VZCZCXRO3483
RR RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHCH #0171/01 0520837
ZNY CCCCC ZZH
R 210837Z FEB 08
FM AMEMBASSY CHISINAU
TO RUEHC/SECSTATE WASHDC 6294
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

C O N F I D E N T I A L SECTION 01 OF 02 CHISINAU 000171 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/UMB 
 
E.O. 12958: DECL: 02/21/2018 
TAGS: ECON PGOV PREL MD
SUBJECT: MOLDOVA: CHISINAU CAUGHT IN A COMMUNIST TRAP 
 
REF: 07 CHISINAU 1520 
 
Classified By: Ambassador Michael D. Kirby for reasons 1.4(b) and (d) 
 
¶1. (C) SUMMARY:  The opposition-controlled Chisinau municipal 
government is struggling with the decision of its Communist 
Party (PCRM) predecessor to increase and subsidize heating 
tariffs for all residents of the capital city.  Although the 
current Chisinau city council attempted to cancel these 
measures, the PCRM controlled judiciary delivered a series of 
unusually swift court decisions against the municipal 
government.  Chisinau was ordered to pay Termocom, the 
capital's heating company, Moldovan Lei 149 million (about 
USD 13 million) for heating debts.  The IMF has raised 
concerns about Chisinau's mounting debts and implications for 
Moldova's current lending program, which sets a tight fiscal 
belt for 2008.  With the heating season ending in seven 
weeks, Chisinau's municipal leadership hopes to survive 
short-term, while increasing tariffs and implementing 
subsidies prior to next year's heating season.  We have no 
doubt that the PCRM central government will continue to be an 
obstacle to any solution.  END SUMMARY. 
 
ENGAGING WITH CITY HALL AND THE INTERNATIONAL COMMUNITY 
--------------------------------------------- ---------- 
 
¶2. (C) On February 19, the Ambassador hosted a luncheon with 
Chisinau Mayor Chirtoaca, City Council President Mihail 
Ghimpu (the mayor's uncle and Liberal Party leader), and the 
representatives of the EU presidency, EC, IMF, World Bank and 
UNDP in Moldova, to discuss Chisinau's legal battles with 
Termocom and the need to raise heating tariffs.  The luncheon 
was organized in response to Ambassador's February 15 meeting 
with IMF Resident Representative Johan Mathisen, who noted 
the IMF's concern with Chisinau's mounting debts and the 
impact on Moldova's compliance with current lending program 
conditions, including a total (national and local) budget 
deficit cap of USD 25.5 million for 2008. 
 
HEATING, TARIFFS AND DEBTS 
-------------------------- 
 
¶3. (U) Centralized heating in Chisinau is provided by 
Termocom, which is owned by the municipality of Chisinau 
(70%) and private investors (30%), and serves 80% of the 
population in the capital city's mostly Soviet-era apartment 
blocks.  Since 2001, the company has been in bankruptcy and 
under the control of the courts and a council of creditors, 
which include state-owned power companies and the partially 
state-owned MoldovaGaz.  According to Moldovan law, the 
Chisinau municipal government, not the National Agency for 
Energy Regulation (ANRE), has the authority to set heating 
tariffs for Chisinau.  In April 2007, shortly before the June 
elections, the then PCRM-controlled Chisinau municipal 
government decided to increase heating tariffs from Moldovan 
Lei (MDL) 233 per gigacalorie (gcal) to MDL 540/gcal. 
 
¶4. (C) The increase was warranted as costs have risen 
considerably, yet the heating tariff in Chisinau had not been 
adjusted since 2000.  However, in a populist pre-election 
move, the PCRM-controlled municipal council also agreed to 
subsidize the tariff.  However, it also agreed to pay the 
subsidy bill in September 2007 following the local elections. 
 The difference between the old and new rates (about MDL 
307/gcal) for all residents of Chisinau (excluding commercial 
enterprises) represented a significant burden on city 
finances.  Faced with mounting deficits, on December 4, the 
current Chisinau municipal government voted to rescind the 
tariff increase, returning to the MDL 233/gcal tariff.  After 
a series of judicial defeats, which Chirtoaca linked to the 
PCRM's influence over the judiciary, Chisinau was ordered to 
reinstate the MDL 540/gcal tariff and pay Termocom MDL 149 
million for debts owed since December.  Previously, Chisinau 
had partially paid for debts from April-November 2007, with a 
court ruling that the municipal government owed Termocom MDL 
100 million and transferring the funds from the city's 
accounts.  If a similar measure is taken to enforce the 
current judgment, the city's accounts will be drained, 
leaving only about MDL 14 million.  Unless the municipal 
government can negotiate a payment agreement with Termocom, 
the city will be unable to pay salaries and operating costs. 
 
CHISINAU'S PLAN FOR MOVING FORWARD 
---------------------------------- 
 
¶5. (C) Chirtoaca acknowledged that unless the Chisinau 
municipal government raised tariffs, debts generated by the 
subsidy would break the city's budget.  He estimated the cost 
of the subsidy at MDL 300 million for 2007 and, if unchanged, 
at MDL 500 million for 2008 (out of a total budget of MDL 1.6 
billion).  Chirtoaca noted that this problem had been caused 
 
CHISINAU 00000171  002 OF 002 
 
 
by his PCRM predecessors, but acknowledged that it would not 
simply go away.  His challenge was how to solve the issue 
without losing political capital and giving the central 
government the opportunity to discredit the opposition for 
its inability to manage the city's finances. 
 
¶6. (C) Chirtoaca and Ghimpu outlined their views on how to 
move forward.  First, Chirtoaca noted, he would determine the 
real cost of heating, taking into consideration Termocom's 
input costs and the results of an audit of the company's 
finances.  He added that previous PCRM control of Chisinau 
had led to murky business practices at Termocom.  With this 
cost information, he would inform the public and the 
municipal government would determine the real tariff, setting 
a politically and economically viable consumer tariff with a 
targeted subsidy mechanism.  If the city needed additional 
resources, Chirtoaca noted, he was willing (as a last resort) 
to sell municipally owned real estate. 
 
¶7. (C) Ghimpu preferred to focus on the 2008-09 heating 
season, noting that the central government would do 
everything possible to discredit the opposition's management 
of Chisinau.  He believed that politically the municipal 
government was obligated to provide consumer subsidies.  He 
also worried that the central government, acting through 
Termocom and using the courts, would force another price 
increase to further squeeze the city's finances.  Ghimpu 
noted that state-owned energy assets are known sources of 
financial support for the PCRM.  Ghimpu ultimately 
acknowledged the need to increase tariffs, but was not as 
committed as Chirtoaca. 
 
COMMENT 
------- 
 
¶8. (C) We believe that our meeting will increase the Chisinau 
municipal government's sense of urgency about resolving the 
heating tariff problem.  Chirtoaca understands that the PCRM 
central government wants him to fail and will continue to be 
an obstacle.  However, his failure to increase tariffs and 
negotiate a payment mechanism with Termocom in a timely 
manner has exacerbated the current problem.  The IMF notes 
that Chirtoaca has been promising for months to increase the 
heating tariff for consumers but has yet to deliver.  The 
Ambassador noted that the international community was ready 
to provide the political cover needed to implement a 
difficult tariff increase.  In the short term, the Chisinau 
municipal government can generate the needed revenue by 
selling municipally owned land, however, this is not 
sustainable.  Implementing a full cost recovery tariff and a 
targeted subsidy mechanism will be a true test of the young 
mayor's leadership and the opposition's ability to manage the 
capital city's finances.  His uncle's very weak understanding 
of economics will complicate the mayor's task.  END COMMENT. 
KIRBY