“Romania – Battling the Dark Forces”

The European Lawyer, October 2011 – A recent special report examines the on-going challenges facing Romania as it struggles to attract new investment in the midst of the financial crisis, and how law firms in Romania are reacting to a changing environment.

Foreign direct investment to Romania has come to a virtual standstill since the onset of the financial crisis. Gone are the days of the “Romanian Tiger” in the 1990s and early 2000s, when the country’s economy was growing by more than 8% annually.

Daniel Torsher, Managing Partner of Kinstellar’s Bucharest office, points out that it took time for business people in Romania to feel the full impact of the crisis and adjust to the new reality: “People realise now that we are in a completely different economic environment than we were three or four years ago.”

Areas of possible new investment

M&A and real estate were among the principle drivers of Romania’s growth previously. With activity in these areas significantly diminished, the country is hoping to attract new investment in the core areas of infrastructure and energy.

Although roughly the size of the UK, Romania has only 200 km of motorways (compared to 3,500 km in the UK). Even during the growth years, Romania was unable to take existing plans to expand the country’s infrastructure forward, and this is proving to be an obstacle to growth.

Successive governments have tried to promote projects through public-private partnerships, but the legal frameworks for these have been too complex and no new projects have started. Efforts are underway to remedy this, but progress remains slow.

Investment into Romania’s energy sector, it is hoped, will be faster. One large project involving private investors is the expansion of the Cernavoda nuclear power plant. Investment into renewable energy, such as wind power, is also expected.

As Daniel Torsher explains: “There is a lot of focus on wind power. It hasn’t developed that significantly until now, but that is primarily down to the fact that the regulatory environment wasn’t right.” He goes on explain that investment into renewable energy projects is expected to pick up following the EU’s recent approval of Romania’s “green certificate” regulatory scheme.

Corruption and the slow pace of reform

Investment into Romania also remains muted by concerns over the country’s lingering problems of corruption. This is particularly true regarding infrastructure projects. But corruption is not the only factor that inhibits growth.

Daniel Torsher comments: “There is a consensus at a fairly general level that corruption is an issue, but it is not an issue that is unique to Romania – you see it all over the region. Another factor are the public procurement rules. In common with other countries in the region, Romanian procurement rules allow people to contest decisions very quickly. It is a difficult and slow process, and it is almost de rigueur as part of the process that someone will contest. There is a lack of finality […] and that is frustrating and slow things down.”

Another frustration for investors, and one that contributes to uncertainty, is the frequency at which the government amends public procurement laws and other regulatory frameworks. One recent and significant change to the country’s legal environment is the new and completely reformed Civil Code, which brings a major change for the legal profession.

“It is a good step forward,” Daniel Torsher explains. “It has been done relatively quickly for a project of that scale. And though everyone is anticipating a period of adjustment, it will affect the whole economy immediately.”

The decrease in transactions means an increase in competition among law firms

Although Romania is taking steps to implement reforms, no one is expecting a dramatic pick up of investment in the near term. For the legal profession, the decrease in transactions has had led to a drop in turnover and increased competition. The article points out that some law international law firms in the country may find it difficult to sustain their businesses.

Daniel Torsher comments: “Some [international law firms] continue to have futures in Romania. Some appear to have a coherent strategy that they follow; others seem to take their decisions in a more piecemeal fashion. I’m not hearing of any of them getting cold feet at the moment, but it is often the case that the people on the ground […] are the last to know when a decision has been taken to pull the plug.”

Romania joining the euro would strengthen investor confidence

Another factor that affects the business environment in Romania is the country’s intention of joining the euro. Before the sovereign debt crisis hit, Romania was hoping to join the single currency by 2013. With the crisis underway, it now seems this will not happen until after 2016 at the earliest. Despite the delay, there are strong signs that the country remains committed to joining the euro-zone, and postponing the date should, in the end, strengthen Romania’s position.

Bogdan Bibicu, Partner in Kinstellar’s’ Bucharest office, explains: “ The man in the street would be in favour of full adoption today. But the government and the national bank have adopted a more cautious approach. They maintain that Romania should only go in when we are fully prepared economically for the consequences.”

The article concludes that as the EU increases the fiscal criteria that euro-zone members must meet, Romania’s eventual membership in the single currency should raise investor confidence.