UNDER PRESSURE FROM RUSSIA ON ARMS LICENSES,

C O N F I D E N T I A L SECTION 01 OF 02 SOFIA 000177

SIPDIS

SIPDIS
NOFORN

DEPT. FOR EUR/NCE, EUR/RPM, EUR/RUS, PM

E.O. 12958: DECL: 02/12/2017
TAGS: PREL PARM ETTC RS BU
SUBJECT: UNDER PRESSURE FROM RUSSIA ON ARMS LICENSES,
BULGARIA SEEKS OUR ADVICE

REF: 06 SOFIA 1677

Classified By: Amb. John Beyrle, for reasons 1.4 (b) and (d).


1. (U) This is a guidance request. Please see paragraph 10.


2. (C/NF) SUMMARY: Russia has recently turned up the heat on
Bulgaria in the long-running dispute over "licenses" for
Soviet-designed small arms and light weapons. The GoB
believes that Russia's claims are unfounded, but remains
sensitive to Russian attempts to portray the dispute as an
IPR or counterproliferation issue, thereby sullying
Bulgaria's image in Brussels and Wassenaar. According to
Bulgarian officials, the real issue is political, with Moscow
seeking a veto over Bulgarian sales to countries such as
Georgia. Bulgaria is eager to conclude a deal with Russia
that will take this issue off the political front burner
while protecting its arms industry. But the GoB has
requested our views in advance to ensure that an eventual
settlement with Russia does not harm our security partnership
or create an obstacle to future Western cooperation with the
Bulgarian defense industry. END SUMMARY.


3. (C/NF) Unlike most licensing disputes, Russia's interest
in the Bulgarian defense sector has little to do with money
(Russia's defense export monopoly, Rosoboronexport, counts
annual sales in the billions, and would gain little from
royalties on Bulgaria's defense exports, which approach $100m
annually). According to XXXXXXXXXXXX, the principal demand
of the Russian side for years has been the institution of a
"permissive regime," in which all exports of Soviet-designed
systems would be treated as re-exports requiring Russia's
consent. This proposal is fundamentally unacceptable to the
Bulgarians -- the industry views it as a suicide pill while
the government sees it as an affront to Bulgarian
sovereignty. Still, the GoB is eager to move this festering
issue from the political to the commercial realm.


4. (C/NF) Foreign Minister Kalfin was noticeably annoyed
when the Russians pushed this issue to the top of the
bilateral agenda during Kalfin's visit to Moscow last
December (reftel),essentially blocking progress on other
issues until the "licensing" question is resolved. Bulgaria
also worries about the potential for "made to order" damage
to its international reputation. According to XXXXXXXXXXXX,
Russian money is funding critical stories about the Bulgarian
arms industry "every week" in the Western European press,
attempting to use the dispute to suggest that Bulgaria is
pirating Russian intellectual property or that the Bulgarian
defense industry poses a dangerous proliferation threat.
Bulgaria tries to defend itself, XXXXXXXXXXXX said, but cannot
compete with Russian resources.

Bulgaria's proposal:
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5. (C/NF) Bulgaria's response has been to suggest a
compromise deal that would allow the GoB to negotiate
directly with Russia on the systems it uses for its own
military (such as the Mi-17 and Mi-24 helicopters which it
has so far been unable to modernize without Russian parts)
while allowing private Bulgarian companies to negotiate
directly with Rosoboronexport on licensing terms for the
systems they continue to use.


6. (C/NF) Bulgarian defense firms like this approach because
they prefer to negotiate for themselves rather than face
complying with an agreement negotiated by the government.
Some Bulgarian firms are interested in the possibility of
commercial ties with Russia (a wider choice of suppliers,
etc) which are currently impossible due to the licensing
dispute. Their self-confidence is bolstered by their
calculation that, as private firms, Russia would have little
direct leverage over them. If a diplomatic agreement were
signed but the firms failed to agree to terms with
Rosoboronexport, they believe that Russia would not be able
to do much about it. According to XXXXXXXXXXXX, that's
precisely the idea: the GoB's goal isn't to bind the hands of
its industry, but instead to kick the issue from the
diplomatic to the commercial arena.

The catch?

SOFIA 00000177 002 OF 002


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7. (C/NF) While the Bulgarian government tells us that it
will never agree to seek Russian consent before selling
weapons abroad, Radomirski and experts at the Ministry of
Energy and Economy (MoEE) advise us that this is exactly the
sort of deal that Russia is likely to seek if its state-owned
firms negotiate directly with Bulgarian arms producers.
Several variants are possible, according to Radomirski.
Russia may seek an "informative" rather than "permissive"
regime, in which it would only demand to be notified of
Bulgarian sales abroad, or it could seek an outright ban on
sales to countries of particular concern (he mentioned
Georgia) in exchange for giving Bulgarian firms a free hand
elsewhere.


8. (C/NF) Industry leaders, such as Arsenal Corp.'s Nikolai
Ibushev and Arcus's Banko Bankov tell us that they would
refuse to sign such a deal, and there is no apparent
financial incentive for them to sacrifice access to defense
markets. However, if such a deal were negotiated in a
commercial context, Radomirski confirmed that the Bulgarian
government would have little leverage to stop it.

Comment and guidance request:
--------------


9. (C/NF) GoB contacts and industry leaders think they have a
formula that will allow them to get past this issue once and
for all, but before they officially propose it to the
Russians (in talks scheduled for the end of February) they
want to know the USG opinion in order to better formulate
their negotiating redlines. Both Radomirski and MoEE Export
Control Chief Ivelina Bachevanova have asked if the U.S.
government has an official position on potential solutions to
the licensing issue. In particular, they and arms company
owners worry that signing an arms licensing deal with Russia
-- particularly one that includes a "permissive regime" --
will render them ineligible to participate in lucrative USG
contracts to supply the Iraqi and Afghan national armies, and
may even result in U.S. pressure for other foreign markets to
close their doors to Bulgarian weapons.


10. (C/NF) Post requests Department guidance in responding to
the GoB on this issue. If possible, the GoB would appreciate
a response in advance of bilateral consultations with Russia
to be held in late February (exact date TBD).

Legal background:
--------------


11. (C/NF) Bulgarian policymakers and defense industry
officials are united in the opinion that the dispute with
Russia over Soviet-era weapons systems is not a licensing or
intellectual property dispute in the true sense of the terms.
According to them, the weapons systems in question were
never patented and the agreements that governed weapons
production among Warsaw Pact countries did not have the legal
character of licensing agreements. Moreover, the basic
designs of some weapons (e.g., the AK-47 assault rifle) are
more than 50 years old and have been widely adapted and
produced throughout the world. Taking the high figure of
some 720 disputed agreements claimed by the Russian side, the
Bulgarians say that 340 contained no provision for payment,
while others included significant obligations for the Soviet
Union (e.g., to immediately provide technical documentation
in case of systems upgrades or to deliver components) which
were breached by Russia in the 1990s. When Russian suppliers
stopped delivering, Bulgarian firms were forced to modify
original designs and substitute suppliers, resulting (in some
cases) in a fundamentally different product. For these
reasons (and to avoid any potential complications following
Russia's eventual WTO accession) Bulgaria insists that
"licenses" are not the issue, and that any royalties paid be
treated as fees for spare parts or technical documentation.


BEYRLE