(Corrects name of analyst in 24th paragraph of story published Dec. 3)
Dec. 3 (Bloomberg) -- In an echo of Cold War rivalry, the European Union and the U.S. are competing with Russia for influence in Moldova, a corner of the old Soviet empire and the poorest nation in Europe.
The small, landlocked country in eastern Europe is an unlikely testing ground, with its gross domestic product barely exceeding $2,000 per capita. The former Soviet republic has gained in international significance since neighboring Ukraine, with an economy 25 times larger, bowed to Russian threats of gas cutoffs and other punitive steps last month and backed away from closer EU ties.
While Ukraine’s decision has drawn hundreds of thousands of pro-EU demonstrators into the streets of Kiev and other cities, Moldova is described as “more democratic, freer and less corrupt” by Anders Aslund, a senior fellow at the Peterson Institute for International Economics in Washington.
Moldova, independent since 1991, is “pro-European and supports European integration wholeheartedly,” Aslund told a U.S. Senate Foreign Relations Committee panel last month.
In a show of support, U.S. Secretary of State John Kerry, will fly about 1,400 miles (2,253 kilometers) to Chisinau, Moldova’s capital, tomorrow following a NATO meeting in Brussels, after snubbing Ukraine by canceling a planned stop in Kiev.
The EU’s “Eastern Partnership” outreach to nations including Moldova and Ukraine offers the promise of greater prosperity through enhanced access to its large market, while Russia uses economic inducements and threats to thwart what it regards as incursions into its sphere of influence.
Russian President Vladimir Putin decided to treat the EU initiative as a challenge, and his objective is “in essence the restoration of a sphere of domination,” Damon Wilson, executive vice president of the Atlantic Council, a Washington-based policy group, told the same Senate panel.
Moldova so far has defied the Russian pressure, including an import ban on Moldovan wine, a major export for the country, and last week initialed an EU cooperation agreement. The goal is to sign the agreement next year, providing for extensive trade liberalization if Moldova meets benchmarks in bringing legal and regulatory measures in line with EU standards.
“Moldova, today we have secured our way to the European Union,” said Prime Minister Iurie Leanca, according to a statement from his office after initialing the accord.
In doing so, he’s risking Russian reprisals.
“Moldova is more vulnerable to Russian threats than Ukraine because it is much smaller, poorer and a part of Moldova’s territory, Transnistria, is controlled by Russian ‘peacekeepers,’” Aslund told the Senate committee.
Kerry last week applauded Moldova and Georgia, which also initialed an EU association agreement Nov. 29 at a meeting in Vilnius, Lithuania. Their eventual integration with the EU “is one of the surest paths to a Europe whole and free and at peace,” Kerry said in a statement.
The top U.S. diplomat met in Brussels today with Georgia’s Foreign Minister Maia Panjikidze as part of what a U.S. official said are efforts to send a strong signal of support for those countries advancing their relationship with the EU. The official, who briefed reporters, asked not to be named under State Department practices.
Kerry’s stop in Moldova will be the first by a U.S. secretary of state since James Baker in 1992, when he set the stage for establishing formal relations with the newly independent nation. Vice President Joe Biden visited Chisinau in March 2011, and in a speech praised Moldova for its commitment to reform and democratic values.
Moldova, with a population of 3.6 million, had a gross domestic product last year totaling about $7.25 billion, the smallest in central and eastern Europe after Kosovo, according to World Bank data. Ukraine, with a population of more than 45 million, had a GDP last year of $176.3 billion, according to the data. Moldova’s latest consumer price inflation rate of 4.6 percent is up 57 percent from last year, according to data compiled by Bloomberg.
The EU established its Eastern Partnership program in 2009 to advance political and trade integration -- and democratic development -- with former Soviet republics Ukraine, Belarus, Moldova, Georgia, Armenia and Azerbaijan.
The EU already is Moldova’s largest trade partner -- accounting for 54 percent of its trade -- followed by Ukraine at 15 percent and Russia at 12 percent, according to data from the European Commission.
Moldova’s main exports to the EU are agricultural products, clothing, textiles and machinery, while its imports include machinery, transportation equipment, chemicals, fuels and mining products. More than half of Moldova’s direct foreign investment came from EU member states, according to the commission.
The U.S. has a modest economic stake in Moldova, a country about the size of Maryland with two-thirds of that American state’s population. U.S. two-way trade in goods with the nation totaled $64 million last year, versus U.S. trade with Ukraine totaling more than $3.29 billion, according to U.S. government statistics.
Nevertheless, the U.S. supports the EU’s efforts as Russian officials pressure former Soviet republics to align themselves with the Russian-led customs union, which so far includes Belarus and Kazakhstan. Armenia, another country that had been working with the EU, pulled away in September and said it would join Moscow’s customs union.
The U.S. has given Moldova about $1.1 billion in aid over the past two decades, including $22 million in fiscal 2013 for improving governance, fighting corruption and strengthening the rule of law and improving the business climate, according to the State Department.
During his 2011 visit, Biden said the U.S. would further support Moldova with a five-year, $262 million Millennium Challenge Corp. aid program to bolster its agriculture sector and road network.
The test for Moldova will come as soon as this winter if Russia increases pressure -- as it did with Ukraine and Armenia -- to join its nascent customs union and eventual Eurasian Economic Union, a potential regional counterweight to the EU.
In cutting off imports of Moldova’s wine and brandy, Russian authorities suddenly claimed that its prized exports didn’t meet quality standards. Agriculture -- production of fruit, wine and tobacco -- account for about half of Moldova’s exports and almost a third of employment, according to a report by Steven Woehrel of the nonpartisan Congressional Research Service.
Dependent on Russia
The squeeze could get much worse. Moldova is dependent on Russia’s Gazprom for natural gas for heating, and is heavily in debt to Russia for the cheap gas imports also needed for to power its economy. Russia Deputy Prime Minister Dmitry Rogozin issued what may have been a warning when he visited Chisinau in September.
“I hope you won’t freeze this winter,” he said, according to the Moscow Times newspaper.
Russia has other levers of influence. With little opportunity at home, more than a quarter of Moldovan workers are employed abroad -- many of them in Russia, where they could lose their jobs -- and their remittances account for about 20 percent of their country’s gross domestic product, according to the CRS report. Russia also dominates the breakaway Transnistria, an industrial region adjoining Ukraine made up of ethnic Russians and Ukrainians.
An “obvious danger” is that Moscow will recognize the separatist region -- whose status has remained unsettled since it broke away in a brief war in 1992 -- as an independent state, as it did with Georgia’s troubled territories of Abkhazia and South Ossetia in 2008, said Aslund.
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