Due to a considerable increase in commerce with Russia, Georgia and Armenia, two Caucasus nations that unexpectedly saw economic development in the wake of the conflict in Ukraine, now risk Western punishment. An inflow of Russian employees, income, and commerce helped seven former Soviet nations close to Russia’s southern border experience double-digit growth last year, which supported their larger post-Covid recoveries. According to the International Monetary Fund, in 2022, Armenia’s GDP had a significant increase of 12.6% while Georgia’s economy grew by 10.1%.
However, growth rates are predicted to slow in 2023, with Georgia forecast to expand by about 4% and Armenia by around 5.5%. This is in line with a larger regional trend in the Caucasus and Central Asia. Analysts contend that the fundamental development drivers still exist despite this downturn, which might put these nations in the worldwide limelight.
The worry stems from warnings from Western authorities this year that some merchants may be using nations like Armenia, Georgia, Kazakhstan, and Turkey to get under Russian sanctions. The European Bank for Reconstruction and Development (EBRD) noted in its most recent economic outlook that these nations are evolving into the isolated state’s intermediary trading partners, with significant growth being seen in exports from the European Union, the United Kingdom, and the United States to Central Asia and the Caucasus.
Russia is now Georgia’s second-largest economic partner in terms of imports and third-largest in terms of exports, according to preliminary statistics from Georgia’s National Statistics Office, Geostat. In 2022, Russian exports to Russia climbed by 7% while imports into Georgia rose by 79%. Similarly, Russia is Armenia’s top export and import trade partner. According to IMF statistics, trade between Russia and Kyrgyzstan, Tajikistan, Azerbaijan, and other nearby nations increased during the last year.
For the area, the shifting trading patterns provide both possibilities and threats. According to the EBRD, “intermediated trade” contributes between 4 and 6 percent of Armenia’s and Kyrgyzstan’s yearly GDP. While this strengthens the developing logistics sectors in these nations and helps local currencies gain value, it also raises questions about possible sanctions evasion.
The European Union and its allies have urged either engaging these countries in sanctions compliance or subjecting them to secondary penalties in reaction to these developments. There are initiatives ongoing to identify rerouting of trade flows from certain third-party nations functioning as potential entryways to Russia. According to Armen Nurbekyan, Deputy Governor of the Central Bank of Armenia, sanctions compliance is Armenia’s top concern.
Despite the fact that commerce has increased in a number of industries, such as food processing, agricultural products, and autos, Nurbekyan claims that weekly monitoring is in place to guarantee that embargoes are followed. He notes the significant increase in demand for components for innovative technologies, but he also stresses the nation’s dedication to upholding greater compliance requirements than other nations.
Concerns about compromising ties with nations seeking membership in the EU and NATO are being voiced by Western allies in light of the growth in commerce with Russia. Along with Ukraine, Georgia filed for EU membership in 2022 and has stated ambitions to join NATO. Georgia is striving toward candidate status. A new survey shows that 81% of Georgians prefer joining the EU, while 73% still favour NATO membership. This indicates a comeback in public support for EU membership in Georgia. On the other hand, Armenia has not submitted a membership application, and nations from Central Asia are unable to join the EU.
Analysts warn that expanding commercial ties with Russia might exacerbate tensions and make it more difficult for these nations to become members of the EU. To promote sustainable prosperity and coincide with their geopolitical objectives, they highlight the need to lessen reliance on the Russian economy and strengthen economic links with the EU, the US, and other Western nations.
