Moldova’s Association with the EU may help to solve the conflict in Transnistria

Moldova with its 3.6 million inhabitants is today one of Europe’s poorest countries and it will benefit a lot from the association agreement with the EU despite its peripheral location.

Moldovan economy is based mainly on agriculture and forestry. In 2012 this post-Soviet republic posted the GDP of  less than USD 7.5 billion, which ranks it penultimate in Europe in terms of citizen affluence. Yet, it is Moldova, and not Ukraine, considered for many years to be at the forefront of pro-European vanguard, which has become the first European country from the Eastern Partnership community to have initialled the association agreement with the European Union.

The initialling of the document did not come without certain trouble. For many years, in part because of Russian pressure, Moldova was considered an outsider of the European integration implemented within the framework of the Eastern Partnership. Critics indicated the lack of structural reforms and rampant corruption resulting in the weakness of the country’s economy. One of the factors thwarting co-operation was the unresolved conflict with the self-proclaimed Transnistrian Republic, which split from Moldova following the collapse of the USSR. As late as in 2004, the majority of Moldova’s citizens opted for strong ties with Russia. Today, however, in the wake of political changes and removal of local communists from power in 2009, the citizens’ mood changed as well – the majority wants stricter ties with Europe.

Eventually, in 2010, Moldova began negotiating the conditions of association with the European Union, and at the beginning of 2012 also the conditions of Deep and Comprehensive Free Trade Agreement. The negotiations were finalized in June and it is estimated that relevant documents may be signed next year.

The association of Moldova with the European Union covers economic integration, gradual liberalisation of trade in goods and services, free flow of workforce, dismantling of tariffs and abolition of quotas as well as harmonization of Moldovan legislation with the EU normative base.

Coming out of the slump

The example of the poor Moldova shows that post-Soviet republics can, if they want to, reorient their economies and successfully build  economic ties with countries from outside of the ex-USSR. Although the size of the Moldovan economy is microscopic in EU terms, its pace of growth is to be admired. According to the release by the Moldovan National Statistical Office, the GDP of this country in the first half of 2013 posted a 4.9 per cent increase in comparison with the first half of 2012.

Moldova has also reduced its foreign trade deficit. The total value of exported goods and services in the three quarters of this year amounted to USD 1.7 billion and was as much as 11 per cent higher than in the corresponding period of 2012. Exports to EU countries accounted for 46 per cent of total exports and in 2013 reached the value of USD 790 million, increasing by 9.6 per cent on the corresponding period of 2012. This is another year in which the value of exports to the EU has exceeded the value of exports to the CIS countries. The share of the CIS in the total volume of Moldovan exports decreased over a year from 43 to 40 per cent. In the period from January to September, Moldova imported goods of the total value of almost USD 4 billion, i.e.  6.3 per cent more than in the corresponding period of the previous year. Imports from the EU accounted for 45 per cent of total imports and were 7.4 per cent higher than a year before. Imports from the CIS countries reached USD 1.2 billion increasing over the year by 3.2 per cent.

According to EU estimates, the implementation of the association agreement will allow the Moldovan export to EU countries to increase by 16 per cent and the Moldovan GDP to attain 5.6 per cent.

However, experts from  Chisinau point out to  the often superficial and purely formal character of Moldovan preparations for the association.

“How are reforms conducted in our country? The authorities first look into the road map, see what has to be done and do it, so that they can report it in Brussels. But they do it in such a way so as not to harm their own interests,”  said Igor Bocan, the head of the ADEPT association that monitors Moldovan preparations for the association with the EU, citing Moldovan anti-corruption legislation enabling officials to hide abroad the assets obtained illegally at home.

Russian scare

Despite the seemingly obvious benefits of opening the  EU market to Moldovan products, the lobby opting for economic integration with Russia and Russia-sponsored Customs Union remain strong in Chisinau. The opponents of embracing co-operation with the EU claim that economic ties between Moldova and the CIS countries  forged in the times when the republic formed part of the USSR are so strong that they cannot be replaced by relatively fresh economic links with the West. In their opinion  the association with the EU will slam the door of the CIS markets in Moldova’s face, and Russia will resort to a weapon that has already been tested against Ukraine, i.e. a trade embargo.

Admittedly, the plausibility of that last claim spurs little controversy. Moscow’s attitude towards the liberalisation of trade between Moldova and the EU was made clear several months ago by Russia’s representative at the EU, Vladimir Chizhov.

“If some country, no matter whether it is Ukraine, Moldova or any other, strives towards association with the European Union, it should remember that by doing so it will close the door to full membership in the Customs Union and that the Union will react accordingly, also with respect to tariffs. If, in accordance with the terms of association agreements, the signatory countries were to meet certain EU requirements and such requirements were contradictory to Customs Union requirements, conflict would be inevitable,” Chizhov said.

An opposite view is represented by the Moldovan Expert Group think-tank, which claims that there is no need to fear Russian threats. On the eve of initialling the association agreement the group released their analysis of the consequences of European integration for Moldovan economy.

As the authors point out, Russia – contrary to the opinions of the supporters of the Customs Union – does not constitute the main market for Moldovan goods. Although Russia remains the largest single recipient of Moldovan goods, accounting  for 30 per cent of its exports, starting from 2006 the scale of Moldovan exports to EU countries has exceeded exports to the CIS as a whole, which – on top of that – is a larger group than Customs Union countries alone (i.e. Russia, Belarus and Kazakhstan) and also includes a number of other countries which used to form part of the USSR.

Expert Group analysts emphasize that exports to Russia do not generate new jobs and do not stimulate the innovativeness of the Moldovan economy. Two thirds of this exchange consist in re-exporting goods, a practice that does not involve active processing. And a large part of the re-exported production takes place in free economic areas, thus generating no tax income either. As a result, Russia accounts for only 17.5 per cent of exports manufactured in Moldova “from scratch”. And the first place in this respect belongs to Romania, with a 19.5 per cent share.

Moreover – as the authors of the analysis remind their readers – Moldova successfully handled the embargo imposed by Russia on wine in 2006, so now when the EU market opens to its produce, it can handle such an embargo all the more easily. It seems that they have a point. The more so that – as it has turned out – Moldova can count on its EU partner’s help.  Without waiting for the agreement initialled in Vilnius to be signed and ratified, the European Commission has already suggested a full opening of the EU market to Moldova’s main export, i.e. wine, along with the abolishment of the present quota system allowing only 240 thousand hectolitres a year onto the common market.

“A full opening of the EU market to Moldovan wine in times when Moldovan farmers experience difficulties related to the limitation of exports to their traditional markets proves that the EU can show solidarity,” commented Dacian Ciolos, the European Commissioner for Agriculture and Rural Development.

Association will not harm farmers

Sceptics are also concerned about the fate of the Moldovan agriculture, which, as they fear, will not be able to stand up to the well-capitalized and EU-subsidized competition. The authors of the report prepared by Expert Group emphasize that these concerns are strongly exaggerated. The association agreement stipulates transition periods of up to 10 years before the switch is made to non-tariff imports of agricultural products from the EU, a proviso which will furnish Moldovan farmers with an opportunity to prepare for competition with their European counterparts. Independently of that protection, the Moldovan government has promised support to domestic producers.

“The terms negotiated for our agricultural producers will make them feel comfortable in the association framework. Apart from transition periods that have been agreed upon, we will soon launch assistance programmes aiming to increase the competitiveness of the Moldovan economy,” announced Octavian Kalmyk, Moldovan  Deputy Minister of Economy, summing up the closure of negotiations in June.

According to Moldovan supporters of the association with the European Union, the association will have one more aspect – it may contribute to solving the 20-year-old conflict in Transnistria and bring about stabilization in the region. Indeed, the provisions of the association agreement cover also the territory of the self-proclaimed Transnistrian Republic, recognized solely by the Kremlin. Its authorities might be interested in sharing the association benefits and finally yield to Chisinau sovereignty, settling for autonomy proposal that has been on the table for years – speculate Expert Group analysts.

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