Georgia has attracted European attention chiefly as a transit route for energy supplies from the Caspian Sea basin but the relationship is slowly changing – write Damian Wnukowski and Konrad Zasztowt

The European Union’s signature of association agreements with the three of Eastern Partnership states – Georgia, Moldova and Ukraine – in June will become a milestone in their rapprochement with the EU. The EU should focus on cooperation with the most ambitious, pro-reform and pro-European governments.

One of the leaders in terms of successful reforms is Georgia. The implementation of a deep and comprehensive free trade area, a crucial part of the association agreement, may create attractive conditions for European exports and investments in Georgia. For its part, Georgia needs to enhance its economic cooperation with the union in order to strengthen its fragile economy. In the context of the Ukraine’s crisis, economic stabilisation of Georgia and Moldova may create hope for better future in other Eastern Partnership states.

The union has been deepening economic relations with Georgia since the Rose Revolution of 2003 and EU enlargement to the East a decade ago. Within the framework of the Eastern Partnership both partners started negotiations on an association agreement in 2010, then on the DCFTA in 2012, concluding in July 2013. At the Eastern Partnership summit in Vilnius in 2013, EU leaders initialled the deal with Georgia.

The goal of the DCFTA is to upgrade EU–Georgia economic ties by facilitating trade and investment. It covers a wide range of issues, such as the elimination of custom duties on nearly all goods and adopting EU standards regarding such things as intellectual property rights and consumer protection. It also reduces non-tariff barriers including technical or sanitary and phytosanitary standards, which could bring significant benefits to Georgian exporters. Overall as a case study for the European Commission anticipates, the DCFTA could increase Georgia’s exports to the EU by 12 per cent and imports by 7.5 per cent – as well as propel Georgia’s gross domestic product by more than 4 per cent, or €290m within a decade.

Currently, the EU is the main trading partner for Georgia and accounts for 26 per cent of the country’s overall goods and services exchanged in 2012. In that year, Georgia exported to Europe goods worth €600m – 5 per cent less than a year earlier – and total imports amounted to €2.1bn. This resulted in a trade deficit of €1.5bn or 12 per cent of Georgia’s GDP. Georgia’s main export goods to the EU are mineral products, chemicals, metals and food. From the Brussels perspective, the country is perceived as a minor trade partner. Its share of total EU trade is about 0.1 per cent. Yet, Georgia has attracted EU attention chiefly as a transit route for energy supplies from the Caspian Sea basin, as reflected in the DCFTA’s energy security chapter. This includes the Southern Gas Corridor, which will link Azerbaijan’s gas fields with Europe’s energy system. Moreover, the reforms implemented in Georgia in the last decade along with DCFTA provisions make it a prospective EU partner in terms of investment.

The economic system built under the rule of the United National Movement party and presidency of Mikheil Saakashvili – from 2004 to 2013 – was often dubbed ‘neoliberal’. Georgia became one of the world leaders in terms of simplicity of registration of new enterprises and a country with a very low level of perceived corruption. It contributed to the country’s impressive 8th position in the World Bank’s ‘Doing Business 2014’ ranking.

However, critics of Georgia’s economic model point to the fact that some negative phenomena have continued such as close connections between political and business elites. Entrepreneurs were often forced to establish informal contacts with officials. This led in fact to corruption at a high level. Therefore, Georgia’s system was often described by its critics as ‘authoritarian liberalism’.

However, Georgia, in fulfilling EU requirements has to implement regulations that change the current system – such as introducing rules on fair competition. The further implementation of the DCFTA, now under the Georgian Dream ruling coalition may increase the transparency of the state and exclude oligarchic-type monopolies. Obviously EU financial and expert support for further reforms as well as monitoring, are crucial.

The DCFTA could give an impetus for EU–Georgian economic ties by prompting companies to search for prospective niches in both markets. For European exporters, opportunities may emerge in such areas as machines agricultural, equipment for processing and food storage, chemical products or pharmaceuticals. Moreover, transport vessels, electrical and home appliances and furniture may successfully compete in the Georgian market.

Furthermore, as the government has plans to improve infrastructure, projects involving construction and the modernisation of roads, airports, railways and hotels this may create business opportunities for construction firms, building materials exporters, engineering service firms and others. Additionally, as more and more people from European countries – especially Central Europe – are interested in visiting Georgia, a land with ancient monuments and mild Mediterranean climate, tourism cooperation should be enhanced.

European companies may also be interested in investing in Georgia which main assets are pro-investment climate, relatively low labour costs, favourable location as a logistic hub and easy access to the markets in the Middle East and Central Asia. Conversely, among its drawbacks are its inefficient judicial system, insufficient IP protection and cultural and linguistic differences.

Closer EU–Georgia cooperation would be beneficial to both parties. It could contribute to speeding-up the modernisation of the Georgian economy, the adoption of high-level European standards and improving citizens’ living conditions. It would also contribute to the stabilisation of the Caucasus region, which takes on particularly serious meaning given the ongoing crisis in Ukraine.

Damian Wnukowski and Konrad Zasztowt are analysts at the Polish Institute of International Affairs think-tank