BUDGET LOSSES RESULT IN PERSONAL PROFITS

UNCLAS SECTION 01 OF 02 CHISINAU 000112

SIPDIS

SENSITIVE

SIPDIS

STATE FOR EUR/UMB

E.O. 12958: N/A
TAGS: PREL PBTS ELTN PINR MD
SUBJECT: BUDGET LOSSES RESULT IN PERSONAL PROFITS


Sensitive But Unclassified. Please Protect Accordingly.


1. (SBU) Summary: One of the issues that will be on the agenda in
any comprehensive Transnistrian (TN) peace settlement will be the
resumption of railway traffic. TN authorities recently presented a
railroad initiative, which appears to be a response to President
Voronin's October 2007 proposal that Moldovan and Transnistrian
experts work together to re-establish full operation of the
railways. The TN initiative offers resumption of travel, while
seeking recognition for TN property rights over the left-bank assets
of Moldova Railways. Chisinau is willing to grant left-bank profits
to Tiraspol, but insists it will not concede ownership. Though both
sides are losing money from the current freeze in railroad traffic,
the status quo appears to generate lucrative illicit private profits
for some members of Transnistria's inner circle. End Summary.

Losses for Both Sides...
--------------


2. (SBU) Local newspapers reported that TN Supreme Soviet
(Parliament) Speaker Shevchuk presented a railway initiative to EU
Special Representative Kalman Miszei during their January 21
meeting. The railway documents were also passed to Minister for
Reintegration Vasile Sova. This initiative appears to be the TN
response to President Voronin's October 2007 confidence-building
proposal that Moldovan and Transnistrian experts work together to
re-establish full operation of the railways. Tiraspol proposed
resuming cargo transportation on the Causeni-Bendery-Cuciurgan rail
line, which would allow passage of Moldovan goods to Ukraine through
Transnistria. Tiraspol also suggested opening the Bendery and
Tiraspol railroad terminals for freight handling, allowing freight
movement under a free-of-charge regime. However, this TN proposal
calls for establishing economic relations between two distinct
economic and legal entities, thus implying recognition of divided
railway assets.


3. (U) In a long interview published on January 29 in "Nezavisamaya
Moldova (Independent Moldova)," the Director General of Moldova
Railways, Miron Gagauz, categorically rejected the TN initiatives,
labeling them as a "provocation" designed to appeal to the
uninformed. Gagauz said that he was ready to negotiate joint
management by Chisinau and Tiraspol of the railways on the both
banks, but that the TN proposal to establish economic relations
between Moldova Railways and the Transnistrian railroad entity,
which had seized Moldovan railway property, was unacceptable.


4. (U) With Transnistria's 2004 seizure of railroad locomotives,
cars and administrative facilities in the left bank, Chisinau lost
effective control over Moldovan national railway assets in TN.
Transnistrian authorities then suspended all railway transportation
in 2006, in reaction to the enforcement of a new customs regime,
while claiming it was Chisinau's fault. The suspension of railway
traffic lasted for six months until the fall 2006 signing of
temporary agreements between Moldovan, Ukrainian and Russian railway
operators. The agreements allowed partial resumption of transit
cargo and passenger trains.


5. (SBU) Under the current rail transportation regime, shipment of
cargo from Transnistria is impossible, and a 100% TN cargo tax makes
it impractical for Moldovan economic entities to ship goods across
TN by rail. The majority of Moldovan goods bound for Ukraine and
points east use the northern railroad line through Ocnita or Otaci
and bypass TN and its 100% tax. Transnistrian heavy industries,
Ribnitsa Steel Plant and Ribnitsa Cement Plant, have cut their own
separate deals with Moldova Railways, and ship their product in
privately owned railway cars, but at greatly increased expense.
Chisinau has appealed to Tiraspol to negotiate TN's share of railway
profits, either on the basis of a 2004 agreement on joint management
of Moldova Railways, or by reaching a new agreement. The status quo
is clearly damaging the economic interests of both sides, but so far
no solution can be found. Chisinau will not accept division of its
railway company, and Tiraspol will not give up claim to the property
it seized.

...But Personal Gains for the Inner Circle
--------------


6. (SBU) Financial interests form the foundation for the railway
dispute. Though Transnistrian businesses are suffering from
increased transportation costs, the TN administration supports the
continued economic division of the railway system because it is in
the personal economic interests of certain members of Smirnov's
inner circle. Some of our Moldovan contacts have claimed that
Smirnov's daughter-in-law, Marina Smirnova, Smirnov's Deputy
Alexandr Koroliov and Security Council Deputy Secretary Yuri Soukhov
own Odessa-based intermediary companies that allow them to earn
personal profits of some 600,000-800,000 USD monthly, with only
minimal payments to the TN budget.


CHISINAU 00000112 002 OF 002


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


7. (SBU) While discussions on the resumption of railway traffic
currently seem to be in a deadlock, this issue is one that will need
to be solved in the context of 5+2 talks and any comprehensive TN
settlement. The current railway transportation regime provides
minimal passenger transportation and the transport of cargo is
effectively blocked, causing significant financial losses for both
left- and right-bank businesses. This is not the first time that
Smirnov's inner circle sacrifices the good of the people in
Transnistria for its own personal gain.

KEIDERLING