Issue 6, 2012. December-January

   

TO MARKET, TO MARKET

The new government of Georgia headed by billionaire Bidzina Ivanishvili has prioritized mending business ties with with Russia. While some Georgian companies are eager to return to the Russian market, analysts warn potential sales could come at a price.

Maia Edilashvili

Kefer headed to Azerbaijan at the Wimm-Bill-Dann Georgia factory outside of Tbilisi. If the Russian market opens, more companies could focus on the Russian market for exports.

Georgian citrus farmers, mineral water bottlers, and wineries are eyeing a possible return to the Russian market as the new government promises to end the six year embargo. A new post - Special Representative for Relations with Russia - was created for diplomat Zurab Abashidze, a former ambassador to Russia, and his first task is returning Georgian products to the Russian market.

The embargo, which dates back to a 2006 political tiff between Moscow and Tbilisi, ended the Georgian export of wine, mineral water, and agriculture products. In an interview with Kommersant, a Russian daily newspaper, Russian Prime Minister Dimitri Medvedev floated the possibility for renewed economic ties.

For Russian investors, Georgia has always remained an open market: Russian businesses invested $150 million in Georgia last year, Bloomberg reported, largely in the energy sector. Economy Minister Giorgi Kvirikashvili told Reuters there are already positive signs from Moscow that business ties are possible as Russia issued 1000 permits to Georgian cargo ships.

A return to the Russian market - the ninth largest economy in the world - could be a boost for local producers. But it could also make Georgia a lot more dependent on Russia, noted economist Michael Fuenfzig.

In 2006, approximately 16 percent of Georgia's total exports went to Russia. Today, however, just 4.6 percent are sold to Russia and exports to other markets are growing: trade turnover to EU countries has increased over the past two years, according to official statistics. Last year, foreign trade turnover with the EU was $2477 million, 27 percent of total trade.

Fuenfzig, an assistant professor at the International School of Economy at Tbilisi State University (ISET) noted both opportunities and dangers for Georgia if it returns to the Russian market. "Russia is a natural trading partner for Georgia, and is almost what the US is for Canada. So we should expect a lot more trade with Russia if politics is left aside and relations improve. But a lot more trade with Russia might mean that trade is not created, but merely diverted," he told Investor.ge.

"Instead of exporting to Europe these exports might be diverted to Russia, as it is overall, a market that is cheaper to serve."

That would be "the worst of two worlds," he said, because while it would signify a slight increase in total exports, it would also result in a much higher dependence on Russia. "The alternative scenario is that trade is created. Georgia will keep exporting to Europe, but will also start exporting to Russia. In this scenario we have higher overall exports, and less dependence on the Russian market."

Fuenfzig stressed that the best solution would be a gradual approach that focuses on industries that can rapidly increase production and exports.

Water and Wine

For Georgian wine and mineral water exporters, the prospects of returning to the Russian market are alluring. Georgian wine, popular in the former Soviet Union, represented roughly a third of the country's export before the embargo; today it is just 2.5 percent. Mineral and still water make up 2.1 percent of total exports.

Prior to the embargo, 80 percent of Georgia's total wine production was sold to Russia. In 2005, Georgian wine producers exported 41.7 million liters of wine at a total value of $81 million, while in 2011 the volume of the total wine export fell to 16.9 million liters, $54.1 million in value.

"The Russian embargo was like a gift from God," noted Roland Burdiashvili, assistant winemaker and production manager at Schushman Wines. "Production of the falsified wines stopped and the quality improved immensely. Though, from the sales point of view, it was a disaster, which led many wine makers to bankruptcy."

Schuchman Wines Georgia was founded in 2008 by Burkhard Schuchmann, a German national, who invested 7 million Euro in the project. The company produces 300,000 liters of premium quality wine - 20 varieties in total - and exports 70 percent to Europe and the United States, as well as other countries.

"Post Soviet countries [where the demand is for cheap wines] are not our main target, because we produce high end wines," explained Burdiashvili as he guided journalists through impressively piled bottles of wine in the company's old-style underground cellars. "If we go to Russia, we will be represented in the premium class segment and I am sure we will have clients."

Last year, Georgia exported 71.3 million liters of mineral water, worth $47 million, close to the 74.9 million liters exported in 2004.

Sandro Lomtadze, marketing manager at Sairme Mineral Water, says that the government's initiative is "positive" and could mean triple or even quadruple sales for Sairme.

Presently, the company produces a million liters of mineral water annually, though the plant's capacity is two million liters; 60 percent of production is exported, mostly to Azerbaijan, Ukraine, Turkmenistan and Kazakhstan. "[Due to its size], the Russian market can be significant not only for Georgia but for any country in the world..." he said.

"We will be ready to export to Russia if it opens, though we are not dependent on that market as we export to 20 countries," said Levan Chikovani, exports manager at Healthy Water, one of the largest mineral water producers in Georgia.

"We will just increase the volume."