Monica Ellena in Tbilisi and Clare Nuttall in Bucharest -
Georgia and Moldova are due to sign their free trade and association agreements with the EU on June 27. The two countries have defied Russian pressure and opposition at home to make a firm choice in favour of European integration, but alongside the opportunities the deals will mean tough new requirements for domestic producers of goods and services.
At the end of 2005, Burkhard Schuchmann, who was about to retire from his job as CEO of a railway company in Germany, had never been to Georgia, but by mid-2006 he owned 65 hectares of vineyard and a winery, Vinoterra, in Kisiskhevi, a village in eastern Georgia. "I am passionate about wine, I was thinking to do something after retiring and a Georgian consultant I met in Germany told me, 'why don't you go to Georgia'?" recalls the 71-year-old investor. "I did, and fell in love with it. It was a difficult time as Russia had just imposed a ban on the Georgian wine. Still, the investment proved to be safe and profitable."
With Georgia about to sign the Association Agreement and Deep and Comprehensive Free Trade Agreements (DCFTA), Schuchmann thinks his experience will become just one of many. "Strengthening the relationship with Europe will be possibly costly, but will benefit both European investors looking for new opportunities and certainly the Georgian economy," he says in a phone interview from Dortmund, where he lives when not in Georgia.
Start of a process
The agreements mark the beginning of a process to deepen political and economic relations with the EU. Georgia and Moldova will be gradually integrated into the EU's internal market, the world's largest.
Politically they have equally great significance, as the fulfilment of a long-held dream in both countries. The ouster of former Ukraine president Viktor Yanukovich and consequent crisis in the country after he dropped plans to sign a similar EU deal in favour of closer ties with Russia means the progress of Georgia and Moldova has become an important element in the new conflict between Russia and the West. Domestically, it is a clear choice between the Soviet past and a European future.
Back in 1999, the then Georgian prime minister Zurab Zhvania told the Council of Europe: "I am Georgian, and therefore I am European," summarizing his people's aspiration to distance themselves from Russia and the Soviet legacy. Georgia moved further along that path when Tbilisi launched extensive anti-corruption reforms after the 2003 Rose Revolution.
The agreements hold equal significance in Moldova, another small country on the eastern fringes of the continent whose government is determined to chart a course towards Europe. "Europe is in our history, our culture, our language and our values – but most importantly it is where we see our future," Moldovan Prime Minister Iurie Leanca told an EU investment conference in Chisinau on June 12. "Change has many enemies... We will not draw back from EU integration, we will take the country forward."
The biggest unknown is how Moscow will react to all this. While a last-ditch attempt to prevent the agreements being signed is now unlikely, it remains possible that Russia could use economic or political means to "punish" the signatories. Boris Iarochevitch, deputy head of the EU delegation in Georgia, told bne that the EU has had assurances from Russia it will not interfere in the process – "although you never know," he adds.
Russia has repeatedly warned Moldova that it risks losing out on trading with Commonwealth of Independent States (CIS) markets if it goes ahead with the EU agreements. "Moldova cannot combine two regulatory systems: of the CIS and of the EU. It will have to make some choice. And if it is in favor of the European system, then the CIS system will cease to be comfortable," Russian Deputy Minister of Economic Development Alexei Likhachev told RIA Novosti on June 16.
Events in the last six months have demonstrated how vulnerable Moldova is to Russian pressure. In the run-up to the November 2013 Vilnius summit when the agreements were initialled, Moscow banned wine imports from Moldova claiming contaminated shipments had been delivered.
Russia holds further potential for leverage through its support of separatists within Moldova and Georgia. As the provider military and financial support to the breakaway republics of Abkhazia and South Ossetia in Georgia, and Transnistria (also known as Transdneister) in Moldova, Moscow has the ability to destabilise both countries.
Georgia has previously experienced Moscow's economic sanctions. Russia slapped sanctions on Georgia in 2006 as relations between the two deteriorated, reaching rock bottom with the August 2008 war over South Ossetia. After the embargo on Georgian products was lifted last year, exports to Russia quadrupled from $45m in 2012 to $190m in 2013, but Georgia had in the meantime moved to diversify the markets it trades with so Moscow now has much less leverage over Georgia than it once used to.
There is also criticism at home for the Georgian government. The party Alliance for Patriots of Georgia, which scored the fourth best results in the local elections on June, warned that "Georgia is not ready" and "it simply cannot implement [the DCFTA], it will cause very negative consequences for us."
Meanwhile, with elections coming up in November in Moldova, Leanca has just five months to prove that he made the right decision by steering the country towards the EU. The rival Communist Party, which has taken a more ambiguous stance on Europe, will take advantage of any negative impact from the agreements.
The prospect of open access to the world's largest consumer market has created a buzz among manufacturers in both countries, which already do the bulk of their trade with the EU. EU-commissioned independent studies forecast that the DCFTA will result in a 4.3% increase in Georgia's GDP, and a 5.4% boost in Moldova.
The general director of Moldovan winery Chateau Vartley, Ludmila Gogu, tells bne she does not expect a dramatic overnight impact from the DCFTA, but anticipates a steady increase in sales. Following the Russian ban on Moldovan wine, Europe is now the company's top export market.
However, after the agreements are signed, the real work will begin for companies that will have work to do to bring their operations into line with EU standards, as well as gearing up to face increased competition from European rivals. "The months ahead will require major efforts on the Georgian side, as it will have to adopt and implement hundreds of regulations on rule of law, justice, human rights and labour rights. It will have a profound impact on the whole society and it would require structural reforms, capacity building in its institutions," says Iarochevitch.
"This agreement… is not only about tariffs and quota, it is about standards," he adds. Having clear rules and raising standards, in areas such as food safety, sanitary and phyto-sanitary measures, would make Georgia an attractive destination for investors, he argues. So too would strengthen regulations on areas such as competition and protection of intellectual property.
Georgia's agricultural sector may be particularly vulnerable. According to official data, 53% of the population derives most of its income from farming, yet productivity has slipped to such an extent that it only contributes 9% of annual GDP. But Juan Echanove, agriculture project manager at the EU delegation says fears about the impact on small farmers are "unjustified".
In Moldova too, there are concerns about the preparedness of local businesses. "We are hopeful that for Moldovan businesses this will result in a stable and transparent regulatory regime, and easier access to capital," Dirk Vantyghem, international affairs director of the Association of European Chambers of Commerce and Industry (Eurochambres), tells bne.
However, he adds that, "there is a lot to be done. There are important challenges with quality control, and production process must comply with technical standards if Moldovan producers are to sell their products in the EU."
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