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Moldovan paradox: Expectation of a crisis – is it worse than the crisis itself or is it a motor of economic development?

According to the National Statistics Department, decline in industrial production in Moldova in the I half-year of 2006 by 6,7% as compared to the same period of 2005 , is directly linked to a reduction in production in wineries. Wine production fell by 46%, distilled alcoholic drinks – by 24%. After winemakers, the history repeated itself in associated industries – production in the paper and cardboard industry (which includes packaging for wines and cognacs) fell by 12%, glass industry – by 8%, printing industry – by 7% (i.e. labels among other things). There was a fall in production in some other industries, though there was a rise in it as well.

Some economists had predicted a decline in production in 2006 before Russia imposed a ban on sale of Moldovan wine on its market. According to Veaceslav Ionita,an analyst of Chisinau Institute of Development and Social Initiatives IDIS Viitorul, this prediction was based on the fact that Moldovan industry is uncompetitive and poorly export oriented. A rise in industry in 2002-2005 occurred due to good market conditions on the Russian market where consumption of wine, canned food and other traditional Moldovan exported products was growing . Veaceslav Ionita is sure if there were no Russian ban on Moldovan wines, Moldova’s industry would face decline anyway. In fact Moldova lost its wine-making industry long ago and in recent years acted as a supplier of wine raw materials from which Russia and other countries produced wine. Most out of 170 wineries in Moldova were and still remain predominantly suppliers of wine raw materials. Besides Moldova has no appropriate export logistics, – small companies, for which it is difficult to win foreign markets, enter the market. With this in mind, Veaciaslav Ionita considers it improper to talk about good prospects for Moldova’s winning European wine markets.

It is true output directly depends on sales. When talking about Moldovan wine, we mostly mean export supplies. And this is supported by statistics. After the Russian ban on sales (and consequently imports to Russian Federation) of Moldovan wine products imposed in March 2006 Moldovan producers lost a huge market. According to Moldova-Vin department, wine exports to Russia in the first half-year in 2006 fell two times as compared to the same period last year – from $122 million to $58,7 million. Russia has been the main market for these products for a long time –it accounted for up to 85% of Moldova’s wine exports.

Still, overall statistics for this item is more positive than the figure for wine exports to Russia. Total reduction in exports of wine products from Moldova has “only” reached 28,4% – from $151,4 million to $108,4 million. That is “only” 28% against 52% of the percentage showing the reduction in exports to Russia. But this in terms of money. Moldovan producers had sharply to change markets – not an easy thing to do, but there are already first results. Exports of wine products to western markets for the half-year has grown 2,9 times – from $5,15 million to $14,94 million. It is of course a little bit more than 8% of exports to Russia, but on the other hand these supplies are more profitable because of the difference in prices – a bottle of Moldovan wine is delivered to western markets at higher prices than to Russian Federation. This can be primarily explained by better paying ability of the West, and anti-dumping measures of the countries whose markets have been formed a long time ago.

One way or another, wine output in the first half-year fell nearly two times. Yet Russia imposed the ban in late March, this means that winemakers were working almost all the first quarter in a normal regime. This makes us believe the situation in II half-year can become even worse. Of course if there are no positive changes in Moldovan wine supplies to Russia.

And preconditions for the positive changes cannot be ruled out. In Moscow on August 8 a meeting took place between Moldova’s President Vladimir Voronin and President of Russia Vladimir Putin. Its main result was a decision on the resumption, after three years’ break, of the activity of Moldova-Russia Government Commission on Trade and Economic Cooperation, and joint effort to increase trade and economic cooperation. After the meeting of the presidents it was said in Chisinau they optimistically assess prospects for Moldovan wines to return to the Russian market as soon as possible.

But the ban is still in force. And after it was imposed, there were frequent rumors in Moldova about a coming autumn crisis. To substantiate these allegations, they say the banking system had been actively providing loans to winemakers who now cannot meet their loan commitments to banks, and the wine making equipment they had offered as collateral lost its liquidity in no time. This resulted in banks’ refusal to lend money.

This information or rumors, if you wish, is vigorously denied by the banks and the National Bank. They, among other things, show figures which indicate that in reality lending by commercial banks in the first quarter of 2006 grew by 16% as compared to the first quarter of 2005, when this growth reached 10%. And the fact that some banks suspended or stopped providing certain kinds of loans (primarily consumer loans without collateral) took place only because of a sharp increase in demand for these loans and somewhat limited bank resources that banks can use for this purpose. As a result the market sent prices for bank services rising. However if interest rates (that everybody can notice immediately) on consumer loans did not grow significantly, the banker’s commission has grown hugely. The banker’s commission on loans for purchase of specific goods in certain stores has risen up to 3% (at the beginning of the consumer lending process it hovered at around 1-1,5% of the principal). And the banker’s commission on loans granted in cash up to 30 thousand lei without collateral reaches 1% for each month of the loan, i.e. 12% of the principal for a loan for 12 months! Well, demand determines supply.

Officials admit that the Russian ban on Moldovan wines was a shock for the Moldovan economy. Agri-industrial agency Moldova-Vin assesses products supplied to Russia but not sold – pure losses for winemakers – at $120 million. However according to Iurie Torcunov, deputy head of the analysis and macroeconomic forecast department of the Ministry of Finance, the wine crisis will not become a disaster for the national economy as a whole and industry in particular. Still, because of the problems with the sale of Moldovan wines in Russia and decline in the wine making associated industries, the Ministry of Economy revised the annual forecasted growth of industrial output, diminishing it from 6,5% to 1%. This small growth must be reached by Moldova by increasing output in a number of industries; in particular by improving performance in energy, gas and water supply, quarrying , other industries. A revised indicator of the industrial output growth of 1% is a cautious prediction. Experts believe if the issue of supplies of Moldovan wines to Russia this autumn is resolved (even in smaller amounts and with fewer participants in supplies), the winemaking industry can be restored very quickly, and indicators will significantly improve, and overall growth in the economy can exceed 1%. Besides after losing the Russian market, according to the Ministry of Economy and Trade, Moldova increased its efforts to find alternative markets and managed to increase wine deliveries to the neighboring countries – Ukraine, Romania, Belarus…

This opinion is not shared by Veaceslav Ionita. He predicts a decline of up to 10-15% in industrial output for the end of the year. “One should not be afraid. The decline in industry will not play a big role in the economy because there is no strong industry in this country and economy is not based on production but on consumption caused by growing money transfers from Moldovans working overseas,” the analyst says. In his opinion it is more dangerous if consumption falls because of the crisis expectations , which will lead to falling budget revenues and will ultimately trigger a full-scale crisis.

And guest workers this year, unlike the Russian Consumer Supervision Agency, continue to make the Moldovan economy happy. According to the National Bank of Moldova, money transfers from physical persons abroad to Moldova through commercial banks of the country in the first quarter of 2006 grew by $55,74 million or 18,47% as compared to the first quarter of 2005, totaling $357,56 million. For all 2005 these money coming through commercial banks reached $683 million. Yet guest workers send their money to Moldova not only through commercial banks. For this purpose they also use fellow travelers, tourist agencies, drivers and train attendants. And nobody can name the exact figure of how much the country gets from its people working abroad. Neither can anyone say whether amounts of legally arriving foreign currency rise or fall against flows which are not transparent.

The first inflation law says if everybody is saying prices are going to rise, prices will rise. In other words, crisis expectations are worse than the crisis itself. And here is a paradox. Like never before, construction boom has been on this year. According to the statistical data, investments in fixed assets in the first half-year grew 13%; of which homes put into operation grew by 10%, and volume of contract works grew by 22% as compared to the same period in 2005. This is official information, but many people repair homes and pay to the workers in so called “black cash” – statistics does not report this money and budget does not get deductions from these sums. And mind, prices for construction materials and services as compared to the previous year grew by 30% – 100%!

Also, sellers of household appliances complain their sales are falling, which is a seasonal phenomenon, sellers of construction materials and tourist companies are flourishing. In the first half-year of 2006 as compared to the same period of the preceding year the number of clients of Moldovan tourist companies increased almost by one third – by 29,1% – and just by the same number, according to the statistics, increased the number of Moldovans who left the country with the help of Moldovan tourist operators, three fourth of whom left for vacation.

As soon as the construction season and vacation season are over, consumers will start to buy household equipment and cars (more of which are new thanks to the leasing system), and real estate.

Ironically, while expecting the crisis, the consumer tries to take advantage of all opportunities his money offer him, because he is not sure he will be able to use these funds in case of the crisis. This results in the growth for certain segments of the economy, of which the sector of services is not the last. These are the realities of the post-industrial society, where services predominate.

Of course no economy can now survive without exports. In recent years Moldova has been exporting two main items: wine and labor. Things are more or less clear with the latter. As to the winemakers, as we mentioned before, the recent meeting of the Moldovan and Russian presidents make us more optimistic, as well as strong revision by wine makers of their priorities. And if some owners of wineries decide to sell their business in Moldova, this business can be of interest to investors with their new markets. And the advantage can be taken of the fact that our state becomes a country bordering the EU from 2007, but without obligation to meet EU requirements which are rather rigid in many aspects.