These economies benefited from Russia's isolation — but they now risk Western retaliation

Caucasus countries Georgia and Armenia, whose economies unexpectedly boomed successful the aftermath of the warfare successful Ukraine, are present facing the imaginable of Western retaliation pursuing a spike successful commercialized with Russia.

The 2 erstwhile Soviet states adjacent Russia's confederate borderline surged to double-digit maturation past twelvemonth arsenic an uptick successful Russian workers, wealthiness and commercialized supercharged their wider post-Covid recoveries.

Georgia's system grew 10.1% successful 2022, portion Armenia's jumped 12.6%, according to International Monetary Fund data. In 2023, their maturation is acceptable to dilatory to astir 4% and 5.5%, respectively, reflecting a wide moderation crossed the wider Caucasus and Central Asia region, the U.N. bureau said.

Still, analysts accidental the cardinal maturation drivers "haven't disappeared," and could enactment those countries nether the planetary spotlight.

"The crushed we haven't decelerated arsenic overmuch arsenic we could person is that we took vantage of Russia being sidelined by the remainder of the world," Mikheil Kukava, caput of economical and societal argumentation astatine Georgian deliberation vessel the Institute for Development of Freedom of Information, told CNBC via zoom.

Western leaders person raised alarm bells this twelvemonth that definite traders are utilizing countries specified arsenic Armenia, Georgia, Kazakhstan and Turkey to evade sanctions connected Russia.

In its latest economical outlook, the European Bank for Reconstruction and Development noted that specified countries were becoming alleged intermediated commercialized partners for the isolated state.

"Exports from the European Union, United Kingdom and United States to Central Asia and the Caucasus [have] accrued dramatically, hinting astatine the emergence of 'intermediated trade,' whereby goods are being exported to Central Asian economies and are past sold onwards to Russia," the EBRD said.

This year, Russia has emerged arsenic Georgia's second-largest trading spouse by imports and its third-largest trading spouse by exports, according to preliminary information from Georgia's National Statistics Office, Geostat. Through 2022, Russian imports into the state rose 79%, portion exports to Russia were up 7%.

Meantime, Russia is Armenia's largest trading partner successful presumption of some imports and exports. Kyrgyzstan, Tajikistan and Azerbaijan, arsenic good arsenic different countries successful the region, person besides recorded a surge successful commercialized with Russia implicit the past year, IMF information shows.

"Changing commercialized patterns successful the portion are an opportunity, but besides a risk," Subir Lall, the IMF's lawman manager of the Middle East and Central Asia, said during a briefing earlier this month.

Spokespersons for the Georgian and Armenian governments did not instantly respond to CNBC's petition for remark connected the uptick, nor did they supply a breakdown of the circumstantial goods traded with Russia.

However, Geostat information showed that cars, petrol and unspecified "other commodities" accounted for the immense bulk of Georgia's commercialized connected a wide basis. Of peculiar note, the fig of vehicles, craft and vessels exported to Russia quadrupled successful 2022 and is presently astir treble 2021 levels.

"I can't retrieve a clip erstwhile Russia was Georgia's starring trading spouse — some successful import and export. Some items saw a 1,000% summation oregon 500% increase. That's suspicious, right?" Kukava said.

"Even though there's thing amerciable present — they're not sanctioned goods — we fishy that it's dual usage items, similar washing machines, that tin beryllium enactment to truthful galore uses," helium added, who noted that the parts from specified items could beryllium repurposed successful subject and microchip products.

The burgeoning commercialized flows person prompted calls from the European Union and allied nations to either get specified countries connected committee with sanctions, oregon slap those countries themselves with secondary sanctions.

A spokesperson for the European Commission, the EU's enforcement arm, told CNBC that it is presently moving to "spot the redirection of commercialized flows from definite 3rd countries acting arsenic imaginable gateways to Russia."

That follows comments earlier this month from European Commission President Ursula von der Leyen, who said the group's 11th bundle of sanctions against Russia would absorption connected "cracking down connected circumvention" successful coordination with Group of Seven nations.

The EBRD present estimates that specified "intermediated trade" accounts for astir 4-6% of annualized gross home merchandise successful Armenia and Kyrgyzstan. That, successful turn, is boosting the countries' "burgeoning logistics industries," and underpinning the appreciation of section currencies, it said.

However, Armenia's cardinal slope Deputy Governor Armen Nurbekyan insisted that authorities are observing the country's commercialized patterns connected a play ground to guarantee businesses are not falling foul of the embargoes.

"For Armenia, being compliant with the sanctions is an implicit priority," Nurbekyan told CNBC. "We are successful a portion which is precise turbulent, truthful we cognize what it means to beryllium astir countries which are nether sanctions, and I deliberation we person been rather palmy successful steering our system successful a mode that we enactment distant from the problematic cases."

Nurbekyan noted that commercialized increases had been seen "across the board" — including successful nutrient processing, cultivation goods, and cars — arsenic home businesses person taken vantage of accrued request pursuing the exodus of Western businesses from Russia.

He acknowledged that the percent summation successful request for precocious exertion parts, successful particular, had been "quite big," but said that was due to the fact that levels had started from a debased base.

"No 1 is truthful naive to presume that fixed the size of the sanctions, fixed the size of the flows, that anybody tin debar immoderate risks. That is ne'er the case. But our modus operandi is ever that ... we guarantee that compliance successful our fiscal institutions and much mostly is of a higher modular [to different countries]. We not going to beryllium opportunistic, successful short," helium added.

Western allies person not yet specified what their adjacent circular of sanctions volition look like, nor erstwhile they mightiness travel into effect. However, immoderate analysts accidental that the imaginable of them could propulsion affected countries to rethink their allegiances.

"We request to wean ourselves disconnected this dependence connected the Russian economy," Kukava said.

"This is simply a pariah state and economical dependence connected them means we won't beryllium capable to commercialized with the EU and the U.S. and the Western countries. The maturation needs to travel from commercialized with them, alternatively than with Russia," helium added.

That's particularly existent for nations that aspire to EU and NATO membership.

Georgia applied for EU membership in March 2022, 1 week aft Russia's full-blown penetration of Ukraine, and is moving toward campaigner status. The country, alongside Ukraine, has declared its aspirations to NATO membership.

Georgian nationalist enactment for EU rank has resurged implicit caller months, with four-fifths (81%) of the colonisation presently successful favour joining the bloc, according to a recent poll from U.S.-founded non-profit the National Democratic Institute. Three-quarters (73%) proceed to enactment NATO membership.

Armenia, meanwhile, has ne'er submitted an exertion for either membership, and different Central Asian countries would not beryllium eligible to articulation the EU.

"We are adding substance to the occurrence by intensifying this commercialized narration with Russia. The geopolitical discourse with which we [Georgia] are present thought of is with different Central Asia countries. But they don't person EU rank arsenic a people — we do," Kukava said.