In response to the events developing around the “Russian Law”, on May 23 the U.S. Secretary of State Antony Blinken announced a comprehensive review of the bilateral cooperation between the United States and Georgia if the law were to be adopted, while visa restrictions would be imposed on individuals who are responsible for or complicit in undermining democracy in Georgia and impeding the goal of Georgia’s integration in Euro-Atlantic structures and the European Union that is defined in the Constitution.
It should be noted that an additional sanctions package is initiated within the framework of the MEGOBARI Act initiated in the House of Representatives and the “Georgian People’s Act” in the Senate. The sanctions announced by the Department of State at this stage carry a reputational risk and may not have a significant impact on the Georgian economy in the short term, but deepening sanctions will have economic consequences and negatively affect economic growth.
The United States imposes sanctions on various entities as well as individuals. In 2012, the U.S. adopted the “Magnitsky Act”, which entailed sanctioning foreign persons for violations of human rights. This was followed by the Global Magnitsky Act of 2016, which envisages sanctions, bans on entry into the U.S. and freezing assets for serious human rights violations and corruption. A similar law was later adopted by several countries, including Canada, Great Britain, and in 2020—the European Union (1). As of December 2023, within the framework of the Magnitsky global sanctions program, the U.S. had imposed sanctions on over 650 foreign persons (individuals and entities)(2). The financial sanctions envisaged by the act entail freezing the property and shares owned by the sanctioned person in the U.S.
The sanctions imposed on the Moldovan politician and businessman Vladimir Plahotniuc are a noteworthy example of sanctions utilized against individuals. The grounds for sanctioning him were, along with participation in corrupt processes, undermining democratic processes in Moldova, as his actions were considered to have been hindering democratic development in the country, which facilitated the weakening of the rule of law and the trust of the public towards the government (3). At first, Plahotniuc and his family members were banned from entering the U.S., and in 2022, additional financial restrictions were announced (4).
Following the United States, the European Union also announced sanctions against Vladimir Plahotniuc in 2023 for destabilizing Moldovan sovereignty and undermining democratic processes (5). The sanctions entailed asset freezes, restrictions on access to financial resources, and travel bans (6).
- Travel restrictions: persons affected by sanctions will be banned from entry into the U.S. or traveling through U.S. airspace;
- Visa restrictions: makes it difficult or impossible for sanctioned persons to obtain a U.S. visa for any purpose, including tourism, business, education;
- Asset freezes: entails freezing the assets that fall within U.S. jurisdiction, which will hinder access to financial assets of the targeted individuals;
- Financial restrictions: meaning bans on financial transactions between the sanctioned individuals and U.S. persons or entities, including bank operations, loans, or investments (sanctioned persons are also restricted from accessing the services of American companies such as Western Union, PayPal, MoneyGram International, and others);
- Trade restrictions: sanctions may include trade restrictions with sanctioned individuals, such as bans on imports/exports with businesses owned by them or business entities otherwise linked to them;
- Business restrictions: sanctioned individuals will be banned from conducting business in the United States or partnering with American companies;
- Restrictions on sale of technologies: sanctions may include restrictions on selling certain technologies or technical expertise to sanctioned individuals or entities;
- Diplomatic isolation: sanctioned persons will be restricted from being able to participate in international forums and negotiations;
The implementation of sanctions against individuals can vary depending on specific circumstances and the purpose of the sanctions, and as such, each case and corresponding approach may be different. In some cases, the sanctions may be imposed all at once, while in other cases they can be imposed gradually. The stage-by-stage approach represents a warning that leaves room open for negotiation.
Targeted sanctions against individuals and entities are relatively novel compared to large-scale economic sanctions and trade restrictions, although a study (7) has confirmed their effectiveness. For example, as a result of the targeted sanctions imposed on Russia by the U.S. and the EU, the sanctioned company or company associated with a sanctioned individual loses a third of its operational revenue and employees and half of the value of its assets as compared to non-sanctioned companies of a similar nature. Targeted sanctions are referred to as “smart” sanctions, as they have a significant impact on sanctioned individuals/entities, but minimal impact on non-sanctioned persons.
The adoption of the law in the third hearing has already led to sharp short-term fluctuations in the currency exchange market as well as the stock market. In the second half of May, the value of Georgian lari began to decline, followed by a currency intervention by the National Bank - a sale of 60 million U.S. dollars and temporary stabilization. Despite this, a small trend of devaluation for the Georgian lari is still evident in relation to both the dollar and euro, while the value of the shares of two of Georgia’s largest banks fell during May (Bank of Georgia -24%, TBC Bank -26%). Sanctions would exacerbate the mentioned effects.
Sources: NBG, Yahoo Finance
The U.S. sanctions are primarily a signal to the international community that the sanctioned persons/state government are engaged in activities that are unacceptable by international standards.
Investments and trade: the sanctions may undermine investor confidence in Georgia’s economic perspectives and political stability, which will in turn have an impact on foreign investment - investments/businesses will act more cautious or refrain entirely from investing in the country. A reduction in direct foreign investment, especially in the field of infrastructure development, will weaken the country’s economic indicators, while a reduction in western investments will make the country dependent on an unstable region.
Financial impact: A decrease in investor confidence will lead to growing risk, thereby increasing the cost of capital for private companies. In addition, the demand for government bonds will decrease. Low investor confidence will negatively impact Georgia's credit rating by increasing its borrowing costs and reducing access to external financing.
Tourism: The country’s damaged reputation may have a negative impact on the number of tourists arriving from America and Europe and the revenues received from tourism. In addition, the promotion of Georgia as an attractive tourist destination may decrease. The imposition of sanctions had a negative impact, on the tourism figures of, for example, Iran and Russia, as the perceived risk to tourists reduces the number of tourists, including from unsanctioned countries (8).
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(3) - https://www.state.gov/response-to-corruption-and-election-interference-in-moldova/
(4) - https://www.moldpres.md/en/news/2022/10/26/22008078
(5) - https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32023R1045
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