Is an Association Agreement with the EU the Best Option for Moldova?

February 6, 2013
Anthony T. Salvia
Director, American Institute in Ukraine

Moldova, like Ukraine, hopes to conclude an Association Agreement, including a so-called Deep and Comprehensive Free Trade Agreement, with the European Union before the end of the year.

In a phone call last weekend, Moldovan prime minister Vlad Filat and the president of the European Commission Jose Manuel Barroso welcomed the progress that has been made in negotiations to date.

Filat: “We hope to complete the negotiations in March so that the Association Agreement will be ready for the Vilnius summit of the ‘European Partnership’.” ["Надеемся, что в марте мы завершим переговоры по Соглашению об ассоциации, чтобы быть подготовленными к вильнюсскому саммиту "Восточного партнерства.”]

The Association Agreement is presented as a millennial event for Moldova -- but is it? Turkey thought so when it negotiated such an agreement with Brussels in 1964, but it regretted it when it became clear that Turkish enterprises were getting clobbered by their European competitors. Forty nine years later, Turkey is no nearer to full membership, and may well have lost interest.

Moldova’s economy is weak: Moody’s, the US rating agency, gave Moldova a less-than-impressive government bond rating of B3. This reflected the country’s “very low economic resilience and moderate level of government financial robustness.”

To cite Moody’s further: “Moldova's very low economic strength is driven by (i) very low GDP per capita [i.e., with per capita income of $1,980, Moldova is Europe’s poorest country, lagging well behind Albania and Ukraine]; (ii) the small scale of the economy [i.e., when Pridnestrovie left, it took much of Moldova’s industry with it, with the result that it is now heavily an exporter of wine, cognac, and agricultural products such as sugar beets; 41% of exports are agricultural]; (iii) high dependence on workers' remittances [i.e., remittances of the many Moldovans who decamped for Europe and Russia constituted 20% of Moldova’s GDP in 2011; these have declined with Europe's economic contraction, although those losses have been somewhat off-set but growth in the Russian job market]; and (iv) limited future growth potential [i.e., Europeans are not lacking in wine, cognac and agricultural products, nor is there any evidence to suggest they are keen to import the Moldovan equivalents].”

Meanwhile, Europe – ostensibly the locomotive for pulling Moldova to the bright uplands of prosperity – is wracked by a crisis brought on by excessive sovereign debt, bloated social welfare spending, declining population, stagnant global demand, and rising nationalism.

A relatively slender slice of the population -- German and other North European taxpayers -- are holding the whole ball of wax together, but only just: Britain plans to mount a referendum on possible secession.

British Prime Minister David Cameron expressed Europe’s dilemma in lapidary fashion: “Europe has 50% of the world’s social entitlement spending, 25% of the world’s GDP, and 7% of the world’s population. That's not exactly the formula for a bright future.”

Perhaps there’s a better option for Moldova? Ukraine, although it too is pursuing an Association Agreement with the EU, is certainly aware of the many, tangible benefits the Moscow-backed Eurasian Customs Union offers, and is torn between its two options. Moscow rules out any partial association with the ECU; wisely, Moscow and Kiev continue to talk.

Perhaps Kishinev should do likewise. There is more for Moldovan enterprises and workers in exporting to a growing, Russian-speaking Eurasian market of 160 million people than in trying to sell wine to Italians and cognac to Frenchmen. Russia is growing at 3% per annum, while the Eurozone contracts by 0.6%. Nor is Russia’s relatively strong economy a flash in the pan. From 2000 to the onset of the global crisis in 2008, the European Union’s average annual growth rate hovered around 2%, whereas Russia’s averaged 7%. Europe has long been a low-to-no-growth affair.

Also attractive for Moldova is Russia’s lack of sovereign indebtedness (a mere 9% of GDP, compared to the Eurozone’s 87.3% and the USA’s 103%). This, coupled with energy revenues, make it a more likely source of possible economic assistance than a financially strapped Europe.

And there is this additional potential benefit: such a move could facilitate a resolution of the status of Pridnestrovie. It would constitute significant confidence building measure both in Tiraspol and in Moscow.

Let’s face it, Europe has no intention of offering Moldova full membership. It only dangles the shiny object of the Association Agreement before Kishinev’s transfixed gaze so as to promote its Euro-Atlantic orientation, and thereby deal a blow to Moscow.

But such a policy will only perpetuate Moldova’s division. Moldova is officially neutral. This is the correct policy in view of the presence of 1,500 Russian troops in Pridnestrovie and other factors as well: 170,000 residents of the territory have Russian passports; 90% of Moldova’s energy imports come from Russia; Russia absorbs 28.2% of Moldova’s exports – its next largest export market, Romania, buys 16.9% same. It share broad cultural affinities with Russia.

Last September, Russian prime minister Dmitriy Medvedev invited Moldova to join the Eurasian Customs Union, while Russian energy minister Aleksandr Novak offered reduced prices for Russian energy products. Of course, the Russian offer came with a price tag – Moldova should drop its plans for European integration.

All things considered, it may well be an attractive deal compared to the alternative.