A Concise History of Bulgaria

by R. J. Crampton

  The Popov government tried to do this by introducing Bulgaria’s ‘big bang’ on 1 February 1991. February also saw a bitter sûbranie battle in which the government finally prevailed in its efforts to enact laws paving the way for the eventual decollectivisation of agriculture and the privatisation of small businesses. In the summer there was a second stage of economic reforms which included further price deregulation and which also made the Bulgarian National Bank accountable to parliament rather than to the government.

  Both sets of reforms had been painful but they did prove Bulgaria’s reforming intent and this reassured some western politicians and bankers. Early in March Bulgaria was one of the beneficiaries of aid released by the European Community for reconstruction in Eastern Europe, and in August a major loan of $250 million was granted by the World Bank.

  The Dimitrov government continued the process. In February 1992 foreign ownership of Bulgarian enterprises and the export of profits were legalised. More banking reform was enacted and after considerable delay a privatisation law was passed in April. In the same month the sûbranie, despite opposition from the BSP, gave its consent to a law restoring to its former owners property confiscated by the authorities during the years 1947 to 1962. In the previous month a land privatisation law had decreed that all agrarian collectives must be dissolved by 1 November 1992. This was a flagship bill but it had been poorly prepared and was to lead to enormous problems over defining individual claims and adjudicating between them in the many cases where they clashed. Furthermore, without help from either the government or the cooperative system of old, many of the new individual proprietors retreated into subsistence farming with serious consequences for the supply of food to the domestic and export markets.

  The lack of foresight in the decollectivisation legislation was one of the many indications that the Dimitrov government was less interested in economic reconstruction than in pursuing political vendettas. It did continue with economic reforms but no longer enjoyed the cushion of the social consensus created under Popov whose tripartite agreement collapsed in April 1992. By mid-summer social and industrial unrest were widespread with strikes by civil servants, on Sofia’s transport network and, despite the provisions of the 1990 law, in the ports, and in the medical services. The government was forced to grant a 26 per cent wage increase to all state employees, an act which weakened its attempts to control the budget deficit and inflation and which did little to impress the international financial organisations (IFIs).

  Shortly after coming to office Liuben Berov produced an economic ‘plan of action’. It had little effect. Inward investment was extremely disappointing whilst privatisation, particularly of land, was way behind schedule. Berov’s plan was based on the assumption that the current economic recession could be cured by more government investment; reflation, it was argued, would stimulate growth. This alarmed not only the UDF. The powerful International Monetary Fund (IMF), which had already expressed concern at the lack of economic reform, criticised Berov’s plan for allowing too high a government spending deficit. Meanwhile, the foreign debt problem had become even worse. In March at a meeting in Frankfurt, the London Club of Bankers, who held most of the credits, had offered a remission of 38 per cent of the total debt, but this the Berov government had refused, holding out instead for 50 per cent. In this it was eventually successful, though agreement on the amount of debt to be repaid also meant that repayments had soon to begin. This would be made more difficult by another economic setback: the decline in the value of the lev. One of the few economic successes of the Bulgarian big-bang had been to stabilise the national currency which for three years had moved gently between 25 and 30 leva to the US dollar. In the summer of 1994 it began to decline and though its value was bolstered by intervention by the BNB, that intervention inevitably encouraged inflation. Had not VAT, introduced by the Berov administration, produced 40 per cent more revenue than anticipated, the government deficit and therefore inflation would have been an even greater problem.

  To make matters much worse Bulgaria, for political reasons, had agreed to observe the sanctions applied on Serbia and Montenegro in 1992 and severely tightened in the spring of 1993. Bulgaria held fast to the UN line but, as with the sanctions against Iraq, the cost was horrendous. The rail and road routes through the former Yugoslavia had been one of the chief arteries for Bulgarian trade, particularly for the export of perishable products, and the only available alternatives, through Romania or by sea, were slow and congested; the Romanian route was even partially closed by a rail strike in August 1993. By September the cost of sanctions was calculated at $2.71 billion, and one estimate put the total cost of all sanctions, i.e. those against Iraq and Libya as well as against Yugoslavia, at $13 billion or the equivalent of Bulgaria’s total foreign debt. At the end of 1993 the UN had approved a transit arrangement for Bulgarian goods but it was limited in extent and so beset with bureaucratic regulations that it was almost useless.

  Five years after the fall of Zhivkov the Bulgarian economy clearly had not been effectively reconstructed. The most serious disappointments were in the privatisation process. It was soon to become apparent, however, that the entire economy and the reform of it were subject to new and sinister forces.

  The Videnov government and the catastrophe of 1996

  As a result of the December 1994 elections the BSP was the first party since 1989 to enjoy an overall majority in the sûbranie. It won 52.08 per cent of the votes and 125 seats; the UDF had 28.65 per cent of the votes and 69 seats; the MRF took 6.25 per cent of the votes giving it 15 seats. Also represented were the Popular Union (PU) which took 7.5 per cent of the votes and had 18 seats, and the Bulgarian Business Bloc (BBB) which had 5.42 per cent of the vote and 13 seats. The main constituent elements of the PU were the Democratic Party and BANU–NP, both of which had left the UDF in September. The BBB, as its name implies, represented commercial interests and its electoral image was enhanced by its exotic leader, Georgi Ganchev, a former fencing star who had taught at Eton.

  The return of a party which had an absolute majority in the sûbranie gave rise to the hope, in even many a non-BSP breast, that at last firm government and effective restructuring would be possible; that, at last, government would replace politicking in post-totalitarian Bulgaria. Initially Videnov did nothing to belie such hopes. He appointed a cabinet which included some members of the Bulgarian Agrarian National Union and a representative of the environmental pressure group, Ecoglasnost. Within his own party he had broken from his former sponsor, the conservative Lilov, and had surrounded himself with ex-Komsomol colleagues who were young and gave the impression of efficiency and modernisation. Videnov confirmed the newly raised hopes in his inaugural speech as prime minister when he asserted that his aims were to reverse the economic decline, to further Bulgaria’s integration into European institutions, and to combat crime. In May 1995 he introduced an action programme in which he reaffirmed these commitments and his belief in the benefits of the ‘social market economy’. Videnov also made it plain that he intended to repair and improve Bulgaria’s relations with Russia.

  Not only did Videnov fail in all four of his main stated aims; he also brought the country to the verge of starvation and economic and social collapse.

  The early months of the new regime gave no indication of the calamities that were to come. Relations with Russia, already improved by the Berov government which in April 1993 had signed a long-term agreement in Moscow for the supply of Russian gas to Bulgaria, appeared even warmer in May 1995 with the conclusion of further agreements on cooperation in trade, defence and the building of pipelines to carry Russian oil and gas from the Bulgarian port of Burgas to Alexandroupolis in Greece and to other points in the Balkans. A new Russo-Bulgarian joint company, Top-Energy, was created to implement the agreement and the former prime minister, Lukanov, was appointed its head.

  In the economy, too, there appeared to be a fresh dawn. GDP increased by 3 per cent in 1995 and the first half of t
hat year produced a trade surplus of $106.3 million. Even inflation seemed to be coming under control, the overall rate for the first half of the year being 15.2 per cent compared to 59.4 per cent for the same period in 1994. In the circumstances the Bulgarian National Bank felt confident enough to lower interest rates no fewer than seven times in 1995.

  The dawn proved false. Even relations with Russia soon began to sour. In the long negotiations over the construction of pipelines the Russians proved such difficult partners that the Bulgarians accused them of unfair dealing. The Russians even insisted, without any compensating concession on their part, that Bulgaria give a pledge not to join NATO. Videnov had no intention of joining NATO but he could not give such a pledge at the behest of a foreign government. In April 1996 Russia’s president Yeltsin gravely embarrassed the Sofia administration and infuriated many Bulgarians by stating that Bulgaria, like Belarus, might sign an integration agreement with Russia and other former Soviet republics. By the end of 1996 relations between Bulgaria and Russia were worse than when Videnov took office.

  The critical failings of the Videnov government, however, were in domestic rather than foreign affairs. One problem was food. Videnov could not be blamed for the many shortcomings of the UDF’s land privatisation policies but where the new administration could be held accountable was in allowing the export of grain. The selling of grain abroad in times of shortage at home was of questionable legality and the exporting agencies included a number of the large conglomerates which were soon to play a baleful role in Bulgarian affairs, and with which a number of ministers, including Videnov himself, were said to have close connections.

  On the wider economic front the end of 1995 brought the first indications that the recovery was illusory. The privatisation programme which the government had promised was making little progress. The Videnov administration favoured the voucher scheme which had been used in the Czech Republic and which was more acceptable to left-wing parties than the alternatives because it passed ownership to the population at large not to wealthy sections of it. Voucher privatisation, however, does not ensure that ownership and control of the enterprises passes to those best qualified to run them, nor does it create a great deal in the way of foreign currency earnings, the more so when, as in the Bulgarian case, firms were not privatised unless they were in desperate straits. In fact, the heart of the Videnov government was not in privatisation and when it did at last offer some 1,500 enterprises, some 20 per cent of the state’s assets, for privatisation the economic and political climate had changed beyond recognition.

  The first storm cone was hoisted in December 1995 when the minister of finance announced that the budget deficit for the year would be 17 per cent greater than predicted. This put pressure on the lev on the foreign exchanges, to counteract which interest rates were raised in February 1996 from 8 to 42 per cent. The critical event came in the same month. Early in the year the Bank for Agricultural Credit ‘Vitosha’ had found itself in difficulties and in January had received $33 million dollars from the BNB. But not even this could keep it afloat and it therefore attempted to call in a number of non-performing loans. The money was not forthcoming and at end of February the BNB took it over; in effect the Vitosha Bank had failed.

  The Vitosha affair laid bare the weaknesses of Bulgaria’s transition from communism, in the political as well as the economic sphere, and it highlighted the nexus between corruption, the political system, and the economy. In the early years of the transition many industrial managers had come to agreements with private entrepreneurs to buy raw materials from the latter at inflated prices and to sell the finished product, often with state subsidies, at reduced levels. The managers then took a slice of the profits made by the entrepreneurs whilst the industrial workforce was kept happy by unrealistic pay increases. When the government attempted to discipline the enterprises by imposing credit restrictions the enterprises escaped control by failing to pay for their supplies or by taking loans from the banks. The banks knew that there was little or no prospect of these loans being repaid. The state enterprises and the banks were in effect beyond the control of the state. It was widely believed they were under the control of the conglomerates or, in popular parlance, ‘the mafia’.

  The origins of the Bulgarian mafia are obscure. In the last years of communist rule many in the higher ranks of the party in Bulgaria, as elsewhere in Eastern Europe, realised what was happening and were reported to have used their powerful positions within the system to shift money into safe havens in Switzerland or elsewhere. After 1989 this money was sometimes used to establish companies which traded domestically and internationally, a number of companies merging into loose confederations or conglomerates. The wealth and influence of the conglomerates were increased by sanctions on Yugoslavia; huge sums were earned in smuggling illicit goods and much was spent in bribing officials at all levels to keep silent. The conglomerates were also involved in the mulcting of the state enterprises. Any organisation making profits from these activities would not wish to see effective economic restructuring or the privatisation of the enterprises from which they were making their profits; and many such organisations had money enough to buy both votes in the assembly and influence within the ruling party. It was also feared that they would not refrain from extreme methods to protect their interests and the murder of former prime minister, Andrei Lukanov, in October 1996 was attributed to criminal gangs associated with the conglomerates. The muscle of the conglomerates could also ensure that the banks continued to be compliant when hopelessly insolvent enterprises came forward with requests for yet more loans. It was with this in mind that President Zhelev declared in March 1996 that the banks were ‘plundering’ the nation.

  Despite the president’s words the crisis deepened. The lev fell constantly and on 16 May came ‘Black Friday’ when two more banks had to be placed under the supervision of the BNB; depositors, fearing their savings would be destroyed, rushed to withdraw their leva and turn them into goods or dependable currencies. The government was forced to act and Videnov announced that sixty-four of the largest loss-making enterprises would be closed and a further seventy would be ‘isolated’, that is they would be denied further state subsidies or loans. At the same time the budget deficit was to be eased through a series of drastic measures which included raising VAT from 18 to 22 per cent, a levy on imports, and large increases in fuel and public utility prices. It was not enough. The lev continued to fall and the IMF announced that it would offer no more help unless Bulgaria allowed it some say in running the BNB and also introduced a currency board which, independent of all government control, would regulate the money in circulation. The government’s refusal to accept these terms provoked a further loss of confidence in the banks, a further nine of which had to be placed under BNB control in September, and precipitated yet another crisis in the foreign exchange market, notwithstanding another hike in interest rates which now stood at a staggering 300 per cent. Inflation remained unchecked and by the end of the year had reached an annual level of 578.6 per cent. The latter inevitably devalued salaries, a problem which was made much worse by delays of up to three months in payment.

  Public reaction to the growing crisis had not been absent. There had been large demonstrations in Sofia, one on 7 June involving an estimated million people, but it was in the presidential elections in October–November that popular anger was most tellingly expressed. In the summer President Zhelev had been forced by the UDF into a primary campaign which he had lost, the party taking its revenge for the disagreements between him and premier Dimitrov. The UDF candidate was an anti-communist lawyer, Petûr Stoyanov, who easily won the second round of the contest, scoring 60 per cent of the poll to the BSP candidate’s 40 per cent; the BSP polled a million fewer votes than in the parliamentary contest two years before.

  Anger at the government’s performance was also expressed within the BSP. In November nineteen leading party figures signed an open letter calling for the formation of a new administr
ation under a different leader. On 21 December Videnov resigned both as prime minister and leader of the party. The protesters’ anger was not assuaged, the more so when Nikolai Dobrev was named as BSP leader. He was considered little different from Videnov.

  At the end of 1996 Bulgaria was in a dangerous condition. The economy was in tatters and social deprivation was intensifying and spreading. Any hope that the country would be included in the list of applicant states to the EU had evaporated and with it Videnov’s proclaimed policy of bringing Bulgaria closer to Europe. The public, in the presidential elections, had passed a vote of no confidence in the ruling party which was generally believed to be too close to a number of dubious organisations. At the end of the year the out-going president apologised to the nation and admitted that he was ‘ashamed of the Bulgarian political class’. But with the next parliamentary elections not due until 1998 there seemed no way out of the impasse.

  In January 1997 the scene began to change. The UDF, led since its 1994 electoral defeat by Dimitrov’s minister of finance, Ivan Kostov, announced that, unlike the BSP, it was prepared to follow IMF orders and introduce a currency board. At the same time it demanded that elections be held immediately because such a drastic measure could only be imposed by a government enjoying the nation’s confidence. The UDF statement galvanised the population. Peaceful demonstrations began, and were much inspired by those in Belgrade where gentle but massive popular pressure was soon to force Slobodan Miloevi to accept opposition victories in the Serbian local elections. On 10 January, however, the mood turned sour when opposition deputies walked out of parliament and in the evening protesters invaded the sûbranie building to be met with tough action by the police; over a hundred were injured, among them Filip Dimitrov. Tension rose further on 22 January when constitutional convention forced the incoming president Stoyanov to invite Dobrev, as leader of the largest group in the assembly, to form a government. Strikes and demonstrations raged across the country and Bulgaria stood nearer to open revolution and perhaps civil war than at any other time since 1989. The situation was saved by Dobrev who announced on 4 February that he would resign and that a general election should be held in April, a caretaker ministry under the UDF mayor of Sofia, Stefan Sofiyanski, being formed until then.