As Foreign Firms Flee, Bulgaria Must Finally Curb Its Corruption Problem

Share on Facebook Share on Twitter Share on LinkedIn Share in Email Print article
Written by Caroline Holmund

In a month which has seen 200,000 Bulgarians abruptly lose their mandatory auto insurance, after the Cypriot insurance company Olimpic collapsed, the Commercial Registry go offline for days, and a deadly car crash which led three ministers to be sacked amid calls for fresh elections, Prime Minister Boyko Borissov’s government can ill afford more bad news. Yet the end of August brought even more worrying tidings, whose consequences could eclipse all the crises Sofia was grappling with so far: Foreign Direct Investment (FDI) numbers are dropping—rapidly.

Investment by overseas companies fell 10-fold in the last decade, plummeting to just $1.13 billion. As a share of GDP, it went from 28% to a paltry 2%. Bulgarian industrialists wryly commented that they were now receiving more money in remittances from Bulgarians living overseas than from foreign companies doing business in the country.

Life without FDI?

Sofia simply can’t afford for FDI to collapse. More than a decade after Bulgaria joined the European Union, it has the bloc’s lowest GDP per capita. Nearly one in four Bulgarians live in poverty, and brain drain has caused its population to shrink faster than any country on earth. Embattled Prime Minister Boyko Borissov has held an iron grip on power over the past decade, but if he can’t persuade the foreign firms to come back, he risks leaving a legacy of economic and political ruin.

The principal reason foreign investors are being scared away is the culture of corruption which has lingered since the collapse of the Soviet empire 30 years ago. The break-up of the USSR left a vacuum in Bulgaria, greedily filled by former Soviet secret agents and criminal “thick necks.” Bulgaria’s entry to the European Union was supposed to eradicate this problem, but instead it seems to have worsened; FDI began to drop off a cliff in 2007—the very same year Bulgaria joined the EU.

EU officials have committed around €80 billion to help Bulgaria meet a series of benchmarks related to corruption and malpractice, but the campaign has proved fruitless. In a report last November, the EU admitted that none of the criteria had been fulfilled. The cooperation and verification mechanism, a supposedly temporary measure imposed at the start of Bulgaria’s EU membership to narrow its transparency deficit with the rest of the bloc, remains in place.

Instead, it seems Borissov and his regime are the major problem. The prime minister is accused of maintaining ties with the old Soviet elite, and refusing to jail high-profile criminals. Detractors even claim Borissov’s Bulgaria is an  “autocracy in which public resources and institutions are used to serve the private interests of those in power”, and where those who defy this culture are prosecuted on trumped-up charges. Under Borissov’s watch, Bulgaria has developed a reputation as the most corrupt country in Europe, with an estimated 22% of its GDP lost to graft each year.

Besides the system of “old boy networks” through which the Bulgarian government gives favorable terms to certain companies in return for kickbacks, foreign companies must also contend with a two-tier system meaning that Western companies are confronted by arbitrary and unjustified obstacles.

Bulgaria, long perceived as the “energy centre of the Balkans”, is now struggling to maintain fruitful relations with the investors in the energy sector. When Sofia opened its market to Western capital and privatized Bulgaria’s electricity distribution companies, observers interpreted this as willingness to decrease Russian influence in its energy sector. Two decades later, Bulgaria’s energy sector still strongly favors Russia, while making its Western investors’ lives difficult: all three electricity distribution companies have had to initiate arbitration proceedings against Bulgaria, and the country is pushing to terminate its Power Purchase Agreements with overseas energy companies AES and ContourGlobal, which generate around a fifth of Bulgaria’s electricity, while attempting to revive the controversial Belene NPP, which uses Russian technology.

The Czech company CEZ’s decision to sell its Bulgarian business to a completely unknown local company is a clear sign that major international energy players no longer have confidence in Bulgaria as an investment destination. Bulgaria has justified its energy policy by arguing it needs to liberalize its market, but undermines this argument by failing to curb Moscow-headquartered Lukoil’s monopoly power. Borissov may feel that favoring Russian enterprise will rebuild ties with the Kremlin, a key aim of his administration. Yet it has already driven away a number of Western energy companies, who wonder if they are next to be singled out.

Sofia’s choice

Even if Bulgaria were to ensure its foreign investors faced a level playing field, many of them would be perturbed by the country’s extremely unreliable judiciary. The country’s legal system is beset by a litany of problems, from the over-centralisation of the Prosecutor’s office to the independence of the court system, which allows judges to join the gravy train of graft without fear of sanction. Bulgaria’s chambers of commerce have long urged the government to tighten up the system, but so far the pleas have fallen on deaf ears; a recent Eurobarometer poll found that Bulgarians have the least positive perception of their judiciary out of any EU country.

Given these gaping holes in the judicial structure, it’s hardly surprising that only a handful of corruption cases ever make it to trial. According to statistics cited by the Centre for the Study of Democracy, only 72 court cases were completed in Bulgaria in 2015 – even though more than 1.3 million adults are thought to have taken part in a corrupt transaction. Moreover, the Bulgarian judiciary does not guarantee private property. Worried foreign firms have long settled their Bulgarian legal disputes in London, rather than locally. Now, it seems they’ve decided to get rid of the problem altogether by leaving the Bulgarian market.

Borissov rather arrogantly asked his detractors earlier this year “if there is so much corruption, why do people keep electing us?” Yet now it seems he can hold back the tide no longer; the foreign firms have had enough, and if he can’t sort things out, his summer of shame could spiral into years of infamy.