There are at least three main transmission channels for Romania that a potential UK retreat could stretch to a certain point: exports, investments (FDIs) and, last but not least, the labor force, according to a BCR Researche report.

Romanian exports to the UK have grown two times over since 2008 to reach an estimated EUR 2.3bn in 2015.

Britain has thus become the fifth largest destination for Romanian exports (4% of total exports).

Some specialized forecasters contend that a prospective Brexit would halve the country’s economic growth in the near term. If this turns out to be the case, then Romanian exports to this country would begin to struggle.

Indeed, the segment represented by ‘machines & transport equipment’, making up 46% of total exports to the UK, could take the brunt more strongly, as usually demand for high value-added products slackens off more quickly in lean times than for other types of goods (convenience goods).

A potential trade agreement between Britain and the EU should somewhat take the edge off exports. If we look back at 2008 and 2009, Romanian exports posted a two-year aggregate drop of 21%, corresponding to a loss of EUR 261mn, although in a Brexit scenario, the ground rules could be quite different.

In a scenario involving political reprisals by the EU to discourage other potential runaways, we could witness much larger disruptions in the export flow towards Britain, which would most likely be accompanied by a rapid capital divestiture by UK owners.

Britain is the most sought after playing ground for FDIs in Europe. According to a European attractiveness survey issued in 2015 by Ernst & Young, the UK holds the high ground in terms of the number of FDI projects and number of new jobs created in the EU.

Britain concentrated 20% of all European FDI inflows in 2014, capturing 16% more projects than Germany and a whopping46% more than France.

Information from Eurostat regarding cross-country foreign direct investments is few and far between. However, data released by Eurostat for 2011 signaled that the stock of FDIs made by the UK in the Eurozone topped EUR 529bn, while only EUR 418bn was invested in the UK by the countries belonging to the single currency area.

Germany seems to be the largest investor, with EUR 106bn tied up in Britain (11% of the total capital placed abroad).

These facts would be difficult to ignore for both the UK and the EU, in the case that other breakaway referendums were to follow in the future.

Studies on economic competitiveness have revealed that the size of the market plays a crucial role for international companies when deciding about their location.

Apart from that, companies have a better chance to succeed when operating on a level playing field with similar rules and norms.

This important detail should not be overlooked by the UK in the future.

Britain is the tenth largest foreign investor in Romania (EUR 1.5bn or 2.5% of total FDIs), after Greece but before Spain. FDIs are a pretty strong catalyst not only for job creation, but also for exports.

While in Romania the overall number of jobholders was down more than 5% in 2014 on 2009, the number of
employees working in an FDI-based company was up 3.7% during the same period of time.

Exports generated by the FDI-based companies in Romania
accounted for almost 79% of total manufacturing exports.

This means that every 1 euro invested in manufacturing turns in 1.6 euros of exports of manufactured products.

Around 63% of the total FDIs (or EUR 959mn) committed by the UK to Romania are tied up in manufacturing.

Aside from manufacturing, Britain has also established a foothold in professional services, non-banking financial services and energy.

There is no getting around the fact that, once the UK opts out of the EU, we could see sales of assets and even
disinvestments.

The magnitude of retrenchment in the case of Brexit is difficult to ascertain now, as we do not know the specific terms in which the UK would end its relationship with the EU.

The labor force is perhaps the most talked-about issue for Romania when it comes to the UK leaving the EU.

Romanians gained full access to the British labor market only recently (January 1, 2014), once the work restrictions were eliminated.

The number of Romanian workers with national insurance numbers amounted to an estimated 170k in 2015, of which 86% were employed (0.5% of total employment in the UK).

According to the British statistics, as of end-2015, there were about 2mn EU immigrants working in the UK, of which 968k were workers from the group of eight states that joined the EU in 2004 (Poland, Hungary, the Czech Republic, Slovakia, Slovenia, and the Baltics).

For Romania, a worst-case scenario from a potential Brexit would be imposing restrictions that might force the circa 170k Romanians with national insurance numbers to either come home or relocate to other EU countries.

This could create a major disruption in the flow of money, as Romanian expats send home more than EUR 500mn a year (0.3% of GDP), according to our broad estimates.

Summing up, a potential UK break-away from the EU poses some risks that could cost Romania anywhere from a few hundred million euros up to several billion, depending on the severity of the scenario.

Most likely, there will be short-term negatives for the local economy arising from a marked slowdown or (even worse) a recession in the UK, with exports and remittances the first to come into the line of fire.

The bad effects on exports could be further compounded in the case that no trade agreements are clinched between the EU and the UK before the exit.

While we do not see massive disinvestments as an immediate consequence of the Brexit (some business could be kept in place), in the short to medium term, we cannot rule out asset sales or winding down of businesses by UK owners.

As regards the labor force, even though some social allowances will no longer be granted to Romanian expats that are already UK residents, it is less likely for the UK government to introduce additional restrictions for foreign-born workers as long the EU does not impose similar rules.

However, it is almost a certainty that, once the UK has left the EU, workforce migration from the CEE region to this country would become much more difficult. So, the flow of foreign remittances from the UK to Romania could indeed dwindle away, but would not vanish.

Apart from the three main channels mentioned above, fixed income and forex investors could become risk-off, with local bond yields and the national currency coming under temporary pressure, once Britain decides to leave the
Union.

Weakening sentiment, immediately after a majority leave-EU vote is cast in the referendum, would also be expected to drive the price of Romanian Eurobonds down, as British investors have been heavy buyers of the paper
debt issued abroad by the Romanian government.