Pacific Money

China and Georgia’s Economic Relations: Diversity and Contrasts

Georgia has adopted Western models of economics and politics, but its trade has benefited from looking East.

China is on a global economic quest for foreign direct investment (FDI) and business opportunities. It is a quest in large part driven by the need for commodities. But other industries benefit from the opportunities created when Chinese businesses invest and trade. Georgia offers an interesting example. A seldom analyzed subtext of its relationship with China is the fact that Georgia is both an emerging economy and a former Soviet republic that, rather than falling prey to the forces of political and economic recidivism that have plagued so many of its peers, has chosen to root itself firmly in free market economics and democracy.

With a population of just under 4.5 million, Georgia is small in comparison to the other states of the former Soviet Union. But with a GDP of USD26.6 billion (2012 figures from the IMF, on a purchasing power parity basis) and real GDP growth of 7% for 2011 (and 6% for 2012 projected), it boasts an economy considerably more robust than those of larger former Soviet states and fellow “colored revolution” countries like Ukraine. It’s an economy that has proven its resilience, coming back from a 3.8% contraction in 2009 due largely to the political and economic upheaval caused by the Russo-Georgian War of August 2008, better known as “The Five Day War.”  An instrumental figure in Georgia’s improving, if at times varied, fortunes is current President Mikheil Saakashvili, a largely Western-leaning and U.S.-educated leader who has been a staunch ally of the U.S., and a proponent of a free market economy for his country. At times both an enigmatic and controversial leader, Saakashvili and Russian President Vladimir Putin have been at loggerheads since the beginning of Saakashvili’s presidency. Tensions between the countries remain high, with the close U.S.-Georgian relationship still drawing sharp anti-U.S. rhetoric from Russia.

Yet despite external pressures and internal political changes, Georgia appears determined to forge ahead with its commitment to free markets and democracy. Trade and foreign investment are a key element, and China an increasingly important partner. China and Georgia established diplomatic relations in 1992, when trade between the two nations was a paltry USD3.7 million. By 2011, that figure had risen to USD550 million. Recently China announced that it would invest as much as USD1.7 billion in Georgia over the next five years. While FDI from China into Georgia is largely focused on mining (gold, copper, marble) as well as timber cutting and processing, Georgia has ensured that money goes to other industries as well.

Take the example of the Sichuan Electric Power Corp China (SEPC). One of the first large Chinese companies to establish a presence in Georgia, SEPC built the Khadori Hydro Power Plant, which has a capacity of 24,000 kilowatts and 120 million kWHs (annually). With an investment of USD34 million, the firm is 93% owned by SEPC, China, and 7% by Peri, a Georgian company. It’s a significant employer of Georgians. China Xinjiang Hualing Group is the largest Chinese investor in Georgian mining and timber production, employing 1,600 local workers. Xinjiang Hauling Group will also build a trade center and an Olympic Village for the 2015 European Youth Olympic Games, investing at least USD1.5 billion over the next 5 to 6 years. Meanwhile, Georgia has been increasing its wine exports to China, with volumes rising from 180,000 liters in 2008 to 580,000 liters by 2011.

Trade between Georgia and China has had social and cultural implications for Georgia, which faces a small but proportionately significant influx of new immigrants, predominantly from China, India and Africa, drawn by employment opportunities. A relatively homogenized country, Georgia is now seeing a shift in population demographics as a direct result of its openness to trade.  The migration offers Georgia and China the opportunity to exchange on other, perhaps deeper levels.

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Georgia-China trade cooperation is a study in contrasts. Georgia has adopted democracy and free markets, and has economically outperformed its neighbors, even in the face of the existential threat that is Putin’s Russia. Yet while emulating Western models, Georgia is reaping the benefits of looking east, trading with China, diversifying its economic options, and reducing the dominance of Russia.