137363 1/15/2008 12:34 08CHISINAU39 Embassy Chisinau UNCLASSIFIED 07STATE158802 VZCZCXYZ0000 RR RUEHWEB DE RUEHCH #0039/01 0151234 ZNR UUUUU ZZH R 151234Z JAN 08 FM AMEMBASSY CHISINAU TO RUEHC/SECSTATE WASHDC 6125 INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC RUCPDOC/USDOC WASHDC 0722 RUCPCIM/CIM NTDB WASHINGTON DC RUEHBM/AMEMBASSY BUCHAREST 4254 RUEHKV/AMEMBASSY KYIV 0566 RUEHSF/AMEMBASSY SOFIA 0668 UNCLAS CHISINAU 000039
STATE FOR EB/IFD/OIA AND EUR/UMB BUCHAREST AND KYIV FOR FCS SOFIA FOR FAS STATE PASS OPIC, USTR AND EX-IM BANK
E.O. 12958: N/A TAGS: EINV, EFIN, ETRD, PGOV, KTDB, OPIC, USTR, MD SUBJECT: MOLDOVA 2008 INVESTMENT CLIMATE STATEMENT
REF: 07 STATE 158802
1. Embassy Chisinau submits the 2008 Investment Climate Statement in response to reftel.
Openness to Foreign Investment
2. Moldova continues to take steps toward developing a stronger economy, reforming a cumbersome regulatory framework, combating corruption and adopting reforms aimed at improving the business climate. After a prolonged recession, the economy rebounded in 2000, GDP grew and inflation decreased. Moldova, which is consistently ranked as the poorest country in Europe, relies heavily on investments, foreign trade and remittances sent by Moldovans working abroad for economic growth. Recent years have seen an increase in foreign direct investment (FDI) as investors take advantage of the eastward expansion of the European Union (EU), which now borders Moldova following the January 1, 2007, accession of Romania. The Government of Moldova (GOM) has made efforts to tackle some obstacles to investment, such as corruption and red tape. Furthermore, Moldova has declared European integration as a strategic objective. The country signed an Action Plan with the EU that provides a roadmap for democratic and economic reforms and the harmonization of Moldovan laws and regulations with European standards. Moldova expects to sign a new collaborative document with the EU when the current Action Plan expires in February 2008.
3. As a country with a small market, Moldova benefits from liberalized trade and investment and wants to promote the export of its goods and services. Moldova has been a member of the WTO since 2001 and has signed free trade agreements with the countries of the former Soviet Union (CIS) and Southeast Europe. In December 2006, Moldova joined the Central European Free Trade Agreement (CEFTA). Enjoying an extended generalized system of preferences (GSP-plus) from the EU, starting in 2008 the EU will unilaterally offer Moldova an asymmetric free trade regime, expanding the access of Moldovan goods to EU markets.
4. The GOM has created an adequate legal base, including favorable tax treatment for investors. Under Moldovan law, foreign companies enjoy the same treatment as local companies (national treatment principle). The GOM views investments as vital for sustainable economic growth and poverty reduction. However, the amount of FDI is far below the country's needs. In attracting FDI, the GOM emphasizes strategic investments that can ensure the transfer of new technologies, know-how, efficient management, and access to new foreign markets. The GOM prioritizes investments based on the following criteria: competitiveness and potential for penetration of export markets; potential for import substitution; efficiency through higher added value; sectoral diversification, especially through the advantages derived from the export service sector; and possible multiplier effects.
5. Annual foreign direct investment (FDI) inflow to Moldova slowed in 1999, primarily because of the 1998 Russian financial crisis that negatively affected Moldova's economy, and also because of a break in IMF and World Bank financial support in 1999. Moldova's annual FDI inflow increased in 2002, reaching USD 167.6 million. In 2003, however, FDI inflows amounted to just USD 98.5 million, a sharp decrease from the previous year, but characteristic of overall FDI inflows into Central and Eastern Europe. The lower 2003 figure was also the result of fewer GOM privatizations and the perceived deterioration of the business climate. Since 2004, FDI inflows have increased steadily. Moldova has benefited from the eastward movement of companies relocating operations in countries neighboring new EU members. In 2006, FDI reached USD 368.12 million, the highest FDI figure since independence. In the first six months of 2007, FDI amounted to USD 200.5 million. Recent years have seen several large investments by Germany's Metro Cash & Carry, France's Societe Generale, Austria's Grawe insurance company, Austria's Raiffeisen Investment, The Netherlands' Easeur Holding B.V., Italy's Veneto Banca, and U.S. investment fund NCH Capital.
6. The GOM describes its vision for economic and social development as a move from a "classical" to a "knowledge-based, new" economy. The new vision is based on the hope of promoting a liberal and friendly business climate, proactive trade regimes, a stimulatory tax regime, uniform geographic distribution of the development of economic and technical infrastructure, and macroeconomic and political stability. American investments in Moldova are primarily in the wine and food industry, cosmetics, telecommunications, banking and real estate.
7. Despite the GOM's efforts to lower tax rates, strengthen tax administration, increase transparency and simplify business regulations, decision-making remains opaque and the application of regulations inconsistent. On occasion, government officials interfere in business decisions in favor of a protected individual, use governmental powers to pressure businesses for personal or political gain, and selectively apply regulations. Since the judicial system remains weak, recourse to the courts does not guarantee citizens and foreign investors an impartial ruling on alleged governmental misdeeds.
8. In May 2004, the GOM approved the Economic Growth and Poverty Reduction Strategy (EGPRS), which established a policy framework for Moldova's sustainable development in the medium term from 2004 to 2006. In 2006, the GOM extended the EGPRS to 2007. Both the World Bank and the International Monetary Fund (IMF) support the implementation of the EGPRS. Together with the EU-Moldova Action Plan signed in February 2005 and the GOM program "Modernization of the Country, Well-being of the People," approved in April 2005, the EGPRS guided Moldova's economic development in recent years. Starting in 2008, the GOM will consolidate its development strategies into an umbrella document - the National Development Plan (NDP) - which prioritizes the GOM's policies for 2008-2011. Seeking to improve living standards, the NDP is based on five basic pillars: consolidation of the rule of law, Transnistrian conflict resolution, competitiveness enhancement, human development and regional development. Attracting foreign direct investment is key to enhancing the economy's competitiveness. In 2006, after a five-year intermission, the GOM resumed financial relations with the IMF by signing a Memorandum of Economic and Financial Policies that includes criteria for the improvement of macroeconomic indicators, infrastructure development and better state property management. The country is eligible for project funding from the Millennium Challenge Corporation (MCC) and the GOM is currently developing a compact proposal. Once implemented, MCC compact projects should make a significant impact on economic development. The MCC's current Threshold Country Program focuses on supporting Moldova's anti-corruption efforts.
9. The Constitution of the Republic of Moldova guarantees the inviolability of investments by all natural and legal entities, including foreigners. Key constitutional principles include the supremacy of international law, a market economy, private property, provisions against unjust expropriation, provisions against confiscation of property, and separation of powers among government branches. The Constitution provides for an independent judiciary; however, government interference and corruption remain problems in the application of laws and regulations and in the impartiality of the courts.
10. Current investment legislation is based on nondiscrimination between foreign and local investors. Moldovan law ensures full and permanent security and protection of all investments, regardless of their form, though application of the law remains spotty. There are no economic or industrial strategies that have a discriminatory effect on foreign-owned investors in Moldova, and no limits on foreign ownership or control, except in the right to purchase and sell agricultural and forest land, which is restricted to Moldovans.
11. International treaties and Moldovan law regulate business activity, including foreign investments. Such laws include, but are not limited to, the Civil Code, the Law on Property, the Law on Investment in Entrepreneurship, the Law on Entrepreneurship and Enterprises, the Law on Joint Stock Companies, the Law on Small Business Support, the Law on Financial Institutions, the Law on Franchising, the Tax Code, the Customs Code, the Law on Licensing Certain Activities, and the Law on Insolvency.
12. The Law on Investment in Entrepreneurship came into effect on April 23, 2004, superseding the previous Law on Foreign Investment. It was designed to be compatible with European legislative standards and defines types of local and foreign investment. It also provides guarantees for the respect of investors' rights, non-application of expropriation or actions similar to expropriation, and for payment of damages in the event investors' rights are violated.
13. There is no screening of foreign investment in Moldova and legislation permits 100 percent foreign ownership in companies. By statute, special forms of legal organizations and certain activities require a minimum of capital to be invested (e.g., Moldovan Leu (MDL) 5,400 for limited liability companies, MDL 20,000 for joint stock companies, MDL 15 million for insurance companies and MDL 50 million for banks).
14. The Law on Investment in Entrepreneurship permits investment in all sectors of the economy. Certain activities require a business license.
15. The Law on Entrepreneurship and Enterprises states that only state enterprises are permitted to participate in the following activities:
- Some types of human and animal medical research; - Manufacture of orders and medals; - Production of symbols verifying payment of state taxes and fees; - Postal services (except express mail) and production of postage stamps; - Sale and production of combat and special military technical equipment, explosives (except gun powder) and any weapons; - State registry, tracking and technical inventory of real estate, restoration of ownership titles and administration of real estate; - Printing and minting of currency and printing of state securities; and - Certain scientific activities.
16. The GOM launched the first privatization process in 1994. It has adopted three different privatization programs since that time, including privatization via National Patrimonial Bonds (foreigners were not allowed to participate); via cash transactions for both locals and foreigners; and via a program which involved only cash privatization. The third program began in 1997-1998 and was extended to 1999-2000. The program was later extended with some modifications until the end of 2006. Foreign investors have successfully participated in these privatizations. In 2007, Parliament passed a new privatization law, introducing a new plan for privatizing and managing state-owned assets with a priority on economic efficiency. The law has a list of assets not subject to privatization. The GOM also adopted regulations on the privatization of state-owned non-agricultural land through commercial tenders. A list of assets subject to privatization has been approved. 17. The government has privatized most state-owned enterprises, and some sectors of the economy are almost entirely in private hands. However, some large enterprises are still controlled by the government and their privatization has been either postponed indefinitely or abandoned altogether. These are the two northern electrical distribution companies, the Chisinau heating companies, the fixed-line telephone operator Moldtelecom, state airline Air Moldova and majority state-owned bank Banca de Economii. Recent privatization efforts have been insignificant, consisting mainly in the sale of residual government shares in companies originally sold during the mass privatizations of the 1990s.
18. The Law on Investment in Entrepreneurship prohibits discrimination of investments based on citizenship, domicile, residence, place of registration, place of activity, state of origin or any other grounds. The law provides for equitable and level-field conditions for all investors. It rules out discriminatory measures hindering the management, operation, maintenance, utilization, acquisition, extension or disposal of investments. Local companies and foreigners are treated similarly with regard to licensing, approval, and procurement. In recent years, the GOM made significant efforts to streamline business registration. In the business registration procedure, the GOM simplified document submissions by implementing a "one-window" approach. This process reduced the number of documents and days necessary for business registration. Further simplification of registration procedures is expected with the implementation of on-line business registration. Limited on-line business registration services were introduced in 2006 and 2007. In the business licensing procedure, the government simplified the process in 2002 by establishing one authority in charge of business licensing -- the Licensing Chamber -- and by reducing the number of business activities that require licensing. The GOM plans to streamline the permit process for entrepreneurial activity and introduce elements of the "one-window" approach in the activities of public authorities, including through their electronic interconnection to facilitate the exchange of electronic data. The government has implemented some regulatory reform to reduce corruption and increase transparency.
Currency Conversion and Transfer Policies
19. Moldova accepted Article VIII of the IMF Charter in 1995, which required liberalization of current foreign exchange operations. There are no restrictions on the conversion or transfer of funds associated with foreign investment in Moldova. After the payment of taxes, foreign investors are permitted to repatriate residual funds. Residual-funds transfers are not subject to any other duties or taxes, and do not require special permission. There are no significant delays in the remittances of investment returns, since domestic commercial banks have accounts in leading multinational banks. Companies are not obliged to sell their hard currency earnings to the government. Foreign investors enjoy the right to repatriate their earnings.
20. Generally, there are no difficulties associated with the exchange of foreign or local currency in Moldova. However, shortages of Moldovan currency in the banking system have occurred in the past. While the local currency, the Moldovan Leu (MDL), has been generally stable, its exchange rate proved volatile in the face of external shocks in 2006. The Moldovan Leu strengthened from MDL 12.9 to 11.2 per U.S. dollar over the course of 2007, influenced by the weakness of the U.S. dollar, a massive surge in worker remittances exchanged into MDL, and changes in monetary policies. Seasonal factors play an important role in the Moldovan Leu's exchange rate. The National Bank of Moldova (NBM) responded to the upward pressure on the national currency's exchange rate by somewhat relaxing its tight foreign exchange regulations, focusing on inflation control instead of price controls.
21. The U.S. Embassy has no information on complaints from U.S. investors regarding converting or remitting funds associated with investments in Moldova.
Expropriation and Compensation
22. The Law on Investment in Entrepreneurship states that investments cannot be subject to expropriation or measures with a similar effect. An investment may be expropriated only if all three of the following conditions are present: the expropriation is done for purposes of public utility, is not discriminatory, and is done with just and preliminary compensation. If a public authority violates an investor's rights, the investor is entitled to reparation of damages. The compensation will be equivalent to the real extent of the damage at the time of occurrence. The public authorities concerned will pay compensation for any damage caused, including any lost profits. Compensation must be paid in the currency in which the original investment was made or any other convertible currency, if the investment was made in a convertible currency. Public authorities may provide investors additional guarantees beyond those described in the law.
23. The government has given no evidence of intent to discriminate against U.S. investments, companies, or representatives by expropriation or of intent to expropriate property owned by citizens of other countries. No particular sectors are at greater risk of expropriation or similar actions in Moldova.
24. Moldovan law restricts the right to purchase agricultural and forest land to Moldovans. Foreigners may become owners of such land only through inheritance and may only transfer the land to Moldovan citizens. In 2006, Parliament further restricted the right of sale and purchase of agricultural land to the state, Moldovan citizens and legal entities without foreign capital. However, foreigners are permitted to buy all other forms of property in Moldova, including land plots under privatized enterprises and land designated for construction. Moldovan-registered companies with foreign capital are known to own agricultural land, allowed by loopholes in the previous law. There have been some reports that the newer limit on foreign ownership of agricultural land was used in lawsuits as an argument against foreign companies. The only option available to foreigners who desire to obtain agricultural land in Moldova at this time is to rent agricultural land.
25. Since 2001, the GOM has cancelled several privatizations, citing the failure of investors to meet investment schedules or irregularities committed during privatization. While the government agreed to repay investors in such disputes, payment of compensations was delayed. In one instance involving a German-registered investor and state-owned airline Air Moldova, the German investor has not been paid to date. The German investor filed suit against the Moldovan government in the European Court of Human Rights. A ruling in the case is still pending.
26. Investors should be aware that Moldovan territory east of the Nistru (Dniester) River is under the control of a separatist regime that does not recognize the sovereignty of the legitimate Moldovan authorities in Chisinau. These separatists have declared a self-proclaimed "Dniester Moldovan Republic," commonly known as "Transnistria." The U.S. Embassy regularly warns potential investors who are considering doing business in Transnistria that the Embassy is extremely limited in its ability to provide any assistance there, including consular and commercial services. Also, the GOM has indicated that it will not recognize the validity of contracts for the privatization of firms in Transnistria that are concluded without the approval of the appropriate Moldovan authorities. In March 2006, Ukraine imposed new customs regulations under which Transnistrian companies seeking to engage in cross-border trade had to register in Chisinau. Despite initial protests by the local regime, most of Transnistria's large companies subsequently registered with Moldovan authorities.
27. In 2000, a U.S. company claimed that it exported packing equipment and other capital goods to a privatized Transnistrian factory, only to be forced out later by the local factory manager with the collusion of local authorities. The company's representatives reported that they had been harassed by Transnistrian authorities until they decided that the safety of their company's employees could not be guaranteed. The U.S. company finally pulled out.
28. Moldova has a record of disputes over past privatizations involving foreign investors. Communist Party officials, when in opposition prior to 2001, were critical of what they regarded as "sweet-heart deals" in many privatizations. Consequently, once in power, the first government appointed by the Communist Party in 2001 increased its scrutiny of the privatization process, including previously concluded contracts. The GOM cancelled some privatizations because of alleged irregularities in the privatization procedures or the failure of investors to meet an investment timetable. In order to ensure predictability and credibility of the government's privatization policy, the GOM wants to introduce a statute of limitations of three years on the investigation of privatization files. There have been reports from companies that they had become targets of investigations by the Center for Combating Economic Crimes and Corruption (CCECC), while others complained of bureaucratic red tape or arbitrary decisions made by government agencies, police or tax authorities.
29. As a result of negotiations connected with Moldova's accession to the WTO, modern commercial legislation was adopted in accordance with WTO rules. The main challenges to the business climate remain the lack of effective and equitable implementation of laws and regulations, and arbitrary, non-transparent decisions by government officials. For example, in recent years the government has taken opaque measures, which violate WTO commitments, to protect domestic producers from foreign competitors in the agricultural sector. The Embassy has also received reports of targeted actions by politically-connected individuals against profitable businesses. These measures include abusive inspections and opaque administrative sanctions. Major foreign investors have also complained about the government's lack of willingness to engage in constructive dialogue on important issues affecting the business community.
30. In 2003, the government restructured the judiciary by eliminating the lower-tier of appellate courts (called tribunals) and the Higher Court of Appeals. The judiciary now consists of lower courts (i.e., trial courts), five Courts of Appeals, and the Supreme Court. Moreover, a separate layer of courts covering the judicial settlement of economic/trade-related litigations was created. This quasi-separate court system consists of the District Economic Court as trial court, the Economic Court of Appeals and the Supreme Court, whose jurisdiction implies the adjudication of economic litigations. Courts are nominally independent from government interference. However, the Ministry of Justice controls their administration and budget and reports of interference in law suits by influential figures are commonplace. Moldovan courts suffer from low levels of efficiency, independence and trust by the citizenry. The independent Association of Judges claims that newly appointed judges are loyal to the government and that government officials influence their decisions.
31. The GOM accepts binding international arbitration of investment disputes between foreign investors and the state. By law, investment disputes can be solved through Moldovan courts or arbitration. In the event of ad hoc arbitration, the law requires following UNCITRAL rules, arbitration rules of the Paris International Chamber of Commerce (ICC) of January 1, 1998, and other rules, principles and norms agreed upon by the parties.
32. Moldova is a signatory to the Convention on the International Center for the Settlement of Investment Disputes (ICSID - Washington Convention) and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Moldova is also a party to the Geneva European Convention on International Commercial Arbitration of April 21, 1961, and the Paris Agreement relating to the application of the European Convention on International Commercial Arbitration of December 17, 1962. Moldova has also ratified various trade agreements establishing bilateral investment protection with 35 countries (see paragraph 73), including with the United States. Moldova enjoys normal trade relations with the United States.
33. Any incentives are applied uniformly to both domestic and foreign investors. Unlike the previous law, the new Law on Investment in Entrepreneurship no longer protects new investors from legislative changes for ten years. However, the new law left in effect past privileges and guarantees granted to foreign investors according to the old Law on Foreign Investment. One such privilege provides for exemptions from customs duties on imports until April 23, 2014, if the imports are used to manufacture goods bound for export.
34. The current Moldovan Tax Code provides corporate income tax benefits. Companies with investments of more than USD 250,000 in charter capital enjoy a 50% exemption from income tax for five consecutive years. Companies with investments exceeding USD 2 million in charter capital enjoy full exemption from income tax for three consecutive years. Companies are eligible for such exemptions, if at least 80% of their income-tax payments were reinvested in production development or in national or sectoral development programs. For a minimum investment of USD 5 million, a company would be exempt for three years from income-tax payments, if it reinvested locally 50% of what it would otherwise have paid in income tax. A USD 10 million investment would require only 25% reinvestment of income-tax payment for a full 3-year exemption from income tax. Four-year exemptions are available for USD 20 million investments with 10% reinvestment and USD 50 million investment with zero percent reinvestment. Furthermore, upon expiration of these exemptions, eligible companies investing an additional USD 10 million can enjoy tax exemptions for an extra 3-year period. Also, fixed assets contributed in-kind to the charter capital are exempted from the value-added tax and customs duties. Full income-tax exemptions may also be enjoyed by small businesses (for 3 years), software developers (for 5 years), agribusiness (5 years), and scientific research and innovations (unspecified). Commercial banks and microfinance organizations are tax exempt on income derived from loans with maturities over 3 years. Other tax exemptions and deductions are also available according to the Tax Code. The loss carry-forward period was raised from three to five years. Effective January 1, 2008, a zero percent income tax rate on re-invested corporate profits entered into force, part of a GOM initiative of "economic liberalization." However, it remains unclear which tax benefits take precedence, since both the previous scheme and zero percent tax rate are in effect according to the Tax Code.
35. No formal requirements exist for investors to purchase from local sources or to export a certain percentage of their output. Informally, however, such requirements, often decided in an arbitrary and non-transparent basis, have been imposed by Moldovan authorities in some industries to serve short-term goals.
36. No limitations exist on access to foreign exchange in relation to a company's exports. There are no special requirements that -- an enticing aspect of these positions is the right to a personal car.
7. (U) Despite the fact that the Duma session is underway, the leadership is still working on committee assignments. This unfinished piece of business has been a major irritant for some Duma deputies. Until they are assigned to a committee, they are without an office. Offices are assigned
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based on proximity to the committees on which deputies serve.
NEW "GOVERNMENT HOUR" TO BE LAUNCHED
8. (U) A new feature to be added to the work of the Duma will be a regularly scheduled "Government Hour" during which officials of the executive branch will answer questions posed by deputies. The idea was initiated by Communist Party faction member Anatoly Lokot, who expressed interest in questioning Prime Minister Zubkov about inflation. Another member of the party has stated she would like to question ministers about social reforms.
9. (SBU) As the Duma sets out on an aggressive course of lawmaking, the path it follows will be determined by the Kremlin. While there will be some expressions of dissent from the Communist faction and the voice of LDPR leader Zhirinovskiy will be heard often, United Russia's constitutional majority guarantees that any legislation it takes up will pass with limited debate. BURNS