INSIGHTS FROM BULGARIA: BUSINESS/ECONOMY/POLITICS

14
APRIL–JUNE 2020 | WWW.CAPITAL.BG

BULGARIA AND THE GLOBAL SLOWDOWN

BULGARIA
OF CARDS
UPSTARTS MAY SHAKE UP POLITICAL,
MEDIA AND BUSINESS ESTABLISHMENT

The gambling war

The attack on gambling tycoon
Vasil Bozhkov is yet another example
of how politics and business
in Bulgaria are intertwined
 КQUARTERLY 1

At the beginning of the second season of the hit Netflix TV drama

House of Cards the US Vice-President threw a news reporter
under a train to cover up his relationship with her. The show
promptly lost much of its credibility. Even with Donald Trump in
the White House it somehow stretched the boundaries of credulity
too far. Sometimes, to spice up a story, scriptwriters detach them-
selves from reality.

The reality in Bulgaria in recent months, however, INSIGHTS FROM BULGARIA: BUSINESS/ECONOMY/POLITICS

can provide a lot of material for a more realistic, yet 14

intriguing political thriller. This is a story of an ag-

APRIL–JUNE 2020 | WWW.CAPITAL.BG

BULGARIA AND THE GLOBAL SLOWDOWN

gressive new Prosecutor General who embarks on
BULGARIA
a massive campaign to investigate not only alleged OF CARDS
crimes of today, but also thousands of crimes pos-
UPSTARTS MAY SHAKE UP POLITICAL,
MEDIA AND BUSINESS ESTABLISHMENT

sibly committed in the past. Going on the warpath, he

discards people who helped him get the position, tam-
pers with witnesses, instigates spying scandals, publicly
humiliates opponents and slowly encroaches on the
recently undisputed power of the Prime Minister, who,
quite possibly, will face in the next episodes the might of
the unchecked state prosecution, which he personally
helped unleash. With the powers vested in his hands the The gambling war
Prosecutor General can easily topple the government The attack on gambling tycoon
Vasil Bozhkov is yet another example
of how politics and business
and manipulate every choice politicians make… in Bulgaria are intertwined

The storyline is only a slight exaggeration of the current political drama in Bulgaria
in which the newly elected Prosecutor General Ivan Geshev is acting more as a poli-
tician rather than as an impartial magistrate. His actions and growing popularity show
that there is a new political factor in Bulgaria other than Prime Minister Boyko Borissov.
Mr Geshev’s behavior is highly reminiscent of Mr Borissov’s own political biography. The
current PM also exploited the image of a man with an iron hand when he was Secretary
General of the Interior Ministry to launch his political project almost twenty years ago. As
with Mr Borissov then, behind Mr Geshev now also lurks a power center that helps him
navigate Bulgaria’s muddy political waters. Both men even dress and wear hats in similar
ways.

It remains to be seen in the next several months if Mr Geshev indeed wants a role
bigger than that of Prosecutor General and more interestingly, how the Prime Min-
ister will strike back.

Ilin Stanev,
Managing editor

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2 KQ TABLE OF CONTENTS

//POLITICS AND SOCIETY

06 Geshev Unchained
The new Bulgarian Prosecutor General Ivan Geshev has
stepped up his game from the very start of his mandate, picking
fights against oligarchs, rural crime and even the president
himself. Is he at something bigger than just crime busting?

12 No water to clean the garbage

Many Bulgarian towns live on water rationing and next to
piles of imported waste because of intentional neglect by the
authorities.

14 MRF Corporation
Launched as a party fighting for the political representation of
Bulgaria’s ethnic Turks, the Movement for Rights and Freedoms

24
has morphed into a quasi-business organization quietly pulling
strings behind the scenes.

18 Organized Crime in Bulgaria

Five popular beliefs re-examined
IS STATE
CAPITALISM 24 Is State Capitalism Marching On?
Within a brief period, Bulgaria’s government has aggressively
MARCHING ON? injected billions of levs into key sectors, and has effectively
WITHIN A BRIEF started nationalizing businesses
PERIOD, BULGARIA’S 27 Not everything is so rosy on the
GOVERNMENT HAS gender front
AGGRESSIVELY
INJECTED BILLIONS //FOREIGN POLICY
OF LEVS INTO KEY
SECTORS, AND 30 The Perils of Engagement
HAS EFFECTIVELY Bulgaria appears to be doing Ankara’s bidding.
STARTED 33 A very serious spy vaudeville
NATIONALIZING The latest episodes of the unfolding Bulgarian-Russian spy saga
BUSINESSES leave a mixed taste

//ECONOMY

38 A Glitch on Bulgaria’s Euro Path

Prime Minister Boyko Borissov unexpectedly “freezes” Bulgaria’s
advance into the euro area despite positive signals from
Brussels.

42 Bulgaria gliding on the waves of the

economic cycle
The local economy continues to move in sync with European
trends, while opportunities for reforms slowly dwindle

46 The loophole of in-house

procurement

42
The in-house procurement procedures – the awarding of public
contracts without tenders, has become a favorite way to allocate
money in a non-transparent manner

48 Bulgaria and the global slowdown

BULGARIA GLIDING Some industries are already losing steam
ON THE WAVES OF
THE ECONOMIC //BUSINESS
CYCLE
THE LOCAL ECONOMY
CONTINUES TO
60 The gambling war
The attack on gambling tycoon Vasil Bozhkov is yet another
MOVE IN SYNC WITH example of how politics and business in Bulgaria are
intertwined
EUROPEAN TRENDS,
WHILE OPPORTUNITIES 66 Taxing Trouble
The taxation Ordinance N-18 that affects almost every company
FOR REFORMS SLOWLY in Bulgaria has introduced an extremely complex, unclear and
DWINDLE expensive regulation, and will repel foreign investors
 КQUARTERLY 3

69 Bulgaria’s new factories

Investment projects worth 1.3 billion levs were announced last
year, up 500 million levs on 2018

74 Bulgaria strikes at AirBnB, Booking.

com
After unsuccessfully trying to shut down the lodging sharing
service, the GERB-led coalition government imposes a small
fee on apartment owners

76 Bulgarian automobile market:

Growing but getting older
In 2019, the share of diesel engines and vehicles that were
more than 20 years old kept increasing

60
79 New cigarette peak
Rothmans primed to become the best-selling brand in
Bulgaria

80 Agencies of change THE GAMBLING WAR

Riding on the waves of an expanding economy,
communications companies have been cashing in THE ATTACK ON
84 The biggest advertisers GAMBLING TYCOON
The construction sector has significantly increased VASIL BOZHKOV IS YET
communication investment ANOTHER EXAMPLE
88 Bulgaria’s Bright Side: OF HOW POLITICS
When smart ideas turn into business AND BUSINESS IN
90 The Other Southwest BULGARIA ARE
Blagoevgrad still lurks in Sofia’s shadow despite its position in
the economically affluent Southwest
INTERTWINED
95 Blagoevgrad’s Ivy League college
The town housing the American University in Bulgaria fails to
tap its potential because of its location

98 The real estate market in Sofia shows

first signs of recession
Sales increased in 2019 but, on average, prices stagnated

//BANKS AND FINANCE

106 Filling the gap

First Investment Bank (Fibank) prepares to smooth out
wrinkles on its balance sheet found by ECB

69
109 Investors snap up
Bulgarian bonds
Since the start of the year, the Ministry of Finance has been
briskly selling government bonds amidst strong investor
interest BULGARIA’S NEW
111 Bulgarian Stock Exchange: FACTORIES
enthusiasm dwindles early on INVESTMENT
Eleven Capital to test the mood in March PROJECTS WORTH 1.3
BILLION LEVS WERE
//ENERGY ANNOUNCED LAST
YEAR, UP 500 MILLION
LEVS ON 2018
116 What’s in it for Bulgaria in the EU’s
Green Deal?
Bulgaria’s government is underwhelmed
by the European Commission’s attempts
to further increase EU climate change
mitigation goals

118 How come high prices

are actually low?
Despite record high electricity prices on the energy exchange,
Bulgarian consumers keep getting a good deal
4 KQ INSTEAD OF A THOUSAND WORDS

OBTAINING INFORMATION FROM PUBLIC AUTHORITIES WEB SITES (LAST 12 MONTHS, IN 2019 IN %)
Increase since 2008 (rhs) 2019

100 400
90 350
80 300
70 250
60 200
50 150
40 100
30 50
20 0
10 -50
0 -100
Denmark
Finland
Sweden
Netherlands
Estonia
Austria
Germany
Latvia
Czechia
Hungary
Greece
Spain
Lithuania
France
Cyprus
Slovakia
Ireland
Belgium
Slovenia
EU-27
Malta
UK
Portugal
Luxembourg
Croatia
Poland
Bulgaria
Italy
Romania
*from 2020 Source: Eurostat

A TECHNICAL NATION – websites of public authorities. Over the past ten

WELL, NO years there has been a significant improvement,
One of the Communist-era slogans was that Bul- but it is dwarfed by the achievements of neigh-
garia is a “technically advanced nation”, a phrase boring Greece, which in Bulgaria is often regarded
that is still frequently repeated. But looking at as a laggard. Eurostat data shows that only 10%
the e-governance penetration rate, Bulgaria is of Bulgarians submit completed forms on-line, a
far from deserving this title. In the EU, Bulgar- dismal result given that, for example, the option to
ians are only ahead of Romanians and Italians file tax statements on-line has been available for
when it comes to obtaining information from the more than seven years.

INFANT MORTALITY IN THE EU (DEATHS PER 1000 LIVE BIRTHS IN 2018)

Improvements since 1998 (rhs) 2018
7 90
6 80
70
5
60
4 50
3 40
30
2
20
1
10
0 0
Romania
Bulgaria
Malta
Slovakia
Luxembourg
Croatia
UK
Belgium
France
Poland
Denmark
Greece
Netherlands
EU 27*
Lithuania
Hungary
Portugal

Latvia
Ireland
Italy
Spain
Austria
Czechia
Cyprus
Finland
Sweden
Slovenia
Estonia
Germany

*from 2020 Source: Eurostat

INFANT MORTALITY: pean member states have done better, with Esto-
TWO PIECES OF BAD NEWS nia slashing infant mortality by a staggering 83%.
Although infant mortality rate has remarkably The high mortality rate in Bulgaria is frequently
improved in Bulgaria since 1998 – 59% in 2018, it explained by the ethnic minority structure of the
is still 50% higher than the EU average , or the rate Bulgarian society (Romania and Slovakia have
in neighboring Greece. What is more depressing is similar rates), but this is too convenient an expla-
that in the last twenty years almost all East Euro- nation.
 POLITICS AND SOCIETY

GESHEV
UNCHAINED
IS THE NEW BULGARIAN
PROSECUTOR GENERAL IVAN
GESHEV AT SOMETHING BIGGER
THAN JUST CRIME BUSTING?

//IN THIS SECTION:

No water to clean the garbage

MRF Corporation

Organized Crime in Bulgaria

Is State Capitalism Marching On?

Not everything is so rosy on the

gender front
6 KQ POLITICS/GESHEV

Q Prosecutor General
Ivan Geshev likes to
project himself as
the prosecutor of the
people | Photo by Velko
Angelov

GESHEV
I
Ivan Geshev needed just two months

UNCHAINED
at the helm at the Prosecutor’s
Office of Bulgaria to demonstrate
his vast ambition. Following the
most transparent and - ironically
THE NEW BULGARIAN - controversial selection procedure, the self-

PROSECUTOR GENERAL described “boy from the city suburbs” started

confronting in blitzkrieg-style fashion important
IVAN GESHEV MOVED political and business figures. From Neno Dimov,

INTO FIRST GEAR now ex-Minister of Environment and gambling

tycoon Vasil Bozhkov, to President Rumen Radev,
FROM THE OUTSET, many people in high positions in the public and

PICKING FIGHTS WITH private sectors alike have become targets of

the prosecution’s highly publicized operations
OLIGARCHS, RURAL spanning a mere few weeks.

CRIMINALS AND Not only did Mr Geshev and the institution he

EVEN THE PRESIDENT leads announce their pursuit of individuals or

HIMSELF. IS HE AIMING crimes, they targeted more or less vague con-

cepts. These include the ’criminal privatization‘ of
AT SOMETHING BIGGER state assets of the late 1990s and early 2000s and

THAN JUST CRIME ’household crime‘– a widely speculative concept

denoting crimes committed with the intention of
BUSTING? depriving a person of, or damaging, their personal
property, dreaded especially by rural dwellers.
Even the coronavirus disease (COVID-19) has fall-
MARTIN DIMITROV en under the scope of Mr Geshev, with his spokes-
person Siyka Mileva announcing it has ordered
the Minister of Health to “control institutions re-
sponsible for citizens’ health.”

A NEW BOYKO BORISSOV IN THE MAKING

Almost every day the public prosecution ushers

in a new investigation, inspection or crime-bust-
ing operation. Usually they are announced by Mr
Geshev himself, who recently started wearing a
signature newsboy cap reminiscent of those worn
by characters in the English TV drama Peaky Blin-
ders about post-WWI gangsters. The announce-
ments are then quickly uploaded onto the newly
created YouTube channel of the Prosecutor’s Of-
fice.
The Prosecutor General seems to have been in-
spired by gangster movies not only when it comes
to his looks. He also responds to questions with
memorable one-liners like “the time has come for
politicians to pick a side” and “on the one side, you
have the interest of the people – security, peace
and order, which we intend to protect, and, on the
other, the interests of the criminals and the oli-
garchs.”
Mr Geshev’s announcements are obviously tar-
geting the wider public. And if at the beginning it
looked like he was trying to intimidate the courts,
now it is obvious that the Prosecutor General is
not concerned about judges’ opinions. He fre-
quently disparages them, seeking to portray them
as hostile to his take on high-level crime in Bul-
garia. Such an approach will help Mr Geshev in the
near future, when it is quite possible that many of
the indictments brought will not hold in court. In
the public imagination, however, it would be the
Prosecutor General who fights the baddies, while
everyone else tries to thwart his newfound quest.
This is a strategy already well exercised. Current
Prime Minister Boyko Borissov came under the
spotlight while he served as Secretary General
at the Interior Ministry (2001-2005) with his re-
lentless drive to be photographed at every crime
scene. In the four years he spent on the job, he
became famous for his striking dress sense that
included black trench coats and fedoras, as well
as for his invariable arrival at any crime scene
that attracted public attention – and public-
ity. His memorable zinger was “I catch them [the
criminals], they [judges] release them”. The nation
wanted a hero cop to fight the rampaging mafia
thugs of the late 1990s and Mr Borissov gladly
took on that role to later capitalize on it politically.
To sum it up, Bulgaria has found in Mr Geshev a
new, somewhat bolder and dramatic version of
the early Boyko Borissov. As people hanker for
punishments for oligarchs and politicians who got
too full of themselves, so Mr Geshev promises to
deliver. While it is too early to tell whether the new
Prosecutor General has political ambitions akin
to Mr Borissov’s, it is clear that he has found an
opening and gladly exploits it. >8
КQUARTERLY 7
DEVELOPMENTS TO FOLLOW:
After Coronavirus officially
reached Bulgaria on the eve of 8
March with four people report-
edly contracting the virus in the
towns of Gabrovo and Pleven, the
government in Sofia has been tak-
ing a series of precautions to stop
the potential spread of the dis-
ease. Schools have been closed and
mass sporting and cultural events
have been suspended for a week at
the time of this KQ issue’s printing.
Apart from the health hazard, there
are fears that the development of
the epidemic might hit the Bulgarian
economy, especially its tourism and
export-oriented sectors.
An investigation into a potential
money-laundering scheme that
might involve Bulgarian Prime
Minister Boyko Borissov, carried
out by the Catalan publication
elPeriodico, has led to a probe by
Spanish police and anti-corrup-
tion authorities. While Mr Borissov
immediately dismissed the accusa-
tions, blaming Russian propaganda
and President Rumen Radev for the
scandal, the Bulgarian Prosecution
announced it will ask their Spanish
colleagues for information on the
case and, if needed, interrogate the
people involved. The story, which has
its roots in the so-called YanevaGate
scandal from 2016, claims that Mr Bo-
rissov has laundered money in order
to purchase a house for a woman,
Borislava Yovcheva, with whom he
allegedly has a child.
The Bulgarian Socialist Party
(BSP), the main opposition force
in the current Parliament, will
elect its new leader – or re-elect
Kornelia Ninova, the acting head
of the party – in a two-round elec-
tion in April-May 2020. This is the
first time in the history of the party in
which its President will not be elected
by the representatives that local party
structures send to the Party Congress,
but directly by party members. The
only significant opponent to Ms Ni-
nova is Kiril Dobrev, an MP and senior
party member, who has previously
sided with Ms Ninova as part of the
younger, reformist block of the party.
8 KQ POLITICS/GESHEV
//NEWS BRIEF
NO CONFIDENCE/On 4 February Presi-
dent Rumen Radev announced he is offi-
cially withdrawing his confidence in the
government. Besides the institutional cri-
ses that led to water shortages in the town of
Pernik, he indirectly criticised the use of the
prosecution as a political instrument. He was
also critical of what he perceived as the gov-
ernment “quietly pushing” for reform of the
Currency Board, while poverty and inequality
deepen.
NEWSPAPERS/The Bulgarian Postal Ser-
vice, which was put in charge of distrib-
uting newspapers by the government in
October 2019, is planning to subcontract
this activity to a private company and pay
30 million euro for a period of four years
for the service. The decision of the govern-
ment to nationalise print media distribution
came as a response to the regular criticism of
the Reporters Without Borders media watch-
dog about the dominance of media mogul
Delyan Peevski over newspaper ownership and
distribution.
PATRIOTIC QUARRELS/After Ataka – one
of the three nationalist parties that used
to form the United Patriots group in par-
liament – left the coalition in September
2019, tensions between the disgruntled
MPs of the faction and their former al-
lies have been brewing. At the beginning of
March, Desislav Chukolov from Ataka accused
Defense Minister and head of the other nation-
alist party, VMRO, Krassimir Karakachanov, of
allegedly “turning the Defense Ministry into
the largest real estate firm on the market.”
REVISORO/The new environmental
minister Emil Dimitrov, known for his
nickname “Revisoro”, is already at odds
with the majority ruling partner GERB
that backed unanimously his appoint-
ment. The reason is that a deputy of Mr Dim-
itrov from the GERB quota, Krassimir Zhivkov,
blamed Tsvetelina Kaneva, head of the Plov-
div Water Directorate, for failing to comply
with her obligations which led to her arrest by
heavily armed and masked police.
CHINESE STATISTICS/The Bulgar-
ian National Statistics Institute (NSI) has
under-reported data about oil products
imports, leading to a record amount of
“errors and omissions” in the balance of
payments data of the Bulgarian economy
last year. This was announced by Socialist MP
Rumen Gechev, who said that if the data were
correct, the growth of the Bulgarian economy
would only amount to 0.8-1%, compared to the
present optimistic estimates of 3.7%.
FIGHT THE FIFTH COLUMN
The first victim of the new Prosecutor General
was Environment Minister Neno Dimov, who was
escorted in handcuffs out of the Ministry of En-
vironment for interrogation and, later arrest, on
January 9, as the water crisis in the town of Pernik
spiralled out of control. While Mr Dimov, a nomi-
nation of United Patriots – the junior partner of
Borissov’s GERB party in the government coali-
tion, definitely held some responsibility for the
severe water shortage, his arrest was a clear pub-
licity stunt because of the need for a scapegoat
after tensions against the government started to
mount two months into the crisis.
Mr Dimov was not the sole appointment of the
United Patriots to be snatched by police on the
job. Tsvetelina Kaneva, director of the water au-
thority of the city of Plovdiv and an appointee
of VMRO (one of the two parties making up the
United Patriots alliance) was taken into custody
by masked police officers carrying assault rifles.
This happened at the end of February, when an
investigation of suspected public property mis-
management was launched against Ms Kaneva by
the anti-corruption agency CIAF, now headed by
Mr Geshev’s predecessor Sotir Tsatsarov. Her ar-
rest was quickly followed by the apprehension of
another VMRO activist.
“That’s insane […] sending masked special police
force armed with assault rifles against a woman
armed with a pen! Next time around they would
do better to send in commandos with tanks,”
commented Defense Minister and VMRO leader
Krassimir Karakachanov. His anger provoked a
sardonic response from Mr Geshev: “I heard that
tanks should be brought in. Unfortunately, I don’t
know if these combat vehicles still work.”
OPENING A SECOND FRONT
And while the prosecution tightened the noose
around GERB’s most significant nationalist coali-
tion partner, Mr Geshev targeted Bulgarian Presi-
dent Rumen Radev. In the last week of January,
the Prosecutor’s Office announced out of the blue
that it would ask the Constitutional Court to clar-
ify the degree of immunity from criminal prosecu-
tion for a present head of state and whether the
prosecution can open an investigation against the
incumbent president. And that was it – no con-
text, no clue why this clarification is needed right
now and definitely no mention of a suspected
crime for which the prosecution would investi-
gate the president.
Experts in constitutional law soon banged on the
head any notion that the prosecution can inves-
tigate the president. But the question “why” re-

IN THE THREE MONTHS SINCE IVAN
GESHEV BECAME PROSECUTOR
GENERAL, HARDLY A SINGLE DAY HAS
PASSED WITHOUT THE PROSECUTION
ANNOUNCING A NEW INVESTIGATION,
INSPECTION OR OPERATION
mained open for a short while. A hint came from
a publication by Pik.bg, the government-friendly
tabloid on steroids used to trample the public im-
age and personal life of the government’s critics.
It said that the prosecution was likely investigat-
ing Mr Radev about an episode from 2014, when
as Commander of the Bulgarian Air Force he ap-
pointed his then would-be wife Desislava Radeva
as his PR officer.
Several days later Mr Geshev announced there
has indeed been an investigation linked to Mr
Radev. A few hours later, in a move that has be-
come standard in recent months, the prosecutor’s
office published a selection of audio recordings
from 2019 in which President Rumen Radev is
heard talking to General Tsanko Stoykov, his suc-
cessor as Air Force commander. They talk about
documents required to be submitted to CIAF
for an investigation into the appointment of Ms
Radeva in the Air Force in 2014. Yet the conver-
sation gives little inkling about what potential
crime, if any, they allegedly attempt to conceal.
According to prosecutors dealing with the wiretap
(their names were erased from the transcript that
was published) there were reasons to believe the
president had tried to induce Gen. Stoykov to hide
some of the documents requested by CIAF and the
latter was actually the person investigated by the
prosecution. In the recording, Mr Radev is heard
saying that nothing should be hidden.
However, the Prosecutor’s Office never said what
Gen. Stoykov had been investigated for and why
the probe was assigned to the Specialised Crimi-
nal Court rather than to the Military Court re-
sponsible for investigating armed forces per-
sonnel. Secondly, wiretapping a conversation
involving the incumbent president should have
not only stopped the moment when it was clear
who is on the phone, but the recordings should
have been destroyed immediately. Lastly, the re-
cordings were made in April 2019 – so why were
they published now?
The simple answer is that Mr Geshev wanted to
remind the president who is in charge. On Novem-
ber 26, 2019 (the day Mr Radev signed the decree
for the appointment of the new Prosecutor Gen-
eral after initially declining to approve Mr Geshev
КQUARTERLY 9
to the post) the president stressed that a reform
of the position of the top prosecutor is much
needed, as “in the Bulgarian constitutional model
the accountability of the Prosecutor General ends
with his appointment”.
“The Prosecutor’s Office is accountable enough,”
Mr Geshev angrily retorted, speaking before jour-
nalists a few minutes later.
HITTING THE NEW BAD OLIGARCH
Without taking a break, Mr Geshev went after his
next prey – the newly ostracised gambling tycoon
Vasil Bozhkov (see at p. 60). Suddenly, one by one,
institutions responsible for controlling gambling,
up to the Minister of Finance, realised that Mr
Bozhkov’s National Lottery had not been subject
to correct taxation over the past five years.
Then, on January 29, Mr Geshev made his move
and charged Mr Bozhkov on seven accounts, in-
cluding tax avoidance valued at over 275 million
euro and leading an organized crime group. “It’s
time for this criminal transition [to democracy]
to end; my whole life, your whole lives have co-
incided with this,” the Prosecutor General la-
mented before reporters. He later calculated
that the 275 million euro unpaid by the lottery
would enable Bulgarian retirees to get an im-
mediate 50-euro increase in their pensions. The
next day, additional charges of murder, rape and
soliciting prostitution were brought against Mr
Bozhkov.
Once again, the motives for the actions of the
prosecution (and the state as a whole, for that
matter) are pretty strange. Mr Bozhkov, colloqui-
ally known as The Skull, has been perceived as
one of the most notorious figures of the Bulgarian
underground over the past 30 years and has been
pampered by the state for almost as long. This
ambivalence hints at the theory that the Prosecu-
tor’s Office and the government are simply part of
a charade that covers up redistribution of wealth
and businesses among oligarchs rather than rob-
bing the undeserving rich to give to the poor.
PROSECUTOR GENERAL
Yet the image of defender of the man-in-the-
street is what Mr Geshev wants to create. He
combines high-profile actions with ones aiming
to highlight how close he is to the average Bul-
garian. On February 1, the Prosecutor General de-
clared war on ‘household crime‘ – a controversial
and non-legal notion that has become popular in
Bulgaria in the past decades. In the public mind, it
denotes burglaries and theft of property, mostly
in rural areas and predominantly by perpetrators
of Roma origin. There are, however, no formal > 10
10 KQ POLITICS
criteria for what constitutes household crimes, so
no statistics exist to measure their frequency.
This did not stop Mr Geshev from claiming that
the household crime rate in the area of Montana,
a town in north-western Bulgaria, has dropped
by 40% since the start of his operation. And
that’s not all – he uses these operations to show
through friendly media outlets that the prosecu-
tion and he personally are close to the people. On
March 7, for example, he can be seen on a vid-
eo talking to the mayor of the village of Doctor
Yosifovo, in the Montana region, about installing
a surveillance system. He was also seen talking
to grannies nearby, whom Mr Geshev approaches
by saying “I was told that the young grannies are
here.”
A “memorable” highlight was on March 3, when
Bulgaria celebrates its Liberation from Ottoman
rule. The YouTube channel of the State Prosecu-
tion published a “greeting” from the Godlevski
Velikden folklore choir with a song dedicated to
Father Parteniy Geshev – a revival era teacher
and priest – who happens to be an ancestor of
the acting Prosecutor General. Self-publicising on
the Prosecution’s YouTube channel, however, was
far from enough for Mr Geshev. So later, an entire
one-page article dedicated to the revolutionary
and enlightenment activities of Father Geshev
appeared as paid content in the vehemently pro-
government 24 Hours newspaper.
This amicable relationship of the Prosecutor Gen-
eral with selected media whose main mission is to
serve the powerful of the day is nothing new. Mr
Geshev’s immediate predecessor Sotir Tsatsarov,
for example, had proudly showcased his prefer-
ence for Pik.bg and had often launched investi-
gations based on publications appearing on this
yellow website. The warm relationship seems to
remain intact – the Prosecutor’s Office was un-
lawfully wiretapping a conversation of the Bul-
garian president on the basis of articles published
by Pik.bg, as the website proudly announced. The
entire spying scandal involving the Russophile
Movement (read more about it in the Foreign
Policy section) was based on an “investigation”
compiled by Telegraph daily that is controlled by
media mogul and member of parliament Delyan
Peevski.
ROBIN HOOD WITH A NEWSBOY CAP…
Mr Geshev tirelessly attempts to construct a self-
image as a rugged, adamant and insolent cop
who can face anyone and anything and is doing
it all for the greater good of the suffering Bulgar-
ian people. He taps into the justified anger and
disillusionment of Bulgarians about the way the
transition to democracy and market economy has
been implemented over the past 30 years since
the fall of the Berlin Wall.
Another one of Mr Geshev’s well-publicised oper-
ations announced in February would be a review
of the entire privatization process – a feat never
completed by most of his predecessors from Niko-
la Filchev onwards. Mr Geshev acknowledges that
the statute of limitation for any potential crimes
his institution will uncover will have expired long
ago. But that did not prevent his spokesperson,
Ms Mileva, announcing the investigation of hun-
dreds of bigger privatization deals with the pri-
mary aim of ‘educating’ the people.
To put it simply – there will be no punishment
but selective discoveries of alleged crimes that
will be used as ammo by friendly tabloids firing
salvos against whoever has to be attacked. Some-
times the targets will be those who dare to protest
against the unaccountable Prosecutor’s Office, at
other times – for the ‘circuses’ part of modern-day
‘bread and circuses’, i.e. for their distraction.
The new Prosecutor General has made it clear
that he expects Parliament to investigate the pos-
sibility of changing the Constitution and handing
the prosecution extraordinary powers to inves-
tigate privatization deals far after the statute of
limitation for the alleged crime has expired.
…OR AN ABSOLUTE MONARCH IN THE
MAKING?
If this happens, it will mean that the much-dread-
ed scenario of Bulgaria becoming the first Pros-
ecutorial Republic would be a fact. And it will have
its absolute leader.
While Mr Geshev claims that there will be no im-
punity for anyone, regardless of their status, he
has prioritized attacking old and new opponents
of the current government rather than key figures
from the highest echelons of Bulgarian political-
oligarchic elite. For example, Mr Geshev prefers
not to investigate all those who might have con-
tributed to the bankruptcy of Corporate Commer-
cial Bank in 2014. One of them – Delyan Peevski,
remains a taboo for the Prosecutor General, be-
yond the generalist claims that he will investigate
the mogul if he has to.
It is too early to say what Mr Geshev’s game is.
However, to judge from the first three months of
his tenure, it looks like the game will be a long
and dirty one. Moreover, he might be trying to
ultimately rewrite its basic rules – which would
lead to the already messy democracy in Bulgaria
becoming ever more tarnished.
 КQUARTERLY 11

YEARS
www.geostroy.com; office@geostroy.com

DESIGN AND CONSTRUCTION OF DESIGN AND CONSTRUCTION OF

INFRASTRUCTURE PROJECTS CIVIL PROJECTS

DESIGN AND CONSTRUCTION OF MINING OPERATIONS

INDUSTRIAL PROJECTS
LAND SURVEYING SERVICES
12 KQ POLITICS/CRISES
Q We want air and
water, not garbage
| Photo by Georgi
Kozhuharov

NO WATER TO and waste pollution have been not only well-known

CLEAN THE
problems, but it seems that the authorities have in-
tentionally turned a blind eye to the looming crises.

GARBAGE The dwindling of the water reserves of the Studena

dam, Pernik’s drinking water source, was detected
months ago but the authorities decided to keep the
population in the dark before the local elections in
MANY BULGARIAN November 2019. The same goes for the attempts by
TOWNS LIVE ON WATER power plants in Pernik and in other towns to burn
garbage instead of coal, which has also been well-
RATIONING AND NEXT known for years. Yet, no measures have been taken
TO PILES OF IMPORTED to cease these illegal practices.

WASTE BECAUSE OF WADING KNEE-DEEP IN WATER,

INTENTIONAL NEGLECT WHILE STAYING THIRSTY
Pernik is situated just to the west of the Vitosha
BY THE AUTHORITIES mountain and to the south of the Lyulin mountain,
i.е. this is an ideal location to have excellent access
ILIN STANEV to high quality water supply. But years of neglect

T
This morbid joke arises from
the situation in Pernik. The city,
situated 35 kilometers southwest
of Sofia, has been subjected to water
rationing for several months, while
the local thermal power plant, which occasionally
uses waste for fuel, gasses the city’s neighborhoods
with heavy smoke. The conditions in the former
coal mining town have become unbearable even
for the resilient locals who from an early age had
breathed in the industrial smoke and coal dust of
the town’s factories that used to make it a Socialist-
era powerhouse. Now, many of those people join the
daily protests in Bulgaria’s capital Sofia, which is
conveniently close.
The situation in Pernik and several other Bulgar-
ian towns with similar problems is not the result
of trivial mismanagement. Both the water shortage
have ruined the town’s water distribution network..
According to Ivan Vitanov, director of the local wa-
ter supply company, over 75% of the water that has
been flowing from the Studena reservoir has been
wasted on the way to people’s homes because of
outdated infrastructure. A municipality develop-
ment plan acknowledges that over 60% of the
water pipes in the city date back to the 1960s and
1970s and were beyond repair long ago. In addition,
most of the public resources for water utilities in
recent years were allocated to sewerage systems, a
priority for the EU – for Brussels water supply is an
issue that was supposed to be solved long time ago.
The situation was no secret but the local authori-
ties and the water utility concealed the real extent
of the problem, fearing a public backlash just be-
fore the local elections in November. If measures
had been taken earlier, for example by limiting the
water supply to industrial consumers and proba-
bly introducing moderate water rationing (instead

of the current seven dry hours per day), the pre-
sent severe crisis could have been avoided.
The weather answered the prayers of Pernik citi-
zens in January and February before the govern-
ment had completed the construction of a new
water mains designed to fill the Studena reservoir
with water from the bigger Iskar reservoir that
feeds Sofia with drinking water. At the time the wa-
ter crisis in Pernik was partly alleviated, only four
out of 13 km of the emergency pipeline had been
laid. Climate was quicker than people and rain and
melting snow began slowly filling the Studena res-
ervoir.
Right now, it seems that former minister of envi-
ronment Neno Dimov will be the only scapegoat in
a crisis that is of local political nature, while the re-
sponsible local officials will get a free pass just be-
cause they are members of the ruling GERB party.
This is not good news for more than 120 thousand
Bulgarians who might continue living with water
rationing in the 21st century.
GARBAGE EVERYWHERE
The garbage drama was no less predictable, either.
Companies related to businessman Hristo Ko-
vachki which have been implicated in illegal waste
disposal, have a long history of serious environ-
mental violations that have largely been ignored
by the Bulgarian authorities for years. While Prime
Minister Boyko Borissov reacted to the waste cri-
sis in his typical manner – feigning surprise and
indignation at the “revelation” that trash is being
burned at Mr Kovachki’s plants, it is his govern-
ments that have largely tolerated, if not indirectly
backed, those firms’ behavior over the past ten
years.
Mr Kovachki officially has no ownership in any
energy company, but in practice he controls eight
power plants, making his energy group the big-
gest privately held one in Bulgaria. Most of those
power plants were decrepit back in the early 2000s
when the state offered them up for privatization,
instead of closing them down outright. The predic-
tion at that time was that they would have a short
life before being shut down. However, Mr Kovachki
has since then miraculously outmaneuvered en-
vironmental and labor inspections, tax and social
security administrations, trade unions and angry
citizens exposed to daily pollution. It was helpful
that he supported a small political party that could
mobilize enough votes to swing elections in the
districts his companies work in.
The import of waste as an energy source started
back in 2014 with companies related to Valentin
Zlatev, the long-time local representative of Rus-
КQUARTERLY 13
sia’s Lukoil. The origin of the shipments was Italy,
which has always had problems with its garbage
disposal. The shipments have become easier as
of 2007, because of the EU’s single market – if the
waste is not qualified as a dangerous product,
it could travel freely. However, the initial probes
didn’t pick up speed, because it turned out that the
imports from Italy contained partially separated
garbage rather than refuse-derived fuel (RDF),
which power plants and cement factories are look-
ing for.
The imports started in earnest in 2017, when pric-
es for CO2 allowances jumped. With their current
price, Bulgaria’s coal-fired thermal power plants
(TPP) add approximately 30 euro to every mega-
watt hour of electricity they produce. If instead of
coal they burn waste, which qualifies as renewable
product under the EU rules, they are not required
to buy emission allowances. As a result, the com-
panies profit twice – first by using fuel for free and
second by slashing their environmental expenses.
Most power plants and cement factories would not
touch the garbage, because their installations are
not adapted for waste incineration, but this was
not the case with the several power plants related
to Hristo Kovachki. Even though environmental or-
ganizations as well as energy companies exposed
to unfair competition have complained for years,
the authorities have ignored Mr Kovachki’s dirty
secret, fearing social unrest if his plants went bust.
Left unchecked, several of the power plants in Mr
Kovachki’s group began burning garbage, even be-
fore their permits had been approved. As a result,
Pernik, Galabovo, Bobov Dol and Sliven have suf-
fered from experiments that should have never
been allowed.
An outright ban on waste incineration at facilities
not equipped to do that could have solved the prob-
lem. But such a ban has never materialized. Many
of the local environmental inspectors, for example,
are related to the workers in some of Mr Kovachki
coal mines and TPPs. Instead, the government is
teetering between various populist measures to
ban waste imports entirely which might destroy
entire industries relying on products that are con-
sidered waste, including in the metallurgic and
clothing sectors.
In short, the two crises are the latest examples of
how the intertwining of bad governance, poor and
short-sighted policy making and hidden political
and economic connections are making the life of
hundreds of thousands of Bulgarians miserable
– all for the sake of Prime Minister Borissov’s po-
litical survival and GERB’s stable stranglehold over
the country.
 14 KQ POLITICS

I
If something is close to resembling a
state within a state in Bulgaria, then it
is probably the MRF – the Movement
for Rights and Freedoms. The party,
established 30 years ago to protect
the political and social rights of Bulgarians of
Turkish ethnic origin, violently hounded by the
former Communist regime, has morphed into a
clientelist organization whose tentacles spread to
the judiciary, national security agencies and all the
state bodies that deal with money (and EU funds in
particular). Even though recent MRF-related news
mostly concerns the number of yachts its honorable
chairman Ahmed Dogan has acquired, or the efforts
state authorities apply to help him make ends meet
(we don’t say launder his money), Mr Dogan and his
current lieutenant Delyan Peevski are indisputably
the masters of Bulgaria’s clandestine political life.

The MRF has unscrupulously exploited its sup-

port among Bulgarian ethnic Turks, guaranteeing
it an indispensable position in Bulgaria’s political
life. Having secured such a kingmaker’s place, it
knitted a dense network of political protégés who
Photo by Nadezhda Chipeva

know that only the ethnic party provides them

with continuous support. Crucially, it subverted
the Bulgarian judiciary by carefully nurturing and
promoting key magistrates to top positions. And
as traditional parties in Bulgaria lost ground, the
role of the Movement has become even stronger,
regardless of which political force has the upper
hand at any given moment.
MRF THE REVIVAL PROCESS
CORPORATION It all started with the attempts of the leadership of
communist Bulgaria to assimilate Bulgarian eth-
nic Turks and Muslims throughout the 1970s and
LAUNCHED AS A 1980s. This process peaked in the 1984-1985 pe-

PARTY FIGHTING riod with the forced change of Turkish and Arabic
names of most of the 900,000 Bulgarian Muslims
FOR THE POLITICAL of Turkish and other minority descent for Bulgar-

REPRESENTATION ian ones. Violent repressions against dissenters

continued throughout the decade, with hundreds
OF BULGARIA’S incarcerated. The escalating tensions culminated

ETHNIC TURKS, THE in the ‘Great Excursion’ of the summer of 1989, just
a few months before the fall of the regime, when
MOVEMENT FOR up to 360,000 people were forced out of the coun-

RIGHTS AND FREEDOMS try to Turkey, with most of their belongings and
real estate expropriated by the authorities.
HAS MORPHED INTO
A QUASI-BUSINESS Although most of those recent emigres were free
to come back just a few months later once the
ORGANIZATION QUIETLY Zhivkov regime was toppled, the wound of the at-

PULLING STRINGS
tempted forced assimilation remained.

BEHIND THE SCENES It was in this atmosphere that the MRF rose to
prominence as a political force seeking to rep-
resent the interests and protect the rights of the
MARTIN DIMITROV ethnic Turkish minority. With most of its leader-

ship – including Mr Dogan – having links to secret
organizations that opposed the assimilation poli-
cies of the previous decades, the party was rec-
ognized by the majority of ethnic Turkish voters
as their legitimate representative for the years
to come. Ironically, by the time dossiers of former
agents of Communist-era State Security service
started getting released in the mid-2000s, ex-
posing Mr Dogan as its operative, he had already
established himself as a formidable charismatic
leader and had entrenched the political positions
of the MRF among the insular, mostly rural Bul-
garian ethnic Turks.
KINGMAKER IN PARLIAMENT
The loyalty of these core voters, numbering about
200,000-400,000 throughout the years, has al-
ways shored up MRF’s position as a third or, at
worst, fourth largest political force in Parliament.
Also, despite professing to be a centrist liberal
party accepted by the European liberal family, its
reliance on the backing of mostly undereducated
rural voters who have very little notion of the doc-
trine of liberalism means that the MRF leadership
can practically do whatever it wants nationally
– as long as it maintains its dominance of local
politics.
The MRF has managed to strike this balance – al-
most no party has ever even tried to contest its
positions in its heartlands, allowing it to keep
its grip over ethnic Turks while simultaneously
backing the powerful of the moment overtly or
more secretively. Thus, in its 30-year history, the
MRF has become a key actor in Bulgarian politics,
capable of overthrowing and installing govern-
ments. It has been in power several times, some-
times informally, for example as a supporter of
the anti-Communist government of Filip Dimitrov
(1991-1992). This reformist cabinet was brought
down with the votes of the movement, which
withdrew its support in order to back, alongside
the Communist Party transformed into Bulgarian
Socialist Party (BSP), a nominally technocrat gov-
ernment led by Prof. Lyuben Berov.
The MRF then stayed in opposition until the quick
IN ITS 30-YEAR LONG HISTORY, THE
MRF HAS BACKED CABINETS ON THE
LEFT, RIGHT AND CENTER. IN RECENT
YEARS THE PARTY FOUND OUT IT CAN
INFLUENCE POLITICAL OUTCOMES
EVEN BETTER AS A NOMINAL
OPPOSITION OF GERB, PLEDGING ITS
SUPPORT WHEN NEEDED - NOT FOR
FREE, OF COURSE.
КQUARTERLY 15
ascent to power of Bulgaria’s last King Simeon
Saxe-Coburg-Gotha, who had formed the NDSV
liberal party that won the 2001 elections. The
MRF joined a government coalition with NDSV
that served until 2005. Later, the MRF formed a
coalition government with the BSP and NDSV un-
der Socialist Prime Minister Sergei Stanishev that
was in power until 2009. Most recently, the MRF
was a coalition partner of the BSP in the govern-
ment of Plamen Oresharski (2013-2014).
PROSPERING IN POWER,
PROSPERING IN OPPOSITION
The MRF has managed to prosper even when
the right-wing GERB party is in power in coali-
tion with far-right partners. It has become the
new normal that the party of Prime Minister
Boyko Borissov uses the votes of MRF members
of Parliament to pass legislation opposed by its
nationalist sidekicks. Laws ranging from legisla-
tion benefiting large fuel companies like Lukoil to
changes strengthening even further the hand of
the Prosecutor’s Office have been backed by the
MRF, even when nationalists protested against
them. Pro-Euro-Atlantic legislation such as the
ratification of the free-trade agreement between
the EU and Canada (CETA) or the approval of the
acquisition of new F-16 fighter jets for the Bulgar-
ian Air Force would never have passed without
the MRF’s backing.
This does not come cheap. Municipalities run by
the MRF consistently get far more cash subsidies
per capita from central government compared
to those governed by Socialists. For example, 36
municipalities run by the MRF received 13 million
levs (6.5 million euro) in subsidies in 2018, while
six comparable municipalities governed by the
BSP only got one million levs – less than half.
MRF-linked firms have been some of the largest
beneficiaries of road construction projects and
other public procurement tenders, both at a lo-
cal and national scale. In 2005 Ahmed Dogan,
then still MRF leader, declared that his party has
„a whole orbit of companies” that depend on him.
“In the last fifteen years maybe half of the busi-
nessmen above the average level got there with
my help, or at least with my nod,” Mr Dogan said,
causing a widespread backlash that tainted Mr
Stanishev’s government for four years and in 2009
probably blew the Socialists’ chances of winning a
new term of office. It opened the door for Boyko
Borissov whose GERB party came to power on a
largely anti-graft platform.
This process of merging corporate with party
interests happened gradually. First, during the
1990s, the MRF offered protection and patronage
to business people in the localities it con- > 16
16 KQ POLITICS/MRF
> 15 trolled. Later, as it proved itself to be an en-
during and stable political party, many large-scale
businessmen started relying on it at a national
level. The most notorious of all business groups
that relied on the MRF in Parliament was Multi-
group, a corporation linked to ex-State Security
officials that took control of large swaths of Bul-
garia’s rapidly privatized economy.
In all cases, relying on the MRF was the safest bet
for business people and oligarchs – they knew it
would always be an active kingmaker in Parlia-
ment and could easily pass any piece of legislation
without fearing repercussions from its voters. As
years passed by, it turned out that the party could
also easily be used to capture the nominally inde-
pendent judiciary by appointing loyal magistrates
to key positions in the justice system.
THE GLORIOUS LEADER
There are several reasons for the MRF’s success,
apart from its reliance on its hardcore electorate.
First of all comes the iron grip of Ahmed Dogan
as leader over the local party structures, the busi-
nesses linked to them and the MRF parliamentar-
ians. For over two decades Mr Dogan has managed
to take total control of the workings of the party,
ousting opponents at the first sign of disloyalty.
Several politicians who were initially MRF mem-
bers have tried to stand up to Mr Dogan, but to no
avail – not a single alternative party that sought
to attract the votes of ethnic Turks has ever suc-
ceeded.
The most well-known case is that of Lyutvi Mes-
tan, who allegedly tried to steer the party towards
closer links to Ankara. The attempt was at odds
with the interests of Mr Dogan who had already
retired to the position of honorary leader and led
to the ousting of Mr Mestan as party leader in a
matter of days at the end of December 2015. For-
mally, the sin committed by Mr Mestan was that
he urged Bulgaria’s parliament to back Turkey – a
NATO ally – in the aftermath of the downing of a
Russian warplane by the Turkish Air Force over
Syria in December 2015. Informally, however, it
was the growing boldness of Mr Mestan, who had
taken the reins of the party in 2013 after an at-
tempt on the life of Mr Dogan. Later, an attempt
by Mr Mestan to create an alternative ethnic
Turkish party with liberal aspirations was short-
lived and completely unsuccessful – just as all
other attempts before his had been. Mr Dogan’s
full domination of the MRF has worked for so long
not only because he has been good at wrong-foot-
ing his internal opponents and making strategic
coalitions with key people outside the party. He
also pretends to be a Platonic “philosopher-king”
pulling wisely, albeit ruthlessly, the strings of the
party – and the state. “I am the instrument of
power that allocates the portions for the compa-
nies in this country,” he was recorded as saying
at a party rally in 2009 – a confession that might
have cost the career of any politician in the West,
but only served to fortify the image of Mr Dogan
as a grey eminence in Bulgarian politics that can-
not be ignored.
ENTER PEEVSKI
A notorious figure personifying the full-fledged
corporatization emerged in the mid-2000s. This
was Delyan Peevski whose appointment as head
of the State Agency for National Security (known
by its Bulgarian acronym DANS) in June 2013
sparked the largest post-1997 protests in Bul-
garia’s democratic history.
Before that summer, Mr Peevski was a little-
known MRF backbencher with vast business in-
terests and few assets listed in his public state-
ment of conflict of interest. He was kicked out as
deputy minister in charge of disaster response in
the Stanishev government in 2008 for alleged ex-
tortion of the CEO of a state-owned company but
was later reinstated after pressure from the MRF.
Despite his young age at the time (he was born
in 1980), Mr Peevski had forged a whirlwind ca-
reer spanning from the directorship of the Port of
Varna when he was 21 to a stint as a crime inves-
tigator at the Sofia Investigation Service of the
Interior Ministry. In the meantime, his mother
– Irena Krasteva, who was heading the National
Lottery during the Simeon Saxe-Coburg-Gotha
government, started buying off bankrupting me-
dia outlets in the aftermath of the global financial
crisis with credits from Corporate Commercial
Bank (Corpbank) of Tsvetan Vasilev.
While the New Bulgarian Media Group publishing
company – the media conglomerate controlled by
Ms Krasteva and later by her son – backed GERB
during the party’s first three years in power,
they made a U-turn in a matter of weeks in the
spring of 2013 – just like they did in 2009 when
they shunned the Socialists. It was Mr Peevski’s
media outlets that fuelled a public scandal later
dubbed The Kostinbrod Scam, an alleged vote-
rigging attempt by a GERB loyalist. It is debatable
whether the scandal tipped the election results,
but it shows the might of NBG not only to cause
public scare, but also to mobilize prosecutors to
chase ghosts.
The scandalous appointment as head of DANS
of the then 33-year-old “young and successful
businessman”, as Mr Peevski described himself
in an interview for one of his own media out-
lets, turned out to be a step too far and caused

the #DANSwithMe protests of the summer of
2013. And while it was the Socialist Party and
technocrat Prime Minister Plamen Oreshar-
ski who took the brunt of public outrage at Mr
Peevski’s appointment, his installment at the
helm of DANS served to expose the extent of
MRF’s growing prowess and highlight the im-
portance, ambition and audacity of the young
media mogul. In Bulgaria, Mr Peevski has come
to personify high-level corruption and state
capture by shady oligarchic circles for an entire
generation.
THE CORPBANK-PEEVSKI AXIS
The media empire that Mr Peevski built using
credits from Corpbank is just the tip of the ice-
berg of his business interests. They peaked in
2014 when companies related to him were select-
ed to build the 4-billion euro Bulgarian section of
Gazprom’s South Stream gas pipeline, a project
КQUARTERLY 17
Q Delyan Peevski, who
until recently was one
of Mr Dogan‘s closest
lieutenants, has become
the personification of
high-level corruption and
state capture by shady
oligarchic circles for an
entire generation | Photo by
Anelia Nikolova
that was subsequently abandoned. By that time
Mr Peevski controlled an empire valued at more
than 500 million euro, spanning from retail and
food to construction and real estate.
After Mr Peevski and Mr Vasilev fell out in 2014,
which led to the collapse of Corpbank, the state-
owned Bulgarian Development Bank became the
lender of last resort for the mogul’s businesses.
This is yet another proof of how a state struc-
ture captured by MRF interests is financing the
exploits of their most prominent member, and of
these there are many.
In another twist, after decades in which Mr Dogan
preferred to indirectly manage his money, in 2018
he acquired the mothballed Varna thermal power
plant (TPP), on the Black Sea coast. Miraculously,
the new owner restarted the power plant and re-
ceived tens of millions of levs in contracts to keep
it in cold reserve. The business of staying idle
was so profitable that the company that owns the
power plant now consolidates under its umbrella
all real estate properties owned by Mr Dogan. In
addition, Bulgarian authorities issued a number
of decisions and licenses to the small seaport ad-
jacent to the TPP and which is used for unloading
of coal deliveries that may make it a full-fledged
operating port. This would, in practice, divert part
of the cargo business of state-owned Port of Var-
na into the hands of Mr Dogan’s private holding.
The acquisition of Varna TPP and its operations
are just one of the examples of how Mr Dogan
has been using his political influence for personal
gain. And this is just an example visible on the
surface, because it is directly linked to the MRF
strongman. One can spend a lifetime untangling
how the informal network of patronage and favor-
itism established by the MRF and Mr Dogan in the
past decades works in the public administration
and political parties connected to specific busi-
ness circles. The MRF has proved that you need
not be the biggest fish in the pond if you are a
strong, centralized, non-ideological organization
serving a single purpose – to perpetuate itself
and the well-being of its leadership.
18 KQ POLITICS/CRIME

\\ORGANIZED CRIME IN BULGARIA

incapable of curbing tax fraud; 4) The proceeds of

FIVE POPULAR
organized crime are huge and constantly growing;
and 5) Organized crime exerts a high social cost but

BELIEFS law enforcement bodies lack the capacity to tackle it.

RE-EXAMINED BULGARIA IS A COUNTRY OF

POWERFUL AND EXTREMELY
VIOLENT ORGANIZED CRIME
NOT ANYMORE
CENTRE FOR THE STUDY
OF DEMOCRACY

B
Аt the time of Bulgaria’s accession to the EU, ex-
perts from the Center for the Study of Democracy,
Bulgaria, unfortunately, has built a Sofia based think-tank, who had been monitor-
an image of a country deeply ing the state of conventional and organized crime
affected by organized crime. This in Bulgaria and Europe since the mid-1990s, were
image is rooted in the 1990s, often asked about the impact of organized crime
with its rampant extortion in the country. Was it rising or was it subsiding?
and racketeering by criminal ‘insuring groups’ Our general perception was that the trend was
whose stickers were obtrusively visible on cafes, downward but we needed verifiable data to back
restaurants, cars and even residential buildings. this assessment. By definition, organized crime
The years of widespread extortion were followed is an opaque phenomenon which is very hard to
by equally widespread smuggling of goods and the measure using standard crime statistics. We were
spread of black markets. For external observers, looking for police data which could be clearly
Bulgaria’s EU pre-accession period (2001-2007) linked to the level of organized crime and at the
was dominated by news of public assassinations same time was not prone to manipulation. Our
of criminal bosses and businessmen. choice fell on three indicators which are hard to
conceal for political reasons, and which can be
Since then, however, the crime situation in Bulgaria easily traced over time: the number of premedi-
has changed significantly, yet many perceptions tated homicides, contract killings, and explosions
about organized crime shared by both foreigners and aimed at property destruction (used either to
locals are unaltered. This current analysis re-exam- send a warning, or take revenge on competitors).
ines five of the following myths in the light of crime
statistics and expert estimates of criminal markets: Placing these three indicators on a chart (Figure
1) Bulgaria is a country of powerful and extremely 1) created a storyline not only of organized crime
violent organized crime; 2) It has one of the highest but also of the important events in the last three
crime rates in Europe; 3) Bulgarian authorities are decades of Bulgarian political history.

FIGURE 1. TRENDS IN VIOLENT CRIME, 1989–2018

600

1990 1991 1998 2001 2007 2014

UN embargo
on fomrer Yugoslavia Opening of accession
500 491 492
negotiations with the
462
Revocation of EU and abolishment of
461
licences of insurance Schengen visas for
companies associated Bulgarian citizens Full opening of the EU
Bulgaria’s accession to the EU labor market for
Beginning of the with ‘violent entreprenuers’
democratic 404 Bulgarian citizens
400
transition
375 371
in Bulgaria
351

309 Murders
301
300 Sanctions against Yugoslavia 282

238
245 Bombing
230
Insurance racket
226
explosions
200 188
Protection racket Contract killings
177 174
160
150
142 139 136
122 126
112
105
95 92
100
79
55 185 200 169 174 120 121 120 161 159 119 78 53 38 35 24 53 37 16 26 34 26 21 18 30 14 15 8

? ? ? ? ? ? ? 7 10 7 10 15 11 26 21 18 12 12 10 8 3 2 3 2 4 2 1
0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
 КQUARTERLY 19

Homicides, peaking in the first half of the 1990s, FIGURE 2. HOMICIDE RATE PER 100,000 POPU-
LATION IN BULGARIA – AVERAGE FOR 2013–2018
have steadily declined ever since. Contract kill-
Intentional homicide and sexual offences by legal status
ings, averaging about 13 per year for the period and sex of the person involved - number and rate for the
1998–2009, are down to a couple per year in the relevant sex group
2010s. The use of explosives has also subsided, Lithuania
from a peak of 200 incidents in 1994 to fewer than Latvia
Albania
ten in 2018.
Estonia
Montenegro
These trends confirm that at least the violence Hungary
associated with totally uncontrolled organized Serbia
crime has been largely contained. Bulgaria
But how does Bulgaria compare to its European Finland
France
counterparts?
Malta
Cyprus
BULGARIA HAS ONE OF THE Bulgaria 2018
HIGHEST CRIME RATES IN EUROPE North Macedonia
STILL HIGH, BUT NOT EXORBITANT Slovakia
England and Wales
Scotland
The perception of an extremely high crime rate
Northern Ireland (UK)
is closely linked to the positioning of Bulgaria as Denmark
‘the poorest and most corrupt country in the EU’. Sweden
Comparing crime rates across countries is a rath- Croatia
er complex task due to discrepancies in criminal Greece
legislation and police statistics. Comparing regis- Germany
Poland
tered crimes, Bulgaria and Romania have almost
Slovenia
10 times lower crime rate per 100 000 population Czechia
than Sweden and Finland – simply because the Italy
Nordic countries include in their counts admin- Netherlands
istrative offences, while Bulgaria and Romania Spain
don’t. Luxembourg
Austria
Iceland
Victimization surveys, another possible method Norway
for international comparison, are also viewed Switzerland
with skepticism, as their output is considered soft 0 1 2 3 4 5 6
data that does not capture the true crime level. Source: Eurostat

The most trusted indicator in comparative statis-
tics on violent crime is the number of premedi-
tated murders. In the mid-1990s Bulgaria had one
of the highest rates in Europe, with 4.8 homicides
per 100,000 inhabitants, followed only by Russia
and Ukraine. In the 2010s, though, comparison
of crime statistics (as reported by Eurostat) on a
number of serious crimes places Bulgaria closer
to the middle. In addition, rates for many types
of crime have been going down steadily for the
past two decades. A look at the homicide rate, for
instance, places Bulgaria in a group with France,
Finland and Malta, and ahead of most countries
of Eastern Europe (Figure 2).
In terms of sexual crimes (rape and sexual as-
sault), Bulgaria has one of the lowest rates in Eu-
rope (Figure 3), though there should be a caution-
ary note about possible differences in reporting
standards.
Comparative crime statistics for the 2010s chal-
lenge also the belief that Bulgaria has one of the
highest crime rates in Europe. Still, the concern
that organized crime is damaging the Bulgar-
ian business environment and robbing the state
budget remains.
BULGARIAN AUTHORITIES ARE
INCAPABLE OF CURBING TAX FRAUD
THERE IS ACTUALLY A REMARKABLE
IMPROVEMENT
Organized crime is traditionally associated with
contract murders, explosions, kidnapping and ex-
tortion. Another equally important impact is the
damage caused to the competitive environment
of a country. If criminal entrepreneurs don’t pay
taxes, it is very difficult for anyone else to com-
pete with them. One of the best criteria for the
state of a tax system of an EU member state is its
VAT collection record.
The VAT Gap study commissioned by Directorate
General Taxation and Customs Union of the Eu-
ropean Commission (TAXUD) has some reassur-
ing data for Bulgaria. The VAT Gap, which is the
difference between expected VAT revenues > 18
20 KQ POLITICS/CRIME

FIGURE 3. RAPES PER 100,000 POPULATION – FIGURE 4. VAT GAP AS A PERCENTAGE OF THE VAT
AVERAGE FOR 2013–2017 TOTAL TAX LIABILITY (VTTL) IN EU-28, 2017 AND 2016
Intentional homicide and sexual offenses by legal status
and sex of the person involved - number and rate for the BE 2016 VAT Gap (%)
relevant sex group BG 2017 VAT Gap (%)
England and Wales CZ Median
Sweden DK
Norway DE
Scotland
EE
Northern Ireland (UK)
IE
France
Denmark EL
Luxembourg ES
Finland FR
Austria HR
Ireland IT
Germany
CY
Croatia
LV
Switzerland
Czechia LT
Malta LU
Hungary HU
Lithuania MT
Latvia NL
Spain AT
Poland
PL
Greece
Bulgaria PT
Slovenia RO
Portugal SI
Albania SK
Slovakia FI
Serbia SE
Montenegro
UK
0 10 20 30 40 50 60 70 0 5 10 15 20 25 30 35 40
Source: Eurostat Source: Study and Reports on the VAT Gap in the EU-28 Member States, TAXUD, 2019

> 21 and VAT actually collected, provides an esti- and 2019 (Figure 5). The significant improvement
mate of revenue loss due to tax fraud, tax evasion is due to the introduction of a real-time link be-
and tax avoidance, but also due to bankruptcies, tween all cash registers and the servers of the
financial insolvencies or miscalculations. The VAT National Revenue Agency, and the collaboration
Gap for Bulgaria for 2017 is estimated at 1.22 bil- of large private companies in avoiding risky sup-
lion levs or 11.8%, which is slightly above the EU pliers and clients.
average of 11.2% (Figure 4). Thus, Bulgaria’s VAT
Gap has considerably shrunk compared to the 24- One telling example is the fate of the largest grey
25% divide of the first estimates for 2009–2011. marketplace on the Balkans, the Iliyantsi bazaar
in Sofia, whose turnover went down by some 70%
In contrast to the VAT Gap study, which uses a
bottom-up approach employing macro data for FIGURE 5. ESTIMATED FINANCIAL LOSSES DUE
TO ORGANIZED VAT FRAUD (2005–2014)
the GDP, imports, exports, internal consumption,
AND PROJECTIONS (2015–2018) IN BULGARIA
investment, etc., the Bulgarian National Revenue
1200
Agency (NRA) uses a top-down approach to assess
losses from organized VAT fraud. It evaluates the
1000
revenue stated by companies which does not cor-
respond to tax collection for the respective year.
800
In Bulgaria, VAT fraud schemes run by organized
criminal networks were extremely widespread
since the turn of the century, peaking between 600
2007 and 2011. Back then, even large chain stores
operated by multinationals were, knowingly or 400
not, using goods and services delivered through
criminal networks. NRA estimates showed that in 200
that period organized VAT fraud varied between
12 and 14% of the total VAT revenues. Such as- 0
2006 2009 2012 2015 2018
sessments were conducted in 2010, 2013, 2015 Source: National Revenue Agency
 КQUARTERLY 21

after the entry into the Bulgarian market of the FIGURE 7. POLICE RECORDED THEFTS OF MOTORIZED
LAND VEHICLES PER 100,000 POPULATION
Metro hypermarket retailer.
Luxembourg
PROCEEDS OF ORGANIZED CRIME Greece
ARE HUGE AND CONSTANTLY Italy
GROWING Sweden
IN SOME AREAS THERE IS A France
Czechia
SIGNIFICANT DROP
Netherlands
England and Wales
Measuring the total proceeds of organized crime Belgium
is far from an exact science. One approach is to Finland
view organized crime as a set of “criminal mar- Ireland
kets”. The levels of precision vary widely among Cyprus
different criminal markets. For instance, esti- Portugal
Austria
mates for the volume of illicit cigarette trade or
Scotland
the number of stolen vehicles are considered
Northern Ireland (UK)
sufficiently accurate, while estimates for the pro- Germany
ceeds from human smuggling or illegal trade in Spain
fuels are usually only tentative approximations. Malta
Latvia
After the fall of communism, the sale of illicit ciga- Bulgaria
Lithuania
rettes and car theft became the two largest and
Poland
most emblematic criminal markets in Bulgaria.
Slovenia
Their abrupt decline in the last decade is due to Hungary
the collaboration of law enforcement agencies Slovakia
and the private sector. For instance, the reliable Estonia
statistics on stolen vehicles (containing data on Croatia
the vehicle’s value and the circumstances of theft) Romania
was the result of the common efforts of insurance Denmark
companies and law enforcement bodies. Similarly, 0 50 100 150 200 250 300 350
Source: Eurostat
large tobacco companies, with their regular sur-
veys of the illicit cigarette market, and in particu- Western Europe. Since 2000, when over 11,000 ve-
lar the “empty pack surveys”, provided a kind of hicles were reported stolen in Bulgaria, the num-
dashboard showing the most problematic towns ber has dropped to 2,068 in 2018, or less than the
and regions of the country. number of cars stolen in the late 1980s, before the
beginning of the transition to democracy.
Of course, each criminal market is driven by other
factors as well. For instance, the decline in vehicle Compared to the mid-1990s, when every third
theft (Figure 6) is also explained by advances in car imported from Western Europe got stolen,
car protection technology and by the extensive and Bulgaria ranked among the top three Euro-
import of affordable second-hand vehicles from pean countries in terms of stolen cars per 100,000
population, the current state of the market is very
FIGURE 6. STOLEN VEHICLES IN BULGARIA, different. Eurostat data for the 2015–2017 period
1987-2018
place Bulgaria among the Member States with the
fewest car thefts (Figure 7).
25 000
The criminal market with the most significant
20 000 and, at least for the time being, stable downward
trend is the trade in illicit cigarettes. From a coun-
try with one of the highest shares of illicit tobacco
15 000 products consumption in Europe, in recent years
Bulgaria ranks close to the top of European coun-
10 000 tries with minimal illegal trade. This development
is even more surprising given the deep rooted tra-
ditions in cigarette production, and the dominant
5000 role of cigarette smuggling in the business of Bul-
garian organized crime groups in the 1990s. The
0 estimated share of illicit tobacco products sold on
1988 1993 1998 2003 2008 2013 2018
Source: Police statistics the domestic market after Bulgaria’s acces- > 20
22 KQ POLITICS/CRIME

FIGURE 8. ILLICIT CIGARETTE MARKET (%) FIGURE 10. IRREGULAR BORDER CROSSINGS
(2009–2018) (ENTRY AND EXIT, 2013–2019) IN BULGARIA

35 200 000
Entry
30 Exit
150 000
25
100 000
20

15 50 000

10
25 000
5

0
0 Q3.07 Q3.09 Q3.11 Q3.13 Q3.15 Q3.17 Q3.19 2013 2015 2016 2017 2018
Source: Empty-pack surveys conducted by PMI, BAT, JTI, Imperial Tobacco and Bulgartabac Source: Estimates of the Center for the Study of Democracy

FIGURE 9. SHARE OF THE ILLICIT CIGARETTE tered not only by the regular empty-pack surveys
MARKET IN EU MEMBER STATES
(carried out in Bulgaria since 2007), but also by
NORWAY the significant increase of excise tax and VAT rev-
IRELAND enue from cigarette sales, at a time when the per-
FRANCE centage of smokers and the Bulgarian population
GREECE itself are dwindling.
UNITED KINGDOM
LITHUANIA Human smuggling is a good example of how Bul-
NETHERLANDS garia has managed to bring a fast expanding crim-
LATVIA inal market under control. In 2013, when Greece
BELGIUM introduced strict measures to curb illicit migrant
trafficking across its land borders, the migrant
FINLAND
flow through Bulgaria increased. Due to the im-
GERMANY
mense migratory pressure, the migrant smug-
SWEDEN
gling networks’ capacity soared. Thus, during the
AUSTRIA
migration crisis of 2015 they managed to smug-
ROMANIA
gle through Bulgaria between 110,000 and 174,000
SWITZERLAND
people with their proceeds reaching 120–130 mil-
ESTONIA
lion euro (according to estimates of the Center
DENMARK for the Study of Democracy). In 2016 and 2017, the
LUXEMBOURG number of unlawful border crossings by migrants
CZECH REPUBLIC dropped significantly as a result of several factors
HUNGARY such as investments in border surveillance infra-
POLAND structure, establishment of specialized units at
SPAIN the Ministry of Interior, mutual control between
PORTUGAL Bulgarian migration institutions and increased
SLOVAKIA cooperation with Turkish authorities. Thus, the
Q2 2019
ITALY number of border crossings in 2018 went down to
Q3 2019
BULGARIA between 2,000 and 5,000, whereas migrant smug-
0 5 10 15 20 25 30 35 40 gling proceeds shrank to three million euro.
Source: Empty-pack surveys

> 23 sion to the EU reached 35%.
After 2014, that share took a steep dive, reaching a
record low of 3.3% in 2019. The proceeds of organ-
ized crime from illicit cigarettes have shrunk from
over 300 million euro in 2010 to about 50 million
euro in 2018. The estimated losses to the budget
from unpaid excise tax and VAT have gone down
from 1.5% of GDP in 2010 to 0.15% in 2018. The suc-
cessful curbing of this criminal market is regis-
The sharp decline in three key markets of Bul-
garian organized crime cannot be taken as proof
that the overall proceeds of criminal groups are
shrinking. Still, they are an indication that the
constant growth of criminal proceeds is not ab-
solute.
The final most pertinent question concerns what,
if anything, is being done to combat organized
crime in Bulgaria. For years on end, telephone

fraud was perceived as a crime which police and
prosecution were powerless to tackle.
ORGANIZED CRIME EXERTS
HIGH SOCIAL COST BUT LAW
ENFORCEMENT BODIES LACK THE
CAPACITY TO TACKLE IT
POLICE NEED COOPERATION FROM
THE PRIVATE SECTOR
One of the most persistent crimes in the past dec-
ade has been telephone fraud. It is perpetrated by
a relatively small group of fraudsters and in terms
of cash proceeds is one of the smallest criminal
markets, with an estimated total turnover of
about eight million levs per year (Figure 11). At the
same time, its social damage is much higher for
two reasons: first, its victims are the most vulner-
able citizens (predominantly elderly people living
alone), and second, the bosses of telephone fraud
groups are well known but remain beyond pros-
ecution due to lack of evidence linking them di-
rectly to the committed fraud.
The crime relies on shocking and confusing the
victims (for example, with claims of needing to
help a terminally ill or injured relative), and by
the time they contact the police (if at all) it is al-
most impossible to collect physical evidence. It
is estimated that for every “successful” call (i.e. a
call where a victim is tricked into giving away a
certain sum of money or other valuables), fraud-
sters make thousands of unsuccessful calls. Vic-
timization surveys suggest that one in every four
Bulgarians has been the target of an attempted
telephone fraud in the last five years. As a crimi-
nal market, telephone fraud has demonstrated
extremely high flexibility. Fraudsters exploited
a network of middlemen, used pre-paid phone
cards registered to third persons with no income,
and moved their calling campaigns to other coun-
FIGURE 11. ESTIMATED PROCEEDS FROM
TELEPHONE FRAUD (2012-2018) IN BULGARIA
9000
8000
7000
6000
5000
4000
3000
2000
1000
0 in collaboration with transnational criminal net-
2012 2013 2014 2015 2016 2017
Source: Police statistics
КQUARTERLY 23
tries (mostly to Romania) after roaming charges
in the EU were dropped.
It was this pattern of high volume outgoing calls
that prompted the design of a technological so-
lution that can disrupt, and in the long run de-
struct, the telephone fraud business model. Simi-
lar to VAT fraud, car theft and illicit cigarettes,
cooperation between private companies and law
enforcement agencies produced a viable solu-
tion. With the support of telephone operator Vi-
vacom, attempts at telephone fraud were drasti-
cally reduced from over 60,000 per month at the
beginning of 2019, to practically no attempts and
no registered victims in the last quarter of 2019.
In addition, in 2019 twenty-six members of three
criminal groups based in the towns of Gorna Ori-
ahovica, Vetovo and Levski (the strongholds of
telephone fraud) were arrested and prosecuted.
It remains to be seen how sustainable this crack-
down would be, but available statistics so far
point to the near extinction of telephone fraud
in Bulgaria. (There are indications, however, that
Bulgarian telephone fraudsters have attempted
to replicate their schemes in Greece).
THE PERSISTING PROBLEMS WITH
ORGANIZED CRIME
While many of the popular beliefs about the state
of crime in Bulgaria are no longer valid, the coun-
try is far from being unaffected by organized
crime. The latest assessments of serious and or-
ganized crime in Bulgaria for 2018 and 2019 have
demonstrated that criminal networks are suc-
cessfully adapting and integrating into a num-
ber of European-wide criminal markets, exploit-
ing the flaws in communication among Member
States’ law enforcement bodies.
Criminal players have also made investments in
legal businesses, making it hard to distinguish
between criminal and legal activity. Using a legiti-
mate business as cover is widespread in the illicit
fuels market, VAT frauds, illicit logging and even in
the export of sex services. A prominent trait of cur-
rent Bulgarian organized crime is its growing con-
nection to white-collar crime – financiers, lawyers,
high-level administrative officials and politicians.
While discarding the violent methods typically
used in the past, today’s criminal networks are
employing administrative and political corruption
to eliminate competition. Organized crime players
in Bulgaria are increasingly dealing in renewable
energy projects, waste processing companies, in-
frastructure projects, and agriculture. They are
abusing EU funds and exploiting opportunities
2018
works across Europe.
24 KQ POLITICS/STATE CAPITALISM

T
The campaign launched
by Prosecutor General
Ivan Geshev against
privatization, announcing
all deals of the last 30
years are to be re-examined, seemed just like
previous ones. Whenever political pressure
accumulates and corruption scandals rage,
the state prosecution steps in to divert public
attention by blaming the real or imagined
failures of privatization for today’s woes.
Pointing a figure at privatization, regarded by
most Bulgarians as highly unjust, has always
been an effective tool to shift responsibility
for all current failures. It was used by two of Mr
Geshev’s predecessor as well– Nikola Filchev in
2001, Sotir Tsatsarov in 2017.

But the present offensive is different. Not only be-

cause it is going to be the most populist campaign
of all– Mr Geshev has said its purpose is to seek
justice for the embezzlement of funds involving
“companies built with the pensions of many peo-
ple”, but also because of the context in which it
occurs. It is unlikely that there is a detailed plan,
but discrediting the privatization process gives a
veneer of legitimacy to the attempted makeover
of Bulgaria’s flawed market economy into some
sort of state capitalism. Behind the smokescreen
of crime-busting there is a bigger transformation
ongoing.

IS STATE In the last two years the coalition government led

CAPITALISM
by GERB party has increased the state’s interven-
tion in the economy. Every time there is a problem

MARCHING ON? – a water supply shortage, public procurement

failure or bankruptcy of a “strategically impor-
tant company”, the cabinet proposes yet another
state-owned holding to solve it. The state-owned
WITHIN A BRIEF Bulgarian Development Bank (BDB) began bank-
PERIOD, BULGARIA’S rolling local oligarchs, substituting for their failed
banks, and preventing the market from throw-
GOVERNMENT HAS ing them overboard. The competition authority
AGGRESSIVELY abandoned all pretence of being a fair regulator;
instead it began picking winners in the economy.
INJECTED BILLIONS
OF LEVS INTO KEY The shift is symptomatic of the elite’s changing
strategy. Intermediaries are no longer needed
SECTORS, AND HAS when money has to be syphoned from public cof-
EFFECTIVELY STARTED fers. Gone are complex ploys, like the scheme in
which the now defunct Corporate and Commercial
NATIONALIZING Bank (Corpbank) collected the deposits from the
BUSINESSES big state-owned companies to finance political
and business projects and ensure media support.
While until a few years ago, governments had to
balance according to the interests of several com-
peting oligarchs, and sometimes lose power, now
ROUMIANA CHERVENKOVA, the GERB-led cabinet can directly control them.
IVAYLO STANCHEV

“NO” TO COMPETITION, “YES” TO
THE STATE
A recent attempt by the Movement for Rights and
Freedom (MRF), the party that represents Bulgar-
ians of Turkish ethnic origin (see more at p.17)
and supports the current government, to change
the law in order to allow private citizens to hire
employees of the National Protection Service as
personal bodyguards, is probably the most sig-
nificant privatization of the past few years. Aside
from this being an all-too-real joke, it seems that
the Bulgarian state has reversed the process of
economic liberalization.
The construction of new pieces of public infra-
structure and repairs of existing ones that take
the lion’s share of budget outlays are good exam-
ples. In the last two years two state-owned com-
panies - Montagi and Avtomagistrali, received
multi-billion contracts without bidding in public
procurement procedures (see at p.46). The offi-
cial reason is the need to speed up construction
of vital infrastructure but the reality is pure cir-
cumvention of the tendering process. Up to this
point considerable public resources were distrib-
uted through bidding procedures to a few favored
companies, which then hired subcontractors to
compensate for their own lack of capacity. Now,
however, public contracts have been discontinued
and subcontractors are chosen through the state-
owned companies without the limitations of a
procurement procedure and the basic transpar-
ency it provides. This way, even the all-powerful
favorites will become a lot more dependent and
obedient in order to stay in the game.
At the same time, the government does not shy
away from using the power of regulatory bodies to
reward its political friends and to solidify its base.
One telling example is the decision of the Com-
mission for Protection of Competition’s (CPC) to
choose who should and who should not buy No-
vaTV – the biggest private TV channel in Bulgaria,
and who should not buy the local assets of Czech
energy group ČEZ, which include the biggest pow-
er distribution company in the country.
In both cases, foreign investors had to comply
with vague demands of the government, only to
see their places (in the case of NovaTV) taken by
politically more convenient local buyers. If anyone
ever doubted the CPC’s impartiality, it is now clear
that the anti-trust body is not the independent
regulator that will guarantee competition in the
Bulgarian economy.
When the CPC is not at hand, the government is
openly attempting to forcibly take over private
companies. A prominent example in this resoect
КQUARTERLY 25
are the multiple efforts to nationalize arms man-
ufacturer Dunarit, which was part of Tsvetan Va-
silev’s fallen Corpbank empire alongside already
nationalized aircraft repair plant Avionams. Re-
cently, it was the turn of Vasil Bozhkov and his
National Lottery. Under the noble pretext of curb-
ing the vice of gambling, the speedily amended
Gambling Law has established a government mo-
nopoly in this sector.
The cherry on the cake in this new policy is the
BDB. Created to assist small and midsized busi-
nesses, in recent years the bank actually turned
into source of government assistance to favored
businessmen. One third of BDB’s loans portfolio
consists of credits extended to companies con-
nected to two businessmen, both related to the
Movement for Rights and Freedoms - Delyan
Peevski, who is an MP from the party and Rumen
Gaytanski, aka the Wolf, who owned several com-
panies jointly current honorary chairman of MRF
Ahmed Dogan. These exposures can result in the
end in nationalization of those companies losses.
THE NEW FASHION – OF
GOVERNMENT HOLDINGS
Of course, the state’s increased role in the econo-
my could sometimes be attributed to mere incom-
petence. When the government is in a bind (see p.
10) and no apparent solution is at hand, the only
politically viable course of action is to throw pub-
lic money at the problem concerned. GERB has
simply taken this practice to an extreme by mak-
ing it seem that any problem can be resolved by
creating a new state-owned holding.
This is how the water crisis in the city of Pernik
precipitated the birth of the Bulgarian Water-
works Holding under the aegis of the regional
development ministry. To make more bang, one
billion levs from the country’s fiscal reserve were
poured into the new structure.
The Ministry of Economy had created its own
holding group – the State Consolidation Com-
pany (DKK), which assembled many state-owned
companies from different sectors with combined
worth of about one billion levs. Two years ago the
government increased DKK’s capital by 500 mil-
lion levs. The model follows that of the Bulgarian
Energy Holding (BEH) group, created back in 2008.
For all these years since then BEH’s sole purpose
has been to transfer money from its profit making
subsidiaries to those losing money.
The main characteristic of these structures is
the almost total lack of transparency over the
expenditure of public funds. The ineffectiveness
of state-run economy is best highlighted in the
26 KQ POLITICS/STATE CAPITALISM
THE GOVERNMENT DOES NOT SHY
AWAY FROM USING THE POWER OF
REGULATORY BODIES TO
REWARD ITS POLITICAL FRIENDS AND
TO SOLIDIFY ITS BASE.
energy sector. The National Electrical Company
(NEK), which is inherently a monopoly and dic-
tates the rules in the sector by simultaneously
buying and selling electricity, is more than 4 bil-
lion levs in debt and has lost over 1.2 billion levs.
On the other hand, instead of investing profits
generated by Kozloduy nuclear power plant in the
proper handling of nuclear waste or new technol-
ogies, BEH has been syphoning them out to the
unprofitable lignite-fired Maritsa East 2 thermal
power plant. Even so, the thermal plant’s debt
amounts to more than 1.6 billion levs and the ac-
cumulated losses amount to 850 million levs.
Kaloyan Staykov, economist from the Institute for
Market Economics, is damning about the state’s
role. “The common theme in all these cases – BEH,
DKK, the funding of the construction of Hemus
highway and the plans for a new waterworks
holding, is that the state has no idea how to man-
age its assets. And it has no idea why it has these
assets to begin with. The new law on state-owned
companies introduces a requirement to present
an evaluation of the necessity to create a new
state-owned company, but there is no such re-
quirement for existing companies or assets. The
only explanation for the existence of most state-
owned companies is that they were inherited
from a period when there were no private com-
panies, but have now been taken over by private
interests. There is no reason for not privatizing or
awarding a concession for companies operating
the railways and the postal service, the compa-
nies within BEH, waterworks and many others,”
he believes.
MORE THAN JUST A WASTE OF MONEY
When Boyko Borissov formed his third govern-
ment three years ago, the new economy minister
Emil Karanikolov had already announced the halt
of privatization. “We welcome every action that
has to do with passing legislation that will regu-
late public-private partnerships,” he said then.
The gesture seemed to target those swaths of
Bulgarian society which felt deprived during the
post-Communist economic transformation. Al-
though this is not a substantial part of the Bulgar-
ian electorate, those people have provided crucial
swing votes, blowing into the sails of populist par-
ties. And since one such a party – Ataka (“Attack”
in Bulgaria) which was then part of the governing
coalition had proposed Mr Karanikolov for the job,
his position sounded all too logical.
But there was something more sinister about it. The
Minister of Economy gave voice to those who have
always branded the privatization process as unjust,
not because of its social cost, but because it was
not under their control. The ragtag group of former
officers of Communist-era State Securityservice,
businessmen from the murkiest years of Bulgarian
transition and newly minted oligarchs has become
collectively known as “The Librarians”, because
many of them have found refuge in the University
of Library Studies and Information Technologies.
According to their narrative Bulgaria has veered
into a destructive path, led by liberal values and
Western ideals. And all those who rode the wave
of economic liberalization and took part in the pri-
vatization process are – if not outright criminals –
then part of a wicked group who must be punished
and in the meantime stripped of their assets.
This is a smear campaign constantly trumpeted
by the tabloid empire of Delyan Peevski. It has
served him all too well since most of his business
adventures have been attempts to hijack some-
one else’s business, be it in retail, insurance or
construction.
The anti-privatization, anti-liberal rhetoric also
fitted PM Borissov’s game plan. It allowed the
prime minister to depict his liberal critics as “bad
hombres from privatization”.
“The paradox is that, on the one hand, people have
the least trust for institutions and the state as a
whole, but on the other, they expect transparent
responsibility,” sаys Parvan Simeonov, director of
Bulgaria’s Gallup International.
He believes that the explanation is that the state
is hated, but this is exceeded only by hatred for
private wealth. This explains why Bulgarians are
not that suspicious when the government is ex-
panding its economic activities, , even when it
means keeping afloat hemorrhaging companies
that should have been restructured long ago.
The privatization of state-owned assets was the
key condition for getting the support of inter-
national creditors for the macroeconomic sta-
bilization of Bulgaria after 1997. The path taken
then has now made it possible to countenance
the country’s accession into the Eurozone. The
“total revision of privatization”, as announced by
the prosecutor general, moves in the opposite di-
rection. It can only be speculated whether this is
the result of interests that seek to steer Bulgaria
away from the Eurozone and the EU’s Banking un-
ion, or just mere populism.
 КQUARTERLY 27

POLITICS AND SOCIETY:

NOT EVERYTHING IS SO ROSY ON THE GENDER FRONT
Quite a few of the more liberal-minded GENDER PAY GAP IN INDUSTRY,
Bulgarians who yearn for positive news CONSTRUCTION AND SERVICES
from their native country point out that in 2018 in %
gender issues – a major cultural cleav-
age in the West – are not so marked in Estonia
Bulgaria. Yes, gender attitudes might be Germany
Czechia
a legacy from the Communist regime
UK
which almost forcefully integrated wom- Austria
en into the labor force (it was so inef- Slovakia
ficient that it desperately needed every Finland
able hand), but nevertheless it puts the Portugal
EU-28 (’13-’20)
country among the more progressive
France
nations. In terms of gender pay gap (the Netherlands
difference between the average gross Denmark
hourly earnings of men and women ex- Ireland
pressed as a percentage of the average Latvia
gross hourly earnings of men) Bulgaria Norway
Lithuania
occupies the better part of the ranking
Spain
as well (see the graph Gender Pay Gap Iceland
in Industry, Construction and Services). Cyprus
As a true champion of the gender cause Bulgaria
Bulgaria can also boast about its share Greece
Sweden
of women in the IT industry – the coun-
Malta
try is at the top in the European Union. Hungary
Bulgaria is also second only after Latvia Croatia
in terms of the number of women work- Poland
ing in sciences compared to men. Slovenia
Belgium
Italy
But the picture is not all that rosy when
Luxembourg
examined in more detail. Even though Romania
there are many women in the IT indus- 0 5 10 15 20 25
try, according to the Eurostat statistics, Source: Eurostat
the pay gap with men is one of the wid-
est in Europe. The precise calculations GENDER PAY GAP IN SOME OCCUPATIONS
IN BULGARIA
are precarious, because, for example,
income statistics for 2014
Bulgarian women enjoy longer mater-
nity leave than – let’s say - their Swed- Average
ish or French peers, thus reducing their In healthcare and social
workable hours and their remuneration work
during maternity (which is capped at In
sciences
80% of their social security contribu-
In finances
tions). The picture with regard to sci- and insurance
ences is also very similar – science work In
is one of the worst paid in Bulgaria and IT
In
men shy away from it, thus artificially education
inflating the numbers of women scien- In
tists. public authorities
An interesting group are Bulgarian In
real estate business
women in finance. They are not only a
In
substantial number in comparison with construction
the other EU member states, but they In administrative and
also seem to defend their rights for equal other supporting activities
payment better than other professional -30 -20 -10 0 10 20 30 40
groups in Bulgaria (though they are still Source: National Statistical Institute
The difference between the average gross annual earnings of men and wom-
paid lower than their male peers). en expressed as a percentage of the average gross annual earnings of men.
Negative value means that women in the respective field are better paid.
28 KQ POLITICS
POLITICS/DASHBOARD

GENDER PAY GAP WOMEN AS A SHARE

IN IT WOMEN IN IT OF SCIENTISTS
in 2018 in %
Lithuania
Gender pay gap in the IT Women in the IT Latvia
Bulgaria Bulgaria
Romania Denmark
Lithuania Finland
Finland Hungary
Latvia Luxembourg
Sweden Germany
Ireland Italy
France
Malta
Estonia
Netherlands
Denmark
Belgium Greece
Slovakia

Shutterstock
UK
Cyprus Czechia
EU France
Netherlands UK
Germany EU-28 (’13/’20)
Slovenia Romania
Italy Estonia
Austria Cyprus
Poland Slovenia
Portugal Belgium
Slovakia Croatia
Croatia Austria
Luxembourg Spain
Malta
Ireland
Czechia
Poland
Hungary
Spain Sweden
Greece Portugal
0 5 10 15 20 25 30 35 0 20 40 60 80 100 120 140
Source: Eurostat Source: Eurostat

GENDER PAY GAP IN BULGARIA SURPRISINGLY, THE GENDER PAY GAP IN

IS RELATIVELY LOWER IN FINANCE BULGARIA IS LOWER IN THE PRIVATE SECTOR
AND INSURANCE in 2018 in %
in 2018 in % Public sector Private sector
Czechia Belgium
Lithuania
Bulgaria
Iceland
Estonia Czechia
UK Denmark
Slovakia
Germany
France
Poland Spain
Romania Croatia
Norway
Finland Cyprus
Germany Latvia
Austria
Lithuania
Latvia
Malta Hungary
Netherlands Netherlands
Sweden
Bulgaria Poland
Croatia Portugal
Cyprus
Romania
Portugal
Slovenia Slovenia
Luxembourg Slovakia
Belgium
Hungary Finland
Denmark Sweden
Spain UK
0 5 10 15 20 25 30 35 40 45 -10 -5 0 5 10 15 20 25
Source: Eurostat Source: Eurostat
 FOREIGN POLICY

THE PERILS OF
ENGAGEMENT
BULGARIA APPEARS
TO BE DOING
ANKARA’S BIDDING
//In this section:

A very serious spy vaudeville

Bulgarians see EU as guarantee

for quality of life
30 KQ FOREIGN POLICY/TURKEY
//BULGARIA-TURKEY:
THE PERILS OF ENGAGEMENT
BULGARIA APPEARS TO BE DOING ANKARA’S BIDDING
DIMITAR BECHEV
B
Bulgaria Prime Minister Boyko
Borissov is a firm believer in the
art of the deal. If only EU leaders
would just talk with the likes of
Russia or Turkey! There is always
a way to cobble together a compromise on even the
thorniest of issues. So long as the respective sides
sit at the table, tone down their rhetoric a notch or
two, and focus on common interests.
The massing of 10,000 refugees and migrants on
Turkey’s border with Greece put the Bulgarian
prime minister to the test. Rushing to Ankara on
2 March for a tête-à-tête with President Erdogan
(“my friend Tayypie”), he proposed to host a
three-way summit with Prime Minister Kyriakos
Mitsotakis. The offer seem to have fallen on deaf
ears.
Mr Borissov stressed his solidarity with Turkey’s
predicament as home to more than 3.6 million
war-displaced Syrians. But he also used the
occasion to chastise the EU for promises it al-
legedly failed to keep. Rather than acting as go-
between, Bulgaria appeared to be doing Ankara’s
bidding.
WINNING DOMESTICALLY
Mr Borissov’s overtures to the Turkish presi-
dent make perfect sense in light of Bulgarian
domestic politics. The prime minister is trying
to fend off yet another bout of public hysteria
over the arrival of asylum seekers as in 2014-15.
It would chip away at his ratings, benefiting the
nationalistic-leaning Bulgarian Socialist Party
and the far-right United Patriots, nominally
still in coalition with his governing GERB party.
The consolation prize from the ill-fated Ankara
trip, on the eve of the national holiday celebrat-
ing the 1878 liberation from the Ottomans, was
Mr Erdogan’s implicit promise that no Afghans,
Syrians etc. would be heading to the border with
Bulgaria. “So to speak, I came, we shook hands,
we are sticking to our commitments and keeping
in touch,” as Mr Borissov put it, true to his trade-
mark folksy ways.

Q Rather than mediating between
Ankara and Brussels, PM Boyko Borissov
(left) appeared to be taking the side of
President Recep Erdogan in the crisis |
Council of Ministers Press Office
He might have a point. Although the Greek-Turk-
ish border along the Evros/Maritsa/Meric river
has witnessed near battle scenes with police tear
gassing and pushing back migrants, things have
been quiet at Turkey’s frontier with Bulgaria. But
the reasons why asylum seekers are reluctant to
seek entry into the EU through Bulgarian terri-
tory are likely more complex than Sofia being in
Mr Erdogan’s good books. Harsh treatment at the
hands of the Bulgarian border police and the ex-
pectation that their chances of making it to West-
ern Europe are better through Greece are prob-
ably at least as important motivations. But what
ultimately counts with Mr Borissov, as – let’s be
frank – any politician worldwide – is public per-
ceptions. He has done his share to keep the nation
safe.
THE BIGGER GAME
Much depends on developments far beyond Brus-
sels’ control. Mr Erdogan has single-handedly
manufactured a crisis to exert pressure on the
EU. He wants support from big European states
in Idlib: e.g. in the form of financial contributions
for a safety zone in parts of the rebel-held enclave
and joint pressure on Vladimir Putin to abide by
the deal he struck with the Turkish president in
Moscow on 5 March. Long-term, Erdogan is after a
renewal of the 2016 refugee agreement with the EU.
Four years ago, the EU pledged to disburse some
€6 billion in exchange for Turkey’s commitment
to keep borders closed and accept asylum seek-
ers back from Greece. Ankara now wants at least
as much. The Turkish president is also pushing
for an upfront payment into the Turkish budget,
brushing aside Brussels’ rules. No more tranches,
contracts with state agencies, reports back to
the European Commission, or any other strings
attached. And if Turkey gets its way, the money
could well be diverted into areas under Turk-
ish control in Syria to pay for infrastructure and
housing projects. These would doubtless be car-
ried out by firms handpicked by the presidential
palace in Ankara. No wonder that EU leaders and
officials are not thrilled about the prospect of
writing a blank cheque of sorts.
Mr Erdogan’s visit to Brussels on 9 March is just
the beginning of prolonged bargaining. His ad-
ditional demand that the EU should lift visas for
Turkish citizens suggests that the conversation
is anything but smooth. On the positive side, Ger-
many supports the establishment of a safe > 32
КQUARTERLY 31
DEVELOPMENTS
TO FOLLOW:
Bulgaria is adamant that EU
downplays its Cohesion Policy
for the sake of boosting its Just
Transition Fund, which is supposed
to divert a significant part of the EU
budget towards the so-called EU Green
Deal. Bulgarian Prime Minister Boyko
Borissov underlined on 19 February,
when the Multiannual Financial
Framework of the EU for 2021-2027
was discussed in Brussels, that funding
for traditional policy priorities like
agricultural and infrastructure subsidies
should not suffer because of the new
focus from the EU Commission on
science, innovation and climate change.
Bulgarian President Rumen Radev
will visit Moscow and attend the
75th Victory parade, celebrating
the end of the Second World War in
May. The announcement came after
a phone conversation between the
heads of state of Russia and Bulgaria
on 18 February where the two sides
discussed energy issues as well, the
Kremlin press service announced.
While Bulgarian-Russian relations
have formally suffered due to a series
of spying scandals, good diplomatic
relations and joint energy projects
seem to carry on unobstructed. It is
expected that Russian Foreign Minister
Sergei Lavrov will also visit Sofia in April.
Bulgaria and North Macedonia,
which co-chair the rotating
Presidency of the Berlin Co-
operation Process with the Western
Balkans in 2020, will host a Joint
Summit that will take place in Sofia
in October this year. This will be one
of the two major forums focused on the
Western Balkans this year, with the first
being a EU-Western Balkans Summit
in Zagreb in May. The Berlin Process
was set up in 2014 at the initiative of
Germany to intensify efforts for the
integration of the Western Balkans into
the EU. While North Macedonia and
Albania’s hopes to start EU integration
negotiations were dashed by France
in the autumn of 2019, there are signs
that Paris might change its mind and
unblock the process.
32 KQ FOREIGN POLICY/TURKEY
//NEWS BRIEF
REFUGEE PUSH/So far, Bulgaria
has been spared from the in-
crease of pressure on the border
after the effective suspension of
the EU-Turkey statement from
2016 that brought the flow of mi-
grants and asylum seekers to a
halt on 28 February. Prime Minis-
ter Boyko Borissov immediately flew
to meet Turkish President Recep
Tayyp Erdogan as tensions on the
Turkish-Greek border escalated in
the first days of March. Despite fail-
ing to organize a multilateral meet-
ing between the leaders of the EU,
Greece and Turkey in Sofia, Mr Bo-
rissov got assurances that the migra-
tory flow will not be directed against
Bulgaria.
DEVELOPED ECONOMY/The US
Trade Representative Office an-
nounced on 10 February that it is
no longer designating Bulgaria
a developing country and now
considers it a developed one. The
measure makes it easier for Washing-
ton to launch investigations and im-
pose customs and other penalties if it
finds unlawful subsidies or commer-
cial practices. The USA contends that
Bulgaria and Romania should not be
treated as developing countries since
the whole EU is considered to be a de-
veloped economy in trade. This comes
even though the two countries still
don’t pass the threshold of the World
Bank that only categorizes states
where annual income per capita ex-
ceeds $12,375 as developed.
LUKOV MARCH/The first suc-
cessful suspension of the annual
march dedicated to the memory of
a pro-Nazi sympathising Bulgar-
ian WWI era general Hristo Lukov,
regularly attended by represent-
atives of domestic and interna-
tional far-right groups, attracted
international acclaim. This in-
cluded praise from the US and Israeli
embassies to Sofia, as well as several
high-profile Jewish organisations. For
the first time since the first Lukov
march, as the event is known, Sofia
Municipality managed to ban it – and
uphold the ban both in court and in
practice.
> 31 zone in Idlib and is now showing willingness
to accept, together with other EU countries, refu-
gee children from the Greek islands. EU Foreign
and Security Policy Josep Borell advocates grant-
ing Turkey additional funding to deal with refu-
gees.
A country like Bulgaria, a net recipient of EU sub-
sidies, does not have a great say in the matter at
hand. What Mr Borissov could do is urge his col-
leagues to broker terms with the Turkish presi-
dent. This was precisely his mission at the EU-
Turkey summit he hosted in Varna in March 2018,
during the Bulgarian presidency of the EU Coun-
cil. Yet back then the 2016 deal was still in force
and the issue revolved around the green-lighting
of the second tranche under the so-called Facility
for Refugees in Turkey.
The situation now is different. Mr Erdogan’s
scorched-earth tactics, compounded by the web
of disputes with Greece over other issues such as
territorial waters, do not augur well for a speedy
compromise. Greeks have dug in. Others in the
EU have voiced support. Last week, the European
Commission head Ursula van der Leyen visited
the border town of Orestiada accompanied by the
presidents of the European Council and the Euro-
pean Parliament, as well as Croatian Prime Minis-
ter Andrej Plenković. Van der Leyen insists Turk-
ish authorities should move the migrants away
from the Greek border as the precondition to a
substantive discussion. Turkey won’t give ground
easily either. If it decides to ramp up the pressure,
Bulgaria could well prove to be collateral damage.
NOT TO BE USED
Bulgaria traditionally prefers engagement over
confrontation with Turkey. Episodes such as the
expulsion of a Turkish diplomat in February 2016
are rare. Being friends with your large neighbor,
which is also an important trading partner with
links to a sizeable minority, is a sensible policy.
Bulgaria has a huge stake in a better relationship
between EU and Turkey too, irrespective of Mr Er-
dogan’s authoritarian populist rule.
But Borissov has gone much further than any oth-
er predecessor in building personal ties with the
Turkish president. The benefits of such a policy
are questionable. It is one thing to insist that An-
kara has a point and it deserves help with regard
to Syrian refugees. Europe has largely chosen
to ignore the devastating war next to its border
– and is now paying the price. It is quite another
matter to be sucked into a bid to strongarm the
EU. If the Bulgarian prime minister goes on lobby-
ing for a renewed refugee pact he should do so in
Brussels rather than Ankara.

A VERY SERIOUS SPY VAUDEVILLE
THE LATEST EPISODES OF THE UNFOLDING
BULGARIAN-RUSSIAN SPY SAGA LEAVE A MIXED TASTE
MARTIN DIMITROV
I
In classic spy parodies, the moment the
main character is ready to do his move,
it turns out that he is without pants. Or
instead of a 9 mm Luger, he is holding
a cucumber. It seems that the series of
spy scandals that have shaken Bulgaria over the
past year are going the same way. The very real
attempt to murder Bulgarian arms dealer Emilian
Gebrev, quite possibly with a Novichok-type nerve
agent, an investigation that uncovered undeniable
links between the attack on Gebrev in Bulgaria
and the attempted poisoning of a former Russian
intelligence officer in the UK, and Russia’s all too
visible meddling in Bulgarian politics, have recently
turned into vaudeville.
The story began intriguingly in January 2019,
when a Capital Weekly investigation exposed a
potential link between the Russian intelligence
service operation in Salisbury, England, which at-
tempted to wipe out ex-Russian secret agent Ser-
gei Skripal in March 2018, and a cold case from
Bulgaria from 2015. Back then, Mr Gebrev, his son
and an executive at their weapons production
firm EMCO almost lost their lives, potentially due
to intoxication with a Russian-sourced chemical
nerve agent. Pressured by the British authorities,
the Bulgarian prosecution reopened the Gebrev
case later in 2018 and indeed found a link be-
КQUARTERLY 33
Q Despite the now regular
spy showdowns, Bulgarian-
Russian energy projects
seem to be moving forth
without much hindrance |
Photo by Nadezhda Chipeva
tween the two operations.
THE RUSSOPHILES WHO WERE
SECRET RUSSIAN AGENTS
Then, in the second season of the Bulgarian-
Russian spy drama, things already started going
south. On September 9 of last year the mouth-
piece of the opposition Bulgarian Socialist Party
(BSP) – Duma newspaper, reported that its ex-ed-
itor-in-chief Yuri Borissov, who is now secretary
of the National Russophile Movement, had been
taken into custody in relation to a spying inves-
tigation. The following day it turned out that the
real target of the investigation was the Russo-
phile Movement chairman Nickolay Malinov who
was charged with spying for two Russian organi-
zations – the Russian Institute for Strategic Stud-
ies (RISI) and the Double-headed Eagle Society,
both of which have links to the Kremlin.
In the context of that investigation Bulgaria ex-
pelled a Russian diplomat but the scandal had the
distinct whiff of a domestic political spat, in which
President Rumen Radev and Prosecutor General
Ivan Geshev were involved. RISI had paid for a
sociological poll prior to the presidential elec-
tions in 2016. The results had been used to sup-
port the candidacy of the current Bulgarian head
of state Rumen Radev who indeed calls for > 34
34 KQ FOREIGN POLICY/SPYING
closer relations with Russia. Already as president,
Mr Radev was critical of the procedure for selec-
tion of the next Prosecutor General, in which Mr
Geshev was the sole nomination. He even delayed
Mr Geshev’s appointment in 2019, therefore the
spying charges brought by the Prosecutor’s Office
against the head of the Russophile Movement ac-
tually looked aimed at pressuring Mr Radev.
Just as the story was gathering steam, Mr Malinov
– formally indicted for spying for foreign organi-
zations originating in Russia – suddenly appeared
in a photo shaking hands with Russian President
Vladimir Putin in the Kremlin on November 4, af-
ter receiving Moscow’s State Prize for the Day of
National Unity. It emerged that Andon Mitalov,
a judge at Bulgaria’s Specialized Criminal Court,
had released Mr Malinov on bail for a limited pe-
riod, so that the head of the Russophile Move-
ment could visit the very country he was accused
of spying for.
SOME COUNTERPRODUCTIVE AID
FROM THE BIG BROTHER
As the spy drama was increasingly turning into
tragicomedy, a new character entered upon the
stage in an attempt to save the show. Unfortu-
nately, the effect was quite the opposite. At the be-
ginning of February 2020, the US Ambassador to
Sofia, Herro Mustafa, told NovaTV that very soon
Washington would designate a Bulgarian official
suspected of corruption and ban him from enter-
ing the USA. The suspense in Sofia rose again.
A few days later the US Embassy announced that
the Bulgarian citizen designated by the US Secre-
tary of State is … Judge Andon Mitalov. The official
statement claimed that “in his official capacity,
Mitalov was involved in corrupt acts that under-
mined the rule of law and severely compromised
the independence of democratic institutions in
Bulgaria”.
The news was, to put it mildly, anticlimactic, as
in the time span between Ms Mustafa’s interview
and the day the name of the judge was released,
people speculated wildly about who the desig-
nated official would be. Some thought it might be
the Member of Parliament from the Movement for
Rights and Freedoms and media mogul Delyan
Peevski, as his name is the epitome of corruption
in Bulgaria.
The designated official is a little-known judge who
has never been involved with high-profile cases,
with his cardinal sin being that he released on
bail the head of the Russophile Movement and
alleged spy, so that Mr Malinov could travel to
Moscow. While some people holding high office
heaved a sigh of relief, many Bulgarians having
sympathy for pro-Euro-Atlantic, anti-corruption
views groaned with chagrin. While it is clear that
members of the latter group unduly expected an
outside actor (who has good relations with this
government, especially in the security field) to
fix Bulgaria’s corruption problems, the barring of
Mr Mitalov looked like an excessive use of force
by the US that, in fact, completely missed the big
picture. And disillusioned many who believed the
US has serious plans to help fight the overwhelm-
ingly high-level corruption in Bulgaria.
DEBACLES PILE UP
On the contrary, the decision to bar Judge Mitalov
has likely solidified the notion that Prosecutor
General Ivan Geshev had struck a deal with the
US to chase alleged Russian spies that leaves him
leeway to pursue his own agenda on the domestic
arena.
Moreover, no piece of evidence of Mr Mitalov’s
alleged corrupt acts has been presented by the
US, although Bulgaria’s Supreme Court of Justice
(SCJ) and its Disciplinary Committee asked for
such evidence immediately after news of the ban
broke. So far, the SCJ has found no legitimate rea-
sons to suspend the magistrate and at the time
this issue of KQ went to print, he was back at work.
This is not the only debacle in that part of the spy
story. At the beginning of March, Yuri Borissov
said that he had successfully sued the Interior
Ministry for unlawfully taking him into custody in
September last year. In an interview for bTV Mr
Borissov said that the questions his interrogators
asked him during the time of his arrest were all
but direct quotes from an article on the Russo-
phile Movement published by Telegraph daily, one
of the newspapers controlled by Delyan Peevski.
“There was not a single question linked to spy-

Q Undercover officers of Russia‘s
GRU military intelligence service
were filmed in 2015 during an alleged
attempt to poison Bulgarian arms
trader Emilian Gebrev
ing. The same goes for the interrogations of my
colleagues,” Mr Borissov said, adding that the
investigators inquired about the political goals
and connections of the Russophile Movement in-
stead. Incidentally or not, when the spying allega-
tions against the Russophile Movement chairman
Nickolay Malinov were brought up in 2019, they
repeated almost word for word an article in Moni-
tor newspaper, another media outlet owned by Mr
Peevski.
SECONDARY SCENARIOS THAT ARE
MORE INTERESTING
A couple of side stories unfolded alongside the
disappointing main spying plotline featuring
Nickolay Malinov and the Russophile Movement.
At the end of January, the prosecutor general in-
formed Foreign Minister Ekaterina Zaharieva that
two Sofia-based Russian diplomats had been spy-
ing for Moscow. One of them was holding the post
of first secretary in the consular section of the
Russian embassy, while the other was a member
of the trade section.
The Prosecutor’s Office said the first individual
was suspected of “carrying out reconnaissance
work related to the Bulgarian electoral proce-
dures” since 2017. The second one had allegedly
collected intelligence including “state and profes-
sional secrets in the sphere of energy and energy
security of the country [since October 2018] that
was sent to the intelligence services in Moscow”.
THE SERIES OF SPYING SCANDALS
INVOLVING BULGARIA AND RUSSIA
STARTED OFF INTRIGUINGLY, BUT AS
MORE WAS REVEALED IT LOOKS LESS
LIKE JAMES BOND AND MORE AKIN
TO JOHNNY ENGLISH.
КQUARTERLY 35
The alleged spy had also been meeting with “Bul-
garian citizens who had access to information in
that sphere”. While the Russian Embassy said
that Sofia had presented no evidence to back the
charges made by the prosecution and protested
the fact that the Bulgarian authorities had pub-
licized the allegations before informing the em-
bassy about them first, it met the deadline set by
the Bulgarian foreign ministry and sent its two
diplomats home.
The Prosecutor’s Office, already super-active on
Russia-related topics, announced on January 23
that it has issued European arrest warrants, In-
terpol red notices and requests for the interna-
tional hunt for three unnamed Russian citizens
charged with the attempted murder in 2015 of
the three people who appeared at the beginning
of our story – the arms dealer Emilian Gebrev, his
son Hristo and Valentin Tahchiev, an executive at
Gebrev’s arms production firm EMCO. The alleged
perpetrators were accused of having attempted
to kill the victims “in a way and by means danger-
ous to the lives of many” in the period between
April 28 and May 4, 2015, using a still unidentified
organic phosphorus compound, the prosecutor’s
office said in a statement. In response, Russian
Foreign Ministry spokesperson Maria Zakharova
said that Bulgaria ought to follow established
international criminal procedures and work to-
gether with the Russian authorities on the Gebrev
case.
It appears that the sudden rise in Russia-related
anti-spying activity is paying off for the Bulgarian
authorities from a totally unexpected direction.
Although Prime Minister Boyko Borissov tries to
keep his distance and even acts as an advocate
of Moscow when alleged Russian spies are being
indicted and sent back home, he has managed
to find a connection between an investigation of
a money laundering scheme in Spain potentially
linked to him and the recent rough handling of
Russian agents in Bulgaria. According to Mr Bo-
rissov, the investigation conducted by Spanish
police and anti-corruption authorities of possi-
ble links between him and a purchase of an ex-
pensive house in Barcelona has been initiated by
some unidentified pro-Russian forces who aim to
divert Bulgaria from its Euro-Atlantic path. Even
though the allegations of a link between Mr Bo-
rissov and the Barcelona house are two-years old
and there is no hard proof that he is implicated,
he decided to play the Russian card. The prime
minister and media outlets friendly to his govern-
ment even managed to link the Catalan magazine
El Periodico (which made the investigation public)
and the local anti-corruption agency to Russian
intelligence. Go figure!
36 KQ FOREIGN POLICY./DASHBOARD

BULGARIANS SEE EU AS
GUARANTEE FOR QUALITY OF LIFE

Bulgarians are still more positive about the Eu-
ropean Union than citizens of other EU member
states. Bulgaria is one of three European coun-
tries the citizens of which have the highest level
of confidence in the EU (60%) alongside Lithu-
ania (66%) and Denmark (63%). Bulgarians, how-
ever, are less likely (42%) to share the belief that
the interests of their country are sufficiently
explanation is that Bulgarians themselves tend
to migrate.
For Bulgarians, the EU means mostly freedom to
travel, work and study within the Union. They see
the EU as a guarantee for the quality of life of the
future generations, a guarantor of peace and de-
mocracy.

41%
taken into account at EU level.

Bulgarians see the main issues facing the EU

and their country quite differently compared to
most of other Europeans. It is obvious, for exam- of the Bulgarians do not support a "European
ple, that they do not pay much attention to the economic and monetary union with one
issue of climate change. They are much more single currency, the euro". Only 28% on aver-
preoccupied with their economic situation. It is age in the EU are against the single currency
interesting to note that they are far less con- with 18% in the euro area countries. Czechs
cerned by migration, even though Bulgaria sits with 68% are the most sceptical, Estonians
at the EU’s outer border. Probably part of the with 6% against are the greatest fans.

WHAT ARE THE TWO MOST IMPORTANT ISSUES FACING YOUR COUNTRY
AT THE MOMENT IN YOUR OPINION?

Rising prices\cost of living

Health and social security
Economic situation
Pensions
Crime
Unemployment
Education
Immigration
Еnvironment, climate and energy
Taxation
Government debt
Terrorism
Housing
0 5 10 15 20 25 30 35 40 45 50
Source: Eurobarometer 92

 BBULGARIANS ARE THE GREATEST OPTIMISTS ABOUT THE EU‘S ECONOMY

(ONLY THE ANSWERS STATING THE SITUATION WITH THE EUROPEAN ECONOMY IS VERY GOOD)

BG AT RO HU HR PL CZ IE EL EU28 BE DE ES IT SE UK FI FR
13 12 12 11 8 8 7 7 7 4 2 2 2 2 2 2 1 0

 AND ONE OF THE MOST PESSIMISTIC WHEN IT COMES TO THEIR OWN ECONOMY
(ONLY THE ANSWERS STATING THE SITUATION IN THE NATIONAL ECONOMY IS VERY GOOD)

LU NL DK AT MT PL CZ DE SE EU28 BG EL FR LV LT PT SK ES
33 29 23 19 13 13 12 11 11 6 1 1 1 1 1 1 1 0
Source: Eurobarometer 92
 ECONOMY

A GLITCH ON BULGARIA’S
EURO PATH
PRIME MINISTER BOYKO BORISSOV
UNEXPECTEDLY “FREEZES”
BULGARIA’S ADVANCE INTO
THE EURO AREA

//In this section:

Bulgaria gliding on the waves

of the economic cycle

The loophole of in-house

procurement

 Bulgaria and the global slowdown

Source: Eurostat
38 KQ ECONOMY

U
Until very recently, Bulgaria’s path
to the Exchange Rate Mechanism
(ERM II), the training grounds
A GLITCH ON before entry into the Eurozone

BULGARIA’S
and the EU’s Banking Union,
seemed assured. The technical requirements were

EURO PATH met, the final obstacle being the capitalization of

the two problematic lenders – First Investment
Bank (Fibank) and Investbank, which were found
to have significant capital shortfalls following last
PRIME MINISTER year’s comprehensive assessment conducted by
BOYKO BORISSOV the ECB.

UNEXPECTEDLY At the end of January, however, Bulgaria’s bid to

“FREEZES” BULGARIA’S
ADVANCE INTO THE EURO
AREA DESPITE POSITIVE
SIGNALS FROM BRUSSELS
NIKOLAY STOYANOV,
VERA DENIZOVA
join the euro area suddenly steered away from
the quiet channels of technical preparation and
hit a wall following a U-turn by Prime Minister
Boyko Borissov. The stumbling blocks were sev-
eral little publicized changes to the legal frame-
work that technically “untied” the Bulgarian lev
from the euro. They sparked speculation and
unfounded fears about the stability of Bulgaria’s
currency board system, which has been an an-
chor for the local economy since the late 1990s.
After several weeks of ever increasing crescendo
and feeble government reaction, Mr Borissov
came out and said that “as long as there is no
absolute consensus, confidence in the euro area,
we will not force our entry”.

QThe Executive
Vice-President
of the European
Commission Valdis
Dombrovskis (on
the left) had to
intervene in order
to dispel anti-euro
sentiments in
Bulgaria | Photo by
Nadezhda Chipeva
The prime minister’s statement was, to put it
mildly, surprising, considering it came at a time
when negotiations and preparations for the Bul-
garia’s entry into ERM II were in their final stage.
Many observers took that to mean one of two
things – either Bulgaria doesn’t have enough ex-
ternal support to enter the Eurozone and is now
trying to backpedal, or that there is no political
will to finish the process.
The first theory seems less likely. There are
strong signals from Brussels that Bulgaria has
a very good chance of joining the Banking Un-
ion and the exchange rate mechanism, if not by
April 30, the date originally set by the Minister
of Finance Vladislav Goranov, then by mid-year.
The Executive Vice-President of the European
Commission, Valdis Dombrovskis, who is directly
overseeing Bulgaria’s accession to the euro area,
A HANDFUL OF EXPERTS AND
POLITICIANS EXPLOIT THE
OPPORTUNITY TO AWAKEN FEARS
OF DROPPING THE BULGARIAN LEV’S
FIXED EXCHANGE RATE AND CAST
DOUBT ON THE BENEFITS OF EURO
ADOPTION.
КQUARTERLY 39
told Capital newspaper that Sofia is following the
initial schedule, the implementation of its com-
mitments was “at an advanced stage” and there
is no reason for delays.
Mr Borissov’s backpedaling seems to follow his
habit of quelling any tension arising on a po-
tentially explosive topic, even if it contravenes
common sense and Bulgaria’s long-term interest.
So far, this doesn’t mean that Bulgaria is aban-
doning its plan to join ERM II – there is no such
statement from the government. However, the
prime minister’s wavering encouraged euroscep-
tics to step up their campaign against the Euro-
zone and even start a petition for a referendum
on joining the euro. Moreover, other EU capitals
are wondering if Bulgaria, which had insisted
on joining the euro, is still certain of its goals.
Without determination, Sofia could lose support,
because after joining ERM II a lot more reforms
will have to be made to prepare Bulgaria’s sub-
sequent entry into the euro area. The other EU
member states are wary of Bulgaria promising a
lot and then backtracking as happened after EU
accession in 2007.
A possible “freeze” of the government’s efforts to
adopt the euro could irk foreign investors, who
will take this into account when exploring the
country as a destination where future reforms
are expected to improve the local business en-
vironment. At the end of last year, for example,
rating agency Standard & Poor’s upgraded Bul-
garia’s credit rating by one degree, taking into
account the country’s progress in preparations
to join ERM II.
PR CRISIS
It all started with an amendment to the Law on
the Bulgarian National Bank which stated that
the lev’s fixed exchange rate to the euro will be
abolished following the country’s entry into ERM
II.
The change was necessary and requested by the
ECB in order to demonstrate Bulgaria’s central
bank independence in dealing with the national
currency. However, the amendment was submit-
ted between two readings in parliament of a com-
pletely different law and was not accompanied by
any assurance that no one, in any form, was plan-
ning to change the current fixed exchange rate of
1.95583 levs to the euro. This opened the door for
wild speculation.
Economic and political populists quickly seized
their chance to gain ground on people’s fears,
which mostly go in two directions. Firstly, the
exchange rate will be renegotiated upon en- > 40
40 KQ ECONOMY/EURO
>
Once again, the benefits of
the euro
The classic benefits of the euro are clear – a better
credit rating and cheaper loans, more invest-
ment and lower transaction costs. These effects,
in addition to the reforms and legal amendments
undertaken in the process, improve the business
environment.
But what Bulgaria would miss if it remains in its
current position is just as important. Better banking
supervision, for example. Bulgaria’s most significant
banking problems since 1990 have been caused
by institutions with local ownership. The tempta-
tion of bankers to channel depositors’ resources
to their other endeavors is always present and the
local regulator will always be under pressure from
oligarchic interests. ECB supervision is not perfect,
it doesn’t fully eliminate the risks but it definitely re-
duces them. Another benefit is that staying in ERM
II will involve more reform commitments and follow-
up on entry into the mechanism. For example, legal
amendments aimed at improving the governance of
state-owned companies. Although such amend-
ments are steps in the right direction themselves,
they really depend on how they are implemented.
The same applies to anti-money laundering, finan-
cial sector supervision and more.
Moreover, strategically, a deeper question concerns
Bulgaria’s vision for its future outside the Eurozone.
Establishing close cooperation with the ECB, and
subsequently joining the Eurozone, is a logical exit
from the currency board that geopolitically binds
Bulgaria to the core of the EU and gives the country
a seat at the decision-making table. There are
several alternatives to this and it is not clear what
the benefits are. Maintaining the status quo leaves
Bulgaria with no monetary policy and no access to
ECB liquidity or bailouts. In the event of economic
turbulence, this doesn’t help the economy one
iota. The other option – switching to some form of
floating exchange rate, has not been suggested by
anyone, not even the harshest critics of the euro. So
– the ball is in Borissov’s court once again.
> 39 try in ERM II and people’s lev savings will
depreciate. Secondly, prices will increase signifi-
cantly and the purchasing power will drop like a
rock – a fear that has persisted despite numer-
ous rebuttals using statistics from countries that
have already accepted the euro.
Formal statements that this exchange rate will
not change and Bulgaria will keep its currency
BULGARIA WILL HAVE TO (ONCE
MORE) CHOOSE BETWEEN A
BETTER ECONOMIC FUTURE AND
MAINTAINING THE STATUS QUO.
board arrangement were countered by allega-
tions of hypothetical backstage agreements and
guaranteed depreciation of the lev, because ERM
II allows for fluctuation of the exchange rate of
the candidate country’s currency to the euro
within a corridor of +/- 15%.
In short, both institutions driving the procedures
for Bulgaria’s membership in ERM II – the Minis-
try of Finance and the Bulgarian National Bank,
became prisoners of their own strategy to keep
it quiet. Any talk about scrapping the currency
board and a potential depreciation raises very
real fears, because only 23 years ago Bulgaria
suffered a severe hyperinflation that wiped out
people’s savings, and pushed many to consider
turning their levs into euro or dollars “just in
case”. Turning these fears into panic can shake
not only the political resolve to join the Eurozone
but the actual currency board as well. In less
than a week in the middle of February more than
one billion levs were exchanged and if the panic
had continued, BNB would have had to decide to
use some of its not so liquid currency reserves to
meet the demand for euro.
The noise has shifted to the core of the matter
– arguments for and against the euro area. The
fiercest critics are among the devotees that have
long ago taken a stand against Bulgaria adopting
the euro. And the play with people’s fears went
up a notch –”What if the Eurozone ends up col-
lapsing?” or “What if we become like Greece?”
Spearheading the anti-euro campaign, Steve
Hanke – professor at Johns Hopkins and senior
fellow at Cato Institute, often wrongly promoted
as the “father of the Bulgarian currency board”,
proclaimed that Bulgaria is left to the mercy
of Frankfurt (where the ECB is based) and the
Bulgarian lev could be devalued through secret
agreements.
These “what if” arguments are valid and theoreti-
cally sound, albeit rebuttable in practice. If one is
a true eurosceptic and believes in the imminent
collapse of the euro area, then it makes sense
to preserve the national currency. The problem
with this logic is that Bulgaria already has a deep
attachment to the European economy. In such
a catastrophic event, the existence of the lev,
whether fixed or floating, will not do anything to
mitigate the fallout.
 КQUARTERLY 41

The issue of fiscal discipline is a natural conse-

quence of the accumulated mistrust of politi-
cians along many lines. However, assuming that
the primary objective of the government is to
preserve a fertile corruption environment, they
would be better off doing it outside of the tighter
controls of the euro area and the single banking
supervision.

IN SEARCH OF CONSENSUS
It’s unclear what kind of policy the prime min-
ister is seeking. Typically, politicians make big
strategic steps like this with the clear awareness
that not everyone in society will agree but that
they’re in the country’s best interests long-term.
Eva Elges, Managing Director of Cargill in
In 1997, when the currency board was introduced
Bulgaria:
in Bulgaria, there was no consensus, too, but after
23 years of operation the rigid monetary mecha- MARKET NEEDS MORE
nism has become an article of faith. TALENT
What was the biggest event in your sector in the
Even though polling results show that only 43%
last quarter and why?
of Bulgarians support the euro, there is virtually
unanimous support for euro adoption among the The continued market expansion. More global com-
panies have noticed the strong skills, experience,
parliamentary parties. Only Volya, a fringe popu-
and potential of talent in Bulgaria. Like Cargill, other
list party has announced that it would propose
companies are seeing Bulgaria is a location where
a referendum on the euro, which would also in-
they can establish capabilities centеrs that are not
clude questions on whether illiterate people
just cost effective, but can also deliver a lot of value.
should be able to vote, whether there should be
video surveillance when opening ballot boxes
and whether waste imports should be allowed. What do you expect in the next big development
in the sector over the next quarter or further and
So far, the prime minister’s statement has not why ?
been construed by relevant institutions as the People development. With the industry’s acceler-
cue to cease preparations for Bulgaria’s euro ated growth, our market needs to continue to meet
accession. “The Bulgarian National Bank has no growing demands for talent. And these needs
comment on the Prime Minister’s statement. combine higher education, specialized skills and
The work on fulfilling the tasks related to join- languages with agile thinking, lean mindset and soft
skills.
ing ERM II and the Banking Union continues in
accordance with the established schedule,” said
central bank governor Dimitar Radev in response Eva Elges is the Managing Director of Cargill in Bulgar-
to questions from Capital. ia and Cargill Business Services Sofia Center Lead. She
also leads the biggest function the center – Finance,
The last hurdle before joining the ERM II is the which is supporting Cargill in the Europe, Middle East,
requirement to recapitalize First Investment Africa and Russia region.
Bank (Fibank) and Investbank (see more on Eva joined Cargill in 2018, bringing more than 20 years
p106). Even if they fail to do that through pri- of experience in the accounting and reporting field,
vate investors, the amount could easily be raised and a decade of experience working for global com-
through budgetary or quasi-budgetary funds as panies, including Interbrew, Bosch, and Bombardier.
a last resort. Eva is half German, half Hungarian, and married to a
Romanian. She and her family relocated to Bulgaria
Despite the turbulence, at least publicly Sofia to join Cargill. One of Eva’s favourite quotes is, “With
is still en route to the Eurozone and there is no passion you can win everything.”
change in Brussels’ support. A day after Boriss-
ov’s comments, Mr Dombrovskis posted on Twit-
ter a photo with finance minister Goranov. “Euro
accession is open to any EU country working
towards it; the European Commission supports
this effort to get ready for a successful member-
ship,” the commissioner wrote.
PThe growing sector of auto parts
manufacturers could be seriously
hit by the ongoing economic
slowdown | Photo by Tzvetelina Belutova

BULGARIA of an economic crisis is minimal, but reduced global

GLIDING ON THE
growth will be the new reality in the coming years.

WAVES OF THE According to economic outlooks unveiled by vari-

ous institutions, accelerated growth is to be ex-

ECONOMIC CYCLE pected in some developing countries this year,

but Bulgaria will not be among them. Realisti-
cally, the outlook for Bulgaria is set at 3% growth,

THE LOCAL ECONOMY to be driven by record-low unemployment, rising

wages and government spending on upcoming
CONTINUES TO major infrastructure projects such as highways.

MOVE IN SYNC WITH However, many of Bulgaria’s significant issues ac-

EUROPEAN TRENDS, cumulating over the past decade will probably re-

WHILE OPPORTUNITIES main unaddressed in 2020. Demographic trends

clearly outline the future of the Bulgarian labor
FOR REFORMS SLOWLY market: the number of workers is in decline and

DWINDLE qualified personnel will become more and more

expensive and difficult to retain. Meaningful re-
forms in a number of sectors such as the judicial
LILIYA IGNATOVA
system, health care and education also remain in
the background as an abstract idea embedded in

U
Uncertainty is no longer a surprise
but rather the normality for the
global economy. Last year, none
of the significant geopolitical
headaches were resolved and
they were left hanging in 2020 - Brexit, trade
disputes, and now Iran. These issues, individually
and cumulatively, are capable of derailing
macroeconomic projections, which are otherwise
pretty much in concurrence. Namely, the likelihood
government strategies for some time in the fu-
ture. The prospects for structural changes are
also weighed down by the regular parliamentary
elections due in 2021.
And while Bulgaria is gliding on the wave of the
А POSSIBLE “NO” OR A NEW DELAY
FOR THE EUROZONE WOULD HAVE A
STRONG NEGATIVE EFFECT FOR THE
ECONOMY.

WORLD BANK ECONOMIC OUTLOOK
(GDP growth rate)
Eurozone Bulgaria Eurozone outlook Bulgaria outlook
8
-2
-4
-6
'08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21
Source: Bulgarian Ministry of Finance
current economic cycle, the world is slowly but
steadily moving to new priorities like digitaliza-
tion, green and circular economies. The economic
upturn is coming to an end. And as the window
of opportunity for making structural changes
slowly closes, Bulgaria risks remaining in an end-
less game of catch-up with advanced economies
in both Europe and the world in general.
NOT EXACTLY A CRISIS
Weaknesses in international trade and indus-
trial production continue to weigh down on
global growth. This does not imply an impending
recession. Moreover, the IMF expects the global
economic growth rate to rise slightly from 3% in
2019 to 3.4% in 2020. But that’s not a cause for
celebration. Acceleration is driven by develop-
ing countries, whereas rich countries are slow-
ing down, which in the long run is unlikely to be
sustainable.
None of the major international and local institu-
tions expect Bulgaria to be among those report-
ing acceleration. One of the most positive out-
looks comes from the Ministry of Finance, which
is betting on a slowdown in economic growth
from 3.4% in 2019 to 3.3% this year. The IMF pre-
dicts 3.2%, the European Commission and the
World Bank - 3%. There are variations, but even
an optimistic 3.5% growth will not be enough to
accelerate Bulgaria’s convergence with other EU
countries, according to James Jolovski, Doctor of
Economics.
GROWTH ENGINES
Similarly to the past several years, economic
growth in Bulgaria will depend on consumption
and investment in 2020. Household budgets
are growing on the back of record-low unem-
ployment and rising wages. On the other hand,
Latchezar Bogdanov, chief economist at Sofia-
based Institute for Market Economics points to
construction, where, he maintains, activity will
КQUARTERLY 43
Georgi Angelov, Open Society Institute:
BECOMING A MEMBER OF
ERM II AND THE BANKING
UNION WOULD BE A
STRONG POSITIVE SIGNAL
TO FOREIGN INVESTORS
Undoubtedly, the possible entry of Bulgaria
into ERM II and the European Banking Union
would have a positive impact on the Bulgar-
ian economy, even though the benefits have
already been partly absorbed in advance. The
fulfilment of the conditions set by the euro
area finance ministers, in addition to the asset
quality review of local banks, in themselves
have a positive effect on the business environ-
ment in Bulgaria.
However, Bulgaria’s accession to ERM II would
also involve additional commitments for struc-
tural reforms and would create opportunities
for access to funding to finance the reforms.
These factors would be strong incentives
for implementing structural changes, which
would improve the Bulgarian economy’s
potential. Moreover, entry into ERM II and the
Banking Union would be a strong positive
signal to foreign investors and would improve
the country’s credit rating.
be rising (see the sidebar with his opinion).
The government is also coming to the rescue
with a 10% increase in the salaries of public sec-
tor employees and a 6.7% increase in pensions.
In addition, government expenditure for invest-
ment will be turning to the local economy this
year, unlike in 2019, when billions were directed
to foreign suppliers for the purchase of fighter
jets. > 44
44 KQ ECONOMY/ECONOMIC CYCLE
Latchezar Bogdanov,
Institute for Market Economics:
THE REAL INCREASE IN
CONSTRUCTION IS JUST
BEGINNING
The obvious short-term drivers of economic
growth in Bulgaria are domestic consumption and
public expenditure on infrastructure. However,
in my opinion, there are two more engines that
are underrated. In the short term, because of
the sharp increase in property prices in the last
three years and the relative settling in recent
months, a misperception has been created that
the effect from the housing boom has already
been recorded in the economic data. Actually,
the real increase in construction activity is just
beginning and in 2020 and 2021 we will probably
see a serious contribution of construction to the
value-added in the economy.
The second factor is more important - contrary to
gloomy expectations, new investment in export-
oriented industries can be increased. Bulgaria can
take advantage of its long-term trump cards - be-
ing part of the common European market and the
low costs for business. If that happens, it would
be in high-productivity sectors precisely because
of the record-low unemployment rate and rising
wages. This would be the transformation of the
structure of the Bulgarian economy which we
have been increasingly talking about in recent
years - towards increased use of knowledge,
technologies and capital.
“A number of investment projects are entering
their implementation phases, such as the gas
pipelines to Greece and Serbia, parts of the He-
mus, Struma and Europe highways,” says econo-
mist Georgi Angelov of Sofia-based Open Society
Institute. Moreover, Bogdanov notes, the absorp-
EUROPEAN COMMISSION'S TAKE ON INFLATION
(Harmonised index of consumer prices, annual percentage change)
Eurozone Bulgaria Eurozone outlook Bulgaria outlook
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
'15 '16 '17 '18 '19 '20 '21
Source: Bulgarian Ministry of Finance
> 44 tion of EU funds usually accelerates in the
last three years of the programming periods.
REPUTATIONAL BENEFITS
One of the biggest unknowns this year is wheth-
er Bulgaria will finally receive the long-awaited
approval for membership of the European ex-
change-rate mechanism (ERM II) and the Euro-
pean Banking Union. The answer is set for April,
according to Finance Minister Vladislav Goranov.
A “yes” from the ECB, the countries of the euro
area and Denmark would send a clear positive
signal about Bulgaria’s prospects to foreign in-
vestors and rating agencies. It would also bring
more pressure from the EU for structural reform.
However, the positives of such an event have al-
ready been factored into expectations. Accord-
ingly, a possible “no” or a new delay would have
a much stronger negative effect. Currently, that
seems unlikely, as the last formal obstacle - in-
creasing the capital of Fibank and Investbank to
meet ECB requirements, is being tackled, albeit
behind the scenes.
EXTERNAL RISKS ARE NOT WHAT
THEY ONCE WERE
Last year’s major external issues are still in focus
in 2020: the possible negative economic conse-
quences of a hard Brexit for both Europe and the
UK, and international trade tensions.
“The US and China are moving toward some
kind of initial understanding, but this may not
be good news if it puts Europe at the center of
US trade policy. Duties on imports of European
cars, for example, would have a severe negative
effect on the German economy, which is already
on the brink of recession,” says Georgi Angelov.
According to Mr Bogdanov, the risk in this regard
is related to the change in the “rules of the game”
in global trade in the face of severe restrictions

FOREIGN TRADE IN GOODS
(Billion levs)
Export Import
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
I.14 I.15 I.16 I.17 I.18
Source: Bulgarian Ministry of Finance
and disturbances in international relations not
envisioned in the past 30 years.
However, the results from the Bulgarian Indus-
trial Association’s most recent annual business
survey show that these issues are not signifi-
cant to Bulgarian businesses. Considering that
the Brexit referendum took place in 2016, the UK
leaving the EU can hardly be a shock and every-
one has had enough time to adapt. The 800 ex-
ecutives who took part in the survey are far more
worried about European policies: 36% of them
expect business indicators to worsen because of
possible new regulations and restrictions associ-
ated with the increasing number of “green” mem-
bers of the European Parliament.
However, the state of the European industrial
sector is important for Bulgarian export-orient-
ed industries. “Undoubtedly, stagnation in Euro-
pean industry will shrink demand for the prod-
ucts of many Bulgarian engineering companies,”
says Bogdanov. However, such a situation can
be avoided by investing in capacity expansion of
existing plants in Bulgaria to higher value-added
products, i.e. relocation of the industrial base of
western European manufacturers to Eastern Eu-
rope.
From that perspective, another year of record-
low interest rates is good news for lending to the
private sector. However, resistance is growing to-
wards the policies of big central banks and ques-
tions arise regarding their diminishing efficiency
and long-term effects. For example, Mr Yolovski
warns of declining returns of pension funds that
invest in more conservative instruments.
In macroeconomic terms, Bulgaria looks good
and could potentially withstand an economic
shock, but the country still has many structural
problems - inefficient and unsustainable so-
КQUARTERLY 45
I.19 X.19
James Jolovski, Doctor of Economics:
FAILURE TO MEET THE
TARGET FOR CAPITAL
EXPENDITURE SET IN THE
BUDGET IS AN ECONOMIC
RISK
There is a risk to public finance in Bulgaria as
a result of the systematic failure to meet the
target amount of capital expenditures set in the
national budget against the backdrop of raising
and exceeding the targets for current expenses.
This trend significantly reduces the ability of
the government to manoeuvre in the event of
adverse economic developments.
The government is optimistic about Bulgaria’s
accession to ERM II by the end of April. However,
there is a lack of information on this issue. The
results from the ECB’s stress test and asset
quality review were declared as positive. At the
same time, the results obviously proved to be
an unexpected obstacle to Bulgaria’s acces-
sion to ERM II. The efforts of one of the two
troubled banks to increase their capital raise
some doubts, considering that their shares are
issued at a value well above the market price. In
any case, a delay in the response to Bulgaria’s
candidacy to join ERM II and the Banking Union
after the end of April would give a negative
signal to the economy, which would lose part
of the confidence gained from the increase in
Bulgaria’s credit rating.
cial systems, a deep-rooted feeling of injustice
and corruption and, consequently, the lowest
incomes and the worst demographic outlook in
Europe. The last years before the economic cycle
turns downward are also the final chance to set
longer-term goals and take more decisive steps
in order to achieve them.
46 KQ POLITICS

THE LOOPHOLE OF IN-

HOUSE PROCUREMENT
THE IN-HOUSE PROCUREMENT
PROCEDURES – THE AWARDING
OF PUBLIC CONTRACTS WITHOUT
TENDERS, HAS BECOME A FAVORITE
WAY TO ALLOCATE MONEY IN A
NON-TRANSPARENT MANNER
MILA CHERNEVA

A
About 3 billion levs (1.5 billion
euro) without VAT – this is the
overall value of the contracts
which Bulgarian authorities have
signed with state or municipally-
owned companies in the last three years. These
so called in-house deals permit skipping the
bidding procedures when the contracting party
and the contractor are related, for example when a
municipality hires its own waste management unit
to implement a project. This type of procedure is
perfectly legal; it can save the municipal or state
institutions time, money and effort. But the recent
proliferation of this procedure in Bulgaria shows
the authorities are using it to circumvent public
procurement rules to distribute money to favorites
in a totally non-transparent manner.
Take the case of the government’s Road Infra-
structure Agency (RIA). It has signed three con-
tracts for a total of over 2.7 billion levs without
VAT with state-owned highway construction
company Avtomagistrali – the most impressive
procurement awarded to a single company in the
last 30 years. Avtomagistrali is supposed to build
about 220 km of the Hemus motorway in north-
ern Bulgaria, as well as work on 74 smaller road
projects. The current pace of construction of sec-
tions of the highway shows no signs of acceler-
ating but competition in the construction sector
has been further reduced to an exclusive list of
Bulgarian companies which will work as unoffi-
cial subcontractors, evading the public tendering
process.
HOW IT WORKS
In countries like Finland, Germany and the UK,
in-house public procurement is used success-
fully, Dr. Irena Georgieva, a lawyer and special-
ist in the field, explains. The benefits of in-house
procurement are that the procedures are faster
– there is no waiting for a tender, no appeals
are submitted to the competition authority, no
demands to lower the price are issued. “If this
construct is used legally and adequately, it would
lead to efficient spending of budgetary funds,
without violating any principle of public procure-
ment,” says Ms Georgieva.
However, Bulgaria’s environment is slightly dif-
ferent. “The public procurement sector continues
to be a reflection of the widespread corruption
problems of the government,” the Center for the
Study of Democracy, a Sofia-based think-tank,
wrote in 2016. In 2011, 2014 and 2016, various
legislative changes were adopted regarding in-
house tenders, fully implementing the respective
EU rules. “It should be borne in mind that if the
in-house contract meets all the requirements of
the EU and national legislation, then the size of
the project and the allocated funds in any case
do not matter,” Ms Georgieva explains.
NOT FOR CONSTRUCTION?
THINK TWICE
Eight years ago, at the introduction of the in-
house practice, Tomislav Donchev, then Minister
of European Funds, said: “No one is imagining
that it is right and beneficial (to the private sec-

QState-owned Avtomagistrali received
the biggest procurement contract
awarded to a single company in the last
30 years without any tendering | Photo by
Tzvetelina Belutova
tor, contracting authority or taxpayer) for mu-
nicipal and state-owned companies to repair and
build roads, railways or anything similar.”
This is exactly what is happening now. The first
contract for 134 km of the Hemus motorway is
valued at an estimated 1.15 billion levs without
VAT and the sum may even grow, according to
the agreement signed by RIA. It was awarded in
December 2018, after the government decided to
spend part of the budget surplus faster than a
typical tender would allow. The other two incred-
ibly expensive contracts that Avtomagistrali has
received are worth respectively 483 million levs
and 1.15 billion levs, with the first one for 74 road
repair projects and the second for construction
of a further 89 km of Hemus.
Capital newspaper asked Mr Donchev, who is
now Deputy Prime Minister, whether the current
practice has deviated from the initial plans. He
replied: “In this respect, the in-house allocation
of highway construction contracts follows the
spirit of the law, as the company is fully public.”
In order to award in-house contracts, the con-
tracting authority needs to exercise control of
the company in question, be it state-owned or
municipal, and make sure that more than 80%
of the company’s business is formed by activities
for the same contracting entity or other entities
controlled by it. In this case, Avtomagistrali is
under the umbrella of the Regional Development
Ministry together with its contracting authority,
the Road Infrastructure Agency.
A BAD IDEA
The rationale behind this decision was that
northern Bulgaria urgently needs a highway,
because the region’s lack of a modern infra-
structure connection to the rest of the country
impedes its economic development. Thus, the
government went for the easy, but questionable
method – without an open tender procedure,
without evaluating offers by a range of com-
panies and without risking any appeals. Part
of the reason for this decision lies in the fiscal
rules – the government didn’t want to delay the
THE IN-HOUSE PROCEDURES FURTHER
CLOSE BULGARIA’S PROCUREMENT
MARKET FOR FOREIGN COMPANIES
КQUARTERLY 47
spending of the money, because the expenditure
would increase the budget deficit just before the
expected invitation to Bulgaria to launch its ac-
cession to the Eurozone. But nothing prevented
Avtomagistrali from tendering the construction
in an open way, as many private companies are
required for the works.
The progress of the project is actually not that
fast. Construction is shockingly slow – within a
year of the signing of the first contract only a 1.6
km-long stretch is being built, according to of-
ficial construction permits. In comparison, the
last completed section of the Hemus motorway,
which is 9 km long, was designed and built in a
year and a half.
Since there was no tender, it is not clear whether
the money is being spent in the most efficient
and appropriate way. There is no way to cut the
cost through competition and market principles.
When open tender procedures were used, the
cost of construction of two other stretches of He-
mus varied between 7 and 9 million levs per kilo-
meter. In the case of Avtomagistrali’s contract,
the cost stands at 10 million levs per kilometer
but this is not the final price. The funds were al-
located from the budget without a clear estimate
of how and why it would cost so much.
Secondly, in-house contracts do not allow the use
of subcontractors. However, Avtomagistrali is go-
ing around the law and occasionally breaking it.
It has signed contracts for equipment rentals but
in practice they are subcontractor agreements.
Thus, the government-owned firm is functioning
as a broker for road construction for billions of
levs without any transparency and responsibil-
ity taken by the chosen private companies which
have been put on an exclusive list through secret
arrangements.
Unofficially, many construction companies admit
that they are involved in the construction of He-
mus, despite denials by Avtomagistrali manage-
ment.
Third, the money is being spent in a non-trans-
parent way. The Road Infrastructure Agency has
not even published two of the three contracts
it signed with Avtomagistrali, saying that public
procurement law doesn’t cover in-house con-
tracts.
Moreover, private companies are subject to
stricter scrutiny, in theory at least. With a state-
owned company, the authorities will need to fine
themselves in case of poor quality construction,
actually paying for the same thing twice.
48 KQ ECONOMY/GLOBAL
BULGARIA
AND THE
GLOBAL
SLOWDOWN
SOME INDUSTRIES
ARE ALREADY
LOSING STEAM
INSTITUTE
FOR MARKET
ECONOMICS
O
Over the past year economic
tensions among the major glob-
al economies have intensified,
which has led to a considerable
decline in economic activity. The
increased uncertainty has taken its toll on global
investment, manufacturing and trade. Conse-
quently, the modest rebound in global GDP growth
in the first half of 2019 appears to have been short-
lived, and the near-term outlook has turned no-
tably cooler than expected in the spring. However,
both monetary and fiscal stimuli in a number of
major economies, including the US and China, as
well as resilient labor markets and accommodative
financing conditions in advanced economies, are
expected to limit the depth of the global slowdown.
As the EU is Bulgaria’s key trading and investment
partner (it accounts for close to 70% of Bulgarian
export of goods), the deteriorating conditions in
major European economies, especially in certain
manufacturing sectors, will directly affect compa-
nies that are part of complex international value
chains in the short term. A potential industrial de-
cline and inevitable restructuring will particularly
affect businesses that supply capital and interme-
diate goods to the producers of cars, machinery
and equipment where the importance of leading
European industrial economies is even higher.
The share of such companies has grown in the last
decade, as the Bulgarian economy went through
a deep structural transformation. Manufacturing
has gradually shifted away from labor intensive
activities towards products with higher value add-
ed. During the previous expansionary cycle before
2008 the Bulgarian economy was mostly depend-
ent on the constant inflow of foreign capital; since
2009 the key driver of growth is the integration
into the production supply chains of the leading
EU economies. Similar trends affect services, as IT
development and business processes outsourcing
experienced a huge expansion in both export value
and employment.
During the period 2016-2018 the ranks of Bulgaria’s
Top 100 companies were gradually filled with more
and more export oriented firms. For example, the
share of turnover of companies in the sectors of
energy, telecommunications, and food and drinks
in 2016 was around 28% of the turnover of the Top
100 companies in the country, while in 2018 it was
26%. During the same period the share of turnover
of companies in the sectors of metals, machinery,
and pharmaceuticals has increased from 22.6% to
around 26% in 2018.
In the short term, the deeper integration of Bul-
garian businesses into EU manufacturing and
business services value chains goes hand in hand
with higher exposure to negative developments
in the advanced economies, and mostly Germany.
From a broader prospective, a prolonged period of
stagnant investment and private consumption in
the EU will pose challenges to the entire export-
ing sector in Bulgaria, as demand will be subdued
 КQUARTERLY 49

while competition to retain or increase market
share will intensify.
As Bulgarian exports to the United Kingdom are
rather modest, the potential negative effects from
Brexit will affect Bulgaria through the overall de-
terioration of manufacturing sales to the UK in a
scenario of an unfavorable trade deal post-2021.
Nevertheless, the Bulgarian economy has its
strengths and comparative advantages, which may
counter some of the effects of the euro area slow-
down. A sound fiscal position and resilient eco-
nomic growth – without a build-up of sizable mac-
roeconomic imbalances, are notable in comparison
to the indebtedness and anemic growth in most of
the euro area. The performance of heavy indus-
try, especially in processing fuels and metals, the
transformation of manufacturing (gaining higher
share of CEE exports into the leading EU markets),
and the positive development of ICT (being the
most dynamic sector in recent years), will be cru-
Shutterstock
volumes remain similar to those of 2018. Exports
from Bulgaria also remain for the most part sta-
ble, especially within the EU despite negative de-
velopments in German and Italian manufacturing
export industries throughout most of last year.
Only two manufacturing sectors (sports goods
and transport equipment) saw a 30-50 percent-
age points increase in sales, while the rest were, at
best, stagnating.
Employment data also shows early signs of stag-
nation. The most interesting trend is the decline
in employment in the manufacture of fabricated
metal products, despite stable productions rates.
On the one hand, this very well may be a conse-
quence of investments in capital that lead to in-
creasing productivity. On the other hand, it is also
possible that businesses are expecting a slowdown
and lower demand for their product, reducing their
labor force in advance. At the same time, in the
second quarter of 2019 the output of rubber and
plastic products and electrical equipment (both
related to the automotive sector, among others)

cial for shaping the Bulgarian economy in the near
future. These are also the key features of a positive
scenario for steady economic convergence even if
the EU enters a prolonged period of stagnant new
investment and industrial slowdown.
EARLY SIGNS OF PAINS
Bulgaria is already feeling the effects of the syn-
chronized global slowdown (a term coined at the
IMF). The latest 2019 data suggests that some in-
dustries are already losing steam - the decline in
basic metals production, particularly during the
summer, shows some exposure to the global slow-
down.
For most manufacturing sectors 2019 production
are approaching 30 000 employees each, with lit-
tle sign of slowdown in expansion.
Only two sectors – apparel production and manu-
facturing of leather products, have been rapidly
losing workers (the former is down by more than
10 000 in less than two years), but this has to do
more with the increase of labor costs in Bulgaria
rather than with the global slowdown.
AUTOMOTIVE, ELECTRICAL
EQUIPMENT AND MACHINERY
PRODUCTION
Three sectors will be most likely affected in a
negative scenario of a global and EU manufactur-
ing downturn – automotive parts, electrical > 50

К | EXPORT OF GOODS К | GROWTH

BY CATEGORIES 2010-2018 IN KEY EXPORT CATEGORIES
in EUR million 2010 = 100

Food, drinks and tobacco Raw materials Food, drinks and tobacco Raw materials
Mineral fuels, lubricants and related materials Mineral fuels, lubricants and related materials

Chemicals and related products, n.e.s. Other manufactured goods Chemicals and related products, n.e.s. Other manufactured goods

Machinery and transport equipment Machinery and transport equipment Total

100 300
90 2 600
6 369
250
80
70
200
5 910
60 10 283
50 150
40 1 233
2 840 100
30 2 102
2 395
20 1 467 2 125 50
10
2 007 3 287
0 0
2010 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Eurostat
Source: Eurostat
50 KQ ECONOMY/GLOBAL SLOWDOWN

К | STRUCTURE OF EXPORTS IN 2018

Electrical machinery and Copper and articles Cereals Plastics and Apparel,
equipment and parts thereof articles thereof knitted or
thereof crocheted

Other Ores, slag and

ash
Pharmaceutical
products

Apparel, not knitted

or crocheted
Machinery, mechanical Vehicles and parts
Mineral fuels and oils appliances, parts and accessories
thereof thereof
Iron and steel

Articles of iron or
steel Furniture; bedding,
mattresses

Source: Trade Map, International Trade Centre, www.intracen.org/marketanalysis, categories by the Harmonized Commodity Description and Coding System (HS)

К | FASTEST GROWING INDUSTRIAL mediate and investment goods, and as such are
PRODUCTION ACTIVITIES IN BULGARIA AS deeply integrated in international value chains.
OF OCTOBER 2019
Exports of electrical machinery and equipment
2015 = 100
reached 3.1 billion euro in 2018 and became Bulgar-
Manufacture of rubber
and plastic products ia’s leading group of export products. The growth
Mining between 2013 and 2018 was the highest among key
of metal ores
Manufacture of motor vehicles,
export products, reaching 76%. Compared to 2008
trailers and semi-trailers
– the peak year for Bulgarian exports before the
Other
manufacturing 2009 crisis – exports of electrical machinery and
Manufacture of computer, equipment are 3.4 times higher and their share in
electronic and optical products

Manufacture of other
total exports grew from 5.9% to 11%.
transport equipment
100 110 120 130 140 150 160 170
The automotive industry was the second fastest
Source: NSI
growing among the big manufacturing sectors in
the last decade. Ten years ago it ranked 23rd in
К | DECLINING INDUSTRIAL Bulgaria’s exports with less than 1% of the total
PRODUCTION ACTIVITIES AS
value. In 2018 it reached a share of 3.1% after a 65%
OF OCTOBER 2019
growth in the period between 2013 and 2018.
2015 = 100, 2000-2019

Manufacturing of tobacco products Exports of machinery and mechanical appliances

Manufacturing of clothing
were slightly below 2.3 billion euro in 2018 and re-
Manufacture of leather and related products
mained number four product group in Bulgarian
Manufacturing of furniture
exports. They grew by 42% in the last five years;
300 since 2008 the value of those exports doubled. The
250 share of machinery and mechanical appliances in
total exports grew modestly – from 7.5% in 2008
200
to 8.1%.
150

100 The prospects of slow growth in the EU will de-

press new business investment, which particularly
50
affects the demand for capital goods. About 77% of
0
’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16 ’17 ’18 ’19
Bulgarian products are exported to the EU market
– some 87% in the automotive industry, 80% in the
Source: NSI machinery and mechanical appliances and 71% in
electrical equipment. EU automotive and machin-
ery production will probably be hit most severely
> 49 equipment and machinery which represent by uncertainties about the rules of international
23.4% of Bulgarian exports, or about 6.2 billion euro trade and the slowdown in global investment, and
in 2018, and are heavily dependent on external de- particularly investment moderation in China – the
mand. The downside impact on their performance two industries accounted for 480 billion euro, or
will be relatively strong, because they are export 25% of EU exports to the global market.
oriented and do not rely on domestic demand. At
the same time, they produce predominantly inter- As these three sectors are rather capital inten-
 КQUARTERLY 51

К | STRUCTURE OF MANUFACTUIRNG EMPLOYMENT IN BULGARIA, Q2 2019

Wearing apparel Metal items, without machinery Electrical appliances Repairs and Lumber Chemical
and equipment installing of and procuts
machinery wooden
and items,
equipment without
furniture

Cars, trailers and Basic metals Computers, Leather

semi-trailers electronics and
and optics leather
Machinery and equipment products
Food
Items from other Textiles, other Manufac- Printing
non-metal and mineral than apparel turing, not
materials elsewhere
classified
Rubber and plastic
Furniture Bevarages Paper and
paper items

Source: Eurostat

sive industries, the relative share in manufactur-

ing employment is slightly lower – about 16.5%, or
about 82 000 workers in the first half of 2019. It
should be noted, however, that these three sectors
added more than 20 000 jobs in the last six years
despite the long-term process of improving labor
productivity through capital investment.
Additionally, two other industries will be relatively
strongly affected in this scenario – the manufac-
ture of iron and steel products, and optical and
measuring instruments and appliances. They ac-
counted for 2% and 1.4% of Bulgaria’s total exports
in 2018, respectively, or about one billion euro com-
bined. About 86% of iron and steel products were
sold on the EU market, while for the optical and
measuring instruments the share was 66%. The
two industries employed about 65 000 workers
in the first half of 2019 and both have added jobs
since 2013.
Germany is the top export destination for all of
the five manufacturing product groups. The other
key markets are Italy, Romania and the Czech Re-
public – all major industrial economies in the EU
– and Turkey. It should be noted that the share of
Germany in all product groups has gradually in-
creased during the last five years.
>
ICT AND OUTSOURCING:
OPPORTUNITIES
Much of the growth and expansion of the ser-
vices sector of Bulgaria in the years following
the economic crisis has come from the ICT and
business process outsourcing sector. They account
for a significant portion of the record labor market
expansion in larger cities, Sofia in particular. These
activities, however, are also quite distinct in being
almost exclusively outward focused, catering to
foreign markets.
This in turn means that those sectors are not as
much dependent on the economic cycles of Bul-
garia as they are on the major markets they work
for: the UK, USA, Germany and the Netherlands,
to name a few of the largest. As a result of this de-
pendency, any major economic downturn in those
markets, especially ones triggered by a burst of a
bubble in the technological sector, will likely have
significant consequences for the Bulgarian ICT and
outsourcing sectors even if the country itself is not
in a major crisis.

CHEMICALS, PAPER, GLASS AND
SIMILAR PRODUCTS
Manufacturing of chemicals, paper and glass is
also highly dependent on global trends. However,
they are not that closely integrated to the key in-
dustrial economies of the euro area compared to
the export-oriented automotive and machinery
production. Markets are more diversified, with
stronger importance of neighboring economies, as
Romania, Greece, Turkey and Serbia are typically
among the major importers. This pattern might
alleviate a potential cut in orders from external
business partners in case of short-term shocks in
global demand, but a medium- to long-term EU-
wide manufacturing slowdown will neverthe- > 52
Given the uneven exposure of those sectors to
individual markets, it is hard to quantify the exact
dimensions of a possible slowdown in the techno-
logical field, but it is relatively safe to assume that
from 2020 onwards it will not add new employment
and expand production at the same rates that it
has achieved in the 2015-2019 period. At present,
according to estimates by sectoral organizations,
outsourcing and ICT services contribute about 5%
of the GDP of the country, and employ around 200
000 people, thus any risk to its well-being translates
into a systemic risk to Bulgaria’s economy as a
whole, and in particular to its growth potential.
52 KQ ECONOMY/GLOBAL SLOWDOWN

К | CHANGE IN MANUFACTURING tions have also increased substantially – by 3.4

EMPLOYMENT BETWEEN Q2 2009 AND Q2 2019
times since 2008. Exports of glass and glassware
%
more than doubled, while exports of paper and
Tobacco
products paperboard grew 2.3 times. Altogether, the five
Wearing
apparel industries accounted for more than 7.3% of Bul-
Leather and
leather products garian exports in 2018, or about 2.1 billion euro.
Items from other non-metal
and mineral materials
CONSUMER GOODS
Bevarages Bulgaria’s exports of consumer goods should not be
Furniture directly affected in the short term by a deteriora-
Basic metals tion of global trade conditions or slowdown in ma-
Prinitng jor EU export sectors such as transport equipment
Food
and machinery. A prolonged period of stagnating
Lumber and wooden items, growth in the EU, however, will subdue demand for
without furniture
Textiles, other products made by Bulgarian suppliers. Several im-
than apparel
Vehicles, portant factors should be considered here.
other that cars
Repairs and installing of
machinery and equipment
Paper and
First, exports of clothing and footgear are on a
paper items
Metal items, without
long-term decline. The major factor is the in-
machinery and equipment
creasing cost of labor. Competitive pressure is
Chemical
procuts gradually rising and industries are transforming
Machinery
and equipment by shifting into products with higher value added
Rubber
and plastic while investing in capital to replace manual labor.
Manufacturing,
not elsewhere classified Within the apparel industry, exports of knitted
Computers, electronics
and optics clothing grew by 18% since 2008, while exports of
Electrical
appliances not-knitted clothing fell by 5% during the same
-80 -60 -40 -20 0 20 40 60 period. Overall, exports were slightly growing both
Source: Eurostat in the last decade and the five-year period after
2013. However, the growth rate was close to zero
К | FASTEST GROWING SERVICES
and much lower than the average increase in ex-
EMPLOYMENT, 2009 - 2017
ports. The value of footgear exports increased by
number of employees
27% since 2008 – well below the average. Statis-
Computer programming, consultancy and related activities
tical data on end-markets is misleading, as some
Office administrative, office support and other business support activities
Employment activities
exports that are recorded in Germany or Italy are
Information service activities further distributed to other countries. Still, the
Scientific research and development overall share of the EU is above 90%.
60,000
Pharmaceutical exports are geographically diver-
50,000 sified and the share of the EU market in them is
slightly below average at about 65%. This is one
40,000
of the fastest growing industries with a 3.7 times
30,000 increase in the value of exports since 2008 and
a share of 3.1% in total Bulgarian exports in 2018.
20,000
Russia and Serbia are key markets.
10,000
The sectors of furniture, bedding, mattresses
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 and ceramic products depend on both household
Source: Eurostat
spending and business investment. The overall
conditions for households in the EU – employ-
ment, disposable income, access to credit – will di-
> 51 less affect these industries. rectly affect demand for finished products. At the
same time, new investment such as new buildings,
Production of plastics and plastic articles reached hotels and offices will also play a key role in the fu-
830 million euro in 2018, or about 3% of total Bul- ture market. In any way, a scenario for a prolonged
garian exports. The growth since 2008 was com- slow growth in Europe will put downward pressure
paratively low – about 68%. At the same time, on demand for these products, although it is highly
manufacturing of rubber products grew 4 times, unlikely that a huge shock can occur in the short
reaching 300 million euro in 2018. term. Exports of ceramic products doubled since
2008 and accounted for almost 1% of total exports
Exports of essential oils and cosmetics prepara- in 2018. Exports of furniture, bedding and mat-
 КQUARTERLY 53

tresses trebled to reach a share of 2.3% in total ex-

К | SHARE OF COMPANIES’ TURNOVER IN TOP
100 COMPANIES’ TURNOVER BY SECTOR IN
ports. The final destinations are quite diverse with
BULGARIA
no country having a dominant position.
%
Overall, these six industries accounted for more
5
than 3.3 billion euro of exports in 2018, or 11.9% of 3
3
9 24
the total. From a labor market perspective, cloth- 3
3 23
ing and footgear manufacturing is downsizing em- 4 3
3
ployment as a key strategy for retaining competi- 5 4
tiveness. Since 2010 the number of jobs decreased 2016 2018
5
by 73 000; the decline continued even after 2013 6
with 30 000 lay-offs. 5

Still, clothing and footgear production account for 21

19
over 17% of total manufacturing employment. The 13
12
downsizing – both due to companies moving to 13
cheaper production destinations and replacement 14
of labor by capital – will continue in any scenario
for the EU economy. The furniture, bedding and Fuels Energy Metals Trade
mattresses production is exposed to similar labor Machinery & equipment Pharmacy Telecommunication
Food and drinks Agriculture Transport Other
cost pressures but the fast growth in exports has
prevented a sizable decline in employment in the Source: Eurostat

sector. It is still a relatively important part of the

manufacturing jobs market with 19 000 workers.
К | CHANGE IN EXPORTS BETWEEN
2013 AND 2018
Pharmaceuticals and ceramics are capital-inten-
%
sive industries and their share in overall employ- Electrical machinery and equipment
ment is low – about 2%, or 10 000 workers. Automotive
Furniture, bedding, mattresses
Articles of iron or steel
BULGARIAN ECONOMY’S Plastics and articles thereof

STRENGTHS Machinery
Pharmaceutical products
The foundations of the Bulgarian economy are Total
Copper and articles thereof
significantly different in comparison to the pre- Apparel, knitted or crocheted
vious boom. It ended with the so called Great Re- Iron and steel
Ores, slag and ash
cession that began at the end of 2008. Economic Apparel, not knitted or crocheted
growth in recent years is supported by the transi- Cereals
Mineral fuels
tion to more knowledge-intensive activities, with Oil seeds
most of them taking advantage of export markets. 0 20 40 60 80 100 120 140 160 180
While the previous expansion cycle was depend- Source: Trade Map, International Trade Centre, www.intracen.org/marketanalysis

ent on the constant flow of foreign capital chan-

neled through direct investment or banking credit,
the current cycle is characterized by export-led
growth of manufacturing and services and private
consumption.
Fiscal policy is quite prudent, with year after year
of budget surpluses and government debt is pro-
jected to decrease below 20% of GDP in 2022. This
favorable fiscal position is extremely important in
the face of a euro area slowdown and the buildup
of negative expectations throughout the leading
EU markets. The recent decision of S&P to increase
the credit rating of Bulgaria to “BBB” with positive
outlook is a result of the resilient economic growth
of Bulgaria, without building macroeconomic im-
balances.
The growth of the Bulgarian economy in 2020-
2022 should also be supported by strong domestic
demand, as private consumption will continue to
be the major driver. Consumer spending is sup-
ported by favorable conditions on the labor mar-
ket – the employment rate in the 20-64-year age
group reached 76.3% in the third quarter of 2019,
while nominal wages increased on average by 12%
in the first nine months of 2019. Loans to house-
holds, expected to have increased by 10% in 2019,
will further propel private consumption and resi-
dential construction. The pace of growth of private
consumption is expected to slow down, as future
employment growth will be limited, but neverthe-
less consumer spending will continue to support
domestic demand. Growth of public spending on
huge infrastructure projects is also to be expected,
mostly in the framework of EU funds.
The transition in manufacturing from traditional
sectors like apparel or furniture (with added val-
ue of 6-7 thousand euro per employee) to more
capital-intensive industries like machinery and
equipment, electrical equipment, motor vehicles,
computers, electronic and optical products (with
added value of 14-15 thousand euro to 20 > 54
54 KQ ECONOMY/GLOBAL SLOWDOWN

К | BULGARIAN EXPORTS BY PRODUCT GROUP AND MARKET, 2018

Germany
Italy France ES RO
Germany Romania IT Germany RO
Germany RO IT

US
CH AT CN SE RU
GR CZ HU
RU NL HU SK UK BE
HU CN-HK France
TH IN PL
PL TR
Turkey SI BE FR
GR FI AT
US IT GE
NL HR Austria ES
UK PH AT IT
BE SE
UA
Czech Republic JP DE GR
PL Greece
SK TR CS US
RO

Electrical machinery and equipment and parts thereof Machinery, mechanical appliances and parts thereof
Vehicles and parts and accessories thereof Articles of iron and steel Optical, measuring, precision instruments
Source: Trade Map, International Trade Centre, www.intracen.org/marketanalysis

К | TOP 30 PRODUCTS EXPORTED TO THE EU IN 2018

Apparatus for Boards, panels, Electric Articles for the Plates, sheets, Bicycles Parts for Medicaments Men's suits
switching or consoles accumu- conveyance or film, foil and strip, tractors consisting of mixed
protecting lators packaging of of non-cellular and or unmixed products
electrical circuits goods, of plastics trucks for therapeutic or
plastics Motorcycles prophylactic uses
Auto- Engines and Parts
matic motors suitable for
data- with the Furniture and Seats, Women's suits
Electrical resistors Parts for use with pro- machinery parts thereof whether or
the apparatus of cessing of heading not
heading 8535, 8536 ma- 8425 to convertible
Electrical transformers, or 8537 chines 8430 into beds,
static converters and parts
Mattress thereof, n.e.s.
Pumps for liquids Taps, supports (excluding
cocks, medical, ...
Insulated cable Parts of footwear Tubes, pipes
valves
and hoses, of
Refrigerators Jerseys, T-shirts, vulcanised
Telephone sets pullovers, knitted or Tubes, pipes and hollow rubber
cardigans crocheted profiles

Electrical machinery and equipment and parts thereof Plastics and articles thereof Machinery, mechanical appliances, parts thereof
Vehicles and parts and accessories thereof Furniture; bedding, mattresses Apparel, knitted or crocheted
Pharmaceutical products Footwear Articles of iron and steel Apparel, not knitted or crocheted Rubber and articles thereof
* excluding energy and fuels, basic metals and agriculture
** Product labels at 4-digit level according to the HS classification Source: Trade Map, International Trade Centre, www.intracen.org/marketanalysis

> 53 thousand euro per employee) will most likely Bulgaria’s comparative advantages in those most
continue even in a scenario of continuous slow- dynamic sectors are supported by the rush to cre-
down in the euro area. ate industrial parks in the leading economic cent-
ers in the country.
Bulgaria still holds only around 2% of Central
and East European (CEE) countries’ exports to As labor costs will continue to increase and the
Germany and Italy in electrical equipment and supply of labor will be limited, low-tech industries,
machinery, but the share is increasing in recent which rely on cheap labor, will face additional chal-
years. CEE countries have a competitive advan- lenges. In 2019, there were already a few examples
tage in those sectors and their share in Germa- of low-tech companies leaving the country and
ny’s imports of machinery increased from 18.7% this may continue in 2020. A global slowdown will
in 2014 to 20% in 2018. Bulgaria follows this trend, affect those companies, as they face sluggish de-
increasing its share in CEE exports of machinery mand and increasing labor cost. Some Bulgarian
to Germany – from 1.6% in 2015 to 1.82% in 2018. companies in low-tech manufacturing may need
A similar dynamic is observed in electric equip-
ment. As Bulgaria will most probably continue to
integrate deeper into the EU’s largest markets
and increase its share in CEE exports (this pro-
COMPANIES PART OF GLOBAL
cess intensified in the last two years), those sec- VALUE CHAINS AND LOW-TECH
tors may be in a position to soften the impact of a MANUFACTURERS WILL FACE
continuous slowdown in the euro area. CHALLENGES.
 КQUARTERLY 55

K | E XPORTED VALUE IN 2018 AND CHANGE IN VALUE 2018/2008,

BY 2-DIGIT HARMONIZED SYSTEM PRODUCT CATEGORIES

Exported value in 2018

Product Change 2018/2008
in EUR million
Electrical machinery and equipment and parts thereof 3076 238%
Mineral fuels and oils 2534 3%
Copper and articles thereof 2482 55%
Machinery, mechanical appliances, parts thereof 2284 98%
Cereals 1032 127%
Pharmaceutical products 869 274%
Vehicles and parts and accessories thereof 867 487%
Articles of iron or steel 855 160%
Plastics and articles thereof 831 168%
Apparel, not knitted or crocheted 758 -5%
Iron and steel 662 -30%
Furniture; bedding, mattresses 662 195%
Apparel, knitted or crocheted 658 18%
Ores, slag and ash 583 330%
Oil seeds and oleaginous fruits 576 83%
Miscellaneous chemical products 422 1339%
Aluminium and articles thereof 415 69%
Glass and glassware 392 108%
Optical, measuring, precision instruments 392 101%
Animal or vegetable fats and oils 321 314%
Essential oils, cosmetics 308 245%
Toys, games and sports requisites 303 392%
Rubber and articles thereof 296 300%
Wood and articles of wood 295 96%
Inorganic chemicals 287 41%
Preparations of cereals, flour, starch or milk 254 122%
Residues and waste from the food industries 243 388%
Paper and paperboard 239 134%
Tobacco 211 9%
Footwear 211 27%
Meat and edible meat offal 194 84%
Fertilisers 189 4%
Dairy produce; birds' eggs; natural honey 189 78%
Cocoa and cocoa preparations 177 871%
Zinc and articles thereof 176 29%
Ceramic products 173 106%
Lead and articles thereof 165 34%
Beverages, spirits and vinegar 151 39%
Wool, fine or coarse animal hair 147 47%
Miscellaneous articles of base metal 140 316%
Total 28 209 85%

*All product labels have been edited and slightly shortened, for their full name check the HS product categories Source: International Trade Center, UNCTAD/WTO

to move from the most attractive economic cent-
ers to less developed regions of the country. While
these processes may create structural problems,
they will support the general trend of transforma-
tion of Bulgarian industry.
The growth in the ICT sector is likely to continue,
as Bulgaria is having competitive advantages,
which facilitate more investments in that sector.
A global slowdown, even if it affects the financial
sector, will not necessarily disrupt the growing ICT
industry in Bulgaria. Investment in human capital
will be crucial, as labor shortages may be the main
constraint to further growth of the ICT business. In
that sense, the continuous expansion of ICT in the
secondary economic centers (Plovdiv, Varna, Bur-
gas) will also be crucial and should be supported
by local communities/authorities.
56 KQ POLITICS/STATE CAPITALISM
ECONOMY/DASHBOARD

ECONOMY:
BULGARIA KEEPS POSITIVE
CURRENT ACCOUNT BALANCE
Net foreign direct investment in Bulgaria rose to
630 million euro at the end of the fourth quarter,
up by a little over 90 million euro compared to end-
2018, according to preliminary data from the Bul-
garian National Bank (BNB). However, it should be
noted that the data will be subject to revisions in
the coming months due to new information com-
ing in from companies’ annual reports. According
to preliminary data, Bulgaria’s trade balance was
in surplus of 120 million levs at the end of 2019,
whereas the surplus in services was close to 4 bil-
lion levs, resulting in a positive current account for
the year. The BNB’s reserve assets remained high
at close to 48.6 billion levs as at the end of Decem-
ber.
The consolidated government budget went into
negative territory as at the end of 2019 – the deficit
was 1.1 billion levs or close to 1% of GDP projected
for the year. A month before New Year’s Eve, the
budget was in surplus of 1 billion levs, but in De-
cember the Ministry of Finance distributed 760
million levs for the future construction of Hemus
Highway, 200 million levs to local municipali-
ties and 208 million levs to state-owned National
Railway Infrastructure Company. Domestic gov-
ernment debt decreased slightly - from 3.1 billion
levs in 2018 to 2.98 billion levs at the end of 2019,
whereas external government debt remained al-
most the same. Total government debt to GDP ra-
tio was 20.4% at end-December 2019 compared to
22.1% a year earlier.

PRIVATE SECTOR CONTINUES BULGARIA BECOMES

TO SHRINK ITS INDEBTEDNESS FOREIGN CREDITOR
(% of GDP) in bln of levs
Public sector foreign debt (% of GDP) Private foreign debt Gross foreign debt Net foreign debt
90.0
40
80.0
70.0 30
60.0
50.0 20
40.0
10
30.0
20.0 0
10.0
0.0 -10
'11 '12 '13 '14 '15 '16 '17 '18 I'19 III'19 V'19 VII'19 IX'19 XI'19 '11 '12 '13 '14 '15 '16 '17 '18 I'19 III'19 V'19 VII'19 IX'19 XI'19
Source: Bulgarian Ministry of Finance Source: Bulgarian Ministry of Finance

BULGARIAN GOVERNMENT DEBT STRUCTURE

Domestic government debt External government debt Total government debt Total government debt/GDP (rhs) GDP (EUR million)

70000 80%

60000 70%
60%
50000
50%
40000
40%
30000
30%
20000 20%
10000 10%
0 0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Bulgarian Ministry of Finance
 КQUARTERLY 57

CURRENT ACCOUNT SURPLUS (IN MN EURO)

Net primary income Trade balance Net services Net secondary income Current account
7000

5000

3000

1000

-1000

-3000

-5000

-7000
2011 2012 2013 2014 2015 2016 2017 2018 2019 XII `19
Source: National Statistical Institute

FISCAL RESERVE KEEPS ON GROWING CURRENCY RESERVES

in bln. levs in bln. levs
Public debt Available funds in the fiscal reserve Reserve assets of the Bulgarian National Bank (lhs)
M3/reserves M3 levs' component/reserves
30.0
60 3
25.0
50 2.5
20.0
40 2
15.0
30 1.5
10.0 20 1
5.0 10 0.5

0.0 0 0
'12 '13 '14 '15 '16 '17 '18 I'19 II'19 V'19 VII'19 IX'19 XI'19 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 XII`19
Source: Bulgarian National Bank Source: Bulgarian National Bank

FOREIGN TRADE
Trade balance in mn of levs (lhs) Export in % Import growth in %
10000 60.00%
7500 40.00%
5000
20.00%
2500
0 0.00%
-2500
-20.00%
-5000
-40.00%
-7500
-10000 -60.00%
I `11 IX `11 V `12 I `13 IX `13 V`14 I `15 I X`15 V `16 I `17 I X`17 V `18 I `19 XII `19
Source: Bulgarian National Bank

FOREIGN DIRECT INVESTMENTS

in mn euro
Debt instruments Reinvested profit Equity Foreign Direct Investment
3000
2500
2000
1500
1000
500
0
-500
-1000
-1500
I `11 IX `11 V `12 I `13 IX `13 V`14 I `15 I X`15 V `16 I `17 I X`17 V `18 I `19 XII `19
Source: Bulgarian National Bank
58 KQ BUSINESS / MONBAT
ECONOMY/DASHBOARD
ECONOMY/EURO

BULGARIA RELATIVE TO ITS PEERS* BULGARIAN GOVERNMENT INTEREST EXPENDITURE

*Czechia, Croatia, Hungary, Estonia, Latvia, Lithuania, Poland,
Romania, Slovenia, Slovakia Interest Expenditure/ Budget Expenditure
Interest Expenditure/Tax Revenues
GDP per capita in PPS relative to peers average(lhs)
Share of GDP in constant prices in peers total (rhs) 16.00%

5.00% 80.00%
14.00%

4.80% 75.00% 12.00%

10.00%
4.60% 70.00%

8.00%
4.40% 65.00%

6.00%
4.20% 60.00%
4.00%

4.00% 55.00%
2.00%

3.80% 50.00% 0.00%

2000 2003 2006 2009 2012 2015 2018 1998 2001 2004 2007 2010 2013 2016 2019
Source: Eurostat Source: Bulgarian Ministryof Finance

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

% of GDP
50.0%

40.0%

30.0%

20.0%

10.0%

0.0%

-10.0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

GENERAL GOVERNMENT ADMINISTRATION DEFENCE AND SECURITY EDUCATION OTHER EXPENSES

HEALTH SOCIAL SECURITY, SUPPORT AND CARE HOUSING, PUBLIC WORKS, BUDGET REVENUES
RECREATION, CULTURE, RELIGIOUS ACTIVITIES ECONOMIC ACTIVITIES AND SERVICES UTILITIES AND ENVIRONMENT BUDGET DEFICIT(-)/SURPLUS(+)
Source: Ministry of Finance

 BULGARIAN ECONOMY IN NUMBERS

2012 2013 2014 2015 2016 2017 2018 2019
Q1 Q2 Q3 Q4
GDP (in mn levs) 82 040 82 166 83 634 88 575 94 130 101 043 107 925 24 860 29 533 31 764 32 372
Real GDP growth (%) 0 0.9 1.3 3.6 3.9 3.6 3.1 4.5 3.8 3.1 -
GDP per capita (in levs) 11 162 11 310 11 577 12 339 13 206 13 939 15 312 - - - -
Annual inflation (%) 3 0.9 –1.4 –0.1 –0.8 2.1 2.8 3.3 3.3 2.7 3.1
Unemployment (%) 11.4 11.8 10.7 10.0 8.0 7.1 6.1 5.9 5.2 5.3 4.1
Trade balance (as % of GDP) –11.2 –8.5 –9.4 –.5 –4.3 –4.6 –7.1 -0.5 -0.5 0 -
Export FOB (as a % of GDP) 49.5 53 51.7 50.7 50.1 54.0 51.2 11.9 11.8 12.6 12.2
Import CIF (as a % of GDP) 60.7 61.5 61.1 58.2 54.4 58.6 58.3 13.1 12.4 12.6 13.1
Current acount (as a % of GDP) –0.9 1.3 0.1 0.0 2.6 6.5 4.6 1 3.7 8.3 -
Financial account (as a % of GDP) 2.3 2.1 –0.7 6.8 8.6 4.2 3.6 1 1.8 4.8 -
FDI in Bulgaria (as a % of GDP) 3.1 3.3 2.7 5.3 2.1 2.7 3.2 0.1 0.9 1.3 -
Source: Bulgarian National Bank
 BUSINESS

THE
GAMBLING
WAR—
THE ATTACK ON
GAMBLING TYCOON
VASIL BOZHKOV
IS YET ANOTHER
EXAMPLE OF
HOW POLITICS
AND BUSINESS IN
BULGARIA ARE
INTERTWINED

//In this section:

A new tax regulation stirs mass

protest

Bulgaria strikes at AirBnB, Booking.

com

Bulgarian automobile market:

Growing but getting older

Cigarette market in 2019: remark-

able growth

The PR and communications mar-

ket in Bulgaria

Blagoevgrad: the Other Southwest

The real estate market in Sofia

shows first signs of recession
60 KQ BUSINESS/THE SKULL
THE GAMBLING WAR
THE ATTACK ON GAMBLING TYCOON VASIL
BOZHKOV IS YET ANOTHER EXAMPLE OF
HOW POLITICS AND BUSINESS IN BULGARIA
ARE INTERTWINED
CAPITAL NEWSPAPER TEAM
A
A runaway gambling tycoon…
This line could open your average
mafia thriller but the story
of Vasil Bozhkov, now held in
police custody in the United Arab
Emirates according to the Bulgarian Prosecutor’s
Office, could give scriptwriters ideas for much more
sinister plots.
Mr. Bozhkov is not the first oligarch among
wealthy Bulgarian businessmen who made their
money in the murky 1990s to have aroused the
wrath of Bulgarian authorities recently. But surely
he is the biggest and one of the savviest.
Charged in absentia with tax evasion, extortion,
influence peddling, illegal possession of cultural
artifacts (11 counts in total), Mr Bozhkov looks like
a super villain. But there is a bigger story. His case
cuts deep into Bulgaria’s culture of mixing politics
with business, sometimes making it impossible to
distinguish where private interests overwhelm
QUntil very recently
the PM Boyko Borissov
didn‘t shy away from
discussing sports policy
with Vasil Bozhkov |
Council of Ministers Press Office
public ones. The blitzkrieg started by the Bulgar-
ian authorities against Mr Bozhkov is as much
about crime and corruption, as it is about media
freedom, shadowy control of government bodies
and how big business operates in Bulgaria.
WHY IS THE GAMBLING DRAMA
PLAYING OUT NOW?
The Prosecutor’s Office charged Mr Bozhkov in
January 2020 with tax evasion and leading an or-
ganized criminal group. Later, when it was appar-
ent that Mr Bozhkov had left Bulgaria and would
not be coming back, the prosecutors launched
an investigation of his suspected involvement
in murders, rapes and racketeering. Three of his
business associates were also arrested, as well as
a former chairman of the State Commission on
Gambling (SCG). According to the prosecution, Mr
Bozhkov and his companies had allegedly evaded
paying half a billion of levs in taxes and fees.
The public side of the attack emerged after Mr

Bozhkov’s former partners in the gambling busi-
ness - the Naydenov brothers Boyan and Ts-
vetomir, accused him of tax fraud and extortion
in the media. Together with their father Stefan
they own Efbet, a chain of casinos and bookmak-
ers. They are partners with Mr Bozhkov in ten of
their nearly 100 gambling joints. They own a stake
in sports betting operator Eurofootball, in which
Boyan Naydenov held a senior position for years.
In interviews for local media the brothers allege
that Mr Bozhkov exercised behind-the-scenes
control of SCG, the industry regulator, allowing
the two games of chance owned by him - Lottery
Bulgaria and National Lottery, to evade taxes by
taking advantage of a legal loophole. They ac-
cused him of death threats against them and filed
several complaints to the Prosecutor’s Office, the
Commission for Protection of Competition and
the Ministry of Finance concerning the tax eva-
sion.
Mr Bozhkov has denied wrongdoing, pointing out
that the gambling regulator and the National Rev-
enue Agency (NRA) had exercised strict control of
his business. According to his business partners,
Lottery Bulgaria and National Lottery both took
advantage of a legal option to use a taxation re-
gime more favorable than the one used by the
state-owned sports betting organization Bulgar-
ian Sports Totalizator (BST). Strangely, NRA and
the Ministry of Finance have not questioned this
practice for more than five years, although it
saved the two companies between 200 and 500
million levs in taxes, depending on different esti-
mates (see sidebars).
The Naydenovs claim that their interviews are a
type of life insurance, yet there is a suspicion that
they haven’t come public without a prior assur-
ance that the authorities will take their side in
their business dispute with Mr Bozhkov.
WHY DID THE GOVERNMENT TAKE
SIDES AND STRIKE BOZHKOV?
Vasil Bozhkov’s domination of the gambling in-
dustry – a heavily regulated business – has not
changed in the last ten years, for at least eight of
which GERB has been in power. Mr Bozhkov’s tax
evasion techniques were also well known to the
Bulgarian tax administration which has closed its
eyes for years. The question is what caused the
ruling party’s sudden change of heart.
The easiest answer is the appointment of the
new Prosecutor General, Ivan Geshev. He took of-
fice in November 2019 and rushed to prove him-
self with a string of investigations and charges
against notorious businessmen. But Mr Ge- > 62
КQUARTERLY 61
DEVELOPMENTS
TO FOLLOW:
Dutch-based
telecommunications and
media company United
Group, owned by UK private
equity firm BC Partners, is
seeking anti-trust approval
to acquire Bulgarian
Telecommunications
Company (BTC), the
European Commission (EC)
said. The EC has set April 3
as a provisional deadline for
its decision. In November last
year, United Group said that
it had agreed to acquire BTC.
The price was not disclosed but
BTC’s main shareholder, Spas
Rusev, said it was about €1.3
billion, or seven times EBITDA.
BTC operates under the brand
name Vivacom and has over 1.8
million customers in Bulgaria.
It competes with A1 Bulgaria, a
unit of A1 Telekom Austria, and
Telenor Bulgaria, a unit of PPF
Group majority owned by Czech
investor Petr Kellner.
The acquisition of Central
European Media Enterprises
(CME) by PPF Group is
expected to be completed in
the middle of 2020, CME said
in a press release presenting
its 2019 financial results.
CME, majority owned by U.S.
telecommunications concern
AT&T, said last November it
had entered into an acquisition
agreement with an affiliate of
PPF Group, the investment
company of the Czech Republic’s
most wealthy man Petr Kellner.
The transaction, which is valued
at $2.1 billion, is subject to several
closing conditions, including
approval of the transaction
by CME’s shareholders and
receipt of certain competition
and other regulatory approvals.
CME is owner of five television
companies in the region: bTV
in Bulgaria and one in Romania,
the Czech Republic, Slovakia and
Slovenia each.
 Photo by Tsvetelina Belutova
> Bozhkov probably sponsored Maya Manolova, the
Who is Vasil Bozhkov?
Mr Bozhkov is an emblematic figure from the transi-
tion years after the fall of the Communist regime
and one of the few who has not moved abroad or to
the netherworld. That he controls gambling in Bul-
garia and no one could enter the business without
his say-so has been an open secret for many years.
Mr Bozhkov was already in the gambling world be-
fore November 10 1989. The archives of Communist-
era State Security service have files on him dating
back to 1985. His nickname was the Skull. After the
political changes in the early 90s, he established
one of the first gambling companies together with
Ilia Pavlov, the Bulgarian oligarch who was killed
in 2003. Mr Bozhkov was among the founders of
business associations like G-13 in the early 90s and
the Revival Club later that brought together Bulgar-
ian oligarchs in a miniature homegrown imitation
of their Russian peers who plundered juicy assets
from the economy with the state’s active participa-
tion. By the mid-90s, Mr Bozhkov owned a chain of
currency exchange shops and a bank, after which
he developed a small gambling company and prac-
tically monopolized the market. He owns construc-
tion companies and enterprises in other sectors, but
lotteries are the crown jewel of his holdings.
Mr Bozhkov is an avid antique collector and owns
exceptional objects of Thracian origin. His collection
is displayed at the National History Museum and
was even exhibited at the European Parliament in
Brussels. The collection consisting of artifacts found
in Bulgaria is in Mr Bozhkov’s private possession,
even though the law requires all such archeological
finds to be in exclusive ownership of the state.
Mr Bozhkov may well have kept away from the
country’s political life but there is little doubt that he
has meddled with those gambling regulations that
mainly impacted his own business. In 2002, he was
in open conflict with today’s Prime Minister Boyko
Borissov, then secretary general at the Interior Min-
istry, but the confrontation later subsided.
> 61 shev had been a prosecutor for more than
fifteen years before and he has never been known
to take on the powerful of the day, unless such a
move serves some other goal, and not necessarily
a judicial one. In addition, opposition politicians
have been pointing to the tax avoidance scheme
for more than two years but the prosecution has
failed to take notice until now.
Apart from the potential political motives - Mr
main contender to unseat the ruling GERB party
in Sofia in 2019 mayoral election, and now the at-
tack is a payback, or a pressure from foreign gov-
ernments complaining that their companies were
barred from Bulgaria’s gambling market - the
most plausible reason is the fight for control of
NovaTV – the biggest private television channel
in Bulgaria.
WHO CONTROLS TV, CONTROLS THE
POLITICAL POWER
NovaTV’s owner – Sweden’s Modern Times Group
(MTG), offered its Bulgarian holdings for sale in
2018 as part of an overall transformation of its
business. MTG initially selected Czech billion-
aire Petr Kellner to acquire NovaTV, but Bulgar-
ia’s competition authority blocked the deal with
poorly concealed political motives. Mr Kellner is
not a known quantity in Bulgaria - a threat that
the government could not ignore. Controlling or
having a serious say in the TV channels’ news
coverage is a key political strategy in Bulgaria, be-
cause the three biggest networks - NovaTV, bTV
and public television BNT, have an outsized influ-
ence following the demise of the print media in
the country.
With the withdrawal of foreign investors in the TV
networks – MTG and Central European Media En-
terprises which still owns bTV, the door was wide
open for Bulgarian investors to enter. This already
happened with the newspapers in 2010-2012,
when Germany’s WAZ group sold the two biggest
dailies in Bulgaria to local investors and both
newspapers immediately began toeing the gov-
ernment’s line. A similar process unfolded all over
Eastern Europe, solidifying the role of strongmen
like Viktor Orban in Hungary or Andrej Babis in
the Czech Republic.
After a year of manoeuvring, MTG sold NovaTV to
Domuschiev brothers Kiril and Georgi. The broth-
ers have diversified business interests and had
owned indirectly one of Bulgaria’s daily newspa-
pers (now defunct), but what is more important,
they are well-known GERB loyalists and are not
embarrassed to cut deals with unsavoury busi-
nessmen. Almost immediately after the acquisi-

tion, NovaTV was taken over by lieutenants of
Delyan Peevski - Bulgaria’s eminence grise, who
has developed a lucrative practice of lending the
support of his media empire comprising the most
popular yellow newspapers to whatever govern-
ment is in power in exchange for business favours.
BOZHKOV’S FAILED SCHEME
Now enter Vasil Bozhkov. Around the start of No-
vaTV’s sale, the advertising of National Lottery
at NovaTV dried up. According to sources of Bul-
garia’s Capital newspaper, before the ads were
discontinued they amounted to over 30 million
levs annualy, or a little less than a quarter of the
>
Did private lotteries evade taxes?
The conflict between the Naydenovs and Mr Bozhkov
brought to the surface the fact that the state-run
lottery business and its privately held counterparts
paid taxes under different provisions of the Gambling
Law. The state-run BST paid 15% tax on its total sales,
whereas Lottery Bulgaria and National Lottery paid
20% of the difference between their sales revenue and
expenses for prizes. As a result, the two private com-
panies effectively paid half of what their state-owned
competitor did. This option is provided for in the law
but it depends how the legal texts are interpreted.
In an interview for NovaTV in January, the executive
director and minority shareholder at National Lottery,
Dimitar Ganev, stated that there are two options to pay
taxes under the Gambling Law - to levy a higher tax on
a smaller taxation base, or use a larger base on which
to levy a lower tax.
“Our legal experts and accountants, after examining
the two methods, decided that in order to be able to
pay out higher prizes to our clients as a percentage
of profits, the option to pay on a smaller base was the
better choice,” said Ganev.
According to the Public Financial Inspection Agency
(ADFI), which was tasked by finance minister Vladislav
Goranov to review the revenue from gambling taxa-
tion, there was a breach of the applicable law. The
financial inspection is yet to be completed, but ADFI’s
preliminary calculations estimate that the organizers
of the game Instant Lottery have underpaid more than
210 million levs in taxes. Subsequently, the agency
stated that after receiving additional documents from
the State Commission on Gambling “we can conclude
that the sum has turned out to be considerably larger.”
КQUARTERLY 63
TV channel’s overall revenue. The formal reason
was NovaTV’s reluctance to support Mr Bozhkov’s
gambling business during the attack mounted in
2018 by GERB’s coalition partner Valery Simeonov
who had introduced amendments to the gambling
law explicitly banning any advertising of lotteries.
But the more likely reason for Mr Bozhkov’s de-
cision to stop its advertising campaign has to do
with the sale of NovaTV. With the revenue from
the lottery ads gone, the price of the TV channel
would have been seriously depressed. Taking con-
trol of the biggest TV network in Bulgaria, or at
least controlling a sizable share in it, would > 64
Later, the chair of the parliament’s budget commission
Menda Stoyanova, as well as the director of the tax
policy department at the finance ministry Lyudmila
Petkova announced that they believe the law is clear
- the state-run lottery and private operators must pay
tax amounting to 15% of the price of every ticket sold.
Ms Stoyanova explained that after it became clear that
the instant lotteries were not covered by the Gambling
Law (adopted in 2014 under a different government)
and have avoided taxes for a year, she initiated a legis-
lative amendment to include them.
“If you look at the motives for my proposal, you will
see that I introduced the changes in order to correct
the oversight and have the lotteries pay a tax like the
other operators - 15% of all sales,” explained Ms Stoy-
anova. “For me, the question is - how did the gambling
regulator allow this to happen? I am waiting to hear an
answer from these people and the prosecutors who
will be questioning them,” she added.
It is still unclear whether the other offline games such
as sports bets and private lotteries, also controlled by
Mr Bozhkov, paid the same advantageous tax of 20%
of the difference between sales revenue and prizes
paid.
After the Prosecutor´s Office said it had filed sev-
eral charges against Mr Bozhkov, his Nove Holding
announced that “different institutions have made
different inspections of all our lottery games through-
out the years and we have always cooperated with
authorities. We welcome every inspection and have
provided the requested documentation promptly.
What’s more, our systems are connected to those of
the National Revenue Agency and they receive all the
information in real time.”
64 KQ BUSINESS/THE SKULL

>

How much is the lottery

business worth?
At least an estimated 2 billion levs per year in the
last five years. There is no exact figure due to the
murky financial reports of New Games (the main
company behind National Lottery) and National
Lottery (which organizes sports and casino bets)
uploaded to the Commercial Register and the
unclear modus operandi of the companies. After the
scandal broke out, the two companies published
data, according to which their revenue in 2018
slightly topped 1.5 billion levs, way above expecta-
tions.

The other game of chance in Bozhkov’s gambling

empire - Lottery.bg, was organized by Eurobet but
has lately almost disappeared. Over the years, its
revenue varied between 30 and 50 million levs,
meaning that it has hardly earned more than 100
million levs.

> 63 have strengthened Mr Bozhkov’s grip of the
gambling market in Bulgaria. But it didn’t happen.
Kiril and Georgi Domuschiev paid the full price
MTG asked, despite the deterioration of NovaTV’s
cash flow.
Instead, when NovaTV finally changed hands in
2019, National Lottery restored part of its adver-
tisements, but they were far from their previous
magnitude. There is no explanation for this move
– it might have been a strictly business decision
to optimize costs, or an attempt by Mr Bozhkov
to remind the new owners of the TV network
how much they depend on his goodwill and deep
pockets. Whatever the reason, the dwindling rev-
enue from lottery advertisements might have
given Kiril and Georgi Domuschiev a reason solid
enough to decide to start their own lottery with-
out depending on the whims of a third party. Mr
Bozhkov’s previous partners, the Naydenov fam-
ily who were trying the break the connection with
him, were readily available to provide the experi-
ence and know-how.
The massive presence of Mr Peevski in the deal
for NovaTV is another reason to believe that such
a scheme was put in motion. His star rose in 2002
when he entered politics, riding on the back of
his mother who was appointed CEO of Bulgarian
Sports Totalizator. The state-owned organization
was a monopoly with a huge budget which was
one of the main spoils of any political party in
power. There is no doubt that Mr Peevski has been
eyeing the lottery market for a long time, trying
several years ago to monopolize the distribution
of lottery tickets.
Mr Bozhkov commented in an interview for Radio
Free Europe that the attack probably aims to take
a profitable business away from him and hand it
over to someone else. “There is certainly someone
else. I don’t know who he is; we are thinking, ana-
lyzing, investigating,” he stated.
Kiril Domuschiev, the owner of football club Lu-
dogorets whose primary sponsor is Efbet, an-
nounced in February he knows Mr Bozhkov well
and he has “never been threatened” by the gam-
bling tycoon. Domuschiev added that two years
ago (before he purchased NovaTV) he opposed
proposed restrictions to gambling advertisement.
Back then, the Confederation of Employers and
Industrialists in Bulgaria chaired by Domuschiev
published an official statement. The Naydenov
brothers also denied having any plans to start a
lottery business, either alone or in partnership
with the Domuschiev brothers.
It’s possible that the war over the gambling busi-
ness began because of Mr Bozhkov’s paranoia.
Fearing that his former business partners will
launch an alternative lottery, he might have de-
cided to pressure them which forced Naydenov
brothers to go public about the conflict. But the ac-

Photo by Julia Lazarova
tions of Bulgarian authorities show that Mr Bozhk-
ov probably had some grounds to be paranoid.
THE STATE WILL SEIZE CONTROL
OF FRESH RESOURCES TO PROP UP
FRIENDLY MEDIA
Almost immediately after the Prosecutor’s Office
filed charges against Mr Bozhkov, the Bulgarian
parliament considered two changes to gambling
legislation. The first envisages that instant lotter-
ies could be run only by the state operator, and
scratchcards only sold at licensed outlets located
at least 300 meters from the nearest school. The
changes are now in force, meaning that Bozhk-
ov’s largest gambling businesses will be forcibly
closed.
Mr Bozhkov has said that the changes will allow
the state “to take away a functioning business for-
cibly and anti-constitutionally.”
“Make an appeal at the Constitutional Court,
if you want,” Valery Simeonov, who tabled the
amendments, told an opposition MP.
Games of chance have exploded in Bulgaria since
2014 and, according to some estimates, 60% of
Bulgarians are avid players. The turnover in this
gambling segment is estimated at around 2% of
GDP. Gamblers usually come from the most vul-
nerable social strata – pensioners, unemployed,
minorities and people with little education who
impoverish themselves on the back of their dream
of becoming lotto-millionaires.
Whether the ban on the private lotteries is justi-
fied is an important question but something that
the authorities haven’t done is more revealing
about the new gambling regulation.
At the moment, no one is talking about the lot-
tery ads that have inundated the TV channels and
which are in a legal grey zone. It is precisely due to
these ads showing happy winners that the tickets
are enormously popular and many people scratch
cards in the hope of becoming the next million-
КQUARTERLY 65
>
Soccer – another favorite
pet of Bulgarian oligarchs
FC Levski, one of the most popular soccer clubs in
Bulgaria, is owned indirectly by Vasil Bozhkov and
National Lottery is its main sponsor. Mr Bozhkov
has stated that should the amendments to ban the
private lotteries proposed by Valery Simeonov be
accepted, he would be unable to maintain Levski’s
finances any more.
Based on data provided by the club, the news site
Dnevnik estimated that in a year the companies
connected to Mr Bozhkov have invested 25 mil-
lion levs. At the same time, the club itself earned
about 7.7 million levs, or about a third of Bozhkov’s
expenditure.
This, of course, provoked thousands of the club’s
fans to stand for Mr Bozhkov’s interests and protest
against the government in mid-February.
Prime Minister Boyko Borissov intervened in the
debate over Levski’s future, proposing to the fans
to become owners of the soccer club. This option
sounds unworkable, because the fans will not have
the funds to subsidize the club. It is likely that true
to his style, Mr Borissov will seek a new sponsor
when the money flow dries up.
aire. Two years ago, it was again Valery Simeonov
who proposed legislative changes to curb this
type of advertising but they never made it to the
assembly’s floor. This issue is no longer raised.
It is still unclear whether the state-owned BST
will pick the tab left from the private lotteries. Its
management has said it has no such ambition, al-
though it spells increased revenues. At the same
time, the Lafka kiosk chain – one of the biggest
vendors of lottery tickets, was closed down al-
most immediately after the parliament voted to
ban the privately run games of chance. But there
are already rumors that BST will buy Lafka owned
by Mr Peevski, in order to expand its operations.
The parliament’s omission to shut down adver-
tisements of lotteries leaves the impression that
the government simply aims to take hold of this
revenue stream and direct it to friendly media.
Just like NovaTV which lost significant revenue in
the last two years and is now owned by business-
men friendly to the government who had overpaid
to have it. > 65
66 KQ POLITICS

QThe new tax

regulation caused
some small business
owners to close shops
and go out on the

TAXING TROUBLE
street to protest | Photo
by Julia Lazarova

W
THE TAXATION
ORDINANCE N-18 THAT While global businesses are
concerned whether and when
AFFECTS ALMOST EVERY the next economic crisis
COMPANY IN BULGARIA will hit, most companies
operating in Bulgaria have
HAS INTRODUCED AN been more concerned these past two years about

EXTREMELY COMPLEX, a finance ministry regulation. The Treasury has

prepared a new regulation concerning the sales
UNCLEAR AND EXPENSIVE management software at points of sale, the now

REGULATION, AND WILL notorious Ordinance N-18. This has sparked

protests by small traders, made large companies
REPEL FOREIGN INVESTORS invest substantial amounts for an unclear purpose
and left popular online platforms wondering
VERA DENIZOVA whether to move outside Bulgaria.

It all started with the revenue administration’s
(albeit well-intentioned) plan to prevent tax eva-
sion by restricting the use of software that allows
for hiding turnover. So traders are required to
only use software licensed by the tax authorities.
The problem is that the National Revenue Agency
(NRA) did not bother to consult businesses about
their operational processes, the systems they
use and the effect the requirement would have
on them. In practice, N-18 introduced a new ex-
pensive super-regulation for companies that use
some kind of sales reporting software. Besides,
their number turned out to far exceed the 20 or 30
thousand companies estimated: at least 300,000
businesses will be affected. Thus, only days before
January 31, when the ordinance had to be en-
forced, most companies were still uncertain about
the practical specifications involved and whether
they would do it on time.
The new regulation will probably affect business-
es far beyond the expense involved in changing
software and fiscal devices. Firstly, the whole bur-
den will be transferred to end-consumers in one
form or another. Secondly, starting a business in
Bulgaria after N-18 is implemented will be more
difficult and more expensive and for some micro
traders it will be almost impossible. Last but not
least, that will make Bulgaria less attractive for
foreign investors.
It is some consolation that, in Finance Minister
Vladislav Goranov’s words, the revenue admin-
istration will be helping and not punishing com-
panies at the beginning. “The revenue adminis-
tration has been implementing this reform since
mid-2018. It certainly requires much more effort
on both sides. We will partner with diligent tax-
payers to help them tackle problems. We do not
want to ruin businesses. We want to eliminate the
grey sector,” he said.
GOOD INTENTIONS…
The chaos surrounding N-18 illustrates the long-
term damage a new regulation can have without
a proper impact assessment. When parliament
passed amendments to the VAT Act in March 2018,
obliging companies that accept cash and bank-
card payments to have NRA-approved software
for sales reporting connected to a cash register,
the fallout was underestimated. The revenue ad-
ministration said the change would affect about
20,000 points of sale using about 43,000 fiscal de-
vices and that their costs would be about 120 levs
per workplace. Back then the new regulation was
supposed to cover only those companies deemed
liable to hide turnover, i.e. about 25% of business-
es – mainly retailers, restaurants, bars and whole-
sale warehouses.
КQUARTERLY 67
Two years later, however, it turns out that there
is almost no business unaffected by the new re-
quirements. Moreover, there are no blanket soft-
ware solutions for the different types of enter-
prises. “Unlike previous changes, this one cannot
be implemented with additional software, so all
companies have to change their basic business
management software,” said Ivan Arzhentinski of
the Bulgarian Association of Information Tech-
nologies. It is the IT sector that warned about the
problem, whose responsibility it is to develop pro-
grams for sales reporting.
“We are worried that deciding what is part of the
sales process and what is not is left to the NRA’s
discretion. There have been interpretations and
answers to questions but every lawyer will tell you
that this has no legal weight,” said Pasko Paskov of
the Bulgarian Association for Business Software
Development.
“The official explanations, instructions and Q&A’s
on the implementation of Ordinance N-18 that are
published on the website are the NRA’s official po-
sition. This particular ordinance, as well as most
statutory acts in principle, cannot exhaustively
cover all real-life hypotheses. Therefore, written
explanations stands in this and many other cases
additionally clarify the statutory provisions,” the
NRA pointed out.
… PAVING THE ROAD TO HELL
Tax consultants say that large and small compa-
nies face the most serious problems. The result is
huge expenses for the former and probably going
into the unofficial economy for the latter.
“The information provided to big traders that use
expensive international systems like SAP, Navi-
sion etc. was controversial. They were first told
that their cash register software should be li-
censed and not the entire ERP system, but then
that changed. The situation is particularly serious
for companies that are part of an international
group that uses the same software in all countries
of operation,” a tax lawyer said. Such is the case
with large retailers that have many stores: their
high-paid foreign IT departments have probably
worked for months on the Bulgarian issue, incur-
ring expenses of millions of levs.
The tax administration decided, in one of its sev-
eral hundred official opinions, that when > 68
TRADERS HAD TO
RESTORE PAPER
INVOICING OF THE PAST
CENTURY.
68 KQ BUSINESS/TAX REGULATIONS
//NEWS BRIEF
SPREADING WINGS/The mu­ni­cipal
council of the city of Ruse has is-
sued a preliminary approval for the
sale of the local airport to Eonmetall
Bulgaria. The company plans to develop
the site into a logistic and airport facility
for a price of 57 million levs (€29.1 mil-
lion). Eonmetall Bulgaria, established in
August 2019, has five shareholders, all
of them private individuals: two Malay-
sian citizens, two US citizens and one
Bulgarian citizen. The Bulgarian investor
owns a 33.2% stake, while the four other
shareholders own 16.7% each. Among Eo-
nmetall Bulgaria’s shareholders is Cheng
Huat Goh, board member of Malaysian
machinery producer Eonmetall Group,
which is listed on the Malaysian Stock
Exchange.
BTC’S NEW OWNER/Dutch-based
telecommunications and media com-
pany United Group will place €1.22
billion worth of bonds to finance the
acquisition of Bulgarian Telecom-
munications Company (BTC). The is-
sue has been already contracted with
JPMorgan being lead manager. A number
of other banks, as well as the KKR fund,
which is a minority shareholder in United
Group, have committed to subscribe the
bonds. According to Moody’s and S&P the
deal will amount to at least €1.2 billion.
However, the final price will depend on
BTC’s financial results for 2019 and will
be a bit higher – just below €1.3 billion –
so a small portion of the deal will be fi-
nanced with the buyer’s own funds.
NEW RUSSIAN INVESTOR/South Ko-
rean electrical equipment manufac-
turer Hyundai Electric& Energy Sys-
tems has sold its unit Hyundai Heavy
Industries Co. Bulgaria to Interna-
tional BEZ Group (IBG), the Bulgarian
company said after consulting firm
CMS announced earlier that the buy-
er was Russia’s SVEL Group. Hyundai
Heavy Industries Co. Bulgaria did not
specify if the two companies were con-
nected but according to media reports
from 2018 the Russian group was pre-
paring to acquire of Slovakia-based IBG.
There is no information if the deal was
finalized. Late last year the Korean group
said it would sell its Bulgarian unit for
$24.5 million in order to improve its fi-
nancial structure.
> 67 used for invoicing, Excel and Word are point-
of-sale sales management software. But Bill Gates
is unlikely to visit Bulgaria to license his pro-
grams. Thus, all important data are now not saved
on a computer but in a notebook, as small traders
restore paper invoicing of the past century.
“We have a client, a hairdresser’s owner, which
uses US software for client reservations. Under
the new regulations, this is point-of-sale sales
management software. But the US company has
no intention whatever of coming to register its
product with the NRA. Now the client has to ei-
ther start working illegally or shut down,” Hristo
Petrov, manager of Golden Vision accounting firm,
says. He also cites a language school using Croa-
tian software to record the number of teachers’
lessons. “No company is going to come to Bulgaria
and license its software when it is used by four or
five companies only.”
The ordinance and the lack of clarity about its
implementation triggered a protest by dozens of
small business owners in front of the Ministry of
Finance building. They were concerned about the
way the NRA would conduct check-ups, as these
could be highly subjective.
The revenue administration said it was training
its supervisory officers. “We have no reason to be-
lieve our officers are insufficiently prepared and
ready to apply the ordinance. Besides, the NRA’s
acts are subject to administrative and two-in-
stance judicial control,” the agency said.
DAMAGE REPAIR
The truth is that after the initial cold shower for
companies the tax authorities realized that if they
did not work together with businesses the chaos
would spread. Finally, the regulation introduc-
ing the new rules for sales management software
was put on hold for six months. Several working
groups were set up including NRA experts and
business representatives in a bid to make the
provisions of N-18 applicable. As a result, sales re-
porting for medical practices was simplified and
additional guarantees were given to protect confi-
dential trade information, the NRA said. A simpli-
fied mechanism for electronic trade reporting is
also expected to be worked out.
Meanwhile, Prime Minister Boyko Borissov stated
that the changes would not enter into force un-
less a consensus was reached with the different
industry organizations on their implementation.
“The process needs to be optimized. We wanted to
eliminate the grey sector but that should not be
done at the expense of small and mid-sized busi-
nesses,” he said.
 КQUARTERLY 69

Shutterstock
BULGARIA’S NEW
I
Investment projects in manufacturing
totaling 1.3 billion levs will be completed
FACTORIES in Bulgaria in the next few years. Though
different in length and stage of progress,
the 15 largest projects outline some
INVESTMENT common trends.

PROJECTS WORTH 1.3 Most of them, including the largest ones, are in
existing enterprises that are being expanded and
BILLION LEVS WERE upgraded. They are concentrated around Sofia,

ANNOUNCED LAST three are in Plovdiv and, for a second year run-
ning, Vratsa attracts two new investors.
YEAR, UP 500 MILLION
LEVS ON 2018 Unlike in 2018, when nearly half of the projects
were launched by German companies, in 2019
most of them were Bulgarian ones. The largest
IGLIKA PHILIPOVA single foreign investment comes from Portugal
and belongs to BA Glass, which several years ago
bought Drujba Glassworks from Greece’s Yioula.

The good news is that the total amount of new

investment announced in 2019 is some 500 mil-
lion levs larger than in the preceding year, when
the projects’ worth amounted to 800 million levs.
The investment in existing enterprises shows that
companies have long-term plans and desire to in-
crease production and that – once here – investors
often manage to accommodate expansion plans.
The new investors, however, are few. A notable
missed opportunity was that of Volkswagen, > 70
70 KQ BUSINESS/MANUFACTURING

> 69 as the German company preferred Turkey to
Bulgaria for its new automobile assembly plant, al-
though no final decision has been announced yet.
Another new trend started to emerge last year:
with the rise in labor costs, low-tech production
facilities shut down. Canada’s leather seating cov-
er producer ALC pulled out of Bulgaria and a lot of
automotive wire harness manufacturers signifi-
cantly curbed or entirely stopped production. For
those that decided to stay the solution is switch-
ing to more complex products where labor costs
do not have such a big weight.
The list only includes manufacturing investments
and does not show projects in the mining indus-
try. There were two large investments in that sec-
tor too: the $165 million new mine of Canada’s
Dundee Precious Metals near the town of Kru-
movgrad and the 60-million-lev quartz and kaolin
processing plant of Kaolin (owned by Germany’s
Quarzwerke) in the town of Dulovo.

1. BA Glass Bulgaria
Sector: Glass bottles and jars
Location: Plovdiv and Sofia
Investment: 400 million levs (€205 million)
New jobs: n.a.
Portugal’s BA Glass, which three years ago bought Bulgarian bottle
and jar manufacturer Drujba Glassworks with factories in Plovdiv and
Sofia, started a five-year investment program worth 400 million levs.
The first 80 million levs was invested last year in the plant in Plovdiv.
Most of it was used for a new furnace with a 70% bigger capacity and
four automated production lines. The project envisages the instal-
lation of a second furnace in Plovdiv to replace the existing one, as
well as a new furnace in Sofia. The investment is expected to increase
BA Glass Bulgaria’s sales by 40% to 360 million levs. The bulk of the
output is exported.

2. KCM
Sector: Metallurgy
Location: Plovdiv
Investment: 254 million levs (€130 million)
New jobs: n.a.
Plovdiv-based metallurgical plant KCM will increase lead and zinc pro-
duction by some 30% to 200,000 tons a year with a €130 million invest-
ment. The project will be implemented in 2020-23, with the European
Investment Bank providing loan financing for half of the project cost.
The project consists of several parts, the main being the reconstruction
of the refinery in lead production and a new automated electrolysis unit
in zinc production. KCM will also increase its capacity for processing
secondary materials. The new investment will build upon the previous
mega project of a similar amount, which finished a few years ago and
included the construction of an entirely new lead plant.

3. Melexis Bulgaria
Sector: Automotive components
Location: Sofia
Investment: 147 million levs (€75 million)
New jobs: 300
Belgian automotive sensor maker Melexis will expand
its production and R&D base in Sofia with a €75 million
investment. The project is being implemented in stages
and will eventually add 15,000 sq. m to the existing
7,500 sq. m of space. Construction will be finished this
fall. The entire project, including equipment, will be
completed in 2022. It is part of the Belgian group’s plans
to enhance its European footprint. A total of 300 new
jobs are expected to be opened in R&D and production
in 2018-22.
 КQUARTERLY 71

4. Integra Plastics
Sector: Plastic recycling
Location: Elin Pelin
Investment: 78 million levs (€40 million)
New jobs: 80
The plant for recycling plastic waste into raw material (gran-
ules) that is used to produce various industrial and household
plastic goods is due to start operating this year. The invest-
ment in the town of Elin Pelin near Sofia amounts to €40 mil-
lion and is made by Bulgaria’s Integra Plastic. Majority owner
of the company (51%) is Betainvest of Angel Georgiev, who
also owns sunflower oil producer Oliva. The factory spans 3.5
ha and is fully automated. It will employ about 80 people. At
full capacity, turnover is expected to reach some €20 million.

5. Ideal Standard - Vidima

Sector: Sanitary ceramics and fittings
Location: Sevlievo
Investment: 62 million levs (€32 million)
New jobs: n.a.
Sanitary ceramics and fittings producer Ideal Standard – Vidima,
which is part of Ideal Standard International, has invested 62 million
levs in production expansion and productivity enhancement. The first
part of the project was carried out in the ceramics plant and finished
two years ago. In 2019 the company completed the basic investments
in its sanitary fittings plant. Many of the processes were automated,
reducing manual labor. However, that does not result in staff reduc-
tion, as the purpose is to increase the production volume. The com-
pany plans to hire new workers for some of the processes but there is
no information yet about their number. Several smaller investments
and improvements will be carried out before the project is completed.

6. Etem Bulgaria and Gestamp

Sector: Metallurgy
Location: Sofia
Investment: 59 million levs (€30 million)
New jobs: n.a.
Metallurgical company Etem Bulgaria will invest €30 million in
partnership with Spain’s Gestamp in the production of automo-
tive components. The project was announced in early 2019 and
will be implemented over a three-year period. The new produc-
tion facility will be built at Etem’s site in Sofia. The partners have
already set up two joint ventures: for production of extruded
aluminum profiles and for additional processing of profiles. Etem,
which is known mainly as a manufacturer of architectural aluminum
systems, started producing automotive components several years
ago. Its partnership with a major automotive metal component pro-
ducer like Gestamp will further enhance its positions in the sector.

7. Sigmatech
Sector: Metal processing
Location: Burgas
Investment: 50 million levs ($30 million)
New jobs: 200
Sigmatech, which was registered in late 2017 by Ukrainian citizen
Oleksiy Filippov, is building an R&D and production complex for
applying protective coatings and repair services for turbine compo-
nents of aircraft engines. The project cost amounts to $30 million and
is carried out in Industrial and Logistic Park Burgas, where the com-
pany has bought a two-hectare plot. The production premises have
been already built and are being equipped, with production expected
to start by mid-year. The company did not provide more information
but its initial plans were to open 200 jobs.
72 KQ BUSINESS/MANUFACTURING

8. Sensata Technologies Bulgaria

Sector: Automotive components
Location: Botevgrad
Investment: 47 million levs ($27 million)
New jobs: 300
US sensor producer Sensata Technologies is building a new production
facility and warehouse at its plant in Botevgrad. The factory manufac-
tures high-temperature sensors for the automotive industry. The new
building will span 4,300 sq. m and feature high energy efficiency. The
investment in construction and equipment amounts to $27 million.
Once completed, it will provide 300 new jobs. Currently the company
employs 2,700 people in Botevgrad. In addition, Sensata Technologies
has a production facility in Plovdiv, where it manufactures pressure
sensors for cars, farming machines and medical equipment.

9. Monbat
Sector: Starter battery production
Location: Vratsa
Investment: 42 million levs (€22 million)
New jobs: 150
Bulgarian starter battery producer Monbat will build a new plant
in Vratsa. The company has informed the local municipality of its
investment intention and plans to inject 42 million levs in the project,
which will be carried out in two stages. Monbat has already bought
a two-hectare plot of land. The plant will manufacture bipolar lead
batteries under a new technology for which Monbat recently bought
a license and which is used in renewable energy projects, industrial
UPS systems, electric and heavy-duty vehicles. According to informa-
tion from the municipality, the plant will initially employ 150 people.
That will be Monbat’s third plant in Bulgaria, the first two being in
Montana and Dobrich.

10. Coca-Cola HBC Bulgaria

Sector: Soft drinks
Location: Kostinbrod
Investment: 40 million levs (€21 million)
New jobs: 8
Coca-Cola Hellenic Bottling Company Bulgaria has invested
40 million levs in expansion of production in the town of
Kostinbrod. The project includes a new PET bottling line
that doubles the capacity of the enterprise. The new facility
uses 20% less energy and saves water. The company has
also expanded its warehouse base and refurbished the site
infrastructure. A part of the project was certified by Invest-
Bulgaria Agency, with the company committing to open 8
new jobs.

11. Teklas Bulgaria

Sector: Automotive components
Location: Vratsa
Investment: 30 million levs (€15 million)
New jobs: 500
The seventh Bulgarian plant of Turkey’s automotive com-
ponent maker Teklas will open in Vratsa in mid-year. The
investment amounts to 30 million levs and will provide
500 new jobs. The plot Teklas Bulgaria bought last year,
however, is quite large – 7 ha – with the company plan-
ning to build a second production facility if there is suf-
ficient workforce. That can raise the number of workers
to 1,000. The plant will manufacture rubber, plastic and
metal components for practically all large automotive
producers. Recently Teklas has started making compo-
nents for Tesla too.
 КQUARTERLY 73

12. Agropolychim
Sector: Fertilizer production
Location: Devnya
Investment: 26 million levs (€13 million)
New jobs: 12
Devnya-based fertilizer producer Agropolychim will invest nearly 26 mil-
lion levs in expanding its ammonia storage capacity. The raw material is
crucial for the production of nitrogen fertilizers and the construction of
a new storage facility is expected to further reduce the company’s de-
pendence on the price of natural gas, which makes up 60% of the cost of
the ammonia it produces. The facility will provide an additional capacity
for 20,000 cu. m of import ammonia. It is expected to start operating in
the middle of the year and add 12 new jobs to the 700 workers currently
employed in the company. The ammonia storage facility Agropolychim
uses at present was built in 2014 with a €23 million investment.

13. Mondelez International

Sector: Chocolate products
Location: Svoge
Investment: 22 million levs (€11 million)
New jobs: n.a.
Mondelez has invested more than 22 million levs in a new
chocolate packaging line at its factory in the town of Svoge.
Its capacity is twice that of the old one and can produce 6,600
chocolate blocks per minute. The implementation of the
project started in 2018 and its completion allows the factory
to become a hub for Milka chocolates production. Since 1994
the plant has been owned by Kraft Jacobs Suchard (now
Mondelez). The company employs an average of 580 people.
Company data show Mondelez has a 35% value market share
in Bulgaria.

14. Lindner Building Envelope

Engineering
Sector: Construction elements
Location: Ruse
Investment: 20 million levs (€10 million)
New jobs: 200
Germany’s construction group Lindner, which has several
companies in Bulgaria active in construction and real estate,
will launch production of façade elements in Ruse. For the
purpose, the group has set up a new company, Lindner Building
Envelope Engineering. The new facility will be located on a
6.7-hectare plot and the investment will amount to €10 million.
The company does not give information about the time of the
expected launch.

15. BTL Industries

Sector: Medical equipment
Location: Plovdiv
Investment: 20 million leva (€10 million)
New jobs: 80
Electronic medical equipment manufacturer BTL Industries will
build its own factory in Plovdiv, where it currently works in rented
premises. The company has already purchased a two-hectare
plot in the city. The investment in land and building is estimated
at 20 million levs with production there expected to start in 2021.
The company has been growing steadily in recent years and cur-
rently manufactures 50,000 units a year. About 300 people are
employed in production in Plovdiv and 30 engineers work in the
company’s R&D center in Sofia.
74 KQ POLITICS

BULGARIA
A
Аfter Bulgaria banned Uber,

STRIKES
AirBnB and Booking.com were
slated to suffer the same fate

AT AIRBNB, but popular outcry forced

the government to soften its

BOOKING.COM stance. Instead of harsh administrative curbs

both websites and their peers offering short
term accommodation services will need to pay a

AFTER UNSUCCESSFULLY moderate tourist registration fee.

TRYING TO SHUT AirBnB and Booking.com offer apartment own-

DOWN THE LODGING ers the opportunity to sublet their property to

tourists. Since these are usually short stays,
SHARING SERVICE, THE they are never registered under existing legisla-

GERB-LED COALITION tion and often taxes on the income are evaded.
Even though taxes are often mentioned as the
GOVERNMENT IMPOSES reason, the attack comes from the hotel indus-

A SMALL FEE ON try. Over the last few years, new registrations at
the AirBnB platform have boomed and accord-
APARTMENT OWNERS ing to data provided by the company, to date
there are slightly over 3300 apartment apart-
DENITZA VATEVA ment listings in Sofia (14 000 in the country). In
comparison, the capital city has 12 500 officially
registered hotel beds. This new shared economy
puts a serious dent in the markets of the tra-
ditional hospitality industry exactly when low-
cost airlines made Sofia more accessible for for-
eign tourists.

Q?????????????????????????????????????
???????????????????????????????????????
Shutterstock
????????????????? | Photo by Julia Lazarova
THE STRIKE AGAINST
SHORT-TERM STAYS
In December, the ruling GERB party introduced
two related legislative proposals. One required
the owners of properties listed on AirBnB or
Booking.com to register with the local authorities.
The other said that at least half of all apartment
owners in a building must agree to a property in it
being rented out for a short-term stay. And all of
this to be completed by mid-2020.
No motives were given, but it is worth noting that
no such requirements were to be put in place for
long-term renting of property.
The new rules would have required every apart-
ment owner to register with the municipal au-
thorities. The owners would have had to attach
a document certifying that 50% of the neighbors
in the property agreed. The latter requirement,
though, was not to apply to designated apartho-
tels and tourist complexes.
“The goal is to create the necessary conditions that
will aid compliance with regulations in the tourism
sector,” the proponents argued. During the delib-
eration, the chairman of the economic commission
in parliament, Petar Kanev from opposition BSP
expressed reservations about the ability of owners
to collect the necessary signatures from neighbors.
КQUARTERLY 75
>
No designation of
noisy and quiet zones
in resorts
Another key proposal in the tourism
sector was rejected on its second and
final reading in parliament. It allowed
resorts to offer product zoning. The
idea, authored by the tourism ministry,
aimed to give resorts the opportunity
to designate zones for different types
of tourism, like party tourism or family
vacations. The amendment fell through
when GERB and their junior partner in
the government coalition NFSB intro-
duced two corrections for its dismissal.
According to the newly introduced
amendments, the national resorts will
be designated by the government
under proposals by the Ministry of
Tourism.
A LESSER RESTRICTION
Тhe proposed legislation sparked uproar and
parliament swept it under the carpet. Instead, it
equated the apartments for short-term rental to
hotels. Consequently, their owners will be obliged
to pay a tourist fee of 0.20 and 0.40 euro for every
overnight accommodation.
Obviously, the change is of little value. Most
apartment owners will not register their prop-
erty anyway and unless municipalities actively
pursue cooperation with AirBnB or Booking.com,
the revenue from the new tax will be less than
impressive. Even now hotels in Bulgaria fail to
declare the real number of sleepovers, which is
demonstrated by the mismatch between the Na-
tional Statistical Institute data for hotel over-
nights and the municipalities’ revenue from
tourist fees.
The new regime will be short-lived, because the
European Court of Justice has ruled that AirbnB
is an information service and as such it does not
fall under EU property regulations. Tourism min-
ister Nikolina Angelkova stated that sanctions
will not start applying immediately and member
states will be given a period to adjust to any prob-
lematic legislation, which is a strange logic when
adopting a brand new law.
76 KQ BUSINESS/VEHICLES

Shutterstock
expected tightening of environmental regulations
that, in time, will limit the big polluters.

Understandably, the first group is more numerous

and vocal and data from the Road Traffic Control
(RTC) for last year show that it is probably right.
The total number of vehicles in Bulgaria (light,
light-duty, heavy-duty and buses) is growing, fed
mainly by the increase in old vehicles (20-plus
years). Contrary to the trend in Western Europe,
the number of used diesel cars is rising. At the
same time sales of new and relatively new used
automobiles are also increasing but slightly.

NOTHING NEW
According to data from the RTC for 2019 the total
number of motor vehicles in Bulgaria is 3.75 mil-
lion, up by nearly 90,000 year on year. The number
of newly registered vehicles was relatively steady
at 302,000 (320,000 in 2018 and 306,000 in 2017)
and the difference comes from deregistered auto-
mobiles. For the first time last year the number of
diesel vehicles (light vehicles excluded) exceeded
that of petrol engines and the gap is widening this
year.

The number of light vehicles increased by 57,000

in 2019 with diesel cars growing faster than petrol
ones. With a minimum difference now – 1.31 mil-
lion petrol cars vs 1.29 million diesel cars – the
BULGARIAN latter are expected to top the former this year.

AUTOMOBILE
Most disturbingly, the share of the oldest vehicles
(20-plus years) remains considerable. Besides, it

MARKET: keeps on growing, reaching 41% in 2019 compared

to 38% in 2018. When we add the share of vehicles

GROWING BUT that are 15 to 20 years old (26%), it turns out that
a substantial part of the fleet is above 15 years
GETTING OLDER of age. Of all the 302,000 vehicles registered last
year, 193,000 were above 10 years old.

IN 2019, THE SHARE OF “It was a slow growth market in Bulgaria last year.

DIESEL ENGINES AND The import of used cars is still considerably big-
ger, which keeps the sale of new vehicles well
VEHICLES THAT WERE below their economic potential,” said Alexander

MORE THAN 20 YEARS Milanov, manager of BMW Group Bulgaria.

OLD KEPT INCREASING The optimist’s arguments in the story are to some
extent based on the rising share of automobiles
KONSTANTIN NIKOLOV up to 5 years of age. It reached 6.1% of all vehicles
last year: 230,000 compared to 212,000 (5.8%) in

T
The automobile market in Bulgaria
is like a glass of water that is half
empty or half full. Pessimists say
that due to low incomes the old
cars on the roads will always be
pollutants. Optimists, on the other hand, point
out the increasing number of new cars and the
2018 and 191,000 in 2017. But that is still an insig-
nificant number compared to the rest of automo-
biles; besides, the share of vehicles 5 to 10 years
old is decreasing.
Still, new car sales continue rising, reaching
43,200 in 2019, up 8.6% on 2018. However, growth
slowed down from 10% in 2018 and 20% in 2017
and the result was far from the record 55,000
 КQUARTERLY 77

>
automobiles registered in 2008. Besides, it is not
clear how many of the new automobiles were re-
exported to other markets. Some players in the Premium market
sector say the share of re-exports is about 20%.
Interior Ministry data show that the number of BMW still tops the market of new premium auto-
deregistered new automobiles is almost 6,300, i.e. mobiles, followed by Mercedes and Audi. Last year
more than 14%. A market analysis shows that for there were two new Roll-Royces registered (a total
some brands re-exports may top 30% and reach of 62), five Ferraris (of 93) and five Lamborghinis
as high as 60%. Re-exports are entirely legal but (of 64). The number of new Teslas in Bulgaria also
they blur the actual state of the automobile mar- increased by 16 to a total of 109.
ket in Bulgaria. Dealers say that the most often
re-exported vehicles are SUVs, which have the
biggest share in Bulgaria too. K | BULGARIA'S AUTOMOBILE FLEET
Number of vehicles by brands, 01.2019-01.2020
BEST SELLERS
Leaders in the new automobile market in 2019 0-5 years 6-10 years 11-15 years
were two companies of the Renault group. Da- 16-20 years Over 20 years Total
cia remained number one, speeding up its sales
growth by 17% to 5451 cars (M1 and N1 categories). 2019 2020

Renault remained second but with a slight drop in Volkswagen 458 612
466 571
sales. The two brands held more than 21% of the 356 907
Opel
new automobile segment. “Companies remain the 349 187
285 492
biggest customer of new automobiles but we also Mercedes
298 336
saw a rise in private purchases, the crucial factor Renault 208 122
201 835
for that being the accessibility of the Dacia brand,”
Ford 202 544
said Emil Garnev, general manager of Renault and 200 176
Dacia for Bulgaria. “We also registered growth by Peugeot 187 408
191 418
more than 100% in electric vehicle sales year on
Audi 174 086
year.” 181 184

BMW 146 339

155 231
The rest of the top 5 were unchanged: Skoda, 121 805
Toyota
Toyota and Volkswagen. “Due to our 20-plus-year 136 412

FIAT 114 826

experience in hybrid technology, hybrid modifica- 110 969
tions make up 42% of our sales mix in Bulgaria,” Citroen 105 285
107 999
said Vayios Dotsikas, general manager of Toyota
Honda 86 319
Balkans. Unlike second-hand vehicles, the new 94 508
automobile market follows the trend in Europe Nissan 74 067
77 568
with diesel slightly losing popularity at the ex-
Skoda 62 330
pense of petrol engines and, to a certain extent, 68 474

alternative-propulsion models. Data from the SEAT 57 520

58 185
European Automobile Manufacturers’ Associa- 53 527
Suzuki
tion (ACEA) show that in 2019 diesel car sales in 57 601

Mazda 54 534
Bulgaria fell 20%, while petrol car sales increased 56 997
13%. Hyundai 54 076
49 456

Corporate purchases are the main driver of new
automobile sales in Bulgaria. Therefore they are
considered a relatively good indicator of econom-
ic activity. The share varies from importer to im-
porter but the average level is about 60%. One of
the exceptions is Toyota, which has more sales to
end customers. An important factor to take into
consideration is that there were no large public
procurement contracts last year. At the same time
many new automobiles were delivered under con-
tracts signed prior to 2019: 300 Skoda Rapids for
the Interior Ministry and the first portion of 280
Peugeot ambulances ordered by the Ministry of
Health.
ВАЗ 46 384
48 718
RISE IN LPG, CNG AND ELECTRICITY
As the offering of electric vehicles is rising, so are
sales, though their share is still insignificant. The
number of e-vehicles in Bulgaria is 1185: a surge
by 67% year on year. Rough calculations show
that probably the biggest buyer of e-cars in Bul-
garia is the shared mobility service Spark, which
last year increased its fleet by 150 automobiles; in
February 2020 it added another 80 vehicles, ex-
panding its fleet to more than 350 all in all. > 78
 78 KQ BUSINESS/ VEHICLES

АРИЯ K | VEHICLES BY FUEL TYPE K | NEW VEHICLES MARKET K | AUTOMOBILE FLEET'S AGE
2020 г. (M1 AND N1 CATEGORIES) (up to January)
01.2019-01.2020
2019 2020
11-15 г. Total vehicles From which cars
0-5 years 212 412
Общо 2019 2020 2018 г. 2019 г. 229 421
3 664 621 2 773 325 3 752 566 2 829 946
264 834
2020 г. 5-10 years
260 589
4666
458 612 Dacia 5451
466 571 10-15 years 773 449
Total 4030 755 214
356 907 Renault 3827
49 187
Skoda
3752
15-20 years 1 009 121
492 3717 984 810
8 336 3386
1 589 685 1 339 819 1 570 251 1 312 662
Toyota 3631 1 404 994
Over 20 years
Volkswagen
3017 1 522 559
3476
Petrol 2928 3 664 726
Nissan Total
3183 3 752 626
2406
Peugeot 2719
1 656 676 1 218 211 1 740 541 1 288 415
2018
Ford 1899 K | NEW VEHICLES DE-REGISTERED
Diesel KIA 2020 FROM THE TRAFFIC REGISTER
1875 43 420 (01.2020)
1545 39 984
Citroen
1626 Nissan 2 268
1 600 710 EV 2 431 1 185 1203
Opel 1495 Dacia 791
5 987 5 355 Hybrid 8 430 7 735 1 171 Volkswagen 601
BMW
1276 Toyota 454
23 231 21 856 19 598 18 403
Gas Hyundai 847
987 Opel 441
164 081 157 440 178 538 170 707 810 Renault 433
LPG Mercedes
914
Suzuki 396
Audi 792
21 823 17 829
NG 24 611 19 771 624 Total KIA 382
FIAT 325
Citroen 293
K | NEWLY REGISTERED VEHICLES 319 639
302 461 Peugeot 285
(cars, cargo, trucks, buses and motorcycles) Skoda 242

208 165 Jeep 145 Source: Traffic Police

2018 2019 193 285

51 967 54 962 43 266 37 953

16 241 16 261

Under 5 years old Under 10 years old Over 10 years old Over 20 years old Total

> 77
Purchased brands included Nissan Leaf, BMW i3,
Hуundai Kona and Hyundai Ioniq. Hybrid cars are
also gaining popularity: their number went up by
nearly 2,400 to more than 7,735.
THE IMPORTANCE OF CONTROL
The authorities have long talked of the need to
tighten up control on used cars in Bulgaria but
few measures have been taken so far. Last year
the Ministry of Environment said it planned to
limit the import of automobiles below the Euro 4
standard (i.e. produced before 2005) but later the
then minister Neno Dimov backtracked, saying
that would violate the rules for free movement of
people, goods, services and capitals in the EU. At
the same time countries in the region have much
stricter regulations: in 2016 Bosnia and Herzego-
vina banned the import of cars below Euro 3 and
last year it limited those below Euro 4. Five years
ago, North Macedonia banned the import of cars
of more than 15 years old. From the beginning of
this year Romania has imposed a fee on cars be-
low Euro 3 when entering Bucharest.
The flow of old diesel cars from Germany and
other European countries continues flooding Bul-
garia and Eastern Europe. According to prelimi-
nary data from the National Statistical Office, the
number of imported light vehicles last year was
about 100,000, unchanged from the preceding
year (including new cars). Demand has remained
flat for years. An analysis of one of the most popu-
lar platforms for used car sales in Bulgaria shows
that the average age of the 601,612 automobiles
offered on the website last year was 17.08 years.
More than 83% of them were between 15 and
20 years old and 61% were diesel cars. German
brands made up the top 5 of the list (Mercedes-
Benz, Volkswagen, BMW, Audi, and Opel).
People from the sector say that the problem in
Bulgaria is not so much the age of automobiles
but poor control, i.e. registrations, technical in-
spections etc., which allows polluting and faulty
cars to run on the roads. If that trend persists, the
pessimist’s outlook will remain valid for years to
come.
Photo by Nadezhda Chipeva
NEW CIGARETTE
PEAK
ROTHMANS PRIMED
TO BECOME THE BEST-
SELLING BRAND IN
BULGARIA
DESISLAVA NIKOLOVA
I
f a market keeps growing in value by
the year, this can mean several things:
consumers are increasing, new products
are being launched, prices are rising or
smuggling is shrinking.
All those factors hold true for the cigarette market
in Bulgaria, which once again registered remarkable
growth in 2019.
Curbs on the grey market offering cigarettes
without excise-duty labels have limited illegal sales
to two-digit rates in the past 10 years, reducing
their share of total sales to a EU record low of 3.3%.
That is one of the reasons for the growing official
market of cigarettes, which reached 3.2 billion levs
(1.636 billion euro) last year, according to AC Nielsen
79
data. That makes an increase of 9.3% year-on-year
in terms of value and 7% on the number of pieces
sold. Data from the World Health Organization show
that 35 to 40% of Bulgaria’s population of some 7
million smoke.
Besides, an entirely new category – that of smoke-
free products – has gained popularity in the past
few years, especially in big cities, rising by some
4.6% in value. The consumption of smoke-free
products is assessed at more than 230 tonnes,
given that a pack weighs 6.1 grams on average.
Those products, which are not considered part of
the cigarette market due to their specific character,
additionally increase the sales of tobacco products
and their consumers: in this case some 160,000
people, with more than 70% of them using only
smoke-free products. Judging by the data about
the sold quantities, that segment makes an annual
turnover of some 200 million levs.
FAREWELL, BULGARTABAC BRANDS
There are visible shifts on the market and the most
important of them is that a new best-selling brand
will emerge in the next few months.
The purchase of leading brands of Bulgarian
tobacco company Bulgartabac in 2017 made British
American Tobacco (BAT) the leader in cigarette
sales in the country with more than 40% of the
market. Its Rothmans brand mainly accounts for
it holding pole position. Within two years after
the purchase the concern prompted all major
brands of Bulgartabac (Sredets, MM, GD, Tresor
and Bulgartabac) to migrate to Rothmans and thus
the brand reached second place in sales in Bulgaria.
In 2019 the last but one brand of Bulgartabac, Eva,
also migrated to BAT’s global brand Vogue. The
migration of Bulgartabac’s last remaining brand,
Victory, to Rothmans started in late 2019.
If BAT’s aim was to not only be a leader in market
share but also producer of the best-selling brands
in Bulgaria, after the merger of Victory that aim
will be achieved. Even if half of Victory’s current
consumers switch to Rothmans, the brand will
surpass the 2011 leader, Karelia.
BAT Bulgaria says that the incorporation of the
acquired brands into the global brands is a business
decision led by the demand of adult consumers.
“According to Nielsen data Rothmans has been the
fastest growing brand on the market in the past few
years. The migration to Rothmans is still ongoing
and will be completed soon. It preserves the same
tobacco blend and different varieties and is so far
well accepted by adult consumers,” BAT said.
The company added that it has four names > 80
80 KQ BUSINESS/TOBACCO
> 79 among the top 10 of the best-selling brands
in Bulgaria and Dunhill is leader in the high price
segment. Nielsen data show it was the brand chosen
by one in ten adult smokers in the capital Sofia in
December 2019.
THE CHEAPEST CIGARETTE DUO
While market leader BAT is changing its entire
portfolio and thus reshaping the ranking of the
major brands on the Bulgarian market, the behavior
of some of the other players remains traditional.
Greece’s Karelia has been a brand leader for years
thanks to its lowest prices. Despite the increase in
cigarette prices in 2018-19, Karelia remained the
cheapest brand: its standard cigarettes sell for 5 levs
a pack despite a series of excise-duty hikes in recent
years related to European Union requirements.
Local producer KT International (formerly Kings
Tobacco), which is in the same price segment of
the cheapest cigarettes, did not increase its prices
last year either. Karelia’s and KT’s products have
something else in common: their brands have been
offered for years on the market without excise-
duty labels. By keeping its prices unchanged on
the official market last year Karelia achieved a
considerable increase in market share – by 1.3
percentage points, which was the best market
performance of producers in the ranking. KT,
however, could not get the same advantage and
reported a drop in sales by 0.6 percentage points.
RANKING SHIFTS
Traditionally, the market share lost by leader BAT is
distributed among the other cigarette companies.
Besides Karelia, the biggest gainers last year
were Japan Tobacco and Imperial Tobacco, which
registered an impressive increase in their Sobranie
and Davidoff brands.
Philip Morris preserved its market share in the
cigarette segment. However, both in Bulgaria and
globally the concern is investing mainly in the
smoke-free segment. According to Nielsen data
the sales of smoke-free tobacco products last year
reached 777 million pieces.
Consumer tastes remain unchanged. While in other
European countries the best-selling products are
80 mm cigarettes (the so-called king size), in
Bulgaria 44% of consumption comes from the so-
called long cigarettes with normal thickness, while
slim cigarettes make up more than 30% of sales.
Flavored cigarettes (menthol, chocolate, rose) are
not very popular, so producers do not expect any
serious market disruptions to arise from the EU
ban of sales of menthol cigarettes that comes into
force on 20 May 2020.
AGENCIES OF
CHANGE
RIDING ON THE
WAVES OF AN
EXPANDING ECONOMY,
COMMUNICATIONS
COMPANIES HAVE
BEEN CASHING IN
SIRMA PENKOVA
A
Assuming that the
state of the com-
munications mar-
ket is best defined
by its participants,
then 2019 was definitely a ”dynamic“
year. This was the word most cited by
nearly 60 of Bulgaria’s largest com-
munications agencies. In a period
free of surprises or market shocks,
the agencies gained another year in
which to transform and prepare for a
potential economic crisis.
THE BIG TEN
All seems rather rosy in their busi-
ness to judge from the financial re-
sults of the biggest market partici-
pants. The total revenue of the ten
most dominant communications
companies, those offering a full
range of market and media services,
grew by double digits in 2019. They
even breached the 300 million levs
figure for the first time. What´s more,
their total 318 million levs in revenue
represents two thirds of the volume
of Bulgaria’s communications busi-
ness. The main engine of this growth
continues to be media agencies that
manage the multi-million advertis-
ing budgets of their clients, but don´t

necessarily earn very much themselves.
Traditionally, the first five spots go to companies
that are part of an international holding. The 2019
leader is once again Ogilvy Group Bulgaria with
a revenue of 65.6 million levs, which is 10 million
levs ahead of second placed DDB Group. Third
place goes to Publicis Groupe Bulgaria for the
second year in a row with 48 million levs.
Aegis Network Bulgaria with 45.9 million levs and
BBDO Group with 37.7 million levs switched posi-
tions in the ranking, occupying spots four and five.
The second half of the ranking contains mainly
Bulgarian agencies that have expanded their
businesses over the years to take in a full range
of services. Without big changes, sixth place is
taken by Direct Media Group Bulgaria with 25.3
million levs. The only international presence in
the bottom half is Havas Group Bulgaria with 17.1
million levs. All Channels Communication Group
climbed one spot from 2017 with 9.6 million levs
for 2018. The transformation of New Moment New
Ideas’ business has bumped them one spot down
to ninth place with 7 million levs, or 26% less than
in 2017. With a small difference (6.5 million levs),
the group forming around The Smarts takes tenth
position.
The companies have expanded their service port-
folios with the aim of capturing new clients. In
КQUARTERLY 81
Shutterstock
2019, for instance, Ogilvy Group Bulgaria acquired
the marketing agency Knoway, while a new PR de-
partment was developed as part of DDB Group.
The All Channels group established a media unit,
whereas The Smarts added the branding compa-
ny Enthusiasm to their portfolio.
There were changes at New Moment New Ideas as
well. The group’s media wing MediaS was merged,
while at the international level Havas Group
Bulgaria was purchased by the Vivendi group, to
which Universal Music, Gameloft and Canal+ be-
long. The companies BBDO Group, Publicis Groupe
Bulgaria and Dentsu Aegis Network invested in
acquiring and developing new technologies that
focus on data and consumer behavior analysis.
Direct Media Group Bulgaria expanded its busi-
ness through servicing regional organizations
and in 2019 it operated on three foreign new mar-
kets with the Organization for Security and Co-
operation in Europe.
INDIVIDUAL PLAYERS
Many of the independent agencies on the mar-
ket, responding to clients’ demands for a full ser-
vice package, also bet on the expertise expansion
strategy. Most of them avoid labeling themselves
as a particular type of agency and opt for the
“full communication services agency” tag. Hence
2019’s ranking of the largest independent com-
panies comprises entities with an artistic, digital
and BTL profile that are expanding their ser- > 83
82 KQ BUSINESS/COMMUNICATIONS

K | COMMUNICATION GROUPS (IN THOUSANDS OF LEVS)

Change Employees up to
’18 ’17 Service offered Agency 2017 2018
18/17 (%) November 2019
Media agency MediaCom 18421 20189 9,6 16
Media agency Intomedia 2256 2365 4,8 4
Digital media agency Metric DS 5080 7528 48,2 16
BTL agency Ogilvy Action 1023 843 -17,6 7
1 1 PR agency Ogilvy PR 444 294 -33,8 4
Media agency Wavemaker 2418 8
Media agency Mindshare
31180 31932 2,4 42
Creative Agency Ogilvy Advertising
Total Ogilvy Group Bulgaria 58404 65569 12,3 97
Advertising, PR and digital agency guts&brains DDB 8301 11693 40,9 55
Media and digital buying Optimum Media 10981 13169 19,9 18
Media and digital buying PHD 18618 23476 26,1 27
2 2 Advertising, media and digital agency DNA 6154 6146 -0,1 19
Advertising and digital agency Tribal Worldwide 602 961 59,6 11
Production services Final New (Founded in 2019)
Total DDB Group 44656 55445 24,2 130
Creative and advertising brand Saatchi&Saatchi Sofia
Creative and advertising brand Leo Burnet
Advertising brand Publicis Sofia
Strategic marketing and brand design BrandWorks
11864 12080 1,8 72
Advertising brand Red Lion
3 3 BTL and shopper makering brand Publicis Dialog
PR brand MSL
Digital brand Digitas (Founded in 2019)
Media brand Zenith 31899 35895 12,5 47
Media brand Starcom
Total Publicis Groupe Bulgaria 43763 47975 9,6 118
Dentsu Aegis Network Bulgaria 15929 23236 45,9
Vizeum 3765 3671 -2,5
Creative, media and CRM services
4 5 Amnet 695 1135 63,3
Isobar 13961 17832 27,7
Total Dentsu Aegis Network Bulgaria 34353 45875 33,5 240
Strategic planning and advertising Graffiti BBDO 7 428 8 032 8,1 17
Media agency Media Direction 26 442 27 718 4,8 22
5 4
Digital marketing and PR Proximity Sofia 1 735 1 967 13,4 15
Total BBDO 35 605 37 717 5,9 54
Full communication services KRES 1056 199 -81,2 N/D
Full communication services Direct Media KRES 8311 8162 -1,8 20
6 6
Media agency Direct Media 16852 16929 0,5 21
Total Direct Media Group Bulgaria 26219 25290 -3,5 41
Full communication services Havas Group Bulgaria 1434 3323 131,7 12
Media agency Media Planning Group 9379 9319 -0,6 10
7 7
Advertising and PR agency Havas Worldwide Sofia (+PR) 3497 4475 28,0 24
Total Havas Group Bulgaria 14310 17117 19,6 46
Advertising agency All Channels Advertising 4082 4416 8,2 33
BTL agency All Channels Activation 2334 2599 11,4 10
Digital media agency All Channels Interaction 0 0 - 4
8 9
PR agency All Channels PR 1084 1263 16,5 12
Media agency Connected (All Channels Media) 807 1181 46,3 5
Total All Channels Communication 8307 9459 13,9 64
Full communication services New Moment New Ideas Company 9478 6990 -26,3 22
9 8
Total New Moment New Ideas Company 9478 6990 -26,3 22
Advertising agency The Smarts 2370 2774 17,0 40
Media agency IQ Media 1629 2956 81,5 7
10 10 PR agency Paragraf 42 86 511 494,2 9
Production services Shoot 538 238 -55,8 4
Total The Smarts 4623 6479 40,1 60
Total for the 10 communication groups 279 718 317 916 13,7 966
 КQUARTERLY 83

> 81 vices and businesses. K | INDIVIDUAL AGENCIES

Revenues Revenues
Change
Aiming to meet increasing demand for commu- 2017 (in 2018 (in
Agency in %
thousands thousands
nications services, the agency eTel has, for ex- 2018/2017
of levs) of levs)
ample, created a new company to cater for its Huts JWT 7373 11064 50,1
e-commerce clients. Knoway’s managing director Kiwi Advertising Agency 12140 10684 -12,0
Emil Petkov explained that new services, mainly Digital ID 3571 5682 59,1
related to the creation of video content, have been Brand New Ideas 5432 5584 2,8

added to the agency’s portfolio. Netpeak’s focus A Team 6073 5170 -14,9
Noble Graphics 4012 4764 18,7
continues to be the development and automation
Smart Communications 4253 4434 4,3
of effective advertising and SEO services.
Reforma 2815 3963 40,8
Silver Advertising 2906 3108 7,0
THE MEDIA WORLD
Qwerty Promotions 2251 2989 32,8
The country’s largest media agencies are repre-
Xplora 2064 2813 36,3
sented in a separate ranking. Apart from their
Мethodia web 1747 2712 55,2
business continuing to be narrowly focused, the
JWT Sofia 779 2447 214,1
large accumulation of revenue from managing Netpeak 2005 2428 21,1
their clients’ media budgets makes their volume Knoway 1283 2163 68,6
incomparable to the other market participants. Mag Communications 2006 2156 7,5
The combined revenues of the Top 10 media agen- Httpool Bulgaria 1570 2147 36,8
cies total 114 million levs in 2018, or 20 million levs Mediapost Hit Mail Bulgaria 1838 2120 15,3
more than the revenue of nearly 30 of Bulgaria’s McCann Sofia 926 2043 120,6
most successful communications services com- B+Red 1814 1895 4,5
panies. Interpartners 2832 1860 -34,3
Strata 1296 1638 26,4
The absence of a dramatic change in the market- Clockwork 2276 1550 -31,9
ing investments of advertisers is borne out by Format Vision 989 1420 43,6
the total revenues of media agencies, which had Next-DC 1060 1376 29,8
a yearly growth of less than 1%. This explains why Geko Adv 1128 1333 18,2

some of them have added digital management
to their services. “We restructured our team, ac-
quired the digital agency All Digital, and this now
allows us to offer a full spectrum of digital ser-
vices,” said Simona Tencheva, operations director
at Argent. Similar steps were also taken by Zenith
Advertising & Communications (ZAC), who has in-
vested in the specialized agency Digital ID offer-
ing a full portfolio of digital services.
The managing director of Universal Media Bulgar-
ia and Initiative agencies, Mariana Kovachevich,
also described 2019 as dynamic. “The ownership
changes at the two largest TV channels in Bul-
garia (Nova and bTV) made a lot of noise in the
industry, even though they were not a surprise.”
(The BTV deal, yet to be finalized, is expected in
mid-2020.)
THE DIFFERENT PR AGENCIES
The largest PR agencies in Bulgaria have a sepa-
rate ranking as well. Even though ten years ago
their business was at a crossroads, they managed
to adapt to the changed market environment
and drastically expanded their services. They
placed consulting at the core of their services
and worked for the creation of a long-term vision
for their clients, both inside and outside the firm.
Hence the Top 10 PR agencies in Bulgaria reported
double-digit revenue growth for 2018 as well. They
Amexy 1697 1308 -22,9
eTel 1210 1160 -4,1
EasyAds 897 1155 28,8
Total 80 243 93 166 16.1
earned over 4 million levs more than the year be-
fore and their total revenue was 19 million levs.
Client expectations in the PR industry are also on
the rise and according to Kamelia Dimitrova, ex-
ecutive director at PR Play, they have been ever
more discerning and in search of integrated solu-
tions. In order to meet that demand, Broks Visiоn
JSC have also expanded their digital services
portfolio.
Although they have a different focus, the services
of advertising, PR, digital and BTL agencies are
increasingly overlapping. Even as competitors,
they must often work together in the service of
the same client and achieve a synergy of commu-
nication. “The best campaigns happen when dif-
ferent communication agencies and departments
inside a company work in sync, meaning that less
ego and more creativity, common sense and joint
effort equal a better result,” says Olga Lozanova, a
partner at OT-DO Consult. The executive director
of M3 Communications Group, Maxim Behar, be-
lieves that in a few years the agencies will merge
into large companies under the aegis of PR busi-
ness that creates content.
84 KQ BUSINESS/ADVERTISERS

Shutterstock

THE BIGGEST
E
Economic growth in Bulgaria

ADVERTISERS
continues, directly benefiting
the advertising market. Big
international companies have been
increasing their communication
THE CONSTRUCTION budgets, albeit slowly. In spite of the rise in TV

SECTOR HAS ad prices, medium sized businesses have also

been investing more in communication and now
SIGNIFICANTLY appear in ads aired at the largest TV stations. On

INCREASED the other hand, digital advertising has given even

the smallest companies and limited budgets the
COMMUNICATION opportunity to effectively reach their customer

INVESTMENT base.

WHO ARE THE BIGGEST?

SIRMA PENKOVA According to data by GARB and Nielsen Admos-
phere Bulgaria, the total investment in TV ad-
vertising in 2019 will likely surpass the volume of
 КQUARTERLY 85

K | BIGGEST TV ADVERTISERS K | BIGGEST ADVERTISERS (IN TV, PRINT

IN JAN-SEPT 2019 (IN 2018) AND RADIO) IN JAN-SEPT 2019 (IN 2018)
Source: GARB Source: Nielsen
Company Total budget (mln levs) Company Total budget (mln levs)

1 FERRERO (4) 41.6 (47.3) 1 FERRERO (4) 42.0 (47.4)

2 PROCTER & GAMBLE (2) 41.2 (49.6) 2 PROCTER & GAMBLE (1) 41.4 (51.0)
3 CARLSBERG (12) 41.1 (31.5) 3 CARLSBERG (13) 40.7 (31.0)
4 LIDL BULGARIA (1) 38.7 (49.6) 4 LIDL BULGARIA (2) 40.5 (50.2)
5 NATURPRODUKT(5) 38.5 (48) 5 NATUR PRODUCT (3) 40.5 (47.7)
6 COCA COLA Co. (6) 33.1 (38.2) 6 COCA COLA Co. (6) 34.0 (38.5)
7 BILLA (7) 27.8 (35.2) 7 NESTLE BULGARIA (12) 29.8 (31.1)
8 FICOSOTA SYNTEZ (9) 25.7 (34.1) 8 BILLA (9) 28.5 (34.6)
9 SANDOZ (16) 24.8 (25.4) 9 FICOSOTA SYNTEZ (7) 27.4 (35.5)
10 L’OREAL (8) 23.8 (34.6) 10 RECKITT BENCKISER (10) 25.1 (33.5)
11 RECKITT BENCKISER (11) 23.4 (32.3) 11 NATIONAL LOTTERY (5) 24.6 (43.3)
12 NATIONAL LOTTERY (5) 23.4 (39.1) 12 SANDOZ (18) 24.5 (24.6)
13 KAUFLAND BULGARIA (10) 22 (33.9) 13 KAUFLAND BULGARIA (8) 23.8 (34.7)
14 ALLEGRO GROUP (18) 21.5 (24.2) 14 ALLEGRO GROUP (17) 23.2 (24.6)
15 KAMENITZA (19) 21.2 (24) 15 KAMENITZA (19) 22.7 (24.0)
16 NESTLE BULGARIA (21) 19.7 (23.5) 16 L’OREAL (11) 22.5 (31.3)
17 ZAGORKA (25) 19.6 (18.7) 17 NATURPHARMA (29) 20.0 (17.2)
18 NATURPHARMA (30) 19.5 (16.9) 18 GLAXOSMITHKLINE (GSK) (14) 19.8 (27.4)
19 GLAXOSMITHKLINE (15) 19 (25.8) 19 HENKEL (23) 19.4 (21.5)
20 HENKEL (22) 18.4 (21.5) 20 TELENOR (15) 18.6 (26.3)
21 WALMARK (17) 16.7 (24.5) 21 ZAGORKA (26) 17.6 (18.9)
22 TELENOR (13) 16.4 (25.9) 22 TECHNOPOLIS (24) 17.3 (20.5)
23 TECHNOPOLIS (26) 15.1 (18.7) 23 WALMARK (20) 17.1 (23.8)
24 BEIERSDORF (14) 15 (25.9) 24 MONDELEZ (KRAFT FOODS) (27) 16.1 (18.0)
25 UNILEVER (29) 14.2 (17) 25 BEIERSDORF (16) 15.7 (26.3)
26 MONDELEZ (KRAFT FOODS) (28) 14 (17.6) 26 BELLA BULGARIA 14.2
27 BELLA BULGARIA (31) 13.6 (15.6) 27 CHIPITA 13.5
28 CHIPITA (32) 12.8 (15) 28 A1 BULGARIA (22) 12.8 (23.0)
29 SANOFI - AVENTIS GROUP (20) 12.2 (23.6) 29 UNILEVER (30) 12.7 (15.9)
30 METRO CASH & CARRY (24) 11.4 (19.6) 30 TYMBARK 12.7
31 AROMA COSMETICS (44) 11.4 (8.4)
32 BERLIN - CHEMIE (34) 10.9 (12.3)
2018. Traditionally, the biggest investors in adver-
33 TYMBARK (45) 10.7 (8.1)
34 A1 BULGARIA (23) 10.6 (21.2)
tising are pharma companies. According to Sofia
35 FORTEX (36) 10.4 (11.9) Peneva, executive director of BBDO Group, by the
36 VIVACOM (27) 9.9 (18.1) end of October 2019 the sector recorded a budget
37 FRONERI BULGARIA (48) 8.8 (7.5) increase of 20%, while the other leading advertis-
38 ACTAVIS (35) 8.8 (11.9) ers (foods, beverages, retail and cosmetics) added
39 JACOBS DOUWE EGBERTS BG (33) 8.4 (12.7) over 10%. The executive director of Ogilvy Group
40 BAYER (47) 8 (7.5) Bulgaria, Ekaterina Tupareva, believes that the
41 TECHNOMARKET EUROPA (43) 7.8 (8.4) bigger spending by pharma companies has shift-
42 AIKO (37) 7.6 (11.5) ed towards food supplements from traditional
43 GLOBEX FINANCE (42) 7.4 (8.6) pharmaceuticals.
44 EU PHARMACIA (49) 7.2 (7.4)
45 PRAKTIKER (50) 7.2 (7.3) The Top 3 advertisers in GARB’s ranking are the
46 ZORA 6.9 chocolate and confectionery producer Ferrero,
47 VINPROM PESHTERA 6.8 multinational consumer goods manufacturer
48 BONI HOLDING 6.5 Procter & Gamble, and Carlsberg brewery. In addi-
49 VEDRA INTERNATIONAL 6.4
tion to the pharmaceutical sectors, the two lead-
50 PHILIPS BULGARIA 5.9
ing sectors are foodstuffs and retail. > 86
86 KQ BUSINESS/ADVERTISERS

Ad expenditures by sector in January-September

2019 (2018)
K | AD EXPENDITURES BY SECTOR K | NET ADVERTISING INVESTMENT BY CHANNEL
Source: Bulgarian Association
January-September 2019 (2018) of Communications Agencies (BACA)
Total budget 2018 2019 Change
Company
(mln levs) (mln levs) (mln levs) 2019/2018 (%)
1 Pharmaceuticals 243.4 (301.3) TV 240 260 8.3
2 Food stuffs 186.2 (228.5) Digital 98 112 14.3
3 Retail 183.8 (241.1) Print 13.8 13.5 -2.2
4 Beverages 176.5 (194.2) Radio 19.6 20.3 3.6
5 Cosmetics 149.5 (202.9) Billboards 43 45 4.7
6 Telecommunications 82.9 (133.8) Cinema 0.75 0.78 4
7 Financial services 56.8 (91.4) Total 415.1 451.6 8.8
8 Household chemicals 55.3 (66.7)
The data, collected by media agencies, repre-
9 Hobbies, Fashion, Sports 42.2 (76.7)
sents the net investment in the main commu-
10 Cars 23.7 (44) nication channels, excluding the costs associ-
11 Household goods 10.3 (18.2) ated with creative content and production of
12 Insurance 5.5 (7.1) advertising formats. The forecast for 2019 is
13 Audiovisual 5.3 (6.6) prepared by BACA experts.
14 Social campaigns, civic initiatives 5 (8)
15 Election campaigns 4.5
Bulgaria’s advertisement market registered dou-
ble-digit growth in 2018 and expectations are
16 Others 4.4 (4.5)
for continued growth. In the first nine months of
17 Real estate 4.2 (2.8) 2019 the net investment in advertisement prod-
18 Tourism 4.2 (8.2) ucts reached 415 million levs for the first time, a
19 Machines and equipment 3.2 (2.5) 12% increase over the previous year. TV still dom-
20 Transport 2.2 (2.8) inates the market, attracting more than half of
21 Publishing 1.7 (1.9) investments in advertisements. Traditionally the
22 Office equipment and furniture, stationery 1.4 (0.3)
digital media are expected to achieve the highest
growth in the advertisement market, but in 2019
23 EU funds 0.4 (1.4)
they are still at the fourth place as the most pre-
24 Total 1252.5 (1646.2) ferred communication channel.

> 85 The Top 10 of advertisers in every industry
account for more than half of its advertising in-
vestment (see chart). Ten companies account for
nearly 100% of advertising in the home appliance
sector. Over 80% of spending comes from the su-
permarket chains, cosmetics, beverages and tel-
ecom sectors. The national lottery’s TV ad budget
accounted for more than half of the total in the
hobbies, fashion and sports sector.
Nielsen Admosphere Bulgaria reports that for the
first nine months, the press has attracted ad in-
vestment equal to just over half of the investment
for the full year 2018 and is unlikely to reach that
year’s level (see chart). With slight changes in the
leading spots, the Top 10 companies of 2018 main-
tained their positions in the first three quarters of
2019. Even so, Yanis Minakos, managing director
of Huts JWT and JWT Sofia, is optimistic: “Almost
all our clients increased their budgets in 2019 and
their sales grew compared to the previous year.”
FRESH ADVERTISING BUDGETS
Nikolay Nedelchev, founder and director of Publi-
cis Groupe Bulgaria, says that there isn’t a single
new company in the Top 100 ranking for January-
October 2019. “There are, however, several play-
ers from different sectors that deserve attention:
Roshen, EVN, Home2You, A&D Commercial, Aflo-
Pharm, Aroma and Speedy. Most of these compa-
nies have long been part of the Bulgarian market,
but 2019 saw them invest (EVN, Aroma) in TV ads
after a long pause,” he notes.
Market watchers have also recorded an increase
in the communication budgets of real estate com-
panies, as increased construction activity and
growing competition have reflected positively
on advertising investments. According to Ma-
ria Grashnova, director of Dentsu Aegis Network
Bulgaria, the investments made by the construc-
tion, home improvement and furnishing sectors
jumped by over 60% in the first three quarters of
2019. “An interesting fresh participant in the Top
20 group is the agri sector with a 130% jump,” she
says.
In the last few years, expanding Bulgarian com-
panies have been increasingly active in communi-
cation investments. All Channels Communication
Group’s director Alexander Duchev says that they
have also been seeking progressively exhaustive
market analysis from their communication part-
ners. “On the other hand, the consolidation in
the banking sector has inevitably impacted our
industry, especially in the media. This was com-
pensated by perishable goods and non-banking
financial services, which are eagerly competing to
attract some of the growing income of consum-
ers,” he notes.
 КQUARTERLY 87
БИЗНЕС ДОКЛАД НА КАПИТАЛ

2020: Bulgaria and the Global

Economic Slowdown

TOPICS:

• Bulgaria‘s exports structure is changing towards higher

value-added goods

• Risks are visible to the IT sector as the local companies are

mainly linked to the USA, UK and Germany

• Employment is still dominated by traditional sectors

Подърайте на
capital.bg/kreport
88 KQ POLITICS
BUSINESS/POSITIVE STORIES

BULGARIA’S amateur project into a mass education platform.

BRIGHT SIDE: As is often the case, he got the idea about Ucha.se
by chance. While studying abroad, he helped his
sister learn her physics lessons by recording vid-
WHEN SMART IDEAS eos. Her classmates liked the videos very much, so

TURN INTO BUSINESS he started publishing them on YouTube. Then he

bought the domain and in 2012 he decided to re-
turn to Bulgaria and make Ucha.se
a business. Mr. Madjarov attracted

Photo by Krasimir Iuskeseliev

professional teachers to help him
with the different subjects. He also
found his first investor, LAUNCHub,
which provided €30,000 for the en-
terprise, as well as a business part-
ner, Nikolay Zheynov.

The platform was initially free and

quickly gained popularity. In 2013 it
attracted another investor, copper
mining company Asarel-Medet’s VC
fund, as well as two business angels
who invested a total of €200,000.
To make the business sustain-
able, the following year Madjarov
made Ucha.se a paid platform but
subscription did not prevent its
further growth. A third round of in-
EASY LEARNING vestment followed in 2016, when LAUNCHub pro-

WITH UCHA.SE
vided €200,000.

J
Judging by parents’ opinions, the
education website Ucha.se (“I learn”
in Bulgarian) is a complete success.
Teachers also like the platform: some
95% say the website helps pupils
learn the lessons and achieve higher results. In just
seven years, founder Darin Madjarov has turned his
In 2019 Ucha.se’s revenue jumped 85% year on
year, reaching 7 million levs (€3.5 million), and
profit amounted to 3 million levs. Some 150 people
work for the company at present and 70 of them
are permanently employed. “We managed to cre-
ate a platform that not only allows us to make
profit from a social project but also grow,” Mad-
jarov says.

WISH A CAKE at home but soon realized that such undertak-

ings turn into business in other countries and

H
Hidden in the shadow of the
National Television’s building
in downtown Sofia is the first
cupcake bakery that Elitsa
Tamneva and Ivan Blagoev
opened nine years ago. Since then Take a Cake has
become a favorite both at home and at corporate
events, growing at a two-digit rate. The family firm
today has two bakeries in the capital city (and
working on a third one), as well as an online shop.
The family started experimenting with cupcakes
that there were no such bakeries in Sofia. Armed
with the idea, their savings and loans from
relatives, Tamneva and Blagoev registered the
firm in August 2010. Several months later they
opened their first shop on Tulovo Street. Take a
Cake’s list includes traditional flavors like cocoa
and vanilla, as well raspberry, strawberry, cherry
in liquor, savory muffins and special collections.
Another ingredient of Take a Cake’s success is
their online presence. In 2012 they opened their
first online shop and today they say that was a
good decision. Clients can order cupcakes on-
line and have them delivered right to their door
 КQUARTERLY 89

SOFIA’S
FAVORITE
PIZZA

T
There are very
few restaurants
in Sofia that can
boast clients
lining up in
front of the door. In just three
years, however, Franco’s Pizza
has become the favorite place
for both residents and tourists.

Photo by Tsvetelina Belutova

The secret of Franco’s success
is not just its perfect loca-
tion (close to the busy Vitosha
Street). Firstly, this is a pizza-
only place: 16 kinds of delicious
pizza and nothing else to dis-
tract attention. Secondly, it is an
excellent value-for-money offer. Thirdly, service is
very fast and efficient. And last but not least, the
place is small but cozy.
Surprisingly, Franco’s has almost nothing Ital-
ian in it. The name was chosen entirely for its
marketing effect, owner Ivaylo Arangelov admits.
However, he borrowed Franco’s success formula
from Italy: a clear focus on pizza, no compromise
with the technology and product quality, attrac-
tive prices and fast service.
Figures also speak of Franco’s success. The res-
taurant started with a staff of three people and
today it employs 13. Though it has only 30 seats,
200 to 300 people visit it on workdays and up to
400 on weekends, the owner says. It is also in-
dicative that the small pizza place had an annual
turnover of 350,000 levs (€175,000) in 2018.
Franco’s operates at full capacity, so it does not
offer home deliveries except for takeaway. Mr.
Arangelov is mulling opening a second restaurant
but finding a good location is crucial. He wants it
to be larger and have a more spacious kitchen, so
he can try new ideas and pizza recipes.

in 2 hours. A few years later a new

website was developed to make the
online venue more customer friendly
and improve user experience. Take a
Cake’s online business makes up half
of the firm’s turnover, which topped
620,000 levs (€310,000) in 2018.

Tamneva and Blagoev opened their

second physical shop in the capi-
tal city, on Benkovski Street, in 2014
and are already planning a third one.
It will be located in one of Sofia’s big
residential districts, Mladost 1, and
will be larger than the first two bak-
eries.
90 KQ POLITICS
THE OTHER SOUTHWEST
BLAGOEVGRAD STILL LURKS IN SOFIA’S
SHADOW DESPITE ITS POSITION IN THE
ECONOMICALLY AFFLUENT SOUTHWEST
LILIYA IGNATOVA
T
The district of Blagoevgrad is part
of the richest region in Bulgaria
from a statistical perspective
- the Southwest, which is also
home to the capital. Consequently,
Blagoevgrad often gets overlooked and remains
in Sofia’s shadow. The size of the local economy
is incomparable to the capital, which is about
100 km away, but Blagoevgrad district has many
advantages. Employment is at a record high,
unemployment is low and Blagoevgrad’s has two
universities, attracting ambitious young people.
The local tourism sector is booming and set to
expand into new territories.
However, the district of Blagoevgrad has the low-
est average wage in the country. And, similarly to
other districts, the growth rate of the local econ-
omy has been falling behind the national average
over the past decade. What makes Blagoevgrad
different is that there are no large employers,
state-owned enterprises, power plants or mili-
tary factories to offer high salaries to its popula-
tion. The economy specializes in low value-added
sectors such as agriculture, light industries and
sectors which traditionally go hand in hand with
modest wages and relatively large grey sectors
like tourism. All this brings down the averages for
the district.
MODEST GROWTH RATE
Blagoevgrad’s macroeconomic indicators leave
the initial impression that the local economy is
growing at a much slower rate than the nation-
al average. The value of gross domestic product
reached 2.7 billion levs in 2017, according to data
from the National Statistical Institute (NSI), but
that’s just 43% above what it used to be a decade
ago. Meanwhile, the national average growth rate
was 59% for the same period. A similar lag is vis-
ible in data for local value-added.
During the past decade, there has been a re-
structuring in Blagoevgrad’s economy, which has
 КQUARTERLY 91

moved away from industry to focus more on ser- “We see more and more people opening small
Shutterstock

vices. The shift was probably due to the decline
of one of the traditional branches of the local
economy - tobacco production. In 2017, cigarette
manufacturer Bulgartabak Holding cut half its
staff at the Blagoevgrad factory. At the beginning
of 2019, the production plant officially shut down,
leaving the remaining 200 employees jobless.
However, Blagoevgrad’s potential in this sector is
still intact. “I hope someone will reopen the fac-
tory because the base is built and the trained
people for these machines are still here,” says
Romeo Shatev, chairman of the local branch of
the Bulgarian Chamber of Commerce and Indus-
try (BCCI).
In services, the undisputed leader is tourism,
which is booming. “Before, winter and moun-
tain tourism dominated, but now the sector is
expanding towards spa. The mineral springs in
the region are a natural resource, and we’re still
using only a small portion of the ones available.
There’s a lot of potential for growth here,” says
Shatev. Services generate 61% of the value-added
in Blagoevgrad. Agriculture contributes 10% and
was worth 238 million levs in 2017, second only
to Plovdiv in size. The area, known for its mild
climate, is home to growers of early sprouting
vegetable and fruit in Bulgaria and winemaking
is also gaining ground.
wine cellars and investing their money in edu-
cating their children abroad, where they learn
from wine-making practices in Australia, France
and Chile. Which is a good prospect for the re-
gion,” says Shatev. He claims that sectors such
as woodworking, furniture production and sew-
ing also have good positions, even though cloth-
ing manufacturers have difficulties due to lack of
manpower.
But it is precisely the specialization in these
sectors that may explain Blagoevgrad’s sluggish
economic performance. Agriculture is tradition-
ally the lowest performing sector in the Bulgar-
ian economy in terms of value-added. Branches
in light industry also don’t operate at large mar-
gins, and tourism offers the lowest wages in the
district (an average of 532 levs per month in 2017)
after transport (505 levs).
WHY THE LOW WAGES?
Despite its universities, the short distance to
the capital and its positive business environ-
ment, Blagoevgrad district has the second-low-
est average wage in the country, according to
data from 2018. The average gross monthly sal-
ary is 771 levs, whereas Sofia offers twice that.
Wage growth is comparable to the national av-
erage, but the low base makes catching up dif-
ficult. > 92

GDP PER CAPITA

In levs
Blagoevgrad National average Blagoevgrad's GDP (% of total in Bulgaria, rhs)
16 000 4.0

14 000 3.5

12 000 3.0

10 000 2.5

8000 2.0

6000 1.5

4000 1.0

2000 0.5

0 0
‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17
Source: NSI
92 KQ BUSINESS/BLAGOEVGRAD

AVERAGE MONTHLY GROSS WAGE > 91 Average figures, however, are not enough

Shutterstock
In levs
of an argument for a district’s development.
National average Blagoevgrad
According to data on average wages by munici-
1200
pality published by the Sofia-based think-tank
1000 Institute for Market Economics last year, the
Blagoevgrad district’s average salary was 691
800
levs in 2017, but in Blagoevgrad municipality the
600 amount was 809 levs, ranking it 15th among the
district centers in the country, with a higher
400
average than other municipalities like Gabrovo,
200 Yambol, Pernik and Haskovo, and in 66th place
among all 265 municipalities in Bulgaria. The
0 smaller municipalities in the southwestern part
‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 Q4‘18
Source: NSI of the district offer lower wages, bringing down
the average.
EMPLOYMENT RATE
15 - 64 completed years (%)
The disparity comes partly from local population
Blagoevgrad National Average
distribution. Usually, average wages are highest
75
in a given district’s economic center where the
70 biggest employers are. The economic center is
also where most of the population is based. The
65
more people live in the center (and get paid high
60 wages), the more the average amount rises in the
district. Blagoevgrad municipality is not an ex-
55
ception in terms of the wages it offers compared
50 to other economic centers. Where it does differ
is people - only about a quarter of those living
45 in the district reside in its economic center. That
‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18
Source: NSI is the lowest share among all of the Bulgarian
districts, which gives the higher wages offered in
UNEMPLOYMENT RATE Blagoevgrad municipality a comparatively small-
15 - 64 completed years (%)
er weight in the district’s average.
Blagoevgrad National Average
16
Also, there are no large employers in Blagoevgrad.
14
Usually, big corporations offer better pay, mak-
12 ing other companies in their area of operation
10 raise their wages as well to compete for potential
8 employees.
6
4
BLAGOEVGRAD’S
ACTIVE CITIZENS
2
Leaving aside the low average wages in Blago-
0 evgrad, the district has some of the best regional
‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18
Source: NSI economic indicators in the country. Close to
three-quarters of the population were economi-
FOREIGN INVESTMENT PER CAPITA cally active in 2018 (152,000 people), and 145,000
Foreign direct investment in non-financial enterprises
of them were employed, which brought employ-
at cumulative base as of 31.12, euro
National average Blagoevgrad ment up to 71%, whereas the national average
4000 was 67.7%. Unemployment also fell to 4.8% in
3500 2018, which is below the Bulgarian average.
3000
2500 The restructuring of the local economy from in-
dustry to services is also evident in the employ-
2000
ment statistics. Over a third of the 89,700 people
1500
employed in Blagoevgrad in 2017 worked in man-
1000
ufacturing, down from 41.1% in 2007. Construc-
500
tion has also been also losing ground, with 5,000
0 people employed in 2017 - half the number ten
‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17
Source: NSI years earlier.
 КQUARTERLY 93

On the other hand, locals are focusing on eco- LONG-TERM ASSET EXPENDITURE
Levs per person
nomic sectors like transport and logistics, tour-
Blagoevgrad National Average
ism, research and healthcare. The highly profit-
4000
able (by Bulgarian standards) ICT sector has few
3500
representatives in Blagoevgrad – it employed
only 700 people in 2017, or 0.8% of all employ- 3000
ees in the district. One reason could be the ex- 2500
tremely low average wage - 899 levs for a job 2000
in ICT, whereas in Sofia or Plovdiv, for example, 1500
an employee could easily get several times that 1000
amount. 500
0
YOUNG PEOPLE LEAVING ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17
Similarly to other regions outside the capital, Source: NSI

companies in Blagoevgrad are also facing dif-

ficulties associated with retaining employees.
The pace of population decline is low compared
to other areas in the country like the Northwest.
Elderly citizens made up 19.3% of the district’s
population in 2018, which is the third-lowest
share in Bulgaria after Sofia (17.5%) and Varna
(18.9%). However, the downward trend is visible.
Over the past decade, the population in the dis-
BLAGOEVGRAD CAN BE CONSIDERED
A GOOD ALTERNATIVE FOR
OUTSOURCING OPPORTUNITIES
CONSIDERING THE ABUNDANCE OF
STUDENTS AND THE SHORT DISTANCE
TO SOFIA AIRPORT.
trict has decreased by 7%. The group of people
under 24 years old has shrunk from 32% of the
population in 2001 to 23% in 2018.
The city of Blagoevgrad has two academic in-
stitutions - The South-West University and the
American University in Bulgaria. Together, they
have over 12,000 students. Despite that, it looks
like most graduates don’t choose to stay in Bla-
goevgrad. Barely a fifth of the district’s popula-
tion has a higher education degree. Compara-
tively, the national average stood at 27.8% in 2017.
According to national statistics, 4,000 people left
the district in 2018, 42% of whom headed abroad
and a third of whom chose to live in Sofia. > 94
94 KQ BUSINESS/BLAGOEVGRAD
//NEWS BRIEF
MORE WATER/Belgian mineral wa-
ter bottling group Spadel will invest
€17 million in the construction of
a new logistics center and the re-
placement of two production lines
at its plant in the Bulgarian town of
Devin. The investment will enable the
company to meet its growing production
needs by 2028, Spadel said. According to
Marc Du Bois, CEO of Spadel, the Bulgar-
ian market has a significant growth po-
tential. Spadel acquired Devin in 2017.
The company bottles and sells a wide
range of products including mineral wa-
ter, spring water and table water under
its Devin and Divna brands. It is also the
official distributor of Red Bull energy
drinks and fruit-juice brand Granini in
Bulgaria.
EXPANSION/Bulgaria-based IT and
BPO services provider Bulpros has
acquired local company Beam, an
integrator of SAP business manage-
ment solutions, for an undisclosed
sum. The addition of SAP expertise is
of strategic importance for Bulpros as it
complements the portfolio of digital so-
lutions offerings for corporate clients in
the company’s core markets. Beam is the
sixth company to become part of Bulpros
since it was founded in 2010. The group
has a wide range of competences with a
focus on financial and professional ser-
vices and telecommunications. It oper-
ates on a global scale and has more than
1,300 employees, working across 20 of-
fices in Europe and North America.
CO2 FREE STORAGE/Bulgarian lo-
gistics company Dreams Trans has
launched the construction of a 25
million levs (€12.8 million) logistics
park in the Bozhurishte industrial
zone near Sofia. The project, part of
which is financed through a loan pro-
vided by DSK Bank, is expected to be
wrapped up in the middle of 2021. DT
Logistics Park will include a spacious
storage base and other buildings, all
spreading on some 35,000 sq. m. The
park will have a capacity of 40,000 euro
pallets. It will be carbon-neutral, as it
will be equipped with 1.1 MW photovol-
taic rooftop installations. The company
already operates warehouses in Ger-
many, North Macedonia and elsewhere
in Bulgaria.
> 93
SOFIA’S LONG SHADOW
Photo by Anelia Nikolova
Over the past 15 years, the total amount of for-
eign direct investment in Blagoevgrad has risen
to 474 million euro, or 1,541 euro per capita. Ac-
cording to an analysis by the Institute for Market
Economics, over half of foreign capital flows was
directed into the trade sector by the end of 2015
as a result of the advent of modern retail chains.
Although this breakdown is a bit old, the amount
of FDI in Blagoevgrad did not change significant-
ly over the next two years, indicating a very low
probability of a significant shift in FDI structure.
However, Blagoevgrad can be considered a good
alternative for outsourcing opportunities con-
sidering the abundance of students and the
short distance to Sofia Airport and major infra-
structure links. “The proximity to the capital pro-
vides tremendous opportunities for the develop-
ment of Blagoevgrad, but they are not used by the
local government structures. In my opinion, there
is no long-term vision for the development of the
district, no initiative, no desire for change,” says
Simeon Kitanov, chairman of the local branch of
the Bulgarian Industrial Association.
Another obstacle to unfolding Blagoevgrad’s full
potential are the missing sections of Struma
Highway. According to locals, they should have
been built years ago. “The Struma highway was
stolen from us by Sofia,” says Romeo Shatev. “The
first highway that received full funding from the
EU pre-accession funds was Struma. And yet,
construction may not be completed by 2023.
We’re paying for the subway in Sofia, the Tra-
kia Highway and now the Hemus Highway. Why
shouldn’t the money for the subway be distrib-
uted to other infrastructure projects?”
The very fact that Blagoevgrad shares a planning
region with Sofia - the Southwest, is to the dis-
trict’s detriment, Shatev argues.
“Sofia increasеs the average macroeconomic in-
dicators for the whole region, as a result of which
our access to European programs is limited,” Sh-
atev explains. Anyone looking at the macroeco-
nomic statistics can see that the capital is very
different and far ahead of the rest of the regions
in the country. Consequently, this distorts the
numbers for the whole Southwest, as well as the
competition for access to cohesion funds, which
are allocated on the basis of average GDP per
capita. Sofia itself is above the EU average but
because it shares the same planning region with
other less developed districts, the capital contin-
ues to receive the lion’s share of European fund-
ing for major infrastructure projects such as the
subway.
 КQUARTERLY 95

BLAGOEVGRAD’S
I
It’s not overstating things to describe

IVY LEAGUE
the American University in Bulgaria (or
AUBG, as it is more commonly referred

COLLEGE to) as the most successful foreign

project to have taken root since the fall
of Communist rule three decades ago. It is, by far,
also the most important institution in Blagoevgrad,
THE TOWN HOUSING a town of about 70,000 in the southwest that has
THE AMERICAN now housed the university for 28 years.

UNIVERSITY IN So far, the coexistence has been a symbiosis – the

BULGARIA FAILS TO TAP university brings to the town about 800 young
people, many of them foreign, while the munici-
ITS POTENTIAL BECAUSE pality has mostly been welcoming to the institu-
OF ITS LOCATION tion and, especially in the years of its inception,
has helped it take root. Alongside the other higher
education institution in town - the Southwestern
MARTIN DIMITROV University, Blagoevgrad is truly a university hub.
Yet the local authorities seem incapable of tap-
ping the huge potential that comes with having
the top university in the country on their door-
step. > 96
96 KQ BUSINESS/AUBG
President of AUBG
DAVID EVANS
I want our students to do more socially
responsible work – from simple things like
cleaning up graffiti and clearing up the river-
banks, to interning in the local administration
and gathering funds for initiatives in town. As
citizens, they need to learn that improving the
environment around them is their duty.
> 95
A LIBERAL ARTS PARADISE…
AUBG is the only higher educational institution
in the country that follows the liberal arts prin-
ciples of education – students live on campus,
most of them complete dual degrees, combining
various social sciences with the likes of computer
science, accounting and economics, and there is
much more interaction between them and their
instructors. Walking around the shiny campus of
the university feels like being in any similar col-
lege somewhere in the USA, with the added bonus
of having the highest mountain in the Balkans,
Rila, as a background. And it’s not only nice build-
ings – AUBG is a melting pot for students from all
over the Balkans and beyond, who study in a truly
international environment.
They also show impressive results – the univer-
sity tops the charts in the annual Bulgarian Uni-
versity Ranking in four out of five majors that are
taught there, including Business administration,
Economics, Political Science and Journalism, and
is second only to Sofia University in Computer
science. Needless to say, there is practically no
unemployment among its graduates and their av-
erage salaries are significantly higher than those
of their peers from other Bulgarian universities.
…IN A PLACE
THAT CAN’T USE IT
The rosy picture is disturbed only by Blago-
evgrad’s lack of employment opportunities for the
well-educated and ambitious young people who
graduate from AUBG.
“That is the sad part – in reality there isn’t much
opportunity to make a career here, the companies
are closed and people like me who want to stay in
Bulgaria go to Sofia, while the rest go abroad,” says
Kristina Kukoleva, a student at the university and
a native of Blagoevgrad. According to the Presi-
dent of AUBG David Evans, the only way for the
town to retain some of the talent the university
produces, is to attract at least one international
investor in need of AUBG-trained managerial cad-
res.
Being in Blagoevgrad is a double-edged sword in
other respects as well. On the one hand, many of
the staff and students like staying in a smaller,
cozy town where practically all they need is at
walking distance. There are just enough cafes,
shops and other amusements to keep students
entertained when they are not studying, and Sofia
and its international airport are close enough – at
about 1.5-2 hour drive – for those who prefer more
diversity.

AUBG TOPS THE CHARTS IN THE
ANNUAL BULGARIAN UNIVERSITY
RANKING IN FOUR OUT OF FIVE
MAJORS.
At the same time, a liberal arts college aspiring to
train the next generation of business and politi-
cal leaders suffers, because it is not at the heart
of national socio-economic events.. “It would be
much easier to attract more foreign students if we
were based in Sofia,” says Mr Evans. Blagoevgrad
mostly remains a temporary home for the major-
ity of students who relocate after graduation.
STRONG ALUMNI BONDS
This, however, does not mean that they lose con-
nection to their alma mater. On the contrary,
AUBG boasts the strongest alumni network of
any Bulgarian university. Irena Macheva, who is
responsible for connecting the alumni to the uni-
versity and fundraising, believes that the intimate
links created when studying and living together
on campus for four years have positive and long-
lasting effects. Not only alumni contributions
make up for about 25% of the revenue of AUBG,
but former students come to give lectures and
kick off initiatives years after their own gradua-
tion.
At the end of 2019, for example, a partner from
venture capital fund Eleven and AUBG alumni
Daniel Tomov announced that he was launching a
practical entrepreneurship accelerator program.
The caveat is that the university will hold a 5%
stake in any start-up to be launched during this
program.
AN INSTITUTION WITH A MOST
PECULIAR HISTORY
If there is one thing that is most unusual about
the location of this liberal arts college, it is the
story of its inception and early years. One can
learn about it from the still unpublished manu-
script of Robert “Bobby” Phillips, one of the first
instructors at AUBG, in effect with the univer-
КQUARTERLY 97
sity from its first days of operations in Septem-
ber 1991. Even its author, however, finds it hard to
pinpoint whose idea exactly it was to open a new
institution sponsored by a U.S. government grant
and private contributions, including from the fa-
mous financier and philanthropist George Soros.
One thing is certain – the creation of the univer-
sity was an almost magical coincidence of inter-
ests, including those of the last Socialist-era U.S.
Ambassador to Sofia Sol Polansky, his press aide
John Menzies and the first director of the Bulgar-
ian branch of Open Society Institute Georgi Pro-
hasky. They managed to attract the interest – and,
respectively, the sponsorship and patronage – of
both Mr Soros and a number of famous Bulgarian
emigres exiled by the Communist party, includ-
ing journalists Dimi Panitsa and Stefan Gruev. At
the same time, the reformist-minded leader of the
Temporary Executive Committee of Blagoevgrad
(and, later, the first democratically elected mayor
of the town) Eliana Maseva managed to convince
the local authorities to rent out the local House
of the Communist Party, now defunct for obvious
reasons, to the Americans.
“So far, so good, but in the beginning we had to
convince everyone that we were not American
spies,” Mr Phillips recalls of his first years in the
small post-Communist town. It was a different
world back then, which had little to do with the
simple, yet modern look Blagoevgrad has today.
“The town was so poor, the infrastructure was
crumbling, packs of rabid dogs roamed around
and you took to the streets risking your life,” says
David Flanagan, an ex-president of the Board of
Trustees of the university. Electricity shortages
and a lack of toilets also hindered the early years
of the university in the harsh post-Communist
reality of 1990s Bulgaria, but what the country
lacked materially, it substituted for intellectually.
“The first graduates were so smart! It was their
first chance to go beyond the limitations of Com-
munism and they grabbed and held onto it. They
took the SAT exams in a language they had almost
never practiced and their results were better than
those of Ivy League schools applicants. They were
true pioneers,” Mr Flanagan adds.
So is AUBG. Despite the many hardships and
problems piling up throughout the years, the uni-
versity, its staff and its students have managed to
overcome all odds and even grow.
“Nobody expected the small university in Blago-
evgrad to survive, but we made it. We are survi-
vors,” concludes Bobby Phillips.

THE REAL ESTATE MARKET IN
SOFIA SHOWS FIRST SIGNS OF
RECESSION
SALES INCREASED IN 2019 BUT, ON AVERAGE,
PRICES STAGNATED
BORYANA GENCHEVA
T
The segmentation in Sofia’s
residential property market
continued last year. Location has
ceased to be an indicator of prices;
instead build quality and overall
environment have become much more important
for prospective buyers. At the same time, record
low mortgage rates and wage growth have led to
increased sales. Prices, however, seem to have
stalled, mainly because old properties are losing
their lure.
INCREASED SALES
The real estate market in Sofia experienced yet
another good year. The public register recorded
29 772 deals in 2019, which is 5.45% more than
2018. Two of the big agencies on the market, Ad-
dress and Yavlena, reported a 15% growth in sales
in Sofia and Bulgarian Properties saw increased
sales as well.
“Demand has continued to be active, as well as
supply of new construction. But growth has been
much more gradual and moderate than in past
years,” says the managing director of Bulgarian
Properties, Polina Stoykova.
The managing director of Address, Gergana
Tenekidzhieva, points to the favorable bank loan
Q Buyers prefer newly
built buildings | Photo by
Tsvetelina Belutova
environment and the considerable slowdown in
price growth as factors that contributed to the
good results. Combined, they created the right
conditions for both personal and investment
purchases. Yavlena’s data puts investment buys
at 15%, which equals the percentage recorded in
2018. This stagnation is due to increased supply,
which in turn makes buyers more careful. Accord-
ing to Address’ data, investment buyers constitut-
ed 24% of the total, compared with 20% in 2018.
The past year saw a number of these buyers close
deals after a protracted wait for the appropriate
moment.
Arco Real Estate noted that an additional stimu-
lus for buying was the increase in the property
purchase tax, which rose from 2.5% to 3% in Sofia
from the start of 2020.
THANKS FOR ALL THE MORTGAGE
LOANS
Alongside growing income – whether from sala-
ries, transfers from family members abroad, or
other sources – the record low mortgage interest
rates also account for the vibrant market. Yavle-
na recorded 35%-40% of deals as being financed
with loans. Address’ data shows 55% and a con-
tinuing increase. “The reason is the higher prices

and buyers’ desire for a better home in a more
prestigious area, which in turn calls for external
financing,” Gergana Tenekidzhieva explained.
Polina Stoykova commented that 2019 also wit-
nessed heightened activity because of an expect-
ed interest rate hike, which never materialized.
“If we calculate the percentage of income that
goes into the mortgage of a middle-sized property,
homes today are more affordable for people with
an average salary and mortgage loan than at any
moment in the last 12-13 years,” real estate expert
Georgi Pavlov told Bulgaria On Air TV. “If there is
anything that can hinder the real estate prices in
Bulgaria, it would be a decision by the European
Central Bank to raise interest rates. Something
for which there are no indications whatsoever,” he
added.
The chairman of the National Real Estate Associa-
tion, Dobromir Ganev, says that political stability,
the migration toward Sofia and the close to zero
interest rate on bank deposits are additional factors
stimulating buyers. He also believes that returning
inflation is an incentive.
EVERYONE LOVES SOMETHING NEW
“New construction dominates the demand of buy-
ers,” commented Polina Stoykova. The sales statis-
tics of Bulgarian Properties show that in the last five
years new construction has conquered the market.
Its share has grown from less than 50% in 2014
to over 90% in 2019. “The record low cost of bank
financing was aided by an increased availability
of payment programs provided by investors,” she
added.
“Buyers insist that their purchases be new and
previously uninhabited,” confirmed Gergana
Tenekidzhieva. There is demand for old apart-
ments as well, mostly because of the way the old
regulation measured the property’s surface (new
construction includes walls, stairways and other
common-use areas in the total surface, decreas-
ing living space by 15 to 20%). “It is important for
buyers that old apartments be renovated and re-
furnished,” Tenekidzhieva noted, adding that the
price may go up by 20-25% per square meter in a
renovated old brick building with identical speci-
fications.
SLIGHT PRICE INCREASE
According to data by Bulgarian Properties, the av-
erage price was 1095 euro per sq. m. in the fourth
quarter against 1088 euros per sq. m. in the third
quarter (an increase of 0.6%). As a whole, however,
2019 ended with an average price identical to that
of 2018. Address recorded a 7.13% increase in their
КQUARTERLY 99
deals. The agency clarified that the hike is not due
to any real price increase but to other factors –
the increased interest for furnished and remod-
eled apartments, which are more expensive, and
sales of new or under construction buildings that
sell for higher prices than old buildings. Other-
wise, most areas have retained the same prices
for standard properties. Yavlena registered an
average price growth of 1.5% in 2019. A quarter of
their deals last year were for new construction.
THE FIRST NEIGHBORHOODS WITH
A PRICE DECLINE
Imot.bg, the largest local real estate website, reg-
istered a drop in prices in 2019 in six of the 53 So-
fia neighborhoods listed. Medical Academy, Boro-
vo, Lagera, Slavia, and Zona B-5 saw prices drop
between 2% and 5%, while the decrease reached
9% in Poligona. Yavlena recorded a decrease of
between 1% and 6% in seven of the 24 neighbor-
hoods it collects data for. ¨We are seeing stagna-
tion and a drop in prices, and our general impres-
sion is that this process will develop further,” said
Mladen Mitov, manager of market research and
analysis department at Yavlena. He noted that
all cases are individual, but in general the prices
of prefabricated buildings have decreased, while
monolithic ones have increased by about 5%.
Gergana Tenekidzhieva also remarked that the
completion of new buildings and the numerous
new construction permits are likely to depress
demand for prefabricated apartments and lower
their price. She explained that fully renovated
prefabricated buildings are in a different category
and they still generate interest.
GROWTH IN THE MOST AND LEAST
EXPENSIVE AREAS
“It is an interesting tendency that the largest
price increases were recorded in the most and
least expensive areas of Sofia. In the most ex-
pensive – because of limited supply and great
demand, while the cheapest are catching up with
the overall market movement,” commented Polina
Stoykova. Her observations are confirmed by Imot.
bg’s data. Selling prices in Lyulin and Nadezhda
rose by 4-5%. The increase is the same in the posh
neighborhoods of Simeonovo and Boyana. Prices
in the center of Sofia went up by 6% and 8% in
the most expensive area behind the Sofia Univer-
sity building. Address representatives added that
there is also an increase in the areas where there
is demand, but new construction is insufficient. In
some of Sofia’s eastern areas there is overpricing
by some individual sellers. In the southern part
of the city, where there is new construction as in
Manastirski Livadi, deals are usually concluded
during construction because of improved condi-
tions and the price increase is therefore > 100
100 KQ BUSINESS/REAL ESTATE

WHAT TO EXPECT
IN 2020

Address
GERGANA
TENEKIDZHIEVA

Stability and heightened buyer activity with a similar

volume of sales. The share of properties purchased
with loans will steadily increase. The number of
homes in Sofia is growing more dynamically than
the population. This will provide a variety of choices
for buyers and will probably exert some pressure on
the market.
> 99 more moderate.

BUYERS BETWEEN 26 AND

35 YEARS OF AGE
Bulgarian Properties “The real estate market is still a market for the
POLINA top 10% of the population in terms of incomes,
STOYKOVA and in good years like the previous one – for the
top 20%,” said Georgi Pavlov. Individuals between
26 and 35 years of age have emerged as the main
buyer group in Sofia in 2019. This age group now
It is not unlikely that we end up seeing a slight
constitutes about 39% of Address’s customer
increase of about 3% in prices in 2020 because of
base and has overtaken the 35 to 46-year-old
the strong finish of the previous year and the strong
generation, which had dominated so far. Buyers
start of the new one.
older than 55 are barely 15% of the total in the
agencies’ statistics.

Gergana Tenekidzhieva explained that this only

Yavlena reflects the information in the deeds. It would be
MLADEN MITOV difficult to ascertain to what extent these individ-
uals were aided by their parents. “It is true that
young people have become the main buyer group
in Sofia,” confirmed Polina Stoykova. They pur-
chase homes for their own use, mostly with bank
A market with increased supply, a buyer’s market, a
loans. There has been an increased demand from
deepening segmentation of properties according to
individuals from around the country for homes
quality and the pricing expectations of buyers.
for their children who live in the capital. “Even
though the young are the active buyers, their
parents take a leading role. They encourage their
children to buy, look for homes, help with sav-
real estate expert ings, even attend viewings to vet their children’s
GEORGI PAVLOV choice,” she added.

Dobromir Ganev looks at millennials as just one

more group that is becoming active. Young people
between 26 and 35 are the most difficult buyers,
One problem is expected in the long run – decreased
believes Gergana Tenekidzhieva. “They are first-
demand.
time buyers; they are unsure of what they want
and have difficulty taking a decision. They hesi-
tate between purchasing a home in an environ-
ment close to that of their childhood or a modern
smart home in a gated complex. They feel con-

fused. And if until recently the older generation
had a big say, over the last year their influence
has decreased and the young must decide on
their own,” she says.
“The tendency is for buyers to wait and search
for a longer time. This reflects on the overall
time to finalize a sale, between two and four
months,” added Mladen Mitov. Address repre-
sentatives noted that according to their data, in
2019 buyers looked at 20% more homes on av-
erage than in 2018. Another reason is the great
availability of choices. The agency expects that
this tendency will become more pronounced.
STRONGER DEMAND FOR ONE-
BEDROOM HOMES
“In terms of 2019 sales, one-bedroom homes
overtook two-bedroom ones,” commented
Mladen Mitov from Yavlena. He believes this
was one of the major changes of the past year.
The share of one-bedroom apartments (re-
ferred to in Bulgaria as two-room dwellings)
grew by 12 percentage points to 45% of the to-
tal. Two-bedroom homes had a 34% share, three
and more-bedroom apartments accounted for
14%, while single-room studios formed 7% of the
new purchases. “There are at least two explana-
tions – younger buyers look to satisfy their ba-
sic needs – a bedroom, living room and kitchen.
Also, if the preference before was for kitchens
to be part of the living room, now separate
kitchens are in greater demand,” added Mr Mi-
tov. This does not mean that smaller homes are
being purchased. With new construction having
more expansive spaces, a one-bedroom apart-
ment may have a surface of 90-100 sq. m. In old
construction, it was usually 60-75 sq. m. What’s
more, the agency’s statistics show that the av-
erage surface of sold properties was nearly the
same in 2018 and 2019 – about 82 sq. m.
КQUARTERLY 101
Q The construction
boom is suppressing
the prices of the
real estate | Photo by
Tsvetelina Belutova
//NEWS BRIEF
OFFICE SPACE INCREASE/In 2019,
180 thousand sq. meters of modern
office space were unveiled in Sofia – a
twofold increase in comparison with the
previous year. An analysis by MBL, which
specializes in business real estate and
consulting, shows that the increase brings
the existing office space in the city to 2.14
million sq. meters. As a consequence of the
growth in new construction, the share of
vacant offices has risen from 8.5% to 9.8%.
In 2019, the construction tempo slowed
down by 15%. The most active renters are
those from the IT sector with 43% of new-
ly rented spaces. On average, rents have
maintained their levels. Class A buildings,
with some exceptions, rented for 12-14 euro
per sq. m., Class B between 8-11 euro per sq.
m. MBL analysts do not expect considerable
changes in the first half of 2020.
BIG THREE KEEP ON GROWING/Real
estate sales in the four largest cities
in Bulgaria have gradually increased
in number since 2012. The tendency was
solidified in 2019. According to data by
the Registry Agency, sales in Sofia grew
by 5.45% in 2019, when 29 772 deals were
closed, compared to 28 232 in 2018. In
Varna, there were 12 927 deals in 2019, or
1.7% more than in the previous year. Sales
in Burgas grew by 6.4%, reaching 6 697.
Only Plovdiv, which was the 2019 European
culture capital, had a decrease, with deals
dropping by 5.6% to 15 221.
102 KQ
KQ BUSINESS
POLITICS / DYNAMIC
RETAIL SMES
BUSINESS/DASHBOARD

REAL SECTOR:
WAGE GROWTH RATE STILL SURPASSES INFLATION

Annual inflation in Bulgaria accelerated to 4.2%
in January of this year from 3% in January 2019.
The increase in prices was led by some foods
such as meat and fruits, where the growth rate
has been in double digits in the past few months,
possibly as a result of African swine fever which
destroyed more than 20% of production at local
industrial pig farms in the summer. The growth
rate of average wages in Bulgaria remained
higher than the rate of inflation at 12% in the
fourth quarter on an annualized basis. Tourism
had a rough year. The number of foreign tourists
visiting Bulgaria was little changed last year as
compared to 2018, as was the total revenue from
overnights the spent in the country. In industry,
the growth of production remained subdued at
an average of 3% in the fourth quarter compared
to the same period of the previous year.

INDUSTRIAL ACTIVITIES INDEX IN %

Producers' prices Manufacturing Revenues in the industrial sector
30.0
25.0
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
-15.0
2011 2012 2013 2014 2015 2016 2017 2018 2019 XII.19
Source: National Statistical Institute

CONSTRUCTION BUSINESS ACTIVITIES INDEX

Construction - total Construction of buildings Civil/infrastructure building
30
20
10
0
-10
-20
-30
-40
2011 2012 2013 2014 2015 2016 2017 2018 2019 XII.19
Source: National Statistical Institute
 CHALLENGES FACED BY YOUR COMPANY (IN %)
2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1
Insufficient domestic demand 43.8 34.6 32.7 28.9 28.2 25.9 24.8 26.5 26.3
Insufficient foreign demand 30.7 21.5 18.5 19.2 19.4 19.8 20.2 19.9 18.9
Competitive import 16.3 13.7 12.9 13.6 13.1 13.7 12.8 12.3 12.9
Labor shortage 9.6 10.8 11.9 12.5 12.6 14.9 17.6 18.0 17.7
Materias or equipment shortage 3.4 3.2 3.6 3.8 3.7 3.8 3.7 3.6 3.4
Energy shortage 0.7 0.5 0.4 0.5 0.5 1.0 1.3 0.8 0.4
Financial difficulties 19.1 16.2 15.6 15.6 16.0 15.0 13.5 12.0 12.2
Weaknesses in the legislation 23.4 22.2 22.9 20.4 22.7 23.0 23.9 23.1 23.5
Unstable economic environtment 52.8 54.8 58.5 58.7 56.4 56.0 55.4 52.9 54.6
Other 27.9 26.1 20.4 23.3 22.0 21.2 20.8 23.7 24.6
No difficulties 5.4 8.5 8.7 8.9 8.9 9.5 8.2 8.5 8.4
 КQUARTERLY
КQUARTERLY 103

 AVERAGE MONTHLY SALARY IN BULGARIA (IN LEVS) GROSS SALARIES AND UNEMPLOYMENT
Unemployment rate (rhs, %)
2014 % change 2018 Sofia=100 Avarege monthly salary in Bulgharia (in levs)
Sofia (City) 570 42.2% 811 100.0
1 400 14.0
Stara Zagora 424 32.5% 562 69.3%
Varna 401 38.2% 554 68.4% 1 200 12.0
Sofia (region) 429 33.3% 572 70.6%
1 000 10.0
Vratca 432 23.2% 532 65.6%
Plovdiv 370 35.7% 502 61.9% 800 8.0
Gabrovo 356 41.2% 503 62.0% 600 6.0
Burgas 367 30.4% 478 62.0%
Razgrad 362 36.2% 493 60.8% 400 4.0
Shumen 346 35.7% 470 58.0% 200 2.0
Russe 344 38.5% 477 58.8%
0 0.0
Pleven 323 38.0% 446 55.0% ‘11‘12‘13‘14‘15‘16‘17‘18 I II III IV V VI‘19VII VIII IX X XI XII
Targovishte 335 37.9% 462 56.9% Source: National Statistical Institute
Veliko Tarnovo 337 33.1% 449 55.3%
CONSUMER PRICE INDEX IN %
Lovech 324 35.7% 440 54.2%
6.0
Dobrich 340 30.7% 444 54.8%
Montana 330 30.8% 432 53.2% 5.0
Sliven 321 32.8% 426 52.6% 4.0
Pernik 312 40.9% 440 54.2% 3.0
Kardjali 312 42.3% 444 54.8%
2.0
Yambol 307 50.1% 461 56.8%
1.0
Smolian 317 36.4% 432 53.3%
Pazardjik 335 33.7% 448 55.3% 0.0
Haskovo 305 34.4% 410 50.6% -1.0
Silistra 318 26.4% 402 49.6% -2.0
Kyustendil 311 29.8% 404 49.8% -3.0
Blagoevgrad 298 29.0% 384 47.4%
-4.0
Vidin 289 34.2% 388 47.8% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: National Statistical Institute Source: National Statistical Institute

VISITS BY FOREIGN TOURISTS TO BULGARIA IN THOUSANDS (LHS) AND IN MN LEVS (RHS)

From EU From Russia The rest of the world Revenues
6000 1200

5000 1000

4000 800

3000 600

2000 400

1000 200

0 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: National Statistical Institute

2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3 2019Q4
26.7 26.0 24.2 24.7 22.0 21.8 22.7 23.0 25.5 25.9 26.9 27.9 27.7 26.8 26.3
20.4 20.4 19.1 19.5 14.6 15.1 15.9 16.4 17.2 18.8 18.3 20 19.3 19.9 21.6
12.9 13.1 12.1 11.9 11.1 11.2 12.3 10.9 10.5 10.2 11.2 11.6 11.4 11.1 10.7
20.6 24.2 24.3 24.8 27.1 27.0 30.3 32.0 34.0 33.7 35.1 35.1 33 32.5 33.1
3.2 3.3 3.3 2.5 3.7 3.6 2.9 3.3 4.2 3.3 2.9 3.3 2.8 3.1 2.9
0.4 0.4 0.3 0.5 1.7 1.6 0.9 0.7 1.2 0.7 0.9 1.1 0.9 1 0.9
11.1 10.8 11.0 10.5 11.1 11.7 11.1 11.0 9.0 8.5 7.6 9.9 8.2 7.4 8.6
20.3 19.9 18.0 18.4 20.5 20.6 17.6 18.0 20.6 20.3 19.3 20.7 19 17.9 18.9
52.6 48.4 47.1 47.9 47.8 46.7 45.8 43.3 40.5 38.3 38.2 36.8 35 32.8 32.5
24.9 23.6 27.3 25.5 26.4 24.7 25.6 23.7 21.6 20.8 22.0 21 21.8 22.4 21.5
8.5 8.6 8.8 8.4 7.1 8.1 8.2 8.7 8.3 9.7 9.9 9.3 10.3 12.8 13.5
Source: National Statistical Institute
104 KQ
KQ POLITICS
BUSINESS/DASHBOARD

WHILE OVERALL OPTIMISM IN EU DECLINES, BULGARIANS STILL SEE FUTURE IN BRIGHTER TERMS
The economic situation in the EU is better Spring 2019 Autumn 2019
FI
SE
NL
DK
DE
MT
BE
UK
AT
FR
SI
EE
CZ
EU (28)
IE
SK
PL
CY
ES
LT
LV
EL
HU
IT
HR
BG
PT
RO
0% 5% 10% 15% 20% 25% 30% 35%

 BULGARIANS CONTINUE TO THINK THEIR COUNTRY IS THE MOST CORRUPT IN EU

(Transperancy International corruption perception index*)

2019 2018 2017 2016 2015 2014 2013

Germany 80 80 81 81 81 79 78
Rwanda 53 56 55 54 54 49 53
Bulgaria 43 42 43 41 41 43 41
Greece 48 45 48 44 46 43 40
Romania 44 47 48 48 46 43 43
*100 is the complete absence of corruption Source: Transperancy International

 BULGARIA IMPROVES ITS SCORE IN WORLD BANK‘S DOING BUSINESS RANKING, BUT DROPS TWO PLACES

DB 2020 Rank DB 2020 Score DB 2019 Score Change in Score (% points)

Overall 61 72 71.8 0.2
Starting a Business 113 85.4 85.4 0
Dealing with Construction Permits 43 75.9 75.5 0.4
Getting Electricity 151 55.1 54.9 0.2
Registering Property 66 69.8 69.3 0.5
Getting Credit 67 65 65 0
Protecting Minority Investors 25 74 74 0
Paying Taxes 97 72.3 72 0.3
Trading across Borders 21 97.4 97.4 0
Enforcing Contracts 42 67 67 0
Resolving Insolvency 61 57.8 57.5 0.3
Source: World Bank 2018
 BANKS AND FINANCE
КQUARTERLY 105

FILLING THE GAP

FIRST INVESTMENT BANK
PREPARES TO SMOOTH
OUT WRINKLES ON ITS
BALANCE SHEET FOUND
BY ECB

//In this section:

Bulgarian Stock
Exchange enthusiasm
dwindles early on

Investors snap up
Bulgarian bonds
106 KQ CALLENDAR

FILLING THE GAP

FIRST INVESTMENT BANK
(FIBANK) PREPARES TO SMOOTH
OUT WRINKLES ON ITS BALANCE
SHEET FOUND BY ECB
NICKOLAY STOYANOV

F
Fibank‘s intention to raise a record
200 million levs (102 million euro)
in fresh capital from investors
on the Bulgarian Stock Exchange
has received an unexpected
rebuff. The Financial Supervision Commission
(FSC) rejected the bank’s prospectus at the end
of February, throwing into limbo its planned
recapitalization. The need for more capital arose
after a comprehensive assessment of six Bulgarian
lenders by the European Central Bank (ECB)
uncovered a 263 million levs capital shortfall in
Fibank last summer.
FSC has not published motives for its decision,
but it leaves limited time for reaction to the lend-
er. Fibank had to fulfil what ECB had prescribed
within nine months after the completion of the
stress tests. If the bank can’t react rapidly, the
mishap may delay Bulgaria’s plans to join the
ERM II, the waiting room for Eurozone entry, by
the summer of 2020.
THE GAP
As soon as ECB published the results, Fibank
stated that it had already secured almost half of
the amount through current profit, accrued pro-
visions, repaid loans and additional collateral for
exposures. However, it seems that these measures
were insufficient and Fibank has been working on
its balance sheet for months now in order to com-
ply with the ECB-imposed corrections.
Now, the bank will have to raise fresh capital as
well. According to sources of Capital newspaper,
when informally reconciling the plans of the two
IF FIBANK CAN’T REACT RAPIDLY, THE
MISHAP MAY DELAY BULGARIA’S PLANS
TO JOIN THE ERM II, THE WAITING
ROOM FOR EUROZONE ENTRY, BY THE
SUMMER OF 2020.

Q European Central Bank
uncovered a 263 million levs
capital shortfall in Fibank
last summer | Photo by Nadezhda
Chipeva
Bulgarian banks identified with a capital shortfall -
Fibank and Investbank, the ECB insisted on seeing
real increases in the capital in both credit institu-
tions. A few days before Fibank’s announcement of
the planned capital increase, Investbank said that
it intends to go public and increase capital.
THE PARAMETERS
Fibank, a public company since 2007, doesn’t need
to go through the process of listing on the stock
exchange. However, a capital increase would re-
quire writing a prospectus and getting approval
from the Financial Supervision Commission.
Fibank intends to raise its capital to 150 million
levs from 110 million levs by issuing 40 million
new shares of one lev in face value each which
will be offered at a price of five levs apiece. Thus
the bank will be able to attract a maximum of 200
million levs in fresh capital. However, even if the
credit institution manages to sell only 4 million
КQUARTERLY 107
new shares at that price, which corresponds to 20
million levs in fresh capital, the increase would
still be considered successful, according to the
announcement.
WEIGHING OPTIONS
Raising 200 million levs at 5 levs per share seems
a daunting task for Fibank, whose shares traded
below 3 levs apiece before the announcement. Af-
ter informing of plans to raise capital, the bank
saw its share price jump to 3.60 levs. Subsequent-
ly, the price decreased to levels around 3.40 - 3.45
levs - well below the value laid down in the plan.
In its announcement, FIbank said that the issue
price and the number of shares may be changed;
if so, this would be announced in the prospectus
or in an addition to it. So, if there is little or no
investor interest in the offer at the stated price of
5 levs, it may be possible to sell a larger number
of shares at a lower price. The capital increase is
managed by First Financial Brokerage which is af-
filiated with Fibank.
It would be more profitable for investors to ac-
quire existing shares of Fibank on the stock ex-
change rather than pay around 2 levs more for
new ones. A possible reason for an investor’s will-
ingness to pay a premium of 60% can be an ac-
quisition of a large package that comes with some
form of control. A potential explanation is that a
preliminary agreement has already been reached
with some institutions to subscribe at least part
of the increase under these conditions. Accord-
ing to sources of Capital, the government has re-
searched options for interests in a minority share
in Fibank with international institutions like the
European Bank for Reconstruction and Develop-
ment and the International Finance Corporation.
A reason for the significantly higher price of
the planned new shares is the unwillingness of
Fibank’s controlling shareholders to give up a
part of their decision-making powers. Fibank
is controlled by Tseko Minev and Ivaylo Mutaf-
chiev, who own 46.75 million shares or 42.5% of all
shares each. If Minev and Mutafchiev do not par-
ticipate in the capital increase, their stakes will
fall to 31.17% each after the issuance of 40 million
new shares, but still they will control over 60%
shareholding among themselves.
THE SUPPLEMENTS
In addition to the capital increase, Fibank also an-
nounced that it has already signed off on a new
subordinated debt of 30 million euro. The bond
has a fixed interest rate of 8% and is a hybrid fi-
nancial instrument that will be included in Tier 1
capital, which means that the bond can’t be used
directly for covering the capital shortfall because
108 KQ BANKS AND FINANCE/FIBANK
//NEWS BRIEF
TESTING MONEY/ Bulgaria’s Ministry
of Finance supports the establishment
of a so-called regulatory sandbox – an
instrument which tests new business
models not covered by existing regu-
latory frameworks. According to Minis-
ter of Finance Vladislav Goranov, the aim
is to adapt the regulatory environment to
the dynamic growth of the most innova-
tive companies in a way that does not sti-
fle fintech companies with rules, but at the
same time does not diminish consumer
protection. Sofia RegTech Sandbox dialog
development platform would be the first
in the region to allow global companies to
test their products and services in a secure
regulatory environment.
BRIEF PANIC/At the end of January,
after the first headlines asserting that
the exchange rate of the Bulgarian lev
could be amended before Bulgaria en-
ters ERM II, the training grounds for
adoption of the euro, a considerable
amount of lev-denominated assets
were converted into euro. This is evi-
dent from Capital Newspapers review of the
Bulgarian National Bank’s (BNB) monetary
statistics, although the effect cannot be
calculated accurately. Household deposits
in January decreased by 352.5 million levs
(180 million euro) and increased by 259 mil-
lion euro. Business deposits did not change
substantially, but overall the deposits in
banks shrank by almost 1.2 billion levs,
while increasing by 353 million euro. The
transfers in the savings and checking ac-
counts can’t be verified due to a major sta-
tistical revision conducted by the BNB.
BIG CLEANING/The Bulgarian National
Bank’s statistics show that the amount
of bad and restructured loans in Bul-
garia’s banking system decreased by
21% in 2019 and their share in total
loan portfolio fell from 10% to 7.35%. In
December alone 281 million levs of non-
performing loans (NPLs) were written off,
which is probably due to the Fibank efforts
to clean its balance sheet. Thus, after a de-
cline of almost 1.14 billion levs in 2019, the
amount of NPLs in the system fell to 4.3 bil-
lion levs - the lowest since December 2009.
The drop is due mainly to the cleaning up
of bad corporate exposures, which fell from
3.5 billion levs to 2.74 billion levs last year.
On the other hand, bad household loans
decreased by about 400 million levs to 1.56
billion levs last year.
FIBANK’S BIGGEST
Photo by Nadezhda Chipeva
PROBLEMS ARE IN ITS
CORPORATE LOAN PORTFOLIO.
the ECB monitors capital of higher quality (CET1).
According to Fibank’s data, its total capital ade-
quacy was 17.65% as of September 2019, whereas
the CET1 ratio stood at 14.8%.
The funds raised through the planned issuance of
shares and 30 million euro of debt will be used
to finance lending to small and medium-sized en-
terprises and citizens. In general, those are the
healthier units in the bank’s business, whereas
the biggest problems identified by the ECB were
in its corporate loan portfolio.
In addition, the bank announced that in Decem-
ber they sold a portfolio of non-performing loans
of individuals and legal entities for a little over
half a billion levs. The bank did not disclose de-
tails of the deal but according to sources of Capi-
tal, the portfolio was sold to S.G. Group - one of the
leading companies in the receivables market and
the largest domestic group in the sector. There
was no auction and the deal was struck at a price
significantly above market levels, with the buyer
being directly or indirectly funded by Fibank it-
self, sources say.
FINANCIAL RESULTS FOR 2019
According to the preliminary data announced by
Fibank, it closed 2019 with a profit of about 130
million levs, which is a drop of more than 20%
compared to the profit recorded the previous
year. The press release was not accompanied by
a financial report. The results for both 2018 and
2019 are strongly influenced by one-off effects.
The sale of the package of bad loans last year may
have contributed to the end-2019 profit figure,
because Fibank’s profit amounted to just over 64
million levs as of the end of September.
The announced data show that the income from
banking operations increased by 48 million levs
year-on-year, which should amount to about 420
million levs in 2019. Considering that Fibank’s
net interest income is on a downward path and
growth in revenue from fees and commissions
income is minimal, the increase is probably due
to higher net trading income and other operating
income.
Impairment costs reached 117 million levs, of
which 94 million levs were accrued following the
ECB’s asset quality review in the middle of 2019.
 КQUARTERLY 109

INVESTORS SNAP
T
The Ministry of Finance has

UP BULGARIAN
been eagerly issuing government
bonds since the start of the year,

BONDS taking advantage of favorable

international and domestic factors.
Two auctions of five-year bonds in January and one
in February have already given the government
SINCE THE START 600 million levs. Another was scheduled for late
OF THE YEAR, THE February when the ministry planned to sell 200
million levs of ten-year government bonds. Even
MINISTRY OF FINANCE though the auctions have only about two weeks
HAS BEEN BRISKLY in between, investors have been enthusiastic and
prices are improving. Yields have been steadily
SELLING GOVERNMENT going into negative territory, signalling that
BONDS AMIDST STRONG confidence in the country’s ability to pay off its debt
is growing and debt is getting cheaper for Bulgaria.
INVESTOR INTEREST
There are a few factors that play into this trend.
NICKOLAY STOYANOV,
To start with, Bulgaria is currently taking advan-
LILIYA IGNATOVA tage of the extremely favorable conditions on
global debt markets. Even eurozone countries
that went through a serious financial turbulence
in recent years are now selling government se-
curities at a brisk pace. In January, Spain > 110
110 KQ BANKS AND FINANCE/BONDS

> 109 saw huge investor interest in its auction of
ten-year bonds, receiving record-breaking orders
of 53 billion euro. Italy auctioned 7 billion euro of
thirty-year debt, with demand reaching 47 billion
euro. Bonds of Belgium, Cyprus and Ireland also
enjoyed record high demand.
THE PURPOSE
The first auction for 2020 took place on January
13 and the proceeds from the issue entered the
ministry’s accounts by January 15. The timing
suggests that the bonds were issued to partially
cover payment on maturing government securi-
ties. According to the calendar for forthcoming
payments, an issue of 165 million euro worth of
government bonds issued in 2013 was to be re-
paid on January 16, which is a pretty solid sum for
Bulgarian standards. The next payment was 400
million euro at the beginning of February. In total,
in 2020 Bulgaria will have to repay just over 1 bil-
lion levs of principal and over 150 million levs of
interest.
Last year, the government issued bonds worth 1
billion levs, selling them on the domestic market
and relying mainly on the longer-term maturi-
ties segment (10- and 20-year bonds). Part of the
proceeds was intended to finance the purchase of
new F-16 fighter jets. Until then, the government
had not been on the debt market for a year and
a half, which means that the current issuance of
medium-term government securities was the first
in over two years. The limit for issuing new debt
during 2020 is set at 2.2 billion levs in the state
budget. The Ministry of Finance states that its is-
suance policy strategy will be to rely more on the
internal market and increase its share.
Shutterstock
deeply into negative territory. Which is why finan-
cial institutions and investors are looking at the
periphery where positive interest rates can still
be found.
BULGARIA’S GRADE ABROAD
Bulgaria’s transparency in terms of government
spending leaves much to be desired but it seems
that the consistent fiscal policies of the authori-
ties, resulting in small budget deficits or even
surpluses, are paying off. For example, yields on
five-year bonds have gone down from an average
of 1% in January 2016 to 0.095% in 2019 and were
at negative 0.11% in February of this year, accord-
ing to the platform Investing.com. In comparison,
Romania pays 3.391% yield on its five-year bonds,
whereas Germany pays -0.623%.
Bulgaria’s progress towards the euro area and the
associated improvement in its credit rating con-
tribute to the success of the auctions. In March
2019 Fitch revised the outlook to positive from
stable, S&P revised Bulgaria’s outlook to positive
from stable in June 2018. S&P revised Bulgaria’s
L/T rating to BBB from BBB- in Dec 2019.
“All else being equal, Fitch would be likely to up-
grade Bulgaria’s Long-Term Foreign-Currency IDR
by one notch on admission to ERM II and one fur-
ther notch when formally joining the euro area,”
said Fitch Ratings in their February report on Bul-
garia, which confirmed the country’s credit rating
of BBB with a positive outlook.

IT’S CHEAPER FOR BANKS

“The allocation of the approved amount of gov-
ernment securities by investor type shows a lead-
ing participation by banks, which acquire 64% of
the issue volume, followed by insurance compa-
nies with 26.5% and pension funds with 9.5%,”
said the Ministry of Finance following its second
auction of five-year bonds worth 200 million levs.
Banks are looking for places to put their excess
reserves. They could deposit them with the Bul-
garian National Bank but they would have to pay
a 0.7% negative interest rate because of the nega-
tive interest rate policy of the Eurioean Central
Bank (ECB). Against this backdrop, the cheaper
government securities are more attractive.

As a whole, investors are betting on the ECB, un-

der the command of Christine Lagarde, to contin-
BULGARIA STILL OFFERS
ue its negative interest rate policy and secondary POSITIVE INTEREST RATES,
market purchases of 20 billion euro per month. In ALTHOUGHT THEY ARE ALSO
Germany and other euro area countries yields are CLOSE TO ZERO.

BULGARIAN
STOCK EXCHANGE:
ENTHUSIASM
DWINDLES
EARLY ON
ELEVEN CAPITAL TO TEST
THE MOOD IN MARCH
MARIO TANEV
A
After closing in the red for a
second straight year in 2019, the
Bulgarian Stock Exchange’s blue-
chip SOFIX index welcomed 2020
with a pinch of optimism and a
one-month rally, which ended with a 7-month peak
of 585.73 points on January 20.
The SOFIX dropped 4.43% overall in 2019, but
ended the year on a high note with a strong run
that started on December 17 and continued in
January. The index gained 8.2% over the Decem-
ber 17-January 20 period, as thirteen of its fifteen
members saw their share price grow, while two
closed unchanged.
The rally during that period was heavily support-
ed by members of the financial sector. Diversified
group Doverie United Holding outshined its peers,
gaining a massive 78.13% in under a month, as it
thrived on its acquisition of Moldova’s second
КQUARTERLY 111
SOFIX HAS EARLY YEAR STIFFNESS
30 December 2019 - 28 February 2020
590
580
570
560
550
540
Source: BSE
biggest bank by assets.
Doverie United Holding acquired a majority stake
in Moldindconbank through its wholly-owned
subsidiary Doverie-Invest in 2019, but only gained
full control of the lender in early 2020. Until then,
Moldindconbank was under an early intervention
regime by Moldova’s central bank, due to issues
with the bank’s previous owners.
In 2019, Doverie United Holding boosted its con-
solidated net profit to some 190 million levs, com-
pared to under 2 million levs in 2018, backed by
the acquisition of Moldindconbank. The financial
report was released on February 28, meaning the
company might see its share price grow further in
the near future.
Other financial sector members also contrib-
uted to the SOFIX advance. Financial and insur-
ance group Eurohold Bulgaria posted the second
biggest rise in share price during the December
17-January 20 rally, gaining 17.65%. First Invest-
ment Bank (Fibank) and Central Cooperative
Bank (CCB) came in third and fourth, respectively.
Fibank shares added 17.12%, while CCB gained
9.83%.
However, the SOFIX quickly lost steam after Janu-
ary 20, as all aforementioned companies, except
Doverie United Holding, erased their gains. The
blue-chip index closed February at 550.25 points,
down 3.15% year-to-date.
TOP DECLINERS
Sirma Group Holding
Same as in 2019, software group Sirma Group
Holding remained the top decliner among > 112
112 KQ BANKS AND FINANCE/STOCK EXCHANGE

> 111 the blue chips in early 2020. The company SIRMA GROUP HOLDING
seems unable to escape its downward spiral, as it IS THE TOP DECLINER AMONG BLUE CHIPS
lost 23.2% of its share price in the first two months 30 Decembre 2019 - 28 February 2020
0.70
of 2020, after taking a 30.9% blow in 2019. In the
last day of February, the company announced that
0.65
its consolidated net profit fell sharply in 2019,
while its revenue remained flattish year-on-year,
0.60
which is also unlikely to help it recover.
0.55
First Investment Bank
Another major decliner so far this year has been 0.50
First Investment Bank, which saw its share price
drop 22.47% in the January-February period. The 0.45
lender took several measures in late 2019 to ad-
dress the 263 million euro capital shortfall identi- 0.40
fied through a comprehensive assessment by the Source: BSE

European Central Bank in the first half of last year.

MARKET DOESN'T TRUST FIBANK'S
Fibank placed a 30 million euro bond issue and RECAPITALIZATION EFFORTS
sold non-performing loan (NPL) portfolios with 30 December 2019 - 28 February 2020
3.7
a total face value of some 538 million levs in De-
cember. The bank also announced it will seek to
3.5
raise up to 200 million levs via a capital increase,
but the plan failed as the Financial Supervision
3.3
Commission rejected the lender’s prospectus in
February.
3.1

Eurohold Bulgaria
2.9
Financial and insurance group Eurohold Bulgaria
was third among the blue-chips losers in the first 2.7
two months of 2020, as its share price dropped
18.75%. Throughout the review period, the com- 2.5
pany largely erased the gains it had made in the Source: BSE

last two weeks of December.

EUROHOLD BULGARIA
On February 29, the company reported a 61.6% 30 December 2019 - 28 February 2020
decrease in its 2019 consolidated net profit after 1.8
minority interest. However, the group also an-
1.7
nounced a hefty 26% rise in revenue, to a record-
high 1.6 billion levs. 1.6

WHAT’S TO COME? 1.5

Eleven Capital IPO
Bulgarian investment firm Eleven Capital recently 1.4
announced that the bookbuilding for its initial
public offering (IPO) on the Bulgarian Stock Ex- 1.3
change will run between March 4 and March 17.
1.2
The company will offer 500,000 newly-issued
ordinary shares at a price in the range 7-8 levs, 1.1
seeking to raise up to 4 million levs. If fully sub- Source: BSE

scribed, the new shares will represent 20% of the

share capital after the IPO. Eleven Capital set the
minimum success threshold at 50% of the num-
ber of offered shares.
Eleven Capital was established in 2019 with a five
year term, which can be extended by up to two
years with the approval of the majority of share-
holders. Subsequently, Eleven Capital carried out
two capital increases that left it with a registered
capital of just under 2 million levs. The company’s
founders subscribed for 200,000 shares at nomi-
nal value through Eleven Bulgaria, while the other
1,799,264 shares were subscribed for at a price
of 5.44 levs per share. Thus, the company raised
some 10 million levs from its founders and angel
investors.

In June, Eleven Capital agreed to acquire a 99%
stake in Dutch-registered Eleven Fund Coopera-
tief from Jeremie Bulgaria for 4.1 million euro. The
remaining 1% was acquired from Eleven Bulgaria
the following month for 41,414 euro.
Eleven Fund Cooperatief was launched in 2012 as
a 12 million euro acceleration and seed fund fi-
nanced by the European Investment Fund’s JER-
EMIE programme. The fund’s portfolio comprises
stakes in 115 innovative tech companies, acquired
in the 2012-2015 period.
Eleven Capital is now in the process of acquiring
direct control over 34 companies from Eleven Fund
Cooperatief’s portfolio, which it deems to have the
highest growth potential. The remaining part of
Eleven Fund Cooperatief’s portfolio will be divested.
The 34 companies picked by Eleven Capital
booked total revenue of 17.9 million levs in 2018,
up by an annual 37.7%.
Eleven Capital’s largest shareholder is local Fu-
sion Works with a 16.18% interest, followed by
Eleven Bulgaria and Karoll Standard with stakes
of 10% and 8.99%, respectively. Eleven Bulgaria
agreed to a three-year lock-up, while Fusion
Works and Karoll Standard agreed to a one-year
lock-up.
TELELINK BUSINESS SERVICES
GOING PUBLIC
Bulgarian information and communications tech-
nology group Telelink Business Services Group is
another company likely to make a debut on the
Bulgarian Stock Exchange in the near future. The
company is currently awaiting approval from
the Financial Supervision Commission to list its
shares on the Sofia bourse.
Telelink Business Services Group plans to offer
up to 3.75 million existing shares, or 30% of its
capital, in two tranches after listing on the bourse,
at a minimum price of 7.6 levs apiece.
Telelink Business Services Group was spun off
from local company Telelink Bulgaria in July of
last year, taking control of Telelink
Bulgaria’s business services division. Telelink Busi-
ness Services Group controls seven units - Telelink
Business Services, Comutel, Telelink Montenegro,
Telelink Bosnia, Telelink Slovenia, Telelink Albania
and Telelink Business Services Macedonia.
The group generated a revenue of over 116 mil-
lion levs in 2018, of which 68% was formed by ac-
tivities related to data networks and 19% by data
КQUARTERLY 113
centers. The group’s biggest unit is Bulgaria’s Tel-
elink Business Services, which posted a revenue
of some 52 million levs in 2018, of which 37% from
data networks and 34% from data centers.
In 2019, Telelink Business Services Group lifted its
consolidated net profit by an annual 7% to 8.2 mil-
lion levs, despite a 5% decrease in revenue caused
by lower sales in the Western Balkans, according
to preliminary data. Telelink Business Services
Group intends to distribute 4 million levs as divi-
dend for 2019, equal to 4.2% dividend yield related
to the planned 7.6 levs share price.
The Telelink group’s founder – Lyubomir Minchev,
controls directly 83.65% interest in Telelink Busi-
ness Services Group.
SIN CARS INDUSTRY PLANNING
BEAM DEBUT
Bulgarian electric supercar maker Sin Cars Indus-
try has long been on the list of prospective new
Bulgarian Stock Exchange members. Now, the com-
pany seems to have a clearer idea of how it wants
to tap into the bourse’s fundraising potential.
In February, the company’s founder - Rosen
Daskalov, announced that Sin Cars Industry will
seek to raise up to 6 million levs through the
Bulgarian Stock Exchange SME Growth Market
BEAM. The BEAM market allows small and medi-
um-sized enterprises to seek listing under sim-
plified procedures as compared to the regulated
market.
Mr Daskalov also explained that the company in-
tends to use the funds to widen its portfolio, en-
tering segments with a larger number of potential
clients. Sin Cars Industry has several ideas, in-
cluding the designs of a new urban electric vehi-
cle, or electric tricycles, which could be used for
transportation of tourists.
Sin Cars Industry has signed a deal with a com-
pany servicing tricycles, which envisages the pro-
duction of 50 tricycles in 2020 and double that
number in 2021. The company is also consider-
ing the options of developing an eight-passen-
ger business vehicle or a commercial vehicle for
transportation of cargo.
Also in February, Sin Cars Industry announced
that its shareholders have approved the compa-
ny’s plan to increase its capital by 500,000 levs
via a new share issue. The new issue will be fully
subscribed by local VKA Solutions, Sin Cars In-
dustry said. The company will have a registered
capital of just over 18.5 million levs if the capital
increase is successful.
114 KQ
KQ POLITICS
FINANCE /DASHBOARD

MONEY AND BANKING: LOAN INTEREST RATES (%)

Consumers credits in levs
RAPID INCREASE OF MORTGAGE CREDIT Companies credits in levs
Mortgages in levs

Bulgarian banks reported a profit of 1.675 billion levs as at the end 16

of 2019, down by just 3 million levs compared to 2018. As a whole, 14
banks managed to maintain steady their main profit source – the 12
net interest income, which increased year-on-year by just 0.12% to 10
2.75 billion levs, according to data from the Bulgarian National Bank. 8
The rise is due to the growth in loan volumes and the rapid increase 6
in housing and consumer loans, where the annualized growth rate 4
remained in the double digits in December. Meanwhile, non-per- 2
forming loans decreased by 1.7 billion levs to 4.3 billion levs last year.
0
I.07 XII.19
WHAT DRIVES BANKS' PROFITS Source: Bulgarian National Bank
in mn levs
Net interest income Other net operating income Net profit
Net fee income Non-financial instruments Impairments DEPOSIT INTEREST RATES (%)
Administrative expenses Financial instruments - operations and revaluations
Households' deposits in levs
600 Households' deposits in euro
Companies' deposits in levs
400 Companies' deposits in euro
9
200 8
7
0 6
5
-200 4
3
2
-400 1
0
-600 -1
31.I.15 30.IX.17 30.XII.19 I.07 XII.19
Source: Bulgarian National Bank Source: Bulgarian National Bank

NON-PERFORMING LOANS PASS THEIR PEAK

in bln. of levs
Total credit Non-performing Right hand scale Share of non-performing credits Companies Households
70 25%
60
20
50
40 15

30 10
20
5
10
0 0
I '04 I '07 I '10 I '15 XII `19
Source: Bulgarian National Bank
BANKS’ NET FOREIGN ASSETS AND RESERVES
in mn. of levs
Foreign liabilities Foreign assets Net foreign assets BNB's reserves
30000
25000
20000
15000
10000
5000
0
-5000
-10000
-15000
-20000
-25000
I.04 I.09 III.13 VII.16 XII.19
Source: Bulgarian National Bank
 ENERGY

WHAT’S IN IT FOR
BULGARIA IN THE
EU’S GREEN DEAL?
BULGARIA’S GOVERNMENT
IS UNDERWHELMED BY THE
EUROPEAN COMMISSION’S
ATTEMPTS TO FURTHER
INCREASE EU CLIMATE
CHANGE MITIGATION GOALS

//In this section:

How come high prices
are actually low?

Bulgarian energy
sector in numbers
116 KQ ENERGY/GREEN DEAL

B
WHAT’S IN IT FOR Bulgarian governments have never

BULGARIA IN THE
been big fans of the European
Union’s climate policies. They

EU’S GREEN DEAL? would prefer that the billions

of euro allocated to reducing
greenhouse gases were spent on highways and
sports halls instead. The latest push from the
BULGARIA’S European Commission to raise the 27-member
GOVERNMENT IS bloc’s ambitions to tackle climate change hasn’t
aroused much enthusiasm either. “The Green Deal
UNDERWHELMED will be a big problem for us,” said Bulgarian Prime
BY THE EUROPEAN Minister Boyko Borissov just before the EU summit
in February. His words were a very polite way of
COMMISSION’S ATTEMPTS saying that the proposals leave Sofia cold.
TO FURTHER INCREASE
The Green Deal, which is the cornerstone policy of
EU CLIMATE CHANGE the new European Commission headed by Ursula
MITIGATION GOALS von der Leyen, in its essence is a trade in which
the coal-dependent countries in the EU agree to
shut down their mines and old power plants in
ILIN STANEV exchange for financial support for the transition
to cleaner energy. The need for speedier exit from
coal is driven by the agreement of all EU member
states (minus Poland) to achieve climate neutral
economies by 2050. In order to do that, in ten
years the 27 countries will need to cut their CO2

Q Bulgaria, which sources 45% of
its electricity from coal-fired power
plants, will face serious challenges
switching to cleaner energy sources
| Photo by Tsvetelina Belutova
emissions by at least 50 or 55% instead of 40% as
has already been agreed. The higher goal means
that coal should stop being used as an energy
source by the end of the next decade. This is a
serious challenge for a country like Bulgaria that
sources about 45% of its electricity from coal-
fired power plants.
Sofia came grudgingly on board only when it be-
came crystal clear that Brussels’ green drive can’t
be stopped by a few East European countries
clinging to their coal. But being on board doesn’t
mean that Bulgaria has a clear policy.
THE GREEN OFFER
Under the deal, a new Just Transition Fund (JTF)
will provide 456 million euro for the two most af-
fected coal-mining regions in Bulgaria – Maritza
East and Bobov Dol. However, there is a catch.
In order to get access to the funding, Bulgaria
will need to top up the sum by 1.2 billion euro,
or around 10% of all EU structural funds for the
country for the period 2021-2027. This is money
that will not be allocated to railways and tunnels,
reducing the available pot for Bulgaria in > 118
КQUARTERLY 117
DEVELOPMENTS
TO FOLLOW:
The indicative deadline for
submitting binding offers in
the procedure for selection of
strategic investor in Bulgaria’s
Belene nuclear power plant
project is set for May. The five
companies that have shown
interest - Russia’s Rosatom,
China’s CNNC, South Korea’s
KHNP, US-based General Electric
and France’s Framatome, are
expected to submit bids. It is very
likely that there will be a single
offer in which all the participants
will combine their interest, as has
been the case with the tender
for construction of the Bulgarian
section of Gazprom’s TurkStream
gas pipeline to Europe. The
construction of the Belene power
plant was frozen in early 2012
over lack of funds and scant
prospects for finding markets for
its output.
Bulgaria will probably notify
the European Commission
in the first half of the year
of introduction of capacity
mechanism for power
producers. Under the
mechanism, power plants get
paid to stay ready in reserve. Sofia
has already missed a deadline,
which means that all such support
should cease by the end of
2025. Without such a capacity
mechanisms it would be very
difficult for power plants to remain
on the market.
By the end of the year two new
gas pipelines have to become
operational – Greece-Bulgaria
gas interconnector (ICBG),
which will provide a three billion
cubic meter alternative gas
supply route to Bulgaria, and
the expansion of the Bulgarian
transmission system to allow
Gazprom’s gas transit from
Turkey to Serbia, Hungary and
Austria, bypassing Ukraine. The
construction of both pipelines is
going behind schedule.
118 KQ ENERGY/GREEN DEAL
//NEWS BRIEF
LOOMING FINE/State-owned Bulgarian
Energy Holding (BEH) has transformed
598 million levs (306 mln euro) of out-
standing loans to its whole-owned sub-
sidiary Maritsa Iztok 2 thermal power
plant into new shares. The capital increase,
which is intended to stabilize the second big-
gest Bulgarian electricity producer, was post-
poned several times. BEH had been in contact
with the European Commission for almost a
year to establish whether such financial injec-
tion could be regarded as unlawful state-aid.
In February, the Bulgarian parliament adopt-
ed a decision authorizing the government to
increase the capital of the power producer
“irrespectively of the opinion of the European
Commission”. Maritsa Iztok 2 has accumu-
lated 900 million in losses in the last three
years, mainly due to the price increase of the
CO2 emission allowances in the EU Emissions
Trading System. The power plant needs to buy
1.3 allowances, now valued at 22 euro each, for
every MWh of produced electricity.
INVESTIGATE THIS/The Supreme Ad-
ministrative Prosecutor’s Office an-
nounced on February 13 that it has
tasked the minister of environment
with carrying out an immediate investi-
gation of four thermal power plants. All
four plants are connected to Hristo Kovachki,
a Bulgarian businessman with dubious fame,
and are suspected of illegally burning waste
products. This is the second time such an
investigation has been ordered by the pros-
ecutor’s office, but no results of the previ-
ous one have been released. Most of those
power plants had to be stopped years ago on
environmental grounds but the Bulgarian
authorities still can’t rein in Mr Kovachki’s
business practices.
FINALLY ALTERNATIVE GAS/State-
owned gas supplier Bulgargaz opened
a tender to select a credit institution to
issue a $ 109.3 million unsecured bank
guarantee in favor of Azerbaijan Gas
Supply Company (SOCAR). The guarantee
will cover some of Bulgargaz’s financial obli-
gations under the company’s 25-year natural
gas supply contract with SOCAR. The planned
annual deliveries of one billion cubic meters
will be enough to cover 40% of Bulgaria’s
consumption. Bulgargaz has also announced
that it will hold negotiations with SOCAR on
a new price formula connecting the price of
the gas to quotations of the liquid gas hubs
in Europe.
> 117 the EU budget. In addition, the government
will need to prepare development plans for the
two regions together with clear paths for gradual-
ly exiting from the coal industry. The speed of this
withdrawal is still unclear, but it is more likely to
be fast than slow which is not favored by the min-
ing trade unions – the last strong labor organiza-
tions that can stir mass protests and wreak havoc
in Bulgaria’s energy system.
The money from the JTF could be mainly used
for social measures like retraining former work-
ers in the coal industry, funding start-ups or re-
cultivating abandoned mines. The replacement of
the old power plants will need to be financed as a
normal investment project. According to the Eu-
ropean Commission’s projections, Bulgaria will be
able to mobilize at least 4.5 billion euro in private
and public investments, using EU guarantees and
loans from the European Investment Bank.
Bulgaria will also have access to other sources
to finance its energy transition. The main one is
the Modernization Fund, a dedicated facility for
the poorer countries in the EU that could provide
Bulgaria with a further 450 million euro (the exact
amount depends on the prices of CO2 emission
allowances). The fund could support moderniza-
tion of power producers and industrial companies
that also need to get rid of their carbon footprint.
BULGARIA’S DISORIENTED REPLY
Sofia has been slow to react to the new green
mood in Brussels. In the last couple of years the
Bulgarian government has been trying to derail
as much as possible the provisions of the new
EU climate and energy legislation. For example, it
threatened to sue the European Commission over
the introduction of new and much higher envi-
ronmental standards for coal-fired power plants.
During its presidency of the Council of the EU in
the first half of 2018, it pushed for reduced emis-
sion cuts.
Still reeling from those rear-guard battles it sim-
ply missed the determination of the new mem-
bers of the European Parliament (elected in May
2019) and most West European EU member states
to set a much more ambitious climate agenda.
In September last year Bulgarian Minister of
Energy Temenuzhka Petkova was still trying to
placate the trade unions with promises for con-
tinued government support for the coal industry
well beyond 2040. In addition, government plans
to restart the construction of the nuclear power
plant in Belene, frozen in 2012 over lack of funds,
diverted much of the resources and the attention
of the energy ministry.

The first coherent response came at the end of
February with the Framework Position on the
Green Deal. But some of its main points seem
wildly off the mark.
The bottom line of the Bulgarian position is to
resist any attempts by other member states to
set higher CO2 emission reduction goals. Under
Sofia’s current plans electricity production from
coal-fired power plants will start gradually de-
creasing in 2025 to end in 2040. This is possible
only if emission standards remain unchanged.
However, the emissions’ train has already left the
station. The European Commission will publish
an impact assessment in September as part of its
proposed Climate Law that will estimate whether
the member states could cut their greenhouse
emissions by 50 or 55% by 2030. Following the im-
pact assessment, the new targets will be adopted
by qualified majority by the member states and
Bulgaria has practically no way to prevent this.
The second main element of the Bulgarian posi-
tion is the proposal to include nuclear energy in
the green deal. “The role of nuclear energy should
be adequately foreseen in the upcoming initia-
tives,” the government says in the Framework Po-
sition. Sofia hopes that the EU budget will some-
how support the construction of Belene nuclear
power plant which the government sees as an
adequate substitute for the existing coal power
plants. The problem is that the EU has never di-
rectly funded a nuclear power plant project and it
will most certainly not do it now. Nuclear energy
was also squeezed out at the end of 2019 from the
EU’s green finance scheme.
MONEY NOT ENOUGH
Funding opportunities are not making the Bulgar-
ian government happy either. The first reason is
the obvious mismatch between the money envis-
aged for energy transition and real needs. Accord-
ing to the government’s own estimates, Bulgaria
will need to invest more than 33 billion euro over
the next decade to meet the new EU emission
goals.
Even though this sum includes some controver-
sial projects, like the above mentioned Belene nu-
clear power plant which will cost at least 10 billion
euro, the funding gap is certainly there. To accom-
ACCORDING TO THE GOVERNMENT’S
OWN ESTIMATES, BULGARIA WILL
NEED TO INVEST MORE THAN 33 BIL-
LION EURO OVER THE NEXT DECADE TO
MEET THE NEW EU EMISSION GOALS.
КQUARTERLY 119
plish the transition, Bulgaria will effectively need
to allocate all the money the EU budget provides
to it. This means there will be none left for other
badly needed projects. The second reason for So-
fia’s cold response to the European Commission’s
proposal has to do with Bulgaria’s legacy in the
energy sector. Households and businesses in Bul-
garia now enjoy the lowest electricity prices in the
EU mainly because investments in most energy
producers had been repaid long ago.
However, this situation was easily tipped in re-
cent years with the introduction of new and more
expensive renewable energy sources or coal-fired
power plants (which came on-line in 2012). A rise
in energy prices led to mass street protests in
2013 that toppled the first government of cur-
rent Prime Minister Boyko Borissov. This is a cau-
tionary tale for every Bulgarian politician which
makes them averse to ideas of massive invest-
ments in energy infrastructure.
MORE TROUBLES
Bulgaria has some country-specific problems –
it faces increased competition from neighbors
which do not need to follow the EU’s strict cli-
mate legislation. In the last two years, Bulgaria
began importing more and more electricity from
Turkey and Serbia, which do not need to burden
their power producers with CO2 allowances. In
practice, Bulgaria is restricting its own coal-fired
power plants but instead imports electricity pro-
duced from coal abroad.
A similar process is unfolding in heavy industry.
Cement producers, also heavily reliant on coal,
are eyeing North Macedonia and Turkey, freezing
their investment plans in Bulgaria. Fertilizer pro-
ducers are ceasing production of ammonia, pre-
ferring to import it.
Another problem identified by the Bulgarian au-
thorities is the proposed inclusion of transport
and housing in the European CO2 trading scheme.
Since Bulgaria’s vehicle and housing stock is very
old and inefficient, Bulgarians would see a com-
paratively higher increase in their fuel and heat-
ing bills than citizens of some of the more devel-
oped EU member states.
The government complains that Bulgaria will
need to bear the burden of a very ambitious en-
ergy and climate policy before the country has
modernized its energy sector accordingly. The
required massive investments in new energy as-
sets will crowd out badly needed investments in
other sectors, hampering Bulgaria’s economic
growth. As the government sees it, the Green
Deal is a lemon that can’t be used to make lem-
onade.
120 KQ POLITICS

Photo by Nadezhda Chipeva

arm, keeps placing Bulgaria among the cheapest
places to power your factory from the grid. How’s
that possible?

The mismatch is a result mainly of the difference

HOW COME HIGH in the organization of the respective markets. In

PRICES ARE
Germany, most of the electricity cost is trans-
ferred directly to the consumers with the grid

ACTUALLY LOW? fees (paid for every consumed kilowatt hour of

electricity), while in countries like Bulgaria, those
fees are substantially lower. Network cost and all
the taxes, fees, levies and charges are six times
DESPITE RECORD HIGH higher in Germany than in Bulgaria and what is
ELECTRICITY PRICES ON more important, their cost is six times higher than
the price of the electricity itself. In practice, Ger-
THE ENERGY EXCHANGE, man consumers pay predominantly for additional
BULGARIAN CONSUMERS costs, while energy is a marginal expense.

KEEP GETTING A GOOD Bulgaria’s market organization is a legacy from the

DEAL times when most of the market was regulated, i.e.
the prices for consumers were set by the energy
ILIN STANEV regulator. There was a small segment of market par-

P
Prices on the Independent
Bulgarian Energy Exchange (IBEX)
have soared to record heights
in recent months, prompting
widespread uproar among big
industrial consumers. Since the start of 2020,
electricity on the main day-ahead market has
been cheaper for just one day than the offers on
the German market (where prices fell as low as
1.57 euro per MWh on February 9), while most of
the time prices were twice as high. Even regional
energy exchanges in Hungary and Romania, which
traditionally were a little more expensive, are now
predominantly cheaper.
ticipants who were allowed to freely buy electricity
directly from producers. To encourage this process,
the regulator kept the grid cost low, making electric-
ity prices for the industry extremely competitive. It is
no surprise that as of 2005 a lot of energy-intensive
metallurgical companies have arrived in Bulgaria.
Contrary to the German example, in recent years
the Bulgarian regulator has been trying to reduce
the additional fees on electricity. In the last two
years the Obligation to Society fee (which pays for
green energy, long-term power purchasing con-
tracts and cogeneration facilities) was lowered
from 36 levs (18 euro) to 19 levs per MWh, but at
the same time the average electricity price on the
IBEX grew from 78 to 93 levs per MWh.

At the same time Eurostat, the EU’s statistical The second reason for the high prices on the IBEX
is the traded volume. In Germany, more than 50%
of the electricity is traded daily on the two energy
ELECTRICITY PRICES COMPONENTS
exchanges in the country, while in Bulgaria only a
FOR NON-HOUSEHOLD CONSUMERS –
ANNUAL DATA (FROM 2007 ONWARDS) quarter of all sales are done on the IBEX. In prac-
tice, the Bulgarian market is not for base power, it
0.35 is used rather to cover peak consumption which is
Taxes, fees,
levies and charges naturally more expensive.
0.30
RES taxes
0.25 Network costs All in all, Bulgaria is still a cheap place for house-
Energy supply hold and industrial electricity consumers, but this
0.20 comfort is achieved to a large extent by a build-up
of pressure inside the energy system. For example,
0.15
the regulator reduces grid cost artificially, while
0.10 energy producers are required to pay a special fee
on their turnover to compensate for the long-term
0.05 power purchase contracts and renewable support
schemes of the underfinanced public supplier.
0 Sooner rather than later the accumulated pres-
EU 28 Bulgaria Czechia Germany Greece Hungary Romania
Source: Eurostat sure will shatter the current market environment.
 КQUARTERLY
КQUARTERLY 121

ELECTRICITY, GAS AND MOTOR FUELS

IN ANTICIPATION OF BIG DROP
IN RUSSIAN GAS PRICE
Electricity prices: Despite the discontent of big
energy consumers in Bulgaria with the wholesale
price of electricity in the last two quarters, the
trend at the Independent Bulgarian Energy Ex-
change (IBEX) is more or less on a par with the
peer markets of Romania and Hungary. Moreover,
in the last six months the volumes traded on the
exchange have continued to grow and the price
spreads between peak and off-peak hours of con-
sumption – the IBEX’s Achilles heel, have shrunk.
The prices for households and small businesses
have remained stable, because they are still regu-
lated. However, as of July some 55,000 consumers
will lose this privilege. This is the first step in a
long process that will see at the end all consum-
ers having to find their own electricity supplier.
Natural gas: The price of natural gas imports at
Bulgaria’s border is still among the highest in Eu-
rope, due to the protracted negotiations with the
country’s main supplier - Gazprom. The Russian
gas giant has already renegotiated the contracts
with its other European customers but Bulgaria
was left at the end of the queue. Most probably,
the delaying tactic was used to pressure Sofia to
hurry up with the construction of the Bulgarian leg
of Gazprom’s TurkStream gas pipeline. A new 40%
lower price was agreed in the last week of February
and it will probably kick off as of April, but will be
applied retroactively for the previous nine months.
Motor fuels: Fuel prices in Bulgaria remained
stable in the last quarter of 2019, defying the all-
European upward drift before the Christmas holi-
days. This is a new trend in Bulgaria where retail-
ers usually appliy such practices to the extreme.

ENERGY INTENSITY OF THE BULGARIAN ECONOMY

Primary energy consumption in kg of oil equivalent per 1 000 EUR, 2000=100
EU-28 Bulgaria
100.2

100.0

99.8

99.6

99.4

99.2

99.0

98.8

98.6

98.4
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Eurostat

BORDER GAS PRICE AGAIN ONE OF THE HIGHEST IN EUROPE

in euro for MWh
Gas import from Russia in MWh (RHS) Russian gas price at the Bulgarian border Gas price at the German border
Russian gas price at the German border* Nenry Hub (US spot prices) EGIX (Germany)**
45 12000000
40
10000000
35
30 8000000
25
6000000
20
15 4000000
10
2000000
5
0 0
1Q 2012 1Q 2013 1Q 2014 1Q 2015 1Q 2016 1Q 2017 1Q 2018 1Q 2019 4Q 2019
* German BAFA discontinued the data series in 2017 **EGIX reflects NCG and GASPOOL spot prices Source: KEVR, NSI, BAFA, EIA, EEX
122 KQ
KQ POLITICS
ENERGY
ENERGY/DASHBOARD

ELECTRICITY PRICE IN BULGARIA BECOMES ONE OF THE MOST EXPENSIVE IN CEE

(Weekly day ahead electricty prices in Bulgaria, Romania, Hungary and Germanyin euro for MWh)
OPCOM (ROM) HUPX (HU) PHELIX (DE/AT) Ibex (BG)
120

100

80

60

40

20

0
1.2017 31.2017 52.2017 3.2019 35.2019 10.2020
Source: OPCOM, HUPX, Ibex, Epexspot

HIGHER TRADED VOLIMES CALMED PEAK PRICES, BUT HAVEN'T PUSHED PRICES CLOSE TO CEE PEERS
(Weekly electricty prices and volumes in the day ahead market in Bulgaria in euro per MWh)
Volumes (MWh) Base load Peak(9-20) Off-Peak (1-8 & 21-24)

250 45000

40000
200 35000

30000
150
25000

20000
100
15000

50 10000

5000
0 0
1.2017 29.2017 1.2018 25.2018 4.2019 48.2019 8.2020
Source: Ibex

 ELECTRICTY PRICES FOR HOUSEHOLDS (IN EURO FOR KWH WITH ALL TAXES AND LEVIES) IN THE 1ST HALF OF 2019
Germany Denmark Belgium Spain Italy EU-28 UK Netherlands Austria Sweden Luxembourg France
0.3088 0.2984 0.2839 0.2403 0.2301 0.2159 0.2122 0.2052 0.2034 0.2015 0.1798 0.1765

 GAS PRICES FOR HOUSEHOLDS (IN EURO FOR KWH WITH ALL TAXES AND LEVIES) IN THE 1ST HALF OF 2019
Sweden Netherlands Denmark Italy Portugal Spain France Austria EU-28 Germany Czechia Slovenia

0.1183 0.0921 0.0855 0.0769 0.0760 0.0736 0.0736 0.0660 0.0632 0.0632 0.0586 0.0572

 GAS PRICES FOR SMALL AND MID SIZED COMPANIES (IN EURO FOR KWH, EXCLUDING ALL RECOVERABLE TAXES AND LEVIES)
Finland Sweden Netherlands France Poland Estonia Italy Slovakia Slovenia Denmark EU-28 Lithuania

0.0627 0.0397 0.0387 0.0378 0.0347 0.0343 0.0342 0.0342 0.0339 0.0337 0.0327 0.0327

 ELECTRICTY PRICES FOR SMALL AND MID SIZED COMPANIES (IN EURO FOR KWH, EXCLUDING ALL RECOVERABLE TAXES AND
Italy Germany UK Slovakia EU-28 Portugal Spain Belgium Austria Greece Latvia France

0.1661 0.1557 0.1517 0.1286 0.1251 0.1186 0.1148 0.1147 0.1076 0.1059 0.1052 0.1024
 КQUARTERLY
КQUARTERLY 123

WHOLESALE PRICE AGAIN ABOVE THE EU AVERAGE AND GERMAN ONE

(Price of euro-super 95 net of taxes and duties, euro for 1000L)
Euro-super 95 - Bulgaria Euro-super 95 - EU weighted аverage Euro-super 95 - Germany

700

650

600

550

500

400
37.2016 11.2017 35.2017 13.2018 2.2019 34.2019 9.2020
Source: EU Oil Bulletin

DIESEL WHOLESALE PRICE IS LOWER THAN THE EU AVERAGE

(Price of diesel net of taxes and duties, euro for 1000 L)
Diesel - Bulgaria Diesel - EU weighted аverage Diesel - Germany
750

700

650

600

550

500

450

400
37.2016 11.2017 35.2017 13.2018 3.2019 35.2019 9.2020
Source: EU Oil Bulletin

Czechia Finland Greece Slovenia Latvia Slovakia Romania Estonia Poland Lithuania Hungary Bulgaria
0.1748 0.1734 0.1650 0.1634 0.1629 0.1577 0.1358 0.1357 0.1343 0.1255 0.1120 0.0997

Greece Belgium UK Poland Estonia Lithuania Bulgaria Slovakia Latvia Croatia Romania Hungary

0.0555 0.0554 0.0493 0.0473 0.0458 0.0450 0.0449 0.0449 0.0446 0.0375 0.0347 0.0346

IN THE 1ST HALF OF 2019*

Austria Germany Latvia Romania Bulgaria Spain Greece Croatia Czechia Hungary UK Belgium

0.0326 0.0318 0.0318 0.0317 0.0308 0.0308 0.0299 0.0299 0.0293 0.0287 0.0282 0.0239

LEVIES) IN THE 1ST HALF OF 2019

Poland Romania Hungary Slovenia Netherlands Lithuania Estonia Bulgaria Czechia Sweden Finland Denmark

0.1003 0.0972 0.0970 0.0959 0.0941 0.0926 0.0917 0.0887 0.0768 0.0738 0.0709 0.0707

 Source: Eurostat
124 KQ
KQ POLITICS
EXPLAINER
WHAT?
WHAT
WAS
THAT?
You have probably heard idi-
oms and proverbs in Bulgarian
that read like “The horse went
into the river” or “A united com-
pany moves a mountain”. when
translated to English word-
for-word They cause a 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 vari-
ous websites which make fun
of the habit (typical not only for
Bulgarians) to translate literally
idiomatic expressions and prov-
erbs into English.
The current section of KQ has the
ambition to explain the jargon of
Bulgarian politics and economy
which sometimes is as inexpli-
cable 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?
Torbichka
Bagging Karakachanov
definition :
A picture of the defense minister provoked an
outburst of memes and collages with a shopping
bag – and ended with a dark twist.
If you have any Bulgarian friends added on social media,
chances are that you have seen the image of Defense Min-
ister Krassimir Karakachanov in a desert yellow-colored
uniform, supposedly holding a plas-
tic Billa supermarket bag (“torbich-
ka” in Bulgarian) photo shopped on
various backgrounds.
The gag depicting the defense min-
ister carrying a shopping bag, sup-
posed to mock his perceived paro-
chial appearance, had been running
since Mr Karakachanov visited
Washington, DC last year. But the real
explosion came in mid-January when
he and Prime Minister Boyko Boriss-
ov published a photo of their meet-
ing with an Egyptian government minister. It showed the
Bulgarian defense minister dressed in the said uniform
which – how shall we put it? – fitted his corpulent body all
too well. And the internet exploded: in a matter of minutes
the first collage was posted, with a Billa bag placed next to
him, sardonically amplifying the inappropriateness of the
selected piece of clothing. A tsunami of funny versions of
Mr Karakachanov’s image, often alongside an added Billa
bag, then ensued. He appeared in a still from Star Wars,
substituting Jabba the Hutt; on the bow of the sinking Ti-
tanic; sitting on the bench next to Forrest Gump from the
eponymous movie… Indeed the memes with him became
so viral that people started collecting them in “Best of” al-
bums on Facebook.
In an attempt to appease the jokers, Mr Karakachanov
asked them politely on TV to stop making “montages” of
him with the Billa bag. Yet this only added fuel to the fire.
Dozens of new collages appeared, this time depicting him
minus the now legendary bag. And while some may con-
sider the jokes fat-shaming, it is hard to sympathize with
a cabinet minister and party leader who freely uses hate
speech against various minorities and opponents.
A more serious consequence of the gag was that Valdes
Radev – one of the key meme creators on this and other
topics – was fired from NovaTV, where he had worked for
20 years, a few short weeks after his meme was circulated
on social media. In Bulgaria’s media environment, no joke
goes unpunished.

Revizoro
An old face receives
a new portfolio
definition :
The nickname of Emil Dimitrov,
a political chameleon and jack-of-all-trades,
gets a funny revamp.
Bulgaria has a new environment minister after
Neno Dimov penned his resignation from his cell,
becoming the much-needed scapegoat for the
multilayered incompetence that has left the town
of Pernik waterless. The new incumbent is Emil
Dimitrov, better known by his nickname Revizoro
– a tongue-in-cheek pun combining “reviziа” (Bul-
garian for “financial inspection”) with “Zorro”, the
fictional masked vigilante celebrated in the 1998
movie that starred Antonio Banderas.
Curiously, the original spin on Mr Dimitrov’s
nickname is actually positive – he earned it after
winning the title of financial inspector (or “revi-
zor” in Bulgarian) of the year in 1997 for discov-
ering numerous irregularities in state companies
and forcing them to return the equivalent of 283
million levs in today’s money to the state cof-
fers. When his political career began, however, he
proved to be a chameleon. His most notable ap-
pearance was his short stint at the helm of the
customs office between the end of 2001 and start
of 2002, memorable only for the chaos that he
caused. “Wherever he appears, he fires, he hires,
he seizes contraband goods, or does not find any…
but certainly creates mayhem,” Capital Weekly
wrote at the time.
In recent times he became a notable lobbyist for
the interests of large businesses, including Bul-
gartabac (owned by mogul Delyan Peevski), Rus-
sia’s oil major Lukoil, alcohol and tobacco produc-
er Vinprom Peshtera and the maritime business
of Kiril Domuschiev, the new owner of NovaTV.
With a diverse career like this, there is little won-
der that Mr Dimitrov has been chosen to head the
environment ministry. He explained his appoint-
ment by saying that “there was no one else” and
“this government needs to complete its mandate,”
which appears to be more than enough in the cur-
rent toxic political environment. On the bright
side, Dimitrov’s nickname bestowed on him on the
internet, seems oddly befitting given the water
crisis in Pernik confronting him- Yazoviro, a pun
built on “yazovir” (water reservoir in Bulgarian).
КQUARTERLY 125
Slobodiya
Too much
freedom
definition:
Many Bulgarian politicians do not understand
the concept of freedom of expression – to the
peril of us all.
There is a peculiar distinction in Bulgarian be-
tween two types of freedom. “Svoboda” which
stands for “liberty”, and “slobodiya” which can be
translated as a profligate, unfettered type of free-
dom that results in anarchy. And while tradition-
ally the latter term was used to describe the need
for rules that would prevent arbitrariness, Bul-
garian politicians have started abusing it, result-
ing in further erosion of public trust in the media
at a time its capture by the oligarchy continues.
“There is no freedom of expression in the Bulgar-
ian National Radio; there is full-blown “slobodiya”,
said Yordan Tsonev, an MP from the Movement
for Rights and Freedoms. Without batting an eye,
the politician turned a discussion about political
incursion into the public radio that almost saw a
leading justice system reporter, Sylvia Velikova,
dismissed, into a harangue in which he accused
journalists of having too much freedom of speech.
His colleague from GERB, Vezhdi Rashidov, who
heads the media committee in the National As-
sembly, has also frequently argued that media
freedom has gone overboard.
Lastly, Prime Minister Boyko Borissov appar-
ently agrees. “There is no other place in Europe
with such great freedom of speech as Bulgaria,”
he famously said back in 2015, adding that Bul-
garian media benefits from “slobodiya” more than
any other media in the EU. He had also clearly
delineated what constitutes freedom of speech:
“I watch the TV and wonder: on the most viewed
national programs… a man comes out and speaks
out against me, and the government and ends up
complaining about freedom of speech. If there was
a problem with freedom of speech, you wouldn’t
be saying whatever you want on TV.”
The fact that journalists who are critical of the
government leave the TV stations once they have
been captured by oligarchic interests, or that
most of the country’s press is controlled by one
man does not seem to bother the prime minister.
Alas, he might not fully grasp the distinction be-
tween “svoboda” and “slobodiya.”
126 KQ POLITICS

EAT
& DRINK
IN STYLE

Photo by Tsvetelina Belutova

MANZO: IF YOU’RE ON A MEAT DIET
CLASSY STAKES AND BURGERS

A COZY
Accidentally or not, the Manzo

COCKTAILS
Restaurant (meaning „beef“ in
Italian) is occupying a space once
built for fruit and vegetables. The
place offers several varieties of OUT OF THE
focaccia, three calzones and several types of pasta.
And here we end with the dough. Because the main
TOURIST
character in the menu is meat. TRAPS
The design here is clearly in the style of the 1970s
and in this case convenience did not fall victim THEY KNOW HOW
to the communist-era esthetics, as sometimes
happens. The vibe is channeling a New York bistro,
TO STIR THEM
and while entering, expectations are growing not
so much for the pasta as for the burgers – there
are four varieties.

This cornerstone of contemporary food, as we

remember from Tarantino’s Pulp Fiction, finally
conquered the world after becoming number one
in France in terms of consumption. Sofia is in no
way an exception to this trend, so Manzo gets
involved in the eternal debate about “where they do
it best”. Alongside the burgers there are two classic
steaks – beef and pork. Raw tartare and carpaccio
are the perfect warm-up for the grill: the beef is
from Uruguay and Italy, the pork is from Bulgaria
(more specifically, Livadi Chiflik). Plus, Manzo is
also suitable for a quicker and a light meal – try
Lampredo, the classic Florentine sandwich with
grits, as well as a saucy dinner with grilled bonfilet.

193 Rakovski Street

12 - 22 h
0879 900699

P
Places with generic names like The
Restaurant or The Cocktail Bar
usually should be avoided at all
cost, because they are tourist traps
for those seeking lazy options. Not
in Sofia’s case. The Cocktail Bar is a place to have a
good time and where the staff knows what it’s doing
(you won’t just get a mix of several types of lemon
juice and gin) and offers a look which might remind
you of a Parisian kiosk. The place was named Bar of
the Year in 2019 by Bacchus Magazine (a gourmet
edition linked to KQ publisher Economedia).
An added bonus to the bar is that it is fully glazed
so you have a nice view all around. Just don’t ask
what the space under The Cocktail Bar was used
for. Honestly, don’t ask.
Rayko Daskalov Sq., Sofia
Photo by Anelia Nikolova
КQUARTERLY 127
WHERE ASIA
MEETS BULGARIA
QUALITY FUSION RECIPES
A
Although it’s in one of the city’s
most central locations (literally
just across the park from where
The Cocktail Bar is located),
Niko’las 0/360 is definitely not
one of the places where people end up by accident.
According to the restaurant team, the audience
around the place became more specialized with
time, so today almost everyone who enters Niko’las
knows where they are going and what to expect,
including what the daily menu is, which is posted
on Facebook. And speaking of social networks and
platforms, 83% of the reviews on TripAdvisor are
five-star. Niko’las 0/360 is Bacchus’ Restaurant of
the Year for 2017.
If we have to give a keyword for the cuisine here,
it’s fusion with a strong Asian accent. This is one
of the few places where you can try surf & turf
options. Interestingly, Chef Tsvetomir Nikolov
(who is also the owner) mixes Asian with Bulgarian
cuisine, which comes as a surprise to many. The
menu changes frequently according to the fresh
and seasonal products the market offers, so you
can get up-to-date offers from the restaurant’s
website, which gets updated frequently.
Prices are high by Bulgarian standards but below
the average for Brussels and Paris, and for the
quality being offered, they are actually downright
low.
3 Rayko Daskalov Sq., Sofia
+359 87 688 8471, nikolas.bg
128 KQ CALENDAR

26.03. Until 5.04. 24.04.

A live performance by experi-
mental London trio Benin City
in Tell Me, one of Sofia’s major
nightlife spots.
For the first time, the National The Howard Shore-composed
Gallery puts a focus on street soundtrack to Lord of the Rings
art, a touchy subject in the lo- trilogy will be performed live at
cal art scene. The exhibition A Arena Armeec hall.
Window to Childhood delves
into the personal memories of
major graffiti artists in Bulgar-
ia, but also goes back in time
to revisit their own childhood.

Until 29.03. 09-30.04.

The work of Bulgarian sculp-
ture artist Marko Markov
(1889-1966), author of some of
the best-known public sculp-
tures in Sofia, is on display at
Vaska Emanuilova gallery.
31.03.
Canadian singer-songwriter
and popular Bulgarian indie
band Dead Man’s Hat will
perform at Mixtape 5.
New edition of Master of Art, a
film festival, entirely focused on
art documentaries, often about
key figures in culture. The pro-
Until 05.04. gram for 2020 includes mov-
Art Without / With The Times? ies on Salvador Dali, Dora Maar,
is a group exhibition at Sofia Romy Schneider and Luis
City Art Gallery which gath- Buñuel.
ers new and old works by re-
nowned representatives of
Bulgarian contemporary art
like Luchezar Boyadjiev, Na-
dezhda Oleg Lyahova, Ivan
Moudov and younger ones
like Sevda Semer. The selec-
tion is deliberate since accord-
ing to the curators, the very
definition of “contemporary” 13.06.
has always been problematic The 13th edition of Sofia Pride
for visual art – there is no con- is taking place once again to re-
sensus when it started. spect LGTB rights and visibility
in Bulgaria. The event starts in
the park around the Monument
of the Soviet Army.

Until 31.03.
The 24th edition of Sofia Film
Fest will once again bring all
cinemaphiles together. Oscar-
winner Parasite, arthouse
favorite The Lighthouse,
North Macedonian
documentary hit Honeyland
and some of the new well-
received Bulgarian movies
like Cat in the Wall and The
Father are in the selection.
24.04.
The first edition of Balkan
Beer Bash will present vari-
ous craft beer brands from all
around Europe in Sofia. The
event will take place near the
Despred warehouses on Ves-
lets street.
20.06.
Pink Floyd drummer and co-
founder Nick Mason is hitting
the road with the band’s early
catalogue. Nick Mason’s Source-
ful of Secrets is performing at
Hall 1 of National Palace of Cul-
ture (NDK).
 K Executive Circle is a specially developed
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the network.

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economy and business prepared by Kapital journalists, external
experts and academia. Exclusive data for macro economy,
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opportunity for exclusive networking and private meetings with speakers

Special offers from selected partners and invitations to Bacchus

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 CYBERSECURITY
AND DATA
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November 17th, 2020
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