THE PHONY BATTLE FOR BTC VTB SELLS BULGARIAN TELECOMS OPERATOR

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1 ECONOMY/POLITICS/ENERGY 01 NOVEMBER- JANUARY 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 > PAGE 31 IS BULGARIA ENTERING A DEBT SPIRAL? SINCE 2008 BULGARIAN GOVERNMENTS HAVE FAILED TO RESTRAIN THE GROWING FISCAL DEFICIT, WHICH COULD BE A LONGTERM PROBLEM FOR THE BUDGET > PAGE 23

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3 In this issue: 03 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 17 ALWAYS WITH EUROPE, NEVER AGAINST RUSSIA Is Bulgaria under Boyko Borissov still a viable Western partner? Or is it Russia s Trojan horse in the EU? 23 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 31 THE PHONY BATTLE FOR BTC VTB sells Bulgarian telecoms operator to VTB 42 NOT SO STRESSFUL TEST The banking system review was expectedly positive, yet questions remain 48 DREAMING ABOUT SOUTH STREAM What are the chances of Bulgaria becoming a gas distribution center? Ilin Stanev, Managing editor For many years a lot of our readers have asked us to do an English language version of Capital. Capital, after all, is the closest thing in Bulgaria to a newspaper of record, but, despite Google s best efforts (thank you, guys!), its authoritative voice remains restricted mainly to Bulgarian readers. Now you have it. KQuarterly is not simply an abridged version of Capital Weekly and Capital Daily. We publish original articles that summarize the main events in the last quarter of the year and shed some light on the upcoming months. KQ enjoys the benefit of having more time to think through the chaotic Bulgarian political and business life and to present a clear picture of its various developments and shenanigans. You can expect a lot of data that can give you immediate understanding of Bulgarian economy, as well as many authors and experts who are not part of our editorial team and will broaden our covarage of the events in Bulgaria. If you wonder why we chose K, instead of C for the name of this publication, it has nothing to do with us trying to be original, or evading some probable trademark violation. Капитал is an established brand we cherish, so we take the liberty to show this in our English language title. Enjoy KQ. Published by Economedia AD 30 Ivan Vazov str., Sofia 1000 phone (02) kq@capital.bg Managing editor Ilin Stanev Design: Madlen Nacheva Prepress Konstantin Vachkov Advertisement Angelina Todorova tel reklama@economedia.bg We would be grateful if you give us your feedback. If you wish to subscribe for KQ, give us a call on: or send an kq@economedia.bg

4 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

5 POLITICS КQUARTERLY 3 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 The upcoming presidential elections in Bulgaria could be the tipping point for a possible systemic change in the country s politics. The election campaign signals a weakening of the pro-eu consensus and general slide towards national-populism. This is hardly good news for the country as it may lead to instability and turbulence. DEVELOPMENTS TO FOLLOW: Bulgaria will hold presidential elections on 6 November. Polls suggest there will be a run-off on 13 November, as none of the candidates is expected to win more than 50% of the vote in the first round. Prime Minister Boyko Borissov announced that unless the nominee of the ruling GERB party, Tsetska Tsacheva, leads in the first round, he will resign to trigger early parliamentary elections. If Mrs. Tsacheva wins though, Mr Borissov is expected to reshuffle the ruling coalition and strip the junior partner in the government coalition, the Reformist Bloc, of some of its power in the ministries. There are signals that GERB would seek deeper cooperation with the two far right nationalist forces in parliament, the Patriotic Front coalition and Attack party. In addition to electing a new head of state, on 6 November Bulgarians will also vote in a national referendum initiated by TV host and music star Slavi Trifonov. The three questions that will be asked refer to state subsidies to parties, whether members of parliament should be chosen by a simple majority, and if voting in elections and referenda 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 five constituent parties will decide but one of them, Democrats for Strong Bulgaria, is already considering pulling out. Its leader Radan Kanev is undertaking a nationwide tour to present his ideas, presumably in preparation for a new political project.

6 4 KQ POLITICS 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 DANIEL SMILOV* T The upcoming presidential elections in Bulgaria could be the tipping point for a possible systemic change in the country s politics. The election campaign signals a weakening of the pro-eu consensus and general slide towards national-populism. This is hardly good news for the country as it may lead to instability and turbulence. The reasons for the systemic change are both external and domestic. For the last two decades Bulgaria has enjoyed a rather favorable international environment, in which the EU and NATO have always been important anchors and stabilizers. The general course of Bulgarian governments was in synchrony with the other European capitals, which has contributed to the creation of a sense of continuity and even inevitability of the most important political decisions. This sense is now gradually being lost with the succession of crises affecting the EU, and with the aggravation of the security situation in both Ukraine and the Middle East. Most importantly, after the Brexit referendum the EU has lost its previously unquestionable soft power and attraction. Or at least Brexit has given wings to a motley crew of populists, nationalists and Russophiles united in their Euroskepticism. The domestic factors pointing towards a possible systemic change relate to unfinished business in the fight against corruption, the reform of the judiciary and the fall out of the collapse of CCB (Corporate Commercial Bank). Although the second government of Borisov came to power in 2014 with promises to fix all these significant domestic problems, it is now apparent that it has failed to do so to a considerable degree. Progress is modest and hopes for further significant steps are generally weak. This has eroded the support for the government forcing it to rely more and more on ad hoc coalitions in parliament. Furthermore, the loss of support for GERB is particularly visible in the presidential race. Although the GERB s candidate Tsetska Tsatcheva - is still the favorite to finish first in the first leg of the election, the candidate of the Socialists, Roumen Radev, may win the elections in the second leg, according to some polls. Even the very prospect of a possible loss undermines the political position of GERB and makes early parliamentary elections in the first part of 2017 very probable. As a result of these developments, the pro- EU consensus among the political establishment in Bulgaria is falling apart. At one extreme, there are more and more voices calling for the withdrawal of the country from NATO and even the EU. These voices are for now marginal and ROUMEN RADEV, THE PARATROOPER OF THE LEFT The name of Maj Gen Roumen Radev, former Bulgarian Air Force commander, was almost unknown outside of the Armed Forces until three months ago, apart from a couple of short, yet memorable publicity spells - the staging of the largest Bulgarian air show since 1989 and the vocal handing of his resignation in 2015 in disagreement over the way the joint air policing of the Bulgarian air space with NATO allies should be handled by the Ministry of Defence. He has repeatedly stated that paying another state - be it allied or not - to defend Bulgarian skies is inadmissible. In 2015, PM Borissov urgently granted the air force 80 mln. levs (40 mln.euro) to extend the flight resource of the aging MiG-29 fighter jets in Polish maintenance facilities in order to keep Mr Radev in his post. Yet, after the negotiations between the two main left-wing parties BSP and ABV for a joint presidential nomination commenced, the Air Force commander s name popped out as of nowhere. At the beginning of August, as rumours of Radev possible nomination 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 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 had studied not once but twice at the Maxwell Air Force Base NCO Academy, a leading US pilot school, and graduated in the top of his class. He then worked at NATO headquarters. Yet, from the start of his election campaign he got hooked up on BSP s leading messages for spearheading better relations with Russia and investing in nuclear energy projects (after billions of losses in two previous attempts to build a new NPP), as well as anti-refugee rhetoric (adopted by most of the presidential candidates). Mr Radev fervently denies his opponents claims that he is pro-russian but the label sticks. Although his image as a patriotic defender of the nation in a tumultuous time gives him a chance to reach out beyond the BSP s elderly hard-line electorate, Mr Radev remains largely unknown to the general public.

7 КQUARTERLY 5 exotic, but their sheer presence is surprising in a country, which has benefited tremendously from the EU. More troubling are the centrist and nuanced voices which seemingly accept membership in the two major organizations of the West, but try to qualify this membership in a variety of ways. The most vocal are the so-called patriots who advocate bizarre ideas such as introducing mandatory military service or the deployment of missiles directed against Istanbul for deterrence of Erdogan. The patriots have capitalized politically the refugee crisis and have fanned a mass hysteria directed at all migrants or invaders, as they call them. The electoral chances of this bloc of parties may be positively affected by the upcoming presidential elections, in which their candidate Krassimir Karakachanov is expected to do well. This may be used as a springboard for the next parliamentary elections in which the national-populists may establish a sizeable presence in parliament. The stance of these political formations on major political issues is either problematic or ambiguous. Part of them sides openly with Russia and campaigns against EU and NATO. All of them are staunchly against common EU solutions to the refugee crisis, such as quotas, for instance; further, they harbor unrealistic hopes that Europe can simply ignore the refugee problem by surrounding itself > 6 WHAT DO THE PRESIDENTIAL ELECTIONS POLLS PREDICT Tsetska Tsacheva Rumen Radev Krassimir Karakachanov Ivaylo Kalfin Traycho Traykov Tatyana Doncheva 6.8% 7.8% 5% 4.5% 4.3% 8.7% 11.5% 8.3% Note: Gullup International original data presented presidential candidates' suport among all voters. The data was recalculated using the assumption of 50% voting activity. Disclaimers required by the Election codex "The poll was conducted in the period between 08 and 13 of October 2016г. by Alpha Research. The poll is published on the agency's site and was paid for with own funds. The research is conducted among 1025 adults in Bulgaria and utilizes stratified two-level sample with quotas for the main social and demographic characteristics. The data was collected with direct standardized interviews in the respondents homes.alpha Research is responsible for the data and interpretation, published on its website, but not for selective or manipulative use of such data." *Disclaimer: Gallup International Association or its members are not related to Gallup I1nc., headquartered in Washington D.C which is no longer a member of Gallup International Association. 21.4% 24.2% 29.9% 30.7% Alpha Research Gallup International The survey was conducted among 998 people from 4 to 12 October, "face to face" through direct semi-standardized interviews. One percent of the sample corresponds to 56,000 people (see Note:). The maximum standard statistical deviation of 50 percentage shares is ± 3%. The methodology is comparable to any regular monthly polling of "Gallup International" in Bulgaria since Source:Alpha Research, June 2016 TSETSKA TSACHEVA, THE STEPMOTHER OF THE NATION When PM Boyko Borissov announced his party s presidential nominee, Parliament Speaker Tsetska Tsacheva, he said: To this day, the nation has had many fathers, it is time for it to have a mother. GERB s candidate was named just a month before the election date and there has been a lot of speculation why this happened. The most benevolent theory was that the party wanted to protect its nominee from the usual smear campaign in the media that will try to ruin her reputation - something which some of the other candidates, including the main opposition one, Roumen Radev, have already faced. A more prosaic reason, however, was that none of the leading and popular members of the party would take the risk to become president and get constantly pressured by PM Borissov every time their stances clash. Ms Tsacheva apparently has no issues with that. She has been one of Mr Borissov s most loyal lieutenants ever since she entered Parliament and became its chair in July In this position she often shielded the PM from difficult opposition enquiries during question time, using her powers. She also refused to admit to discussion in parliament a legislative proposal drafted by the civic initiative Justice for 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. Ms Tsacheva is by no means the most popular GERB candidate and it is clear that the party will do its best to muster the full potential of its unwavering electorate to get her elected. This has worked so far. In 2007, shortly after joining GERB, Ms Tsacheva won 6000 votes in the mayoral elections in her stronghold, Pleven, that gave her only the third place in the race. Two years later, in the heyday of GERB s popularity, she won close to 55,000 votes as candidate for MP from Pleven. Her membership of the Communist Party until 1989, her lack of international experience, absent foreign language skills, a tendency for absurd slips of the tongue run against her. What is more, she is not seen as a strong, independent candidate who can emancipate herself from Boyko Borissov - a quality that the PM may cherish, yet one that makes the reputation of the future mother of the nation languish.

8 6 KQ POLITICS ALTHOUGH THE SECOND GOVERNMENT OF BORISOV CAME TO POWER IN 2014 WITH PROMISES TO REFORM THE JUDICIARY AND THE FIGHT CORRUPTION, IT IS NOW APPARENT THAT IT HAS FAILED TO DO SO. > 5 with razor-wire fences. On domestic issues the patriots are either irrelevant or worse. Regarding the constitutional amendment passed in 2014, for instance, they were rather instrumental in watering down the initial, more coherent proposals. While such a behavior is expected from the national populists, the real surprise is the Bulgarian Socialist Party (BSP) which has positioned itself very much in the Euroskeptical corner. As part of the Party of the European Socialists, the BSP is supposed to be one of the mainstream, pro-eu parties, supporting supra-nationalism and the humane treatment of refugees. The BSP is at odds with all these positions, however. Its presidential campaign is centered on issues such as sovereignty and regaining control from Brussels. In addition, it is a party which advocates the lifting of the sanctions against Russia and is generally seen as a lobbyist for Russian energy projects. Finally, the BSP has quite openly fanned fears of migrants and refugees for the purposes of electoral mobilization. Against this background, the only unequivocally pro-eu parties have remained in the Reformist Bloc (RB) coalition. Their presidential candidate Traycho Traykov has given them a temporary sense of unity, but the rifts they have on domestic politics make the survival of the whole coalition unlikely in the short term (see more in The uncertain future of the Reformist Bloc). After the presidential elections this ambiguous situation is likely to come to an end since Mr Borisov has signaled that he is willing to part with the reformers. The problem for him is that there are no other legitimate options for coalitions open to him, which may continue the limbo for a while. THERE IS A READY FORMULA FOR A RATHER FAST ORBANIZATION IN BULGARIA In fact, the key of the present situation is held by the still-biggest Bulgarian party GERB of Prime Minister Boyko Borisov. So far he has tried to balance among the different trends in Bulgarian politics, which has left his own position relatively indeterminate. Because of this balancing act, there are at least three rather different possible scenarios for developments in the country: MUDDLING THROUGH This scenario will materialize if Tsetska Tsatcheva still manages to win the elections. Then Mr Borisov will have an argument to stay in power albeit with certain ministerial reshuffles. Most probably, RB ministers will go and they will be replaced with GERB nominations. It is unrealistic to expect the patriots to participate in the government with ministers since this will shut the door to possible support from the Movement for Rights and Freedoms (MRF) the main Turkish minority party. In essence, in this scenario GERB will have a minority government with the explicit support of a variety of smaller political forces, and with the tacit support of MRF. This scenario cannot last very long because it is likely to delegitimize GERB further and to diminish its prospects for success in the next parliamentary elections. Still, this might be the best or at least the least risky option for the ruling party. TRAYCHO TRAYKOV, REFORMISTS LAST HOPE They send a letter saying we give you all the money as a credit, you don t pay anything, why bother about the price. This is an absolute insult to our intelligence, but some people buy this argument. The comment was made by Traycho Traykov, then Minister of economy referring to the planned Belene NPP and among those who bought this argument was PM Borissov himself. At the beginning of 2011, in a new reversal of his position, Mr Borissov became a fan of the NPP project, only to scrap it personally a year later. The statement was one of many that soon led to the removal of Traycho Traykov, then economy minister, from the first government of Boyko Borissov ( ). Mr Traykov was fired in March 2012 with some bogus arguments. The real reason was Mr Borissov s personal disdain of his minister s independence and refusal to bow to every whim of the PM. The government has lost half of its IQ was a popular comment on Facebook. Mr Traykov made enemies not only with Russia s Rosatom, the company that was going to build Belene NPP, but also with Lukoil which owns the 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 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 leading services companies. He has never been affiliated with Mr Borissov s party and became known as one of the few government ministers who stuck to their expert opinion. This made him a familiar figure in the civic council of the Reformist Bloc during the formation of the alliance in 2014, yet he remained out of public positions when the RB joined the second Borissov government. The divisions within the bloc would definitely affect Mr Tryakov s chances to reach the second round of the election, as well as his declaration that he would support the GERB candidate if he fails to reach the run-off phase. However, Mr Traykov remains the only serious candidate who has outspokenly defended Euro-Atlantic positions and strongly opposed Russia s interference into Bulgaria s domestic politics.

9 КQUARTERLY 7 In such circumstances, we could generally expect the continuation of current policies in the medium term. However, anti-eu positions will benefit from the gradual erosion of GERB. ORBANIZATION GERB may attempt to move into the field of patriots and nationalist-populists. If the rise of nationalism is significant enough, Borisov may opt to entrench himself in power by coalescing more explicitly with the Patriotic Front. This is a highly risky and opportunistic strategy, which will result in worsening of the relations with the EPP and Chancellor Merkel relations of which Borisov is particularly fond. So this scenario is unlikely unless we see a serious turn to the Euroskeptical right in Europe next year. If something like that happens in elections in France and Germany, in Bulgaria we have a ready formula for a rather fast Orbanization of the country. A softer and more likely version of this scenario could materialize if GERB attempt to find in BSP a possible coalition partner. This could become possible if the candidate of the socialists Mr Radev does well at the presidential elections, wins them or comes in a close second. For a grand coalition to be engineered something like a national emergency needs to be announced, however, otherwise the GERB supporters will be seriously disappointed. Fanning anti-immigrant hysteria could be resorted to for their persuasion. Policy changes from such a shift will be dramatic and most of them will relate to renewal of Russian energy projects, lobbying for the lifting of EU sanctions against Russia, etc. CENTRE-RIGHT, PRO-EU GERB The presidential elections clearly show that in terms of electoral support GERB is positioned centre-right. Its voters are pro-eu, pro-nato, and generally support domestic anticorruption and judicial reforms. The GERB leadership has abandoned some of this agenda with the hopes to attract other, more centrist votes (or for other reasons, related to the suspected tacit ties between Borisov and DPS). The presidential elections will most probably show that moving towards the left is a wrong strategy for GERB. Especially if the candidate of GERB loses, this will be a serious reason for its rethinking. In order to stay closer to its own base, however, GERB need to be much more radical in terms of anti-corruption and the securing of judicial independence. It remains to be seen whether Borisov is at all capable of such U-turns, but they may be necessary for the preservation of his own party. All in all, the main political forces are at a crossroads at the moment. The Socialists have obviously chosen radicalization in anti-eu direction: the question is whether GERB will follow them. In either case, however, we do have a political system which is markedly different from the one based on the broad pro-european consensus of the last two decades. * Daniel Smilov is a comparative constitutional lawyer and political scientist. He is Program Director at the Centre for Liberal Strategies, Sofia, Recurrent Visiting Professor of Comparative Constitutional Law at the Central European University, Budapest, and Associate Professor of Political Theory at the Political Science Department, University of Sofia. MR BORISOV HAS SIGNALED THAT HE IS WILLING TO PART WITH THE REFORMERS. THE PROBLEM FOR HIM IS THAT THERE ARE NO OTHER LEGITIMATE OPTIONS FOR COALITIONS OPEN TO HIM. KRASSIMIR KARAKACHANOV, PATRIOT AGAINST THE REFUGEES Krassimir Karakachanov, leader of VMRO - an anti-roma, anti-refugee party - has one of the longest CVs in modern-day Bulgarian public life. He started his career as a historian and counter-intelligence officer in the repressive security service apparatus of the Communist era. He claims to have prevented the creation of a pro-macedonian independence party in Southeastern Bulgaria that would have acted under the influence of Belgrade. After the shift to democracy he became leader of a party which claims the heritage of VMRO, the XIX-XX century organization that fought for the independence of Macedonia from Ottoman rule. VMRO has consistently argued that there is no Macedonian identity separate from the Bulgarian - an assertion that sits well not only with Bulgarian nationalists but with regular folks as well. Apart from the Macedonian issue, Mr Karakachanov s party has fed on the xenophobic attitude of parts of Bulgarian society towards Roma population and, in recent years, towards refugees and migrants crossing from Turkey. VMRO proposes sending both refugees and migrants to closed-off camps outside of cities and Romas - to reservations, not much different from the ones, in which native Americans dwell in the USA. The party and Mr Karakachanov himself have gained increased popular support since the start of the refugee crisis in Bulgaria in His nomination is backed by two other nationalist parties which had been at odds with each other - Volen Siderov s pro-russian Attack party and Valeri Simeonov s anti-turkish National Front for the Salvation of Bulgaria (NFSB). NFSB and VMRO form the Patriotic Front (PF) group in parliament. The PF supports Mr Borissov s cabinet and although they have never signed a coalition agreement with GERB like the RB did, Mr Karakachanov and Mr Simeonov have remained much more loyal to Mr Borissov, as long as he supports their demands to build a wire fence on the border with Turkey and take a tougher stance in relations with Ankara. Some public opinion research agencies point out that Mr Karakachanov may have a chance to reach the run-off, yet his major weakness is that his main anti-migration message has been taken over by almost all other presidential nominees. Most probably, he will urge his voters to support GERB s candidate in the second round of the elections.

10 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* I 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 (BSP) elected a new chair - Kornelia Ninova. She was seen as a more energetic and confrontational substitution to the outgoing leader Mihail Mikov 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-president of Bulgaria 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 these expectations would seem ill-founded. HOPES FOR UNITY At first, though, there seemed to be substance behind this prognosis. After both leaders visited Moscow and attended Vladimir Putin s United Russia party conference, Mrs. Ninova invited Mr Parvanov to talks for a joint nomination for the upcoming presidential elections in November. Another renegade Socialist-turned-corruptionfighter joined the talks - Tatyana Doncheva, leader of Movement 21 (D21). Although D21 and ABV have limited electoral support (Mrs. Doncheva s party didn t pass the 4% threshold to enter parliament in 2014 and only received 1.9% of the vote, whereas Mr Parvanov s ABV won only 4.15%, compared to BSP s 15.4%), their leader are both considered charismatic by the left-leaning electorate and are able to scrape votes off the mainstream Socialists. The talks between the three parties yielded mixed results. Mrs. Doncheva pulled out quickly, arguing that BSP only wanted her blessing for the presidential candidate they planned to put forward - the ex-commander of the Bulgarian Air Force Gen. Roumen Radev. Mr Radev, a US-educated apolitically-looking officer was seen as the perfect balancing Former energy minister Roumen Ovcharov and businessman Georgi Gergov in a cordial conversation during the Bulgarian 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 figure among the left-wing parties. He took a staunch stance against the government policy to invite NATO to conduct air-policing of the Bulgarian skies instead of using solely the country s own outdated Air Force and seemed to be a tough guy who would make PM Boyko Borissov himself stand for president. The leftwing parties saw this option as an opportunity to stir disarray in the governing centre-right coalition and take advantage of the changes in the balance of power that would ensue from the abandonment of the prime minister s post by Mr Borissov. INTERNAL BICKERING The joint efforts of the left-wing parties hit rock bottom in August just days after Mr Radev was formally endorsed by both BSP and ABV. At a surprising press conference BSP s Mrs. Ninova announced that the party would withdraw from the negotiations with ABV and she wouldn t allow Mr Parvanov to twist her arms and Mr Radev became the formal nominee of BSP. After Mr Parvanov s ABV party recovered from the shock, it nominated former labor minister in Borissov s government and MEP Ivaylo Kalfin for President. Mr Kalfin had already run against incumbent president Rossen Plevneliev and lost by a margin of just 5% in the run-off of the 2011 elections. The reason for Mrs. Ninova s move remains largely obscure but it shows that the left remains focused mostly on itself and too preoccupied with its internal rivalries and personal vendettas to build a coherent opposition to the GERB-dominated government. Mr Parvanov s aim was to join hands with BSP and present ABV as an equal partner, despite the lack of electoral weight. Mrs. Ninova wanted to prevent this, as she saw Mr Parvanov s move as a prelude to an attempt for a takeover by the ex-chairman. By uniting the core of BSP around Mr Radev, Mrs. Ninova hoped to make ABV redundant in the long run. Polling results from Alpha Research show that having three nominees of left-wing parties (Mr Radev, Mr Kalfin and Mrs. Doncheva) will muster the votes of the core electorate of those parties, but it may also split the left-wing vote. This, in turn, would decrease the chances of any of the three candidates to make it to the second round of the elections. *Martin Dimitrov is reporter with Capital

11 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 I won t disappoint you, I won t let you down! Together we will unite the party behind the left-wing idea and make it the force for change in Bulgaria, Kornelia Ninova, the newly elected leader of the Bulgarian Socialist Party, declared in front of the delegates at the National Palace of Culture in Sofia, the traditional conference venue of the party, in early May. Her victory over the incumbent chairman Mihail Mikov came as a surprise to many, as it seemed that Mr Mikov had managed to take hold of the party apparatus in the two years since becoming leader of the party. An old-fashioned Socialist, who was too busy pounding neoliberalism in his speeches in parliament to have the time to oppose some of the most controversial policies of Mr Borissov s second government, Mr Mikov was ousted by the joint effort of all business lobbies within the party. Mrs. Ninova, on the other hand, seemed much more modern, assertive and outspoken, a force for good in the Socialist party that could both bring back the alienated hard-line electorate lost after the appointment of business mogul Delyan Peevski as chief of the state security agency in 2013 and open the party to voters tired of the dominance of GERB. Mrs. Ninova started her career as an economist in two state-owned companies that were privatized during her tenure. She then became a shareholder in one of them. Mrs. Ninova rose through the ranks of BPS during the government of Sergei Stanishev ( ) when she was appointed deputy economy and energy minister under Roumen Ovcharov, as well as board director of then state-owned Bulgartabac tobacco giant. The latter position put her in the sight of Delyan Peevski, who was then trying to take over the tobacco company. The prosecution investigated her, Mr Peevski and Mr Ovcharov of influence peddling, yet all charges were dropped due to lack of evidence. However, the three of them lost their public positions. Mrs. Ninova could have easily claimed to have been one of the first fighters against the state capture model, personified by Mr Peevski, that toppled the government of PM Plamen Oresharski in 2014, if it wasn t for her vote in support of the appointment of Mr Peevski as chief of the state security agency. Mrs. Ninova issued mixed signals in the first few months as party chief. In the first days after her election she wore the St. George s ribbon (the Russian symbol of victory in WWII which became a popular sign of the pro-kremlin forces that took over Crimea and the east of Ukraine in 2014) at a ceremony commemorating the capture of Nazi Germany s Reichstag by the Red Army in She also posed for a photo in front of a statue of Todor Zhivkov, the communist-era Bulgarian dictator. These moves were aimed at the hard-line BSP electorate, yet they did little to make disenchanted voters believe the Socialist party is modernizing itself. Under Mrs. Ninova BSP began to use much more vocal criticism and hostile rhetoric against GERB, yet rarely in a constructive manner. The legislation proposals that BSP put forward were mostly related ideas for increased state interference in the economy rather than the much-needed judicial, education and financial reforms. Mrs. Ninova tried to outmaneuver the alternative left-wing parties by initiating talks for a joint presidential candidate (Gen. Roumen Radev, an ex-commander of the Air Force) and then emancipating him from those parties. By putting Mr Radev forward she aimed to please the Western embassies in Sofia, who see him as a successful NATO general, as well as Russia, as Mr Radev embraced the agenda of the left with regard to large-scale energy projects.

12 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* W We have white smoke, said Ivan Ivanov from the Bulgarian Agrarian National Union (BZNS), 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 Economy Bozhidar Lukarski disputed the finality of the decision in an interview for the newspaper 24 Hours. Although Mr Lukarski retracted his words later and stood behind Mr Traikov s nomination, the episode showed the disunity that has reigned within the Reformist Bloc ever since it joined the coalition government led by Boyko Borissov in THE ORIGINS OF THE REFORMISTS The RB, a coalition of five center-right parties, was formed in 2014, as the government of Prime Minister Plamen Oresharski was crumbling and the protest movement of 2013 had accumulated social and political energy for systemic reform. The RB mustered this energy and entered parliament on a platform of anticorruption action and reform of key sectors - healthcare, education, defense, foreign affairs, economy and most importantly - the highly centralized and non-transparent judiciary. They joined the broad and colorful center-leftright government coalition led by Mr Borissov and were granted the corresponding key ministries, as well as the position of Deputy- PM for the ex-eu Commissioner Meglena Kuneva, one of the leaders of the bloc. However, in a few months time it became PM Boyko Borissov (in the center) doesn t speak to Radan Kanev (on the right), one of the RB leaders. The other key figure in RB - Meglena Kuneva (on the left), grudgingly stays in the government Photo by Julia Lazarova clear that the RB and their efforts would remain nothing but a facade for GERB s continuous resistance to reform. The dominant party in the government coalition continued to form floating majorities based on the specific interests of both the governing and opposition parties that allowed it to pass controversial bills or block any legislation that would destabilize the status quo. For example, GERB gained BSP s support to take down the main pillars of judicial reform proposed by the RB-backed Justice Minister Hristo Ivanov in December The undermining of judicial reform made Mr Ivanov resign and some observers expected that the RB would pull out of the government coalition. Only a few of the RB MPs, led by the Democrats for Strong Bulgaria s (DSB) leader Radan Kanev withdrew their support for the government. The rest of the key figures - Meglena Kuneva, leader of the Movement Bulgaria of the Citizens, DBG, (at the time Deputy-Prime Minister), Petar Moskov (Healthcare Minister and Mr Kanev s deputy in DSB), and Nikolay Nenchev (Defense Minister and leader of BZNS) remained loyal to Mr Borissov. THE DILEMMAS OF A DISUNITED BLOC The events surrounding the judicial reform in December 2015 dispelled the image of unity. Since then RB has rarely acted as an entity Mr Kanev and ten other members of parliament mostly act as opposition, while the rest of the RB MPs back GERB s majority. The bloc almost failed to nominate a presidential candidate and some of its members like Mr Loukarski, who is close to Mr Borissov, played against such nomination. It is clear that the small member parties of the bloc won t have enough electoral support to get back into parliament if the RB disintegrates before the next elections. On the other hand, the fact that some of them Mr Nenchev s BZNS, Mrs. Kuneva s DBG and Mr Loukarski s SDS - are willing to cede ground to GERB in its efforts to scale down any attempts for actual reforms make morally illegitimate the very existence of the bloc as a united, reformist entity. The RB supporters are already voting with their feet, with recent polls showing decline in support for the bloc to the levels of the far-right nationalists. Radan Kanev s efforts to brighten up the civic spirit that was initially at the RB s core seem to bear no fruit so far.

13 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 W With the presidential elections drawing closer, rumors of possible early parliamentary elections increase by the hour. Political parties battle for the media spotlight and spreading such rumors offers an easy path to draw attention. The Bulgarian Socialist Party (BSP) and the Movement for Rights and Freedoms (MRF) have already urged the Prime Minister to resign following the unsuccessful bid of Bulgarian EU Commissioner Kristalina Georgieva to become the next UN Secretary General. PM Boyko Borissov himself gave an indication that he might call a snap vote if the GERB s candidate for president, Tsetska Tsacheva, is not leading in the first round of November elections. There is even a conspiracy theory that GERB has deliberately chosen the 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, has no popular support, the supporters of this scenario claim. This outcome will give Mr Borissov a motive to get rid of the RB and one more reason to embrace a coalition with BSP. The Prime Minister already threatened the RB ministers in the cabinet with expulsion from the government in a recent row over the Election codex. A hypothetical grand coalition between 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 instincts are restrained by the Reformist Bloc - a motley crew of right-wing parties who claim to pursue a reformist agenda. If GERB and BSP join forces, it is quite possible that they will try to outdo each other s rhetoric on immigration issues, EU-bashing, finding new ways to please Russia and investing > 12 GOVERNEMENT APPROVАL RATING Boyko Borissov's cabinet (2009) 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 Positive PM'S APPROVАL RATING Boyko Borissov 2009 Positive Plamen Oresharski's cabinet Neither positive, nor negative Plamen Oresharski 2013 Boyko Borissov's cabinet (2014) Negative Negative Source:Alpha Research, June 2016 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 Neither positive, nor negative Boyko Borissov 2014 Source:Alpha Research, June 2016

14 12 KQ POLITICS NEWS BRIEF// BORDERS/ Oct 2016/ PM Boyko Borissov ordered interior minister Rumyana Bachvarova to urgently hire 1,000 ex-police officers to join border police force and strengthen the perimeter along the border with Turkey. Over the past few months many vigilante groups, mainly consisting of former conscripts, police and army officers, have been conducting civil arrests and pushbacks of irregular migrants attempting to cross the Bulgarian border. Pursuit of real judiciary reform, in order to guarantee justice for all EU funds absorption Increase in the pre-hospital care funds Exploring for oil and gas in the Black Sea which, if successful, could bring energy independence for Bulgaria Highway and road construction 37.6% 35.2% 45.1% 43.6% 51.7% BORDERS/ Oct 2016/ The new European border and coastguard agency was launched in Bulgaria. The successor to Frontex has an extended mandate to deport people who were not granted refugee or humanitarian status, monitor the performance of border control agencies and dispatch some of its own pool of 1500 troops to zones under high migrat ory pressure. The fight against smuggling The fence on the Bulgarian-Turkish border Repairing and weatherization of old buildings with public money The introduction of compulsory voting The restrictions on voting outside of Bulgaria 24.3% 23% 34.9% 30.8% 30% AIR FORCES/ Sep 2016/ A squadron of US Air Force F-15 fighter jets joined the Bulgarian Air Force in the first week-long NATO air-policing exercise in Bulgaria. Other allies have also been invited to take part in such joint exercises intended to compensate for the dwindling engine capacity of BAF s Russian-made MiG-29 jets. MILITARY/ June 2016/ Parliament passed a bill that allocates 2.3 bln levs (1.15 bln euro) for upgrading the military hardware of the armed forces by Half of the sum would be spent to buy new frigates and a squadron of multitask fighter jets that will replace the aging MiG-29 planes which rely on Russian spare parts for maintenance. > 11 taxpayers money in grandiose, yet futile projects. Given the increased migratory pressure, the government formula will certainly include a national salvation badge and one more reason for populist policies. An alternative theory predicts that Boyko Borissov will call snap elections regardless of the result of the upcoming vote for president, because the government is losing steam. GERB s own commissioned polls show that support for Boyko Borissov is falling and he would have been unable to win the presidential elections in the first round. Borissov didn t want to risk a second round and decided not to run. But a weak result for GERB in the presidential elections will give him reason to ask the voters for a new mandate. Parliamentary elections have different dynamics in comparison to the presidential elections: they tend to split the vote and if fewer parties pass the 4% threshold required to enter parliament, then the biggest party will gain the most. This seems quite a possible scenario given that last polls show that even Source:Alpha Research, June 2016 the MRF with its traditionally strong ethnic vote is losing traction with its supporters. Despite the flurry of conspiracy theories, when rumors of snap elections in Bulgaria become this pervasive, it usually means they are unfounded. Even in 2013 and 2014, when the previous government of Boyko Borissov and the government of his successor Plamen Oresharski faced massive protests and calls for resignation, the decisions to call early elections came as a surprise. There are many signals that GERB is unwilling to take risks. For example, only two months ago PM Borissov declared that he would call early parliamentary elections if his party loses the president s post. Few weeks before the elections he changed his mind. The prospect of defeat (no matter how distant) made him state that a snap vote will be called only if GERB loses the elections in the first round (statistically impossible). But the snap elections rumors persist. So don t be surprised if the election season continues for a while longer.

15 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 I 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 hear talk about solidarity with refugees stuck at Greece s Idomeni could Bulgaria. There are a Bulgarian head towards Bulgaria. The Bulgarian and a European flag flying on our PM was the first European leader to visit side of the border. It s high time for both of them to earn their place, Prime Minister Boyko Borissov said in his unique edifying tone, standing with his back towards the three-meter high razor wire fence on the post-coup Turkey in an attempt to make sure that Ankara won t release a flood of invaders, as the majority of Bulgarian press and many politicians refer to the migrants and asylum seekers. border with Turkey. To his right stood Victor Orban, his Hungarian counterpart and a fellow strongman, showing support for what has become Mr Borissov s obsessive cause in the past few months - MIGRATION BECOMES A CENTERPIECE OF THE PRESIDENTIAL RACE Despite the low number of asylum stopping the refugee influx into Bulgaria. seekers and economic migrants in Mr Borisov has highlighted this Bulgaria panic is growing. Anti-immigrant goal on different occasions and hasn t spared both domestic and EU resources to achieve it. Over 146 million leva ( 73 mln) have been invested since 2013 in the border fence, called euphemistically a protective engineering facility. Army 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. One of the main pivots of the presidential MARTIN DIMITROV* detachments were briefly deployed near race is the immigration issue, > 14 THE REFUGEE ISSUE MAY MAKE BULGARIA MORE XENOPHOBIC BULGARIA CONTINUES TO RECEIVE REFUGEES DESPITE THE EU- TURKEY DEAL

16 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 в брой хора Arrivals on Greek islands Arrivals in Macedonia from Greece Arrivals in Serbia from Bulgaria and Macedonia Arrivals in Bulgaria September 2015 The Chancellors of Austria and Germany announce that migrants stuck in Hungary will be allowed through Austria on their way to the Western states 17/10/2015 Hungary sets up special border controls on its border with Slovenia 29/11/2015 First EU-Turkish discussion of the refugee deal 20/1/2016 Austria announces it will limit the number of people allowed to claim asylum in the country to up to 37,500 per year 11/2/2016 NATO launches an operation against human traffickers in the Aegean sea /10/ /10/ /11/ /12/ /1/ /2/2016 Macedonia seals its border with Greece. The Idolomeni crisis commences 16/2/2016 Austria restricts the number of allowed daily arrivals to up to 80 per day. Special border controls are set up on its borders with Slovenia and Italy > 13 with the government focusing its efforts and scarce funds more and more on border fences and expulsions instead on the much needed education, judicial and police reforms. Mr Borissov is adopting anti- European rhetoric (sometimes not without reason) which will play into the hands of EUbashers an attitude that is not very helpful for a country that benefits so much from its membership in the EU. But the biggest danger of all is the change in mood towards foreigners. Generally, Bulgaria is a hospitable place for foreign nationals who rarely see some of the xenophobic stereotypes existing in other countries. This has helped a lot in attracting foreign direct investments as well as many Europeans, Russians and Ukrainians who found their second of third home in Bulgaria. Reversing this positive attitude may have devastating results for a country that actually badly needs immigrants to counter an exodus of its own nationals for economic reasons and a drop in population numbers. Bulgaria is number one in depopulation in Eastern Europe, a recent UN study found. RISING NUMBERS Despite the EU-Turkey deal and the drop in the number of detained irregular migrants to a three-year low, Bulgarian refugee camps and the temporary police detention centers are crammed. In August the police facilities were percent over their maximum capacity and the refugee camps of the State Agency for Refugees (SAR) are catching up and are slowly getting packed to their maximum. According to internal ministry statistics, there are more than 6500 people in all of the camps today - a number, unseen since the winter of CURIOUSLY, REFUGEES ARE PERCEIVED TODAY BY BULGAR- IANS AS A BIGGER THREAT THAN ETHNIC CONFLICTS. The increased border control in Serbia and the deployment of Frontex officers alongside their Bulgarian counterparts puts pressure on human traffickers, creating a bottleneck for migrants who would otherwise continue their journey to the wealthier countries of Western Europe. In order to fight this, government pressed its case for creating three additional crisis centers, each able to accept 1,000 people, with the money that Bulgaria received from the EU to protect the bloc s external border. The prime minister managed to draw the attention of European leaders and almost instantly got 160 million emergency funding from the EU security and migration funds, on top of the 72.7 million from the EU s Internal Security Fund (ISF), which Bulgaria stands to receive during the period A CHANGING PROFILE The profile of migrants is also changing. While last year more than two-thirds of the irregular migrants caught crossing Bulgarian borders were from Syria or Iraq, this year Syrians are only 10% of asylum seekers. More and more young men from Afghanistan enter Bulgaria illegally, as they are the most desperate to cross the country on their way to Western Europe undetected. This is a markedly different trend compared to Greece, where the UNHCR still registers more Syrians attempting to cross the Aegean than any other nationality. Less and less Syrians are trying to cross Bulgaria due to the strengthening of the guarded perimeter around the border and the reported violent pushbacks and harassment by Bulgarian border police over the past three years. The first instance of an asylum seeker killed within the borders of Europe was registered in Bulgaria in October 2015 when a young Aghan man was shot dead by a police officer near the town of Sredets, near the border with Turkey. Many people were found frozen to death on the borders with Serbia and Turkey as well. The same bad reputation haunts the Bulgarian asylum system. In August, the country drew fire from the UN rights chief, Zeid Ra ad Al Hussein, who sees worrying

17 КQUARTERLY 15 8/3/2016 Slovenia announces it will only accept refugees who plan to seek asylum in the country. Serbia and Croatia strengthen their border controls 9/3/2016 Macedonia formally shuts down its border for migrants. Donald Tusk, president of the European Council, announces that Balkan refugee route is permanently closed 20/3/2016 The Turkey-EU deal enters in force Although Macedonia does not accept migrants since the 8th of March, hundreds of people continue crossing into Serbia in the following months. Most probably they come from Bulgaria and this is why Belgrade strengthened its border controls with Bulgaria in August 13/6/2016 Greece opens 4 hotspots to accommodate the migrants that had remained on its territory after the Turkey-EU deal 15/7/2016 Turkey coup attempt, followed by heightening of tensions between Istanbul and Brussels. Despite the cooling down of the EU-Turkey relationship, no substantial increase in the number of migrant arrivals in Europe has occurred since then. 28/2/ /3/ /4/ /5/ /6/ /7/2016 signs in Bulgarian regulations for detention of migrants. Moreover, the number of rejected or terminated asylum procedures increased, especially the latter. More than 10,000 people gave up their applications to be granted a humanitarian or refugee status last year, yet just 644 have been deported since the beginning of The majority of the rest tried to leave the country. POLITICAL SCAREMONGERING Anti-immigration rhetoric has become norm in the language of almost all mainstream political parties in Bulgaria. Although the president has very limited options to influence the refugee issue, the idea that migration poses a threat is being used by the majority of presidential candidates including the Socialist nominee, Roumen Radev, centrist Tatyana Doncheva, who rides on an anti-corruption platform and even the Reformist Bloc s Traycho Traykov, who has said that Bulgaria shouldn t become Europe s immigrant ghetto. Rhetoric isn t the only tool used by politicians, though. In recent weeks, nationalist party VMRO, part of the so-called Patriotic Front, which is the unofficial partner of the governing GERB, used the refugee card in another way. The local branches of VMRO in the Ovcha Kupel neighbourhood of Sofia and in the town of Harmanli, near the border with Turkey, (both housing refugee camps) staged protests against the facilities - and the people inside them. The rallies were endorsed by VMRO leaders - the member of the European Parliament Angel Dzhambazki and the presidential candidate Krasimir Karakachanov - and were attended not by local members of the public but by party affiliates and motor gang members. PUBLIC FEARS AND VIGILANTES The fear of refugees has infiltrated the public realm as well. According to Bulgarian pollster Alpha Research, 43% of Bulgarians see the government handling of the refugee crisis as too soft and will prefer a tougher response. What is more, most respondents in Alpha Research s latest survey see international terrorism and refugees as one of the biggest international and domestic threats to the state. Curiously, refugees are perceived today as a bigger threat than ethnic conflicts. While 34% of Bulgarians saw ethnic conflicts as a threat to peace and just 8% pointed to immigration last year, results shifted in Only 18% of respondents now believe that a conflict between Bulgarians and ethnic minority groups can threaten the country s existence, while 40% think that refugees may do harm - almost as much as the share of people who see crime as the most significant domestic issue. Another troubling phenomenon occurred on the Turkish-Bulgarian border. It all began when btv news channel reported the story of Dinko Valev, a self-styled vigilante migrant-hunter who caught several refugees single-handedly while taking a drive on his ATV along the border fence south of Yambol. His actions polarized public opinion in Bulgaria and shed light on several vigilantestyle groups which also patrolled the border. Yet, outside of human rights groups and some liberal circles Mr Valev was mostly liked for his actions. Even Prime Minister Boyko Borissov thanked these patrols in a statement: I personally talked with them [the voluntary patrols] and I thank them. I am sending the director of Border Police to meet and coordinate with them. Some of these groups act like paramilitary organizations proper, imitating military hierarchy and recruiting their members among former Army members. They also boast a vividly pro- Russian, anti-muslim rhetoric in their online social media channels, which put them on the radar of Bulgarian security services. A bigger threat to the migrants crossing into Bulgaria, though, is the complete lack of basic social or integrational support. Without such support, no border fence will help the country avoid the segregation of yet another minority, just like its own Roma population.

18 16 KQ ECONOMY/ENERGY organizes: Fourth Annual Conference Banks the Business 24th November, Sofia Hotel Balkan WHAT IS THE OUTLOOK OF THE BANK SECTOR IN BULGARIA AFTER THE ASSET QUALITY REVIEW AND STRESS TESTS MACROECONOMIC EXPECTATIONS FOR THE UPCOMING YEAR AND HOW THEY WILL AFFECT THE BANK SECTOR SHOULD THE BUSINESS EXPECT NEW PRODUCTS AND OPPORTUNITIES FOR SMEs FINANCING THE RISE OF NPLs AFTER THE ASSET QUALITY REVIEW WHAT COULD THE BANKS OFFER IN ORDER TO FOSTER SUCCESSFUL PROJECTS FOR THE BUSINESS capital.bg/banks/en general partners: partners:

19 КQUARTERLY 17 FOREIGN POLICY КQUARTERLY 17 ALWAYS WITH EUROPE, NEVER AGAINST RUSSIA IS BULGARIA UNDER BOYKO BORISSOV STILL A VIABLE WESTERN PARTNER? OR IS IT RUSSIA S TROJAN HORSE IN THE EU? Will Bulgaria move closer to Russia?, BBC HARDtalk asked the Bulgarian Foreign minister Daniel Mitov in interview on 25th of October. The question is not surprising, because relations with Russia are standard issue for many media outlets which still refer to the stereotype of Bulgaria being the staunchest ally of USSR. But in the last year Bulgarian government s attitude towards Moscow showed that the question might still hold some merit. DEVELOPMENTS TO FOLLOW The relations with Turkey appear hijacked by the refugee crisis. While Boyko Borissov s government was not eager to develop Bulgarian-Turkish relations before the attempted coup in July 2016, because of displeasure with the Turkish politics, now, when Turkish government is becoming more and more authoritarian, Sofia is ready to hand over without any due process members of the Turkish opposition who sought asylum in Bulgaria. After an unsuccessful bid to become UN Secretary General, Bulgarian EU Commissioner Kristalina Georgieva announced she will leave her current post to become a CEO of the World Bank, starting January It has been rumored that outgoing Bulgarian president Rosen Plevneliev can be her successor in the Commission, but the PM Boyko Borissov flatly rejected such a possibility. The name of the new commissioner will be known in a few days and his/her CV will determine whether Bulgaria will keep a good profile in the European Commission. The preparations for the EU Council chairmanship. Bulgaria needs to set its priorities straight for the six months in 2018 when it will be at the helm of the European Union. A set of well defined goals will reduce the bureaucratic burden over the Bulgarian administration and can show for once that Sofia can do better than simply absorb EU funds.

20 18 KQ FOREIGN POLICY Anti-government protestors in Sofia making fun with Mr Borissov policies towards Russia W Will Bulgaria move closer ALWAYS WITH to Russia?, BBC HARDtalk EUROPE, NEVER asked the Bulgarian Foreign Minister Daniel AGAINST RUSSIA Mitov in an interview on 25th of October. The question is not surprising, because relations with Russia are a standard IS BULGARIA issue for many media outlets which still refer to the stereotype describing of Bulgaria as the UNDER BOYKO staunchest ally of the USSR. But the Bulgarian BORISSOV STILL A government s attitude towards Moscow over the past year shows that it might still hold VIABLE WESTERN some merit. Whitin just a couple of months Prime Minister PARTNER? OR IS IT Boyko Borrisov declared that he doesn t want to RUSSIA S TROJAN wage war against Russia (although nobody has urged him) and his party s presidential candidate HORSE IN THE EU? Tsetska Tsatcheva stated that the Western sanctions against Russia should be lifted. What is more, the second GERB government has been trying to please Russia on every energy project that Moscow has promoted in Bulgaria. This turn comes at a time when concerns over Russia s footprint in Bulgaria are growing concern. The Kremlin Playbook, a research project by the two think-tanks - Bulgarian CSD and the US CSIS, concludes that Russian economic influence in Bulgaria has often been seen as bordering on state capture. When it comes to the vast wealth that the Russians are holding inside your country Photo by George Kozhuharov including property, the Russian have you round the neck, HARDtalk s Stephen Sackur pressed Mr Mitov. The Bulgarian Foreign Minister s answer was not reassuring: That is somewhat of a fair assessment SO IS THERE A RUSSIAN U-TURN? The short answer is no, albeit with a lot of nuances. Despite the public declarations in defiance of the Western policy towards Russia, the Bulgarian foreign policy is in line with the EU positions. Sofia has never proposed that sanctions against Moscow be lifted. In October Mr Borissov reluctantly said he would support new sanctions against Russia, because of Moscow s military operation in the Syrian city of Aleppo that has contributed to the humanitarian crisis there. Even though he vehemently disapproved of the creation of a permanent joint naval force of the Black Sea NATO members, the government didn t change its position on sending troops in Romania to boost the Alliance s presence near the Russian borders. There are three things to consider. First, Mr Borissov genuinely believes that Russia is not only meddling in Bulgarian politics, but that the mass protest that led to his resignation in 2013 were instigated by Moscow, which was unhappy with his energy policies. There is no definite proof of Kremlin s interference, but this remains

21 КQUARTERLY 19 a recurrent motive in the PM s speeches. Secondly, Mr Borissov is famous for his drive to be a balancer both when it comes to domestic and international politics. A habit of balancing is not a bad trait, unless applied to things that can t be balanced, like foreign agression. Or if it substitutes decision-making. One of the quintessential elements of Boyko Borissov s international relations thinking can be deduced from a statement on July 2015 about the government s position on the EU sanctions against Russia: I pray to God that the big chiefs agree among themselves faster, so that the sanctions are lifted - an attitude that could easily be called defeatist. Mr Borissov also doesn t shy away from calling the GERBnominated President Rossen Plevneliev a hawk for his clear positions vis-a-vis Russia. BILLIONS AT STAKE Most probably the conciliatory tone can be attributed to Russia s part in Bulgaria s massive problems in the energy sector. The first government of Mr Borissov canceled two major projects the planned Burgas-Alexandroupili oil pipeline with Russian Transneft as a main shareholder and then the construction of Belene Nuclear Power Plant, a 10 bln euro project, which was supposed to be built by Russia s Rosatom. Mr Borissov has always supportded the third Russian project the South Stream gas pipeline intended to bypass Ukraine. In September 2014, after the project had been officially frozen in Bulgaria for three monts, and a month before the much-anticipated return of Mr Borissov s GERB party to power, the Russian company paid an obnoxious sum of money for a land plot on the Bulgarian coastline where South Stream was planned to come ashore. The plot was sold by a Bulgarian bank known for its political connections. The cancelation of South Stream will have negative consequences for Bulgaria. Russia s Gazprom will almost certainly build an alternative pipeline that goes through Turkey bypassing Bulgaria (see more in the Energy section of KQ). An international arbitrage awarded Rosatom 630 mln euro for the canceled NPP Belene project, a very substantial sum for Bulgaria (see more in the Energy section of KQ). The Bulgarian government decided not to appeal the decision and to pay the money, a step that obviously is meant to improve relations with Russia. One explanation for this move is that Sofia hopes Rosatom will in return help selling the equipment for the nuclear power plant which will reduce the Bulgarian losses. The other, more sisinster explanation is that Mr Borissov is paying for other promises he had made to Moscow - promises, he can t meet now. It is important to realize that Mr Borissov s foreign policy in general and attitude towards Russia in particular are based on his domestic agenda and are highly opportunistic. He finds little problem in changing his position on many issues overnight. The messages he delivers to his partners in Brussels and the ones that make it into his monthly appearances on Bulgaria s morning TV talk-shows may have nothing to do with each other. Yet the lack of pressure from the opposition that flirts with Mr Borissov give him very few reasons to remain coherent in his stances. This, however, might change, as Washingtion and Berlin, which now calls most of the shots in the EU, are both getting nervous. *The headline alludes to Always with Germany, never against Russia, a statement atrubutted to the Bulgarian King Boris III ( )

22 20 KQ FOREIGN POLICY BULGARIA UNLAWFULLY EXPELS ALLEGED FETO MEMBERS TO TURKEY A BUSINESSMAN, A TEACHER AND A JOURNALIST WERE AMONGST THE DEPORTED GÜLENISTS ALEXANDER TERZIEV* O n August 10, 2016, Bulgaria expelled the 43-year-old Turkish citizen Abdullah Büyük. At the time he was under investigation in Turkey for suspected association with the terrorist organization of the self-exiled cleric Fethullah Gülen, or FETO, as the Turkish authorities call it. Thе expulsion happened despite the fact that in March the same year two successive Bulgarian court instances parried Turkey s demand for his extradition. In early August, however, the Turkish Foreign Minister announced to the crowd during a political rally in Ankara: There is a traitor in Bulgaria who fled there before [the coup attempt]. We will demand that they hand him over to us, as quoted by the Bulgarian public radio BNR. A VERY SWIFT DUE PROCESS It was only after the Turkish media reported that Büyük had been turned over by agents of the Bulgarian authorities to Turkey at Kapıkule border crossing, that the Bulgarian Interior Ministry announced that it was deporting Büyük on the grounds of not leaving the country until the expiry of the permitted period of stay. I want to firmly declare that there is no agreement between Turkey and Bulgaria [for the extradition of Büyük], the Deputy Chief Secretary of the Bulgarian Interior Ministry, Georgi Arabadzhiev, said at a press briefing. However, he could not explain why the Turkish media had already been notified about the turning over of Büyük at Kapıkule by the Bulgarian authorities. During the briefing it emerged that the FETO supporter had been expelled in less than a day - a period of time that had hardly given him the opportunity to seek legal aid. FEAR OF A REFUGEE EXODUS Prime Minister Boyko Borisov appeared on TV but he neither confirmed nor denied whether Bulgarian authorities had been under pressure by Turkey, yet he hinted at a connection between the ongoing migration crisis and the deportation of Büyük. Since the failed coup attempt in Turkey in July, Mr Borrisov has publicly expressed his concerns about a possible mass exodus of refugees from Turkey to Bulgaria. This is not the only case when Bulgaria unlawfully expels suspected members of the FETO movement to Turkey. In late October, the Bulgarian authorities expelled seven people to Turkey after arresting them while trying to leave the country at the bridge over the Danube near the city of Ruse. These included a teacher, a journalist and civilians who were linked to a protest twitter profile. They were deported within less than 24 hours, while Syrians who were detained together with the seven Turkish citizens only received light sentences and could apply for a refugee status. Under Bulgarian law, such a quick procedure can be invoked only if the person being expelled poses a direct threat to the country s security. Evidence of the latter has not been presented by the authorities yet. What is more, the deported Turkish citizens claimed before Turkish media that they applied for political asylum but their applications were not considered at all, which is a direct violation of the Bulgarian legislation. *Alexander Terziev is reporter with Capital DOES BULGARIA HAVE A POST- BREXIT ECONOMIC POLICY? ATTEMPTS TO LURE COMPANIES WILLING TO LEAVE THE UK IS NOT A TOP PRIORITY FOR SOFIA MILA CHERNEVA* A s the results from the Brexit referendum gloomed over the British economy, other EU member states realized that they could actually benefit from Britain s decision to leave the EU. While Frankfurt, Dublin and Paris were said to be competitors for the role of Europe s new financial capital, the Hungarian Minister of Economy said that Hungary would love to become home to any other businesses leaving Britain. Meanwhile, Bulgaria is still struggling to create a coherent post-brexit policy and to point out how it can benefit from Brexit in economic terms. Bulgaria may not be the perfect destination for London s enormous financial sector, but it has its plus sides. Low corporate tax and cheap labor in comparison to other European countries are some of the country s attractive features. In municipalities with unemployment 25% above the country s average, companies may be granted up to 100% exemption from corporate tax. DHR International, a recruitment company, claims that skilled labor is 40% cheaper in Eastern Europe than in Britain, The Guardian reports. INVESTMENT-FRIENDLY SECTORS Invest Bulgaria Agency, the country s investment promotion body, has drafted

23 КQUARTERLY 21 a strategy which comprises 14 sectors estimated as investment-friendly. Some of them are defined as traditionally strong for Bulgaria, including manufacturing of computers and communication technology, electronic and optical products, machinery, textiles and clothing, chemical products 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. BULGARIAN RACE FOR TOP UN JOB HOW BULGARIA MISSED A FAIRLY GOOD CHANCE FOR A BULGARIAN TO HEAD THE UN 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 to improve its infrastructure, though Kristalina Georgieva Irina Bokova important steps have been made in P 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 years ago, Ivan Hadjiiski, a international push for the Sеcretary General working on identifying investors, to go beyond the most famous household names, and to establish networks that sociologist, tried to define it as an endeavour that was not thought through or was illconsidered, ill-started, without leadership to be a woman, both from various NGOs and from some of the permanent members of the 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 decision to leave the EU. *Mila Cherneva in scandal, only to serve as a disgraceful registration of its rueful characters. Nowadays the phrase perfectly fits to turn of Eastern Europe, which has never had a Secretary General. 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

24 22 KQ FOREIGN POLICY > 21 the highest-ranking woman from Eastern Europe in the UN system and for seven years at the helm of UNESCO she has built a wide network of contacts. Although Mrs Bokova was definitely part of the modern pro-european wing of her Socialist party, she has never been very popular in Bulgaria and her career outside politics was a matter of good connections and skillful positioning: ambassador to France and then Director General of UNESCO. And her past is a heavy load. She comes from a high-ranking communist family, graduated from Moscow State University of International Relations a hatchery for loyal nomenclature in the former socialist countries, and then had a career quite untypical for a woman in Bulgaria: she was a diplomat, a job as a rule denied to ordinary women, because it was considered an exclusively male profession. These attributes plus the fact that she and Russian Foreign Minister Sergei Lavrov know each other from the times they were both students in Moscow, made her the natural choice for Russia. RUSSIA S FAVORITE Having a UN Secretary General from Eastern Europe was very important for Russia, because Eastern Europe was actually meant to denote the countries of the former Soviet bloc. In those times any person from Eastern Europe at the helm of the UN would have meant direct control from Moscow, something that has never happened in the history of the world organization. Which made Russia play all its cards, sometimes openly canvassing votes for Mrs Bokova. In order to secure Mrs Bokova nomination, the outgoing Socialist-led government appointed her in June 2014 without any consultations, neither in Bulgaria, nor with the countries from the UN Security Council it simply didn t have the time to do it. Had that government tried to hold talks about Mrs Bokova s candidature, it would have dawned upon them that she will face staunch opposition from the UK, as well as mild at this point - displeasure from the US. Basically, Irina Bokova candidature was dead on arrival. It didn t help when she appeared in Moscow in May 2015 (when very few Western leaders came) to celebrate 70 years of the end of the World War Two, decorated with St. George ribbon, a symbol of the Russian annexation of the Crimean peninsula and the Kremlin support for the pro-russian separatists in Ukraine. The early choice, however, made it difficult for the next government to replace Mrs Bokova as the Bulgarian candidate for UN chief. Аny substitution would have been regarded by Moscow as an anti- Russian move and would have triggered a veto on a new candidate. In addition, at the end of 2015 Russia warned that it will not support any official who voted to impose sanctions on Russia, which basically meant every EU foreign minister or EU Commissioner, a signal to one of Mrs Bokova prospective competitors. THE GAME WAS OVER BEFORE IT BEGAN In these circumstances the second Boyko Borissov Government, set up in October 2014, had to act swiftly, because with any day past, the change of Mrs Bokova would have been made more difficult. But Mr Borissov waited, and then waited some more. Probably the Prime Minister didn t regard the UN run as important, or he didn t want to spoil its relations with his coalition partner ABV, which were totally behind Mrs Bokova. And this is how Bulgaria missed its chance to field another candidate who might have had better chances of getting the top UN job. The Bulgarian EU Commissioner Kristalina Georgieva began her campaign to become UN Secretary General in 2014, partly because she was not sure that the then ruling Socialist government will support her for a second tenure at the European Commission. Working under the radar and mostly without the support of the Bulgarian government she collected impressive support. In early 2016, media reported that on the sidelines of a G-8 summit German Chancellor Angela Merkel had tried to convince Russian President Vladimir Putin to support Mrs Georgieva. Later, as she became Bulgaria s official candidate, several East European countries backed her nomination. Mrs Georgieva had a good track record with Russia as well, having served as World Bank s representative in Moscow for number of years. When Mr Borrisov finally made his choice in January 2016, it was actually too late for both Mrs Bokova and Mrs Georgieva. Mr Borissov decided to support Mrs Bokova, claiming pressure from his coalition partners, left-wing ABV party. This might have been true, but they left the government two months later anyway. The reason for Mr Borissov s decision was his unwillingness to take risks while can easily blame other for Mrs Bokova failure. Mrs Bokova was now the official Bulgarian candidate, but because she was imposed, she never received the wholehearted support of the government. In September, when the straw voting in the Security Council began, it was obvious that Mrs Bokova can t pass the test she had two firm NOs from permanent members of the Security Council. Again, instead of swift reaction, the PM waited and at the end budged under pressure from various politicians from the European Commission President Jean-Claude Juncker to Chancellor Merkel. When Mrs Georgieva finally became Bulgaria s official candidate, Russia realized that Mrs Bokova is a losing horse and switched its support to Antonio Guterres, the former Portuguese PM, whom Moscow had firmly rejected for several months. At the end, a fairly good chance for a Bulgarian to lead the UN was wasted without a proper fight, and left too many scars on the characters involved.

25 КQUARTERLY 23 ECONOMY/MACROECONOMY KQUATERLY 23 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 Rumors of high level bribery, somewhat justified allegations of corporate raidership, murky middlemen and a fugitive banker are all intertwined in the takeover of the Bulgarian Telecommunications Company (BTC). DEVELOPMENTS TO FOLLOW Record government spending planned for The good news that 2016 s budged will be balanced has been overshadowed by the expected 1 bln euro spending increase for Its manly due to EU funds which will flood Bulgaria next year. However, the spending boost will come handy for the government, in the eve of the next regular national elections that are scheduled for The introduction of common corporate tax base. The proposed new regime by the European Commission for EU-wide taxation of corporate profits is not favourable for Bulgaria, because it will significantly change the current tax system which provides low tax, but wider taxable income base. Social security payments increase. As of 2017 the employers will pay additional 0.6pp social security contributions for their workers. Employees themselves will pay 0.4pp higher social security contributions. As of 2018 there will be another increase of the social security contributions with 1 pp.

26 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* A As Kenneth Rogoff, an economics professor at Harvard defines it, the debt spiral has four phases: rising debt, rising cost of borrowings, spending cuts and/or tax increases, slowing economic growth and once again rising debt. Is Bulgaria already dancing this fatal dance? Let us look at each of the four phases to try to find the answer. BULGARIAN GOVERNMENT DEBT STRUCTURE EUR million % 70.00% 60.00% 50.00% 40.00% RISING DEBT Over the past 17 years government debt has dramatically declined. It reached its minimum in absolute dimension in 2009 at EUR 4,828 million, while the minimum in relative terms was registered in 2008 when the government debt stood at 13.30% of GDP. After 2009 government debt has grown at an average annual rate of 17% on year-to-year basis. That is quite disturbing and in fact this is the reason to ask whether the country goes into a debt spiral. Driven by permanent budget deficits from 2009 on, government debt has more than doubled as share of GDP between 2009 and 2016 from around 13.40% to 29.30%. Even though it is still relatively low compared to EU peers, this ratio will inevitably increase in the coming years if fiscal consolidation proves difficult to implement or in case further funding is needed by the financial sector or some sectors of the real economy. At the same time the financing needs of the government are constantly increasing, making deficit reduction а difficult task. Furthermore, the growing size of contingent liabilities related to stateowned enterprises, most notably in energy and transportation sector, are definitely a risk factor for the national economy. Debt servicing has not been significantly affected because of the favorable financing conditions created by the low-interest-rate environment in the last few years. However, the situation can change in the medium term May 2016 External government debt Domestic government debt Total government debt/gdp An additional risk factor is the growth of contingent liabilities related to state-owned enterprises, most notably in energy and transport. Another noticeable trend is that the government has been steadily changing the ratio between domestic and external borrowing. From 1999 to 2009 domestic debt was on average some 20% of the total government borrowing, increasing from 9% to 32%, while in the period it is on average 37%, but declining from 45% to 26%. This probably indicates that when debt is rising, the lending capacity of the domestic market (especially in local currency) is easily exhausted. The figures once again demonstrate the fact that being a small open economy, Bulgaria strongly depends on international capital markets and IFIs. RISING COST OF BORROWING The next three charts illustrate the changes in the cost of borrowing for the 30.00% 20.00% 10.00% 0.00% Source:Bulgarian National Bank The debt spiral starts with uncontrollably rising debt, which inevitably erodes the confidence of lenders in the government. Naturally, in such situation the government will try to regain the investors trust by attempting to cut its budget deficit. Raising taxes or closing the most significant tax loopholes may be adequate measures, but cutting budget spending is a quite more efficient way of reducing the deficit. Normally none of these measures contributes to the popularity of the government. More likely, a government introducing such fiscal consolidation policies will see its popularity significantly weakened. On top of that, in the short term fiscal consolidation is a kind of a poison pill for economic growth. It will slow down growth if such exists, but occasionally it even may trigger recession. Inevitably, the economic slowdown (or recession) translates into less budget revenues and ultimately bigger deficit and rising debt.

27 КQUARTERLY 25 LONG-TERM INTEREST RATE 8.00% 6.00% 4.00% 2.00% 0.00% I.04 I.06 I.08 I.10 I.12 I.14 I.16 Source:BNB BULGARIAN GOVERNMENT S 10Y BOND YIELD (DENOMINATED IN EURO) III.08 III.09 III.10 III.11 III.12 III.13 III.14 III.15 III.16 Source:Bloomberg INTEREST EXPENDITURE 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Interest Expenditure/Tax Revenues Interest Expenditure/Budget Expenditure Source:Ministry of Finance Bulgarian government. The long-term interest rate for convergence assessment purposes (see chart 2) is determined on the basis of the secondary market yield to maturity of a long-term bond (benchmark) issued by the Ministry of Finance and denominated in national currency. It has been influenced over the past five years by the ever increasing (lately even excessive) liquidity on the domestic banking market, not so much by concerns of increasing government debt. Simply local banks and pension funds are hungry for government bonds due to lack of alternatives similar in risk profile. The next chart (chart 3) shows the yield of the benchmark 10-year Bulgarian government bond denominated in euro. It shows the positive effect of the global low-interest-rate environment in the last few years. Regarding the measurement of investors perception of Bulgaria s financial stability, to some extent sterilized from the effect of low interest rates, we can look at the CDS spreads of the country and its direct EU peers in the next chart. Clearly, with the exception of Croatia, Hungary, Slovakia, Czech Republic, Poland and even Romania outperform Bulgaria after mid-2014 when the fourth largest Bulgarian bank collapsed, increasing concerns about the soundness and resilience of the country s banking sector. Investors concerns about Bulgaria are still not so much driven by the level of public debt but by the sectors which need structural reforms like energy and transport. There are sizable liabilities of stateowned companies in these sectors, which may produce one-off financing needs that will have be covered by the government. SPENDING CUTS AND/OR TAX INCREASES Interest expenditure of the government budget is still rather moderate. Therefore, it does not motivate the government to cut spending or increase taxes (Chart 4 chart illustrates the evolution of interest expenditure for the period ). The next chart (Chart 5) shows the government spending and respectively the budget revenues and budget deficit/surplus for the period The chart clearly visualizes the lack of specific effort by the government to achieve fiscal consolidation after Fiscal consolidation means a robust policy aimed at reducing budget deficit and debt accumulation. The most efficient way of doing this is to optimize and eventually cut government spending. 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% GENERAL GOVERNMENT ADMINISTRATION DEFENCE AND SECURITY EDUCATION HEALTH SOCIAL SECURITY, SUPPORT AND CARE HOUSING, PUBLIC WORKS, RECREATION, CULTURE, RELIGIOUS ACTIVITIES ECONOMIC ACTIVITIES AND SERVICES UTILITIES AND ENVIRONMENT OTHER EXPENSES BUDGET REVENUES BUDGET DEFICIT(-)/SURPLUS(+) Source:Ministry of Fin

28 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 Investment 14 Q3 14 Q4 15 Q1 15 Q2 15 Q3 15 Q4 16 Q1 16 Q2 Capacity utilization in industry n/a Labour market 14 Q3 14 Q4 15 Q1 15 Q2 15 Q3 15 Q4 16 Q1 16 Q2 Unemployment rate Labor costs International transactions Nov.'15 Dec.'15 Jan.'16 Febr.'16 March'16 April'16 May'16 June'16 Current account n/a Direct investment (net) n/a Prices Nov.'15 Dec.'15 Jan.'16 Febr.'16 March'16 April'16 May'16 June'16 HICP 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 Households and NPISHs n/a 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 - GDP PER CAPITA AND TOTAL GDP RELATIVE TO PEERS* (INCLUDING BULGARIA) 4.20% 4.10% 4.00% 3.90% 3.80% 3.70% 3.60% 3.50% Bulgarian GDP in PPS per capita as percentige of its peers (rhs) *BG;CZ;EE;LV;LT;HU;PL;RO;SI;SK 76.00% 74.00% 72.00% 70.00% 68.00% 66.00% 64.00% 62.00% 60.00% 58.00% Bulgarian GDP in PPS per capita as percentige of its peers (lhs) Source:Eurostat > 25 missed the opportunity to introduce much-needed reforms in the education system, healthcare, the social security system and the labor market. Reforms are also crucially needed in the financial sector, mainly regarding the quality of supervision of the banks and pension funds. The financial sector is still perceived as a potential source of risks for the overall stability of the country. The state-owned companies in the energy sector (and to a lesser extent in the transport sector) have generated substantial amount of liabilities, which may require a shift in government spending or may lead to an increase in budget deficit. The government has slightly improved the efficiency of tax collection but still there are significant opportunities for better tax revenues, as the effort of the government has so far been rather opportunistic, but not systematic. In general, there is no severe necessity for imminent spending cuts but implementing immediate and radical reforms is a necessity. In its last country report on Bulgaria the European Commission makes the following comment about the country s economic growth: The recovery has not so far been strong enough to support economic convergence with regional peers. Compared with peer economies, Bulgaria has significantly underperformed since the outbreak of the crisis in terms of both GDP growth and GDP per capita (Graph 6). The economic growth post crisis has been export-driven, which is rather healthy, but there are several structural constraints for the country to reveal its potential. Among the most important ones are the business and administrative environment and the related problems with the rule of law, the human capital i.e. the labour market (rapid population ageing, substantial outward migration, skills shortages and mismatches), the education, social security and healthcare systems, the level of corporate debt. An advisable fiscal consolidation may lower economic growth in the short term, but if it comes as a result of much needed reforms it will help the country in the long term. The level of government debt is not threatening economic growth in the short term, but the lack of adequate reforms jeopardises the midto long-term perspectives of Bulgaria. To sum it up, Bulgaria is clearly not yet in a debt spiral, but the lack of structural reforms will take the country there sooner rather than later. *Yordan Yordanov is a Managing Partner of Optimum Consilium OOD, an independent investment and financial advisory company.

29 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:

30 28 KQ MACROECONOMY ANALYSIS// IS JOB CREATION DYING OUT? THE NUMBER OF NEW JOBS IN THE SECOND QUARTER OF 2016 HITS A 2-YEAR LOW E ven though the number of employees keeps rising, the first half of 2016 shows a slowdown of job creation. The number of new employees in the second quarter of 2016 is , which is the lowest since the beginning of 2014 when the 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 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. The bad news is that some of the sectors, which have been at the forefront of job creation, are already showing a decline of employment. Among these is the IT industry[1], which surprised on the negative side in the second quarter with a loss of 4.1 thousand jobs against a year earlier. The manufacturing industry is also faring disappointingly. A number of branches of the manufacturing industry have attracted substantial investment and expanded rapidly after the crisis. Among these is the production of auto parts, machinery and equipment, appliances, optics, pharmaceutics, plastics, etc. In the second quarter of 2016, however, employment in the wider manufacturing industry also fell for the first time in quite a while, by 5.5 thousand people in yoy terms. *Desislava Nikolova, Chief Economist, Institute for Market Economics [1] The data quoted here refer to the sector of Creating and distribution of information, creative products; long-distance communication. Yet, the IT industry (and mostly software development), which is a part of this wider branch, has been the main driver of job creation in the sector over the past couple of years. NUMBER OF EMPLOYEES, YOY CHANGE (thousand people) Q DESISLAVA NIKOLOVA* Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source:National Statistical Institute MINISTRY OF FINANCE PREDICTS MODERATE GROWTH IN THE NEXT THREE YEARS THE ECONOMY WILL SUFFER FROM DEPRESSED EXTERNAL DEMAND BUT DOMESTIC CONSUMPTION WILL SUPPORT GROWTH W eak economic growth, increased consumption, almost frozen exports, more government contracts. In brief, these are the expectations of the Bulgarian Ministry of Finance in its autumn macroeconomic forecast for the next three years. The autumn forecast is crucial, because it is used in the preparation of the national budget for The ministry predicts a real 2.5% growth of GDP for next year and slight acceleration over the next two up to 2.7%. The Bulgarian treasury is a bit more conservative than the IMF, which predicts 3% growth for 2016 and 2.8% for next year. Bulgarian economy could expect a depressed export growth due to a projected slowdown in developed economies, according to the ministry. As a result, export companies may have fewer orders and the wages of their workers will grow more slowly. The national statistical office recently recorded a decline in Bulgarian exports but it was limited mainly to countries outside the EU. Bulgaria s economic growth in 2017 will come primarily from increased consumption. The assumption is based on an expected increase of disposable income on the back of a rise in the regulated minimum wage and salary growth in the private sector which already experiences labor shortages. EU funds will be the second driver of Bulgaria s economic growth as new EU financed projects will kick off and public spending will increase substantially. Increased domestic consumption will be reflected in a rise in imports and by 2019 net exports will contribute only 0.2 pp to the GDP growth. The unemployment rate is expected to reach an average of 7.3% next year. Increased retirement age will prevent a faster decline of the jobless rate. "In 2017 the rate of change of income growth will slow to 5.4%, but will remain high as a result of acceleration of the actual performance, positive change in prices and demand for labor in the country," the Ministry of Finance report says. By the end of 2019 productivity is expected to grow by around 2% a year.

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

32 30 KQ MACROECONOMY HOW UBER LOST ITS BATTLE WITH BULGARIAN REGULATORS BULGARIAN TAXI COMPANIES WON THE FIGHT AGAINST THE MARKET- DISRUPTIVE COMPETITION U ber is one of those companies that stir controversies in every country in which they decide to make business. Bulgaria is one of them: after Uber launched services in the country in December 2014, the Commission for Protection of Competition initiated legal action against the company. In September 2015, the Supreme Administrative Court decided that Uber should no longer operate in Bulgaria, as the company failed to comply with taxi transport regulations requiring owners to paint their cars yellow, to pay taxes in Bulgaria, and to declare their tariffs. The Uber case in Bulgaria is not unique, as other countries have opposed its business model as well. However, it illustrates quite well the unified and strong resistance that regulators often build around incumbents without taking into account any argument the disruptive industries bring in their defense. In the spring of 2015, Sofia Municipality sent a letter to the CPC just five days after Uber started operating in Bulgaria. It expressed concerns about the safety of the service the company provides. The Bulgarian legislation bans the offering of services for transporting clients for money without the required registrations, Sofia Municipality argued. One of the leading taxi companies in Sofia, OK Supertrans, also filed a complaint, claiming that Uber was its direct competitor but did not comply with the law and introduced dumping practices into the taxi transport market. Up to that point, the registered cars were almost 400, according to Uber s own data. In July 2015, the CPC ruled that Uber was involved in unfair competition by offering unregulated taxi services and should cease the practice immediately. The commission fined Uber and Rasier Operations, both registered in the Netherlands, with 50,000 levs each for unfair competition and with a further 50,000 levs for not providing financial information. In September 2015, the Supreme Administrative Court upheld the CPC decision. Uber has its conflicts with local regulators all over Europe and beyond. It had to suspend its services in China, 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 V ery soon every Bulgarian ministry or government agency will have to meet specific criteria when creating a register or any other digital system: to be open source, to have a standard interface, so that it can be connected to other administrative systems, and to operate with the system for electronic identification of citizens, which is supposed to start working very soon. This is one of the main tasks for the newly established E-government state agency. The new body will be directly subordinate to the Council of Ministers, which is underlying its importance for the government policy in this area. It will control, advise and coordinate the projects for digitalization of administrative processes and services. The establishment of the E-agency does not mean that all government websites or software will be modernized overnight, but it is a significant step forward, marking the launch of specific rules. However, there are two quite difficult tasks before the new agency: to change the way clerks work and to impose control over the IT budgets and procurement orders of cabinet ministers who are above it in terms of hierarchy. The new agency is expected to start functioning in no less than four months, says Grozdan Karadjov, a MP from the Reformist Bloc and ex-chair of the transport commission in parliament.

33 ECONOMY/BUSINESS THE PHONY BATTLE FOR BTC VTB SELLS BULGARIAN TELECOMS OPERATOR TO VTB КQUARTERLY 31 KQUATERLY 31 DEVELOPMENTS TO FOLLOW The concession procedure for Sofia airport will reopen soon. It was blocked by some creditors which argued that the new concessioner might not respect their claims. The government 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. Rumors of high level bribery, somewhat justified allegations of corporate raidership, murky middlemen and a fugitive banker are all intertwined in the takeover of the Bulgarian Telecommunications Company (BTC). By the end of the year the Bulgarian 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 Bulgarian oligarchs influence in construction public procurement contracts. The outcome of the new tenders will show whether this goal is achieved.

34 32 KQ ECONOMY/BUSINESS DEAL IN FOCUS// THE PHONY BATTLE FOR BTC BTC OWNERSHIP STRUCTURE Empreno Ventures Limited 100% (Now Dmitry Kosarev, 100% previously Tsvetan Vassilev) THE OWNERSHIP SCHEME BEFORE R Rumors of high level bribery, somewhat justified allegations of corporate raidership, murky middlemen and a fugitive banker are all intertwined in the takeover of the Bulgarian Telecommunications Company (BTC). The Russian creditor of the biggest telecoms company in Bulgaria, Vneshtorgbank (VTB), sold it at the end of August 2016 following convoluted negotiations and legal actions that lasted more than a year. The new owner, Spas Roussev, is a politically well connected Bulgarian businessman active in the IT sector, real estate and hotel industry. The change of BTC s ownership is the biggest business acquisition in Bulgaria in The company, operating under the brand name Vivacom, dominates the telecoms market with annual revenue of 442 mln. euro in 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 at the core of a complex and obscure network of companies, most of them acquired with the tacit assistance of his political friends. Now, the fight for the assets of Mr. Vassilev s empire points to re-distribution of power behind the curtains of the official political show. BTC turned out to be a battlefield for competing Russian investors. To get their hands on the company, they seek local political support, exemplifying the Russian business penetration into the Bulgarian political system. The deal also shows how unattractive Bulgaria has become for strategic investors in sectors soaked with political intrigues. LIC Telecommunications S.a.r.l 43.34% 33.33% 100% 100% V Telecom Investment S.C.A V2 Investment Directors: Europim Conselux InterV Investment Directors: Maze Europim Viva Telecom Bulgaria Directors: Svetlana Bahchevanova, Zlatozar Surlekov, VTB ENTERS BTC BTC, owned by a consortium of financial investors, ran into serious trouble serving its 1.7 billion euro debt back in After two years of negotiations, creditors, including the Royal Bank of Scotland and Deutsche Bank, approved the sale of the company in August The winning bidder was Viva Telecom Bulgaria, a wholly owned subsidiary of Luxembourg-registered InterV Investments. The biggest shareholder was Tsvetan Vassilev, followed by VTB and a group of BTC creditors. InterV Investments took a 150 mln euro loan from nine banks to finance its outstanding debt in November 2013 as part of the deal. Crusher Investment 100% Conselux Delta Capital Investment 100% Milen Velchev, Eleonora Sarbova 22.34% Pledged as collateral for VTB s 150 mln euro credit Former creditors led by Michael Tannenbaum VTB DID NOT HAVE THE INCENTIVE TO FIND THE BEST OFFER, BUT RATHER TO CUT THE COMPANY S PRICE AT THE EXPENSE OF THE OTHER EXISTING SHAREHOLDERS AND MAKE A BIGGER PROFIT LATER

35 КQUARTERLY 33 OWNERSHIP AFTER THE DEAL Viva Edge Telecom Limited Spas Roussev Sold by the bank in an auction in November 2015 for 330 mln euro. The money goes to VTB, CCB and the shareholders. An unnamed 20% related company minus 46% owned by VTB one 19% share 240 mln euro credit 100% Delta Capital Investments (Milen and George Velchevs, Krassimir Katev) Viva Telecom (Luxembourg) Directors appointed on 30 August 2016 : Spas Roussev shares Class A Boyan Ivanovich (VTB) shares Class B 15% + one share Former creditors led by Michael Tannenbaum Franz Hoerhager (Mezzanine Investments) shares Class D Bruno Ducharme (expert in the telecoms business) Bulgarian Telecommunications Company 100% 100% 100% InterV Investment Directors appointed on 30 August 2016: James Body, Keimpe Reitsma, Christian Tailleur - Directors in Totalserve Viva Telecom Bulgaria Directors appointed on 31 August 2016: Spas Roussev, Jivko Nikolov Source: Trade registries The loan was later consolidated by VTB. The VTB loan matured on 22 May 2015, at the time when Vassilev s CCB Bulgaria s fourth-largest lender - had already gone bankrupt. The result of the payment default was another debt crisis for BTC. VTB decided to foreclose on the loan collateral - 100% of InterV Investment shares. HASTY SALE The next stage came in November VTB held a hastily prepared auction in London which failed to attract many investors. In fact, there were only two - and a consortium between Greek Olympia of the founder of Germanos retail chain, Panos Germanos, and the American hedge fund Third Point. Some investors like Mark Schneider, former Chief Executive Officer at Liberty Global Inc, together with US equity investment fund CVC, were, however, discouraged to show up, as there was no option to conduct due diligence and ensure enough transparency. On 20 November 2015, Viva Telecom (Luxembourg) won the auction with a bid of 330 million euro. The consortium owners are Spas Roussev with 46%, VTB with 20% minus 1 vote and Delta Capital Investments, a company owned by former Bulgarian finance minister Milen Velchev, with 19%. The other shares went to smaller BTC creditors. CHEAP VALUATION The auction raised a number of questions. VTB acted as both a seller and a buyer in the transaction. Not only did VTB and Delta, which without any doubt are related, hold the majority stake, but VTB also provided the bulk of financing to Spas Roussev through a 240 million euro credit facility for the buyer, Viva Telecom. In this arrangement VTB did not have the incentive to find the best offer, but rather to cut the company s price Spas Roussev, in partnership with VTB, > 34

36 34 KQ ECONOMY/BUSINESS THE DEAL SHOWS HOW UNATTRACTIVE BULGARIA HAS BECOME FOR STRATEGIC INVESTORS IN SECTORS SOAKED WITH POLITICAL INTRIGUES. THE BTC DEAL NEEDED AT LEAST A NOD FROM THE GOVERNMENT. THE QUESTION IS WHY DID IT ALLOW SUCH A PROCEDURE TO TAKE PLACE AT THE EXPENSE OF THE TAXPAYERS VIVACOM S REVENUE AND PROFIT Sales Profits Source:KAPI > 33 at the expense of the other existing shareholders and make a bigger profit later by reselling BTC one more time. Mr Roussev looks like the perfect cover for the real deal makers. He is very close to Milen Velchev, who is CEO of VTB s Bulgarian arm, VTB Capital AD. The rumor goes that actually Mr Roussev proposed Mr Velchev for finance minister back in The speculation was partially confirmed by the fact that Schneider s indicative offer was considerably higher. He valued BTC at 830 mln euro, while Spas Roussev s bid valued it at 700 mln. euro, when factoring in the existing debt of the company. TEAM RUSSIA-2 The plot was tied even further when a new contender emerged Dmitry Kosarev. The Russian businessman claims that his Empremo Ventures Ltd is the rightful holder of Vassilev s shares in BTC. Mr Kosarev, however, allegedly owns just one of InterV Investments shareholders, while VTB sold InterV Investments as a whole. In doing so, Mr Kosarev claims, VTB had deprived him of his property. He announced that lawyers representing Empreno, had begun legal action in London against VTB Capital, the UK subsidiary of the Russian bank. He even filed a complaint before the US Office of Foreign Assets Control. Mr Kosarev claims, as Mr Vassilev did previously, that he had offered to re-finance the bank loan, but his offer was not even considered by VTB. The bank denies that Mr Kosarev delivered real evidence for his claims. RUSSIAN CONNECTIONS Mr Kosarev has a questionable business history, including links to the Russian oligarch Konstantin Malofeev, which he fervently denies. Mr Malofeev was interested in the BTC acquisition, but was unable to take part in it because of the EU and US sanctions against Russia and Russian nationals implicated in supporting the pro-moscow separatists in Ukraine. Mr Malofeev has never made a secret of his involvement in the Ukrainian conflict. Before Mr Kosarev appeared, there was another dubious investor who claimed BTC ownership the Belgian Pierre Louvrier who had a long career in Russia and was probably also connected with Mr Malofeev. The complex structure of the BTC ownership makes it very difficult to judge who really controls the shares of the last owner of the telecoms operator. It is quite possible that they were transferred by Mr Vassilev to Mr Malofeev s stooges in the hope that he can win over VTB. Mr Malofeev previously fought a seven-year battle against VTB that he finally won in a London court. Later, he settled his arguments with VTB in Russia as well. Russian newspaper Kommersant wrote in 2015 that the Russian bank significantly reduced its claims against Mr Malofeev due to his support for the pro-russian separatist movement in Ukraine. WHO GETS WHAT? VTB financed the whole operation with a 240 mln. euro loan, while consortium members came in with 100 mln euro of their own. The deal was made more expensive by the various fees, commissions and other transaction costs. With its participation VTB refinanced its non-performing loan to InterV Investment, which in the meantime had swelled to nearly 170 mln. euro. In practice, VTB came in with less than 100 mln euro, and was able to acquire a controlling position in the future resale of BTC. The bulk of the money paid for BTC, 125 mln euro, will go to the receivers of the failed CCB. This is the funding the bank lent to Tsvetan Vassilev to acquire his stake in BTC in 2012, which is now blocked by the receivers. As a result, the shareholders of the telecoms operator will receive only mln. euro in the best case scenario. RUMORS OF CORRUPTION The rapid approval of the deal by the Bulgarian regulators shows that it met the local political litmus test. This prompted Kosarev supporters to spread unsubstantiated rumors in the Russian press that Bulgarian Prime Minister Boyko Borissov was allegedly part of a corruption scheme. This is probably not true. But the real test for the BTC deal significance for the shadowy forces of the Bulgarian business and political life is an event that happened a day before the final sale Spas Roussev became owner of Sofia-based soccer club Levski. In previous years most of the soccer club owners in Bulgaria were arranged personally by Prime Minister Boyko Borissov. The BTC deal definitely needed at least a nod from the government. The question is why then the government allowed such a procedure to take place at the expense of the state. The lower-than-expected price for BTC deprives the CCB receivers of tens of millions money, which will ultimately come from the taxpayers who funded the repayment of the debt of the bankrupted bank.

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

38 36 KQ ECONOMY/BUSINESS NEWS BRIEF// FINANCE/ Latvia-based 4finance Holding Acquires TBI Bank Oleg Boyko, another Russian billionaire, enters the Bulgarian market. 4finance Holding, one of the big players in the fast customer credit business with presence in 15 countries, acquired TBIF, the financial unit of Dutch-Israeli group Kardan. TBIF includes Bulgarian TBI bank, the leasing companies TBI Rent in Bulgaria and TBI Leasing IFN in Romania, as well as Romanian fast-credit company TBI Credit IFN. The combined assets of TBIF in the two countries total 272 mln. euro. The acquisition price was 69 mln euro. TBI bank is one of the smallest credit institutions in Bulgaria with assets of 255 mln euro but according to Capital s TOP 10 Banks ranking, it is number one in terms of efficiency and profitability. Luxembourg-registered 4finance Holding is headquartered in Latvia. The company is owned by Russian billionaire Oleg Boyko. He made his fortune running slot machine halls and now his SMS Finance operates a network of ATMs for fast credits. MANUFACTURING/ KJK Capital invests 7 million in Leader 96 The Finnish fund acquires 60% of the growing Bulgarian bicycle manufacturer. Finland s KJK Capital Fund has acquired 60% of Bulgarian bicycle manufacturer Leader 96 by investing nearly 7 million in the Plovdiv-based factory. The rest of the capital is owned by the company founders. Leader 96 s sales more than doubled over the past two years, reaching 63.5 million levs ( 32.5 mln.) in 2015, as demand for bicycles increased. Earlier this year, the company opened a new factory, doubling its annual capacity to over 500,000 units. KJK Capital provides financial services and manages assets worth 450 million. It has already made several minority equity investments in Bulgaria. Bicycle production is one of the few fast-growing industries in Bulgaria. The country ranks fifth in Europe with 940,000 bicycles manufactured in Leader 96 is the first Bulgarian company in the sector to attract a foreign investor. AGRICULTURE/ Agria Group acquires sunflower oil producer Kehlibar Factory s former owner buys 10% in agricultural holding. Bulgaria s Agria Group Holding has acquired 100% of local sunflower oil producer Kehlibar from the sole owner, Svetlomir Todorov. The price of the deal is 14.8 million levs ( 7.6 mln.). In a parallel transaction,mr Todorov has acquired 9.75% of the holding company for 6.8 million levs ( 3.5 mln). Kehlibar, based in the town of Lyaskovets, is one INTERNATIONAL INVESTORS BUY THREE IT BUSINESSES BULGARIAN TECH COMPANIES START TO APPEAR REGULARLY ON GLOBAL M&A MAP. Following the successful and widely acclaimed $263 mln acquisition of Bulgarian software company Telerik by the US-ba sed Progress Software in 2014, now it seems that the Bulgarian IT industry has started to provide such M&A success stories on a regular basis. In the last couple of months three companies found new foreign owners, though the investment was significantly lower. UK-based market research agency Future Thinking acquired GemSeek Consulting, a Bulgarian data science and analytics market research business for an undisclosed price. The two companies had been working together for almost a year prior to the deal. GemSeek Consulting saw remarkable growth in recent years. Between 2013 and 2014 its revenue more than tripled and reached 3 mln euro. In 2014, GemSeek was distinguished as the most dynamic among small and midsize companies in the IT sector in the Capital Gepard annual ranking. Bulgarian network services provider and IX operator OM-NIX was bought by Australian network interconnection company Megaport, which also said it signed a purchase agreement for the second largest internet exchange in Germany, Peering. The combined acquisition cost was 3.1 mln euro, Software firm Ideagen bought its Bulgarian re-seller Logen, expanding is direct client base in Eastern Europe. Logen provided the UK company s specialized audit, resource and risk management product to clients such as the Bulgarian National Revenue Agency, the Croatian Tax Administration and the Czech National Bank. PEEVSKI BUYS HIS PRINTING HOUSE BACK CHEAPLY THE DEAL EXEMPLIFIES THE EASE WITH WHICH PUBLIC SALES CAN BE MANIPULATED A company associated with Delyan Peevski, a MP from the Movement for Rights and Freedoms considered one of the so called oligarchs in Bulgaria, has acquired in a public auction the land plot and the buildings of IPK Rodina 1 in Sofia, the country s biggest and most modern printing house. As expected, there was no bidding since the buildings can hardly be used for other purposes. The equipment, which is prohibitively expensive to be moved out, is being sold in a different auction, making the whole procedure highly suspicious. The sale price for Pechatnica Sofia, located near Sofia airport, is 4.4 million levs (2.25 mln euro), nearly one-seventh of the value of the credit from Corporate Commercial Bank (CCB) used to build it. The printing complex was built in The CCB financed the whole project with loans in excess of 80 mln levs (41 mln.euro). The printing house was built by a company related to Mr Peevski and his former business partner Tsvetan Vassilev, the owner of CCB, but it has never worked. Following the break-up of Mr Peevski and Mr Vassilev, the printing house was transferred under the control of the latter, because the whole company was set as loan collateral in CCB. Now the receivers of the failed CCB are looking to recover the credits and are selling the printing house. The price could have been even lower. The asking price in the first auction was set at only 2.3 mln levs, but the sale failed, because the minimum price, according to the obligatory tax valuation, should have been 4 mln. levs.

39 КQUARTERLY 37 As a result now A.E. Best Success Services Bulgaria EOOD buys Pechatnica Sofia for a fraction of its real price. It is strange that the buyer did not seek permission for concentration from the competition authority, because it owns the biggest operating printing house in Bulgaria which prints almost all national newspapers. One possible explanation could be that Peevski plans to close down the existing facility and to transfer all its operations to his newly and cheaply acquired printing house. The ultimate losers are the taxpayers who funded the repayment of the debts of bankrupt CCB. BULGARIAN ARMS EXPORTS GROW BY 59% IN 2015 HALF OF THE MLN EURO EXPORTS WENT TO THE MIDDLE EAST Bulgaria exported weapons and ammunition worth mln euro in 2015, according to the annual report of the Interdepartmental Commission on Export Control (ICEC) with the Ministry of Economy. This is a 59% increase in comparison with the previous year. In 2014, Bulgarian arms exports were worth 403 mln euro. > 38 ANNUAL ARMS EXPORT, (IN MLN EURO) THE BIGGEST ARMS TRADERS (INCOME IN THOUSANDS OF LEVS) Apollo Engineering OOD Armitrans OOD Kintex EAD Sage Consultants JSCo. Allguns OOD Armako AD Arsenal-2000 Yotov&Son OOD THE BIGGEST ARMS PRODUCERS (IN THOUSANDS OF LEVS) Arsenal AD Emko EOOD VMZ EAD Dunarit AD Arkus AD Samel-90 AD Source:Ministry of Economy NEWS BRIEF// of the largest sunflower oil producers in Bulgaria with capacity of more than 50,000 tonnes per year. In 2015 its sales increased by more than a fifth to 41 million levs ( 20.1 mln) and its profit doubled to 3.5 million levs. Agria Group is among the largest agricultural holding companies in Bulgaria with some 20,000 ha of arable land owned or leased. It has been growing actively through acquisitions. The Kehlibar transaction is considered strategically important, as it gives Agria Group an entry into a new sector. INSURANCE/ Bulstrad acquires UBB-AIG for 3.2 million The former competitor remains independent, renamed to Nova Ins. Bulstrad Vienna Insurance Group has acquired for 3.2 million its smaller rival UBB- AIG Insurance Company, which is specialized in loan related insurance. UBB-AIG will continue operating independently under a new name, Nova Ins, and in close partnership with United Bulgarian Bank (UBB), one of the former owners. The deal included UBB-AIG s assets worth 8.5 million levs (4.346 mln. euro) and liabilities of 805,000 levs. No further restructuring of the company is envisaged. The new owner will continue to develop it as a bank assurance sales channel. UBB-AIG is the smallest insurance company on the Bulgarian market with a share of about 0.3% as of November Its business depends mainly on customers provided by UBB. Bulstrad in turn is leader with 12.6% of the market. The group also has a life insurance business, Bulstrad Life Vienna Insurance Group. RETAIL/ Piccadilly remains with one owner after partners withdraw Nikolay Lazarov to look for new co-investor in troubled retailer. Two of the owners of Bulgarian retail chain Piccadilly have quit the company and it is now solely owned by Nikolay Lazarov. The withdrawal of the Popov brothers, comes after two years of partnership with Mr Lazarov. During this time the chain shrank and stopped paying regularly to suppliers. Mr Lazarov, who lives in Paris, will be looking for a new co-investor. Last autumn Piccadilly s business was moved to Select Trade, a company owned by Luxembourgregistered BK Finance, which is connected with Mr Lazarov. The company posted more than 41 million levs revenue and 786,000 levs profit for Piccadilly s turnover decreased 20% to 159 million levs last year and the company booked a loss of 31.6 million levs. In May 2015 the company borrowed 11.8 million from Investbank, paid some of its debt to suppliers and unveiled a plan to recover the business.

40 38 KQ ECONOMY/BUSINESS NEWS BRIEF// SOLAR POWER / Renewables undergo consolidation. The renewables business in Bulgaria, which until recently had a pretty much scattered ownership, is undergoing slow consolidation. In less than six months energy trader Energy TM acquired Zhrebchevo HPP in partnership with Nikolay Valkanov, owner of Minstroy Holding, and now it buys the local subsidiary of US-based SunEdison which owns 20 MW photovoltaic installations. The price was not announced, but it is probably in the range of mln euro. At the beginning of the year China s ReneSola sold its 10 MW photovoltaic park to Luxembourg-based Solar World Invest Fund SIF. The fund is looking for new deals in Bulgaria. PACKAGING/ Portuguese BA Vidro acquires Druzhba Glassworks. The second largest glass manufacturer in Bulgaria, Druzhba Glassworks, now part of Greek group Yioula, will be acquired by Portugal s BA Vidro. The intention of Yioula to sell parts of its business has been known for more than a year, because the family owned group has substantial debts and seeks restructuring. Druzba Glassworks had a turnover of over 220 mln levs in 2015 and is the second largest in the sector after Turkish SiseCam in Targovishte. It is a big producer of bottles and jars for canning, wine and beer industry, with 70% of its production exported to Greece, Italy and Serbia. The company has two production units - in Sofia and Plovdiv. Druzhba Glassworks is one of the largest companies on the stock exchange in Bulgaria. Its market capitalization is 235 mln levs, but the company is one of the least liquid. Shares outside its core Greek owner were only 0.76%, according to its financial statement for MARKET/ Commodity exchanges in Sofia and Ruse merge. The Sofia Commodity Exchange and the Bulgarian Commodity Exchange (based in Ruse) signed a memorandum to merge. The deal, which is expected to be finalized by the beginning of next year, will practically consolidate the whole commodity trading business in one place. The annual turnover of the new exchange will amount to 600 mln. levs (307 mln euro). The Ministry of Finance decided several months ago to cut the number of goods which public institutions and state-owned companies can buy from the commodity exchanges. The ministry motivated its decision with the widespread suspicion that the exchanges are used to bypass the open tender procedure and to manipulate prices. > 37 ICEC issued 697 permits for export and transfer totaling billion euro in 2015, which is an indication that exports will continue to grow in Capital K100 annual ranking showed that in 2015 some arms exporters were among the most profitable companies in Bulgaria. Traditionally, Bulgaria has exported military hardware mainly to conflict points in Africa and the Middle East. It is noteworthy that Ukraine became a serious market for Bulgarian weapons. In 2014 arms exports were worth less than a million euro, but the Bulgarian authorities issued export certificates for 39 mln euro. Iraq remains the main client of Bulgarian arms companies. Baghdad purchased arms worth mln euro in 2015, twice as much in comparison with The second biggest customer was Saudi Arabia, which bought weapons for 92.4 mln euro. Israel, Qatar and the United Arab Emirates were also big buyers of Bulgarian arms. Afghanistan was the fourth biggest destination for Bulgarian arms exports with purchases of 57.4 mln euro in 2015, up from 42.7 mln euro in BULGARTABAC S DOMESTIC MARKET SHARE SHRINKS THE FORMER STATE MONOPOLY CONTROLS JUST BELOW 30% OF THE BULGARIAN CIGARETTE MARKET The domestic market share of Bulgartabac, the tobacco company related to Delyan Peevski, fell to 29.5% in August, according to data from cigarette companies. In recent years Bulgartabac was able to keep its market share above 30% and now, for the first time, that share is lower. The other company that lost market share is KT International (formerly Kings Tobacco, owned by the Peshtera Winery shareholders). Its share is down by 1.2pp. Two foreign companies - Philip Morris and British American Tobacco, increased their market share Even though the drop in sales is not significant, it is a bad omen for Bulgartabac, because the company had to slash its exports. Bulgartabac ceased exports to the Middle East, which represented over 80% of its sales. The reason was a determined action by the Turkish authorities to fight illegal sales. In 2014, 50% of the cigarettes smuggled into Turkey originated from Bulgartabac. Last year, their share fell to 45% of illegal sales but Bulgarian cigarettes remain the most popular contraband brand in Turkey. Bulgartabac s woes are probably the source of the rumors that Mr Peevski plans to sell the tobacco company. Besides three cigarette factories, Bulgartabac controls cigarette distributor ELD as well as Lafka, a network of newspaper and cigarette kiosks. Peevski hid his ownership of Bulgartabac behind a Dubai-based company at the beginning of the year following his problems with the Turkish authorities. In the meantime, the tobacco market is growing, while the smuggling of cigarettes an endemic problem for Bulgaria until recently, almost disappeared. The latest study on the consumption of cigarettes without excise label shows a record decrease for the last ten years. Now, only 8.1% of the cigarettes sold in Bulgaria are smuggled cigarettes. Decreased smuggling, increased excise duties and a rise in consumption contributed nearly 200 million levs (102 mln euro) more in excise tax revenue in the nine months of the year in comparison with the same period in 2015.

41 КQUARTERLY 39 THE NEW PUBLIC PROCUREMENT ACT: LESS INDIRECT BARRIERS FOR BIDDERS, MORE TRANSPARENCY AND FLEXIBILITY KOSTADIN SIRLESHTOV* B Bulgarian public procurement practices and irregularities have often been criticized and therefore the timely transposition of two new EU Directives on public procurement and on procurement by entities operating in the water, energy, transport and postal services sectors in the new Bulgarian Public Procurement Act (PPA) came much as a pleasant surprise. PPA entered into force on 15 April 2016 and the Bulgarian government already adopted the rules for its implementation. The new law differs substantially from the latest Public Procurement Act as it introduces an entirely new package of EU public procurement regulations into the Bulgarian legislation. The PPA aims to meet the needs of both the contracting authorities/entities and the national market. It creates a legal platform to help EU companies get better access to the Bulgarian procurement market. A CLEAR VICTORY OVER BUREAUCRACY Over-bureaucratization has been one of the main areas of concern related to the Bulgarian public procurement procedures, because it created indirect barriers for foreign companies. Now the new PPA allows for the bidders to submit a European Single Procurement Document in which they declare the fulfilment of the conditions regarding the personal criteria required for the public procurement without providing any additional documents to certify these. The actual certification shall be done only after the bidder has been awarded the contract, which substantially streamlines the procedures and allows bidders from abroad to spend substantially less time and money in preparation for public procurement procedures in Bulgaria. Once a bidder fills the European Single Procurement Document, it can be used again in subsequent tenders if the information contained in it is still up-to-date. In line with this legislative trend the PPA also provides a possibility for the contracting authority to award a contract jointly with contracting authorities from other EU member states. In an attempt to introduce cost-savings into the process, the new PPA provides for fully electronic management of the entire tender process, guaranteed by a centralized electronic platform administered by the Bulgarian Public Procurement Agency. The complete electronic tendering platform shall become fully applicable no later than 15 April 2017 and will therefore allow for quicker and much more efficient public procurement procedures to be carried out. COMPLIANCE WITH MARKET The new PPA introduces several other important changes including a clear division between the two mains groups of contracting authorities: sectorial and public. The PPA also excludes the obligation of the contracting authorities to follow the PPA in certain cases of internal in-house awarding. This regime is of particular importance in the Bulgarian defense and transportation sectors where the process of privatization of the former consolidated conglomerates of companies is still not complete and the competitiveness of these state-owned companies is somewhat restricted. In preparation for tenders the PPA permits the contracting authority to conduct prior market consultations with independent experts and market players in order to examine the market and the nature of the activities to be assigned. The fact the introduction of a legal regulation of this very important aspect of each public procurement procedure is a clear recognition of the important of this pre-tender stage. In line with the EU procurement requirements that advice may be used in the planning and conduct of the procurement procedure, provided that such advice does not have the effect of distorting competition and does not result in a violation of the principles of nondiscrimination and transparency. In an attempt to avoid combination of objectively separable activities, the PPA provides that where the different parts of a potential public procurement contract are objectively separable, the contracting entities are obliged to divide the contract into separate lots allowing for more competition. Similar considerations led to the requirement that contracts be awarded on the basis of the most economically advantageous offer. The option for the contracting authorities to award the contract on the basis of the lowest price is no longer available. The flexibility for the contracting authority is granted by the provisions permitting up to 20% of the procurement to be excluded from the total forecasted value of the procurement when the contracting authority deems it appropriate. The practices of the Bulgarian public procurement was limiting the availability of alternative and equally secure instruments for guaranteeing the performance of the public procurement contacts and therefore the PPA permits insurance policies to be offered as a form of a performance guarantee and optimizes the terms for public procurement related appeals. The new PPA is a general framework law that includes main principles and rules that will need to be further clarified and specified in a secondary legislative act to be adopted by the Bulgarian Government. However, it provides the necessary legislative background for a modern, successful and timely evolution of the public procurement in Bulgaria. * Kostadin Sirleshtov has been a partner at CMS Cameron McKenna in Sofia since He is head of the Energy, Projects and Construction practice of the office and covers Central and Eastern Europe for CMS Cameron McKenna when it comes to energy issues.

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

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44 42 KQ ECONOMY/ENERGY ECONOMY/FINANCE NOT SO STRESSFUL TEST THE BANKING SYSTEM REVIEW WAS EXPECTEDLY POSITIVE, YET QUESTIONS REMAIN Despite their name, banking stress tests are not meant to be too stressful. It s as simple as that - the regulator will never risk banking stability just to make a point or solve a problem or two in the sector. DEVELOPMENTS TO FOLLOW Bulgarian insurers and private pension funds undergo balance sheet review and stress tests. A balance sheet review and stress tests were launched on June 15 to check the health of the insurance sector and the private pension system in Bulgaria. The country will be the first in the EU to review the performance of its pension funds and the second after Romania to do the same with insurers. The procedure was mandated by the European Commission in 2014, based on indications of malpractice by some participants in the nonbanking financial sector such as related party investing and inadequate reserves for risks. The European Insurance and Occupational Pensions Authority (EIOPA) will oversee the deleyed review of the pension system in Bulgaria. This is because the country s Financial Supervision Commission (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 company contained substantially false information. The audit company has won almost a third of the contracts in insurance and pension industry.

45 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 D 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 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 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 largely in the same careful vein when it prepared to unveil the results of the stress test of the country s banks in August. The check-up showed an overall robust banking sector, with capital adequacy ratios well above the EU average and above domestic regulatory thresholds. The examination revealed a small need expressed as its top quality capital divided by its risky assets). In the worst-case scenario of the stress tests, the capital shortfall was downplayed as purely hypothetical and due to highly unlikely assumptions. So, the BNB recommended relatively mild regulatory measures to stem deficiencies at the two banks. for additional provisions mln levs (340 mln euro) compared to 88 bln levs (45 bln euro) assets, concentrated mainly in two domestically-owned lenders - First Investment Bank and Investbank. Both of them were found to stay just above the absolute minimum of Common Equity Tier 1 DID THE EXAMINER FAIL? The whole exercise left the impression that the BNB was treading a thin line. The regulator was loaded with high expectations for change after it vowed to restore 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 NOT SO STRESSFUL TEST THE BANKING SYSTEM REVIEW WAS EXPECTEDLY POSITIVE, YET QUESTIONS REMAIN

46 44 KQ ECONOMY/FINANCE > 43 Bank (CCB), made possible by inadequate supervision. Widespread suspicions among the general public that related lending was rampant in other domestically owned banks and the arrival of a new BNB governor (former deputy finance minister Dimitar Radev came back to Bulgaria after more than a decade at the IMF) raised expectations that the asset quality review (AQR) and stress test will be an efficient tool to expose the system s long accumulated problems. The BNB was in a good position to raise its supervisory profile which had been strongly criticized as inadequate both by the Bulgarian parliament and foreign observers such as the European Commission and the IMF in the wake of the CCB collapse. Still, the declared outcome of the stress test exceeded even the most optimistic expectations, leaving the impression that the inspection had failed to reveal the whole truth. With such optimistic results it is hard for the central bank to instill confidence that it has done its job thoroughly and fairly and nothing was left hidden in the closet once again. What makes it even harder is the level of transparency of the stress test results, which in the end was considerably lower than the European Central Bank standards and didn t live up to the announcements at the start. The BNB disclosed the bare minimum of numbers which was hardly enough to compare performance among banks and discover where potential future problems lie. In the end, the big losers are the bank clients and generally the taxpayers, who might be exposed again to still unidentified risks stemming from the banking sector. mildly below the 20% level declared in the first half of 2016 but way above the minimum of 10% required by the BNB. And also way above EU levels. Bulgarian banks are traditionally urged by the regulator to maintain higher capital and liquidity levels partly because of the currency board system functioning in the country which limits the ability of the central bank to act as lender of last resort. OPPORTUNITY WASTED Even if the doubts that the stress test results were somewhat deliberately toned down prove true, it does not mean straight away that the BNB is again turning a blind eye to persisting bad practices. Bulgaria s banking sector is not particularly sophisticated and in a relatively small market it is easy to trace most of what is going on. Leaked reports from supervisory inspections in the failed CCB and in the worst AQR performer FIBank showed that deficiencies did not go unnoticed by the experts in the regulator. So probably what the BNB is trying to achieve is to clean up the problems quietly rather than bring them to media and public attention. Whether this is true or not will be seen in the followup actions of the regulator which is in the process MAYBE WHAT THE BNB IS TRYING TO ACHIEVE IS TO CLEAN UP THE PROBLEMS QUIETLY RATHER THAN BRING THEM TO MEDIA AND PUBLIC ATTENTION. WIDESPREAD SUSPICIONS AMONG THE GENERAL PUBLIC THAT RELATED LENDING WAS RAMPANT IN OTHER DOMESTICALLY OWNED BANKS REQUIRED VIGILANT INVESTIGATION OF THEIR PRACTICIES. SAILING AT TWO SPEEDS Having discovered some big shortcomings, the AQR generally painted a fair picture of the banks and confirmed the two-speed structure of the sector. On the one hand, are the local subsidiaries of big EU banking groups which generally have a sound management as they import some good practices from their headquarters. Overall, they have a higher share of non-performing loans but that is due to their more prudent accounting and disclosure standards. As a result, BNB expectedly found next to no need for them to set aside more provisions. On the other hand are the domestically owned banks controlled by business people who also have interests in various other sectors and are tempted to extend credits to fund their endeavors. This related lending requires circumventing banking regulations and creates huge conflicts of interest, particularly in the absence of good oversight by the regulator. And predictably this is where the problems were found. The general feeling among analysts is that the check-up revealed the direction if not the full scope of the problems in the banking sector. The CET1 ratio at the system level stood at 18.9% post AQR - only of beefing up its supervision department and trying to shake off the public mistrust it got with the CCB failure. The problem with this strategy is that even if applied rigorously, it will take time to implement which means that BNB has missed an opportunity to act tough and restore its image of a vigilant guardian by taking a more hard-line approach. The BNB and Bulgaria s financial sector also face some more scrutiny from the outside. Currently the IMF and the World Bank are conducting a complete Financial Sector Assessment Program (FSAP) in the country which, when finished, will undoubtedly provide an additional look at the state of the banking sector after the AQR. The first part of the FSAP conducted last year looked only at banking supervision. It was highly critical and was the basis for reform at the BNB launched by the new team of governors led by Mr Radev. Other institutions that may want to look deeper into the whole AQR/stress test process include the European Commission and the ECB if Bulgaria indeed steps up its plans to join the European banking union and take action to enter ERM II and the Eurozone. Nikolay Stoyanov, editor with Capital

47 КQUARTERLY 45 FOURTH LARGEST BANK IN BULGARIA IS UP FOR SALE NBG COULD RECEIVE UP TO 500 MLN EURO FOR UBB T the fourth largest lender in Bulgaria, United Bulgarian Bank (UBB), is in a sale procedure. The bank has about 7 bln levs (3.5 bln euro) assets, or 8% market share. It is 99.9% owned by the National Bank of Greece, which is under pressure to sell its non-strategic units as it relies on ECB liquidity support. The sale is in its initial phase as it is yet to attract indicative offers. According to unofficial information, at least 7 candidates have expressed interest. Among them are Belgian KBC (which already owns the smaller CIBank in Bulgaria) and Hungarian OTP (which is the owner of Bulgaria s second biggest lender DSK). The French Credit Mutuel also expressed interest in the deal. The other candidates are financial investors or funds with shorter term interest such as Apollo, Warburg Pincus, JC Flowers. The Bulgarian National Bank is likely to give its regulatory nod to groups that already control banks in the country as it has spoken frequently about the need to consolidate the sector. UBB passed the stress test well and with 1.2 bln leva capital it is among the best capitalized banks in the country. Analysts expect a deal at percent of its capital, or mln euro for NBG s shares in bank. But NBG may choose to distribute profits and reserves as dividend before the sale which would lower the price. NEWS BRIEF// HAPPY SHAREHOLDERS / Bulgarian banks improve their profitability. The net profit of the Bulgarian banking system exceeded 500 mln euro in the first eight months of more than the profit for the whole The five biggest banks on the market (UniCredit Bulbank, DSK, FIB, UBB and Eurobank) account for 71% of the result. Compared to the same period of last year, the profit is 192 mln euro higher. This is mainly due to one-off effect from the acquisition of Visa Europe by Visa Inc which led to a windfall gain for all European members of the card franchise. According to some estimations the transaction contributed mln euro to the aggregated net profit. Another factor for the good result is the growth of mortgage lendingby 46.6 mln euro June 2015 July 2015 Aug 2015 Sept 2015 Oct 2015 Nov 2015 Dec 2015 Jan 2016 Feb 2016 March 2016 April 2016 May 2016 June 2016 July 2016 Aug 2016 VICTORIA COMMERCIAL BANK MAY FINALLY FIND NEW OWNER Net interest income Administrative expenses Writedowns Non-financial instrument opertions Other net opertive income Net profit Net fee income Depreciation Financial instrument opertions Exchange rate differences Taxes Source:BNB EIGHT BIDDERS EXPRESSED INTEREST IN THE PURCHASE OF THE BANK E Eight bidders expressed interest in the purchase of Victoria Commercial Bank (VCB) before the deadline in mid-september. The lender is a wholly owned subsidiary of Corporate Commercial Bank which went bankrupt in The willing buyers are Investbank, Bulgarian American Credit Bank, D Commerce Bank, Transact Europe Holding, the Bulgarian Telecommunications Company, Egyptian engineering group Zaghloul Holding, and two consortia comprising insurance company Lev Ins and Kerbler Holding GmbH, and Hanson Holdings Lux s.a.r.l. and Eurofinance, respectively. The sale of VCB was launched in 2015 but the expessed interest was low. In March 2016, the procedure was relaunched with the help of Afa consultancy which advised the seller to increase the capital of VCB. As of the end of June, the bank s capital was 62.5 mln euro and total assets stood at 70.3 mln euro. The buyer should repay an outstanding debt of 44.9 mln euro to the parent bank. The current phase of the process is submission of non-binding offers, to be followed by the final stage with binding offers. TAKE A CREDIT / Good times for corporate borrowers. The average interest rate on corporate loans continued its steady drop, reaching levels below 5%. August data of the Bulgarian National Bank shows new credit contracts for less than 1 mln euro were signed at 4.51% on average, which is 2-3 pp lower than in August For loans exceeding 1 mln euro the average rate was 4.16%, which is 1.29 pp lower than in the previous month in Volume in levs (mln levs) Volume in euro (mln euro) interest for credits in levs(%) interest for credits in euro(%) Source:BNB

48 46 KQ ECONOMY/FINANCE DEALS AND REGULATIONS// MONEY FROM JUNK / 500 mln euro non performing loans are up for grabs. The non performing loans (NPL) market in Bulgaria is booming with five ongoing deals at about 500 mln euro in total. Compared to 2015, when NPLs for mln euro were sold, in the first half of 2016 the transactions reached mln euro. Almost half of them came from a single deal between Postbank (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 nonperforming 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. PLAYERS TO WATCH// FILIP GENOV, LEADS THE UNICREDIT BULBANK PROGRAM FOR START-UP LOANS UNICREDIT BULBANK IS THE FIRST BANK TO ENTER THIS FINANCIAL SEGMENT AND WILL HELP BOOST ITS GROWTH 35% 30% 25% 20% 15% 10% 5% 0% July 2007 January 2008 July 2008 January 2009 July 2009 January 2010 July 2010 January 2011 NO FREE REGULATION / FSC could increase its fees. An increase in the fees paid by pension funds, insurers and investment companies to the Financial Supervisory Commission in Bulgaria could be imposed if the Ministry of Finance approves the idea, accoridng to Karina Karaivanova, the newly elected chairperson. Her motives are that a higher level of income could make the regulator entirely independent from the state budget. For 2016 the Commission sustentation costs EUR 5.3 million, while the transfer from the state budget is EUR 1.6 million. The proceeds from fees in 2015 amounted to EUR 2.5 million. July 2011 January 2012 Business Consumer July 2012 January 2013 July 2013 January 2014 July 2014 Mortgage Others January 2015 July 2015 April 2016 Source:BNB F Filip Genov, Unicredit Bulbank s first vice-president, is the driver behind its new program for first loans to start-ups. Nine months after the special tool was launched, a total of 2 million euro financing has been approved by the governing committee for seven companies, three of which already obtained the funds. These are Playground Energy which converts kinetic energy on playgrounds into lights and sounds, Sensika Technologies, developer of a business investigation online engine, and Coursedot, which specializes in online tech education. All of them have been previously financed by the startup accelerator Launchub and have a potential to grow internationally. Mr Genov announced that until the end of the year the number of contracts could double. He said that the special program has no limits to its funding, but a single contract should not exceed thousand euro. Mr Genov also explained that the loans could be converted into share capital subscribed by the bank. The average interest charged on the first start-up customers is 9.75%, way above the average rate in corporate lending. ТHE SPECIAL PROGRAM HAS NO LIMITS TO ITS FUNDING, BUT A SINGLE CONTRACT SHOULD NOT EXCEED THOUSAND EURO

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

50 ECONOMY/ENERGY DREAMING ABOUT SOUTH STREAM WHAT ARE THE CHANCES OF BULGARIA BECOMING A GAS DISTRIBUTION CENTER? DEVELOPMENTS TO FOLLOW The World Bank will present its long-awaited report on the liberalization of the electricity market in Bulgaria. Its most important findings concern the market integration of the renewables support schemes and the long-term power purchasing agreements. The Constitutional Court will discuss Energy Law amendments which drastically reduced feed-in-tariffs for smallscale photo-voltaic installations that received EU grants. The Court had struck down several similar retroactive measures in the past. Despite their name, banking stress tests are not meant to be too stressful. It s as simple as that - the regulator will never risk banking stability just to make a point or solve a problem or two in the sector. 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 in the new gas link. In the first, non-binding phase the capacity of the pipeline was overbooked, but companies have begun to withdraw their bids as of lately.

51 КQUARTERLY 49 DREAMING ABOUT SOUTH STREAM WHAT ARE THE CHANCES OF BULGARIA BECOMING A GAS DISTRIBUTION CENTER? ILIN STANEV P Probably you have heard about the miracle gas hub Balkan, a project that will cost between one and two billion euro. It will provide Bulgaria with various gas sources, it will assure Bulgaria's central role in the future gas supply routes to Europe and will allow the country to cash in from the billions of cubic meters of gas that are supposed to flow via its transmission network. The gas concentrator is exactly the kind of engine for the Bulgarian economy that we were looking for years, it combines significant investments with guaranteed high return, says the former Bulgarian Prime Minster Ivan Kostov (who is otherwise critical of the policies of the government led by Prime Minister Boyko Borissov). Wow, what beast is that? The establishment of a gas hub in Bulgaria is one of the most widely publicized priorities of Borissov s government. He never stops promoting it, he even drew a scheme of it for the European Commission President Jean-Claude Juncker who now proudly presents the scribbles in his office. The hub is so important to the government that sometimes it seems that the it subjugates its foreign and energy policies to the hub (particularly the relations with Russia) in order to ensure the green light for the project. The idea sprung out immediately after the cancellation of South Stream the giant Gazprom project to bypass Ukraine as a gas transit route with a new pipeline across the Black Sea, connecting Russia directly to Bulgaria. It took only a week after Russian President Vladimir Putin announced in Ankara at the end of THE GAS FLОWS INTO BULGARIA Despite the fact that at the current moment Bulgaria has only one gas supplier, the government has ambitions to establish a gas hub for the whole region 1,8-3,1 bcm 0,8 bcm (0,14 bcm for 2014) 3 bcm (1,75 bcm for 2014) Greece 1,8-3,1 bcm Sofia Source: Bulgartransgaz, TAP, DESFA 1 bcm LNG terminal near Revithoussa Capacity - 5 bcm annually, now Greece uses only 2 bcm. Bulgaria can receive gas from Revithoussa even now 1-3 bcm 1,5 bcm Kardjali 0,5 bcm 3-5 bcm Komotini Project for LNG terminal near Alexandroupolis Capacity 6.1 bcm annually 2014 that South Stream is dead, for the Bulgarian government to come up with its new gas infrastructure plan. The timing made two things obvious: the hub idea had been brewing for some time (and probably was discussed with Gazprom), and second, it is inextricably related to the failed South Stream pipeline. Deputy Prime Minister Tomislav Donchev, who is the main driver of TAP Main gas pipeline 3 bcm Pipeline diversion Transit gas pipeline Interconnector Bulgaria- Turkey (planned) 14 bcm (12,9 bcm for 2014) Turkey 28,7 bcm (17,366 bcm for 2014) Varna Interconnector Bulgaria-Romania Planned gas hub Balkan LNG terminal Marmara - Capacity - 8 bcm annually The route of South Stream or a possible successor of the failed project Interconnector Greece- Bulgaria (planned) Interconnector Bulgaria- Serbia (planned) the government's big energy projects, made no secret of the relation: Without a new pipeline across the Black Sea we can't speak about a hub. The gas hub plan is only briefly described in the Bulgartransgaz's 10-year development plan. The state-owned gas transmission operator hints at the new infrastructure that needs to be built for the hub, mainly a new pipeline from the > 50

52 50 KQ ECONOMY/ENERGY > 49 coastal town of Varna to the northwestern city of Oriahovo that broadly follows the South Stream planned route. Government officials frequently describe the prospective sources of gas Gazprom, the Shah Deniz II consortium, LNG supplies from Greece and Turkey, and possible local production from the prospective Black Sea Khan Asparuh exploration block (developed by a consortium between Total, OMV and Repsol). It is not mentioned, 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 PLAYERS TO WATCH// TOMISLAV DONCHEV THE SHADOW ENERGY MINISTER MOST DECISIONS ABOUT THE BIG ENERGY PROJECTS ARE TAKEN IN THE VICE- PREMIER S OFFICE 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 infrastructure, exempted from the EU's Third Energy Package. Then traders will buy gas from the hub and it will be transported via the Bulgarian transmission operator's own pipeline system. The gas hub idea received approval from the European Commission. In May 2016, the EU Commissioner for Climate Action and Energy Miguel Arias Canete said that Bulgaria has the potential to become one of the important gas hubs. But the European Commission and the Bulgarian government often speak in different languages. While the Commission emphasizes the need for Bulgaria to be connected to three different gas sources and fully implement the EU's energy competition laws, the Bulgarian government talks about huge investment plans worth up to two billion euro, conspicuously close to the price of the construction works for South Stream won by Bulgarian companies. Sometimes it feels that Brussels encourages Bulgarian gas hub ideas in order to keep the country on track with the policies it favors. Until now it has succeeded: the project development of the Greek- Bulgarian gas interconnector is progressing, albeit slowly, and Bulgaria is liberalizing its gas market allowing more competition. D Deputy Prime Minister Tomislav Donchev is in charge of the whole economic portfolio of the government but his favorite beats are EU funds and energy policy. He was minister in charge of EU funds in Borissov s previous government but the energy sector is his newly acquired passion. Mr. Donchev is the main engine behind the idea to establish a gas hub in Bulgaria. He frequently talks about it and claims that he has the full support of Brussels. Most energy experts, however, are skeptical and see the European Commission endorsement of the gas hub plan as a way to push Bulgaria to make other reforms in its energy sector that are part of the EU agenda. The Deputy Prime Minister is also supervising the nuclear power plant (NPP) Belene project and the planned construction of a new unit at Kozlodui NPP. Sometimes, Mr. Donchev has bizarre ideas. During the negotiations on the measures that were taken last year to improve the National Electricity Company s (NEK) cash flow (without them NEK would have gone bankrupt) he proposed an introduction of a Robin Hood tax equal to 20% of the revenues of energy companies. The tax, however, was supposed to be paid only by the renewable energy producers (RES). Later, a similar measure was adopted, with a 5% fee paid by all electricity producers. The proceeds from the fee are used to trim NEK s tariff deficit (the difference between the price of electricity and the regulated consumer prices). Most probably, Mr. Donchev bowed to pressure from industrial organizations which at that time were lobbying for drastic measures to cut energy prices. They raised the spectre of mass bankruptcies of industrial companies and proposed nationalization of RES and some other electricity producers. Tomislav Donchev s efforts might help bring some energy diversification for Bulgaria, but there is a risk that too big ambitions could lead to overinvestment in infrastructure that will not be actually needed.

53 КQUARTERLY 51 FOUR YEARS OF AN OBVIOUS CARTEL A-95 prices without taxes and duties. All prices lvs per littre A-95 Romania Jan 10 А-95 EU-28 A-95 Bulgaria The requirement that all importers need to maintain 60-days reserves in Bulgarian excise registered storage enters into force Jan 11 Following a KZK decision in 2012, the fuel prices without taxes and duties became higher than the prices in Romania or EU-28 Jan 12 Jan 13 KZK FINALLY DISCOVERS CARTEL ON THE FUEL MARKET A YEAR-LONG INVESTIGATION BY THE REGULATOR FINDS PRICE FIXING T The Commission for Protection of Competition (KZK) filed a price-fixing claim against six fuel retailers in October. Lukoil Bulgaria EOOD, Eco Bulgaria JSC, Shell Bulgaria EAD, OMV Bulgaria OOD, Nis Petrol Ltd. and Petrol were found to have exchanged price information, conducted a common pricing policy and shared information about their sales in order to prevent or distort competition in the fuel market. KZK has yet to publish its conclusion from the investigation of alleged abuse of dominant position launched against Lukoil-Neftohim, Bulgaria s sole refinery. KZK published the results of its year-long investigation against the fuel retailers just three weeks before the presidential elections. The pricing policy of the fuel retailers the so-called rocket and feather approach, has long angered consumers. When oil prices rose, retailers immediately passed on the full increase to consumers, causing the Jan 14 Following the record high fuel prices in 2014 and 2015 and the public outcry the retails dropped the prices. Jan 15 The margin between Lukoil s wholesale and the retail prices reached historical maximum 36% The margin between the Bulgarian and EU prices without taxes and duties reached historical maximum as well. Jan Source: EU Oil Bulletin Sept 16 price at the pump to soar like a rocket. But when the price of oil fell, prices at the pump dropped like a feather, while retailers profit from the increase margin between the wholesale and retail prices (see the graph). Everyone could see that the prices at all gas stations in Bulgaria were changed daily in a perfectly coordinated manner. This approach changed recently, partly as a result of the KZK investigation, partly as a result of the growing influence of the gas stations owned by Vesselin Mareshki, a maverick businessman who shattered some of the established practices on the fuel retail market. Gas and diesel are 20% cheaper at his VM gas stations compared to the prices of major retailers nationwide. The peers of Mareshki accuse him of allegedly selling smuggled fuel or evading tax payments. Allegations aside, the spread of the VM brand has led to considerable regional price differences. The fuel retailers will probably appeal the KZK conclusion before the Supreme Court. NEK MIGHT SURVIVE AFTER ALL THE NATIONAL ELECTRICITY COMPANY IMPROVES FINANCIAL POSTURE Last year, the National Electricity Company (NEK) improved its results for the first time since In 2015, its loss was 197 mln levs (101 mln euro), about a third of the 2014 loss of 587 mln levs (300 mln euro). NEK, which is the backbone of the electricity system due to its status of a single buyer from the power plants and supplier to the regulated market (households and small businesses), has been in constant financial distress over the last five years. With the regulated market accounting for about 50% of electricity consumption in Bulgaria, NEK s losses had been mounting since the second half of 2011 due to a regulatory decision to suppress a rise in consumer prices. The State Energy and Water Regulatory Commission failed to adequately compensate NEK for the legislatively imposed obligations to buy expensive green energy, whose production boomed in 2012, as well as electricity cogenerated by central heating plans and industrial installations. NEK is also obliged to buy considerable amounts of expensive electricity under long-term power purchasing agreements with the local units 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 were other state-owned companies. Since the beginning of 2015, however, NEK has been receiving significant financial injections as a result of amendments to the Energy Law. All the proceeds from the sale of the state-owned CO2 quotas (part of the EU ETS) have been directed towards NEK, reducing its tariff deficit. In addition, all electricity producers are obliged to pay a 5% levy on their turnover, with the proceeds going to > 52 NEK PROFITS In thousand levs Source:NEK's financial statements

54 52 KQ ECONOMY/ENERGY >51 NEK as well. The third significant boost to NEK finances came from an increased obligations to society fee. The fee is paid by all electricity consumers and is intended to compensate NEK for its obligations to buy green and co-generation electricity. Until recently, however, big businesses were not obliged to pay the fee in full. NEK financial stabilization remains shaky, because none of the fundamentals in the Bulgarian energy system has improved. REDUCED ENERGY BILLS FOR BIG INDUSTRY INDUSTRIAL CONSUMERS WILL BE SPARED THE FULL COST OF GREEN ENERGY. Euro per kwh, all taxes and levies included Midium size Household Bulgaria Midium size Household Germany Midium size Business Bulgaria Midium size Business Germany Source:Eurostat As of August, big electricity consumers have a special discount on the green energy component of their bills. Companies with annual consumption of more than 30 GWh of electricity and energy intensive production will pay only 15% of the green energy component of the obligation to society fee. While the rest of the electricity consumers are levied a surcharge of levs per MWh, big electricity consumers pay between levs (8.2 euro) and levs (13.56 euro) depending on their energy intensity. The companies could get a rebate on their electricity bills for the past 12 months, because a government decree has been postponed for almost a year, awaiting approval from the European Commission. BELENE NPP SUCKS ANOTHER BILLION LEVS 620 MLN. EURO WILL BE PAID TO RUSSIA S ROSATOM FOR EQUIPMENT MANUFACTURED FOR THE TERMINATED NUCLEAR POWER PLANT PROJECT The Bulgarian parliament voted a special law on September 20 stipulating that the government could loan an unspecified sum to NEK to repay debt owed to Russia s Rosatom. NEK lost an arbitrage in the International Court of Arbitration (ICC) in Geneva against the Russian company which is the main supplier of equipment for the Belene NPP. The ICC awarded a 620 mln. euro compensation to Rosatom s subsidiary Atomstroyexport for the manufactured, yet unpaid for equipment for the ill-fated nuclear power plant project. The 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. The construction of the Belene NPP, which began in 1981, was restarted in 2006 but ran into serious problems three years later. NEK was left as the sole investor in the project 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 Having remained alone, NEK was unable to pay for the construction. Later, several attempts were made to reinvigorate the project but they only postponed the final termination and made it more expensive. The overall cost of the unsuccessful attempt to build a second NPP in Bulgaria is 1.3 billion euro, most of it taxpayers' money. Strangely, Bulgaria has decided not to contest the ICC ruling, neither in Geneva, nor in Sofia. Some observers see the decision as a goodwill gesture towards Russia. On the one hand, Rosatom might help resell the equipment, while on the other the company might smooth the way for other energy projects with Russian participation. BULGARTRANSGAZ MAKES ANOTHER STEP TOWARDS OPENING THE GAS MARKET THE COMPANY FINALLY ALLOWED VIRTUAL GAS TRADE As of July it is already possible to conclude virtual gas deals in Bulgaria, i.e. without physically moving the gas. In this kind of deals a company in Greece could swap gas volumes with a Bulgarian counterpart. The Bulgarian company will receive them either from locally stored gas or from the transit flows to Greece. The technical breakthrough came with the modernization the interconnection point (IP) Kulata-Sidirokastro which now permits virtual reverse flow. The more important regulatory breakthrough is due to years of European Commission pressure on Bulgaria to align national legislation more closely with the EU practice. Until recently, the Bulgarian transmission operator Bulgartransgaz rejected any attempt for virtual trade, referring to its contract with Gazprom that doesn't permit swap deals. Several years ago, Bulgartransgaz won a case before the European Court of Justice against the European Commission which sued the company for its intransigence. However, pressured by Brussels, both Bulgartansgaz and Gazprom (DG Competition is still investigating the Russian company for suspected abuse of dominant position) had to change their practices.

55 КQUARTERLY 53 NATURAL GAS PRICES 1st half of 2016 Euro per kwh, all taxes and levies included Inustrial consumers Bulgaria Inustrial consumers Germany Source:Eurostat The first deals concluded in July only tested the system. At present, the Gazprom-supplied gas is cheaper for the Bulgarian consumers than the available alternatives. BULGARIA MULLS ACQUIRING A STAKE IN A LNG TERMINAL IN GREECE SOFIA WANTS TO INCREASE COMPETITION IN ITS GAS MARKET AND PUT A BRAKE ON GAZPROM S PRICE DECISIONS The Bulgarian Energy Holding (BEH), the company which controls state-owned energy assets, mulls acquiring a stake in the Alexandroupulis LNG terminal project. The 400 mln. euro LNG terminal, promoted by Greece s Gastrade SA, will be located on the northeastern Greek Aegean coast, near Turkey. The move follows the poor results of the first market test of the Greek-Bulgarian gas interconnector (IGB). The IGB project, with annual capacity of 3 billion cubic meters, aims to provide Bulgaria with an uninterrupted access to alternative gas supplies. The project is planned to enter into operation by 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 European market. Azeri SOCAR, and Edison hope to enter the Southeast European gas market as well. BEH hopes its possible stake in the Alexandroupolis terminal will allow Bulgaria to tap the global LNG market without having long-term supply contracts. Such flexibility will finally permit Bulgarian companies to arbitrate between various suppliers and will put pressure on Bulgaria s main supplier, Gazprom, to price its gas according to the global trends. LUKOIL CONSIDERS SELLING ITS BULGARIAN ASSETS THE RUSSIAN COMPANY IS THE DOMINANT PLAYER IN THE BULGARIAN FUEL MARKET Oil giant Lukoil declared at the beginning of June that the sale of its assets in Romania, Bulgaria, Italy and the Netherlands is under discussion. The statement of Lukoil's president Vagit Alekperov signaled the company's intention to concentrate its business on exploration and development and divest some of its non-core assets. 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 criticism because of its price policy, it has never met serious regulatory or legislative challenges like in neighboring Romania where it faces charges of tax fraud. Lukoil owns Bulgaria's sole oil refinery, Lukoil Neftohim Burgas, as well as Lukoil-Bulgaria, which is the biggest fuel wholesaler; and a chain of more than 200 filling stations, which make up about 35% of the fuel retail market. The company s combined annual turnover from its operations in Bulgaria exceeds 6 billion euro. Earlier this year, the Bulgarian competition authority, KZK, launched an ambitious probe into suspected abuse of dominant position against Lukoil Neftohim. The results are yet to be seen. In recent months, Azeri oil major SOCAR expressed interested in the Bulgarian oil and gas market, hinting at possible investment in the refinery.

56 54 KQ ECONOMY/ENERGY WHAT? WHAT WAS THAT? YANEVAGATE, BAI HUI AND KTBFILES You have probably heard idioms and proverbs in Bulgarian that read like The horse went into the river or A united company moves a mountain. when translated to English wordfor-word They cause chuckle among your Bulgarian friends, but the only thing you can do is to raise politely your eyebrows. Many more similar meaningless phrases can be found in various websites which make fun of the habit (typical not only for Bulgarians) to translate literally idiomatic expressions and proverbs into English. The current section of KQ has the ambition to explain the jargon of Bulgarian politics and economy which sometimes is as inexplicable if literally translated as in the above mentioned phrases. Who s Cecoron? Or what Tsvetan thoughts means and what for the love of god ladybirds have to do with management? Yanevagate: The Rotten apples of the Bulgarian judiciary definition: 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 politics and law in the country. Imagine a number of leaked tapes of two senior magistrates talking about influence peddling between members of the different branches of power, illicit practices within the state prosecution and under-the-radar communication between senior members of the executive and the judiciary, including Prime Minister Boyko Borissov, his GERBlieutenant Tsvetan Tsvetanov, Chief Prosecutor Sotir Tsatsarov and many other members of the Supreme Judicial Council (SJC) and even the secret services. A STORY OF AN ILLEGAL WIRETAPE In any other EU country this would have caused a huge public scandal, uproar within the opposition and a large-scale independent investigation. Not in Bulgaria. The strongest reaction came from the French ambassador Xavier Lapeyre de Cabanes, who called the two magistrates in the conversations the rotten apples of the Bulgarian judiciary. What would become known as the Yanevagate scandal, after the owner of one of the recorded voices, would never be properly investigated by the prosecution, the majority of SJC magistrates would simply ignore it, as would the opposition parties. Yet, if they were properly investigated, these tapes could have exposed the secretive, roguish and sometimes purely absurd ways Bulgaria is governed. A year ago, investigative reporting website Bivol released the first of what would become a series of leaked wiretapped conversations between the ex-chairwoman of the largest district court in the country, the Sofia City Court (SCS) Vladimira Yaneva, her exsubordinate in charge of trade disputes, Roumiana Chenalova, and lawyer Momchil Mondeshki. In one of the conversations Yaneva tells Chenalova how Chief Prosecutor Tsatsarov warns her about an impending investigation against her. WHAT THE LEAKS EXPOSE In another series of monologues she claims that the secret services belong to the Movement for Rights and Freedoms (MRF), later specifying that they are controlled by the infamous member of the party, the ex-court investigator, present media and business mogul Delyan Peevski. In 2013 the attempt by the Oresharski government to put Mr Peevski formally in charge of the Bulgarian secret services became the catalyst of one of the largest protests in modern Bulgarian history. Another conversation sheds light on the alleged love affairs of Prime Minister Boyko Borissov and the presents in the form of mansions in Barcelona he buys for an unknown mistress. Or, businessmen related to First Investment Bank were ready to gather money to bail out Yaneva and buy off media comfort from the editor of one of the leading daily newspapers in the country, 24 hours. Last, but not least - in one of the leaked audio files Mondeshki and Yaneva discuss their issues with a fortuneteller. Later on, a series of independent technical inspections by foreign experts found the footprint of the Bulgarian secret services in the recordings and proved that the voices of Ms Chenalova, Ms Yaneva and Mr Mondeshki were indeed their own. When Yaneva testified, she simultaneously claimed she didn t remember anything from the conversations and the recordings had been manipulated. Unsurprisingly, the prosecution office dropped the case because it found that the recordings had been manipulated...because they were cut into separate shorter pieces. The Supreme Judicial Council (the self-governing body of the Bulgarian judicial system) found no ethical dilemma in the substance of the conversations that could expose grand misdemeanors on behalf of members of the government and the judiciary. They wrote the case off by simply saying that the recording might be illegal.

57 КQUARTERLY 55 Bai Hui, where are your basic manners? definition: An emotional slip of the tongue made by reformist-turned-oppositionist Radan Kanev revived a pop culture reference from the early 2000s in a new light. And it shows how the last barriers before impolite and improper public speaking are simply gone. Prime Minister Boyko Borissov is not known for his placid temper, yet very few things annoy him as much as tongue-in-cheek comments by his ex-ally Radan Kanev that mock him. Mr Kanev is the leader of the Democrats for Strong Bulgaria (DSB) party, still part of the half-governing, half-oppositionist Reformist Bloc (RB). He withdrew his and his party s support for the government last December when GERB passed a watered-down version of the crucial judicial reform bill, yet his critique of Mr Borissov dates way back. But after the Prime Minister summarily humiliated the Reformist Bloc ministers by warning them how easily they can get out of their ministerial chairs, Mr Kanev s lost his temper and called Mr Borissov Bai Hui in a TV show. The phrase means little to non-bulgarians, unless you are from China, where it means the place where everything meets, a symbol of Buddha (as well as the name of a photo model). And it would have been nice if Mr Kanev used the expression in its Chinese meaning. Yet in Bulgarian it literally means Uncle D*ck, a reference to a famous refrain by the popular rap trio Upsurt that goes: Bai Hui, you have no basic manners. The phrase has almost been forgotten by the general public, as it was popular more than a decade ago. Yet, its mentioning with reference to the Prime Minister sparked interest - and outrage - in the Bulgarian online society. Many supporters of Mr Kanev, who see in him a rare modern politician, bashed him for sinking to the level of Mr Borissov, who doesn t shy away from using unsophisticated language (to put it mildly). Others, though, saw his words as a genuine expression of his exacerbation with the ways Mr Borissov treats his colleagues, especially after Mr Kanev apologized to the TV viewers. How did the Prime Minister respond? He simply called Radan Kanev a snot. KTB files Secrets of the oligarchy definition: A string of leaks and acquisitions linking former business partners Mr Vassilev and Mr Peevski, offers a look behind the scenes of business and political life in Bulgaria Scandals between former business partners who had a nasty break up could be as revealing as the shouting between former lovers, who split breaking the family china. This is now happening in Bulgaria. Tsvetan Vassilev (you can see his name here and there in KQ), the former owner of bankrupt Corporate Commercial Bank (CCB), began spitting details of his business dealings in the last ten years that shed a lot of light over the connection between business and politics. Of course, his newly found candidness did not come before his bank went down; he had to flee to Belgrade and his former partner Delyan Peevski (also a visible presence in this issue of KQ) began to take control over the remains of their former media and business empire. In a string of leaks to a blog of a former journalist and most recently in an interview with KTBfiles, a research project aiming to explain how it was possible for CCB to highjack the Bulgarian authorities, Mr Vassilev made public a lot of dealings that were suspected but have never received any authoritative proof. There is no way you can do serious business in Bulgaria if you refuse to make kickbacks to politicians, Vassilev said in the interview with KTBfiles. His main accusations concern two of the biggest business deals in Bulgaria in the last ten years the privatization of Bulgartabac and the recent acquisition of BTC. According to Mr Vassilev the owners are just a façade for the real interests behind the deal. The former owner of CCB claims that his offer for Bulgartabac was rejected in 2011 so that Mr Peevski could take control over the company. Mr Vassilev claims now that current PM Boyko Borissov, his friend Alexander Staliyski and MRF leader Ahmed Dogan arranged the deal and were supposed to receive some of the company s shares in exchange for their alleged support for the buyer of Bulgartabac. Back then the government decided that the new owner of the cigarette producer needed to commit firmly to buying tobacco from domestic producers. Such a requirement made tobacco majors uninterested (Mr Vassilev partnered with the Korean KT) and opened the way for domestically related interests. The alleged plot, with schemes drawn by Mr Peevski s lawyer, appeared online a year ago, but their authenticity has not been verified. Mr Vassilev makes similar accusations in connection with the 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.

58 56 KQ WHERE TO GO, WHAT TO DO Adams. If you know Bryan Adams only by his musical output, be prepared for a huge surpise. Vivacom Art Hall 5.11 A new exhibition by the renowed Bulgarian contemporary artist Pravdoliub Ivanov. At Sariev Contemporary in Plovdiv. Also an opportunity to explore Plovdiv's art district Neo Dervish a performance piece by Turkish dancer Ziya Azazi in collaboration with local musicians, photographers and actors. At National Theatre. 19:00 Up until Through the Open Windows - еxhibion of Russian impressionist paintings. at National Art Gallery Tuxedomoon Live in Sofia. Legendary US experimental act Tuxedomoon are performing their avantgarde classic album Half- Mute. Sofia Live Club. 20: Future Shorts a platform for international short movies. If you're a short form fan and curious about the different ways of storytelling, this one is for you. Premiere of it's autumn programme. 20:00. At House of Cinema Zucchero Live in Sofia. National Palace of Culture, Hall 1. 20:00. Those who fancy a bit of pop nostalgia can also catch him in Ruse on 17th November. Up until The Afternoon of an Idealogy. An exhibition of paintings showing the everyday life of the society during the Communist regime. Curated by writer Georgi Gospodinov and culturologist Georgi Lozanov. At Sofia City Art Gallery Immortal Shakespeare. A cantata by Dobrinka Tabakova. At Sofia Opera and Ballet, marking the 400th anniversary of the death of both Shakespeare and Cervantes. 19: Premiere of Amahl and the Night Visitors. Opera for children by Gian Carlo Menotti. at Sofia Opera and Ballet. 17: Act Independent Theatre Festival. New edition of the renowed annual festival of contemporary and experimental theatre. Performances by both local and international directors, actors and choreographers. Don't hesitate to get confused. More over at actfest.org The Big Tech Run. A running marathon in a 5 and 10 km distance. Feel free to bring friends and colleagues. at Sofia Tech Park. 09:00. More over at techrun.bg Up until Exposed a photo exhibition by Bryan SoBazaar handmade crafts, jewels, accessories, made by various local designers. Early Christmas shopping opportunity. At art coworking space SOHO Live performance of the Frozen OST. At National Palace of Culture, Hall 1. 20: Live in concert Ruth Koleva in collaboration with a symphonic orchestra. For those of you who are curious about how the contemporary local pop can sound with a classical twist. At National Palace of Culture, Hall 1

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60 WORKSHOP Cuisine with QNRDR bacchus.bg/events with INA and rossi paunovi from roseysmark.com 13 th November am-2pm Culinary School Food Connection Sofia, 1602, 64, Ami Bue, str. fl. 2