ROMANIA: An Introduction
ROMANIA - COUNTRY OVERVIEW
Author: Razvan Vlad, Partner, NNDKP
Located at the crossroads of Central, Eastern and Southeast Europe, Romania is the largest country of the Central-Eastern European region, and its history, life and economy have been largely and decisively shaped by its geostrategic position. Torn apart by 45 years of communism, with the last ten years during Ceausescu’s regime being the darkest ones, Romania has started since December 1989 the transition to a democratic and capitalist system, at first with tentative small steps, which then turned into rapid strides towards achieving the status of an emergent country from an economic, political and social perspective.
As a result of its concerted effort and considering its strategic location, in 2004 Romania has been admitted to NATO, and three years later, in 2007, it joined the European Union. This path has become irreversible for the country and its progress has been, from many points of view, closely linked to the choice made in the early 2000s.
Although from a social, political and economic perspective the Euro-Atlantic integration has been undoubtedly a major success, Romania is still striving to bridge the gaps and align with the rest of the developed European states. In addition, Romania is now coping with the worldwide consequences of the COVID-19 pandemic that affected primarily supply chains and tourism, with a high inflation rate and Russia’s invasion of Ukraine and related effects, especially the need to absorb the high number of Ukrainian refugees fleeing the country. Next to Poland, Romania has been a safe route for Ukrainian refugees and specific legislation to protect and secure their rights has been expeditiously enforced.
These events, and especially the galloping inflation along with the border conflict will affect and further shape the country’s course in the following years. The energy crisis, which has triggered a collective European effort to seek alternative sources, considering the sanctions applied to Russia and the latter’s decision to partially cut off the gas supply to European countries (including Romania), is a source of national concern.
Romania is not highly dependent on the Russian gas compared to other European countries and it has also started exploring the gas reserves available in its territorial Black Sea waters. The exploration and exploitation were taken over by Romgaz (the largest gas company in Romania) together with OMV Petrom, which are looking for potential partners to implement the project. It is estimated that these gas resources may ensure Romania’s gas independence, as well as the possibility to export to other countries. However, it will take time to implement these major projects and to see their positive effects, precisely considering Russia’s decisive role on the energy market in Europe. Therefore, more and more renewable energy projects (wind and solar), mostly financed from the National Recovery and Resilience Plan for Romania (NRRP), will land on the table of the Romanian authorities. Moreover, Romania has also recently made important steps to secure a US loan designed to rehabilitate units 3 & 4 of Cernavoda nuclear power plant.
The galloping inflation is nonetheless a battle which needs to be carefully planned and addressed. Romania reached a 15.9% inflation rate in September 2022, which is significantly higher than the one in the Euro zone, of 9.9% and, from this perspective, Romania must adapt its economy, finance and tax policies to deal with this concern. The National Bank of Romania has increased the official interest rate to 6.75% per annum to reduce the impact of an increased inflation rate. This is the highest interest rate level since 2010, when the effects of the financial crisis were still felt by the population.
However, this will negatively affect both the amounts to be reimbursed under existing loans, and the volume of loans to be granted by banks, considering that it will be increasingly difficult to meet the score requirements. In spite of the above, nevertheless, in terms of economic growth Romania managed to achieve a 5.9% rebound in 2021 and, according to the World Bank data, performed above the reasonable expectations and further reached 5.8% in 2022, despite the current worldwide vulnerabilities.
From a fiscal perspective, steps for improvement have been taken as authorities applied a set of measures to digitalise tax-related formalities and speed up the collection process. Additionally, some taxes have been increased and some exemptions have been eliminated. Gas prices have been capped for captive consumers within the limits of a certain consumption level and the Romanian government is planning to cope with the surge in gas and energy prices by imposing a regulated tariff, at least for a temporary period.
From a political and economic standpoint, Romania is making every effort to join the Schengen Area. Despite intense negotiations and discussions for a favourable decision, Romania still awaits the accession to the Schengen Area after Austria’s veto in December 2022. Romania’s bid was backed by the European Commission, the European Parliament and a majority of member states, based on its fulfilling the technical conditions required for admission. When materialised, the admission will have a clear positive effect over Romania’s economy, with the transport and distribution of goods becoming much easier and efficient, thus contributing to economic growth.
One of the most important goals for Romania is the absorption and distribution of the funds that are allocated to the country through the National Recovery and Resilience Plan. These funds are earmarked for infrastructure, health, agriculture, tourism, social cohesion, and other sustainable projects designed to increase the standard of living in Romania and bring it closer to EU standards. Although the impressive economic and social advance achieved over the past two decades is undeniable, Romania still lags behind in infrastructure development and lacks a reliable health system. While agriculture is one of the most important components of Romania’s economy, investments in this field are still unsubstantial and insufficient to ensure the efficient exploitation of resources, particularly considering climate change effects.
In a nutshell, a lot of things still need to be adjusted and further implemented in Romania in terms of sustainable investments.
The funds ensured through NRRP are specifically designed to bridge these gaps and the Romanian government seems determined to ensure an efficient absorption and distribution thereof in line with the requirements of the European Commission.
From a legal perspective, Romania has implemented a series of normative acts which will have a positive impact on the business environment. After years of relative political instability, the current government has proposed and adopted a series of legislative amendments which will make it easier to create and develop startups.
Corporate law amendments will simplify the bureaucratic process of incorporating and authorising a company. Romania has suffered for many years from endemic bureaucracy as regards the support offered to businesses during the incorporation process and, more importantly, in conducting business activities. The red flags raised by the business community and international bodies (eg, OECD) seem to have been finally heard by the authorities and one of the main acts adopted in late 2022, which will become fully applicable in 2023, regulated the Single Industrial Licensing (SIL) procedure.
According to the SIL procedure, all the authorisations and permits needed for a certain business (including for heavily regulated industries) will be handled and issued through one single authority that will liaise with other relevant institutions currently issuing the permits and authorisations, which will streamline and simplify the licensing process. If the implementation of this process succeeds (and there are no serious reasons to believe otherwise), it will be a breakthrough for the business environment.
In terms of general legislation, Romania is aligned to the European Commission’s requirements. The directive on foreign direct investment was implemented and additional legislation in the fields of energy, consumer protection, and money laundering has been pushed forward. Romanian authorities also enacted specific legislation to facilitate the absorption of the NRRP funds and speed up the process of awarding public contracts for key national projects.
2023 will certainly be a pivotal year for Romania as the country will have to thoroughly pursue legislative and structural reforms, distribute, and efficiently use the funds from NRPP and, most importantly, cope with the effects of the galloping inflation and of Russia’s war against Ukraine. Romania’s response to these challenges will determine whether the country will assert itself as a more influential member of the European Union and as a pole of stability in the region.