VZCZCXRO0904
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHBM #0647/01 2271335
ZNR UUUUU ZZH
P 141335Z AUG 08
FM AMEMBASSY BUCHAREST
TO RUEHC/SECSTATE WASHDC PRIORITY 8589
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 03 BUCHAREST 000647 
 
STATE FOR EUR/CE - ASCHEIBE 
ALSO FOR EUR/OHI - AMBASSADOR KENNEDY 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN ETRD ECON CASC PGOV RO
SUBJECT: ROMANIA : PROPERTY FUND IS HIRING PROFESSIONAL MANAGERS AND 
GOING PUBLIC 
 
Sensitive but Unclassified, not for Internet distribution. 
 
¶1. (SBU) Summary:  The long process of establishing a property 
restitution fund to reimburse former owners of certain expropriated 
properties is finally drawing to a close.  The four billion Euro 
fund has already distributed nearly 20 percent of its outstanding 
shares and is in the final stages of completing a listing on the 
Bucharest Stock Exchange.  The last major hurdle to clear before the 
fund is ready to list, hiring a professional asset manager, is 
underway.  According to the Property Fund's Executive Vice 
President, Daniela Lulache, the letters of intent received by the 
Fund's board from top asset management companies are impressive. 
While at the same time, the President of the National Authority for 
Property Restitution (ANRP), Ingrid Zaarour, has made procedural 
changes which should allow many of the stickiest outstanding 
restitution cases to be brought to a close.  End Summary. 
 
 
BACKGROUND 
 
¶2.  (SBU) The GOR established the fund in 2005 to compensate victims 
of illegal communist expropriation for cases where the actual return 
of property is no longer possible, e.g. in cases where a school was 
built on the site of a former home.  The fund provides financial 
compensation by granting shares, to both victims and their heirs, in 
a fund comprising state-owned companies and privatized companies in 
which the GOR has retained a minority stake.  The fund currently 
contains shares in 88 Romanian firms, with large stakes in companies 
such as: Petrom, Transelectrica, Transgaz, Romgaz, the Romanian Post 
Office, Hidroelectrica, EON Gaz Romania, and the Otopeni airport. 
Former property owners apply for compensation from the ANRP, which 
assesses the current market value of the expropriated properties and 
issues damage titles for fund shares. The initial face value of one 
share was established at 1 RON (approximately US 40 cents).  The 
owners of the Property Fund shares will be able to sell them freely 
on the regulated capital market. 
 
¶3.  (SBU) The fund is managed by a supervisory board appointed by 
the Ministry of Economy and Finance.  The current management, 
including the executive Vice President, appear highly professional. 
They have operated in a manner that protects the fund's assets, 
while generating a return for shareholders.  They do not have the 
scope or authority to dispose of the fund's underlying assets, but 
are able to conduct capital market operations to generate additional 
dividends.  The fund was also designed to be transparent, and 
outside companies have been hired to provide accounting and advisory 
services.  According to George Mucibabici, the Chairman of Deloitte 
Romania, Deloitte's recent audit confirmed that the books are being 
kept in a manner consistent with generally accepted accounting 
principles. 
 
NEW MANAGEMENT AND AN EXCHANGE LISTING 
 
¶4.  (SBU) The recently released list of asset management companies 
seeking to take over the fund is impressive, and includes several 
major U.S. and international companies.  Letters of intent were 
received from the following U.S. companies:  JP Morgan, Blackrock, 
Artio Global Management, New Century Holdings, Morgan Stanley 
Investment Management, and Goldman Sachs Asset Management.  Other 
multinational bidders include: HSBC Bank (U.K.), UBS Global Asset 
Management (Switzerland), Deutsche Bank (Germany), Royal Bank of 
Scotland (U.K.), Barclays Capital (U.K.), BNP Paribas Asset 
Management (Austrian subsidiary), and Credit Suisse (Germany), as 
well as other smaller outfits.  The current management, with the 
advice of a GOR-appointed commission, will begin direct negotiations 
to select the bidder offering the best mix of experience and 
competitive pricing to the fund's shareholders.  According to 
Commissioner Nicolae Cinteza, Director of Bank Supervision at the 
Romanian Central Bank, the commission will complete its work and 
hopes to have the management firm take over the fund no later than 
January 1, 2009.  The new management firm will have input into the 
future investment strategy of the fund and will work in conjunction 
with the current managers to develop a fund prospectus.  According 
to Lulache, her long-term idea is for the fund to become a South 
Eastern Europe investment fund, investing not only in Romania, but 
also in other neighboring countries.  However, in the near term the 
fund's current assets will leave it primarily focused on the 
Romanian energy market.  The listing on the stock exchange will take 
place once the new management team is in place and the fund 
prospectus has been published. 
 
¶5.  (SBU) While Lulache said that she was committed to listing the 
fund on the stock exchange, in her opinion, the listing needs to be 
pursued at a deliberate, measured pace, taking into account local 
capital market conditions.  The opposing view, held by Cinteza, is 
that the longer listing is postponed, the more opportunities it 
creates for unscrupulous businessmen to grab shares at below-market 
prices on the unregulated market. While the ultimate goal is to have 
 
BUCHAREST 00000647  002 OF 003 
 
 
the price per share exceed the face value, according to Cinteza, it 
is likely that shares will initially trade in the range of .5-.7 
RON.  After the initial price fall, the price per share should rise 
as the new management company begins to make strategic investments 
and the market price adjusts to reflect the expected future 
earnings, rather than the current asset value.  One concern about 
the listing is that at the current estimated value of 4 billion 
euros, the fund will likely double the capitalization of the 
Bucharest Stock Exchange (BVB).  Lulache suggested that the fund 
would consider a listing on an additional foreign stock exchange, 
most likely in London, to dilute this impact.  Having a dual-listed 
fund will have the added benefit of making investment more 
accessible to foreign portfolio investors, and should result in 
higher share prices.  Regardless, the initial public offering 
remains on schedule for the first half of 2009, with any additional 
listings occurring at a later date. 
 
¶6.  (SBU) About 80% of the fund is currently under state ownership, 
while 20% is in private hands.  The state owned portion is falling 
as property restitution cases are brought to a close and claimants 
are allocated shares in the fund by the GOR.  At present, shares are 
allocated at face value (1 RON).  After the listing, shares will be 
distributed at the market price, albeit using a formula to protect 
against market manipulation.  By using a weighted average of the 
last 60 trades together with the average trading price on the first 
60 days after listing, it will be difficult for traders to influence 
the number of shares distributed to any particular claimant through 
a few large well-timed trades.  These provisions will help to 
protect the fund and the shareholders if the market turns out to be 
less liquid than expected. 
 
THE ANRP'S VIEW 
 
¶7.  (SBU) ANRP President Zaarour met with ACS Chief and EconOff on 
the Property Fund and restitution issues.  She expressed her 
frustration with the slow pace of property restitution, blaming the 
lack of clear legislation in the years immediately following 
independence.  She explained that, after years of communism and then 
additional lost time in the initial post-communist period, in-kind 
restitution has become more difficult to provide.  Streets, 
factories, and schools have replaced some of the former properties, 
while the establishment of a property fund lagged due to the 
political opposition of the PSD.  Zaarour now believes that 
sufficient legislative backing exists to bring Romania's property 
restitution saga to a close.  She offered to examine any of the 
lingering AmCit property restitution cases to see if they could now 
be settled under the ANRP's authority.  She pointed out that the 
legislation governing property restitution has shifted 
responsibility from the localities to her agency, giving her 
increased authority to settle on a final compensation offer.  While 
there is a ceiling of RON 500,000 on cash reimbursements, there is 
no ceiling on the number of property fund shares that may be 
allocated to claimants.  Reimbursements for amounts larger than RON 
500,000 will be paid using either property fund shares or a 
combination of cash and shares, up to the property's current market 
value. 
 
¶8. (SBU) Zaarour also explained in more detail the procedure for 
determining the value of expropriated properties.  The assessment is 
conducted by independent assessors, paid by ANRP, who are required 
to work in accordance with international professional standards. 
For non-agricultural property, the independent assessors must be 
members of the national professional association (ANEVAR). The 
assessment attempts to establish a current market price for the 
property, using criteria such as location, size, and comparable 
sales. Those former owners who have historical records, such as 
maps, photos, and old fiscal records will likely be more satisfied 
by this process than those possessing more limited information about 
the property, according to Zaarour.  There is one internal appeal 
allowed after the evaluation, either by ANRP or the former owners, 
after which an independent arbitration process will set a final 
market value in cases of disagreement.  The window to file new 
restitution cases closed permanently for all types of property in 
2005 and Zaarour expressed her hope that all pending cases could now 
be expeditiously resolved. 
 
COMMENT 
 
¶9.  (SBU) Begin Comment: The property fund is firmly established in 
law and the progress leading up to a stock exchange listing is well 
advanced.  The fact that so many marquee foreign companies are 
jockeying to manage the fund's assets reflects a belief that, once 
listed, they will be able to add significant value through the 
careful stewardship of the fund's assets.  Those who have acquired 
shares at the current face value of one RON per share are likely to 
see these shares multiply in value in the medium to long term. 
While listing on the stock exchange will in some ways signal the end 
of this process, the current shareholders are not holding worthless 
 
BUCHAREST 00000647  003 OF 003 
 
 
paper.  The shares are already generating substantial yearly 
dividends, and while they cannot yet be sold on the regulated 
market, they are providing income to the shareholders. 
 
¶10.  (SBU) One significant benefit deriving from a stock exchange 
listing is that the non-regulated market for shares will disappear. 
Until a transparent market price has been established, there remains 
a concern that the claimants, who have already suffered the loss of 
their property, will sell-out for quick cash to the same cast of 
characters who enriched themselves on the mass privatization 
certifiQes twelve years ago, and miss out on a substantial 
monetary return on the property they lost.  Another concern is the 
caution of American citizens who, having fought years of 
interminable battles in local courts and who rightly or wrongly 
perceive corruption in every shadow, are unwilling to accept shares 
in a property fund.  Rather they continue to demand cash or 
property-in-kind.  Convincing these individuals, despite our 
generally positive view of the property fund, may prove difficult. 
Furthermore, with national elections expected in November, the 
helpful and professional disposition of ANRP could change with a new 
government.  End comment. 
 
TAUBMAN