COMMERCIAL NEWS DIGEST for August, September and October 2002

Moldova Commercial New Digest

May – July, 2006

Author: Iulian Bogasieru, BISNIS Representative, Moldova

SUMMARY

This report summarizes press reporting on business developments in the Republic of Moldova for the months of May, June and July 2006. End summary.

07.31.2006

BUSINESS CLIMATE AND ECONOMIC TRENDS

1. Inflation was 0.2 percent in June 2006, bringing the cumulative rate for the first six months of the year to 7.4 percent, according to the National Statistics Bureau. Food prices dropped 0.2 percent compared with May, an expected seasonal phenomenon. At the same time, nonfood items were1.2 percent more expensive, while the price of public utilities increased by 0.2 percent. The evolution of inflation prompted Economist Intelligence Unit to forecast a 13.5 percent inflation rate for Moldova against the 8-10 percent forecast by the Moldovan authorities.

2. In the first half of 2006, industrial output represented 9.6 billion Moldovan lei (USD 711 million), a 6.4% drop in comparison with the same period of 2005, according to the National Statistics Bureau. The decrease resulted from the recession in the wine industry caused by Russia’s sanitary embargo imposed in early March on Moldovan and Georgian wine imports. Wine output, which usually accounts for 12% of the country’s industrial output, shrunk 42% to MDL 1 billion (USD 74 million). The decrease affected other industries as well: vegetable oil (-7%), glass manufacturing (-6%), cardboard (-12%), food (-19%) and tobacco (-8%). The growing industries were medical equipment (+64%), leather (+58%), stone bricks (+57%), carpets (+29%) and non-alcoholic beverages (+29%).

3. Citing sanitary violations, Russia’s Consumer Protection Agency (Rospotrebnadzor) imposed March 27, 2006 a ban on imports of wines from Moldova. Moldova ships 85 percent of its wine exports to Russia, while the wine and wine-related industries represent up to 10 percent of the country’s GDP. The ban brought the activity of some wineries to a halt and led to a contraction in the amount of credits issued by banks. It also caused downward pressures on the exchange rate of the leu, the national currency, causing the National Bank to intervene for the first time over the recent years to prop up the currency market.

4. In June 2006, the average monthly salary represented MDL 1,823.8 (approx. USD 137), up 36 percent as compared with June 2005, according to Moldova’s Statistics Bureau. Employees on farms earned the lowest monthly salaries, MDL 786 (USD 59), whereas banking employees were paid highest per month - MDL 4,165 (USD 312).

5. The Agricultural Industrial Agency Moldova-Vin forecast for 2006 a grape harvest of 470,000 tons, down 10 percent from 2005, according to Infotag. The lower harvest is the result of last winter’s severe frosts. About 300,000 tons of grapes will be processed into wine.

6. In January-May, 2006, Moldova's trade balance gap widened by 41.3 percent to USD 561.9 million, according to Infotag. Moldovan exports represented USD 382.5 million, down 10.6 percent year on year. Russia’s ban on Moldovan wines in late March affected Moldova’s exports. CIS remains Moldova’s main export market. Imports represented USD 944.4 million, up 14.4 percent. As Russia’s gas supplier Gazprom is increasing gas prices and the ban on Moldovan wines has not been lifted, the country’s trade balance deficit is expected to deepen.

7. In January-June 2006, Moldova’s state budget revenues amounted to MDL 4,001 billion (USD 300.8 million), exceeding projected targets by 10 percent, according to Infotag. Compared with the first half of 2005, revenues increased by MDL 594.9 million or 17 percent. The share of customs duties and taxes in budget revenues constituted 71.3 percent. Budget expenditures, on the other hand, stood at MDL 3.723 billion, a 30.6% increase. A total of USD 20.8 million was allocated for servicing Moldova's external debt and MDL 72.1 million for the internal debt.

8. Moldova’s Ministry of Agriculture and Food estimated the size of the 2006 harvest of wheat at 786,000 tons, according to Infotag. The barley harvest for the same year is projected to reach 300,000 tons.

INTERNATIONAL FINANCING, ASSISTANCE AND FOREIGN DEBT

9. The International Monetary Fund (IMF) approved May 5, 2006 a new three-year Poverty Reduction and Growth Facility (PRGF) arrangement of 80.08 million Special Drawing Rights (SDR) or approximately USD 118.2 million for Moldova. Moldova has thus resumed its financial relations with the IMF after a four-year break. The first portion of USD 16.9 million was disbursed into the accounts of the National Bank of Moldova, the country’s central bank. As part of its Memorandum of Economic and Financial Policies with IMF, Moldova agreed to a set of structural performance criteria and structural benchmarks that include improvement of macroeconomic indicators, infrastructure development and betterment of state property management.

10. Following the approval of IMF’s PRGF arrangement with Moldova, the Paris Club agreed to restructure Moldova’s foreign debt on May 12, 2006. The agreement consolidates roughly USD 150 million due on debts contracted by Moldova before 31 December 2000. This amount consists of arrears (USD 68 million, including late interest) due as of 30 April 2006 as well as maturities falling due from 1 May, 2006 up to 31 December 2008 (USD 81.8 million). According to IMF estimates, the total stock of Moldova’s debt was estimated as of 31 December 2005 to be USD 821 million. The stock of debt owed to Paris Club creditors in March 2006 was estimated to be USD 276.1 million.

11. In June, the Moldovan Parliament ratified two international agreements for financial assistance worth USD 28.2 million, according to Infotag. The first Agreement, signed with the International Development Association (IDA), stipulates that Moldova will receive USD15 million for the 2nd Rural Investment and Services Project (RISP-II). A half of this sum will be furnished as credit, and the other half as grant. The second Agreement, signed with the International Fund for Agricultural Development (IFAD), stipulates that Moldova will receive a USD13.2 million credit to be used for the development of farm businesses. Both credits are payable on standard IDA terms – 40-year maturity carrying an interest of 0.75% p.a., with a 10-year grace period. Credit repayment will be effected in equal portions twice a year, by April 1 and October 1.

12. Moldova’s foreign exchange reserves reduced in June by USD 12.58 million to USD 632.71 million dollars, according to BASA. The country’s central bank, the National Bank, cited payment of foreign debt, interventions on the currency market and fluctuations of the national currency rate as primary causes for the reduction. The National Bank is expected to raise its forex reserves to USD 750 million by the end of the year in accordance with the IMF memorandum.

TELECOMMUNICATIONS

13. In late June 2006, the National Regulatory Agency for Telecommunications and Informatics (ANRTI) awarded Moldtelecom, the state-run fixed telephony company, the CDMA2000 third generation mobile license for the 450MHz frequency range, according to BASA. The license is valid for 15 years. Moldtelecom had to pay USD 8 million for the license, of which USD 4 million was payable immediately while the balance over 24 months. Moldova has two GSM mobile operators, Voxtel and Moldcell, and one CDMA operator, Interdnestrcom, which operates in breakaway Transnistria without a license from Moldovan central authorities.

14. In 2005, the total number of mobile phone users rose 38.5 percent to 1.09 million exceeding the number of fixed phone users, according to a report published by ANRTI. Voxtel accounted for 659,000 mobile users, while its competitor Moldcell numbered 430,000 users. The total number of fixed phone users was 929,400. Moldtelecom, the state-run telephony company, remains by far the largest fixed phone service provider, with a few private companies holding a fractional share of the fixed telephony market.

15. Moldtelecom slashed phone tariffs for calls from mainland Moldova to breakaway Transnistria starting August 1 from from 4.2-4.4 lei (0.31-0.33 U.S. cents) per minute to 3.2-3.6 lei (0.24 - 0.27), according to Infotag. There has been no conventional landline communication between the rest of Moldova and Tranistria since 2003, when the region’s Interdnestrcom phone company refused to accept Moldova’s new phone numbering plan. Phone calls from mainland Moldova to Transnistria can be made only by IP telephony.

ENERGY

16. Russia’s gas giant Gazprom increased the price for gas deliveries to Moldovagaz, its Moldovan branch in which it controls 50 percent plus 1 share, from the previous USD 110 per 1,000 cubic meters to USD 160 starting July 1, 2006. The new price was set in a new interim contract that the parties will have to renegotiate. Following Gazprom’s decision, the National Regulatory Agency for Energy raised the gas price for household consumers by 50.4 percent from MDL 1,533 (approx. USD 120) per 1,000 cubic meters to MDL 2,335 (approx. USD 180). In 2005, Gazprom supplied 2.45 billion cubic meters of gas to Moldova.

17. Prices for gasoline and diesel fuel rose 7 percent and 3 percent respectively in July, according to BASA press. This was the third fuel price increase in 2006. The price for the standard highest octane number gasoline A95 (European Premium) available in Moldova increased from MDL 11.95(USD 0.90) per liter to MDL 12.85 (USD 0.97) per liter. Diesel fuel price increased from MDL 10.40 (USD 0.78) to MDL 10.70 (USD 0.81). The hike was attributed to the ongoing fuel price increase on world markets. Gasoline prices grew almost 50% in 2005.

BANKING AND FINANCE

18. Italy’s Veneto Banca, the new owner of Moldova’s commercial bank Eximbank, decided to raise the minimum required capital in the bank to upgrade its license to the highest level, C, according to Infotag. The minimum required capital for level C license is MDL 150 million (USD 11.4 million). The level C license will allow Eximbank to engage in the full range of banking and investing operations.

19. The private commercial bank Businessbank, stripped of its banking license by the National Bank over violations of banking regulations, was reorganized into an investment company, according to Infotag.

COMPANY FOCUS

20. Аcorex Wine Holding, a major private wine producer, won five awards at the International Wine & Spirit Competition held this past July in London, Great Britain. The company won silver medals for its 2005 Select Pinot Gri and 2003 Legenda Pinot Noir. Its Cuvee Aleksandr, Acorex Reserve Cabernet Sauvignon and Acorex Reserve Merlot received bronze medals. All in all, Moldovan wine companies attending the competition won 11 medals.

21. Germany’s chain Metro Cash & Carry has unveiled plans to open in Chisinau a second department store by the end of 2006 in the outskirts of the capital city near the Chisinau International Airport, according to Infotag. The first Metro Cash & Carry store opened in Moldova in December 2004.

PRIVATIZATION

22. Moldova’s Privatization Agency put up for sale state-owned shares of 51 enterprises at the Moldovan Stock Exchange during the period July 24 – August 15, according to Infotag. Auctioned at the Exchange in single packages were state held shares of 0.01 percent to up to 100% in such companies as CTI-Capital International Technical Center, Monotip, Zimbru-Nord, Cicec, Darurile Naturii and the Arionesti incubator. The first similar auction in May 22-June 9 resulted in the sale of state-owned shares in 8 out of 32 companies, mostly at the starting price, generating earnings of MDL 6 million (USD 454,500). The 2006 state budget envisions privatization earnings of MDL 28 million (USD 2.1 million).

LEGAL DEVELOPMENTS

23. Moldova and Spain signed in May an agreement on promotion and mutual protection of investments, according to Infotag. Spain is the second largest investor, after Russia, with USD 81.2 million invested in the Moldovan economy. Union Fenosa, owner of three out of five electricity distribution companies in Moldova, is by far the biggest Spanish investor.

24. Moldovan Parliament voted in June a law that cancels starting January 1, 2007 the entry visa requirement for citizens of the European Union, U.S., Canada, Switzerland and Japan.

25. The National Bank has raised the non-declarable cash limit for outbound travelers from USD 5,000 to EUR 10,000; export of sums in excess of EUR 50,000 will require a permit from an authorized bank or the cental bank, according to Infotag. There are no limits on the import of cash; nor is any document required to bring in foreign or local currency in Moldova.

26. As per requirements of the European Union, the Government has transferred the responsibility for issuing certificates of origin on EU-bound exported goods from the Moldovan Chamber of Commerce and Industry to the Customs Department, according to BASA press.

REGIONAL CORNER: TRANSNISTRIA

27. The region’s largest and famed brandy producer Kvint was sold to the local company Sheriff for USD 21.07 million on July 12, 2006, according to Infotag. Kvint annually produces 1,320 decaliters of alcoholic beverages, including brandy, vodka and wine. The company also owns 445.8 hectares of vineyards. The region’s authorities plan to earn over USD 40 million from privatizations in 2006. Sheriff is Transnistria's largest owner of fuel stations and supermarkets. It also holds a majority stake in the local commercial bank Agroprombank, Tiraspol bakery, Tiraspoltrans enterprise and Rabnita wine and brand complex. The Moldovan Government had previously warned companies that it would not recognize privatizations in Transnistria that occurred without its prior approval.

28. Transnistrian authorities privatized Tirsteklo, a Tiraspol-based producer of glass containers and corrugated cardboard, by selling 100% shares to the local company Viled for USD 760,000 in July, according to Infotag. Tirsteklo has an annual production capacity of 487 million glass containers and 25 million square meters of corrugated cardboard.

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BUSINESS INFORMATION SERVICE FOR THE NEWLY INDEPENDENT STATES BISNIS)

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Email:Iulian_Bogasieru@mail.doc.gov

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