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ROMANIA: An Introduction

Romania – Country Overview 

Adriana Gaspar, Senior Partner, Corporate/M&A, NNDKP

Romania finds itself in pole position for the post-pandemic economic reboot, with most of the recent developments appearing to fend off observers’ expectations and previously issued rankings. Geopolitics, national politics and the global epidemiological crisis seem to have constructively converged with the country’s medium-term growth projections to outweigh structural dysfunctions that generally hold back investment decisions.

A NATO member since 2004 and a gatekeeper for the European Union by the sea, Romania has proven itself as a South-East European military and intelligence shield, an economically strategic partner and as a contributor to the achievement of the Three Seas initiative’s top priority objectives: energy, infrastructure and digital. Unprecedented financial packages have been secured by Romania with the US Government (USD 7 bn) as well as under the EU Recovery and Resilience Facility for, among others, the development of capacities in these areas (up to EUR 80 bn) and under the newly established EU Modernisation Fund (approximately EUR 4.2 bn) supporting, along with the Just Transition Fund, the actions mandated by the European Green Deal. With a new legislative term under way, the Romanian Government has a historic opportunity to capitalize on available financing in order to design and proceed to the implementation of a forward-thinking investment program nurturing an appealing business environment, economic invigoration and social advancement.

Energy 

Energy is the industry offering the entire range of value-added and speculative investment potential. Romania has an impressive natural potential for renewable energy production and, thus, could pursue the transition to carbon neutrality required and fundable under the European Green Deal. Investments in new generation capacities from renewable sources, as well as in energy efficiency, energy storage and intelligent networks, coupled with better interconnection of the country’s energy infrastructure with those of its neighbours could make Romania into the energy hub of the South-East Europe region and an energy security vector for the EU.

The Export-Import Bank of the United States has agreed to replace China’s commitment to finance the refurbishment of an existing reactor and the building of two new reactors for Romania’s Nuclear Power Plant Cernavodā, along with other investments bringing US expertise in energy and infrastructure projects.

Romania also controls onshore reserves of oil and gas, copper, gold, and other resources, which have been complemented in the past years by sizable offshore oil and gas reserves in the Black Sea, and developments in production facilities and associated logistic infrastructure. Exploitation of gas deposits in the area is among the top priorities of the first EU Energy Security Strategy, which aims to build a fully integrated internal energy market within the EU, to reduce Central and Eastern Europe’s reliance on imports via Ukraine (subject to available transportation capacities outside the Romanian borders) and to mitigate supply disruption risks. Phase 1 of the BRUA pipeline is drawing to a close to the benefit of local communities and industrial investors, while the construction of the Azerbaijan-Georgia-Romania Interconnector is designed to offer the European Union an alternative route for Azeri gas. Royalties and other related fees to be paid by investors are still competitive and it is a realistic expectation that they will so remain.

Infrastructure  

The investment potential in the field has remained almost intact, as public sector-driven infrastructure has been progressing slowly, with much-needed investments in roads, airports, ports and railways being constantly postponed or aborted. Romania is still below the target of 1,000 km of motorway and express roads out of a necessary total estimated at 3,000 km. Only 60% of the railway network is currently useable and at a speed not exceeding 60% of the projected one. Romania is confronted with an ever-deeper deterioration of the investment and social conditions due to missing or inadequate energy, environmental protection and social infrastructure. New or upgraded brick and mortar storage, processing and transport capacities are highly demanded and critical to overcome Romania’s chronic infrastructure insufficiency and pressing need to capitalize on its resource richness, as well as its economically and geo-politically strategic location.

With the Romanian Government’s commitment to much-needed infrastructure development depending on access to EU and US financial support and on sustainable growth, it is reasonable to expect that the next decade will see major projects being launched and implemented. However, building institutional capabilities to secure the convergence of policies, efforts and resources for the elaboration and pursuit of a sound cross-sector and cross-country infrastructure strategy is a still distant pre-requisite.

Although private logistic real estate has developed at a higher rate, it has continued to fall short of the needs of the businesses that have continued to grow under economic progress and changes in consumers’ behaviour, both prior to and following the first lock-downs of 2020. North and North-Eastern Romania are still to be connected to the other regions and with the borders, and digitalization and multimodal integration are required countrywide. Market size and geographic position have a strong appeal to institutional investors’ opportunistic placements in Romanian logistics, subject to prior consolidation.

Digital  

Frequently attributed to the communist legacy of excellence in science, Romania has asserted itself as an incubator for cutting-edge tech start-ups, with visionary business angels being followed at a distance by state and EU programs and sector-oriented venture capital in funding technology performance.

Owing to the seemingly inexhaustible science-savvy workforce, the Romanian IT&C industry is a world-renowned heavyweight, originating high volume technology and talent-driven cross-border M&A and powering growth-fostering digital transformation. The first Romanian unicorn (estimated at USD 20 bn for NYSE listing in 2021) operates the most powerful enterprise RPA platform. It has recurrently outperformed traditional champions of the domestic energy sector market.

The country is also a global leader in internet speed and Bucharest ranks as the best city in the world for working from home or remotely, according to the Remote Working Index prepared by Broadband Deals in the wake of the first confrontation with the 2020 epidemiological crisis. Bucharest has also been listed among the cities with the largest number of professionals working in the high-tech industry, alongside London, Dublin, Madrid and Budapest, with over 70,000 employees in the sector.

Other  

Financial institutions’ pandemic period ranking generally recommends processing (pharma, chemicals, food), manufacturing and services contributing to digitalization, construction, construction materials and agri-business.

Romania features one of the lowest prices per hectare of land in Europe and has approximately 500,000 hectares of tradable land available, hence there is a high potential for speculative investments (estimated to reach up to 800% return on investment). Romania also has one of the largest areas of agricultural land among EU countries (approximately 8% of the total agricultural surface in the European Union), high fertility or low costs for the restoration of lands and continuing EU non-reimbursable finance. Long-term investment in irrigation, hail and rain protection systems and in risk management tech are required.

Notably, the manufacturing industry could re-surface as favourite nearshoring option for EU and US producers, with labour force education and cost, as well as the convenience of the location, scoring highly in the companies’ decision-making process.

Most recent improvements in the tax legislation, following advocacy by the business community, and a strong probability of stability in taxation for corporates over the coming period add to Romania’s designation as a jurisdiction ‘recommended for investment’.