ZOiS Spotlight 31/2021

Georgia’s Free Trade With the EU: Who Benefits?

Georgia’s national flag flying beside the European flag in Tbilissi © IMAGO / Frank Sorge

Increasing trade liberalisation with the EU over the past fifteen years has helped Georgia to increase and—to an extent—diversify its exports to the union. Yet, when it comes to who benefits from better market access to the EU, the picture is less clear. In 2020, roughly 60 per cent of Georgia’s commodity exports to the EU came from sectors like minerals, where key market players are closely connected to oligarchic structures under the leadership of billionaire Bidzina Ivanishvili. So far, trade liberalisation between the EU and Georgia has therefore unintentionally helped to maintain oligarchic structures.

This development is worrisome and is not limited to Georgia, as previous research on the effect of trade liberalisation between the EU and Ukraine shows. Ongoing discussions on the future of the EU’s Eastern Partnership (EaP) policy, in particular with a view to the EaP summit planned for December 2021, need to address this topic more explicitly. This is all the more important because one of the EaP’s proposed long-term objectives is support for creating inclusive and resilient economies in the partner countries, including by strengthening the competitiveness of small and medium-sized enterprises (SMEs) and promoting their integration into EU value chains.

Main beneficiaries of Georgia’s liberalised trade with the EU

Georgia is a front runner among EaP countries in terms of trade liberalisation with the EU. As early as 2006, 90 per cent of Georgia’s trade turnover with the EU was at zero tariff thanks to the EU’s Special Incentive Arrangement for Sustainable Development and Good Governance (GSP+). The immediate impact on bilateral trade of the Deep and Comprehensive Free Trade Area (DCFTA) between the EU and Georgia, which has been provisionally in force since September 2014, was therefore limited.

After Georgia joined GSP+, mineral products continued to dominate the country’s exports to the EU (table 1). Data from 2020 indicate that minerals maintained their top position and that their export volume had more than doubled over the previous fifteen years. Agrifood and textile exports saw the strongest boost from EU trade liberalisation, while metals fell in significance.

Georgia’s top export sectors to the EU, 2004–2020

Rank 2004, before GSP+ (export share, total export volume) 2007, after GSP+ (export share, total export volume) 2013, before DCFTA (export share, total export volume) 2020, after DCFTA (export share, total export volume)
1 Minerals (58.4%, €183.7m) Minerals (55.8%, €256m) Minerals (57.3%, €382m) Minerals (60%, €460m)
2 Metals (13.3%, €41.9m) Agrifood (19.2%, €87.9m) Agrifood (18.4%, €122.9m) Agrifood (18.2%, €139.3m)
3 Agrifood (10.7%, €33.5m) Metals (11.9%, €54.5m) Metals (7.9%, €52.8m) Textiles (6.8%, €52m)
5     Textiles (3.6%, €23.7m) Metals (3.4%, €25.8m)
9   Textiles (0.71%, €3.3m)    
10 Textiles (0.86%, €2.7m)      

Source: Eurostat data series ‘EU trade since 1988 by HS2-4-6 and CN8’ (DS-645593), authors’ calculations

The ownership structures of companies in Georgia’s current top export sectors reveal much about the main beneficiaries of the country’s free trade with the EU. In the minerals sector, Rich Metals Group (RMG) Copper is Georgia’s most important export company. Since 2019, RMG Copper has been owned by Mining Investments LLC, which is controlled by Russian billionaire Dmitriy Troitskiy. With other Russian businessmen, Troitskiy had already controlled RMG B.V., the previous owner of RMG Copper.

Reports by Georgian NGO Green Alternative suggest that RMG B.V. enjoyed close links to Georgia’s ruling elites, who turn a blind eye to the environmental and social impacts of RMG’s mining operations. A case in point was the 2013 decision by the Georgian Ministry of Culture to revoke the status of the world’s oldest gold mines in Sakdrisi as a protected historical site. As a result, RMG Gold—RMG Copper’s sister company—was allowed to start mining operations there. Furthermore, individuals connected with RMG Copper reportedly made generous donations to Georgia’s ruling party, Georgian Dream, which is close to Ivanishvili, in the run-up to the 2020 parliamentary election.

Georgia’s agrifood and textile industries made up roughly 25 per cent of the country’s exports to the EU in 2020. The ownership structures of these sectors are more diverse than in the case of minerals. Still, the benefits of trade liberalisation are highly unequally distributed, in particular in textiles.

From 2006 onwards, the elimination of tariffs in the context of GSP+, along with favourable government decisions, helped to boost foreign direct investment and contract manufacturing of apparel with major international brands like Adidas and Moncler. The government’s decision to create free economic zones and the launch of the Produce in Georgia programme in 2014 played important roles in attracting investors, in particular from Turkey, with reduced tax rates and competitive labour costs.

However, the government’s tendency to give investors and local textile producers a free hand, especially regarding labour standards, comes at a high social cost for the local workforce. Local firms like Geo-M-Tex, which used to be a contractor of Moncler, received massive funding under the Produce in Georgia programme in 2016–17 and was a beneficiary of the EU4Business programme in 2017. A recent report documented close personal connections between the company’s then owners, Lasha Bagrationi and Ramaz Sagharadze, and members of Georgia’s ruling elite.

An unequal distribution of the benefits of EU trade liberalisation also characterises parts of Georgia’s agrifood industry. Here, nuts and wine are the main export commodities. Most small Georgian nut producers cannot reap the full benefits of free trade because they export their product through intermediary companies from Turkey or EU countries that take on the burden of regulatory and export procedures. While this approach helps small producers to increase their sales, it also reduces the benefit to them, since intermediaries offer the producers much lower prices than the sale prices on the EU market.

A few larger companies, such as Tbilvino and Telavi Wine Cellar, operate on Georgia’s wine market. Some leading company figures maintain relationships with Georgian Dream, as several donations in 2017 and 2020 as well as connections to pro–Georgian Dream media suggest. At the same time, the National Wine Agency and the Georgian Wine Association have played important roles in diversifying the industry’s ownership structures. These bodies helped local wine producers to overcome information asymmetries, initiated certification procedures for export companies, and fostered participation in international fairs, which increased awareness of Georgian wines.

EU twinning initiatives have allowed for exchanges between Georgian authorities and their EU counterparts. As a result, between 2017 and 2020, around 300 wine companies, mostly SMEs, were exporters. That said, according to Eurostat data, Georgia’s wine sector accounted for only 2.65 per cent of the country’s total exports to the EU in 2020.

Implications for the EaP

Georgia’s trade liberalisation with the EU has so far predominantly helped to maintain the country’s oligarchic structures or create profits for larger, foreign-owned firms, resulting in high environmental and social costs for Georgia. These findings should inform EU programmes aimed at supporting the competitiveness of local firms and their integration into EU value chains, especially in Georgia, Moldova, and Ukraine, the three EaP countries that have signed Association Agreements with the EU. Empowering a wider group of local economic actors to engage in trade and entrepreneurial activities will lay the basis for more inclusive export-led growth.

Julia Langbein is the head of the Political Economy and Integration Research Cluster at ZOiS.

Irina Guruli is the deputy director of the Economic Policy Research Center and an associate professor at Ilia State University in Tbilisi.