FEATURE-China’s new foreign policy takes shape – in Moldova

* $1 billion loan promise to poor country with few minerals

* Shows China flexing financial might in Russia’s backyard

* Also brings Chinese influence closer to Europe

By Olesya Dmitracova

BARONCEA, Moldova, Feb 2 (BestGrowthStock) – Small, poor nations
without significant mineral deposits are unlikely candidates for
investment by the world’s third-largest economy.

Yet China is taking a growing interest in Moldova, a former
Soviet state that is poorer than many countries in Africa.

Here, horse-drawn carts loaded with hay trundle on battered
roads alongside top-end Mercedes and Lexus cars, and villagers
get water from daily trips to wells.

China last July signed a memorandum of understanding to lend
Moldova $1 billion — equal to a tenth of the east European
country’s gross domestic product, and easily the biggest loan it
will have received from anywhere.

Asked why, experts have to stop and think.

“It is true that Chinese exporters are looking to diversify
their export base,” said Duncan Innes-Ker, Beijing-based China
analyst for the Economist Intelligence Unit (EIU).

“I would imagine that they would go to the much more
traditional places because Moldova really doesn’t have the
infrastructure.

“It doesn’t have, well, very much of anything,” he added
with a laugh.

Economic crisis has pummelled Moldova, which depends on
money earned abroad for about one-third of its gross domestic
product — the third-highest ratio globally. Moldovan workers
sent home about a third less cash last year than in 2008,
according to the National Bank.

People like Mariana Liulceac are feeling the impact: in
better days, she got enough money from her husband’s work as a
builder in Russia to send her son to a $1,200-a-year boarding
school for children with learning difficulties. For the past six
months, her husband hasn’t been paid. Her son quit school.

Living in a two-room house with three children, no kitchen,
bathroom or running water, Liulceac now depends on a British
charity.

So Moldova needs the money.

How dim its prospects are is summarised in the CIA Handbook:
“Likely to have a modest recovery in 2010, but remains
vulnerable to political uncertainty, weak administrative
capacity, vested bureaucratic interests, higher fuel prices,
poor agricultural weather, and the scepticism of foreign
investors as well as the presence of an illegal separatist
regime in Moldova’s Transdniestria region.”

SKILLS

What, besides diversifying some of its $2.4 trillion foreign
exchange reserves, is China after?

Travel around Moldova and you see and hear some possible
targets. Although the only official language is Moldovan, most
people can speak Russian and thousands travel to the country’s
former Soviet master to work.

Agriculture makes up a fifth of Moldova’s economy, yet with
the legacy of a Soviet-era education system, Moldova’s literacy
level is a fraction higher than in the United States.

The capital Chisinau is full of Internet cafes, and Moldova
sits comfortably in the top half of 134 countries ranked for
information technology potential by the World Economic Forum.

Funds from the promised loan, still being negotiated after
it was agreed with a previous government, will go towards
construction and infrastructure projects. Part is intended to
create high-tech industries, Moldova’s current government says.

INFLUENCE

More significant, though, is the influence the loan can buy.

“China is exercising its new-found foreign policy,” said IHS
Global Insight analyst Lilit Gevorgyan. She added that it is
eyeing “advantages of being a rising superpower”.

While China is becoming increasingly assertive with the
United States, in eastern Europe it is moving gently into poor
spots, gradually building financial ties with Russia’s
neighbours.

Last June, it agreed to invest more than $1 billion to build
power plants and roads in Tajikistan, an impoverished ex-Soviet
state with limited natural resources. In March, China’s central
bank agreed a three-year currency swap worth 20 billion yuan
($2.93 billion) with another former Soviet republic, Belarus.

“By strengthening its hand in Russia’s backyard, as it were,
China gives itself more leverage in overall negotiations with
Moscow,” EIU’s Innes-Ker said.

Gevorgyan agreed China wants to earn a “political dividend”.

Moldova is in Russia’s backyard in more than one sense:
Russia has kept troops in the breakaway region of Transdniestria
since 1992, and negotiations to withdraw them have so far
failed. Transdniestria wants independence or integration with
Russia, but Moldova is willing to give it only autonomy.

China will increasingly need leverage with Russia as its
dealings with its oil- and gas-rich neighbour expand. Russia
provides nearly 8 percent of China’s total crude oil imports,
and Gazprom is in advanced talks on a deal to supply gas.

“For decades Russia has had rocky relations with its
powerful eastern neighbour, but now Russian strongman (Prime
Minister Vladimir) Putin has decided to set these aside and
embrace closer economic co-operation,” IHS Global Insight
analysts wrote in a note in October.

But, they added, there remains mistrust between the two.

EUROPE’S BACKYARD

For China, the loan is also not devoid of commercial
potential, and it could be a way to establish a clientele in the
European Union’s backyard as well as Russia’s.

“There are synergies between China’s export interests and
concerns and Moldova’s specific manufacturing base,” said
Franklin Steves, political counsellor at the European Bank for
Reconstruction and Development.

China would likely focus on Moldova’s agriculture, wine and
textiles sectors, he said. Exporting goods to the European Union
via Moldova could cut Chinese transport costs significantly.

“The textiles sector … is an area in which Moldova remains
competitive on European and regional markets and is, of course,
a sector in which Chinese investors are major players on the
global stage,” said Steves.

Moldova’s comparatively low wages have already attracted a
number of European textile manufacturers, he noted. Some have
relocated from places like Romania, where wages have increased.

Moldova’s poverty, weak governance and the Transdniestria
dispute — which means the government doesn’t control part of
its territory — make its chances of joining the European Union
remote. It is a member of the EU’s Eastern Partnership and was
entitled to 210 million euros in EU assistance for 2007-2010,
tied to projects to promote democracy and reform.

The Chinese loan would dwarf any money coming from Brussels,
or from anywhere.

To put it into context: before he became prime minister in
Moldova’s current pro-Western coalition, Vlad Filat said it
expected to receive $2 billion from the West — $1.5 billion in
loans from international financial institutions and $500 million
in U.S. grants.

It has received about $93 million out of a promised $574
million from the IMF in a programme agreed last month. Russia
promised the former communist government a $500 million loan.
Nothing has been disbursed so far.

Of course, no money has yet been received from China,
either. But the promise is pretty powerful.

“In some ways, in a small country like Moldova you can get
more bang for your buck,” said Steves.

Stock Market Today

(Additional reporting by Paul Taylor; Editing by Sara Ledwith)
(For news on humanitarian issues please visit www.alertnet.org;
email [email protected])

FEATURE-China’s new foreign policy takes shape – in Moldova