COUNTRY REPORT

Belarus Moldova

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3rd quarter 1999

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Contents

3 Summary

Belarus

5 Political structure 6 Economic structure 7 Outlook for 1999-2000 10 Review 10 The political scene 12 Economic policy 14 The economy 17 Foreign trade and payments

Moldova

20 Political structure 21 Economic structure 22 Outlook for 1999-2000 26 Review 26 The political scene 29 Economic policy 33 The economy 34 Foreign trade and payments

38 Quarterly indicators and trade data

List of tables

9 Belarus: forecast summary 15 Belarus: consumer prices 16 Belarus: exchange rate 17 Belarus: monthly wages and pensions 17 Belarus: foreign trade, Jan-Mar 1999 18 Belarus: current account 26 Moldova: forecast summary 34 Moldova: consumer prices 36 Moldova: balance of payments 38 Belarus: quarterly indicators of economic activity 39 Moldova: quarterly indicators of economic activity 40 Belarus: OECD trade 41 Moldova: foreign trade

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 2

41 Moldova: structure of trade 42 Moldova: direction of trade 42 Former Soviet republics: exchange rates per $ 43 Former Soviet republics: GDP and GDP per head

List of figures

9 Belarus: gross domestic product 13 Belarus: money supply and consumer prices 15 Belarus: inflation 16 Belarus: exchange rate 16 Belarus: wages and pensions 17 Belarus: foreign trade 26 Moldova: gross domestic product 29 Moldova: National Bank credit 35 Moldova: exports 36 Moldova: imports

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September 1st 1999 Summary

3rd quarter 1999

Belarus Outlook for 1999-2000: The president, Alyaksandar Lukashenka, will benefit from the opposition’s marginalisation and remain in office until the end of the forecast period. Relations with the West will not improve significantly, while unification with Russia will remain on hold. The administration is unlikely to introduce economic stabilisation measures or dismantle Soviet-style economic controls. As a result, average annual inflation will remain in triple digits, while agricultural output will decline further. Although industrial production will continue to grow, GDP will stagnate this year and grow only slowly in 2000.

The political scene: Mr Lukashenka remains in office despite protests by the opposition and criticism from multilateral organisations. The opposition is in disarray and faces ongoing intimidation from the authorities. Frustrated by the slow pace of unification with Russia, Mr Lukashenka has toned down his anti- Western rhetoric, although his foreign policy remains unchanged.

Economic policy: Although the budget is generally sound, monetary and credit policies remain recklessly expansionist. Government control over prices and wages continues, as do strict foreign-exchange controls. The chairman of the central bank has promised full currency convertibility by 2000, which seems implausible. The IMF has turned down Belarus’s request for an emergency loan.

The economy: GDP has continued to grow, albeit slowly. Although industry has fared reasonably well, the agricultural sector’s performance has been dismal. The currency’s nominal decline has slowed, but inflation remains high. Official unemployment figures are deceptively low.

Foreign trade and payments: Despite an increase in non-CIS exports, export revenue remains dependent on Russia and has therefore fallen from last year’s levels. Import expenditure has dropped even further, resulting in a current-account surplus in the first quarter of 1999. Barter still figures prominently in Belarus’s trade.

Moldova Outlook for 1999-2000: President Petru Lucinschi’s attempt to institute a presidential system will be constrained by international pressure and parliamentary opposition. There are few prospects for an early resolution to the crisis over the status of the breakaway region of Transdniestr. There is a risk that the government will collapse, owing to its slim majority. Structural reforms will accelerate as long as further political crisis is avoided. The economy will remain in decline. Average inflation will reach more than 35% this year, before falling to under 25% next year. The current-account deficit will narrow considerably.

The political scene: The ruling Alliance for Democracy and Reforms coalition has in effect fallen apart. However, the centre-right’s desire to avoid an early election has ensured the minimum cohesion needed to remain in

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power. Parliament has opposed the presidential commission’s draft proposals for a move to a presidential system. The Kiev summit on the status of Transdniestr has not resulted in any major breakthrough.

Economic policy: The World Bank has approved $51m in loans, while the IMF has disbursed $34m. The government has reiterated its intention to keep the budget deficit at 3% of GDP and tighten monetary policy further. Continued progress on land reform has privatised smallholdings for more than 215,000 farmers. Energy and telecommunications privatisations are moving ahead. The central bank continues to allow the currency to float freely.

The economy: In the first quarter of 1999 GDP fell by 7.8% in year-on-year terms, mostly owing to a steep fall in industrial output. Year-on-year inflation had reached 43% by June. The currency has stabilised and even appreciated slightly in nominal terms.

Foreign trade and payments: Both export revenue and import expenditure have plummeted this year, as a result of the collapse of CIS markets. This severe contraction in trade has permitted a considerable reduction in the current- account deficit. Moldova has avoided a default on its Eurobond, but remains in arrears on its bilateral Russian debt.

Editor: Stuart Hensel All queries: Tel: (44.20) 7830 1007 Fax: (44.20) 7830 1023 Next report: Our next Country Report will be published in December

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 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 power 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 due in 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 Popular Front of Belarus (PFB)

Council of Ministers Prime minister Sergei Ling First deputy prime minister Vasily Dolgoliov Deputy prime ministers Gennady Novitski Valery Kokorev Leonid Kozik Ural Latypov Gennady Novitski Alyaksandar Popkov Vladimir Zametalin Head of the presidential administration Mikhail Miasnikovich

Key ministers Agriculture Yuri Moroz Communications Vladimir Goncharenko Defence Alyaksandar Chumakov Economy Vladimir Shymev Education Vasily Strazhev Enterprise & investment Alyaksandar Sazonev Finance Nikolai Korbut Foreign affairs Ural Latypov Industry Anatali Kharlap Internal affairs Valentin Agolets Labour Ivan Lyakh Social security Olga Dargel State property & privatisation Vasily Novak

Central bank governor Piotr Prakapovich

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Economic structure

Latest available figures

Economic indicators 1994 1995 1996 1997 1998 GDP at market prices (BRb bn) 17,815 119,813 184,174 356,079 662,370 GDP at market exchange rates ($ m) 3,830 10,407 13,778 13,575 14,302 GDP at purchasing power paritya ($ bn) 39.2 36.1 37.9 42.5 42.1 Real GDP growth (%) –12.6 –10.1 2.8 10.4 8.3 Consumer price inflation (av; %) 2,221 709 53 64 70 Population (mid-year; m) 10.35 10.31 10.28 10.20 10.18 Exports fob ($ m) 2,510 4,803 5,790 7,383 7,135 Imports cif ($ m) 3,066 5,563 6,939 8,689 8,549 Current-account balance ($ m) –444 –458 –516 –788 –947 State budget balance (% of GDP) –4.2 –2.5 –1.7 –1.2 –1.9 Reserves excl gold ($ m) 101.0 377.0 469.2 393.7 338.8 Foreign debt ($ m) 1,273 1,667 1,096 1,162 1,076a Exchange rate (official; av; BRb:$) 4,652 11,513 13,368 25,964 46,295 Exchange rate (av; BRb:Rb) 2.12 2.53 2.61 4.53 4,767

August 27th 1999 BRb279,000:$1 (official)

Origin of gross domestic product 1997 % of total Components of gross domestic product 1997 % of total Agriculture & forestry 14.1 Private consumption 58.8 Industry 36.9 Public consumption 19.3 Construction 7.2 Gross fixed capital formation 24.6 Transport & communications 12.6 Increase in stocks 1.0 Trade & catering 9.4 Net exports of goods & services –4.0 Total incl others 100.0 GDP 100.0

Principal exports 1997 % of total Principal imports 1997 % of total Machinery & equipment 31.7 Mineral products 27.5 Chemicals 11.5 Machinery & equipment 20.0 Textiles 11.3 Food products 12.9 Metals 9.2 Metals 12.5 Food & food products 8.6 Chemicals 11.5 Mineral products 8.2 Plastic & rubber 6.1

Main destinations of exports 1998 % of total Main origins of imports 1998 % of total CIS 73.7 CIS 66.9 of which: of which: Russia 65.5 Russia 53.8 Ukraine 5.8 Ukraine 11.1 Non-CIS 26.3 Non-CIS 33.1 of which: of which: Germany 2.7 Germany 8.7 Poland 2.5 Poland 3.3 Lithuania 2.2 Lithuania 2.4 a EIU estimates.

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Outlook for 1999-2000

Mr Lukashenka will The president, Alyaksandar Lukashenka, will continue to maintain that his remain in office— legitimacy derives from the constitutional amendments adopted following the controversial referendum held in 1996. By allowing him to remain in office until 2001, these amendments in effect extended his original five-year term by two years. Although domestic opposition groups and most Western govern- ments have consistently rejected the amendments as invalid, owing to serious flaws in the 1996 referendum, it is unlikely that Mr Lukashenka will accept their claim that his term expired in July. Emboldened by the opposition’s weakness and his own popular support, he will instead continue to ignore calls for a new election and will remain in office through to the end of the forecast period.

—as long as the economy The most significant risk to this forecast is the possibility of an even greater avoids a complete economic crisis than is currently expected. This would push Mr Lukashenka collapse— either to call a pre-emptive election before the collapse deepens, or to com- promise with the opposition in order to head off the possibility of widespread domestic unrest. However, assuming that there is no further economic crisis in Russia, Mr Lukashenka should be able to avoid this worst-case economic scenario and thereby retain his tight control on power.

—as a result of the The opposition groups now centred around the Popular Front of Belarus (PFB) opposition’s and the 13th Supreme Soviet, the legislative body dissolved by Mr Lukashenka in marginalisation 1996, are likely to respond to the president’s continued intransigence by boy- cotting next year’s parliamentary election. The opposition will only participate if it succeeds in securing Mr Lukashenka’s agreement to a number of pre-election conditions. However, despite signs of improved communication between the various opposition groups in advance of the forthcoming negotiations between the authorities and the opposition sponsored by the Organisation for Security and Co-operation in Europe (OSCE), the EIU does not expect Mr Lukashenka to consider the opposition strong enough to necessitate any significant compromise (see The political scene). He will hope either that the opposition’s internal divisions cause the negotiations to founder, or that he can use the talks to promote the emergence of an alternative and more quiescent opposition— thereby creating the illusion of political pluralism. At present, it is unlikely that anything more will emerge from the roundtable discussions, or that these negotiations will prove as decisive as the negotiations in Poland between the Solidarity movement and the communist government in the late 1980s.

Union with Russia will be Mr Lukashenka will continue to push for a relatively radical version of the put on hold proposed union with Russia, which includes both a supranational executive body and presidency. However, this is highly unlikely to be favoured over far more minimalist Russian proposals. Moreover, political instability and electoral manoeuvring in Russia before this year’s parliamentary election and next year’s presidential election will preclude the proposed union from becoming a top priority among the Russian elite. While some form of union treaty is likely to emerge before the end of 1999, it is more likely to reinforce the status quo than represent an acceleration of the union process. It is likely to follow the Russian

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model of a union based on two sovereign states with no supranational presidency, and would once again defer all of the more radical decisions, such as monetary union, until after the end of the forecast period.

Anti-Western rhetoric may Despite his disappointment at Russia’s reluctance to commit to deeper union, be toned down but policies Mr Lukashenka cannot credibly threaten to reorient his foreign policies will not change towards the West. Although we expect the president to moderate his anti- Western stance somewhat, his fundamental disagreements with the US and western Europe will remain. As Mr Lukashenka can remain in power only through a combination of authoritarian methods and a patriarchal style of government, he will have little choice but to label the West’s insistence on greater democratisation as undue interference in Belarus’s internal affairs. Similarly, any significant rapprochement with the West will be precluded by his need to preserve the existing system of economic organisation. In particular, Mr Lukashenka has staked his administration’s legitimacy on its ability to ensure employment, provide subsidised housing and utilities, produce high industrial growth, and provide easy credit to state farms and obsolete industrial enterprises. Any move towards policies more acceptable to the West would fundamentally endanger this system by forcing bankruptcies, rationalisation and greater price liberalisation. The government is unlikely to introduce any stabilisation measures that could have negative political repercussions, especially in the run-up to the parliamentary election next year.

Easy credit will continue to Mr Lukashenka’s economic vision will necessitate continued reliance on credit alienate multilateral expansion to keep the economy afloat, although we do not expect him to lenders— return to the extreme monetary loosening seen towards the end of 1998. This easy credit policy will enable the government to finance housing construction, agriculture and loss-making industrial enterprises, but will effectively preclude any access to either IMF or World Bank funding. This will force the govern- ment to make greater efforts to find other sources of foreign capital inflows, none of which will prove very fruitful. Although it has already indicated its intention to generate more privatisation revenue, this will not include the sale of state-controlled enterprises to foreign investors. While small stakes in existing enterprises might be offered to foreigners, these will remain too minor to ensure serious restructuring and will therefore fail to tempt investors.

—as will Soviet-style The government’s continued reliance on expansionary credit policies will force economic controls it to continue to administer price and wage controls as a means of managing inflation. We expect monthly inflation rates to increase further during the fourth quarter of this year, as a result of some liberalisation in utility prices and the effects of harvest-related credit expansion. This should lead to year-end consumer price inflation in 1999 of around 200%. Average inflation for the year will be even higher, at around 280%, owing to extremely high inflation during the first quarter of the year. The stabilisation expected in Russia next year will ensure slightly higher demand for Belarusian manufactured goods, thereby allowing for fewer subsidies to industrial enterprises and lower inflation in 2000. Assuming that the government does not return to the extreme monetary expansion seen in the fourth quarter of 1998, we expect average annual inflation in 2000 of around 140% and year-end inflation nearer to 120%.

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Agricultural output will The shortage of fodder grain following last year’s bad harvest has forced agri- remain low— cultural producers to reduce livestock numbers, which will result in a drop in poultry, dairy and meat production this year. Moreover, initial harvest results suggest critically low levels of grain output. Given little likelihood of adequate agricultural sector reform, we do not expect a strong rebound in agriculture until after the forecast period,. As a result, we expect a decline in agricultural production of 5% in 1999, followed by an increase of 1% at most in 2000.

—but strong industrial We expect Belarusian exports to benefit from some improvement in Russian output will permit demand in 2000—especially given increased substitution in Russia away from moderate GDP growth— Western imports. Russia’s relatively rapid stabilisation following last year’s crisis has already helped to mitigate the slowdown in Belarus’s industrial output growth. However, the sluggishness of the industrial sector in recent months suggests the limits of Belarus’s attempts to achieve high levels of growth while avoiding economic restructuring. Therefore, although we forecast that industrial production in Belarus will increase by 5% in 1999, we expect growth to slow slightly to around 3% in 2000. A combination of the decline in agricultural production and moderate industrial growth will result in stagnant output this year and GDP growth of at best 2% in 2000.

—despite continued Mr Lukashenka’s ability to avoid reforms in the industrial sector has depended reliance on the Russian primarily on Russia’s willingness to accept low-quality Belarusian goods on export market terms that are highly favourable to Belarus. Belarus will therefore fail in any large-scale efforts to diversify exports towards hard-currency markets in the West, unless it permits greater industrial restructuring and market reforms, and changes to its foreign policy—none of which the Belarusian leadership is likely to embrace. As a result, export growth will continue to depend heavily on the Russian market, with the result that total exports will remain below 1998 levels for both years of the forecast period. However, by maintaining the degree of import compression seen over the first half of the year, Belarus will build on its strong first-quarter result and achieve a slight current-account surplus this year of around 1% of GDP. Next year, increased import costs and slow growth in exports will result in a current-account deficit of around 2.7% of GDP—still considerably below 1996-97 levels.

Belarus: gross domestic product % change, year on year Belarus: forecast summary (% change year on year unless otherwise indicated) Belarus Eastern Europe (a) a a b b 12 1997 1998 1999 2000

10 Real GDP 10.4 8.3 0.0 2.0 Industrial production 17.6 11.0 5.0 3.0 8 Agricultural production 6.9 –0.4 –5.0 1.0 6 Consumer prices 4 Annual average 64 70 280 140 2 Year-end 63 182 200 120 nil 0 Exports fob ($ m) 7,383 7,135 6,300 6,700 -2 Imports fob ($ m) 8,718 8,569 6,600 7,500 1996 97 98 99(b) 2000(b) Current-account balance (a) Excluding former Soviet Union. (b) EIU forecasts. Sources: EIU; Belarus Economic Trends. (% of GDP) –5.7 –6.6 1.2 –2.7

a Actual. b EIU forecasts.

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Review

The political scene

Mr Lukashenka remains in The constitution in place when the president, Alyaksandar Lukashenka, first office despite considerable took office in 1996 stipulated July 20th 1999 as the last day of his presidency. protest— However, Mr Lukashenka has steadfastly insisted that constitutional amend- ments introduced following the controversial 1996 referendum have extended his term to 2001. This has sparked criticism from the opposition, which has insisted that he resign, and from international institutions and foreign governments that reject the results of the 1996 referendum.

—from foreign The US government, in particular, has refused to acknowledge the legitimacy of governments and Mr Lukashenka’s presidency until a new election is held. Similarly, an institutions— unofficial statement by the OSCE Parliamentary Assembly has stated that Mr Lukashenka can no longer be considered a democratically elected president. Nonetheless, Belarus’s diplomatic relations are unlikely to change greatly as a result of this development. The US and the OSCE have qualified their responses, with the US apparently unwilling to break off ties with Mr Lukashenka’s administration completely, and the OSCE issuing an official statement that is considerably less clear than the unofficial one presented above. Similarly, the EU presidency has largely avoided the question of legitimacy in its response to Belarus’s constitutional crisis and has instead chosen only to reaffirm that, as Mr Lukashenka’s presidential mandate expired on July 20th, a free election is the only way to overcome the impasse.

—and from the domestic The opposition in Belarus has proved far less equivocal. In anticipation of opposition Mr Lukashenka’s refusal to step down on July 20th, it organised demon- strations in Minsk and in provincial centres. On July 23rd the deputies of the 13th Supreme Soviet (the elected body disbanded by Mr Lukashenka following the 1996 referendum) declared the Supreme Soviet speaker, Syamon Sharetski, as the country’s acting president, in keeping with the constitution that was in place at the time of Mr Lukashenka’s election. Mr Sharetski has since proceeded to declared as invalid all legislative acts passed since July 20th.

The opposition remains More than anything, however, these efforts have emphasised the extent to glaringly weak and which the opposition has been marginalised as a result of its own internal divided— divisions, and the government’s ongoing campaign of harassment and intim- idation. The demonstrations that it organised on July 20th drew only a few thousand participants and proved a relative failure. Mr Sharetski has been forced to rally his alternative government from across the border in Lithuania. In exile, he has elicited little response, either from Mr Lukashenka or from foreign governments, and has further dispersed the opposition’s leadership, without succeeding in gaining the widespread support of anti-Lukashenka forces.

—even with the help of Although the OSCE has actively sought to support the opposition’s efforts, it the OSCE— lacks the leverage needed to force the government into a more conciliatory stance. Its attempts to secure a meeting between Belarusian deputies and

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opposition leaders in Bucharest in August failed, owing to a lack of interest on the part of the parliamentarians. The OSCE’s most recent attempt to arrange a dialogue between the two sides might prove to be slightly more successful. Although few details have been settled, the latest effort would bring represent- atives from the administration and opposition together in OSCE-sponsored negotiations centred on arrangements for next year’s parliamentary election. In this instance, the major opposition parties appear to have set aside some of their differences, albeit grudgingly, by signing an agreement in mid-August authorising the Supreme Soviet to represent them in the OSCE-sponsored talks. This was a considerable step, given the acrimony that exists between the political parties, such as the Popular Front of Belarus (PFB), and the delegates of the 13th Supreme Soviet. Nonetheless, several opposition parties remain outside this latest agreement, while the Supreme Soviet is an isolated and unpopular force consisting of intellectuals and former Soviet officials—in itself an unlikely and unworkable alliance.

—because of Mr Lukashenka probably therefore sees little reason to fear that a unified Mr Lukashenka’s continued opposition will force him to compromise. He has presumably calculated that popular support his influence over the agenda, tone and media coverage of any dialogue with the opposition will allow him to remain in control. Moreover, he can continue to ignore international criticism as long as he benefits from the support of the two political forces most important to him: Russian officialdom and the Belarusian public. In an official statement, the Russian foreign ministry rejected speculations about Mr Lukashenka’s legitimacy and expressed respect for the choice made by the Belarusian people. At home, Mr Lukashenka’s popularity has diminished little, as reflected by an independent opinion poll in which only 28% of respondents favoured a presidential election in 1999 and more than 50% indicated that they would have voted for Mr Lukashenka had an election taken place in July. According to the poll, the two main opposition leaders—the former prime minister, Mikhail Chigir, and the PFB leader, Zyanon Paznyak—would have received 11% and 6% respectively.

Plans for unification with Opposition leaders such as Mr Paznyak are perhaps most at odds with the Russia stall— current administration on the issue of unification with Russia. Mr Lukashenka remains the strongest proponent of closer union with Russia, espousing a vision of a union state that would include a supranational executive body, a single currency and a presidency (in addition to the existing presidencies of Russia and Belarus). However, Russian officials have proved more circumspect about the proposed union state and about the timetable for its creation. Although Russian leaders are not averse to the idea of a union, much of the Russian polity is apprehensive. Their concern stems in part from the fact that Russia’s already strong regions might use the proposed union as a pretext for demanding a change in their status from that of constituent parts of the Russian Federation to that of sovereign states united with Russia. Even more worrisome from the Russian perspective is the contrast between Russia’s relatively greater movement towards a market economy and Belarus’s attempts to preserve a Soviet-style system. Integration of the two countries’ monetary systems would prove particularly difficult, given Belarus’s reliance on expansionary monetary policies. Therefore, even though opinion polls in

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Russia indicate that support for the general concept of a union is higher than 70%, the actual process is likely to take years, rather than months, as hoped by Mr Lukashenka.

—leading Mr Lukashenka In a speech on the subject of unification, Mr Lukashenka included a short state- to tone down his anti- ment on the need to develop better relations with all neighbours, including Western rhetoric— Western states. However, this did not signal a radical change in foreign policy, as he continues to rule out any reorientation away from Russia towards the West. Nonetheless, he has admitted the importance of Western export markets and in recent months has refrained from his traditionally intransigent rhetoric—in addition to expressing confidence in an eventual improvement in relations with the US.

—although his foreign At present, however, the US ambassador to Belarus resides in the US and only policy remains unchanged visits Minsk for several weeks at a time, as a result of the still unresolved crisis over his official residence—from which he was evicted more than a year ago on Mr Lukashenka’s orders (3rd quarter 1998, pages 9-10). While relations with the US are in effect frozen, Belarus has actively sought to develop closer ties with China, and maintains friendly relations with Iraq. During the visit to Belarus of an official Chinese delegation in July, the chairman of the upper house of the Belarusian legislature, Pavel Shypuk, declared that only China, Russia and Belarus could counter NATO’s eastward expansion. When the Belarusian deputy prime minister Vladimir Zametalin visited Baghdad on July 24th, Belarus was praised by the Iraqi president, Saddam Hussein, for its “noble stand” on international issues and opposition to the UN embargo on Iraq. More than anything, these efforts provide an indication of Belarus’s growing isolation and the extent to which Mr Lukashenka feels that he can benefit at home from an anti-Western and anti-NATO stance.

Economic policy

The soundness of the The government’s budget performance represents one of its better executed budget is misleading— policies—at least on the surface. The 1998 budget deficit was the equivalent of 1.9% of GDP, an improvement on the original target of 2.5% of GDP, while total tax arrears reached only 0.3% of GDP. Preliminary figures for 1999 suggest an even stronger performance, with the consolidated budget surplus for the first six months of the year amounting to around BRb230bn ($824,000; 0.7% of GDP). However, the state budget expenditure/GDP ratio of 40% does not reflect the scope of the government’s extensive involvement in the redistribution process. In particular, several extra-budgetary funds exist that are controlled by the presidential administration and financed through relatively untransparent sources—such as proceeds from obligatory sales of hard currency at artificially low rates by exporters. The government’s strong budgetary performance also masks a worrying trend towards an excessive reliance on indirect taxes and excise duties as sources of revenue: value-added tax (VAT) and excise taxes have steadily increased as a share of total government revenue since 1994, and have now reached around 40% of total revenue. In contrast, the share of income taxes and taxes on profits has declined from close to 40% in 1994 to around 25% in 1998.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Belarus 13

—especially given its The government’s ability to subsidise loss-making enterprises and finance reliance on easy large-scale projects is facilitated by the state’s active use of credit and monetary credit policies— expansion. This keeps annual inflation in triple digits, but allows the admin- istration to solve short-term problems, such as financing the harvesting cam- paign, and to ensure that expenditure decisions remain at its own discretion. Nonetheless, the government recognises that it can undermine its currency only to a certain point and has therefore reduced its expansionist monetary policy in recent months. In the first five months of the year M2 money supply increased at an average monthly rate of 7.2%, up from an average of around 4.8% in the same period of last year, but still a significant decline from the 33.2% average recorded in the fourth quarter of 1998. Despite this marginal improvement, excessive monetary expansion will persist as long as the government is focused on avoiding fundamental enterprise restructuring.

—thereby necessitating Despite recent small steps towards the tighter monetary policy recommended excessive price controls by the IMF, the persistence of expansionary policies has forced continued reliance on pervasive price controls. These have succeeded in preventing the economy from erupting into open hyperinflation, and are likely to allow the Belarus: money supply and government to escape the most extreme consequences of its loose policies. consumer prices % change, month on month Nonetheless, price controls are unable to contain all of the symptoms of hyperinflation, including widespread shortages of basic goods and spiralling M2 Consumer prices black-market prices. The exchange rate is the most visible evidence of this 100 policy: the Belarusian currency may only be used as legal tender in export and 80 import operations with prior permission from the National Bank of Belarus 60 (NBB, the central bank). Moreover, permission can only be issued at the request 40 of the Council of Ministers, individual ministries, regional executive com-

20 mittees and large state-owned enterprises.

0 Although the Belarusian authorities have recently moved towards a degree of

-20 exchange-rate liberalisation, this is destined to remain as limited as similar Jan . .Apr. . Jul . .Oct. . Jan . .Apr. . Jul 1998 99 initiatives launched in the past. The Council of Ministers has decided gradually

Source: Belarus Economic Trends. to ease its ban on using the Belarusian rubel in foreign trade transactions. Moreover, the chairman of the NBB, Piotr Prakapovich, has suggested that the Belarusian rubel might become convertible as early as next year. According to the NBB’s programme, Belarus would peg the rubel to the euro and would even contemplate the introduction of a currency board, based on raising foreign- currency reserves by around $400m—which he proposes to achieve by increasing mandatory sales of foreign currency at an officially established rate. It is notable that none of the earlier liberalisation plans mooted by Mr Prakapovich since he became head of the central bank in May 1998 has been successfully implemented. The EIU believes that it is unlikely that a currency board is feasible within the current policy framework.

The criminal justice system The government’s efforts to retain tight control over Belarus’s economy are is used to intimidate evident in several recent high-profile trials of successful entrepreneurs. In the entrepreneurs opaque, chaotic and contradictory legal environment that exists in Belarus, entrepreneurs are in effect unable to run a profitable operation without breaking (often unwittingly) rules and regulations. This provides the govern- ment with considerable leverage over private entrepreneurs—a power that it

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 14 Belarus

has so far not hesitated to use. Vasily Starovoitov, a former collective farm chairman who succeeded in transforming his farm into a profitable joint-stock company, at a time when most collective farms in Belarus operated at a loss, was recently sentenced to two years in prison for tax evasion, bribery and trading without a licence. The authorities have brought similar charges against Andrei Klimov, formerly a successful real estate developer, who is currently in detention. The former prime minister Mikhail Chigir awaits trial on charges of embezzlement, which was alleged to have occurred after he left the govern- ment. The director of the Belarusian Metallurgical Plant, Yuri Feoktistov, has recently been arrested on charges of criminal negligence—even though Mr Feoktistov’s plant is responsible for 20-30% of the hard currency purchased by the government at official rates.

The IMF decides against an Several IMF delegations have visited Belarus in recent months as part of emergency loan ongoing efforts by the government to secure a $100m emergency loan intended to alleviate the consequences of Russia’s economic decline. However, the IMF has demanded further exchange-rate liberalisation and tighter monetary policy, and has so far refused to extend an emergency loan. This has prompted the government to cast a positive light on the IMF’s unwillingness to lend, by insisting that its own long-term development plans can be achieved without foreign assistance. The prime minister, Sergei Ling, has gone so far as to express satisfaction with the IMF’s decision, arguing that it prevents a further build-up of the country’s external debt stock. However, the efforts that the government has expended since last year’s crisis to attract IMF support suggest that the government had actively counted on IMF funding to boost its exceedingly scarce foreign-currency inflows.

The economy

GDP continues to grow— According to official statistics, real GDP increased by 1.4% year on year in the first seven months of 1999—well below the government’s growth forecast of around 4% for the year and sharply down from the 12% growth recorded in the same period of 1998. Real agricultural output performed particularly poorly, declining by almost 10% in January-June 1999 compared with the same period of 1998. In particular, the shortage of animal and poultry feed following last year’s poor harvest has resulted in reduced output of meat, dairy and poultry products. Belarusian agriculture is still dominated by state- controlled collective farms and is badly prepared to operate under less than perfect weather conditions. This year’s moderate drought therefore placed significant strain on agricultural enterprises suffering from shortages of equipment and labour. Although the government has allocated more than BRb8,000bn ($28m) of credits for repairing ageing farm equipment before this year’s harvest, total grain production appears set to fall well short of last year’s already dismal result of 4.8m tonnes, and significantly below Mr Lukashenka’s forecast of a 6m-tonne harvest.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Belarus 15

—led by the industrial However, continued growth in the industrial sector has compensated for this sector— decline. In the first seven months of the year industrial output increased by 6.5% compared with the same period of 1998, predominantly owing to the government’s emphasis on relentlessly boosting output regardless of financial considerations. In May more than 23% of Belarusian enterprises operated at a loss, including 40% of enterprises in the agricultural sector and 13% in the manufacturing industry.

—and accompanied by high Belarus’s impressive growth statistics in recent years have only proved possible inflation— at the cost of high inflation. Since the devaluation of the Russian rouble in August 1998, inflation levels have increased even further. Consumer prices increased by 97% in the first seven months of 1999, compared with 25% in the same period of 1998, leading to year-on-year consumer price inflation of around 340% at the end of July. Nonetheless, monthly inflation figures have fallen gradually since their peak in November 1998. This steady monthly disinflation was broken only by a slight increase in May, when a two-fold increase in the minimum wage sparked a 37% jump in the average nominal wage. As before, latent inflation remains an endemic feature of the Belarusian economy, brought on by continued shortages of basic goods and services.

Belarus: consumer prices (% change; av)

Month on month Year on year Belarus: inflation 1998 % change, year on year Jan 3.9 49.9 Feb 3.1 44.9 350 Mar 3.3 46.4 300 Apr 3.8 45.7 May 3.4 43.4 250 Jun 2.7 41.0 200 Jul 2.8 42.9

150 Aug 3.8 46.9 Sep 17.6 64.5 100 Oct 21.0 92.9

50 Nov 25.0 136.8 Dec 21.7 181.7 0 Jan . .Apr. . Jul . .Oct. . Jan . .Apr. . Jul 1999 1998 99 Jan 16.6 216.2 Sources: Belarus Economic Trends. Feb 13.7 248.7 Mar 12.1 287.4 Apr 7.4 291.5 May 8.9 312.3 Jun 7.1 330.0 Jul 6.0 343.4 Sources: Belarus Economic Trends; press reports.

—while nominal After five months in which the currency lost between 20% and 40% of its value depreciation is slowing each month, the rubel’s slide decelerated considerably in the second quarter of dramatically 1999. Slightly tighter monetary policy in Belarus and greater currency stability throughout the region permitted the authorities to contain the depreciation, such that it lost less than 7% of its value in the second quarter, compared with

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 16 Belarus

a fall of more than 70% during the first quarter. In real terms this slower Belarus: exchange rate BRb ’000:$; inverted scale nominal depreciation translated into a strengthening of almost 15% against the dollar and around 8% against the rouble in the second quarter. This still 0 does little to erase the sharp real depreciation recorded against the dollar since the start of the regional financial crisis in August 1998. The rubel has strengthened in real terms by almost 20% against the value of the Russian 100 rouble immediately prior to the financial crisis. This relative worsening in Belarus’s terms of trade appears unlikely to last, given expectations that it is

200 unlikely to succeed in containing the rubel’s nominal slide.

Belarus: exchange rate % change, 300 Jan . .Apr. . Jul . .Oct. . Jan . .Apr. . Brb:$1a month on month 1998 99 1998 Sources: Belarus Economic Trends; news reports. May 35,299 3.0 Jun 36,605 3.7 Jul 39,551 8.0 Aug 45,288 14.5 Sep 51,732 14.2 Oct 55,332 7.0 Nov 68,143 23.2 Dec 96,211 41.2 1999 Jan 123,222 28.1 Feb 168,300 36.6 Mar 232,636 38.2 Apr 241,000 3.6 May 247,895 2.9 Jun 254,773 2.8

a Period averages. Source: Belarus Economic Trends.

Unemployment figures are According to official labour statistics published in May, unemployment in deceptively low while real Belarus nudged slightly downwards from 2.3% in the first quarter of 1999 to wages have increased 2.2% of the total workforce. However, this figure is deceptive, as a large number of unemployed workers see little reason to register for the low level of Belarus: wages and pensions benefits available. Moreover, because of the lack of economic restructuring, employees are rarely laid off, even when they are no longer occupied at their Consumer price index; right scale Wages, BRb m; left scale workplaces. Mr Lukashenka in effect admitted this when he suggested recently Pensions, BRb m; left scale 25 50,000 that a large number of idle workers in the industrial sector could be spared to help in this year’s harvest campaign. 20 40,000 The government’s decision to double the minimum wage in May led to a sharp 15 30,000 increase in average real wages. These had languished well below last year’s

10 20,000 levels since the start of the year, as a result of high levels of inflation. Although average real wages in May were just over 10% higher than the level in 5 10,000 May 1998, the EIU expects this improvement to dissipate quickly as a result of

0 0 high inflation. The minimum pension level was raised in May and June 1999, Jan . .Apr. . Jul . .Oct. . Jan . .Apr. . 1998 99 but by considerably less than the minimum wage, with the result that real pensions were 6% lower than they were in the same period of 1998. Source: Belarus Economic Trends.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Belarus 17

Belarus: monthly wages and pensions (av; BRb ‘000 unless otherwise indicated)

Wages Pensions Nominal Reala Minimum Arrearsb Nominal Reala 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 Jun 4,176.8 118.6 250.0 1,312.9 1,475.3 124.1 Jul 4,348.2 120.1 250.0 758.7 1,721.2 140.9 Aug 4,449.0 118.4 250.0 1,068.6 1,721.2 135.7 Sep 4,663.6 105.5 250.0 1,234.7 1,738.8 116.6 Oct 5,731.1 107.2 350.0 1,167.0 2,011.4 111.5 Nov 6,369.0 95.3 350.0 766.0 2,119.8 94.0 Dec 8,008.2 98.4 350.0 1,113.7 2,579.8 94.0 1999 Jan 8,978.5 94.7 500.0 1,418.9 2,922.3 91.3 Feb 9,953.9 92.3 500.0 1,135.5 3,610.9 99.2 Mar 11,682.2 96.6 500.0 1,473.1 4,026.9 98.7 Apr 12,849.6 99.0 500.0 2,047.7 4,500.2 102.7 May 17,580.6 124.3 1,000.0 4,328.8 5,481.6 114.9 Jun 19,061.8 125.9 1,000.0 n/a 5,974.2 116.9 a Dec 1993=100. b BRb bn. Source: Belarus Economic Trends.

Foreign trade and payments

Foreign trade declines In January-April 1999 Belarus’s foreign trade turnover, at $3.8bn, represented a sharply— drop of almost 30% on the same period of 1998. Both export revenue and import expenditure have fallen dramatically since last year’s crisis. Export revenue continues to suffer from the effects of reduced demand in Russia, and declined by around 21% year on year in the first four months of 1999.

Belarus: foreign trade, Jan-Mar 1999 (% of total) Belarus: foreign trade Exports Imports $ m Vehicles 20.3 5.6 Imports Exports Mineral products 8.7 24.8 800 Machines & equipment 11.6 13.4

700 Textiles 10.6 4.7 Chemical products 13.2 10.8 600 Food products 7.6 11.5

500 Non-precious metals 7.9 15.9 Plastic & rubber 5.2 4.8 400 Construction materials 1.9 1.0

300 Wood & wood products 4.1 3.0 . Jul . . Oct . . Jan . . Apr . 1998 99 Other 9.0 4.4

Source: Belarus Economic Trends. Total 100.0 100.0 Source: Belarus Economic Trends.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 18 Belarus

As a result of Russia’s disproportionately large role in Belarusian trade, the 40% drop in revenue from exports to Russia more than outweighed the 38% increase in revenue from exports outside the Commonwealth of Independent States (CIS). This relative surge in non-CIS exports reflected not only the benefits of real depreciation, but also the effects of below-market prices, which are made possible by the beneficial credits and unrealistically priced inputs available to Belarusian industries.

—leading to a current- The decline in import expenditure was even larger than the drop in export account surplus revenue. Imports in dollar terms dropped by around 36% year on year in the first four months of 1999 as a result of a shortage of foreign currency and reduced energy imports from Russia. This remarkable import compression allowed for a merchandise trade deficit of around $78m, in sharp contrast to the $656m trade deficit recorded in the same period of 1998. The increase in export revenue from non-CIS countries resulted in a trade surplus of around $16m with those countries. Most noticeably, the sharp reduction in imports resulted in a slight current-account surplus of $21m in the first quarter of 1999, a considerable improvement on the $368m deficit registered in the same period of 1998. This surplus came despite a year-on-year decline in net services of more than 40% and a 24% drop in export revenue. However, it has only proved possible because of the considerable decline in imports, which is likely to hamper Belarus’s ability to reverse the slump in exports over the remainder of the forecast period.

Belarus: current account ($ m; % change year on year in brackets)

1998 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr Exports of goods 1,773 1,894 1,662 1,753 7,081 1,354 ––––(–4.1)(–23.6) Imports of goods –2,259 –2,265 –1,954 –2,049 –8,528 –1,397 ––––(–2.2)(–38.2) Trade balance –486 –372 –293 –297 –1,447 –43 – – – – (8.4) (–91.2) Net services 116 144 72 108 440 68 – – – – (–20.6) (–41.4) Net income –14 –26 –16 –22 –78 –18 ––––(–8.4)(–28.6) Current transfers 15 43 17 65 140 14 ––––(79.1)(–6.7) Current-account balance –368 –210 –220 –146 –945 21 Source: National Bank of Belarus, published in Belarus Economic Trends.

Barter is still a major In the first four months of 1999 barter transactions accounted for 37% of component of foreign exports and 36% of imports in dollar terms, up from 30% and 23% respectively trade— in the same period of last year. This is likely to come down in coming months, following a presidential decree at the end of June that introduced a tax on barter foreign trade transactions. The tax amounts to 5% for the transactions authorised by the Council of Ministers and 15% for all other transactions, and

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Belarus 19

should be seen as an effort to boost revenue rather than an attempt to reduce barter foreign trade. The finance minister, Nikolai Korbut, has justified the tax by pointing out that companies receiving foreign currency for their goods have to sell 30% of proceeds at the artificially low official rate (in effect paying additional tax), while those involved in barter transactions avoid this tax—and deprive the government of additional revenue. However, the tax on barter trade will almost certainly reduce overall trade, given the limited ability of many companies to switch from barter to non-barter markets.

—and debts to Russia for Even though Belarus was able to pay in full for Russian natural gas imports in energy remain a the first five months of this year, its debt for total outstanding gas supplies has chronic problem accumulated in recent years, and at the end of August amounted to around $285m, according to Belarusian sources. Belarus’s energy payment situation will ease somewhat in the reminder of the year, following a decision by the Russian gas monopoly Gazprom to cut the price of gas supplied to Belarus from $50/1,000 cubic metres to $30/1,000 cu metres, and to reduce the volume of supplies planned for this year from 18bn cu metres to 16.6bn cu metres. However, Belarus’s electricity debt also remains a concern, with around $100m owed to Lithuania for past electricity supplies.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 20 Moldova

Moldova

Political structure

Official name Republic of Moldova

Legal system Moldova adopted a new constitution on July 28th 1994. The Transdniestr region has declared independence, which the central government has not recognised. 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 November 17th 1996 (presidential) and March 22nd 1998; next elections due in late 2000 (presidential) and by 2002 (parliamentary)

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

National government Moldova has an executive presidency. The prime minister chairs the Council of Ministers; a new coalition government was approved by parliament on March 1st 1999

Main political parties The ruling coalition is the Alliance for Democracy and Reforms, made up of the Bloc for a Democratic and Prosperous Moldova (24 seats in parliament) the Democratic Convention (17 seats) and the Party of Democratic Forces (11 seats). Together with the Christian-Democratic Popular Front (9 seats), these parties comprise the centre and centre-right in parliament. The Communist Party of Moldova holds the largest number of seats (40)

Council of Ministers Prime minister Ion Sturza First deputy prime minister Nicolae Andronic Deputy prime minister & minister for the economy Alexandru Muravschi Deputy prime ministers Valentin Dolganiuc Oleg Stratulat State minister Vladimir Filat

Key ministers Agriculture & food-processing Valeriu Bulgari Culture Pavel Pelin Defence Boris Gamurar Education Anatol Grimalschi Finance Anatol Arapu Foreign affairs Nicolai Tabacaru Health Eugeniu Gladun Industry & commerce Alexandra Can Justice Ion Paduraru Labour & social protection Vladimir Guritsenco Security Valeriu Pasat

Central bank governor Leonid Talmaci

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Moldova 21

Economic structure

Latest available figuresa

Economic indicators 1994 1995 1996 1997 1998 GDP at current prices (Lei m) 4,737 6,480 7,658 8,917 8,804 GDP at market exchange rates ($ m) 1,109 1,441 1,663 1,929 1,639 GDP at purchasing power parityb ($ bn) 7.3 7.3 6.9 7.1 5.9 Real GDP growth (%) –30.9 –1.9 –8.0 1.3 –8.6 Consumer price inflation (av; %) 486.4 29.9 23.5 11.8 7.7 Population (mid-year; m) 4.35 4.35 4.33 4.31 4.30 Exports ($ m; fob) 619 739 823 890 644 Imports ($ m; fob) 672 809 1,075 1,235 1,043 Current-account balance ($ m) –82 –98 –191 –268 –334 Consolidated budget balance (% of GDP) –5.9 –5.8 –9.8 –7.7 –2.5 Reserves excl gold ($ m) 179.9 239.8 313.6 366.0 144 Foreign debt ($ m) 504 677 834 1,040 1,040b Exchange rate (av; Lei:$) 4.27 4.50 4.61 4.62 5.37

August 27th 1999 Lei11.02:$1

Origin of gross domestic product 1997 % of total Components of gross domestic product 1998 % of total Agriculture & forestry 32.2 Private consumption 84.0 Manufacturing 28.6 Public consumption 18.3 Construction 4.6 Gross fixed investment 21.9 Services 34.6 Increase in stocks 4.1 Total GDP 100.0 Net exports –28.3 Total GDP 100.0

Principal exports 1998 % of total Principal imports 1998 % of total Food products, beverages & tobacco 55.1 Mineral products & fuel 31.7 Vegetable products 11.2 Machines, electronic devices & equipment 19.1 Textiles 9.8 Chemicals 9.0 Machines, electronic devices & equipment 6.6 Textiles 6.2 Live animals & animal products 5.4 Metals & metal products 4.0

Main destinations of exports 1998 % of total Main origins of imports 1998 % of total Russia 53.0 Russia 21.7 Romania 9.6 Ukraine 16.0 Ukraine 7.8 Romania 11.7 Germany 5.0 Belarus 9.0 Belarus 3.8 Germany 5.2 a Excluding Transdniestr. b EIU estimates.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 22 Moldova

Outlook for 1999-2000

Structural reforms will The depth of Moldova’s economic crisis appears finally to have impressed itself accelerate— on the country’s political elite. A strong performance over the past six months by the pro-reform prime minister, Ion Sturza, combined with the constraints imposed by Moldova’s dependence on multilateral support, leads the EIU to expect continued efforts by the government to increase the pace of long- delayed reforms. However, the cabinet’s generally solid reform credentials are substantially offset by the near-certainty of continued political instability over most of the forecast period.

—but they are threatened Our expectation that a centre-right government will remain in place for most by political instability— of the forecast period will only hold as long as members of the governing Alliance for Democracy and Reforms (ADR) coalition see an incentive to contain their considerable differences sufficiently to prevent a dissolution of parliament and an early return to the polls. However, a considerable risk exists that irreconcilable differences between the centre-right parties will force Mr Sturza’s resignation, whereon the centre-right could precipitate a new election by proving unable to form a new government. This outcome would probably result from an irreparable falling-out between the constituent parties of the ADR, or else from a decision by the centrist Bloc for a Democratic and Prosperous Moldova (BDPM) to forge an alliance with the Communist Party of Moldova (CPM), in return for a promise by the Communists to keep Dumitru Diacov as parliamentary speaker. Given the ideological gap that exists between the Communists and the BDPM, and the incentive faced by ADR members to avoid an early election, we believe that these scenarios are unlikely. Nonetheless, intensified in-fighting among centre-right parties in recent months has already led to the effective dissolution of the ADR, thereby significantly increasing the risk of an early election.

—the possibility of a left- An early return to the polls could conceivably lead to a Communist-led wing government— government in Moldova. Not only does the CPM already control 40% of the parliamentary seats, it also performed well in the local elections in May and would stand to benefit greatly from public dismay over the centre-right’s ineffectiveness. However, if the CPM does end up in government, its ability to roll back existing reforms will be contained—either because of an alliance with the BDPM, or because it will need to respond to the considerable constraints imposed by Moldova’s dependence on IMF assistance. Nonetheless, the CPM would attempt to slow the pace of reform and would be more likely to seek a restructuring of external debt obligations. There would also be a risk of greater fiscal or monetary policy loosening.

—and efforts by Ongoing efforts by the president, Petru Lucinschi, to change Moldova’s form of Mr Lucinschi to increase government from a parliamentary to a presidential system will lead to even presidential powers more political instability over the forecast period. If put to a referendum, Mr Lucinschi’s proposal stands a good chance of succeeding. He controls a large section of the media and would benefit from the well-publicised corruption of many leading politicians. Moreover, Moldova’s deep economic crisis has

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Moldova 23

increased the public’s frustration with the existing political system; in particular, the public blames political gridlock for exacerbating major problems such as widespread payment arrears to workers, pensioners and energy creditors.

The president’s proposal Preliminary reports suggest that Mr Lucinschi’s constitutional commission will will face considerable propose an even more decisive move towards a presidential system than was opposition— originally expected. However, this is not a foregone conclusion. Most parlia- mentarians view Mr Lucinschi’s plans as a dangerous step towards autocratic government and are almost certain to deny him the two-thirds majority needed to amend the constitution. Moreover, although the public would probably endorse Mr Lucinschi in a referendum, this endorsement could fall short of the absolute majority of registered voters needed. In particular, much of the impoverished public has lost faith in the political process or is too preoccupied with scraping together a living, both of which will reduce voter turnout in a referendum.

—from both domestic and Mr Lucinschi will be constrained by both domestic and external considera- external sources— tions. In order to succeed, he will need the support of at least some of the vested interest groups with which Moldova’s political parties are linked. Even the traditionally pro-presidential BDPM objects to Mr Lucinschi’s initiative, as does the ideologically anti-presidential CPM, the one party with the political infrastructure capable of mobilising effectively against the proposal. External considerations may prove even more influential. Given Moldova’s dependence on multilateral support and its aspirations for further integration into west European structures, the opinion of international bodies such as the Council of Europe will play a major role in keeping Moldova’s constitutional changes within European norms.

—while further Even if implemented, therefore, the proposed changes are unlikely to prove as heightening political extreme as is currently argued by the opposition. The most significant con- instability sequence of Mr Lucinschi’s initiative could prove to be the destabilising political impact that the debate leading up to any decision might have, by exacerbating the already tense relations between the presidency and the legis- lature, while further straining the government’s virtually non-existent majority. It is likely to provide a time-consuming distraction for parliament and shift priorities away from other reform legislation. Any slowdown in other reforms could seriously affect Moldova’s multilateral relations, thereby endangering the official financing inflows without which the country has no chance of meeting the external debt-service obligations due over the forecast period.

Transdniestr’s status will This considerable dependence on multilateral inflows derives in part from remain unresolved Moldova’s slow progress in attracting foreign direct investment (FDI). However, more substantial FDI inflows will prove difficult unless Moldova resolves the status of Transdniestr, the breakaway region of the country bordering Ukraine. It still appears unlikely that this question will be resolved during the forecast period, even following the recent agreement reached at the Kiev summit in July (see The political scene). As argued in previous reports, the conflict’s intractability stems predominantly from Transdniestr’s lack of incentive to settle the issue. Although opposition to integration with Romania played a

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 24 Moldova

major role at the outset of the conflict, the entrenched Transdniestr leadership is now more concerned with preserving its position at the centre of a lucrative smuggling operation. None of the other parties involved in the conflict has sufficient leverage or incentive to force a rapid conclusion of the dispute. Russia’s only major interest in the conflict is to ensure that weapons do not flow from Transdniestr to separatist regions within the Russian Federation. Moreover, Russia’s attention will be distracted by the parliamentary and presidential elections scheduled to take place in the forecast period. Moldova, for its part, remains dependent on electricity supplies from the power plant located in Transdniestr, and lacks the military or financial leverage needed to force a solution.

Land reform will only As long as the government can contain the fallout from these various sources slowly transform of political instability, we expect continued progress towards greater structural agriculture reform and fiscal consolidation. Mr Sturza’s government has already demon- strated considerable commitment to reform and will continue to respond to the need for multilateral assistance. We expect progress in the agricultural sector during the forecast period as a result of implementation of the World Bank-supported project to redistribute land from state farms to individual farmers (see Economic policy). However, the impact of these reforms will be limited, at least during the forecast period, owing to a lack of investment and borrowing possibilities in the agricultural sector. Despite increased land ownership, agricultural producers will continue to lack the access to inputs and the marketing expertise needed to boost production or to penetrate competitive markets outside the former Soviet Union.

The budget deficit will stay Despite the unrealistic underlying assumptions used in the budget, the on target— government is likely to meet its budget deficit target of 3% of GDP this year. Mr Sturza has shown his commitment to containing expenditure, and will benefit both from recent measures to boost revenue collection capabilities and from an acceleration of large-scale privatisation. We expect further fiscal consolidation in 2000. Once again, Moldova’s IMF agreement will provide a powerful external incentive, while further fiscal reform should improve budget planning and revenue collection. Privatisation will accelerate even further during the second half of the forecast period, which will prove crucial in Moldova’s efforts to meet the considerable debt-service obligations scheduled for next year.

—although economic Throughout the forecast period Moldova will continue to suffer the performance will depend consequences of having an economy overwhelmingly geared towards on neighbouring countries supplying food and beverages to members of the Commonwealth of Independent States (CIS). We expect that this year’s recession in Russia, traditionally the destination of more than 60% of Moldovan exports, and in neighbouring Ukraine and Romania, will at most level out in 2000—and will therefore continue to limit the potential for an export-led recovery in Moldova. Combined with a poor fruit harvest this year, which will affect the local wine and canned goods industries, this will lead the economy to shrink by around 9% in 1999. In 2000 the impact of gradual reforms, greater economic stability throughout the region and incremental improvements in

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Moldova 25

the agricultural sector thanks to greater foreign investment should slow the economy’s decline to around 1%. Positive growth in 2000 will be precluded by low domestic demand in the presence of declining private real incomes and public consumption, and by a shortage of critical inputs, particular fertilisers and energy supplies.

Inflation will decelerate Following some loosening in the first half of 1999, Moldova’s monetary policy gradually— remains relatively tight and is expected to tighten further over the course of the forecast period. Despite this tightening, however, we continue to expect relatively high inflation this year, owing to a combination of considerable currency depreciation, fuel price shocks and the liberalisation of utility prices. This will result in average and year-end inflation of between 35% and 40% in 1999. We expect monthly inflation levels to decline gradually throughout the remainder of the forecast period, leading to year-end inflation of just over 15% in 2000.

—while unemployment is We expect the number of unemployed to increase during the forecast period as set to rise a result of further fiscal tightening and economic restructuring. Workers in the public sector will be the hardest hit, owing to cost-cutting in the health and education services, the consolidation of local government and a freeze on public-sector employment. Similarly, the privatisation of utility companies will also entail cuts in the labour force as enterprises begin to introduce long- delayed restructuring. This will prove a source of considerable political instability, even if officially recorded unemployment remains relatively low. The population already suffers from widespread impoverishment following years of hyperinflation, economic stagnation and ineffective policies; without a booming urban economy, and without the possibility of retraining or supporting these workers adequately, Moldova will find it very difficult to re-integrate the unemployed.

Trade will be depressed— We expect export revenue to remain well below pre-crisis levels for the duration of the forecast period, given that there is little sign yet of any recovery in exports to Russia. Export revenue from western and central Europe will increase slowly over the remainder of the forecast period, although this will hardly compensate for the drop in the more important Russian market. Nonetheless, we still expect a significant reduction in the current-account deficit compared with last year, owing to an even greater fall in import expenditure. This will ensure that trade deficits in the forecast period remain well below half of the $400m deficit recorded in 1998, and will permit a current-account deficit of below 9% of GDP in both years of the forecast period, compared with more than 20% in 1998 and 14% in 1997.

—and default will remain These reduced current-account deficits will prove crucial for Moldova as it a concern struggles to pay around $150m in debt servicing in both years of the forecast period. Nonetheless, it will still need to continue to seek restructuring terms from its major creditors, especially Russia. Although the threat of a formal external debt default will remain high, Moldova should be able to meet its relatively small Eurobond payments over the course of the forecast period.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 26 Moldova

Moldova: gross domestic product Moldova: forecast summary % change, year on year (% change year on year unless otherwise indicated)

Moldova 1997a 1998a 1999b 2000b Eastern Europe (a) 6 Real GDP 1.3 –8.6 –9.0 –1.0 4 Industrial production –2.3 –11.0 –9.0 –3.0 2 Agricultural production 11.0 –7.0 –7.0 1.0 0 Consumer price inflation -2 Average 11.8 7.7 39.0 24.0 -4 Year-end 11.1 18.2 38.0 16.0

-6 Exports ($ m) 890 644 470 500

-8 Imports ($ m) 1,235 1,043 590 625 -10 Current-account balance ($ m) –268 –334 –70 –70 1996 97 98 99(b) 2000(b) % of GDP –13.9 –20.4 –6.8 –8.7 (a) Excluding former Soviet Union. (b) EIU forecasts. Sources: EIU; Moldova Economic Trends. Exchange rate (Lei:$) Annual average 4.62 5.37 11.00 17.50 Year-end 4.66 8.32 15.00 20.00

a Actual. b EIU forecasts.

Review

The political scene

In-fighting between the Formed amid considerable rancour in the wake of the March 1998 parlia- centre-right groups mentary election, the governing coalition, the Alliance for Democracy and intensifies— Reforms (ADR), had until earlier this year proved relatively successful at containing disputes among its various constituent groups, motivated by the ultimate goal of keeping the Communist Party of Moldova (CPM) in opposition. However, since the resignation in February of the prime minister, Ion Ciubuc, the extent of the divisions plaguing the centre-right groups in parliament has become increasingly evident. Most notably, the ADR in effect now exists in name only. The Christian-Democratic Popular Front (CDPF) has left the coalition and has joined the CPM in opposition. The remaining ADR members have shown little sense of coalition unity and were only able to form a one-seat majority through a controversial proxy vote (2nd quarter 1999, page 28). Since then, some ADR members have occasionally joined the CPM in voting down the cabinet’s proposals, while individual ADR legislators have opposed their parties’ interests by serving in the presidential commission tasked with proposing constitutional changes.

—leading to pressure on the Divisions within the centre-right have surfaced most clearly in relation to a parliamentary leadership number of corruption allegations that have dominated parliamentary proceedings in recent months. In July the CPM succeeded in removing Valeriu Matei, leader of the Party of Democratic Forces (PDF), from his post as deputy parliamentary speaker. The CPM had sought Mr Matei’s removal ever since he was fined for obstructing the authorities’ efforts to search a company with which he was connected. Until recently, however, Mr Matei’s coalition partners in the ADR had helped to block the CPM’s efforts to oust him. It was only as a

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result of new rifts within the governing coalition in recent months that the way was cleared for Mr Matei’s removal. On July 9th parliamentarians voted by 59 votes to four in favour of his ouster, with members of both the Bloc for a Democratic and Prosperous Moldova (BDPM) and the CDPF joining forces with the CPM. The parliamentary speaker and leader of the BDPM, Dumitru Diacov, has also faced considerable pressure to resign over the past quarter. Mr Diacov has faced allegations that he interfered in parliament’s debate over the investigation of the prosecutor-general, Valeriu Catana. The head of the CDPF, Iure Rosca, has accused Mr Catana of shielding Mr Diacov’s own business dealings from scrutiny, while Mircea Snegur, head of the Democratic Convention, has demanded Mr Diacov’s resignation.

The presidential These deepening political squabbles have reinforced the position of the referendum is declared president, Petru Lucinschi, in his efforts to strengthen the role of the presidency valid— vis-à-vis parliament. Mr Lucinschi has long held Moldova’s parliamentary system directly responsible for the country’s ongoing political chaos and economic crisis. On May 23rd Mr Lucinschi sponsored a non-binding referen- dum in which a majority (55%) of participants voted in favour of moving from a parliamentary to a presidential system (2nd quarter 1999, page 29). Although the 58% turnout fell short of the 60% required by the constitution to validate the poll, the Central Electoral Commission still voted overwhelmingly to validate the referendum. The commission justified its move on the basis that, while it had the right to annul a referendum, it was under no obligation to do so. The Constitutional Court has endorsed the commission’s ruling, while Mr Lucinschi has formed a commission to propose the potential constitutional changes. The electoral commission’s unexpected ruling on the validity of the poll could prove critical if Mr Lucinschi’s initiative is rejected by parliament later this year and is therefore brought to a referendum—in which voter turnout might easily fall below 60% once again (see Outlook for 1999-2000).

—but his initiative goes The presidential commission in charge of preparing the draft constitutional further than initially amendments has reportedly proposed changes that would significantly envisaged increase the power of the presidency relative to the legislature. The commission will present the draft to international legal experts for review, and then to the Constitutional Court for approval, before submitting it to parliament towards the end of September. However, parliament remains adamantly opposed to Mr Lucinschi’s plans. Deputies have already been extremely vocal in their opposition, arguing that the proposed amendments represent an unprecedentedly anti-democratic step for a country aspiring to join west European structures. Even the pro-presidential BDPM, which does not usually object to an increase in the president’s powers, has tried to persuade Mr Lucinschi to withhold endorsement of the commission’s proposals. The president appears set to put the issue to a referendum in October or November should the legislature refuse to back him. He is relying on the fact that public disappointment with years of political gridlock will provide him with the endorsement that he requires.

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Possible changes to Moldova’s constitution

According to preliminary reports, these are among the constitutional changes under consideration:

The president would appoint the prime minister and government, which would remain directly subordinate to him. Parliament would play a consultative role in choosing the government, and would lose the right either to reject the president’s nominations or to dismiss the government.

The government would replace parliament as the legislative body.

The president would gain the right to dissolve parliament if it blocked his legislative initiatives for more than 60 days.

A single-mandate constituency would replace the existing system of proportional representation based on party lists. The number of deputies would be reduced from 101 to 70.

Parliament would retain the right to appoint the prosecutor-general, although regular prosecutors would be appointed by a special council headed by the president. The president would also appoint the judges. Under the current system the president appoints the senior judiciary on the recommendation of a Higher Magistrates’ Council.

The president’s term of office would be increased from four to five years.

Kiev hosts a summit on The long-awaited Kiev summit on the Transdniestr conflict finally took place Transdniestr in July. The summit had been repeatedly postponed owing to political upheavals in Russia and the intransigence of the Tiraspol leadership, which has a vested interest in maintaining the status quo. The summit does not appear to have moved the conflict any closer to resolution. Although the participants signed an agreement to negotiate further on issues of boundaries, defence, finance and citizenship, the status of Transdniestr was deliberately left open until the end of these subsequent negotiations in the hope that a final agree- ment on the region’s status would evolve more readily following preliminary agreements on these other issues. However, this assumes that agreement can be reached in these areas, and also presupposes a degree of mutual goodwill that appears sorely lacking, as seen by Transdniestr’s move to cut off Chisinau’s power supply within days of the summit. Moreover, it starts from the premise that both sides would negotiate with the aim of preserving a common state— even though the Transdniestrian leadership is almost certain to negotiate from a far more confederate perspective.

Russia’s withdrawal of The inflexibility of the Transdniestrian leadership was recently evident in arms becomes an connection with the massive arms cache located in the region, which was left issue again behind in Transdniestr after the dissolution of the Warsaw Pact and has remained one of the major international concerns in the region. Russia’s agreement to a withdrawal schedule was motivated by concerns that the arms would otherwise make their way to Russia’s various trouble spots. Transdniestr,

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however, intends to make money from the arms in any way possible and therefore considers them property “on loan to Russia”. It refused to attend a meeting on the issue sponsored by the Organisation for Security and Co- operation in Europe (OSCE) in Moscow on July 24th, and has ignored Russia’s troop and arms withdrawal schedules. In August it refused entry to NATO, which is committed to financing the arms withdrawal and had sought to enter the region for inspection purposes.

Moldova signs a border Moldova and Ukraine have recently proved more successful at resolving their treaty with Ukraine own outstanding territorial dispute. On August 18th Mr Lucinschi and his Ukrainian counterpart, Leonid Kuchma, finally signed a Moldovan-Ukrainian border treaty in Kiev. Under the treaty the two countries exchanged small but critical pieces of territory. Ukraine obtains the portion of the Izmail-Odessa road that previously crossed Moldovan territory, while Moldova receives a 100-metre strip of land along the Danube, giving it more direct access to the Black Sea. Most importantly, the agreement allows work to resume on the suspended Giurgiulesti oil terminal at the confluence of the Prut and Danube rivers, thereby enabling Moldova to diversify its energy supplies.

Economic policy

Recent budget revisions The government’s latest revisions to the 1999 budget include an increased call for a 3% deficit deficit target of Lei386m ($35.1m; 3% of GDP) on a commitment basis, significantly higher than the 1.7% deficit contained in the original budget. Moldovan authorities blame the economic crisis for necessitating these revisions. In its memorandum to the IMF in July, the government pledged to meet its targets through increased large-scale privatisation and a freeze on public-sector employment, rather than by resorting to increased wage and pension arrears as in the past.

Monetary indicators are In the first half of 1999 monetary indicators rose at a significantly faster rate rising faster than in 1998 than in the same period of 1998. With the National Bank of Moldova (NBM, although policy is tighter— the central bank) no longer draining its reserves as it did in 1998, M2 money supply (M1 plus lei time deposits) rose by around 8% in the first six months of 1999, compared with an 8% decline in the same period of 1998. Similarly, Moldova: National Bank credit currency in circulation increased by more than 6%, compared with a decline of End-period stock, Lei m over 11% in the same period last year. More worrisome, perhaps, in terms of Credit to the government excessive dollarisation of the economy, is the rapidly increasing scale of Credit to commercial banks 1,600 foreign-currency deposits: these have grown by more than 85% since the start 1,400 of the year and now make up one-third of broad money, compared with under 1,200 10% at the start of 1998. This has resulted in a 25% increase in broad money 1,000 M3 in the first six months of 1999, compared with a 3% drop in the same 800 period of 1998. 600 400 Nonetheless, the central bank has significantly tightened its credit policy 200 compared with the fourth quarter of 1998, with total credit to the government 0 . Jul . . Oct . . Jan . . Apr . . increasing by only 15% in nominal terms over the first six months—compared 1998 99 with an almost 85% increase during the fourth quarter of 1998 alone. The Source: National Bank of Moldova. central bank has pledged to reduce net credit to the government by the

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equivalent of more than 11% of reserve money (around Lei135m) during the second half of 1999. Similarly, credit to commercial banks has continued to tighten, falling by almost 40% in nominal terms since the start of the year. Moreover, by increasing the minimum reserve requirement for commercial banks to 15%, the NBM engineered an increase in required reserves of more than 100% in nominal year-on-year terms by the end of June, along with an increase in the bank reserves/currency in circulation ratio from just under 15% in mid-1998 to more than 35% a year later.

—while the currency The central bank has refrained from intervening in foreign-exchange markets remains freely floating since November 1998, and has instead recently calculated the official daily exchange rate as a weighted average of commercial bank transactions. How- ever, in its efforts to ensure currency stability, it has relied on a 15% minimum reserve requirement for the banking sector and has used its supervisory powers to exert more control over foreign-exchange markets: it has closed down around 30 of the country’s 150 exchange offices for failing to meet the statutory minimum capital of Lei200,000, and intends to raise this level further.

The IMF resumes lending— With Moldova unable to return to international capital markets, it now relies on multilateral inflows as its primary source of external financing. After a lengthy delay, it finally received a new $34m tranche from the IMF in August and is likely to receive a similar amount again by the end of the year. The IMF had first suspended Moldova’s extended fund facility (EFF) when reforms derailed in the run-up to last year’s parliamentary election, and then delayed its latest tranche following the political crisis sparked by the government’s resignation in February 1999. Although it voiced concern over the fragility of the economic situation, the IMF recently provided a generally positive appraisal of the country’s reform progress, including support for efforts to privatise the telecommunications and energy sectors.

—as does the World Bank The World Bank has also recently resumed its lending. In June it approved a $40m structural adjustment credit and a $11m social protection management credit, both of which carry highly concessionary terms, owing to Moldova’s International Development Agency status (the arm of the World Bank focused on the world’s poorest countries). The Bank’s adjustment credit is targeted towards agriculture, energy and privatisation initiatives. In the energy sector, World Bank credit will support the privatisation of the electricity distributing and generating companies, the gas company and district heating companies. In the agricultural sector, Bank funds will focus on the restructuring of the agro- industry, support for private farmers and an ambitious land reform programme under way since last year. The programme is designed to redistribute land and restructure agricultural enterprises, by establishing a land registry, liquidating enterprises in return for debt write-offs, and establishing new boundaries for possession by individuals and enterprises. As of mid-August more than 215,000 individual farmers had received entitlement to their own land.

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Highlights of macroeconomic and structural programme for 1999 (as presented to the IMF in the government’s memorandum of July 29th)

Contain the budget deficit to 3% on a commitment basis. Resist all tax exemptions or deferrals.

Contain the current-account deficit to 9.7% of GDP. Continue consolidation of government departments and ministries. Limit inflation to 6% in the second half of 1999 and 28.5% for the full year. Cut off non-paying energy customers and use the bankruptcy law more proactively. Contain domestic liquidity by reducing financing of the government by the National Bank of Moldova (the central Contain public-sector salaries and reduce public-sector bank) by around Lei135m (11% of reserve money) during employment over the medium term. the second half of 1999. Begin privatisation procedures for 600 state farms by end-1999. Increase official reserves to 3 months import cover. Privatisation of 400 state farms had already been started by end-June.

Limit central bank foreign-exchange interventions and avoid Accelerate large-scale privatisation, including a commitment to: administrative controls. privatise Tirex-Petrol (end-1999); launch a tender for privatisation of tobacco plants (September 1999); finalise the sales agreements Reduce domestic expenditure arrears by Lei65m during the for Moldova’s electricity distribution companies (end-1999); second half of 1999. launch a majority-stake tender for Moldtelecom (end-1999); offer five major wineries for sale by public tender (end-1999); Cap netting-out operations in 1999 at 10% of total launch tenders for the country’s electricity generation revenue, down from 34%. Eliminate netting-out operations companies (March 2000); sell the state’s 35% share of in 2000. Moldovagas (2000).

Moldova is hit by more Multilateral pressure and a number of serious energy crises in recent months blackouts— have forced the government to concentrate also on energy sector reform. Moldova’s chronic inability to pay for energy supplies has been underlined once again over the past quarter. In July the Kuchurgan generating station in Transdniestr cut off supplies to Chisinau and demanded that Moldova immediately pay $12m of the $31m owed in outstanding electricity debts. The capital was without electricity for three days, halting water supplies and sewage processing, bringing industry to a standstill and sparking public protests. Supplies were eventually restored after Moldova reached agreement with Transdniestr on the size of the debt to be repaid ($26m) and arranged a barter agreement with Gazprom to pay off $10m of Transdniestr’s gas debt to the Russian company with food supplies. Moldova’s gas-debt problems are proving increasingly disruptive to the country’s energy supplies. Ukraine, which is owed around $20m for electricity, and which cut supplies in both May and June, turned down a request for fuel in July. Moldova’s $5m debt to Romania for electricity supplies sparked further energy shortages earlier this year (2nd quarter 1999, page 33).

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—but is expected to proceed Nonetheless, the current government appears somewhat more willing than its with privatisation of the predecessors to expend the political capital needed to force industrial concerns, energy sector ministries and other major consumers to pay for their energy. In April the prime minister, Ion Sturza, instructed domestic energy suppliers no longer to accept goods in lieu of cash, and to cut off industrial and ministerial customers who failed to settle their debts. In June some 150 enterprises were cut off for non-payment, while Moldovan radio was forced off the air in August. However, privatisation of the energy sector is the only long-term viable solution for solving the cash-strapped government’s energy debt problem. In August the government selected Crédit Commercial de France to advise it on privatising the electricity sector. Its first task will be to oversee the sale of 100% stakes in the five distribution companies, for which tenders were due in August. The government subsequently intends to sell 51% stakes in each of the three power generating companies. The government has recently accelerated its privatisa- tion timetable, with the goal of completing electricity sector privatisation in three to six months, rather than the 12 months initially scheduled. However, as in other countries in the region, the major hindrance to effective energy sector privatisation will come from the large stock of debts owed to the sector. Although the new investors will inherit only the last two months’ debt prior to the tender, this will still considerably reduce privatisation prices.

—and of Following the cancellation of an initial tender last year, Mr Sturza’s telecommunications— government is also attempting to privatise Moldtelecom, the state telephony provider. Moldtelecom’s privatisation appeared to suffer a setback at the end of July, when the Constitutional Court ruled that the original Moldtelecom privatisation law was invalid, having fallen one vote short of the majority required for “organic” laws (1st quarter 1999, page 29). The court also ruled that the provision granting the winner significant advantages in mobile telephony was anti-competitive. Within a week, however, parliament had passed a revised law to ensure that Moldtelecom’s privatisation remains on track. This sale should prove more successful than the first attempt (3rd quarter 1998, page 35), now that Moldtelecom has taken up a 10% stake in Voxtel, the country’s only mobile system, alongside France Télécom (51%), Moldovan Mobile Telephone (35%) and Romanian Mobil Rom (4%). Voxtel, which started operating towards the end of 1998, has built up its Global System for Mobile Communications (GSM) subscriber base to 11,000, and in July 1999 it received a $28m loan from the International Finance Corporation to expand its GSM services.

—with the help of the Moldova’s major challenge in all of these privatisations is to attract foreign EBRD strategic investors, despite its reputation for corruption and political instability, and its legacy of shifting privatisation regulations. The European Bank for Reconstruction and Development (EBRD) has recently provided a boost to the government’s efforts by promising to become a shareholder in both the energy and telecommunications sales. The EBRD generally acts as a passive share- holder in such circumstances, but uses its role and country expertise to provide reassurance for strategic partners. The EBRD is also to resume financing of the Giurgiulesti oil terminal on the confluence of the Prut and Danube rivers, giving Moldova access to alternative sources of oil (see The political scene).

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The pensions law is One of the government’s other major reform programmes focuses on taking effect restructuring the country’s pension system. Moldova has joined the list of former communist countries, including Poland, Latvia and Kazakhstan, hoping to emulate the success of Chile’s three-pillar pension system, which combines a state system, a mandatory private system and voluntary private system. In October 1998 parliament passed a state pensions insurance law. In August 1999 the law on second-pillar private pensions came into effect, allowing for both closed and open-ended funds to be established—with the latter being restricted to banks and insurance companies authorised by the central bank. Ultimately, however, the success of these efforts to establish a private component of the pension system will depend on the progress of parallel efforts to further the functioning capital markets needed to ensure capital appreciation.

The economy

Output continues to Moldova’s economic decline has continued unabated. In the first quarter of plunge— 1999 GDP fell by 7.8% in year-on-year terms. Industrial performance, for which more recent figures are available, has proved particularly disastrous, with prod- uction in the first half of 1999 down by almost 29%. This reflects sharply reduced demand in markets of the Commonwealth of Independent States (CIS), which prior to the Russian financial crisis of August 1998 took 60% of Moldova’s exports, as well as the rising cost and limited availability of imports— particularly energy. According to data provided by Moldova Economic Trends, output from the food and beverages industry, which accounts for almost one- half of total industrial production, fell in year-on-year terms by more than 33% in the first quarter. Within this sector, wine production fell by 54%, milk by 23% and bread by 25%. Only textiles and tobacco production recorded a modest rise.

—with agriculture facing Agricultural output in the first half of 1999 fell by 2% compared with the same another bleak year period of 1998, mainly as a result of reduced livestock production. Bad weather will once again lead to poor harvest results, including a projected drop in grain production of almost 25%. Wheat yields have fallen from 2.75 tonnes/hectare in that period of 1998 to 2.5 tonnes/ha in 1999. According to the agriculture ministry, fruit production is also expected to drop precipitously, from 363,000 tonnes in 1998 to under 150,000 tonnes this year, a record low level for a country that in the past produced in excess of 1m tonnes. As well as poor weather conditions, including late frosts and drought, farmers are now struggling with significantly higher fuel prices, which threaten to disrupt the rest of the harvest.

The exchange rate stabilises The leu continued its nominal decline against the dollar during most of the for the time being— second quarter of 1999, reaching a low of around Lei11.7:$1 in mid-June, for a total decline in value of around 30% since the start of the year. However, it appreciated slightly in nominal terms to around Lei11:$1 by the end of August, despite renewed regional instability caused by rising fuel prices and consid- erable currency instability in neighbouring Ukraine. Although the leu has depreciated against the Russian rouble by around 11% in nominal terms since the start of the second quarter, it has still increased in value by more than 70% against the rouble since the start of Russia’s financial crisis last August.

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—although inflation is Month-on-month consumer price inflation rose to 4.1% in May and 7.2% in still high June, bringing year-on-year inflation to nearly 43% by the end of June. Nominal currency decline has played a major role in fuelling inflation, as has the liberalisation of administered prices such as utilities tariffs. In June food prices increased by more than 10%, with buckwheat prices up by 55%, sugar by about 40%, vegetable oils by 13% and flour by 20%. As a result, Moldova’s largest bakery raised the price of bread by 20-25% in June. In contrast, prices of services rose by 0.8% and of non-food goods by 4.2% in that month. In July the rise in food prices moderated to 2.5%, while services costs rose by 12.3% compared with the previous month. Utilities charges shot up by 18.5%. Given the recent sharp increase in the cost of imported fuel, the prime minister’s forecast of a 25-28% year-end inflation rate in 1999 appears unduly optimistic: in July alone petrol prices rose by up to 20% over a period of ten days. In August Moldtelecom raised telephone tariffs by between 50% and 100%, citing the continuing devaluation of the leu and rising fuel prices.

Moldova: consumer prices (% change)

Month on month Year on year 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 Jul –1.4 3.9 Aug –0.6 4.1 Sep 0.2 3.1 Oct 1.4 3.6 Nov 8.6 11.3 Dec 7.8 18.2 1999 Jan 5.4 23.0 Feb 1.5 24.3 Mar 0.6 25.2 Apr 2.0 26.8 May 4.1 31.8 Jun 7.2 42.8 Sources: Moldova Economic Trends; press reports; EIU.

Foreign trade and payments

Trade remains depressed— Moldova’s trade turnover has nearly halved as a result of depressed export markets in the Commonwealth of Independent States (CIS) and the sharp import compression sparked by the leu’s depreciation. According to govern- ment data published in Moldova Economic Trends, export revenue declined by 45% in year-on-year terms in the first half of the year, down from $358m in the first six months of 1998 to $196m this year. A 49% year-on-year decline in revenue in the second quarter of 1999 exceeded even the first-quarter decline and represented the sixth consecutive quarter of falling revenue. The drop in

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revenue from food, beverages and tobacco exports, which traditionally account for around one-half of total revenue, has accelerated over the past five quarters to reach more than 60% in year-on-year terms in the second quarter. Only metals exports showed any positive growth, but these still only account for less than 5% of total export revenue. Both vegetable products and textiles exports, which together account for between 25% and 33% of total revenue, recorded double-digit declines in year-on-year terms in the second quarter, having registered growth in the preceding two quarters.

—with the CIS’s share of A notable feature of this export performance is the decline in the importance of exports plunging— CIS markets, following Russia’s financial collapse in August 1998. Moldova has been hurt not only by a sharp drop in demand in traditional markets such as Russia and Ukraine, but also by the customs duties and tariffs that many CIS states have imposed to protect local producers. The value of goods exported to the CIS in the first half of 1999 fell by more than 60% in year-on-year terms, from $275m in 1998 to $106m. In contrast, export revenue from EU markets rose in year-on- year terms by more than 7%, and from central and east European markets by almost 14% in the first six months of 1999. These two regional markets together accounted for around 33% of total exports in the second quarter, up from 16% in the same period of 1998. The CIS market share has dropped from 79% to 59% over the same period, while Russia’s share has fallen from 64% to 42%.

Moldova: exports % of total

June 1st 1998 June 1st 1999

Russia 36.7 Russia 53.2 cisCIS, 17.3 CIS,11.7 excl Russia 17.3 excl Russia 11.7 Other 7.3 Other 19.2 CEE 17.7 CEE 7.1 EU 21.0 EU 8.9

Source: Moldova Economic Trends.

—but imports shrink by Despite this calamitous fall in export revenue, Moldova’s trade deficit has even more— narrowed considerably this year as a result of an even larger reduction in import expenditure. The drop in imports has intensified steadily in the past four quarters and equalled almost 60% during the second quarter. In the past three quarters Moldova’s import expenditure has dropped by 50% year on year; monthly data have yet to suggest any trend towards an easing of this decline. All categories of imports have fallen for the third successive quarter in year-on- year terms. In particular, a 43% year-on-year decline in mineral imports in the second quarter indicates the degree to which Moldova has cut back on fuel imports—although these still accounted for around 30% of total import costs. Imports of machinery and equipment have been choked off even further, after increasing solidly in the first three quarters of 1998, and totalled only $23m in the first half of 1999, compared with $108m in the same period of 1998.

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Moldova: imports % of total

June 1st 1998 June 1st 1999

CIS, excl Russia 15.2 CIS, excl Russia 19.7 Russia 19.3 Other 7.3 Russia 26.6 Other 22.4

CEE 20.4 EU 25.7

EU 22.8 CEE 20.7

Source: Moldova Economic Trends.

Moldova: balance of payments ($ m)

1997 1998 1999 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Exports fob 190.4 204.8 210.7 283.7 179.1 184.8 142.8 137.4 99.4 Imports fob –298.4 –277.2 –306.8 –352.3 –297.9 –282.1 –258.9 –203.7 –132.0 Trade balance –107.9 –72.3 –96.1 –68.6 –118.8 –97.3 –116.1 –66.3 –32.7 Net services –17.9 –11.9 –7.0 –25.3 –18.6 –15.8 –18.1 –20.9 –18.3 of which: transport –14.4 –7.9 –2.5 –16.4 –9.6 –4.5 –2.2 –4.5 –5.9 travel –2.6 –2.1 –2.0 –3.4 –3.5 –2.3 –6.1 –6.2 –5.6 Net income 18.9 11.7 19.5 13.0 14.4 9.2 13.4 3.6 7.9 of which: remittances 24.9 24.5 31.6 26.8 28.0 27.3 29.3 22.3 21.3 Net transfers 14.9 15.9 23.8 21.9 18.6 26.0 23.3 29.6 26.3 Current-account balance –92.0 –56.6 –59.8 –59.0 –104.4 –77.9 –97.5 –53.9 –16.8 Capital account 0.0 –0.1 –0.1 –0.1 0.0 0.0 0.4 1.1 –0.1 Financial account 107.0 48.1 48.9 52.8 129.8 49.5 61.8 63.8 21.4 of which: direct investments 14.4 15.8 21.3 20.0 13.1 32.0 16.2 25.0 12.4 portfolio investments 12.8 223.4 6.6 –6.2 –0.2 –12.2 –5.7 –36.7 –6.7 Capital & financial account 107.0 48.0 48.8 52.7 129.8 49.5 62.2 64.9 21.3 Errors & omissions –15.0 8.7 11.0 6.3 –25.4 28.4 35.3 –11.0 –4.5 Overall balance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Source: National Bank of Moldova, published in Moldova Economic Trends.

—leading to a reduction in This considerable import compression has permitted a year-on-year decline in the current-account deficit the trade balance of around 75% in both the first and second quarters of this year, resulting in a historically low first-half trade deficit of $55m. This led to a reduction of almost 85% in the current-account deficit to $17m in the first quarter, the most recent data available. With little change in the services balance or current transfers, and a reduction in the income balance, this improvement was almost entirely the result of Moldova’s improved trade

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balance. According to preliminary data provided by the IMF, Moldova’s current-account deficit dropped to 8.4% of GDP in the first half of 1999, after finishing last year at around 20%.

Some energy debts are Moldova’s government has relied on a number of different arrangements to reduced— service its outstanding debts to the Russian gas monopoly Gazprom, estimated at somewhere between $450m and $600m. An arrangement in 1996, whereby Moldova transferred $140m of government securities to Gazprom, against IMF advice, has reportedly worked to the country’s advantage, as Moldova has been able to redeem them at an advantageous (but unspecified) rate ahead of their maturity in 2003.

—and Eurobond payments Moldova continues to meet its Eurobond obligations, most recently making a continue $3.75m payment in June on the five-year $75m bond issued in June 1997 with a 9.75% coupon (3rd quarter 1997, page 34). However, one of the unfortunate consequences of Moldova’s strenuous efforts to meet its foreign bond obliga- tions has been increased wage and pension arrears, which reached around Lei1bn ($91m) by the end of the first half of 1999. Moreover, in contrast to Moldova’s Eurobond payments, the government’s arrears on its bilateral debt to Russia stood at around $75m at mid-1999. In its IMF memorandum, the government suggested that its efforts to restructure this debt had suffered from the governmental crises in Russia, but would continue with the formation of the new administration.

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Quarterly indicators and trade data

Belarus: quarterly indicators of economic activity

1997 1998 1999 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=100 104.9 106.3 108.2 103.3 107.0 106.6 104.6 104.8 106.8 Fuel “ 75.7 76.9 81.8 74.0 96.4 103.9 110.2 119.2 134.2 Employment Unemployed ‘000 157 140 126 118 105 106 106 107 100 End-Qtr Employed, registered ‘000 4,184 4,187 4,196 4,235 4,234 4,265 4,291 4,304 4,279 Wages & prices Nominal wagesa BRb ‘000 2,188 2,664 3,276 3,698 4,177 4,664 8,008 11,682 19,062 Monthly av Consumer prices 1993=100 13,344 14,485 15,796 17,296 19,086 21,969 37,554 60,259 78,710 change year on year % 64 69 70 47 43 52 138 248 312 Producer prices, ind 1993=100 9,867 10,632 11,380 12,578 13,685 16,068 26,814 53,422 68,848 Retail trade Sales Jan 1995=100 108.7 118.5 137.2 134.3 142.2 150.4 134.4 116.8 139.3 Money End-Qtr M1 BRb bn 22,886 28,340 33,852 35,642 44,435 58,583 80,932 100,348 122,416b change year on year % 99.0 105.6 115.5 98.1 94.2 106.7 139.1 181.5 n/a Foreign trade Qtrly totals Exports $ m 1,774.1 1,961.5 2,126.2 1,758.2 1,878.3 1,643.1 1,736.6 1,325.5 1,018.8c to CIS “ 1,096.4 1,404.6 n/a n/a n/a n/a n/a n/a n/a Imports ” 2,004.9 2,222.6 2,522.1 2,259.4 2,255.8 1,959.3 2,031.5 1,410.9 1,077.6c from CIS “ 1,289.7 1,387.7 n/a n/a n/a n/a n/a n/a n/a Exchange holdings End-Qtr Foreign exchange $ m 376.2 383.5 393.7 291.3 286.1 299.4 338.4 335.3 284.4b Exchange rate Official rate BRb:$ 26,980 27,830 30,740 33,660 37,540 53,200 220,000 236,000 250,000b a Average monthly. b End-May. c Total for April-May. Sources: TACIS, Belarus Economic Trends, monthly; IMF, International Financial Statistics.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Quarterly indicators and trade data 39

Moldova: quarterly indicators of economic activity

1997 1998 1999 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Employment Monthly av Unemployed, registereda ‘000 22.8 27.1 28.0 39.1 33.7 33.8 32.0 40.1 n/a Wages & prices Nominal wagesb Lei 193 210 229 238 248 256 287 258 285c Consumer prices Jun 1994=100 129.8 131.2 133.9 137.8 138.9 137.2 143.1 178.3 187.3c change year on year % 8.0 8.5 8.1 8.1 7.0 4.6 6.9 29.4 n/a Wholesale prices, ind Dec 1992=100 23,518 24,217 24,678 25,066 25,856 25,826 27,147 33,178 35,636 Money End-Qtr M1, seasonally adj Lei m 1,121.4 1,075.5 1,159.7 1,356.5 1,209.5 887.5 951.3 1,170.1 1,212.1 change year on year % 11.5 20.3 30.6 31.7 7.9 –17.5 –18.0 –13.7 0.2 M2 Lei m 1,411 1,585 1,740 1,689 1,603 1,370 1,357 1,391 1,461 Foreign trade Qtrly totals Exports $ m 201.9 206.4 276.8 176.0 182.4 142.8 135.9 100.6 95.5 to CIS “ 158.1 154.3 160.4 128.7 144.0 98.5 60.0 49.6 56.2 Imports ” 267.7 294.3 320.8 293.8 282.2 252.8 196.8 130.9 120.3 from CIS “ 135.7 145.4 153.4 133.3 105.6 98.4 99.7 72.6 43.8 Exchange holdings End-Qtr Foreign exchange $ m 335.3 358.7 364.8 324.2 287.6 211.9 142.9 179.3 164.0 Exchange rate Official rate Leu:$ 4.59 4.62 4.66 4.72 4.74 4.97 8.32 9.68 11.46 a End-quarter. b Average monthly. c Average for April-May. Sources: OECD, Short-term Economic Indicators; IMF, International Financial Statistics; TACIS, Moldova Economic Trends.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 40 Quarterly indicators and trade data

Belarus: OECD trade ($ ‘000)

Germany Italy France Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec OECD exports fob 1997 1998 1996 1997 1997 1998 Food 31,439 15,871 5,991 6,023 2,490 1,182 of which: cereals & preparations 3,621 1,375 1,178 413 182 340 Chemicals 115,391a 118,172a 4,343 6,900a 14,375a 19,709a Textile yarn, cloth & manufactures 32,256b 27,120b 14,162 25,561b 2,728b 3,456b Iron & steel 141,597c 56,631c 846 4,628c 2,037c 763c Metal manufactures 7,672d 5,232d 5,871 1,386d 1,861d 1,376d Machinery & transport equipment 287,423 361,701 38,541 43,666 25,842 20,092 of which: road vehicles 137,449e 193,489e 1,665 3,504e 6,801e 6,763e Clothing & footwear 16,061 15,592 10,157 17,044 54 289 Scientific instruments etc 21,993 19,840 5,046 1,846 2,043 1,928 Total incl others 769,998 723,877 107,738 130,543 64,921 57,835

Germany US Italy Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec OECD imports cif 1997 1998 1996 1997 1996 1997 Food 18,386 17,804 448 0 1,864 1,239 Wood & cork & manufactures 25,597 36,838 1,137 85 3,151 3,735 Metalliferous ores & scrap 7f 0f 1,109 0f 39 0f Petroleum & products 124g 127g 00g 0 490g Chemicals 25,936a 16,265a 6,221 2,421a 588 973a Textile yarn, cloth & manufactures 17,057b 14,630b 2,789 8,415b 7,029 10,531b Non-metallic mineral manufactures 4,682h 4,710h 536 1,222h 233h Non-ferrous metals 5,910c 7,675c 062c 09c Metal manufactures 360d 145d 52 30d 1,821 118d Machinery & transport equipment 25,235 33,373 8,029 7,228 3,909 3,487 Clothing 52,005 44,952 33,545 46,493 18,536 24,806 Scientific instruments etc 15,002 16,154 777 582 58 240 Total incl others 220,989 229,638 56,677 70,083 63,419 66,033 a Including crude fertilisers and manufactures of plastics. b Including fibres. c Including manufactures and scrap. d Tools etc and miscellaneous metal manufactures. e Including tractors. f Ores, slag and ash. g Mineral fuels. h Including precious metals and jewellery. Source: UN, External Trade Statistics, series D.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Quarterly indicators and trade data 41

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 Source: UN, External Trade Statistics, series D.

Moldova: structure of trade ($ m)

Imports Exports Jan-Dec 1997 Jan-Dec 1998 Jan-Dec 1997 Jan-Dec 1998 Total CIS Total CIS Total CIS Total CIS Live animals & products n/a n/a n/a n/a 75.4 57.7 34.2 19.3 Vegetable products 37.3 11.6 16.4 6.9 75.3 44.8 71.5 35.3 Food prods, beverages & tobacco n/a n/a n/a n/a 479.0 394.3 350.5 295.9 Mineral prods, incl fuels 414.0 369.0 324.7 255.5 n/a n/a n/a n/a Chemicals 112.7 29.7 92.5 22.8 n/a n/a n/a n/a Textiles 61.7 11.7 64.0 8.3 58.2 13.6 62.2 7.8 Metals & products 51.8 31.4 41.3 23.3 8.6 2.5 9.3 1.6 Machinery 150.8 35.5 196.2 37.4 45.7 37.3 42.3 32.0 Total incl others 1,171.7 604.6 1,025.5 445.1 874.4 608.4 636.4 431.1 Source: Moldova Economic Trends.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 42 Quarterly indicators and trade data

Moldova: direction of trade ($ m)

Imports Exports Jan-Dec Jan-Dec Jan-Dec Jan-Jun Jan-Jun Jan-Dec Jan-Dec Jan-Dec Jan-Jun Jan-Jun 1996 1997 1998 1998 1999 1996 1997 1998 1998 1999 CIS 664.1 604.6 445.1 238.9 116.4 546.1 608.4 431.1 272.7 105.8 Russia 295.3 333.2 222.4 133.8 66.8 430.1 508.9 337.3 223.7 71.9 Ukraine 297.1 211.2 163.7 77.9 39.3 47.6 49.4 49.4 28.2 16.6 Belarus 61.0 48.6 52.9 22.4 9.2 34.2 35.4 32.1 17.6 12.8 Central & eastern Europe 179.5 217.9 239.5 141.4 51.9 132.4 95.7 81.6 29.8 34.8 Romania 72.1 101.3 119.6 65.6 28.4 74.9 58.9 61.3 22.7 18.5 Bulgaria 58.4 61.7 31.5 21.9 4.1 12.7 9.9 3.3 1.6 2.8 Hungary 14.2 15.7 39.7 23.9 5.4 2.7 1.7 3.5 0.5 4.4 EU 162.6 234.0 269.2 157.6 64.5 78.3 90.0 83.6 37.3 41.2 Germany 65.9 94.7 91.9 56.7 28.4 29.9 32.4 24.1 10.4 13.2 Italy 33.9 48.6 56.0 32.6 14.4 21.1 23.9 22.4 9.7 10.1 Netherlands 10.5 12.0 13.6 6.4 2.0 8.7 5.6 4.8 2.1 1.4 Total incl others 1,079.2 1,171.7 1,025.5 576.0 251.2 801.6 874.4 636.4 358.4 196.1 Source: Moldova Economic Trends.

Former Soviet republics: exchange rates per $

1997 1998 1999 Jul 11th Oct 6th Jan 12th Apr 3rd Jul 4th Oct 7th Jan 14th Apr 9th Jul 9th Outside rouble zone Armenia (dram) 505 501 496 502 502 508 529 535 543 Azerbaijan (manat) 3,968 3,928 3,891 3,858 3,861 3,857 3,896 3,931 3,950 Estonia (kroon) 14.0 14.2 14.5 14.8 14.5 13.1 13.4 14.5 15.3 Georgia (coupon/lari) 1.30 1.30 1.31 1.34 1.35 1.37 1.96 2.21 1.93 Kazakhstan (tenge) 75.6 75.6 75.6 76.5 77.1 80.5 84.2 118.0 132.7 Kyrgyz Republic (som) 17.3 17.3 17.4 18.1 19.3 22.4 29.6 34.8 41.1 Latvia (lat) 0.58 0.59 0.60 0.60 0.60 0.58 0.57 0.59 0.61 Lithuania (litas) 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 Moldova (leu) 4.57 4.62 4.66 4.72 4.75 4.99 8.40 9.48 11.19 Turkmenistan (manat) 4,165 4,165 4,165 4,165 5,200 5,200 5,200 5,200 52.00 Ukraine (hryvnya) 1.86 1.87 1.90 2.04 2.07 3.41 3.43 3.94 3.97 Uzbekistan (som) 63.6 75.8 80.4 84.5 93.5 105.8 110.7 114.8 123.6 Inside rouble zone (local parallel currencies & Russian rouble) Belarus (rubel) 43,337 27,910 30,830 33,760 38,010 53,600 113,000 239,000 260,000 Russia (rouble) 5.788 5.865 5.972 6.112 6.202 15.794 21.800 26.150 24.440 Tajikistan (Tajik rouble) 398a 747 748 754 754 754 985 1,050 1,287 a June 10th. Sources: OMRI; FT; BBC Monitoring, Summary of World Broadcasts; Reuters; Bloomberg.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 Quarterly indicators and trade data 43

Former Soviet republics: GDP and GDP per head (at purchasing power parity)

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Armenia GDP $ bn 17.6 17.0 16.1 7.9 6.9 7.3 8.0 8.6 9.0 9.8 per head ($) 5,058 4,804 4,467 2,142 1,853 1,942 2,122 2,287 2,389 2,508 Azerbaijan GDP $ bn 21.8 20.0 20.7 13.8 10.9 8.7 7.4 7.6 8.2 9.1 per head ($) 3,074 2,804 2,879 1,888 1,476 1,171 986 1,010 1,080 1,191 Belarus GDP $ bn 49.5 50.1 51.4 47.8 43.8 39.2 36.0 37.8 42.5 46.4 per head ($) 4,837 4,881 5,009 4,635 4,228 3,802 3,507 3,683 4,154 4,554 Estonia GDP $ bn 7.9 7.6 7.0 6.2 5.8 5.8 6.2 6.5 7.4 7.8 per head ($) 5,033 4,816 4,471 3,998 3,803 3,859 4,162 4,452 5,094 5,366 Georgia GDP $ bn 23.4 21.4 17.8 10.9 7.7 5.6 5.5 6.2 7.0 7.3 per head ($) 4,296 3,919 3,256 2,001 1,407 1,036 1,009 1,147 1,303 1,355 Kazakhstan GDP $ bn 71.8 74.6 72.3 64.6 56.0 43.0 40.0 41.2 42.5 41.8 per head ($) 4,342 4,477 4,302 3,825 3,316 2,569 2,421 2,495 2,710 2,696 Kyrgyz Republic GDP $ bn 11.1 11.9 11.2 9.7 8.4 6.3 6.0 6.5 7.3 7.5 per head ($) 2,557 2,706 2,524 2,166 1,865 1,406 1,337 1,419 1,568 1,593 Latvia GDP $ bn 13.6 14.6 13.6 9.1 8.0 8.2 8.3 8.8 9.7 10.1 per head ($) 5,094 5,469 5,114 3,460 3,070 3,213 3,313 3,516 3,920 4,138 continued

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999 44 Quarterly indicators and trade data

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Lithuania GDP $ bn 20.3 20.1 19.7 16.0 13.7 12.7 13.4 14.3 15.6 16.6 per head ($) 5,505 5,412 5,278 4,268 3,681 3,409 3,612 3,853 4,164 4,483 Moldova GDP $ bn 15.9 16.2 13.9 10.2 10.3 7.3 7.3 6.9 7.1 6.5 per head ($) 3,664 3,723 3,193 2,335 2,362 1,675 1,681 1,583 1,637 1,515 Russia GDP $ bn 865.0 875.4 864.7 759.7 711.9 636.3 623.6 613.1 629.5 606.6 per head ($) 5,871 5,919 5,833 5,122 4,805 4,300 4,210 4,150 4,280 4,141 Tajikistan GDP $ bn 9.9 10.2 9.7 6.9 5.2 4.5 4.0 3.9 4.1 4.3 per head ($) 1,914 1,920 1,768 1,247 915 782 693 665 678 710 Turkmenistan GDP $ bn 10.0 10.7 10.5 10.2 9.5 7.7 6.8 6.4 4.8 5.1 per head ($) 2,797 2,903 2,806 2,540 2,196 1,758 1,513 1,396 1,040 1,088 Ukraine GDP $ bn 171.6 179.0 186.1 191.2 168.4 132.9 119.4 109.5 108.2 107.4 per head ($) 3,314 3,446 3,579 3,673 3,224 2,551 2,308 2,133 2,126 2,133 Uzbekistan GDP $ bn 44.5 47.2 48.8 44.6 44.7 43.7 43.9 45.4 47.4 48.8 per head ($) 2,215 2,312 2,341 2,089 2,048 1,963 1,952 1,982 2,010 2,041 Sources: IMF; World Bank, Statistical Handbook: States of the Former USSR; UN Economic Commission for Europe, Bulletin for Europe, Vol. 44 1992; EIU calculations.

EIU Country Report 3rd quarter 1999 © The Economist Intelligence Unit Limited 1999