By Dennis Shen, Sovereign and Public Sector

Georgia is the most geopolitically at-risk sovereign state of the 40 we rate publicly aside from Ukraine (rated selective default on long-term debt in foreign currency). This is reflected in the BB long-term credit ratings we have assigned to Georgia, which include an extraordinary one-notch downward adjustment for geopolitical risk.

This one-notch adjustment considers the geographical border with Russia, latent tensions around the separatist regions of South Ossetia and Abkhazia alongside a spectre of a long-run escalation in the conflict given changing aspirations of the Russian government.

Such risks have risen following Russia’s full-scale war in Ukraine. Only if the war ends poorly for Russia do such dangers for Georgia ease.

Georgia’s political situation looks precarious ahead of the elections

As Georgia approaches its parliamentary elections on Saturday, the political landscape remains precarious. The elections follow large-scale demonstrations during and after the passing by June of a Russian-inspired “foreign agents law”, which enforced stricter controls on international and specifically pro-western civic organisations ahead of the elections.

This year’s elections are even more decisive given Geogia’s transition to a fully parliamentary system. The presidency, until this year directly elected and currently held by the pro-European politician Salomé Zourabichvili, will late this year be chosen by an electoral college composed of members of the next parliament alongside local and regional authorities. If parliament remains under the ruling Georgian Dream (GD) party, the presidency may change hands – doubling the stakes for the pro-EU majority of the electorate.

On the surface, opinion polls suggest that GD has been losing voter support in the recent years. Many polls place the party with around 30-40% of the nationwide support, which does not necessarily guarantee re-election after 12 years in power. But given modern history and the slippage of democratic norms around elections, for many it may be hard to imagine the party losing this election and handing over power to the opposition. Reports of Russian interference – like long-standing allegations made by the Moldovan government before and after Sunday’s vote on EU accession – elevate uncertainty.

GD itself has announced that if elected with a so-called constitutional majority of a minimum 113 of the 150 seats in parliament, it plans to ban the “collective National Movement” – the main pro-Western opposition groups – from further political participation.

Consolidation of power could accelerate unpredictable regime changes

Although securing such a parliamentary super-majority may appear on the surface difficult to obtain based on latest polls, the threat to abolish political rivals inevitably worsens a polarised political climate and places the opposition and pro-western core of Georgian civil society in an existential contest this weekend.

Growing tensions in Georgia may have parallels with the experience of Ukraine during the early 2010s (Figure 1) of a nation having a Russian-leaning government facing a problem of democratic legitimacy seeking to sustain close ties with Moscow while most voters want to move nearer the orbit of the European Union and the US.

Georgia’s drifts towards Russia threatens institutional integrity

The pro-Russian drift exposes Georgia to institutional degradation alongside a risk of escalation of western sanctions given the context of Russia’s war in Ukraine and the intensified western sanctions regime against Moscow.

The US has recently suspended USD 95mn of aid for Georgia and has contemplated curbs on long-standing defence cooperation. The EU suspended accession negotiations of Georgia alongside EUR 30m in payments this year under the European Peace Facility. Recognising the drift of Georgia, the final declaration of this year’s NATO summit did not reference Georgia’s prospects of membership for the first time since 2008.

At this stage, sanctions on Georgia remain highly targeted and restricted in scope in the hopes they encourage Georgia to resume a former role as a beacon of democratic transition among the post-Soviet republics rather than pushing Georgia further into Russia’s embrace.

Sanctions risks exacerbate economic vulnerabilities

Nevertheless, further drift towards Russia might necessarily present meaningful risk for Georgia’s economy.

The International Monetary Fund suspended a Stand-by Arrangement, representing a USD 280m insurance policy against economic risks after Georgia’s failure last year to observe specific American sanctions. Official reserves remain off their peaks, standing at USD 4.7bn – or around 105% coverage of short-term external debt – in September this year after the crisis around the foreign-agents law earlier this year.

Geopolitical risk remains elevated

In the context of current geopolitics, it might be sensible for Georgia to promise to join the EU in the long run while seeking to ensure relations with Russia do not fray in the near term. Georgian authorities need to consider the legacy of three wars against Russia including the military defeat of 2008 when the country received limited military support from the US and allies during the Russian invasion. Commitments by GD to re-integrate the breakaway regions of Abkhazia and South Ossetia, however unrealistic, require the government to cooperate closely with Russia.

The elections next month in the US might prove consequential: whereas a Kamala Harris presidency may mean more of the same drift for Georgia, a re-election of Donald Trump holds uncertain consequences for Georgia given his promises of ending the war in Ukraine but only by withholding American budgetary support for Ukraine to achieve lasting peace.

Make sure you stay up to date with Scope’s ratings and research by signing up to our newsletters across credit, ESG and funds. Click here to register.