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The Funambulists - Moldova Walks a Tightrope Between the EU and Russia

The Funambulists - Moldova Walks a Tightrope Between the EU and Russia

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A Fortunate or Unfortunate Positioning

Central and Eastern Europe lies at the crossroads between East and West, with countries struggling to free themselves from the lingering shadow of their five-decade-long association with the Soviet Union while still, where possible, benefiting from their relative proximity to Russia’s riches. This is true perhaps nowhere else as much as Moldova, a small, land-locked country trapped between Romania and Ukraine.

Indeed, Moldova – Europe’s poorest country, with a nominal GDP per capita for 2019 of only 3,300 international dollars – often finds itself struggling to define its role independent of the economic, geo-political, and cultural pressures put on it by the Russia/CIS countries on one side and the European Union on the other. Its positioning is as much a strategic asset as a problem, though, and the country has free-trade agreements with the EU and the Commonwealth of Independent States, as well as with Turkey and the Balkan states.

In fact, Moldova has, in recovering from a 2014 banking crisis and the effects on its economy of Russia’s financial downturn and the conflict in Ukraine that led to a recession in 2015, begun to stabilize, and the ties to the West that started to form in the years before that crisis hit have begun to grow stronger. Indeed, a majority of the country’s population now identifies as pro-EU – especially in the country’s cities – and the great majority of foreign direct investment into the country comes from EU member states.

The most significant factor in this turn to the West in recent years, according to most, was the 2014 Association Agreement entered into by Moldova and the European Union, which came into effect in 2016, in the process establishing a “Deep and Comprehensive Free Trade Area” between the EU and Moldova, removing import duties for most goods traded between the two, and asserting a commitment to “broad mutual access to trade in services for both partners.” In large part as a result of this agreement, FDI, which had dropped from USD 338 million in 2014 to only USD 91 million in 2016, began to recover, amounting a total of USD 228 million in 2018, and then a historic high of USD 593 million in 2019.

Still, and although Moldova’s membership in the Soviet Union ended 29 years ago, the country’s ties to Moscow remain strong as well. The country is currently governed by a Russian-friendly coalition, and Moldovan President Igor Dodon – the former chief of Moldova’s Socialist party – has been identified as “pro-Russian.” In fact, in an attempt to support President Dodon, on April 17 of this year, Russia granted Moldova a loan of EUR 200 million (which the Moldovan parliament then ratified on April 23). Moldova also has observer status with the Russia-dominated Eurasian Economic Union.

Of course, nothing is black or white. Attracting FDI – from whatever source – is a common goal of all parties, and President Dodon has stated that, despite his personal friendship with Putin, “in Moldova it is almost impossible to be only pro-Russian or only pro-European.” According to Dodon, “the overwhelming majority of our citizens want to be friends both with the Russian Federation and the European Union.” Thus, he has insisted, “the foreign policy I have been promoting for the last years is a balanced one, meaning, on one hand, implementing the association agreement with the EU, and re-establishing the strategic relations with the Russian Federation on the other.”

Given the importance of FDI coming from both the EU and Russia to Moldova’s fragile economy, and the historic ties (and investors coming from both), we asked leading commercial lawyers in Moldova to share their thoughts on the twin sources of investment, and how the legal industry in Moldova has adapted to its unique circumstances.

Russia’s Waning Influence

Although Russian commercial influence on the Moldovan economy remained strong in the first years after the 1989 fall of the Berlin Wall and the country’s 1991 declaration of independence from the Soviet Union, that influence is now much weaker. “The situation was different in the early 90’s, when a lot of the investment came from the East,” says Roger Gladei, Managing Partner at Gladei & Partners. “However, the situation took a massive shift afterwards, and now most of it comes from the EU and the US.”

In fact, as late as 2015 Russia remained the largest source of FDI in Moldova, with 28% (although even then European countries contributed 61% of all FDI). Still, by 2019 Russia was only the seventh largest source of FDI (following Romania, the UK, the Netherlands, France, Estonia, and Italy, in that order).

As the moment, according to Igor Odobescu, Founding Partner of ACI Partners, “although Russian firms are generally present on the market, there isn’t a single sector in which they are more popular than the EU.”

Ultimately, Moldova may simply be too small a market for Russian investors to bother with, suggests Alexandar Turcan, Managing Partner at Turcan Cazac. “If we look at the list of top 100 Russian companies,” he says, “then we can recognize only a few names that have actually invested in Moldova (like Gazprom, Lukoil, and Yandex). Large Russian companies traditionally have showed little interest towards the Moldovan market due to its small size and lack of mineral resources.”

Oleg Efrim, Managing Partner at Efrim, Roca & Asociatii, says that “it’s interesting to note that Russian companies showed more presence last year than in the previous few years. Still, in sectors such as Banking or Energy, EU investments were decisive.”

Gladei confirms that there are almost no Russian banks in Moldova, and indeed, that “the Banking sector is where most of the strategic investment from the EU comes from.” Other strong sectors for the EU, he reports, “are ICT, Telecom, Manufacturing – particularly in the export-oriented free economic zones and industrial parks – and Energy, where also only a few minor Russian players are present.”

And it appears that even the few high-profile investments that are made by Russians are controversial. The 50-year concession to run Moldova’s only international airport – the Chisinau International Airport – is a particular source of scrutiny. Many Moldovan authorities and media watchdogs have challenged both the legality of the concession and the ultimate ownership of the company holding it, Avia Invest. Indeed, in February of this year, under pressure from Moldovan authorities, Russian billionaire Andrey Goncharenko said he had given up his shares in the company owning 95% of Avia Invest. Nonetheless, both President Dodon and Prime Minister Ion Chicu have cited the need to terminate the concession contract, and have accused Goncharenko of being a front for local business tycoon Ilan Shor, who is now a fugitive in Israel. “There are no investors from Russia [in the airport] and never have been,” Dodon said in an interview on Radio Free Europe last December.

With Russia’s decline, the European Union has stepped up its investment in Moldova, and the 2014 Association Agreement is a frequently-cited factor in the country’s recent growth. “The deal signed with the EU in 2014 makes for a cooperation that has contributed to changing the Moldovan export and FDI landscape, and has the potential to continue to do so,” says Ludmila Ciubaciuc, Senior Legal Associate at PWC Legal in Chisinau. “The future of FDI coming into Moldova depends on the government’s commitment to the continued implementation of the Association Agreement, the country’s political climate, and the economic dynamic both in western and eastern neighbors.”

But not everyone is so enthusiastic about the Association Agreement. Daniel Cobzac, Managing Partner at Cobzac & Partners, describes it as “limiting our country’s Government when it comes to choosing partners,” and he reports that “the Agreement is not very welcomed by the ruling Socialist Party, since it’s viewed as a matter of political influence.” Ultimately, though, even he suggests Moldova’s future lies with the West. “Even though the pro-Russian Government is trying to prepare the grounds for more Russian investment, I see no way of this succeeding.”

Either way, according to Efrim, “even more investment is likely going to come from the EU than it has up to this point.”

The Legal Industry Does Not Discriminate

The political and cultural ties between Moldova and the Soviet Union that dominated the middle part of the 20th century meant that for many years Russian was a second language in Moldova (after Romanian), and laws were historically published in both languages. As a result, Efrim says, “the older generation of lawyers have no problems speaking Russian – that might only be an issue, sometimes, to the younger generations.”

In fact, Efrim reports that, even today, “we require new hires to know either of the two languages [English and Russian], given the fact that our clients will need assistance and answers in one of the two. Knowing both would be perfect. We tend to make BD trips to both markets, and our promotional products in Russian at this moment include offers for legal services if they are required by a specific client.”

“Our lawyers speak Romanian, English, and Russian languages, so lawyers on our team are assigned to work on projects from both [the EU and Russia],” reports Ludmila Ciubaciuc. “When looking for new hires, knowledge of both Russian and English is important to us,” she says.

Still, there’s little doubt which language is most important to the modern practice. “Each candidate has to take an English test,” Ciubaciuc says, “and only individuals who score high enough are then selected for additional interviews, [but] we don’t give tests on candidates’ Russian knowledge level.” In addition, she says, “most of our promotional material is made in English and Romanian,” though she emphasizes that “we sometimes contribute articles in the local newspaper or magazines dedicated to the business community in Russia as well.”

Beyond language, most believe the idea of significant cultural differences between East and West are overblown. “No particular differences stand out,” insists Alexander Turcan. “Good Eastern companies have adopted the Western corporate culture, so that language is often the main difference. The legal needs are generally the same, too.”

Roger Gladei agrees, noting that “legal-wise, both markets speak the same language, and the same approach to business and culture makes almost all differences disappear.”

Igor Odobescu stakes out a middle ground. “While maybe some cultural differences exist, at the end of the day big investors are quite professional and used to the current standards in the industry,” he says. “This might not be true for smaller ones, though.”

But not everybody is so sure. Oleg Efrim, for one, insists that “the culture of doing business is different – the classic Russian way of working is distinct from the European one in due diligence, approach, mindset, and perspective.” Still, he is quick to note, “strategically, these differences are getting smaller.”

Daniel Cobzac believes some differences exist as well. “With Russian companies, things happen faster,” he says. “There is no central body that makes decisions, nor many people to consult with.” By contrast, he says, “with EU companies every decision requires that they obtain the approval of a supervisory body, hence things happen slower.” He reflects. “We recently advised a client who exported goods to the Netherlands. Because he was a bit late, the purchaser didn’t want to wait half an hour, which cost our client. This could never have possibly happened in Russia – they just don’t like to waste their money like that.”

In addition, Cobzac reports, the kind of legal services clients from Russia require is different than those from the West. “It’s common for Russian businesses to usually ask for legal services in connection with large-scale transactions (i.e., business acquisitions), while European companies require a more diversified portfolio of legal services, like setting up a business, regulatory compliance, employment law matters, and real estate transactions.”

Looking Forward

“In the next 10 to 15 years we will not become members of the EU,” President Dodon has said. “Even if part of our population – meaning young people – want immediately to become members of the EU this will not happen. So we need to be pragmatic.”

Pragmatism. Balance. Focus. For leading Moldovan law firms, keeping their options open and making sure they are ready and able to serve clients from both the West and the East is a critical element of their success.

This Article was originally published in Issue 7.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

ACI Partners at a Glance

ACI Partners is a leading law firm in Moldova with an expanding network of partners throughout Europe. ACI Partners was established in 2006 and since then has managed to build a very strong and competitive legal practice. Our business strategy strives to deliver a solid and reliable service, going beyond merely grasping the law, which the clients may turn to whenever they need. In reaching this goal, ACI Partners employs a personalized approach to each client, showing a genuine respect for their values and unqualified commitment to their interests and needs, steadily investing in knowledge and data management and ensuring a working environment consistent with our clients’ quality demands and high expectations.

ACI Partners is a one-stop shop law firm proficient in all possible legal matters a business might come across in Moldova, starting with incorporation of a business, and obtaining of all the necessary regulatory permits, continuing with various daily matters, such as contracts, labor, and migration, and finishing with dispute settlement, insolvencies, and criminal investigations. But we pride ourselves especially for our unmatched expertise in most innovative and complex areas for Moldova, as Modern Financial Products, Data Protection, Renewable Energy, Competition, Clinical Studies, Public Procurement, and Regulatory. In our work, we always involve a team of professionals with the relevant skill-mix, which enables us to provide our clients with an integrated and comprehensive advice, superior to our competitors.

ACI Partners has advised the Government of the Republic of Moldova, businesses, international organizations, and other institutions on most challenging transactions, assignments and projects.

ACI Partners is not just another law firm. Over the course of our existence and working in Moldova, and on the international stage for our non-Moldovan clients, we have developed a strong set of core values which, we believe, guide us in everything that we do and, moreover, gives us a competitive advantage – differentiating us from other firms on the market.

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