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Cablegate: Romania: Investment Climate Statement, 2010

VZCZCXRO6857
PP RUEHIK
DE RUEHBM #0022/01 0131227
ZNR UUUUU ZZH
P 131227Z JAN 10
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 0238
RUCPDOC/USDOC WASHINGTON DC PRIORITY
RUCPCIM/CIM NTDB WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 13 BUCHAREST 000022

STATE FOR EUR/CE ASCHIEBE, EB/IFD/OIA DJAHN AND TJWALSH
STATE PLEASE PASS TO USTR

SIPDIS

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB KTDB PGOV OPIC USTR RO
SUBJECT: ROMANIA: INVESTMENT CLIMATE STATEMENT, 2010

REF: 09 STATE 124006

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1. Following is Embassy Bucharest's submission for the 2010
Investment Climate Statement, in response to tasking reftel.

A. OPENNESS TO FOREIGN INVESTMENT

ENCOURAGING INVESTMENT

Romania actively seeks direct foreign investment. Romania's
marketplace offers 21.5 million consumers, a well-educated
workforce, a strategic geographic location, and abundant natural
resources, making it an increasingly attractive destination for
investment. To date, favored areas for American investment include
IT and telecommunications, energy, services, manufacturing, and
consumer products.

Romania has taken steps to strengthen tax administration, enhance
transparency, and create legal means to resolve contract disputes
expeditiously. Mergers and acquisitions are subject to review by
the Competition Council. Romania's accession to the European Union
on January 1, 2007 has helped solidify institutional reform.
However, judicial and legislative unpredictability continues to
affect the investment climate. Prospective U.S. investors should
exercise careful due diligence, including consultation with
competent legal counsel, when considering any investment.

U.S. companies establish a local presence in the Romanian market in
several forms. Many sign distribution agreements with a local
Romanian firm which brings experience, expertise and access to the
partnership. Other firms cover Romania from a distributor or sales
representative in the region. Still other American companies choose
Romania as a base of manufacturing or distribution and establish a
subsidiary. The choice of strategy depends on the industry, the
nature of the customer (government buyer or retail trade), and the
business case. Companies that rely on regular access to the
Government of Romania, or have a significant service component,
generally seek to establish a subsidiary, sometimes through
acquisitions.

Investments that involve the public authorities (central government
ministries, county governments, and city administrations) are
generally more complicated than investments or joint ventures with
private Romanian companies. Large deals involving the
government--particularly public-private partnerships and
privatizations of key state-owned enterprises-- can become stymied
by vested political and economic interests or bogged down due to a
lack of coordination among governmental ministries. Investors have
generally encountered greater success with less complex deals
involving small- to medium-sized private and state enterprises.

EU ACCESSION

Romania became a member of the European Union on January 1, 2007.
The country has worked assiduously to create a legal framework
consistent with a market economy and investment promotion, and has
largely concluded its efforts to enact EU-compatible legislation.
At the same time, implementation of these regulations sometimes
lags. The U.S. Department of Commerce recognized Romania as a
market economy for anti-dumping investigation purposes beginning in
March 2003.

LEGAL FRAMEWORK

Romania's legal framework for foreign investment is encompassed
within a substantial body of law, largely enacted in the late 1990s
and subject to frequent revision since. Investors are strongly
encouraged to engage local counsel to navigate through the various
laws, decrees, and regulations.

This body of legislation and regulation provides national treatment
for foreign investors, guarantees 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 rights to other Romanian or foreign
investors.

Foreign investors may engage in business activities in Romania by
any of the following methods:

-- Setting up new commercial companies, subsidiaries or branches,
either wholly owned or in partnership with Romanian natural or legal

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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, public order,
and public health interests and regulations.

There have been few hostile take-over attempts reported in Romania,
and as a result 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 investors.


PRIVATIZATION

The State Asset Resolution Authority (AVAS) is responsible for
privatizing state-owned industrial assets and managing them during
the privatization process. The Ministry of Economy oversees energy
assets. Romania's privatization law permits the responsible
authority to hire an agent to handle the entire privatization
process, though ultimate decision-making authority remains with the
Government.

Major energy sector privatization remained largely stalled in 2008
and 2009. After having successfully privatized 87 of its micro
hydropower plants (HPP) to Romanian and foreign investors, the
state-owned hydro power producer, Hidroelectrica, has halted
divestiture of the remaining 63 micro HPPs. Additional
privatizations are not currently contemplated for the energy sector;
rather, the Government seeks to combine remaining assets into two
fully integrated, state-owned companies.

State-owned energy companies are seeking joint ventures with private
investors for electric power production, as well as onshore and
offshore oil and gas exploration, as an alternative to
privatization.

Prospective investors are strongly advised to conduct thorough due
diligence before any acquisition, particularly of state-owned
assets. Some firms have found it advantageous to purchase
industrial assets through AVAS's budget arrears recovery process
rather than through direct privatization. When utilized, this
method may avoid assuming historical debt or encumbering labor
agreements. As a member of the European Union, Romania is required
to notify the European Commission's General Directorate for
Competition regarding significant privatizations and related state
aid. Prospective investors should seek assistance from legal
counsel to ensure compliance by relevant government entities. GOR
failure to consult with, and then formally notify, the European
Commission properly has resulted in delays and complications in some
past privatizations. Some investors have also experienced problems
due to the occasional failure of GOR entities to fully honor
contractual obligations following conclusion of privatization
agreements.

Romanian law allows for the inclusion of confidential clauses in
privatization and public-private partnership contracts to protect
business proprietary and other information. However, in certain
high-profile privatizations, Parliamentary action has compelled the
public disclosure of such provisions.

PROPERTY AND CONTRACTUAL RIGHTS

Property and contractual rights are recognized, but enforcement
through the judicial process can be lengthy, costly, and difficult.
Foreign companies engaged in trade or investment in Romania often
express concern regarding Romanian courts' lack of expertise in
commercial issues. Judges generally have limited experience in the
functioning of a market economy, international business methods,
intellectual property rights, or the application of Romanian
commercial and competition laws. Even when court judgments are

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favorable, enforcement of judgments is inconsistent and can require
further lengthy appeals.

The Heritage Foundation's Economic Freedom report ranked Romania
29th out of 43 countries in Europe in 2009, with an overall score
higher than the world average; Romania has demonstrated slow but
steady improvement in the index in recent years. The report points
out, however, that labor freedom, property rights, and freedom from
corruption lag behind other countries in the region, and that
Romania's judiciary remains vulnerable to corruption and
inefficiency. In Transparency International's Corruption Perception
Index, Romania lost ground in 2008-2009 after steady improvement
leading up to EU accession in 2007.

Heritage Foundation Index of Economic Freedom score
- 2009: 63.2
- 2008: 61.7
- 2007: 61.2
- 2006: 58.2
- 2005: 52.1

Transparency International Corruption Perception Index:
- 2009: 71
- 2008: 70
- 2007: 69
- 2006: 84
- 2005: 85


World Bank Doing Business ranking
- 2010: 55
- 2009: 45

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 another currency
and transferred abroad at the market exchange rate after payment of
taxes.

Romania's national currency, the Leu, is freely convertible in
current account transactions, in accordance with the International
Monetary Fund's (IMF) 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 1997, the Romanian Government implemented new regulations that
liberalized foreign exchange markets. The inter-bank electronic
settlement system became fully operational in 2006, eliminating past
procedural delays in processing capital outflows. Commission fees
for real-time electronic banking settlements have gradually been
reduced.

Capital inflows are free from restraint as well. Romania concluded
capital account liberalization in September 2006 with the decision
to permit non-residents and residents abroad to purchase
derivatives, treasury bills and other monetary instruments.

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. Four cases against
Romania are pending with the International Center for Settlement of
Investment Disputes (ICSID). Several cases involving investment
property nationalized during the Communist era also remain
unresolved.

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 1958 New York Convention on the Recognition and Enforcement of
Foreign Arbitral Awards. Romania is also a party to the European
Convention on International Commercial Arbitration concluded in
Geneva in 1961 and is a member of ICSID.

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Romanian law and practice recognize applications to other
internationally-known arbitration institutions, such as the ICC
Paris Court of Arbitration and 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. Arbitration awards are
enforceable through Romanian courts under circumstances similar to
those in other Western countries, although legal proceedings can be
protracted.

MEDIATION

Mediation as a tool to resolve disputes is gradually becoming more
common in Romania. Mediation became a legal profession in 2006 when
the Romanian Parliament passed legislation recognizing it and
establishing a certifying body, the Mediation Council, to set
standards and practices. The professional association, The Union of
Mediation Centers in Romania, is the umbrella organization for
mediators throughout the county. There are recognized mediation
centers in every county seat where court-sanctioned and private
mediation is available.

There is no legal mechanism for court-ordered mediation in Romania,
but judges can encourage litigants to use mediation to resolve their
cases. If litigants opt for mediation, then upon completion of the
mediation process they must present their proposed resolution to the
judge who must approve the agreement.

The Union of Mediation Centers is a member of the European Mediation
Network Initiative and is recognized by the European Union and other
regional bodies.

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 lag behind law-making, which often results in
inconsistent outcomes. To mitigate the time and financial costs of
bankruptcies, Romanian legislation provides for administrative
liquidation as an alternative to bankruptcy. However, investors and
creditors have complained that the liquidators sometimes lack the
incentive to expedite liquidation proceedings, and that, in some
cases, their decisions have served vested outside interests. Both
state-owned and private companies tend to opt for judicial
reorganization to avoid bankruptcy.

A law passed in December 2009 institutes a debt settlement
mechanism, Company Voluntary Agreements (CVAs), as a means for
creditors and debtors to establish partial debt service schedules
without resorting to bankruptcy proceedings.

E. PERFORMANCE REQUIREMENTS AND INCENTIVES

INCENTIVES

Currently, customs and tax incentives are available for investors in
six free trade zones and 36 regions of the country designated as
economically disadvantaged. State aid is available for investments
in free trade zones under EU regional development assistance rules.
Large companies may receive aid up to 50 percent of their eligible
costs (limited to 40 percent in Bucharest and surrounding Ilfov
County), while small- and medium-sized enterprises (SMEs) may
receive assistance with up to 65 percent of their eligible costs.
To mitigate the effects of the economic crisis, the GOR can offer
individual aid up to 500,000 euros until December 2010 under a state
aid scheme approved under the EU's Temporary Framework. Prospective
investors are advised to investigate thoroughly the current status
of fiscal incentives.

In 2007 Romania adopted EU regulations on regional investment aid
and instituted state aid schemes for large investments. To benefit
from state aid under these schemes, the applicant must secure
financing for at least 25 percent of the eligible costs, either
through its own resources or by external financing, in a form which
is free of any public support. The applicant must document this
financing in strict accordance with Ministry of Finance guidelines.
In practice, unfortunately, GOR budget constraints and a
less-than-fully transparent application process have limited access
to these forms of state aid.
Different ministries and government entities manage the various
state aid schemes, and rules and procedures are complex. Companies
interested in state aid are encouraged to seek competent counsel.

To reduce initial startup costs, a system of industrial and

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technological parks is being created. Tax incentives are available
for the park operator, while companies that establish themselves in
the park benefit from access to utility hookups and infrastructure
and from potential local tax rebates under regional development aid
schemes. There were 62 such parks throughout Romania as of December
2009.

As a member of the EU, Romania must receive European Commission (EC)
approval for any state aid it grants which is not covered by the
EU's block exemption regulations. The Romanian Competition Council
acts as a clearinghouse for the exchange of information between the
Romanian authorities and the EC. Specifically, the Council screens
state aid notifications and provides an initial opinion to state aid
grantors as to whether the request is consistent with EU directives,
allowing for an opportunity to revise or withdraw a request before
it is submitted to the Commission. Even after submission, the
Council retains jurisdiction over competition and antitrust matters.
The failure of state aid grantors to notify the EC properly of aid
associated with privatizations has resulted in the Commission
launching formal investigations into several privatizations.
Investors should ensure that government entities with which they
work fully understand and fulfill their duty to notify competition
authorities. Investors may wish to consult with EU and Romanian
competition authorities in advance to ensure a proper understanding
of notification requirements.

Companies operating in Romania can also apply for aid under
EU-funded programs that are co-financed by Romania. When planning
the project, prospective applicants have to bear in mind that they
cannot start the project before finalizing the financing agreement,
and the application, selection and negotiation process can be
lengthy. They also need to secure financing for the non-eligible
expenses and for their co-financing of the eligible expenses.
Finally, EU reimbursement of eligible expenses--which must be
financed up front by the investor--is often very slow.

TAX SYSTEM

Since 1999, Romania has revised its tax system to bring it closer
both to EU models and to the recommendations of the World Bank and
IMF. In 2004, Romania adopted a flat tax of 16 percent on personal
income and corporate profits and simplified the tax code. The GOR
reduced employers' payroll taxes by two percent in 2007 and by an
additional six percent in three stages in 2008. In 2009, the
newly-elected GOR reversed some of these reductions. For normal
working conditions, payroll taxes are now 31.3 percent, with 10.5
percent payable by the employee and 20.8 percent by the employer (up
from 27.5 percent, 9.5 percent, and 18.0 percent, respectively).
For careers with high morbidity or disease rates, the total payroll
taxes are 36.3 percent, with employees paying 10.5 percent and
employers 25.8 percent (as compared to 32.5 percent, 9.5 percent,
and 23.0 percent previously). For certain professions such as
mining and aviation, where workers may be exposed to high levels of
radiation, the current rate is 41.3 percent, with 10.5 percent paid
by the employee and 30.8 percent by the employer (an increase from
37.5 percent, 9.5 percent, and 28.0 percent respectively). Accident
and risk fund contributions range from 0.15 percent to 0.85 percent
depending on the risk class of the company (previously 0.4 to 2.0
percent.) Rates for medical and unemployment insurance have
remained unchanged.

Romania has a 19 percent value added tax (VAT). Investors should be
aware that, due to budget constraints, the GOR has regularly delayed
VAT reimbursements due to foreign companies for extended periods,
especially if the reimbursement amount is large. The country is
fully integrated into EU customs, excise tax, and VAT transfer
systems. While there has been some discussion of raising tax rates
to boost revenues and reduce the fiscal deficit, the government
which took office in late December 2009 has proposed in its 2010
budget to keep the flat tax and VAT rates unchanged.

TARIFF PREFERENCES

Upon EU accession, Romania implemented the EU Common Customs Tariff,
the Generalized Preference Scheme, EU commercial safeguards,
preference agreements and cooperation agreements concluded by the EU
with third countries, as well as other EU commercial commitments
vis-a-vis the WTO.

F. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT

The Romanian Constitution, adopted in December 1991 and revised in
2003, guarantees the right to ownership of private property.
Mineral and air rights, and similar rights, are excluded from
private ownership. Under the revised Constitution, foreign citizens
can gain land ownership through inheritance. With EU accession,
citizens of EU member states can now own land in Romania subject to

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reciprocity in their home country.

Companies having foreign capital may acquire land or property
necessary for fulfilling or developing company goals. If the
company is dissolved or liquidated, the land must be sold within one
year of closure and may only be sold to a buyer(s) with the legal
right to purchase such assets. For a transition period of seven
years after Romania's accession to the EU, foreign investors cannot
purchase agricultural land or forests and forestry land (except for
farmers acting as commercial entities). Investors can purchase
shares in agricultural companies that can lease land in the public
domain from the State Land Agency.

G. PROTECTION OF PROPERTY RIGHTS

MORTGAGES

In early 2006, the Parliament passed a legislative package that
regulates the establishment of specialized mortgage banks, including
the possibility of transforming existing non-banking mortgage credit
institutions into specialized mortgage banks. The law also makes
possible a secondary mortgage market by regulating mortgage bond
issuance mechanisms. Mortgage lending is offered by commercial
banks, specialized mortgage banks, and non-bank mortgage credit
institutions. Romania's mortgage market is now almost entirely
private (although the state-owned National Savings Bank, or CEC,
also offers mortgage loans).

The primary mortgage market demonstrated robust growth until the
third quarter of 2008. Since then, credit has tightened in response
to the international financial crisis and the implementation of much
stricter national regulations on borrower qualifications. For loans
denominated in Romanian lei (RON), standard banks charge one-month
ROBOR (currently 9.5 percent) plus a 6-7 percent spread of interest
and commission fees for up to 30 years. For euro-denominated loans,
banks currently charge three-month EURIBOR plus 6-7 percent interest
and commission fees for up to 30 years. Due to the financial
crisis, however, many banks have reduced euro-denominated lending.


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 online authorship. While
the IPR legal framework is generally good, enforcement in some areas
remains weak and ineffectual. The flagrant trade of retail pirated
goods has largely been eliminated, but personal use of pirated
products and software remains high. The recording, video, and
software industries have expressed concerns over increasing levels
of Internet-based piracy of electronic media. Romania has passed
broader IPR control enforcement provisions as required under the
WTO, yet judicial enforcement remains lax.

PATENTS

Romania is a party to the Paris Convention for the Protection of
Industrial Property and subscribes to all of its amendments.
Romanian patent legislation generally meets international standards,
with foreign investors accorded equal treatment with Romanian
citizens under the law. Patents are valid for 20 years. Romania
has been a party to the European Patent Protection Convention since
2002.

TRADEMARKS

In 1998, Romania passed a trademark and geographic indicators law
which is generally consistent with international standards. Areas
that require improvement are in administrative procedures and
sanctions. Romania is a signatory to the Madrid Agreement relating
to the international registration of trademarks and the Geneva
Treaty on Trademarks. Trademark registrations are valid for ten
years from the date of application and renewable for similar
periods. In 2007, Romania ratified the Singapore Treaty on
Trademarks Registration.

COPYRIGHTS

Romania is a member of the Bern Convention on Copyrights. Its 1996
law on the protection of copyrights and related rights was among the
most modern in this field when enacted. The Romanian Parliament has
ratified the latest versions of the Bern and Rome conventions. The
Romanian Copyright Office (ORDA) was established in 1996 and
promotes and monitors copyright legislation. The General
Prosecutor's Office (GPO) provides national coordination of IPR
enforcement. However, copyright law enforcement is often a low

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priority for Romanian prosecutors and judges. Some magistrates
still tend to view copyright piracy as a "victimless crime." This
attitude, coupled with a lack of resources, has resulted in weak
enforcement of copyright law. Copyright infringement in software,
music, and video is prevalent throughout Romania. Although they
have declined over the past few years, piracy rates remain high
largely due to widespread cyber-piracy. The latest industry
estimates of piracy rates by sector are 66 percent of business
software and 40 percent of music.

SEMICONDUCTOR CHIP LAYOUT DESIGN

Romanian law protects semiconductor chip layout design. In order to
benefit, designs must be registered with the Romanian Inventions and
Trademark Office. Romania is a signatory to the Washington Treaty.


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, environmental
approvals, property titles, licenses, and utility hook-ups. Romania
enacted a "Silent Approval" Law in 2003 to reduce bureaucratic
delays, but it has yet to be universally enforced or recognized.
Furthermore, regulations change frequently, often without advance
notice, and may be vaguely worded and poorly explained. These
changes, which can significantly add to the costs of doing business,
can complicate investors' business plans.

Romanian law requires consultations with the private sector and a
30-day comment period on legislation affecting the business
environment (the "Sunshine Law"). However, not all ministries
adhere consistently to this requirement. Even when they do observe
the comment period, in many cases public input does not appear to be
considered seriously or incorporated into the final legislation.

State aid legislation and EU state aid regulations (directly
applicable to Romania after January 1, 2007) aim to limit state aid
in any form, such as direct state subsidies, debt rescheduling
schemes, debt for equity swaps, or discounted land prices. The
European Commission must be notified of and must approve GOR state
aid above the pre-approved monetary threshold for the corresponding
category of aid.

I. EFFICIENT CAPITAL MARKET AND PORTFOLIO INVESTMENT

CAPITAL MARKETS

Romania seeks to develop efficient capital markets. The National
Securities Commission (CNVM) is responsible for 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.

The Bucharest Stock Exchange (BVB) resumed operations in 1995 after
a hiatus of 50 years. The BVB operates a three-tier system that, at
present, lists a total of 70 companies, with 21 companies in the
highest tier. The official index, BET, is based on a basket of the
10 most active stocks listed, while the BET-C index follows the
trend of all stocks listed on the BVB. The BVB also has a RASDAQ
(OTC) market segment that currently lists 1,570 different stocks.
The BVB additionally allows trade in corporate, municipal, and
international bonds. In 2007, the BVB opened derivatives trading.

Despite lower trading fees and a diversified securities listing, the
situation on the international capital and financial markets has
adversely affected the Romanian capital market. Country funds,
hedge funds and venture capital funds continue to participate in the
capital markets, yet on a decreasing scale.

Minority shareholders have the right to participate in any capital
increase. Romanian capital market regulation is now EU-consistent,
with accounting regulations reflecting EC Directives IV and VII.

BANKING SECTOR

There are 42 banks and credit cooperative unions currently operating
in Romania. The largest, Romanian Commercial Bank (BCR), was
privatized in 2006 through sale to Erste Bank of Austria and has a
20.8 percent market share. The second-largest is French-owned
Romanian Bank for Development (BRD-Societe Generale) with 16 percent
market share, followed by Austrian-owned Volksbank (7 percent) and
Raiffeisen Bank (6 percent). Other large banks include the
Greek-owned Alpha Bank (5.7 percent), Italy's UniCredit Tiriac (5.6
percent), and domestically-owned Banca Transylvania (5.5 percent).

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According to Romania's Central Bank, overdue and doubtful loans now
amount to 3.13 percent of total non-bank loans, 10.5 percent of the
bank's own capital, and 0.92 percent of total banking assets.

The GOR actively encourages foreign investment in the banking
sector, and there are no restrictions on mergers and acquisitions.
The only remaining state-owned banks are the National Savings Bank
(CEC Bank), with a market share of 4.4 percent, and Eximbank with
1.7 percent.

While Romania's Central Bank must approve the operation of all new
non-EU banking entities in the country, banks and non-banking
financial institutions with existing approval in other EU countries
need merely notify the Central Bank of plans to provide local
services.

J. COMPETITION FROM STATE-OWNED ENTERPRISES

Private enterprises are allowed to compete with public enterprises
under the same terms and conditions with respect to access to
markets and credit. Energy production and transportation, along
with mining, are majority state-owned sectors, while the state holds
a monopoly in transportation of electricity and natural gas.

While state-owned oil and gas companies received exploration and
extraction licenses through direct allocation before 1989, they are
now required to compete in transparently advertized bidding rounds
organized by the National Agency for Mineral Resources. Improved
transparency in decision making will help ensure fair access to
state aid for both private enterprises and State-owned Enterprises
(SOEs).

SOE senior management reports directly to the relevant ministry.
Board seats are specifically allocated to ministry representatives.
SOEs are required by law to publish an annual report. Majority
state-owned companies listed on the capital market, as well as
state-owned banks, are required to submit their books for
independent audit.

K. CORPORATE SOCIAL RESPONSIBILITY

There is increasing awareness of corporate social responsibility
(CSR) among producers and consumers in Romania. CSR, as a concept,
is increasingly common in Romanian business, driven primarily by
multinational companies that have transferred their corporate
culture to the local level. Virtually all foreign enterprises in
Romania have some kind of CSR program, and most follow generally
accepted CSR principles such as the OECD Guidelines for
Multinational Enterprises. Romanian legislation allows companies to
allocate part of their corporate income tax (a maximum of 0.3
percent of turnover and 20 percent of total corporate income tax
due) for CSR under the sponsorship law.

L. POLITICAL VIOLENCE

There have been no reported 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.

M. CORRUPTION

Despite some improvements, corruption remains a serious problem.
Romania and Bulgaria shared the lowest ranking among EU member
states in Transparency International's (TI) 2009 Corruption
Perception Index. TI's 2007 report on judicial corruption pointed
to poor judicial decision making and weak ethical values.
International organizations such as TI and local non-governmental
"watchdog" organizations operate in Romania.

U.S. investors have complained of government and business corruption
in Romania, with the customs service, municipal zoning offices and
local financial authorities most frequently named. In some cases,
demands for payoffs by low- to mid-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 have often evaded prosecution or conviction. Under
pressure from the EU, the GOR is attempting to prosecute several
high-level political officials from previous governments, including
a former Prime Minister.

The Government announced a National Anti-Corruption Plan and passed

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an anti-corruption law in April 2003. The plan contains an
impressive list of measures and benchmarks for judging the
Government's commitment to combating corruption. A national
strategy to combat corruption in local public administration was
adopted in June 2008. However, the implementation of these measures
and commitments has lagged.

In December 2002, Romania passed an anti-money laundering and
terrorism financing law, which was amended in April 2008. With U.S.
help, the Romanian Government established a new institution in
September 2002--the National Anti-Corruption Prosecutors' Office
(DNA)--staffed by prosecutors and police. A new criminal code came
into effect in 2003. In the first half of 2008, Romania also
established the National Integrity Agency, which is designed to
monitor financial asset flows, limit conflicts of interest, and
sanction unjustified increases in the personal assets of politicians
and public sector employees.

Bucharest hosts the Southeast European Law Enforcement Center
(SELEC), previously known as the Southeast European Cooperation
Initiative (SECI) Regional Center for Combating Corruption and
Organized Crime. Romania is one of the three members of the SELEC
Joint Cooperation Committee. Romania has signed and ratified the
Agreement on Cooperation to Prevent and Combat Trans-border Crime of
May 1999.

In March 2002, to reduce corrupt practices in public procurement,
the GOR inaugurated a web-based e-procurement system
(http://www.e-licitatie.ro/). Initiated with seed money from USAID,
the system is a transparent listing of both ongoing and closed
solicitations, with the names of the winners and the closing prices
made available to the public. The use of "e-licitatie" has
increased government efficiency, reduced vulnerability to
corruption, and improved fiscal responsibility in government
procurement. E-procurement has increased from 159 government
clients and 600 suppliers in its initial months to 11,535 state
entities and 21,563 suppliers currently listed. Initially used
solely for basic, standard procurements, the program is also now
applied to more complex projects.

Romania's public procurement law, passed in 2006 and repeatedly
amended since, establishes ex-ante controls on public procurement
processes, stricter rules on eligible participants, and an appeals
mechanism for complaints against the process. The National Agency
for Public Procurement has general oversight over procurements and
can draft legislation, but procurement decisions remain with the
procuring entities. Notably, procurements of goods and services for
projects that receive EU funding have to comply with the public
procurement law.

COURT SYSTEM

The Romanian judicial system suffers from corruption, inefficiency,
lack of expertise, and excessive workloads. Divergent and often
contradictory rulings are not uncommon, complicating normal
commercial activities. Companies routinely complain that commercial
disputes take too long to resolve through the court system and, once
a verdict is reached, court orders may not be enforced. Errors in
court procedures, whether peripheral to the outcome or not, may
result in complete retrials, further delaying verdicts. Courts are
overburdened and the number of magistrates and judges is too small.
Litigants in virtually all cases have a right to two appeals,
contributing to clogs in court dockets throughout the system and
lengthy delays. Final judgments are not binding until all appeals
are exhausted. Clerks, attorneys and judges reportedly remain
susceptible to bribes or other "extra-judicial" payments, most
commonly to "speed up" litigation, to assure a particular judge is
assigned to a case, or to create intentional procedural errors
leading to retrial. Magistrates across Romania went on strike for
several weeks in fall 2009 to protest proposed changes to their
wages and bonus payments, paralyzing the court system and adding to
already lengthy case backlogs.

CYBER CRIME

Romania has one of the world's highest occurrences of Internet
fraud. The problem is illustrated by a growing stream of
complaints, some of which involve U.S. companies and their customers
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, fraudulent use of on-line auction platforms, and
sophisticated phishing schemes to defraud customers of legitimate
e-commerce companies.

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

BUCHAREST 00000022 010.2 OF 013


hackers have offered to sell the means by which they hacked the
company's server back to the victimized U.S. company. On other
occasions, hackers have attempted blackmail by threatening to
release sensitive data or the means to hack the system unless a
specific amount of money is paid.

An e-commerce law that defines and punishes cyber crime came into
force in July 2002. Law enforcement efforts are still not
commensurate with the scale of the problem, but enforcement
activities have increased notably, thanks in part to the substantial
assistance U.S. law enforcement agencies have provided to their
Romanian counterparts. Several recent investigations into cyber
crime, and continuing successful arrests by Romanian authorities,
may serve as a deterrent to new cyber criminals.

N. BILATERAL INVESTMENT AGREEMENTS

The U.S.-Romanian Bilateral Investment Treaty (BIT) 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 dispute resolution
mechanism, liberal capital transfer, prompt and adequate
compensation in the event of an expropriation, and the avoidance of
trade-distorting performance requirements. The U.S. Government
negotiated an agreement with the EU and eight accession countries,
including Romania, to cover any possible inconsistencies between the
pre-existing BITs and the countries' future EU obligations. This
revised BIT was ratified by the U.S. Senate and the Romanian
Parliament in 2004, and went into effect on February 9, 2007. Other
bilateral trade agreements with third countries were terminated upon
Romania's EU accession.

O. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS

The Overseas Private Investment Corporation (OPIC) began operations
in Romania in late 1992 and continues to actively finance projects
in Romania. Romania has been a member of the Multilateral
Investment Guarantee Agency (MIGA) since 1992.

P. LABOR

Romania has traditionally offered a large, skilled labor force at
comparatively low wage rates in most sectors, although the labor
pool has tightened in highly skilled professions, despite growing
unemployment overall. The university system is generally regarded
as good, particularly in technical fields, though foreign and
Romanian business leaders have urged reform of outdated higher
education curricula to better meet the needs of a modern,
innovation-driven market.

The quality of work of Romanian craftsmen, engineers, and software
designers is well regarded by foreign managers. With appropriate
on-the-job training, local labor performs well with new technologies
and more exacting quality requirements. However, labor shortages
have appeared in certain sectors, resulting in strong upward
pressure on wages in recent years. Before the onset of the global
economic downturn, analysts estimated that as many as 600,000
additional skilled workers would be needed in the construction
industry alone. Outward labor migration and the number of students
graduating without the practical skills needed in the modern
workplace are considered the main causes for this trend. Slowing
growth and recession in West European countries were expected to
alleviate domestic labor market shortages somewhat as some Romanian
workers return from abroad. Although Romanian workers have not
returned in large numbers, Romania has experienced a marked increase
in unemployment as the recession has deepened. Unemployment
officially stood at 7.5 percent in November 2009, representing some
680,000 workers, up from 4.4 percent at the end of 2008. Analysts
forecast the unemployment rate to peak around 10 percent in 2010.

Since the revolution of December 1989, labor-management relations
have occasionally been tense as a result of economic restructuring
efforts and personnel layoffs. Trade unions, much better organized
than employers' associations, are vocal defenders of their rights
and benefits. The national minimum wage was set at RON 600 per
month (about USD 210) on January 1, 2009 after extensive
negotiations between unions, employers associations, and government.
The GOR adheres to the ILO convention protecting workers' rights.

According to Eurostat, Romania's minimum wage (as adjusted for
purchasing power parity) of 232 points is next to last among the 27
EU member states, ahead only of Bulgaria. However, Romania
registered the EU's biggest growth of the minimum salary in real
terms, 12.2 percent, from 2000-2008.

Employers consider the Labor Code passed in 2003 to be overly rigid
for a market economy, as it makes it harder for employers to dismiss

BUCHAREST 00000022 011.2 OF 013


employees for poor performance. In June 2005 the GOR approved
several amendments to the Code which foreign investors consider to
be an improvement, but the Code still favors trade unions and
retains provisions restricting labor flexibility.

Payroll taxes remain steep. As a result, an estimated 25-30 percent
of the labor force works in the "underground economy" as
"independent contractors" where their salaries are neither recorded
nor taxed. Even for registered workers, under-reporting of actual
salaries is common.

Current law makes it very costly to locate non-EU citizen expatriate
staff in Romania. Foreign companies often resort to expensive staff
rotations, special consulting contracts, and non-cash benefits.
Work permits are issued for a maximum one-year period (except for
seasonal work) for a fee of 200 euros (payable in the RON equivalent
at the daily exchange rate). These permits are automatically
renewable with a valid individual work contract. As of December
2009, there are 41 offices--one in each county--of the Romanian
Immigration Authority authorized to issue work permits for foreign
citizens. After January 1, 2007, citizens of EU countries that do
not impose restrictions on Romanian citizens can work in Romania
without work permits. Although several companies hire foreign
workers, mainly from Turkey, China, India, Pakistan or Moldova, most
Romanian businesses are still reluctant to bring in large numbers of
foreign employees. In 2010, Romania will issue no more than 8,000
work permits, 2,000 fewer than in 2009.

Q. FREE TRADE ZONES

Free Trade Zones (FTZs) received legal authority in Romania in 1992.
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, regardless of nationality.
Foreign-owned firms have the same investment opportunities as
Romanian entities in FTZs.
Currently there are six FTZs, primarily located on the Danube River
or close to the Black Sea: Sulina, Constanta-Sud Agigea, Galati,
Braila, Curtici-Arad, and Giurgiu. 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.

R. FOREIGN DIRECT INVESTMENT STATISTICS

Romania has been an attractive destination for foreign direct
investment (FDI), and is currently the number one destination in
Southeastern Europe. However, Romania did not become a significant
target of FDI until after 1990s due to delays in post-Communist
economic reforms. According to data provided by the National Office
of the Trade Registry, the cumulative net stock of FDI for the
period from January 1990 through September 2009 totaled $32.48
billion, representing 16.2 percent of GDP. FDI in 2008 amounted to
$5.9 billion (2.9 percent of GDP). Romanian direct investments
abroad for January-September 2009 were $369 million.

Major sectors for foreign investment include:
-- Automobile and automotive components (Renault, Daimler Benz,
Ford, Siemens, Continental, Alcoa, Delphi Packard, Johnson Controls,
Honeywell Garrett, Michelin, Pirelli);
-- Banking and finance (Citibank, Societe Generale, AIG, ING,
Generali, Volksbank, Raiffeisen, Erste Bank, Unicredit, Alpha Bank,
National Bank of Greece, Intesa Sanpaolo, Millenium Bank, GE
Money);
-- Information Technology (Hewlett Packard, Microsoft, Oracle, Cisco
Systems, IBM)
-- Telecommunications (France Telecom, OTE, Telesystem International
Wireless Services, Airtouch-Vodafone);
-- Hotels (Hilton, Marriott, Best Western, Howard Johnson, Sofitel,
Crowne Plaza, Accor, Ramada, Radisson);
-- Manufacturing (Timken, General Electric, Cameron, LNM, Marco,
Flextronics, Holcim, Lafarge, Heidelberg);
-- Consumer products (Procter and Gamble, Unilever, Henkel,
Coca-Cola, Parmalat, Danone, Smithfield Foods);
-- Retail chains (Metro, Delhaize, Carrefour, Cora, Billa, Selgros,
Auchan, Kaufland).

Officially, the value of U.S. direct investment in Romania as of
September 2009 was $1.31 billion. The U.S. is the eighth-ranked
foreign investor nation after the Netherlands, Austria, Germany,
France, Cyprus, Greece, and Italy. U.S.-source investment
represented 4.0 percent of Romania's total FDI. However, because
official statistics do not fully account for the tendency of U.S.
firms to invest through foreign, especially European-based,
subsidiaries, the actual amount is higher. Romanian statistics also
over-emphasize physical, capital-intensive investments, such as
brownfield investments, while de-emphasizing the impact of foreign

BUCHAREST 00000022 012.2 OF 013


investment in services and technology. Significant U.S. direct
investors (including investments made through branches or
representative offices) include:

- Advent Central and Eastern Europe - investment fund
- AIG - general insurance
- AIG Life - life insurance
- AIG New Europe Fund - investment fund
- Alcoa - automotive, aluminum processing
- Bunge - food
- Cargill - grain export and food processing
- Citibank - banking
- Coca-Cola - beverage, food
- Cooper Cameron - gas field equipment manufacturer
- Delphi Packard - automotive parts
- Ford - automotive assembly
- General Electric - aircraft components
- GE Money - non-banking financial services
- Hewlett Packard - IT equipment, services
- Hoeganess - iron powder for automotive
- Honeywell Garrett - automotive
- IBM - IT equipment
- Johnson Controls - automotive
- Kodak - film processing
- McDonald's - food
- Microsoft - software services
- New Century Holding - investment fund
- Office Depot - office and business supplies
- Oracle - IT services, consulting
- Pepsico - beverage
- Philip Morris - tobacco products
- Procter and Gamble - consumer products
- Qualcomm - telecommunications
- Sigma Bleyzer - investment fund
- Smithfield Foods - pork production
- Flextronics - contract manufacturing (IT)
- Timken - industrial bearings
- UPC - cable television operator
- Visa - financial services
- Washington International Group/URS - 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 $6.1 billion invested. The
current stand-by agreement with the IMF also includes a one billion
euro loan from the EBRD, European Investment Bank (EIB), and
International Finance Corporation (IFC). The U.S. is a 10 percent
shareholder in the EBRD.

Romania's biggest investors are:

- The Netherlands - $5.96 billion (18.4 percent of total FDI): IT,
banking, insurance, consumer products, food;
- Austria - $4.45 billion (13.7 percent): banking, insurance,
construction materials, etc.
- Germany - $3.80 billion (11.7 percent): insurance, food, machine
construction, chemicals, cement, banking;
- France - $3.10 billion (9.6 percent): food, IT, automotive,
manufacturing, cement, agriculture, banking, hypermarkets;
- Cyprus - $1.76 billion (5.4 percent): banking, retail, services;
- Greece - $1.65 billion (5.1 percent): banking, food, consumer
products, retail;
- Italy - $1.38 billion (4.3 percent): footwear, textiles, food,
banking, insurance;
- U.S. - $1.31 billion (4.0 percent): IT, automotive, banking,
insurance, hospitality, manufacturing, consumer products.

Web Resources

Romanian Government
http://www.guv.ro

Romanian Agency for Foreign Investments
http://www.arisinvest.ro

The Authority for State Assets Recovery
http://www.avas.gov.ro/

Ministry of Public Finance
http://www.mfinante.ro

Ministry of Economy
http://www.minind.ro

International Centre for Settlement of Investment Disputes
http://www.worldbank.org/icsid


BUCHAREST 00000022 013.2 OF 013


Romanian Copyright Office
http://www.orda.ro

Ministry of Communications and Information Technology
http://www.mcti.ro

National Securities Commission
http://www.cnvmr.ro

Bucharest Stock Exchange
http://www.bvb.ro

National Bank of Romania
http://www.bnro.ro

National Anti-Corruption Prosecutors' Office
http://www.pna.ro

Romanian Government's Web-Based e-Procurement System
http://www.e-licitatie.ro

Overseas Private Investment Corporation
http://www.opic.gov

Ministry of Labor, Social Solidarity and Family
http://www.mmuncii.ro

GUTHRIE-CORN

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