A small, landlocked eastern European country, Moldova is most commonly known for its wine. After a banking crisis that caused a recession in 2015 – together with many disruptive and ongoing changes of government – the economy has stabilised and the former Soviet state is becoming increasingly EU-oriented. 

Despite a decade of a seemingly endless procession of different political parties rising to power, there is agreement across the political spectrum that foreign investment is necessary for national growth. To this end, a generally held commitment to economic reform has pushed the country up the World Bank’s Doing Business index, taking it from 108th position in 2008 to 48th today.

Rough waters

Over the past five years, Moldova has witnessed political and economic upheaval, but has emerged in reasonable shape. The wine industry – vital to the country's economy – was hit by Russian sanctions in 2013, in retaliation against Moldova’s growing economic alignment with the EU and, in particular, the EU-Moldovan Association Agreement. 

The following year saw an economic crisis, as years of endemic corruption culminated in the theft of $1bn from three Moldovan banks, made worse by an internal political stalemate, the financial downturn in Russia and the conflict in Ukraine (two of Moldova's key economic partners).

These factors resulted in a large fall in FDI numbers, says a spokesperson from the National Bank of Moldova (NBM), the country's central bank. According to Unctad data, foreign investment flows dropped from $338m in 2014 to $91m in 2016.  

Bouncing back 

Despite these difficulties, from 2016 on the economy began to stabilise. GDP growth bounced back to 4.4%, remaining around that mark in the following years, with 2019 expected to register 3.8% growth, according to the EBRD. Meanwhile, GDP per capita (at purchasing power parity) has risen impressively over the past decade, and Moldova is currently rated as ‘B3 stable’ by Moody’s.

Since 2016, FDI has also recovered – growing consistently to hit an annual total of $228m in 2018, according to Unctad, while the export of services has also grown to record (albeit still modest) levels since 2016.

In the first half of 2019, Moldova received $294m in FDI, surpassing all total annual inflows since 2014, according to data from the NBM, which measures FDI in terms of assets and liabilities. In this regard, the country is on track for a stellar performance in 2019, despite attracting limited greenfield FDI this year, according to greenfield investment monitor fDi Markets.  

Moldova’s recovery of foreign investment can be partly attributed to increased trade and investment garnered by the 2014 EU-Moldovan Association Agreement. Moreover, from 2018, significant banking sector reform attracted new investors into five of the 11 Moldovan banks, while agro-processing is another sector that has recently attracted significant FDI. 

Investment incentives

One factor that could explain the country's rising popularity with investors is that it takes just one day and four procedures to set up a business in Moldova. Excluding construction and electricity permits, the country performs well across all categories in the World Bank’s Doing Business index, which ranks it alongside the likes of Italy and Belgium.

Another pull factor is that corporate income tax is one of the lowest in eastern Europe, at 12%, while VAT is 20% and social insurance contributions 18%. “The good news for investors is that there’s a political consensus in Moldova that tax rates aren’t going to rise, and that in periods of political volatility, it is actually very difficult to change the tax regime,” said former minister of finance Natalia Gavrilita, during the annual Moldova Business Week in the capital, Chisinau.

There are also special areas for reduced tax within Moldova's free economic zones, for example, or the 7% unique tax on turnover in virtual IT parks, while the government pays investors €2000 per job created. 

Although the average gross salary has risen since 2015, it remains low at €357 per month, according to 2019 figures from the National Bureau of Statistics. This makes an attractive proposition for would-be foreign investors when combined with the high productivity rates per capita, especially in labour-intensive industries such as manufacturing. The manufacturing sector has the highest stock of foreign investment in Moldova, as measured in 2018, according to the NBM.

Though Moldova is not in the EU, and looks unlikely to join within the next decade, its location between EU member Romania (Chisinau is a 90-minute drive away) and Ukraine places it strategically between the east and the west. The country has free-trade agreements with the EU and the Commonwealth of Independent States, as well as with Turkey and the Balkan states. 

East-west tension

There are undoubtedly tensions, however, between Russian and EU influences in the country. The primary language is Latin-based Romanian, but many people (especially the older generation) speak Russian, while a fast-growing proportion of the younger generation speaks more English, French or German. Since independence in 1992, these tensions have been reflected in Moldovan politics. The separatist Transnistria region has remained a frozen military conflict since 1992. 

Ongoing political tension led to the collapse of Moldova’s recent coalition between the pro-EU PAS Party and the pro-Russia Socialist Party in November 2019. It remains to be seen in what direction the country’s new, much more Russia-friendly coalition will take. However, all parties want to attract FDI and it was Moldova’s nominally pro-Russia Communist Party that began EU negotiations more than a decade ago, in a good example of how paradoxical Moldovan politics often are.

Over the past 15 years, the country has become increasing EU-oriented, especially economically. Exports to the EU have risen to almost 70% of the country's total in 2018, at €1.64bn, up from 40% in 2013, while exports to Russia have dropped sharply as a result of punitive embargoes on Moldovan wine. 

In 2019, Moldova’s leading investors were Romania, the UK, the Netherlands, France, Estonia, Italy and Russia, in that order. There has been limited greenfield FDI from Russia into Moldova since 2013 – ending a steady stream of investment in the decades before, reports fDi Markets. Meanwhile, the proportion of foreign investment coming from the EU continues to grow. Which way Moldova will point over the next decade remains to be seen, but its EU ambitions and the influence of Russia on the country are unlikely to go away.