On December 14th, 2023, the European Council decided to open accession negotiations with Moldova, recognizing Moldova''s substantial progress when it comes to anti-corruption and de-oligarchisation reforms. The first intergovernmental conference was held on the 25th of June 2024, officially launching accession negotiations (European Council, 2024). On October 20th, 2024, Moldova will hold a referendum on enshrining Moldova’s EU ambitions in the constitution. However, several issues remain to be solved, for Moldova to enter the EU.
The COVID-19 pandemic and refugee flows caused by Russia''s invasion of Ukraine have only intensified this dependence. Furthermore, these events excavated existing vulnerabilities in the Moldovan economy, such as high inflation and soaring energy and food prices, which depressed households'' disposable incomes and consumption, while war-related uncertainty contributed to weaker investment (World Bank, 2024c).
In addition to Moldova''s economic challenges, the country also faces a particular and unusual problem; it does not fully control its territory. The Transnistrian region in the North-West of the country (at the South-Western border of Ukraine) constitutes about 12 percent of Moldova''s territory. The region has a population of about 350 000 people, mostly Russian-speaking Moldovans, Russians, and Ukrainians.
Over the years, the interpretations of the conflict have become more controversial, ranging from the local elite''s perspectives to assertions of an entirely artificial conflict fueled by malign Russian influence (Tofilat and Parlicov, 2020).
Notably, the Moldovan government has never officially recognized Transnistria as an occupied territory (see Article 11 of the Moldovan constitution stating "The Republic of Moldova – a Neutral State (1) The Republic of Moldova proclaims its permanent neutrality. (2) The Republic of Moldova shall not allow the dispersal of foreign military troops on its territory" (Constitute, 2024)).
Furthermore, the European Council''s official recognition of Transnistria as an "occupied territory" on March 15, 2022, underscores the EU''s stance on the matter and highlights Russia''s pivotal role in providing political, economic, and military support to Transnistria (PACE, 2022).
Despite Russia''s central role in Transnistria, the region''s economy is, in practice, substantially integrated into the Moldovan and EU economies. This fact should be considered at various levels of decision-making when discussing Moldova''s EU accession.
As depicted in Figure 1, economic activity in Transnistria has been quite "stable" in the last decade. GDP per capita has remained around 2000 US dollars, 2,5 times lower than Moldova''s GDP per capita in 2021.
Figure 1. Moldovan and Transnistrian GDP per capita, in thousand USD
Another distinctive feature of Transnistria is the substantial reliance on remittances from abroad (see Figure 2). In 2021, remittances amounted to 143.7 million US dollars, constituting 15.5 percent of GDP in 2021 (if relying on the official exchange rate for US dollars, as published by the Pridnestrovian Republican Bank).
Figure 2. Remittances to/from Transnistria, in million USD
These figures highlight the significant integration of the Transnistrian economy into the European market and, to some extent, indicate the strong potential to further align in this direction.
The increase in Transnistria''s exports to the EU in recent years can be largely attributed to the implementation of mandatory registration of Transnistrian enterprises in Moldova in 2006 as a prerequisite for engaging in foreign economic activities (EUBAM, 2017). Consequently, Moldova has exercised full control over Transnistrian exports and partial control over its imports since 2006.
However, Transnistria remains reliant on Russia for its imports, particularly in the energy sector. In contrast to the export structure, Russia''s share in Transnistrian imports was significantly larger in 2021. About 45 percent of the imports originated from Russia in 2021, and mostly constituted of fuel and energy goods (447.0 million US dollars) and metal imports (254.3 million US dollars), quite typical for a transition economy.
Figure 4. Transnistrian imports by origin countries, in percent
The biggest challenge for Transnistria, as well as for Moldova, is the large fuel and energy dependence on Russia, mostly in the form of natural gas.
For many years, gas has been supplied to Transnistria effectively for free, often in the form of a so-called "gas subsidy" (Roșa, 2021). This gas flows through Transnistria to Moldova, effectively accumulating a gas debt. Typically, Gazprom supplies gas to Moldovagaz, which in turn distributes gas to Moldovan consumers and to Tiraspol-Transgaz in Transnistria. Tiraspol-Transgaz then resell the gas at subsidized tariffs to local Transnistrian households and businesses. This included providing gas to the Moldovan State Regional Power Station, also known as MGRES – the largest power plant in Moldova. MGRES, in turn, exports electricity, further highlighting the interconnectedness of energy distribution between the Transnistrian region and the rest of Moldova.
Figure 5. Export/import of fuel and energy products from/to Transnistria, in million USD
The revenue generated from energy exports to Moldova has been deposited into a so-called special gas account and subsequently channeled directly into the Transnistrian budget in the form of loans from Tiraspol-Transgaz. In this way the Transnistrian government has covered more than 30 percent of their total budgetary expenditures over the last ten-year period. This further points to Transnistria''s'' fiscal inefficiencies and highlights its precarious dependency on gas from the Russian Federation.
The disagreement on the debt amount was the official reason for the gas supply to be drastically reduced in October 2022. From December 2022 to March 2023, Russia''s Gazprom supplied gas only to Transnistria and it was not until March 2023 that supplies to the rest of Moldova were resumed. Since then, there have been shifts back and forth with Moldova mainly buying gas from Moldovan state-owned Energocom, which imports gas from suppliers other than Gazprom (Całus, 2023; Tanas, 2023). Understanding all turns and events is at times challenging due to lack of transparency in dealings.
Currently, despite Gazprom''s debt claims, the entirety of Transnistria''s gas is still being provided by Russia. While this is a relatively "cheap" investment from the Russian perspective, its impact on Moldova is large, as highlighted by Tofilat and Parlicov (2020) "the bottomline costs for Russia with maintaining Transnistria as its main instrument of influence in Moldova was at most USD 1 billion—not too expensive for twenty-seven years of influence in a European country of 3 million people".
The Sheriff company encompasses supermarkets, gas stations, construction firms, hotels, a mobile phone network, bakeries, a distillery, and a mini media empire comprising radio and TV stations. Presently, the company is reported to exert control over approximately 60 percent of the region''s economy (Wesolowsky, 2021).
A straightforward illustration of Sheriff''s political influence is the establishment of the Sheriff football team. For the team, Victor Gushan constructed the Sheriff sports complex, the largest football stadium in Moldova, accommodating12 746 spectators. This investment in sports infrastructure is notable, especially considering that the total population of Transnistria is only approximately 350 000, and that the region is fairy poor. A similar example concerns the allocation of a land plot of 6.4 hectares to the company "to expand the construction of sports complex for long-term use under a simplified privatization procedure" signed directly by the former president.
While these details may seem peripheral to broader problems, they illustrate how some vested interests in the Transnistrian region may not be keen to change towards a society based on the rule-of-law, increased transparency and a market-oriented economy.
As Moldova grapples with both the consequences of the ongoing conflict in Ukraine and the prolonged "frozen" conflict with Transnistria, its economy remains vulnerable. With the recent attainment of EU candidate status, it''s essential for the Moldovan government to map out ways to solve the conflict despite strong interest from powerful political and economic groups in preserving the status quo.
Furthermore, while the Transnistrian region de-facto has strong economic ties with the Moldovan and European markets in terms of exports, its heavy reliance on Russian gas imports remains a significant vulnerability.
When integrating Transnistria and severing its ties with Russia, Moldova would also need to resolve the issues arising from its reliance on the electricity produced at MGRES using subsidized Russian gas. Natural gas bought at market prices would make Moldovan electricity highly costly, presenting financial challenges to Moldova, and effectively destroying the competitive advantage and important source of revenue in the Transnistrian region. Moreover, alternative electricity routes to Moldova are yet to be completed (with an estimated cost of approximately 27 million EUR).
These and other issues need to be dealt with for a successful Moldovan transition into the EU. Although these challenges are highly important from a Moldovan point of view, and even more so from a Transnistrian perspective, it should be emphasized that these issues are, in economic terms, relatively small for the EU. Given that the EU has opened the way for Moldovan accession, it should be ready to step up financially to help Moldova solve these issues and stay on the membership path.
Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.
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