Ukraine War Rocks Moldova’s Fragile Economy

Tuesday, 29 March, 2022

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Natalia Graur

Contributor

Moldova’s close economic ties to both Ukraine and Russia, its escalating energy crisis and the impact of mass displacement are putting pressure on the country of 2.6 million as the war continues to unfold next door.

President Maia Sandu said that Moldova remains highly vulnerable and, similarly to 2014 after Russia annexed Crimea, Chisinau has decided to stick to its neutrality and has not imposed sanctions on Moscow. In late March, Kyiv mitigated its initial criticism over the decision. Ukraine’s presidential adviser Oleksiy Arestovych acknowledged that strong pro-Russian parties would make it difficult to apply sanctions, which, in any case, would have an insignificant impact on the Russian economy. 

Moldovans have welcomed Ukrainian refugees but the large influx is putting enormous pressure on Europe’s poorest country. Over 380,000 Ukrainians have crossed into Moldova since February 24. The financial support from international organisations, including the UN and the EU - which Moldova officially applied to join on March 3 – has been vital. In late March the US pledged 30 million US dollars adding to a 150 million Euros (164 million dollars) allocation from the EU. The country is also receiving financial and in-kind donations from individual European countries to cope with its needs.

A protracted war could push 30 per cent of Moldovans below the poverty rate, according to the UN development programme, with one in every second citizen at risk of becoming poor in 2022. In 2018, the World Bank stated that 12.8 per cent of the population was below the poverty line. 

“People across the region urgently need peace to help prevent a freefall into poverty,” said UNDP representative in Moldova, Dima Al-Khatib.

The forecast comes after a positive year for Moldova’s economy. In 2021, the gross domestic product grew 13.9 per cent year-on-year, rebounding from a pandemic-induced slump. Imports still outpace exports but the economic data surpassed forecasts of both the government and international financial institutions, including the IMF and the World Bank. 

Moldova’s long-term plan is to integrate its economy with the EU’s. Moldova embarked in this path in 2014 when it signed the Association Agreement, which entails a preferential trade system with reduced or eliminated tariffs for Moldova’s goods, increased services market, and better investment conditions.

The agreement angered Moscow, which imposed a trade embargo on Moldova and Georgia, which also signed the accord. The trade restrictions were only fully lifted in August 2021.

“The uncertainty of the Russian market convinced a part of the Moldovan producers to export towards the EU market,” economist Stanislav Madan told IWPR. “At the moment, apple growers are the most dependent on the Russian market.” 

Vasile, an apple farmer in his 50s in northern Moldova, is well aware of the risks.  He has been exporting his apples to Russia for 20 years, but in 2018 thought to diversify and plant varieties sought-after in the EU.

“It is more difficult to comply with EU standards, but the market is more stable,” he told IWPR, assessing the impact the war in Ukraine will have on his business. “Right now, my transporters are driving back from Russia through Poland…I don’t know how we’ll do it in the future, the distance doubles when you bypass Ukraine and Belarus.” 

As of January 2022, 65 per cent of the country’s exports head west to the EU, while imports from the bloc account for over 43 per cent of the total. Meanwhile, the Commonwealth of Independent States (CIS) received 12 per cent of Moldova’s exports and originated 24 per cent of the country’s imports, with Russia accounting for nine per cent and 14 per cent respectively. 

“Moldova will have a difficult year, but not an economic collapse."

The strongest shock Moldovans have felt thus far however has been regarding the cost of living. 

According to the National Bureau of Statistics (NBS), in February average consumer prices had increased by 18.52 per cent year-on-year and 2.7 per cent month-on-month. For comparison, in February 2021 the month-on-month increase was 0.38 per cent. 

The war exacerbated an already dire situation. The NBS stated that gas rose by 130 per cent over the past year, while in January 2022 the price of vegetables was 59 per cent higher than in January 2021. 

The purchasing power of low-income Moldovans has taken a hit. 

"Prices for bread, flour, oil, vegetables, and even my medicines went up in March. I was thinking of quitting my job this year, but I couldn't afford to live only on my pension," said Rodica, a 65-year-old pensioner who continues to work in a shop to make ends meet. 

From April 1, pensions will be indexed by 13.94 per cent and they will increase from 2,470 Moldovan lei (134 dollars) to 2,980 Moldovan LEI (162 dollars). Rodica said that this will not compensate for the hike in prices.

In 2021 the NBS estimated the minimum expenditure basket for a pensioner at about 98 dollars, but Moldovans as well as economists and even politicians acknowledge that this is not enough. Remittances from Russia are likely to be hit although money transfer from the about 200,000 Moldovans living in Russia accounted for 13.6 per cent of the more than one billion dollars received in 2020.

Gas supply is the other critical link to Russia, which provides for all of Moldova’s energy needs. In October 2021, the contract with Gazprom, Russia’s state gas provider, was extended for five years after a payment dispute had left Moldovans in the cold for several weeks. 

The relation with the gas giant has been rocky since Moldova gained independence in 1991 and Chisinau has been trying to diversify its supply. On March 25, the European Council decided to jointly buy natural and liquefied gas as well as hydrogen, and to open the acquisition platform to Moldova, Ukraine and Georgia. Foreign Minister Nicu Popescu stated that the move was an important step toward Moldova’s energetic security. Gazprom has not yet commented on the announcement. 

Energy resources account for about half of Moldova’s imports and Ukraine is key to gas transit. Companies are looking to start using the Romanian port of Constanta instead of Odesa, a change that will push prices further up since Constanta is further away. 

Petrol and diesel prices have shocked Moldovans. When the authorities announced a 0.38 cent-hike in prices on March 9, thousands of drivers rushed to the gas stations, with queues extending for kilometres. 

“Russia and Ukraine are large raw material exporters. Due to the invasion and the imposed sanctions, their exports decreased dramatically, and this will generate global inflation,” Alexandru Fala, an economist at the think tank Expert Group told IWPR, adding that Moldova’s high reliance on imports will inevitably impact Moldova. 

“The country however is well prepared, with substantial currency reserves and a stable banking sector,” he continued. “Moldova will have a difficult year, but not an economic collapse."