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Cablegate: Romania: Investment Climate Statement, 2005

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 13 BUCHAREST 003560

SIPDIS

DEPT FOR EUR/NCE - WILLIAM SILLKWORTH AND TARA ERATH
EB/IFD/OIA - ABRYAN
DEPT PASS TO USTR
USTR FOR LERRION
TREASURY FOR DO/GCHRISTOPOLUS
USDOC FOR ITA/ATAYLOR
USAID FOR E&E

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB PGOV RO
SUBJECT: ROMANIA: INVESTMENT CLIMATE STATEMENT, 2005

REF: STATE 250356

---------------------------------
A. Openness to Foreign Investment
---------------------------------

Encouraging Investment
----------------------
Romania actively seeks foreign direct investment. A new
center-right government that assumed power in late
December 2004 has emphasized its desire to make Romania
a more attractive investment destination and to improve
aspects of the business climate. To date, despite
Romania's marketplace of 21.7 million consumers, a well-
educated workforce, and abundant natural resources,
investment remains below potential. Favored areas for
American investment include IT and telecommunications,
biotechnology, manufacturing, and consumer products.

Romania is moving to lower tax rates and strengthen tax
administration, enhance transparency, and create legal
means to resolve contract disputes expeditiously. Until
recently, legislative unpredictability continued to
undermine investor confidence. Prospective U.S.
investors should consult legal counsel to receive up-to-
date legal information.

Successful U.S. companies tend to establish a local
presence to familiarize themselves with the business
climate. Using this expertise, firms develop longer-
term strategies and commitments necessary for building
lasting partnerships with the Government of Romania
(GOR), local government authorities, labor unions, and
local partners. These partnerships can ameliorate
potential resistance to foreign investment that remains
in some quarters, including nationalistic officials,
workers fearful of losing their jobs, some managers of
state-owned enterprises who are not accustomed to market
economy business practices, and some local companies
resisting competition through corrupt connections and
practices.

Investments that involve the public authorities (GOR
ministries, local public authorities) are generally more
complicated than greenfield investments or joint ventures
with private Romanian companies. Large deals involving the
GOR - particularly public-private-partnerships- have been
stymied by vested political and economic interests and
bogged down by inaction within and lack of coordination
among governmental ministries. Privatizations by lesser-
known buyers have been at times obstructed by the
privatization agency's failure to honor its commitments or
take other actions consistent with the best interests of the
privatized enterprise.

EU Accession
------------
Romania has worked to create a legal framework
consistent with a market economy and investment
promotion, and is moving ahead with EU-compatible
legislation in its quest to join the European Union.
Implementation lags, however. With an increasing number
of EU-driven pieces of legislation, it is at times hard
for Romania to balance its EU accession goals with its
WTO undertakings. To date, Romania has added into its
national legislation over 2000 primary and secondary
pieces of legislation from the EU acquis.

Romania provisionally closed pre-accession negotiations
with the EU in December 2004. Pending continued
progress in complying with membership criteria, Romania
is to become a EU member on January 1, 2007. However,
the EU added a safeguard clause into Romania's Accession
Treaty, which enables the EU to postpone Romania's
accession by one year, to January l, 2008, if there is
clear evidence that Romania is manifestly unprepared to
meet the requirements of EU membership.

The U.S. Department of Commerce recognized Romania as a
market economy for anti-dumping investigation purposes
in March 2003. Romania also received functioning market
economy status from the EU in October 2004, thus meeting
a necessary condition for EU membership. However,
Romania's ability to withstand competitive pressures
after EU accession remains a concern.

Legal Framework
---------------
Romania's legal framework for foreign investment is
contained in a substantial body of law, largely passed
in the late 1990s and subject to frequent revision
since. Local counsel should be engaged to navigate
through the various laws, decrees, and regulations.

Romanian legislation and regulation provides national
treatment for foreign investors, guarantees them free
access to domestic markets, and allows foreign investors
to participate in privatizations. There is no limit on
foreign participation in commercial enterprises.
Foreign investors are entitled to establish wholly
foreign-owned enterprises in Romania (although joint
ventures are more typical) and to convert and repatriate
100 percent of after-tax profits. Foreign firms are
allowed to participate in the management and
administration of the investment, as well as to assign
their contractual obligations and their rights to other
Romanian or foreign investors.

Foreign investors may engage in business activities in
Romania via any of the following methods:
- Setting up new commercial companies, subsidiaries or
branches, either wholly owned or in partnership with
Romanian natural or legal persons;
- Participating in the increase of capital of an
existing company or the acquisition of shares, bonds, or
other securities of such companies;
- Acquiring concessions, leases or agreements to manage
economic activities, public services, or the production
of subsidiaries belonging to commercial companies or
state-owned public corporations;
- Acquiring ownership rights over non-residential real
estate improvements, including land, via establishment
of a Romanian company;
- Acquiring industrial or other intellectual property
rights;
- Concluding exploration and production-sharing
agreements related to the development of natural
resources.

Foreign investor participation can take the form of
foreign capital, equipment, means of transport, spare
parts and other goods, services, intellectual property
rights, technical know-how and management expertise, or
proceeds and profits from other businesses carried out
in Romania. Foreign investment must comply with
environmental protection, national security, defense
interest, public order, and public health regulations.

Privatization
-------------
Romania has made significant progress in privatizing
industrial companies. To date, less than 5% of the
industrial assets are still state-owned. Privatization
in the energy sector also has progressed, with the
privatization of national oil company Petrom, two energy
distribution companies, and two natural gas distribution
companies. Romania has granted some companies involved
in energy privatizations with safeguards against paying
for environmental remediation resulting from past
contamination.

Under current law, the government ministry or agency
that has authority over a state-owned company (the State
Asset Resolution Authority (AVAS), the Ministry of
Economy and Commerce, Ministry of Transportation,
Ministry of Communications and IT, or in some cases,
local government) also has the authority to privatize
it. The law on privatization requires the setting up of
pre-privatization management team to facilitate
restructuring of the company and eventual privatization.
The law permits the responsible authority to hire an
agent to handle the entire privatization process.

Buyers of state-owned companies must negotiate
requirements and restrictions concerning the company's
purpose, scope of activities, turnover, and social
protections in the form of limited layoffs or funding
for retraining programs. Privatizing agencies continue
the practice of rolling into privatization agreements
provisions of previously negotiated collective labor
agreements, which are labor-protective and restrict
layoffs. Prospective investors are strongly advised to
make a thorough due diligence review before any
acquisition.

Property and Contractual Rights
-------------------------------
Property and contractual rights are recognized, but
enforcement through the judicial process can be
extremely difficult, costly, and lengthy. Foreign
companies engaged in trade or investment in Romania
often express concern regarding the lack of commercial
experience of Romanian courts. Judges generally have
little experience in the functioning of a market
economy, international business methods, intellectual
property rights, or the application of new Romanian
commercial law.

------------------------------------
B. Conversion and Transfer Policies
------------------------------------

Romanian legislation does not restrict the conversion or
transfer of funds associated with direct investment.
All profits made by foreign investors in Romania may be
converted into hard currency and transferred abroad at
the market exchange rate after payment of taxes.
However, some conversion and transfer procedures can be
time-consuming due to Romanian bureaucracy.

The Leu is freely convertible on current-account
transactions, in accordance with the IMF's Article VII.
Proceeds from the sale of shares, bonds, or other
securities, as well as from the conclusion of an
investment, can also be repatriated. There is no
limitation on the inflow or outflow of funds for
remittances of profits, debt service, capital gains,
returns on intellectual property or imported inputs.

In February 1998, the Romanian government implemented new
regulations that liberalized foreign exchange markets.
However, procedural delays in processing capital outflows
remain, mainly from the lack of a domestic inter-bank
electronic system, which is under development and scheduled
to become operational in 2005.

Capital inflows are relatively free from restraint.
Only the opening of the ROL deposits by non-residents
still requires approval by the Central Bank, in order to
prevent inflows of "hot money" from abroad, but this
restriction is expected to be removed in April 2005 as
capital account liberalization advances. According to
Romania's agreements with the European Union and
international financial organizations, Romania will
gradually implement such liberalization prior to
Romania's accession to the EU (i.e. enable ROL-
denominated deposit accounts to be opened by foreigners
with resident financial institutions, and current and
deposit accounts by residents abroad).

----------------------------------
C. Expropriation and Compensation
----------------------------------

The law on direct investment includes a guarantee
against nationalization and expropriation or other
equivalent actions. The law allows investors to select
the court or arbitration body of their choice to settle
potential litigation. Since 1989, there have been two
American expropriation claims, one arising from a
controversial privatization and the other the
nationalization of an investor's assets. Several cases
involving property nationalized during the communist era
remain unresolved.

Investors should be aware, when purchasing land or a
former state-owned company, that in those cases where a
former owner wins title to a privatized asset, it may be
restituted in kind and the investor compensated by the
public institution that privatized it. If restitution
is not possible in kind, the public institution must
compensate the former owners. In either case, the
current or former owners run the risk of less than fair
market value compensation. Prospective investors must
conduct a careful due diligence review encompassing
potential restitution claims.

----------------------
D. Dispute Settlement
----------------------

Arbitration
-----------
Romania recognizes the importance of arbitration in the
settlement of commercial disputes. Many agreements
involving international companies and Romanian
counterparts provide for the resolution of disputes
through third-party arbitration. Romania is a signatory
to the New York Convention of 1958 regarding the
recognition and execution of foreign arbitration awards.
Romania is also a party to the European convention on
international commercial arbitration concluded in Geneva
in 1961 and a member of the International Center for the
Settlement of Investment Disputes (ICSID).

Romanian law and practice recognize applications to
other internationally known arbitration institutions,
such as the ICC Paris Court of Arbitration or the Vienna
United Nations Commission on International Trade Law
(UNCITRAL). Romania also has an International Commerce
Arbitration Court administered by the Chamber of
Commerce and Industry of Romania (the "Arbitration
Court"). Arbitration awards are enforceable through
Romanian courts under circumstances similar to those in
Western countries.

Bankruptcy
----------
Romania's bankruptcy law contains provisions for
liquidation and reorganization that are generally
consistent with western legal standards. These laws
usually emphasize enterprise restructuring and job
preservation. Legal and economic education and the
training of judges and lawyers lags behind law-making,
which often results in inconsistent outcomes. Moreover,
social concerns often prevail over economic reasoning,
resulting in the survival of overstaffed loss-making
companies which should otherwise be dissolved.

To mitigate the time and financial costs of
bankruptcies, Romanian legislation provides for
administrative liquidation as an alternative to
bankruptcy. However, investors have complained that the
liquidators lack the competence and incentive to
expedite liquidation proceedings. For state-owned loss-
making companies, state subsidies, accumulation of
arrears, debt rescheduling and debt-for-equity swaps are
the preferred alternatives to putting such companies
through insolvency or bankruptcy procedures. Both state-
owned and private companies tend to opt for judicial
reorganization to avoid bankruptcy.

---------------------------------------
E. Performance Requirements/Incentives
---------------------------------------

Incentives
----------
Since 1991, Romania's legislation has seesawed between
granting, amending and suspending investment incentives.
The availability of incentives is dependent on the economic
situation, with the government at times suspending
incentives in order to tighten fiscal policy. To meet the
requirements of the EU body of law termed the "acquis
communitaire" (short form: the "acquis"), Romania is
revisiting its fiscal incentives to bring them in line with
the EU state aid regulations. Investors are encouraged to
verify the current status of investment incentives. As a
general rule, new fiscal regulations do not grandfather past
incentives.

As Romania prepares for EU accession, customs and tax
incentives are being phased out for investors in free
trade and economically disadvantaged zones. In line
with the revised state-aid law, Romanian has capped the
state aid available for major investments based on the
investment size and location. The state aid available
through incentives for companies in free trade zones and
disadvantaged zones has been capped at 50% of the
investment, and likewise state aid for small and medium-
sized enterprises (SMEs) to 65% of the investment.
Prospective investors are advised to investigate
thoroughly the current status of fiscal incentives and
consider possible future changes resulting from EU
accession negotiations when drafting business and
investment plans.

To reduce initial startup costs, a system of industrial
parks and technological parks is being created. Tax
incentives are available under the law solely for the
industrial park operator, while companies that establish
themselves in the park benefit from access to utility
hookups and infrastructure, and eventual local tax
rebates within state aid caps.

Tax System
----------
Romania has revised its tax system to bring it closer to
EU models and more in line with the recommendations of
the World Bank and IMF.

In December 2004, a new government amended the Fiscal
Code by emergency ordinance, abolishing tax brackets and
establishing a 16% flat tax on personal incomes.
Corporate taxation will likewise be reduced from 25% to
16%. Both of the measures are to come into force
beginning January 1, 2005. Offsetting these cuts is an
increase in the micro-enterprise tax from 1.5% to 3%,
and a rise of the tax on dividends obtained by
individuals from 10% to 15%, in line with the corporate
dividend tax of 15%.

Tariff Preferences
------------------
Like many other Central and Eastern European countries,
Romania provides tariff preferences for EU goods under
its association agreement with the EU. In 2003, Romania
came under generalized system of preferences (GSP)
scrutiny because of preferential tariff treatment
(reverse preferences) it offers the EU, but no formal
review was taken because Romania reduced its tariffs on
Bourbon - the main U.S. industry petitioner. However,
Romania took no further action to reduce tariff
preferences for other U.S. products, and may actually
raise some of the tariffs previously reduced. In June
2004, a pharmaceutical company petitioned USTR for
review of Romania's GSP status.

--------------------------------------------- -----
F. Right to Private Ownership; Establishing Firms
--------------------------------------------- -----

The Romanian constitution, adopted in December 1991, and
revised in 2003, guarantees the right to ownership of
private property. Mineral, air rights, and similar
rights are excluded from private ownership. At the
present time, property can only be purchased by
foreigners through their participation in a Romanian
company. As of January 1, 2007, EU citizens will be
able to buy land without restrictions.

Foreign investors involved with commercial companies
having any foreign capital may acquire land or property
necessary for fulfilling or developing the company's
corporate goals. If the company is dissolved or
liquidated, the land must be sold within one year of the
company's closure and may be sold only to a buyer(s)
with the legal right to purchase such assets. Foreign
investors cannot purchase agricultural land at this
time. Under Law 268/2001, investors can purchase shares
in agricultural companies that can lease land in the
public domain from the State Land Agency.

-----------------------------------------
G. Protection of Private Property Rights
-----------------------------------------
Mortgages
---------
Law No. 190/1999 on mortgage loans for real estate
investments allows a debtor's receivables to be used as
a guarantee, and specifically addresses the protection
of both borrowers and creditors, in an effort to
minimize risk to the lender. Domestic private and
foreign capital banks and investment funds freely
compete on the mortgage market with the state-supported
Banca Comerciala Romana (BCR) and with the state-budget
National Housing Agency (ANL). Using its limited state
budget resources, ANL targets young applicants and
charges interest of 7% per annum in EURO for applicants
under 35, and 9% for applicants over that age. Banks
charge an average 9.87% per annum for USD loans and
9.185% for Euro loans, practice more flexible terms, and
have greater resources available for mortgages.
Usually, interest charged tracks LIBOR at six months for
loans granted in USD and EURIBOR at six months for loans
granted in Euro, with the addition of Romanian country
spread.

Intellectual Property Rights
----------------------------
Romania is a signatory to international conventions
concerning intellectual property rights (IPR), including
TRIPS, and has enacted legislation protecting patents,
trademarks, and copyrights. Romania signed the Internet
Convention to protect on-line authorship. While the IPR
legal framework is generally good, enforcement is
woefully weak. Romania has passed border IPR control
enforcement provisions as required under the WTO, yet
customs authorities and border police controls remain
equally lax. As result of persistent problems in the
enforcement of intellectual property rights, the U.S.
Trade Representative (USTR) kept Romania on its Special
301 Watch List for 2004. High piracy levels continued
across all sectors, optical disc piracy grew, and poor
border enforcement led to a surge in imports of pirated
material. The situation is further exacerbated by the
lack of resources dedicated to enforcement. Prosecution
of IPR violators is rare, and when cases are
adjudicated, penalties meted out are light. No one has
gone to jail for IPR piracy.

Patents
-------
Romania is a party to the Paris Convention for the
protection of industrial property and subscribes to all
of its amendments. Foreign investors are therefore
entitled to the same treatment as Romanian citizens.
Patents are valid for 20 years. A patent application
can be contested for six months. A modern Patent Law
(No. 64/91) broadens and clarifies the basis on which a
patent is granted. By GOR Decision 499 of May 2003,
technical enforcement rules on the Patent Law came into
force. Several other laws (No. 129/92, on the
protection of industrial drawings and designs; No.
16/95, on the protection of integrated circuit designs,
etc.) have helped bring Romanian patent legislation up
to international standards. Legislation providing for
transitory ("pipeline") patent protection was enacted in
early 1998. The Romanian Parliament passed legislation
to protect confidential drug test data submitted to
regulatory authorities for marketing approval. Law 123
of April 2004 clearly articulates data exclusivity
provisions.

Trademarks
----------
In 1998 Romania passed a new law on trademarks which is
generally consistent with international standards.
Areas that require improvement are administrative
procedures and sanctions. Romania is a signatory to the
Madrid Agreement relating to the international
registration of trademarks. Trademark registrations are
valid for 10 years from the date of application, and
renewable for similar periods.

Copyrights
----------
Romania is a member of the Bern Convention on
Copyrights. Its 1996 law on protection of copyrights
and neighboring rights is among the most modern in this
field. The Romanian parliament ratified the latest
versions of the Bern and Rome conventions. The Romanian
Office for Copyright protection (ORDA) was established
in 1997, and ostensibly oversees copyright enforcement.
However, copyright law enforcement is a low priority for
Romanian prosecutors, judges, police officers, and
customs officers. Some in government, including those
responsible for enforcement, view copyright piracy as a
"victimless crime." This attitude, coupled with lack of
resources, has resulted in weak enforcement of copyright
law and the failure to prosecute and punish violators.
Copyright infringement in software, music, and video is
pervasive throughout Romania. Although on a decline
over the past few years, piracy rates are still high.
Latest estimated piracy rates by sector are: 73% of
business software; 95% of entertainment software; 56% of
music; and 55% of video.

Semiconductor Chip Layout Design
--------------------------------
Law No. 16/1995 protects semiconductor chip layout
design. In order to benefit from this law, the designs
must be registered per GOR decision no. 535/1996 with
the Romanian Trademark Office.

-----------------------------------------
H. Transparency of the Regulatory System
-----------------------------------------

Cumbersome and non-transparent bureaucratic procedures
are a major problem in Romania. Foreign investors point
to the excessive time it takes to secure necessary
zoning permits, property titles, licenses, and utility
hook-ups. Furthermore, regulations change frequently,
often without advance notice. These changes, which can
significantly add to the costs of doing business, make
it difficult for investors to develop effective business
plans.

Recognizing the need for more effective communication
with foreign investors and Romanian private businesses,
in April 2002 the GOR instituted a preliminary
consultation procedure before drafting business-related
legislation. As a result, some ministries, such as the
Ministry of IT and Communications, do consult with
businesses, but not all. The labor code adopted in 2003
is a glaring example of the GOR's failure to consult
with or listen to the business community. The
controversial code gives extensive new rights to labor
unions and employees and is a significant impediment to
new foreign direct investment. Following general
elections in November and December 2004, the GOR pledged
to amend some aspects of the code, but whether it will
be able to do so in the face of labor unions' objections
remains to be seen.


Many foreign investors feel they are unfairly targeted
by Romanian tax authorities for audits and reviews and
that Romanian authorities view them as "cash cows" that
can be milked to fill government coffers. Unlike most
Romanian companies, foreign investors generally have
good financial records, making investigation easier.
Foreign investors also tend to be more conscious of the
need to remain in compliance with local laws and
regulations. Despite the establishment of a new
Minister Delegate for Control in June 2003 to coordinate
the audits of the various ministries and government
agencies, redundant or too-frequent audits and reviews
continue to be a hindrance.

The presence of large state-owned and government-subsidized
enterprises in the economy is a major impediment to the
efficient mobilization and allocation of investment capital.
An EU-inspired law on state aid aimed to limit state aid of
any form (direct state subsidies, debt rescheduling schemes,
debt for equity swaps for utility arrears, or discount
prices). However, implementation of the law has been slow
and preferential debt rescheduling (and on occasions
forgiveness) by the GOR has continued.

--------------------------------------------- ---------
I. Efficient Capital Markets and Portfolio Investment
--------------------------------------------- ---------

Capital Markets
---------------
Romania seeks to develop efficient capital markets.
Ordinance No. 18/93 and Government Decision No. 552/92
established a National Securities Commission (CNVM)
charged with regulating the securities market in order
to protect investors. The process provides for the
registration and licensing of brokers and financial
intermediaries, filing and approval of prospectuses, and
approval of market mechanisms.

Romania officially re-opened the Bucharest Stock
Exchange (BSE) on June 22, 1995. On November 20, 1995,
the stock exchange made its first transactions after a
hiatus of 50 years. The BSE operates a two-tier system
that, at present, lists a total of 60 companies, with
17 companies in the first tier. The official index,
BET, is based on a basket of the 10 most active stocks
listed on the first tier. The BSE has a home page at
http://www.bse.ccir.ro.

In September 1996, RASDAQ, an over-the-counter stock
market, was inaugurated. It is supported by several
independent registries and is a depository for Romanian
securities. 4,040 companies are listed on the RASDAQ,
although less than 200 companies are actively traded on
an average day. RASDAQ has a home page at
http://www.rasd.ro.

The BSE and RASDAQ are set to merge in 2005. The new
Capital Markets Law 297/2004 allows the Bucharest Stock
Exchange to incorporate as a stock company, which
permits its merger with the OTC-market, RASDAQ. Once
the National Securities Commission (CNVM) approves the
merger and the technical plan, the consolidation process
should require 5-6 months to complete.

Despite the presence of two stock exchanges, Romanian
capital markets have developed more slowly than might be
expected. This is due in part to legislative
instability, non-transparent privatization, lack of
performance and liquidity of most listed companies and
poor corporate governance. In 2002, the GOR issued
several ordinances designed to increase liquidity and
transparency and encourage portfolio investment. The
GOR also granted additional power to the National
Securities Commission (CNVM). Securities Collective
Placement Organizations are now allowed to invest
locally and internationally in foreign currency-
denominated instruments.

Tight competition has brought trading fees down, but
listed volumes make it difficult to place large purchase
orders. This, in conjunction with non-transparent
disclosures and the lack of annual audit reports, tends
to discourage large institutional investors. Country
funds, hedge funds, and venture capital funds continue
to participate actively in the capital markets.

The Romanian government has responded to complaints by U.S.
investment funds regarding the abuse of minority shareholder
rights by including some protections in a 2002 GOR ordinance
on securities, financial investments and regulated markets.
The new reforms allow shareholders owning more than 10% of a
stock to request a general shareholders meeting. Dividend
payments must now remain in effect six months after the
announcement. An extraordinary shareholders' meeting must
approve purchase or sale/rent/lease of fixed assets worth
over 20% of the company's total assets. Law 525 of July
2002 ratified the ordinance on securities and regulated
markets, and was complemented by Law 512 on commodity
exchanges and derivatives.

Banking Sector
--------------
Romania's largest bank, the state-owned Romanian
Commercial Bank, with assets totaling $6.5billion (27%
of total banking assets), is to be privatized in
installments. 25% plus two shares were sold to two
international financial organizations, EBRD and IFC, for
a combined $222 million in 2004. The contract stipulates
that the stock is to be purchased back by the GOR in
2006 if no strategic investor acquires a majority stake
in the bank by then. If a strategic investor places a
binding offer, the two international finance
organizations are to redeem their shares to the GOR at a
price per share not lower than the one initially paid.
In turn, the GOR will re-sell the shares to provide the
investor a 51% portfolio stake, (8% of the stock has
already been sold to bank management and employees.)

After BCR, of the 39 banks operating in Romania, the
Romanian Bank for Development (BRD, Societe General),
with $ 3.1 billion assets (12.95% of total), is the
second largest bank, followed by Raiffeisen Bank ($1.4
billion, 7.1%), ABN-AMRO Bank, ($1.3 billion, 6.6%), and
the National Savings House (CEC), $1.28 billion, 6.5%.
Citibank is the major U.S. brand name, with
approximately $500 million in assets (market share of
about 2.3%).

Removing non-performing assets from the banking sector
cost Romania $2.2 billion, almost 7% of the annual GDP
in the late nineties. According to the Romanian Central
Bank, non-performing past due and doubtful loans now
represent only 0.6% of the total loan portfolio, but
this is probably a substantial underestimate.

The GOR actively encourages foreign investments in the
banking sector, and there are no restrictions on mergers and
acquisitions. Few hostile take-over attempts have been
reported in Romania, with the result being that Romanian law
has not focused on limiting potential mergers or
acquisitions. There are no Romanian laws prohibiting or
restricting private firms' free association with foreign
investments. Capital account liberalization is in progress
and scheduled to be completed by 2005, with the exception of
land purchase by non-residents, for which Romania was
granted a 7-year phase-in period by the EU.

----------------------
J. Political Violence
----------------------

There have been no incidents in Romania involving
politically motivated damage to foreign investments
(projects and/or installations). Major civil
disturbances are not expected to occur in Romania in the
near future.

--------------
K. Corruption
--------------

According to Transparency International, Romania is
included in the tier of countries considered the most
corrupt. U.S. firms frequently complain of government
and business corruption in Romania. The customs
service, municipal zoning offices, local financial
authorities, and other bodies are influenced to some
degree by corruption. In some cases, demands for
payoffs by mid- to low-level officials reach the point
of harassment.

Romanian law and regulations contain provisions intended
to prevent corruption, but enforcement is generally
weak. Corruption is currently punishable under a
variety of statutes in the penal code. Prison sentences
are sometimes imposed, but powerful and influential
individuals often evade prosecution.

The GOR announced a National Anti-Corruption Plan in
spring 2003 and passed an anti-corruption law in April
of that year. The Plan contains an impressive list of
measures and commitments that constitute key benchmarks
for judging the GOR's commitment to combat corruption.
The implementation of these measures and commitments has
lagged, undercutting the state's professed commitment to
follow through on its anti-corruption policies. The new
center-right government came to power in December 2004,
in part based on a pledge to combat corruption. At the
time of drafting it was premature to make any judgment
about GOR commitment to this pledge. Nevertheless, the
USG will continue to work actively with the GOR to
secure more effective anti-corruption measures.

A new criminal code came into effect in 2003. Romania
passed an anti-money laundering law in 1999 which set up
the Romanian National Office for the Prevention and
Control of Money Laundering (NOPCML). Romania followed
this legislation with the Law on the Prevention and
Sanctioning of Money Laundering in 2002. With U.S.
help, the Romanian government established in September
the National Anti-Corruption Prosecutors' Office (PNA)
in 2002, staffed by prosecutors and police to combat
corruption. Despite these measures, most anti-
corruption efforts remain focused on low-level
corruption. To date, criminal prosecutions of only low
and mid-level officials and functionaries have been
carried to completion.

Romania is a member country of the Southeast European
Cooperation Initiative (SECI), and it has signed and
ratified the Agreement on Cooperation to Prevent and
Combat Transborder Crime of May 1999. Bucharest hosts
the SECI Regional Center for Combating Corruption and
Organized Crime, and Romania is one of the three members
of the Joint Cooperation Committee.

To reduce corrupt practices in public procurements, in March
2002 a web-based e-procurement pilot system was inaugurated
and is available at www.e-licitatie.ro. The system is a
transparent listing of ongoing auctions and closed auctions,
with the names of the winners and closing prices made
available to the public. The use of e-licitatie has
increased government efficiency, reduced GOR vulnerability
to corruption, and improved fiscal responsibility in
government procurement. E-procurement increased from 159
government clients and 600 suppliers in its initial months
matching the procurements of 1,000 state entities with
offers from 10,000 bidders. With a turnover of EURO 300
million in 2003, the system resulted in an estimated average
22% savings rate, saving the budget EURO 100 million in two
years. Initially used solely for standard products, the
program has grown to include complex projects (e.g. state-
financed sports halls for public schools). The system does
not take the human element completely out of the decision-
making process, as the bids for complex supplies and
projects are still reviewed by appraisal committees. Pre-
qualification criteria for prospective bidders and contract
follow up by the end-user also leave room for corruption.

Court System
------------
The Romanian judicial system suffers from corruption,
inefficiencies, lack of competence, and excessive workloads.
Divergent and often contradictory rulings have alienated
both investors and ordinary citizens and discredited the
Romanian judicial system. Companies routinely complain that
commercial disputes take too long to resolve through the
court system and once a verdict is reached, court orders are
not enforced. Low salaries result in clerks, attorneys and
judges being susceptible to bribes or other "extra-judicial"
payments, most commonly to "speed up" litigation or to
assure a particular judge is assigned to a case. Courts are
overburdened and the number of magistrates and judges too
small. Significantly, litigants in virtually all cases have
unrestricted right to appeal their cases all the way to the
High Court of Cassation and Justice, which clogs court
dockets throughout the system and introduces lengthy delays.

Cyber Crime
-----------
Romania has one of the world's highest occurrences of
internet credit card fraud. The problem, which surfaced in
the fall of 1998, has escalated to a steady stream of
complaints, some of which involve U.S. companies being
defrauded of millions of dollars. The most common problems
result from the use of stolen credit card numbers for the
purchase of goods on-line. An e-commerce law that defines
and punishes cyber crime was passed in June 2002 and came
into force in early July 2002.

Romanian hackers also have gained notoriety for hacking into
U.S. companies' servers and stealing proprietary
information, including customer credit card data. There
have been cases where Romanian hackers have offered to sell
the U.S. company the means by which they hacked the
company's server. On other occasions, the hackers have
threatened to release the sensitive data or the means to
hack the system unless a specific amount of money is paid.
Several recent investigations into and arrests of cyber-
crime by Romanian authorities may serve as a deterrent to
new hackers.

-----------------------------------
L. Bilateral Investment Agreements
-----------------------------------

The U.S.-Romanian Treaty on the reciprocal encouragement
and protection of investment (signed May 1992, ratified
by the U.S. in 1994) guarantees national treatment for
U.S. and Romanian investors. It provides a workable
dispute resolution mechanism, liberal capital transfer,
prompt and adequate compensation in the event of an
expropriation, and avoidance of trade-distorting
performance requirements.

In response to EU pressure on acceding countries to
abrogate their bilateral investment treaties (BITS) with
the U.S., the U.S. government negotiated an agreement
with the EU and eight accession countries, including
Romania, to cover any possible inconsistencies between
the BITs and the countries' future EU obligations.
After two years of negotiations, the U.S. and EC signed
a political understanding in Brussels that preserved, in
slightly amended form, bilateral investment treaties
with the Czech Republic, Estonia, Latvia, Lithuania,
Poland, the Slovak Republic, Romania, and Bulgaria. All
eight revised BITS went to the U.S. Senate for
ratification as a package. The Senate ratified the new
treaties in May 2004. Romania's Parliament is expected
soon to ratify the revised BIT, which will only take
effect when Romania becomes an EU member.

Romania also has concluded bilateral investment
protection agreements or treaties with the following
countries: Albania, Algeria, Argentina, Armenia,
Australia, Austria, Bangladesh, Belarus, Belgium,
Luxembourg, Bolivia, Bulgaria, Cameroon, Canada, Chile,
China, Croatia, Cuba, Czech Republic, Cyprus, Denmark,
Egypt, Finland, France, Gabon, Germany, Ghana, Greece,
Hungary, Indonesia, Israel, Italy, Jordan, Kazakhstan,
Kuwait, Lebanon, Lithuania, Malaysia, Moldova,
Mauritania, Mongolia, Morocco, Nigeria, Norway,
Netherlands, Pakistan, Paraguay, Peru, Philippines,
Poland, Portugal, Qatar, Russia, Senegal, Singapore,
Slovakia, Slovenia, South Korea, Spain, Sri Lanka,
Sudan, Switzerland, Tunisia, Turkey, Turkmenistan,
Ukraine, United Kingdom, USA, Uruguay, Uzbekistan,
Yugoslavia.

--------------------------------------------- ---
M. OPIC and Other Investment Insurance Programs
--------------------------------------------- ---

The Overseas Private Investment Corporation (OPIC) began
operation in Romania in late 1992, following the signing
of an investment incentive agreement in June 1992.

Romania has been a member of the Multilateral Investment
Guarantee Agency (MIGA) since 1992.

---------
N. Labor
---------

Romania offers a large skilled labor force at
comparatively low wage rates in most sectors. The
university system is regarded as high quality,
particularly in technical fields. Romanian craftsmen,
engineers, and software designers win kudos for quality
work from foreign managers. With appropriate on-the-job
training, local labor performs well with new
technologies and more exacting quality requirements.
However, there continues to be a shortage of western-
trained managers.

Since the revolution of December 1989, labor-management
relations have occasionally been tense as a result of
economic restructuring efforts and personnel layoffs.
In mid-2003, unemployment officially stood at 7.8
percent of the country's active labor-force. Trade
unions are vocal defenders of their prerogatives. The
government adheres to the ILO convention protecting
worker rights.

Many of the remaining state enterprises maintain that
the first priority for an enterprise is to preserve jobs
rather than turn a profit. Individual dismissals for
poor performance must be carefully documented and are
subject to legal challenge by the affected employee.
The new Labor Code passed in 2003 makes it even harder
for employers to dismiss employees for poor performance,
and requires the employer to provide three options to
transfer positions within the company before actual
termination of employment. Foreign investors often
encounter labor problems when they try to trim staff in
loss-making product lines.

Current law makes it very costly to locate expatriate
staff in Romania. Foreign companies often resort to
expensive staff rotations, special consulting contracts,
and non-cash benefits. As a rule, work permits are
issued for a period of six months for a fee of $200, and
may be renewed for subsequent six-month periods at $100
per renewal.

--------------------
O. Free Trade Zones
--------------------

Free Trade Zones (FTZs) operate under Law No. 84/1992,
amended in 2002 and 2004. General provisions include
unrestricted entry and re-export of goods, and an exemption
from customs duties. The law further permits the leasing or
transfer of buildings or lands for terms of up to 50 years
to corporations or natural persons, Romanian and non-
Romanian.

Currently, there are six FTZs: Sulina (located at the mouth
of the Danube); Constanta-Sud Agigea (located close to the
port of Constanta, at the entrance to the Black Sea-Danube
Canal); Galati (located about 100 km from the Danube mouth);
Braila (located 30 km up the Danube from Galati); Curtici-
Arad (located about 30 km from the border with Hungary); and
Giurgiu (located on the Danube, 60 km south of Bucharest)

The Administrator of each FTZ is responsible for all
commercial activities performed within the zone. FTZs are
under the authority of the Ministry of Transportation,
Construction, and Tourism.

----------------------------------------
P. Foreign Direct Investment Statistics
----------------------------------------

Despite some substantial gains in recent years, direct
investment flows into Romania have remained relatively low
compared to other countries in the region. According to
data provided by the Romanian Trade Registry, cumulative
foreign direct investment for the period between 1990-2003
totaled $10.4 billion, of which $1.42 billion represents
2003 inflows.

At the end of September 2004, cumulative foreign direct
investment (FDI) since 1990 rose to $11.8 billion.

Preferred areas for foreign investment include:

--Automobile and automotive components (Renault, Daewoo,
Daimler Benz, Siemens, Continental, Alcoa, Delphi
Packard, Johnson Controls, Honeywell Garrett, Michelin);

--Banking and finance (Citibank, Socit Gnrale, ABN Amro
Bank, AIG, ING Barings, Hypovereinsbank, Volksbank,
Raiffeisen, Banca di Roma);

--Telecommunications (Qualcomm, France Telecom, OTE,
Telesystem International Wireless Services, Airtouch-
Vodafone);

--Hotels (Hilton, Marriott, Best Western, Howard Johnson,
Sofitel, Crowne Plaza, Accor);

--Manufacturing (Timken, Trinity Industries, General
Electric, LNM, Marco, Solectron, Holcim, Lafarge,
Heidelberg);

--Consumer products (Procter and Gamble, Unilever, Henkel,
Colgate Palmolive, Kraft, Coca-Cola, Parmalat, Danone);

);

--Retail chains (Metro, Delhaize, Carrefour, Cora, Billa,
Selgros).

Significant U.S. direct investors (or investors with
representative branch offices) include:

--Advent Central and Eastern Europe - investment fund
--AIG - insurance
--AIG New Europe Fund - investment fund
--Alcoa - automotive, aluminum processing
--Bunge - food
--Citibank - banking
--Coca-Cola - beverage, food
--Colgate Palmolive - consumer products
--Cooper Cameron - gas field equipment manufacturer
--Delphi Packard - automotive
--General Electric - aircraft components
--Hoeganess - iron powder for automotive
--Honeywell Garrett - automotive
--Johnson Controls - automotive
--Kodak - film processing
--Kraft - food
--Marco Group - aluminum processing
--McDonald's - food
--New Century Holding - investment fund
--Philip Morris - tobacco products
--Procter and Gamble - consumer products
--Qualcomm - telecommunications
--Romanian-American Enterprise Fund - investment fund
--Sara Lee - apparel
--Solectron - contract manufacturing (ICT)
--Timken - industrial bearings
--Trinity Industries - railcars
--UPC - cable television operator
--Washington International Group - engineering

In addition to these companies, the European Bank for
Reconstruction and Development (EBRD) remains the single
largest investor (debt plus equity) in Romania with some
$3.31 billion invested. The U.S. is a 10 percent
shareholder in the EBRD.

As of end-September 2004, Romania's biggest investors are:

-- Holland -- $ 2.01 billion, or 17.90% of total FDI, with
investments in telecommunications, banking, insurance,
detergents, and food;
-- France -- $ 1.50 billion, or 12.7%% in food,
telecommunications, IT, machine-construction, cement,
agriculture, banking, hypermarkets;
-- Germany -- $ 1.02 billion, or 8.6% in insurance, food,
machine construction, banking, chemicals, hypermarkets;
-- U.S. -- $ 876.7 million or % 7.4% in ICT, automotive,
telecommunications, hospitality, agriculture, manufacturing,
consumer products.

2. AmEmbassy Bucharest's reporting telegrams are available
on the Bucharest SIPRNet webwsite:
www.state.sgov.gov/p/eur/Bucharest.

Crouch

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