$Unique_ID{COW03021} $Pretitle{360} $Title{Romania Chapter 7. Conducting Business} $Subtitle{} $Author{Donald E. deKieffer} $Affiliation{Embassy of Romania, Washington DC} $Subject{foreign romanian romania trade business goods western economic system government} $Date{1990} $Log{} Country: Romania Book: Doing Business with the New Romania Author: Donald E. deKieffer Affiliation: Embassy of Romania, Washington DC Date: 1990 Chapter 7. Conducting Business GOVERNMENT ECONOMIC STRUCTURE For fifty years, Romania has had a highly-centralized economy. The government was deeply involved in all aspects of commerce, and a foreign firm desiring to do business simply had to become more or less a government contractor. This has changed. Even government agencies are now at pains to tell a foreign business executive that it is no longer necessary to discuss matters with a majority of the Ministries, industrial centrals, foreign trade organizations or the plethora of other institutions which flourished under the Communists. In fact, most of the major Ministries emphasize the new policy of encouraging foreign firms to contact local producers directly to arrange deals. Nevertheless, old ways die hard, especially when Romanian "companies" have so little experience in negotiating contracts or even dealing with foreigners. Further, many parts of the old system still exist-in technical "competition" with the "producers." It was these agencies which traditionally fulfilled the government's economic and trade programs by arranging for the sale and purchase of goods from abroad. It is therefore important at least to be aware of these entities. In certain circumstances, it may be wise to contact these groups, if for no other purpose than to locate the "producers." As of late 1990, there was still no comprehensive list of independent trading companies available in the country, and no index of producers. Various entities are trying to establish themselves as sources for such information, but a directory of private sector firms may not be available from the Chamber of Commerce and Industry until mid-1991 at the earliest. Listed below are institutions which still perform important functions in the operation of the Romanian foreign trade regime. Many of them will continue to operate with a diminished role for many years to come. Ministry of Foreign Trade The Ministry of Foreign Trade (MFT), formerly known as the Ministry of Foreign Trade and Economic Cooperation, is still responsible for coordinating and administering the foreign trade program of the government. In former years, it was responsible for implementing the Communist Party's international economic program. Today, it is working toward becoming a "trade policy" agency similar to the United States Trade Representative in the United States, or MITI in Japan. In addition to its policy role, the MFT also issues licenses which are still required for all products entering or leaving the country. Since the revolution, the MFT has seen cause to deny no licenses, but the process still retains much of its bureaucratic antecedent. Applications must contain the name and address of the importer and exporter, a description of the nature of the goods, the value of the transaction (and whether it is denominated in local currency or hard currency), the approximate time of the export or import, the port of embarkation, a certificate from a bank known to the MFT certifying to the financial particulars of the transaction, and a statement concerning the financial condition of the parties. The MFT has made it clear that these requirements can change, and that the Romanian partner in any transaction will be responsible for making sure that all requirements extant at the time of the transaction are met. The same requirements are applicable for joint ventures in Romania. The MFT is also responsible for Customs regulations. Although Romania is a member of the Customs Coordination Council in Brussels and a signatory to the Harmonized System of tariff nomenclature, the country has been slow in implementing a comprehensive tariff schedule. This is understandable since tariffs under the old system were largely irrelevant. Since the State was the only importer, collection of duties (essentially from itself) was not a high priority. Until at least 1992, it would be prudent for any prospective exporter of goods to Romania to check with the MFT on the applicable duty rate, and secure a letter from them concerning the ad valorem rate. These decisions are likely to be made on an ad hoc basis for the next several years. Adoption of a comprehensive tariff system-including the possibility of protective tariffs for some industries-is under review, but is a laborious process. In the meantime, the MFT has made it clear that it will issue "interim" advice upon request. Technical-Production Ministries Under the Communists, government Ministries were directly responsible for implementing the party's economic policies. They were similar to Western-style conglomerates or holding companies, with direct control over the production and delivery of products under their jurisdiction. The Ministries maintained both production units (industrial centrals) and research institutes, as well as foreign trade organizations (FTOs) which served as the equivalent of an import-export department in a Western firm. One of the most fundamental changes brought about by the December, 1989 revolution was the dismantling of the authority of the Ministries to control the economy. While their production units, institutes and FTOs are still in existence, the Ministries themselves have lost their exclusive authority to determine what will be produced and by whom. This transition has caused more than a little uncertainty. The Ministry of the National Economy now has a special division charged with "privatizing" many of the operating divisions of the other Ministries over a period of years. In the meantime, however, the Ministries act as at least caretakers for the production units and FTOs under their jurisdiction, and should not be totally ignored. In fact, many of the Ministries (especially those involved with agricultural production, food processing, telecommunications and tourism) are actively seeking foreign partners for various projects themselves. Industrial Centrals As noted above, Industrial Centrals (ICs) were the production units for the specialized Ministries under the old system. Most of these still exist under the nominal authority of their old Ministries, but are now at least partially independent. Contact the Romanian Chamber of Commerce and Industry for a current list of ICs. Under the post-revolutionary reforms, they are permitted to deal directly with foreign investors, purchasers and sellers. By 1993, many of these will be entirely privatized, but some may remain under state control (especially in heavy industry where operating losses make "free-standing" corporations impossible). One of the major efforts of the new government is to encourage foreign investors to establish joint ventures with the "industrial centrals" to speed the process of privatization and to provide necessary technology to these enterprises. There are literally hundreds of these ICs, most now in total control of the disposition of their assets. Among the advantages of doing business with or through an IC are: - The government is actively encouraging the sale or privatization of these enterprises, and terms can be extremely attractive; - The ICs have buildings, equipment and trained work force extant. This can save considerable hassle for an investor wending his way through the transitional rules of acquiring property, negotiating labor contracts, etc.; - Most ICs are familiar with making products to the specification of others. Few of them design their own goods, and do not have the "Not Invented Here" syndrome common in the West where companies prefer to do things "My Way." ICS can be identified either through reference to the appropriate Ministry, or, increasingly through the Romanian Chamber of Commerce and Industry, which maintains an interim list of ICs available for direct consultation. Foreign Trade Organizations FTOs performed very specific functions under the old regime. They were responsible for negotiating and implementing the import and export policies of the government. It is likely these groups will cease to exist by 1995 as their functions are replaced by independent producers and trading companies. Contact the Romanian Chamber of Commerce and Industry for a descriptive list of currently operating FTOs. Already, more than 400 private trading companies have been formed under the auspices of the new economic dispensation. Research and Design Institutes Research and design was centrally planned and controlled through the National Council of Science and Technology during the Communist era. Actual research and design was carried out by R&D institutes which were subordinate to the technical/production Ministries. The new economic program of the Romanian government seeks to decentralize research, and it is likely that private concerns will supplant the Research and Design Institutes over the next several years. Nevertheless, these institutions are still extant, and have ongoing responsibilities. Factories and Other Entities Producing enterprises and factories can now act as principals in foreign trade transactions and are open to direct contact with foreign firms. The transition from a centrally-planned economy to a market system, however, will not be easy for this sector. Few enterprises were even allowed to deal with foreigners under the prior regime (contracts were negotiated by FTOs), and these groups have little experience with complex contracts. Chamber of Commerce and Industry (CCI) The Chamber of Commerce and Industry is a non-governmental entity made up of more than 700 member organizations. It includes most of Romania's foreign trade entities and related economic and industrial organizations. The Chamber is now in the process of "decentralization" and local "chapters" are being formed in major cities. The Chamber provides information about Romania's economy, foreign trade system, and foreign trade laws and regulations. In addition, it promotes Romanian products abroad, arranges contacts between foreign producers and Romanian foreign trade entities, and offers a wide range of services and facilities designed to assist foreign businessmen. Its Foreign Relations Department handles inquiries from abroad and its Arbitration Commission assists in resolving disputes arising from foreign trade transactions. Center For Economic Information And Documentation (CIDE) CIDE was created immediately after the December revolution to support Romania's transition to a market economy. The Center offers assistance in setting up and consolidating new enterprises in Romania, both with local and foreign capital. In particular, CIDE offers: - business contacts; - appointments with Romanian partners; - legal assistance; - advertising and publicity; - daily quotations for commodities; - daily exchange rates for most currencies; - international trade statistics. Charges for services are negotiable. For further information contact the Center at B-dul Republicii nr. 12, Sector 3, cod 70348, Bucharest, Romania; telephone 50.60.02; telex 11429 inemo r. Goods Control Organization (ROMCONTROL) The quality and quantity control of import and export goods is undertaken by ROMCONTROL, or the Goods Control Organization. Upon request, this agency, which is part of the Chamber of Commerce and Industry, carries out a wide range of inspection operations: quality control at all stages of production; technical surveys; sampling; laboratory analysis and testing; quantity inspection; packing; marking; expediting production and transit of goods; draft and bunker surveys; control of means of transport; tallying; etc. For each of its operations, ROMCONTROL issues control certificates. Inspections comply with the customer's instructions and are based on international standards. They are available in a variety of areas, including electrical engineering, mechanics, electronics, metallurgy, chemistry, light industry, furniture and foodstuffs. ROMCONTROL services may be secured by permanent contracts or by special control orders submitted by phone, fax, mail, cable or telex. Generally, finished goods are presented for control but, upon request, control and testing may be performed at any stage of production. ROMCONTROL serves as an "independent" testing facility performing services much like Underwriters Laboratories in the United States. In short, ROMCONTROL, through its technical staff and library, acts as an agent for purchasers to assure the quality, packaging, servicing and shipping of any goods ordered from Romania. Its certificates may be submitted to financial institutions as a precondition for the payment of letters of credit as per contracts between Romanian and foreign companies. For further information, contact ROMCONTROL, 22, Blvd. Nicolae Balcescu, Sector 1, Bucharest, Romania; telephone 13.06.79, telex 11876 OCEME. State Insurance Administration (ADAS) ADAS is the State Insurance Administration which insures export and import shipments. ADAS also insures the motor vehicles of foreign tourists and acts as an agent for foreign insurance companies. The new economic system of Romania will also permit foreign insurers to offer policies in Romania. ADAS is in the process of privatization. National Travel Office (ONT-CARPATI) ONT-CARPATI, the National Travel Office, organizes tourist activities and services in Romania and abroad and plans the promotion and development of tourism in Romania. ONT also handles the rental of office space and living accommodations for foreign businessmen. Foreign Trade Publicity Agency (PUBLICOM) PUBLICOM is a specialized publicity and advertising agency. Its main objective is to publicize Romanian exports through radio and television services, media advertising, outdoor and indoor advertising, displays of Romanian products and symposia. PUBLICOM can also provide services to foreign companies doing business in Romania through its contacts with over 150 magazines and daily newspapers. PUBLICOM faces increasing competition from the private sector in the coming years, but can still provide necessary services. Department for Press and Information The Department edits periodicals and numerous economic and commercial publications designed to keep foreign markets informed about Romanian economic achievements, Romanian foreign trade regulations, and the availability of Romanian products. The Department also publishes a number of periodicals designed for foreign markets. These include both product-oriented magazines such as Foresta, the Romanian Journal of Chemistry and Romanian Engineering, as well as informational booklets dealing with Romania's economic foreign policy, foreign trade regulation and economic units (see Bibliography). COMTURIST COMTURIST is the agency providing foreign visitors (and, increasingly, Romanian citizens) with hard currency goods that are generally unavailable for sale in lei. The main units of the COMTURIST network are found in the larger hotels of Bucharest and Brasov along the Black Sea coast and in other major tourist areas. COMTURIST also has over 300 shops where goods are sold to local residents for hard currency. In its network of shops, COMTURIST offers Western-and Romanian-made goods such as textiles, handicrafts, ceramics, crystal, cosmetics, cigarettes, imported clothing, furs, carpets, electrical household appliances and electronic apparatus, automobiles and liquor. COMTURIST deals directly with Western vendors of consumer products, and is open to negotiations with any foreign manufacturer. NEGOTIATING AND PRICING Contacts between overseas firms and Romanian entities may be initiated by either side. Foreign entrepreneurs may take the initiative by: - Contacting the Romanian Embassies or Trade Offices, or the Romanian Chamber of Commerce and Industry. While these entities do not take part in commercial negotiations or sign contracts, they are important sources of information and can be useful in initiating contact between Romanian trade entities and foreign firms; - Writing or telexing directly the appropriate Romanian entity; - Sending company representatives to Romania to meet with appropriate individuals; - Participating in Romanian trade fairs and other trade promotion events in Romania; - Arranging to meet with Romanian entrepreneurs who visit abroad. Information about such visits can sometimes be obtained from the Romanian Embassies and Trade Offices. Negotiating Certain factors should be kept in mind in early negotiations, especially by firms new to the market. The process leading to a signed contract is essentially the same whether a foreign company is negotiating a major or small project in Romania. Only written contracts are valid in Romania; therefore, Romanian negotiators place heavy emphasis upon extensive discussions of contract details. It should be kept in mind that in prior years, only the FTOs had the responsibility (and the right) to negotiate contracts with foreigners. The "producers" (Industrial Centrals) were often represented at negotiations, but took little part in them. Further, the Ministries involved had veto power over any negotiation. This made contracts extremely tedious to negotiate. The new government has now permitted any group to negotiate contracts with foreigners. This "freedom," however, is largely untested. Few Romanians have experience with international commercial negotiations, so Western business executives are often dealing with ingenues across the table. While the Romanian parties may be enthusiastic, and may want to "do a deal," their lack of sophistication can be frustrating. This is not to suggest that the Romanian parties are naive or incapable of driving a hard bargain. Romanians have been trading for thousands of years. Nevertheless, complex commercial contracts are simply unfamiliar to most representatives of Romanian production facilities. This problem is exacerbated by the lack of a comprehensive Commercial Code, Tax Code or Customs regulations. In prior years, the Communists had developed an elaborate "Socialist" commercial system which has now been scrapped. The adoption of Western-style commercial laws is a high priority for the new government, but will take several years for full implementation. In the meantime, many contracts are being drafted using a Civil Law approach, especially the French Commercial Code. This system is at least remotely familiar to Romanians in that it was widely copied in the country prior to World War I. Western European business executives, in particular, have found that reliance on French legal principles is useful in crafting their commercial documents in Romania. Business executives should be cautious in using this approach exclusively, however, as new legislation is being drafted and adopted on an almost daily basis. It is unlikely that Romania will depart radically from the "traditional" civil commercial codes of Western Europe. Legal Counsel Another problem facing Western negotiators is the absence of independent legal counsel in Romania. In prior years, lawyers were assigned to "Law Firms" by the state. All attorneys were effectively government employees. Romania maintained a myth of "independence" of these counsel by contrasting them with lawyers who worked directly for Foreign Trade Organizations. As a matter of practice, lawyers were mere technicians of the law, not advocates for their (foreign) clients. Although the new government has made many changes, the old system of attorneys working for state-run firms is still in place. While attorneys are able to offer independent advice on their own time, Romania has not yet encouraged the formation of truly independent law firms as has occurred in Czechoslovakia, for example. Despite this, it is important for a foreign business executive to consult counsel in Romania-if for no other reason than to stay current with the rapidly-changing legal structure of the country. Business executives are strongly advised to consult experienced Western counsel as well to assist in drafting documents which will hold up in courts other than Romania. Often, contracts can be drafted in such a way as to imply that performance takes place outside Romania, or is guaranteed by independent entities. This can be tricky, but there are qualified counsel available both in Western Europe and the United States who have considerable experience in such niceties. Financial Considerations One of the biggest problems in negotiating a commercial contract with Romania is the nascent state of the country's financial system. Although it has now shaken off the rigidly statist role it had in the past, the banking system of Romania is inadequate to support many sophisticated financial transactions. Merchant banking is unknown, and investment banking (in the Western sense of the term) was unheard of until recently. Even Lines of Commercial Credit are a relatively new phenomenon-especially when extended to actual manufacturing entities. Fortunately, there are some foreign banks in Romania which can assist business executives in these matters. The bad news is that banking laws have not yet been sufficiently modified to allow these institutions to provide the level of service common in the West. It is strongly advised that before entering negotiations with any Romanian entity, a Western business executive meet with the representatives of the foreign financial institutions to determine how best to structure payment terms. As the laws are changing so rapidly in Romania, it is likely the country's banking services-particularly those permitted to be offered by foreign banks-will increase substantially. Pricing Pricing can be one of the trickiest parts of negotiating a commercial contract with Romania. The currency is "soft," and is likely to remain so for several years. Foreigners are, however, allowed to purchase Romanian products for lei, and export them for hard currency. This is a radical departure from the prior system in which all exports had to be purchased directly with hard currency. There are any number of other mechanisms which can be used to convert profits made in Romania into hard currency, but all of them, like the above example, imply costs not usually found in the West. Negotiators should carefully compute these costs when setting prices in a contract. Negotiating Language Romanians rarely expect foreign business executives to conduct negotiations in their language, and will often provide their own interpreters. Some Western business executives, however, have found it a better procedure to hire their own interpreters who are more familiar with technical terms. Many Romanians are more familiar with Italian or French than English, and are comfortable negotiating in either of those languages. English is, however, more and more common in Romanian firms. STATISTICAL INFORMATION For an American businessman who is used to having market research data and information instantly available, Romania can be frustrating. Consumer marketing studies are virtually non-existent and even such ordinarily straightforward matters as production statistics are sometimes difficult to obtain. Official Romanian statistics, for example, are often expressed in terms of growth rates rather than in real numbers. One must recalculate each year from a base, if known. Official Romanian statistical tables are, however, readily available from the National Commission of Statistics. While these statistics are generally accurate, one should exercise extreme care in analyzing them. Definitions used for different categories are sometimes not specified and bases for comparison will change from year to year, being expressed, for example, in either foreign currency or lei. Foreign embassies in Bucharest usually have experience in interpreting the difference between Western and Romanian statistical methods, and can be of real assistance to businessmen in decoding numbers. The new National Commission of Statistics was established in 1990 to address the serious problems created during the Ceausescu era. There was a tendency over the past 20 years for the Romanian authorities to use "creative accounting" to disguise poor performance in various economic sectors. According to most Western sources, the Commission's new statistics are generally accurate, but it will take some time to correct the error of previous years. Statistics used in this book come from a variety of sources, which are cited whenever possible. MARKETING To speak of "Romanian marketing" is to coin a contradiction in terms. As a state-controlled economy for 40 years, where consumer goods were generally produced and sold by a state monopoly, marketing in the accepted Western sense was superfluous. Commercial messages in the Romanian media are rare by Western standards. Further, there are few commercial billboards, signs, or other advertising media. Nevertheless, Western goods are widely known and some have even made significant inroads among Romanian consumers. While lack of marketing skills may not be particularly important within Romania, given their economic system, a foreign businessman needs to take special care when marketing Romanian-made goods abroad. Romanian packaging and labeling are usually unsuitable for Western markets. Extreme care should be exercised, for example, in insuring accurate translations of operating instructions. The Romanians are fond of hyperbole and although many speak English fluently, their use of the language sometimes leads to questionable conclusions. Fairs One of the best ways to improve business contacts and promote sales in Romania is participation in specialized exhibitions, trade fairs and trade seminars. The most important event is the Bucharest International Fair, held twice a year, in spring (consumer goods) and autumn (technical goods). In addition, Romania sponsors numerous industrial exhibitions each year. Firms interested in more information or in participating in one of these shows should contact PUBLICOM, 22 N. Balcescu Boulevard, Bucharest; TELEX: 11374. A foreign company desiring to participate in Romanian fairs and exhibitions should also contact ROMEXPO, TELEX: 11108 TIBR. This organization stages many of the international fairs and exhibitions in Romania. It also organizes Romania's official participation in international fairs and exhibitions abroad. VENALITY One of the best indicia of whether it is appropriate for Western businessmen to invest in any country is the "venality quotient". Regardless of how a country describes itself (capitalist, socialist, scientific-socialist, Communist, etc.), it is impossible for a Western-oriented enterprise to return a reasonable profit if there is widespread corruption. If, for example, bribes are anticipated at every stage of the negotiation process and are a common method of doing business, it becomes difficult to accurately estimate the ROI since bribe "costs" are difficult to estimate. Although the system of "gratuities" is rather common in Romania, the governmental structure is largely free of high-level corruption. "Grease" payments in the form of a carton of cigarettes or a bottle of whiskey are common; large-scale bid-rigging through payoffs to government officials is rare. While companies may argue they have been denied advantages because of their failure to engage in underhanded practices, the more likely explanation in Romania is that the bureaucratic wheels turn slowly and that it is this factor, rather than a lack of engaging is shady dealings on the part of the foreign firm, which is the cause. Romania's slow economic progress in the past was caused less by the corruption of its officials than by the complex system of authorizing and regulating business activities. It remains to be seen how the new government officials will react to the temptations of a capitalist system. For now, most ranking Romanian officials are extremely puritanical. Even the mere mention of a bribe can be counter-productive. Don't do it.