02.12.22 Analytics

A boom in newcomers

Growth potential has left Russia for its neighbours

Oleg Khokhlov
When the war broke out, the IMF predicted that Russia’s deep recession would hamper economic growth for 2022 in nearby countries. But for many of its neighbours, the crisis stemming from the war and its accompanying sanctions has proved to be an opportunity. For one thing, these countries, especially those that do not have a customs border with Russia, have become the most natural channel to bypass the newly created barriers to direct trade between Russia and Western countries. However, the main benefit for several of these countries has been the flight of human capital from Russia, and the increased consumer spending that has accompanied this. In Georgia and Armenia, this double effect has created a situation reminiscent of an economic boom — their economies are experiencing double-digit growth this year. The citizens of these countries, however, are facing the attendant costs of this: rising prices for goods and services consumed by the middle class and, above all, housing. At the same time economists are debating how long-lasting these effects are likely to be. And, several countries face the prospect of becoming a haven for members of Russia's IT sector fleeing Putin's regime and the war, and the associated economic opportunities this brings with it.

Two Types of Capital Fleeing 

According to the IMF forecast, the Ukrainian economy will shrink by 35% in 2022; the Russian economy — by 3.4%. This is the cost of war. Shortly after the Russian invasion began, the Fund predicted that neighbouring countries would also suffer. This would especially be the case for countries that are not resource rich, as they would not be able to reap the benefits of increased raw materials prices to compensate for the harm to their economies. For example, the IMF forecast that Georgia's GDP growth would fall from 5.4% to 3%, and Armenia's GDP from 4.5% to 1.5%. "Rising fuel and food prices, shrinking remittances, increased volatility on global financial markets — this will increase current account deficits, lead to higher inflation, and slower economic growth," according to the IMF forecast. But the situation has played out much differently in reality.

If the Georgian authorities have assessed correctly, the country has taken in the most emigrants from Russia in 2022 — 100 thousand people. As a result, the population of Georgia has increased by 3% this year. Almost 50,000 Russians opened Georgian bank accounts; before the war, only 15,000 Russians had them. The funds deposited in these accounts increased by a factor of about 3, growing to $700 million. Almost ten thousand of those who had newly arrived opened businesses. This demonstrates a tenfold increase over the past year. However, most registered as Individual Entrepreneurs (IE). This status is often used by freelance IT professionals, who are not entrepreneurs in the strict sense of the word. But over 700 legal entities were registered as well. 

According to local Armenian migration authorities, Armenia received up to 40,000 people in the first nine months of this year. As a result, the country’s population has swelled by about 1.5%. The country's Economy Ministry has released figures showing that more than 2,700 Russians started businesses between February and August. Most of these received Individual Entrepreneur status. Every second business registration was in the field of IT.

High-paid IT specialists find it comparatively easy to relocate abroad. According to a study by Habr Careers, about 60% of specialists have not thought about and are not considering emigrating.. In the spring, 10% of respondents went to Georgia, 6% went to Armenia. Among those who left Russia in the autumn, 6% chose Georgia and 5% Armenia. 

According to Georgian President Salome Zurabishvili, "among those leaving Russia for Georgia are members of the middle classes, and young citizens who no longer see a place for themselves in their country in the current climate”. Data gathered in online surveys (Re: Russia covered these here) reveals that it is not just the most oppositionally minded people who are leaving, but also the most successful: the average age of those who emigrated between February and September is over 30, most have a higher education, and the proportion of this group that can afford to buy a car is seven times higher than the Russian average. 

In addition to this, Russians have brought more than just their human capital, they also brought money with them, a lot of it. The National Bank of Georgia estimated remittances from Russia over the first nine months at $1.1 billion. That is a fivefold increase year on year. By comparison, Georgia's entire GDP in 2021 was $18.7 billion. According to the Union of Banks of Armenia, net inflows from Russia were over $2 billion in the first nine months of 2022.  This was approximately four times higher than during the same period in 2021. Indeed, the entire GDP of Armenia in 2021 was $13.9 billion. 

Such a significant increase in remittances has affected the payments balance. In 2022, the sharp rise in commodities prices has caused the value of currencies in most developing countries to fall. The exceptions to this are exporting countries, including Russia, as well as some neighbouring countries: this year, the Georgian lari has increased in value by 20% against the dollar, the Armenian dram — 30%. 

In both Georgia and Armenia, the service sector makes up over 50% of GDP.. The influx of many Russian emigrants, who are (by local standards) financially well-off, has provided the service sector with impressive growth: in Georgia this grew by 15% (in monetary terms) and in Armenia it increased by 27%. 

At the same time, both Georgia and Armenia increased their exports to Russia. Between January and September, Georgia increased exports to Russia by 11% (total volume — $473 million) and Armenia — by at least 60% (over $1 billion). Transcaucasian economies are benefiting from Russia's trade embargo. In a major report about the impact of the war in Ukraine on the country's economy, Transparency International’s Georgia office wrote that the main contribution to this increase in exports was automobiles. Their exports to Russia have more than quadrupled. "Armenia does not violate sanctions, but nevertheless a logistical overhaul has been initiated. Russia is one of the key trade partners for Armenia," claims Sofia Donets, Chief Economist at Renaissance Capital for Russia and CIS.

Generally speaking, both countries will end 2022 leading in terms of economic growth, not only in comparison with the region, but globally. According to the IMF forecast, Georgia's GDP might grow by as much as 10%, while Armenia's growth might reach 11%. 

Why isn't everyone welcoming this growth? 

Paradoxically, the citizens of Georgia and Armenia do not seem to perceive the noticeable spike in economic growth as a success, or even as a positive thing. Quite the contrary, according to opinion polls.

A recent poll by the US-based International Republican Institute (IRI) showed that almost 70% of Armenian citizens believe that the war in Ukraine has worsened the economic situation in the country, rather than improved it. Only 9% think otherwise. The IRI survey in Georgia demonstrates similar results: only 13% of Georgian citizens think that the economic situation has improved this year. Only 1% noticed a significant improvement. On the other hand, 30% complained of a significant deterioration. 

Most Georgian citizens are dissatisfied with the lack of jobs and increase in prices. It is estimated that, in 2022, unemployment in Georgia was around 15.6%. This is indeed a high figure, but currently stands at 3.9% less than this time last year. A similar situation can be observed with regards to prices. In November, annual inflation was at 10.6% compared to 13.9% in 2021. And finally, the number of new arrivals have resulted in an additional serious problem for local residents: according to an assessment by real estate agents, the prices for apartments in new buildings in central Tbilisi has risen by 15% over the year, and in Yerevan by 20%, with rent prices almost doubling. 

Thus, the newcomers from Russia have created tension in the labour market, while also increasing prices for goods and services that are consumed by the local middle class, which is not as strong as the Russian middle class. Meanwhile, the positive effects of accelerating economic growth will take a long time to be redistributed across the entire economy. And, these benefits will not be distributed evenly among society. 

Economists and financiers are confident that the new wave of Russian emigration has done more good than harm. At the same time, they are not in agreement as to whether this effect will endure in the long-term. 

"Such economies, due to their size, do not absorb new people well, so it is unlikely that the Russians who are arriving will help the country in the long term," says Anton Tabakh, Managing Director of macroeconomic analysis and forecasting at Expert RA. He tends to attribute the double-digit economic growth that has been witnessed to the low base effect. 

Sofia Donets from Renaissance Capital holds a similar opinion, but she also sees great potential in certain sectors: "We see that the IT sector [in Armenia] is currently not that big, in terms of GDP percentage, but the state is helping arriving specialists and IT businesses, which may boost the country's economy. We will see strong double-digit growth in this sector." 

Transparency International Georgia finds the growing dependence on Russians and their money to be a serious problem for Georgia's economy, which was already heavily tied to  Russian markets and supplies. This dependence has not yet reached critical levels, when the breakdown of economic ties would lead to a deep crisis, the report notes. But it is impossible to predict how many of these new immigrants will stay in the country in the long term. 

Some have moved with their employers. IT companies in Armenia are exempt from corporate tax, and the income tax for employees is just 10%. This tax situation has made Armenia a popular choice for relocating teams from Russia. At the same time, a study by Habr Careers shows that, predictably, IT specialists prefer the EU. The best of the best are already there. Those who have failed may try their luck later, stopping to catch their breath and getting a residence permit. 

At the same time, the financial situation of many emigrants is still highly dependent on the state of the Russian economy and the ruble specifically. Neither’s prospects look entirely certain for 2023.

One way or another, Russian "human capital", investment in which the Russian government made a priority  throughout the 2010s, is moving to nearby countries, taking with it the potential for economic growth and a quality segment of consumer demand.