Economic Program

23 Economic Program

In 2016, the Economic Program focused its work on the following areas:

• Energy market liberalization and energy security. CSD continued to analyze the energy security challenges for SEE: excessive dependence on energy imports, reliance on a limited number of energy suppliers, high energy poverty levels, unsustainable energy intensity and demand; and persistent energy governance risks. CSD engaged in an initiative for the development of a Long Term Electricity Roadmap for the SEE, and performed a poverty and social impact assessment of the National Program for Energy Efficiency of Multifamily Buildings. Drawing on its expertise in energy security and good governance, CSD, in cooperation with the Center for Strategic and International Studies (CSIS), published a study The Kremlin Playbook: Understanding Russian Influence in Central and Eastern Europe. It became the most downloaded publication of the year for CSD and CSIS.

• good governance, anticorruption, and state capture. CSD piloted a feasibility study on designing metrics for the state capture phenomenon. CSD continued its work on fraud and corruption risks in the area of public procurement, the nexus between European financing and anti-corruption, and the policy options for countering money laundering. The Southeast Europe leadership for Development and Integrity (SElDI) initiative, coordinated by CSD, was able to further its impact in the SEE region. In its flagship reportShadow Power: Assessment of Corruption and Hidden Economy in Southeast Europe, SElDI underlines that in none of the countries in the region has there been a clear sustained policy breakthrough in anticorruption, though efforts to deliver technical solutions and to improve the functioning of the law enforcement institutions have persisted. CSD continued to deepen its theoretical and empirical capacity in anti-corruption and good governance through its participation in AnTICorrP.eu and the Eu Anticorruption Report network.

• Hidden economy. CSD and Vitosha research continued their good cooperation with the University of Sheffield Management School and the Institute of Public Finance in the study and exchange of best practices in tackling undeclared work in Europe. In the framework of the SELDI initiative, CSD experts and their partners from eight SEE countries prepared a backgrounder report, a policy brief and national Hidden Economy Fact Sheets presenting key findings on the manifestations, causes and impacts of the hidden economy and undeclared labour in the SEE countries in 2016.

• Competitiveness and knowledge economy. CSD continued analyzing the barriers to the Bulgarian business, provided recommendations for improvement of the overall economic competitiveness and contributed to the 24

development of the 2016 IMD World Competitiveness Yearbook. CSD experts participated in the development of the annual Innovation BG report, drawing key recommendations for improving the national innovation policy in Bulgaria.

I. Energy governance and energy region’s energy challenges, and puts at security stake Europe’s opportunity to diversify its energy supply. In that sense, there is In 2016, the Economic Program contin- a need for developing a common under- ued to analyze the deficits in the energy standing for the constraints stemming sector governance and the EU-Turkey from the current segmented approach to Energy Dialogue. The topic is of par- energy security and governance issues ticular importance, since at the moment in the region and the identification of Turkey is at a pivotal point in its eco- the multilateral mechanisms that can be nomic development, whereby it is trans- utilized to strengthen the overall energy forming itself into a modern industrial security architecture. The latter requires economy. As with other industrializing the deeper engagement of civil society economies, Turkey is experiencing ris- organizations, which play a crucial role ing natural gas consumption wedded in advocating strategic energy policies to supply challenges. However, Turkey, improving the security of supply and with the development of proactive poli- the governance of the sector. cies, is able to change the current para- digm of industrial inefficiency (such as In partnership with the Economic Policy rising energy intensity rates) and pro- Research Foundation of Turkey (TEPAV) mote economic competitiveness. Turkey and the mediterranean Energy observ- has also become a crucial factor for the atory (omE) the CSD prepared a policy completion of the EU-backed Southern brief on Ensuring Effective Cooperation gas Corridor, which for Europe is a pri- between EU and Turkey to Foster Energy ority project to diversify energy imports Security. The analysis contains a list of and make Europe less dependent on practically-oriented policy recommen- russia. In the context of the Eu Energy dations to accelerate the process of re- Union initiative, Turkey is placed strate- gional market integration, the transfer gically to assist in its goals of bringing of the EU energy acquis in the Turkish about energy market integration and energy sector framework and the com- meaningful diversification of sources in pletion of critical cross-European energy the Black Sea region. diversification projects. The policy advocacy effect of the proposals have been Strengthening the EU-Turkey Energy strengthened by the active participation Dialogue on Energy Security of the Turkish Oil and Gas Association and Governance (PETFORM) and the participation of key energy Turkish and EU policy-makers in Despite EU’s activism, Turkey and the two workshops in Ankara and Istanbul. countries in the region still pursue mostly a bilateral approach to energy securi- The policy brief underlines that the suc- ty, which is insufficient for the develop- cessful creation of a European energy ment of a strategic regional energy sys- union will not be possible without the tem. The latter erodes efforts for a mul- active involvement of Turkey. The latter tilateral (pan-regional) approach to the is going to play a vital role as a natural 25

Workshop: Ensuring Effective Cooperation between EU and Turkey in Fostering Security of Energy Supply, Ankara. From left to right: Mr. Volkan Özdemir, Chairman of EPPEN Energy, Dr. Todor Galev, Senior Analyst, CSD, Ms Bengisu Özenç, TEPAV’s Macroeconomic Studies Program Director, Mr. Eser Özdil, Turkish Oil Platform (PETFORM) Secretary General, and Mr. Martin Vladimirov, Analyst at the Economic Program of CSD gas trading hub for future alternative seasonal peak demand period. Most of natural gas supply from the Caspian re- oil and gas and half of coal supply came gion, East mediterranean and the middle from imports leading to serious macr- East. Similarly, Turkey will benefit from oeconomic imbalances and producing a the development of the Energy union negative impact on business and invest- because it can transform itself in a major ment confidence. energy-trading hub based on alternative gas supplies that will satisfy domestic The workshop Ensuring Effective Coop- demand, while the excess supply could eration between EU and Turkey in Fostering be re-exported to Europe. Still, Turkey’s Security of Energy Supply, organized by energy sector transformation towards the Economic Policy research Founda- becoming part of the planned European tion of Turkey (TEPAV), the Center for internal energy market is happening the Study of Democracy (CSD), the Turk- only very slowly. given that the inevita- ish oil and gas Association (PETForm) ble changes will have an effect on both and the mediterranean Energy observ- industries and individual consumers, atory (omE) on 8 September 2016 in An- politicians have been reluctant to sign kara, Turkey, deepened the discussion on the dotted line and initiate the final on these issues. Senior Turkish and EU stages of liberalization. The analysis energy policy-makers took part in the also notes that Turkey is one of the most event and spoke on the Turkish energy vulnerable countries from possible en- security risks and challenges before the ergy supply cuts, especially during the successful integration of Turkish energy 26 sector in the Energy Union framework. was one of the conclusions of the work- The participants noted the crucial im- shop on Energy Market Liberalization and portance of the Turkish geopolitical po- Regional Market Integration, organized sition for the future of the Energy union. in Istanbul on 10 october 2016 on the They emphasized that the countries in sidelines of the world Energy Congress the Black Sea region need to overcome (wEC). their focus on bilateral energy cooperation, which is insufficient for developing The CSD experts pointed out that the a strategic pan-European partnership cooperation between private and public agenda. More than ever, market inte- actors would be crucial to the market gration would require stronger policy liberalization, the reduction of energy cooperation that goes beyond inter-gov- security risks and the improvement of ernmental talks to include businesses regional energy cooperation. however, and civil society organizations (CSOs) energy cooperation in the SEE region in the energy dialogue. The Director of and Turkey is mostly in the electricity TEPAV’s macroeconomic Studies Pro- sector, while in natural gas there is com- gram, the President of a Network Oper- petition between countries. The partici- ation group at the regulator, EPDK and pants noted that the Eu has the objective the Business Development manager at of creating a gas hub in the mediterrane- GAMA Energy were prominent speak- an region and currently Turkey, Bulgar- ers at the event. ia, greece, Italy, Cyprus, and Egypt are vying for this position. however, one of Energy Market Liberalization and the big hurdles is the limited amount of Regional Market Integration different natural gas sources available in the region. BOTAŞ’ virtual monopoly on Competition in the energy sector needs the Turkish gas market was underlined to be reinvigorated if an efficient en- as one of the biggest impediments to the ergy hub is to emerge in Turkey. This gas market liberalization. The discus-

Energy Market Liberalization and Regional Market Integration Workshop, Istanbul 27 sants stressed that any successful gas the application of state of the art elec- trading hub instituted in Turkey must tricity and gas sector market models, have two fundamental aspects: the abil- renewable deployment model and re- ity to import and export gas to the mar- gional electricity network model in the ket, and a mature consumption centre. timeframe of 2050. Various renewable Turkey has the potential to satisfy both and infrastructure scenarios are being requirements. however, regional gas tested, underpinned by consultation market integration would also depend with local experts over the assump- on the creation of a new regulatory tions, data validation and scenario defi- framework that encourages competitive nitions. entrants. The Director of hydrocarbons at the mediterranean observatory for Energy (OME), a member of the Turkish national gas Assembly and Commercial operations manager of Trans Anatolian natural gas Pipeline Project (TAnAP), PETForm’s Secretary general, and the International Energy Agency’s Desk Of- ficer for Turkey took part in the event.

Development of a Long Term Electricity Roadmap for the SEE region energy governance anD state capture risks The SEE region consists of two distinct in southeast europe groups of countries – Eu members and Western Balkan countries aspiring for regional assessment report membership. In spite of the distinct legal environment and Eu membership status, they also share some important features from the electricity sector point of view. They have difficulties to access low cost financing for energy projects, so rES developments are seen as the cause of increasing burden on electricity consumers. In addition, these coun- The SElDI initiative, coordinated by the tries can show less intention to regional Center for the Study of Democracy, also cooperation due to historic reasons and focused on the issue of energy govern- also to their geographical location. ance and related corruption and state capture risks. The SELDI background re- Тhe SEERMAP initiative, which began port Energy Governance and State Capture in September 2016 with a kick-off work- Risks in Southeast Europe: Regional Assess- shop in Belgrade, would contribute to ment Report, the policy briefs Transparent the development of a Long Term Electric- Governance for Greater Energy Security in ity Roadmap for the SEE region including CEE and Countering Energy Governance all Western Balkan countries and add- and State Capture Risks in the Western Bal- ing Bulgaria, greece and romania to kans and Turkey, as well as in the SELDI complete the analysis of the whole SEE Energy Governance Fact Sheets presented region. CSD, as the partner organisation summarized information on key energy from Bulgaria, is currently supporting sector governance challenges, state of 28 electricity sector liberalisation, financial problems that need to be tackled in the ratios of leading energy companies and drive for greater national energy secu- progress of energy acquis implementa- rity. Energy poverty is defined as hav- tion. ing two components – affordable access to electricity and reliance on traditional The energy sector holds specific socio- uses of biomass (mainly wood and coal, economic power that is exposed to al- and inefficient stoves for burning them). most self-explanatory corruption risks. Bulgaria experiences serious problems however, determining the occurrence regarding both components. In 2010, in or actual appearance of corruption in a CSD study over a third of households public procurement and public insti- reported being unable to afford keep- tutions in this sector poses significant ing their homes adequately warm, and challenges. In addition to being one of roughly 60 % reported using wood and the most vital economic sectors, energy coal as a major heating source. The 2011 is also one of the least transparent. of census data confirmed the latter – near- particular concern are also the energy ly 54 % of homes in Bulgaria use wood security challenges for SEE: exces- and coal for heating, while in rural areas sive dependence on energy imports; the respective share is 95 %. Subsidized reliance on a limited number of energy electricity prices, kept artificially low suppliers; high energy poverty levels; due to political reasons, have made a unsustainable energy intensity and considerable share of people, particular- demand; and persistent energy govern- ly in big cities, overly reliant on electric- ance risks. ity for heating, while the majority of the population uses non-efficient electricity The corporate governance of state- appliances. owned enterprises (SoEs) is charac- terized by political meddling in the In 2016, CSD continued to work on the day-to-day operations; non-transparent nexus of these issues, performing a pov- staffing procedures; prevalent politi- erty and social impact assessment of the cal affiliations; conflicts of interest; and National Program for Energy Efficiency of limited management transparency and Multifamily Buildings on behalf of the accountability. CSos and governments World Bank. Launched in early 2015, should look for several red flags: unfavo- the Program has already contracted the rable financial indicators of SOEs, debts, implementation of energy efficiency and and public procurements that prioritize structural renovations measures with a single company, especially in the con- nearly 2000 buildings across the coun- struction of sometimes unnecessary in- try. The analysis conducted by CSD has frastructure. a twofold aim: to estimate what is the impact of the Program on vulnerable Energy affordability groups (low income households, eld- erly people, and ethnic minorities), and Energy poverty among the popula- to determine the factors that have to be tion and the subsequent deterioration included into the design of future gov- of the energy affordability experienced ernment programs in order to ensure by the Bulgarian households have re- they are socially acceptable, inclusive, mained important research and policy economically effective, and politically advocacy issues for CSD in 2016. The feasible. Center recognizes both topics and the low level of energy efficiency of hous- The initial research findings show sev- ing stock as the most crucial social eral important developments in the pat- 29 terns of individual and collective energy behavior in the last few years: i) Consid- erable increase of the share of households that had implemented energy efficiency measures financed by themselves as compared to the 2011 census data, which pointed out to an important change in people’ attitudes towards energy efficiency; ii) Successful implementation of the Program as of the end of 2016 despite the initial delay and administrative and practical difficulties that had to be overcome in the process of establishing effective cooperation between the ministry of regional Development and Construction Works, municipalities, the Bulgarian Bank for Development and the other stakeholders involved. The work of the Ministry in particular has been crucial for success despite the limited human and administrative resources assigned for the management of the program. iii) The Program has proved to be socially and economically clear energy scenarios in CEE. while inclusive and has benefited vulnerable stakeholders’ involvement is well ac- groups, covering them proportionally knowledged in the respective national to their shares in the total population legislation, action towards meeting these despite the fact that these groups have challenges is still insufficient, partly due not been particularly targeted according to traditions in this highly specialized to the Program’s design. area of energy policy and to not linking relevant competences outside the state The need for greater involvement of authorities with appropriate decision all relevant stakeholders in the design making processes. and implementation of specialized energy policies has been the focus of CSD Among the CEE countries, Bulgaria activities towards the elaboration of a faces these challenges according to the strategy for increased participation of whole spectrum of possible scenarios – general public and independent social from phasing out of old nuclear reactors, science researchers and experts in the through continued operation of current development of social, societal and gov- and planned reactors, to (future) con- ernance issues of nuclear energy policy struction of new ones. Built on experts’ in Bulgaria. Through the PlATEnSo evaluation of the proposed scenarios FP7-EurATom project, CSD actively and on an analysis of the national situ- participated in setting up a platform for ation in nuclear energy from a societal enhanced societal research related to point of view, the strategy proposed nuclear energy in eight countries from by CSD addresses existing gaps in the Central and Eastern Europe. within this stakeholders involvement with a focus framework, CSD has participated in the on inclusion of independent social sci- assessment of social and political chal- ence research expertise in the policy de- lenges related to different possible nu- sign and implementation, and how these 30 gaps could be overcome, while simulta- particular; v) and last but not least, im- neously strengthening the research co- proving the practical application of pub- operation at the Eu and CEE level. lic consultation procedures, envisaged in the legal framework and ensuring The most straightforward way of achiev- that there is enough time and publicity ing this is by implementing the existing for public consultations regarding nu- and introducing new legal provisions clear issues. in this field that improve the overall governance structure in the sector by Understanding Russian Influence including a wider range of experts, in- in Central and Eastern Europe cluding from social sciences and hu- manities (SSh), and by ensuring wider The impact of the Russian influence stakeholder participation in the decision has been felt across most of Central and making. Eastern Europe. After 2008, the russian leadership has aggressively deployed Specific measures to achieve it will in- its resource-based resurgent economic clude: i) focusing on the real and not power in combination with old time formal involvement of independent ex- security networks and skilful use of perts, incl. from SSh domain, and of the traditional soft power appeal to exploit general public in the lifecycle of nuclear and further strategic vulnerabilities in policy design and implementation – the region with the goal of undermin- from the very beginning to the very end ing the Eu cohesion and the strength of the projects; ii) building consensus on of the Transatlantic relations. These are long-term priorities, backed-up with na- some of the conclusions reached by the tional strategic documents, approved by 16-month study The Kremlin Playbook: major political parties, in line with the Understanding Russian Influence in Central Eu priorities; iii) introducing compulso- and Eastern Europe trying to highlight ry corporate governance standards for the russian involvement in the politics state owned enterprises in the energy sector following the best international principles, such as the oECD Guidelines on Corporate Governance of State-Owned Enterprises; iv) improving accountability and transparency in the field, and particularly in terms of new decisions concerning the development of nuclear energy in the country; introducing rules for selection of representatives of the civil society organisations in the policy decision making and thus avoiding misuse of civil society as an instrument for legitimation of particular policy; improving the secondary school and university curriculum for those fields of education that are related to energy policy, nuclear energy policy, management of energy sector through including education courses on social, societal and governance issues regarding the energy sector in general and nuclear energy in 31

Figure 1.1. Channels of Russian Influence

authoritarian sovereign “democracy” that is economically controlled by the oligarchic capitalism of a select innerChannels circle. of Russian Influence. The Kremlin Playbook:

UnderstandingBut perhaps Moscow Russian is simply capitalizing Influence on the in West’s Central political and and economicEastern crisi Europe,s of confi- 2016 dence following the 2008 global economic recession? On this question, the statistical analysis is inconclusive but the qualitative evidence reveals that Russia’s economic behavior in the region just and economicsbefore 2008 of differed Central from andthe period Eastern following the 2008its modelGeorgian-Russian of governance conflict and global as a more at- recession, in which it was geared toward accelerating and cementing Russian influence in the Europe, conductedregional economy. by theMoreover, Center in certain for case the study countries,tractive there alternative appears to be greater to involve- the u.S.-domi- Study of Democracyment of individuals (CSD) directly linked in partner- to the Kremlin’s innernated circle internationalin a number of transactions, order: an illiberal ship with acquisitions, the Center or scandals, for Strategicsome of which and are on a regsovereignional scale. These “democracy” individuals are almost that should be Internationalnever Studies directly implicated (CSIS). but use opaque and complexrespected channels of atcorruption least andas aan web equal of player in intermediaries—individuals, companies, or organizations—that interface with local affiliates. Fre- quently, these channels follow nonlinear paths in anglobal effort to affairs.obscure a trail leading back to the Russia hassource. used The its release economic of the Panama influence Papers in 2016 has provided a unique spotlight on the extent as a leverageand natureto exploit of these networks,governance which link defi prominent- TheRussian report individuals alsoto busines presenteds partners, evidence of cits withinpoliticians, the democratic and high-stakes transactions systems in Central of andhow Eastern russia Europe viahas nontransparent leveraged webs its of economic the CEE countriesaffiliates, holding to companies, ensure and the offshore max- accounts.presence to cultivate an opaque web imisation Russia of the appears benefits to be implementing of its a engage vital element- ofof General economic Valery Gerasimo andv’s doctrine political of New patronage ment withGeneration the region Warfare, (i.e. which market “is primarily share a strategy ofacross influence, the not ofregion brute forc e”that that isthe about Kremlin uses in the energy sector) and enrich mem- to influence and direct decision-mak- bers of the inner power circle Heather A. around Conley, Jamesing. Mina,This Ruslan web Stefanov, resembles and Martin Vladimirov a network-flow3 the Kremlin through large-scale infra- model – or “unvirtuous circle” – which structure projects or lucrative m&A the Kremlin can use to influence (if not deals. Another equally vital motiva- control) critical state institutions, bod- tion is to weaken the European Union ies, and economies, as well as shape na- and the west’s desirability, credibility, tional policies and decisions that serve and moral authority, including among its interests while actively discrediting Eu aspirant countries such as Serbia, the western liberal democratic system. Ukraine, Moldova and Georgia, in order to reduce their enthusiasm to cooperate The three strategic objectives behind with and integrate into these structures. Russia’s influence in the CEE region last but not least, russia’s assertiveness could be seen as interdependent albeit in the past decade is driven by its desire not necessarily centrally designed. It is to reclaim its lost sphere of influence in instead a combination of intent and op- Central and Eastern Europe and elevate portunism. In 2007, President Putin’s BULGARIA: WHAT STATE CAPTURE LOOKS LIKE 32 Figure A.2. Bulgaria

Bulgaria: Democracy Scores vs. Russia’s Economic Footprint. The Kremlin Playbook: Understanding Russian Influence in Central and Eastern Europe, 2016 speech at the munich Security Confer- yet in parallel russia activated its net- ence signalled the beginning of a new work of Kremlin-linked companies both era of confrontation between russia and domestically and within the region to the united States and Europe. A year conduct strategic projects and invest- later, the 2008 Russian-Georgian conflict ment deals via a web of non-transparent was the physical manifestation of this offshore entities, which has allowed for new confrontation. Senior Russian offi- a multitude of corruption transactions cials publicly underscored the weakness that have enriched a number of inter- of the European project and Europe’s mediaries, or have been used to capture 42 inabilityAppendix. to economically Case Studies sustain the key institutions and policy-makers. The regions of Central and Eastern Europe private benefit from corruption linked that were lagging behind in the after- to mega projects could be then lever- math of the 2008 global economic crisis, aged to ensure the control of an exten- providing a growing body of evidence sive network of individuals. Some of that a new policy agenda was geared these investments have also been used toward undermining the west. russia to facilitate political party financing and followed the rhetoric with actions aim- in some cases even direct campaigns for ing to strengthen its grip on the region’s producing political and/or economic in- energy market through large-scale in- stability. frastructure projects led by state-owned companies such as rosatom, rosneft The motives behind russia’s increased and Gazprom. involvement in the region after 2007 can 33 easily explain the methods that have • capturing influential policy-makers been employed and they are not new and/or power brokers through cor- to the region. Political and regulatory ruption or intimidation; capture, financing political parties, the • leveraging corporate profits and whole range of soft power instruments, presence; including historical, religious, and • pulling old-time security networks’ ethnic symbols, and russian interna- strings; and tional media presence and local media • raiding pre-89 shared assets. ownership, organizing massive media campaigns (like the anti-shale gas cam- while in principle there is nothing paign), have compounded economic le- wrong about russian corporate pres- vers such as acquiring critical (energy) ence in a particular country, evidence sector companies to form a potent rus- shows that: 1) the russian capital has sian government toolbox for influence in been used by Kremlin to carry through CEE. A mixture of economic muscling, interrelating economic and political corruptive (energy-related) mega deals, interests, and 2) russian state-owned media propaganda, and geopolitical resources in particular have been seen pressure have cost considerable resourc- as used in party financing, protest cam- es and/or swayed many governments paigns and the acquisition of media in the region, including those of some channels outside of the usual corporate nATo members, to adopt policies that governance frameworks. The combina- are not consistent with their national se- tion of the two factors may have been curity needs and trend lines, but benefit used to provoke government change, the interests of foreign private and state the rise of bogus extremist or national- interests. istic parties, the shift in foreign policy priorities and the opposition to Eu com- The report estimates that, on average, mon legislative initiatives. Additionally, Russia’s economic footprint in the five the domestic moscow proxies echo rus- case study countries (Serbia, Bulgaria, sian interests or lobby for a pro-russian Latvia, Hungary and Slovakia) has policy stance. ranged from about 11 percent of the economy (in the cases of hungary and The leading authors of the Kremlin Slovakia over the course of the study Playbook presented the key findings of period) to an impressive 22 percent in the report at a public event at CSIS in Bulgaria. The full extent of russia’s washington D.C. on 13 october 2016. reach, however, remains unknown, as More than 150 US policy-makers, ex- russia has sought to conceal its eco- perts and media reporters participated nomic activity behind a web of foreign in the event The Kremlin Playbook: Un- shell companies and offshore accounts. derstanding Russian Influence in Central There are different mechanisms that and Eastern Europe, which illuminated russia uses in order to amplify its eco- the linkages between Russia’s economic nomic influence in the CEE region in- presence in Central and Eastern Europe cluding: and the region’s general decline in political stability, diminishing democratic • playing on structural economic vul- standards, and erosion of governance nerabilities on bilateral level; standards in five case study countries: • exploiting governance deficits, e.g. in Bulgaria, Serbia, Slovakia, Hungary, state-owned enterprises, regulatory and latvia. The report’s launch was bodies, the court system, the tax au- covered largely by Bulgarian and inter- thorities, etc.; national media including in a dedicated 34

Recommendations

• Eu institutions and member states should substantially enhance anticorruption and development assistance mechanisms to help the most vulnerable countries build greater resilience to Russian influence. • Enhance EU internal benchmarking and governance mechanisms built around its anticorruption report. The European union should augment the report’s follow-up mechanisms and make individual country recommendations more specific (including with comments on third-country capture risks). Compliance with these recommendations should be linked to EU development assistance penalties. • Enhance European union oversight of Eu development funds and require full disclosure of company ownership when meeting EU diversification requirements. • national antitrust authorities should provide public biannual assessments of the diversification of strategic economic sectors, particularly the energy sector, aided by tax and customs authorities and other agencies to clearly establish final beneficial ownership and linkages to other market players and determine potential national security threats. Eu governments should dis- close final beneficial ownership and offshore havens to strengthen the transparency, knowledge, and understanding of their national economic base in relation to Russian influence. • Encourage NATO and EU members to task their own financial intelligence units with developing dedicated units that track illicit Russian transactions. • Prioritize enhanced EU-U.S. financial intelligence cooperation. An EU-U.S. Summit should be held on the margins of the 2017 nATo Summit, and one of its top agenda items must be preventing undeclared cross-border money flows invested in strategic areas or economic sectors of the economy.

Source: The Kremlin Playbook: Understanding Russian Influence in Central and Eastern Europe, 2016. preview by reuters, as well as articles even failures in Europe – both at Eu and from the Financial Times, Süddeutsche national level, which provide ample op- Zeitung, Foreign Policy, New York Post, portunities for russian aggressive eco- Kyiv Post, Ukraine Today, etc. nomic and political behavior.

In his opening remarks, CSD Chairman heather Conley, CSIS Senior Vice Presi- Dr. Ognian Shentov emphasized that dent for Europe, Eurasia, and the Arc- we need to look first at the Russian eco- tic, explained that the research has nomic footprint in Europe, and metrify determined that russia cultivated an this footprint, which is still largely un- opaque web of economic and political known or ignored; otherwise we would patronage across the region which the simply be cataloging only anecdotal Kremlin uses to influence and direct evidence. on the other hand, we need decision making. This web resembles to run this analysis from different op- a network-flow model – or “unvirtuous tics – the governance deficits, gaps and circle” – which the Kremlin can use to 35

Heather Conley, CSIS Senior Vice President for Europe, Eurasia, and the Arctic, and Ruslan Stefanov, Director of the Economic Program of CSD at the event The Kremlin Playbook: Understanding Russian Influence in Central and Eastern Europe, Washington D.C. influence (if not control) critical state Kremlin Playbook report is to recognize institutions, bodies, and economies, as the general framework used by Russia well as shape national policies and de- in its policies and activities towards the cisions that serve its interests, while ac- CEE, adding that russia’s policy increas- tively discrediting the western liberal ingly rejects the post-Cold war order in democratic system. Europe. russia, she underscored, is also willing to undermine existing rules, as According to ruslan Stefanov, Director witnessed in its coordinated aggressive of the Economic Program at CSD, russia actions in Ukraine, elsewhere in Europe, has exploited governance deficits in the and in the united States. ms. Kavalec five countries, e.g. in state-owned enter- noted that they aim to weaken core in- prises, regulatory bodies, the court sys- stitutions in the west and cast doubt on tem, the tax authorities, etc. to amplify the integrity of the west’s democratic its economic presence in Central and systems. Eastern Europe. The Center for the Study of Democracy In her keynote Kathleen A. Kavalec, presented the Kremlin Playbook at an in- Deputy Assistant Secretary at the Bu- ternational conference in Sofia The Rus- reau of European Affairs, U.S. Depart- sian Economic Footprint in Central and ment of State, commented that one of Eastern Europe: Addressing Strategic Vul- the most important achievements of the nerabilities in Hybrid Warfare, co-spon- 36

The Russian Economic Footprint in Central and Eastern Europe: Addressing Strategic Vulnerabilities in Hybrid Warfare International Conference, Sofia sored by the nATo Public Diplomacy According to Ilian Vassilev, former Division. Ambassador of Bulgaria to russia, the malign Russian influence is no longer Dr. ognian Shentov, Chairman of CSD, only a problem for Eastern Europe, but emphasized in the opening remarks of has also been rather visible in western the international conference, held on Europe because russia has learnt how 28 november 2016, that the study esti- to play according to Western playbook mates the russian economic footprint and manipulate the weakness of demo- in five countries including Serbia, Hun- cratic systems to its advantage. he also gary, Latvia, Slovakia and Bulgaria and emphasized that Russian influence had looks at its impact from different per- been so debilitating because russia had spectives, most importantly through not only exported energy but also its the analysis of governance deficits. model of governance based on privilege Dr. Shentov added that russia has politics, rather than market rules. systematically taken advantage of the governance vulnerabilities to increase The 2009 warning by CEE leaders to the their political leverage over govern- obama administration that russia had ments in the region. hence, countering “used overt and covert means to eco- the malign Russian influence depends nomic warfare, ranging from energy on their ability to improve the func- blockages and politically motivated tioning and independence of regula- investments to bribery and media ma- tory bodies, and to strengthen anti-cor- nipulation in order to advance its inter- ruption policy. ests and to challenge the transatlantic 37 orientation of Central and Eastern Eu- Pszczel, Director of the NATO Informa- rope”, had rung hollow until the an- tion Office in Moscow. Dr. Iryna- Kli nexation of Crimea in 2014. The deep menko, Chief Economic Adviser and misunderstanding of russia’s motives Senior research Fellow at the Institute by western leaders gave, according to for Strategic Studies “New Ukraine”, ruslan Stefanov, Director of the Eco- addressed the problem of Russian influ- nomic Program at CSD, the greenlight ence in Ukraine as paramount to the de- to Russia to step up its efforts to un- terioration of governance in the country. dermine democratic liberal systems in The second panel, chaired by Traicho CEE and to challenge international law. Traikov, Minister of Economy, Energy He noted that the Kremlin Playbook and Tourism (2009 – 2012), focused on a has tried to establish a link between comparative country-by-country over- the deterioration of governance stand- view of different dimensions of Russian ards and the expansion of the russian influence. economic footprint in the last 10 years. mr. Stefanov explained that the russian The wilfried martens Centre for Euro- economic footprint has been estimated pean Studies in Brussels invited CSD to to hover between 10 % in Slovakia and present the Kremlin Playbook report to- hungary and 25 % in Bulgaria between gether with researchers from a number 2005 and 2014. he also provided a brief of leading European think-tanks exam- overview of the main tools russia has ining the malign Russian influence in been using to amplify the effect of the Europe. During the seminar titled Un- large economic footprint on national derstanding Russian Influence in Central policy-making since 2007/2008, includ- and Eastern Europe, the Director of the ing by exploiting governance deficits Economic Program at CSD, ruslan Ste- in state-owned enterprises (SoEs) to fanov, and martin Vladimirov, an en- prevent policy consistency in key eco- ergy analyst at the Economic Program nomic sectors such as energy, banking, discussed the findings of the report on telecommunications and large projects, the extent of the russian economic foot- which are becoming extremely difficult print in CEE and the amplifiers, which to stop. one example is the reduction of increase the impact of this presence. The the gas price on hungary’s long-term speakers also debated how Russia has gas supply contract with Gazprom in leveraged its economic presence to cul- exchange for the conclusion of the Paks- tivate an opaque web of economic and 2 nuclear power plant deal. The cutting political patronage across the region of prices assured that Pm orban would that the Kremlin uses to influence deci- be reelected in 2014. russia has also lev- sion-making. Veronika Víchová, Ana- eraged structural economic vulnerabili- lyst of the Kremlin watch Programme ties and dependencies and has engaged of European Values Think-Tank, which old-time security services and financial publishes a weekly brief on the main networks through opaque ownership dimensions of the russian disinforma- structures concealing economic and po- tion campaign and other soft levers litical activities. over countries in Central and Eastern Europe, confirmed that most of the con- Civil Society Organizations (CSOs) have clusions in the Kremlin Playbook applied to lead the way in investigating further to the Czech Republic. She added that the topic of Russian influence, as civil apart from the economic levers, russia servants and government officials face had strengthened its presence through much greater difficulties in addressing a number of pro-russian media outlets sensitive topics, according to robert and ngos that had been spreading 38

Understanding Russian Influence in Central and Eastern Europe, Brussels Seminar. From left to right: Roland Freudenstein, Policy Director of the Martens Centre, Veronika Víchová, Analyst of the Kremlin Watch Programme of European Values Think-Tank and Ruslan Stefanov, Director of the Economic Program at CSD fake news undermining the credibility Russian aggression in Eastern Ukraine, of the EU vis-à-vis the Czech Republic. mr. Freudenstein added, the overt or Vít Novotný, Senior Research Officer at covert support for these organisations the Martens Centre spoke about the im- must become a matter of concern to portant link between Russia’s economic the Eu. footprint and the political orientation of the countries in the region. he and his colleague roland Freudenstein, the II. Regional and European Policy Director of the martens Centre, cooperation in good governance shed light on organisations operating and anti-corruption in Europe that are funded by the russian government, whether officially or The lack of a sustainable anticorruption unofficially. These include government- solution in Bulgaria is indicative of a far organised non-governmental organi- more significant problem – the numer- sations (gongos), non-governmental ous corrupt relations and dependencies organisations (NGOs) and think tanks. involving high-level officials and politi- Their goal, according to mr. novotny cians, known as state capture. This leads is to shift European public opinion to- to the formation of systemic flaws such wards a positive view of russian poli- as abuse of public procurement mecha- tics and policies, and towards respect nisms, hidden economy, VAT and other for its great power ambitions. In light tax scams, blocking of law enforcement of russia’s annexation of Crimea and and control institutions, media capture. 39

These are the conclusions of the Twelfth not compromise. So far countering cor- Anticorruption Policy Forum, held by the ruption has been based primarily on Center for the Study of Democracy on legislative changes, such as the division 4 July 2016. The forum presented the of the Supreme Judicial Council in two findings of the Corruption Assessment colleges – magisterial and prosecuto- Report, which examines the level of cor- rial. Mr. Lozan Panov, Chairman of the ruption and the efficiency of the anticor- Supreme Court of Cassation, stressed ruption strategies and policies in the pe- that a greater balance between judicial riod 2015 – 2016. mr. rosen Plevneliev, governance and management is needed President of the republic of Bulgaria, and political influence over the courts emphasised the importance of pub- should not be allowed. Another serious lic-private partnerships in anticorrup- problem is self-censorship applied by tion, highlighting CSD’s efforts in this some judges because of a sense of loyal- respect. A radical reform in all institu- ty or fear. while drafting anticorruption tions is needed in order to disentangle measures and laws, politicians must existing corruption dependencies. mr. rely on civil society’s independent re- Plevneliev pointed out that the public search to identify the bottlenecks in the has a right to know the truth about failed practice. ms meglena Kuneva, Deputy energy projects such as Belene nPP and Prime minister and minister of Educa- Tsankov Kamak. The future anticorruption and Science, expressed satisfaction tion law can instill intolerance to corrup- with the support of all but one parlia- tion if its implementation is supported mentary represented political parties by all institutions. In this sense the fight for the law on Prevention of Corrup- against corruption requires consensus, tion and Forfeiture of Criminal Assets,

Twelfth Anticorruption Policy Forum: State Capture Unplugged: Countering Administrative and Political Corruption in Bulgaria, Sofia 40 and the fact that the law stipulates that the Assets Forfeiture Commission will be part of the future independent body. She noted that anticorruption measures should not stop with the implementation of this law, but should be complemented by the efforts of inspectorates and other institutions. ms rumyana Bachvarova, Deputy Prime minister and minister of Interior, said that the findings of theCor- ruption Assessment Report are an accurate benchmark for the government’s work. She thanked CSD for acknowledging the anticorruption efforts of the Minis- try of Interior, including the curbing of 34!4%Þ#!0452% cigarette smuggling, which brought in 5.0,5''%$ hundreds of millions of revenues. ms #/5.4%2).'Þ!$-).)342!4)6% Sonya naydenova, member of the Su- !.$Þ0/,)4)#!,Þ#/22504)/. preme Judicial Council, stated that the ).Þ"5,'!2)! sense of impunity promotes corruption at all levels, but it is the court that bears the brunt of regaining the confidence of the people. Ms Ekaterina Zaharieva, minister of Justice put forward the need to strengthen the independence and ac- Two days after the presentation of the countability of the judiciary as the main report at the Twelfth Anticorruption Policy anticorruption argument. She elabo- Forum, the Council of ministers (Com) rated that the pivotal role in the fight invited the CSD experts to share their against corruption belongs to the judici- findings and policy recommendations ary, impartial prosecutors, and investi- on countering administrative and po- gators. litical corruption at a Com meeting. As a result of the meeting, the Council of The eleventh Corruption Assessment Re- Ministers put forward specific targets port of the Center for the Study of De- for decreasing corruption in key areas, mocracy is focused on the most potent such as smuggling, public procurement form of corruption affecting Bulgaria: procedures and the public administra- state capture. The report builds on years tion. Recognizing the importance and of CSD experience in the regular moni- the potential future impact of the dis- toring and assessing of the spread of cussed anticorruption initiatives, major administrative and political corruption. Bulgarian media published commentar- This is now complemented by an as- ies and full minutes of the Council of sessment of the mechanisms by which ministers meeting. powerful lobbies capture government decision making to the benefit of shady In 2016, the Southeast Europe Leadership business interests and the detriment of for Development and Integrity (SELDI) ini- public good. The report finds that these tiative was able to further its influence two manifestations – administrative cor- and impact in the SEE region. In its flag- ruption and state capture – are closely ship regional Anti-corruption report linked because they represent different Shadow Power: Assessment of Corruption facets of the same phenomenon. and Hidden Economy in Southeast Europe, 41

the functioning of the law enforcement institutions, mostly with support from QG@CMU NMUDP the Eu, have continued and even in- tensified in some cases. This has led to further slow decline in administrative corruption levels but at the expense of waning public support for reforms and of declining trust in national and Euro- pean institutions. The report makes an important contribution to the regional approach to anticorruption. It provides a civil society view of the state of corruption and comes in the wake of the 2014 SElDI comprehensive assessment of the various aspects of the legal and institutional anticorruption environments of nine SEE countries. In 2016, SElDI followed up on these assessments with an update of corruption monitoring and a special focus on state capture in the energy sector and the corruption – hidden economy nexus. It also published an updated Civil Society Strategy and Joint Strategic Programme for Good Governance SElDI underlines that in none of the and Anti-Corruption in SEE 2020, which countries in the region has there been describes the current and desired future a clear sustained policy breakthrough role of the civil society from the South- in anticorruption though efforts to de- east Europe region in implementing liver technical solutions and to improve anti-corruption measures.

Corruption pressure compared to involvement in corruption, 2016 (%)

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Source: SELDI Corruption Monitoring System, 2016. 42

SELDI’s Corruption Monitoring System (CMS) – its analytical tool for measuring corruption – has identified three trends in the dynamics of corruption in the region:

• Since the early 2000s when SElDI started its monitoring the overall levels of corruption in the SEE countries have gone down, and the public has become more demanding of good governance. • yet, progress has been slow and erratic, and corruption continues to be both a major preoccupation for the general public and a common occurrence in the civil service and senior government. Specifically, in the 2014 – 2016 period corruption pressure – the primary quantitative indicator for the levels of corruption in a country – has relapsed in some countries, but the overall improvement in the region was negligible. • The combination of stubbornly high rates of rent seeking from corrupt officials and rising expectations for good governance related mostly to Eu accession aspirations in SEE have shaped negatively public expectations about potential corruption pressure. more than half of the population of the SElDI countries believe it is likely to have to give a bribe to an official to get things done. This indicates that the restoration of trust in institutions would be much more difficult than the mere reduction in the levels of administrative corruption.

Source: SElDI regional Anti-Corruption report Shadow Power: Assessment of Corruption and Hidden Economy in Southeast Europe, 2016.

The Center for the Study of Democracy that is educated in democratic values. and the SElDI partners presented the The Cooperation and Verification Mecha- conclusions of the SELDI Regional Anti- nism (CVm), as well as the new approach Corruption Report at regional conferences of opening chapters 23 and 24 earlier in in Skopje and Brussels, as well as at na- accession negotiations have the potential tional events. The need to reduce corrup- to push the necessary long-term reforms, tion and state-capture vulnerabilities in beyond the term of a single government. Southeast Europe, in particular in the Countries need to have sustainable and energy sector, was the main focus of effective anti-corruption mechanisms discussion at the SELDI Policy Workshop: that are systematically used to expose il- Strengthening Resilience to Corruption and legal wealth. State Capture in Southeast Europe held on 14 June 2016 in Brussels. The participants however, countries have recently started underlined that having good laws and to embrace soft preventive tools, and ef- institutions are good first steps; however fective enforcement is missing, according they need to be accompanied by political to ms Sabine Zwaenepoel, Chapter Co- will and change of mentality. The coun- ordinator, Accession negotiations to the tries from Southeast Europe need to fo- Eu, Directorate-general for neighbour- cus not only on the fight against corrup- hood and Enlargement negotiations, tion, but also on making institutions ef- European Commission. Anti-corruption ficient, as recommended by Mr. Andrey agencies need sufficient power, financing Kovatchev, member of the European Par- and staff, as well as true independence, liament, Committee on Foreign Affairs. It according to mr. Julien mousnier, Depu- is important to create a new generation ty Head, Citizens and Security Unit, Poli- 43

SELDI Policy Workshop: Strengthening Resilience to Corruption and State Capture in Southeast Europe, Brussels cy Co-ordination Directorate, Secretariat in the institutions that should fight cor- general, European Commission. Institu- ruption. tions such as the Special Public Prosecu- tors should be using all legal mechanisms The participants in the SELDI Second available to them to determine which Regional Anti-Corruption Policy Forum: individuals unlawfully gained assets, Countering Corruption and State Capture and to return these assets to the people. in Southeast Europe, held in Skopje on however, in cases such as macedonia, 29-30 September 2016, stressed that in the work of the Special Public Prosecu- the past ten years, both the nature of tor of the republic of macedonia, ms. corruption and the anticorruption agen- Katica Janeva, is hindered by the refusal da in Southeast Europe have changed. of cooperation and access to information Political corruption has replaced petty from other public bodies. As highlighted bribery both as the dominant concern by Ms. Milica Bozanic, Assistant Director of national and international reformists for International Cooperation at the Ser- and as one of the leading causes for most bian Anti-Corruption Agency, anti-cor- social and economic damage. The ear- ruption plans and strategies do not truly lier emphasis on harmonising national drive or guarantee results of anti-cor- legislation with international standards ruption reforms. All institutions should has now been substituted by a focus on have the necessary political will in order its enforcement. The representatives of to achieve the desired change, with a key the public institutions talked about the focus on tackling high-level corruption practical challenges of initiating a large- and ensuring whistleblower protection. scale anti-corruption campaign in spite unfortunately, political appointments of the outside political pressure to pre- and promotion systems exist, including vent it from bearing fruit. 44 mr. nicola Bertolini, head of Coopera- macedonia noted that the price of cor- tion at the Delegation of the European ruption is paid by the citizens, however Union in Skopje underlined that cor- all efforts are in place to provide the ruption should be countered by preven- needed institutional response. In addition, control and enforcement methods. tion, the freedom of press and investi- To achieve this common goal, the Civil gative journalism should in no way be Society Facility supports the CSos ef- obstructed, as noted by Dr. Janina Berg, forts to provide advocacy and keeping good governance, Anti-Corruption & the governments accountable. The state- human rights Consultant, Ascent-Eu. ment that “the price of liberty is eter- nal vigilance” was further reinforced They key challenge is setting in place by Mr. Alexander A. Arvizu, Deputy reliable, responsive protection mecha- Assistant Secretary, Bureau of Interna- nisms for whistleblower. ms Sabine tional narcotics and law Enforcement Zwaenepoel, Chapter Coordinator, Ac- Affairs (INL). Mr. Ivo Vajgl, MEP, Rap- cession negotiations to the Eu, Direc- orteur for macedonia, European Parlia- torate-general for neighbourhood and ment expressed his hope that the mac- Enlargement negotiations, European edonian parliamentary elections on Commission underlined that since 2011 11 December 2016 will be democratic there is a new approach in accession and transparent, and will be the start negotiations, focusing on results, not of an efficient cooperation between all only on legislative harmonization. Thus parties working towards the common chapters 23 and 24 are opened at the be- European goals. ms Katica Janeva, Spe- ginning and closed at the end of the ac- cial Public Prosecutor of the republic of cession negotiations, in order to provide

SELDI Second Regional Anti-Corruption Policy Forum: Countering Corruption and State Capture in Southeast Europe, Skopje 45 sufficient time for the reforms to take jsilovic, Senior Adviser, Corruption Pre- place. vention Department, Anti-Corruption Agency of Serbia further underlined During the second day of the Policy that when maturity of the political sys- Forum, the discussion focused on the tem is missing, stronger mechanisms processes of building institutional com- are needed. petencies and enhancing the efficiency of the administration. Mr. Vladica Babić, Experts from the Economic Program Assistant Director, Sector for the Pre- took part in numerous events in the vention of Corruption at the Agency countries from Southeast Europe and for the Prevention of Corruption and Turkey, providing policy advice and Coordination of the Fight against Cor- presenting the conclusions of SElDI’s ruption, Sarajevo described their role Corruption Monitoring System. These in- in providing guidelines to institutions cluded the regional conference: Sustain- which are currently preparing Integ- ability of the FPAs held on 26-27 Janu- rity Plans. he also noted the challenges ary 2016 in Brussels, the conference that the complex administrative setup Effective Combating of High-Level Corrup- in Bosnia and Herzegovina poses to the tion: Matter of Person or a System? held effective coordination when improving in 22 March 2016 in Skopje, the Closing the legal framework, the operations of Event of the Framework Partnership Agree- judicial bodies, raising public aware- ments held on 10-11 november 2016 in ness and participation, monitoring and Skopje and the Second Annual Meeting of evaluation of the implementation of the the South East Coalition on Whistleblower Anti-corruption Strategy. mr. milos mo- Protection held in Zagreb on 14 novem-

Panel Discussion: Shadow Power: Corruption and Hidden Economy in Southeast Europe, Washington D.C. From left to right: Martin Vladimirov, Energy Analyst, Economic Program, Center for the Study of Democracy, Ruslan Stefanov, Director, Economic Program, Center for the Study of Democracy and Dr. Daniel Serwer, Academic Director of Conflict Management, Johns Hopkins School of Advanced International Studies 46

Round Table: The Anti-Corruption Agenda for Southeast Europe after the 2016 Enlargement Package: How to Break the State Capture Deadlock and Make Enlargement Deliver Again? Brussels, hosted by Monica Macovei, Member of the European Parliament, European Conservatives and Reformists Group ber 2016. The Director of the Economic private dialogue in identifying effective Program of the Center for the Study of counter-measures and possibilities for Democracy, ruslan Stefanov and mar- future collaboration among all stake- tin Vladimirov, Energy Analyst in the holders. It called to the countries not to Economic Program of CSD presented lose the gained momentum of imple- the latest findings of the Shadow Pow- menting the Eu membership condition- er: Assessment of Corruption and Hidden ality, as well as their will for reforms. In Economy in Southeast Europe report at a her opening remarks, Monica Macovei, panel discussion in the School of Ad- mEP, underlined that pubic support is vanced International Studies (SAIS) at the key of success, especially in terms of Johns Hopkins University on 17 Octo- holding politicians accountable in times ber 2016. of elections. The citizens should share the responsibility, report cases of cor- The round table The Anti-Corruption ruption, and not overly rely on the insti- Agenda for Southeast Europe after the tutions to solve all problems. legislation 2016 Enlargement Package: How to Break should be effectively enforced and the the State Capture Deadlock and Make En- policies should apply corruption risk largement Deliver Again?, hosted by ms assessment, thus focusing on the most monica macovei, mEP, and the SElDI critical areas. ms macovei highlighted initiative on 30 november 2016 in the the positive impacts of the Cooperation European Parliament, sought to chart and Verification Mechanism (CVM), but needed next steps in finding effective at the same time she noted that in re- tools to tackle one of the worst out- cent years there is a concerning trend of standing challenges in the region – of young judges and prosecutors seeking corruption and state capture in a dis- fast enrichment, resulting in increased cussion between representatives of the amounts of the bribes. civil society, the European Commission, and the European Parliament. The event SElDI members from six countries contributed to promoting the public- shared the challenges that they face. 47

They stressed on the key role of the the Center for Democratic Transition CSOs in keeping political elite ac- (CDT), montenegro and Institute Al- countable. All countries in the region ternative (IA), montenegro. Transpari- have systemic problem with corrup- fy, a non-profit initiative, provides the tion, and even high levels of prosecu- first-ever global rating of the financial tion and investigation cannot tackle transparency of 200 major think tanks it in the next 5-10 years, according to in 47 countries. ruslan Stefanov, SElDI Coordinator, Center for the Study of Democracy, representatives of six SElDI mem- Bulgaria. mr. Stefanov presented the bers also took part in the Multi-Stake- key findings from the Shadow Power, holder Workshop on the United Nations the SElDI Regional Anticorruption Re- Convention against Corruption and its port 2016. Anticorruption progress has Review Mechanism, held on 20-23 Sep- slowed down in the past two years, tember 2016 in Vienna, Austria. They with citizens feeling trapped in what learned about the possibilities for co- they increasingly see as their captured operation between governments and states by powerful political – economic civil society organizations (CSOs) in networks. On average a quarter of the implementing the united nations Con- citizens in the region have been forced vention Against Corruption (unCAC) to engage in corruption, exposing a and its second review cycle. The work- systemic governance problem in SEE. shop brought together 63 experts from This has slowed growth, sustained 18 African and Southeast countries. poverty and fueled inequality. Sabine The participants engaged in plenary Zwaenepoel, Coordinator of the Cen- sessions, structured discussions and tre of Expertise on rule of law and practical group exercises based on Fundamental rights, Dg nEAr, Eu- country review simulation and role ropean Commission summarized the reversal. The speakers underlined that conclusions from the 2016 Enlargement un Convention against Corruption Package. She expressed her disappoint- is the only legally binding, universal, ment at the limited results achieved by anti-corruption instrument. Its Article the countries after the huge amount 13 specifically calls on society, includ- of funding provided by EC. The EC is ing the CSos, to actively participate in working to develop a more strategic ap- combating corruption. proach to countering state capture and money laundering, supporting policy At the end of 2016 the Economic Pro- and administrative reforms, ensuring gram engaged in several new initiatives appropriate control over the work of in the area of anti-corruption: evalua- the agencies and transparent elections, tion of the work of the Macedonian State improving managerial accountability Commission for Prevention of Corrup- and public procurement systems. tion, support for the creation of a new Anti-Corruption Southeast Europe Regional SElDI also signed Memoranda of Under- Platform hosted at the unCAC Coalition standing for future anti-corruption col- website, and the European Platform for laboration with seven Albanian CSos Tackling Undeclared Work. on 1 June 2016. Anticorruption and State Capture In the 2016 Transparify ranking, three SELDI Members were awarded five As an essential part of CSD long-term stars for a second time: the Center for efforts toward establishing sustainable the Study of Democracy, Bulgaria, good governance mechanisms in South- 48 east Europe countries in 2016, the Center tion) in order to obtain privileged status has started a process of elaborating a or preferential treatment. sound methodological framework for international comparative assessment of state capture. The concept of state capture helps policy makers and analysts account for some of the most insidious forms of subversion of governance. This State Capture DiagnoStiCS roaDmap practice has become a major issue of Working paper, august 2016 policy concern, in particular in relation The concept of state capture has been in use for to developments in Southeast Europe to- some �me now and has helped policy makers and table of ContentS analysts account for some of the most insidious forms Defining state capture...... 2 of subversion of governance. As this prac�ce has wards Eu enlargements, and in view of become a major issue of policy concern, in par�cular The state capture concept...... 2 in rela�on to developments in Southeast Europe Forms of state capture...... 7 towards EU enlargements, and in view of the security the security implications for Europe fol- implica�ons for Europe following Russia’s more Measurement of state capture...... 11 aggressive recent stance vis-à-vis its energy projects State capture diagnos�cs areas...... 11 lowing russia’s more aggressive recent and enlargement plans, the general no�on needs to State capture risk zones...... 12 find its opera�onal and policy-relevant dimensions. Captured public ins�tu�ons This paper contributes to a higher analy�cal precision or ins�tu�onal areas...... 13 stance vis-à-vis its energy projects and in the defini�on of state capture, which enables the Measuring state capture construc�on of measures that would help evaluate, assess and eventually measure this phenomenon. This in the security sector...... 14 enlargement plans. requires a more in-depth analysis of the state capture Towards a state capture index...... 16 concept, an analy�cal descrip�on of the results of state capture involving different social actors (government, companies, the economy and society at toring state capture risks across countries and over large) and a descrip�on of its principal mechanisms. �me. Here we present a possible way to measure The development of methodological As state capture is often associated with corrup�on, state capture in certain ins�tu�ons with a focus on it would be necessary to differen�ate between these the security sector, as the key target of capture as framework at CSD aims at construc- concepts and find their eventual intersec�ons. it controls the repression monopoly of the state. Further work would be needed to arrive at a com- The ul�mate goal of the current discussion is the prehensive and sound index measurement of state tion of measures that would help evalu- construc�on of an index that would enable moni- capture.

*. CSD would like to thank the par�cipants at the workshop State Capture: Drivers, Outcomes and Measurement on December ate, assess and eventually quantifiably 3-4, 2015 in Istanbul for the provided feedback, cri�cal comments and input to an earlier version of this working paper. In par�cular, we would like to thank Professor Paul Heywood and Professor Colin Williams for reviewing the paper, Professor Alina Pippidi, Professor Alexander Stoyanov, and Dr. Zolta Adam for modera�ng the workshop sessions, and Dr. Mihaly measure this phenomenon. This re- Fazekas for his valuable ideas. CSD would also like to acknowledge the contribu�on of the SELDI.net partners for taking part in the workshop and for providing input and prac�cal examples of state capture prac�ces in their respec�ve SEE countries. CSD would like to thank Dr. Michaela Saisana and Dr. Domenico Perrotta for hos�ng a CSD expert group visit to DG JRC’s quires a more in-depth analysis of the Competence Centre on Composite Indicators & Scoreboards. Supported by a grant from the Foundation Open Society Institute in cooperation with the Think Tank Fund of the Open Society state capture concept, an analytical de- Foundations scription of the results of state capture involving different social actors (government, companies, the economy and society at large) and a description of The State Capture Diagnostic Roadmap, its principal mechanisms. As state cap- published by CSD, paved the way ahead ture is often associated with corruption, and has greatly benefited from the ex- it would be necessary to differentiate tensive collaboration in monitoring and between these concepts and find their policy advocacy activities towards good eventual intersections. The ultimate governance and anticorruption within goal of the efforts is the construction of the framework of SElDI coalition, head- an index that would enable monitoring ed by CSD, as well as from the extensive state capture risks across countries and cooperation with leading academic and over time. The notion of state capture, policy experts in Europe. despite its frequent use does not have a single definition because it is used in dif- Countering fraud and corruption risks ferent contexts and covers various types in the area of public procurement of phenomena. For example, state capture is used when referring to the estab- The Economic Program contributed to lishment of control by one state over the the increasing of the institutional capac- resources of another state, for the cap- ity and cooperation of romanian and ture of the institutional capacity of the Bulgarian authorities to prevent and executive (or other powers) by political combat public procurement criminality. parties aimed at extracting corruption The CSD experts addressed the need to rents, or when business sector entities combat public procurement criminality, seek to shape (by paying bribes to state with a focus on improving the under- officials) the “rules of the game” (legisla- standing of corruption vulnerabilities, 49 such as economic loopholes, bureau- ing, Countering and Analyzing Corruption cratic stand stills, competition infringe- Risks. The publication covers selected ments, legal weaknesses and poor in- internationally recognized standards ter-stakeholder cooperation and mutual on approaches, methods and guide- understanding. In 2016, through collab- lines for countering criminality and oration between CSD and its romanian corruption practices in the public pro- partners from governmental and non- curement process. The practical guide governmental organizations, a number is tailored to aid the work of civil serv- of Bulgarian experts from prosecutors` ants, magistrates and practitioners in offices, the judiciary and the public -ad the area. The guide is based on conclu- ministration participated in workshops sions from series of seminars, work- and seminars dedicated to understand- shops and conferences, involving Bul- ing and tackling the existing corruption garian and romanian experts, which challenges in the public procurement took place between December 2014 and sector. These were organized as part of July 2016 in Romania. the initiative Law, Economy, Competition, and Administration – Developing a Multi- disciplinary Approach in the Fight against Public Procurement Criminality (lEAD). on 14 December 2016, during the lEAD final conference in Bucharest, CSD pre- УПРАВЛЕНИЕ НА ОБЩЕСТВЕНИТЕ ПОРЪЧКИ В БЪЛГАРИЯ: sented its most recent publications in КОРУПЦИОННИ РИСКОВЕ the area of public procurement. И НАКАЗАТЕЛНО ПРЕСЛЕДВАНЕ Policy Brief No. 64, октомври 2016 г.

Наличието.на.сериозни.недостатъци,.характерни. за.повечето.регулаторни.и.контролни.агенции,.и. ОСНОВНИ ИЗВОДИ липсата. на. политическа. воля. за. въвеждането. на. → Секторът. на. обществените. поръчки. в. България. нови. политики. и. инструменти. продължават. да. продължава.да.бъде.отражение.на.по-широките. възпрепятстват. установяването. на. ефективен. и. корупционни.проблеми.на.държавното.управле- . . Закон за обществените поръчки ефикасен. институционален. подход. в. борбата. с. ние. Новият (ЗОП).въвежда.препоръките.на.европейските.ди- ...... корупцията в България. Това е особено изявено рективи.и.обещава.по-голяма.гъвкавост.за.пуб- в сферата на обществените поръчки,.където.ко- личните.възложители,.но.за.отчитане.на.неговия. рупционният натиск и риск от злоупотреби про- антикорупционен.потенциал.е.твърде.рано. дължава да бъде сред най-високите..Членството. → Трудностите. в. изграждането. на. работеща. кон- на.България.в.Европейския.съюз.(ЕС).предоставя. тролна.система.при.европейските.фондове.през...... възможност. за. подобряване. ефикасността. на. последното десетилетие са показателни за не- обходимостта.от.непрекъснато.внимание.върху. публичните. разходи,. чрез. повишаването. на. про- изразходването.на.държавни.средства..Рискът.от. зрачността. и. отчетността,. хармонизиране. на. за- злоупотреби.при.проекти,.финансирани.изцяло. конодателството.с.европейските.правила.и.осигу- с.национални.средства.е.четири.пъти.по-голям.в. ряването.на.по-стриктен.контрол.и.надзор.върху. сравнение.с.такива,.подкрепени.от.европейски- търговете,.особено.тези.с.европейско.финансира- те.фондове. → Работата.на.контролните.органи.и.наказателно- не.. От. друга. страна,. европейското. финансиране. то. правораздаване. в. сферата. на. обществените. създаде. допълнителни. предпоставки. за. появата. поръчки,.един.от.ключовите.елементи.на.поли- на.корупционни.практики.в.сферата.на.обществе- тическата. корупция,. е. неефективно. и. съсредо- ните.поръчки.поради.факта,.че.в.много.сектори.то. точено.върху.ниските.управленски.етажи..Броят. постепенно.замени.националните.фондове.и.до- и.ефикасността.на.наказателните.производства. за. злоупотреби. с. обществени. поръчки,. остава. веде.до.въвеждането.на.по-усложнени.процедур- пренебрежимо. нисък. на. фона. на. множеството. ни.правила,.без.да.има.съразмерно.увеличаване. публични.разкрития.за.конфликти.на.интереси,. на. административния. капацитет. при. различните. злоупотреби.и.корупция. възложители. → Необходима.е.периодична.и.независима.оценка. на.ефикасността.на.антикорупционните.мерки.на. ниво.възложител,.както.и.активна.превенция.на. пазарната.концентрация.на.обществени.поръч- ПрестъПления и злоуПотреби ки.в.ключови.сектори.като.„Инфраструктура”.

Тази публикация е подкрепена финансово от Българо-швейцарската програма за сътрудничество с обществени Поръчки и от Европейския съюз. Мненията, изразени в нея не отразяват позицията на Българо-швейцарската програма за сътрудничество или на Европейската комисия.

наръчник за Превенция, Противодействие и анализ на рисковете A policy brief on Governance of the Bul- garian Public Procurement Sector: Corrup- tion Risks and Criminal Prosecution was prepared by CSD Economic Program. Despite the legislative and institutional progress, especially in terms of increased transparency and access to data, the public procurement (PP) sector CSD developed a Public Procurement in Bulgaria continues to be associated Criminality: Practical Guide for Prevent- with high levels of corruption risk. The 50

Defrauding the Bulgarian Public Procurement System: Prevention, Countering and Analysis of Corruption Risks Round Table, Sofia. From left to right: Dr. Todor Galev, Senior Analyst at CSD, Ruslan Stefanov, Director of the Economic Program at CSD, Tomislav Donchev, Deputy Prime Minister for European Funds and Economic Policy, Dr. Ognian Shentov, CSD Chairman, Aneliya Yordanova, Director of the Analysis and Reporting of Inspection Activities Directorate at the Agency for State Financial Inspection (PFIA) and Stefan Karaboev, Analyst at CSD number of irregularities uncovered by significant. Mr. Stefanov also discussed the control bodies remains considerable. the role of the European financing in At the same time there is a lack of effec- the Bulgarian public procurement land- tive investigation, while criminal cases, scape, highlighting that Eu Funds grad- involving PP, are still very limited and ually expand their share in the overall predominantly focused on the lower PP market. Public procurement financed levels of governance. by the Eu is both more competitive and risk averse – analysis by CSD found the These were some of the overall con- exclusively state-funded PP is up to four clusions among the participants at the times as vulnerable to corruption, com- round table Defrauding The Bulgarian pared to Eu funded procurement. Public Procurement System: Prevention, Countering and Analysis of Corruption Analyzing the Nexus Risks organized by CSD on 31 October between European Financing 2016. There is a clear trend of sustaining and Anti-Corruption very limited number of criminal cases, which do not reach the higher echelons In 2016, CSD continued to expand its of power. The fluctuations in the pub- research and policy analysis capacity lic procurement sector are often tied to at national, regional and European lev- political cycles, while at the same time els. As part of the AnTICorrP project, the number of irregularities remains the biggest anti-corruption effort of the 51

Eu`s FP7, CSD developed an analysis section of the upcoming in second Eu evaluating the impact on Bulgaria’s anti- Anticorruption report. CSD also partic- corruption performance against the ex- ipated in evaluation of the effectiveness isting Eu policy conditionalities and and efficiency of cohesion policy imple- EU financial assistance, with a focus on mentation during the period 2007 – 2013, post-accession developments. Although reviewing the main underlying success the EU never formally linked EU assist- factors and areas in need of develop- ance to progress on anti-corruption, the ment. The work of the Center in the areas disbursement of funds has tended to of Eu funding continues with analysis peak around critical deadlines for ac- of ESIF 2014 – 2020 programming docu- cession progress, e.g. the signing of the ments in Bulgaria and an assessment of accession treaty in 2005, and the expira- the integration, impact and applicability tion of the Cooperation and Verification of the provided by the Council of the Eu mechanism’s (CVm) safeguard clauses country-specific recommendation dur- in 2010. Both years also marked the lowing the 2012 – 2016 period. est levels of corruption experienced by Bulgaria’s citizens. This suggests that Fight against money laundering the combined effect of EU anticorruption conditionality and development as- Money laundering (ML) and other finan- sistance on governance in Bulgaria was cial crimes are generally linked to dif- positive, but temporary. ferent predicate offences by organized crime groups (most often with regards to traffic of narcotics and human beings,

This project is co-funded by the Seventh Framework Programme for prostitution, weapons, computer crimes, Research and Technological Development of the European Union etc.). Combating and investigating mon- EU Grant Agreement number: 290529 ey laundering thus requires a system- Project acronym: ANTICORRP

Project title: Anti-Corruption Policies Revisited atic approach to collection and analysis of financial information for the activities 8 of organized crime groups, as well as TitleWork of Package:deliverable: WP D8.2)Corruption, Case studyassistance reports and developmenton control of corruption and EU funds broader application and understanding Due date of deliverable: 29.02.2016 Actual submission date: 29.02.2016 of the legal framework, and substantia- Editor(s): Jana Warkotsch tion of the existing capacity within the relevant law enforcement structures. In Organization name of lead beneficiary for this deliverable: German Institute for Global and Area Studies 2016, CSD partnered with the Basel In- Project co-funded by the European Commission within the Seventh Framework Programme stitute of Governance in attempt to ana- Dissemination Level PU Public X lyse the current trends and institutional PP Restricted to other programme participants (including the Commission Services) RE Restricted to a group specified by the consortium (including the Commission Services) Co Confidential, only for members of the consortium (including the Commission Services) dynamics, and to contribute to the fight against money laundering. The information and views set out in this publication are those of the author(s) only and do not reflect any collective opinion of the ANTICORRP consortium, nor do they reflect the official opinion of the European Commission. Neither the European Commission nor any person acting on behalf of the European Commission is responsible for the use which might be made of the following information. Those were some of the main issues put forward during a round table organized by CSD on 14 July 2016. The participants, among which there were representa- 1 tives of general Directorate national Police, the State Agency for national Security (SAnS), the Commission for Additionally, as part of the network of Illegal Assets Forfeiture, and the Basel local correspondents, of Dg home of Institute on governance, discussed Bul- the European Commission, in 2016 CSD garia's recent and historical develop- continued working on the Bulgarian ments in the domain of investigating 52

The participants in the round table Tackling Criminal Finances: Anti-Money Laundering in Bulgaria and combating money laundering. The tackle the rise of destructive and artifi- latest report from the Committee on the cially created cross-institutional compe- Evaluation of Anti-money laundering tition. last but not least, the round table measures and the Financing of Terror- participants agreed that the procedures ism (monEyVAl) at the Council of leading to confiscation of illegally ob- Europe assessed the country positively, tained assets should start as early as especially concerning the existing legal possible and go in parallel with (not af- and institutional anti-money laundering ter the conclusion of) the criminal pro- (AML) framework. It is true that no uni- ceedings. versal solution exists for increasing the ML prevention and investigation effectiveness. The presence of institutional III. Tackling the hidden economy in capacity, including appropriate funding Bulgaria and in Southeast Europe and qualified human resources, however, is critical. Intra-institutional coop- In recent years, the shadow economy, eration on every level and international once thought to be a problem only for collaboration with foreign organiza- less economically developed countries, tions and intelligence units are also key has become a pressing issue for devel- elements for establishing a solid track oped economies as well. It acutely affects record when it comes to Alm and the Bulgaria which is widely recognised as forfeiture of illegally obtained assets. having the largest shadow economy in Similarly, it is essential to establish an the European union. effective organization and structuring of the related national bodies in order to In 2016, CSD and Vitosha research avoid any duplication of functions and continued their good cooperation with 53

Conference and Summer School on Shadow Economies and Undeclared Work in Europe: New Insights and Policy Response, Sofia. From left to right: Ms. Denitsa Sacheva, Deputy Minister of Labour and Social Policy, Mr. Ruslan Stefanov, Director of the CSD Economic Program and Mr. Arnis Sauka, Director of the Centre for Sustainable Business, Riga the University of Sheffield Manage- the support and policy solutions of its ment School and the Institute of Public Southeast European partners. Profes- Finance in the study and exchange of sor Colin Williams from Sheffield Uni- best practices in tackling undeclared versity emphasized the importance of work in Europe. CSD hosted in Sofia an understanding the difference between international marie Curie conference the causes and effects of undeclared and summer school on Shadow Econo- work, and how this can most easily be mies and Undeclared Work in Europe: New achieved through the prism of institu- Insights and Policy Response. The events tional theory, which points to an asym- aimed to provide a better understand- metry between formal and informal ing of the causes and effects of the shad- institutions as being the root cause of ow economy and undeclared work, and the informal economy. Professor wil- to offer new insights and identify vari- liams discussed different policy ap- ous policy responses in the field. The proaches towards undeclared work conference, which gathered leading and laid out the hypotheses about the academics, government officials and rational economic actor and the social politicians, made it clear that the task if actor, their behaviour, influences and identifying and rectifying the shadow reasoning behind engaging in hidden economy is achievable, though neither economy activities. he also presented easy, nor simple. a breakdown of the findings and conclusions of a study on participation in mr. ruslan Stefanov, Director of the undeclared work based on the method CSD Economic Program, stressed that of multi-level logistic regression using Bulgaria still faces severe undeclared 27,563 interviews conducted in Eu-28. work issues, and could benefit from The Deputy minister of labour and So- 54 cial Policy of the republic of Bulgaria the President of the Confederation of ms. Denitsa Sacheva pointed out the Independent Trade unions of Bulgaria Bulgarian government’s commitment mr. Plamen Dimitrov, mr. Veselin mi- to tackling these problems, whilst en- tov, International Secretary of the Pod- suring that the views of all stakehold- krepa Confederation of Labour, the ers are being taken into account. Mr. masterCard Country manager for Bul- Georgi Pirinski, Member of the Euro- garia and macedonia ms. Vanya mano- pean Parliament, described the prac- va, ms. Teodora Dicheva of the gen- tices of “labour dumping” where immi- eral Labour Inspectorate, Mr. Nikolay gration and free movement can greatly Petkov, Director of Risk Management at swell the labour force. This, he stated, is the national revenue Agency, Dr. To- then being used by employers to drive dor yalamov, SElDI expert, Professor down wages and create a climate in Emilia Chengelova from the Bulgarian which undeclared work can thrive. He Academy of Sciences, mr. milen Kolev recommended the introduction of ef- of the national Statistical Institute, fective policies such as tax breaks. The Dr. Peter rodgers, lecturer in Strat- participants also discussed the tools egy and Business at the university of for measuring and tackling the hidden Sheffield, Dr. Marija Risteska, Director economy and undeclared work in Bul- of the Center for research and Policy- garia, macedonia and Croatia, which Making, Skopje, Marie Curie Research are the focus countries of the marie Fellow Ms. Legha Momtazian from the Curie collaboration between CSD and University of Sheffield, and Mr. Josip Sheffield University. Other speakers in- Franic, researcher at the Institute of cluded many renowned international Public Finance, Croatia. and local experts and policy-shapers: Mr. Arnis Sauka, Director at the Cen- Following the conference, a two-day tre for Sustainable Business, latvia, summer school on the topic of shadow

Conference and Summer School on Shadow Economies and Undeclared Work in Europe: New Insights and Policy Response, Sofia 55 economy in Europe and beyond took consequences of the hidden economy are place, at which international experts multidimensional and their identifica- and PhD students presented their work tion and limitation is of key importance. and research and debated the causes According to data from the 2015/2016 and impacts of the informal economy. Hidden Economy Index hidden employ- The event included numerous simula- ment receded according to both business tions and presentations exploring issues representatives and the public at large. such as the tax morale and informality The evasion of social and health insur- in post-socialist rural areas, the informal ance payments decreased as well. This competition in the private sector, and dynamic contributed to the lowest level the nature of the relationship between of the hidden employment sub-index dur- the minimum wage and the size of the ing the period 2002 – 2015. nonetheless, shadow economy, among others. a quarter of the individuals employed still do not declare some or all of their social security payments. In that regard, change in the tax morality cannot be expected in Bulgaria without significantly improving the quality of public services and achieving higher public trust in the HIDDEN ECONOMY IN BULGARIA: 2015 – 2016

Policy Brief No. 64, September 2016 state institutions.

The correct understanding of the dynamics and the structure of the hidden economy is essen�al KeY pointS for improving the governance of the public and → Data from the 2015/2016 Hidden Economy Index the private sector. Two thirds of entrepreneurs showed that hidden employment receded according to globally start their business by engaging one way or both business representa�ves and the public at large. another in hidden economic ac�vi�es.1 Given the The evasion of social and health insurance payments HIDDEN ECONOMY FACT SHEET: decreased too. This dynamic contributed to the lowest right set of circumstances (compa�bility between level of the “hidden employment” sub-index during formal and informal ins�tu�ons, high level of the 2002 – 2015 period. Nonetheless, a quarter of the trust in the government, the law enforcement individuals employed still do not declare some or all of BULGARIA and the judicial authori�es) these entrepreneurs the social security payments. → Data as of: June 2016. formalize their ac�vi�es and integrate themselves The labor market’s major challenges in reducing hidden employment proved to be the wider coverage of young quickly and effec�vely into the official economy. employees (18-29 years of age), par�cularly males, At the same �me, the negative consequences and the increase of social security income for specific SOURCE: SELDI, HIDDEN ECONOMY AND GOOD GOVERNANCE IN SOUTHEAST EUROPE: REGIONAL ASSESSMENT REPORT 2016. groups of employees. One third of the young employees of the hidden economy are mul�dimensional KEY HIDDEN ECONOMY INDICATORS and their do not pay social security contribu�ons on their actual identification and limitation is of key earnings. importance. In Bulgaria the high level of hidden → Organized VAT fraud is among the main threats to Hidden economy is driven by the feeling of social injustice and dissatisfaction of public economy undermines the economic development the na�onal economy as they are the second biggest of the country and requires serious and persistent source of revenue for the organized crime after human services received against social and health security payments. Large companies transfer poli�cal atten�on. The unprecedented growth trafficking and before drug and illegal cigarettes trade. profits abroad and don’t pay even the marginal 10% tax. The danger comes from the fact that these type of in the field of digi�za�on of economic ac�vi�es, frauds cause direct fiscal damage and compromise the convergence between some of them, and compe��veness in en�re economic sectors. the emergence of brand new services creates an → The issue with the introduction of VAt for the personal opportunity for achieving a desirable environment, use of premium goods/services listed as company expenses remains hanging as the implementa�on of No written Higher salary No social Social security on Social security on No health which may reduce the hidden cash flows and contract than in contract security mimimum wage contract wage security the measures proposed by the Ministry of Finance in boost the economic development of the country. 2016 causes costs that seem unreasonably high. Comprehensive reforms focused on the func�oning → Change in the tax morality and the behavior leading to of the market mechanisms and administra�ve engagement in hidden economy ac�vi�es cannot be effec�veness are needed in order to promote expected and achieved in Bulgaria without significantly improving the quality of public services and achieving the process of economic convergence within the higher public trust in the state institutions and the European Union and limit the harmful effects of the allocation of public funds. hidden economy in Bulgaria.

1. Statement made by Prof. Colin Williams of the University of Sheffield at the “Tackling the Hidden Economy: Employing Best Maximum levels in SEE EU Policy Prac�ces for Growth and Jobs” policy forum held in Skopje, Macedonia on October 13, 2015. *. This policy brief has been elaborated with the financial assistance of the Bulgarian-Swiss Coopera�on programme, the Global Hiding levels in Bulgaria Challenges Research Fund (GCRF) and the Economic and Social Research Council (ESRC). The views expressed in it do not 4.17% 44.44% 8.33% 20.83% 44.44% 8.33% necessarily reflect the views of the Bulgarian-Swiss Coopera�on programme, GCRF and ESRC. WAGE PREMIUM IN THE FORMAL ECONOMY OVER THE HIDDEN ECONOMY

Those employed in hidden economy earn slightly more (1.4%) than those in formal economy, but this is not enough to compensate the loss of medical leave and social benefits.

23.8 Net Tax Gap 9.9%

Hidden Economy Index

2013 27.2% 2014 100 74.9% Gross tax gap GDP GDP

Non observed economy in GDP

31.2% 17.1% During the events, the Center for the 50 26.2% 19.3%

Study of Democracy presented the 2013 2014

0 GDP GDP policy brief Hidden Economy In Bulgaria: Bulgaria Min SEE Max SEE Schneider’s EY Shadow 2015 – 2016. The authors stress that the Shadow Economy Economy This publication is co-funded by the European Union and the Central European Initiative (CEI). correct understanding of the dynamics The views expressed in this publication do not necessarily reflect the views of the European Commission and the CEI. and the structure of the hidden economy is essential for improving the governance of the public and the private In the framework of the SELDI ini- sector. Two thirds of entrepreneurs glo- tiative, the experts from the Economic bally start their business by engaging Program and their partners from eight one way or another in hidden economic SEE countries, prepared the SELDI activities. At the same time, the negative Policy Brief 6: Hidden Economy in South- 56 east Europe: Monitoring and Policy Im- (ClDS), Serbia, held a round table Tack- plications for Good Governance, national ling Undeclared Work and Hidden Economy Hidden Economy Fact Sheets 2016, and a in Southeast Europe: Improving Govern- backgrounder entitled Hidden Economy ance and Prosperity on 13 December 2016 and Good Governance in Southeast Eu- in Belgrade, Serbia. Prof. Colin williams rope: Regional Assessment Report 2016. from the Sheffield University Manage- These analyses and fact sheets present ment School, University of Sheffield, UK, SELDI’s key findings on the manifesta- Ana Mickovska-Raleva, Policy Analyst, tions, causes and impacts of the hid- Center for Research and Policy Making den economy and undeclared labour in (CrPm), macedonia and Josip Franic, the SEE countries in 2016. The research researcher, Institute of Public Finance, found out that hidden economy in SEE Croatia shared their knowledge and ex- remains widespread, perpetuates infor- perience at the event. mality, which is linked to corruption, and signifies a substantial gap between formal and informal institutions. This IV. Competitiveness and gap is due both to underdeveloped for- the knowledge economy mal market institutions and to the lack of coherent enforcement of the rules, of- In 2016, CSD continued its work on ten related to corruption. The immense the study of the competitiveness of the diversity of scale (19 % in Croatia and Bulgarian economy and the innovation 81 % in Kosovo), prevailing patterns potential of the Bulgarian economy. Ex- (no written contracts in Turkey, non- perts from the Economic Program con- payment of health care contributions in tributed actively in the development of Kosovo, envelope wages in macedonia the annual publication Innovation BG. and Bulgaria, non-formalised business The report makes recommendations in Albania) and statistical estimation for improving the public policies for of the hidden economy to gDP across Southeast European countries requires tailor-made policies and sequencing of reforms. Working entirely in the formal 2016 INNOVATION.BG sector as compared to the hidden economy earns significantly higher wages in Bosnia and Herzegovina, Albania and Turkey, slightly higher in Macedonia, Innovation Serbia and montenegro, and about the WWW.ARCFUND.NET BG same or slightly lower in Kosovo and Bulgaria. however, sustained high-levels of the hidden economy in SEE cou- pled with systemic petty corruption, low trust in public institutions, and, in some cases, ambiguous national iden- tity, has resulted in a change of the tax morale and lower revenues for governments in the region.

To further discuss these findings the AR

Sheffield University Management Funded by the School, uK, the SElDI initiative and the Center for liberal-Democratic Studies 57 innovation in Bulgaria and in the Eu, national innovation system based on building on the most recent theoreti- five groups of indicators: cal and empirical studies in the world and taking into account the specific • aggregate innovation product; economic, political, cultural and insti- • entrepreneurship and innovation tutional framework in which the coun- networks; try’s innovation system operates. over • investment and financing for inno- the past 12 years, Innovation.bg has vations; made a number of specific proposals • human capital for innovation; for improving the country’s innovation • information and communication policy and practice, which have been technologies. supported by business and academia. The lack of specific and sustainable ac- Innovation.bg 2016 focuses on the coun- tions by Bulgarian governments on the try’s talents and the potential to iden- proposals made – despite their com- tify, develop and attract talents; the po- mitment to the process at the highest tential to manage them appropriately political level – reveals a serious insti- and to develop national and regional tutional deficit in development and competences on that basis. Innovation application of relevant policies in the is a function of the creativity, out-of- field. Innovation.bg 2016 analyses the the-box thinking, imagination, passion status and potential for growth of the and perseverance of people who have

Changes in the Competitiveness Landscape of Bulgaria 2015 – 2016, IMD 2016

&$0/0.*$ (07&3/.&/5 #64*/&44 */'3"4536$563& 1&3'03."/$& &''*$*&/$: &''*$*&/$: 1SJDFT 'JOBODF &EVDBUJPO 'JTDBM1PMJDZ &NQMPZNFOU 1VCMJD'JOBODF -BCPVU.BSLFU *OUFSOBUJPOBM5SBEF %PNFTUJD&DPOPNZ #BTJD*OGSBTUSVDUVSF 5FDI*OGSBTUSVDUVSF 4PDJFUBM'SBNFXPSL #VTJOFTT-FHJTMBUJPO "UUJUVEFTBOE7BMVFT .BOBHFNFOU1SBDUJDFT *OTJUVUJPOBM'SBNFXPSL 4DJFOUJñD*OGSBTUSVDUVSF 1SPEVDUJWJUZ&îDJFODZ )FBMUIBOE&OWJSPONFOU *OUFSOBUJPOBM*OWFTUNFOU 58 the potential to generate ideas and the making. International investors moni- knowledge to convert them into success- tor very closely the ImD competitive- ful new products and business models. ness ranking. CSD presented the results of the IMD World Competitiveness The Economic Program continued an- Yearbook 2016 during a press conference alyzing the barriers to the Bulgarian on 30 May 2016. The profile of the Bul- business and provided recommenda- garian competitiveness for 2016 shows tions for improvement of the overall detachment from the bottom, after competitiveness landscape. CSD is nearly five years of stagnation. In 2016, partner for Bulgaria of the world Com- Bulgaria ranks 50th out of 61 econo- petitiveness Center at ImD (Interna- mies, which is an improvement of five tional Institute for management Devel- places compared to 2015. The Bulgarian opment), Switzerland, which publishes economy, however, remains among the the World Competitiveness Yearbook. The most uncompetitive in Europe, with Yearbook has had a direct impact on only Greece, Croatia and Ukraine hav- the Bulgarian competitiveness policy- ing lower scores.