Russian Investments and Corporate Relocation: Economic Strategy or Threat to Democracies
By Davit Maisuradze and Zurab Gvelesiani, Structural Reforms Center (SRC)
All Eyes on Ukraine and Quiet Capture of Georgia
While the global community is fixated on Russia’s brutal war in Ukraine, a parallel but less visible development has been unfolding in the region. Russia has quietly seized control over Georgia, effectively stalling its Europeanization process and severely damaging its ties with the West. This shift in Georgia’s foreign policy carries profound implications. Georgia’s role as a testing ground for Russian strategies underscores its importance in understanding Moscow’s broader ambitions.
Historically, Georgia has been a precursor to Russia’s larger geopolitical moves. The Russo-Georgian war of 2008 serves as a stark example. Russia invaded a neighbouring sovereign state with minimal international repercussions. This lack of meaningful consequences emboldened Moscow to escalate its actions, culminating in the annexation of Crimea in 2014 and the full-scale invasion of Ukraine in 2022. Georgia’s fate is a microcosm of the playbook Russia has refined and expanded over time.
The early signs of Russia’s hybrid warfare also surfaced in Georgia. Russia’s large-scale cyberattacks against Georgian government and media websites in 2008 predated similar tactics used against Ukraine and Western democracies. This digital warfare was accompanied by disinformation campaigns, employing troll armies and manipulating public opinion. These operations were trial runs for the more sophisticated efforts seen globally, aimed at undermining democratic institutions and fostering division.
Economically, Georgia has faced the brunt of Russia’s coercive tactics. Moscow has used its dominance in energy resources as a weapon, cutting gas and electricity supplies during the harsh winter months to exert pressure. Politically motivated sanctions targeting Georgian exports have further demonstrated Russia’s readiness to leverage economic dependence to achieve its strategic goals. Such measures serve as a blueprint for Russia’s broader economic interventions in its sphere of influence.
Georgia’s experience should be a warning for the European Union and the broader international community. It demonstrates how Russia’s incremental strategies, from military aggression to economic coercion and cyber warfare, can systematically undermine democracies. If the EU wishes to anticipate and counteract Russia’s future moves, it must pay closer attention to the developments in Georgia. Supporting Georgia’s democratic institutions and its European aspirations is not just about aiding a Black Sea Nation; it’s about addressing the root causes of a geopolitical strategy that threatens democracies on a global scale.
Russian Economic Invasion of Georgia
In February 2022, Russia initiated a brutal and unjustified invasion of Ukraine, unlawfully seizing its territory and perpetrating severe acts of violence and war crimes. In response, Western nations and their allies displayed significant solidarity, providing extensive support to Ukraine to exercise its right to self-defence against foreign military aggression. To aid Ukraine and limit the financial resources fuelling the war, the United States and the European Union imposed a range of sanctions on Russia.
These sanctions triggered significant economic and social repercussions. Following the invasion and the imposition of sanctions, hundreds of thousands of Russians fled to neighbouring countries, looking for more comfortable, sanctions-free lifestyle and for economic opportunities. While Russia lost thousands of young men, avoiding military service, it still capitalized on this migration by flooding investment-hungry neighbouring countries with tens of thousands of Russian companies and using the economic leverage for influencing the political landscape. Georgia is particularly clear example of this.
As of June 1, 2024, around 37,400 companies in Georgia were owned by Russian citizens, with more than 30,000 of these companies registered after 2022[1] (n comparison, fewer than 50,000 Russian-owned businesses operate within the European Union). This deepening economic dependence is clearly visible in trade dynamics as well. In 2023, Georgia’s trade turnover with Russia was 47% higher than in 2021, underscoring the critical role Russian markets play for Georgia.[2] Additionally, in 2023, Georgia received 3.1 billion USD from Russia through remittances, tourism, and export of goods, accounting for 10.3% of Georgia’s GDP.[3] Russia gained significant influence in the electricity sector, in the oil and gas sector.[4] Following the resumption of direct flights between Russia and Georgia in May 2023, Georgia’s tourism industry saw a substantial rise, with Russian visitors increasing by 447.8% to reach 184.600.[5] However, this shift soon saw Russians moving from being tourists to business owners, progressively taking control of a significant share of this vital sector of the Georgian economy.
The influx of Russian capital into Georgia, along with the associated challenges and responses, carries broader implications. These issues are not unique to Georgia but are also relevant to other countries in Eastern Europe and Central Asia, which are facing similar challenges.
Two forms of Corrupt Capital
Sanctions imposed on Russia primarily target organizations and individuals directly involved in supporting the Russian military actions and its violations of human rights. Russian manufacturing, research, and military companies, or any business entities linked to war production, are subjected to sanctions that block access to Western technologies. Russian companies have attempted various methods to acquire the modern technologies necessary for upgrading their weaponry, but Western nations have been closely monitoring and working to close any loopholes.
However, another form of corrupt capital that falls outside of direct sanctions seeks to leave Russia or has already relocated to other countries. These businesses often attempt to launder money or engage in illicit activities. They are trying to avoid direct sanctions but are also involved in corrupt dealings. Some Russian migrants who have moved to Eastern Europe or Central Asia have integrated into local economies and, in some cases, collaborated with local professionals (enablers) to facilitate the flow of sanctioned goods into Russia. In addition to this, Russian migrants and businesses are also exporting their familiar ways of doing business—such as bribery, racketeering, and corruption.
The influx of Russian businesses into Georgia poses a risk of reintroducing the old Soviet and Russian business practices, where corruption and racketeering were prevalent. These practices have largely disappeared in Georgia, but there are concerns that they could return, especially as some local businesses and municipal entities are eager to cater to investors, including those from Russia. The economic invasion of Russian migrants and businesses—referred to as corrosive capital—since Russia’s invasion of Ukraine has increased Georgia’s economic dependence on Russia. This situation is likely to worsen the country’s corruption landscape, leading to the resurgence of petty corruption and strengthening high-level corruption among elites.
Political Impact of Russia’s Economic Presence in Georgia
Russia illegally occupies 20% of Georgia’s territories and it is responsible for years of destabilization, numerous conflicts, war crimes, ethnic cleansing etc. committed in Georgia. It is no secret that the Russian government does not view its neighbours as equal sovereign states and tries to place them under its sphere of influence (or alternatively directly annexes them). Russia is also well-known to use economic force for its political objectives and it has previously abused Georgia’s dependence on Russian resources and Russian market. This situation where Russian businesses capture a significant portion of Georgian markets, including strategic ones, obviously contains huge security risks.
The growing presence of Russian businesses and investments in Georgia has profoundly influenced the country’s political trajectory, steering the country away from its European aspirations and fostering authoritarian tendencies. The erosion of democratic values in Georgia is further compounded by the government’s growing hostility towards the European Union. Emboldened by the temporary economic boost from Russian investments, the Georgian Dream government has become increasingly dismissive of EU recommendations and funding. This shift has effectively stalled Georgia’s EU integration process, a cornerstone of its foreign policy aspirations.
Russian businesses are associated with bribery, racketeering, and cronyism. If these practices are introduced in Georgia, they will weaken institutional integrity and create an environment conducive to further Russian influence. By establishing a foothold in key industries, Russian businesses not only dominate economic sectors but also wield significant political influence. This influence extends to shaping policies that serve Moscow’s strategic interests, such as facilitating sanctions evasion through Georgian trade routes and relaxing customs controls to allow the flow of sanctioned goods.
The social fabric of Georgia has also been affected. Public trust in democratic institutions has eroded, as citizens perceive the government’s alignment with Moscow as a betrayal of their aspirations for a European future. The suppression of dissent and the enactment of repressive laws have further alienated segments of the population, leading to heightened social tensions.
The political consequences of Russia’s economic presence in Georgia serve as a cautionary tale for other countries in Eastern Europe – economic alignment with Russia reduces the political sovereignty. They illustrate how economic tools can be weaponized to achieve geopolitical objectives, undermining sovereignty and democratic integrity. In summary, Russia’s economic penetration into Georgia has facilitated a form of influence that extends beyond mere financial transactions. The intertwining of economic interests has paved the way for political leverage, enabling Russia to exert control over Georgia’s policy decisions and international alignments. This strategy underscores the intricate link between economic dependency and political sovereignty, illustrating how economic tools can be effectively employed to achieve geopolitical objectives without overt military intervention.
Ways to Counter Russia’s Economic and Political Influence in Georgia
To address the multifaceted challenges posed by Russia’s economic and political influence in Georgia, a comprehensive strategy is essential. The following measures outline how Georgia, with the support of its international partners, can mitigate these risks and safeguard its democratic future.
- Strengthening Monitoring and Evaluation of EU Integration Reforms. As Georgia’s political integration with the EU remains stalled, there is an urgent need for increased monitoring of the country’s economic reforms within the framework of EU approximation. While Moldova and Ukraine have made significant progress politically toward EU alignment, Georgia’s primary advancements have been in strengthening the legal foundation to support its economic agenda. Close evaluation and monitoring of these reforms are crucial to ensuring continued progress toward EU integration, even amidst political setbacks.
- Reducing Economic Dependence on Russia. Strengthening political and economic ties with the EU should go hand in hand with reducing economic dependence on Russia. While trade relations and investments from Russian businesses may bring short-term benefits, they pose significant national security risks. Georgia must diversify its trade and investment partnerships, particularly with the European Union, the United States, and neighbouring countries. By fostering the growth of local Georgian businesses in key sectors, the country can reduce reliance on Russian enterprises and enhance its economic resilience.
- Combatting Russian Disinformation. Russia’s disinformation campaigns aim to polarize Georgian society, diminish public support for EU and NATO aspirations, and undermine democratic values. Georgia must invest in robust media literacy programs, promote transparency in public discourse, and counter false narratives through accurate and accessible information. Communicating the potential benefits of increased trade and integration with the EU can help rebuild public trust and support.
- Enhancing Legal and Regulatory Frameworks. Both central and local governments in Georgia must strengthen legal and regulatory frameworks to ensure that foreign businesses, including Russian firms, operate transparently and contribute positively to the economy. Effective oversight and transparent governance are critical to minimizing the risks of foreign interference. Raising public awareness about the potential dangers of Russian influence is equally important for building societal resilience.
- Fostering Regional Cooperation. Georgia can enhance cooperation with neighbouring countries and Central Asian states to form a united front against Russian economic and political influence. Joint initiatives on trade, security, and regional stability can help counter Russia’s divisive tactics. Collaboration with civil society organizations and investigative journalists can play a pivotal role in monitoring government actions and ensuring accountability.
- Encouraging Transparent Foreign Investments. Georgia should offer incentives to foreign companies (excluding Russian businesses) that operate transparently and contribute positively to the local economy (constructive capital). These incentives could include tax breaks, infrastructure support, and access to local markets. Investments from Russian companies should be subjected to thorough due diligence to identify potential risks (corrosive capital). Restricting or limiting investments that pose a threat to national interests is vital to safeguarding Georgia’s sovereignty.
- Leveraging International Support. The international community, particularly the European Union and the United States, must provide financial, technical, and diplomatic support to strengthen Georgia’s institutions. This support should focus on bolstering democratic governance, improving economic infrastructure, and fostering public engagement in policy-making processes. Active engagement with international allies can also help Georgia resist external pressures and advance its European aspirations.
- Raising awareness of enablers. Lawyers and financial professionals (financial analysts and accountants) have a significant influence on assisting foreign investors in setting up businesses in host countries. Civil society groups should collaborate with professional associations of lawyers and accountants to organize training sessions and seminars. These initiatives would aim to increase awareness among association members about the potential legal and reputational risks associated with offering legal and financial services to individuals or entities linked to corrosive capital.
- Promoting Civic Engagement and Education. Public engagement through media campaigns, civic education, and open discussions can help build a more informed and resilient society. Empowering citizens to understand the risks of foreign influence and the benefits of democratic governance is crucial for sustaining long-term progress.
By implementing these measures, Georgia can counter Russia’s economic and political influence while reinforcing its commitment to democratic principles and European integration. The success of these efforts will require sustained collaboration between Georgia’s government, civil society, and international partners.
The blog was developed as part of the project “Increasing Transparency of Russian Controlled Business in Georgia and assessing its security, legal, socio-economic and cultural impact” which is supported by the Embassy of the Kingdom of the Netherlands in Georgia. SRC is the sole responsible for the contents of the blog and the views expressed in it may not reflect the position of the Embassy.
[1] Companies Founded in Georgia by Russian Citizens – Links and Registration Features
[2] https://mythdetector.com/en/has-russia-made-territorial-and-economic-advances-in-georgia-under-the-rule-of-the-georgian-dream-party/?utm_source=chatgpt.com
[3] Georgia’s Economic Dependence on Russia: Summary of 2023 – საერთაშორისო გამჭვირვალობა – საქართველო
[4] ISET, A Study on the Risks Associated with Russian Business Ownership in Georgia, 2023
[5] https://www.travelandtourworld.com/news/article/georgias-exceptional-growth-in-russian-tourism-stands-in-stark-contrast-to-armenias-decline/
