Kurt Bodewig Bundesminister a.D.

The Economic Situation in Moldova


Bodewig, Kurt (2007): The Economic Situation in Moldova.

I. Introduction

1. The Republic of Moldova borders Romania on the West and Ukraine on North, East and South, and comprises the Eastern half of the Romanian Principality of Moldavia (1359-1859). It has a long history of occupation, which continues to colour its political and economic culture. After being annexed by the Ottoman Empire in the 16th century, the territory was ceded to the Russian Empire in 1812 and became known as Bessarabia. The Prut River on the West, the Nistru River on North and East, the Black Sea at South and the Chilia arm of the Danube River on South East delineated the territory. Bessarabia remained under Russian control until 1918, when it joined Romania. During the World War II Soviet troops occupied Bessarabia. It was briefly recaptured by Romania and was incorporated as the Soviet Socialist Republic of Moldova (SSR Moldova). On August 27, 1991 Moldova declared its independence from the Soviet Union.

2. Contemporary Moldova is the poorest country in Europe and it is ruled by Europe’s only communist government. The Transnistrian “frozen conflict” as well as the country’s dubious role as a hub of human trafficking and smuggling in Europe have led the analysts to characterize it as one of the last remaining security challenges within Europe.

3. Although in 1991 Moldova was considered a middle-income country, the economic situation deteriorated sharply over the following decade. By 1999 the national poverty rate stood at 73%. After having launched a series of structural reforms designed to trigger growth, the poverty rate in 2005 decreased to 14.7% in large cities, 48.5% in small towns and 42.5% in rural areas . Moldova is poorly endowed with natural resources. It is entirely dependent on imports to meet many of its consumer, manufacturing and energy needs. After gaining independence, Moldova lost the direct and indirect subsidies from the Soviet Union, which had comprised nearly 25% of its GDP ; its terms of trade simply collapsed. Moldova lost access to the CIS markets; the sudden influx of close substitutes from the West and the rapid decline of disposable income eviscerated domestic demand for Moldovan-made products. Over the past five years, however, and as a result of significant structural reforms, the economy rebounded, and Moldova’s economy has since grown by 20%.

4. One thorny question has dominated political life in Moldova: should the country link itself to Russia and the CIS system, or should it seek integration with Europe and, by extension, Romania. Five years ago, the Party of Communists of the Republic of Moldova (PCRM) led by Vladimir Voronin was elected on a pro-Russia platform aiming at linguistic Russification, Russian inspired foreign and security policies and integration in CIS. After three years in power, President Voronin declared himself disillusioned with Russia and, in spite of Kremlin’s pressure, he adopted a set of pro-Western reforms designed to tighten Moldova’s links with Euro-Atlantic institutions. This U-turn helped his party’s win 56 seats out of 101 in the 2005 parliamentary elections. At the same time he was able to gain the support of the main opposition parties, the right- conservative Christian Democratic People’s Party (CDPP) and right-leaning Social Liberal Party (SLP). Crucial for the support was a ten-points-cooperation plan concerning reforms in Justice and Medias based on the EU-Action-Plan. But because of the lack of progress in implementing these reforms, the president was more and more criticized by Prime Minister Tarlev, followed by changes in the Economy- and Traffic ministry. Shattered after several scandals and disputes, the opposition is rather weak until today. In fact, reforms can only be carried out with the consent of the President and actually there has been reached a big progress in implementing it into the legislation, but, showing a lack of democratic understanding, is still problematic to realize.

5. The separatist region of Transnistria poses Moldova’s most pressing domestic challenge. The region proclaimed independence from Moldova in 1990, and engaged in a bloody confrontation with the Moldavian army in 1992. Although the warring parties signed a cease-fire that year, this failed to resolve the central bone of contention: the degree of autonomy to be accorded to the region. Transnistria remains a haven for organized criminal groups, which are engaged in illegal arms sales, smuggling, and money laundering. It. hosts the largest post-soviet army depot in Kolbasna, the Russian (formerly Soviet) 14th Army and several Soviet era armament factories. Although there is an ethnic dimension to the Transnistria conflict, the economic dimension may well be more important. In spite of its small size (12% of the territory and 17% of the population), most Moldavian industry is located in the breakaway region.

6. According the International Organization for Migration (IOM), Moldova has the greatest number of victims of human trafficking in Eastern Europe. Law enforcement agencies identified 1643 victims between January 2000 and December 2004 . Victims included women, children and men whom organized criminal groups trafficked for sexual exploitation, labour, begging and petty crime. More than 80% of the these victims illegally crossed international borders. Traffic routes for begging and delinquency have course through Poland and Russia, while human traffickers have used the well worn sexual exploitation byways through the Balkans. Their main destinations are South Eastern Europe and the European Union. Although the authorities, together with IOM, OSCE, UNDP and other bodies have been running information campaigns and anti-trafficking programs, it is difficult to assess the scale of these operations and the effectiveness of efforts to contain and diminish the problem. Judging from the growing number of the identified victims (319 in 2000 to 1643 in 2004), one can conclude both that the identification and prosecution mechanisms have improved over time and that the problem remains very serious. Extreme poverty has been identified by the majority of the victims as the ultimate source of the problem.

7. With Romania’s accession to the EU on January 2007, Moldova became the new Eastern border of the Union. Given its profound political divisions and disastrous socio-economic and security problems the West needs to pay closer attention to the Moldavian problem and develop a strategy to ameliorate conditions there.

II. The Economy

8. Because Moldova is a small, open economy, it has been extremely vulnerable to external shocks like the 1998 Russian currency crisis. At the same time, the lack of political consensus regarding economic policies of the short-lived coalitions in power until 2000, hampered the implementation of a coherent program of structural reforms. Its economic challenges have thus been both internal and international

9. Moldova’s economic transition has been difficult and is hardly completed. The first stage, initiated in 1990, involved the liberalisation of prices, trade and enterprise operations. A second phase began in 1993 when, in cooperation with the IMF and the World Bank, Moldova pursued massive privatisation of state-owned enterprises, introduced a new and stable national currency (Leu) and established a securities market. In 1995, however, the reform process begged down and the economy entered a stage of “stable depression” , which culminated in the 1998 crisis. Land privatisation slowed, and the government accumulated external debt at a rapid pace. Only after 2000 did the Moldavian economy begin to recover as the 2001 elections provided the government with a reform-oriented mandate, which facilitated the conduct of a more coherent economic policy.

10. The process of privatisation began in 1991 with the distribution of vouchers (patrimonial bonds) to all Moldavian citizens. The aim of the process was to redistribute state ownership to all citizens and to create a private sector where none had existed before. Only Moldavian citizens were allowed to participate in this privatisation, however, and this deprived industry of a key potential source of international capital. By 1996, 60% of industry, 93% of the agricultural raw material processing sector and 95% of the services and trade sectors had been privatised. Between 1997-2000, the government completed land privatisation, and conducted a program of privatisations, this timef through investment tenders for 942 enterprises. The goal of the program was to sell property for cash, sell of previously protected infrastructure and attract much needed foreign investment. The Spanish Company Union Ferosa, for example, bought South, Central and Chisinau energy distribution companies in 1999, while Israel investors bought 83.29% of Moldova-tur, a large hotel chain. After 2001 privatisation became more ad-hoc and there was a clear tendency to sell to Russian companies in exchange for reduced debt obligations . There remain a number of key enterprises yet to sold off. Among these are wineries, tobacco companies and Moldtelecom, the Moldavian telecommunications company. Several pharmaceutical companies, water utilities, the Railways and civil aviation companies could also attract foreign investors but have not yet been put on the auction bloc. Foreigners are still not allowed to purchase agricultural or forestland in Moldova.

11. Over the last 5 years Moldavian GNP growth has averaged 7% a year. There are several reasons why economic development has been so robust: structural reforms began to pay off, Moldova’s main trading partners Russia, Ukraine and Romania underwent notable economic growth and production proved easy and cheap to expand due to low capacity utilization in the previous period. Moreover favourable weather conditions helped bolster agricultural output (agriculture and agricultural processing products account for approximately 30% of GDP) . Finally consumer spending soared, fuelled by a significant increase in real wages and pensions, while a growing inflow of worker’s remittances reaching 33% of GDP in 2005 or US$ 920.000.000 (World Bank estimates ). This influx of foreign exchange helped stoke domestic demand.

12. Indeed, Moldova’s economic growth is primarily consumption led. Investment rates remained very low, as do net exports. Although exports grew significantly, reaching 52% of the GDP in 2005, imports that year stood at 83% of GDP (World Development Indicators database ). In this context, it is unlikely that the current rate of growth cannot be sustained over the medium and long term unless there is marked improvement in the investment climate or a rapid expansion in net exports. Neither seems likely given the current policy and demand trends among Moldova’s trade partners.

13. Although Moldavian structural reforms have resulted in the closure of enterprises, unemployment has remained relatively stable over the last 5 years, hovering around 8% (6.6% in 2005) according to the World Bank estimates but over 20% in the EIU statistics. Although the lower numbers may seem comforting, they conceal a rather worrying reality: 25% of the active population has left Moldova, and 50% of those remaining have turned to agriculture for sustenance. The average monthly wage of 1657.6 lei (MOLDSTAT), approximately US$ 129, is simply not sufficient to live on. This helps explain the existence and role of Moldova’s large shadow economy that, simply put, helps Moldavians survive.

14. Since the 1998 rouble crisis, inflation in Moldova has remained low (11.7% in 2004, 13.1% in 2005). Interest rates have continued to fall and the exchange rate against the US dollar has remained relatively stable.

15. Between 1998-99, Moldova’s monetary base expanded by roughly 40% . The Central Bank had to rebuild international reserves while financing a growing budget deficit. It did so by offering direct credits to the Ministry of Finance and buying T-bills for its own portfolio. Although the resulting increase in money supply should have triggered inflation, this did not transpire due to mounting demand for the Leu as a result of GDP growth. Substantial remittances from Moldavians working abroad helped prevent a dramatic depreciation of the national currency against western currencies. Although the Leu did depreciate somewhat against the Euro and the USD, it simultaneously appreciated against the Russian rubble, the currency of its main trade partner.

16. As Russia and the CIS are Moldova’s traditional export markets, Leu appreciation adversely affected exports. Moldova’s export base is small and comprises of a small number of commodities, mainly consisting of agricultural goods and textiles. Russia’s recent ban on Moldavian meat and wine, effective as of March 2006, has had a significant negative impact on the Moldavian trade balance. As Moldova imports virtually all of its energy needs and most of its inputs supplies, recent Russian gas price have had an adverse impact on the trade balance and the terms of trade.

17. Moldova’s trade deficit is reflected in the current account deficit. Although the capital account has registered a surplus in recent years, this has not been sufficient to compensate for the current account deficit. Foreign direct investments (FDI) fell steadily until 2003 partly as a result of Moldova’s deteriorating investment rating. Since then the rating has improved. In 2006, for example, Fitch rated Moldova at B-(stable). This improvement came as a result of falling political risk, improved property rights enforcement, and an overall better business and investment climate. FDI has picked up as a consequence. Potential investors, however, have not favoured equity investments, preferring to put their money in short and medium-term loans.

18. One important transaction, statistically recorded as FDI, was the transfer of 50% of the state owned gas company (Moldovagaz) to Russian Gazprom as a repayment of debt Moldova had accumulated for previous energy imports. This transaction did not generate any cash revenues, it deepened Moldova’s dependency on Russia in the energy sector, and it has left Moldova vulnerable to unilaterally imposed Russian price hikes, which Moldova may be tempted to finance through more asset give-aways. This is obviously not a sustainable policy, and there is a risk that Moldova could become a subsidiary of Russia’s energy interests.

19. Although Moldova’s GDP fell steadily after independence, government expenditures did not. Moldova’s resulting budget deficit, in turn, eventually threw state finances into arrears. Starting in 1997, the government implemented fiscal policies to reduce government expenditures. It slashed direct and indirect subsidies to a range of sectors and borrowers (mainly state-owned loss making enterprises), but it also reduced public outlays on health, education and social protection. The debt improved but at the expense of public access to critical services. Because tax evasion is widespread, there is an ever present risk of fiscal crisis.

20. Moldova’s external debt in 2006 accounted for US$ 2.5 billion. Moldova is primarily exposed to international financial institutions (IFI’s), but Russia and other Paris Club members are also important creditors. In 2006, after signing an arrangement of US$118.2 million with the IMF under the Poverty Reduction and Growth Facility, Moldova was able to negotiate a US$ 150 million debt re-scheduling with the Paris Club of Creditors. Although debt rescheduling has brought some relaxation on fiscal constraints, Moldova’s huge debt hangs like Damocles’ sword over the national economy.

III. Trade And Energy

21. Trade partners. Moldova’s main export partners are the Russian Federation (39%), the EU (26,7%), Romania (11,4%), Ukraine (7,1%) and Belarus (5,2%). It imports from the EU (36%), Ukraine (22%), Russian Federation (13%), Romania (7%) and Belarus (3,6%) . Moldova’s eastern trade partners account for 51,3% of its exports and 38,6% of its imports, while almost all of its imported fuel and electricity come from Russia.

22. Moldova’s domestic oil reserves are estimated at 15 million barrels . In 1960’s the Soviets undertook oil and gas exploration in the southern part of Moldova, but abandoned these fields once more promising reserves were discovered in other parts of the Soviet Union. In an attempt to develop alternatives to the Russian imports, the Moldavian government granted an exclusive oil and gas development concession to the American company Redeco Energy inc in 1995. In 1999 Redeco concluded test drilling at Vladeni Oilfield and Victorovca Gasfield. The estimates indicate a production of 100 000 tons a year for oil and 5 million cubic meters a year for gas. This can only cover a very small share of Moldova’s overall energy needs . In 2005 the Azeri company AZ-Petrol obtained a 99-year concession contract for investing in the unfinished Giurgiulesti Oil Terminal on the Danube River and the right to build an oil refinery and 50 filling stations. In June of that year, the Moldavian trader AZ-Petrol opened the first oil refinery in the country in Comrat. The refinery has a capacity of 600bbl/d, and processes domestic crude from Valeni. In November 2005 AZ Petrol Moldova started exporting the first domestically produced oil products to Bulgaria.

23. As suggested above, Moldova has accumulated a huge debt to Gazprom over the years. Gazprom subsequently slashed gas supplies to the country, and in January 2006, it cut off deliveries after a price dispute. Gazprom eventually reopened the tap after Moldova agreed to pay $3/thousand cubic feet, up from $2/thousand cubic feet. Moldova subsequently initiated negotiations with the Kazakh Company Ascom for alternative supplies, but transporting natural gas from Kazakhstan to Moldova is problematic given the current state of pipeline infrastructure.

24. Moldova generates little electricity and relies on imports here as well. There is one thermal plant under construction in Burlaceni, which is scheduled to on line in 2008. Gazprom is managing the project, and the land on which the power plant is going to be built belongs to Itera. As late as 2001 Moldavians experienced scheduled cut-offs lasting 10-14 hrs/ day. Since 2002 however, due to a program for reducing losses in the distribution grids, electricity has been made available on a round-the-clock basis. The Spanish company Union Fenosa Internacional S.A. acquired the distribution companies from the state in early 2000. In 2001, International Financial Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD) each lent US$ 25 million to increase efficiency and expand existing distribution networks.

25. The eastward orientation of Moldavian trade poses a range of practical problems, the most formidable of which is that traded goods have long had to bypass Transnistria. Moldova has consequently invested a portion of its already limited resources into diverting railways and roads to the north and south of its border with Ukraine . This has raised transportation costs and, by extension, export prices. Although Moldova has entered a Free Trade Agreement (FTA) with Ukraine, a free transit regime is not yet in place.

26. Foreign policy is drifting to the West. Moldavian authorities are anxious to reduce the dependence on Russia and Ukraine and look to do so by establishing a closer relationship with the EU as a main subject, hazarding the worsening of the relation to Russia as a consequence. The relationship between Russia and Moldova is already burdened with Russia supporting Transnistria politically, economically and financially Although the location, size and wealth of the EU would seem to make it a natural trading partner for Moldova, this is far from becoming a reality. The EU’s external tariff system and its high level of agricultural subsidies only explain part of the story. There are also domestic obstacles as well:

  • Moldavian standards, regulations and procedures fail to conform to those of the EU;
  • Inefficient, costly and corrupt border procedures;
  • High transportation costs within Moldova due to poorly maintained infrastructure;
  • Restrictions limiting foreign exchange lending to Moldavian exporters;
  • Time constraints governing the repatriation of export proceeds and the high costs of monitoring, recording and reporting the process to the banking system;
  • A generally poor business and investment climate;

IV. The Transnistrian Market And The Moldovian Economy

27. Any analysis of the Moldavian socio-economic life cannot overlook the role played by the Transnistrian market, although this economy is not accounted for in official Moldavian economic statistics. Transnistria relies on three principal sources of income: legal trade, Russian subsidies and illegal trade (smuggling). Legal Transnistrian trade is dominated by the remnants of Soviet industry. Steel produced in Ribnita generates 50% of total transnistrian export earnings. Although its main trading partners are Russia, Ukraine and Moldova, Transnistria has managed to diversify its market and has managed to build a small presence in the US, the EU, as well as Africa and Asia. Russian subsidies are vital. The separatist republic is given a preferential rate for its natural gas imports, and is often exempted from paying for energy. Smuggling generally takes the form of re-exporting schemes through which paying Ukrainian and Moldavian import duties and VAT are avoided: goods arrive in Ukrainian ports with Transnistria as their final destination, but soon after arriving in Transnistria they are re-exported to Ukraine or Moldova. In this sense Transnistria is a source of genuine fiscal burden to the countries and regions at its borders. The lack of trading accountability is also of great concern to European and US officials worried about human and arms trafficking.

28. Among the post-Soviet separatist regions, Transnistria has achieved a relatively high degree of self-sufficiency. It enjoys reasonably robust infrastructure (railroads, gas and power supply networks, telecommunications), it has introduced its own currency, and it has pursued an effective export policy. When it declared “independence” from Moldova ten years ago, Transnistria was highly centralized and dominated by state-owned enterprises. This began to change in 2000. The Transnistrian political elite altered power sharing arrangements among leading political institutions (President-Supreme Council-Executive) and redefined the relationship between public authorities and private economic actors.

29. The self-proclaimed republic has adopted a presidential system. The President forms the Cabinet of Ministries (the executive) without the agreement of the Supreme Council (unicameral parliament) and appoints judges. The Supreme Council, however, approves the Chairpersons of the Constitutional and Supreme Courts as well as the chairperson of the Central Bank nominated by the President. The President is also the Commander-in-Chief of the Armed Forces. This constitutional arrangement suits the "Khozyain” (patron, father figure, strongman) who casts himself as the protector of national welfare, a role the incumbent president, Igor Smirnov, plays with relish.

30. The Transnistrian system has also eradicated normal distinctions between public interest representation and private economic activity. The Supreme Council, comprising of 43 parliamentarians, has 33 permanent full-time members and 10 delegates who combine their political roles with their economic ones (CEO’s, directors, chairmen of the boards for joint stock companies, etc). Personal and corporate interests are thus directly represented in the Transnistrian political project, and this reinforces the view that the Transnistrian conflict with Moldova is strongly economic in nature, rather than ethnic or religious.

31. In 2000 the Transnistrian government privatised state-owned enterprises. Privatisation represented a pragmatic response to an economic crisis. Transnistria’s economy is very open (foreign trade turnover was 309.7% of GDP in 2006) , and the domestic market is quite limited. It thus must continuously adapt to the shifting external conditions. This, coupled with the lack of investment capital and deteriorating fixed capital stocks, led to a serious deterioration of the local economy. Privatisation was thus seen as a solution to the fiscal crisis as well as means to bolster Transnistrian enterprises efficiency. The government subsequently privatised ¾ of the state assets selling these primarily to Russian companies . These include the strategically important Moldovan Hydroelectric Power Station in Cuciurgan (purchased by the Russian RAO EES) and the Moldovan Metalurgial Plant in Ribnita (bought by the Austro-Ukrainian Hares Group) . In 2005 revenues from privatisation generated funds more than 50% of the region’s budget.

32. Transnistria is a net importer. The composition of its exports is narrow and includes rolled metal (61.4% in 2004) , textiles, electricity, footwear, machinery and equipment. Its primary export markets are Russia and the CIS (42% in 2004) and the EU (33.3%). Transnistria is almost totally dependent on food imports (20% of total imports), but it also imports energy, non-ferrous metals, machineries, transport equipment and chemicals. CIS countries are the primary source of production inputs, and Ukraine is the largest importer. The Transnistrian state has accumulated a massive external debt since the region’s secession. This debt was more than US$ 1.5 bn in 2005. Most of the debt is owed to Gazprom both for gas imports and for fines for the non-payment of outstanding bills. By January 2005, fine for outstanding gas debt reached US$ 525 million.

33. In February 1996 the Moldavian and the Transnistrian authorities signed a protocol for disbanding internal custom controls and agreed to form joint customs controls at the Transnistrian -Ukrainian border. Moldova handed over customs stamps and seals to Transnistrian authorities and both sides agreed to standardize customs regulations and procedures. Moreover, Moldavian authorities also agreed to exempt from taxation Transnistrian imports and exports. Moldova has kept its side of the bargain, but Transnistria has not. As a result, Transnistrian firms export legally without paying taxes to Moldova, and, since Transnistrian authorities apply very low or no taxes on imports, a highly profitable re-export business has emerged for goods from third countries. Goods imported this way are significantly cheaper than goods imported through Moldova (as their prices include the customs duties as well). A great variety and volume of goods officially for Transnistria are somehow “lost” in transit through Ukraine or Moldova. Judging from official import statistic, for example, five hundred thousand Transnistrians consume 12 times as many chickens as do Germans.

34. A large array of goods are smuggled including fuel, alcohol, tobacco and food products. There have also been frequent allegations in the Moldavian media of arms exports from Transnistria to Chechnya and Abkhazia. These allegations however have not yet been proven.

35. Since Transnistria applies very low (or zero) taxes to its imports, official revenues generated through goods re-export is insignificant. The real beneficiaries of the huge profits are individuals in Transnistria and their business partners in Moldova, Ukraine, Russia and elsewhere . Any settlement to the “frozen” Transnistrian conflict would therefore disrupt cash flows to this flourishing and illegal parallel economy. The stakeholders in the current situations are obviously dedicated to the status quo.

36.The Transnistrian leadership has been actively searching for friends and allies. They have developed close contacts with a wide range of Russian institutions. Their lobby has targeted the middle strata of the presidential administration, the Russian Duma, universities, NGO’s, and the Russian Orthodox Church. In Ukraine, Transnistrian authorities mobilized some support from the Presidency and Rada , which have both recognized the value of the intensified commerce with the region. The Transnistrian leadership has been less successful in Moldova. Besides the Russian nationalist Equal Rights (Ravnopravie) political movement, successive Moldavian governments and parties are strongly anti-secessionist. Moldavian business groups, however, have participated in Transnistria’s shadow economy and have helped bloc measures designed to curb illicit trade in the region.

V. Other Significant Actors

37. In recent years, the EU has begun to focus greater attention on Moldova and the surrounding region. After the adoption of an action plan based on the „European Neighbourpolicy“ in February 2005, a special emissary in question on Moldova was appointed, followed by an opening of a EU-delegation in Chisinau in October 2005. Moreover, the EU has, like the United States, gained observer status in the 5 + 2 negotiations in the Transnistria conflict with Moldova. Following a joint request from the Moldavian and Ukraine governments, the EU launched in December 2005 a border assistance mission (EUBAM) to help stop contraband over the 1400 km long border between the two states, including the almost 500 km with Transnistria. With the backing of the EU, the two governments agreed to implement a new tougher customs control, according to which Transnistrian goods must bear a Moldavian stamp to be exported eastwards. Transnistrian exporting companies have to register with the Moldavian authorities in order to obtain the export licence, and therefore pay taxes to the Moldavian state. Beyond the economic revenues that this policy generates, it also restores a degree of Moldavian leverage over the breakaway region. It does not come as a surprise, therefore, that the Transnistrian and Russian authorities have denounced this as a “blockade”.

38. Russia continues to view Moldova lying within its legitimate sphere of geopolitical interest. It actively discourages contact with NATO and has expressed concern about the consequences of the EU’s Eastward enlargement. Russia’s rising leverage in the region is due, in no small measure, to its control of the gas trade. It has exploited Moldova’s economic vulnerability and the Transnistrian problem as a mean to “discipline” an independent minded Moldavian government. Although it agreed to withdraw its troops from Transnistria at the OSCE Istanbul Summit in 1999, Russia has maintained its military presence in the region ostensibly for peacekeeping purposes.

39. Ukraine’s position on Moldova has been fairly consistent. It makes no claim on Moldovan territory and has been willing to cooperate with it. Recent Ukrainian support for the EU- backed border initiative is an expression of Ukraine’s professed European vocation. Ukraine is also concerned about Romania’s influence in Moldova, and would never welcome unification of the two states.

40. After initially enjoying a friendly rapport in the early ‘90s, Moldavian-Romanian relations subsequently turned rather cold. The Moldavian authorities are alarmed by the unionist discourse sometimes heard in Bucharest, and chafe under the notion that some in Romania see their country as Moldova’s “big brother” . In 1992 Romania served briefly as a mediator in the Transnistrian conflict, but Russia did not welcome this. Poland and Lithuania have since became key partners for Moldova. For its part, the US sees a resolution of the Transnistrian conflict as an important step towards stabilizing the Black Sea area and has conducted a dialogue with Moscow on the matter.

41. Romania’s recent accession to the EU generated both emotion and practical problems in its relations with Moldova. From 1991 up to January 2007, the two countries abandoned the visa regime governing cross-border travel. Once Romania became an EU member state, it has had to reintroduce visa requirements for Moldavian citizens and toughen the border security. This measure disrupted the lives of thousands of Moldavians who have been studying, working or engaged in small trade across the border in Romania . Because few countries have consulates in Chisinau, a significant number of Moldavian citizens planning to work or travel in European countries were accustomed to travelling to Bucharest to obtain visas . As of January 1, 2007, they are required to obtain a Romanian visa before applying to the second one . Since remittances play an essential role in the Moldavian economy, blocking the access of Moldavian migrant workers to the West, could have serious consequences. According to IOM, 100 000 Moldavian migrant workers travel through Romania every year. The Romanian consulate in Chisinau can only process 20,000 visa applications per year, one fifth of the number before the EU accession. This could result in a significant decline in Moldavian remittances , and in some estimates, GNP could fall as much as 7% in 2007 as a result. In order to prevent this from unfolding, the Moldavian government has initiated talks with the EU aimed at relaxing visa requirements for Moldavian citizens, and also agreed to the opening of two more Romanian consulates in Cahul and Balti.

42. To avoid the visa hassle, a significant number of Moldavian citizens have applied for Romanian citizenship. Approximately 90 000 Moldavians became Romanian citizens between 1991-2007 , and there were 800 000 applications in the first month of 2007. This creates a paradoxical situation whereby 21% of Moldova’s population would like to have Romanian citizenship, although the 2004 census revealed that only 1,9% declared themselves ethnic Romanian.

43. The US has consistently supported Moldova’s aspirations to build a democracy with a functional market economy operating under the rule of law. To that end, the US has for years been Moldova’s largest bilateral aid donor and outside partner in settling the Transdniestria issue. The US has called for the withdrawal of Russia munitions and troops from the region, and has offered to pay Russia for the expenses incurred. The Russians have resisted these overtures. After September 11th, US’ attention towards Moldova has further increased since unrecognised Transdniestria and its unguarded borders are perceived as a potential terrorist haven and a potential channel for smuggling components of weapons of mass destruction as well as conventional weapons (The Atlantic Council).

VI. Conclusions

44. The recent EU enlargement has brought Moldova into the direct proximity with the EU and NATO. With few prospects of joining either organization in the foreseeable future, there are concerns in Moldova that a new “iron curtain” has descended across Europe and that it will pay a heavy price. This must not be allowed to happen.

45. First and foremost Moldova should continue to advance internal reforms. Its institutions must be strengthened, anti-corruption programs must be implemented and the business and investment climate improved. Secondly, it should promote its regional interests externally in a more assertive fashion. Moldova and its supporters should lobby for better market access to the EU, and work to have the Transnistria issue placed higher on the EU agenda. Ukraine’s support should be secured to help tackle the Transnistrian problem.

46. For its part, the EU should see the Moldova problem as a test of its integrative capacities. The EU’s experience in institution building could help Moldova become a more viable state capable of sustaining a stronger economy. This will ultimately require extending greater market access to Moldova as well as targeted aid to help advance the transition process. Finally the EU should continue to challenge the status quo of the Transnistrian “conflict”.