ECONOMY/POLITICS/ENERGY 01

NOVEMBER- JANUARY | WWW.CAPITAL.BG

BULGARIAN POLITICS MIGHT BE ON THE VERGE OF SYSTEMIC CHANGE THIS IS HARDLY GOOD NEWS FOR THE COUNTRY AS IT MAY LEAD TO INSTABILITY AND TURBULENCE > PAGE 03

THE PHONY BATTLE FOR BTC VTB SELLS BULGARIAN TELECOMS OPERATOR TO…VTB

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IS ENTERING A DEBT SPIRAL? SINCE 2008 BULGARIAN GOVERNMENTS HAVE FAILED TO RESTRAIN THE GROWING FISCAL DEFICIT, WHICH COULD BE A LONG- TERM PROBLEM FOR THE BUDGET

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In this issue:

Ilin Stanev, 03 Managing editor BULGARIAN POLITICS MIGHT BE ON THE VERGE OF SYSTEMIC CHANGE This is hardly good news for the country as it may lead to instability and turbulence For many years a lot of our readers have asked us to do an English language version of Capital. Capital, 17 aft er all, is the closest thing in Bulgaria to a newspaper ALWAYS WITH EUROPE, NEVER AGAINST of record, but, despite Google’s best eff orts (thank you, RUSSIA guys!), its authoritative voice remains restricted mainly Is Bulgaria under Boyko Borissov still a to Bulgarian readers. viable Western partner? Or is it Russia’s Now you have it. Trojan horse in the EU? KQuarterly is not simply an abridged version of 23 Capital Weekly and Capital Daily. We publish original IS BULGARIA ENTERING A DEBT SPIRAL? articles that summarize the main events in the last Since 2008 Bulgarian governments have quarter of the year and shed some light on the upcoming failed to restrain the growing fi scal defi cit, months. KQ enjoys the benefi t of having more time which could be a long-term problem for the to think through the chaotic Bulgarian political and budget business life and to present a clear picture of its various developments and shenanigans. 31 THE PHONY BATTLE FOR BTC You can expect a lot of data that can give you VTB sells Bulgarian telecoms operator to… immediate understanding of Bulgarian economy, VTB as well as many authors and experts who are not part of our editorial team and will broaden our 42 covarage of the events in Bulgaria. NOT SO STRESSFUL TEST The banking system review was expectedly If you wonder why we chose K, instead of C for the name positive, yet questions remain of this publication, it has nothing to do with us trying to be original, or evading some probable trademark 48 violation. Капитал is an established brand we cherish, DREAMING ABOUT SOUTH STREAM so we take the liberty to show this in our English What are the chances of Bulgaria becoming language title. a gas distribution center? Enjoy KQ.

Published by Economedia AD Advertisement We would be grateful 30 Ivan Vazov str., Sofi a 1000 Angelina Todorova phone (02) 4615 444 tel. +359 2 4615 280 if you give us your e-mail: [email protected] [email protected] feedback. If you wish to Managing editor subscribe for KQ, give Ilin Stanev us a call on: 02 46 15 349 or send an e-mail: Design: Madlen Nacheva Prepress Konstantin Vachkov [email protected] 2 KQ POLITICS

With the departure of the incumbent president Rossen Plevneliev Bulgaria might loose the last high ranking openly pro-EU voice. Photo by VINCENT KESSLER POLITICS КQUARTERLYКQUARTERLY 3

DEVELOPMENTS TO FOLLOW: BULGARIAN Bulgaria will hold presidential elections on 6 November. Polls suggest there will be a run-off POLITICS on 13 November, as none of the candidates is expected to win more than 50% of the vote in the MIGHT BE ON fi rst round. Prime Minister Boyko Borissov announced that unless the nominee of the ruling GERB THE VERGE party, , leads in the fi rst round, he will resign to trigger early parliamentary OF SYSTEMIC elections. If Mrs. Tsacheva wins though, CHANGE Mr Borissov is expected to reshuffl e the ruling coalition and strip the junior partner in THIS IS HARDLY the government coalition, the , of some of its power in the ministries. There are signals that GERB would seek GOOD NEWS FOR deeper cooperation with the two far right nationalist forces in parliament, the Patriotic Front THE COUNTRY AS coalition and Attack party.

In addition to electing a new IT MAY LEAD TO head of state, on 6 November will also vote in a national referendum initiated INSTABILITY AND by TV host and music star Slavi Trifonov. The three questions that will be asked refer to state TURBULENCE subsidies to parties, whether members of parliament should be chosen by a simple majority, and if voting in elections and ref- erenda should be compulsory.

The agreement that formed the Reformist Bloc will expire by the end of the year. It is too early to say what the fi ve constituent The upcoming presidential could be the parties will decide but one of them, Democrats for Strong Bul- tipping point for a possible systemic change in the country’s garia, is already considering pull- politics. The election campaign signals a weakening of the pro-EU ing out. Its leader Radan Kanev consensus and general slide towards national-populism. This is is undertaking a nationwide tour to present his ideas, presumably hardly good news for the country as it may lead to instability and in preparation for a new political turbulence. project. 4 KQ POLITICS

BULGARIAN The upcoming presidential possible systemic change relate to unfinished elections in Bulgaria could be business in the fight against corruption, the POLITICS the tipping point for a possible reform of the judiciary and the fall out of the systemic change in the country’s collapse of CCB (Corporate Commercial Bank). MIGHT BE ON T politics. The election campaign Although the second government of Borisov THE VERGE signals a weakening of the pro-EU consensus came to power in 2014 with promises to fix and general slide towards national-populism. all these significant domestic problems, it is OF SYSTEMIC This is hardly good news for the country as it now apparent that it has failed to do so to a may lead to instability and turbulence. considerable degree. Progress is modest and CHANGE The reasons for the systemic change are hopes for further significant steps are generally both external and domestic. For the last two weak. This has eroded the support for the decades Bulgaria has enjoyed a rather favorable government forcing it to rely more and more on THIS IS HARDLY international environment, in which the EU and ad hoc coalitions in parliament. GOOD NEWS FOR NATO have always been important anchors Furthermore, the loss of support for GERB and stabilizers. The general course of Bulgarian is particularly visible in the presidential race. THE COUNTRY AS governments was in synchrony with the other Although the GERB’s candidate – Tsetska European capitals, which has contributed to Tsatcheva - is still the favorite to finish first in IT MAY LEAD TO the creation of a sense of continuity and even the first leg of the election, the candidate of the INSTABILITY AND inevitability of the most important political Socialists, Roumen Radev, may win the elections decisions. This sense is now gradually being in the second leg, according to some polls. Even TURBULENCE lost with the succession of crises affecting the the very prospect of a possible loss undermines EU, and with the aggravation of the security the political position of GERB and makes early DANIEL SMILOV* situation in both Ukraine and the Middle East. parliamentary elections in the first part of 2017 Most importantly, after the Brexit referendum very probable. the EU has lost its previously unquestionable As a result of these developments, the pro- “soft power” and attraction. Or at least Brexit EU consensus among the political establishment has given wings to a motley crew of populists, in Bulgaria is falling apart. At one extreme, nationalists and Russophiles united in their there are more and more voices calling for the Euroskepticism. withdrawal of the country from NATO and even The domestic factors pointing towards a the EU. These voices are for now marginal and

parties BSP and ABV for a joint presidential nomination commenced, the Air Force commander’s name popped out as of nowhere. At the ROUMEN RADEV, beginning of August, as rumours of Radev’ possible nomination THE PARATROOPER OF spread, he quickly resigned as Air Force chief, citing the same reasons as the year before and saying that paying for air policing was worse THE LEFT than the Treaty of Neuilly-sur-Seine of 1919 which granted large Bulgarian territories with Bulgarian-speaking population to the Balkan winners of WWI. Mr Radev’s credentials as NATO general are hard to dismiss - he The name of Maj Gen Roumen Radev, former Bulgarian Air Force had studied not once but twice at the Maxwell Air Force Base NCO commander, was almost unknown outside of the Armed Forces until Academy, a leading US pilot school, and graduated in the top of his three months ago, apart from a couple of short, yet memorable publicity class. He then worked at NATO headquarters. Yet, from the start of his spells - the staging of the largest Bulgarian air show since 1989 and the election campaign he got hooked up on BSP’s leading messages for vocal handing of his resignation in 2015 in disagreement over the way spearheading better relations with Russia and investing in nuclear the joint air policing of the Bulgarian air space with NATO allies should energy projects (after billions of losses in two previous attempts be handled by the Ministry of Defence. to build a new NPP), as well as anti-refugee rhetoric (adopted by He has repeatedly stated that paying another state - be it allied most of the presidential candidates). Mr Radev fervently denies his or not - to defend Bulgarian skies is inadmissible. In 2015, PM opponents’ claims that he is pro-Russian but the label sticks. Borissov urgently granted the air force 80 mln. levs (40 mln.euro) to Although his image as a patriotic defender of the nation in a extend the flight resource of the aging MiG-29 fighter jets in Polish tumultuous time gives him a chance to reach out beyond the BSP’s maintenance facilities in order to keep Mr Radev in his post. elderly hard-line electorate, Mr Radev remains largely unknown to Yet, after the negotiations between the two main left-wing the general public. КQUARTERLY 5

exotic, but their sheer presence is surprising in WHAT DO THE PRESIDENTIAL ELECTIONS POLLS PREDICT a country, which has benefited tremendously from the EU. More troubling are the “centrist” Tsetska 29.9% and “nuanced” voices which seemingly accept membership in the two major organizations of Tsacheva 30.7% the West, but try to qualify this membership in a variety of ways. Rumen 21.4% The most vocal are the so-called “patriots” Radev 24.2% who advocate bizarre ideas such as introducing mandatory military service or the deployment Krassimir 8.7% of missiles directed against Istanbul for “deterrence” of Erdogan. The “patriots” have Karakachanov 11.5% capitalized politically the refugee crisis and have fanned a mass hysteria directed at all migrants Ivaylo 6.8% or “invaders”, as they call them. The electoral Kalfin 7.8% chances of this bloc of parties may be positively affected by the upcoming presidential elections, Traycho 5% in which their candidate Krassimir Karakachanov is expected to do well. This may be used as a Traykov 8.3% springboard for the next parliamentary elections in which the national-populists may establish Tatyana 4.5% Alpha Research a sizeable presence in parliament. The stance Doncheva 4.3% of these political formations on major political Gallup International issues is either problematic or ambiguous. Part Note: Gullup International original data presented presidential candidates' suport among all voters. The data was recalculated using the assumption of 50% voting activity. of them sides openly with Russia and campaigns Disclaimers required by the Election codex "The poll was conducted in the period between 08 and 13 of October 2016г. by Alpha Research. The The survey was conducted among 998 people from 4 to 12 October, "face against EU and NATO. All of them are staunchly poll is published on the agency's site and was paid for with own funds. The research is conducted to face" through direct semi-standardized interviews. One percent of the against common EU solutions to the refugee among 1025 adults in Bulgaria and utilizes stratified two-level sample with quotas for the main social sample corresponds to 56,000 people (see Note:). The maximum and demographic characteristics. The data was collected with direct standardized interviews in the standard statistical deviation of 50 percentage shares is ± 3%. The crisis, such as quotas, for instance; further, they respondents’ homes.Alpha Research is responsible for the data and interpretation, published on its methodology is comparable to any regular monthly polling of "Gallup website, but not for selective or manipulative use of such data." International" in Bulgaria since 1992. harbor unrealistic hopes that Europe can simply *Disclaimer: Gallup International Association or its members are not related to Gallup I1nc., ignore the refugee problem by surrounding itself headquartered in Washington D.C which is no longer a member of Gallup International Association. Source:Alpha Research, June 2016 > 6

one of Mr Borissov’s most loyal lieutenants ever since she entered Parliament and became its chair in July 2009. In this position she often TSETSKA TSACHEVA, “shielded” the PM from difficult opposition enquiries during question THE “STEPMOTHER” time, using her powers. She also refused to admit to discussion in parliament a legislative proposal drafted by the civic initiative Justice for OF THE NATION All. The amendments proposed by Justice for All aimed at reforming and decentralizing the National Prosecution Office which is now dominated by the Chief Prosecutor who can interfere with any single case assigned to anyone of his subordinates. When PM Boyko Borissov announced his party’s presidential nominee, Ms Tsacheva is by no means the most popular GERB candidate and Parliament Speaker Tsetska Tsacheva, he said: “To this day, the nation it is clear that the party will do its best to muster the full potential of its has had many fathers, it is time for it to have a mother”. unwavering electorate to get her elected. This has worked so far. In 2007, GERB’s candidate was named just a month before the election date shortly after joining GERB, Ms Tsacheva won 6000 votes in the mayoral and there has been a lot of speculation why this happened. The most elections in her stronghold, Pleven, that gave her only the third place in benevolent theory was that the party wanted to protect its nominee the race. Two years later, in the heyday of GERB’s popularity, she won from the usual smear campaign in the media that will try to ruin her close to 55,000 votes as candidate for MP from Pleven. reputation - something which some of the other candidates, including Her membership of the Communist Party until 1989, her lack of the main opposition one, Roumen Radev, have already faced. international experience, absent foreign language skills, a tendency for A more prosaic reason, however, was that none of the leading and absurd slips of the tongue run against her. What is more, she is not seen popular members of the party would take the risk to become president as a strong, independent candidate who can emancipate herself from and get constantly pressured by PM Borissov every time their stances Boyko Borissov - a quality that the PM may cherish, yet one that makes clash. Ms Tsacheva apparently has no issues with that. She has been the reputation of the future “mother of the nation” languish. 6 KQ POLITICS

> 5 with razor-wire fences. On domestic issues the “patriots” THERE IS A READY FORMULA are either irrelevant or worse. Regarding the constitutional FOR A RATHER FAST ORBANIZATION amendment passed in 2014, for instance, they were rather IN BULGARIA instrumental in watering down the initial, more coherent proposals. While such a behavior is expected from the national In fact, the key of the present situation is held by the populists, the real surprise is the Bulgarian Socialist still-biggest Bulgarian party – GERB of Prime Minister Boyko Party (BSP) which has positioned itself very much in the Borisov. So far he has tried to “balance” among the different Euroskeptical corner. As part of the Party of the European trends in Bulgarian politics, which has left his own position Socialists, the BSP is supposed to be one of the mainstream, relatively indeterminate. Because of this balancing act, there pro-EU parties, supporting supra-nationalism and the are at least three rather different possible scenarios for humane treatment of refugees. The BSP is at odds with developments in the country: ALTHOUGH all these positions, however. Its presidential campaign is THE SECOND centered on issues such as “sovereignty” and regaining control MUDDLING THROUGH from Brussels. In addition, it is a party which advocates the This scenario will materialize if Tsetska Tsatcheva still GOVERNMENT lifting of the sanctions against Russia and is generally seen manages to win the elections. Then Mr Borisov will have an OF BORISOV as a lobbyist for Russian energy projects. Finally, the BSP has argument to stay in power albeit with certain ministerial CAME TO quite openly fanned fears of migrants and refugees for the reshuffles. Most probably, RB ministers will go and they will POWER IN 2014 purposes of electoral mobilization. be replaced with GERB nominations. It is unrealistic to expect WITH PROMISES Against this background, the only unequivocally pro-EU the “patriots” to participate in the government with ministers TO REFORM parties have remained in the Reformist Bloc (RB) coalition. since this will shut the door to possible support from the Their presidential candidate Traycho Traykov has given them Movement for Rights and Freedoms (MRF) – the main Turkish THE JUDICIARY a temporary sense of unity, but the rifts they have on domestic minority party. In essence, in this scenario GERB will have a AND THE FIGHT politics make the survival of the whole coalition unlikely in the minority government with the explicit support of a variety of CORRUPTION, short term (see more in The uncertain future of the Reformist smaller political forces, and with the tacit support of MRF. IT IS NOW Bloc). After the presidential elections this ambiguous situation This scenario cannot last very long because it is likely APPARENT THAT is likely to come to an end since Mr Borisov has signaled that to delegitimize GERB further and to diminish its prospects he is willing to part with the reformers. The problem for him is for success in the next parliamentary elections. Still, this IT HAS FAILED that there are no other legitimate options for coalitions open might be the best or at least the least risky option for the TO DO SO. to him, which may continue the limbo for a while. ruling party.

was a popular comment on Facebook. Mr Traykov made enemies not only with Russia’s Rosatom, the company TRAYCHO TRAYKOV, that was going to build Belene NPP, but also with Lukoil which owns the REFORMISTS’ sole refinery in Bulgaria and controls 35% of the fuel retail market. He claimed that the Russian oil company didn’t play by the market rules and LAST HOPE was hurting consumers, while the budget was ripped off of billions in tax revenue because Lukoil always closed the year with a loss. Before entering politics Mr Traykov was a corporate manager and consultant with Roland Berger, specialized in restructuring and advised „They send a letter saying – we give you all the money as a credit, you leading services companies. He has never been affiliated with Mr Borissov’s don’t pay anything, why bother about the price. This is an absolute insult party and became known as one of the few government ministers who to our intelligence, but some people buy this argument”. The comment stuck to their expert opinion. This made him a familiar figure in the civic was made by Traycho Traykov, then Minister of economy referring to council of the Reformist Bloc during the formation of the alliance in 2014, the planned Belene NPP and among those who ”bought this argument” yet he remained out of public positions when the RB joined the second was PM Borissov himself. At the beginning of 2011, in a new reversal of Borissov government. his position, Mr Borissov became a fan of the NPP project, only to scrap The divisions within the bloc would definitely affect Mr Tryakov’s it personally a year later. The statement was one of many that soon led chances to reach the second round of the election, as well as his to the removal of Traycho Traykov, then economy minister, from the declaration that he would support the GERB candidate if he fails first government of Boyko Borissov (2009-2013). Mr Traykov was fired to reach the run-off phase. However, Mr Traykov remains the only in March 2012 with some bogus arguments. The real reason was Mr serious candidate who has outspokenly defended Euro-Atlantic Borissov’s personal disdain of his minister’s independence and refusal positions and strongly opposed Russia’s interference into Bulgaria’s to bow to every whim of the PM. “The government has lost half of its IQ” domestic politics. КQUARTERLY 7

In such circumstances, we could generally expect the CENTRE-RIGHT, PRO-EU GERB MR BORISOV continuation of current policies in the medium term. However, The presidential elections clearly show that in terms of HAS SIGNALED anti-EU positions will benefit from the gradual erosion of electoral support GERB is positioned centre-right. Its voters THAT HE IS GERB. are pro-EU, pro-NATO, and generally support domestic anti- WILLING TO corruption and judicial reforms. The GERB leadership has PART WITH THE ORBANIZATION abandoned some of this agenda with the hopes to attract REFORMERS. GERB may attempt to move into the field of “patriots” and other, more “centrist” votes (or for other reasons, related nationalist-populists. If the rise of nationalism is significant to the suspected tacit ties between Borisov and DPS). The THE PROBLEM enough, Borisov may opt to entrench himself in power by presidential elections will most probably show that moving FOR HIM IS coalescing more explicitly with the Patriotic Front. This is towards the left is a wrong strategy for GERB. Especially if THAT THERE a highly risky and opportunistic strategy, which will result the candidate of GERB loses, this will be a serious reason ARE NO OTHER in worsening of the relations with the EPP and Chancellor for its rethinking. In order to stay closer to its own base, LEGITIMATE Merkel – relations of which Borisov is particularly fond. So however, GERB need to be much more radical in terms of this scenario is unlikely unless we see a serious turn to the anti-corruption and the securing of judicial independence. It OPTIONS FOR Euroskeptical right in Europe next year. If something like that remains to be seen whether Borisov is at all capable of such COALITIONS happens in elections in France and Germany, in Bulgaria we U-turns, but they may be necessary for the preservation of OPEN TO HIM. have a ready formula for a rather fast Orbanization of the his own party. country. All in all, the main political forces are at a crossroads at the A softer and more likely version of this scenario could moment. The Socialists have obviously chosen radicalization materialize if GERB attempt to find in BSP a possible coalition in anti-EU direction: the question is whether GERB will follow partner. This could become possible if the candidate of the them. In either case, however, we do have a political system socialists – Mr Radev – does well at the presidential elections, which is markedly different from the one based on the broad wins them or comes in a close second. For a grand coalition to pro-European consensus of the last two decades. be engineered something like a national emergency needs to be announced, however, otherwise the GERB supporters will * Daniel Smilov is a comparative constitutional lawyer be seriously disappointed. Fanning anti-immigrant hysteria and political scientist. He is Program Director at the Centre could be resorted to for their persuasion. for Liberal Strategies, , Recurrent Visiting Professor of Policy changes from such a shift will be dramatic and Comparative Constitutional Law at the Central European most of them will relate to renewal of Russian energy projects, University, , and Associate Professor of Political Theory lobbying for the lifting of EU sanctions against Russia, etc. at the Political Science Department, University of Sofia.

issue, Mr Karakachanov’s party has fed on the xenophobic attitude of parts of Bulgarian society towards Roma population and, in recent years, KRASSIMIR towards refugees and migrants crossing from Turkey. VMRO proposes KARAKACHANOV, sending both refugees and migrants to closed-off camps outside of cities and Romas - to reservations, not much different from the ones, in which PATRIOT AGAINST THE native Americans dwell in the USA. REFUGEES The party and Mr Karakachanov himself have gained increased popular support since the start of the refugee crisis in Bulgaria in 2013. His nomination is backed by two other nationalist parties which had been Krassimir Karakachanov, leader of VMRO - an anti-Roma, anti-refugee at odds with each other - Volen Siderov’s pro-Russian Attack party and party - has one of the longest CVs in modern-day Bulgarian public life. He ’s anti-Turkish National Front for the Salvation of Bulgaria started his career as a historian and counter-intelligence officer in the (NFSB). NFSB and VMRO form the Patriotic Front (PF) group in parliament. repressive security service apparatus of the Communist era. He claims The PF supports Mr Borissov’s cabinet and although they have never to have prevented the creation of a pro-Macedonian independence party signed a coalition agreement with GERB like the RB did, Mr Karakachanov in Southeastern Bulgaria that would have acted under the influence of and Mr Simeonov have remained much more loyal to Mr Borissov, as long Belgrade. as he supports their demands to build a wire fence on the border with After the shift to democracy he became leader of a party which Turkey and take a tougher stance in relations with Ankara. claims the heritage of VMRO, the XIX-XX century organization that Some public opinion research agencies point out that Mr Karakachanov fought for the independence of Macedonia from Ottoman rule. VMRO may have a chance to reach the run-off, yet his major weakness is that has consistently argued that there is no Macedonian identity separate his main anti-migration message has been taken over by almost all other from the Bulgarian - an assertion that sits well not only with Bulgarian presidential nominees. Most probably, he will urge his voters to support nationalists but with regular folks as well. Apart from the Macedonian GERB’s candidate in the second round of the elections. 8 KQ POLITICS

WEAKER THREAT TO THE GOVERNMENT FROM THE LEFT BSP’S PRIMARY AIM IS TO DOMINATE THE LEFT-WING SPACE, NOT TO FIGHT GERB OR WIN THE PRESIDENTIAL ELECTIONS

MARTIN DIMITROV*

In the span of a week in May 2016, two events shook the political left in Bulgaria. First, the largest left-wing force, the Bulgarian Socialist Party I (BSP) elected a new chair - Kornelia Ninova. She was seen as a more energetic and confrontational substitution to the outgoing leader and, more importantly, she seemed more open to the prospect of bringing back together the fragmented left. Secondly, a day after her appointment, the offshoot party of ex-BSP chairman and ex- Georgi Parvanov, Alternative for Bulgarian Revaival (ABV), decided to leave PM Boyko Borissov’s coalition government. Analysts saw in these events a potential push towards a grand left-wing coalition which would tackle the dominance of GERB on the political landscape. A couple of months later Former energy minister Roumen Ovcharov and businessman Georgi Gergov in a cordial conversation during the Bulgarian these expectations would seem ill-founded. Socialist Party’s congress which elected Kornelia Ninova as the new leader of the party. The business lobbies in BSP united behind her Photo by Julia Lazarova HOPES FOR UNITY figure among the left-wing parties. He took a for President. Mr Kalfin had already run against At first, though, there seemed to be substance staunch stance against the government policy incumbent president Rossen Plevneliev and behind this prognosis. After both leaders visited to invite NATO to conduct air-policing of the lost by a margin of just 5% in the run-off of Moscow and attended Vladimir Putin’s United Bulgarian skies instead of using solely the the 2011 elections. The reason for Mrs. Ninova’s Russia party conference, Mrs. Ninova invited Mr country’s own outdated Air Force and seemed move remains largely obscure but it shows Parvanov to talks for a joint nomination for the to be a “tough guy” who would make PM Boyko that the left remains focused mostly on itself upcoming presidential elections in November. Borissov himself stand for president. The left- and too preoccupied with its internal rivalries Another renegade Socialist-turned-corruption- wing parties saw this option as an opportunity and personal vendettas to build a coherent fighter joined the talks - , to stir disarray in the governing centre-right opposition to the GERB-dominated government. leader of Movement 21 (D21). Although D21 coalition and take advantage of the changes in Mr Parvanov’s aim was to join hands with BSP and ABV have limited electoral support (Mrs. the balance of power that would ensue from the and present ABV as an equal partner, despite Doncheva’s party didn’t pass the 4% threshold to abandonment of the prime minister’s post by the lack of electoral weight. Mrs. Ninova wanted enter parliament in 2014 and only received 1.9% Mr Borissov. to prevent this, as she saw Mr Parvanov’s move of the vote, whereas Mr Parvanov’s ABV won only as a prelude to an attempt for a takeover by the 4.15%, compared to BSP’s 15.4%), their leader are INTERNAL BICKERING ex-chairman. By uniting the core of BSP around both considered charismatic by the left-leaning The joint efforts of the left-wing parties hit Mr Radev, Mrs. Ninova hoped to make ABV electorate and are able to scrape votes off the rock bottom in August just days after Mr Radev redundant in the long run. mainstream Socialists. was formally endorsed by both BSP and ABV. At Polling results from Alpha Research show The talks between the three parties a surprising press conference BSP’s Mrs. Ninova that having three nominees of left-wing parties yielded mixed results. Mrs. Doncheva pulled announced that the party would withdraw from (Mr Radev, Mr Kalfin and Mrs. Doncheva) will out quickly, arguing that BSP only wanted her the negotiations with ABV and she wouldn’t muster the votes of the core electorate of those blessing for the presidential candidate they allow Mr Parvanov to “twist her arms” and Mr parties, but it may also split the left-wing vote. planned to put forward - the ex-commander Radev became the formal nominee of BSP. After This, in turn, would decrease the chances of any of the Bulgarian Air Force Gen. Roumen Radev. Mr Parvanov’s ABV party recovered from the of the three candidates to make it to the second Mr Radev, a US-educated apolitically-looking shock, it nominated former labor minister in round of the elections. officer was seen as the perfect balancing Borissov’s government and MEP Ivaylo Kalfin *Martin Dimitrov is reporter with Capital КQUARTERLY 9

PLAYERS TO WATCH// KORNELIA NINOVA, THE NEW HOPE OF THE POLITICAL LEFT

BSP ELECTED AN ENERGETIC, YET HECTIC LEADER WHO HOPES TO REVITALIZE THE PARTY AND MAKE IT AN ALTERNATIVE TO GERB.

“I won’t disappoint you, I won’t peddling, yet all charges were dropped let you down! Together we will due to lack of evidence. However, the three unite the party behind the of them lost their public positions. Mrs. left-wing idea and make it the Ninova could have easily claimed to have I force for change in Bulgaria,” been one of the first fighters against the Kornelia Ninova, the newly elected state capture model, personified by Mr leader of the Bulgarian Socialist Party, Peevski, that toppled the government of declared in front of the delegates at PM Plamen Oresharski in 2014, if it wasn’t the National Palace of Culture in Sofia, for her vote in support of the appointment the traditional conference venue of the of Mr Peevski as chief of the state security party, in early May. Her victory over the agency. incumbent chairman Mihail Mikov came Mrs. Ninova issued mixed signals in as a surprise to many, as it seemed that the first few months as party chief. In the Mr Mikov had managed to take hold of first days after her election she wore the the party apparatus in the two years St. George’s ribbon (the Russian symbol of since becoming leader of the party. An victory in WWII which became a popular old-fashioned Socialist, who was too busy sign of the pro-Kremlin forces that took pounding neoliberalism in his speeches over Crimea and the east of Ukraine in in parliament to have the time to oppose 2014) at a ceremony commemorating some of the most controversial policies the capture of Nazi Germany’s Reichstag of Mr Borissov’s second government, Mr by the Red Army in 1945. She also posed Mikov was ousted by the joint effort of for a photo in front of a statue of Todor all business lobbies within the party. Zhivkov, the communist-era Bulgarian Mrs. Ninova, on the other hand, dictator. These moves were aimed at the seemed much more modern, assertive hard-line BSP electorate, yet they did and outspoken, a force for good in the little to make disenchanted voters believe Socialist party that could both bring the Socialist party is modernizing itself. back the alienated hard-line electorate Under Mrs. Ninova BSP began to use much lost after the appointment of business more vocal criticism and hostile rhetoric mogul as chief of the state against GERB, yet rarely in a constructive security agency in 2013 and open the party manner. The legislation proposals that to voters tired of the dominance of GERB. BSP put forward were mostly related ideas Mrs. Ninova started her career as an for increased state interference in the economist in two state-owned companies economy rather than the much-needed that were privatized during her tenure. She judicial, education and financial reforms. then became a shareholder in one of them. Mrs. Ninova tried to outmaneuver the Mrs. Ninova rose through the ranks of BPS alternative left-wing parties by initiating during the government of Sergei Stanishev talks for a joint presidential candidate (2005-2009) when she was appointed (Gen. Roumen Radev, an ex-commander deputy economy and energy minister of the Air Force) and then emancipating under Roumen Ovcharov, as well as board him from those parties. By putting Mr director of then state-owned Bulgartabac Radev forward she aimed to please the tobacco giant. The latter position put her in Western embassies in Sofia, who see him the sight of Delyan Peevski, who was then as a successful NATO general, as well as trying to take over the tobacco company. Russia, as Mr Radev embraced the agenda The prosecution investigated her, Mr of the left with regard to large-scale energy Peevski and Mr Ovcharov of influence projects. 10 KQ POLITICS

UNCERTAIN FUTURE FOR THE REFORMIST BLOC THE FIVE (DIS)UNITED PARTIES FIGHT TO SURVIVE AMIDST INTERNAL BICKERING AND BORISSOV’S ATTEMPTS TO USE THEM AS A BUFFER

MARTIN DIMITROV*

We have white smoke”, said Ivan Ivanov from the Bulgarian Agrarian National Union (BZNS), W one of the five political parties that make up the right-wing Reformist Bloc (RB), when he emerged from the meeting of the Executive Council of the bloc at the beginning of September. The reference to papal election meant that the coalition had finally decided on joint nominees for president (Traycho Traikov, former minister of economy and energy in the first GERB government) and for vice president (Sabi Savev, a retired Maj Gen). But the papal metaphor also signaled the difficulty with which the decision was taken. A couple of hours later the leader of the Union of Democratic Forces (SDS) and Minister of PM Boyko Borissov (in the center) doesn’t speak to Radan Kanev (on the right), one of the RB leaders. The other key fi gure in Economy disputed the RB - (on the left), grudgingly stays in the government Photo by Julia Lazarova finality of the decision in an interview for the newspaper 24 Hours. Although Mr Lukarski clear that the RB and their efforts would THE DILEMMAS OF A DISUNITED retracted his words later and stood behind remain nothing but a facade for GERB’s BLOC Mr Traikov’s nomination, the episode showed continuous resistance to reform. The The events surrounding the judicial reform the disunity that has reigned within the dominant party in the government coalition in December 2015 dispelled the image of unity. Reformist Bloc ever since it joined the coalition continued to form floating majorities based Since then RB has rarely acted as an entity – Mr government led by Boyko Borissov in 2014. on the specific interests of both the governing Kanev and ten other members of parliament and opposition parties that allowed it to pass mostly act as opposition, while the rest of the RB THE ORIGINS OF THE controversial bills or block any legislation MPs back GERB’s majority. The bloc almost failed REFORMISTS that would destabilize the status quo. to nominate a presidential candidate and some The RB, a coalition of five center-right For example, GERB gained BSP’s support of its members like Mr Loukarski, who is close to parties, was formed in 2014, as the government to take down the main pillars of judicial Mr Borissov, played against such nomination. of Prime Minister Plamen Oresharski was reform proposed by the RB-backed Justice It is clear that the small member parties of crumbling and the protest movement of 2013 Minister Hristo Ivanov in December 2015. the bloc won’t have enough electoral support to had accumulated social and political energy for The undermining of judicial reform made Mr get back into parliament if the RB disintegrates systemic reform. The RB mustered this energy Ivanov resign and some observers expected before the next elections. On the other hand, the and entered parliament on a platform of anti- that the RB would pull out of the government fact that some of them – Mr Nenchev’s BZNS, corruption action and reform of key sectors - coalition. Only a few of the RB MPs, led by the Mrs. Kuneva’s DBG and Mr Loukarski’s SDS - healthcare, education, defense, foreign affairs, Democrats for Strong Bulgaria’s (DSB) leader are willing to cede ground to GERB in its efforts economy and most importantly - the highly Radan Kanev withdrew their support for to scale down any attempts for actual reforms centralized and non-transparent judiciary. the government. The rest of the key figures make morally illegitimate the very existence of They joined the broad and colorful center-left- - Meglena Kuneva, leader of the Movement the bloc as a united, reformist entity. The RB right government coalition led by Mr Borissov Bulgaria of the Citizens, DBG, (at the time supporters are already voting with their feet, and were granted the corresponding key Deputy-Prime Minister), with recent polls showing decline in support for ministries, as well as the position of Deputy- (Healthcare Minister and Mr Kanev’s deputy the bloc to the levels of the far-right nationalists. PM for the ex-EU Commissioner Meglena in DSB), and (Defense Radan Kanev’s efforts to brighten up the civic Kuneva, one of the leaders of the bloc. Minister and leader of BZNS) remained loyal spirit that was initially at the RB’s core seem to However, in a few months’ time it became to Mr Borissov. bear no fruit so far. КQUARTERLY 11

HUSH-HUSH POLITICS// WHAT ARE THE CHANCES FOR A SNAP VOTE? RUMORS SPREAD THAT EARLY ELECTIONS WILL BE CALLED IN MARCH NEXT YEAR

With the presidential GOVERNEMENT APPROVАL RATING elections drawing closer, rumors of possible early Boyko Borissov's Plamen Oresharski's Boyko Borissov's 60 parliamentary elections cabinet (2009) cabinet cabinet (2014) W increase by the hour. Political parties battle for the media spotlight 50 and spreading such rumors offers an easy path to draw attention. The Bulgarian Socialist 40 Party (BSP) and the Movement for Rights and Freedoms (MRF) have already urged the Prime 30 Minister to resign following the unsuccessful bid of Bulgarian EU Commissioner Kristalina Georgieva to become the next UN Secretary 20 General. PM Boyko Borissov himself gave an indication that he might call a snap vote if 10 the GERB’s candidate for president, Tsetska Tsacheva, is not leading in the first round of 0 November elections. There is even a conspiracy VI.12 IX.12 II.13 VI.13 XI.13 II.14 VI.14 XI.14 II.15 VI.15 XI.15 II.16 VI.16 theory that GERB has deliberately chosen the Positive Neither positive, nor negative Negative Source:Alpha Research, June 2016 least popular candidate in their ranks. Data of Alpha Research polling agency shows that Mrs. Tsacheva’s approval rating is half that of Sofia Mayor Yordanka Fandakova, whose possible nomination was discussed in all seriousness. A loss for GERB’s candidate will give the Socialist Party a president and in turn they will support the government, the conspiracy theory goes. In addition, the presidential elections will show that GERB’s partner in the government coalition, the Reformist Bloc, PM'S APPROVАL RATING has no popular support, the supporters of this scenario claim. This outcome will give Mr Boyko Borissov Plamen Oresharski Boyko Borissov Borissov a motive to get rid of the RB and one 60 2009 2013 2014 more reason to embrace a coalition with BSP. The Prime Minister already threatened the 50 RB ministers in the cabinet with expulsion from the government in a recent row over the 40 Election codex. A hypothetical grand coalition between 30 GERB and BSP will be a game changer, but not necessarily a good one. In theory, in the current ruling coalition setting, GERB’s most populist 20 instincts are restrained by the Reformist Bloc - a motley crew of right-wing parties who 10 claim to pursue a reformist agenda. If GERB and BSP join forces, it is quite possible that 0 they will try to outdo each other’s rhetoric on VI.12 IX.12 II.13 VI.13 XI.13 II.14 VI.14 XI.14 II.15 VI.15 XI.15 II.16 VI.16 immigration issues, EU-bashing, finding new Positive Neither positive, nor negative Negative Source:Alpha Research, June 2016 ways to please Russia and investing > 12 12 KQ POLITICS

NEWS BRIEF// BORDERS/ Oct 2016/ PM Boyko Borissov ordered Pursuit of real judiciary reform, interior minister Rumyana in order to guarantee justice for all 51.7% Bachvarova to urgently hire 1,000 ex-police officers to join border police force and EU funds absorption 45.1% strengthen the perimeter along the border with Turkey. Over the past few Increase in the pre-hospital care funds 43.6% months many vigilante groups, mainly consisting of former Exploring for oil and gas in the Black Sea which, if conscripts, police and army 37.6% officers, have been conducting successful, could bring energy independence for Bulgaria civil arrests and pushbacks of irregular migrants attempting Highway and road construction 35.2% to cross the Bulgarian border.

BORDERS/ Oct 2016/ The The fight against smuggling 34.9% new European border and coastguard agency was launched in Bulgaria. The The fence on the Bulgarian-Turkish border 30.8% successor to Frontex has an extended mandate to deport people who were not granted Repairing and weatherization 30% refugee or humanitarian status, of old buildings with public money monitor the performance of border control agencies and The introduction of compulsory voting 24.3% dispatch some of its own pool of 1500 troops to zones under high migrat ory pressure. The restrictions on voting outside of Bulgaria 23%

AIR FORCES/ Sep 2016/ A Source:Alpha Research, June 2016 squadron of US Air Force F-15 fighter jets joined the Bulgarian Air Force in > 11 taxpayers’ money in grandiose, yet the MRF with its traditionally strong ethnic the first week-long NATO futile projects. Given the increased migratory vote is losing traction with its supporters. air-policing exercise in pressure, the government formula will Despite the flurry of conspiracy theories, Bulgaria. Other allies have certainly include a “national salvation” badge when rumors of snap elections in Bulgaria also been invited to take and one more reason for populist policies. become this pervasive, it usually means they part in such joint exercises An alternative theory predicts that are unfounded. Even in 2013 and 2014, when intended to compensate for Boyko Borissov will call snap elections the previous government of Boyko Borissov the dwindling engine capacity regardless of the result of the upcoming and the government of his successor Plamen of BAF’s Russian-made MiG-29 vote for president, because the government Oresharski faced massive protests and calls jets. is losing steam. GERB’s own commissioned for resignation, the decisions to call early polls show that support for Boyko Borissov is elections came as a surprise. MILITARY/ June 2016/ falling and he would have been unable to win There are many signals that GERB is Parliament passed a bill the presidential elections in the first round. unwilling to take risks. For example, only two that allocates 2.3 bln levs Borissov didn’t want to risk a second round months ago PM Borissov declared that he (1.15 bln euro) for upgrading and decided not to run. But a weak result for would call early parliamentary elections if his the military hardware GERB in the presidential elections will give him party loses the president’s post. Few weeks of the armed forces by reason to ask the voters for a new mandate. before the elections he changed his mind. The 2022. Half of the sum would Parliamentary elections have different prospect of defeat (no matter how distant) be spent to buy new frigates dynamics in comparison to the presidential made him state that a snap vote will be called and a squadron of multitask elections: they tend to split the vote and if only if GERB loses the elections in the first fighter jets that will replace fewer parties pass the 4% threshold required round (statistically impossible). the aging MiG-29 planes which to enter parliament, then the biggest party But the snap elections rumors persist. rely on Russian spare parts for will gain the most. This seems quite a possible So don’t be surprised if the election season maintenance. scenario given that last polls show that even continues for a while longer. КQUARTERLY 13

Despite the low number of asylum seekers and economic migrants in Bulgaria, аnti-immigrant marches took place in several Bulgarian towns. The protestors were a relatively small number of extreme nationalists but anti-immigrant feelings have started to shape the political debate in Bulgaria Photo by Georgy Kozhuharov

THE REFUGEE I have stressed a number of the Greek-Macedonian-Bulgarian border times that I don’t want to simply in March, when there were fears that the ISSUE MAY MAKE hear talk about solidarity with refugees stuck at ’s Idomeni could Bulgaria. There are a Bulgarian head towards Bulgaria. The Bulgarian BULGARIA I and a European flag flying on our PM was the first European leader to visit MORE side of the border. It’s high time for both of post-coup Turkey in an attempt to make them to earn their place”, Prime Minister sure that Ankara won’t “release a flood XENOPHOBIC Boyko Borissov said in his unique edifying of invaders”, as the majority of Bulgarian tone, standing with his back towards the press and many politicians refer to the three-meter high razor wire fence on the migrants and asylum seekers. BULGARIA border with Turkey. To his right stood Victor Orban, his Hungarian counterpart MIGRATION BECOMES CONTINUES and a fellow strongman, showing support A CENTERPIECE OF THE TO RECEIVE for what has become Mr Borissov’s PRESIDENTIAL RACE obsessive cause in the past few months - Despite the low number of asylum REFUGEES stopping the refugee influx into Bulgaria. seekers and economic migrants in Mr Borisov has highlighted this Bulgaria panic is growing. Anti-immigrant DESPITE THE EU- goal on different occasions and hasn’t marches took place in several Bulgarian TURKEY DEAL spared both domestic and EU resources towns. The protestors were a relatively to achieve it. Over 146 million leva (€73 small number of extreme nationalists mln) have been invested since 2013 in but anti-immigrant feelings have started the border fence, called euphemistically to shape the political debate in Bulgaria. “a protective engineering facility”. Army One of the main pivots of the presidential MARTIN DIMITROV* detachments were briefly deployed near race is the immigration issue, > 14 14 KQ POLITICS

HOW THE BALKAN REFUGEE ROUTE CLOSED The March Turkish-EU deal restrained the refugee flow to Bulgaria and Greece, but numbers were dwindling even before that Arrivals on Greek islands Arrivals in Macedonia from Greece Arrivals in from Bulgaria and Macedonia Arrivals in Bulgaria 19/2/2016 29/11/2015 Macedonia seals 17/10/2015 First EU-Turkish its border with Hungary sets up discussion of the Greece. The September 2015 special border controls refugee deal Idolomeni crisis – on its border 20/1/2016 The Chancellors of commences with Slovenia Austria announces it will Austria and Germany 12000 limit the number of announce that people allowed to claim migrants stuck in 16/2/2016 asylum in the country to 11000 Hungary will be up to 37,500 per year Austria restricts the allowed through number of allowed daily 10000 Austria on their way 11/2/2016 arrivals to up to 80 per to the Western states NATO launches an day. Special border 9000 operation against controls are set up on its human traffickers borders with Slovenia 8000 in the Aegean sea and Italy

7000

в брой хора 6000

5000

4000

3000

2000

1000 1/10/2015 31/10/2015 30/11/2015 30/12/2015 29/1/2016

> 13 with the government focusing its were 80-95 percent over their maximum 2014-2020. efforts and scarce funds more and more on capacity and the refugee camps of the State border fences and expulsions instead on Agency for Refugees (SAR) are catching A CHANGING PROFILE the much needed education, judicial and up and are slowly getting packed to their The profile of migrants is also changing. police reforms. Mr Borissov is adopting anti- maximum. According to internal ministry While last year more than two-thirds of European rhetoric (sometimes not without statistics, there are more than 6500 people the irregular migrants caught crossing reason) which will play into the hands of EU- in all of the camps today - a number, unseen Bulgarian borders were from Syria or Iraq, bashers – an attitude that is not very helpful since the winter of 2013. this year Syrians are only 10% of asylum for a country that benefits so much from its seekers. More and more young men from membership in the EU. CURIOUSLY, REFUGEES ARE Afghanistan enter Bulgaria illegally, as they But the biggest danger of all is the PERCEIVED TODAY BY BULGAR- are the most desperate to cross the country change in mood towards foreigners. IANS AS A BIGGER THREAT THAN on their way to Western Europe undetected. Generally, Bulgaria is a hospitable place for ETHNIC CONFLICTS. This is a markedly different trend compared foreign nationals who rarely see some of the to Greece, where the UNHCR still registers xenophobic stereotypes existing in other The increased border control in Serbia more Syrians attempting to cross the Aegean countries. This has helped a lot in attracting and the deployment of Frontex officers than any other nationality. foreign direct investments as well as many alongside their Bulgarian counterparts puts Less and less Syrians are trying to Europeans, Russians and Ukrainians who pressure on human traffickers, creating cross Bulgaria due to the strengthening of found their second of third home in Bulgaria. a bottleneck for migrants who would the guarded perimeter around the border Reversing this positive attitude may have otherwise continue their journey to the and the reported violent pushbacks and devastating results for a country that wealthier countries of Western Europe. harassment by Bulgarian border police over actually badly needs immigrants to counter In order to fight this, government pressed the past three years. The first instance of an an exodus of its own nationals for economic its case for creating three additional crisis asylum seeker killed within the borders of reasons and a drop in population numbers. centers, each able to accept 1,000 people, Europe was registered in Bulgaria in October Bulgaria is number one in depopulation in with the money that Bulgaria received from 2015 when a young Aghan man was shot dead Eastern Europe, a recent UN study found. the EU to protect the bloc’s external border. by a police officer near the town of Sredets, The prime minister managed to draw the near the border with Turkey. Many people RISING NUMBERS attention of European leaders and almost were found frozen to death on the borders Despite the EU-Turkey deal and the drop instantly got €160 million emergency with Serbia and Turkey as well. in the number of detained irregular migrants funding from the EU security and migration The same bad reputation haunts the to a three-year low, Bulgarian refugee camps funds, on top of the €72.7 million from the Bulgarian asylum system. In August, the and the temporary police detention centers EU’s Internal Security Fund (ISF), which country drew fire from the UN rights chief, are crammed. In August the police facilities Bulgaria stands to receive during the period Zeid Ra’ad Al Hussein, who sees ‘worrying КQUARTERLY 15

9/3/2016 Macedonia formally shuts Although Macedonia does not accept migrants since the 8th of down its border for 15/7/2016 migrants. Donald Tusk, March, hundreds of people president of the European continue crossing into Serbia in the Turkey coup attempt, followed Council, announces that following months. Most probably by heightening of tensions Balkan refugee route is they come from Bulgaria and this is between Istanbul and Brussels. permanently closed why Belgrade strengthened its Despite the cooling down of 20/3/2016 border controls with Bulgaria in the EU-Turkey relationship, no The Turkey-EU deal August 13/6/2016 substantial increase in the 8/3/2016 enters in force Greece opens 4 number of migrant arrivals in “hotspots” to accommo- Europe has occurred since Slovenia announces it date the 50 000+ then. will only accept refugees migrants that had who plan to seek asylum remained on its territory in the country. Serbia after the Turkey-EU deal and Croatia strengthen their border controls

28/2/2016 29/3/2016 28/4/2016 28/5/2016 27/6/2016 27/7/2016

signs’ in Bulgarian regulations for detention with Turkey, (both housing refugee camps) domestic issue. of migrants. staged protests against the facilities - and Another troubling phenomenon occurred Moreover, the number of rejected or the people inside them. The rallies were on the Turkish-Bulgarian border. It all began terminated asylum procedures increased, endorsed by VMRO leaders - the member of when bTV news channel reported the especially the latter. More than 10,000 people the story of Dinko Valev, a self-styled vigilante gave up their applications to be granted a and the presidential candidate Krasimir migrant-hunter who caught several refugees humanitarian or refugee status last year, Karakachanov - and were attended not by single-handedly while “taking a drive” on his yet just 644 have been deported since the local members of the public but by party ATV along the border fence south of Yambol. beginning of 2016. The majority of the rest affiliates and motor gang members. His actions polarized public opinion in tried to leave the country. Bulgaria and shed light on several vigilante- PUBLIC FEARS AND style groups which also patrolled the border. POLITICAL SCAREMONGERING VIGILANTES Yet, outside of human rights groups and Anti-immigration rhetoric has The fear of refugees has infiltrated the some liberal circles Mr Valev was mostly become norm in the language of almost all public realm as well. According to Bulgarian liked for his actions. Even Prime Minister mainstream political parties in Bulgaria. pollster Alpha Research, 43% of Bulgarians Boyko Borissov thanked these patrols in a Although the president has very limited see the government handling of the refugee statement: “I personally talked with them options to influence the refugee issue, crisis as too soft and will prefer a tougher [the voluntary patrols] and I thank them. I am the idea that migration poses a threat is response. What is more, most respondents sending the director of Border Police to meet being used by the majority of presidential in Alpha Research’s latest survey see and coordinate with them.” Some of these candidates including the Socialist nominee, international terrorism and refugees as one groups act like paramilitary organizations Roumen Radev, centrist Tatyana Doncheva, of the biggest international and domestic proper, imitating military hierarchy and who rides on an anti-corruption platform threats to the state. recruiting their members among former and even the Reformist Bloc’s Traycho Curiously, refugees are perceived today Army members. They also boast a vividly pro- Traykov, who has said that Bulgaria shouldn’t as a bigger threat than ethnic conflicts. Russian, anti-Muslim rhetoric in their online become Europe’s “immigrant ghetto”. While 34% of Bulgarians saw ethnic conflicts social media channels, which put them on Rhetoric isn’t the only tool used by as a threat to peace and just 8% pointed to the radar of Bulgarian security services. politicians, though. In recent weeks, immigration last year, results shifted in 2016. A bigger threat to the migrants crossing nationalist party VMRO, part of the so-called Only 18% of respondents now believe that into Bulgaria, though, is the complete lack Patriotic Front, which is the unofficial partner a conflict between Bulgarians and ethnic of basic social or integrational support. of the governing GERB, used the refugee card minority groups can threaten the country’s Without such support, no border fence will in another way. The local branches of VMRO existence, while 40% think that refugees may help the country avoid the segregation of in the Ovcha Kupel neighbourhood of Sofia do harm - almost as much as the share of yet another minority, just like its own Roma and in the town of Harmanli, near the border people who see crime as the most significant population. 16 KQ ECONOMY/ENERGY organizes:

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general partners: partners: КQUARTERLYКQUARTERLY 17 FOREIGN POLICY КQUARTERLY 17 ALWAYS WITH EUROPE, NEVER AGAINST RUSSIA DEVELOPMENTS TO FOLLOW IS BULGARIA The relations with Turkey ap- pear hijacked by the refugee crisis. While Boyko Borissov’s UNDER BOYKO government was not eager to develop Bulgarian-Turkish rela- tions before the attempted coup BORISSOV STILL A in July 2016, because of displea- sure with the Turkish politics, now, when Turkish government VIABLE WESTERN is becoming more and more authoritarian, Sofi a is ready to hand over without any due PARTNER? OR IS IT process members of the Turkish opposition who sought asylum in Bulgaria.

RUSSIA’S TROJAN Aft er an unsuccessful bid to become UN Secretary General, Bulgarian EU Commissioner HORSE IN THE EU? Kristalina Georgieva an- nounced she will leave her current post to become a CEO of the World Bank, starting January 2017. It has been rumored that outgoing Bulgarian president can be her successor in the Commis- sion, but the PM Boyko Borissov fl atly rejected such a possibility. The name of the new commis- sioner will be known in a few days and his/her CV will deter- mine whether Bulgaria will keep a good profi le in the European Commission.

The preparations for the EU Council chairmanship. Bul- garia needs to set its priorities “Will Bulgaria move closer to Russia?”, BBC HARDtalk asked the straight for the six months in Bulgarian Foreign minister in interview on 25th of 2018 when it will be at the helm of the European Union. A set of October. The question is not surprising, because relations with well defi ned goals will reduce Russia are standard issue for many media outlets which still refer the bureaucratic burden over to the stereotype of Bulgaria being the staunchest ally of USSR. But the Bulgarian administration and can show for once that Sofi a in the last year Bulgarian government’s attitude towards Moscow can do better than simply absorb showed that the question might still hold some merit. EU funds. 18 KQ FOREIGN POLICY

Anti-government protestors in Sofi a making fun with Mr Borissov policies towards Russia Photo by George Kozhuharov

ALWAYS WITH “Will Bulgaria move closer including property, the Russian have you round to Russia?”, BBC HARDtalk the neck”, HARDtalk’s Stephen Sackur pressed EUROPE, NEVER asked the Bulgarian Mr Mitov. The Bulgarian Foreign Minister’s Foreign Minister Daniel answer was not reassuring: “That is somewhat of AGAINST RUSSIA W Mitov in an interview on a fair assessment…” 25th of October. The question is not surprising, because relations with Russia are a standard SO IS THERE A RUSSIAN U-TURN? IS BULGARIA issue for many media outlets which still refer The short answer is no, albeit with a lot to the stereotype describing of Bulgaria as the of nuances. Despite the public declarations in UNDER BOYKO staunchest ally of the USSR. But the Bulgarian defiance of the Western policy towards Russia, BORISSOV STILL A government’s attitude towards Moscow over the Bulgarian foreign policy is in line with the the past year shows that it might still hold EU positions. Sofia has never proposed that VIABLE WESTERN some merit. sanctions against Moscow be lifted. In October Mr PARTNER? OR IS IT Whitin just a couple of months Prime Minister Borissov reluctantly said he would support new Boyko Borrisov declared that he doesn’t want to sanctions against Russia, because of Moscow’s RUSSIA’S TROJAN wage war against Russia (although nobody has military operation in the Syrian city of Aleppo urged him) and his party’s presidential candidate that has contributed to the humanitarian crisis HORSE IN THE EU? Tsetska Tsatcheva stated that the Western there. Even though he vehemently disapproved sanctions against Russia should be lifted. What of the creation of a permanent joint naval force is more, the second GERB government has been of the Black Sea NATO members, the government trying to please Russia on every energy project didn’t change its position on sending troops in that Moscow has promoted in Bulgaria. This turn Romania to boost the Alliance’s presence near comes at a time when concerns over Russia’s the Russian borders. footprint in Bulgaria are growing concern. The There are three things to consider. First, Mr Kremlin Playbook, a research project by the two Borissov genuinely believes that Russia is not think-tanks - Bulgarian CSD and the US CSIS, only meddling in Bulgarian politics, but that the concludes that „Russian economic influence in mass protest that led to his resignation in 2013 Bulgaria has often been seen as bordering on were instigated by Moscow, which was unhappy state capture”. „When it comes to the vast wealth with his energy policies. There is no definite that the Russians are holding inside your country proof of Kremlin’s interference, but this remains КQUARTERLY 19

a recurrent motive in the PM’s speeches. shareholder and then the construction of Belene meant to improve relations with Russia. One Secondly, Mr Borissov is famous for his drive Nuclear Power Plant, a 10 bln euro project, which explanation for this move is that Sofia hopes to be a balancer – both when it comes to domestic was supposed to be built by Russia’s Rosatom. Rosatom will in return help selling the equipment and international politics. A habit of balancing Mr Borissov has always supportded the third for the nuclear power plant which will reduce is not a bad trait, unless applied to things that Russian project – the South Stream gas pipeline the Bulgarian losses. The other, more sisinster can’t be balanced, like foreign agression. Or if it intended to bypass Ukraine. In September 2014, explanation is that Mr Borissov is paying for other substitutes decision-making. after the project had been officially frozen in promises he had made to Moscow - promises, he One of the quintessential elements of Boyko Bulgaria for three monts, and a month before can’t meet now. Borissov’s international relations thinking the much-anticipated return of Mr Borissov’s It is important to realize that Mr Borissov’s can be deduced from a statement on July 2015 GERB party to power, the Russian company paid foreign policy in general and attitude towards about the government’s position on the EU an obnoxious sum of money for a land plot on Russia in particular are based on his domestic sanctions against Russia: “I pray to God that the Bulgarian coastline where South Stream agenda and are highly opportunistic. He finds the big chiefs agree among themselves faster, was planned to come ashore. The plot was sold little problem in changing his position on many so that the sanctions are lifted” - an attitude by a Bulgarian bank known for its political issues overnight. The messages he delivers to that could easily be called defeatist. Mr Borissov connections. his partners in Brussels and the ones that make also doesn’t shy away from calling the GERB- The cancelation of South Stream will have it into his monthly appearances on Bulgaria’s nominated President Rossen Plevneliev a “hawk” negative consequences for Bulgaria. Russia’s morning TV talk-shows may have nothing to do for his clear positions vis-a-vis Russia. Gazprom will almost certainly build an alternative with each other. Yet the lack of pressure from pipeline that goes through Turkey bypassing the opposition that flirts with Mr Borissov give BILLIONS AT STAKE Bulgaria (see more in the Energy section of KQ). him very few reasons to remain coherent in Most probably the conciliatory tone can An international arbitrage awarded Rosatom his stances. This, however, might change, as be attributed to Russia’s part in Bulgaria’s 630 mln euro for the canceled NPP Belene Washingtion and Berlin, which now calls most of massive problems in the energy sector. The first project, a very substantial sum for Bulgaria (see the shots in the EU, are both getting nervous. government of Mr Borissov canceled two major more in the Energy section of KQ). The Bulgarian *The headline alludes to “Always with Germany, projects – the planned Burgas-Alexandroupili government decided not to appeal the decision never against Russia”, a statement atrubutted to oil pipeline with Russian Transneft as a main and to pay the money, a step that obviously is the Bulgarian King Boris III (1894-1943) 20 KQ FOREIGN POLICY

BULGARIA UNLAWFULLY DOES BULGARIA EXPELS ALLEGED FETO HAVE A POST- MEMBERS TO TURKEY BREXIT ECONOMIC A BUSINESSMAN, A TEACHER AND POLICY? A JOURNALIST WERE AMONGST THE DEPORTED “GÜLENISTS” ATTEMPTS TO LURE COMPANIES

ALEXANDER TERZIEV* WILLING TO LEAVE THE UK n August 10, 2016, Bulgaria less than a day - a period of time that had expelled the 43-year-old hardly given him the opportunity to seek IS NOT A TOP Turkish citizen Abdullah legal aid. PRIORITY FOR Büyük. At the time he was O under investigation in FEAR OF A REFUGEE EXODUS SOFIA Turkey for suspected association with the Prime Minister appeared “terrorist organization” of the self-exiled on TV but he neither confirmed nor denied cleric Fethullah Gülen, or FETO, as the whether Bulgarian authorities had been Turkish authorities call it. Thе expulsion under pressure by Turkey, yet he hinted MILA CHERNEVA* happened despite the fact that in March at a connection between the ongoing the same year two successive Bulgarian migration crisis and the deportation of s the results from the Brexit court instances parried Turkey’s demand Büyük. Since the failed coup attempt in referendum gloomed for his extradition. In early August, Turkey in July, Mr Borrisov has publicly over the British economy, however, the Turkish Foreign Minister expressed his concerns about a possible other EU member states announced to the crowd during a political mass exodus of refugees from Turkey to A realized that they could rally in Ankara: “There is a traitor in Bulgaria. actually benefit from Britain’s decision to Bulgaria who fled there before [the coup This is not the only case when Bulgaria leave the EU. While Frankfurt, Dublin and attempt]. We will demand that they hand unlawfully expels suspected members Paris were said to be competitors for the him over to us,” as quoted by the Bulgarian of the FETO movement to Turkey. In late role of Europe’s new financial capital, the public radio BNR. October, the Bulgarian authorities expelled Hungarian Minister of Economy said that seven people to Turkey after arresting Hungary would love to become home to any A VERY SWIFT DUE PROCESS them while trying to leave the country at other businesses leaving Britain. It was only after the Turkish media the bridge over the Danube near the city of Meanwhile, Bulgaria is still struggling reported that Büyük had been turned over Ruse. These included a teacher, a journalist to create a coherent post-Brexit policy and by “agents of the Bulgarian authorities” and civilians who were linked to a protest to point out how it can benefit from Brexit to Turkey at Kapıkule border crossing, twitter profile. They were deported within in economic terms. Bulgaria may not be the that the Bulgarian Interior Ministry less than 24 hours, while Syrians who were perfect destination for London’s enormous announced that it was “deporting” Büyük detained together with the seven Turkish financial sector, but it has its plus sides. on the grounds of “not leaving the country citizens only received light sentences and Low corporate tax and cheap labor in until the expiry of the permitted period of could apply for a refugee status. Under comparison to other European countries are stay”. Bulgarian law, such a quick procedure some of the country’s attractive features. “I want to firmly declare that there can be invoked only if the person being In municipalities with unemployment 25% is no agreement between Turkey and expelled poses a direct threat to the above the country’s average, companies Bulgaria [for the extradition of Büyük]”, the country’s security. Evidence of the latter may be granted up to 100% exemption Deputy Chief Secretary of the Bulgarian has not been presented by the authorities from corporate tax. DHR International, a Interior Ministry, Georgi Arabadzhiev, yet. What is more, the deported Turkish recruitment company, claims that skilled said at a press briefing. However, he could citizens claimed before Turkish media labor is 40% cheaper in Eastern Europe not explain why the Turkish media had that they applied for political asylum but than in Britain, The Guardian reports. already been notified about the turning their applications were not considered over of Büyük at Kapıkule by the Bulgarian at all, which is a direct violation of the INVESTMENT-FRIENDLY authorities. Bulgarian legislation. SECTORS During the briefing it emerged that *Alexander Terziev Invest Bulgaria Agency, the country’s the FETO supporter had been expelled in is reporter with Capital investment promotion body, has drafted КQUARTERLY 21 a strategy which comprises 14 sectors BULGARIAN RACE FOR TOP UN JOB estimated as investment-friendly. Some of them are defined as ’traditionally strong for Bulgaria, including manufacturing of computers and HOW BULGARIA MISSED A FAIRLY GOOD communication technology, electronic CHANCE FOR A BULGARIAN TO HEAD and optical products, machinery, textiles and clothing, chemical products THE UN and food. Car manufacturers are looking to move their R&D teams to Eastern Europe, according to a recent article in The Guardian. IBA also says that the car industry is a potential target for investments. Among the strategic industries newly added to IBA’s list are the IT sector, nanotechnology, pharmacy, biotechnology and outsourcing. Several countries are targeted for a more intensive search of investments in these areas and the United Kingdom is among them. However, it is clear that no thorough analysis has been made and there is a lot more to learn about what Bulgaria can offer and whom to offer it to. According to Borislav Stefanov, an ex-chief of IBA and a businessman, the strategy needs to be more specific and based on real analysis. “The help from people with local knowledge is important as well”, he adds.

A BETTER PLAN IS NEEDED On the other hand, low corporate tax and low salary expenses may not be enough to counter the impact of corruption and the flawed judicial system. Compared to other Eastern European countries, however, Bulgaria can be competitive after all. “We are friendlier than Hungary and Poland”, Mr Stefanov says. The political situation in Hungary and Poland creates a somewhat unpredictable climate for potential investors. Bulgaria still needs Kristalina Georgieva to improve its infrastructure, though important steps have been made in this direction with large investments in Probably you haven’t heard the Secretary General of the United Nations. highways. phrase which is quite familiar The process officially began in 2014 with Besides, it is still unknown what kind to everyone in Bulgaria: “A great the nomination of UNESCO Director General of Brexit will be negotiated. Meanwhile, job, yet a Bulgarian one”. Eighty Irina Bokova for the post. There was a strong the Bulgarian institutions have to start P years ago, Ivan Hadjiiski, a international push for the Sеcretary General working on identifying investors, to go sociologist, tried to define it as „an endeavour to be a woman, both from various NGOs and beyond the most famous household that was not thought through or was ill- from some of the permanent members of the names, and to establish networks that considered, ill-started, without leadership Security Council, such as the UK and the US. might help the country’s economy or botched leadership, which inevitably ends It was also widely believed that now it is the benefit from the United Kingdom’s in scandal, only to serve as a disgraceful turn of Eastern Europe, which has never had a decision to leave the EU. registration of its rueful characters”. Secretary General. *Mila Cherneva Nowadays the phrase perfectly fits to Irina Bokova checked these two boxes is reporter with Capital describe the Bulgarian run for the post of perfectly. Or too perfectly. She is > 22 22 KQ FOREIGN POLICY

> 21 the highest-ranking woman from Eastern THE GAME WAS OVER BEFORE IT Europe in the UN system and for seven years at the BEGAN helm of UNESCO she has built a wide network of In these circumstances the second Boyko contacts. Although Mrs Bokova was definitely part Borissov Government, set up in October 2014, had to of the modern pro-European wing of her Socialist act swiftly, because with any day past, the change of party, she has never been very popular in Bulgaria Mrs Bokova would have been made more difficult. and her career outside politics was a matter of good But Mr Borissov waited, and then waited some more. connections and skillful positioning: ambassador to Probably the Prime Minister didn’t regard the UN run France and then Director General of UNESCO. And her as important, or he didn’t want to spoil its relations past is a heavy load. She comes from a high-ranking with his coalition partner ABV, which were totally communist family, graduated from Moscow State behind Mrs Bokova. University of International Relations – a hatchery for And this is how Bulgaria missed its chance to loyal nomenclature in the former socialist countries, field another candidate who might have had better and then had a career quite untypical for a woman in chances of getting the top UN job. Bulgaria: she was a diplomat, a job as a rule denied The Bulgarian EU Commissioner Kristalina to ordinary women, because it was considered an Georgieva began her campaign to become UN exclusively male profession. These attributes plus Secretary General in 2014, partly because she was the fact that she and Russian Foreign Minister not sure that the then ruling Socialist government Sergei Lavrov know each other from the times they will support her for a second tenure at the European were both students in Moscow, made her the natural Commission. Working under the radar and mostly choice for Russia. without the support of the Bulgarian government she collected impressive support. In early 2016, RUSSIA’S FAVORITE media reported that on the sidelines of a G-8 Having a UN Secretary General from Eastern summit German Chancellor Angela Merkel had Europe was very important for Russia, because tried to convince Russian President Vladimir Putin “Eastern Europe” was actually meant to denote the to support Mrs Georgieva. Later, as she became countries of the former Soviet bloc. In those times Bulgaria’s official candidate, several East European any person from Eastern Europe at the helm of the countries backed her nomination. Mrs Georgieva UN would have meant direct control from Moscow, had a good track record with Russia as well, having something that has never happened in the history of served as World Bank’s representative in Moscow for the world organization. Which made Russia play all number of years. its cards, sometimes openly canvassing votes for Mrs When Mr Borrisov finally made his choice in Bokova. January 2016, it was actually too late for both Mrs In order to secure Mrs Bokova nomination, the Bokova and Mrs Georgieva. Mr Borissov decided outgoing Socialist-led government appointed her to support Mrs Bokova, claiming pressure from his in June 2014 without any consultations, neither in coalition partners, left-wing ABV party. This might Bulgaria, nor with the countries from the UN Security have been true, but they left the government two Council – it simply didn’t have the time to do it. Had months later anyway. The reason for Mr Borissov’s that government tried to hold talks about Mrs Bokova’s decision was his unwillingness to take risks while candidature, it would have dawned upon them that she can easily blame other for Mrs Bokova failure. Mrs will face staunch opposition from the UK, as well as Bokova was now the official Bulgarian candidate, but mild – at this point - displeasure from the US. Basically, because she was imposed, she never received the Irina Bokova candidature was dead on arrival. It didn’t wholehearted support of the government. help when she appeared in Moscow in May 2015 (when In September, when the straw voting in the very few Western leaders came) to celebrate 70 years Security Council began, it was obvious that Mrs of the end of the World War Two, decorated with St. Bokova can’t pass the test – she had two firm NOs George ribbon, a symbol of the Russian annexation of from permanent members of the Security Council. the Crimean peninsula and the Kremlin support for Again, instead of swift reaction, the PM waited and the pro-Russian separatists in Ukraine. at the end budged under pressure from various The early choice, however, made it difficult for politicians – from the European Commission the next government to replace Mrs Bokova as the President Jean-Claude Juncker to Chancellor Merkel. Bulgarian candidate for UN chief. Аny substitution When Mrs Georgieva finally became Bulgaria’s official would have been regarded by Moscow as an anti- candidate, Russia realized that Mrs Bokova is a losing Russian move and would have triggered a veto on a horse and switched its support to Antonio Guterres, new candidate. In addition, at the end of 2015 Russia the former Portuguese PM, whom Moscow had firmly warned that it will not support any official who voted rejected for several months. to impose sanctions on Russia, which basically meant At the end, a fairly good chance for a Bulgarian to every EU foreign minister or EU Commissioner, a signal lead the UN was wasted without a proper fight, and to one of Mrs Bokova prospective competitors. left too many scars on the characters involved. КQUARTERLYКQUARTERLY 23 ECONOMY/MACROECONOMY KQUATERLY 23

IS BULGARIA ENTERING A DEBT SPIRAL? SINCE 2008 BULGARIAN GOVERNMENTS DEVELOPMENTS HAVE FAILED TO TO FOLLOW Record government spending planned for 2017. The good RESTRAIN THE news that 2016’s budged will be balanced has been overshad- owed by the expected 1 bln euro GROWING FISCAL spending increase for 2017. Its manly due to EU funds which will fl ood Bulgaria next year. DEFICIT, WHICH However, the spending boost will come handy for the govern- ment, in the eve of the next regular national elections that COULD BE A LONG- are scheduled for 2018.

The introduction of common TERM PROBLEM corporate tax base. The pro- posed new regime by the Euro- pean Commission for EU-wide FOR THE BUDGET taxation of corporate profi ts is not favourable for Bulgaria, be- cause it will signifi cantly change the current tax system which provides low tax, but wider tax- able income base.

Social security payments in- crease. As of 2017 the employers will pay additional 0.6pp social security contributions for their workers. Employees themselves Rumors of high level bribery, somewhat justifi ed allegations of will pay 0.4pp higher social se- corporate raidership, murky middlemen and a fugitive banker are curity contributions. As of 2018 there will be another increase of all intertwined in the takeover of the Bulgarian Telecommunica- the social security contributions tions Company (BTC). with 1 pp. 24 KQ MACROECONOMY

IS BULGARIA ENTERING A DEBT SPIRAL? SINCE 2008 BULGARIAN GOVERNMENTS HAVE FAILED TO RESTRAIN THE GROWING FISCAL DEFICIT, WHICH COULD BE A LONG-TERM PROBLEM FOR THE BUDGET

YORDAN YORDANOV*

As Kenneth Rogoff, an BULGARIAN GOVERNMENT DEBT STRUCTURE economics professor at Harvard defines it, the debt 16 000 EUR million 80.00% spiral has four phases: rising A debt, rising cost of borrowings, 14 000 70.00% spending cuts and/or tax increases, slowing 12 000 60.00% economic growth and once again rising debt …. Is Bulgaria already dancing this fatal dance? 10 000 50.00% Let us look at each of the four phases to try to find the answer. 8 000 40.00%

RISING DEBT 6 000 30.00% Over the past 17 years government debt has dramatically declined. It reached its minimum 4 000 20.00% in absolute dimension in 2009 at EUR 4,828 2 000 10.00% million, while the minimum in relative terms was registered in 2008 when the government debt 0 0.00% stood at 13.30% of GDP. After 2009 government 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 May 2016 debt has grown at an average annual rate of 17% on year-to-year basis. That is quite disturbing External government debt Domestic government debt Total government debt/GDP Source:Bulgarian National Bank and in fact this is the reason to ask whether the country goes into a debt spiral. Driven by permanent budget deficits from An additional risk factor is the growth of The debt spiral starts with uncontrollably 2009 on, government debt has more than contingent liabilities related to state-owned rising debt, which inevitably erodes the doubled as share of GDP between 2009 and enterprises, most notably in energy and confidence of lenders in the government. 2016 from around 13.40% to 29.30%. Even transport. Naturally, in such situation the government though it is still relatively low compared to Another noticeable trend is that the will try to regain the investors’ trust by EU peers, this ratio will inevitably increase government has been steadily changing the attempting to cut its budget deficit. Raising in the coming years if fiscal consolidation ratio between domestic and external borrowing. taxes or closing the most significant tax proves difficult to implement or in case further From 1999 to 2009 domestic debt was on loopholes may be adequate measures, but funding is needed by the financial sector or average some 20% of the total government cutting budget spending is a quite more some sectors of the real economy. At the same borrowing, increasing from 9% to 32%, while efficient way of reducing the deficit. Normally time the financing needs of the government are in the period 2010-2016 it is on average 37%, none of these measures contributes to the constantly increasing, making deficit reduction but declining from 45% to 26%. This probably popularity of the government. More likely, а difficult task. Furthermore, the growing indicates that when debt is rising, the lending a government introducing such fiscal consolidation policies will see its popularity size of contingent liabilities related to state- capacity of the domestic market (especially in significantly weakened. On top of that, in the owned enterprises, most notably in energy local currency) is easily exhausted. The figures short term fiscal consolidation is a kind of a and transportation sector, are definitely a risk once again demonstrate the fact that being a poison pill for economic growth. It will slow factor for the national economy. small open economy, Bulgaria strongly depends down growth if such exists, but occasionally Debt servicing has not been significantly on international capital markets and IFIs. it even may trigger recession. Inevitably, the affected because of the favorable financing economic slowdown (or recession) translates conditions created by the low-interest-rate RISING COST OF BORROWING into less budget revenues and ultimately environment in the last few years. However, The next three charts illustrate the bigger deficit and rising debt. the situation can change in the medium term. changes in the cost of borrowing for the КQUARTERLY 25

LONG-TERM INTEREST RATE BULGARIAN GOVERNMENT’S INTEREST EXPENDITURE 10Y BOND YIELD 8.00% 16.0% (DENOMINATED IN EURO) 14.0% 6.00% 12.0% 8 4.00% 7 10.0% 6 2.00% 8.0% 5 6.0% 0.00% 4 I.14I.12I.10I.08I.06I.04 I.16 3 4.0% 2 Source:BNB 1 2.0% 0 0.0% III.15III.14III.13III.12III.11III.10III.09III.08 III.16 1998 2000 2002 2004 2006 2008 2010 2012 2014

Source:Bloomberg Interest Expenditure/Tax Revenues Interest Expenditure/Budget Expenditure Source:Ministry of Finance

Bulgarian government. The long-term interest Regarding the measurement of investors’ SPENDING CUTS AND/OR rate for convergence assessment purposes perception of Bulgaria’s financial stability, to TAX INCREASES (see chart 2) is determined on the basis of some extent sterilized from the effect of low Interest expenditure of the government the secondary market yield to maturity of a interest rates, we can look at the CDS spreads budget is still rather moderate. Therefore, long-term bond (benchmark) issued by the of the country and its direct EU peers in the it does not motivate the government to cut Ministry of Finance and denominated in next chart. spending or increase taxes (Chart 4 chart national currency. Clearly, with the exception of Croatia, illustrates the evolution of interest expenditure It has been influenced over the past five Hungary, Slovakia, Czech Republic, Poland for the period 1999-2015). years by the ever increasing (lately even and even Romania “outperform” Bulgaria after The next chart (Chart 5) shows the excessive) liquidity on the domestic banking mid-2014 when the fourth largest Bulgarian government spending and respectively the market, not so much by concerns of increasing bank collapsed, increasing concerns about budget revenues and budget deficit/surplus government debt. Simply local banks and the soundness and resilience of the country’s for the period 1999-2015. pension funds are hungry for government banking sector. Investors’ concerns about The chart clearly visualizes the lack of bonds due to lack of alternatives similar in risk Bulgaria are still not so much driven by the specific effort by the government to achieve profile. level of public debt but by the sectors which fiscal consolidation after 2008. Fiscal The next chart (chart 3) shows the yield of need structural reforms like energy and consolidation means a robust policy aimed at the benchmark 10-year Bulgarian government transport. There are sizable liabilities of state- reducing budget deficit and debt accumulation. bond denominated in euro. It shows the owned companies in these sectors, which may The most efficient way of doing this is to optimize positive effect of the global low-interest-rate produce one-off financing needs that will have and eventually cut government spending. environment in the last few years. be covered by the government. Several consecutive governments have > 26

GOVERNMENT SPENDING (BY FUNCTION), BUDGET REVENUES AND BUDGET DEFICIT/SURPLUS

% of GDP 40.0%

35.0%

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

-5.0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

GENERAL GOVERNMENT ADMINISTRATION DEFENCE AND SECURITY EDUCATION OTHER EXPENSES HEALTH SOCIAL SECURITY, SUPPORT AND CARE HOUSING, PUBLIC WORKS, BUDGET REVENUES RECREATION, CULTURE, RELIGIOUS ACTIVITIES ECONOMIC ACTIVITIES AND SERVICES UTILITIES AND ENVIRONMENT BUDGET DEFICIT(-)/SURPLUS(+) Source:Ministry of Fin 26 KQ MACROECONOMY

Bulgaria’s main economic indicators

Output 14 Q3 14 Q4 15 Q1 15 Q2 15 Q3 15 Q4 16 Q1 16 Q2 Gross domestic product 1.6 2.1 2.9 2.9 3.1 3.0 2.9 3.0 Investment 14 Q3 14 Q4 15 Q1 15 Q2 15 Q3 15 Q4 16 Q1 16 Q2 Capacity utilization in industry 73.4 76.1 74.3 74.3 72.5 75.2 72.4 n/a Labour market 14 Q3 14 Q4 15 Q1 15 Q2 15 Q3 15 Q4 16 Q1 16 Q2 Unemployment rate 10.8 10.6 10.6 9.9 8.3 7.9 8.6 8.0 Labor costs 5.4 6.6 6.7 8.1 7.2 5.6 7.7 7.3 International transactions Nov.'15 Dec.'15 Jan.'16 Febr.'16 March'16 April'16 May'16 June'16 Current account -281.1 -161.3 173.0 -5.2 144.2 -93.0 n/a Direct investment (net) -26.4 133.2 -88.0 -174.9 -93.8 -55.2 n/a Prices Nov.'15 Dec.'15 Jan.'16 Febr.'16 March'16 April'16 May'16 June'16 HICP -0.9 -0.9 -0.4 -1.0 -1.9 -2.5 -2.5 -1.9 Monetary and financial indicators Nov.'15 Dec.'15 Jan.'16 Febr.'16 March'16 April'16 May'16 June'16 Credit to Non-financial Corporations and -0.2 -1.6 -1.9 -1.9 -2.3 -1.9 -1.1 n/a Households and NPISHs Note: yoy % ch. - growth rate compared to the same period of the previous year. * The key indicators are elaborated in accordance with the euro zone indicators system. The analytical document is quarterly updated. Source of the data are the NSI statistical surveys and BNB data. ** The publication from BNB of data compiled in accordance with the Sixth Edition of the IMF's Balance of Payments and International Investment Position Manual starts on 17 April 2015 (BPM6). Information on the methodology and data on BNB indicators can be found on the website of the BNB, Statistics section - http://www.bnb.bg/Statistics/StMethodologicalInstructions/index.htm .

> 25 missed the opportunity to introduce with peer economies, Bulgaria has significantly GDP PER CAPITA AND TOTAL much-needed reforms in the education system, underperformed since the outbreak of the GDP RELATIVE TO PEERS* healthcare, the social security system and the crisis in terms of both GDP growth and GDP (INCLUDING BULGARIA) labor market. per capita (Graph 6). Reforms are also crucially needed in the The economic growth post crisis has been 4.20% 76.00% financial sector, mainly regarding the quality export-driven, which is rather healthy, but 74.00% of supervision of the banks and pension funds. there are several structural constraints for the 4.10% The financial sector is still perceived as a country to reveal its potential. 72.00% Among the most important ones are the 4.00% potential source of risks for the overall stability 70.00% of the country. business and administrative environment 3.90% 68.00% The state-owned companies in the energy and the related problems with the rule of sector (and to a lesser extent in the transport law, the human capital i.e. the labour market 3.80% 66.00% sector) have generated substantial amount (rapid population ageing, substantial outward 64.00% of liabilities, which may require a shift in migration, skills shortages and mismatches), 3.70% government spending or may lead to an the education, social security and healthcare 62.00% increase in budget deficit. systems, the level of corporate debt. 3.60% 60.00% The government has slightly improved An advisable fiscal consolidation may 3.50% 58.00% the efficiency of tax collection but still there lower economic growth in the short term, but 2000 200620042002 20102008 2012 2014 are significant opportunities for better tax if it comes as a result of much needed reforms Bulgarian GDP in PPS Bulgarian GDP in PPS revenues, as the effort of the government it will help the country in the long term. The per capita as percentige per capita as percentige has so far been rather opportunistic, but not level of government debt is not threatening of its peers (rhs) of its peers (lhs) systematic. economic growth in the short term, but the *BG;CZ;EE;LV;LT;HU;PL;RO;SI;SK In general, there is no severe necessity for lack of adequate reforms jeopardises the mid- Source:Eurostat imminent spending cuts but implementing to long-term perspectives of Bulgaria. immediate and radical reforms is a necessity. To sum it up, Bulgaria is clearly not yet in a In its last country report on Bulgaria debt spiral, but the lack of structural reforms the European Commission makes the will take the country there sooner rather than following comment about the country’s later. economic growth: The recovery has not so *Yordan Yordanov is a Managing Partner far been strong enough to support economic of Optimum Consilium OOD, an independent convergence with regional peers. Compared investment and financial advisory company. КQUARTERLY 27

organizes

11th Annual Investment Summit DEALS & DEALMAKERS 29 NOVEMBER 2016, SOFIA HOTEL BALKAN

MAIN TOPICS

Economic outlook for the region Investing after BREXIT What were the drivers of M&A in Bulgaria in 2016 and what to expect in 2017 Private Equity in SEE – where are the opportunities and what are the challenges for international investors Alternative Financing Fresh Investment Opportunities. Sectors poised to growth

More information and registration: capital.bg/conference

general partners:

partners: 28 KQ MACROECONOMY

ANALYSIS// MINISTRY OF FINANCE IS JOB CREATION DYING OUT? PREDICTS MODERATE GROWTH IN THE NEXT THE NUMBER OF NEW JOBS THREE YEARS IN THE SECOND QUARTER OF 2016 HITS A 2-YEAR LOW THE ECONOMY WILL SUFFER FROM DESISLAVA NIKOLOVA* DEPRESSED EXTERNAL DEMAND BUT DOMESTIC ven though the number of employees keeps rising, the first half of 2016 shows a slowdown of job creation. The number CONSUMPTION WILL of new employees in the second quarter of 2016 is 22 200, which is the lowest since the beginning of 2014 when the SUPPORT GROWTH E post-crisis recovery of the labor market kicked off. In the first quarter of 2016, the number of new employees was not much higher either - 25 300. In fact, the first half of 2016 is the worst half year in terms of job creation since the upturn of the labor market two years ago. eak economic growth, increased The bad news is that some of the sectors, which have been at the consumption, almost frozen exports, more forefront of job creation, are already showing a decline of employment. government contracts. In brief, these are Among these is the IT industry[1], which surprised on the negative side in the expectations of the Bulgarian Ministry the second quarter with a loss of 4.1 thousand jobs against a year earlier. W of Finance in its autumn macroeconomic The manufacturing industry is also faring disappointingly. A number forecast for the next three years. The autumn forecast is of branches of the manufacturing industry have attracted substantial crucial, because it is used in the preparation of the national investment and expanded rapidly after the crisis. Among these is the budget for 2017. The ministry predicts a real 2.5% growth of production of auto parts, machinery and equipment, appliances, optics, GDP for next year and slight acceleration over the next two – pharmaceutics, plastics, etc. In the second quarter of 2016, however, up to 2.7%. The Bulgarian treasury is a bit more conservative employment in the wider manufacturing industry also fell for the first than the IMF, which predicts 3% growth for 2016 and 2.8% for time in quite a while, by 5.5 thousand people in yoy terms. next year. Bulgarian economy could expect a depressed export *Desislava Nikolova, Chief Economist, Institute for Market Economics growth due to a projected slowdown in developed economies, according to the ministry. As a result, export companies may [1] The data quoted here refer to the sector of “Creating and distribution of have fewer orders and the wages of their workers will grow information, creative products; long-distance communication”. Yet, the IT industry more slowly. The national statistical office recently recorded (and mostly software development), which is a part of this wider branch, has been a decline in Bulgarian exports but it was limited mainly to the main driver of job creation in the sector over the past couple of years. countries outside the EU. Bulgaria’s economic growth in 2017 will come primarily from increased consumption. The assumption is based on NUMBER OF EMPLOYEES, YOY CHANGE an expected increase of disposable income on the back of a (thousand people) rise in the regulated minimum wage and salary growth in the private sector which already experiences labor shortages. 80 EU funds will be the second driver of Bulgaria’s economic growth as new EU financed projects will kick off and public 60 spending will increase substantially. Increased domestic consumption will be reflected in a 40 rise in imports and by 2019 net exports will contribute only 0.2 pp to the GDP growth. 20 The unemployment rate is expected to reach an average

Q1 2012 Q1 of 7.3% next year. Increased retirement age will prevent a Q2 2012 Q2 2012 Q3 2013 Q1 2013 Q2 2013 Q3 2013 Q4 Q4 2012 0 faster decline of the jobless rate. "In 2017 the rate of change of income growth will slow to -20 5.4%, but will remain high as a result of acceleration of the Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 actual performance, positive change in prices and demand -40 for labor in the country," the Ministry of Finance report says. By the end of 2019 productivity is expected to grow by around -60 Source:National Statistical Institute 2% a year. КQUARTERLY 29

PLAYERS TO WATCH// GAME OF REGULATORS THE APPOINTMENT OF NEW CHAIRPERSONS OF THE TWO OF THE MAIN MARKET WATCHDOGS STILL DOESN’T MEET THE STANDARDS FOR TRANSPARENT AND COMPETENT SELECTION

n 2016, the chairpersons of two major regulators, the Commission for Protection of Competition (CPC) and the Financial Supervision Commission (FSC), had to be replaced. Both institutions I were thought to be inefficient or biased in their work. CPC is famous for its feeble anti-monopoly investigations of the fuel market or the cartelization of the media market which happened under its watchful eye. The FSC is responsible to a large extent for the market manipulations on the stock exchange conducted by Corporate Commercial Bank, which played a significant role in the bank’s demise in 2014. The financial regulator was unaware of the otherwise obvious fact that some pension funds invested the bulk of their assets in companies that were connected Karina Karaivanova Julia Nenkova with them. Both regulators were guilty of superficial supervisory work, making rules and regulations look empty and easily evadable. had one advantage in comparison with the choice of a new chairperson of Unfortunately, the successors are not much different or less politically the competition regulator – almost everyone chosen to succeed Stoyan connected as one might hope. Mavrodiev, FSC chairman between 2010 and 2016, would have been better than him. Mavrodiev had been famous for his personal vendettas THE NEW GUARDIANS OF COMPETITION with investors (most notably with the publisher of Capital and Dnevnik The CPC had had the same chairperson - Petko Nikolov, for thirteen newspapers, Ivo Prokopiev), unmotivated decisions to prevent some years. In his tenure the competition regulator failed to distinguish itself companies’ IPOs and scandals inside the commission that led to the with bold actions to attack the monopolies on the market, taking aim at resignation of several of its members. Most recently, the procedure for low-ball cases that rarely had an impact on consumers or companies which conducting a stress test of the pension funds and insurance companies suffered from anti-competitive practices. There are reasonable criticisms resulted in an uneven distribution of the inspected companies among that CPC sometimes acted in favor of certain businesses. For example, auditors and odd clusters of companies with Bulgarian owners in small most cases that related to the notorious Bulgarian businessman and and little known local audit firms. politician Delyan Peevski were handled only by one of the seven members The FSC chairman was supposed to leave his post on June 18th, of the CPC and there were many instances that point to decisions being when his mandate ended, but the procedure to find a replacement was taken in his favor. In the spring of 2016, Prime Minister Boyko Borissov only launched on July 10th. The delay most probably was caused by cancelled the initial procedure for replacing Nikolov. At that point Rossen considerations of possible extension of Mr Mavrodiev’s term of office. Zhelyazkov, a previous chief secretary of the Council of Ministers, was the Only one person was proposed for the post by the end of the nomination of GERB, the political party led by Mr Borissov. His nomination, nomination period, Karina Karaivanova, and she was a GERB nomination. however, was criticized for being politically aligned with those in power. Mrs Karaivanova was Deputy Minister of Finance with a long career in Eventually, it turned out that the new nominee, Julia Nenkova, was no government departments dealing with EU funds, but with no experience less politically connected to GERB and was chosen as she was the only in the investment market. candidate proposed for the post. The final voting took place on July 28th and Mrs Karaivanova was The new chairperson, Julia Nenkova, had been Deputy Mayor of Sofia appointed with 139 votes “for” and 24 votes “against”, with those against Municipality, in charge of Legality, Coordination and Control department, being from opposition Bulgarian Socialist Party and the center-right since 2006 (when Mr Borissov became mayor of the Bulgarian capital, Reformist Bloc, the junior partner in Mr Borissov’s coalition government. Sofia). Her son is a member of parliament from GERB. According to representatives of the Bulgarian Socialist Party, the election The other members of the commission were predictable choices procedure was tainted because the deadlines for nominations and sending based on secret prior arrangements among the parties in parliament. The questions to the candidates were between three and five days - a time only candidate with strong support from the civil society and a proven period too short to do that. public track record, Georgi Ganev, an economist and program director of It is too early to judge the performance of the newly elected chairpersons the Center for Liberal Strategies think tank, did not receive the support of the CPC and FSC, but one of the first actions of Mrs Karaivanova was to needed to be elected. Overall, the parliamentary vote on the new CPC terminate the contract of an auditor firm that had apparently misled the seemed pretty much preconcerted. regulator about its capabilities. In addition, the firm was conspicuously chosen by most of the Bulgarian-owned pension funds and insurance A NEW START FOR THE FINANCIAL SUPERVISION? companies to run their balance sheets and asset quality reviews. This is a The selection of a new head of the Financial Supervision Commission good start for Mrs. Karaivanova. 30 KQ MACROECONOMY

HOW UBER LOST ITS BATTLE WITH BULGARIAN REGULATORS BULGARIAN TAXI COMPANIES WON THE FIGHT AGAINST THE MARKET- DISRUPTIVE COMPETITION

ber is one of those companies that stir service the company provides. The Bulgarian legislation controversies in every country in which bans the offering of services for transporting clients they decide to make business. Bulgaria for money without the required registrations, Sofia is one of them: after Uber launched Municipality argued. One of the leading taxi companies in U services in the country in December 2014, Sofia, “OK Supertrans”, also filed a complaint, claiming that the Commission for Protection of Competition initiated Uber was its direct competitor but did not comply with legal action against the company. In September 2015, the the law and introduced dumping practices into the taxi Supreme Administrative Court decided that Uber should no transport market. longer operate in Bulgaria, as the company failed to comply Up to that point, the registered cars were almost 400, with taxi transport regulations requiring owners to paint according to Uber’s own data. their cars yellow, to pay taxes in Bulgaria, and to declare In July 2015, the CPC ruled that Uber was involved in their tariffs. ‘unfair competition’ by offering unregulated taxi services The Uber case in Bulgaria is not unique, as other and should cease the practice immediately. The commission countries have opposed its business model as well. However, fined Uber and Rasier Operations, both registered in the it illustrates quite well the unified and strong resistance Netherlands, with 50,000 levs each for unfair competition that regulators often build around incumbents without and with a further 50,000 levs for not providing financial taking into account any argument the disruptive industries information. In September 2015, the Supreme Administrative bring in their defense. Court upheld the CPC decision. In the spring of 2015, Sofia Municipality sent a letter Uber has its conflicts with local regulators all over to the CPC just five days after Uber started operating in Europe and beyond. It had to suspend its services in China, Bulgaria. It expressed concerns about the safety of the Spain and in big cities like Brussels and Amsterdam.

BULGARIA SETS UP E-GOVERNMENT AGENCY TO PUSH STANDARDIZATION OF E-SERVICES THE GOVERNMENT CHOOSES THE OPEN SOURCE APPROACH

ery soon every Bulgarian ministry or digitalization of administrative processes and services. government agency will have to meet The establishment of the E-agency does not mean that specific criteria when creating a register all government websites or software will be modernized or any other digital system: to be open overnight, but it is a significant step forward, marking V source, to have a standard interface, so the launch of specific rules. However, there are two quite that it can be connected to other administrative systems, difficult tasks before the new agency: to change the way and to operate with the system for electronic identification clerks work and to impose control over the IT budgets and of citizens, which is supposed to start working very soon. procurement orders of cabinet ministers who are above it This is one of the main tasks for the newly established in terms of hierarchy. E-government state agency. The new body will be The new agency is expected to start functioning in directly subordinate to the Council of Ministers, which is no less than four months, says Grozdan Karadjov, a MP underlying its importance for the government policy in this from the Reformist Bloc and ex-chair of the transport area. It will control, advise and coordinate the projects for commission in parliament. КQUARTERLYКQUARTERLY 3131 ECONOMY/BUSINESS KQUATERLY 31 THE PHONY BATTLE FOR BTC VTB SELLS BULGARIAN TELECOMS DEVELOPMENTS OPERATOR TO FOLLOW The concession procedure for Sofi a airport will reopen TO…VTB soon. It was blocked by some creditors which argued that the new concessioner might not respect their claims. The gov- ernment expects 550 mln. levs (281 mln.euro) for the 35-years concession.

The government is expected to choose contractor to build a national toll system. The 200 mln levs (102 mln euro) tender has been postponed two times already, because of companies which appealed the procedure in the competition regulator.

By the end of the year the Bul- garian road agency (API) will select builders for three highway sections – two part of the Hemus highway and one part of Struma. The total price of the three lots is expected to be 481 mln levs (246 mln euro). At the beginning of the year government terminated a tender for the construction of a longer stretch of Hemus for 400 mln euro. The stated motive was lack of funds, but the real reason was an attempt to rein in Bulgar- Rumors of high level bribery, somewhat justifi ed allegations of ian oligarchs’ infl uence in con- corporate raidership, murky middlemen and a fugitive banker are struction public procurement contracts. The outcome of the all intertwined in the takeover of the Bulgarian Telecommunica- new tenders will show whether tions Company (BTC). this goal is achieved. 32 KQ ECONOMY/BUSINESS

DEAL IN FOCUS// THE PHONY BTC OWNERSHIP STRUCTURE

BATTLE THE OWNERSHIP FOR BTC SCHEME BEFORE Empreno Ventures Limited 100% (Now Dmitry Kosarev, 100% previously Tsvetan Vassilev)

LIC Telecommuni- Crusher Former creditors 33.33% cations S.a.r.l 43.34% Investment 22.34% led by Michael Tannenbaum

Rumors of high level bribery, somewhat justified allegations Pledged V Telecom Investment S.C.A 100% of corporate raidership, murky as middlemen and a fugitive collateral R banker are all intertwined in the for VTB’s takeover of the Bulgarian Telecommunications V2 Investment Directors: 150 mln Company (BTC). Europim Conselux 100% euro The Russian creditor of the biggest credit telecoms company in Bulgaria, Vneshtorgbank (VTB), sold it at the end of August 2016 InterV Investment following convoluted negotiations and legal Directors: Conselux 100% actions that lasted more than a year. The Maze Delta Capital new owner, Spas Roussev, is a politically well Europim Investment connected Bulgarian businessman active in the IT sector, real estate and hotel industry. The change of BTC’s ownership is the Viva Telecom Bulgaria biggest business acquisition in Bulgaria in 2016. Directors: The company, operating under the brand name 100% Svetlana Bahchevanova, Milen Velchev, Vivacom, dominates the telecoms market with Zlatozar Surlekov, Eleonora Sarbova annual revenue of 442 mln. euro in 2015. But the deal is even more intriguing, because BTC was the crown jewel in the business and media empire of Tsvetan Vassilev, one of the main players in the shadowy political and business life in Bulgaria. Vassilev’s Corporate Comercial Bank (CCB), which went bankrupt in 2014, was VTB ENTERS BTC VTB DID NOT HAVE THE at the core of a complex and obscure network BTC, owned by a consortium of financial INCENTIVE TO FIND THE BEST of companies, most of them acquired with the investors, ran into serious trouble serving its OFFER, BUT RATHER TO CUT tacit assistance of his political friends. Now, 1.7 billion euro debt back in 2010. After two the fight for the assets of Mr. Vassilev’s empire years of negotiations, creditors, including the THE COMPANY’S PRICE AT points to re-distribution of power behind the Royal Bank of Scotland and Deutsche Bank, THE EXPENSE OF THE OTHER curtains of the official political show. approved the sale of the company in August EXISTING SHAREHOLDERS BTC turned out to be a battlefield for 2012. The winning bidder was Viva Telecom AND MAKE A BIGGER PROFIT competing Russian investors. To get their Bulgaria, a wholly owned subsidiary of LATER hands on the company, they seek local political Luxembourg-registered InterV Investments. support, exemplifying the Russian business The biggest shareholder was Tsvetan Vassilev, penetration into the Bulgarian political followed by VTB and a group of BTC creditors. system. The deal also shows how unattractive InterV Investments took a 150 mln euro loan Bulgaria has become for strategic investors from nine banks to finance its outstanding in sectors soaked with political intrigues. debt in November 2013 as part of the deal. КQUARTERLY 33

OWNERSHIP AFTER THE DEAL

An unnamed 20% Delta Capital Viva Edge Former Spas related company minus Investments Telecom 15% creditors Roussev 46% owned by VTB one 19% (Milen and Limited + one share George Velchevs, led by share Krassimir Katev) Michael 240 Tannenbaum mln euro Sold by the bank in an auction in credit November 2015 for 330 mln euro. The money goes to VTB, CCB and the Viva Telecom (Luxembourg) shareholders. Directors appointed on 30 August 2016 : Franz Hoerhager (Mezzanine 100% Spas Roussev – shares Class A Investments) – shares Class D Boyan Ivanovich (VTB) – Bruno Ducharme (expert in shares Class B the telecoms business)

InterV Investment Directors appointed on 30 August 2016: 100% James Body, Keimpe Reitsma, Christian Tailleur - Directors in Totalserve Bulgarian Telecommunications Company Viva Telecom Bulgaria Directors appointed on 31 August 2016: 100% 100% Spas Roussev, Jivko Nikolov Source: Trade registries

The loan was later consolidated by VTB. and a consortium between Greek Olympia company owned by former Bulgarian finance The VTB loan matured on 22 May 2015, of the founder of Germanos retail chain, minister Milen Velchev, with 19%. The other at the time when Vassilev’s CCB – Bulgaria’s Panos Germanos, and the American hedge shares went to smaller BTC creditors. fourth-largest lender - had already gone fund Third Point. Some investors like Mark bankrupt. The result of the payment default Schneider, former Chief Executive Officer CHEAP VALUATION was another debt crisis for BTC. VTB decided at Liberty Global Inc, together with US The auction raised a number of questions. to foreclose on the loan collateral - 100% of equity investment fund CVC, were, however, VTB acted as both a seller and a buyer in InterV Investment shares. discouraged to show up, as there was no the transaction. Not only did VTB and Delta, option to conduct due diligence and ensure which without any doubt are related, hold HASTY SALE enough transparency. the majority stake, but VTB also provided the The next stage came in November On 20 November 2015, Viva Telecom bulk of financing to Spas Roussev through a 2015. VTB held a hastily prepared auction (Luxembourg) won the auction with a bid 240 million euro credit facility for the buyer, in London which failed to attract many of 330 million euro. The consortium owners Viva Telecom. In this arrangement VTB did investors. In fact, there were only two - are Spas Roussev with 46%, VTB with 20% not have the incentive to find the best offer, Spas Roussev, in partnership with VTB, minus 1 vote and Delta Capital Investments, a but rather to cut the company’s price > 34 34 KQ ECONOMY/BUSINESS

THE DEAL SHOWS > 33 at the expense of the other existing Mr Malofeev’s stooges in the hope that he HOW UNATTRACTIVE shareholders and make a bigger profit later can win over VTB. Mr Malofeev previously BULGARIA HAS BECOME by reselling BTC one more time. Mr Roussev fought a seven-year battle against VTB that looks like the perfect cover for the real deal he finally won in a London court. Later, he FOR STRATEGIC makers. He is very close to Milen Velchev, who settled his arguments with VTB in Russia as INVESTORS IN SECTORS is CEO of VTB’s Bulgarian arm, VTB Capital well. Russian newspaper Kommersant wrote SOAKED WITH POLITICAL AD. The rumor goes that actually Mr Roussev in 2015 that the Russian bank significantly INTRIGUES. proposed Mr Velchev for finance minister reduced its claims against Mr Malofeev due back in 2001. to his support for the pro-Russian separatist The speculation was partially confirmed movement in Ukraine. by the fact that Schneider’s indicative offer THE BTC DEAL NEEDED was considerably higher. He valued BTC WHO GETS WHAT? AT LEAST A NOD FROM at 830 mln euro, while Spas Roussev’s bid VTB financed the whole operation with THE GOVERNMENT. valued it at 700 mln. euro, when factoring in a 240 mln. euro loan, while consortium THE QUESTION IS WHY the existing debt of the company. members came in with 100 mln euro of their DID IT ALLOW SUCH A own. The deal was made more expensive by TEAM RUSSIA-2 the various fees, commissions and other PROCEDURE TO TAKE The plot was tied even further when a transaction costs. With its participation VTB PLACE AT THE EXPENSE new contender emerged – Dmitry Kosarev. refinanced its non-performing loan to InterV OF THE TAXPAYERS The Russian businessman claims that his Investment, which in the meantime had Empremo Ventures Ltd is the rightful holder swelled to nearly 170 mln. euro. In practice, of Vassilev’s shares in BTC. Mr Kosarev, VTB came in with less than 100 mln euro, and however, allegedly owns just one of InterV was able to acquire a controlling position in Investments’ shareholders, while VTB sold the future resale of BTC. InterV Investments as a whole. In doing so, The bulk of the money paid for BTC, 125 Mr Kosarev claims, VTB had deprived him mln euro, will go to the receivers of the failed of his property. He announced that lawyers CCB. This is the funding the bank lent to representing Empreno, had begun legal Tsvetan Vassilev to acquire his stake in BTC action in London against VTB Capital, the UK in 2012, which is now blocked by the receivers. subsidiary of the Russian bank. He even filed As a result, the shareholders of the telecoms a complaint before the US Office of Foreign operator will receive only 30-40 mln. euro in Assets Control. Mr Kosarev claims, as Mr the best case scenario. VIVACOM’S REVENUE AND PROFIT Vassilev did previously, that he had offered to re-finance the bank loan, but his offer was RUMORS OF CORRUPTION not even considered by VTB. The bank denies The rapid approval of the deal by the Sales that Mr Kosarev delivered real evidence for Bulgarian regulators shows that it met the Profits his claims. local political litmus test. This prompted Kosarev supporters to spread unsubstantiated 2015 RUSSIAN CONNECTIONS rumors in the Russian press that Bulgarian Mr Kosarev has a questionable business Prime Minister Boyko Borissov was allegedly history, including links to the Russian oligarch part of a corruption scheme. Konstantin Malofeev, which he fervently This is probably not true. But the real test 2014 denies. Mr Malofeev was interested in the BTC for the BTC deal significance for the shadowy acquisition, but was unable to take part in it forces of the Bulgarian business and political because of the EU and US sanctions against life is an event that happened a day before 2013 Russia and Russian nationals implicated in the final sale – Spas Roussev became owner supporting the pro-Moscow separatists in of Sofia-based soccer club Levski. In previous Ukraine. Mr Malofeev has never made a secret years most of the soccer club owners in 2012 of his involvement in the Ukrainian conflict. Bulgaria were arranged personally by Prime Before Mr Kosarev appeared, there was Minister Boyko Borissov. another dubious investor who claimed BTC The BTC deal definitely needed at least ownership – the Belgian Pierre Louvrier who a nod from the government. The question 2011 had a long career in Russia and was probably is why then the government allowed such a also connected with Mr Malofeev. procedure to take place at the expense of the The complex structure of the BTC state. The lower-than-expected price for BTC 2010 ownership makes it very difficult to judge who deprives the CCB receivers of tens of millions really controls the shares of the last owner – money, which will ultimately come from the 0 200000 400000 600000 800000 1000000 of the telecoms operator. It is quite possible taxpayers who funded the repayment of the Source:KAPI that they were transferred by Mr Vassilev to debt of the bankrupted bank. КQUARTERLY 35

PLAYERS TO WATCH// SPAS ROUSSEV, THE BUSINESSMAN EVERY BULGARIAN POLITICIAN KNOWS

THE NEW BTC OWNER IS A RARE BREED OF A LOBBYIST WHO HAS BEEN ABLE TO MAINTAIN HIS NETWORK OF CONTACTS FOR MORE THAN 20 YEARS

„There is no Bulgarian politician who move largely regarded as a prerequisite for the would not pick up my call.” The bold telecom deal and a clear sign of political meddling in statement is one of the few public the BTC transaction. disclosures Spas Roussev has ever T made. Roussev, who lives in London, is THE FIRST STEPS frequently named by the Bulgarian media as one of Mr Roussev rarely speaks with the media and the most influential grey eminences, which he refutes he never comments on the origin of his money or with disdain. He prefers to talk about culture and his the early 90s – the chaotic years after the fall of charitable causes. Roussev collects Annie Leibovitz communism when many of today’s well-established (he prefers that the media publish his photo taken business people in Bulgaria made their fortunes. He by the renowned photographer) and the Chinese worked at the Foreign Aid Agency, a government body abstract painter Zeng Fanzhi. in charge of managing foreign aid arriving into the No matter how private Mr. Roussev likes to be, country, and media publications connected him to his name frequently surfaces in relation to scandals the siphoning of funds from the agency. "One of my in Bulgaria. In 2003, a bomb blasted to pieces the biggest faults was that I agreed to go to the agency. I car of Ivan Todorov, a notorious Bulgarian smuggler personally have never been subject to investigation. I nicknamed The Doctor. Mr Todorov survived only have no qualms, I have not done anything wrong," Mr to be murdered in 2006, but in the trunk of the car Roussev said in interview in 2010. In 1991, he moved police found a number of interesting photographs. In to London. one of them, The Doctor was seen playing cards on Few things are known about Mr Roussev’s early an yacht in Monaco with Milen Velchev (then finance business career in London with the exception of his minister), Plamen Petrov (then transport minister) relations with the businessman of Iranian origin and Miroslav Sevlievski (a MP from the then ruling Eskandar Maleki (another art-collector). With Mr party, NDSV). Maleki's support Mr Roussev took part in several Bulgarian privatization deals. He only succeeded THE ‘YACHT SCANDAL’ in privatizing Balkan Holidays tour operator It turned out that the gathering was organized which had an attractive office building in London. by Spas Roussev, who hired the yacht to watch the Mr Roussev and Mr Maleki tried to take part in Formula 1 Monaco Grand Prix. Other people in the the unsuccessful BTC privatization procedure in photo were Petar Petrov - Amigosa, an alleged money 1999, but their offer was not accepted on technical launderer and Lyubomir Minchev, Roussev’s business grounds. Later, Mr Roussev had been always involved partner in Telelink, an IT provider. The so-called Yacht in BTC privatization attempts, but as a consultant Scandal led to the resignation of the Chief Secretary and lobbyist. His Telelink, however, became a major of the Ministry of the Interior Boyko Borissov – the supplier to all telecoms in Bulgaria. current Prime Minister. Borissov claimed police was Mr Roussev came into the spotlight with the being prevented from investigating the connections government of Simeon Saxe-Coburg-Gotha (2001- between business and politics. His resignation was 2005). Mr Roussev was regarded as the ‘godfather’ of not accepted and none of the government ministers all the young Bulgarian professionals who came from in the photo lost their job. the City banks to take ministerial seats in the new Mr Roussev’s main business is Telelink, a company cabinet. One of them was Milen Velchev, who was in with a strong presence in the Bulgarian telecoms the 2003 pictures and now partnered Mr Roussev in market. He is chairman of publishing company the BTC acquisition. Liberis Media Group Bulgaria. More recently, in 2012 Mr Roussev didn’t make significant deals in he bought Radisson hotel in Sofia and took part in the Bulgaria in this period but his Telelink delivered a deal for Hilton-Sofia in 2013. His biggest hit so far is stellar performance, repeatedly winning procurement the acquisition of the Bulgarian Telecommunications deals with the Bulgarian telecoms. Company (see The Phony War for BTC). Mr Roussev Now, 17 years after his first attempt to take control also became owner of soccer club Levski-Sofia, a over BTC, Mr Roussev’s wish may have been fulfilled. 36 KQ ECONOMY/BUSINESS

NEWS BRIEF// INTERNATIONAL INVESTORS FINANCE/ Latvia-based 4finance Holding BUY THREE IT BUSINESSES Acquires TBI Bank Oleg Boyko, another BULGARIAN TECH COMPANIES START TO Russian billionaire, enters the Bulgarian APPEAR REGULARLY ON GLOBAL M&A MAP. market. 4finance Holding, one of the big players in the fast customer credit business Following the successful and widely acclaimed $263 mln acquisition of with presence in 15 countries, acquired TBIF, Bulgarian software company Telerik by the US-ba sed Progress Software the financial unit of Dutch-Israeli group Kardan. in 2014, now it seems that the Bulgarian IT industry has started to TBIF includes Bulgarian TBI bank, the leasing provide such M&A success stories on a regular basis. In the last couple companies TBI Rent in Bulgaria and TBI Leasing of months three companies found new foreign owners, though the IFN in Romania, as well as Romanian fast-credit investment was significantly lower. company TBI Credit IFN. The combined assets UK-based market research agency Future Thinking acquired of TBIF in the two countries total 272 mln. euro. GemSeek Consulting, a Bulgarian data science and analytics market The acquisition price was 69 mln euro. research business for an undisclosed price. The two companies had TBI bank is one of the smallest credit institutions been working together for almost a year prior to the deal. GemSeek in Bulgaria with assets of 255 mln euro but Consulting saw remarkable growth in recent years. Between 2013 and according to Capital’s TOP 10 Banks ranking, 2014 its revenue more than tripled and reached 3 mln euro. In 2014, it is number one in terms of efficiency and GemSeek was distinguished as the most dynamic among small and mid- profitability. Luxembourg-registered 4finance size companies in the IT sector in the Capital Gepard annual ranking. Holding is headquartered in Latvia. The company Bulgarian network services provider and IX operator OM-NIX was is owned by Russian billionaire Oleg Boyko. He bought by Australian network interconnection company Megaport, made his fortune running slot machine halls which also said it signed a purchase agreement for the second largest and now his SMS Finance operates a network of internet exchange in Germany, Peering. The combined acquisition cost ATMs for fast credits. was 3.1 mln euro, Software firm Ideagen bought its Bulgarian re-seller Logen, MANUFACTURING/ KJK Capital invests expanding is direct client base in Eastern Europe. Logen provided the €7 million in Leader 96 The Finnish fund UK company’s specialized audit, resource and risk management product acquires 60% of the growing Bulgarian to clients such as the Bulgarian National Revenue Agency, the Croatian bicycle manufacturer. Finland’s KJK Capital Tax Administration and the Czech National Bank. Fund has acquired 60% of Bulgarian bicycle manufacturer Leader 96 by investing nearly €7 million in the Plovdiv-based factory. The rest of PEEVSKI BUYS HIS PRINTING HOUSE the capital is owned by the company founders. BACK CHEAPLY Leader 96’s sales more than doubled over the THE DEAL EXEMPLIFIES THE EASE WITH past two years, reaching 63.5 million levs (€32.5 WHICH PUBLIC SALES CAN BE MANIPULATED mln.) in 2015, as demand for bicycles increased. Earlier this year, the company opened a new A company associated with Delyan Peevski, a MP from the Movement factory, doubling its annual capacity to over for Rights and Freedoms considered one of the so called oligarchs in 500,000 units. KJK Capital provides financial Bulgaria, has acquired in a public auction the land plot and the buildings services and manages assets worth €450 of IPK Rodina 1 in Sofia, the country’s biggest and most modern printing million. It has already made several minority house. As expected, there was no bidding since the buildings can hardly equity investments in Bulgaria. be used for other purposes. The equipment, which is prohibitively Bicycle production is one of the few fast-growing expensive to be moved out, is being sold in a different auction, making industries in Bulgaria. The country ranks fifth in the whole procedure highly suspicious. Europe with 940,000 bicycles manufactured in The sale price for Pechatnica Sofia, located near Sofia airport, is 4.4 2015. Leader 96 is the first Bulgarian company in million levs (2.25 mln euro), nearly one-seventh of the value of the credit the sector to attract a foreign investor. from Corporate Commercial Bank (CCB) used to build it. The printing complex was built in 2012. The CCB financed the whole AGRICULTURE/ Agria Group acquires project with loans in excess of 80 mln levs (41 mln.euro). The printing sunflower oil producer Kehlibar Factory’s house was built by a company related to Mr Peevski and his former former owner buys 10% in agricultural business partner Tsvetan Vassilev, the owner of CCB, but it has never holding. Bulgaria’s Agria Group Holding has worked. Following the break-up of Mr Peevski and Mr Vassilev, the printing acquired 100% of local sunflower oil producer house was transferred under the control of the latter, because the whole Kehlibar from the sole owner, Svetlomir Todorov. company was set as loan collateral in CCB. Now the receivers of the failed The price of the deal is 14.8 million levs (€7.6 CCB are looking to recover the credits and are selling the printing house. mln.). In a parallel transaction,Mr Todorov has The price could have been even lower. The asking price in the first acquired 9.75% of the holding company for 6.8 auction was set at only 2.3 mln levs, but the sale failed, because the million levs (€3.5 mln). minimum price, according to the obligatory tax valuation, should have Kehlibar, based in the town of Lyaskovets, is one been 4 mln. levs. КQUARTERLY 37

As a result now A.E. Best Success Services Bulgaria EOOD buys NEWS BRIEF// Pechatnica Sofia for a fraction of its real price. It is strange that the buyer of the largest sunflower oil producers in Bulgaria did not seek permission for concentration from the competition authority, with capacity of more than 50,000 tonnes per because it owns the biggest operating printing house in Bulgaria which year. In 2015 its sales increased by more than a prints almost all national newspapers. One possible explanation could be fifth to 41 million levs (€20.1 mln) and its profit that Peevski plans to close down the existing facility and to transfer all its doubled to 3.5 million levs. operations to his newly and cheaply acquired printing house. Agria Group is among the largest agricultural The ultimate losers are the taxpayers who funded the repayment of holding companies in Bulgaria with some 20,000 the debts of bankrupt CCB. ha of arable land owned or leased. It has been growing actively through acquisitions. The Kehlibar transaction is considered strategically BULGARIAN ARMS EXPORTS important, as it gives Agria Group an entry into GROW BY 59% IN 2015 a new sector. HALF OF THE 642.5 MLN EURO EXPORTS WENT TO THE MIDDLE EAST INSURANCE/ Bulstrad acquires UBB-AIG for €3.2 million The former competitor Bulgaria exported weapons and ammunition worth 642.5 mln euro remains independent, renamed to Nova in 2015, according to the annual report of the Interdepartmental Ins. Bulstrad Vienna Insurance Group has Commission on Export Control (ICEC) with the Ministry of Economy. acquired for €3.2 million its smaller rival UBB- This is a 59% increase in comparison with the previous year. In 2014, AIG Insurance Company, which is specialized in Bulgarian arms exports were worth 403 mln euro. > 38 loan related insurance. UBB-AIG will continue operating independently under a new name, ANNUAL ARMS EXPORT, (IN MLN EURO) Nova Ins, and in close partnership with United Bulgarian Bank (UBB), one of the former owners. 700 The deal included UBB-AIG’s assets worth 8.5 600 million levs (4.346 mln. euro) and liabilities of 500 805,000 levs. No further restructuring of the company is envisaged. The new owner will 400 continue to develop it as a bank assurance sales 300 channel. UBB-AIG is the smallest insurance 200 company on the Bulgarian market with a share of about 0.3% as of November 2015. Its business 100 depends mainly on customers provided by UBB. 0 Bulstrad in turn is leader with 12.6% of the 2010 2011 2012 2013 2014 2015 market. The group also has a life insurance business, Bulstrad Life Vienna Insurance Group. THE BIGGEST ARMS TRADERS (INCOME IN THOUSANDS OF LEVS) RETAIL/ Piccadilly remains with one owner 0 100 000 200 000 300 000 400 000 after partners withdraw Nikolay Lazarov Apollo Engineering OOD to look for new co-investor in troubled Armitrans OOD retailer. Two of the owners of Bulgarian retail Kintex EAD chain Piccadilly have quit the company and it Sage Consultants JSCo. is now solely owned by Nikolay Lazarov. The Allguns OOD withdrawal of the Popov brothers, comes after Armako AD two years of partnership with Mr Lazarov. During Arsenal-2000 this time the chain shrank and stopped paying Yotov&Son OOD regularly to suppliers. Mr Lazarov, who lives in 2013 2014 2015 Paris, will be looking for a new co-investor. Last THE BIGGEST ARMS PRODUCERS (IN THOUSANDS OF LEVS) autumn Piccadilly’s business was moved to Select Trade, a company owned by Luxembourg- 0 100 000 200 000 300 000 registered BK Finance, which is connected with Arsenal AD Mr Lazarov. The company posted more than 41 Emko EOOD million levs revenue and 786,000 levs profit for VMZ EAD 2015. Piccadilly’s turnover decreased 20% to 159 million levs last year and the company booked a Dunarit AD loss of 31.6 million levs. In May 2015 the company Arkus AD borrowed 11.8 million from Investbank, paid Samel-90 AD some of its debt to suppliers and unveiled a plan 2013 2014 2015 Source:Ministry of Economy to recover the business. 38 KQ ECONOMY/BUSINESS

NEWS BRIEF// > 37 ICEC issued 697 permits for export and transfer totaling SOLAR POWER / Renewables undergo 1.402 billion euro in 2015, which is an indication that exports will consolidation. The renewables business in continue to grow in 2016. Bulgaria, which until recently had a pretty Capital K100 annual ranking showed that in 2015 some arms much scattered ownership, is undergoing slow exporters were among the most profitable companies in Bulgaria. consolidation. In less than six months energy Traditionally, Bulgaria has exported military hardware mainly to trader Energy TM acquired Zhrebchevo HPP conflict points in Africa and the Middle East. It is noteworthy that in partnership with Nikolay Valkanov, owner Ukraine became a serious market for Bulgarian weapons. In 2014 of Minstroy Holding, and now it buys the local arms exports were worth less than a million euro, but the Bulgarian subsidiary of US-based SunEdison which owns authorities issued export certificates for 39 mln euro. 20 MW photovoltaic installations. The price was Iraq remains the main client of Bulgarian arms companies. not announced, but it is probably in the range Baghdad purchased arms worth 159.6 mln euro in 2015, twice as of 33-35 mln euro. At the beginning of the year much in comparison with 2014. The second biggest customer was China’s ReneSola sold its 10 MW photovoltaic Saudi Arabia, which bought weapons for 92.4 mln euro. Israel, Qatar park to Luxembourg-based Solar World Invest and the United Arab Emirates were also big buyers of Bulgarian arms. Fund SIF. The fund is looking for new deals in Afghanistan was the fourth biggest destination for Bulgarian arms Bulgaria. exports with purchases of 57.4 mln euro in 2015, up from 42.7 mln euro in 2014. PACKAGING/ Portuguese BA Vidro acquires Druzhba Glassworks. The second largest glass manufacturer in Bulgaria, Druzhba BULGARTABAC’S DOMESTIC MARKET Glassworks, now part of Greek group Yioula, will SHARE SHRINKS be acquired by Portugal’s BA Vidro. The intention THE FORMER STATE MONOPOLY CONTROLS of Yioula to sell parts of its business has been JUST BELOW 30% OF THE BULGARIAN known for more than a year, because the family CIGARETTE MARKET owned group has substantial debts and seeks restructuring. Druzba Glassworks had a turnover The domestic market share of Bulgartabac, the tobacco company of over 220 mln levs in 2015 and is the second related to Delyan Peevski, fell to 29.5% in August, according to data largest in the sector after Turkish SiseCam in from cigarette companies. In recent years Bulgartabac was able to Targovishte. It is a big producer of bottles and keep its market share above 30% and now, for the first time, that jars for canning, wine and beer industry, with share is lower. The other company that lost market share is KT 70% of its production exported to Greece, Italy International (formerly Kings Tobacco, owned by the Peshtera Winery and Serbia. The company has two production shareholders). Its share is down by 1.2pp. Two foreign companies - units - in Sofia and Plovdiv. Druzhba Glassworks Philip Morris and British American Tobacco, increased their market is one of the largest companies on the stock share exchange in Bulgaria. Its market capitalization is Even though the drop in sales is not significant, it is a bad omen 235 mln levs, but the company is one of the least for Bulgartabac, because the company had to slash its exports. liquid. Shares outside its core Greek owner were Bulgartabac ceased exports to the Middle East, which represented only 0.76%, according to its financial statement over 80% of its sales. The reason was a determined action by the for 2015. Turkish authorities to fight illegal sales. In 2014, 50% of the cigarettes smuggled into Turkey originated from Bulgartabac. Last year, their MARKET/ Commodity exchanges share fell to 45% of illegal sales but Bulgarian cigarettes remain the in Sofia and Ruse merge. The Sofia most popular contraband brand in Turkey. Commodity Exchange and the Bulgarian Bulgartabac’s woes are probably the source of the rumors that Mr Commodity Exchange (based in Ruse) signed Peevski plans to sell the tobacco company. Besides three cigarette a memorandum to merge. The deal, which is factories, Bulgartabac controls cigarette distributor ELD as well expected to be finalized by the beginning of as Lafka, a network of newspaper and cigarette kiosks. Peevski hid next year, will practically consolidate the whole his ownership of Bulgartabac behind a Dubai-based company at commodity trading business in one place. The the beginning of the year following his problems with the Turkish annual turnover of the new exchange will authorities. amount to 600 mln. levs (307 mln euro). The In the meantime, the tobacco market is growing, while the Ministry of Finance decided several months smuggling of cigarettes – an endemic problem for Bulgaria until ago to cut the number of goods which public recently, almost disappeared. The latest study on the consumption institutions and state-owned companies of cigarettes without excise label shows a record decrease for the can buy from the commodity exchanges. last ten years. Now, only 8.1% of the cigarettes sold in Bulgaria are The ministry motivated its decision with the smuggled cigarettes. Decreased smuggling, increased excise duties widespread suspicion that the exchanges are and a rise in consumption contributed nearly 200 million levs (102 used to bypass the open tender procedure and mln euro) more in excise tax revenue in the nine months of the year to manipulate prices. in comparison with the same period in 2015. КQUARTERLY 39

THE NEW PUBLIC PROCUREMENT ACT: LESS INDIRECT BARRIERS FOR BIDDERS, MORE TRANSPARENCY AND FLEXIBILITY

KOSTADIN SIRLESHTOV*

Bulgarian public procurement procurement procedure is a clear recognition practices and irregularities of the important of this pre-tender stage. In have often been criticized line with the EU procurement requirements and therefore the timely that advice may be used in the planning B transposition of two new EU and conduct of the procurement procedure, Directives on public procurement and on provided that such advice does not have the procurement by entities operating in the water, effect of distorting competition and does not energy, transport and postal services sectors result in a violation of the principles of non- in the new Bulgarian Public Procurement Act discrimination and transparency. (PPA) came much as a pleasant surprise. PPA In an attempt to avoid combination of entered into force on 15 April 2016 and the objectively separable activities, the PPA Bulgarian government already adopted the provides that where the different parts of rules for its implementation. a potential public procurement contract The new law differs substantially from the are objectively separable, the contracting latest Public Procurement Act as it introduces In an attempt to introduce cost-savings entities are obliged to divide the contract into an entirely new package of EU public into the process, the new PPA provides for fully separate lots allowing for more competition. procurement regulations into the Bulgarian electronic management of the entire tender Similar considerations led to the requirement legislation. The PPA aims to meet the needs of process, guaranteed by a centralized electronic that contracts be awarded on the basis of both the contracting authorities/entities and platform administered by the Bulgarian the most economically advantageous offer. the national market. It creates a legal platform Public Procurement Agency. The complete The option for the contracting authorities to to help EU companies get better access to the electronic tendering platform shall become award the contract on the basis of the lowest Bulgarian procurement market. fully applicable no later than 15 April 2017 and price is no longer available. The flexibility will therefore allow for quicker and much more for the contracting authority is granted by A CLEAR VICTORY efficient public procurement procedures to be the provisions permitting up to 20% of the OVER BUREAUCRACY carried out. procurement to be excluded from the total Over-bureaucratization has been one of the forecasted value of the procurement when the main areas of concern related to the Bulgarian COMPLIANCE contracting authority deems it appropriate. public procurement procedures, because it WITH MARKET The practices of the Bulgarian public created indirect barriers for foreign companies. The new PPA introduces several other procurement was limiting the availability of Now the new PPA allows for the bidders important changes including a clear division alternative and equally secure instruments for to submit a European Single Procurement between the two mains groups of contracting guaranteeing the performance of the public Document in which they declare the fulfilment authorities: sectorial and public. The PPA also procurement contacts and therefore the of the conditions regarding the personal excludes the obligation of the contracting PPA permits insurance policies to be offered criteria required for the public procurement authorities to follow the PPA in certain cases as a form of a performance guarantee and without providing any additional documents to of internal “in-house” awarding. This regime optimizes the terms for public procurement certify these. The actual certification shall be is of particular importance in the Bulgarian related appeals. done only after the bidder has been awarded defense and transportation sectors where The new PPA is a general framework law the contract, which substantially streamlines the process of privatization of the former that includes main principles and rules that the procedures and allows bidders from consolidated conglomerates of companies is will need to be further clarified and specified abroad to spend substantially less time and still not complete and the competitiveness of in a secondary legislative act to be adopted money in preparation for public procurement these state-owned companies is somewhat by the Bulgarian Government. However, it procedures in Bulgaria. restricted. provides the necessary legislative background Once a bidder fills the European Single In preparation for tenders the PPA for a modern, successful and timely evolution Procurement Document, it can be used again permits the contracting authority to of the public procurement in Bulgaria. in subsequent tenders if the information conduct prior market consultations with * Kostadin Sirleshtov has been a partner at contained in it is still up-to-date. In line with independent experts and market players CMS Cameron McKenna in Sofia since 2008. He this legislative trend the PPA also provides in order to examine the market and the is head of the Energy, Projects and Construction a possibility for the contracting authority nature of the activities to be assigned. The practice of the office and covers Central and to award a contract jointly with contracting fact the introduction of a legal regulation Eastern Europe for CMS Cameron McKenna authorities from other EU member states. of this very important aspect of each public when it comes to energy issues. 40 KQ ECONOMY/BUSINESS

INDUSTRY ANALYSIS// AUTOMOTIVE PART MANUFACTURERS GROWING, MULLING FURTHER INVESTMENTS BULGARIA REMAINS A CHEAP LOCATION FOR NEW ENTERPRISES BUT STAFF SHORTAGE BECOMES A PROBLEM

IGLIKA PHILIPOVA*

utomotive part manufacturers WHY DID YOU CHOOSE BULGARIA? automotive components are about 50, but in Bulgaria expect an provide jobs to 33,000 people. Typically, they increase in revenues, staff Labor force cost 50% are suppliers of global automotive companies and investments in 2016. The EU membership 45% and only one has an assembly facility (China’s A industry has been one of the Location – close to clients 45% Great Wall). and producers best performers recently: last year the 50 or so Companies in Bulgaria manufacture Taxes 36% companies producing auto components only everything from seat covers and seating systems Currency board 23% posted 3 billion leva revenues. (ALC, Grammer), through instrument panels and Price of the electricity 14% The trend for the sector is to continue climate control systems (Visteon, Behr-Hella), to Labor force access 14% strengthening in the coming years. However, a microelectronic solutions and sensors (Melexis, Labor force competenc 9% crucial factor for that will be staff training and Festo). The total revenues of the companies 0 10% 20% 30% 40% 50% infrastructure development. That emerges from that manufacture automotive components only the first survey of the sentiments in the industry Source: Colliers International and Automotive Cluster Bulgaria amounted to €1.55 billion in 2015 (3.5% of GDP). conducted by Automotive Cluster Bulgaria and There is almost no region in Bulgaria without WHAT HAMPERS YOU BUSINESS IN BULGARIA? Colliers International. such a manufacturer. However, most of them Lack of qualified labor force 35% (about two-thirds) are concentrated in southern STRONG YEAR 2016 The public administration 22% Bulgaria. Most of the companies in the sector (59%) Judicial system 13% expect that the Bulgarian economy will grow in WHY BULGARIA Absence of good business 2016; the share of those projecting an increase environment 9% it is not surprising that the main reason in their own revenue is even bigger: 64%. “That is Competitive suppliers 9% why companies choose Bulgaria for their new a very strong signal from companies generating production facilities is the low labor costs, Corruption 4% 3.5% of the gross domestic product,” said Georgi according to the results of the survey conducted Small market 4% Kirov, Director of Investment Services at Colliers. among the enterprises manufacturing The investment plans of enterprises High export costs 4% automotive components. Labor costs in Bulgaria are connected mainly with the purchase of Source: Colliers International and Automotive Cluster Bulgaria are 10 to 50 times lower than in Western Europe new machines – 59% of them project a rise and 30 to 50% lower than in Central and Eastern in equipment spending. The share of those economic growth and employment in Bulgaria. Europe. Accoridng to Colliers’ data the average planning bigger investments in real estate is Currently there are approximately 100 companies annual salary in the segment in Bulgaria is smaller: 27%. operating in the sector, half of them are focused €5,100, i.e. about 830 leva per month. “That is In the medium term, most enterprises plan exclusively on the automotive industry and the above the average wage but it is not a poorly- to expand production in this country and 41% rest have combined production. As a matter of paid job in the Bulgarian context,” Kirov added. expect to increase their personnel. Since the fact, the mixed-profile enterprises have added However, the shortage of qualified workforce is shortage of qualified staff is a major problem for automotive part production to their portfolios, the major problem for investors, which means companies in the sector, most of them solve it by encouraged by increased demand and the good additional costs for staff training. organizing internal trainings. opportunities for this business in Bulgaria. For EU membership is another advantage, mainly An important trend for new entrants is instance , the Greek-owned Etem, which used because Bulgaria’s main rival in attracting their preference of green-field projects – be it to manufacture only aluminum profiles and automotive investors is Serbia, which has not building their own plants or renting built-to- architectural systems now produces aluminum yet joined the EU. suit premises on a long-term basis. In Kirov’s components for chassis, doors, bumper beams Bulgaria is also a competitive destination words that is typical of the more technologically etc. in relation to construction costs and electricity advanced productions. “All in all, the companies working for the prices. Even though these parameters are close automotive industry have a staff of nearly 55,000 to those in Central and East Europe, Bulgaria has FLOURISHING SECTOR and their total output accounts for nearly 6% of a considerable advantage compared to Western In recent years, the production of automotive the Bulgaria’s GDP,” Kirov said. Europe. components has turned into a key engine of The enterprises that manufacture Iglika Philipova is editor with Capital

ECONOMY/42 KQ ECONOMY/ENERGYFINANCE

NOT SO STRESSFUL

TEST DEVELOPMENTS TO FOLLOW Bulgarian insurers and pri- THE BANKING vate pension funds undergo balance sheet review and stress tests. A balance sheet SYSTEM REVIEW review and stress tests were launched on June 15 to check the health of the insurance WAS EXPECTEDLY sector and the private pension system in Bulgaria. The country will be the fi rst in the EU to POSITIVE, YET review the performance of its pension funds and the second aft er Romania to do the same QUESTIONS with insurers. The procedure was mandated by the European Commission in 2014, based on REMAIN indications of malpractice by some participants in the non- banking fi nancial sector such as related party investing and inadequate reserves for risks.

The European Insurance and Occupational Pensions Au- thority (EIOPA) will oversee the deleyed review of the pension system in Bulgaria. This is because the country’s Financial Supervision Com- mission (FSC) claimed it lacks auditors because the review overlapped the same procedure in the banking sector. Analysts and media, however, attributed the delay to poor preparation by the regulator. Another threat to the assessment exercise came in September when the FSC removed RSM Bulgaria from the list of external reviewers as an investigation revealed that the documents submitted by the Despite their name, banking stress tests are not meant to be too company contained substantial- stressful. It’s as simple as that - the regulator will never risk bank- ly false information. The audit company has won almost a third ing stability just to make a point or solve a problem or two in the of the contracts in insurance and sector. pension industry. КQUARTERLY 43

BNB governor Dimitar Radev was loaded with high expectations to restore the Central Bank’s reputation tarnished by the 2014 collapse of Corporate Commercial Bank Photo by Nadejda Chipeva

NOT SO Despite their name, banking stress THE DECLARED OUTCOME OF THE STRESS tests are not meant to be too stressful. TEST EXCEEDED EVEN THE MOST OPTIMISTIC STRESSFUL It’s as simple as that - the regulator EXPECTATIONS, LEAVING THE IMPRESSION will never risk banking stability just THAT THE INSPECTION HAD FAILED TO REVEAL TEST D to make a point or solve a problem or THE WHOLE TRUTH two in the sector. That’s why analysts expected the approach of the Bulgarian National Bank (BNB) to be THE BANKING largely in the same careful vein when it prepared to expressed as its top quality capital divided by its unveil the results of the stress test of the country’s risky assets). In the worst-case scenario of the SYSTEM banks in August. stress tests, the capital shortfall was downplayed REVIEW WAS The check-up showed an overall robust banking as purely hypothetical and due to highly unlikely sector, with capital adequacy ratios well above assumptions. So, the BNB recommended relatively EXPECTEDLY the EU average and above domestic regulatory mild regulatory measures to stem deficiencies at POSITIVE, YET thresholds. The examination revealed a small need the two banks. for additional provisions - 665 mln levs (340 mln QUESTIONS euro) compared to 88 bln levs (45 bln euro) assets, DID THE EXAMINER FAIL? concentrated mainly in two domestically-owned The whole exercise left the impression that the BNB REMAIN lenders - First Investment Bank and Investbank. was treading a thin line. The regulator was loaded with Both of them were found to stay just above the high expectations for change after it vowed to restore absolute minimum of Common Equity Tier 1 its reputation tarnished by the 2014 collapse of the NIKOLAY STOYANOV* ratio of 4.5% (a key measure of bank’s soundness fourth largest lender, Corporate Commercial > 44 44 KQ ECONOMY/FINANCE

> 43 Bank (CCB), made possible by inadequate mildly below the 20% level declared in the first half supervision. Widespread suspicions among the general of 2016 but way above the minimum of 10% required public that related lending was rampant in other by the BNB. And also way above EU levels. Bulgarian domestically owned banks and the arrival of a new banks are traditionally urged by the regulator to BNB governor (former deputy finance minister Dimitar maintain higher capital and liquidity levels partly Radev came back to Bulgaria after more than a decade because of the currency board system functioning at the IMF) raised expectations that the asset quality in the country which limits the ability of the central review (AQR) and stress test will be an efficient tool to bank to act as lender of last resort. expose the system’s long accumulated problems. The BNB was in a good position to raise its OPPORTUNITY WASTED supervisory profile which had been strongly Even if the doubts that the stress test results criticized as inadequate both by the Bulgarian were somewhat deliberately toned down prove parliament and foreign observers such as the true, it does not mean straight away that the BNB is European Commission and the IMF in the wake again turning a blind eye to persisting bad practices. of the CCB collapse. Still, the declared outcome of Bulgaria’s banking sector is not particularly the stress test exceeded even the most optimistic sophisticated and in a relatively small market it expectations, leaving the impression that the is easy to trace most of what is going on. Leaked inspection had failed to reveal the whole truth. reports from supervisory inspections in the failed With such optimistic results it is hard for the CCB and in the worst AQR performer FIBank showed central bank to instill confidence that it has done its that deficiencies did not go unnoticed by the experts job thoroughly and fairly and nothing was left hidden in the regulator. So probably what the BNB is trying in the closet once again. What makes it even harder to achieve is to clean up the problems quietly rather is the level of transparency of the stress test results, than bring them to media and public attention. which in the end was considerably lower than the Whether this is true or not will be seen in the follow- European Central Bank standards and didn’t live up up actions of the regulator which is in the process to the announcements at the start. The BNB disclosed the bare minimum of numbers which was hardly enough to compare performance among banks and MAYBE WHAT THE BNB IS TRYING TO ACHIEVE discover where potential future problems lie. IS TO CLEAN UP THE PROBLEMS QUIETLY In the end, the big losers are the bank clients RATHER THAN BRING THEM TO MEDIA AND and generally the taxpayers, who might be exposed PUBLIC ATTENTION. again to still unidentified risks stemming from the banking sector.

SAILING AT TWO SPEEDS of beefing up its supervision department and trying Having discovered some big shortcomings, the to shake off the public mistrust it got with the CCB AQR generally painted a fair picture of the banks failure. The problem with this strategy is that even and confirmed the two-speed structure of the if applied rigorously, it will take time to implement sector. On the one hand, are the local subsidiaries of which means that BNB has missed an opportunity big EU banking groups which generally have a sound to act tough and restore its image of a vigilant management as they import some good practices guardian by taking a more hard-line approach. from their headquarters. Overall, they have a higher The BNB and Bulgaria’s financial sector also face share of non-performing loans but that is due to some more scrutiny from the outside. Currently the their more prudent accounting and disclosure IMF and the World Bank are conducting a complete standards. As a result, BNB expectedly found next to Financial Sector Assessment Program (FSAP) in WIDESPREAD no need for them to set aside more provisions. the country which, when finished, will undoubtedly On the other hand are the domestically owned provide an additional look at the state of the SUSPICIONS AMONG banks controlled by business people who also have banking sector after the AQR. THE GENERAL PUBLIC interests in various other sectors and are tempted The first part of the FSAP conducted last year THAT RELATED LENDING to extend credits to fund their endeavors. This looked only at banking supervision. It was highly related lending requires circumventing banking critical and was the basis for reform at the BNB WAS RAMPANT IN regulations and creates huge conflicts of interest, launched by the new team of governors led by Mr OTHER DOMESTICALLY particularly in the absence of good oversight by Radev. Other institutions that may want to look OWNED BANKS the regulator. And predictably this is where the deeper into the whole AQR/stress test process problems were found. include the European Commission and the ECB REQUIRED VIGILANT The general feeling among analysts is that the if Bulgaria indeed steps up its plans to join the INVESTIGATION OF check-up revealed the direction if not the full scope European banking union and take action to enter THEIR PRACTICIES. of the problems in the banking sector. The CET1 ratio ERM II and the Eurozone. at the system level stood at 18.9% post AQR - only Nikolay Stoyanov, editor with Capital КQUARTERLY 45

FOURTH LARGEST BANK NEWS BRIEF// HAPPY SHAREHOLDERS / Bulgarian banks IN BULGARIA IS UP improve their profitability. The net profit of the Bulgarian banking system exceeded 500 mln FOR SALE euro in the first eight months of 2016 - more than the profit for the whole 2015. The five biggest banks on the market (UniCredit Bulbank, DSK, NBG COULD RECEIVE FIB, UBB and Eurobank) account for 71% of the result. Compared to the same period of last year, UP TO 500 MLN EURO FOR UBB the profit is 192 mln euro higher. This is mainly due to one-off effect from the acquisition of Visa the fourth largest lender lender DSK). The French Credit Mutuel Europe by Visa Inc which led to a windfall gain in Bulgaria, United also expressed interest in the deal. The for all European members of the card franchise. Bulgarian Bank (UBB), is other candidates are financial investors According to some estimations the transaction in a sale procedure. The or funds with shorter term interest such contributed 75 - 87 mln euro to the aggregated T bank has about 7 bln levs as Apollo, Warburg Pincus, JC Flowers. net profit. Another factor for the good result is (3.5 bln euro) assets, or 8% market share. The Bulgarian National Bank is likely the growth of mortgage lendingby 46.6 mln euro. It is 99.9% owned by the National Bank to give its regulatory nod to groups that of Greece, which is under pressure to sell already control banks in the country as its non-strategic units as it relies on ECB it has spoken frequently about the need 600 000 liquidity support. to consolidate the sector. UBB passed 400 000 The sale is in its initial phase as the stress test well and with 1.2 bln leva it is yet to attract indicative offers. capital it is among the best capitalized 200 000 According to unofficial information, banks in the country. Analysts expect a at least 7 candidates have expressed deal at 60-75 percent of its capital, or 0 interest. Among them are Belgian KBC 400-500 mln euro for NBG’s shares in -200 000 (which already owns the smaller CIBank bank. But NBG may choose to distribute in Bulgaria) and Hungarian OTP (which profits and reserves as dividend before -400 000 is the owner of Bulgaria’s second biggest the sale which would lower the price. -600 000 Jan 2016 Oct 2015 Feb 2016 July 2016 July 2015 Dec 2015 Nov 2015 Aug 2016 Aug 2015 May 2016 Sept 2015 June 2016 June 2015 April 2016 March 2016 Net interest income Net fee income Administrative expenses Depreciation VICTORIA COMMERCIAL BANK Writedowns Financial instrument opertions Non-financial instrument opertions Exchange rate differences MAY FINALLY FIND NEW OWNER Other net opertive income Taxes Net profit Source:BNB

EIGHT BIDDERS EXPRESSED TAKE A CREDIT / Good times for corporate borrowers. The average interest rate on INTEREST IN THE PURCHASE corporate loans continued its steady drop, reaching levels below 5%. August data of the OF THE BANK Bulgarian National Bank shows new credit contracts for less than 1 mln euro were signed at Eight bidders expressed GmbH, and Hanson Holdings Lux s.a.r.l. 4.51% on average, which is 2-3 pp lower than in interest in the purchase of and Eurofinance, respectively. August 2015. For loans exceeding 1 mln euro the Victoria Commercial Bank The sale of VCB was launched in 2015 average rate was 4.16%, which is 1.29 pp lower (VCB) before the deadline but the expessed interest was low. In March than in the previous month in 2016. E in mid-September. The 2016, the procedure was relaunched with lender is a wholly owned subsidiary of the help of Afa consultancy which advised Corporate Commercial Bank which went the seller to increase the capital of VCB. 16 1000 bankrupt in 2014. The willing buyers As of the end of June, the bank’s capital 12 800 600 are Investbank, Bulgarian American was 62.5 mln euro and total assets stood 8 at 70.3 mln euro. The buyer should repay 400 Credit Bank, D Commerce Bank, 4 Transact Europe Holding, the Bulgarian an outstanding debt of 44.9 mln euro to 200 Telecommunications Company, Egyptian the parent bank. The current phase of 0 0

engineering group Zaghloul Holding, and the process is submission of non-binding 39083 39326 39569 39814 40057 40299 40544 40787 41030 41275 41518 41760 42005 42248 42491 two consortia comprising insurance offers, to be followed by the final stage Volume in levs (mln levs) interest for credits in levs(%) company Lev Ins and Kerbler Holding with binding offers. Volume in euro (mln euro) interest for credits in euro(%) Source:BNB 46 KQ ECONOMY/FINANCE

DEALS AND REGULATIONS// PLAYERS TO WATCH// MONEY FROM JUNK / 500 mln euro FILIP GENOV, non performing loans are up for grabs. LEADS THE UNICREDIT BULBANK PROGRAM The non performing loans (NPL) market in Bulgaria is booming with five ongoing deals FOR START-UP LOANS at about 500 mln euro in total. Compared to 2015, when NPLs for 233.8 mln euro were UNICREDIT BULBANK IS THE FIRST BANK TO sold, in the first half of 2016 the transactions ENTER THIS FINANCIAL SEGMENT AND WILL reached 217.4 mln euro. Almost half of them came from a single deal between Postbank HELP BOOST ITS GROWTH (Eurobank) and EOS Matrix at the beginning of the year. The current five open procedures are expected to be finalized by the end of the year. The biggest one is for the 130 mln euro NPL portfolio of Heta Asset Resolution, followed by Unicredit whose portfolio comprises commercial NPLs for 100 mln euro. First Investment bank also offers a bunch of non- performing consumer loans for 35.9 mln euro and OTP Factoring taps the market with 15.9 mln euro consumer NPL portfolio. For the first time a company is looking for a systematic buyer of its future NPLs. This is Unicredit Consumer Financing which seeks a partner for its consumer and stock loans.

35% 30% 25% 20% Filip Genov, Unicredit Bulbank’s ТHE SPECIAL PROGRAM first vice-president, is the 15% driver behind its new program HAS NO LIMITS TO 10% for first loans to start-ups. ITS FUNDING, BUT A Business Mortgage 5% F Nine months after the special SINGLE CONTRACT Consumer Others 0% tool was launched, a total of 2 million euro SHOULD NOT EXCEED financing has been approved by the governing 200-300 THOUSAND July 2007 July 2008 July 2009 July 2010 July 2011 July 2012 July 2013 July 2014 July 2015 committee for seven companies, three of April 2016 EURO January 2008 January 2009 January 2010 January 2011 January 2012 January 2013 January 2014 January 2015 which already obtained the funds. These are

Source:BNB Playground Energy which converts kinetic energy on playgrounds into lights and sounds, Sensika Technologies, developer of a business NO FREE REGULATION / FSC could investigation online engine, and Coursedot, increase its fees. An increase in the which specializes in online tech education. fees paid by pension funds, insurers and All of them have been previously financed by investment companies to the Financial the startup accelerator Launchub and have a Supervisory Commission in Bulgaria could be potential to grow internationally. imposed if the Ministry of Finance approves Mr Genov announced that until the end the idea, accoridng to Karina Karaivanova, of the year the number of contracts could the newly elected chairperson. Her motives double. He said that the special program has are that a higher level of income could make no limits to its funding, but a single contract the regulator entirely independent from should not exceed 200-300 thousand euro. the state budget. For 2016 the Commission Mr Genov also explained that the loans could sustentation costs EUR 5.3 million, while be converted into share capital subscribed by the transfer from the state budget is EUR the bank. The average interest charged on the 1.6 million. The proceeds from fees in 2015 first start-up customers is 9.75%, way above amounted to EUR 2.5 million. the average rate in corporate lending. КQUARTERLY 47

PLAYERS TO WATCH// SOFIX CATCHING FIRE BULGARIAN STOCK MARKET RANKS SECOND ONLY TO REGIONAL LEADER CROATIA IN 2016, BUT THE GROWTH IS SHAKY AND CAN EASILY WITHER

KRASIMIR ATANASOV*

or about a year the SOFIX, the SOFIX HAS SOARED SINCE SEPTEMBER benchmark index of the Bulgarian 520 8 000 Stock Exchange, drifted without 500 7 000 direction but now it seems ready 6 000 480 F for prime time sail. The launch 5 000 460 of an exchange-traded fund based on the 4 000 440 SOFIX and the arrival of mostly retail inflows 3 000 catapulted the index by almost 10% in the final 420 2 000 weeks of the third quarter of 2016. 400 1 000 The 11% rise of the SOFIX year to date (as of 380 0 20th of October) ranks the Sofia stock market X.15 XI.15 XII.15 I.16 II.16 III.16 IV.16 V.16 VI.16 VII.16 VIII.16 IX.16 X.16 second only to regional leader Croatia (+19.8%), SOFIX Volume (in thousand euro) Source:BSE leaving behind Romania and Serbia (0%) and Greece (-4.37%.) The engine behind this surge tests by local banks and the hopefully identical The surge in the SOFIX can be attributed is typical for every developed market – low real performance of insurers and pensions funds will mostly to retail clients, with institutionals still yields on government securities, abundant free help further alleviate investment insecurity on stuck in a wait-and-see mode. Yields on bank liquidity, real estate appreciation or, in short, the the stock market. The newly elected Bulgarian deposits are close to nothing and, naturally presence of the notorious beauty TINA (There Is financial watchdog and the government’s enough, people start looking for alternatives. No Alternative). rediscovered awareness of the capital market While real estate is the first choice by far, savers While the minority coalition government (the support with public money for new IPOs, for are slowly warming to stock markets. of PM Boyko Borissov looks stable, it is fragile example) are positive whiffs. Pension funds, long absent from the and prone to both inside and outside pressures. Even though fundamentals look well, the headlines, recently acquired a 3.5% stake Regional uncertainty is stoked by Greece’s Bulgarian stock market is not a meal for those in Monbat, one of the blue chips. They have financial woes, political turbulence in Turkey, who can’t scratch beneath them. On the surface, accumulated huge assets under management Russia’s push to restore its influence in the the most closely followed price/earnings ratio and can easily become a determining factor, yet and more generally the increased is 10 and looks strikingly good. But the results it is too early to say that tides are turning. The frictions between Moscow and the West. Not to are heavily skewed by the profits of a single return of the IPOs – most notably the public forget the migration crisis and the EU in turmoil company, Chimimport. Browsing through its offerings of the IT companies Sirma and Alterco, after Britain’s decision to leave the bloc. financial statements poses a challenge and is another sign of companies beginning to chase On the bright side, the Bulgarian economy requires specific knowledge and one should the abundant money looking for a place to park. added 3% in the first half of the year, be careful spotting accounting gimmicks and Technically speaking, after a long unemployment fell to 8% and tourism is likely to shenanigans. Thus, company specific approach consolidation, a powerful move in either give a considerable boost to Q3 GDP. Inflation is is a superior strategy to indexing. Though there direction can be expected. There is a clear hovering around zero (-0.8% y/y in September) are few well-behaved blue chips, long lasting impulsive upside breakout and an ongoing test and the government maintains a healthy budget investments are in doubt given the shortage of which, if valid, opens a path for further gains surplus equivalent to 3.5% of GDP as of the end quality companies, as well as the relatively small into year-end and probably targeting 2014 highs. of June. size, tiny liquidity and governance issues. The longer-term determinant of the trend, the The Bulgarian banking sector faced its worst Liquidity remains a concern. The average 200-day moving average and the shorter-term crisis since the 1997 meltdown as the country’s daily turnover – around half a million euro, low 50-day moving average are upward sloping, and fourth largest lender, Corporate Commercial free float, few traded issues and relatively small supportive. That said, the upward move is a bit Bank, collapsed in 2014. Sentiment quickly went market capitalization of the companies are extended and some digestion is on the agenda. dour and just lately began to recover. Real estate endemic issues. These problems pose a natural The verdict is: the market is susceptible to prices were the first beneficiaries, supported by barrier to big foreign investors. The recent an explosive move, but roots are shaky and can low interest rates, with the capital Sofia leading efforts of stock exchanges in the region to create easily wither. the way with 11.5% annual appreciation as of June a common trading platform were a step in the *Krasimir Atanasov is private investor 2016. The successful passing of recent stress right direction, albeit a small one. and investment consultant. ECONOMY/ENERGY

DREAMING ABOUT SOUTH STREAM WHAT ARE THE CHANCES OF BULGARIA BECOMING A GAS

DISTRIBUTION DEVELOPMENTS TO FOLLOW CENTER? The World Bank will present its long-awaited report on the liberalization of the electricity market in Bulgaria. Its most important fi ndings concern the market integration of the renew- ables’ support schemes and the long-term power purchasing agreements.

The Constitutional Court will discuss Energy Law amendments which drastically reduced feed-in-tariff s for small- scale photo-voltaic installations that received EU grants. The Court had struck down several similar retroactive measures in the past.

The second, binding phase of the Interconnector Bulgaria- Greece market test will be completed by the end of the year. The test will show the level of commercial interest Despite their name, banking stress tests are not meant to be too in the new gas link. In the fi rst, stressful. It’s as simple as that - the regulator will never risk bank- non-binding phase the capacity of the pipeline was overbooked, ing stability just to make a point or solve a problem or two in the but companies have begun to sector. withdraw their bids as of lately. КQUARTERLY 49

DREAMING ABOUT SOUTH STREAM WHAT ARE THE CHANCES OF BULGARIA BECOMING A GAS DISTRIBUTION CENTER?

ILIN STANEV

Probably you have THE GAS FLОWS INTO BULGARIA heard about the miracle gas hub Despite the fact that at the current moment Bulgaria has only one gas supplier, Balkan, a project that the government has ambitions to establish a gas hub for the whole region P will cost between one and two billion euro. It will provide 28,7 bcm Bulgaria with various gas sources, 1,5 0,5 (17,366 bcm it will assure Bulgaria's central role bcm bcm for 2014) in the future gas supply routes to Planned gas Europe and will allow the country hub Balkan to cash in from the billions of cubic 1,8- 3,1 bcm meters of gas that are supposed to Varna flow via its transmission network. 1,8- 3,1 “The gas concentrator is exactly bcm the kind of engine for the Bulgarian economy that we were looking Sofi a for years, it combines significant investments with guaranteed high return”, says the former Bulgarian Prime Minster Ivan Kostov (who 0,8 bcm is otherwise critical of the policies (0,14 bcm 14 bcm (12,9 bcm of the government led by Prime for 2014) 3 for 2014) Minister Boyko Borissov). Kardjali bcm Wow, what beast is that? 3 bcm (1,75 bcm 1 bcm 3-5 bcm Turkey The establishment of a gas hub 1-3 bcm for 2014) in Bulgaria is one of the most widely publicized priorities of Borissov’s government. He never stops Project for LNG terminal near promoting it, he even drew a scheme Alexandroupolis Capacity 6.1 bcm LNG terminal Marmara - of it for the European Commission Greece annually Capacity - 8 bcm annually President Jean-Claude Juncker who Interconnector now proudly presents the scribbles Bulgaria-Romania in his office. The hub is so important LNG terminal near Revithoussa TAP The route of South Stream or a possible successor of to the government that sometimes – Capacity - 5 bcm annually, now Main gas pipeline the failed project it seems that the it subjugates its Greece uses only 2 bcm. Bulgaria Pipeline diversion Interconnector Greece- foreign and energy policies to the can receive gas from Revithoussa even now Transit gas pipeline Bulgaria (planned) hub (particularly the relations with Interconnector Bulgaria- Interconnector Bulgaria- Russia) in order to ensure the green Source: Bulgartransgaz, TAP, DESFA Turkey (planned) Serbia (planned) light for the project. The idea sprung out immediately after the cancellation of South 2014 that South Stream is dead, for the Bulgarian the government's big energy projects, made no Stream – the giant Gazprom project government to come up with its new gas secret of the relation: “Without a new pipeline to bypass Ukraine as a gas transit infrastructure plan. The timing made two things across the Black Sea we can't speak about a hub”. route with a new pipeline across the obvious: the hub idea had been brewing for some The gas hub plan is only briefly described in the Black Sea, connecting Russia directly time (and probably was discussed with Gazprom), Bulgartransgaz's 10-year development plan. The to Bulgaria. It took only a week after and second, it is inextricably related to the failed state-owned gas transmission operator hints at Russian President Vladimir Putin South Stream pipeline. Deputy Prime Minister the new infrastructure that needs to be built for announced in Ankara at the end of , who is the main driver of the hub, mainly a new pipeline from the > 50 50 KQ ECONOMY/ENERGY

PLAYERS TO WATCH// > 49 coastal town of Varna to the northwestern city of Oriahovo that broadly follows the South Stream TOMISLAV DONCHEV – planned route. Government officials frequently THE SHADOW ENERGY MINISTER describe the prospective sources of gas – Gazprom, the Shah Deniz II consortium, LNG supplies from Greece and Turkey, and possible local production MOST DECISIONS ABOUT THE BIG ENERGY from the prospective Black Sea Khan Asparuh PROJECTS ARE TAKEN IN THE VICE- exploration block (developed by a consortium between Total, OMV and Repsol). It is not mentioned, PREMIER’S OFFICE however, how the market place will be organized or if there are any interested parties that will buy gas from it. All South East European countries with more or less considerable gas consumption have more supply options than Bulgaria. There is a simple explanation for the scant information about the hub: this would be the South Stream pipeline in disguise. The Gazprom-led project failed to get Brussels’ approval because it violated the EU's Third Energy Package which requires the owner of any newly built infrastructure to share it with its competitors. Gazprom didn't want that. The gas hub - in theory - could circumvent those restrictions. Gazprom will deliver the gas only to SOMETIMES IT FEELS THAT BRUSSELS ENCOURAGES BULGARIAN GAS HUB IDEAS IN ORDER TO KEEP THE COUNTRY ON TRACK WITH THE POLICIES IT FAVORS.

Bulgaria, claiming the Black Sea pipeline is upstream Deputy Prime Minister to improve the National Electricity infrastructure, exempted from the EU's Third Energy Tomislav Donchev is Company’s (NEK) cash flow (without Package. Then traders will buy gas from the hub and in charge of the whole them NEK would have gone bankrupt) it will be transported via the Bulgarian transmission economic portfolio of he proposed an introduction of a Robin operator's own pipeline system. D the government but his Hood tax equal to 20% of the revenues The gas hub idea received approval from favorite beats are EU funds and energy of energy companies. The tax, however, the European Commission. In May 2016, the EU policy. He was minister in charge of EU was supposed to be paid only by the Commissioner for Climate Action and Energy funds in Borissov’s previous government renewable energy producers (RES). Later, Miguel Arias Canete said that Bulgaria has the but the energy sector is his newly a similar measure was adopted, with a potential to become one of the important gas hubs. acquired passion. 5% fee paid by all electricity producers. But the European Commission and the Bulgarian Mr. Donchev is the main engine The proceeds from the fee are used to government often speak in different languages. behind the idea to establish a gas hub trim NEK’s tariff deficit (the difference While the Commission emphasizes the need in Bulgaria. He frequently talks about it between the price of electricity and the for Bulgaria to be connected to three different and claims that he has the full support of regulated consumer prices). gas sources and fully implement the EU's energy Brussels. Most energy experts, however, Most probably, Mr. Donchev bowed to competition laws, the Bulgarian government talks are skeptical and see the European pressure from industrial organizations about huge investment plans worth up to two Commission endorsement of the gas hub which at that time were lobbying billion euro, conspicuously close to the price of plan as a way to push Bulgaria to make for drastic measures to cut energy the construction works for South Stream won by other reforms in its energy sector that prices. They raised the spectre of mass Bulgarian companies. are part of the EU agenda. bankruptcies of industrial companies Sometimes it feels that Brussels encourages The Deputy Prime Minister is also and proposed nationalization of RES Bulgarian gas hub ideas in order to keep the country supervising the nuclear power plant and some other electricity producers. on track with the policies it favors. Until now it has (NPP) Belene project and the planned Tomislav Donchev’s efforts might succeeded: the project development of the Greek- construction of a new unit at Kozlodui help bring some energy diversification Bulgarian gas interconnector is progressing, albeit NPP. for Bulgaria, but there is a risk that too big slowly, and Bulgaria is liberalizing its gas market Sometimes, Mr. Donchev has bizarre ambitions could lead to overinvestment allowing more competition. ideas. During the negotiations on the in infrastructure that will not be actually measures that were taken last year needed. КQUARTERLY 51

FOUR YEARS OF AN OBVIOUS CARTEL NEK MIGHT SURVIVE A-95 prices without taxes and duties. All prices lvs per littre AFTER ALL Following the record high fuel prices in 2014 and 2015 and the THE NATIONAL ELECTRICITY public outcry the retails dropped the prices. COMPANY IMPROVES FINANCIAL The margin between Lukoil’s POSTURE wholesale and the retail prices A-95 Romania А-95 EU-28 A-95 Bulgaria reached historical maximum – 36% The margin between the Bulgarian Last year, the National Electricity Company (NEK) 1.5 and EU prices without taxes and duties reached historical maximum as well. improved its results for the first time since 2012. In 1.3 2015, its loss was 197 mln levs (101 mln euro), about a third of the 2014 loss of 587 mln levs (300 mln euro). 1.1 Following a KZK decision in 2012, the fuel prices without taxes and 0.94 NEK, which is the backbone of the electricity duties became higher than the system due to its status of a single buyer from the 0.9 prices in Romania or EU-28 power plants and supplier to the regulated market (households and small businesses), has been in 0.7 The requirement that all importers need to maintain constant financial distress over the last five years. 60-days reserves in Bulgarian excise registered storage enters With the regulated market accounting for about into force Source: EU Oil Bulletin 0.5 50% of electricity consumption in Bulgaria, NEK’s Jan ‘10 Jan ‘11 Jan ‘12 Jan ‘13 Jan ‘14 Jan ‘15 Jan ‘16 Sept ‘16 losses had been mounting since the second half of 2011 due to a regulatory decision to suppress KZK FINALLY DISCOVERS a rise in consumer prices. The State Energy and Water Regulatory Commission failed to adequately CARTEL ON THE FUEL MARKET compensate NEK for the legislatively imposed obligations to buy expensive green energy, whose production boomed in 2012, as well as electricity co- A YEAR-LONG INVESTIGATION generated by central heating plans and industrial installations. NEK is also obliged to buy considerable BY THE REGULATOR amounts of expensive electricity under long-term power purchasing agreements with the local units FINDS PRICE FIXING of US-based AES Corporation and CountourGlobal. NEK didn’t file for bankruptcy only because of its public status and the fact that most of its debtors The Commission for price at the pump to soar like a rocket. were other state-owned companies. Protection of Competition But when the price of oil fell, prices at Since the beginning of 2015, however, NEK has (KZK) filed a price-fixing the pump dropped like a feather, while been receiving significant financial injections as claim against six fuel retailers profit from the increase margin a result of amendments to the Energy Law. All the T retailers in October. between the wholesale and retail prices proceeds from the sale of the state-owned CO2 Lukoil Bulgaria EOOD, Eco Bulgaria JSC, (see the graph). Everyone could see that quotas (part of the EU ETS) have been directed Shell Bulgaria EAD, OMV Bulgaria OOD, the prices at all gas stations in Bulgaria towards NEK, reducing its tariff deficit. In addition, Nis Petrol Ltd. and Petrol were found were changed daily in a perfectly all electricity producers are obliged to pay a 5% levy to have exchanged price information, coordinated manner. on their turnover, with the proceeds going to > 52 conducted a common pricing policy and This approach changed recently, shared information about their sales in partly as a result of the KZK investigation, order to prevent or distort competition partly as a result of the growing influence NEK PROFITS in the fuel market. of the gas stations owned by Vesselin In thousand levs KZK has yet to publish its conclusion Mareshki, a maverick businessman 200000 from the investigation of alleged who shattered some of the established abuse of dominant position launched practices on the fuel retail market. Gas 100000 against Lukoil-Neftohim, Bulgaria’s sole and diesel are 20% cheaper at his VM 0 refinery. gas stations compared to the prices of -100000 KZK published the results of its major retailers nationwide. The peers of -200000 year-long investigation against the fuel Mareshki accuse him of allegedly selling retailers just three weeks before the smuggled fuel or evading tax payments. -300000 presidential elections. The pricing policy Allegations aside, the spread of the VM -400000 of the fuel retailers – the so-called brand has led to considerable regional -500000 “rocket and feather” approach, has long price differences. -600000 angered consumers. When oil prices The fuel retailers will probably 20102011 2012 2013 2014 2015 rose, retailers immediately passed on the appeal the KZK conclusion before the full increase to consumers, causing the Supreme Court. Source:NEK's financial statements 52 KQ ECONOMY/ENERGY

>51 NEK as well. The third significant boost to NEK finances to NEK to repay debt owed to Russia’s Rosatom. NEK lost came from an increased “obligations to society” fee. The fee is an arbitrage in the International Court of Arbitration (ICC) paid by all electricity consumers and is intended to compensate in Geneva against the Russian company which is the main NEK for its obligations to buy green and co-generation electricity. supplier of equipment for the Belene NPP. The ICC awarded Until recently, however, big businesses were not obliged to pay a 620 mln. euro compensation to Rosatom’s subsidiary the fee in full. Atomstroyexport for the manufactured, yet unpaid for NEK financial stabilization remains shaky, because none of equipment for the ill-fated nuclear power plant project. The the fundamentals in the Bulgarian energy system has improved. law doesn't specify the precise amount of money, because the ICC awarded 167,000 euro interest to Rosatom for every day of delay in the payment of NEK’s dues. REDUCED ENERGY BILLS FOR BIG The construction of the Belene NPP, which began in 1981, INDUSTRY was restarted in 2006 but ran into serious problems three INDUSTRIAL CONSUMERS WILL BE SPARED years later. NEK was left as the sole investor in the project THE FULL COST OF GREEN ENERGY. following the RWE departure. The German company was selected as co-investor in 2008 but several months later it became disgruntled by NEK's method of work and withdrew from the project in 2009. Having remained alone, NEK was Euro per kWh, unable to pay for the construction. all taxes and levies included Later, several attempts were made to reinvigorate the project but they only postponed the final termination and 0.35 made it more expensive. The overall cost of the unsuccessful attempt to build a second NPP in Bulgaria is 1.3 billion euro, 0.3 most of it taxpayers' money. 0.25 Strangely, Bulgaria has decided not to contest the ICC 0.2 ruling, neither in Geneva, nor in Sofia. Some observers see the decision as a goodwill gesture towards Russia. On the 0.15 one hand, Rosatom might help resell the equipment, while 0.1 on the other the company might smooth the way for other 0.05 energy projects with Russian participation. 0 Midium size Midium size Midium size Midium size BULGARTRANSGAZ MAKES ANOTHER Household – Household – Business – Business – STEP TOWARDS OPENING THE GAS Bulgaria Germany Bulgaria Germany MARKET Source:Eurostat THE COMPANY FINALLY ALLOWED VIRTUAL GAS TRADE As of August, big electricity consumers have a special discount on the green energy component of their bills. Companies with As of July it is already possible to conclude virtual gas deals annual consumption of more than 30 GWh of electricity and in Bulgaria, i.e. without physically moving the gas. In this energy intensive production will pay only 15% of the green energy kind of deals a company in Greece could swap gas volumes component of the “obligation to society” fee. While the rest of the with a Bulgarian counterpart. The Bulgarian company will electricity consumers are levied a surcharge of 35.77 levs per receive them either from locally stored gas or from the MWh, big electricity consumers pay between 16.12 levs (8.2 euro) transit flows to Greece. and 26.53 levs (13.56 euro) depending on their energy intensity. The technical breakthrough came with the modernization The companies could get a rebate on their electricity bills the interconnection point (IP) Kulata-Sidirokastro which for the past 12 months, because a government decree has now permits virtual reverse flow. been postponed for almost a year, awaiting approval from the The more important regulatory breakthrough is due European Commission. to years of European Commission pressure on Bulgaria to align national legislation more closely with the EU practice. Until recently, the Bulgarian transmission operator BELENE NPP SUCKS Bulgartransgaz rejected any attempt for virtual trade, ANOTHER BILLION LEVS referring to its contract with Gazprom that doesn't permit 620 MLN. EURO WILL BE PAID TO swap deals. Several years ago, Bulgartransgaz won a case RUSSIA’S ROSATOM FOR EQUIPMENT before the European Court of Justice against the European MANUFACTURED FOR THE TERMINATED Commission which sued the company for its intransigence. NUCLEAR POWER PLANT PROJECT However, pressured by Brussels, both Bulgartansgaz and Gazprom (DG Competition is still investigating the Russian The Bulgarian parliament voted a special law on September 20 company for suspected abuse of dominant position) had to stipulating that the government could loan an unspecified sum change their practices. КQUARTERLY 53

NATURAL GAS PRICES European market. Azeri SOCAR, and Edison hope to enter the Southeast European gas market as well. 1st half of 2016 BEH hopes its possible stake in the Alexandroupolis Euro per kWh, terminal will allow Bulgaria to tap the global LNG market without having long-term supply contracts. Such flexibility all taxes and levies included will finally permit Bulgarian companies to arbitrate between 0.045 various suppliers and will put pressure on Bulgaria’s main 0.04 supplier, Gazprom, to price its gas according to the global 0.035 trends. 0.03 0.025 0.02 LUKOIL CONSIDERS SELLING ITS 0.015 BULGARIAN ASSETS 0.01 THE RUSSIAN COMPANY IS THE 0.005 DOMINANT PLAYER IN THE BULGARIAN 0 FUEL MARKET Inustrial consumers Inustrial consumers Oil giant Lukoil declared at the beginning of June that Bulgaria Germany the sale of its assets in Romania, Bulgaria, Italy and the Source:Eurostat Netherlands is under discussion. The statement of Lukoil's president Vagit Alekperov signaled the company's intention The first deals concluded in July only tested the system. to concentrate its business on exploration and development At present, the Gazprom-supplied gas is cheaper for the and divest some of its non-core assets. Bulgarian consumers than the available alternatives. Lukoil's announcement came as a surprise to Bulgaria. The Russian company is doing quite well in the Bulgarian market. Even though the company regularly ignites consumer BULGARIA MULLS ACQUIRING A criticism because of its price policy, it has never met serious STAKE IN A LNG TERMINAL IN GREECE regulatory or legislative challenges like in neighboring SOFIA WANTS TO INCREASE Romania where it faces charges of tax fraud. COMPETITION IN ITS GAS MARKET AND Lukoil owns Bulgaria's sole oil refinery, Lukoil Neftohim PUT A BRAKE ON GAZPROM’S PRICE Burgas, as well as Lukoil-Bulgaria, which is the biggest fuel DECISIONS wholesaler; and a chain of more than 200 filling stations, which make up about 35% of the fuel retail market. The The Bulgarian Energy Holding (BEH), the company which company’s combined annual turnover from its operations in controls state-owned energy assets, mulls acquiring a stake Bulgaria exceeds 6 billion euro. in the Alexandroupulis LNG terminal project. The 400 mln. Earlier this year, the Bulgarian competition authority, euro LNG terminal, promoted by Greece’s Gastrade SA, will KZK, launched an ambitious probe into suspected abuse of be located on the northeastern Greek Aegean coast, near dominant position against Lukoil Neftohim. The results are Turkey. yet to be seen. The move follows the poor results of the first market In recent months, Azeri oil major SOCAR expressed test of the Greek-Bulgarian gas interconnector (IGB). The interested in the Bulgarian oil and gas market, hinting at IGB project, with annual capacity of 3 billion cubic meters, possible investment in the refinery. aims to provide Bulgaria with an uninterrupted access to alternative gas supplies. The project is planned to enter into operation by 2019. But at the end of December 2015 only two companies – Bulgarian Bulgargaz and Greek DEPA - expressed interest to use the future pipeline, with declared combined interest of 1.2 billion cubic meters annually. Bulgargaz has a contract with Azerbaijan to buy 1 billion cubic meters of gas annually when the Caspian field Shah Deniz II becomes commercially operational, while DEPA expressed interest to import into Bulgaria 200 mln. cubic meters of gas. The Bulgarian interest in the Alexandroupulis LNG terminal prompted more companies to attend the second non-bidding phase of the IGB market test. Most of them plan investment in the LNG terminal. The first one, Gastrade SA, is the originator of the project, Nobel Energy considers the Aegean terminal as a possible entry point into the 54 KQ ECONOMY/ENERGY WHAT? Yanevagate: WHAT WAS The “Rotten apples” of the Bulgarian judiciary

THAT? definition:

YANEVAGATE, A series of leaked wiretapped conversations by senior magistrates expose how thin the separation of powers in Bulgaria is. They also offer a rare glimpse into the ways of BAI HUI AND politics and law in the country. Imagine a number of leaked tapes of two WHAT THE LEAKS EXPOSE KTBFILES senior magistrates talking about influence In another series of monologues she peddling between members of the different claims that the “secret services belong to branches of power, illicit practices within the Movement for Rights and Freedoms the state prosecution and under-the-radar (MRF)”, later specifying that they are communication between senior members controlled by the infamous member of the of the executive and the judiciary, including party, the ex-court investigator, present Prime Minister Boyko Borissov, his GERB- media and business mogul Delyan Peevski. lieutenant , Chief In 2013 the attempt by the Oresharski Prosecutor and many other government to put Mr Peevski formally members of the Supreme Judicial Council in charge of the Bulgarian secret services (SJC) and even the secret services. became the catalyst of one of the largest protests in modern Bulgarian history. A STORY OF AN ILLEGAL Another conversation sheds light on the WIRETAPE alleged love affairs of Prime Minister Boyko In any other EU country this would Borissov and the “presents” in the form have caused a huge public scandal, uproar of mansions in Barcelona he buys for an within the opposition and a large-scale unknown mistress. Or, businessmen related independent investigation. Not in Bulgaria. to First Investment Bank were ready to The strongest reaction came from the gather money to bail out Yaneva and buy French ambassador Xavier Lapeyre de off media comfort from the editor of one of Cabanes, who called the two magistrates in the leading daily newspapers in the country, the conversations “the rotten apples” of the “24 hours”. Last, but not least - in one of the You have probably heard idioms and Bulgarian judiciary. What would become leaked audio files Mondeshki and Yaneva proverbs in Bulgarian that read like known as the “Yanevagate” scandal, after discuss their issues with a fortuneteller. “The horse went into the river” or “A the owner of one of the recorded voices, Later on, a series of independent united company moves a mountain”. would never be properly investigated technical inspections by foreign experts when translated to English word- by the prosecution, the majority of SJC found the footprint of the Bulgarian secret for-word They cause chuckle among magistrates would simply ignore it, as services in the recordings and proved that your Bulgarian friends, but the only would the opposition parties. Yet, if they the voices of Ms Chenalova, Ms Yaneva thing you can do is to raise politely were properly investigated, these tapes and Mr Mondeshki were indeed their own. your eyebrows. Many more similar could have exposed the secretive, roguish When Yaneva testified, she simultaneously meaningless phrases can be found and sometimes purely absurd ways claimed she didn’t remember anything in various websites which make Bulgaria is governed. from the conversations and the recordings fun of the habit (typical not only A year ago, investigative reporting had been manipulated. Unsurprisingly, for Bulgarians) to translate literally website Bivol released the first of the prosecution office dropped the case idiomatic expressions and proverbs what would become a series of leaked because it found that the recordings had into English. wiretapped conversations between the been manipulated...because they were cut The current section of KQ has ex-chairwoman of the largest district into separate shorter pieces. The Supreme the ambition to explain the jargon of court in the country, the Sofia City Judicial Council (the self-governing body Bulgarian politics and economy which Court (SCS) Vladimira Yaneva, her ex- of the Bulgarian judicial system) found no sometimes is as inexplicable if literally subordinate in charge of trade disputes, ethical dilemma in the substance of the translated as in the above mentioned Roumiana Chenalova, and lawyer Momchil conversations that could expose grand phrases. Who’s Cecoron? Or what Mondeshki. In one of the conversations misdemeanors on behalf of members of “Tsvetan thoughts” means and what for Yaneva tells Chenalova how Chief the government and the judiciary. They the love of god ladybirds have to do with Prosecutor Tsatsarov warns her about an wrote the case off by simply saying that management? impending investigation against her. the recording might be illegal. КQUARTERLY 55 Bai Hui, KTB files where are your basic manners? Secrets of the oligarchy definition: definition:

An emotional slip of the tongue made by A string of leaks and acquisitions reformist-turned-oppositionist Radan Kanev linking former business partners Mr revived a pop culture reference from the early Vassilev and Mr Peevski, offers a look 2000s in a new light. And it shows how the last behind the scenes of business and barriers before impolite and improper public political life in Bulgaria speaking are simply gone.

Prime Minister Boyko Borissov is not known for Scandals between former business partners who had a nasty break his placid temper, yet very few things annoy him as up could be as revealing as the shouting between former lovers, who much as tongue-in-cheek comments by his ex-ally split breaking the family china. This is now happening in Bulgaria. Radan Kanev that mock him. Mr Kanev is the leader Tsvetan Vassilev (you can see his name here and there in KQ), the of the Democrats for Strong Bulgaria (DSB) party, former owner of bankrupt Corporate Commercial Bank (CCB), began still part of the half-governing, half-oppositionist spitting details of his business dealings in the last ten years that Reformist Bloc (RB). He withdrew his and his party’s shed a lot of light over the connection between business and politics. support for the government last December when Of course, his newly found candidness did not come before his bank GERB passed a watered-down version of the crucial went down; he had to flee to Belgrade and his former partner Delyan judicial reform bill, yet his critique of Mr Borissov Peevski (also a visible presence in this issue of KQ) began to take dates way back. But after the Prime Minister control over the remains of their former media and business empire. summarily humiliated the Reformist Bloc ministers In a string of leaks to a blog of a former journalist and most by warning them how easily they can get out of their recently in an interview with KTBfiles, a research project aiming ministerial chairs, Mr Kanev’s lost his temper and to explain how it was possible for CCB to highjack the Bulgarian called Mr Borissov “Bai Hui” in a TV show. authorities, Mr Vassilev made public a lot of dealings that were The phrase means little to non-Bulgarians, suspected but have never received any authoritative proof. „There unless you are from China, where it means “the is no way you can do serious business in Bulgaria if you refuse to place where everything meets”, a symbol of Buddha make kickbacks to politicians”, Vassilev said in the interview with (as well as the name of a photo model). And it would KTBfiles. have been nice if Mr Kanev used the expression in its His main accusations concern two of the biggest business deals Chinese meaning. Yet in Bulgarian it literally means in Bulgaria in the last ten years – the privatization of Bulgartabac “Uncle D*ck”, a reference to a famous refrain by the and the recent acquisition of BTC. According to Mr Vassilev the popular rap trio Upsurt that goes: “Bai Hui, you have owners are just a façade for the real interests behind the deal. no basic manners”. The phrase has almost been The former owner of CCB claims that his offer for Bulgartabac forgotten by the general public, as it was popular was rejected in 2011 so that Mr Peevski could take control over the more than a decade ago. Yet, its mentioning with company. Mr Vassilev claims now that current PM Boyko Borissov, his reference to the Prime Minister sparked interest - friend Alexander Staliyski and MRF leader Ahmed Dogan arranged the and outrage - in the Bulgarian online society. deal and were supposed to receive some of the company’s shares in Many supporters of Mr Kanev, who see in him exchange for their alleged support for the buyer of Bulgartabac. Back a rare modern politician, bashed him for sinking then the government decided that the new owner of the cigarette to the level of Mr Borissov, who doesn’t shy away producer needed to commit firmly to buying tobacco from domestic from using unsophisticated language (to put it producers. Such a requirement made tobacco majors uninterested mildly). Others, though, saw his words as a genuine (Mr Vassilev partnered with the Korean KT) and opened the way expression of his exacerbation with the ways Mr for domestically related interests. The alleged plot, with schemes Borissov treats his colleagues, especially after Mr drawn by Mr Peevski’s lawyer, appeared online a year ago, but their Kanev apologized to the TV viewers. How did the authenticity has not been verified. Prime Minister respond? He simply called Radan Mr Vassilev makes similar accusations in connection with the Kanev a “snot”. BTC deal (see on page 24). The telecom changed hands recently cheaply. Again the authorities, which are the main loser from the deal, are suspiciously passive. Mr Vassilev is not the perfect whistleblower but such revelations usually need to be followed by a serious investigation. The Bulgarian prosecutors are as usually absent. The only effect of the accusations of corruption until now is a hacker attack against ktbfiles.com. 56 KQ WHERE TO GO, WHAT TO DO

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5.11 13-14.11 04.12 A new exhibition by Neo Dervish – a Tuxedomoon – Live the renowed Bulgarian performance piece by in Sofi a. Legendary contemporary artist Turkish dancer Ziya US experimental act Pravdoliub Ivanov. At Azazi in collaboration Tuxedomoon are Sariev Contemporary with local musicians, performing their avant- in Plovdiv. Also an photographers and garde classic album Half- opportunity to explore actors. At National Up until 23.11 Mute. Sofi a Live Club. Plovdiv's art district Theatre. 19:00 Through the Open 20:30 Windows - еxhibion of Russian impressionist paintings. at National Art Gallery

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WORKSHOP Cuisine with QNRDR

bacchus.bg/events

with INA and rossi paunovi from roseysmark.com

13 th November 2016 | 11am-2pm

Culinary School Food Connection Sofi a, 1602, 64, Ami Bue, str. fl . 2