Lilo’s Bazaar is the biggest open market in Georgia. Merchants sell everything here, clothing, electronics, toys, food and sweets – lots of sweets.
A sharp eye will catch the well-known international brands — Mars, Snickers, and others — but most of the “confetti” on the shelves would look strange to a westerner. Vendors proudly say they mostly come from Russia, followed by Ukraine. And these sweets are in high demand, as they always have been. The names are well known since Soviet times and were an intimate part of many people’s childhoods. The iconic Mishka chocolate, which depicts a mother bear with three playing cubs is a potent symbol of Soviet ‘sweet’ power.
Despite their visible leadership in New Year candies, Russian-made products are not in the majority at Georgian markets. In 2016 Russia exported goods worth $675mn to Georgia, slightly more than China but still less than half of Turkish exports, and far less than imports from the EU worth $2.2bn.
However, Russia’s trade with Georgia is improving. In 2012 the import of Russian goods to Georgia was worth $475mn and that grew by $200mn in the next four years. On the other hand Georgia’s exports to Russia exploded from a mere $45mn in 2012 to circa $200mn in 2016. But that leaves a wide deficit, which is partly covered by the net remittances from Russia of around $300mn in 2016, or a third of total individual transfers.
Despite the flow of goods and money between the two countries, there is still little demand for the ruble in Georgia. As in Russia itself, the population prefers to hold their savings in euros and US dollars, and Russian companies too prefer to convert the Georgian currency, the lari, into one of these currencies.
It is difficult to estimate the exact number of active Russian businesses in Georgia. The number of companies registered in Georgia by Russian citizens count in the hundreds, and most of them are small business. Many are not active at all. Compared to Georgia’s neighbours like Turkey, Russian companies do not occupy a dominant position among foreigners in terms of numbers. Yet the public is highly interested in Russian companies’ activities in Georgia.
Georgians’ suspicions are based on experience. Back in 2005, Russia flexed its economic muscles and dramatically increased the natural gas price for Georgia, followed by the 2006 trade sanctions coupled with the disruption of remittances by expelling Georgian workers from Russia. True, it hardly played well for Russia, as Georgia gained more independence from Russian energy resources and the Russian market. However, Georgia also paid a severe price. It is believed the Georgian economy lost around $600mn due to the sanctions of 2005-2007.
Russian exposure, food for thought
The current geopolitical conflicts have made it clear that no one is immune from Russia’s hybrid warfare, especially those that live in the Russian neighbourhood. Disruption is a key part of a hybrid aggression and it could be caused by many channels including economic channels. Thus, it is important to understand which investment (if any) could potentially be used for disruption. Energy plus IT, media and communications are key sectors that affect the national security of the country for any modern nation; disruptions in food, finance and transportation could cause chaos too.
Most of the Russian companies in Georgia are risk-free in terms of security. Many Russian citizens investing in Georgia are not even ethnic Russians. Quite often they are Georgians who made their fortune in Russia’s dark past. Such investments are usually driven by the business-friendly environment, diversification needs and/or simply nostalgia and love of the homeland. Companies are involved in housing construction, hospitality, trade, and so on. They may contain risks associated with the origination of the money, but as Emperor Vespasian famously said, “Pecunia non olet” (Money does not stink.)
Russian companies’ role in Georgia’s food and beverages sector is negligible, apart from mineral water production. Russian beneficiaries control some Georgian producers of dairy products, wine, and beer but their share in the market is very small. Food security is not an issue for Georgia. Even during the worst periods of its history, the country was able to produce enough food and avoided famine, largely thanks to its fertile soil.
Transport and banks
Russia’s presence is even lower in Georgia’s transportation sector. Georgian Railway is a 100% state-owned enterprise, unlike the Armenian railway operator, which is under the sole ownership of Russian state-owned Russian Railways (RZD). An interesting fact is that the official name of RZD’s Armenian subsidiary is South Caucasus Railway, which gives ground for further speculation.
Airports and seaports are free from Russian capital too, although the country’s biggest airport, Tbilisi International Airport, is controlled by the Turkish company TAV Airports, and all seaports are owned by foreign companies, including Batumi, gateway of the Autonomous Republic of Adjara, which is effectively controlled the government of Kazakhstan through JSC KazTransOil, a subsidiary of the state-owned JSC KazMunayGas.
Russia banking powerhouse VTB Bank has a presence in Georgia as well as in Armenia, Azerbaijan, Belarus and other countries. The Georgian banking sector consists of 17 banks, none of them state-owned. All the country’s banks are privately owned and 14 of them are fully or partially owned by foreign companies.
VTB ranks in fifth place by total assets, however, its nominal value is rather small especially compared to the two systemic Georgian banks – Bank Of Georgia and TBC – that control more than half of the banking sector, thus its potential influence over the Georgian economy and country as a whole is unimportant.
Oil, gas and power
Russia and Russian capital enjoy considerable presence in the Georgian energy sector. The Georgian economy and households are partly fuelled by electricity, which is primarily locally produced from hydro resources while a smaller but important portion is based on thermal power. They also rely on imported natural gas and imported oil products, such as gasoline and diesel.
Russia’s gas price bomb detonated in Georgia back in 2006 cause a severe disruption and gas shortages during a harsh winter. But the country emerged a winner at the end of the crisis by cutting its dependence on Russian imports. Currently, 90% of all natural gas supply comes from Azerbaijan with the remaining 10% supplied from local production, Russia and Armenia.
Gasoline and diesel supply from Russia is limited to circa 10% of total supply. Russian oil and gas giant Lukoil has been in Georgia since 2002. It owns around 65 gas stations, which places it among the five biggest oil and gas products seller companies, and it comprises around 15% of the total network.
In addition, Russia significantly enhanced its presence on the Georgian market in 2014 when the government-owned Rosneft purchased 49% of Petrocas Energy Group, a holding which owns the largest gas station network in Georgia (30% of the network) and an important oil terminal in Poti seaport. In total, nearly half of the gas stations in Georgia are fully or partially controlled by Russian companies.
The electricity sector is another industry where Russia has a solid presence in Georgia. The country’s total consumption of electricity is around 12bn kWh (2017), most of which is locally produced. Imports are irregular and do not exceed around 5% of total consumption, while the Russian share of imports is even smaller. Around 80% of electricity is hydropower and homemade, and the other 20% comes from the thermal plants primarily based on natural gas.
More than third of Georgia’s hydroelectricity consumption is covered by the largest hydropower plant (HPP) Enguri HPP (together with Vardnilhesi), that belongs to the state-owned enterprise Enguri, which is not physically immune from Russia due to its proximity to the Russian occupied Abkhazian territory of Georgia.
The Russian government controlled Inter RAO UES (through Rosneft and other minority state-owned shareholders) is the owner of the Khramhesi I and Khramhesi II HPPs with installed capacity of 227 MW, which makes them the second largest after the Enguri dam HPPs. In addition, Darialihesi and Larsihesi HPPs with an installed capacity of 127 MW together with a few smaller HPPs are under the ownership of Georgian nationals who are also Russian citizens.
Inter RAO is the owner of Mtkvari Energy Thermal Power Plant (TPP) with an installed capacity of 300 MW, which makes it the biggest TPP in the country which has total capacity of 926.2 MW.
Georgian state-owned JSC Georgian State Electrosystem (GSE) together with its subsidiary Energotrans Ltd. and Russo-Georgian joint owned JSC Sakrusenergo own around 4,000 km of electricity transmission lines in Georgia. 3,350 km is owned by GSE while 220/330/500 kV 603 km of lines in Georgia, as well as 305 km lines on Russian soil, are owned by Sakrusenergo. Sakrusenergo’s Russian partner is the Russian government through Inter RAO while the Georgian assets in the company represent the critical high-voltage 500 kV line running across the country connecting its energy sector to the neighbouring countries.
There are three electricity distribution companies in Georgia. The biggest is Czech JSC Energo-Pro, distributing around 5,000mn kWh of electricity. It is followed by the Russian Inter RAO majority owned JSC Telasi, which distributes circa 2,800mn kWh to the citizens of the Georgian capital Tbilisi, sold to the Russian company by the former American owner.
Russia a big player in TMT
Most of the disruption risks are concentrated in IT, media and communications, as well as energy. Georgia has already experienced cyber attacks.
Russia’s capital proven presence in Georgia’s IT, media and communications sector is small, though the ownership transparency in these strategic sectors is very low. IT in Georgia simply is not well developed yet.
Some Russian capital exists in media and communications but the visible part of it is too small to have an impact on the sector. Russian telecommunications company PJSC VimpelCom’s brand Beeline operates in Georgia but its actual size is far less than the local industry giants Magticom and Geocell.
Even though Russian capital is not active, it should be noted Georgia is not immune to Russian media and potential interference in telecommunications simply because of already well-documented Russian cyber and media propaganda activities, which is coupled with its technical ability to physically interfere into the communications because of geographical proximity and Soviet-designed telecommunication lines hubbing in Sochi through the Georgia-Russia Optical Fibre Submarine Cable System.
VimpelCom is the owner of two cables connecting Tbilisi and Yerevan through its subsidiary ArmenTel. In 2016 the Georgian company Caucasus Online, the owner of Caucasus Cable System, was accused of planning the sale of fibre-optic cable to the same Russian VimpelCom. Company representatives recognised the sale negotiations generally with VimpelCom, but at the same time rejected the claim that negotiations involved the submarine cable.
Russian capital participates in other businesses too. Among them are two commercially important entities: IDS Borjomi Georgia, which produces the famous Borjomi mineral water, and Rich Metals Group, which mines gold and copper. However, the current trend of Russian investment in Georgian blue-chip companies is on the decline, Russian investments left the Georgian fertiliser producer Azoti, as well as Tbilisi drinking water supplier Georgian Water and Power Ltd.
Georgia needs and wants investment from the rest of the developed world. The country has been the receiver of huge investment flows over the last years, mainly driven by its highly attractive investment-friendly climate and local opportunities. Russian investments are not extraordinary and many are just good business. German companies are well-represented in the Georgian manufacturing sector; Turkish companies are everywhere; Chinese companies are visibly active; Arab countries are investing big sums into Georgian hospitality. Compare to all this, Russian investments seem to be modest.
Yet, Russia has a sizeable footprint in Georgia’s economic sectors that are essential to its national security. However, the energy market is regulated in Georgia, price formation is controlled by the independent industry watchdogs.
Georgia does not have an FDI screening system, though the general public is very active, and all political actors vigorously monitor the activities of Russian capital in Georgia, even if Russian capital has not showed any signs of hostility. The government runs a non-discriminatory open-door policy for everyone, but with visible preferences. The Georgian government has not entered into any new economic-political framework with Russia since it left the Commonwealth of Independent States (CIS), while the country signed a free trade agreement with China and in 2014 concluded a historical Association Agreement with the European Union resulting in free trade and visa-free movement of Georgian citizens in the EU.
Kakha Baindurashvili is an economist and former minister of finance of Georgia. Currently, he works for non-governmental international organisation World SME Forum (www.worldsmeforum.org).