VIII. TRADE AND PROJECT FINANCING Description of Banking System The Romanian banking system has undergone major restructuring in order to assist the country in its transition toward a market economy. Key elements have been the transformation of the National Bank of Romania (NBR) into an entity having the traditional role of the central bank, and the development of a network of commercial banks. This two-tiered banking system was formally established in March 1991, although it had been in operation since late 1990. Considerable effort has been devoted to developing an appropriate institutional infrastructure for a modern central bank. At present, the prime functions of the NBR as set forth in Law No. 34/1991 on the statutes of the NBR, are to: regulate credit and currency in the best interest of the nation; control and protect the value of the national currency; mitigate by its influence fluctuations in the general level of production, trade, prices, and unemployment; and generally promote the country's economic welfare. The NBR is engaged in several major areas of activity including: -- controlling both the supply of notes and coins and the overall supply of monetary aggregates; -- establishing the foreign exchange policy of the State, setting the official exchange rate and licensing and supervising legal entities authorized to conduct foreign exchange transactions; -- maintaining Romania's international foreign reserves and balance of payments system; -- licensing commercial banks, both foreign and domestic, and monitoring their activities on a monthly basis; -- setting the level of reserve requirements of commercial banks, which in turn influences the liquidity of the financial system; -- setting interest rate levels; and -- acting as an integral part of the emerging payments clearing system. Interest rates for loans are currently controlled by the central bank. For example, the NBR regulates the spread on deposit and loan rates at commercial banks by imposing a floor on deposit rates and ceiling on lending rates. It also regulates the interest rates paid by the Savings Bank (CEC). Over time, the development of a more competitive banking system and continued progress toward a free market will eliminate the need for the NBR to regulate interest rate spreads. The Romanian economy operates mainly on a cash basis, with commercial banking still in the early stages of development. Currently, about 15 commercial banks (state-owned, private Romanian, foreign, and joint-venture) handle foreign exchange transactions. Branches of state banks operate in all major Romanian cities and several foreign countries, and correspondent bank relations are expanding. But, in spite of improvements, neither Romanian citizens nor foreign businesses are pleased with the ways in which the present system handles accounts, transfers funds or grants loans. The major domestic commercial banks in Romania are: the Romanian Commercial Bank, the Romanian Bank for Foreign Trade, the Agriculture Bank (Agrobank), and the Romanian Bank for Development. They operate in a manner similar to that of commercial banks in other parts of the world, taking deposits and offering a variety of personal, commercial, and foreign trade services to their customers. In addition, the Savings Bank (CEC) provides limited banking services in the national currency (leu) to individuals. A number of new banks with private capital have been licensed to begin operations including: the Bank for the Development of Small and Medium- Sized Industries (Mind Bank), "Dacia Felix" Bank, BankCoop (cooperatives' bank), and the "Ion Tiriac" Commercial Bank. There are also several banks with foreign capital -- Banque Franco-Roumaine, Frankfurt-Bukarest Bank, MISR-Romanian Bank (with Egyptian capital), and the Turkish-Romanian Bank -- as well as branches of such foreign banks as Chemical Bank (U.S.A.) and Societe Generale (France). In addition to making loans, banks may buy, sell, maintain in custody, and manage monetary assets. They may also carry out transfers, clearing operations, and other operations for their own account as well as for the account of third parties. In time, commercial banks will be able to carry out operations and activities with respect to the investment, custody and trading of securities, banking consulting services, trusteeship, etc. Commercial banks may, within the limits specified in their licenses, carry out operations in foreign currency. There are no legal impediments to carrying out these activities. A number of commercial banks (Romanian Commercial Bank, Romanian Bank for Foreign Trade, Agrobank, Romanian Bank for Development, Mind Bank, and BankCoop) have acted as brokers in the currency auction system. Foreign Exchange Controls Affecting Trading In concert with the policies of gradualism, the Romanian authorities opted for a policy of gradual liberalization of the exchange regime which was intended to lead to eventual convertibility. In the process, the leu has undergone a substantial devaluation. By end-1993, the leu was trading at 1,276 to the dollar from the rate of 20 to the dollar in October 1990. After the stabilization efforts during the first part of 1994, the leu settled at about 1,650 to the dollar, which rate has now remained in a narrow trading range for several months. Historically, the course of exchange policies has been dictated by a wish to avoid a vicious spiral of inflation-depreciation that was feared would occur if the rate were freed in the absence of supporting macro-economic policies. The government also wanted to ensure secure access to foreign exchange for imports of energy and raw materials. Nevertheless, these policies failed as government intervention was not adequate in stemming continuing depreciations. Large fiscal deficits occurred, highly negative interest rates created unreal pricing through most of the period, and episodal price liberalizations contributed to continued pressures on the exchange rate. Moreover, parallel markets flourished at premiums often much above the official rates. At the end of 1993, it was estimated that only about 15 percent of exchange transactions was passing through the official auction. About two-thirds of the flow of foreign exchange was passing through an unofficial "grey" market, consisting largely of enterprise transactions, at a premium generally between 25-35 percent of the auction rate. The wide disparity between the official and parallel rates created, in effect, subsidies to those importers who were able to get foreign exchange at the auction. In addition, pricing of energy and agricultural products referenced the official rate as benchmark for domestic price setting, giving considerable cost advantages to energy users. Meanwhile, the many changes in the foreign exchange regime undercut Romania's drive for sustained export growth and reduced confidence in the leu. Recognition that these policies were harming Romania's prospects for sustained income growth became more apparent in late 1993. As of February 1994, NBR started to implement a program for the gradual liberalization of the national currency's exchange rate and the transition to an interbank currency market. By the end of July 1994 the interbank currency market will fully replace the currency auctions organized by the NBR. The interbank currency market will integrate all authorized intermediaries (banks and exchange offices) which will be able to sell and buy currency without any limitations at freely negotiable rates. The currency market will be in agreement with international standards, being decentralized and continuous. General Financing Availability During 1990-93, Romania's considerable demand for foreign goods and services was constrained by severe hard-currency shortages. Currently, domestic sources of financing are no longer so limited as they used to be. Moreover, a number of external financial resources have become available in early 1994. Romania financed its post-revolution development first by drawing on its foreign exchange reserves, estimated at USD 1.7 billion at the end of 1989. By the end of 1993, even with external assistance, the National Bank's reserves had sunk to about USD 50 million, while the liquidities kept by commercial companies in Romanian banks stood at about USD 450 million. External financial support to Romania was first granted in the form of humanitarian aid. Later on, both multilateral and bilateral governmental assistance became available, but at nowhere near the levels the GOR had hoped. Virtually debt-free at the time of the revolution, Romania has since then increased its foreign debt to USD 3.3 billion at the end of 1993 (of this, USD 1.1 billion is short-term debt). Loans from international financial institutions totalled USD 2.54 billion. Foreign debt servicing amounted to USD 351 million, of which USD 204 million represented interest paid. The debt service ratio in 1993 was 7.2 percent of hard-currency export earnings. Romania's external debt is expected to increase by USD 1.5 billion in 1994. On the other hand, Romania is still owed USD 2.6 billion, of which more than USD 1.7 billion is owed by Iraq. During the last 4 years Romania has worked closely with the International Monetary Fund (IMF) to implement its economic/financial reforms. In spite of this, two standby programs were terminated by mutual consent before final tranches were disbursed when it became obvious that Romania would be unable to meet all program targets. In May 1994, after long- drawn negotiations, the IMF finally approved a new Standby Agreement with the GOR. The first tranche of a USD 700 million standby/special transfer facility package has already been disbursed. Since 1990, the World Bank has approved loans totaling USD 1,350.6 million, including a USD 400 million structural adjustment loan (SAL) to support economic stabilization, industrial restructuring and social welfare. However, disbursement of the second tranche of the SAL (USD 150 million plus USD 33 million from Japan's Eximbank) was delayed pending completion of negotiations with the IMF and further measures by the GOR to assure compliance with conditions of the loan agreement. These funds will now be freed. Other World Bank loans include a USD 150 million for the health sector, USD 120 million for transportation system improvements, USD 175.6 for the modernization of the oil and gas sector (granted for 20 years, with a 5-year grace period), USD 175 million for industrial development, and USD 100 million for supporting private farmers. Loans were also granted for critical imports (USD 180 million) and for education (USD 50 million). World Bank loans under consideration include USD 250 million for the restructuring and privatization of industry and the banking system, USD 200 million for energy sector development, USD 75 million for the development of telecommunications, and USD 114.5 million for environmental and social programs. For assistance in working with the World Bank, U.S. companies should contact Janice Mazur, the U.S. Department of Commerce procurement liaison officer to the Bank. She can be reached on Tel. (202) 482-4332 or Fax (202) 477-2967. The European Bank for Reconstruction and Development (EBRD) has so far funded 17 projects in Romania (total loans: 424.7 ECUs) of which 4 are devoted to the development of the banking system. Main infrastructure projects include telecommunications modernization, European roads rehabilitation, agribusiness development, petroleum sector pilot modernization, and upgrading of the garment industry. It should be noted that the U.S. capital subscription to the EBRD totals USD 1 billion over five years. U.S. companies are eligible to compete for and bid on all EBRD financed projects. For information on EBRD projects in Romania, interested U.S. companies should contact Tom Kelsey, Senior Commercial Officer, Office of the U.S. Executive Director, One Exchange Square, London EC 2EH, U.K.; Tel. 44-71-338-6569; Fax 44-71-338-6487. Last but not least, commercial lending to Romania has improved, although lenders remain extremely cautious. In 1993 commercial loans totaled about USD 200 million. Technical assistance of a nonrepayable nature has also been granted. The most extensive has come from the EU's PHARE program, which in 1991-92 disbursed a total of 230 million ECUs. The United Nations provided USD 869 million in 1991, and could give as much as USD 4 billion by 1996. Individual countries have also initiated technical assistance programs for Romania. U.S. assistance to Romania was limited to humanitarian and food aid in 1990 and most of 1991. In 1992, technical assistance, soft credits, and other financial support became available. The most sizeable was a USD 10 million loan given under G-24 auspices for agricultural sector assistance. Romania became eligible for U.S. Trade and Development Agency (TDA) program funding in November 1991. Since then it has received five grants (with a combined value of USD 2.4 million) for feasibility studies covering such important sectors as electric power (modernization of the energy management system for the national electric power grid; development of Bucharest's district heating system), land reclamation (irrigation system modernization), and telecommunications (telephone local distribution project; network management center project). TDA also funded Romanian participation in international conferences and in procurement trade missions in the fields of electric power technologies, telecommunications, food processing and packaging equipment, printing equipment, and highway development. A USG-funded privately-managed Romanian-American Enterprise Fund was approved in April 1993 and is expected to start operations in late 1994. It will be capitalized at USD 50 million in foreign assistance appropriations over a 3-4 year period. The purpose of the Fund is to promote private sector development in Romania. The Fund will have authority to make equity investments and loans, and offer technical assistance to promote new private initiatives and privatization of existing enterprises, with special emphasis on the promotion of small and medium-sized businesses. The Fund may support joint ventures which involve U.S. investors with Romanian partners. Export Financing and Insurance. Methods of Payment As noted earlier, although the supply of hard currency is scarcely adequate, Romanian companies, both state-owned and private, currently have considerably higher amounts of hard currency in their bank accounts than was the case in 1990-93. With about USD 1 billion in Romanian banks, individual companies are now in a better position to pay for imports of Western goods. However, in general, such straight imports are not of great magnitude, being made mainly in the area of food products, consumer goods, and smaller equipment and parts. Financing more substantial Romanian imports continues to be difficult. Until now, major credits have come from multilateral institutions (for imports earmarked for specific projects) and from Western European banks covered by guarantees issued by the exporters' governments. Supplier credits have also been granted. With the improvement in the operations of several Romanian commercial banks, local credit is expected to become more readily available. Until November 1993, when the bilateral Trade Agreement was ratified by Congress, Romania's access to USG financing and insurance programs was limited. The Export-Import Bank of the United States (Eximbank) opened for short-term (180 days) coverage for exports to Romania in May 1992. So far, the largest U.S.-Romanian transaction covered by Eximbank has been the export of two Boeing 737's purchased by the Romanian national airlines Tarom. However, it should be noted that special Eximbank rules apply for the financing of aircraft exports. Eximbank's latest vote (May 1994) on the sovereign and private risk ratings for Romania appears not to have changed the country's rating, Romania not being eligible for medium-term and long-term coverage. Other U.S. agencies fill various market niches. The U.S. Department of Agriculture, the Small Business Administration, and the Agency for International Development have initiated a variety of programs in Romania, some of which present direct business opportunities for U.S. companies. The most widely accepted method of payment is by confirmed letter-of-credit, since it provides the greatest protection to the seller against payment delays. Of other, less desirable arrangements, unconfirmed letter-of-credit terms are preferable to cash-against-documents or open-account terms. Contracts should stipulate interest payment if the Romanian partners do not meet their obligations on time. The financing environment in Romania has encouraged methods of payment which circumvent the problems generated by the lack of hard currency. One solution is offered by barter/countertrade. Compared with the old system, under which countertrade was not only mandatory but also subject to sourcing restrictions, the current mechanisms provide for considerable flexibility. Co-production arrangements, deferred payment plans, and self- financing packages are other means of coming to terms with the situation. In general, the more willing the U.S. company is to be creative, the greater the chances of concluding a contract. Many Romanians, especially small private entrepreneurs, admit their inexperience in financing, so it is largely up to the U.S. partner to suggest possibilities. Project Financing Available Romania's program of economic restructuring and modernization includes an impressive number of projects which are scheduled to be implemented during the next 10-15 years. As in the case of major projects underway (See list under Part III), future projects will be financed, to a large extent, from Romanian sources (Government and industry funds), but an essential part of financing is expected to come from multilateral institutions and foreign investors. Priority projects supported by multilateral institutions are mainly related to infrastructure modernization in a broad sense, including such sectors as transportation, telecommunications, power generation, and environment protection. Viable private sector projects are also supported on a priority basis. U.S. project financing and insurance can be provided by the Overseas Private Investment Corporation (OPIC), which began operations in Romania in late 1992. The major project approved to date has included an OPIC loan of USD 5 million, plus investment insurance of up to USD 15 million, granted to a U.S.-Romanian manufacturer of ion-exchange resins to be used for industrial and domestic water purification. The project was co- financed by EBRD. The usual structure of financing packages for Romanian projects has until now included one or more multilateral lenders -- the World Bank (or its International Finance Corporation), EBRD, the European Investment Bank -- plus foreign and Romanian commercial banks. Romanian government guarantees are issued by the Ministry of Finance for projects of up to USD 30 million. Guarantees for larger projects have to be submitted by the Ministry of Finance to the Government for approval. GOR guarantees are approved on the basis of feasibility studies which must contain a clear description of the financial package for the project. Project funding for technical assistance has so far been offered by EU's PHARE program and by the TDA. Romanian Banks with Correspondent U.S. Banking Arrangement Romanian Commercial Bank: U.S. corespondents: CitiBank New York, NY; American Express Bank Ltd. New York, NY; Bank One Columbus, Columbus, OH; Bank One Dayton, Dayton, OH; The Bank of New York, NY; The Chase Manhattan Bank, New York, NY; Comerica Bank Inc., Detroit, MI; Commerce Bank of St. Louis, St. Louis, MO; Amtrade Int'l Bank, Atlanta, GA; First National Bank of Chicago, New York, NY; First Wisconsin, Milwaukee, WI; Swiss Bank Corp., New York, NY; The Pacific Bank, San Francisco, CA; Philadelphia National Bank, Philadelphia, PA; Standard Chartered Bank, New York, NY; Trust Co. Bank, Atlanta, GA; Seattle First National Bank, Seattle, WA; Marrinne Midland Bank New York, NY; Republic National Bank of New York, NY; Credit Lyonnais, New York, NY; Bank America Corp., San Francisco, CA; Bank of Tokyo/New York Agency, New York, NY. Agricultural Bank: U.S. correspondents: American Express Bank Ltd. New York, NY; Bankers Trust Co., New York, NY; CoBank- National Bank for Cooperation, Denver, CO; Robabank Nederland New York, NY; ABN AMRO Chicago, Chicago, IL. Romanian Bank for Development: U.S. correspondents: American Express Ltd. New York, NY; CitiBank New York, NY; Credit Lyonnais New York, NY; Republic National Bank, New York, NY; The Riggs National Bank, Washington, DC. Romanian Bank for Foreign Trade: U.S. correspondents: CitiBank, New York, NY; Morgan Guaranty Trust Co., New York, NY; Bankers Trust Co., New York, NY; First Chicago International, New York, NY; Chase Manhattan Bank, New York, NY; Credit Lyonnais, New York, NY; Bank of New York, NY; European American Bank, New York, NY; American Express Bank, New York, NY. Bank Post S.A.: U.S. correspondents: First Wisconsin National Bank Milwaukee, WI; American Express Bank, New York, NY; The Riggs National Bank, Washington, WA.