BULGARIA: INVESTMENT DISPUTES TEST NEW GOVERNMENT

C O N F I D E N T I A L SECTION 01 OF 02 SOFIA 000479 SIPDIS E.O. 12958: DECL: 08/23/2019 TAGS: ECON PGOV ENRG BU SUBJECT: BULGARIA: INVESTMENT DISPUTES TEST NEW GOVERNMENT Classified By: CDA John Ordway for reasons 1.4 (b) and (d). ¶1. (C) Summary: Several high profile, U.S.-related investment disputes are testing the new government's resolve to turn Bulgaria into a more transparent investment destination. The successful resolution of these cases, many left over from the previous government, will go far in demonstrating the new government's commitment to battling corruption, breaking up entrenched, murky business networks, and cleaning up Bulgaria's battered image. Unfortunately, even if the political will to do this exists, the budget may get in the way. Bulgaria's worsening balance sheet is pushing the government toward some rash measures whose long-term costs would outweigh short-term gains. End Summary. DISPUTE 1: AES: SCORE ONE FOR THE NEW GOVERNMENT -------------- -------------- ¶2. (C) The Arlington, VA-based AES Corporation is constructing a USD 1.4 billion 670 MW lignite-fired power plant in the south-central municipality of Galabovo. The project -- the single largest green field investment in Bulgaria -- is strategically important, supporting Bulgaria's push to become a regional energy hub. For the past several months the entire project has been held up by the openly hostile actions of the politically-independent mayor of Galabovo, Nikolay Tonev. Tonev has contested permits he himself has signed, and has demanded exorbitant sums for the purchase of land AES already owns, in order to "persuade" AES to send contracts to companies he and his associates own. The mayor has refused to obey decisions of two Bulgarian courts regarding the AES case and has enlisted local authorities and police to intimidate AES personnel and bailiffs trying to enforce court decisions. Due to the mayor's actions, AES and its partner, the Bulgarian National Electric Company, are losing time, money, and patience. ¶3. (C) While the previous socialist-led government knew of AES' problems (which were raised by this Embassy at the highest levels of government),there was little evidence of concern or action. But PM Borissov and his cabinet wasted little time to take bold action. On August 22, the regional prosecutor's office in Plovdiv brought charges of misuse of office against Tonev. If found guilty, the mayor could face one to eight years in prison and would lose the right to hold public office. Further charges are expected to be brought in the next two weeks. The conduct of this case will be watched closely by the international financial institutions and banks financing the AES project as well as foreign investors deciding whether the new government is serious about foreign investment. The fact that charges against this mayor were filed less than a month after the new government took office is a heartening sign. DISPUTE 2: IBM: MIXED SIGNALS -------------- ¶4. (SBU) In May 2009 the Government of Bulgaria and IBM (with the participation of the U.S. Ambassador) cut the ribbon on the first Bulgarian Nanotechnology Center. This landmark collaborative initiative was intended to leverage IBM's vast experience with the ingenuity and skills of Bulgaria's business and academic communities. The center was expected to generate commercial results within three years and was designed to position Bulgaria as a leader in this emerging industry. Then, without warning in early August, Deputy Prime Minister and Finance Minister Simeon Dyankov announced to the press that the project would be canceled due to budgetary constraints. IBM was not notified in advance and instead learned of the cancellation via the media, even as it was fulfilling its contractual obligations to the project. When IBM representatives tried to meet with Dyankov, they were told he would not be available for several weeks. ¶5. (C) After hearing IBM's concerns, the Embassy urged the Prime Minister's office and the Minister of Economy and Energy to work out a mutually acceptable solution. As a result, the Prime Minister met with IBM on August 20. He told the company he supported the project and agreed the government had handled this prize foreign investor and its project unwisely. IBM will meet with the Prime Minister and Deputy Prime Minister Dyankov again on September 1 to work out the future of the Nanotechnology Center. Though recovering from a case of whiplash, IBM is optimistic the new government will meet its commitments to the Nano Center. DISPUTE 3: YORK CAPITAL: A TOUGH SLOG SOFIA 00000479 002 OF 002 -------------- ¶6. (C) In 2006 New York-based York Capital Management bought the majority stake in a 323 million euro bond issue for the Kremikovtsi steel mill, the largest steel mill in Bulgaria. The mill has been plagued by depressed steel prices, worker strikes, shutdowns, ownership changes, asset stripping and ill-conceived government intervention (the government is a minority shareholder). In 2007, Kremikovtsi defaulted on its bonds. When the previous government sought to escape its obligation to bondholders through the use of falsified records, York successfully took the government to court. Now, York is demanding the new government withdraw a motion to claw back previous state aid to the mill and revise an order that charges current ownership of the mill for expenses related to clean-up of the mill's decades-old site. York is also seeking to scale down operations of the plant to turn it into a profit-making mini-mill and is prepared to invest a limited sum to turn the plant around. ¶7. (C) York Capital's meetings with the new government have been contentious. Though anxious to right the wrongs of the previous government in this case, the pressure to plug the government's budget shortfall is compelling Finance Minister Dyankov to pursue all possible sources of revenue. Reimbursement for previously-paid state aid to Kremikovtsi is one such cash cow. Unfortunately, this path may end up ultimately costing the government more, as York and its fellow bondholders promise to seek further court action, liquidation, and a negative publicity campaign in the international business press if the government does not back down. This is just the type of publicity the new government is hoping to avoid. ORDWAY