Andrey Devyatkov: Still between Scylla and Charybdis: socio-economic agenda of the new Transnistrian government

December, 17 at the suggestion of newly elected Transnistrian president the extraordinary session of the Supreme Council has appointed heads of the government, Transnistrian Republican Bank as well as a new Prosecutor. These appointments did not bring any surprises. Alexandr Martynov, the head of Committee on Economy of the Supreme Council became new prime-minister. The Transnistrian Republican Bank is now trusted to Vladislav Tidva, also a deputy of the parliament and at the same time representative of Agroprombank. This bank is closely connected with group of companies “Sheriff”. Prosecution Office turned out to be under command of Anatoly Gurezky, who actually was in this office from 2006 to 2011. The last appointment was particularly telling and symbolized close relationship between the party Obnovlenie and the first president Igor Smirnov. Smirnov has been taking part in the parliamentary sessions and this time he welcomed the appointment of Gurezky with a warm speech.

There are no doubts that newly designated persons possess useful professional skills. At the same time they all belong to one group of interests. A possible alternative would be the appointment of neutral technocrats who could play a role of crisis managers. It means that now not only the whole power but also all the responsibility is in hands of party Obnovlenie, financial and industrial group Sheriff and personally Vadim Krasnoselsky.

The economy of the break-away republic is pretty much ruined. The GDP fell down in 2015 by more than 20 %. In the first half of 2015 30 % of pensions and salaries in the public sector were allegedly frozen in the budget and paid to the people with a big delay. This year was marked by a severe crisis at currency market. The negative tendencies in key macroeconomic indicators seem to persist further this year. When Evgeny Shevchuk was in power, these stories were made to topics of political contestation between the president and the parliament.

Certainly some decisions of Shevchuk’s government really damaged the economy. We can follow it drawing on the example of Transnistrian industrial giants – Kuchurgan power plant and Moldovan metallurgic plant (MMZ). These factories play a key role as sources of foreign currency for Transnistria as an export-oriented economy. While pursuing pure fiscal aims, the government practically doubled internal gas prices in 2013. For example, as data published by the government itself shows, the gas price for Kuchurgan station grew from 144 to 258 dollars per 1 000 cubic meter. This measure interrupted the functioning of both companies; their activity came to a standstill. Consequently, the industrial output in electricity, iron and steel industry fell in 2013 by 26 % and 51 % respectively. Particularly damaging it was for the metallurgic factory owned by the Russian company Metalloinvest because Kuchurgan demonstrated positive dynamic after a substantial slump in production in 2009-2010 caused by world economic crisis. Under these circumstances the government was enforced to return the previous gas price for Kuchurgan and diminish it substantially for MMZ (up to 42 dollar). It helped to restore indicators as they were before the decision on gas prices was taken.

Since 2014 many other negative factors appeared but this time they were not produced by the decisions of the regional government. Due to political crisis in Ukraine it became much more difficult for MMZ to get scrap iron from this country. There has always been a deficit of scrap iron but MMZ is dramatically dependent on this imported raw material. After Maidan the Ukrainian mass-media began to publish negative articles about Transnistria which was portrayed as a grey zone importing iron scrap from another grey zone – Donbass. Substantial commercial interests in Ukraine were threatened. In comparison with previous times Kuchurgan is not any more an object of interest for Ukrainian oligarchs, so they seem now to be interested in undermining the factory. The low gas price is not saving as well. Eventually this factor was the main reason why the Russian investor decided to get off in early 2015. Later it was announced that Talgat Baytaziev, a new director of MMZ, was trying to attract new credits and guarantee the import of iron scrap. Partially he managed to do that, but the economic indicators of the company have not improved in general. In 2015-2016 the output has been falling by 20 % each year. After a political scandal initiated by the Supreme Council broke out, Baytaziev stepped down.

Some negative factors influence the business of Kuchurgan power plant as well. Transnistria is dependent on Moldova as a key importer. Due to the fact that the Moldovan government was determined to decrease electricity tariffs which were key driving force behind the protests at the end of 2015 it pushed Tiraspol to diminish the price by 28 % in February 2016. Some months later the break-away republic began to suffer from currency crisis. If to compare official statistics of January-September 2016 with the same period of the previous year the revenues from exporting electricity fell by 30 million dollar (from 170 to 140). This is not the only one problem: in April 2017 the Moldovan government is going to organize a new open call for proposals. The Transnistrian supplier can be replaced by a Ukrainian competitor.

In the context of the situation with Kuchurgan power plant the Transnistrian budget lost something also indirectly, due to decreasing income at “special gas account”, where all the revenues from reselling Russian gas on internal market are gathered by the government. The reason was that in face of falling external prices the authorities were enforced to diminish the gas price for Kuchurgan from 130 to 73 dollar per 1000 cubic meter since April this year. It should be a substantial loss for the extrabudgetary funds accumulated at “special gas account”. Not to forget is that these funds have a very important role for financing the Transnistrian budget deficit which amounted to about 140 million dollar in 2015 (the whole budgetary spending was about 440 million). This deficit could be only partially covered by commercial credits and loans.

Therefore, the new Transnistrian government will face a plethora of structural challenges. Actually the authorities in Tiraspol have permanently to find themselves between Scylla and Charybdis: Transnistrian economy should not suffer from fiscal reasoning of the authorities and at the same time social spending should be further kept at a very high level. At the last session of the Supreme Council the new head of the Transnistrian Republican Bank announced a series of measures which correspond with what the parliamentary majority envisaged before: reduction of gas prices; reduction of tax burden on the economy (it now amounts to about 34 % of GDP what is much higher than in CIS countries); abolishment of intermediary companies selling the production of state-owned factories abroad; holding a stable course of the Transnistrian currency. All these measures are able to contribute to economic growth and fiscal stability but they may be belated at the end (gas prices are already reduced to minimum) or cost some money. In the second case the holding of the course of Transnistrian currency should be mentioned. To do that Tiraspol would like to request assistance in Moscow, but the success is far from being guaranteed here.

There is one additional risk substantially threatening the fiscal stability in Transnistria. According to a special agreement with Moldova and the EU Tiraspol remained in free trade regime with the EU after 2015 but since then Transnistria is obliged to reduce import tariffs within two years. One year has passed but the authorities in Tiraspol do not seem to have done much in this direction. Consulting agency Berlin Economics GmbH counted that the losses of the Transnistrian budget could amount to 12,4 million dollar annually (1,3 % of GDP) due to the implementation of this decision.

Nevertheless, theoretically Transnistria does have some chances for positive development. Such branches as metal production or machine manufacturing will eventually degenerate further; electricity market will also remain unstable. But Transnistria has a quite successful textile industry which is exporting to EU and CIS markets. Besides, the republic has a great agricultural potential but this sector needs clear market rules, organizational skills and huge investments. Probably the consolidation of all branches of government as well as experienced managers in power could help to find a way for Transnistria to develop.