Gesture politics: Sofia’s reborn Atlanticists

Part 1: Due diligence

There’s never a dull – and rarely a less-than-surreal – moment in Bulgarian politics. After a couple of years without a regular government, our long-suffering country is governed by a non-coalition between two political groupings, headed for the moment by the pro-Western PM Nikolai Denkov.

There’s “We Continue the Change–Democratic Bulgaria” (PPDB) – progressive and pro-EU. And there’s Citizens for the European Development of Bulgaria (GERB), which is ostensibly progressive and pro-Western, yet has a rather solid track-record of pro-Russian actions.

Lately that non-coalition has been suffering political turbulence over the question of which element is more pro-Western, more Euro-Atlanticist – an issue to be judged, it seems, on how quickly. and on the basis of what strategy, the anomalous special rights of the country’s Russian-owned oil refinery to process Russian crude oil are to be removed.

The first part of this two-part article will take a closer look at the specific issue and, then, at the broader context and the track-record of the born-again Atlanticists of GERB (and their friends at the Movement of Rights and Freedoms [DPS], headed by the Magnitsky Act sanctioned Delyan Peevsky). That might help readers define the thin line between virtual and genuine reality.

In St Luke’s Gospel, it is written that there is more joy in heaven “over one sinner that repenteth …. than over ninety and nine just persons, which need no repentance.” Well, the angelic hosts must really be in a good mood right now, since, on the face of it, it seems that not one, but two, rather prominent sinners have seen the light.

One is Boyko Borissov, leader of GERB and Bulgaria’s prime minister for most of the last decade and a half. The other is Delyan Peevsky, the ethnic Bulgarian businessman who has, for most of that period, dominated the mainly ethnic Turkish Movement for Rights and Freedoms (DPS) – and is currently co-leader of its group in the National Assembly (parliament).

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In a largely undeclared but pretty obvious alliance, these two gentlemen have defended their own interests – and those of Russian leader Vladimir Putin. More on the latter activity below: but for now, at least, it’s apparently over. Messrs Borissov and Peevsky (and their acolytes) are now proclaiming their Euro-Atlantic credentials and zealously pushing radical policies that seem to match their pretense.

Lukoil Neftochim: three-day wonder

Take the controversial matter of the Lukoil Derogation. “Lukoil”, in this context – no relation to St Luke, by the way – means Lukoil Neftochim, the giant Russian-owned facility near Bourgas on the Black Sea coast and Bulgaria’s only significant oil refinery.

This had been the beneficiary of a “derogation” (exemption) of Bulgaria in June 2022 from an EU ban on the import of Russian Urals blend crude oil, in the wake of Mr Putin’s invasion of Ukraine.

It made sense: Neftochim had been specifically designed to process Urals crude; the Bulgarian economy and consumers depended on Neftochim-refined fuels; and there were no oil pipelines connecting Neftochim to non-Russian sources of crude. So Russian sea-borne crude had to be tolerated for the time being, even though it was rather lucrative for Mr Putin and his war effort. On top of this, in the initial period of the Ukrainian war, the gasoil (red diesel or DERV, in UK terms) that the refinery produced accounted for a significant share (over 30%) of the total supplied to the Ukraine and its army.

However, times are a-changin’.

Originally due to expire at end-2024 – by which time alternative supply arrangements were expected to have been devised – the derogation period was shortened by parliament last month (October) to end in October 2024. And that expiry date has more recently been brought forward to March 1, 2024 (with export of by-products to the EU banned after January 1, 2024).

Not without objections from Born-Again-Boyko and his newly Euro-Atlantic friend Delyan, however. There was consensus within the PPDB coalition on March 1, but both Mr Borissov and Mr Peevsky said that was far too long, demanding an end to the derogation in three days! Mr Peevsky went so far as publicly to level accusations of corruption against PPDB-aligned finance minister Assen Vassilev and to allege that PPDB was playing ball with the Kremlin and financing Mr Putin’s war machine, to the tune of EUR 1 billion per year.

Messrs Borissov and Peevsky – along with yet another Delyan (parliament’s GERB-aligned Energy Commission chairman Delyan Dobrev) – apparently believed they could force the three-day variant through by a parliamentary vote. In the event they failed, because the issue became entangled with a confidence vote that was on the agenda at the same time, and the possibility of that succeeding was a bit too much for parliamentarians.

Just as well, it might be said. For the “three-day” idea was either monumentally stupid or egregiously malign.

If it had happened, it would just have been too sudden to work for a government and institutions, that have been systematically deprived of capacity and resources to manage fuel market crises related to malfunctions in the Burgas refinery. It would have entailed a very high risk of Lukoil Neftochim declaring force majeure and substantially cutting the volumes of crude oil it was processing, thus generating upward pressure on fuel prices. This would have helped Lukoil build a solid case that the Bulgarian authorities were being driven by ideology and emotions, at the expense of the Bulgarian consumers, rather than by EU law or by cool and calm calculations on the best way forward in diversifying crude oil sources. Likely destabilization of the Bulgarian government and the country’s fuel market would also have given rise to public protests in favor of – or at any rate to the benefit of – the Kremlin’s proxies in the country (of whom there is no shortage, starting with Bulgaria’s President Rumen Radev). Finally, its effect would have been to obstruct progress on the issue of the strategic restructuring of the ownership of Lukoil Neftochim, as public support for such a policy would quickly have been eroded amidst high fuel prices. The idea of Lukoil-as-Problem would soon have been replaced by that of Lukoil-as-Saviour.

Now, whether the “Two Delyans and a Boyko” (D2-B1) comedy troupe really thought they could pull this one off is debatable. Maybe they just reckoned they could win Euro-Atlantic brownie points by suggesting something radical and having it rejected. Or maybe it was seen as a win-win situation – mayhem if their alternative was accepted, Euro-Atlantic cred if it wasn’t. But pure motives don’t seem very likely.

Weighed in the balance

Are we being too cynical? Well, let’s digress somewhat and do a little “due diligence” on the Euro-Atlantic track records of Messrs (or Messiahs?) Borissov and Peevsky. While true “repentance” is always possible, of course, is it really plausible in this case?

I would say “not very”. Over the last decade or so, even quite recently, actions against the Kremlin seem mostly to have consisted of virtual contributions; diplomatic expulsions; “information bombs”; threats; legislative manoeuvres devoid of tangible substance; and, above all, tokenistic actions which look detrimental to Mr Putin’s interests, but when looked at closely are barely tangible or lasting. Overall, there have been a lot of public relations gestures but relatively little in the way of action that really matters.

In terms of money actually diverted from the Kremlin, the sums involved have been relatively small and have primarily concerned companies and individuals of secondary importance to Mr Putin. For example, there has recently been diversification of the nuclear fuel supplied to Bulgaria’s nuclear power plant (NPP) at Kozloduy, with Rosatom replaced as supplier by the USA’s Westinghouse and France’s Framatome.  True, Rosatom loses several hundreds million dollars in proceeds from nuclear fuel sales. But that’s peanuts, compared to the larger picture.

To Russia with love: eight favours to Vladimir

Now set against this the rather extensive list of actions and policies that have suited Mr Putin just fine. I will confine myself to eight of these:

(1)  Lukoil:

Control over Neftochim’s cash-flow guarantees access to power in Bulgaria – one of the commandments in Bulgarian politics. If the Borissov-Peevsky duo is (or seems to be) cracking down on Lukoil Neftochim now, that should be viewed in the context of a long record of favouritism before 2022, mostly on the watch of Mr Borissov (who, incidentally, is a long-standing friend – and former supplier of security services – to Valentin Zlatev, the Bulgarian oligarch who for many years ran the Lukoil operations in Bulgaria).

The most striking manifestation of this favouritism was that, for 15 years, Lukoil Neftochim paid no profit tax whatever, because the authorities (not, apparently, having heard of transfer pricing) accepted the rather implausible claim that it wasn’t making a profit. That sort of thing just doesn’t happen in Bulgaria without the approval of those at the top of politics.

The same applies to the fact that Mr Borissov’s tax authorities consented to recognise an investment of $1.5 billion – a total hyper-inflated through transfer pricing – which gave the company the right to write off amortization for years to come.

The result was that billions of dollars in business proceeds were essentially handed to the Kremlin during Mr Borissov’s premiership, in exchange for millions distributed within Bulgaria as benefits to politicians, business people, the judicial system and the media – in what amounted to wholesale state capture the state. And that represented a deal negotiated with Mr Putin – and not with Mr Biden or his predecessors.

Meanwhile, there are actually some murky doings underway right now, in the form of a potential takeover of the Bourgas refinery, facilitated by the Borissov-Peevsky tandem, with the participation of a Bulgarian oligarch and a US investment fund. Which might explain why “three-day-termination” stunt has taken centre stage and why the Denkov government is under such ferocious pressure. Mr Borissov and Mr Peevsky need a nice charm offensive directed westwards to distract attention from the fact that they are up to no good. And, ideally, they both need to be in charge of the government to close the deal on their terms, which implies intermediary fees worth hundreds of millions of dollars.

(2)  Gazprom:

A&A readers will be familiar by now with arguments on the record regarding Gazprom, so I’ll be brief. The years of the Borissov-Peevsky double act have seen long-standing corruption and persistent obstruction of efforts to reduce Gazprom’s dominance by diversifying away from Russian gas. These have included facilitating the South Stream project, diverting to personal accounts hundreds of millions of euro of advance payments from Gazprom, deliberate delays to the Greece-Bulgaria Interconnector project (IGB) – involving coordinated sabotage by both Peevsky and Borissov proxies – and the toppling of Kiril Petkov’s reformist government in July 2022 to safeguard Gazprom’s interests.

Result: billions of additional dollars flowing to the Kremlin – and hundreds of millions lost to Bulgaria. And at the end of GERB’s rule, the Russian giant’s share of the Bulgarian gas market stood at 94%. So much for diversification!

Instead of diversifying energy sources, the Borissov government effectively cemented Gazprom’s monopoly, perpetuating it by importing Russian gas via intermediaries in Turkey and Greece. This is still the case today; the only difference is that there is a new member in the Borissov-Peevsky group – President Radev, with his Botas-Bulgargaz deal, which adds to the sources feeding Putin’s war chest. A diabolical duo has been replaced by an unholy trinity.

(3)  Turk Stream:

Turk Stream, of course, was Mr Borissov’s main gift to Gazprom, and a shameful betrayal of Ukraine, whose position as a gas supply route it allowed Russia to bypass. It was an expensive step for Bulgaria too, and quite in keeping with the Borissov-Peevsky principle that private political luxury should be indulged at the expense of public funds.

To implement the Turk Stream project, Bulgarian transmission system operator Bulgartransgaz (BTG) effectively sank into a new BGN 3 billion of debt to Gazprom, well above BTG’s pre-deal book value. BTG’a debt repayment today is conditional upon the uninterrupted flow of the agreed volumes of Russian gas through Bulgaria – a perfect case of one-sided dependence. On top of this debt, Gazprom gained exclusive control over the most critical transit route via Bulgaria, transporting 15 billion cubic metres of Russian gas in 2022 alone and receiving over USD 15 billion – which the Kremlin is using to finance its war machine in Ukraine.

And with little gratitude to Bulgaria, since in April of that year Gazprom cut off the gas supply to state-owned gas trader and supplier Bulgargaz, following Bulgaria’s rejection of its counter-contractual demand that payment be made in roubles (a demand supported by both Mr Borissov and Mr Peevsky).

And a quick comparison of the volumes of American and other non-Russian gas purchased with those of Russian gas reveals the grim reality that, under the Borissov government, Bulgaria had contributed heavily to the build-up of Mr Putin’s war machine not only at the geopolitical level (helping his pincer strategy to suffocate Ukraine), but in terms of the gas transited, bought and consumed by Bulgaria itself.

(4)  The gas transit tax:

Now, it’s true that, as a partner in the current government, Mr Borissov’s GERB has not blocked the recent imposition of a20 BGL/MWh excise tax on Russian gas imported by or transiting Bulgaria. And that’s important. One effect could be to help the Bulgarian state recover, at least in part, what Bulgartransgaz (BTG) owes Gazprom on the Turk Stream project. But the levy could also have a material impact and dig deep into Mr Putin’s pockets.

If, that is, the tax is actually implemented. But that is not a foregone conclusion.

While the Borissov-Peevsky duo is gushing Euro-Atlanticism, their henchmen are far more guarded: Mr Dobrev, GERB head of parliament’s energy commission, and DPS parliamentarian Hamid Hamid have publicly expressed a scepticism that verges on opposition and obstruction to the levy’s enforcement.

One possible explanation, implied by an article carried by Russian government daily Rossiyskaya Gazeta on November 22, is that the Kremlin is confident in a commitment it obtained several years back from Mr Borissov’s government. Codified in the strangely missing Turk Stream Road-Map, this was a promise not to change the terms of the transit contract between BTG and Gazprom’s foreign sales arm Gazexport. If this is true, it explains a lot. And if the Russians are confident even now that Mr Borissov will deliver on his promise, that explains even more.

(5)..Gas sector personnel:

Soviet dictator Joseph Stalin famously said that “cadres decide everything”. And there’s some sign that Mr Borissov and Mr Peevsky agree. For they have been quite determined in resisting demands from GERB’s partners in the current government that top officials in BTG and Bulgargaz be replaced. These – and in particular BTG chief Vladimir Malinov, who can in many respects be seen as the “architect of Turk Stream” and key mover in Putin’s variant of the Turkish Gas Hub – are highly prized in Moscow: Mr Malinov is reportedly referred to at Gazprom HQ in Moscow as “our guy in Sofia”.

(6)  Belene NPP:

Going back a few years, there’s another example of subordination of Bulgaria’s interests to those of Russia and Mr Putin, namely the Belene Nuclear Power Plant (NPP), which of course was never finished and almost certainly never will be. While the project wasn’t Mr Borissov’s idea in the first place, the fact remains that billions were squandered on it during his tenure and, in large measure, thanks to inept or weak decisions by him or his allies.

So far, Belene NPP has cost Bulgaria BGN 3.7 billion, most of which can be considered “sunken” – that is, irrecoverable. In 2016, Bulgarian state power company NEK lost its arbitration case against Russian nuclear equipment supplier Rosatom, due mostly to the earlier actions of Mr Borissov and Mr Dobrev. The former had, in 2011, ordered the then NEK CEO Krassimir Parvanov to sign a binding extension of the contract with Rosatom without authorisation from Traicho Traikov, energy minister at the time. And, in 2012, Mr Dobrev, as Mr Traikov’s successor, had terminated NEK’s EPC contract with Rosatom before its expiry, thus incurring consequences that would not have ensued if he had simply waited for the term to expire naturally. Both of these steps were coordinated with the DPS and the two actions topped the list of arguments Rosatom used in the arbitration court – successfully and, for Bulgaria, rather expensively.

(7)  VTB Bank and Vivacom:

To the list can be added various projects financed through VTB Bank. State-owned and Russia’s second-largest bank, VTB can effectively be counted as “Vladimir Putin’s bank”. Prominent among these deals was the occasion in2015 when Mr Borissov personally intervened to prevent two American investment funds from participating in the acquisition of Bulgarian telecoms company Vivacom, allowing it to be purchased by fronts of the VTB at below its market value in the absence of bidders – for USD 600 million – and then resold for USD 1.2 billion. This price premium, which largely ended up in the hands of VTB and its proxies in Bulgaria, could have been avoided had American investors been allowed to participate in the initial bidding process. With Russian money, local corruption flourished, capturing the state.

(8)  Corporate Commercial Bank (KTB):

VTB was also in no small way a beneficiary of the very Bulgarian affair of KTB. The Russian bank was involved in all stages of this ill-fated Bulgarian bank’s meteoric rise, spectacular collapse in 2014, and subsequent bankruptcy – ultimately seizing control and making substantial gains. Mr Peevsky, consigliere of the bank’s CEO, took the lead in this drama, but Mr Borissov played ball and his government never challenged the legality of the raiders’ actions. Billions in asset value were plundered in the process.

In short, Mr Borissov and Mr Peevsky have a long track record of, individually or jointly, taking decisions that favour the interests of Russia, Mr Putin, and big Russian companies – and that have little or nothing to do with Bulgarian national interests. And the answer to our original question is: no, it isn’t unduly cynical to regard the D2-B1 comedy act’s latest turn – a turn in a westward direction – with a little suspicion.

So much for our “due diligence”. The final part of this two-part article will explore one or two other cases of conciliation of the US by Mr Borissov and Mr Peevsky, before asking what is really going on – and how it reflects the character of the Bulgarian elite.