Note 13 – December 2005

A Glance from the Outside: Expensive Natural Gas for Moldova: Consequences
by Oleg Petrushin, Nuremberg

Conditions of ensuring the energy security of the Republic of Moldova are peculiar: on the one hand, its economy is not so power-consuming as of the most European countries, there is no heavy or extractive industry, but, on the other, more than 9/10 of Moldova’s need in energy resources are provided by import. Local resources – water-power, small oil, gas or lignite fields, wood, agricultural wastes – provide for no more than 5-7% of the need in energy resources. 

Since the beginning of the 80’s, Moldova’s energy balance has been regularly shifting towards natural gas as the most effective, ecological and the cheapest energy carrier, both for the economy and the population. After 1990, the course towards gasification of the country, including rural settlements, was also actively undertaken. And, as a result, the main part of energy resources (80%) consumed now in the country is made up of natural gas. 

At that, Russia is essentially the only supplier of gas, and its share within the total import of energy resources to Moldova was 28.1% during January-October 2005. 

Strategy of Economic Growth and Poverty Reduction approved by the Parliament of the Republic of Moldova (December 2004) stipulates that “accelerated gasification of the country” is a priority and it is based on “(i) development of a system of main and gas-distributing networks according to the Programme of Gasification of the Republic of Moldova and (ii) introduction of the national system of import and transit of natural gas”[1]. 

Nothing, it seemed, betokened any threat to these plans. Truth to tell, various Government concepts and programmes spoke from time to time of the need to diversify sources of import of energy resources, utilization of alternative energy (sun, wind, biogas), all possible reduction of the GDP’s power consumption, etc.  

But here came a clap of thunder… Russia is Moldova’s main economic partner (its share within Moldova’s foreign trade turnover was 18.5% during January-October 2005) – announced a rise of the price for natural gas imported to Moldova pending from January 1, 2006, - a doubling, at least (now, 80,0 USD for 1 cubic meter), and even more, possibly. 

The Moldovan Government’s reaction to this was quite original: first, it said (to whom?!) that Moldova is poor and its population will not withstand high prices for gas; later, it reminded of Moldova’s good payment discipline that has already been paying for 100% of the currently imported gas, and the debts for previous deliveries, excluding fees, are small – about 220 bil USD, while Transnistrian debts equal to 560 bil USD), and so on. And, finally, it said that, since expenditures for gas make up only 1.7% of GDP (?), the situation should not be dramatized until negotiations in Moscow about the new price for gas imported to Moldova are over. 

In the meantime, as it can be judged by the Moldovan mass media, business community started doing its own calculations using the direct calculation method: “The price of a loaf can mount by 20% in the next year’s January. As well as sugar can – by 10-15% and electric power – by 7-9%”. Suppositions are made about increasing tariffs for thermal energy. Thus, the HPP-1 chief engineer L. Belinsky mentioned in an interview to “Economic Review”: “Weight of the fuel within the energy we produce is 82%, and in case the price for the consumed gas doubles, our tariffs will increase by approximate 80%”. Another manager surmised: “If it (the imported gas) doubles in price, the price of heating will go up by 30%”. 

As for the industry, “it will become an extremely unpleasant and undesirable factor that will make life of enterprises and production distribution considerably more difficult” for energy-consuming production sectors. O. Baban, the “Glass Container Company” glass-works CEO, said: “Share of natural gas within the input of our plant is about 20%. Consequently, the price of a bottle we produce will increase by the same amount”. And wine, as it is well-known, makes up 1/3 of the Moldovan export. 

Since private estimates are insufficient, and the working group formed by the Government to “examine the situation and prepare proposals” has not finished its work yet, we tried to evaluate the impact of the new, double price for natural gas upon the country’s economy as a whole starting from the experience of such research based on the input – output model made by the Planning Institute during the 80’s. As it is well known, this model was used for the first time in the 30’s by V. Leontieff, native of Russia, to examine structural processes in the American economy. And it has already been 70’s when the institute of V. Leiontieff evaluated impact of the sharp rise in international oil prices upon the American economy. Similar models were also widely used in other countries, including USSR. 

Our evaluation was done based on the input – output model, that characterizes the system of ties between production output in one sector and inputs of all other sectors participating in production of such product. The calculations were based on the official statistics. 

The result, overall, appeared to be the same as expected: under the impact of the sharp rise of the price for natural gas imported to Moldova with the permanent structure of demand GDP will probably drop by 9-10%. But it is an extreme, a case of an inertial development of the situation. A more probable scenario is based on the changing solvent demand for the imported natural gas – both in sectors of the economy due to the rise in prices, as well as of the population due to the changing structure of expenditures. In this case, the economy’s fail will be smaller – about 2.0%. But, at that, inflation acceleration rate can be 15-16% and, taking into account the rate of 10.0% planned for 2006, can reach 25%. Given the permanent exchange rate, export-oriented sectors will lose competitiveness. The pressure upon the exchange rate of the Moldovan lei against main currencies will grow and, of course, it the NBM and Government will have to conduct a very flexible macroeconomic policy. It is necessary to think through a strategy of behavior in advance to not allow agiotage at the money-market and inflation to become a hyper-inflation. 

It is known from the experience of Germany and other European countries that once prices for energy resources (oil, natural gas) sharply increase, new realities emerge in the economy that “saves itself” shifting to a new structure of production and consumption.  

The increased price for natural gas and, consequently, increasing production costs, is what breaches the peace as regards the input – output model that we used. The model allowed taking into account both direct costs of a specific product for production of another product, as well as general production costs of the main sectors of the economy. An admission was made: the model assumed invariability of the gross value added components, though it is hard to ensure in the reality. It is clear that under high inflation wages have to be raised, while entrepreneurs will not concede to decreasing profitability. Which only further prompt inflation. 

Results of the calculations of the probable rise in prices in various sectors are presented in the following table; starting from the impact of different factors, these results can vary within 10-20%. 

Possible change of prices in various sectors of the economy (2006)

As it is known, in a market economy, the price rise is limited by solvent demand. Prices will not grow in an instant. It is a gradual process, during which some enterprises will adapt to the new conditions and some with a high probability will become financially insolvent. Energy-consuming sectors and sectors with low profitability are at the top of this list, and, first of all, it will affect production of electric and thermal power. Manufacturing industry as a whole and food industry sectors, in particular, can lose up to 30% of profitability, light industry – up to 65%, engineering and metalworking industries – up to 75%. Decreasing profitability will also constrain investment activity of enterprises. And all this will surely slow down the economic growth. 

Let us hope, though, that Moldova on its own, or with an outside help, will manage to find a way out of this situation. After all, no mathematical model can take into account all factors of the future processes in the economy. It can only help catch the most probable tendencies, which have to be taken into account in the economic policy. And it will be the Government, business and the population that will have to take decisions and withstand negative effects of the increasing price for natural gas. 

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