Trade and logistics with the EU

Introduction

Georgia is located at the crossroads of Europe and Asia its location gives the country the opportunity to become a logistical hub of the region. Historically Georgia was part of the old silk road connecting Asia to Europe by land and waterway routes. Now Georgia is a part of the belt and road initiative commenced by China in 2013.  This initiative aims to revive the idea of the old silk road and develop new routes for trade between China and Europe, through central Asia and Caucasus countries. Georgia is a part of the Trans-Caucasus Corridor which is the alternative route for freight transit between China and Europe. Developing alternative transit routes is in the interest of European countries as well as for China because trade volume between these two regions is increasing and diversification of routes becomes more and more important.

Nowadays most preferred route for freight move between China and Europe is marine, then comes the northern route, which passes through Russia and there is also Trans Caucasus Transit Corridor (CTC) which connects China to Europe passing through central Asian countries and Caucasus. The corridor comprises seaports in Caspian (Alat) and Black sea (Poti and Batumi), railway and roads. Georgia covers 348 km of the transit corridor. Though Georgia, as well as Azerbaijan, spent significant investments in the development of the corridor its participation in intercontinental transits is minor. If we compare price and time 400-foot container needs to reach European borders from China, for now, CTC has no advantage compared to the northern land route. The price estimate to transit freight from Chengdu China to Europe is $3500-$4500 when the northern route price ranges between $2800-$3200. The time needed in the case of CTC ranges between 16-20 days and for the northern route 14-18 days. The importance of the CTC corridor cannot be undermined even nowadays its price and timing are not less attractive for businesses it has other advantages it gives the opportunity to central Asian countries to reach the European market more easily and diversify transit routes.

Despite its historical role and advantageous geographic location, Georgia is losing its position as a transit country. This tendency is reflected in the Logistics Performance index published by the World Bank every two years. In 2012 Georgia was ranked at 93 from 155 countries total but in 2018 we moved on 119 place. The index looks at six indicators:

• Custom – efficiency of the clearance process (e.i. speed, simplicity, and predictability of formalities) by border control agencies, including customs
• Infrastructure – Quality of trade and transport-related infrastructure (e.g. ports, railroads, roads, information technology
• International shipments – ease of arranging competitively priced shipments
• Logistics competence – competence and quality of logistics services (e.g. transport operators, customs brokers);
• Tracking and tracing – ability to track and trace consignments
• Timeliness – timeliness of shipments reaching their destination within the scheduled or expected delivery time.

According to the 2018 index from six indicators listed above Georgia had the lowest evaluation in logistics competence (2.27) and the highest evaluation in timeliness (2.92).

Another indicator that is important to look at is the volume of investments in transport development in Georgia.

Figure 1

Source: geostat.ge

*preliminary data

Official data from the last five years clearly shows the downtrend in FDI. Each year volume of FDI in transport was less than the previous year. Preliminary data in 2019 shows that FDI in the sector shrank by 65%. Deputy Minister of Economy and Sustainable Development of Georgia Ekaterine Mikabadze explains negative changes in the sector with several factors. Most importantly with the ending of several large projects, including central gas pipeline construction.

Georgia’s logistical infrastructure for today includes

• Three international airports in the three largest cities Tbilisi, Kutaisi, and Batumi.
• Four local airports in smaller cities and regional centers in Mestia, Ambrolauri, Natakhtari, Telavi
• Two main ports in Batumi and Poti.
• Black see and Supsa terminals
• Georgian railway and Marabda-kartsakhi railway

Trade with the EU

Figure 2

Source: geostat

In 2014 Georgia signed DCFDA with the EU this gave Georgian producers a new opportunity to access the European market with more than 500 million consumers more easily. Export value with EU countries was increasing in 2016-2019 while its share in total export shrunk. Georgia’s export with EU countries in USD Dollars has increased by 45% in 2019 compared to 2016. but its share in total export has declined by 5.5% in 2019 compared to 2016 and reached 21.5%.

Figure 3

Source: geostat

According to official data most frequently marine transport is used to export cargo from Georgia to the EU and its value increases each year. The second place takes motor transport, air and rail transport are least used modes of transport. These tendencies are conditioned by a number of factors. But most important of them is companies interest in time and cost freight will need to reach the destination point. Marine transport is the cheapest mode of transport for freight in Georgia, but transportation time is the highest compared to other transport. Motor transport needs less time than marine but is more costly. Air transport is the fastest but most expensive, thus it is used rarely. Rail route for exporting the freight to EU countries is least developed, companies, as usual, are not considering railway. Georgia has only the Baku-Tbilisi_Kars railway, which can be used to move freight in Turkey and afterward in the EU countries, but this opportunity is not absorbed by local producers yet.

Figure 4

Source: geostat

Almost 80% of the total export value from TOP 5 products in 2019 was copper ores. Copper ores are mostly re-exported from Armenia. The second product is locally produced fresh and dried hazelnuts. Georgia is one of the top producers of hazelnut. Hazelnut is produced by small size farmer and collected by exporting companies. Ammonium nitrate in Georgia is produced by large factories and exported in large quantities compared.  Wine and mineral waters are strategically important products for Georgia. Unique wine and mineral water made Georgia known to the world.

Figure 5

Source: geostat

Copper ores in 2019 mainly were exported/re-exported to Bulgaria using marine transport. Georgia has a weekly ferry line moving between ports of Poti and Burgas this makes it easier to export freight to Bulgaria with marine transport. The biggest importer of ammonium nitrate in 2019 from EU countries was Lithuania and marine transport was used. Before reaching Lithuania with marine transport freight should stop in one of the deep ports in the Black Sea. The biggest importers of fresh and dried hazelnut were Italy and Germany in 2019. In the case of hazelnuts, motor transport was prevailing. Hazelnut is used in food production and timely supply is a priority for importers. Motor transport offers higher speed with extra payment. Georgian wine was exported in 21 EU countries in 2019. The biggest importers were Germany, Estonia, and Lithuania. Motor transport was used more frequently, it appears that time is also important for wine importers in the EU. The biggest importer of mineral waters from EU countries in 2019 was Lithuania and marine transport was preferred.

In the last decade, Georgia has made major investments to develop industrial production in the agriculture sector. Production of berries and nuts was supported with the state program “Plant the Future”. By 2021 Georgia will have planted 1000 ha of berries. Georgia has already planted 2,927 ha walnut and 1511 ha almonds since 2014 when the supporting program has started. Producers are expecting that in the next 5 years Georgia will become a net exporter of nuts and berries. The primary market for exporting walnuts and berries is the EU.

Difficulties identified in the logistics sector

Lack of cargo/freight from Georgia - Representatives of logistics companies as well as SMEs’ exporting products to EU countries identify the lack of cargo as a problem. For logistics companies, it is difficult to find enough freight to execute the orders because there are not enough commodities produced locally for exporting in the EU and it is not financially rentable for them to move only partially full container/truck. Otherwise, SMEs’ wishing to export small freight should pay for the whole container/truck, which makes transportation for them very expensive.  

Lack of infrastructure and capacity of Georgian seaports - For today ports of Georgia do not have the capacity to receive Panamax or Post Panamax type cargo ships. This fact determines routes and time span cargo needs to get to the destination point. Small cargo ships loaded in Poti and Batumi ports are entering Turkey’s seaports where cargo is reloaded on bigger ships and only afterward it moves to destination. As a result, over one month is needed for the commodity to reach the buyer in EU countries.

Poor motorway infrastructure and delays on the border checkpoints – borders with Russia and Turkey are used to move freight from/in Georgia to/from EU countries by land route. Customs on both borders have their disadvantages. With Turkey, Georgia has two border checkpoints one in Sarphi (coast of the black sea) and the other in Vale (southwestern Georgia). Logistics service providers prefer to use the Sarhpi checkpoint because the road infrastructure is better there compared to Vale. This creates lines on the Sarhi checkpoint and increases transportation time. With Russia Georgia (in the territory controlled by Georgia) has one checkpoint Kazbegi/Dariali. The checkpoint is in a mountainous region where due to difficult climate conditions in the winter trucks are frequently stacked on the border.

The uncontrolled market of logistics service providers – there are more than 6000 private logistics service provider companies on the Georgian market. There are no standards defined by low which should be regarded to operate on the market. The existence of many companies increases the competition but most of the time this competition is not fair. A number of service providers are not professional and offer lower prices at the expense of service quality when fair players are not risking their reputation thus their service is more expensive.

Projects addressing to increase Georgia’s logistical capacity

Nowadays Georgia’s logistics sector lacks new projects and investments in the sector to realize its potential. In the last decade, Georgia was implementing the three most significant projects that should at least partially solve the problems identified by sector representatives and place Georgia in the region as a logistical hub. These projects are Anaklia deep seaport, Baku-Tbilisi-Kars new railway and development of logistical centers in Tbilisi and Kutaisi.

Anaklia deep sea port

Experts from the logistics sector of Georgia as well as government officials admit the importance of this project for Georgia’s future development as a logistical hub in the Caucasus region. A new deep seaport would create new opportunities and attract transit freight from central Asian countries to Georgia. Anaklia would be the first deep seaport in Georgia. According to the plan published by the Anaklia consortium seaport had to be finished in 9 phases. The first phase must have been finished in 2020. The total budget for the project was evaluated at 2.5 billion US dollars. The berth’s depth was expected to be 16 meters which is almost two times deeper than the Poti seaport berth (8,4 meters). This would enable Georgia to receive cargo ships with a capacity of more than 10 000 containers. Anaklia would have a capacity of 9.2 tons already at the end of the first phase in 2020. After finishing all 9 phases port would have the capacity to receive over 100 million tons of freight.

Anaklia development consortium was created in 2014 and 99.9% of its shares are in possession of Anaklia Holding, only 0.01% is held by the government. The consortium included TBC Holding, SSA Marine and Konti Group. Consortium won tender to build the new seaport in 2016 but an agreement between consortium and government of Georgia was tore in January 2020. According to the official stated reason for the contract, termination was unfulfillment of obligations. Before contract termination government accused the chairman and the deputy chairman of the Anaklia development consortium board (Mamuka Khazaradze and Badri Japaridze) of money laundering after the accusations main investors have left the development group. The future of this project is ambiguous.

As an alternative to Anaklia deep sea port government was supporting the extension of the Poti sea port. The project was presented by the Poti sea port managing company “APM terminals” in May 2020. APM terminals aim to construct deep-sea berth in Poti that will be able to serve ships with a capacity of over 9000 TEU. After the information about giving the permission for construction of a new deep sea port in Poti has spread in Media at the time when the government was still supporting the Anaklia project officials rejected the fact of giving permission to APM terminals.

Construction of a deep sea port is crucial for Georgia to become an active member of CTC in the future. In the region Kazakhstan, Turkmenistan and Azerbaijan are developing logistical infrastructure. As a result, CTC attracts more and more freight from Central Asia and China. With the development of other countries in the region, Georgia should not lag behind because the demand for logistical services in the region will increase in the future.

Figure 6

Source: Ministry of Economy and Sustainable Development

The number of cargo containers shipped from Batumi and Poti ports has increased in the last five years. The number of cargo containers in the Poti sea port in 2019 has increased by 64% compared to 2016. In the future this trend will remain as trade between China and Europe is increasing. To satisfy an increased demand for transit Georgia would need to have a deep sea port at that time.

Baku-Tbilisi-Kars Railway


Source: Georgian Railway

Baku-Tbilisi-Kars railway is part of the alternative route connecting Asia and Europe. It connects Azerbaijan and Turkey through Georgia. Project in Georgian comprised rehabilitation and construction of Marabda Kartsakhi 180 km railway. The project started in 2008 and officially was opened in October 2017 but it is not functioning fully at this time. In 2019 only 19 freight trains from China used the line. In 2020 planned to move 170 trains. Representatives of the company managing the railway - “Marabda Kartsakhi Railway” can not announce the date when the railway will function at its full capacity.

The functioning of Baku-Tbilisi-Kars railway is important for Georgia to increasing trade volumes with EU countries. This is the first project connecting Georgia and Turkey by railway. The new railway gives the opportunity to diversify freight transit routes and increase the share of railway transport in transit. In the end, the goal of this project is to increase Georgia’s value in the region as a transit country between Asia and Europe. As a competitor to Baku-Tbilisi-Kars railway is considered Chongqing-Duisburg railway which moves freight from China to northern Germany through Kazakhstan, Russia, and Poland.

Construction of logistical centers in Tbilisi and Kutaisi

The development of logistical centers in Tbilisi and Kutaisi was announced by the government in 2017. These two cities were selected according to the research prepared by Dornier ConsultingInternational. The research studied the demand for freight transit and forecasted the significant increase by 2030 that will be conditioned by an increase in the amount of freight moved with containers. Logistical centers should have been in Kumisi (near Tbilisi) and nearby airport territory in Kutaisi. In 2018 the government called for expression of interests to build both centers. At the first phase of the selection process, five companies submitted their proposals including Anaklia Development Consortium, Colin Insaat, Nedlog, Merfi Kazbegi Merfi shipping and commercial service Azerbaijan and China State Construction and Engineering Corporation. Consortium expressed interest in both centers. After the second phase of selection, only one company (China State Construction and Engineering Corporation) applied to build Tbilisi logistical center but the Georgian government stopped developing the project further. Despite the fact that the EU announced to finance the development of Kutaisi (€61million) and Kumisi (€78.3 million) cargo in the Trans-European Transport Network (TEN-T) Investment Action Plan published in January 2019 the future of these projects is not clear.

At present air cargo shipments have only Tbilisi International Airport with three cargo terminals but exporters assess this service as very expensive and low quality if the product is perishable. The main concerns are about Airlines. They are using airliners for passengers to move freight thus frequently perishable products are not transported correctly with proper climate control and safety norms.

Concluding Remarks

Share of EU countries in total export of Georgia has increased in the past four years and this trend is expected to remain in the future. Georgia is the part of the transit route between Asia and Europe that will become more and more demanded with the development of logistical sectors in participant countries. Investments in new projects are critical to developing the logistical sector in Georgia. Development of marine, air, motor and railway transports are equally important. At present air and railway, cargo shipment has the lowest share in the export. Georgia should work towards increasing share air and railway shipment by investing more in the air and railway transports infrastructure. Research showed that Trans Caucasian Transit Corridor is not yet attractive for companies moving freight from Asia to Europe or vice versa. The government of CTC countries should work together to develop the whole route. The government should tightly collaborate with Central Asian and Caucasian countries involved in CTC to create the unified logistical system alongside the corridor.