Development / Economics / Politics

Romania’s Marshall Plan for Moldova’s economic doldrums

Romania’s Marshall Plan for Moldova’s doldrums: quixotic crusade or methodic initiative?

Dadiana Chiran contends that Romanian assistance might be the key to Moldova’s economic issues. The latter, a country which lost one billion dollars from its national budget, is in need of solidarity and support from its EU neighbour 

December 1st marks the glorious unification of all the Romanian provinces at the end of World War I in 1918. As a national day, it is celebrated with great patriotism and melancholic sentiment, on both sides of the river Prut. This is due to the fact that since 1945 Bessarabia (now the Republic of Moldova) no longer forms part of Greater Romania. The melancholy is more heartfelt given Moldova’s precarious economic and political status; neither Communist nor fully democratic, inflationarily corrupt, and poor enough to make political or economic stability a far-off scenario. Moldova is now the Bermuda triangle of the East: in Moldovan banks, money enters and exits, governed by rules unknown to man, as reflected in the miraculous vanishishing of $1bn (one eighth of the country’s total GDP)[1]

It is crystal-clear to any eye that the situation in Moldova is unsustainable. So is the fact that Moldova has been and will remain incapable of self-sufficiency, due to factors ranging from geopolitics to endemic path-dependency. The EU and NATO seem to have lost their interest in dealing with a former soviet republic, which is neither here nor there; hence they are capable of dismissing the issue entirely. Moldova is a small market, uninteresting for corporate lobbyists, who otherwise might have a vested interest in EU integration. To complicate things further, Moldova is under the under the jealous watch of Russia, a toxic and complex relationship from which Moldova has not extricated itself for the past two decades. The EU’s hands are already full – immigration, the war in Ukraine – leaving Moldova squashed between Russophiles and melancholic democrats.

Who, then, can help Moldova? Everybody, including Romanians themselves, think Romania should step up, in the name of duty, responsibility for its lost brothers and solidarity. If adopted, this sort of attitude would be a perfectly timed, common-sense approach to a troubled neighbour’s worries. However, the performance test has always been Romania’s nemesis.

On the 1st of December this year, 40 NGOs from Romania and Moldova, led by the Black Sea University Foundation and the Romanian Academic Society, launched a public appeal addressed to the Romanian authorities to create an investment fund for Moldova. The initiative was dubbed “Romania’s Marshal Plan”, though the only resemblance lies in good intentions.

 

Moldova Fund in contouring lines: the why and the how

By now, the EU integration of Moldova is a pipe dream for which resources have been exhausted, at least in the shot term; an unrealistic and foolhardy ambition. At the EU level it has been remarked that Romania should invest itself with more imagination in finding solutions for Moldova other than integration.

Despite its already characteristic lack of savoir-faire, Romania is at the stage where shifting from a dependent competitive market, to a performing competitive market, is vital, and economic expansion can achieve this, with or without the need to satisfy solidarity debts with Moldova. According to Prof. Petrisor Peiu, coordinator of the economic department of the Black Sea University Foundation, Romania should incentivise the private sector to invest abroad, particularly in Moldova: “In the Romanian Banks there are cash deposits of $300bn, and outside the country another $10bn, all with small returns… it is a pity”.[2]

The promoters of Moldova Fund state that it should be “an open investment fund listed on the Bucharest Stock Exchange (BVB). It will be initiated thorough a €100m contribution from the Romanian state – aid which Romania had promised by default to Moldova anyway, under a previous agreement. In the first phase the Romanian Minister of Finance will inject €100m cash into the fund, which will then issue shares of that value, offered first to institutional investors, and then to retail investors. In the following phases, as soon as investment projects are identified, the fund will issue new shares (through capital accumulation) in €100m installments. In three years, the fund could reach €1bn.[3]

During preliminary discussions in December 2015, Prof. Dan Dungaciu, director of the Institute for Political Science and International Relations of the Romanian Academy, one of the promoters and initiators of the Moldova Fund project, explained how it will reverse the current situation. Romania has been pouring money into Moldova until now as aid with no strings attached. The Romanian investments through the Moldova Fund will have to acknowledge market realities such as corruption, and the macroeconomic situation.

Prof. Dungaciu emphasised that capital infusions through the fund mechanism do not have a solidarity objective and that the aim of the fund is to invest in three main directions: i) budgetary support through the acquisition of bonds issued by the Government and/or municipalities; ii) investment in transport, energy or telecommunication infrastructure; and iii) co-financing of investment projects of Romanian companies in Moldova.

Shares would be offered to the ERBD and IFC (investment mechanisms of EU and World Bank), as well as investment funds active in the region. Share packages would be offered to the interested Romanian companies (such as Electrica, Transgaz, Transelectrica etc.) and other entities with an appetite for investment and wish to subscribe.[4]
The atypical structure of the fund assumes that the Romanian state, under the auspices of the Ministry of Finance, will be a guarantor of investments, and prohibit “participation of the fund in investments that the fund cannot control”[5], adding that “there will be no investments in joint-ventures in which the Moldova Fund is not the major shareholder”[6] The administration of the fund will be private and “business-oriented”, non-partisan, although paradoxically, among the above listed companies to which share packages will be offered, the major shareholder is the Romanian State either through the General Secretariat of the Government or through the Economic Ministry ( 48,7%, 58,51% and 58,6% respectively), which are by all means politically vested.

Present at the discussions, incumbent Moldovan Minister of Environment, Valeriu Munteanu, sustained the idea of the Moldovan Fund, stressing that “the relationship between Romania and Moldova has to be as pragmatic as possible”[7] advancing the need to discipline Moldova “as a child”.

5 Simple Ways To Make The Moldova Fund  Work

There is no shadow of a doubt that the timing is right, the objective is valid, and the initiative of the Moldova Fund is significant – it isn’t every day that €1bn investment funds are proposed in Eastern Europe. However, to avoid becoming a red herring the project needs to consider these points:

  1. Moldova is in a deep economic black hole. After the bank robbery of the century, the national public deficit has risen by 44% YoY since H1 2014.[8], attributable to a decline in foreign currency import, remittances, and exports against a backdrop of a distorted banking system have led to a depreciating currency: it has dropped 33.2% against USD and 8.8% against the Euro. Inflation reached 11.1% in June 2015, while most of the indicators of the balance of payments growth rate for 2015 are negative. In this climate, who amongst corporate, non-political, non-state investors will be willing to fully acknowledge the risk and proceed, even when the fund has been guaranteed by the Romanian state? Had the proposal been possible without state interference, it would have been already carried out. Yet, not even the ERBD or the IFC invest in charities.
  1. Government bonds (gilds), preferred by pension funds for their high degree of safety, are proposed as leverages of investment of the Moldova Fund. Should the Moldova Fund also provide budgetary support, through the acquisition of bonds issued by the Government, the calculate risk will be enormous, given that the fixed interest rate for this instrument in 2014 was 8.75%[9] (the lower the interest rate the stronger the economy; as soon as the interest rate exceeds 7% p.a. in normal conditions the risk associated to the investment is at peak). Furthermore, if government bonds are indeed purchased, the help will only be given to cover holes of budget deficit, not for the well-intended infrastructure development.
  1. Within the Moldova Fund draft structure, the Bucharest Stock Exchange (BVB Bucuresti) is a proposed lynchpin of the fund. However, the capacity, experience and success rate of BVB in managing investment instruments is limited, not only due to the negligible appetite of Romania for investments, but also as consequence of poor administrative capacity and legislative lay-offs. Only recently, BVB vas reshuffled and now has close to decent financial parameters of transaction. The Romanian Stock Exchange lags behind its neighbors[10]. In 2014, the median value of BVB transactions was €11.7m, a negative record for Europe. Mihai Chisu, a broker, comments: “Take as a relevant example Poland which transacts €2-300m daily”. Big investors avoid Romania because the market cap is small, with reduced offer buy offers. Free from doubt that the Moldova Fund could diversify the offer in terms of quantity and availability but qualitatively there is still a well-shaped deficit. In 2014 the stock exchange represented only 12.3% of Romania’s GDP. In the hierarchy of markets, Romania has a lower status of “periphery market” being ranked as “modest” at the Stability of the institutional framework. [11] Romania does not have yet the status of Emergent Market, hence big investment funds cannot penetrate the market.
  1. Within the Moldova Fund draft structure, the Romanian State should act as guarantor of the Fund in order to encourage investment by ensuring coverage, but in doing this over €100m or more, the Romanian state itself could create a budget deficit while trying to cover Moldova’s. The Minister for Environment, Mr. Moldoveanu states that Romania needs to discipline Moldova like ‘a child’. Romania has proved on more than one occasion incapable of disciplining itself, let alone others. It is cynical to consider investing in the infrastructure of a neighbor when your own infrastructure is suffering. These facts do not help establish Romania as a trustworthy guarantor. The methodology and structure of the Moldova Fund must be flawless in order to compensate for lack of trust among the partners.

  5.   In order to provide feasibility to the Moldova Fund, an ex ante        analysis must be conducted, regarding the appetite of the Moldovan market for Romanian capital and influence. The unionist argument (easily, fervourly and frequently mentioned) cannot be the overall valid replica that will lead to the salvation of Moldova and to the regaining of lost Bassarabia. Pragmatism and lack of coherence seem to be the missing elements in proposals targeting Moldova,including civil society ones. The lofty goal of helping a poorer neighbour also runs a risk of becoming a political football game, on the eve of electoral campaign in Romania.

Dadiana Chiran

Editor-in-Chief, Romania 

                                            

[1] The Great Moldovan Robbery (2015). Retrieved from http://www.bbc.com/news/magazine-33166383. Accessed December 21, 2015.

[2] The entire debate can be watched (only in Romanian) at: https://www.privesc.eu/Arhiva/64847/Dezbaterea-organizata-de-Fundatia-Universitara-a-Marii-Negre-si-Societatea-Academica-din-Romania-cu-tema–Fondul-Moldova—Planul-Marshall-al-Romaniei

[3] Adevarul (2015). Planul Marshal al Romaniei pentru Republica Moldova. Retrieved from http://adevarul.ro/international/europa/fondul-moldova–planul-marshall-romaniei-republica-moldova-1_55feece6f5eaafab2ccffca4/index.html . Accessed December 20, 2015.

[4] idem

[5] Romania Curata, (2015) Fondul Moldova – Planul Marshal al Romaniei pentru Republica Moldova. Retrieved from http://www.romaniacurata.ro/fondul-moldova-planul-marshall-al-romaniei-pentru-republica-moldova/ Accessed December 20, 2015.

[6] Adevarul (2015). Planul Marshal al Romaniei pentru Republica Moldova. Retrieved from http://adevarul.ro/international/europa/fondul-moldova–planul-marshall-romaniei-republica-moldova-1_55feece6f5eaafab2ccffca4/index.html . Accessed December 20, 2015.

[7]Romania Curata, (2015) Fondul Moldova – Planul Marshal al Romaniei pentru Republica Moldova. Retrieved from http://www.romaniacurata.ro/fondul-moldova-planul-marshall-al-romaniei-pentru-republica-moldova/ Accessed December 20, 2015.

[8] Moldovan Economic trends No. 18(Q22015). Retrieved from http://ince.md/en/activitatea-iefs/publicacii/met/#. Accessed December 20, 2015.

[9] Wall Street MD (2014)– Cererea mare la obligatiunide stat cu dobanda fixa a impus Ministerului Finantelor sa emita noi obligatiuni. Retrieved from http://www.wall-street.md/cererea-mare-la-obligatiuni-de-stat-cu-rata-fixa-a-dobanzii-a-impus-ministerul-finantelor-sa-emita-noi-obligatiuni/ Accessed December 20, 2015.

[10]Bucharest Stock Exchange IR Update (May 2015). Retrieved from http://www.bvb.ro/info/2015_05_15_IR%20Update%20May%202015.pdf. Accessed December, 22 2015

[11] idem

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One thought on “Romania’s Marshall Plan for Moldova’s economic doldrums

  1. Pingback: Romania’s Marshall Plan for Moldova’s economic doldrums | FUNDAȚIA UNIVERSITARĂ A MĂRII NEGRE

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