Identifier
Created
Classification
Origin
08CHISINAU39
2008-01-15 12:34:00
UNCLASSIFIED
Embassy Chisinau
Cable title:  

MOLDOVA 2008 INVESTMENT CLIMATE STATEMENT

Tags:  EINV EFIN ETRD PGOV KTDB OPIC USTR MD 
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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 

SIPDIS

SIPDIS

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

UNCLAS CHISINAU 000039

SIPDIS

SIPDIS

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.


Dispute Settlement
--------------


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.


Performance Requirements/Incentives
--------------


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
nationals own shares of a company. Both joint ventures and wholly
foreign-owned companies may be set up in Moldova. However,
individual privatization projects in sectors such as energy,
telecommunications, wine, and tobacco may have specific performance
requirements.


37. While not official policy, in strategic sectors of the economy,
such as energy and telecommunications, past administrations
preferred to have experienced foreign investors instead of local
investors. In all other sectors, foreign and local investors are
nominally treated the same.


38. The government does not impose "offset" requirements on
procurements. Moldovan law allows investments in any area of the
couQry in any sector, provided that national security interests,
anti-monopoly legislation, environmental protection, public health,
and public order are respected.


39. Enforcement procedures for performance requirements to enjoy tax
incentives are described in the Tax Code and related governmental
decisions and Ministry of Finance instructions. Foreign investors
are required to disclose the same information as local ones. There
are no discriminatory visa, residence, or work-permit requirements
inhibiting foreign investors' mobility in Moldova. However, the
government administers a quota system limiting the number of
available residence permits. The Embassy receives regular
complaints that the issuance process for labor and residence permits
is unnecessarily complicated and seemingly arbitrary.


40. Moldova has commercial relations with over 100 countries. It
has a liberal commercial regime. According to the Tax Code,
Moldovan exports are exempt from value-added tax. Although there
are no formal import-price controls, some businesses have complained
about arbitrary price assessments on imported goods by the Moldovan
Customs Service.


Protection of Property Rights
--------------


41. The legal system protects and facilitates the acquisition and
disposition of all property rights. Moldova has adopted laws on
property and on mortgages. A system for recording property titles
and mortgages is in place; however, the mortgage market is still
underdeveloped.


42. Moldova adheres to key international agreements on intellectual
property rights. Moldova is a signatory to the International
Convention on Intellectual Property, signed July 14, 1967, in
Stockholm.


43. Moldova took measures to implement and enforce the WTO TRIPS
agreement before its official accession to the WTO, and adopted
local laws to protect intellectual property, patents, copyrights,
trademarks and trade secrets. The country has an agency for the
protection of copyright, the State Agency for Intellectual Property.
Although many basic policies are in place and meet international
standards in the field, enforcement is sporadic. Also, Moldova
still needs to implement changes to its Criminal Code to strengthen
copyright protection.

Transparency of the Regulatory System
--------------


44. Bureaucratic procedures are not always transparent and red tape
often makes processing unnecessarily long, costly and burdensome.
Discretionary decisions by state functionaries provide room for
corruption. The GOM has taken measures to fight corruption with the
implementation of the "guillotine law," which eliminated costly and
obsolete regulations and forced the publication of all
business-related regulations. All regulations and governmental
decisions related to business activity have been published in a
special business registry. These steps were intended to raise the
awareness of business people about their rights, increase the
transparency of business regulations, and help fight corruption. A
second "guillotine law," the Law on Basic Principles Regulating
Entrepreneurial Activity, was enacted in August 2007, but full
implementation was delayed until January 1, 2008. To enhance
transparency in the drafting of laws and regulatory acts in the
future, the GOM will apply a Regulatory Impact Assessment (RIA) to
all draft laws and acts bearing on business activity. As a first
step, the GOM vetted 100 laws with the goal of reducing payments to
regulatory and control bodies and streamlining business-licensing
procedures and economic-financial controls.


45. The legal framework for anti-monopoly regulation is the Law on
Protection of Competition. The law establishes the fundamental
principles, based on EU standards, for regulating the activity of
enterprises with a de facto monopoly and for support and development
of competition. After several years of delay, the government
established a National Competition Agency in 2007. However, the
agency's targeted actions against major foreign investors drew
accusations of abuse, lack of experience, and flawed anti-trust
legislation. Complaints from the business community prompted the
GOM to submit to Parliament amendments to the current legislation.


46. The government took measures to streamline business registration
with the implementation of a "one-window" approach in 2004. Despite
the creation of a Licensing Chamber and a significant reduction in
the number of regulated business activities requiring licensing,
businesses must still provide a great deal of supporting
documentation to receive a license. Regulation of foreign trade
transactions, business licensing, and lending remain a problem.


47. The government usually publishes significant laws in draft form
for public comment. Business fora and trade associations represent
other opportunities for comment. The working group of the State
Commission for Regulation of Entrepreneurial Activity, which was
established as a filter to eliminate excessive business regulations,
meets weekly to vet draft governmental regulations dealing with
entrepreneurship. The working group's meetings are open to
interested businesses. A Foreign Investors Association (FIA) was
established in 2004 with the support of OECD. FIA engages in a
dialogue with the GOM on topics related to the investment climate
and publishes an annual White Book of concerns and recommendations
for the improvement of the investment climate. In 2006, the
American Chamber of Commerce was registered in Moldova, representing
another voice for the business community in Moldova.


48. In 2003, the GOM passed new criminal and civil codes and
ratified several important international conventions that, in
general, create a better environment for the market system.


49. Moldova introduced its National Accounting Standards (NAS) based
on International Accounting Standards (IAS) in 1998. While this
meant greater transparency of financial information and
compatibility with IAS, the NAS has not been updated siQe then,
leaving it outdated. NAS is not compatible with the International
Financial Reporting Standards (IFRS) introduced in 2004. A new law
on accounting will take effect on January 1, 2008. Moldova is
moving toward adoption of IFRS by 2011. Large and publicly listed
companies that meet compliance criteria set out in the law have to
apply the IFRS starting January 1, 2009.


Efficient Capital Markets and Portfolio Investment
-------------- --------------


50. Laws, governmental decisions, securities regulations, National
Bank regulations, and Stock Exchange regulations provide the
framework for capital markets and portfolio investment in Moldova.
The GOM began regulatory reform in this area in 2007 with a view to
spurring the development of the weak non-banking financial market.
In particular, only two bodies - the National Bank and the National
Commission on the Financial Market - will regulate financial and
capital markets starting in 2008. The Stock Exchange will switch
from a non-profit to for-profit status.


51. Credit is allocated on market terms with banks being the only
reliable source of business financing. The GOM regulates credit
policy via credits from the National Bank, auctions through
commercial banks, compulsory reserves, credits secured through
collateral, open market operations, and T-bill auctions on the
primary market. Foreign investors may obtain credit on the local
market. However, funds from local commercial banks are lent at
prohibitively high interest rates and mostly on short-term, which
reflect the country's perceived high economic risk and inflation.
Also, large deals rarely can be financed through a single bank and
require a bank consortium. Recent years have seen a growth in
leasing and micro-financing. In 2007, Raiffeisen Leasing was the
first international leasing company to open a representative office
in Moldova.

52. The private sector's access to credit instruments is difficult
because of the insufficiency of long-term funding. Financing
through local private investment funds is virtually non-existent. A
few U.S. investment funds have been active on the Moldovan market,
notably NCH Advisors, Western NIS Enterprise Fund and Emerging
Europe Growth Fund, the latter two managed by Horizon Capital equity
fund managers.


53. In 2007, a "mega-regulator," the National Commission on the
Financial Market (NCFM),replaced the National Securities
Commission. The NCFM supervises the securities market, insurance
sector and non-bank financing. The NCFM is operationally
independent. Once it has reached full operating capacity, starting
October 1, 2008, it will acquire the right to issue and withdraw
licenses for all non-bank financial sectors it supervises. The
Commission adopted a Corporate Governance Code and passed new
regulations intended to simplify the issuance of corporate
securities and increase the transparency of transactions at the
Moldovan Stock Exchange. The GOM is interested in transforming
Moldova into a regional hub for capital market services by becoming
a center of distribution of international venture capital. The GOM
wants to attract investment fund management companies to relocate
their regional headquarters to Moldova.


54. Moldovan banks are the main source of business financing, with
non-bank financing, albeit growing, poorly developed. The banking
system has two levels: the National Bank of Moldova (NBM) and 15
commercial banks. The NBM supervises the commercial banks and
reports to the Parliament. The government holds a controlling stake
in one bank, Banca de Economii (Savings Bank). As of October 31,
2007, foreign investors' share in Moldovan banks' capital was more
than 65 percent.


55. As of September 2007, total bank assets were USD 2.61 billion
(equal to 77% of GDP). Moldova's five largest commercial banks
account for 66 percent of the total bank assets, as follows (as of
September 30, 2007):

Moldova Agroindbank: MDL 6,308 million (USD 548 million) in
assets;

Banca de Economii: MDL 4,086 million (USD 355 million);

Victoriabank: MDL 3,646 million (USD 316 million);

Moldindconbank: MDL 3,377 million (USD 293 million);

Mobiasbanca: MDL 2,418 million (USD 210 million).


56. Unofficial "cross-shareholding" and "stable shareholders"
agreements are used mostly by investment funds to restrict other
companies' participation, not specifically aimed against foreign
investment.


57. Measures to prevent hostile takeovers are typically designed to
protect against all potential takeovers, not just foreign
takeovers.


58. No laws or regulations authorize private firms to adopt articles
of incorporation or association which limit or prohibit foreign
investment.


59. The U.S. Embassy has no reports about private sector or
government efforts to restrict foreign participation in industry
standards-setting consortia or organizations. However, private
enterprises' internal regulations may include such restrictions.


Political Violence
--------------


60. The U.S. Embassy has received no reports over the past ten years
involving politically motivated damage to projects or installations
in Moldova. Such civil disturbances are unlikely in the near
future.


61. Separatists control the Transnistrian region of Moldova along
the eastern border with Ukraine. Although a brief armed conflict
took place in 1991-1992, the cease-fire of July 1992 has generally
been observed. Local authorities in Transnistria maintain a
separate monetary unit, the Transnistrian ruble (current market
exchange rate equals about 8.5 rubles per one USD),and a separate
customs system. Despite the political separation, economic
cooperation takes place in various sectors. In recent years, the
GOM has implemented measures requiring businesses in Transnistria to
register with Moldovan authorities (see paragraph 26). A settlement
is still being negotiated with the Organization for Security and
Cooperation in Europe (OSCE),Russia, and Ukraine acting as
guarantors/mediators and the U.S. and EU as observers. The
settlement talks have been stalled since 2006. In 2007, the
Moldovan President announced several confidence-building initiatives
in a bid to resume negotiations.


Corruption
--------------


62. Moldova is making efforts to adopt European and broader
international standards to combat corruption and organized crime.
In 2007, Moldova ratified the United Nations Convention against
Corruption, subsequently adopting amendments to its domestic
anti-corruption legislation. In this respect, the Center for
Combating Economic Crimes and Corruption has drafted a new Law on
Preventing and Combating Corruption. The GOM has also developed
several companion draft laws designed to address current legislative
gaps. A Code of Conduct for Public Servants is also under
development.


63. Moldova's Criminal Code (effective June 12, 2003) has also
contributed to the effort to combat corruption. It includes
articles on public and private sector corruption, combating economic
crimes, criminal responsibility of public officials, active and
passive corruption, and trade of influence. These additions put the
legislation more in line with international anti-bribery standards
by criminalizing the act of offering a bribe. Under this
definition, the act of promising, offering or giving a bribe to a
"person of responsibility," i.e., a public official, is a crime.


64. Both offering and accepting a bribe are criminal acts. A bribe
- whether to a foreign official or not - is a criminal act and is
not deductible for tax purposes.


65. The penalties for offering and accepting a bribe are included in
two articles of the Criminal Code. Offering a bribe is punishable
by up to three years imprisonment or by a fine of 10,000-20,000 lei
(approximately USD 716-1,432); if repeated, the penalty is up to
five years imprisonment or a fine of 20,000-40,000 lei (USD
1,432-2,865); and offering a large bribe for the benefit of a
criminal organization is punishable by 5-10 years imprisonment.


66. Accepting a bribe is punishable by up to five years imprisonment
or by a fine of 10,000-30,000 lei (USD 716-2,148); if the offense is
repeated, the penalty is 5-10 years imprisonment or a fine of
20,000-60,000 lei (USD 1,432-4,297); and for accepting a large bribe
in the interest of a criminal organization, the punishment is 7-15
years imprisonment. The result of these penalties is that many
corruption crimes are classified as "less serious," and
investigative agencies are therefore restricted from utilizing
undercover techniques.


67. Several international and local organizations in Moldova work on
combating corruption. In December 2006, the Republic of Moldova and
the United States signed a USD 24.7 million Millennium Challenge
Corporation (MCC) Threshold Country Program (TCP) agreement aimed at
reducing corruption. Moldova's current MCC TCP program focuses on
persistent corruption in the judiciary, the health care system, and
the tax, customs and police agencies.


68. In 2005, the Council of Europe's Program against Corruption and
Organized Crime (PACO) launched a one-year regional project on
"support to the National Anti-Corruption Strategy of Moldova." An
agreement for a follow-up project - the Project against Corruption,
Money Laundering, and Terrorism Financing in the Republic of Moldova
(MOLICO) - was signed in July 2006 between the Council of Europe,
the European Commission, and the Swedish International Development
Cooperation Agency. The MOLICO project is aimed at ensuring the
implementation of Moldova's anti-corruption strategy on the basis of
annual action plans and strengthening the anti-money
laundering/counter-terrorist financing system of Moldova.


69. Moldova is not a signatory of the Organization for Economic
Cooperation and Development (OECD) Convention on Combating Bribery.
However, Moldova is part of two regional anti-corruption
initiatives: the Stability Pact Anti-Corruption Initiative for
South East Europe (SPAI) and the Group of States against Corruption
(GRECO) of the Council of Europe. Moldova cooperates closely with
the OECD through SPAI, and with GRECO, especially on country
evaluations. In 1999, Moldova signed the Council of Europe's
Criminal Law Convention on Corruption and Civil Law Convention on
Corruption. Moldova ratified both conventions in 2003.


70. The Embassy has received reports that corruption and bribery are
serious problems for foreign investors. For example, when a foreign
investor discovered that he had under-paid his taxes and wished to
remedy the situation, the tax inspector assigned to the company
attempted to extort money. However, when the investor informed the
tax administration of his error, the tax service lauded his
self-reporting and negotiated a reduced payment. In other
situations, however, a foreign investor may be faced with the choice
of either paying a bribe or leaving. The Embassy has received
reports of "informal" hostile takeovers of profitable businesses.
In these cases, business owners are approached by
politically-connected individuals who wish to acquire part of the
business. If business owners refuse, they are soon forced to close
via non-transparent measures.


71. Based on Transparency International reporting and an assessment
of closed court cases, corruption is most pervasive in the following
areas: law enforcement, customs, taxation and regulatory system;
judicial system; health care system; educational system, government
procurement and procurement in general; agricultural subsidies and
social assistance.


72. Moldova's ranking in Transparency International's
Corruption Perception Index steadily worsened from 2001, when it was
ranked 63 out of 91 countries, to 2004, when it ranked 116 out of
145 countries. In 2006, Moldova ranked 81 out of 163 countries
surveyed, but slipped in 2007, dropping again to 113 out of 180
countries. Moldova's score placed the country behind Albania,
Bosnia and Herzegovina, Croatia, Montenegro, Macedonia, and Serbia.
According to surveys conducted in 2006, about one third of Moldovan
firms admit that they frequently pay bribes.


Bilateral Investment Agreements
--------------


73. Moldova has signed bilateral investment protection and promotion
agreements with 35 countries, including Albania, Austria,
Azerbaijan, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria,
China, Croatia, the Czech Republic, Finland, France, Georgia,
Germany, Greece, Hungary, Israel, Italy, Kuwait, Kyrgyzstan, Latvia,
Lithuania, the Netherlands, Poland, Romania, Russia, Slovenia,
Spain, Switzerland, Tajikistan, Turkey, Ukraine, the United Kingdom,
the United States, and Uzbekistan.


74. Moldova has a bilateral treaty with the United States on the
Encouragement and Reciprocal Protection of Investment, but does not
have a bilateral taxation treaty with the United States.

OPIC and Other Investment Insurance Programs
--------------


75. The Overseas Private Investment Corporation (OPIC) became active
in Moldova in September 1997, providing political-risk insurance to
an American company investing in an agribusiness. In 1992, Moldovan
and U.S. governments signed an investment incentive agreement that
exempts OPIC from Moldovan taxes on loan interests and fees. In
2002, OPIC provided nearly USD 1 million in political-risk insurance
to two U.S. companies operating in the telecommunications and
agricultural sectors. In 2004, OPIC extended a USD 150,000 loan to
a New York-based small telecommunications business. In 2005, OPIC
closed on a USD 3 million loan to Procredit, a microfinance
institution providing loans to small businesses in Moldova. In
2007, OPIC committed USD 10 million in financing to a U.S. company
to support the expansion of its agribusiness operations.


76. The U.S. Export-Import Bank (Ex-Im) provides U.S. companies
investing in Moldova short- and medium-term financing in the private
sector under its insurance, loan and guarantee programs. In 2000,
the Ex-Im Bank and Moldova signed a Framework Guarantee Agreement
setting the terms for the GOM to issue sovereign guarantees to
facilitate Ex-Im Bank financing of U.S. exports to Moldova. Also in
2000, the Ex-Im Bank and Moldova signed a Project Incentive
Agreement that enabled the Bank to consider financing of U.S.
exports for credit-worthy private sector projects in Moldova on a
non-sovereign risk basis, but which required host-government support
in project-related activities such as permit and license approvals.
Under the agreement, repayment of Ex-Im Bank financing is based on
the capture of financed projects' revenue streams in special escrow
accounts held in banks approved by the Ex-Im Bank.


77. In 2002, the Ex-Im Bank signed a memorandum of cooperation with
the Black Sea Trade and Development Bank. Under the memorandum, the
Ex-Im Bank's financing products can be used to support exports of
U.S. goods and services to any country located in the Black Sea
region, including Albania, Armenia, Azerbaijan, Bulgaria, Georgia,
Greece, Moldova, Romania, Russia, Turkey and Ukraine. The agreement
enables the Black Sea Trade Development Bank to act as a guarantor
of specific transactions and also provides for parallel financing
arrangements.


78. Moldova is eligible for U.S. Trade and Development Agency
(USTDA) funding of feasibility studies, orientation visits,
specialized training grants, business workshops and other forms of
technical assistance. USTDA considers funding for a wide range of
sectors with export potential for U.S. companies. In 2003, USTDA
approved funding for a study on upgrading the telecom system for the
Moldovan Customs Service.


79. Institutions such as the European Bank for Reconstruction and
Development and the World Bank are very active in Moldova in both
the private and public sectors, offering various financial tools for
both insurance and credit. Moldova is a member of the Multilateral
Investment Guarantee Agency. Moldova is also eligible for project
and trade financing from the Black Sea Trade and Development Bank.


Labor
--------------


80. Skilled labor is readily available in Moldova, which has an
adult literacy rate of 99.1 percent. The labor force includes
numerous workers with specialized and technical skills. Labor
migration has led to some shortages of workers in the agricultural
and construction sectors. The Moldovan Constitution guarantees all
employees the right to establish or join a trade union. Trade
unions have influence in the large and mostly state-owned
enterprises and historically have been strong in negotiations on
labor relations, such as minimum wage and basic worker rights.
Unions are less active in small private companies. Moldova is a
signatory to numerous conventions on the protection of workers'
rights.


81. The Moldovan General Federation of Trade Unions has been a
member of the ILO since 1992, and is also affiliated with the
International Confederation of Free Unions in Brussels since 1997.
After the Federation split into two separate unions in 2000, the two
merged in 2007, forming the National Trade Union Confederation.


Foreign Trade Zones/Free Ports
--------------


82. One of the GOM's stated economic policies is the creation and
development of free economic zones (FEZ). At present, six FEZs and
one international free port - Giurgiulesti - are registered in
Moldova. According to Moldovan law, export-oriented production is
the main goal of such zones. FEZ commercial residents are allowed
to sell no more than 30% of their products in Moldova. FEZ activity
is regulated by the Law on Free Economic Zones (2001). Foreigners
have the same investment opportunities as local entities. FEZ
commercial entities enjoy the following advantages: 25% exemption
from income tax; 50% exemption from tax on income from exports; for
investments of more than USD 1 million, a three-year exemption from
tax on income resulting from exports, and for investments of more
than USD 5 million, a five-year exemption from tax on income from
exports; zero value-added tax; exemption from excises; and
protection of residents against any changes in the law for 10 years.
The GOM plans to establish three industrial parks in 2008.
Businesses operating in industrial parks do not enjoy special fiscal
treatment, but have access to ready-to-use production facilities and
offices.


83. Similar to the FEZs, the Giurgiulesti Free International Port
was established in 2005 for 25 years. Commercial residents of the
port enjoy the following advantages: 25% exemption from income tax
for the first 10 years following the first year when taxable income
was reported; 50% exemption from tax on income for the remaining
years; exemption from value-added tax and excises on imports and
exports outside Moldova's customs territory; zero valued-added tax
on imports from Moldova; and protection of commercial residents
against any changes in the law until February 17, 2030.

Foreign Direct Investment Statistics
--------------


84. As of January 1, 2007, the total stock of foreign direct
investment (FDI) inflows in Moldova since independence amounted to
USD 1,300.2 million, according to the National Bank of Moldova
(NBM).


85. According to NBM data, annual FDI inflows (in million USD) to
Moldova have increased steadily over the past several years: 241.02
(2004); 262.84 (2005); 368.12 (2006); and 200.46 (Jan-Jun 2007).


86. FDI by country in 2006, according to NBM data and based on
charter capital (as a percentage of total charter capital) was as
follows:

Italy 34.2%
Russia 9.1%
Turkey 6.0%
Romania 6.0%
Ukraine 3.8%
Germany 3.8%
France 3.3%
Cyprus 2.3%
Netherlands 2.1%
Other countries 29.4%


87. According to the NBM, the stock of FDI inflows (in million USD)
by country of origin for the seven largest investing countries for
the period 1992 to 2006 was:


1. Russia 161.0

2. Spain 81.5

3. United States 80.3

4. Netherlands 62.3

5. Italy 50.3

6. Germany 36.6

7. Romania 35.5


88. Based on figures from the National Bureau of Statistics, FDI
stock since 1992 by sectors was (as a percentage of total FDI):

--Electricity, gas and water supply: 26.6%
--Food processing: 26.1%
--Wholesale, retail & repair services: 18.8%
--Financial activities: 14.5%
--Transportation and communications: 5.3%
--Real estate transactions: 4.8%
--Other activities: 3.9%


89. According to NBM data, at the end of 2006, Moldova's direct
investment abroad since independence amounted to USD 29.15 million.


90. In 2006, FDI inflows were 11.0% of annual GDP (USD 3.356
billion).


91. Major U.S. investors or representatives of U.S. companies in
Moldova include:

- NCH Group of Investment Funds: real estate and financing
companies;
- Horizon Capital: equity investment fund managing the investments
of Western NIS Enterprise Fund (which is phasing out its local
activity) and the recently created Emerging Europe Growth Fund with
holdings in banking, food processing and glass manufacturing;
- McDonald's: fast food;
- Coca-Cola: soft drinks;
- Foodpro International: food processing;
- Development Group USA: food processing, wine and media;
- Lion Gri: wine;
- Transoil Ltd.: farming, agribusiness and grains trading;
- Mary Kay: perfumes and cosmetics;
- Avon: perfumes and cosmetics.

KEIDERLING