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Introduction

Stiftung Wissenschaft und Politik German Institute for International and Affairs Comment

Georgia Positions Itself on ’s WP New S Relations between and in the Light of the Belt-and-Road Initiative Franziska Smolnik

China’s importance and presence in are growing. The , Beijing’s vision of a new Silk Road, has met with active approval here – in contrast to a number of European capitals, where the project is instead increasingly viewed with reservations scepticism. The government in Tbilisi is carefully positioning Georgia as an essential part of the south Eurasian corridor. In order to profit from future trade flow between China and , it has implemented a series of measures. In 2017, it became the first country in to conclude a free-trade agreement with China. Large infrastructure projects are being carried out to facilitate transit. Georgia is also using formats such as the Tbilisi Belt & Road Forum to promote its location. However, whether the new Silk Road will be a purely win-win situation for the country, still remains to be seen.

In autumn 2013 the Chinese government The BRI and National announced its concept of a new Silk Road, Development Strategies which now operates under the designation Georgia’s leadership sees China’s initiative of the Belt and Road Initiative (BRI). It in- as confirmation of its own foreign-policy tends to build and/or expand a multi-layered goal of establishing the country as a trans- network of sea and overland routes in the port hub between Europe and . It coming years and decades, along which expects improved regional connectivity to regional and supra-regional cooperation lead to both increased transit and a marked can prosper. The Initiative is less a fully upturn in its domestic economy. According worked-out foreign-policy plan, more a to the government’s discourse, it is above framework or superstructure. It also sub- all Georgia’s strategically important geo- sumes existing traffic routes and infra- graphical location that predestines it as a structure plans. Despite its rather hazy hub: not only do its ports offer outline – or perhaps because of it – the BRI ’s landlocked countries access seems to be successful in inspiring visions to European markets, but for China and for the future in the southern Caucasus. the EU the route via Georgia complements

Dr. Franziska Smolnik is an Associate in the and Eurasia Division at SWP SWP Comment 13 March 2018

1 northern Eurasian overland routes through . Extensive Chinese economic inter- Russia. The government in Tbilisi also fore- ests in Georgia should prevent Russia from grounds the country’s political order, point- using military aggression against the coun- ing to its democratic reforms and high level try – at least that is the idea – since Moscow of economic liberalisation. It has sought to will take care not to endanger Chinese in- put itself on the map as an attractive busi- vestments. According to local observers, ness location through such events as the Georgia’s cooperation with China also sends Tbilisi Belt & Road Forum, which was organ- a crucial message to Moscow that alter- ised with Chinese partners in 2017 for the native markets exist – and that potential second time and is meant to be a “mini export losses from renewed sanc- Davos”. Associating its own development tions against Georgian products could strategies with the “BRI” label is also in- easily be recouped. tended to boost Georgia’s image abroad. To establish itself as a hub linking East and West, Georgia is primarily banking on The Development of Bilateral two series of measures: creating a network Economic Relations to Date of free-trade agreements, most recently Economic cooperation between Georgia through the agreement with China; and and China has developed rapidly in the past expanding infrastructure, in particular few years. There are ever more meetings through the –Tbilisi–Kars railway between Chinese entrepreneurs and Geor- route and the deep-sea port at Anaklia. gian government officials and business However, these measures will only take representatives with the aim of further ex- full effect in several years’ time. Whilst this panding relations. In the , the two is in keeping with expectations in Georgia, countries’ trading volume was negligible. it does make it difficult to gauge their suc- According to Georgia’s statistical agency, cess (or otherwise). This is reflected in the until 2000 annual imports from China came ambivalence characterising the debate in to under US$3 million; Georgian exports to Georgia, as the author discovered in China did not even reach US$1 million. This conversations in Tbilisi. changed dramatically in the first decade of the new century, when trading volumes rose more than a hundredfold. This increase Economic and Political Objectives was primarily driven by the enormous In Tbilisi, close relations with China are growth in Chinese exports and under- seen as an essential factor for increasing pinned by China’s changed foreign policy, trade flow along the southern Eurasian proclaimed by Beijing in the early 2000s route and helping to realise the goal of under the motto “Going Out”. During the Georgia becoming a transport hub. Geor- late 2000s, several larger commissions for gia’s vision is to act as a bridge between infrastructure development in Georgia, East and West. In this context, Georgia- such as bypasses, tunnels and railway lines, China relations do not rival but comple- went to Chinese companies. Trade between ment the country’s Euro-Atlantic orienta- the countries continued to increase sharply tion and its ongoing integration into Euro- in the following years. In 2017 Georgian pean structures. exports to China amounted to over US$207 The Georgian leadership primarily views million; imports from China to Georgia expanded relations with China in terms of were valued at over US$732 million. economic gains. However, it also hopes for However, these figures reveal not only an important synergy effect of economic the strong growth in bilateral trade rela- cooperation and increased economic inter- tions. They also highlight a trade deficit ests, namely security guarantees and a on the part of Georgia, which, with its not counterweight to its neighbour to the north, even 4 million inhabitants, is a tiny country

SWP Comment 13 March 2018

2 compared to China. There is also an imbal- for wine from Georgia, after Russia – al- ance in the range of traded goods. Whilst though the total volume of bottles sold China sells a range of goods to Georgia, to Russia is still about six times greater. the latter’s exports to China are not very The agreement was negotiated relatively diversified. Ores, copper and copper prod- quickly. Its advocates see this as proof of ucts predominate alongside alcoholic Beijing’s interest in Georgia. However, scep- drinks, especially wine. In contrast to the tics – including many representatives of wide portfolio of exported goods from Georgia’s business – feel the hasty China, little diversification exists in Chi- agreement reflects the asymmetry between nese foreign direct investment (FDI) in the two economies and inadequately pro- Georgia. One company in particular, the tects Georgia’s own market against China’s Hualing Group, looms large – inter alia as economic might and its affordable prod- operator of a duty-free industrial zone in ucts. They have numerous unanswered Georgia’s . The Hualing Group’s in- questions, in particular how domestic vestments pushed China’s FDI to its peak production and the local workforce might of nearly US$218 million in 2014. How- profit from the agreement. One challenge ever, the dominance of a single investment for Georgia’s economy is the frequently low source carries with it a risk of fluctuation. competitiveness of local products. Despite Thus, in 2016 China’s direct investments positive dynamics, its industrial sector were only about US$26 million. In 2017, is neither well-developed nor productive. FDI increased again, though far below 2014 Georgia’s stumbling block, however, con- levels. tinues to be its agricultural sector. The national development strategy “Georgia 2020” concedes that the country’s export Free Trade with China from 2018 potential is generally low. For sceptics, This is the backdrop against which Geor- these conditions will make it challenging gia’s leadership judges its free-trade agree- to diversify the country’s exports and there- ment with China, which entered into effect fore difficult to make extensive use of the on 1 2018, to be a real success. The customs exemption on Georgia’s side. agreement is seen as paving the way for Furthermore, the growth of promising and further development of economic relations export-orientated sectors of the economy and Georgia’s future as a hub between East often founders due to a lack of qualified and West. Import duties have been removed labour in the country. on both sides for over 90 percent of export categories. The government in Tbilisi assumes that Georgia in particular will The Free-Trade Network as a profit from the agreement since most im- Competitive Advantage ports from China were already exempted The free-trade agreement with China com- from customs duties before the agreement, pletes a whole series of comparable agree- a sign of the liberalisation of Georgia’s ments concluded by Tbilisi. Georgia also economy. A feasibility study carried out in has free-trade agreements with the CIS the run-up to the negotiations came to a countries , , , Ka- similar conclusion. For instance, the agree- zakhstan, Kirgizstan, and Turk- ment stipulates that China will remove menistan; its neighbours , Azer- customs duties from alcoholic drinks, in- baijan and ; the EFTA states Switzer- cluding wine. Previously these were as high land, , and ; as 20 percent for Georgian wines. Tbilisi and, via the Deep and Comprehensive Free therefore expects this export hit to further Trade Area (DCFTA), the EU member states. establish itself on the Chinese market. It also enjoys preferential trade rules within China is already the second-biggest market its relations with the USA, and

SWP Comment 13 March 2018

3 ; negotiations for a free-trade agree- Rail Traffic: Baku–Tbilisi–Kars ment with are planned. Although the Baku–Tbilisi–Kars rail link This network of customs-exempt trade was conceived, and work begun, long has enabled Georgia to grow its own mar- before BRI, it is now seen in Georgia as a ket exponentially, according to Georgian central component of the southern Eura- government officials. They point out that, sian route. After a decade of construction with existing free-trade agreements alone, and several delays, the physical infrastruc- the country can offer Chinese companies ture has been completed. On 30 October access to a market of more than 800 million 2017, the line was inaugurated in Baku by people. This, they believe, is one of its fun- the heads of state or government of Azer- damental advantages as a business location baijan, Georgia, Turkey, and in the competition not only for transit Uzbekistan. Once the railroad has become flows from East to West but also for attract- fully operational, it is expected to be able to ing Chinese companies to transfer produc- carry up to 17 million tonnes of freight and tion to Georgia. However, a precondition three million passengers annually. Current- for using Georgia as an export platform for ly, its capacity is still substantially below the EU market is that it fulfils or imple- those levels, at around five million tonnes ments the DCFTA requirements on rules of freight and one million passengers. The of origin as well as product-safety, hygiene first test run was carried out as long ago as and social standards. To date, Chinese in- 2015 from Lianyungang, a town vestment focuses mostly on non-tradable in northeast China, via Kazakhstan, the goods, and investment in Georgia’s export- to and Georgia to orientated sectors is extremely low, accord- Turkey – with the last leg again by ship ing to two studies made in 2017 by the from the Georgian port of , rather than Georgian Foundation for Strategic and In- by train. The journey time of 15 days be- ternational Studies. came the benchmark for those involved; in Georgia this figure was also used to herald its arrival as a competitor to the northern Expanding Infrastructure routes via Russia. Alongside its free-trade extension, the Geor- Despite the importance accorded to the gian government is also making efforts to BTK route for the southern Eurasian cor- expand the country’s road, rail and sea ridor by the initiating countries, no Chi- traffic infrastructure. Its aim is to markedly nese, European or international investors increase the attractiveness of both Georgia’s participated in its financing. From early location and the route from China to Europe on, actors such as the , the through the southern Caucasus. or the European Currently, the southern route is still Bank for Reconstruction and Development overshadowed by the northern routes via favoured a connection that included Russia, which handle the large majority of Armenia. Due to the conflict over Nagorno- overland (rail) transit between China and Karabakh, however, this was not an option Europe. Two infrastructure projects in par- for Azerbaijan or Turkey – the two coun- ticular now aim to change that: the new, or tries’ borders with Armenia are closed. The rather modernised, Baku-Tbilisi-Kars (BTK) BTK railroad was therefore sponsored by rail link connecting the neighbouring coun- Turkey and Azerbaijan. The latter co-financed tries of Azerbaijan, Georgia and Turkey; the Georgian section of the link through and the mega project at Anaklia, a deep-sea two loans from the state energy company, port on Georgia’s Black Sea Coast, estimat- totalling approximately US$775 million. It ed to cost US$2.5 bn. is likely that the government in Baku also secured itself some control over the terms of use for the Georgian section. It has al-

SWP Comment 13 March 2018

4 ready announced that Armenia would only particularly true for projects not financed be allowed to use the BTK to transport its by the state and therefore less closely regu- own freight if progress was made in the Na- lated. Georgian financial analysts argue gorno-Karabakh conflict. that Chinese companies draw on Chinese employees not least because of the shortage of skilled labour in Georgia. However, the Sea Traffic: Anaklia Deep-Sea Port wider public tends to be critical of growing Georgia plans to use the deep-sea port at labour migration from China; fears of for- Anaklia to decisively strengthen the mari- eign domination increasingly play a role in time component of this southern route. Georgia’s social discourse. The two Georgian Black Sea ports which Although the Georgian-American bid currently handle most of the traffic are Poti was awarded the contract for Anaklia, Chi- and , further south. Their shortcom- nese commitment was welcomed from the ing is insufficient depth for container ships outset to position the project within the BRI of the Panamax class. Freight coming from context. Since early 2018, the Chinese com- or going to Georgia therefore has to be trans- pany Zhenhua Heavy Industries Co. (ZPMC) ferred to other ships in Istanbul or Constanta has been involved in the project, providing (), leading to delays. The deep-sea US$50 bn. It is also expected to find further port at Anaklia is meant to remedy this. source of investments for Anaklia in China. Anaklia is viewed as a -in-a-century project – “a new Georgia is being born”, ac- cording to Prime Minister Giorgi Kvirikash- Challenges beyond the Physical vili. Its construction in several phases is Infrastructure projected to take the next few decades. The Despite its optimism regarding opportuni- first operational phase is expected to start ties for Chinese-Georgian cooperation, the in 2020 with a capacity of 900,000 TEU leadership in Tbilisi is not solely banking (standard containers) per year – more than on bilateral relations with Beijing. It is also half of what the port at Poti can currently making efforts to expand regional coopera- process. tion, for instance as part of the BTK. Its rela- China was initially not involved in this tions with Azerbaijan and Turkey are al- mega project, whose first phase of con- ready close. Georgia cooperates with these struction began in December 2017. A Geor- two countries mainly economically, but gian-Chinese consortium had submitted a increasingly also in security and military bid to the government for building the matters. Recently, there have been attempts deep-sea port, but the contract was ulti- to resuscitate the GUAM Organisation for mately awarded to a Georgian-American Democracy and Economic Development, joint venture, to the surprise of many. The whose members are Georgia, Ukraine, Azer- leadership in Tbilisi sees this choice not baijan and Moldova. Last year, the organisa- least as a confirmation of the country’s tion’s first high-level meeting since 2008 Euro-Atlantic orientation and shared values was held under a Georgian presidency. It with the West. As well as offering better agreed to strengthen the economic aspects terms, the Georgian-American concept dis- of cooperation. Georgia is also working with tinguished itself by planning to employ as Ukraine, Azerbaijan, Kazakhstan and Tur- much Georgian labour as possible. This key within the framework of the Trans-Cas- choice also reflects the scepticism of parts pian International Transport Route (TITR). of Georgian society towards increasing This multilateral approach makes sense. Chinese commitments in the country. Many Transport experts believe that the southern specialists and workers on infrastructure Eurasian route suffers from a competitive projects conducted by Chinese companies disadvantage because it crosses so many so far have come from China. This has been countries. Another test run, also in 2015,

SWP Comment 13 March 2018

5 from in western China to the efforts would have to be reciprocated and Georgian Black-Sea port of Poti only took also met with the corresponding political nine days, but by all accounts almost a willingness by the other countries along third of that time was lost to administrative the route. hurdles. To make the southern corridor truly competitive, substantial adjustments will be required in terms of prices/fees, Route Competition – customs, operation, and work processes – Even within Georgia? for instance when changing means of trans- The inclusiveness of the Belt and Road port to cross the Caspian and Black Sea, in Initiative is often cited as one of its central itself a weakness of that route compared characteristics. There are no fixed routes, to the entirely overland routes via Russia. only sketched-out corridors. On a much Regulations in the countries involved must smaller scale, Georgia has a similarly web- also be harmonised, which requires close like structure. Improvements to the sea cooperation of all stakeholders along the route via the Black Sea, the rail link to- entire transport chain. Such is the conclu- wards Turkey and the road network are sion of a study commissioned by the Inter- meant to help the country benefit as much national Union of Railways, published in as possible from the flow of goods between October 2017. China and Europe. However, analysts and Georgia has already successfully imple- those involved in expanding the transit mented several reforms, for instance by route raise the question of whether the introducing integrated border manage- planned capacities will really be fully uti- ment and making customs clearance more lised. The operator of the port at Poti, no efficient. However, in Georgia as well “soft” doubt inter alia with an eye on future com- infrastructure could still be improved. Its petition from Anaklia, has announced an officials rightly assert that the country expansion of that port as well. A 2015 scores well in international governance World Bank report on Georgia’s transport and business rankings. However, where the and logistics strategy did acknowledge that preconditions for creating a transport hub the existing Georgian Black-Sea ports are are concerned, individual indicators can operationally limited, but also stated that give a more nuanced picture. The latest their capacities corresponded to both cur- Enabling Trade Index (2016), published by rent demand and the projected demand for the , ranks Georgia the next few years. Moreover, the comple- 41st and thus the best in Eurasia. However, tion of the BTK rail link has also connected it slides further down the table in sub- Turkey’s Mediterranean and Black-Sea ports indices such as availability and quality of to the southern Eurasian route via Georgia. transport infrastructure, and availability These might also compete with Anaklia. In and quality of transport services (76th and conversation, local and international ex- 98th out of 136). In the Doing Business perts point out that, at least for the moment, Ranking 2018 Georgia made the global top the growth rates on which planning for ten with an impressive ninth place, but in Anaklia was based have not been realised. the Trading across Borders category it did On this point, the above-mentioned In- less well, coming 62nd. Meanwhile, in the ternational Union of Railways study stated World Bank’s latest Logistics Performance that overland transport by rail between Index (2016), Georgia only reaches 130th Asia and Europe was growing quickly and out of 160 – which puts it mid-table among would continue to grow. Nonetheless, its comparable Eurasian countries. Given the share of total trade is expected to remain interdependencies in the transit sector, uni- small compared to sea freight. Experts lateral Georgian efforts to improve soft infra- calculate that rail freight is around three structure will not be enough, however. The times quicker than the sea route, but also

SWP Comment 13 March 2018

6 three to three-and-a-half times more expen- na is eyeing Georgia’s ports in particular sive. It is therefore best suited, they say, to can be seen not just in Anaklia but Poti as high-cost goods where quick availability is well: in 2017, CEFC China Energy acquired a priority and additional costs are less im- 75 percent of the tax-exempt industrial portant. Moreover, they say, the greater zone there. share of the goods will still travel on the northern routes via Russia. According to projections for 2027, only three percent Conclusion and Outlook of the Eurasian rail traffic will go on the China’s Belt and Road Initiative has hit a southern routes, meaning both the line chord with the Georgian government. It via Georgia and those via Central Asia, is compatible with the government’s own and Turkey which circumvent Georgia. attempts to establish Georgia as a transport Analyses by the ISET Policy Institute in hub and to capitalise on its geographical Tbilisi reveal that freight transport on position between Europe and Asia. To make Georgia’s railways has been declining in the country attractive as a regional and recent years, dropping from 22 or 23 mil- inter-regional hub, Tbilisi is counting in lion tonnes in 2007-2008 to under 12 mil- particular on a network of free-trade agree- lion tonnes in 2016. The analyses found ments as well as the expansion and up- a reduction particularly in transit, even grade of its infrastructure. The fact that, in though a large share of it remained on the 2017, Georgia was one of the first countries southern route and merely moved to roads. ever to receive a credit from the Beijing- Some freight, however, also migrated to the initiated Asian Infrastructure Investment northern routes. Figures from the Georgian Bank (whose founding members include Finance Ministry and the national statistics Georgia) is seen as proof, along with the agency similarly show that freight has free-trade agreement, of Georgia’s signifi- declined overall in recent years. cance for the Chinese. Experts in Georgia largely welcome the As a trade hub, Georgia wants to profit government’s initiative to turn the country from more than just transit. It also intends into a transport hub. However, some ques- to further boost its domestic economy. tion whether Georgia is not better suited to When the first building phase of the deep- being a hub for regional trade between the sea port at Anaklia was launched in Decem- states of the southern Caucasus and Central ber 2017, Prime Minister Kvirikashvili said Asia than a hub for international trade be- the project would turn Georgia into a tween China and Europe. Many agree that “logistics and industrial development hub”. Georgia will have to acquire noticeably As an export platform, Georgia wants to more trade to realise its potential as a trans- attract foreign companies that will relocate port junction, and not only trade from their production or processing facilities so China or from East to West, but also in the as to benefit from the DCFTA with the Euro- opposite direction. Having the physical pean Union or the free-trade agreement infrastructure is a necessary but not suffi- with China for goods “made in Georgia”. cient condition for this. Whether these plans will be realised re- To increase transit volumes, Georgia is mains to be seen. Georgia certainly requires also gambling on geopolitics. Russia’s on- further measures to harmonise with Euro- going embargo on certain European and pean standards and regulations so as to Ukrainian food stuffs, as well as the con- profit comprehensively from the DCFTA. straints imposed on Ukrainian goods It will also need to make greater efforts to transit via Russia to China, could benefit train skilled labour so as to strengthen the the southern route. After all, China is an export-orientated sectors of its economy. increasingly important buyer of Ukrainian Not least of all, Georgia’s very active agricultural products. And the fact that Chi- integration into the Belt and Road context

SWP Comment 13 March 2018

7 shows the independent-mindedness of its foreign policy. While that policy continues to be primarily orientated towards the West, it is increasingly open towards the East. How far Georgia’s agency (both finan- cial and political) will go given the huge asymmetry between China’s economy and its own is an open question. So far, the Georgian government has emphasised the economic importance of the new Silk Road and its associated Chinese commitments in the region. Georgia’s geopolitical consider- ations mainly concern Russia – whether they be opportunities for fencing in its

© Stiftung Wissenschaft und neighbour to the North by increasing Chi- Politik, 2018 nese economic interests in Georgia, or All rights positioning the southern Eurasian route This Comment reflects as an alternative to the northern routes the author’s views. dominated by Moscow. The online version of Tbilisi stresses that its relations with the this publication contains West and China complement each other. functioning links to other SWP texts and other relevant In several West European capitals, however, sources. there are growing doubts as to whether the

SWP Comments are subject Belt and Road Initiative as promulgated to internal peer review, fact- by China will be equally profitable for all checking and copy-editing. sides. Instead, suspicions are that the Initia- For further information on our quality control pro- tive is a Chinese geostrategic project. For cedures, please visit the SWP Georgia, this means that the extent to website: https://www.swp- berlin.org/en/about-swp/ which its two foreign-policy orientations quality-management-for-swp- can be reconciled will only be proved in publications/ practice. SWP Stiftung Wissenschaft und Politik German Institute for International and Security Affairs

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Translation by Tom Genrich

(English version of SWP-Aktuell 8/2018)

SWP Comment 13 March 2018

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