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EXECUTIVE SUMMARY AND RECCOMENDATIONS

With Romanias expected entry into the European Union in 2007, the EU will share a border with Moldova, a weak state divided by conflict and plagued by corruption and organised crime. Moldovas leadership has declared its desire to join the EU, but its commitment to European values is suspect, and efforts to resolve its dispute with the breakaway region of Transdniestria have failed to end a damaging stalemate that has persisted for fifteen years. Young people have little confidence in the countrys future and are leaving at an alarming rate. If Moldova is to become a stable part of the EUs neighbourhood, there will need to be much greater international engagement, not only in conflict resolution but in spurring domestic reforms to help make the country more attractive to its citizens.

Two recent initiatives by the EU and Ukraine gave rise to hopes that the balance of forces in the separatist dispute had changed significantly. An EU Border Assistance Mission (EUBAM) launched in late 2005 has helped curb smuggling along the Transdniestrian segment of the Moldova-Ukraine frontier, a key source of revenue for the authorities in Tiraspol, the Transdniestrian capital. At the same time, Kievs implementation of a landmark customs regime to assist Moldova in regulating Transdniestrian exports has reduced the ability of businesses in the breakaway region to operate without Moldovan oversight, striking a major psychological blow.

But optimism that these measures would ultimately force Transdniestria to make diplomatic concessions appears to have been false. Although EUBAM has had significant success, particularly given its small size and budget, widespread smuggling continues. Nor has the Ukrainian customs regime had a decisive effect on Transdniestrian businesses, which remain capable of profitable legal trade as they were in the past. Moreover, domestic political uncertainty has raised questions about whether Kiev will continue to enforce the new regulations.

Russia has increased its support for Transdniestria, sending economic aid and taking punitive measures against Moldova, including a crippling ban on wine exports, one of its main revenue sources. Moscow refuses to withdraw troops based in Transdniestria since Soviet times whose presence serves to preserve the status quo. With Russian support, the Transdniestrian leader, Igor Smirnov, has little incentive to compromise in his drive toward independence. The internationally-mediated negotiations between the two parties are going nowhere, despite the presence since 2005 of the EU and U.S. as observers. Although some understanding had been reached about the level of autonomy in a settlement, Moldova has hardened its position to match Transdniestrias intransigence.

Barring a softening of Russias stance, the best chance for moving toward a sustainable settlement is to convince the Transdniestrian business community that cooperating with Moldova is in its own interests. There is evidence that some business leaders are growing frustrated with Smirnov and may be willing to work with Chisinau.

For this to happen, however, both Transdniestrians and Moldovans will have to believe in the countrys economic future. Its business environment is poor, foreign investment is low, and GDP per capita is on a par with Sudans. The Communist Party government, headed by Vladimir Voronin, has shown little will to root out corruption and improve the business climate, and its Transdniestria policy seems based more on easy rhetoric than engagement. Moldovas relatively new commitment to a Western-oriented policy is opportunistic rather than deep-rooted.

The EU has the leverage to play a greater role in pressuring Moldova to carry out reforms; it can also help by lifting tariffs on agricultural products, including wine, that Moldova could potentially sell in its market, as well as on products from Transdniestrian factories such as steel and textiles. Transdniestrias smuggling revenue must be further restricted, through long-term assistance to the Ukrainian and Moldovan border and customs services and a multi-year extension of EUBAMs mandate. The Transdniestrian business community needs confidence it can make money in a united Moldova but it is equally important to limit the economic benefits of the status quo.

Even if efforts to alter the economic calculus are successful, however, the absence of mutual trust will remain debilitating. Addressing this will likely require years of confidence-building, through political dialogue, transparent customs rules and trade relations, and measures to increase democratisation and freedom of the media on both sides. It may also require international guarantees to convince Transdniestrian businesses that they will not be stripped of their assets by the Moldovan government following a settlement.

Moldova is increasingly reliant on the EU and so is vulnerable to pressure from Brussels for reforms that would increase its economic and political attractiveness to its own citizens, including Transdniestrians. These reforms will have to have a central place if the groundwork for a settlement is to be prepared. The U.S. has been content to let the EU lead on Moldova, and the EU has done so și to a degree. But it must do far more with both incentives and pressures if it is to secure peace and prosperity in its neighbourhood and strengthen the weak roots of Moldovas European policy

RECOMMENDATIONS

To Moldova:

1. Show real political commitment in implementing the EU-Moldova Action Plan, particularly in the areas of media freedom, anti-corruption, judicial reform and the business environment.

2. Stop conditioning negotiations with Transdniestria on up-front progress in democratisation and demilitarisation and instead show willingness to cooperate, particularly on customs and trade issues, even in the absence of movement on those longer-term goals.

3. Reform the customs service and border guards in line with EU Border Assistance Mission (EUBAM) recommendations, including by granting investigatory powers to the border guards, phasing out use of conscripts, developing risk analysis capabilities and putting serious effort into tackling corruption.

4. Request, with Ukraine, a multi-year extension of EUBAMs mandate.

To the Transdniestrian Authorities:

5. Call off the 17 September 2006 referendum on independence and work constructively with Moldova and the international mediators on reaching a settlement, and, more immediately, on customs and trade issues.

To the EU and its Member States:

6. Give more technical aid for reforms if Moldova demonstrates a genuine willingness to use it effectively.

7. Expand anti-smuggling assistance, in particular by:

(a) seeking a request from Moldova and Ukraine for a multi-year extension of the EUBAM mandate; and

(b) providing greater financial assistance and training to the customs and border services of both Ukraine and Moldova, including through EUBAM.

8. Grant Autonomous Trade Preferences to key Moldovan agricultural products, including wine, as well as goods produced by Transdniestrian factories, such as steel products and textiles.

9. Offer the Transdniestrian business community incentives to work constructively with Chisinau, including:

(a) Autonomous Trade Preferences for Transdniestrian exports;

(b) technical help in overcoming non-tariff barriers; and

(c) seminars, business clinics and trade missions.

10. Show parallel willingness to impose targeted financial sanctions against the Transdniestrian leadership, including members of the business community, and/or a trade embargo on Transdniestrian exports to the EU if cooperation is not forthcoming after a reasonable period of time.

11. Increase the EUs profile in Moldova and Moldovans awareness of European values by:

(a) relocating the EU Special Representative (EUSR) to Moldova to Chisinau, with a view to double-hatting the same individual as both EUSR and head of the European Commission delegation;

(b) granting the European Commission a mandate to negotiate a visa-facilitation agreement with Moldova, and opening a joint visa application centre in Chisinau;

(c) increasing funding for exchange programs involving officials, students, and civil society; and

(d) doing more public diplomacy in Transdniestria, targeting the business community and students.

To Ukraine:

12. Continue to enforce the new customs regime along the Moldova-Ukraine frontier and reform the customs service and border guards in line with EUBAM recommendations, including by granting them investigatory powers, phasing out use of conscripts, developing risk analysis capabilities and tackling corruption seriously.

13. Request, with Moldova, a multi-year extension of EUBAMs mandate and agree to establish joint customs posts with Moldova, both on Moldovan territory in areas controlled by Moldova and on Ukrainian territory between Ukraine and Transdniestria.

To Russia:

14. Agree with Moldova, the EU, U.S., OSCE and other parties on the deployment of a modest international peacekeeping and/or policing operation with participation from the EU, Russia, and other interested states, and withdraw all remaining troops accordingly.

15. Exert political and economic influence on the Transdniestrian leadership to negotiate with Moldova in good faith and accept a reasonable political settlement; discourage and do not recognise the Transdniestrian referendum scheduled for September 2006.

16. Revoke the ban on Moldovan wine and other agricultural products.

To Russia, Ukraine, the OSCE, the EU and U.S.:

17. Explore the possibilities for providing an international guarantee on property rights in a settlement between Moldova and Transdniestria.

To the EU and U.S.:

18. Help Ukraine and Moldova, through the relevant EU Action Plans and other instruments, to develop effective anti-corruption programs, particularly within the customs service and border guards; and urge Ukraine and Moldova to come to an agreement on joint customs posts on Ukrainian and Moldovan territory if Transdniestria continues to refuse to allow Moldovan customs officers to operate on its territory.

19. Continue to condition ratification of the adapted Conventional Armed Forces in Europe (CFE) Treaty on withdrawal of Russian troops, including peacekeepers, from Moldova, unless they are re-hatted as members of a new international peacekeeping force, and prepare for such a new force, including troops and civilian police from the EU, Russia, and other interested states.

To the EU, U.S., OSCE and Other Donors:

20. Strengthen cooperation between Transdniestria and Moldova at non-official levels by organising and supporting educational exchanges, NGO workshops, cultural events and business clinics with participation from both sides, and provide greater funding to Transdniestrian civil society and independent media.

Chisinau/Brussels, 17 August 2006