ROMANIA: INVESTMENT DISPUTE UPDATE

UNCLAS SECTION 01 OF 02 BUCHAREST 001158

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E.O. 12958: N/A
TAGS: ECON EINV RO
SUBJECT: ROMANIA: INVESTMENT DISPUTE UPDATE

Ref: Silkworth EUR/NCE; May 13, 2005

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Background
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1. (SBU) Romania's piecemeal approach to privatizations
resulted in discontent from a number of foreign investors
concerned over inequitable or dubious privatization
proceedings. The current government is aware of the
damaging impact of investment disputes on Romania's image,
but lacks the technical expertise and professional approach
to alleviate investors' concerns. Below are brief outlines
of potential and current investment claims lodged against
Romania.

Noble Ventures (U.S.)
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2. (U) Noble Ventures ("NV") acquired a local steel mill in
Resita, Romania. NV claims that the GOR then illegally
repossessed shares of the company. Romanian government
officials contend that because NV failed to meet its
commitments under the privatization contract, the GOR had
the legal right to seize NV's shares. Claimant D filed for
$350 million in damages with the World Bank's International
Center for Settlement of Investment Disputes (ICSID) in
Washington, D.C. In 2003, the GOR re-sold the firm to
another investor. The case is pending. A decision by ICSID
is expected in 2005.

New Century Holdings (U.S.)
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3. (SBU - Business Proprietary) New Century Holdings (NCH)
purchased 11.66 percent of the shares in the domestic
Constanta Oil Terminal. In 2001, the Romanian Government
transferred certain pipeline assets owned by the Oil
Terminal to state ownership. The owners were not
compensated for this transfer. The expropriated assets were
valued at more than $20 million and constituted
approximately 80 percent of the company's capacity for
transporting oil. After the expropriation, the Oil Terminal
was forced to enter into a concessionary agreement with the
government to use the assets it previously owned. The
Bucharest Stock Exchange suspended trading of the shares in
the Oil Terminal, and the stock lost 50 percent of its
value. In 2003, NCH submitted an application to the
European Court of Human Rights against Romania based on the
expropriation. The case is pending. Both parties have
indicated that they prefer to settle the claim directly
rather than in court.

Cross Lander (U.S.)
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4. (SBU - Business Proprietary) In 2004 Cross Lander (CL)
acquired an off-road vehicle manufacturing company. GOR
moved to free the company from past budgetary arrears as
agreed in the privatization contract. Because of unsettled
non-budgetary arrears to state-owned energy companies, the
company was put under judicial reorganization under
insolvency law. CL is seeking an amicable resolution of the
issue, but is also contemplating the possibility of filing
for international arbitration with ICSID for an amount to be
determined should it fail to solve the issues.


S&T Oil Equipment and Machinery (U.S.)
--------------

5. (SBU - Business Proprietary) S&T Oil Equipment (S&T)
acquired a majority stake in a Romanian explosives and
domestic fertilizer production company in November 2003.
The contract had as a precondition the fulfillment of a debt
for equity swap of the company's arrears to energy
companies. The GOR claims to have received S&T's written
waiver of the precondition. In 2005, because of overdue
debts, the Romanian company was placed under judicial
reorganization through Romanian insolvency law. In 2005,
the GOR terminated the privatization contract and seized
S&T's shares, contending that S&T was in breach of contract.
S&T announced intent to file for international arbitration
with ICSID for an amount TBD.

Gavazzi Steel (Italy)
--------------

6. (U) Gavazzi Steel (GS) bought a state-owned local steel
mill in 1999. The company was subject to reorganization
under the Romanian insolvency law, reportedly due to GOR's
failure to reschedule debts, as agreed in the initial
privatization deal. In 2004, the GOR terminated the
privatization contract and seized GS's shares. In 2005, the
GOR sold the steel mill to a Russian company. GS announced
intent to file claim with ICSID for an amount TBD.

Comment
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7. (SBU) Key economic players in the current Romanian
government are keenly aware that the ICSID's impending
decision on the Noble Ventures case has the potential to
damage the GOR's reputation and credit rating. Despite
these potentially serious consequences, the GOR still has
not created a damage control plan or strategy for addressing
possible fallout as the country still struggles on a daily
basis to handle immediate political and economic issues, as
well as challenges resulting from upcoming EU accession.

Delare