The Unfolding Financial Crisis Threatening Moldova
It is understandable that in recent months the still-unresolved crisis in Ukraine and renewed Cold War with Russia have commanded the attention of most western watchers of events in the former Soviet Union. Perhaps that’s one reason far less notice has been paid to an unfolding financial crisis that threatens the stability of Moldova, a country of over three million people delicately sandwiched between Ukraine and Romania. The latter is a member of both NATO and the European Union, and the large majority of Moldovans are Romanian-speakers.
In a nutshell, the Moldovan crisis involves the abuse of power by politicians of several parties—including those running the country’s shaky pro-EU minority government—for the purpose of siphoning funds from a number of Moldovan banks, notably from Banca de Economii Moldova (BEM). At the end of last year, a scandal broke out following a series of statements made by several politicians that $1 billion had been embezzled from three of the country’s banks, including BEM. Fingers were pointed directly at private investors in the banks as the main culprits.
The allegations spurred a popular panic and mass withdrawals of deposits in the banks concerned. The crisis reached a peak in February when the Moldavian currency (the leu) fell almost by 40% against the euro and the dollar.
Under pressure, authorities reluctantly opened an investigation into what really happened. Even the American consulting firmKroll was engaged, to which the National Bank of Moldova, the country’s central bank, paid from $200,000 to 300,000. However, Moldovan officials were dissatisfied with the results of Kroll’s inquiry, believing that their report did not shed much light on how the money was lost and that it consisted mainly of a digest of local media reports. Viorel Chetraru, the head of the National Anticorruption Center, which has also looked into the banking scandal, called the Kroll’s report a “fiction” overall.
Most recently, after months of media hype about the missing “billion dollars,” it turns out that figure was a “myth,” according to a May 7 statement by Dorin Drăguțanu, Governor of the National Bank of Moldova. The relevant discrepancy, said Dragutanu, amounts to less than half that sum—closer to $450 million. But even at that reduced figure the extent to which BEM was despoiled is astonishing, amounting to about 8% of the country’s GDP. (As a comparison, on the scale of the GDP of the United States the equivalent figure would be about a trillion dollars).
No less staggering than the larceny itself is the shamelessness of Moldovan politicians’ maneuvers in covering their tracks and trying to blame private investors for the loss of funds. Starting in late 2013, when insiders became aware that BEM was nearing collapse, on the recommendation of a government commission (controlled by the same political interests that had looted the bank in the first place) the Moldovan government sold off part of BEM’s shares to private investors while concealing the bank’s liabilities. There was a second, bigger sell-off in August 2014 in anticipation of parliamentary elections just three months later. There were no independent audits, just the Finance Ministry’s report of the bank’s essentially sound condition. Then, in November 2014, days before the election, the government raided BEM and placed it back under state control.
Only now, after months of noisy public recriminations, is the truth is beginning to dribble out. Many high-ranking officials called before Parliament have been compelled to admit that BEM’s looting lasted for years, well before the private investors got involved. National Bank Governor Dragutanu was explicit in reporting that “Since 2007, BEM has been sustaining losses for hundreds of millions of lei. How did they accumulate? From commissions for bad loans.…[that were] were provided both till 2009, and in 2009-2013”—that is, the year when BEM’s shares began to be sold to private investors. In turn, the Prosecutor General of Moldova, Corneliu Gurin, declared at the same parliamentary hearings: “Thefts in BEM began not in 2014 and not even in 2013. They occurred long before these events, and in 2009 they increased considerably.” In other words, BEM was empty long before the scandal broke out in 2014.
The reality is that BEM’s losses are the result of consistent plundering over 20 years or more. The absurdity of officials’ accusations against investors would be amusing if not for the rot this episode exposes at the core of what many deem a leading candidate country for EU integration. Indeed, not too long ago, Moldova was considered (accurately or not) well ahead of other countries like Ukraine and Georgia precisely in the area of rule of law and regulatory (including financial) reform to meet European standards. That image is now a shambles and, in the description of one well-informed analyst in Poland, amounts to an exercise in “Euro-imitation”:
From the perspective of the parties currently in power in Moldova, European integration is interesting as an idea which makes it possible to attract the pro-European electorate. It is also considered a source of aid funds and loans. However, the real dimension of European integration, involving modernising the country by way of implementing necessary reforms, is not favourable for the coalition leaders because it poses a threat to their business dealings. This is why, despite five years of rule by a coalition composed of pro-European parties which from the beginning announced their intention to modernise Moldova in the Western style, the country has not been subject to any structural reconstruction concerning how the state institutions operate. Huge aid funds worth hundreds of millions of euros granted by the EU as part of support for reform programmes did not help much. For example, attempts at limiting the scale of ever-present, endemic corruption permeating all spheres of life in Moldova – from the judiciary through the financial sector to the schooling system and healthcare – have proved unsuccessful.
As thousands of Moldovans take to the streets demanding “Down with the thieves” and “We want the billions back,” to say that the BEM imbroglio bodes ill for Moldova’s European integration prospects is an understatement. Nor does it suggest a climate conducive to investment and economic growth, where an entrenched ruling clique exercises unlimited influence on the judicial system, law enforcement, and investigatory bodies. What normal investors will come to a country where first they are offered for sale illiquid assets officially and falsely certified to be sound, then are deprived of them, and then are blamed for their illiquidity?