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September 2006

Edited by
General Manager
Editorial Coordinator

Dumitru Ion
Mircea Jalb`

Executive Manager
Project Manager
Sales Manager
Project Assistant

M`d`lina Athanasiu
Diana Dumitra[cu
Oana Guiu
Luiza Iliescu

IT Manager

Liviu Munteanu

DTP Manager
Production Manager

Nicoleta Grigoriu
Carmen Popescu

The publisher wishes to thank:
ABN AMRO Romania
Alpha Finance Romania
Automotive Manufacturers and Importers Association
Banca Comercial` HVB }iriac & Unicredit Romania
Banca Comercial` Romn`
Bucharest Stock Exchange
Central Europe Trust Company
Colliers International
EFG Eurobank Finance
Ernst & Young
GfK Romania
IBM Romania
IDC Romania
ING Bank
Intellinews ISI Emerging Markets
KPMG Romania
Larive Romania
Leadership Development Solutions
Leasing and Non Banking Financial Services Association - ALB
Magazinul Progresiv
National Bank of Romania
National Institute of Statistics
Nestor Nestor Diculescu Kingston Petersen
Pachiu & Associates
PI Partners
PricewaterhouseCoopers Management Consultants
Raiffeisen Capital & Investment
Raiffeisen Investment Romania
Roland Berger Strategy Consultants
RSM Hemmelrath
Romanian Commodities Exchange
The Economist Intelligence Unit
The Employers Association of the Software and Services Industry
The Romanian Association for International Road Transport
Vanguard Investi]ii Financiare
World Bank Office Romania
and to all the others involved in this project.
ISBN 973-8006-13-9

Printed by PROTIP s.r.l.

Romanian Business Digest has a free distribution.
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Copyright 2006


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Note: The publisher cannot, under any circumstances, assume
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Business Digest

World Bank
Office Romania

Dear Reader,

We have the pleasure and the honour to introduce to you the September 2006
edition of Romanian Business Digest, edited by IBP Publishing & Conferences.
The high quality information provided by our editorial contributors positions our
digest as the reference source of information on the Romanian business
Articles, studies and reports published in Romanian Business Digest are
complemented by Major Companies in Romania, the database featuring the
largest companies active on the local market, a direct result of our in-house
The information is available for free both in printed and electronic format and, if
you wish to learn more about this multimedia information system, we gladly
invite you to visit our website at www.doingbusiness.ro.
The September 2006 edition of Romanian Business Digest will benefit from a
special distribution on the occasion of two significant international events:

Eighth Business Roundtable with the Government of Romania, organised by

Economist Conferences in Bucharest on October 30-31, 2006;

Emerging Europe Energy Summit, organised by IBP Publishing &

Conferences to be held in Vienna during November 9-10, 2006.

We would like to thank once again all our editorial partners involved in the
making of this edition and we hope that the readers will find interesting and
useful information for their projects and activities.

Romanian Business Digest

Editorial Team

Economic Trends


Romania: Fundamental Drivers

by ING Bank
Romania - Economic Overview
by Deloitte
Positive Outlook with Focus on
Disinflation and EU Accession
by Banca Comercial` HVB }iriac
& Unicredit Romania
NBR Braces for Larger Deficits
by ABN AMRO Romania
Romania Outlook for 2006-07
by The Economist Intelligence

Investment Climate




Foreign Direct Investment in

by Larive Romania
M&A Market in Romania - Past
Evolutions & Future Trends
by PricewaterhouseCoopers
Management Consultants
Legal Considerations for
Foreign Investors
by PI Partners
EBRD in Romania
Romania and World Bank
by World Bank Office Romania


Evolutions and Perspectives in

the Romanian Economy
by Banca Comercial` Romn`
72 Financial Reporting in Romania
by Ernst & Young
79 Taxation in Romania
by Ernst & Young
93 Latest Developments in the
Romanian Tax and Fiscal
by RSM Hemmelrath
98 The New Customs Code and its
Rules Application, starting with
19 June 2006
by The Romanian Association for
International Road Transport
103 False Friends in Romanian
Share Transactions?
by Nestor Nestor Diculescu
Kingston Petersen

108 Survey of Public Private

Partnership Arrangements
under the Romanian Law
by Pachiu & Associates
112 Overview of New Provisions of
Romanian Insolvency Law
by Pachiu & Associates
117 From Hire to Fire: Traps in the
Labor Code
by Salans
121 Executive Search and
Leadership Development in
by Leadership Development
125 (Re)branding Romania An overview of the nation
branding context and opportunity
by Brandient

Capital Markets
132 Sources of Finance in Romania
by Deloitte
139 Romanian Capital Markets
Regulatory Framework
by Alpha Finance Romania
148 Should More Romanian
Companies be Listed on the
Stock Exchange?
by KPMG Romania
153 BSE First Half 2006 Performance Review
by Vanguard Investi]ii Financiare
155 Bucharest Stock Exchange
January - June 2006
by Bucharest Stock Exchange

Overview of
Economic Sectors
161 Romanian Banking Overview
by Roland Berger Strategy
169 The Bank of the Future
by IBM Romania
177 Overview of Insurance &
Banking Market
by Intellinews ISI Emerging
183 Non Banking Financial Market
in Romania - Leasing Sector
by Leasing and Non Banking
Financial Services Association ALB
185 Organization and Prospects of
the Romanian Commodities
by Romanian Commodities

191 Romanian Power Sector

Overview - Power Generation
Privatization just Starting
by Central Europe Trust Company
199 Romanian Oil & Gas Sector
by Raiffeisen Capital &
207 Crude, Refining,
Petrochemicals Sector in
by EFG Eurobank Securities
215 Romanian Pharmaceutical
Market in 2006
by Raiffeisen Investment Romania
221 Romanian Telecom Market
by Roland Berger Strategy
229 Information Technology Market
by IDC Romania
233 The Romanian Software
Industry - Still Booming in 2006
by The Employers Association of
the Software and Services
237 Romanian Hotels Industry
by Raiffeisen Capital &
242 Romanian Construction and
Real Estate Report
by Intellinews ISI Emerging
249 Retail Market - Shopping
Centers in Bucharest and
by Colliers International
253 Key Retailers' Plans for the
Second Quarter of 2006
by Magazinul Progresiv
258 What have you done in the Past
Five Years? - Focus on the
Romanian Consumer
by GfK Romania
260 The Motor Vehicle in Romania
by Automotive Manufacturers and
Importers Association
268 Automotive Parts
Manufacturing in Romania
by Central Europe Trust Company

274 Statistical Indicators
by National Institute of Statistics
281 Macroeconomic Statistics
by National Bank of Romania
300 Advertisers Index

Economic Trends

Fundamental Drivers
by ING Bank

Good weather, lax monetary policy spur growth

Early elections could help economic growth
Eroding sentiment for EM brings yields higher
RON strength dented by NBR
The capital market becoming more attractive
Will foreigners keep paying for the C/A deficit?
RON credit more than replaces FX credit
Inflation to undermine NBR credibility
Budget deficit set to widen
Good weather, lax monetary policy spur growth
After a disappointing 2005, the economy surprised with impressive growth of 6.9% YoY for
1Q06. Behind this was strong industrial output growth of 4.8% YoY, pushed by a soaring
construction sector (up 20.4% YoY) and a continuation of the consumption boom (up 10.2%
YoY). Given this breakdown of growth drivers, we suspect much of the growth is the result of
loose monetary policy throughout 2005, along with the fiscal stimulus and good weather in the
last three-quarters. Looking forward, signs of healthy growth are sprouting as GFCF increased
by 11.4% YoY. But all this growth spells trouble for the NBR as it will likely increase inflationary
pressures and require more tightening for the 2007-2008 inflation targets to be met.
Activity and inflation

Fiscal stance and yields

(%ch YoY)











Industrial growth






Unemployment (rhs)


Budgetary balance (4Q mov avg)

2Q06F 1Q07F
3M BUBOR (rhs)

Current account and financing

(%ch YoY)




Inflation (rhs)

Unemployment and wages


(% of GDP)




Wages (lhs)

(% of GDP)




Current account







Other financing


ING Bank

Early elections could help economic

The European Commission (EC) postponed its final
recommendation for Romanias EU accession until
September, but with a strong message that 1 January 2007
will remain as the default accession date. This might appear
to be bad news, but in fact it will force the political class to pull
together for the next few months it is not a secret that the
current governing alliance is held together by a thread.
Looking back, it all started with last years refusal by Prime
Minister T`riceanu to resign, which created a big gap
between the PD, the presidents party, and the PNL, the PMs
party. Since then it has been almost impossible for any
meaningful reforms to be implemented as everyone in the
ruling coalition has been more concerned with preserving a
positive image in the eyes of the electorate. Therefore,
infrastructure investment, fiscal reform, property restitution
and fighting corruption were all put on hold. The first two have
implications for long-term economic growth while the latter
two contributed to the ECs decision to postpone its
recommendation for Romania. But besides postponing
reforms, the complacent attitude from the political class has
led to unsatisfactory progress in creating the institutions
needed to channel funds from the EU to different sectors of
the Romanian economy. As a result, unless the EU provides
some compensating inflows, Romania could even become a
net contributor to the EU in 2007 instead of a net beneficiary
of EU funds.

Eroding sentiment for EM brings

yields higher
Although there is genuine interest in RON bonds, so far in
2006 the Ministry of Finance has cancelled all its planned
auctions as the budget has performed better than expected.
At the earliest, we expect the Ministry of Finance to issue
bonds at the end of 3Q06 after a third upward adjustment of
the targeted 2006 fiscal deficit. Shorter-term yields are likely
to remain high due to international monetary tightening and
the risk reduction attitude towards emerging markets which
translates into higher risk premiums.
Longer-term yields should continue the downward movement
as a consequence of the positive long-term economic outlook
and imminent EU accession, but at a measured pace.




-3 Months


+3 Months

RON strength dented by NBR

Both real and nominal appreciation slowed in 1H06 to 4% and
3.4%, respectively, due to higher inflation abroad and

Thus the NBR is not willing to risk a short-term slowdown in

economic growth in order to secure non-inflationary
sustainable long-term growth. In our view this shows that the
NBR is only independent de jure but not de facto. We still
believe further rate hikes are needed to consolidate the
disinflation process, but we do not expect major changes until
the NBR adjusts its CPI forecasts for 2007 and 2008 and
most importantly until the inflation targets for 2008 and 2009
are announced. In the absence of restrictive monetary policy,
the biggest risk to the RON remains the ballooning C/A
deficit. The probability of this is amplified by eroding
international sentiment towards EM, especially those with big
C/A deficits. While there are few foreigners in the tiny FX
market, the fact that it is very shallow leaves it vulnerable to
moves from foreign investors.
Exchange rates





Exchange rate vs USD



10/06F 6/07F

Exchange rate vs EUR

The capital market becoming more

Given the downward movement of the bonds yield and the
appreciation of the RON deemed to happen creates the
premises for further increased attractiveness of the
Romanian capital market. The liquidity of the market is going
to benefit in the second half of the year also of the freshly
listed entity, Transelectrica and also the potential increase in
liquidity in the largest market capitalised stock, Petrom (given
the recent announcement of the Government we have high
trust that the 8% stake will be added to the current free float).

Yeld curve dynamics


accommodative monetary policy at home. We expect further

nominal appreciation in 2006 due to remittances, the last
stage of capital account liberalisation and finally good news
from the EC on the countrys accession date. However, we do
not expect support from the NBR in the short term. After
announcing that the 2006 inflation target (5% 1%) will be
missed, the NBR does not seem eager to significantly hike
the key policy rate to ensure the 2007 CPI target will be met.
Instead, the NBR seems content with using direct measures
to control RON credit growth, much as it did in 2005 with FX
credit. The reason behind the NBRs attitude lies the fear that
aggressive monetary policy will lead to real short-term costs
for the Romanian economy.

The improved sentiment for the medium term outlook,

expressed through the increased rating of the two key sectors
(oil and banking) in Romania offered by S & P and Fitch
together with the positive financial reporting at 1H06 are
going to strengthen the rebound in the capital flows accessing
the Romanian capital market especially in the light of a
positive report of EU towards Romanian Accession in
January 2007.
Romanian Business Digest 2006

ING Bank

Will foreigners keep paying for the

C/A deficit?
The C/A deficit remains a weak point for the economy. The
immediate danger is RON appreciation. In theory, as long as
FDI inflow matches more than 50% of the C/A deficit, a RON
sell-off should not be expected. But this is certainly not a
binding rule. The main question is: how long will foreigners
invest their savings in Romania to support domestic spending
on foreign goods? The odds of this happening at the current
pace are very low in a world where higher yields in developed
economies and a possible slowdown in global growth in 2007
make investments in EM seem riskier.
Furthermore, even the current structure of FDI, with most
investment targeting the domestic market, not the export
sector, should raise questions about C/A sustainability as we
move into 2007.

Core inflation resumes upward trend




(EUR mn)








C/A deficit


RON credit more than replaces FX

Increased reserves ratios for FX deposits led to a slowdown
in FX credit. This was replaced, however, by stronger RON
credit growth. In fact, the new RON credit dynamic has more
than compensated for the FX credit slowdown and led to an
acceleration in total private sector credit growth. Encouraged
by its success in slowing FX credit, we expect the NBR to
consider higher minimum reserves for RON deposits. In our
view such measures would only have a temporary effect. FX
credit growth has resumed, albeit at a slower pace, after
instruments to circumvent the MRR were developed. We
expect similar developments for RON credit, with growth of
60% YoY by the end of 2008 in the absence of significant
interest rate hikes from the NBR.



Budget deficit set to widen

Continuous pressure from the IMF led to a declining fiscal
deficit up to 2005 through lower expenditures. Since then,
however, the new ruling coalition has maintained the low
budget deficit, not on the back of lower expenditure, but
rather with the scaling back of infrastructure investment. Of
course, such an approach is not sustainable in a transition
economy and in 2006 we have already seen two upwards
adjustments of the deficit from 0.5% towards 2%. We expect
it to widen in the coming years by at least 1% a year due to
Romanias contribution to the EU budget, the co-financing of
funds from the EU, and the increase in infrastructure
investments. And revenues will not likely grow as fast given
there have been no changes to the tax code.
Fiscal deficit will add to excess demand


RON credit fuels total credit growth








(Growth YoY)

RON credit


FX credit



Private sector









ING Bank
{oseaua Kiseleff Nr.11-13, ING Building, Sector 1, Bucure[ti
Tel.: +40 21 222 1600
Fax: +40 21 222 1401



The NBR has already updated its end-2006 CPI target three
times this year (from 6% to 6.8% now). Oddly enough, even
though it also forecasts the output gap to remain positive until
the first part of 2007, its forecasts for end-2007 inflation
remain unchanged. At this point, the 2006 target looks too
ambitious yet the target for 2007 will likely remain unchanged.
However, even though monetary policy works with a two-year
lag, no target has been set for 2008 and it seems the NBR is
conducting policy for the short term. We expect the NBR to
announce a 2008 target of 4%, which in our view will be too
ambitious given the almost six quarters of accommodative
policy and another six quarters of positive output gap.


CA deficit financed by FDI, for now


Inflation to undermine NBR credibility

Florin C]u, Chief Economist - Financial Markets
E-mail: florin.citu@ingromania.ro
Nicoleta B`nic`, Equity Analyst
E-mail: nicoleta.banica@ingromania.ro

Economic Overview
by Deloitte

EU accession Macroeconomic trends

The private sector and privatization; Foreign Direct Investments
Final remarks
EU accession
Following accession negotiations and the signing of the Accession Treaty by Romania in April
2005, Romania committed to adopt and implement the following policies in line with the EU
member states in relation to: free movement of goods, persons and capital; competition policy;
agriculture; energy; industrial policy; small and medium-sized enterprises; education and
training; telecommunications and information technologies and environment.
The progress in all these fields is summarised into two major criteria by which Romanias
progress towards accession to the EU has been monitored by the European Commission,
namely: the existence of a functional market economy and the capacity to cope with competitive
pressure and market forces within the Union. If in 1997, the EC stated that Romania had made
considerable progress in the creation of a market economy, in 2004, the Commission finally
concluded that Romania complies with the criterion of being a functioning market economy.
Acknowledging the positive changes undergone by the Romanian economy, the European
Council confirmed its commitment to welcome Romania as full EU member as of January 2007
if the issues mentioned in the commissions May 2006 report will be addressed and solved
without delay. At the same time, the Council actively encourages the Member States to complete
the ratification of the Accession Treaty on time. Even more, the European Commission has
announced its intention to release the monitoring report for Romania and Bulgaria in September
this year, one month ahead of schedule.
Romanian integration minister Anca Boagiu promised to present the progress made in key areas
on July 14th in front of the EU representatives and have on September 7th a further meeting to
inform on the final stage of measures taken by the authorities.
After integration in the EU, Romania will benefit from financial support from the Union in the form
of structural funds of approximately EUR 2 billion per annum in the first three post-accession

Macroeconomic trends
The first quarter of 2006 follows on a successful 2005 - the sixth year of uninterrupted economic
growth, though accompanied by a widening current account deficit and a slowdown of
disinflation. Although the overall evolution of the economy was positive, a slowdown in growth
was forecasted for 2006, following a tightening of the countrys fiscal and monetary policies after
the relaxation in 2005.
Surprisingly enough for this forecast, Q1 2006 shows a y/y GDP growth of 6.9%, more than
expected, and supported by the services sector.
The Romanian currency slowed down its appreciation against both the Euro and the US dollar
keeping a steady range of +/-4% around RON 3.55 to Euro 1. The disinflation process,
supported by the appreciation of the local currency, continued in the first quarter of 2006,
although at a slower pace, which was mainly due to the increase in administered prices, strong
wage growth and booming domestic demand.

GDP, Public Debt
Nominal GDP (USD bn)
current prices
Real GDP growth rate
GDP per capita
in PPS compared to
EU-25 average1
Weight of gross value
added in GDP (%):
- industry:
- agriculture:
- construction:
- services:
General governmental2
debt as % of GDP


2000 2001 2002 2003 2004 2005


36.9 39.7



45.7 57.3 73.2








25.0 26.2

28.2 28.9 31.2 32.5


27.6 27.7
11.4 13.3
4.8 5.3
46.6 44.5

28.4 28.4 30 28
11.3 11.7 11.6 8.3
5.6 5.7
5 5.5
45.1 44.6 43.3 45.3


22.7 23.2

23.3 21.3 18.5

During the last 2 years, Romania had a real GDP growth of

8.4% in 2004, that eased to 5.2% in 2005 and bounced back
to 6.9% y/y in Q1 2006.
As in previous years, the continued GDP growth in 2005 and
in the first quarter 2006 was the result of increased domestic
demand, fuelled by the boom of consumer credits with a real
growth of up to 42% y/y in Q1 2006, a surge in final
consumption up to 10.2% y/y but also improved export
performance, determined by an increase in industrial output.
The industrial production index increased 4.5% y/y as of end
of Q1, matched by a surge in exports of 17% y/y, close to
2005s average of 18% y/y.
Slow but steady progress was recorded in relation to per
capita income levels, as GDP per capita in Romania is
estimated to stand at approximately 34.7% of the EU
average, a level that is slightly higher than in previous years,
but still rather low if compared to the ten latest-joiners of the
Union, where it ranges from 47% in Latvia to 83.4% in Cyprus
as of 2005.


















67.9 70.4












Czech Rep.

Total governmental debt stands at one of the lowest levels in

Europe approximately 23% of the GDP, as of end-2005,
less than half of the EU-25 average of 60% (of GDP). With
foreign public debt moderately increasing with 5% y/y in the
first quarter of 2006 to reach 46% of total debt, Romania is
still in a good position to attract further financing from abroad,
considering also that the favourable economic evolution has
attracted successive upgrades of the countrys rating, leading
to diminishing risk premiums on Romanian sovereign debt.
Inflation, Foreign Exchange 1999-2006
1999 2000
2001 2002
2005 2006*
Inflation rate (Dec. on Dec.)
54.8% 40.7% 30.3% 17.8% 14.1%
8.6% 6.8%
Inflation rate (annual average)
45.8% 45.7% 34.5% 22.5% 15.3% 11.9%
9% 8.0%
Year-end exchange rate (RON per USD)
1.8255 2.5926 3.1597 3.3500 3.2595 2.9067 3.1078 2.8300
Year-end exchange rate (ROL per EUR)
1.8331 2.4118 2.7881 3.4919 4.1117 3.9663 3.6771 3.8700
*forecasted values
Source: The National Bank of Romania, www.securities.com, Economist
Intelligence Unit

Inflationary pressure persists due to international energy

price hikes, as well as further increasing wages without a
correlation to improvements in productivity. The increase in
consumer prices was less than anticipated, due to the fact
that the newly introduced tax on vice, similar to an excise on
alcoholic beverages and tobacco, was not fully passed to the
end-user prices by producers and retailers.
Inflation moved up to 7.3% y/y in Q1 2006 in line with central
banks expectations.
Foreign Trade
Foreign trade registered a continuously increasing trend over
the past 15 years but the true breakthrough was recorded in
the year 2000 when the Romanian government, in an attempt
to limit current account deficit decided to lower tax on profits
related to the export activities to only 5%.

GDP per capita in PPS in Romania, Bulgaria, Hungary,

the Czech Republic and France, as compared
to the EU-25 average

Industry ranks second with 4.8% y/y in Q1. Due to seasonal

influences agriculture shrinks in Q1 of 2006 to 5.3% y/y of the


1) EU-25 = 100.
2) The general government sector comprises the sub-sectors of central
government, state government, local government and social security funds.
Sources: Eurostat, the National Bank of Romania, the National Institute of
Statistics, www.securities.com, no additional data available for Q1 2006


60% in Hungary or the Czech Republic, or even 73% in

France or the United Kingdom.



Source: Eurostat, no additional data available for Q1 2006

Foreign trade evolution in Romania during the period

45 USD billion
1997 1998



2001 2002




Source: National Bank of Romania

Services continue to have the greatest contribution to GDP,

but their weight reaches to approximately 41% in Q1 2006,
the same as last year, as compared to levels in the region of

After 2 years of consolidated positive trend and following

agreements with IMF and EU, the government announced
Romanian Business Digest 2006

plans to align tax on profit related to export activities to the
general taxation system over a 3 year period. Consequently,
in 2002 the tax rose to 6%, in 2003 it reached 12.5% and
finally starting 2004, tax on profits resulting from export
activities is no longer differentiated.
Although the level of both imports and exports has been on a
steady upward trend, the gap between them has been
widening in recent years for most product categories. The
booming consumer credit starting 2003 has sharply
increased aggregate demand, but internal production could
not satisfy such demand in terms of quantity or quality, so
consumers started to increasingly rely on imported products.
GDP levels 1999-2005
1999 2000 2001
Current account
deficit (% of GDP)

2002 2003 2004 2005

3.5% 3.8% 5.5% 3.7% 6.7% 8.2% 8.1%

Source: National Bank of Romania

Accordingly, the main challenge for Romania for 2006, in

order to achieve sustainable growth, will be to reduce the
current account deficit, which has reached the alarming level
of 8.2% of GDP in 2004 and immediately calls for committed
actions to curb aggregate demand and for structural
measures to stimulate exports.
In the first quarter of 2006, exports increased by a remarkable
17% in all sectors. The forecast for average growth this year
is at an optimistic 15-20%, especially considering that the
growth may no longer be fuelled by a constant growth in
crude oil price and that the steel prices have also ceased to
have massive positive impact as seen in the past years.
Imports increased in Q1 with 28% y/y, slowing down in April
to a still high 14%. Especially the imports of crude oil and
natural gas showed a growth of 35% in Q1, accelerating even
more in the period January to April to 41% y/y, showing that
Romania still remains a net importer of energy resources.
The foreign trade gap widened in the period January to April
56% y/y to EUR 2.5 billion. (Source: Intellinews)
Employment and wages
The official unemployment rate levels in Romania were
moderate if compared with those of peer countries in Central
Europe. For instance, according to the EU Statistics Office
(Eurostat), in 2004 the Czech Republic had 8.3%
unemployment, Bulgaria 12%, Slovakia 10% and Poland
18.9%. Still, Romania with 6.2% has a higher rate than
Slovenia (6%) and Hungary (5.9%).
Unemployment levels in Romania during the period
1999 2000 2001 2002 2003 2004 2005
Unemployment rate 11.8% 10.5% 8.6% 8.4% 7.6% 6.7% 5.9%
Source: The National Institute of Statistics, National Bank of Romania

In the time period January to March 2006 the number of

employees increased by a 1.6%, continuing this trend also in
April with an increase of 1%. The number of workplaces in
industry shrunk by more than 4% but with only one increase
in the food industry of 6.3%. The retail sector employed 11%
more workers in the same period, followed by the financial
industry (banking and insurance).

The average net monthly wage in Romania stood below EUR

100 for more than a decade after 1990. The Governments
real commitment towards privatization and restructuring of
the state-owned sector after the year 2000, as well as the
foreign investment inflows brought the return to economic
growth and generated steady increase in income over the last
five years. The average gross/net monthly wage history in
Romania as reported by National Institute for Statistics is
shown in the graph below.
The evolution of gross / net monthly salary in Romania
during the period 1999-2005
300 EUR





















Jan-Nov '05

Source: Economist Intelligence Unit, www.securities.com

In fact, the low wages have represented one of the main

incentives for investors over the past 15 years, although the
employment taxation system has been excessive until 2005.
Payroll taxes were increased in the late 1990s in the hope of
raising revenues to the state budget. In reality, these
increases shrank the collection base as a result of the
expansion of informal activities and the widespread practice
of under-declaring wage payments.
The introduction of a 16% tax rate for all salary income levels
as of January 2005 was aimed at bringing part of the grey
economy into the official economy. However, social security
taxes are still excessive, despite a series of reductions in
recent years.
In Q1 2006, the average net wage growth of 5.7% y/y is well
above the expected growth in productivity. The number of
employees also increased by 1.6% in the same period. The
gain in industry-wide productivity reached a satisfactory 7.5%
y/y in Q1 2006.

The private sector and privatization;

Foreign Direct Investments
Although with the acquisition of BCR (Banca Comercial`
Romn`) in late 2005 by Erste Bank and takeover of oil
company Petrom by OMV Group in 2004, the Romanian
State apparently concluded the series of large-scale
privatization procedures, there are still a number of other
large state-owned companies that are planned to be
transferred to private investors in 2006 and in the years to
After some hesitations at the beginning of the year, the
Romanian State started the sale procedures for the national
savings and loans bank, CEC, and announced the bidding
schedule with binding bids expected by July 17th. Under the
revised privatization bill, 69.9% of CEC shares will be sold
and the preferred buyer is expected to be announced by mid
The privatization processes of the National Company for
Freight Railway Transport CFR Marf`, the Romanian

Post Corporation and radio communications company
Radiocomunica]ii are also gaining momentum.
The privatization of the three remaining electricity distribution
companies - Electrica Muntenia Nord, Electrica Transilvania
Sud and Electrica Transilvania Nord is also well on track, the
privatization strategy currently being drafted by the sell side
Following Enels successful bid for Electrica Muntenia Sud for
a total amount of EUR 820 million for the acquisition of 50%
of shares plus subsequent capital increase up to 67.5%,
EUR 395 million are expected to flow to state owned parent
company Electrica.
Several large thermal power plants, namely the energy
complexes of Turceni, Rovinari and Craiova, are also
expected to bring significant amounts to the state budget if
the privatization strategies will be approved by Government.
The draft privatization strategy for Rovinari has been sent to
the government for approval by OPSPI and the privatization
At the same time, the Initial Public Offering of shares of
electricity transmission grid operator Transelectrica has been
a real success, the IPO of 10% of the companys shares
being over six times oversubscribed and bringing
EUR 35 million to the company. Building up on this success,
minister of economy Codru] Sere[ re-iterated the decision to
float the national gas transportation operator Transgaz in the
next 1 to 2 years.
From the portfolio of AVAS tractor producer Tractorul Bra[ov
stops operations due to unpaid utilities after failed
privatization attempts. Off-road vehicle producer Aro is also
the subject of a failed privatization attempt and is forced, by
the Court to admit bankruptcy.
Foreign Direct Investments (FDI)
The outlook for 2006 and the following years is positive, not
only from the point of view of volume of contribution to the
share capital of companies in Romania, but also from the
point of view of value added by the sectors preferred by
investors. As Romania is expected to continue its economic
growth, with indicators such as GDP growth rate, GDP per
capita or average wages on a steady upward trend, the
country will be providing a stable and safe investment
environment and investors are expected to shift from low
value added sectors (lohn, textiles etc.) to more specialized,
technology-intensive fields with high value added. The gross
inflow of FDI as reported by the foreign investment agency
ARIS is estimated at EUR 6.2 billion this year up from
EUR 5 billion last year and excluding bank privatization
proceeds expected from BCR and CEC. Erste Bank is
expected to pay EUR 3.75 billion for BCR.

Comparison between Romania and other countries in CEE

If until 1996 the performances in the privatization process
were somewhat similar across Central and Eastern Europe,
the economic recession in Romania during 1997 2000 has
severely affected this process, creating a considerable gap in
terms of number of privatization deals and revenues from
such deals between Romania and its neighbours. As after
2000, economic growth was resumed and a set of reforms
were adopted. For 2004, statistics show a diminishing
difference between Romania and countries like the Czech
Republic, Hungary, Poland or Bulgaria. Given the countrys
imminent accession to the EU, its performances should be
analysed not only as compared to previous years, but also as
compared to present or soon-to-be EU member states and
the EU average.
2004 represented a peak for Romania in terms of FDI, which
was double the absolute size of foreign investments attracted
by its neighbour, Bulgaria (Romania EUR 4.1 billion vs.
Bulgaria EUR 1.8 billion). However, in relative terms,
Bulgaria was among the best performing in CEE, with net
FDI/GDP rising to 9.3% in 2004 and 7.6% in 2005, as
compared to Romanias 7% in 2004 and 4.9% in 2005. At the
same time, net FDI per capita reached EUR 206 in Bulgaria
in 2005, whereas in Romania this indicator was EUR 162 for
the same year. This comparative analysis shows that
Romania may currently not be exploiting its full potential as
the largest market in South-East Europe and that, pending on
continued efforts and commitment, the recent favourable
evolution can be expected to continue and improve.

Final remarks
In November 2004, following the positive economic
performance of 2004, Fitch assigned investment grade
rating to Romania3. In September 2005, Standard & Poors
also revised Romanias rating and raised it to investment
grade3. At the same time, S&P warns that Romania may be
exposed to certain fiscal risks and over-heating of the
economy, pointing out that the rating for Romania and
Bulgaria is quite dependent on fiscal and monetary policies
and of entry to eurozone. Moodys rating agency places
Romania sovereign debt at Ba1/positive rating with review for
possible upgrade, bringing the country close to investment
grade. The decision was fundamented by the governments
progress in terms of indebtedness and restructuring, with a
concern expressed over the current account deficit and the
local currencys strengthening. The review will assess the
sustainability of recent improvements, the agency being
optimistic on the planned 2007 accession to EU to strengthen
these. (Source: S&P, Moodys, World Bank, Intellinews)
The World Bank has endorsed the Country Partnership
Strategy (CPS) earmarking USD 450-550 million annual
financing for Romania over 2007-2009.

{oseaua Nicolae Titulescu Nr. 4-8, America House, Etaj 3
Sector 1, Bucure[ti
Tel.: + 40 21 222 1661
Fax: + 40 21 222 1660

3 - BBB with a stable outlook.


Ilinca von Derenthall, Manager
E-mail: ivonderenthall@deloitteCE.com
Romanian Business Digest 2006

Positive Outlook with

Focus on Disinflation and
EU Accession
by Banca Comercial` HVB }iriac & UniCredit Romania

Outlook Economic growth Inflation and monetary policy

External balance and FDIs Fiscal policy
The economic outlook is generally positive with sound economic growth, gradual disinflation and
good prospects deriving from the forthcoming EU accession. Consumption remains the main
driver behind the economic growth while investments are rapidly accelerating.
The disinflation process continued but is expected to lose pace as both demand and supply side
pressures will adversely impact in the next interval. Bringing inflation on a path consistent with
this year NBR target is conditional on even more restrictive monetary conditions. Further policy
rate hikes are still likely as more as the recent upward revision of the deficit target translates into
additional demand side pressures.
After the modest performance registered last year, the industry is on recovery, stirring up the
demand for investment - oriented imports. Despite growing exports, the current account deficit
is widening but remains sustainable in view of the historically high FDIs expected for this year.

Real GDP yoy

Inflation (CPI) yoy, December
Unemployment rate (%)
Exchange rate / EUR, avg
Intervention rate (December)
Current Account / GDP (%)
FDI / GDP (%)
Consolidated Gov. Balance / GDP (%)
Public Debt/GDP (%) (ESA95)
Total External Debt/GDP (%)





Economic growth
The preliminary figures released by the Statistical Office indicate a rebound in the economic
growth which advanced to 6.9% in Q1, beyond the market expectations. Following the pastyears trend, the economic growth remained mainly consumption driven with private consumption
up to a real 11% yoy. The investment component also expanded by a significant 11% yoy but
contributed only by some 1.8% to Q1 growth, due to limited 16% share in GDP. At the same
time, the growing exports were accompanied by an even higher demand for imported goods,
thus resulting in a still significant negative contribution of the net external demand.
On the aggregate supply side, the Q1 GDP was driven by sound growth in services, industry
recovery and booming constructions while agriculture continued to provide a negative
The main macro indicators suggest that solid economic growth continued in Q2. For the
remaining part of the year we expect good prospects to prevail, with GDP growth for this year to
be additionally helped by the lower base effect, following the modest growth registered in the
second part of last year. Consumption, both private and public, will remain the engine of growth.
However, we expect a slowdown in private consumption growth following the enforcement of
more restrictive monetary conditions and tighter control as regards the wage policy. Investments
growth is expected to peak to 15%, in view of the industry restructuring and the start up of large

Banca Comercial` HVB }iriac & UniCredit Romania

infrastructure investments projects. The negative net external
demand will continue to widen, based on robust demand for
imported good (mainly industry equipment) despite exports
recovery. Overall, this year economic growth is expected to
reach a sound 5.5% with still active risks coming from
unstable climate conditions.

Inflation and monetary policy

The disinflation process advanced in the first half of 2006,
despite some temporary departures from the downward path
determined by further adjustments in administrative prices
(mainly gas and energy), the newly introduced vice tax and
also some negative impact on the food prices side in the first
part of the year. The exchange rate appreciation together with
NBR control over demand side pressure through enhanced
draining of excess liquidity constituted a real stimulus to
bringing down CPI inflation to 7.1% yoy in end-June from
8.6% yoy in 2005.
For the second half, we do not expect further visible progress
as regards the disinflation process since both demand and
supply side pressures are going to adversely impact CPI. The
exogenous supply side pressures are lower than previously
expected but will remain important also this year. Further
upward adjustments in the administrative prices of energy
and/or excise duties are expected for July and then for
end-autumn. The inflationary potential of the new upward
revision of the fiscal deficit target to 2.5% of GDP will add to
the existent demand-side pressures, expected to prevail in
the next interval.
At the monetary policy level, the recent June decision to
operate a further strengthening of the monetary policy
conditions is expected to have only a limited impact. The hike
of 25bps in the monetary policy rate will rather support the
local currency than to be effective as regards tempering down
the demand for banking loans. The increase to 20% (by 4pps
up) in the reserve requirements ratio for RON liabilities will
have a more direct impact in depressing the demand for
loans, as the reserve requirements ratio has proved
traditionally a more effective instrument. However, bringing
inflation on a path consistent with this year 5% target requires
further tightening of the monetary policy conditions. An
increase in the policy rate is still likely and could support a
controlled appreciation of the exchange rate and further the
disinflation process through imports price channel. Such a
move is favored as the repeated increases operated this year
in FED and ECB rates reduce the risks of an unsustainable
appreciation of RON.

for industry equipment. Exports growth recovered to 19.8%

following the recovery of the domestic industry and of the EU
economy. The resulting commercial deficit has reached
EUR 3.5 bn (FOB/FOB) during the same period, triggering a
likewise current account deficit. The current account gap is
expected to widen even more, to some 9.5% of GDP
year-end, in view of the enlarged budget deficit target and of
the projected appreciation of RON. Such a large deficit is by
no way comfortable but still sustainable in view of the
expected massive FDI inflows. The latest figures are
indicative of historical high FDIs this year as EUR 2.3 bn (up
130% yoy), were reported only for the first four months. The
FDIs are going to accelerate in the second half and drive this
year FDIs to a new maximum, estimated to some EUR 7.5 bn
when considering also the large inflows coming from
privatizations (mainly BCR and in the energy sector).

Fiscal policy
The fiscal policy pursued this year by the Government was
rather inconclusive, with the deficit target widened two times
in a row while the Treasury stood on surplus throughout H1.
The intermediary figures are indicative of higher than planned
revenues, equaling RON 41 bn in end-May, as improved
budget collections resulted based on robust consumption and
better performance of the overall economic activity. On the
expenditure side, the surplus registered by mid-year,
estimated to some 1% of GDP proves that the funddemanding infrastructure projects has not yet been started.
Under these conditions, it was as more surprising as the
Government decided to increase the deficit target from 0.5%
in GDP to 0.9% in April and then to 2.5% in June. Even if the
decision was based on the necessity to allocate more funds
to start the major infrastructure projects, the extra
expenditure will eventually translate in extra consumption, to
put additional pressure on inflation. In view of the surplus
registered so far and in the absence of a clear long-term
expenditure strategy, it is difficult to believe the Government
will effectively throw some EUR 3 bn more money in the
economy in H2 only. We rather believe the actual year-end
deficit will stay below the target, most likely around 2%
of GDP.

The current account deficit continued to widen in the first part

of the year as the demand for imports remained robust and
continued to outpace the growing exports. Imports expanded
by 26% by end-May, mainly based on the increased demand

The problem of extra resources needed to support the

investment projects has temporarily been tackled by
increasing the budget deficit, but the core issue of scarce
budget revenues is still waiting for a long-term solution. Even
if both EU and IMF has repeatedly advocated for increasing
either VAT or corporate tax, the local authorities seem to
prefer to keep the current taxes in place, as the recent
adjustments to the Fiscal Code (to be enforced starting next
year) bring no changes as regards the major tax structure.
Over medium term, it is expected that the Government starts
reconsidering either an increase in VAT or in corporate tax,
as extra resources will be needed in order to support the
obligations resulting upon the future EU membership.

UniCredit Romania
Strada Ghe]arilor Nr. 23-25, Sector 1, Bucure[ti
Tel.: +40 21 200 2000
Fax: +40 21 200 2002
E-mail: office@unicredit.ro

Banca Comercial` HVB }iriac

Pia]a Charles de Gaulle Nr. 15, Sector 1, Bucure[ti
Tel.: +40 21 203 2222
Fax: +40 21 230 8485
E-mail: contact@ro.hvb-cee.com

Ioana Roescu, PR Officer

Ioana P`un, Head of Corporate Communications

External balance and FDIs


Romanian Business Digest 2006

NBR Braces for Larger

by ABN AMRO Romania

The context Impact of NBR decisions Conclusions

Confronted with increased domestic unbalances and taking advantage of the supportive global
environment, the Romanian central bank seems to have finally decided to have a more hawkish
monetary policy.

The context
The slowdown of the disinflation is no longer news. The NBR itself has signaled in its May
inflation report that the decline of Core 2 inflation (headline minus administered price minus
seasonal prices) seems to have come to a halt. Indeed, both the February and March year-onyear inflation was 5.6%, the same level as the end of 2005 one. After a temporary decline in April
to 4.8%, Core 2 inflation jumped in June to 5.2%. Given that the dynamics of Core 2 inflation has
nothing to do with administered prices, it reflects actually the gap between domestic demand and
domestic supply.
Indeed, Q1 GDP growth rate came well above market and official expectations. The 6.9%
suggests that the Romanian economy is far from slowing down to its sustainable potential output
estimated to be 4.6-4.8%. The big surprise came from the construction sector, which posted a
year-on-year growth of 20%. The industrial sector rose 4.8%, as predicted by the industrial
output, while services rose 6.8%. The industrial sector and services sector posted growth rates
similar to those of a year ago, the construction sector being the main responsible for raising the
1Q GDP 1 percentage point higher than in 1Q05. As anticipated by the high growth rate of retail
sales, household consumption rose 10.9% year-on-year compared with 12.5% one year ago.
Gross fixed capital formation was 11.4%, much higher than the 5.2% posted one year ago. Such
figures suggest that the Romanian economy is far from cooling down in line with NBRs forecast
which would have expected a sustainable GDP growth already by mid this year.
Headline inflation (CPI) and core inflation (yoy)




headline inflation

core 1 % (yoy)

core 2 % (yoy)

Core 1 - CPI minus administered prices

Core 2 - Core 1 minus seasonal food prices

On the other hand, the speculative inflows, so much feared by NBR in the past, seem to be no
longer a threat. After the significant outflows witnessed in May it is unlikely to see a massive
return of speculative investors on the Romanian local market even assuming additional rate hikes.

ABN AMRO Romania




Source: Ministry of Finance, ABN AMRO

The planned widening of the budget deficit made NBRs

governor Mugur Is`rescu to express his concerns related to
the potential inflationary pressures and mainly to the impact
on current account deficit. He said that any larger deficit will
create a problem, a pressure either on the balance of
payments or on inflation. However, should the excess
spending be directed only for infrastructure projects the
impact will hit especially the balance of payments. The
governors concern was related to the efficient use of the
supplementary funds by saying that this is now the biggest
challenge: how efficient are we using the money and how
little of them are we going to waste.
His appeal to the government to keep to the pledge of using
80 percent of additional spending only for investments aimed
at integration in EU and education suggest that NBR was
only marginally involved in the decision to widen the budget
deficit. He acknowledged that the wider budget deficit was
one of the reasons for the measures taken by NBR, saying
that what we need now is a shift from consumption, which is

Impact of NBR decisions

The central banks ultimate objective in taking these
measures is to contain medium-term inflation, more precisely
the 2007 inflation, inside the 4% + 1% band. The monetary
policy tightening is intended to slow local currency credit
expansion and reduce consumer spending acceleration. This
is not going to be easy.
NBRs key rate evolution








The need to develop the infrastructure is badly needed

indeed. But this is not news. It was already known when the
2006 budget was constructed, as well as when the
government decided that there is no need to boost budget
revenues by an increase of either the flat income tax or the
VAT. Plans to raise the budget deficit suggest as well that the
IMF was correct last year when it attempted to persuade the
government to increase budget revenues in anticipation of a
significant increase in budget expenses.

change to 0.9%


Indeed, we see the decision to widen the budget deficit as

being negative for the macroeconomic balances. This marks
the second time during its mandate that the governments
fiscal policy is pro-cyclical. In 2005, after a GDP growth of
8.4%, a flat income tax of 16% was introduced, leading to a
general boost of consumption in 2005, and to an inflation
overshooting. In 2006, after 1Q GDP growth of 6.9% significantly above the potential and a sign that disinflation is
in danger - the government decides to more than double the
budget deficit.

planned change to 2.5%

planned change to 2%


In its June press release NBR mentioned that recent data

shows strong domestic demand dynamics driven by an
unsustainable expansion of consumption against the
background of a rapid increase in non-government credit,
especially leu-denominated loans. The expected increase of
the budget deficit will, in the opinion of the central bank,
additionally boost domestic demand pressure both on the
external deficit and on inflation, which requires monetary
policy tightening.



But despite the fact that all the variables were indicating
consistently that a rate hike was needed, NBR seemed to
have taken only a last moment decision to hike its key rate by
25bps, in June, in addition to the largely anticipated rise of the
minimum reserve requirement from 16% to 20% for RON
liabilities with a tenor of up to 2 years. The trigger might have
been the governments surprising decision to widen the
budget deficit for the second time this year but this time by
more than doubling it, from 0.9% to 2.5%.

Budget deficit revisions



After a period during which central banks had loose monetary

policies aimed at preventing recessions or even deflations in
the respective countries we face a tightening cycle of
monetary policies. The main central banks, ECB, Fed and
even the Bank of Japan, tighten their monetary policies in
order to contain the domestic inflationary pressures.
Moreover, in a number of important emerging economies,
such as India, Koreea, South Africa and Turkey, the
respective central banks rose their key rates. It is quite likely
that other emerging countries, mainly in Asia, might follow.
Such developments are relevant for a number of reasons.
The rising rates in developed markets will make the investor
appetite for emerging markets to remain low. It is unlikely that
a rate hike in Romania will make investors to treat the country
as a case in itself, as long as they look at emerging countries
as an investment class. But even those considering that
investors are sophisticated enough to judge countries on a
case by case basis should not worry given the general rate
movement in emerging markets and the concerns produced
among investors by the increasing current account deficit of

intervention rate (1M depo)

1M interbank rate (mid)
NBR's monetary policy rate

Romanian Business Digest 2006

ABN AMRO Romania

To date, retail sales this year have posted growth figures
sensibly higher than in any of the previous years, confirming
that a consumption boom is under way. Given that the main
growth driver is food products, the NBR does have a problem
faced otherwise often by central banks in emerging
economies. The small proportion of products funded by
consumer credit in the consumer basket requires significant
rate hikes to contain consumption. Therefore, increments of
at least 50bp would be required.
According to our calculations, the 25bp rate hike plus the
increase in MRR, both decided in June, should translate into
a 35bp increase for the cost of credit, assuming that the
banks decide to maintain their profit margins intact. However,
the banks strategies seem more oriented towards increasing
or defending their market shares, which means that the
increased cost might rather reduce the profit margin than
increase the loan rate. Hence, in our opinion we might see
only a very limited rise of the lending rates and, therefore,
only a small slowdown in credit growth and consumption
following the central banks actions.

On the fx market for the reasons already mentioned

previously we dont expect a major impact, offshore investors
being likely to continue to stay on both sides with both buying
and selling orders. A 25bp rate hike is not enough to change
investors mood overnight.

It is clear that the central bank is confronted with signs of a
weakening disinflation, while the economy again shows signs
of overheating. The international context remains favourable
for monetary policy tightening, as interest rate hikes are likely
to continue at the international level.
Further rate hikes should not to be ruled out, if market
conditions would warrant such measures. The credit
expansion, wider budget deficit, GDP growth, EM bearish
sentiment and EUR-RON dynamics are all in favour of the
central banks tighter monetary policy. However as in the past
the central bank might prefer to wait for the outcomes of their
June decision before deciding to move further.

ABN AMRO Romania

Bulevardul Expozi]iei Nr. 2, WTCB-E, Etaj 2
Sector 1, Bucure[ti
Tel.: +40 21 202 0400
Fax: +40 21 224 2736
Radu Cr`ciun, Head of Research
Tel.: +40 21 202 0435
E-mail: radu.craciun@ro.abnamro.com


Outlook for 2006-07
by The Economist Intelligence Unit
Political outlook Economic policy outlook
Economic forecast

Political outlook
Domestic politics
Relations between the two senior parties in the ruling coalition, the centre-right National Liberal
Party (NLP) and the centre-left Democratic Party (DP), have reached breaking point following
the latest dispute between the prime minister, C`lin Popescu T`riceanu (NLP), and the
president, Traian B`sescu (formerly DP). Relations with the two junior coalition partners, the
Hungarian Democratic Union in Romania (HDUR) and the Conservative Party (CP), are also
strained. There is a risk that the differences between the NLP and the DP could become so
intractable that the two senior government parties can no longer work together, jeopardising
crucial EU accession-related reforms. It seems only a matter of time before Mr. B`sescu
engineers the removal of Mr. T`riceanu or the holding of pre-term elections. The only thing that
seems to be holding the coalition together and preventing such a denouement is the forthcoming
decision by the EU on the timing of Romanias membership. A recommendation on that will be
made by the European Commission on September 26th. The Economist Intelligence Unit
assumes that major changes will be avoided until after that date.
Assuming that Romania joins the EU in January 2007, we expect an early dissolution of the
government and a pre-term election in 2007 (the next scheduled parliamentary election is due in
2008), with the ruling parties hoping to capitalise on their achievement in securing accession.
The NLP and the DP will almost certainly not stand again as an alliance, but another coalition
government will be the likely outcome. The problem is that relations between the NLP and DP
have been so badly poisoned that it seems almost impossible that they could govern together
again in another coalition. On the other hand, neither the NLP nor the DP could govern with the
formal support of the discredited Social Democratic Party (SDP), the extremist Greater Romania
Party (GRP) or the populist New Generation (NGP) without discrediting their own parties. The
options for the countrys current governing elite are thus circumscribed. Mr. B`sescu may thus
prefer to avoid an election and preserve the alliance by changing the prime minister. However,
if Mr. T`riceanu were to resist and galvanise support in his own party, this in itself could cause
such political ructions that an election becomes unavoidable. Whatever happens over the next
six months or so, the outlook is for more political uncertainty, with damaging implications for
economic policy management.
International relations
A decision on the timing of Romanias EU accession will be made in late September 2006, after
the European Commission delayed making a final recommendation in its May 16th report. The
report highlighted four areas of serious concern for Romania: the lack of fully functioning
payments agencies for EU agricultural aid; shortcomings in the system for animal registration
needed to pay EU farm subsidies and to maintain proper veterinary standards; a shortage of
facilities for collecting and treating animal by-products so as to prevent BSE (otherwise known
as mad-cow disease); and the lack of a computer system in the tax administration that is
compatible with the rest of the EU, preventing collection of value-added tax (VAT) throughout the
internal EU market. Romania also has to make progress in areas such as the fight against

The Economist Intelligence Unit

corruption; the functioning of the judicial system; protection of
intellectual property rights (IPRs); veterinary border
inspection; and human-trafficking. Bulgarias list of areas of
serious concern is longer (it has six), and the issues it must
address are more fundamental. The Commission has set a
deadline of end-September for the two countries to overcome
these shortcomings. It will issue a report on September 26th
and make a recommendation on whether Romania and
Bulgaria should be allowed to join the EU in January 2007 or
whether membership should be delayed until January 2008.
The European Council will then vote and is expected to follow
the Commissions recommendation.
We assume that Romania and Bulgaria will do enough to
persuade the Commission to recommend EU accession in
January 2007, but there is a risk that their membership could
be delayed until 2008. The Commission is also likely to apply
specific safeguards to both countries if they fail to make
progress in problem areas, such as veterinary health and
food safety. This would result in the reinforcement of customs
controls and restrictions on the free movement of food
products. There are also likely to be substantial financial
penalties for both countries, for example, if they fail to
establish fully operational payment agencies for EU farm
subsidies. The imposition of safeguards may satisfy those EU
member states facing public opposition to further
enlargement. However, such conditionality would be
unprecedented and could generate a backlash in the new
member states, especially since the free movement of people
and goods is regarded as the most valuable aspect of

Economic policy outlook

Policy trends
For some time our baseline economic forecast had assumed
that the Romanian authorities would act to address external
concerns and tighten fiscal, monetary and wage policies in
2006. However, the governments decision in April to double
the size of the targeted 2006 budget deficit, from 0.45% to
0.9% of GDP, led us to revise our assumptions and baseline
forecast. In a second budget revision in July, the government
decided to increase the budget deficit target to 2.5% of GDP.
The governments budget revisions have provoked criticism
from the IMF, which had advocated a balanced budget in
2006 and small surpluses in subsequent years. The
European Commission has also expressed concern about
the current policy mix and urged the authorities to adopt a
more responsible fiscal stance.
The Ministry of Finance claims that it can direct the extra
budget spending towards non-inflationary investment, but
any fiscal loosening is likely to fuel domestic demand and
make it difficult to reduce the size of the external deficits.
Without supportive, cautious fiscal and wage policies it will
also be difficult for the National Bank of Romania (NBR, the
central bank) to meet its inflation target. However, the
government feels that it is under conflicting pressure both to
increase public expenditure to prepare for EU membership
and to restrict the size of the budget deficit to allow for higher
private-sector spending. Furthermore, it is probably
persuaded that it can tolerate large deficits for a little longer,

given the expectation of significant revenue from privatisation

and inflows of foreign direct investment (FDI) in 2006-07. A
fiscal policy tightening may therefore be postponed until after
the election of a new government in 2007-08.
Fiscal policy
The governments decision in late April and again in late June
to increase the targeted 2006 budget deficit, first from 0.45%
of GDP to 0.9% and then from 0.9% of GDP to 2.5%, flies in
the face of advice from the IMF and the EU to adopt a more
prudent fiscal stance. The government has indicated that
there may well be a further budget revision entailing
additional increases in expenditure in October. The fiscal
loosening implied by the 2006 budget revisions is likely to
exacerbate macroeconomic imbalances, especially the
current-account deficit, and to make the task of containing
inflationary pressures more difficult for the central bank. We
forecast a deficit of 2.8% of GDP in 2006 and 3.3% of GDP in
2007, reflecting the demands of meeting EU membership
obligations, as well as the likely losses to the budget from
state financing of a new Property Fund to compensate
Uncertainty remains about the direction of fiscal policy in
2007, for which year the government is under pressure to
raise revenue significantly by increasing tax rates. At 30% of
GDP, Romanias general government revenue ratio is
considerably below the levels prevailing in the EU. The
introduction of the flat tax is estimated to have resulted in
revenue losses equivalent to 1% of GDP, at a time when
Romania needs to raise revenue permanently in order to
cover its contribution to the EU budget, co-finance EU
projects and increase infrastructure spending. The prime
minister, C`lin Popescu T`riceanu, has insisted that there will
be no change in the 19% rate of VAT (which accounts for
about 50% of total tax revenue), or in the 16% flat-rate tax,
but the Ministry of Finance has hinted on several occasions
that both tax rates may be reconsidered (for example, an
increase of 3 percentage points in the VAT rate to 22%, or a
smaller increase in both the VAT and flat-tax rates). As yet,
however, there is no consensus in the government about how
to proceed, and the revised fiscal code does not include any
increase in the main tax rates for 2007.
Monetary policy
A monetary policy tightening by the central bank aims to
counter the consumption boom of the past two years and
preserve the disinflation trend. The NBR switched to a direct
inflation-targeting regime in August 2005, setting year-end
inflation targets of 7.5% in 2005 and 5% in 2006, within a
band of 1 percentage point. However, the NBRs
commitment to the new policy was called into question by a
loosening of monetary policy in 2005 and by the failure the
same year to meet the inflation target. In response, in the first
quarter of 2006 the NBR raised the monetary policy rate (the
maximum level for money market deposit-taking) from 7.5%
to 8.5%; it also raised the reference rate (the effective
sterilisation rate at which the central bank drains liquidity from
the market) to 8.5% in March, from the 7.5% rate in operation
from November to February. The NBRs vigorous efforts to
Romanian Business Digest 2006

The Economist Intelligence Unit

sterilise excess liquidity by open-market operations are
starting to have an impact on money supply growth, and
increases in the minimum reserve ratio on credits
denominated in foreign exchange have led to a pronounced
shift towards local-currency lending. However, the
acceleration of credit growth during the subsequent two
months fuelling the consumption boom and driving up the
external deficits and the fiscal loosening implied by the
governments two budget revisions led the central bank to
take further steps to tighten monetary policy at the end of
June. At its meeting of June 27th, the NBR board decided to
raise the monetary policy rate again, to 8.75% per year, and
increased the minimum reserve requirement on
leu-denominated liabilities with maturities of up to two years
from 16% to 20%. The latter decision was taken in a bid to
slow the continued, fast-paced credit growth, especially of
leu-denominated loans. The NBR has hinted that it is
prepared to raise interest rates further if necessary, and we
expect the central bank to persist with a cautious monetary
policy in 2006-07, with interest rates remaining high this year
and declining only slightly in 2007.

Economic forecast
International assumptions
International assumptions summary
(% unless otherwise indicated)
Real GDP growth
Eurozone 12
Exchange rates
Financial indicators
EUR 3-month interbank rate
USD 3-month Libor
Commodity prices
Oil (Brent; USD/bn)
Gold (USD/troy oz)
Food, feedstuffs & beverages
(% change in USD terms)
Industrial raw materials
(% change in USD terms)






















Note: Regional GDP growth rates weighted using purchasing power parity
exchange rates.

Global economic growth slowed to 5% in 2005, from 5.6% in

2004 (at purchasing power parity PPP exchange rates),
and is expected to slow in 2006-07 to an annual average of
4.7%. Growth in the EU, Romanias main export market, has
been held back by weak domestic demand and high oil
prices, and we expect EU growth to average 2.2% in
2006-07. The average weighted growth of import demand in
Romanias 20 leading export markets is forecast to slow to
4.8% in 2006, from 5.1% in 2005, and to pick up to 5% in
Prices for dated Brent Blend crude oil are set to average
USD 70/barrel in 2006 and USD 66/barrel in 2007, reflecting
robust demand, growing concerns about Irans nuclear

programme and the fact that new oilfields are not coming on
stream as quickly had been assumed. Higher oil prices will
have a negative impact on inflation, although the
strengthening of the euro in 2006-07 will dampen the impact
of high oil prices on Romania. With concerns about the large
US current-account deficit again coming to the fore, the US
currency is forecast to weaken against the euro, from
USD1.24:EUR1 in 2005 to USD1.28:EUR1 in 2006 and to
USD1.39:EUR1 in 2007.
Economic growth
Gross domestic product by expenditure
(Lei bn at constant 2002 prices where series are indicated;
otherwise % change year on year)
2004 a 2005 a 2006 b 2007 b
Private consumption
Public consumption
Gross fixed investment
186 c
204 c 219
Final domestic demand
10.3 c
10.1 c
0.3 cd -0.1 cd -0.1 d
0.1 c
189 c
207 c 222
Total domestic demand
10.4 c
9.8 c
Exports of goods & services
Imports of goods & services
Foreign balance
-2.8 d
-5.5 d -4.2 d -3.0 d
180 e 189 e
199 e
GDP incl statistical discrepancy 173
a - Actual. b - Economist Intelligence Unit forecasts. c - Economist Intelligence
Unit estimates. d - Contribution to real GDP growth (as a percentage of real
GDP in previous year). e - GDP data reflect redenomination of the leu on July
1st 2005.

Real GDP rose by 6.9% year on year in the first quarter of

2006, with private consumption growing by 10.9%. Net
exports made a negative contribution of 9.9% to growth.
Private consumption growth is expected to slow compared
with 2005, but not as sharply as previously expected (retail
sales, which can be taken as a rough proxy for consumption
growth, grew by 24% year on year in real terms in the first
quarter of 2006). Investment activity will continue to be the
main engine of growth in 2006-07. Fixed investment grew by
11.4% year on year in the first quarter and is forecast to grow
by 12% in 2006 and by 13.5% in 2007, as new and
modernised production facilities come on stream, large public
investment projects get under way and inflows of FDI
continue to rise. We assume that the slowdown in
consumption growth will contribute to a modest deceleration
in the pace of import expansion and that the negative
contribution of net exports to real GDP growth will diminish.
Agricultural output is expected to rebound, rising by about 4%
year on year in 2006, despite flooding early in the year.
Industry, which grew by 4.8% year on year on a value-added
basis in the first quarter, is expected to perform above the

The Economist Intelligence Unit

official forecast, growing by about 5% year on year in 2006.
We forecast that real GDP growth will accelerate to 5.5% year
on year in 2007, as investment and export growth accelerate.

policies and productivity gains will be needed to offset the

impact of currency appreciation.


External sector

The NBR set year-end inflation targets of 7.5% for 2005 and
5% for 2006, within a band of 1 percentage point. The
central banks credibility has been dented, however, by the
failure to meet the 2005 target, with inflation reaching 8.6%
year on year in December and averaging 9% annually.
Inflationary pressures remain strong as a consequence of
rapid growth in real wages and credit, as well as upward
adjustments to energy prices. In the first half of 2006
consumer price inflation has remained above the target band,
but in line with the central banks forecast trajectory: in May
the year-on-year inflation rate rose to 7.3% from 6.9% in April.
We assume that the central banks monetary policy tightening
and a strong leu will aid disinflation in 2006. However, the
2006 target is unlikely to be met because of scheduled
increases in excise taxes and energy prices. We forecast
year-end inflation of 6.8% in 2006 and of 4.8% in 2007.

Another risk generated by the tightening of monetary policy is

the potentially adverse impact that appreciation of the leu
could have on the trade balance, at least in the short term.
Strong leu appreciation could erode the external
competitiveness of exports, assuming that any increase in
productivity would be insufficient to compensate, and would
lead to an increase in demand for imports. The merchandise
trade deficit increased by 50% year on year in euro terms in
January-May 2006 (fob:fob); imports grew by 26.2% year on
year and exports by 19.8%. We expect a slight increase in the
current-account deficit in 2006 compared with 2005, followed
by a modest reduction in 2007.

Exchange rates
Higher interest rates, the liberalisation of the capital account
and a generally positive view of Romanias prospects will
stimulate speculative capital inflows in 2006-07. These could
result in further significant real appreciation, a costly
sterilisation of the inflows, or a combination of both. Following
an annual average real effective appreciation of 17.7%
against a trade-weighted basket of currencies in 2005, the leu
appreciated against the euro by about 5% in real terms in the
first quarter of 2006. In the second quarter, the leu came
under depreciation pressure against the euro as a result of a
general downturn in sentiment towards emerging markets.
We do not expect this to persist and forecast a continued,
albeit smaller, nominal appreciation against both the USD
and the EUR in 2006. In 2007 we expect further nominal
appreciation against the USD, but a nominal depreciation
against the euro. This will result in real appreciation against a
trade-weighted basket of currencies in both years. The
exchange rate appears to be competitive at the moment, but
the substantial appreciation of the leu in 2004-06, together
with strong wage growth, has begun to damage profitability
and competitiveness in some sectors, underlining the need
for more structural reform of the economy. Prudent wage

Forecast summary
(% unless otherwise indicated)
2004 a
Real GDP growth
Industrial production growth
Gross agricultural production growth 22.2
Unemployment rate (year-end)
Consumer price inflation
(av; national measure)
Consumer price inflation
(year-end; national measure)
Consumer price inflation
(av; EU harmonised measure)
Commercial bank lending rate
Consolidated budget balance
(% of GDP)
Exports of goods fob (USD bn)
Imports of goods fob (USD bn)
Current-account balance (USD bn)
Current-account balance (% of GDP)
External debt (year-end; USD bn)
Exchange rate Lei:USD (av)d
Exchange rate Lei:EUR (av)d
Exchange rate Lei:USD (year-end)d
Exchange rate Lei:EUR (year-end)d

30.0 c


2006 b 2007 b



















a - Actual. b - Economist Intelligence Unit forecasts. c - Economist Intelligence

Unit estimates. d - The redenomination of the Romanian leu on July 1st 2005
entailed the dropping of four zeroes: one new leu (RON) = 10,000 old lei (ROL).

The Economist Intelligence Unit

26 Red Lion Square London WC1R 4HQ United Kingdom
Tel.: +44 (0) 20 7576 8181
Fax: +44 (0) 20 7576 8476
Joan Hoey, Senior Analyst, Central & Eastern Europe
E-mail: joanhoey@eiu.com

Romanian Business Digest 2006

Investment Climate

World Bank
Office Romania

Foreign Direct Investment

in Romania
by Larive Romania

Legal framework with impact on direct investment

Evolution of the foreign direct investment in Romania
Short presentations of some Romanian industries
Investment funds
In the last years, Romania became a more appealing target for an increasing number of foreign
investors due to the priority objective settled for January 2007, the accession to the European
Union. This will confirm the fact that Romania is irreversibly connected to the values of the
European democracy and the principles of a functioning market economy.
Romania signed in Luxemburg, on April 25, 2005, together with Bulgaria and the representatives
of the 25 Member States, the Treaty of Accession to the EU. The signing of the Accession Treaty
was proceeded by the assent of the European Parliament, which was given on April 13, 2005,
with an absolute majority of votes.
A decision on the timing of Romanias EU accession will be made in September 2006, after the
European Commission delayed making a final recommendation in its May 16th report. The report
highlighted four areas of serious concern for Romania: the lack of fully functioning payments
agencies for EU agricultural aid; shortcomings in the system for animal registration needed to
pay EU farm subsidies and to maintain proper veterinary standards; a shortage of facilities for
collecting and treating animal by-products so as to prevent BSE (otherwise known as mad-cow
disease); and the lack of a computer system in the tax administration that is compatible with the
rest of the EU, preventing collection of value added tax throughout the internal market of the EU.
Romania also has to make progress in areas such as fight against corruption; the functioning of
the juridical system; protection of intellectual property rights (IPRs); veterinary border inspection,
and human-trafficking. A report is expected to be issued on September 26th with a
recommendation on wether Romania and Bulgaria should be allowed to join the EU in January
2007 or whether this should be delayed until January 2008.
Romania will benefit from the EU accession, that offers a harmonization of capital market
regulations, taxation, accounting rules. The exporting procedures to the EU members will be
simplified in business administration, the exchange risks and conversion charges will be
eliminated after the accession and a new extended market of more than 500 million consumers
will be open.
According to estimates of IntelliNews, which corroborates data from regional central banks,
Romania ranks second in the SEE region, after Turkey, considering total FDI inflows by the end
of 2005.
Evolution of FDI in South East Europe in the period 1996-2005
25000 EUR mn





and Hertzegovina



Macedonia Moldova


Serbia Slovenia
and Montenegro


Source: Central banks, IntelliNews


Larive Romania
In 2006, the investor interest in expected to increase, the
Romanian Agency for Foreign Investments (ARIS) predicting
a new annual record EUR 5.8 to 6.2 billion in FDI. The
figure is higher that the projected FDI of EUR 4-4.2 billion for
2005, up from an initial estimation of EUR 3.2-3.8 billion.
ARIS considers that improvements in the business
environment, the flat tax of 16% and a positive attitude from
foreign partners helped improving FDI inflows dramatically.

offer professional services for foreign investors, all along the

investment cycle.

The activity areas most intensely sought by foreign investors

in 2005 were information technology (IT&C), the energy
industry, the pharmaceuticals market and the automotive

Besides the law on direct investment with significant impact

on the economy, the other most important legal incentive
offered to direct investment in Romania is the new single tax
reform, introduced by the newly elected liberal government at
the end of 2004. This fiscal revolution brought Romania
among the most competitive investment destinations in the
region. The country was known for its high level of income
taxation: 25% for companies and 18% to 40% for individuals.
Starting 2005, following a successful model already
introduced by other countries in the region, corporate and
individual incomes are levied with a single tax rate of 16%.
This fiscal reform was coupled with a softening of the taxation
principles on which all fiscal procedures will be based:
transparency, simplicity, partnership with taxpayers, and

The evolution of FDI in Romania between 2000-2006


EUR mm







1294 1212










Source: ARIS INVEST The Romanian Agency for Foreign Investment

Legal framework with impact on

direct investment
In order to improve the business climate and to offer
incentives for large investment projects, the Parliament has
issued in 2001 the Law No. 332 regarding the promotion of
direct investment with significant impact on the economy.
Investment that qualify has a value higher than USD 1 million
(or equivalent), is made in the forms and ways provided by
the law and contributes to the development and
modernization of the Romanian economic infrastructure,
determining a positive spin-off effect in economy and creating
new jobs. Direct investment with significant impact on
economy are allowed in all economic sectors with the
exception of financial, banking, insurance and re-insurance,
as well as the sectors regulated by special laws.
The Fiscal Code, enforced starting 2004, maintained and
reinforced the investment incentives introduced by this law,
such as:
1. Exemption from payment of custom duties for the
machinery, installations, equipment, measuring and
control devices, automation equipment and software
products purchased from Romania or abroad, necessary
for achieving the investment
2. Carrying forward the fiscal loss during the following 5
years from the taxable profit
3. Other incentives that may be granted by the local
authorities (such as exoneration or reduction of local
taxes, etc)
A significant step forward taken for improving the relationship
with the investors is the establishment of a governmental
agency in charge with attracting and maintaining the contact
with foreign investors in Romania. This is the Romanian
Agency for Foreign Investment (ARIS), which has as main
objectives to increase significantly the investment volume in
Romania, to actively promote investment opportunities and to

In the period October 1, 2001 - December 30, 2005, ARIS

managed, through regional development agencies, a number
of 445 investment projects, each with values exceeding
USD 1 million, these investors benefiting from facilities
according to the Law on direct investment with a significant
impact upon the economy.

Presently, the Romanian single tax rate is competitive

compared to the other countries levels of taxation, an
overview being given below:
Taxation levels applicable in countries in SEE
as of end of 2005

Corporate tax
Income tax (highest rate)


SerbiaMacedon Roman HungarySlovak Polan Bulgari Croati Sloven Czech Rep

Source: Central banks

This measure has yielded very positive results, as FDI grew

at an accelerated pace, favored also by the pre-accession
context. According to the experience of other countries, this
fiscal reform will increase Romanias competitive advantage
in attracting higher FDI, especially in export oriented, labor
intensive and high value added industries.
In spite of the advantages of the new single tax system, its
downside appeared already after six months. In order to
counter the lower taxes collected on corporate and individual
income, the Government was forced to raise quotas for other
taxes, such as: tax on dividends (from 5 to 10% for
individuals, and subsequently to 16%), tax on capital gains
(from 1 to 10%, and then 16%). The new fiscal strategy of the
Government puts emphasis on indirect taxes, as compared to
direct taxes (which are aligned at 16%, the same quota
applicable for tax or income).

Evolution of the foreign direct

investment in Romania
Romania has a leading role in attracting FDI in Southeast
European region. In 2005, out of the total EUR 10.4 billion in
Romanian Business Digest 2006

Larive Romania
FDI attracted by countries in the region, Romania received
half of these inflows. The positive trend continues in 2006,
where, in the first four months of the year, FDI increased
130% over the similar period of the previous year, up to EUR
2.3 billion. Comparatively, Poland reported EUR 2.7 billion as
direct foreign investment over the same period, Bulgaria EUR
765 million and the Czech Republic, EUR 564 million.
The year 2005 was the sixth year of economic growth, after a
long period of hesitating transition towards the market
economy. The GDP registered an estimated growth of 4.1%,
slowing down on the record high level of 8.3% from 2004.
This positioned the country on a top place among EU
candidate countries in terms of economic performance. The
estimated GDP increase for 2006 is set at 6%.
Evolution of FDI stock in Romania

EUR bn










Source: National Bank of Romania

Having in view that FDI in a country is facilitated, inter alia, by

the development of the infrastructure, the efficiency of
administration, and by an adequate legislative system, the
international financial institutions are actively supporting
Romania in its efforts to meet these criteria, and surpass the
difficulties of the transition.
Foreign investment generated in 2005 almost 12,400 new
workplaces, mainly in the automotive industry (car
components), placing Romania 5th in Europe by this criterion
after Poland, Great Britain and France, and ahead of
Hungary, Germany and Spain.
In Romania, the record level of investment inflows in the last
years, compared to the other South-East European countries,
was partly a result of the successful privatization (such as the
sale of the oil company, Petrom, to OMV Austria in 2004).
Inflows were also important in green-field and expansion
projects, particularly in the automotive industry and in
services. The accelerated growth pace in the last three years
have placed Romania among the leading FDI destinations in
CEE region, as shown in figure below.
Evolution of FDI in selected countries in CEE
EUR bn




Czech Rep




Source: Central banks





The EBRD is the largest individual investor in Romania,

country which is the third-largest recipient of EBRD funding.
As at December 2005, the European Bank for Reconstruction
and Development (EBRD) signed a number of 106
investment projects in Romania, totaling EUR 3.2 billion. A
total of 67 % of investments are concluded in the private
sector, with its portfolio rapidly expanding in areas such as
private sector investment, financial sector development,
critical infrastructure such as power, transport and municipal
infrastructure and large-scale privatization with strategic
Whenever possible, EBRD is encouraging the private
financing of infrastructure through concessions and build,
operate, transfer (BOT) schemes. The Bank is also actively
supporting the development of the non-banking financial
sector by promoting investment in leasing and insurance
companies and in equity, mortgage and pension funds.
The World Bank is Romanias largest institutional creditor and
its assistance covers all areas of the economy. The World
Bank has financed over 40 operations in the country for a
total original commitment of almost USD 5 billion.
In addition, rural development and poverty alleviation
programs aim at improving rural infrastructure, including
irrigation systems, social services and the rural finance
system, through a participatory process. Banks assistance
focus is progressively changing from financing the hard
sectors, such as industry and infrastructure, towards the
softer sectors, such as human development and social
protection, health, education and environment. The rate of
disbursement is one of the highest in the World Bank,
demonstrating a substantial implementation capability and
ability to successfully manage large capital inflows. In the
coming future the World Bank is set to increase its
involvement in developing rural infrastructure, providing
finance to rural areas, social sector development, agriculture
and forestry.
In support of the country integration into the EU community,
the EU Commission is actively assisting Romania technically
and financially. It is estimated that the non-reimbursable
funds that will be made available for Romania by the end of
2006 should amount up to EUR 650 million annually. The
funds are allocated for projects supporting convergence with
the EU and focused on updating the legislation, aid to
institutionalized children, supporting solutions to minorities
issues, etc. The government main tasks in the integration
process will be to create the conditions for a functional market
economy, to increase the financial discipline, to reduce
inflation, and to stop injecting money into the big state-owned
companies, and privatize them, in order to reduce losses.
After EU accession, expected for 2007, Romania will benefit
of structural, post-accession funds, as part of 7-year
allocation plans, in amount of EUR 16.4 billion. The main
recipients of these funds will be local and state
administration, mainly for infrastructure projects.
The amount of FDI in a country is dependent also upon the
privatization strategy adopted by the government. Until the
end of 2005, the Romanian government has privatized most
of the sectors of the economy. The largest privatization deals
yet concluded are: Banca Comercial` Romn` (sold to Erste
Bank at the end of 2005), Petrom (the national oil company,
sold to OMV in 2004), Agricultural Bank (sold to Raiffeisen
Bank in 2001), Sidex - the giant steel mill (sold to LNM Ispat
in 2000), Romanian Development Bank (sold to Socit
Gnrale in 1998), and Dacia car manufacturer (sold to
French Renault in 1997).
The privatization of the largest Romanian bank, Banca
Comercial` Romn`, finalized at the end of 2005, is by far the

Larive Romania
largest ever realized in Romania. The amount obtained by the
Romanian state, approximately EUR 3.75 billion for 61.88 %
of shares, is so large, that it is about equal to the value of all
the other privatizations of the last 15 years.
Another successful major privatization was done also with an
Austrian investor Petrom, the national oil company. The
deal was concluded in July 2004, when OMV acquired 33%
of the company, for about USD 900 million, having the right
to acquire the control package (51%), through a share capital
increase. Petrom is the largest company in Romania, with a
turnover of about USD 3 billion. The company is an integrated
oil company, with active exploitation domestic and
international activities, as well as processing and retail of oil
products, being an important regional player.
Privatization of utilities was successfully concluded by the
end of 2004. The privatization of the regional electricity
distribution companies Electrica Banat and Electrica
Dobrogea was done with the Italian company Enel in mid July
2004. The two gas distribution companies, Distrigaz Sud and
Distrigaz Nord, were sold in October 2004 to European
strategic investors. Gas de France has acquired Distrigaz
Sud, paying EUR 128 million for 30% of its shares, and
subsequently increasing the share capital by another EUR
183 million, thus gaining the company control. Distrigaz Nord
was privatized with the German company Ruhrgas (part of
E-ON Holding), which paid EUR 125 million for 30% stake
and earmarked EUR 179 million for a share capital increase
that will bring over the 51% control.
Romania is actively integrated into the European economical
environment, as reflected by the distribution of FDI per
countries of origin. The top ten countries classification
according to foreign capital registered as at 30 April 2006 is
presented below:
Table 1: Distribution of FDI per countries of origin for
companies with foreign ownership
No. Country

Value of the registered capital

brought in foreign currency
(mn EUR)*

1 The Netherlands
2 Austria
3 Germany
4 France
5 Italy
7 United Kingdom
8 Dutch Antilles
9 Greece
10 Cyprus
TOTAL registered capital in foreign
currency for top 10 countries
TOTAL registered capital in
companies with foreign ownership

% in total







Source: Statistical bulletin of the National Trade Registry Office, April 2006
*as at 30 April 2006

The following investors accounted for the largest foreign

equity investments as of December 2005 (Table 2).
Dutch investment in Romania
With over 16% of total foreign investment in Romania, The
Netherlands occupies the first place in the top of foreign
investors in Romania. More than 2,100 companies activating
on the Romanian market have Dutch capital, high investment
being made by Unilever (approximately USD 108 million),
ING (ING Bank, ING Nederlanden, and ING Securities),
ABN AMRO Bank, and Frans Maas.

Friesland Romania, subsidiary of the Dutch food producer

Friesland Coberco, important player on the Romanian market
of dairy products, entered the Romanian market in 2001,
when it took over the operations held by Nutricia Dairy and
Drinks, which withdrew from the dairy business in Central and
Eastern Europe. The company is presently competing with
another Dutch company present on the Romanian market:
Campina Romania, subsidiary of the Dutch Group Campina,
a top dairy producer in the EU.
Austrian investment in Romania
Since 1990, Austria has constantly been among Romanias
most important trade partners. Bilateral trade has steadily
Compared to 1989, in 2005, Romanian - Austrian trade
exchanges increased by almost eight times - export by nearly
four times, import by almost twenty-five times.
Currently, Austria ranks second within the classification of
foreign investors in Romania, the subscribed equity capital
amounting to EUR 1.9 billion., with over 3,300 companies
having Austrian capital, and over one hundred thousand
employees in joint ventures.
An important share within the Romanian - Austrian business
relations is held by industrial and technical cooperation in
various fields, such as: machine construction, electrotechnical, metallurgy, command, measurement and control
equipment production, construction materials, food industry,
etc. The cooperation with the Austrian companies in the fields
above - mentioned was an important factor both in relation to
the restructuring process conducted in the main economic
sectors, and for speeding up Romanias EU integration
The leading Austrian investors in Romania are, apart from the
new entrant Erste Bank: OMV, Raiffeisen, Schweighofer
(wood processing), Strabag (construction), Porsche
Romania, Brau Union, Bramac Baumit and Wienerberger
(building materials).
German investment in Romania
Germany is one of the most important commercial partners of
Romania, occupying in April 2006 the third position after The
Netherlands and Austria, with a total value of registered
capital brought in foreign currency of EUR 1,3 billion in April
There are more than 12,000 German capital companies
registered and operating in Romania. The majority of German
investments are in small businesses. More than 90% of these
investments amount to less than EUR 40,000.
French investment in Romania
Over 3,000 French capital companies are registered with the
Romanian Trade Registry, France occupying currently the
fourth position in top of foreign investors in Romania. The
major French investors are Orange (EUR 700 million),
Socit Gnrale (EUR 350 million), Lafarge Romcim (EUR
320 million), Renault-Dacia (EUR 308 million), Vivendi
Environment (EUR 89.5 million), Carrefour (EUR 80 million)
and Alcatel (EUR 40.4 million). French investors were mainly
interested in companies being privatized, greenfield
investments being less preferred. One exception is Alcatel
that invested in Romania starting with 1991 and later France
Telecom, invested in Orange Romania, company which is
now contributing with 2% to the total annual turnover of the
Romanian Business Digest 2006

Larive Romania
Table 2: Largest foreign equity investors as of end of 2005
No. Investor
Foreign investor
1 Petrom SA
OMV Aktiengesellshaft
2 Automobile Dacia SA
3 Mittal Steel Gala]i SA
Mittal Steel Holding
4 Forte Business Services SRL
Siemens Business Services GMBH
5 A&D Pharma Holdings SA
Sograno B.V.
6 Rompetrol Rafinare SA
The Rompetrol Group N.V.
7 Telemobil SA
8 Cosmote Romanian Mobile
Cosmote Mobile
Telecommunications SA
Telecommunications SA
9 Mobifon SA
Mobifon Holdings B.V.
10 Hiproma SA
Bearbull SAS

Country of origin
Netherlands Antilles
Virgin British Islands
British Virgin Islands

Oil Processing
Steel production
Oil Processing



Source: Romanian Agency for Foreign Investment

Italian investment in Romania

Italy is presently one of the most important commercial
partners of Romania ranking fifth in the top of foreign
investors in Romania, with more than 15,000 Italian capital
companies registered with the Romanian Trade Registry. The
main Italian investors are Italstrade Spa, Unicredito Italiano
Spa (USD 54 million), Radicifibres (USD 17 million),
Butangas (USD 16 million).
US investment in Romania
American investors became key players within a series of
strategic Romanian industries such as telecommunication,
infrastructure, construction of large machines, finance, and
agriculture. There are more than 4,000 companies with US
participation registered at the end of 2005. In total, the
American investment in Romania exceeds USD 800 million,
the main investors being Qualcomm, Philip Morris, Solectron,
Timken, Colgate-Palmolive Inc., Coca-Cola, McDonalds
System of Romania Inc., Citibank Overseas, Trinity Industries
Inc, Procter & Gamble Manufacturing Company, Procter &
Gamble Eastern Europe Inc., Kraft Foods International Inc.,
American Life Insurance Company.
After fifteen years of transition, however, the results of the
gradual reform and restructuring are beginning to show
results. The services and the distribution, overlooked in the
communist regime, have grown steadily, outshining the
industry. The distribution of foreign investments stock per
economic sectors reflects the development and the
attractiveness of the industries for foreign investors,
dependent also on the privatization strategy of the
government. For the period 1991-April 2006 the breakdown
of foreign investment per sectors can be presented as
Distribution per industries of share capital stock subscribed
in foreign companies (as of 31 of April 2006)






Source: National Trade Registry Office


The majority of FDI was heavily concentrated in Bucharest

with over half of the registered equity contributions, while the
smallest inflow of FDI was registered in the region of Moldova
(Eastern Romania).
Among the factors that are deemed to support higher FDI in
the future the following are the most important:

Romania is a politically and socially stable country, firmly

engaged towards EU accession, expected in 2007;

Romania has already gained full membership of NATO;

Pro-reformist government, determined to continue

privatization, restructuring, and administration reform;

Romania represents the second largest market in the

CEE region;

The privatization program still includes some very

interesting companies;

The crucial geographical positioning of the country, a

gateway between East and West of Europe;

The commitment of investment funds present in the

country to develop their business and the association of
the government with international financial institutions,
such as IMF, EBRD, World Bank, and the EU

The high qualification of labor force and its low costs,

below the levels of other countries in the CEE region;

Existence of important natural resources and proximity to

energy suppliers;

As the market is growing, there are increasing business

opportunities, while the entry barriers remain low.

Most of the investors present in CE countries were initially

attracted by the low labor and production costs, and by fiscal
incentives. As the investment increased, however, so did the
living standards, getting closer to EU standards. After these
countries joined EU at the beginning of May 2004, the fiscal
incentives became no longer available for the investors.
Thus, this initial low cost advantage is becoming less and
less decisive.
Romania is ready to accommodate a higher inflow of FDI in
sectors such as agriculture, construction materials,
automotive industry, oil and gas, petrochemical, energy,
metallurgy, telecommunications, transportation, air transport,
railways, shipping and shipbuilding, food industry, retail,
tourism, IT, financial sector, and distribution. Among these,
the most appealing for foreign investors are automotive,

Larive Romania
financial services, software, electronics,
pharmaceutical, and chemical industries.


longer keep pace with the demand and this is covered by

Retail industry

Short presentations of some

Romanian industries
Approximately 62% of Romanias territory is arable, while
forests cover an additional 28%. Following the land
privatization, currently some 90% of all agricultural land is in
private hands. However, this reform has created a large
number of small farms, with an average surface of
2 hectares, where productivity stays at low levels. The
agriculture sector is now one of the top priority sectors of the
Government that started implementation of long-term reforms
in this sector. The state owned farms (accounting for about
1.5 million hectares) are still not fully privatized. With
adequate financing and modern techniques, Romania can
provide ideal conditions for fruit growing, cereal production,
sunflower, viticulture, and animal breeding (cattle, pigs,
poultry and sheep).
A significant support for the agricultural sector is offered by
the EU through the SAPARD program, which finances private
and community projects in rural areas. The program typically
covers 50% of the project value through a non-reimbursable
contribution, for project values up to EUR 4 million, while the
applicant must finance the remaining amount. The budget
available for Romania, second largest after Poland, amounts
to EUR 150 million for a period of 7 years.
Food industry
This sector was among the first to be approached by foreign
investors, mainly because of the size of the market, the
second largest in the region, after Poland. Important
international players already present in this industry include
Coca-Cola, Pepsi Co., Danone, Unilever, McDonalds, and
Kraft Jacobs Suchard. Local players such as Pan Group,
Dobrogea, Pambac, and European Drinks are also becoming
Romania is the second largest market in east-central Europe
after Poland, with a population of 21.7 million. Romania has
one of the fastest growing economies in Europe: GDP
expanded by an estimated 4.1% in 2005 compared with 8.3%
in 2004. The forecast shows a growth around 5 % for the
following period. This growth allowed the population higher
incomes and therefore the retail trade increased significantly
over the last period.
According to MEMRB a market research company the
Fast Moving Consumer Goods (FMCG) market in 2005 grew
with 12.10% by volume and 29.40% by value. On the food
market the growth was 20.20% by volume and 35.40% by
The modern retail format increased over time, currently
holding about 29% at the national level. All the forecasts
shows that the modern format will continue to expand, while
the other retail formats will continue to decrease. Due to
these facts all companies involved in modern retail
announced large investments in expanding the network and
new companies are considering entering the Romanian
market. Most of these retailers sell domestic products.
However, due to the significant consumer demand, the
domestic supply for certain food product categories can no

The development of the producers is also favored by the

change in consumer behavior, following the same patterns
recorded in the CE countries. Day-to-day shopping in the
corner small shops is being outpaced by weekend shopping
in large supermarkets, cash and carry outlets, malls, and
commercial centers. The total volume of the retail market is
expected to increase in 2005 by 5 to 7%. Existing retail
players Metro, Cora and Carrefour have consolidated their
positions by opening new stores, while other major retailers
are preparing their entry on the market. The German group
Tengelmann entered in Romania in 2005, and plans to invest
EUR 200 million into a national discount shop network under
the name Plus, which will consist of 120 discounter
supermarkets in all important cities in Romania. It is foreseen
that in 5 years time, 35-50% of total distribution will be made
via large retail chains. For 2005 the total investment made in
retail is estimated EUR 1.25 billion.
The supermarket landscape will also further improve next
year with the arrival of other stores. As the existing players in
the retail sector showed excellent results, while the market
seemed not to lose pace, other retail giants showed interest
in Romania, Tesco and Wal-Mart being among them.
Today, the most important players on the market are Metro
(with 23 stores opened), Billa (20 stores), Delhaize (Cora - 2
stores, Mega Image - 18 stores), REWE (Selgros - 10 stores
opened, XXL - 5 stores, Billa - 20 stores, Penny Market 16
stores), Profi (24 stores), Carrefour (7 hypermarkets), La
Fourmi (11 supermarkets), Artima (16 stores), Kaufland (9
Louis Delhaize group intends to open in Romania 14 Cora
hypermarkets by 2010 in cities with over 300,000 inhabitants.
Its product range counts about 100,000 items, of which about
20% represent imported products.
During 2005, Billa has opened another two stores, bringing
the total to 20, with 100 stores as its long-term target. At the
end of 2005 the network had 1,613 employees. Billa, part of
Germanys Rewe trade group, was the first major
international supermarket player to enter the Romanian
market, in February 1999. Subsequently, the German group
brought to Romania its cash&carry stores, Selgros, as well as
its discount stores (XXL Mega Discount and Penny Market).
XXL Megadiscount owns presently five units, each operated
after an initial investment of EUR 4 million. Penny Market
network includes 16 stores, in smaller cities, opened after an
initial investment for each store of EUR 1,5 million.
Selgros was the second player in Romanian trade sector in
terms of turnover at the end of 2005. The company operating
the Selgros Cash & Carry store network last year derived
turnover worth EUR 457 million.
The Delhaize Belgian Group in 2000 acquired the Mega
Image network, which currently owns 17 stores in Bucharest
and the rest in the country. Mega Image had been set up in
the mid 90s by Greek investors.
In 2005, Polands Polish Enterprise Fund V paid EUR 17
million to acquire the Artima supermarket network, developed
by a Romanian entrepreneur. La Fourmi, a network of
supermarkets developed in Bucharest by Lebanese investors
was involved in a buyout deal in the second half of 2005. An
investment fund managed by the Global Finance Greek
Romanian Business Digest 2006

Larive Romania
company purchased 80% in La Fourmi, with the value of the
deal being put at several million euros.
Universall, the supermarket network owned by a Romanian
businessman, plans to include an investment fund on the list
of its shareholders. The company at present operates seven
stores in Bucharest and the rest of the country.
The rapid expansion of total retail sales is based on the
following factors:

continuous increase in number of outlets and consumers

tendency towards modern retail stores

growing consumer purchasing power

market demand growth for fast moving consumer goods

increasing access to credit for durable goods such as

refrigerators, TV sets, cars, which released part of the
budget to be spent on food items.

Retail market structure, Romania, 2000-2005

Retail format
Cash & Carrys
Small stores
Open markets
Other formats


Source: GfK Romania

French company has benefited from incentives provided by

the government, such as a five-year exemption from profit
tax, customs duties and VAT on imported inputs and
technology, and from VAT on capital goods sourced locally.
In 2000, Renault started the reorganization and
modernization of Dacias management and production
facilities. Dacia already proved a successful bet, after
launching of the Logan model (the EUR 5,000 car) by the
middle of 2004. In 2005, Logan represented 6% of total
turnover of the Renault group, with a total number of 163,000
The development of the automotive industry has created also
a positive environment for investment in car parts
manufacturing by large international players such as the
Belgian chemical giant Solvay, the Swedish Autoliv. The
German giant Continental has developed a state-of-the-art
tire production facility, in the West of Romania, with an initial
investment of USD 50 million. Johnson Controls Romania, a
subsidiary of the US company, Johnson Controls, will
manufacture chairs and automobile covers at a 2.7 hectare
facility that costs EUR 16 million. Other companies in the
automotive parts are to open production facilities in Central
and Eastern Europe. An example of such company is the
German producer Ina Schaeffler that started to build a factory
in Bra[ov. The total investment is estimated to reach EUR
180 million and will be totally finished in 2007.
Romania is well positioned to attract further FDI in this
industry thanks to its combination of skilled and cheap labor.
Oil and gas

In Bucharest, the situation is different than at the national

level, as the retail sector is more advanced with consumers
earning higher incomes. Bucharest is the largest retail market
in Romania, 45% of the Romanias retail being made in
Construction sector
The local construction market is expected to reach EUR 10
billion in 2010 with a significant increase in the construction
market driven by the increase in the construction materials
market as well. The value of the construction works
amounted in 2005 to EUR 7,31 billion.
Romania requires significant progress in infrastructure,
whereby funds from the international financial institutions
such as the European Bank of Reconstruction and
Development (EBRD), are expected to accelerate the
process, ahead of its accession into the EU in 2007.
The cement consumption per capita remains low in Romania,
compared to EU levels. The cement consumption is about
230 kg/capita, as compared to 1,124 kg/capita in Spain,
1,019 kg/capita in Greece or 580 kg/capita in Slovenia.
Many international contracting groups have a presence in the
country: Bouygues (France), Italstrade (Italy), Strabag
(Austria), Typsa (Spain). The building materials sector is
represented by the Romanian subsidiaries of Lafarge
(France), the Swiss Holcim (Holcim sees for 2006 a 14% y/y
growth in its turnover) and the German Heidelberg Cement.
The Romanian construction materials market is expected to
grow y-o-y by at least 5%, in average, during 2005-2008.
Automotive industry
The most important development in the Romanian
automotive industry was the sale of a majority share of the
biggest Romanian car maker, Dacia, to Renault, in 1999. The

Romania has large oil and gas reserves, which have attracted
the interest of foreign investors, and produces a wide range
of oil products and petrochemicals. With World Bank and
EBRD support, Romania is implementing a 20-year program
aimed to revitalize the oil and gas industry via the introduction
of new equipment and new production methods. Companies
already active in the country include Shell (UK-Netherlands),
Enterprise Oil (UK), Paladin Resources (UK), Elf Aquitaine
(France) and OMV (Austria), which has become the main
player in the region after acquiring the national oil company
Petrom. Romania has also a good tradition in manufacturing
oil-drilling equipment. The highly skilled labor force in the
industry, proximity to the Caspian oil and gas route, and
traditional relations with the former Soviet and Arab countries
may sustain further growth of this sector.
In February 2005, the Romanian government decided to
invest EUR 800 million in the Nabucco project to built a 2,841
km gas pipeline linking Turkey with Austria. Around 30% of
the funds will come from the state budget, while the rest
consists of state-guaranteed loans from international banks.
The government hopes to reduce Romanias dependence on
Russian gas imports by diversifying supply possibilities. The
Nabucco project is a joint venture between Romanian stateowned gas company Transgaz, Hungarys Mol, Turkeys
Botas, Austrias OMV and Bulgarias Bulgargaz.
Romania has a diversified petrochemical sector, with
processing capacities exceeding the volume of locally
extracted oil. The sectors reform started in 1997, by the
establishment of the national Oil Company Petrom. Petrom,
now privatised with Austrian OMV, is a vertically integrated
company, incorporating an oil producer, three refineries and
a distribution arm, the largest on the market. Petrom is
competing with Rompetrol, OMV, Mol, Agip and other private

Larive Romania
retailers. In 1998, LukOil Europe acquired 51% of the Petrotel
Refinery (the third largest in Romania).
Many of the foreign companies in the chemical industry, such
as Akzo Nobel, BASF, Huntsman, ICI, and Astra Zeneca, are
also considering opening production facilities in Central and
Eastern Europe, targeting countries with qualified labor force
and available raw materials.
The diversity of the production facilities and the highly
qualified workforce in the industry, create premises for an
increase in foreign investment in this sector.
The reform of the monopolistic utility suppliers was quite late
in Romania. RENEL, the former monopolistic vertically
integrated energy supplier was unbundled in two steps in
1998 and 2000, and divided into five companies: three in
power generation, one distribution company and one
transmission company.
The Romanian Government has made significant
investments in the CANDU nuclear power plant in
Cernavod`, where the first unit was put into operation in
1996. Private investment is currently at work for the
completion of Unit 2 at Cernavod`. Significant investment
opportunities could be the completion of Units 3 and 4 at
Cernavod`, which are currently under conservation. In the
area of fossil fuel-based generation, some of the most
efficient units could be privatized in the next 2-3 years.
The government started in 2003 the privatization of two
regional electricity distribution companies and the
privatization contracts were signed in July 2004 with Italian
ENEL. Privatization of gas distribution was also
accomplished in 2004 with Gas de France and Ruhrgas. In
terms of sector policy, the key targets for the near future are
the progressive opening of the market to competition (PSAL II
includes clauses for liberalization of the power distribution),
removal of state subsidies and to attract foreign investments.
The Romanian steel industry is diversified, and largely
oversized. The sector underwent heavy restructuring, now
the main units being in private hands. The most important
company in the steel production is Sidex Gala]i, the largest
steel plate producer in Eastern Europe. Sidex was
successfully sold in 2001 to UK-Indian joint venture LNM
Ispat, creating stimulating conditions for privatization of other
companies in the sector. The privatization of Sidex S.A.
Gala]i, representing 4% of Romanias industrial production, is
considered to be crucial for the economic reform in Romania.
As the largest heavy industry players are moving their
operations in countries with cheaper labor force and lower
energy prices, Romanian metallurgic sector is offering
interesting investment opportunities.
Textile and clothing industry
The clothing industry has been a model for successful
privatization, currently over 98% of the sector (over 8,500
companies) being in private hands. The foreign investors
have been attracted to invest in Romanian sectors such as
textiles, ready-made clothes, leather processing and
footwear because of the Yugoslavian crisis, and because
they benefited from low entry costs and qualified, cheap labor
force. Almost all the investments were structured as subprocessing, benefiting from an advantageous customs
inward-processing regime.

The direct investment made in the sector made possible a

boost of the exports, so that during 2005 (first 11 months)
textile and clothing industry represented 19% in total
Romanian FOB exports. Romania became, starting 2000, the
largest supplier of textiles for EU among candidate countries.
However, rising labor cost may drive out of the sector
significant capacities during the next 3-5 years and push
companies in the sector towards a more upscale business
It is possible that half the companies manufacturing clothing
may get wiped off after accession of Romania to the EU,
officials from the Light Industry Unions Federation (FEPAIUS)
declare. Major cause for this move is the depreciation of
EUR, along with expensive utilities, illegal work and illegal
competition. The FEPAIUS official said that the government
will have to rein in expenses incurred upon employers and
employees and search other financial avenues to support
clothing industry.
Small and Medium Companies (SMEs) will suffer to a greater
extent the EU accession shock and will have to put in more
efforts to stand its ground after 2007.
Currently, the status of the fixed-line phone network is not
adequate. In order to improve fixed-line infrastructure, the
government has attracted funds worth of USD 7-8 billion from
the EBRD and the World Bank, in a program spanning over
15 years, including provisions for the installation of 500,000
new phone lines and the introduction of digital systems. The
new digital switching devices are mainly supplied by joint
ventures made by local companies with world leaders of the
sector Alcatel, and Siemens. Between 1997 and 2003 the
state sold in two stages a 54% stake with majority voting
rights in RomTelecom, the national fixed-line telephony
supplier, to the Greek telecommunications firm OTE. The
residual participation of the State of 45% will be sold in 2006,
through an IPO on the London Stock Exchange.
On the 1st of January 2003, the fixed-line telephony market
was liberalized and opened to private competition. The
Romanian market became one of the most permissive in
Europe, open to almost all technologies: CATV, NMT450,
GSM LEMS, CDMA, and DECT. Moreover, the Romanian
liberalized market benefited from no entry barriers (no charge
for license, numbering, etc.).
The wireless telephony recorded an incredible boom, by the
end of 2005, about 45% of Romanians having a mobile
phone. The wireless market is disputed by four private
companies: Mobifon (a consortium controlled by Vodafone),
Orange Romania, Telemobil (controlled by US Inquam), and
Cosmote (the wireless division of OTE).
The Romanian telecom industry has
characteristics, declare industry officials:



Good opportunities for growth, particularly in fixed and

mobile access, and traffic levels.

Opportunities for new services based on broadband

Internet access both the access itself, and web-based
content services of various kinds.

Potentially, some international service opportunities if

Romania can establish itself as a regional hub for Internet
traffic and service provision.

Overall, telecom sector revenues are expected to grow by

a factor of 4-5 over the coming decade.
Romanian Business Digest 2006

Larive Romania
IT is growing rapidly in Romania, and it seems to be one of
the most interesting sectors for direct investment. Romania
can offer highly trained professionals, both in engineering and
software, requiring lower wages than in developed countries,
and a dynamic private sector of IT companies with
experience in the sector. The most important investment in
the sector is the 5-year hardware manufacture project started
by Solectron in Timi[oara, which will eventually employ 6,500
people. The hardware and software market is expected to
increase with 12-15% per year, which will create additional
investment opportunities. One important source of growth for
the sector will be represented by the IT reforms for the
administration sectors such as national public administration,
the digital mapping of countrys territory, health insurance,
ministry of finance and local fiscal administrations etc. The IT
sector will be also encouraged by the announced fiscal
incentives, although there is still a debate over the way these
will be granted.

Investment funds
The foreign investment funds are among the most active
players acting on the Romanian market. Their presence on
the market was simultaneous with the consolidation of the
private sector. The targeted companies were mainly those
with an important growth potential, a steady market and a
competitive management. Nowadays, after a certain
stabilization of the market, the funds are carefully selecting
the most interesting opportunities of development and the
criteria used are dynamism, flexibility, market-orientation and
private ownership. Most of the senior managers of those
investment funds are confident about the future development
of the market.
The activity of the investment funds is regulated by the
Regulation 5 issued by the National Commission for
Securities in April 1998. The investment fund is defined as a
venture capital association set-up as a closed investment
fund or investment company, which manages the funds of
private or corporate persons.
Regional funds are becoming more active compared with
country funds, particularly with respect to large deals.
Nevertheless, competition is not very intense among the
funds. The banks are not a threat for venture capital funds in
the real economy, as they are not yet prepared to provide
long-term development financing, due to the unstable
economic climate, and the high returns obtained on the
money markets. This leads to relatively low entry valuations
and may ensure significant returns. As the capital market is
still not enough developed, the most probable exit route to be
used by the funds active in Romania is via sales towards
strategic investors.
Some of the main investment funds acting on the Romanian
market are presented next. The funds are listed in
alphabetical order, and the information is supplied by fund
Advent Central and Eastern Europe III
Advent Central and Eastern Europe III which manages
EUR 330 million was established in 2005, after Advent
Central and Eastern Europe II and Advent Private Equity
Fund already managed USD 220 million and USD 78 million
respectively in the region. Investors in the fund are EBRD,
IFC, Teachers Private Capital, Alpinvest, other US and

European pension funds and institutions. The management

company is Advent International Corporation. Advents
current Romanian investment is Dufa Deutek, one of the
largest Romanian decorative paints producers acquired in
2005. Three portfolio companies were exited in 2004, 2005
and 2006: shares in mobile operator Mobifon (trading under
the brand name Connex), acquired by TIW, a Canadian
cellular operator with operations in Romania and the Czech
Republic, Euromedia, Romanias largest outdoor advertising
group, acquired by local media group, Plasty Prod and
Terapia, a leading pharmaceuticals business acquired
in 2003.
Brewery Holdings, one of Advents first investments in the
country, was successfully exited in 2000.
Advents primary investment focus is on established
companies that generate significant revenue and earnings,
with growth opportunities and good management. The typical
investment size is EUR 15-50 million, in majority or minority
positions. Advent seeks representation on the companys
board of directors as a way of actively supporting
management with operational and strategic issues and will
exit in 3-5 years, usually through sale to a strategic investor
or IPO. Most industries exhibiting strong growth and exit
potential are eligible for investments (in particular healthcare,
media, business and financial services, FMCG, retail,
construction materials, telecoms) but Advent does not invest
in start-ups, real estate, tobacco, spirits and weaponry.
Oresa Ventures Romania SRL
It is a Swedish investment company that has been present in
Romania since 1997 with a current net asset value of over
EUR 100 in Romania: Fabryo Corporation SRL, Flamingo
International SA, La Fntna SRL. Exited investments:
Medicover, Motoractive, Brewery Holdings Ltd., Churchill
Media SRL, Flanco International SRL and Credisson
International. Business orientation: consumer goods,
healthcare, financial services. Type of investment: venture
Romanian American Enterprise Fund (RAEF)
Romanian-American Enterprise Fund (RAEF) is a private
corporation established in 1995. RAEF have led and
participated in equity and quasi-equity transactions
amounting to over USD 150 million.
RAEF s activities are: private equity and venture capital,
energy efficiency, investment banking/ advisory services,
asset management; RAEF offers support services to
companies interested in investing in Romania .
RAEF investments include: commercial banking, leasing,
consumer finance, mortgage, micro-lending, retail, manufacturing, services etc.
SEAF Trans-Balkan Romania Fund
The Fund entered the Romanian market in March 2001, by
taking over the former K + Venture Partners Fund. The
management of this USD 8 million Fund is ensured by Small
Enterprise Assistance Fund LLC (SEAF), a global fund
management company based in US, managing 17 funds
covering 23 countries and specialized in investments in Small
& Medium Sized Enterprises (SME). The major investors are
International Finance Corporation, Black Sea Trade and
Development Bank, FinnFund, Norfund, Governments of US
and Switzerland. The average size of the investments made

Larive Romania
by the Fund is USD 600,000, but the amount may vary
between USD 200,000 and USD 1,600,000. The Fund is
interested in companies with growth potential irrespective of
the sector, in which the minority position (25-49%) is
preferred. Type of investments: venture capital / private
equity combined with quasi-equity (convertible loans, high
yield loans, etc.). Usual investment period is three to five
years. Standard exit route is via selling the majority share
package alongside with the initial owners to strategic or
financial investors. Initial shareholders have preemption
rights. Alternatively, in certain cases, non-convertible, high
yield instruments may be preferred or buy-back scheme s
may be agreed with existing owners. TBRF involves itself
only in the strategic and major operational decisions through
its presence in the Board of Directors and the Shareholders
General Assembly, leaving current management to the owner
manager. The fund has invested in the software industry
(TotalSoft), retail (ARTIMA, RomPhoto and GSM),
DISTRIBUTION (TELEZIMEX, ILS Distribution), real-estate
development (Casa Real Estate and Casa Real Estate
Investment), energy services (ELCOMEX), car parts
manufacturing (Interpart Automotive) and wine making.

exceeding USD 1.1 billion. In 2004 Enterprise Investors

closed Polish Enterprise Fund V, its largest fund, at EUR 300
million and in 2006 will close its sixth fund of around EUR 600
million, destined to be invested in Romania and other
countries of Central and Eastern Europe.

In 2005, SEAF TBRF successfully exited two of its investments, Artima, a regional supermarket chain (58% Annual
IRR, 2.8 times money) and TotalSoft (62% Annual IRR over
an investment period of 4 years).

South Eastern Europe Fund (SEEF). SEEF has had a

successful first closing at EUR 197 million in 2006. The Fund
will target companies with good market standing but
unutilized possibilities; supporting professional management
teams to run them and realize their value potential.

Enterprise Investors

The Euromerchant Balkan Fund was established in 1994,

having USD 12 million available for Romania and was fully
invested during 1996-1998 in companies like Delta Romania,
Axxon Romania, Moara Loulis, Neoset, Romcolor and

Active since 1990, Enterprise Investors has been managing

the largest group of private equity funds in Poland and CEE
region, with capital provided by major private European and
US insurance companies, pension funds, banks and other
financial institutions. Total capital committed to the five funds
exceeds USD 1.1 billion.
Our achievements in Poland and Central Europe and recently
in Romania are evidence that we are capable of meeting the
challenge of fast-growing economies.
The fund investments are ranging from EUR 5 million up to
EUR 45 million, focusing in particular on such sectors as:
manufacturing, services, consumer goods, financial services,
retail, IT & telecoms. EIs investment horizon is 3 to 7 years
and concentrates on increasing the long-term value of each
Funds under management
EI currently manages five private equity funds: Polish
Enterprise Fund V, Polish Enterprise Fund IV, the Polish
Enterprise Fund, Polish Private Equity Funds I & II and the
Polish-American Enterprise Fund, with a total capital

EI in Romania
In October 2004, Enterprise Investors opened its
representative office in Romania, because of the large
market, rapid development and major investment
opportunities in this country. As part of EIs commitment to
Romania, three Romanian companies benefited of equity of
USD 50 million so far: Orange Romania, Artima and SIVECO
Romania. In March 2005, PEF V, managed by EI, had
acquired 100% of Artima, the largest independent retail chain
in Romania, in a EUR 17 million transaction. In April 2005,
Polish Enterprise Fund si Polish Enterprise Fund IV sold their
stake in Orange Romania to France Telecom, yielding a 4x
multiple of the initial capital. In July 2005, PEF V had acquired
22.5% of SIVECO Romania, the largest software provider in
Romania in a buyout transaction, collaborating with Intel
Capital, the investment division of Intel Corporation.

The Black Sea Fund, established in August 1998,

successfully invested more than USD 100 million in Romania
in companies like Delta Romania, Germanos, Chipita
Romania, Sicomed, Orange, TotalSoft and La Fourmi . The
main investment criteria are: minimum USD 5 million invested
in a project that would lead to a strong minority or majority
position in a company with a significant position on the
market and excellent quality of management.
The Global Growth Fund, was capitalized in 2003 with
EUR 20 million available for investment in small and mediumsize enterprises in Romania and Bulgaria with significant
potential for growth and led by strong management teams.
The main investment criteria are: up to EUR 1 million per
company, active minority or majority position, significant
presence on the market and quality management.
Note: The last four mentioned funds are currently managed by Global Finance,
a leading regional private equity management firm and are focused on Eastern

Larive Romania IBD SRL

Strada Clucerului Nr. 82 B1, Sector 1, Bucure[ti
Tel.: +40 21 223 0014, 223 0015
Fax: +40 21 223 0019
E-mail: info@larive.ro

Romanian Business Digest 2006

M&A Market in Romania

Past Evolutions
and Future Trends
by PricewaterhouseCoopers Management Consultants

Privatizations Future trends

Fueled by the economic development, close EU accession and the overall countrys
attractiveness, the Romanian Mergers & Acquisitions market is experiencing an all times high,
both in terms of value and in the number of deals. The best news is that the growth is likely to
continue, driven by the GDP increase and the future EU membership.
The actual figures speak for themselves, with the M&A market value reaching a staggering USD
5.8 bn in 2005 (excluding privatizations), up 313% versus USD 1.4 bn recorded in 2004, year
which recorded a 157% increase versus 2003. In terms of numbers, 117 publicly disclosed deals
were concluded in 2005 versus 42 in 2004 and 33 in 2003. Another important fact to note is the
average deal value, which increased to USD 65 mn in 2005, up from USD 41 mn in 2004 and
USD 18 mn in 2003.
Total transactions' value
(excluding privatizations)

Number of disclosed deals






Value USD bn




Following the impressive results recorded in 2005, Romania ranked fourth in terms of value in
the CEE/CIS region, behind Russia, Poland and The Czech Republic, after lagging on the sixth
place in 2004 and 2003.
Foreign investors involvement in the M&A activity in Romania was similar to 2004 level.
Foreigners were responsible for 72% of all deals as compared to the CEE/CIS average of 40%
(in terms of volume), indicating the choice of Romanian companies for strategic foreign partners.
Among top investors, United Kingdom holds the first place in terms of total value of deals with
USD 2,582.5 mn invested, the major player being Vodafone International Holdings
(USD 2,528 mn). France ranks second with USD 625.6 mn (main investor being France
Telecom USD 523 mn) and the United States is third with USD 457.8 mn (main investor:
Liberty Global USD 407 mn). In terms of number of deals, Austrian investors were the most
active with 11 deals, followed by Greek (ten), American (nine) and French (eight). The most
dynamic sectors were manufacturing (17 deals), financial services and services (16 deals), with
manufacturing maintaining its leader position from the previous two years (2003 and 2004). The
telecommunication sector was replaced from the second position held in 2004 by the financial
services sector in 2005. The main driver of financial transactions in 2005 was the insurance
sector which had been growing at a fast pace following the changes in legislation from 2000.
Among the most notable M&A transactions in the financial sector were the merger between HVB
Bank and }iriac Bank and the take over of Omniasig (70.7%) by Wiener Staedtische Allgemeine
Versicherung AG. The telecommunication sector (ten deals) leads in terms of the total value of
deals holding 62% of the total Romanian market (Vodafone-United Kingdom acquired

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Mobifon-Connex for an estimated price of USD 2.5 bn the
second largest transaction in the region).
More recently, in 2006, the M&A market witnessed increasing
activity in the pharmaceutical segment, with two major drugs
producers, Terapia and Sindan, acquired by the Indian based
company Ranbaxy and Iceland based company Actavis
respectively. The two transactions exceeded EUR 450 mn in
total. Other transactions worth mentioning include the
acquisitions of Motoractive Leasing, Ralfi & Domenia Credit
acquired by GE Finance, Mindbank acquired by ATE Bank,
Kvaerner IMGB acquired by Doosan Heavy Industries,
Charles de Gaulle Plaza acquired by Accesion Fund,
Construdava acquired by European Property Convergence
Company, the merger between Flamingo and Flanco, etc.
Number of deals by sector in 2005
1 11


media (9)

telecom (10)
IT (15)
other (11)

manufacturing (17)
services (16)


transportation (1)
financial services (16)


food and beverages (15)

retail and wholesale (5)

pharmaceuticals and chemicals (2)

Share of capital invested by country in 2005



5% 2%

Austria (5%)
Germany (6%)


India (1%)
Romania (5%)




France (12%)

Luxembourg (2%)

United Kingdom (50%)

United States (9%)

Czech Republic (2%)
Greece (4%)
Lebanon (2%)
Switzerland (1%)
Hungary (1%)
Other (3%)

2005 was the year when the total value of the publicly
disclosed transactions in the public sector reached a record
figure for Romania of USD 4.9 bn (estimated market value).
The driver behind this high amount was the privatization of
the state-owned bank the Romanian Commercial Bank.
The other important privatizations consisted of foreign capital
of USD 326 mn invested in acquiring majority ownership in
two major electricity distribution companies. Electrica Oltenia
and Electrica Moldova were sold to Ceske Energeticke
Zavody (CEZ), and E.ON AG.

The major trend in privatization for 2005 followed a similar

path to that undertaken during the past year. Several high
profile privatizations have occurred during 2004-2005:
privatization of gas distribution and the sale of four electricity
distribution companies. In 2005, the financial sector was also
active in terms of privatizations with the launching of
privatization processes for the Romanian Commercial Bank
(BCR) and the National Savings Bank (CEC), the former
being almost completed. BCR represents the largest
Romanian bank, with approximately 25 percent market share.
Its privatization is viewed as the most important privatization
deal in Romania together with the privatization of Petrom, the
Romanian national integrated oil company.
The new owner of BCR is Erste Bank which acquired a
61.88% stake for USD 4.5 bn. Among other bidders were
important foreign banks such as Millenium PCB, Deutsche
Bank, Dexia, BNP Paribas, and the National Bank of Greece.
In terms of the total value of publicly disclosed privatizations,
Romania shares the first position with Ukraine among the 10
CEE countries analyzed with USD 4.9 bn invested in 2005
followed by the Czech Republic (USD 4.3 bn) and Hungary
(USD 2.7 bn). Another notable aspect is the evolution of the
average disclosed deal size which increased from
USD 62 mn in 2004 to USD 442 mn in 2005, Romania
ranking third after Ukraine and Slovakia. This may be
explained by the shift towards fewer but larger deals, with
99% of the privatization spending coming from foreign
Compared to previous years, the manufacturing sector was
replaced by the utility sector in terms of number of
transactions occurring. On the other hand, the financial sector
total deal value ranks first followed by investments in utilities.

Future trends
A timid shift towards capital market financing has already
begun, with Transelectricas initial public offer subscribed
over 6 times. The Romanian State may take notice of such a
successful IPO and might consider increasing the pace for
the listing of gas companies Transgaz and Romgaz and fixed
telephony operator Romtelecom.
The electricity segment is likely to be the major privatization
driver for the years to come. In the electricity distribution
segment, three of Electricas subsidiaries, Electrica
Transilvania Nord, Electrica Transilvania Sud and Electrica
Muntenia Nord are expected to attract high caliber foreign
investors, following the privatization of The Crown Jewel
Electrica Muntenia Sud, where ENEL acquired a 67.5% stake
for around EUR 820 mn. As for electricity generation, the
focus is on the privatization of the three power complexes,
Turceni, Rovinari and Craiova and on the commissioning of
units 3 and 4 within Cernavod` nuclear power plant. Why
would foreign strategic investors flock to invest in this sector?
There are plenty of reasons, the most important being the
forecasted increase in demand, already high and increasing
oil prices, access to new markets and strategic expansion,
etc. Energy hungry Western Europe is also an important
incentive, considering the export opportunities.
Several other significant privatizations are awaited, among
them the Romanian National Post, National Salt
Company Salrom, drugs producer Antibiotice Ia[i, SNR
Radiocommunications Company; all companies are expected
to attract major strategic investors.

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In the private sector, the consolidation trend is likely to
continue in all industries, as the competition tightens with the
arrival of private equity funds and strategic investors. Among
the most attractive industries for investors with plenty of
attractive targets we can mention the banking & insurance,
pharmaceutical, food production, construction, goods
transportation, publishing and retail segments.
The banking sector is likely to witness several major
transactions, with the two remaining banks controlled by
Romanian capital (Banca Transilvania and Banca
Comercial` Carpatica) to be acquired by foreign strategic
groups, while another potential target in this segment remains
Libra Bank. As for insurances companies, there are still some
local players that can be acquired by strategic investors, such
as Asirom, Asiban, Asitrans, Ardaf.
These are exciting times when a large number of successful
start-ups established in the 90s or more recently and owned

by Romanian businessmen are targeted by investment funds

and strategic investors. The investment funds that already
control stakes within Romanian companies have already
started to make their exits, marking their profit as much as
tenfold. Investment funds, after restructuring the acquired
companies and turning them profitable sell them either to
strategic investors that prefer to expand through acquisitions
rather than greenfield investments or through the capital
Romania has passed the stage where it was attractive strictly
for its low labor costs. Its competitive edges now include
trained and skilled personnel, a large and fast growing
market, a bridgehead for further expansion, etc.
Overall, the M&A market is likely to continue the fantastic
growth recorded in the recent years, following a consolidation
trend in all industries.

PricewaterhouseCoopers Management Consultants

Strada Costache Negri Nr 1-5, Opera Center
Sector 5, Bucure[ti
Tel.: +40 21 202 8640
Fax: +40 21 202 8650
Emilian Radu, Partner
Radu Stoicoviciu, Director
Dan F`rc`[anu, Senior Manager

Romanian Business Digest 2006

Legal Considerations
for Foreign Investors
by PI Partners
Denomination of currency Choosing a form of enterprise
Mergers and acquisitions Property acquisitions
Investment incentives Tax litigation
Foreign investors coming to Romania would be well advised, before starting their business, to
inform themselves about every available option to set up and carry out their activities in a
profitable manner that corresponds to their business profile and investment plans. This overview
provides basic information about the legal requirements for a foreign investor in Romania.

Denomination of currency
Foreign investors should consider the currency re-denomination process that has been carried
out in Romania. According to Law No. 348/2004, as subsequently amended, the Romanian Lei
(ROL) has been re-denominated beginning 1 July 2005, so that ROL 10,000 represents RON 1
(RON being the new currency). The old Romanian currency, ROL, can be used along with the
new currency till 31 December 2006.

Choosing a form of enterprise

For a foreign investor coming to Romania to set up business, choosing a form of enterprise, as
provided by Romanian legislation, represents the first step of the investment. The most
frequently used forms of enterprise are:
a. Limited liability company (SRL) the shareholders liability is limited to the amount
subscribed as participation in the companys share capital. The share capital of an SRL must
be of at least RON 200 (or ROL 2 million), divided into shares with a nominal value of at least
RON 10 (ROL 100,000) each. An SRL may be formed by a minimum one shareholder and a
maximum of 50. These shareholders may include individuals and/or legal entities. A person,
either natural or legal, cannot be the sole shareholder of more than one SRL. If a person
intends to form several companies, it would be necessary for a minimum of one share to be
held by another person or entity. Moreover, an SRL cannot have, as sole shareholder,
another limited liability company that is also owned by a single shareholder.
b. Joint stock company (SA) the shareholders liability is limited to the amount subscribed
in the companys share capital. Further to the latest amendments brought by Law No.
302/2005 to Romanian Companies Law, the minimum statutory capital for a joint stock
company has been increased from RON 2,500 (or ROL 25 million) to the RON equivalent of
EUR 25,000 (calculated at the RON/EUR exchange rate of the National Bank of Romania on
the date of subscription). Companies have one year from the date Law No. 302/2005 came
into effect to raise their share capital to the legal requirement.1 Shares must be held by a
minimum of five shareholders, individuals and/or legal entities (there is no maximum limit),
and can be open to either public or private participation.
c. Representative office usually set up by foreign companies in Romania to carry out noncommercial activities such as advertising and market research on behalf of the parent
company. Representative offices cannot conduct commercial activities in Romania. In order
to register a representative office, company officials should apply to the General Department
of Commercial Policies in the Ministry of Economy and Trade and pay an annual fee of USD
1,200 for the license.
Please note that Law No. 302 of 2005 on the amendment and completion of Romanian Companies Law came into force
on 26 October 2005.


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d. Branch of foreign company does not have its own
legal personality or share capital. Being a unit of the
parent company, branch activities cannot exceed the
scope of activity of the parent company.
e. Consortium domestic legislation allows for the
conclusion of a joint venture agreement (contract de
asociere \n participa]iune). Under this agreement, parties
act together for the accomplishment of a common
business goal. This form of doing business in Romania
does not create a legal entity. Generally, one party is in
charge of the bookkeeping of the joint venture.
Limited liability companies are the most popular vehicles
among local and foreign investors for carrying out business
activities in Romania because they have fewer administrative
requirements and greater flexibility in operations than other
types of companies. They also have a low initial capital
requirement. However, the number of joint stock companies
in Romania is increasing because of their attractiveness to
investors interested in equity investing. An SA must be set up
a. the company wants to carry out certain types of activities
(e.g. insurance, banking activities, etc.);
b. the entrepreneurs foresee any advantage or necessity
with respect to the acquisition of its own shares by the
company (for instance, offering them to the managers);
c. the entrepreneurs plan to list the company on a stock
exchange or on the OTC market;
d. the entrepreneurs contemplate financing the company
through issue of bonds or other financial instruments;
e. the entrepreneurs intend to allow receivables towards
third parties to be subscribed as participation in the
The other forms of doing business are not common among
foreign investors in Romania. However, foreign investors still
use representative offices if their activity involves only
promoting one of their group companies in Romania.
Branches are mainly used in cases where foreign investors
plan for a short presence in Romania or if the investors
decide, for capitalization (in the case of banks) or commercial
reasons, not to legally separate the Romanian entity from the
parent company.

Mergers and acquisitions

After completing the first investment stage establishing a
Romanian legal entity foreign investors may, during the
course of business, restructure their activities through
mergers and acquisitions as stipulated by Romanian law.
Law No. 31/1990 (Company Law) and methodological norms
approved under Order 1376/2004 (regarding accounting
procedure of mergers, spin-offs, dissolution, liquidation of
companies, withdrawal and exclusion of associates as well as
the fiscal regime of such operations) represent the general
legal framework for mergers and acquisitions in Romania.
Company Law regulates both merger by absorption (whereby
one or more existing companies are absorbed by another
existing company) and merger by fusion (whereby a new
company is created by integrating two or more existing
companies). The merger should be decided separately, by
each participating company voting in the General Meeting of
Shareholders. Following this, a merger plan is prepared and
registered with the Trade Registry in order to get the approval

of a delegate judge and published in the Official Gazette. The

merger is completed after registration with the Trade Registry
of the final shareholders decisions approving the merger and
of the amendments to the statutes of the merging companies
(i.e. dissolution or increase of share capital at the level of the
absorbing company).
With regard to acquisitions, Company Law regulates the
acquisition of shares in a limited liability company or in a joint
stock company. The acquisitions procedures are different as
shares in a limited liability company are not freely transferable
to third parties (a special quorum and a majority in the
General Meeting of Shareholders are required), while shares
in a joint stock company are not subject to specific restrictions
regarding their transferability to third parties, if not otherwise
provided for.
There are also some instances where companies involved in
a merger or acquisition are subject to certain competition
regulations. However, as a general rule there are no
competition issues to be considered when companies
participating in a merger and/or acquisition are part of the
same group of companies. Mergers and acquisitions
involving at least one public company must be done in
accordance with Capital Market Law No. 297/2004 and by
observing the regulations issued by the National Securities
and Exchange Commission (CNVM).

Property acquisitions
Foreign investors interested in property acquisitions should
be aware that according to Romanian legislation, foreign
entities (foreign citizens and foreign companies) can acquire
land in Romania only under the conditions of Romanias EU
accession, or subject to the conditions of the international
treaties to which Romania is a party, and based on
reciprocity, or according to the conditions set up through
Romanian laws, or through inheritance. The above legal
restrictions do not apply to buildings, which may be owned by
any individual or legal entity irrespective of nationality.
Law No. 312/2005 lays down conditions under which foreign
citizens, expatriates and foreign companies may acquire land
in Romania. Citizens of EU member states, expatriates with
domicile in Romania or in a member state and legal entities
established in accordance with the laws of a member state
may own land under the same conditions as any Romanian
citizen or legal entity from the date of Romanias accession to
the European Union.
However, citizens of EU member states not residing in
Romania, expatriates with domicile in EU but not residing in
Romania and non-resident legal entities set up in accordance
with the legislation of a EU member state and having a
secondary place of business in Romania, may acquire
ownership over land for secondary residence after five years
of Romanias accession to the EU.
Furthermore, the above-mentioned citizens and legal entities
may acquire agricultural and forest land after seven years of
Romanias accession to the EU.
Farmers carrying out independent activities and who are: (i)
citizens of member states or expatriates with domicile in a EU
member state who have established residence in Romania,
or (ii) expatriates domiciled in Romania may acquire
agricultural and forest land under the same conditions as any
Romanian citizen, from the date of Romanias accession to

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the EU without the possibility for such persons to change the
purpose of the land.
For foreign citizen, expatriates and legal entities from non-EU
states, ownership over land may be acquired in accordance
with the provisions of international treaties, based on

Investment incentives
Foreign and domestic investors are offered equal
opportunities to invest in Romania. In general, incentives are
intended to boost economic development of the country,
particularly the acceleration of industrialization in
disadvantaged zones, as well as the development of small
and medium enterprises (SMEs), oil and gas sectors and
micro enterprises.
However, a foreign investor should be careful when planning
business on the basis of the current incentives granted by
Romanian legislation due to the frequent amendment of laws
in this field during the recent past.
Large investments with significant impact on the
Law No. 332/2001 provides incentives for direct investment in
the equity of a Romanian company exceeding USD 1 million
(or the equivalent in ROL/RON or other convertible
currencies) and which contribute to the development and
modernization of Romanias infrastructure, creating new

Small and medium enterprises

Law No. 346/2004 provides incentives for private investors
who set up or run small and medium-sized enterprises
Domestic legislation defines an SME as a company that (i)
has an annual average number of employees below 250, and
(ii) whose net annual turnover does not exceed EUR 50
million, or whose value of the total held assets does not
exceed EUR 43 million, according to the latest approved
financial statements. It is compulsory for these enterprises to
comply as well with the independence criterion (i.e. a small
and medium enterprise is considered independent if
companies outside the SME category do not hold solely or
cumulatively more than 25% of its shares or voting rights).
The following exception is allowed:

Banking companies, insurance and reinsurance companies,

companies managing investment funds, financial investments
companies (i.e. security trading companies) and companies
that have foreign trade as sole object of activity do not qualify
as SME.
Romanian legislation provides for certain financing incentives
to SMEs such as state assistance and loans guaranteed by
the state.

The following are the incentives granted to such investments:

Under Law No. 332/2001, no customs duties are imposed on
new goods (e.g. technology and automation equipment,
installations, measuring and control devices, software
products, etc.). In order to benefit from this incentive, these
assets have to meet two requirements: (i) must have been
manufactured a maximum one year before entry into
Romania, and (ii) must not have been used before.
In addition, local authorities may grant an exemption/
reduction of the land tax for land related to such investments,
up to a maximum of three years from the beginning of the
Further, according to the Fiscal Code, large investments with
a significant impact on the economy benefit from a profits tax
deduction equal to 20% of the investments value as well as
from accelerated depreciation. However, this fiscal incentive
is limited to investments made till 31 December 2006.
There are several conditions to be met in order to benefit from
these incentives:
a. The enterprise qualifying for these incentives may not
benefit from any other tax incentives. If this is the case,
the company should decide whether other tax incentives
are more appropriate for their activity.
b. The enterprise qualifying for these incentives may not be
liquidated within 10 years from the date on which it
benefited from the incentive provisions. Otherwise the
enterprise will be subject to repayment of the tax benefit
along with retrospective penalties.
c. Investors will also be liable to pay the equivalent of
incentives as well as late penalties if the goods imported
under customs duty exemption are re-exported within two
years from the date of acquisition or entry into the country.

enterprises owned by public investment companies,

venture capital companies, institutional investors,
business angels (on condition that the total investment
amount of such investor into the same company does not
exceed EUR 1,250,000), universities and non-profit
research centers, local public administration authorities,

Micro enterprises
The Fiscal Code establishes the taxation regime for micro
enterprises. To qualify for this regime, the following
conditions should be met by Romanian legal entities by 31
December of the previous year:

has as object of activity production of goods, supply of

services and/or trade activities;

should have at least one employee but not more than


annual turnover of less than EUR 100,000; and

the share capital of the micro enterprise is owned by

natural persons or legal entities, other than the state, or
local authorities and public institutions.

Micro enterprises are required to pay 3 % tax on any income,

except certain items of revenue specifically provided (e.g.
income from stock variations, income from provisions, etc.).
The tax is paid quarterly, by the 25th of the first month
following the reporting quarter.
Companies complying with the above conditions and taxed
under the general profits tax legislation may opt for the 3%
tax regime. In such cases, companies should submit a
declaration exercising their option by 31 January. Newly setup companies may indicate their option with respect to the
applicable tax regime within the registration application
lodged with the Trade Registry.
Preferential economic zones
According to Government Emergency Ordinance
No. 24/1998 for setting up preferential economic zones in
disadvantaged areas, as further amended, these zones may
be determined by Government Decision for a period of
Romanian Business Digest 2006

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zone of a minimum USD 1 million in depreciable tangible
assets used in the processing industry. This exemption
does not apply in case more than 25% of the shareholding
changes within one year.

at least three years, but no more than 10 years.

Law No. 507/2004 abolished the provision granting the
possibility of extending the 10-year period.
Currently, there are 38 disadvantaged zones in Romania,
nearly all for a period of 10 years and located mostly in the
mining centers of the country.
Investments in preferential economic zones benefit from tax
exemption for profits on new investments, for the period
during which the preferential economic zone status exists and
only for legal entities that obtained the permanent certificate
of investor in preferential economic zones before 1 July 2003.
The incentives granted under this law are subject to the
limitations imposed by state aid regulations.
Industrial parks
Industrial parks, regulated by Government Ordinance
No. 65/2001, as further amended, are considered strictly
delimited areas where economic, research and technological
development activities are performed. An industrial park may
be set up only by a joint venture (asociere \n participa]iune)
between the public authorities, legal entities, research and
development institutions and/or other interested partners, as
applicable. The industrial park must be managed by a
Romanian company established in accordance with the
Company Law, and whose shareholders can be the abovementioned members of the partnership.
The incentives granted to industrial parks have undergone
cancellations and/or amendments during the recent past, and
more recently through the Fiscal Code.
The following incentives currently apply to the establishment
and development of an industrial park:

exemption from taxes due on conversion of agricultural

land to be used for industrial parks;

for investments in construction, maintenance and repair,

internal infrastructure and in the utilities network carried
out till 31 December 2006, one-off allowance of 20% of
the investment value granted as a reduction of the taxable
base for profits tax purposes;

buildings, constructions and land located inside industrial

parks are respectively exempt from building tax and land
other incentives which may be granted in compliance with
the law by the local administration.
Free trade zones

Law No. 84/1992, as further amended, regulates the free

trade zones regime.
Free trade zones are characterized by a specific customs
regime: the customs supervision is limited to the borders of
such areas.
Means of transport, products and other goods are admitted
into the free trade zones regardless of their country of origin
or destination. However, import of goods subject to
prohibition under domestic law or under international
agreements to which Romania is a party, is forbidden.
The following incentives are available within free trade zones:

Profits tax exemption till 31 December 2006 for taxpayers

who made investments by 1 July 2002 in the free trade


VAT exemption for operations performed within the free

trade zone.

Also, for investments in free trade zones, operators can

receive state aid amounting to 50-65% of the value of
Mineral resources
Romania is rich in natural resources, especially oil, gas, salt,
gold and silver ore and non-ferrous metals. Recent geological
and geophysical studies have shown there are many mineral
deposits (gold, silver, lead, zinc, copper, iron and
manganese) and oil reserves (both on land and offshore) with
considerable potential for exploitation.
These offer
substantial opportunities for foreign investors interested in
these sectors.
Mining Law No. 85/2003, as further amended, regulates
mining activities in Romania. Its defined scope is to ensure
maximum transparency in mining activities and fair
competition without discrimination between operators,
depending on the property type and the origin of the capital.
Subterranean and aboveground mineral resources located
within Romanian territory, within the continental shelf and in
Romanias Black Sea economic area are part of the states
public property.
Mining is carried out through a mining license granted by the
National Agency for Mineral Resources for a maximum period
of 20 years, and the right to extend it for successive five-year
periods in exchange for an annual mining royalty and surface
Each mining license is established by Government Decision,
and its provisions will remain valid throughout the license
period, except when possible legal dispositions favorable to
the license-holder might come into effect.
Foreign operators should set up a permanent subsidiary in
Romania within 90 days of obtaining the mining license to be
maintained throughout the period of operation.
Petroleum Law
Petroleum Law No. 134/1995, regulating all operations
involving oil and gas reserves within Romania, was abolished
and replaced by Law No. 238/2004.
Oil resources located on Romanian territory are exclusive
public property of the Romanian state.
The Romanian states interests in the mineral oil sector are
represented by the National Agency for Mineral Resources.
Through its representative authority, the state can grant a
Romanian or foreign legal entity the right and the obligation to
perform oil operations, based on an oil concession. The
concession period may not exceed 30 years.
The oil operations can be conducted through exploitation
licenses or exploration permits only within some perimeters,
as delimited by the NAMR. Titleholders of an oil license are
liable to pay a petroleum royalty in accordance with the
provisions of Petroleum Law No. 238/2004.
Foreign operators should create a permanent establishment
in Romania (i.e. a branch or company) within 90 days of

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obtaining the oil and gas license to be maintained throughout
the period of activity.

payment increases, penalties, or other amounts recorded and

imposed, but of any other actions of the fiscal authorities.

Unlike Law No. 134/1995, Law No. 238/2004 does not grant
any incentives to the holders of an oil license.

The appeal must be filed with the fiscal authority issuing the
respective action within 30 days from its communication to
the petitioner.

Tax litigation

The competent fiscal authority rules over the appeal by

issuing a decision. The decision has to be communicated to
the petitioner through the means specified by the Fiscal
Procedure Code.

When doing business in Romania, investors may not only

encounter investment incentives but also the disadvantages
of tax payments and tax inspections.
With a view to harmonizing legislation in the field, a Fiscal
Procedure Code (further to the Fiscal Code) was enacted in
December 2003 through Government Ordinance No.
92/2003. The Fiscal Procedure Code regulates, among other
matters, the procedures for appealing against the action of
the fiscal authorities.
Such contestations may refer to the reduction and/or
cancellation depending on the case not only of taxes,
dues, customs debts, contributions to special funds, late

The petitioner may appeal such decision in the relevant court

of law while observing all legal terms and formalities. After
this, the judgment can be appealed at the superior law court.
Another important aspect related to such a dispute is that
beginning an appeal does not suspend the execution of the
contested action issued by the fiscal authorities. Therefore, a
separate appeal to suspend the execution of the action
should be filed with the competent fiscal authority, which may
suspend the execution on condition that the petitioner
provides valid reasons.

PI Partners
Strada Dr. N. Staicovici Nr. 75, Forum 2000, Etaj 5
Sector 5, 050557, Bucure[ti
Tel.: +40 21 402 4100
Fax: +40 21 410 6987
Eirinikos Platis, Senior Manager
E-mail: pipartners.ro@pipartners.eu

Romanian Business Digest 2006

EBRD in Romania
Introduction to the EBRD EBRD activities in Romania

Introduction to the EBRD

Purpose and role
The European Bank for Reconstruction and Development (EBRD) was established in 1991.
EBRD was set up to foster the transition towards market-oriented economies and to promote
private and entrepreneurial initiative in the countries of Central and Eastern Europe and the CIS
committed to and applying the fundamental principles of multiparty democracy, pluralism and
market economics. The EBRD aims to help its countries of operations to implement structural
and sectorial economic reforms, promoting competition, privatisation and entrepreneurship,
taking into account the particular needs of countries at different stages of transition. Through its
investments the EBRD promotes private sector activity, the strengthening of financial institutions
and legal systems, and the development of the infrastructure needed to support the private
sector. In fulfiling its role as a catalyst of change, the EBRD encourages co-financing and foreign
direct investment from the private and public sectors, helps to mobilize domestic capital, and
provides technical cooperation in relevant areas. It works in close cooperation with international
financial institutions and other international and national organizations. In all of its activities, the
Bank promotes environmentally sound and sustainable development.
Membership and capital
The EBRD has 62 members (60 countries, the European Community and the European
Investment Bank), including 27 countries of operations in Central and Eastern Europe and the
former Soviet Union. From an initial amount of EUR 10 billion, the Banks initial capital base was
doubled in 1997 to EUR 20 billion, allowing us to continue to meet the growing demand for its
services and to increase its commitment to the region.
One of the EBRDs strengths is that it can operate in both the private and public sectors. It
merges the principles and practices of merchant and development banking, providing funding for
private or privatisable enterprises and for physical and financial infrastructure projects needed to
support the private sector. The EBRD aims to be flexible by using a broad range of financing
instruments, tailored to specific projects. The type of finance it offers include loans, equity
investments and guarantees. The Bank applies sound banking and investment principles in all
of its operations. The terms of the EBRDs funding are designed to enable it to cooperate both
with other international financial institutions and with public and private financial institutions
through cofinancing arrangements.
The EBRDs operations are carried out through its Banking Department, which is composed of
teams combining the Banks private sector and public sector specialists. Country teams ensure
consistent implementation of the Banks country strategies; these are backed up by the specialist
expertise of sector teams and operations support units. EBRDs countries of operations
comprise: Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia,
Czech Republic, Estonia, Former Yugoslavia Republic of Macedonia, Georgia, Hungary,
Kazakhstan, Kyrgyzstan, Latvia, Lithuania, Moldova, Poland, Romania, Russian Federation,
Slovak Republic, Slovenia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan, Serbia and

EBRD activities in Romania

Romania is a founding member of the EBRD. The Bucharest resident office was set up in June
1992. Romania ranks third in terms of EBRD signed projects, after Russia and Poland. As of
31 December 2005, the Bank had signed over 160 projects in Romania, totalling a net
cumulative business volume of EUR 3,2 billion, 62% of which in the private sector. This
represents approximately 10 percent of the EBRDs total investment portfolio.
The Romanian portfolio includes the following sectors: transport, telecommunications, banking,
tourism, private corporations, municipal utilities and energy.

EBRD Portfolio as of June 2006
Operation Name

Portfolio Instrument

European Roads Rehabilitation Project, Romania
Bucharest-Pite[ti Motorway Upgrading
and Tolling Project
NAR Restructuring and Road Rehabilitation Project
Road Sector Restructuring & Pitesti By-Pass
CFR City Stations Enhancement Project
Constan]a Port Development
Constan]a by Pass
CFR Rail Traction
Sector Total


Banca Agricol` IT Loan
Alpha Bank Romania
}iriac Bank
Capital SA
Bank Coop
}iriac Bank, Stand by Loan
Energy Conservation and SME credit line
Romanian Development Bank Project
Banca Agricol` Credit Line Extension
Danube Fund
Alpha Bank Romania Equity Investment
Bank Post Convertible Loan
Romanian PPF (15 subprojects)
Ion }iriac Bank Capital Increase
Privatisation of Romanian Development Bank
Banca Transilvaniei SME Facility (I)
Regional TFP: Demirbank Romania S.A.
Banca Comercial` Romn` SME Line
Regional TFP: Banca Transilvania
Regional TFP: Raiffeisen Bank Romania SA
Alpha Bank Romania SME
Banca Transilvania
Banca Transilvania SME Facility (II)
ProCredit (MIRO)
Regional TFP: RoBank
Volksbank SME Facility
BancPost SME Facility
Raiffeisen SME Facility

























Transelectrica Power Operational
Efficiency Improvement
Termoelectrica Power Operational
Efficiency Improvement
Thermal Energy Conservation Project (TECP) State
Romania National Power Grid Company (NPGC) State
Dalkia ESCO Romania
Romanian Industrial Energy Efficiency
Bucharest Multi Sector Project
Transelectrica SA
Distrigaz Sud
Sector Total
INFRASTRUCTURE - Municipal & Water
Municipal Utilities Development Programme
Municipal Utilities Development
Programme - Phase II
Regional Water and Environment Programme
MELF: Subproject Constan]a
MELF: Subproject Ia[i
MELF: Subproject Arad
MELF: Bra[ov
Apa Nova
Bucharest Multi Sector Project
MELF: Subproject Trgu Mure[
MELF Timi[oara
MELF Oradea
MELF Sibiu
MELF Bac`u
Urban Transport Arad
Urban Transport Sibiu
Regional Operating Company
Bra[ov Urban
Ia[i Municipal District Heating
Bucharest WWTP (Glina)
Bra[ov County Road Project
Sector Total

(EUR 000)























Operation Name

Portfolio Instrument



Regional TFP: Banc Post
Regional TFP: BCR
BCR SME Credit Line II
BCR Mortgage Loan
Raiffeisen Leasing Romania SME Credit Line
ProCredit (Microfinance Bank)
Banca Romneasc` SME
Banc Post Mortgage Loan
Banca Transilvania SME Credit Line
Banca }iriac Capital Increase
BRD Sogelease SME
ProCredit (Microfinance Bank)
Alpha Bank SME II
BT Leasing SME Credit Line
BCR Pre-Privatisation
Domenia Credit SA
Banca Transilvania Mortgage
Polish Enterprise Fund V (regional)
RPPF (2 projects)
Banca Transilvania Capital Increase
TriGranit (regional)
Advent Central & Eastern Europe Fund (regional)
Alpha Leasing
EIB/EIF SME Guarantee Facility
BCR Leasing
Raiffeisen Internaitonal
Banc Post Mortgage II
Banca Austria/HVB Mortgage Loan
BCR SA MMF Credit Line
Banca Transilvania Syndic. Loan
Volksbank SME II
Banca Romneasc` Equity Investment
ProCredit Bank Romania
Banca Transilvania- 2nd Cap. Increase
CEC SME line
BCR Mortgage II
BCR Leasing II
Banc Post Capital Increase
Alpha Bank Municipal facilities
Southeast Europe Equity Fund II
Banca Romneasc` Increase
ProCredit Bank Romania
Sector Total

Private Debt/Equity



SPECIALIZED INDUSTRY - Telecommunications

Eurovision - Romanian Television
RomTelecom Transition Project
Mobifon - Romania GSM
MobiFon Romania GSM - Phase II
MobiFon Corporate Loan Facility
Astral Telecom
Sector Total





Agribusiness Development Project
Coca-Cola Bihor & Ia[i
Bucharest Wholesale Market
Leventis Extension
Rompak S.R.L
United Romanian Breweries SRL
EPH Grain Handling Project
Danone MPF - Danone SRL
Parmalat MPF - Romania
BRD SocGen Warehouse Receipts
Soufflet Agricultural Credit Line Romania
Eurex Alimentare
Tnuva Diaries and Milk
Sector Total





Romanian Business Digest 2006


EBRD Portfolio as of June 2006

(EUR 000)

Portfolio Instrument

Operation Name



SPECIALIZED INDUSTRY - Property and Tourism

Athenee Palace, Bucharest
Italian-Romanian Industrial Development EnterprisePrivate
Victoria Office Building
EuropolisII (regional)
Towers Phased Project, Bucharest
Global Property Fund
Emerging europe convergence fund
Sector Total





Petroleum Pilot Modernisation Project, Romania
SNP Petrom Pre Privatisation Loan
SNP Petrom Equity
Sector Total







Railway Rehabilitation
Prompt SA
Arctic Privatisation and Modernisation


Portfolio Instrument

Operation Name

Virolite S.A. Extension
Samsung MPF - Otelinox
MPF Lafarge: Romcim
Michelin Romania
Sidex II
Michelin II
Terapia SA
Michelin IV
Wienerberger II
Sector Total

Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Equity
Private Debt/Equity


EBRD strategic priorities for 2006

Continue to support the infrastructure and energy
development particularly through the transfer to private
ownership and commercialisation of the energy utilities.
Support the governments efforts to utilise PPP financial
structures to address the investment needs in the
infrastructure sector and to prioritise infrastructure
development designed to address regional integration. In
particular, in the energy and energy efficiency sector,
priorities will be to provide support for the key transition
challenges relating to electricity generation and distribution
companies; gas production, transmission and distribution
companies; oil and oil products transportation companies;
and market operation, especially in the context of the SEE
regional energy market. The Bank will seek to work with
strategic investors interested in the privatisation of energy
companies. The Bank will continue to explore opportunities
for energy efficiency components in all its projects,
particularly in energy-intensive sectors. It will consider
extending credit lines for sustainable energy projects (energy
efficiency and renewable energy) in combination with
technical co-operation and bilateral co-financing. Also, in the
municipal and environmental infrastructure sectors, the Bank
has a strong reputation as a provider of municipal finance as
a result of its work in supporting the institutional capacity, the
corporatisation and commercialisation of local utilities and the
decentralisation of public finances. The broadening of such
high standards will be a key priority. The forthcoming
regionalisation in the water sector will enable the Bank to
work with existing clients to extend their operations into
smaller cities. The Bank will continue to provide finance to
support Accession-related projects with strong transition
impact. The Bank will seek to build on existing relationships
to move into new segments which will include urban
transport, regional roads, municipal parking, district heating
and solid waste management.
Continue to support the private sector together with foreign
and local investors. The Bank will continue to enhance FDI
flows while also supporting local enterprises to help them
expand their businesses and improve their competitiveness.
The main tools the Bank will use in the corporate sector will
be equity and quasi equity, LT local currency funding and
commercial co-financing. Special attention will be given to the
agribusiness sector, in particular to food and food processing
companies needs. The Bank will continue its support to the






improvement of the investment climate through continuing

high level policy dialogue.
Contribute to the broadening and deepening of financial
intermediation through strengthening financial intermediaries
and facilitating the availability of a wide range of financial
products. The Bank will also place increased emphasis on
lending in local currency and developing local capital
In achieving its objectives the Bank will also contribute to
strengthen the administrative capacity of the Romanian
public administration and local authorities to absorb both the
pre- and post accession funding in close co-operation with
the EU and the EIB under JASPERS (Joint Assistance for
Preparing Projects in European Regions).
EBRDs investment guidelines
The EBRD has a set of investment guidelines to which it
adheres in participating in a projects financing. These are as
Typical private sector projects are based on no more than
two-thirds debt financing and at least one-third equity;
The EBRD can finance up to 35 per cent of the total
project cost;
The Banks minimum participation in a project is cca EUR
5 million;
Significant equity contributions are required from other
investors, particularly industrial sponsors with technical
and management skills;
Equity from sponsors need not always be in cash but can
be in plant, machinery, equipment etc.
The EBRD will not normally provide financing for the
purchase of existing shares in a company.

EBRD Romania
Strada Gina Patrichi Nr. 8, Sector 1, Bucure[ti
Tel.: +40 21 202 7100
Fax: +40 21 202 7110
Hildegard Gacek, Country Director
James Hyslop, Deputy Director

Romania and World Bank

by World Bank Office Romania

World Bank Romania Challenges ahead

World Bank assistance

World Bank Romania

Romania is a middle income country with a GNI per capita of USD 3830. With a population of
21.63 million, it is the second largest country in Central and Eastern Europe and is larger than
19 of the 25 current members of the European Union (EU).
The country is currently engaged in reforming and restructuring its economy and administration
with a view to joining the EU in 2007. As part of this, the Government seeks to build institutions
and implement public policies to fundamentally transform Romanias economy and society. This
requires strong political commitment, considerable expertise and resources, as well as popular
and external support.
Despite robust economic growth over the past five years, important challenges remain. Further
structural reforms are crucial to consolidate a competitive market economy, capable of
withstanding the pressures of EU integration. Moreover, poverty persists with 15.1 percent of
the population living below the poverty line. Two-thirds of Romanias poor live in rural areas
despite the countrys substantial potential in agriculture, forestry and fisheries.
Recent economic performance
Since 2000, the Government has implemented macroeconomic policies which are supportive of
growth. A disciplined fiscal policy, which complemented a tight monetary policy and which was
augmented by strong advances in structural reform led to improved financial discipline in the
enterprise sector and has placed public finances and the financial system on much firmer
This resulted in robust GDP growth for five consecutive years. In addition, inflation and interest
rates declined steadily, the fiscal deficit was brought under control, foreign exchange reserves
increased to historic highs and external debt was held to comfortable levels. The
competitiveness of the enterprise sector was boosted by productivity gains.
Romania is now a visible and attractive destination for international investors as a result of better
sovereign ratings and improved access to international capital markets.
Romania GDP growth


































World Bank Office Romania

Challenges ahead
Romania faces a number of challenges as it strives to
alleviate poverty and meet its EU integration commitments.
These challenges include the following:

Accelerating structural reforms. Key challenges

include completing the privatization agenda, improving
the business climate by eliminating administrative barriers
and implementing a transparent, predictable and efficient
tax system aimed at enhancing revenue collection in
order to co-finance the absorption of the EU Structural
and Cohesion Funds that Romania will have access to
after integration.

Reforming public institutions and improving

governance. Public services need to be delivered in a
manner which benefits the population. This can be
achieved through the development of a merit-based civil
service that is adequately remunerated. A supportive
legal and regulatory framework is also needed.

Reforming the legislative process and the judiciary. In

the past, reforms were impeded by frequent changes in
legislation and the lack of capacity to implement new
laws. It is therefore essential to streamline existing
legislation and strengthen the system to pass new laws.
The professionalism and integrity of judges need to be
enhanced and the independence of the judiciary
strengthened. The judicial process also needs to be
improved through greater speed and efficiency in courts.

Reforming the pension system. Despite recent

parametric reforms, the public pension system faces
significant challenges deriving from population aging,
demographic structure and poor revenue collection
performance. Further reforms are needed to ensure
medium and long term financial sustainability, higher
pensions and affordable transition to the second pension
pillar (mandatory contribution and private management of
pension funds).
Developing rural areas and reducing poverty. With the
majority of Romanias poor living in rural areas,
agricultural sector reforms are essential to reduce the
countrys high levels of poverty. Although Romania has
fertile agricultural land, vast tracts of forest and a rich
network of rivers, its rural areas suffer from inadequate
infrastructure and inefficient agricultural production.
Access to education and social services in these areas
must be improved.
Reforming the energy sector. Although energy sector
reforms have been impressive, the restructuring of the
sector should continue mainly in the energy generation
sector. The privatization of electricitys generation
companies has been delayed and this would affect the
sector efficiency, and competitiveness of the power sector
within the European market.

World Bank assistance

The World Banks assistance covers practically all areas of
the economy. The Banks portfolio focuses on three broad

Promoting the private sector and the growth of

efficient markets. This includes completing the
privatization agenda, improving infrastructure services,
establishing a business environment conducive to


investment and growth, and enhancing labor market


Accelerating structural and institutional reforms to

support sustainable growth. This will be accomplished
by reforming the civil service, improving public
implementing the anticorruption strategy and reforming
the judiciary.

Targeting poverty reduction and promoting social

inclusion. This will be done by enhancing the delivery of
social services in health and education and improving the
pension system. Rural development and poverty
alleviation programs aim at improving, through a
participatory process, the rural infrastructure (including
irrigation systems) and the rural finance system. World
Bank operations also aim to enhance agricultural
productivity and to improve the living conditions for
disadvantaged and vulnerable groups.

At the end of Fiscal Year 2006 (FY 06), World Bank

commitments for active projects amounted USD 1485.6
Romania: World Bank commitments (USD million)
* Lending per fiscal year, July 1-June30


91 992 993 994 995 996 997 998 999 000 001 002 003 004 005 006
1 1 1 1 1 1 1 1 2 2 2 2 2 2 2


Total commitment of active portfolio by sector

as of June 30, 2006 (%). Total USD 1485.6 million
Private sector
Judicial reform

Social support and




Energy and mining

Rural sector and hazard


The World Bank Office Romania

Bulevardul Dacia Nr. 83, Sector 2, Bucure[ti
Tel.: +40 21 201 0311
Fax: +40 21 201 0338
Alexandra Caracoti, External Affairs Officer
E-mail: acaracoti@worldbank.org

Business Environment


Evolutions and Perspectives

in the Romanian Economy
by Banca Comercial` Romn`

Introduction The evolution of the main macroeconomic ratios

Foreign trade The state budget deficit
The financial-banking sector
The current account deficit
The arrears in the economy Sustaining the disinflation process
Liberalisation of the capital account
Economic and financial perspectives

The Romanian economy is powerfully anchored in the global economy and thus its evolutions or
involutions are felt at national level as well. It can be affirmed that the global economy is
beginning to notice rehabilitation, although it still remains fragile, with possible risks of certain
economic distortions.
The vulnerability of the global economy is connected to both the uncertainties that may appear
in the evolution of great economic powers and also to its heterogenic character.
The prices of oil and other energy products are high which may influence the development of the
global economy. Since the beginning of 2006, the oil quotations increased by 20%. The
international bodies estimate that, until 2007, the price of oil will continually increase, thus
generating incertitude in the development of the global economy. Under the circumstances
generated by the current conflict in the Middle East, the price of oil might increase in the following
period due to oil deliveries in the area being affected.
Consequently, Romania must adjust its programs to achieve its most important priority, that of
integrating in the EU structures. The economic targets which were negotiated for 2006 and the
following years reflect the unequivocal commitment to accomplish Romanias Preparation
Program for EU accession.
Given the current international and domestic situation, Romania must take actions to apply
efficient measures for preventing adverse factors in order to observe the set economic targets.
Romanias macroeconomic characteristics starting with 2005 show a comeback to economic
increase paces which are considered moderate, as well as a one-digit annual inflation rate, the
slowdown of the disinflation process, a high current account deficit etc. Even so, the way
Romania is seen internationally has lately improved.
The Romanian economy is likely to maintain its growing trend of the previous years and to
provide a favourable macroeconomic picture for the years to come, despite certain pressures
existing in respect of inflation and the foreign deficit.
The measures for capital account liberalisation, the domestic currency denomination, the
amplification of international Fx flows, a one-digit inflation, a monetary and foreign exchange
policy aimed at directly targeting inflation, all these are premises for ensuring a consistent and
coherent macroeconomic background.

Banca Comercial` Romn`

The evolution of the main

macroeconomic ratios

It may be estimated that the financial system is relatively

robust and healthy, although still developing, with certain
dynamic unbalances of some of its components.

The main macroeconomic ratios show the following evolution

(Table 1).
The Gross Domestic Product recorded in the first quarter of
2006 a level of RON 61 billion (as compared to RON 51 billion
for the 1st Quarter of 2005 and to RON 287.2 billion for the
entire 2005), a 6.9% increase in real terms, continuing the
trend from the previous periods.
In the first 5 months of 2006 the industrial output recorded a
5.9% increase as compared to the similar period of 2005,
while the manufacturing industry achieved a slightly higher
increase of 6.3%. Significantly, labour productivity in industry,
respecting the same comparison terms, grew by 9.9%.
The year-end inflation rate for 2004 was 9.3% and 8.6% for
2005, thus proving an attenuation of the disinflation process;
the inflation decreased, with less than 1 p.p. in June 2006, the
inflations evolution being characterised by a 102.67% index
compared to the price levels recorded in the last month of the
previous year and a 107.11% index compared to June 2005.
In order to achieve the 2006 set target of 6%, special antiinflation measures are needed. Based on economic
interdependencies, the impact of industry prices must also be
taken into consideration, since in 2005 was superior to the
impact of consumer prices by 1.8%, later increasing to more
than 3% in the first part of 2006.
According to certain estimations derived from economic
inquiries based on representative panels, with respect to the
evolution trends of economic activities, industry, retail trade,
services and constructions are most likely to continue their
growing process.
The Romanian financial system, where the banks have an
important position, significantly developed in the last period,
although the financial intermediation degree is the lowest
compared to all Central and Eastern European countries. The
increases of some components in the non-governmental loan
reflect a natural convergence with other countries, but a rapid
convergence may generate certain macroeconomic risks.
Table 1

The insurance sector rapidly developed in the last period, the

connection degree with the banking market also increased,
which improved its role in maintaining financial stability.
At regional level, there are certain development disparities
which increased lately, due to economic restructuring in
mono-industrial areas and other causes.

Foreign trade
In 2005, the foreign trade continued to record relatively high
growing paces of 17.5% and 23.9% for exports and imports,
respectively (a 6.4% difference). The results in foreign trade
were achieved due to the domestic currency appreciation and
to an international climate influenced by the fact that
European commercial partners recorded lower increases
compared to previous forecasts.
In H1 2006, the exports (FOB) raised by 20.3% compared to
the same period of 2005, while the imports (CIF) grew by
25.3%. In H1 2006, the imports recorded significant
increases, over the 25.3% average, in mineral products
(+34.0%), cars and mechanical devices (+33.1%), transport
materials and equipment (+32.1%). The same groups record
significant increases with respect to exports.
The weight of exports to EU countries (EU-25) in total exports
in the first half of the year was 67.0%, first ranking Italy
(18.4% of the total exports), followed by Germany (14.6%),
France (7.5%), Turkey (7.5%) etc. The value of imports from
UE countries (EU-25) was 62.1%, also with Italy ranking first,
(15.3% of the total imports), followed by Germany (14.4%),
Russian Federation (9.40%), France (6.7%) etc.
It is important to notice that the recent prognoses for the 2010
horizon indicate the reconstruction of balances in Romanias
foreign trade and the inverting of the ratio between the
increase of exports and that of the imports.





Gross domestic product - %

- increase against the same period of the previous year
Industrial production indexes - %
- increase against the same period of the previous year
Consumer price index - %
- increase year-end against previous December
Foreign trade
- increase against the same period of the previous year
Export (FOB)
Import (CIF)
Current account balance
(cumulated from the beginning of the year)
EUR mn
% in GDP
Foreign debt (end of period) - EUR bn
Gross international reserves
(end of period) - EUR bn
Non-governmental loan
(end of period) - RON mn
Unemployment rate (end of period) - %




1st quarter




5 months




6 months




6 month
6 month



- 8.7



5 months




6 months
6 months


5 months
5 months (estimates)
4 months

Source: Statistic NBR and NIS bulletins


Romanian Business Digest 2006

Banca Comercial` Romn`

Taking into consideration that the decrease of imports cannot
be done in a short period of time, since it implies energy
resources, raw materials, fuels and equipments needed for
reengineering the economy, the only way to reduce the
commercial deficit and ensure a long-term sustainable
economic growth is to export competitive products and

2005 and the first part of 2006 meant for the Romanian
banking system a series of achievements. The national
system for electronic payments was introduced, leading to a
considerable decrease in the settlement time. The new
architecture and functionality of the payment system are
compatible with the European Union systems, generating an
increased transaction security and a better risk control.

The H1 2006 commercial deficit was of EUR -5,807.4 million

in FOB/CIF prices (37.8% above the level of the same period
of 2005) and of EUR -4,385.1 million in FOB/FOB prices
(42.5% above the level of the same period of 2005).

Most banks extended their networks to be closer to their

customers, being preoccupied to extend certain alternative
channels for market penetration.

The state budget deficit

Within the policy mix applied in the previous years, the fiscal
performance is noticeable and it can be expressed through
the decrease of the state budget deficit, generating a
decrease of the aggregated demand.
The evolution of the state budget deficit and of the
consolidated budget for the 2000-2005 period and the first 5
months of 2006 is as follows:






5 months

State budget deficit (RON mn)

- 2,760.8 -3,580.3 -4,761.8 -2,900.3 -1,878.1 -2.182.9
GDP weight (%)
The general consolidated budget deficit (RON mn)
-3,204.5 -3,758.0 -3,950.2 -4,395.1 -2,907.5 - 2.326.3 +4,186.6**
*estimates; ** May
Source: Statistic NIS bulletins

The mitigation of the state budget deficit reflects an

improvement in the management of state treasury activity.
Measures are needed for increasing budgetary income. The
public authorities must establish measures to improve the
incomes collectibility, also by revising the legal framework on
fiscal evasion, as it is preferable to increasing fiscal quotas.
The policy aimed at decreasing both the budget deficit and
the quasi-fiscal deficits has to be even more accentuated in
2006 and the following years with the purpose to reduce the
aggregated demand excess, the pressure on the current
account deficit and to maintain the disinflation process. The
main short and medium term objective of the fiscal-budgetary
policy is to sustain the nominal and real convergence

The financial-banking sector

1. In the financial-banking sector, according to certain
studies, the Romanian banking market is the most dynamic in
Central and Eastern Europe. The main catalyser for the
development of the banking market in this region remains the
corporate segment, but the retail segment is growing more
attractive for banks. In Romania, in the previous periods, the
banks mainly targeted institutional customers (corporate);
starting with 2003, the consumer loan significantly increased,
followed by the housing and mortgage loans, and the retail
sector started to evolve towards the share it has in countries
with a developed banking system.

The internet banking services are developing, in line with the

European and even global development trends with respect
to e-banking and e-finance services.
2. Aiming to reduce banking intermediation costs, taking into
consideration the commercial banks contribution to the
establishment and functioning of the Fund for Deposits
Guarantee in the Banking System, as well as the actual level
of the Funds resources, we consider that a reduction or even
elimination of the banks contribution to this fund is
necessary. Under these circumstances, we consider that the
Funds necessary financial resources should be ensured only
from the RON stand-by credit line annually granted to the
fund by the credit institutions, as these credit lines are
regulated by the Governments Emergency Ordinance
No. 23/22 March 2006.
3. The measures recently adopted to limit the consumer
lending expansion targeted the prevention of macroeconomic
unbalances, prices stability and the stability of the foreign
balance. These restrictive measures were applied taking into
consideration that some leverages have lost efficiency,
others being necessary to mitigate the consumer lending
Due to the accentuated increase of the internal demand,
based especially on the consumptions unsustainable
expansion and on the increase of the consumer lending
mainly in RON, with the foreign unbalance strengthening,
NBR decided to increase the monetary policy interest rate
from 8.5% to 8.75% and the minimum mandatory reserve rate
for RON liabilities with less than two-years maturity from 16%
to 20%. These monetary policy measures, together with
maintaining a sharp control on liquidities on the monetary
market by sterilising the liquidity excess, will contribute to the
disinflation process consolidation, thus the 4% inflation target
for 2007 being sustainable.
The situation is contradictory. The consumer loan has a
weight in GDP ten times lower than the 50% weight recorded
in the euro zone. The steep evolution of the commercial
deficit and, implicitly, of the current account, lies not only in
the increase of the consumer loan, but also in the real
economy, in the poor competitiveness of the Romanian
The increase of the private sector lending is supported by the
amplification of loans available amounts based on an
enhanced trust of the population in the banking system, due
to macroeconomic stability and a relative steadiness of the
populations income. Searching for a market share, the
branches of authorised foreign banks also generated lending
flows, based on better yields as compared to their origin
4. The latest evolutions of the non-governmental loan,
consumer loan, housing and mortgage loans are shown in
Table 2.

Banca Comercial` Romn`

Table 2
Jan. 2004 May 2004
Non-governmental loans
- RON mn
31,247.4 34,010.0
- % (Jan. 2004 =100)
Consumer loans
- RON mn
- % (Jan. 2004 =100)
RON Consumer loans
- RON mn
- % (Jan. 2004 =100)
Fx consumer loans - in RON equivalent
- RON mn
- % (Jan. 2004 =100)
Housing and mortgage Fx loans
- RON mn
- % (Jan. 2004 =100)

July 2004

Jan. 2005

May 2005

July 2005

Dec. 2005

May 2006




























* - in parenthesis: computed indexes - May 2006 to May 2005

Source: NBR - The financial behaviour of population and corporations in regional profile

In the analysed period (January 2004 May 2006), the

consumer loan had a superior dynamic as compared to the
non-governmental loans, raising by 3.9% against 2.3%. In the
first part of the period the most dynamic component of the
consumer loan was recorded by the foreign currency loan,
but later, due to NBRs measures, the situation changed in
favour of the RON loans.
The above mentioned ratios are presented dynamically as in
the figure below:


The increase of the current account deficit in the first five

months of 2006 is generated by relatively high current
transfers (EUR +1,256 million), with a 9.6% decrease,
however, as compared to the similar period of the previous
year (EUR +1,389 million). Without these foreign currency
input, the current account deficit would have been higher.
The current account, for the first five months of 2005 and
2006, respectively, in Romania compared to Bulgaria and
Poland is presented in Table 3.
The above table shows, for Poland, a different configuration
for the influences of the current account deficit, as compared
to Romania and Bulgaria. The cause of the Polands deficit is
not found in the trade balance. The main cause generating
the current account deficit in both Romania and Bulgaria is
the commercial deficit, not balanced by the favourable
balance of current transfers.

% - ian 2004 = 100


The current transfers show a decreasing trend in the three

countries, due to the fact that a part of the respective
amounts probably found more attractive placement in their
origin country.

The comparative situation of the current account in the three

countries, for the first five months of 2006, is presented

Jan. 04

May 04

July 04 Jan.05

May 05 July 05

Dec. 05 May 06

Non-governmental loans

Consumer loans

RON consumer loans

Fx consumer loans

Fx housing and mortgage loans

At regional level, the financial behaviour of the population is

different, hence generating regional development disparities.

The current account deficit

In 2005, the current account deficit reached EUR -6,891
million, a 35.1% increase against 2004 (when this deficit was
EUR -5,099 million), and a twofold increase as compared to
2003. In the first five months of 2006, the current account
deficit reached EUR -3,336 million, 53.2% higher than the
similar period of the previous year. The current account deficit
and the foreign commercial deficit are increasing sharply,
raising problems in respect of the macroeconomic balance,
with direct and indirect influences on the main economic
ratios evolution.

EUR mn










Current account - balance (a+b+c)

a) goods and services - balance
b) income - balance
c) current transfers - balance

The figure above shows positive data for current transfers

The continuous increase of the current account deficit is also
the result of certain influences from structural factors. A large
Romanian Business Digest 2006

Banca Comercial` Romn`

Table 3
01.05.2005 01.05.2006
Current account balance- (a+b+c) -2,178
a) goods and services -balance
b) incomes - balance
c) current transfers -balance

- EUR mnPoland
01.05.2005 01.05.2006


Source: Data from the central banks of the respective country

part of the exports is represented by low technology products,

mainly based on low and medium qualified labour. The high
technology products, through the technological scissors, will
prevail against product incorporating a high volume of cheap
labour, presenting a volatile advantage, and also against
product having the price as main advantage.
The recent evolution of the current account confirms the
persistence of some consistent deficits generated by the
negative factors in the economy. Overall, the evolution of the
current account reflects the actual weaknesses of the
economy, the solution for curing macroeconomic deficits
being the acceleration of the reform processes.
The risks induced by the current account deficit must be
analysed by also taking into consideration the fact that 93%
of the deficit is generated by the private sector. 86.7% of the
current account deficit is covered with foreign investments
(EUR 2.9 billion in the first 5 months of the year as compared
to EUR 1.5 billion in the same period of the previous year).
Under these circumstances, the current account deficit at the
end of 2006 will most probably reach 85% of the GDP.

The arrears in the economy

In the depth of the economy, at microeconomic level, there
still exist certain slippages, many of them connected to the
configuration of corporate financing. The arrears represent a
sensitive problem, although a slight reduction is noticed,
which reflects the restructuring of the economy and the fact
that the companies are adjusting to the requirements of
market economy. After December 89, this was the main
obstacle against the accomplishment of the reform, of
economic stability and efficiency. Starting with 2001, the
phenomenon decreased constantly, with some small
The arrears, a default to suppliers and public budgets,
represented almost 40% of the GDP in 2000, reaching 25.8%
in 2004 and an estimated 20% for 2005, while the banking
financing merely represents 20% of the GDP (estimates for
year-end 2005), as compared to 30% in Central European
countries and approximately 100% in the developed
countries. The microeconomic status is supported by
maintaining a certain tolerance to default.
The important volume of the arrears represents a risk for the
Romanian economy since it maintains an artificial pressure
on the internal aggregated demand, inflation and current
account. Such a situation induced a certain degree of moral
hazard and adverse selection, with negative effects on the
market competition.

Sustaining the disinflation process

The inflation was mainly mitigated by establishing an
economic and monetary policy mix adopted with the view to
keep the economic balance under control.

The inflation rate evolution during 2000 2005 period and the
first half of 2006, in Romania compared with Bulgaria and
Poland, is presented in the table below:
- % - annual increases compared with December previous year -

2000 2001 2002 2003

Romania 40.7 30.3 17.8 14.1
Bulgaria 11.3 4.8
3.8 5.6
8.5 3.6
0.8 1.7


2005 June 2006


Source: Data from the Central Banks of the respective countries

From the data above it results that in Romania the inflation

was mitigated extremely accentuated in the last 6 years, the
inflationary status reducing more than 4 times. During the
same period, inflation in Bulgaria and Poland reduced
significantly, but its level in these countries for year 2000 was
almost equal the inflation rate for year 2004 or 2005 in
Graphically, the inflation rate evolution during the 2000
2005 period, in Romania compared with the situation from
Bulgaria and Poland, is as it follows:

Annualised data






June 06


The 8.6% inflation level, as it was in Romania for the year

2005, exceeded the inflation target. For year 2006, there
must be applied exceptional measures for counteracting the
inflationary measures, in order to meet the forecasted target.
The actual projections regarding the inflation status at the end
of the year reflect the fact that the annual inflation rate will be
0.8 percentage points above the upper limit of the variation
interval of 1 percentage point from 5% target set for this
year. It is estimated that inflation will be within variation
interval during the next year, so that the 4% target set for
2007 is achievable.
The tightening of the monetary policy, started at the end of
2005 and accentuated this year, is aimed to enhance the
restrictiveness of the monetary conditions in a broad sense
and ensure an inflation within the predicted variation interval.
The restrictiveness of the monetary policy is imposed by the
necessity to moderate the aggregate demand, especially the
dynamics of the populations consumption, which represents
a major factor that stimulates inflation.

Banca Comercial` Romn`

Liberalisation of the capital account

In accordance with the principle of gradual liberalisation of the
capital account, by applying the liberalisation stages from
2005, non-residents have the right to make RON deposits,
while the residents have the right to open current accounts
and deposits abroad, without prior authorisation.
These stages represent important steps for the
accomplishment of the total convertibility of the domestic
currency. The two stages applied for the liberalisation of the
capital account in 2005 had a different impact on the
domestic currency: one concerns the capital inflows, while
the other concerns the capital outflows. The capital inflows as
a consequence of allowing the non-residents to make RON
deposits, without prior authorisation, put a relative pressure
on the national currency in the way of its appreciation.
Considering the more pronounced speculative potential, the
operations with money markets instruments will liberalise
according to the schedule convened with European Union in
September 2006, date that represents the deadline for the
liberalisation of the capital account.

Data presented in the table reflects, for the 2006-2009 period,

the continuation and consolidation of the economic growth
process started in 2000.
Liberalisation of all operations related to capital account
beginning with 01.09.2006, the denomination of the domestic
currency in progress since 01.07.2005 and the adoption by
NBR of the strategy regarding the direct targeting of inflation,
combined with the accession process and its completion will
directly influence the financial environment.
The 2006-2009 trends regarding the GDPs real increase,
industrial output and inflation rate evolution are graphically
presented below:
- Percentage change compared with the previous year -


Economic and financial perspectives

The economic and financial perspectives for 2006 and for the
following years are marked by the absolute priority of
Romania, the accession to the EU at 1 January 2007.
Romania must demonstrate the managerial capacity in
completing the investment projects subordinated to this
national desiderate in infrastructure, health, agriculture, and
rural development, energy environment, and especially in
domains that ensure the continuation of the economic growth
and the enhancement of exports without impending on the
inflation target and the macroeconomic equilibriums.

Despite some failures, which characterise a developing

market economy/functional market economy but not entirely
competitive, Romania may have, in the future, a favourable
period if the economic growth rates will be accompanied by
an accentuation of the disinflation process, and by financing
without adjacent problems of the foreign deficits, by the
overall amelioration of the financial discipline and the
substantial growth of labour productivity.
It may be stated that in Romania the banking system reform
overcame the economic reform on its whole, which we
consider is capable of giving banks an important role for in
the future economic development.
1. The projections made by specialised bodies for the
following period regarding the dynamics of the main
macroeconomic indicators are presented in the table below:
- Percentage change compared to the previous year -

2006 2007 2008 2009

Gross Domestic Product (GDP)
Industrial Output
Net export (contribution to the
real growth of GDP)
Current account
- EUR bn
- percentage out of GDP - %
Inflation rate - Dec/Dec
Unemployment rate %



+6.3 +5.9
+4.1 +4.4









Source: Data of the National Prognosis Commission


2003 2004






Gross Domestic Product

Industrial output
Inflation rate - Dec/Dec

2. In the following stages, the restructuring of the economy

must continue, mainly leading to the deactivation of the
oscillatory factors at macroeconomic level, taking into
consideration the integration of the high monopolization
degree segments in the market economy, including the high
energy consumer sectors.
The current account deficits of 7-8% of GDP and even higher,
the delays in structural reforms, the establishment of a flat
taxation rate, act towards limiting the operating margin of
NBR to counteract the inflationary pressures in 2006 and in
the following years as well. The situation is accentuated by
the expansion that embraced progressively the components
of the aggregate demand, especially investments, exports
and populations consumption as a result of real increase of
incomes and banking loan despite the restrictive monetary
policy measures.
3. Due to the EU accession, in the following period, labeled
as a radical one, the costs of this action will be perceived.
Romania must make efforts, not just domestically, but abroad
as well, considering that some countries are facing economic
and political difficulties that could determine them to be
reserved regarding the accession of Romania and Bulgaria.
According to the Pre-accession Economic Program, a
document of strategy and a quantitative and functional base,
Romania has to accomplish within a unitary framework the
economic policies to be implemented with the view to fulfill
the economic accession criteria and to prepare for entering
the single European market.
During the next period, the fiscal reform must target the
consolidation of competitiveness gains following the
implementation of the flat taxation rate and the continuation
Romanian Business Digest 2006

Banca Comercial` Romn`

of the process of alignment to the acquis communitarian
recommendations, simultaneously with supporting the
economic reform and the macrostabilisation, by maintaining a
prudential budgetary deficit.
4. The increase of imports must be analysed in connection
with the lending situation. The imports are mostly influenced
by the financing granted by non-banking institutions, such as
leasing companies and other institutions. Non-banking
financers have a major impact on imports.
5. The special attention paid by banks to the retail segment is
currently justifiable. The limited character of this segment,
however, will determine banks to mainly target domestic
currency financing for companies and even agriculture.
Foreign currency financing, justifying the foreign currency
denomination, is represented by mortgage loans and those
for exports and imports loans.
The populations savings, due to the lack of profitable
alternatives, will continue to be kept with credit institutions.
Most banks encourage long term deposits, providing a safe,
although not significant gain. The investments on the capital
market or in real estate involving large amounts are not
accessible to the population.
6. The volume of financial resources that can be put to use for
the benefit of the real economy the so-called banking

intermediation is a result of the economic development

degree. In this respect, the sight and term deposits must be
mentioned (the sum of the quasi-money monetary aggregate
plus the sight liquidities in the M1 monetary aggregate, which
in 2003 had a 21.2% weight in the GDP, followed by 23.9%
in 2004 and 26.1%, a rate well below other transition
The lending capacity of the banking system could significantly
increase, given the current banking capitalisation conditions,
if a real lending demand from companies existed, which is if
the companies presented major investment projects.
The weight of loans in GDP noticed an increasing trend in the
last years, but below the rate of other countries in the region.
The banking intermediation rose from 15.9% in total GDP in
2003 to 17.5% in 2004 and 21.1% in 2005, way under the
European Union average.
The average intermediation degree of the ten countries that
joined EU in 2004 was 39%, and, probably, at the moment of
adopting euro, will reach 50%. Romanian could also reach
the same level when switching to euro.
7. The development of the real economy implies the gradual
re-monetization, while increasing the monetary base on a
non-inflationary basis and developing other superior
monetary aggregates (to include M1 and M2 aggregates).

Banca Comercial` Romn`

Calea Victoriei Nr. 15, Sector 3, Bucure[ti
Tel./Fax: + 40 21 312 0056
Ilie Mihai, Ph.D., Executive Vice President
E-mail: mihai.ilie@bcr.ro


Financial Reporting
in Romania
by Ernst & Young

Sources of accounting principles Fundamental concepts

Valuation principles and accounting policies
Disclosure, reporting and filing requirements
Report of the Administrator(s) Approval and publication
Dividend distribution Consolidated financial statements
2007 year end requirements
Significant accounting concepts for investors and users of financial
reporting information
Audit requirements
Impact of changes in Romanian Company Law on financial

Financial reporting and auditing requirements in Romania continue to undergo change and
evolve towards application of standards comparable with the European Union1.
Financial reporting in Romania has taken time to develop since the country adopted a market
economy in 1990. For much of the time since then, financial reporting has been focused on
providing information to the government authorities rather than providing information to investors
(current and prospective), management, financial institutions and other common users of
financial reports in an international context. Financial reporting (and accounting in general) in
Romania has tended to be more about form than about substance, dotting the Is and crossing
the Ts, rather than focusing on whether the figures reflect the accurate financial position of the
reporting entity and the results from activities during the reporting period.
The Ministry of Finance undertook a programme in 1997 to make Romanias accounting and
auditing legislation comparable to international standards and European Union directives on
accounting and auditing.
Fundamental changes in legislation have taken place as a result of this programme including:
harmonisation of financial reporting in Romania with the requirements of International
Accounting Standards and the European Union 4th Directive Minister of Finance Order
94/2001 (MoF Order 94/2001);
harmonisation of the financial reporting for Romanian companies not applying MoF Order
94/2001 with the requirements of the European Union 4th Directive Minister of Finance
Order 306/2002 (MoF Order 306/2002); and
setting up a body responsible for the training and regulation of the independent audit function
in Romania, the Chamber of Auditors Emergency Ordinance 75/1999 (EO 75/1999) as
approved by Law 133/2002;
approval of Accounting Regulations to comply with European Directives Minister of Finance
Order 1752/2005 (MoF Order 1752/2005);
conformity of Accounting Regulations with International Financial Reporting Standards and
Respecting Conformity of Accounting Regulations with European Directives Minister of
Finance Order 907/2005 (MoF Order 907/2005);
This article aims to provide an overview and the reader should refer to relevant legislation and/or seek appropriate
professional advice prior to making any decisions in relation to financial reports in Romania or the applicable legislative


Ernst & Young

application of International Financial Reporting Standards

Minister of Finance Order 1121/2006.

With effect from 1 January 2006, MoF Order 1752/2005 for

the approval of accounting regulations compliant with
European Directives has replaced MoF Order 94/2001, MoF
Order 306/2002 and a number of other previously issued
Minister of Finance orders and regulations.

Sources of accounting principles

Accounting in Romania is regulated by the provisions of Law
82/1991, republished in January 2005 (the Accounting Law).

In accordance with the Accounting Law, it is mandatory for all

legal entities and authorised individuals to keep accounting
records in Romanian language and in the national currency of
Romania. For internal information purposes, entities may
choose to draw up statements in another currency.
Legal entities or individuals have to keep written evidence of
all transactions and record these transactions in their
accounting books. The records required by the Accounting
Law include: Journal Registers, Stock Register (based on an
annual inventory of assets and liabilities), and Nominal
Ledger (based on analysis of the accounting information
posted from source documents or Journal Registers). The
books and the accounting records may be hand-written or in
an electronic format and can be used as evidence in court
and are subject to review by Romanian fiscal and judicial
authorities. Accountants should prepare a trial balance from
the nominal ledger on an annual basis and this trial balance
is the basis for preparation of periodic financial statements.
Accounting regulations issued require a specific chart of
accounts and specific reporting disclosure contents and
formats for entities. Previously these were indicated in MoF
Order 94/2001 or MoF Order 306/2002 and the related
regulations. From 1 January 2006, MoF Order 1752/2005
provides the applicable base to be followed and is
accompanied by two regulations:
accounting regulations for compliance with the 4th
Directive of the European Economic Communities
(AR4); and
accounting regulations for compliance with the 7th
Directive of the European Economic Communities
The focus in the rest of this article will be mainly on looking at
the situation from 1 January 2006 onwards, based on
legislation, ministerial orders and regulations issued to date.
From 1 January 2006, MoF Order 1752/2005 applies and, in
conjunction with the accompanying accounting regulations
issued, it addresses: prescribed layout and content of the
annual financial statements, accounting principles and
valuation rules, rules to the preparation, approval, auditing
and publication of the annual financial statements.

Fundamental concepts
MoF Order 1752/2005 looks to cover in one piece of
legislation the financial reporting applicable to entities of all
sizes, with differing level of disclosure relating to size and
public interest consideration.
MoF Order 1752/2005 stipulates that the following general
principles apply:
Accruals basis Transactions and other events are
recognized when they arise and are entered in the
accounting records and reported in the financial
statements for the related period.
True and fair view Annual financial statements are to be
prepared to give a true and fair view of the assets,
liabilities, financial position and period results of an entity.

Comparative figures are to be disclosed for all statements

Going concern The entity is presumed to be carrying on
its business as a going concern. If this basis is not
appropriate and the Administrator(s) are aware of that
there is a doubt on the ability of an entity to continue its
activities, then this should be disclosed in the explanatory
Consistency There should be an application of valuation
rules on a consistent basis from year to year.
Prudence In particular:
- Only profits made at the balance sheet date are to be
- Includes all liabilities relating to financial year or prior
years, even if such liabilities become apparent or
become known between the balance sheet date and
the date of completion of preparation.
- All depreciation (value adjustments) is to be included
irrespective of whether the result for the financial year
is a loss or a profit.
Independence Income and charges relating to the
financial year are recorded irrespective of the date of
receipt or payment.
Separation Components of asset and liability items are
valued separately.
Intangibility Opening balance sheet for each financial
year must correspond to the closing balance sheet for the
previous financial year.
No offset Offset between asset and liability items in the
period end balance sheet is not allowed.
Economic substance and reality of events Carrying
values and transactions should be considered and not
only the legal form and/or substance.

Any departures from the above principles are seen as being

exceptional and would require disclosure in the explanatory
notes indicating reason for not applying and the effect on the
disclosure of: assets and liabilities carrying value, the
financial position and period results.

Valuation principles and accounting

Valuation in general is based on purchase price or production
cost. In specific situations contribution value and fair value
(including revaluations) may be used. MoF Order 1752/2005
mentions that assets and liabilities will be valued according to
the contents of this Order and to norms issued by the Ministry
of Finance.
Accounting principles are meant to reflect cost values, but
fair value should also be considered for carrying values for
annual financial statement preparation. This includes
revaluations of tangible assets. It is indicated that valuations
should be completed by a professional valuator (i.e. a
member of a relevant professional body with national or
international recognition).
MoF Order 1752/2005 includes guidance on valuation
methods and accounting principles to be considered in the
maintenance of financial records and in the preparation of
annual financial statements.
There is no direct mention of International Financial
Reporting Standards (IFRS) in MoF Order 1752/2005 or the
accompanying accounting regulations (AR4 and AR7).
There is, as far as AR4 and AR7 are concerned, a
consistency in many areas with IFRS, and we assume, but it
is not stated, that where further guidance is required, there
should be a reference to the relevant IFRS. In many areas

Ernst & Young

IFRS will provide further guidance on valuation methods and
accounting policies.

Disclosure, reporting and filing


At the same time, there are some IFRS that are not applied
or have only limited comment in AR4, such as:
Deferred taxation, while applying under MoF Order
94/2005, there is no requirement to apply IAS 12 Income
taxes to consider calculation of deferred tax based on
differences carrying value of assets and liabilities at
period end for tax purposes compared to accounting
carrying values.
For treatment of financial instruments2 there is some
mention of treatment, but it is uncertain as to what extent
the comments apply the requirements of IAS 32 Financial
instruments disclosure and presentation and IAS 39
Financial instruments recognition and measurement.

MoF Order 1752/2005 has been effective from 1 January

2006 for reporting year ending 31 December 2006.

An entity that meets the size criteria during two consecutive

financial years or that is a listed company3 is required to
annually complete financial statements that comprise:
Balance sheet
Profit and loss statement
Statement of changes in equity
Cash-flow statement
Explanatory notes.

No functional currency concept as indicated in IAS 21

The effects of changes in foreign exchange rates.
IFRS 3 Business combinations is not touched on.
IAS 18 Leases, some limited comment.
No specific addressing of matters referred to in: IAS 11
Construction contracts, IAS 14 Segment Reporting,
IAS 19 Employee Benefits, IAS 35 Discontinuing
operations, and IAS 41 Agriculture.
For intangible assets, there are some specific treatments
prescribed, that are not in all cases consistent with IAS 38
Intangibles. This includes treatment for depreciation of
goodwill arising from acquisition.
Extent of specific disclosure requirements is more limited
than IFRS requirements.
IFRS have more guidance on accounting policies and
principles in specific areas and for specific industries.

Broadly speaking, MoF Order 1752/2005 should provide

enough guidance for most entities in most situations. As
application commences, some issues on treatment and
disclosure may arise, requiring further clarification. In
addition, there are plans to issue a revised Company Law in
2006, which may also impact on MoF Order 1752/2005
practical application, as may subsequently issued rules and
regulations by the Romanian Securities Commission and
other authorities.
In relation to accounting policies, AR4 indicates that:
specific principles and policies adopted by the entity in
preparing, drafting and completing its annual financial
the management of each entity shall set the accounting
policies for the operations carried out, to reflect the
specific activity of the entity;
in establishing accounting policies, an entity needs to
ensure that the general accounting principles
(fundamental concepts) as included in AR4 are
accounting policies should be:
- relevant for the needs of the users in the decisionmaking process;
- credible present a true and fair situation, be
neutral, be prudent and be complete in all significant
- only be changed if required by law or to present more
relevant or credible information.

Financial instruments refer to: cash, equity instruments, cash contractual

rights (receivables, payables, other receivables, other liabilities).


MoF Order 1752/2005 differentiates between entities that

need to meet all financial reporting requirements and those
that can complete abridged financial reporting. The entities
are differentiated by size criteria. The size criteria indicated
are: [Art 3(1)]
Total assets
(for the period) (at year end)
EUR mn
EUR mn
31 December year end
Over 7.3
Over 3.65

Average no. of
employees for
the period

For 2006 reporting, the above criteria are to be based on the

financial statements for the year ending 31 December 2005.
Some subcategories of main balance sheet items can be
combined, where amounts are immaterial or where
combination would provide for greater clarity. This does not
apply for listed companies.
Entities that do not meet the size criteria are required to
Abridged balance sheet
Profit and loss statement
Explanatory notes to the simplified financial statements
At their own discretion, entities below the size criteria may
prepare a statement of changes in equity and/or cash-flow
In addition the annual financial statements for all entities
(regardless of size) should be accompanied by a written
declaration of the responsibility for entity management for the
annual financial statement and an Administrator(s) Report on
Certain Groups may be required to complete consolidated
financial statements (see further comment below).
MoF Order 1752/2005 details a specified chart of accounts
listing to be applied and includes direction for the mapping of
individual accounts to the balance sheet and income
statement formats.
The general chart of accounts has the following categories:
Class 1 Equity accounts
Class 2 Non-current assets
Class 3 Inventories and work in progress
Class 4 Third party accounts (receivables and payables)
Class 5 Treasury accounts
Class 6 Expense accounts
Class 7 Revenue accounts
Class 8 Special accounts (off-balance sheet)
Class 9 Management accounts4.

An entity that has its securities traded on a regulated market.

Use of the accounts in Class 9 is optional.

Romanian Business Digest 2006

Ernst & Young

Specified formats are provided in AR4 for:
Balance sheet (full and abridged)
Profit and loss statement
Statement of changes in equity
Cash-flow statement.
Explanatory notes are to be completed to:
present information on the accounting regulations
underlying the preparation of the annual financial
statements and the accounting policies used;
provide additional information that is not disclosed in the
financial statements5, but that is relevant for the
information user to understand the financial statements.
Specific details for compulsory explanatory notes preparation
are included in MoF Order 1752/2005 (AR4). These include:
Non-current assets
Profit distribution
Analysis of operating result
Statement of receivables and payables
Accounting principles, policies and methods
Interest and financing sources
Information regarding employees, administrators,
management and supervisory bodies
Computation and analysis of the main economic and
financial indicators
Other information.
If there is any departure from the indicated general
accounting principles (fundamental concepts) that underlie
MoF Order 1752/2005 requirements, then disclosure of the
reason and impact is required.
MoF Order 1752/2005 in AR 4 details disclosures that are
required as part of explanatory notes to the annual financial
Specific disclosure requirements are also indicated for
matters such as:
accounting policies, including valuation methods and
basis for conversion of transactions into national
currency, as applicable;
changes to accounting policies, including impact on
current financial year results;
name of entity, main place where activities are performed
and registered office, main activities, name of parent and
ultimate holding company;
related parties for relationship, balances at period end
and transactions during the period;
non-current asset details and movements;
information on revaluations, including method of
revaluation and impact;
information on financial instruments;
details on participating interests and investments;
disclosures by category for: receivables, payables and
inventory and other relevant information;
provisions, for comments on composition and
reconciliation between accounting results and fiscal result
and taxation payable at period end;
information on composition of share capital by type and
securities issued during the year;

turnover details by separate activities and geographic

information on distribution of net profits, including details
on dividends proposed and/or paid;
commitments and contingencies;
events after balance sheet date;
financial auditors fees disclosures.
average number of employees by main categories and
related personnel costs;
management and supervisory boards;
amounts paid under lease agreements and on going
obligations under lease agreements.

Report of the Administrator(s)

A Report of the Administrator(s) is to be completed with each
financial year to accompany the annual financial statements.
The Report is to provide comment on the current years
activities of the entity, the financial position and a description
of the main risks and uncertainties facing the entity.
Disclosure of financial ratios and non-financial ratios is
Specific items to be addressed, as applicable are:
Significant events that occurred during the financial year
Probable evolution of the entity
Research and development activities
Purchase of own shares
Branches of the entity
Use of financial instruments and potential associated

Approval and publication

The annual financial statements include details of the
persons that have prepared the financial statements. The
Administrator (or Chairman of the Administration Board) and
the preparer are required to sign the annual financial
On completion the annual financial statements and the
Report of the Administrator(s) are presented to the general
meeting of shareholders.
The annual financial statements, the Report of the
Administrator(s) and the Report of the Financial Auditor are
published in compliance with legislation.
Current publication requirements are for the annual financial
statements and related reports to be submitted to the Trade
Register in the location where the entity is registered.
For entities the following deadlines apply for completion and
submission of annual financial statements to the Trade
150 days after closing of the financial year for operating
entities above the size criteria and public interest entities;
120 days after closing of the financial year for operating
entities not meeting size criteria or being public interest
60 days after closing of financial year for micro
60 days after closing of financial year for dormant

Financial statements refer to: balance sheet, income statement and, if

applicable, the statement of changes in shareholders equity and the cash-flow


A company which does not have its own accounting

department and/or a qualified person in charge of the
accounting records, and which has turnover greater than the

Ernst & Young

lei equivalent of EUR 50,000, must contract an authorised
person (individual or firm) to prepare its financial statements.

Dividend distribution

Report of Administrator(s)
Audit requirements
Approval, execution and publication
Layout of consolidated balance sheet and consolidated
profit and loss statement.

Dividend distribution is based on the statutory accounting


The guidance provided is consistent with the EU 7th Directive.

Consolidated financial statements

2007 year end requirements

In addition to comments in MoF Order 1752/2005 [Art 7

and 8], specific guidance is provided in the accompanying
Accounting Regulations Compliance with the 7th Directive
of the European Economic Communities (AR7).

MoF Order 907/2005 provides that subject to further

regulations to be published by relevant Romanian
authorities6, the following entities will be required to comply
with applicable International Financial Reporting Standards
for the 2007 financial year, including:
Credit institutions
Insurance and re-insurance companies
Listed entities and entities with securities traded on a
regulated market
State-owned entities
Entities which benefit from State support or State

Consolidation is required where an entity has the majority of

voting rights in another entity or substantially controls another
If any entity in the Group is a listed company then
consolidated financial statements must be prepared.
If a Group does not contain a listed company, then it is only
required to prepare consolidated financial statements if the
Group meets size criteria. The requirement for the
preparation of consolidated financial statements is to meet
two of the following three criteria based on the latest annual
financial statements:
Total assets
(for the period) (at year end)
EUR mn
EUR mn
31 December year end Over 35.04
Over 17.52

Average no. of
employees for
the period

Even if a Group meets the requirements as indicated above,

it is not required to prepare consolidated financial statements
if the parent entity of the Group is also a subsidiary entity and
its own parent entity is governed by Romanian law or EU
member state law and:
where the parent entity holds all the shares in the
exempted entity; or
where the parent entity holds 90% or more of the shares
in the exempted entity and the remaining shareholders in
or member of the entity have approved the exemption.
The above exemption has some additional conditions that
need to be met.
The exemption does not apply for entities that:
are listed companies;
have a requirement as a State institution or for
employees information.
A subsidiary does not need to be included in the
consolidation if:
not material to provide a true and fair view of the assets,
liabilities, financial position, results for the period for the
consolidated Group as a whole;
the individual entity:
- has severe long-term restrictions to hinder operations;
- information necessary for the preparation of
consolidated accounts cannot be obtained without
disproportionate expense or undue delay;
- the shares of that entity are held exclusively with a
view to a subsequent resale.
AR7 provides guidance for consolidated financial statements
in relation to:
Preparation principles
Content of explanatory notes

For 2007 IFRS compliance, preparation of financial

statements based on IFRS for the financial year ending 2006
would be required to enable comparatives to be available for
2007 reporting.
Banks and insurance companies
Over recent years, there have been changes in financial
reporting for banks and insurance companies to bring
Romanian requirements in line with European Union
directives and International Accounting Standards for Banks.
Initially legislative changes were under MoF/National Bank of
Romania Order 1982/5/2001 (for banks) and MoF Order
2328/2001 (for insurance companies).
As indicated above, MoF Order 905/2005 requires
compliance with IFRS for banks and insurance entities for the
financial year 2007.
Further guidance on IFRS adoption
Minister of Finance Order 1121/2006 provides additional
guidance on the application of IFRS commencing with the
year ending 31 December 2007. MoF 1121/2006 is short and
reiterates certain points from MoF Order 905/2005. Included
in MoF 1121/2006 (article 4) is a comment that where IFRS
financial statements are prepared by an entity, that the entity
will be required to complete annual financial statements in
accordance with the European Directives. It would appear
from this that entities preparing IFRS financial statements will
also be required to prepare financial statements for
submission to the Romanian State authorities a set of
financial statements prepared in compliance with MoF
1752/2005, under current legislation. This is a matter that
further clarification is required.

Significant accounting concepts for

investors and users of financial
reporting information
Historically, Romanian accounting records have been heavily
influenced by the use of information for tax compliance
purposes. The primary function of financial/accounting details
collection and recording process has been seen by many

Relevant Romanian authorities include: Ministry of Finance, National Bank of

Romania, Insurance Supervision Commission and the National Securities

Romanian Business Digest 2006

Ernst & Young

Romanian entities and the management/staff within the
entities (both State and private) as being for taxation
compliance and taxation reporting purposes. As a result of
this, the reported information has tended to reflect a form
over substance disclosure, that is, greater importance is
placed on having particular documents or recording
something in a specific way, rather than in accurately
reflecting the financial position of the enterprise at a point in
time or indicating whether the results for the period are an
appropriate representation of what has occurred, as
International Financial Reporting Standards and EU
4th Directive require.
Romanian accounting laws and regulations are not as such at
fault, as they both seem to provide for and encourage
treatments that are consistent in many ways with international
accounting principles. Issues have, however arisen in how
laws and regulations are applied and have tended to reflect
the background and outlook of Romanian accountants.
Up to 31 December 2003, Romania was considered to be a
hyperinflationary economy, under the criteria of IAS 29
Financial reporting in hyperinflationary economies. For
Romanian statutory reporting IAS 29 was not applied. In
looking at financial statements where there are significant
non-monetary items, users should keep this in mind.
The introduction of MoF Order 1752/2005 should provide for
consistency in accounting and presentation for Romania with
current EU member states and has in mind the planned 2007
accession into the EU of Romania.

Audit requirements
All entities meeting the size criteria requirements and public
interest entities (including listed companies) are required to
have a financial audit.
Entities preparing simplified financial statements do not
require a financial audit, unless required by other legislation
(such as Company Law).
The financial auditor issues a report, which while not stated
in MoF Order 1752/2005, it is assumed that the report of the
independent financial auditor is addressed to the
shareholders (or equivalent) at the annual general meeting of

Matters to be included in the Report of the financial auditor

are indicated in MoF Order 1752/2005. In addition the
financial auditor is required to comply with audit standards as
issued by the Romanian Chamber of Auditors.
A financial audit can be completed by a financial auditor,
which can be an individual or a company that is a member of
the Romanian Chamber of Auditors.
The Romanian Chamber of Auditors was established by
Ordinance 75/1999 (as subsequently approved by Law
No. 133/2002) to establish auditing standards in Romania
and to monitor the profession in relation to membership and
qualification standards, including establishment of
examinations and membership criteria, ongoing training
programmes, ethical standards and quality review
The Chamber of Auditors has adopted the International
Standards on Auditing as issued by the International
Federation of Accountants for application in Romania.
Listed companies
The report of the independent financial auditor is also issued
to the Romanian Securities Commission with the annual
financial statements for listed entities.
As indicated above, MoF Order 907/2005 introduces, subject
to further regulations, a requirement for listed entities to
prepare annual financial statements based on the
requirements of IFRS for Financial Year 2007.

Impact of changes in Romanian

Company Law on financial reporting
Further changes to Romanian Company Law (Law 31/1990,
as amended) are expected to be completed during 2006.
These are expected to further clarify the auditing
requirements in Romania and address such accounting
related matters as: reporting requirements, Administrator(s)
and management roles and responsibilities, corporate
governance and dividend declaration and payment.

Ernst & Young Romania

Strada Dr. N. Staicovici Nr. 75, Forum 2000, Etaj 8
Sector 5, 050557, Bucure[ti
Tel.: +40 21 402 4000
Fax: +40 21 410 4965
Garry R. Collins, Partner - Assurance & Advisory Business Services
E-mail: garry.r.collins@ro.ey.com
Camelia Horlaci, Partner - Statutory Financial Accounting Services
E-mail: camelia.horlaci@ro.ey.com


Taxation in Romania*
by Ernst & Young

Corporate taxes at a glance Taxes on corporate income and gains

Withholding taxes Value added tax (VAT) Customs duty
Excise duty Local taxes Stamp duty Individual taxation
Fiscal Procedure Code Fiscal sanctions
Corporate taxes at a glance
Corporate income tax rate (%)


Capital gains tax rate (%)


Branch tax rate (%)


Withholding tax (%)












Entertainment and sports activities 16

Branch remittance tax


Net operating losses (years)



(a) See section related to profits tax. (b) The withholding taxes referred
to above are levied on income earned in Romania by non-resident
individuals and legal entities (referred to below as non-residents),
income that is not attributable to a Romanian permanent establishment
of the non-resident income recipient. (c) The 10% rate applies to
dividends paid by resident legal entities to other resident legal entities.
Dividends paid by resident legal entities to non-residents (i.e.,
individuals and legal entities) or resident individuals are subject to the
16% withholding rate. (d) The 10% rate applies to non-residents for
interest income related to term deposit, deposit certificates and other
savings instruments provided by banks and other authorised lending
institutions from Romania if they were set-up or acquired between 1
June 2005 and 31 December 2005. Starting 1 January 2006, the rate
increased to 16%. The following categories of interest derived by nonresidents are not subject to withholding tax: interest income related to
on-sight deposits with an interest rate equal or less than the reference
interest rate on the inter-banking market; interest related to foreign loans
or debt instruments, as well as interest related to state bills issued on
the domestic and external markets, if they are issued and/or guaranteed
by the Romanian government, local councils, the National Bank of
Romania or by financial institutions acting as agents for the Romanian
government; and interest related to debt instruments or securities traded
on a recognised stock market and issued by a Romanian legal entity
that is not affiliated to the interest recipient. (e) Withholding tax generally
applies to services rendered in Romania, except for international
transport and services related to such transport. However, income from
management and consultancy services is taxable regardless whether
these services are rendered in Romania or abroad, if such income is
obtained from a resident or if it is a cost of a permanent establishment
in Romania. (f) See section related to determination of taxable income.

Taxes on corporate income and gains

The Fiscal Code came into effect on 1 January 2004. The code integrates key tax legislation
and provides the basis for a stable framework of tax legislation, by requiring amendments to
necessarily follow a specific juridical route.
Fiscal year
In Romania, the fiscal year is the calendar year.
Corporate income tax
Resident entities are subject to tax on worldwide income. An entity is resident in Romania if it is
incorporated in Romania or if its effective management and control are in Romania.
Associations or consortia between Romanian legal entities, which do not qualify as a legal
person, are taxable in Romania separately at the level of each partner. For such associations
between a Romanian legal entity and individuals or foreign entities, the tax must be computed
and paid by the Romanian legal entity on behalf of the individuals or its foreign partners.
Non-resident companies are subject to tax on their Romanian-sourced income only. Sale of
shares held in Romanian companies by non-resident companies and sale of real estate located
in Romania are also subject to profits tax in Romania (see section related to capital gains tax).

Note: The information presented in

this article is based on legislation
applicable in July 2006.

Non-resident companies are taxed in Romania at the standard rate of 16% on earnings derived
exclusively from their Romanian operations (through branches, permanent establishments or
consortia). A foreign company is considered to have a permanent establishment in Romania,
without a legal presence here, if it has any of the following types of presence in Romania: an
office, a branch, an agency, a factory, a mine, land for oil and gas extraction, a building site that
exists for a period exceeding six months.

Ernst & Young

Rates of corporate income tax
The standard rate of tax for Romanian companies is 16%.
Profits tax payable by companies earning revenues from
bars, nightclubs, discos, casinos and sports betting (including
revenues obtained based on an association agreement) is
computed at the standard 16% rate, provided the tax amount
is not less than 5% of the total declared revenue. In case the
profits tax payable is below this threshold, the taxpayer is
liable to pay corporate income tax computed at 5% of the
declared revenue from such activities.
Representative offices are taxed on a yearly basis at a lump
sum of the RON equivalent of EUR 4,000, payable in two
equal instalments.
Capital gains tax
No separate capital gains tax is payable by resident entities.
Capital gains from sale of immovable property located in
Romania or from sale/transfer of shares held in a Romanian
legal entity are taxed at the standard corporate tax rate of
Dividends paid by a Romanian legal entity to another
domestic entity are subject to a 10% withholding tax, while
dividends paid by a Romanian company to a non-resident
(both legal entity and individual) are subject to a 16%
withholding tax or, if a double tax treaty is applicable, to a
more favourable tax rate available under the respective
Dividends paid by a Romanian entity to individual resident
shareholders are subject to a 16% withholding tax rate.
Payments made by a Romanian legal entity to any of its
shareholders for goods or services provided by the latter, in
excess of the market value of the transaction, are assimilated
to dividends from a tax point of view. The same tax treatment
will apply to payments made for supply of goods/services to
be used for personal purposes by the companys
shareholders or associates.
The dividend tax must be withheld and paid to the state
budget by the 25th of the month following the payment of
dividend. In case of dividends declared to Romanian
residents (legal entities or individuals) which were not
effectively paid by the end of the year, the dividend tax must
be paid by 31 December of the respective year.
A participation exemption is granted to dividends paid
between Romanian legal entities, provided a participation of
at least 25% in the share capital of the paying entity existed
for a period exceeding two years. However, such an
exemption would only be available after Romanias accession
to the European Union.
Foreign tax relief
Foreign income of Romanian entities is included in the
taxable income. This includes passive income as well as
capital gains. However, a credit is allowed for foreign taxes
paid, up to the level of the Romanian tax on that income.
After Romanias accession to the European Union, dividends
received from EU resident entities would constitute nontaxable income at the level of the Romanian recipient, if the
Romanian beneficiary of dividends held at least 25% of the
shares of the EU entity for at least two years.
Determination of taxable income
Starting point for determining taxable income
Taxable income equals revenues from all sources, including
the delivery of goods and the supply of services, less

deductible expenses, non-taxable revenues and other

deductions and adding the non-deductible expenses.
The following items are considered as non-taxable:
dividends paid out by a Romanian entity to another
Romanian entity. Dividends received from a non-resident
are taxable (see also the Foreign tax relief and Dividends
gains in the value of shares held in other entities,
registered further to the increase of capital in those
entities through incorporation of reserves, premiums,
profits, etc.;
revenues from the reversal of expenses and provisions
previously considered as non-deductible;
non-taxable income, expressly provided by specific
As a rule, expenses related to earning taxable revenues
including those regulated by legal norms are considered
The Fiscal Code also provides for certain types of expenses
that are specifically deductible such as:
expenses incurred for labour protection, prevention of
professional hazards and diseases and insurance
premiums for professional risks;
advertising and publicity expenses for the promotion of
business, products and/or services, if properly
documented, as well as expenses for other goods and
services incurred to boost sales;
transport and accommodation expenses of management
as well as other authorised persons, based on contractual
clauses, provided the taxpayer makes a profit in the
current and/or in the previous years;
subscription fees, dues and other mandatory
contributions, as provided by legal norms;
contributions to the fund for the negotiation of the
collective labour contract;
expenses associated with professional training of
marketing expenses, market research and promotion
expenses in existing or new markets, participations in
fairs and exhibitions, business missions;
research and development expenses, in case these do
not qualify as intangible assets from an accounting
expenses for the improvement of management, of
maintenance and improvement of quality management
systems, for the acquisition of certificates attesting quality
expenses for the protection of environment and
conservation of resources;
expenses related to losses made by companies when
writing off doubtful or disputed uncollected receivables in
case of bankruptcy (based on a final court decision), as
well as in other cases such as death of the debtor (when
the receivable cannot be collected from the heirs),
dissolution of SRLs with sole shareholders or liquidation
in case no successor exists and when the debtor has
financial difficulties;
registration fees, dues and contributions owed to
commercial chambers, unions and owners associations.
Key items which are partially deductible include, inter alia:
provision expenses and contribution to reserve funds
exceeding specified limits (see the Provisions and
reserves section);
Romanian Business Digest 2006

Ernst & Young

protocol and entertainment expenses (i.e., gifts to clients,

business lunches) up to 2% of the adjusted accounting
profit before tax;
employee-related expenses (i.e., birth, death, incurable
disease support, expenses aimed at the proper
functioning of certain units/activities of taxpayers, e.g.,
kindergartens, health units, canteens, sports clubs,
sponsorship for schools, as well as Christmas gifts for
employees children, part of employees transport costs,
treatment in health resorts) currently up to 2% of the total
salary cost;
expenses on meal vouchers, in accordance with the law;
perishable goods within the limits provided by
government-approved norms;
interest expenses and foreign exchange differences
within the limits described in the Thin capitalisation rules
expenses on behalf of employees in relation to optional
occupational pension schemes, within legal limits (i.e.,
EUR 200);
health insurance premiums within the legal limits (i.e.,
EUR 200);
expenses for the maintenance or repair of cars used by
management and administrative personnel, limited to one
car per person.

Key expenses which are non-deductible include, inter alia:

Romanian and foreign profits tax (a tax credit is allowed
for taxes paid in other countries refer to the Foreign tax
relief section);
sponsorship expenses (a tax credit is allowed for
sponsorship expenses on meeting certain conditions
refer to the Sponsorship section);
late payment interest, penalties and fines paid to
Romanian or foreign authorities and non-residents;
losses from reduction in the value of inventory and assets
which have not been insured, including the corresponding
VAT on goods given to employees as benefits in kind, if
they were not taxed at employees level;
any expenses made in favour of shareholders or
associates, other than those generated by payments for
goods and services at the market value;
insurance premiums that are not related to the taxpayers
assets or its business scope, except for rented and leased
assets or assets used as collateral for a business-related
insurance premiums and other employment-related
expenses that are not taxable at the level of the
expenses related to non-taxable income;
service expenses, including management and
consultancy expenses, which cannot be substantiated by
written contracts and documents proving the rendering of
the services;
losses in the value of shares held in other entities, except
for losses made by selling such shares;
contributions paid in excess of the legal limits or that
which are not regulated by legal norms.

sponsorship expenses do not exceed 20% of the profits

tax liability.

Provisions and reserves

Under existing regulations, the following provisions and
reserves are deductible for profits tax purposes:
contributions to the legal reserve fund, generally up to 5%
of the adjusted annual accounting profits before tax, until
the reserve fund reaches 20% of the social capital;
bad debt provisions within the limit of 30%, if certain
conditions are met. Starting 1 January 2007, the bad
debt provision is entirely deductible if certain conditions
are met;
provisions for quality performance guarantees granted to
specific provisions and reserves created by banks and
other credit institutions, mortgage companies and
financial services companies, as provided by the laws
governing these entities;
provisions set by guarantee funds as provided by the
norms of the National Bank of Romania;
technical reserves set by insurance and re-insurance
companies, as provided by the relevant regulatory laws;
risk provisions for financial market operations, as
provided by the regulations of the National Securities
Thin capitalisation rules
Usually, interest expenses incurred by companies (other than
credit institutions) are subject to the following limitations:
Debt-equity ratio interest expenses are deductible if the
debt-equity ratio is lower than 3. In case such ratio is
higher than the aforementioned limit, interest expenses
are non-deductible for profits tax purposes and can be
carried forward until they are fully deductible under the
same conditions.
Interest expenses for loans granted by companies other
than lending institutions are deductible based on the
following limits:
- the reference interest rate of the National Bank of
Romania relating to the last month of the quarter, for
loans denominated in RON;
- the annual interest rate of 6%, respectively 1.5% per
quarter for loans in foreign currencies.
Separately, the difference between foreign exchange losses
and foreign exchange revenues relating to long-term loans
(over 1 year) is treated as interest expense and is subject to
the debt-equity ratio limitation (see above).
The interest expenses as well as the foreign exchange
differences related to loans obtained from Romanian banks
(including subsidiaries of foreign banks), leasing companies
(for leasing operations) and other legal entities allowed to
grant credits according to the law are not subject to the thin
capitalisation rules.
Deductibility of interest expenses incurred by lending
institutions is not limited based on the above-mentioned


Tax depreciation

Taxpayers incurring sponsorship expenses in accordance

with relevant legislation are entitled to a tax credit (i.e.,
deduction from the profits tax payable of an amount equal to
the sponsorship expense) if the following conditions are
cumulatively fulfilled:
sponsorship expenses do not exceed 0.3 of the
turnover; and

Three alternative methods are available for the computation

of tax depreciation, namely:
straight-line depreciation;
reducing balance depreciation; and
accelerated depreciation (for equipment and patents).


These methods must be followed consistently.


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Buildings can be depreciated only on the straight-line
method. Land is not a depreciable asset.

distributed shares, proportionally with their market value

immediately after the distribution.

From a tax perspective, the law prescribes the concept of

useful lives, which are provided by Government Decision, as

If a Romanian entity holds more than 25% of the shares in

another Romanian entity, which is transferring its assets and
liabilities to the shareholder, the cancellation of the shares is
not a taxable transfer.

Buildings and constructions (e.g. roads and fences) 8 to 60
Machinery and equipment
2 to 24
Furniture, fittings and protection systems
2 to 15
3 to 9
The useful life for each type of asset is provided as an
interval. Upon commissioning, the taxpayer is allowed to
choose a useful life within such interval. In case of
improvements upon depreciable assets that are expected to
result in future benefits, the useful life may be increased
by 10%.
Patents, licences, know-how, manufacturers brands,
trademarks, as well as other similar industrial and commercial
property rights are depreciated over the period provided for
their utilisation or the contractual period, as the case may be.
Goodwill is not considered a depreciable asset for tax
The revaluation of fixed assets after 1 January 2004 is not
to be taken into account for fiscal purposes.
Reorganisation, liquidation, other transfers
Capital contributions in exchange of shares are not
considered taxable transfers. The tax value of the assets
received as contribution is equal to the tax value of these
assets when held by the contributor. At the same time, the tax
value of shares received by the contributor equals the tax
value of the contributed assets.
Asset distribution to shareholders, either as dividend or
following liquidation, is taxable, except in case of:
merger, whereby the shareholders of merging entities
receive shares in the resulting entity;
split, whereby shareholders receive proportional stakes in
the resulting entities;
acquisition of the business of a Romanian entity by
another Romanian entity in exchange of shares;
acquisition by a Romanian entity of at least 50% of shares
in another Romanian entity, in exchange of its own
shares, and, as the case may be, for a cash payment not
exceeding 10% of the nominal value of the newly issued
In the above-mentioned cases, the following rules apply:
transfers of assets/liabilities and exchange of shares held
in one Romanian entity with the shares in another
Romanian entity are not taxable;
in a split, distribution of shares is not treated as dividend
tax value of assets/liabilities for the receiver equals the
tax value of the same items for the transferor;
fiscal depreciation for assets continues in the same
manner as before the transfer;
transfer of provisions/reserves is not taxable if the
receiver takes them over and maintains them at the same
value as before the transfer;
in a share exchange (as above), the tax value of shares
received equals the tax value of the shares transferred;
in a split, the tax value of shares held before the
distribution is allocated between these shares and

Transfer pricing
According to Romanian fiscal legislation, transactions
between related parties must be carried out in accordance
with the arms-length principle (i.e., transactions should be
carried out at the same price as if concluded among nonrelated parties). The methods for the assessment of market
value include: the Comparable Uncontrolled Price Method,
the Cost Plus Method, the Resale Price Method and any
other method recognised by the transfer pricing guidelines
issued by the Organisation for Economic Cooperation and
Relief for losses
Tax losses may be carried forward over five years and are
not updated for inflation purposes. Loss carry-forward is not
available for entities that cease to exist as a result of a split or
merger. The carry-back of losses is not permitted.
Fiscal consolidation
The legislation regarding consolidation of companies is at an
early stage of development and till now only the consolidation
for accounting purposes is regulated. Special norms for
consolidation of financial statements for credit institutions are
available since 2002 for company groups headed by a bank
and beginning 2003, for those held by a credit cooperative.
There is no existing provision in legislation on consolidation
for tax purposes.
Filing tax returns
Taxpayers are required to file profits tax returns and pay
profits tax quarterly (except for banks that fulfil such
obligations monthly) by the 25th of the first month of the
following quarter. The definitive annual tax return should be
filed along with the financial statements. As an exception,
certain categories of taxpayers have the liability to pay the
profits tax by February 15th of the following year.
Legal entities ceasing to exist need to file a final tax return
and pay the profits tax within 10 days prior to registering
such an event with the Trade Registry.

Withholding taxes
Withholding tax is applicable on a number of payments made
by Romanian tax residents to non-resident recipients.
Types of payments which require withholding tax are
presented in the table below.
Type of payment
Withholding tax rate (%)
Interest, except interest income
expressly exempt (see footnote below)
Various services
Gambling income
1 - The 10% rate applies to non-residents for interest income related to term
deposits, deposit certificates and other savings instruments provided by banks
and other authorised lending institutions in Romania set up or acquired
between 1 June and 31 December 2005. The 16% rate applies to

Romanian Business Digest 2006

Ernst & Young

non-residents for any other interest income except the following, which are
specifically exempt: interest income related to on-sight deposits with an interest
rate equal or less than the reference interest rate on the inter-banking market;
interest related to foreign loans or debt instruments, as well as interest related
to state bills issued on the domestic and external market, if they are issued
and/or guaranteed by the Romanian government, local councils, the National
Bank of Romania, or by financial institutions acting as agents for the Romanian
government; and interest related to debt instruments/securities traded on a
recognised stock market and issued by a Romanian legal entity that is not
affiliated to the interest recipient.
2 - Also see the participation exemption to be available after Romania joins the
European Union.

After Romania joins the European Union, a participation

exemption will be available for dividends paid out to
companies incorporated in the European Community
countries, provided the beneficiary of dividend holds a
minimum of 25% in the Romanian company paying the
dividends for at least two years.
Incomes received by non-residents from consultancy and
assistance services based on contracts financed by
international financing bodies with which Romanian state
authorities or Romanian legal entities signed financing
agreements is not subject to withholding tax if the interest
rate charged for such financing is less than 3% per year. The
qualifying entities are European Bank for Reconstruction and
Development, International Bank for Reconstruction and
Development, International Finance Corporation and the
Association for International Development, International
Monetary Fund, European Investment Bank. The exemption
applies also in case of non-resident entities earning income
from consultancy services based on non-reimbursable
financing agreements signed between the Romanian
government and foreign governments or organisations.
The withholding tax must be paid to the state budget by the
25th of the month following the one in which payment was
Companies are required to file an annual withholding tax
return till 28th (29th) February of the year following the relevant
tax year.
Romania has signed around 80 agreements since the 1970s
for the avoidance of double taxation, which may reduce the
applicable withholding tax rate.
In order to apply the more beneficial provisions of a treaty, the
income beneficiary has to provide a certificate of tax
residence issued by the foreign tax authority. The domestic
law bans application of double tax treaties in case of net-oftax arrangements.
Historically, the interpretation of treaty provisions by
Romanian authorities has led to withholding tax being applied
on a wide range of services, contrary to OECD principles.
In view of this practice, a foreign services provider may be
advised to review the residence country tax credit
mechanisms to ensure availability of credit for taxes withheld
in Romania.

Value added tax (VAT)

VAT representative
Foreign companies without an establishment in Romania but
making taxable supplies in Romania are required to appoint a
VAT representative, who will be responsible for fulfilling the
administrative obligations and the payment of tax due on
behalf of the foreign entity. In case foreign suppliers of
services do not appoint a VAT representative in Romania,
beneficiaries are liable to account for/pay the related VAT.
Taxable operations
Transactions subject to VAT refer to the supply of goods,
services and the import of goods. To be taxable, a supply
must be made for consideration.
Supply of goods
Supply of goods refers to the actual transfer of the ownership
of the goods from one person to another against payment,
directly or through an intermediary.
As a rule, supply of goods has the place of supply where the
goods are located at the moment when the delivery takes
place, with certain exceptions for goods to be transported,
installed, or for goods to be delivered on board of ships,
aircraft, trains, etc.
Supply of services
The supply of services is taxable in Romania if the place of
supply is deemed to be in Romania. The general rule is that
the place of supply is considered the place where the supplier
has his business, his fiscal establishment or residence.
However, there are several exceptions similar to those listed
in the 6th EU Directive (e.g., services related to immovable
property place where immovable property is located;
renting and leasing of movable goods and intangible
services place where the recipient of the services is
located). The term services applies to all transactions not
treated as supply of goods.
Import of goods
Goods brought from abroad and introduced into the territory
of Romania are considered import of goods and within the
scope of VAT with certain exceptions (i.e., supply of goods
under customs duty suspension regime).
Reverse-charge VAT
For certain services provided by a foreign supplier for which
place of supply is deemed to be in Romania (e.g., leasing
and rent of tangible assets, marketing, e-services, banking,
non-competition assurance and other specified services), the
law imposes the application of the so-called VAT reversecharge mechanism by the Romanian beneficiary.
Under the reverse-charge mechanism, the beneficiaries
(provided they are registered for VAT purposes) have to
simultaneously recognise the related VAT both as input and
output VAT in the returns of the respective month, based on
a self-invoicing system.

The Romanian VAT system is modelled on the 6th EU
Directive and aims at full harmonisation in the near future.
Taxable persons
Any person supplying taxable goods or services in the course
of business on a regular basis is considered a taxable
person. The term business refers to all independently
carried out activities of producers, traders and suppliers of

Simplified recording of VAT

For certain deliveries of goods (e.g., waste and scrap
materials, land, buildings, wood products, etc.), a simplified
VAT recording mechanism similar to the reverse-charge
mechanism is applicable, provided that both the seller and
the purchaser are registered as VAT payers.
Under this mechanism, both the seller and the purchaser
have to simultaneously recognise the related VAT both as an
input and output VAT in the return of the respective month,
without any cash flow implications.

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Taxable base
VAT is assessed on the total amount received or to be
received by the supplier, as consideration for the supply of
goods or services, including taxes, commissions, packaging,
transport and insurance expenses. The discount provided to
the client is not included in the taxable base.
Tax rates
The following rates apply in Romania:
19% standard rate, which is applicable to supplies of
goods and services not subject to VAT exemptions or to
the reduced rate; and
9% reduced rate, which is applicable to the suppliers of
certain goods/services specifically enumerated in the
Fiscal Code, such as sale of medicines, hotel
accommodation services, books, tickets to museums,
cinemas, etc.
Exempt operations
Supplies within the scope of VAT are classified as taxable
operations and exempt operations.
Exempt operations are divided as follows:
exempt supplies with credit for input tax (exemption for
exports and other similar supplies, international
transportation, as well as specific exemptions related to
international traffic of goods, certain transactions within
the free trade zones);
exempt supplies without credit for input tax (e.g.,
healthcare services, educational services, financial and
banking services, leasing and renting of immovable
property with certain exceptions, etc.);
import operations exempt from payment of VAT.
Import of goods received as donation for humanitarian,
social, religious, cultural, artistic, sports and scientific
purposes are VAT exempt.
Also, the Fiscal Code provides for specific rules regarding to
goods benefiting from special customs regimes. The
following transactions are VAT exempt with credit for input
tax, provided they do not lead to a final use/consumption of
goods within Romania:
supply of goods placed under a bonded warehouse
customs regime;
goods imported in free trade zones for storage purposes
goods introduced in free trade zones from abroad and
sold within the free trade zones.
Persons with an annual turnover in excess of RON 200,000
are required to register for VAT purposes. Persons not
meeting the above-mentioned turnover criterion may also
register for VAT purposes.
Credit for input VAT
General rule
As a rule, the performance of taxable supplies allows
offsetting output VAT against input VAT. Exempt supplies do
not allow the recovery of input VAT, except in the event of
VAT exempt supplies with credit, for which input VAT can be
recovered. Companies performing a combination of taxable
and exempt supplies generally have the right to recover the
input VAT on a pro-rata basis. The unrecovered input VAT
would generally represent a cost.
Refund of VAT
If the input VAT exceeds the output VAT, the recoverable
balance VAT (defined as negative VAT balance) can be:
carried forward to the next period; or

compensated/refunded by the tax authorities, based on

the option expressed by the taxpayer in the VAT return;
the option can be exercised only for negative VAT
balance exceeding RON 5,000.

The VAT refund/compensation request should normally be

carried out within a 45-day term, during which tax authorities
are entitled to require additional information from the
taxpayer. The term is to be extended for the period between
the date of the additional information request and the date of
the receipt of information by the tax authorities. In case the
refund/compensation request is not resolved at the expiration
of such term, the taxpayer is entitled to receive late payment
interest from the state budget.
Payment and filing requirements
Taxpayers must file VAT returns with the tax authorities and
pay VAT on a monthly basis, specifying the taxable amount
and the tax due. The tax return must be filed and the
respective VAT paid by the 25th of the following month. In
case of taxpayers whose annual turnover is less than EUR
100,000, the VAT returns should be filed with the tax
authorities on a quarterly basis.

Customs duty
Foreign trade was liberalised in 1990 and generally follows
the guidelines of the European Union. As a result of this
liberalisation and an on-going process of harmonisation of
Romanian customs rules with the EU system, import and
export of commodities are not generally subject to special
authorisations. Exceptions apply to quantity restrictions or
control requirements imposed through the different
agreements entered into by Romania.
Radioactive and explosive materials, chemical products,
residues, weapons, nuclear equipment and related materials
are subject to particular legislation requirements. Specific
laws prohibit the import of narcotics.
Customs duties
Customs duties are expressed as a percentage of the costinsurance-freight (CIF) value of goods. Other taxes, duties
and levies may be required to be paid upon import in addition
to customs duties, such as import VAT, excise duty, customs
commission and clearance fees.
Preferential rates apply to a wide range of products imported
in Romania based on certain free trade arrangements (see
the Regional and international trade agreements and
associations section). There are certain internationally
accepted norms that are essential for determining the
applicable customs duty rates, including the corresponding
international tariff headings, value declared in customs and
the country of origin of the goods.
Romania has adopted the Brussels Harmonised System for
the nomenclature of goods and follows the valuation rules of
the World Trade Organisation for the assessment and
declaration of the value in customs.
The law provides for two definitive procedures import for
free circulation and export. A definitive import requires the
payment of import duties (unless a specific relief is available);
the export of goods is exempt from duties.
Further to the June 2006 amendments to the Romanian
Customs Code, the current customs regulation provides for
several suspensive and economic customs regimes, which
may be granted for definite periods of time:
inward processing;
outward processing;
bonded warehouse;
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temporary admission;
transformation under customs control; and
customs transit.

The suspensive regimes do not require payment of customs

duties, although a bank guarantee equal to the amount of
such duties may be necessary.
The amendments to the Customs Code have introduced new
provisions for customs valuation, including provisional value
declaration, first sale-price provision, specific cases when
the declaration for customs value shall not be filed, royalties
and license fees, adjustment of the declared customs
value, etc.
Other changes to the Customs Code applicable from June
2006 include inter alia:
new provisions on the customs status of goods;
new conditions, technical procedures and documentation
requirements on economic customs regimes (including
inward/outward processing, bonded warehousing,
temporary admission, etc.), and on the simplified customs
clearance procedures;
transfer of rights and obligations of a titleholder of
favorable treatment, under specific conditions; and
new term of 24 months for keeping goods under the
Temporary Admission regime.
Besides the general customs clearance system, Romania
has adopted simplified customs clearance procedures similar
to those applied in EU.
In 2005, Romania adhered to the convention on the common
transit regime applicable in Europe. Generally, the common
transit system applies to goods transported by rail and road
in accordance with EU norms.
Specific customs duty rates, related tariff quotas and export
duties are applicable to trade in certain processed agricultural
products between Romania and EU. Additionally, starting
1 March 2006, a specific guarantee system was introduced
for import and export of agricultural products, in line with EEC

For travellers under the age of 15, the duty exemption can be
granted up to a total value of EUR 90 per person. The duty
exemption mentioned above for tobacco and alcoholic
beverages does not apply for travellers under 18 years.
After Romanias accession to the European Union, customs
regulations fully harmonised with EU regulations (EU
Customs Code EEC Council Regulation 2913/92 and
Implementing EEC Commission Regulation No. 2454/93),
Integrated Customs Tariff (common duty rates and
preferential trading relationship) and other related EU
Directives) would be applicable.

Excise duty
Excise duty is a consumption tax payable on certain
categories of goods including alcoholic beverages, gasoline,
tobacco products, cars, perfumes, electricity and certain
other items. The tax is payable on import and sales of locally
produced items on the domestic market and is set as fixed
EUR amounts per unit (specific excises) or as a percentage
of a specified taxable base.
The excise duties in respect to the main categories of goods
are given in EUR in the table below:
Category of products
Alcoholic products

Certain measures apply in case of goods entering/leaving

Romanian territory to ensure compliance with intellectual
property rights norms during customs clearance.
Temporary duty relief

Car fuel
Fur, jewels, crystal,

Certain customs regimes may defer, suspend or allow for the

refund of customs duties and other import-related taxes,
under conditions specifically stipulated in domestic customs
regulations. Such temporary duty relief may include the
bonded warehousing regime, inward and outward processing
relief or temporary admission regimes.
Customs regime for individuals
Customs regulations provide for a specific customs duty
treatment for the personal belongings of individuals
establishing domicile or residence in Romania, goods
introduced into Romania upon marriage, inherited goods and
household goods used for furnishing a secondary residence
in Romania, as well as goods shipped by individuals via
parcels and postal services.
A specific import duty exemption applies for goods in the
personal luggage of travellers, brought into Romania without
commercial purposes. This duty exemption can be granted
up to a total value of EUR 175 per traveller. For certain
goods, such exemption is granted within the following
quantity limits:
tobacco products: 200 cigars or 100 cigarettes (cigars
with a maximum weight of 3 grams each) or 50 cigars or
250 grams of smoking tobacco or their proportional

Alcohol and alcoholic beverages:

- distilled and spirit beverages whose alcoholic content
exceeds 22% by volume; un- processed ethyl alcohol
of 80% concentration or more: 1 litre;
- distilled and spirit beverages and appetizers based on
wine or alcohol, sake or similar beverages whose
alcohol content does not exceed 22% by volume;
sparkling wines, brandy: 2 litres or proportional
combination of such products;
- light wines: 2 litres;
Perfumes: 50 ml (eau de toilette: 250 ml);
Medicines: quantity required to meet the needs of the

Excise duty rates

up to EUR 465.35 per hl3
EUR 9.10/1,000 cigarettes
+ 30% of the declared maximum
retail price4
EUR 680-EUR 4,000 per ton
EUR 307-EUR 480 per ton5
EUR 0.14 or EUR 0.30/MWh6

3 - Increased to EUR 665.35 per hl starting 2 May 2006 and to EUR 750 per hl
starting 1 July 2006
4 - Increased to EUR 15.53/1,000 cigarettes + 30% of the declared maximum
retail price starting 2 May 2006 and to EUR 16.28/1,000 cigarettes + 29% of
the declared maximum retail price starting 1 July 2006
5 - Increased to EUR 307-EUR 513 per ton starting 1 July 2006
6 - Increased to EUR 0.19 or EUR 0.39/MWh from 1 July 2006.

The excise duty for cigarettes is computed as the sum of the

specific and ad valorem tax, which may not be lower than
EUR 19.92/1,0007 cigarettes (the minimum excise).
Taxpayers are required to submit monthly tax returns and pay
the excise duties by the 25th of the following month. In case of
imported goods, the related excise duty (if applicable) should
be paid at the time of making import declaration at customs.
A special supervision and control system is provided for the
production and distribution of alcoholic beverages and certain
mineral oils.

Increased to EUR 30.83 EUR/1,000 cigarettes starting 2 May 2006


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A specific reimbursement procedure for harmonised excise
duties based on fiscal risk analysis is available for supplies of
certain excisable goods.
Fiscal warehouse regime
The fiscal warehouse regime allows the production,
transformation and/or storage of products subject to
harmonised excise duties (e.g., beer, wines, other fermented
beverages, intermediary products, ethyl alcohol, tobacco
products, mineral oils) without the payment of related excise
duties. Generally, the fiscal warehouse regime cannot be
used for retail sale of such products.
The Fiscal Code allows production (and storage) of electricity
and natural gas outside fiscal warehouses.
The Ministry of Finance has introduced in June 2006 certain
clarifications on the implementation of the electronic
database to be used in the exchange information system
between Romania and EU Member States in respect of
excise duties.
This clarification introduce a template of the Return
regarding the identification details of the warehouse holder
and of the tax warehouse, which should be submitted by the
authorised warehouse holders to the fiscal authorities until 1
July 2006; failure in submission of this return triggers
temporary suspension of the authorisation.
An excise duty code will be granted to warehouse holders
and tax warehouses based on the information included in the
above-mentioned returns; this excise duty code shall be
mentioned also on the tax warehouse authorisations issued
by the tax authorities until 31 December 2006.

Vehicle tax
Vehicle tax is payable by owners of land/water vehicles,
which should be registered in Romania. The tax depends on
the engine capacity, and is computed as a fixed amount per
500 cubic centimetres. The tax must be paid quarterly, by the
15th of the last month of each quarter. For the fourth quarter,
the tax is payable by 15 November.
Tax for construction authorisations
The tax is established as a percentage on the construction
value and is payable upon obtaining the construction
Publicity and advertising tax
Advertising tax is payable by the 10th of each month during
the execution of the contract by the suppliers of publicity and
advertising services rendered in Romania, except for publicity
and advertising services through audio, video and the print
media. The tax rate is established by the local councils and
ranges between 1% and 3%. It is applied on the value of the
publicity and advertising services. Users of outdoor
advertising have to pay an outdoor media advertising tax
computed as a fixed quota per square metre, depending on
the surface used for advertising. Such tax should be paid
in four equal instalments by 15 March, 15 June, 15
September and 15 November.
Resort tax
The tax is payable by individuals over 18 years for their stay
in resorts and is included in the accommodation tariff. The tax
rate is established by local councils and ranges between
0.5% and 5%.
Show tax

Local taxes
Starting 1 January 2004, local taxes in Romania are
regulated by the Fiscal Code. Local taxes represent a distinct
category of taxes set by the local administration, which are
payable by both individuals as well as entities in Romania.

Show tax is payable by individuals and entities for public

performances at a rate of between 2% and 5% of revenues,
or a fixed fee depending on the surface area of the premises
(from RON 0.12 per sqm per day to RON 0.24 per sqm per
day, further adjusted depending on location). The show tax is
payable monthly in arrears by the 15th of the month following
the one in which the performance took place.

The local taxes include:

Other local taxes
Building tax
Building tax is payable by owners of buildings located in
Romania, regardless of their residence. The tax rate ranges
between 0.1% and 0.2% for individuals and between 0.5%
and 1% for legal entities. For buildings not revaluated three
years prior to the concerned year, the tax payable by legal
entities may vary between 5% and 10% applied on the book
value of the building. The tax is applied on the value of the
building (minimum established values are provided) for
individuals and on the book value of the building, for legal
entities. The tax must be paid quarterly, latest by the 15th of
the last month of the quarter. For the fourth quarter, the tax is
payable by 15 November.
Land tax
Land tax is payable by owners of land. Generally, the tax is
established as a fixed amount per square metre, depending
on the location of the land within certain determined zones,
towns and villages and depending on the use of the land. The
tax must be paid quarterly, latest by the 15th of the last
month of the quarter. For the fourth quarter, the tax is payable
by 15 November. As derogation from this procedure for land
outside urban built-up areas, the tax must be paid in three
equal instalments (i.e., by 15 June, 15 September and 15

The local councils may impose a daily fee for temporary use
of public places and for admissions to museums, memorials,
or historical, architectural and archaeological monuments
and also for the ownership or use of equipment that is held for
the purpose of obtaining income, as well as fees for activities
with an impact on the environment.

Stamp duty
Stamp duty is payable on most judicial claims, issue of
certificates and licences, and documentary transactions
which require notary registration.
There are three existing types of stamp duty:
notary stamp duty;
judicial stamp duty; and
extra-judicial stamp duty.
Notary stamp duty is charged for the authentication of
documents and other services rendered by the Notary Public.
The duty is applied either as a regressive tax or as a fixed
percentage tax or as a fixed amount, depending on the type
of notary service.
Judicial stamp duty is levied on claims and requests filed with
courts and the Ministry of Justice, depending on the value of
the claim. Quantifiable claims are taxed under the regressive
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Ernst & Young

tax mechanism. Non-quantifiable claims are taxed at fixed
amount levels.

Extra-judicial stamp duty is charged for the issue of various

certifications such as identity cards, car registrations, etc.

The Fiscal Code provides for special tax rates in case of

income obtained from investments, gambling and transfer of
ownership rights over real estate.

Individual taxation
Romanian citizens domiciled in Romania are considered to
be Romanian tax residents and are taxed in Romania on their
worldwide income. Foreigners and Romanian individuals
without a Romanian domicile, who become Romanian tax
residents, may be subject to taxation in Romania on
worldwide income under certain circumstances (see
Taxpayers section below).
An individual is considered to be a Romanian tax resident if
he/she fulfils at least one of the following conditions:
(a) individual has domicile in Romania;
(b) individuals centre of vital interest is located in Romania;
(c) individual is present in Romania for a period or periods
exceeding 183 days during any 12-month period ending
in the respective calendar year; or
(d) individual is a Romanian citizen working abroad as
employee of the Romanian state.
Taxpayers of individual income tax can be:
residents, Romanian individuals domiciled in Romania for
incomes obtained from any source, both from Romania
and abroad and residents other than Romanian
individuals domiciled in Romania only for Romanian
sourced income;
non-residents, who either:

carry out independent activities through a permanent

establishment in Romania, for the net income
attributable to the permanent establishment; or

carry out dependent activities in Romania, for the net

income from such dependent activities; or

earn other types of income.

If a non-resident individual complies with one of the

conditions mentioned in the Residence section above under
b) or c) for a period of three consecutive years starting 1
January 2004, he/she becomes subject to taxation on
worldwide income starting from the fourth year. Until the end
of the three-year period, the respective individual is subject to
Romanian income tax only for Romanian-sourced income.
Individuals who are tax residents in countries that have
signed double tax treaty with Romania may benefit from a
reduced tax rate or a tax exemption under the terms of the
respective treaty. Individuals who are tax residents in
countries that have not entered into a double tax treaty with
Romania are subject to Romanian taxation from the first day
of presence in Romania.

agricultural income;
other income.

Employment income
Taxable compensation includes salaries, income in cash or
kind, wage premiums, rewards, temporary disability
payments, paid holidays and any other income received by
an individual based on an employment agreement. Taxable
compensation also includes salaries received by daily or
temporary workers, fees and compensation paid to directors
and managers of private commercial companies, to members
of the board of directors and General Shareholders Meeting,
to members of the administration council and to members of
the audit commission.
For employment, the monthly tax is determined by deducting
from the gross income:
mandatory social security contributions;
personal deductions allowed, if any;
monthly trade union contribution;
contribution to the voluntary occupational pension
scheme (up to EUR 200 per year).
Income from independent activities
Income from independent activities includes:
income from commercial activities;
income from freelance activities;
income from intellectual property rights.
Income from freelance activities
The net taxable income from freelance activities is computed
as gross income less specified deductible expenses that may
be subject to certain limits. Authorised individuals are obliged
to maintain single entry books. Alternatively, income earned
by certain categories of freelancers who do not have
employees is subject to income tax based on income
quota(s), which are annually established by the Ministry of
Freelancers are required to make anticipated payments on a
quarterly basis, by the 15th of the last month in each quarter.
Income from intellectual property rights
The net income from intellectual property rights results by
deducting from the gross income the following:
deductible expenses representing 40% of gross income;
compulsory social security contributions.
Payers of intellectual property rights compensation are
required to compute, withhold and pay a 10% advance
income tax by the 25th of the following month.
Income from other independent activities

Categories of income subject to taxation

A flat income tax rate of 16% applies to the following
categories of income:
income from freelance activities;
salary income;
rental income;
pension income;

Income from the following sources is also taxed at 10%

advance income tax:
income from sale of goods on consignment;
income from agent, commission or commercial mandate
income from civil conventions based on the Civil Code;
income from accounting, technical, judicial and extrajudicial expertise.

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Payers of such income are required to compute, withhold and
pay the advance income tax by the 25th of the following
Separately, payers of income required to compute, withhold
and pay the advance income tax are required to submit a
statement for each individual by 30th June for the previous
year. Only payers of salary income are exempted from this
Income from all types of independent activities is subject to
an annual regularisation, which is performed by applying a
16% tax rate to the annual taxable income less carried
forward fiscal losses for a period of five consecutive years (if
Rental income
Gross rental income consists of amounts in cash or kind
stipulated in the rental agreements and related to a fiscal year
(regardless of the time of effective cashing), as well as certain
expenses borne by the tenant and which, based on the law,
are the landlords liability.
The taxable amount is determined by deducting a 25%
expense quota from the gross income. Tax on rental income
is determined by applying 16% on the taxable amount.
As an exception, taxpayers may opt for the determination of
the net rental income based on single entry accounting.
Investment income
Investment income includes:
dividend income;
interest income;
gains from transfer of securities;
income from futures/forward transactions with foreign
currencies and other similar operations;
income from liquidation/dissolution without liquidation of a
legal entity.
Dividend income
Dividends are defined as any grant of benefits in cash or kind
by a legal entity to shareholders or associates, as a
consequence of holding participation titles in that legal entity
(with certain exceptions). Any amount paid by a legal entity
for goods or services provided by a shareholder is treated as
a dividend in case the value of such goods or services
exceeds the market value. Also, any amount paid by a legal
entity for goods and services provided in favour of a
shareholder is considered dividend. Additionally, for taxation
purposes, amounts received from holding participation titles
in closed investment funds are treated in the same manner as
The tax rate applicable to dividends distributed to resident
individuals is 16% and is calculated, withheld and paid by the
payer of dividend. The tax should be paid by the 25th of the
month following the dividend payment; in case of dividends
distributed but not paid till the end of the year, the tax is
payable by December 31st of that year. The dividend tax is
final (i.e., the income is not subject to regularisation). The
withholding tax for non-resident individuals is either 16% or, if
a double tax treaty is applicable, the more favourable rate
available under the respective treaty (refer to section on
withholding taxes).
Interest income
The taxable income from interest is any income in the form of
interest other than:
interest from current account/on-sight deposits and
deposits for which the interest rate is less than the
reference monthly interest rate on the inter-banking

market, as well as interest for deposits with mutual

assistance institutions;
interest related to debt instruments and municipal bonds,
bonds issued by the National Agency for Housing, and
other entities that issue bonds for housing construction;
interest for deposits made in accordance with the
provisions of Law 541/2002 regarding real estate
collective savings and loan.

The tax rate applicable to interest income is 16%, and is

calculated, withheld and paid by the payer of interest on a
monthly basis, by the 25th of the following month. The interest
tax represents a final tax. The withholding tax applied to
interest income earned by non-resident individuals as per the
domestic legislation is 16% or, if a double tax treaty is
applicable, the more favourable rate available under the
respective treaty (see section on withholding taxes).
Gains from transfer of securities
Capital gain represents the positive difference between the
sale price and the purchase price of different types of
securities, reduced by related costs, as the case may be. In
case of transfer of shares in a limited liability company, the
capital gain represents the difference between the sale price
and the nominal value/purchase price of such shares. In case
of redemption of investment titles held in open-ended
investment funds, the capital gain is the positive difference
between the redemption price and the purchase/subscription
price. Capital gains on shares obtained as a result of a stock
option plan is defined as the difference between the sale
price and the preferential acquisition price.
A concept of net capital gain has been introduced as
representing the difference between gains and losses
registered during one year (i.e., positive or negative
differences between the sale and purchase price, less the
related transfer costs).
The net capital gains from sale of shares is subject to 16% tax
in case of shares acquired after 1 June 2005 and sold after
1 January 2006, if held for less than 365 days, and to 1% tax
for shares acquired from 1 June 2005 and held for more than
365 days.
Income from futures/forward transactions with foreign
currencies and other similar operations
Gains from sale-purchase transactions of foreign currencies
with subsequent term settlement, as well as from any other
similar operations, are taxable at the rate of 16%. The tax is
computed and withheld by the intermediary of such
transaction (e.g., a bank), upon finalisation of the operation.
Subsequently, the tax is payable by the 25th of the month
following the date when the tax was withheld. The tax is final
(i.e., the gain is not subject to year-end adjustment).
Income from pensions
Income from pension comprises any amount received in form
of pension from funds created from mandatory social
contributions made to a social insurance system. Income
from pension includes any amount from optional occupational
pension schemes and those financed by the state budget.
Monthly pension income of up to RON 900 is not taxable. The
tax is to be determined by levying 16% on the taxable
amount. The tax is final.
The tax computed for pension is to be withheld on the date of
actual payment of the pension and remitted to the state
budget by the 25th of the month following the pension
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Income from agricultural activities
Taxable income from agricultural activities is to be
determined on income quotas issued by the Ministry of
Agriculture. Alternatively, taxpayers earning income from
agricultural activities may choose to determine the income
based on single entry bookkeeping. The tax is computed by
levying 16% on the taxable income.
Prizes and gambling income
The tax on prizes is 16% and is levied on the net income
representing the balance between gross realised income and
the tax free amount (i.e., currently RON 800).

The tax is payable by the 25 of the following month and the

liability to compute, withhold and pay the tax rests with the
payer of the income. The tax is final.
The tax on gambling is final and is determined by applying a
tax rate of 20% on the net income not exceeding RON
10,000 and a tax rate of 25% on the net income that exceeds
RON 10,000.
The net income in case of gambling income is computed
similar to income from prizes.
Income from real estate transactions
The following incomes derived from sale of real estate are
subject to taxation:
income from sale of constructions of any kind as well as
the related land, if such sale is performed in a period not
exceeding three years from the acquisition;
sale of land of any kind without constructions, if such land
was purchased after 1 January 1990.
Certain exemptions are provided, inter alia, for property
inherited or exchanged. Capital gains on sale of real estate is
subject to 16% tax, starting 1 January 2006.
Income from other sources
Income from other sources include, inter alia:
insurance premiums borne by a freelancer or any other
entity on behalf of an individual who is not an employee of
the respective freelancer/entity. Such income is taxable in
the hands of the recipient at 16%, through withholding,
the tax being final;
income received by pensioners or former employees
arising out of the employment contracts concluded with
their former employers or based on some special laws, in
the form of price differences for certain goods, services or
other rights. Such income is taxable in the hands of the
recipient at 16%, through withholding, and the obligation
for the calculation and withholding rests with the payer of
such income.
Tax on income from other sources is payable by the 25th of
the month following the realisation of the income.
Personal deductions
Romanian individuals domiciled in Romania as well as
foreigners meeting the residence criteria for three
consecutive years are entitled to personal deductions, which
vary depending on the gross monthly income and the number
of dependents, as follows:
for gross monthly income up to RON 1,000, the monthly
deductions vary between RON 250 for persons without
dependents and RON 650 for at least four dependents;
for gross monthly income between RON 1,000 and RON
3,000, the digressive deductions have been established
through an order issued by the Ministry of Finance;

for gross monthly income higher than RON 3,000, the

taxpayers right to deductions is withdrawn.
Filing and payment requirements

Taxpayers, with certain exceptions, have to file an annual

income tax return as well as special declarations with the tax
authorities by 15 May of the following year. The tax
authorities compute the annual income tax on the basis of the
information provided in the annual income return. The
taxpayers are subsequently informed about the tax
payable/reimbursable and the deadline for its payment.
Taxpayers earning only salary income throughout the entire
fiscal year fulfil their tax liabilities through employer
withholdings. Employers withhold the income tax on a
monthly basis.
Expatriates employed abroad but performing an activity in
Romania should file monthly tax returns and pay monthly tax
in Romania by the 25th of the following month.
Social security
Under Romanian employment regulations, both employer
and employee are required to contribute to the social security
Social security contributions at the individual level
Social security contribution 9.5% on the gross salary,
capped at the level of five times the national average
salary (for the respective year);
Health fund contribution 6.5% on the gross monthly
income subject to income tax; and
Unemployment fund contribution 1% on basic monthly
Social security contributions at the employer level
Social security contribution between 19.75% and
29.75% (depending on working conditions) of the total
salary fund, which is capped at the level of five times the
national average salary, multiplied by the average number
of employees;
Health fund 7% of total salary fund;
Unemployment fund 2.5% of total salary fund;
Contribution for medical leave and indemnity 0.75% of
total salary fund;
National insurance fund for work accidents and
professional diseases the contribution ranges between
0.5% and 4% of total salary fund, depending on the risk
category; and
Labour Chamber commission 0.25% or 0.75% of total
salary fund, depending on whether the company or the
Labour Chamber keeps the workbooks.
Contribution to the health fund by foreign individuals
According to existing regulations regarding the health fund,
foreign individuals requesting the extension of their residence
right in Romania are liable to pay a monthly health
contribution of 6.5% calculated at the level of the taxable
income obtained from Romania. In case no income is
obtained from Romania, the above-mentioned foreign
individuals are liable to pay a monthly 6.5% contribution
calculated at the level of one national minimum gross salary.
However, foreign individuals who are temporarily resident in
Romania may opt to contribute to the health fund an amount
equal to 13.5% calculated on the value of two national
minimum gross salaries.
Citizens of European Union countries, as well as individuals
resident in countries which have signed mutual agreements
with Romania, benefit from coverage of medical expenses

Ernst & Young

incurred on Romanian territory, according to the provisions of
the respective agreements.

Fiscal Procedure Code

Starting 2004, the Fiscal Procedure Code (hereafter referred
to as FPC) regulates the rights and obligations of parties
engaged in fiscal juridical relations regarding:
administration of taxes (i.e., activities related to fiscal
registration; declaration, assessment, verification and
collection of taxes, solving of appeals against fiscal
minutes) provided by the Fiscal Code;
administration of customs duties;
contributions, fines and other revenues of the general
consolidated budget.
The FPC constitutes the common law for administration of
taxes and if silent on certain matters, provisions of the Civil
Procedure Code are to be applied.
General principles for administration of taxes
Consistent application states the obligation of the fiscal
authorities to apply in a consistent manner the provisions of
fiscal legislation with a view to correctly assess taxes due by
Right to be consulted according to this principle enforced by
the FPC, prior to making a decision, the fiscal authorities are
obliged to allow the taxpayer to express the position in
respect to the deeds and circumstances relevant for decisionmaking. The FPC stipulates several exceptions from this
general principle.

Material errors are errors or omissions in respect to the name,

capacity of parties of the fiscal legal relationship, computation
errors or other errors similar to these, and do not refer to the
substance of the fiscal act.
The corrected act will be notified to taxpayers.
Obligation to provide information
Taxpayers or their appointed representatives are obliged to
provide the fiscal authorities with the requested information,
necessary for the determination of the actual facts regarding
the fiscal position, in writing. The fiscal authorities may
request information from other persons only when the facts
scrutinised have not been clarified by taxpayers, such
information being considered only if confirmed by other
Right not to provide information/evidence
The spouse and relatives of taxpayers may refuse to provide
information and written documents and performing of
expertise, such persons being informed about such rights.
Other persons such as priests, lawyers, notary public, fiscal
consultants, judicial executors, auditors, certified
accountants, physicians and psychiatrists may refuse to
provide information gathered during professional practice,
except for information concerning compliance with their own
fiscal liabilities.
Charge of proof
Taxpayers are held responsible to prove the facts and deeds
supporting their declarations and appeals to the fiscal
authorities, whereas the latter have the obligation to motivate
the amount payable by taxpayers.

Confidentiality fiscal authorities are obliged to ensure the

confidentiality of information pertaining to taxes and

Fiscal sanctions


Failure to submit tax returns and failure to pay taxes in due

time entails penalties as follows:

Taxpayers may appoint representatives in their relations with

the fiscal authority. Representatives of taxpayers without
Romanian fiscal residence should be Romanian fiscal

Failure to file tax returns

General procedure provisions

Competence of fiscal authorities
The fiscal authorities are empowered to administer fiscal
claims, perform fiscal audits and issue application norms for
the fiscal legislation. Customs authorities are empowered to
manage customs related duties.
The competent fiscal authority for administration of taxes is
the fiscal authority of the district where the taxpayer or the
income payer has fiscal residence. In case of taxpayers
performing activities through a permanent Romanian
establishment, the competent fiscal authority is determined
based on the place where the turnover of the permanent
establishment is obtained.
Conflict of competence
A conflict of competence occurs when two or more
fiscal authorities declare their fiscal competence or
non-competence. The conflict will be solved by the common
superior authority or by mutual agreement between the
superior authorities of the parties engaged in the conflict.
Correction of material errors
The fiscal authority may proceed to correction of material
errors identified in the fiscal administrative acts on its own
initiative or further to an application submitted by the

Non-filing of tax returns by the respective deadline may

attract the following fines:
RON 50 to RON 1,500 for individuals and RON 10 to
RON 100 for the income tax return of individuals; and
RON 500 to RON 10,000 for legal entities.
Taxpayers remain liable for the payment of the fines for late
filing of returns regardless of the payment of the tax due.
Interest and penalties on delays in payment of tax due
Failure to pay taxes at the prescribed dates is penalised with
late payment penalty, which is currently 0.1% per day of
Additionally, for failure to withhold or failure to pay taxes
withheld at source (taxes on salary-type income, dividend
income and non-residents income), a fine ranging between
RON 500 and RON 10,000 may be applied, depending on
the amount of fiscal obligations.

Ernst & Young Romania

Strada Dr. N. Staicovici Nr. 75, Forum 2000, Etaj 8
Sector 5, 050557, Bucure[ti
Tel.: +40 21 402 4000
Fax: +40 21 410 7052
Venkatesh Srinivasan, Partner - Head of Tax Department
E-mail: venkatesh.srinivasan@ro.ey.com
Romanian Business Digest 2006

Integrated Services in
RSM Hemmelrath is an international
multidisciplinary partnership of tax advisers,
public accountants and lawyers with 14 offices
worldwide and more than 500 professionals.
The Bucharest office was opened in 1998 and
has since then grown into one of the major
business advising firms in the country.
The Romanian and foreign tax advisers,
lawyers, auditors and accountants act for
international companies from different sectors,
particularly industry, leasing, car supply, food
and transport, providing integrated services
and advising on investment projects as well as
the daily running of businesses in the country.
Our companies, offering tax and business
advice, audit and related services, and our law
office have been established and function in
compliance with the local legislation and
international business practice. Our audit
company is a full member of RSM
International, the sixth largest organization
worldwide in the field of audit and business
Starting 2006, a strategic agreement has been
concluded between RSM Hemmelrath and
RSM McGladrey, one of the major consulting
firms in the United States of America.
This alliance paves the way of RSM
McGladrey to the European market and,
through us, to the Romanian market. Its
purpose is to become one of the main world
players in tax, financial and legal consultancy,
with special emphasis on transactions. This
strategic agreement represents for us, in
Romania as well, a tremendous opportunity
which opens wide horizons to particularly
interesting developments.

Our Main Areas of Practice

General advice on corporate reorganizations,
mergers and acquisitions, financing structures
(leasing), company successions, real estate
Specific tax planning and tax structuring
International/cross border taxation, in particular
relating to double taxation treaties
Transfer pricing; On going tax advice, including
tax returns, negotiations with tax authorities;
tax applications; customs regulations
Tax audits
Assistance in administrative and judiciary tax
proceedings; Tax evasion regulations

Audit and related services
Financial advisory services in connection with
transactions, e.g. financial and tax due
diligence reviews for mergers and acquisitions
Corporate finance services, e.g. business
valuation, feasibility studies
Risk assurance services, internal audit


Company, Commercial and Contract Law

Mergers and Acquisitions
Antitrust and Competition Law
Banking and Finance
Project Finance, Structured Finance and
Real Estate Law
Public Procurement; Concessions
Employment Law
Media and Advertising Law
IP / IT Law
Litigation and Arbitration Proceedings

Hubertus Eichler Managing Partner, Hubertus.Eichler@rsm-hemmelrath.com
Bogdan Ion Partner, Audit and Transaction Services, Bogdan.Ion@rsm-hemmelrath.com
Gabriel Sincu Senior Tax Manager, Head of Tax Department, Gabriel.Sincu@rsm-hemmelrath.com
Adriana Duncea Senior Associate Lawyer, Adriana.Duncea@rsm-hemmelrtah.com
Str. Emanoil Porumbaru, nr. 77, sector 1, Bucharest, RO-011424
Phone: (+40-21) 260 07 10 / Fax: (+40-21) 260 07 11
www.rsmi.com, www.rsm-hemmelrath.com

Berlin Bielefeld Bucharest Budapest Dusseldorf Frankfurt a. M. Hamburg Leipzig

Moscow Munich Prague Shanghai Warsaw

Latest Developments in
the Romanian Tax and
Fiscal Environment
by RSM Hemmelrath

Amendments to the tax code, which are not conditional upon

Romanias admission to EU
Amendments to the tax code, which will be effective if Romania
becomes a EU member

As we mentioned in last years issue, given the strong relationship between taxation and
business, Governments plans for economic growth require not only an innovative but also a
sound fiscal policy, having in view its highly complex character and its impact on the countrys
economy. The fiscal policy has to support and maintain Governments tax position and,
concurrently, provide for a climate which benefits business, where the economic strategy
prevails over the fiscal strategy.
The novelty of the 2005 tax legislation was the flat rate tax introduced by the new coalition which
came victorious out of the elections held by the end of 2004. Ambitious and disputed alike, the
flat rate tax project was to consume tremendous quantities of toner as it represented the current
topic of numberless issues not only of the specialised literature but also of other publications,
focussing the attention of the entire Romanian society for days on end.
Considered an act of suicidal unawareness by some, while by others the only chance for the
Dmbovi]a cart to eventually catch up the high-speed train of the developed Europe, the flat rate
tax has, however, succeeded for two years, without undergoing major changes, to strengthen
the idea of legislative stability of the Romanian economic environment, despite the numerous
obstacles which have had to be surmounted and the errors which have been made in its
It has been said with good reason that no flat rate tax system has been operating in Romania,
owing to the numerous exceptions from the 16% tax rate applicable particularly on the profit
achieved by legal entities and on the income obtained by employees and part of freelancers.
Such exceptions which refer to the 3% tax on the income obtained by micro-enterprises, the 1%
tax on interest or the income obtained from the sale of securities, 10% tax on the income
achieved from copyright, or the exemption (in a first stage) of natural entities from the payment
of tax on the gains realised from the transfer of real property are as many arguments brought to
the fore by the partisans of the real flat rate tax in the hope that said exceptions will be
eliminated and a simple and efficient taxation system will be set up with a view to encouraging
productive work and discouraging any initiative for tax evasion.
In consideration of the foregoing and the much desired admission of Romania to the European
Union, the occurrence of amendments to the Romanian tax legislation has been imminent.
Consequently, for about one year (starting June 2005 until June 2006), numerous bills on the
amendment of the Tax Code were prepared, some of which contained fiscal anomalies (can you
remember the tax on non-current assets?), while others were more realistic and nearer to the
expectations of the business circles in Romania.
Relying on the unexpectedly good results of the flat rate tax system in 2005, the Ministry of
Public Finance has not taken any step toward changing it only for the sake of making changes,
has thoroughly examined available options, has reasonably consulted with representatives of the
business circles and, moreover, has considered to bring amendments to the tax legislation by
normal means, i.e. under a law passed by Parliament rather than under an emergency
ordinance. Thus, in early summer this year, the aforesaid Ministry submitted a bill on the
amendment of the Tax Code to Parliament for approval, which seems to be more coherent, more
realistic and closer to meet the current requirements of the Romanian economy.

RSM Hemmelrath
Nevertheless, as it has happened more than once for many
to go out for wool and come home shorn, the Romanian
parliamentarians have not agreed in full with the proposals
advanced by the Ministry of Public Finance and modified
pretty much the text of the aforesaid bill, which has ultimately
led to maintaining the original flat rate tax; hence, certain
categories of taxpayers will benefit from favourable tax
treatment in comparison to their majority, a fact which will
further generate fierce debates and commentaries.
Since Law No. 343/2006 amending the Tax Code has been
published in Monitorul Oficial al Romaniei shortly before this
issue of Romanian Business Digest was to be disseminated,
we may inform you, inasmuch as possible, of the most
significant amendments brought to the tax legislation, of
which some are to be applicable from the very first day of next
year and others might be applied as of such day, provided
that Romania becomes a member of the European Union.

Amendments to the tax code, which

are not conditional upon Romanias
admission to EU
These amendments have been based on various reasons
such as the application of the flat rate tax on gains which
initially benefited from a preferential treatment, as shown
above, the elimination of incongruities or disturbances in the
application of tax provisions following their identification by
authorities or business circles and, last but not least, the need
for modification called for by the evolution of the taxation
system on an international level.

the level set for public institutions, even if such taxpayers

record losses;

the value of tangible fixed assets and stocks which have

been destroyed by natural disasters shall be taxdeductible;

expenses on private scholarships granted by taxpayers

shall be treated the same as expenses on sponsorship or
Maecenas-like aid, and may be deemed tax credit up to
an amount representing 0.3% of the their turnover or a
maximum of 20% of the profit tax due;

expenses on fees to non-government organisations and

professional associations shall be deductible up to EUR
4,000 per annum;

the provisions specific for non-banking financial

institutions shall become tax-deductible expenses;

the equalisation reserve created by insurance and

reinsurance companies shall become non-tax-deductible

airline companies may deduct the provisions created for

covering repair and maintenance operations by virtue of
the standard rules approved by the Romanian Civil
Aviation Authority;

the limits established for tax-deductible interest expenses

shall not be applicable to the interest on loans granted by
non-banking financial institutions or on the loans obtained
from the bonds allowed for transactions performed on a
regulated market;

the profit tax shall be paid annually by banking companies

starting 2007 fiscal year, while by the other taxpayers
starting 2008; however, taxpayers shall pay a quarterly
pre-tax amounting to 1/4 of the tax owed in the past year,
which will be adjusted to the inflation rate. No pre-tax shall
be paid in the trimester in which a taxpayer has recorded
tax loss. The tax due shall be computed and settled until
15th of April in the year to follow, when the profit tax return
shall also be filed.

a. The definition of finance lease has been supplemented by

two new conditions, a fact which renders the classification
of leases easier:

any lease the residual value of which is lower than or

equal to the net book value of the leased asset shall be
deemed a finance lease;

any case in which the total value of lease instalments

(principal plus interest) exceeds the initial value of the
leased asset shall also be viewed as a finance lease.
In this manner, from a tax perspective, the definition of
finance lease is almost similar to the definition given
thereto under the International Financial Reporting
Standards, which simplifies the fiscal recording of
contracts that, starting 2007, will no longer be classified
as operating lease from a tax point of view, while from an
accounting point of view as finance lease.

b. Affiliated natural entities shall also include spouses (who

are related by affinity), apart from relatives within the third
degree (who are related by consanguinity).

e. The tax on the dividends received by legal entities shall

be 10%-rated, except for the case in which a legal entity
holds, for at least two (2) years, more than 15% (10%
starting 2009 fiscal year) of the share capital of the entity
which pays the dividends; in such case, the tax is zero

With reference to the taxation of natural entities, the

following amendments have been made:

the income realised from investment shall be subject to a

16% tax, just as most of the categories of income;

expenses on private scholarships shall be treated the

same as the expenses on sponsorship or Maecenas-like
aid, and shall be jointly deductible in an amount of up to
5% of the taxable income of a freelancer; in the case of
individuals who obtain income from salaries, private
scholarships may be granted in an amount of up to 2% of
the annual tax due, and so shall be the amounts
supporting non-profit entities;

nursery tickets shall not be deemed taxable income;

the income obtained from a first transaction of shares

issued by Proprietatea Fund performed by the
individuals who received such shares under law shall be
exempt from taxation;

c. Any income achieved from the liquidation or dissolution of

a Romanian legal entity shall be considered income
obtained in Romania, while non-residents that realise
such income shall be subject to taxation at a 16% rate.
d. As regards the tax on profit, the following amendments
have been introduced:


transport and accommodation expenses incurred by

employees or administrators shall be deductible, whether
taxpayers record profit or loss; likewise, expenses on
daily allowance for business travels, incurred by private
firms, shall be deductible in an amount of up to 2.5 times

Romanian Business Digest 2006

RSM Hemmelrath

the income realised from investment, dividends, interest,

transfer of securities, as well as from foreign exchange
sale/purchase operations on term shall be subject to a
16% tax.

50%, income obtained from activities other than advisory

and management services.
The tax on income which shall be paid by microenterprises shall stand at 2% in 2007, 2.5% in 2008 and
3% in 2009.

Regarding the first mentioned two categories of income, the

tax is retained and paid by the income payer, while

in the case of the income achieved from the transfer of

other securities and from foreign exchange
sale/purchase operations on term, a 1% pre-tax shall
be paid, which is retained and paid by the agent that
intermediates the transaction. If loss is recorded as an
outcome of this transaction, such loss may be set off
by the income obtained from a similar transaction
effected during the same fiscal year. By the end of that
year, the taxpayer shall file a declaration with the tax
authority, regarding the value of all the transactions
performed by such taxpayer and the pre-taxes it has
paid. The tax authority shall make the final calculation
by applying the 16% tax rate to the total net realised
income, settling the tax amount by requesting
payment of the difference, or by refunding the amount
paid in addition.

the income obtained from the sale of agricultural produce,

obtained after cropping shall be subject to taxation from
1 January 2008; the tax applied in this case shall be 2%
of the realised income;

Unlike the current system, micro-enterprises that will

achieve an annual turnover exceeding EUR 100,000 shall
have the obligation to pay tax on profit in consideration of
the taxable income and deductible expenses provided
under title II.
g. The tax on buildings payable by natural entities has been
slightly modified since it has been increased by 5% for
each 50 square meters or fraction of such area in the case
of buildings covering more than 150 square meters.
In the case of legal entities, the maximum amount of the
tax due has increased from 1% to 1.5%, which is rather
significant if we consider that the annual depreciation rate
of a building ranges between 1.6% and 2.5%. It means
that the tax rate will be approximately equal to the annual
depreciation rate and, hence, these entities will have to
pay, throughout the useful life of the building, a tax the
value of which will be nearly equal to the value of the

Amendments to the tax code, which

will be effective if Romania becomes
a EU member
a. The tax treatment of dividends shall modify as follows:

the dividends received by a Romanian legal entity from a

subsidiary established in a EU member state shall be
subject to profit tax if the Romanian company holds at
least 15% (10% starting 2009) in the foreign subsidiary
during an uninterrupted period of two (2) years; and

the dividends paid by a Romanian legal entity to a legal

entity operating in a EU member state which has an
interest equity in value of at least 15% (10% starting
2009) during an uninterrupted period of two (2) years shall
be tax-exempt in Romania.

the income obtained from the transfer of real estate (land

and buildings) shall be taxed as follows:


in the case of the income achieved from the transfer of

securities in closed-end companies, a 16% tax shall
be levied upon registration of such transfer with the
Trade Registry or in the Share Register; any loss
recorded as an outcome of such operation shall be
final and shall not be compensated for by other gains;

in the case of real estate the value of which is lower

than RON 200,000, a 3% tax shall be applied to the
value of the transaction;
in the case of real estate the value of which is higher
than RON 200,000, a tax amounting to RON 6,000
plus 2% of any amount in excess of RON 200,000
shall be applied, provided that the real estate was
acquired within a period of up to three (3) years, or 1%
of any amount exceeding RON 200,000, if the real
estate was acquired within a period that is longer than
three (3) years.

the value of the transaction shall be the value provided

under the contract, but it may not be lower than the
value set in the experts report submitted to the notary

this tax shall be calculated and received by the notary

public who has the obligation to pay it to the State
Budget. Offices operating under the Real Estate
Registry shall not record the transfer of ownership
right unless they have been provided with evidence of
payment of such tax.

As far as micro-enterprises are concerned, in spite of the

numerous debates regarding these entities, the
Parliament has decided that they may continue operating
but, in order to benefit from the taxation treatment
envisaged for them, the total income achieved by these
entities should represent, in a proportion of more than


b. In the case of reorganisation (merger, spin-off, split-off,

split-up, transfer of shares, exchange of shares), specific
rules shall be applied similar to those applicable under the
EU tax legislation. The general rule in such case is that
reorganisation operations shall not be taxable but, when
the beneficiaries of the securities resulting from
reorganisation transfer the right of property over such
securities to third parties, the operation shall be taxable.
The Law amending the Tax Code refers in detail to these
operations, defining all terms and presenting the manner
in which they are treated from a tax perspective.
c. The tax treatment of the income obtained from savings in
Romania by natural entities residing in EU member states
is described in a separate chapter. The basic idea of this
chapter is that such savings shall be subject to taxation in
Romania and the Romanian tax authorities shall have the
obligation to exchange information with the relevant
authorities in the natural entitys state of residence so that
the manner in which such entity fulfils his/her payment
obligations may be appropriately verified.

RSM Hemmelrath
In this case as well, the Law provides for numerous
specific rules and aspects aiming at the correct
application of the European legislation.

services, as well as to the VAT payers obligations after

Romania becomes a EU member.
Noteworthy is the fact that, once Romania joins the EU
member states, it will have to give up the bureaucratic
system of obtaining, preparing, issuing and accounting
fiscal invoices. The manner in which invoices are to be
issued will remain at the taxpayers discretion, but certain
requirements for the content of these documents will have
to be met.

d. Tax treatment of royalties and interest paid to affiliated

enterprises: on the strength of the new provisions, the
amounts which are paid by Romanian legal entities to
affiliated legal entities in EU member states shall be taxexempt in Romania.
Specific rules and procedures are also provided in this
respect, including temporary rules concerning legal
entities of certain member states.
e. The value-added tax will be the most affected after
Romanias admission to the European Union.
Consequently, most of the amendments brought to the
Tax Code refer to the value-added tax. Having in view that
this represents a very large area of debate, which cannot
be possibly covered by this Article, we are only
mentioning that the greatest part of the amendments refer
to intercommunity purchases and deliveries of goods and


Excise duty is another area to which significant

amendments will be brought in compliance with the EU
relevant legislation. However, these amendments will not
exert any direct fiscal impact on taxpayers, as they refer
mainly to administrative changes.

In conclusion, if Romania is admitted to the European Union

in 2007, the Romanian taxation system will undergo radical
changes and all entities dealing with it shall have to be well
aware of its implications on their activity and shall have to
thoroughly plan in due time any reforming process which they
contemplate to implement.

RSM Hemmelrath
Strada Emanoil Porumbaru Nr. 77, Sector 1, Bucure[ti
Tel.: +40 21 260 0710
Fax: +40 21 260 0711
www.rsm-hemmelrath.com; www.rsmi.com
Hubertus Eichler - Managing Partner
E-mail: Hubertus.Eichler@rsm-hemmelrath.com
Bogdan Ion - Partner, Audit and Financial Advisory Services
E-mail: Bogdan.Ion@rsm-hemmelrath.com
Gabriel Sincu - Senior Tax Manager, Head of Tax Department
E-mail: Gabriel.Sincu@rsm-hemmelrath.com
Adriana Duncea - Associate Senior Lawyer, Head of Legal
E-mail: Adriana.Duncea@rsm-hemmelrath.com

Romanian Business Digest 2006

The New Customs Code and

its Rules of Application,
starting with 19 June 2006
by The Romanian Association for International Road Transports
Law No. 86/2006 regarding the Customs Code of Romania was published in the Official Journal,
1st Part, No. 350, on 19 April 2006.
The New Customs Code applies the European Council Regulation (CEE) No. 2.913/92 in
Romania, implementing the Communitarian Customs Code including all further modifications. It
was published in the European Communities Official Journal No. 302/1992.
The old Customs Code, Law No. 141/1997 regarding the Customs Code of Romania was
abrogated on 19 June 2006.
Thus, the Government respected the engagements assumed when negotiating the adoption of
the Customs Union Chapter and one of the targets set by the Governing Programme for
2005-2008, regarding the Customs Code enforcement in complete accordance with the
communitarian acquis.
The Customs Code of Romania adopted the latest changes the European Parliament and
Council operated in the European Union Customs Code. The New Customs Code is valid until
Romania becomes an EU member state, when the Communitarian Customs Code will come into
effect. In fact, there are not so many differences between the two Codes, the New Customs
Code being entirely similar to the European Customs Code, except for the chapters on the
sanction regime and the institutional management, specific to each European state.
The Customs Code entered into force within 60 days from its publication; those interested
considered this delay useful, as they had enough time to study and set clear the legal aspects.
Unfortunately, the Government adopted the Customs Code Rule of Application too late, by
Decision No. 707, dated 7 June 2006, published in the Official Journal, No. 520, from 15 June
2006, just a few days before the New Customs code was to apply. Even though the National
Customs Authority (ANV) tried to make public the successive projects of the Rule of Application
a few months before its adoption, the information could not be used, until its official publication.
Without getting into further details on the Customs Regulations, given the short delay before its
publication, as well as its volume, together with its technical specificity, as well as the on-going
process within the National Customs Authority (ANV), in order to effectively implement it we are
going to limit our analysis to the new principles the New Customs Code brings, in general, getting
to particular aspects international road transport operators might be interested in. (For further details
on the issue, please consult the ANV web site: www.customs.ro, Section: Legislative Guide containing some directives
referring to the implementation of the Customs Code and Regulations).

The New Customs Code brings a series of new concepts, intended to simplify customs
procedures, with a special emphasis on subsequent control. Nevertheless, the more involved the
economic operators get beside the customs authorities, the more important simplified
procedures will become for operators. The transfer from the inactive to the active status of
customs partner, with the inherent benefits brought by the new legislation, will make companies
become expert in the field. If not, they will not have access to all the benefits; moreover, the
companies carrying out import or export operations that do not acknowledge the new procedures
may undergo negative consequences.
The New Customs Code stipulates the electronic customs procedures, as well as the export
electronic check system. These measures are intended to simplify the import/export procedures,
to reduce the administrative costs as well as to render the tax collecting process more efficient.
Among the main new provisions included in the Law on the Customs Code of Romania
introduces we can mention:
The New Customs Code uses the Communitarian Customs Code term relief for free
circulation for the old import customs regime. The new term sets the background for
Romanias forthcoming integration in the common market and the Communitys customs

The Romanian Association for International Road Transports

union, when not all foreign goods entering Romania will be
imported. Thus, the goods made in the EU will no longer be
imported, once Romania becomes an EU member;
nevertheless, there will be some procedures specific to
relief for free circulation. Hence, there is no confusion
between the relief for free circulation customs regime and
other customs regimes that use the term of import,
whenever foreign goods in this customs regimes are
introduced in the country.
Taking into account the modifications made to the
European Customs Code, as well as to its Rule of
Application, the so-called Security Amendment intended
to bring into line opposing interests from the business
environment with the national customs authorities: cutting
off the customs operations times, on the one hand and the
need to reduce, as much as possible, the customs frauds,
to strictly apply the national trade policy and to benefit from
most of the due customs rights, on the other hand, both at
the European and at the national level, the Code includes
the terms of risk and risk management. Thus, customs
officers are authorised to carry out intelligent checks,
taking into account the risks, though this is possible only for
a small percentage of the total amount of customs
operations. Anyway, this working manner will become
A legal framework for risk management was introduced,
stipulating common criteria and balanced requirements
applicable to all economic operators, for their authorisation,
instituting thus the notion of authorised economic
operator (AEO). The AEO stands for importers, exporters
or goods operators from the suspensive customs regime or
their holders and international transport operators, who,
once authorised, will benefit from facilities or exemptions at
checks, as well as from simplified customs procedures. In
order to attain the AEO status, companies must comply
with the common criteria of trade and transport document
checking system, of administrative management system of
goods flow and document registration, internal information
security policy and fight against frauds, financial solvency,
according to the Customs Regulations provisions.
Accordingly, the New Customs Code brings benefits to the
economic operators, similar to the ones from the European
area. The most favoured are the authorised ones, customs
partners, reliable companies, that benefit from simplified
customs procedures. After the integration, the AEO status
will be mutually recognised by all national customs
At present, there are about 900 economic operators who
have already concluded protocols with the customs
authorities, benefiting from simplified customs procedures.
The authorised economic operators can pay their customs
duties periodically, according to a protocol concluded with
the respective customs authority. Once Romania is an EU
member, the customs authority may grant the debtor other
paying facilities than payment postponement. Such
payment facilities are granted provided there is a guarantee
fund, this leading to an extra interest levied on the credit, a
brand new notion.
With respect to compulsory tariffs information or
compulsory information on the origin, the New Customs
Code contains the same provisions as the Communitarian
Customs Code. The compulsory information will be
released within the same terms, having the same regime as
for all the EU States. Thus, the customs authority will have

to provide information on the tariffs - within 90 days from

application, maximum, 6-year validity, as well as
information on the origin within 150 days, 3-year validity.
The new provisions make the distinction between
non-preferential and preferential origin of goods, which is in
fact a major distinction when it comes to different ways of
setting the origin - general rule - as well as the terms
required for having a preferential regime - particular rule.
The non-preferential origin is set according to two criteria:
goods entirely made in a country and those substantial
The new provisions stipulate the oral declaration of goods,
when their value is below a certain level. Therefore, the
customs procedures become simpler for casual or ordinary
operations. The term for customs declaration of goods has
changed: 45 days for sea transports and 20 days for other
types of transports (instead of 30 days); the customs
declaration of goods is recorded in the Accounting
Register, whenever the customs regulation apply, without
filling-in the customs declaration, having thus the possibility
to change or declare invalid the customs declarations, after
the customs formalities have been concluded.
As every person can be directly or indirectly represented
beside the customs authorities, the non-residents may also
declare the goods at the customs.
Thus, there may be set free warehouses that, legally
speaking, are precincts situated on the Romanian customs
territory, separated from the rest of the area, where the
customs regime applicable to goods is similar to the one in
the free zones. The warehouse administrators may use
them allowing to storage goods without any customs
formalities, or customs taxes, for an unlimited period. For
exceptional cases, the customs authority may set a term
compelling the warehouse administrator to decide the
customs destination of goods.
The reference currency rate is the one valid for the
penultimate Wednesday of each month, being changed
every month, not every week (as before, according to the
old regulations). If the exchange rate is superior to 5%, the
new rate is used starting with the following week.
A major change refers to implementing two customs
regimes: the suspensive and the economic one. Alongside
with the existent suspensive customs regime, the customs
regime having an economic impact was introduced
(customs warehousing; inward processing; processing
under customs control; temporary admission; outward
processing). The economic customs regime can be used
provided there is an authorisation issued by the customs
authority, granted to persons who provide all the required
conditions for the operations to be correctly carried out and
provided the former can supervise and control the regime,
without applying disproportionate administrative measures
in comparison with economic requirements.
A term of 24 months was introduced for temporary customs
entrance. According to previous provisions, there is no
deadline for this type of operation.
The current Customs Code, as the former one, stipulates
the offences and their specific sanctions, according to the
social danger the penal facts may represent in the customs
area (illegal imports, qualified contraband, forgery and use
of false documents).

The Romanian Association for International Road Transports

With respect to the new provisions international road
transport operators are particularly interested in, the most
important is the compulsoriness to submit a summary
declaration when entering the goods on the Romanian
territory. This obligation was adopted from the European
regulations compelling transport operators to notify the EU
customs offices at entry or at exit, by a summary declaration
(Annex No. 7 of the Customs Regulation presents a copy of
the document) - the goods that are to entry or exit the EU
customs area.
Even if the law stipulates the summary declaration to be
made by data processing, ANV reserved itself the right to set
a 3-year term necessary to implement the electronic
declaration and the automatic systems for risk management,
as well as the electronic data exchange between the customs
offices at entry, import, export and at exit.
The summary customs declaration is submitted to the entry
customs office by the person introducing the goods on the
Romanian customs territory, or the one taking the
responsibility for their transport to the aforementioned
territory, before the goods enter the Romanian customs
territory, within the terms set by the Customs Regulations,
according to the transport modes. If we speak of road
transport, the term is one hour minimum, before arriving to
the entry customs office, when the summary customs
declaration is submitted in electronic format, or 4 hours
minimum, when submitted by other means.
We can mention here other specific provisions, useful for
international road transport operators:
The customs authority is authorised to check transport
means and goods, as well as personal goods and effects
belonging to physical persons, presented at entry or at exit.
The law stipulates also a broad corporal control, by persons
of the same sex, when there is a strong clue of fraud. The
customs authority may check the goods compliance with
the customs provisions, whatever the location. During the
checks, the customs officers in charge may seize from
moral and physical persons, any document, whatever the
form, liable to hinder the checking operation. The mobile
customs teams, identified by distinctive marks, have the
right to stop vehicles, in order to check their compliance
with the customs regulations, by means of specific official
Any person, directly or indirectly involved in goods
exchange operations between Romania and other
countries is compelled to provide the customs authorities,
upon request and within the set term, with any documents
or information, whatever the form, as well as with the
needed support; he/she has to keep the aforementioned
documents, for 5 calendar years, for customs control.
Foreign goods or Romanian in transit can be carried out
- the transit regime;
- the TIR Carnet;
- the ATA Carnet;
- other provisions stipulated in international agreements
or conventions, signed by Romania;
- by mail.
The transit regime is considered closed and the holders
obligations fulfilled, once the goods carried out under the
aforementioned regime and the required documents are
presented to the customs office of destination, according to
the regime provisions.

In general, the customs regime regulations from the

Customs Code and its Rule of Application are mostly taken
from the Common Transit Convention that Romania
adopted by Law No. 22, from 23 February 2006, regarding
the Government Urgent Ordinance No. 150/2005 on the
common transit regime, adopted at Interlaken, on 20 May
1987 and from the specific legislation previously issued by
ANV (orders and directives) for the application of the
present Convention.
Alongside with other offences stipulated under the Customs
Code, its Rule of Application sets the customs
contraventions, which shall be punished accordingly, among
which we mention the ones applicable to transport operators
undergoing customs procedures.
The following deeds represent contravention and are
sanctioned with fine from 500 to 1,500 RON:
the transport operators or representatives failure to submit
to the border customs office the accompanying documents
of the transport vehicle in international traffic, as well as the
documents required for the transported goods;
the transport operators failure to present, upon customs
authoritys request, the required documents for the
transport means for the transported goods, in international
the transport operators or the uncustomed goods
administrators failure to preserve the seal integrity, except
for exceptional cases or cases of major force;
failure to submit the customs declaration (including the
summary customs or transit declaration) dully and fully
completed, even when it does not affect the rights of import
or any other legal duties fees and taxes set for
uncustomed goods, but it has major consequences on
trade policy or any other regulations imposed by special
The following deeds represent contravention and are
sanctioned with fine from 1,500 to 3,000 RON:
the vehicle drivers failure to stop at the official stop sign of
the customs officers in charge;
failure to present the required documents at the customs
check, whatever the nature or form, as well as failure to
comply with the term set by the customs authority, for
document submission;
submission of customs declaration containing incomplete
or erroneous data on tariffs levied on goods, thus affecting
the rights of import or any other legal duties fees and
taxes levied by the customs authority at customs
formalities clearance for goods;
the customs transit or the economic customs regime
holders failure to comply with the terms, conditions and
obligations stipulated in order to carry out and conclude the
present regimes.
The following deeds represent contravention and are
sanctioned with fine from 3,000 to 8,000 RON:
failure to comply with the customs controls for goods that
should be placed under the customs regime; such goods
are confiscated;
estrangement of goods carried under the customs transit,
whatever the form; such goods are confiscated;
Romanian Business Digest 2006

The Romanian Association for International Road Transports

submission of customs declaration containing erroneous
data on the invoiced value of goods;
submission of customs declaration and accompanying
documents containing erroneous data on the amount of
goods, even when it does not breach the Customs Code. If
the present infringement affects the rights of import, or any
other legal duties fees and taxes - levied by the customs
authority at customs formalities clearance for goods, the
extra amount of goods non recorded in the customs
declaration is confiscated;
submission of customs declaration and accompanying
documents containing erroneous data on the types of
goods. If the present infringement affects the rights of
import, or any other legal duties fees and taxes - levied
by the customs authority at customs formalities clearance
for goods, the extra amount of goods different from the
types in the customs declaration is confiscated. The term
types of goods refers to the type or to the specific traits of
The customs legislation that differs from one legislative sector
to another is extremely technical, in permanent change. The
customs regulations technical character is the result of its aim
to fight against fraud, and to better adapt itself to international
trade economic requirements and to globalisation
consequences and to international labour division.

In conclusion, in order to balance the two tendencies,

apparently opposed the constraints imposed by customs
checks, budget duties and national trade policy, on the one
hand, as well as the simplification of customs procedures,
greatly imposed by the business environment, on the other
hand first of all the legislative texts have to be extremely
precise, clear and fully accessible to those interested. This is
what the new legislation aims at, by its new additional
provisions, even if the result is an enormous volume of
normative acts.
First of all, the customs authority and the interested economic
operators will have to make efforts to reach this goal, being
compelled to train their personnel in the legislative field, in
order to benefit from the available facilities. Then, this target
cannot be reached unless the customs authorities and the
economic operators cooperate, the latter having the
possibility to choose the degree of involvement. The more
they respect and implement the legislation, i.e. taking on
some of the customs authorities activities, whenever the latter
have scarce resources available, the more benefits they will
have, thus decreasing the goods transfer delays. We do not
know how the companies will react to such customs offer,
and how the customs itself will manage complex legislative
changes, as well as some principles it is compelled to adopt
as part of the integration process.

The Romanian Association for International Road

Transports - ARTRI
Strada Alexandru Constantinescu Nr. 12, Sector 1, Bucure[ti
Tel.: +40 21 319 3714
Fax: +40 21 319 4807
E-mail: office@artri.ro
Ioan Ila[cu, Head of Transport Service and Public Relations
E-mail: ioan.ilascu@artri.ro
Sergiu Botez, Transport Department Specialist
E-mail: sergiu.botez@artri.ro
Mircea Borza
E-mail: mircea.borza@artri.ro


False Friends in Romanian

Share Transactions?
by Nestor Nestor Diculescu Kingston Petersen

Interpretation of SPA provisions - parties good faith

Sellers warranty obligations
Limitation and exoneration of sellers liability under its warranty
obligations. Are there any implied warranties?
In recent years, Romania has substantially privatized its formerly state-owned economy in
preparation, among other things, for accession to the European Union. The country has also
witnessed a number of increasingly sophisticated merges and acquisitions. In many cases,
transaction documents, even if governed by Romanian law, were enriched with reasoning and
concepts imported from common law jurisdictions.
Romania is a civil law jurisdiction in which the 1864 Civil Code is the core legislation governing
transactions. The Civil Code was of French inspiration, and until the late 1940s doctrine and
court practice largely followed the interpretations of the French Civil Code. During the
half-century of communist rule, Romania lacked private companies and share ownership. The
absence of private transactions in particular share purchase and sale transactions created a
significant interruption in the development of legal principles adapted to a market economy. As
a result, there is little and sometimes contradictory doctrine and court practice regarding the
interpretation of various legal provisions in share sale-purchase agreements, whether for private
acquisitions of shares or for privatizations.
For investors and advisors accustomed to common law share sale-purchase agreements, the
use of certain customary concepts and provisions in these documents for Romanian transactions
may create a false sense of comfort. Representations, certain special warranties, liability and its
limitation, and indemnifications are all familiar concepts to the Romanian Civil Code. At the same
time, some of their effects and interpretation may on some occasions be different than those
attributed to them in common law documents. As such, these provisions may constitute false
friends to those who expect them necessarily to operate in their favor under the Romanian
The purpose of the considerations below is to focus attention on some of the concepts designed
to protect parties to a share sale-purchase agreement, without intending to provide an
exhaustive presentation of the matter or to make a comparative analysis between the
Anglo-Saxon and Romanian legal treatment of the same notions. Instead, as we point out below,
there are circumstances when a purchaser of shares may obtain increased legal protection
under Romanian law where, for example, special warranties are deemed incorporated by default
into share sale-purchase agreements. Alternatively, the seller has to be very careful when
structuring limitations to its liability to ensure that the intended limitation or exoneration is
expressed unambiguously in the transaction documents.

Interpretation of SPA provisions - parties good faith

Parties good faith obligation
According to a general rule of interpretation imposed by the Civil Code, agreements are
interpreted in favor of the debtor of a particular obligation. An exceptional rule applies however
to sale-purchase agreements, where the Civil Code states that any unclear or doubtful clauses
are interpreted against the seller, irrespective of whether those clauses create rights or
obligations for the seller.
This rule is grounded, among other things, on the sellers duty to clearly explain to the purchaser
all the obligations undertaken by it under the sale-purchase agreement, as well as on the general

Nestor Nestor Diculescu Kingston Petersen

interpretation rule stating that all agreements have to be
concluded and performed in good faith.
Exercising rights and obligations in good faith has been
generally considered a matter of fact and left therefore to
judicial evaluation. Due to the absence of transactions, no
court practice developed for a long period of time, leaving the
parties with the very difficult task to estimate what their good
faith obligations are in sale-purchase transactions.
Sellers obligation to act in good faith
In the past few years however, certain court decisions issued
with respect to privatization disputes have shed some light on
the interpretation of the good faith obligations of the seller. In
particular, the High Court of Cassation and Justice, in a
decision issued last year and recently reported, considered
that a sellers legal obligation to prepare and present to the
bidders a presentation file regarding the target company has
to be interpreted in the light of the above Civil Code
principles, according to which agreements have to be
executed and performed in good faith. The High Court
reasoned that such obligations would confer to the seller a
duty to offer to the purchaser all the information needed in
order to knowingly conclude the share sale-purchase
agreement. It seems therefore that the seller has a good faith
obligation to expressly inform the purchaser of every aspect
that would influence the formation of the purchasers opinion
in buying the shares or paying a certain price. Moreover,
certain other court or arbitral decisions, confirmed by the High
Court, have found that the sellers failure to inform the
purchaser with respect to decisive elements, such as the
existence of encumbrances over a major portion of a target
companys assets, or the existence of significant debts, may
amount implicitly to bad faith and trigger the annulment of the
share sale-purchase agreement, the restitution or reduction
of the price paid, and/or indemnification of the purchaser for
the damages incurred.
It appears therefore that the above court practice suggests
that a minimum set of representations need to be given by the
seller to the purchaser, within the transaction documents. In
share sale-purchase transactions, such minimum
representations seem to include also every indication
regarding the target companys obligations, to the extent that
such information would enable the purchaser to decide
whether to buy the companys shares or to pay a lesser price.
Moreover it has been considered by the court that the public
authority selling a majority stake in a target company within a
privatization process cannot argue that it had no knowledge
of the target companys activity. This might be considered as
imposing a duty on the seller of a majority stake to inform
itself before the sale with respect to the activity and
obligations of the target company, with a view to sharing such
information with the purchaser.
Sellers diligence: obligation to verify the situations
prepared by the target company
Furthermore, the courts have begun to inquire into the
practice developed over the past years, in particular in
privatization transactions, where the seller provides the
purchaser with a set of representations relying on the
statements of the management of the target company. When
the seller, having been ordered by the court to indemnify the
purchaser for a breach of a representation, reverted against
the target company and its management claiming that the
representation was actually made by them, the court found

that a diligent seller should have verified each representation

made by the target companys management. Accordingly, the
seller is not exonerated of its liability for breach of
representations made in reliance on company management
In the light of the above, it results that careful analysis and
drafting is essential before preparing transaction documents.
The purchaser may receive substantial legal protection
having in view sellers obligation to act in good faith and
clearly provide information to the purchaser. At the same
time, a clause stating that the seller gives no representations
other than as expressly provided in the sale-purchase
agreement may be ineffective for the seller, as it does not
limit the sellers liability and might even raise concerns that
the sellers knowledge is more extended than actually shared
with the purchaser. Therefore, sellers legal counsel would
need to consider from the very beginning other mechanisms
for the protection of its client that would need to be reflected
in the transaction structure, timing, and documentation.

Sellers warranty obligations

According to the Civil Code, the seller is liable towards the
purchaser for the asset sold. Such liability is based on two
categories of legal warranty obligations: the warranty against
eviction and the warranty for hidden flaws of the assets.
Warranty against eviction
Under the legal warranty against eviction, the seller has an
obligation to warrant the purchaser against (i) the total or
partial loss of the sold asset due to causes pre-existing the
sale-purchase, as well as (ii) the existence of any
encumbrances that have not been declared on conclusion of
the sale-purchase agreement.
Such warranty covers various situations, such as:

where the ownership over the sold asset is challenged by

a third party;

where the seller or a third party invokes any right over the
sold asset (such as a use, or encumbrance), that was not
reserved in the sale-purchase agreement;

where, although no legal right is invoked, de facto the

purchaser is prevented from actually holding the
possession over the sold asset by an act of the seller.

The warranty against eviction by a third party applies if the

following conditions are met:

the third party invokes a right in respect of the sold asset;

such third party right existed before the sale-purchase of

the asset;

such third party right was unknown to the purchaser

before the conclusion of the sale-purchase agreement
(see Interpretation of SPA provisions - parties good faith

A restrictive interpretation of such warranty would lead to the

conclusion that, in what concerns the sale of shares of a
target company, the warranty against eviction would refer
exclusively to the loss or encumbrance of such shares, while
a loss or encumbrance over the target companys assets
would not impact on the ownership of the sold asset (the
Romanian Business Digest 2006

Nestor Nestor Diculescu Kingston Petersen

The practice of the courts as referred above seems to bring a
significant extension in the interpretation of the warranty
against eviction, in particular in connection with the sale of
shares and the impact of the loss of, or encumbrance over,
the target companys assets. In one case for example, it has
been somewhat audaciously decided that the existence of a
target companys substantial debts, undeclared to the
purchaser, may breach the sellers warranty with respect to
the absence of encumbrances over the target companys
shares. According to a provision of the Civil Code, unsecured
creditors enjoy a common general encumbrance over a
companys net asset value. The Supreme Court (now
renamed the High Court of Cassation and Justice)
consequently reasoned that a substantial debt of the target
company, unknown by the purchaser at the moment of
conclusion of the sale-purchase agreement, would
substantially reduce the value of the target companys net
assets and thus increase the general encumbrance of the of
the unsecured creditors. Therefore, the sellers warranty
against eviction was deemed to be breached, the Court
considering that there is a strong link between the net asset
value and the share capital of a company, as the market
value of the target companys shares reflects the net asset
While the reasoning put forward is arguable the undeclared
debts of the target company being rather more similar to
some hidden flaws (see Warranty against hidden flaws
section) the effect of the decision on the parties rights and
obligations in share sale-purchase transactions should be
carefully reflected in future transaction documents.

Limitation and exoneration of sellers

liability under its warranty obligations.
Are there any implied warranties?
Generally the sellers liability under the above warranties
against eviction and hidden flaws may be augmented,
reduced or eliminated in the transaction documents. In any
case, all modifications of the legal warranty obligations need
to be agreed expressly and in clear terms by the parties.
However, there are legal limits to such possibility that need to
be taken into consideration when drafting transaction
Modification of sellers liability under warranty against
There are no limitations concerning the extension of the
sellers liability. For the limitation or exoneration of liability, the
following considerations should be made:

sellers warranty against eviction through its own act or

fact cannot be reduced or eliminated by agreement of the
parties. Such a contractual clause would be void,
according to the Civil Code;

the limitation of a sellers liability for a third party act is

allowed, but the seller shall be obliged to return the price
of the transaction, unless the purchaser knew of the
danger of eviction and acquired the asset on its own risk.
It appears that (i) the purchaser needs to agree to buy on
its own risk and clearly acknowledge in the transaction
documents the risk of eviction, and (ii) the limitation of
sellers liability would have as its sole effect the
exoneration of the seller from its legal obligation to
indemnify the purchaser against additional damages due
to the eviction (such as costs of litigation, etc);

the time limitation of a sellers liability does not appear to

have been tested in courts. According to the applicable
legislation, the purchaser may raise claims under the
warranty against eviction within the general statutes of
limitation, which is three years starting from the moment
when the eviction occurred. It results that, unless a
warranty term is provided in the transactions documents,
the warranty against eviction is not limited in time, and the
seller might be requested to respond for an eviction
occurring after, for example, 15 years from the moment of
the sale-purchase. The three-year statute of limitation is
deemed to represent a public policy rule and cannot be
limited by agreement of the parties. The practice of
providing a warranty term in the transaction documents
should be accompanied by an express exoneration of
seller liability for events occurring after the passage of
such term; such clause would be effective, with the limits
discussed above in this section.

Warranty against hidden flaws

The seller has a legal obligation to warrant the purchaser
against hidden flaws in the sold asset if such asset cannot be
properly used according to its intended purpose or if its use is
so reduced that it may be deemed that the purchaser would
not have bought the asset or would have paid a lesser price
had it known the assets flaws.
There are no particular detailed rules applying the above
principle to the sale-purchase of shares. Nevertheless, as the
value of the shares reflects the value of the target companys
assets and liabilities, a reduced value of the companys
assets, or increased value of the companys liabilities may
lead to a judicial finding of the existence of a hidden flaw or
even to a finding of bad faith on the part of the seller
(see Interpretation of SPA provisions - parties good faith
The following conditions need to be fulfilled in order to meet
the conditions triggering a sellers liability for hidden flaws:

the flaw is hidden and the purchaser could not have

discovered it for example through a prudent and diligent
investigation. Some courts have considered that such
investigation would require the use by the purchaser of
adequate professionals, although some of the doctrine
argues against such practice;

the flaw exists on or before the conclusion of the salepurchase agreement;

the flaw needs to be significant, leading to the

impossibility to use or improper use of the asset in
accordance with its intended purpose.


Modification of sellers liability under warranty against

hidden flaws
Again, there are no limitations concerning the extension of
the sellers liability for hidden flaws. Regarding the reduction
or exoneration of liability, the following should be taken into

the limitation or exoneration of liability for hidden flaws

may only be valid if the seller acted in good faith, i.e., the
seller did not know the existence of such hidden flaws.

Nestor Nestor Diculescu Kingston Petersen

Otherwise, the sellers liability would subsist according to
the Civil Code;

the legal warranty term of one year since the actual takeover may be reduced or even eliminated, while the
statutes of limitation six months, or three years if the
flaws were hidden fraudulently cannot be reduced.

Although in practice common law sale-purchase agreements

are used to a large extent, and include representations and
warranties on wide range of matters relating to the target
companys activity, assets and liabilities, such clauses do not
necessarily provide greater protection to purchasers than that
provided by the Civil Code warranty against eviction and
warranty against hidden flaws. Through such warranties, the
seller must fulfill an obligation to inform the purchaser in good
faith regarding every aspect that may influence the
purchasers decision to buy the target companys shares or to
pay a certain price. Sellers counsel should be prepared to
properly advise its client when the latter goes beyond its legal

information obligation or when, on the contrary, the seller may

be deemed to have failed to properly provide information to
the purchaser.

Although widely used in privatizations and other sophisticated
transactions, many of boiler-plate representations and
warranties inspired from common law documents are not
sufficient to protect a partys interests in share sale-purchase
agreements governed by Romanian law. Making careful use
of Romanian law, experienced practitioners can develop
mechanisms in transaction documents designed to maximize
the legal protection available to their clients. The
consequences of any failure to do so can be significant for the
parties. If either the warranty against eviction or the warranty
against hidden flaws are deemed to apply, these
consequences may include court-ordered annulment,
rescission, purchase price reduction, and damages.

Nestor Nestor Diculescu Kingston Petersen

{oseaua Bucure[ti - Ploie[ti Nr. 1A
Bucharest Business Park, Intrarea A, Etaj 4
Sector 1, Bucure[ti
Tel.: +40 21 201 1200
Fax: +40 21 201 1210
Carmen Peli, Senior Associate
E-mail: Carmen.Peli@nnkp.ro

Romanian Business Digest 2006

Survey of Public Private

Partnership Arrangements
under the Romanian Law
by Pachiu & Associates
Public Private Partnership (PPP) regime before Government
Emergency Ordinance No. 34/2006
Introduction to GEO No. 34/2006
PPP arrangements under GEO No. 34/2006
Award procedure for the public works or services concession
Exceptions from the application of GEO No. 34/2006
Public projects award control and challenge procedures
Public Private Partnership (PPP) regime before
Government Emergency Ordinance No. 34/2006
On June 30, 2006 Government Emergency Ordinance No. 34 of April 19, 2006, on awarding
public procurement agreements, public works concession agreements and public services
concession agreements, as published with the Official Gazette of Romania No. 418 of May 15,
2006 (GEO No. 34/2006) came into force.
Before June 30, 2006 the PPP arrangements were governed by Government Ordinance
No. 16/2002, on public-private partnership, as amended, and implementing norms relating
thereto (GO No. 16/2002) and by Law No. 219/1998, on the regime of concession agreements,
as amended, and implementing norms relating thereto (Law No. 219/1998).
Under GO No. 16/2002 and Law No. 219/1998, PPP was regulated as an implementing type of
public works concession agreement referring to the execution or to the design and execution of
certain development undertakings involving public interest matters. The issue of concession
was at the core of the PPP concept regulated under GO No. 16/2002 and Law No. 219/1998
The works under such public concession agreement were being awarded to an entity or group
of entities through tender procedures.
Upon conclusion of such tender procedures, a public-private partnership agreement was to be
executed by and between the contracting public authority and the private entity or group of
entities, selected through the tender procedure. Usually, a project company was to be
incorporated by such parties for the purpose of accomplishing the works awarded under the
concession agreement.

Introduction to GEO No. 34/2006

GEO No. 34/2006 compiles provisions of the European Directives 2004/18/CE, 2004/17/CE,
1989/665/CEE, and 1992/13/CEE regulating the regime of public procurement in EU member
GEO No. 34/2006 replaces the former legal regime of public procurement arrangements and
public private partnership as regulated under: Law No. 219/1998; Government Emergency
Ordinance No. 60/2001, on public procurement, as amended, and implementing norms relating
thereto; GO No. 16/2002; Government Ordinance No. 20/2002, on public procurement by
electronic tender, as amended, and implementing norms related thereto; and Government

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Resolution No. 1186/2001, on the approval of the public
procurement procedure, as amended.

The concession contract is awarded by the completion of one

of the following procedures:

GEOs No. 34/2006 core principle refers to the transparency

of the entire public procurement process.


PPP arrangements under

GEO No. 34/2006
Under the new legal frame work established by GEO
No. 34/2006, the 3 types of public-private agreements are:

the public procurement of works, services or goods


ii) the concession of public works agreement, and

iii) the concession of public services agreement.
GEO No. 34/2006 does not make any further reference to
PPP arrangements or to any of the institutions regulated by
the GO No. 16/2002, nor defines the concept of PPP as
detailed under GO No. 16/2002.
As under GO No. 16/2002, the PPP concept was centered on
concessions, we may consider that PPP arrangements
under the provisions of GEO No. 34/2006 were limited to: (i)
the concession of public works agreements and (ii) the
concession of public services agreements.

Award procedure for the public works

or services concession agreements
The general principles and rules regarding the award
of public concession agreements are provided by
GEO No. 34/2006 (in Chapter VII).
The public authority awarding a public concession agreement
may be one of the followings:

central or local state authorities;

ii) public organizations, established for serving public

interests and which are financed, subordinated or
administered by a state authority;
iii) any form of association between the entities under items
i) and ii) above;
iv) any public enterprise or company which is active in the
public works field, whenever it is to assign agreements
concerning such works;
v) any other individual or legal entity who is part in a public
procurement or concession agreement and who assigns
all or part of its special or exclusive rights to third parties.
The award procedure of a public concession agreement is
initialized by the public authority. Such shall publish a tender
announcement with the Electronic System of Public
Procurement (SEAP) and with the Official Gazette of
Romania. When the value of the contract exceeds EUR
5,000,000, the tender announcement shall be also published
with the Official Journal of the European Union. Such public
announcement shall be published not later than 52 days
before the date established for the participants to submit their

open tender, where every interested entity is allowed to

submit its offer;

ii) limited tender, where every interested entity is allowed to

submit its offer and the public authority is allowed to select
for the awarding process only those entities deemed as fit
for the performance of the public-private project;
iii) competitive dialogue; such procedure applies when the
project is of such complexity that the contracting public
authority could not establish the technical or funding
requirements of the project absent dialogue with
applicants and parties involved;
iv) negotiations; such procedure allows the public authority to
establish the final terms and conditions based on previous
negotiation with selected offering entities;
v) offers request; such procedure may be employed only
when the aggregate value of the project, without VAT,
does not exceed EUR 250,000;
vi) solutions comparison; such procedure is mainly employed
for public domain development projects.
GEO No. 34/2006 provides that all public procurement
contracts shall be awarded by either open tender or limited
The other public awarding procedures may be employed by
public authorities under certain legally prescribed
With regard to the award of public works concession
agreements, GEO No. 34/2006 provides that the form and
substance of the participation documents and the
implementing norms shall be established by Government
decision. Such Government decision is to be published with
the Official Gazette of Romania after July 15, 2006.
Under the provisions regarding electronic tenders and the
procurement system, GEO No. 34/2006 thoroughly regulates
electronic tenders conditions for awarding public contracts.
The public project is awarded to the best author upon an
award announcement. Such award announcement has to be
issued not later than 48 hours after finalizing the awarding
procedure and has to be published with SEAP, Official
Gazette of Romania and the Official Journal of the European
By the awarding documents, the public authority has the right
to impose on the private contractor: (i) to assign the contracts
to third parties as much as 30% of the value of awarded
works or services or (ii) to mention how much of the value of
the contract will it assign to third parties.
GEO No. 34/2006 introduces new elements on the technical
specifications of a project of public interest and allows such
elements to refer not only to the fulfilment of certain
standards, but also to the fulfilment of functional or
performance criteria.

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Exceptions from the application of

GEO No. 34/2006
Under art. no. 11, the provisions of GEO No. 34/2006 do not
apply to public - private projects regarding the defence
system of Romania or classified state information.

Public projects award control and

challenge procedures
The public tenders and procurement activities are surveyed
by the Romanian National Authority for Regulating and
Surveillance of Public Procurement (ANRMAP). Such
authority has the task of verifying the observance of the
applicable legal provisions throughout every public works
awarding process.
Any individual or legal entity may petition any public
procurement related act at the National Council for
Contestations Resolution (CNSC).
When challenged, a public procurement process is
automatically suspended until the petition is resolved by the
CNSC. CNSC may overrule the petition or may sustain the
petition and invalidate, in part or entirely, the illegal or

damaging public act related to the public procurement

The decisions of the CNSC may be appealed at the
competent Court of Appeal, in 5 days as of the date when
such decision was communicated to the relevant party.

Under the conditions prescribed to Romania with regard to
the up coming adhesion to the European Union treaty, the
new legal frame work on public procurement and concession
introduced by GEO No. 34/2006 dismisses PPP as a viable
option for spending public funds. Moreover, even though
GEO No. 34/2006 does not prohibit in any way arrangements
formerly known as PPP, according to official sources at
ANRMAP, all existing PPP arrangements were brought to a
stand still and are going to be terminated by the contracting
public authorities. In the near future, it is unlikely for the state
authorities to enter in such new PPP arrangements.
In the absence of a special regulation to be enacted on PPP,
as of June 30, 2006, the only means private entities may
contract public works shall remain the public works and public
services concessions agreement provided under GEO No.

Pachiu & Associates

Strada Sp`tarului Nr. 36, Apt. 4, Sector 2, Bucure[ti
Tel.: +40 21 212 0023
Fax: +40 21 211 5636
Lauren]iu Pachiu, Partner
E-mail: laurentiu.pachiu@lp-legal.com
Andrei Dumitrache
E-mail: andrei.dumitrache@lp-legal.com

Romanian Business Digest 2006

Overview of New Provisions

of Romanian Insolvency Law
by Pachiu & Associates
Innovative insolvency provisions under the Insolvency Law
A new Romanian law regarding the insolvency proceedings (the Insolvency Law), was
published under No. 85 with the Official Gazette No. 359 of April 21st, 2006. The Insolvency Law
shall enter into force on July 20th, 2006 and shall repeal the currently effective Law No. 64/1995
on bankruptcy. Within six months as of the date of entering into force, the Ministry of Justice shall
issue a Manual of good practice for the application of the insolvency proceeding.
The purpose of the Insolvency Law is to improve judicial reorganisation and bankruptcy
proceedings and to implement European insolvency acquis. As such, the Insolvency Law
enhances creditors protection and simplifies the insolvency proceedings.
The Insolvency Law comprises several measures designed to render efficient the insolvency
proceedings. We shall detail below the core features of such measures.

Innovative insolvency provisions under the Insolvency Law

An explanation of the insolvency concepts
A major improvement of the Insolvency Law is to detail under Art. 3 the legal means of the
insolvency term. Under such definition, insolvency represents the condition of a debtors
patrimony characterised by insufficiency of funds to pay due debts. Such condition is presumed
if several debts were not paid in 30 days as of the due date. The insolvency is imminent when
proof is provided that the debtor will not be able to pay its debts upon their due date.
Bankruptcy is defined as the proceeding to which the debtor is subjected for liquidation of its
patrimony and payment of its debts. Such liquidation is followed by the deletion of the debtor
from the relevant Register where it is recorded.
Under the common insolvency proceeding, the debtor, provided that a 60 day surveillance period
has been observed, enters successively in the judicial reorganisation and bankruptcy
proceedings or either in the judicial reorganisation proceeding or in the bankruptcy proceeding.
The simplified insolvency proceeding
In order to facilitate the dissolution of certain legal entities, when insolvent, the Insolvency Law
provides for a simplified proceeding. Such proceeding allows certain debtors to go bankrupt
either simultaneously with the opening of the insolvency proceeding or after a 60 day
surveillance period. Such proceeding applies only to the insolvent debtors listed hereunder,
according to Art. 1 para 2 of the Insolvency Law:

individual merchants;

family associations;

companies, provided that: (i) the patrimony comprises no assets; (ii) the constitutive or
financial documents or the administrator cannot be found, or (iii) the premises cease to exist
or to correspond to the address registered with the Register of Commerce;

companies which failed to provide in due time with: (i) the complete list of their assets,
including bank accounts; (ii) for secured assets - a list comprising details from publicity
registers; (iii) the list of creditors comprising the due amount and the preferred claims;


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(iv) the list of current activities to continue during the
surveillance period; (v) the declaration on intention to be
subjected to the simplified proceeding or to the judicial
reorganisation proceeding;

companies liquidated prior to the application of the

insolvency proceeding;
debtors which demanded to be subjected directly to the
bankruptcy proceeding or are not entitled to judicial
reorganisation proceeding.
The Bulletin of Insolvency Proceedings

The Insolvency Law introduces the Bulletin of Insolvency

Proceedings. Such bulletin shall include summons,
notifications and court resolutions issued in course of the
insolvency proceedings. Hardcopy and online edition of the
bulletin is published by the National Office of the Register of
The act of summoning the parties, as well as communication
of any procedural deed, including calls and notifications is
performed by publication with such bulletin. Courts, syndic
judges and insolvency administrators and liquidators shall
submit documentation relating to any insolvency proceeding
for publication with the bulletin.
Attributions of the Syndic Judge
Under Insolvency Law the attributions of the syndic judges
were limited to the judicial control over the activity of judicial
administrator or liquidator of the insolvent company. The
syndic judge is also competent to assess litigations and
judicial requests related to the insolvency proceeding.
Basically, under the Insolvency Law the syndic judge ceases
to oversee the insolvency proceedings. Such managerial role
now belongs to the judicial administrator or to the liquidator.
They act under the Insolvency Law as specialists of the
insolvency proceedings having the required expertise. The
syndic judge only provides for the legal control over the
insolvency proceeding, having no competence on
commercial matters. The rulings of the syndic judge are final
and enforceable and may be challenged with a Court of
Appeal. Such remedy shall be judged by specialised panels.
The right to censor the commercial decisions belongs to the
Furthermore, the syndic judge is no longer competent to
authenticate acts concluded by the liquidator, when required.
Authentication shall be performed by a notary public, at
market costs.
During the bankruptcy procedures, the liquidator may
conclude sale-purchase agreements on debtors assets.
When related to property rights or other real rights over land
the authentic form is required. All costs shall be covered from
debtors patrimony.

Under the current drafting of the Insolvency Law, the syndic

judge is compelled to appoint a creditors committee
comprising 3 to 7 creditors. Under the former law on
bankruptcy such appointment was performed by the syndic
judge, depending on the proportions of the insolvency case.
Such committee is granted with a surveillance right over the
development of the insolvency proceeding and over the
activities performed by the judicial administrator or by the
The Insolvency Law enables the creditors committee with the
following proceedings: (i) to analyse the debtors condition
and to recommend to creditors measures related to the carryover of the debtors activity and to reorganisation of activity;
(ii) to negotiate the appointment terms of judicial
administrator or liquidator; (iii) to verify and analyse and, if
necessary, to challenge the reports drafted by judicial
administrator or liquidator; (iv) to draft and submit to creditors
assembly reports regarding measures applied by the judicial
administrator or the liquidator and to suggest further
measures; (vi) to demand the lift of the debtors right to
manage its patrimony; (vii) to file claims for cancellation of
patrimonial transfers performed by the debtor by fraudulent
means, if such claims were not filed by the judicial
administrator or the liquidator, without prior approval of the
syndic judge.
The creditors committee holds monthly sessions, in the
presence of the judicial administrator or the liquidator. Such
committee may gather upon request of the judicial
administrator or the liquidator or upon the request of two of its
members. The decisions are legally adopted by the simple
majority of its members.
The Insolvency Law explicitly provides that any creditor may
challenge the actions and resolutions of the creditors
committee to the creditors assembly, provided that such
creditor previously filed the complaint to the creditors
The Special Administrator
The Insolvency Law introduces the institution of the special
administrator. Such is appointed by the general assembly of
shareholders of the debtor legal entity, subsequent to the
opening of the insolvency proceeding. The role of the special
administrator, individual or legal entity, is to represent the
interests of the debtor and its shareholders and to participate
on behalf of the debtor to the insolvency proceeding. If the
management right of the debtor is lifted, the special
administrator shall only have the right to represent the
debtors interests.
According to the Insolvency Law, the special administrator
has the following attributions:

communicates the intent of the debtor to submit a

reorganisation plan;

participates, on debtors behalf, to the court assessments

on cancellation of detrimental patrimonial transfers
performed by the debtor;

files complaints under the insolvency proceedings;

submits a reorganisation plan;

manages the debtors activity after the confirmation of the

reorganisation plan;

once the bankruptcy procedure is initiated, it participates

to the inventory, receives the final report and the closing

Extension of the Creditors Committee Competences

In order to ensure the centralised management of the
creditors rights and to prevent the occurrence of abuses, the
Insolvency Law enhances the attributions of the creditors
committee. The role of the creditors committee is to
represent and defend the rights of all creditors in relation with
the debtor, the judicial administrator or the liquidator and the
syndic judge.


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balance and participates at the approval procedure of
such documents;

receives the notification regarding the closing of the


indispensable for the debtors activity, with unsecured

claims, and (iv) other creditors with unsecured claims.

The Insolvency Law explicitly provides that under the

reorganisation plan the following measures may be
adopted: (i) restructuring and continuation of the debtors
activity; (ii) liquidation of the debtor assets, or (iii) a
combination of the latter two measures.

As regards the liquidation proceeding, the Insolvency Law

introduces the sale regulation. Such sale regulation is
adopted by the creditors assembly. Although the current
legal provisions do not specify the detailed contents of
such sale regulation, the early practice stated the minimal
requirements: (i) the sale method, i.e. - a) public tender or
direct negotiation sale; b) sale of assets individually or by
group of assets; (ii) the minimal starting price; (iii) the
payment terms, and (iv) the guarantee for the public

Various new provisions

The Insolvency Law brings major improvements on the
insolvency field. We shall briefly provide you below with some
of such amendments:

The Insolvency Law amends the threshold of the

creditors claim necessary in order to request the initiation
of the insolvency proceedings. The minimum value of
such claim is currently of RON 10,000 save for the claims
arising from labour relationships which have to meet the
threshold of at least 6 average salaries per national

The judicial administrator or the liquidator is entitled to

continue or cancel any agreement, including ongoing
lease agreements or other long-term agreements,
provided that such agreements have not been fully or
substantially executed by all parties involved. The judicial
administrator or the liquidator has 30 days to answer to
the contracting partys notification regarding the
continuation or cancellation of the agreement; in case of
failure to observe such term, the agreement is deemed to
be terminated and the judicial administrator or the
liquidator may no longer require performance of the

Concerning the judicial reorganisation proceeding, under

the Insolvency Law, the voting system of the
reorganisation plan has been improved by establishing
voting categories, in consideration of the creditors
interests. Therefore, four categories, voting separately,
have been created: (i) creditors with secured claims; (ii)
creditors with budget claims; (iii) creditor - suppliers,

The Insolvency Law represents a modern regulatory
instrument answering the European Unions requirements in
the insolvency matter.
The Insolvency Law was drafted as part of a group of legal
acts on insolvency, i.e. the law regarding the preventive
covenant and the law regarding the organisation of the
insolvency practitioners profession and, the Insolvency
Under current drafting of the Insolvency Law, celerity of the
proceedings, fast market exit mechanisms for bankrupt
entities, higher protection degree for the creditors are
ensured. The law enhances creditors active role during the
proceedings in order to correspond to European standards on

Pachiu & Associates

Strada Sp`tarului Nr. 36, Apt. 4, Sector 2, Bucure[ti
Tel.: +40 21 212 0023
Fax: +40 21 211 5636
Lauren]iu Pachiu, Partner
E-mail: laurentiu.pachiu@lp-legal.com
Alexandru Lefter
E-mail: alexandru.lefter@lp-legal.com

Romanian Business Digest 2006




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We specialize in representing the worlds leading
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who trust us with their investment, acquisition
and financing needs.
Together with our European emerging markets team,
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we offer global reach matched with unsurpassed local
Our Bucharest office, established in 1997, is recognized
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From Hire to Fire:

Traps in the Labor Code
by Salans
Individual labor agreement Duration of the labor agreement
Working hours Non-compete clauses Disciplining an employee
Automatic termination under the labor code
Termination for reasons related to the employee
Termination for reasons related to the employer
Mass dismissals Business transfers Conclusions
In Romania, labor relationships are strictly regulated. Statutory rules, regulations and legally
enforceable collective bargaining agreements limit the contractual freedom. A number of
interlocking legal and contractual provisions represent the main sources of labor law. These are
mainly comprised in Law No. 53/2003 the Labor Code, as amended (the Labor Code), the
national-level and, if the case, industry and company-level collective bargaining agreements and
several other relevant pieces of legislation (e.g., Law No. 130/1996 regarding the collective labor
agreements, as republished and subsequently amended; Law No. 168/1999 regarding the
settlement of labor conflicts, as amended; Law No. 54/2003 regarding trade unions). There is a
hierarchy of all said provisions in the sense that the provisions of the aforementioned sources of
law will supersede any terms of the individual labor agreements, to the extent that they are more
favorable to the employee.
The Labor Code entered into force in Romania on March 1, 2003 (Law No. 53/2003 was
published in the Romanian Official Gazette on February 5, 2003), significantly changing labor
relationships in Romania in the attempt to come into line with European Union standards. Its
provisions have been extensively debated and criticized particularly because many observers
view the Labor Code as heavily favoring the employee. From the outset, we note that the Labor
Code is not always consistent with the subsequent labor legislation. In such cases, the
provisions more favorable to the employee would apply.
This article highlights some of the topical themes of the Labor Code which turned out to be the
most problematic in practice, with the caveat that the labor authorities and the courts often have
an insufficiently developed and inconsistent practice.

Individual labor agreement

An employers relationship with an employee is based on the individual labor agreement, whose
terms cannot be less favorable than the collective bargaining agreement at superior levels.
The employment relationship is, in essence, based on subordination. As such, employment
relationship may inadvertently be created if the essential elements of the employment
relationship are proved to exist, namely the remuneration for activities performed under the
authority and upon the instructions of another. We caution that, according to the Labor Code,
having personnel working without an employment agreement is deemed misdemeanour and is
sanctioned with fines ranging from RON 1,500 (approximately EUR 428) to RON 2,000
(approximately EUR 570) for each such employee, but the fine may not exceed RON 100,000
(approximately EUR 28,570). In addition, we caution that persons in such situation may claim in
court the employment relation, thus invoking all rights and obligations resulting from a labor
agreement, including payment of all related taxes.

Duration of the labor agreement

As a rule, individual labor agreements are concluded for an undetermined duration. A time limit
of up to 24 months may be introduced in the agreement, but only in the following circumstances:

(i) replacement of an employee whose labor agreement was
suspended, except for employees participating in a strike; (ii)
temporary increase in the companys activities; (iii) seasonal
activities; (iv) hiring of employees on the basis of special laws
favoring on a temporary basis those who are unemployed; (v)
in other circumstances provided by special laws; (vi) if the
employee will be eligible for retirement within 5 years;
(vii) throughout the duration of the mandate, if the employee
accepts a position within a Union, an employers organization
or other NGO; and (viii) if, based on the relevant legal
provisions, the employee receives salary and pension at the
same time.

Working hours
Generally, working hours are expected to be 8 per day,
40 per week, with 2 days rest. Due to a recent amendment to
the Labor Code, employees may now work more than
48 hours a week, provided that the average number of work
hours, calculated for a reference period of one calendar
month, does not exceed 48 hours/ week. For certain activity
fields, units or professions, longer reference periods can be
negotiated, but these may not exceed 12 months.

Non-compete clauses
In the past, not all domestic and multi-national companies
sought to require their employees to sign agreements
restricting post-employment competition, solicitation of
customers or employees, or use of confidential information.
Currently, an increasing number of them are taking steps to
ensure that their trade secrets or know-how are protected to
the greatest extent possible when an employee leaves the
company to join a competitor or potential competitor. This
general trend impacts employers on both sides of the
equation: those wishing to protect themselves when
employees leave, and those wishing to hire employees away
from their competitors.
Under the Labor Code, a non-compete provision is defined as
(i) one that requires the employee to not provide, on his/her
behalf or someone elses, a service in competition with that
provided to the employer and/or (ii) to not provide a service to
another party that is in competition with the employer.
Every non-compete provision in an individual employment
agreement must include (i) third parties in competition with
the employer, (ii) geographical restrictions, (iii) temporal
restrictions (now applicable for up to 2 years from the
employment agreements termination, regardless of the
position previously held by the employee) and (iv) the
services the employee is prohibited from engaging in, during
his/her agreement.

Disciplining an employee
In addition to firing an employee, the employer may institute
disciplinary measures against an employee who violates
workplace rules or the individual labor agreement. Such
measures include: (i) written warning; (ii) suspension of the
labor agreement up to 10 working days; (iii) demotion of the
employee up to 60 days with a corresponding salary
reduction; (iv) 5% to 10% salary reduction for one to three
months; (v) 5% to 10% salary reduction and/or, as applicable,
reduction of the management compensation for one to three
months; and (vi) termination of employment.
Except for the written warning, the employer must follow
certain procedures, within a very strict timeframe, to discipline
an employee namely starting a disciplinary investigation
and the publishing of a report with the following information:
(i) actual circumstances of the breach; (ii) employees guilt;
(iii) consequences of the disciplinary breach; (iv) the
employees general behavior; and (v) previous disciplinary
sanctions applied to the employee.
The employee must be informed in writing of the disciplinary
investigations time and place and has the right to defend
himself. His/her failure to appear before the investigation
without reason allows the employer to apply the disciplinary
measure without further formality. However, failure to perform
a disciplinary investigation triggers the nullity of the applied
disciplinary sanction.
The employer then may issue a written decision within
30 days after the breach is acknowledged, but no later than
6 months from the breach. Such decision must describe the
breach and inform the employee that he/she may challenge
the sanction before a court of competent jurisdiction.

Automatic termination under the

labor code
The Labor Code provides that a labor agreement may be
terminated by effect of law, mutual consent of the parties or
unilaterally, by either the employer or employee.
Unilateral termination by the employee may further
be qualified as being caused by employer-related or
employee-related reasons.

Termination for reasons related to the


To enforce such a clause, the employer must pay the

employee a monthly indemnity in an amount equaling at least
50% of his/her salary, throughout the entire period covered by
the non-compete obligation, post-termination of the labor

The Labor Code provides 5 grounds for terminating an

employees contract for reasons related to the latter:
(i) serious or repeated breaches of workplace rules or labor
agreement provisions; (ii) employees detention for more than
30 days; (iii) pursuant to a decision of a competent medical
expert, the employee is deemed to be physically or
psychologically incapable of performing the tasks required by
his/her employment; (iv) if the employee does not correspond
from a professional standpoint to the position he/she holds;
and (v) if the employee has met retirement conditions but has
not requested it.

As in other countries, courts in Romania will likely view

non-compete clauses with suspicion as an unfair burden on
the employees right to earn a living. Thus, the Labor Code
specifically provides that a non-compete clause can in no way
prevent, in an absolute manner, an employee from exercising
his/her profession. But if found overly burdensome, the Labor
Code provides that a court may diminish the effect of such a
clause, rather than declare it null in its entirety.

In order to dismiss the employee for breach of workplace

rules or of the individual labor agreement, or for failure to
correspond from a professional standpoint, the employer is
required to follow the same procedure as for disciplining an
employee in any other fashion, i.e. investigate the
circumstances leading to the breach and issue a report
containing the information above. As with any other
disciplinary measure, the employee has the right to defend


Romanian Business Digest 2006

himself during the investigation. Failure to perform a
disciplinary investigation makes the applied disciplinary
sanction null.
Termination of someones employment is the most difficult
decision for an employer to make and one of the most likely
to lead to litigation. It is therefore very important for employers
to carefully consider the decision and analyze the inherent
risks prior to taking action (review of the personnel file,
assessment of relevant motivations, preparation of
documentation, as well as a review of the current status of the

Termination for reasons related to the

By contrast, termination for employer-related reasons is
defined as lay off due to: (i) economic difficulty; (ii) implementation of new technology; or (iii) reorganization of the
companys activities.
In such case, loss of position must be effective and have a
real and serious motive, i.e., caused by economic difficulties.
Elimination of job position must also be final, meaning that for
at least 9 months from the effective date of the elimination of
the respective position, the employer cannot reinstate such
position or positions having similar job descriptions.
As with the above described procedure, the employer is
required to follow a number of steps to minimize the impact
on the dismissed employee, such as providing a minimum
termination notice and notifying the appropriate agency for
workforce occupation to ask if similar positions are available
elsewhere for the employee.

Mass dismissals
Mass dismissals or lay-offs are defined under the Labor Code
as dismissals within 30 calendar days of: (i) 10 employees, if
the employer has more than 20 but less than 100 employees;
(ii) 10% of employees, if the employer has more than 100 but
less than 300 employees; (iii) no fewer than 30 employees, if
the employer has more than 300 employees.
The decision to lay off such individuals triggers several
obligations on the part of the employer, including:
(i) publication of a social plan in consultation with the union or
employee representatives; (ii) proposing programs for
professional development for the affected employees;
(iii) informing the Union or employee representatives of the
mass dismissal; (iv) initiating consultations with the Union or
employee representatives regarding the methods and means
to avoid the mass dismissals, to mitigate the negative impact.
The employer who engages in mass dismissals cannot hire
anyone for the positions laid off for 9 months after the layoffs.

Business transfers
The Labor Code provides that, in case of transfer of an
enterprise (or of a unit or parts thereof) from transferor/seller
to transferee/buyer, the latter will also take charge of the
employees working in the transferred enterprise. The Labor
Codes provisions in this matter are quite recent (2003).
A more detailed regulation (Law No. 67/2006) will come into
force when Romania accedes to the EU (presumably
January 1st, 2007).
The basic principles are: (i) the employees rights based upon
the labor agreement (e.g. salaries, position, vacations) are

entirely preserved in case of transfer of the enterprise to

another employer and (ii) the transfer itself may not constitute
ground for individual or collective dismissal either by the
transferor or by the transferee. Prior to the transfer, both
transferor and transferee must inform and consult with the
Union/employees representatives in connection with the
legal, economic and social implications of the business
The Labor Code is silent as to the actual means, steps and
timing applicable to the actual transfer of the employees.
Some labor authorities agree that the transfer of employees
operates by virtue of law, while other authorities impose the
execution of a tripartite agreement (initial employer, new
employer and employee) acknowledging the transfer,
termination of the existing labor agreement and execution of
a new agreement with the new employer. In other cases, the
authorities request the execution of addendums (in fact
novation deeds) to the existing labor agreements.
Furthermore, the sale-purchase agreement is the common
way to transfer a companys tangible assets, such as motor
vehicles, computers, office equipment and furniture. The form
and implications of such sale-purchase depend on the
specific assets to be transferred and must be determined on
a case-by-case basis. For example, in case of transfer of
plots of land, the sale-purchase agreement must be
notarized, involving a larger amount of paperwork and
formalities, including payment of notary and stamp fees
(approximately 1% of land value).
In case the infrastructure to be acquired includes rights
derived from agreements, these would have to be assigned
to the buyer (in all situations requiring such transfer of
obligations, upon notifying or obtaining the approval of the
other contractual party).
Intellectual property rights, if any, will be transferred through
separate instruments and recorded with the competent
agencies. All licenses will have to be assigned to the buyer.

Although the labor legislation was significantly amended in
the past years in order to comply with the EU standards, the
envisaged effect has not been fully reached in respect with
the stability and clarity of the rules governing labor
relationships. Due to the inconsistency shown by both labor
authorities and courts of law in applying the labor regulations
and the persistency of overprotective rules in favor of the
employees, Romanian employers often encounter serious
difficulties when enforcing commercial policies with impact on
the companys personnel for resolution for which the
involvement of legal professionals is increasingly required.

Strada Gen. C. Budi[teanu 28-C, Sector 1, 010775, Bucure[ti
Tel.: +40 21 312 4950
Fax: +40 21 312 4951
Obie L. Moore, Partner
E-mail: omoore@salans.com
Tiberiu Csaki, Counsel
E-mail: tcsaki@salans.com
Anamaria Corbescu, Associate
E-mail: acorbescu@salans.com

Executive Search and Leadership

Development in Romania
by Leadership Development Solutions

Romanias pool of professional talent: the raw material of future

The executive search industry in Romania: the process
The way of the future in executive search: it is all about
Romanias accession to the European Union is merely a matter of time. Whether it happens in
2007 or 2008, it bears a most important career aspect for all Romanian nationals: working within
the European business environment will open up new challenges. The biggest of them will be to
compete for their own professional identity. The country is characterized by a profound
imbalance in demand and supply of top quality professionals. Unfortunately, this is the case,
despite the fact that raw talent, high IQ and technical skills exist in abundance on the local
market. What most Romanian professionals lack are proven track record and the exposure to
the responsibility of making the final decision.

Romanias pool of professional talent: the raw material of

future development
Currently, the countrys pool of professional talent is still immature, due to the high level of
heterogeneity brought about by the large number of business cultures that have interacted here
over the past 15 years. The composition of the sector of Foreign Direct Investment companies
entering the country was very diverse, but did not contain significant multinational participation.
Multinationals, especially North American, recognized for their strong business culture, are still
underrepresented in Romania. Most of the FDI was brought by more entrepreneurial business
cultures, of Balkan and Eastern Mediterranean origin, thus bringing into the country a less
structured set of business values and principles. However few they were, the Western
companies have created a special (business culture) identity for themselves and constitute the
main attraction and No. 1 employment preference of the Romanian professionals.
One of the main factors hindering the local professional talent supply is the educational system.
It fails to prepare and guide the youth for coping with new challenges. Romanian graduates are
not used to independently develop their own responsibility, to choose among their professional
alternatives, to make career decisions. They are not given enough relevant information to be
able to choose the path to go.
Moreover, the education system is not connected to the real economy. The applicability of its
content to real (economic) life is almost symbolic. It consistently fails to meet markets demand
for high-quality know-how first and foremost, as well as for courses, specialties, and number
of graduates. The Romanian universities produce, at an ever increasing pace, graduates with
high level of theoretical knowledge, especially in abstract domains, but with scarce, if any,
know-how for applied sciences. This system was unable to design and manage a credible and
competitive business education sector aimed at preparing young professionals for acting in the
real economy. The result is a level of quality and consistency in practical knowledge way below
expectations for the highly educated entry-level professionals. Subsequently, the business
sector has to create its own educational system which, under normal circumstances, should not
be needed. The decision making level within most companies is represented by individuals with
in-house/on-the-job business education. The downside of this phenomenon is that young
professionals get an education based primarily on specific company needs, instead of generally
applicable economic, business and market principles. Moreover, it is only normal that not all
businesses offer such education and trainings. Thus, the number of individuals suitable to fulfill
a management role is lowered even more. This chain of educational irregularities has

Leadership Development Solutions

If we are to talk about leadership skills, such talents are in

even scarcer supply. Most of the local managers were taught
to execute, not to strategize and decide. Before 1989, doing
what one had been told to do was the only way. In early 90s,
the necessity to use in Eastern Europe a business code fully
compatible with the international business environment
produced the emergence of the expat management
The typical emerging market conditions in Romania fostered
the development of the mercenary type of expat the one
who came down here, established the business, quick-fixed
unexpected difficulties, and did not take enough time to
explain the logic of things to their Romanian colleagues.
15 years later, most of the expat managers are still
mercenaries the lack of predictability and stability of the
local market forced the companies to maintain this
management alternative.
Fortunately, some top regional managers saw the importance
of being represented by a true leader and started to send to
Romania missionary expats. Such people used their
dedication to the mission of the company to set an example
and developed the know-how transfer to the local
management. In this process, missionaries abundantly
used very modern development techniques: providing
extensive on-the-job education and trainings, implementing
performance assessment systems based on core business
values, ensuring the consistency of the management
performance system evaluation. The most important
contribution of a missionary expat was to exercise the power
of example, and consistently live their system of values (walk
their talk). Setting up the right conditions for their local
colleagues to learn by doing and to increasingly assume
responsibility and manifest initiative were the most important
talent development inputs of such missionary leaders.
Unfortunately, they were not many, which explains the
scarcity of leadership skills in local Romanian professionals.
In 2007 (or 2008, at the latest), Romania will become part of
a very large market, and, implicitly, will be targeted by
significant FDI attempting to take advantage of the relatively
low costs of local labor force. The increased investments will
put more pressure on the small local pool of highly qualified
management and leadership talent. The supply of talent not
only will not grow, but it will remain the same and even
diminish because young professionals will be allowed to go
for career opportunities at a continental level.
Consequently, the availability of top management talent will
be further restrained by the EU accession, and the gap
between demand and supply will increase even more. This
gap will only be filled from two potential sources: a new
intensification of the expat phenomenon, and a significant
increase of the repat process (Romanian nationals who
emigrated during early 90s or before 89 who are willing to
return to their home country if presented with career
opportunities matching their current professional status).


Dynamics of demand and supply of talent in Romania


contributed and still contributes to the increasing gap

between the demand and supply for talented local business
professionals, ready to take up a fully fledged management



Talent demand
Talent supply





The executive search industry in

Romania: the process
With Romanias growing role in international business, the
free and effective movement of management skills is vital for
allowing companies to take full advantage of a pool of welleducated technical and professional managers. Although
executive search is well established in Western Europe, it is
still in its infancy in Romania. In fact, the entire management
market is yet to develop itself into a clear-cut, efficient, and
well-focused problem-solving community. In this market, it is
not enough to offer executive search advice alone, but it
becomes paramount to stay by the client and act as a
leadership development adviser.
If we are to look at the global industry and its major players it
is significant to note that none of the largest retained
executive search companies are present in Romania. This
can be easily interpreted as an indicator (and confirmation) of
the degree of attractiveness that the local market has had
over the last 15 years. One of the most important aspects is
that the industry is not regulated. There are no laws on Data
Privacy, while the companies active on the recruitment
market have little, if any, tradition in the field. This lack of
tradition, company culture, and commitment to adhere to core
industry values determined the way these companies
positioned themselves on the market. Too many times, they
aimed at doing it all. Their business credo is: We can
provide you with a secretary, as well as with the Chairman of
the Board. This is an expression of the fact that most often
people are transformed into pieces of paper (CVs), and are
judged by the title/position they hold. All these factors
ultimately translate into a low standard of service quality.
Some of the firms understood the necessity for focalization
and they concentrated on certain levels. Thus, separate
entities should focus on separate levels: top management
executive search, middle management recruitment, mass
recruitment and other.
Executive search is based on one main premise that
differentiates it from regular recruitment agencies. The
search firm acts for the client, who is seeking the right senior
manager for a specific role or, for example, a team of
managers to pioneer entry into a new market. The cultural
dynamics are critical and are often the key differentiator in
whether or not a candidate is successful in the new role.
Simply put, executive search is a mean of finding the
highest-caliber professionals on the local, regional or
Romanian Business Digest 2006

Leadership Development Solutions

international market. Confidentiality is paramount. It is not
always possible or appropriate for companies to advertise,
use word-of-mouth or go to a recruitment agency whose
objectives are to secure job positions for the candidates in
their records. A clear differentiation of the executive search is
the fact that it focuses in finding who is the best professional
for a certain role, and not who is available. Executive search
is oriented towards the clients needs and then finding the
candidates best suited to those requirements.
In Romanias case, norms of professional behavior,
standards of ethical conduct, the relationship between the
employee and the employer need to be revised and
upgraded to new and viable concepts and methods suitable
to the Romanian environment. The future candidates need to
be convinced of the genuineness of a certain career
opportunity. After multiple less than pleasant experiences
they had in the market, they need to be re-assured that the
executive search process is a professional service designed
to satisfy the paying clients needs, but not to the expense of
the future candidate. They need to be convinced that they
have their own rights, and that the overall objective is to build
a win-win situation resulting in a long-lasting relationship
between the two sides. In this context, credibility and highquality professionalism remain the key words.
Using a high-quality executive search firm ensures that the
client will benefit from confidentiality, a commitment to finding
the right professional whatever the challenges, specialist
knowledge of the industry, and the ability to secure the best
players in a time scale tailored to the clients objectives.
The search process
The client briefing.
The search firm first agrees the details of the position/role
and the type of candidates the organization needs in terms of
skills, experience, personal qualities, and corporate culture.
The brief is refined and submitted to the client for approval.
The search plan.
The search process begins with research across different
industries and markets, depending on the extent agreed with
the client, using an in-house database, market information,
internal brainstorming, and the search firms own network or
Identification of candidates.
The firm then interviews the candidates on its long list,
evaluates them and puts forward a short list to the client
with evaluation notes and recommendations.
Quality control.
Once the client has selected its choice of candidate, the
search firm will run extensive reference and qualifications
checks, seeking to secure the candidate and advise in the
negotiation process.
Candidate appointment.
The search firm carries out a follow-up service to ensure the
success of the candidate and satisfaction of the client.

The way of the future in executive

search: it is all about leadership
Being a leader is like being a lady. If you have to tell people
you are one, you probably are not (Margaret Thatcher).
Indeed, it is all about leadership and its benefic influence over
the fate of businesses. We have never heard about a
leaderless organization becoming successful. Conversely,
we have never heard about a successful business being
leaderless. We will never be able to understand why people
give such foggy definitions to leadership. Understanding the
words of Lady Thatcher has much more to do with common
sense and very little to do with ones rank, social position or
title. In the first place, the point in having a certain (senior)
role in an organization is to do good things to that
organization, to leave something behind, to make a
difference, a positive one. If people will notice such a positive
difference, after the top executive that managed it has left the
organization, then people will admire that executives
contribution and they will feel tempted to give Caesar what
belongs to Caesar. If, on the other hand, they will not notice
any significant difference, then they will remain silent and
all that early talk about one being a leader will become
Leading a business is not about us, it is about the organization.
This is a simple truth that most people cannot grasp. And, if
they do, they tend to forget it too easily. Whether we are top
level executives responsible for the fate of a large
organization (including, of course, for building up the team,
which makes us an employer) or we are a simple member
of the team (i.e. an employee), the point about any of us
being there, in the organization, is the need for success of
that business, not about our need for success. The bottom
line is that our possible success is just a consequence of the
success of the organization. This is the right order of
priorities. Not the other way around. Romanians have a very
old and popular saying: The human being is blessing the
place. Mature, truly professional leaders are passionate
about what they need to do so that they too will leave behind
a blessed place.
We are strong believers in the idea that the act of Leadership
ought to be acknowledged as a post-facto occurrence and
not as a cheap badge that people distribute around to any
person that holds a certain title in an organization or - even
worse - to just-about-anyone that happens to be in a position
that bears some decision-making responsibility. Concretely:
the fact that one person is the sole owner of a business and
the president of the company does not automatically make
him a leader. The person manages the company the best
he/she can, and he/she caters for the needs of his/her clients
the best he/she can, but being a leader has nothing to do with
that. The attribute of leadership can only be granted by
his/her clients and the people around him/her, those who
suffered the consequences of his/her work and witnessed
what they eventually perceived to be his/her contribution to
the success of their business and the well-being of the
society: his/her clients. It is only up to them to - eventually say that he/she was a leader and not at all up to him/her.
Leadership Development Solutions
Strada Alexandru Constantinescu Nr. 47
Sector 1, 011472, Bucure[ti
Tel.: +40 21 224 7124
Fax: +40 21 224 7505
E-mail: office@kfi.ro
Mr. Radu Furnic`, President



(Re)branding Romania
An overview of the nation branding context and
by Brandient

Why dedicate this material to Romania branding topic?

Clichs on Romania and the lesson about perception is reality
Why isnt anybody able to start the process of nation rebranding?
(apart from the isolated jobs and accomplishments of each of us, of course)
Rebrand Romania is vital
Why Romania needs a national branding programme*

Motto: To be Romanian is a certain fact. To be Romania is an unfinished business.

(Traian Ungureanu, 2005)

Why dedicate this material to Romania branding topic?

The need to professionally rebrand Romania is an emerging and powerful, albeit disputed, issue
these days.
As branding consultants we do consider that there is no more intelligent and effective way to take
advantages of the historical, economical and social opportunities than by investing in raising our
nations profile both in front of the Romanian people and worldwide.
Otherwise each and every of our countrys momentum opportunities, each and every of the
brilliant recommendations and ideas coming from politicians, businessmen, consultants,
intellectuals and organizations will fail under the obstruction of the inadequate, out of control
issue of country/nation image.
As we said in our brand industry analysis done for Romanian Business Digest (Spring 2006),
Romanias re-branding is now a chance, not a choice. We will reiterate bellow our reasons:

The worlds perception over Romania is still far off the Romanian reality.

Brands relate on both favorability and un-favorability. It is wrong to think that a brand is a brand
only if it is positive, favorable. Romania is a brand and not necessarily one capable of creating
fans and empathy. Romania has an uneven, rather negative image, full of unwanted stereotypes
and clichs. On the other hand, we (Romanians) are all confused when it comes to our identity.

Our beautiful geographical locations cannot succeed to attract tourists and generate
businesses by themselves, our best young talents dream to leave Romania for a better future
outside, our products have not succeeded to build preference and positive associations on
foreign markets, our legal system and corrupt way of doing business still keep the investors

These facts are well known by politicians, businesspersons, intellectuals, media people, but their
reaction is rather some kind of ongoing, powerless lamentation - no action plan has been taken
into consideration.

NOTE: * - contributed by Wally Olins

The Romania brand is the Achilles heel of the current economical opportunities and

No matter how much effort Romanian commercial brands would make to build something
outstanding, unique and valuable in front of the global village audiences, the set of associations
generated by the countrys origin will negatively affect the mentioned effort, even in the case of
very good intrinsic quality.


There is no clear visual identity of the country - graphic

symbolism is simply chaotic and unprofessional. There
are no acknowledged and promoted visual brand
properties. The communication messages about
Romania are chaotic, unconvincing, unattractive and
unclear, like disparate pieces from different puzzles.

The fact that we have a country brand with image problems

is the result of the way we (all) have communicated our
national identity and positioning (promise) for the last 16
years. By our actions, we have generated this image it
didnt come up from nowhere, but from our negligence and
lack of professionalism.
Probably one of the journalists most favorite topics over the
past 2-3 years, the subject of Romania brand refreshment is
still treated in such a dilettante way that has generated (and
degenerated in) endless media opinions war with zero
practical results (other than de-valuating the importance of
the topic itself, of course). Whenever an international political
leader or businessperson, a global corporation, a foreign
tourist or investor claims about disappointments offered to
him by Romania, we consider ourselves treated with
unfairness or we blame back the messenger.
It is obvious that Romania does have a brand which has
incorporated rather negative associations than positive ones.
And it is obvious that in order to compete, to accelerate
growth and to reborn our nation as a modern 21st century
community Romania must be managed like a brand.

Clichs on Romania and the lesson

about perception is reality
Firstly, how do Romanians think about themselves? (please
take this chapter cum grano salis and with a little bit of
Recent surveys revealed what Romanian people think and
feel about Romanian people and Romania. The results are
showing a community:

rather traditional and conservative, with a strong post

communist mentality (especially on the topic of
patriotism), but with high tolerance to the novelty and
creativity, openness to the Western values (as comprised
in lifestyle) and balancing a contradictory optimistic pessimistic feeling;

quite unreliable, short-term oriented,

inconsistent, and non-disciplined;


reluctant to competition and prone to egalitarianism.

Some of the greatest Romanian intellectuals see us like

undisciplined, obsessed to denigrate ourselves, weak and
spineless, egocentrics, with show-off attitude, dreamers,
gamblers but also creative and friendly.
Although we praise the liberalism, we are not progressist and
visionary, we are risk-averse and are perceived as unreliable
From the perspective of branding, one of the most destructive
characteristics of Romanians is the anti-Romanian attitude
sustained by ourselves. Just imagine that a company
denigrates itself on a regular basis and then expects the
audience to trust its products and services. A dangerous
effect of this attitude is the negative impact on the young
generations spirit.

A few famous popular expressions complete the picture of

Romania brand:

Nicio problem` (no problem) a kind of can-do spirit,

but not entirely positive because of its power to lower
performance and reject standards.

Merge [i a[a (make do . or dont bother its good

enough) comes to offer an alternative of even less effort
to Nicio problem` attitude!

Romnul s-a n`scut poet (The Romanian is a natural

born poet) is a way to express our creativity, which
unfortunately is not supported by relevant creative skills or
creative innovation performance. In a recent European
survey, Romanian people rated among the highest in
accepting novelty and creativity but the lowest in skills.

Under these circumstances, the Romanian tourism industry

advertising slogan Romnia mereu surprinzatoare
(Romania always surprising) could be taken as a true fact
(of course, the question whether this cynical promise
succeeded to attract visitors got an answer: it did not).
Regarding how the external world perceive us, in the second
half of the 19th century the Iron Chancellor Bismarck wrote to
Carol I Romania is not a nation, to be Romanian is a job
These days: Romanian people developed different
perceptions on different markets and different audiences,
based on context while in UK, Germany and France some
bad deeds of our co-nationals tarnished our reputation, in US,
Canada or in Japan, the perception is totally different and
Romanian people are perceived as hard workers, well
performing in the IT sector, friendly, open etc. A specific case
is the one of Spain, where more than 2 million Romanians are
working. The Spanish people directly in contact with
Romanians think they are good workers, warm and friendly,
while the Spanish people learning about Romanians only
from media have a rather bad impression.
Generally speaking, Romania projected outside an image of
a poor country (especially in capital resources) with a strong
agrarian component (actually agriculture contributes only
13% to GDP) a source of handicraft and a post-communist
behaviour (corruption, unreliable attitude and lack of
entrepreneurial spirit risk averse).
If this is the set of associators that Romanian nation and
country have developed in the mind of internal and external
audience, the rebranding exercise will have to impose a set
of decisions to dilute the negative perceptions about Romania
and to subsequently replace those with favourable/positive
perceptions based on accepted and recognizable truths.
This kind of program which aims to amplify the positive truth
and to dilute the negative clichs must start with social and
economical projects and follow with proper communication.
False promises or images that the reality cannot actually
sustain are the biggest enemies of a rebranding exercise.
The actual image of Romania is not only poor and
inconsistent but also marks a discrepancy between
perception and reality, and this should be a good trigger for a
nation branding process.
Romanian Business Digest 2006


Why isnt anybody able to start the

process of nation rebranding?
(apart from the isolated jobs and
accomplishments of each of us, of course)
It is difficult to believe that someone looking for business
success in todays world could face global competition with
no brands and no brand driven business models.
Democratizing customers aspirations might be balanced only
by certitude and dependence generated by brands.
There is no modern management to ignore the relationship
based on differentiation ingredient and the shared
experience. There is no growth without brands. And there are
no attractive margins without brands. Big corporations try to
be Cathedrals of Reputation, because reputation protects the
best against uncertainty or downside markets.
As Romanians, we must feel national reputation pushing over
our shoulders every day and we must strive to live up to the
mark of this burden.
Here are the main issues in the process of implementing a
national rebranding program in Romania:

Lack of understanding/knowledge. Lack of vision.

Both Presidency and Government do not consider this topic a

national priority.
The explanation is the fact that people from Presidency and
Romanian Government are not acknowledged on the topic of
modern management - they have never been managers
therefore they do not know how a brand is adding value to a
business, to an organization. Not having a previous
managerial experience, the actual administration is leading
the country based on common sense and based on the
guidance of the context (for example, the European
Community requirements). B`sescu, the only genuine leader
of the country is probably not in touch with professional
consultants capable to enlarge his horizon with the modern
requirements of representing a country.
The actual administration is stacked into endless politicallyegocentric debates and daily executives jobs, therefore
nobody is in charge with the future of the nation (excepting
the EU, probably).
To reach credibility, this kind of project must be endorsed by
a popular and powerful leader and developed with the help of
top branding consultants. The process must be associated
with people who are beyond reproach in terms of reputation,
professionalism and trust.

The project did not gathered steam among Romanian

politicians and intellectuals - partly because there are
other high profile subjects to take the front page:
(anti)corruption etc. There is a certain noise around
branding in Romania, but mostly coming from overnight
experts, people with very thin credentials, and this rather
hurts the credibility of the issue.
Another reason is the heritage of our ADN, which has kept
Romanian people away from the quality of being
visionary. As we said, Romanian people feel
uncomfortable in generating and implementing long-term
projects they are obsessed with short-tism, about
denigrating the projects started by other Romanians. This
generates the impossibility to vision and to build
consistency capable to cascading the positive effects.


Its worth mentioning that a nation rebranding program must

be built in time, with patience, discipline and passion. The
brand is a long-term strategy, an ongoing channeling
investment in a vision.

A further reason is the lack of mechanisms capable to

start and implement such a job.

The structure of the State, the systems, the procedures are

so unfitted to the needs than it will be difficult to find a reputed
partner for this job. The bids are obstructive and so
bureaucratique that, even when done in good faith, succeed
to attract only minor or inexistent players to collaborate. The
most recent examples of rebranding the Romanian Tourism
Industry or the IT Industry or Sibiu European Capital are
proofs of amateurism and lack of respect for this job. The
State entity responsible for the project of nation rebranding is
the Strategy Governmental Agency and all we can say about
them is our popular saying long-time ill means surely dead.
It is not simple at all to build easy, clear, positive,
differentiating phrases about the uniqueness of this country
or nation, capable and generous enough to be illustrated
verbally and visually in order to inspire a wide range of
internal and external audiences. This is why a re-branding
process is required. But it must be done with the help of real
specialists, not with those invented by politicians or belonging
to their camarilla.
Large sums of public money are still spent and obviously
there is so much talk about it, but there is no visible result.
Advertising cannot help a country rediscover its natural
identity but a professional re-branding process can.
Especially for politicians, it is important to understand that
they cannot restore a countrys image without repairing its
problems and its causes because there is no PR or
advertising tactic capable of transforming an unattractive
place in an appealing one.
About budgets and money: one of the clichs is we are not
a rich country, and do not have money for this. Totally wrong
- money are spent anyhow and in large amounts, since yearly
budgets of over 30 millions EUR are going to Romanias
image abroad and the results are risible, mainly due to a lack
of strategy and consistency.

Rebrand Romania is vital

In the first place let us disregard the clich of the last train,
saying that we have to rebrand only because of the 2007 EU
acceptance. Its true that inside EU community each country
must maintain a clear positioning based on competitive
advantages, those capable to build reputation and
preference. Its also true that the circumstance of joining EU
is not the main reason to rebrand the country, but the modern
context of the 21-century, which imposes us to follow the
rules of the game and to professionalize our approach to the
Globalisation also means that countries are somehow like
products on a shelf - this prosaic view must not hurt any
feeling, because it is as true for USA as it is for Romania.
When people think in what country to invest their money, from
where to import their needed merchandise or where to spend
their vacation, they face a large number of choices. And their
choice is influenced largely by how secure, competitive,
attractive a country seems to be, i.e. how strong that
countrys brand is.

For Romania, a good branding strategy would mean more
foreign investment, more incoming foreign tourists, increasing
exports of domestic products and - maybe the first and
foremost - stopping the brain drain. An additional reason to
tackle this issue with priority is that Romania faces a major
identity crisis after 50 years of communist darkness.
The aim of a re-branding process must be to create a certain
state of feeling an elation state able to channel the
energies of individuals and corporations. Something imposed
has zero chance to succeed.
The advantages of such a process will be felt by all of us: a
nation brand is a certitude agreement with the internal and
external audience, able to attract investors, tourists and
clients for the domestic merchandise and also to hold back
home its talented young people. Maybe its relevant that
Romania seems to be the second supplier of IT specialists to
Microsoft (after India) and it is the fifth foreign country
providing Harvard applicants & graduates but who never
come back. A potential country re-branding process may also
be perceived as a powerful statement about our commitment
to the future European Union.
There are few stages when taking this step. A country knows
when the program has started, but not when it ends. Spain,
after 20 years of what the specialists recognize as the most
successful European rebranding exercise still works to find
over and over new ways to create positive associations and
favorability (ballet, cinema etc).
We will end this article with the pages that Wally Olins
considered the foremost authority in branding and nation
branding, life-long practician, teaching at Oxford and author
of a few sacred books in management, branding and design
- dedicated to rebranding Romania. It is a material that every
manager, entrepreneur, politician, leader of opinion must

Why Romania needs a national

branding programme
(contributed by Wally Olins)
Who is doing it
Many countries of different sizes facing different image
issues, have relatively recently been involved in national
branding programmes. Dubai, Singapore, New Zealand,
Portugal, Spain and nearer home Poland and Estonia are just
a few of them.
Even the current Bush administration distressed to discover
that the United States is not universally loved and admired
has dabbled in it, appointing an Under Secretary for Public
Diplomacy and Public Affairs, an exercise which bearing in
mind recent events has perhaps predictably not proved too
At the other end of the spectrum tiny Liechtenstein has
launched a quite coherent and sophisticated national
branding programme in order primarily to dissociate itself
from perceptions that it is simply a convenient financial centre
for money laundering drug dealers.
What it is
Essentially a national branding programme is designed to
dissipate negative or non existent perceptions of a nation and
to create and sustain accurate positive and favourable

perceptions instead. Since there is hardly a single country in

the world that is happy with the way it is perceived by
outsiders its not particularly surprising that national branding
programmes are becoming increasingly significant and
popular amongst governments.
There is of course nothing really new about attempts to raise
national consciousness and self-esteem to gain greater
political influence in the outside world. Nineteenth century
and twentieth century nationalist doctrines were based
around these ideas as many older Romanians will remember.
What is new though is that in a rapidly globalising 21st century
where there are far more nations than ever before (51 UN
members in 1945 and 191 in 2004) there are now major and
quantifiable economic issues at stake.
The three commercial factors
The three major commercial and economic factors which are
influenced by national branding programmes are foreign
direct investment, brand export and tourism.
Foreign Direct Investment
Lets take each of them in turn. First FDI: An interdependent
global economy means that companies are increasingly
looking outside their own borders not only to get things made
in the cheapest market place, but also for technical research,
for outsourcing back office activities and so on. For many
years US investment in neighbouring Mexico led to
maquiladoras, US financed Mexican companies paying
Mexican wages for products which were shipped a few
kilometres across the US border for sale. The same thing is
happening now between Germany and some of its near
Central European neighbours. So the Czech Republic,
Slovakia, Poland, Hungary and others compete for foreign
direct investment of this kind. Of course physical and fiscal
issues are very important. Labour costs, educated workforce,
language competence, transport infrastructure, stable and
honest central and local government, no or few bureaucratic
hurdles, favourable tax regimes and so on all count in
investment decisions.
But once these very important hygiene factors are in place
other issues emerge.
Is it a decent place for a family? Can I educate my children?
What is the housing like? And what about the weather? Do I
want my family to move there? In other words foreign direct
investment involving making products is as much about
emotional as rational factors.
But in the new kind of FDI, which is about outsourcing,
creating technical and technological centres and about
building call centres and other back office infrastructures for
major international businesses decisions depend even more
on emotional factors. How can one nation prove that it is
better than a competitor in terms of providing a highly
motivated educationally elite work force or that its just a
nicer place to live. These are largely subjective factors.
Thats why marketing inward investment seriously is an
expensive and sophisticated business. Its about stressing
the advantages of a nation or region in a powerful, attractive,
differentiating way. It needs highly professional marketing
and promotional techniques.
And the particularly interesting issue is that peer group
pressure works. Success builds on success. India is
becoming a major centre of information technology
Slovakia for automobiles and so on, because big companies
follow each other.
Romanian Business Digest 2006

Brand Export
Linked to foreign direct investment is brand export, the
second major issue for the national brand. Slovakia is
becoming a major centre for automobile production but there
are no Slovak branded cars. Skoda, on the other hand,
clearly and unmistakably derives from the Czech Republic
even though its in the VW group, its a Czech car, just as
Dacia comes from Romania even though its part of Renault
its a Romanian car.
The issue for brand export is can you charge a premium for a
nationally based brand. Is Scotch whisky or Bohemian glass
or French perfume or Italian clothing worth more than similar
products without a national pedigree. Is a French made tee
shirt with a little green crocodile on it, perceived to be worth
more than an identical product made in Turkey or Romania
without the crocodile. Certainly it will cost more. Thats what
brand export is really about.
If you can get it right the brand derives strength from the
nation and the nation from its brands. Germany has cars:
Mercedes, Audi, BMW. Japan and South Korea have small
domestic hard won products. These kinds of products can
achieve premium pricing and they can also contribute to the
influence and prestige of power of the nation itself.
As Australia, New Zealand and Chile have shown through the
production and superb marketing of competitively priced high
quality wines its perfectly possible to break into the charmed
circle of brand export and move away from commodity pricing
if you do it properly and carefully. An example for Romania
carefully to examine.
The third area in which the national brand plays a highly
significant role is tourism which is now very big business. The
tourism market is growing at 9% per year, its the worlds
fourth largest industry and it can be a huge foreign exchange

earner for the most unlikely countries like New Zealand.

The emergence of the internet and of low cost airlines linked
to increasing leisure and wealth means that the mass tourism
market is going through very rapid changes. People in the
richer countries are moving away from sun, sea and sand
holidays purchased at the lowest possible price. More people
are looking for unusual holidays, exploring different cultures,
different foods and so on. This opens up huge opportunities
for countries to trade up, differentiating themselves like
consumer brands, emphasising their art, history, culture,
food, architecture and landscape. Romania with its deeply
impressive multinational cultural heritage and its wonderful
landscapes, cities, and flora and fauna has immense
possibilities if it can harness them effectively.
How is Romania perceived
Anecdotally one has to assume that Romanias image in the
world is poor. The job of a national branding programme is to
align perceptions with reality. The Ceau[escu years, the
vandalising of Bucharest, the scandal of Romanian orphans,
even Dracula have all been headline news at one time or
another. The reality as every visitor to Romania knows is far
better than the image. The job for a national branding
programme is to align outsiders perceptions to a changing
reality. Wally Olins, London, 31 August 2004
Note: We have used information from the following research reports:
CURS, Sectiunea D Elemente identitare, November, 2005,
GALLUP Romania, Mediul socio-economic din Romnia n perspectiva
integr`rii n UE, April, 2006,
GALLUP Romania, Capitalismul n mentalit`]ile romnilor, June, 2006,
GALLUP Romania, Studiu despre imaginea Romniei \n Spania, December,
Also, besides the material credited to Mr Wally Olins, some assertions in the
material have been inspired from the following books outside the management
and branding specialism:
Dan Dimanescu, Romania Redux, Humanitas, Bucharest 2004
Traian Ungureanu, Tehnica neputin]ei la romni, Humanitas, Bucharest 2006

Bulevardul Aviatorilor Nr. 59, Sector 1, 011854, Bucure[ti
Tel./Fax: +40 21 222 8167
Aneta Bogdan, Managing Partner
E-mail: office@brandient.com


Capital Markets


Sources of Finance
in Romania
by Deloitte

Capital market Private equity funds

The banking sector Leasing
The need for financing is a common occurrence for many businesses both during the early
stages of their life-cycle and for the development projects during their maturity stage. Corporate
decision makers are faced with the process of selecting the optimal capital structure (i.e.
ensuring the optimal balance between debt and equity). There are many key drivers behind this
selection process: the desire of shareholders to keep control over the company, the concern of
lenders to limit gearing to reduce risk, the difficulties and cost incurred by financiers in order to
obtain reliable information about the financial status and the prospects of the firm, and the stage
of development and maturity of markets supplying debt and equity.
During the previous decade, when the capital market was still in its infancy stage and bank
credits were expensive and difficult to obtain, reinvestment of profits was the preferred
alternative of financing for many Romanian firms. It is still widely used by many small and
medium sized businesses. Currently, the main sources of funding available to Romanian
companies are: the public capital market, the private equity funds (for equity-type financing), the
banking sector and the leasing market for debt-type financing. Following is a brief review of each
of these sources of finance.

Capital market
The legal framework for the capital market was set up in 1994, establishing the National
Securities Commission (CNVM) as a regulatory authority, followed by the launch of trading on
the Bucharest Stock Exchange (BSE) in November 1995. One year later, the over-the-counter
RASDAQ market started its operations.
Over the last three years, there were several changes in the capital market legislation, with the
aim of bringing legal provisions in line with the EU directives. The main step in this regard was
the issue in 2004 of a new Capital Market Law, containing in a single act, provisions for the
capital market institutions, intermediaries and issuers of securities.
Due to the limited offer of trading instruments (currently only shares, municipal and corporate
bonds and since recently preemptive rights are traded), and the limited number of large and
well performing companies on the market, the average daily turnover in the first six months of
2006 was around EUR 10 mn. This ranks the BSE among the smallest exchanges in the Central
European region. According to a comparative study prepared by the Vanguard brokerage house,
the daily liquidity of the Warsaw Stock Exchange in 2005 was EUR 100-200 mn, the turnover of
the Prague bourse did not decrease below EUR 90 mn, while Budapest Stock Exchange traded
on average EUR 50 mn per day.
The BSE official listing is structured into three segments: (i) domestic stock, (ii) bonds and other
debt securities and (iii) foreign securities. The domestic stock segment is organized into the
following tiers, based on the quality of the traded stock: First Tier (with 21 shares listed as of
July 2006), Second (Base) Tier (with 44 shares listed) and the premium Plus Tier, introduced in
2001 for the most transparent listings. The Plus Tier includes shares traded on both First and
Base tiers which meet additional transparency and corporate governance criteria required by the
exchange. The admission of shares to the Plus Tier has no impact on their preservation in the
Base or First tiers. Currently, only one stock is listed on this tier. Apart from the Base and First
tiers, the BSE runs the so-called unlisted market which trades stocks which have been delisted
from the main market and for which the exchange does not impose any requirements of
information disclosure or daily variance in price. The unlisted market is open only two hours a
day and has low trading volume. Listing requirements of the BSE by tiers are shown in the table

Listing requirements for the Base Tier
Registration at the securities Registration Office with the
Free transferability of securities;
Conclusion of a registry contract with the exchange or
with an independent registrar;
Minimum share capital requirement: EUR 2 mn
Disclosure requirements;
Payment of applicable BSE fee
Listing requirements for the First Tier
Listing requirements for the Base Tier fulfilled (except the
minimum share capital requirement)
Minimum operation of three years;
Net profit in the last two years;
Minimum share capital requirement: EUR 8 mn
Business plan prepared for the following two years;
Proven management performance, satisfactory financial
ratio levels;
Shares: free float over 15% including at least 75,000
shares, held by minimum 1,800 shareholders (except
issuer employees), holding at least RON 10 in par value
each, and
Corporate bonds: free float over 30%, including at least
50,000 bonds, held by minimum 1,000 bondholders
(except issuer employees), holding at least RON 30 in par
value each.
Source: BSE Regulation on admission to listing

Listing of municipal bonds started in 2001 and at the end of

July 2006 there were 12 such securities listed on the
exchange. Apart from the municipal bonds, the BSE also
trades 6 corporate bonds (one on the Base Tier and five on
the unlisted market), of which three were issued by banks,
two by leasing companies and one by an industrial firm.
Public offerings are regulated by the Capital Market Law as
well as by specific CNVM rules. In order to carry out a selling
public offer, an issuer must prepare and submit a prospectus
providing detailed information on the company and the
conditions of the offer to CNVM for approval. According to the
Law, CNVM has to make a decision on the approval of the
public offer in 10 days, but this term may be prolonged in
case of any additional information requirements or changes in
the prospectus demanded by the regulatory authority. The
validity period of a prospectus is 12 months from the date of
CNVMs approval. Once the announcement for a public offer
is published in the media, the offer becomes mandatory. The
minimum duration for a selling public offer is five business

Yearly BET index performance
















*Data as of July 2006

Source: Bucharest Stock Exchange

The total capitalization of the Romanian capital markets (BSE

and RASDAQ) as of July 2006 stood at EUR 19.6 bn. The
stocks traded on the BSE accounted for 88% of this
capitalization. Capitalization increased more than ten times
over the last four years as a result of the escalation in the
market value of the companies in the First Tier.
BSE liquidity and capitalization history
Liquidity (EUR mn)
Capitalization (EUR mn)
* Annualized value
Source: Bucharest Stock Exchange

A breakdown of market capitalization (as of July 2006) shows

that the energy sector accounted for more than half (53%) of
the value, followed by the financial sector (35%), materials
(5%), equipment (3%), pharmaceuticals (3%) and chemicals
(1%) stocks. As far as turnover is concerned, the financial
sector (comprising a few banks and five investment funds)
accounted for 71% of trades, while trades of energy stocks
accounted for only 13%, chemicals 7%, pharmaceuticals 5%
and equipment 4%.
The low daily liquidity of the market, even in the best traded
stocks was in the past a strong deterrent for large institutional
investors. The average daily turnover exceeded EUR 1 mn
for the first time in early 2003, and grew to EUR 2.4 mn in
2004, EUR 8.7 mn in 2005 and EUR 10.1 mn in the first six
months of 2006.

In 2003, the BSE and RASDAQ started negotiations for a

merger with the intention of strengthening the Romanian
capital market, by increasing the daily volume and attracting
the interest of investors. The merger was agreed to in August
2005 and formally completed in November 2005. Several
hundred of the RASDAQ listed shares are already being
traded using the more advanced trading platform of the BSE.

Liquidity on the bond market has been very low (EUR 35.3
mn during 2005). This is due to the relatively small size of the
issues (the largest issue of municipal bonds did not exceed
EUR 6 mn) and the investors preference to keep such
instruments until maturity (as a result of the yields on these
bonds, significantly higher than the ones offered by the
alternative long-term bank deposits). The primary offers of
municipal bonds were mostly subscribed by banks and
investment funds and therefore there is a concentration of the
issues in the hands of a few bondholders, which has reduced
liquidity further.

The historical performance of BSE measured by the progress

of the official BET index (including the top ten shares in terms
of market capitalization and liquidity listed on the First Tier)
ranked the exchange among the best performing markets in
the region in 2005. It was 2004, however, that was the year
of highest returns, when the BET index advanced by 111.5%.

Listings are a relatively recent occurrence on the Romanian

exchanges. Only a few companies went public this way over
the last years. In 2005, there were five new listings of shares
on the BSE, all on the Second Tier, of which two were stocks
transferred from the RASDAQ market, and three were first
time listings. As of July, there was only one new listing in
2006, Transelectrica (TEL_PV).



The year 2005 also saw three municipal bond listings (Aiud,
Timi[oara and S`cele), the first listing on the BSE of
corporate bonds issued by a non-financial company (Hexol
Lubricants) and two listings of preemptive rights (Impact and
Petrom). From January to June 2006 there were two more
municipal bond listings (Bistri]a and N`vodari).
Local institutional investors account for the lions share of
investment on the Romanian stock exchanges. The main
categories of buyers on the capital market are the mutual
funds, the five financial investment companies (SIFs) and the
banking and insurance sectors. Fueled by the sharply falling
interest rates on bank deposits, the demand for alternative
investment opportunities has been constantly increasing. In
the last half of 2005, eight new mutual funds were launched,
of which five are focused on capital market investment. The
close establishment of the private pension funds will critically
increase the supply of investment capital on the market and
put additional pressure on the stock exchange. Another
stream of investment capital comes from foreign investors,
attracted by the countrys growth prospects following the
accession to the EU. In 2005, the share of purchases of nonresidents on the BSE was over 30%.

The main reasons quoted by the managers of PE funds to

explain their prior reluctance to invest in Romanian targets
were the unavailability of professionally skilled management
teams and the limited alternatives on exit (which could only
be made through a private transaction due to the
underdeveloped capital market). The countrys advances in
preparation for the accession to the EU, the steady economic
growth over the last five years accompanied by the rushing
demand for growth capital in many sectors of the economy
and the recent progress of the stock market, have caused the
acceleration of activity of the PE funds, reflected in the
incease in invested capital. Judging from the value of the
deals, over the last three years there was growing activity in
terms of both investments and exit. The European Private
Equity and Venture Capital Association (EVCA) reported the
PE investments in Romania in 2004 at EUR 32.5 mn in 2004
(chart below), a figure not including additional EUR 51 mn in
transfers among PE investors.
PE investment volume, 2004

Private equity funds

EUR mn


















Private equity (PE) financing in the form of an injection of

capital is available for a limited number of well performing
companies, that are in the growth stage of their life cycle,
have proven the capacity of their management team and
have outstanding growth prospects. The investment cycle of
PE funds lasts for a period of 3-4 years and generally
includes an exit provision, through stock exchange listing or
private placement. A list of PE funds currently active in
Romania is shown in the table below.

Source: EVCA

PE funds active in Romania

Fund manager

AIG-CET Capital


Amount (EUR mn) Region

Global Emerging Markets Fund II


Advent International Advent CEE III


Enterprise Investors Polish Enterprise Fund V


Global Finance

Global Growth Fund - EUR 20 mn

Black Sea Fund - EUR 100 mn
Global Emerg. Property - EUR 150 mn
Bedminster Capital SE Europe Equity
Fund II LP
New Century
Broadhurst Investments Ltd,
Broadhurst Investments
Romania, Lindsell Enterprise
DBG Eastern Europe DBG Eastern
Europe II LP
SigmaBleyzer Fund IV
GED Capital
Fondul Romn
Post Privatizare
Romanian Capital BAF, RIEEC
SG Emerging
Societe Generale
Romania Fund
Oresa Ventures-SE Oresa Ventures


Latin America



Retail, consumer
finance, IT, telecom,
Media, healthcare,
financial services, retail
Retail, financial services,
IT, pharma
Retail, IT, media,
telecom, real estate

Recently exited Astral

CATV company and Orange
Dufa, Terapia
Aritma, Siveco

Black sea
RO, Balkans, TR Fin. services, infrastructure
large privatisations
Fin. services, bakery,
industry, real estate

Many control
and minority stakes













Romania & Moldova Romania and Moldova

Direct Fund
SE Europe
Danube Fund





Fin. services, retail,

real estate

Gemisa Servicii SRL Gemisa Investments


Services, media, etc


Markets with firm

growth prospects
Distribution, food, software
Medium sized
Fin. services, retail,
logistics, distribution
Fin. services, FMCG,
retail, pharma, media
Oil, distribution, industry

Delta, Chipita, Neoset, Titan

Loulis, La Fourmi, Total Soft

Continental, Regisco
Megapress, Policolor,
La Fntna, Flanco, Credisson
Sanex, First Logistics &
Alpha Leasing, Interstar Chim,
Buch Corporate Center,
Flanco, Credisson
Miniblu, Optical Network,
Oxigen Plus, Cristal Diagnostic

Source: IntelliNews - Romania Industry Report


Romanian Business Digest 2006

Taking into account the size of the countrys GDP, PE
investment level in Romania, which stood at 0.06% of GDP in
2004 was still below the CEE average of 0.1% and much
below the general European average of 0.32%.
PE investment as % of GDP in 2004
1.20% 1.11%













0.15% 0.12% 0.10%

0.07% 0.06% 0.02% 0.02% 0.02%


The returns earned by PE investors in Romania were

significantly higher than the average such returns in the EU.
For instance, Oressa Ventures, mentions 35% pa return from
its recently sold investment in Credisson, Enterprise
Investors earned four times its entry price in Orange five
years ago, GED Capital Development reported 20-25% pa
return on a group of eight investments in Romania, while
SEAF Trans Balkan Romania Fund sold Aritma for more than
2.5 times the acquisition price paid in 2002.
To raise financing with a PE fund, a company has first to fulfill
the eligibility criteria related to the size of investment, quality
of management, profitability and growth prospects, prepare a
detailed and argumented business plan for its activity and try
to contact as many as possible fund management companies
targeting its economic sector, a search that can be made
directly or intermediated by a financial advisory firm.

Source: EVCA

The banking sector

The most dynamic economic sectors in 2005 retail and the
related consumer finance, real estate and IT were among the
preferred targets of the PE funds. In retail, two of the three top
players in the white goods segment Domo and Flanco
obtained financing against minority participations in the
business. Both companies have set up consumer finance
firms, also with participation of private equity funds. The large
supermarket/ hypermarket retail chains (such as Metro,
Carrefour, Cora, Mega Image) have available financing from
their parent companies, but the smaller, privately owned
players in need of funding such as Aritma and La Fourmi
were also approached by the PE funds.

Banks are by far the most important external source of

financing for businesses in Romania. The total outstanding
amount of debt finance provided by banks to the corporate
segment stood at EUR 11.36 bn as of May 2006. Of this total,
49% was RON denominated credit, while 51% was foreign
currency denominated debt. Romanian companies still prefer
to use RON denominated credit for short-term products (60%
of all such debt is issued in RON), while 66% of medium and
long-term debt is foreign currency denominated.

In the IT sector, Intercapital and Enterprise Investors took

over a 32.5% stake in Siveco (a software producer), while
other two top companies Romsys and Softwin are also in
view of PE investors. Among the largest private equity deals
in 2005, two were transfers among PE funds. In the largest
deal, Enterprise Investors acquired 100% of the supermarket
chain Aritma jointly held by the SEAF Trans Balkan Romania
Fund and a private investor and expressed its intention to list
the company on the capital market. In the other deal, Total
Soft (a software company) was taken over by the Greek PE
fund Global Finance. A review of the top PE investments in
2005 is shown in the table below.


The year 2005 was also remarkable by its wave of successful

exits. Several PE funds which entered the market in the late
nineties or in the early years of this decade, reached the end
of their investment cycle and successfully sold their holdings
to strategic investors or in a few cases to other PE funds. In
2005, three exits alone (AIG-CET Capital Investment and
Enterprise Investors sold 23% stake in Orange, AIG New
Europe Fund sold 25% in Astral Telecom and GED Capital
Development and Global Finance sold 51% stake in
Sicomed) gathered over USD 720 mn.
Top PE investments in Romania
Security systems
Dufa Romania
Total Soft*
Dragon Star Guard
La Fourmi

Credit stock history in the banking system


EUR mn


Foreign currency


RON credit






Source: National Bank of Romania

The Romanian banking sector is organized as a two tier

system with the National Bank of Romania (NBR), acting as
an independent central bank. According to the NBR, as of
July 2006, there were 39 local banks and subsidiaries of
foreign banks licensed in Romania. Following a series of
privatizations, mergers and takeovers, with a few exceptions
(notably related to CEC, currently in privatization process,
and Banca Transilvania) the Romanian banking system is
controlled by foreign capital.

Inv. size (EUR mn)
Enterprise Investors
AIG - CET Capital Management
Advent Romania
Enterprise Investors, Intel Capital
Global Finance
GED Eastern Fund II
Global Finance


Source: IntelliNews - Romania Industry Report; * Transfers among PE investors



The top five banks concentrate 59.9% of total assets, 62% of
credits and 59% of total equity. Further changes at the top of
the banking system are expected to occur this year once the
ongoing merger between HVB, Unicredit and Banca }iriac is
completed. The newly created entity will rank third in terms of
total assets.
Market shares in the banking system
(based on total assets - March 2006)

Given the long-term history of inflation, requiring permanent

adjustment by the banks of the cost of borrowed resources,
the long-term lending is still almost exclusively done on
floating interest rate basis interest rates being adjusted
periodically by the banks.



The spread between the average credit and deposit interest

rates narrowed rather slowly with the slowdown of inflation;
the spread was 14.2% in May 2005 and fell to 9.3% in May
2006, which was roughly two times the average deposit
interest rate (4.9%) at that time. The high spreads resulted in
outstanding profits reported by the banks in 2005, roughly
double in year-on-year terms.


Alpha Bank




Source: Intellinews - Romanian financial sector report

The lower cost of borrowing in foreign currencies in addition

to the strengthening RON has traditionally lead individuals
and companies to prefer foreign currency denominated
credit. The stock of such credit increased more rapidly than
the one of RON credits, a trend that accelerated in 2004 and
in the first half of 2005 (table below).
Credit stock history in the banking system

EUR mn


FX denominated credit


RON denominated credit








The situation changed, however, as the NBR decided to act

to curb the excessive accumulation of the foreign currency
debt. NBR issued in September 2005 a regulation forbidding
banks from increasing their balance of un-hedged foreign
currency loans above 300% of their own funds. The hedged
loans for which this limitation did not apply were the ones
granted to a debtor who was predictably earning enough
foreign currency to service its debt. For one third of the
banks, this regulation led to an end of their foreign currency
credit expansion, but for many others there is still significant
room for lending.


Source: National Bank of Romania

In July 2005, the National Bank of Romania approved the

liberalization of residents access to foreign accounts and
deposits. This decision represented a major step towards the
full convertibility of the national currency and complied with
the principle of the progressive liberalization of capital inflows
and outflows. The full convertibility is to be accomplished by
September 1st, 2006 when all restrictions on operations with
highly speculative monetary market instruments are to be
Special lending programs have been gradually developed to
cover the financing needs of particular groups of customers.
Many banks are now distributing products designed for
SMEs, based on funds provided by the Government or
international organizations such as the EU, European Bank
for Reconstruction and Development, European Investment
Bank, DEG (German Investment and Development
Organization), KfW (German bank for Reconstruction), FMO
(Netherlands Development Finance). Other beneficiary
groups of such programs are: exporters, the rural community
(for the expansion of the family farming, agricultural services,
acquisition of specific equipment, fertilizers and seeds), small
businesses set up in the disadvantaged monoindustrial
zones, firms dealing with environmental protection, etc.
Given the fact that many companies still have outstanding
debts taken on high interest rates, some banks developed

Average interest rate history in the banking sector (RON)




Nov-05 Dec-05 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06

Source: National Bank of Romania


Romanian Business Digest 2006

special refinancing products as a way to get cheaper
financing. Among the banks offering such loans are BCR,
BRD, HVB, Piraeus, Banca Transilvania and Volksbank.

The first leasing company was set up in Romania in 1994,
and the regulatory framework for this activity started to be
developed since 1995. Following a boom of the leasing
business in 1997, the first law specifically dedicated to this
activity was passed in early 1998.
The total number of players on the market is around 200.
Some 18 of these firms are leasing companies affiliated to
banks, a few are companies created by manufacturers or
dealers of automobiles and other goods while the rest are
independent leasing firms. A number of 38 leasing firms are
affiliated to the Association of Leasing Companies of
Romania (ASLR) whose members account roughly for half of
the market, while other 15 are members of the Leasing
Bankers Association (ALB).
According to ASLR, the size of the Romanian leasing market
in terms of value of concluded contracts has grown over the
last six years at an average compounded rate of 40% per
year from EUR 285 mn in 1999 to over EUR 2.2 bn in 2005
(table below). The top 20 leasing firms account for 80% of the
Romanian leasing market
1999 2000 2001 2002 2003 2004 2005
Market size
285 422 962 900 1,400 1,815 2,215 2,769.75
(EUR mn)*
Growth rate pa
48% 128% -6% 56% 30% 22%
Source: ASLR
* Value of concluded contracts

Historically, most of the lease contracts on the market have

been financial leases. Based on ASLR statistics, in 2004,
financial leases accounted for 91% of the total (in terms of
value of goods), a weight that had increased to 96% in 2005.
67% of the leases are concluded with the corporate
customers, the public sector accounts for 21% while the
leases to individuals represent the remaining 12%. As far as
the term of such agreements is concerned, most of these
(54%) are over a period of 3-5 years, and only 43 % are shortterm (1-2 years). The usual term for real estate leases is 5 to
8 years.
The overwhelming source of demand for financing through
leases on the local market comes from the automotive sector,
which accounted in 2005 for 91% of total contract value for
ASLR members. The remainder was split between equipment
leases (6%) real estate investments (1%) and others (2%).
ALB members reported a lower share of their leases going to
the automotive sector over the same period (71%) and an

increased share of leases for equipment (26%) and real

estate (3%).
Market analysts estimate that the automotive leasing market
has already reached its maximum as its growth rate will
probably slow down or even become negative following the
liberalization of imports of second hand cars without a
restriction on age in January 2007. Alternatively, equipment
leasing which is still in infancy stage will continue to
accelerate, propelled by the growing demand for equipment
occasioned by the implementation of EU norms, particularly
in the environmental sector. Developments in the
construction, food processing and textile industries are seen
by the key market players as the main beneficiaries of
equipment financing by leasing.
The reason for the insignificant weight of real estate leasing
(3% of total) is that the inclusion in the product range and the
development of this product was not considered a priority by
most of the leasing companies. The insolvency at
headquarters of a German leasing company selling real
estate leases that managed to attract a few hundreds of
customers through its office in Romania had a negative
impact on this market in 2005. Of the few firms which are
leasing real estate, most only finance the acquisition of
existing buildings and avoid financing new construction. Real
estate leases are almost exclusively offered to corporate
customers and are generally accepted only over a certain
minimum value of the building. Analysts consider that the
filling of this niche will become a priority for the main players
in the following period, which will lead to a significant growth
of the market.
Following an initiative of the ALB, joined also by ASLR, the
Romanian Legislature has adopted Law No. 266/2006
governing non-bank financial institutions. Among the
changes, a mandatory transformation of the leasing firms
which are organized as limited liability companies into joint
stock firms. There was a significant increase in the mandatory
minimum equity capital to EUR 200,000 to be achieved by
December 31, 2006, as well as a number of measures meant
to improve transparency in the sector (setting up a
transparent reporting system to a supervisory authority) and
other clauses to protect the leasing firms clients in case of
bankruptcy. It is widely estimated that only around 60% of the
players in the market will be able to comply with the new
regulations, leading to strong consolidation and weeding out
of the small or uncompetitive players. Leasing clients should
benefit because of greatly increased reliability and reduced
As a conclusion, the improvement of the regulatory
framework in view of alignment to the EU standards, the
strengthening and consolidation of the Romanian financial
institutions and the increasing competition among these are
factors likely to improve the availability and to lower the cost
of finance to the corporate customers.
{oseaua Nicolae Titulescu Nr. 4-8, America House, Etaj 3
Sector 1, Bucure[ti
Tel.: + 40 21 222 1661
Fax: + 40 21 222 1660
{erban T`nas`, Analyst
E-mail: STanasa@DeloitteCE.com
Gheorghe Nistoroiu, Senior Associate
E-mail: GNistoroiu@DeloitteCE.com



Romanian Capital Markets

Regulatory Framework*
by Alpha Finance Romania
Key regulations Key regulators
Main company & stock market provisions
Types of available instruments Taxation and fees
Bucharest Stock Exchange RASDAQ
Key regulations
The legislative framework of the Romanian Capital Markets consists of the following Laws and
Capital Market Law (Law No. 297/2004);
Company law (Law No. 31/1990);
CNVM instructions & regulations;
Bucharest Stock Exchange regulations;
Privatisation laws.
The legal framework for securities trading was first put in place in 1994, leading to the
establishment of the Romanian National Securities Commission (CNVM), the organisation and
functioning of the Bucharest Stock Exchange (BSE), the issuance and trading of securities, as
well as the regulation of brokerage activities of intermediaries and investment advisors. As a
consequence, effective securities trading started in November 1995 on the Bucharest Stock
Exchange and one year later on the over-the-counter Rasdaq market.
Over the past ten years, the governing law on the Romanian capital market experienced
numerous changes, which culminated in a new, consolidated capital market law that was
enacted on 29 June 2004 and came into force one month later.
The new Capital Market Law (Law No. 297/2004) aims at bringing the Romanian capital market
in line with European standards. While the new law outlines only the general principles,
additional secondary legislation was elaborated by the regulatory body CNVM.

Key regulators
The National Securities Commission (CNVM in Romanian) is the main regulatory body, which
supervises both securities markets. The Commission was established in October 1994, as an
independent administrative authority accountable to the Romanian Parliament.
CNVM is comprised of seven commissioners (appointed by the Parliament) who constitute its
management board. The commissioners have five-year mandates, which can be extended only

* Disclaimer: The above

information is a summary of
published regulations and is not
intended to be a legal advice or a
legal opinion on which you may
rely. For further information
please contact a specialised law
firm. Alpha Finance Romania SA
expressly disclaims any liability
to any person in respect of the
contents of this publication

CNVM has an equivalent role to the one of the American SEC in regulating the function of the
Romanian equity markets. It is responsible for the all operations on the Romanian securities
markets, the protection of investors against unfair, abusive, and fraudulent practices, the
circulation of information regarding securities, holders and issuers, and the establishment of a
legal framework for financial services activities. In order to protect the investors interest, the
Commission has the right to apply sanctions for the breach of the provisions of the laws and the
regulations issued for its implementation. Sanctions may range from fines to withdrawal of
authorization. Listed securities cannot be traded outside regulated markets, which are those
established under the authority and the supervision of CNVM.
The Romanian brokerage companies are authorised to trade securities in Romania or in the EU
member countries (members of the European Union and other states of the European Economic
area) only with the approval of CNVM. The brokerage houses that intend to provide full financial

Alpha Finance Romania

investment services must have an initial capital of EUR
730,000 by December 2006, compared to EUR 530,000 as at
the end of 2005. A foreign company (domiciled in an EU
member state and other states of the European Economic
area) can trade in Romania without CNVM approval if it is
licensed as a brokerage company in its home country.
There are currently two self-regulatory organisations (SRO),
namely the BSE and BMFMS (the Sibiu Futures Market) who
have received their SRO status from CNVM. The SROs have
the authority to adopt their own rules regarding membership,
listing, trading, clearing, settlement, and registry activities.
The National Bank of Romanias main involvement in the
functioning of the capital markets refers to:

Authorisation of clearing and custodian banks, in cooperation with CNVM;

Cash settlement bank for both equity markets.

Main company & stock market

Corporate governance
The general framework for managing a Romanian company
is provided by Company Law No. 31/1990, whose provisions
have been adjusted by the Capital Market Law for application
to listed companies.
The Ordinary General Shareholder Meetings (OGSM) are
called at least once a year and can decide on the following
main issues: the analysis of the managements performance,
the approval of the annual financial statements and the
setting of the dividend level; the discussion on the budget for
revenues and expenses for the following year; the election of
the companys board of administration and censors. The
quorum required for the first call of the OGSM is at least 50%
of voting shares, while any decision can be taken with at least
50% of present voting rights. If the quorum is not met on the
first call, the decision can be approved in the second date by
the majority of present votes irrespective of the present
The Extraordinary General Shareholder Meetings (EGSM)
are called whenever necessary in order to discuss issues
such as: the change of the companys legal form, object of
activity, headquarters, and share capital; the issuance of
bonds; the merger with other companies or the
splitting/spinning-off of a part of it; and changes to the
companys by-laws. The quorum required for the first call of
the EGSM is at least 75% of voting shares, while any decision
can be taken with at least 50% of total voting rights. The
quorum for the second call is at least 50% of voting shares,
while any decision can be taken with at least one third of total
voting rights.
A shareholder meeting can be called at the request of any
significant shareholder (holding at least 10% of the
companys shares outstanding). Shareholders can be also
represented by other persons that the companys
shareholders, based on a notarised proxy.
The identification of the shareholders that are entitled to
receive dividends or any other rights as a result of the GSM
decision is set during the respective GSM and should be no
earlier than 10 days after the GSM date.

Listing on the capital market

In order to be eligible for listing on the capital market, a
company should be operating for at least three previous
years and to have an expected market capitalisation of at
least EUR 1 mn. In addition, the company should provide
adequate free float, which is set by law at 25% of its shares
outstanding; however this can be lower if approved by CNVM
given that a large number of shares are dispersed among the
public investors.
Corporate disclosure requirements
Listed companies are obliged to disclose quarterly, half-year
and yearly financial reports (including consolidated reports, if
available) to the public and submit them to CNVM and the
stock market (BVB or Rasdaq). The companies must also
make public the audited results at the end of a fiscal year and,
if exist, at half-year. The reports have to be published in
maximum five days from their approval. The annual financial
statements and the annual report should be made public
within four months from the end of the fiscal year (December
31st for all Romanian companies), while the half-year report
should be made public within two months from the end of the
reporting period.
Listed companies are required to disclose any privileged
information and send a report in maximum 24 hours to CNVM
and to the market operator. At the same time, listed
companies should inform the markets about any material
event (which can influence the stocks or bonds price) within
48 hours from occurrence. Also, the companies are bound to
inform the shareholders about the shareholder meetings,
dividends and share capital increases.
The administrators must report any legal act signed by the
company with its administrators, employees or controlling
shareholders, as well as with their related parties, whose
value exceed EUR 50,000. A company must inform without
delay the public and CNVM in relation with any privileged
information but, if approved by CNVM, can decide to delay
the disclosure of the sensitive material information that can
affect its interests. However, CNVM can impose the company
to disclose such information in order to maintain transparency
and integrity of the market.
The BSE offers online delivery of corporate information.
During 2002 and 2003, Rasdaq significantly improved
disclosure requirements and currently provides online
delivery of corporate information.
At the same time, the enforcement by the Government of the
General Framework for Harmonising the Romanian
accounting regulations (RAR) to the Fourth Directive of
European Economic Community and to the International
Financial Reporting Standards (IFRS) led to an improvement
in the quality of financial information prepared by the listed
companies, although the new RAR are still not fully compliant
with IAS standards. All companies listed on the BSE and
RASDAQ are now required to prepare their financial
statements also in accordance with the above mentioned
The cumulative voting method can be used to elect the
members of a publicly-traded companys board of
administration if the number of board members is at least five,
but is mandatory if it is expressly requested by a significant
shareholder (which holds at least 10% of the companys
shares outstanding). A significant shareholder can request
only once during a financial year for the meeting of GSM
regarding the election of administrators by cumulative votes.
Romanian Business Digest 2006

Alpha Finance Romania

Trading disclosure
When, as a result of an acquisition/selling of securities issued
by a publicly held company, the percentage of voting rights
held by an investor reaches, exceeds or falls below the level
of 5%, 10%, 20%, 33%, 50%, 75% or 90% of the companys
total shares, the respective investor has the obligation to
simultaneously inform the issuer, CNVM and the stock
exchange within about the respective transaction within three
business days from its completion.
Capital increases framework
Any capital increase must be decided by the extraordinary
shareholder meeting, which can set a maximum level of the
capital increase. In this case, the board of administration will
be delegated to decide on the exact level of the capital
increase. This delegation must be renewed on an annual
In the case of cash capital increases, the shareholders
preemption rights can be suspended, which must be
approved by the EGSM where at least 75% of the number of
shareholders are present and only with the votes of 75% of
the companys total voting rights. The similar quorum is
requested for the approval of in-kind contributions, which can
be made only with performing assets required to perform the
companys object of activity.
In addition, Law No. 161/2003 on anticorruption prohibits all
listed and non-listed companies from increasing the share
capital with the difference resulting from the revaluation of
fixed assets, which can be included only in the reserves
Public offerings
Public offerings are regulated by the Capital Market Law and
the CNVM Regulation No.1/2006, enforced since April 2006
(it replaced CNVM Regulation No. 13/2004, with no
significant changes).
The selling public offerings must be accompanied by a
prospectus and the purchase public offerings by an offering
document (OD) that provide information about the issuer and
specifies all conditions to which the offer is subject. The
prospectus/offering document must be approved by CNVM.
CNVM must decide on a prospectus approval in maximum
10 days from its submission, but any additional information
required by CNVM or changes in the initial information would
extend the term. Any change in the prospectus or the OD
should be filed with CNVM within seven business days before
the closing of the offering and CNVM can decide to extend
the offering period in order allow for at least 5 business days
between the publication of the changes and the end of the
The prospectus for the selling offerings is valid 12 months
from CNVMs approval, while the OD for the purchase
offerings is available only for the approved offering period.
Once the announcements for the public offerings are
published, the offerings are mandatory. The offering
announcement may be published anytime after the
prospectus/OD was approved by CNVM, but the purchase
offering is annulled should the offering announcement is not
published within 10 business days from the CNVM approval.
The prospectus/OD should be available for public access in
the format CNVM approved it once the offering
announcement was published. The selling public offering can
last minimum 5 business days and maximum 12 months,

while the purchase public offering can last minimum 15

business days and a maximum period of 50 business days.
Any person who, alone or acting together with other persons,
intends to acquire more than 33% of an issuer shall conduct
a take-over bid for all outstanding shares of the respective
issuer. In this case, the offeror shall submit a preliminary
announcement to the CNVM and shall publish it in one
central and one local newspaper. The target companys
board of administration is allowed to express its position
regarding the bid within five days from the date of receiving
the preliminary announcement and is forbidden to take any
action that would affect the target companys patrimony or the
scope of the takeover bid. In maximum 30 days from the
preliminary announcement the offeror should file to CNVM for
approval the documentation for the offering.
Any person can launch a counter-offer on the same company,
under the following conditions:
To have the same number of shares or at least the same
quota of share capital;
To offer a price at least 5% higher than the initial price.
The launch of the counter-offer should be made within 10
working days from the publishing of the offering
announcement for the purchase and take-over offerings and
within 10 working days from the publishing of the preliminary
announcement for the mandatory take-over bid. CNVM will
set a single deadline for the closure of all competing bids for
the same issuer, which cannot exceed 60 business days from
the initiation of the first offering.
The minimum price for the purchase or takeover offering
should be at least equal with the highest price between the
The highest price paid by the offeror for the securities of
the same issuer within the last 12 months prior to the
launch of the offer
The weighted average market price of the issuers shares,
computed for the last 12 months prior to the submission
of the public offering documentation to the CNVM.
The net asset value per share, following the latest
financial situation.
The law also provides for the launching of mandatory
takeover offerings, which should be initiated by shareholders
that exceeded the 33% stake in a company by market
operations or by acting together with other persons in
maximum two months from the date of reaching the
respective holding threshold. The voting rights above 33%
are suspended and the offeror cannot acquire additional
shares in the company until the mandatory take-over bid.
The minimum price for the mandatory take-over offering
should be at least equal with the highest price paid by the
offeror for the securities of the same issuer within the last 12
month prior to the launch of the offer.
In case a majority shareholder controls more than 95% of
companys shares or acquired during a takeover offering
more than 90% of the shares subject to that offering, the
majority shareholder can ask the shareholders that did not
participate in the public offering to sell their shares at a fair
price (the price offered in the takeover offering). Likewise, a
minority shareholder in a company whose at least 95% of its
shares are controlled by an investor has the right to ask the
respective majority investor to buy its shares at a fair price.
In addition, starting February 2006, CNVM decided also to
permit the delisting of a company if so voted by the

Alpha Finance Romania

extraordinary general shareholder meeting. In this case, a
licensed valuation expert will recommend the selling price at
which the issuer is obliged to pay to the selling shareholders.

Dividends are approved by the annual shareholder meeting,

generally in March-April period, and are paid for the full year
in a single tranche.

Insider trading / Market manipulation

Taxation of capital gains

The framework for preventing insider trading or price

manipulation by the market participants is well covered by
Capital Market Law. Evident conduct of insider trading is
sanctioned by CNVM, which can be challenged in the court
within 15 days from its notification and the sanction is either
a fine consisting of between half and total transaction amount
resulting from the insider trading transaction or between 6
months up to 5 years in prison if it falls under the criminal law.

Historically, the capital gains tax has been only 1% for both
Romanian and foreign investors and applied on individual
transactions (gains count not have been offset by losses).
However, Law No. 163/01.06.2005. which modifies the Fiscal
Code, maintains the 1% tax only for longer-term trades (i.e.
sale takes place after at least one year since the acquisition
of respective securities) and also for all the securities bought
before end-May 2005 (irrespective when the sale transaction
takes place), while the profits obtained from shorter-term
trades (within one year) were taxed at 10% until January
2006 and at 16% thereafter. Law No. 163/2005 also
introduces the principle of portfolio taxation (losses on some
trades can be offset with gains from other trades), with profits
being determined for all transactions that takes place during
the calendar year. Net losses cannot be carried forward in
order to be recovered in later years.

The limits for fines in case of sanctions other than for insider
trading are:
Legal persons are liable for a fine ranging between 0.5%
to 5% of the share capital.
Fines for natural person range between RON 500 and
RON 50,000 mn, unless the case is considered to fall
under criminal law.

Taxation of profit and income

Types of available instruments

Despite its almost ten years of trading, the Romanian capital
market currently lists the basic trading instruments only, i.e.
plain stocks and bonds. Currently, there are over 4,000
stocks listed on the two stock exchanges with an official
market capitalisation of EUR 19.8 bn as of August 2 (BSE
with EUR 17.4 bn and RASDAQ with EUR 2.4 bn) and 10
municipal bond issues with a total face value of EUR 18 mn
and 6 corporate bond issues (one on the listed market and
five on the unlisted market with a total face value of EUR 68
mn respectively. Despite several attempts and the existence
of a legal framework, no Treasury bills, notes or bonds have
been listed for public trading so far, as their trading in both
primary and secondary market is still conducted exclusively
by the commercial banks.
Neither the BSE nor Rasdaq trades derivative products
based on stocks and bonds. The Sibiu Monetary Financial
and Commodities Exchange (BMFMS) does offer futures and
options instruments based on the more liquid stocks traded
on the BSE as well on the exchange rate RON/USD,
RON/EUR, EUR/USD and futures on BUBOR three-month
interest rate. As of end of July 2006, the Sibiu Exchange was
offering futures and options contracts based on 21 BSE-listed

The corporate tax was reduced to 16% from 25%, starting

January 2005. At the same time, the progressive five-bracket
personal income system was replaced by a flat tax of 16%.
Transaction fees
As in any other free market, brokerage fees are negotiable
and subject to demand and supply. The brokerage fees
include the fees paid to CNVM (0.08% on each buy trade)
and to the stock exchange (between 0.1% and 0.3%,
depending on the type of trade) The transaction fees are
applied to all investors, irrespective of the their provenience.
As for public offerings, primary offerings are taxed between
0.15% and 0.4% (depending on the some characteristics of
the issuer), buying offerings are taxed 1.5%, while take-over
offerings are taxed 2% of their total amount. These fees are
paid by the initiator of the respective offering.
The stock exchanges merger
After more than two years of negotiations, the BSE finally
absorbed Rasdaq at the end of November 2005. Currently, all
the Rasdaq-listed stocks are traded on the BSEs Arena
platform, on either Regular BER section (order-driven) or
XMBS (negotiation-driven).

Bucharest Stock Exchange1

Taxation and fees

The new Government that was elected after November
2004s general elections implemented significant tax cuts for
both corporate profits and individual revenues, but was forced
to increase other taxes in order to partly cover the expected
budget deficit. The latest changes to the Fiscal Code were
enforced through Law No. 343.
Taxation of dividends
Starting with January 2005, dividends paid by the Romanian
companies are subject to a withholding tax of 10% for both
Romanian legal persons and individuals, compared to 10%
and 5% respectively, before. Starting January 2007,
dividends to individuals will be taxed at 16%. Foreign
investors currently pay a dividend tax of 16% for both legal
persons and individuals, level that was increased from 15%
starting January 2006.

Establishment & organisation

The first stock exchange in Romania was initially established
in 1882, but was closed in 1948 following the nationalisation
of private property by the Communist Party.
The BSE was formally re-opened on April 21, 1995 based on
CNVM Decision No. 20 and effectively started trading on
November 20, 1995, with six companies and one trading
session per week. As of February 2005, there are 62
companies listed on the BSE that can be traded on a daily
As a self regulated body, the BSE issues its own regulations
and rules regarding membership, listing & trading, clearing,

Currently the BSE regulations are in the process of changing in order to

comply with the capital market law and are expected to be enforced in the first
half of 2006.

Romanian Business Digest 2006

Alpha Finance Romania

settlement & registry activities, while ensures compliance
with them. Trading is carried out through authorised
brokerage companies that are members of the Stock
Exchange Association (SEA).
The SEA elects the Exchange Committee, the executive body
of the BSE comprised of nine members of the brokerage
houses, which in turn elects the General Manager of the BSE
for a five-year period; both the Exchange Committee and the
General Manager are subject to CNVMs approval.
A CNVM-designated General Commissioner supervises the
BSE activity. While his role is limited to an observer at the
Exchange Committees meetings, he can however propose
the cancellation of any decision issued by the EC or the BSE
General Manager to CNVM, which in turn can oppose its veto
The general shareholder meeting of BSE adopted at the end
of April 2006 a new Stock Exchange Code, which unifies all
its existing regulations and which will enter into force after its
approval by CNVM, expected in the third quarter of 2006.
Listing requirements
The corporate sector of the BSE is organised into two
qualitative levels, namely the First Tier (with 21 stocks listed
as of end of July 2006) and the Base (Second) Tier (with 44
stocks listed), with different listing requirements. While it is
comparably more accessible for a company to get listed on
the base tier (with the information disclosure and account
auditing being the main requirements), first tier listing is
mainly sought by larger, well-established and profitable
companies. The following table summarises the main criteria
for each of the BSEs tiers.
Requirements for listing and maintaining on the BSE
First Tier
Base Tier
Base tier requirements (excepting
Securities registration with the
share capital requirements), plus:
CNVMs Registration Office
Minimum three years of activity
Free transferability of the
Share capital of minimum
Securities registration with the
EUR 8 mn in ROL equivalent
BSE,via a Registry Contract
Net profit, excluding financial profit,
Share capital of minimum
during the last two years
EUR 2 mn in RON equivalent
Business plan for the following two years Information disclosure
Proven management performance
BSE fee payment
and integrity, adequate ratio levels
Free float no less than 15%, representing
at least 75,000 shares, to be held by at least
1,800 shareholders (excluding the companys
employees), each with a minimum holding
of ROL 100,000
Source: The BSE.
Note: The 15% minimum free float requirement is superseded by the Capital
Markets Law's provision for a 25% minimum free float level.

Starting with July 2001, the BSE introduced a new tier for the
most transparent listings, named PLUS Tier. The PLUS Tier
is a special level, which can include both first and second tierlisted stocks, whose special requirements are the adherence
to a governance code and the publication of all information as
requested by CNVM and BSE on the companys website,
both in Romanian and English. The inclusion or exclusion of
a stock from the PLUS Tier does not affect its position on the
first or base tier. Currently, there is only one company listed
on this tier.

The proposed Stock Exchange Code adds a third tier to the

market, which will be dedicated to companies operating in the
new technology sectors (such as IT&C, biotechnology,
drugs etc), replaces the minimum share capital requirement
with minimum shareholders equity requirement for the first
and second tier (which is also reduced from EUR 2 mn to
EUR 1 mn), and increases the first tiers required free float to
25%, to be held by at least 2,000 investors. In addition, the
bond market will be split into three tiers, while new sections
dedicated the investment companies (such as SIFs) and
Treasury papers are created.
The BSE is an electronic order-driven market. All brokerage
houses trade remotely from their offices.
Until February 2005, trading on the BSE was conducted
through the Horizon trading system, a Windows-NT-based
application developed by the Canadian software house EFA
Software Services Ltd. Starting with mid-February 2005, the
BSE moved trading of the second tier-listed stocks on a new
trading platform called Arena, an in-house Java-based
software produced by the exchanges IT department, and
moved the trading of first tier-traded stocks on Arena a few
weeks later.
In addition to the main market, a new market was created
within the BSE in the first half of 1999, called the unlisted
market. On this market, stocks that have been de-listed by
the BSE or at their special request can be traded on a daily
basis, and the BSE does not impose any limit as to the
maximum-allowed daily price variation or the level of
corporate information disclosure.
The number of trading sessions was set at five days a week
starting with April 30, 1997. Trading generally takes place
between 10:00 and 14:30 Romanian time (GMT+2), with the
following phases:

09:45 - 10:15 pre-opening

10:15 - 14:15 continuous trading

14:15 - 14:30 pre-closing.

During the pre-opening phase, orders are input into the

trading system, which subsequently calculates the opening
price, i.e. the price that maximises the share volume for each
stock. The orders are then executed in real time within the
continuous phase, respecting the following priorities: best
price/client type/time. The client type criterion aims at
protecting the clients interests (both individual and
institutional) against the brokerage houses proprietary
trading. During the pre-closing phase, no trades actually take
place, but the broker is allowed to input/modify orders for the
following trading day.
Trading on the BSE is achieved on three main markets,
depending mainly on the size of orders:

regular market: the main market, which determines the

reference prices (a stocks reference price is the previous
days closing price on the regular market) of the listed
stocks; shares are traded in blocks (of minimum 500
shares, with few exceptions);

odd lot market: stocks are traded in quantities below 500

shares (with few exceptions);

deal market: the value of a deal order should be in

excess of RON 0.2 mn (c EUR 56,000 as of end of July

Alpha Finance Romania

A stocks price is not allowed to fluctuate outside a 15%
range from its reference price. Furthermore, the price
variation of a market order between two consecutive trades is
limited to a maximum pre-set value, called price protection,
which depends on the price interval in which the stock is
traded. The price variation limit is not applied in the first day
of trading of a stock, or in the first day of trading after the
issuer changed the number of securities outstanding without
changing its share capital (e.g., when splitting/consolidating a
share value). However, this limit is not suspended in cases
when the issuer offers bonus shares (through incorporation
of reserves into share capital), even if the number of shares
in issue will increase significantly.
The monitoring of the market volatility is done by the BSE
with a view to minimise price manipulation and protect
investors and is based on the negative variation of the BSEs
BET index from its closing value of the preceding trading day.
A 10% fall of the BET Index represents the warning level, a
12% fall leads to a minimum 30-minute trading suspension,
while a 15% fall triggers definitive suspension for the rest of
the session.
Beside market trades, cross, special (block) and excepted
trades are also allowed. Cross trades represent transactions
done between clients of the same brokerage house and
should be executed at the markets best price; in this respect,
when a brokerage house introduces a buying or selling order
which could create a cross transaction, it should wait five
minutes before introducing the counter-part order. Special
(block) trades, with a minimum value of RON 0.2 mn are
concluded on the deal market. Excepted trades, such as
donations or inheritances, are not executed in the market but
need to be reported to the BSE in order to update the Share
The main types of orders that are currently accepted by the
BSE trading system are market (to be executed at the
markets best price), limit (to be executed at a specified
price), and can be submitted by client to the brokerage house
both in written form and over-the-phone. Stop-market, stoplimit, take (the order to buy the entire share volume at the
markets best price) and hit (the order to sell the entire share
volume at the markets best price) orders are not yet
accepted by the BSE. As a special mechanism for the
protection of large investors and the market, the system
accepts hidden orders, in which only a fraction of a larger
order is visible in the system. The BSE currently accepts six
validity terms for orders, namely: Day, GTD (good till date),
GTW (good till week), GTM (good till month), Open (valid
until execution, withdrawal or cancellation) and FOK (fill or
Trading suspension
The BSE is empowered to suspend trading in a security when
the company breaks listing requirements.
The BSE also suspends a company from trading immediately
in case it announces the call for shareholder meeting that is
to discuss important issues (such as the change of the share
capital, of number of shares issued or profit appropriation), as
well as during the dates of the shareholder meetings. The
stock will resume trading the following day after the
publication of the announcement.

Day Procedures
Following the end of the trading session, the BSE
submits to each brokerage house the reports on Trading,
Commission, Clearing and Settlement. The custodians receive only
the Clearing and Settlement reports.
T+1 Confirmation of the reports by the brokerage houses and
T+2 Resolution of eventual litigation on the reports submitted by the BSE
The BSE issues the Balance of final settlements, based on
which the NBR will settle the cash. Following the NBRs settlement
T+3 confirmation, the BSE will transfer the shares and cash to each
client account.
Source: The BSE.

The BSE ensures technical and logistical support for the

processes of settlement, clearing and shareholder registry. In
order to facilitate the clearing and settlement operations,
each broker, member of the BSE, has an account with a
settlement bank, which, in turn, holds a clearing account with
the NBR.
Custodian operations
Depository accounts can be opened both with the brokerage
houses and with custodian banks. When a client operating
through a custodian places orders on the market, it must
instruct the custodian on the trade before the end of the trade
day; brokers also have to check that their client has sufficient
securities/money to fund the operation. In a sell operation, the
BSE trading software automatically checks the availability of
shares in the clients account.
Registry operations
The BSE has its own shareholder registry, which is organised
into three sections:
clients who never opened an account with a broker;
clients who have already opened an account with a
brokerage houses proprietary accounts.
Currently, beside the BSE Registry, there are two more
independent registries authorised to operate within the stock
exchange, namely Regisco (which merged by absorption with
RRA - Romanian Registry of Shareholders) and Monitor
Registry. At present, most companies use the BSE Registry
and Regisco. However, the new Capital Market Law
established a new entity called the Central Depository which
will take over the functions of settlement and registry of the
independent registries as well as the functions of the SNCDD
(the central depository for the Rasdaq market).
Risk management / Failed trades
Although the settlement is not fully guaranteed by the BSE,
the BSE provides far stricter rules than the RASDAQ as
regards the prevention or eventual workout of failed trades.
Prevention rules refer mainly to the daily trading limit and
share availability.


In order to minimise the payment default risk, each brokerage

firm has a daily trading limit, which refers to the maximum
allowed trading volume both for client and proprietary trading;
exceeding this limit will lead to the automatic suspension of
all orders input by the respective broker.

Settlement takes place three days after trading (T+3) on a

delivery-versus-payment basis (DVP). The following table
summarises the T+3 settlement cycle:

Secondly, in a selling operation, the BSE checks the

availability of shares in the sellers account, otherwise the
order is rejected.


Romanian Business Digest 2006

Alpha Finance Romania

Coverage of failed trades is achieved through banking loans,
the BSEs Guarantee Fund and SEA members contribution.
In case of insufficient funds on the clearing date, the
brokerage houses bank may grant it a loan to cover the due
amount. If the banks loan is not sufficient, the BSE will use
the Guarantee Fund in order to settle the trade. If the
Guarantee Fund is not sufficient, all members of the SEA
must make a contribution in order to fund the unsettled
The Capital Market Law also provides for the establishment
of an Investor Compensation Fund, which will indemnify
investors against the losses caused by the Fund members
incapacity to return the cash funds or the securities held in
investors name. The Fund members are the brokerage
houses and the investment management companies, which
must pay annual contribution based mainly on their assets
under management. According to the CNVM Regulation
No. 3/2006 regarding the establishment of the Fund, the
compensation granted to investors is set to rise gradually
from EUR 4,500/investor as at the end of 2006 to
EUR 20,000/investor by the end of 2011. The Fund started
operations in the first part of 2006.
Tracking market performance
The BSE publishes its own set of indices, all of them tracking
the changes in the market capitalisation index against a
reference period. The BET index (Bucharest Exchange
Trading) was launched on 22/9/97 and monitors the ten
largest market capitalisation and most liquid stocks listed on
the market (of which one is listed on the second tier), while
the BET-C (composite) index, launched on 16/4/98, follows
the performance of the entire market. It should be noted that
BSE does rightfully not include the five Financial Investment
Companies (SIFs), which currently account for some 7.5% of
the total market capitalisation, from the calculation of the
BET-C index, in order to avoid the double counting of some
listed share stakes. On 1/11/00, the BSE launched a third
index called BET-FI, which monitor the performance of the
five Financial Investment Companies.
In order to limit the influence of the markets heavyweight
stocks on the indices, the BSE instituted maximum weighting
limits for both the BET and BET-C Indices, which currently
are set at 20%. As of the end of July 2006, the largest weights
in the BET-C index are of Petrom (20%, versus a 48% weight
in the markets actual market capitalisation), BRD (20%,
versus a 20% weight in the markets actual market
capitalisation) and Banca Transilvania (12.2%, versus a 4%
weight in the markets actual market capitalisation). At the
same time, the top four out of the ten constituents of the BET
Index, namely Petrom, BRD, Rompetrol Rafinare and Banca
Transilvania, have a cumulative weight of almost 75% of the
BET Index.
Municipal bonds
The first municipal bond started trading on the BSE in
November 2001, and currently there are 10 bonds listed on
the BSE. Trading liquidity in bonds is however very limited
(below EUR 30 mn in 2005), mainly because most investors
prefer to keep them until maturity thanks to their attractive
coupons as well as the limited size of these issues (the
largest is around EUR 5.6 mn).

Corporate bonds
The first corporate bond issue, of the real estate developer
Impact SA Bucuresti (2-year, USD1.5 mn) started floating on
the BSE in May 2003, followed in 2004 by three banking
bonds issues, namely BRD-Groupe Socit Gnrale
(c. EUR 12.5 mn), Raiffeisen Bank (c. EUR 33.5 mn) and
Finansbank (EUR 10 mn). Beside the banking issues, there
are currently another two bond issues of the leasing
companies BCR Securities and TBI Leasing and another one
of vehicle and industrial lubricant producer Hexol Lubricants.

Establishment & organisation
The RASDAQ (the Romanian Association of Securities
Dealers Automated Quotation), or the Romanian OTC
market, was officially established on September 27, 1996 and
started trading started one month later.
The market, which was modelled on the US NASDAQ trading
system, was created in order to enable trading in the shares
of some 6,000 companies that, following the Mass
Privatisation Program, were partially privatised to some
16 mn Romanian citizens. The markets institutional
framework was developed by the National Association
of Securities Dealers (ANSVM) under a USAID USD 21 mn
worth project and initially included as main participants the
ANSVM trading system (RASDAQ), a central depository
(SNCDD), independent registries, settlement banks as well
as the National Bank of Romania.
Following the absorption of the Rasdaq by the BSE at the end
of 2005, all the Rasdaq-listed stocks are now traded on the
BSEs Arena platform, on either the Regular BER section
(order-driven) or XMBS (negotiation-driven), while SNCDD
central depository was replaced by the BSE Registry.
Custodians act as an interface between their clients and
brokerage houses, while the settlement banks perform the
cash settlement operation on the delivery day. The net
balance between the BSE Registry and the settlement banks
is settled through the National Bank of Romania (NBR).
Listing requirements
The companies included in the Mass Privatisation Program
(over 5,000 companies), concluded in 1996, were
automatically listed on the Rasdaq. Since then, the market
has made efforts to filter the stocks based on qualitative
criteria, which culminated with the CNVM Regulation 2/2002,
which created three qualitative levels, namely the First Tier,
the Second Tier and the Base Tier with three different listing
requirements. Currently, there are nine issuers listed on the
first tier, 15 on the second tier and some 3,200 listed on the
base tier.
The First Tier requirements are the following:
the issuer recorded profit for at least one of the last two
fiscal years;
the issuers turnover is at least EUR 9 mn;
the issuers total assets exceed EUR 4.5 mn;
the number of shares held by the shareholders with less
than 5% of the total number of shares exceeds 15% of the
total number of shares or the average market value of
these shares is at least EUR 150,000;
the share capital or the average market capitalisation for
the last two quarters exceeds EUR 1 mn;

Alpha Finance Romania

the companys shares were traded in at least half the total

number of trading days for the last four quarters.

For the Second Tier, the main requirements are:

the issuers turnover is at least EUR 2.5 mn;
the number of shares held by the shareholders with less
than 5% of the total number of shares exceeds 10% of the
total number of shares or the average market value of
these shares is at least EUR 50,000;
the share capital or the average market capitalisation for
the last two quarters exceeds EUR 0.5 mn;
the companys shares were traded in at least a quarter the
total number of trading days for the last four quarters.
The requirements for listing on the Base Tier are identical
with the minimum conditions imposed by CNVM for a
publicly-held company, namely:
the issuers shares should be publicly held;
the issuers shares should be dematerialized and
registered with OEVM;
the issuer has an agreement with an authorized registry;
the issuer has more than 100 shareholders;
the issuers share capital should be higher than EUR
In order to maintain their shares on the First and Second Tier,
the issuers are obliged to submit to the market current,
quarterly, half-yearly and yearly reports.
Trading suspension
Suspension from trading is mainly decided when a listed
company changes its registry service provider, alters its
share capital or undergoes a merging or splitting process.
In addition, the Managing Committee of the BSE or even
CNVM can temporarily suspend a company from trading in
order to protect investors and maintain the publics
confidence in the market.
Trading is now exclusively conducted on the BSE Arena
platform and is price-driven for the Regular BER section and
quote-driven for the XMBS section. Trading takes place from
Monday to Friday, between 10:15 - 14:15 Romanian time
(GMT+2) for the Regular BER section and between
11:15 - 13:15 for the XMBS section.
Trading on the Regular BER section is similar to trading on
the BSE, whereas trading on the XMBS section is based on
indicative quotes that are introduced by the brokerage
houses into the trading system.
In order to make trading on the over the counter market more
transparent and fluid, the National Securities Commission
issued Regulation 2/2002, which introduces, among others,
an individual password for every trader, a reference price and
daily price variation limits as well as the use of a new field in
the process of reporting a trade in order to disclose if the
buyer and/or the seller is a resident/non-resident.
The Rasdaq market will disclose a reference price for each
listed stock computed as the weighted average price of the
common trades reported in the last day in the respective
stock was traded. Starting December 2005, the daily price
variation does not depend on the tier on which a stock is
listed, and is set at 25% under the condition that the listed
company should have been traded at least once a week

during the last semester and the annual transaction volume

calculated for the last 12 months should represent at least 1%
of the share capital of issuer. The daily price variation limit is
not enforced in the first day of trading of a security, in the first
day of trading following a change in the share nominal value
(share split/consolidation), after the distribution of bonus
shares or in case when no trade has been registered in that
stock in the previous 30 consecutive days.
Special trades are reported outside the bid-ask price range,
but cannot exceed the maximum allowed daily price variation
limit, and must fulfil the following cumulative requirements:
the number of shares subject to the special trade
represents at least 1% of the issuers total number of the
shares outstanding;
the trade value is at least RON 0.1 mn (c. EUR 25,000);
in a special trade it is not permitted the cumulation of
As on the BSE, all securities are traded, transferred and
registered in a dematerialised form. Following the move of all
stocks onto the BSE trading platform, the settlement is now
performed by the BSE, at T+3 on a DVP basis. It is worth
mentioning that, unlike the BSE, the securities cannot be
resold until they are settled at T+3 (e.g., one cannot buy and
sell the same shares the same day).
From the foreign investors viewpoint, working through a
custodian offers enhanced security since, at settlement time,
the custodian will not transfer the money unless the shares
(bought by the foreign investor) have been already deposited
with it.
Registry operations
The Rasdaq-listed companies hold their shareholder registry
with one of the authorised registry service providers. Most
of them use the services of Regisco which merged by
absorption with Romanian Shareholder Registry (RRA).
Risk management / Failed trades
Following the merger with the BSE, the risk management is
now covered by the BSE rules, referring to the daily trading
limit for each brokerage house, the availability of shares and
coverage mechanism for the failed trades.
Tracking market performance
The official index of the RASDAQ, called RASDAQ
Composite, was launched only on July 31, 1998. It is a
market capitalisation index, monitoring all the stocks listed on
the OTC market. On October 28, 2002 another two indices
were launched, namely RASDAQ I and RASDAQ II, in order
to track the performance of the stocks listed on the First (9
stocks at present) and Second Tier (15 stocks at present),

Alpha Finance Romania

Calea Doroban]ilor Nr. 237B, Sector 1, Bucure[ti
Tel.: +40 21 209 2233
Fax: +40 21 231 5332; 231 5389
Daniel Pali]`, Associate Director
E-mail: d.palita@alphafinance.ro
Romanian Business Digest 2006

Should More Romanian

Companies be Listed on
the Stock Exchange?
by KPMG Romania
Reasons for making an IPO Getting the details right
Delisting can bring advantages for some Romanian companies
Research reveals that an IPO can be time-consuming
Decision time for Romanian companies
Recently, an increasing number of companies have taken the important step of listing their
shares on the Bucharest Stock Exchange, and other markets.
This has proved a very useful way for these firms to raise financing for new investments, with
many advantages over alternative sources of funding such as bank loans. Making an Initial
Public Offering (IPO), the technical term for a company listing its shares on the stock exchange
(also described as going public), has allowed firms to expand their business, as well as bringing
indirect benefits through giving them a higher public profile, which can be a particular boost to a
companys image if the shares perform well. The Bucharest Stock Exchange is still in a fairly
early stage of its development, and our firm has drawn on its global experience of launching
IPOs, particularly in emerging markets, to provide specialist advice to Romanian companies, so
that they can prepare carefully for this big step, choose the right moment to list their shares, as
well as gaining the maximum benefits from being a listed company once trading in their stocks
has begun.

Reasons for making an IPO

As Romanias economy continues to grow, EU accession approaches and the activity on the
Bucharest Stock Exchange increases, more and more companies are coming to see the
advantages of making an IPO. However, the decision will depend very much on the nature of the
company. Not all firms are suitable, and there are no set rules for those who do or do not qualify
for an IPO. However, generally speaking, issuers (these are the companies which have decided
to go public and issue shares) must possess certain prerequisites. For example, long serving
and competent management is a positive consideration for investors. Also the company must be
financially sound and show earnings growth and future potential. It does help if the company is
a market leader or has a unique product or service to offer. Overall, issuers have to have a
convincing story to tell to the investor community.
The main reason for making an IPO is to raise finance for expansion of the business. For
example, companies might consider making an acquisition or purchasing high technology
production equipment. An IPO also permits a company to become more visible and improve its
profile, as well as helping it to establish its market value. An IPO can involve not only shares but
also bonds (loans) as well as options and rights, although in Romania IPOs have still not
developed to the same level of sophistication as in Western countries. A publicly listed company
allows free trading by investors, who can buy and sell shares, and this brings further advantages
besides the initial influx of capital. It can increase a companys ability to obtain more and possibly
cheaper finance through issuing either additional shares or bonds (loans). It generates publicity
for the company, because of its higher public profile, and also establishes a market value for the
undertaking, which can strengthen confidence if the share value increases. This can bring many
benefits including attracting and retaining key employees, through increased confidence in the
company and possibilities for improved compensation packages.
Listing on the stock market also imposes certain prerequisites on the company, requiring greater
transparency and continuous compliance with the regulatory environment. The company needs
a history of long serving and competent management, as well as to be financially sound, showing

KPMG Romania
earnings growth and future potential. It is helpful if the
company is a market leader, or has a unique product to offer.
Listing on the stock market will mean that the companys
business is a matter of public record, and hence accessible to
competitors. Disclosure requirements are more arduous and
the company will have to comply with stricter controls
imposed by the stock exchange regulatory authorities. There
is also a transaction cost attached to an IPO, for example for
the work of lawyers and auditors in preparing the sale of
shares, although for most companies this will be insignificant
when compared to the overall benefits to be gained from the
Once the company is listed, it will have to maintain its
professional advisors to ensure compliance with the
securities regulatory regime, and other legal requirements.
The companys owners will have to run the risk that they
might one day lose control as well as having to deal with
outside shareholders who at times may seem demanding and
who sometimes expect short term results which might go
against the companys long term interests. After the IPO, the
companys management will have to prove continuously to
investors and shareholders that it can maintain the value of
their investment and grow shareholder value, while resisting
taking a short-term view geared to satisfying shareholders
immediate needs. As with any other form of financing, there
are no guarantees that an IPO will be successful. However,
these challenges will not be an obstacle to the forward
looking entrepreneur who embraces modern concepts of
good corporate governance, and understands the importance
of securing the right professional advice.

Getting the details right

An important part of launching an IPO is underwriting. This is
the process of raising money by either debt or equity (in this
case it is equity). Normally a companys broker will do this, in
one of two ways, either on a best efforts basis or with a firm
commitment. The difference between the two is that if the
broker underwrites in a firm commitment, he or she
guarantees that a certain amount will be raised by buying the
entire offer and then reselling it to the public. In a best efforts
agreement, however, the broker sells the companys shares
without guaranteeing the amount to be raised. In Romania up
to now, few brokers have underwritten an issue by
guaranteeing it, since many do not have the capital to do so.
But this is likely to change in the future.
A critical issue for companies preparing an IPO is how much
stock to float on the market. They should consider how much
money needs to be raised as well as the value of the
company. It will be important to bear in mind the need for
liquidity of shares, which will require a critical mass in free
float, represented by the amount of shares which are freely
traded on the market. There are no benchmarks, but a
minimum of 10% seems to be an acceptable figure for most
companies. It is also important to remember that the amount
must be high enough to justify the transaction cost of the IPO.
At each stage of the process, it will be very important to
secure professional advice from an outside consultant with
knowledge of how to set up IPOs. In more mature markets,
investment banks normally take the lead. In Romania,
brokerage firms have been playing a crucial role for obvious
reasons because they are authorized agents to execute the
IPO. Companies would be wise also to think about seeking
legal counsel as well as corporate finance and tax advice.
After the IPO, there will be a need for ongoing compliance
with regulatory requirements and hence continued external

professional advice will be, necessary, for example from

The timing involved in setting up an IPO is also an important
consideration. In the preparatory stage leading up to the IPO,
a company will need to plan well in advance. It will have to
think about putting in place the management team, as well as
considering the time to be spent in implementing strategies
and showing an earnings track record. Three years of audited
statements will be needed. The company may need to do
some house cleaning, such as disposing of non core assets,
upgrading information systems or resolving potential
liabilities. The IPO itself should take roughly three to six
months, but deciding when to launch it can also be critical, as
investors behavior is very unpredictable. What may be a hot
IPO one day can quickly fizzle out the next. So it is important
to be alert to the market, and again an external advisor can
help with this. In more mature markets, issuers do a lot of preselling through, for example, road-shows to investors.
Although a company should not go overboard with the
marketing, it should pay attention to effective promotion of the
IPO on the market.
The cost of an IPO will vary depending on the size of the
issue. Apart from legal fees, brokerage commissions and
registration fees will also have to be paid. Time spent by
management on the preparation of the IPO should also be
considered and should not be underestimated. So prior to the
IPO, management will need to think hard about the
companys main selling points, weighing up the pros and
cons of a listing. Preparations should be made well in
advance, and a decision needs first to be made as to whether
an IPO is the right way to raise finance. The companys
management will need to determine how much needs to be
raised, keeping in mind the cost and taking appropriate
professional advice.
If the flotation of the company is to be successful, a robust
audit needs to be carried out well before listing takes place,
to create the right image, giving strength and value to going
public. Coherent financial statements will need to be
presented, because investors require clear information about
the company. Such statements also need to be provided on
an ongoing basis, to ensure that investors continue to be
properly informed about the companys activities, and hence
retain confidence. At the same time, management will need
to be cautious, and not give too much forward financial
information for which they could be held liable. Setting up an
IPO will require teamwork involving management, lawyers,
auditors and brokers to present the companys profile in the
most transparent and open manner. Some marketing will also
be necessary to make investors aware of the sale. A
secondary market will consequently develop around IPOs as
more firms are listed on the stock exchange, involving
analysts, advisors, traders, brokers and public relations
specialists. Throughout the process, it will be essential for the
company to secure professional corporate finance and
auditing advice to maximize the benefits of listing and
minimize the risks.

Delisting can bring advantages for

some Romanian companies
On the other hand, delisting of some companies whose
shares are not being actively traded is important both for the
more effective operation of the Stock Exchange, and to
enable the firms themselves to operate more efficiently. In the
early stages of the operation of the Bucharest Stock

KPMG Romania
Exchange, which opened in 1996, many privatized former
state companies were listed, and a large part of their shares
were never actively traded, since many were distributed to
citizens as a populist measure by governments as part of the
sell-off. Many of these new shareholders had little idea of
what a stock market means and simply did nothing with their
certificates. In addition, governments failed to require these
companies to comply with the normal transparency
requirements which should apply to a firm whose shares are
traded on the Stock Exchange. These companies should not
be on the Stock Exchange, which is supposed to be a
meeting place between buyers and sellers, when there is little
public interest in trading in them.
In February 2006, the National Securities Commission
introduced temporary measures, making the process of delisting simpler, which it says were necessary to clear the
Stock Exchange of companies whose shares are not being
actively traded, prior to the definition of new rules in the next
few months. The temporary arrangements allow companies
to withdraw from the Stock Exchange based on a majority
vote of shareholders at an extraordinary general meeting,
which then appoints an expert to set the shares value before
the minority shareholders are bought out. This will facilitate
delisting for many privatized industries, which are not trading
effectively on the Stock Exchange, and in which the majority
shareholder usually owns around 60-70%. Under the
standard rules, defined in the Capital Market Law of 2004,
majority shareholders in such companies would first have had
to make a public offer, and only after obtaining 90% of the
shares could they then proceed to de-list. Since many of the
smaller shareholders are unknown, in practical terms it has
been virtually impossible to de-list these companies under the
old rules.
Once a company has de-listed it has the advantage of no
longer being subject to the same onerous and costly reporting
requirements. Just as for companies which want to start
trading on the Stock Exchange, those which de-list will need
to seek expert legal advice to ease them through the
transition to their new status as a non-listed company. An
advisor will also help a newly de-listed company to maximize
the advantages to be gained from its new status, mainly
resulting from simplified reporting requirements and auditing,
as well as greater commercial confidentiality.

Research reveals that an IPO can be

Recently our company conducted studies into companies
experiences in setting up IPOs, including telephone
interviews with managers in several firms which have listed
on European stock exchanges within the last five years. The
results are particularly useful for Romanian companies which
are currently considering listing on the Bucharest stock
exchange, since they illustrate the pros and cons of the
Some of the most important findings from the studies have

Preparation and verification of the prospectus, due

diligence and marketing are the most challenging aspects
of the IPO process. Respondents consistently said these
three areas were far more difficult and time-consuming
than they had expected. In general, larger companies
found this process more challenging than did smaller

The IPO process is very time-consuming for key

executives. At the busiest time in the listing process, a
majority of Chief Executives and Finance Directors spent
over half their time focusing on the IPO. This leaves
significantly less time for them to do their normal work and
could increase the risk of the companys regular activities
being neglected.

Around a third of smaller companies, and about half of

those with market capitalization of over EUR 150 million
said that they had to do a significant amount of work to
prepare for the IPO. However, businesses backed by
private equity houses before the flotation generally
needed to do much less work.

Around 40% of companies take longer than expected to

complete the IPO, while only 4% take less time. The four
main reasons for delays were: issues uncovered during
due diligence; changing market conditions; unrealistic
timetables; and the complexity of preparing the financial
track record. Sometimes delays were caused by lack of
adequate systems or documentation at the start of the
process, or at other times by factors outside
managements control.

Key challanges in the IPO process

Preparation/verification of prospectus


Due diligence


Improving corporate governance


Source: KPMG LLP (UK) 2005





Preparation of financial track record
















Co-ordination of numerous advisors

Preparation of robust business plan












Don't know

Romanian Business Digest 2006

KPMG Romania
In spite of the obstacles, it is nevertheless possible to make a
company public within a reasonable timeframe. Our studies
reveal that 70 percent of firms surveyed spent less than three
months planning and preparing for the IPO. Following the
planning stage, almost the same percentage took less than
three months to complete it. Over two-thirds, therefore,
completed their IPO within six months.
Our studies have revealed that the issue of resources should
be dealt with at an early point in the process, ideally at the
planning stage. The amount of in-house resources required
was the most important aspect of the process that
respondents would have liked to know before starting.
Management also needs to think about resources over the
longer term. Completing an IPO is not just a six-month
procedure after which the business returns to its previous
state. Public company status will make continued demands
on senior executive time. It may be worth considering hiring
new staff on a permanent basis, particularly in areas such as
investor relations, finance and business development, or
commissioning an external consultant both to manage the
IPO and to assist with some of the subsequent requirements
of being a listed company.

Decision time for Romanian

The Bucharest Stock Exchange is beginning to emerge from
the period of transition towards a fully developed market
economy, becoming more mature and efficient. It has moved
well beyond its initial, largely symbolic status, and is starting
to play an increasingly important role in facilitating the growth
of companies. It is now in the process of becoming more of a
genuine market place, which should promote economic
growth. This is consequently a very good time for both listed
and non-listed companies to review the pros and cons of their
shares being traded on the stock exchange. The answer as
to whether to be listed or not will depend very much on the
individual circumstances of the company, and a professional
financial advisor will be able to help in the decision making
process, as well as with the practicalities of listing or
As Romania now enters the final stages of its journey towards
EU membership, its financial markets are operating more and

more like those of a developed capitalist country. After

accession, standards of financial reporting will become
stricter, with listed companies being required to apply
International Financial Reporting Standards (IFRS). But
regardless of the legal framework, the more competitive
environment of the European Single Market will make it
imperative for Romanian companies to apply stringent
standards of auditing to demonstrate to the markets that
buying their shares will be a sound investment. Our
experience with assisting companies in the 2004 accession
countries with launching IPOs has shown how important it is
for a successful company to follow strict reporting standards,
particularly within the EU.
A well established financial services provider can help a
company launch an IPO through due diligence procedures,
which ensure that all legal processes have been complied
with. It can also help with auditing services, which will not only
aid compliance with the legal requirements for an IPO, but will
also act as a badge of quality for a company, indicating a
commitment to principles of transparency and integrity. In
Romania it is frequently the case that good laws exist on
paper, but they are often not applied correctly in practice.
Many rules exist setting out auditing standards in compliance
with international norms which are applicable to Romanian
companies. Unfortunately, what is lacking is quality checking
to ensure compliance. It is very important to consider who is
checking the auditors. When choosing an outside auditor,
companies consequently need to consider what sort of
internal quality controls the auditor applies, for instance
assessing whether sufficient checks and balances exist to
prevent conflicts of interest. These mechanisms of quality
controls play a very important role in the internal procedures
of a major international consultancy company, which bases
its activities on principles of corporate governance.
As Romania approaches EU accession, the Romanian
financial market is increasingly taking on the characteristics
of a developed Western economy, with much greater
emphasis on principles of transparency, integrity and high
standards of corporate governance, while the stock exchange
is beginning to lose the handicaps deriving from past
inefficiencies, even though much work still needs to be done.
Many companies will consequently come to see the
advantages of raising additional financing through an IPO.

KPMG Romania
Calea {erban Vod` Nr. 133, Central Business Park
Sector 4, Bucure[ti
Tel.: +40 21 317 2266; +40 741 800 800
Fax: +40 21 316 1177; +40 741 800 700
E-mail: kpmgro@kpmg.ro
Victor Kevehazi, Senior Partner


BSE First Half 2006 Performance Review

by Vanguard Investi]ii Financiare

Stock market events

Top 20 market capitalization as of June 30, 2006
During the first half of 2006 one could see on the Bucharest Stock Exchange a pattern similar to
that of the entire region. After a January effect, which added a further 32% to the BET Index
and 18% to the BET-FI, the market entered a downward trend, losing around 20% or even more
in some cases, by the end of the semester.
The Bucharest Stock Exchange was not excepted from the effect of higher interest rates in the
US economy. It seems that the current level of interest rates in the global economy is already
priced-in, so we do not expect a further significant decline in the evolution of BSE in the
upcoming months. The first signs of a stabilizing market showed up at the end of June and
during the first weeks of July.
This 6-month evolution signaled that the listed assets were somewhat overvalued in February,
at the same time revealing the correlation with other CEE markets. We can state that
international investors already added Romania to the group of 3 other large regional markets
Poland, Hungary and the Czech Republic, although our country faces a structural delay in its
economic development.
Cumulated returns on BSE H1 2006













06/06/06 06/20/06




Source: BSE

The daily average liquidity reached EUR 10.3 mn, 39% higher than the H105 level, which
showed the upward trend of various investors interest both resident and non-resident
institutional and retail investors.

Stock market events

An important event of the period was the IPO for the Romanian power-grid company
Transelectrica, who raised EUR 35 mn from the market while bids where actually exceeding
EUR 100 mn. Transelectrica expects revenues of EUR 512 mn and profits of EUR 45 mn in
2006. The state-owned company was valued at some EUR 350 mn considering the IPO price.
The listing of Transelectrica was the first step in an extended program through which the
Romanian authorities intend to support the development of our capital market.

Vanguard Investi]ii Financiare

Further listings expected in the second half of this year come
from the private sector: the Continental Hotel chain, CC
Bluetelecom a cable TV & Internet provider, Turism B`ile
Felix a spa profile company.
Regulations regarding the Financial Investment Companies
(SIFs) were an issue that increased volatility during the past
months. Currently, the SIFs shareholders can own
individually or concentrate up to 1% share capital. The
National Securities Commission (CNVM) intends to impose
the obligation to sell the excess of shares within a 3-month
time frame, but no regulation was enacted until now.
Currently, there are debates on whether this type of
regulation violates basic ownership principles.

Another factor that capped the evolution of the Stock

Exchange in the first part of the year was the story of the 8%
stake in SNP, to which the current and former employees are
entitled. Although 2 years have passed since the
privatization, no solution regarding the way these shares will
be transferred to the employees was made public. The
pessimistic short-term market scenario that of a significant
supply of shares that would push the price down - caused a
retracement in the price of SNP. No matter what the solution
will be, the good part is that Petroms free-float will double
after this share allocation.
This kind of uncertainties can maintain volatility in the market
but we believe that in the long-run investors will be rewarded
by the potential that lies ahead.

Top 20 market capitalization as of June 30, 2006

Company Name




Oil & Gas E&P





Aluminium producer




Chemicals and petrochemicals

Oil R&M
Financial Investment Company




Financial Investment Company

Financial Investment Company



Financial Investment Company

Financial Investment Company









House building
Pipe and tubes manufacturer




IT & Electronics retailer



Oil Products Handling in Constan]a Harbour

Pipeline construction

In a couple of years, we are expecting new issuers and

sectors to be represented at the BSE and some new market
segments to be developed: bonds including government
bonds to be traded on the Stock Exchange, mortgage

Capitalization (EUR)



securities, real estate securities just to name a few. This way,

an investor will have a much broader spectrum to invest in,
such as instruments with different risk-return profiles.

Vanguard Investi]ii Financiare

Bulevardul Unirii Nr.19, Bl.4B, Parter
Sector 5, Bucure[ti
Tel.: +40 21 336 9325; 336 9326
Fax: +40 21 336 9233
Cristian Tudorescu, Senior Financial Analyst
E-mail: ctudorescu@vanguard.ro

Romanian Business Digest 2006

Bucharest Stock Exchange

January June 2006
by Bucharest Stock Exchange
The activity of the Bucharest Stock Exchange (BVB) and Romanian capital market continued to
develop during the first half of this year, emphasizing the consolidation of the trust of both
Romanian and foreign investors in the financial instruments traded on the regulated market
operated by BVB.The positive trends, that marked the BVB market during the last years, have
continued at the beginning of the 2006 and as a consequence the market indicators and indices
recorded new historical highs:

BET index, which indicates the market price evolution of the ten most liquid stocks listed on
the first tier, has reach its historical high in February 7 (8,484.3 points);

BET-C index, which indicates the market price evolution of all listed companies except for
investment funds (SIFs), was calculated in February 7 for 4,970.94 points;

BET-FI index, which indicates the market price evolution of listed investment funds (currently
five Financial Investment Companies), went up to a new all time high in February 7 (54,904

BET vs. regional indices

9500 BET & BET-C













1/9 06
1/1 06
1/1 006
1/2 006
1/3 006
2/6 06
2/1 006
2/1 006
2/2 006
2/2 006
3/6 06
3/1 006
3/1 006
3/2 006
3/2 006
4/3 06
4/7 06
4/1 006
4/1 006
4/2 006
5/3 06
5/9 06
5/1 006
5/1 006
5/2 006
5/3 006
6/6 06
6/1 006
6/1 006
6/2 006
6/2 006





The evolution of the BSE blue chips index BET in the first two quarters of 2006 highlighted a
stronger correlation with its peers in the region.
BET vs. BUX, WIG20 & PX


































The total trading value of the Bucharest Stock Exchange (listed and unlisted shares and bonds)
during January 1 - June 30, 2006 was of USD 1,572.90 million, representing an increase by
+28.3% compared to the value recorded in the same period of 2005 (USD 1,225.60 million).
The market capitalization in USD increased by +48.24% and on June 30, 2006 was over
USD 19.68 billion.

Bucharest Stock Exchange

Entire Market

Main Figures



























mn USD








mn EUR








mn RON








mn USD








mn EUR








Turnover Velocity (TV)

(Turnover/Mkt cap)








Market P/E Ratio (PER)








Price/Book value (P/BV)








Dividend yield (DIVY)















mn RON








mn USD








mn EUR












mn RON







mn USD







mn EUR







Total turnover
(listed and
unlisted shares,




mn RON





mn USD




mn EUR




mn RON

Number of companies

Listed Companies




No. of unlisted companies



No. of bonds
Value Traded/



* January - June 2006

Turnover and capitalization (January - June 2006)













an6-J 06
an11- 06
16- -06
19- -06
24- -06
27- -06
1-F 06
eb6-F 06
9-F -06
14- b-06
17- -06
22- b-06
27- -06
2-M 06
ar7-M 06
10- r-06
15- r-06
20- r-06
23- r-06
28- r-06
31- r-06
r5-A 06
10- r-06
13- r-06
18- r-06
21- r-06
27- r-06
3-M -06
ay8-M 06
11- y-06
16- y-06
19- y-06
24- y-06
29- y-06
y1-J 06
un7-J 06
12- -06
15- -06
20- -06
23- -06
28- -06


Turnover mn USD


Mk Cap bn USD

Romanian Business Digest 2006

Bucharest Stock Exchange

The most important event in the beginning of this year was
the election of the new Board of Governors on the occasion
of the General Assembly of the Shareholders of Bucharest
Stock Exchange. The new chairman of the Board is Mr.
Septimiu Stoica. The BSE Board of Governors is composed
of: Mr. Ovidiu Sergiu Pop - Vicepresident, Mr. Dan Viorel Paul
- Vicepresident, Mr. Nicolae Alexandru Rusu - Secretary
General, Dr. Petru Prunea - Member, Mr. Rare[ Nilas Member, Mr. Adrian M`n`il` - Member, Mr. R`zvan Pa[ol Member and Mrs. Dana Mirela Ionescu - Member.
On 20th of January the General Meeting of the Association of
European Central Securities Depositories decided upon
admission as a member of the Bucharest Stock Exchange
(BSE). Since 1999, BSE was a member of the Central and
Eastern Europe Central Depositories and Clearing House
Association). In September 2005, the two associations
decided to merge in order to achieve their objectives. As a
result of this merger, CEECSDA was dissolved and its
members became members of ECSDA.
Within the framework co-operation between Bucharest Stock
Exchange and Vienna Stock Exchange (WBAG), two new
agreements were signed in Bucharest: the Framework
Agreement regarding licensing of BSE indices and the New
Europe Blue chips Index (NTX) Agreement. NTX index was
launched on September 27, 2005 by WBAG and reflects the
evolution of 30 blue-chips traded on the stock markets in
Bucharest, Budapest, Ljubljana, Prague, Vienna, Warsaw
and Zagreb. BSE is represented in NTX by the BRD and SNP
shares, which on March 7, 2006, counted for 3,98% of the
index weight.
In June one of the most important event organized by BVB
and the Program partners for Financial Stability (PFS) was
the Seminar The role of the company director within listed
company. On this occasion a lot of important experts from
Great Britain, USA, Sweden, Latvia and Turkey, and
representatives from Albania, Bosnia and Herzegovina,
Bulgaria, Egypt, Turkey and Ukraine have participated.
Romania was represented by personalities of political and
economical life, members of the Romanian National

Commission, Bucharest Stock Exchange and representatives

of the companies traded in BSE.
Bucharest Stock Exchange intensified its efforts aimed to
become more visible, and the official openings of the trading
session started in 2003 became a current practice involving
officials, personalities of the political and business
environments. Bucharest Stock Exchange hoping that this
type of events would increase its visibility and create a culture
of the Stock Exchange among investors.
The Bucharest Stock Exchange closes an important period of
its existence and finds itself in a transformation process that
prepares the further development of Romanian capital market
and its integration into the global environment of European
Union financial markets. The European Union accession is a
challenge and the Bucharest Stock Exchange is able to get
through, so that each year passed from its re-opening in 1995
has marked a step forward, bringing more value on the stock
market through the activity carried out by its main actors:
investors, issuers and brokerage companies.
Compared to the first year of transactions, the progresses are
obvious and significant.
From one trading session organized on a weekly basis in
1995, with an average turnover of only USD 200,000 and a
total capitalization of USD 100 million, currently the
Bucharest Stock Exchange reached a capitalization beyond
USD 21 billion and to an average daily value of the
transaction higher than USD 10 million.
Bucharest Stock Exchange strategic target is a total
capitalization exceeding in the next year, the amount of
EUR 40 billions representing 30-40 % from GDP.
Based on positive changes of local economic environment,
on the increase in the population incomes and on the
changes in investors structure, the daily average of the
transactions could be above EUR 20 million.
The figures alone are not able to offer an overall image of the
stock market plans for the next years: to transform the stock
investments into one option of financial investment,
accessible to investors at the largest possible extent.

Bucharest Stock Exchange

Bulevardul Carol I Nr. 34-36, IBC Modern, Etaj 14
Sector 2, Bucure[ti
Tel.: +40 21 307 9500
Fax: +40 21 307 9519
E-mail: bvb@bvb.ro
Rodica Negoi]`, Head of International Relations & Marketing
E-mail: rodica.negoita@bvb.ro


of Economic Sectors


Romanian Banking
by Roland Berger Strategy Consultants

Recent developments in the Romanian banking market

Overall trends: consolidation and specialization
Banking products and distribution overview

The steady growth posted by the Romanian banking system in 2005 continued to represent a
major driver for the economy in the first quarter 2006, increasingly supporting the development
of a large number of industries. This dynamic was reflected in the growth of the total banking
assets, changes in the top ten ranking of Romanian banks, and in M&A activity.

Recent developments in the Romanian banking market

Banking assets as of March 2006 posted an increase of over 41.5% compared to March 2005.
The increase has been mostly driven by the spectacular upsurge in the non-governmental
lending, channeled mainly towards the retail sector. The total banking assets per capita
increased from EUR 1,063 in 2004 to EUR 1,764 according to our estimates (as of March 31, 2006).
Romanian banking system total assets1) as share of GDP, 2000-2006 (EUR bn, %)
CAGR 8.4%












Total assets of the banking system





2006 3)

Share of GDP 2)

Notes:1) Data under RAS Romanian Accounting Standards; 2) The share of banking assets in GDP is calculated for data
in RON; 3) As of March 31, 2006
Source: NBR National Bank of Romania, ECB European Central Bank, NSI National Statistics Institute,
Roland Berger Strategy Consultants

Benchmark versus CEE 4 and EURO zone

Nevertheless, Romania shows a lower financial intermediation compared to other countries in
CEE and EU, indicating significant potential for future growth. At the end of 2005, Romanias
banking assets per capita were approximately fifty times lower than the average for the
EURO-zone and approximately ten times lower than the top ranked countries in the CEE.
Furthermore, the banking penetration ratio, although up to approximately 45% of GDP in 2005,
lags far behind EU countries (avg. 220%) and is still lower than in countries such as Croatia and
the Czech Republic (avg. 100%+).

Roland Berger Strategy Consultants

Overview banking penetration in EU and CEE, 2005
(%, EUR/capita)
Banking assets
% GDP, 2005
EURO zone
75,913 EUR


This is a direct effect of the appreciation of the local currency

in 2005, which brought a sudden confidence surge in the
local currency, mainly in the corporate segment. The retail
savings in RON remained almost steady between 2004 and
2005 (64% and 65% respectively) while the share of the
corporate deposits in RON increased slightly to 49% from
47% for the same time span.








7,954 EUR





2,153 EUR
1,632 EUR
40 %

Notes: 1) 2002-2005 CAGR for banking assets

The size of the bubble represents the banking assets/capita
Source: Roland Berger Strategy Consultants, BA-CA CEE Report, ECB,
Eurostat, Central banks

The total non-governmental loans amounted to EUR 22.7 bn

at the end of March, 2006. This represents 23% of GDP and
a 15% increase versus December 2005. The split shows a
major share of approximately 63% of corporate lending. But
most of the growth came from retail. The corporate lending
increased by approximately 38% in 2005 compared to 2004,
mainly driven by the investment lending and the SME sector.
Total loans outstanding (bn EUR)

Although booming in the last three years, retail lending still

shows modest levels compared to the other European
countries. As such, the retail loans to GDP at the end of 2005
stood at 14% of the EURO zone average and 50% of the CEE
4 value.

CAGR: 35%

Benchmarking Romania versus CEE and EURO zone

Retail loans 2005 (% GDP)

Retail credit per capita 2005 (EUR)












Bank deposits 2005 (% GDP)












Retail loans (mn EUR)

CAGR: 96%


According to the National Bank of Romania, deposits posted
a 36.2% increase during the first three months of 2006
compared to the same period of 2005.
The total deposits at the end of March 2006 amounted to
EUR 22.4 billion, of which 49% corporate deposits. This
continues the trend identified since 2004 of a declining share
of retail deposits in total deposits. Two hypotheses may be
considered to explain this decrease: on one hand, the drop in
interest paid on deposits, which channeled savings towards
higher yield opportunities (e.g. real estate, stock exchange),
and the boom in retail lending fueled by the growing
propensity to consumption, on the other hand.
From a currency point of view, 70% of savings at the end of
March 2006 were in RON compared to 59% at the end of 2004.


Loans (corporate and retail)


Source: Roland Berger Strategy Consultants estimate, NBR, Merrill Lynch,

annual banks reports; CEE 4: HU, CZ, PL,SK



Share of GDP

Non-government loans, 2005 (% GDP)
















Share of GDP









Loans (retail) (EUR bn)

Notes: * As of March 31, 2006; * Including retail loans outstanding at consumer

Source: NBR report, NSI, Roland Berger Strategy Consultants

The NBR statistics as of March 31st, 2006 highlight a 75%

share of consumer credit in retail lending and only 25% as
mortgage lending. The split is different in the EU countries
where mortgage loans represent almost 70% of the total retail
The local currency accounted for 43% of the total nongovernmental lending, with retail lending in RON at 52%. The
RON lending received a boost in the last quarter of 2005,
when the NBR imposed restrictions on lending in foreign
currency. At the end of March 2006, 72% of the consumer
finance lending was in local currency, up from 60% in 2005,
Romanian Business Digest 2006

Roland Berger Strategy Consultants

while 86% of the mortgage lending was still in foreign
currency, down from 90% in 2005.
The bad debt development is closely watched by the NBR
and the Romanian Credit Bureau, the entity in charge of the
bad debt database. The bad debt stood at 0.36% of total
non-governmental loans as of March 2006, 70% being
generated by corporate clients.

Top ten banks, by market share (%)

Interest spread
According to NBR data, the average lending and deposit
interest rates for RON denominated transactions fell further
due to monetary policy and the competitive environment,
resulting in a lower average interest spread of approximately
10%. Taking into account the 8.4% inflation rate, and the
deposits average interest rate of 4.6%, the real yield for
deposits was negative.
Average interest spread for RON denominated
non-government transactions, 2000-2006 (%)



The 39 banks operating in Romania reflect a highly

fragmented market with modest financial penetration, which
supports the ongoing consolidation trend. Top 10 banks
accounted for 87.6% of the banking assets at the end of
2005. The concentration ratio for top 5 was 62.6% at the end
of 2005, already fairly high and expected to increase further,
as main players will continue to strenghthen their position.

December, 2005

Market share [% assets]


1 Banca Comercial` Romn`


2 BRD Socit Gnrale

3 HVB }iriac UniCredit*


4 Raiffeisen Bank


5 ING Bank NV


6 Bancpost




8 Banca Transilvania


9 ABN AMRO Bank Romania


10 Alpha Bank











Lending average interest rate





Deposits average interest rate

Note: As of March 31, 2006

Source: NBR reports

Although in 2005 the banks responded to the decrease of the

NBR interest rate (from 18% to 7.5%) through a general
decrease of credit interest rates, the current interest rates for
mortgage loans for example are on average 4-6% higher than
in the other CEE countries.
In 2006 the lending interest rates are expected to decrease
slightly, triggered mostly by competition between banks
despite National Bank of Romanias intervention policy. The
NBR continued to implement its restrictive monetary policy
and inflation targeting by recently raising the minimum
reserve requirements in RON to 20% from 16% and raising
its reference rate to 8.75%.

Overall trends: consolidation and

Competitive landscape
Competition is heating up. On one hand we witnessed the
continuous boom of the consumer finance sector, and on the
other hand banks have become increasingly keen to
penetrate the market. A number of foreign players have
managed to turn around their local operations successfully
(e.g. Raiffeisen, BRD-GSG), others have developed from a
lower base (e.g. NBG, OTP Bank), while even the
state-owned banks have shown enhanced marketing

Top 10 banks


Note: *Proforma taking into account the merger of HVB Bank Romania, Banca
}iriac and UniCredit
Source: Estimates Roland Berger Strategy Consultants, Official reports, BSE

If 2004 was Raiffeisen Banks year, in 2005 the bank slightly

reduced its market share to 8.6%. BRD-GSG has
successfully increased its market share from 12.8% to 14.7%,
after a rebranding campaign and an aggressive retail
strategy. ING took over the fifth position with an increase of
1.5 percentage points in market share in 2005. Also, among
the winners, Banca Transilvania enters the top ten on the 8th
position with 3.8% of the total banking assets.
In 2005 the banking sector witnessed large deals such as
Erstes acquisition of the market leader, BCR, and HVBs
move to acquire Banca Ion }iriac, which in turn, was
swallowed by the international merger with UniCredit. The
merger propelled the new entity, UniCredit & HVB }iriac, on
a pro-forma basis, to a third place with a 8.8% market share,
outperforming Raiffeisen.
The sale of BCR to Erste Bank is expected to further intensify
the competition in the banking sector. On December 21st,
2005, Erste Bank signed the agreement to purchase
61.8825% of BCRs shares for EUR 3.75 bn, the highest price
paid for a company in the history of Romanian privatization (a
multiple of 5.8x Price to Book value). With operations in five
CEE countries, Erste is one of the most experienced buyers
of CEE banks and has an excellent track record of successful
turnarounds of formerly state-owned operations. However,
the deal is still pending to close in September, and in the
meantime BCR is vulnerable to a further erosion of market
share due to the merger distractions. Nevertheless, the
optimization and integration objectives that Erste announced

Roland Berger Strategy Consultants

2006 seems to be the year of a second wave of takeovers

targeting smaller banks with a market share of below 1%.
ATE Bank of Greece, a newcomer to CEE, bought 57.13% of
Mindbank, a bank with a focus on SMEs, C.R. Firenze
purchased 56.23% of Daewoo Bank for EUR 30.5 mn,
Israel-based Leumi Bank acquired 95% of Eurom Bank for
EUR 35 mn, and Mass Financial took over 84% of Nova
Bank. Very recently, Bayerische Landesbank, through its
majority-controlled Hungarian subsidiary MKB, announced
the takeover of Romexterra Bank, a bank traditionally
focused on the oil & gas sector through a tender offer to
Romexterras fragmented shareholder base. Romexterra,
holding a 0.8% market share at the end of 2005, has recently
expanded into retail and has ambitious expansion plans for its
branch network.
2006 also brings important milestones for the privatization of
CEC, for which the recent success with BCR has set high
price expectations. Despite the fact CEC lost 1.5 percentage
points in market share in 2005, it remains currently the most
attractive investment opportunity in the Romanian banking
industry. Out of 9 banks that expressed interest in the fall of
2005, 6 submitted preliminary offers and only three banks are
still in the run for CEC with binding offers: Raiffeisen, NBG
and OTP, all with operations in Romania, so the winner of
CEC may reshuffle the rankings.
Rumors always abound regarding the remaining retail
operations up for sale, including Carpatica, Libra Bank and
the remaining jewel Banca Transilvania. Nevertheless, most
banks announced ambitious plans of enlarging their
distribution organically as acquisitions have become
expensive and thus, branch density is expected to almost
double over the next three years.

Raiffeisen Bank developed an aggressive corporate and

retail acquisition strategy

UniCredit HVB }iriac has emerged a a strong universal

bank, combining }iriac strong retail operations,
complemented by HVBs corporate profile and UniCredits
strength in SME. UniCredit initially targeted the mediumsize corporate segment and to a limited extent the retail
customers, but since 2004 the bank has shifted towards
the retail segment more aggressively.

In the opposite corner, OTP and CEC are mostly oriented

towards the retail segment while ABN AMRO Banks
traditional focus is on the corporate segment. Still, since 2004
ABN AMRO Bank looked at the retail segment, too, but with
a focus on the upper affluent customers segment.
CEC has the largest branch network, but it lacks alternative
distribution channels, that are successfully embraced by
other banks. Although traditionally focused on the retail
segment, CEC still has a limited product range offer for retail
Porsche Bank and Raiffeisen Banca pentru Locuin]e are
examples of focus on specialized products but distributed via
different channels.
Competitive banking environment, Romania

BCR Bancpost
Unicredit +
HVB }iriac

Alpha Bank


are expected to strengthen BCR on the medium term. In

terms of strategy, according to Erste Bank officials, BCR will
consolidate its leading position, and will focus on product
diversification for the retail segment, but also on the SMEs
and micro-client base with particular attention to crossselling.



Banking products and distribution

The stability of the economic environment, inflation on a
downward trend, higher average salary and increased
business opportunities in retail and FMCG sectors together
with the fall of the NBR interest rates, have all contributed in
the last 2-3 years to shift the banks focus from a cautionary
approach, targeting easy money operations towards
financing the real economy.
As Romania is an emerging market, banks tailor their offer to
a less sophisticated demand for retail and corporate
products, as opposed to mature markets where banks
differentiate their offer and customize it per specific customer
segments. While most Romanian banks offer universal
services, still few exceptions exist.
As shown in the graphics, most Romanian banks are
clustered in the universal services area that means broad
products range distributed via various channels. The major
players in this area have capitalized on various strengths:

BCR and BRD-GSG are examples of the supermarket

bank concept, with clear scale benefits and cross-selling


Banca pentru

Porsche Bank


Cost Saver/


= Asset size
Source: Roland Berger Strategy Consultants

Distribution channels
Banks have invested heavily in expanding their branch
networks, still the major distribution channel, and plan to do
so even more aggressively. Overall, banks increased their
branch networks by 12% in 2005 compared to 2004. Further
growth prospects remain solid, although the gap with CEE
branch density has shrinked: the average in Romania is
approximately 16 branches per 100,000 inhabitants, almost
equal to the branch density in Czech Republic. However,
severe discrepancies remain between branch density in
Bucharest and the rest of the country, especially the rural
Romanian Business Digest 2006

Roland Berger Strategy Consultants

The ATM network saw a 21% increase in the first quarter
2006 compared to the end of 2005, and reached a total of
4,608. Based on the dynamics of the first semester we can
estimate over 30% growth ratio of the ATMs number for the
entire year. This is a sign banks are prepared to invest in
developing all distribution channels in an attempt to foster
penetration and reduce average time a customer spends in
the branch.
Branches and ATMs growth, Romania

products that are sold via non-banking financial entities

(mainly applicable to retail banking).
One main challenge consists in the need for accelerated
expansion of the banks distribution network in order to tap
into the full potential of different geographic areas, but with
increasing efficiency. Therefore, channels such as i-banking,
m-banking, e-banking are expected in the future to become
standard distribution channels. Telephone banking is already
becoming a norm. All these alternative distribution channels
will lower the expansion and operational costs of banks.



Bank branches






Notes: Bank branches for top 10 banks; As of March 31st, 2006

Source: NBR, Roland Berger Strategy Consultants, banks reports

Apart from the most developed distribution channels

(branches, ATMs, POS), few players have adopted different
distribution strategies that are meant to maximize the
efficiency of the customer interfaces:

ING Bank started in 2004 to address the retail segment,

via an innovative Self Bank concept that is further
supported by a franchising network.

ABN AMRO Bank pioneered a retail banking practice

consisting of mobile banking agents, adopted quickly by a
large number of players for selected products

Citibank started in 2004 the implementation of its retail

arm - CitiFinancial, via a network of retail agencies

Volksbank set up its first franchising outlet in 2005, where

basic operations for retail customers such as loan files
collection and primary analysis, leasing and insurance
support services are offered in a first phase, while
services for micro companies and SMEs are planned for
a later stage.

Cross-selling may be another alternative to the traditional

banking network. At present, cross-selling is practiced to
some extent by banks that are part of a financial group, where
scale and synergies are important. Examples of financial
entities with promotion and sale of banking practice:

Insurance companies ING, HVB }iriac, BCR

Mutual funds BRD, BCR, Transilvania etc.

Leasing BRD, BCR, Volksbank, HVB }iriac

Overall, banks will have to decide whether they will develop

their products in-house or will acquire from third parties.
Mature market distribution models rely on the insourcing/outsourcing of products with direct benefits on the
cost side. Also, along with an increasingly sophisticated
demand, banks will have to decide on how much of nonbanking products the customer expects to be offered by
banks. Things may work the other way too, with banking

Cards are increasingly being used for payments in retail

outlets, via internet or directly at ATMs for utility bills, despite
the fact that most card transactions are mostly linked to
salary cash withdrawals (over 90%).
The card penetration ratio shows considerable potential for
growth. Romania achieved a modest 217 cards/1,000
inhabitants in 2004, which was far from 493, the average
CEE 3 (Czech Republic, Poland and Hungary), and a very
long distance from 1,280 for the EU average. In 2005, the
card penetration in Romania increased to 330 cards/1,000
inhabitants, half of the rate in CEE 3 of around 612.
According to public data, the foreign currency denominated
cards represented 4.4% in the total card transaction volume
in 2005 compared to 3.4% in 2004 and 1.82% in 2003, while
in terms of volume, the foreign-denominated hold only 2.17%
of the total number of cards in use at year-end 2005. The
proportion is still extremely low and reflects the fact that cards
are used to a lower extent beyond Romanian borders.
Out of the total number of cards in 2005 the proportion of
credit cards remains extremely low, below 6% (approximately
400.000 credit cards).
The dynamics in the number of POS shows signs of growth
in the electronic payments volume: from 11,136 in 2003 to
16,426 in 2004 and posting a 52% yearly growth as of March
2006, exceeding 25,000, according to a VISA press
Cards transaction volume and number









Volume cards
transaction (EUR bn)




Total cards (mn)

Note: As of March 31, 2006

Source: Pia]a Financiar`, No-cash; Estimates Roland Berger Strategy

Agreements between banks and commercial partners have

fuelled considerably the consumer finance development in
the past three years. Co-branded cards have been issued by
banks in partnership with retailers, telecom companies, oil

Roland Berger Strategy Consultants

companies, as an alternative or complementary to installment
loans. Banks are slowly moving towards the end consumer
via such alternative channels. Below are few examples of
such trade partnerships:

Retail operators: Credex with Raiffeisen Bank, Credisson

with Banca Transilvania, Carrefour with BRD Finance,
Fiba Mall with Finansbank

Telecom players: Vodafone with Raiffeisen Bank

Others: GeCad with BRD, Banca Transilvania with Astral,

Citibank with AGIP, Raiffeisen Bank with the Romanian
Post, Certinvest with Eurobank.

In such cases banks issue a co-branded card or have their

services promoted and sold via the partners outlets (most
often, consumer credits). The product may combine both the
credit facility with the card as in the co-branded credit card
(e.g. GeCad).
As banking customers become more sophisticated and banks
need to differentiate their product offering, new products are
launched, even though they are generally products that exist
in other banking markets, customized to the local market.
Such an example is card customization, used successfully in

the USA and Western Europe which was recently launched in

Romania: such as BRDs recent issuance of cards with
prominent sports figures. Also, more recently, banks have
turned their attention to the SME sector by tailoring their
offers and marketing them aggressively such as Banca
Transilvania, BRD, Raiffeisen Bank.
Looking at the future
The long term driver for the Romanian banking system is the
low financial penetration that should fuel double digit growth,
at least over the medium term. Thus, although Romanian
banks do show opportunity for cost improvement as indicated
by the average Cost Income Ratio (for 7 out of the top 10
banks) of 64%, well above the best practice ratio for a bank
in a mature banking environment of 45%-50%, the focus is
still on growth. Nevertheless, 2006 is expected to bring
further pressure on margins driven by intensifying
competition from both banks and non-banks and possibly by
NBRs policies. The increasing competition and
sophistication of the market, along with this pricing pressure
should gradually result in cheaper, more convenient and
more diversified banking services for Romanian consumers.

Roland Berger Strategy Consultants

Bulevardul Lasc`r Catargiu Nr. 17, Sector 1, Bucure[ti
Tel.: +40-21 222 1904; 222 1905
Fax: +40-21 222 6271
Codru] Pascu, Managing Director
E-mail: codrut_pascu@ro.rolandberger.com
Florentina Marinescu, Project Manager
E-mail: florentina_marinescu@ro.rolandberger.com

Romanian Business Digest 2006

The Bank of the Future

by IBM Romania
Introduction Banking ecosystem: The rise of the specialists
Enterprise reconstruction: The case for componentization
Process optimization: Inadequacies of this approach
Complexity costs and enterprise optimization
A new competency-based governance model
Service-Oriented Architecture: A componentized infrastructure
Next steps: The roadmap to value
Develop a robust partner management strategy Conclusion
Traditional banks are facing large challenges from innovative competitors and increasingly
demanding customers. To survive in this new environment, some of them will have to
fundamentally change the way they approach their business. Once focused on a generalized
core group of services and customers, banks today have to react to the dual challenges of
serving diverse stakeholder needs while selecting which areas of the industry and company
value chains they want to specialize in. The difficult choices that banks must make as to which
markets to enter and which customers to serve must include a critical review of the products and
services that will enable the bank to avoid the erosion of its profit margins.
Maturing industries generally look to innovation to prevent commoditization. Unfortunately,
however, the banking industry is steeped in tradition and slow to adopt true customer innovation.
Consider that customers are enticed to open bank accounts that, although advertised as free,
often include hidden fees, and customers sometimes suffer poor customer service at the hands
of under-trained staff. The much touted customer innovations, such as in-branch cafs, wireless
access and khaki-clad service representatives, have done little to meaningfully improve the
banking experience for most customers.
From a performance perspective, banks have turned almost exclusively to acquisitions for
growth. The resulting lack of attention on organic initiatives has prevented banks from creating
high-performance organizations capable of delivering value in the face of cyclical economic
forces. Furthermore, the inability of banks to satisfy customers with innovative products and
services has squeezed profit margins. Incremental change has become the norm for this
industry, but more is needed.
An extensive research on the banking industry might provide some interesting answers to
several of these issues. Indeed, it is anticipated that when the recommendations are combined
with smart adoption and execution, banks will have the ability to gain sustainable competitive
A focus on execution excellence and strategic flexibility is necessary to create differentiated
financial institutions that can satisfy the demands of the three key stakeholders: Customers,
shareholders and employees. Customers want best-in-class services and solutions personalized
to their needs, shareholders require market returns that far exceed the performance of industry
indices, and employees seek well-paying and fulfilling roles in dynamic organizations. Not only
does the traditional generalist banking business model fail to address the requirements of these
three constituents, it does not provide banks with the means to differentiate themselves, to
respond to rapidly changing market challenges or to optimize efficiency and attract the best
talent. To meet these often conflicting objectives, successful banking institutions are embarking
on a strategy of specialization, both external to the market and internally in the way in which they

IBM Romania
Senior banking executives have to rethink three critical
assumptions, on which they may have designed their present
strategy. These assumptions include:

Where is the unique source of competitive advantage

relative to the larger banking ecosystem? How can trends
in this ecosystem be better understood and predicted and
what are their implications on the business model?

Who are the emerging players in the ecosystem that are

stealthily creating unique value offerings for the

Specialization trends will drive firms to assess their own

capabilities in light of an emergent group that can deliver
services faster, cheaper and better based on operating
models that are more direct and connected to the end
customer. Specialists are displacing traditional banks from
the role they once played as the sole providers of certain

What steps should be taken internally to prepare the bank

for the inevitable effect of the specialization of roles in the
core markets?

componentized business models allowing banks to

deliver best-in-class performance through internal
excellence and external partnerships.

For example:

risk specialists provide liquidity and financial guarantees

that enable market participants to effectively hedge risks
and eliminate unwanted assets,

Banking ecosystem: The rise of the


niche manufacturers deliver industry-leading solutions

that are sold through large financial institutions to address
specific customer needs,

A transformation in the competitive banking landscape will

shape a banks success or failure. Specialization is creating
new competitors with capabilities that are superior to those of
many firms viewed as traditional incumbents. The drivers for
this specialization are business and technology enablers that
together simplify the integration of capabilities into a broader
value chain and create more efficient mechanisms to deliver
services. The ecosystem encompassing the banking firms
involved is significantly broader than the traditional
participants and the influence of specialists is growing as they
continue to capture an increasing share of this ecosystems
value. This dynamic is forcing all participants to face stark
choices regarding which activities they can profitably perform
and which activities are best performed by others. The
decisions that firms make will either leverage them toward
financial success or market underperformance.

distributors are directly attacking the most prized

possession of traditional banks, the customer
relationship, with impartial advice and a broad range of
attractive products and services,

and processing specialists have created efficient

infrastructure and aggregated the necessary business
volume to benefit from massive economies of scale
networks which connect multiple participants in the
ecosystem through pervasive platforms that permit the
flow of goods or information using network-defined
standards for interaction.

The IBM Institute for Business Value examined the

performance of participants in the banking ecosystem and
looked at organizations that were core to the banking
ecosystem as well as at those that were active enablers,
providing services designed to make existing players and the
ecosystem more efficient. The objective was to understand
how some organizations were able to grow faster, build
stronger balance sheets and deliver strong operating margins
while others continued to struggle with slow growth, declining
margins and the lack of pricing power. The goal was also to
highlight industry trends that indicate a change in the
operational and business rules governing the banking
ecosystem and that might have serious competitive
implications for future business strategies.
It is appropriate to suggest that banking is at a point in its long
history where key leaders can potentially break away from the
pack, taking advantage of competitive opportunities that are
being presented. These opportunities include the following:

increased and quicker competition resulting in success or

failure with faster speed,
globalization resulting in increased pressures as firms
look for opportunities and respond to threats,

increased regulatory compliance and integrated markets

exposing businesses to new opportunities and risks to
which unique and faster responses will be necessary,

empowered customers requiring firms to sense and

respond with stronger value, propositions and innovative


As the capabilities of specialists continue to grow, the

economic benefits of a traditional generalist banking business
model will likely face accelerating erosion. Generalists will
need to identify those aspects of their business that embody
sustainable advantage and rectify those functions that are
providing suboptimal performance through potential
integration strategies with specialists providing optimal
solutions to clients. The evolution of industry deconstruction
will lead to a final state in which participants are part of a large
network linking specialists. An industry network would have
dynamic, cross-enterprise linkages that enable full
deconstruction as firms focus exclusively on areas where
they have a competitive advantage. While no industry has
achieved this end state, the signs that business is
accelerating toward a networked environment are apparent.

Enterprise reconstruction: The case for

Individual banks possess varying degrees of influence in
accelerating industry deconstruction. Faced with this
inevitability, banks can choose one of three approaches:

proactively hasten the forces unleashing change across

the value chain,

react rapidly to industry leaders enacting specialization,

or observe patiently to understand the full repercussions

of this evolution.

Regardless of the choice it makes to respond to the dynamics

of the industry, a bank must evolve its internal operating
model with an objective of innovating at the enterprise level.
It is anticipated that employing this strategy will not only
Romanian Business Digest 2006

IBM Romania
Figure 1: Banks embark toward enterprise reconstruction by breaking down their product-oriented silos




Silo 2


Phone Internet

Silo 2

Phone Internet





Supply chain

and sales

Service and





Silo 3


Silo 1




Step 3
Enterprize optimized



Silo 1


Step 2
Process optimized



Silo 3

Step 1
Business unit optimized


Shared facilities
Source: IBM Institute for Business Value analysis

address the inadequacies of taking a business unit or

process-based approach, but it will provide the organization
with the agility necessary to succeed in the on demand
environment. Many banks have embarked on the path toward
enterprise reconstruction by breaking down the productoriented silos that once demarcated their organization.

chat applications during the application process. All of these

initiatives are contained within a specific business unit or
involve only one process. As we will explain in the following
pages, significant benefits result from an enterprise effort that
allows efficient processes to be shared across an

By tearing down these walls between business units and

geographies, banks are discovering discrete processes that
can be shared across the organization. For example, several
leading banks have begun to optimize the account opening
process within a single product or channel. One bank
launched an instant deposit account that can be opened
online and without paper documentation within a matter of
minutes. Another bank allows its prospective online
customers to consult with live bank representatives through

Process optimization: Inadequacies of

this approach
Without a doubt, optimizing processes in this manner can
lead to incremental performance gains, most notably by
reducing costs through such activities as elimination,
consolidation and automation. However, the real drawback
with this approach is that it fails to consider the full scope of

Figure 2: A banks mortgage refinancing component shares many activities with the banks mortgage component

needs ID



level data







against 3rd

against 3rd

Score the

score with




Set up new
security profile

CPC data

3rd party







Mortgage origination

needs ID





2nd tier
authorization of





Score the

level data



Match score
with request


Mortgage refinancing
Duplicated activity
Source: IBM Institute for Business Value analysis



IBM Romania
a given activity across the entire enterprise. Consequently,
process optimization misses opportunities to eliminate
redundancy in people, process and technology that exists
across the enterprise. For example an analysis done by the
IBM Institute for Business Value found that the mortgage
refinancing process shares 67 percent of the activities with
the mortgage origination process in the average bank.
Despite this, most banks treat these as two separate and
discrete processes. Given that account opening typically
accounts for approximately 20 percent of a retail banks total
manufacturing and processing cost base, this duplication
significantly impacts a banks bottom line.

Complexity costs and enterprise

The inherent complexity of a large and growing banking
organization exacerbates a process-based approach. In fact,
it may further increase complexity and accelerate scale
diseconomies. As organizations grow, managers must
navigate a considerable amount of interconnection points
among geographies, markets, channels and products. The
organizations level of complexity rises by far more than the
revenue growth. So a successful and aggressive mergers
and acquisitions strategy might leave a bank with an
enormous number of interconnections by virtue of it not
rationalizing its internal activities over multiple integration
What alternative approaches can a growing bank consider to
mitigate the negative impact of complexity? To address the
challenge of complexity while preparing for the imminent
changes brought by value chain deconstruction, a bank must
restructure around its set of components the highly
cohesive, discrete building blocks that serve a unique
purpose and are supported by a layer of people, process and
technology. Componentization forms the core of the
enterprise optimization approach as banks utilize a
companywide view to consider their range of activities. Banks
are in the early stages of applying an enterprise model to
decisions based on their operating structure. They must
restructure around the set of their components:
These components are supported by a layer of people,
processes and technology (Figure 4).

A new competency-based governance

To support a move to a componentized organization, a banks
change management plan must focus on redesigning the
banks legacy governance model. Traditionally, all of a banks
activities are directed and controlled by the business unit. The
hierarchy within the business unit is clear with all of the
resources reporting up to the senior line-of-business
manager. In a component-based construct, the bank is
reoriented away from a business unit and toward
competency. Therefore, the governance model must support
this new orientation.
In contrast to typical governance models, this one must
account for the extended enterprise, including best-in-class
partners that assume such a pivotal role in the on demand
bank. Softer issues, such as infusing partners with a unified
culture, become critical success factors. In addition, the
banks managers must become adept at deploying the
appropriate resources to high-priority opportunities or areas
of need. A centralized resource clearinghouse allows the
bank to team virtually on an as-needed basis. By
reconfiguring the banks governance model, the organization
moves a step closer to realizing the full benefits of the on
demand proposition. This is clearly among the most important
initiatives that must be addressed as an institution embarks
on its componentized journey. Alignment of the goals at the
component level to enterprise level goals and linking them to
compensation packages will be key to fostering the proper
conduct from staff members. Selecting the right mix of people
skills and verifying their alignment within flexible and focused
teams will ensure that the components exceed service levels
continuously and with limited supervision.

Service-Oriented Architecture:
A componentized infrastructure
As mentioned earlier, the componentized approach is being
facilitated by the congruence of several forces key among
them being the support of open flexible service standards
from existing technologies. The underlying technology
architecture of the enterprise-optimized bank should mirror
similar principles of the component-based business model; it
should organize technology around individual business

Figure 3: Banks must restructure around their set of components


New business


sales and






Business purpose
Why does it exist?



What simple
cohesive actions
are regularly

What tangible
assets and
resources are

How are
activities and

Business services
What is taken and offered to other components?

Source: IBM Institute for Business Value analysis


Romanian Business Digest 2006

IBM Romania
Figure 4: Banks components and their support layer

Component management

Business purpose
Manage customer insights




Perform customer
analysis and
profiling through
data mining

Employees with
segmentation and
analysis skills, plus
data mining tools


Directed by
strategy to support


Business services
Receives information, IT, HR and financing






Source: IBM Institute for Business Value analysis

functions or services. A service may be a business function

such as check customer credit, or it may be a system
capability such as log in user.

specialization to their internal operations, demolishing the

siloed walls that stifle collaboration and promote
unnecessary duplication within the organization.

A Service-Oriented Architecture provides the bank with

optimum IT flexibility. Services are not hardwired into the
infrastructure; instead, they are loosely coupled, sharing a
common code of communication so they can easily be
moved, consolidated or eliminated in response to business
needs. In a fundamental shift with legacy architectures, a
Service-Oriented Architecture allows the bank to build,
deploy and integrate services independent of existing
applications and platforms.

Without question, the journey to on demand has begun. To

maintain a banks competitive position, banking executives
must take appropriate steps today to prepare for this future
state. We believe that banks taking a hesitant wait-and-see
approach to industry deconstruction will destroy shareholder
value in the short term and ultimately jeopardize the viability
of their organizations longer term. Managers must accept that
industry and enterprise transformation is not a matter of if
but when. In this context, the basic assumptions that have
always held true value propositions, competitive threats,
governance models are no longer certainties.

All new applications are developed using open standards to

enable this important benefit. Finally, an Enterprise Service
Bus provides the layer of middleware on which the reusable
services sit. In an on demand environment, no business
model lasts forever. Managers must continually reassess
their operating structure, adjust it according to shifting internal
capabilities and develop market-based alternatives.
Consequently, rethinking the business model should not be
performed on a one-off basis; it must become a regular
element of the strategic planning process. In this way,
managers will enable continuous improvement cycles that
force their banks to sense and respond to change faster than

Next steps: The roadmap to value

Full realization of the on demand promise requires a
comprehensive movement to industry deconstruction and
enterprise reconstruction. In both cases, generalization gives
way to specialization. On the industry level, specialists are
redefining the integrated value chains of the past. Several
banking industries are rapidly progressing toward value chain
deconstruction, although no industry has yet achieved the
characteristics of a comprehensive industry network.
Meanwhile, progressive banks are applying the tenets of

Bank managers can take several steps immediately to

prepare for the future state of specialization in the on demand
world. These steps include the following:
a) Optimize the business model
Banks need to rethink their business models as the effects of
industry deconstruction and the rise of the specialized
enterprise reduces the effectiveness of current models
Banks siloed configuration often causes duplication of
efforts and redundancies from a business and IT perspective
since one group does not know what another group is doing.
As a result, multiple lines-of-business reengineer processes
or launch similar improvement projects within the business
unit or in collaboration with another business unit due to lack
of a comprehensive enterprise lens. This approach has left
banks rife with inefficiencies and fails to capture the interbusiness unit synergies that can arise from a culture of
internal collaboration. Banks need to dispense with this shortsighted organizational perspective and rethink existing
projects that do not incorporate an enterprise perspective.
The first step in achieving this all-encompassing
understanding of the organization is identifying all of the
components that underpin a banks activities. With a map of

IBM Romania
components, managers can address the issues of resources,
processes and technologies at the most basic level. Then
managers can understand where value is being created,
where it is being destroyed and which components will deliver
differentiated advantage.
b) Align business needs, technology enablers, people
skills and performance metrics
Industry deconstruction is causing a major rethink in the way
banks organize themselves around their key strategic
objectives. A componentized specialized enterprise will
succeed only if its employees that have incentives can take
full advantage of provided technology and business tools and
the components operating model. It is critically important that
banks go through a detailed exercise in terms of designing
peoples roles and responsibilities and setting individual goals
aligned to the component goals. These goals, in turn, should
be perfectly aligned with the organizations strategic goals
a clear focus and armed with differentiated business and
technology design elements the component will be able to
deliver best-in-class results to the enterprise ecosystem
within which it operates. With this framework, managers gain
transparency into the direct and indirect dependencies
supporting a banks operating model at the most granular
level. As a result, managers gain insight into the strategic
implications across the enterprise of their technology and
process-related decisions. Additionally, the model allows
managers to see the P&L statement for each component,
further enhancing the alignment between business, people
and IT decisions. Going forward, bank managers must
consider the technology, as well as the process and people,
implications resident in any business decision.
c) Identify emerging competitive threats
The emergence of non-traditional players in the banking
ecosystem is tipping the competitive balance away from
traditional banks. The primary difference for banks in the
developing on demand environment is that these competitive
threats are not the usual suspects rising from banking
domains. Instead, insight specialists, processing specialists,
distributors, and product, brand and distribution innovators
continue to wrest value from the traditional generalist banking

institutions. These players are successfully bringing

innovation and market value to key capability sets as
represented by products and services, customers and
markets, and the networks and channels that they use. They
are able to redefine how each of these capability sets are
designed and leveraged, thereby making existing players
less relevant in the banking ecosystem. Traditional banks
need to respond by expanding their competitive intelligence
activities to include not only existing but potential players in
the banking domain, they must understand why industries
changes, what the new technology and people enablers are
and use that knowledge to predict change, and select
partners and technologies at the forefront of creating
differentiated capabilities.

Develop a robust partner

management strategy
By definition, on demand banks rely on external, best-in-class
providers to an unprecedented degree. When a bank enters
the third stage of enterprise reconstruction, the traditional
boundary lines between internal and external blur. To
facilitate this transition, banks must develop a new
competency Partner Management to complement its
existing competencies. Culture is a critical component of this
partnering management function. In many cases, a banks
ability to infuse its external partners with the consistency that
defines its brand and the culture that shapes its internal
existence will determine success or failure. It is anticipated
that continuous management of shared performance metrics
aligned with business needs will help ensure that goals are
achieved with limited supervision.

As the on demand environment in banking evolves, banks
can implement critical actions to prepare their institutions for
the inevitability of a banking domain that relies on specialists.
Doing so will help preserve a banks profit margins and set
the stage for competitive success.

IBM Romania
{oseaua Bucure[ti-Ploie[ti Nr. 1A,
Bucharest Business Park, Intrarea A2
Sector 1, 013681, Bucure[ti,
Tel.: +40 21 405 8100
Fax: +40 21 405 8101
Cornelius Granig, Leader of Global Resource Center
Eastern Europe
E-mail: cornelius.granig@ro.ibm.com

Romanian Business Digest 2006

Overview of Insurance &

Banking Market
by Intellinews ISI Emerging Markets

Insurance sector overview Market players

Banking sector overview Market players

Insurance sector overview

The total insurance market expressed in gross written premiums amounted to EUR 446.4 million
(RON 1.58 billion) in January-March 2006, according to statements of Nicolae Cri[an, former
head of insurance market regulator, CSA. These are preliminary data for Q1 but CSA did not
detail on companies data and their ranking for the said period. According to XPrimm insurance
magazine, the total written premiums amounted to EUR 444.21 million in Q1. The figure is based
on data coming from all insurance companies in the market and it is close to the official figure
issued by CSA.
Further detailing on insurance segment based on data provided by XPrimm insurance magazine,
the general insurance segment continues to dominate the market, with a weight in total of
82.26% and an absolute value of EUR 365.42 million. Expressed in euro, the segment posted a
28.87% y/y growth in Q1, 2006, close to the growth rate posted by the life insurance 28.54% y/y, euro terms as well. In Q1, 2006, the life insurance segment amounted to
EUR 78.78 million.
Allianz }iriac dominates the top of insurance companies, preserving its leader position gained
from one year already. The company reported premiums of EUR 80.56 million in Q1 enjoying
thus a 18.13% market share. Allianz is followed by Asirom, former market leader, which
manages to rank 2nd in the hierarchy as a result of premiums of EUR 59 million and a 13.28%
market share. Asirom budgeted for this year premiums of EUR 203 million, which would mean
an advance of 45% y/y. The most significant change in Q1 2006 top refers to Astra insurer which
manages to rank the 3rd versus the 9th position in Q1, 2005. As of last year, Astra is 27% held by
Austrian Uniqua. On the opposite side is Ardaf which lost several positions to reach the 8th in
Q1 2006 versus 4th one in Q1, 2005. The company was faced with liquidity problem and was for
a period of time under supervision of CSA.
Total insurance market, Q1, 2006

Allianz }iriac
BCR Asigur`ri

Gross written premiums

RON mn
EUR mn

Source: XPrimm insurance magazine

Total insurance market, Q1, 2005

Allianz }iriac
BCR Asigur`ri
AIG Romania

Gross written premiums

RON mn
EUR mn

Source: XPrimm insurance magazine

On the general insurance segment, Allianz }iriac becomes the leader with a 19.23% market
share, followed by Asirom - 14.23% and Astra 10.2%. Allianz and Asirom switched positions as
compared to Q1, 2005. Basically, we find the same companies in Q1, 2006 but with slight
different positions as compared to Q1, 2005.

Intellinews ISI Emerging Markets

As in case of full insurance market top, Astra gained
momentum and ranked the 3rd, while other companies such
as BCR Asigur`ri and Asiban gained significant market
shares and advanced in top.
General insurance market, Q1, 2006
Gross written premiums
RON mn EUR mn
Allianz }iriac
BCR Asigur`ri
AIG Romania

General insurance market, Q1, 2005

Gross written premiums
RON mn EURmn
Allianz }iriac
AIG Romania
BCR Asigur`ri

Source: XPrimm insurance magazine

As regards life insurance segment, ING life insurance and

AIG Life dominate the top, concentrating almost 50% of the
said market. We notice that BCR Asigur`ri which managed to
rank the 4th in Q1, 2005 is no longer in first ten life insurers in
Q1, 2006. On the other hand, Allianz }iriac posted a
significant change as it ranked the 3rd in Q1, 2006 versus 7th in
Q1, 2005. The same trend was followed by Aviva which
gained three positions and ranked the 6th in Q1, 2006.
Life insurance market, Q1, 2006
Gross written premiums
RON mn EUR mn
AIG Life
Allianz }iriac
Omniasig Life
Delta Asigur`ri

Life insurance market, Q1, 2005

Gross written premiums
RON mn EURmn
AIG Life
BCR Asigur`ri
Omniasig Life
Allianz }iriac
Delta Asigur`ri



Source: XPrimm insurance magazine * including Sara Merkur

The total insurance market is seen to reach EUR 1.5 billion

this year versus EUR 1.22 billion registered last year. As
compared to last year when 42 insurers were operating in the
market, as of end March 2006, there were left 37. In early Q1,
the insurance market regulator, CSA, announced it withdrew
the operating license of ABG Insurance, Mediterranean
Assicurazioni (Medas), Mondial Assurances, Omniasig
Addenda and Na]ionala, as they did not increase their share
capital in compliance with CSA requirements. On the other
hand, CSA informed that a number of five insurance
companies are ready to enter the local profile market. These
are a life and a general insurance company held by Greek
EFG, an insurer from Slovenia controlled by KD group, one
from France-Cardif, member of BNP Paribas, and one from
Israel, controlled by Clal Insurance.

Market players
Aviva life insurance company reported gross subscribed
premiums of EUR 13.5 million (RON 49 million) for last year
while for January-March, they reached EUR 4.1 million (RON

14.6 million), up by 46% y/y, in euro terms. Aviva manages

13 investment programs attached to life insurance policies. In
early February, Aviva launched an investment fund for real
estate placements. The fund is denominated in both euro and
dollar. Also, the insurer manages an investment program
which places funds on the local capital market.
AIG Life registered gross subscribed premiums of
RON 34.8 million (EUR 9.8 million) for Q1, 2006, up by
46% y/y. This year, the insurer intends to enter the local
health insurance market. The first product to be launched will
be addressed to individuals. Later on, they will launch
products for companies employees. Currently, the insurer
negotiates closing of several contracts with providers of
medical services. On the health insurance market operates
several insurers such as Allianz-}iriac, Aviva, Interamerican,
Generali and RAI.
Interamerican insurance company wants to become one of
the first four life insurance companies in the local profile
market by end 2008, according to an annual report of Eureko
group which is the majority shareholder of the company.
Interamerican ranked the 10th in the life insurance market top
last year, down by two positions as compared to previous
year. Thus, Interamerican enjoyed a 2.1% market share in
the life insurance segment. Furthermore, the insurer intends
to become leader of health insurance market and increase its
market share to 30% by 2008. Medisystem, part of Eureko
group, opened Euroclinic private hospital through mid last
year in a EUR 10 million investment.
Grawe life insurer managed to boost its business after it took
over Sara Merkur insurance company last year. Therefore, in
January-March, the gross subscribed premiums amounted to
RON 12.63 million (EUR 3.54 million), up by 98.5% y/y. The
huge increase in premiums was prompted as well by the
development of the sales force. Currently, Grawe works with
insurance brokers and 650 agents. According to recent
statements of Grawes officials, the company would enter the
general insurance market this year through the acquisition of
a company.
ING life insurance logged gross subscribed premiums of EUR
30.7 million (RON 106 million) in Q1, 2006, up by 15%, y/y.
Based on companys estimations, the market share would be
roughly of 38%. The paid benefits amounted to EUR 8 million
for the analysed period. The company plans to launch new
products this year as per statements of Bram Boon, INGs
executive manager.
BNP Paribas will enter the local insurance market with its
own division as of this summer, as stated by the French
group and reported by local press. BNP Paribas, which holds
Credisson consumer credits company, will enter the market
through a greenfield investment. On the long term, the plan
includes an integrated financial services network in Romania.
Austria Raiffeisen Zentralbank got hold of a 10% stake in
Ardaf insurer following several acquisitions through Rasdaq
OTC market. Rumours in the market have indicated that
Austrian Uniqua might be interested in Ardaf and they might
be in advanced negotiations currently. Last year, Uniqua took
over a 27% stake in Astra for EUR 10 million. Besides
Uniqua, other important companies were mentioned for a
potential deal with Ardaf, such as French Axa, Hungarian
OTP and Austrian Wiener and Grawe. The fact that the
companys officials negotiate the sale of a 70% stake in Ardaf
was confirmed by the deputy president of the company,
Tiberiu Tender. Still, he did not disclose the names of the
potential buyers, or the date by which the deal will be
Romanian Business Digest 2006

Intellinews ISI Emerging Markets

completed. He added however that in case negotiations for
the 70% stake will not be successful, then a 21.36% stake will
be sold through the stock exchange. Furthermore, the
shareholders of the company will discuss a capital increase
by EUR 10 million. They said that the increase is necessary
for consolidation of companys position in the profile market.
This would be translated in either investing the funds in
developing the sales force or in the acquisition of a small
insurer. The financial results for the first three months have
indicated a decline in the companys activity. Thus, the
gross subscribed premiums went down by 25% y/y to
RON 78.7 million (EUR 22 million). However, the liquidity rate
has been improved to 2.02, from below 1 as of end 2005.
Astra insurer might increase its share capital by
EUR 10 million most likely in July. The issue has been
discussed in the shareholders meeting from end April.
Currently, the companys capital amounts to EUR 45 million.
Nova Trade holds a 72.6% stake and Austrias Uniqua - 27%.
As of this year, Astra might enter local health insurance
market. On the other hand, Astra might be de-listed from the
Rasdaq market, as currently, the company has now two
major shareholders, according to Dan Adamescu, head of
Nova Trade. The data for January-March have indicated a
total of gross subscribed premiums of EUR 37.3 million, up by
100% y/y. Furthermore, Uniqua group announced it might
increase its stake in the insurer. Officials of the Austrian
group said that in the sales contract there is a clause
stipulating the possibility of expanding the stake in Astra. By
July 10, Astra will merge with Uniqua group and the newly set
up company will be named Astra Uniqua.
Asirom insurer ended in red last year as it registered losses
of RON 36 million (EUR 10 million). The loss went up as
compared to 2004 when it amounted to EUR 5.8 million.
Companys officials have reasoned these continuous losses
through the appreciation of the national currency, decrease in
banking interest rates, and re-evaluation of the stake of the
company. Asirom is 50% held by Interagro, other
shareholders being Astra Romn` refinery and US QVT fund.
Other source of losses is the benefits payment for last years
floods. The gross subscribed premiums amounted to
EUR 158.3 million last year, with EUR 135.5 million coming
from general insurance and the rest from life insurance
segment. The car insurance accounted for 65% of total
companys portfolio. As of end last year, Asirom has a
2.13 liquidity ration on the general insurance and 8.88 on life
insurance. The solvency ratio was 1.24 on general insurance
and 1.66 on life insurance. Recently, Interagro (50%) and
Astra Romn` (8%) decided to de-list the company from
Rasdaq, but the decision was challenged in Court by the
minority shareholder, US-based QVT investment fund. The
Court ruled against this decision so currently the company
cannot be de-listed. However, since April the trades with
Asirom shares were suspended. On the other hand, QVT and
Broadhurst investment funds submitted to the capital markets
regulator, CNVM, documentation for an IPO on Asirom
shares. According to the said documents, Asirom is assessed
at EUR 126 million.
Allianz }iriac insurer expects an increase by 20% for this
years subscribed premiums and a stagnation of the profit,
y/y. For January-March, the company reported gross
subscribed premiums of EUR 80.8 million, marking an
advance by 33% y/y. The most significant growth was posted

on the life insurance segment - 200% to EUR 9.8 million.

Companys official said that the growth pace might not be
kept for the rest of the year.

Banking sector overview

Total assets of the banking system amounted to EUR 37.7
billion as of end March 2006, up by 8.3% y/y. Despite the
solid growth, several large banks have posted decreases in
their market shares in terms of assets. Among those banks
are Raiffeisen, HVB Bank, BancPost, ABN AMRO and }iriac
Bank. On the opposite is ING bank which managed to gain
1pps in its market share to 6.3% as of end March, versus end
December 2005. Also, market leaders BCR and BRD gained
as well momentum which was translated into higher market
shares for the analysed period. Third ranked bank,
Raiffeisen, managed to preserve its place despite a drop in
market share by 0.7pps. HVB Bank lost as well 0.7pps in its
market share to 4.2% as its assets went down to
EUR 230 million as of end March 2006. If important banks
were on a downward trend in early 2006, it is not the case of
still state-owned bank, CEC, which jumped on the 5th place as
of end March from 7th as of end December 2005. In the same
category enters Alpha Bank which climbed to 7th place from
9th following a 0.3pps increase and goes in front of BancPost,
another Greek-held bank. The remaining 24 banks after the
15 positions cumulate assets of EUR 4.1 billion as of end
March 2006. Out of small banks, changes in the shareholders
structure have been noticed to Eurom Bank - taken over by
Leumi; Daewoo Bank - acquired by CR Firenze, and MISR
acquired by Lebanese Blom Bank. Also, recent deals took
place in the banking system according to which Mindbank
was bought by Greek ATE, Romexterra is to be acquired by
Hungarian MKB and Nova Bank (former Unirea bank) will be
taken by US MFC (Mass Financial Corporation).
Market shares of top ten banks, Q1 2006, in terms of assets

Raiffeisen Bank


ING Bank
HVB Bank


Alpha Bank
Banca Transilvania

4.50% 6.30%


Remaining banks

Value of banks assets, Q1 2006


Remaining banks

Banca Transilvania




Alpha Bank


HVB Bank




ING Bank


Raiffeisen Bank





EUR bn




Intellinews ISI Emerging Markets

RON mn


Credit to non-government 44,949.76

ROL denominated credit
Short term credit
Medium term
Long term
Convertible currency
Short term credit
Medium term
Long term
Credit to government
Total credit
Current total credit
Overdue total credit
Total credit/M2 %
Current total credit/M2 %
Credit to nongovernment/total credit %
Credit to government / total
credit %
Overdue total/total credit%














47,097.44 48,956.43 50,548.13 52,352.38 55,012.00 57,485.57

59,634.62 60,672.75 61,627.00 62,403.92 65,675.24 68,123.94 72,310.00

























































Source: BNR, IntelliNews calculations

The stock of non-government credit increased by 43% y/y in

real terms as of the end of May to RON 72.31 billion (EUR
20.6 billion), which is the highest growth rate in the last two
years. The forex loans hit EUR 421 million in May which is
actually the highest monthly net flow ever. Local currency
loans however reached higher values, to a peak of
EUR 688 million. Recently, the central bank decided to hike
again the reference interest rate by 0.25pps to 8.75% and
has also increase the required reserve ratio by 4pps to 20%
for local currency deposits set by commercial banks to the
central bank. The moves were aimed at curbing the local
currency lending, after a few months ago the central bank
increased the required reserve ratio at forex deposits.
Detailing on type of credits, the stock of credit to households
surged twice as fast as the loans to corporate, namely by real
75% y/y in May and increased its share in total
non-government credit to 38% from 31% one year earlier.
The credits extended to households, local or foreign currency
denominated, reached RON 27.9 billion (EUR 8 billion), out of
a total of RON 72.3 billion (EUR 20.6 billion). 60% of loans to
households were extended in local currency denominated.
As regards other types of credit, the consumer credit
strengthened to RON 21.6 billion (EUR 6.16 billion) in May.
The share of RON denominated loans increased to 73% from
65% in May 2005.

Market players
Largest country lender, BCR, will pay this year dividends to
its shareholders of RON 360 million (EUR 103 million), which
is almost half of the profit registered in 2005. Last year, the
bank logged a profit of EUR 202 million. The largest part of
dividends, roughly EUR 64 million, will go to the state, as from
the legal point of view the state is still the largest shareholder
of the bank. The deal through which BCR was taken over by
Austrian Erste was not yet completed. More specifically, the
ownership transfer at BCR bank was postponed by three

months until September 21 under a government decision.

Moreover, the Competition Council has not issued the long
waited conformation yet. The head of the local competition
body actually asked the state assets agency AVAS last week
to draft a bill stipulating in a clear manner the guarantees
covered by the state for possible costs incurred by BCR as a
result of taking over bankrupt Bancorex (back in 2000). Until
the state assets agency and the finance ministry sort out this
issue, the Council can not give its green light. On the other
hand, Erste is willing to buy the 8% stake currently held by the
banks employees. They proposed to employees either
money or Erste Bank shares. A formal letter with this end was
sent to banks employees already. The shares will be
purchased over 2007-2009 under a schedule to be
announced in September. The other minority shareholders of
BCR, the SIFs want the bank to be listed on the stock
exchange, but Erste Bank does not agree this move. The
Austrians prefer to list Erste Bank on the stock exchange and
not BCR.
The deadline for submission of binding bids for CEC savings
bank was set for July 17 while the preferred buyer will be
announced in mid-September upon contest between the best
two bidders. According to the revised bill on CEC
privatisation, 69.9% of CECs shares are for sale. In the said
package is included as well a 9.9% stake which will go to
Property Fund (Fondul Proprietatea). Earlier last year,
preliminary bids were submitted by National Bank of Greece,
Monte dei Paschi di Siena, Dexia Bank, EFG Eurobank,
OTP Bank and Raiffeisen. Out of them, Monte dei Paschi di
Siena and Dexia have withdrawn recently. In Q1,
CEC managed to recover from the decline in its market share,
to 4.5% as its assets went up to EUR 171 million as of end
March. Furthermore, the stock of extended credits amounted
to RON 2 billion (EUR 563 million) as of end March, up by
15% y/y.
ATE Bank, fifth largest one in Greece took over 57.13% in
Romanian small sized bank Mindbank from a group of
Romanian Business Digest 2006

Intellinews ISI Emerging Markets

individual investors for EUR 35.8 million. The bid makes it
possible for the other Mindbank shareholders to sell their
interests to ATE Bank within 60 days from the signing of the
contract. Besides ATE, the largest shareholder of Mindbank
is UCECOM (trade cooperative of small firms) with a 24%
stake. They are not ready to sell the stake yet.
US Mass Financial Corp (MFC) will take over Nova Bank,
currently controlled by Russian investors who have frozen
operations in early 2005. Nova Bank is the former Banca
Unirea, initially owned by local Banca Popular` - which has
gone bankrupt in 2003. Meanwhile, Unirea has been taken
over by Russian investors through Swiss-registered Alpur
and renamed Nova Bank. But in early 2005 the bank has
fallen under a special monitoring regime of the central bank.
Hungarian MKB, branch of German Bayerische Landesbank,
signed the acquisition agreement for the takeover of
Romexterra bank, according to statements of the latter.
According to local press, the Hungarian bank was willing to
get hold of a 51% stake in Romexterra for a total of
EUR 100 million. Among shareholders of Romexterra are
Petrom - 2%, entities from the natural gas industry - 3.2%,
legal entities - 26.18% and physical persons - 68.6%.
The significant shareholder of Transylvania Bank,
EBRD, announced an investment of EUR 5.4 million in new
shares in order to preserve its 15% stake in the bank.
A capital increase was scheduled for June and was supposed
to attract EUR 35.5 million. BT reported a gross profit of
EUR 8.4 million in Q1. The assets went up by 11.4% y/y to
EUR 1.5 billion as of end March. For full 2006, the bank
expects a gross profit of EUR 38 million, up by 25% y/y. The
investments earmarked for this year total EUR 30 million,

while a large part of them will go to the development of the

territorial network of the bank. Last year, the bank doubled
its network to 200 units. Also, BT expects revenues of
EUR 146 million for this year.
Total assets of Finansbank surged by 29% y/y in
January-May versus end of December 2005 reaching
EUR 450 million. The stock of extended credits inched up by
20% y/y to EUR 280 million during the analysed period, while
the deposits posted a slower growth, by only 13% y/y to
EUR 250 million. The bank has recently finalised a capital
increase, by 50%, to EUR 35 million. Another significant
increase will be made after the deal through which Greek
NBG acquired Turkish Finansbank will be completed. The
deal was made at global level. Recently, Finansbank
attracted EUR 60 million in a Eurobond issue on the
international markets. Initially, the bank planned to attract
EUR 40 million. The funds will be used for the development
of credit portfolio with a focus on the SMEs segment. The
bank however attracted other syndicated loans in past years.
The last financing was obtained in last fall and was worth
EUR 55 million.
Banca Romneasc` will contract a EUR 65 million credit
from its majority shareholder, Greek NBG. The funds will be
used to support the crediting activity of the bank. In early this
year, NBG brought another EUR 66 million to Banca
Romneasc`. Financial data released for Q1 indicated a
gross profit of EUR 3.2 million, up by 36% y/y.
The operational revenue surged by 21% y/y as of end Q1 to
EUR 11.6 million. As of end March, total assets amounted to
EUR 709 million, up by 36% y/y. According to estimations of
NBG, Banca Romneasc` holds a 3% market share on the
retail credits market with a stock of EUR 201 million.

Intellinews ISI Emerging Markets

Strada Daniel Barcianu Nr. 36, Etaj 1
Sector 3, 030901, Bucure[ti
Tel.: + 40 21 326 1196/97/98
Fax: + 40 21 326 1199
Ioana Elena Severin - SEE Analyst, IntelliNews
E-mail: iseverin@securities.com


Non Banking Financial

Market in Romania
Leasing Sector
by Leasing and Non Banking Financial Services Association - ALB

As the title itself mentions, today financial leasing is crystal clear defined as a financial service
under Romanian legislation. The definition comes not only from the new leasing law but also
from the new law dedicated to non banking financial institutions. Consequently, the Fiscal Code
comes with a new definition of financial leasing and operational leasing.
A simple inventory of the new legislation shows a tremendous legislative effort that has been
done by the Romanian authorities as a result to the lobbying activity of the Leasing and Non
Banking Financial Services Association ALB as well as by other similar professional lobbyist.
The short list of this inventory goes to the following titles:

Leasing Law No. 278/2006 that modifies the Governmental Ordinance 51/1997 republished

Non Banking Financial Institutions Law No. 266/June 2006 that approves Governmental
Ordinance No. 28/February 2006

Law No. 343/July 2006 that modifies Law No. 571/2003 on Fiscal Code

Leasing Law No. 278/2006 - The legislative framework related to the leasing activity was
represented only by a Governmental Ordinance that tried to regulate the minimum legislative
conditions related to leasing companies and their activity. The amendments regarding leasing
operations and leasing companies are now all focused on ensuring the harmonization of
Romanian specific legislation to the EU practice as well as to bringing this activity into the
general field of financial activities. All the changes related to G.O. 51/1997 reflect the inclusion
of financial leasing in the category of credit activities, with must clause for leasing companies
related to a minimum share capital, subscribed and paid equal to the equivalent to RON of EUR
200 000. Under this new law it is stipulated the fact that all leasing companies that have already
been incorporated under previous legislation that do not meet these requirements must increase
their paid in social capital latest 31st of December, 2006. As a step forward to the non banking
financial institutions special law, the leasing law brings amendments related to the obligation for
external audit of all leasing companies by accredited auditors, obligation for only one main field
of activity which has to be leasing, the obligation to report on periodical bases to the Central
Bank, the right and obligation to consult the banking risk data base. The new legislation has also
considered the consumer/lessee protection in case of lessors bankruptcy. Thus, under
bankruptcy procedure, all lessees rights derived from leasing contract are opposable to the
syndic judge and creditors. From commercial point of view the new text of law comes with
specific definitions related to sale & lease back, sublease, cross border leasing, syndicated
leasing. It also better defines the leasing installment in financial leasing as compared to the
operational leasing as well as the rights and obligations of contracts parties on bilateral reports
and in report to the goods supplier. Thus, the new regulations define leasing installments as a
quota of the assets entry value plus the leasing interest set by agreement of the parties, for
financial leasing and by mutual agreement of the parties, for operational leasing.
With purpose to eliminate any confusion between financial and operational leasing, Law
No. 287/2006 sets forth that leasing agreements should contain a clause to define the
agreement as financial or operational leasing.
The law also clarifies the parties rights and obligations related to the goods insurance aspects.
Thus, while by the former Governmental Ordinance, the obligation to insure the leased assets
fell exclusively to lessors, Law No. 287/2006 allows the parties to include a clause in the leasing
contract setting forth derogation from the general rules. Nevertheless, the full risk insurance of
the leased asset stays as a contractual obligation.
Besides the special leasing law, the new law that regulates the non banking financial market Law No. 266/June 2006 that approves Governmental Ordinance No. 28/February 2006 includes financial leasing under its umbrella and defines the service as a financial one. It comes
with consequent obligations of lessors related to respect prudential rules, accounting reporting

Leasing and Non Banking Financial Services Association - ALB

on quarterly bases to NBR, authorization by Central Bank in
the meaning of General or Special Registry, according to
specific criteria on turnover, capital requirements, etc as well
as rules for internal audit and control, management specific
requirements. According to the Central Banks decision to
include a leasing company in Special or General Registry, it
may become subject to further supervision if it enters the
Special Registry. Those leasing companies that are
authorized under the regime of General Registry will be
subject to NBRs monitoring activity. It is important to mention
that once registered in the Special Registry that company
remains there, even if, from business indicators point of view,
it may go back to General Registry.
With respect with the above mentioned legislative changes
related to the leasing activity, the Fiscal Code has been
amended accordingly. Thus the new Law No. 343/July 2006
that modifies Law No. 571/2003 on Fiscal Code comes with
specific definition of financial and operational leasing. This
definition is with respect to International Accounting
Standards IAS 17, and brings more clearly the specific
aspects of each type of leasing contract in direct relationship
with the fiscal authorities. Besides this basic redefining of
financial and operational leasing, the new text of law makes
a revolution from principals point of view by recognizing the
fiscal ownership of lessee in financial leasing contracts. The
3rd aspect that brings a change for financial leasing is its
fiscal recognition as a financial service from the profit
deductibility provisions point of view.
With a history of more than 10 years within the Romanian
local market, the Romanian leasing market speaks for itself
when statistics are to be presented. The economic growth of
last years was also experienced at the level of the leasing
market, which registered a significant development,
confirming the status of leasing as a complementary financial
product to other banking products and accessible to a high
number of economic agents. To this extent, one could claim
that leasing became a medium-term financing source
capable of supporting the development of different sectors of
the national economy at competitive financing costs.
Founded in 2004, the Leasing and Non Banking Financial
Services Association (ALB) represents members of wellknown banking and financial groups on the Romanian and
European markets: Afin Romania, Alpha Leasing, BRD
Sogelease, BT Leasing Transilvania, EFG Eurobank
Leasing, Estima Finance, Finans Intl Leasing, HVB Leasing,
Immorent Romania, ING Lease, Italo-Romena Leasing,
Motoractive Leasing, Piraeus Leasing, Raiffeisen Leasing,
UniCredit Leasing, Volksbank Leasing, TBI Credit, TBI
Leasing. The total signed lease contracts during the first half
of year 2006 by ALB members counted 26 573 contracts and
amounts to EUR 810,5 million, over 100% higher than the
same period of year 2005. The diversity of the financing

granted to the sectors of the national economy is shown in

the fact that 29% of the total financing was represented by
industrial equipment, 6% by real estate and 65% by the
transport sector.
Regarding the total of the Romanian leasing market as of end
of June, 2006 a study conducted by Leasing and Non
Banking Financial Services Association ALB, shows an
estimated total volume of financed assets worth around
EUR 1,37 billion. Bank affiliated leasing companies register
the largest market share with 61.5% of the total, followed by
captive companies with 24.8% and the independent
companies with 13.7%. On the issue of the main financing
categories, the vehicle sector is dominant, with 75.9% of the
total, second comes the industrial equipment sector with
19.4 % and the real estate sector with 4.7%. The growth rate,
between 2005 the same period and end of June, 2006 is
ALB signed lease contracts (% of ALB total) - Q2 2006
Total asset value EUR 810,5 million
Real estate 6%
Equipment 29%

Vehicle 65%

Romanian Leasing Market Q2 2006: EUR 1,37 billion




For the end of year 2006 ALB estimates a total amount of

EUR 1.4 billion leased assets at the level of ALB members
with a total of 2.3 billion at Romanian leasing market level,
meaning 15% growth rate. Analysing the trend of vehicle
importation and sales, it is not difficult to assume that, in
structure, the lease financing, on one hand will decrease,
concerning the passenger cars segment, but on the other
hand will increase, concerning the equipment and real estate

Leasing and Non Banking Financial Services

Association - ALB
Strada Naum Rmniceanu Nr. 21, Sector 2, Bucure[ti
Tel.: +40-21 230 0145; 230 6132
Fax: +40-21 233 9549
E-mail: office@alb-leasing.ro
Adriana Ahciarliu, Secretary General - Leasing and
Non Banking Financial Services Association
E-mail: adriana.ahciarliu@alb-leasing.ro

Romanian Business Digest 2006

Organization and Prospects of the

Romanian Commodities Exchange
by Romanian Commodities Exchange
RCEs main activities Trading system Trading values
Auction market
Another perspective on the legal framework and its impact on the
commodities market
Territorial network Projects and strategies
International activity
Romanian Commodities Exchange (RCE) is organized as a private owned company, meant to
provide the business environment the exchange tools specific to the modern market economies.
Throughout almost 14 years of existence, RCE has involved both in the privatization,
restructuring and liquidation processes and in the commercial activities regarding the
procurement and sale of fungible and mobile goods, of services and products. In fact, this
involvement consists in the possibility of any natural and legal person to sale or to buy within a
procedure organized on the RCE floor. Moreover, such procedures may be organized for private
or state owned companies, different entities, ministers or other authorities.
RCE was officially established on November 20, 1992, while the first trading session took place
on December 10, 1992. RCE functions as a joint stock company and is organized in accordance
with the rules and regulations of the traditional exchanges in the world. The RCE ownership
structure is made up of 120 shareholders including: commercial banks, investment companies,
brokerage companies, as well as foreign trade companies. RCE develops cash markets for
grains, oil and oil products, metals, scraps, etc. Also, since 1998 RCE has been developing a
derivatives market for the trading of currencies and interest rates.
Romanian Commodities Exchange is the leader on the national market and its prime objective
is to become a regional leader. Aware that a national Exchange has no real chance of survival
without international connections, RCE is one of the founders of the Association of Futures
Markets (AFM). Since 2001, RCE participates, through AFM, in the annual assembly of the
international commodity exchanges at Brgenstock, being on excellent terms with the worlds
major exchanges. In 2005, RCE also became full member of the Association of the European
Commodities Exchange.
Since December 2005, RCE is functioning under a new regulatory framework, due to the
entrance into force of the new law regarding the commodity exchanges; RCE finally has a
specific legal framework. In accordance with the new law, RCE develops transactions on spot
and forward markets, sales and procurements of commodities, services and works on the
auction market, as well as sales and procurements of commercial receivables on the receivables
market. RCE also develops a mixed market, meaning an incipient spot market, organised in
order to transfer a commodity from the auction market on the spot market.

RCEs main activities

RCE has as main field of activity the management of the commodity exchanges and performs
the following:

procedures for sale and procurement of commodities, services and works;

transactions on specialised floors for grains, commercial receivables, oil and oil products,

training programs on exchange topics, as well as courses and events on risk management,
project management, derivatives, management or investments and consulting services
through BRM Business Consulting - educational division of RCE.

Romanian Commodities Exchange

Trading system

Auction market

By the adoption of the 2004/17/CE Directive regarding the

coordination process of the procurement procedures for the
state companies supplying water distribution, energy,
transport and postal services and of the 2004/18/CE Directive
regarding the award of the public procurement for products,
services and works, the EU member countries are given the
opportunity to implement the provisions regarding the
electronic auctions stipulated in these directives.

The Romanian Government grants high importance to the

award of the public procurement contracts through
transparent procedures and within a competitive
environment, according to the European legislation further to
be implemented in Romania. This allowed RCE to obtain,
since 2003, record trading values on the auction market, one
of the most dynamic and transparent Romanian market.

Given our accession to EU at January 1st, 2007, RCE

developed an electronic system for the public procurements
that fits the requests of the European provisions in that
The electronic auction trading system is meant to automate
different stages of the auction procedures, allowing the direct
interaction between the contracting authority and the
organizer on the one hand, and the bidder and the organizer,
on the other hand.
The electronic procurement system of RCE is made up of a
series of applications ensuring the interaction through
electronic channels between the participants at the auction
market organized by RCE.
In order to allow the equal access of the economic agents
providing the rules of the free competition, each stage of the
procedures, except for the auction sessions, are enabled to
take place simultaneously both electronically and physically.
Thus, during each stage, except for the auction session, the
data, information and documents transmission can be carried
on both electronically and in writing. In the last case, the
procedures administrator must turn the information into
electronic data for the system.
Each participant to the electronic trading system is conferred
a sum of rights and duties, according to the category they
belong to and, if needed, according to the type of the account
they own.
In order to ensure the security of the system and
confidentiality of the data, the users owing an access code
will be delivered a digital certificate allowing them to sign
electronically the issued documents.

Trading values
Up to the present, RCE has become the national exchange
leader both regarding the exchange activities, in general, and
procedures for the award of procurement and sale of
commodities, services and works, in particular. Throughout
this period, RCE has gained a rich experience in organizing
public procurements, which is reflected mostly by the growth
of the trading value, as the following table shows.
The evolution of the trading value for the RCE auction
market (1998-2005)
Trading value (USD million)
581 *
534 *
* Figures exclude trading values registered in the international auctions for the
purchase of crude oil and sale of gasoline, gas oil, urea and methanol
organized by RCE for Petrom.


In the first semester of 2006, both on the RCE floor from

Bucharest and the territorial floors of its terminals, over 850
procurement and sale procedures were performed,
representing an 20% increase to the similar period of the
previous year. The value of the favourable price
improvements obtained for the contracting authorities
reached a total of USD 18.7 million, while the total trading
value amounted USD 181.5 million.
Year 2005 meant for the RCE the consolidation process of
the auction market organized on its floor and throughout the
territorial network all over the country. During 2005, RCE
together with its terminals organized 2,240 procurement and
sale procedures, totally amounting over USD 587 million. The
total value of the favourable price improvements obtained for
the contracting authorities reached a total of USD 57 million,
meaning an average price improvement of 8.79% for each
procedure. Thus, in 2005, on the RCEs floor in Bucharest
were performed 1,010 procedures for sale and procurement
valued at USD 512 million, while the total value of the
favourable price differences amounted almost USD 45
million. The most important trading values on the RCE floor
during 2005 were registered for the following contracting
authorities: CFR Marf` (over USD 170 million), CFR C`l`tori
(over USD 82 million), CNCF CFR (about USD 39 million). In
2005, the total trading value registered by the RCE terminals
exceeded USD 75 million, within over 1,230 sale or
procurement procedures.
In 2004, the RCE trading value reached USD 534 million.
RCE, together with its territorial terminals organized over
1,640 procurement and sale procedures. The total amount of
the favourable price improvements reached USD 57 million,
representing an average price improvement of 4.32% for
each procedure. Moreover, if taking into account the
international auctions for the purchase of crude oil and sale of
gasoline, gas oil, urea and methanol organized by RCE for
Petrom, the total value of the transactions almost reached
USD 1.31 billion. Petrom was in 2004 the main player on the
oil products market and RCE has monthly organised for this
contracting authority oil procurements and oil products
(gasoline, diesel, urea, methanol) sale auctions. The total
trading value exceeded USD 760 million, while the favourable
price difference obtained by Petrom as contracting authority
exceeded USD 12.6 million.
During 2003, RCE organized over 800 auctions for
procurement and sale of commodities and services, while the
total trading value exceeded USD 581 million. The total
favourable price difference obtained was over USD 44
million, meaning an average price improvement of 3.39% for
each auction. If also considering the international auctions for
the purchase of crude oil and sale of gasoline, gas oil, urea
and methanol organized by RCE for Petrom, the total value of
the transactions exceeded in 2003 USD 1.30 billion. Among
the companies that performed auctions through the RCE the
following can be mentioned: Academia Romn` de Avia]ie,
Administra]ia Canalelor Navigabile, Administra]ia Porturilor
Maritime Constan]a, Aeroportul Interna]ional Bucure[ti
Romanian Business Digest 2006

Romanian Commodities Exchange

B`neasa, Aeroportul Interna]ional Bucure[ti Otopeni, Agen]ia
Aeronautic` Civil` Romn`, Autoritatea Rutier` Romn`,
Administra]ia Drumurilor Na]ionale, AND Direc]ia Jude]ean`
Drumuri [i Poduri din Bucure[ti [i Constan]a, CFR C`l`tori,
CFR Marf`, CFR Gevaro, CNCF CFR, Electrica, Grup
Interven]ii Salvare Naval` Constan]a, Hidroelectrica,
Inspectoratul de Stat n Construc]ii, Metrorex, Regia
Autonom` Rami Dacia, RATB, Registrul Auto Romn,
ROMATSA, Servicii Construc]ii Maritime, Societatea de
Administrare a Activelor Feroviare, SNP Petrom Bucure[ti,
SNP Petrom Arpechim, SNP Petrom SBA Flore[ti, SNP
Petrom Petrobrazi, TAROM, Termoelectrica Ploie[ti,
Transelectrica, Zona Liber` Giurgiu. The rank of the first
three companies that organized auctions through RCE is the
following: firstly, SNP Petrom with over USD 691 million,
secondly, CNCF CFR SA with over USD 346 million and the
third ranked is CFR Marf` SA, with a trading value exceeding
USD 256 million.
Trading value 1999-2005 (USD million)












* Figures exclude trading values registered in the international auctions for the
purchase of crude oil and sale of gasoline, gas oil, urea and methanol
organized by RCE for Petrom.

Another perspective on the legal

framework and its impact on the
commodities market
The end of 2005 points out a new beginning for the
commodity exchanges in Romania. Naturally, following the
legislative gap provided by Law No. 279/2004 regarding the
capital market, the commodity exchanges found their legal
identity under the aegis of the Law No. 357/2005.
The law regarding the commodity exchange, which is both a
technical and a practical instrument, brings out an
acknowledgement of the exchange tools used for almost 15
years on the regulated markets. Moreover, the law comes out
with new stipulations, as an answer to the needs of the
economy in general.
In other words, why a law for the commodity exchanges?
Starting with the items provided by the regulatory text, the
commodity exchanges are supposed to spread in Romania
and the neighboring countries information regarding the
market price for commodities and their derivative products.
The information provided by the Exchange means to deliver
to producers, manufacturers, traders and consumers, data
related to the commodities, services and works they are
interested in. Consequently, the law opens the perspective of

Which would be the spring of this information? In order to

answer in a definite manner, it would be recommended to
reckon that the information refers to the price obtained on the
markets developed by the commodity exchanges. The
activities specified above refer to the specific figures of the
goods. In this respect, the classification encloses:

spot and forward procurements and sales, having as main

object fungible and mobile commodities by nature or
fungible and mobile commodities by anticipation, as well
as any other goods qualified by the commodity exchange
as being tradable;

spot and forward procurements and sales, having as

object representative certificates for commodities, such
as the warehouse certificate, warrant, bill of lading, as
well as other certificates authorized and qualified by the
commodity exchange;

procurements and sales of commodities, services and

works on the auction market;

procurements and sales of commercial receivables on the

receivables market;

procurements and/or sales of goods on a mixed market.




a barometer of the economic reality seen from the point of

view of the final price paid or received for any commodity.

The basic market organized by a commodity exchange

consists in the activity of buy and sale transactions developed
by the cash market. The formation of a cash market
supposes: the existence of some fungible goods; the entities
specialized in trading these goods, meaning a brokerage firm;
standardized clauses for the concluded contracts. The
standardization of these contracts is translated, in the
language of a commodity exchange, by spot and forward
contracts. The specificity of these classical instruments used
to conclude a business through the exchange, consists in the
fact that, these sale and buy contracts enclose predefined
specifications regarding the quality and quantity of the goods,
the negotiation referring exclusively to the price of the
contract. The aspect that is basically specific to a spot
contract, and the difference between such a contract and a
forward one refer to the fact that, while a spot contract implies
the immediate delivery (within maximum 10 days from the
conclusion), the forward contract stipulates a predefined
carry out duration established by bidder, that cannot be
longer than 18 months, but no shorter than 10 days.
Standardized goods represent, in fact, the quintessence of a
forward market.
In order to establish the degree in which a new commodity
authorized to be traded on the exchange floor can be
standardized, it is possible to launch it first on the auction
market. Consequently, the auction market is a basic market
that accepts for trading any kind of good, service or work, the
actors being generally entities interested in the services
provided by a commodity exchange. On one hand, the main
goal of a commodity on such a market is to help its
customers, beneficiaries, manufacturers, consumers, traders
etc. to find their counterparts for their goods, guaranteeing to
both of them the execution of the contract, by perceiving a
participation bid. On the other hand, it aims to establish: the
transition frequency of the traded goods on the exchange
floor, the frequency of the same characteristics of the goods
with a view standardizing and launching them on the
specialized forward market.

Romanian Commodities Exchange

The main part in the auction market is played by the
procurement procedures, respectively the purchase bids for
commodities, services or works. The exchange provides and
organizes, through its mechanisms, the performance process
of these types of operations. These mechanisms are
provided both to private and state owned customers.
In fact, the present legislation regarding the public
procurements, as well as the new law draft mention the
commodity exchanges and their necessity as consultant, and
intermediary, respectively, in order to identify the best selling
offer for its state owned contracting authorities. Thus, the
migration of a commodity from such a large market, like the
auction market, to a specialized market, like the forward
market is not a facile process, since a lot of factors are
involved, like: the specialization of the actors, the frequency
degree, as well as their standardization. In order to welcome
those who appeal to the services of an exchange market, the
bidders are provided, through the new law, with a mixed
market, conceived like a primary forward market. This market
trades the goods according to their characteristics on the
auction market, keeps the advertising figures of the main
market, keeps the organization circuit of the market providing
the commodity, doesnt imply fixed quantities, and yet tries to
establish a price similar to the forward one. This means that,
while trading on the mixed market, the players will negotiate
only the price, in comparison with the auction market, where
the offer is accepted only provided that, the technical
characteristics fit exactly, following the analysis and
evaluation stage, to a predefined technical specification file.
Consequently, the mixed market eliminates the need of a
technical specification file, the good that is meant to be sold
or bought being described very briefly in the auction notice. In
that way, the counterpart will understand, only through the
definition of a standard, what is intended to be sold or bought,
without any other explanations enclosed in a technical
specification file.
The absolute novelty of the law regarding the commodity
exchanges resides in the concept of the liability (receivable)
market, the commodity, being considered for this floor a
commercial receivable a debtor owns upon a creditor.
The attraction of this market consists in the fact that, any
natural or legal person that has to cash a debt against a sold
good or against a supplied service, is entitled to sell that right
to a third party, interested in obtaining rights upon the
respective debtor. Equally, any natural or legal person is
entitled to request the purchase of such a liability right from
the hand of a creditor upon a specific debtor, for example, in
order to conclude the mutual debts.
The mechanism implies sale and purchase procedures at
equal levels, smaller or bigger than the nominal value of the
liability. The buy & sale mechanisms observe the auction
market system, the guarantee being ensured through the
request from all participants of a bid calculated as a
percentage of the receivables value which are to be sold or
bought. Moreover, the system provides protection for the
parties, through provisions that impose trading limits, such

It is forbidden to the debtor the total or partial, direct or

indirect, recovery of the liability;

It is forbidden to shareholders or associates, natural or

legal persons, owning more than 10% of the registered
capital of the debtor companies to participate, direct or


indirect, to the purchase of the receivables issued for

those companies;

It is forbidden to the commercial companies to which the

debtor of a liability owns more than 10% of the registered
capital, the direct or indirect participation to the purchase
of that receivable.

The purpose of this law, while regulating this market, is to

eliminate the budget receivables and to provide a regulated
environment, in order to obtain liquidity for the commercial
receivables, ensuring all at once, through the authorized
bodies, the control and efficiency of the procedures. One of
the consequences issued from the trading of the commercial
receivables in a regulated framework is the transparency and
objectivity needed in the financial operations.
As a matter of fact, the legal provision welcomes the
commercial best practices, according to which, the receivable
cession is the option of many economic agents, the
framework being regulated by the Civil Code.
Therefore, the new law regarding the commodity exchanges,
through its mechanisms represents the answer to social
commandments, market organization, its regulation and
supervising appearing as a natural grievance.

Territorial network
The exchange activity developed by RCE at national level
bases on a wide territorial network, gathering at present 26
RCE terminals officially opened and operational or further to
become operational in Gala]i, Constan]a, Ia[i, Cluj, Craiova,
Prahova, Bra[ov, Piatra Neam], Timi[oara, Alexandria, Trgu
Mure[, Giurgiu, Slobozia, Suceava, Trgovi[te, Oradea,
Foc[ani, Pite[ti, Bistri]a, Ilfov, Vaslui, Bac`u, Arad, Buz`u,
Re[i]a and Baia Mare.

Projects and strategies

Implication on derivatives market
Under the new legislation regarding the capital market, RCE
intends to manage an alternative trading system, allowing it
to put best use of its former experience on the derivatives
Trading and settlement of commercial receivables
According to the new law on commodity exchange recently
came into force, one of the markets managed by RCE is the
one for commercial receivables, meaning those debts older
than 1 year and registered by the companies in relation to the
third parties. Launching such a market at RCE could
significantly contribute to the financial unblocking of the
Romanian economy. On this RCE market the commercial
receivables shall be traded within an organised and regulated
framework, especially providing the transparency and
objectiveness absolutely necessary in the financial
Developing the RCEs oil and energy floor
The Eastern-European markets represent a proper area for
the expansion of the oil and oil products international
holdings. Furthermore, the increase of the oil and oil products
quotations generates a higher interest of the investors in the
Black Sea region and implicitly in the need of developing an
oil exchange in this area. It should also be considered that
Romanian Business Digest 2006

Romanian Commodities Exchange

Romania benefits of the most important refining capacity,
exceeding the local demand for refined products. All these, as
well as the RCE high experience accumulated in organising
oil procurement and oil products sale procedures for the
contracting authority Petrom, represent encouraging
premises for developing an RCE oil and oil products floor.
Nevertheless, this could be the first step towards the
launching of a common regional platform for trading energy,
oil and oil products.

International activity
As an active part of the international exchange community,
RCE became in 1998 one of the founding members of the
Association of Futures Market (AFM). At present, among the
full members of this association, besides RCE, are Budapest
Stock Exchange, Budapest Clearing and Settlement HouseKELER, Dubai Gold & Commodities Exchanges, Eurex
Frankfurt AG, Euronext, European Climate Exchange,
Mercado a Trmino de Buenos Aires, Multi Commodity
Exchange of India Ltd, Patsystems, JSE Securities
Exchange, Turkish Derivatives Exchange (TURKDEX),
Ukrainian Interbank Currency Exchange, Warsaw Board of

Trade, RTS Stock Exchange, plus the associate members

Hanover Commodity Exchange, Produktna Berza Novi Sad,
Swiss Futures and Options Association (SFOA) and Sofia
Commodity Exchange. In 1999, the annual assembly of this
association took place in Bucharest, being organised by
RCE. Since 2001, through AFM, RCE became also part of
the Annual Brgenstock Meeting, where all the major
worldwide institutions involved in the commodity exchange
business are present. In 2005, RCE was the local host of the
8th Annual Conference of AFM, held for the second time in
Bucharest between May 25-27 and the RCEs President &
CEO, Mr. Mircea Filipoiu received the presidency of AFM. In
2005, RCE became full member of the Association of
European Commodities Exchange, on the occasion of the
45th reunion of the European Commodities Exchange held in
Aware of the importance of being integrated and
acknowledged within the worldwide exchange community,
RCE continues to be a dynamic participant in the international
events on exchange and financial topics. RCE also
consolidates especially the co-operation with the other
regional Central and Eastern European exchanges.

Romanian Commodities Exchange

Pia]a Presei Libere Nr. 1, Sector 1, 013701, Bucure[ti
Tel.: +40 21 317 4560
Fax: +40 21 317 2878
E-mail: bursa@brm.ro; pr@brm.ro
Mircea Filipoiu, President & CEO


Romanian Power Sector

Overview Power Generation
Privatization just Starting
by Central Europe Trust Company

Key events in 2005-2006 Romanian energy resources base

Romanian power market Privatization developments
Continuing privatization of the power distribution
Starting privatization of the power generation
Further restructuring of the power generation sector
IPO in the power transmission sector
Diverse and vibrant power wholesale trade sector

Key events in 2005-2006

The second half of 2005 and first half of 2006 have brought interesting developments
to the Romanian power sector, which represents currently a EUR 6.8 bn market, out of
which EUR 2.4 bn in generation, EUR 3.5 bn in distribution & supply, with the balance of
EUR 948 mn in transmission, services, equipment.
The report below is only an overview of the most important developments and doesnt pretend
to be exhaustive; however we believe it has accurately captured the main trends in the industry.
The figures presented are sometimes based on indirect sources as privatized companies in the
sector are less transparent and lately reporting due to commercial and competitive reasons.

Romanian energy resources base

The main determinant of the Romanian power industry status and future is the access to energy
resources, domestic or imported. The domestic energy resources of Romania are quite
diversified, still insufficient for maintaining an adequate supply for the domestic economy. For
example, in 2004 when GDP grew by almost 7%, the increase in fuel sales was 10% and in
power consumption 6%.
Romanian energy resources base
(mn tons or bn cm (in equivalent
for natural gas)
standard liquid
fuel tons) (TEF)
Natural gas
Hard coal
Brown coal**

Annual production
2005 (mn tons or
bn cm for natural


Domestic supply
coverage of
demand (%)

Source: The Romanian Energy Policy for 2006-2009 a draft for public debate
* calculated for only 1 nuclear power unit operating (Unit 1 of NPP Cernavod`); the situation will change with commissioning
of Unit 2 in 2007 and Units 3 &4 in 4-5 years time.
** Brown coal output insignificant as share in total energy balance


Central Europe Trust Company

If we analyze how the primary energy demand (39.018 mn
tef) was covered in 2005 from different energy carriers, the
breakdown is as follows: natural gas (36.4%), crude (25.1%),
coal (22.4%) and others for the balance. The domestic
primary energy sources accounted for ca 28 mn tef; the
decline in domestic crude and natural gas output has been
partly compensated by increase in coal output; however the
energy dependency of imports increased from 22.5% in 2000
to 34% in 2004.

As we may see, the coal is the only dependable domestic

energy resource on the long term; recent history of coal
exploitation is shown below:
Domestic coal output 2000-2005
2000 2001 2002
Hard coal (mn t) 3.2
Lignite (mn t)
25.8 29.4 26.8
Brown coal (mn t) 0.3


2004 2005
28.6 28.0

Primary energy demands coverage out of various energy

2000 2001 2002 2003 2004 2005
Primary energy
36.374 37.971 36.480 39.032 39.018 40.500
demand (mn tef)
- coal & coke (%) 20.6 21.5 24.2 24.4 23.5 22.4
- crude & oil (%)
27.0 28.5 25.7 23.3 25.9 25.1
- natural gas (%)
37.6 35.1 36.5 39.3 35.3 36.4

Source: The Romanian Energy Policy for 2006-2009 a draft for public debate

The crude output has declined continuously since 1976

(maximum output of 14.7 mn t) down to current 5.2 mn t in
On top of these depletable energy carriers, Romania also
enjoys a significant potential of recyclable energy sources,
unfortunately not very emphasized during recent years, such
Hydro-energy: the technical potential that could be
installed is of maximum 36 TWh/year, while the
economically feasible potential is of 23-25 TWh/year; in
2005 some 80% of the economically feasible potential has
already been exploited, with further 600 MW installed
power (equivalent of 1.87 TWh/year) under construction.
Biomass energy: the potential is of 7.594 mn tef / year,
out of which 15.5% wood waste and burning wood, 6.4%
smaller wood waste (wood ash), 63.2% agricultural
waste, 7.2% household waste and 7.7% bio-gas.
Solar energy: the potential is at 1.434 mn tef/year, out of
which that of photo-voltaic at some 1.2 TWh/year.
Wind energy: the technical potential that could be
installed is of maximum 8 TWh/year.
Thermal water energy: low enthalpy thermal water
potential at 167,000 tef/year, out of which ca 30,000
tef/year already utilized

Source: The Romanian Energy Policy for 2006-2009 a draft for public debate

Primary energy domestic output by various energy carriers

2000 2001 2002 2003 2004 2005
Primary energy
domestic output 28.190 29.021 27.668 28.192 28.094 28.050
(mn tef)
19.9 21.5 22.1 23.2 22.0 22.1
- coal (%)
- crude & oil (%)
21.8 21.0 21.5 20.5 19.9 18.0
38.9 37.3 37.5 37.4 36.3 37.2
- natural gas (%)
Source: The Romanian Energy Policy for 2006-2009 a draft for public debate

Primary energy net imports by various energy carriers

2000 2001 2002 2003 2004 2005
Primary energy
7.978 9.436 8.951 10.527 11.851 12.070
net import (mn tef)
- coal & coke (%) 23.9 24.4 30.7 26.3 26.6 23.1
- crude & oil (%)
42.9 52.1 38.0 30.5 39.4 40.1
- natural gas (%)
34.0 24.7 34.0 44.9 34.8 37.4

Between 2000 and 2005, the GDP has increased by 31.8%,

reaching some EUR 3,665/inhabitant, some 6.3 times lower
than the EU average and some 1.9 times lower than the
average of the 10 new entrant EU members. The primary
energy consumption per inhabitant, has only increased by
11.3% over the same period (2000-2005), currently being at
1.8 tef/inhabitant in Romania or 2 times lower than the EU-25
average. We have to mention that GDP growth (31.8%) was
not proportionally linked to primary energy consumption
growth (11.3%) due to economy restructuring.
Energy Carrier
Total coal
- lignite
- hard coal
Natural gas
Hydroelectric energy
Nuclear-electric energy &
Uranium ore

Other fuels & renewables

Total domestic output
of primary energy

mn tef
mn tons
mn tef
mn tons
mn tef
mn tons
mn tef
bn cm
mn tef
mn tef

Source: The Romanian Energy Policy for 2006-2009 a draft for public debate

Primary energy coverage from diverse sources for

The prognosis of primary energy resources production
between 2005-2009 is shown in the table below:






2009/2005 (%)




mn tef









K tons
mn tef









mn tef










Source: The Romanian Energy Policy for 2006-2009 a draft for public debate
*Ratio to 2005 figures not relevant due specific weather conditions of that year


Romanian Business Digest 2006

Central Europe Trust Company

It is noteworthy the increasing energy dependency of
Romania, from current 33-34% to as high as 40% by 2015.
Other more pessimistic forecasts state that overall energy
import dependency will reach 50% by 2015. Energy bill paid
by Romania for energy carriers import has already reached
USD 4 bn per annum and growing; it is obvious that such
dependency will put its fingerprint on the entire industrial
structure of Romania, as well as on the living standards in the
coming decade.

17% by hydro-carbonates and 9% nuclear. Find below the

breakdown for the Q1, 2005:
nuclear 10%
hydro 37%

coal 35%
heavy fuel 4%

Primary energy forecast 2004-2015

2005 2008 2009
Total primary energy demand, covered out of
mn tef 39.018
41.36 45.00 46.30 47.65
- domestic output
mn tef 28.094
27.37 29.14 29.04 29.00
- net imports
mn tef 11.852
13.99 15.86 17.26 18.65
Import dependency
37.3 39.00


By 2015 the gross energy output of Romania is forecasted to

reach 72.09 TWh, out of which 25 % lignite, 24% hydro, 21%
hydro-carbonates, 22% nuclear and 8% hard coal.
A detailed breakdown of market share of domestic power
generators (as per Q 1, 2005) is shown in the graph below:


Termoelectrica Turceni


Source: The Romanian Energy Policy for 2006-2009 a draft for public debate


The evolution of the electricity generated over the decade

ending in 2005 is presented in the following table.

Source: ANRE Annual reports and other sources

The history of the electricity production in Romania between

1989 and 2004 is shown in Graph 1, the bar chart
representing the electricity produced in (Tj)ad measured on
the left axis, while the line representing the electricity
produced in (TWh) and measured on the right axis.
As of 2005 the total power installed in the Romanian power
generation sector was of 14,714 MWe, out of which 40.2% on
coal, 30.7% on hydrocarbonates (liquid fuel + natural gas),
24.6% hydro and 4.5% nuclear (1 unit of 660 MWe). In 2005
the total energy consumed in Romania reached 59,729 GWh,
out of which 40% coal (lignite + hard coal), 34% hydro,


Oradea One[ti
Ia[i 10%
Elcen Ploie[ti-Dalkia
SNP-Petrobrazi Arad
5% Bac`u


Romanian power market

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Electricity generated (TWh)
59.27 61.35 57.25 53.97 49.89 51.95 53.86 55.19 56.91 55.82 59.70

natural gas 14%


Privatization developments
The privatization process has continued practically in all
power sector segments: generation, transmission,
distribution, at various speeds and through various methods.
Power sector privatization in Romania has attracted so far
first tier (but mostly European) investors; among those having
already invested we may notice ENEL (distribution Electrica
Banat, Dobrogea, Muntenia South), CEZ (distribution
Electrica Oltenia), E-ON (distribution Electrica Moldova),
Bateman (generation Iernut TPP), Unit (power & heat
co-generation Bucharest South CHPP), VA Tech (power &
heat co-generation Bucharest West CHPP), Dalkia (power
& heat co-generation Bucharest Groz`ve[ti CHPP, Ploie[tiBrazi CHPP). There are many others having tried their luck
without success so far, but they still monitor the opportunities
in the sector. International Financing Institutions (such as WB
or EBRD) are following closely the processes and providing

Graph 1













Produced electricity (TJ)
Produced electricity (Twh)

















300067 251496 204883 195102 199714 198490 213361 220860 206104 194285 179611 187020 193890 198680 204862 204804
















Source: ANRE Annual Report 2004



Central Europe Trust Company

finance for transactions support; while in numerous cases
they offered to join the winning bidder.
Privatization of regulated power business has been an
excellent trigger for improving the regulatory framework with
financial assistance from the European Commission,
International Financing Institutions and even World Bank
Partial Risk Guarantee Instruments, to the satisfaction of the
private investors.
Privatization of competitive power business (such as power
generation) will be a serious exam for the legal & regulatory
framework (Regulated Third Party Access, industry
de-regulation, reserves regulation, concessions etc).
But the main downturn is that Romania has privatized till now
mostly natural monopolies (such as power and natural gas
distribution) and to a lower extent the competitive sub-sectors
(such as power generation). In some cases privatization
processes were slower and more hesitant than in neighboring
countries, therefore they suffered the competition of parallel
regional privatizations.
Recent energy threats (interrupted or diminished Russian
natural gas supply in the winter of 2005) have raised again
the issue of energy safety and availability, delaying or
imposing a new strategy on the privatization of domestic
energy resources (eg. Romgaz privatization was delayed and
will be redesigned towards a 20% IPO listing rather than
selling 51% to a strategic investor, such in previous SNP
Petroms case).
Regulatory comfort (eg. with regard to tariff adjustment
mechanisms and tariff methodologies) has improved with
time and this was fully reflected in the upward evolution of
prices for power assets and the more diverse attendance of
such privatization processes.

Continuing privatization of the

power distribution
Electrica will steadily continue its privatization program, while
reinventing itself as a holding company (with significant
22.5-49% participations in all its privatized subsidiaries) and
increasingly as a services company (telecommunications).
The new investors in the power distribution have to face
severe obsolescence of assets, resulting in high energy
losses in Romanian distribution (12.6% in 2004 compared to
7.3% the EU average).
The way the 8 leading regional distributors (either Electrica
or privately controlled) have purchased their energy in the
1st quarter of 2005 is shown below; lets note the very much
different quota of cheap hydro energy each of them was
allocated (most of it went to privatized subsidiaries, indirectly
to E-ON, ENEL and CEZ):

The distribution tariffs are expected to grow steadily during

coming years, to compensate for inflation (currently at 7% per
annum) and converge to EU levels. As we may see from the
table below there are already regional differences in the
tariffs, for all levels of voltage:
Specific distribution tariffs by distribution company valid
for 2006 (RON/MWh)1 without VAT
Banat Dobrogea Moldova Oltenia Muntenia Muntenia Transilvania Transilvania

18.39 12.42 16.38 17.09 9.95
29.38 33.57 32.40 36.38 23.43 22.25
110.28 114.94 113.42 114.50 130.00 118.60

No silva
rd nia
Su i l v a
d nia





No nten
rd ia




Su ten
d ia

Termoelectrica SA
Electrocentrale Deva SA
Complex Energetic Turceni SA
Nuclearelectrica SA







Privatization of the jewel of the crown: Electrica

Muntenia South
Electrica Muntenia Sud privatization was the most attractive
to foreign investors, with 10 investors expressing interest in
the privatization process and all being pre- qualified,
8 submitting bids and finally 5 companies (CEZ, ENEL, Gaz
de France, RWE and Iberdrola) qualifying for the 2nd round of
improved financial bids; of all these 5 ENEL became the front
runner after offering the most in the 1st round (EUR 720 mn
for 67.5% of Electrica Muntenia Sud). After the 2nd round of
enhanced financial offers, ENEL completed the acquisition
with an unexpectedly high EUR 820 mn, followed by Iberdrola
with EUR 770 mn.
ENEL offered EUR 820 mn for a 67.5% stake in EMS,
resulting in a price per share of EUR 41.28 (or 15 times
nominal value). The ENEL offer consisted of acquiring 50% of
existing shares (for a consideration of EUR 394.8 mn) plus a
simultaneous capital increase (of more than EUR 425 mn) to
reach 67.5%.
Privatization of the last 3 state controlled power
The market position of the three power distributors still to be
privatized is shown in the table below; expectations are that
they will be launched into the privatization process as soon as
September-October 2006:

Hidroelectrica SA
Electrocentrale Bucure[ti SA
Complex Energetic Craiova SA
Complex Energetic Rovinari SA


As per Q1, 2005, the Electrica subsidiaries purchased their

distributed electricity as follows: 65% in the regulated
contracts market, 28% in the negotiated contracts market and
7% in the PMS market. Electrica has had increasing
problems with power acquisition; recent report of the
Ministers of Economy (as of May 2006) revealed the fact that
Electrica purchased power some 30% more expensively than
its private competitors (136 RON/MWh compared to
95 RON/MWh, where 1 EUR = 3.45 RON).

Power sales Power sales Number of

(RON mn) consumers

3,647,986 1,040.7
3,647,338 1,054.8
3,507,065 1,047.6

(EUR mn)







Source: Electrica S.A. & other sources (1 EUR = 3.6234 RON average FX rate
for 2005)
* preliminary and indicative valuation range resulting from using various
multiples methods

Romanian Business Digest 2006

Central Europe Trust Company

Overall Electrica (as a holding owning still 100% in 4 regional
distributors, and 49% in the 4 distributors already privatized)
has ended 2005 with the following results: Net Profit
EUR 197 mn (almost 2.5 times higher than in 2004 when this
was ca EUR 80 mn), Turnover EUR 2.03 bn (5% lower than
in 2004) .

Starting privatization of the power

Large power generation privatizations starting with
Turceni Energy Complex
The three lignite fired power complexes are Rovinari (4*330
+ 2*200 MWe), Turceni (6*330 MWe) and I[alni]a-Craiova II
(2*315+2*150 MWe); they include adjacent surface lignite
quarries which supply them for the next 40-50 years. Rovinari
and Turceni are thermal power generation cost-leaders, with
costs in the 120-150 RON/MWh range, compared to
Termoelectricas 170 RON/MWh; their historical debt has
been written-off on spin-off from Termoelectrica. Both
Rovinari and Turceni need ample environmental capital
expenditure (mainly in de-sulfuring, in the range of EUR 800
1,000 mn each) to comply to EU standards. The first one to
be put for sale is Turceni, whose privatization is scheduled to
be launched by autumn 2006.
Another indirect way in which the privatization of several
thermal power generators may be sped up is through
liquidation sale of Termoelectrica generation assets following
their foreclosure for Termoelectrica overdue debts, by various
state entities such as the Ministry of Finance, through its
dedicated arms such as the Customs Administration or the
National Fiscal Agency etc. Very recently the Custom
Administration imposed foreclosure procedures on several
thermal power plants owned by Termoelectrica (TPP
Borze[ti, TPP Paro[eni, CHPP Br`ila Chi[cani etc); such
assets will only be sold to investors willing to operate them
and not looking to scrap them. So far none of these assets
were liquidated, but we can imagine this procedure working
efficiently in some cases. This fast privatization method is
less agreed by the Ministry of Economy, which wants to sell
businesses not assets as per recent statements of Minister
Sere[. Ministry of Economy says that Termoelectrica is
actually paying the bill for 15 years of populistic social
protection (through subsidizing energy to both industry and
households) rather than for poor financial management. It is
noteworthy that all bad debt stayed with mother company
Termoelectrica in most cases when spin-offs occurred (such
as the three lignite fired energy complexes); the reason was
to turn the spin-offs in more attractive debt free privatization
targets, while keeping all problems in Termoelectrica.
Greenfield high efficiency power plants
Another envisaged and actually applied privatization method
is the formation of JVs to build and operate modern high
efficiency thermal power plants, that will exceed 80% fuel
burning efficiency and will benefit of the incentives under EU
Directive 8/2004 (consisting mainly in priority take-off by the
grid independent of the price). Electrocentrale Bucharest has
entered such JV arrangements and is currently implementing
5 combined cycle projects (120 MWe cogeneration unit at
Bucharest South, 60 MWe cogeneration unit at Bucharest
Grozave[ti, 13 MWe cogeneration unit at CHPP Titan,
400 MWe condensation unit at TPP Iernut, 75 MWe
cogeneration unit at CHPP Palas); we expect Termoelectrica
and some local authorities operating cogeneration plants to
follow up closely.

Out of Termoelectricas projects that may start we mention

some, without being able to tell for sure which of them will fly
and when:

rehabilitation of up to three of the 200 MWe hard coals

groups at TPP Mintia (5*210 MWe owned by
Electrocentrale Deva)

the 200-500 MWe greenfield lignite unit at TPP Borze[ti

(2*210 MWe)

the 150-250 MWe greenfield lignite unit at TPP Doice[ti

(2*200 MWe)

the 200 MWe greenfield lignite unit at TPP Paro[eni

(2*150 MWe)

the 100 MWe oil & gas combined cycle cogeneration unit
at CHPP Gala]i (3*105 MWe)

The cogeneration plants already transferred to the local

authorities account for 70% of the domestic heat supply,
while their contribution to the power supply is diminishing due
to low capacity utilization due to reduced heat consumption
(by households mainly during winter time, with little industrial
round the year demand).
Small hydro generation capacities privatization will
Hidroelectrica, the owner of most hydro-power plants, has
recorded in 2005 a profit of EUR 72 mn on turnover of EUR
587 mn (67% higher than in 2004); such profit has to cover
new investment (EUR 17 mn) and 2003 unusually high losses
due to excessive drought (EUR 55 mn). Due to very favorable
weather conditions, Hidroelectrica produced in 2005 some
20,100 GWh, contributing 34% to the national power demand
and already reaching 56% of the technical hydro generation
Between 2006-2008, Hidroelectrica proposed to complete
works and commission some 16 hydro power plants, whose
generation costs are under EUR 35/MWh, while between
2009-2011 some additional 10 hydro power plants, whose
generation costs are in the range EUR 35-50/MWh. The total
36 plants added will have a rated capacity of 392 MWe and
will produce an output of 1,400 GWh/year. Such projects may
be also treated as BOT opportunities and involve foreign
Another still very interesting project is the construction of the
1,000 MWe pumping storage HPP at Tarni]a-M`ri[elu, in a
JV between Hidroelectrica, Nuclearelectrica (interested to get
system services after commissioning its Unit 2 at NPP
Cernavod`) and other attracted investors.
Hidroelectrica will continue in 2006 selling some of its smaller
(and obviously less profitable) hydro-power plants; however
such opportunities attracted numerous domestic and foreign
investors. The attractiveness of such smaller generation
capacities (under 10 MWe capacity) was further enhanced by
their eligibility for green energy incentives (as high as
EUR 42/MWh generated out of recyclable energy resources).
In 2006 Hidroelectrica will put for privatization 51 micro hydro
power plants out of its total stock of 227; the target is to sell
as many as 150 by the end of 2007.
IPOs in the power sector
The Property Restitution Fund has already been transferred
20% of Hidroelectrica and Nuclearelectrica, 12% of all 8
regional power distributors (here included the 5 that have

Central Europe Trust Company

already been privatized to foreign strategic operators) and
15% of the lignite fired power complexes in Oltenia (Turceni,
Rovinari, I[alni]a-Craiova). The exit for the Property Funds
shareholders will be through an IPO on the local Bucharest
Stock Exchange; this measure is aimed both at satisfying old
restitution claims that could not be solved in kind, as well as
helping the local capital markets to grow larger, more
sophisticated and liquid.
The huge success of recent Transelectrica IPO was a clear
signal that the market is waiting for such opportunities and is
willing to value them adequately, possibly much in excess of
a strategic sale.
There were also suggestions for Nuclearelectrica to raise
funds for completing the Units 3 and 4 at NPP Cernavod`
(cca. EUR 1 bn for Unit 3 and EUR 1.5 bn for Unit 4) through
an IPO, but more recently the strategic privatization way was

Further restructuring of the power

generation sector
The turmoil in the power generation issues will continue in
2006 also, fueled by some initiatives of the Ministry of
Economy (MEC), aiming at the restructuring of the generation
sector and creation of more competitive sub-units.
In June 2006 MEC promoted the decision for writing-off
historical Termoelectrica debts worth some EUR 1,200 mn.
Following such cleaning, Termoelectrica shall merge with
Hidroelectrica, while the resulting entity will be further split
into regional units with comparable generation costs and
easier to privatize.
The spin-off of certain thermal power plants and their transfer
to local authorities may continue, with units such as CHPP
Palas, CHPP Titan, CHPP Progresul, Electrocentrale Gala]i
very likely to change hands soon. For CHPP Bucharest South
and West, such transfer has to be also approved by foreign
investors already present there. CHPP Craiova II will remain
included in the I[alni]a Power Complex.

IPO in the power transmission sector

Approximately 10% of Transelectrica has been listed in an
IPO on the Bucharest Stock Exchange (BSE), i.e. some 7.33
mn new shares being issued. Offer price was of EUR
4.75/share, resulting in a total offer of approximately EUR 35
mn. This corresponded to a PER=12 (which is slightly under
the 13-17 range usual for European listed utilities); for
comparison the largest Romanian listed company, namely
SNP Petrom was at that time valued at PER=14.6. The IPO
was launched in June 2005 and managed by a syndicate
comprising Alpha Finance, Raiffeisen Capital & Investment
and BRD Securities. The IPO was 6.66 times
over-subscribed; investors subscribed 47.3 mn shares with a
total value of EUR 227.45 mn (compared to the initial offer of
EUR 35 mn).
Transelectricas 2005-2007 capex program is EUR of 375
mn. By 2008 will be built and commissioned 11 new HV
transformer stations (3 already completed in Constan]a,
Oradea, Slatina) while other 11 will be modernized. Postlisting, state shareholding (MEC) has decreased to 72%, with
the newly created Property Restitution Fund holding 13.5%
and 4.5% being earmarked for further claims under
Law No. 10.

Diverse and vibrant power wholesale

trade sector
The power trading business has been one of the most vibrant
and publicly debated during recent years. The distribution
and supply markets jointly accounted in 2005 for
approximately EUR 3.5 bn; in the second half of 2005 the 65
private suppliers actively participating in the OPCOM auction
market have traded ca 1,700 GWh meaning 6.72% of the
entire Romanian power market, at an average spot price of
EUR 34/MWh. Just for comparison, the average power price
for residential captive consumers was in 2005 of
EUR 92.1/MWh.
In 2005 the market opening degree was 83.5%, while by July
2006 has already reached 100% for industrial consumers;
January 2007 will bring the 100% opening for all consumers,
residential ones included. By May 2006, ANRE has issued
around 122 licenses for power supply, among which the most
noteworthy (as 2005 traded volume) are Hidroelectrica,
Electrica Muntenia Nord, Electrica Muntenia Sud, Electrica
Transilvania Sud, Electrica Transilvania Nord, E-ON
Moldova, Energy Holding, Interagro, Luxten Lighting.
There were a series of questionable power acquisition
contracts concluded between private companies and low cost
state owned generators, such as Hidroelectrica in most
cases. Hidroelectricas exposure to the competitive market
was 40% in 2004 and 69% in 2005; as of May 2006 the
Hidroelectrica selling price was increased to EUR 28.5/MWh,
still remaining extremely competitive with all other
generators. Only 2 private companies currently purchase
cheap electricity from Hidroelectrica; the clauses of current
purchase contracts provide for an automatic renewal of such
contracts plus an option to increase volume purchased
(therefore establishing de facto a cheap power monopoly
situation, hopefully not for long due to other players
challenging such allocation of hydro power). Another similar
case recently under investigation by the Ministry of Economy
was that of power purchase contracts concluded between low
cost thermal power generators (Turceni & Rovinari) with a
series of private companies.
Expectations are that such limited and discretionary access
to cheaper energy will eventually cease, while the wholesale
market will start operating only according to transparent
market practices.
The wholesale market will possibly benefit of power imports
from the FSU space, after solving certain technical
constraints (such as synchronism between Romanian grid,
already UCPTE connected, and the neighboring grids of
Ukraine and Moldova). There are also exciting export
opportunities to Turkey (via the planned EUR 300 mn
undersea power cable to be built by a JV including
Transelectrica and Teias), Bulgaria (possibly after closure of
Kozlodui NPP), Serbia and Greece.

Central Europe Trust Company, Ltd.

Strada Aviator Petre Cre]u Nr. 38, Sector 1, Bucure[ti
Tel.: +40 21 260 2908
Fax: +40 21 260 1628
Adrian Rusu, Director
E-mail: adrian.rusu@cet.com.ro
Romanian Business Digest 2006

Major player on the secondary market

In this area RCI offers the following services: intermediation for
acquisition and sale of securities portfolio management
subscriptions administration of public offerings for buy / takeover
and sale.
RCI is responsible for transactions of more that EUR 360 mn in 2005,
on BSE and Rasdaq combined.

Adding Value through Expertise

Raiffeisen Capital & Investment (RCI) is part of the Raiffeisen
Group, one of the major players on the Romanian financial
market. RCI offers a full array of financial investment services.
The companys strong points stem from being part of an
established international financial group, while at the same
time providing in-depth knowledge of the local market and an
active presence throughout the country.

Raiffeisen Capital & Investment history

Raiffeisen Capital & Investment (RCI) has intermediated the first
transactions in November 1998, and enjoyed an accelerated growth
ever since. The companys development was positively influenced by
a major breakthrough in 2002, when Raiffeisen Bank was established,
following the acquisition of Banca Agricol` by Raiffeisen Zentral Bank
Vienna. With the aid of Raiffeisen Banks national network, the
company set up its own network of authorized agents of financial
investment services, in record time. In 2003 and 2004, the company
ranked first in its field of activity, having the highest cumulated volume
of transactions through Rasdaq and Bucharest Stock Exchange
(BSE). In 2005, the company ranked second by cumulated volume of
equity transactions, while on the bond market it ranked first with a 55%
market share.

Trendsetter on the primary market

RCI provides financial investment and consultancy services for:
listing of companies on the BSE raising of fresh capital, through
public offerings or private placements, for listed or privately held
companies privatization through the capital market.
During 2005, RCI played the Joint Lead Manager role in the largest
private IPO on the local market, the Flamingo International offer,
which raised a total of EUR 12.5 mn and was subscribed 3.7 times.
Simultaneously, RCI was the Lead Manager of the largest municipal
bond issue to date, by the City of Timi[oara.
In 2004, RCI was Lead Manager for two issues of corporate bonds
that altogether represented 80% of the total market.

During 2004, the combined value of the trades intermediated on the

secondary market was close to EUR 100 mn. Furthermore, RCI was
the market leader in the secondary corporate bond market, with a
market share of 65% in 2004.

Trailblazer on the local capital market

RCI is acknowledged to be a pioneer on the fast growing Romanian
capital market. Creative solutions and new products that respond to
clients specific needs are defining characteristics of RCI on the
Romanian market. RCIs list of firsts is extensive and remarkable, we
will mention just a few accomplishments:
June 2006 the largest IPO to date on the Romanian Capital Market,
EUR 35 mn.
July 2005 the first IPO to use the competitive bid pricing method,
Flamingo International worth EUR 12.5 mn.
October 2004 the first underwritten arrangement (50%) for the
Finansbank bond issue (in ROL), worth EUR 10 mn.
May 2004 the largest issue of corporate bonds on the BSE,
Raiffeisen Bank SA, with a total value of RON 138 mn.
August - September 2002 the first public offer for the de-listing of
an equity issuer.
November 1999 the first primary public offer of shares to be
subscribed in foreign currency, a total value of over USD 2 mn.

Major intermediated transactions

The acquisition of a 27% stake in Astra SA by Uniqa of Austria, a deal
worth EUR 10 mn.
The transfer of ownership rights over the majority stake in Agras SA,
through a public sale offer with a value of USD 2.8 mn.
Public tender offer for the takeover of Terapia Cluj SA, with a total
value of USD 40 mn.
Public tender offer for takeover of Sidex SA by LNM Holdings NV. The
total value of the purchasing offer was USD 25 mn.

Acknowledgement of performance
2004 Raiffeisen: Best Investment Bank in Romania by Euromoney
2003 Raiffeisen: Best Investment Bank in Romania by Euromoney
2003 Prize for Performance on the Capital Market, by Pia]a
Financiar` Magazine.
2000 Best securities house by Bucharest Business Week.

EUR 35,000,000

EUR 12,400,000

EUR 5,500,000

EUR 34,000,000

Transelectrica S.A.

Flamingo International S.A.

Municipality of Timi[oara

Raiffeisen Bank S.A.

Initial Public Offering

for 10% new shares

Initial Public Offering

for 22.5% of the shares

Primary Public Offering

of municipal bonds

Intermediation of
corporate bond issuance


Joint-Lead manager

Lead manager

Lead manager

EUR 10,000,000

USD 40,000,000

USD 25,000,000

USD 2,800,000

Finansbank Romania S.A.

Terapia S.A.

Sidex S.A.

Agras - Omniasig S.A.

Intermediation of
corporate bond issuance

Leveraged Take-over Bid


Tender Offering
for company delisting

Secondary Selling Public

Offering of 51.9% of shares

Lead manager

Lead manager

Lead manager

Lead manager

Romanian Oil & Gas Sector

by Raiffeisen Capital & Investment
Romanian oil sector Romanian natural gas sector
Sectors key players

Romanian oil sector

The foundation of the Romanian oil industry dates back from 1857, when the first well was drilled
in Ploie[ti. Since then, some 720 mn tons of crude oil have been produced, making Romania an
important oil producer in the region over the last 140 years. Romania ranks 4th in Europe in terms
of oil reserves, after Norway, Great Britain and Denmark. With oil reserves estimated at around
1 bn boe (barrel oil equivalent) at the end of 2005, Romania accounted for 5% of the total
European oil reserves. Currently, the annual volume of oil production stands at 5.2 mn tons.
Overview of restructuring process
Starting early 1990s, the state-owned oil monopoly went through a dramatic restructuring
process, as a result of which the 100% state-owned autonomous regie Petrom RA was created.
In the following years, several auxiliary activities were spun-off, namely the drilling (1992) and
construction (1994) activities. To assure the development of the industry according to the
Government of Romania (GOR) strategy for the oil sector, SNP1 Petrom was created in
November 1997 through the merger of 45 previously independent companies in upstream and
downstream oil business. Since some of the companies were publicly traded before the merger,
Petrom shares automatically had a 6.8% free float after the merger. The newly created Petrom
was the sole Romanian vertically integrated company in the sector and covered the following

exploration and production;

refining and petrochemicals;

pipeline operation and railway transportation of oil products;

road transportation of oil products;

oil products distribution.

The privatization of SNP Petrom was decided in December 1998, but failed to be completed
within initially established timeframes. Although Petroms privatization was delayed several
times, in July 2004 the government signed the privatization contract with Austrias OMV, which
acquired a 51% stake for a total of EUR 1.5 bn. After privatization, the company name has been
changed to Petrom SA.
* Note: For the purpose of this
report, we have used the
following sources of information:
Government of Romania Strategy
for oil and gas sector; Statistics
yearbook of the National Institute
Publications of ANRGN, the
regulatory authority for the natural
Publication of the Romanian
www.aper.ro; Energy Sector
Study, Rolland Berger, April
2004; BP 2005 Statistical Review
of World Energy, www.bp.com;
Petrom SA annual reports and
public information; Rompetrol
Group annual reports and
company presentations.

Exploration and production

Since 1992, several foreign companies undertook exploration works in Romania, by investing
over USD 210 mn. The newly discovered reserves, did not justify the large investments made in
this sector. Petrom continues to be practically the sole company producing crude oil in Romania.
In 2005, the company produced 5.21 mn tons of crude, representing 100% of the domestically
produced crude and over 40% of the total crude processed by the Romanian refineries. It is
expected that imports of crude will increase their share in total crude processed as the domestic
resources gradually deplete, reaching 60% by 2010. According to the GORs strategy for
2002-2010, which provides for the main strategic objectives, the domestic crude production will
stay flat, reaching 5.57 mn tons by 2010, the lions share of this volume coming from Petrom.

SNP stands for Societatea Na]ional` a Petrolului (The National Oil Company).


Raiffeisen Capital & Investment

both having the Ministry of Economy and Commerce (MEC)
as main shareholder with a 70% participation. Taking into
consideration their strategic importance for the Romanian
economy, the companies operate their assets based on a
30-year concession agreement signed with the National
Authority for Mineral Resources (ANRM), by which they
commit among others, to undertake investments aiming at
rehabilitating and modernizing their facilities. Under the
concession agreement, Conpet has to grant third party
access to the transportation system, in line with the EU

Crude oil produced in Romania


mn tons












Oil Terminal carries out storage and dispatch operations for

internationally traded crude oil, petroleum and petrochemical
products. Its current storage capacity for crude and oil
products reaches 1.7 mn m3. The operational capacity for
crude oil and petroleum products handling is 24 mn tons and
10 mn tons per year respectively.

As a result of Petroms privatization, the refining sector was

fully transferred into private hands. The refining sector
consists of ten refineries, which can be grouped into two
categories: five large refineries with nominal capacity of over
3.5 mn tons per year and five small refineries that specialize
in low volume products.

Conpet is the pipeline carrier, ensuring the transportation

operations for crude oil and petroleum products both from the
domestic (i.e. wells) and import sources, as well as from
refineries to final users. The operational capacity of the crude
oil pipeline network reaches 14 mn tons per year, some 50%
of the designed capacity.

In 2005, the ten refineries processed some 14.6 mn tons of

crude, representing cc. 75% of the total operational capacity
of 19.5 mn tons. This fact indicates that refineries with low
capacity utilization will have to downsize in order to optimize
their production process.

Railway transportation services of oil products are provided

by Petrotrans and 12 private carriers. Petrotrans was owned
by Petrom until 2002, when it was spun-off. Following the
take over of its pipeline business by Conpet, the company
was delisted and is currently 100% owned by the state, which
considers privatizing it.

1976 1993 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: INSSE, RCI Research

Crude oil processed by Romanian refineries


Marketing and distribution

mn tons



The economic downturn recorded between 1990 and 2000

led to a sharp decrease in consumption of both petroleum
and petrochemical products. Thus, the level of crude oil
processed in 2000 represented about a third of the 1989
volumes. The current level of crude processed in Romania
largely covers the domestic consumption of gasoline, diesel
oil and liquid petrol gas (LPG).


12.3 10.4 10.7 11.4 11.7 10.9 12.1


1990 1998 1999 2000 2001 2002 2003 2004

2005 2010f

Source: INSSE, GOR oil sector strategy, RCI analysis and estimates

The output of refined products recorded a decreasing trend

until 1999 due to contracting market demand caused by the
economic recession. The output picked up again in 2000.
According to the GORs strategy, the volume of refined
products output is estimated to reach 13.7 mn tones by 2005.

Fuels and lubricants account for about 90% of the total

refined products output, the balance being inputs for the
petrochemical sector. According to our estimations, the
domestic refiners produced some 9.5 mn tons of motor fuels
in 2005.

Storage and transportation

The distribution and marketing of refined products is fully

liberalized and open to competition, which increased
significantly since 1994. However, before the privatization of
Petrom, the Government, through its representatives in
Petroms Board, has capped fuel product prices in order to
keep inflation under control.

The oil storage and transportation sector is mainly

represented by two companies, Oil Terminal and Conpet,

Gasoline distribution is performed through a two-tier system:

regional storage facilities for wholesale and retail service

Romanian refining sector





Operational capacity
'000 tons
% of total


Crude processed, 2005

'000 tons
% of total





Source: RCI analysis


Romanian Business Digest 2006

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stations. The major refineries (i.e. Petrom, Lukoil, Rompetrol
and Rafo) own regional storage facilities that ensure the
supply of their own and third parties gas stations. The
storage facilities are supplied by pipelines or railway. There
are around 180 storages across the country, of which 145
belong to Petrom.
The retail market is represented by some 2.600 service
stations (as of end-2005). With 553 filling stations, Petrom is
the retail market leader with an estimated market share of
24%. At the beginning of 2006, Petrom has taken over OMVs
operations in Romania, Bulgaria and Serbia-Montenegro,
operating as a hub for OMVs operations in SEE. KPMG, the
international audit company, mandated by SNP, valued the
three companies at EUR 234.4 mn. As a result of the
transaction 178 OMV stations were transferred under
Petroms ownership, but continued to be operated under the
OMV brand.
LukOil is the second largest player on the retail market. Other
key players are MOL, which completed the acquisition of
Shells gas stations network in 2004, followed by Rompetrol.
Although unbranded private gas stations account for 53% of
the total number of gas stations, they account for less than
25% of total fuel sales in the distribution sector.
Breakdown of fuel retail market, end-2005
no of outlets

% of total

Source: RCI analysis

Following a decline between 1990 and 2000, the

consumption of petroleum products rebounded in 2001. The
consumption was mainly driven up by the transportation
sector, and, to a minor degree, by agriculture and industry.
Consumption of petroleum products, 000
Diesel oil
Fuel oil



Source: National Institute of Statistics

Gasoline is mainly used for transportation purposes, which

account for about 93% of total gasoline consumption. The
balance is used by machine building and construction
The stagnation of gasoline consumption in the transportation
sector between 1998-2003 is the result of the mutually
offsetting evolution of the two main factors driving the
gasoline consumption, namely (i) the motorization ratio that
increased by 22% in 2003 as compared to 1998, and (ii) the
average distance driven that has decreased by 8.5% during
the same period. The gasoline consumption is expected to
grow by an annual average of 3.3% by 2010, driven by the
following factors:

growth of the motorization ratio from 153 vehicles per

1000 people in 2003 to 200 in 2010;

increase in the average distance driven by 15% over the

same period.


The diesel oil consumption has grown after 2000 and is

expected to reach approximately 3.4 mn tons by 2010.
Transportation accounts for 80% of the total diesel oil
consumption and has been the main consumption growth
driver over 2000-2003. Taking into consideration that the
large refining facilities are able to produce Euro compliant
diesel, the GORs strategy foresees diesel oil to be supplied
only from domestic sources.
Forecast of petroleum products production and consumption,
000 tons
Diesel oil
Fuel oil









Production Consumption



Source: GORs strategy for oil sector

The final price for gasoline and diesel oil consists of a series
of components:

ex-works refinery price it includes crude oil price, oil

storage tariff, oil transportation tariff and refinery
operational cost plus profit margin;

excise applied to fuels it is higher for gasoline and for

high polluting products;

special fund for petroleum products tax it was created

with the aim of covering the loss registered by the former
state-owned Compania Romn` de Petrol from crude oil

value added tax.

Currently, taxes represent over 70% of the final prices of fuels

sold in Romania. This taxation level is similar to EU countries,
but is lower in absolute terms.

Romanian natural gas sector

Overview of restructuring process
Romania has the largest natural gas market in Central
Europe, the total consumption reaching 17.3 bcm (billion
cubic meters) in 2005. Starting in early 1990s, the sector
went through a gradual restructuring process. Thus, in 2000
the vertically integrated Romgaz Natural Gas National
Company was reorganized into five 100% state owned
companies based on their specific business. One year later,
two of the five companies (i.e. Expogaz and Depogaz)
merged into Romgaz SA, which undertook exploration,
production and underground storage activities. The merger
was in line with the GORs strategy of creating an entity able
to financially sustain the enlargement of the underground
storage capacities in order to secure the countrys gas
supply. Two other companies, Distrigaz Sud Bucure[ti and
Distrigaz Nord Trgu-Mure[ undertook the gas supply and
distribution activities in the southern and northern part of the
county respectively. The fifth company, Transgaz, undertook
the gas transmission activity.
To comply with the EU targets for setting-up a competitive,
secure and environmentally sustainable natural gas market,
the market liberalization process started in August 2001 with
an initial degree of market opening of 10%. The market was
further opened over the following years and reached 75%
starting July 2006. For industrial customers the market will be
fully opened by January 2007 and by July 2007 for household
customers. In addition, the liberalization process implied
setting-up a new market framework, which includes a system
operator, as well as a regulatory authority. Transgaz was

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nominated the system operator and is responsible for
monitoring the supply/demand balance, forecasting demand
and developing a competitive natural gas market. The
regulatory authority was established in 2000 under the name
of ANRGN and is responsible for dealing with such issues as
licensing, regulating of prices and tariffs, approving sector
related construction, as well as market supervision.
Following the gas sector restructuring, the government
expressed its intention to start the privatization of the sector
by putting the two distribution companies up for sale as part
of the PSAL II program. Although initially planned for end
2003, the privatization contracts were signed in October
2004. Distrigaz Nord was aquired by Germanys E.ON
Ruhrgas in a EUR 304 mn deal and Frances Gaz de France
took over Distrigaz Sud for EUR 311 mn. According to
privatization contracts, both investors initially acquired a
stake of 30% that was further raised to 51% through capital
As for Transgaz, the company is considered of strategic
importance and will not be privatized in the foreseeable
future. However, the company was included in the
Governments Program for a Strong Capital Market with the
aim to float some 10% of Transgaz shares on the Bucharest
Stock Exchange sometime in 2007.

Underground storage
Following the steep decline in domestic gas production, the
development of underground storage facilities became a
major priority after 1990s. The current storage facilities
owned by Romgaz allow for the storage of 2.45 bcm. There
are two more underground storage facilities (i.e. Depo Mure[
and Amgaz) operated by joint-ventures (JVs) set-up by
Romgaz and private companies. According to GORs
strategy, the underground storage capacities will be gradually
increased to 5 bcm by 2010. The investments required for
increasing the underground storage capacities between
2006-2010 are estimated at USD 517 mn.
Evolution of natural gas underground storage capacities,
2005 2006 2007 2010
3.00 3.50
Depo Mure[ 0.20
0.30 0.30
0.20 0.20
1.00 1.00
4.50 5.00
Source: GORs strategy for the natural gas sector

Exploration and production
During the last fifteen years, the natural gas sector was
marked by limited discoveries of new major natural gas fields,
which resulted in stalling of production levels.
Evolution of natural gas output, bcm
SNGN Romgaz
Petrom SA
15 28.0
7.1 6.8
1984 1990 1998 1999 2000 2001 2002 2003 2004 2005
Source: ANRGN

The Romanian natural gas industry has developed an

extensive infrastructure. Romgaz is the largest natural gas
producer, operating an exploration, production and storage
infrastructure consisting of 3,800 wells, 3,500 km of collecting
pipelines and 17 compressor stations with a total installed
power of 163,000 HP. There are six underground storage
facilities with a total capacity of 2.45 bcm per cycle. In 2005
Romgaz produced 6.3 bcm of natural gas. According to the
GORs strategy, Romgaz will decrease its annual output to
3.2 bcm by 2010.
Petrom is the second largest natural gas producer, operating
1,495 gas-producing wells and 227 compression stations. Its
output consists mainly of well gas that is co-produced with
crude oil. In 2005, Petrom accounted for about 50% of the
total domestic output of natural gas. Apart from Romgaz and
Petrom, there are several foreign companies that are
currently undertaking exploration works. The investments
made by foreign companies in exploration works in Romania
over the last 10 years are estimated at USD 125 mn. So far,
Wintershall is the only company to have discovered new
natural gas reserves.

Transgaz is the 100% state-owned company that operates

the national gas transmission system. Due to the growing
importance of transmission and international transit activities,
Transgaz enjoys a monopolistic position in Romania and will
not be privatized in the medium to long term. The company
owns a transmission network consisting of approximately
11,900 km of major transportation pipelines and 758 pressure
regulating/measurement stations. The pipeline system has a
transit capacity of 40 bcm per year. Transgaz also operates
two international transit pipelines with a total capacity of 28
bcm per year. According to the GORs strategy for
rehabilitating the transmission network, Transgaz shall
undertake an investment plan of USD 477 mn.
The natural gas distribution is carried out by 19 companies,
including Distrigaz Sud, Distrigaz Nord and Petrom. Most of
distribution infrastructure is operated by formerly state-owned
distributors (i.e. Distrigaz Sud and Distrigaz Nord) and
consists of over 20,000 km of pipelines. The other gas
distributors can be classified into two categories, namely
(i) ventures set-up by pipeline construction companies, and
(ii) companies set up by one of the state distributors and local
According to the GORs strategy, some 46% of the entire
pipeline network will be modernized, which implies
replacement of existing steel pipes with polyethylene ones
that ensure longer lifetime. The investment in the
rehabilitation and expansion of gas distribution networks over
2006-2010 was estimated at USD 1.26 bn.
Natural gas market
Romania was one of the first countries to use natural gas for
both residential and industrial purposes. The market
penetration reached highest levels in the early 1980s due to
a government policy driven to achieve self-sustainability. One
of the consequences of this policy was a sharp increase of
domestic production leading to an accelerated depletion of
the domestic natural gas reserves.
Over the 1990-2002 period, the imports of natural gas stood
between 20-25% of the total consumption. Starting with 2003,
following the increase in gas consumption and gradual
Romanian Business Digest 2006

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depletion of domestic resources, the share of imports went up
and is set to continuously increase, reaching 60-65% of total
consumption by 2010.
Natural gas consumption (by sources), bcm
25 9.1
10 19.1
1999 2000 2001 2002 2003










Source: ANRGN

Currently, there are two trading companies in charge of

Romanias natural gas imports, namely WIEE and Wirom
Both companies are controlled by German Wintershall, a JV
between BASF and Gazprom. Gazexport, the export arm of
Russias Gazprom, expressed its interest in setting up a
direct importer of natural gas jointly with Romgaz, the issue
being still under negotiations. Russia will be Romanias main
gas supplier in the medium to long run. Yet, as of 2005
alternative sources have been considered, the main ones
being (i) Western Europe following the construction of the
Arad-Szeged interconnection pipeline, and (ii) Caspian Sea
basin through the foreseen Nabucco project.
Natural gas consumption in Romania has seen a sharp
decline since 1990 following the downturn in industrial activity
as well as in energy demand. The reverse trend started in
2001. The total number of clients went up by 54% over 20002004, standing at 2.1 mn at the end of 2004, of which 2% are
hooked to private distributors networks. Currently, there are
some 1,657 settlements connected to the distribution system.
The two distribution companies, Distrigaz Sud and Distrigaz
Nord, supply gas to 92% of the connected communities.
There are also 18 licensed distributors established through
participation of private companies.
The breakdown of natural gas consumption by destinations
reveals that industrial sectors account for over 60% of total
consumption, being followed by energy production sector and
The consumption of households, estimated at approx. 1.9
mn, increased over the last years mainly due to (i) the
expansion of the distribution networks, which started to
encompass rural areas, and (ii) the rise in sales of household
appliances (i.e. cooking machines and combination boilers).
We expect that in the medium term the following factors will
have a positive impact on the natural gas consumption:

energy production will increase over the next period in line

with the industrial upturn, thus primary energy resources
demand will also increase. Moreover, according to the
GORs Energy Roadmap, the output of the power plants
based on natural gas will increase in the medium term as
gas turbines with combined cycles are seen as more
reliable, efficient and less harmful to the environment;
industrial customers will also give a boost to natural gas
consumption following the economys upturn. Industrial
customers will also seek to diversify their energy sources
in an effort to bring down costs and gas-based combined
heat and power plants could be a solution in some of the


household consumption is also to increase in the medium

term especially due to the natural gas distribution
networks expansion leading to a larger customer base.
The government strategy foresees supplying natural gas
to around 1500 new communities until 2010.

ANRGN, the regulatory authority, is responsible for setting

natural gas prices for captive consumers and tariffs for the
regulated downstream activities (underground storage,
transmission and distribution). Since 2000 natural gas prices
and tariffs have experienced significant adjustments.
Thus, between September 2000 and August 2001, the final