07TBILISI2114, IMPACT OF RUSSIAN SANCTIONS ON GEORGIAN ECONOMY

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Reference ID Created Released Classification Origin
07TBILISI2114 2007-08-23 10:41 2011-08-30 01:44 CONFIDENTIAL Embassy Tbilisi

VZCZCXRO8023
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHSI #2114/01 2351041
ZNY CCCCC ZZH
P 231041Z AUG 07
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC PRIORITY 7406
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION PRIORITY
RUEHVEN/USMISSION USOSCE PRIORITY 2142

C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 002114 
 
SIPDIS 
 
SIPDIS 
 
DEPT PASS TO DEPT OF AGRICULTURE - PRIORITY 
DEPT OF COMMERCE FOR 4231 DANICA STARKS 
MOSCOW PASS TO USDA 
 
E.O. 12958: DECL: 08/15/2027 
TAGS: EAGR ECON ETRD PREL GG
SUBJECT: IMPACT OF RUSSIAN SANCTIONS ON GEORGIAN ECONOMY 
 
REF: A. 06 TBILISI 419 
 
     B. 06 TBILISI 624 
     C. 06 TBILISI 709 
     D. 06 TBILISI 871 
     E. 06 TBILISI 1069 
     F. 06 MOSCOW 5104 
     G. 06 TBILISI 1647 
     H. 06 TBILISI 1730 
     I. 06 TBILISI 1786 
     J. 06 TBILISI 2601 
     K. 06 TBILISI 2626 
     L. 06 TBILISI 2846 
 
TBILISI 00002114  001.2 OF 002 
 
     M. 06 TBILISI 3069 
 
1. (U) Summary.  A recent report by the International School 
of Economics at Tbilisi State University provides a rigorous 
analysis and confirms the widely held view that Russian 
economic sanctions on Georgia have not had the intended 
overall negative effect on the Georgian economy.  Although 
growth would have been higher had they not been imposed, the 
sanctions came at a time when Georgia -- buoyed up by 
increased foreign direct investment and economic aid from 
donors -- was able to cushion the negative impact.  The 
blockade prompted maturation and diversification of the 
Georgian export sector, and in fact, Georgian exports have 
only increased since the beginning of 2006.  At the 
microeocnomic level, however, the ban caused losses of USD 
600 million to key Georgian industries, affecting most 
notably the wine sector and other agricultural industries 
whose main export destination was Russia.  Nevertheless, even 
these industries were not as devastated as had been 
predicted.  If the GoG continues to seek new markets and then 
is able to renew its ties with the Russian market, the cloud 
on the Georgian economy caused by the sanctions will be seen 
to have a silver lining.  End Summary. 
 
Timeline of the ban 
------------------- 
 
2. (U) A series of economic sanctions by Russia started in 
late 2005 and are still in place to this day: 
 
- (C) December 2005: Russia restricts imports of agricultural 
products from Georgia, citing problems with falsified export 
certificates.  GoG officials learn about the ban from the 
press.  Preliminary analysis indicates a negative effect on 
exports (ref A). 
 
- (U) January 2006: Gazprom doubles the price of gas to 
Georgia to $110 per thousand cubic meters. 
 
- (U) March 2006: Ban on imports from any country shipping 
through Georgia; Russia cites falsified documents as a reason 
(ref B).  Two weeks later, Russia bans Georgian wine.  The 
Georgians cry foul claiming the wine meets U.S. and EU 
standards (ref C). 
 
- (C) March 2006: The ban is extended to cognac and 
champagne.  Minister of Foreign Affairs says privately the 
ban would not be serious until the end of the harvest that 
fall and hints the GoG will take the issue to the WTO 
committee on market access and trade facilitation.  In 
Moscow, Russia's Chief Sanitary Inspector Gennadiy 
Onishchenko refuses to meet with then Agricultural Minister 
Svimonishvili.  The GoG postpones tax collections for wine 
producers for three months, and officials across the board 
engage in a push to find new markets for wine (ref D). 
 
- (C) May 2006: The ban is extended to mineral water, despite 
Borjomi's strong working relationship with Onishchenko.  The 
ban follows then Minister of Defense Okruashvili's derogatory 
statement about the purchasing preferences of Russian 
consumers: that even fecal matter could be sold in Russia 
(refs E and F). 
 
- (C) July 2006: Russia closes the only official border 
checkpoint with Georgia at Upper Lars (ref G), driving trade 
into illegal smuggling routes in the separatist regions of 
South Ossetia and Abkhazia (ref H).  The Ministry of 
Agriculture reports that Georgia had lost between USD 35-70 
million because of the ban on wine and mineral waters (ref 
I).  The GoG continues helping the private sector develop a 
long-term solution--looking to European markets for fresh 
produce, improving standards, fighting falsified appellations 
of origin, fighting smuggling of Georgian goods, and 
 
TBILISI 00002114  002.2 OF 002 
 
 
encouraging more food processing plants (ref H). 
 
- (SBU) September, October 2006: Russian spy row prompts 
Russia to recall its Ambassador and most of the diplomatic 
corps (ref J) and to begin deportation of Georgians accused 
of immigration violations.  People die in the process of 
deportation. 
 
- (SBU) October 2006: Russia suspends all rail, air, road, 
sea, and postal links to Georgia (ref K) prompting a request 
for another donation of wheat from USDA (ref L)
. 
 
- (U) Janaury 2007: Gazprom again doubles the price of gas 
imports to Georgia to $235 per thousand cubic meters. 
 
By the numbers 
-------------- 
 
3. (SBU) The Russian blockade, though it continues, has not 
had the intended or expected disastrous effect at the 
macroeconomic level.  The IMF initially predicted the longer 
the economic blockade was in place, the worse the damage to 
the economy, and that GDP growth in 2006 would be only 7 
percent (ref M).  However, the economy actually grew 9.4 
percent in 2006 and is estimated to have grown by 11.4 
percent in Q1 2007.  Foreign direct investment (FDI) in 2006 
was USD 1.1 billion and is predicted to be as much as USD 2.1 
billion in 2007.  Inflation accelerated in summer 2006 but 
dropped below 10 percent by the end of the year and is 
currently in the 7-8 percent range.  Unemployment edged up 
slightly, reaching 15.3 percent in early 2007, when 
unemployment usually reaches a seasonal peak. 
 
4. (SBU) This is not to say the blockade had no effect, 
however.  Extrapolating from trends over 1999-2005, exports 
to Russia were reduced by about USD 175 million from those 
predicted for 2006, largely because of the ban on 
agricultural goods.  According to time series analysis by the 
Tbilisi State University economists, the Georgian economy 
lost a total of USD 635 million (current dollars) from the 
predicted value of GDP, about 7.8 percent, between January 
2006 and March 2007.  The agriculture sector took the greatet 
hit, dropping 25 percent (USD 425 million) from predicted 
output.  The manufacturing sector dropped by only 2.6 percent 
(USD 24 million) of its predicted output and construction 
dropped 15 percent (USD 127 million) below the predicted 
output.  The remaining USD 24 million can be attributed to 
various other sectors.  The effect on migration patterns was 
limited as Russia already had a strict visa regime in place 
prior to the escalation in sanctions.  Remittances from 
Russia, averaging about USD 30-35 million per month, did not 
decrease significantly, but there was a sharp drop -- 
averaging about USD 7.3 million per month -- in the outflow 
of remittances to Russia after October 2006.  Expansionary 
measures taken by the NBG aimed at redirecting resources only 
partially offset the impact of the Russian sanctions. 
Georgia's economy was already on an increasing trajectory 
prior to the blockade.  Ironically, the Russian blockade 
appears to have done more good than harm to the Georgian 
economy, by forcing producers to look for alternative 
markets, including the U.S. 
 
Comment 
------- 
 
5. (SBU) The analysis -- using official government data -- by 
economists at Tbilisi State University appears to be 
statistically sound, although its projections of potential 
GDP and exports is limited by the short, 6 year time series. 
We will continue to work with the GoG on further 
business-friendly changes, including improvements to its 
judicial system.  We will look for ways to help Georgia 
diversify its trade and industrial production and increase 
its global competitiveness.  End Comment. 
PERRY

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