Tag: annexation

Risks of Russian Business Ownership in Georgia

Posted on November 27, 2023 | Policy Brief

Image of Tbilisi at night representing risks of Russian business ownership in Georgia

This policy brief addresses risks tied to Russian business ownership in Georgia. The concentration of this ownership in critical sectors such as electricity and communications makes Georgia vulnerable to risks of political influence, corruption, economic manipulation, espionage, sabotage, and sanctions evasion. To minimize these risks, it is recommended to establish a Foreign Direct Investment (FDI) screening mechanism for Russia-originating investments, acknowledge the risks in national security documents, and implement a critical infrastructure reform.

Russia exerts substantial influence over Georgia. First and foremost, Russia has annexed 20 percent of Georgia’s internationally recognized territories of Abkhazia and South Ossetia. Further, it employs a variety of hybrid methods to disrupt the Georgian society including disinformation, support for pro-Russian parties and media, trade restrictions, transportation blockades, sabotage incidents, and countless more. These tactics aim to hinder Georgia’s development, weaken the country’s statehood, and negatively affect pro-Western public sentiments (Seskuria, 2021 and Kavtaradze, 2023).

Factors that may also increase Georgia’s economic dependency on Russia concern trade relationships, remittances, increased economic activity driven by the most recent influx of Russian migrants, and private business ownership by Russian entities or citizens (Babych, 2023 and Transparency International Georgia, 2023). This policy brief assesses and systematizes the risks associated with Russian private business ownership in Georgia.

Sectoral Overview of Russian Business Ovnership

Russian business ownership is significant in Georgia. Recent research from the Institute for Development of Freedom of Information (IDFI) has addressed Russian capital accumulation across eight sectors of the Georgian economy: electricity, oil and gas, communications, banking, mining and mineral waters, construction, tourism, and transportation. Of the eight sectors considered by IDFI, Russian business ownership is most visible in Georgia’s electricity sector, followed by oil and natural gas, communications, and mining and mineral waters industries. In the remaining four sectors considered by IDFI, a low to non-existent level of influence was observed (IDFI, 2023).

Figure 1. Overview of Russian Ownership in the Georgian Economy as of June 2023.

Source: IDFI, 2023.

There are several reasons for concern regarding the concentration and distribution of Russian business ownership in the Georgian economy.

First, it is crucial to keep Russia’s history as a hostile state actor in mind. Foreign business ownership is not a threat in itself; However, it may pose a threat if businesses are under control or influence of a state that is hostile to the country in question (see Larson and Marchik, 2006). Business ownership has been a powerful tool for the Kremlin, allowing Russia to influence various countries and raising concerns that such type of foreign ownership might negatively affect national security of the host country (Conley et al., 2016). Similar concerns have become imperative amidst Russia’s full-scale war in Ukraine (as, for instance, reflected in Guidance of the European Commission to member states concerning Russian foreign acquisitions).

Further, Russian business ownership in Georgia is particularly threatening due to the ownership concentration within sectors of critical significance for the overall security and economic resilience of the country. While there is no definition of critical infrastructure or related sectors in Georgia, at least two sectors (energy and communications) correspond to critical sectors, according to international standards (see for instance the list of critical infrastructure sectors for the European Union, Germany, Canada and Australia). Such sectors are inherently susceptible to a range of internal and external threats (a description of threats related to critical infrastructure can be found here). Intentional disruptions to critical infrastructure operations might initiate a chain reaction and paralyze the supply of essential services. This can, in turn, trigger major threats to the social, economic, and ecological security and the defense capacity of a state.

Georgia’s Exposure to Risks

Identifying and assessing the specific dimensions of Georgia’s exposure to risks related to Russian business ownership provides a useful foundation for designing policy responses. This brief identifies six distinct threats in this regard.

Political Influence

Russia’s business and political interests are closely intertwined, making it challenging to differentiate their respective motives. This interconnectedness can act as a channel for exerting political influence in Georgia. Russians that have ownership stakes in Georgian industries (e.g. within electricity, communications, oil and gas, mining and mineral waters) have political ties with the Russian ruling elite facing Western sanctions, or are facing sanctions themselves. For instance, Mikhail Fridman, who owns up to 50 percent of the mineral water company IDS Borjomi, is sanctioned for supporting Russia’s war in Ukraine. Such interlacing raises concerns about indirect Russian influence in Georgia, potentially undermining Georgia’s Western aspirations.

Export of Corrupt Practices

The presence of notable Russian businesses in Georgia poses a significant threat in terms of it nurturing corrupt practices. Concerns include “revolving door” incidents (movement of upper-level public officials into high-level private-sector jobs, or vice versa), tax evasion, and exploitation of the public procurement system.  For instance, Transparency International Georgia (2023) identified a “revolving door” incident concerning the Russian company Inter RAO Georgia LLC, involved in electricity trading, and its regulator, the Georgian state-owned Electricity Market Operator JSC (ESCO). One day after Inter RAO Georgia LLC was registered, the director of ESCO took a managerial position within Inter RAO Georgia LLC. Furthermore, tax evasion inquiries involving Russian-owned companies have been documented in the region, particularly in Armenia, further highlighting corruption risks. We argue that such corrupt practices might harm the business environment and deter future international investments.

Economic Manipulation

A heavy concentration of foreign ownership in critical sectors like energy and telecommunications, also poses a risk of manipulation of economic instruments such as prices. The significant Russian ownership in Armenia’s gas distribution network exemplifies this threat. In fact, Russia utilized a price manipulation strategy for gas prices when Armenia declared its EU aspirations. Prices were then reduced after Armenia joined the Eurasian Economic Union (Terzyan, 2018).

Espionage

Russian-owned businesses within Georgia’s critical sectors also pose espionage risks, including economic and cyber espionage. Owners of such businesses may transfer sensitive information to Russian intelligence agencies, potentially undermining critical infrastructure operations. As an example, in 2022, a Swedish business owner in electronic trading and former Russian resident, was indicted with transferring secret economic information to Russia. Russian cyber-espionage is also known to be used for worldwide disinformation campaigns impacting public opinion and election results, compromising democratic processes.

Sabotage

The presence of Russian-owned businesses in Georgia raises the risk of sabotage and incapacitation of critical assets. Russia has a history of using sabotage to harm other countries, such as when they disrupted Georgia’s energy supply in 2006 and the recent Kakhovka Dam destruction in Ukraine (which had far-reaching consequences, incurring environmental damages, and posing a threat to nuclear plants). These incidents demonstrate the risk of cascading effects, potentially affecting power supply, businesses, and locations strategically important to Georgia’s security.

Sanctions and Sanction Evasion

Russian-owned businesses in Georgia face risks due to Western sanctions as they could be targeted by sanctions or used to evade them. Recent cases, like with IDS Borjomi (as previously outlined) and VTB Bank Georgia – companies affected by Western sanctions given their Russian connections – highlight Georgia’s economic vulnerability in this regard. Industries where these businesses operate play a significant role in Georgia’s economy and job market, and instabilities within such sectors could entail social and political concerns. There’s also a risk that these businesses could help Russia bypass sanctions and gain access to sensitive goods and technologies, going against Georgia’s support for international sanctions against Russia. It is crucial to prevent such sanctions-associated risks for the Georgian economy.

Assessing the Risks

To operationalize the above detailed risks, we conducted interviews with Georgian field experts within security, economics, and energy. The risk assessment highlights political influence through Russian ownership in Georgian businesses as the foremost concern, followed by risks of corruption, risks related to sanctions, espionage, economic manipulation, and sabotage. We asked the experts to assess the severity level for each identified risk and notably, all identified risks carry a high severity level.

Recommendations

Considering the concerns detailed in the previous sections, we argue that Russia poses a threat in the Georgian context. Given the scale and concentration of Russian ownership within critical sectors and infrastructure, a dedicated policy regime might be required to improve regulation and minimize the associated risks. Three recommendations could be efficient in this regard, as outlined below.

Study the Impact of Adopting a Foreign Direct Investment Screening Mechanism

To effectively address ownership-related threats, it’s essential to modify existing investment policies. One approach is to introduce a FDI screening mechanism with specific functionalities. Several jurisdictions implement mechanisms with similar features (see a recent report by UNCTAD for further details). Usually, such mechanisms target FDI’s that have security implications. A dedicated screening authority overviews investment that might be of concern for national security and after assessment, an investment might be approved or suspended. In Georgia, a key consideration for designing such tool includes whether it should selectively target investments from countries like Russia or apply to all incoming FDI. Additionally, there’s a choice between screening all investments or focusing on those concerning critical sectors and infrastructure. Evaluating the investment volume, possibly screening only FDI’s exceeding a predefined monetary value, is also a vital aspect to consider. However, it’s important to acknowledge that FDI screening mechanisms are costly. Therefore, this brief suggests a thorough cost and benefit analysis prior to implementing a FDI screening regime in Georgia.

Consider Russian Ownership-related Threats in the National Security Documents

Several national-level documents address security policy in Georgia, with the National Security Concept – outlining security directions – being a foundational one. Currently, these concepts do not specifically address Russian business ownership-related threats. When designing an FDI screening mechanism, however, acknowledging various risks related to Russian business ownership must be aligned with fundamental national security documents.

Foster the Adoption of a Critical Infrastructural Reform

To successfully implement a FDI screening mechanism unified, nationwide agreement on the legal foundations for identifying and safeguarding critical infrastructure is needed. The current concept for critical infrastructure reform in Georgia envisages a definition of critical infrastructure and an implementation of an FDI screening mechanism. We therefore recommend implementing this reform in the country.

Conclusion

This policy brief has identified six distinct risks related to Russian business ownership in several sectors of the Georgian economy, such as energy, communications, oil and natural gas, and mining and mineral waters. Even though Georgia does not have a unified definition of critical infrastructure, assets concentrated in these sectors are regarded as critical according to international standards. Considering Russia’s track record of hostility and bearing in mind threats related to foreign business ownership by malign states, this brief suggests regulating Russian business ownership in Georgia by introducing a FDI screening instrument. To operationalize this recommendation, it is further recommended to consider Russian business ownership-related threats in Georgia’s fundamental security documents and to foster critical infrastructural reform in the country.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Conflict, Minorities and Well-Being

Posted on June 17, 2018 | Policy Brief

20180618 Conflict, Minorities and Well-Being Image 01

We assess the effect of the Russo-Georgian conflict of 2008 and the Ukrainian-Russian conflict of 2014 on the well-being of minorities in Russia. Using the Russian Longitudinal Monitoring Survey (RLMS), we find that the well-being of Georgians in Russia suffered negatively from the 2008 Russo-Georgian conflict. In comparison, we find no general effect of the Ukrainian-Russian conflict of 2014 on the Ukrainian nationals’ happiness. However, the life satisfaction of Ukrainians who reside in the southern regions of Russia in close proximity to Ukraine is negatively affected. We also show that the negative effect of conflict is short-lived with no long-term legacy. Additionally, we analyze the spillover effect of conflict on other minorities in Russia. We find that while the well-being of non-Slavic and migrant minorities who have recently moved to Russia is negatively affected, there is no effect on local minorities who have been living in Russia for at least ten years.

Militarized conflict affects a myriad of socioeconomic outcomes, such as the level of GDP (Bove et al. 2016), household welfare (Justino 2011), generalized trust and trust in central institutions (Grosjean 2014), social capital (Guriev and Melnikov 2016), and election turnout (Coupe and Obrizan 2016). Importantly, conflict has also been found to directly affect individual well-being (Frey 2012, Welsch 2008).

However, previous research studying individual well-being in transition countries largely abstracts from heightened political instability and conflict proneness, while this has been particularly pertinent in transition countries. Examples of transition countries facing various types of conflicts are abound, such as Yugoslavia, Ukraine, Tajikistan, Russia, Armenia, Azerbaijan, Moldova, and so on. Therefore, it is imperative to explore how conflict shapes well-being in transition countries.

In a new paper (Gokmen and Yakovlev, forthcoming), we add to our understanding of well-being in transition in relation to conflict. We focus on the effect of Russo-Georgian conflict of 2008 and the Ukrainian-Russian conflict of 2014 on the well-being of minorities in Russia. The results suggest that the well-being of Georgians in Russia suffered negatively from the 2008 Russo-Georgian conflict. However, we find no general effect of the Ukrainian-Russian conflict of 2014 on the Ukrainian nationals’ happiness, while the life satisfaction of Ukrainians who reside in the southern regions of Russia in close proximity to Ukraine is negatively affected. Additionally, we analyze the spillover effect of conflict on other minorities in Russia. We find that while the well-being of non-slavic and migrant minorities who have recently moved to Russia is negatively affected, there is no effect on local minorities who have been living in Russia for at least ten years.

Data and Results

We employ the Russian Longitudinal Monitoring Survey (RLMS) which contains data on small neighborhoods where respondents live. Starting from 1992, the RLMS provides nationally-representative annual surveys that cover more than 4000 households with 10000 to 22000 individual respondents. The RLMS surveys comprise a broad set of questions, including a variety of individual demographic characteristics, health status, and well-being. Our study utilizes rounds 9 through 24 of the RLMS from 2000 to 2015.

In this survey, we identify minorities with the question of “What nationality do you consider yourself?” Accordingly, anybody who answers this question with a non-Russian nationality is assigned to that minority group.

We employ three measures of well-being. Our main outcome variable is “life satisfaction.” The life satisfaction question is as follows: “To what extent are you satisfied with your life in general at the present time?”, and evaluated on a 1-5 scale from not at all satisfied to fully satisfied. Additionally, we use “job satisfaction” and “health evaluation” as outcomes of well-being.

Our results suggest that our primary indicator of well-being, life satisfaction, for Georgian nationals has gone down in the Russo-Georgian conflict year of 2008 compared to the Russian majority (see Figure 1). The magnitude of the drop in life satisfaction is about 39 percent of the mean life satisfaction. Our estimates for the other two well-being indicators, job satisfaction and health evaluation, also indicate a dip in the conflict year of 2008. Lastly, our estimates show that the negative impact of the conflict does not last long. Although there is a reduction in the well-being of Georgians both on impact in 2008 and in the immediate aftermath in 2009, the rest of the period until 2015 is no different from the pre-2008 period.

Figure 1. Life Satisfaction of Georgian Nationals in Russia


Source: Authors’ own construction based on RLMS data and diff-in-diff estimates.

Furthermore, when we investigate the effect of the Ukrainian-Russian conflict of 2014, we find no negative effect on the life satisfaction of Ukrainians. One explanation for why the happiness of Ukrainians in Russia does not seem to be negatively affected in 2014 is that the degree of integration of Ukrainians into the Russian society is much stronger than the degree of integration of Georgians. On the other hand, our heterogeneity analysis reveals that in the southern parts of Russia closer to the Ukrainian border, where there are more Ukrainians who have ties to Ukraine, Ukrainian nationals are differentially more negatively affected by the 2014 conflict. The differential reduction in the happiness of Ukrainians is about 19 percent of the mean life satisfaction.

Moreover, we also look into whether there is any spillover effects of the Russo-Georgian and the Ukrainian-Russian conflicts on the well-being of other minorities. We first carry out a simple exercise on non-Slavic minorities of Russia. We pick the sample of non-Slavic ex-USSR nationals that are similar to Georgians in their somatic characteristics, such as hair color and complexion. This group of people include the nationals of Azerbaijan, Kazakhstan, Uzbekistan, Kyrgyzstan, Turkmenistan and Tajikistan. We treat this group as “the countries with predominantly non-Slavic population” as their predominant populations are somatically different from the majority Russians, and thus, might either have been subject to discrimination or might have feared a minority backlash to themselves during the times of conflict. This conjecture finds some support below in Figure 2 in terms of violence against minorities. We observe in Figure 2 that hate crimes and murders based on nationality and race peak in 2008.

Our estimates also support the above hypothesis and propose that there is some negative effect of the 2008 conflict on non-slavic minorities’ happiness as well as their job satisfaction, whereas 2014 conflict has no effect.

Figure 2. Hate Murders in Russia over Time

Source: Sova Center

Next, we investigate the spillover effects of conflict on Migrant Minorities. Migrant minorities are minorities who have been living in their residents in Russia for less than 10 years. We conjecture that these minorities, as opposed to the minorities who have been in place for a long time, could be more susceptible to any internal or external conflict between Russia and some other minority group for fear that they themselves could also be affected. Whereas other types of longer-term resident minorities, which we call Local Minorities, are probably less vulnerable since they have had more time to establish their networks, job security, and most likely also have Russian citizenship. Our estimates back up the above conjecture and demonstrate that migrant minorities suffer negatively from the spillover effects of the 2008 conflict onto their well-being captured by any of the three measures, and not from the 2014 conflict, whereas there is no negative impact on local minorities.

Conclusion

In this paper, instead of focusing on the direct impact of conflict on happiness in war-torn areas, we contribute to the discussion on conflict and well-being by scrutinizing the well-being of people whose country of origin experiences conflict, but they themselves are not in the war zone. Additionally, we show that some other minority groups also suffer from such negative spillovers of conflict. Being aware of such negative indirect effects of conflict on well-being is essential for policy makers, politicians and researchers. Most policy analyses ignore such indirect costs of conflict, and this study highlights the bleak fact that the cost of conflict on well-being is probably larger than it has been previously estimated.

References

  • Bove, V.; L. Elia; and R. P. Smith, 2016. “On the heterogeneous consequences of civil war,” Oxford Economic Papers.
  • Coupe, T.; and M. Obrizan, 2016. “Violence and political outcomes in Ukraine: Evidence from Sloviansk and Kramatorsk”, Journal of Comparative Economics, 44, 201-212.
  • Frey, B. S., 2012. “Well-being and war”, International Review of Economics, 59, 363-375.
  • Gokmen, Gunes; and Evgeny Yakovlev, forthcoming. “War and Well-Being in Transition: Evidence from Two Natural Experiments”, Journal of Comparative Economics.
  • Grosjean, P., 2014. “Conflict and social and political preferences: Evidence from World War II and civil conflict in 35 European countries” Comparative Economic Studies, 56, 424-451.
  • Guriev, S.; and N. Melnikov, 2016. “War, inflation, and social capital,” American Economic Review: Papers & Proceedings, 106, 230-35.
  • Justino, P., 2011. “The impact of armed civil conflict on household welfare and policy,” IDS Working Papers.
  • Welsch, H., 2008. “The social costs of civil conflict: Evidence from surveys of happiness” Kyklos, 61, 320-340.

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.