Information Note regarding Existing Constraints in Economic Contacts Maintained by Pridnestrovie

Information Note  regarding Existing Constraints in Economic Contacts Maintained by Pridnestrovie

Pridnestrovian economy during almost the entire period of the Pridnestrovian statehood has been under constant external pressure and artificially created constraints.

Currently, particular difficulties are connected with the economic blockade introduced jointly by the Republic of Moldova and Ukraine on March 3, 2006 when all export operations on the basis of customs clearance of Pridnestrovie were banned by the neighboring countries.

In such circumstances, it is not the question of development but survival of the Pridnestrovian economy. Only because of direct payments to the budget and extra-budgetary funds of the Republic of Moldova, as well as additional expenses and losses connected with the violation of cargo movement logistics, the Pridnestrovian enterprises have lost more than 250 million U.S. dollars since 2006. Correspondingly, the PMR's budget was underpaid around 80 million U.S. dollars.

At the same time, indirect losses and lost profit for Pridnestrovian economic entities can hardly be calculated mathematically and amount to hundreds of millions of dollars annually. Under the blockade circumstances, economic agents, being in fact subject to double taxation, have no opportunity to invest financial resources into producer's durable equipment, in the modernization of technological process or increasing the number of employees. Unstable external environment and problems in the banking sector (blocking correspondent accounts), despite the very liberal legislation in the field of investment activity, impede the attraction of large international capital to the Republic in the form of long-term investments.

The present situation leads to the stable out-migration of the population abroad, first of all, to the Russian Federation. According to the statistics agencies, more than 10% of the population or about 30% of the working population has left the Republic since 2006. There are significant imbalances in the population structure when there are two pensioners per one person of working age and about 3.7 pensioners and children per one person employed in the real sector of economy.

Enterprises focused on domestic consumption are actively developing. However, the number of employees of export-oriented economic entities is constantly decreasing. Between 1998 and 2013, the number of employees of top ten enterprises reduced almost by half – from 23 399 to 12 377 people.

1. Historical Background

Throughout almost the whole period of its existence, the Pridnestrovian Moldavian Republic has been forced to overcome artificially created barriers in its foreign trade, the freedom of which is enshrined by a number of documents of the negotiation process. At times, these artificial barriers created by the neighboring countries evolved into full blockades leading to the formation of the mobilization economy in Pridnestrovie (when unacceptably large amounts of resources were allocated to address the threats rather than to foster development), as well as to the serious deformation of geography of the PMR's foreign trade. This resulted in significant drop in production volumes, decline in export, closure of a number of enterprises, job cuts, and decline in revenues.

1996-2001 was the period of relatively normal interaction between customs authorities of Pridnestrovie and Moldova under the Protocol Decision on addressing emerging problems in activity of customs services of Moldova and Pridnestrovie of February 7, 1996.

In that period, customs clearance was carried out according to the following provisions of the Protocol Decision, “From March 10, 1996 customs clearance of cargoes moving from Pridnestrovie shall be carried out by customs authorities of the Pridnestrovian region by using new stamps and seals reading “The Republic of Moldova. Pridnestrovie. Customs of Tiraspol” in Moldovan and Russian languages, with the right for customs registration of all Pridnestrovian cargoes”. From formal and legal viewpoint, this agreement is still a document of the negotiation process, which has not been denounced by either party.

On September 1, 2001, the Republic of Moldova, unilaterally and in violation of its commitments under the negotiation process, introduced new customs provisions without submitting new samples of customs documents and stamps to Pridnestrovie. On March 25, 2003, Ukraine and Moldova agreed the Protocol between State Customs Service of Ukraine and Customs Department of the Republic of Moldova on mutual recognition of consignment, commercial and customs documents and customs provisions; however, until 2006 Ukraine virtually ignored the given document.

It was not until March 3, 2006 that Ukraine under pressure of the USA and the European Union and with the personal involvement of V. Yushchenko sanctioned blockade against Pridnestrovie.

Because of the blockade and the resulting shutdown of enterprises in 2006, the PMR's losses totaled more than 450 mln. dollars, with the loss of economic entities amounting to 380 mln. dollars, which led to the underpayment of taxes to the PMR's consolidated budget in the amount of 76 mln. dollars. It was only due to the all-round assistance rendered by the Russian Federation to Pridnestrovie that the full-scale humanitarian catastrophe was averted.  

In subsequent years, the form of pressure on Pridnestrovie was somewhat changed, since Moldova, fearing of image and political losses due to the humanitarian catastrophe in Pridnestrovie, decided to replace the total blockade by introducing restrictive measures and bans of local character, severe and burdensome enough to prevent economic growth in Pridnestrovie but insufficient for complete strangulation of the PMR's economy.

Thus, since 2003 Pridnestrovian enterprises, to be able to carry out foreign trade, were forced to register with the Registration Chamber of Moldova, which caused the problem of double customs clearance.

In 2004-2006, Moldova efficiently destroyed the sphere of automobile cargo transportations of Pridnestrovie by refusing to issue TIR-Carnets and ECMT licenses, which made Pridnestrovian enterprises resort to the services of less reliable and more expensive Moldovan operators.

The Republic of Moldova is constantly implementing measures of pressure against PMR's banking system, sending appeals on behalf of the National Bank of Moldova to different foreign banks, totally unreasonably accusing Pridnestrovie of terrorism financing and money laundering. The result of these actions is actual isolation of the banking sector of Pridnestrovie from the international financial system.

During the first years of republic's existence its banks were successfully establishing correspondent relations with foreign banks. Today, however, such opportunity exists only in respect of several banks of the Russian Federation. This seriously complicates monetary settlements of Pridnestrovian enterprises with their foreign partners, causing distrust to the Pridnestrovian bank in the West, thus implicitly reducing the volumes of foreign investments.

On November 29, 2013, during the Vilnius summit of the Eastern Partnership, Moldova initialed Agreement on Association with the European Union, which includes, inter alia, provisions on establishing a Deep and Comprehensive Free Trade Area (DCFTA). Since Association Agreement disregards interests of Pridnestrovie, experts predict a significant deterioration of economic situation in the Republic after its signing. In particular, European, Moldovan, and Ukrainian markets (in case similar Agreement is signed between the EU and Ukraine) may be completely closed for Pridnestrovian exports.

In 2014, the evolving internal political crisis in Ukraine caused serious problems connected with crossing of the Ukraine-Pridnestrovian border by Pridnestrovian citizens, and difficulties with the transit of goods through Ukraine's territory.

2. Costs of Pridnestrovian Economic Agents in Connection with Moldova's Blockade Measures

As a result of current circumstances, when export of Pridnestrovian enterprises is possible only by means of clearance at customs authorities of Moldova, economic agents of Pridnestrovie are bearing the burden of the following material and time costs:

а) double customs clearance:

Pridnestrovian enterprises are paying customs fees in favour of Moldova in the amount of 0.4% and 0.1% of the customs cost of goods for import and export respectively.

Along with this, exporters are suffering losses connected with service fees paid during customs clearance of goods in favor of Moldova's broker companies, as well as fee for storage of goods at a customs terminal, etc.

Since 2006, the overall costs of Pridnestrovian companies for customs clearance of imported and exported goods paid in the Republic of Moldova amounted to about 14 mln. dollars, including:

- for the JSC “MMZ”: 3547,4 U.S. dollars (including customs clearance – 2821.2 U.S. dollars, broker services – 726,2 U.S. dollars);

- for the CJSC “Tirotex”: 3037,0 U.S. dollars (including customs clearance – 1708.9 U.S. dollars, broker services – 1328,1 U.S. dollars);

- for the CJSC “Moldavkabel”: 473,3 U.S. dollars (including customs clearance – 401.2 U.S. dollars, broker services – 72.1 U.S. dollars);

- for the LLC “Softshuz”: 472,9 U.S. dollars;

- for the CJSC “Tighina Footwear Factory”: 150,7 U.S. dollars.

Moreover, due to the fact that in 2006 Moldova started to collect fines at a VAT rate on products imported to Pridnestrovie bypassing Moldovan customs posts (via Ukraine), Pridnestrovian enterprises were faced with new challenges. Thus, in 2012 Moldova imposed a 1 mln. lei fine (100,000 dollars) on Intercentre Lux Company and a 400 thousand lei fine (more than 30 thousand dollars) – on the CJSC “Moldavkabel”.

b) environmental fees:

Since 2008, when importing certain goods used in chemical industry (polymers, for example), Moldova has been levying the environmental fee from Pridnestrovian economic agents at the rate ranging from 0.5% to 3% of the cost of imported raw material. The fee is paid to Moldova's National Environmental Fund and, according to Moldova's legislation, should be used solely to compensate the costs associated with the collection and sorting of accumulated waste, as well as to improve air quality (this means that payments should reach enterprises at their location). However, no refunds to Pridnestrovie for environmental purposes were made.

As far back as in 2009, the Moldovan side within the negotiation process committed itself to develop a draft law exempting Pridnestrovian enterprises from environmental fee paid to Moldova and to grant an appropriate delay for a preparatory period. However, over the past 5 years this draft law has not been adopted by the Parliament of Moldova, and the delay for Pridnestrovian economic agents has not been provided.   

Since 2008, the total burden caused by payments of the environmental fee made up over 700 thousand U.S.  dollars, including:

- for the CJSC “Tirotex”: 447 thousand U.S. dollars;

- for the CJSC “Moldavkabel”: 62,3 thousand U.S. dollars;

- for the LLC “Softshuz”: 109,6 thousand U.S. dollars.

c) problems with certification:

Pridnestrovian enterprises bear considerable losses when they are issued phytosanitary and veterinary certificates in public authorities of the Republic of Moldova needed for export, because Pridnestrovian certificates are not recognized by Moldova.

There are also significant difficulties in obtaining certificates of the country of origin issued by the Republic of Moldova, as their issuance is conditional on the mandatory declaration of all imported raw materials in Moldovan customs authorities. Logistically, the optimal way to deliver raw materials for Pridnestrovian enterprises is importing them from Ukraine (i.e. through Odessa and Illichevsk ports). As a result, enterprises are forced to make a wide detour importing goods into the territory of the Republic of Moldova for double customs clearance, which entails extra costs.

New challenges are faced by enterprises when receiving EUR.1 preferential certificates of origin necessary to export goods to the EU market. Thus, to obtain these documents economic agents need to pass customs audit of the company to check compliance with the EU legislation and to submit to the customs authorities of Moldova with calculations of the production prime cost and of all raw materials used for each batch of products.    

Every year PMR's enterprises bear expenses connected with obtaining preferential certificates in the amount of more than 21 thousand USD. Over 8 years, the overall sum made up more than 165 thousand USD.

d) transport losses:

Moldova continues to put pressure on the PMR by refusing to issue permits for international passenger and cargo transportations by road.

Such destructive actions on the part of Moldova led to the fact that from 2004 onwards all cargo carriers of the PMR were forced either to cease their activity or to move completely to the fiscal field of Moldova with a full tax regime. As a result, international road freight transportations were virtually eliminated. 

At the same time, until 2004 revenues of freight haulers amounted to about 17 mln. U.S. dollars annually. As a result, even if the possibility of developing this market segment is not considered, by 2014 Pridnestrovian enterprises have already lost more than 135 mln. U.S. dollars, and Pridnestrovian budget didn't get 27,5 mln. U.S. dollars in taxes.

Since 2006, because of the disrupted normal logistics of cargo movement, additional expenses of MMZ amounted to 44, 317 U.S. dollars (more than 80% of these losses fall between 2006 and 2009), losses of Tirotex made up about 300 thousand U.S. dollars, etc.

Losses of enterprises due to the disrupted logistics of cargo movement by road make up about 1.35 mln. U.S. dollars annually. Over 8 years, total costs are estimated at 11 mln. U.S. dollars.

Apart from that, additional expenditures because of the transportation by the longer route through the Republic of Moldova (Mateuti station) made up about 73.8 mln. U.S. dollars over 2006-2011, for Rybnitsa station only. As a result, the State Unitary Enterprise “Pridnestrovian Railway” lost revenues in the amount of approximately 10.8 mln. U.S. dollars.

The Protocol Decision on the Resumption of the Freight Railway Communication through the Territory of Pridnestrovie signed on 30th of March 2012 helped facilitate transportation of goods by rail. However, passenger rail services remain partially paralyzed, with only one Kishinev-Moscow train having fixed routes. Pridnestrovie's initiative to expand the route network, including the launch of the Kishinev-St. Petersburg and Kishinev-Rostov routes is impeded by the Moldovan side.

Despite formalized Pridnestrovian initiatives, air traffic using Tiraspol aerodrome and trans-border navigation on the Dniester River are not carried out.

e) problems with removal of black and non-ferrous base metals waste

The Pridnestrovian enterprises are unable to sell waste products of black and non-ferrous base metals in view of the fact that the RM does not issue a relevant permit for export. The enterprises are forced to export via Metalferos, Moldovan monopolist, the only company in the RM which has a license for buying-up and selling black and non-ferrous base metals waste scrap. Taking advantage of its position on the market, the Metalferos considerably lowers purchase prices, making it economically unprofitable for Pridnestrovian enterprises to sell the scrap metal to it.

As a result, Moldova Steel Works JSC (MMZ), a non-profit organization Elektromash CJSC, and Moldavcabel CJSC have accumulated substantial amounts of scrap metal of more than $500,000 which they cannot sell at a fair market value and invest their profit into fixed assets.

f) setting indicative prices by Moldova for Pridnestrovian goods when making the VAT and customs payments

In 2012 there were periodically situations when customs authorities of Moldova refused to admit Pridnestrovian goods to Moldova on the obviously invented pretexts.

The example of Bendersky CJSC is quite illustrative. Deliveries of sausage products to Moldova by that enterprise amounted to 508 tons in 2010-2011. In January 2012, despite the fact that the enterprise had certificates of audit issued by the Chamber of Commerce and Industry of the RM, and also veterinary and sanitary control certificates, the Causeni customs passed a resolution to pay customs duty in addition to VAT.

That done, the enterprise started importing its production through Vadul lui Vodă customs post and for some time it did not have any trouble. Then, however, the Customs Service of Moldova unexpectedly demanded to pay VAT of the production cost that was 2.5 times higher than the invoice cost. After that, Moldova's Customs Service carried out inspection of the plant to check objectivity of price formation, but it did not provide the report on the inspection. As a result of actions by the Moldovan side, Benderski Meat Factory CJSC lost the opportunity to make shipment of goods to Moldova losing buyers and frustrating plans.

Besides, over the past years the RM's tax authorities started practicing compulsory shift of the Pridnestrovian enterprises from the border territorial tax services (Causeni) into the tax services of Kishinev, considerably aggravating the situation for the Pridnestrovian enterprises operating in mobile conditions of raw material deliveries from abroad.

g) requirement to manage paperwork in compliance with Moldovan standards

Since 2012 the Republic of Moldova started creating new serious problems for the Pridnestrovian enterprises such as a requirement to provide accounting statements in the Romanian language drawn up according to the standards adopted by Moldova (it should be noted that paperwork management and accounting system differ considerably in the PMR and in Moldova).

So, the Pridnestrovian Intershoes enterprise was required to submit to the Tax Service in Causeni the following documents in the Romanian language and in accordance with Moldova's standards: accounting balance-sheet, accounting policy, register on the purchase of commodities, tax invoices, and agreements with economic agents.

Similar requirements were regularly imposed on the Intercenter-Lux firm – as a result, it was forced to employ additional staff dealing solely with the paperwork and financial statements according to Moldovan standards, suffering losses because of it.

h) requirement to pay excise duty when importing excise goods

Since January 1, 2014 the Law N. 324 of December 23, 2013 has come into force according to which some amendments were made to a number of legislative acts, including the Law N. 1054-XIV on the Enactment of Part IV of the Tax Code of June, 16 2000. Among other things, new provisions of the legislation established that since 2014 import transactions by business entities of Pridnestrovie shall be subjected to excise duty.

Thus, the Republic of Moldova, on a unilateral basis, tried to remove Pridnestrovian import from the special mechanism, established by it independently in 2006, according to which Pridnestrovian enterprises, to be able to carry out foreign economic activities, should be registered in the Republic of Moldova without paying taxes or duties, except for payments for customs procedures.

If the decision on the introduction of excise had been implemented by the Moldovan side, the Pridnestrovian enterprises would have suffered losses in the amount of approximately $ 2.5 million annually, and the price for some types of raw materials would have been almost 8 times higher.

During the meeting of expert (working) groups of the parties on economic issues held on February 19, 2014 it was agreed that the Moldovan side would initiate the cancellation of import excise on the goods imported by the business entities of Pridnestrovie within a month. Unfortunately, the relevant draft bill was submitted to the RM's Parliament with delay, and the law was passed only on April 11, 2014, following one unsuccessful attempt.

Unilateral actions made by the Republic of Moldova once again demonstrated the Moldovan side's orientation towards taking unjustified measures deteriorating investment climate in Pridnestrovie. Despite the fact that Moldova's Parliament after all cancelled the excise in view of the negative reaction of all participants in the 5+2 negotiations, the information about intended collection of excise duties made foreign partners of some Pridnestrovian enterprises reconsider a number of contracts which had already been scheduled.

Moreover, the above situation once again proved imperfect nature of the existing scheme of foreign economic contacts of Pridnestrovie depending on arbitrariness of the Moldovan authorities.

i) the new threats:

The whole range of existing problems is supplemented in 2014 by more and more difficulties associated mainly with the situation in the neighboring Ukraine.

Many contractors, in the Russian Federation including, demand that Pridnestrovian enterprises should deliver cargo without transiting them through Ukraine. Due to the insecurity of the transit, many companies, especially Moldovan ones, refuse to transport Pridnestrovian cargo through Ukraine's territory.

Along with this, there is a slump in demand for Pridnestrovian products in Ukraine itself due to a serious decline in solvency of Ukrainian counterparties. An absolute majority of contracts for supply of Pridnestrovian goods to Ukraine is “frozen”. At the same time, Pridnestrovian firms are already having problems with the return of money (or of prepayments) for the products which were purchased but not delivered from Ukraine.

Economic situation in Pridnestrovie can be extremely complicated after the signing of the DCFTA Agreement between the European Union and the Republic of Moldova this June (or even earlier). This Agreement in no way reflects interests of Pridnestrovian economic agents and ignores the fact that over 20 years two entirely different economic systems were established in Moldova and Pridnestrovie.