The Impact of Russian Money Transfers on Stability of Georgian Economy

News | Research | Good Governance | Publications 19 May 2015

On May 8th, 2015, IDFI presented research “Russian capital in Georgian Business”, which gathers information on the companies founded in Georgia and owned by Russian citizens. The research showed that the share of Russian capital in Georgian business is high and this can become one of the impediments of economic stability in the future. Especially considering that Russian capital is invested in such economic sectors as energy, water supply, oil products and communication.
This time we would like to present one more issue that can impede economic stability of the country - the money transfers to Georgia. By money transfers we imply the money which migrants send to their families or other relatives living in the homeland.

 

The importance of foreign money transfers for Georgia is shown by the fact that after the commodity export, money transfers by the Georgian migrants is one of the main sources of foreign currency inflows in the country. For instance, if we compare the amount of direct foreign investments with the money transfers from foreign countries in Georgia since 2009, we will see that the amount of money transfers significantly exceeds the investments.

 

 

We presented the official data on foreign money transfers in Georgia. However, presumably the amount of non-registered money transfers is significantly higher. This presumption is confirmed by existing studies, according to which non-registered money transfers worldwide are 2.5 higher than registered ones. In case of Georgia, according to 2007 survey by EBRD, one third of money transfers in Georgia comes from unofficial channels.

 

Considering that the largest diaspora of Georgians is represented in the Russian Federation, the biggest amount of money transfers comes from Russia and accordingly the influence of Russian Federation on Georgian economic stability is the highest (according to unofficial information from the Office of the State Minister of Georgia for Diaspora Issues, Georgian Diaspora in the Russian federation is about 800 000 people, which equals to the number of Georgian people residing in all the other countries counted together). According to the National Bank of Georgia, the money transfers from Russia to Georgia amounted to 709,2 million dollars in 2014, which is approximately 49% of total money transfers.

 

 

 

Generally, the amount of foreign money transfers is quite stable. But as the data about Georgia suggest, an economic crisis may have important influence on the amount of transfers.


Considering the fact that, the biggest share of money transfers comes from the Russian Federation, the economic instability of Russia had direct influence on the amount of money transfers to Georgia. For instance, comparing with the same period in 2014, the amount of transfers in the first quarter of 2015 has almost halved. This can be caused by the Russian economic crisis. It should be noted that, the similar situation occurred in the first quarter of 2009, which was presumably connected to the world financial crisis.


Besides, it should be mentioned that the decreased income of Georgiansliving abroad, reflects not only on the decreased money transfers from them, but also increases the amounts of money transferred to them from Georgia. During the first quarter of 2015 the money transfers from Georgia to Russia amounted to 19 Million US Dollars, which vastly outnumbers the data of the same period from the previous years.

 

 

 

Studies confirm that money transfers have a positive influence on incomes of domestic economies and correspondingly on consumption growth, increase of economy indicators as well as the stability of exchange rates.


In this regard we suppose that the decrease of money transfers from Russia, which started since October 2014, could have a negative impact on economic environment in the country.


Since the money transfers from Russia is one of the main sources of inflow of foreign currency in Georgia, we assume, that one of the core reasons for devaluation of Georgian currency, which started in December 2014, could be the decrease in money transfers from Russia. Besides, as mentioned above, along with the decrease of inflow of foreign currency, the amount of money transfers from Georgia has considerably increased in 2015, which also had some influence on stability of the national currency.


The graph given below illustrates net money transfers (difference between transfers to Georgia and transfers from Georgia) and the percentage of exchange rate changes between the national currency and US Dollar in the corresponding periods of the previous years.

 

 

The data given above confirm that the economic crisis in the Russian Federation and the decrease of money transfers could be one of the main factors for national currency devaluation, which itself could have a negative influence on economic stability in the country.

 

Recommendations:

  • The analysis has emphasized the need for support of inflow of foreign currency from alternative sources. In this way Georgian economy will be less dependent on Russian federation;
  • First of all, is is important to considerably increase direct foreign investments and production of local export products, which will promote alternative sources for the inflow of foreign currency in the country and reduce the dependence of stability of Georgian economy on the Russian economy.
  • The abovementioned emphasizes the need for active engagement of the Government of Georgia in order to attract more investments from Europe, USA and East Asia and increase export to these regions.
Other Publications on This Issue