beyondbrics

By Isabel Gorst and Stefan Wagstyl

With Georgian president Mikheil Saakashvili (pictured) seemingly ready to drop his objections to its arch-enemy, Russia, joining the World Trade Organisation, it’s worth asking – what’s in it for Tbilisi?

Since Russian troops still occupy the Georgian territory they seized in the 2008 war, Georgia might be forgiven for digging in indefinitely on the trade front. But Tbilisi has good political and economic reasons for taking a co-operative approach.

First, the publicity has helped to remind the world of Georgia’s claims to Abkhazia and South Ossetia, the two breakaway territories now guarded by Moscow’s soldiery. Very few countries have followed Russia in recognising Abkahzian and South Ossetian independence but they have mostly kept quiet about challenging the situation on the ground. A bit of WTO-linked diplomacy puts the matter back on the international table – albeit indirectly.

Russia quite reasonably rejected Georgia’s original proposal for Georgian customs officials to monitor trade across the two breakaway states’ borders with Russia. It’s hard to imagine how Georgian customs officials might have worked side by side with the Russians manning the frontiers.

Moscow is now considering a Georgian proposal for international monitors to do the job. That’s not as good from Tbilisi’s viewpoint, as asserting its territorial right by posting its own officials – but it’s a good second best as it highlights that these frontiers are disputed, or, at the very least, constitute a special case.

Next, Georgian president Mikheil Saakashvili saw even some of his supporters in the west brand him a hot-head over his behaviour in the run-up to the war. A touch of flexibility today may win back a few friends in Washington and Brussels.

Both the US and the European Union have recognised, de facto, that Russia has re-asserted its influence in the former Soviet Union. And they aren’t ready to do much about it, given the globe’s manifold economic and political challenges.

Georgia says it has not come under pressure from the US to approve Russia’s WTO bid. However, it is not impossible the US could find a way of rewarding Georgia if the WTO deal goes through.

Meanwhile, the inclusion of its hostile, northern neighbour in the international trading club could bring economic benefits to Georgia.

Once inside the WTO, Russia will have to observe civilized trading rules that make it difficult for members to bully each other. Russia will almost certainly have to scrap the ban Moscow health inspectors slapped on Georgian wine and mineral water in 2006 that blew a hole in Georgia’s beverage exports. It might become harder to impose such restrictions in future, though certainly not impossible.

Georgia has found new trading partners since 2008 and tried to take advantage of its strategic location at the cross roads between Europe and Asia.

Russia, traditionally the biggest outlets for Georgian exports, now ranks in sixth place in a ranking of the tiny country’s leading trading partners. Turkey, Azerbaijan, Ukraine and China have emerged as the main markets for Georgian metals and minerals exports including ferrous alloys, fertilizers and gold.

China, Kazakhstan and the European Union drink Georgian wine, albeit in smaller quantities that the Russians once did. Borzhomi, the super fizzy Georgian mineral water renowned as an antidote for hangovers, is too salty for most western tastes, but is sought after in CIS countries nostalgic for Soviet times.

Plucky Georgia deserves credit for diversifying its exports, but would still benefit if it could rebuild trading relations with the huge Russian market under WTO rules. Foreign direct investment in Georgia has plunged to less than $600m a year from a peak of $2.1bn before the war, but might pick up if access to the Russian market was stable.

Finally, WTO membership might improve Georgia’s security. Abkhazia and South Ossetia were renowned as black holes for smugglers in the decade before the 2008 war when the lawless regions battled to escape rule from Tbilisi. Georgian officials even referred to South Ossetia as the “world’s biggest duty free shop.”

Georgia believes that even under the watchful eye of the Russian secret police, its breakaway regions are still channels for contraband goods. Another set of monitors might help.

“It is a matter of fact that trade across the borders is corrupt and quite murky,” says Sergi Kapanadze, Georgian deputy minister of foreign affairs. “There is no accountability or transparency about what comes in and out of Georgia.”

International monitors could put things right. “That’s what we get out of this deal.”

Related reading
Russia and the WTO, Lex video
Russia will struggle to join the fold on trade, FT
Russia’s central bank: hands tied, beyondbrics
Capital flight: $49.3bn and counting, beyondbrics
Special Report: Investing in Russia 2011, FT