This article is part of ECFR's Wider Europe Forum
Apart from the role of corruption, another cause of the crisis is politics.
Transnistria is experiencing a financial crisis which is plain for all to see. It started in March 2016 after the president announced a ban on the free trade of hard currency. As imports are nearly double exports and include food, fuel, and other essentials, these past three months have led to a significant decrease in turnover. Food prices are soaring and the shelves of supermarkets are barren. It is impossible to buy hard currency at the bank and the soaring demand for it has provoked a flourishing black market where the value of the dollar is 60-80 percent above the official rate set by the Central Bank.
Where’s all the money gone?
The Transnistrian economy is dependent on and very sensitive to changes in external markets. Firstly, most of the industrial sector relies on exports making it dependent on international buyers, and secondly, there has been a negative trade balance for several years now. The steady decline in Transnistria’s economy has generated momentum, and combined with ill-thought out decisions on the part of the government, the result has been dire. GDP fell by an astonishing 22 percent in 2015 alone.
In 2016, the situation got even worse. In March, the president banned the sale of hard currency to commercial banks, which led to difficulties in converting the local unrecognised Transnistrian rouble into almost anything else. The lack of hard currency in the country has led to a scarcity of food and household goods because local manufacturers are not able to cover the cost of importing. Transnistria’s main import partner - Ukraine - is not ready to deliver goods on credit, explaining the empty shelves in the supermarkets.
According to the Customs Committee and the Ministry of Economic Development, Transnistria exported $212 million worth of goods in the first five months of 2016. Of this amount, exports by state-controlled enterprises came to $133 million, making up 63 percent of the total. All of these companies use the state bank "Sberbank", while "Sheriff" - a private company and a major importer of food and fuel to the region – banks at Agroprombank. From this we can see that it is highly likely that Sberbank has a stockpile of hard currency that allows it to continue trading, while AgropromBank has only roubles. Why is the Central Bank failing to carry out its regulatory function and get the country back on its feet again?
The parliament and journalists investigate
In 2015, the Moldovan media reported that it would need to increase electricity tariffs because the privately owned "Gas Natural Fenosa" and the state-owned Energocom would now buy electricity through intermediary Transnistrian companies Energocapital and Moldovan Energocom, instead of direct from the source. Energocapital is linked to Transnistrian President Yevgeny Shevchuk and is the second largest taxpaying company in the country, whilst apparently employing just two people. Energocapital is thought to have been specially created to purchase Russian gas, transfer it to the company Moldovan GRES and subsequently resell the electricity to Moldova in order to make a profit in hard currency, which it can then deposit in offshore bank accounts.
According to the Black Sea website, one of owners of Energocapital is an offshore company that is involved in the high-profile bank theft in Moldova. Parliament insisted on carrying out am inspection of Energocapital and it was found that in 2015 alone $19 million was paid out in dividends from its offshore accounts. Energocapital can earn up to $160 million a year in brokers’ fees and former Moldova Prime Minister Ion Sturza accused the governments in Tiraspol and Chisinau of being Energocapital’s the main beneficiaries. Ex-Transnistrian Prime Minister Vlad Filat is thought to also have a hand in ensuring the success of this company on the Moldovan electricity market.
The political context
Apart from the role of corruption, another cause of the crisis is politics. 2016 is the year of presidential elections in Transnistria, and the candidates are the current President Yevgeny Shevchuk, who is associated with the sinking living standards in the country, and a group of members of parliament that are supported by a private company called Sheriff, which owns most of the big companies in Transnistria, has a monopoly on landline and mobile phone provision, and is the only internet provider locally. It runs a supermarket chain of the same name, wholesale warehouses, and its president - Viktor Gushan - before founding the company in 1993, worked in the Soviet-era Ministry of the Interior.
The crisis in the banking sector is also partly linked to this upcoming political struggle, as President Shevchuk banned Sberbank from selling excess hard currency to the Central Bank This was done so that the commercial Agroprombank – which is linked to a company that supports Shevchuk’s political opponents – could not acquire hard currency to spend on the import of goods and services. This rendered the interbank foreign exchange trades ineffective and is a direct violation of the law, which forbids the banks from storing excess foreign currency.
Local economists argue that the balance of currency inflows and outflows is normal and there is no need for an immediate devaluation of the rouble. They claim that the currency deficit has been created artificially by those who are preventing the Central Bank from balancing supply and demand.
The devaluation of the Transnistrian rouble to promote economic recovery – as advocated by the head of the Central Bank - will provoke inflation and affect the local standard of living. There are no plans to introduce compensatory measures for particularly vulnerable groups. The government even introduced an indirect 10 percent tax on the sale of hard currency by the Central Bank, but it had no effect. After ten days this law, which had been called devaluation by stealth, was repealed.
Recently, AgropromBank shareholders gave the Central Bank an interest-free loan of $15 million for five months to meet the demand for hard currency from one specific buyer - Sheriff. Hard currency is need for the wholesale purchase of essential supplies and fuel. Most petrol stations were empty and when there was fuel, it was impossible to buy it at a normal price.
This $15 million loan is a temporary measure, a kind of anesthesia, but not a panacea for the crisis in the consumer market and in the economy in general. However, there are some good signs.
At present, the mandatory sale of hard currency to the Central Bank has begun to function. There is still a possibility that the Central Bank will do everything it can to ensure the inflow of hard currency and regulate the balance of supply and demand in currency trading. This should at least help to soften the blow to the economy from the next round of turbulence.
The European Council on Foreign Relations does not take collective positions. This commentary, like all publications of the European Council on Foreign Relations, represents only the views of its authors.