Economic Benefits of NATO Integration – By Nina Chitaia

Georgian Government is concentrating attention on improving trade ties with Russia to support economic development, but focusing efforts instead on enhancing financial stability by improving security environment through pursuing actively NATO integration would be a much wiser strategy. Not only would NATO membership increase the efficiency of Georgia’s defense spending, but it would also create a friendly environment for the growth of domestic and foreign businesses.

In response to current economic challenges, Georgian government has sought to retain strong trade ties with Russia. According to the Ministry of Agriculture, expanding commercial relations with Russia would benefit thousands of Georgian farmers, businesses, and other private sector enterprises. However, raising Georgia’s dependence on the Russian market would increase its vulnerability to Russian pressure and aggression, and pose challenges to its economic development.

We all witnessed how ongoing crisis in Eastern Europe triggered by Russia’s annexation of Crimea has contributed to undercutting Georgia’s economic development. While its GDP growth has fallen from 7.2% to 3.3% since 2011, the devaluation of the Russian ruble has affected Georgian lari, which currently stands at 2.02 per dollar—the lowest it has been since March 2004. Furthermore, although the inflation rate has remained steady at 1.4% over the past year, prices of select products, such as medical equipment and fruit, have jumped by 15.8% and 20.9%, respectively.

In order to control inflation and maintain financial stability, the Georgian central bank has raised its interest rates and converted $40 million US dollars in Georgian lari. However, Georgia continues to experience economic difficulties, as ongoing turbulent security environment has repelled foreign investments. While companies across Europe and North America were responsible for funding development projects, such as transportation, manufacturing, and energy, since 2011 their investments have shrunk from $1.1 billion to $941.9 million.

Experiencing economic difficulties as a result of Russia’s aggressive tendencies is not new to Georgia, as this has happened previously over the last decade. In 2006, after the Georgian government arrested Russian spies, Moscow blocked key Georgian imports, including wine, mineral water, and agricultural products. Since 70% of Georgian wine was sold on Russian market, Georgian economy significantly suffered. While Kremlin allegedly imposed the ban because of health and safety concerns, 35 countries that imported Georgian products reported no problems with their quality or consistency.

In addition, Georgian market faced economic challenges following the 2008 war with Russia. Between 2007 and 2009, Georgia’s GDP growth fell from 12.3% to negative 3.8%, and, in addition to global economic crisis, turbulent security environment reduced foreign investments from $1.9 billion to $652.9 million. For example, while Caucasus Online, a Georgian internet company, had hired American engineers to install underwater cables, their decision to delay the project because of security concerns cost the company $1 million in damages each month it was put off.

Since extending trade ties with Russia could impede Georgia’s economic growth, Tbilisi should work to diversify trade and improve its financial stability by moving towards NATO integration. Although Georgia could risk losing the Russian market, joining NATO would open up economic opportunities with its member states across Europe and North America.

Thus, in addition to signing an association agreement with Europe and launching negotiations with the European Free Trade Association, pursuing NATO membership would stabilize security environment, and advance Georgia’s economic development by reducing its defense spending and establishing a friendly business environment.

For one, NATO membership would provide collective defense, which would be efficient and cost effective. While in 2013 Georgia spent 736 million lari ($365 million) on defense, in 2008 defense expenditure amounted to 1.6 billion ($794 million), which constituted 29% of government spending. As defense spending doesn’t come cheap, NATO’s cost-sharing would enable Georgia to access the latest technology, install communication systems, and support military training at a lower cost.

For example, while NATO’s total military spending for 2014 was €1.4 billion ($1.59 billion), the cost-sharing agreement enabled its members to spend much less for defense and equipment individually. Since the amount each country contributes to NATO’s military budget is determined by its economic stance, the United States covered 22.2% of the funds, while others, such as Estonia and Poland, covered only 1.0% and 2.6%, respectively. In addition, as NATO provides joint financial support to its military and humanitarian operations, in case of outbreak of conflict affecting one of its allies, each of its member states could avoid taking singlehandedly heavy financial burdens and can rely on allied cost sharing arrangments.

Furthermore, while conflict in Eastern Europe has contributed to undercutting Georgia’s economic activity, NATO membership would provide a secure and stable environment for its economic growth. In addition to domestic politics, a country’s economic growth depends largely on outside factors and international relations, which is why it’s necessary to promote a peaceful security framework. For example, as the following chart reveals, after joining NATO in 2004, economic activity in Estonia and Lithuania, both post-Soviet states, increased significantly. By 2005, GDP in Estonia jumped from 6.5% to 9.5%, and in Latvia from 8.7% to 10.6%.

In addition to stabilizing domestic economy, NATO membership would promote foreign investments in Georgia. It’s clearly demonstrated in the case of Estonia, where, after joining NATO, foreign investment more than tripled from $965.8 million to $3.1 billion. Similarly, such trends started going upwards in Latvia and Lithuania. While foreign investment in both countries totaled $636.9 and $773.2 million in 2004, respectively, by 2007 numbers increased to $2.7 and $2.3 billion.

As Georgia continues moving towards European integration, it should also focus on deepening its integration with NATO. While joining NATO would benefit country’s economic growth by providing cheaper and more efficient defense spending, it would also promote a more peaceful environment, which would contribute to stabilizing economic growth and increasing inflow of foreign investments.

By Nina Chitaia – An MA candidate at the University of St. Andrews and a former intern at the Foreign Policy Initiative.

“Opinions expressed by authors in the materials published on this web-portal, does not imply necessarily the official views of NATO or Romania, as NATO Contact Point Embassy in Georgia”.