THE IMPACT OF THE RUSSIA-UKRAINE WAR ON GEORGIA'S ECONOMIC ACTIVITY
Authors: Bidzinashvili David 
Published: August 2022

A global threat to food supplies has emerged in the wake of the Russia-Ukraine war. A number of developing countries are already pointing to shortages of basic consumer goods such as wheat, corn, buckwheat, sunflower. Food supply risks are significantly linked to and exacerbate global inflation, which began in the second half of 2021 amid a pandemic and is already approaching double-digit levels even in developed economies. Annual growth in consumer price indices last month was 8% in the US, the Eurozone, the UK and other developed economies, and as output price indices range in the 10-20% range, inflation is not expected to slow in the near future.

This phenomenon is known as supply-side inflation and poses an additional challenge not only to economic policy makers, but also primarily to producers and consumers. The developments due to the Russia-Ukraine war and the sanctioning of Russia have significantly increased the demand for the Georgian corridor, which is both an opportunity and a challenge.

Amid rising inflation risks, monetary policy is in a tightened phase as a result of the gradual increase in the monetary policy rate over the past year. The National Bank of Georgia is expected to tighten monetary policy until the risks to rising inflation expectations are sufficiently mitigated.

The double-digit economic growth achieved by Georgia recently is significant. In the first quarter of this year, Georgia's economic growth amounted to 14.4%. Our country has dealt with the challenges with dignity, has maintained the stability and development of the economy in the light of current events in the world. It is noteworthy that according to the International Monetary Fund, the Ukrainian economy is expected to shrink by 44% and the Russian economy by 13%. In our neighboring countries, the economic growth rate is a single digit.

The data against the background of those hostilities unequivocally confirm, on the one hand, the resilience of the Georgian economy to the increased negative exogenous political and economic factors, on the other hand, the growing diversification of the national economy and the more active involvement of Georgian business in the global economy.

Russia's aggression against Ukraine and the start of hostilities in the region have a significant impact on the Georgian economy. Increased inflation and inflationary risks remain a recent global challenge. While 2022 was considered a period of global inflation, Russia's war against Ukraine posed new risks, in particular sanctions against Russia over hostilities and restrictions on supplies, which significantly increased the prices of certain categories of goods on world markets. Consequently, in both developed and emerging economies, inflation has risen significantly.

After the battles that have developed in neighboring countries, there is a possibility of attracting 16-20 million tons of cargo, and if Georgia is able to absorb at least 60%, the country will transit 10-12 million tons of cargo. An example of this is Kazakhstan, which has developed alternative routes according to which it is possible to load the Baku-Tbilisi-Ceyhan pipeline with maximum capacity.

In order to further popularize Georgia's transport corridor, it is necessary to have a more coordinated work of the public as well as the private sector. The situation in the region allows us to predict a significant increase in cargo turnover. Therefore, the Ministry of Economy and Sustainable Development together with the Maritime Transport Agency, the Department of Roads, JSC "Georgian Railway" need to take care of further popularization of the Georgian corridor and development of infrastructure to ensure timely and safe transportation of cargo;

Inflation is rising around the world, even before the Russia-Ukraine war. Supply - mismatch of demand, rising prices of goods (fuel and food) stimulate growth in inflation since the beginning of 2021. That is why the Central Bank of Georgia should be more vigilant now, because long-standing high inflation can have quite high costs and therefore the monetary authority may have to react more strongly;

It is necessary for the country to accelerate its integration with the European Union and take effective steps to improve the investment environment in response to socio-economic challenges.

It is important to establish strict monitoring of the free movement of capital in relation to the aggressor country and appropriate restrictions in response to existing threats.

The National Bank of Georgia should continuously monitor the current economic processes and financial markets and use all the tools at its disposal to ensure price stability;

Despite the Russia-Ukraine war, Georgia's financial sector must remain resilient and respond adequately to this challenge.