Telegramele Wikileaks 21
În multe telegrame trimise de diplomații americani de la București către Washington se face referire la compania Bechtel și contractul pentru autostrada Transilvania, încheiat în timpul guvernării Năstase. Imediat ce Băsescu a cîștigat alegerile, în decembrie 2004, Ambasada nota într-o telegramă că Băsescu a criticat acordarea contractului fără licitație. În martie 2005, însă, după ce Băsescu a făcut o vizită la Washington și s-a întîlnit cu George W. Bush, președintele și-a schimbat părerea și a devenit fan al proiectului. Totuși, rolul de critic al contractului l-a preluat Tăriceanu, care s-a opus în mai multe rînduri continuării contractului, după cum se notează în telegrame. Dosarul complet al negocierilor și presiunilor americane în cazul Bechtel, mai jos, unde există, integral, toate telegramele care tratează acest subiect.
TAGS: PGOV, PREL, KDEM, SOCI, RO
SUBJECT: ROMANIA'S NEW PRESIDENT: FORMER SAILER PILOTS SHIP OF STATE
REF: A. A) BUCHAREST 3421
B. B) BUCHAREST 3415 C. C) BUCHAREST 3318 D. D) BUCHAREST 3092 E. E) BUCHAREST 2956 F. F) BUCHAREST 2748 G. G) BUCHAREST 2226 H. H) BUCHAREST 1730
Classified By: POLITICAL SECTION CHIEF ROBERT GILCHRIST FOR REASONS 1.4 B AND D
1. (C) Summary. Romania's President-elect, National Liberal Party-Democratic Party (PNL-PD) alliance co-leader Traian Basescu, is a skilled political campaigner and popular politician, renowned for his tenacity, but also for his approachability and straightforward style. Basescu is a long-standing domestic political figure, serving as Transportation Minister in the 1990's and Bucharest Mayor from 2000 until his presidential victory over Social Democratic Party (PSD) candidate and Prime Minister Adrian Nastase. Basescu characterizes himself as a strong ally of the U.S. and a vocal advocate for strengthening transatlantic relations. He strongly supports Romania's EU integration and is known for his tough stance on corruption and drive for economic reform and modernization. Sometimes criticized for poor managerial skills in Bucharest City Hall, Basescu now faces the challenge of building a governing coalition and constructing a successful governing team. End Summary.
The Happy Warrior
2. (C) Bucharest's Mayor and President-elect Traian Basescu, the surprise winner in the December 12 runoff presidential election, is little known outside of Romania, as his entire political career has focused on internal politics until now. Within Romania, however, he is renowned as a consummate political wrangler and a longstanding thorn in the side of the center-left Social Democratic Party (PSD), which governedRomania from 2000 until Basescu's upset victory over PSD Prime Minister Adrian Nastase. A native of the seaport city of Constanta, the 53 year-old Basescu will now take on the role of Chief of State from outgoing President and PSD leader Ion Iliescu later this month. His next task is formal designation of a Prime Minister and formation of a government but at the time of this writing, Social Democratic leadership is still arguing that they have the prerogative to form a PSD-centered government based on the majority status of their newly forged parliamentary alliances. (Comment: We may have a Constitutional crisis brewing, but our reading of the Constitutional Article clearly gives a free hand to Basescu to attempt to form a government. End comment)
From Sailor to Alliance Leader
3. (C) Basescu was thrust into the national spotlight in October 2004 following the surprise withdrawal from the presidential race of PNL-PD candidate and Liberal Party president Teodor Stolojan for undisclosed health reasons. However, Basescu is no newcomer to Romanian politics and has been a major player on the Romanian political scene since the early 1990's. Prior to the end of communist rule, Basescu was in the merchant marines, finishing as an oil tanker captain before moving on to become a high-ranking civil servant in Romania's Transport Ministry. Basescu served as Transportation Minister from 1991-92 and 1996-2000. He was elected to parliament as a Democratic Party (PD) deputy from 1992 to 1996. He followed his first election as Mayor of Bucharest in 2000 with another victory in June 2004, handily defeating PSD candidate FM Mircea Geoana and quickly becoming the PD's most popular politician. Indeed, Basescu was arguably the "star" of the PNL-PD local election campaign; his easy win in Bucharest over the popular FM helped energize the PNL-PD Alliance for upcoming parliamentary and presidential elections.
4. (C) Basescu was elected PD president in 2001 after an intense and sometimes acrimonious struggle for control of the party, leading to the defection of some former PD stalwarts. In September 2003, the nominally center-left PD entered into a formal alliance with the center-right National Liberal Party (PNL), elevating Basescu to co-president of the alliance. As alliance co-president, Basescu worked closely with PNL President Teodor Stolojan to forge a unified campaign and strong opposition challenger to the ruling PSD and its well-developed party machine in local and national elections.
Promoting the Transatlantic Alliance
5. (C) Basescu publicly and privately advocates a strong strategic alliance with the United States. During the final televised presidential debate on December 8, Basescu highlighted the importance of the "Bucharest-Washington-London" alliance. At the same time, Basescu insists that EU accession is Romania's number one foreign policy objective - a view shared by political leaders across the spectrum. During the presidential campaign, however, Basescu hammered his opponent for making concessions to EU negotiators without first laying the necessary groundwork domestically. In the course of his December 13 victory speech, Basescu stressed that political leaders must "explain the costs" of EU accession to the population.
6. (C) Basescu, a fluent English speaker, has long been a candid and reliable interlocutor with the Embassy. Indeed, one of his two daughters attended an American university, and Basescu has complained that Romania's rigid academic hierarchy is hesitant to recognize a U.S. diploma in some instances. Basescu's generally pro-American stance, however, did not prevent him from criticizing during the campaign a sole source highway construction contract awarded by the PSD government to Bechtel Corporation. (Note: Basescu also slammed the PSD government for awarding contracts to European companies under less than transparent circumstances. End Note.) In the past, Basescu has voiced reservations about the 2003 U.S.-led military intervention in Iraq. Subsequently, he has privately and publicly expressed his solid support for continued Romanian troop contributions in Iraq and Afghanistan -- even advocating a potential increase, provided Romania has the capacity to do so.
Rolling Up the Shirt Sleeves
7. (C) Even Basescu's fiercest opponents acknowledge that he is a brilliant debater. He punctuates his blunt speaking style with wry humor and a candid admission of his own weaknesses. Indeed, during the last presidential debate, he bemoaned the fact that Romania's two presidential contenders were both ex-communists. One political observer who had been with Basescu on the hustings in rural Romania during the campaign described audiences breaking into tears as Basescu eloquently described the disastrous impact of corruption and inefficient bureaucracy on the lives of ordinary citizens. Earlier, after his city administration came under attack for lagging road repairs, Basescu occasionally doffed his sport coat and pitched in with one of the repaving crews working in the evening under artificial light. It was great politics and endeared him to the citizens of Bucharest.
8. (C) Basescu is famed for his approachable style. As one Romanian remarked to Poloff, he is not intimidating and "anyone can talk to him." His favored public attire is an open collar polo shirt. When forced by official business to don a tie, his cravat is invariably slightly askew, with top button often undone. During the June mayoral race, the shirt-sleeved Basescu mocked his opponent, FM Mircea Geoana, who campaigned at factories and subway stops in tailored, Italian suits. Basescu's informal, straightforward manner starkly contrasted with PM Nastase's button down reserve during the presidential campaign. Indeed, during the debate Basescu consistently referred to his opponent by his first name and by using the informal form for "you." Those who know Basescu insist that his public demeanor accurately reflects his personal style. In a meeting with the Ambassador, his chief of staff remarked that he was a wonderful person to work for and that what you see is what you get. In stark contrast to many of Romania's political elite, whose lavish lifestyle occasionally is featured on tabloid front pages, Basescu has a reputation for dwelling with his wife in a relatively modest home decorated with model ships he has assembled.
Foot in Mouth Disease
9. (C) Nonetheless, Basescu's informal demeanor and shoot from the hip style - which can blend irony and pathos in a few sentences - has occasionally been his Achilles heel. During the campaign he caught flack from the powerful Christian Orthodox hierarchy for his statement that one in five Romanians is homosexual and for his reported endorsement of gay marriage. In classic Basescu style, however, he bluntly admitted that he had "made an error." During the presidential campaign, his opponents attempted to portray him as "unpresidential" - perhaps a competent mayor but, at heart, a former merchant marine lacking the "gravitas" to steer Romania through the shoals of EU accession.
Sharing the Reins of Power?
10. (C) Some former colleagues of Basescu bitterly complain that his management style is non-consultative and frequently disregards the concerns of colleagues. Indeed, one of the most pointed questions leveled at him during the debate inquired whether he was capable of working with a team. Basescu insisted that he is a "team player," but politicians who have worked with him insist that he is a poor manager. Political insiders caution that Basescu will need finely honed diplomatic skills to build a cohesive and consistent
PNL-PD led government.
11.(C) During the presidential campaign, Basescu identified eliminating rampant corruption as a national security priority. His tough talking stance on corruption resonated with many voters who, despite Romania's impressive macroeconomic growth, continue to live in straitened circumstance fifteen years after the end of communist rule. The Nastase campaign's promises to continue fighting corruption were small beer compared to Basescu's insistence that many PSD leaders were directly or indirectly benefiting from a culture of corruption and that state institutions, including the judiciary, must be insulated from political influence.
12. (C) Basescu himself, however, remains dogged by a National Anti-Corruption Prosecutor's Office (PNA) investigation launched in the summer of 2004 into his alleged profiteering from the sale of Romanian merchant marine ships during his tenure as Transport Minister in the 1990's (Ref G). He has vigorously denied these charges, claiming that they are politically motivated. Similar charges in 1996 were dropped due to lack of evidence, following Basescu's agreement to give up his parliamentary immunity to be investigated. This gesture clearly boosted his popularity, marking him in stark contrast to other MP's that allegedly hid their misdeeds under the cloak of parliamentary immunity.
Many Romanians saw the case simply as an attempt by the PSD to tar Basescu with corruption charges. He did not appear to have financially benefited from the fleet sale and any misdoings on his part appear to have been procedural, if that. Constitutional lawyers now say that, with his election to the presidency, the "Fleet File" charges against Basescu will be suspended, as a sitting Romanian president can only be prosecuted for crimes of "high treason."
13. (C) Since the mid-1990's, Basescu has been a stalwart advocate for economic reform, including transparent privatization of state-run enterprises, fiscal reform, and economic modernization to attract foreign investment. During the presidential contest, Basescu reached out to the domestic and international business community, holding forums with leading business groups and pledging to institute market-oriented reforms. Liberal economic reform -- including major changes to the tax code -- remained a central component of PNL-PD's campaign platform. Political analysts
are now watching to see if he will succeed in putting together a government capable of implementing this program.
14.(U) Amembassy Bucharest,s reporting telegrams are available on the Bucharest SIPRNET Website: www.state.sgov.gov/p/eur/bucharest
TAGS: ECON, ETRD, EFIN, PGOV, PREL, RO
SUBJECT: BECHTEL BEGINS TO SHUTDOWN ROAD CONSTRUCTION IN ABSENCE OF PAYMENTS
THIS CABLE IS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISTRIBUTION.
1. (SBU) Summary: High-ranking Bechtel representatives currently in Bucharest failed to obtain sufficient funds from the GOR to cover mounting arrears on work performed on the 2.8 billion dollar Transylvania Motorway project. Discussions at ministerial level have provided no clear way ahead for the short term. As a result, subcontractors were told to shut down June 2nd and the majority of the direct- hire work force was sent home June 3rd. This will be an enormous story with negative implications for business climate perceptions. Post recommends high-level and sustained USG pressure on this important commercial issue. A USG approach should also push for relaxation of anextremely strict IMF deficit target that is seen by the GOR as a barrier to needed infrastructure spending, particularly as massive flooding in large areas of the country has diverted substantial financial resources to relief and reconstruction. End Summary.
Bechtel Says "Show us the Money"
2. (SBU) In the past several weeks, Post has worked closely with Bechtel representatives to press the GOR to provide compensation for work that Bechtel has already performed in 2004 on the Transylvania Motorway project, as well as to provide a mechanism for timely payments for work finished or scheduled for 2005. Current arrears stand at approximately 80 million euros. Since the current government came to power in December 2004, only 16 million euros of payments have been made.
3. (SBU) Despite three different potential funding sources for the project, the GOR has experienced difficulties in accessing any money for the project and provides it only after Bechtel's constant prodding and then only in small allotments. The three sources of funds that the GOR is supposed to use for the project are:
- Internal budgetary funds. There are supposed to be 213 million euros earmarked in the 2005 Transportation Ministry budget for the Bechtel project. Due to a (repeatedly) delayed government budget rectification, however, the Ministry claims it cannot release the money for work performed. They note that there is both need for emergency spending in the wake of widespread spring floods and claim that the expected rectification could result in a lower budget allocation than projected.
- U.S. Ex-Im Bank loan. Activation of this 144 million dollar package has been delayed due to GOR nitpicking regarding language of the letter of agreement (eighteen revisions and counting). In addition, this loan can only be drawn down for purchase/use of American goods and services, a point that many in the GOR still don't seem to understand.
- External credits. The GOR must finance the rest of the motorway through commercial loans and the GOR has been reluctant to take on this debt, because it will count against the IMF-mandated limits on state debt. After much prodding from Bechtel and Post, however, the Finance Ministry is working on a syndicated loan package for 100 million euros. This money, however, will probably only be available, in the best of circumstances, in late July or August.
Increasing Pressure, Increasing Frustration
4. (SBU) Post for many months has been working closely with Bechtel representatives to get the project on track. But just when everything seems to be working, the GOR reverts to historic bad habits that include ignoring Bechtel's repeated requests for meetings to discuss the project, repeating vague assurances of payments that then do not materialize and indulging in round-robins of blame-shifting to other ministries or to the IMF.
5. (SBU) Post had hoped that a breakthrough had come after President Basescu's visit to Washington this spring and his assurances that he would support the project. Indeed, small payments were made and some movement on outstanding issues did occur. But another lull came later in the spring. Similarly, Post was hopeful that the project would start moving in the right direction after Commerce Department's Assistant Secretary Lash, on May 12, received assurances from President Basescu that he would work to resolve issues related to the motorway. However, little has happened positively since then.
Bechtel's Work Shutdown Begins
6. (SBU) With only a token payment of 10 million euros from the Transportation Ministry in sight (enough to pay some of Bechtel's local contractors), and after a very unsatisfactory meeting between the Charge and Bechtel's London-based representatives and Minister of Transportation Dobre on June 3 (obtained only through the direct intervention of the Embassy with the Prime Minister's Economic Advisor), Bechtel has stopped work on the motorway and is sending home its Romanian contractors and workers. Subsidiaries were told to cease work yesterday, June 2nd, while direct hire local employees were mostly told to go home today, June 3rd. Bechtel is complying with all legal requirements in this procedure and will continue to pay workers three-fourths of their salary while they are in forced work stoppage. Bechtel will perform no more roadwork without substantial payments, although minor ancillary work on archeological and environmental projects will continue for the time being.
7. (SBU) Both Embassy and Bechtel urged the Transport Ministry and earlier, the PM's economic advisor, to improve communication between government bodies required to coordinate on funding projects and to exercise political will to take on board necessary external financing. In all meetings, GOR reps eventually ducked behind the IMF, claiming that the strict 0.7 percent of GDP deficit target set by the IMF prevented the GOR from expensing the project at a more rapid rate - either through straight budgetary outlays or loans. They also noted that massive spring flooding (still affecting parts of western Romania) made it incumbent that the government maintains budgetary reserves for emergency relief and infrastructure repair.
8. (SBU) The current GOR continues to behave as if Bechtel will continue to absorb operating expenses for at least some additional months while external credits and an EXIM loan are put in place. Bechtel, under edict from home office, has simply refused to play along any longer. The shut down of the works now taking place should serve to disabuse the GOR of the idea that the free lunch will continue indefinitely. Bechtel needs to meet operating expenses in order to start up again.
9. (SBU) Post recognizes that recent flooding in the western areas of the country has caused unforeseen budgetary strains for the GOR. Nonetheless, the chaotic nature of the GOR's decision-making process and traditional Romanian penchant to "put off until tomorrow what you can get away with" indicates that only the squeaky wheel here will get the grease.
10. (SBU) Post recommends high-level State Department and Commerce Department intervention with the GOR to express concern that the project is still in danger of stalling despite assurances from the highest levels of the GOR that the motorway contract is legal and binding. Post also suggests that the USG should make the GOR aware of the damage it will cause to its own image as a business-friendly country if the motorway is stopped for even a brief time due to inability to pay. Finally, we also recognize that the GOR does not want to challenge the IMF with a request for further flexibility, even though a relaxation of the deficit target to take flooding damage into account would be a useful means to spur the GOR to think about moving ahead with truly desirable infrastructure projects. Post believes that serious discussions with the IMF, by the USG and GOR, are in order.
TAGS: PGOV, PREL, ECON, KDEM, SOCI, RO
SUBJECT: GOVERNMENT RESIGNS; ROMANIA HEADS TOWARDS SNAP ELECTIONS
REF: A. BUCHAREST 1433 B. BUCHAREST 1205
BUCHAREST 00001511 001.2 OF 002
Classified By: Political Section Chief Robert S. Gilchrist for Reasons 1.4 B and D
1. (C) Summary: Prime Minister Calin Popescu-Tariceanu announced the resignation of his cabinet July 7, pending acceptance by President Traian Basescu. The move, ostensibly in response to a Constitutional Court decision against a judicial reform package, will likely spark new parliamentary elections sought by Basescu to increase his government's majority. Many observers also believe new elections raise the odds of a delay by a year of Romania's EU accession now slated for 2007. Although the macroeconomic impact of new elections would likely be slight, businesses may defer investments until certainty is restored. End Summary.
A Surprise Announcement
2. (C) In a surprise announcement July 7, PM Tariceanu stated in a hastily called press conference that he and his cabinetwere submitting resignations, effective immediately, precipitating likely snap parliamentary elections by early fall. President Traian Basescu was expected to accept the resignations in a planned televised speech later the same evening. Basescu is bound by the constitution to appoint a caretaker cabinet, which will likely include many of the members of the current government led by the center-right Liberal-Democratic (PNL-PD) alliance.
3. (SBU) Tariceanu's announcement followed a Constitutional Court decision on July 6 that annulled key elements of a judicial reform package passed in Parliament on June 22. The court decision was interpreted as largely political, as the court is comprised largely of members closely associated with the opposition Social Democratic Party (PSD). Tariceanu told the press that once he received word of the court's decision, he immediately began to contact key party leaders and members of the government to consult on next steps. New elections appeared to be the "only way forward" and the Cabinet convened at noon on July 7 effectively to vote itself out. Tariceanu communicated the decision to President Basescu. He also vowed to enact by emergency ordinance elements in the judicial reform package that the Court did not strike down, including the organization of a fund to compensate individuals for properties seized under communism (Ref B).
Between Now and Elections
4. (C) There now remain several procedures the governing alliance must pass through before new elections can actually be held (Ref A). According to the Constitution, upon the resignation of a cabinet, the President should designate a new prime ministerial candidate who must present a new team and governing program to the Parliament within ten days. If that fails, the process must be repeated again, and if the second attempt fails the President is empowered to call new elections. Romania has never held snap parliamentary elections in the 15 years since the restoration of democratic government. Constitutional vagueries allow much leeway, and political contacts tell post that requirements will likely be followed only in form but without any intention of preventing a new vote. Presidential Advisor Claudiu Saftoiu told PolChief "Romania is clearly headed towards new elections."
5. (C) The Government is couching the decision by the Constitutional Court as an impediment to Romania's ability to enact reforms necessary for EU accession. The measures the Court struck down would implement a mandatory retirement age for judges and prosecutors; allow the Supreme Council of Magistrates (the managing body for the courts) to dismiss or
transfer senior judges and prosecutors; and strengthen and professionalize court management. In sum, the reforms were intended to remove older judges and prosecutors in place before the end of communism, many of whom remain associated with the PSD. The latter is widely regarded as the inheritor party to the former communist party led by Nicolae Ceausescu.
Implications for EU Accession
6. (SBU) Some local pundits have opined that snap elections would lead to a delay in Romania's EU accession from 2007 to 2008. EU officials have repeatedly expressed public concern that elections would distract officials charged with implementing accession requirements. Romania's Accession treaty signed in Brussels in April provides for such a delay if Romania lags in implementing key reforms required for membership. Nonetheless, in recent days there have been indications that the government had become increasingly resigned to such a delay regardless of whether there were new elections. Tariceanu himself said 2008 appeared more likely and would not be debilitating.
7. (C) Comment: Embassy contacts point out that the Government made no effort to call the Parliament back into session to work out compromise legislation with the opposition PSD. Many opined that the events of recent days merely provided a pretext for moving to new elections, which President Basescu seeks to increase the currently narrow majority of the PNL-PD led government. Post agrees with that assessment. Interestingly, as recently as July 5, Basescu said he had given up interest in new elections for the time being and that the country should focus on implementing EU accession requirements. With those comments -- and Parliament in recess and many Romanians on vacation -- it appeared that the political leadership would stick with the status quo. However, Tariceanu's announcement has completely reversed the course.
8. (C) Comment Continued: The macroeconomic fallout from the GOR's resignation will probably be slight. The currency will probably not suffer a major jolt, given the relative overall financial stability of the country at this time. However, businesses may defer key investments. Post is aware of two potential U.S. investments that government chaos, or even uncertainty, could hinder, if not fully torpedo. It will also be more difficult for Post to press ahead on major investment problems and disputes. In particular, Bechtel's ongoing struggle with the GOR to get paid for work already done on the Transylvanian Motorway has probably just gotten harder. Oher, more low-key investment and business climate issues might become more difficult to work throug a bureaucracy waiting to see what happens in the fall elections, but Post thinks it is still manaeable. End Comment.
9. (U) Amembassy Bucharst,s reporting telegrams are available on the Buharest SIPRNET Website: www.state.sgov.gov/p/eurbucharest
TAGS: PGOV, PREL, KDEM, SOCI, ECON, PINR, RO
SUBJECT: THE NEW GOVERNMENT'S FIRST WEEKS - BASESCU COMES OUT STRONG
REF: BUCHAREST 130
Classified By: POLITCAL SECTION CHIEF ROBERT GILCHRIST FOR REASON 1.4 A , B AND D
1. (C) Summary: During his first several weeks in office, President Traian Basescu has been outspoken on the fight against corruption, foreign policy priorities and the status of the center right National Liberal Party -Democratic Party (PNL-PD) political alliance with the small Humanist Party (PUR). Meanwhile, much of the PNL-PD led government has focused internally on filling sub-ministerial jobs and appointing new prefects to represent the national government at the county level. End Summary.
2. (C) Despite a constitutional provision restricting the partisan political activities of the head of state, President Traian Basescu's blunt public comments on a range of issues have grabbed headlines since his December 20 inauguration. Indeed, many political analysts and ordinary Romanians have remarked that Basescu, so far, is Romania's most outspoken, visibly "hands on" president since the 1989 overthrow of communism. Few Romanians are troubled by Basescu's foraysinto partisan politics, notwithstanding the constitutional ban on this kind of activity, recalling that ex-President Iliescu overtly supported the PSD and PM Adrian Nastase during 2004 local and national elections.
BASESCU ON FOREIGN POLICY AND CORRUPTION
3. (C) Since his inauguration, Basescu has been particularly outspoken about Romania's foreign policy priorities and the fight against corruption. In a January 10 television interview, he chided previous governments, complaining that Romania has had only two foreign policy priorities for the past decade - accession into NATO and the EU. Basescu highlighted the Black Sea as a region where Romania should play an important role, opining that the U.S. is the only country willing and able to help "consolidate Romania's strategic position in the Black Sea region." Since his inauguration, Basescu has also publicly restated the importance of strengthening what he described during the campaign as the "Bucharest-Washington-London axis," a theme he recently repeated in private meetings with USG interlocutors. Basescu also has stressed that Romania should play a more active role in helping to resolve the frozen conflict in Transnistria, criticizing previous governments for insufficient engagement on this issue. Finally, to underscore Romanian commitment to the anti-terror fight and to the U.S., during the past week Basescu told both the Ambassador and NATO Supreme Commander Jones that the "last Romanian troops would leave Iraq only with the last American troops."
4. (C) Basescu has reminded citizens of his campaign pledge to treat the fight against corruption as a national security issue. He has promised to pursue cases against individuals allegedly protected by the previous government, a direct allusion to a pending criminal fraud investigation against several senior managers of the Rafo Onesti oil refinery and the government's recent action to block the departure from Romania of two senior Rafo officials. Basescu has also asserted that the government should pursue "mafia clans" and major corruption cases. PM Tariceanu, for his part, has declared that fighting "corporate fraud" will be among the government's key priorities, and that his government may ask for help from the U.K., Germany or France to assist with the investigation of several high profile cases.
5. (C) On New Year's Eve, Basescu matched his candid public comments with behavior that his admirers describe as "spontaneous" and his detractors decry as "unpresidential." Eschewing the traditional custom of delivering a staid, televised presidential address a few minutes before midnight, Basescu took the stage before several thousand revelers at a downtown Bucharest celebration where he toasted Romania and drank champagne from a bottle. For many, Basescu's hoisting of the bubbly - which was caught by the TV cameras - was emblematic of his unconventional style.
INTERNAL POLITICKING IN THE RULING COALITION
6. (SBU) In a newspaper interview published January 6, Basescu described the small Humanist Party's (PUR) presence in the National Liberal Party-Democratic Party (PNL-PD)- led government as an "immoral solution" to the PNL-PD's relatively weak parliamentary support. The PUR had aligned itself closely with the PSD during the elections. The solution, opined Basescu, is new parliamentary elections that would permit the PNL-PD to capture a clear parliamentary majority. In the same interview, Basescu also said that PNL and PD should move ahead with a planned merger and that PNL-PD should take steps to oust the presidents of the Chamber of Deputies and Senate -- ex-ruling Social Democratic Party (PSD) PM Adrian Nastase and Nicolae Vacaroiu, respectively. Finally, in a statement that enraged some PSD leaders, Basescu opined that neither Nastase nor former President Ion Iliescu is fit to head the PSD. (Comment: Basescu's tough attitude toward his new allies in the Humanist Party (PUR) seems to have been a well calculated step to call the bluff of these defectors from the PSD-led opposition. While the PUR threatened to withdraw their support or make it conditional, Basescu's answering shot - possible new elections and extinction of the PUR clearly carried the day. End Comment.)
7. (C) PM Calin Popescu-Tariceanu subsequently declared in a newspaper interview published January 14 that "no political party" wants parliamentary elections soon, and characterized the brouhaha surrounding Basescu's remarks about the PUR as "perhaps a clash of egos, but not a political crisis." Nonetheless, Tariceanu defended Basescu's outspokenness and characterized the bruited PNL-PD merger as "the most important and necessary thing at this moment." Other PNL and PD leaders have expressed support for a merger - but not just yet. Bucharest Vice-Mayor Ludovic Orban, a PNL member, perhaps best captured the spirit of many mid and senior level PNL and PD leaders when he commented publicly that the merger should take place, but only "when the fruit is ripe."
GOVERNMENT GETTING ITS SEA LEGS
8. (C) Leaders of the PNL-PD, their ethnic Hungarian party (UDMR) allies and the PUR also used the initial weeks of their turn at the helm to discuss allocation of prefect positions among the parties. The prefects are the national government's appointed local representative in each of Romania's 41 counties, and Bucharest. Except for the PUR, which ultimately opted not to request a share of prefectures, the final tally reflects the relative parliamentary strength of the governing coalition: 22 prefects are PNL members, 16 are PD, and 4 are UDMR.
9. (C) Media commentators observed that many of the prefects are "young and rich," with the youngest only 27 years old. For the first time, two prefects are women. The prefects' youth and gender breakthrough reflect Basescu's and Tariceanu's campaign promises to bring "new faces" into government. One appointment of an "old face" provoked controversy - the designated Bucharest prefect, a PD member, was an officer in the "foreign intelligence division" of the infamous communist-era "Securitate." President Basescu expressed "huge disappointment" at his being named prefect, and he resigned from the position after only several days in office. The government also held fast to its decision to appoint several ethnic Hungarians in areas with large Magyar populations, despite protests from nationalists.
10.(C) The next important administrative task facing Tariceanu's government is the appointment of state secretaries, de facto "deputy ministers." Until the positions are filled, many Ministries are relying on the services of the state secretaries from the previous government. The slots also fall into the political appointee category, so PNL-PD, UDMR and PUR functionaries are discussing their allocation among the parties. According to recent reports, the appointments will occur sometime in February and will be allocated as follows: PNL-25; PD-19; UDMR-10; PUR-9. The government has already named several state secretaries, but more than 50 positions are still vacant. The new government is also hampered by logistic problems. Many incoming ministers complained, and the press has confirmed, that departing cabinet members and their staffs emptied many offices of furniture and files and disconnected phone lines.
11.(C) Practical difficulties notwithstanding, however, several new ministers, including the PM, have used their positions as bully pulpits, outlining their goals and strategies. PM Tariceanu promised that his government will examine contracts awarded by the previous government, including a major highway construction contract awarded to American corporation Bechtel. Justice Minister Monica Macovei stressed that she would focus on taking steps to keep Romania's EU accession on track, including implementation of regulations aimed at regulating conflicts of interests by public officials and governing immunity of former officials.
PARLIAMENTARY DEFECTORS TO STRENGTHEN RULING BLOC? --------------------------------------------- -----
12.(C) PNL spokesman Eugen Nicolaescu claimed January 10 that 30 legislators from the PSD and the extreme nationalist Greater Romania Party (PRM) are poised to leave their parties and join an "independent group" that would support the government. PNL-PD sources have not revealed the identities of the possible defectors, and Nicolaescu's announcement may be principally a PNL-PD attempt to destabilize and demoralize the PSD and PRM. However, the 30 possible defectors could include five deputies from the National Democratic Bloc (BND), unionists elected on the PRM parliamentary list, and a PRM senator who have already broken with the party. PSD insiders also confirm that the former ruling party is internally divided and in the midst of a leadership struggle - a situation which could encourage some fainthearted PSD parliamentarians to jump ship.
13. (C) Comment: Most Romanians appear to welcome Basescu's plainspoken candor and apparent commitment to follow through on campaign promises to combat corruption and implement reform. The new Government's early approval of flat tax legislation also added credence to a perception that this government plans to move quickly (Reftel). Basescu's persona as President has differed relatively little from his behavior as candidate - although his preferred public attire of polo shirt or loosened tie and rolled up shirtsleeves appears to have been mostly replaced by sober business suits.
At the same time, Basescu's outspokenness may serve to deflect some public scrutiny from the fact that PM Tariceanu's government remains a work in progress, requiring competent state secretaries and prefects to function efficiently. Early "glitches" - such as naming a communist-era intelligence officer as Bucharest prefect - reflect the new government's growing pains. However, his speedy departure seemed to indicate a decisiveness lacking in the former government. End Comment.
14.(U) Amembassy Bucharest,s reporting telegrams are available on the Bucharest SIPRNET Website: www.state.sgov.gov/p/eur/bucharest .
TAGS: PGOV, PREL, KDEM, SOCI, ECON, PHUM, EINV, EFIN, RO, ETRO, biographic information, political assessment
SUBJECT: SCENESETTER FOR DEPUTY SECRETARY OF STATE ZOELLICK'S MARCH 30 VISIT TO BUCHAREST
REF: A. A) BUCHAREST 476 B. B) BUCHAREST 429
Classified By: CHARGE D'AFFAIRES THOMAS DELARE FOR REASONS 1.4 A, B ANDD
1. (C) Introduction and Summary: Embassy Bucharest warmly welcomes your March 30 visit as a tangible demonstration of the deepening U.S./Romanian partnership. Your visit will provide an opportunity to underscore the points raised during the successful March 8-10 visit by newly elected President Traian Basescu to Washington. During the first few months of their mandates, President Basescu and Prime Minister Calin Popescu Tariceanu pledged to vigorously battle corruption, supported implementation of free market economic reforms and promised to steer Romania to EU accession in 2007. We note, however, that the charismatic and staunchly pro-U.S. Basescu has more energetically asserted the primacy of the U.S.-Romanian strategic alliance than Tariceanu and FM Mihai Razvan Ungureanu, whose pro-American views are tempered by a generally Euro-centric philosophy. Nonetheless, both the PM and FM share Basescu's view that Romania should remain a stalwart supporter in the GWOT and seek to deepen its integration into transatlantic values and institutions. Your visit will permit you to discuss Romanian progress on key issues raised during President Basescu's visit earlier this month, including plans to lift Romania's ban on international adoptions. End Introduction and Summary.
Romania's "Orange Revolution"
2. (C) Basescu's upset presidential victory against former Prime Minister Adrian Nastase on December 12 surprised even his closest political advisors and ushered in a new era of center-right government following four years of political dominance by the center-left Social Democratic Party (PSD), whose senior leaders were viewed by many Romanians as arrogant and corrupt. Upon the initial release of results on election night, youthful Basescu supporters clad in orange flooded the streets of central Bucharest in a scene reminiscent of events in neighboring Ukraine the week before.
In subsequent weeks, Basescu appointed center-right co-leader Calin Popescu-Tariceanu as prime minister, and rebuffed attempts by the PSD to maintain a hold on the government and parliament. Basescu and Tariceanu asserted that they were committed to leadership untainted by corruption or communist pasts.
3. (C) The new cabinet they formed is the youngest in Romania's post-communist history, with an average age in the late 30's, including FM Ungureanu, who was a Foreign Ministry State Secretary from 1998 to 2000. The cabinet also includes many members with solid experience in the private sector and NGO community. However, the new government is faced with a
significant minority opposition in parliament and, with such a new team, is still working to get its "sea legs" in handling tough domestic and international issues. We have seen occasional signs of tension between the robustly pro-American Basescu and the more Euro-centric Tariceanu (a francophone who made his fortune as owner of a Citroen distributorship) and Ungureanu in the first several months of the new government. On one occasion, for example, the FM publicly qualified the President's endorsement of "preemptive" anti-terrorist actions by the GOR as "mere intellectual exercises." A senior Basescu adviser recently lamented to Embassy that the PM's office and key ministries appear (at least to the Presidency) as sometimes disorganized and lacking focus.
Seeking Strong Transatlantic Ties
4. (C) During his presidential campaign, Basescu repeatedly made reference to what he called a "Bucharest-London-Washington" axis. He clearly intended to emphasize that his government would seek to strengthen Romania's "strategic partnership" with the U.S. and Britain. We understand such assertions have raised eyebrows in Brussels, Paris, and Berlin. Nonetheless, Basescu has refused to back off his robustly pro-American stance. When pressed by the media as to what such a special relationship would entail, Basescu has pointed to the importance of a U.S. role in the Black Sea region and Romania's solid commitment to the NATO alliance. Post has sensed a somewhat less enthusiastic response on this policy from PM Tariceanu and FM Ungureanu, who are keenly focused on securing Romania's proposed 2007 EU accession.
5. (C) Nonetheless, the PM and FM share Basescu's desire for a strong strategic relationship with the U.S., including enhanced cooperation in the Black Sea area. Since Basescu's visit to Washington, senior MFA interlocutors have underscored to Charge and other Embassy officers the GOR view that the Black Sea region is central to Romania's security, urging the USG to weigh in with other littoral states, especially Turkey, in support of Romania's proposed establishment of a Romanian-Bulgarian-Turkish "Black Sea Task Force" linked to NATO structures. This proposal, however, exists only on paper and the GOR tells us that Turkey opposes it, preferring an expanded role for BLACKSEAFOR and Turkish-led Operation Harmony.
6. (C) Basescu and his team are clearly enthused about the "Orange Revolution" that swept into power in Ukraine and here and would like to use the momentum to help jar loose the long
frozen conflict between Moldova and Transnistria. With the strong support of FM Ungureanu and lower-level advisors in the MFA, Basescu has vocally advocated increasing Romania's role in the settlement process and improving previously tepid relations with neighboring Moldova. At a minimum, this stance reflects a desire to be included in the current multilateral framework under OSCE aegis (See also Ref A). However, Basescu is clearly not inclined to a passive role. He surprised his own Foreign Ministry with a trip to Chisinau within days of assuming the Presidency. Just back from consultations in Berlin, Basescu told the Charge that Schroeder backed away from offering suggestions regarding Moldova-Transnistria. To that, Basescu said that he replied that he "and the Americans would solve it and the Germans wouldn't like it."
7. (C) Basescu and Tariceanu have also reaffirmed strong support for a potential U.S. basing presence in Romania. They view such proposed basing as confirmation of the trust the U.S. has in Romania as an ally. Romania's support for basing, as well as its emphasis on Black Sea regional security, reflect an underlying and longstanding concern about Russian military and economic domination of the region.
A Steadfast GWOT Ally: Romania in Iraq and Afghanistan; Emerging Strategy of Terrorist Preemption
8. (C) Romania has been a continuous supporter of U.S.-led operations in Afghanistan and Iraq, and Basescu repeatedly has vowed to ensure a Romanian troop presence in those countries "as long as necessary." Romania maintains more than 750 troops in Iraq, as well as recently deploying an additional infantry company of about 100 personnel for UN force protection. In Afghanistan, more than 400 Romanian soldiers serve alongside U.S. forces. Romania has made its military facilities and airspace fully available to U.S. forces. PM Tariceanu and FM Ungureanu will likely echo Basescu's open ended pledge to maintain Romanian troops in both Iraq and Afghanistan as long as they are needed. It is noteworthy that the latest iteration of that commitment was made after the recent decisions of Poland and Ukraine to draw down their troop levels in Iraq.
9. (C) In general, the commitment to the GWOT, Afghanistan, and Iraq receives broad bipartisan support in Romania, with few calls from the media or opinion leaders for a departure from this policy. The government has actively expressed support for the GWOT in international fora such as the UN and endorses President Bush's Proliferation Security Initiative (PSI), and is currently discussing with us possible ways to support the PSI in the Black Sea region. In the UN Commission for Human Rights, Romania supported resolutions on Cuba and Belarus. Romania currently holds a rotating UN Security Council Seat and views its membership on the UNSC as one way of bolstering its regional and international stature.
Finally, we expect to see issuance of an MOD White Paper within days that will highlight terrorist preemption as one of a half a dozen key strategies. While this is consonant with U.S. thinking, it has also been attacked by foreign policy pundits on the left including ex-Foreign Minister Geoana, for its ostensible hubris and overreach.
Rosy Macroeconomic Picture...
10.(C) In its slightly more than two months in office, the new government has implemented bold measures championed by PM Tariceanu, such as introducing a 16 percent flat tax on incomes and corporate profits and declaring the fight against high-level corruption as a national security priority. On the latter issue, there has been movement on several large-scale corruption cases, including a scandal involving the erasure of massive tax arrears owed by a politically connected oil refining company. In the battle against corruption, independent observers have noted an energy and intensity lacking under the previous government.
11.(SBU) Romania has significantly improved its macroeconomic situation in the past few years, cutting inflation to below 10 percent in 2004 for the first time since the 1989 Revolution. For the past several years, Romania posted GDP growth close to 5 percent, peaking at 8.3 percent last year owing to an extremely favorable harvest, surging exports and robust construction.
12.(SBU) Overall, foreign direct investment (FDI) is growing, but is still relatively low for Eastern and Central Europe. The total net stock of FDI between 1990 and 2004 amounted to almost $13.6 billion. Leading country investors are the Netherlands, Austria, France, Germany, U.S. (6.5 percent), and Italy. In 2004, U.S. investment rose 26.1 percent to $888.4 million. Despite good macro-economic news, many potential American investors still perceive Romania as a high-risk country for doing business due to corruption and a weak judicial system. However, investors are tending more bullish and the recent rise in Moody's rating for foreign currency denominated bonds (Ba1) has been cited by many as a positive sign.
13.(SBU) Additionally, Romanian 2004 exports posted record levels * up 33.8 percent in USD from 2003. However, Romanian exporters fear that 2005 may slow export growth, reflecting appreciation of the ROL toward the Euro and the USD. Although agricultural exports mark a major bright spot in U.S. trade with Romania, reaching $197 million in 2004, this growing U.S. agricultural trade balance is threatened by Romania,s expected EU accession in 2007. In particular, the EU is expected to pressure Romania to end its interest in biotechnology production (corn and soybeans) and unrestricted beef imports.
...But Sticking Points Remain with IMF
14.(SBU) The Government of Romania is attempting to secure IMF agreement to a combined second and third review of its current standby arrangement. Romanian officials want to conclude this review in part to satisfy EU demands that IMF attention continue to encourage sound Romanian macro economic policies. However, the IMF and the Romanian government differ over macro-economic targets--the IMF wants a deficit target of 0.4 percent of GDP for the 2005 budget, while Romania insists on a 0.7 percent, arguing that the higher ceiling will allow Romania to invest in urgent infrastructure improvements. The GOR also rejects the IMF,s current recommendations to increase the flat tax and the VAT, pointing to rising tax revenues in the first two months of 2004 as evidence that any revenue fall off will not be substantiated. Discussions with the IMF are ongoing and Basescu told us he secured a 3-month breathing space from the IMF to make Romania's case. Your interlocutors may stress that they view the IMF's treatment of the GOR as "rigid," especially given the current government's reform-oriented, pro-market focus.
15.(SBU) Tariffs remain one of the few contentious issues in our bilateral economic relationship. Romanian tariffs on U.S. imports are a problem the U.S. Embassy has been discussing with the GOR for more than 2 years. Romania lowered its tariffs to the EU Common External Tariff (CXT) for EU countries, but maintains higher levels for non-EU trading partners, including the U.S., with Romanian government officials claiming they are under intense pressure from the EU to maintain tariffs at current levels for non-EU partners until EU Accession.
16.(SBU) Romania recognizes its legal obligation to protect intellectual property rights (IPR) as a signatory to several international conventions and its domestic legislation provides only adequate theoretical protection. Romanian anti-piracy efforts are uncoordinated and a low priority for police, border police, customs, financial guard, prosecutors and courts. The U.S. Embassy has recommended that Romania remain on the Watch List for 2005.
Forging Ahead on EU Accession
17.(C) Basescu and his government are committed to securing Romania's 2007 EU accession, with PM Tariceanu and FM Ungureanu out in front on Romania's lobbying efforts in Brussels and EU capitals. EU membership enjoys widespread political and popular support, though the average Romanian remains unclear about the specific implications of EU membership. The Basescu government and press have begun to warn the public that accession strains will be significant, particularly as non-competitive firms close and many agricultural units unable to meet higher standards are forced to exit the market. Most simply view EU accession, together with 2004 NATO membership, as solidifying Romania's Western orientation after decades of communist rule. Basescu is slated to go to Luxembourg in late April to sign Romania's accession treaty, an historic step that will set in motion the final process for implementing EU-mandated reforms. EU member officials tell us Romania's membership in 2007 is almost certain, and would only be impeded by a major interruption in democratic governance or backsliding in anti-corruption efforts or other reforms.
Confronting the Communist Past
18.(C) In an attempt to redress some of the wrongs committed under communist rule, Basescu has vowed to open up additional files of the notorious former secret police for public inspection. He and the PM also promised to reform Romania's inefficient and often corrupt judiciary, putting several agency heads on notice that their work is being closely monitored for its effectiveness. On another sore point, Basescu and his team have already taken steps to make good on his pledge to eliminate political pressure on the Romanian media, a significant problem under the previous government. These actions have boosted the governing alliance's post-election popularity to new heights. One area of potential conflict between Basescu and the PM stems from the president's public support for "snap elections," a move generally opposed within Tariceanu's center-right National Liberal Party (PNL) and other members of the center-right governing alliance.
Continuing Points of Contention: Adoptions, Awards, Accidents and(Business)Acrimony --------------------------------------------- ------
19.(C) While overall relations with Romania are excellent, there are a number of contentious issues which have either eluded resolution or could benefit from further discussion. Each of these issues was raised during Basescu's March 8-10 visit to Washington.
20.(C) The first issue is Romania's failure thus far to resolve over 200 pending inter-country adoption cases for U.S. parents. During his visit to Washington on March 8-10, Basescu met separately with President Bush and a group of American prospective adoptive parents. In both meetings, he said that Romania's new law prohibiting inter-country adoptions is too restrictive, but explained that his government could not move forward on this issue before the EU and Romania sign the accession treaty on April 25. Basescu told the parents' group that he felt an international review commission, an idea earlier mooted by the last government, the U.S. and several EU states, may not be necessary and might only delay the process. It is thus unclear exactly how the Romanian government will decide to address the pending cases. Your meetings will provide an opportunity to welcome President Basescu's commitments in Washington - and to urge Romania to move ahead with resolving pending adoption cases.
21.(U) At his meeting with Basescu on March 9, President Bush responded positively to an on-the-spot request from Basescu to include Romania and Bulgaria in the Visa Waiver Program (VWP) road map. The Romanian government understands that Romania does not yet meet the criteria for inclusion in the VWP, but that we are interested in helping them understand what is needed to get to that point.
22.(C) Also contentious was the awarding in December by the previous Romanian president of Romania's highest honor, the Star of Romania, to the xenophobic and extremist politician Corneliu Vadim Tudor. Nobel Prize laureate Elie Wiesel immediately resigned his membership in the Order of the Star and -- along with prominent U.S. and international Jewish leaders -- continues to call for Romania to revoke Tudor's award. The U.S. Embassy similarly has pressed Basescu and advisors to take appropriate action. Basescu's team tells us the government is on the verge of setting up a process to revoke the award, but a senior Basescu advisor recently told us that the revocation process involves sailing in uncharted waters and could take "some time." Separately, we are encouraged by signs that both the presidency and Tariceanu government appear committed to transparent and fair resolution of property restitution claims stemming from the WWII era and communist period.
23.(C) The new Romanian Government's apparent willingness to tackle business issues requiring considerable political capital and courage - notably including high-level corruption, radical tax reform and labor code reform - have drawn plaudits from U.S. businesses. Nevertheless, compliments about the anti-corruption stance of the government should be linked with strong encouragement for appropriate prosecutions and effective implementation of numerous pieces of dormant anti-corruption legislation.
24.(C) On the negative side, the new government has been dilatory in meeting some contractual obligations with U.S. firms and in addressing flawed privatization contracts put in place by the last government that clearly disadvantage a number of U.S. purchasers. In regard to the former, the largest project ever won by an American firm in this country has suffered from extensive contract reviews and payment delays. In this instance, Bechtel's 2.5 billion USD road project linking South-Central Romania to the Hungarian border has teetered on the brink of cancellation for months. Although about 90 million USD have been paid, Bechtel is still owed substantial sums for work completed. Also problematic are complaints about flawed privatization conditions imposed by the last government that have prevented some U.S. purchasers from restructuring their new assets to become competitive. Noteworthy here are difficulties experienced by the U.S. purchases of 4x4 automaker ARO. On a more positive note, a border surveillance contract issued without tender to EADs and worth about 800 million USD is also being closely scrutinized. President Basescu recently told the Charge that the contract was corrupt (as we suspected) and almost wholly redundant.
25.(C) Finally, the December 2004 accident involving the U.S. Embassy Marine Security Guard detachment commander that led to the death of Romanian rock star Teo Peter received wide press coverage and created public outcry. Basescu and his government are under considerable political pressure to make sure justice is done in a Romanian Court. Naturally, given that Marine Corps legal proceedings against the former detachment commander have not even begun, the question of extradition and lifting of the Marine's immunity cannot even be addressed at the present time. Nevertheless, PM Tariceanu and FM Ungureanu may ask for the Marine's return, possibly repeating a promise made earlier to our Ambassador by Basescu that the former detachment commander would receive a fair trial and, regardless of outcome, would not serve a single day in prison in Romania.
Comment and Conclusion
26.(C) Your visit to Romania provides an opportunity to underscore that, despite some unresolved bilateral issues, Romania and the U.S. seek to maintain a close strategic relationship, as reflected by the GOR's unwavering, open-ended commitment of troops to Afghanistan and Iraq. It also provides an opportunity to stress key points with the Romanians - including the importance of continuing pro-market economic reforms and taking concrete steps to win the battle against corruption. End Comment and Conclusion.
27.(U) Amembassy Bucharest's Reporting telegrams, as well as daily press summaries, are available on the Bucharest SIPRNet website: www.state.sgov.gov/p/eur/bucharest
TAGS: PREL, PGOV, IZ, RO
SUBJECT: THE DEPUTY SECRETARY'S MARCH 30 MEETING WITH ROMANIAN PRIME MINISTER CALIN POPESCU-TARICEANU
Classified By: POLITICAL SECTION CHIEF ROBERT S. GILCHRIST FOR REASONS 1.4 B AND D
1. (C) Summary: In his March 30 meeting in Bucharest with Deputy Secretary Zoellick, Romanian Prime Minister Calin Popescu-Tariceanu underscored the central importance the new Romanian government ascribes to strong bilateral relations with the U.S. Tariceanu requested as much information sharing and coordination as possible on the kidnapping of three Romanian journalists and their American citizen guide in Baghdad. He urged the U.S. to encourage Turkish participation in the development of a long-term Black Sea regional strategy and sought U.S. support for increased Romanian engagement on Moldova/Transnistria. The Deputy Secretary encouraged Romanian progress towards resolving outstanding international adoption cases, a more rapid effort to revoke an award given to an outspoken extremist politician, and care in making a final decision on proceeding with a major highway project undertaken by U.S. firm Bechtel so as to ensure the right signals are sent to potential U.S. investors and business partners. The Deputy Secretary congratulated the GOR on economic growth and anticipated EU accession in 2007. End Summary.
2. (C) The Deputy Secretary began his March 30 meeting withPM Tariceanu by relating that he had traveled to European capitals to gain a sense of priorities in the region. He expressed strong appreciation for the important role Romania has played in Iraq and for the productive partnership we have developed with Romania as a new NATO ally. PM Tariceanu underscored the importance the new Romanian government ascribes to strong bilateral relations with the U.S. He said he felt comfortable that relations were improving and noted Romanian President Traian Basescu's "delight" with the productive dialogue during his March 9-11 trip to Washington.
Tariceanu stated firmly that the U.S. can "count on Romania to fulfill its commitments."
3. (C) At the same time, Tariceanu said the GOR was taking steps at home that it believed would make Romania an even more valuable partner. This included aggressively fighting corruption and implementing a new strategy for reform of Romania's judiciary. Such steps were also critical for meeting requirements for EU entry in 2007, addressing the concerns of the business community, and -- more fundamentally -- reassuring the Romanian public of the preeminence of the rule of law. He singled out the implementation of a 16 percent flat tax on personal income and corporate revenue as an important incentive for encouraging long-term investment from abroad. The Deputy Secretary agreed that these are important undertakings that could only make our relationship stronger.
Iraq and Romanian Hostages
4. (C) The Deputy Secretary and PM Tariceanu discussed the March 28 kidnapping of three Romanian journalists and an accompanying American citizen in Iraq. The Deputy Secretary emphasized that the U.S. would provide information to the Romanian government as fast and efficiently as possible. He underscored a commitment to do all we can to work with Romania on this difficult situation. At the same time, he noted events can move quickly and expressed hope there would be freedom to act rapidly when and if opportunities present themselves to deal with the situation.
5. (C) Tariceanu replied that the situation was complicated and requested as much information as possible from the U.S., thereby better permitting the GOR to make the difficult decisions as they arise, including the potential deployment of forces. He reiterated that he, President Basescu, and the entire security team were seized with the issue, suggesting that it was not clear that the motivation for the kidnapping was entirely political. Tariceanu committed to ensure information flows both ways and to coordinating closely in
Bucharest and Baghdad.
6. (C) More broadly on Iraq, the Deputy Secretary noted that as the security situation becomes more stable, it is now incumbent on the international community to help the new Iraqi government address the economic and political issues that will, together with security steps, help to defeat the insurgency. He recognized that Romania's capabilities for playing a role may be limited, but that its voice with other Europeans will be helpful.
Romania's Regional Role
7. (C) Tariceanu then turned to Romania's interests in its own region, particularly the Black Sea Basin, which Romania views as critical for its security and economic well-being. He said Romania seeks a NATO presence in the Black Sea and would like to see an Active Endeavor-type operation carried out there at some point. He said U.S. support would be important in helping convince Turkey of such an expanded role for NATO. The Deputy Secretary noted that he had discussed the issue more extensively in an earlier one-on-one meeting with FM Ungureanu. He commended Ungureanu's proposal to focus initially on common environmental concerns as a practical way to engage Turkey and other littoral states. A step-by-step approach would likely be the most effective in convincing Turkey of the value of more coordinated policies.
8. (C) With regard to Moldova, Tariceanu emphasized that Romania continues a strategy of drawing Moldova westward. He described Moldova and Romania as having a common historical, cultural, and linguistic heritage. The end goal would be Moldovan membership in the EU such that the divisions between Moldova and Romania disappear. The GOR is also planning a more active approach on Transnistria. Although providing no specifics, Tariceanu expressed hope that the U.S. would support Romania in that effort.
Romania and Europe
9. (C) The Deputy Secretary said that EU accession will be a big boost for Romania but will also come with a heavy load of responsibilities. One of the biggest challenges will be to ensure Romania gets benefits from participation in a large single market, but also does not become over-burdened by EU regulations and social-welfare structures of richer countries; these would crush economic development in Romania.
He pointed to Ireland as a good example of a EU member that took the right steps to bring in investment and create an environment for strong economic growth. The Deputy Secretary
encouraged Romania to bring its perspectives to both NATO and, later, EU councils, suggesting that these perspectives will be useful on regional issues (the Balkans, Moldova) as well as economic ones (regulations, etc.).
10.(C) Tariceanu reiterated that EU accession in 2007 remains a top priority for his government. He marveled at what he characterized as retrograde ideas he had found in Paris and Berlin about the strong regulatory role of government. He characterized himself as a true liberal at heart, in the economic sense of the word, and expressed hope that Romania could be a liberalizing force within the EU after accession. He expressed satisfaction that the Foreign Affairs Commission of the EU Parliament had just approved Romania's application for 2007 and Romania looked forward to signing its accession agreement in late April. He noted that the government has much work ahead, including on justice and home affairs, corruption, and press freedom.
The Economy, Investment, Bechtel
11. (C) The Deputy Secretary congratulated Tariceanu on the economic growth Romania continues to enjoy and other positive economic signs. PM Tariceanu acknowledged that his government had broadly inherited a good economic situation, with 8 percent growth in 2004, and a projected 5.5 to 6 percent growth in 2005. At the same time, he noted, the current account deficit had increased and the government would have to be careful to prevent overheating. He related that the IMF continues to emphasize the importance of reducing the deficit. He lamented, however, that this does not take into consideration the importance of public spending on infrastructure needs. Tariceanu expressed hope that the GOR and IMF reach a solution and asked if the U.S. could help in encouraging the IMF to be more flexible. The Deputy Secretary said he would follow up on this request with U.S.
Treasury and the IMF.
12. (C-Business Proprietary) PM Tariceanu noted that U.S. investment in Romania had increased over time, but that Romania continues to seek investment from a flagship U.S. firm such as Ford or General Motors. In this regard, Tariceanu noted that both GM and Ford had expressed serious interest in the Daewoo factory in Craiova. The Deputy Secretary spoke positively of this and emphasized that creating an environment of transparency and openness can go a
long way toward attracting investors.
13.(C) The Deputy Secretary encouraged particular care with Romania's contract with Bechtel to construct a nearly 3 billion USD highway through Transylvania, which continues to face opposition from the EU. How Romania handles this will impact its reputation among potential U.S. investors and business partners. Tariceanu described the Bechtel deal as a "good contract" negotiated by the "dirty hands" of the previous government. Because the contract was announced without a competitive tender, it is not eligible for European Investment Bank (EIB) financing. In addition, the previous government ignored EU plans for a highway transversing Romania to the south of the Bechtel route, so-called Corridor 4. Tariceanu said the World Bank had done a study on the Bechtel highway and that on a cost basis the project makes sense. Nonetheless, he was worried that Romania would not be able to obtain financing for both the Bechtel and EU routes. Tariceanu said that as a future EU state, Romania has to take EU priorities into account. He expressed hope that the GOR would be able to work out a plan to continue with the Bechtel project, but remained unsure.
Star of Romania, Adoptions, Visas, Restitution, UNHRC --------------------------------------------- --------
14.(C) The Deputy Secretary noted the importance of people-to-people issues that can produce a negative impression if they are not addressed. He expressed hope that the GOR would make progress towards revoking Star of Romania medal awarded to xenophobic politician Corneliu Vadim Tudor. He urged action to resolve the hundreds of pending international adoption cases filed before Romania's implementation of a ban on international adoptions, underscoring the importance of placing these children in permanent, loving families as soon as possible. He also urged adoption of legislation more in keeping with that of many European countries that allows for international adoptions. Tariceanu said he "understood fully" U.S. concern on adoptions, noted that it was shared by some other European countries such as France, and that he was "paying close attention" to the issue and would try to find a solution.
15.(C) Tariceanu reiterated President Basescu's request to President Bush that Romania be included among those working toward the visa waiver program on the basis of a workplan. The Deputy Secretary explained that Congress had set strict legal requirements before any country could be admitted into the Visa Waiver Program. He noted that there was very little flexibility, but that a U.S.-Romania Consular Working Group would be a good format for discussing the issue and that we want to work constructively with the Romanian government on this.
16.(C) Tariceanu also informed the Deputy Secretary that Romania is taking initial steps toward speeding up the restitution of personal and religious properties seized during the communist period. He expressed concern that the previous government had dragged its feet on the issue and underscored a firm belief that the GOR has a moral obligation to ensure properties are returned. The Deputy Secretary commended Tariceanu on these initial steps.
17.(C) The Deputy Secretary expressed appreciation for Romanian support for this year's UN Human Rights Commission resolution on Cuba, and expressed hope that Romania would encourage Ukraine to support the measure. Tariceanu did not provide a response. (Note. The Romanian MFA subsequently confirmed that Romania would approach Ukraine in Geneva. End Note.)
18.(C) The Deputy Secretary reiterated the U.S. interest in the use of facilities in Romania as part of the realignment of its forces under the Global Force Posture Review. He indicated the U.S. hoped to have further discussions with Romania in April.
Governing with a Slim Majority
19.(C) The Deputy Secretary asked PM Tariceanu if the GOR faced difficulties with such a narrow majority in the Parliament. PM Tariceanu conceded that there were potential problems, particularly in the Senate where the majority is smallest. Nonetheless, he claimed that "none of the parties" want early elections, particularly given important EU accession benchmarks to be achieved in coming months. The Deputy Secretary commented that it is often the case that smaller majorities lead to more parliamentary discipline within the ranks of a governing party or coalition.
20. (C) In sum, the Deputy Secretary and PM Tariceanu agreed bilateral relations between the U.S. and Romania remain strong, with the prospects for even greater cooperation as the new government undertakes its aggressive program of reform.
21.(U) Minimize considered.
TAGS: PREL, ECON, ENRG, EPET, PGOV, PHUM, CASC, RO
SUBJECT: ROMANIA: AMBASSADOR AND PM DISCUSS ENERGY, ECONOMY AND ADOPTIONS
Classified By: Ambassador Nicholas F. Taubman for reasons 1.5(b) and (d ).
1. (C) The Ambassador met with Romanian Prime Minister Calin-Popescu Tariceanu on June 22 to discuss the state of our bilateral economic relationship and the future of international adoptions. Tariceanu reiterated a request made by letter the previous day for U.S. assistance in strategic planning on energy security. According to the PM, Romania is not comfortable relying solely on energy imports from Russia, and would welcome U.S. assistance in convincing central and western European nations of the importance of "Southern Corridor" pipeline projects drawing on new sources in the Caspian Basin. Tariceanu also expressed optimism that the GOR would soon resolve issues with Daewoo Korea, hastening a potential investment by an American automaker. The PM is happy to see the Transylvania Motorway back on track, and offered to join the Ambassador on a site visit in the near future to illustrate his support. On international adoptions, Tariceanu reiterated the argument that Romania will not re-visit its ban on inter-country adoptions (ICA), that the European Commission supports this position, and that international adoptions are not consistent with the Romanian or European philosophy of child welfare. END SUMMARY.
2. (C) Underscoring a point from his letter of the previous day, PM Tariceanu requested U.S. assistance in developing Romania's long-term strategy towards energy security. Tariceanu pointed out his long-standing concern that Romania diversify its energy sources, mentioning a project begun in 1997 under his tenure as Minister of Economy and Commerce linking Romania's gas network to Hungary's (NB. the project has yet to be realized). The GOR intends to increase its focus on other domestic energy sources, including bringing on-line two new reactors at its Cernavoda nuclear plant andencouraging renewable energy and biofuel through investment incentives. The GOR is also considering another large-scale hydro plant on the Danube. Tariceanu suggested US expertise would not only provide a broader global vision to the GOR's planning, but would also help ensure that Romania does not "follow a path it will regret in ten years."
3. (C) The PM acknowledged that reliance on Russia as its only gas supplier is a weak point in Romania's energy posture. The country is eager to shed this legacy of the Cold War trading structure and pursue projects such as the Nabucco gas pipeline or the Pan-European Oil Pipeline. However, central and western European nations must be convinced of the need to diversify sources, and of the importance of the Caspian Basin as an alternative. Tariceanu pointed to Germany's close relationship with Russia, observing that the country feels it has secured its long-term energy needs in a reliable way. "I believe Germany is wrong," he said. The PM suggested the U.S. could play a role in promoting "Southern Corridor" projects with European partners. Without European buy-in, Romania's domestic energy partners, including Austria's OMV, will be reluctant to participate. Tariceanu also worried about Turkey's attempts to dominate new projects under development. Turkey is trying to assume the Russian role of "master at the switch," he said.
MOTORCARS AND MOTORWAYS
4. (C) Tariceanu informed the Ambassador that he had spoken with Minister of Economy and Commerce Seres regarding negotiations with the Koreans on the Craiova auto plant immediately before their meeting. According to the PM, the Korean side has agreed to the request that all creditors' claims be acknowledged in the final agreement. However, the timeline for concluding discussions has not been decided on, and Tariceanu fears the Koreans may be dragging their feet. The PM re-emphasized his intent that an American investor take over Craiova, acknowledged the need for expediency, and pledged to do all he could to ensure a swift conclusion to the negotiations.
5. (C) On the Transylvania Motorway, Tariceanu took a generally more positive approach than in previous meetings, inviting the Ambassador to visit a Bechtel worksite the week of June 26. Although the PM revisited the history of the dispute, he acknowledged at the Ambassador's prompting that contractual problems are in the past. He said he recognized the importance of the infrastructure project and the need to meet the GOR's contractual commitments, including prompt payment.
6. (U) The Ambassador then raised the request in the PM's letter for continued cooperation with the U.S. on child welfare issues. He told Tariceanu that the USG sees this subject in the context of our goal for Romania to be the strongest democracy in the region, a member of the EU, with values that set an example for its neighbors. He was concerned, he explained, that new reports about the inhumane conditions in which some orphans and abandoned children find themselves will damage Romania's reputation.
7. (C) The Ambassador shared with the PM a document reporting on the appalling conditions in one maternity hospital outside Bucharest. The Ambassador emphasized this was an internal document, but that information from many other sources indicated the conditions reported there were not an anomaly. He emphasized that the USG does believe inter-country adoption (ICA) should be part of the solution to these problems, and that the GOR should consider amending its ban on ICA.
8. (U) Tariceanu responded that he was "very much disappointed" by what the Ambassador had said. While "the facts may be real, you cannot generalize" about the situation of Romania's abandoned children from one report. He asked for details on the institution where the report came from so he could investigate whether the institution's administration was doing its job properly.
9. (U) The PM complained that "all this campaign about institutionalized and abandoned children is only about one issue: re-starting inter-country adoption." The European Commission supported the GOR's ban, he emphasized, as being consistent with what was expected from a future European Union member. Brussels, he insisted, opposed any change in the law. Romania was considered a model in the region for its legal framework on adoptions. He did not want to "create any expectations" around a possible amendment of the law. No other EU state allows ICA, he said. Tariceanu noted that he had discussed the matter with President Traian Basescu and they shared the same view.
10.(U) On the subject of the pending cases, the PM said he had asked the Romanian Office for Adoptions to issue a report, as it had, on its case-by-case evaluation of each petition. None fulfilled the criteria for adoption under the current law.
11.(U) Tariceanu stated that the High Level Group for Romanian Children would conduct an investigation of child welfare institutions, and the USG or U.S. NGOs were welcome to participate. (Note: Tariceanu co-chairs the Group with European Parliament Member Baroness Emma Nicholson. End note). The GOR's statistics indicated that Romania had no problem dealing with the numbers of children abandoned in institutions. Most were reintegrated into their natural families. According to the PM, the figure of nine thousand children abandoned annually, published by UNICEF in 2005, was "completely false."
12.(SBU) Glancing through his copy of the report the Ambassador had handed him about one Romanian institution, the PM dismissed the idea that visitors were being asked not to pick up children from their cribs lest they cry uncontrollably. "My son would also have cried after being put down," he said. Consul General clarified that the point of that report was that the children's reaction to being held indicated they were being denied human contact. The PM doubted that possibility, but said it was a matter for the experts. Tariceanu said he would ask the ROA to work closely with us in discussing the issue.
13.(U) Consul General explained that the two reference documents to which the ROA often points, the UN Convention on the Rights of the Child, and the Hague Convention on International Adoption, both cite ICA as a legitimate tool, to be preferred over long-term temporary measures in a child's home country, such as foster care or institutionalization. The Ambassador closed the discussion by repeating that the USG believes there is an important place for ICA in addressing the needs of orphans and abandoned children, and that the pending cases are a piece of the issue.
14. (C) Tariceanu is trying to put our economic relationship on a more sturdy footing and in so doing to raise his profile as a valued U.S. partner. His offer to visit the Bechtel
site with the Ambassador is a welcome change in his approach toward the project. He may be influenced in part by a desire to improve his political standing as he faces increasing criticism from President Basescu and the opposition about his government's performance. We know from Tariceanu's staff that the PM is interested in visiting the U.S. but has been told by the Romanian ambassador in Washington as well as by us that the lack of movement on the adoptions issue is a major complication. The PM was manifestly disappointed that his effort in the previous day's letter to find a way to bridge our differences on the adoption issue had fallen flat.
In fact, Tariceanu showed no real signs of budging, and our approach will have to factor in his adamant opposition to changing Romania's hard-line stance against international adoptions. End Comment.
TAGS: ECON, ETRD, MARR, MOPS, NATO, PGOV, PHUM, PREL, RO, SOCI
SUBJECT: SCENESETTER FOR DEPUTY NATIONAL SECURITY ADVISOR J.D. CROUCH'S VISIT TO ROMANIA
REF: BUCHAREST 519BUCHAREST 00000902 001.2 OF 004
Classified By: Ambassador Nicholas Taubman for Reasons 1.4 A, B and D
1. (C) Summary. Embassy Bucharest warmly welcomes your upcoming visit to Bucharest. Your participation at the June 5 "Black Sea Forum for Dialogue and Partnership Summit" is a tangible sign of USG support for Romania's aspirations to promote regional efforts to strengthen democratic institutions, diversify energy sources, and combat asymmetric transnational threats such as TIP and narcotics trafficking. Romania seeks U.S. leadership in bringing greater stability and prosperity to the Black Sea region, a point that President Traian Basescu has repeatedly stressed, both in meetings with U.S. interlocutors and in public remarks. (Reftel) A staunch ally in the global war on terrorism (GWOT), Romania has signed, and should ratify soon, a defense cooperation agreement which will permit U.S. forces "access to and use of" Romanian military facilities for a broad range of activities. Romania is on track for EU accession in January 2007, but a recent European Commission report delayed until autumn a final decision on Romania's entry date. End Summary.
Romania's Vision for the Black Sea Region
2. (C) Promoting greater regional security in the wider Black Sea region has been among the most prominent items on President Traian Basescu's foreign policy agenda. Basescu strongly advocates an increased U.S., NATO and EU role in the Black Sea region as a way of linking Europe proper to unstable regions further east. Basescu and his senior advisers consider frozen conflicts in the Caucasus and in neighboring Moldova/Transnistria as a prima facie reason for a stabilizing Western role in the region. Romanian officials have also cited security challenges along the Black Sea littoral, including trafficking in narcotics and persons and smuggling. Although Bucharest's initial emphasis on Black Sea matters focused on defense and security matters, at U.S. urging the GOR's focus has shifted since last fall toward a broader approach that includes encouraging democratic transformation and economic cooperation in the region. Toward that end, Romania has increased its dialogue with Black Sea littoral neighbors, including Russia and Turkey. Romania favors an extension of NATO's Operation Active Endeavor (OAE) into the Black Sea region, but recognizes that OAE extension is very unlikely if Turkey continues to oppose it. Romania strongly opposes any expansion of the mandate of BLACKSEAFOR to include counterterrorist activities. However,
Romania has not excluded the possibility of cooperation with a Turkish-led Black Sea Harmony, providing any cooperation entailed transparent and comprehensive information exchange with NATO.
3. (C) Last summer, Romania proposed the "Black Sea Forum for Dialogue and Partnership Summit" on June 5 as a launching pad for a process of dialogue and partnership among Black Sea states, the U.S. and the EU. The forum focuses on "soft security" concerns such as promoting democratic governance, economic development and environmental protection. It will produce a "Joint Declaration" by "heads of state or government" from the Black Sea area. Your participation at the June 5 forum is a tangible sign of USG support for Romania's efforts to strengthen dialogue and cooperation in the wider Black Sea region. Indeed, Romania views active U.S. support for the Forum as pivotal to the event's success.(Reftel)
A Reliable Ally in the GWOT
4. (SBU) Romania has been a staunch ally in both words and deeds in the global war on terrorism (GWOT), providing troops in both Afghanistan and Iraq and consistently promising to keep Romanian troops in both those countries. About 2000 Romanian troops are presently deployed abroad, including more than 1500 soldiers in Afghanistan and Iraq and more than 200 soldiers and gendarmes in the Balkans.
5. (C) President Basescu has repeatedly underscored the centrality of Romania's strategic alliance with the U.S. and senior Romanian leaders, including the President and Prime Minister Calin-Popescu Tariceanu, fully support a U.S. military presence on Romanian soil. Indeed, in December 2005, Secretary Rice and Foreign Minister Razvan-Mihai Ungureanu signed a defense cooperation agreement which will permit U.S. forces "access to and use of" Romanian military facilities for a broad range of activities, including training, transit, staging and deploying of forces materiel, and prepositioning of defense equipment. Chamber of Deputies has approved the agreement and Defense and Foreign Relations Committees have both recommended ratification by the full Senate, which happen as early as June. Romania is a dedicated NATO member, fully committed to developing niche capabilities and serving as a role model and guide to aspirant NATO members in the region. Romania has been actively involved in regional organizations, such as the Southeast Europe Cooperation Initiative (SECI) and the Stability Pact for Southeast Europe.
Sights Set on EU Membership in 2007
6. (C) EU accession in January 2007 is Romania's number one foreign policy priority. The European Commission,s May 16 monitoring report gave Romania a conditional green light for accession to the European Union on January 1, 2007. Most significantly, the government's fight against corruption was rewarded in the report by downgrading corruption from a serious concern that could have delayed Romania's EU entry until 2008. However, the report did not fix the date for EU accession, thus keeping Romanians on their toes until October. The only remaining "red card" concerns cited in the report were technical issues in agriculture and VAT collection which most observers believe Bucharest will be able to satisfactorily address by this fall. If so, Romania will almost certainly join the EU in 2007. In your meetings with GOR officials, you should congratulate them on Romania's favorable EU report -- but urge them to stay the course in the battle against corruption.
7. (S) Romania's largely bipartisan foreign policy and security goals stand in marked contrast to the country's domestic politics, which remain opaque and to some degree unpredictable. The effectiveness of the center-right government coalition is diminished by chilly, even hostile relations between President Traian Basescu and Prime Minister Calin-Popescu Tariceanu. Most observers expect Tariceanu to survive in office at least through the next EC report. But Basescu has reportedly already floated the notion of removing Tariceanu with the opposition Social Democratic Party (PSD), but refrained from moving forward due to likely opposition from Brussels at this critical juncture in the EU accession process.
At the same time, the PSD remains embroiled in its own infighting and corruption scandals, the most notable being the resignation in March of former PM Adrian Nastase from his position as Chamber of Deputies president following revelations of his highly suspicious property deals alleged money laundering.
8. (C) The recent outbreak of Avian Influenza (AI) Bucharest and around the country has galvanized the of Romanians and exacerbated tensions in the ruling coalition, with President Basescu criticizing Prime Minister Tariceanu and Minister of Agriculture Flutur of poor leadership and a failure to identify the cause of the outbreak. While the root causes remain unknown, the outbreak has been traced to malfeasant behavior in two commercial poultry farms in Brasov County, where plant managers attempted to cover up an earlier outbreak. Post believes that central authorities reacted quickly and transparently. USAID is providing $2.4 million in assistance to the GOR for public health and animal husbandry education campaigns, diagnostic and protective equipment, and pandemic management training.
9. (C) Romania's EC-imposed ban on international adoptions -- and failure to process roughly 200 pending adoption cases for American parents -- remains a sharp irritant in our bilateral relationship. Basescu has privately promised at various points to resolve at least some of the cases once the EC sets a definite date for accession. However, the EC's deferral of this decision until the fall has postponed prospects once again for further action by the GOR with regard to the pending cases. At the same time, it has become apparent that there are serious flaws in the 2005 law that imposed the ban.
A recently released report by a respected NGO, Mental Disabilities Rights International (MDRI), revealed harsh conditions for abandoned children in a hospital in Braila, a situation MDRI claims is duplicated at other institutions across the country. The Embassy has also seen such conditions, as well as substantial numbers of babies warehoused in hospitals for prolonged periods. Basescu and Tariceanu both assert that Romania can take care of its own abandoned children. Evidence is building, however, that it cannot. You may wish to urge Basescu and Tariceanu to process the pending cases in favor of U.S. parents when it is in the best interests of the children involved; and to work to correct the serious flaws in the 2005 law.
10. (C) Romania, once a net exporter of energy products, now produces 40% of its domestic oil consumption and 60% of its gas needs, and the rates are decreasing each year. While oil imports are based on trades at the international oil boards,
Romania imports nearly all gas from Gazprom through two main middlemen agents, WIEE and Conef. WIEE is a 50/50 joint venture between the German firm Wintershall and Gazprom, while Conef is a subsidiary of Marco International. Though headquartered in Switzerland, Marco International is allegedly controlled by Russian businessman Vitaly Mashytsky.
11.(C) While Romania has sought a greater role in European hydrocarbon distribution for some time, the January Russia-Ukraine energy crisis has refocused attention on the need for energy security and a diversification of source. As envisioned, both the Nabucco gas pipeline and the Pan European Oil Pipeline would pass over Romanian soil, potentially providing a "southern corridor" alternative to Russian imports. However, Russia is moving quickly to solidify its presence in Romania, as demonstrated by the visit of Gazprom Vice Chairman Alexander Medvedev to Bucharest on May 15 to finalize the extension of Romania's gas import agreement from 2009 to 2030. The new agreement substantially increases Conef's role in gas imports to roughly 10 percent of the market. Medvedev also announced Gazprom's intention to enter into a joint venture with state-owned Romgaz to construct an 800 million cubic meter gas storage facility in Romania and to participate in Romgaz's eventual privatization. You may wish to explore Romania's energy security strategy in meetings with senior government leaders.
Boosting Trade Ties
12.(SBU) Finally, while most elements of our relationship are exemplary, there is still room for improvement in the commercial and economic sphere. While many American companies are in Romania and doing well (Hewlett Packard has transferred much of its European customer support operations to Bucharest) and the GOR has improved the overall business environment, transparency has not permeated the system. Only after one year of delays and political maneuvering has the GOR made good on its contract with Bechtel for the Transylvania Motorway, settling its arrears and paying the contractual advance on May 29. Many businesses complain of a lack of consultation on major government decisions that affect their economic health. Some ministries, and particularly the Ministry of Economy and Commerce, routinely ignore provisions of Romanian law that require 30 days of public notice and comment before legislation can take effect.
13.(SBU) Your visit is an opportunity to encourage the GOR to work more closely with American investors and their representatives, such as the American Chamber of Commerce in Romania, on improving the overall business climate. It is also an opportunity to encourage Romania to stand up for its interests within the European Union. For instance, the GOR is under strong pressure from the Commission to eliminate GMO seed cultivation. Romania is the largest grower of GMO crops in Europe.
Welcome Back Dr. Crouch
14.(C) In sum, Basescu and the Romanian government are greatly looking forward to your return to focus on one of the GOR's core foreign policy objectives -- to increase international engagement and coordination on the Black Sea basin. You are remembered well as U.S. ambassador during the period in which Basescu and the Tariceanu government first came to power. Your presence at this symbolically important juncture will similarly be appreciated and linked to our broader -- and still deepening -- strategic partnership.
15. (U) Amembassy Bucharest's reporting telegrams are available on the Bucharest SIPRNet website: www.state.sgov.gov/p/eur/bucharest
TAGS: PGOV, PREL, RO
SUBJECT: AMBASSADOR MEETS WITH PRIME MINISTER TARICEANU
REF: BUCHAREST 0115 Classified By: DCM Mark A. Taplin for Reasons 1.4 (B) and (D).
1. (C) Summary: The Ambassador accompanied by DCM and Acting Polchief met with Prime Minister Tariceanu on February 8, to get his views on the current domestic political turmoil and to remind the PM of continuing US priorities on Iraq, Afghanistan and NATO. While Tariceanu was at times cagey in responding to U.S. concerns, he provided some measure of assurance that he is not planning to himself advocate any change in Romania's foreign policy direction. While he was anything but positive in speaking about President Basescu, he made it clear that the Liberals and the Democrats are still consulting about ways to stave off the opposition censure motion. He cited in particular his concern that the current political turmoil could have a negative effect on this year's economic picture. Some of the PM's comments about what ails Romania, including critical comments about the pace of judicial reform and the lack of independence among Romanian "judicial" officials, were worrisomely close to views expressed by opposition foes of reformist Minister of Justice Monica Macovei. In a surprise development, the PM raised as a "huge problem" the performance of Bechtel in the Transylvanian highway construction project, threatening to cancel the contract and reopen the road project for bidding if something was not done to improve the situation. The Ambassador pledged to get the Minister of Transportation together with Bechtel senior representatives to establish the facts and to find a solution. End Summary. .
2. (C) The Ambassador opened discussions with Prime Minister Calin Popescu Tariceanu with good news: the International Energy Agency said Romania was welcome to participate in the upcoming Southern Corridor Energy Conference. Tariceanu said he was glad to hear the news. The Ambassador underscored the importance of the IEA's welcome, in view of the progress on the Nabucco pipeline. Tariceanu said the problem with Nabucco was that Turkey wants to "have a hand on the valve." Ambassador noted that EUR DASBryza had worked hard to address the issue. The PM stressed the importance for Romania of having both a diversification of energy supplies and a broader distribution. For these reasons the PM has formed a energy security consultation group within the government that will look at energy from a strategic and geopolitical perspective. The Ambassador updated Tariceanu on the status of his request to have a U.S. energy advisor consult with the Minister of Economy and other GOR officials on regional energy issues.
Dismissal of Foreign Minister .
3. (C) The Ambassador said he was sorry to see FM Ungureanu leave (reftel) although he understood the PM's perspective. He was glad to see Ungureanu had decided to stay with the National Liberal Party (PNL) since he was young and had talent. Tariceanu said that Ungureanu had made a mistake but that he appreciated his efforts and accomplishments; Ungureanu would continue to play a role in the party, heading the PNL list for the European Parliamentary elections planned for May. The Ambassador said that it would be important that the next foreign minister have an appreciation of the important role that Romania plays in areas that are of special significance to the U.S., namely Iraq, Afghanistan and NATO. He added that the US was aware that there were some concerns within the PNL over Iraq and Afghanistan. Romania continued to play a strong, important role in some of the toughest regions, the Ambassador went on, and the US fully appreciated Romania's contributions. The Ambassador also thanked the PM for helping keep these issues in the GOR on "an even keel" over the last several months. The PM noted that these were delicate issues, and that there were some clear differences with the US inside his party on these two points. Tariceanu underscored that the differences were not a reflection on how Romanians feel about the U.S., but rather "natural reactions" to Romania's "European profile."
4. (C) The Ambassador assured the PM that the Embassy would continue to represent the US "blind to personalities," and said that the US and Romania have done good things together. It is because of that mutual effort that, from the President on down, the U.S. wholeheartedly supported Romania's bid to host the 2008 NATO Summit. He added that the US was still working hard for the Summit to be in Bucharest, and though there is still work to do, things appeared to moving in the right direction. Tariceanu said that the NATO Summit would send a very important and strong signal, and he appreciated the US efforts. The Ambassador asked the PM if he was considering any names in particular for his next foreign minister. Tariceanu said he would be looking first within the PNL, but that the Ambassador could disregard the names that had initially been raised in the media. There were some in the party who sought to use the media to do their lobbying, but he had not had a single meeting to discuss possible candidates among his Liberal colleagues. The PM added that he was in no hurry to name someone, and that he would look for the best candidate for the job, even if it meant looking outside the PNL.
Current Political Situation .
5. (C) While acknowledging the current political situation in Romania was an internal domestic issue, the Ambassador commented that he thought the PM's appeal for all parties to exercise restraint in effort to suspend the President had been helpful. It was important to focus on what was best for Romania, the Ambassador observed. The US wanted Romania to be recognized as the strongest democracy in the region because we recognized that Romania that a strong, democratic Romania would always be our friend. We recognized also that there were areas that still needed support: rule of law, independent judiciary, and a strong executive and parliament that had the respect of the voters. He asked the PM where he felt the political situation was headed? .
6. (C) Tariceanu began by saying he thought the question was best addressed to President Basescu. The PM said that for two years he had tried to avoid a political conflict at the level of institutions and personalities, but had not succeeded. The PM pointed out that "the one with the strongest voice is not always right." The PNL got Romania into the EU because of Romania's "strong institutions"; things might not be perfect but they were moving forward. The judiciary, for example, needed strengthening, and he was disappointed that it had not moved far enough. Tariceanu placed the blame on "ex-communists" who have taken positions in the judiciary and not performed well, and those who retained "old communist mentalities" and who did not respect "the rights of citizens." As long as these ex-communists made citizens out to be guilty before they were judged in a court, then Romania could not say its judiciary was performing well.
Tariceanu criticized judges for being swayed by political influences, saying there were too many people who had been in positions for the last 17 years who had "no political culture" and lacked "the experience to be statesmen." "They behave like they would in their private lives," he lamented. If Romania's leaders were not on the right track, then the EU would reject them. He added that Romania, however, was not the only country in the EU with these problems. There were those that preferred to have things in permanent turmoil, preventing the country from moving forward, spending energies on political debate that appeared as nonsense to the average citizen. Tariceanu's real fear, he said, was that Romania's 2007 economic performance would suffer because of the political turmoil, which was why he proposed delaying the impeachment procedures against Basescu. He could not say that President Basescu had anything to do with the current situation, but if people wanted to concentrate on real priorities, it would depend "on the reaction and counter-reaction by each side." Tariceanu noted that the PSD opposition had made such a strong point that it risked losing face if it were to drop the issue. The Ambassador said there had to be a way for reasonable people to sit at the table and talk things over. US business had an interest in Romania, and while he liked to tell Americans that Romanians would solve their political problems, there were some days it was harder to say than others. The PM replied that the GOR's institutions were strong enough to solve the current political issues "within the constitutional framework."
7. (C) The PM asked his economic and privatization advisor Razvan Oresanu to update the Ambassador on the latest state of play on the Craiova privatization effort. The PM and the Ambassador agreed that the Commission had to present "well-defined criteria, a specific calendar and an action plan," at the latest in June, in order to move forward on the privatization process. The PM emphasized he had included Oresanu on the commission in order to ensure that decisions were made quickly and to keep things on track. He added that time is crucial for the two US companies interested in the plant. The Ambassador agreed, noting that after June, there was a serious risk that Romania could lose the interest of one or both of the major US car companies planning to bid on the plant. .
Bechtel Transylvanian Highway .
8. (C) Tariceanu described Bechtel's performance in the highway construction project as "a huge problem." He said that he had expected Bechtel would have the capacity to do the job and, after discussion with Transportation Minister Berceanu, had agreed to the scope of work under the revised highway contract. Tariceanu complained that he now believed Bechtel was unable to keep pace to get the project completed under the agreed terms. PM Tariceanu said that at the current pace and expense, he would need to talk directly with the Bechtel chairman about having a more realistic framework, or else he will have to cancel the contract and open up the highway construction project for rebidding. "It does not look like Bechtel has the capacity to do the job," he insisted. The Ambassador expressed surprise, noting that he had spoken with the Bechtel project director recently, and been assured that Bechtel was "at 105 percent of where it wants to be right now." The PM said that he has a political interest in seeing the work is completed within the specified framework and that Romania has the money to pay, but the performance was simply not there. He warned that Bechtel's image would be affected by delays. The Ambassador pledged that he would put the project director together with himself and Minister Berceanu in order to find out what was the real situation. He would then provide his assessment to Tariceanu. The PM said he would let Transportation Minister Berceanu know to expect the Ambassador's call.
TAGS: ECON, ENIV, PREL, RO
SUBJECT: AMBASSADOR'S MEETING WITH TRANSPORTATION MINISTER REGARDING BECHTEL HIGHWAY CONTRACT: SAME OPERA, DIFFERENT SINGERS
REF: BUCHAREST 0144
Classified By: John Rodgers, Economic Chief, for reasons 1.5 (b) and (d)
1. (C) Summary: Bechtel's efforts to build a highway in Romania are still plagued by Romanian government obstructionism and inability (or unwillingness) to understand the basics of the contract. The Ambassador's most recent meeting with the Minister of Transportation revealed that some of the Romanian complaints against Bechtel may exist only in his mind and in that of the Prime Minister. We fear Bechtel may continue to suffer the slings and arrows of outrageous governmental "oversight." The Embassy, too, may be in danger of becoming a punching bag, furthering the tactical political ends of the Prime Minister in showing his "toughness" on a contract with a U.S. company, or ingratiating himself to the European Union, which has always opposed the Bechtel contract. End Summary.
2. (C) After a very blunt statement by PM Tariceanu to the Ambassador last week (see Reftel) that the GOR was contemplating breaking the multi-billion dollar highway construction deal with Bechtel because of the American company's non-fulfillment of the contract, the Ambassador, with Bechtel's concurrence, sought a meeting with Transportation Minister Berceanu to elicit his views on the problems related to the construction project and seek a resolution of the outstanding disagreements between the GOR and Bechtel. Embassy notes that the PM later went public with his dissatisfaction about the Bechtel contract, citing his conversation about Bechtel with the Ambassador, which the Embassy had assumed was confidential in nature.
3. (C) Bechtel representatives and Econ Chief accompanied the Ambassador to the meeting on February 16, and Minister Berceanu convened his ministry advisors and staff, including officials of the National Road Authority, which is the "contracting party" and main GOR partner for Bechtel. Minister Berceanu began the discussion by commenting that he has put a lot of emphasis on developing plans for building highways in Romania. This includes using EU funds. He has an ambitious agenda for construction. He wants roads built in Romania. Minister Berceanu then launched into a criticism of the slow pace of work on the Bechtel project. He said that, while it was understandable that there had been some change in the schedules due to the re-negotiation of the contract last year, he was concerned that the agreed-upon completion date of 2013 was now unattainable. Berceanu continued his rather lengthy exposition of the roadway,s problems by claiming that Bechtel had not spent all the money budgeted in 2006, and he therefore doubted that the company could spend all the money budgeted for 2007 (Euro 120 million). Berceanu asked how, at this pace, could the road possibly be finished by 2013? He said that the GOR needs to know in advance, even a year in advance, how much work will be done so that the GOR can come up with the funding. His basic demand appeared to be that Bechtel should assure him in writing that it could finish the project on time in 2013, while Romania would guarantee the funding for the work.
4. (C) The Ambassador, after coordinating his message with Bechtel representatives, succinctly laid out the reasons for coming to see the Minister with the Bechtel representatives: - He noted that he had received a rather sharp message from the Prime Minister and had committed to the PM to meet with Berceanu to understand the specific problems that the GOR has with the Bechtel highway contract.
- Although he was not a negotiator for Bechtel, he wanted to find a way forward to get the deal on track.
- He wanted to get the two sides together to work through the problems.
- He also noted, however, that the GOR must give Bechtel what it needs to complete the work, and this included material, land and money.
- Finally, the Ambassador noted that Bechtel has told him the work for this year was well ahead of the work plan and that Bechtel was very confident of its ability to finish the project on time.
5. (C) In the following back and forth between Minister Berceanu and the Ambassador and Bechtel representatives, it became quickly apparent that Minister Berceanu was not well informed about the contract or its actual contents or obligations. Conversation among the Romanian government representatives and Berceanu (in Romanian) to clarify points of arguments and provide basic information among themselves about the contract actually took as much time in the meeting as the exchanges between the Romanians and the Americans. Minister Berceanu was visibly (and audibly) impatient with his staff and seemed confused.
6. (C) At this point, Bechtel did not need to go on the attack, since the Romanians had already punched holes in their own arguments and complaints. Bechtel graciously offered to review the plans for the roadway, in particular to revise the schedule of completion of specific sections of the roadway, in order to meet the concerns of the Romanians. Bechtel told the Minister that it was only doing what the revised contract had stipulated. Bechtel also reminded the Romanians that they had taken from Bechtel the responsibility for designing the highway in the last revision and without plans, Bechtel couldn,t work.
7. (C) At the end of the meeting, a seemingly embarrassed Minister Berceanu apologized for the confusion on his part and among his staff regarding the contract. He said he wanted to be &personally and directly8 involved in the project. Saying in English what he had told his staff in Romanian, Berceanu said that he was responsible for making the project work. He offered to meet with Bechtel soon to discuss more technical issues. The Ambassador concluded the meeting by asking Berceanu to come to him if there were problems with the contract so that they could work them out without letting them fester into resentment (or messages of discontent from the PM).
8. (C) Although Embassy had perceived the meeting as a positive step forward, a subsequent phone call between the Ambassador and the Prime Minister revealed that the PM remained dissatisfied with the Bechtel contract and the GOR was continuing to demand that Bechtel revise its contract and agree to pay penalties for late fulfillment of the contract. The PM asked that the Ambassador meet with the PM and Minister Berceanu without Bechtel in the room as early as possible. A Bechtel representative told Embassy on February 23 that a high-level Liberal Party (PNL - PM's party) member had warned him that the PM was going to use the next meeting with the Ambassador to criticize the project yet again and to impose "severe measures."
9. (U) In the past couple of days, the real intentions and thinking of the GOR toward the contract have become even murkier through further public utterances of Minister of Transportation Berceanu. Press has quoted the Minister as reiterating earlier statements that he realizes the GOR cannot get out of the contract, but that it is still bad for Romania. Other press items mention that Bechtel is negotiating with the GOR to realign the work schedule and make proposals for the funding needed. Meanwhile, the Deputy Minister of Transportation this week told the press that the highway would be delayed by a year (until 2014) and Bechtel was to produce plans to reorganize the construction schedule.
10.(C) The meetings with the Prime Minister and Minister of Transportation, the subsequent telephone conversation between the PM and the Ambassador and the rumors circulating about the PM's continuing anger at the contract could simply be construed as more examples of how disorganized and ill-informed the GOR decision-makers are in their approach to project management. If this were truly the case, the Ambassador might be able to help Bechtel to work through the misunderstandings and mitigate the effects on the Bechtel project of the typical "stove-piped" management within the GOR, in which one ministry does not communicate with another at the mid-level. The GOR, however, has not taken repeated advice from Bechtel and the Embassy to create an integrated team of professionals to manage the project. Unfortunately for Bechtel, this makes it, at best, the "guinea pig" for large-scale contracts in Romania and it will continue to suffer through the experiment.
11.(C) Unfortunately, other forces may be at work to make Bechtel and the highway project stumble. The Prime Minister's decision to go public with his latest criticisms about the Bechtel contract and his request to meet yet again privately with the Ambassador about the contract appear to be an effort to put the onus on the U.S. side to come up with solutions that seem mostly to be fabricated by the GOR. The PM may also be using the issue to punish his coalition partners (Democrat Party - PD) which supports the highway since it goes through the PD political stronghold of Cluj, whose mayor, Emil Boc, is the head of the PD. Given the level of infighting and skullduggery in Romanian politics at the moment, Embassy cannot rule out these darker scenarios. In addition, the pro-EU faction inside the GOR may want to demonstrate its fealty to the EU on this contract issue, perhaps even scheming to reopen the bidding on the highway to allow European companies to bid.
12.(C) Bechtel is still concerned about money flow from the GOR (the project must be financed per GOR decision solely with external credits). Unless the issues of money and timely payments can be worked out, Bechtel may soon be forced to stop work yet again. Another deadline is looming for the GOR to pay a substantial sum to Bechtel (early March). If the money doesn,t come, then the machines will stop. This would provide yet another (unjustified) excuse for the GOR to snipe at Bechtel, or even worse, to abrogate the contract.
13.(C) Embassy will continue to monitor the situation closely and will provide all appropriate assistance to Bechtel to ensure that the contract is successful. Embassy is inclined, however, to decline any meetings with GOR officials unless Bechtel officials are also in the room so that we can reinforce the message that the GOR must negotiate directly with its business partner, Bechtel. Embassy will also reiterate, in public if necessary, that it is not a party to this contract, but the USG firmly supports the sanctity of legal contracts as a bedrock of the free market system.
TAGS: PGOV, PREL, RO
SUBJECT: PM TARICEANU: DON'T PUT ALL YOUR EGGS IN ONE BASKET
Classified By: Ambassador Nicholas Taubman for 1.4 (b) and (d)
1. (C) Summary: Prime Minister Tariceanu told Ambasssador that he was personally disappointed with the ongoing domestic turmoil in Romania, but also claimed he had received a vote of confidence from European Commission President Barroso. Tariceanu was concerned about reports that the USG was being "more than cautious" in its contacts with the GOR during the suspension period. He also provided assurances that all parties were supporting Romania's 2008 NATO Summit bid. Tariceanu insisted that no single side was to blame for the turmoil, and expressed the hope for a "balanced" posture from the USG. Tariceanu provided assurances that the referendum to remove President Basescu would be carried out under the current law and that Romania would not "discredit itself" in the process by engaging in manipulations. He acknowledged, ironically enough, that the anti-Basescu referendum was a "waste of time, energy, and money" because it was improbable that the Romanian President would be defeated, and as a result, "nothing will change in the end." On the Craiova auto plant, Tariceanu confirmed that a deadline was set for company tenders, and evinced confidence that the minority shareholder problem had been resolved. The PM also evinced doubts about Bechtel's ability to fulfill its road-building contract. End Summary.
2. (C) Ambassador (with DCM and Polcouns) met with Prime Minister Calin Popescu-Tariceanu April 23, at the Prime Minister's request. Tariceanu said that he had two messages for the USG: he said that he wanted first to convey his "personal disappointment" with the internal political turmoil. The country had strong institutions, but they were not functionally normally right now, and citizens were beginning to get worried. He added, however, that he had recently spoken to European Commission President Jose Manuel Barroso. Barroso had assured him that such problems were not unusual even in other EU countries; he also reportedly expressed a personal vote of confidence that Romania would overcome its internal conflicts.
3. (C) Tariceanu said his second message was about the NATO Summit and bilateral relations: he had heard from the Romanian NATO Ambassador and the Romanian Embassy in Washington that there were "serious concern" in the USG about the political conflict in Romania, and that there was a USG decision to be "more than cautious" about contacts with Romanian authorities right now. Tariceanu said that he considered these reports to be "very strange" and that he was "unpleasantly surprised" by the news. Tariceanu laughed sardonically and quipped, "we can consider this to be a confidential meeting if you prefer." He also said he hoped the Ambassador would send back the message to Washington that this was not the "proper attitude" to adopt towards Romania.
4. (C) Tariceanu also complained that he had been kept in the dark by President Basescu and then-Foreign Minister Ungureanu regarding the NATO Summit. Despite this, he was "more than supportive" of the summit, and was confident that the PSD would support the summit as well. Tariceanu also deflected responsibility for the political turmoil on the PSD, remarking that "the current situation did not arise because of the government, but because of the PSD." He said President Basescu was in a "difficult position" and his situation might worsen if a "valid" referendum took place. He added that his "impression" was that the Americans had "put all of their eggs in one basket." Tariceanu also evinced the hope that the relationship could be more "balanced" in the future as "not just one side is the guilty one."
5. (C) Ambassador inquired whether discussions with the European Commission had included mention of any safeguard clauses. Tariceanu replied that he had assured Barroso that Romania would meet all benchmarks imposed by the Commission; for example, the Romanian Senate would begin deliberations soon to adopt a new law on the National Integrity Agency (ANI); similarly, the new Justice Minister had met with EC Vice President Frattini and had reportedly received high marks from his EU counterparts. Tariceanu added that Barroso's primary concern appeared not to be Romanian political stability but rather the hope of breaking the impasse within the EU for a new constitutional treaty.
6. (C) Ambassador also assured Tariceanu that USG backing for Romania's 2008 NATO Summit ambitions remained firm. He added however that Tariceanu needed to put himself in the shoes of US policymakers who might be loath to send a President to a place where governance was in turmoil. He said that the bilateral relationship transcended personalities and hoped that we could continue to build on the relationship, especially in terms of our common strategic agenda in such areas as security and intelligence cooperation.
7. (C) Ambassador also remarked on recent press reports regarding the upcoming referendum, noting that while politics might be played as a play by the rules. the government would and that the process press reports that lawsuits and other legal actions were being prepared against the suspended President, Tariceanu replied that "the government can't do such things." He added that he would "go crazy" if he had to respond to all press speculation, but that he had already answered "no" to press reports that he might remove the Prosecutor General or the ANI head. Asked if Romania might accept foreign monitoring of the referendum, Tariceanu bristled that "Romanian is not a third world country" but added that "if somebody wants to come, he's welcome."
8. (C) Tariceanu also said that it was unlikely that a "valid referendum result" could be obtained under the current referendum law, which specified that over 50 percent of all registered voters needed to vote "yes" in order to remove a president. In response to a query from the Ambassador, he confirmed that the GOR would be operating under "existing legislation" in holding the referendum. He added with some exasperation that, for him personally, the referendum was a "waste of time, energy, and money" and that nothing will be changed in the end.
9. (C) On the Craiova auto plant, Tariceanu confirmed that the final date had been set for company tenders. He said that his two primary concerns included dealing with the minority shareholder issue and how to "sell the deal" with the general public. He added that Economy and Finance Ministry State Secretary Sebastian Vladescu seems to have "found a solution" for the minority shareholder problem--they were interested less in the industrial assets but in the real estate assets, and hopefully the GOR would be able to satisfy them. Asked whether he would like to see Vladescu directly, Ambassador responded that Ford (and GM) would be doing that.
10.(C) On Bechtel, the Prime Minister noted he was a civil engineer by training. What he saw last year at the Bechtel construction sites last year had left some doubts about its ability to fulfill the Transylvanian Highway contract. While he had "an open mind" and would be "happy" to see if they were working better now than last year, he was under "continuous media pressure" regarding lack of progress on the highway. Ambassador replied that it was best to let Bechtel work the issue out directly with Transportation Minister tough sport, he hoped all sides would Tariceanu assured the Ambassador that not "discredit itself" in the referendum would be straightforward. Regarding Orban; Bechtel knew how to build roads, they would finish on time if they were provided the money and the land right-of-ways that were required, and it was best to let them get on with the job.
11.(C) Comment: Tariceanu is somewhat disingenuous in claiming that he was kept in the dark regarding the NATO Summit, as we have heard from MFA sources that he was asked as early as last fall to help lobby for Romania and had refused to get involved. His concern about the fate of the summit appears to be driven in part by a desire to avoid being seen as losing the summit during his watch. His remarks about the referendum being carried out in a "straightforward" manner under current legislation is reassuring, but his reference to a possible "invalid" referendum result gives some pause, since some PSD leaders are already insisting that if a referendum is invalidated because of insufficient voter turnout, the process should be repeated. Press reports today indicate that the PSD met yesterday with the PC, UDMR, and PNL leaders to discuss proposals to change the current referendum law by emergency ordinance, after having two attempts to amend the current law rejected by the Constitutional Court as being unconstitutional. We need to make it clear to all parties here that we expect the referendum game to be played in a fully democratic manner, and that if an effort emerges to change the rules now, we will speak out. End Comment.
TAGS: EFIN, ECON, EIND, ETRD, PGOV, PREL, RO
SUBJECT: ROMANIA'S ECONOMY SET FOR A LANDING, BUT HOW HARD?
REF: BUCHAREST 915 AND PREVIOUS
Classified By: DCM Jeri Guthrie-Corn for Reasons 1.4 (B) and (D).
1. (C) The forward momentum in Romania's red-hot economy is already slowing and will definitely hit the brakes in 2009, government officials and outside analysts told visiting U.S. Treasury representatives last week. Still, while Romania can expect sharply lower growth due to the global downturn, the majority view is that Romania will still escape a recession. The banking system is generally stable and has so far shown few major effects from the meltdown that hit the financial sector in developed markets over the last two months. Emerging troubles in the real economy will further stress the banking sector, but will also force a tightening of the loose consumer credit boom which has fueled consumption and helped push the current account deficit to uncomfortably large levels. All eyes now are on the Government of Romania's (GOR) growing fiscal deficit amid concerns over how the deficit will be financed, especially given the GOR's effective lack of access to external borrowing in the current tough global environment. While GOR officials continue to maintain that Romania's high-flying economy will glide in for a soft touch-down in 2009, many outside analysts seem increasingly convinced that it's time to start fastening the safety belts for a rougher landing. End summary.
BNR: BANKING SYSTEM IN PRETTY GOOD SHAPE...
2. (SBU) Despite the turmoil in global financial markets over the last two months, Romania's banking sector is relatively stable, officials of the National Bank (BNR) told visiting analysts from the U.S. Treasury Department on November 18-19. According to BNR Director for Bank Supervision Nicolae Cinteza, close to 90 percent of Romania's banking sector is controlled by local subsidiaries of large European banks, and 94 percent of banks' foreign liabilities are owed to parent institutions. The level of financial intermediation in Romania is low compared to the rest of Europe, and local banks have little exposure to the types of distressed assets that have hurt institutions in the United States and elsewhere, Cinteza said. Banks' solvency ratios currently average nearly 12 percent, well in excess of the legal limit of eight percent, and BNR enforces very high reserve deposit requirements (40 percent of the value of loan portfolios in foreign currency and 18 percent for loans in Romanian lei). Romanian banks have generally been very profitable and BNR sees no movement by external parent banks to repatriate capital, although nearly all banks have sharply curtailed lending in recent weeks and parent banks are not providing additional capital to increase market exposure, Cinteza noted.
...BUT REAL ECONOMY EFFECTS ON BANKS STARTING TO BE FELT
3. (SBU) While local banks have so far weathered the financial crisis well, potential signs of trouble from the real economy are emerging, according to BNR Director for Financial Stability Ion Dragulin. All banks have been pinched by extremely high overnight and inter-market rates stemming from inter-bank confidence problems, and the BNR has had to intervene occasionally to inject additional liquidity.
However, BNR sees these as episodic rather than systemic problems, and inter-bank rates have moderated since October, Dragulin said. Of greater concern are challenges posed by the impending slowdown in the real economy. GDP growth over the last couple of years has been led by construction, but this has slowed down in tandem with falling real estate prices which are currently down 25-30 percent from highs registered earlier this year. The rate of non-performing loans, though still low, is trending upward. The availability of credit is shrinking; banks have tightened their own lending policies in response to market uncertainties at the same time that BNR has imposed new restrictions on credit, with tougher loan-to-income ratios and better documentation required from borrowers. With unemployment starting to increase and evidence of easing in tight labor markets, demand for credit is moderating and borrowers are finding it much harder to qualify for loans, Dragulin observed. (This was confirmed anecdotally by a senior economic adviser to the Prime Minister, who told the Treasury analysts in a separate discussion that he himself had been unable to qualify recently for a mortgage loan.)
4. (SBU) Dragulin admitted that the banking sector had yet to be tested by a full-fledged economic downturn, and with signs of weakness just starting to multiply, the next several months would likely be tough ones. Even so, he insisted that BNR's recent "stress testing" scenarios -) accounting for further leu depreciation, higher interest rates, and a much softer economy -) continued to indicate that most banks would remain within BNR solvency limits and that the risk of a systemic financial sector failure in Romania is low. Dragulin did confess, however, that a recent, previously-scheduled technical mission from the IMF had recommended that BNR needed to be less optimistic in its stress test assumptions, and that the GOR needed to improve coordination and crisis management capability among state
financial institutions. The GOR has set up an interagency working group on these issues, he said.
MEF: A "POLITICALLY ADVERSE" BUDGET ENVIRONMENT
5. (C) Dorin Mantescu, Director for Macroeconomic Analysis and Economic/Financial Policies at the Ministry of Economy and Finance (MEF), was surprisingly direct in acknowledging that election politics is playing havoc with the budget. Coming off a very strong year -) MEF believes GDP growth will average close to eight percent for 2008 despite the end-of-year slowdown -) politicians are primed to keep spending money despite warning signs that fiscal prudence is needed. Mantescu predicted that Romania's current account (CA) deficit will end the year at just over 13 percent of GDP, down slightly from 2007, helped by depreciation of the leu in the third quarter. Even so, Romania's external financing needs remain very large. FDI coverage of the CA deficit rose to 65 percent in the third quarter but will likely fall off by year's end as foreign investors start to curtail their plans. Foreign remittances from Romanians working abroad are also expected to decline, particularly as recessions in major destination countries like Italy and Spain affect the expatriate workforce.
6. (C) Mantescu lamented that for every positive trend, there is now a countervailing negative one. Slower growth will dampen consumption and act to bring down the CA deficit on its own, but FDI and remittance flows may fall even faster, creating a short-term financing squeeze. State budget revenues are up a healthy 31 percent in 2008 but government spending has risen at an even faster clip, with much of that coming in the form of permanent increases in public sector wages and pensions. Mantescu conceded that the GOR's official projection of six percent GDP growth in 2009 is much too high, with three to four percent the most optimistic estimate. Extremely tight conditions in international credit markets, combined with the recent downgrade of Romania's sovereign debt rating to "junk" status by Standard and Poor's and Fitch, have effectively closed off GOR access to external financing in the near term. Therefore, the fiscal deficit must be financed internally through T-bill auctions at very high yields. The GOR needs to raise about 2.5 billion euros more by the end of December, a sizeable amount for the internal market. Financing needs in early 2009 loom as an even greater challenge, Mantescu said, particularly in light of the exorbitant spending promises being generated in the current parliamentary election campaign. "The next few months will be very tough," he concluded.
7. (C) At the same time, Stefan Nanu, MEF Director for the Treasury and Public Debt, insisted to the Treasury visitors that sufficient domestic demand exists to finance the deficit on the local market. In contrast to Mantescu's gloomy assessment, Nanu predicted that the fiscal deficit for 2008 will come in well under three percent of GDP and will be easily financed; "our last auction was oversubscribed," he boasted. Nanu said 2009 GDP growth could be as high as five percent and that Romania's external financing needs would be minimal, noting that none of Romania's current external debt is due to roll over until 2010. He did express some concern about the 2009 budget, which won't be adopted until early in the year when a new government and parliament are in place, and agreed that big wage hikes for teachers and other public sector workers would put a lot of pressure on GOR finances if fully implemented. Still, he believed this could be partially mitigated through better MEF internal controls to keep other ministries from reprogramming funds and by forcing the ministries to return unused monies to MEF. Nanu was dismissive of the rating agencies which recently downgraded Romania, saying "they have been blind to anything that is positive" in the country's macroeconomic picture.
IMF AND RAFFEISEN BANK: EVERYONE BETTER BUCKLE UP
8. (C) IMF resident representative Juan Fernandez-Ansola and Raffeisen Bank Vice President John Stewart told the Treasury visitors in separate meetings that, from their perspectives, the near-term prognosis for Romania is very worrisome. Both predicted that the fiscal deficit for 2008 would exceed the GOR's predictions, and that funding pressures into 2009 would be severely aggravated by the lack of access to external financing. Not only does Romania need to find a way to cover the deficit )- and Stewart observed that the potential shortfall could equal nearly the entire value of liquidity available in the internal commercial market -- but it must do so at a time when economic growth is slowing rapidly. To get back on sound fiscal footing, the GOR needs a budget correction of four to five GDP percentage points. If the deficit continues to balloon, the correction could be forced on Romania in the form of a rapid depreciation of the leu and a potential balance-of-payments crisis. In that regard, both interlocutors said the BNR will use its substantial foreign currency reserves to try to prevent dramatic movements in the exchange rate, but will likely not resist a gradual weakening
of the leu, even past the psychologically important level of four lei to the euro (the current rate is about 3.8). Stewart opined that Romania may have no choice but to seek assistance from the IMF in early 2009. Fernandez-Ansola was noncommittal on that point, but observed, "the next three to four months will be crucial."
REAL ECONOMY OBSERVATIONS: THE PARTY IS WINDING DOWN
9. (SBU) Construction cranes still dot the Bucharest skyline and shopping center parking lots are as full as ever. Still, evidence is mounting that the Romanian economy is slowing down after averaging well in excess of six percent GDP growth annually over the last five years. Romania's biggest domestic car maker, the Renault-owned Dacia, suspended production at its Pitesti assembly plant for the first half of November due to weak demand. Similar suspensions have been announced by steel maker Arcelor Mittal and Rompetrol's petrochemicals division. Occasional announcements of new FDI projects still appear in the local press, but they are far outnumbered by reports that investors are scaling back or deferring plans altogether. (Post will report septel on FDI trends.) The notoriously tight labor market, which has driven wages in some sectors to near Western European levels, is slackening. The MEF's Ion Dragulin said IT engineers, attorneys, accountants, and other professionals cannot command the same high salary increases which they were demanding just a few months ago.
10.(C) The rapidity with which the economy has begun to show signs of stress has taken political leaders by surprise, and many of them remain in denial. While Prime Minister Calin-Popescu Tariceanu was insisting as late as mid-October that Romania would largely escape the financial crisis, the debate now is over just how bad the economic slowdown is going to get. Politicians across the spectrum had berated Standard and Poor's and Fitch for downgrading Romania, while praising Moody's for not following suit. However, when Moody's local analyst announced November 24 that the situation is worse than estimated and that Romania may actually face a recession in 2009, the Prime Minister retorted that that "Moody's has a problem with respect to their insufficient knowledge of the Romanian economy". For his part, President Traian Basescu stressed to the media that Moody's had not opted to downgrade Romania at this time despite the gloomy analytic forecast.
11. (C) Romania is certain to face tough going because of the global economic crisis, particularly through the first half of 2009. The big question now is whether the economy will simply glide in for a soft landing or will hit the ground harder. There are factors that should soften the blow. Government debt as a percentage of GDP is very low (about 12 percent) compared to the rest of Europe. While private credit growth has been dramatic in recent years, the average household's indebtedness remains very modest by European standards. Analysts across the board praise the BNR for its stewardship of the banking and monetary system, and the financial sector remains relatively stable. Leu depreciation and tightening of lending standards have already boosted exports, trimmed imports, and dampened consumption, reversing the growth trend in the CA deficit.
12.(C) Analysts also agree, however, that the GOR is fiscally ill-prepared for tough times, and their critique of the political leadership (or, more accurately, the lack thereof) at MEF is especially harsh. MEF appears to have no coherent debt management policy and has proven inept at paying the bills even in good times. In the coming crunch, the MEF will do anything it possibly can to avoid going hat-in-hand to the IMF, meaning that some creditors and contractors -- including important U.S. corporate names like Bechtel and Lockheed-Martin -- are probably not going to get paid. This situation comes against the backdrop of elections, in which all political parties have made dramatic spending promises in an effort to woo voters (reftel). If even a portion of those commitments are implemented, the fiscal deficit will mushroom. Add to that the drying up of consumer credit, drops in FDI and foreign remittance levels, and a fall in exports to troubled, major European markets, and the forecast for 2009 starts to look bleaker indeed. Whatever government emerges from the November 30 elections, it will have its hands full. End comment. TAUBMAN
TAGS: ECON, EFIN, PGOV, IMF, EUN, RO
SUBJECT: ROMANIA: IMF TEAM DEPARTS AND TAKES ITS CHECKBOOK WITH IT
REF: BUCHAREST 723 AND PREVIOUS
Classified By: DCM Jeri Guthrie-Corn for reasons 1.4 (B) and (D).
1. (SBU) The IMF assessment team charged with determining whether Romania has met its obligations for the next funding tranche packed its bags and went home on November 6, declaring in a closing news conference that it cannot complete its assessment until Romania resolves the current political impasse and has a functioning government in place. The decision to suspend the visit means that chances are very slim Romania will receive any more IMF money this year, and accompanying representatives from the European Commission (EC) and World Bank (WB) stated flatly that their own disbursements to Romania cannot come before early 2010. The team had planned to postpone its visit after the government of Prime Minister Emil Boc fell in a no-confidence motion on October 13. However, they stuck to the original schedule in response to an appeal from President Traian Basescu and other political leaders (reftel) who were scrambling to preserve the chance that Romania could qualify to receive the money this year. That gamble failed, and the Government of Romania (GOR) now must borrow in the commercial market to replace the more than two billion euro -- one billion from the EC, 360 million from the WB, and half of the 1.5 billion due from the IMF -- it had been counting on for deficit support.
2. (SBU) In a November 9 briefing to the diplomatic corps after the team's departure, local IMF Resident Representative Tonny Lybek sought to put the best possible face on the situation, noting the team's conclusion that Romania had generally met the technical targets through September 30 required to qualify for the next funding tranche. (Comment: Lybek said the one exception was GOR payments on arrears, which of course comes as no surprise to U.S. companies like Cargill and Bechtel which for many months have been owed VAT refunds or late payments for work performed. End comment.) Lybek said domestic demand continued to be very weak but that external demand for Romania's exports was improving, leading the IMF to revise their 2009 GDP projection upward from minus 8.5 percent growth to between minus 7.0 and 7.5 percent. Reflecting weak internal demand, the current account deficit will fall to around 4.5 percent of GDP this year, a huge adjustment from the greater than 12 percent deficit Romania was running in 2008.
3. (SBU) Still, the fact remains that the current political impasse is preventing Romania from making any progress on the structural reforms required under the IMF agreement. Despite
maneuvering in Parliament to authorize the interim Boc Government to submit a proposed 2010 budget, the IMF believes Boc's cabinet is constitutionally barred from doing so, and an approved budget which clearly establishes a deficit target of 5.9 percent of GDP and outlines the measures the GOR will take to reach this target is an essential precondition for the next disbursements from IMF, EC, and WB. With the next IMF Board meeting tentatively set for December 14, and internal IMF procedures requiring that targets be met a full week in advance of the meeting in order for the Board to approve release of the money, a satisfactory 2010 budget must pass Parliament by December 7 -- the day after the presidential election runoff. While technically not impossible, Lybek acknowledged that the chances of having a new prime minister and cabinet approved and in place to meet this deadline are very slim, and receding with each passing day.
4. (SBU) In terms of required legislation, Lybek isn't expecting any more progress on pension or fiscal reform bills this year. He welcomed last week's decision by Romania's Constitutional Court to uphold the unitary wage and government restructuring laws passed by Parliament in September, but noted that the resulting delay in implementing these laws means they will not help Romania meet its deficit targets this year. The wage law, for instance, includes provision for a 10-day mandatory furlough for all central government employees. The GOR will likely not be able to implement this provision until mid-December at the earliest, meaning that wage savings won't show up in the budget until January. As a consequence, the GOR will almost certainly overshoot its IMF-agreed 2009 deficit target of 7.3 percent of GDP by at least half a percentage point (i.e. to 7.8 percent), Lybek admitted. He also expressed concern that while the central government is working hard to keep spending under control, local governments and state-owned enterprises continue to exceed their targets.
5. (SBU) Lybek stressed that 2010, especially the first half of the year, will be a critical time for the IMF program and that Romania must take "very strong measures" to pass the needed legislation and make the tough political choices to keep the deficit at 5.9 percent of GDP. While careful to say that deciding where to cut is Romania's job, not the IMF's, Lybek believes that significant public sector layoffs, elimination of subsidies to money-losing state-owned companies, and tax increases are inevitable. If such measures are not taken, the IMF predicts the 2010 deficit could exceed nine percent of GDP, a crushing level likely beyond the GOR's capacity to finance, Lybek concluded.
6. (C) Comment: In response to the IMF/EC/WB mission's decision to cut short its visit and head home, Romanian officials from Basescu on down have rushed to reassure public sector workers, pensioners, and others that the GOR can continue to finance the deficit and meet its payment obligations through the end of 2009. They are probably right, but the cost will be very steep. National Bank of Romania (BNR) senior adviser Adrian Vasilescu told the media November 6 that the GOR's financing needs for the rest of the year are on the order of five billion euro, and all of that must now be raised through debt auctions in the domestic market. Even BNR Governor Mugur Isarescu, normally circumspect in his public comments, described the financing dilemma absent IMF/EC money as an "acute problem." Contacts in the banking sector tell post that local banks are coming under very direct, if quiet, pressure from both BNR and the Ministry of Finance to keep buying GOR debt. With little prospect that a functional government will be installed until after the presidential elections, the financial vise in which the GOR finds itself can only get tighter. End comment.
TAGS: ECON, EFIN, EINV, ETRD, PGOV, RO
SUBJECT: ROMANIA: 2009 BUDGET MIXES REALISM WITH WISHFUL THINKING
REF: A) Bucharest 1008, B) Bucharest 1016 Sensitive but unclassified; not for Internet distribution.
1. (SBU) The Cabinet of Ministers has approved a 2009 budget draft that is expected to be approved by Parliament without substantial amendments. The final draft combines selected doses of austerity with an effort to balance competing interests by promising priority projects to all parties; the results are likely to leave everyone less than satisfied. The budget draft aims to convey an image of the Government of Romania (GOR) responding to the global economic slump by billing several spending initiatives as "anti-crisis"measures, although much-anticipated populist measures -- such as major hikes in public sector wages and pensions -- have been pared dramatically. Overall, the proposed budget underscores the fact that the new governing coalition is a fragile balancing act between its PD-L and PSD partners, whose marriage of convenience will be constantly tested by money matters throughout the coming year. End Summary.
COOKING THE NUMBERS SUNNY-SIDE UP
2. (SBU) While an improvement over the pie-in-the-sky numbers proposed by the former Tariceanu Government in its first budget draft late last year, the underlying economic assumptions on which PM Emil Boc's Government has based its 2009 budget still look too optimistic in light of current economic weakness. The budget programs a year-end fiscal deficit of two percent of GDP based on projections of a "stable" macroeconomic outlook for 2009, despite early indications that this year will be anything but stable for Romania. (Comment: Skeptics naturally point to last year's projected deficit of 2.5 percent, while the actual 2008 deficit came in at 5.2 percent in a year when GDP grew by eight percent. End Comment). The 2009 budget plans for overall GDP growth of 2.5 percent coupled with five percent inflation and an average exchange rate of four RON per Euro. According to outside analysts, inflation may fall to five percent or less based on how dramatically the economy slows, but few outside the GOR believe 2.5 percent GDP growth is realistic. Similarly, the currency would have to strengthen considerably from the present rate of nearly 4.3/Euro to meet the GOR target. The biggest disconnect is that the GOR forecasts its state budget revenues will increase by 24 percent over 2008 to RON 76 billion (USD 24.3 billion), despite weaker growth and a 30 percent fall-off in revenue in the last two months of 2008. These ephemeral revenue projections form the basis for a planned 17 percent increase in expenditures over 2008 to RON 94 billion (USD 30.1 billion).
AND THE WINNERS ARE...
3. (SBU) The underlying subtext for budget allocations to individual ministries has been the need to balance competing coalition interests. This distribution between the PSD controlling the main "social spending" Ministries (Labor, Agriculture, Education, and Health) and the PD-L running the Ministries of Economy, Finance, and Transport (ref A) meant delays in the budget submission to allow more time for intra-coalition negotiations. The final results seem to be a careful calibration of various interests which, depending on what numbers are used, could be seen as a victory for either party. The biggest gainers over last year are the PSD-run Ministry of Foreign Affairs (up 61 percent); the PD-L Ministry of Youth and Sports, which had been demoted to a subcabinet agency by the last
government (up 47 percent); and the offices of the President, Prime Minister, and Parliament (up 46 percent, 31 percent, and 23 percent respectively). However, in terms of share of GDP the biggest ministries by far are the PSD-led Ministries of Labor, Family, and Social protection (2.8 percent of GDP) and Education and Research (2.1 percent of GDP). The PD-L-controlled Transportation, Interior and Public Administration, and Defense Ministries are also among the biggest spenders (at 1.8, 1.7, and 1.3 percent of GDP respectively), while the PSD Ministries of Agriculture (1.5 percent) and Health (0.7 percent) rounded out the major spenders. The PD-L-run Finance Ministry will additionally be responsible for allocating other funds worth up to 2.8 percent of GDP over the next year.
4. (SBU) Acknowledging the global economic downturn, the GOR is labeling several spending measures and tax cuts as an economic stimulus program. Most notable is the plan to spend 20 percent of the 2009 budget, amounting to 40 billion RON (12.8 billion USD), on much-needed infrastructure investments. The hope is that this number can be substantially augmented by EU structural funds, and every ministry is under orders to devote more staff and resources to this task. (Comment: To date the GOR has made little progress in accessing EU funds and remains a net contributor to the EU budget, despite being one of the EU's poorest members. End Comment). There is broad political consensus that Romania desperately needs more and better highways, hospitals, and schools. The biggest challenge for the GOR, however, will not simply be allocating more money to infrastructure, but using the funds productively. In past years, poor administrative capacity and lax internal controls meant that many infrastructure funds went unused, fueling end-of-year spending binges on non-productive consumption (2008 being a good case in point).
PENSIONERS AND PUBLIC SECTOR WORKERS DISAPPOINTED
5. (SBU) The draft budget throws only half a bone to core PSD constituencies, such as pensioners. In line with PSD campaign promises, the Government will establish a new minimum pension of 350 RON (112 USD) per month which will extend coverage to all elderly persons regardless of prior work history. The GOR will also pay 90 percent of the cost of pharmaceuticals for all pensioners receiving less than 600 RON (192 USD) a month. Other populist measures include a three-month tax holiday for temporarily laid-off workers, 50 percent coverage for adult education and training programs, and an across-the-board, five percent increase in public sector wages and pensions. However, the GOR has dropped other, more generous measures, including a scheduled increase of more than 20 percent in
certain categories of pensions due on January 1 under the pension law. Teachers will get the general five percent wage increase, but not the much-debated 50 percent hike promised in a law passed before the November 2008 elections. The five percent raise will be offset almost entirely by reductions in bonuses and other payments. The GOR is also contemplating the need for some public sector layoffs. In response, teachers' unions are filing suit over breach of the law, and other public sector unions and pensioners' groups are threatening work stoppages and demonstrations in the coming weeks.
SOME U.S. COMPANIES GETTING PAID, OTHERS NOT
6. (SBU) To its credit, the GOR is moving to pay arrears, including to U.S. firms, left behind by the Tariceanu Government. New Minister of Transport Radu Berceanu has promised Bechtel that all arrears on the Transylvania Motorway project, totaling over 140 million euros, will be paid by March and that installments due in 2009 will be made on time. (At the same time the Minister is pressuring Bechtel to agree to contract modifications, insisting that the GOR cannot afford the contract as it stands). Lockheed Martin and other defense contractors have received similar firm assurances on long-overdue payments from the Ministry of National Defense.
7. (SBU) However, another sore point with many companies -- the failure of the Ministry of Finance to return long-overdue VAT refunds -- remains a problem. The new budget proposal includes a plan to allow companies to offset these overdue reimbursements by deducting them from future VAT payments. This may satisfy some companies, but offers little short-term relief to others such as Cargill which are owed tens of millions of euros in VAT refunds dating back over a year. The GOR is also aiming to save some money by freezing its contributions to the private pension scheme at 2.0 percent of individuals' gross income, instead of raising it to 2.5 percent as mandated in the national pension law. This has private pension fund managers, including AIG, alarmed that the GOR is jeopardizing their substantial long-term investments in the sector for short-term budgetary gains. Post coordinated with like-minded EU embassies on a letter to the Prime Minister asking that this proposal be dropped.
WILL ATTEMPTS TO BOOST REVENUES BE ENOUGH?
8. (SBU) With economic growth slowing dramatically, the GOR is proposing several tax increases to make up for falling revenue, and is betting that some revenue sources will continue to grow despite the slowdown. One lingering bright spot (so far) is retail consumption; the GOR is projecting VAT receipts will grow by nine percent. Continued inflation will bolster income tax receipts by 8.7 percent and corporate income tax revenues by three percent (despite a provision making reinvested dividends tax-free beginning in the second half of the year). The GOR proposes to hike excise taxes on cigarettes and alcohol to boost revenue by a programmed 31 percent, and to introduce a new surtax on gambling and luxury goods.
More controversially, a hefty social security tax hike of 3.3 percent, to 43.5 percent of the gross salary, will allow social security revenues to rise by 25 percent, but will do little to stimulate job growth in a falling economy. A big hole in the proposed budget is a projected 165 percent increase in public debt servicing costs to 7.4 billion RON (2.36 billion USD) in 2009.
9. (SBU) The 2009 budget is evidence that a difficult economic correction is underway in Romania, but it also illustrates that political responses to the deteriorating economy still lag behind economic realities. While modified since December, the budget's revenue and deficit projections in particular still evince some detachment from the harsh climate Romania is facing. Of course, if past years are a guide, the budget is almost certain to be revised several times over the course of the year, so budgeted amounts now will bear little resemblance to the final spending tally at the end of 2009. This track record will keep the business sector nervous and will increase the pressure on the Government to conclude some kind of external financing arrangement to restore a sense of stability. Tellingly, at a time when other central banks in the region are actively cutting interest rates, Romania's central bank (BNR) announced only a miniscule (0.25) cut in the benchmark rate to 10 percent right after the GOR budget was presented. In recent years the BNR has had to shoulder the burden of countering the effects of the Government's profligate fiscal policies. The tiny cut, despite worsening economic indicators, signals a lack of confidence that the GOR can truly rein in spending enough to allow for a more relaxed monetary policy. BNR would no doubt be happy to furnish a bit more stimulus if the Government would only exercise more fiscal restraint. End Comment.