The new Transnistrian government of Alexandr Martynov, which had been established in December 2016, came into office when the regional economy laid practically in ruins. In 2015 industrial output fell by 15 % and by 10 % in 2016. In this period the government was also paralyzed due to political skirmishes within the Transnistrian ruling elites. Therefore, the new government was enforced from 2017 to carry out the crisis management. Some structural reforms or at least tactical improvements to overcome the dramatic situation in economy were needed.
The so-called People’s Program of the Transnistrian president Vadim Krasnoselsky did not contain any strategy or plan for these reforms. Only a couple of some important, but still unsystematic initiatives was mentioned in this document: cancellation of all planned inspections of enterprises by law enforcement agencies for 2 years and reduction of patent charge for small businesses by 50 %. Both ideas were realized immediately after the new president came to power at the end of 2016. But all other initiatives were formulated in a more nebulous way: for instance, the attraction of Russian investors, promotion of Transnistrian goods on the Russian market or increased social responsibility of employers.
In January 2017 two working groups were established to hammer out “roadmaps” for “Improvement of internal conditions for business activity in Transnistria” and “Support of Transnistrian exporters on international markets”. The administrative responsibility for these two groups was delivered to the minister for economic development Sergey Obolonik. In March a special post within the government was created, namely deputy prime-minister for strategic development and reforms. The head of Government’s Chief of Staff Alexey Tsurkan was appointed for this position. But already in October this position was cancelled, while Obolonik’s status was widened: he became not simply a minister, but also deputy prime-minister (without “strategic development and reforms” in the job title). Therefore, practical work within two working groups mentioned is being coordinated and done by the ministry for economic development, without creation of any special agency with extraordinary powers. The roadmaps were approved by the Government’s Decisions in October and August respectively.
Since the ministry should regularly report on results of how “roadmaps” are realized we can draw some consequences about reform processes going on. Firstly, it should be argued that both roadmaps contain three types of initiatives: a) important tactical measures, predominantly with regard to tax system; b) important strategic measures, for instance promotion of e-government technologies or creation of a more open and efficient procurement system; c) secondary bureaucratic measures like small improvements in customs administration.
The most tangible results for the economy were supposed to be achieved due to tax deduction for key industrial sectors. The initial problem was that enterprises in Transnistria should pay to the budget the so-called corporate income tax which depends not on real revenues but on general turnover. It used to mean in fact that companies should share with the authorities all their profit and remain unmotivated for any modernization and development. Besides, for each branch the tax rate used to be different. In September 2017 the government decided to amend the law on corporate income tax and almost halved in fact the tax burden on key industrial sectors.
The concrete factories turned out to be the beneficiaries of this decision. For instance, for Moldovan Metallurgic Plant, which is now actively reviving its production, the tax rate fell from 3,25 to 2,04 %, for Moldavizolit – from 3,25 to 1,28 %, for Electromash, producer of electric motors, from 3,5 to 2,45 %, for Moldavcabel – from 5,5 to 1,5 %, for Biohim, the producer of spirit, from 12 to 4,43 %, for footwear producers – from 6,5 to 3,52 %, etc. The production of jewelry, textiles, printing and publishing also got substantial tax deduction.
Besides, some key industrial sectors got support in form of lower gas price. According to the information of Tiraspoltransgaz, the companies from electrical and chemical industries, textile and cement producers as well as iron industry should pay now about 35-50 dollar per 1 000 cubic meters. The second measure which could help the regional companies is the reduction of tariffs for railway servies and their adjustment to tariffs existing in the right-bank Moldova.
At the same time some fundamental changes to the tax system were not undertaken. Firstly, the government seems to be unwilling to bring its own tax system in compliance with international standards, also by replacing the actual corporate income tax by profit tax and VAT. It is difficult to say what is the key reason for that: a fiscal one (the corporate income tax fills out the budget for about 30 %), a pragmatic one (the government can be aware of the possibility that the companies and consumers will not be able to adjust to VAT financially) or private interests of key economic agents play the key role here. It should be mentioned that Sheriff, the merchandising company with monopolistic position on the market, should pay the highest corporate income tax for its trading activities – 13,2 %. That’s why it is not correct to blame Sheriff for everything. Nevertheless, by keeping the current tax system, the government undermines the investment climate, because investors do not see stable conditions for their investments and can evaluate the existing tax burden as disproportionate and non-transparent.
Secondly, the Transnistrian government did not dare to cut some other important taxes. Originally it was decided to consider the reduction of unified social tax from 25 to 20 %. But at the end the authorities found this measure unadvisable and replaced it by reduction of minimum monthly wages. Obviously, this measure is much less efficient. The problem is that the tax rate of 25 % is quite high for enterprises: for instance, in right-bank Moldova the companies should pay only 10,5 %. Such tax rate cannot stimulate the legal employment. Two more examples when tax reduction was considered but was found inappropriate at the end are related to the support of small trading businesses and housing development sector.
The roadmaps contained also some measures of strategic importance, including the promotion of e-government technologies, more open and efficient procurement system or Transnistrian goods on the Russian markets. The Transnistrian ministry of economic development bumped here into two fundamental problems. The first one is about lack of money, because reforms are usually expensive. The situation with reform of procurement system is illustrative in this regard. The Transnistrian parliament tabled a bill which proposed the introduction of procurement system on the Russian model. But the government handed down its own critical opinion on that: the bill is hardy realizable, because the parliament did not mention in the bill how the money should be found for educating and hiring procurement and marketing specialists for budgetary organizations and creation of a special web-site for state procurement etc., so the government. The same situation is with the e-government: all the electronic platforms needed are technologically not so easy to implement and they demand not only initial, but also substantial maintenance costs.
The second problem is the dependence on external factors which the Transnistrian government is not able fully to change. For instance, with regard to promotion of Transnistrian exporters the government is concentrated exclusively on the Russian markets. But in Russia the Transnistrian companies face two important challenges: closeness of procurement system of big state-owned companies and functioning of state program for import substitution. The Transnistrian authorities only managed to create with the Russian Customs Service a special system of data sharing which should help to avoid situations when Transnistrian goods, like from the whole Moldova, are identified as high-risky by Russian Customs Service. In all other spheres there is a lack of any substantial progress.
To conclude, we should argue that roadmaps, issued by the Transnistrian government, solved some tactical problems through deduction of taxes and some other tariffs. At the same time, they failed to provide strategic changes, predominantly because of the lack of financial resources for fiscal and administrative reforms. It should be mentioned that Transnistrian authorities are applying now strong measures of fiscal austerity: the budgetary expenditures for 2018 are planned by 50 million US dollar lower than in 2017 while the budget deficit is expected at the level of 40 % and the revenues are expected to be lower by 25 million. The key lost for revenues (about 10 million) will emerge because of abolition of almost all customs tariffs for goods imported from the EU countries. In this fiscal situation the government can afford itself only tactical improvements, not structural reforms.