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Diplomacy in Action

2013 Investment Climate Statement - Moldova


2013 Investment Climate Statement
Bureau of Economic and Business Affairs
April 2013
Report
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Openness to, and Restrictions upon, Foreign Investment

Moldova continues to take steps toward developing a stronger economy, reforming a cumbersome regulatory framework, combating corruption and adopting reforms aimed at improving the business climate. The Government of Moldova (GOM), re-elected in November 2010 and representing a coalition which initially came into office in September 2009, pledged to accelerate democratic and economic reforms begun in 2009 with European orientation and integration as its fundamental foreign policy goal. After a prolonged recession in the 1990s, Moldova's GDP grew for eight straight years between 2001 and 2008, primarily driven by soaring remittances from migrant workers abroad that fueled economic growth. In 2009, like most countries in the region, Moldova was affected severely by the global economic crisis, and experienced a six percent drop in GDP as a result of plummeting remittances from abroad. Economic growth rebounded after 2010, but took a dip in the first nine months of 2012 falling to negative 0.2 percent growth due to the slowdown in Europe and a severe drought that adversely affected domestic agriculture. The GOM and International Monetary Fund (IMF) nevertheless estimate that real GDP growth will settle at 0.3% in 2012.

Moldova, consistently ranked as one of the poorest countries in Europe, relies heavily on investments, foreign trade and remittances for economic growth. Moldova profited from increased inflows of foreign direct investment (FDI) with eastward expansion of the EU, which became the country’s immediate neighbor following Romania's accession to the EU on January 1, 2007. However, the global crisis significantly decreased FDI in Moldova, which fell more than 60 percent in 2009 and has yet to return to pre-crisis levels. Although remittances have increased, they have yet to rebound to 2008 peak year levels, reflecting sluggish economic performance in countries with large numbers of Moldovan migrant workers. The country created an Action Plan with the EU from 2004-2008 that established a roadmap for democratic and economic reforms so that Moldovan laws and regulations would better conform to European standards. Following the expiration of the Action Plan in February 2008, Moldova explored other trade options with the EU before starting negotiations with the EU on an Association Agreement in January 2010, which the GOM hoped would raise the bilateral relationship to a new level. The GOM sees the Agreement as a framework that will bring Moldova closer to the EU through political association and economic integration. In turn, the EU works with Moldova through the European Neighborhood Policy (ENP).

As a country with a small market, Moldova implements a liberalized trade and investment strategy to promote the export of its goods and services. A member of the WTO since 2001, Moldova has signed free trade agreements with countries of the former Soviet Union. In December 2006, Moldova joined the Central European Free Trade Agreement. In 2008, Moldova moved from the extended generalized system of preferences (GSP-plus) with the EU to autonomous trade preferences, which expanded the duty-free access of Moldovan goods to EU markets. The EU market is the country's largest export destination, usually accounting for slightly less than a half of all Moldovan exports. Originally valid until 2012, the EU extended the autonomous trade preferences through 2015. To deepen its preferential trade arrangements with the EU, Moldova began negotiating a Deep and Comprehensive Free Trade Area Agreement (DCFTA) in 2012. Since then, the GOM has achieved significant progress in DCFTA negotiations, with the adoption of policies and laws aimed at creating a friendlier business environment and opening new business opportunities with the EU. Ultimately, these changes will lead to Moldova's integration into the common EU market. Moldova's signing of the DCFTA and the EU Association Agreement is expected in November 2013 at the ENP Summit in Vilnius, Lithuania.

Attracting FDI is critical to enhancing Moldova's economic competitiveness. Under Moldovan law, foreign companies enjoy equal treatment as local companies – also known as the "national treatment principle." The GOM views investments as vital for sustainable economic growth and poverty reduction. However, the amount of FDI is far below what Moldova needs to create jobs and promote economic growth.

After years of low FDI in the 1990s, FDI inflows steadily increased from 2004 to 2008. According to the National Bank of Moldova (NBM), FDI inflows amounted to a record high of US$873.38 million in 2008. The world economic crisis contributed to an abrupt drop in foreign investment in 2009, when FDI fell by more than60 percent to US$360.01 million. Since then, annual FDI inflows have never exceeded 2008 levels. Recent years have seen large-scale 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 Gruppo Veneto Banca, U.S. investment fund NCH Capital, U.S. equity fund Horizon Capital and the U.S. Lear Corporation. American investments in Moldova are primarily in the wine and food industry, automotive parts, cosmetics, telecommunications, banking and real estate.

Over the years, the GOM has made efforts to lower tax rates, strengthen tax administration, increase transparency and simplify business regulations. However, progress has been slow. Decision-making remains sometimes opaque and the application of laws and regulations inconsistent. While the coalition government provided more transparency and openness to the private sector, public service at lower levels remains problematic. The GOM needs to take more steps to reform public service and improve the quality of administrative performance. Moreover, Moldova must prevent government interference in the private sector, which protects influential individuals, uses governmental powers to pressure businesses for personal or political gains, and selectively applies regulations.

Following the parliamentary elections of July 2009, the GOM approved an Economic Stabilization and Recovery Program (ESRP), which focused on balancing public finances and liberalizing the highly regulated economy. The ESRP received the backing of the International Monetary Fund (IMF) in January 2010 with the approval of a combined three-year US$580 million Extended Credit Facility/Extended Fund Facility to support the country’s economic program by restoring fiscal and external sustainability. Developed in 2009, the ESRP does not represent a substitute for the GOM's longer-term reform agenda. In 2012, The GOM outlined in the National Development Strategy Moldova 2020 seven-priority areas for development and reform in the Strategy: education, access to financing, road infrastructure, business regulation, energy efficiency, justice system and social insurance.

On January 22, 2010, Millennium Challenge Corporation (MCC) CEO Daniel Yohannes and Moldovan Deputy Prime Minister Iurie Leanca signed a five-year, US$262 million Millennium Challenge Corporation (MCC) Compact intended to reduce poverty and accelerate economic growth by improving Moldova's transportation and agricultural sectors. The Compact funds two projects, one for road rehabilitation and the other for a transition to high-value agriculture project, which focuses on rehabilitating centralized irrigation systems, providing technical assistance and providing access to financing for farmers.

The GOM launched the first privatization in Moldova in 1994. It has adopted three separate privatization programs, 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 2000. The program was later extended with some modifications to the end of 2006. Foreign investors have successfully participated in the third program of privatizations. In 2007, Parliament passed a new privatization law, which introduced a new plan focused on efficiency for privatizing and managing state-owned assets. In 2012, the GOM continued to focus on privatization of state-owned assets, recently releasing a new list of assets subject to privatization. However, the GOM is increasingly emphasizing private and public partnerships as means for companies to have access to state-owned resources, especially in infrastructure-related projects.

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.

Rankings for Moldova:

Measure

Year

Index/Ranking

TI Corruption Index

2012

94 of 176 (2011 112 of 176)

Heritage Economic Freedom

2012

124 of 179 (2011 120 of 183)

World Bank Doing Business

2012

83 of 185 (2011 86 of 185)

MCC Government Effectiveness

2011

-0.14 (41%) (Median 0.00)

MCC Rule of Law

2011

0.11 (63%) (Median 0.00)

MCC Control of Corruption

2011

-0.1 (38%) (Median 0.00)

MCC Fiscal Policy

2011

-3.7 (47%) (Median -3.5)

MCC Trade Policy

2012

80.0 (79%) (Median 75.3)

MCC Regulatory Quality

2012

0.26 (84%) (Median 0.00)

MCC Business Start Up

2012

0.984 (91%) (Median 0.943)

MCC Land Rights Access

2012

0.91 (89%) (Median 0.69)

MCC Natural Resource Protection

2012

7.5 (6%) (Median 34.8)

MCC Access to Credit

2012

44 (75%) (Median 34)

MCC Inflation

2011

7.7% (31%) (Max 15)

Moldova receives an annual scorecard from MCC assessing its performance in the three policy categories: Ruling Justly, Investing in People and Economic Freedom. For each indicator Moldova receives a score and percentile ranking in its income peer group (0 percent is worst; 50 percent is the median; 100 percent is best). Moldova receives its peer group median for each percentile ranking. Country performance is evaluated relative to the peer group median. Scores above the peer group median meet the MCC required performance standard for eligibility for MCC programs. Scores at or below the median do not meet the performance standard. In 2011, MCC raised Moldova from the low-income country group to low middle income country group – this step also elevated the median criteria necessary for performance standards.

Conversion and Transfer Policies

Moldova accepted Article VIII of the IMF Charter in 1995, which required liberalization of 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. 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. After the tumultuous period of inflation and devaluation of the 1990s, the local currency, the Moldovan leu (plural, lei) (MDL), has been generally stable. The leu is the only accepted legal tender in the retail and service sectors in Moldova. The foreign exchange regulation of the National Bank allows foreigners and residents to use foreign currencies in some current and capital transactions in the territory of Moldova. The leu regained positions in the aftermath of the first wave of the global crisis and somewhat weakened in 2012 as the country suffered from a worsening economic situation in the Eurozone and a bad agricultural year. In 2012, the MDL began the year at 11.71 to one U.S. dollar and finished at 12.06.

The U.S. Embassy has received no 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 to 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 in any other convertible currency.

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 forestland 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. In the past, the limit on foreign ownership of agricultural land was used in lawsuits as an argument against foreign companies. The only straightforward option available to foreigners who wish to use agricultural land in Moldova at this time is to lease 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 compensation was delayed. Often, investors had to apply to the European Court of Human Rights (ECHR) to enforce payment of compensation from the Moldovan government. The GOM has been compliant with the ECHR rulings involving foreign businesses.

Investors should be aware that most 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 "Transnistrian Moldovan Republic," commonly known as "Transnistria." The U.S. Embassy advises any potential investors of its limited ability to provide any assistance, including consular and commercial services, in areas east of the Nistru River. Also, the GOM has indicated in the past 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.

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, criticized what they characterized as "sweetheart deals" for many privatizations. Consequently, once in power in 2001, the first PCRM-backed government increased its scrutiny of the privatization process, including previously concluded contracts. (The PCRM lost power following the July 2009 parliamentary elections.) The GOM cancelled some privatizations because of alleged irregularities in the privatization procedures or the failure of investors to meet an investment timetable. There have been allegations in recent years from companies that they became politically motivated 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. Businesses frequently complain about constant inspections carried out by various authorities, sometimes bordering on harassment.

As a result of negotiations connected with Moldova's accession to the WTO, modern commercial legislation was adopted in accordance with WTO rules. The main challenges to the business climate remain the lack of effective and equitable implementation of laws and regulations, and arbitrary, non-transparent decisions by government officials. In circumvention of WTO principles, the GOM nevertheless applies measures that put domestic producers at an advantage in comparison with foreign competitors in certain areas. For example, an environmental tax is applied on bottles and other packaging of imported goods, while such a tax is not levied on bottles and packaging produced in Moldova. Additionally, the GOM may intervene in the economy, in defiance of the declared respect for market principles, under the excuse of public security or general social welfare.

Moldovan courts are nominally independent from government and political interference, suffering from low levels of efficiency and citizen trust. In 2012, the Judicial Administration Department was still under the Ministry of Justice. According to the 2011-2016 Justice Sector Reform Strategy, the Department will be transferred to Superior Council of Magistrates supervision by the end of 2013. After the enactment in 2011 of the 2011-2016 Justice Sector Reform Strategy, the Strategy’s Action Plan was enacted at the beginning of 2012 by the Moldovan Parliament. The Action Plan envisions multiple actions aimed at restricting the court system, prosecution and other law enforcement agencies, institution of zero-tolerance policies towards corruption, integrity and polygraph testing of justice sector officials and creation of a strong ethics framework. To improve the investment climate, the GOM included a separate pillar within the Justice Sector Reform Strategy entitled “The Role of Justice in Economic Development”. The overall objective of this pillar is to identify and implement actions, which will enable the justice sector agencies to help create a favorable environment for a sustainable development of Moldovan economy. All actions under this objective target three strategic directions, namely: strengthening the system of alternative dispute resolution; improving the insolvency procedures and modernization of the system for maintaining and providing information concerning companies’ registration.

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. In addition, a separate layer of courts covering the judicial settlement of economic/trade-related litigation was created. This quasi-separate court system consisted of the District Economic Court as a trial court, the Economic Court of Appeals, and the Supreme Court of Justice, whose jurisdiction included the adjudication of economic litigation. In July 2011, Parliament enacted a series of amendments, which reorganized the judicial system and dissolved the economic courts. Within six months from the date of enactment, the jurisdiction of economic courts was gradually transferred to common law courts, namely appellate and trial level courts. The economic courts' assets and budgetary resources were re-directed to the common law and appellate courts. Throughout 2012, the GOM completed the entire transition process by re-appointing judges and other personnel to new courts.

The GOM accepts binding international arbitration of investment disputes between foreign investors and the state. By law, investment disputes can be solved in Moldovan courts or through arbitration. In the event of ad hoc arbitration, the law requires compliance with the 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.

In 2011, Moldova ratified the Convention on the International Center for the Settlement of Investment Disputes (ICSID - Washington Convention). The country also ratified 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 39 countries, including with the United States.

While Moldova has enjoyed normal trade relations with the United States since its independence, in late 2012, U.S. Congress repealed the Jackson-Vanik Act, which restricted trade with the Soviet Union. Moldova benefits from its eligibility for U.S. Generalized System of Preferences (GSP) trade status by exporting various categories of goods to the United States. Under Congressional authorization, the GSP program is designed to promote economic growth in the developing world by providing preferential duty-free entry for up to 4,800 products from 129 designated beneficiary countries and territories.

Performance Requirements and Incentives

All incentives are applied uniformly to both domestic and foreign investors. Unlike its predecessor, the Law on Investment in Entrepreneurship, in effect since 2004, 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 under 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.

After a four-year period with no corporate income tax, the GOM reintroduced a 12 percent corporate income tax beginning in January 1, 2012. Small businesses that meet requirements set out in the Fiscal Code can opt for a flat three percent levy on sales instead of corporate income tax. Starting in 2012, the Tax Code has fewer corporate income tax breaks available for businesses.

No formal requirements exist for investors to purchase from local sources or to export a certain percentage of their output.

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.

While not an official policy, in sectors of the economy that require large investments and experienced management, such as energy or telecommunications, the GOM has always showed preference to experienced foreign investors instead of local investors. In all other sectors, foreign and local investors receive equal treatment.

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. In 2010, the GOM set up a one-stop shop for foreigners applying for Moldovan residence and work permits in a bid to streamline a rather complicated procedure.

Moldova has a liberal commercial regime with over 100 countries. According to the Tax Code, Moldovan exports are exempt from value added tax. Although there are no formal import price controls, some businesses have complained about arbitrary price assessments on certain types of imported goods by the Moldovan Customs Service.

Right to Private Ownership and Establishment

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. 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.

In addition to international treaties, Moldovan law regulates 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 current Law on Investment in Entrepreneurship came into effect on April 23, 2004. 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. The law permits investment in all sectors of the economy, while certain activities require a business license.

There is no screening of foreign investment in Moldova and legislation permits 100 percent foreign ownership in companies, except for a law prohibiting offshore companies from holding shares in commercial banks. 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 (US$450) for limited liability companies, MDL 20,000 ($1,700) for joint stock companies, MDL 15 million (US$1.25 million) for insurance companies and MDL 100 million (US$8.4 million) for banks.

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.

However, the judicial sector remains weak and does not always guarantee the rights of citizens and foreign investors from alleged governmental or private sector misdeeds. Recent examples of judicial malfeasance involve four cases, where Moldovan and foreign investors were illegally dispossessed of their shares in Moldovan financial institutions, and were not protected in dubious Moldovan lower courts' decisions. Only one of the cases was appealed to the Moldovan Supreme Court, where it ruled in favor of the investors.

Moldova technically adheres to key international agreements on intellectual property rights. Moldova is a signatory to the International Convention Establishing the World Intellectual Property Organization. However, the Business Software Alliance (BSA) consistently ranks Moldova among the top ten offenders in the world for IT piracy. According to the latest annual BSA global piracy study released in 2011, Moldova is among the countries with the highest software piracy rate at 90 percent.

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 copyrights, the State Agency for Intellectual Property. The country also has a few professional associations dedicated to protecting its members' copyrights. Although many basic policies are in place and the country is taking steps of legal approximation with EU norms in the field, enforcement is sporadic. The GOM undertook measures to crack down on sales of unauthorized copies of CDs and DVDs. It also has attempted to deal with internet piracy. However, copyright infringements are rarely if ever prosecuted. Efforts are underway to set up a motion picture association to tackle the issue of unlicensed broadcasting of films by TV stations. A new law on copyright and related rights went into effect on January 1, 2011, increasing the role of internet providers in preventing the spread of pirated materials. To make the new copyright law effective and toughen penalties for copyright infringements, in 2011 Moldova passed changes to its Code of Administrative Contraventions and Criminal Code. In 2012, GOM adopted a new National Intellectual Property Strategy for 2012-2020.

Transparency of the Regulatory System

Bureaucratic procedures are not always transparent and red tape often makes processing registrations, ownership, etc. unnecessarily long, costly and burdensome. Discretionary decisions by state functionaries provide room for corruption. Since 2004, The GOM has been taking steps to reduce excessive government regulation of business activity. In 2004, a so-called "guillotine law" 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 - also known as the "Register of Regulations on Business Activity." 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 passed in August 2007. The GOM started applying a regulatory impact assessment to all draft laws and acts bearing on business activity to enhance transparency in the drafting of laws and regulatory acts. 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. As part of the USAID-backed program, the Ministry of Economy reviewed the number of permits and authorizations issued to businesses as well as the number of authorities issuing such documents. As a result, GOM approved a list of business permits and authorizations and banned governmental agencies and inspections from issuing or requesting any form of documents not included in the list. In 2012, Parliament passed a law to introduce clear and uniform rules for the release of information and standardized documents through a "one-stop window." Business registration has been carried out through a one-stop window since 2010. The GOM took further steps to deregulate construction projects by reducing the number, cost and time of administrative procedures needed to obtain building permits. To further protect businesses from arbitrariness of inspecting bodies, in 2012, Parliament passed a law that regulates the timing and the types of checks various authorities can conduct on businesses. Starting in 2012, businesses are able to apply on-line to get licenses, following years of moving to electronic reporting for statistical, tax or social security purposes.

After several years of delay, the government established a National Competition Agency in 2007. From its outset, the agency's targeted actions against major foreign investors drew accusations of abuse, lack of experience and flawed antitrust legislation. As a result, in 2012, Parliament passed a new law on competition that was hailed by the EU Ambassador in Moldova as compliant with EU practice and legislation. The National Competition Agency was renamed the Competition Council.

In the World Bank's 2013 "Ease of Doing Business" global index, Moldova moved up three spots to 83 out of 185 countries. The GOM still continues to ease day-to-day business activity and simplify regulation of foreign trade transactions. In 2011, the GOM adopted an action plan that called for the removal of non-tariff barriers to trade and elimination of a series of customs fees until 2014.

The government usually publishes significant laws in draft form for public comment. Business and trade associations represent other opportunities for 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 produces an annual publication of concerns and recommendations for the improvement of the investment climate. In 2006, the American Chamber of Commerce (AmCham) registered in Moldova, representing another voice for the business community. In fall 2009, AmCham produced a Roadmap for the Development of Moldova's Business and Economic Climate, which it presented to the new Prime Minister. The Roadmap made a number of recommendations to improve business regulation. In 2011, a group of ten large EU investors founded the European Business Association (EBA) with the support of the EU Ambassador to Moldova.

Since 2008, the National Business Agenda supported by the U.S. Center for International Private Enterprise (CIPE) has organized 30 domestic business associations putting forth an annual list of priorities in their dialogue with the authorities. These priorities deal with the general business environment and regulatory framework.

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. The current NAS is not compatible with the International Financial Reporting Standards (IFRS), yet work is underway to adopt new accounting standards based on IFRS. A new law on accounting took effect on January 1, 2008. Banks, insurance companies, non-governmental pension funds, investment funds and publicly listed companies were required by law to apply the IFRS beginning January 1, 2011. However, adoption of IFRS for the vast majority of companies is optional.

Efficient Capital Markets and Portfolio Investment

Laws, governmental decisions, securities regulations, NBM 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, since 2008 only two bodies – the NBM and the National Commission on the Financial Market – regulate financial and capital markets.

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 NBM, 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 provide mostly short-term, high interest loans, which require large amounts of collateral, reflecting the country's perceived high economic risk. In recent years, lending activity has been growing and interest rates have been dropping. However, in 2012, financing by banks was low due to the country's weak economic performance. The banking sector is viewed as being sound overall, yet several banks, including the large, state-owned Banca De Economii (Savings Bank), are struggling to compete. Large investments rarely can be financed through a single bank and require a bank consortium. Recent years have seen a growth in leasing and micro-financing. Raiffeisen Leasing remains the only international leasing company to have opened 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.

Moldova's securities market is underdeveloped. Acting as an independent regulatory agency, the National Commission on the Financial Market (NCFM) supervises the securities market, insurance sector and non-bank financing. 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 on the Moldovan Stock Exchange. In 2011, the GOM adopted a new Strategy for the Development of the Non-Banking Financial Strategy through 2014 that focuses on adopting European standards in financial market regulation and supervision. Amendments were passed in 2011 to the law on joint-stock companies to strengthen minority shareholder rights and improve disclosure obligations for transactions involving conflicts of interest. A new capital markets law that transposes European Union regulations comes into effect in mid-2013. It is designed to open up capital markets to foreign investors, strengthen NCFM's powers of independent regulator and sets higher capital requirements on capital market participants.

Moldovan banks are the main source of business financing, with non-bank financing, albeit growing, still playing a minor role. The banking system has two tiers: the NBM and 14 commercial banks. The NBM supervises the commercial banks and reports to Parliament. The GOM holds a controlling stake in one bank, Banca de Economii. Foreign investors' share in Moldovan banks' capital is around 75 percent.

As of November 30, 2012, total bank assets were MDL 56,947 million (US$4.7 billion). Moldova's five largest commercial banks account for almost 70 percent of the total bank assets, as follows: Moldova Agroindbank: MDL 11,350 million (US$938 million); Victoriabank: MDL 9,935 million (US$821 million); Moldindconbank: MDL 7,974 million (US$659 million); Banca de Economii: MDL 6,758 million (US$558 million); and Eximbank: MDL 4,204 million (US$347 million).

Competition from State-Owned Enterprises

Moldovan legislation does not formally discriminate between state-owned enterprises and private-run businesses. By law, governmental authorities have to provide a level legal and economic playing field to all enterprises.

The Law on Entrepreneurship and Enterprises has a list of activities restricted solely to state enterprises, which includes, among others, human and medical research, manufacture of orders and medals, postal services (except express mail), sale and production of combat equipment and weapons, minting and real estate registration.

The GOM has privatized most state-owned enterprises, and most 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, the state railway company and the majority state-owned bank Banca de Economii.

There are reports of state-owned enterprises having an advantage over privately-run businesses in Moldova. Either from government representatives sitting on their boards or from their dominant position in their industry, state-owned companies are generally seen as being better positioned to influence decision-makers than the private sector, and uses this perceived competitive advantage to prevent open competition in their individual sector. The GOM restarted efforts to sell a series of attractive assets in 2008 by privatizing the footwear manufacturer Zorile, the former Soviet military-industrial complex Mezon and the Codru Hotel. The coalition government, which first came into office in 2009, continued the selloff of government assets. Nevertheless, international economic uncertainties coupled at times with domestic political instability over the last years led to subdued privatization efforts by the GOM. In 2012, the GOM was able to achieve only half of its annual privatization target of 260 million lei (US$21.5 million). The sell-off of the government-owned cosmetics company Viorica was the major privatization of 2012.

Corporate Social Responsibility

Corporate Social Responsibility (CSR) and a culture of volunteerism and philanthropy are not highly developed in Moldova. Many Moldovans still have a view widely held from Soviet times of a paternalistic government being responsible for maintaining the social welfare of all citizens. With the entry of foreign companies into the Moldovan economy, the concept of CSR is being introduced. AmCham has set an example with its corporate members in the business sector by engaging in a forestation project, in the rehabilitation of medical facilities and in Christmas collection projects for orphanages.

Foreign investors have incorporated CSR principles into their operations. CSR activities are viewed positively by Moldovans, but are largely centered in the capital of Chisinau.

Political Violence

The U.S. Embassy has received no reports over the past ten years involving politically-motivated damage to business projects or installations in Moldova. Following parliamentary elections in April 2009, protestors severely damaged the Parliament and the Presidential Administration buildings. However, the unrest was very limited, and no business facilities or projects were targeted.

Separatists control the Transnistrian region of Moldova, located between the Nistru River and the eastern border with Ukraine. Although a brief armed conflict took place in 1991-1992, both sides signed a ceasefire in July 1992, which has generally been observed. Local authorities in Transnistria maintain a separate monetary unit, the Transnistrian ruble (current market exchange rate is approximately 11 rubles per U.S. dollar), and a separate customs system. Despite the political separation, economic cooperation takes place in various sectors. The GOM has implemented measures requiring businesses in Transnistria to register with Moldovan authorities (see Expropriation and Compensation). The Organization for Security and Cooperation in Europe (OSCE), Russia, and Ukraine acting as guarantors/mediators and the U.S. and EU as observers continue to support negotiations between Moldova and the separatist region Transnistria (known as the "five plus two" format). Throughout the years, negotiations have been piecemeal at best, with talks stalling in 2006 and formally resuming in late November 2011. In 2012, there were five official meetings between the sides, accompanied by the reactivation of 15 expert working groups on broad set of topics. An important achievement of the talks has been the resumption of rail freight traffic through Transnistria.

Corruption

Moldova is making efforts to adopt European and international standards to combat corruption and organized crime. In 2007, Moldova ratified the United Nations Convention against Corruption, subsequently adopting amendments to its domestic anti-corruption legislation. In 2008, the GOM developed and enacted a series of companion laws designed to address current legislative gaps such as the Law on Preventing and Combating Corruption, the Law on Conflict of Interests and the Law on the Code of Conduct for Public Servants. In December 2011, the Moldovan Parliament passed the Law on the National Integrity Commission, which took effect in March 2012. The National Integrity Commission is designed to become the sole public authority responsible for the regulation and implementation of policies concerning conflicts of interest in the Moldovan public service. It is also in charge of scrutinizing the disclosure of assets by judges, prosecutors and other public officials. Since the law's entry into force, the Moldovan Parliament managed to elect the Commission’s Chairman and members. However, the Commission still lacks administrative personnel and other resources to function properly.

The Center for Combating Economic Crimes and Corruption (CCECC) was also reorganized in 2012 into the National Anticorruption Center (NAC). According to law, the new NAC will focus solely on investigating public corruption and bribery crimes, and will be subordinated to the Parliament (CCECC was under the Government). For the first time, the GOM held an open competition for the position of NAC Director, with all milestones of the process being broadcast on multiple TV stations. In October, Parliament passed several amendments to the Law on Status of Judges that stripped judges of their immunity if under investigation or being for corruption crimes. However, the Supreme Court of Justice challenged the constitutionality of these amendments at the Constitutional Court, with the Court set to deliver its opinion in early 2013.

Moldova's Criminal Code 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 public official is a crime.

According to the Moldovan Criminal Code, offering a bribe is regulated by Article 325 entitled "Active Corruption." Penalties for offering a bribe include prison terms up to 12 years and fines of up to 60,000 MDL (approximately US$5,100). The minimum penalty for offering a bribe is now imprisonment for up to five years with a fine of 20,000 MDL (approximately US$1,700) to 60,000 MDL (approximately US$5,100). If committed by two or more persons or on a large scale, the offering of a bribe is punishable with imprisonment from three to seven years with a fine of 20,000 MDL (approximately US$1,700) to 60,000 MDL (approximately US$5,100). The maximum penalty for offering a bribe in its aggravated forms, on an especially large scale, in the interest of an organized criminal group or criminal organization is punishable with imprisonment from six to twelve years with a fine from 20,000 MDL (approximately US$1,700) to 60,000 MDL (approximately US$5,100). For legal entities, the lowest fine is 40,000 MDL and the highest is 200,000 MDL (US$11,700).

Accepting a bribe is regulated by the Moldovan Criminal Code under Article 324 - "Passive Corruption." Penalties for accepting a bribe include prison terms up to 15 years, and fines of up to 60,000 MDL (approximately US$5,100), the deprivation of the right to hold certain positions or practice certain activities for two to five years.

In November 2012 as part of the Justice Sector Reform Action Plan, the Ministry of Justice drafted a series of amendments in the anticorruption area. These amendments toughen the penalties for active and passive corruption. This anticorruption package also includes a draft law on integrity testing of all justice sector officials, i.e. judges, prosecutors and police officers.

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.

In the past several years, the U.S. Embassy received reports from foreign investors of serious problems with corruption and bribery. For example, when a foreign investor discovered that he had under-paid his taxes and wished to remedy the situation, the tax inspector assigned to the company attempted to extort money. The tax service later lauded the investor for his self-reporting and negotiated a reduced payment. The Embassy also has received reports of "informal" hostile takeovers of profitable businesses. In these cases, business owners were approached by politically-connected individuals who wished to acquire part of the businesses. When business owners refused, they were soon forced to close via non-transparent measures.

According to the survey “Corruption in Moldova: Perceptions of Businesses and Households” carried out by Transparency International Moldova in 2012, police, prosecution, customs and the judicial system are still among the most corrupt institutions in Moldova.

Despite the established anti-corruption framework, the number of cases involving persecution of corruption did not meet international expectations. The Corruption Perceptions Index (CPI) as estimated on an annual basis by Transparency International indicates that the population of the country and the international community perceive Moldova as a country with widespread corruption. In 2012, Moldova managed to score 36 points and was ranked 94th.

Bilateral Investment Agreements

Moldova has signed bilateral investment protection and promotion agreements with 39 countries. In addition to the United States, these include Albania, Austria, Azerbaijan, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, China, Croatia, the Czech Republic, Cyprus, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, Iran, Israel, Italy, Kuwait, Kyrgyzstan, Latvia, Lithuania, the Netherlands, Poland, Qatar, Romania, Russia, Slovakia, Slovenia, Spain, Switzerland, Tajikistan, Turkey, Ukraine, the United Kingdom and Uzbekistan.

Moldova has a bilateral treaty with the United States on the Encouragement and Reciprocal Protection of Investment. Moldova has not signed a separate bilateral taxation treaty with the U.S. However, the U.S. Government applies the Convention on Matters of Taxation signed with the USSR on June 20, 1973, which also deals with avoidance of double taxation, to former Soviet republics, including Moldova.

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 interest and fees. OPIC became active in Moldova in September 1997, providing political-risk insurance to a U.S. company investing in an agribusiness. Since then, OPIC has provided a number of financial and insurance products to U.S. businesses operating in Moldova in such fields as agribusiness, telecommunications, banking, consulting, transportation logistics and mortgage financing.

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, 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, 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 Ex-Im Bank.

In 2002, Ex-Im Bank signed a memorandum of cooperation with the Black Sea Trade and Development Bank. Under the memorandum, 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 for 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 (MIGA) and a member of the World Bank group. MIGA promotes foreign direct investment into developing countries by insuring investors against political risk, advising governments on attracting investment, sharing information through on-line investment information services and mediating disputes between investors and governments. Moldova is also eligible for project and trade financing from the Black Sea Trade and Development Bank. The country also benefits from loans extended by the EU's European Investment Bank and the Council of Europe Development Bank.

Labor

For years, Moldova prided itself on its skilled labor force, including numerous workers with specialized and technical skills. However, with past economic turmoil, many skilled laborers left Moldova for better paying jobs in other countries. This led to leading to shortages in skilled workers in Moldova. Moldova's 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 have historically negotiated for strong labor relations, minimum wage and basic worker rights. Unions are less active and effective 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 has been affiliated with the International Confederation of Free Unions (ICFU) since 1997. The Federation split into two separate unions in 2000, but merged in 2007, forming the National Trade Union Confederation (CNSM). After attempts of the previous Communist-led government to interfere in the activity of unions, the CNSM was isolated from the international trade unions movement. With a change in government in 2009 and the election of new trade union leaders, CNSM was given membership in the International Trade Union Confederation in 2010.

Foreign Trade Zones/ Free Ports

At present, seven FEZs, one international free port – Giurgiulesti – and one international free airport – Marculesti - are registered in Moldova. According to Moldovan law, job creation, attraction of foreign and domestic investments, and export-oriented production are the main goals of such zones. The Law on Free Economic Zones regulates FEZ activity. 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 US$1 million, a three-year exemption from tax on income resulting from exports, and for investments of more than US$5 million, a five-year exemption from tax on income from exports; zero value-added tax; exemption from excises; and protection of residents against any changes in the law for 10 years.

The GOM also passed a law creating nine industrial parks in 2008 with the aim of attracting investments in industrial projects. Businesses operating in those parks do not receive any special tax treatment, but typically have access to ready-to-use production facilities, offices and lower office rent fees for 25-30 years. Typically, these are idle premises of former big industrial enterprises.

Similar to the FEZs, the Giurgiulesti Free International Port, Moldova's only port accessible to sea-going vessels 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 is 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.

The Marculesti International Free Airport, a former military air base, was established in 2008 as a free enterprise zone for a 25-year period to develop cargo air transport. The airport management is also interested in turning Marculesti into a regional hub for low-cost passenger airlines.

Foreign Direct Investment Statistics

As of January 1, 2012, the historical cost of the total stock of foreign direct investment (FDI) in Moldova since independence amounted to US$3.17 billion according to the NBM. However, FDI data are not always accurate due both to lack of reporting by businesses and changing methodologies by the National Bank.

FDI was growing steadily through 2008, when it reached the highest level in recent years. Inflows dropped afterwards as the global economic crisis took its toll on foreign investment. After a downward trend in 2009 and 2010, FDI inflows grew in 2011 and were expected to record a decrease in 2012. According to NBM data, FDI inflows (in millions of U.S. dollars) were as follows: US$868.28 (2008); US$374.77(2009); US$362.35 (2010); US$430.49 (2011); US$220.62 (Jan-Sep 2012).

FDI by country in 2011, according to NBM data and based on charter capital was as follows (USD millions):

1. Netherlands

26.75

2. Russia

20.62

3. Italy

19.26

4. Germany

14.76

5. Romania

7.91

6. USA

5.59

7. Turkey

5.47

8. France

2.8

9. Switzerland

2.01

10. Austria

0.97

According to the NBM, the stock of FDI inflows by country of origin for the ten largest investing countries for the period 1992 to 2011 was (USD millions):

1. Russia

191.45

2. Italy

157.82

3. Germany

144.99

4. Romania

139.45

5. Cyprus

139.25

6. USA

135

7. Netherlands

124.01

8. France

92.24

9. Turkey

53.07

10. Switzerland

51.78

Based on figures from the National Bureau of Statistics, FDI by sectors as a percentage of total FDI since 1992 has been as follows:

Financial activities

28.9 percent

Processing industry

23.1 percent

Wholesale, retail & repair services

17.0 percent

Real estate transactions

11.1 percent

Electricity, gas, and water supply

9.1 percent

Transportation and communications

5.0 percent

Agriculture and Hunting

1.4 percent

Other activities

4.4 percent

According to NBM data, at the end of 2011, Moldova's direct investment abroad since independence amounted to US$67.85 million.

In 2011, FDI inflows were 6.1 percent of annual GDP (US$7.001 billion), while the FDI stock was 45.3 percent of GDP.

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 Emerging Europe Growth Funds I and II with holdings in banking, food processing and glass manufacturing
  • Transoil: farming, agribusiness and grains trading
  • McDonald's: fast food
  • Coca-Cola: soft drinks
  • Development Group USA: food processing, wine and media
  • Lion Gri: wine
  • Mary Kay: perfumes and cosmetics
  • Avon: perfumes and cosmetics
  • Lear Corporation: car seat covers
  • Ford: car dealership
  • Chevrolet: car dealership
  • PricewaterhouseCoopers: auditing and tax advisory
  • KPMG: auditing and tax advisory
  • Deloitte: auditing and tax advisory
  • Ernst & Young: auditing and tax advisory



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