32897 5/19/2005 7:35 05BUCHAREST1158 Embassy Bucharest UNCLASSIFIED//FOR OFFICIAL USE ONLY This record is a partial extract of the original cable. The full text of the original cable is not available. UNCLAS SECTION 01 OF 02 BUCHAREST 001158
DEPT FOR INL DEPT FOR EUR/NCE - WSILKWORTH, EB/IFD/OIA - MROCHE DEPT PASS TO USTR USTR FOR GBLUE TREASURY FOR DO/GCHRISTOPOLUS USAID FOR E&E
E.O. 12958: N/A TAGS: ECON, EINV, RO, Investment Disputes, Privatization SUBJECT: ROMANIA: INVESTMENT DISPUTE UPDATE
Ref: Silkworth EUR/NCE; May 13, 2005
This message is Sensitive but Unclassified. It contains business proprietary information. Not for distribution outside of USG channels.
1. (SBU) Romania's piecemeal approach to privatizations resulted in discontent from a number of foreign investors concerned over inequitable or dubious privatization proceedings. The current government is aware of the damaging impact of investment disputes on Romania's image, but lacks the technical expertise and professional approach to alleviate investors' concerns. Below are brief outlines of potential and current investment claims lodged against Romania.
Noble Ventures (U.S.)
2. (U) Noble Ventures ("NV") acquired a local steel mill in Resita, Romania. NV claims that the GOR then illegally repossessed shares of the company. Romanian government officials contend that because NV failed to meet its commitments under the privatization contract, the GOR had the legal right to seize NV's shares. Claimant D filed for $350 million in damages with the World Bank's International Center for Settlement of Investment Disputes (ICSID) in Washington, D.C. In 2003, the GOR re-sold the firm to another investor. The case is pending. A decision by ICSID is expected in 2005.
New Century Holdings (U.S.)
3. (SBU - Business Proprietary) New Century Holdings (NCH) purchased 11.66 percent of the shares in the domestic Constanta Oil Terminal. In 2001, the Romanian Government transferred certain pipeline assets owned by the Oil Terminal to state ownership. The owners were not compensated for this transfer. The expropriated assets were valued at more than $20 million and constituted approximately 80 percent of the company's capacity for transporting oil. After the expropriation, the Oil Terminal was forced to enter into a concessionary agreement with the government to use the assets it previously owned. The Bucharest Stock Exchange suspended trading of the shares in the Oil Terminal, and the stock lost 50 percent of its value. In 2003, NCH submitted an application to the European Court of Human Rights against Romania based on the expropriation. The case is pending. Both parties have indicated that they prefer to settle the claim directly rather than in court.
Cross Lander (U.S.)
4. (SBU - Business Proprietary) In 2004 Cross Lander (CL) acquired an off-road vehicle manufacturing company. GOR moved to free the company from past budgetary arrears as agreed in the privatization contract. Because of unsettled non-budgetary arrears to state-owned energy companies, the company was put under judicial reorganization under insolvency law. CL is seeking an amicable resolution of the issue, but is also contemplating the possibility of filing for international arbitration with ICSID for an amount to be determined should it fail to solve the issues.
S&T Oil Equipment and Machinery (U.S.)
5. (SBU - Business Proprietary) S&T Oil Equipment (S&T) acquired a majority stake in a Romanian explosives and domestic fertilizer production company in November 2003. The contract had as a precondition the fulfillment of a debt for equity swap of the company's arrears to energy companies. The GOR claims to have received S&T's written waiver of the precondition. In 2005, because of overdue debts, the Romanian company was placed under judicial reorganization through Romanian insolvency law. In 2005, the GOR terminated the privatization contract and seized S&T's shares, contending that S&T was in breach of contract. S&T announced intent to file for international arbitration with ICSID for an amount TBD.
Gavazzi Steel (Italy)
6. (U) Gavazzi Steel (GS) bought a state-owned local steel mill in 1999. The company was subject to reorganization under the Romanian insolvency law, reportedly due to GOR's failure to reschedule debts, as agreed in the initial privatization deal. In 2004, the GOR terminated the privatization contract and seized GS's shares. In 2005, the GOR sold the steel mill to a Russian company. GS announced intent to file claim with ICSID for an amount TBD.
7. (SBU) Key economic players in the current Romanian government are keenly aware that the ICSID's impending decision on the Noble Ventures case has the potential to damage the GOR's reputation and credit rating. Despite these potentially serious consequences, the GOR still has not created a damage control plan or strategy for addressing possible fallout as the country still struggles on a daily basis to handle immediate political and economic issues, as well as challenges resulting from upcoming EU accession.