Mid-December may not be the best time of year for an inaugural visit to Moldova, officially the poorest country in Europe. What might, in the light of a summer’s day, look charmingly shabby cannot help but seem drab when cast against a dreary grey sky and covered with a slushy snow.

It is hard to know what to expect from Moldova, though, because few people beyond the immediate area know much about it – or that it exists at all. If outsiders have heard its name in the news, it is usually in a story about human trafficking, smuggling or the bandit-plagued breakaway province of Transnistria. Few foreign countries have consulates or embassies in the capital, Chisinau.

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If first impressions are underwhelming, on closer inspection the country offers some pleasant surprises. It is difficult to see it in the blustery winter weather, but Moldova has a Mediterranean climate and Latin cultural leanings.

“This past summer, we grew our own wine here,” says Paul Galbraith, pointing at some seasonably withered vines wrapping around awnings outside the offices of the Moldovan Investment and Export Promotion Organisation (MIEPO). Mr Galbraith spent 18 months leading a support team from the European Commission advising Moldova on export and investment promotion; the project wrapped up at the end of 2007.

Wine is, in fact, one of Moldova’s main exports. Spurred on by a damaging Russian ban on Moldovan wines in 2006, producers are scrambling to find new export markets. Northern European countries, such as the UK, Ireland and Sweden, are showing a taste for Moldovan wines, as is Poland. (fDi investigated the sector and can report that the local wines are more than passable.)

For the purposes of foreign investors, Moldova is trying to position itself as an export platform into the surrounding region. A member of the World Trade Organization, the country has signed double-taxation treaties (DTTs) with about 40 countries, including most recently the UK. Thanks to a dense web of trade agreements, “Moldova is the only country in the region that can export east and west – in all of the Commonwealth of Independent States, EU, and central Europe and south-eastern Europe”, says minister of economy Igor Dodon. “While having a small internal market, we offer exclusive opportunities to export goods produced in Moldova [to these places].”

Eyes on the West

As a tiny country sandwiched between the two relative giants of Ukraine and Romania and straddling the demarcation between Russia and the West, Moldova navigates a tricky geopolitical line. Increasingly, its eyes are on the West. “The amount of money from the EU that has gone into neighbouring Romania and Bulgaria has not been missed here,” says Mr Galbraith . One telling sign of where its ambitions lie is the title of the Moldovan foreign office: the Ministry of Foreign Affairs and European Integration.

Geographical position and historical ties mean that many Moldovans speak Romanian and Russian fluently, as well as English and often Ukrainian – a draw for call centres and shared services operations.

“In my centre, most people speak four languages well,” says Olivier Prado, director of Global Phoning Group, which has a 100-seat operation that he says has evolved from call centre to contact centre and is moving towards business process outsourcing. “Not many people in other countries can speak Latin languages as well as Russian and Slavic languages.”

Information and communications technology (ICT) is another flowering industry. “The sector is relatively small but has a good deal of capability,” says Peter Carr, investment adviser on the European-led support project. A targeted incentives programme implemented three years ago ensures that people working in the sector do not pay any income tax.

French telecoms company Orange employs 450 people in Moldova, all but three of them locals, and expects to hire 150 more this year. “We have the best productivity in Europe for the Orange Group,” says director-general Bruno Duthoit. “We pay well for local standards but for us the cost is extremely low.”

Investment climate

The legal and regulatory framework still needs some improvement, investors say, but most agree that the government is favourably inclined towards foreign investment, despite having the C-word (communist) in its party name. The 33-year-old minister of economy gets good marks from the foreign business community. Meeting with fDi in his Chisinau offices, he does not sound much like a communist, rattling off a list of the government’s business-oriented achievements, including a raft of privatisations, a crackdown on corruption and an overhaul of the tax system.

Moldova’s new, improved tax system, brought into force on January 1, is effectively “the Estonian model, but more liberal”, Mr Dodon boasts. Most enticing for potential investors is a 0% income tax on companies.

“The 0% corporation tax plus the DTT agreements have already motivated companies to come here, but we certainly have a lot to do, such as improving roads and infrastructure,” the minister acknowledges.

Another item on the government’s to-do list is topping up the labour pool. “The workforce is one of Moldova’s biggest challenges,” says Mr Dodon. “We could even reach such a stage where we have big investments and good conditions for investment, but no workforce. To maintain a quality workforce, we need to offer salaries that are competitive. This is only possible through attraction of foreign investors, which is only possible through these reforms.”

Despite wage inflation in the ICT sector, salaries remain depressed – at an average rate of €130 a month – and purchasing power is still comparatively low. Too many Moldovans rely on remittances to get by.

Brain drain is a problem but there is some know-how to exploit. During Soviet times Moldova produced electronics for the space programme, so there remains a solid base of engineering and technology skills, according to Lilia Russu, executive director of MIEPO. Challenges aside, she says: “We do think we will be able to succeed and build up a market economy.”

It is a rather modest ambition. Given its small proportions, Moldova will never be a heavyweight. “Yet in its own right and for its size it will do well,” predicts foreign investor Thomas Moser, Moldova country manager for EASEUR Holding (see below).

The country might settle, as a starting point, for being more widely recognised on a map of Europe.

 

IN FOCUS:

COASTLINE CACHÉ

Formerly landlocked, Moldova received a coveted piece of coastline in a land swap with Ukraine in 1998 – a 430-metre stretch along the Danube River. The question is how to make the most of it.

Danube Logistics SRL has some ideas. A Moldovan limited liability company (the largest shareholder being Netherlands-based EASEUR), Danube Logistics owns and operates Giurgiulesti International Free Port (GIFP), the country’s only port accessible to sea-going vessels. GIFP’s masterplan calls for oil, dry cargo and passenger terminals as well as a dedicated industrial free zone.

The oil terminal and industrial free zone are already operational and the first dry cargo berth is scheduled for completion in the middle of this year. Still to come on-stream, grain silos with a direct rail link will expedite grain exports, and a bio-ethanol plant will be integrated with the grain silos and oil terminal to allow for the export of ethanol.

COUNTRY PROFILE:

MOLDOVA

Population: 4.3 million

Pop. growth rate: -0.11%

Area: 33,843 sq km

Real GDP growth (2007): 6%

GDP per capita (2007): $2200

Current account (2007): -$569m

Key sector (as % GDP): Services

Labour force (2007): 1.3 million

Unemployment (2007): 2.1%

Source: CIA World Factbook