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Feb 20, 2013 | 15:44 GMT

In Bulgaria, High Energy Prices Bring Down the Government

In Bulgaria, High Energy Prices Threaten the Government
DIMITAR DILKOFF/AFP/Getty Images
Summary

In Bulgaria, as elsewhere, administrations change, but the constraints those administrations face remain the same. On Feb. 20, Bulgarian Prime Minister Boyko Borisov announced the resignation of his entire Cabinet. The announcement follows days of protests against rising utility prices and calls for the government's resignation. The parliament, which is dominated by the prime minister's GERB party, will vote on the resignation on Feb. 21. While the mechanics of the political transition remain unclear, it is likely that elections will be held prior to their originally scheduled date in July.

Whoever rules Bulgaria will inherit the same issues that constrained the Borisov administration. Like many of its Central European neighbors, Bulgaria faces steep challenges in preserving its EU-sanctioned financial austerity policies. Political instability in Bulgaria, especially regarding future energy policy, will be of increasing concern to other countries with interests in Bulgarian energy. Russia, which is Bulgaria's only natural gas supplier, will want to ensure that political instability does not delay the construction of the South Stream natural gas pipeline. Moscow may offer the new government in Sofia short-term natural gas price discounts to help manage the social unrest, but such a measure, even if it were successful, would only be a temporary solution to a longer-term problem.

Bulgaria is the first EU country to dissolve its government in 2013. In 2012, Romania, Slovakia and Greece all underwent unplanned transitions following weeks of protests against austerity measures and worsening economic conditions. The resignation of the Borisov Cabinet highlights how the economic crisis continues to weaken governments across the Continent, particularly those in Central Europe.

While demonstrations have been taking place for more than a week, they worsened over the past weekend. Demonstrators blame the rise in utility prices on the government's adherence to strict austerity measures, which include public sector budget cuts and refusals to nationalize foreign utility companies to offset the rising costs.

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Bulgaria has suffered a particularly cold winter, so electricity prices have been a particularly sensitive issue. Bulgarians are consuming more electricity and heating gas despite the fact that prices are high. Meanwhile, the country's unemployment rate continues to rise — currently, the unemployment rate is 12 percent — and the standard of living for Bulgarian citizens remains one of the lowest in the European Union. Unsurprisingly, the government's approval ratings have been falling steadily.

To placate the protesters, Borisov dismissed Finance Minister Simeon Djankov on Feb. 18 and promised to reduce electricity prices by 8 percent on Feb. 19. He also announced he would revoke the operating license of the Czech company CEZ, one of the largest energy distributors in the region, and fine two other Czech and Austrian utility companies. But these measures proved insufficient for the protesters.

Western European and Central European consortiums own the vast majority of the Bulgarian utility sector. Like so many European governments, these companies have been facing significant financial difficulties in the wake of the European economic crisis. As a result, they have been forced to raise consumer electricity prices in many Central European markets.

One of the key issues behind the electricity price protests was Sofia's unwillingness to partially renationalize its utility sector. Renationalizing the sector would place an additional burden on the state's finances — national industries would have to be subsidized — and would undo many of the reforms the government had to impose to gain EU membership.

Moreover, a sustained nationalization drive would alienate Sofia from EU members such as Germany and the Czech Republic, which hold assets in the Bulgarian utility sector. It would also significantly increase the country's risk rating, driving off foreign investment and raising the cost of its debt. Were that to happen, Bulgaria could be faced with an even more serious financial crisis.

Russian Help

One of the few options the next government has to rectify the problem stems from Bulgaria's close relationship with Russia, its dominant supplier of natural gas. Moscow and Sofia have been more cooperative with each other on energy issues, since Bulgaria is set to be a key transit state for the Russian South Stream natural gas pipeline project. As part of the transit negotiations, Bulgaria received a significant discount on its long-term purchases of natural gas.

Because of the South Stream project, Russia has a strong interest in maintaining political stability in Bulgaria. Political instability could delay the project, which needs to continue apace if it is to be implemented before competing EU pipelines. Moscow's primary goal will be to ensure that whoever rules Bulgaria remains committed to the South Stream construction plans.

One of the only ways Russia can help Bulgaria manage social unrest is by offering a short-term discount on natural gas sales that would allow Sofia to reduce utility prices for its constituency and to help pay for its increasingly steep electricity bill. While such a solution would only be temporary and would not address the core grievance of the protesters, it could help Bulgarians see a moderately lower utility bill during the coldest months of the winter until energy consumption levels wind down.

However the current political crisis plays out, the upcoming Bulgarian government will continue to face far-ranging structural questions. Sofia will have to decide whether it will keep its economy relatively healthy through continued austerity measures or give in to domestic political pressure and enact populist policies. Those policies will isolate Sofia from international markets, lead to disputes with the European Union and raise the risk of a serious financial crisis. Russia will continue to accommodate any new administration in Sofia, but its options are limited. 

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