Spectre of lawsuit losses hangs over Bucharest

Financial Times, London, April 18 2005

Spectre of lawsuit losses hangs over Bucharest

By Christopher Condon in Bucharest

Romania’s past treatment of foreign investors may soon come back to haunt its new government and an economic plan agreed with Brussels ahead of membership of the European Union.

A World Bank arbitration panel, the Icsid, is expected to rule in coming weeks on a lawsuit seeking $350m (€270m, £180m) from the state brought by Noble Ventures, an American investment group.

The group accuses the government of Adrian Nastase, the former prime minister, of sabotaging its acquisition of a state-owned steel mill and illegally renationalising the mill in 2001.

The ruling will be final and binding under Romania’s bilateral investment treaty with the US.

With a handful of other disgruntled foreign investors lining up to sue Romania for additional hundreds of millions of dollars for alleged mistreatment, the Noble Ventures suit may prove an important test case.

A significant award to Noble Ventures could signal that Romania’s new government, in office since December, stands to inherit a substantial financial mess at an awkward time.

The new government of prime minister Calin Tariceanu, which took power in December, appears to be far more friendly to western investors and is making efforts to eliminate the corruption that characterised much of the deal-making under the Nastase government.

However, it has not sought to settle the claims and last week even sold to Russian investors a steel mill that the Nastase government repossessed from an Italian group.

The Italian group, Gavazzi Steel, also plans an Icsid suit. Gavazzi, which bought the Otelu Rosu steel mill in 1999, claims the government illegally seized the mill after pushing it into reorganisation after failing to reschedule debts, as agreed in the initial privatisation deal.

Last week, the Romanian government announced it had sold the assets of Otelu Rosu, void of debts, to Ductile Steel, a Russian company, for $6.5m.

The Noble Ventures case stems from the privatisation of the Resita steel mill in 2000. The US group agreed to pay $4.5m and invest $85m in the plant over three years. However, the deal, according to Noble Ventures, also included the Romanian government rescheduling $35m in unpaid tax and utility debts, allowing liens on Resita’s bank accounts to be lifted.

The procedure for rescheduling was initiated by the country’s privatisation agency but, after elections in November 2000, was halted by the incoming Nastase government.

In arbitration hearings in Washington in October, Romania’s defence centred largely on the claim that privatisation officials had promised merely to seek debt rescheduling from government creditors, but did not explicitly guarantee a new debt payment calendar. Testimony at the hearing, however, appears to back Noble Ventures’ claimsthat Romanian officials did little to secure the debt rescheduling.

Without debt rescheduling, Noble officials say, operating the business proved nearly impossible.

In 2001, government creditors acted in concert to force Resita into reorganisation, and the government subsequently renationalised the plant. In 2004 the same government cancelled Resita’s debts and resold the mill to TMK, a Russian steelmaker, for a symbolic €1.

“What is on trial here is the whole way Romania has managed its transition to a market economy,” said Barry Appleton, Noble Ventures’ lawyer.

EDF Services Group, another American investor, is closely watching the Noble case and plans to file a claim this month with the Icsid for at least $100m. In 1992 EDF signed a 20-year agreement to operate duty-free retail and other commercial activities at three Romanian airports and aboard flights operated by Tarom, the state-owned airline. In 2001, according to Rick Weil, owner of EDF, Mr Nastase’s chief of staff asked for a $2.5m bribe in order to keep the agreement in place, which Mr Weil said he refused to pay. Mr Nastase has denied the accusation.

In September 2002 the Nastase government passed an emergency ordinance banning all airport duty-free operations. A month later, Tarom, Romania’s state-owned airlines, which was run at the time by Mr Nastase’s sister-in-law, forced EDF off its flights. The two moves effectively destroyed EDF’s business in Romania, according to the company.

The suits and potential suits could derail the new government’s budget plans as it scrambles to meet stringent EU rules.

Under pressure from Brussels, Romania is seeking a stand-by credit agreement with the International Monetary Fund that will put a stamp of approval on the government’s medium-term fiscal and economic plans. The government has balked, however, at the IMF’s demand that it lower the budget deficit from 1.2 per cent of gross domestic product in 2004 to below 0.5 per cent this year.

Each additional $100m in claims that must be paid by the government would add a tenth of a percentage point to the deficit.

“They are struggling already” to reduce the deficit, said Radu Craciun, an economist for ABN Amro Bank in Bucharest. “This could complicate the picture further, first because of the amount and second in terms of creating a precedent.”

source: Financial Times