ECONOMY MINISTER DESCRIBES PROGESS AND

C O N F I D E N T I A L SECTION 01 OF 03 CHISINAU 001017

SIPDIS

STATE FOR EUR/UMB

E.O. 12958: DECL: 10/08/2018
TAGS: ECON EFIN EPET RS MD
SUBJECT: ECONOMY MINISTER DESCRIBES PROGESS AND
NEED FOR EU SUPPORT

Classified By: Charge d'Affaires Kelly
Keiderling for reasons 1.4 (b) and (d)


1. (C) Summary: During Ambassador Chaudhry's
October 6 courtesy call on Deputy Prime Minister
and Minister of Economy Igor Dodon, the Minister
explained that the GOM had privatized over 90
percent of land and 80 percent of enterprises
following independence. Since then Moldova had
succeeded in attracting European investors and
was the only country in the region that enjoyed
both free trade with CIS countries and
preferential trade status with the EU. The
Minister stressed the GOMQs strong desire for a
new mandate from the EU supporting integration.
He outlined plans to develop infrastructure and
to restructure the energy sector. Dodon noted
that Moldova could not do much about its natural
gas dependence on Russia, but hoped to encourage
private investment to develop sources of energy.
He argued that pension reform was necessary but
could not be implemented before elections. He
hoped reforms would reduce the agricultural
sector from 35 percent to 15 percent of the
economy and help the services sector to grow.
End Summary.

Economic Development and Privatization in the 1990s
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2. (C) Minister Dodon outlined Moldova's
economic development since independence and
explained that Moldova had inherited a state-
managed economy that had required major
restructuring. The economy had been primarily
agricultural with a well-developed manufacturing
sector that had been tightly connected to the
military-industrial complex of the Soviet Union.
Most factories had produced parts for Soviet
military equipment. During the 1990s the GOM
had succeeded in introducing numerous reforms
that had transferred 80 percent of public assets
into private hands. At the same time, the GOM
had privatized 90 percent of the land in the
country.

Economic Reform after Privatization
--------------


3. (C) The Minister explained that after the
privatization of state assets, a boom in
consumption had begun in Moldova around 2000.
At that time the GOM had understood that it
needed to increase domestic production to meet
consumption demand and had set a goal of
attracting foreign investment. The GOM had
realized that it had to attract foreign
investors to its small consumer market. One
advantage Moldova had to offer investors now was
that it was the only country in the region that
enjoyed both free trade with CIS countries and
also preferential trade status with the EU.
Minister Dodon pointed out that Ukraine had free
trade with CIS countries but not with the EU,
while Romania could trade freely in the EU but
not with CIS countries. Moldova had been
successful in attracting European businesses, as
shown by the fact while approximately 70 percent
of MoldovaQs trade had been with Russia in the
1990s, 52 percent of its trade was now with the
EU. Further, the Minister noted that in 1997-98
Russia had been the source of 70 percent of the
foreign direct investment (FDI) into Moldova but
now more than 56 percent of FDI was from the EU.


4. (C) Minister Dodon described how the GOM had
launched Guillotine Act reforms over the past
three years to analyze all by-laws and
parliamentary laws. He stated that the GOM had
succeeded in excluding the maximum possible
number of laws that had been impediments to
domestic and foreign entrepreneurs. The GOM no
longer permitted ministries to enact business
regulations; only Parliament or the executive
branch in a few cases could introduce laws on
business.

Economic Liberalization
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5. (C) Minister Dodon explained that the GOM had
introduced three recent efforts to liberalize
the economy in 2007 and to promote investment.
First, the government had introduced zero
corporate income tax on companies in Moldova.
Only distributions to shareholders can be taxed.
Profits reinvested or held by a company are not
taxed. Secondly, the GOM had introduced a tax
amnesty on January 1, 2007 which had cancelled
the debts of all businesses with the government.
The amnesty had also forbidden the auditing or
examination of prior business activity.
Thirdly, the GOM had adopted capital
legalization which had allowed Moldovan
individuals to register previously undeclared
capital. Minister Dodon felt that these
decisions had substantially improved the
atmosphere for FDI. FDI had doubled in 2007 and
in 2008 FDI was already 70 percent ahead of last
yearQs total. The Minister expected 7 percent
growth in GDP and predicted inflation would
remain in the single digits in 2008.

Moldova Faces Challenges
--------------


6. (C) Dodon said that Moldova faced major
political and socio-economic challenges. He
underlined that the GOM continued to pursue
integration with the EU and the GOM now needed a
clear signal from the EU. The Minister stressed
that a new mandate from the EU was very
important because of the geo-political concerns
that had arisen in the region as a result of the
conflict between Russia and Georgia. The
efforts to resolve the conflict with
Transnistria had become even more important and
the GOM was thankful for the support of the USG
in seeking a solution in the 5-plus-2 format.


7. (C) Dodon added that the GOM would have to
reform its pension system. He was currently
working with the World Bank to prepare the legal
framework for this reform. The implementation
would have to be undertaken by the next
government, because no administration could
introduce painful reforms before an election.


8. (C) The Minister believed that Moldova also
needed investment in infrastructure to attract
FDI. The two major areas that needed attention
were the airport and roads. He noted that
another important step would be the
privatization of two state monopolies, Air
Moldova and Moldtelecom. Minister Dodon felt
that the government should privatize state
enterprises only when the private sector was
ready to invest. In other cases, the government
should pursue public-private partnerships.
Future GOM budgets would need to devote more
funds to infrastructure improvement projects.
The GOM needed an MCC Compact agreement to
improve roads and wangted to sign a Compact as
soon as possible. He stated that further delay
would be interpreted domestically as an effort
to avoid reaching an agreement with the current
government.


9. (C) The Minister stated that the energy
sector was another serious concern. There was
not much Moldova could do about its natural gas
dependency on Russia; however, the GOM did
control its sources for electricity and heating.
The GOM planned to encourage private investment
to help diversify sources of energy. The
government hoped to pursue public-private
partnerships in the energy sector next year.

The Future Economy in Moldova
--------------


10. (C) The Minister said that since agriculture
was the largest sector of the Moldovan economy,
at 30-35 percent, many felt that the government
should focus on this sector and develop food
processing. Minister Dodon thought that the
agricultural sector should be only 10-15 percent
of the economy. He suggested that the economy
should focus on services such as finance, IT,
and transportation logistics.

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USG Support for Reform and European Integration
-------------- --


11. (C) Ambassador Chaudhry expressed USG
support for Moldova's reforms. He noted that
the introduction of laws and regulations to
liberalize the economy and attract investment
had proceeded well and encouraged the government
to focus on implementation to attract more
investors to Moldova. The Ambassador pointed
out two recent foreign investment conflicts, Sun
Communications and PRO TV, that were of concern
because they could potentially harm the
perception of the investment climate in Moldova
and both concerned freedom of the media. The
Ambassador noted that corruption was also a
serious problem that discouraged investors.
The Ambassador expressed his desire to work with
the Minister to encourage development and said
he would like to organize an investment mission
focusing on agriculture in the near future.

Comment
--------------


12. (C) Moldova has come a long way since
independence and continues to introduce reforms
and seek closer integration into Europe. While
progress has been made in reforming legislation,
Moldova now needs to show diligence in
implementing its new laws and regulations.
Salaries remain low in civil service and
corruption continues to be a major problem. In
the agricultural sector, most farmers have small
plots and little has been done to encourage the
consolidation of farm land to create larger and
more efficient enterprises. The fact that FDI
continues to grow is positive. Russian
dominance of the energy sector will continue to
be a major challenge. It remains to be seen
what kind of private investment the GOM can
attract to the electricity sector.

KEIDERLING