Monday, March 30, 2009

Research findings on “Privatization and privatized enterprises in Transnistria”

Transnistria with its command-administrative economy entered a tremendously hysterical stage of transformation. The privatization in the industrial sector, which is still sensitive and delicate issue in the Transnistrian-Moldovan relationships, mainly aimed at foreign investors, mostly from Russia.

Origins of Moldovan and Transnistrian privatization initiatives go back to 1990, when Supreme Soviet of MSSR took a decision on transition to market economy, and subsequently, on the necessity for the changes in ownership and form of economic management mechanisms. In 1991, it was adopted a low on ownership and privatization in both Moldova and Transnistria. The drama lies in the fact that those laws and decisions were not supported by a concrete privatization programme in Transnistria. In 1997, Supreme Soviet of PMR issued a special regulation which suspended the privatization as “a predatory and anti-nation action”.[1] However, in the meantime, private persons, on the basis of orders and ‘special decisions’, could get the right of disposal and management of certain enterprises. The largest industrial enterprise of the region, Moldovan Metallurgical Plant, in the form of exclusion, was already privatized in 1998.[2] So, during the past ten years ‘red leaders’ of the region benefiting from shadow economy persisted in a system with a strong state regulation of macroeconomic indices. It means an emphasis was granted to the state and collective enterprises with the condition that: “Private ownership should be in live. But it should be labor private ownership”[3]

At the beginning of ownership privatization process, it was mostly small-scale privatization of service providers, construction in progress, housing, and state property located outside of the region. In this period, the process was developed “on your own”, in the absence of mechanisms for the transformation in ownership issues, and its different schemes were developed. This situation was mostly characteristic for processes where the borders among state, corporative and private forms of ownerships are not defined. Consequently, the situation was resulted with freezing of the process of privatization in the region, and without removal of violations and introducing new programme, all attempts to establish “market economy” based on state ownership failed. The reason is absence of complex model, appropriate infrastructure (real estate market, open market), and closed-based conversion of enterprises into joint - stock companies.

Several problems, like the need to foreign investors (mostly from Russia) and legitimization of property rights of the ruling elites, budget deficits necessitated privatization in the region. However, process was accompanied with a range of problems: Moldova claimed on the right to dispose state property objects in the regional territory; some (even larger) enterprises did not honor their privatization commitments, set forth in the privatization contracts, which consequently, threatened cancellation of privatization contracts. Now the key problem of Transnistrian privatization is its recognition by RM. It doesn’t mean that the process is illegitimate. For example, two groups of American advocates researched the legitimacy of Transnistrian privatization in 2006, from the view of international law. The answer was nevertheless at odds: first – yes, it is legitimate, second – it is illegal.[4]

Privatization: Incentives and the process

Mass wave of privatization in Transnistria started rather later than in the adjacent countries. First attempts of “large-scale privatization” were made in 2002 – a decade later than in Moldova. In the same year asset of Bender Corn-remanufacturing Combinat “Tigina” was sold to OOO “Sheriff” at the price of US$ 600 thousands.[5] There were several reasons and incentives for an outburst of privatization in Transnistria:[6]
Transnistrian authorities searched for the economic stability of large industries by attracting investor funds. Transnistrian authorities were mainly striving to attract Russian investment to the region that would obviously doubled as ‘a shield, protection against claims of Moldova on the right to dispose state property objects in the regional territory’;
Privatization revenues are now viewed as one of the main sources of funding the republic’s budget deficit;
Privatization would serve as a safeguard of ownership rights within a ‘common state’. It means to secure, “legitimize” local elite (administration, entrepreneurs) property rights in regional enterprises until ‘a common state’ with the Republic of Moldova could be created. (It was times when Kozak Memorandum was intensively discussed).

Since privatization signifies one of the most important priorities of social-economic policy, in 2003-2006 its normative/legal base, regulating issues related to ownership in Transnistria, were also modified. New laws were adopted: Law on de-nationalization and privatization (07.2003), stock market (2003), State Programme on de-nationalization and privatization in PMR for 2001-2004 years (12.2003), Law on joint-stock companies (02.2004), and valuation activity (03.2004), etc. New Law on Privatization was adopted in 2006. This Law facilitated Tiraspol authorities to ask for the cancellation of the contracts favouring expropriation in case deviation from privatization contracts is revealed. Under the law, the "Transnistrian state" is entitled to recover the assets from owners who do not invest fixed assets during more than a year, admit reduction of production volume up to 40% from the moment of privatization, or downsize by 50% the number of employees over the first three years after signing the privatization contract. Tiraspol was enabled to expropriate enterprises in case owners to not manage to cover the loan debt.[7]

The first Transnistrian stock exchange was held in August 2003. The state share holding (15.6%) of the Moldovan Metal Works put up for sale and was sold to El Energy Investment and Management Corporation registered in Lichtenstein at the price of US$ 2.6 million. The starting price of the plant was set at US$ 10 million when it was presented for privatization. [8]

According to the official data of 2007, at least 125 enterprises were privatized in Transnistria until this time with incomes estimated at 108 million dollars.[9] Enlivenment in privatization in the first years of privatization (2002-2003) is mostly associated with the wish of Transnistrian authorities to define owners of the enterprises on the threshold of the “common state” with the Republic of Moldova. The privatization programme for 2001-2002 included 55 enterprises, and even 75 more for the following years. In 2002 – 2 enterprises, in 2003 – 12 and 2004 – 16 were privatized.[10] In 2003, there were privatized Bendery enterprises – Danastr (the 100% of share holders of the Shoe factory “Danastr” was sold to an Italian company “Damtan SA” for US$ 200 thousand), Moldavkabel “Oil-Extraction Plant” (Bender factory “Moldavkabel” – 100% share holding – was acquired by AO “Sevkabel” from Saint Petersburg, Russia), and the state share holding in the Moldovan Metallurgical Plant was sold.[11] Privatization of ten industrial enterprises among which are Moldowskaja Power Plant, “Tigina” and “Floare” shoe factories, “Odema” clothes factory and several other enterprises of machine-building, light and food industries in Tiraspol, Bender, Dubassar and Grigoriopol. In 2005, 41 state enterprises and 171 objects of municipal properties were privatized. US$ 35 million from privatization were transferred to the regional budget. So, by the end of 2005, 68 state enterprises were sold, for which development it was invested US$ 114.3 million.[12] In 2006, Transnistria sold 52 out of 64 enterprises, planned to be privatized, and earned US$27 million out of the planned $40 million.[13] In 2006, Wine and Cognac Complex “KVINT” were sold to OOO “Sheriff” for US$ 21.7 Million. The budget-2007 included privatization earnings at $13.4 million, which the regional authorities hoped to get from the sale of about 80 enterprises.[14] In 2007, Bender-based commercial river port was purchased by the Russian Gazprombank for US$ 365 thousand,[15] and the contest of privatization of the silk factory from Tighina Benderskii Sholk, at the initial price of 2 million 761 thousand dollars were announced.[16] Russian investor bought Transnistrian TV-radio centre.[17]

Russian capital

As far as Russian investment concerned, it already exists in Transnistrian market, in the form of financial and technical loans to enterprises. ITERA Russia purchased the 2/3 shares of region’s largest Metal Plant – Rybnita Metal Works. In certain contexts, the participation of Russian companies in the privatization contest (for example, in the contest of Moldowskaja Power Plant) is explained by both their strategic orientation at the Balkans and the agreement on joint work at the CIS energy markets. Russia included seven Transnistrian companies in the production cooperation programme between Republic of Moldova and Russia, which demonstrated its interest in stabilizing and “codifying” its ties with the region.[18] Russian capital was going to be present in Transnistria in the form of ownership and co-ownership. Willingness to attract investors in the wine and tobacco sectors led to lifting ban on foreign companies’ operation in the sectors. Aroma, Russia, which is the main exporter of Bouquet of Moldova’s products to Russian market, now is the new owner of this winery. Now Russia owns majority of strategic enterprises in Transnistria. It includes metallurgy, machine-building, winemaking, energy and light industry. At the same time, Russia purchased several important Moldovan enterprises (Moldovan Shopping House “Aroma”, “Salute”). This fact – Russia’s interests in both sides of Nistru – can play as a good base for a search of consensus in a very complicated issue – politicized Transnistrian privatization “problem”.

Problems with privatized enterprises

In the first half of 2007, the downswing was registered with 40 Transnistrian enterprises (out of 130). 26 enterprises have not begun their activities at all. According to the TD Ministry of Economy, the Tiraspol baby food factory, privatized in 2006, the Bender vegetable oil refinery, the soft drink factory, the Vetbiofarm and the Camenca grain procurement were idle. In Dubasari the tobacco fermentation factory, meat factory and bakery do not function. The Camenca cannery decreased its output in January-July by 90.4% against the same period of 2006, the Odema clothing factory - by 63.3%, the Metlax footwear company - by 61.4%, the Bendertex clothing factory - by 58.8%, the Evrostil furniture factory - by 37%.[19]

The data reveal the fact that while considerable growths were detected in the heavy industry sectors, there was a downswing in the light industry in Transnistria. The decrease was also noticed in other sectors of industry and influenced the process of fulfilment of their privatization commitments. In 2007, the Prosecutor’s office reported that 4 out of 13 enterprises, privatized in 2003, did not fulfil their commitments. These are Moldavkabel, the Bender oil extraction factory, the coal and oil products base, the Moldovan Regional Power Station. There were six such enterprises out of 14, privatized in 2004, 17 out of 21 in 2005. Dossiers of the most persistent defaulters were sent to the court. Several enterprises have been already returned to the state by the court verdict, in particular, the Grigoriopol poultry factory.[20] According to the results of the inspection of the objects, privatized in 2002-2006, it was revealed that almost one third of the owners did not fulfil their commitments. To start control at private enterprises, the standing committee for Policy, Budget and Finance of the TD Supreme Council approved amendments to the Law on Privatization, which tightened the responsibility of enterprises’ new owners for the non-fulfilment of purchase-sale agreements’ terms.[21] Soon after TD privatization authority started to check the way owners follow the requirements of privatization. Inspections were held in shoe factories – “Tighina” and “Floare”, Factory of Milk products from Bender, the Meat production factory from Tiraspol, privatized in the periods of 2003-2004. Transnistrian Privatization Department asked Tiraspol Court of Arbitration to cancel privatization contracts for the Bender-based Oil Extraction Plant and Tiraspol-based Founding Machine Production Plant. "The enterprises did not honor their privatization commitments, set forth in the privatization contracts ", regional Minister of Economy, Elena Cernenco, stated. (Tiraspol-based Founding Machine Production Plant was sold in 2005 to Transnistrian company Tirimpex for US$1.3 million, while the Oil Extraction Plant was purchased in 2003 by WJ Holding Limited with US$1 million.)[22]

Contradictory approach of Moldova towards the privatization in Transnistria

Overall approach of Moldova towards the privatization in Transnistria was pretty contradictory. Moldova did not demonstrate unique stance in this issue, which has partially held (Western) investors back.

When Moldovan Metallurgical Plant was sold in 1998 Moldova approached it quite calmly and without any kind of protest. Chisinau, without any further condition, signed the Protocol on Guarantees for Attraction and Protection of Foreign Investments and Cooperation in the Field of Investment Activity (2001), which says that “the activity of foreign investors and entrepreneurs on the territory of Transnistria is guaranteed by the laws of the Republic of Moldova, Transnistria and international laws”.[23] From this protocol, it became clear that the right of Transnistrian Administration to carry out privatization basing on its own legislation in force was recognized.
However, when in 2002-2003, the privatization process was perked up in Transnistria, Chisinau started to display incompatible reaction. Official Chisinau stated that it has supported “legal privatization” (?), at the same time speaking about likely outcomes for the investors who have already privatized some property in Transnistria the Moldovan Government does not exclude that some problems may arise if the buyers had not consulted the Moldovan authorities beforehand.[24] In this stance of Moldova it is not clearly specified what kind of investors my have problems: the local or foreign ones.
Transnistria demanded of Moldova to recognize privatization in the region legitimate as a condition for its further participation in the Joint Constitutional Commission. Therefore, in 2003, Tiraspol officials demanded to sign an Act on Ownership, which should legally guarantee the absence of pretensions of Chisinau to Transnistrian ownership.
In 2004, Parliament adopted Law of the Republic of Moldova on Privatization of Enterprises in Settlements of the Left-Bank of Dniestr River and Municipality of Bender. The Law did not recognize the fact of privatization of Transnistrian enterprises, proposed new privatization procedures and declared invalid the privatization of enterprises, carried out with violation of the current law provisions and other legislative acts of the Republic of Moldova, from the date of conclusion of the privatization agreement.[25]
However, in the official documents of 2005, the results of privatization are officially recognized, which were carried out until the adoption of Basic Principles of the Status of Transnistria.
In 2006, the Government of RM stated that all properties owned by the population of the region and the production capacity used by the economic agents of the region are not and cannot – be subject of pretensions by the official authorities of the Republic of Moldova. The Government of Moldova guarantees property rights to those legal and physical persons from Transnistrian region who were registered in the appropriate bodies of RM. By this, permanent-based registration was rigorously/unsystematically correlated with privatization and was possible if deed of ownership was issued by the appropriate bodies of Transnistria by the end of July, 2005 (on this day the Law on the Basic Principles of the Status of Transnistria had to take effect) and reissued in the cadastral bodies of RM within 90 days from the time when the law (on Basic Principles of the Status of Transnistria) took effect. Otherwise, based on the list of Registration Chamber, the enterprise goes to state ownership (of RM) and its take-over/alienation is not recognized.[26]
In 2007, President Voronin stated that “Moldova guarantees the inviolability of the ownership rights of all Transnistrian real and legal persons”.[27] President further voiced that a special procedure of recognizing Transnistrian property was worked out. According to the President, this procedure has a character of law and is based on the statement principles. Voronin, however, stressed that this law “can only be adopted in a package with the adoption of a full-fledged legal status for Transnistria - neither sooner nor later”


Privatization of industrial objects, flow of foreign investment and reinforcement of private sector will make it unavoidable for ‘red directors’ of Transnistria to go transition from planned-economy to the market one. This process can produce indispensable preconditions for a peaceful resolution of Transnistrian conflict on the economic basis

Involvement of investors will accelerate the settlement of the conflict. Russian capital, which is present in Transnistria already in the form of ownership or co-ownership, can be seen as potential conflict prolonging factor. However, it is a fact that Russia purchased several enterprises in Moldova, and therefore, interests of Russian companies in both sides of Nistru River can be a good base for a search of consensus in politicized Transnistrian privatization.

Contradictory (still not formulated) stance of Moldova towards ownership privatization in Transnistria does not help solve both economic and political problems as soon as possible rather aggravate tensions. Such approach by Moldova has partially held Western investors back from privatization in Transnistria and facilitated Russia to get hold of more economic power in the region.

[1] Anatol Gudim, Centre for Strategic Studies and Reform: “Privatization in Transnistria”.
[2] RAO Gazprom (“Itera International Energy Group L.L.C.”) became owner of 70% of shares, 15.6% remained in state ownership, 14.4% in ownership of physical person.
[3] Igor Smirnov, „PMR President“, in Anatol Gudim, Centre for Strategic Studies and Reform: “Privatization in Transnistria”.
[4] “Moldovskaja i Pridnestrovskaja ekonomiki – ot konflikta k perspektivam mirnoqo razvitija”, Centre of Strategic Studies and Reforms, Chisinau 2007, pp. 41
[5] “Ibid, pp. 38.
[6] “Research Paper on Transnistria“, Centre for Strategic Studies and Reforms, 2003. pp. 14
[7] BASA-Press, 20.03.2007
[8] “Moldovskaja i Pridnestrovskaja ekonomiki – ot konflikta k perspektivam mirnoqo razvitija”, Centre of Strategic Studies and Reforms, Chisinau 2007, pp. 39
[9] BASA-press, 10 July 2007
[10] Official data of Ministry of Economy of PMR
[11] “Research Paper on Transnistria“, Centre for Strategic Studies and Reforms, 2003. pp. 16
[12] Informatsionnoe Aqentstvo „Noviy Region“, 06.07.2006
[13] Infotag, October 3, 2007
[14] Infotag, 03.10.2007
[15] 24.04.2007
[16] BASA-Press, 10.07.2007
[17] Infotag, 03.10.2007
[18] “Research Paper on Transnistria“, Centre for Strategic Studies and Reforms, 2003. pp. 16
[19] But, the industrial growth by 54.3% up to 3.656 billion rubles is observed in TD. This growth was provided by 64 enterprises, incl. the Bender brewery- 3.4 times, the Rybnitsa Cement-sheeting Plant - 2.6 times, the Moldovan regional power station - twice, the MMZ - by 83.5%, the Moldavizolit - by 47.3%, the Tiraspol KVINT wine and cognac enterprise - by 31.5%.Infortag, 28.08.2007
[20] Infotag, 24.04.2007
[21] Infotag, 14.05.2007
[22] Both investors assumed investment commitments worth several million dollars. Tiraspol authorities are asking for the cancellation of the contracts based on a Law adopted by Transnistrian lawmakers in 2006, favoring expropriation in case deviation from privatization contracts are revealed. Under the law, the "Transnistrian state" is entitled to recover the assets from owners who do not invest fixed assets during more than a year, admit reduction of production volume up to 40% from the moment of privatization, or downsize by 50% the number of employees over the first three years after signing the privatization contract. BASA-press, 20.03.2007
[23] The Protocol on Guarantees for Attraction and Protection of Foreign Investments and Cooperation in the Field of Investment Activity, 16.05.2001, Tiraspol
[24] “Research Paper on Transnistria“, Centre for Strategic Studies and Reforms, 2003. pp. 17
[25] Parliament of the Republic of Moldova. Law on Privatization of Enterprises in Settlements of the Left-Bank of Dniestr River and Municipality of Bender, October 14, 2004.
[26] “Moldovskaja i Pridnestrovskaja ekonomiki – ot konflikta k perspektivam mirnoqo razvitija”, Centre of Strategic Studies and Reforms, Chisinau 2007, pp. 35
[27] Infotag, Moldpres, 24.10.2007


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