Romania continues to grapple with the malign legacy of Nicolae Ceausescu, but its legal sector is thriving.
The Romanian economy refuses to roll over and die. Despite the greed and lunacy of dictator Nicolae Ceausescu, shot by firing squad some 25 years ago, the country’s economy is in good health. Its gross domestic product (GDP), which grew by 2.2% last year, is rising faster from the wreckage of global recession than the GDPs of the UK (almost 2%) and several other western European states.
The legal services sector is particularly vibrant, with the country’s largest firms founded and staffed by home-grown lawyers. The Legal 500 lists more than 60 firms in Romania, some of which have partnerships with international firms such as Allen & Overy and Eversheds, and all of which are aspiring to compete with the market leaders.
There are opportunities awaiting domestic and overseas lawyers as the economy grows and diversifies. For instance, the country has ambitions (and the resources to match) to become wholly energy-independent in the next few years. In the process, there will be a role for corporate and banking lawyers to advise on financing exploration and on building the infrastructure to store and distribute fuel.
Romania also has mineral wealth in abundance and vast swathes of countryside ready for agricultural development. There are multi-billion-pound infrastructure projects in the offing, including a new motorway, and China has signed letters of intent to invest billions in the development of nuclear reactors, hydro-electric schemes and modern manufacturing facilities.
All these activities require input from lawyers. There are no protectionist restrictions on foreign law firms setting up offices in the country provided they do so in association with Romanian lawyers, at least one of whom should be a partner. There is, similarly, no prohibition on UK or other European economic area (EEA) law firms entering into partnership with or employing Romanian lawyers, and there are no restrictions on the ownership share of EEA lawyers in a Romanian firm. There are currently around 10 firms with international links established in the country, including firms from the UK, Greece, Italy, Germany, Austria and the US.
Romania is a land of opportunity, then, but the legacy of the toxic Ceausescu years hinders economic growth. Many state-owned enterprises from that era are so inefficient that, with no prospect of turning a profit, nobody wants to buy them. Privatisation, in which lawyers would expect to have an advisory role, is also hampered by social considerations. Entire towns in Romania can still rely upon a single state-owned company for employment and so closing down such enterprises is not an option, even if they cannot be sold.
The Ceausescu years have left deep scars, not only in the economy but also in the Romanian psyche. He was the country’s 20th-century equivalent of Vlad the Impaler, the Romanian medieval prince who was the inspiration for Count Dracula. Like Vlad, Ceausescu treated friends and foes alike with extreme cruelty. Both were intent on self-enrichment and both would go to any lengths in the quest for self-aggrandisement.
Some of Ceausescu’s diktats defy belief. In a bid to grow ‘socialism’, for example, he hatched a plan to increase Romania’s population from 23 million to 30 million by 2000. He announced that the foetus of a baby was state property and anyone who avoided having children was by extension an enemy of the state.
He banned contraception and sex education, and ordered childless women under the age of 45 to attend clinics for medical examinations to determine why they had yet to begin a family. Continued failure to become mothers was punished with a ‘celibacy tax’ of up to 10% of salaries. Children were even tasked with quizzing adults about their sex lives. ‘How often do you have sexual intercourse?’ one question read.
At first, the birth rate nearly doubled, but poor nutrition and inadequate prenatal care soon took their toll, as evidenced by soaring infant mortality and the many babies who were born underweight.
Ceausescu’s Palace of the People in Bucharest, now renamed the Palace of Parliament, further exemplifies his hubris. At 3.77m square feet, it is one of the largest buildings in the world.
Ceausescu was executed before the building was completed, but not before squandering the country’s wealth on a vanity project while the people, often with no lighting or heating in their homes, lived in squalor.
The Gazette spoke to lawyers from the country’s leading firms to discover how they reconcile the conflict between emerging opportunities and historic dampeners on economic progress, such as the legacy of Ceausescu.
Gheorghe Musat is managing partner of Bucharest-based Musat & Asociatii, which he says is one of the leading firms in Romania in terms of transactions. Some 99% of the firm’s clients are private, Musat adds, and 80% are international. He is bullish about the prospects for native Romanian firms and has declined approaches from ‘three or four top London firms’ to form an alliance. ‘Compared with the Czech Republic, Poland and other former communist countries, it is the native firms that are dominant in Romania and grow stronger by the year,’ he said. ‘We have overseas firms here from the UK, Italy, France, the US, Austria and elsewhere. They are doing well, but it is Romanian firms that always come out top.’
Compared with the Czech Republic, Poland and other former communist countries, it is the native firms that are dominant in Romania and grow stronger by the year — Gheorghe Musat, Musat & Asociatii
Miruna Suciu, an energy partner at the same firm, notes that native firms are successful in part because there is less residual evidence in Romania of the communist legacy of ‘huge bureaucracy and indecisiveness’ than in, say, neighbouring Bulgaria. She says ‘our people never really embraced communism’, but to compete in a global economy have learned to ‘comply with EU standards’ and take responsibility for their own actions, rather than fall back on the state.
Suciu observes that the country has rich reserves of oil and gas both onshore and offshore. ‘By 2012, we were 90% energy-independent for electricity, oil and gas, although reducing consumption [because of the economic downturn] helped.’
The country is also rich in copper, gold, silver, coal and uranium. More controversially, it has vast reserves of shale gas, estimated at 51bn cubic feet. ‘Prospecting for shale gas has been halted, at least temporarily, by people power,’ Suciu notes. Romania is an earthquake zone and people are concerned about polluting the water table, or the risk of gas explosions. People mobilised and mounted protests at sites where companies, including multinational oil and gas company Chevron, were prospecting.
Musat adds: ‘The government is keen to attract overseas investment in shale gas, while the people, mindful of the ecological damage inflicted during the Ceausescu reign, are more and more aware of the environment.’
Bogdan Bibicu is a partner at Bucharest firm Kinstellar, which crossword puzzlers will recognise as an anagram of magic circle firm Linklaters. This is no coincidence. Bibicu says that Kinstellar is the result of a ‘very amicable spinoff’ when, after 10 years in the country, Linklaters decided to close its office. Bibicu and other local Linklaters lawyers chose to go it alone by building on the firm’s decade of business in Romania, albeit under a new name.
Asked about obstacles to growth in Romania and whether political instability is an issue for overseas investors, Bibicu says that political instability is not so much a problem as political infighting. ‘The government has a comfortable majority in parliament, but our politicians are losing focus on putting in place effective measures to create a business environment that will attract new foreign investors,’ he notes.
‘This is because this is a year of elections and they are focusing foremost on the electorate and how people will vote. There are elections for the European parliament mid-year and a presidential election at the end of the year. There is also a referendum, still in its discussion phase, to revise our constitution.’
The proposed new constitution will reduce some of the powers of the president, Traian Basescu, who is in his second five-year term of office, and also grant new powers. Some of the new constitution has already been scrutinised by the Venice Commission, the Council of Europe body that advises member states on the legality of proposed legislation.
Bibicu points to the government’s decision last year to cancel its ‘green certificate’ scheme, which gave financial incentives to the renewable energy sector, as an example of it valuing votes above attracting foreign investment. ‘Most people are on low incomes,’ he says. ‘Reducing the green surcharge so that electricity bills are cut is a sure vote winner. It also went down well with those industries that are large consumers of electricity.’
Bibicu adds that the renewable energy sector was one of the few drivers of the economy during the financial crisis: ‘Energy and banking lawyers had lots of projects to work on during that period. But that all stopped when the green certificate scheme was withdrawn.’
On a happier note, Bibicu speaks about the prospects for growth promised by a planned €3.4bn motorway linking Bucharest to Transylvania and then to Hungary and the rest of Europe. It is a project, he says, that has been discussed at a European level and is mostly to be built with EU funds. However, he and other Romanians believe the project has been ‘delayed and postponed too much’ with the result that foreign investors have stayed away.
‘Bucharest to the western border of Hungary is less than 600km,’ Bibicu points out, ‘and yet the poor state of our existing roads means it takes all day to get there. In contrast, from Hungary you can reach as far as France in just one day. A better road network will attract more and bigger investments to Romania. It will encourage more tourist activity from Europe and make it easier for Romanians to travel abroad. And it will also open up under-developed parts of the country so that agribusiness can expand by taking advantage of the good quality soil and lower prices.’
The projected motorway, the A3, will be 584km long and connect with Hungary’s M4 motorway near the town of Bors. It is an ambitious engineering project, crossing much rugged terrain, including the Carpathian mountain range.
Legal practice: an overview
There are two distinct professions working in legal practice in Romania.
There are lawyers (‘avocati’) who defend and represent legal entities and people. And there are legal advisers whose activities are restricted to the defence of the state and of public authorities or institutions.
An avocat must be a member of one of 41 regional bar associations in Romania, which hold most of the regulatory powers governing the profession.
The National Association of Romanian Bars (Uniunea Nationala A Barourilor Din Romania) consists of representatives from each of the 41 bar associations. It has advisory jurisdiction over issues related to the regulation and discipline of avocati.
The activities reserved for lawyers, as described by Romania’s Lawyers Act, include:
- legal consultancy and petitions;
- legal assistance and representation before courts of law;
- drawing up legal documents;
- defence and representation of legitimate rights;
- fiduciary activities;
- registration of companies; and
- supporting the right to a defence.
An avocat can also work as a local government representative, in academia or act as an arbitrator, conciliator, mediator, negotiator, tax adviser, IP adviser, licensed translator, administrator or liquidator.
An avocat cannot undertake paid activity practising another profession, any activities which would damage the independence of the lawyer’s profession, or any material trading activity.
Bibicu has worked for Linklaters in London and Romania. He has the following advice for international firms considering setting up in his home country: ‘Hourly rates and fees are lower here than in most countries in Europe. Does it make commercial sense for an international firm to be in this market trying to compete with local firms that are charging out maybe a third or less than they do at home?
‘Some international firms, like Linklaters, have already pulled out, others are planning to do so. My advice, and it is probably not what your readers want to hear, is that it makes better sense to team up with Romanian lawyers or an existing Romanian firm than to establish your own independent office here.’
International firm CMS Cameron McKenna has formed an alliance with local lawyers. CMS has been in Bucharest since 1999 and has around 60 lawyers there, including Romanian managing partner Gabriel Sidere. He tells the Gazette that 2013 was busier even than 2008 before the credit crunch changed everything.
‘Banking and finance are extremely busy,’ he says. ‘We are not just restructuring loans, but arranging financing deals for new projects. New production facilities were developed in 2013 for the first time since the 2008 crash. And just last week we were instructed on a major new factory. It’s all quite encouraging.’
Sidere is confident about the future: ‘Things could all be about to change for the better because of China’s interest in developing its presence in central and eastern Europe. China’s prime minister visited Romania in November. He was with us for four days, which is longer than he stayed anywhere else, and in that time signed letters of intent [to] invest billions of dollars in our energy sectors, infrastructure (including railways) and agriculture. We now expect several major Chinese companies to set up headquarters in Romania, including a number of Chinese banks.’
Why is Romania of such special interest to the Chinese? ‘I asked them the same question,’ Sidere recalls. ‘They said that Romania is one of the few countries that Chinese people, for historical reasons, feel comfortable. They didn’t go into details.’
CMS banking and finance partner Simon Dayes, an English solicitor who relocated from London to Bucharest in 2004, says that China’s willingness to invest might contribute to a wider initiative to address the lack of liquidity that is slowing Romania’s growth. ‘We are not a frontier country,’ said Dayes. ‘There are simple things to be done, such as the government showing commitment to developing infrastructure on international models and helping the regulatory framework encourage banks to release funds.’
He instances Romania’s 51bn cubic feet of shale gas as an asset that could help the economy if funds were made available to exploit it – and if popular opposition to it could be overcome. Sidere observes: ‘The environmentalists’ protest was Romania’s own version of the Arab Spring. The protesters co-ordinated their actions through social media. The draft law permitting mining for shale gas already had the full support of government, but failed in parliament because the politicians paid attention to the street, their electorate, and not to the economic future of this country.’
Dayes adds: ‘Foreign investors invested heavily into renewable energy projects, but that all stopped when the green subsidy was eroded in 2013. Renewables were Romania’s great hope, as the forerunner of an infrastructure boom, but not anymore.’
Stefan Damian is deputy managing partner of Tuca Zbarcea & Asociatii, a firm that he and eight other partners from their previous firm set up in 2005. Tuca Zbarcea has since grown, says Damian, to 101 lawyers, including 24 partners, making it ‘Romania’s biggest law firm in terms of headcount and turnover’.
‘Energy and mining are the leaders,’ Damian notes, ‘followed by litigation and restructuring, including insolvency. Activity on the domestic front is maybe 20% of our turnover, the rest being work for international clients.’
Damian is ‘pretty optimistic’ about the future. After Poland, Romania is the largest country in the region, he points out, and could become a ‘powerhouse’ economy with GDP growing 4%-5% annually. Energy independence is ‘fashionable with politicians’ and, once the two new nuclear reactors to be built with Chinese capital come online, should be a reality in seven or eight years, he says.
‘Infrastructure, after years of under-development, is booming. Many projects in the past have been started, then abandoned, because the infrastructure was not there to support them. Things are improving, in particular when the new sections of the A3 motorway are completed linking Bucharest to Hungary and beyond.’
The political will to support that is mixed. ‘We are suffering from political interference into business,’ Damian notes. ‘In an election year, politicians concentrate on politics, not the economy. This year will not be a good one for seeing economic decisions implemented. But that’s life.’
Finally, as deputy managing partner of Romania’s biggest law firm, what advice can he offer foreign firms considering setting up in his country? ‘The Romanian market has strong domestic firms, as well as a number of major internationals,’ replies Damian. ‘There is not a lot of room for new entrants, but there will always be opportunities provided our growth is sustained.’
Jonathan Rayner is a Gazette reporter