VTB and Lukoil feel at home in Bulgaria

How Russian corporations control officials and the media in the country.
Origin source
Bulgaria turned out to be an easy target for large Russian business, which is actively introducing opaque business schemes familiar to itself in other countries. Bulgaria, a country with a socialist past and deep historical, political and economic ties with Russia, has its own traditions of corruption. The level of corruption here is the highest in the EU, and over the 13 years of staying in the European Union, the country has not made significant progress in combating this phenomenon. Free Russia Foundation analyst Alisa Volkova explains how large Russian business, primarily VTB and Lukoil, forging close ties with Bulgarian politicians, strengthens Bulgaria’s dependence on the Russian energy sector and keeps corrupt politicians in government posts.

After the end of World War II, the Bulgarian economy was completely dependent on the USSR: the Union provided Bulgaria with oil and gas and purchased almost all the goods produced there. It is not surprising that today Bulgaria remains dependent on Russia, especially in the energy sector: 90% of the gas comes from Russia, Rosatom supplies nuclear fuel to the Bulgarian nuclear power plant. And Lukoil owns a Bulgarian oil refinery - the largest in the Balkans - and a wide network of more than two hundred gas stations in the country, which makes the company one of the main employers in Bulgaria and a source of 9% of its GDP.

State "Lukoil"

After the collapse of socialism and the implementation of the reforms of economic liberalization that followed, Bulgaria began selling its industrial facilities. In 1999, privatization of the country's only oil refinery, Neftohim, was announced, which was cheaply sold to Lukoil. According to Pyotr Stoyanov, President of Bulgaria in 1999-2001, it was a purely political decision made by then Prime Minister Ivan Kostov. Since then, Lukoil, represented by its director of the Bulgarian branch, Valentin Zlatev, has played a large role in the political life of the country, supporting the Bulgarian Socialist Party (BSP) and Citizens for the European Development of Bulgaria (GERB) - the party of the current Prime Minister Boyko Borisov.

Thanks to Valentin Zlatev, Lukoil’s business in Bulgaria flourished: he managed to negotiate good deals with all Bulgarian governments and all prime ministers. For 20 years, the company has been repeatedly suspected of violating antitrust laws and corruption, but it has never been charged. The close relationship between Zlatov and the Bulgarian authorities resulted in a very special situation for Lukoil, thanks to which the company exists as a state within the state.

Lukoil in Bulgaria is practically a monopolist, owning all local capacities for the import and processing of crude oil, as well as for the storage, transportation and export of petroleum products. According to the Bulgarian edition of Bivol, the main oil port of Lukoil, Rosenets (near the city of Burgas), which is used to import oil, was even nicknamed the Russian “enclave”: you will not meet representatives of the Bulgarian authorities, including customs officers, and therefore check what is happening there they cannot.

The law requires that, for tax purposes, all pipes be equipped with devices for measuring the amount of oil entering and leaving warehouses. These devices then transmit the data to the customs department. However, inspections conducted in 2011 showed that Lukoil did not have such a system, and the company was deprived of its license. Soon the license was returned, but the tracking system did not appear. According to Bivola’s investigation, the then US ambassador to Bulgaria, James Warlick, who was US Consul General in Russia in 2001-2003, thwarted government attempts to raise appropriate contributions. Warlick visited the refinery and spoke favorably of his work. After this diplomatic intervention, Lukoil was returned the license, and this topic was no longer raised. After finishing his work in Bulgaria and resigning from the State Department in 2016, Warlik began working at the Russian law firm Egorov Puginsky Afanasyev & Partners. The company was founded by a classmate of Vladimir Putin, Nikolai Egorov. Attempts to force Lukoil to comply with Bulgarian law failed because of these ties and the help organized by Russia.
Lukoil is the only supplier of fuel for water and air transport in Bulgaria; the company virtually alone supplies all institutions and services, including the police and the army, using intermediaries. Bulgarian legislation requires that excisable goods be stored in licensed excise warehouses, this allows you to monitor their movement from the moment of production or import to sale to consumers. In 2011, the Ministry of Finance announced that Lukoil directly controls 80% of such fuel depots, and indirectly, more than 95%. Most of Lukoil’s profit in Bulgaria leaves the country. In 2017, the company claimed that it had paid more than 32 billion leva (about 16 billion euros) in taxes, but according to the data provided by Bivol, since the privatization, it has paid only 151 million leva (about 77 million euros) of income tax. The lack of authority and political will to control Lukoil leads to the country's largest company hiding its profits and using Bulgaria as a gateway to Europe - for the illegal import of oil into the EU.

Director of the Bulgarian Lukoil Zlatev and Prime Minister Borisov do not deny that they have been friends since the 90s. In 2001, Lukoil signed a contract with the security company Ipon, founded by Borisov, to protect the pipeline coming from Burgas, where the oil refinery is located, to Sofia. According to some media reports, this deal provided Borisov with a stable income while he was building his political career. At that time he was the secretary general of the Ministry of the Interior. Moreover, according to the Bivol investigation, which is based on WikiLeaks, there is evidence that Zlatev indirectly financed Borisov’s political take-off, from his election as mayor of Sofia in 2005 to the victory of the HERB party in the 2009 national elections at the expense of received from Lukoil.

U.S. diplomatic leak

“Borisov has close financial and political ties with the director of Lukoil Bulgaria, Valentin Zlatev, an extremely influential gray cardinal and backstage tycoon in politics. Borisov’s loyalty to Zlatev (and vulnerability to him) plays an important role in his political decisions. From the beginning of his work as mayor, he attracted Lukoil to a number of government partnerships: Lukoil agreed to donate asphalt to repair city streets, take over the maintenance of the Soviet Army monument and finance the construction of housing for the poor. In response, Borisov supported the use of land owned by the city for the construction of new Lukoil stations. Although this may seem like a serious example of the “you to me, I to you” [sic] deal, Borisov’s public agreements with Lukoil are only additional deals in his much deeper and more extensive business relations with Zlatev, which were reported through other channels. ”

According to the same sources, there were suspicions that Valentin Zlatev might be connected with Russian intelligence in Bulgaria. With this in mind, it is logical to assume that he was not just trying to expand Lukoil’s business and ensure stable import of Russian oil and gas, but on the whole promoted Russian interests in Bulgaria. So, in 2011, Zlatev attended a meeting of Deputy Minister of Economy, Energy and Tourism of Bulgaria Maria Koseva with representatives of Rosatom in Moscow on the project for the construction of Belene NPP. According to Kosev, the director of Lukoil "unexpectedly appeared at the meeting for unknown reasons."

Belensk nuclear power plant - the second nuclear power plant in Bulgaria near the city of Belene, is in unfinished condition. It was planned in the 1980s, in the 1990s the construction site was frozen. In 2002, the Bulgarian authorities intended to sign a construction agreement with the Russian Atomenergoproekt, the daughter of Rosatom. The project actively supported BSP, which at that time had the majority of seats in parliament. When Boyko Borisov and his party GERB came to power in 2009, he first froze the project in order to remove people and companies associated with BSP from the project, and then in 2010 opened it again for negotiations with Rosatom. Several preliminary agreements were signed, after which the project was stopped in 2012 under pressure from the EU. Then the coat of arms voted against him in parliament, and Boyko Borisov publicly criticized the draft.

Zlatev, however, maintained good relations with politicians from all major parties. In 2016, Bivol investigated how Lukoil handed over a large coastal piece of land near its refinery to Ahmed Dogan, then head of the Movement for Rights and Freedoms (DPS). This political party represents the interests of the Turkish minority. Dogan built a huge mansion and blocked public access to the beach. The relationship between Dogan and Zlatev was tracked through offshore companies. In 2019, Zlatev was finally fired: according to media reports, the management of Lukoil in Russia was unhappy with the massive loss of profit.

Vneshtorgbank finances controversial transactions

Another example of how much Russian business close to the state plays in the Bulgarian economic and political arena is the participation of the Russian VTB in two scandalous deals. We are talking about the transfer of the third largest telecommunications company Vivacom (Bulgarian Telecommunications Company, BTK) to the famous Bulgarian reseller Spas Rusev. VTB actually provided unsecured loans to its own managers for this purchase. It is possible that the details of this transaction would remain secret if the former owner of Vivacom, Tsvetan Vasilev, did not try to challenge the deal. True, not directly: unexpectedly, his interests were represented by Dmitry Kosarev, assistant to the so-called “Russian Orthodox oligarch” Konstantin Malofeev, who was included in the EU sanctions list for supporting 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 now hiding from Bulgarian justice in Serbia after the collapse of his Corporate Commercial Bank (KKB) in 2014. In turn, Spas Rusev is supported by VTB First Deputy Chairman Yuri Soloviev and two managers of the Bulgarian branch of the bank, Milen and Georgy Velchev. The first was the Minister of Finance in the government of Simeon II (2001-2005), and the second is a major developer and owner of numerous hotels on the Black Sea coast.

So, in 2015, BTK shares came under the control of VTB Capital after non-payment of the loan. In November of that year, VTB sold its shares at auction to an investment consortium led by the Luxembourg company Viva Telecom SA for 330 million euros. It turned out that the real owners of Viva Telecom were the Bulgarian businessman Spas Rusev, the managers of VTB Capital, the brothers Milen and Georgy Velchev, as well as Krasimir Katev. The general public did not like this outcome, and the media began to doubt that the deal was fair. In order to buy a stake in VTB Capital, Viva Telecom SA took a loan of € 240 million from VTB. According to The Moscow Post, this company through a chain of offshore companies belongs to Yuri Solovyov, VTB’s first deputy president and citizen of Great Britain. The Velchev brothers are top managers of the Bulgarian VTB branch. It turns out that the bank provided a loan to its own top managers for the purchase of its own assets.

Another dubious deal was the privatization of the Bulgarian tobacco company Bulgartabac. It took four years and the help of VTB to spend it and make the owner of politician Delyan Peevsky. This is an odious political figure who has become a symbol of corruption in Bulgaria. Being a member of parliament from the DPS party, he controls, in addition to Bulgartabak, Technomarket, a network of electronic goods stores, and other companies. Together with their mother, Irena Krasteva, the former head of the National Lottery, they now control about 80% of the print media and Channel 3, which are used for political purposes in the interests of the ruling coalition. Due to this concentration of ownership in the hands of politicians, Bulgaria has a very low index of freedom of the press for an EU member state - it remains in 111th place in the world. Media belonging to the Peevsky family are regularly used to denigrate opposition during elections.

In 2011, Bulgartabac was sold to the Austrian BT Invest GmbH as part of a privatization tender at a price that is significantly lower than the market price. 79.83% of the shares of the state tobacco company cost 100.1 million euros. BT Invest at that time belonged to a Cyprus offshore company called VTB Capital Pe Investment Holding Ltd. BT Invest was supposed to invest 7 million euros in “Bulgartabac” within two years from the date of acquisition and to buy 5000 tons of Bulgarian tobacco every year for a 5-year period. In 2014, 100% of BT Invest was sold to the offshore company from Liechtenstein Livero Establishment, associated with Tsvetan Vasilev. Then, in 2014 and 2015, the chain of owners changed and, according to the Capital magazine, leads to Delyan Peevsky. The fact that Bulgartabak was sold to local Bulgarian investors was confirmed by a source in VTB to the Russian edition of Vedomosti. According to the source, the asset was resold with a 30 percent bonus on the acquisition price. This means that the transaction amount could be up to 130 million euros.