Transnistria’s Economy Going from Bad to Worse

transnistriaAfter months of crisis which has been ongoing since 2013, Transnistria faced the threat of economic catastrophe. Such poor conditions of Transnistria’s economy have additionally worsened due to the Ukrainian crisis. Russian aid, which had been so far one of the most important pillars of the region’s economy has significantly been limited due to the bad economic situation inside Russia.

 

Meanwhile, budget revenues are not enough to secure the payments of pensions and salaries for employees of Transnistria’s public sector. Obviously, the dramatic economic situation poses a direct threat to stability in the region and creates tensions among society in this unrecognised republic. However, the current crisis can also be seen as an opportunity. It is the best moment to push Tiraspol to strengthening political and economic cooperation with Chișinău.

 

The anatomy of a crisis

 

The financial situation of Transnistria began to noticeably worsen at the beginning of 2013. Then, a 70 per cent increase in the price of gas introduced by the so-called President Yevgeny Shevchuk made the largest steel producing company in the region, Moldova Steel Works (MMZ), to lose its competitiveness and nearly shut down production. MMZ, based in Rîbnița, is the backbone of the Transnistrian economy. Revenues from other key industrial companies have also evidently dropped. The Rîbnița cement factory and MoldGRES, the biggest power plant in the region suffered the worst. MoldGRES, which exported energy to Moldova and Romania, resigned from using gas and switched to the less effective and less accessible coal. As a result, Transnistria’s industrial production and export decreased in 2013, respectively, by 14 and 30 per cent.

 

The limitation or halting of production by major Transnistrian industries quickly influenced the financial situation in the region and raised the deficit. On the one hand, large companies could not pay income taxes; on the other hand they nearly stopped gas consumption completely. This was significant as Transnistria receives gas from Russia, de facto for free. Selling Russian gas was then a serious source of income for the Transnistrian budget – up to 270 million US dollars per year. This revenue was usually used by the government to fill the budget gap. A drop in gas demand (by 20 per cent in the first quarter of 2013 alone), thus, was a painful test for the Transnistrian economy.

 

By the end of 2013, the economic situation appeared to have stabilised. MMZ re-launched production along with other companies and factories. As a result, Transnistrian exports noted a 42 per cent increase in 2014. However, the improvement did not last long. The Russian-Ukrainian conflict brought very negative consequences for the Transnistrian economy. The worsening economic situation of Ukraine, which was Transnistria’s important trade partner, and the hryvnia’s decrease in value cut Ukraine’s demand. Trade flows between Transnistria and Ukraine soon dropped by 25 per cent (compared to a year earlier). At the same time, two other important currencies noted a fall in value: the Russian rouble and the Moldovan leu. Russia and Moldova make up to 15 and 40 per cent of Transnistria’s export, respectively. Within the last four months of last year, Transnistria’s export fell by 21 per cent.

 

The lean years

 

A lower amount of budget revenues in July 2014 pushed Transnistrian authorities to cut public expenditures. On July 2nd 2014 the government reduced wages in the public sector by 15 per cent. Administration expenses were also limited. The Transnistrian parliament gave the government the right to fill the deficit gaps with revenue from the Transnistrian Republican Bank and its reserves of special funds (i.e. for infrastructure). However, this was not enough. As compared to April and May 2014, the budget received around 95 and 85 per cent of the projected revenue; while in January 2015, the Transnistrian budget received only 25 per cent. Such poor indicators forced officials to introduce another round of cuts and raise taxes. Communication discounts for pensioners were abolished and the government is planning to introduce a mandatory liability insurance for the bearers of cars registered outside Transnistria as well as paid visas for foreigners. What is more, new import customs on grain and utilities costs were raised.

 

Actions undertaken by the government were opposed by the society as the situation continues to worsen. Additionally, because of difficult economic situation of Russia and hight cost of conflict with Ukraine, the Kremlin has significantly reduced its aid for Transnistria. For example, a monthly bonus of 15 dollars for Transnistrian pensioners was cancelled. In spite of austerity measures, employees of the public sector will probably not receive salaries for January. Shevchuk declared that Transnistria wants to take a $100 million loan to settle its financial obligations but, due to the economic crisis in Russia, it is not sure who could guarantee such loan to an unrecognised state.

 

In the nearest future, the situation is likely to worsen even more. If the current situation is somehow fixed; at the beginning of 2016 the Transnistrian economy will be hit another time. The EU regulation on Autonomous Trade Preferences (ATP) will expire in 11 months. Right now, thanks to the ATP, enterprises operating in Transnistria can export goods to European Union members states enjoying custom preferences. At the beginning of 2016, however, Transnistria’s industry will be much less attractive for European buyers and will likely lose considerable share of the EU market, which receives 35 per cent of Transnistria’s current production.

 

A window of opportunity?

 

The expiration of the ATP is a result of the Association Agreement that Moldova signed with the EU in June 2014. Its integral part is the Deep and Comprehensive Free Trade Area (DCFTA) which will replace the ATP in 2016. However, as some regulations of the DCFTA have been already in use since September 2014 in Moldova, they are not applicable to Transnistria. Although it would be profitable for Tiraspol, it does not want to implement the agreement. A critical position on DCFTA presented by Transnistria is a direct result of its addiction to Russia. Transnistria’s rejection of the Association Agreement is nothing more but the execution of the Kremlin’s political will, which is to slow down Moldova’s integration with the EU.

 

The current situation can be, however, seen as a window of opportunity. The economic crisis in Transnistria and the perspective of its worsening after the ATP expires, lower the capabilities of Russia’s aid and the Kremlin’s focus on Ukraine presents an opportunity to put pressure on Transnistrian authorities in order to get certain concessions such as an agreement to adopt the DCFTA. It would give Transnistria the possibility to keep competitiveness of its economy and to develop trade with the EU. It would also lead Transnistria to adopt a part of the acquis communautaire which could become a tool of modernisation and support integration with the rest of Moldova (or at least help to avoid further division) which has been already implementing the acquis. At the same time, the EU could offer Transnistria financial help under the condition that it will implement the DCFTA in the future.

 

According to unofficial signals coming from Transnistria, Tiraspol is indeed interested in entering such talks. The only real obstacle in the way is Moscow, but in the current circumstances there is hope that such actions would not meet firm opposition. It is unlikely that Transnistria’s bankruptcy is in Russia’s interests. As Russia cannot (or does not want to) financially help Transnistria at the moment, the development of its trade relations with the EU could be perceived by the Kremlin as the only acceptable way out of the situation.

 

There is no doubt that the current situation in Transnistria should be carefully observed by both Chisinău and Brussels. Not only because it gives such a unique chance but also because of its possible negative consequences in case it is not resolved.

 

Kamil Całus is an analyst with the Warsaw-based Centre for Eastern Studies.

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