Wikileaks - MDLXVIII

Tuesday, 06 September, Year 3 d.Tr. | Author: Mircea Popescu





REF: 09 STATE 124006

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1. Embassy Chisinau submits the 2010 Investment Climate Statement in response to reftel:

A.1. 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. A new Government of Moldova (GOM) assumed office on September 25, 2009, and has publicly committed itself to a reform agenda and European orientation. After a prolonged recession in the 1990s, GDP grew for seven straight years and inflation decreased between 2002 and 2008. In 2009, like most countries in the region, Moldova was severely affected by the global economic recession. GDP decreased by approximately nine percent for 2009. Moldova, which is consistently ranked the poorest country in Europe, relies heavily on investments, foreign trade, and remittances sent by Moldovans working abroad, for economic growth. Recent years saw an increase in foreign direct investment (FDI) as investors took advantage of the eastward expansion of the European Union (EU), which now borders Moldova following the January 1, 2007, accession of Romania. The global crisis took its toll on FDI, which fell more than 50 percent in 2009. Though remittances dropped sharply in 2009 following the global crisis, they still equaled approximately one third of GDP. Over the past five years the GOM has made efforts to tackle some obstacles to investment, such as corruption and red tape. Furthermore, Moldova has declared European integration a strategic objective. The country had an Action Plan with the EU that set out a roadmap for democratic and economic reforms and the harmonization of Moldovan laws and regulations with European standards. The Action Plan expired in February 2008 and Moldova is set to start negotiations with the EU on an Association Agreement in January 2010.

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 countries of the former Soviet Union (CIS) and southeast Europe. In December 2006, Moldova joined the Central European Free Trade agreement. Moldova benefits from an extended generalized system of preferences (GSP-plus) with the EU, and starting in March 2008 the EU unilaterally granted Moldova autonomous trade preferences, which expanded the duty-free access of Moldovan goods to EU markets. Moldova also seeks to further deepen its preferential trade arrangements with European Union in the negotiation of a deep and comprehensive Free Trade Agreement.

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.

5. After years of low FDI caused by a weak business climate, FDI inflows steadily increased from 2004 to 2008. According to the National Bank of Moldova, FDI inflows in 2007 amounted to USD 611.85 million and in 2008 FDI totals were USD 868.31 million. In the first nine months of 2009 FDI dropped to USD 231.06 million. Recent years have seen large investments by Germany's Metro Cash & Carry, Germany's Draexlmaier, France's

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Societe Generale, Austria's Grawe insurance company, Austria's Raiffeisen Investment, the Netherlands' Easeur Holding B.V., Italy's Veneto Banca, the U.S. investment fund NCH Capital and the U.S. equity fund Horizon Capital. American investments in Moldova are primarily in the wine and food industry, cosmetics, telecommunications, banking and real estate.

6. Despite the GOM's efforts to lower tax rates, strengthen tax administration, increase transparency and simplify business regulations, decision-making remains sometimes opaque and the application of regulations inconsistent. On occasion, government officials have interfered in business decisions in favor of a protected individual, used governmental powers to pressure businesses for personal or political gain, and selectively applied 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.

7. 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) supported the implementation of the EGPRS. Together with the EU-Moldova Action Plan signed in February 2005 and subsequent GOM programs, the EGPRS guided Moldova's economic development in recent years. Starting in 2008, the GOM consolidated its development strategies into an umbrella document - the National Development Plan (NDP) Q 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.

8. Attracting FDI is critical to enhancing the economy's competitiveness. In 2006, after a five- year intermission, the GOM resumed relations with the IMF by signing a Memorandum of Economic and Financial Policies that included criteria for the improvement of macroeconomic indicators, infrastructure development and better state property management. The memorandum expired in June 2009 and the Communist-led GOM was unwilling to negotiate a new agreement with conditions calling for salary freezes and other unpopular measures shortly before parliamentary elections on July 29, 2009. The new GOM has negotiated a new agreement with the IMF and is awaiting IMF board approval in January 2010. In 2007, Moldova received USD 24.7 million funding from the Millennium Challenge Corporation (MCC) for a Threshold Country Program which focused on supporting Moldova's anti-corruption efforts. In January 2010, the GOM will sign an MCC Compact for USD 262 million. The Compact will fund two projects, one for road rehabilitation and the other for the transition to high value agriculture by rehabilitating central irrigation systems, providing technical assistance and providing access to financing for farmers. The MCC compact targets poverty reduction through economic growth.

9. 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 to the

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end of 2006. Foreign investors have successfully participated in these privatizations. In 2007, Parliament passed a new privatization law which introduced a new plan for privatizing and managing state-owned assets with a focus on economic efficiency. The law has a list of assets, connected to the security of the state, which are not subject to privatization. The GOM also adopted regulations on the privatization of state- owned non-agricultural land through commercial tenders. The GOM has approved a list of assets subject to privatization.

10. The Law on Investment in Entrepreneurship prohibits discrimination against 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 to be treated equally 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. 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 their electronic interconnection to facilitate the exchange of electronic data.

11. Rankings for Moldova:

Measure Year Index/Ranking

TI Corruption Index 2009 89 of 180 Heritage Economic Freedom 2009 120 of 183 World Bank Doing Business 2010 94 of 183

12. Moldova receives an annual scorecard from MCC assessing its performance in 17 indicators in the three policy categories of Ruling Justly, Investing in People, and Economic Freedom. Under the name of each indicator is the Moldova's score and percentile ranking in its income peer group (0% is worst; 50% is the median; 100% is best). Under each percentile ranking is the peer group median. Country performance is evaluated relative to the peer group median. Scores above the median meet the MCC required performance standard for eligibility for MCC programs. Scores at or below the median do not meet the performance standard.

Measure Year Index/Ranking

MCC Government Effectiveness 2010 0.03 (58%) (Median 0.00) MCC Rule of Law 2010 0.43 (81%) (Median 0.00) MCC Control of Corruption 2010 0.13 (63%) (Median 0.00) MCC Fiscal Policy 2010 -0.4 (61%) (Median -1.4) MCC Trade Policy 2010 79.9 (92%) (Median 67.9) MCC Regulatory Quality 2010 0.43 (92%)

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(Median 0.00) MCC Business Start Up 2010 0.986 (93%) (Median 0.918) MCC Land Rights Access 2010 0.952 (98%) (Median 0.612) MCC Natural Resource Mgmt 2010 69.49 (70%) (Median 61.61)

A.2. Conversion and Transfer Policies
13. 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. Foreign investors enjoy the right to repatriate their earnings.

14. Generally, there are no difficulties associated with the exchange of foreign or local currency in Moldova. However, shortages of Moldovan currency do occur in exchange offices, usually at times of sharp exchange rate fluctuations. While the local currency, the Moldovan Leu (plural, Lei) (MDL), has been generally stable, its exchange rate has proven volatile in the face of external shocks. After several years of appreciation owing to the weakness of the U.S. dollar, a massive surge in remittances and changes in monetary policies, the trend reversed in 2009 as a result of the fallout from the global crisis coupled with the uncertainties of an electoral year. The MDL started the year at 10.4 to one U.S. dollar and finished it off at 12.20.

15. The U.S. Embassy has no information on complaints from U.S. investors regarding converting or remitting funds associated with investments in Moldova.

A.3. Expropriation and Compensation
16. The Law on Investment in Entrepreneurship states that investments cannot be subject to expropriation or to 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 in any other convertible currency, if the investment was made in a convertible currency.

17. 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. The new government that took power on September 25, 2009 has mentioned plans to review privatizations that took place under the Communist-led government. No particular sectors are at greater risk of expropriation or similar actions in Moldova.

18. Moldovan law restricts the right to purchase

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agricultural and forest land to Moldovan citizens. 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, by means of loopholes in the previous law. In the past, the limit on foreign ownership of agricultural land was used in lawsuits as an argument against foreign companies. The only straightforward option available to foreigners who wish to use agricultural land in Moldova at this time is to rent agricultural land.

19. 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. Often, investors have had to apply to the European Court of Human Rights (ECHR) to enforce payment o compensation from the Moldovan government. The GOM has been compliant with the ECHR rulings ivolving foreign businesses.

20. Investors shoud be aware that Moldovan territory east of the Nstru (Dniester) River is under the control of a sparatist regime that does not recognize the soveeignty of the legitimate Moldovan authorities inChisinau. These separatists have declared a sel-proclaimed "Dniester Moldovan Republic," commony known as "Transnistria." The U.S. Embassy advises any potential investors that it is limited in its ability to provide any assistance, including consular and commercial services, in areas east of the Nistru River. 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.

21. 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 working in collusion with 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 and the company decided to pull out.

A.4. Dispute Settlement
22. Moldova has a record of disputes over past privatizations involving foreign investors. Party of Communists (PCRM) 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 PCRM 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 the predictability

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and credibility of the government's privatization policy, the previous GOM has attempted to introduce a statute of limitations of three years on the investigation of privatization files. There have been reports in recent years from companies that they had become politically motivated 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, and police or tax authorities.

23. 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. In recent years the previous GOM took opaque measures, which violated WTO commitments, to protect domestic producers from foreign competitors. For example, the previous Communist- led GOM introduced an environmental tax on bottles and other packaging of imported goods while not taxing bottles and packaging produced in Moldova. 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.

24. 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 of Justice. 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 a trial court, the Economic Court of Appeals, and the Supreme Court of Justice, whose jurisdiction includes the adjudication of economic litigations. Courts are nominally independent from government interference. However, the -- TAGS: KGHG, SENV, ENRG, PREL, DA SUBJECT: CLIMATE CHANGE: DENMARK TO ENDORSE COPENHAGEN ACCORD THROUGH EU



1. (SBU) Denmark's chosen means for associating itself with the Copenhagen Accord, which it "strongly supports," is to work within the EU for a common position, in order to preclude backsliding by certain EU members. Denmark is confident an EU common position will be reached before end January. Denmark intends to play an active role as this year's chair of the COP, but with a "less activist style," working more with others. So said MFA Head of Section in the Environment and Sustainable Development Department Ketil Iversen Karlsen when A/DCM delivered reftel demarche January 13 to him and to the Head of the Americas Dept. Morten Lauridsen. Karlsen was pleased to take note of a phone number for the UNFCCC secretariat: he said his government is being inundated with queries from other countries about how to contact the secretariat.

2. (SBU) Karlsen took the opportunity to mention the following points regarding climate-change efforts:

- Rapid mobilization of financial assistance for adaptation in developing countries is crucial to bolster the credibility of the Copenhagen Accord and build momentum.

- Denmark is encouraged by India's decision to host a meeting of the BASIC countries in Delhi this month. China will play a big role in the meeting, which Denmark believes will likely result in a reiteration of support for the Copenhagen Accord.

- A major challenge is to figure out the best way to coordinate between the Copenhagen Accord and the UN process.

- Denmark is undecided about how to handle criticisms of the Copenhagen Accord - whether to respond to them all or to ignore most of them.

- Denmark has been invited to an alternative climate-change summit in Bolivia in April. It has not decided whether to participate. MCCULLEY

Category: Breaking News
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