The global transport and logistics sector saw major disruptions in recent years as it was ﬁrst hit by the pandemic in 2020. While 2021 showed promising signs of recovery, Russia’s invasion of Ukraine in early 2022 once again rocked the industry and threatened major disruptions. TBC Capital’s latest sectoral review examines the impact of these events on Georgia’s logistics and transportation industry and evaluates the prospects of transforming the country into a regional transport hub.
The Covid-19 pandemic and its related restrictions had a devastating impact on Georgia’s transportation and storage sector. A survey conducted in the spring of 2020 indicated that 69% of companies in the industry had seen a more than 50% decline in revenue as lockdowns, virus containment measures, and supply-chain disruptions threatened their operations. By the start of 2022, many of these pandemic-related disruptions had largely subsided; but Russia’s invasion of Ukraine in February left a fresh sense of uncertainty as a new round of production and transportation delays, international sanctions, and increased commodity prices rippled through the industry globally.
Cargo transit, which consists of rail and road freight services, is an important driver of demand for transportation services in Georgia. In the ﬁrst half of 2022, cargo transit accounted for more than 60% of total external (transit + export + import) cargo transportation volumes.
Prior to 2019, cargo transit through Georgia was on the decline; however, since 2019, the fading impact of the 2014-2016 crisis and increased throughput by Georgian Railway has led to steady double-digit growth in transit volume. This upward trend was further augmented by the outbreak of war between Ukraine in Russia. While Q1 of 2022 registered modest 4% YoY growth of cargo transit in Georgia, Q2 witnessed surging demand and a 29% YoY increase.
TBC Capital’s Senior Research Associate Giorgi Mzhavanadze says that this increased demand is largely the result of companies looking for alternative routes of transport. “Our data indicates that most of this increase is cargo coming from Kazakhstan and Uzbekistan as companies choose not to transit through Russia.” Cargo transit from Kazakhstan and Uzbeki-stan, he notes, spiked by 1173% and 185% YoY, respectively, in the ﬁrst half of 2022.
Mzhavanadze says that this shift in preferred routes indicates the increased level of risk and the stigma associated with transiting through Russia. “It is important to note that current sanctions do not preclude rail transit through Russia. For instance,” he notes, “transit from China through Georgia grew negligibly in the ﬁrst half of 2022. This could potentially indicate that Chinese companies are continuing to transit through Russia and are not seemingly concerned with the associ-ated risks.”
Cargo transit by road also grew substantially in the ﬁrst part of 2022, primarily due to increased demand from Russia (+66% YoY), Turkey (+11% YoY), and the EU (+27% YoY). This, in part, was due to sanctions against Russia, including those on Black Sea ports, that pushed it to increasingly utilize Georgian roads for transit. Georgian roads were particularly impacted by Russia’s increased trade with Armenia and Turkey as it jumped to compensate for Russia’s lack of access to other parts of the global market.
OPPORTUNITIES AND CHALLENGES
As data from land transit indicates, the current geopolitical situation in the region has the potential to increase Georgia’s attractiveness as a major transit hub. The transportation and logistics sector represented 5.7% of the country’s GDP in the ﬁrst half of 2022, which, while surpassing EU levels, trails behind Turkey, the Baltics, and most of Eastern Europe. This indicates that Georgia has considerable opportunities to further unlock its potential as a major gateway for international trade routes.
One potential area of growth for Georgia is through gas pipelines. Following the 2018 expansion of the South Caucasus Pipeline and the recent deal between the EU and Azerbaijan to double gas exports from Azerbaijan by 2027, Georgia will beneﬁt from both increased gas transit and favorable purchase prices far below market rates.
As part of the Trans-Caspian International Transport Route (TITR), known as the Middle Corridor, which links China to Europe through Kazakhstan, the Caspian Sea, Azerbaijan, and Georgia, the country has the potential to beneﬁt from increased transit as routes through Russia are increasingly perceived as risky. Recent updates to Georgia’s railway network are expected to increase its annual capacity from 27 million to 48 million tons annually once its modernization project is completed in 2023. And even with increased demand in the ﬁrst half of 2022, the railroad’s utilization rate came in at 57%, which, according to Georgian Railway, indicates that it is equipped to handle even higher levels of demand.
Despite this increased capacity of Georgia’s railway, there are signs that the rest of the Middle Corridor was not prepared for the recent surge in demand. “One of the major bottlenecks the route is experiencing now is in the Caspian Sea,” explains Mzhavanadze. “There has been a huge queue of cargo and containers stuck in Kazakhstan waiting to be transported to Baku. Unless the entire route is updated, these types of bottlenecks will increase transit times and make the Middle Corridor less attractive.”
Another challenge to the corridor is the capacity of Georgia’s ports. “In Poti, container cargo is currently at a utilization rate of around 67%, so there is room for increased utilization. However, in the case of bulk cargo, Poti is already working at its maximum capacity. Updating Georgia’s ports and increasing their capacity will be essential to boosting the potential of the Middle Corridor.”
These issues are further compounded by the Middle Corridor’s multi-modality and transit times, according to Mzha-vanadze. “In terms of time, compared to the North Corridor through Russia, the Middle Corridor is, on average, about 5 or 6 days slower. Furthermore, more than 90% of trade from China to Europe is still transiting through the sea.”
And while these limitations are substantial, Mzhavanadze says there are still signiﬁcant opportunities for Georgia. “We need to establish long-term relationships with the companies that are temporarily turning to Georgia as a transit route. Many of the Georgian logistics companies who have created short-term contracts with transport companies abroad have said that they believe 30% to 40% of these companies will remain in Georgia in the long term if they feel they are receiving high quali-ty service.”
“For a country like Georgia,” he notes, “an additional 5 to 10 million tons of cargo per year – while negligible in the global scale – has the potential to make a signiﬁcant impact on the economy.”