On Tuesday, July 11, 2016, ten senior Romanian lawyers gathered at the Bucharest office of Wolf Theiss for a CEE Legal Matters Round Table to discuss the state of the Romanian economy, the Romanian legal market, and their expectations for the future.
The good humor and general confidence exhibited by participants of the Round Table reflected Romania’s growing economy and stable legal market, and the participants seemed to share a belief – though of course cautiously expressed – that the future in Romania is bright. Ioana Regenbogen, the Head of Legal & Corporate Affairs, ING Bank N.V. Amsterdam Bucharest Branch, summarized: “We have the figures and predictions for the next year. It’s something like 4.2, and if we look to the other countries, it’s amazing; it’s like double of Croatia, Serbia, much higher than Bulgaria, and so on. Even Poland is only at something like 3.5. So it’s amazing.”
A Qualified Enthusiasm
At the same time, many of the experts who gathered at Wolf Theiss’s office agreed that they were not quite as busy as the country’s overall economic figures might suggest, and a number of them pointed at the current political situation in the country as the reason.
Bryan Jardine, Managing Partner at Wolf Theiss Romania and host of the event, suggested that the upcoming election in the country might be playing a role. “I think on a macro level the economy’s going quite well, and the statistics suggest that it’s one of the best performing economies in Central and Eastern Europe. The problem for us, at a more micro level, is how you translate this into real business. This is because we face an election year coupled with aggressive and public anti-corruption efforts. While the latter is a positive development in the medium to long term, in the short term it can have a chilling effect. Indeed, we have seen that impact on many deals that have stagnated or not proceeded. This is the case in particular when you’re dealing with public officials on the other side of deals. Effectively, they are reluctant to take the initiative, or sign contracts, or move negotiations forward, given the concerns that they could be replaced following the elections and their actions subsequently scrutinized by the anti-corruption authorities. So in this context, it is often ‘safer’ to do nothing.... So from our perspective, while Romania certainly is one of the biggest potential legal markets in the region, we have seen challenges in part because of these contextual factors.”
Lucian Bondoc, Managing Partner at Bondoc & Asociatii, expressed a tempered enthusiasm. “We see the market growing, for sure, and I believe that such is likely to continue for a couple of years, but indeed one needs to remain prudent. I think from a psychological stand-point, we are not out of the crisis. But in terms of number of deals, complexity, and people being more relaxed about decisions, we see some real progress.”
Bondoc agreed with Jardine’s suggestion that the government’s hesitancy was affecting business but suggested that the effects were more likely to be felt down the road. “I’m more concerned in the medium term, because we see a bit of temptation from the Parliament for populist decisions, and this could have an impact on the medium term…. I agree that the appetite of the politicians and of the government generally to take decisions of a certain magnitude in the current environment remains to be tested.”
Catalin Baiculescu, Partner at Tuca Zbarcea & Asociatii also agreed that the public sector “has not been the biggest generator of law firm fees for many years now,” but he put a positive spin on the situation, pointing to reports showing that “2015 was the best year for M&A transactions since 2010,” and suggesting that, “in light of the state sector’s failure to generate work, the increase in the private sector is even more significant, because in 2010 there were a significant number of public projects which do not exist these days.”
Alina Popescu, the co-Managing Partner at Maravela & Asociatii, suggested that even the little work that does come from the state may be fool’s gold. “Even if there is a project, and even if you win a tender, the number of billable hours you are able to actually charge the state is lower than it would be in case of working with a private client in a similar deal, and although there is some work we have seen – for instance water infrastructure rehabilitation projects, court litigation, or international arbitration – when you decide to go for such a project you need to think very carefully about whether you actually have a margin out of the deal.”
Marian Dinu, the Managing Partner at DLA Piper Dinu, concurred that the temporary nature of the current government made big deals and privatizations unlikely. “The current government is transparent and is trying to do everything right, but they’ve also only been here for a very short term, and we’re going to have elections in a few months, and no one can predict exactly what the outcome will be; therefore this is not an environment where big transactions, big privatizations can be done, as obviously that would take a bit more time than the two or three months.”
Not everyone was as resigned to the current situation, however, and Ana-Gabriela Atanasiu, the Head of Legal at the Bucharest Stock Exchange, expressed her impatience. “Honestly, I don’t think we should be so resilient and understanding that deals are delayed or falling through because it’s election year. Normally, I shouldn’t have to care that it’s election year when doing business. There should be some sort of general understanding that the deals will go through in a certain climate, that the state policies will continue to exist, because they need to exist, regardless who comes to power. People that live here often get frustrated that they have to wait for the elections to pass in order for things to move. I don’t think it’s normal for us to say, ‘we will put the deals on hold, we will not privatize anything, for example, because we will have elections in November and we should see what happens.’ We’re losing a summer; we’re losing precious time.”
In any event, there was general agreement that, despite a recent slowdown in legal work (“a pause”, as Marian Dinu described it), many sectors remained active. According to Ramona Ene, Legal Manager at Cargill, “agriculture is not dead … not at all. It’s true that agriculture may not be perceived as glamorous as other industries, but I think the fact that we ignore how much agriculture brings to Romania in GDP is a mistake. It’s a huge potential that Romania still has in agriculture.”
“The current government is transparent and is trying to do everything right, but they’ve also only been here for a very short term, and we’re going to have elections in a few months, and no one can predict exactly what the outcome will be”
Stefan Caramida, Senior Counsel Romania & Bulgaria at Philip Morris International added that infrastructure was equally busy. Caramida explained that: “We had a discussion with a huge banking group which is very interested in investing in infrastructure and in financing huge infrastructure projects. And the stoppage is also because we had some problems with European funds. And it looks like this will be solved, and maybe at the end of the year, and next year, we will have some European funds in order to invest in infrastructure.”
Bryan Jardine clarified that even the government was making the right efforts. “I think the important thing is that the government seems to be committed to making the right decisions in terms of investor-friendly policies. For example, we’ve recently seen the adoption of some comprehensive new laws in the area of public procurement, which I hope will incentivize foreign investors to come in with the expectation that the playing field will be more level.”
Caramida then turned the subject to the inequality of economic recovery benefits across the various regions of Romania: “Some areas in Romania, they’re doing incredibly well. Consider cities like Sebes, where a lot of foreign investors built manufacturing facilities. For example, Mercedes manufactures car transmissions there. Apparently, Sebes’ unemployment rate is close to zero. Cluj is another example of a success story, with companies investing and developing there, particularly in the IT area. And then we have cities like Bucharest. I read recently that Bucharest’s per capita GDP on a PPP [ purchasing-power-parity] basis is allegedly more than 120% of EU average. Personally, I don’t feel it, but from this perspective apparently Bucharest does better than Berlin or Madrid. I look around, I don’t feel that we are doing better than Berlin, but this is what the statistics say. If we look at other cities or regions, the statistics probably come closer to what I perceive as reality – GDP per capita stands in some places at below 40% of the EU average. I think this huge disparity is a problem for the government, but also for companies with national reach, including FMCG [fast-moving consumer goods] companies who need different business models to address the disparities in purchasing power and consumers’ behavior.”
“I think the important thing is that the government seems to be committed to making the right decisions in terms of investor-friendly policies. For example, we’ve recently seen the adoption of some comprehensive new laws in the area of public procurement, which I hope will incentivize foreign investors to come in with the expectation that the playing field will be more level.”
Ramona Ene nodded, noting that the unequal distribution of skilled lawyers in Romania also posed “a challenge for various clients who have activities spread across the country.” She elaborated: “I have difficulties in retaining a trustworthy and efficient lawyer outside of Bucharest. There are very competent lawyers in the countryside, but they might have a challenge with email, they might not have the habit of informing the client immediately after a meeting is held or after a hearing in court.”
Lucian Bondoc said he didn’t think that this was much of a problem, suggesting that most work can be done from Bucharest anyway. For Bondoc, the bigger problem is keeping up with the many and ongoing changes to Romanian law. As a result, he said, “there is indeed a difficulty sometimes to build up resources from other counties, but not because there would not be good individual lawyers there. It is rather about the complexity of law now …. In a context where you have over 130,000 pages of EU acquis communautaire transposed since 1989, much of it modified many times since the transposition [he noted later that “the fiscal code has changed over 250 times since the Romanian revolution, and health care legislation over 1,000 times”], and there is almost no single public institution keeping the same name as 20 years ago, it is quite unlikely for someone that is a freelancer to be able to properly cover very complex projects, even if he/she may well be very good in some law areas.”
The Contested Significance of Brexit
None of the Round Table participants expected the United Kingdom’s vote to withdraw from the European Union to have a profound effect on the Romanian economy or business.
Ioana Regenbogen expressed the general ambivalence on the subject. “Brexit matters,” she said, “but at least from what we know they are not one of the key export partners for any of the CEE countries, including Romania, so from this point of view let’s say that the impact should be moderate. The second consideration would be how much it would cost us, the exit, as regards contribution of Romania or other CEE countries to the EU budget, or if we look to the highest net contributors to EU budget, we see Netherlands in first place, and then Germany, Finland, Sweden, Austria, and so on, and we are, maybe third before last, and if we keep the scenario of spending what we spend now, maybe for Romania it will be an extra 0.05 from our GDP. So probably a moderate impact on us. And, in general, on the CEE level.”
Marian Dinu expressed a mild skepticism that the Brexit would turn out to be positive for the country. “There are some people who say that it may in the medium term actually benefit Central and Eastern Europe, because some manufacturing may relocate from the UK to here. It’s still too early to see any concrete outcome out of that, and on balance I would not see Brexit as a very good thing for the region, to be honest, as in fact chances are that it will produce economic damage in Europe and in UK and we will also experience that.”
“We are not the main competitors of the UK market,” Ana-Gabriela Atanasiu conceded, “so I don’t think that the opportunities will come directly to us,” adding that she believes Brexit ultimately does represent an opportunity for Romania and its neighbors. “What we can do is to be smart about it and to see how we can position ourselves, because we are a very interesting country within the region. Can we make some sort of alliances with other countries in Central and Eastern Europe to get a piece of what is leaving UK? I think we should analyze why people and businesses were seated in the UK... I don’t think it was just the financial center of London, it was also a cultural choice; it was the whole package that the UK had to offer; it was the legal system too and the lifestyle…. I think we should target the players that could be interested to move into this hub that Romania can be for Central and Eastern Europe, and we need to be smart about it. What can we really get out of Brexit?”
Several Round Table participants suggested that the process of moving away from UK choice of law provisions and jurisdictional provisions had already begun, and thus should not properly be attributed to Brexit. “UK law was traditionally important,” said Marian Dinu, “but more and more we have seen Romanian law govern transactions, and that has been a trend for the past few years, so it’s probably going to continue as a natural trend, it’s not going to be necessarily because of the Brexit. Sometimes I even puzzle when I see that people want English law on relatively small transactions when in fact the cost of resolving a dispute in the UK, it’s enormous, and it could not be justified by the size of the transaction. We don’t tend to have many transactions in the hundreds of millions of euros here – maybe with the exception of the banks, who occasionally do big loans and so on – therefore I think that’s one of the reasons why the UK laws are on a downtrend already, and that may continue.”
Approval for the Romanian Judiciary
While the quality and reliability of courts in a number of other CEE jurisdictions have drawn criticism, the Romanian judiciary was consistently praised by the Round Table participants. Alina Popescu, for one, noted that “I personally have a good opinion, at least in terms of trends, and in the newer generations, that have graduated the National Magistrates’ Institute and are better and better.”
Of course, nothing’s perfect, and as the conversation continued a few reservations appeared. Lucian Bondoc suggested that, “the trend is positive in our experience, and I think overall you usually get what you expect, kind of,” but said “there are some areas where it’s a bit trickier, such as fights against public authorities.”
And Ioana Regenbogen said that she “would add just one other area, which is consumer litigation, where we still see a non-unitary approach of the courts, in the sense that we see different judgments on essentials of similar or even identical cases, for example related to abusive clauses or conversion of foreign currency loans.”
Ramona Ene added her concerns as well: “I would also point here to fiscal claims, where the final outcome is quite unpredictable to my taste at this moment. Although we had some successes in court, it took too long. We were not able to have success from the first tier of jurisdiction. We had to go to the supreme court and then back to the first court for error retrial.”
Marian Dinu smiled and suggested a balanced view: “I would answer this in the following way. We occasionally still have bad surprises in the Romanian legal system, but the fact that they are surprises is actually quite good.”
The New Generation of Lawyers
Stefan Caramida turned the conversation to the subject of young lawyers, pointing out that he had been intrigued by the conversation in the Hungarian Round Table that appeared in the April 2016 issue of the CEE Legal Matters magazine about the challenges older lawyers had encountered with the new generation. He asked the table, “although every generation says about the next generation, ‘you know, back in our time,’ I’m actually curious how everybody’s feeling about the younger generation.”
Alina Popescu agreed that new lawyers seemed to have attitudes and goals different from those of previous generations. “They definitely seem to have quite a different approach to the one we had at the beginning of our career. For instance, we are seeing fewer and fewer people who are willing to commit to a challenging work schedule. We therefore need to come up with something far more interesting than just the prospective of becoming a partner in the law firm, or interesting deals. These are still important things altogether, but we are seeing more and more people who are looking for something more than that: more balance between professional and personal life, a fair and friendly working environment, the perspective of being exposed to significant roles in important projects from an early stage in one’s career, benefits.”
Ana-Gabriela Atanasiu had also observed a difference, but she thought it was a positive. “When I had my juniors, I found them to be extremely creative, but they would actually do the work only if you know how to use them, if you know how to talk with them. I had juniors that were only five to ten years younger than me and I still didn’t understand what their gadgets were about, how they found access to information, what resources they used, etc. I’m not an old lawyer, but when I got the students for summer practice, and later on then they became junior associates, they found things, and they knew stuff which sometimes amazed me. So, if you just encourage them and look at their creativity and try really hard to understand the way they want to do things, which is completely different than the way we used to do things, we might find some common ground to work together.”
“On the other hand,” Atanasiu said with a smile, the new generation keeps her on her toes and forces her to reevaluate her expectations. “I recall a time when we were in this really big transaction, and at 6:00 or 7:00 they used to look at the door and at me and then again at the door. Usually, they wanted to go out because they had reservations for dinner, the movies, etc., so they behaved in a way I never thought was possible when I was a junior. If you refuse them ‘the 7:00 PM exit’ they challenge you, and they say, ‘Why not?’ And then you have to provide an answer and justify yourself.”
Wrapping Up
Bryan Jardine, who opened the conversation, concluded it as well. “Often our role as lawyers is more than just advising clients. We’re trying to be ‘cheerleaders’ to promote investors to come into Romania. Therefore, how do we differentiate Romania from other regional competitors? While it’s true that Bulgaria may have a more attractive flat tax rate of 10% versus 16%, 16% for Romania is still quite attractive when compared to neighboring countries in the region. And while Romania may not be as employer-friendly as Bulgaria, we still have less restrictive and protective labor laws than France, for example. So, there may be some specific areas where Romania is not as competitive. However, what we try to promote is a more holistic vision of Romania as an investment destination. We talk about the educated work force and certain sectors which are booming, like IT in areas around Cluj, tremendous potential in agriculture and agro-tourism. Indeed, all of these areas could further prosper if the inadequate access infrastructure in Romania were improved. However, this is a double-edged sword–if you improve highway access, more development will follow, which could lead to the despoiling of the Romanian countryside.”
Finally, Jardine said, “One of the biggest concerns for investors remains the legislative uncertainty in Romania. We’ve seen how poor governmental policies have decimated the renewable energy sector. Even for investors who aren’t necessarily interested in renewable energy, they look at this as a case study for Romania and question if the government could pull such ‘bait-and-switch’ tactics to attract investors into other sectors with incentives that are granted and then subsequently revoked. ‘How do I know they’re not going to do that with agricultural subsidies or with IT salary incentives or tax breaks for investment in favored zones,’ investors may rightfully ask. So there’s always this legitimate concern of investors that they may become ensnared in a situation of changing legislation, and unfortunately Romania doesn’t have a very good track record one can defend when it comes to this concern. But again, I think if you really look at Romania as a whole, we continue to counsel our clients on the advantages of investing here, stressing the positives while being realistic about the challenges.”
Round Table Attendees:
- Host: Bryan Jardine; Managing Partner; Wolf Theiss Rechtsanwalte
- Lucian Bondoc; Managing Partner; Bondoc & Associatii
- Ana-Gabriela Atanasiu; Head of Legal; Bucharest Stock Exchange
- Ramona Ene; Legal Manager; Cargill
- Marian Dinu; Managing Partner; DLA Piper Dinu SCA
- Ioana Regenbogen; Head of Legal & Corporate Affairs; ING Bank
- Alina Popescu; Co-Managing Partner; Maravela & Asociatii
- Stefan Caramida; Senior Counsel Romania & Bulgaria; Philip Morris International
- Catalin Baiculescu; Partner; Tuca Zbarcea & Asociatii
This Article was originally published in Issue 3.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
