problems ahead,” Bogov says. “It depends on how integrated they are into the economy and society of Armenia.”
The middle corridor beckons
Both Armenia and Georgia have adopted policies aimed at promoting sustainable development and green growth, the Organization for Economic Cooperation and Development (OECD) report notes. Georgia accepted WHEN? new environmental liability legislation, and both countries are working with the European Union to adopt better standards.
Georgia has applied to join the EU in 2022 and the accession process is already underway, but most observers expect it to drag on. According to some analysts, a shorter route to international economic integration may be the Middle Corridor, more formally known as the Trans-Caspian International Transport Route and less formally known as the Silk Road, a multimodal supply chain route connecting China and Central Asia. and Europe. Given current geopolitics, it also offers an attractive alternative to the Northern Corridor, which runs through Russia and Belarus.
The “Middle Corridor” needs Georgia to access the Black Sea, which offers the end point for goods traveling by rail from Central Asia to the Caspian Sea, then by ship to Azerbaijan, then to Georgia by rail, before the final leg from Georgia to Europe by ship. Although the Middle Corridor route is logistically and bureaucratically complex, it has the advantage that it is currently untroubled by wars and economic sanctions.
Despite the bottlenecks, container traffic along the Middle Corridor grew 33% year-on-year in 2022, according to the International Institute for Strategic Studies (IISS), a London-based global think tank. Swedish companies such as Ikea, Tetra Pak and Volvo need a reliable and low-cost supply chain route from Asia, says Jean-Paul Larson, professor emeritus of strategy and international business at HEC Paris business school. Air travel is faster, but more expensive; shipping through the Suez Canal takes 40 days and poses security risks given Houthi attacks on shipping; and the trip around the Horn of Africa takes 50 days. The Northern Corridor is also vulnerable to geopolitical and security risks.
That makes the Middle Corridor an “incredible opportunity” for countries along the way, including Georgia, Larson said.
The EBRD has already invested in Georgia’s transport infrastructure and the future of the Middle Corridor looks bright, he adds, as it is predicted that at least 10% of Asia-Europe trade could use the route in the near future.
“If you are Georgia, why not invest in this?” He says.