Most market economies have a big issue with the so-called revolving doors between government and business. The practice of public officials to switch to working or lobbying for entities they used to oversee clearly sows conflicts of interest and breeds corruption.
In Bulgaria, that practice has been unabashedly promoted by the government led by GERB party which doesn't hide that former heads of regulatory or other state bodies are often rewarded/compensated with jobs at state-owned companies after they leave office. The most prominent case this summer was the appointment of Stoyan Mavrodiev, former chairman of the Financial Supervision Commission (FSC), as executive director of Bulgarian Development Bank (BDB). The appointment came just after the end of the one-year cooling off period, during which public officials cannot be employed by entities they supervised.
BBD manages more than two billion levs and is supposed to support small and medium- sized businesses. Instead, in the last several years it has financed business ventures of some very well connected personalities in Bulgaria. The appointment of Mr. Mavrodiev, a former economic expert with GERB party who had a controversial tenure at FSC, will definitely fuel suspicion that public financial institutions in Bulgaria fall an easy prey to the hidden interaction between politics and business.
A reward for controversy
During his six-year (2010-2016) reign over the financial regulator, which oversees investment, insurance and pension markets in Bulgaria, Mr. Mavrodiev got entangled in a number of scandals.
Most notably, his name emerged in the criminal investigation against Evelin Banev, a Bulgarian national who was arrested and charged with drug trafficking and money laundering. Mavrodiev was managing founder of United Consulting, a company whose main line of business was setting up offshore companies. Documents obtained by the prosecution showed that several companies used by Mr. Banev in his criminal activities were set up and possibly managed by Mr. Mavrodiev as those documents contained his signature. That is why Mr Mavrodiev was subpoenaed but failed to appear in court. After Capital and Dnevnik newspapers reported on this case, FSC responded by increased regulatory pressure over companies controlled by one of the owners of the newspapers - Ivo Prokopiev. FSC also fined Economedia, the company publishing Capital, for what it said was market manipulation (in fact, reports on a bank run in 2014). The fine was later repealed by court.
FSC also suffered a blow to its reputation after the collapse of Corporate Commercial Bank (Corpbank) in 2014. The financial regulator had the obligation to oversee Corpbank as a public company, as well as a lot of related companies such as issuers, investment intermediaries, asset managers and insurers. Leaked documents showed that in the year prior to the bank's collapse Mr. Mavrodiev had frequently visited the office of the bank's majority shareholder and chairman, Tsvetan Vassilev.
In the summer of 2016 Mavrodiev was eager to secure political support for a second six-year term as FSC chairman. The snap decision of governing GERB party to replace him with deputy finance minister Karina Karaivanova came after a harsh letter from the European Insurance and Occupational Pensions Authority (EIOPA). The institution expressed concerns about the launch of balance sheet reviews and stress tests on the Bulgarian insurance market as well as asset quality reviews of pension funds that had to be managed jointly by FSC and EIOPA. Sources of Capital say that as early as this point in time Mavrodiev was assured that he will get another high ranking state-backed job.
His own state-owned bank
Mr. Mavrodiev was elected as BDB executive director soon after the government transferred control over the bank from finance minister Vladislav Goranov (GERB) to economy minister Emil Karanikolov (United Patriots, the junior partner of GERB in the government coalition) in July. The transfer was seen as a shift of responsibility, as it came after signs emerged that some factions within GERB were unhappy with the nomination of Mr. Mavrodiev.
Mr. Mavrodiev's appointment was part of a major overhaul of BDB's management. According to sources, it was partly driven by pressure from the EU institutions alarmed at the bank's large credit exposures, especially to politically well connected persons. Two of the three executive directors of the bank were dismissed, while three new were appointed.
One of those three was Mr. Mavrodiev. A new appointment was Roumen Mitrov, who prior to his new banking career was FSC director in charge of regulation and oversight activities - one of two special posts set up in the regulator after 2010, through which FSC deputy chairpersons were stripped of their powers. Between 2010 and 2016 three of them resigned over conflicts with Mr. Mavrodiev, some of them claiming he was trying to run FSC individually.
According to the BDB statutes, all decisions of the bank have to be signed by two executive directors, which means that Mr. Mavrodiev with the help of Mr. Mitrov can duplicate his management style from FSC. Moreover, two months after the changes in management structure the BDB statutes were amended and a new CEO position was created and handed to Mr. Mavrodiev. It grants him more privileges as now he can personally appoint or fire employees, set wages, etc.
A misdirected bank
A coalition of five small opposition parties, who openly opposed Mr. Mavrodiev's appointment, dubbed BDB "bank of the oligarchs". While it was set up with a mission to support SMEs, in recent years the bank gradually turned into a financial hospital for big corporate clients. Some of them are big construction companies hit by the crisis that started in 2009, some can be linked to political parties, while others can be directly pinpointed as connected to or controlled by politicians.
One of the most blatant examples of this relationship emerged at the end of 2016, when the bank extended one of its biggest loans to a company directly linked to Georgi Gergov, a high ranking executive member of Bulgarian Socialist Party. Back then, the statutes of BDB explicitly prohibited the bank to fund political parties and persons related to them. Now, this restriction in the statutes has been changed too - only persons with party affiliation are considered to be politically related persons. Moreover, the new BDB statutes scrapped the cap on single credit exposure, which used to be 10% of the bank's capital (about 30 mn euro). Now, the bank can potentially extend single credits up to the general EU limit of 25% of its capital (75 mn euro).
In short, instead of restricting politically related credit exposure at BDB, the government will promote it.