Nicolae Timofti and Herman van Rompuy source: Flickr – European Council
Moldova is a partner country for the European Union in the framework of Eastern Partnership, which is a part of the European Neighbourhood Policy – a wider geopolitical concept. A month before the historical parliamentary elections, it’s worth to have a look at the recent developments in the political and economic situation of this small country focusing on the recently signed Association Agreement and the Deep and Comprehensive Free Trade Area (DCFTA) with the EU. What kind of consequences does it bring to the future of Moldova and what are the difficulties that government in Chisinau is going to encounter in light of this agreement?
Moldova – EU relations
Moldova has been developing its relations with the EU since 1994 which was marked by signing the Partnership and Cooperation Agreement. In 2005 Moldova signed the Partnership Action Plan and since 2012 it negotiates DCFTA with the EU, which was finally signed on 27 June 2014. On the other hand, Moldova is also a member of the Commonwealth of Independent States and a Russia-led free trade agreement among 8 members of the Commonwealth of Independent States. The tiny country landlocked between Romania and Ukraine is still Europe’s poorest state with GDP per capita accounting for 1975 US dollars. When it comes to Moldova’s economy, the main pillar is the agriculture – about 18-20% of GDP, whereas 27% of the labour force is employed.
EU – DCFTA
EU is already Moldova’s first trading partner accounting for 54% of its total trade, being followed by Ukraine (15%) and Russia (12%). Moldova exports to EU for 940 million euro (2012), mainly agricultural products, clothing, textiles and machinery. On the contrary, EU exports to Moldova stand for 2 billion euro and are mainly machinery, transport equipment, chemicals, fuels, mining products and agricultural products. For more than a year, there has been a debate on the outcomes of joining the EU DCFTA versus Russian free trade agreement. According to some experts, joining DCFTA would reduce trade barriers between EU states and Moldova and cause GDP growth of 6,4%. It would also be connected to some costs, hitting the vulnerable agriculture sector – it could lead to 3% decline in the agricultural sector. On the other hand, joining Russian CU would lead to 9,7% GDP decrease caused by high external tariff. DCFTA with EU means duty free exports to the EU for industrial products, quotas on duty free exports for agricultural products to the EU and duty free imports on majority EU products in agriculture to Moldova, as well as the trade liberalisation. It also means full abolition of import tariffs for all industrial goods and reduction of non-tariff barriers. Moreover, Moldova would keep its existing trade agreements and could sign new FTAs.
Despite the development of relations with the EU, we have to remember, that Moldovan economy is heavily dependent on external factors. Climate is one of them, as it is an agriculture oriented economy, and big role is played by relations with neighbours, especially Russia, on whom Moldova is dependent on energy supplies. Russia is also the biggest importer of Moldovan goods. In some areas, like fruit and vegetables sector, Moldova is entirely dependent on the Russian market.
To leverage the EU approximation with Moldova, Kremlin intensified its restrictions to Moldova, which grew up to a geopolitical game, especially after the escalation of the conflict in Ukraine. To warn Moldova before joining the Association Agreement with the EU Russia has imposed embargo on Moldovan wines in September 2013, and later on in July 2014 on all agricultural products, which stands for the majority of Moldovan exports to Russia. It is expected that the entire export to Russia will fall by ¼ this year. Despite this impediment from the Russian site, current Moldovan government decided to ratify the trade agreement with EU.
Moldova exportation to CIS countries amounted in 2012 for 928 million USD which is about 43% of total exports and equals to the EU export. It can be explained by strong historic and economic ties – inheritance of the Soviet integration and trade specialization, geographical proximity and non-existing trade barriers. Nonetheless, trade with non-CIS countries has significantly increased since 2005 – as with China and Turkey. By joining the Russia led Customs Union, Moldova would have to accept the unified customs tariff with Russia, Kazakhstan and Belarus. This CU is more goods-trade oriented, than trading the services, and would limit Chisinau trade sovereignty. This means, that Moldova can conclude as many as possible FTAs but can join just one Customs Union. Consequently, if Moldova joins Russian CU, it will not be able to sign FTA with the EU, or Turkey, Canada, USA. In the time horizon there are as well upcoming parliamentary elections in Moldova. By imposing sanctions and embargos on the import from Moldova, Russia tries to punish Moldova for ratifying the AA with the EU and influence the upcoming parliamentary elections scheduled on 30 November 2014. Russian officials expect the communist party to win and this way to challenge the European orientation of the current government.
The wine sector plays a crucial role in the Moldovan economy both in terms of the image of Moldova in the world, but as well in the economic terms. Globally, Moldova is the 22nd largest world wine exporter, exporting 2.3 million hectolitres of bottled wine, mainly to CIS countries, but as well as to the new EU member states like Poland or Czech Republic. All in all, the wine from Moldova accounts for 10% of wine drunk in Russia. In the previous years, for example 2007, export to Russia stands for 60%, and within the last years it decreased to 30%. Other main importers of Moldovan wine are Turkey (5,2%), Ukraine (2,8%) and Belarus with 1,7%. Currently, with the embargo the incomes in this sector are drastically decreasing, and Moldova is looking for new markets around the world. Russian market shows to be unpredictable, and the local wine producers have new incentives to open for new markets in the EU, but also in the far East (China, South Korea) and USA.
Upcoming parliamentary elections may change the track Moldova has chosen, if the communist party wins. But so far, current government and public administration has been very keen on the European Integration. Talking to officials in ministries in Chisinau, observing their work, and agendas of public agencies one can be sure that the European Integration and implementation of the DCFTA is on the tongues of everyone and everyone aims at it. It is confirmed as well by the Activity programme issued by the Moldovan government, in which European Integration is the main point, putting an emphasis on Freedom, Democracy and Welfare. Moldova among EaP countries became the best student in the class, using best practices from the new EU member states, implementing difficult reforms in all sectors of the public life. From the point of view of an average Moldovan citizen, the choice still looks very difficult – integration with the EU brings its advantages as disadvantages. On the other hand, allying with Russia is a known story with predictable outcomes.
B. Marcinkowska, Is the European Neighbourhood Policy a Way to Prepare Countries to the Full Integration with the EU or a Way to Replace the Integration by Something Smoother? The Case of Ukraine,Biuletn Analiz CIM nr 3/2014
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Cezary Szczepaniuk, - Współpracownik CIM - absolwent stosunków międzynarodowych Wydziału Politologii Uniwersytetu Marii Curie-Skłodowskiej w Lublinie oraz podyplomowych Interdyscyplinarnych Studiów Europejskich na specjalizacji „Unia Europejska jako aktor regionalny” w Kolegium Europejskim w Natolinie. Jego zainteresowania obejmują szeroko rozumiane aspekty bezpieczeństwa międzynarodowego, Partnerstwo Wschodnie (Ukraina, Gruzja), NATO oraz Wspólną Politykę Zagraniczna i Bezpieczeństwa UE.
Cezary Szczepaniuk graduated from University of Maria Curie-Skłodowska in Lublin, Poland with Master degree in international relations and from College of Europe European Interdisciplinary Studies with “EU as a regional actor” specialization. His interests vary from international security, Eastern Partnership, Ukrainian geopolitics and French security to defence policy. He took part as an international observer in the Election Observation Mission during presidential elections in Georgia on October 27, 2013.