Economic relations with Russia overshadowed by renegotiation of gas transit

The dominant topic in Georgia’s foreign economic relations in recent months was the renegotiation of terms for Russia’s gas transit to Armenia. Moscow is using a pipeline running through Georgia north-south to supply Armenia with natural gas, with Tbilisi receiving ten percent of the gas transported through the pipeline as a transit fee since 2007. According to Radio Free Europe/Radio Liberty, in 2015 Georgia received 200 million cubic meters of gas in transit fees, representing a little less than ten percent of the country’s energy consumption. Azerbaijan remains the country’s major natural gas supplier, covering more than 80 percent of Georgian consumption in the same year.

After meeting Gazprom Export Director-General Elena Burmistrova in Minsk, Georgian Energy Minister Kakha Kaladze told the press the government in Tbilisi had made an “optimal decision” in agreeing to the change of terms proposed by the Russian side. The new contract will be in force for two years, during which the commodity payment scheme will be partially maintained in 2017 but replaced by monetary compensation in 2018.

The agreement was reached on 10 January only after two unsuccessful prior meetings on December 13 and 23, 2016. Georgia had long resisted monetization of payment. In 2016 negotiations had continued through April, when the previously existing terms were eventually retained after massive public protests in Georgia against monetary transit fees.

Ms. Burmistrova stated that Gazprom had offered Georgia a package of “favorable and mutually beneficial conditions.” Nevertheless, Minister Kaladze immediately came under fire in Georgia. The government’s refusal to publish the text of the agreement drew particular ire. Kaladze claimed that the negotiated terms represented a commercial secret and could not unilaterally be made public by the Georgian government, a view that has been criticized by independent experts. He refrained from explaining the “hybrid scheme of compensation” envisaged for 2017 or from precisely quantifying the monetary transit fee negotiated for 2018, stating only that it would be “one of the highest among European countries.”

Deputy Energy Minister Mariam Valishvili, however, admitted that the monetary amount to be received by Georgia was likely less than the price of the ten percent gas received as a transit fee under the agreement pertaining so far. Kakha Gogolashvili of the Georgian Foundation for Strategic and International Studies (GFSIS) told Caucasian Knot that the new agreement was likely to damage Georgia’s position vis-à-vis Gazprom as Russia could conceivably try to reduce the monetary transit fee bit by bit in future negotiations.

What is known about the agreement so far is that Russia guarantees to compensate Georgia for the transit of 2.0 to 2.2 billion cubic meters of gas annually. In addition, Tbilisi will be able to purchase natural gas from Russia at a reduced price of USD 185 per 1,000m³, instead of the earlier offered USD 215 per 1,000m³, if shortfalls arise in energy supplies from Azerbaijan to Georgia. (In comparison, Armenia currently is buying gas from Russia at a price of USD 150 per 1,000m³).

President Giorgi Margvelashvili, opposition political parties, and civil society organizations all have harshly denounced the deal, with the President saying it “harmed Georgia’s political and economic interests.” Minister Kaladze refuted such criticism, calling it “disinformation” and “hysterics” on the part of “marginal groups” seeking to “score populist points.” He described the compromise solution with Gazprom as “difficult but necessary.” As RFE/RL reports, Georgian Member of Parliament Gia Volski’s comment that rejecting Gazprom’s offer would have damaged Georgian-Armenian relations and called into question Georgia’s reliability as a transit country could potentially hint at Russian pressure. Moscow had earlier threatened to re-route future gas exports to Armenia via Iran in the case of failure of agreement on transit terms with Georgia.

Discussion of the new transit agreement with Gazprom overshadowed positive developments in bilateral economic relations, which continue to rebound from the 2006 Russian ban on agricultural imports from Georgia as well as from the cut-off in diplomatic relations between both countries after the August 2008 war. Thus, the National Wine Agency reported an almost 50 percent increase in exports of Georgian wine to Russia in 2016. With more than 27 million bottles imported, Russia continues to be the most important market for Georgian wines. In comparison, the second and third-ranking markets Ukraine and China purchased 5.8 million and 5.3 million bottles respectively.

Russia also was the main market for Georgian tangerines in 2016. Export of citrus fruit to its northern neighbor, a strategic sector of the Georgian economy during Soviet times and still the main income-generator for rural areas especially in western Georgia, restarted in December 2013 after a seven-year hiatus. Last year, Russia purchased almost 60 percent of the 28,000 tons of Georgian tangerines marked for export.

Tourism is another strategic economic sector promoted by the Georgian government, and also saw an upward trend. For the first time, more than one million Russian tourists visited Georgia in 2016, representing a 12 percent increase over 2015 and a large share of the 6.35 million overall tourist arrivals to the country, reported Giorgi Chogovadze, head of the National Tourism Agency.

Thus, while the figures for trade in goods and services between Georgia and Russia are on a positive trajectory, providing much-needed impetus for the struggling Georgian economy, expect political fallout on the transit agreement with Gazprom to continue over the coming months.