December 15, 2022
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The whirlwind of international visits and engagements from the country’s top leadership has continued with President Sandu and other senior leaders working to shore up support for Moldova in the winter season. President Sandu recorded a lengthy interview with CNN’s Christiane Amanpour last week in which she discussed Moldova’s challenges in energy and security. The President noted specifically the challenge of the war and how the Moldovan government has been highly focused on crisis management, but noted that the goal of "keeping Moldova part of the free world" remained their primary focus. Speaking of the current military threats to Moldova, President Sandu noted that "Ukraine defends its freedom, but also defends Moldova's freedom…" saying that while the acute period of military threat had mostly passed, Russia is conducting a “hybrid war” against Moldova’s energy infrastructure and through protests movements. The interview, which went on to discuss another Russian missile that fell on Moldova’s territory last week, was a comprehensive overview of Moldova’s situation as well as a frank discussion of the support coming from the US currently, and what is needed in the future.
While President Sandu was in the United States, Prime Minister Gavrilita visited Kyiv for the first time since the beginning of the war, including visits to suburbs that were the location of Russian war crimes. She said:
“I visited both Bucha and Irpin. With my own eyes I saw burnt houses, schools, kindergartens, broken roads. But the most painful thing was to see the crosses in the gardens. Not a single photo or video will convey what I saw here, on the spot, ”
The Prime Minister voiced Moldova’s support for international war crimes investigations saying:
“Every citizen of Ukraine, especially women and children who have been subjected to cruelty and inhuman treatment, deserves justice,”
The Moldovan delegation, which also included the new Minister of Economy Dumitru Alaiba, had bilateral meetings with Ukrainian counterparts. The Prime Minister noted that they discussed defense cooperation including the topic of air defense (which we will come to again below).
Finally, some sad news from the EU this week as Austria unilaterally blocked Romania’s ascension to the Schengen visa-free zone and Austria and the Netherlands jointly blocked Bulgaria’s ascension. The ability of one or two EU countries to continue delaying the full integration of Romania and Bulgaria, in spite of full support for the countries from the EU Parliament, shows that the EU has a long way to go in ironing out the practical problems of enlargement. This fact will be particularly challenging for Moldova as it continues down its EU path.
Parliament and opposition factions have had a busy two weeks with major legislation, and various interesting political maneuvers. We’ll do a rapid fire roundup of key news and then dive deeper into the national budget that was approved for 2023.
Parliament passes updated electoral code - Last week parliament changed the composition of the Central Election Commission CEC in a way that assures the ruling party will have greater control over the conduct of elections. In the previous composition, the CEC was made up of 9 members with 1 appointed by the president and 8 appointed by parliament in proportion to the parties. In the new version, the CEC will have 7 members appointed by: 1 president; 1 government; 1 Superior Council of Magistracy; 4 by parliament but not proportionally. Of the 4, 2 will come from the ruling party, 1 appointed by outside civil society groups (ratified by parliament), and 1 by the opposition. Additional changes removed the requirement to print ballots in Russia or to open polling stations in Transnistria - both are now subject to the CEC or local election officials’ discretion. Finally, it will now be possible to open certain high-volume polling places for 2 days of voting, a provision presumably targeted at diaspora voting locations which are frequently subject to massive lines (and are PAS strongholds).
Socialist MP Gaik Vartanean leaves his party - Vartanean announced this week that he would leave the Socialists and become an independent MP. The Socialist Party announced that this was expected and that they assumed he was defecting to Chisinau Mayor Ion Ceban’s MAN Party (more on that below). The party asked Vartanean to resign from parliament in order to keep his seat in Socialist control. Vartanean announced that he would not be doing so, and would continue to serve as an independent. This is the first parliamentary party defection since the 2021 election.
Expert Grup Report of government progress - The thank tank “Expert Grup” came out with a year’s end report of the government’s progress on its agenda, highlighting that the government has managed the crises aptly, but has not managed much in the way of reform. They noted that the gap between the expectations for reform of the electorate, and the lack of any real action, creates potential for political instability. They particularly highlighted the “resistance in the system” to reform and noted that the government has not managed to overcome it. The director of Expert Grup said:
“If this government can hardly be called reformist, then it is definitely anti-crisis. It must be admitted that, despite the unprecedented shocks, it was possible to maintain the stability of state institutions, the macro-financial situation, public finances and the national currency,"
Chisinau Mayor Ion Ceban launching the National Alternative Movement - Mayor Ceban announced that his new party would apply for official registration soon and said that there was lots of enthusiasm from people who wanted to join. He also unveiled their flag and colors utilizing the party’s rather awkward Romanian acronym “MAN.”
Parliament Passes the 2023 Budget
The government and parliament have been in the process of passing Moldova’s 2023 budget over the last 2 weeks. Initially, the budget was presented to the cabinet of ministers for approval, but was only provided to them 3 hours before the required vote. Gagauzia’s Bashkhan, Irina Vlah, noted the short timeline, and asked for a delay of consideration until everyone had a chance to actually read the budget. Prime Minister Gavrilita said that this was not possible. She apologized for continuing Moldova’s long tradition of rushed and non-transparent budgets, but noted that negotiations with lenders and international partners had been ongoing right up until the end, and it was critical that the bill be passed through the parliament by year’s end.
At the top line, the budget projects a deficit of 18.3 billion lei ($900 million) in 2023 or around 6% of GDP. The budget assumes 15.7% inflation in 2023 and 2% growth in GDP. The deficit will be covered by domestic and international borrowing and projects total national debt to be at 39.4% of GDP at the end of 2023.
In terms of specifics, the budget calls for the following main changes in tax and spending:
Minimum wage increase from 3500 lei / mo to 4000 lei / mo. This applies to both public and private employees and also envisions a 1300 lei pay increase for most public sector employees. The Congress of Local Authorities of Moldova has already noted that this is an “unfunded mandate” requiring local governments to raise salaries without the provision of funds to do so. They have called this unconstitutional an implied legal appeals.
Micro SMEs will no longer pay taxes on re-invested profits
A new system will be created for VAT refunds. Currently many companies who manufacture and export gather up large tax credits but can’t access them - making them long term zero-interest loans to the government. This will be fixed in the new year.
“Patentas” are renewed only through July. The “patenta” is a legacy business system that works like a “taxi medallion” for nearly everything. Holders can operate million dollar companies while paying a flat tax of less than $100 / year. Every government in the last decade has promised to do away with this, and once again it has been punted for 6 months. We’ll revisit the topic in June.
“Progressive” income taxes have been brought back. Moldova currently has a flat income tax system of around 38%. The new budget plans to increase taxes by an additional 6% for people earning over 1 million lei / year (~$51,000). It is not clear if this is a marginal rate - previous tax codes have not had marginal rates creating a major incentive to hide income if you approach the threshold.
Note: it’s worth noting that Moldova’s tax system is actually still very regressive, with IT workers paying only a ~7% rate and top income earners generally taking advantage of other structures to totally avoid income tax. In practice, Moldova has a flat 38% tax only on poorer workers.
Excise Tax Increases - Excise taxes on alcohol will increase by 15%; on tobacco products by 25%.
The National Military Budget will increase by 68% - The Ministry of Defense says that this will primarily be used for the purchase of air defense systems, but the Minister notes that it will take a minimum of 1-1.5 years between the purchase of such systems and their delivery. The Minister also stated that for Moldova to have a credible military defense of its neutrality, the government will need to spend between 1-2% of GDP on the military for 5+ years. In 2022 the budget amounted to 0.38% and planned increases will bring that number to 0.55% in 2023.
Economic and Energy Updates
In past weeks, the new Minister of Economy has begun rolling out an ambitious regulatory reform agenda aimed at “cutting red tape” across the economy. The planned scope of reforms is broad, and it is not clear what will get through to the final bill, but here are some key focus areas:
Simplifying Labor Relations - Reforms envision removing legal requirements for what should largely be internal company processes in record keeping, contract negotiation and more. Currently companies report vast troves of HR data to the state on a near constant basis - a system rooted in the Soviet assumption that the state as the “owner” of all companies.
Making Controls (Inspections) less toxic for companies - Inspections will be consultative (rather than punitive) for new companies and all inspectors will be required to present “check lists” outlining what they are allowed to inspect (this is a really important improvement - just last month a health inspector insisted we paint a wall at my restaurant because she didn’t like it).
Eliminating the Blue Medical Passport - In our Moldova Matters Explainer “Understanding Reform” from September 4th, we discussed the “Blue Medical Passport” and the huge amount of STD testing and anal swabbing that goes on in Moldova’s health labor code (or really, the huge amount of bribes paid to avoid said “anal swabbing”). This reform package targets this process for elimination in a victory for the 30,000 workers a year who need to suffer this indignity.
These reforms must still work through the legislative process - and they are only a start. The ability to get things moving will be a major test of the new Minister of Economy and will soon show if he can overcome the institutional inertia that prevented his predecessor from taking any significant actions this past year.
Quick Energy Updates:
Understanding the Chisinau - Tiraspol deal.
We spent most of the last update on energy policy, but should quickly note some updates that have come out of the expert analysis written in the last week. As we discussed, the Chisinau government has now agreed to send 100% of the daily natural gas supplies coming from Russia to Transnistria in exchange for the Transnistrian MGRES power station supplying 54% of Moldova’s electricity needs at cheaper prices. What’s interesting here is that MoldovaGaz will not receive any payments for this gas as Russia is expected not to ask Transnistria to pay for this gas at all.
Back in October, we discussed how Moldovan State Company Energocom loaned MoldovaGaz 1.05 billion lei in order to pay for gas deliveries. This loan was to be repaid in May 2023 at the national bank interest rate of 21.5%. The loan was collateralized by the entire assets of MoldovaGaz including the transit system and infrastructure in Moldova. Back in October, part of the purpose of this loan structure was to encourage GazProm to supply more gas to Moldova so that its subsidiary, MoldovaGaz, would make money through the winter and would be able to pay off the loan. GazProm did not do this. Now, the arrangement with MoldGRES has removed huge amounts of income from MoldovaGaz. The company will still have some income as it buys gas for consumers from Energocom (the state company is responsible for the gas storage in Romania and Ukraine), but prices have not been set yet and are unlikely to favor MoldovaGaz.
Bottom Line: Moldova’s recent energy maneuvering is likely to result in the effective nationalization of GazProm’s property in Moldova next May. This is a complicated deal, but Moldova continues to deftly play its energy cards with Russia.
Crime and Corruption
Last month the US Government announced sanctions against some of Moldova’s top fugitive oligarchs including Ilan Shor and Vladimir Plahotniuc. Last week, the UK also sanctioned both oligarchs denying them access to UK financial institutions as well as visas to the UK. Meanwhile, in Moldova the Ministry of Justice has announced that they will soon be presenting a Moldovan version of the Magnitsky Act, designed to sanction corrupt officials and inside and outside of Moldova. The "Magnitsky for Moldova" law will seize assets, prevent companies and banks from doing business with sanctioned individuals, and, critically, revoke all radio and TV licenses from companies affiliated with sanctioned individuals. This law is clearly targeting Ilan Shor’s recent acquisition, with the help of the Russian government, of TV stations that previously belonged to the Socialist Party.
President Sandu noted that “The noose around the neck of the corrupt fugitives from Moldova is being tightened.” While Prime Minister Gavrilita spoke more broadly about the impact of US sanctions saying:
“Reputable international law firms no longer work for fugitives. Financial transactions have stopped: those paid “elements” that the media talked about are no longer so active on the streets of Chisinau. Although this is not directly related to the sanctions, we have seen a court decision related to the return of the airport. We also have news about the seized assets, but for now we will not disclose details,”
The leveling of American sanctions has clearly given the Moldovan government a boost in their fight against corruption, we will see in the coming months whether they can capitalize on this opportunity and begin the real process of unwinding these corrupt networks.
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