Economy

Soon after Moldovan independence and the subsequent war with Transnistria, the economy and the industrial production went into recession in the mid-90s. Until these days, Moldova ranks as one of the poorest countries in Europe and has the highest unemployment rate.

(Bosse 2010) Nevertheless, concerning the EU-Moldova economic cooperation, Moldova has made a significant progress in implementing reforms in the area of economics, trade, and financial matters alongside the AA/DCFTA. The EU is for Moldova the biggest trading and investment partner, accounting for 52% of its total trade (second one is Russia with 10%). In 2020, 66.4% of all national exports went to the EU. On the other hand, Moldova ranks as the 59^th trade partner for the EU, with an annual turnover of around €4.7 billion – a 40% increase since 2015. The total trade between the partners has between 2016-2020 increased by 22%.

The main Moldovan exports to the EU are electrical equipment and machinery, clothing, and oil seeds (i.e. sunflower). The EU mostly exports mineral fuels, electrical machinery and vehicles. The number of Moldovan companies exporting to the EU slightly increases every year - in 2019 accounting for 1837 firms. (European Commission 2021d)

The Association Agreement (AA), including the Deep and Comprehensive Free Trade Area (DCFTA), has since 2014 contributed to a stronger economic integration and political association between the EU and Moldova. (European Commission 2020h) Their trade relations are determined and set out in the DCFTA, which facilitates bilateral/regional trade in numerous ways. It removes practically all import duties on goods; provides an inclusive mutual access to services for both partners; and companies from the EU and Moldova can create an office or subsidiary on the partner`s market on an equal and non-discriminatory basis. The DCFTA also ensures that Moldovan trade-related laws align with the EU legislation, which in turn increases economic and trade opportunities by opening the EU market to Moldovan goods and services. Thanks to the DCFTA, Moldova has already acquired around

25.000 EU technical standards and rules in its national legislation. (European Commission 2021d)

The bilateral dialogue is conducted through the Association Committee in Trade Configurations, and respective sub-committees (-Customs; -Geographical Indications; -Trade;

-Sanitary and Phytosanitary Measures) were established. Moldova has also been part of the WTO since 2001, and complies to international trade standards. (European Commission 2019b) The EaP Platform 2 for Economic Development and Market Opportunities has since 2017 organized high-level meetings and conferences, where officials and policy-experts discuss economy-related issues and best practices. In 2018, an EaP Agriculture and Rural Development Panel was held in Chisinau, where the EU and EaP representatives discussed inquiries for sustainable development, environment, and synergies between rural and urban areas. Furthermore, panels on trade and harmonization of digital markets were held – aligned with the EaP action plan from 2016. (EaP CSF 2021)

Concerning the private sector, the EaP program aims to improve business and investment environment, which is commonly hindered by the lack of financial resources, burdensome legislation, and difficulties entering new markets. Through the EU4Business initiative, the EU aims to support SMEs by boosting their economic growth and realizing their full potential.

Particularly in Moldova, the EU4Business has thus far achieved to support more than 19.500 SMEs and consequently creating more than 21.900 new jobs. (European Commission 2020h;

EU4Business 2021a) In 2020, there were 30 concrete SME projects in Moldova that were assisted with a budget of €172.7 million. The largest field of EU intervention (€102.3 million) has been in the area of Business Development Services (BDS), which consist of consultancy services to SMEs, capacity building, helping business incubators, B2B activities, and trade information. Second largest area of EU support (€48.6 million) is allocated to Access to Finance (A2F). Herein, the particular A4F instruments are the following: SME Incentive grants;

capped guarantees; structured funds; grants to SMEs; technical assistance to local banks and microfinance institutions; and interest subsidies. The third area of EU intervention in SME aid in Moldova is the Business Enabling Environment (BEE) with a total of €21.8 million in funding.

The BEE instruments comprise of regulatory reforms, capacity building for regulators and policy-makers, public-private dialogue, and communication with SMEs. (EU4Business 2021b) Additionally, Moldova was the first EaP country to join the EU program Competitiveness of

Enterprises and Small and Medium-Sized Enterprises Program (COSME) in 2014 to boost entrepreneurial culture, and access to markets and finance. (Blockmans et al. 2016)

Regarding the EaP objective of elaborating on the TEN-T core networks and transport connections, a dedicated EaP Transport Panel was established in 2011. This specialized EaP Panel caters to regional improvement and strengthening of diverse transport connectors, regulatory convergence, and exchange of information between the EaP states. This regional cooperation is coordinated directly by the EC – specifically DG NEAR (technical support; road safety; External Investment Plan) and DG MOVE (TEN-T methodology; Sophia Investment Conference). In Moldova, three major projects can be highlighted. In 2017, the proposal for M14 Balti-Criva road rehabilitation was released and has been gradually implemented in the timeline of 2013-2022. Following a positive outcome of a feasibility study, the EU together with the Moldovan Ministry of Transport and Road Infrastructure considers this as one of the EaP priority projects - due to its international importance being a border road with Ukraine.

(European Commission 2021c)⁵

Second EaP project concerns a new connection road between Moldova and Romania, with a cost of around €3.5 million. The project entails modification of a railroad bridge and road construction; and thereby reducing transport time whilst contributing to cross-border cohesion and economic growth. The EU hence fully funded a road bypass in the border region Ungheri, which was opened in 2018 with around 700 km of reconstructed roads. (European Commission 2020h) Thirdly, rehabilitation and modernization of a ring-road around Chisinau has been an EaP TEN-T project since 2017. Furthermore, the EaP also targets road safety in Moldova as of 2016, with the goal of reducing road injuries and deaths by 50% in 2020. The EU has implemented measures to increase safety awareness, infrastructure, licensing, staff training, monitoring, and compliance with traffic regulations. (European Commission 2016) In the framework of the EaP 20 Deliverables for 2020, the EU has successfully targeted some energy efficiency objectives. Moldova became the first contracting party of Energy Community in adopting new legislation transposing the Energy Efficiency Directive [2012/27/EU]. Accordingly, under the authority of the Ministry of Economy, energy efficiency

5 Detailed information about the projects can be found on the website of the Ministry of Transport and Road Infrastructure Republic of Moldova [www.mtid.gov.md]

and renewable policies have been implemented and reformed, in compliance with the EU’s Third Energy Package. A visible achievement was the separation of the shareholding unit from the state-owned energy company Moldelektrica in 2018. However, there are still issues to be addressed in the energy and corporate governance sectors, exemplified by the lack of transparency around the state-owned company Energocom. (European Commission 2019b) Within the energy- and climate-related program for the EaP countries is the Eastern European Energy Efficiency and Environment Partnership (E5P), that Moldova has been a full-fledged member of since 2017. The specific projects are financed by multiple donors, mainly from the EU (i.e. EBRD & EIB), but also the recipient countries themselves. Moldova has over the past years benefitted from €74 million of investments, implemented in 4 different projects. In the capital Chisinau, two projects targeted the solid waste management, and energy efficiency in public buildings. In the region of Balti, E5P projects developed around the public transport (trolleybus), and district heating. The EU estimates that around 1 million Moldovans have been served by the program; reducing consumption of natural gas, removing at least 40.000 vehicles from the road, and changing consumer consumption behavior. (E5P 2021) Amongst others, a tangible result in the energy area has the installment of biomass heating in more than 225 schools, community centers, and other sites. As a result, heating became cheaper and the energy sources diversified (in some places solar hot water systems were included).

Moreover, 35 new biomass businesses were established, which created more than 400 jobs in this sector. (European Commission 2020h)

The EU has supported Moldova in building gas interconnectors between Moldova and the EU (Romania). Due to full Moldovan dependence on Russian gas coming in from interconnectors through Ukraine, the EU supports an alternative natural gas route from the EU, which will be ready no sooner than end 2021. This interlinks with the EaP deliverable for 2020 of augmenting energy supply security. (European Commission 2019c) There are two gas operators in Moldova: Moldovatransgaz and Tiraspoltransgaz (operating through the autonomous territory of Transnistria). Moldovatransgaz is the main national supplier (importing from Gazprom), and is an important transit along the Trans-Balkan corridor;

alongside Ukraine, Romania, Bulgaria, and Turkey. (Moldovatransgaz 2021) As part of its commitment within the EU-led Energy Community, Moldova aims to fully implement EU gas laws by the end of 2021. In liaison with the EU`s Third Energy Package, compliance with the

EU standards on multiple levels has been occurring - such as operator certification and revision of cross-border tariffs. (Dovgal & Martin 2020)

Overall, the EaP has yielded positive results in the economic and environmental sector of Moldova. Following the successful negotiations for the Association Agreement (including the DCFTA) concluded in 2014, important reforms and advancements have been implemented.

Tangible results have also ensued in the SME financial and technical assistance (EU4Business), energy efficiency and energy security sector, increased bilateral and regional trade, etc.

Nonetheless, experts and scholars indicate that the cooperation should strive to go beyond the mere formal fulfillment of obligations – as the potential of EU-Moldova cooperation has not fully materialized. (Morari 2016) Namely, the assumed commitments from the Moldovan side are often curbed by the existing high-level corruption, lack of transparency, and other governance-related issues (elaborated in Chapter 5.3.). As such, entrepreneurs and businesses are vulnerable - and often limited - by the national regulatory institutions. The EU could therefore increase support and opportunities by engaging with them locally/directly.

(Frear et al. 2018) The scope and success of the EaP in the economic area is proportionally dependent on the advancement in the governance field; such as fight against corruption, progress in law and justice reforms, and preventing money laundering within the institutional system. The EU membership thus remains distant and unattainable for Moldova thus far, albeit the many positives vis-à-vis the EaP (economic) cooperation.