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Cablegate: Restitution and the Property Fund: Envoy Christian

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RR RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHBM #0789/01 1900927
ZNR UUUUU ZZH
R 090927Z JUL 07
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC 6960
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUEAUSA/DEPT OF EDUCATION WASHDC

UNCLAS SECTION 01 OF 04 BUCHAREST 000789

SIPDIS

SENSITIVE
SIPDIS

STATE DEPT FOR EUR/NCE - AARON JENSEN
STATE DEPT FOR H - PASS TO CONGRESSMAN LANTOS

E.O. 12958: N/A
TAGS: PGOV KCOR PREL EINV ECON RO
SUBJECT: RESTITUTION AND THE PROPERTY FUND: ENVOY CHRISTIAN
KENNEDY MEETS WITH ROMANIANS ON HOLOCAUST ISSUES

1. (SBU) Summary: Special Envoy for Holocaust Issues
Christian Kennedy discussed Holocaust education and property
restitution with Romanian officials on June 6-8. The
minority Liberal government on June 28 forced through an
emergency ordinance that should enable the Property Fund to
start the process of becoming listed on the stock exchange --
potentially becoming the largest investment fund in Eastern
Europe as early as spring 2008, if the Liberals have their
way. Both restitution and Holocaust education are nascent
Romanian projects where progress remains slow.
Unfortunately, property restitution has produced many
illegitimate results. It remains to be seen whether the
Property Fund, if ever reified, will be abused for
illegitimate private interests as well. End summary.

Holocaust Education
-------------------------

2. (SBU) Special Envoy Kennedy discussed Holocaust education
with Ministry of Education State Secretary Gabriella Pasztor,
Director General Liliana Preoteasa, and Education Inspector
Doru Dumitrescu on June 8. Holocaust education is now first
introduced in compulsory history courses in 7th grade as a
dimension of World War II. It receives a full chapter in 9th
grade history, is connected to WWII in 10th grade, and is
thematically approached in 11th grade. The 12th grade has an
optional course available to teachers who wish to teach the
"History of Jews and Holocaust" which was announced in
October 2005. Since Congressman Lantos' visit in February
2007, Pasztor said, the Ministry has revised the 12th grade
compulsory history course to specifically discuss the
Holocaust in Romania based on the Wiesel Commission's Final
Report. She added, "of course we will be criticized by the
extremist parties." Pasztor said there were four centers in
Romania for training teachers how to teach the Holocaust and
that each year one or two teachers go to Yad VaShem for
training and others go to Paris and the Holocaust Memorial
Museum in Washington. She said the challenge was training
teachers to teach a subject that they never learned
throughout their education.

3. (SBU) The Elie Wiesel National Institute for the Study of
the Holocaust co-hosted with the Embassy a roundtable on the
"Holocaust in Romania: Unresolved Issues?" that received good
TV and press coverage. The press reported the continuing
problems with anti-Semitism, restitution, and the need for
Holocaust education that were raised by Kennedy, Wiesel
Institute Director Mihail Ionescu, Radu Ioanid of the
Holocaust Memorial Museum, and others, including a Holocaust
survivor. A poll conducted by the Wiesel Institute in May
2007 showed the need for such awareness raising as only 65
percent of Romanians have heard of the Holocaust, and of
those, only 28 percent agreed that the Holocaust happened in
Romania.

Property Restitution
------------------------

4. (SBU) National Authority for Property Restitution (ANRP)
President Ingrid Zaarour and Vice President Theodor Nicolescu
reviewed Romanian property restitution with Kennedy. The
ANRP monitors the restitution of forests, agricultural land,
religious group's properties, and housing when possible or
provides alternative compensation to those who had their
property taken by the Communist government during 1945-90.
According to Nicolescu, Romania was the first state in Europe
to restitute properties taken from Jews during the Holocaust,
with Antonescu's law 641 in 1944. That law rescinded the
Anti-Jewish laws of 1940, restituting property that had been
taken shortly before the Communist's re-taking in 1945. The
ANRP does not consider property taken prior to 1945, with the
exception of claims dating back to 1940 from ethnic
communities, such as the Jewish Communities Federation, which
has filed over 1800 claims. Restitution has been a very slow
process in Romania, but with gradual improvements in the laws
governing it. Even though the restitution process started in
1991, documentation other than titles to establish ownership
has only been accepted since 2005. The 1995 law allowing
Romanians to buy the housing they then occupied solidified
the housing privileges people enjoyed during Communism and
further complicated restitution, especially of the more
valuable estates that were legally subject to restitution
instead.
5. (SBU) Since the process of restituting forest and
agricultural land started in 1991, about 90 percent of the
800,000 restitution requests submitted by the November 2005

BUCHAREST 00000789 002 OF 004


deadline have been "solved" by local commissions and most are
now waiting to be validated by the county commissions, which
have validated only 210,000 requests. Once a person's right
to land has been validated, the local commission must then
develop plans to restitute the property. About one-third of
the requests have been rejected, which may be pursued in the
courts. In rare cases, the ANRP has applied some sanctions,
totaling about a million euros, to roughly 10 percent of
Romania's mayors -- who preside over the local commissions.

6. (SBU) According to Zaarour, the emerging jurisprudence now
favors the former owners, as Romania was fined several times
by the European Court of Human Rights for not respecting
property rights and the ANRP has started to work with the
Superior Council of Magistracy to educate judges on the
applicable laws. (Note: In practice, however, post has seen
little being done to sanction those who corruptly enrich
themselves at the expense of those seeking restitution. Post
is aware of numerous cases involving local barons, mayors,
prefects, prosecutors, and judges preventing or accepting
bribes for restitution, or more blatantly, just grabbing
prime real estate for themselves. One example among the
thousands illustrates the stark reality: in 2006, the Supreme
Court effectively upheld the anti-Jewish 1940 confiscation
law by ruling against an American regaining a USD 200,000
house in Braila due to insufficient evidence that his family
"retook possession" after 1944, before it was again
confiscated when the family left for Israel in 1964;
meanwhile a former judge occupies the house. MFA State
Secretary Anton Niculescu, in a separate June 6 meeting,

SIPDIS
described it more simply as, "Romania is losing lots of
trials in Strasbourg for failing to restitute property --
this forces Romania to act." He also gave examples of mayors
delaying restitution through administrative means. He
alleged mayors were "inclined to use such tools to build
their power."

7. (SBU) Religious groups filed over 14,700 claims by the
January 2006 deadline for property restitution, including
schools, buildings, and other real estate apart from places
of worship. Only 2,500 have been solved, mostly with the
return of the property itself. Less than 50 claims have been
resolved by awarding shares in the Property Fund. (Note:
Specifically excluded from the ANRP's competency are the
Greek Catholic Churches confiscated in 1948 by the government
and given to the Orthodox Church. The Orthodox Church has
consistently refused to restitute these properties. Instead,
this confiscation may become codified in law as the Religion
Law of December 2006 contains a provision that might prevent
the Greek Catholics from ever getting back these churches.
End note.)

8. (SBU) Zaarour noted that Romania's process of repairing
the damage done by Communism sped up when the Democratic
Alliance replaced the Social Democratic (PSD) government at
the end of 2004. While 30,000 restitution requests were
"solved" from the introduction of the dwelling restitution
law in 2001 through 2004, the total has reached 95,000 by mid
2007. Restitution requests by physical persons for urban
properties totaled 201,750 by the February 2002 deadline
(claims not filed by the deadline have recourse now only
through the courts), so the ANRP is almost half way through
determining the rights to property seized from individuals.
However, the ANRP has restituted only 15,000 actual
properties seized by the Communists and provided alternative
compensation to an additional 5,500 people. It has rejected
about 35,000 claims. The remaining 39,000 have been awarded
claim certificates that, once independently evaluated,
challenged, and re-evaluated by a third evaluator, determine
the amount of shares the ANRP instructs the Central
Commission to provide in the still unlisted Romanian Property
Fund.

Romania's Property Fund -- About to Launch Largest Fund in
Eastern Europe
------------------------------

9. (SBU) The Property Fund's assets constitute sizeable
ownership positions in major industries yet to be privatized
and significant state holdings in some privatized firms.
According to Zaarour, the Minister of Economy and Commerce
Varujan Vosganian has promised to sign an emergency ordinance
by the end of June to enable the Property Fund to proceed
with becoming listed on the stock exchange. Until then,
shareholders enjoy all rights apart from the crucial ability
to trade their shares for currency. No taxes are to be paid

BUCHAREST 00000789 003 OF 004


on the receipt of restituted property or compensation and the
first transaction of shares in the Property Fund are not to
be taxed.

10. (SBU) Property Fund President Alexandru Paunescu told
Kennedy on June 6 that Romania's Property Fund is the most
important private firm in the country, comprising minority
stakes in all public utilities (natural gas, oil,
electricity, maritime transportation, railways
transportation, air transportation, etc.). The Fund owns
stakes of 10 percent in Petrom and Nuclearelectrica, 12
percent in Electrica branches, and 20 percent in
Hidroelectrica. With a potential value of four to six
billion euros, it could be the largest investment fund in
Eastern Europe and would double the value of the Bucharest
Stock Exchange. The Fund,s seven-member board operates
under the supervision of the Ministry of Economy and Finance.
Unproductive assets constitute only about 0.2 percent of the
portfolio the Fund received from the various state
ministries. The GOR has pledged to the Fund a 9.9 percent
stake in the National Savings Bank (CEC) privatization
proceeds, but it postponed privatization after rejecting low
bids last year. On the positive side, the Fund has received
88 million euros from the successful privatization of the
Romanian Commercial Bank (BCR) and should receive a further
160 million euros.

11. (SBU) As of May 30, 2007, the Fund had registered only
2,256 shareholders, who hold about 3 percent of the Fund,s
total portfolio. Two of the largest ANRP certificate
holders, AmCit families Malaxa and Auschnitt -- whose
combined certificates could account for about 8 percent of
the Fund, have opted not to become shareholders due to
unfavorable U.S. tax implications, according to Paunescu.
(Note: News reports, however, say more precisely that they
are considering complaining to the European Court of Human
Rights that the GOR has yet to make the Property Fund a
reality by listing it on the stock exchange. End note.)
Unlike the National Authority for Property Restitution which
represents the state, the Fund is a private enterprise where
the state's holdings will diminish and private shareholders
will gradually increase. Paunescu believes the Fund,s real
value will likely double in the next two to three years.

12. (SBU) Paunescu said the Fund would hire an international
manager only after the GOR passed a government ordinance
amending the Fund,s legislative framework -- a step which he
described as being "imminent" for almost a year. He said the
problem was that the National Securities Commission (CNVM),
which regulates and supervises the capital market, had not
been happy with the Fund,s initial legislation. While the
Fund was established by the National Liberal Party (PNL), the
CNVM is a Parliament-controlled body managed by political
appointees -- and the top position belongs to the political
opposition Social Democrats (PSD) who had publicly vowed to
dismantle the fund. However, Paunescu could not understand
why the Liberals had not yet issued the emergency ordinance,
since it was becoming obvious that the PSD would not vote
down the government for fear of facing early elections.
Paunescu explained the GOR's initial delay as due to former
Finance Minister Sebastian Vladescu,s animosity toward the
Fund, in principle, despite several explanatory meetings. In
Paunescu's opinion, if the GOR would pass an emergency
ordinance and delay Parliament's debate on it until at least
the Fall, the Fund could "buy enough time" to issue more
shares to international shareholders and select an
international fund manager so that it would become impossible
for the PSD or any other "enemies of the project" to
terminate it. As a solely Liberal project, it would be up to
the current Liberal government to fully enact the Fund. The
Democrats (PD) never got involved in the Fund while in the
coalition government and the other political parties were not
even consulted prior to establishing the Fund.

13. (SBU) Paunescu was confident that the Fund would get a
very good, internationally reputed fund manager from one of
the 30 letters of interest received for that position from
"big names." He said once the government issued the emergency
ordinance, the Fund would go through a three- to four-month
valuation process audited by KPMG, and then a Fund Manager
could be selected, perhaps six to seven months later. The
Property Fund cannot therefore be listed on the Bucharest
Stock Exchange in 2007, but might get listed by spring 2008.

14. (SBU) The Fund,s next General Shareholders Meeting
(AGA) scheduled for mid-July will decide how to reinvest the

BUCHAREST 00000789 004 OF 004


Fund's dividends. Until now, all dividends have been merely
deposited in Romania's top three commercial banks. The next
AGA may decide to invest them in CDs or other diversified
saving instruments. While the Fund,s former Board only
preserved the Fund,s portfolio, the new enlarged one
appointed last month is expected to participate in upcoming
capital increases of the firms in the Fund's portfolio;
Paunescu specifically mentioned as an example the next
capital increase of Transgaz.

The View from the President's Cotroceni Palace
--------------------------------------------- -------------

15. (SBU) Presidential Counselor Theodor Baconschi told
Kennedy on June 7 that he did not have "a clear picture" of
the Property Fund, but believed there were "dark forces --
not political ones" hovering around it. He said that there
were currently "high levels of speculation in land,
buildings, and offices" in Romanian real estate, that justice
was very slow in resolving restitution cases, and that
bureaucratic problems hindered the development of Romania's
private property system. He said he was not aware of how the
Property Fund was functioning, but knew it was "very much
criticized by many." Baconschi said he did not know if it was
"valuable," but that in general, a Liberal European
government would encourage such compensation for past
confiscations.

The View from the PM's Victoria Palace
--------------------------------------------- -----

16. (SBU) The Prime Minister's chef-de-cabinet, Mihnea
Constantinescu, told Kennedy in a June 8 meeting that the
political piece of the puzzle was easy, but that the problem
was in the technical details of the functioning of the Fund,
admitting that Romania "probably doesn't have the expertise
to handle such a large fund -- the largest in Eastern
Europe." Constantinescu said the Fund's legal framework had
to be updated to address some serious complaints. He said
the government's pause was due to the fact that "if the Fund
doesn't function properly, we will face lawsuits." He noted
that Prime Minister Tariceanu had urged the legal framework
to be updated two weeks prior and believed "probably in one
month it would be resettled in a proper way." Constantinescu
affirmed that the "government will issue an ordinance to
update this Fund, but the problem is to have support in
government." He said the government had the duty to ensure
political support was in place. Constantinescu said he
believed there was the political will to resume the process
of enabling the Fund to work. Kennedy concluded that while
getting the Fund going was important, getting it right was
very important, and ensuring proper financial controls was
imperative. Subsequently, on June 28, the GOR passed the
emergency ordinance establishing the Property Fund.

17. (SBU) Comment: Property restitution proceeds at a very
slow pace. Officials provided statistics to demonstrate
progress, but a deeper examination suggests that property
restitution is still subject to widespread corruption. Only
the large cases that exhaust recourse to Romanian courts and
end up achieving favorable results in Strasbourg appear to be
pushing Romania slowly towards a greater respect for property
rights. As for the Property Fund itself, despite positive
noises from some GOR officials, it is uncertain that the fund
will become fully functional even in 2008, given the current
Liberal government,s political weakness and the need for
parliamentary approval for the fund,s final form. Even if
it eventually becomes fully listed on the capital markets in
Romania, it remains an open question whether the Property
Fund will truly become a legitimate tool for restitution or,
instead, become another way opportunistic "barons" pocket
portions of the country's remaining valuable assets.
TAUBMAN

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