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July 2002
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3. POLITICAL ENVIRONMENT

Nature of Political Relationship with the United States

The United States and Romania have very close relations. The visit of then-President Clinton to Bucharest in July 1997, and of then-President Constantinescu to the United States a year later, marked a continued strengthening of bilateral contacts. The Strategic Partnership established in 1997 provides a framework for closer cooperation in regional political, economic, and military affairs. The U.S. Congress founded a Romanian Caucus in mid-1998, and the Romanian Senate established a Strategic Partnership caucus in April 1999. Since the December 2000 election of a new government, the trend of ever-closer U.S.-Romanian cooperation has continued. In November 2001, Prime Minister Nastase paid a visit to Washington and met with President Bush; since then, both Secretary of State Colin Powell and Treasury Secretary Paul O'Neill have visited Romania.

Both the government and opposition advocate integration into Euro-Atlantic structures. At considerable economic and political cost, the government resolutely supported NATO actions in Kosovo. Following the tragic attacks in the U.S. on September 11, 2001, Romania immediately offered full support to the war on terrorism. Romanian troops now serve in Afghanistan, not only in peace keeping operations, but also alongside U.S. troops as part of Operation Enduring Freedom.

Major Political Issues Affecting Business Climate
Romania has consolidated its democratic political system and has made steady if insufficient progress toward the establishment of a free market economy. Although the transition to a market economy remains slow, the current government has sought to stimulate reform efforts, including by greater attention to rule of law issues. There are no major political issues that affect the business climate.

Synopsis of Political System, Schedule for Elections and Orientation of Major Political Parties

Romania is a constitutional republic with a multiparty parliamentary system. Parliament includes a 345-member Chamber of Deputies and a 140-member Senate, representing 41 counties plus Bucharest municipality. The president is elected by universal suffrage. The position is non-partisan under the terms of the constitution. The president has responsibility for foreign and security affairs.

The president designates a candidate for prime minister following consultations with the political parties represented in parliament. The designated prime minister, his cabinet, and their governing program must be approved by parliament before the new government takes office.

The president, deputies, and senators are elected to four-year terms, but early elections may be held under certain circumstances. Elections in November 2000 brought a center-left minority government formed by the Social Democratic Party (PSD). The next elections are expected in November 2004, but could come as late as March 2005 under the terms of the constitution.

Major political parties have the following orientation:

A) Governing Party

The center-left Social Democratic Party topped the polls in the November 2000 elections but failed to win a majority in parliament. Its presidential candidate, Ion Iliescu (former president between 1990 -1996), was re-elected in run-off elections held December 10, 2000. Adrian Nastase was subsequently designated prime minister. In spring 2001, he also was elected chairman of the party.

B) Opposition Parties in Parliament:

The Greater Romania Party (PRM) espouses nationalist policies verging on xenophobia. In November 2000 it won 21 percent of the vote in the Senate and nearly 20 percent in the Chamber of Deputies. Its presidential candidate and party leader, Corneliu Vadim Tudor, came in second to Ion Iliescu in the presidential run-off, with 33% of the votes.

The Democratic Party (PD) has a social democratic orientation. In November 2000, it gained 7.5 percent in the Senate and 7.3 percent in the Chamber of Deputies. The National Convention of the PD held in May 2001 elected Bucharest Mayor Traian Basescu as party chairman, replacing former PM and Foreign Minister Petre Roman.

The National Liberal Party (PNL) won 7.4 percent in the Senate and 7.3 percent in the Chamber of Deputies. Since 2000, the PNL has been led by Valeriu Stoica (former Minister of Justice); elections for a new party leadership are expected to be held in 2002.

The Democratic Alliance of Hungarians (UDMR), a party which represents the interests of the ethnic Hungarian minority in Romania, won 6.8 % percent of the votes in both houses of Parliament in the November 2000 elections. In December 2000, the UDMR signed a collaboration protocol with the ruling PDSR. So far, the UDMR has consistently supported the minority PSD government, effectively giving it a parliamentary majority.
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4. MARKETING U.S. PRODUCTS AND SERVICES

Distribution and Sales Channels

An encouraging sign of transition in Romania has been the steady growth of the private sector. Although generally small and medium-sized, private companies represent a good nucleus for U.S. firms seeking distribution channels.

Private firms are typically limited liability companies with few partners and low capitalization. Shortage of capital and limited collateral channel entrepreneurs towards activities where initial investment is low, and returns can be made rapidly, like services and trade. Companies engaged in foreign trade tend to focus on consumer goods. Import has been in many cases the first and only activity of new private businesses. State-owned companies, too, are now free to make their own business decisions and engage in foreign trade directly, with no need for intermediaries.

Factors that have a restrictive influence on the functioning of distribution channels include:

The U.S. Commercial Service, through its International Partner Search and Gold Key Service, can help new-to-market U.S. companies find experienced local companies willing to act as agents, distributors or representatives. However, as a general rule, finding an agent/distributor in Romania's complex economic situation requires U.S. companies to invest sufficient time on their own to satisfy themselves that the selected partners are fully capable and reliable.

Investigating a company's bona fides is not always easy in Romania. There are no specialized institutions providing survey services on a regular basis. Currently, the only source of information about a company is the Trade Registry, which, for a moderate fee, can release data from its database. The Chamber of Commerce and Industry (CCIR) is the authorized distributor for Dun & Bradstreet in Romania. CCIR provides information on the reputation, reliability, and financial status of a company using the Dun & Bradstreet format and rating. Banks can benefit from the services provided by the National Bank of Romania regarding the indebtedness ratio and payment history of their potential clients.

U.S. companies should consider using the International Company Profile (ICP) services provided by the U.S. Commercial Service. ICPs provide information on the reputation, reliability, and financial status of a prospective trading partner.

Joint Ventures/Licensing

Most foreign companies involved in local manufacturing are organized under joint-venture agreements, but greenfield investments are becoming increasingly popular. The main advantages offered by joint ventures include quick market access using existing facilities and knowledge of the local business environment. Disadvantages of joint-venturing include the acquisition of excess personnel and the potential for incomplete control of the business.

Steps to Establishing an Office

Foreign companies have numerous options available for organizing business operations in RomaniRepresentative offices: Foreign corporations are entitled to set up representative offices in Romania.

Representative offices: are not entitled to carry on economic activities on their own behalf or on behalf of the parent. Therefore, a representative office can carry on activities of advertising, provision of information, marketing research or similar operations of a ''preparatory or auxiliary'' character.

Branches and subsidiaries of foreign companies: A foreign corporation can carry out business in Romania through a branch or a subsidiary (Romanian legal person). Branches may only operate in the same field of activity as their parent company. Branches are not specifically defined in the Romanian legislation and therefore Romanian authorities are not very familiar with branch operations.

In Romania, the branch of a foreign company is subject to the national law of the parent company and Romanian public order rules (i.e. tax law, currency regulations etc.). Legally, the branch has no separate status from the foreign company itself; it is merely carrying on business in Romania. The foreign company will be liable to the employees and creditors of the branch for the actions of, and debts contracted by, its managers and agents on behalf of the branch.

Branches must be registered with the Commercial Register of the Romanian Chamber of Commerce and with the local tax authorities.

The subsidiary of a foreign company in Romania is a Romanian legal entity and, consequently, it is subject to Romanian law. It is liable on its own behalf for the actions taken by its management.

Company Law No. 31/90 (subsequently revised in 1997, 1999) provides for the following main forms of business organization in Romania:

All commercial enterprises must be registered with the Commercial Register of the Romanian Chamber of Commerce; they take on separate legal status beginning with the date of this registration. The Commercial Register is an organization mandated to maintain statistical information on business activity in Romania. It also ensures that trade names, for example, are not duplicated.

The forms of subsidiary most commonly used by foreign investors are the limited liability company (SRL) and the joint stock company (SA).

A limited liability company (SRL) can be set up by one or more shareholders (but not more than 50) and must have a minimum capital of ROL 2 million (about $60.00). At present, capital contributed by a foreign investor is converted to lei at the prevailing market exchange rate in effect at the time the capital is contributed for accounting purposes only. Companies may maintain bank accounts in foreign currency. The registered capital is divided into equal shares whose value cannot be less than ROL 100,000 (about $3.00) each.

A joint stock company (SA) requires a minimum of five shareholders (no maximum) and a minimum prescribed capital of ROL 25 million (about $750). A joint stock company may be set up privately or by public subscription. The registered capital is divided into equal shares whose value cannot be less than ROL 1,000 (about $0.03) each.

There is no limit on foreign ownership and participation in the share capital of a Romanian company. A foreign investor is allowed 100% ownership in a Romanian company.

Setting up a legal entity in Romania generally takes 3 to 6 weeks to complete. The registration procedure for a limited liability company or a joint stock company includes the following main steps:

Since July 1, 2001, the procedure of setting up a legal entity in Romania has been simplified. There is a one-stop office operational within each territorial Chamber of Commerce, handling all permits and authorizations previously obtained from various administrative authorities. Within 20 days, a Certificate of Registration, including a single registration code, is issued. In practice, this may take longer. The appendix of the registration certificate contains the sanitation-veterinary and environmental permits as well as the approvals from the Labor Protection and Fire Fighting Divisions.

The branch registration procedure is technically quite similar to the above, but in practice it is often more cumbersome.

Selling Factors/Techniques

Quality, price and payment conditions are the most important factors in determining who will succeed in concluding business in Romania. The Romanian market, like all former East-European markets, is still cash poor. A company's willingness to entertain long-term credit arrangements, possibly barter transactions, and concepts like processing contracts will put it in a better competitive situation vis-a-vis others interested in doing business in Romania.

Product distribution is another important factor. Local partners can help maximize market coverage. Understanding the type of distribution required by a product and adapting it to the Romanian market's specifics is mandatory for any company. While distribution of industrial goods in Romania is quite similar to the one existing in most European countries, in the case of Fast Moving Consumer Goods (FMCG), the situation looks completely different. Retail trade is very fragmented, with many small independent outlets and few emerging retail chains. There are very few professional distributors and in most cases they lack the financial sources, the logistics and the know-how required by a profitable distribution activity. Moreover, Romanian distributors' business ethic is substantially different as compared to their Western peers.

Special note should be made of the fact that U.S. companies face strong competition from EU countries on the Romanian market. Goods from the European Union enjoy generally lower duty rates compared to similar goods from the United States.

Advertising and Trade Promotion

Accompanying Romania's change to a market economy has been a notable growth in the variety and quality of advertising. Total advertising expenditures rose from $27 million in 1993 to over $700 million in 2001, with multinational companies active in the consumer goods sector and mobile communications operators being the top advertisers.

Television, which attracts over 70 percent of total ad spending, is the predominant media, followed by press, outdoor, radio, and movie advertising. Television includes four state-owned national networks, a large number of state-owned local networks, and several privately-owned networks which tend to cover the whole country (Pro TV, Prima TV, Acasa, Antena 1, Tele 7 ABC, Atomic TV, HBO). About 60% of the population watches television daily.

Romanian press offers a wide variety of national and local daily and weekly newspapers, as well as a large number of magazines and specialty publications (i.e. sports, business, entertainment and family). Only 20 percent of the population is reported to read one or more newspapers a day.
Outdoor billboard advertising has grown rapidly and is becoming more sophisticated. Billboard locations are multiplying and simple painted billboards are being replaced by back-lit models. Advertising on public transportation vehicles is also common.

The radio accounts for about 5 percent of ad spending. There are four national state-owned AM radio networks which target audiences interested in, respectively, news, culture, music, and programs for young listeners. In addition, there is a national FM network (Europe FM) and a large number of FM stations in Bucharest and other major cities, which have a broad audience appeal. The most popular are: Contact, Pro FM, Radio 21, RadioTotal. About 50% of the population listens to the radio daily.

Movie advertising allows a high quality message to be delivered. However, its share in the general market for advertising is modest.

All major western advertising companies are represented in Romania. Major agencies with international affiliation include: Ogilvy & Mather, McCann-Erickson, Lowe Lintas GGK, Tempo Advertising, Graffiti/BBDO, Saatchi and Saatchi, and Young and Rubicam.

Specialized market testing and market research are available from independent suppliers (IRSOP - Romanian Institute for Public Opinion and IMAS - Institute for Marketing and Market Research) as well as established institutes (Institute of World Economy and Romanian Chamber of Commerce and Industry). However, companies with extensive experience in market studies are rare. The best-known English-language publications providing market insights are the following:

The product pricing structure is similar to that used in developed countries: prices are increased by wholesale and retail markups as well as with government and, sometimes, local taxes.

Romanian law recognizes the existence of mortgages for immovable property and pledges for movable property. Thus, assets can be pledged as collateral for loans and as guarantees. Also, the law provides that the guarantee agreement has the value of a writ of execution.

To protect the interests of creditors, Romanian law provides for: the right to request forced execution against debtors' s assets, the right to request the cancellation of legal acts that breach the creditors' rights ("action paulienne"), the right to request the taking of various measures for the purpose of preserving the debtor's patrimony (e.g., seizure by court order of assets to satisfy a due amount, the right to intervene in trials related to the debtor's assets, etc.), the right to start court actions in relation to certain rights of an inactive or negligent debtor ("action oblique").

Romanian bankruptcy legislation provides creditors the possibility to force insolvent companies to go either into reorganization or liquidation. Therefore, if a company is able to overcome the incapability to pay its debts, by way of reorganization, it may not go into liquidation. Nevertheless, if the reorganization is not successful, the judge will order the start of the liquidation procedure. Unfortunately, the lack of specialization of judges and lawyers in the bankruptcy field makes it difficult to bring these kind of cases to court and to obtain consistent outcomes.

Romanian justice continues to be slow and bureaucratic. Therefore, avoiding conflicts of any type is the best policy. It is strongly recommended that sales be based on confirmed irrevocable letters of credit opened with banks that are correspondents of American banks or are confirmed by such banks. In the case of investors, extensive due diligence is advised. In case of conflicts, competent legal assistance is available. The U.S. Commercial Service maintains a list of law and business advisory firms with expertise in both Romanian and U.S. law, which is available on request.