CORRUPTION
Large Russian businesses actively work abroad, transferring non-transparent Russian business practices to other countries. Bulgaria seems to be an easy target for that. The country with a socialist past and deep historical, political, and economic connections with Russia has its own tradition of corruption. It has the highest level of corruption among all the EU states and shows little progress even after 13 years of being part of the Union. Logically it provides favorable ground for Russian malign influence to spread into business and politics in Bulgaria. Alisa Volkova, a political analyst at The Free Russia Foundation, describes how large Russian businesses successfully establish close connections with local politicians in order to promote their interests and deepen Bulgarian dependency on Russia’s energy sector, as well as keep corrupt politicians in positions of power.
Russian help to the Bulgarian Socialist Party (BSP), to the current Bulgarian Prime Minister Boyko Borisov and his political party, Citizens for European Development of Bulgaria (GERB), led to the continuation of Bulgarian dependency on Russian oil and gas, pushing the South Stream project, supporting the Turkish stream project, and the construction of the second nuclear power station in Bulgaria by Russian Rosatom.
Bulgaria and Russia have long-lasting economic and cultural ties thanks to close relations during the socialist period and a few key historical events like Russia’s contribution to the liberation of Bulgaria from Turkish rule in 1878. After the Second World War Bulgaria and the USSR made a strong economic bond. The USSR provided Bul- garia with oil and gas and bought almost all commodity goods manufactured there. The Bulgarian economy was fully dependent on the USSR. Unsurprisingly, Bulgaria has remained dependent on Russia since the collapse of Soviet Union, especially in the energy sector. Russia is still Bulgaria’s main trading partner in oil and natural gas (90% of Bulgaria’s gas imports comes from Russia). The Russian state company Rosatom provides nuclear fuel for the Bulgarian nuclear power station. The Russian oil company Lukoil owns the Bulgarian oil refinery plant— the largest in the Balkans—and a wide network of more than 200 gas stations in the country, making it one of the biggest employers in Bulgaria and contributing 9%to its GDP.
The Lukoil State
The story of Lukoil’s influence in Bulgaria requires deeper insight. After the failure of socialism and following the economic liberalization reforms, Bulgaria was selling its industrial facilities. In 1999 the privatization of the only oil refinery in the country “Neftokhim” was an- nounced and sold to Lukoil at a low price. According to Peter Stoyanov, the president of Bulgaria in 1997-2001, this was a purely political decision taken by then Prime Minister Ivan Kostov. Since then, Lukoil, represented by its director Valentin Zlatev, has played a great role in Bulgarian political life supporting the BSP and GERB, and especially in the political career of the current Prime Minister, Boyko Borisov.
Thanks to Valentin Zlatev, Lukoil’s business in Bulgaria has been prosperous during all the years the company has been present there. Zlatev was able to negotiate good deals with all Bulgarian governments and all prime ministers. During its 20 years in business it was under investigations for suspected monopoly and corruption, but it never faced any charges. Close relations between Zlatev and Bulgarian authorities led to a very special position for Lukoil in which it operates like a state inside a state.
Lukoil in Bulgaria is practically a monopolist possessing all local facilities for the import and processing of crude oil, as well as for the storage, transportation, and export of petroleum products. According to an investigation by the Bulgarian media Bivol, the main oil port of Lukoil Rosenets near the city Burgas, which is used to import oil, has been named a Russian “enclave” where no representatives of the Bulgarian authorities, including Customs officials, are present and can check ongoing activities.
The law requires that, for tax purposes, all pipes should have devices to measure how much oil enters and leaves warehouses. These devices then transmit the data to the Customs Agency. However, checks carried out in 2011 showed that the system was not in place on the pipelines at the Lukoil refinery and the company was deprived of its license. But this did not last long. Shortly after the license was returned and Lukoil continued to work without a proper tracking system. According to Bivol’s investigation, the State’s effort to collect its dues was thwarted by then US Ambassador James Warlick, who was a Consul General at the US Embassy in Moscow in 2001-2003. Warlick made a deliberate public visit to the refinery and spoke favorably about its work. After this diplomatic intervention, the license was returned to Lukoil and this topic was not raised anymore.
After Ambassador James Warlick ended his term in Bulgaria and left the State Department in 2016, he started a new job at the Russian law firm “Egorov, Pugin- sky, Afanasiev and Partners.” The firm was founded by a university classmate of Vladimir Putin, Nikolay Egorov. Attempts to make Lukoil comply with the Bulgarian law failed because of these connections and Russian-rooted help.
Lukoil is the only supplier of fuel for sea and river ships and aircraft at the national airports of Bulgaria. In 2011, the Bulgarian Ministry of Finance announced that Lukoil directly controls 80% of the tax warehouses for fuels. In fact, the company indirectly controls over 95% of them. Lukoil is the main, and in reality, the only fuel supplier for all institutions and services, including the police and the army. The rest of the companies are just intermediaries that also offer its product. Bulgarian legislation requires excise goods to be stored in tax warehouses that are licensed.
Moreover, most of Lukoil’s profit from its activities in Bulgaria leaves the country. In 2017, the company claimed to have paid over 32 billion leva (around EUR 16 billion) in taxes, but according to official figures, it has paid only 151 million leva (around EUR 77 million) in profit tax since privatization. Lack of authority and absence of political will to control the company leads to the situation where the biggest company in the country hides its profits and uses Bulgaria as an entry point for the illegal import of oil to the EU and sends money offshore to private interests of connected people.
The friendly connection between Zlatev and Borisov, which they have not denied, has been in place since 1990s. But the real rise of the Borisov’s political career began in the beginning of the 21st century. In 2001 Lukoil signed a contract with a security firm “Ipon”—a firm founded by Boyko Borisov—for guarding an oil pipeline that runs from Burgas, where the oil refinery is located, to Sofia. According to some media, this deal ensured a stable income for Borisov, while he was building up his political career. At that time, he was a general secretary at the Ministry of Internal Affairs.
Moreover, according to the investigation of Bivol, which is based on the WikiLeaks files, there is evidence that Zlatev indirectly financed the political rise of Borisov from his election as a Mayor of Sofia in 2005 to the victory of his political party, GERB, at the general elections in 2009, with funds diverted from Lukoil.
The evidence comes from leaked US diplomatic correspondence:
“Borisov has close financial and political ties to LUKoil Bulgaria Director Valentin Zlatev, a vastly influential kingmaker and behind-the-scenes power broker. Borisov’s loyalty (and vulnerability) to Zlatev play a major role in his political decision making. The Mayor has engaged LUKoil in a number of public-private partnerships since taking office: LUKoil has agreed to donate asphalt for the repair of city streets, take on the upkeep of a Soviet Army monument, and finance construction of low-income housing. In a reciprocal gesture, Borisov has advo- cated using municipal land to develop new LUKoil stations. Though this may seem a significant quid- pro-quo [sic], Borisov’s public agreements with LU- Koil are only side deals in his much deeper and broader business relationship with Zlatev, which has been reported in other channels.”
According to the same sources, it was suspected that Valentin Zlatev might be connected to the Russian intelligence in Bulgaria. Taking this into account it is logical to assume that he was not just trying to expand Lukoil business and ensure stable import of Russian oil and gas but he was also promoting wider Russian interests in Bulgaria. In support of this, in 2011 Zlatev was present at the meeting between Bulgarian Deputy Minister of Economy, Energy and Tourism, Mariy Kossev, with representatives of Rosatom in Moscow on the Belene Nuclear Power Plant project.9 According to Kossev, the Lukoil director “surprisingly appeared at the meeting in an unclear capacity.”
Belene Nuclear Power Plant is a project of constructing the second NPP in Bulgaria near the town Belene. It was planned in the 1980s but was frozen in the 1990s after the collapse of socialistic system. In 2002 the project came again at the agenda of Bulgarian authorities. The construction agreement should have been signed with Russian “Atomenergoproekt,” one of the subsidiaries of Rosatom. The project was actively supported by the BSP, which had a majority at that time. When Boyko Borisov and his party GERB came into power in 2009 he first froze the project to cut off BSP-linked contacts and companies from the implementation of the project and then in 2010 opened it up again for negotiations with Rosatom. A couple of preliminary agreements was signed before the project was stopped in 2012 under pressure from the European Union. Then GERB voted against it in the Parliament and Boyko Borisov publicly criticized the project. The BSP remained supportive of it.
Zlatev’s strategy was to put eggs in different baskets; he kept good connections with politicians from all main political parties. In 2016 Bivol investigated how Lukoil gave a large coastal plot of land next to its refinery, to then head of the Movement for Rights and Freedoms (MRF), a political party of Turkish minority, Ahmed Dogan. He erected a huge mansion and closed public access to the beach, which is against the law. The connection between Ahmed Dogan and Valentin Zlatev was also found in the ownership network of countless offshore companies.
In 2019 Zlatev was finally dismissed from his position. The possible reasons discussed in media included the version that Lukoil’s management in Russia wasn’t happy with the massive outflow of profits, which was not only against Bulgarian interests but also against Lukoil’s own business interests.
At the same time, it would be wrong to say that Zlatev or Lukoil controls Bulgarian politicians. They have their own interests and understand well all the benefits of being in the European Union and NATO. Borisov, who for years supported the “South Stream” project, immediately turned against it after pressure from the EU. He also did not support Russia’s annexation of Crimea.
Vneshtorgbank Finances Ambiguous Deals
Another example of how close-to-state Russian business plays a great role in the Bulgarian economic and political scene, is the involvement of the Russian state- owned foreign trade bank, Vneshtorgbank (VTB), in two scandalous deals. VTB is a leading Russian bank, in which the Russian government owns 60.93% of shares. It has a wide network of affiliated entities all over the world. In recent years, it was noticed that VTB was involved in several suspicious investment schemes in different countries. At least two suspicious “investments” were related to Bulgaria: the sale of the Bulgarian Telecommunication Company (BTC), which owns the Vivacom trademark, and the privatization of Bulgartabac, a large Bulgarian tobacco producer.
One case describes the conveyance of the third largest telecommunications company Vivacom to a well- known Bulgarian investment reseller Spas Rusev, and managers of a local VTB Capital branch using unsecured credit from VTB. It is possible that details of this deal would have remained hidden if the former owner of Vivacom, Tsvetan Vasilev, had not tried to declare the deal invalid. However, Vasilev did not do it himself. Unexpectedly his interest was represented by Dmitriy Kosarev, an assistant to so-called Russian orthodox oligarch Konstantin Malofeev, who is included in the EU sanction list for his support of illegal armed groups in the Donetsk region of Ukraine in 2014. In the Panama papers journalists found a connection between Malofeev, Kosarev, and Tsvetan Vasilev, who is currently hiding from the Bulgarian government in Serbia because of the failure of his Corporate Commercial Bank (CCB) in 2014.
The Panama papers exposed corrupt practices, financing of affiliated companies, and personal gain at the expense of the state. The scandal escalated to the international level but Bulgarian authorities made an effort to calm it down and avoid investigation.
Vivacom is Bulgaria’s third largest mobile operator and owner of the previously state-owned telephone network, and an arena of serious struggle in the last few years. Interestingly, both conflicting parties are supported, financially and politically, by Russia.
On one side, there is BTC’s former owner Tsvetan Vasilev, trying to promote his interests through Konstantin Malofeev and his assistant Dmitriy Kosarev. Malofeev was repeatedly caught by Russian media in questionable deals and connections with the Orthodox Church. On the other side, there is a Bulgarian businessman Spas Rusev, supported by VTB’s first deputy chairman Yuri Solovyov and two managers in the bank’s Bulgarian branch, Milen and Georgi Velchev. The former is known as the Minister of Finance in the Government of Simeon II (2001-2005), while the latter is a major developer and owner of numerous hotels on the Black Sea coast.
The story attracted mass media attention back in 2015, when BTC shares passed into the control of VTB Capital PLC after failing to return a loan. In November 2015, VTB sold its shares on auction to an investment consortium led by Viva Telecom SA, a Luxembourg company for EUR 330 million. It was discovered that real owners of Viva Telecom were the Bulgarian businessman Spas Rusev, VTB Capital managers – brothers Milen and Georgi Velchev, and Krasimir Katev.
The general public did not like the outcome; mass media started to doubt that the deal was fair. To buy a share in VTB Capital PLC, Viva Telecom SA made a EUR 240 million loan from VTB. According to the Russian newspaper The Moscow Post, this company is owned by a chain of offshore companies, ultimately owned by Yuri Solovyov, first deputy chairman of VTB, a British citizen. Apart from that, the consortium that won the auction included the Velchev brothers, top managers of VTB’s Bulgarian branch. It was revealed that the bank gave a loan to its own top executives to buy its assets.
The questionable operations by VTB did not go unnoticed by the other side, who was also interested in Vivacom ownership. In early 2016, a Russian businessman Dmitriy Kosarev started a campaign to regain his control over Vivacom assets.
According to the Russian magazine Sobesednik and the documents revealed in the Panama Papers, offshore companies connect Kosarev and Malofeev to Ts- vetan Vasilev, the former owner of Vivacom. The magazine suggests that Vasilev could call Malofeev for help in saving at least a part of his CCB share.
VTB also believes that Kosarev was acting on behalf of Vasilev. The bank’s representatives told Russian news agency RBC about a document that stated the division of assets to be gained by Kosarev and Vasilev in the ratio of 80:20.
In his interview with the Russian newspaper Nezavisimaya Gazeta, Dmitriy Kosarev claimed that VTB Capital illegitimately gained a 76.6% share in Vivacom previously owned by him. Kosarev stated that he bought shares in CCB through a chain of offshore companies back in 2012. He is the owner of Empreno Ventures, a company which owns (through LIC Telecommunications Sarl) a 43.3% share in InterV, the former CCB owner, and a further 33.3% share pledged on behalf of Crusher.
In March 2016, Kosarev filed a lawsuit in the London court where the auction took place. He also wrote an open letter to the Russian prime minister and Alexei Ulyukaev, then the Russian minister of economic development and a head of the advisory council of VTB, who was later arrested for accepting the bribe, asking to investigate the questionable deal by VTB. He was given no answer. That did not stop him from holding a wide media campaign against VTB. A wave of publications in Russian media following Ulyukaev’s arrest makes it clear that Ko- sarev continued his struggle, as he hoped that the bank’s reputation was unstable due to Ulyukaev’s arrest and he could bring the case forward.
On 26 September 2016, Russian media put out a rumor that Yuri Solovyov visited Sofia to “settle the matters” of the Vivacom deal with Boyko Borisov, then prime minister of Bulgaria. The information, coming from unnamed sources from The Moscow Monitor magazine, was distributed by some Bulgarian media, among them the investigational website Bivol. However, the purely tabloid reputation of The Moscow Monitor and the fact that no serious Russian media shared the news, hint that it is likely a fake. The Bulgarian Government’s Public Office has no information about such a meeting.
Though the CCB deal was officially closed on 30 August 2016, its results can be revoked. It depends not as much on the professional work of lawyers in both countries, as on the political will of the Russian and Bulgarian governments. Today, the political position of VTB looks stable following Ulyukaev’s arrest. The bank’s executives did not defend the head of their advisory board. Andrei Kostin, VTB Chairman, described Ulyukaev’s arrest to Kommersant as “a very sad story,” and immediately informed about a new candidate for the position.
Another deal was the privatization of the Bulgarian tobacco company Bulgartabac. It took four years and the assistance of VTB to conduct the privatization of Bulgartabac in a way that politician Delyan Peevski became the owner. Delyan Peevski is an odious political figure in Bulgaria, who became a symbol of corruption. Being a member of the Parliament from the MRF he controls a number of businesses, including Bulgartabac, Technomarket, a network of shops for electronic items, and others. Together with his mother Irena Krasteva, former head of the national lottery, they now control around 80% of print media and a TV-channel (Kanal 3), which are used for political purposes in the interest of ruling coalition. Due to this concentration of ownership in political hands, Bulgaria has a very low Press Freedom Index for a country in the EU – it remains in 111th place. Their media is regularly used for black PR against the opposition during elections.
In 2011 the company was sold under the privatization tender to Austrian company BT Invest GmbH at the price much lower than the market evaluation. A 79.83% share of the state tobacco company cost EUR 100.1 million. BT Invest at that time was owned by the Cyprus offshore called VTB Capital Pe Investment Holding Ltd. BT Invest was to invest EUR 7 million in Bulgartabac within two years from the acquisition and buy 5000 tons of Bulgarian tobacco every year within a 5-year period.
In 2014, 100% of BT Invest was sold to the offshore Liechtenstein company Livero Establishment, linked to Tsvetan Vasilev. Then in 2014 and 2015 the chain of owners changed and according to the Capital magazine leads to Delyan Peevski. Analysis of the deal prices in 2011 and 2014 shows that VTB sold Bulgartabac for a very low price, which looks like a “friendly gesture” at the expense of the Russian state budget.
The fact that Bulgartabac was sold to local Bulgarian investors, was confirmed by the Russian magazine Vedomosti from a source in VTB. According to the source, the asset was resold with a 30% bonus from the acquisition price. This means that the deal could add up to EUR 130 million. At the same time, BT Invest costs much more on the stock exchange — the capitalization of Bulgartabac on the Sofia Stock Exchange was about EUR 400 million in December 2013. It turns out that the deal makes no economic sense for VTB; it could bring lost profit to the bank and ultimately to the Russian state budget.
The deal looks non-market, comments Maksim Korolyov, chief editor of the Russian Tobacco news agency. According to him, the price hints at a “friendly” deal, or VTB Capital wanted to get rid of the asset quickly. So, Russian money was used to privatize Bulgartabac for no profit. This raises doubt about the motives of those who lead an otherwise state-owned Russian financial institution.