The OSCE project for federalization of the Republic of Moldova generated controversial reaction among local authorities and politicians. Here are several considerations of the CISR on economic aspects of this scenario.

Idea of federalization and prerequisites for approximation
of economic systems of the Republic of Moldova and Transnistria
(December 2002)

According to the OSCE estimates (Kimmo Kiljunen, November 2002), in spite of the dissent among political scientists, both Chisinau and Tiraspol authorities realize more and more that draft of the Agreement on federal system of Moldova as a “common state” proposed by the OSCE and guarantor-countries is a basis for further negotiations and decision, in the end, of the Transnistrian problem. Declaration of the President, V. Voronin, at the Prague NATO Summit (“efforts of the Republic of Moldova, OSCE and guarantor-countries to solve the Transnistrian problem and conflict-free reintegration of the country are a model example of joint practical actions”) and confirmation of the Transnistrian leader, I. Smirnov, of that “Transnistria is still devoted to principles of the common state, which have been approved by guarantor-states and mediators” can serve as confirmation of this fact.

Transnistrian problem has many aspects – political, legal, military, economic and humanitarian. Since the moment the problem emerged, in 1989 – 1990, and, especially, after the armed conflict during the spring and summer of 1992, main attention, due to understandable reasons, was paid to the search for political solution. 

At the same time, as we already mentioned it since the mid 90’s (see: www.cisr-md.org ), economic kernel of the Transnistrian problem became more and more apparent. Economic underlying reason of the conflict’s stability remained a mystery for a long time. The conflict became a rather profitable business not only for Chisinau or Tiraspol, but for third parties as well. Yet, the situation has worsened in September 2001 when the Republic of Moldova introduced new customs procedures on its borders (in view of the country’s entry into the WTO), which adversely affected socio-economic situation in Transnistria (drop of budget incomes, interruption of activity of enterprises and reduction of export and financial resources for social goals) and is considered by administration of region as “another form of war – an economic blockade”. 

Consequences of this measure for economy of the Transnistrian region were, indeed, extremely unfavorable. If, according to totals of the 9 months of 2001, the Transnistrian statistics showed an increase of GDP by 11.5%, industry – 7.0%, export – 19.4% and incomes of the population – 9.4%, in the autumn of 2001 economy of the region began shaking with fever and by the Q1 of 2002 industrial output dropped by 21.9%, foreign trade turnover – by 33.5%. Totals of the 9 months of 2002 were even more disturbing: GDP shrank by 13.0%, industrial output – by 22.3%, export – by 47.6%. The downswing was recorded at 83 enterprises, while 13 enterprises did not start operating at all since the beginning of the year. Transnistrian – Moldovan economic ties suffered as well: export to Moldova during the 9 months of 2002 was half as much as the respective period of the previous year, while import decreased by 1/3. 

A rather emotional reaction for the existing situation was implementation, under the Decree of the President of Transnistria of November 4, 2002, of “measures of adequate response for the restrictions introduced by the Republic of Moldova” in form of setting “for all goods imported from the Republic of Moldova a special duty of 20% of their customs value”, outlaw of official Moldovan certificates, etc. “It is most likely that, as a result, commodity turnover with Moldova will come to a minimum” – that is how the Ministry of Economy of Transnistria estimates the prospective consequences. 

However, our opinion is that consequences of this confrontation will be absolutely different: it is very likely that under the influence of external circumstances and Moldovan-Transnistrian incentives there will be taken actions oriented at approximation of two economic systems. 

So, what are these circumstances and incentives? First of all, it is realities of the modern Europe, under which conditions such acute confrontation of neighboring territories or even autarchy of one of them (let us recall Albania of the 60’s) just have no future. On the contrary, there are many typical examples of “cross-border cooperation”, “border crossing”, etc., including administratively divided islands of Ireland or Cyprus. 

Since both parties – the Republic of Moldova and Transnistria – appreciate the concept of federal system of the “common state” rather positively, they will inevitably switch from parallel or even confrontational development of their economies to construction of a common economic area, which will increase both competitive capacity of enterprises and image of the common economy at foreign markets, European and regional structures or in relations with international financial organizations. As it is well known, both “truncated” Republic of Moldova and “unrecognized” Transnistria are in extreme need of this. 

There can be produced the following arguments for that approximation and future integration of two economic systems is not so problematic, but rather possible in the nearest years (3-5 years?):

a)      As “eastern enlargement” of the European Union and the NATO is finished, our region (gripped between Romania and Ukraine, to boot) will become a frontier territory, where confrontation will be contrary to the all-European orientation at stability and integration;

b)      The task is being lightened by that no more than ten years ago this region had a common territorial-economic complex with rather intensive social and production relations, well-developed engineering infrastructure and territorial division of labor. That complex cannot be recovered, but many of its components (infrastructure, internal trade and points of social inter-attraction) remained;

c)      Trade between two sub-regions of the future “common state” has not died down. Thus, Moldova’s share in Transnistria's export in the first half of 2002 was of 26.6%, while Russia’s – 13.9%. 34.0% of Transnistria's import fells at Russia, but if one takes into account that natural gas supply from Russia makes up 26.1%, then it will become evident that Russia’s import volume (7.9%) and the one of Moldova (7.2%) are equal. Moreover, Moldova’s share in the Transnistria’s export-import can be at least doubled at the expense of informal sector turnover (oil products, construction materials, textile and shoes, alcohol, tobacco, medicines, etc.). Draft of Transnistria's budget foresees deficit of 36% as regards budget expenditures and 6.5% as regards GDP (“Transnistria for 11 years has never had such strained budget before” – according to the estimate of the Ministry of Economy of Transnistria). The declared reorientation of enterprises at Ukraine will complicate financial situation of them and the region as a whole even more. This circumstance will also prompt to search for a compromise with Moldova – the nearest trade partner;

d)      The more apparent factor urging on approximation of two economies is intensifying “Russian presence”, at first, in Transnistria and, now, in Moldova as well both as an owner or joint owner of enterprises and due to strategic orientation at Balkans of such giants of the Russian business as RAO EES, RAO Gazprom, Itera and Lukoil;

e)      Since the middle of 2002, in Transnistria finally began mass (pecuniary!) privatization of enterprises mainly oriented at buyers from Russia. Following this, there will inevitably be weakening of the “state regulation” and development of market independence of economic units, including selection of partners not through a directive, but based on common sense;

f)        Finally, another quite important incentive to integration of two sub-regions of the “common state” are benefits of joint entering into European and world markets, realization of large projects within the framework of the Pact for Stability in the South-East Europe (IX transport corridor, electrification of railroads, reconstruction of power lines, etc.) and cooperation with donor-countries and international financial organizations. 

The task of approximation and, especially, integration of economic systems of the Republic of Moldova and Transnistria is not an easy one. 12 years of their “parallel development” generated considerable differences of legal bases, property structure, budget and tax system and social policy. Besides, recurrences of the “customs war” were recorded twice during the last year (first, in September 2001 and, later, in November 2002) and political polemics was supplemented with economic confrontation. 

Our opinion is that long-term economic interests and common sense will finally prevail and the conflict will be overcome. Federalization of the future “common state” may fully contribute to this, since under conditions of the developed federalism as, for instance, in Austria, Belgium, Germany, USA or Switzerland regional peculiarities and problems are taken into account and solved in the most constructive way, providing the state with both external unity and internal diversity.

Anatoly Gudym, George Balan,
Center for Strategic Studies and Reforms