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Implications of Russian foreign credits: The ongoing Moldovan case

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A crisis in progress…

While 1004 medical officers were tested positive out of 3980 patients as of May 2 (one of the highest rates worldwide of infected medical personnel), the reduced income sources received by the government have contributed to a budget deficit of almost 25 % for the year 2020 (approx. 16 billion Moldovan Lei or € 800 million). To cover this significant gap, amid falling income flows, the government has requested the help of its foreign partners. With the European UnionNATO and particular member states (e.g. HungaryRomania) providing substantial medical and financial support, additionally, the country was able to secure future social payments provision through a US$ 235 million loan from the International Monetary Fund (IMF).

Nonetheless, to close the existent deficit, the government, informally led by President Igor Dodon, concluded a US$ 200 million credit from the Russian Federation, which has divided the Moldovan society. Although the package has been announced for the first time in November 2019, as a US$ 500 million package, the amount has significantly decreased to its current form. The 2 % interest rate credit received the approval of the Moldovan Parliament, only to be suspended by a decision of the Constitutional Court (CC) on April 23, with a final ruling to be given on May 7. After this decision, the President unleashed an attack on the institution, claiming that it may have come under the control of political forces. This follows after former CC President, Vladimir Țurcan, was demoted due to a vote of no confidence following the revelation that the President broke the principle of separation of powers after Dodon confirmed himself that he contacted Țurcan to receive information on the Court’s internal voting.

The “cursed” apple

To understand the reasons behind the Court’s negative opinion on the subject, we need to consider the legal provisions attached to the agreement and the current political context.

Concerning the credit agreement itself, the political opposition has mentioned that the provisions under sub-point 3.3 and 7.2 represent a significant risk to the Moldovan government interests. The two provisions imply that the Moldovan government would need to utilise the money in joint common projects with Russian firms, while also guaranteeing to pay private Moldovan companies loans to Russian banks. This would tie the State interests to significant Russian influence, although the majority of the population desires future integration within the European Union, while the government considers the implementation of the EU-MD Association Agreement as a top priority (at least declaratively). Moreover, significant criticism was provided to the signature process, with the PM Ion Chicu avoiding to name the group of negotiators.

The second consideration to this agreement is connected to the upcoming presidential elections. Considering that, the agreement provisions maintain the money will be dedicated to infrastructure works (e.g. national roads), Dodon would receive a popularity boost amid local claims that he has done very little since his 2016 inauguration. Considering that the economic effects of the COVID-19 pandemic will further aggravate towards the end of the year, with a second wave of the disease still probable during Fall-Winter, the President requires a “victory” to reduce the downside of the economic crisis. Notwithstanding the many economic shocks brought by the pandemic and the necessity of providing support for local enterprises, the decision to transpose these funds into “cosmetic” road repairs is evidence of consideration of political interests over the ongoing threats.

Therefore, it is of no surprise that on April 24, following the CC decision, Dodon was threatening the opposition that in case the agreement is not passed, the state will not be able to pay pensions and other social benefits starting May 1. Moreover, following the Court’s vote, law enforcement officials have been watching the four judges that allegedly voted against the agreement, with the new CC President Domnica Manole issuing a request to the General Prosecutor to investigate the situation.

The Implications for the Moldova – Russian relation

While considering the Moldovan case, similarities can be observed with other foreign credit instruments deployed by the Russian Federation in its foreign policy exercise. As acknowledged by expert D. Cenușa, the Moldovan case is similar to the 2019 Serbian credit agreement, involving similar procedures to the consolidation of debts or dispute settlement. However, the expert acknowledges that the consolidation of private loans to Russian banks is an addition to the Serbian example. Moreover, in the Serbian case, the financial credit assured that 75% of the value of goods and services would be carried out by Russian entities.

From these considerations, a fog curtain would remain over the gas debt of the breakaway unrecognized Transnistrian territory, which is estimated at US$ 6.2 billion (half the Moldovan GDP). Although the Moldovan government does not recognize it as an integral part of its debt to Russian gas-supplier “Gazprom”, the political opposition believes that the debt of the private Moldovan gas distributor could transform into a state obligation based on this credit agreement.

Instead of conclusions…

With the Constitutional Court expected to issue the final decision at the beginning of May, the credit saga could lead to significant cracks in the current government coalition. The junior coalition party leaders have issued several remarks against Dodon’s pension comments. Without their support, Dodon and the Socialists’ Party would lose their parliamentary majority and could face further opposition with regard to their informal leader’s presidential campaign. Acknowledging this risk to his campaign, Dodon changed his tone, calling upon the opposition for discussion “to find a solution so that the population would not suffer”.

Considering the Russian side, so far, the Russian Parliament has not approved the credit agreement – a requirement to its approval. This observation leads the reader to question if the financial resources are available for disbursement at all, pending the ongoing hardships caused by low oil prices (a key contributor together with the gas sector to 40 % of Russian federal budget revenues).

Author

The author of this article is Emil Burinschi, B.A. student in International Relations at the Corvinus University of Budapest. Born in the Republic of Moldova, Emil is a Middle Manager within the International Diplomatic Student Association (IDSA.) He is also part of the organizing team at Munapest 2020.

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