Bulgaria To Inaugurate Reform Minded President: Judicial Reform is A Top Priority

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By Robert J. Guttman

December 14, 2016

While America will be inaugurating a new independent non-politician Donald Trump on January 20, 2017 so will the European Union and NATO member Bulgaria also inaugurate a new independent non-politician Rumen Radev two days later on January 22, 2017.

The new president, who was formerly the Bulgarian Air Force Commander, has ties with America having graduated from the Air War College in Maxwell Air Force Base in Montgomery, Alabama with a Master of Strategic Studies with honors.

Like the new President-elect in the United States, Rumen Radev, 53,  has no background in politics. He is a fresh face in Bulgarian politics who is independent and reform minded and was elected in November on the Socialist ticket.

“Radev won’t backpedal on initiatives such as the Bulgarian contribution to the multinational NATO brigade stationed next door in Romania. Nor will he be willing or able to pull the plug on U.S. bases in the country (which date back to 2006 when the BSP was in government).  There will be no shortage of drama in Bulgaria over the coming months, to be sure, but it will be driven by local forces not the geopolitical contest between Russia and the West,” says Visiting Scholar at Harvard University Dimitar Bechev.

General Radev, who will take office as president of Bulgaria on January 22, 2017, has a largely ceremonial role.  But he is a respected figure “who chooses some top officials and can appoint technocrat governments in a crisis.”

As a result of the just held elections in November the current Prime Minister Boyko Borisov and his Government resigned.  This will be the second time Borisov has made the decision not to finish his term in office.  Once again, Bulgaria will be faced with an interim government limited in its ability to undertake serious policy decisions.

The new Bulgarian president and the new government (elections will most likely be held in the spring of 2017) will have to tackle a host of domestic issues.  The leading issue that will have to be dealt with is the recognized need to address judicial reform in the country.  Despite repeated pressure from the European Union, the international business community, many of the EU ambassadors and many average Bulgarian citizens, monitoring reports continue to show a lack of progress in judicial reform.  This failure continues to provide many opportunities for corruption, manufactured takeovers of companies and serious questions directed at various aspects of a justice system that can be manipulated.

Because Bulgaria has a reputation for corruption the country is subjected to monitoring under the EU Cooperation and Verification Mechanism. Pertaining to judicial reform, the fight against corruption and organized crime are the main points of the reports. The outgoing Prime Minister Boyko Borisov requested the monitoring to be finished by January, 2017.  But, in response Jean-Claude Juncker, the President of the European Commission, has responded that the monitoring would be extended to cover also the Supreme Judicial Council.  This includes the Inspectorate which oversees the activity of the judicial bodies.  Prosecutors from the U.K., Germany, the Netherlands and Spain are currently performing monitoring of the Bulgarian Prosecution Office and the report is due by the end of this month.

Foreign direct investment is a lifeblood for smaller nations like Bulgaria.  International Chamber of Commerce organizations that represent nations which provide 90% of FDI to Bulgaria  have voiced their concern to outgoing Prime Minister Borisov.  These nations want to make certain that the rule of law and protection of contracts will be protected in Bulgaria.  These Chambers have made it clear that their international members were increasingly questioning them about the safety of investing in Bulgaria. Given the lack  of movement on judicial reform and a number of high profile cases where international firms were being and are being threatened or coming under actual attack, this issue is back on top of the political agenda.

What are the role of takeovers and are there “rotten apples” within the judicial system in Bulgaria as was suggested by outgoing U.S. Ambassador James Pardue (2002-2005).  The former U.S. Ambassador, somewhat well-known for his remarks released by WikiLeaks that he noted the presence of “rotten apples” within the Bulgarian judicial system.

The term “hard takeover” has taken on new and serious importance in Bulgaria and is being closely followed by current and potential foreign investors in the country bordering the Black sea.  These takeovers are being supported by a limited number of commercial judges, private enforcement agents, trustees and other enforcement officials.  The term “hard takeover” has been adopted to describe the activity where the actors mentioned above working as a team substantially undermine the judicial process.  Once the chosen “Judge” has ruled, the other secondary agents take over to close the deal, stripping the company or selling the property to selected surrogates at far below its true value for either operation or more often to find a buyer later at the real value of the asset captured. This is not a new phenomenon in Bulgaria.

There have been other complaints including when the French Ambassador to Bulgaria Xavier Lapaye de Cabanes used the phrase used by U.S. Ambassador Pardue to bring attention to this problem.  A judge allowed the bankruptcy of two subsidiaries of the French Belvedere Group, the suspension of their boards and a substantial loss of funds.  His letter to the Prime Minister Borisov was acted upon with the support of six other ambassadors to Bulgaria.

These are not just problems of the past.  These issues are still raging in Bulgaria affecting future foreign direct investment in the country.  Another case currently in the courts that falls again under the framework of “hard takeover” is being watched closely around the world.  The company under siege is Glorient Investment BG OOD, an international firm established in 2006. Glorient owns a number of commercial real estate properties around Bulgaria.

In 2006, Glorient purchased 13 sites from K&K Electronics EAD.  Later the latter was reorganized as Technomarket AD.  The British company East Balkan Properties (EBP) holds 40% of Glorient’s shares.  Currently, their shareholders assets are being held in several international banks including Utilico Emerging Markets, BNY, Mellon Bank, Deutsche Bank and Citi Bank.  Additionally, very clear and concise records are available to the public showing the original transfer of funds from EBP to acquire their shares and clear records on the original transfer of title to Glorient.

Technomarket AD, a totally independent company from Glorient, continued to pay their rents when controlled by Corporate Commercial Bank, and later by the Italian investor Eduardo Miroglio.  However, when Technomarket was acquired by MRF MP and media owner, Delyan Peevski, an interesting development soon took place.  Technomarket claimed that the EBP Investment of ten years ago was fictitious and that no money had been transferred and that the title was open to question, and that Technomarket was the real owner of the properties.  They stopped paying their rent and currently owe a substantial amount to Glorient.

Glorient and their investors EBP are contesting the position. But they are confident that they will prevail with the requirement of random assignment of judges.  However, a recent mathematical analysis taken by a well- known investigative journalist group might raise some cause for concern.  Their investigation demonstrated that the likelihood of one judge to be allocated to 24 out of 27 cases, as happened in the cases of the Sofia City Court Deputy Chair Petya Kruncheva is one in the astronomical figure one in more than a trillion.  The odds of it happening are overwhelming and cause for serious concern.

The investigation of Bivol provides the first indisputable mathematical proof that the random allocations in the Courts is subject to gross manipulation and falsification.

Kern Hope, writing in the Financial Times, discusses the problems about investing in Bulgaria. Kerin says “Sofia –based lawyers advise their clients preparing to sign a contract with a local partner to insist on a clause permitting arbitration outside Bulgaria in the case of a dispute.  To reduce risk further, they also suggest setting up an investment partnership abroad, so that only the operating company is based in Bulgaria.”

The FT article continues saying “The travails of the East Balkan Properties, a U.K, based property company, underscore the risks associated with investing in a poorly regulated property market where there are doubts about judicial independence.  . . .’We’re extremely worried about this breach of property rights in an EU member state’, says Michael Uhler, East Balkan managing director. Glorient is contesting NSN’s claims in court in Bulgaria.”

A fair and impartial judicial system and the legal protection of existing contracts are vital to a country like Bulgaria.  Bulgaria, an EU member and NATO member, needs to fix its courts and have honest and competent judges if they want to attract the necessary foreign direct investment to grow their economy.

Other European nations and the United States are watching to see how the new president and the new Bulgarian government will “clean up their act” and have a responsible and honest and competent judiciary with respected judges.

Firms across the U.S. and Asia and within the EU will decide about investing in Bulgaria only if they see progress in that country cleaning up its act by having the rule of law respected.

The new Bulgarian President Rumen Radev will have his hands full bringing Bulgaria court system and contract system up to what exists in other EU nations.

Bulgaria and America will both be inaugurating their new presidents in January, 2017.  Both are new to politics and we can all wish both new presidents well in their demanding new roles.

 

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