Ukraine’s small neighbor suffers economic fallout from war

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(Bloomberg) — The Russian invasion of Ukraine has sparked a rush for loans to help tiny Moldova cover the economic blow of the war raging next door. Things are so perilous that the International Monetary Fund is now calling on nations to send money.

The conflict is putting pressure on the former Soviet nation, just as it has begun trying to resolve bribes and other structural issues.

Moldova is in some ways still stuck between two worlds. It hopes to join the European Union but remains linked to Moscow by energy. Tensions are also rising in the pro-Russian separatist territory of Transnistria, raising fears that Moldova could be drawn into a wider conflict.

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The war in Ukraine could potentially push Moldova to break with the past for good. The government has fast-tracked an application for EU membership and, since February, has had the technical capacity to switch from Russian electricity and gas networks to European networks.

Yet with annual inflation at 22%, growth dropping from a post-Covid surge of 14% in 2021 to 0.3% expected this year, and exports and remittances disrupted, the conflict could further destabilize the economy. nation of 2.6 million people.

Putin’s war poses risks for Moldova and its pro-Moscow enclave

The risk, according to Rodgers Chawani, the resident representative of the IMF in Moldova, is that so much is borrowed to save the country from external shocks that there is nothing left for internal reforms.

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“When will they be able to focus on their own agenda? Chawani asked, worrying that institutions such as the IMF can only provide loans, the accumulated debt will consume future revenues that should have been spent on development.

“The problem is that they could be overloaded,” he said, speaking from his office in Chisinau, the capital of Moldova. “That’s why we’re asking bilateral donors to provide more grants.”

Before the war, the IMF projected that Moldova’s public debt-to-GDP ratio would reach 40% in 2022, up from 27.9% in 2019. The fund rates anything over 45% as unsustainable for Moldova, according to Chawani .

The IMF alone has pledged about $815 million in budget support since December (some await final approval), as it tries to fill an estimated $1.7 billion shortfall – about 14% of the economy – much of which is due to the fallout of the war.

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Another $300 million facility for Moldova to buy stored natural gas awaits approval from the board of the European Bank for Reconstruction and Development, and that’s ahead of hundreds of millions more in infrastructure and other support from allies and international institutions. Last month, the EU offered 150 million euros.

Money also reflects a sense of confidence in the current government.

As recently as 2018, the EU suspended aid to Moldova, drained by a seemingly perpetual carousel of broken reform promises and spectacular money laundering scandals.

A year later, a government led by prime minister – now president – ​​Maia Sandu came to power pledging to improve governance, clean up revenue-sapping state enterprises and overhaul a chronically politicized judicial system. These efforts have been set back by his temporary deportation, followed by Covid-19, soaring natural gas prices, and now the costs of war in Ukraine, including the need to support 450,000 refugees, 95,000 of whom have decided to stay.

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Another cost of war is that of remittances, which brought in just under $1.5 billion to the economy in 2020, or more than 10% of GDP. Already falling, the share returned by Moldovans working in Russia, Ukraine and Belarus looks set to collapse. The same will apply to trade with these countries.

The good news, according to Giorgi Shagidze, managing director of Moldova-Agroindbank SA, or MAIB, is that the banking sector – which collapsed in 2015 – is stronger, the central bank has sufficient reserves and the consumers are not over-indebted. “These numbers are not scary,” he said.

“What’s scary is what happens to foreign deposits and investments, as well as outflows as a result of the conflict,” Shagidze said. Hundreds of thousands of Moldovans have Romanian passports and can take their money across the border to the EU member state if they feel unsafe in Chisinau. MAIB is the largest bank in the country.

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“A bet on war”: a vineyard exposes the risks on the front line in Moldova

The Moldovan economy’s potentially weakest point is its long-standing energy dependence on a combination of Gazprom PJSC and Transnistria, where Soviet-era planners concentrated most of the energy. republic industry, including a gas-fired power station.

Until recently, Moldova had no alternative. A gas interconnector with Romania opened in October, and while Moldova used it to buy some gas on the European spot market, the price was 10 times higher than what it was paying Gazprom during Covid, according to the Secretary of State for Infrastructure and Regional Development, Constantin Borosan. Moldova signed a five-year gas contract with Gazprom in October.

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Why Moldova’s Transnistria region matters to Putin

With the refugees added to the population, consumption is on the rise. And the gas purchased from Russia under contract remains much cheaper than on the European spot market.

Moldova also now has a synchronized connection to the Ukrainian power grid. Still, Borosan said he had just extended an expired contract with the Transnistrian electricity company for a month because his price was half that offered by Ukraine.

“Yes, there is solidarity” with Ukraine, he said, but “how can we explain to our people that we are buying more expensive electricity. Who benefits?”

Angela Sax, head of the EBRD mission in Moldova, sees a lost opportunity. “They’ve been through successive crises going straight from the pandemic to energy,” Sax said, while praising the government’s reformist tilt. “The window of opportunity is not that long.”

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