Identifier
Created
Classification
Origin
08CHISINAU171
2008-02-21 08:37:00
CONFIDENTIAL
Embassy Chisinau
Cable title:  

MOLDOVA: CHISINAU CAUGHT IN A COMMUNIST TRAP

Tags:  ECON PGOV PREL MD 
pdf how-to read a cable
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RR RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHCH #0171/01 0520837
ZNY CCCCC ZZH
R 210837Z FEB 08
FM AMEMBASSY CHISINAU
TO RUEHC/SECSTATE WASHDC 6294
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
C O N F I D E N T I A L SECTION 01 OF 02 CHISINAU 000171 

SIPDIS

SIPDIS

STATE FOR EUR/UMB

E.O. 12958: DECL: 02/21/2018
TAGS: ECON PGOV PREL MD
SUBJECT: MOLDOVA: CHISINAU CAUGHT IN A COMMUNIST TRAP

REF: 07 CHISINAU 1520

Classified By: Ambassador Michael D. Kirby for reasons 1.4(b) and (d)

C O N F I D E N T I A L SECTION 01 OF 02 CHISINAU 000171

SIPDIS

SIPDIS

STATE FOR EUR/UMB

E.O. 12958: DECL: 02/21/2018
TAGS: ECON PGOV PREL MD
SUBJECT: MOLDOVA: CHISINAU CAUGHT IN A COMMUNIST TRAP

REF: 07 CHISINAU 1520

Classified By: Ambassador Michael D. Kirby for reasons 1.4(b) and (d)


1. (C) SUMMARY: The opposition-controlled Chisinau municipal
government is struggling with the decision of its Communist
Party (PCRM) predecessor to increase and subsidize heating
tariffs for all residents of the capital city. Although the
current Chisinau city council attempted to cancel these
measures, the PCRM controlled judiciary delivered a series of
unusually swift court decisions against the municipal
government. Chisinau was ordered to pay Termocom, the
capital's heating company, Moldovan Lei 149 million (about
USD 13 million) for heating debts. The IMF has raised
concerns about Chisinau's mounting debts and implications for
Moldova's current lending program, which sets a tight fiscal
belt for 2008. With the heating season ending in seven
weeks, Chisinau's municipal leadership hopes to survive
short-term, while increasing tariffs and implementing
subsidies prior to next year's heating season. We have no
doubt that the PCRM central government will continue to be an
obstacle to any solution. END SUMMARY.

ENGAGING WITH CITY HALL AND THE INTERNATIONAL COMMUNITY
-------------- --------------


2. (C) On February 19, the Ambassador hosted a luncheon with
Chisinau Mayor Chirtoaca, City Council President Mihail
Ghimpu (the mayor's uncle and Liberal Party leader),and the
representatives of the EU presidency, EC, IMF, World Bank and
UNDP in Moldova, to discuss Chisinau's legal battles with
Termocom and the need to raise heating tariffs. The luncheon
was organized in response to Ambassador's February 15 meeting
with IMF Resident Representative Johan Mathisen, who noted
the IMF's concern with Chisinau's mounting debts and the
impact on Moldova's compliance with current lending program
conditions, including a total (national and local) budget
deficit cap of USD 25.5 million for 2008.

HEATING, TARIFFS AND DEBTS
--------------


3. (U) Centralized heating in Chisinau is provided by
Termocom, which is owned by the municipality of Chisinau

(70%) and private investors (30%),and serves 80% of the
population in the capital city's mostly Soviet-era apartment
blocks. Since 2001, the company has been in bankruptcy and
under the control of the courts and a council of creditors,
which include state-owned power companies and the partially
state-owned MoldovaGaz. According to Moldovan law, the
Chisinau municipal government, not the National Agency for
Energy Regulation (ANRE),has the authority to set heating
tariffs for Chisinau. In April 2007, shortly before the June
elections, the then PCRM-controlled Chisinau municipal
government decided to increase heating tariffs from Moldovan
Lei (MDL) 233 per gigacalorie (gcal) to MDL 540/gcal.


4. (C) The increase was warranted as costs have risen
considerably, yet the heating tariff in Chisinau had not been
adjusted since 2000. However, in a populist pre-election
move, the PCRM-controlled municipal council also agreed to
subsidize the tariff. However, it also agreed to pay the
subsidy bill in September 2007 following the local elections.
The difference between the old and new rates (about MDL
307/gcal) for all residents of Chisinau (excluding commercial
enterprises) represented a significant burden on city
finances. Faced with mounting deficits, on December 4, the
current Chisinau municipal government voted to rescind the
tariff increase, returning to the MDL 233/gcal tariff. After
a series of judicial defeats, which Chirtoaca linked to the
PCRM's influence over the judiciary, Chisinau was ordered to
reinstate the MDL 540/gcal tariff and pay Termocom MDL 149
million for debts owed since December. Previously, Chisinau
had partially paid for debts from April-November 2007, with a
court ruling that the municipal government owed Termocom MDL
100 million and transferring the funds from the city's
accounts. If a similar measure is taken to enforce the
current judgment, the city's accounts will be drained,
leaving only about MDL 14 million. Unless the municipal
government can negotiate a payment agreement with Termocom,
the city will be unable to pay salaries and operating costs.

CHISINAU'S PLAN FOR MOVING FORWARD
--------------


5. (C) Chirtoaca acknowledged that unless the Chisinau
municipal government raised tariffs, debts generated by the
subsidy would break the city's budget. He estimated the cost
of the subsidy at MDL 300 million for 2007 and, if unchanged,
at MDL 500 million for 2008 (out of a total budget of MDL 1.6
billion). Chirtoaca noted that this problem had been caused

CHISINAU 00000171 002 OF 002


by his PCRM predecessors, but acknowledged that it would not
simply go away. His challenge was how to solve the issue
without losing political capital and giving the central
government the opportunity to discredit the opposition for
its inability to manage the city's finances.


6. (C) Chirtoaca and Ghimpu outlined their views on how to
move forward. First, Chirtoaca noted, he would determine the
real cost of heating, taking into consideration Termocom's
input costs and the results of an audit of the company's
finances. He added that previous PCRM control of Chisinau
had led to murky business practices at Termocom. With this
cost information, he would inform the public and the
municipal government would determine the real tariff, setting
a politically and economically viable consumer tariff with a
targeted subsidy mechanism. If the city needed additional
resources, Chirtoaca noted, he was willing (as a last resort)
to sell municipally owned real estate.


7. (C) Ghimpu preferred to focus on the 2008-09 heating
season, noting that the central government would do
everything possible to discredit the opposition's management
of Chisinau. He believed that politically the municipal
government was obligated to provide consumer subsidies. He
also worried that the central government, acting through
Termocom and using the courts, would force another price
increase to further squeeze the city's finances. Ghimpu
noted that state-owned energy assets are known sources of
financial support for the PCRM. Ghimpu ultimately
acknowledged the need to increase tariffs, but was not as
committed as Chirtoaca.

COMMENT
--------------


8. (C) We believe that our meeting will increase the Chisinau
municipal government's sense of urgency about resolving the
heating tariff problem. Chirtoaca understands that the PCRM
central government wants him to fail and will continue to be
an obstacle. However, his failure to increase tariffs and
negotiate a payment mechanism with Termocom in a timely
manner has exacerbated the current problem. The IMF notes
that Chirtoaca has been promising for months to increase the
heating tariff for consumers but has yet to deliver. The
Ambassador noted that the international community was ready
to provide the political cover needed to implement a
difficult tariff increase. In the short term, the Chisinau
municipal government can generate the needed revenue by
selling municipally owned land, however, this is not
sustainable. Implementing a full cost recovery tariff and a
targeted subsidy mechanism will be a true test of the young
mayor's leadership and the opposition's ability to manage the
capital city's finances. His uncle's very weak understanding
of economics will complicate the mayor's task. END COMMENT.
KIRBY