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20 May 2016

Transnistria: Support not Abandonment

The socio-economic situation in Transnistria hangs heavily over the region’s future

When it comes to Russian geopolitical investments, Transnistria is one of the major regions in the post-Soviet space. However, unlike South Ossetia or Abkhazia, this region is situated in the immediate vicinity of the border with the European Union and is thus directly affected by the today’s turbulent situations in the neighboring countries of Ukraine and Moldova. Transnistria does not share a border with Russia. Landlocked and lacking an international airport, it is connected with the outside world only thanks to the borders it shares with Ukraine and Moldova. Its economy is export-oriented - giant exporters such as Moldova Steel Works and the Kuchurgan power station are fundamental to the economy. Due to unimplemented market reforms, agriculture in Transnistria, which boasts fertile black soil, is in decline. As a result, food supply security is largely dependent on imports, which come primarily from Ukraine.

Against the backdrop of socio-economic recession and political instability in neighboring countries and the region (including negative economic growth in Russia), the Transnistrian government faced the problem of halting large-scale production (in particular, the closure of the largest textile factory Tirotex  as reported in 2015) and falling tax revenues which impact the budget at all levels. Since the mid-2000s, the model relied upon to make up for the huge budgetary deficit was heavily dependent on the sale of Russian gas. The Transnistrian authorities acquired this gas virtually free of charge but sold it to domestic consumers at prices approaching market prices. Thus, costs for major manufacturers of industrial produce in 2016 reached $150 USD per 1 thousand cubic meters. Revenues from the sale of gas were stored in the so-called “gas account” and used to finance social welfare payments (retirement pensions and public sector wages), among others. Under the conditions of falling GDP (by 20% in 2015 on the preceding year) and industrial production (by almost 8% in the same period), funds in the gas account started to ebb away. As a result, the region saw delayed payments of wages and pensions, and state apparatus and defense was underfunded. The region’s authorities have been forced to take out commercial loans to at least partially make up for the deficit.

Moreover, Russia’s regular financial assistance provided to Transnistria (mainly used to supplement pension payments) has diminished significantly in dollar terms. This is due to the fall in the ruble exchange rate (from 15 to 9 US dollars per pensioner), as  the rate of the Transnistrian ruble against the dollar (the main settlement currency) is maintained at a high level by the authorities of the unrecognized republic. Consequently, the Transnistrian authorities appealed to Moscow for additional financial support but the request was eventually denied.

Transnistrian exporters of agricultural produce also suffered as a result of higher duties on Moldovan goods introduced in 2014. Combined with other factors, this brought about a decline in Russia’s share of Transnistrian exports from 23% (as of 2011) to 8% (currently).

Transnistria currently enjoys less support from Russian economic operators. In January 2015, Metalloinvest Holdings, owned by Alisher Usmanov, transferred its controlling stake in Moldova Steel Works (owned since 2004) to the Transnistrian authorities, allegedly due to the slump in the market for rolled steel.

Under increasing budgetary and economic pressure, Moscow finds it more and more difficult to keep Transnistria “afloat”. The fact that Moscow actually came to terms with Transnistria’s inclusion in the Free Trade Area between Moldova and the EU from early 2016 should be seen as a milestone (although it is unclear, thus far, what the conditions of the agreement are and whether it will be implemented at all). It is noteworthy that the EU’s share of Transnistrian exports reached approximately 33% in 2015 and Moldovan exports approximately 50%. Incidentally, experts have already begun to revisit the possibility that the EU could take advantage of the circumstances by exerting influence on Tiraspol through Transnistrian economic operators with the aim of reintegrating in Moldova.

Thus, material circumstances have prompt the Russian leadership to abandon its support for Transnistria and to strive to achieve a compromise on the settlement of the Transnistrian issue with maximum gain for Russia. However, as was the case with the request for increased cash support for Transnistria, this option was also deemed unacceptable by officials in Moscow. Such a solution does not sit well with the inner “patriotic” discourse of the Russian government, whereas benefits in international political terms (given the current situation) might turn out to be ephemeral. Conservative circles among the Russian elite dealing with foreign policy have sufficient informational evidence to maintain the status quo as opposed to resolving the Moldovan-Transnistrian issue. Among recent events covered by all of the leading Russian media outlets were NATO military training exercises carried out on the territory of Moldova.

Under existing circumstances, the tactics of maneuvering is an effective mechanism for the pursuit of Russian foreign policy interests in the region. In practice this means Moscow will seek to ensure favorable international political and foreign-trade economic conditions for Transnistria through the intensification of political dialogue with Moldova as well as the European Union. At the same time, no serious concessions will be made by Moscow. Talks between intermediaries and parties to the conflict have already been held with the aim of reinstalling the negotiation format 5+2 (the OSCE, Russia, Ukraine and parties to the conflict as participants together with the EU and USA as observers) in the near future. Talks have been conducted with Germany, currently presiding over the OSCE, acting as mediator which has helped sustain consistent interest in the settlement of the Transnistrian conflict as a pilot project for cooperation with Russia since the 2010 Meseberg Memorandum. The previous active round of talks, held in 2011, resulted in significant progress being made towards finding a solution to practical problems in relations between the two peoples of the banks of the Dniester river. However, talks have been frozen since 2012.

In the field of diplomacy, mutual rapprochement between Russia and Moldova has been observed. Andrei Galbur, the Moldovan Minister of Foreign Affairs visited Moscow in April 2016. Together with Sergey Lavrov, they asserted their readiness to cooperate, including in relation to the Transnistrian problem. As part of the preparations for the visit, the Deputy Minister of Foreign Affairs of Russia Grigory Karasin visited Moldova and the city of Tiraspol, underlining the importance of the Transnistrian issue in terms of bilateral cooperation.

However, one should not expect the problem of Transnistria to simply disappear from the Russian agenda even though political commentators love to speak of such a scenario from time to time. Rather, skillful diplomacy conducted by the Kremlin in relations with Moldova will most probably simply reset mutual constraints (Russia imposed trade restrictions on Moldova whereas Moldova constantly impedes the access of Russian troops to its territory, introduces various restrictions on transport for Tiraspol and files criminal cases against Transnistrian officials etc.). Despite total chaos in the country, the political situation in Moldova rather contributes to the above: the government of Pavel Filip, backed by oligarch Vladimir Plahotniuc, is more comprehensible to the Kremlin and more pragmatic than the ideologically-minded government of Vladimir Filat and Iurie Leancă, in power until 2013. In this sense, the situation resembles Georgia at the time when forces led by Bidzina Ivanishvili assumed power in the country.

Elements of maneuvering tactics have already been observed in the midst of the fervor over events in Crimea. Thanks to a leak via Anonymous International’s Russian website, the purpose of the visit of Dmitry Rogozin to Tiraspol in May 2014 became known: the aim was to restrain the local “hotheads” and prevent the conflict from boiling over into Transnistria.

Such tactics may have one weakness: the Transnistrian economy not only requires a return to the status quo (which assumes the region’s relatively stable access to global markets) but a complete reset of the economic mechanism and large-scale foreign investment. In a bid to shore up the budget, the government of Transnistria has sharply increased domestic gas sale prices in recent years, which has resulted in the closure of many businesses. This became one of the main causes of the conflict of the Transnistrian Supreme Council (the “Renewal” party linked to the main Transnistrian monopolist –“Sheriff” Group - dominates there) with President Yevgeny Shevchuk, which has already spilled over into the public space and become a weapon for use in campaigns prior to the elections to be held in 2016. In particular, the Vice-Speaker of the Transnistrian Supreme Council Galina Antyufeyeva accused Yevgeny Shevchuk of syphoning financial resources from major state-owned enterprises offshore.

Russia is trying to retain control over the situation by maintaining public dialogue with both parties. Large-scale social unrest is unlikely in Transnistria (although the specter of Ukraine’s 2004 Orange Revolution hovered over Transnistria in 2011-2012), since the socially active element of the population is simply moving away from the region. However, it will be extremely difficult for the leadership in Transnistria to maintain stability given the delayed wage and pension payments. The model based on financing social commitments made to the electorate, loyal to “the Transnistrian idea”, through external sources (the sale of Russian gas on the domestic market; separate tranches for macroeconomic stabilization from the Russian budget which were applied a few years ago, etc.) has run its course and, presently, it is not clear what will take its place.


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