Abkhazia Hit by Russian Crisis

Tuesday, 20 January, 2015

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Anaid Gogoryan

Contributor

Abkhazia is bracing itself for the knock-on effects of ruble devaluation in its major patron Russia, although some economists say it is not all bad, as locally-produced items should become more competitive.

Russia is the only major country to have recognised Abkhazia’s claim to independence since the territory broke free of Georgian control in the early 1990s. Heavily reliant on aid and subsidies from Moscow, Abkhazian also use the ruble as their currency.

In November, Russia’s Vladimir Putin signed a treaty with Abkhazian president Raul Khajimba that strengthens security ties and also envisages further economic support. Putin promised further subsidies worth more than 270 million US dollars over the next three years.

State assistance between 2009 and 2013 was put at 300 million dollars, but the risk for Abkhazia is that Russia may no longer be in a position to be as generous as before. With Western sanctions imposed because of Moscow’s behaviour towards Ukraine and world oil prices falling to around 50 dollars a barrel. The ruble’s exchange rate to the US currency fell by 40 per cent last year. The government will have to consider cutting expenditure to offset lower revenues.

Tengiz Jopua, an economist who lectures at Abkhazia State University, warns that the shortfall in spending could hit Abkhazia.

“It’s possible there will be a reduction in funding for Abkhazia and South Ossetia. The social and economic situation in Russia is going to remain difficult as long as oil prices remain low,” he told IWPR.

Asked about planned spending cuts, Andrei Areshev, a political analyst at the Institute for Oriental Studies in Moscow, told the Sukhum-moscow.ru website that the Russian government would do everything in its power to abide by prior agreements with Abkhazia.

In Abkhazia, people have responded to the ruble’s rapid decline by turning their savings into more stable currencies or into consumer goods.

“We have seen a flurry of activity in the markets and in the shops as people try to get rid of their ruble savings in order to preserve their purchasing power,” Beslan Baratelia, chairman of the National Bank of Abkhazia, told IWPR. “There has therefore been a rush to buy goods, particularly durable goods like household appliances and phones still on sale at the old prices. We’ve seen the same thing at currency exchange points as people buy up dollars and euro to protect their savings.”

Abkhazia’s economy ministry says that 18 per cent of goods purchased from abroad are paid for in foreign currencies, meaning it now costs more in rubles to buy the same amount. Baratelia pointed out that while Russian-made goods remained at the same prices, imports from other countries had effectively doubled in price.

Deputy Economy Minister Jansugh Nanba told IWPR that importers buying from non-Russian sources would be hard hit.

“Clearly, when goods become that expensive, they become uncompetitive in the marketplace here. Businesses will have to choose whether to wait the currency crisis out, or take their money and invest it in other areas that aren’t subject to exchange-rate risks,” he said.

Amid a mood of economic uncertainty, prices are rising. Some retailers have responded to the crisis by bumping up the prices of goods that were bought and paid for before it started. Even items that were purchased for rubles have been affected, and official statisticians say meat, sugar, cereals and vegetables have all seen some inflation. These foodstuffs mostly come from Russia.

As Russian food items become more costly, consumers are turning to home-grown produce, but as Baratelia explained, “demand is growing and consequently prices of local produce are increasing.”

The prices of petrol and bread are regulated by the Abkhazian authorities and have remained stable although Nanba said that the economy ministry was keeping a close eye on this.

“We import flour from Russia because we neither produce nor process grains here. The price of flour in Russia has recently increased by 20-30 per cent, despite the fact that Russia had a record grain harvest of about 104 million tonnes. Prices crept up as it was profitable for producers to export abroad and sell for dollars,” Nanba said. “In view of this, the Russian government has taken a number of unofficial measures to keep prices at an acceptable level.”

Nanba said the Abkhazian government would use “every method and opportunity available to it to prevent bread prices from rising. As for petrol, the price initially went up in Russia, but the government instituted some measures and the price is now stable. I don’t think we will have to increase the price of petroleum products.”

“One thing is clear – it is a crisis,” Nanba said. “What’s most important is to prevent a currency crisis growing into an economic one, although, in my opinion, it won’t be possible to avoid economic crisis.”

Nanba was keen to stress that it was not all doom and gloom, since a cheaper ruble could mean a more competitive economy.

“It isn’t all as bad as it seems. You need to extract the positive from any situation,” he said. “The change in the ruble can give us a competitive advantage that we need to exploit. Tourism is one thing, as is agriculture. Our local producers have opportunities to find niches in Russian markets. To this end, we are developing a set of measures aimed at expanding local production…. Agriculture and holiday resorts will be the priority. The task is to provide people with an impetus to produce not only for domestic consumption but also for export.”

Baratelia expressed similar cautious optimism, arguing that as long as Russian state assistance continued, it would counterbalance some of the negatives.

“Of course the [Abkhazian] government will do everything it can to keep the price of essential goods stable for as long as possible. As for rising prices and falling incomes, that will be partially mitigated by the assistance Russia will provide despite the crisis there. Public sector wages and pensions are expected to increase next year. I therefore believe that the losses will be balanced out.”

Jopua, however, predicts a few difficult years to come.

“When there’s a crisis, it is possible to affect trends and mitigate the effects of crisis by increasing public sector wages. But in a crisis, the ‘multiplier effect’ of government spending and investment in the real economy is always limited. In an unstable environment, people aren’t keen to invest in manufacturing ventures or generally to get involved in high-risk projects. Business activity will decline,” he concluded.

Anaid Gogoryan works for the Chegemskaya Pravda newspaper in Abkhazia.