Trade and economic cooperation between the EU and post-Soviet states in the context of the Eastern Partnership program: the case of Azerbaijan and Georgia

Allahverdiyev Emil' Student of the Department of Integration Studies, Moscow State Institute of International Relations (University) of the Ministry of Foreign Affairs of the Russian Federation 76 Vernadsky Avenue, Moscow, 119454, Russia emil.av99@gmail.com

Mustafayev Tofig Student of the Department of Integration Studies, Moscow State Institute of International Relations (University) of the Ministry of Foreign Affairs of the Russian Federation 76 Vernadsky Avenue, Moscow, 119454, Russia tofiqmustafayev47@gmail.com

Introduction

The Eastern Partnership Initiative was established in 2009 within the framework of the European Neighborhood Policy and united six countries of Eastern Europe and the South Caucasus: Azerbaijan, Armenia, Belarus, Georgia, Moldova and Ukraine.  In June 2021, Belarus, having taken a unilateral decision, suspended membership in the program due to the restrictive measures imposed by the EU on the republic and the freezing of the implementation of European projects. Despite this, the EU continues to interact with the country's civil society.

The initial overriding goal of the Eastern Partnership program was political and economic integration with the European Union of neighboring countries, as well as the implementation of reforms in the region that contribute to accelerating the processes of political and economic rapprochement, and conflict resolution. Poland and Sweden became the initiators of the project.

The meeting, during which a joint declaration on the program was adopted, was held in Prague on May 7, 2009 ^[1]. The Prague Declaration was based on the so-called "conditionality" principle, which implied the possibility of deep integration with the EU, provided that the requirements put forward by the union and the partner countries of the program were met.

The tasks facing the eastern dimension of the European Neighborhood Policy include the following:

· strengthening energy security; 

· promotion of sectoral reforms and environmental protection; 

· encouraging contacts between people; 

· support for economic and social development; 

· additional financing of projects to reduce socio-economic imbalances and increase stability in the participating countries.

The initiative covers both the EU's bilateral relations with partner countries and the multilateral format. The bilateral one involves negotiations between the partner country and the EU on tasks in the areas of political association and economic integration with the EU (the Association Agreement and the Deep and Comprehensive Free Trade Area), mobility (visa liberalization), sectoral cooperation (energy security, agricultural development, social policy, etc.).

The multilateral format complements the bilateral one through its mechanisms, namely, summits of heads of State, meetings of foreign ministers, meetings of experts. The multilateral format is also designed to promote stability and confidence-building in the region.

In 2019, when the Eastern Partnership celebrated its 10th anniversary, the European Council invited the European Commission and the High Representative of the European Union for Foreign Affairs and Security Policy to submit new long-term political goals of the Eastern Partnership program by the beginning of 2020 ^[2].

Based on the results of consultations initiated in 2019, five priorities were identified for the period after 2020.:

· creating a strong, sustainable and integrated economy;

· ensuring the creation of accountable (independent) institutions, strengthening the rule of law and security;

· achieving environmental and climate sustainability;

· support for digital transformation;

· Promoting the creation of fair and inclusive societies.

These goals were published by the European Commission on March 18, 2020 as part of the joint information document "Eastern Partnership Policy for the Period after 2020: Increasing Sustainability - An Eastern Partnership that benefits everyone" ^[3]. Then the presented goals were approved by the partner states at the next Eastern Partnership Summit, which was held in June 2020 in the format of a videoconference.

The EU plans to achieve the formation of a strong, sustainable and integrated economy in the partner countries by expanding trade between European integration and partner countries, creating new jobs, supporting small and medium-sized enterprises, etc.                                 

Costs and benefits received by Azerbaijan and Georgia from cooperation with both the EU in the framework of the Eastern Partnership and with the Russian Federation

Analyzing the activities of the Eastern Partnership program in the development of trade and economic relations between the EU and the post-Soviet states, it can be noted that since 2010 there has been a gradual progress in trade and economic relations between the Eastern Partnership states and the European Union. Prior to 2010, due to the global financial crisis, all six member States in economic relations with the EU had a sharp decline in exports and imports of goods. In general, it should be noted that the volume of trade between the participating countries and the European Union depends on a whole set of factors, primarily of economic origin: energy prices, the main export and import goods, the state of the economies of the participating countries, the economic situation of the EU and its individual members.  

As for the benefits received from the partnership of the studied countries, it is important to indicate the relative gain from Georgia's cooperation with the EU. This is due to the fact that the Russian market is not a key one for this state, and the level of dependence on energy raw materials supplied by the Russian Federation is significantly lower due to the ability to purchase basic energy carriers from neighboring Azerbaijan. At the same time, the increased openness of trade leads to an increase in competitive pressure on Georgian enterprises from European entities and pushes them to develop new, innovative products and services. Nevertheless, while Georgia has formed a negative balance in trade turnover with the EU, Azerbaijan's exports to the EU countries prevail over imports of European products, due to large volumes of natural gas, oil and petroleum products.

Figure 1 – Azerbaijan's import trading partners, 2022

Source: compiled by the author on the basis of data from the State Customs Committee of Azerbaijan ^[4].

Figure 2 - Azerbaijan's export trading partners, 2022

Source: compiled by the author on the basis of data from the State Customs Committee of Azerbaijan ^[5].

As shown in Figures 1 and 2, the European Union is Azerbaijan's first trading partner in exports and second in imports as of 2022. The EU's share in Azerbaijan's total exports is more than 65%, while the share in imports is about 16%. It is important to indicate that in 2020 The EU also ranked first in terms of exports of products to Azerbaijan, however, based on Figure 1, in 2022 it lost its place to the Russian Federation, which can be attributed, in particular, to the exit from the EU at the end of 2020. Great Britain and the intensification of trade relations between Azerbaijan and the Russian Federation.

Figure 3 - Dynamics of Georgia's exports to the EU and the Russian Federation, 1995-2022

Source: compiled by the author on the basis of data from the National Statistics Service of Georgia ^[6].

In 2022, Georgia's exports to Russia increased by 6.8% and amounted to 652 million US dollars. Since the beginning of its export has increased mainly due to a fivefold increase in the re-export of passenger cars.

The share of exports to Russia amounted to 11.7% of Georgia's total exports, which is 2.7% points less than it was in 2021. Russia's share decreased because Georgia's exports to Russia grew at a slower pace than Georgia's total exports to all countries. In 2022, Georgia's total exports increased by 32%.

In 2022, wine was the leader of Georgia's exports to the Russian market with 161 million US dollars, and ferroalloys were the second largest with 109 million US dollars, followed by exports of soft drinks — 90 million US dollars and passenger cars — 76 million US dollars.

Figure 4 - Dynamics of Georgia's imports from the EU and the Russian Federation, 1995-2022

Source: compiled by the author on the basis of data from the National Statistics Service of Georgia ^[7].

As for imports, the share of imports from Russia increased from 10.1% to 13.6% of Georgia's total imports, which is the highest figure in the last 17 years. In 2022, imports from Russia in value terms increased by 79% and amounted to $ 1.8 billion. The share of imports from Russia amounted to 13.1% of Georgia's total imports, which is the highest figure in the last 16 years.

In 2022, petroleum products were the leaders in Georgia's imports from Russia (US$ 623 million), followed by wheat and wheat flour – US$ 128 million, natural gas – US$ 112 million, coal and coke – US$ 78 million and vegetable oil and margarine – US$ 76 million. USA.

Regarding cooperation with the EU, close trade and economic relations have been established between Tbilisi and Brussels. After signing the Association Agreement with the EU in 2014, Georgia joined the preferential trade regime under the DCFTA. Nevertheless, following the meeting of the European Council on June 23-24, 2022, the country was denied the status of a candidate for EU membership ^[8]. This decision was explained by the fact that the Georgian government should carry out a number of reforms in the country, among which, first of all, the fight against oligarchs is indicated ^[9]. The EU focuses on the value component in the formulation of policy towards Georgia, namely, the emphasis is placed on the issues of democratization, the fight against corruption and the development of democratic institutions. The 2014 EU Free Trade Agreement did not have a significant impact on improving Georgia's economic situation. Moreover, the resumption of flights with the Russian Federation calls into question Georgia's admission to the EU candidate countries.

With the development of the Chinese "Middle Corridor" and the Turkish gas hub, which will include Azerbaijani and Turkmen gas in addition to Russian gas, Georgia's role as a transit state for cargo and energy supplies will increase. This means that the impossibility of joining the EU at some point will cease to matter to Tbilisi, and then a revision of Georgia's foreign policy strategy is quite possible.

According to the results of 2022 The EU is the country's first partner in exports and the second in imports of goods. Moreover, within the framework of the EU4Business program in 2020, the EU financed the largest number of projects to support small and medium-sized enterprises in the Eastern Partnership member countries in this particular republic of the South Caucasus. The EU is thus helping Azerbaijan to diversify its economy by strengthening support for small and medium-sized enterprises, as well as increasing investments in the non-oil sector. In addition, Azerbaijan is a strategically important energy partner for the European Union ^[10]. November 15, 2020 The Trans-Adriatic gas pipeline was put into operation to transport natural gas from Azerbaijan to Western European countries. In the field of diversification of imported energy supplies, this project plays a key role for the EU against the background of the geopolitical situation in the world. Despite close trade and economic cooperation, the Azerbaijani government does not prioritize rapprochement with the EU in its foreign policy. In building relations with Azerbaijan, the EU places great emphasis on the development of economic cooperation, which corresponds to the economic goals of integration.

Both Georgia and Azerbaijan have great potential to supply Europe with clean, renewable energy. At the same time, both states play an important role in ensuring Europe's energy security.

In the period from 2017 to 2021, Russia ranked second and third in terms of the share of trade turnover in Georgia and Azerbaijan, respectively. Undoubtedly, Russia has been the main wheat exporter to both Azerbaijan and Georgia for decades, but the positive thing is that in the first quarter of 2022, Azerbaijan managed to reduce the volume of wheat imports from Russia by 50% compared to the first quarter of last year. Thus, in the first three months of 2021, wheat imports from Russia accounted for 98% of all wheat imports during this period. Azerbaijan has managed to eliminate this dependence to some extent by developing economic relations with Kazakhstan.

In general, despite the forecasts, sanctions against Russia have not had a catastrophic impact on the trade balance of Russia with Azerbaijan and Russia with Georgia. This is due to the fact that both states did not introduce individual restrictions on trade with the Russian Federation. To some extent, this was reflected in the EU's decision not to grant Georgia the status of a candidate for membership in the Union.

In Georgia, the level of imports from the Russian Federation increased, remittances were the highest compared to previous years, and exports also increased during the analyzed period. The negative investment balance with Russia has caused serious problems in the business world, especially affecting entrepreneurs. On the other hand, the share of Azerbaijan's exports decreased slightly in the first two quarters of 2022, while the level of imports increased. At the same time, remittances and foreign investment have increased, especially after the start of its. The most negative effect, most likely, was inflation due to the failures in the supply chain, which immediately hit medium-sized enterprises and the private sector, causing irritation of the population. According to the results of trade with the Russian Federation in 2022, both countries had a negative balance.

Conclusion

As a result of the conducted research, it can be stated that such instruments as financial support and economic cooperation applied to the member countries of the Eastern Partnership have a positive impact on the dynamics of trade and economic relations and contribute to obtaining benefits from the partnership of each of the parties in the long term. Nevertheless, there are negative aspects of the Eastern Partnership program, in particular the in-depth partnership with the EU. Firstly, when entering the European market, manufacturers from participating countries that have signed association agreements with the EU are experiencing competitive pressure. Secondly, due to the thorough quality control of goods, the EU market still remains closed to the sale of meat and dairy products of Georgia, which has a negative impact on the economy, given the export potential of the country. As an alternative, the country prefers to export this type of product to the CIS countries, in particular to the Russian Federation, which can be attributed to the benefits of cooperation with the Russian Federation. In the case of Azerbaijan, it can be noted that the Russian Federation, unlike the EU, is the main importer of non-oil products of the republic.

The EU, within the framework of the Eastern Partnership, focuses more on building civil society in the participating states than on stimulating the development of their economies. For example, the signing of the Association Agreement between Georgia and the EU had a slight impact on the growth of the EU's share in Georgia's trade turnover. As noted above, there are still restrictions on the export of a number of Georgian products to EU countries. In addition, the refusal to admit Georgia to the EU candidate countries is largely due to political motives.

Moreover, it can be concluded that the actual dependence of the amount of financial assistance on the reforms carried out in the country participating in the program is not traced, there is a different level of progress in the implementation of democratic reforms. Azerbaijan is less involved in the Eastern Partnership program, while building trade and economic cooperation with the EU on a commercial basis, concluding bilateral strategic partnership agreements with EU members. Georgia, on the contrary, is largely dependent on EU programs and largely complies with instructions from the European Union. Despite the financial assistance provided to small and medium-sized enterprises of the Eastern Partnership member states, their entry into the EU market is being implemented at a slow pace due to limited financial resources under the program. It should be noted that within the framework of financing small and medium-sized enterprises, priority is given to organizations headed by women and youth, as well as enterprises based in rural areas. The allocation of grants in Azerbaijan is mainly carried out in the field of tourism, winemaking and creative industries, and in Georgia – creative industries, tourism and environmental goods. Direct consulting services are the predominant tool used by the EU in all countries of the Eastern Partnership in order to assist small and medium-sized businesses ^[11]. Nevertheless, it is possible to identify the lack of transparency in the distribution of grants due to the fact that the amount of assistance directed to the development of specific sectors of the economy is not published in the annual reports of EU4Business.

The analysis of the current state of trade and economic relations between Georgia and Azerbaijan with the Russian Federation makes it possible to identify the current vector of the countries' trade and economic policy in the medium term. In the case of Azerbaijan, the active development of trade with the EU is noticeable against the background of the sanctions imposed against the Russian Federation, while Georgia has been getting closer to the Russian Federation in the trade and economic sphere in recent years. In conclusion, it should be emphasized that if the final goal of the Eastern Partnership program is transformed into EU membership, this region will turn into a zone of rivalry between the EU and the Russian Federation, which will create not only economic, but also political risks for the participating countries.