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C O N F I D E N T I A L SECTION 01 OF 02 CHISINAU 001382 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/UMB AND EEB/IFD/OIA 
 
E.O. 12958: DECL: 11/23/2017 
TAGS: ECON PGOV PHUM MD
SUBJECT: THE CHALLENGES OF INVESTING IN MOLDOVA 
 
 
Classified By: Ambassador Michael D. Kirby for reasons 1.4 (b) and (d) 
 
¶1. (C) SUMMARY: Although the Government of Moldova (GOM) has 
adopted measures to attract foreign investment, the business 
climate remains uneven.  In 2006, Moldova achieved record 
foreign direct investment (FDI) of USD 240 million and 2007 
continues to show a positive trend.  However, FDI inflows 
remain low in relative terms and reports from foreign 
investors document the continued challenges of investing in 
Moldova.  Targeted actions against strategic investors, 
politically connected individuals who "acquire" profitable 
businesses, systemic corruption, and legislative obstacles 
all conspire to make Moldova a place for only the savviest of 
investors.  The actions of certain elements of the GOM 
challenge our confidence in their willingness to consolidate 
reforms, causing us to pause (even more than before) when 
counseling potential American investors about investing in 
Moldova.  END SUMMARY. 
 
"MOLDOVA: A NEW CHALLENGE AT THE EU'S BORDER" 
--------------------------------------------- 
 
¶2. (C) The GOM's awkwardly titled October 11-13 national 
investment forum is indicative of the investment climate in 
Moldova.  As many investors note, one comes to Moldova (as 
with many emerging markets) because of the potential for high 
returns, understanding the challenges and risks.  The GOM 
touts Moldova's comparative advantages as democratic 
stability, a legal framework which facilitates foreign 
investment, low-cost labor, favorable investment and tax 
incentives, and a strategic location between the EU and CIS 
(with preferential trade access to both markets).  The GOM 
lauds its recent efforts to "liberalize" the economy: the 
adoption of a capital and fiscal amnesty, introduction of a 
zero tax rate for reinvested income, progress on 
privatizations, the creation of free economic zones, and 
plans to develop industrial parks. 
 
INVEST IN MOLDOVA - AT YOUR OWN RISK 
------------------------------------ 
 
¶3. (C) Although the GOM has continued reforming Moldova's 
economy, the business and investment climate remains weak and 
hindered by corruption, excessive bureaucracy and a weak 
judicial system.  For example, Union Fenosa, the Spanish 
owner of three power distribution companies, has been 
battling the GOM for over 10 months in response to the 
unilateral adoption of politically motivated tariffs for 
electricity which threaten the viability of the company's 
investment in Moldova.  Union Fenosa tried to disconnect 
service to MoldCarton, a Russian-owned company close to the 
Moldovan leadership, because of non-payment of debts. 
Government officials, including the Prime Minister, would not 
allow Union Fenosa to stop providing electricity to 
MoldCarton and pressured the company to accept a payment 
schedule favorable to MoldCarton. 
 
¶4. (C) Other examples include the use of the Center for 
Combating Crime and Economic Corruption by politically 
connected local "investors" and elements of the GOM to take 
over or undermine profitable businesses.  The allegations and 
outcomes of these investigations are rarely made public. 
Some new and disturbing challenges come from the recently 
established National Agency for the Protection of 
Competition, which has gone after France Telecom's Orange 
(mobile telephony) and Moldovan-American joint venture Sun 
Communications (cable television and internet provider) 
citing monopolistic practices.  Both Orange and Sun are 
challenging domestic Moldovan competitors, who seem to be 
resorting to political interference to tilt the playing field 
in their favor. 
 
¶5. (C) Government interference in the economy takes many 
forms - from unpublished internal decrees to government 
decisions which skirt legality.  In the past year, we've seen 
examples of the GOM opaquely banning U.S poultry imports, 
adopting new regulations on non-alcoholic bottled beverages 
which hinder trade, and holding flawed tender offers for 
government procurements.  Although the "Guillotine" process 
(reform of regulatory activity affecting businesses) was 
implemented successfully, and a second phase is underway, 
companies continue to note regulatory-type constraints (and 
related corruption) as impediments to their development. 
 
NOT ALL PROBLEMS ARE STRUCTURAL 
------------------------------- 
 
¶6. (C) Reforms and technical assistance will not resolve the 
 
CHISINAU 00001382  002 OF 002 
 
 
problem of politically connected individuals who acquire 
profitable businesses through intimidation.  According to 
anecdotal evidence, one of the worst offenders is Oleg 
Voronin, the son of President Vladimir Voronin.  It is widely 
believed that Oleg, President of FinComBank, has acquired 
numerous businesses through intimidation and use of his 
family name.  So abundant are the rumors that Oleg Voronin 
gave a rare interview in March 2007 (only his second public 
interview) to VIP magazine, a local publication, discrediting 
these charges and criticizing those who, for political 
reasons, go after the President's son.  However, stories 
abound about the Voronin clan and their holdings.  (NOTE: 
Recently, a CIS publication listed Oleg Voronin as one of the 
richest men in Moldova, claiming he was worth USD one 
billion. We doubt all his riches are the product of his 
business acumen.  END NOTE.) 
 
COMMENT 
------- 
 
¶7. (C) Moldova has made efforts to improve its business and 
investment climate, with considerable support from the U.S. 
and other donors.  Our MCC Threshold Country Program is an 
important effort in addressing one of Moldova's principle 
constraints to economic growth - corruption.  Some GOM 
officials (such as, for example, First Deputy Prime Minister 
Greceanii and Minister of Economy Dodon) recognize that 
improving the investment climate is Moldova's key to a more 
prosperous future and seek to improve that climate.  In 
addition, Parliamentary Speaker Marian Lupu often sides with 
those seeking to improve the business climate. 
 
¶8. (C) Moldova's post-Soviet transition has been uneven.  At 
times this country appears to have only a veneer of reform, 
although more than 15 years have passed since its 
independence.  Moldova has enacted many new, progressive 
laws, but implementing and enforcing them will be the measure 
of true reform.  Unless Moldova can improve the investment 
climate, it risks losing out to other low-cost competitors in 
the region, becoming a haven only for Russian or other 
investors who do not care to operate under western norms. 
KIRBY