Caucasus international locations Georgia and Armenia, whose economies unexpectedly boomed within the wake of the struggle in Ukraine, at the moment are going through the prospect of Western retaliation following a spike in commerce with Russia.

The 2 former Soviet states close to Russia’s southern border surged to double-digit progress final yr as an uptick in Russian employees, wealth and commerce supercharged their wider post-Covid recoveries.

Georgia’s economic system grew 10.1% in 2022, whereas Armenia’s jumped 12.6%, in response to Worldwide Financial Fund information. In 2023, their progress is about to sluggish to round 4% and 5.5%, respectively, reflecting a common moderation throughout the broader Caucasus and Central Asia area, the U.N. company mentioned.

Nonetheless, analysts say the basic progress drivers “have not disappeared,” and will put these international locations below the worldwide highlight.

“The explanation we’ve not decelerated as a lot as we may have is that we took benefit of Russia being sidelined by the remainder of the world,” Mikheil Kukava, head of financial and social coverage at Georgian suppose tank the Institute for Improvement of Freedom of Info, instructed CNBC by way of zoom.

Western leaders have raised alarm bells this yr that sure merchants are utilizing international locations reminiscent of Armenia, Georgia, Kazakhstan and Turkey to evade sanctions on Russia.

In its newest financial outlook, the European Financial institution for Reconstruction and Improvement famous that such international locations had been turning into so-called intermediated commerce companions for the remoted state.

“Exports from the European Union, United Kingdom and United States to Central Asia and the Caucasus [have] elevated dramatically, hinting on the rise of ‘intermediated commerce,’ whereby items are being exported to Central Asian economies and are then bought onwards to Russia,” the EBRD mentioned.

This yr, Russia has emerged as Georgia’s second-largest buying and selling associate by imports and its third-largest buying and selling associate by exports, in response to preliminary information from Georgia’s Nationwide Statistics Workplace, Geostat. By 2022, Russian imports into the nation rose 79%, whereas exports to Russia had been up 7%.

Meantime, Russia is Armenia’s largest buying and selling associate by way of each imports and exports. Kyrgyzstan, Tajikistan and Azerbaijan, in addition to different international locations within the area, have additionally recorded a surge in commerce with Russia over the previous yr, IMF information exhibits.

“Altering commerce patterns within the area are a chance, but in addition a threat,” Subir Lall, the IMF’s deputy director of the Center East and Central Asia, mentioned throughout a briefing earlier this month.

Spokespersons for the Georgian and Armenian governments didn’t instantly reply to CNBC’s request for touch upon the uptick, nor did they supply a breakdown of the particular items traded with Russia.

Nonetheless, Geostat information confirmed that automobiles, petrol and unspecified “different commodities” accounted for the overwhelming majority of Georgia’s commerce on a common foundation. Of specific be aware, the variety of autos, plane and vessels exported to Russia quadrupled in 2022 and is at the moment round double 2021 ranges.

“I can not keep in mind a time when Russia was Georgia’s main buying and selling associate — each in import and export. Some gadgets noticed a 1,000% enhance or 500% enhance. That is suspicious, proper?” Kukava mentioned.

“Despite the fact that there’s nothing unlawful right here — they are not sanctioned items — we suspect that it is twin use gadgets, like washing machines, that may be put to so many makes use of,” he added, who famous that the components from such gadgets may very well be repurposed in navy and microchip merchandise.

The burgeoning commerce flows have prompted calls from the European Union and allied nations to both get such international locations on board with sanctions, or slap these international locations themselves with secondary sanctions.

A spokesperson for the European Fee, the EU’s govt arm, instructed CNBC that it’s at the moment working to “spot the redirection of commerce flows from sure third international locations appearing as potential gateways to Russia.”

That follows feedback earlier this month from European Fee President Ursula von der Leyen, who mentioned the group’s eleventh bundle of sanctions towards Russia would concentrate on “cracking down on circumvention” in coordination with Group of Seven nations.

The EBRD now estimates that such “intermediated commerce” accounts for round 4-6% of annualized gross home product in Armenia and Kyrgyzstan. That, in flip, is boosting the international locations’ “burgeoning logistics industries,” and underpinning the appreciation of native currencies, it mentioned.

Nonetheless, Armenia’s central financial institution Deputy Governor Armen Nurbekyan insisted that authorities are observing the nation’s commerce patterns on a weekly foundation to make sure companies are usually not falling foul of the embargoes.

“For Armenia, being compliant with the sanctions is an absolute precedence,” Nurbekyan instructed CNBC. “We’re in a area which may be very turbulent, so we all know what it means to be round international locations that are below sanctions, and I believe now we have been fairly profitable in steering our economic system in a approach that we avoid the problematic circumstances.”

Nurbekyan famous that commerce will increase had been seen “throughout the board” — together with in meals processing, agricultural items, and automobiles — as home companies have taken benefit of elevated demand following the exodus of Western companies from Russia.

He acknowledged that the proportion enhance in demand for superior know-how components, specifically, had been “fairly massive,” however mentioned that was as a result of ranges had began from a low base.

“Nobody is so naive to imagine that given the dimensions of the sanctions, given the dimensions of the flows, that anyone can keep away from any dangers. That’s by no means the case. However our modus operandi is at all times that … we make sure that compliance in our monetary establishments and extra typically is of a better normal [to other countries]. We not going to be opportunistic, in brief,” he added.

Western allies haven’t but specified what their subsequent spherical of sanctions will seem like, nor once they may come into impact. Nonetheless, some analysts say that the prospect of them may push affected international locations to rethink their allegiances.

“We have to wean ourselves off this dependence on the Russian economic system,” Kukava mentioned.

“It is a pariah nation and financial dependence on them means we cannot be capable of commerce with the EU and the U.S. and the Western international locations. The expansion wants to return from commerce with them, quite than with Russia,” he added.

That is very true for nations that aspire to EU and NATO membership.

Georgia utilized for EU membership in March 2022, one week after Russia’s full-blown invasion of Ukraine, and is working towards candidate standing. The nation, alongside Ukraine, has declared its aspirations to NATO membership.

Georgian public help for EU membership has resurged over latest months, with four-fifths (81%) of the inhabitants at the moment in favor becoming a member of the bloc, in response to a latest ballot from U.S.-founded non-profit the Nationwide Democratic Institute. Three-quarters (73%) proceed to help NATO membership.

Armenia, in the meantime, has by no means submitted an utility for both membership, and different Central Asian international locations wouldn’t be eligible to affix the EU.

“We’re including gas to the hearth by intensifying this commerce relationship with Russia. The geopolitical context with which we [Georgia] at the moment are considered is with different Central Asia international locations. However they do not have EU membership as a goal — we do,” Kukava mentioned.