Title: The Economic Prospects of the Transnistrian Peace Settlement after the Russian Invasion of Ukraine

Introduction

After Vladimir Putin launched what he depicted as “the special military operation” in Ukraine in February of 2022, many analysts predicted that the conflict would inevitably expand to the Republic of Moldova due to the presence of Russian troops in Transnistria and the strategic importance of the secessionist region for a possible Russian advance towards Odessa. Conflict was last seen in the former Moldovan Soviet Republic in the early 1990s when the secession of the country’s eastern districts led to open warfare. A temporary conflict resolution between Moldova and Transnistria was eventually achieved through the “5+2“ negotiation platform initiated in 2005, in which Russia, Ukraine, and the Organization for Security and Cooperation in Europe (OSCE) served as “mediators, “ and the United States and the European Union were “observers“. Russian aggression in Ukraine has raised the risk that decades of frozen conflict might boil over into open war once again. The fact that the two important mediators in the Transnistrian peace settlement, Russia and Ukraine, are engaged in an active military conflict has officially made further negotiations to resolve the Transnistrian War impossible.

During this negotiation halt, there have been some abrupt changes in the economic dynamics of the Transnistrian conflict. The Russian-Ukrainian conflict exacerbated economic and social vulnerabilities in both Moldova and Transnistria more than any other event in the short but intense period of post-Soviet history. It has also created opportunities for Moldovan authorities to incorporate Transnistria into a common customs area. This article argues that Russian aggression against Ukraine will further accelerate the integration of the Moldovan and Transnistrian economies as long as those Russian troops in Transnistria cannot reach the Transnistrian segment of the Moldovan-Ukrainian border. In turn, the Moldovan authorities must prepare a long-term integration strategy, including financial support for vulnerable social groups in Transnistria and legalization options for Transnistrian businesses.

Reconfiguration of infrastructure

The Russian-Ukrainian war has dealt a considerable blow to Ukrainian infrastructure. The destruction of Ukrainian electricity generation facilities, along with much of the country’s transportation system, has gradually caused both Moldova and Transnistria to lose their connection with and dependence on post-Soviet infrastructure.

The loosening of the post-Soviet ties started as early as February 28, 2022, when Ukraine closed its border checkpoints on the Transnistrian segment of the Moldovan-Ukrainian border, the only place where Transnistria can conduct international trade without going through Moldovan customs. Since the very beginning of the secession process, the Transnistrian authorities have used this portion of the border as a gateway for illicit commercial operations. This decision forced the Transnistrian authorities to reorient their trade towards Moldova, and, as a result, by the end of 2022, right-bank Moldova became the leading destination for Transnistrian exports. Transnistrian exports for 2022 totaled 738 million USD, out of which exports to right-bank Moldova amounted to 301 million USD, while exports to the EU amounted to 261 million USD. This means that, under this new geopolitical configuration where Transnistria is unable to export goods to Ukraine, it exports 76 percent of its goods to Moldovan and EU markets.

As a result, for the first time in decades, Moldova can finally control Transnistrian exports. In other words, the Russian-Ukrainian conflict has contributed to the full integration of Transnistria trade into the legal framework of Moldova. In the early 2000s, when Moldova and Ukraine started a complex of measures that increased the common control of goods passing through their border, Transnistria defined what Moldova referred to as the establishment of legal regime and limiting of smuggling operations as “commercial blockade.” This time, the Transnistrian authorities reiterated their opposition to “the Moldovan blockade,” but they have no choice but to cooperate with Moldovan authorities if they want to continue their commercial operations. Furthermore, as Ukraine continues to block its border checkpoints on the Transnistrian segment of the Moldovan-Ukrainian border, Transnistria will inevitably have to increase its dependency on the Moldovan economy.

The Russian-Ukrainian war has also generated an energy crisis for both Moldova and Transnistria. Both Moldova and Transnistria receive their gas supply from Gazprom via a transit pipeline through Ukraine. As Russian missile attacks have consistently targeted energy infrastructure in Ukraine, both Moldovan and Transnistrian leaders have voiced their concerns about the sustainability of Russian gas delivery. In October 2022, Gazprom reduced its gas supply to Moldova, and the Moldovan authorities claimed that Russia was using gas to subvert the Moldovan government. At the same time, Gazprom has also deepened the crisis in the Transnistrian economy, which is heavily dependent on Russian gas for its industries and electricity generation at the Moldavskaia GRES power station in Dnestrovsk.

The Transnistrian authorities have introduced “a regime of economic emergency” that drastically reduces electricity and gas consumption. Under normal circumstances, gas-powered electricity generation plants in Transnistria supply most of Moldova’s electricity. However, in the face of the conflict between Russia and Ukraine, all major Transnistrian industrial enterprises are halted. The country cannot generate sufficient electricity for the whole Moldovan market. As such, Transnistria is facing a reduction in tax revenues because of the decrease in industrial output. In December 2022, Moldova and Transnistria reached a temporary agreement. Transnistria would receive all the gas that Gazprom agreed to deliver to the Republic of Moldova. In exchange, Moldova would receive 50 percent of its electricity at 73 USD per MW/h from the Russian-owned Moldavskaia GRES, which generates electricity by burning Russian gas. The Moldovan authorities favored this agreement instead of purchasing gas from Romania, which had quoted a much higher price. Based on this agreement, the Republic of Moldova has opted for cheaper Russian energy supplies instead of aligning with its Western partners, many of which have taken decisive steps to limit their dependence on Russian gas in the wake of the Ukrainian conflict. The Moldovan government selected this short-term solution with the expectation that they would be able to switch to Western energy sources in the future once the prices drop.

Less welfare, more taxes for the Transnistrian economy

From the very beginning of its de facto statehood, Transnistria has benefitted from subsidies from the Russian Federation. With the escalation of the Russian-Ukrainian war, the Transnistrian authorities have begun to acknowledge that Russian financial assistance will diminish as Russia refocuses its resources on the conflict. Consequently, they have sought to increase the share of internal revenue sources in their local budget. From developing tourism to investing in agriculture, Transnistria has made various attempts to attract more foreign currency and increase the production of local goods. The regime is also promoting fiscal reform with important implications for small businesses. From January 1, 2023, local entrepreneurs must pay a three percent tax for all their sales instead of buying a business license for a meager fixed monthly fee. In this way, the government has sought to extract more budget revenue and increase fairness, unlike the previous taxation rules, under which a large corporation and a sole proprietorship would have similar tax rates.

At the same time, Transnistrian authorities have attempted to reduce spending by cutting funding for healthcare. Arguing in favor of these cuts, Transnistrian President Vadim Krasnoselskii declared in a TV broadcast that this reform is “optimizatsia,” or optimal distribution of funds, since healthcare expenditures represent one-fifth of the total budget. The cut signals that the Transnistrian economic model is losing its traditional socially oriented character in favor of a more austere spending regime.

With its social role diminishing, the Transnistrian government has increasingly relied on the contributions of the private sector, particularly the state’s largest company Sheriff, which holds monopoly power in several strategic areas, such as fuel distribution, retail services, food, and communication networks. In fact, Transnistria has been called the “Sheriff republic” since the beginning of its de facto statehood. Throughout the 1990s, Sheriff benefitted from the flexibility of the Transnistrian borders and customs privileges to import cigarettes, alcohol, and fuel, as Sheriff was exempt from all the Transnistrian customs duties, unlike ordinary Transnistrian enterprises. Now, Sheriff holds business interests in all sectors of the Transnistrian national economy and is involved in nearly every aspect of public service provision in the country; it provides equipment for hospitals, humanitarian packages to local pensioners, and even repairs roads since state investment in infrastructure is minimal.

What next?

The Russian-Ukrainian conflict has radically changed certain economic variables that could have a lasting impact on the Transnistrian peace settlement. Transnistria will finally lose its status as the “black hole” of Europe that it has held since the collapse of the Soviet Union. Thanks to Transnistria’s integration into the Moldovan customs area, the illicit trade of drugs, weapons, and other commodities through the porous Transnistrian-Ukrainian border has been effectively controlled. As such, Moldovan authorities will also be able to monitor the activity of Sheriff, which until recently was a veritable black hole and one of the pillars of Transnistrian statehood. After February 24, 2022, Transnistria has been confronted with an increasing budget deficit. Sheriff will likely be asked to help address this shortfall as compensation for the local taxes it did not pay throughout the 1990s and 2000s. As the margin of profits diminishes, Sheriff will potentially be more willing to trade its support for Transnistrian statehood for some sort of legalization of its businesses in the Republic of Moldova. In that case, Moldovan authorities might demand compensation from Sheriff in exchange.

As a matter of fact, Moldovan authorities have already made several attempts to integrate Interdnestrkom, the Sheriff-owned monopoly that controls all Transnistrian telecommunication services, into the Moldovan market. In 2004, the Moldovan Government issued a license to Interdnestrkom for fixed and mobile communication services in all Moldovan territory. However, all these efforts failed due to the resistance from Moldcell and Orange, the two main mobile communications providers in the Republic of Moldova. Both Moldcell and Orange argued that, if granted a license to operate in all the territory of the Republic of Moldova, Interdestrkom would benefit from the fact that it pays fewer taxes into the Transnistrian budget than what they must pay into the Moldovan budget. They also protested the much lower fee that Interdnestrkom paid for the license. As a result, the Moldovan Constitutional Court issued a decision to withdraw the license from Interdnestrkom because the licensing procedure lacked transparency and violated the principles of fair competition. Interdnestrkom has claimed back the one million USD it paid for the license. This example shows that the Moldovan authorities will have to consider the interests of all the other actors in the Moldovan economy in future attempts to legalize Sheriff’s businesses. Before adopting any abrupt policy decision, the Moldovan government must take a more gradual approach, consider the structural differences between the Transnistrian and Moldovan economic models, and balance the interests of various interest groups. An important step will also be to increase the transparency of all the Moldovan authorities’ decision-making processes in the prospective legalization of the Transnistrian assets.

For the owners of Sheriff, legalization and entry into the Moldovan market will also entail an adaptation to a more competitive, market-oriented economy. The maximum level of administrative control in the Transnistrian economic model can be illustrated by the entrance fees that the Transnistrian state levies even at the ice-skating rink in Tiraspol. For decades, access to cheap Russian gas has been critical to the Transnistrian bureaucratic economic model, which the Transnistrian authorities have boasted about in contrast to what they perceive as the “wild capitalism” and “backward” agricultural economy of Moldova. Transnistrian industrial giants have relied on cheap Russian natural gas to produce electricity or iron, the main Transnistrian exports, at low costs. As Moldova has already started elaborating its 2050 Strategy for Energy Development, which aims to liberalize the energy markets and gradually substitute Russian gas with alternative sources from the EU, the Transnistrian economy will lose the advantage conferred by cheap Russian gas. Already in October 2022, Moldova was able to cover some of the deficit of Russian gas with the purchase of gas from the EU energy market, supplied to Moldovan consumers through the Iasi-Chisinau pipeline that became fully operational in 2021 as an alternative to the Gazprom route. Therefore, there is a possibility that major local industries will have to cease operations, and Transnistria will have to undergo the same process of deindustrialization that affected many European countries in the 1970s and post-Soviet countries in the 1990s.

In the long run, the lack of cheap natural gas will approximate the Transnistrian economy to the Moldovan agricultural and service-based economy. The profitability of Transnistria’s heavy industry and the welfare of Transnistrian residents is predicated on cheap Russian gas. The loss of this competitive edge could lead to lost jobs and higher utility bills for individual consumers. Facing the difficulties of increasing spending and diminishing revenues, both the Transnistrian regime’s revenues and Sheriff’s will likely have limited capacities to support the local population.

Russia has always played an important role in supporting Transnistria’s finances and is the only state that has provided financial assistance to Transnistria. This support has been decreasing since 2014, however. With limited access to international credit, Transnistria’s public budget deficit will likely only grow, potentially threatening the government’s ability to fund its institutions and provide services.

While this scenario might be attractive for Moldovan constitutional authorities, it might become catastrophic for the Transnistrian population, which includes more than 340,000 Moldovan citizens. Pensioners, one of the three major social groups in Transnistria alongside Transnistrian state employees and the Sheriff workforce, have been the main beneficiaries and the main supporters of the Transnistrian state. In a gray area where multiple jurisdictions collide, local pensioners have often chosen to retire on the terms of whichever state pays higher pensions. In addition, in a gesture of gratitude for their support, Russia offers an equivalent of 15 USD to all the Transnistrian pensioners as a monthly supplement regardless of their citizenship. However, after the outbreak of the war in Ukraine, Russia has been delaying these payments. As an alternative to the Russian allowance, the Moldovan authorities may want to consider establishing a special fund to win over the pensioners. The Transnistrian authorities have constantly argued that the Moldovan National Bank blocks international card payments in the Transnistrian banking system. The Moldovan authorities might need to concede the legalization of VISA or Mastercard in the Transnistrian banking system in exchange for the possibility of transferring monthly allocations to the Transnistrian pensioners using the aforementioned international card systems. Providing such monetary incentives to the Transnistrians pensioners amid economic hardship brought about by the Ukraine conflict may serve to shift Transnistrian public opinion and pave the way for further integration between the Republic of Moldova and Transnistria.

Conclusion

The Russian invasion of Ukraine has increased security risks for the Transnistrian peace settlement. Undoubtedly, if Russia manages to achieve its goals in Ukraine and creates a land bridge to Transnistria, it will not shy away from annexing the Republic of Moldova and Transnistria, as it did with the Donetsk and Luhansk People’s Republics and Crimea. However, the Ukrainian resistance against Russian aggression has also created new premises for the possible resolution of the Transnistrian conflict and prospects for uniting the Republic of Moldova and Transnistria under the same political entity. All the unknowns of the Russian-Ukrainian conflict have brought unprecedented changes to the economic variables of the Transnistrian peace settlement in favor of the Moldovan authorities.

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Alexandru Lesanu received his PhD in Russian and East European Studies from George Mason University. His research interests include studies of borderlands, secessionist conflicts, technology transfers, transnational history, Soviet and post-Soviet economies.

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