Thursday, 19 Dec 2013
Overseas Business Risk - Romania
Political and Economic
President Traian Basescu is the current Head of State. In December 2009 he was re-elected for another (and last) five year term with 50.33% of the votes in two rounds of a hotly-contested and bitter Presidential election.
The current Prime Minister is Victor Ponta. He is heading a 20 Minister cabinet that won the Parliament’s vote of confidence on 7 May 2012. The new ruling Social Liberal Union coalition government consists of ministers from the Social Democratic Party, the Liberal Party and the small Conservative Party. PM Ponta said that economic growth and the reversal of measures that caused economic disequilibria would be his first priorities. Wages in the public sector would increase.
The bicameral (two Chambers) Parliament consists of a Senate (176 seats) and a Chamber of Deputies (412 seats). Elections to both Chambers of Parliament are held simultaneously every four years – the most recent in December 2012. The voting system was changed in 2008 from a party list system to one whereby voters vote for individual candidates, so that only candidates achieving more than 50% of the vote are directly elected. Where there are no clear winners seats are filled through redistribution of Parties’ votes to the most successful of the candidates who polled less than 50%.
Romania is divided into 41 counties (Judete), with the separate city of Bucharest forming a 42nd area. Each county is governed by a County Council (Consiliul Judetean) consisting of members elected by universal suffrage for a 4 year term. The President of the county council is appointed by the elected members of the council having executive responsibilities.
A Prefect is appointed to each county by Central Government and is the representative of the Central Government at local level directing public services of the Ministries and other central agencies at county level. A Prefect may block action by a local authority if he/she deems it unlawful or unconstitutional. Although Prefects are often appointed from previous MPs, they do not officially represent political Parties.
Counties have responsibility for development planning, water supply, sewage, public transport, roads, social assistance for children, education.
Businessman reading newspaper
Basic Economic Facts
GDP Growth (2013 forecast): 2.3% Inflation: 1.9% (October 2013)
Unemployment: 7.3% (November 2013)
Major Industries: food and beverages, energy, metallurgy, crude oil processing, chemicals, light machinery and textiles
Exports – EU 70,2%, out of which Germany 18,9%, Italy 12,3%, France 7,1%, Turkey 5,5%, Hungary 5,5%, Bulgaria 3,6%, UK 3,2%, Netherlands 3%, Poland 2,5%, Spain 2,4%
Imports – EU 73.5%, out of which Germany 17,5%, Italy 11%, Hungary 9%, France 5,7%, Russian Federation 4,4%, Poland 4,3%, Austria 4,2%, Kazakhstan 4,1%, China 3,8%, Turkey 3,4%.
Trade Deficit: 4.6 EUR bn deficit (2012)
Current Account Deficit: 5 EUR bn (2012)
Foreign Direct Investments: 1.7 EUR bn (2012)
Exchange rate (October 2013): 1 EUR = 4.45 RON; 1 USD = 3.23 RON; 1 GBP= 5.28 RON
Following the collapse of communist rule in 1989, Romania has undergone a long period of economic transition to a market economy, which has not been smooth nor particularly well managed. Since 2000 there has been more progress. An extensive programme of economic reforms included the privatisation of several state-owned enterprises and the restructuring of Romania’s energy, mining and industrial sector. The economy had been growing at an average annual rate of 6% since 2000 until the economic crisis hit Romania’s economy hard in the final quarter of 2008. Romania officially entered recession in mid-May 2009. Romania signed a €20 billion stand-by agreement with the EU and the IMF, which has helped stabilise the economy.
Agriculture represents about 8.1% of GDP but it is mainly subsistence farming. After 15 years of slow progress, the pace of reform has increased in the last couple of years. Direct payments from CAP and rural development funds are likely to raise living standards in the countryside as farmers and local authorities are eagerly applying for funding. Significant amounts of EU structural funding have been allocated for the 2007-2013 timeframe and despite a slow start in absorbing them, Romania is expected to reap the benefits and develop its infrastructure. For now, the absorption rate reached a modest 21.5% or around €5 billion. On the bright side, special provisions were voted by the EU Parliament to allow Romania to extend the deadline for its fund-absorption commitments by 1 year, saving up to €2 billion from automatic de-commitments and improvements in government co-financing of projects, which has previously been an obstacle in tapping external funds, have contributed to a positive trend in EIB investments aimed at rural development projects.
The mostly foreign-owned banking system has proved stable, thanks to highly effective supervision by the National Bank. Standard and Poor’s (S&P) has recently improved Romania’s prospective rating from “stable” to “positive”, which may earn it a possible “investment grade” rating in 2014. Compared to previous years, liquidity is no longer a problem, but even so the BNR aims to decrease the required reserves banks have to keep, thus freeing up more money in the market.
The 2.3% economic growth rate in 2013 was generated by record-high exports and an exceptional harvest. Inflation is at 1.83%. Romania’s economic growth will remain below potential as long as external financing is scarce. FDI barely reached €1.5bn in 2012 (compared to €9bn pre-crisis), mostly to cover losses in the banking sector. This year FDI is expected to fall by a further 30%.
Romania’s third programme with the EC and IMF remained on track. President Basescu refused to sign the memorandum with the IMF due to the proposed hikes in excise duties for fuel. The delay in approving the letter of intent should not affect the Romanian financial markets in the short-term, as the agreement is still in force. Moreover, the programme is precautionary and so far the Government has not drawn funds. The 2013 budget deficit had reached, at the end of the November, 1.6% of GDP, or almost half the annual target, set at 2.5% of the GDP. Public debt remains constant at 42% of GDP. S&P noted that Romania could slow its structural reforms in the run-up to the 2014 European and presidential elections.
Outlook for 2014
The main issue shaping up for 2014 is the move towards a more sustainable economic growth based internal demand. The 2014 budget will be focused on investments, especially in infrastructure and on stimulating economic growth. Romania’s public finances have been improving, thanks to the combined efforts of the Government and the Central Bank to respect the IMF programme. This has secured Romania's credibility - now reflected in Fitch's upgraded rating - and protected the country from the worst of the economic crisis. However, the previous economic calculations were based on a stable political landscape and the continuation of structural reforms. A possible suspension of the IMF agreement could have a negative effect on investors’ confidence. In the worst case scenario, the IMF agreement could be ended if political fights continue. The economy is likely to feel the political turmoil ahead of the elections.
Romania has ratified most of the European and universal human rights treaties and counts human rights as an official foreign policy priority. Still, human trafficking, including forced labour, and discrimination against minority groups remains.
Romania is a source, transit, and destination country for men, women, and children trafficked for the purposes of commercial sexual exploitation and forced labour in the agriculture, construction, and service sectors. The Government of Romania is making significant efforts to comply with the minimum standards for the elimination of trafficking. One of the priorities of the Government remains the strengthening of the institutional capacity of the National Agency against Trafficking in Persons (NAATIP) and the implementation of the newly adopted 2012-2016 National Anti-Trafficking Strategy.
Public attitude towards the Roma remains negative and they still face structural discrimination, including enjoyment of equal access to housing, education, jobs or health care. Accepting diversity remains a major issue in Romania, particularly regarding sexual orientations. Romania does not allow civil partnerships, nor does it recognize civil partnerships signed in another country.
Bribery and Corruption
Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.
In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.
Six years after its EU accession, the Romanian judiciary is still being monitored by the European Commission under the Cooperation and Verification Mechanism. Romania has made significant progress since 2007. Key legislation has now been put in place, and anti-corruption institutions are demonstrating a convincing track record. The adoption of the National Anti-Corruption Strategy also marks an important step. However Romania need to continue to focus on the implementation of key reforms, improvements in management and organisation of the judiciary, and more efforts are needed to improve the consistency of jurisprudence. The new Civil Code entered into force in Autumn 2011 and the New Civil Procedure Code entered into force in February 2013. The new Criminal Codes are expected to enter into force in February 2014. Romania will be subject to an additional CVM report in January 2014.
Level of perceived corruption in Romania increased in 2013. It ranked 69th in the world in the 2013 Corruption Perceptions Index conducted by Transparency International. Bulgaria and Greece were perceived to be more corrupt than Romania. General perception is that levels of corruption are rising: 93% of Romanians declared corruption was a major issue in a Eurobarometer survey in May 2012.
There is an underlying threat from terrorism. Attacks, although unlikely, could be indiscriminate, including in places frequented by expatriates and foreign travellers.
Protective Security Advice
Businessman working at a computer
You are advised to maintain at least the same level of personal security awareness in Romania as in the UK. You should also be alert to the risk of petty theft in large towns, especially in Bucharest, and for pickpockets and bag snatchers in crowded areas, particularly near exchange shops, hotels, on public transport (especially to the airport), main railway stations and inside airport terminals. Organised attacks by groups, often including children, occur. The most common method is of distraction whilst several people, often the children, attempt to snatch watches and jewellery from pockets or from around the neck and wrist. Thieves have also been known to pose as bogus plain clothes policemen.
We are aware of thefts of valuables including passports from hotel rooms. Items of value, including passports and credit cards should be deposited in hotel safes. However, you should carry a photocopy of the information pages of your passport as ID
You should be aware that there are reports of credit or charge cards being 'copied' when used in some bars and restaurants, resulting in illegal charges being raised against the user account.
IP rights are territorial, that is they only give protection in the countries where they are granted or registered. If you are thinking about trading internationally, then you should consider registering your IP rights in your export markets.
For information on obtaining a patent in Romania, you should contact:
State Office for Inventions and Trademarks
5 Ion Ghica Street, Sector 3,
T: +40 21 3060800
F: +40 21 3123819
Romania’s location in South East Europe with large land and sea borders make it an ideal transit route for the trafficking of drugs and human beings. Romania is on the Balkans route for the smuggling of South West Asian Heroin from Turkey and Bulgaria and/or the Black Sea coast to Western Europe.
Romania is also a nexus point for migration flows from the North (Moldova, Ukraine, FSU) and the South (Turkey, Iran, Iraq, Afghanistan).
Romania is seen as a source country for victims to be used for human trafficking for labour exploitation, sexual exploitation and street crime (shoplifting, table surfing, pick pocketing, etc)
Romania is the source of cyber crime attacks on private and public sectors and is also a threat for cyber enabled crime such as false job offers and false sales through internet auction sites.
The banking sector is especially vulnerable to money laundering from Romanian OCGs laundering the proceeds of their criminality through financial institutions in the UK. The regional cooperation usually proves difficult due to historical prejudices and weak bilateral relationships.
Romania’s position at the external border of the EU makes it a target for fiscal crime, including but not exclusively, cigarette smuggling and infringements of Intellectual Property Rights (IPR offences). When added to the possibility of VAT (MTIC) fraud and emerging fiscal crimes (e.g. Carbon Credit fraud), the country suffers serious losses to its Treasury.