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U.S. Department of State

Diplomacy in Action

2009 Investment Climate Statement - Moldova


2009 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
February 2009
Report
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Openness to Foreign Investment

Moldova continues to take small steps toward developing a stronger economy, reforming a cumbersome regulatory framework, combating corruption and adopting reforms aimed at improving the business climate. Poor physical infrastructure, cumbersome licensing procedures, excessive permit requirements, and proliferation of fee-for-services to public authorities and commercial organizations all contribute to a business environment that remains among the most challenging in the region. For example, in the Doing Business Dealing with Construction Permits indicator, Moldova ranks 158th out of 176 economies and requires twice as many procedures as the average for OECD countries.

Corruption is a serious concern and "unofficial” payments are widespread. An American investor recently encountered numerous bureaucratic obstacles in attempting unsuccessfully to renew a license. Government tax authorities conducted an extensive audit of the investor's company during the same period, in a reminder of the government's power to harass existing investors and keep them in suspense. The company was found to be in compliance with tax laws but had to invest staff time and effort to comply with the audit. The Embassy has also received reports of targeted actions by politically connected individuals against profitable businesses. These measures include abusive inspections and opaque administrative sanctions. Major foreign investors have also complained about the government's lack of willingness to engage in constructive dialogue on important issues affecting the business community.

After a prolonged recession in the 1990s, GDP has grown for seven straight years and inflation has decreased. Moldova, which is consistently ranked among the poorest countries in Europe, relies heavily on investments, foreign trade, and remittances sent by Moldovans working abroad, for economic growth. Remittances equaled 38 percent of GDP in 2007. Recent years have seen an increase in foreign direct investment (FDI) as investors have taken advantage of the eastward expansion of the European Union (EU), which now borders Moldova following the January 1, 2007, accession of Romania. The Government of Moldova (GOM) has made efforts to tackle some obstacles to investment, such as corruption and red tape. Furthermore, Moldova has declared European integration a strategic objective. The country had an Action Plan with the EU that set out a roadmap for democratic and economic reforms and the harmonization of Moldovan laws and regulations with European standards.

Moldova has been a member of the WTO since 2001 and has signed free trade agreements with countries of the former Soviet Union (CIS) and Southeast Europe. In December 2006, Moldova joined the Central European Free Trade agreement (CEFTA). Moldova benefits from an extended generalized system of preferences (GSP-plus) with the EU. Starting in March 2008 the EU unilaterally granted Moldova autonomous trade preferences, which expanded the duty-free access of Moldovan goods to EU markets. Moldova also seeks to further deepen its preferential trade arrangements with European markets in the negotiation of a new EU agreement.

The GOM has created an adequate legal base, including favorable tax treatment for investors. Under Moldovan law, foreign companies enjoy the same treatment as local companies (national treatment principle). The GOM views investments as vital for sustainable economic growth and poverty reduction. However, the amount of foreign direct investment (FDI) is far below the country’s needs. In attracting FDI, the GOM continues to add incentives. In 2008 the GOM introduced zero tax on business profit reinvested in a business.

After years of low FDI due to a weak business climate, FDI inflows have been steadily increasing since 2004. In 2007, FDI inflows amounted to USD 537.7 million, representing almost half of total FDI stock since Moldova's independence in 1991. In the first nine months of 2008, FDI amounted to USD 627.4 million. Recent years have seen large investments by Germany's Metro Cash & Carry, Germany's Draexlmaier, France’s Societe Generale, Austria's Grawe insurance company, Austria’s Raiffeisen Investment, the Netherlands' Easeur Holding B.V., Italy's Veneto Banca, and the U.S. investment fund NCH Capital.

The GOM states on its website that one of its primary tasks is to attract investments and create a favorable business climate for all investors both foreign and local ones. The GOM claims it taking measures to stimulate the business activity and improve the investment climate focusing on the country's geographical position, labor resources, fertile soils and participation in free trade agreements with the CIS countries and the EU. American investments in Moldova are primarily in the wine and food industry, cosmetics, telecommunications, banking and real estate.

Despite some GOM efforts to lower tax rates, strengthen tax administration, increase transparency and simplify business regulations, decision-making remains opaque and the application of regulations inconsistent. Additionally, on occasion, government officials interfere in business decisions in favor of a protected individual, use governmental powers to pressure businesses for personal or political gain, and selectively apply regulations. Since the judicial system remains weak, recourse to the courts does not guarantee citizens and foreign investors an impartial ruling on alleged governmental misdeeds.

In December 2007 the Moldovan Parliament adopted the National Development Strategy (NDS).The NDS succeeded the Economic Growth and Poverty Reduction Strategy (EGPRSP) of 2004-2007. The NDS was developed in broad-based consultations with stakeholders and civil society. The NDS defines the GOM's developmental objectives and will guide the budgetary process over the period 2008-2011. Attracting FDI is critical to enhancing one of the pillars of the NDS, namely enhancing the competitiveness of the national economy. This pillar focuses on policies to improve the business environment in order to encourage more investment activity, technological innovation and modernization; promote the expansion of the small- and medium-enterprise sector; increase labor productivity; improve state asset management; promote inclusion into international networks; address Moldova’s deteriorating physical infrastructure; and reduce its energy vulnerability. In 2006, after a five-year intermission, the GOM resumed financial relations with the IMF by signing a Memorandum of Economic and Financial Policies that included criteria for the improvement of macroeconomic indicators, infrastructure development and better state property management. In coordination with the IMF, the GOM has introduced budgets with low deficits and made reducing inflation a goal. In 2008 the GOM held inflation under ten percent for the first time since 2002. The memorandum expires in June 2009 and the GOM has not decided whether to renew its cooperation with the IMF.

The Constitution of the Republic of Moldova guarantees the inviolability of investments by all natural and legal entities, including foreigners. Key constitutional principles include the supremacy of international law, a market economy, private property, provisions against unjust expropriation, provisions against confiscation of property, and separation of powers among government branches. The Constitution provides for an independent judiciary; however, government interference and corruption remain problems in the application of laws and regulations and in the impartiality of the courts.

Current investment legislation is based on nondiscrimination between foreign and local investors. Moldovan law ensures full and permanent security and protection of all investments, regardless of their form, although application of the law remains spotty. There are no economic or industrial strategies that have a discriminatory effect on foreign-owned investors in Moldova, and no limits on foreign ownership or control, except in the right to purchase and sell agricultural and forest land, which is restricted to Moldovan citizens.

International treaties and Moldovan law regulate business activity, including foreign investments. Such laws include, but are not limited to, the Civil Code, the Law on Property, the Law on Investment in Entrepreneurship, the Law on Entrepreneurship and Enterprises, the Law on Joint Stock Companies, the Law on Small Business Support, the Law on Financial Institutions, the Law on Franchising, the Tax Code, the Customs Code, the Law on Licensing Certain Activities, and the Law on Insolvency.

The Law on Investment in Entrepreneurship came into effect on April 23, 2004, superseding the previous Law on Foreign Investment. It was designed to be compatible with European legislative standards and defines types of local and foreign investment. It also provides guarantees for the respect of investors' rights, non-application of expropriation or actions similar to expropriation, and for payment of damages in the event investors' rights are violated.
13. There is no screening of foreign investment in Moldova and legislation permits 100 percent foreign ownership in companies. By statute, special forms of legal organizations and certain activities require a minimum of capital to be invested (e.g., Moldovan Lei (MDL) 5,400 for limited liability companies, MDL 20,000 for joint stock companies, MDL 15 million for insurance companies and MDL 50 million for banks). The current rate of exchange is 10.4 MDL per USD.

The Law on Investment in Entrepreneurship permits investment in all sectors of the economy. Certain activities require a business license.

The Law on Entrepreneurship and Enterprises permits only state enterprises to participate in the following activities:
  • Some types of human and animal medical research;
  • Manufacture of orders and medals;
  • Production of symbols verifying payment of state taxes and fees;
  • Postal services (except express mail) and production of postage stamps;
  • Sale and production of combat and special military technical equipment, explosives (except gun powder) and all weapons;
  • State registry, tracking and technical inventory of real estate, restoration of ownership titles and administration of real estate;
  • Printing and minting of currency and printing of state securities; and
  • Certain scientific activities.


The GOM launched the first privatization process in 1994. It has adopted three different privatization programs since that time, including privatization via National Patrimonial Bonds (foreigners were not allowed to participate); via cash transactions for both locals and foreigners; and via a program which involved only cash privatization. The third program began in 1997-1998 and was extended to 1999-2000. The program was later extended with some modifications to the end of 2006. Foreign investors have successfully participated in these privatizations. In 2007, Parliament passed a new privatization law which introduced a new plan for privatizing and managing state-owned assets with a priority on economic efficiency. The law has a list of assets not subject to privatization. The GOM also adopted regulations on the privatization of state-owned non-agricultural land through commercial tenders. A list of assets subject to privatization has been approved.

The GOM has privatized most state-owned enterprises, and some sectors of the economy are almost entirely in private hands. However, some large enterprises are still controlled by the government and their privatization has been either postponed indefinitely or abandoned altogether. The major government-owned enterprises are two northern electrical distribution companies, the Chisinau heating companies, the fixed-line telephone operator Moldtelecom, the state airline Air Moldova and the majority state-owned bank Banca de Economii. After a period of abated privatization activity consisting of a selloff of residual governmental shares in companies originally sold during the mass privatizations of the 1990s, the GOM picked up efforts to sell a series of attractive assets. In 2008, the GOM privatized the footwear manufacturer Zorile, the former Soviet military-industrial complex Mezon, and the hotel Codru. Many have questioned the sales which sometimes appear to proceed at rates far below market price. The GOM does not promote transparency in how it evaluates bids. At times the announcements and very short deadlines for submitting make it difficult for potential bidders to arrange financing and comply with all the requirements for bids. It may seem that only bidders with previous knowledge of the sale may be able to comply with bid requirements.

The Law on Investment in Entrepreneurship prohibits discrimination against investments based on citizenship, domicile, residence, place of registration, place of activity, state of origin or any other grounds. The law provides for equitable and level-field conditions for all investors. It rules out discriminatory measures hindering the management, operation, maintenance, utilization, acquisition, extension or disposal of investments. Local companies and foreigners are to be treated equally with regard to licensing, approval, and procurement.

In recent years, the GOM made significant efforts to streamline business registration. In the business registration procedure, the GOM simplified document submissions by implementing a "one window" approach. This process reduced the number of documents and days necessary for business registration. Limited on-line business-registration services were introduced in 2006 and 2007. In the business licensing procedure, the government simplified the process in 2002 by establishing one authority in charge of business licensing -- the Licensing Chamber -- and by reducing the number of business activities that require licensing. The GOM plans to streamline the permit process for entrepreneurial activity and introduce elements of the "one-window" approach in the activities of public authorities, including their electronic interconnection to facilitate the exchange of electronic data.

Currency Conversion and Transfer Policies

Moldova accepted Article VIII of the IMF Charter in 1995, which required liberalization of current foreign exchange operations. There are no restrictions on the conversion or transfer of funds associated with foreign investment in Moldova. After the payment of taxes, foreign investors are permitted to repatriate residual funds. Residual-funds transfers are not subject to any other duties or taxes, and do not require special permission. There are no significant delays in the remittances of investment returns, since domestic commercial banks have accounts in leading multinational banks. Companies are not obliged to sell their hard currency earnings to the government. Foreign investors enjoy the right to repatriate their earnings.

Generally, there are no difficulties associated with the exchange of foreign or local currency in Moldova. However, shortages of Moldovan currency in the banking system have occurred in the past. While the local currency, the Moldovan Leu (plural, Lei) (MDL), has been generally stable. The Moldovan Leu has been strengthening in recent years owing to the weakness of the U.S. dollar, a massive surge in remittances, and changes in monetary policies. The Leu appreciated from MDL 11.3 to 10.4 per U.S. dollar over the course of 2008.

The U.S. Embassy has no information on complaints from U.S. investors regarding converting or remitting funds associated with investments in Moldova.

Expropriation and Compensation

The Law on Investment in Entrepreneurship states that investments cannot be subject to expropriation or measures with a similar effect. An investment may be expropriated only if all three of the following conditions are present: the expropriation is done for purposes of public utility, is not discriminatory, and is done with just and preliminary compensation. If a public authority violates an investor's rights, the investor is entitled to reparation of damages. The compensation will be equivalent to the real extent of the damage at the time of occurrence. The public authorities concerned will pay compensation for any damage caused, including any lost profits. Compensation must be paid in the currency in which the original investment was made or any other convertible currency, if the investment was made in a convertible currency. Public authorities may provide investors additional guarantees beyond those described in the law.

The government has given no evidence of intent to discriminate against U.S. investments, companies, or representatives by expropriation or of intent to expropriate property owned by citizens of other countries. No particular sectors are at greater risk of expropriation or similar actions in Moldova.

Moldovan law restricts the right to purchase agricultural and forest land to Moldovan citizens. Foreigners may become owners of such land only through inheritance and may only transfer the land to Moldovan citizens. In 2006, Parliament further restricted the right of sale and purchase of agricultural land to the state, Moldovan citizens and legal entities without foreign capital. However, foreigners are permitted to buy all other forms of property in Moldova, including land plots under privatized enterprises and land designated for construction. Moldovan-registered companies with foreign capital are known to own agricultural land, by means of loopholes in the previous law. There have been some reports that the newer limit on foreign ownership of agricultural land was used in lawsuits as an argument against foreign companies. The only option available to foreigners who desire to obtain agricultural land in Moldova at this time is to rent agricultural land.

Since 2001, the GOM has cancelled several privatizations, citing the failure of investors to meet investment schedules or irregularities committed during privatization. While the government agreed to repay investors in such disputes, payment of compensations was delayed. Often, investors have had to apply to the European Court of Human Rights (ECHR) to enforce payment of compensation from the Moldovan government. The GOM has been generally compliant with the ECHR rulings involving foreign businesses.

Investors should be aware that Moldovan territory east of the Nistru (Dniester) River is under the control of a separatist regime that does not recognize the sovereignty of the legitimate Moldovan authorities in Chisinau. These separatists have declared a self-proclaimed "Dniester Moldovan Republic," commonly known as "Transnistria." The U.S. Embassy regularly warns potential investors who are considering doing business in
Transnistria that the Embassy is extremely limited in its ability to provide any assistance there, including consular and commercial services. Also, the GOM has indicated that it will not recognize the validity of contracts for the privatization of firms in Transnistria that are concluded without the approval of the appropriate Moldovan authorities. In March 2006, Ukraine imposed new customs regulations under which Transnistrian companies seeking to engage in cross-border trade had to register in Chisinau. Despite initial protests by the local regime, most of Transnistria’s large companies subsequently registered with Moldovan authorities.

In 2000, a U.S. company claimed that it exported packing equipment and other capital goods to a privatized Transnistrian factory, only to be forced out later by the local factory manager working in collusion of local authorities. The company's representatives reported that they had been harassed by Transnistrian authorities until they decided that the safety of their company's employees could not be guaranteed and the company decided to pull out.

Dispute Settlement

Moldova has a record of disputes over past privatizations involving foreign investors. Party of Communists (PCRM) officials, when in opposition prior to 2001, were critical of what they regarded as "sweet-heart deals" in many privatizations. Consequently, once in power, the first government appointed by the PCRM in 2001 increased its scrutiny of the privatization process, including previously concluded contracts. The GOM cancelled some privatizations because of alleged irregularities in the privatization procedures or the failure of investors to meet an investment timetable. In order to ensure the predictability and credibility of the government's privatization policy, the GOM has attempted to introduce a statute of limitations of three years on the investigation of privatization files. There have been reports in recent years from companies that they had become targets of investigations by the Center for Combating Economic Crimes and Corruption (CCECC), while others complained of bureaucratic red tape or arbitrary decisions made by government agencies, police or tax authorities.

As a result of negotiations connected with Moldova's accession to the WTO, modern commercial legislation was adopted in accordance with WTO rules. In recent years the GOM has taken opaque measures, which violate WTO commitments, to protect domestic producers from foreign competitors. For example, the GOM has introduced an environmental tax on bottles and other packaging of imported goods, while not taxing bottles and packaging produced in Moldova. The Embassy interprets this measure to be a non-tariff barrier to trade. The Ministry of Economy and Trade stated it had informed the WTO of the measure and not received a reply.

In 2003, the government restructured the judiciary by eliminating the lower-tier of appellate courts (called tribunals) and the Higher Court of Appeals. The judiciary now consists of lower courts (i.e., trial courts), five courts of appeals, and the Supreme Court of Justice. Moreover, a separate set of courts covering the judicial settlement of economic/trade-related litigations was created. This quasi-separate court system consists of the District Economic Court as a trial court, the Economic Court of Appeals, and the Supreme Court of Justice, whose jurisdiction includes the adjudication of economic litigations. Courts are nominally independent from government interference. However, the Ministry of Justice controls their administration and budget, and reports of interference in law suits by influential figures are commonplace. In January 2008, a new department was created under the Ministry of Justice - the Judicial Administration Department – which deals with all judiciary-related administrative and financial matters. Moldovan courts suffer from low levels of efficiency, independence and citizen trust. During 2008, several lawyers representing Moldovan nationals at the European Court of Human Rights claimed that some judges are loyal to the government and that government officials influence their decisions.

The GOM accepts binding international arbitration of investment disputes between foreign investors and the state. By law, investment disputes can be solved through Moldovan courts or arbitration. In the event of ad hoc arbitration, the law requires following United Nations Commission on International Trade Law (UNCITRAL) rules, arbitration rules of the Paris International Chamber of Commerce (ICC) of January 1, 1998, and other rules, principles and norms agreed upon by the parties.

Moldova is a signatory to the Convention on the International Center for the Settlement of Investment Disputes (ICSID - Washington Convention) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Moldova is also a party to the Geneva European Convention on International Commercial Arbitration of April 21, 1961, and the Paris Agreement relating to the application of the European Convention on International Commercial Arbitration of December 17, 1962. Moldova has also ratified various trade agreements establishing bilateral investment protection with 35 countries (see paragraph 73), including with the United States. Moldova enjoys normal trade relations with the United States.

Performance Requirements/Incentives

Any incentives are applied uniformly to both domestic and foreign investors. Unlike the previous law, the new Law on Investment in Entrepreneurship no longer protects new investors from legislative changes for ten years. However, the new law left in effect past privileges and guarantees granted to foreign investors according to the old Law on Foreign Investment. One such privilege provides for exemptions from customs duties on imports until April 23, 2014, if the imports are used to manufacture goods bound for export.

Effective January 1, 2008, a zero percent income tax rate on re-invested corporate profits entered into force as part of a GOM initiative of "economic liberalization." The current Moldovan Tax Code also provides for a series of corporate income tax breaks. Many of these tax breaks were rendered redundant when the new zero tax rate was introduced. Companies with investments of more than USD 250,000 in charter capital enjoy a 50 percent exemption from income tax for five consecutive years. Companies with investments exceeding USD 2 million in charter capital enjoy full exemption from income tax for three consecutive years. Companies are eligible for such exemptions, if at least 80 percent of their income-tax payments were reinvested in production development or in national or sectoral development programs. For a minimum investment of USD 5 million, a company is exempt for three years from income-tax payments, if it reinvests locally 50 percent of what it would otherwise have paid in income tax. A USD 10 million investment requires only 25 percent reinvestment of income-tax payment for a full three-year exemption from income tax. Four-year exemptions are available for a USD 20 million investment with 10 percent reinvestment and for a USD 50 million investment with zero percent reinvestment. Furthermore, upon expiration of these exemptions, eligible companies investing an additional USD 10 million can enjoy tax exemptions for an extra 3-year period. Also, fixed assets contributed in-kind to the charter capital are exempted from the value-added tax and customs duties. Full income tax exemptions may also be enjoyed by small businesses (three years), software developers (five years), agribusiness (five years), and scientific research and innovations (unspecified). Commercial banks and microfinance organizations are tax exempt on income derived from loans with maturities over three years. Other tax exemptions and deductions are also available according to the Tax Code. The loss carry-forward period was raised from three to five years.

No formal requirements exist for investors to purchase from local sources or to export a certain percentage of their output. Informally, however, such requirements, often decided in an arbitrary and non-transparent basis, have been imposed by Moldovan authorities in some industries to serve short-term goals.

No limitations exist on access to foreign exchange in relation to a company's exports. There are no special requirements that nationals own shares of a company. Both joint ventures and wholly foreign-owned companies may be set up in Moldova. However, individual privatization projects in sectors such as energy, telecommunications, wine, and tobacco may have specific performance requirements. In a previous unsuccessful effort to privatize a power plant in the northern part of Moldova in 2001, the GOM required bidders to have experience with electricity distribution activity in free market conditions and to have work experience in developing countries. In 2002 the GOM attempted to privatize the monopoly telephone company, Moldtelecom. GOM required bidders to have experience servicing at least 1,000,000 customers, an annual turnover at least USD 150,000,000, asset values of at least USD 300,000,000 and experience in developing countries.

Foreign and local investors are nominally treated the same.

The government does not impose "offset" requirements on procurements. Moldovan law allows investments in any area of the country in any sector, provided that national security interests, anti-monopoly legislation, environmental protection, public health, and public order are respected.

Enforcement procedures for performance requirements to enjoy tax incentives are described in the Tax Code and related governmental decisions and Ministry of Finance instructions.

Foreign investors are required to disclose the same information as local ones. Moldova has no discriminatory visa, residence, or work-permit requirements inhibiting foreign investors' mobility in Moldova. However, the government administers a quota system limiting the number of available residence permits. The Embassy receives regular complaints that the issuance process for work and residence permits is unnecessarily complicated and seemingly arbitrary.

Moldova has commercial relations with over 100 countries. It has a liberal commercial regime. According to the Tax Code, Moldovan exports are exempt from value added tax.

Protection of Property Rights

The legal system protects and facilitates the acquisition and disposition of all property rights. Moldova has adopted laws on property and on mortgages. A system for recording property titles and mortgages is in place; however, the mortgage market is still underdeveloped.

Moldova adheres to key international agreements on intellectual property rights. Moldova is a signatory to the International Convention Establishing the World Intellectual Property Organization.

Moldova took measures to implement and enforce the WTO TRIPS agreement before its official accession to the WTO, and adopted local laws to protect intellectual property, patents, copyrights, trademarks and trade secrets. The country has an agency for the protection of copyright, the State Agency for Intellectual Property. Although many basic policies are in place and meet international standards in the field, enforcement is sporadic. Also, Moldova still needs to implement changes to its Criminal Code to strengthen copyright protection.

Transparency of the Regulatory System

Bureaucratic procedures are not always transparent and red tape often makes processing unnecessarily long, costly and burdensome. Discretionary decisions by state functionaries provide room for corruption. The GOM has taken measures to fight corruption with the implementation of the "guillotine law," which eliminated costly and obsolete regulations and forced the publication of all business-related regulations. All regulations and governmental decisions related to business activity have been published in a special business registry. These steps were intended to raise the awareness of business people about their rights, increase the transparency of business regulations, and help fight corruption. A second "guillotine law," the Law on Basic Principles Regulating Entrepreneurial Activity, was enacted in August 2007. To enhance transparency in the drafting of laws and regulatory acts, the GOM started applying a Regulatory Impact Assessment to all draft laws and acts bearing on business activity. The GOM vetted 100 laws with the goal of reducing payments to regulatory and control bodies and streamlining business-licensing procedures and economic-financial controls.

The legal framework for anti-monopoly regulation is the Law on Protection of Competition. The law establishes the fundamental principles, based on EU standards, for regulating the activity of enterprises with a de facto monopoly and for support and development of competition. After several years of delay, the government established a National Competition Agency in 2007. However, the agency’s targeted actions against major foreign investors right at its outset drew accusations of abuse, lack of experience, and flawed antitrust legislation. While the GOM has taken note of the business community's complaints, it has not taken action to change the law.

The government took measures to streamline business registration with the implementation of a "one-window" approach in 2004. Despite the creation of a Licensing Chamber and a significant reduction in the number of regulated business activities requiring licensing, businesses must still provide a great deal of supporting documentation to receive a license. The GOM has made progress in simplifying registration procedures during the startup stage, but still has a long way to go to ease day-to-day business activity and simplify regulation of foreign trade transactions, business licensing, and lending.

The government usually publishes significant laws in draft form for public comment. The working group of the State Commission for Regulation of Entrepreneurial Activity, which was established as a filter to eliminate excessive business regulations, meets weekly to vet draft governmental regulations dealing with entrepreneurship. The working group’s meetings are open to interested businesses. The Foreign Investors Association (FIA) was established in 2004 with the support of the OECD. The FIA engages in a dialogue with the GOM on topics related to the investment climate and publishes an annual White Book of concerns and recommendations for the improvement of the investment climate. In 2006, the American Chamber of Commerce was registered in Moldova, representing another voice for the business community.

In 2003, the GOM passed new criminal and civil codes and ratified several important international conventions that, in general, create a better environment for the market system.

Moldova introduced its National Accounting Standards (NAS), based on International Accounting Standards (IAS), in 1998. While this meant greater transparency of financial information and compatibility with IAS, the NAS has not been updated since then, leaving it outdated. NAS is not compatible with the International Financial Reporting Standards (IFRS) introduced in 2004. A new law on accounting took effect on January 1, 2008. Moldova is moving toward adoption of IFRS by 2011. Large and publicly listed companies that meet compliance criteria set out in the law must apply the IFRS from January 1, 2009.

Efficient Capital Markets and Portfolio Investment

Laws, governmental decisions, securities regulations, National Bank regulations, and Stock Exchange regulations provide the framework for capital markets and portfolio investment in Moldova. The GOM began regulatory reform in this area in 2007 with a view to spurring the development of the weak non-banking financial market. In particular, only two bodies – the National Bank and the National Commission on the Financial Market – regulate financial and capital markets starting in 2008.

Credit is allocated on market terms with banks being the only reliable source of business financing. The GOM regulates credit policy via credits from the National Bank, auctions through commercial banks, compulsory reserves, credits secured through collateral, open market operations, and T-bill auctions on the primary market. Foreign investors may obtain credit on the local market. However, local commercial banks loan funds at prohibitively high interest rates, and mostly short term, which reflect the country’s perceived high economic risk and inflation. The situation has been further aggravated by the uncertainty about the fallout from the global credit crunch. Also, large deals rarely can be financed through a single bank and require a bank consortium. Recent years have seen a growth in leasing and micro-financing. In 2007, Raiffeisen Leasing was the first international leasing company to open a representative office in Moldova.

The private sector's access to credit instruments is difficult because of the insufficiency of long-term funding and excessively high interest rates. Financing through local private investment funds is virtually non-existent. A few U.S. investment funds have been active on the Moldovan market, notably NCH Advisors, Western NIS Enterprise Fund, and Emerging Europe Growth Fund, the latter two managed by Horizon Capital equity fund managers.

In 2007, a "mega-regulator," the National Commission on the Financial Market (NCFM), replaced the National Securities Commission. The NCFM supervises the securities market, insurance sector and non-bank financing. The NCFM is operationally independent. Starting October 1, 2008, it acquired the right to issue and withdraw licenses for all non-bank financial sectors it supervises. The Commission adopted a Corporate Governance Code and passed new regulations intended to simplify the issuance of corporate securities and increase the transparency of transactions at the Moldovan Stock Exchange. The GOM is interested in transforming Moldova into a regional hub for capital market services by becoming a center of distribution of international venture capital. The GOM wants to attract investment fund management companies to relocate their regional headquarters to Moldova.

Moldovan banks are the main source of business financing, with non-bank financing, albeit growing, poorly developed. The banking system has two levels: the National Bank of Moldova (NBM) and 16 commercial banks. The NBM supervises the commercial banks and reports to the Parliament. The GOM holds a controlling stake in one bank, Banca de Economii (a savings bank). As of November 30, 2008, foreign investors' share in Moldovan banks' capital was more than 73 percent.

As of September 2008, total bank assets were USD 3.8 billion (equal to 83.5 percent of GDP). Moldova's five largest commercial banks account for about 62 percent of the total bank assets, as follows (as of September 30, 2008): Moldova Agroindbank: MDL 7,839 million (USD 757 million) in assets; Victoriabank: MDL 5,189 million (USD 501 million); Moldindconbank: MDL 4,868 million (USD 470 million);
Mobiasbanca: MDL 3,744 million (USD 362 million); Banca de Economii: MDL 3,626 million (USD 350 million).

Unofficial "cross-shareholding" and "stable shareholders" agreements are used mostly by investment funds to restrict other companies' participation, but are not specifically aimed against foreign investment.

Measures to prevent hostile takeovers are typically designed to protect against all potential takeovers, not just foreign takeovers.

No laws or regulations authorize private firms to adopt articles of incorporation or association which limit or prohibit foreign investment.

The U.S. Embassy has no reports about private sector or government efforts to restrict foreign participation in industry standards-setting consortia or organizations. However, private enterprises' internal regulations may include such restrictions.

Political Violence

The U.S. Embassy has received no reports over the past ten years involving politically motivated damage to projects or installations in Moldova. Such civil disturbances are unlikely in the near future.

Separatists control the Transnistrian region of Moldova along the eastern border with Ukraine. Although a brief armed conflict took place in 1991-1992, the cease-fire of July 1992 has generally been observed. Local authorities in Transnistria maintain a separate monetary unit, the Transnistrian ruble (current market exchange rate is approximately 8.5 rubles per one USD), and a separate customs system. Despite the political separation, economic cooperation takes place in various sectors. In recent years, the GOM has implemented measures requiring businesses in Transnistria to register with Moldovan authorities (see paragraph 26). A settlement is still being negotiated with the Organization for Security and Cooperation in Europe (OSCE), Russia, and Ukraine acting as guarantors/mediators and the U.S. and EU as observers (the "five plus two"). After a stalling of the settlement talks since 2006, negotiations resumed in 2008 following several confidence-building initiatives announced by the Moldovan President earlier in 2007. Any progress in talks has been piecemeal at best.

Corruption

Moldova is making efforts to adopt European and broader international standards to combat corruption and organized crime. However, significant governance challenges remain as government commitment to fighting corruption has not been successful.The GOM's failure to reduce corruption is reflected by the deteriorating country ranking on the Transparency International corruption index, placing Moldova at 109th place in 2008 (down from 79 in 2006).

In 2007, Moldova ratified the United Nations Convention against Corruption, subsequently adopting amendments to its domestic anti-corruption legislation. As a consequence, the Parliament has adopted the new Law on Preventing and Combating Corruption. In 2008, the GOM also developed several companion draft laws designed to address current legislative gaps.

Moldova's Criminal Code came into effect on June 12, 2003 but there is no evidence that it has contributed to the effort to combat corruption. It includes articles on public and private sector corruption, combating economic crimes, criminal responsibility of public officials, active and passive corruption, and trade of influence. These additions put the legislation more in line with international anti-bribery standards by criminalizing the act of offering a bribe. Under this definition, the act of promising, offering or giving a bribe to a "person of responsibility," i.e., a public official, is a crime.

Both offering and accepting a bribe are criminal acts. A bribe - whether to a foreign official or not - is a criminal act and is not deductible for tax purposes.

The penalties for offering and accepting a bribe are included in two articles of the Criminal Code. Offering a bribe is punishable by up to three years imprisonment or by a fine of 10,000-20,000 lei (approximately USD 1,000-2,000); if repeated, the penalty is up to five years imprisonment or a fine of 20,000-40,000 lei (USD 2,000-4,000); and offering a large bribe for the benefit of a criminal organization is punishable by 5-10 years imprisonment.

Accepting a bribe is punishable by up to five years imprisonment or by a fine of 10,000-30,000 lei (USD 1,000
3,000); if the offense is repeated, the penalty is 5-10 years imprisonment or a fine of 20,000-60,000 lei (USD 2,000-6,000); and for accepting a large bribe in the interest of a criminal organization, the punishment is 7-15 years imprisonment.

Several international and local organizations in Moldova work on combating corruption. In December 2006, the Republic of Moldova and the United States signed a USD 24.7 million Millennium Challenge Corporation (MCC) Threshold Country Program (TCP) agreement aimed at reducing corruption. Moldova's MCC TCP program focuses on persistent corruption in the judiciary, the health care system, and the tax, customs and police agencies.

The Project against Corruption, Money Laundering, and Terrorism Financing in the Republic of Moldova (MOLICO) - was signed in July 2006 between the Council of Europe, the European Commission, and the Swedish International Development Cooperation Agency. The MOLICO project is aimed at ensuring the implementation of Moldova's anti-corruption strategy on the basis of annual action plans and strengthening the anti-money laundering/counter- terrorist financing system of Moldova. While the MOLICO project has been active in conducting training and supporting anti-corruption legislation, concrete results in the fight against corruption are not apparent.

Moldova is not a signatory of the Organization for Economic Cooperation and Development (OECD) Convention on Combating Bribery. However, Moldova is part of two regional anti-corruption initiatives: the Stability Pact Anti-Corruption Initiative for South East Europe (SPAI) and the Group of States against Corruption (GRECO) of the Council of Europe. Moldova cooperates closely with the OECD through SPAI, and with GRECO, especially on country evaluations. In 1999, Moldova signed the Council of Europe's Criminal Law Convention on Corruption and Civil Law Convention on Corruption. Moldova ratified both conventions in 2003.

The U.S. Embassy has received reports that corruption and bribery are serious problems for foreign investors. For example, when a foreign investor discovered that he had under-paid his taxes and wished to remedy the situation, the individual tax inspector assigned to the company attempted to extort money. However, when the investor informed the tax administration of his error, the tax service lauded his self-reporting and negotiated a reduced payment. In other situations, however, a foreign investor may be faced with the choice of either paying a bribe or leaving. The Embassy has received reports of "informal" hostile takeovers of profitable businesses. In these cases, business owners are approached by politically connected individuals who wish to acquire part of the business. If business owners refuse, they may face harassment by tax, fire, sanitary and health inspectors.

According to Transparency International and an assessment of closed court cases, corruption is most pervasive in the following areas: law enforcement, customs, taxation and regulatory system; the judicial system; the health care system; the educational system; government procurement and procurement in general; agricultural subsidies and social assistance.

Moldova's ranking in Transparency International's Corruption Perception Index steadily worsened from 2001, when it was ranked 63 out of 91 countries, to 2004, when it ranked 116 out of 145 countries. In 2006, Moldova ranked 81 out of 163 countries surveyed, but slipped in 2007, dropping to 113 out of 80 countries. In 2008, Moldova ranked 109, behind such countries as Belize, Armenia, Tanzania and Rwanda. According to surveys conducted in 2006, about one third of Moldovan firms admit that they frequently pay bribes.

Bilateral Investment Agreements

Moldova has signed bilateral investment protection and promotion agreements with 35 countries, including Albania, Austria, Azerbaijan, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, China, Croatia, the Czech Republic, Finland, France, Georgia, Germany, Greece, Hungary, Israel, Italy, Kuwait, Kyrgyzstan, Latvia, Lithuania, the Netherlands, Poland, Romania, Russia, Slovenia, Spain, Switzerland, Tajikistan, Turkey, Ukraine, the United Kingdom, the United States, and Uzbekistan.

Moldova has a bilateral treaty with the United States on the Encouragement and Reciprocal Protection of Investment, but does not have a bilateral taxation treaty with the United States.

OPIC and Other Investment Insurance Programs

In 1992, the Moldovan and U.S. governments signed an investment incentive agreement that exempts OPIC from Moldovan taxes on loan interests and fees. The Overseas Private Investment Corporation (OPIC) became active in Moldova in September 1997, providing political-risk insurance to an American company investing in an agribusiness. In 2002, OPIC provided nearly USD 1 million in political-risk insurance to two U.S. companies operating in the telecommunications and agricultural sectors. In 2004, OPIC extended a USD 150,000 loan to a New York-based small telecommunications business. In 2005, OPIC closed on a USD 3.0 million loan to Procredit, a microfinance institution providing loans to small businesses in Moldova. In 2007, OPIC committed USD 10 million in financing to a U.S. company to support the expansion of its agribusiness operations.

The U.S. Export-Import Bank (Ex-Im) provides U.S. companies investing in Moldova short- and medium-term financing in the private sector under its insurance, loan and guarantee programs. In 2000, the Ex-Im Bank and Moldova signed a Framework Guarantee Agreement setting the terms for the GOM to issue sovereign guarantees to facilitate Ex-Im Bank financing of U.S. exports to Moldova. Also in 2000, the Ex-Im Bank and Moldova signed a Project Incentive Agreement that enabled the Bank to consider financing of U.S. exports for credit-worthy private sector projects in Moldova on a non-sovereign risk basis, but which required host-government support in project-related activities such as permit and license approvals. Under the agreement, repayment of Ex-Im Bank financing is based on the capture of financed projects' revenue streams in special escrow accounts held in banks approved by the Ex-Im Bank.

In 2002, the Ex-Im Bank signed a memorandum of cooperation with the Black Sea Trade and Development Bank. Under the memorandum, the Ex-Im Bank's financing products can be used to support exports of U.S. goods and services to any country located in the Black Sea region, including Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Moldova, Romania, Russia, Turkey and Ukraine. The agreement enables the Black Sea Trade Development Bank to act as a guarantor of specific transactions and also provides for parallel financing arrangements.

Moldova is eligible for U.S. Trade and Development Agency (USTDA) funding of feasibility studies, orientation visits, specialized training grants, business workshops and other forms of technical assistance. USTDA considers funding for a wide range of sectors with export potential for U.S. companies. In 2003, USTDA approved funding for a study on upgrading the telecom system for the Moldovan Customs Service.

Institutions such as the European Bank for Reconstruction and Development and the World Bank are very active in Moldova in both the private and public sectors, offering various financial tools for both insurance and credit. Moldova is a member of the Multilateral Investment Guarantee Agency. Moldova is also eligible for project and trade financing from the Black Sea Trade and Development Bank.

Labor

Skilled labor is readily available in Moldova, which has an adult literacy rate of 99.1 percent. The labor force includes numerous workers with specialized and technical skills. Labor migration has led to some shortages of workers in the agricultural and construction sectors. The Moldovan constitution guarantees all employees the right to establish or join a trade union. Trade unions have influence in the large and mostly state-owned enterprises and historically have been strong in negotiations on labor relations, such as minimum wage and basic worker rights. Unions are less active in small private companies. Moldova is a signatory to numerous conventions on the protection of workers' rights.

The Moldovan General Federation of Trade Unions has been a member of the ILO since 1992, and is also affiliated with the International Confederation of Free Unions in Brussels since 1997. After the Federation split into two separate unions in 2000, the two merged in 2007, forming the National Trade Union Confederation.

Foreign Trade Zones/Free Ports

One of the GOM's stated economic policies is the creation and development of free economic zones (FEZ). At present, six FEZs and one international free port – Giurgiulesti – are registered in Moldova. According to Moldovan law, export-oriented production is the main goal of such zones. FEZ commercial residents are allowed to sell no more than 30 percent of their products in Moldova. FEZ activity is regulated by the Law on Free Economic Zones (2001). Foreigners have the same investment opportunities as local entities. FEZ commercial entities enjoy the following advantages: 25 percent exemption from income tax; 50 percent exemption from tax on income from exports; for investments of more than USD 1 million, a three-year exemption from tax on income resulting from exports, and for investments of more than USD 5 million, a five-year exemption from tax on income from exports; zero value-added tax; exemption from excises; and protection of commercial residents against any changes in the law for 10 years. The GOM announced the establishment of three industrial parks in 2008, but their actual operation has not yet begun. Businesses operating in industrial parks would not enjoy special fiscal treatment, but would have access to ready-to-use production facilities and offices.

Similar to the FEZs, the Giurgiulesti Free International Port was established in 2005 for 25 years. Commercial residents of the port enjoy the following advantages: 25 percent exemption from income tax for the first 10 years following the first year when taxable income was reported; 50 percent exemption from tax on income for the remaining years; exemption from value-added tax and excises on imports and exports outside Moldova's customs territory; zero valued-added tax on imports from Moldova; and protection of commercial residents against any changes in the law until February 17, 2030.

Foreign Direct Investment Statistics

As of January 1, 2008, the total stock of foreign direct investment (FDI) inflows in Moldova since independence amounted to USD 1,812.8 million, according to the National Bank of Moldova (NBM).

According to NBM data, annual FDI inflows (in million
USD) to Moldova have increased steadily over the past several years: 262.84 (2005); 368.12 (2006); 537.68; and 362.19 (Jan-Jun 2008).

FDI by country in 2007, according to NBM data and based on charter capital (in million USD) was as follows:

Italy 37.22
Romania 22.16
United States 20.28
Netherlands 17.80
France 17.50
Austria 16.36
Cyprus 15.71
Germany 14.00
Ukraine 13.08
Switzerland 10.18
Other countries 52.28

According to the NBM, the stock of FDI inflows (in million USD) by country of origin for the ten largest investing countries for the period 1992 to 2007 was:

  1. Russia 154.08
  2. United States 102.16
  3. Italy 91.30
  4. Spain 82.57
  5. Netherlands 80.12
  6. France 79.00
  7. Romania 60.14
  8. Germany 50.64
  9. Austria 35.20
  10. Cyprus 27.54

Based on figures from the National Bureau of Statistics, FDI since 1992 by sectors was as a percentage of total FDI:
  • Food processing: 24.6 percent
  • Electricity, gas and water supply: 23.3 percent
  • Financial activities: 19.3 percent
  • Wholesale, retail & repair services: 17.9 percent
  • Real estate transactions: 5.4 percent
  • Transportation and communications: 4.9 percent
  • Hotels and restaurants: 2.1 percent
  • Other activities: 2.5 percent

According to NBM data, at the end of 2007, Moldova's direct investment abroad since independence amounted to USD 41.18 million.

In 2007, FDI inflows were 12.9 percent of annual GDP (USD 4.398 billion).

Major U.S. investors or representatives of U.S. companies in Moldova include:
  • NCH Group of Investment Funds: real estate and financing companies;
  • Horizon Capital: equity investment fund managing the investments of Western NIS Enterprise Fund (which is phasing out its local activity) and the recently Emerging Europe Growth Fund with holdings in banking, food processing and glass manufacturing;
  • McDonald's: fast food;
  • Coca-Cola: soft drinks;
  • Foodpro International: food processing;
  • Development Group USA: food processing, wine and media;
  • Lion Gri: wine;
  • Transoil Ltd.: f arming, agribusiness and grains trading;
  • Mary Kay: perfumes and cosmetics;
  • Avon: perfumes and cosmetics.



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