MOLDOVA 2009 INVESTMENT CLIMATE STATEMENT

UNCLAS CHISINAU 000043


STATE FOR EB/IFD/OIA AND EUR/UMB
BUCHAREST FOR FCS
KYIV FOR FCS
SOFIA FOR FAS
STATE PASS OPIC

E.O. 12958: N/A
TAGS: EINV EFIN ETRD PGOV KTDB OPIC USTR MD
SUBJECT: MOLDOVA 2009 INVESTMENT CLIMATE STATEMENT
(PART 1 OF 2)

REF: 08 STATE 123907


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

Openness to Foreign Investment
--------------


2. Moldova continues to take small steps toward
developing a stronger economy, reforming a
cumbersome regulatory framework, combating
corruption and adopting reforms aimed at improving
the business climate. Poor physical
infrastructure, cumbersome licensing procedures,
excessive permit requirements, and proliferation
of fee-for-services to public authorities and
commercial organizations all contribute to a
business environment that remains among the most
challenging in the region. For example, in the
Doing Business Dealing with Construction Permits
indicator, Moldova ranks 158th out of 176
economies and requires twice as many procedures as
the average for OECD countries.


3. Corruption is a serious concern and
"unofficialQ payments are widespread. An American
investor recently encountered numerous
bureaucratic obstacles in attempting
unsuccessfully to renew a license. Government tax
authorities conducted an extensive audit of the
investor's company during the same period, in a
reminder of the government's power to harass
existing investors and keep them in suspense. The
company was found to be in compliance with tax
laws but had to invest staff time and effort to
comply with the audit. 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.


4. After a prolonged recession in the 1990s, GDP
has grown for seven straight years and inflation
has decreased. Moldova, which is consistently
ranked among the poorest countries in Europe,
relies heavily on investments, foreign trade, and
remittances sent by Moldovans working abroad, for
economic growth. Remittances equaled 38 percent
of GDP in 2007. Recent years have seen an
increase in foreign direct investment (FDI) as
investors have taken 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 a strategic objective. The country
had an Action Plan with the EU that set out a
roadmap for democratic and economic reforms and
the harmonization of Moldovan laws and regulations
with European standards.


5. Moldova has been a member of the WTO since
2001 and has signed free trade agreements with
countries of the former Soviet Union (CIS) and
Southeast Europe. In December 2006, Moldova
joined the Central European Free Trade agreement
(CEFTA). Moldova benefits from an extended
generalized system of preferences (GSP-plus) with
the EU. Starting in March 2008 the EU
unilaterally granted Moldova autonomous trade
preferences, which expanded the duty-free access
of Moldovan goods to EU markets. Moldova also
seeks to further deepen its preferential trade
arrangements with European markets in the
negotiation of a new EU agreement.


6. 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 foreign
direct investment (FDI) is far below the countryQs
needs. In attracting FDI, the GOM continues to
add incentives. In 2008 the GOM introduced zero
tax on business profit reinvested in a business.


7. After years of low FDI due to a weak business
climate, FDI inflows have been steadily increasing
since 2004. In 2007, FDI inflows amounted to USD
537.7 million, representing almost half of total
FDI stock since Moldova's independence in 1991.
In the first nine months of 2008, FDI amounted to
USD 627.4 million. Recent years have seen large
investments by Germany's Metro Cash & Carry,
Germany's Draexlmaier, FranceQs Societe Generale,
Austria's Grawe insurance company, AustriaQs
Raiffeisen Investment, the Netherlands' Easeur
Holding B.V., Italy's Veneto Banca, and the U.S.
investment fund NCH Capital.


8. The GOM states on its website that one of its
primary tasks is to attract investments and create
a favorable business climate for all investors
both foreign and local ones. The GOM claims it
taking measures to stimulate the business activity
and improve the investment climate focusing on the
country's geographical position, labor resources,
fertile soils and participation in free trade
agreements with the CIS countries and the EU.
American investments in Moldova are primarily in
the wine and food industry, cosmetics,
telecommunications, banking and real estate.


9. Despite some GOM efforts to lower tax rates,
strengthen tax administration, increase
transparency and simplify business regulations,
decision-making remains opaque and the application
of regulations inconsistent. Additionally, 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.


10. In December 2007 the Moldovan Parliament
adopted the National Development Strategy (NDS).
The NDS succeeded the Economic Growth and Poverty
Reduction Strategy (EGPRSP) of 2004-2007. The NDS
was developed in broad-based consultations with
stakeholders and civil society. The NDS defines
the GOM's developmental objectives and will guide
the budgetary process over the period 2008-2011.
Attracting FDI is critical to enhancing one of the
pillars of the NDS, namely enhancing the
competitiveness of the national economy. This
pillar focuses on policies to improve the business
environment in order to encourage more investment
activity, technological innovation and
modernization; promote the expansion of the small-
and medium-enterprise sector; increase labor
productivity; improve state asset management;
promote inclusion into international networks;
address MoldovaQs deteriorating physical
infrastructure; and reduce its energy
vulnerability. 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 included criteria for
the improvement of macroeconomic indicators,
infrastructure development and better state
property management. In coordination with the
IMF, the GOM has introduced budgets with low
deficits and made reducing inflation a goal. In
2008 the GOM held inflation under ten percent for
the first time since 2002. The memorandum expires
in June 2009 and the GOM has not decided whether
to renew its cooperation with the IMF.


11. 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.


12. 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, although
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 Moldovan citizens.


13. 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.


14. 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 Lei (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). The
current rate of exchange is 10.4 MDL per USD.


15. The Law on Investmentin Entrepreneurship
permits investment in all setors of the economy.
Certain activities require abusiness license.


16. The Law on Entrepreneurship and Enterprises
permits only state enterprises 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 all 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.


17. The GOM launched the first privatization
process in 1994. It has adopted three different
privatization programs since that time, including
privatization via National Patrimonial Bonds
(foreigners were not allowed to participate); via
cash transactions for both locals and foreigners;
and via a program which involved only cash
privatization. The third program began in 1997-
1998 and was extended to 1999-2000. The program
was later extended with some modifications to the
end of 2006. Foreign investors have successfully
participated in these privatizations. In 2007,
Parliament passed a new privatization law which
introduced a new plan for privatizing and managing
state-owned assets with a 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.


18. The GOM 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.
The major government-owned enterprises are two
northern electrical distribution companies, the
Chisinau heating companies, the fixed-line
telephone operator Moldtelecom, the state airline
Air Moldova and the majority state-owned bank
Banca de Economii. After a period of abated
privatization activity consisting of a selloff of
residual governmental shares in companies
originally sold during the mass privatizations of
the 1990s, the GOM picked up efforts to sell a
series of attractive assets. In 2008, the GOM
privatized the footwear manufacturer Zorile, the
former Soviet military-industrial complex Mezon,
and the hotel Codru. Many have questioned the
sales which sometimes appear to proceed at rates
far below market price. The GOM does not promote
transparency in how it evaluates bids. At times
the announcements and very short deadlines for
submitting make it difficult for potential bidders
to arrange financing and comply with all the
requirements for bids. It may seem that only
bidders with previous knowledge of the sale may be
able to comply with bid requirements.


19. The Law on Investment in Entrepreneurship
prohibits discrimination against investments based
on citizenship, domicile, residence, place of
registration, place of activity, state of origin
or any other grounds. The law provides for
equitable and level-field conditions for all
investors. It rules out discriminatory measures
hindering the management, operation, maintenance,
utilization, acquisition, extension or disposal of
investments. Local companies and foreigners are
to be treated equally with regard to licensing,
approval, and procurement.


20. In recent years, the GOM made significant
efforts to streamline business registration. In
the business registration procedure, the GOM
simplified document submissions by implementing a
"one window" approach. This process reduced the
number of documents and days necessary for
business registration. Limited on-line business-
registration services were introduced in 2006 and

2007. In the business licensing procedure, the
government simplified the process in 2002 by
establishing one authority in charge of business
licensing -- the Licensing Chamber -- and by
reducing the number of business activities that
require licensing. The GOM plans to streamline
the permit process for entrepreneurial activity
and introduce elements of the "one-window"
approach in the activities of public authorities,
including their electronic interconnection to
facilitate the exchange of electronic data.

Currency Conversion and Transfer Policies
--------------


21. 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.


22. 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 (plural, Lei) (MDL),has been
generally stable. The Moldovan Leu has been
strengthening in recent years owing to the
weakness of the U.S. dollar, a massive surge in
remittances, and changes in monetary policies.
The Leu appreciated from MDL 11.3 to 10.4 per U.S.
dollar over the course of 2008.


23. 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
--------------


24. 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.


25. 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.


26. Moldovan law restricts the right to purchase
agricultural and forest land to Moldovan citizens.
Foreigners may become owners of such land only
through inheritance and may only transfer the land
to Moldovan citizens. In 2006, Parliament further
restricted the right of sale and purchase of
agricultural land to the state, Moldovan citizens
and legal entities without foreign capital.
However, foreigners are permitted to buy all other
forms of property in Moldova, including land plots
under privatized enterprises and land designated
for construction. Moldovan-registered companies
with foreign capital are known to own agricultural
land, by means of loopholes in the previous law.
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.


27. Since 2001, the GOM has cancelled several
privatizations, citing the failure of investors to
meet investment schedules or irregularities
committed during privatization. While the
government agreed to repay investors in such
disputes, payment of compensations was delayed.
Often, investors have had to apply to the European
Court of Human Rights (ECHR) to enforce payment of
compensation from the Moldovan government. The
GOM has been generally compliant with the ECHR
rulings involving foreign businesses.


28. 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
TransnistriaQs large companies subsequently
registered with Moldovan authorities.


29. In 2000, a U.S. company claimed that it
exported packing equipment and other capital goods
to a privatized Transnistrian factory, only to be
forced out later by the local factory manager
working in collusion 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 and the company
decided to pull out.

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


30. Moldova has a record of disputes over past
privatizations involving foreign investors. Party
of Communists (PCRM) officials, when in opposition
prior to 2001, were critical of what they regarded
as "sweet-heart deals" in many privatizations.
Consequently, once in power, the first government
appointed by the PCRM in 2001 increased its
scrutiny of the privatization process, including
previously concluded contracts. The GOM cancelled
some privatizations because of alleged
irregularities in the privatization procedures or
the failure of investors to meet an investment
timetable. In order to ensure the predictability
and credibility of the government's privatization
policy, the GOM has attempted to introduce a
statute of limitations of three years on the
investigation of privatization files. There have
been reports in recent years from companies that
they had become 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.


31. As a result of negotiations connected with
Moldova's accession to the WTO, modern commercial
legislation was adopted in accordance with WTO
rules. In recent years the GOM has taken opaque
measures, which violate WTO commitments, to
protect domestic producers from foreign
competitors. For example, the GOM has introduced
an environmental tax on bottles and other
packaging of imported goods, while not taxing
bottles and packaging produced in Moldova. The
Embassy interprets this measure to be a non-tariff
barrier to trade. The Ministry of Economy and
Trade stated it had informed the WTO of the
measure and not received a reply.


32. In 2003, the government restructured the
judiciary by eliminating the lower-tier of
appellate courts (called tribunals) and the Higher
Court of Appeals. The judiciary now consists of
lower courts (i.e., trial courts),five courts of
appeals, and the Supreme Court of Justice.
Moreover, a separate set of courts covering the
judicial settlement of economic/trade-related
litigations was created. This quasi-separate
court system consists of the District Economic
Court as a trial court, the Economic Court of
Appeals, and the Supreme Court of Justice, whose
jurisdiction includes the adjudication of economic
litigations. Courts are nominally independent
from government interference. However, the
Ministry of Justice controls their administration
and budget, and reports of interference in law
suits by influential figures are commonplace. In
January 2008, a new department was created under
the Ministry of Justice - the Judicial
Administration Department Q which deals with all
judiciary-related administrative and financial
matters. Moldovan courts suffer from low levels
of efficiency, independence and citizen trust.
During 2008, several lawyers representing Moldovan
nationals at the European Court of Human Rights
claimed that some judges are loyal to the
government and that government officials influence
their decisions.


33. 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 United Nations
Commission on International Trade Law (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.


34. 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
--------------


35. 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.


36. Effective January 1, 2008, a zero percent
income tax rate on re-invested corporate profits
entered into force as part of a GOM initiative of
"economic liberalization." The current Moldovan
Tax Code also provides for a series of corporate
income tax breaks. Many of these tax breaks were
rendered redundant when the new zero tax rate was
introduced. Companies with investments of more
than USD 250,000 in charter capital enjoy a 50
percent 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 percent 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 is exempt for three years from
income-tax payments, if it reinvests locally 50
percent of what it would otherwise have paid in
income tax. A USD 10 million investment requires
only 25 percent reinvestment of income-tax payment
for a full three-year exemption from income tax.
Four-year exemptions are available for a USD 20
million investment with 10 percent reinvestment
and for a 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 (three years),
software developers (five years),agribusiness
(five years),and scientific research and
innovations (unspecified). Commercial banks and
microfinance organizations are tax exempt on
income derived from loans with maturities over
three 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.


37. 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.


38. 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. In a previous
unsuccessful effort to privatize a power plant in
the northern part of Moldova in 2001, the GOM
required bidders to have experience
with electricity distribution activity in free
market conditions and to have work experience in
developing countries. In 2002 the GOM attempted
to privatize the monopoly telephone company,
Moldtelecom. GOM required bidders to have
experience servicing at least 1,000,000 customers,
an annual turnover at least USD 150,000,000, asset
values of at least USD 300,000,000 and experience
in developing countries.


39. Foreign and local investors are nominally
treated the same.


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


41. Enforcement procedures for performance
requirements to enjoy tax incentives are described
in the Tax Code and related governmental decisions
and Ministry of Finance instructions.


42. Foreign investors are required to disclose
the same information as local ones. Moldova has
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
work and residence permits is unnecessarily
complicated and seemingly arbitrary.


43. 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.