Motivated Moldova makes market moves

Despite the geographical proximity and traditional exchanges between Romania and the neighboring Republic of Moldova, investment flows between the two countries remain low. Authorities on both sides of the border hope to change that and believe that the better promotion of business opportunities will help them do so.

Simona Bazavan

Increasing the investment flows between Romania and the Republic of Moldova is a major discussion topic on the agenda of each meeting between officials from the two countries. Progress has been made in the last couple of years since the Alliance for European Integration came to power in the Republic of Moldova in 2009. Last year alone, 24 bilateral documents were signed between the two countries.

There are plenty of business opportunities on the right bank of the Prut river, say authorities in Chisinau, who are trying to promote the country as a regional business hub. The perception however lags behind their ambitious plans and the figures tell a different story, with modest bilateral investment flows so far.

“Romanian investments in the Republic of Moldova are welcome. There is a clear political message, as well as an economic one, and there is also the required legal framework,” said Iurie Renita, the ambassador of the Republic of Moldova to Romania in a recent interview.

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So far, the main companies with operations in Romania that have chosen to invest in the Republic of Moldova have been Banca Comerciala Romana, Petrom and Rompetrol. Driven by the economic crisis, in the past couple of years the number of companies that have extended or even relocated their operations into the neighboring country has increased. In 2009, Coca-Cola HBC closed its production unit in Iasi and started up in Chisinau.

It is estimated that there are about 490 Romanian capitalized companies active in the Republic of Moldova. In 2008 Romania was the ninth biggest source of FDI to its eastern neighbor with a 3.3 percent share of the total volume.

The country attracted USD 198.9 million FDI in 2010, about 55 percent more than the previous year. More than half of the volumes came from EU member states. The Republic of Moldova’s GDP went up by 6.9 last year and another 7.5 percent in the first semester of this year. The country enjoys stable exchange rates and a low inflation level – an estimated 7.5 percent this year.

Authorities in Chisinau are mainly targeting investments in agri-business and food processing, information and communication technology, housing services, energy infrastructure and logistics development as well as some bilateral infrastructure projects such as the Ungheni-Iasi gas pipe and two bridges over the Prut river at Leova and Nisporeni.

Investors looking to start a business in the Republic of Moldova are offered several fiscal incentives, although on the downside corruption remains an issue. It takes three days to set up a company there and the capital initially required is low. There is a zero percent corporate tax and 15 percent withholding tax on paid out dividends.

Personal income tax varies between 7 and 18 percent and the total social security contribution paid by the employer is 23 percent, according to data from the Embassy of the Republic of Moldova to Bucharest.

VAT is 20 percent and there is a 45-day deadline for the refund of export VAT. The Republic of Moldova has 40 double taxation agreements signed and 37 operational as well as 42 free trade agreements signed. There are eight free economic zones in the Republic of Moldova, which offer incentives such as a zero percent corporate tax, VAT and excise tax exemption.

Labor costs are low in the country, with the average monthly salary reaching about EUR 190, and the labor force is relatively skilled.
Bilateral trade between the two neighbors amounted to approximately USD 800 million at the end of 2010. In the first quarter of this year, Romanian exports to the Republic of Moldova increased by 33.8 percent, while imports hiked by 83 percent against the same period of 2010.

‘We have investors from China and Paraguay but fewer from Romania’

“We are the same people, with the same language and history, but the main investors in the Republic of Moldova are from Paraguay, China, Korea, Russia and Israel and not from Romania,” said Vasile Bumacov, minister of agriculture and the food industry in the Republic of Moldova this July during a Forum Invest seminar in Bucharest, on the topic of the main investors in the Moldovan agriculture sector.

Agriculture and the food processing industry have been pronounced a top priority by authorities in Chisinau when it comes to attracting investments.
Moldovan agriculture had an 8.4 percent share of the country’s GDP in 2009 and employed 33 percent of the population, according to data from the Embassy of the Republic of Moldova to Bucharest. It also provides over 50 percent of the country’s exports, although most of that is made up of raw materials and unprocessed products, something that the authorities say they would like to change.

According to Bumacov, there is an increased demand for Moldovan agriculture products on foreign markets but further investments are required in order for the country to increase and upgrade its production capacity. “I don’t want to sound cynical but the Republic of Moldova is taking advantage of the world food crisis. There is demand for our products on external markets, whether we are talking about fruit, vegetables or meat products,” he said, stressing that there is a need for more marketing know-how in this respect.  “Let us work together in this area and develop our capacity to better sell these products,” he argued.

Bumacov added that the Republic of Moldova has made considerable progress in implementing international food safety regulation and that Romanians’ experience in modernizing their agriculture would be beneficial to Moldovan farmers.

simona.bazavan@business-review.ro