The Effects of Economic Sanctions Imposed on Russia and Their Spill Over Effects on Georgia

In this interview with Dr. Elguja Khokrishvili, Non-Resident Senior Fellow at GIP and ISET, Global Faculty Program Visiting Professor at Free University of Berlin and former Ambassador of Georgia to Germany, we spoke about the implications of sanctions on the Russian economy following the invasion of Ukraine. Dr. Khokrishvili also shared lights on the implications of these sanctions for Georgia and highlighted effective counter-measures that can be pursued by Georgia.

You are an economist of repute so I think to start this interview on this note. I would like to ask, what is the power of sanctions and how will they affect the Russian economy in the near future? Is it possible for these sanctions to stop Russia and how long until Russia starts to feel the effects of these sanctions?

The imposed economic sanctions and the consolidation of the West (free world) around it have great power, and it will inevitably have a devastating effect on the Russian economy in the medium and long term. In the short term, we are already seeing tangible consequences of these sanctions via: the devaluation of the Russian Ruble, the partial collapse of the financial and banking sector, the mass exodus of foreign companies, investors, and joint ventures from the Russian market, blocking of Russian-bound cargo, and imposing restrictions on Russian import/exports. These are just some of the outcomes that is evident.

Currently, the only reason why the Russian economy has not collapsed immediately is due to the so-called “War Treasury” and, the revenues Russia get from the sale of natural gas and oil products. As well as the fact that Russia has been preparing for this war for long, and creating the appropriate reserves. It is not yet possible to refuse to buy Russian natural gas and oil on a large scale in the West, because it takes time to find alternatives. There are already concrete plans in the West (the EU, US and the UK) to reduce their dependence on Russia’s energy sources and move to new alternatives as soon as possible. The EU can cut gas imports from Russia by over a third in a year while supporting the transition to clean energy in a secure and affordable way.

The immediate purpose of imposing sanctions was to show what economic price Russia would have to pay for its actions. The political price is its complete isolation and sooner or later the representatives of its current regime will have to answer before the International Criminal Court for the crimes committed against humanity.

How do you see the fact that Georgia did not join in imposing sanctions, and why did this decision cause dissatisfaction now while Georgia did not impose sanctions in 2014 either? Was it a communication problem with Ukraine and Western partners?

I think first of all Ukraine and the free world expect a clear positioning and sincere solidarity from us in Georgia. A discussion of the technical parts of the sanctions certainly points to a communication problem. All countries would be affected at least in the short-term according to the extent to which they would be able to pay the price imposed on their economies by imposing sanctions on Russia. Due to the content of some sanctions, it will be executed by Georgia as well. It is therefore completely incomprehensible to me to make statements whose content allows for an interpretation that will then be used in favor of Kremlin propaganda.

How does the current situation affect Georgia, both politically and economically? And what would be your recommendations?

The dependence of the Georgian economy on the Russian market has grown significantly in recent years. Russia ranks second in foreign trade in terms of imports and third in terms of exports. Added to these are remittances from Russia and a high share of Russian citizens in tourism. If the Russian economy collapses, automatically the most of people will lose their jobs the remittances will be significantly reduced.

We have a negative trade balance. If remittances decrease, the number of tourists from Russia decreases also, as well as the export of products to Russia will face problems, the national currency Georgian Lari is also expected to depreciate. Therefore, the government should first of all help businesses by finding a new export markets for products exported to Russia, and the government should also work actively to seek alternative markets for business and tourism.

Georgia has a free trade agreement with the EU (DCFTA), however, to take separate export products (excluding Hazelnuts and Copper ores) after concluding a free trade agreement overall exports to the EU had gone up very marginally between 2013 and 2018, but then reduced in 2019 so that they are now below the 2013 level. These numbers certainly seem to suggest that, if anything, the EU’s trade importance to Georgia has been declining over time. This does not mean that the EU Association Agreement has had no impact. It clearly does mean that it has not created a transformative change in aggregate. It has not reduced our dependence on the Russian market. The reason for this is probably because the schemes in the state financed business supporting programs did not provide enough incentives that would make the EU market more easily accessible to Georgian businesses than the Russian one. When we have experience of economic embargo on Georgian products by Russia, reducing dependence on the Russian market should be a priority, because otherwise, we should know that in such crises (the pandemic has shown us) the economy will be vulnerable, not to mention Russia’s use of economic relations as a political tool which hurt Georgia several times in the recent past.

How do you assess the role of Germany in these processes, should we expect even more effective measures from Germany?

In the light of current events, Germany’s defense, security, foreign and energy policies have changed completely (by 180 degrees). The Federal Chancellor from the Social Democratic Party said that a fund of 100 billion Euros will be created for the modernization of German Budeswehr (drones, fighter jets) and from today onwards German military spending will be more than 2% of the GDP. Germany has taken the step of supplying Ukraine with defense weapons and will radically reduce its dependence on Russian energy sources. Today, German political elites and a large part of the population are aware that this is not only Ukraine’s problem, but also the first open military aggression against a sovereign state in Europe after World War II (Russian military aggression against Georgia in 2008 and annexation of Crimea in 2014, unfortunately has not been perceived so), which is a direct challenge to European security. Germany is closely coordinating with the EU in a transatlantic alliance to give a firm response to Russian aggression, which of course implies more effective measures.

In general, what are your expectations, what measures should world leaders take to stop the war immediately, and what do you think would hinder the implementation of these measures?

If we look at the recent diplomatic efforts aimed at consolidating the free world on the one hand and unprecedented transatlantic coordination on the other, we can say that the West is strongly supporting and assisting Ukraine. We talked about sanctions and tightening sanctions is an additional pressure mechanism that will increase even more. Most importantly, the West is helping Ukraine not only financially but also by supplying defensive weapons.

The main goal today is to end hostilities in Ukraine and to avoid a nuclear conflict between the West and Russia. Communication is underway with Russia to sit down at the negotiating table and reach an agreement. The Kremlin and Russian society will have to face the reality that in the event of a military aggression, the civilian casualties will increase and the response of the civilized world will be the complete political isolation of Russia with devastating economic consequences.

Georgia, Ukraine and Moldova have applied for fast-track EU membership. How realistic is EU enlargement now and what is the attitude of European leaders to these fast-track applications?

Of course, the focus of Western leaders is on the Ukraine conflict, but also on those countries that have a democratic agenda and envision their future in a free world. As a result of Russia’s actions, we can say that today, the post-Cold War world order (the rule-based international order) has collapsed and the whole world is waiting for the balance of the new order.

The positioning of any country in the current war of values is also an expression of its geopolitical choice. Therefore, it is important to apply, regardless of how fast the ensuing processes will take place in this direction.