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Report prepared by U.S. Embassy Bucharest, released by the Bureau of Economic and Business Affairs, August 1996
This Country Commercial Guide (CCG) presents a comprehensive look at Romania's commercial environment, using economic, political, and market analysis. The CCGs were established by recommendation of the Trade Promotion Coordinating Committee (TPCC), a multi-agency task force, to consolidate various reporting documents prepared for the U.S. business community. CCGs are prepared annually at U.S. embassies through the combined efforts of several U.S. Government agencies.
Since the revolution in 1989, Romania has made considerable progress towards the development of democratic institutions and a market economy. Romania's private sector is growing rapidly and has become the chief engine of economic growth. Recently enacted economic reform legislation is helping to create a positive business and investment climate.
Romania started its transition to a market economy from a difficult position. Unlike former communist countries such as Poland and Hungary, Romania had no experience of partial economic reform prior to 1989. Thus, the adjustment shock of the first transitional years caused a sharp contraction of GDP, with gross output falling by nearly a quarter through 1992. However, the implementation of a strict macroeconomic stabilization program starting in 1992-93 arrested this decline and brought about significant macroeconomic improvements.
Economic growth became positive in 1993 with GDP up 1.3 percent, followed by a rise of 3.5 percent in 1994. In 1995 growth was a positive 6.9 percent. On the inflation front, the tight monetary policy and fiscal austerity required by Romania's IMF-backed stabilization plan led to a decline in consumer price inflation from 292 percent in 1993 to 62 percent in 1994 and 27.8 in 1995.
Another important factor in the improvement of the economy is the development of a vibrant private sector which now accounts for 45 percent of GDP (compared to only 13 percent in 1989) and nearly half of employment. Over 80 percent of Romania's farmland is now in private hands and the private sector accounts for 70 percent of retail sales. Privatization lags in the industrial sector where 84 percent of output still originates in state-owned factories.
Romania's economy relies heavily on imports, especially for energy, raw materials, and capital equipment. Total imports increased steadily, reaching $7.1 billion in 1994 and $8.7 billion in 1995. Romanian exports increased 25 percent in 1994 to $6.2 billion and reached $7.5 billion in 1995.
Foreign investment in Romania since the revolution has been disappointing, totaling only $1.7 billion as of mid-April 1996. The annual inflow of foreign capital reached a record $650 million in 1994, but went down to only $323 million in 1995. Germany is the largest investor ($162.5 million), followed by South Korea ($159.1 million), Italy ($147.5 million), and the United States ($134.5 million). American companies such as Coca-Cola, Amoco, Colgate-Palmolive, Kraft/Jacobs Suchard, Proctor & Gamble, Tenneco Packaging, M-I Drilling, IBM, Citibank, McDonalds, Pizza Hut, Oracle, Pepsi, and Reynolds Tobacco have invested in Romania, along with numerous other U.S. small and medium-sized companies. As of mid-April 1996, there were 2,231 U.S. investors in Romania.
The essential legislation needed to operate a market economy in Romania is almost complete. Important legislation passed since mid-1995 includes a bankruptcy act, the mass privatization law, a modern copyright law granting protection for software, a new petroleum law regulating concessions for oil and gas exploration, and a new telecommunications law which encourages private investment in this sector. Despite the existence of this legal framework, Romania remains a difficult business environment. This is especially true for companies that have little experience in doing business in formerly-communist developing economies. However, experience has shown that problems can be overcome by persistent effort and a long-term commitment to the country. Despite its difficulties, many U.S. firms have found Romania to be a market offering good returns due, in part, to the continuing absence of serious domestic competition in many areas.
One recommendation for any company planning to come to Romania is to send the best and the most competent representatives -- especially those that have experience in difficult operating environments. Companies should be aware that shortcomings do exist, and can delay full implementation of a company's investment program. However, with tenacity and effort these problems can usually be overcome.
The following is a list of problems that have affected some foreign investors:
-- Absence of transparency: there is a lack of transparency in the manner in which deals and contracts are reached (especially those involving state-owned firms) and a perception that the Romanian legal system does not treat companies equally.
-- Government red tape and bureaucracy are extensive.
-- Land ownership: Romania's Constitution prohibits foreign persons (including foreign-owned companies) from owning land. Some foreign companies have dealt with this restriction by entering into joint ventures with local partners or by leasing land directly from a Romanian owner.
-- Corruption is a major problem that can affect business operations.
-- Lack of developed capital markets: commercial interest rates remain exceedingly high in Romania, and a well-developed capital market does not yet exist.
Despite the above-mentioned shortcomings, Romania can offer companies excellent opportunities for both exports and investments. Companies should consider this country of 22.7 million people, with its well-trained labor force and Central-European location offering access to the Former Soviet Union and the Middle East.
Note: Country Commercial Guides are available on the National Trade Data Bank on CD-ROM or through the Internet. Please contact STAT-USA at 1-800-STAT-USA for more information. To locate CCGs via the Internet, please use the following World Wide Web address: WWW.STAT-USA.gov. CCGs can also be ordered in hard copy or on diskette from the National Technical Information Services (NTIS) at 1-800-553-NTIS.
II. ECONOMIC TRENDS AND OUTLOOK
Major Trends and Outlook
Romania's transition to a market economy has been protracted and painful. The legacy of the communist regime, extreme centralization, a high degree of bureaucracy, and no experience of partial reforms such as those undertaken in other Central European economies during the 1980s, left Romania with one of the longest paths towards a market economy.
Today, six years after the end of communist rule, much of the legislative framework and reform agenda for a market economy is in place, including the establishment of a more efficient system of banking, the introduction of a modern tax system, the freeing of most prices and elimination of most subsidies, and the adoption of a tariff-based trade regime. A series of laws passed in 1995 and the first half of 1996, such as the bankruptcy law, the law on mass privatization, the competition law, a modern copyright law (which includes protection of computer software), a new petroleum law (to regulate concessions for oil and gas exploration), and a new telecommunications law (which is more consistent with EU practices), go further to create the necessary legal framework to enable the restructuring and the privatization of the economy.
The private sector is predominant in agriculture, where 80 percent of property is now in the hands of some five million new landowners (equal to nearly half the country's work force). Private enterprise has also rapidly developed in trade, services, and, to a lesser extent, industry. It now accounts for 45 percent of GDP, 86.5 percent of agricultural production, 70.6 percent of domestic retail trade, 44.7 percent of imports, 41 percent of exports, 43.9 percent of services, and 16 percent of industrial output. There are more than 550,000 private firms, of which about 500,000 are registered as commercial companies, with the remainder being sole proprietorships and family businesses.
Romania still has a long way to go to achieve economic reform.
Opposition from conservatives has slowed the implementation of
market-economy legislation and progress in industry restructuring
and privatization. The state sector still accounts for 84 percent
of industrial production. Only 2,000 of the 6,300 state firms
in existence in 1990 have been privatized, mainly through management-employee
buyouts and public offer. It was only in 1995 that the Government
of Romania (GOR) approved the restructuring of some 200 state-owned
problem companies which account for the bulk of the economy's
losses.
Although suffering from the slow progress of reform, Romania's
economy recorded visible progress in both 1994, when it achieved
a 3.5 percent rise, and 1995, when GDP went up 6.9 percent to
reach 72.3 trillion lei (USD 35.6 billion at the average annual
exchange rate of 2,033 lei to the dollar). This translates into
an average GDP per capita of USD 1,570 for Romania's 22.7 million
inhabitants. Rapid growth was accompanied by lower inflation (CPI
up 27.8 percent Dec/Dec), declining unemployment (8.9 percent
at year-end), and a consolidated fiscal deficit under 3 percent
of GDP. Reviving industrial activity (up 8.9 percent) and construction
(up 11.9 percent) were the main engines of growth. Agriculture
also performed strongly (up 4.9 percent) assisted by good weather.
Services turned in a mixed performance with transport activity
up 0.9 percent and output in commerce, telecommunications, hotels
and restaurants together up 5.0 percent.
Industrial output in 1995 recorded increases in almost all branches except mining (down 0.8 percent for oil and gas and 0.6 percent for metal ores), wood processing (down 0.9 percent) and textiles (down 0.4 percent). The highest growth rates were registered for metal products (23.7 percent), machinery and equipment (23.9 percent) and such products as TV sets, electric engines, electronic equipment, tractors, and bearings. The production of energy-intensive sectors (metallurgy, building materials, glass, chemical products, man-made fibers, rubber and plastic products) also recorded significant increases. In light industry, garments (up 27.9 percent) and footwear and leather goods (up 7.9 percent) had the best performance.
In the agricultural sector, 1995 was a good year due to favorable weather conditions and higher input utilization. Total agricultural output was 4.9 percent higher than in the previous year. Grain production, which is the main subsector of agriculture, reached about 20 MMT, which represents a record crop for Romania. This allowed Romania to become a grain exporter for the first time since 1989. Preliminary estimates indicate that Romanian wheat exports during the 1995/96 marketing year will be about 1.5 MMT. The corn production of 9.9 MMT was also 0.6 MMT higher than in 1994. Higher outputs were also reported for such crops as sunflower seed, potatoes, and vegetables. The livestock sector continued to lag behind the crop production sector. High interest rates and shortage of vegetable protein, especially soybean, were the major factors which negatively impacted the livestock industry.
The outlook for Romanian agriculture in 1996 is mixed. Wheat and
barley production will register sharp declines, primarily due
to unfavorable weather conditions. As a result, the GOR introduced
a wheat export ban in order to meet domestic requirements. Corn
and sunflower, which have been extensively cultivated this year,
are expected to yield higher crops than in 1995. The livestock
sector is likely to register better performances during 1996.
The high import duties for meat and poultry instituted by the
GOR in 1995 provided border protection for domestic livestock
producers against cheaper imported products. This has led to an
increase of animal inventories and of the total production of
meat, milk, and eggs.
Romania's foreign trade registered dramatic disruptions after
the 1989 revolution. The decrease in the quality and quantity
of domestic production, the dissolution of the Comecon market,
and the costs of observing U.N. sanctions against Iraq and Serbia
(two of Romania's traditional trade partners) were the main factors
causing a sharp decline in Romanian exports in 1990-92 and a significant
increase in the country's balance of trade deficit. In 1993, merchandise
exports began to strengthen, reaching $6.1 billion in 1994 and
rising by 22.2 percent in 1995 to reach $7.52 billion (FOB). Textile
exports made up 20 percent of this amount, followed by metals
and metal products (19 percent), minerals (10 percent), and chemicals
(9 percent).
The functioning of Romania's economy relies heavily on imports, of which up to 80 percent are raw materials (mainly oil and gas). Romania is also a net importer of minerals, machinery and electrical devices, plastics, and rubber. Imports of food products and consumer goods have also been large since 1990, as domestic production was unable to meet demand in this area. Imports, which in 1994 stood at $7.1 billion, increased 32.4 percent in 1995, reaching $9.4 billion on a CIF basis ($8.7 billion FOB). Part of the reason for the growth was a 40 percent jump in textile imports (for the expanding apparel export industry) and a 48 percent increase in the import of metal products.
As a result of the steep increase in imports, 1995 saw significant deterioration in Romania's merchandise trade balance. The deficit was $1,166.4 million (FOB/FOB), a 21.7% increase over the 1994 level.
Romania's current foreign trade policy puts at its center the country's integration into Western markets. As a result, Romania has sought association with the European Union (EU) and the European Free Trade Association (EFTA). In 1995, EU member states accounted for 53 percent of total Romanian merchandise exports (up from 46 percent in 1994) and provided 50 percent of Romania's imports (up from 47 percent in 1994).
Romania has also made efforts to normalize its trade relations with the United States. The provisions of the U.S.-Romanian trade agreement (ratified by Congress in November 1993), which restored MFN treatment to Romania, together with the provisions of the bilateral investment treaty, are the underpinning for a stable bilateral economic and commercial relationship and for a stronger American presence in Romania in both trade and direct investment. In 1995 the United States ranked fifth in Romanian imports (after Germany, Italy, Russia, and France) and ninth in Romanian exports (after Germany, Italy, France, Turkey, Holland, United Kingdom, Greece, and Egypt). U.S. exports to Romania totaled $256.1 million, and were led by coal ($84.2 million), machinery and equipment ($56.1 million), cotton textile fibers ($13.6 million), oilseeds ($10.4 million), and meat ($8.6 million). U.S. imports from Romania totaled $222.3 million, and were led by apparel ($57.0 million), iron and steel products ($40.1 million), footwear ($25.9 million), chemical products ($12.3 million), and tractors ($9.2 million).
While the general picture of the country's economic achievements in 1995 is encouraging, structural weaknesses remain in Romania's economy. Few of the output gains recorded in industry reflect an underlying improvement in competitiveness. Rather, they are a result of surging domestic demand. In fact, most state-owned industrial enterprises remain in desperate straits, having seen little new investment since 1980. Many are now virtual museums of rusting, antiquated equipment.
Genuine restructuring, with attendant painful mass lay-offs and capacity reductions, is politically difficult. In 1995, it was postponed. In 1996, which is an election year, it will clearly suffer from the political cycle. To avoid the painful effects of enterprise restructuring, the GOR has eased budget constraints for major state companies, subsidizing them and letting inter-enterprise arrears accumulate, mostly at the expense of such monopolies as the national electric, gas, and railways companies, which are forced to deliver services to state factories unable to pay their bills. The GOR seems confident that it can delay its IBRD FESAL and IMF stand-by commitments on industrial restructuring and foreign exchange market liberalization until after the winter 1996 national elections. This confidence has been strengthened by the previous two years of economic growth, rising foreign investment, and the extraordinary success of the Romanian National Bank's $520 million Samurai bonds issue in May 1996. However, after the reform pause, there will be a need to deal swiftly with pent-up price and foreign exchange market pressures, which would mean that the post-election Government's first order of business will be administering a policy of strict fiscal restraint.
Principal Growth Sectors
The following sectors have good prospects for growth over the next years, especially due to the fact that they account for the highest rate of private ownership in Romania.
Agriculture: With its 10 million hectares of arable land, mostly under wheat, corn, barley and industrial plants, with good fruit-tree growing and viticultural sectors, and with excellent conditions for animal husbandry, farming is a source of substantial potential national wealth for Romania. It could not only meet domestic demand for food, but also generate surpluses for exports. However, during 1990-1994 agriculture performed at very low levels. Factors impeding growth in this branch included the inability of the nascent private sector to participate effectively in market development, a scarcity of credit and hard currency, and several years of drought. The situation is currently improving, since the government introduced policies to support farmers through low interest credits, tax relief, better access to farm inputs, and attractive producer prices. These measures are expected to lead to increases in the production of all agricultural sectors.
Food processing: Given the potential of Romanian agriculture, the food processing industry has very favorable conditions for development. After 1990, the sector was one of the first to be tapped by foreign companies, which have formed a large number of joint ventures with local enterprises. Such large U.S. companies as Coca-Cola, Pepsi Co., Kraft Jacobs Suchard, McDonald's, and Pizza Hut are already present in the market. Growth in this sector is expected to also encourage the rapid development of the food packaging industry.
Services: The services sector in Romania is still far from meeting Western standards. However, as compared with the situation existing before 1990, the progress achieved by the sector has been extraordinary. The greatest potential for development is offered by hotel and restaurant services, tourist services, and leisure activities. Other areas which offer ample room for Western-type upgrading are banking/insurance services, legal and financial advice, and advertising and media development. Some progress has already been made, with Western accountants, bookkeepers, lawyers, consultants and advertising companies beginning to offer their services to the public.
Consumer goods: Accelerated growth rates are expected (partly as a result of increased export potentials opened by MFN and GSP status with the U.S.) in such traditional light industry subsectors as textiles, apparel, footwear, household appliances, glassware, and furniture.
Other sectors which may witness more substantial growth in the near future are those which currently get special attention from the Romanian government in the complex process of restructuring and modernization. The most important are the following:
Electrical Power - In 1995, Romania produced 57.794 GWh electricity and 43,600 Gcal thermal power for district heating installations. As a result, electricity imports were almost totally eliminated. Power plants based on hydrocarbons provided 29.4 percent of electricity output, the share of coal-based thermal plants was 41.6 percent, and hydropower plants covered 28.8 percent of output. The upgrading of existing capacity and the start-up of the Cernavoda nuclear power plant in the summer of 1996 will put Romania in a position to export electricity to its neighbors.
Oil and Gas - In 1995, Romania produced 6.5 million tons of crude oil and 18.2 billion cubic meters of natural gas. To supplement domestic production, about 8.7 million tons of crude oil and 6 billion cubic meters of gas were imported. Growth in these sectors over the next years will be stimulated by EBRD/World Bank projects which aim at increasing oil and gas production via the introduction of new equipment and new production methods. Such firms as Western Atlas and M.I. Drilling have already contributed importantly to an increase in oil production. On the other hand, exploration activities and geological surveys currently conducted by foreign companies (including the U.S. company Amoco) may lead to discoveries of new oil and natural gas reserves. The recently established National Agency for Mineral Resources actively promotes the concession of 15 oil and gas research areas. The tender for these concessions will take place during the third quarter of 1996.
Oil Refining - Romania's refining industry is the largest in Central and Eastern Europe. In the early 1990's, its ten refineries had an annual nominal crude distillation capacity of 34 million tons. In 1992, the refining industry launched a restructuring project under which excess capacity totaling 9 million tons was gradually closed down. Trimming down of capacities was coupled with specialization, emphasis being put on products in demand, such as lubricants, bitumen, and fertilizers. A feasibility study conducted in 1994 by foreign experts put costs for the upgrading of refineries and for critical investments at some $230 million. Under the scheme, Romania's five largest refineries, with a total capacity of 18 million tons a year, will operate as main cracking units. The World Bank is expected to partially finance this project.
Shipbuilding - The Romanian shipbuilding industry has eight shipyards situated on the Danube River and on the Black Sea coast. These yards have been producing a wide range of seagoing vessels (from 2,800 DWT cargo vessels to 165,000 DWT bulk-carriers and 150,000 DWT oil tankers), various river going ships and boats, as well as special structures, such as offshore oil drilling platforms. The shipyards located on the Danube have the capability of building ships up to 55,000 DWT. Bigger vessels are produced by the shipyards situated on the Black Sea coast (Constanta and Mangalia). The ships built for the Romanian fleet have been equipped with locally produced equipment. In May 1996 the South Korean company Daewoo bought 51 percent of the shares of the 2 Mai-Mangalia shipyard for $53 million.
Oil Drilling Equipment - Romania used to be one of the top three oil drilling equipment manufacturers worldwide. According to the "World Oil Review", the first three oil drilling exporters in 1987 were the United States (50.2 percent), Romania (17.1 percent) and the former Soviet Union (15.6 percent). Oil field drilling equipment is produced in eight highly integrated facilities with a total of 46,500 employees. Although the current output is much smaller than that registered in 1987, these facilities are still in existence and are starting to recover from the crisis that plagued them during the 1991-95 period. Romania is making use of their former connections in the NIS and Arab countries to conclude new export contracts.
Government Role in the Economy
The Romanian economy is still largely socialized. The government owns virtually all industry and controls the state farms, which still account for about 10 percent of agricultural lands. While the development of a private sector has started to modify the structure of the economy, basic industries have seen little change. Despite attempts since 1990 to grant more freedom of initiative to lower management levels, decision-making power still rests largely with controlling ministries.
At this time of transition, the government has an essential role to play in the creation of a more propitious framework for structural and systemic changes needed to foster economic reform. To monitor this complex process, the GOR has created a Council for Economic Coordination, Strategy and Reform, an Agency for Privatization, and an Agency for Industrial Restructuring.
Although the essential elements of the legal framework for the
privatization of state-owned enterprises have been in place since
1993, the pace of privatization has been slow. Only 2,000 out
of a total of about 6,300 state-owned commercial companies have
been privatized so far, mainly by management/employees buy-out
(MEBO), but also by public offer, case-by-case negotiation, and
auctioning.
Some hopes are now riding on the GOR's mass privatization program
(MPP). This program, which will eventually allow the equity of
3,900 state-owned companies to pass into private hands, scored
its first success in early 1996, when over 14 million Romanians
subscribed to exchange their privatization coupons for shares
in commercial companies or mutual funds. However, the actual issuance
of shares to these subscribers, and the completion of the privatization
of the 3,900 companies by cash sales of their undistributed equity
(which is managed by the State Ownership Fund), are expected to
be time consuming processes. So far, the State Ownership Fund
has auctioned off its interest (generally 40 percent) in only
160 out of the 3,900 companies in the program. The MPP, therefore,
cannot be expected to have an immediate impact on the economy.
A project sponsored by the European Union's PHARE program and
supported by the European Bank for Reconstruction and Development
(EBRD) has brought in a team led by Creditanstalt Investment Bank
(Austria) to advise the SOF on sales of companies to strategic
partners. The PHARE-EBRD Investment Led Privatization Project
aims to complete seven deals by the end of the team's mandate
(October 1996), the basic assumption being that the introduction
of blue-chip investors will quick-start sales to strategic partners.
By June 1996, the project had completed four transactions involving
such prestigious companies as Unilever, Proctor & Gamble,
South African Breweries, and Brau und Brunnen.
The Council for Economic Strategy and Reform has been given the
task of drawing up plans for the restructuring of about 200 large
inefficient state-owned enterprises, which account for 30 percent
of all losses of Romanian industry. Restructuring is partly associated
with the privatization effort in that funds gained by the sale
of some state-owned assets will be re-channeled into revamping
and modernizing strategic industries. The Council will prioritize
activities and program revitalization plans on an individual enterprise
basis. The first 30 problem enterprises -- operating in such energy-intensive
sectors as the chemical, petrochemical, machine-building and metalworking
industries -- have been put under economic and financial surveillance.
If incapable of recovery, they will be either shut down or split
and privatized through the selling of shares.
Romanian national assets in industry are, in many sectors, antiquated, inefficient, and energy-intensive. Much of the nation's infrastructure shows signs of prolonged neglect. Because of this situation, the success of industrial restructuring will depend, to a large extent, on the availability of investment funds. Despite the fact that private sector activity in trade, services, construction and agribusiness has grown rapidly, private investment capital has been small. The state remains the predominant owner of productive resources and provides nearly one-fourth of national investment. State-owned commercial enterprises provide another 48 percent.
Investment funds needed for industrial restructuring vary from sector to sector. According to GOR development strategies, the capital needed for this purpose up to the year 2002 would include $1.8 billion for the oil and gas sector, $2.2 billion for the steel industry, $300 million for non-ferrous metallurgy, $340 million for the chemical fertilizers sector, $270 million for the pulp and paper industry, and $400 million for the leather goods industry. The main sources for financing the restructuring of industry will be the companies' own revenues (36 percent), domestic (12 percent) and foreign (15 percent) loans, domestic (6 percent) and foreign (8 percent) private capital investment, state restructuring funds (16 percent) and budgetary allocations (7 percent). Budgetary allocations will be restricted to very few basic industrial projects in energy, mining and geology, and environment protection.
Balance of Payments Situation
Romania's national budget for 1996 totals about $5.7 billion under incomes, and about $6.7 billion under expenses (at the estimated 1996 average exchange rate of RL 3,000 to the dollar). The deficit for 1996 has been set at $1.06 billion.
Major revenue sources are a salary tax (26.2 percent), profit taxes (21.7 percent) a value-added tax (18 percent), and excise taxes (22.2 percent).
Romania's current account of the balance of payments for 1995 showed a deficit of $1.3 billion, up from $428 million in 1994. Sluggish inflows of foreign direct investment (up only $350 million) were insufficient to close the gap, leading to a drawdown of reserves and pressure on the leu. For 1996, the National Bank expects the current account deficit to be 2.6 percent of the GDP.
Current account deficits are financed largely via loans and grants
from international financial institutions (IFI's) and
bilateral donors. So far, Romania's most important IFI creditors
have been the IMF ($912 million), the World Bank ($912 million),
the EU ($637 million), and the EBRD ($204 million). Foreign government
creditors include France ($354 million), Germany ($623 million),
U.S. ($322 million), and Japan ($108 million).
At the end of March 1996, Romania's medium and long-term external
debt amounted to $5.448 billion. Out of this amount, $2.759 billion
was owed to IFI's and $2.689 billion to other creditors. Net international
reserves reached $1,369.5 million, the highest level since December
1994.
It is estimated that in 1996 Romania would need external financing
in the amount of $2.5 billion to cover the current account deficit
and its foreign debt service.
IFI's are not expected to be very generous to Romania in 1996. The IMF has made it clear that the disbursement of the remaining $140 million under the current IMF/Romania standby agreement will not take place until the Romanian foreign exchange market is functioning as agreed in the standby loan documents. Balance of Payment (BOP) assistance may come from the World Bank ($354 million), EBRD ($258 million), the European Investment Bank ($115 million), and G-24. However, these figures are, at this time, merely estimates of what the National Bank hopes to obtain.
Romania has sought to diversify its sources of external financing. In late 1995, Romania returned to the international private credit markets with two syndicated loans from a consortium led by Citibank: the first in the amount of $110 million and the second in the amount of $173 million. A $50 million private placement of NBR debt securities followed. In February 1996, Romania obtained its first favorable international country risk ratings from the major rating agencies: Ba3 (Moody's), BB- with positive outlook (Standard & Poors), BB- (IPCA), and BB+ (Japan Credit Rating Agency). These ratings, in turn, facilitated a successful $520 million Samurai bonds issue on the Japanese market (against which a $495 million loan was obtained from Nomura Securities). Another syndicated loan ($90 million) has been obtained from a consortium led by the Japanese Sanwa Bank. In June, 1996, the National Bank, assisted by Merrill Lynch International, launched a $225 million Eurobond issue. A Yankee bond offering may follow later in 1996.
Infrastructure Situation
Transportation: Due to its strategic location at the crossroads of Europe and Asia, Romania is rapidly becoming one of the busiest transportation areas in Central and Southern Europe. Improving the condition of the country's road network, restructuring railways, and upgrading the seaport of Constanta have become imperative.
Romania has a network of public roads totalling 153 thousand kilometers, of which 14.7 thousand are of national importance and support 65% of the total road traffic, 27 thousand are county roads, and the rest have only local importance. Only 113 kilometers are motorways, and only 4.5 thousand kilometers are classified as European-class roads.
Romanian railways rank 5th in Europe as far as freight tonnage is concerned (43 billion tons/km. in 1994). The Romanian National Railway Society (SNCFR) owns 11,365 kilometers of network, of which 45 percent is electrified, 140,000 freight cars, 6,400 passenger coaches, and 3,200 electric/Diesel locomotives. It employs about 140,000 people. SNCFR has recently launched an ambitious rehabilitation program providing for the refurbishing of 1,500 coaches, upgrading of 5,000 freight cars, and the modernization of 1,600 locomotives.
Romania has obtained loans from multilateral lending institutions
for the following major projects in this sector:
- Road rehabilitation ($180 million). The project provides for
the rehabilitation of 1053 km. of national roads;
- Border crossing upgrading ($10.5 million). Six main border crossing
points will be modernized to ensure adequate flow of international
road traffic;
- Road safety ($10.5 million). Includes signaling and marking
of 5,000 km. of roads designated as European;
- Railway restructuring ($17.7 million). Includes urgently needed
track maintenance, data processing equipment, and spare parts;
- Port of Constanta restructuring ($130.6 million).
Additional infrastructure projects have been discussed with the World Bank, EBRD, and EU-PHARE for railway modernization, Bucharest metro extension, motorway extension, and building a bridge over the Danube.
Telecommunications: In 1991, the Romanian government launched a 15-year, $7-8 billion program to expand and modernize the country's telecommunications system, which was one of the most obsolete and inefficient in Europe. To facilitate the implementation of this program, institutional reform was initiated, under which the Ministry of Communications was reorganized as a purely regulatory body; public operators were granted autonomy; private operators were allowed in the field of radio services, paging, mobile cellular telephony, CATV, radio/TV broadcasting, data transmission, and VSAT communications; the market for terminals was completely liberalized; and companies involved in telecommunications equipment manufacturing, installation, and maintenance were opened to free competition and privatization. The new telecommunications law continues to grant Rom Telecom exclusivity rights for basic telecommunications services, but only for the next five years. After that period, services will be liberalized at the national level. In the meantime, special licenses can be granted, via tenders, to private suppliers of basic telecommunications services in rural regions (villages or isolated areas).
During its first four years of implementation, Romania's telecommunications modernization program has produced some impressive results. Local and transit digital exchanges have been installed in major cities (current annual installing capacity is about 200,000 new lines, plus some 100,000 lines replacing analog equipment). The construction of an overlay digital network consisting of fiber-optic cables and digital transmission equipment is well underway. When completed, sometime in late 1997, it will include about 7,000 km. of FO cable. Significant private investment, Romanian and foreign, has been made to develop radio mobile cellular telephony, data transmission, and value-added services.
Nature of Political Relationship with the United States
U.S.-Romanian bilateral relations began to improve following the overthrow of the communist Ceaucescu dictatorship in December, 1989. However, the U.S. was dissatisfied with the imperfect March, 1990, national elections and the lack of movement toward substantial economic reform. The U.S. also took a dim view of the June, 1990, coal miners' actions against anti-government demonstrators in Bucharest, and the miners' intervention of September, 1991, which brought down the government of then Prime Minister Petre Roman. Following these events, however, the government of Prime Minister Teodor Stolojan began to address more effectively Western concerns regarding democratic pluralism and a market economy. Foreign observers considered the local elections of February, 1992, and the national elections of September, 1992, to be free and fair. The private sector has grown to account for about 45 percent of GDP. In May 1995, parliament enacted a program which will result in the privatization of 2,500 to 3,000 state-owned enterprises. Both the current government of Prime Minister Nicolae Vacaroiu and the opposition parties advocate a foreign policy based on Romania's integration into the West, and Romania was the first country in the region to sign NATO's Partnership for Peace. Despite considerable costs to Romania's economy, the Romanian Government has diligently enforced the UN sanctions against Serbia-Montenegro. As Romania's policies have evolved, the U.S. has also moved to improve and strengthen bilateral relations. The U.S. established an AID mission and provides assistance, including a growing Peace Corps contingent, to help Romania build democracy and restructure its economy. A Military-to-Military program has enhanced defense cooperation, and Congressional restoration of Romania's MFN status in October, 1993, has given impetus to trade and commercial relations.
Major Political Issues Affecting Business Climate
In the past and, to a lesser extent, at present, the business climate has been affected by a perception of Romania as a country where former communists are to be found at various levels of political and economic decision-making bodies; several extremist parties are represented in parliament, where they have an influence disproportionate to their size, and one remains in government; human rights are not yet fully observed; and the intelligence services have not been subject to adequate parliamentary control. In fact, however, Romania has made, and is continuing to make, significant progress toward the consolidation of a democratic political system and the establishment of a market economy. In the fall 1992 parliamentary elections, the opposition won approximately 47 percent of the seats in parliament, with national minorities well represented. Observance of human rights has improved significantly. As the State Department's 1994 Human Rights Report for Romania noted, the government respects most internationally recognized human rights norms, although further progress still needs to be made, particularly in ensuring respect for the rights of the Roma (gypsy) minority and proper treatment of detainees by the police. In June, 1993, a parliamentary joint committee was set up to oversee the activities of the domestic Romanian Intelligence Service, whose Director is subject to parliamentary approval, and parliament is currently working on the establishment of a committee to oversee the activities of the External Intelligence Service as well.
Although the transition to a market economy has been relatively slow, the GOR's program for economic and social reform, passed by parliament in March, 1993, indicates its determination to restructure and modernize the economy, encourage privatization, and create a better and more inviting environment for foreign investors. And with the May, 1995, passage of the mass privatization bill, the pace of structural economic reform is expected to accelerate. The U.S. Congress recognized Romania's efforts by restoring MFN in October, 1993, and the IMF approved a major stand-by assistance program for Romania in April, 1994.
Synopsis of Political System, Schedule for Elections, and Orientation of Major Political Parties
Political System: Romania is a constitutional republic with a multiparty parliamentary system. Parliament is bi-cameral; the lower house is the Chamber of Deputies and the upper house is the Senate. The President, elected by universal suffrage, serves for a four-year term. The Presidency is non-partisan under the terms of the Constitution. The head of the government is the Prime Minister. The President designates a candidate for the office of Prime Minister following consultation with the political parties represented in parliament. The candidate Prime Minister and his Cabinet must be approved by parliament in a vote of confidence before they can assume office.
In September, 1992 presidential and parliamentary elections were held. Ion Iliescu was elected President with 61 percent of the popular vote. In November, 1992, President Iliescu's designee for Prime Minister, economist Nicolae Vacaroiu, won a vote of confidence from parliament for a Cabinet composed of technocrats and members of the Party of Social Democracy of Romania, which won a plurality in the parliamentary elections. However, after the Vacaroiu government survived a vote of no-confidence in June, 1994, by a very narrow margin, the Prime Minister gave the nationalist Party of Romanian National Unity several Cabinet seats in order to ensure the government's parliamentary majority.
Schedule for Elections: Romania's next elections are scheduled for the winter of 1996. Theoretically, parliamentary elections could occur earlier in the event that the current government loses a vote of confidence in parliament and no new government can win a confidence vote within 60 days, an unlikely scenario.
Orientation of Major Political Parties
A) Parties which support the current Government:
Party of Social Democracy of Romania (PDSR) won a plurality in the 1992 elections taking 28.2 percent of the votes for the Senate and 27.7 percent of the votes for the House, and is currently the governing party. During the campaign, the PDSR advocated continued economic reform, but at a relatively slow pace, and called for social protection measures to ease the transition to the market economy. Since the elections, however, the PDSR has supported the austere economic measures taken by the government in a successful effort to reduce inflation, stabilize the currency, and bring the budget into balance. The PDSR considers itself to be social democratic in orientation.
Party of Romania National Unity (PUNR) won 8.1 percent of the vote for the Senate and 7.7 percent of the vote for the House. The PUNR was formed in response to the establishment of the Magyar Democratic Union of Romania, is nationalist in orientation and opposes any concessions to Romania's ethnic Hungarian minority. It has supported the current government in votes of confidence.
B) Parties which oppose the current Government:
The Democratic Convention (CDR) parties: The CDR was established as an electoral coalition of opposition parties prior to the local elections of February, 1992. In the fall, 1992, national elections, it won 20.16 percent of the vote for the Senate and 20.01 percent of the vote for the House. Its main constituent parties -- the National Peasant Party-Christian and Democratic, the National Liberal Party, and the Ecological Party -- hold different views on some issues, but are united in advocating more rapid and thorough going political and economic reform.
The Civic Alliance Party (PAC), the Liberal Party-1993 (PL-93),
and the Social Democratic Party (PSDR): These parties were members
of the CDR until March, 1995, when they left the Convention due
to a belief that their views were not being given due weight in
CDR decision making. However, they continue to share the belief
of the CDR parties that the current government is not moving quickly
or strongly enough on reform.
Magyar Democratic Union of Romania (UDMR): The UDMR won 7.58 percent
of the vote for the Senate and 7.45 percent of the vote for the
House in 1992. At that time, the UDMR was affiliated with the
CDR, but it broke its ties with the Convention in March, 1995.
The UDMR was formed to promote the interests of Romania's ethnic
Hungarian minority, focuses on issues of concern to that ethnic
group, and calls for autonomy on an ethnic basis and collective
minority rights. However, it also advocates a policy of rapid
political and economic reform for the country as a whole.
Democratic Party (PD-NSF): The PD-NSF won 10.39 percent of the vote for the Senate and 10.19 percent of the vote for the House. It has a social democratic orientation but, like the other opposition parties with which it cooperates on most issues, supports more rapid reform.
Romania Mare Party (PRM) won 3.85 percent of the vote for the Senate and 3.9 percent of the vote for the House. It holds highly nationalistic, xenophobic, and chauvinistic views.
The Socialist Workers Party (PSM) won 3.19 of the vote for the Senate and 3.04 percent of the vote for the House. It calls for a mixed economy and is on the extreme left of the Romanian political spectrum.
Although PRM and PSM often vote with the government, they have declared themselves in opposition.
Distribution and Sales Channels
An encouraging development of the transition process in Romania has been the steady growth of the private sector. At the beginning of 1996 it included more than 550,000 firms, accounting for 97 percent of all companies incorporated. Although generally small and medium-sized, these firms represent a good nucleus for U.S. firms seeking distribution channels.
Private firms are active mainly in the field of services and trade. The number of companies carrying out foreign trade activities has increased to over 30,000. The new companies tend to focus on consumer goods. Importing has been in many cases the first and only activity of new private businesses. State-owned companies, too, are now free to make their own business decisions and to import or export directly, without the help of intermediaries. Moreover, these companies are entitled to retain 100 percent of their after-tax foreign earnings for their own use.
These positive developments are accompanied, however, by some
aspects that have a restrictive influence:
-- The wholesaling and retailing systems are not yet completely
structured;
-- Obtaining information on markets is difficult due to the lack
of published information;
-- The typical private company set up during this early period
is a limited liability company, devoted primarily to conducting
domestic trade or import-export activities. These companies, again
typically, have few partners and low capitalization. Shortage
of capital, limited collateral, and lack of experience channels
entrepreneurs towards activities where initial investments are
low, and returns can be made rapidly - like trade and services;
-- Little improvement in the availability of local credit is seen
in the short term. Moreover, the financial means of companies
are most often limited and cannot be relied upon in terms of business
financing. Access to capital encompasses not only venture capital
for private entrepreneurs, but also expansion of capital required
to modernize existing installations, an issue particularly important
in Romania;
-- The leasing program for shops and hotels was reconsidered after
1992, partly owing to what were considered to be disappointing
results. Leasing contracts were of short duration, with a maximum
of three years. As a result, lessees extracted maximum profits
and skimped on maintenance expenditures, with the result that
leased assets are deteriorating. The sale-of-assets program provided
state companies with the opportunity to divest themselves of assets
not central to their core business and which may not survive without
the built in business of their former owners;
-- Sometimes "free market" appears to be confused with
"no-rules market," where doubtful business practices
may prevail;
-- The extent of personnel training, although good, is not comparable
to what is found in other Eastern European countries.
These drawbacks do not offset the profitability of entering the Romanian market, but highlight that the search for a local partner remains difficult given the current situation of the Romanian economy and that U.S. companies will still have to overcome bureaucratic obstacles.
Use of Agents/Distributors; Finding a Partner
The choice of a local partner is a critical step, and American managers must have access to local knowledge as a central foundation in making their decisions. As Romania progresses through the early and unstable stages of the economic transition process toward a free market economy, doing business in Romania can be complex and difficult for foreigners. While the Commercial Section of the American Embassy can give some guidance, it is recommended that U.S. companies invest sufficient time on their own to satisfy themselves that the selected Romanian firm is fully capable and reliable.
Fortunately, well qualified expertise and capability exists in Romania. Romanian specialists are very skilled at technical matters, although they have been isolated for nearly two decades from the main stream of technical knowledge. Romanian's need more experience in marketing techniques. One very interesting point is that during the last two decades local specialists erected many industrial facilities in neighboring countries. Indeed, a significant number of outside turn-key projects have been performed by Romanian firms. The experience acquired through carrying out large works could be very useful to American firms who form associations with Romanian partners both locally and in third markets.
Franchising is growing rapidly in Romania. Companies such as Computerland and Israeli fast-food company, Burger Ranch, opened stores in 1993 and 1994, respectively. They were followed by Pizza Hut in January, 1995, and McDonald's in June, 1995. Since then, McDonald's has expanded at a very rapid pace. We estimate that during the next few years franchising will dramatically increase throughout Romania.
Direct Marketing
Under the current business environment in Romania, it is recommended
that direct marketing be done only after a thorough study of local
conditions. Potential problems that have to be considered are:
-- Legislation changes frequently;
-- Relationship with the local municipal administration and other
authorities is not always easy. Much still depends on the personality
of the public officer;
-- Commercial and fiscal legislation is sometimes unclear, reflecting
a certain legal confusion existing in Romania;
-- Western accounting standards and procedures are difficult to
implement;
-- The level of exposure to Western practices has been generally
low. Romanians -especially officials- are often convinced of their
own skills despite the fact that they lack experience and knowledge
of Western business practices. For this reason, providing a solid
training foundation for employees is important. It is also recommended
that the foreign manager be highly visible and involved in day-to-day
activities, with a high level of experience in Central European
or other developing countries.
Joint Ventures/Licensing
Romanian production costs are among the lowest of the former Comecon countries and constitute a major attraction for foreign investors. Most foreign companies involved in local manufacturing and practically all associations with large companies are organized under joint-venture agreements. This is due to the fact that the joint venture often results from a negotiation process with large state entities. Also, potential Romanian partners do not represent a continuum of size and types, but are rather polarized between large state complexes and small private entrepreneurs, reflecting the lack of medium-sized local companies, either private or public, and usually the previous lack of any competition.
The short-term advantages of joint ventures (quick market access by taking over existing installations) could theoretically be outweighed by long-term drawbacks in terms of management efficiency and freedom. However, joint ventures provide some advantages. The knowledge of the local business culture, whether on the market or administrative side, is critical. Having the right partner may considerably speed up and ease the process of creating and developing optimal local business.
Tax advantages for joint ventures are another frequent expectation of Western managers. These tax advantages are linked to bringing foreign capital into Romania, as tax laws provide tax relief for both joint ventures and wholly-owned foreign subsidiaries.
Steps to Establishing an Office
Foreign companies have numerous options available for organizing business operations in Romania.
Representative offices: Foreign corporations are entitled to set up representative offices in Romania. While representatives cannot enter into commercial contracts on their own, they are entitled to enter into contracts on behalf of their parent organizations.
Establishing a representative office with the Ministry of Commerce, Department of Foreign Trade, is a straightforward matter. A nominal fee is levied and general information must be provided on the name of the office, its intended activities, and the name and address of the individual trade representative(s).
Branches and subsidiaries of foreign companies: A foreign corporation can carry out business in Romania through a subsidiary or a branch. Law No. 105/92 on International Private Relations adopts the accepted international practice by which a corporation is governed by the law of the jurisdiction of its incorporation.
Branches are not specifically defined in the Romanian legislation. However, by exemption, some foreign companies operating in the exploration field have been authorized by Government Resolution to set up branches in Romania. Such an authorization is generally issued only to companies operating in strategic fields of the local industry.
In Romania, the branch of a foreign company is subject to the national law of the parent company. Legally, the branch has no separate status from the foreign company itself, it is merely carrying on business in Romania. The foreign company will be liable to the employees and creditors of the branch for the actions of, and debts contracted by, its managers and agents on behalf of the branch. In contrast, the subsidiary of a foreign company in Romania is a Romanian legal entity and, consequently, it is subject to Romanian law. It is liable on its own behalf for the actions taken by its management. Subsidiaries and branches can carry on only the activities for which the parent company is chartered.
The registration procedures for subsidiaries and branches are not expressly regulated by the legislation on commercial companies. In practice, subsidiaries are established following the steps of registering the commercial companies.
The establishment of a branch follows the same steps as that of a subsidiary, but no Court decision authorizing the functioning of the branch is necessary.
Commercial companies: As in other industrialized countries, commercial enterprises may be formed in Romania as separate legal entities. This means they operate in their own right and are distinct from their shareholders and managers. Organizations have their own names, management, head office, and places of business.
Corporations established in Romania are legal entities subject
to Romanian law. Company Law No. 31/90 authorizes and defines
five forms of commercial enterprises:
-- partnership, which must have paid capital, and in which the
partners have unlimited and joint liability;
-- limited partnership, which must have paid capital, and in which
the general partners have unlimited and joint liability. The limited
partners are liable only up to the value of their interest;
-- limited partnership by shares, whose capital is divided into
shares and whose obligations are guaranteed by the capital and
by the unlimited and joint liability of the general partners.
The limited partners are liable only for the payment of their
shares;
-- joint stock company, whose obligations are guaranteed by the
capital. The shareholders are liable only for the payment of their
shares;
-- limited liability company, whose obligations are guaranteed
by the registered assets. The shareholders are liable only for
the payment of their contribution to the registered capital.
All commercial enterprises must be registered with the Commercial Register of the Romanian Chamber of Commerce. Enterprises take on separate legal status beginning with the date of this registration. The Commercial Register is an organization mandated to maintain statistical information on business activity in Romania. It also ensures that trade names, for example, are not duplicated.
Currently, the majority of corporations registered to do business in Romania, whether domestic or foreign-owned, are limited liability companies.
A limited liability company is known as an S.R.L. (Societate cu
Raspundere Limitata). A limited liability company is a corporation
that issues share capital to a limited number of shareholders.
Shareholders can be as few as one but cannot exceed 50. At present,
capital contributed by a foreign investor is converted to lei
at the prevailing market exchange rate in effect at the time the
capital is contributed for accounting purposes only. Companies
may maintain bank
accounts in foreign currency. The registered share capital of
a limited liability company is normally divided into shares with
a registered or par value of not less than 5,000 lei. Shares cannot
be freely traded, making limited liability companies similar to
what are known as private companies in other jurisdictions. Shares
of these companies cannot be pledged as collateral for loans.
A joint stock company is a limited liability corporation with registered capital of a minimum of 1 million lei (US$ 300.00) and with at least five shareholders. Share certificates may be issued in bearer form or may carry the name of a particular shareholder. The nominal or par value of the individual shares should not be less than 1,000 lei. A joint stock company may be set up privately or by public subscription.
Joint ventures: Joint ventures in Romania are not separately regulated
by Romanian law. The term "joint venture" is a commonly
used term to describe any of a number of forms of economic activity
with international investment, including:
-- a limited liability company with shareholdings by both Romanian
and international investors;
-- a partnership of two or more companies or individuals, including
international investors;
-- a contract for production using imports with some type of production
sharing (also known as a cooperation agreement).
Company Incorporation Procedure: The procedure for company incorporation
includes the following main steps:
-- Confirmation with Romanian Development Agency for investment
registration, as well as with Private Ownership Fund and State
Ownership Fund in case state owned companies are involved;
-- Notarization of the contract and statute of the company with
the local public notary;
-- Opening of a bank account in the name of the company and depositing
the statutory capital;
-- Local Court's decision authorizing company's establishment;
-- Publication of the Court decision authorizing company establishment;
-- Registration of the company with the Commercial Register;
-- Registration of the accounting books at the local taxation
office;
-- Obtaining of an Investor Certificate from Romanian Development
Agency.
In practice, this process can be very tedious and takes an average of six weeks.
Selling Factors/Techniques
Quality, price and payment conditions are the most important factors in determining who will succeed in concluding business in Romania. The Romanian market, like all former East-European markets, is still cash poor - although Romania's low foreign debt situation may stand it in better stead than its neighbors. A company's willingness to entertain long-term credit arrangements, barter transactions and such concepts as processing contracts will put it in a better competitive situation vis-a-vis others interested in doing business in Romania.
Most germane to the Romanian industry, a considerable part of the equipment and technologies now in place is European in origin, purchased in the 1960's and 1970's. U.S. companies will recognize that if competition's products are already in place, no matter how old, that competition may have the advantage when it comes to rehabilitation or replacement. Again, price, payment conditions, and service can offset such effects.
Advertising and Trade Promotion
Accompanying Romania's change to a market economy has been notable growth in the advertising field. Key aspects of this growth include: increased quantity and quality of media; and the development of professional advertising agencies and related services, some of them American.
Television is the predominant media followed by radio, press, outdoor advertising and movie advertising. Television includes two state-owned national networks (TVR1, with 100 percent reach, and TVR2 with 40 percent reach), a large number of state-owned local networks, several privately-owned networks whose reach tends to cover the whole country (Pro TV, Tele 7 ABC, Antena 1, Canal 38), a Cable News Network (CNN) Bucharest-based rebroadcasting facility which accepts local advertising, and several small independent television stations in major cities.
Radio is also important. There are three national state-owned AM radio networks which can be characterized by their target audience segment (popular, cultural and youth). In addition, there are a number of FM stations in Bucharest and other major cities which have a broad audience appeal.
The press includes both newspapers (daily and weekly) and magazines. Over 60 percent of the population is reported to read one or more newspapers a day. There are about 10 national dailies, several of them have established their readership based on political philosophy (such as "Romania Libera", the opposition newspaper); others are mass-market newspapers (such as "Evenimentul Zilei", the most widely read periodical), or sport-oriented newspapers. There are also daily and weekly newspapers published in the major cities. Specialty publications (i.e. sports, business, entertainment and family) are a major aspect of the weekly newspaper and magazine segment.
Movie advertising is a rapidly growing form of advertising as it allows a high quality message to be delivered.
Additionally, outdoor billboard advertising is growing rapidly and becoming more sophisticated. Billboard locations are multiplying and simple painted billboards are being replaced by backlit models. Advertising on public transportation vehicles is also common.
The advertising agency industry is experiencing rapid growth of both branches/local representatives and domestic agencies. Notable agencies with international affiliation include: BBDO/Graffiti; DMB&B/OFC; Grey; Ogilvy & Mather/Premiera; Saatchi and Saatchi/BBB Centrade; and Young and Rubicam. Notable Romanian agencies include Plus Advertising and Rom KU.
Specialized services, such as market research and market testing are available from independent suppliers (IRSOP and IMAS) as well as established institutes (Institute of World Economy and Romanian Chamber of Commerce and Industry). However, experienced companies and people in marketing studies are very rare. For production, there are some independent facilities (Domino and Magnum) as well as the in-house operations of the major agencies.
The best known business newspapers and journals in English are the following:
-- Romanian Investment Review (bi-monthly, summary of trade and
investment information). Publisher: Romanian Development Agency
(RDA);
-- Investment Guides. Publisher: RDA;
-- Romanian Law Digest. Publisher: RDA;
-- Quarterly Bulletin (economic, financing, monetary and credit
trend information together with statistics of the National Bank).
Publisher: National Bank;
-- Romanian Insights. Publisher: Romanian Chamber of Commerce
and Industry.
-- Romanian Business News (11 issues per year). Publisher: Cosmos
Development SRL, Bucharest.
-- Romanian Economic Observer (weekly economic newspaper). Publisher:
Adriana Trading Company.
Other publications in English are: Romanian Economic Newsletter (published quarterly in the USA to report on and analyze Romanian economic developments); Nine O'Clock (Bucharest daily); Business Central Europe (published monthly by the Economist Newspaper Group, London); Balkan News (a weekly newspaper published by Balkan News in Athens), and In Review - Romania (a monthly published by Balkan Media Group Inc.).
Pricing Product
Motivated, since October, 1990, by desires to control the pace of price inflation, to limit immoderate markups by monopolies and to ease the costs of adjustment to new price levels, the policy of gradual price liberalization promoted by the government proved difficult to implement. In May 1993, the number of goods for which subsidies were being provided was dramatically reduced. This action was accompanied by the elimination of government control on sales margins, and the elimination of advanced price increase notification. Further, by March 1994, price controls on meat were eliminated, and only the prices of goods and services provided by public utilities (i.e. energy, railways), state procurement prices on some agricultural products, and housing rents remained administered.
Price controls cyrrently apply exclusively to a limited number of products manufactured by state-owned companies. These limits do not apply to the sales of other companies.
Sales Service/Customer Support
As already mentioned, finding good local partners is a matter of careful effort. The lack of good local service companies is also a problem. However, with suitable training this problem can be satisfactorily solved. The lack of exposure to Western practices in the past has left a legacy of indifference to after sales service. U.S. companies should pay attention to ameliorating these attitudes in their operations.
Selling to the Government
During the first years after the revolution many foreign companies avoided dealing with local state-owned firms. However, these firms may be the only possible partner or customer in some market segments. Although the Western manager should know that bureaucracy and corruption are quite a challenge, it is apparent that local authorities are as a whole anxious to collaborate with foreign companies and that changes in the legal framework generally are headed in the right direction (albeit very slowly). In those industries considered as "strategic" by the Romanian government, such as natural resource exploitation and essential basic industries and infrastructure, the American Embassy can be helpful in providing names of contacts and making introductions.
Protecting Your Product from IPR Infringement
In early 1996, the Romanian Parliament passed a new Copyright
Law, which represents a major step towards the completion of the
legal framework ensuring protection of intellectual property rights.
The new law provides for:
-- inclusion of software protection;
-- extending the protection period from 50 to 70 years;
-- cumulative sanctions and criminal remedies in all stages;
-- establishment of free negotiating rights without any restrictions;
-- inclusion of protection for related rights;
-- establishment of administrative monitoring structures for copyright
protection.
A new Romanian Office for Copyright Protection, directly subordinated to the Romanian Government, has been established. Practical measures to stop intellectual property violation are envisaged.
Need for a Local Attorney
Company incorporation, as well as conflicts resulting from possible late payments, debt recovery and bankruptcy might generate the need for local legal assistance.
-- Late payments and debt recovery: The transformation of the state-run economy into a market economy has seen a tendency for some enterprises not to pay their debts on a timely basis. As a result, a regulation has been introduced specifying that invoices not paid within 10 days of presentation or at the specified due date will incur interest at the rate of 0.15 percent per day (54.75 percent per year).
Romania's civil law for contracts is set out in the Civil Code, which follows closely the French civil code, and the Commercial Code, which is modeled on the Italian commercial code. Generally, the specialized body of law, the Commercial Code, would have precedence over the general body of law, the Civil Code. The existing body of law covers the areas of title and pledging title, protective creditor remedies, and debt recovery.
Romanian law recognizes the existence of mortgages for immovable property and pledges for movable property. Thus, assets can be pledged as collateral for loans and as guarantees.
To protect the interests of creditors, the Romanian law provides for the right to revoke sales agreements (Action Paulienne), summary actions to limit irreparable damage, and possessory liens (permitting vendors to withhold delivery of goods for which satisfactory payment terms have not been negotiated).
Debt recovery alternatives include property attachment (attachment of movable property for sale to satisfy an acknowledged debt), "action oblique," (the right for a creditor to recover funds on the receivables of an inactive or negligent debtor), juridical debt recovery (seizure by court order of assets to satisfy a due amount), and forced execution (seizure of collateral to satisfy debts).
Romanian justice continues to be slow and bureaucratic. Therefore, avoiding conflicts of any type is the best policy. It is strongly recommended that sales be based on irrevocable letters of credit opened with banks that are correspondents of American banks or are confirmed by such banks. In case of conflicts, legal assistance not only exists but has improved considerably. Western law firms, including some American ones, are available in Romania.
-- Financial discipline and bankruptcy: As part of the restructuring process, certain large enterprises with financial and other problems are now under a regime of financial discipline. The regime, under coordination of the National Commission for Restructuring, involves limits on their abilities to incur debts as well as a requirement for development of a plan for restructuring or dissolution through bankruptcy.
New bankruptcy legislation was passed in late 1995. The law provides for creditors to be able to petition insolvent companies into either a process of economic reorganization or liquidation.
Following is a listing of best prospect sectors for U.S. exporters to Romania through 1996. Non-agricultural sectors have been ranked by the greatest estimated growth of U.S. exports over the coming year.
BEST PROSPECTS FOR NON-AGRICULTURAL GOODS AND SERVICES
1 - AIRCRAFT AND PARTS (AIR)
Narrative
Romanian demand for aircraft and parts is expected to witness a significant increase over the next years. The increase will be linked to aircraft fleet modernization programs launched by the national airline Tarom and by the country's general aviation company, as well as to purchases by several new carriers, most of them privately-owned. Programs for the rehabilitation of Romania's aircraft industry, which has the capability of producing gliders, light multipurpose aircraft, trainers, helicopters, and short/medium range twin-jet airliners, will call for imports of a wide range of aircraft parts. Tarom's fleet currently includes B-737, A-310, BAC 1-11, TU-154, and AN-24 aircraft. In accordance with the company's modernization program, all Soviet-made airplanes will be withdrawn from the fleet by 1998, being gradually replaced with new turboprop short-range aircraft for domestic and regional flights and with B-737 for international flights. The total value of the aircraft to be purchased by Tarom during the next 3 years could total as much as $300 million. Charter-flight operators (Romavia, Jaro International, Air Antares, Air Special Service, and others) have plans for purchasing MD-83's, B-737's, and such smaller planes as Falcon 50, 900, and 2000, as well as helicopters. General aviation plans for the next 3-5 years include the purchase of small jet planes, micro-light aircraft, and helicopters. Competition in this sector is strongest in the area of short-range aircraft. A serious competitor for U.S. exporters of such aircraft is Canada, which has concluded a contract with the recently created company DAC Air for the delivery of a total of 24 Dash-8-300 and CRJ-200 aircraft (total value: $424 million).
Data Table
1995 1996 1997
(USD Millions)
A) Total Market Size 72.2 130 150
B) Total Local Production 60 60 70
C) Total Exports 10 10 15
D) Total Imports 22.2 80 95
E) Imports from the U.S. 5.7 40 50
Note: The above statistics are unofficial estimates, except for 1995 data on imports, which are official Romanian and U.S. statistics.
2 - TELECOMMUNICATIONS EQUIPMENT (TEL)
Narrative
In 1991, the Romanian government launched a 15-year $7-8 billion program to expand and modernize the country's telecommunications system. Targets for the year 2005 include: increasing the penetration rate to at least 25% (6.2 million lines); creating a national digital network; developing the microwave network and encouraging radio link solutions; improving basic services provided to rural areas; and encouraging the development of value-added services.
The implementation of the program has so far proceeded at a rapid pace, with considerable support from the World Bank, EBRD, EIB, and foreign government credits. Significant private investment, Romanian and foreign, has been made mainly in the field of mobile cellular telephony, data transmission, and value-added services.
During the next 3 years special emphasis will be placed on implementing a GSM cellular system (two licenses will be granted via a tender which was launched in mid-June, 1996); developing rural telecommunications; modernizing the local distribution network; extending the intelligent pay-phone network; and introducing advanced spectrum management and frequency monitoring systems.
The most promising subsectors within the sector are: mobile and network systems, microwave equipment, broadcast equipment, cable distribution networks, and cellular equipment.
Competition to U.S. companies in the sector comes mainly from such countries as France, Germany, South Korea, and Sweden. Nonetheless, U.S. firms, which are reputed for technological know-how in this area, stand good chances of getting contracts, especially in conjunction with GSM implementation, the development of fixed cellular services for rural areas, and the modernization of spectrum management systems.
Data Table
1995 1996 1997
(USD Millions)
A) Total Market Size 303.2 310 320
B) Total Local Production 139.4 145 150
C) Total Exports 12.1 14 16
D) Total Imports 175.9 190 210
E) Imports from the U.S. 12.7 15 30
Note: Data for 1995 are official Romanian and U.S. statistics. Data for 1996 and 1997 are unofficial estimates.
3 - ELECTRICAL POWER SYSTEMS (ELP)
Narrative
Romania has a 20 MW installed electric power capacity, but uses only one third of it (6-7 MW), the other two thirds being in low-efficiency facilities. To increase performance in this sector, the Romanian Electric Power Authority (Renel) is focussing on the following projects, which are slated for top priority investment: the upgrading of coal-fired plants running on medium and low-grade lignite (an IBRD loan has already been granted for this project), the upgrading of at least two major co-generating plants in Bucharest (estimated investment over US$ 225 million) the completion of Unit 2 of the Cernavoda nuclear power plant and of fourteen hydropower plants. This would also include some significant imports of high-technology parts and components. U.S. exports in this sector are expected to consist mainly of turbine and generator parts for the Cernavoda project Unit 2 and, gas turbines and control equipment for thermal power plants.
Romania's large manufacturers of boilers, turbines and generators are seeking joint venture arrangements as a means of upgrading their production. They could become important end users of western know-how, components, parts, and process controls, and also of technology, and management skills.
Data Table
| 1995 | 1996 | 1997 | |
| (USD Millions) | |||
| A) Total Market Size | 80 | 85 | 120 |
| B) Total Local Production | 70 | 78 | 100 |
| C) Total Exports | 15 | 20 | 20 |
| D) Total Imports | 25 | 27 | 40 |
| E) Imports from the U.S. | 2 | 4 | 8 |
Note: The above statistics are unofficial estimates.
4 - COMPUTERS AND PERIPHERALS (CPT)
Narrative
Romanian demand for computers is very large, given the virtual lack of computerization before the revolution of 1989. Until now, the greatest demand has been from governmental bodies, public corporations, private companies, banks, and some state-owned companies. Domestic production is still modest, although there are Romanian companies which assemble clone computers (e.g. with Packard Bell-USA or FORTE Computers - Singapore) or could become co-production venture partners. The most promising subsectors within the sector are high-performance personal computers, computer peripherals, local area networks, and wide area networks. Many U.S. computer manufacturers are already represented on the Romanian market. U.S. exports in this sector increased in 1994, in spite of unfavorable customs duties applied to U.S. products following Romania's association with the EU and the EFTA countries and in spite of competition from such suppliers as Germany, Holland, Taiwan, Austria, France, Korea, Singapore and Japan. Romanian demand for computers and peripherals is expected to witness a significant increase over the next years. The increase will be linked to major programs for the modernization of the national railway company SNCFR, the employment and social protection project, power sector rehabilitation and modernization project, telecommunications project for Rom-Telecom, cadastre project, as well as programs for the higher education reform program.
Data Table
| 1995 | 1996 | 1997 | |
| (USD Millions) | |||
| A) Total Market Size | 143.4 | 150 | 155 |
| B) Total Local Production | 11.7 | 13 | 15 |
| C) Total Exports | 2.7 | 3 | 5 |
| D) Total Imports | 134.4 | 140 | 145 |
| E) Imports from the U.S. | 13.0 | 15 | 20 |
Note: Data for 1995 are official Romanian and U.S. statistics. Data for 1996 and 1997 are unofficial estimates.
5 - OIL AND GAS FIELD MACHINERY (OGM)
Narrative
Romania was one of the world's most important suppliers of oil and gas equipment. In the 1980's, about 85% of the industry's production was exported.
Currently the sector is confronted with serious problems because of the collapse of foreign markets. However, this industry has potential for American oil and gas field equipment exporters, especially if they are willing to engage in joint ventures. The main reason is the increased demand for specialized and sophisticated machinery (engines, pumps, compressors, control equipment) to upgrade the existing equipment and the technology. In addition, Romanian on- and off-shore oil exploration/exploitation possibilities represent a growing market for modern equipment in this area, and U.S. companies are well positioned to provide the necessary equipment and technological assistance to the Romanian industry. The excellent reputation enjoyed by U.S. oil and gas equipment manufacturers and the fact that Romanians have used such equipment for decades to upgrade their drilling rigs can foster American exports to Romania. Joint ventures and co-production schemes that would take advantage of Romania's low labor costs, skilled workforce and export markets could be of interest to both sides. The modernization of this industry will require a large influx of western technologies and imports of various state-of-art components, materials and parts.
Data Table
| 1995 | 1996 | 1997 | |
| (USD Millions) | |||
| A) Total Market Size | 50 | 55 | 80 |
| B) Total Local Production | 48 | 52 | 70 |
| C) Total Exports | 3 | 6 | 10 |
| D) Total Imports | 5 | 9 | 20 |
| E) Imports from the U.S. | 2.4 | 3 | 6 |
Note: The above statistics are unofficial estimates.
6 - AGRICULTURAL MACHINERY & EQUIPMENT (AGM)
Narrative
With its 14.8 million hectares of agricultural area, of which 9.4 million is arable land, Romania has the potential to became a large and diversified market for farming equipment. The Land Reform Act of 1991 returned 80% of agricultural land to private ownership. This resulted in Romania currently having about 5.5 million farmers with small holdings of up to 10 ha. Domestic output of agricultural equipment is far from meeting, in either quantity or adequacy, the demand generated by the new land-ownership pattern. Experts estimate a need for about 720,000 new tractors, 400,000 new cultivators, and 60,000 new harvesters over the next 5 years, compared to only 150,000 tractors, 25,000 cultivators, and 41,000 harvesters in operation at the end of 1993. There is also strong demand for irrigation equipment. While straight imports for the sector are limited by Romania's shortage of hard currency, accessing the market via licensing agreements and joint ventures with the local industry (which has good basic technologies, skilled labor, and low labor costs) could be a rewarding option for U.S. manufacturers of agricultural equipment.
Some U.S. agricultural equipment exporters such as John Deere, International Harvester (CASE), Rainke and Butler, and Valmont Irrigation are already in the market.
Romania has three tractor plants, one harvesting combines plant, and six other agricultural machinery plants. Setting up joint ventures with these plants may represent a practical method of market penetration. Recently, New Holland entered a joint venture with the harvesting combine plant "Semanatoarea" in Bucharest.
Data Table
| 1995 | 1996 | 1997 | |
| (USD Millions) | |||
| A) Total Market Size | 80 | 95 | 145 |
| B) Total Local Production | 90 | 00 | 150 |
| C) Total Exports | 25 | 25 | 40 |
| D) Total Imports | 15 | 20 | 35 |
| E) Imports from the U.S. | 2 | 3 | 20 |
Note: The above statistics are unofficial estimates.
7 - FOOD PROCESSING AND PACKAGING EQUIPMENT (FPP)
Narrative
With its strong agricultural sector, Romania has excellent potential for developing its food industry. This has been recognized by the GOR, which has introduced special incentives for investors in this industry. Over the next years, the largest share of investment is expected to go into the modernization of the existing food processing factories (a total of about 390), and the building of new, smaller and more versatile privately-owned food processing units.
The most promising subsectors within the sector are: grain mill products processing equipment; meat and poultry processing equipment; and fruit and vegetable processing equipment. Romanian interest in U.S. equipment and technologies in this sector is quite high. However, heavy competition from Western European, Turkish, and Middle Eastern companies may reduce the chances of U.S. firms in the Romanian market.
Regarding food packaging equipment, domestic production (with only one large factory, specializing in bottling equipment) is far from meeting demand. The most needed types of equipment include: size reduction equipment (cutting/slicing, portioning liquids and powder, etc.); disposable packaging for liquid foods; bottle filling, closing, and labeling equipment; equipment for tobacco and cigarettes packaging; ink-jet printing systems; equipment for making cans by means of electronic sealing.
The import market is currently dominated by German, Italian, Turkish and Hungarian equipment. In spite of this, U.S. companies have good chances of entering this market, especially if they are willing to consider joint-venture or franchise arrangements. Already such companies as Tetra Pack and USX (which is involved in a tinning line project) are present in the market.
Data Table
| 1995 | 1996 | 1997 | |
| (USD Millions) | |||
| A) Total Market Size | 170 | 175 | 185 |
| B) Total Local Production | 80 | 85 | 90 |
| C) Total Exports | 0 | 0 | 0 |
| D) Total Imports | 90 | 90 | 95 |
| E) Imports from the U.S. | 3 | 4 | 6 |
Note: The above statistics are unofficial estimates.
8 - ENVIRONMENTAL EQUIPMENT (ENV)
Narrative
Because of the inherent difficulties of the transition period Romania is facing today, environmental issues are still regarded as secondary, generally coming behind other priorities. Romanian demand for environmental equipment is large, given the virtual lack of environment protection before the revolution of 1989. Until now, the greatest demand has been from public corporations and some state-owned companies. Domestic environmental protection equipment production is still in its infancy, although there are Romanian companies which are producing the metal bulk components of some environmental protection equipment or could become co-production venture partners. The most promising subsectors within the sector are high-performance electronic sensors for water treatment, air monitoring equipment, and liquid-solid integrated de-polluting equipment. Some U.S. environmental protection equipment manufacturers are already represented on the Romanian market. U.S. exports in this sector increased in 1994. Romanian demand for environmental protection equipment is expected to witness a significant increase over the next years. The increase will be linked to major programs for the petroleum sub-sector rehabilitation project for the national oil company PETROM and for the national gas company ROMGAZ, as well as to the power sector rehabilitation and modernization project for the national power company RENEL.
Data Table
1995 1996 1997
(USD Millions)
A) Total Market Size 100 110 120
B) Total Local Production 40 50 55
C) Total Exports 0 0 0
D) Total Imports 60 60 65
E) Imports from the U.S. 5 7 10
Note: The above statistics are unofficial estimates.
BEST PROSPECTS FOR AGRICULTURAL PRODUCTS
1. SOYBEANS
Narrative
Romania's soybean production is limited because of lower producer returns compared to other crops. In 1995, Romanian soybean production totaled only 108,000 mt. Conservative estimates place Romania's soybean requirements at about 500,000 mt per year. However, because of foreign exchange shortages, actual imports are much below the normal feeding requirements of the Romanian livestock sector. U.S. soybean exports to Romania will continue at high levels. Competition is represented by South American countries. The allocations of the GSM-102 agricultural export credit program will be instrumental in boosting U.S. soybean exports to this country.
Data Table
1995 1996 1997
(USD Millions)
A) Total Market Size 115 120 120
B) Total Local Production 65 60 50
C) Total Exports 0 0 0
D) Total Imports 50 60 70
E) Imports from the U.S. 35 45 50
2. COTTON
Narrative
Romania is not a cotton producer due to unfavorable weather conditions for this crop. The United States continues to be a major cotton supplier to this market. Romanian imports of American cotton amounted to 13,200 mt. in 1994 and 7,000 mt. in 1995. This represented 20 percent and 15 percent of total Romanian imports of cotton for the respective years. American cotton exports were aided by allocations of the GSM-102 export credit guarantee program to Romania. In 1996, the value of Romania's cotton imports from the United States is expected to total USD 50 million. The main competitors are the Central Asian republics of Uzbekistan and Turkmenistan, as well as Greece, Turkey, India, and Pakistan.
Data Table
1995 1996 1997
(USD Millions)
A) Total Market Size 80 90 100
B) Total Local Production 0 0 0
C) Total Exports 0 0 0
D) Total Imports 80 90 100
E) Imports from the U.S. 13.6 50 50
Trade Barriers (Tariffs, Non-Tariff Barriers and Import Taxes)
The Romanian market is open, requiring no special conditions for access or operation.
Romania adopted an 8-digit customs tariff in March 1993. This tariff is similar to the International Harmonized System of tariff nomenclature.
The customs duties vary depending upon the product being imported. The weighted average of customs duty is 11.7 percent with notable exceptions for ores and fuels, for which the taxation is nil or reduced to 3-10 percent. However, tariffs are considerably higher for such items as cigarettes, furs, carpets, vehicles, photographic equipment and supplies, bicycles, TV sets and sound and video registration equipment. Duties applied to industrial equipment are generally about 15 percent ad valorem. As already mentioned, within the customs duties list, certain items are currently not dutiable. Examples include various ores, coal, chemical products, and machine tools.
In a sharp turn from the policy of open markets, Government Decision Number 1055, dated July 1, 1995, introduced prohibitive import duties for a number of agricultural products: 236 percent for pork, 169 percent for veal, 143 percent for chicken meat, 135 percent for sugar and sugar products, 171 percent for cheese and cheese products, 150 percent for potatoes, 98 percent for milk powder, 65 percent for rice, and 25 percent for different vegetables. The highest customs duties are those for alcoholic beverages (whiskeys, gin, brandies): 264 percent. This situation illustrates, to a certain degree, the "unpredictability" of the local business environment.
A potential obstacle for U.S. exporters is the preferential tariff treatment for Western European competitors. The free trade arrangements with the EU and EFTA are already triggering customs duty discriminations against some U.S. products. For instance, products under Ch. 85 Heading 8542 - "Electronic integrated circuits and micro-assemblies; parts thereof" are currently taxed 20 percent if imported from the U.S. and only 16 percent if imported from EU and EFTA countries. In 5 to 9 years, taxes for many of the products imported from the EU and EFTA countries will be reduced to nil creating a barrier to American products.
Customs Valuation
In Romania, customs duties are ad valorem duties. The customs value of imported goods is based on:
-- the external price of the transaction, converted into lei at
the exchange rate set weekly by the National Bank; and
-- charges not included in the price of goods, such as freight,
handling and insurance.
If documentation concerning the value of imported goods is not available, the specific World Trade Organization (WTO) provisions will apply; import prices usually charged for such goods or similar items are then used as the basis for valuation. As stated above, for most items customs valuation is based on the contract value. For those items which cannot be valued according to this general rule the valuation can be done based on international quotations. Customs duties must be paid at the time the goods are imported into Romania.
American companies exporting to Romania should be aware of the fact that, with few exceptions, all commercial revenue is subject to a Value-Added Tax (VAT). The VAT generally applies to the supply of domestic and imported goods, the transfer of real estate, and the provision of services. Exempted activities include: healthcare; scientific, educational, and charitable activities; banking, insurance, and financial services; book and newspaper publishing; rentals of agricultural real estate and agricultural equipment.
Foreign investors must pay the VAT from the start of their operations. The standard VAT rate is 18 percent. Since January 1995, certain products and services, considered to be essential, have been taxed at the lower rate of 9 percent. These include: milk and dairy products, fish and fish products, meat and meat products, edible oils, medicines, livestock, fertilizers, and agricultural services. At the same time, no VAT is paid at the retail level for such essential products and services as bread; electricity for domestic use; fuel, wood, and coal for domestic use; public transportation, and public utilities.
Import Licenses
Romania has eliminated all import licenses. However, sanitary and safety standards as well as special approvals for toxic substances, explosives and arms are in force.
Export Controls
Exports of goods and services are not subject to customs duties
or VAT. For the majority of goods, no export license is required.
Authorizations are, however, required for:
-- Exports of goods in short supply, basically foodstuffs, fuels,
and unfinished wood products;
-- Trade conducted through international clearing accounts;
-- Barter transactions; and
-- Transactions using government lines of credit.
Non-automatic export licenses are issued on a case-by-case basis by the Ministry of Commerce. Details are included in Government Decision 215/1992.
Because imports have surged, some of the existing restrictions on exports have not been enforced, in order to help Romania reduce its trade deficit, thus meeting a requirement established by IMF and other international lenders. This explains why the only restrictions that apply are temporary non-automatic authorizations for items with export ceilings (including lubricating oils, chemical fertilizers and copper alloys) or goods for which production is subsidized.
Import/Export Documentation
No special import documentation besides that normally asked for by customs officials is required. The only exception is related to meeting sanitary and safety regulations. Special documents are, however, required to introduce guns, ammunition, drugs, and environmentally dangerous products.
As for exports, most export licenses are issued for statistical purposes only. Consequently, for those products no special export documents are required. A special case is represented by products under quotas, mainly wood and foodstuffs, for which additional documents may be required, on a case-by-case basis.
Temporary Entry
Romania has a customs duty draw-back system. This system permits a refund of import duties previously collected at the time that the goods in question are exported from Romania in either the same condition or after having been transformed, processed or repaired, or after having been incorporated into products being exported.
Labeling, Marking Requirements
Goods imported into Romania must comply with rules and regulations concerning health, safety and labeling; these rules are similar to those in other developed jurisdictions. There are no special rules applying to foreign products.
Prohibited Imports
Prohibited imports include products such as arms, ammunition, illegal drugs and other similar items which can affect national security, public health or good morals.
Standards
Romanian standards of quality and safety are under the jurisdiction of the Romanian Institute for Standardization. Generally, they match ISO and Western European Standards. Romania adopted, for instance, international quality control standards such as ISO 8402, 9000-9004 and 9004-2 and incorporated them in its national standardization system.
Although the ISO standards are not compulsory by law for individual companies, the buyers increasingly impose them on the suppliers to prove the quality of their products and services by the certification of the quality control system they practice. Generally speaking, American quality standards requirements are superior to local ones. However, Western European countries are acting very aggressively to adapt local standards of their own and this might in time discriminate against American products if countering measures are not taken.
According to Decree No. 21/1992, an Office for Consumer Protection has been created. This office supervises product quality compliance with compulsory standards referring to life, health protection, work security and environment protection.
Free Trade Zones/Warehouses
Free Trade Zones and warehouses operate under Law No. 84/1992. General provisions include unrestricted entry and re-export of goods as well as exemption from customs duties and value added tax. They also include an exemption from profit taxes for the duration of a company's operations in the free trade zones. The law further permits the leasing or transfer of buildings or lands for terms of up to 50 years to either legal person or natural persons, Romanian and non-Romanian.
Currently, there are four free trade zones:
-- Sulina (located at the mouth of the Danube);
-- Constanta-Sud (located close to the port of Constanta, at the
entrance to the Black Sea-Danube Canal);
-- Galati (located about 100 km from the Danube mouth); and
-- Braila (located 30 km up the Danube from Galati).
These free trade zones are operated by the Free Trade Zones Agency of the Ministry of Transportation.
Special Import Provisions
A) Several categories of goods are exempt by law from customs duties. These include:
-- Equipment imported as a foreign investor's initial or subsequent
contribution to the capital of a company incorporated in Romania.
The foreign investment law provides for certain exemptions from
customs duties, if the foreign investor's capital contribution
in the Romanian entity is greater than USD 10,000. Exemption from
import duty is granted on all imported machinery, equipment, vehicles,
and other capital goods representing the in kind contribution
of a foreign investor. Imported supplies, raw materials and components
required for production purposes are exempt from customs duties
during the first two years of operation.
-- Samples and models with no commercial value, as well as promotional
materials.
-- Goods classed as humanitarian materials or as legacies.
B) An important objective during the transition to a market economy is the protection of Romanian companies from goods being dumped or subsidized. Accordingly, in 1992 Romania introduced anti-dumping duties for goods imported at very low or dumping prices and countervailing duties for goods which have received subsidies. Safeguard measures can also be implemented to assist domestic producers adversely affected by imports. Safeguard measures may consist of additional customs duties or quantitative restrictions (quotas). The Ministry of Commerce investigates and sets remedies in cases of dumping, subsidized imports and import surges.
Membership in Free Trade Arrangements
Romania is a founding member of the World Trade Organization; has ratified most codes of the Tokyo Round; and has been an active participant in the Uruguay Round.
On February 1, 1993, Romania signed an Association Agreement with the European Union (EU), the very first step in Romania's long-term plans for European integration. This Association Agreement has been ratified by the European Parliament as well as by the Parliaments of all EU member countries.
Romania has also concluded a free trade pact with the European Free Trade Association (EFTA).
Romania is also signatory to the conventions on Preferential Trade among Developing Countries ("The 16") and Generalized System of Trade Preferences among Developing Countries.
A.1. Openness to Foreign Investment
The Romanian government's policy is to encourage foreign direct investment. To this end, Romania has enacted a substantial body of new legislation to create a favorable investment climate. However, foreign investment in Romania has not kept pace with expectations. The cautious attitude on the part of foreign investors in 1990-93 reflected uncertainties over political stability, concern about productivity, and fears of inadequate return on investment. Later on, in 1994 and 1995, investors gained more confidence in Romania and investment inflows increased. However, there are still significant structural barriers that impede foreign investment.
The legal framework for foreign investment in Romania is provided by the following laws:
-- Commercial Register Law (No. 26/1990);
-- Commercial Company Law (No. 31/1990);
--Foreign Investment Law (No. 35/1991, revised in 1993);
-- Accountancy Law (No. 82/1991);
--Law on Foreign Investment in Exploration and Production of Oil
and Gas (No. 66/1992);
--Free Trade Zones Law (No. 84/1992);
-- Value Added Tax (Ordinance No. 3/1993, as amended);
-- Local Taxes (Law No. 27/1994)
-- Government Ordinance Regarding Tax on Profit
(No. 70/1994);
--Law on Stimulating Foreign Investment in Industry
(No. 71/1994);
-- Privatization Law (No. 55/1995);
-- Bankruptcy Law (No. 64/1995);
-- Petroleum Law (No. 134/1995);
-- Copyrights and Neighboring Rights Law (No. 8/1996);
-- Competition Law (No. 21/1996);
-- State Monopolies Law (No. 31/1996);
-- Banks Privatization Law (being debated in Parliament).
This body of legislation ensures that foreign investors are granted national treatment, have free access to domestic markets, and are allowed to participate in the country's privatization programs. There is no limit on foreign participation in commercial companies. Foreign investors are entitled to establish wholly foreign-owned enterprises in Romania (although joint ventures are the normal pattern) and to convert and repatriate 100 percent of after-tax profits. They are allowed to participate in the management and administration of the investment, as well as to assign their contractual obligations and their rights to other Romanian or foreign investors. Foreign investments in Romania are governed by the provisions established by the Foreign Investment Law in force at the time of incorporation, unless a subsequent law contains more favorable provisions.
Foreign investors may engage in business activities in Romania
in any of the following ways:
- set up new commercial companies, subsidiaries or branches, either
wholly-owned or in partnership with Romanian natural or legal
persons;
- participate in the increase of the registered capital of an
existing company or the acquisition of shares, bonds or other
securities of such companies;
- acquire concessions, leases or agreements to manage economic
activities, public services, or the production of sub-units belonging
to commercial companies or state-owned public corporations;
- acquire ownership rights over non-residential real estate improvements,
with the exception of land;
- acquire industrial or other intellectual property rights;
- conclude exploration and production-sharing agreements related
to the development of natural resources.
Foreign investor participation can take the form of: foreign currency, equipment, means of transport, spare parts and other goods, services, intellectual property rights, know-how and management expertise, or proceeds and profits from other businesses carried out in Romania.
Foreign investment is subject to routine and non-discriminatory screening. It is performed by the Romanian Development Agency, which checks on the compliance of company incorporation documents with Romanian laws and keeps a record of all companies with foreign participation established in Romania. Foreign investment must comply with environmental protection regulations and must not negatively affect Romania's national security, defense interests, public order, or public health.
Foreign investors can participate in privatization programs by acquiring shares and assets in Romanian commercial companies from either the State Ownership Fund or the five Private Ownership Funds.
Romania's policy is not to discriminate against foreign investors. Visa, residence, and work permit requirements, although time-consuming, are not discriminatory or so onerous as to inhibit foreign investors.
Several investment incentives are available to foreign investors
(See "Performance Requirements/Incentives"). They are
specified by law and are not linked to performance requirements.
A.2. Conversion and Transfer Policies
Romanian legislation does not put any restrictions on converting or transferring funds associated with an investment. All profits made by foreign investors in Romania may be converted into a hard currency, and transferred abroad, after payment of taxes. Proceeds from the sale of shares, bonds or other securities, as well as from winding-up an investment can also be repatriated. There is no limitation on the inflow or outflow of funds for remittances of profits, debt service, capital gains, returns on intellectual property, or imported inputs. However, purchasers of dollars must generally pay a premium of 2-4 percent above the official exchange rate.
A.3. Expropriation and Compensation
According to Article 5 of the Foreign Investment Law, foreign investments are not subject to nationalization, expropriation, confiscation, or requisition, except in the public interest, and then only under due process of law and with appropriate compensation. Compensation shall be "prompt, adequate and effective." Since 1990, there has been no record of expropriatory actions affecting foreign investment in Romania.
A.4. Dispute Settlement
Property and contractual rights are recognized, but enforcement is not always effective.
Romania's bankruptcy law meets minimum Western standards of acceptability. It emphasizes enterprise restructuring and job preservation. Its major drawback is that it does not apply to the liquidation of strategic state enterprises ("automonous regies"). Nor does the law apply to heavily-indebted state-owned companies which survive on government subsidies. It thus prolongs the life of Romania's industrial dinosaurs, which are responsible for a large share of the current inter-enterprise arrears of about $5,100 million.
Commercial arbitration is a very important feature of Romanian law for the foreign investor. Foreign companies engaged in trade or investment in Romania often express concerns with respect to the international commercial experience of Romanian Courts. Judges generally have little experience in the functioning of a market economy, international business methods, or the application of new Romanian commercial laws. Consequently, many agreements involving international companies and Romanian counterparts provide for the resolution of such disputes through arbitration. Arbitration offers an effective means of dispute resolution which avoids long trials before non-specialized legal courts. The parties may choose one or more arbitrators who are specialists in international commerce or a particular industry.
Romania recognizes the importance of arbitration in the settlement of commercial disputes. It is a signatory to the New York Convention of 1958 regarding the recognition and execution of foreign arbitration awards. Romania is also a party to the European Convention on International Commercial Arbitration concluded in Geneva in 1961 and the ICSID Convention concluded in Washington in 1965. Arbitration awards are enforceable through the Romanian courts under circumstances similar to those in Western countries.
The new regulations create a modern foundation for the International Commerce Arbitration Court administered by the Chamber of Commerce and Industry of Romania (the "Arbitration Court"). The Regulations and Procedural Rules provide for the Arbitration Court to be a permanent non-governmental arbitration institution.
The Arbitration Court is independent financially, administratively and organizationally. The Chamber of Commerce and Industry of Romania is also non-governmental, and is a self-governing, public interest organization, which organizes arbitration proceedings through the Arbitration Court.
Romanian law and practice recognize applications to other internationally renowned arbitration institutions, such as the ICC Paris Court of Arbitration. In recent years, the Romanian International Commercial Arbitration Court has concluded cooperation agreements with arbitration institutions in the United States, Austria, Switzerland, India, South Korea, and others.
The Tribunal level of the Romanian Courts has jurisdiction to deal with the recognition and enforcement of legitimate awards rendered by any foreign arbitration court.
A.5. Performance Requirements/Incentives
There are no performance requirements imposed as a condition for establishing, maintaining or expanding an investment. Currently, the main provisions governing the granting of incentives for foreign investors are:
-- Capital equipment imported by foreign investors as an in-kind equity contribution to a venture or purchased from their equity cash contribution is exempt from customs duties (Article 12, Law No. 35/1991).
-- Imports of raw materials, consumables, spare parts, and other
supplies needed for the operation of the investment are exempt
from customs duties for the first two years from the date the
project is commissioned or the activity commences.
(Article 13, Law No. 35/1991).
-- Investments of at least US$50 million made in industry are exempt from customs duties on raw materials, consumables, machinery and equipment for 7 years, and enjoy a tax holiday of 5 years from the date they start making a profit, on condition they manufacture products with at least 50 percent Romanian content and export at least 60 percent of their annual production. However, should such a company close its operation within 14 years from the date of its registration, it will have the obligation to pay, retroactively, all relevant taxes and duties (Article 1, Law No. 71/1994).
According to the Ordinance No. 40/1994, the tax on profit is, as a general rule, 38 percent. Exceptions are made depending on the field of activity (e.g. 25 percent for companies which derive at least 80 percent of their income from agriculture; 60 percent for companies which derive at least 50 percent of their income from night clubs, games, etc.). In addition, there is a 10 percent withholding tax for dividends.
A.6. Right to Private Ownership and Establishment
Until 1990, most real estate in Romania was owned by the state. Industrial and commercial (office and retail) properties were state-owned. Agricultural land was either state-owned (and operated as state farms); nominally privately-owned but under state control (cooperatives); or owned by individuals. The majority of the urban housing stock was state-owned, having been either nationalized or built after 1950.
The new Romanian Constitution, adopted in December 1991, guarantees the right to ownership of private property. However, mineral rights, air rights and similar attributes are excluded from private ownership.
By virtue of the Land Law No. 18/1991, about 80 percent of the arable land, formerly under cooperative control, was privatized.
Most residential housing units built with state funds (generally after 1950) have been sold to their occupants. Prices and interest rates reflected the rent already paid and the condition of the units. The issue of how to privatize nationalized residential properties was resolved by the Romanian Parliament in June 1995. The new Law on Nationalized Dwellings favors tenants rather than former owners.
Commercial and industrial real estate has been assigned to various commercial companies into which state enterprises were organized under Privatization Law 58/91. These commercial companies are now being privatized. As private owners take control of the companies, the land is moving to private control.
Foreign ownership of land is prohibited under Article 41.2 of the new Romanian Constitution. Although the Commercial Company Law provides that companies with headquarters in Romania are Romanian legal entities, the Constitutional Court, in its Decision 831 of March 1994, ruled that Romanian-registered enterprises whose capital is 100 percent owned by foreigners are to be considered foreign entities for the purposes of land ownership (i.e. that such firms cannot legally buy land). This prohibition clearly hinders foreign involvement in the Romanian economy. It effectively eliminates the possibility of secured foreign lending on real property since lenders will be unable to foreclose and take possession of the secured property.
A.7. Protection of Property Rights
Romania is a signatory to international conventions concerning intellectual property rights and has enacted legislation protecting patents, trademarks, and copyrights.
-- Patents: Romania is a party to the Paris Convention for the Protection of Industrial Property and has subscribed to all of its amendments. Foreign investors are therefore entitled to the same treatment as Romanian citizens. A new Patent law (No. 64/91) broadens and clarifies the basis on which a patent is granted. Several other laws (No. 129/92 on the protection of industrial drawings and designs, No. 16/95 on the protection of integrated circuit designs, etc.) have helped bring Romanian patent legislation up to international standards. Patents are valid for 20 years. The period for contesting a patent application is six months.
-- Trademarks: Romania joined the Madrid Agreement relating to the International Registration of Trademarks. Trademark registrations are valid for 10 years from the date of application, being renewable for similar periods. The first applicant is entitled to the registration. The period for contesting a trademark is six months. The current trademark legislation has been in force since 1967/1968. A draft law is under preparation updating the law's terminology and harmonizing its provisions with those of the TRIPS agreement (Marakesh Agreement, ratified by Romania via Law No. 133/94).
-- Copyrights: Romania is a member of the Bern Convention on Copyrights. Its 1996 law on protection of copyrights and neighboring rights is among the most modern national legislation in this field. It is consistent with E.U. provisions and incorporates many suggestions made by U.S. experts. To enhance copyright protection for imported sound recordings, GOR must ratify the latest versions of the Bern and Rome conventions.
A.8. Regulatory System: Laws and Procedures
The Romanian government does not yet have a transparent policy to foster competition. The presence of state-owned government-subsidized enterprises in the economy is a major impediment to the efficient mobilization and allocation of investment capital.
Cumbersome and non-transparent bureaucratic procedures are a major problem. Foreign investors point to the excessive time it takes to secure the necessary zoning permits, property titles, licenses, and utility hook-ups. Many foreign investors take on a local Romanian partner to navigate these bureaucratic requirements.
A.9. Efficient Capital Markets and Portfolio Investment
Romania seeks to develop efficient capital markets. However, because of the slow pace of the privatization process, and the absence of the enabling regulation, capital markets are not yet fully operational in Romania. Ordinance No. 18/93 and Government Decision No. 552/92 establish a securities commission charged with regulating the securities market in order to protect investors. The process principally provides for: registration and licensing of brokers and financial intermediaries, filing and approval of prospectuses, and approval of market mechanisms.
Romania officially opened its Bucharest Stock Exchange on June 22, 1995. On November 20, 1995, the stock exchange made its first transactions after a gap of 50 years. In the first six months of operations, trading activity on the Stock Exchange has been disappointing.
A.10. Political Violence
There have been no incidents in Romania involving politically motivated damage to foreign investments (projects and/or installations). Major civil disturbances are not likely to occur in Romania in the near future.
A.11. Corruption
Romania has laws, regulations, and a penal code intended to prevent corruption, but they are inadequate. Enforcement of these laws varies. Legislation to reform the penal code has been introduced in Parliament, but has yet to be approved. There are occasional reports of prison sentences for white collar crimes, but often powerful and influential individuals evade punishment.
U.S. businesses have complained of corruption in all levels of government in Romania. The customs service, municipal zoning offices, local financial authorities all are affected by some degree by this problem. In some cases, demands for pay-offs by mid- to low-level officials can reach the point of harassment. Corruption in Romania can constitute an actual business risk, especially for small and medium-sized companies that are perceived as lacking political clout.
Corruption is frequently linked to government procurement and regulation. The health and communication sectors are widely believed to be corrupt. In other sectors -- heavy industry, construction, transportation, banking, and retailing, for example -- corruption is probably also pervasive.
The government is required to modernize its laws to qualify for entrance into the European Union. Bankruptcy and intellectual property protection legislation have been enacted. Legislation to prevent money laundering is under preparation. More legislation and better enforcement of existing laws are necessary, however.
Bribery is punishable by fines or imprisonment (but not both). In general, fines permitted in the existing penal code are too low to be effective deterrents. There is no deduction for bribery expenses in the Romanian tax code. Although low- and mid-level officials have been convicted of corruption and punished, no senior government official has been found guilty of corruption.
Combatting corruption is the responsibility of the Police, which is under the Ministry of Interior, the Prosecutor's Office, the Financial Guard of the Treasury Ministry, and the Ministry of Justice.
B. Bilateral Investment Agreements
Romania has concluded bilateral investment protection agreements or treaties with the following countries: Albania, Algeria, Argentina (1994), Armenia (1995), Australia (1994), Austria (1977), Bangladesh (1987), Belarus (1995), Belgium + Luxembourg (1980), Bulgaria (1991), Cameroon (1981), Chile (1995), China (1995), Croatia, Czech Republic (1985), Cyprus (1993), Denmark (1995), Egypt (1977), Finland (1993), France (1995), Gabon (1982), Germany (1981), Ghana, Greece (1992), Hungary (1991), Indonesia, Israel (1992), Italy (1991), Jordan (1995), Kuwait (1992), Lebanon (1995), Lithuania, Malaysia (1984), Moldova (1994), Mauritania (1989), Morocco, Nigeria, Norway (1991), Netherlands (1984), Pakistan (1979), Paraguay, Peru, Philippines, Poland (1991), Portugal, Russia (1992), Senegal (1984), Singapore, Slovakia, South Korea, Spain (1995), Sri Lanka (1982), Sudan, Switzerland (1994), Tunisia (1989), Turkey (1994), Turkmenistan (1995), Ukraine (1995), United Kingdom (1995), USA (1994), and Uruguay (1993).
The U.S.-Romanian Treaty on the Reciprocal Encouragement and Protection of Investment (signed May 1992, ratified by the U.S. in 1994) guarantees national treatment for American and Romanian investors. It provides a workable dispute resolution mechanism.
C. OPIC and Other Investment Insurance Programs
Following the signing of an Investment Incentive Agreement in June 1992, the Overseas Private Investment Corporation (OPIC) began operations in Romania in late 1992. An OPIC investment mission visited Romania in October 1993.
In 1992, Romania became a member of the Multilateral Investment Guarantee Agency (MIGA).
D. Labor
Romania offers good-quality labor in most basic economic sectors. With appropriate on-the-job training, local labor can perform well with new technologies and more exacting quality requirements. However, there is a shortage of Western-trained managers.
Since the revolution of December 1989, labor-management relations have occasionally been tense as a result of economic restructuring, which has raised unemployment to 9 percent of the country's active labor-force. Trade unions are vocal defenders of their prerogatives. The Government adheres to the ILO convention protecting worker rights.
Many Romanian enterprises maintain that the first priority for an enterprise is to preserve jobs rather than turn a profit. Individual dismissals for poor performance must be carefully documented and are subject to legal challenge by the affected employee. Romanian unions have little sympathy for lay-offs. Some foreign investors have run into explosive labor problems when they have tried to trim staff in loss-making product lines. Foreign investors must be wary about purchasing an enterprise that is in need of substantial restructuring.
Steep salary taxes may also generate problems. Romania currently levies a marginal tax rate of 60 percent on all salary income above 1,073,000 lei a month (about $360). The law makes it very costly to locate expatriate staff in Romania. Foreign companies often resort to expensive staff rotations, special consulting contracts, and non-cash benefits.
E. Foreign Trade Zones/Free Ports
Free trade zones in Romania are regulated by Law No. 84/1992. Customs control is applicable only at the borders of free trade zones, which have to be strictly delimited. Goods and other merchandise are admitted into free trade zones without restrictions as to country of origin or destination, provided that the import of such goods into Romania is not prohibited. Free trade zones are established by Government decision, at the proposal of interested ministries and local public administrations. They are managed by a Board of Directors, under the supervision of the Free Trade Zones Agency within the Ministry of Transport.
Activities to be carried out in free trade zones (storing, weighing, handling, packaging, processing, banking and financial operations, etc.) are authorized by a license issued by the Board of Directors of the respective zone. The license is issued following a concession or rental contract concluded by the Board of Directors with the client.
According to the provisions of Law No. 84/1992, land and buildings can be rented or concessioned to Romanian or foreign legal or natural persons for a maximum of 50 years.
Foreign-owned firms have the same investment opportunities in free trade zones as Romanian entities. In case of liquidation of assets, foreig