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China's new foreign policy takes shape - in Moldova

By Olesya Dmitracova

BARONCEA, Moldova (Reuters) - 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 pummeled 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 summarized 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 skepticism 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 toward 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 neighbors.

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 neighbor 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 neighbor, 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 counselor 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 program 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.

(Additional reporting by Paul Taylor; Editing by Sara Ledwith)

(For news on humanitarian issues please visit www.alertnet.org; email Alertnetnewsdesk@reuters.com)

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