The DCFTA in Transnistria: Who gains?

shutterstock 178072319As the year 2016 began, Transnistria has joined the Deep and Comprehensive Free Trade Area as a part of the agreement between the European Union and Moldova. It seems that despite earlier objections by the Transnistrian authorities, the quasi-state has obliged itself to implement necessary reforms within the next two years in order to gain access to free trade with the EU. However, including Transnistria into the DCFTA should be rather perceived as a concession towards Tiraspol (the capital of the breakaway region of Transnitria) made by both the EU and Moldova. There is no guarantee that Transnistria will deliver on its promises.


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January 1st 2016 was a long awaited day in Transnistria with an unconcealed concern. This was the day that the EU regulations on Autonomous Trade Preferences (ATP), which were in force since 2008, had expired. Thanks to the ATP Moldova and Transnistria could export certain quotas of their goods to the EU market without paying customs fees. These preferences expired in September 2014 following the implementation of the Association Agreement with the EU and were replaced by the DCFTA which Moldova and the EU signed. Tiraspol had not shown any real interest in participation – together with Chișinău – in the new trade agreement with EU. In order to give Transnistria time to rethink its policy, the quasi-state remained a subject to the ATP regulations until the end of 2015. But this came to an end under the logic that the EU cannot have two separate trade agreements with one partner.


Negotiations between Moldova and the EU on the DCFTA had started in 2012. Since the very beginning of the talks, both Brussels and Chișinău encouraged Tiraspol to join. The quasi-state did not show much interest in such co-operation as it did not want to join the DCFTA via Chișinău. Transnistrian officials claimed that they would agree to sign a separate agreement with the EU but even to them it should have been obvious that such a move would be impossible. Transnistria, as an unrecognised “state”, cannot take part in international agreements. At the same time, Tiraspol declared that its priority is to integrate with the Moscow-led Customs Union (which is now the Eurasian Economic Union).


The EU and Moldova had hoped that Transnistria would adjust its policies as economic analyses predicted that without the DCFTA, the weak economy of the quasi-state would face an even deeper crisis. According to analysts, the expiration of the ATP without the implementation of the DCFTA would cause the “state’s” GDP to drop by an additional five per cent. What’s more, Transnistrian exports were expected to drop by seven per cent (by 25 per cent to the EU). On the contrary, after joining the DCFTA, Transnistrian export could rise by 5-10 per cent, with investment increasing by 3-5 per cent and GDP by 3-4 per cent.


In spite of these figures, Transnistria remained stubbornly against the DCFTA. For Transnistria, the DCFTA would have significant political implications as Moldova would strengthen its integration with the EU. In that case, the Kremlin’s position played a key role. The Transnistrian political elite do not want and – even if they wanted – cannot act against Russia’s interests in the region. Transnistria is fully dependent on Russian financial support. Transnistria receives between 300 and 400 million US dollars annually from selling gas it receives for free from Gazprom. Russia assigns Transnistria $150 million per year for development of its infrastructure and social expenditures. An important role is also played by money transfers from migrant workers who live and work in Russia. Around 80 per cent of the $270 million received from Transnistrians working abroad in 2014 came from Russia. That year, the money coming directly or indirectly from Russia helped finance huge budget deficits ($850 million, the equivalent of 93 per cent of Transnistria’s GDP).


Another reason why Transnistria argued against joining the DCFTA was its own internal politics. This is primarily related to the conflict between President Yevgeny Shevchuk and the largest Transnistrian company, “Sheriff” – Shevchuk’s number one competitor. Shevchuk had probably hoped that the expiration of the ATP without the implementation of the DCFTA could have a strong leverage over Sheriff. Additionally, the Transnistrian president was aware that joining the DCFTA would mean the liquidation of customs for goods imported from the EU (it was not required by the ATP). Currently, these taxes are relatively high (6-7 per cent) and enrich the budget with $35 million every year. From Shevchuk’s perspective, the implementation of the DCFTA would mean a stronger Sheriff and lower revenues to the state budget controlled by the presidential administration.


Tiraspol changes its mind


Until December 2015 it seemed clear that Transnistria would lose its free trade privileges with the EU starting in 2016. Yet suddenly, on December 7th 2015, the Transnistrian authorities made a surprise move to its trade preferences, which was presented as a victory by Transnistrian diplomats and a concession from the EU side. Although it was untrue, Tiraspol claimed that the agreement was a result of bilateral talks with the EU in order to emphasise its strong position. According to official statements by Tiraspol, the agreement it signed with Brussels was “separate from the DCFTA” with Moldova. Neither the EU nor Moldova commented on these claims.


On December 23rd 2015 the EU-Moldova Association Council made it official that as of January 1st 2016, Moldova (together with Transnistria) would be included in the regulations by the DCFTA. The statements from Brussels and the Moldovan government after that were limited but they proved that Transnistria’s declarations were untrue. According to the documents, as well as information from reliable sources, in order to get permission from the EU-Moldova Association Council, Transnistria agreed to lift (within two years) trade barriers for EU products, respect certain regulations of the World Trade Organisation concerning discrimination of competition, customs, indexation, transparency of entrepreneurship and tax reforms like the introduction of VAT, for example. Transnistrian exporters will have to obtain certificates of origin for their products. The state of affairs in Transnistria will be regularly monitored by the EU. In case Tiraspol does not follow the DCFTA assumptions, Chișinău and Brussels have the right to suspend the agreement for the quasi-state.


The reasons for change


In spite of long-lasting opposition, Transnistria finally agreed to join, although gradually, the free trade zone with the EU. There is no doubt that Transnistria had to obtain Moscow’s acceptance to take such a step. There are at least three reasons we can say this. First, the economic situation in Transnistria dramatically worsened which was particularly visible in 2015. It was a result of Shevchuk’s poor economic policy as well as the worsening economic situation in the region linked with the conflict in Ukraine. Significantly weaker currencies of Transnistria’s key economic partners – Moldova, Russia and Ukraine – also had an effect on its economy.


Second, Shevchuk’s approval rating dramatically decreased. On November 29th 2015, the Obnovleniye party (the political arm of “Sheriff” and in opposition to the president) gained more than 70 per cent of mandates in the quasi-state’s parliamentary elections. Shevchuk’s chances to win in upcoming presidential election scheduled for December 2016 seem very low. He must be aware that by not accepting the DCFTA, it will make his chances even smaller. Third, a weaker economic situation in Russia will mean that financial support from the Kremlin will also decrease. If Transnistria does not join the DCFTA, Moscow would have to compensate for the losses, which would be difficult in the current situation.


Whose concessions?


Yevgeny Shevchuk now finds himself in a very uncomfortable situation. Since the beginning of his presidency, he was pursuing a narrative of rapprochement between Transnistria and the Eurasian Economic Union, or even membership in the organisation. On numerous occasions, Shevchuk emphasised that there is no chance Transnistria will join the Association Agreement between Moldova and the EU in any form, including the DCFTA. That is why in doing the contrary, he has started to minimise any possible PR losses by pretending it was a “separate agreement” between him and the EU.


Chișinău and Brussels has kept relatively quiet in this regard. According to some analysts, all sides of the agreement prefer to avoid a situation in which the DCFTA would become a geopolitical issue instead focusing on the technical aspects. However, it seems more likely that Moldova and the EU do not want this decision as seen as a concession towards Transnistria and Russia. It should be remembered that Transnistria had three years to start negotiations and the necessary reforms which could help in the implementation of the DCFTA. Acting consequently, the EU should have removed any trade preferences for Transnistria on January 1st 2016. Instead, it allowed Transnistria to join the DCFTA before any legal changes have been implemented. The EU’s decision was most likely driven by a fear of potential reaction from Moscow. Tiraspol could have presented the situation as an “economic blockade” by Moldova and Ukraine. For Russia, it would be convenient to argue that the EU policy, as well as policies of Moldova and Ukraine, would lead to a humanitarian crisis in the region, allowing Russia to demand access to Transnistria via Ukraine in order to provide aid. It could also become an argument to build an airport in Tiraspol.


Although Transnistria formally obliged itself to implement the changes in the trade regulations, neither the EU nor Moldova have instruments available to force the quasi-state to the reforms. Of course, there is always a possibility to suspend the DCFTA in Transnistria, but again there is a potential risk linked with Russia’s reaction. It is then possible that Tiraspol will completely ignore its obligations under the agreement.


One last reason why the Kremlin decided not to block the agreement may be that it is interested in pursuing the status-quo, in which Transnistrian companies have access to the European market without the need for any concessions and without the need to integrate with Moldova and the EU.


Kamil Całus is an analyst with the Warsaw-based Centre for Eastern Studies.