As the EU’s second poorest member, Romania has been hit hard by the downturn. Can the agriculture and energy sectors save the day?
Like much of Europe, Romania’s residents have had enough of tough austerity measures. Public anger led to a no-confidence vote in Romania’s centre-right government just two months after it took office in April, leaving questions hanging over how the country – the EU’s second poorest member – will climb back up the economic ladder.
“The government may be tempted to give in to those frustrated by three years of severe austerity measures – a temptation that’s greater in 2012 as it is an election year and such promises can bring in votes,” says Doru Bostina, founding managing partner of Bostina Associates.
But Bostina adds that the country is hamstrung by the terms of a €20bn (£16bn) rescue package from the International Monetary Fund (IMF) and EU, which was agreed in 2009.
“On deeper analysis, however, the government doesn’t have too much room to manoeuvre,” Bostina adds. “It’s bound to fulfil the criteria set by the IMF and has recently signed the EU’s financial stability pact. Once in power, ministers have discovered it is much harder to put their money where their mouth is.”
The consequence, Bostina suggests, is that there are unlikely to be sweeping changes from the current government – the left-leaning Social Liberal Union came to power in May – until parliamentary elections at the end of the year. The new government will have to tread carefully under the eyes of the IMF.
Bostina predicts that the privatisation of state-owned companies including national air carrier Tarom, rail freight company CFR Marfa and chemical company Oltchim will go ahead, as will the listing on the Bucharest Stock Exchange of energy companies such as Transgaz, Romgaz and electricity producers Hidroelectrica and Nuclearelectrica.
“The selling of parts of shares in state-owned energy companies is bound to attract many big foreign institutional investors,” he says.
However, the possibility of a change in government could mean the wheels of privatisation turn a little slower, or not at all.
The country’s largest planned privatisation of last year is one example. The Romanian government proposed the sale of copper mining business Cuprumin in 2011, but the bid fell through in April.
“The privatisation is in dispute,” observes Catalin Grigorescu, managing partner of BPV Grigorescu, which worked on the failed privatisation. “This certainly does not contribute to the private sector gaining trust in the process.”
Lack of trust seems to have spread across the legal market, with lawyers worried that government change-overs will cause privatisations to freeze.
“There may be a shift in strategy for the state-run infrastructure companies and we’ll likely see delays in scheduled privatisations that should take place in the coming year,” says Gabriel Sidere, managing partner of CMS Cameron McKenna in Romania. “Apparently, the Minister of Transport is pushing for the sale of Tarom instead of the planned listing, while hoping to postpone the privatisation of CFR Marfa. However, infrastructure projects should continue, such as works for roads in the [Pan]-European Corridor IV.”
On the road
This is not the first time that infrastructure projects, along with energy, have calmed the market during a storm. Around half a dozen Greek banks are active in Romania, for example, but road and rail infrastructure are in dire need of modernisation.
“Although economic uncertainty and exposure to the Greek tempest has seen direct foreign investment dip to levels not seen since the late 1990s, Romania has attracted attention from foreign investors interested in large infrastructure projects and green energy – hydro as well as wind power,” confirms Bostina. “These will continue to raise demand for the Romanian legal market.”
Energy has long been Romania’s hotspot, and even more so since the introduction of the country’s green energy aid scheme which, since November, has attracted the attention of investors that might previously have sat on the sidelines. Romania now uses tradeable green certificates rather than feed-in tariffs to incentivise investors in energy.
“The announced developments in the renewable energy sector are a source of both uncertainty and acceleration of activity,” Grigorescu warns. “It’s rumoured in the industry that the green certificate scheme will be revised, in particular for solar projects, to deal with concerns about overcompensation.”
The result, Grigorescu explains, is that the energy market could see a rush of activity in 2012.
“The uncertainty here has intensified activity in this area, as developers and investors are keen on benefiting from the current scheme by completing their projects before the end of the year,” says Grigorescu.
But energy is not Romania’s only golden nugget. Sidere adds that other sectors – including manufacturing, TMT and real estate “to the extent it is connected with the energy and agriculture sectors” – have attracted new investors in the past year.
“Foreign investors are looking to opportunities in the natural resources sector, such as shale gas and copper mining. There are also investments for developing new farms, the acquisition of agricultural land or forestry, while the renewable energy sector will continue to attract a lot of interest,” says Mares & Asociatii managing partner Mihai Mares.
“Romania is still an attractive destination for manufacturing, as its cost base is lower than the EU average,” Sidere explains. “We should also note that in the past 12 months we’ve seen a diversification in terms of the nationality of foreign investors, with investors not only from EU member countries, but also the US, Canada, South Africa and Australia. We expect that trend to continue in the coming years.”
Grigorescu points to the possibility of US retail giant Walmart entering the Romanian retail market.
“Some retail chains appear to be reconsidering their strategies and rumours are that Carrefour and Real Hypermarkets may exit the market,” he says. “Potential unconfirmed bidders to take over the networks include Tesco and Walmart.”
Although some changes are expected to bolster foreign investment, Grigorescu notes that other measures could counterbalance this.
“It was recently announced that public institutions and state-owned companies with in-house lawyers will no longer be allowed to contact outside counsel unless special government approval is granted,” he says. “This may result in public entities having reduced capability to handle complex projects of the kind that are expected to jump-start the economy, like large energy, infrastructure and utility projects.”
The biggest change in the past year, however, is arguably Romania’s new Civil Code – the first time the code has been updated in 150 years.
“The new Civil Code introduced concepts familiar to foreign investors,” says Wolf Theiss Bucharest partner Ancuta Leach, explaining that the code, which came into force in October 2011, provides compatibility between existing legal rules and modern regulations from Quebec, Italy, France and Switzerland.
“It also provides the business community with a higher degree of flexibility in being able to choose the most suitable legal solutions,” he adds.
“The entry into force of the new code represents a milestone for the legal community as well as for participants in the economy,” says Mares. “There are a lot of new institutions and changes to the old provisions that have a direct impact into the economy. It could not be considered a revolution in the field, however.
“The implementation of the new code is a challenge and with the time passing we will see court decisions based on its provisions, jurisprudence that will add clarity to the way the law should be interpreted.”
While the long-term impacts of the code are yet to unfold, banking and property in Romania are the two areas most likely to be affected.
“Notwithstanding the implied question marks triggered by any fresh legal act,” notes Sidere, “the main merit of the new code may consist of recognising a series of institutions that were not regulated under Romanian law before, such as trust law – a widely used instrument in various jurisdictions for the protection of property.
“We’ve seen amendments that immediately impacted the banking practice, particularly from the regime of securities and the newly introduced independent guarantees.”
Other lawyers expect changes to appear when the first wave of litigation hits the courts, aware that the new framework will eventually affect everyday transactions.
Tuca Zbârcea & Asociatii partner Cornel Popa says: “Investors should be aware that one effect of this reform was to weaken the principle of the binding force of contracts, offering the courts multiple possibilities to intervene in the contractual domain by amending the provisions of contracts or bringing them to early termination.”
Although the market is being modernised, local lawyers say it still has some way to go.
“It remains in crisis mode,” says Marian Dinu, managing partner of DLA Piper Romania. “Good-quality work and significant legal budgets are not abundant.”
Nevertheless, the potential for growth in Romania continues to attract attention.
Eversheds, for example, entered the market in October last year after formalising its alliance with local firm Lina Guia, which advises Danone, Volvo and RBS.
“Romania’s an important geography,” said Eversheds chief executive Bryan Hughes in October (The Lawyer, 3 October 2011). “It’s shown reasonable growth and we anticipate further growth on the infrastructure and projects side. We’ve worked with the firm for a number of years and are confident they’ll deliver high-quality services.”
“International law firms are becoming more interested in the Romanian jurisdiction,”
says Maresas, “and we might see some important moves towards the end of 2012 or the beginning of next year,” .
Local firms, too, are preparing for a more active climate soon.
“Generally speaking, it seems likely that we’ll see transactions in Romania step up in 2012, which should mean the legal market picking up slightly too,” says Sidere, adding that CMS Cameron McKenna has increased its Bucharest team by around 20 lawyers since the start of the year.
“Picking up” or “growing” are the catchphrases of Romania’s legal market, with investor interest in agriculture, energy and manufacturing already seeing growth.
“I’d think that, in the longer term, Romania is likely to be one of the countries with the best economic performance in the EU,” says Dinu. “It’s not so indebted and it’s coming off a very low base compared with other EU countries, so there’s significant catch-up potential.”
What to see in Romania
Bucharest is a yet-to-settle community, still seeking a definitive personality. Not in the East and far from the West, Bucharest is a buzzing city with a lot to offer. Just take a stroll through the recently refurbished old town in the city centre with
its narrow streets and panoply of small pubs and traditional restaurants, some dating back to the 18th century.
Enjoy the architecture of the old buildings and churches, mingle with the rushing locals or tourists or visit the Cismigiu Garden or the National History Museum.
A visit to the parliament building (the ‘Peoples’ House’) – the second-largest building in the world – is a must. The view from the terrace is outstanding, while a walk through the monumental halls gives a glimpse of futile dreams of communist glory. But beware, this is not a museum and may be visited by appointment only.
Dine at the Casa di David in Herastrau Park or Heritage in the centre and I’m sure you will return to Bucharest for more.
Doru Bostina, Bostina & Associates
Romania has something to offer almost everyone: the temporal beauty and tranquility of the former Saxon villages of Transylvania; the wildlife of the Carpathians (the country is home to the largest populations in Europe of such beasts as wolves and bears); the fish and bird paradise that is the Danube delta; and, perhaps more appealing to the socialites, the vivid nightlife of Bucharest and the Black Sea resorts.
Cornel Popa, Tuca Zbârcea & Asociatii
Fishing in the Danube delta is an unforgettable experience. The waters of the Danube, which flow into the Black Sea, form the largest and best preserved of Europe’s deltas. The delta hosts 45 freshwater fish species and more than 300 species of bird in its numerous lakes and marshes.
Mihai Mares, Mares & Asociatii
I would recommend admiring the painted monasteries of Bucovina, true masterpieces of Byzantine art – especially the unique lapis lazuli colour of Voronet, the ‘Sistine Chapel’ of the region; and strolling around the Mogosoaia Palace, the most beautiful secular building in the architectural style known as ‘Brancovenesc’.
Ancuta Leach, Wolf Theiss