CENUSA: Moldova chooses lesser evil and restores energy dependence on Russia-controlled Transnistria

CENUSA: Moldova chooses lesser evil and restores energy dependence on Russia-controlled Transnistria
/ bne IntelliNews
By Denis Cenusa in Germany December 9, 2022

The current energy crisis has been the biggest challenge for Moldova since the beginning of the Russian aggression against Ukraine. Although Moldova has been investing in energy diversification, seen through a sober cost-benefit analysis, energy disengagement from Russia and its energy proxies is a painful decision in a short to medium-term perspective.

Consequently, the Moldovan side would rather put up with unwanted energy ties with Russia than get rid of them at the risk of high political and economic costs. Precisely because of this survival thinking, on December 3, the Moldovan government agreed to resume the contract with the electricity produced by the Cuciurgan Power Station in the breakaway region of Transnistria that is under Russian control.

The decision to resume supplies from Transnistria sparked a mix of bewilderment on the one hand and relief on the other in the Moldovan public. Before that, the government claimed that Romania's power supply will replace Transnistria's. This argument was short-lived and was quickly overtaken by realpolitik thinking. The Moldovan government has realised that it has to learn to extract maximum benefits while playing Russia's energy games, because the alternative is way too expensive. Instead of driving Transnistria into political submission under the pressure of the Russian-inflicted gas deficit, the Moldovan government has fallen victim to trade-offs that actually favour Transnistria more.

For now, Moldova is stuck with a five-year gas contract that the pro-EU, pro-reform government voluntarily signed with Gazprom in October 2021. Without this gas deal, Moldova will have to pay almost double for imported natural gas from other places. Given that market prices are around €1,500 per 1,000 cubic metres, Russian gas is the most affordable for Moldova. Apart from that, the ruling elite acknowledge that Transnistria offers cheap electricity, which is irreplaceable as long as Russia sells lower-priced gas to Moldova. The little room to outmanoeuvre Russia is dictated by the fact that Moldova's energy vulnerability is shaken by the war in Ukraine. When Russian missiles hit Ukraine's critical energy infrastructure hard, Moldova's national grid goes through a shockwave.

Concessions to survive

The concession to Transnistria includes the supply of all the natural gas received from Russia, which means 5.7mn cubic metres of gas per day, at €780 per 1,000 cubic metres. In response, Transnistria's Cuciurgan power station sells electricity produced from Russian gas at €73 per MWh. Moldova will buy 204,000 MW in December. In November, given the spikes in the European spot market, the Moldovan government had to pay for imported electricity prices ranging from €180 to €350 per MWh. Transnistria's electricity eases pressure on public spending and allays criticism from political rivals exploiting energy inflation against the government.

Supplies from Romania will cover the rest of the energy requirements. During November, Moldova was buying 80% of the electricity needed for domestic consumption from Romania, replacing supplies from Ukraine and Transnistria. Ukraine had to suspend exports to Moldova on October 10 due to disruption in power production caused by the start of the Russian missile attack campaign. Transnistria's power supply was interrupted in early November over a disagreement with the Moldovan constitutional authorities to direct 5.7 mcm of gas imported from Russia per day.

To cope with the power deficit and avoid outright blackouts, Moldovan state trader Energocom bought two thirds of the electricity needs from the Romanian OPCOM exchange. In November, the purchase of electricity from Romania amounted to $51.6mn (an average of €231 per MWh). Romania has also sold smaller volumes of electricity to Moldova based on emergency contracts with Romanian producer Hidroelectrica at preferential prices (€90 per MWh), by changing regulations specifically to accommodate Moldova's request. The Moldovan side explained that new contracts were signed with Romanian electricity companies at the price of €90 per MWh. Starting in January 2023, the Moldovan authorities expect their Romanian counterparts to increase domestic electricity production by allowing cheap energy exports to Moldova.

Pros and cons

The new electricity supply contract with Transnistria, greenlit by the Moldovan government, has been criticised by several voices in civil society and the opposition. At the heart of the discontent is the fact that the negotiations between the Moldavan authorities and the separatist regime were not transparent and that the result returns a status quo favourable to Russia.

This is also demonstrated by the fact that the pro-Russian forces in Moldova, represented by the Socialists, have welcomed the signing of the contract. The ruling party and the government reject this criticism, invoking two main counter-arguments: In the first place, the government justifies the usefulness of the contract with Transnistria by the possibility of reducing the price of electricity. More precisely, the intention is to reduce tariffs by 25% to €0.19 cents (MDL4) per kWh. This means that the government will not have to look for additional financial sources for compensation schemes on electricity. The current budget for subsidies to the vulnerable segments of the population constitutes €243mn (MDL5bn), much of which comes from external assistance (the EU and international financial institutions). Probably the authorities are concerned about the latest polls that confirm that high prices and poverty are among the main concerns of the population, 23% and 19.4% respectively, not corruption. The preferred solution for the public is the dismissal of the current government (44%). To stop the growing dissatisfaction, the authorities chose to direct all the Russian gas, bought at a lower price than in the EU market, to Transnistria to buy more affordable electricity produced by Transnistria's Cuciurgan Power Plant (at €73 per MWh).

The second argument that is highlighted by the government refers to the humanitarian aspects of the problem. As Transnistrian industry stopped operating due to the serious electricity deficit, the income from the supply of energy to the rest of Moldova, controlled by the constitutional authorities, and exports to the EU were cut. The number of Transnistria companies registered in Moldova represents 2,312 entities, which were affected by ongoing energy crises. Before the deal on the new electricity supply contract was reached, Transnistria was in a dangerous place from a socioeconomic perspective and Russia could not have helped due to the financial sanctions that make transfers to the separatist region impossible. Consequently, apart from freezing the population after the coal reserves that Transnistria can use to guarantee heating and electricity for approximately two months, the highest risk was the lack of financial resources to keep the economy afloat and control public discontent. The political destabilisation of Transnistria could lead to escalations in the security field. However, the Moldavan government only chose to point out the risk of a humanitarian catastrophe in the region. According to the latest data, the population of Transnistria constitutes 355,000 people, of which 346,000 are citizens of Moldova. In the case of a humanitarian crisis, large parts of this population would have tried to find refuge in other regions of Moldova. That could increase the pressure on the local public administrations of Moldova that are already overwhelmed by the task of helping Ukrainian refugees. In this regard, the Moldovan government seems to have decided that a new electricity contract presents fewer and less harmful risks than the complications of a humanitarian nature.

Geopolitical implications

As far as crisis management is concerned, the government's decision to renew the contract with Transnistria for the supply of electricity makes a lot of sense, since it reduces political costs at home and ensures the survival of the regime. Apart from that, this deal prevents the "cascade effects" of the current energy crisis from occurring, with uncertain consequences for the country's economic and political stability. However, this does not change the fact that the negotiations have been dark and the conditions benefit Transnistria (and indirectly Russia) more than Moldova. It is fair to say that the result of the deal shows the limited negotiating power of the Moldovan side and the weight of the Russian energy leverage that it had in the negotiations between Moldova and the separatist regime.

The main external partners in the West are aware of the problematic situation that the Moldovan government at this time. That is, in this context, the US Embassy in Chisinau and the Secretariat of the Energy Community, which probably also shares the EU voice, have rushed to give a highly positive evaluation of the contract with Transnistria. If the US and the EU were not informed before signing the contract, then the two now have a high degree of confidence in the Moldavan government and do not question the integrity of its decisions. In any case, Western support for this contract is rather bittersweet, because behind the Transnistrian energy producer, Cuciurgan Power Plant, is the Russian energy giant, controlled by the Kremlin-backed InterRAO. In addition to this company's activities in Russia, it also operates in Armenia, Georgia, Kazakhstan and Tajikistan.

Despite the energy sanctions adopted by the EU and the US against Russia for the war waged against Ukraine, InterRAO has not yet been targeted. In May, Finland and Lithuania stopped buying electricity supplied by InterRAO, focusing on the diversification and strengthening of their energy sovereignty (“self-sufficiency”), as well as on expressing solidarity with Ukraine stopping "financing the Russian war machine." Finally, since Moldova appears to be subject to structural dependency on Russia at the moment, the government is reassessing its energy policies. The political ambition of achieving energy independence for Russia does not match the reality that diversifying imports of electricity and natural gas does not solve the problem of price affordability. For the moment, and against the backdrop of the implications of the Russian war in Ukraine, Moldova will choose the lesser energy evil.

Paradoxically, cheaper gas and electricity produced from Russian gas have become a way for the Moldovan government to survive the weaponisation of energy by Moscow. However, the risks of a complete shutdown of the gas flow should not be discounted, especially if this is part of Russia's war of energy attrition against Ukraine. Meanwhile, the Moldovan government will have to mitigate the eventual miscalculated consequences of the "lesser evil" that it has deliberately chosen in the controversial energy deal with Transnistria.

Denis Cenusa is an Associated Expert at Think-Tank EESC in Lithuania and Moldova, and a PhD candidate at Justus-Liebig-Universität in Germany. He tweets @DionisCenusa.