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Romania: So near and yet so far
6 January 2014 | By Burhan Khadbai
8 July 2013
25 June 2013
6 January 2014
16 January 2014
25 November 2013
Romania is bursting with resources but tapping into those riches is proving to be a political obstacle course
Romania is one of the most resource-rich countries in Europe, with huge potential. At present it relies heavily on imports of energy but nurtures a shale gas dream of becoming energy independent in the next few years.
However, tapping into these resources is at a standstill. Plans by US energy giant Chevron for shale gas exploration and Canadian mining company Gabriel Resources to build Europe’s largest gold mine have met with what can only be called public contempt.
Shale gas is seen as one route to energy independence. It is estimated that there are 51 trillion cubic feet of shale gas in Romania. With Ukraine leading the way in shale gas development in Europe, others are jumping on the bandwagon as energy independence becomes an increasingly important issue.
However, unlike in the US – the global leader in shale gas production – European shale formations are mostly in populated areas.
“There are two issues in this country – the first is the lack of publicity over what’s going to happen and the second is that Romania is in an earthquake zone so there’s concern about fracking,” says BWSP Hammond Bogaru & Associates senior partner Nicholas Hammond.
Last month hundreds of protesters broke into a Chevron site, stalling exploration development for a second time.
“Studies by the National Agency for Mineral Resources have confirmed that Romanian citizens are poorly informed about shale gas exploration and production techniques,” says Gide Loyrette Nouel Bucharest partner Bruno Leroy. “Moreover, the information available to them is biased and unreliable. On the one hand, protesters focus on the risks associated with the hydraulic fracturing procedure and in particular the potential contamination of water resources. On the
other, the promoters of shale gas opportunities focus on energy independence and accuse protesters of having a hidden agenda to keep Romania dependent on imports.
“Last, but not least, the shale gas debate – together with recent developments in the Rosia Montana gold mining project – has created a climate in Romania of automatically disapproving of any project that involves the exploitation of natural resources, raising environmental concerns.”
Meanwhile developments in renewable energy are set on a more positive course, with the recent approval of several solar park projects. The government is supporting the growth of renewable energy with a green certificate scheme. Each renewable energy producer receives a number of green certificates from the national transporter Transelectrica for the energy it produces and transports via the network. The certificates are free and producers can sell them on later.
“Since July 2013 the support scheme has been reduced significantly but the renewable energy sector has maintained a lot of attention from investors,” says Musat & Asociatii managing partner Mona Musat. “For example, clients of ours such as Nereo Green Energy or Enel Grenn Power have continued their development of renewable projects and this kept us busy throughout last year, with good prospects for this year too.”
Mares Danilescu Mares managing partner Mihai Mares is less optimistic.
“When it comes to areas with potential, the renewable energy market is surely one,” he says. “Unfortunately, the new subsidies regime will create a lot of reluctance to invest.”
Plus and miners
Mining is another area with potential but it too lacks public support, with widespread concern over damage to the environment.
For 14 years Gabriel Resources has been trying to gain approval to build Europe’s largest opencast gold mine in the small town of Rosia Montana. The potential boost for the town is immense, with some 300 tonnes of gold – £30bn-worth – and 1,500 tonnes of silver yet to be exploited.
Efforts were in full swing last year to push ahead with the controversial project, with the government creating a new mining law designed specifically for it. But following public protests over environmental damage the law was rejected in parliament last month (December) by 204 votes – another stall on its ambitions.
Popovici Nitu & Asociatii managing partner Florian Nitu has been involved in several stages of gold mine development in Romania, including identifying prospective investors. As a result of the rejection of the mining law, work remains to be done on the project and a decision on whether to go ahead is not expected any time soon.
“Now we have the elections, so no decisive measures will be taken this year,” says Nitu.
Another area that has huge potential – and one that is already doing well – is agriculture.
“Agribusiness is booming and this trend will continue,” says Nitu. “It’s probably showing the most spectacular development of any sector.”
Last year, Romania received €2.35bn (£1.99bn) from the European Agricultural Fund for Rural Development, just short of its target for €2.5bn for the year.
According to Leroy, Romania’s agricultural sector represents a much higher proportion of GDP than the EU average – around 5.3 per cent compared with 2 per cent in the rest of Europe.
“We’re assisting several French legal entities in drafting transaction documentation and in their negotiations over the acquisition of large areas of land used for the production of cereals, and of the associated silos and processing facilities,” says Leroy. “As of 1 January, Romania allows the acquisition of agricultural land by EU citizens and legal entities, and we’re already in contact with such investors.”
Romania has about 15 million hectares of agricultural land, helping to make it the second-largest power in the CEE region in terms of agricultural products. Furthermore, only about 60 per cent of that land is being used, meaning there is scope for growth.
“There’s a lot of potential in developing the agricultural sector, especially in respect of improving productivity per hectare,” adds Leroy. “Although Romania has the fifth-largest agricultural surface area in the EU, productivity is below the EU average.”
Changes to the agriculture market are likely to be beneficial.
“Liberalisation will help the agriculture market, allowing foreigners – companies and individuals – to invest in land, especially agricultural land and forests,” says Hammond.
“Higher subsidies and more flexible investment projects, better targeted at the realities of Romania agriculture, are crucial benefits of the Common Agricultural Policy (CAP) reform the country will take advantage of in the next couple of years,” adds Musat. “But for this to happen local authorities will have to adopt a coherent strategy for the agriculture sector.”
The success of the agriculture market is having a positive effect on the economy, with GDP rising by 4.1 per cent in 2013.
Another area where there has been positive movement by government is the privatisation programme, mandated by the €20bn bailout by the IMF, World Bank and EU in 2009. The privatisations are expected to be completed this year, with presidential elections set for June.
“There have been significant developments in public-to-private deals,” says Nitu. “The government has planned privatisations in areas including electricity and other utilities. It has taken the approach of selling on the stock exchange as its route to privatisation, with minority shares being sold.”
While most recent privatisations have failed, such as those of Posta Romana, CFR Marfa, Cuprumin and Oltchim, there was some good news, with the record-breaking privatisation of Romgaz, Romania’s largest producer of natural gas. The 15 per cent stake sold through an IPO last November was the biggest IPO ever in Romania, at £322m. Musat & Asociatii were involved in seven of the eight privatisations conducted on the Bucharest Stock Exchange, including that of nuclear power producer Nuclearelectrica. Its September IPO was the first in Romania since 2007.
There is the potential for Romania to lead the way in ‘emerging Europe’, but how and when it can do this remains unclear.
“Romania is an interesting place to do business and people should try,” says Hammond. “There’s much proper business to be done. The country was starved of a lot in terms of investment and goods to buy. There was a void that even now hasn’t been fully filled. There are opportunities that can only be seen when investors come to Romania.”
Key figures: Romania
Life expectancy at birth: 75
Source: Romania National Institute of Statistics, World Bank
2013’s privatisation deal of the year
Completed: November 2013
Counsel: Bulboaca & Asociatii, Hogan Lovells
Manager’s counsel: Clifford Chance
Should Romania join the eurozone?
Lawyers give their views on one of the country’s most hotly debated topics
Joining the eurozone has been a strategic target for Romania since joining the EU in 2007, as part of the country’s commitment to deeper integration with Europe, and developing a strong market economy and a solid business environment. While this continues to be a target, the timing of Romania joining must be calibrated by two factors: when the country can be considered fully ready and how the present challenges in the eurozone are resolved.
From an economic point of view, Romania meets three out
of five Maastricht euro convergence criteria and there are strong signals that it could meet all of them by the end of 2014. However, the downturn has shaken economies around the world, challenging even the most solid institutions – the euro included.
A study by Clifford Chance from June 2013 shows that the risk of euro fragmentation, or the exit of one or more nations from the euro, is making it difficult for investment decisions to be made. Four of the five countries identified as most attractive for investment are outside the eurozone.
Romania still has important challenges to overcome, as structural reforms on several fronts are behind schedule. Moreover, 2014 and 2015 are election years and the agenda is sure to take a more socially focused turn.
Joining the eurozone will bring economic and political benefits and it is important for Romania to maintain this point of reference. I am confident that it will take the step once the time is right.
According to the government Romania is still committed to adopting the euro in 2015 and joining the exchange rate mechanism. But critics say Romania will be ready to join the eurozone only after having restructured and consolidated the competitiveness of its economy. Most likely, this will be after 2020.
What has happened to Greece, Portugal, Ireland and Spain had raised a lot of questions about the benefit of joining the eurozone. Also, the mere fact of speeding up the eurozone joining process – as is the intention of our politicians – is likely to be painful for the Romanian economy, with higher unemployment and reduced labour market flexibility being likely consequences.
To Romania, joining the eurozone should mean securing sustainable development within an economic and monetary union. But at present, there are too many uncertainties in the aftermath of the economic crisis to judge the full extent of any adverse effects on the Romanian economy.