Recent developments in Romania

In Romania, the pace of change has accelerated over the past couple of months - politically, economically and legally. Since April, Romania has joined NATO, made further progress towards EU membership in 2007, embarked on a new wave of privatisations, held local elections and started to prepare for a general election at the end of 2004. We have put together an overview of the current economic, political and legal news to help you keep abreast of the developments that matter in the Romanian market.

Political change

Although the governing Social Democratic Party (PSD) held on to power in the local elections, it was a closer contest than many expected, especially in the larger cities. The formation of an alliance between the parties placed second (the National Liberal Party) and third (the Democrats) now presents a serious threat to the PSD in the coming general elections.

The result of the local elections has already forced a reshuffle in Prime Minister Nastase's cabinet, with new faces at five ministries: Agriculture, Forests and Rural Development; Interior; IT & Communications; Labour; Social Solidarity and Family; and Public Administration.

Economic change

After concluding its first successful stand-by agreement with the IMF, the Romanian government has recently concluded a new 24-month stand-by agreement for up to US$360 million. This is conditional on government action to reduce not only inflation but also Romania's budget and current account deficits by the end of the year. As part of the battle against inflation, the Romanian Leul is to be redenominated at a rate of 10,000:1 from July 1, 2005, although both versions of the currency will remain in circulation until the end of 2006.

A major tax reform is also planned for 2005, to make Romania more attractive for foreign investment. The reforms include a reduction in [capital gains] tax (from 25% to 19%) and income tax (three rates between 14% and 38% instead of five rates between 18% and 40%). In addition, the employer's social insurance tax contribution is to be reduced by two percentage points, while the tax on dividends is expected to rise from 5% to 10% for individuals and from 10% to 15% for companies.

The dynamic performance of the Romanian economy, combined with preparations for accession to the EU, have led to a spate of recent privatisations. The most important by far is the sale of a 33.34% stake in Petrom, the Romanian National Oil Company, to the Austrian group OMV for €669milion. OMV will pay between EUR723 - €EUR860 million for further Petrom shares, making a record total for Romanian privatisations of EUR€1.5 billion and the largest foreign investment by an Austrian company. Press reports have also suggested that OMV is taking on €EUR292 million of debt as part of the deal. Although the sale is not due to complete until the last quarter of 2004, OMV is already being involved in all strategic decisions and is expected to retain both the Petrom and OMV brands.

The two gas distribution companies, Distrigaz Nord and Distrigaz Sud, are also in the final stages of privatisation. Gaz de France is the current favourite to win the bid for Distrigaz Sud and Ruhrgas is tipped to win Distrigaz Nord. Germany's Wintershall pulled out of the race for Distrigaz Nord despite being one of the early favourites while the early favourite for Distrigaz Sud, Russia’s Gazprom, is thought to have submitted the lowest offer.

After 10 months of negotiations, the Italian company Enel has agreed to buy two regional power distribution companies, Electrica Banat and Electrica Dobrogea, in a deal worth €111.8 million. Enel is reported to be taking on €100 million of debt and to be planning to invest around €1 billion in the companies over the next 20 years.

Two other power distribution companies, Electrica Moldova and Electrica Oltenia, have also been put up for sale and important privatisations are also expected in the banking sector, including the Romanian Savings Bank (CEC) and the Romanian Commercial Bank (BCR).

Legal change

There has also been considerable activity from a legislative point of view, primarily aimed at harmonising Romanian law with EU law in preparation for accession. Among the most important changes now or soon to be in force are:

Public debt

• the National Bank of Romania will become the State’s main agent for the governmental public debt denominated in foreign currency.
• from 2005, the Ministry of Public Finance will be the only part of government entitled to borrow from the private financial sector (other ministries will then borrow from it).

Capital markets

• there is to be a unified system of regulation for securities, derivatives and collective investment schemes
• the regulation of financial instruments markets and collective capital investment bodies is to be further strengthened.
• companies providing foreign exchange and other financial investment services are permitted for the first time with a minimum share capital of €50,000, €125,000 or 730,000 (or its equivalent) depending which services are provided.
• long distance agreements' are introduced for financial services involving long distance communication between an investor and a financial services provider acting as intermediary.
• The Central Depository will oversee registration, settlement and compensation of financial instruments traded on the capital market.
• ownership of all financial instruments, except derivatives, is to be transferred on the date of settlement.
• Consumer credit activities

From Januay 2005, new laws implement EU consumer credit legislation regulating credit provided to consumers in the course of a business (and making non-compliant credit agreements null and void). Key provisions are:

• credit agreements must be in writing and state the schedule of repayments, the annual percentage rate (the 'Dobanda Anuala Efectiva') charged and the terms and conditions under which the rate may be amended.
• where consumers fail to repay in accordance with the agreement, lenders must give 30 days' notice of their intention to recover possession of goods before doing so.
• consumers can make payments using bills of exchange and promissory notes and give guarantees using bills of exchange, promissory notes and cheques.
• consumers are protected against unfair terms and may not waive the rights given to them by the new laws.

Occupational pensions

• From 1 January 2005, new laws will regulate occupational pension schemes. The pension fund must be established by agreement between all participants and administered by a joint stock company which is (a) authorized by the Insurance Supervision Commission; and (b) which has as its sole objects the collection, administration and investment of pension fund assets and the payment of pensions.

Oil law

On September 13 2004, new oil laws come into force which, among other things:

• allow the relevant state authority to conclude agreements with (Romanian or foreign) companies to carry out petroleum operations and concede assets needed for those operations.
• list the ways access can be obtained to land on which oil operations are performed.
• provide for a new national oil transportation system and for oil transit and transportation through the main pipelines.

For further information about this article, please contact Ana Radnev on +40 21 231 64 74 or e-mail [email protected]