MOLDOVA’S UNCERTAIN FUTURE Europe Report N°175 – 17 August 2006 TABLE OF CONTENTS EXECUTIVE SUMMARY AND RECOMMENDATIONS................................................. i I. INTRODUCTION .......................................................................................................... 1 II. A CHANGED INTERNATIONAL LANDSCAPE ..................................................... 2 III. NEW PRESSURE ON TRANSDNIESTRIA ............................................................... 4 A. HOW THE TRANSDNIESTRIAN ECONOMY WORKS ...................................................................4 B. THE EU’S ENGAGEMENT ......................................................................................................5 C. THE CUSTOMS REGIME .........................................................................................................8 IV. MAKING THE CASE FOR A UNITED MOLDOVA................................................ 10 A. A SPLIT IN THE TRANSDNIESTRIAN ELITE? ........................................................................10 B. MOLDOVA’S FLAWED APPROACH .......................................................................................11 C. MAKING MOLDOVA MORE ATTRACTIVE .............................................................................12 1. The EU-Moldova Action Plan .................................................................................14 2. Trading with the European Union ...........................................................................15 3. Attracting (and pressuring) Transdniestrian businesses ..........................................16 4. Visa facilitation........................................................................................................16 D. BUILDING MUTUAL CONFIDENCE .......................................................................................17 E. DUBIOUS PRECEDENTS........................................................................................................18 F. THE NEED FOR INTERNATIONAL GUARANTEES ...................................................................19 V. CONCLUSION ............................................................................................................. 21 APPENDICES A. MAP OF THE REPUBLIC OF MOLDOVA .................................................................................22 Europe Report N°175 17 August 2006 MOLDOVA’S UNCERTAIN FUTURE EXECUTIVE SUMMARY AND RECOMMENDATIONS With Romania’s expected entry into the European Union support, the Transdniestrian leader, Igor Smirnov, has little in 2007, the EU will share a border with Moldova, a weak incentive to compromise in his drive toward independence. state divided by conflict and plagued by corruption and The internationally-mediated negotiations between the organised crime. Moldova’s leadership has declared its two parties are going nowhere, despite the presence since desire to join the EU, but its commitment to European 2005 of the EU and U.S. as observers. Although some values is suspect, and efforts to resolve its dispute with understanding had been reached about the level of the breakaway region of Transdniestria have failed to end autonomy in a settlement, Moldova has hardened its a damaging stalemate that has persisted for fifteen years. position to match Transdniestria’s intransigence. Young people have little confidence in the country’s future and are leaving at an alarming rate. If Moldova is to become Barring a softening of Russia’s stance, the best chance for a stable part of the EU’s neighbourhood, there will need moving toward a sustainable settlement is to convince the to be much greater international engagement, not only in Transdniestrian business community that cooperating with conflict resolution but in spurring domestic reforms to Moldova is in its own interests. There is evidence that some help make the country more attractive to its citizens. business leaders are growing frustrated with Smirnov and may be willing to work with Chisinau. Two recent initiatives by the EU and Ukraine gave rise to hopes that the balance of forces in the separatist dispute had For this to happen, however, both Transdniestrians and changed significantly. An EU Border Assistance Mission Moldovans will have to believe in the country’s economic (EUBAM) launched in late 2005 has helped curb smuggling future. Its business environment is poor, foreign investment along the Transdniestrian segment of the Moldova-Ukraine is low, and GDP per capita is on a par with Sudan’s. The frontier, a key source of revenue for the authorities Communist Party government, headed by Vladimir in Tiraspol, the Transdniestrian capital. At the same time, Voronin, has shown little will to root out corruption and Kiev’s implementation of a landmark customs regime to improve the business climate, and its Transdniestria policy assist Moldova in regulating Transdniestrian exports has seems based more on easy rhetoric than engagement. reduced the ability of businesses in the breakaway region Moldova’s relatively new commitment to a Western- to operate without Moldovan oversight, striking a major oriented policy is opportunistic rather than deep-rooted. psychological blow. The EU has the leverage to play a greater role in pressuring But optimism that these measures would ultimately force Moldova to carry out reforms; it can also help by lifting Transdniestria to make diplomatic concessions appears to tariffs on agricultural products, including wine, that have been false. Although EUBAM has had significant Moldova could potentially sell in its market, as well as on success, particularly given its small size and budget, products from Transdniestrian factories such as steel and widespread smuggling continues. Nor has the Ukrainian textiles. Transdniestria’s smuggling revenue must be customs regime had a decisive effect on Transdniestrian further restricted, through long-term assistance to the businesses, which remain capable of profitable legal trade Ukrainian and Moldovan border and customs services as they were in the past. Moreover, domestic political and a multi-year extension of EUBAM’s mandate. The uncertainty has raised questions about whether Kiev will Transdniestrian business community needs confidence it continue to enforce the new regulations. can make money in a united Moldova but it is equally important to limit the economic benefits of the status quo. Russia has increased its support for Transdniestria, sending economic aid and taking punitive measures against Even if efforts to alter the economic calculus are successful, Moldova, including a crippling ban on wine exports, one however, the absence of mutual trust will remain of its main revenue sources. Moscow refuses to withdraw debilitating. Addressing this will likely require years of troops based in Transdniestria since Soviet times whose confidence-building, through political dialogue, transparent presence serves to preserve the status quo. With Russian customs rules and trade relations, and measures to increase Moldova’s Uncertain Future Crisis Group Europe Report N°175, 17 August 2006 Page ii democratisation and freedom of the media on both sides. 7. Expand anti-smuggling assistance, in particular by: It may also require international guarantees to convince (a) seeking a request from Moldova and Transdniestrian businesses that they will not be stripped Ukraine for a multi-year extension of of their assets by the Moldovan government following a the EUBAM mandate; and settlement. (b) providing greater financial assistance and Moldova is increasingly reliant on the EU and so is training to the customs and border services vulnerable to pressure from Brussels for reforms that of both Ukraine and Moldova, including would increase its economic and political attractiveness through EUBAM. to its own citizens, including Transdniestrians. These reforms will have to have a central place if the groundwork 8. Grant Autonomous Trade Preferences to key for a settlement is to be prepared. The U.S. has been content Moldovan agricultural products, including wine, to let the EU lead on Moldova, and the EU has done as well as goods produced by Transdniestrian so – to a degree. But it must do far more with both factories, such as steel products and textiles. incentives and pressures if it is to secure peace and 9. Offer the Transdniestrian business community prosperity in its neighbourhood and strengthen the weak incentives to work constructively with Chisinau, roots of Moldova’s European policy including: (a) Autonomous Trade Preferences for RECOMMENDATIONS Transdniestrian exports; To Moldova: (b) technical help in overcoming non-tariff barriers; and 1. Show real political commitment in implementing (c) seminars, business clinics and trade missions. the EU-Moldova Action Plan, particularly in the areas of media freedom, anti-corruption, judicial 10. Show parallel willingness to impose targeted reform and the business environment. financial sanctions against the Transdniestrian leadership, including members of the business 2. Stop conditioning negotiations with Transdniestria community, and/or a trade embargo on on up-front progress in democratisation and Transdniestrian exports to the EU if cooperation is demilitarisation and instead show willingness to not forthcoming after a reasonable period of time. cooperate, particularly on customs and trade issues, even in the absence of movement on those longer- 11. Increase the EU’s profile in Moldova and term goals. Moldovans’ awareness of European values by: 3.