Belarus Moldova

COUNTRY REPORT

3rd quarter 1998

The Economist Intelligence Unit 15 Regent Street, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through subscription products ranging from newsletters to annual reference works; through specific research reports, whether for general release or for particular clients; through electronic publishing; and by organising conferences and roundtables. The firm is a member of The Economist Group.

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Contents

3 Summary

Belarus

5 Political structure 6 Economic structure 7 Outlook for 1998-99 9 Review 9 The political scene 12 Economic policy 14 The economy 17 Foreign trade and payments 18 Business news

Moldova

19 Political structure 20 Economic structure 21 Outlook for 1998-99 25 Review 25 The political scene 27 Economic policy 30 The economy 33 Foreign trade and payments 35 Business news

36 Quarterly indicators and trade data

List of tables 9 Belarus: forecast summary 14 Belarus: real interest rates 15 Belarus: monthly wages and pensions 16 Belarus: consumer prices 18 Belarus: current account 24 Moldova: forecast summary 27 Moldova: central government budget 30 Moldova: output of selected products 31 Moldova: consumer prices 33 Moldova: current account 36 Belarus: quarterly indicators of economic activity 37 Moldova: quarterly indicators of economic activity

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 2

38 Belarus: OECD trade 39 Moldova: foreign trade 40 Former Soviet republics: exchange rates 41 Former Soviet republics: GDP and GDP per head

List of figures 9 Belarus: gross domestic product 9 Belarus: inflation 13 Belarus: volume of dollar foreign exchange transactions 24 Moldova: gross domestic product 32 Moldova:Transdniestrian rouble 34 Moldova: net protfolio investment

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 3

September 1st 1998 Summary

3rd quarter 1998

Belarus Outlook for 1998-99: Repression of the opposition will continue, preventing it from active participation in the political process. A presidential election in 1999 is extremely unlikely. The regime will continue its deliberately defiant attitude towards the West. Economic policy will target high growth and low unemployment as the first priorities while the currency will continue to plunge. Russia’s devaluation of the rouble and coming economic recession will have a negative effect on Belarusian economic growth.

The political scene: The president, Alyaksandar Lukashenka, has evicted foreign ambassadors from their residences in a Minsk suburb, causing the recall from Belarus of ambassadors from the EU, the US and Japan and reciprocal actions by those countries against Belarusian ambassadors. Undeterred, he has continued to violate international agreements on the treatment of diplomats resulting in the virtual international isolation of Belarus and a ban on his own travel to EU countries and to the US. A familiar pattern of oppression of the opposition continued with activists arrested, political parties disbanded and newspapers threatened with closure. Yet Belarusian legislators conducted hearings on human rights in Belarus and found no significant violations by the government.

Economic policy: President Lukashenka’s stated goal is to reconstruct the economic system of the late Soviet period. This translates into policies of high economic growth and full employment supported by soft budget constraints, in turn leading to expansionist monetary and credit policies and the severe restric- tion of foreign-exchange transactions. Privatisation and structural economic reforms are non-existent. Price controls are accompanied by the sporadic rationing of basic goods.

The economy: GDP and industrial production have continued to grow at high rates, although some sectors of the economy have experienced a drop in output. The Belarusian rouble has continued to plunge on unregulated markets while the official exchange rate has been maintained at an artificially high level. Inflation exhibited a slowing trend in July, even though it remained higher than the government target, but shortages of basic consumer goods indicate the presence of considerable latent inflation.

Foreign trade and payments: Russia remains the leading trade partner accounting for more than 60% of Belarus’s foreign trade. The trade deficit is widening as is the current-account deficit. Belarusian debt for Russian gas amounted to $250m in August although this may be offset by deliveries of Belarusian goods to Russian state-financed organisations.

Business news: Russia and Belarusian firms are set to agree a joint venture on weapons production. The US car manufacturer, Ford, has announced plans to increase investment in its Belarusian plant.

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Moldova Outlook for 1998-99: The governing coalition, the Alliance for Democracy and Reforms, will hold together to pull the country through the economic crisis. Russia’s internal problems means that a resolution of either Transdniestr’s status or troop withdrawals is that much more unlikely. Growth will be affected by the collapse in Russian demand, but is likely to remain positive. The EIU does not expect Moldova to be able to withstand pressure for a currency devaluation, despite the resumption of IMF lending. Consequently, inflation will rise in 1999.

The political scene: The Bloc for a Democratic and Prosperous Moldova (BDPM) has broken ranks from the government coalition and voted with the Communists, yet the coalition remains intact. Moldova has made little progress in negotiations on the Transdniestr issue, but has resolved its territorial dispute with Ukraine.

Economic policy: The government has revised the 1998 budget but is facing problems collecting taxes and duties. The IMF has given the new government qualified support and indicated it will resume lending shortly. Negotiations are continuing with Gazprom following cuts in gas supplies in July. Electricity prices for domestic consumers are set to rise.

The economy: Industrial output rose slightly year on year in the first half of 1998, but the grain harvest is not as strong as it was in 1997. Inflation has been low so far this year, but unemployment is rising. The World Bank has published a report on the economic situation in Transdniestr.

Foreign trade and payments: The trade deficit continues to widen, putting strong pressure on Moldova’s current-account position. Moldova appears to be persisting for the moment with plans to issue a Eurobond, despite credit rating downgrades.

Business news: The privatisation of Moldtelecom has reached a dead-end for the second time. The EBRD has extended a loan to refurbish Chisinau airport.

Editor: Kitty Ussher All queries: Tel: (44.171) 830 1007 Fax: (44.171) 830 1023

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 Belarus 5

Belarus

Political structure

Official name Republic of Belarus

Legal system The constitution adopted in March 1994 was amended by referendum in November 1996 to increase presidential powers and form a bicameral parliament

National legislature Bicameral parliament (National Assembly): upper house, Council of the Republic, with 64 members; lower chamber, the House of Representatives, with 110 members

National elections June 23rd and July 10th 1994 (presidential); May 14th and 28th, November 29th and December 10th 1995 (legislative); next presidential election was originally due in 1999, but now likely to be postponed to 2001; the date of the next legislative election to be decided by the president.

Head of state President, Alyaksandar Lukashenka, elected with 80% of the popular vote on July 10th 1994

National government The president appoints the Council of Ministers and has strong executive powers

Main political parties The registered parties are: Communist Party of Belarus (CPB) and its ally, the Agrarian Party; parties of left-wing orientation include the Party of People’s Accord and the Party of All-Belarusian Unity and Accord; parties of pro-reform orientation include the United Civic Party and the Belarusian Social Democratic Union (Gramada); the main opposition party is the Belarusian Popular Front (BPF)

Council of Ministers Prime minister Sergei Ling First deputy prime minister vacant Deputy prime ministers Vladimir Garkun Vasily Dolgolyov Valery Kokarev Vladimir Zamyatalin

Key ministers Agriculture Ivan Shakolo CIS affairs Ivan Bambiza Communications Vladimir Goncharenko Defence Alyaksandar Chumakov Economy Vladimir Shymev Education Vasily Strazhev Enterprise & investment Alyaksandar Sazonev Finance Mikolai Korbut Foreign affairs Ivan Antonovich Fuel & energy Valentin Gerasimev Internal affairs Valentin Agolets Labour Ivan Lyakh Social security Olga Dargel State property & privatisation Vasily Novak

Central bank governor Piotr Prakapovich

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 6 Belarus

Economic structure

Latest available figures

Economic indicators 1993 1994 1995 1996 1997 GDP at market prices (BRb bn) 986 17,815 119,813 184,174 351,043 GDP at exchange rate ($ m) 312 3,830 10,407 13,778 13,383 GDP at purchasing power paritya ($ bn) 43.8 39.2 36.1 37.9 42.5 Real GDP growth (%) –10.6 –12.6 –10.1 2.6 10.0 Consumer price inflation (av; %) 1,190 2,221 709 53 64 Population (mid-year; m) 10.36 10.31 10.28 10.25 10.22 Exports ($ m) 1,864 2,510 4,689 5,790 7,383 Imports ($ m) 2,428 3,066 5,466 6,939 8,718 Current-account balance ($ m) –404 –506 –567 –516 –799 State budget balance (% of GDP) –5.6 –3.6 –2.8 –2.0 –2.1 Reserves excl gold ($ m) n/a 101.0 377.0 469.2 393.7 Foreign debt ($ m) 969 1,273 1,667 1,157 1,082a Exchange rate (official; av; BRb:$) 3,160 4,652 11,513 13,368 26,205 Exchange rate (av; BRb:Rb) 3.39 2.12 2.53 2.61 4.53

September 3rd 1998 BRb50,200:$1 (official); BRb240,000:$1 (Moscow banks)

Origin of gross domestic product 1996 % of total Components of gross domestic product 1997 % of total Agriculture & forestry 15.9 Private consumption 59.1 Industry 35.3 Public consumption 19.3 Construction 5.5 Gross fixed capital formation 24.7 Housing & public utilities 4.0 Increase in stocks 1.0 Services 39.3 Net exports of goods & services –4.1 Total 100.0 GDP 100.0

Principal exports 1997 % of total Principal imports 1997 % of total Machinery & equipment 31.2 Mineral products 27.5 Chemicals 11.5 Machinery & equipment 20.0 Textiles 11.3 Metals 12.5 Food & food products 8.6 Food products 12.9 Mineral products 8.2 Chemicals 10.4 Metals 9.2 Plastic & rubber 5.5

Main destinations of exports 1997 % of total Main origins of imports 1997 % of total CIS 73.1 CIS 66.8 of which: of which: Russia 64.7 Russia 53.6 Ukraine 6.0 Ukraine 11.2 Non-CIS 26.9 Non-CIS 33.2 of which: of which: Poland 3.4 Germany 8.0 Germany 3.0 Poland 2.9 Lithuania 1.9 Lithuania 2.2 a EIU estimates.

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Outlook for 1998-99

The suppression of the The current political regime in Belarus, led by the president, Alyaksandar opposition will continue— Lukashenka, has demonstrated both its ability and willingness to suppress the opposition. This trend will continue, the ultimate goal of the regime being to completely stamp out any visible opposition by the time of the 1999 presidential election. Mr Lukashenka plans to cancel the 1999 presidential election citing the terms of a referendum held in 1996 as the legitimisation of his stay in office until 2001. Western observers maintain, however, that the 1996 referendum was not entirely fair, and any opposition groups that are strong enough in 1999 will undoubtedly oppose the postponement of the election but are unlikely to be successful.

—and isolation from the Support for the Belarusian opposition by the EU and the US, as well as continu- West will be self-imposed ing criticism of the Lukashenka regime in Western media will continue to irritate the president and his close entourage. As a result the EIU does not expect Belarus to take steps out of its present international isolation, which in any case was largely self-imposed as a result of the conflict over foreign ambassadors’ residences in Belarus (see The political scene). However, given their negative attitude towards the West, this isolation will not be as painful to Belarusian politicians as it might seem. Meanwhile, a low level of economic relations with more economically developed countries will allow President Lukashenka to continue his conspicuously pugnacious stance without risking negative consequences to the economy.

The government will The current highly interventionist economic policy, which has as its main target high economic goals high growth rates and full employment, will continue. It will be con- growth— ducted through the direct control of the government over most economic entities and activities. Privatisation and structural reforms are unlikely. Those economic activities which the state cannot control will be declared illegal. However, the black market will continue to exist because the government will lack the resources to eradicate it.

—while restricting The monetary system will suffer from continuing restrictions on currency ex- foreign-exchange change and the overvalued official exchange rate of the Belarusian rouble. The transactions— recent devaluation of the Russian rouble will, in the eyes of the Belarusian authorities, provide a further justification for isolating the currency from the international markets, leading to greater foreign-exchange restrictions. Mean- while, monetary emissions will be contingent on the short-term needs of the industrial and agricultural sectors, resulting in erratic and unpredictable expansion of the quantity of money, contributing to heightened inflationary expec- tations. Foreign currency (mostly US dollars) will become the sole means of payment in black-market transactions. At the time of writing, the black-market value of the Belarusian rouble was in free-fall, having collapsed by 70% in the last two weeks of August, to around BRb240,000:$1, compared with an official rate of exchange of BRb50,200:$1. We expect that the free-market value of the Belarusian rouble will continue to fall, owing to the combined effects of high inflation and the collapse of the Russian rouble.

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—and attempting to The government will continue to implement price controls. This will keep control inflation visible inflation down while contributing to the emergence of latent inflation. The latter, associated with shortages of goods and growing black-market prices, is characteristic of a centrally controlled economy. However, despite being quite tangible for the consumer, latent inflation is almost impossible to calculate in monetary terms. Thus, the official inflation figures will not reflect the real situation. We forecast average annual inflation as presented by the official Belarusian statistics to be around 48% in 1998, rising to around 73% in 1999. The real rates of inflation which include black-market prices will exceed 120% in 1998 and 150% in 1999.

The turmoil in Russia will As exports to Russia are vital for the Belarusian economy, the recent Russian bring down growth in devaluation of the rouble and projected economic recession will have a strong Belarus— negative impact on economic growth in Belarus. Whereas previously the EIU had expected growth in the Russian economy in 1999, we are now forecasting an economic contraction of 3% in 1998 and 5% in 1999 as a result of the collapse in real incomes that will accompany the devaluation. The rouble devaluation itself will result in a decreased competitiveness of Belarusian goods on the Russian market. The return to recession will lead to the reduction of demand for both domestic and imported goods. The short-term consequences for the Belarusian economy will be an increase of stocks of unsold goods; in the longer term the consequence will be a slowdown of economic growth, particularly in the manufacturing sector. We forecast an increase in stocks of unsold goods in the next six months of up to 30% and a slowdown in GDP growth to 9% in 1998 and 5% in 1999.

—but some factors will The direct impact of Russia’s recession on the Belarusian economy is likely to cushion the impact be offset by several factors. First, some goods imported from Belarus to Russia (eg foodstuffs) have a low elasticity of demand, such that higher prices do not cause a proportionate contraction in demand. The second factor is the preser- vation of the Soviet-period supply chains whereby some enterprises were the sole suppliers of particular products. For Belarusian exporters this means the absence of competitors within Russia. In this situation, Russian enterprises will have no choice but to continue to import Belarusian goods, albeit in smaller quantities. Third, the predominantly barter nature of transaction between Belarusian and Russian entities, as well as the use of the US dollar as the means of settling accounts, will to a large extent insulate transactions from fluctua- tions of the money market.

Finally, the Belarusian rouble will itself continue to lose value due to factors unrelated to the Russian devaluation. Restrictions on foreign-currency transactions involving the Belarusian rouble will remain in place, thus keeping demand for it low. Combined with continued high levels of inflation, this will ensure that the Belarusian rouble continues to depreciate (both on the official markets and in the black market), offsetting the relative price impact of the Russian devaluation.

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 Belarus 9

Belarus: forecast summary (% change year on year unless otherwise indicated) 1996a 1997a 1998b 1999b Real GDP 2.6 10.0 9.0 5.0 Industrial production 3.2 17.6 11.0 6.0 Agricultural production 1.0 6.9 8.0 4.0 Consumer prices Annual average 53 64 48 73 Year-end 39 63 60 80 Exports ($ m) 5,790 7,383 8,121 8,933 Imports ($ m) 6,939 8,718 9,764 10,936 Current-account balance (% of GDP) –3.7 –6.0 –6.5 –6.9

a Actual. b EIU forecasts.

Belarus: gross domestic product Belarus: inflation (b) % change, year on year % change year-on-year; end-period

Belarus 250 Eastern Europe excl CIS 12 10 200 8 6 4 150 2 0 -2 100 -4 -6 -8 50 -10 -12 1995 96 97 98(a) 99(a) 0 1995 96 97 98(a) 99(a) (a) EIU forecasts. (b) Excl black market price rises. Sources: IMF, International Financial Statistics; Belarus Economic Trends; EIU.

Review

The political scene

The president evicts The political scene over the last three months has been dominated by a breakdown Western ambassadors in diplomatic relations between Belarus and the West. In May foreign ambassadors from their residences— who lived in Drozdy, a compound of country houses near the capital city, Minsk, were ordered out of their residences by the Belarusian authorities. In Soviet times, the Drozdy compound used to house top Communist Party officials, but after the dissolution of the Soviet Union, the houses were allotted to foreign ambassadors, mostly under lease agreements. The Belarusian president, Alyaksandar Lukashenka, moved to a house in the compound following his election in 1994. The decision to evict the ambassadors originated within the presidential administration and was justified by the deputy foreign minister, Nikolai Buzo, as a necessary step to undertake urgent repairs to the antiquated sewerage system in the compound. Despite the diplomats’ refusal to leave, the Belarusian authorities repeated their order on June 17th and two days later water, electricity and telephone services to the ambassadors’ residences were

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cut off and the gates to the US ambassador’s residence were welded shut. Trenches dug across the entrances to the houses prevented the ambassadors’ vehicles from moving in and out. While all this was happening, President Lukashenka signed a decree permitting the diplomats to stay in Drozdy (as long as they are willing to live without electricity and water supply) with one important caveat: the ambassadors would stay as his personal guests since the whole compound was to be declared the residence of the president of Belarus.

—provoking a diplomatic In response, on June 22nd the EU recalled its ambassadors from Belarus, swiftly incident— followed by the US and Japan. The Presidency of the European Union (held at the time by the UK) issued a statement objecting to the ambassadors’ treatment by the Belarusian authorities and pointing out that such treatment violated the Vienna convention on diplomatic rights. As a reciprocal act, Belarusian ambassadors to the EU countries were asked to leave.

—that adds to the The Belarusian Foreign Ministry condemned the ambassadors’ recall as an country’s isolation example of “political pressure and ultimatums directed at Belarus”. Apparently unperturbed by the increased international isolation caused by their actions, the Belarusian authorities violated international agreements further by dis- mantling the fences around the ambassadors’ residences and allowing workers to enter the buildings. EU countries and the US responded by banning President Lukashenka and his top officials from entering their territory. Overall therefore, a deliberately confrontational stance by the Belarusian authorities over two dozen country houses resulted in Belarus’s isolation from some of the world’s richest and most influential countries. President Lukashenka used the occasion to accuse the West in general and the US in particular of trying to punish Belarus for its alliance with Russia and its opposition to the expansion of NATO.

Mr Lukashenka remains At home, however, the president’s populist policies and confrontational stance popular— towards the West has earned him substantial popular support. Opinion polls show that his approval rating currently stands at 45%, approximately the same as in the first round of the presidential election in 1994. However, popular support for President Lukashenka in the capital city, Minsk, seems to be significantly lower. According to opinion polls conducted in July, 62% of respon- dents were in favour of a presidential election in 1999 and only 21% said that it should take place in 2001. Mr Lukashenka, whose term in office technically expires on July 20th 1999, insists that under the terms of the referendum he held in 1996, his presidency is in fact legitimate until 2001. There exists considerable doubt, however, as to whether the 1996 election was free and fair (see the EIU’s Country Profile for 1998-99).

—although criticism risks Another indication of undemocratic practices occurred on June 4th when the imprisonment Belarusian legislature approved a bill which makes insulting the president a criminal offence. The bill, presented to parliament by the head of the president’s administration, states that public insults directed against the president may be punished by up to four years in prison, or two years in a labour camp, or a fine. Repeated offences are punishable by a five-year prison term. Since the definition of “public insult” is not clarified by the legislation, the passage of

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this bill leaves much open to political interpretation, further adding to the president’s power.

The KGB has begun to use Although too weak for a concerted and sustained political action, opposition its new powers— forces in Belarus are continually harassed by the regime. Two young activists of Malady Front, the nationalist youth organisation affiliated to the Belarusian Popular Front (BPF), who participated in demonstrations and street protests in Minsk on May 5th, have been summoned to the Minsk department of the KGB and given an official warning. The KGB were given new powers in April to issue warnings to people who committed minor offences if, in the KGB’s opinion, the offences could classify as a crime if they were repeated (2nd quarter 1998, page 12). Now it is clear that these powers are being actively used by the KGB to intimidate opposition activists who cannot technically be charged with criminal offences.

—alongside other means In addition, several youths were detained in the town of Maladzechna on June to harass the opposition 25th for waving pre-Soviet Belarusian flags at a music festival. Two activists of the BPF were arrested in July immediately after they gave an interview to an independent Ukrainian television company. In May the Belarusian Social Democratic Party and the Belarusian Language Society were refused permission to organise poetry recitals in a park in central Minsk. In June, the Belarusian Ministry of Justice revoked the licence of Garry Pogonyailo, a defence lawyer who represented opposition activists. In August two young Minsk residents were arrested and charged with malicious hooliganism (punishable by up to five years in prison) for possessing and distributing opposition leaflets. Earlier, electricity was cut off at the Minsk office of the BPF. All these events fit a continuing pattern of suppression of the opposition’s activities by all means available to the authorities.

Political parties are In July the Supreme Court received a request from the Ministry of Justice to disbanded— disband the Belarusian Socialist Party (BSP). Among the reasons cited were the party’s failure to report the number of its members to the government and the fact that the BSP showed no sign of political activity. The latter may sound ironic, given that circumstances for non-government political activities in Belarus are hardly favourable. Seven other political parties have been dissolved so far this year for the same reasons. Opposition parties are harassed if they are politically active and dissolved if they are not. On July 10th the Supreme Court closed down the Party for Social Justice, quoting irregularities in the convening of party conferences as a reason.

—and the media stifled— Belarusian journalists working for independent newspapers complain that it has become much more difficult to obtain information from government officials since an official instruction restricting contact between state officials and the independent media was issued by the government in March (2nd quarter 1998, page 12). Russia’s Glasnost Defence Foundation cites numerous instances when representatives of the independent media were denied information by government officials. In June the weekly publication Zdravy Smysl (Common Sense) received an official warning after making a statement implying that President Lukashenka was behind the ban on the dissemination of official

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information. In July a nationalist opposition newspaper Nasha Niva (Our Field) was officially warned against using the old Belarusian script and literary style, that had been prohibited in 1933 by the Stalin regime. These official warnings are issued by the State Press Committee; if a newspaper receives two warnings within a year it may be closed.

—yet Belarus extols its Meanwhile, in June the Belarusian National Assembly (parliament) conducted human rights record— staged hearings on the human rights situation in Belarus. In statements remi- niscent of Soviet-style propaganda, top government officials praised Belarus’s human rights record. The chairman of the Constitutional Court of Belarus insisted that “the general situation [with regard to human rights] in the republic is not worse than in many other countries”. The chairman of the State Press Committee declared that censorship does not exist in Belarus and that there are no restrictions on the independent media. Victor Sheiman, the state secretary of the Security Council, accused the opposition of using human rights rhetoric to weaken the state and undermine sociopolitical stability. Neither representatives of opposition parties nor unofficial human rights organisations were invited to the hearings.

—and blames the West for At the human rights hearings, Belarus’s foreign minister, Ivan Antonovich, negative propaganda blamed the West for exaggerating the country’s human rights problems. Similar views were expressed by Mikhail Myasnikovich, head of the president’s administration. Both claimed that the West in general and the US in particular presented a deliberately distorted picture of the human rights situation in Belarus as a result of the country’s independent foreign policy and close alliance with Russia. Such statements by Mr Antonovich and Mr Myasnikovich are typical of the anti-Western rhetoric common among Belarus’s top officials. Mr Antonovich described the presentation of 1998 EU-US Democracy and Civil Society Awards to members of the Belarusian opposition (but not to government officials), as an “unfriendly act” and evidence that “double standards” are applied to Belarus. Criticism of Belarus’s human rights record by the US Department of State in its Belarus Country Report on Human Rights Practices 1997 was dismissed as “politically biased” by Mr Sheiman.

Economic policy

The harvest is the The grievous financial situation of Belarus is unlikely to receive sufficient atten- government’s top tion from Belarusian government officials in the near future. Instead, they have priority— been preoccupied with supervising gathering in the harvest. Despite the continuing collapse of the Belarusian currency, the chairman of the National Bank, Piotr Prakapovich, has been assigned by the president to supervise the harvest in the Brest region of the country. The president himself is personally oversee- ing the harvest campaign from the air, flying in a helicopter over the farms. The timetable of his flights is kept secret. Mr Lukashenka insisted that “every- one who is alive and can move should be directed towards gathering in the harvest”. This statement points towards the revival of an old Soviet practice when people of all walks of life, including scientists, civil servants and even physicians, were forcibly sent to the countryside to help with harvest.

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—and exchange controls In May Mr Prakapovich promised to liberalise the currency market and intro- are progressively tightened duce a single exchange rate by August. His actions, however, have not matched his words. With foreign currency and gold reserves a meagre $307m on August 1st (slightly down from $401m on January 1st 1998), the National Bank of Belarus (NBB, the central bank) has been unable to support the falling Belarusian rouble. Devaluation being out of question, apparently for political reasons, the only policy choice remaining was to perpetuate an illusion of stability by stead- ily withdrawing the rouble from market transactions. In June Belarusian enterprises were prohibited from using the national currency in payments for imported goods and services. On July 17th state controls were placed on the interbank exchange rate for transactions between the Belarusian rouble and the Ukrainian hryvnya, until then the last freely traded foreign currency. A month later, the NBB imposed a ban on accepting the Belarusian rouble in payments for goods and services exported by Belarusian enterprises. These measures effectively withdrew the Belarusian currency from trading and rendered its exchange rate a fiction since no exchange was taking place at the rate established by the government. Real market currency transactions with the Belarusian rouble now being illegal, the central bank established a telephone hotline for those willing to report instances of such transactions to the authorities.

Belarus: volume of dollar foreign exchange transactions $ m

160

140

120

100

0 Jan..Apr..Jul..Oct..Jan..Apr..Jul..Oct..Jan..Apr..Jul..Oct..Jan..Apr. 1995 96 97 98

Source: Minsk Interbank Currency Exchange.

Monetary policy remains In order to sustain high rates of economic growth, the Belarusian government recklessly expansionist— conducts a policy of easy credit and cheap money. Refinancing rates have been cut twice this quarter, from 44% to 40% in May and then to 38% from August 1st. This has been accompanied by the injection of large amounts of money into circulation. To finance this year’s harvest, the NBB increased the money supply by BRb27trn. Such policies may help some sectors of the economy in the short run, but they effectively destroy the banking and monetary system and move Belarus further towards a complete replacement of the price mecha- nism by direct administrative control.

In the absence of any attempt to restrain government spending, there is little prospect of fiscal targets being met. The latest figures show that instead of the projected deficit of BRb7.4trn, the 1997 budget in fact came in at a deficit of BRb10.1trn. The deficit was financed by Treasury bills, loans provided by the central bank and a loan from the Russian government worth BRb1.7trn.

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Belarus: real interest rates (% per year, period averages) 1997 1998 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Credit rates 40.9 –22.0 –1.7 –3.8 –14.3 Deposit rates –50.3 –32.4 –13.5 –14.3 –22.9 Source: Belarus Economic Trends.

—and import substitution The development of import substitution capacity, in order to become self-suffi- remains a policy goal cient, remains an important thrust of Belarusian economic policy and is being closely monitored by the government. In June the Council of Ministers pointed out that the existing import substitution programme has not yet been fully implemented. This is considered a major setback in the light of the president’s continued calls for measures to increase the economic security of the country and protection of the Belarusian economy from some (as yet unspecified) form of sabotage by the West. Regional authorities joined the central government’s efforts to encourage import substitution. One such programme, developed by the Gomel regional executive committee, is intended to ensure the survival of the region’s economy “under the conditions of economic blockade”. Import- substituting goods will be produced even at a loss to their manufacturers.

Most privatisation As of June 1st only 103m privatisation vouchers had been exchanged for shares vouchers remain unused of privatised companies. This means that more than two-thirds of privatisation vouchers are still unused, most of them remaining in individuals’ special accounts. Meanwhile, the privatisation process remains stalled, with private companies accounting for only 1.8% of total industrial output in the first four months of 1998.

The economy

The economy continues According to official figures, in the first six months of 1998 Belarus’s GDP to grow— increased by 12.5% in real terms compared with the same period of 1997. Industrial output for the same period registered a 13.5% increase. Stocks of unsold goods accounted for 12.1% of total industrial output as of June 1st 1998, a slight increase over the 11.1% of June 1st 1997. The growth in industrial output was not even, however. Relatively large falls in output were registered in the electricity generation sector, as well as in the chemical and petrochemical industries, mechanical engineering, metalworking, light industry and paper industry sectors.

—although the financial Average profit margins in manufacturing industry decreased from 12.2% in the health of enterprises is first five months of 1997 to 10.8% in the same period of 1998. One-fifth of deteriorating industrial enterprises operated at a loss in the first four months of this year, a 2% increase over the same period last year. In the fuel and energy industries 45% of enterprises worked at a loss, against 22.5% a year ago. As of May 1st industrial enterprises owed BRb29.5bn in overdue payments and were owed BRb23.2bn in overdue receivables.

In the services sector, the financial situation in the first four months of 1998 was even worse than in industry: 46.4% of enterprises in consumer services

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 Belarus 15

operated at a loss. On a sectoral basis, 45.7% of enterprises in the household services sector and 43.4% in the transport sector were loss-making. Compar- atively more profitable were the construction and farming sectors, where only 30.5% and 24% of enterprises were loss-making respectively. Overall, taking the manufacturing, services, construction and farming sectors together, just over half of all enterprises were operating at a loss.

Unemployment falls and As the economy grows, the number of unemployed has been falling. As of wages rise— June 1st the number of unemployed was 105,000, a 4.2% decrease from a year ago. Average monthly wages were BRb3,529 in June, a 91.8% increase compared with June last year. However, when adjusted for inflation, the increase was 33.9%.

Belarus: monthly wages and pensions (month average, BRb ’000 unless otherwise indicated) Real wage Total wage Real pension Nominal index Minimum arrears Nominal index wage (Dec 1993=100) wage (BRb bn) pension (Dec 1993=100) 1997 Jan 1,526.2 76.2 130.0 479.8 597.1 88.4 Feb 1,639.6 76.8 130.0 595.2 705.9 98.0 Mar 1,732.5 79.4 130.0 596.8 712.3 96.7 Apr 1,898.7 83.4 150.0 439.7 718.4 93.5 May 2,003.4 83.8 150.0 559.9 718.4 89.1 Jun 2,187.9 87.6 150.0 660.2 857.2 101.7 Jul 2,299.3 90.8 150.0 502.8 857.2 100.3 Aug 2,361.1 92.3 150.0 598.7 980.6 113.6 Sep 2,664.1 99.2 200.0 632.3 1,002.3 110.6 Oct 2,748.3 99.1 200.0 738.4 1,002.3 107.1 Nov 2,743.5 97.2 200.0 498.3 1,204.4 126.5 Dec 3,276.0 113.5 200.0 748.6 1,204.3 123.6 1998 Jan 3,024.2 100.8 250.0 797.5 1,238.2 122.3 Feb 3,390.0 109.6 250.0 803.8 1,475.3 141.4 Mar 3,698.2 115.8 250.0 722.8 1,475.3 136.8 Apr 3,669.3 110.6 250.0 948.3 1,475.3 131.8 May 3,854.9 112.4 250.0 1,081.7 1,475.3 127.5 Source: Belarus Economic Trends.

—as headline inflation Consumer prices rose in monthly terms by 2.7% in June, down from a 3.4% rise dips temporarily in May. In the first six months of 1998 the consumer price index rose by 21.9%, down from 41.3% for the same period last year. However, this modest decrease in monthly inflation rate should not be interpreted as a sign of recovery for Belarus’s monetary system. First, it is too early to make even tentative conclu- sions. Second, a 2.7% monthly inflation figure is above the official target of 2% and even if it were to be sustained for the remainder of the year (which the EIU considers unlikely), it would lead to an annual average inflation rate of 44%, still high by international standards. Third, in Belarus consumer prices are controlled by the state. This means that official figures reflect changes in the officially mandated prices and do not include black-market transactions. Latent inflation, a typical phenomenon of centrally controlled economies, is associated with shortages of goods and services but is very difficult to calculate in monetary terms. Indeed, shortages of basic foodstuffs, such as sugar, were reported in July

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 16 Belarus

and August. Shortages have been particularly acute in provincial cities and towns where the authorities are attempting to introduce rationing.

Belarus: consumer prices (% change) Month on month Year on year 1997 Jan 13.3 49.5 Feb 6.6 53.3 Mar 2.3 53.7 Apr 4.3 58.0 May 5.0 64.8 Jun 4.5 68.4 Jul 1.4 67.1 Aug 1.0 66.6 Sep 5.0 71.8 Oct 3.2 74.9 Nov 1.8 71.4 Dec 2.3 63.3 1998 Jan 3.9 49.7 Feb 3.1 44.8 Mar 3.3 46.2 Apr 3.8 45.5 May 3.4 43.3 Jun 2.7 40.8 Sources: Belarus Economic Trends; press reports; EIU.

The Belarusian rouble A series of restrictions imposed by the NBB on trading in the Belarusian cur- continues to plunge rency (see Economic policy) quite predictably resulted in a steady decrease in demand for the Belarusian rouble and substantial loss of its value. Official exchange rates only partly reflected the rouble’s depreciation. While the official exchange rates for non-cash transactions was altered from BRb36,500:$1 in mid-June to BRb42,500:$1 in early August, the rouble’s street value plunged even further, from BRb55,500:$1 to BRb85,000:$1. By the end of August the black-market exchange rate was reported to have passed the BRb100,000:$1 mark, and was falling even faster as the extent of the likely devaluation of the Russian rouble became clear.

An indicator of the free- (or, black-) market value of the Belarusian rouble is given by the exchange rate at which it trades on Moscow banks. By September 3rd Russian banks were quoting an exchange rate of BRb240,000:$1, indicating that the true value of the Belarusian currency had fallen by around 70% in the preceding two weeks. The Belarusian rouble was trading at similarly low levels on the relatively free foreign interbank exchange in Minsk at the same time. Although the official rate had meanwhile been shifted to BRb50,200:$1, the rapid depreciation of the free-market rate means that the official exchange rate now overvalues the Belarusian currency at least four to five times over.

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 Belarus 17

Foreign trade and payments

Russia remains Belarus’s Data provided by an EU-funded publication, Belarus Economic Trends, shows main foreign trade the total volume of Belarusian foreign trade increasing by nearly 14% in the partner— first quarter of 1998, compared with the same period of 1997. Exports grew by 13% whereas imports grew by 14.5%, leading to a wider trade deficit than in the year-earlier period. Russia remained Belarus’s main trading partner, its share accounting for 61% of Belarus’s foreign trade. It was followed by Ukraine (7%), Germany (5%), Poland (3%) and Lithuania (2%).

—fuelled by barter trade Between May and August delegations from seven Russian provinces visited agreements with Russia’s Belarus and signed agreements on trade and economic co-operation. Each provinces— delegation had talks with representatives of Belresursy, the state agency in charge of supply, a direct descendant of Gossnab, the similar Soviet agency. Belarusian negotiators and their Russian counterparts seemed to agree that barter is the preferable form of trade between Belarus and Russian provinces.

—as investment from CIS A decree on the legal status of Commonwealth of Independent States (CIS) countries is encouraged investors signed by President Lukashenka in August allows the establishment of companies owned either solely by CIS investors or jointly with Belarusian companies. The decree, designed to attract investments from the CIS countries, also gives the president broad discretionary powers to grant tax and custom privileges on an individual basis.

The energy debt to Russia Gazprom, the Russian gas monopoly, threatened to cut gas supplies to Belarus remains a major concern by 40% from June 15th. The main reason for the cut was Belarus’s inability to meet the agreed schedule of payments for Russian gas supplies. At the time, Belarus’s debt to Russia stood at $236m for gas and $136m for oil. By August 10th the sums owed had increased to $250m and $170m respectively. Belarus’s preference for barter transactions (which has accounted for 92% of past payments) was a major cause of disagreement. Gazprom insisted that at least 26% of payments should be made in hard currency. On August 6th Belarusian and Russian representatives negotiated an agreement whereby a portion of Belarus’s debt to Gazprom will be offset by deliveries of Belarusian goods to Russian entities funded by the federal budget. If the recent history of relations between Belarus and Russian gas producers is any indication, this agreement is likely to be short lived, especially in the current conditions of economic turmoil in Russia caused by the recent devaluation of the Russian rouble.

The current-account Data provided by Belarus Economic Trends indicates a current-account deficit deficit appears to be that has been slowly widening as a percentage of GDP for the last two years. widening The current account is driven mainly by the trade balance and so is subject to seasonal variations: the current account moves further into deficit in the colder months of the year as energy imports increase. In the first quarter of 1998 the current-account deficit came in at 11.6% of GDP, considerably wider than the 9.6% of GDP recorded in the first quarter of 1997. Although Belarus is expected to benefit from the lower price of oil imports in the remainder of the year, this will be counteracted by the distorted pricing system that exists between Belarus and Russia, and lower exports to Russia as demand collapses following the

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 18 Belarus

devaluation of the rouble. In 1998 as a whole, we expect a current-account deficit of at least 6.5% of GDP, compared with 6% in 1997.

A caveat should be placed on the reporting of current-account data in Belarus, however. While the trade balance is the main factor affecting the current- account balance, the official figures do not reflect shuttle trade (conducted by private individuals from Belarus and the neighbouring countries). Other factors, such as the compulsory sale of foreign-currency revenues by Belarusian enterprises at official exchange rates, may contribute to the underpricing of exports. Thus, the official figures of the current-account deficit are likely to be a less than perfect indicator of the real state of affairs.

Belarus: current account ($ m) 1997 1998 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Exports 1,570.6 1,708.0 1,959.2 2,144.8 1,772.9 of which: barter 467.3 482.8 475.3 624.8 n/a Imports 1,968.8 2,049.0 2,181.6 2,518.6 2,257.3 of which: barter 638.7 600.1 582.3 720.0 n/a Trade balance –398.2 –341.0 –222.4 –373.8 –484.4 % of GDPa –14.7 –11.3 –5.6 –10.5 –15.2 Net services 140.2 138.4 116.3 142.9 111.8 Net income –18.8 –15.9 –15.2 –29.4 –12.9 Net transfers 16.1 26.6 21.0 14.7 15.0 Current-account balance –260.7 –191.9 –100.3 –245.6 –370.5 % of GDPa –9.6 –6.3 –2.5 –6.9 –11.6

a Belarus Economic Trends estimates.

Source: National Bank of Belarus, published in Belarus Economic Trends.

Business news

Russia and Belarus join The Russian and Belarusian governments are expected to sign an agreement on forces in weapons the creation of FORMASH, a joint industrial-financial group. It will include 55 production— weapons manufacturers from Russia and Belarus as well as several investment companies. Ukraine is expected to join the agreement.

—as Ford steps up its In August a US motor company, Ford, announced it was increasing its invest- operations ment in the Ford Union assembly plant at Obchuck near Minsk by $70m. The plant opened a year ago and is principally designed to export to the Russian market. Although Ford has day-to-day control over the operations at the plant, Ford Union is in fact a joint venture with a 26% stake owned by the Belarusian government and a further 23% by Ford’s local partner, LADA-OMC. The decision to increase output at its Belarus plant could be interpreted as a response by Ford to the difficulties it has experienced in establishing a plant in north west Russia itself. The devaluation of the Russian rouble and the expected return to recession in Russia may, however, make the prospect of exporting from Belarus into Russia less attractive.

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 Moldova 19

Moldova

Political structure

Official name Republic of Moldova

Legal system A new constitution was adopted on July 28th 1994. The Transdniestr region has declared independence, which is unrecognised. The region inhabited by the Gagauz minority was granted special legal status in December 1994

National legislature Unicameral assembly, the parliament, with 101 members, directly elected by proportional representation

National elections March 22nd 1998 (legislative) and November 17th 1996 (presidential); next elections due in late 2000 (presidential) and by 2002 (parliamentary)

Head of state President, Petru Lucinschi, sworn in January 15th 1997

National government Moldova has an executive presidency. The prime minister chairs the Council of Ministers; the new coalition government was approved by parliament on May 21st 1998

Main political parties The Democratic Convention (26 seats in parliament), the Bloc for a Democratic and Prosperous Moldova (24 seats) and the Party of Democratic Forces (11 seats) form the ruling coalition. The Communist Party of Moldova has the largest number of seats (40)

Council of ministers Prime minister Ion Ciubuc Deputy prime minister & minister for the economy Ion Sturza Deputy prime minister & minister of industrial policy Valentin Dolganiuc Deputy prime minister & minister of social policy & science Oleg Stratulat

Key ministers Agriculture & food processing Valeriu Bulgari Culture Ghenadie Ciobanu Defence Valeriu Pasat Education Anatol Grimalschi Finance Anatolie Arapu Foreign affairs Nicolai Tabacaru Health Eugeniu Gladun Industry & commerce Ian Tanase Internal affairs Victor Catan Justice Ion Paduraru Labour & social protection Vladimir Guritsenco National security Tudor Botnaru Privatisation Lurie Badir Transport Tudor Leanca

Central bank governor Leonid Talmaci

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 20 Moldova

Economic structure

Latest available figuresa

Economic indicators 1993 1994 1995 1996 1997 GDP at current prices (Lei m) 1,821 4,737 6,480 7,658 8,655 GDP at exchange rate ($ m) 506 1,109 1,441 1,663 1,872 GDP at purchasing power parityb ($ bn) 10.3 7.3 7.3 6.9 7.1 Real GDP growth (%) –1.2 –30.9 –1.9 –8.0 1.3 Consumer price inflation (av; %) 1,751.0 486.4 29.9 23.5 11.8 Population (mid-year; m) 4.36 4.35 4.35 4.33 4.31 Exports ($ m fob) 393 619 739 828 891b Imports ($ m fob) 528 672 773 1,113 1,235b Current-account balance ($ m) –155 –82 –115 –214 –296b Consolidated budget balance (% of GDP) –7.5 –5.9 –5.8 –9.8 –7.7 Reserves excl gold ($ m) 76.3 179.9 239.8 313.6 366.0 Foreign debt ($ m) 285 504 677 834 1,067b Exchange rate (av; Lei:$) n/a 4.27 4.50 4.61 4.62

September 1st 1998 Lei4.7853:$1

Origin of gross domestic product 1997 % of total Components of gross domestic product 1997 % of total Agriculture & forestry 32.2 Private consumption 70.5 Manufacturing 28.6 Public consumption 26.1 Construction 4.6 Gross fixed investment 19.6 Services 33.8 Increase in stocks 4.6 Total 100 Net exports –20.8 GDP 100.0

Principal exports 1997 % of total Principal imports 1997 % of total Food products, beverages & tobacco 54.8 Mineral products & fuel 35.3 Vegetable products 8.6 Machines, electronic devices & equipment 12.9 Live animals & animal products 8.6 Chemicals 9.6 Textiles 6.6 Textiles 5.3 Machines, electronic devices & equipment 5.2 Metals & metal products 4.5

Main destinations of exports 1997 % of total Main origins of imports 1997 % of total Russia 58.0 Russia 26.0 Romania 6.7 Ukraine 20.5 Ukraine 5.9 Romania 9.3 Germany 4.1 Belarus 8.2 Belarus 3.7 Germany 4.4 a Excluding Transdniestr. b EIU estimates.

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 Moldova 21

Outlook for 1998-99

The governing coalition The governing coalition, the Alliance for Democracy and Reforms (ADR), is will stick together— expected to remain intact despite early disagreements over issues such as the transit of Bulgarian nuclear waste through Moldova and the appointment of a new prosecutor-general (see The political scene). The willingness of the Bloc for a Democratic and Prosperous Moldova (BDPM), one of the parties in the government coalition, to flex its muscles so early in the coalition’s history by siding with the minority opposition Communist grouping, does, however, herald a turbulent term in office for the government, despite the three parties having ideological positions that are not dissimilar.

—for the sake of the Moldova is facing serious economic problems such as a growing deficit in the economy— budget and on the trade and current accounts, difficulties in servicing foreign debt and problems in restructuring the energy sector. These issues should keep the governing parties from letting their internal disagreements lead to a collapse of the government. The alternatives to the present administration are a BPDM-Communist Party coalition, or a fresh election which would undoubtedly see the Communist Party increase its share of the vote. In both cases, reforms would once again be stalled.

—and to obtain Further political instability would also put paid to Moldova’s chances of obtain- multilateral credits ing further credits from the multilateral agencies. Both the IMF and World Bank suspended further disbursements to Moldova in 1997 when the country was overtaken by political paralysis in the run-up to the general election in March 1998. Both agencies have since visited the country and given a cautious approval to the adoption of a revised budget and other economic programmes. The EIU expects the IMF to restart disbursements under its extended fund facility some time in September or October at the latest; this in turn will enable the World Bank to resume disbursements under a $100m structural adjustment loan.

Continued IMF funding will also depend on the government achieving results in its attempts to cut the budget deficit. In this regard, the revision of the 1998 budget in July is seen as positive, particularly its attempts to cut projected expenditure by 21% (see Economic policy). Its attempt to boost revenue will meet with limited success, however. The decision to cancel tax exemptions is laudable except in specific areas such as free economic zones, where it may be subject to legal challenge by foreign investors claiming they were lured there under false pretences. The decision to raise duties on luxury items such as alcohol and cigarettes could, however, prove counterproductive as it will merely increase the incentive to take part in what is already a widespread smuggling industry.

A resolution of the Chisinau’s ability to reach a political and mutually agreeable solution with Transdniestr conflict Transdniestr on the region’s status remains as distant as ever. Tiraspol con- remains distant— tinues to describe the new parliament and government in Chisinau as “pro- Romanian” even though pro-Romanian sentiments have now been marginal- ised within the Moldovan political scene. Moldova itself has little leverage with

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 22 Moldova

either Tiraspol or Moscow, and the fact that it is now accepted that Transdniestr can negotiate its outstanding debts with the Russian gas monopoly, Gazprom, separately is a de facto admission that the region is pursuing a separate political and economic course. All the major parties in the dispute have a vested interest in maintaining the status quo. The Tiraspol government will not give up its entrenched power base. In Chisinau itself, powerful political figures have made money out of the thriving smuggling trade with Ukraine. Meanwhile. there is a strong vein of opinion in Moscow that is keen to retain a military presence in the region as a counterbalance to the eastward expansion of NATO.

—although dialogue may Formal talks between the Moldovan government and the self-styled leaders of be stepped up Transdniestr have stalled since the Moldovan election, but are expected to pick up in the fourth quarter of 1998. The Moldovan government has announced its intention to appoint a minister specifically responsible for the ongoing negotiations with Transdniestr, the first time such a post has been created. The intention is to have greater co-ordination of the government’s policy on the region. A further impetus is expected to come from the reappointment of the Moldovan “expert group” which is the body (mainly lawyers and junior ministers) that holds the official negotiations with its opposite number in Transdniestr. The appointment of the Moldovan expert group was delayed following the formation of the new government, but is expected to be con- cluded in September. The next meeting between the leadership of Moldova and Transdniestr is scheduled for September 15th.

Prices will rise— Moldova has managed to keep price rises under control in recent years and has one of the best records on inflation in the former Soviet Union. This has been due largely to the National Bank of Moldova’s tight monetary policy. However, the government recently enacted a number of administrative price rises, such as imposing an 8% rate of value-added tax (VAT) on bread and dairy products, raising petrol duties and increasing domestic energy prices. This will inevitably feed through into the consumer price index in the remaining months of 1998. In 1999 we assume that the authorities will be unable to resist pressure for a one-off devaluation, and that as a result the price of imported consumer goods from the West will rise, further boosting the consumer price index.

—although the economy The Moldovan economy should experience some growth this year after a re- should show slight growth spectable harvest, which will feed through into greater output in crucial industrial sectors such as wine production and canning. On the other hand, in energy-intensive or inefficient industries, output will drop as a result of the decision by Gazprom to halve supplies on July 1st because of unpaid bills. Gazprom will also come under intense pressure to meet its hard-currency liabilities following the financial crisis in Russia, and will be less inclined to renego- tiate debts it in turn is owed. This raises the prospect of energy shortages in Moldova; Gazprom will also be keen to receive cash rather than barter goods, leaving many Moldovan producers, whose goods had traditionally gone to Gazprom, without a market.

The rouble devaluation will also reduce the competitiveness of Moldovan exports to Russia, denying producers an important market, although we assume some of this disadvantage will be rectified by a corresponding devaluation of

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 Moldova 23

the Moldovan leu at some point in 1999. Additionally, although the ongoing land reform and privatisation programme is expected to unleash some resources leading to increased growth, this is not expected to be felt within our forecast period. As a result we have brought our forecast of Moldovan GDP growth down to 1.5% in 1998 and a mere 1% in 1999.

The trade deficit will rise In Moldova the most significant effect of the Russian rouble’s devaluation in as a result of Russian August will be its impact on exports. Russia accounted for 64% of Moldova’s devaluation— exports in the first half of 1998. The market was already difficult even before the devaluation because of newly imposed Russian tariffs on some Moldovan exports such as some categories of Moldovan wines, as well as the real apprec- iation of the Moldovan currency. The devaluation will make Moldovan exports even more expensive, while those exporters who priced their contracts in roubles will receive lower than expected receipts. Meanwhile Russian imports will become that much more affordable to Moldovan consumers. Exports to Moldova’s second largest market, Ukraine, will also be hurt on the assumption that the Ukrainian hryvnya will also face a faster rate of currency depreciation. Although Moldova’s import bill will benefit from the lower international price of oil, we nevertheless expect the trade deficit to continue widening in 1998.

—pushing up the The trade deficit is the largest component of Moldova’s growing current-account current-account deficit— deficit, and consequently we expect to see a further deterioration in Moldova’s current-account position, to give a current-account deficit of possibly as high as 17% of GDP in 1998. Financing the deficit is proving increasingly difficult because Moldova has yet to generate a respectable inflow of foreign direct investment, while portfolio investment has virtually dried up, as have foreign credits. Some relief will, however, come from Moldova’s multilateral creditors, notably the IMF, which we assume will shortly resume disbursements. Multilateral lenders will remain positively disposed to helping the Moldovan economy, provided demonstrable progress is made on the reform agenda, as the sums involved are relatively small by the standards of recent credits made available to larger emerging markets.

—and increasing the There is little ground to suppose, however, that Moldova will be able to avoid attractiveness of a a significant devaluation at some point in 1999, if not before. Although devaluation Moldova is less exposed to speculatory flows of capital than it was in 1997 (the proportion of non-resident holders of Moldovan Treasury bills has halved to around 35% in the last year), its economic fundamentals point towards problems in the future. As well as a wide current-account deficit, Moldova has high levels of external debt including some short-term liabilities which the government will find it increasingly difficult to roll over. Investor confidence will be further weakened by the government’s inability to roll over its internal debt at affordable yields. As the effects of Russia’s large devaluation start to be felt, and with little prospect of an improvement in Moldova’s external trade position, we expect domestic investors to start moving out of local currency, forcing the central bank to allow the currency to depreciate by at least 20%, possibly in early 1999.

A devaluation would provide welcome relief to exporters, allowing exports to grow in the second half of 1999, and will also provide a small check on the

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 24 Moldova

trend of higher imports into Moldova. As a result, we would therefore expect both the trade and current-account deficits to narrow sharply in 1999, although they will remain wide by international standards.

Eurobond plans will be Moldova has scaled its plans for a Eurobond down to a modest DM50m ($29m), shelved— but has still expressed a desire to borrow. It is hoping to offer a coupon of around 16.5%, which is more than double that of its $75m issue last year, and close to the record coupon set by Ukraine earlier this year. However, we assume that the Euromarkets will remain closed to borrowers from the former Soviet Union for the remainder of this year and possibly next year as well. Regardless of the coupon it offers, the fact that any new bond is needed for the refinancing of existing debt will deter investors anxious that Moldova’s relatively high levels of external debt may lead to an eventual default. The appetite for Moldovan securities will be further dampened by a rating downgrade by Moody’s international credit rating agency in July (see Foreign trade and payments).

—and a debt default is If, as we expect, Moldova is unable to launch Eurobonds in 1998 and 1999, possible then the authorities are expected to encounter significant difficulties in rolling over existing external debt. Although the vast majority of Moldova’s debt is on concessionary terms to multilateral lenders such as the IMF, there are still significant liabilities falling due in the remainder of 1998 and 1999. According to the prime minister, Ion Ciubuc, Moldova’s foreign debt as of June stood at $1.2bn, with $215m of repayments due in 1998 and a further $235m in 1999. We assume that the IMF will be keen to intervene and support the reformist agenda of the new government with additional loans when it concludes its September mission to Moldova. This is, however, unlikely to be enough unless Moldova’s creditors can also be persuaded to come to an arrangement to re- schedule some of the liabilities falling due in the next 18 months.

Moldova: forecast summary

Moldova: gross domestic product (% change year on year unless otherwise indicated) % change, year on year 1996a 1997a 1998b 1999b

Moldova Real GDP –8.0 1.3 1.5 1.0 Eastern Europe excl CIS 6 Industrial production –35.0 –2.3 1.0 –2.5

4 Agricultural production –13.0 11.0 –2.0 1.0

2 Consumer prices Annual average 23.5 11.8 7.1 14.5 0 Year-end 15.1 11.2 8.1 14.2 -2 Exports ($ m) 828 891c 891 980 -4 Imports ($ m) 1,113 1,235c 1,297 1,167 -6 Current-account balance ($ m) –214 –296c –336 –117 -8 % of GDP –12.9 –15.8c –17.1 –6.6 -10 1995 96 97 98(a) 99(a) Exchange rate (Lei:$)

(a) EIU forecasts. Annual average 4.61 4.62 4.78 6.11 Sources: EIU; Moldavan Economic Trends. Year-end 4.65 4.66 5.01 6.53

a Actual. b EIU forecasts. c EIU estimate.

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 Moldova 25

Review

The political scene

The new coalition has The viability of Moldova’s governing coalition, the Alliance for Democracy and early disagreements— Reforms (ADR), was put to the test in July, barely two months after the group signed its co-operation agreement (2nd quarter 1998, page 26). The coalition comprises two right-of-centre parties, the Democratic Convention and the Party of Democratic Forces (PDF), and the centrist pro-presidential Bloc for a Democratic and Prosperous Moldova (BDPM). Specifically, it excludes the Communist Party, which won the greatest number of votes in the general election held on March 22nd, but insufficient to form a parliamentary majority. The constituent parties of the ADR failed to reach an agreement on July 31st over the election of a new prosecutor-general. The BDPM proposed Valeriu Catana, the former prosecutor-general for Chisinau. His appointment was supported by the Communist Party but opposed by the Democratic Convention and the PDF. Since the BDPM and the Communist Party between them can command a majority (they hold 24 seats and 40 seats respectively in the 101-seat legislature) they were able to override the objections of the centre-right parties.

—including a dispute over The same day a similar division occurred over another parliamentary decision, Bulgarian nuclear waste— again proposed by BDPM, to allow the passage of nuclear waste from the Bulgarian plant at Kozloduy to pass through Moldovan territory en route to Russia for reprocessing. With Moldova set to receive $50m in a transit fee and a further $5m in case of an accident, there was a clear financial incentive to allow the material to pass through Moldova, and indeed Transdniestr leapt in to demand a share of the proceeds. Moldovan environmentalists, meanwhile, sided with the Democratic Convention and the PDF in opposing the passage of radioactive material through Moldova, arguing that the plant at Kozloduy was considered one of eastern Europe’s most dangerous nuclear facilities, and have threatened to block the convoy.

—but weathers the crisis Despite early reports that these two incidents had caused the coalition to collapse, the ADR has since patched up its differences and the BDPM has promised not to break ranks again. It is, however, the party with the least to lose if the government collapses: it was the only one prepared even to entertain an alliance with the Communists in the post-election discussions over the formation of a government. By making this point so early on in the new administration, the BDPM has ensured that it will be able to punch above its weight in the coalition. This in turn will benefit the president, Petru Lucinschi, who has close links with the BDPM.

Discussions with The continuing discussions between Moldova and Transdniestr over the Transdniestr make little region’s status—which included a meeting between President Lucinschi and the headway— self-styled leader of Transdniestr, Igor Smirnov, in mid-July—have yielded little results this quarter. Further tension has arisen over the issue of language. Al- though the three languages of Russian, Moldovan and Ukrainian are recognised

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 26 Moldova

in Transdniestr, in practice it is Russian that is favoured. Moreover, Transdniestr continues to use the Cyrillic script for all three languages, whereas Moldova has for some years now reverted to using the Latin script for the Moldovan language (which in practice is little different from Romanian). Chisinau has been demanding that Transdniestr provide funding for the region’s Moldovan-language schools and reintroduce the Latin alphabet. The Transdniestr authorities have refused, instead closing down Tiraspol’s only Moldovan-language school.

On the economic front there has been some progress between the two sides over the outstanding bill for Russian gas supplies (see Economic policy). How- ever, the fact that Chisinau is willing to let Tiraspol accept responsibility for its share of the bill and negotiate separately with the Russian gas monopoly, Gazprom, highlights the extent to which Transdniestr is already operating as an independent state and Chisinau’s lack of political or economic leverage over the region.

—with little movement on Moldova once again appealed to the international community to put pressure a Russian troop on Russia to finalise a schedule for troop withdrawals from Transdniestr. The withdrawal— region has been highly militarised for many years, operating as the southern outpost of the Soviet army. The Russian 14th Army remains in Transdniestr and there is a large arms depot in Colbasna, in the north of the breakaway region. Russia’s membership of the Council of Europe in 1996 was conditional on an eventual withdrawal of the 14th Army. However, the Russian Duma (parliament) has still not ratified the withdrawal treaties, with little prospect of doing so. A further complication is that Russia cannot abandon the stockpile of arms in the region, not wanting the equipment to fall into the hands of the Transdniestrian separatists, but lacks the money to speed up its removal and decommissioning. The crisis following the Russian rouble’s devaluation has, needless to say, pushed this issue even further down Moscow’s agenda.

—although a territorial Moldova and Ukraine finally settled a territorial dispute initiated by Kiev over dispute with Ukraine is a section of the Danube (2nd quarter 1998, page 28). Earlier this year Ukraine resolved unilaterally fenced off a piece of the territory, thus narrowing Moldova’s access to Giurgiulesti where it is constructing an oil terminal. Construction work on the project, which will reduce the transport costs for Moldova’s oil imports, ground to a halt as a result. Following a visit by the prime minister, Ion Ciubuc, in August, the two countries agreed to a land swap. Ukraine acquires a road link between two of its cities, Odessa and Izmail, while Moldova receives more land for the construction of the oil terminal.

New laws aim to Parliament is currently debating a new law which will require registered polit- consolidate larger ical parties to have a minimum of 10,000 members and representatives in at political parties— least two-thirds of Moldovan districts. At present a political party can be registered with only 300 members. The law is designed to rationalise the number of parties contesting elections. 15 parties contested the March 22nd election but only four passed the necessary 4% threshold of votes, resulting in nearly one- quarter of the total number of votes cast being wasted. The new measures are unpopular with both the Communist Party, which has so far voted against the proposals, and (unsurprisingly) Moldova’s plethora of smaller parties. The PDF,

the smallest of the four parties represented in parliament, for example, wants a smaller minimum figure for party membership (4,000).

—with some signs of Several smaller parties that share the same political ideologies are nevertheless success forging alliances. In July the Democratic Agrarian Party, which was the dominant party in the previous legislature but only obtained 3.6% of the votes cast in the election in March, has teamed up with the Communist Party and five smaller left-wing bodies. Meanwhile four small parties that do not have any parliamentary representation, the Civil Alliance “Furnica”, the Party of Progressive Forces, the Social Democratic Bloc “Speranta” and the Moldovan Social Democratic Party, have formed the aptly named Centrist Political Bloc.

Economic policy

The 1998 budget proves The new government’s economic priority has been to revise the 1998 budget. unworkable— This year’s original budget, which came into law in February, envisaged revenue of Lei2,950m and expenditure of Lei3,300m, with the Lei350m deficit equivalent to 3.5% of projected GDP (2nd quarter 1998, page 29). The prime minister, Ion Ciubuc, acknowledged at the time that it was optimistic; in truth it was unrealisable. By the end of June the government was facing a massive shortfall in revenue; the state budget had collected only 33% of its projected 1998 income and local budgets 35%. Only 28% of projected income tax, 32% of VAT, 23% of excise duties and 43% of customs duties had trickled in for the first half of the year. Expenditure had had to be cut accordingly, to 32% of the combined projected target for state and local budgets. The government appears to have achieved this by delaying payments on some of its debt and by inevitably delaying public-sector wage payments: state wage arrears amounted to Lei125m by the end of June.

—and is amended to cut The new budget trims expenditure by 11% to Lei2,919.9m, bringing the pro- expenditure— jected deficit down to Lei315m. Cuts in expenditure include a Lei67m reduction in payments to the social fund, a Lei22m cut in planned capital investments and removal of Lei86m in allowances for war veterans and public-sector workers. In addition the government cancelled state guarantees on Lei250m of loans approved by the previous government and abolished the state-funded indexation of certain bank deposits, which saved a further Lei25m.

Moldova: central government budget (Lei m) 1997 1998 Preliminary Original Jan-May Amended Revenue 2,119.0 2,950.0 611.5 2,604.9 Expenditure –2,726.1 –3,300.0 –688.9 –2,919.9 Balance –607.1 –350.0 –77.4 –315.0 Sources: Moldovan Ministry of Finance, published in Moldovan Economic Trends; press reports.

—and boost taxation On the revenue side the new budget introduces some significant revisions. revenue— Previous budgets were littered with tax exemptions and write-offs for various groups; this time the government removed VAT exemptions for a number of industries, including bakeries and dairies. Excise duties on certain items were

raised significantly: petrol duties rose by Lei200 to Lei800 per tonne, diesel by Lei 100 to Lei300 per tonne and tobacco by Lei200 to Lei400 per 1,000 cigarettes. Duties also increased on coffee, fur and perfume, and the import tariff on vehicles was also raised.

The government has acknowledged that a major reason for the shortfall in revenue is poor tax collection coupled with a lively smuggling trade on the border with Ukraine. One of the government’s proposals is to streamline tax collection by merging the tax inspectorate with other authorities charged with collecting revenues and to set up tax offices in the major enterprises that account for most of the excise duty payable. The tax commission is also threat- ening to publish the names of local officials in those regions where little or nothing has been collected for the pension and social funds. The problem of smuggling will be less easy to deal with as it involves the less than co-operative authorities in Transdniestr. If anything, the higher duties agreed on luxury products will make smuggling even more profitable.

—and eventually passed The most contentious part of the budget was the application of VAT to bread by parliament and dairy products. The new budget initially wanted VAT to be levied at 20%, which most deputies considered too steep: the rate was eventually lowered to 8%. The eventual version cut Lei91.9m in social spending and Lei31.4m from pensions, but it did increase expenditure on healthcare by Lei5.2m and on education by Lei21.1m. Parliament passed the new document on July 16th. The Communist Party, however, refused to participate in sanctioning what it described as an impoverishing budget and abstained by walking out. President Lucinschi was also reported not to be happy with certain aspects of the budget, particularly the tax on food products. Additionally, companies in the free economic zones have questioned the legality of removing their various tax exemptions which were the reasons why they located there initially.

The IMF’s verdict is The IMF returned to Moldova in June to discuss resuming disbursements from tentatively positive— a three-year $190m extended fund facility (EFF). Disbursements were suspended in July 1997 as a result of the paralysis in economic policy in the extremely prolonged run-up to the general election in March 1998.

The IMF praised recent reforms on agricultural land ownership, the continuing success that the country has had in keeping its inflation low despite a surge in money supply earlier this year, the implementation of a bankruptcy law, notably in the banking sector, and plans for restructuring the energy sector. It welcomed the government’s success in reducing the budget deficit in the first quarter of 1998, but expressed concern that this was effected at the cost of a further increase in wage and pension arrears. The IMF recommended a further fiscal tightening, including a rationalising of social fund expenditure, the restructuring of spending on education and health, and ending ad hoc tax am- nesties. Its main concerns focused on Moldova’s growing external debt and widening current-account deficit.

—indicating it will Moldova is crucially dependent on multilateral support for the stability of its resume disbursements currency; government representatives did not require much persuasion to agree to new austerity package with the IMF on June 17th. Some of the IMF’s

concerns were immediately addressed with the passage of the new 1998 budget, leading the IMF to hint that it was likely disbursements would resume by October, with an initial tranche of perhaps $28m. The successful implementation of the austerity package agreed with the IMF would also trigger a second $35m tranche from a $100m World Bank structural adjustment loan. The World Bank had also suspended lending when economic reforms ground to a halt in 1997.

Gazprom cuts supplies— Moldova’s ongoing difficulties in paying its outstanding gas bills to Gazprom reached a critical point this quarter. On July 1st the Russian gas giant halved supplies to the republic and threatened a complete cut-off the following month if the government did not make any progress on settling the bill. Moldova was initially due to receive 3bn cubic metres of gas in 1998 at $58 per 1,000 cubic metres. The outstanding bill as of July amounted to $215m; in addition Gazprom reported that Moldova had still not supplied it with $100m of government securities that were to be issued in lieu of earlier debt. Gazprom’s main concern was to find $50m to pay its own back taxes to Moscow for gas it has already supplied to Moldova.

—forcing Chisinau to the Moldova was given until the end of July to work out a debt repayment pro- negotiating table gramme. The issue is complicated by the fact that Transdniestr owes some $310m of the total. Half of the Russian gas feeds the Kuchurganskaya electricity generating plant in Transdniestr, which in turn supplies Moldova with electricity, for which Tiraspol claims Chisinau owes it $19m. Meanwhile, within Moldova itself large industrial consumers have been lax in paying Moldovan suppliers for their gas and electricity. In the event, supplies were not completely suspended in August, as negotiations continued. Moldova is seeking to pay only half its debt in cash and the rest in goods, whereas Gazprom is demanding that the barter component be kept to a minimum.

Moldova has also offered a further $90m in ten-year government securities, with a 7.5% coupon payable after a three-year grace period. This is in addition to a debt-equity plan agreed in February to create a new joint-venture gas distribution network company, Gasnabtransit, incorporating Moldovgas (the Moldovan distributor), in which Gazprom would hold a 50% stake, Moldova 36% and Transdniestr 14%. The problem of non-payment by consumers would then be internalised, with Gazprom, rather than Moldovgas, holding responsibility for extracting unpaid bills from Moldovan creditors. Agreement has not yet been reached on the valuation of the new company, although some reports indicate that it could be valued at around $200m. If this were the case, transfer of half the company to Gazprom would only go a small part of the way towards paying Moldova’s external liabilities.

The government Moldova’s household energy prices remain heavily subsidised at the expense of rebalances tariffs industrial consumers. The government has taken some steps towards rebalanc- ing energy tariffs by raising domestic prices and lowering those paid by industry. From August 1st the government has applied a uniform heating tax of Lei116 or Lei146 per gigacalorie, depending on the supplier. Previously there was a band of taxes ranging from Lei215 for state-owned companies to Lei70 for private customers. A separate energy tax has also been hiked from Lei0.24

per kwh to Lei0.255 per kwh. The government is also considering the introduction of differential tariffs, such as lower night rates, to ease the load on the electricity grid and ultimately reduce costs. The increases for domestic consumers have raised an outcry from the trade union federation, which complains that raising taxes is unreasonable given the backlog of unpaid wages and has threatened widespread protests. One likely but unfortunate result of higher energy taxes is that electricity thefts will probably increase. In some regions as much as 40% of power is siphoned off illicitly.

Transdniestr also passes Transdniestr’s parliament finally approved its 1998 budget in June. Revenue its budget— has been set at $102.8m, expenditure at $111m. The budget acknowledged the region’s responsibility for unpaid gas to Gazprom, at $300m, as well as a further $19m of repayments on earlier loans from Russia.

—and probes the Transdniestr is also reportedly preparing some of its major enterprises for possibility of privatisation privatisation. It is said to be talking to an investor about privatising the Kuchurganskaya power station as well as parts of the agro-industrial complex. Were stakes in Transdniestrian industries to be considered by a foreign strategic investor, it is likely that legal questions would be raised as to how such privatisations would be interpreted in an international court, since Transdniestr is not recognised as an independent state.

The economy

A fall in wine production The industrial sector does not appear to have sustained the strong performance temporarily hits recorded in the first few months of 1998 (2nd quarter 1998, page 31). Industrial industry— production fell by 1.7% year on year in April, 4.9% in May and 10.6% in June, according to the EU-funded publication Moldovan Economic Trends. When the first six months of 1998 are taken together, however, industrial output is shown to have increased by 0.5% year on year owing to a relatively strong performance in January and February. Industrial performance was constrained by a 3.3% fall in the largest industrial sector, food, beverages and tobacco, in the first half of 1998 compared with the year-earlier period. This in turn was due mainly to a drop in wine production as a result of a bad grape harvest in 1997; the production of milk products and of processed fruits and vegetables increased in the first half of 1998 year on year. Preliminary indications are, however, that the wine industry is set to receive a boost from an improved grape harvest this year. Elsewhere in the industrial sector, electricity production increased, as did the production of clothing and footwear, but the textiles industry recorded a decline and other sectors remained broadly stable.

Moldova: output of selected products (’000 tonnes) 1992 1993 1994 1995 1996 1997 Grain 2,100 3,340 1,754 2,668 2,010 3,150 Meat 165.0 93.6 47.4 32.9 47.4 31.4 Sugar beet 1,973 2,248 1,527 2,084 1,917 1,742 Sugar 208 209 154 197 252 203 Vegetable oil 57.9 39.3 31.4 31.5 23.2 10.8 Source: Interstate Statistical Committee of the Commonwealth of Independent States.

—and the grain harvest Moldova’s grain harvest for 1998 was lower than 1997 but not significantly is down below trend. Preliminary data indicated that the total grain harvest came in at around 2.65m tonnes, a similar level to 1995 and higher than that recorded in 1996. The bumper harvest of 1997, however, makes this year’s figures seem harsh by comparison. The wheat harvest, at 1.01m tonnes, was 18% down on 1997, the barley harvest, at 225,000 tonnes, was 10% lower and maize, at 1.4m tonnes, 18% lower. Despite the smaller crop, the government said that the state reserves were full and imports were unnecessary. The sugar-beet harvest, meanwhile, appears favourable. The head of the state-owned Zahar sugar group stated in June that Moldova expected to produce between 220,000 and 250,000 tonnes of sugar from the 1998 harvest, compared with 203,000 tonnes in 1997.

Inflation has been low Moldova’s inflation has for long been extremely successful by regional stand- to date— ards, and price rises have been moderate in the period covered by the report. Month-on-month prices rose by 0.2% in May and fell by 1.1% in June, reflecting amongst other things the seasonally low cost of food. Recent measures enacted in the budget, however, such as the lifting of VAT exemptions on bread, dairy products and meat, and increased duties on petrol will inevitably push prices up in the short term. In the medium term we expect an inflationary devaluation of the Moldovan leu in response to the devaluation of the Russian rouble.

Moldova: consumer prices (% change) Month on month Year on year 1997 Jan 1.9 13.3 Feb 1.4 10.9 Mar 1.0 10.8 Apr 0.8 10.8 May 0.6 11.3 Jun 2.0 13.8 Jul –1.0 12.6 Aug –0.8 10.1 Sep 1.2 9.7 Oct 0.9 10.6 Nov 1.1 10.3 Dec 1.5 11.2 1998 Jan 1.3 10.4 Feb 0.4 9.3 Mar –0.1 8.1 Apr 0.7 8.0 May 0.2 7.6 Jun –1.1 4.3 Sources: Moldovan Economic Trends; EIU.

—and unemployment There was a steep increase in the unemployment rate in the first quarter of 1998, has risen with the number of registered unemployed (excluding Transdniestr) rising from 27,973 at the beginning of the year to 39,070 at the end of the first quarter of 1998. The official unemployment rate, of 2.3% of the eligible workforce, under- states the true picture, since a further 82,100 workers were on unpaid leave while 30,800 were in part-time employment. By the end of the second quarter, according to preliminary data, the number of registered unemployed had fallen back

to 33,700, of whom 57% were women. Of these around one-fifth are eligible for benefits, but many are not receiving them. Arrears in unpaid unemployment benefits totalled Lei4.9m on July 9th according to Moldovan Economic Trends.

In Transdniestr the The local Transdniestrian rouble collapsed in March, by some 50%, to around currency has steadied TR1.2m:$1, thought to be the result of an excessive rate of money printing by briefly— the Transdniestrian Republican Bank (the central bank). The head of the central bank lost his job as a result, and the Transdniestrian rouble has since recovered thanks to a tighter monetary policy implemented by his successor. On July 24th buy-sell rates at the central post office in Tiraspol were 750,000-755,000:$1, 417,000-419,000:DM1, 120,000-123,000:R1 and 159,000-160,000:Lei1. People have little confidence in the local currency, and considerably higher rates (by around 15%) can be found on the black market, particularly for dollars.

Moldova: Transdniestrian rouble TR:$; inverted scale

200,000

400,000

600,000

800,000

1,000,000

1,200,000 Jan..Apr..Jul..Oct..Jan..Apr..Jul..Oct..Jan..Apr..Jul..Oct..Jan..Apr..Jul 199596 97 98

Source: World Bank, Republic of Moldova: Economic Review of the Transnistria Region; EIU estimates

—but its history is one of According to a World Bank report on the economy of Transdniestr, published instability this June, the Transdniestrian rouble has been unstable since its introduction in 1994, depreciating from TR3,000:$1 at the beginning of 1995 to TR210,000:$1 by the end of the year. The volatility of the Transdniestrian rouble has decreased since then as the central bank’s powers have been strengthened, but local distrust of the currency remains widespread, with only 40% of household cash assets held in local currency according to a survey in April 1997, with 42% in dollars, 10% in Moldovan lei and 8% in Ukrainian hryvnya. The World Bank attributed this to economic mismanagement and economic instability following the 1992 conflict. Price rises in 1995 reached hyperinflationary levels of 50% a month, but by 1997 the monthly rate had moderated to 3.7%.

The region has faced An almost complete lack of monetary and fiscal discipline led to a near collapse severe problems with the of the budget in 1995 according to the World Bank’s report. Although expend- budget— iture is now matched more realistically to revenue, by mid-1997 tax arrears totalled some $6.6m, or 10% of total yearly projected revenue. Wage arrears for state- and budget-financed employees amounted to $1m.

—although some sectors of Although Transdniestr was the industrial heartland of pre-independence industry are performing Moldova, industrial output in the region collapsed by 70% between 1990 and well 1997, compared with a 60% collapse in the rest of Moldova. Agricultural output has also collapsed in Transdniestr, by around 70% between 1990 and 1996, compared with a fall of around 35% for the rest of Moldova in the same time period. There has been some recent good news, however. Steel production at the Rybnitsa plant in the north of Transdniestr has started expanding and is receiving German investment, while the Tiratex textile factory in Tiraspol has attracted Italian capital. Most investors, however, have proved reluctant to invest in a region with an undefined political status, despite its superior industrial infrastructure compared with the remainder of Moldova.

Foreign trade and payments

The trade deficit has Moldova’s trade gap continued to widen, to $187.1m in January-May 1998, a widened further— 20.9% increase on the deficit recorded in the corresponding period of 1997. Imports rose by 7% to $491.2m, while exports grew by a meagre 3.3% to $304.1m. According to preliminary reports, the deficit by the first half of the year had increased to $207.1m, with exports down by 8.2% over the corresponding period of 1997, while imports rose by 1.7%. Barter continues to play an important and understated role in Moldova’s trade with CIS countries: according to official figures, barter comprised 8.9% of total trade and 12.9% for exports in January-April 1998.

Moldova: current account ($ m) 1997 1998 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Trade balance –107.44 –72.30 –96.35 –67.92 –119.52 Exports 190.77 204.88 210.47 284.66 174.58 Imports –298.21 –277.18 –306.82 –352.58 –294.10 Services balance –17.96 –11.37 –6.51 –26.86 –20.37 Income balance 13.98 6.75 7.80 5.43 8.96 Net transfers 17.46 4.44 27.11 27.96 23.22 Current-account balance –93.96 –72.48 –67.95 –61.39 –107.71 Source: National Bank of Moldova, published in Moldovan Economic Trends.

In addition to the difficulties created by a widening trade deficit, the overall decline in trade volume is a further concern, highlighting the underlying weak- ness of the economy. Although the 1997 harvest was good, output of certain important crops which are processed and subsequently exported, for example grapes, sugar beet and sunflowers, was disappointing, affecting this year’s export performance. In addition the strong leu has inevitably been blamed for exacer- bating the trade imbalance. Russia’s effective devaluation of the rouble on August 17th will produce further woes for exporters. The immediate effect is that those exporters with rouble-denominated contracts will see their revenues fall (the government has advised Moldovan companies to aim for contracts denominated in hard currency). More seriously, the prospect of new contracts for exports to Russia will fade as Moldovan goods become uncompetitive on the

Russian market, offsetting any benefit to Moldova from the falling international price of its oil imports.

—leading to an Moldova’s current-account deficit at the end of the first quarter 1998 reached unsustainable $107.71m, an increase of 14.6% over the corresponding period of 1997. The current-account position largest component was the trade deficit, which increased by 11.2% over the period to $119.52m. The deficit on the services account deteriorated by 13.4% to $20.37m, while the net income balance fell by 35.9% to $8.96m. Only current transfers improved, rising by 33% to $23.22m. The capital account Moldova: net portfolio investment highlights the problems that Moldova is facing in financing the deficit. While $ m direct investment increased from $12.61m in the first quarter of 1997 to 240 $15.85m in 1998, the additional inflow was insignificant compared with the

200 collapse in portfolio investment which from $12.98m in the first quarter of 1997 and $226.2m in the second had shrunk by the first quarter 1998 to 160 $750,000. This gap makes a rapid disbursement of IMF and World Bank funds 120 that much more urgent.

80 Moldova has not yet cancelled a plan to go ahead with a Eurobond issue this 40 year despite very poor conditions in the international markets. In July parlia-

0 ment approved a three-year DM50m issue, with a coupon of 16.3%, to be lead-managed by Merrill Lynch and Commerzbank. Merrill Lynch lead- -40 1995 . . . 96 . . . 97 . . . 98 managed Moldova’s first Eurobond, a five-year $75m issue, in June 1997, Source: National Bank of Moldova, Moldovan which carried a coupon of 9.75%. The deputy prime minister, Ion Sturza, who Economic Trends. is also economy minister, warned deputies that the bond had to be issued to enable Moldova to service existing debt obligations and threatened to resign if parliament voted against the proposal. The Communists voted against the issue because its proceeds are not to be channelled into paying off wage arrears.

There are still plans for a Despite obtaining parliament’s approval in July, the subsequent financial tur- Eurobond despite a moil in the region following Russia’s announcement on August 17th that it ratings downgrade would default on its domestic debt means that it is unlikely that Moldova will succeed in launching a further Eurobond. Its economy is seen by investors to share strong similarities with that of Russia. Additionally, any Moldova issue will be hindered by the country’s downgrading by the international credit rating agency, Moody’s, also in July. The rating agency lowered the sovereign ceiling for Moldova’s foreign-currency bonds from Ba2 (the second highest notch in the speculative grade category) to B2 (fifth), and the ceiling for foreign-currency deposits from Ba3 (third highest) to B3 (sixth). Moody’s put Moldova on review for a downgrade in May (2nd quarter 1998, page 34), so the news came as little surprise, and many east European issuers have suffered a similar fate in recent months. In Moldova’s case Moody’s cited the country’s growing budget, trade and current-account deficits and rapid accumulation of debt servicing obligations. It also expressed concern over the problems with restructuring debts to Gazprom, the agriculturally based economy’s depend- ency on the weather and the total reliance on energy imports which are ineffi- ciently used.

In July Moldova also received a speculative B rating from Fitch IBCA on its short-term currency debt and B+ on local-currency debt. The agency had earlier

rated the city of Chisinau B+, but the lower sovereign rating resulted in the agency having to lower the capital’s grade to B.

Business news

The sale of Moldtelecom On August 20th the transport and telecommunications minister, Tudor reaches a second Leanca, announced that negotiations with the Greek telecommunications op- dead-end— erator, OTE, over the sale of the state-run Moldtelecom had once more ground to a halt. Negotiations on the sale had recently re-started following a suspen- sion of the privatisation in February when OTE offered only $46.4m, in addition to $18m for an operating licence (1st quarter 1998, page 31), around half the amount sought by parliament. It had been thought that the new government would manage to conclude a deal with OTE, given the company’s clear ambitions in the region. It already holds stakes in the Serbian and Armenian telecoms operators, is in on the short-list to buy a 30% stake in Romania’s Romtelecom and intends to bid for Bulgaria’s and Macedonia’s telephone privatisations.

Mr Leanca subsequently announced that a commission would be set up to find a new way to privatise Moldtelecom. The commission will be headed up by the prime minister and include the ministers of telecommunications, privatisation, finance, economy and justice. It is presumed that the commission will recommend a new privatisation law to parliament that will set a lower price threshold for the sale of Moldtelecom.

—and the EBRD extends a Meanwhile in June the European Bank for Reconstruction and Development loan to Chisinau airport (EBRD) approved a $9m loan (guaranteed by the Moldovan government) towards a $12m project to upgrade facilities at Chisinau international airport, including refurbishing the main terminal and increasing cargo and passenger capacity.

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 36 Quarterly indicators and trade data

Quarterly indicators and trade data

Belarus: quarterly indicators of economic activity

1996 1997 1998 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Industrial production Monthly av General index Jan 1994=100 82.9 84.3 90.3 92.3 94.1 97.2 97.6 100.1 104.2 106.3a Crude petroleum ’000 tonnes 155.0 154.3 156.0 154.7 149.7 151.7 154.0 155.0b n/a n/a Natural gas m cu metres 21.3 21.0 20.3 20.4 20.5 20.0 20.5 20.8b n/a n/a Employment Employed, registered ’000 4,176 4,144 4,139 4,151 4,178 4,184 4,187 4,196 4,235 4,235a Unemployed “ 167 176 185 183 178 157 140 126 118 111a Wages & prices End-Qtr Nominal wagesc BRb ’000 1,067 1,187 1,289 1,593 1,733 2,188 2,664 3,276 3,698 3,762a Monthly av Consumer prices 1993=100 7,932 8,290 8,729 9,871 12,196 13,957 15,009 16,130 17,849 18,842a change year on year % 73 49 37 39 54 68 72 63 46 n/a Producer prices, ind 1993=100 4,983 5,190 5,578 6,110 8,798 10,219 10,843 11,666 12,872 13,391a Construction Houses completed ’000 0.90 2.57 3.20 5.67 1.60 3.03 3.73 n/a n/a n/a Retail trade Sales Jan 1995=100 79.9 91.1 110.4 123.0 99.4 108.7 118.5 137.2 131.0 141.8a Money End-Qtr M1 BRb bn 9,870 11,502 13,782 15,708 17,995 22,886 28,340 33,852 35,642 40,947d change year on year % 106.8 65.2 64.2 56.7 82.3 99.0 105.6 115.5 98.1 n/a Foreign trade Qtrly totals Exports $ m 1,303.6 1,431.2 1,429.8 1,483.9 1,439.4 1,774.1 1,961.4 2,126.3 1,758.2 1,239.1e to CIS “ 862.9 961.5 933.6 888.8 955.3 1,096.4 1,404.6 n/a n/a n/a Imports ” 1,665.4 1,752.4 1,630.7 1,890.8 1,939.2 2,040.5 2,187.0 2,522.1 2,257.4 1,524.6e from CIS “ 1,080.4 1,143.7 1,073.9 1,272.1 1,345.5 1,289.7 1,387.7 n/a n/a n/a Exchange holdings End-Qtr Foreign exchange $ m 423.7 367.9 410.6 469.0 427.3 376.2 383.5 393.7 291.3 258.4d Exchange rate Official rate BRb:$ 11,500 13,100 14,650 15,500 24,650 26,980 27,830 30,740 33,660 35,670d a Average for April-May. b October only. c Average monthly. d End-May. e Total for April-May.

Sources: TACIS, Belarus Economic Trends, monthly; OECD, Short-term Economic Indicators; IMF, International Financial Statistics.

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 Quarterly indicators and trade data 37

Moldova: quarterly indicators of economic activity

1996 1997 1998 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Construction Monthly av Houses completed ’000 0.20 0.23 0.20 0.53 0.20 0.23 0.27 n/a n/a n/a Employment Total ’000 1,600 1,700 1,670 1,630 1,580 1,690 1,660 n/a n/a n/a Unemployed, registered ” 27.1 26.1 26.3 23.4 22.9 22.8 27.1 28.0 n/a n/a Wages & prices Nominal wagesa Lei 157 177 185 232 189 193 207 229 238 242b Consumer prices Jun 1994=100 154 157 159 165 171 176 177 181 187 187 change year on year % 25.2 25.6 24.2 14.6 10.9 12.0 11.1 9.9 9.4 6.3 Money End-Qtr M1, seasonally adj Lei m 973.3 1,005.5 893.8 888.0 1,029.8 1,121.4 1,075.5 1,159.7 n/a n/a change year on year % 68 64 33 12 6 12 20 31 n/a n/a M2 Lei m 1,110 1,186 1,246 1,292 1,261 1,411 1,585 1,740 1,689 1,701c Foreign trade Qtrly totals Exports $ m 175.4 207.8 187.4 230.9 175.8 190.8 206.6 306.4 171.7 123.2d to CIS “ 121.4 149.1 125.9 149.7 124.1 150.4 155.6 182.4 n/a n/a Imports ” 254.9 259.1 272.9 292.4 301.9 253.8 295.7 321.0 287.0 195.9d from CIS “ 175.3 155.6 151.3 181.9 168.9 130.9 145.4 167.2 n/a n/a Exchange holdings End-Qtr Foreign exchange $ m 243.0 245.9 278.8 305.7 285.8 335.3 358.7 364.8 324.2 n/a Exchange rate Official rate Leu:$ 4.52 4.65 4.62 4.65 4.54 4.59 4.62 4.66 4.72 4.72e a Average monthly. b Average for April-May. c End-May. d Total for April-May. e End-April.

Sources: OECD, Short-term Indicators; IMF, International Financial Statistics; TACIS, Moldovan Economic Trends.

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 38 Quarterly indicators and trade data

Belarus: OECD trade ($ ’000) Germany Italy US Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec 1995 1996 1995 1996 1995 1996 OECD exports fob Food 20,903 30,864 3,364 5,991 14,974 10,439 of which: cereals 4,065 3,835 395 1,178 75 1,096 Chemicals 68,795 88,773 2,575 4,343 4,443 4,167 Textile yarn, cloth & manufactures 23,874 29,916 13,713 14,162 411 827 Iron & steel 5,599 19,977 353 846 18 0 Metal manufactures 11,801 12,514 3,418 5,871 291 46 Machinery & transport equipment 316,816 228,173 34,237 38,541 11,218 15,011 of which: road vehicles 94,908 103,341 1,538 1,665 451 2,111 Clothing & footwear 25,689 24,456 8,690 10,157 806 100 Scientific instruments etc 24,119 21,124 1,423 5,046 4,382 2,809 Total incl others 733,825 620,628 85,292 107,738 47,330 52,836 OECD imports cif Food 14,061 17,386 2,125 1,864 164 448 Wood & cork & manufactures 22,182 20,933 2,971 3,151 105 1,137 Metalliferous ores & scrap 16,486 7,725 31 39 876 1,109 Petroleum & products 452 111 0 0 0 0 Chemicals 75,240 36,578 10,954 588 19,620 6,221 Textile yarn, cloth & manufactures 17,010 11,160 10,317 7,029 1,921 2,789 Non-metallic mineral manufactures 1,593 3,180 151 2 251 536 Non-ferrous metals 98,365 20,662 36 0 0 0 Metal manufactures 7,048 7,963 2,092 1,821 66 52 Machinery & transport equipment 26,336 30,831 2,200 3,909 9,169 8,029 Clothing 37,720 50,268 17,881 18,536 14,400 33,545 Scientific instruments etc 16,438 15,245 209 58 417 777 Total incl others 414,108 259,535 82,443 63,419 49,790 56,677 Source: UN, External Trade Statistics, series D.

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 Quarterly indicators and trade data 39

Moldova: foreign trade ($ ’000) Total Russia Ukraine Romania Bulgaria Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Imports cif 1994 1995 1994 1995 1994 1995 1994 1995 1994 1995 Food 34,477 49,447 3,360 6,620 5,166 10,902 1,913 2,205 459 983 Crude materials 19,141 31,562 5,438 8,188 3,318 8,939 3,023 2,651 217 155 Coal 55,657 50,278 7,390 6,317 47,676 43,485 0 0 0 0 Petroleum & products 132,394 182,568 67,721 63,991 24,345 66,427 15,332 16,281 49 3,045 Chemicals 44,439 77,722 8,482 15,765 6,503 13,433 4,331 5,745 3,239 2,270 Manufactured goods 74,979 120,505 25,895 39,303 14,005 21,888 3,932 10,813 3,491 11,024 of which: paper & manufactures 10,781 26,639 6,970 12,088 640 1,350 218 1,384 576 235 textile yarn, cloth & mnfrs 23,326 28,120 5,050 5,668 1,307 1,428 2,100 2,946 886 218 non-metallic mineral mnfrs 13,928 23,622 2,790 4,291 2,976 4,131 428 3,820 1,837 7,347 Machinery & transport eqpt 84,395 127,877 20,659 27,633 9,081 11,708 7,474 9,729 1,940 3,746 Total incl others 668,951 840,713 319,103 277,995 122,709 228,487 42,553 55,953 10,120 31,876

Total Russia Ukraine Romania Germany Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Exports fob 1994 1995 1994 1995 1994 1995 1994 1995 1994 1995 Food 230,598 295,954 118,144 132,842 27,113 8,886 33,836 63,788 10,851 23,464 of which: fruit, vegetables & preps 105,678 116,279 54,220 56,005 22,040 1,948 1,121 4,604 10,653 23,341 Beverages & tobacco 132,176 174,345 95,204 141,172 13,585 5,911 2,913 3,277 880 203 Manufactured goods 42,327 52,615 12,919 18,905 3,842 7,960 16,428 13,808 1,298 1,866 of which: non-metallic mineral mnfrs 5,640 15,378 1,365 9,319 1,463 2,768 2,504 2,457 0 0 Machinery & transport eqpt 65,148 58,793 36,259 27,607 15,249 14,783 5,777 5,773 313 81 Clothing 14,297 23,315 6,183 5,161 945 226 392 678 1,246 5,902 Total incl others 566,001 745,530 289,703 360,141 68,561 58,894 83,415 103,667 19,678 45,440

Imports ($ m) Exports ($ m) Jan-Dec Jan-Dec Jan-Dec Jan-Mar Jan-Mar Jan-Dec Jan-Dec Jan-Dec Jan-Mar Jan-Mar 1995 1996 1997 1997 1998 1995 1996 1997 1997 1998 CIS 568.9 664.1 612.4 170.1 129.9 466.9 546.1 612.5 135.6 126.6 Russia 278.0 295.3 305.1 82.9 79.7 360.1 430.1 509.8 111.8 103.5 Ukraine 228.5 297.1 240.2 76.9 37.4 58.9 47.6 52.1 12.3 12.3 Belarus 50.7 61.0 52.1 7.5 9.8 26.5 34.2 35.7 8.0 8.4 Central & eastern Europe 120.4 179.5 240.9 35.9 64.2 158.7 132.4 95.7 22.3 15.6 Romania 56.0 72.1 109.3 13.9 29.6 103.7 74.9 59.2 10.6 12.4 Bulgaria 31.9 58.4 62.9 9.6 13.2 21.4 12.7 10.0 1.6 0.9 Hungary 8.5 14.2 22.5 4.0 9.1 5.7 2.7 1.8 0.2 0.2 EU 115.2 162.6 227.2 48.6 78.5 86.2 78.3 90.4 20.3 21.8 Germany 45.6 65.9 95.5 21.9 23.3 45.4 29.9 32.5 7.3 5.6 Italy 19.3 33.9 42.1 8.3 11.2 15.6 21.1 23.8 6.1 4.5 Netherlands 6.6 10.5 12.9 2.9 3.5 2.3 8.7 5.6 1.4 0.8 Total excl others 840.7 1,079.2 1,172.4 288.9 287.0 745.5 801.6 879.6 189.3 171.7 Sources: UN, External Trade Statistics, series D; Moldovan Economic Trends.

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 40 Quarterly indicators and trade data

Former Soviet republics: exchange rates

Exchange rate per $ 1996 1997 1998 Apr 4th Jul 5th Oct 4th Jan 1st Apr 4th Jul 11th Oct 6th Jan 12th Apr 3rd Jul 4th Outside rouble zone Armenia (dram) 404 410 412 440 469 505 501 496 502 502 Azerbaijan (manat) 4,376 4,300 4,304 4,200 4,074 3,968 3,928 3,891 3,858 3,861 Estonia (kroon) 11.9 12.2a 12.2 12.4b 13.4 14.0 14.2 14.5 14.8 14.5 Georgia (coupon/lari) 1.26 1.25c 1.27 1.29d 1.30e 1.30 1.30 1.31 1.34 1.35 Kazakhstan (tenge) 66.0 66.9 70.0 72.5 75.4 75.6 75.6 75.6 76.5 77.1 Kyrgyz Republic (som) 11.5 12.4 13.3 17.0 17.6f 17.3 17.3 17.4 18.1 19.3 Latvia (lat) 0.54 0.56g 0.55 0.56d 0.58 0.58 0.59 0.60 0.60 0.60 Lithuania (litas) 4.00 4.00g 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 Moldova (leu) 4.58 4.65 4.61 4.60 4.57 4.57 4.62 4.66 4.72 4.75 Turkmenistan (manat) 2,500 3,935 4,075 5,000 4,110e 4,165 4,165 4,165 4,165 5,200 Ukraine (karbovanets/hryvnya) 189,100 178,900 1.77h 1.83 1.85 1.86 1.87 1.90 2.04 2.07 Uzbekistan (som) 37.0 37.8 40.0 55.0 58.9i 63.6 75.8 80.4 84.5 93.5 Inside rouble zone (local parallel currencies & Russian rouble) Belarus (rubel) 12,200 15,500 19,300 20,200 34,200 43,337 27,910 30,830 33,760 38,010 Russia (rouble) 4.825 5.131a 5.424 5.747b 5.737 5.788 5.865 5.972 6.112 6.202 Tajikistan (Tajikistan rouble) 280 280 298 330 380i 398g 747 748 754 754 a July 9th. b January 7th. c June 5th. d January 8th. e April 7th. f April 9th. g June 10th. h Karbovanets replaced by hryvnya on September 2nd, at the exchange rate of HRN1.0:KRB100,000. i April 11th. j February 2nd.

Sources: OMRI; FT; BBC Monitoring, Summary of World Broadcasts; Reuters; Bloomberg.

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 Quarterly indicators and trade data 41

Former Soviet republics: GDP and GDP per head (at purchasing power parity) 1989 1990 1991 1992 1993 1994 1995 1996 1997 Armenia GDP $ bn 17.6 17.0 16.1 7.9 6.9 7.3 8.0 8.7 9.1 per head ($) 5,058 4,804 4,467 2,142 1,853 1,942 2,127 2,302 2,407 Azerbaijan GDP $ bn 21.8 20.0 20.7 13.8 10.9 8.7 7.4 7.7 8.3 per head ($) 3,074 2,804 2,879 1,888 1,476 1,171 988 1,016 1,085 Belarus GDP $ bn 49.4 50.0 51.4 47.7 43.8 39.2 36.1 37.9 42.5 per head ($) 4,832 4,876 5,004 4,630 4,228 3,802 3,515 3,699 4,162 Estonia GDP $ bn 7.7 7.4 6.9 6.2 5.8 5.8 6.2 6.6 7.5 per head ($) 4,914 4,691 4,375 3,957 3,803 3,874 4,184 4,496 5,156 Georgia GDP $ bn 23.4 21.4 17.8 10.9 7.7 5.6 5.5 6.2 7.1 per head ($) 4,296 3,919 3,256 2,001 1,407 1,036 1,012 1,155 1,313 Kazakhstan GDP $ bn 71.8 74.6 72.3 64.6 56.0 43.0 40.1 41.5 43.2 per head ($) 4,342 4,477 4,302 3,825 3,316 2,569 2,426 2,510 2,606 Kyrgyz Republic GDP $ bn 11.1 11.9 11.2 9.7 8.3 6.3 6.0 6.5 7.1 per head ($) 2,553 2,706 2,523 2,163 1,863 1,405 1,339 1,427 1,540 Latvia GDP $ bn 13.6 14.6 13.6 9.1 8.0 8.2 8.3 8.8 9.6 per head ($) 5,094 5,469 5,114 3,460 3,070 3,213 3,320 3,538 3,875 continued

EIU Country Report 3rd quarter 1998 © The Economist Intelligence Unit Limited 1998 42 Quarterly indicators and trade data

1989 1990 1991 1992 1993 1994 1995 1996 1997 Lithuania GDP $ bn 20.3 20.1 19.7 16.0 13.7 12.7 13.4 14.4 15.5 per head ($) 5,505 5,412 5,278 4,268 3,681 3,409 3,620 3,877 4,179 Moldova GDP $ bn 15.9 16.2 13.9 10.2 10.3 7.3 7.3 6.9 7.1 per head ($) 3,664 3,723 3,193 2,335 2,362 1,675 1,685 1,593 1,649 Russia GDP $ bn 865.0 875.4 864.7 759.7 711.9 636.3 625.1 616.9 634.2 per head ($) 5,871 5,919 5,833 5,122 4,805 4,300 4,220 4,176 4,305 Tajikistan GDP $ bn 9.9 10.2 9.7 6.9 5.2 4.5 4.1 4.0 4.1 per head ($) 1,914 1,920 1,769 1,247 915 783 694 670 685 Turkmenistan GDP $ bn 10.0 10.7 10.5 10.2 9.5 7.7 6.8 6.8 5.1 per head ($) 2,797 2,903 2,806 2,541 2,195 1,757 1,517 1,485 1,115 Ukraine GDP $ bn 171.6 179.0 186.1 191.2 168.4 132.9 119.7 110.2 108.7 per head ($) 3,314 3,452 3,583 3,667 3,227 2,560 2,318 2,157 2,145 Uzbekistan GDP $ bn 44.5 47.2 48.8 44.6 44.7 43.7 44.0 45.7 47.7 per head ($) 2,215 2,312 2,341 2,089 2,048 1,963 1,956 1,994 2,013 Sources: IMF; World Bank, Statistical Handbook: States of the Former USSR; UN Economic Commission for Europe, Bulletin for Europe, Vol. 44 1992; EIU calculations.