Integration with the Eurasian Union would raise Moldova’s GDP by 5%

_ Yuri Kofner, non-residential research fellow, Skolkovo Institute for Emerging Market Studies, editor-in-chief  analytical media “Eurasian Studies”. Munich. 16  March 2020.

A possible Agreement on Economic Partnership between Moldova and the Eurasian Economic Union (EAEU) would increase the republic’s exports by 50% (USD 170 million), improve the working and living conditions of Moldovan labor migrants and create favorable conditions for attracting new direct investment. As a result, Moldova’s GDP could be annually from 4.6 to 6.2% higher, and each Moldovan from USD 50 to 108 richer.

Steps forward

At a meeting of the Cabinet of Ministers of the Republic of Moldova on March 11, 2020, it was decided to appoint Oksana Grechanaya as the permanent representative of Moldova to the Eurasian Economic Commission (EEC). Oksana Grechanaya is Minister Advisor for Economic Affairs at the Moldovan Embassy in Russia.

This decision is an important step towards strengthening relations between Moldova and the Eurasian Economic Union. In May 2018, the republic became the first observer state to the Eurasian Economic Union. Unfortunately, there was practically no actual cooperation within this format, because the pro-Western government blocked the appointment of an authorized representative to the Eurasian Economic Commission. However, during 2019, the situation changed due to a political shift in favor of the pro-Eurasian president Igor Dodon and his “socialist” party, which are aimed at normalizing relations with the Russian Federation and at a balanced balancing of trade and economic cooperation of Moldova not only with Europe, but also with the EAEU.

In particular, in November 2019, Advisor to the President of Moldova on economic issues, Elena Gorelova, announced the intention of Chisinau to become a member of the Eurasian Development Bank. And in January 2020, the newly elected non-partisan Prime Minister of the Republic of Moldova, Ion Kiku, for the first time participated in a meeting of the Eurasian Intergovernmental Council in Almaty, which gave a long-awaited impetus to the development of cooperation with the EAEU. As a result, a meeting of the Moldova-EAEU working group is scheduled for May 2020  in Chisinau.

Trade relations Moldova – EAEU

Commodity structure of trade

In general, in 2017, the main exports of Moldova were agricultural products (41%), textile products (20.4%) and machinery (17.6%), mainly insulating wire. The country’s import structure was rather diversified: the main import items were cars and vehicles (26.5%), chemical and agri-food products, respectively 18% and 15%. Mineral products, mainly oil products, accounted for a significant share of its imports – 13.5%.

Trade Complementarity Index

The Eurasian Economic Union and Moldova have rather high trade complementarity – the highest of the CIS countries that are not members of the EAEU. In 2017, the commodity structure of imports to the Eurasian Economic Union corresponded to the export commodity structure of the republic by almost 55%. The EAEU export commodity structure corresponded to Moldova’s import commodity structure by 43.3%.

The degree of processing of traded goods

In 2018, the share of processed goods in the republic’s export to the EAEU amounted to more than 60%, and the share of semi-finished products in its supplies to the EAEU was almost 30%. The structure of EAEU exports to Moldova also amounted to 59% for processed products and 39.5% for semi-finished products.

The main positions of trade in goods

In 2018, the three leaders of Moldova’s exports to the Eurasian Economic Union included fruits and vegetables (mainly nuts) worth more than USD 81 million (33.3%) of the total exports to the Union, alcoholic beverages (mainly red wines) at USD 65 million (26.6%), as well as clothing worth almost USD 20 million (8.1%). In turn, the country bought semi-finished products from mineral products and precious stones and metals from the Eurasian Economic Union for USD 94 million (15.4%), refined petroleum products for USD 88.6 million (14.5%), as well as raw mineral products and precious stones and metals for almost USD 46 million (7.5%).

Level of trade diversification

The level of diversification of Moldova’s exports towards the EAEU had a Herfindahl-Hirschman index of 0.18. The Eurasian structure of exports to the republic was more diversified with a HHI of 0.13. The lower the concentration index, the better.

Geographical structure of trade

In 2017, the share of Moldova in the world trade of the EAEU amounted to only 0.3% of exports and only 0.2% of all imports of the Union. The Eurasian market plays a more important role for the republic. Almost 14% of the country’s exports went to the Eurasian Union, and imports from it accounted for 11.2% of the geographical structure of imports to the country.

Level of tariff protection of Moldova and the EAEU

In December 2012, the Republic of Moldova officially joined the CIS Free Trade Area, which also includes all EAEU member states. The parties canceled import customs duties for each other on an overwhelming part of the commodity nomenclature. At the same time, the agreement does not essentially remove the existing obstacles regarding technical regulations, sanitary-phytosanitary measures, dispute resolution and other non-tariff barriers. And in July 2014, in response to the signing by Chisinau of the Association Agreement with the EU (including the e Agreement on a Deep and Comprehensiv Free Trade Area with the EU), Moscow unilaterally excluded Moldova from its CIS free trade area commitment, applying instead the most-favored-nation regime, which meant the introduction of customs duties at the level that the EAEU applies to foreign countries. In addition, Russia has introduced enhanced sanitary-phytosanitary control in relation to Moldavian agricultural products.

The simple average applied tariff regime for the most favored nation of the EAEU has decreased in recent years, but still remains quite high: in 2018, it amounted to 6.8%, – 11.0% for agricultural products and 6.1% for non-agricultural products. The average MFN tariff of Moldova for all goods is 5.3%, for agricultural products – 11.2% and 4.4% for non-agricultural products.

The average ad valorem equivalent of the costs of non-tariff barriers that Moldovan producers experience when importing agricultural goods to the EAEU ranges from 44.8 to 56.2%.

Prospects for the development of trade and economic cooperation Moldova – EAEU

As already mentioned, in 2013, Moldova signed the Association Agreement (AA) with the EU, including the Agreement on a Deep and Comprehensive Free Trade Area (DCFTA). And this implies that Moldova is adopting EU regulation in many areas of tariff regulation, sanitary and phytosanitary measures, energy, banking regulation, etc., while not being a member of the EU common market.

Formally this agreement does not exclude the possibility of creating free trade areas between Moldova and third parties. However, any such initiative must first be approved by the European Union. And the jealous reaction of the European Commission to the conclusion of an FTA between Serbia and the EAEU in 2019 makes it clear that Brussels will be in every way against any strengthening of cooperation between Chisinau and the Eurasian Economic Union.

However, further improvement of trade and economic relations between Moldova and the EAEU should not be perceived as a “zero-sum game”, but rather part of the concept of a common economic space from “Lisbon to Vladivostok”. At first, Moscow could restore the effect of the CIS FTA on goods from Moldova.

Then, in terms of “integration of integrations” it would be advisable to think about combining two free trade areas – the DCFTA and he CIS FTA. Under this framework, Chisinau and the EEC could consider concluding a “Comprehensive Economic Partnership Agreement”, going even further than the package of agreements between the EAEU and Singapore, signed in October 2019. Within the framework of such an agreement, special attention should be paid to two areas: firstly, chapters on “goods”, i.e. on a reduction of non-tariff barriers, harmonization and liberalization of technical regulations and sanitary-phytosanitary measures in merchandise trade, especially agri-food products; secondly, on “economic cooperation”, i.e. on the creation of preferential conditions for the movement and formalization of labor migrants, for free trade in services, for sectoral cooperation and attracting investment.

Work migration

The success of the EAEU is most pronounced in creating a single labor market. As of the beginning of 2020, all citizens of the member states are free to move and work throughout the territory of the Eurasian Economic Union. Everyone enjoys the same labor and social rights, including: placement in most professions without additional documents and permits; mutual recognition of most educational certificates; tax and pension residency; free ambulance and basic health insurance for all family members; free education (from kindergarten to university) for all family members.

Money transfers of individuals working abroad in 2018 amounted to 16.1% of the GDP of the Republic of Moldova. An economic partnership with the EAEU could, among other things, include preferential treatment of Moldovans who come to work in the member states of the Union. Then, they could receive the same preferences. The difference from (non-) participation in the single Eurasian labor market is obvious: the annual growth rate of money transfers of individuals from Russia to the other EAEU countries in 2015-2018 amounted to 13.1%, while the volume of money transfers from Russia over the same period to Moldova decreased by 10.3% on average annually. Over the past five years, about 32.1 thousand Moldovan citizens arrived in Russia annually. Most come for work. Their remittances totaled USD 500 million annually.

Direct investment and sectoral cooperation

A potential agreement on a comprehensive economic partnership between Moldova and the EAEU could also create more favorable conditions for building up Eurasian investments in the republic. Although the regulation of foreign direct investment is not directly assigned to the supranational competencies of the EAEU, nevertheless it can be assumed that regional economic integration has created relatively more favorable conditions in this area within the Union. In general, for 2015-2018, the average annual growth rate of direct investments from Russia to other EAEU member states was one and a half times higher than Russian FDI to Moldova. In 2018, Russian FDI to Moldova amounted to USD 10 million.

It is also worth supporting Moldova’s intention to become a member of the Eurasian Development Bank (EDB) and of the Eurasian Fund for Stabilization and Development (EFSD). The terms of participation, most likely, could be similar to the terms of participation of Tajikistan, which has a similar GDP PPP level with Moldova (USD 31.4 billion and USD 25.8 billion, respectively). Having contributed USD 500 thousand to the bank’s charter capital (USD 7 billion), USD 51.4 million went to the Republic of Tajikistan by March 2020 under six investment projects. And having contributed only USD 1 million to the fund’s total assets (total USD 8.5 billion), Dushanbe, in return, can claim USD 170 million of these funds in the form of loans and grants. The portfolio volume, taking into account the implemented and ongoing EFSD projects in the Republic of Tajikistan, amounted to USD 90 million by March 2020. The EDB provides investments at preferential rates for infrastructure projects mainly in the fields of energy, transport, industry and agribusiness. The EFSD aims to support macroeconomic stability and long-term economic development. The main “donors” in both development institutions are Russia and Kazakhstan (EDB: 66% and 33%; EFSD 88% and 11%).

In January 2020, it became known that by joining the bank, the EDB could finance the construction and equipping of an agro-industrial hub in Moldova, intended for the purchase and processing of agricultural products from Moldovan farmers. Investments in the project are estimated at USD 50 million.

Free trade

Reduction of non-tariff barriers, harmonization and liberalization of technical regulations and sanitary-phytosanitary measures within a potential economic partnership agreement with the EAEU could lead to a significant increase in the welfare of the Republic of Moldova.

Using a gravity model to assess export potential, we can estimate that with the implementation of such an agreement, Moldova’s exports to the common Union market could increase by 50% or USD 171.4 million, which would be tantamount to an additional increase of the republic’s GDP by 4.6 % annually. In this case, the total export to the EAEU member countries would be almost 20% of the country’s total foreign exports. Conventionally, from such a strengthening of cooperation with the EAEU, every Moldovan would become richer by USD 50 (if one divides the income from increased exports by the Moldovan population in 2018).

Gravity model for assessing export potential

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The potential export value of product k delivered by country i to market j in US dollars (USD) is calculated as supply × demand (adjusted for market access) × bilateral “simplicity” of trade. The value of potential exports is predicted by a gravity model based on the characteristics of the exporter, the target market and the strength of the relationship between them. The estimated value in US dollars serves as a benchmark for comparison with actual export performance.

Compared to the scenario without such an agreement, Moldova’s export to Armenia could increase by 36%, to Belarus by 65%, to Kazakhstan and Kyrgyzstan by 86%, to Russia by 40%. Such results are obtained if we divide the potential volumes of Moldovan exports to the EAEU member states by the real average annual volumes of Moldova’s exports to the EAEU countries for 2014-2018.

The greatest export potential to the Eurasian countries is possessed by the country’s agricultural products, primarily fresh apples, wine and fresh grapes, and sunflower seeds.

Similar results came from a study conducted by the German ifo-Institute (Munich) in 2016. Accordingly, Moldova would benefit greatly from the conjugation of the EU and EAEU-CIS free trade areas. If such a scenario were realized, Moldova’s exports would also grow by 50%, the real GDP of the republic would grow by 6.2%, revenues would grow by 6.9%, and inflation would decrease by 2.8%. As a result, every Moldovan would be richer by USD 108. Of the sectors of the Moldovan economy, clothing, agriculture and retail would benefit most.

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