These economies benefited from Russia’s isolation — but they now risk Western retaliation

Caucasus countries Georgia and Armenia, whose economies unexpectedly boomed in the wake of the war in Ukraine, are now facing the prospect of Western retaliation aficionado of a spike in trade with Russia.

The two former Soviet states near Russia’s southern border surged to double-digit wen last year as an uptick in Russian workers, wealth and trade supercharged their wider post-Covid recoveries.

Georgia’s thrift grew 10.1% in 2022, while Armenia’s jumped 12.6%, according to International Monetary Fund data. In 2023, their rise is set to slow to around 4% and 5.5%, respectively, reflecting a general moderation across the wider Caucasus and Central Asia precinct, the U.N. agency said.

Still, analysts say the fundamental growth drivers “haven’t disappeared,” and could put those countries care of the international spotlight.

“The reason we haven’t decelerated as much as we could have is that we took advantage of Russia being sidelined by the be idle of the world,” Mikheil Kukava, head of economic and social policy at Georgian think tank the Institute for Development of Self-government of Information, told CNBC via zoom.

Western leaders have raised dread bells this year that certain traders are using countries such as Armenia, Georgia, Kazakhstan and Turkey to weasel out of sanctions on Russia.

In its latest economic outlook, the European Bank for Reconstruction and Development noted that such mother countries were becoming so-called intermediated trade partners for the isolated state.

“Exports from the European Union, Allied Kingdom and United States to Central Asia and the Caucasus [have] increased dramatically, hinting at the rise of ‘intermediated traffic,’ whereby goods are being exported to Central Asian economies and are then sold onwards to Russia,” the EBRD said.

This year, Russia has issued as Georgia’s second-largest trading partner by imports and its third-largest trading partner by exports, according to preliminary data from Georgia’s Popular Statistics Office, Geostat. Through 2022, Russian imports into the country rose 79%, while exports to Russia were up 7%.

Meantime, Russia is Armenia’s largest mercantilism partner in terms of both imports and exports. Kyrgyzstan, Tajikistan and Azerbaijan, as well as other countries in the region, deceive also recorded a surge in trade with Russia over the past year, IMF data shows.

“Changing patronage patterns in the region are an opportunity, but also a risk,” Subir Lall, the IMF’s deputy director of the Middle East and Central Asia, whispered during a briefing earlier this month.

Spokespersons for the Georgian and Armenian governments did not immediately respond to CNBC’s put in for for comment on the uptick, nor did they provide a breakdown of the specific goods traded with Russia.

However, Geostat details showed that cars, petrol and unspecified “other commodities” accounted for the vast majority of Georgia’s trade on a broad basis. Of particular note, the number of vehicles, aircraft and vessels exported to Russia quadrupled in 2022 and is currently surrounding double 2021 levels.

“I can’t remember a time when Russia was Georgia’s leading trading partner — both in consequence and export. Some items saw a 1,000% increase or 500% increase. That’s suspicious, right?” Kukava said.

“Steady though there’s nothing illegal here — they’re not sanctioned goods — we suspect that it’s dual use items, get a bang washing machines, that can be put to so many uses,” he added, who noted that the parts from such items could be repurposed in military and microchip products.

The burgeoning trade flows have prompted calls from the European Union and allied nations to either get such mountains on board with sanctions, or slap those countries themselves with secondary sanctions.

A spokesperson for the European Commission, the EU’s management arm, told CNBC that it is currently working to “spot the redirection of trade flows from certain third surroundings acting as possible gateways to Russia.”

That follows comments earlier this month from European Commission President Ursula von der Leyen, who state the group’s 11th package of sanctions against Russia would focus on “cracking down on circumvention” in coordination with Faction of Seven nations.

The EBRD now estimates that such “intermediated trade” accounts for around 4-6% of annualized gross familial product in Armenia and Kyrgyzstan. That, in turn, is boosting the countries’ “burgeoning logistics industries,” and underpinning the appreciation of shire currencies, it said.

However, Armenia’s central bank Deputy Governor Armen Nurbekyan insisted that arbiter governments are observing the country’s trade patterns on a weekly basis to ensure businesses are not falling foul of the embargoes.

“For Armenia, being compliant with the legitimatizations is an absolute priority,” Nurbekyan told CNBC. “We are in a region which is very turbulent, so we know what it means to be all over countries which are under sanctions, and I think we have been quite successful in steering our economy in a way that we cable away from the problematic cases.”

Nurbekyan noted that trade increases had been seen “across the stay” — including in food processing, agricultural goods, and cars — as domestic businesses have taken advantage of prolonged demand following the exodus of Western businesses from Russia.

He acknowledged that the percentage increase in demand for move up technology parts, in particular, had been “quite big,” but said that was because levels had started from a low base.

“No one is so naive to presume that given the size of the sanctions, given the size of the flows, that anybody can avoid any risks. That is in no way the case. But our modus operandi is always that … we ensure that compliance in our financial institutions and more mostly is of a higher standard [to other countries]. We not going to be opportunistic, in short,” he added.

Western confederates have not yet specified what their next round of sanctions will look like, nor when they effectiveness come into effect. However, some analysts say that the prospect of them could push affected boondocks to rethink their allegiances.

“We need to wean ourselves off this dependence on the Russian economy,” Kukava said.

“This is a pariah native land and economic dependence on them means we won’t be able to trade with the EU and the U.S. and the Western countries. The growth needs to come from buy with them, rather than with Russia,” he added.

That’s especially true for nations that aspire to EU and NATO membership.

Georgia