On February 10th, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) sanctioned five Bulgarian government officials, citing their engagement in systemic corruption across Bulgarian institutions, with a specific focus on energy. This action is yet another step in the hard-fought battle to roll back state capture in the Bulgarian energy sector, which remains closely intertwined with the Kremlin’s influence in both the country and the region at large. It follows a previous batch of OFAC designations announced in June 2021, prompted by decades of unbridled mismanagement, fraud, and corruption in the energy sector. The political parties directly affected by these sanctions have tried their best to ignore them, and thus far, Bulgarian institutions have failed to produce a convincing response to any of these charges of state capture.
Russia in the Rear-View Mirror
Bulgaria has long been one of the most vulnerable countries in Europe to Russian influence operations. Russia has inherited Soviet-era networks of influence in the country’s gas, oil, and nuclear industries, controlling technology, financial flows, knowledge, security, and safety. In 2008, Putin celebrated the culmination of Kremlin’s tightening grip on Bulgaria’s energy sector with the signing of what then-President of Bulgaria called the “Bulgarian grand slam” in energy. This disingenuously named “grand slam” consisted of three projects, none of which of held any immediate strategic interest for Bulgaria: (i) the South Stream gas pipeline, eventually finalized as the smaller TurkStream in 2020; (ii) the Belene Nuclear Power plant, which the Bulgarian Parliament discontinued in 2012, after the national Public Financial Investigation Agency uncovered serious procurement and financial irregularities in its construction; and (iii) the Burgas – Alexandropoulos oil pipeline, which Bulgaria has been unsuccessfully trying to abandon as a minority shareholder since 2009.
However, after Bulgaria joined the European Union in 2007, the country’s energy and climate risks have been on a continuous decline, converging to the average EU level. This transition has been underpinned by substantial public investment from EU cohesion funds aimed at democratization, liberalization, and the green transition of energy production, transmission, and distribution. This trend came to an abrupt halt, though, with the onset of the Russia-precipitated energy crisis in 2021 and the start of the Kremlin’s full-scale war in Ukraine in 2022. The war has exposed Russia’s longstanding weaponization of energy in Europe for years, and brought to light the influence networks deployed by the Kremlin to gain leverage on European governments.
Since Russia’s full-scale invasion of Ukraine in February 2022, the Bulgarian President and the government have consecutively tried to: (i) restart negotiations with Gazprom; (ii) uphold Bulgaria’s derogation from the EU oil embargo on Russia; and most recently, (iii) threaten to veto sanctions on Russia’s state-owned nuclear sector. The scale and depth of Russia’s reach in the Bulgarian energy sector will continue to come to light in the months ahead, as Europe’s decoupling from the Kremlin’s state capture business practices accelerates.
On January 17, 2023, the Bulgarian government announced its proposal for the country’s energy strategy for the next thirty years (2023-2053). Anyone who has followed the sporadic implementation of the previous 2020 energy strategy would be forgiven for a healthy degree of skepticism regarding the current proposal. Tellingly, the Bulgarian parliament changed the 2020 energy strategy only once, in 2018 – to allow for the ad hoc inclusion of the hurried construction of TurkStream’s extension through Bulgaria’s territory. This did not stop Russia from cutting off gas delivery to Bulgaria in April 2022, among the first such cuts to Europe. The government’s new strategy appears to be a “greatest hits” collection of all the tried and true practices of state capture and Russian influence from the past twenty years, in clear defiance of the strategic priorities of the European Union. Yet the strategy is mute about the elephant in the room: oil and gas, the two primary energy sources which provide roughly half of Bulgaria’s final energy consumption (49.7% in 2021) and dwarf any other source of energy.
Can Bulgaria Decouple from Russia on Oil?
On the topic of oil and gas, a critical element to watch for is Bulgaria’s commitment to decoupling from its deep-seated dependence on the Kremlin playbook in energy, as well as effectively enforcing and leveraging EU sanctions vis-à-vis Russia. The EU ban on imports of Russian crude oil and refined products, entered into full force on February 5, 2023 as part of the EU’s packages of sanctions. The Bulgarian government fought hard for a derogation from these sanctions – and won. Consequently, Bulgaria’s largest company, Lukoil, may continue processing Russian oil and selling the refined products to Bulgarian and/or Ukrainian consumers through its Neftochim Burgas refinery and petrochemicals complex. The government defended the derogation by arguing that its implementation would prevent an imminent market disruption, raise tax revenues, and help lower prices at the pump. Despite these assertions, as of February 2023, prices have actually marginally increased. This raises the age-old specter of Moscow’s long reach in Bulgarian politics, and the Bulgarian government’s numerous, futile attempts to negotiate better prices with Lukoil’s Neftochim refinery, in which the government is a minority shareholder holding a “golden” share. For the past decade, the actual holders of the “golden” share in the refinery on the part of the Bulgarian government have been officials who have defended and directly worked on Russian energy projects in Bulgaria, including one sanctioned under the latest Global Magnitsky designations.
No need for Lukoil’s derogation from EU sanctions on Russia. Lukoil is Bulgaria’s undisputed oil baron. The company owns and operates the only refinery of consequence in the country. It also operates the only oil port in the country, Rosenets, on long-term concession that expires in 2046. Lukoil also owns and operates the only oil products pipeline connecting its refinery to major oil product demand areas, including Sofia, the capital, and ca. 90% of the legally mandated oil product storage capacity in the country - the so-called excise depots. Since becoming part of Lukoil’s assets in 1999, Neftochim Burgas has paid income taxes in Bulgaria in a whopping total of four years (2007, 2016, 2017, total ca. €78 million, and 2022 - ca. 1.8 million). In exchange for Bulgaria’s efforts to keep the Russian oil flowing, Lukoil has promised to also do so for 2023 (ca. €45 million) and 2024 (ca.€ 280-360 million). With all of this in mind, it is hardly surprising that many doubt the Bulgarian government’s real motives in fighting to retain Lukoil’s derogation from EU sanctions on Russia, given the many factors pointing to the lack of grounds for upholding the derogation.
Neftochim Burgas can operate normally without processing any Russian oil. Bulgaria is capable of receiving its supplies of crude oil and other feedstock from non-Russian sources. The risk, if any, of reaching the turndown ratio at Neftochim Burgas is only present if Lukoil continues to procure all feedstock from Russia and sells all of the products exclusively on the Bulgarian market.However, the refinery can operate on a variety of crude oil streams from around the world, and in that instance, there are no limits on the export of refined products obtained from such streams.
The posture adopted by the Bulgarian government on seeking derogation for Russia’s oil is therefore beyond any reasonable explanation. It translates into extending substantial direct financial assistance to the Russian government and to Lukoil, while simultaneously claiming to support Ukraine and the EU’s policies, instruments, and financial framework for dealing with the issue.
The recent and unprecedented designations under the Global Magnitsky Act can help strengthen the resolve of Bulgarian authorities to accelerate the country’s decoupling from Russian energy dependence. However, this would require decisive political action from the three mainstream Bulgarian political parties affected by the designations – which have swiftly been dubbed “The Magnitsky Coalition” – to embrace, support, and enact credible judicial and anti-corruption reforms aimed at rolling back state capture practices in the energy sector.
For a more detailed analysis, including data, read CSD’s latest Working Paper Decoupling from Russian Oil: Overcoming Path Dependencies in the Bulgarian Energy Sector.