Moldova and Russia: between trade relations and economic dependence

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Evoluția exporturilor domestice către Federația Rusă. Sursa: Expert-Grup Evoluția exporturilor domestice către Federația Rusă. Sursa: Expert-Grup
Publishing date: Tuesday, 07 April 2015
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  • Russian Federation has been one of the main export partners of the Republic of Moldova during the whole transition period. However, the share of exports to Russia decreased both because of a natural outcome of diversification of trade partners of a country that had recently obtained its independence and as a result of unclear rules of the game displayed by the Russian Federation in trade relations towards some partners. Thus, in 2014 Russia lost to Romania its status of top destination for Moldovan exports. The share of exports to Russia accounted for 18.1% of the total Moldovan exports. At the same time, Moldova is a minor partner for the Russian imports, with only 0.1% of imports coming from our country.
  • Taking into account the high share of re-exports in the total exports to the Russian Federation (58% in 2014), the analysis of domestic exports (i.e. total export minus re-export) has a higher relevance. Thus, the domestic export to the Russian Federation accounted for 12% of the total domestic export in 2014 and in such a case Russia lost its leading position back in 2012. The domestic exports to Russia accounted for 2.3% of the GDP in 2014 - a high enough level to have a significant impact on the Moldovan economy, but incomparable to the situation a decade ago, when the share of domestic exports to Russia exceeded 10% of the GDP.
  • In 2014 the exports to Russia decreased significantly as a result of two important factors: (i) Russian sanctions, namely the introduction of import duties and import bans on some Moldovan products, following the signature of the Association Agreement between the European Union and Moldova and the establishment of the Deep and Comprehensive Free Trade Agreement and (ii) lower demand from Russia because of more difficult economic condition and economic crisis coming over it. There are currently enough reasons to expect a further period of uncertainty in the trade relations.
  • Though after the establishment of DCFTA between Moldova and the EU the export of some categories of products to the EU has increased, particularly the “edible fruits and nuts; peels of citruses and melons” and “vegetables, plants, roots and edible tubercles”, for most groups of exported goods there was not enough counterbalance from EU and other countries to cover the decrease of exports to Russia for several reasons: (i) 2014 was a more difficult economic year for a number of trade partners and the export to these countries decreased because of lower demand; (ii) diversification of the export markets is not an easy thing to do when the demand for some Moldovan products is almost lacking in some European countries because their low competitiveness or existence of other non-tariff barriers.
  • The Russian Federation is an important sales market for several major groups of products: “edible fruits and nuts”, “vegetables, plants, roots and edible tubercles”, “meat and edible organs”, “prepared vegetables, fruits or other parts of the plants”, “alcoholic beverages, non-alcoholic beverages and vinegars”, including ones outside the agricultural sector and the food and beverages industry, such as “carpets and textile floor covering”, “tobacco and processed tobacco substitutes”, “various items made of common metals”.
  • We could assume that the products that have a high share in Russia’s total imports and the ones that had a steady increase in the export to Russia in the last decade, have a high potential on this market. These are mainly agricultural products: “fresh apples, pears, and quinces”, “fresh and dried grapes”, “fresh apricots, cherries, peaches, plums”, “beef meat”, “sunflower seeds”, but also “wood for cooperage” and “carpets and textile floor covering”. Wine is not included in these categories, because the analyzed period covered years with restrictions on wine import to Russia. For the previous years, their share in the total wine imports of Russia was higher revealing their competitiveness.
  • The analysis of domestic exports to Russia in the value of production broken down by economic activities reveals higher exposure of the following industries: “production of road transport means and production of other means of transport”, “manufacture of machinery and equipment”, “production of textiles”, “production of medical, high-precision, optical devices and tools and clock production”, “production of beverages”, “processing and preservation of fruits and vegetables”.
  • The agricultural exports to Russia account for only 3.7% of the total agricultural production. However, the exposure of this sector is also caused by the high number of employed population, which makes it vulnerable to any shocks, but also indirect exposure through the exports of the food and beverages industry. Hence, from the employment perspective, agricultural sector and beverage production industry are exposed the most to exports to Russia.
  • At the same time, only several sectors highly exposed to exports to Russia have a significant share in the GDP, namely “production of medical, high-precision, optical devices and tools”, “production of textiles”, and “manufacture of machinery and equipment”. The analysis of the economic sectors’ exposure to the exports to Russia depending on sector productivity, estimated as the share of GVA in total production reveals only four sectors with high productivity and high exports to Russia: “production of medical, high-precision, optical devices and tools”, “production of textiles”, “manufacture of machinery and equipment”, and “production of road transport means and production of other means of transport”.
  • The exports to the EU with a significant share in the value of production come from sectors with higher GVA and higher productivity, both compared to exports to Russia and to the CU - RBK as a whole.
  • Thus, we find that the exposure of the Moldovan economy to Russia decreased in the past years and the vulnerable industries are not the most productive ones or ones accounting for a significant share of GDP. Still, Russia’s sanctions most often envisaged those specific products from the agricultural sector and food industry that have a significant volume of exports for higher impact on the Moldovan economy and affect a large share of the employed population. This makes the Moldovan economy quite vulnerable to the Russian sanctions, not only in terms of export and GDP decrease, but also of social consequences.
  • At the same time, the Russian Federation is a significant import partner for the Republic of Moldova, holding 13.5% of the total imports to the Republic of Moldova. However, the high share is mainly caused by the heavy dependence on the Russian gas, which accounts for 65% of the imports from the Russian Federation. Their share in the total imports from Russia doubled in the last decade not only because of the increase in the physical amount of the imported gas, but also because of the increase in the price for the Russian gas. Should this class be excluded, the share of imports from Russia goes down to 6.5% of total imports. We can expect some changes in the structure of import markets once the DCFTA with the EU comes into force and import duties are gradually decreased and removed.
  • Though the trade in services has a lower value than the trade in goods, it also accounts for a significant part of the commercial relations between Moldova and Russia. In the case of trade in services, the Russian Federation is even a more important partner for Moldova than in the trade in goods (if we exclude re-exports from calculation), since 14% of total export and 22.2% of total import of services belong to Russia. The services with a lower value added prevail in the exported services, with transport services accounting for 72.4% of total exported services.

 

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