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21 December 2016

Moldova: the integration of integrations

Following Georgia’s lead, Moldova wants to normalize its relations with Russia. However, this can only be partially fulfilled within the framework of bilateral relations. 

Following a long break, a meeting of the Moldovan-Russian Commission on Trade and Economic Cooperation was held on November 29 in Moscow. This event was the culmination of intensive negotiations between the two countries which had gone on for at least six months. The negotiations were aimed at the restoration of fully-fledged trade and economic cooperation. They are seen as important by Moldova which wants to start selling goods on the Russian market again. Russia regards these negotiations as important too, since it sees them as a gateway towards the implementation of a concept of “the integration of integrations.” This concept is typically applied to describe relations between the Eurasian Economic Union (EAEU) and the EU. It has also been employed to define the combination of Moldova’s and Ukraine’s free trade areas with those of the EU and CIS. What are the main outcomes of the Moldovan-Russian negotiations from the point of view of this concept’s implementation?

Recall that Moscow politicized the issue of the conclusion of Association Agreements between Eastern Partnership countries and the EU immensely in 2013-3014, the stumbling block being one of the key components of the agreement: the Deep and Comprehensive Free Trade Area (DCFTA). Russia put forward two arguments against the DCFTA. To begin with, the Russian authorities believe that less competitive goods will be exported to Russia from Eastern Partnership countries in much greater volumes in the case of liberalization of trade with the EU. Besides, produce from third countries might reach the Russian market guised as goods from Eastern Partnership countries. Secondly, Moscow believes that Eastern Partnership countries violate commitments under the 2011 CIS Free Trade Agreement (CIS FTA) while adopting EU technical regulation standards in view of the formation of a free trade area with the EU.

As a result, Moldova was confronted with a number of restrictions introduced by Russia. Thus, Moscow took a precautionary measure in the form of a ban on the import of Moldovan wine to Russia back in September 2013. Russia imposed the status of “most favored nation” (MFN) on Moldova, the origin of a number of foodstuffs imported to Russia, a year later, which activated an increase in customs duties (14% or higher) in line with WTO norms. In fact, this was the end of the free trade regime in the case of these categories of goods which constitute the core of Moldovan exports. Later, Russia also stopped issuing permits to Moldovan transport companies to transit goods across Russian territory.

Concerns raised by Russia were not groundless both as regards the quality of wine and re-exports which constitute at least one third of Moldova’s total exports according to statistics. However, failure to implement obligations under the CIS FTA has become a real sticking point. Indeed, the Association Agreement stipulates that Moldova is to apply EU standards in the area of technical regulations, veterinary and phytosanitary checks etc., which potentially creates problems for imports of Russian goods to Moldova since there is no mutual recognition of standards between Russia (the CIS) and the EU. The problem pertains to manufactured goods in particular. Let us recall that Russia exported manufactured goods worth approximately 160 million dollars to Moldova in 2012. In the event of full implementation of the Association Agreement, Russian exporters will have to undergo additional certification procedures in order to comply with new standards, which constitutes non-tariff restrictions to trade. In other words, the two free trade areas, each with their own system of weights and measures, standardization and certification, are not fully compatible. Hence, Russia’s tacit consent to the establishment of the DCFTA between the EU and Moldova would have led to significant erosion of the free trade regime within the CIS.

Nevertheless, it is clear that Moscow’s reaction to the Association Agreement is primarily politically motivated. Subsequently, Moscow has employed a plethora of prohibitive measures in the absence of structural constraints or positive political motives (as in the case of Georgia). It is worth remembering that Moscow launched an information campaign against Moldova’s European integration. It also supported political forces in Chisinau who position themselves as “Eurasian” (the Party of Communists of the Republic of Moldova and later on the Party of Socialists of the Republic of Moldova).

The climate of Moldovan-Russian relations has improved since Pavel Filip’s government came to power in Moldova in early 2016. Chisinau expressed a desire to normalize relations with Moscow and to fully restore trade and economic relations with it. As a result, Dmitry Rogozin visited Moldova in July 2016 in his role as co-chairman of the Moldovan-Russian Commission on Trade and Economic Cooperation. He provided the Moldovan party with a provisional road map which included a number of measures Moscow expects of Chisinau. Russia openly declared that it would be impossible to fully normalize trade between Moldova and Russia without the involvement of Brussels. This was stated during meetings with the Moldovan authorities (for example, during the meeting between the Moldovan prime minister and Vladimir Putin on the sidelines of the CIS summit in Bishkek in September). Moldova was tasked with finding a formula for concurrent implementation of both EU and CIS standards in the field of technical regulation. This was precisely the solution offered by Russia during trilateral negotiations with Ukraine and the EU over the very same issue in 2015. However, negotiations reached an impasse back then, which was partially due to the stance of Brussels which argued that simultaneous operation of EU and CIS standards would create unjustified competitive advantages for Russian goods against the backdrop of higher EU requirements which are to be fulfilled by EU producers.

Therefore, only simultaneous implementation of both EU and CIS standards (for example, due to the agreement on mutual recognition of conformity assessment) could fully satisfy Moscow and result in the cancellation of all restrictions, notably the MFN status. However, apparently, the Moldovan government initially avoided such an approach and has been willing to make concessions on other, less important issues related, for example, to broadened cooperation between Moldovan and Russian customs agencies on the electronic exchange of information on goods imported to Russia, applying a “single window” approach to imports of wine to Russia as well as the abolition of the so-called “environmental fees” Russian exporters were previously subjected to.

As a result, the parties agreed on the “Action Plan for the Development of Russian-Moldovan Trade and Economic Relations in 2016-2017” on November 29. If all key provisions are fulfilled, Russia can lift phytosanitary and veterinary restrictions on the import of Moldovan spirits, fruit and vegetables as well as animal products. Still, cancellation of the MFN status, which is tantamount to the imposition of higher customs duties, is out of the question. Moreover, Moscow has already agreed to resume issuing permits to Moldovan transport companies engaged in transit through the territory of Russia.

It is also noteworthy that Russia suggested that the first official visit of the Moldovan president-elect Igor Dodon to Moscow should be used as an opportunity to continue dialogue regarding these issues. This speaks in favor of Russia’s attempt to influence the stance of the Moldovan party for example, due to the fact that during Dodon’s visit, Russia could theoretically agree to remove from the blacklist names of Moldovan migrants who are denied entry to Russia with a view to making progress along trade-related and economic tracks. However, given the limited powers of the Moldovan president, it is unlikely that Dodon’s visit to Moscow will seriously affect the stance of the Moldovan government.

Preliminary results show that Russian-Moldovan talks should hardly be considered a failure even if they cannot be described as promising. Moldova stands a real chance of restoring its access to the extremely lucrative Russian market albeit with tariff barriers in place. On the other hand, Russia stands a good chance of demonstrating that it has normalized relations with yet another Eastern Partnership country and signatory of the Association Agreement with the EU. More ambitious outcomes such as combining two free trade areas in Moldova could be reached by Russia and the EU upon a compromise, although both parties are a long way off constructive dialogue given the deterioration of mutual relations. The EU asserts that the problem with respect to standards is one which Russia should take care of by harmonizing its standards with EU standards. On the other hand, Russia would lose face should it shoulder minimum and not solely obvious, economic losses. When it comes to Moldova, the incumbent Moldovan government and oligarch Vladimir Plahotniuc, who backs it, will not initiate a compromise with Russia alone since they are dependent on political and financial support from the EU and US to a large extent. 

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