Moldova escapes government and currency crises

When a long crisis triggered a sudden run on its currency last month, Moldova’s parliament finally chose a new liberal Prime Minister. If the fragile minority government survives, last year’s EU agreement will help re-kindle economic growth slowed last year by Russian trade embargoes.

Guest post by Dr. Daniel Friedheim

Even though the parliamentary election last Nov. 30 re-elected the liberal coalition that steered Moldova from dependency on Russia to integration with Europe, the three coalition parties haggled for ten acrimonious weeks over whether to re-nominate Prime Minister Iurie Leanca.

The threat of political paralysis sufficed to spark a run on the lightly traded Moldovan leu. The currency plummeted in February prompting a Central Bank rush to raise its key interest rate 5 points to 13.5%, despite the recession.

Gaburici’s election helped calm a developing crisis

The panic only ended on Feb. 18, when Parliament approved a compromise candidate for Prime Minister, 38-year-old businessman Chiril Gaburici, who spent the last 14 years running Moldovan and Azerbaijani subsidiaries of Nordic telecoms giant TeliaSonera. Gaburici promptly pledged to open negotiations with the IMFabout debt payments set to double over the next four years.

But the new Prime Minister is stuck trying to govern with a minority coalition. The 101-seat parliament approved PM Gaburici with 60 votes, but only 42 came from a narrow, two-party coalition of Liberal Democrats and Democrats. Without support from the Liberals, the third party in the previous governing coalition, Moldova’s inexperienced new political leader depends on votes from the reformed Communists, moderate leftists who also back EU integration.

Moldova’s economic future remains fragile

Last year was tumultuous for one of the poorest countries in Europe, torn between lucrative new markets in the European Union and traditional old ones in Russia, and afraid of being sucked into the bloody war that broke out next door in Ukraine in April.

Almost one third of Moldova’s impoverished population – 1 million in a population of about 3.5 million – work abroad. Remittances account for a full 25% of the country’s $8 billion GDP (at official exchange rates), according to the World Bank.

The previous market-friendly government defied Russian trade bans to negotiate deals with the EU for visa-free travel in April and a broad political and trade Association Agreement in June.

Yet the polarized electorate was evenly divided on whether Moldova should continue embracing the EU or return to Russia. Right before the election, the Moldovan Institute for Public Policy found Moldovans evenly divided on the issue, with 44% choosing the EU and 47% choosing Russia, well within the poll’s margin of error.

In fact, the pro-Russian Socialists narrowly led the election results last fall with a plurality of 21%, promising to abrogate the new EU agreement and join President Putin’s alternative Eurasian Union.

Internal challenges join external ones

If Russia moves to destabilize Moldova now, as it has destabilized Ukraine, it would start by accepting the annexation request of Russian-speaking separatists in the Transnistria enclave, a narrow sliver of land along the Eastern border with Ukraine.

The separatists, only a minority of whom are ethnic Russians, won a short war in 1992 with the help of Soviet troops and rely on a small garrison of 1,300 Russian troops to this day. After Russia annexed Crimea from Ukraine last March, they petitioned Russia to annex them, as well.

Moldova depends on Russian gas, and has already extended its contract with Gazprom for another year, as well as building an alternative pipeline for gas from Romania.

After Russia’s partial trade embargo in 2006 wiped out dozens of wineries, both Communist and liberal governments started shifting Moldova’s major exports of wine and fresh produce from East to West. Even before the Association Agreement took effect, the share of all exports to Russia fell from 40% to 20% in the decade leading up to 2013, while the EU share had risen from 40% to 50%. Renewed Russian embargoes since 2013 have accelerated this policy.

The economy faces internal challenges, too. As its dependence on remittances from workers abroad suggests, there is a dire shortage of investment and jobs. Despite recurring corruption scandals, six years of microeconomic reforms under the previous liberal government laid the institutional and policy groundwork for future growth.

Moldova now ranks #63 out of 189 on the World Bank’s Doing Business Index, slightly better than the EU’s poorest member Albania (#68) and much better than a larger emerging-market like China (#90) or frontier-market like Ukraine (#96).

Moldova’s improved business environment has started to attract the foreign direct investment the country needs to grow rapidly and lift its people out of poverty, including German and Austrian auto parts and cable manufacturers.

Construction of one of the world’s fastest fiber-optic Internet backbones, for example, helped attract a new pilot project to provide nationwide 4G/LTE service first in Moldova, then expand it to France, Poland, Romania and Hungary.

So, if Moldova’s politicians can avoid lapsing into partisan gridlock and its diplomats continue defusing the Transnistria conflict with Russia, then this tiny frontier can market should resume growing rapidly, despite the war next door.

Dr. Daniel Friedheim has taught international politics for more than a decade. His earned his PhD in political science from Yale University, has consulted for the World Bank and the US Agency for International Development, and was a Foreign Service Officer with the US Dept. of State. His research focuses on democracy, globalization and foreign policy with a regional focus on both Latin America and Post-Soviet Europe. He speaks Spanish, Portuguese and German.

sourche: http://globalriskinsights.com/2015/03/moldova-escapes-government-and-currency-crises/