FT SPECIAL REPORT Investing in Bulgaria Tuesday November 29 2016 www.ft.com/reports | @ftreports Mr Radev,who speaks fluent English, German and Russian and studied in the Inside US at the Air War College in Alabama, pledgedthataspresidenthewouldwork Reliance on Russian Vacuum at the to end EU sanctions against Moscow for its annexation of Crimea and interven- gas almost over tionineasternUkraine.Healsostressed Bulgaria and its Bulgaria’s commitment to the western system, saying its membership of the neighbours are building EU and Nato is not negotiable. He cross-border pipelines top threatens added: “But to be pro-European doesn’t Page 2 necessarilymeanbeinganti-Russian.” Despite widespread dissatisfaction German-style ‘grand’ with both main parties, Gerb is likely to beat the Socialists at a general election coalition looks unlikely to hinder but would not be able to win an outright The curtain seems to majority, says Ognian Shentov, chair- be coming down on man of the Center for the Study of Democracy,aSofiathink-tank.“Borisov Borisov era will come back with a strong counter- Page 3 progress attack [following the presidential defeat],”he says. “Gerb also has an edge outsideSofiaandothercities.” Gerb controls three-quarters of The new president’s first move will be to call a municipalities and local government officialshaveensuredthatEUlargesseis general election, explains KerinHope spread as widely as possible, especially inregionsofhighunemployment. ulgaria’sreputation for politi- Borisov as Tsetska Tsacheva, Gerb’s Few observers predict that Gerb Country faces drastic cal stability compared with presidential candidate and the speaker would be able to capture more than a skills shortage some of its neighbours has ofparliament,hadbeenhisownchoice. 25-27 per cent share of the vote. That come under threat after this While the Bulgarian presidency is not would leave Mr Borisov struggling to Industry-sponsored month’s election of Rumen a US or French-style executive position, form another coalition government training will help fulfil BRadev, a former national air force chief itcarriessomemeaningfulpowers,such under the pressure of a looming dead- high-tech needs withnopreviouspoliticalexperience,as as the right to reject legislation and the line:BulgariaisduetotakeovertheEU’s Page 3 president, by an unexpectedly large taskofbrokeringtheformationofanew six-month rotating presidency in Janu- margin. government at times of political disar- ary 2018 and will need time to prepare Mr Radev, an independent candidate ray. Mr Borisov’s resignation leaves the foritsEuropeanresponsibilities. Vibrant start-up scene backed by the pro-Russian Socialist country without effective leadership Most of Gerb’s half dozen possible attracts interest party, appealed to many voters as a and with no chance of holding an elec- coalition partners seem unappealing. patriot without connections to the tionbeforenextAprilattheearliest. Echoing Europe’s rising populist trend, But more private finance country’s mistrusted political class. His According to the constitution, outgo- Rumen Radev: ‘Pro-European does not mean being anti-Russian’ — Darko Vojinovic/AP threeso-called“patrioticparties”repre- is the key to persuading popularity soared when he piloted a ing head of state Rosen Plevneliev can- senting rightwingers of different stripes companies to stay MiG-29 fighter jet in an aerobatics dis- not call another election so close to the togetheracaretakerleadershipuntilMr represents the latest example of have gained ground, even though only Page 3 play at an aviation show outside Sofia end of his term. Also Mr Radev can only Radev takes over,after which Mr Radev Moscow’s influence in a country that one, the ultranationalist IMRO, is likely two years ago. The performance fix an election date after he takes office will have to do the same. In an effort to wastheSovietUnion’sclosestsatellitein tocaptureasignificantshareofthevote. attractedmorethan1mYouTubeviews. on January 22 and it must be set for two avoid this, Mr Plevneliev has called for the communist period and remains The fractious Reformist Bloc, Gerb’s Auto parts industry Even before the election result was monthslater. “consultations” with a cross-party largely dependent on Russian natural natural ally as the other main pro-Euro- powers up confirmed, Boyko Borisov, the prime The country faces the awkward pros- groupofseniorpoliticians,includingMr gas. Opinion polls show that more than pean party,may not meet the 4 per cent The number of minister, announced his resignation as pectofbeingrunbytwosuccessivecare- Radev, in what would be the first test of two-thirds of Bulgarians have positive ofthevotethresholdforenteringparlia- head of a coalition government led by taker administrations. Following the the president-elect’spolitical independ- feelings towards Russia, which is cred- ment.Otherwise,thereistheMovement component makers has his centre-right Gerb party. The vote electedprimeminister’sresignation,Mr encefromhisSocialistbackers. ited with liberating the country from for Rights and Freedoms, representing doubled since 2012 was seen as a personal defeat for Mr Plevneliev is responsible for putting To some observers in Sofia, Mr Radev Ottomanruleinthelate19thcentury. Continuedonpage2 Page 4 Foreign investors must look beyond enduring problems GDP growth and FDI Forum’s latest competitiveness report. Business environment But WEF ranks it at only 110th and GDP growth FDI stock (bn) 115th when it comes to independence of The government has made () the judiciary and security of property efforts to encourage foreign rights. companies, but the travails Sofia-based lawyers advise their for- eign clients preparing to sign a contract of one UK-based property with a local partner to insist on a clause company illustrate potential permitting arbitration outside Bulgaria in the case of a dispute. To reduce risk difficulties, says Kerin Hope further, they also suggest setting up an investment partnership abroad, so that only the operating company is based in Bulgariaremainslessappealingtointer- Bulgaria. national companies than its larger “When it comes to property rights neighbour Romania across the Danube, outside the special economic zones our yet investment flows steadily into a - advice is to make sure that title deeds variety of sectors, from automotive are translated and that a history of title components and IT to logistics and food - transactions is compiled,” one lawyer processing. says. Foreign direct investment stock, a ThetravailsofEastBalkanProperties, measure of the total amount of foreign FT graphic Sources: IMF; Unctad a UK-based property company, under- investment in a country at a given time, score the risks associated with investing has risen from $23bn in 2006, before and services, long a source of friction in a poorly regulated property market Bulgaria joined the EU, to $42bn in with foreign companies preparing to where there are doubts about judicial 2015, although it is down from its 2013 entertheBulgarianmarket. independence. peak of $51bn, according to Unctad, the The situation is already markedly dif- Until February, Glorient Investment UN body overseeing trade and develop- ferent in the fast-growing technology Bulgaria, a local affiliate of East Balkan ment.Thefallininvestmentwaslargely sector: start-ups, outsourcing compa- that specialises in building retail duetothecollapseofaprivateBulgarian nies and software developers are all premises, was receiving rent regularly bank which had several foreign share- exempt from most licensing require- from 22 outlets of Technomarket, a holders and the shrinking of operations ments. Bulgarian electrical goods retailer from bysubsidiariesofanAthens-basedbank “The IT sector in particular is getting whom it bought the properties 10 years hithardbytheGreekcrisis,accordingto seriousinvestmentpartlybecauseofthe ago. anindependentconsultantinSofia. skilled workforce available but also But now Glorient says NSN Invest- Ontheotherhand,newinvestmentin because these companies don’t have to ment, a company that acquired Tech- manufacturing and services has shown go through a permitting regime,” says nomarket early this year, is suing Glori- a modest increase rising from €1.2bn in Alex Nestor, vice-president of the ent claiming its deals with the retailer 2010 to €1.6bn in 2015, according to American Chamber of Commerce in are invalid and the properties still data collected by InvestBulgaria, the Sofia. belong to Technomarket. Rents on the government agency for promoting for- However, despite making progress outlets have not been paid since the dis- eigninvestment. with governance since EU accession in pute began, according to Glorient’slaw- Investors will be taking advantage of 2007,thereisstillmuchtobedone. yer. low wage costs and a flat tax rate of 10 “It’s well known that Bulgaria has “We’re extremely worried about this per cent on corporate profits and per- problems with high-level corruption in breachofpropertyrightsinanEUmem- sonalincome,the lowestintheEU. politics and the justice system, we are ber state,”says Michael Uhler, East Bal- “We’re a natural bridge between east kan managing director. Glorient is con- and west . Companies can invest in testing NSN’s claims in court in Bul- Bulgaria and expand across Europe,” garia. says Stamen Yanev, executive director Investors benefit from NSN could not be reached for com- ofInvestBulgaria.Hegesturestowardsa low wage costs and a flat mentaboutthedispute. map of Bulgaria depicting a swath