Bulgaria’s troubles with corruption, organized crime, theft of economic assets and an ineffectual judicial system are testing the EU’s ability to keep absorbing new countries. Now 27 members strong, the political bloc is looking next at taking in Croatia, Macedonia and Turkey, and then Serbia — each of which brings its own challenges. But Bulgaria’s example could give ammunition to opponents who say the EU already has brought too many difficult cases inside its borders.
There have been more than 150 contract killings in the country since 1997, according to the country’s interior ministry, and only a handful have been solved. Bulgaria’s interior minister resigned over contacts with suspected organized-crime bosses earlier this year. The clogged court system can take years to resolve even flagrant breaches of property rights. Opinion polls show Bulgarians view the judiciary as the country’s second most corrupt profession, after customs officials.
Union workers at the giant, troubled steel plant here recently held managers as virtual prisoners to force them to sign a contract. An ex-wrestler who allegedly amassed wealth by squeezing the plant for cash was shot dead by a sniper. Suppliers are suing the factory to force it into bankruptcy as two steel magnates compete to gain control of it.In Russia and Central Asia, such sagas of companies in chaotic power struggles have become familiar. But the Kremikovtzi steel plant is in the European Union. Last year it accounted for about 7% of the exports of Bulgaria, one of the EU’s two newest members. Now a Bulgarian court is about to decide what to do about the debt-ridden steel firm’s imminent collapse after years of stripped assets and neglect, even as thieves plunder the site.The EU’s executive arm took the unprecedented step July 23 of suspending about $780 million in scheduled aid payments to Bulgaria, criticizing it for slow progress in improving the courts, corruption and crime. European governments are increasingly concerned about Bulgaria’s becoming part of the EU’s borderless zone, within which residents can move about among countries without passports. The move, targeted for 2011, would make Bulgaria responsible for part of the shared external border of as many as 29 countries.Bulgaria already is a highway for smuggling people, drugs, counterfeit money and Chinese pirated goods such as CDs into Europe, according to a March report by the United Nations Office on Drugs and Crime. The majority of heroin on Europe’s streets comes via Bulgaria, from Afghanistan, the report says.EU leaders knew Bulgaria had lingering problems when it was admitted to the bloc in January. They attached extra conditions to EU aid to both Bulgaria and Romania, which joined at the same time. Bulgaria says the country’s difficulties are exaggerated by the media, and points to progress: Since 2004, Bulgaria’s economy, the EU’s poorest, has been growing at more than 6%. The country has set up new agencies to oversee the judiciary and investigate corruption and organized crime, adopted new legal codes and proposed law-enforcement reform, but the EU says those moves haven’t produced enough results.
Kremikovtzi’s issues alone make up a major caseload. Prosecutors are investigating whether a recently fired Kremikovtzi chief executive embezzled funds that were transferred from the plant to Bulgaria’s top soccer club, where he was the chairman until last month. The plant, now running at half-capacity, this year has repeatedly failed to pay its workers or its suppliers.A court in the Bulgarian capital is due to rule by next week on the fate of the plant, where a work force that once numbered 20,000 has fallen to 6,000. The current principal owner is Pramod Mittal, brother of Lakshmi Mittal, who controls ArcelorMittal SA, the world’s largest steel firm. ArcelorMittal hopes to buy the plant after bankruptcy proceedings, and signed a contract last month to restore supplies to the plant, but is waiting to see if the Bulgarian government backs its takeover bid before making deliveries.
Workers are fighting a sale to ArcelorMittal, worried that it could cost them even more jobs. Konstantin Trenchev, head of the Podkrepa union confederation that represents thousands of workers at the Kremikovtzi plant, says he prefers a rival bidder: a Ukrainian firm owned by 34-year-old billionaire Kostyantin Zhevago. On July 10 thousands of workers surrounded Kremikovtzi’s shabby office tower for 10 hours, refusing to let executives leave until they had also signed a supply agreement with the Zhevago firm.One Kremikovtzi board member found an unguarded back door and ran away from the crowds across some fields. As night fell, hungry managers ordered sandwiches from outside caterers; workers seized and ate the delivery. The board caved in shortly before midnight and signed the supply contract with the Ukrainians.Mr. Zhevago also controls one of the suppliers suing to place the factory in bankruptcy. “We want to see the money repaid,” says Mr. Zhevago’s representative in Bulgaria, Vyctor Demianiyk. “For that, the plant must stay in operation.”
The sprawling Kremikovtzi plant — which occupies an entire suburb of Sofia — has borne the brunt of Bulgaria’s Wild East brand of capitalism ever since the fall of Communist dictator Todor Zhivkov in 1989. “You can write the history of capitalism in Bulgaria just on the basis of Kremikovtzi,” says Ivan Krastev, head of the Center for Liberal Strategies, a Sofia think tank. It shows, he says, how “Bulgaria has been deindustrialized by interest groups who extracted state assets like oil states extract the oil in their ground.”
When Communism fell, many former officers of Bulgaria’s feared security services — like those in some other former Eastern bloc states — formed shady business conglomerates whose activities included milking former state industries, running extortion and protection rackets, and bankrolling and occasionally assassinating politicians, as the U.N. report notes. They hired many former wrestlers and weightlifters, who were pampered heroes under Communism, as enforcers. Thick-necked former athletes still cruise Sofia streets in luxury sports cars and SUVs, flaunting wealth gained in the transition years. Now a generation of politicians who rose to the top in those troubled years is in charge of cleaning up the mess.Kremikovtzi’s troubles started in the early 1990s, when the state-owned steel company fell under the sway of Ilya Pavlov, a former wrestler who had married the daughter of a Communist-era secret-service chief. Mr. Pavlov persuaded Kremikovtzi’s managers to buy raw materials from a company he chose, at higher prices, and then sell finished steel to him at a discount, says Bogomil Bonev, who investigated Mr. Pavlov as Bulgaria’s interior minister in the late 1990s.Mr. Pavlov’s involvement “is the main reason why Kremikovtzi is bankrupt today,” says Mr. Bonev. He tried in vain to bring down Mr. Pavlov’s empire, which he said used legal businesses as a cover for organized crime and was protected by corrupt prosecutors and judges.
Mr. Pavlov became one of Bulgaria’s richest businessmen. Then a sniper shot him in the back as he and his bodyguards walked out of his offices in downtown Sofia in 2003. The killer was never found. Mr. Pavlov’s funeral was a “Who’s Who” of Bulgaria, presided over by the head of the Bulgarian Orthodox Church, and attended by the bosses of the most important local oil companies and banks and by two former Miss Bulgarias. A government minister read out a message from the then-prime minister, praising Mr. Pavlov for creating jobs.
The steel plant, meanwhile, was starved of cash. The state privatized it in 1999, selling 71% to previously little-known businessman Valentin Zahariev for one dollar and a promise to rehabilitate the plant.The government says Mr. Zahariev didn’t meet his obligations to invest in the company, and has spent years suing him in the country’s slow-moving courts. Union leaders say he used cash squeezed from Kremikovtzi to buy more steel plants, in Serbia and Kosovo.
Mr. Zahariev, in an interview, denied both accusations, and he is contesting the government’s claims. In 2005, he sold Kremikovtzi for $110 million to Pramod Mittal. By then, the plant was badly in need of major investment, to modernize its equipment to both make it commercially viable and to meet EU pollution standards. The haze of pollution belched by the plant’s furnaces often blots out the view of the mountains that rise around Sofia.
In 2006, the plant borrowed €325 million ($506 million) on the international bond market, at a high interest rate, 12%. But those funds didn’t produce notable upgrades of the plant. “Nobody knows where most of the money went,” says Mr. Trenchev, of the union confederation. An association of the bondholders, led by U.S. and U.K.-based hedge funds QVT Financial LP, Mars Capital Group and York Capital Management LLC, says the same.A spokesman for Pramod Mittal’s company, Global Steel Holding Ltd., says funds were used to repay other debts — including to Mr. Mittal. That “certainly reduced” the funds available for investment in the plant, the spokesman acknowledged.
In recent years Mr. Mittal has tried to construct a world-wide steel group by buying or building plants in far-flung and sometimes troubled places, including Nigeria, Bosnia, the Philippines and Libya besides Bulgaria, but his group remains much smaller than the huge steel empire controlled by his older brother Lakshmi Mittal.
Last August, Pramod Mittal hired a controversial figure, former Bulgarian politician Alexander Tomov, as chief executive to stop the bleeding. Mr. Tomov was a senior Communist-era official whose more recent roles include deputy prime minister, leader of four different political parties and chairman of Bulgaria’s top soccer club, CSKA Sofia.
He drew vehement criticism in all those roles. In June, police had to shield Mr. Tomov from attacks by furious CSKA fans: The club had lost its license to play in Europe’s top soccer competition after allegations of unpaid taxes and duties.
Bulgarian prosecutors last month indicted Mr. Tomov over millions of euros that they say were transferred from cash-starved Kremikovtzi to the soccer club, and then to offshore companies controlled by Mr. Tomov.
Meanwhile, bondholders and union officials have criticized Mr. Tomov for selling a string of Kremikovtzi assets, principally plots of land at the steel mill’s vast site, for what union leaders say was a fraction of their value. One contract signed by Mr. Tomov last October, viewed by The Wall Street Journal, sold 1.7 million square meters (about 420 acres) of land for €6.3 million, or about €3.7 per square meter. Surrounding land has been sold for anywhere from €40 to €130 per square meter.
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