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PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHSF #0593/01 1360852
ZNR UUUUU ZZH
P 160852Z MAY 07
FM AMEMBASSY SOFIA
TO RUEHC/SECSTATE WASHDC PRIORITY 3690
INFO RUCPDOC/USDOC WASHDC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 SOFIA 000593 
 
SIPDIS 
 
DEPT FOR EUR/NCE MNORDBERG, EUR/NCE 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EUN ECON EINV BU
SUBJECT: BULGARIA'S EU ENTRY HELPS MANY - BUT NOT ALL 
 
REF: SOFIA 0473 
 
¶1. (SBU) SUMMARY:  Bulgaria entered the EU in strong macroeconomic 
and fiscal shape with 5 percent annualized GDP growth over the past 
7 years and three years of budget surpluses.  Foreign investors are 
piling in to take advantage of cheap prices and labor, much as they 
did in the EU-10 a few years ago, seeing - or hoping to see - 
Bulgaria as a more stable business environment under Brussels' wing. 
 Increased free trade with the EU brings more competition to 
Bulgarian companies, improving quality and lowering prices for 
customers, but will also force weaker firms out of the market.  U.S. 
business interests will benefit on-the-whole from a larger, more 
transparent, and better-regulated market, but EU-specific non-tariff 
barriers will adversely affect U.S. agricultural sales here.  In the 
"victim-of-their-own-success" category, excess demand for 
high-skilled labor is already creating a shortage of specialists in 
the high-tech sectors.  EU membership is clearly positive overall 
for the Bulgarian economy, but not everyone will win.  END SUMMARY 
 
INCREASED EU INTEGRATION TO BENEFIT MANY. . . 
 
¶2. (U) Bulgaria's current trade with the rest of the EU is over 50 
percent of its total trade, and will grow significantly given the 
new tariff-free environment.  New companies and imported goods and 
services will bring more competition to the local market, benefiting 
local customers and producers with higher-quality products at lower 
prices.  Bulgarian exporters are expected to take advantage of new 
opportunities in the EU to improve export growth even further over 
last year's record 26.6 percent increase.  Bulgarian citizens will 
also benefit from new safety regulations for goods in food and 
non-food sectors. 
 
. . . BUT ONLY THE FITTEST WILL SURVIVE INCREASED COMPETITION AND 
REGULATION 
 
¶3. (SBU) EU structural aid in the pre-accession period tried to 
prepare local industries and companies for the challenges of EU 
competition.  While the bigger companies took advantage of this to 
replace old equipment and technology to meet EU market criteria, 
many smaller companies lacked the necessary resources.  Those that 
manage to restructure will be able to utilize economies of scale. 
But the smaller, and often unprepared, companies will face serious 
hardships from rising EU competition.  The regulatory changes will 
also cut both ways; some will meet the new requirements and attract 
further investment, while others will be swamped by EU red tape and 
its Bulgarian corollary, corrupt officials taking advantage of new 
laws and regulations.  There are concerns about the potential for 
biased enforcement of environmental standards - already a problem 
here.  The new European energy strategy aimed at greater efficiency 
and competition will increase the compliance cost for many local 
businesses.  Farmers in the heavily subsidized agricultural sector 
are likely to be most squeezed by the growing EU competition, and 
many will struggle to survive by relying on EU funds. 
 
GROWING NUMBER OF U.S. INVESTORS, AGRICULTURAL HARDSHIPS 
 
¶4. (U) U.S. investors continue to find new opportunities to invest 
in Bulgaria, with U.S. FDI increasing 63 percent to $116 million in 
2006 over $71 million in 2005.  (Bulgarian government statistics do 
not reflect true U.S. investment levels as many are made through 
another European subsidiary, i.e. Austria has appeared as a much 
larger investor in terms of FDI because U.S. companies used Austrian 
holding companies to invest in Bulgaria - usually for tax reasons.) 
Much of U.S. investor interest was pre-EU accession money trying to 
get in early, but we have seen continuing interest from U.S. 
players, including the recent AIG purchase of a controlling stake in 
the national telecom provider for $1.4 billion.  An additional 
stimulus comes from the February 2007 signing of the bilateral 
double taxation treaty, which will create a more favorable tax 
situation for American investors.  While the general tariff level 
for U.S. imports to Bulgaria has decreased due to EU accession, U.S. 
agricultural exports will continue to face high heavy non-tariff 
barriers, especially EU standards on imported meat and nuts.  In 
addition, EU food safety standards will hit hard U.S. beef and 
poultry exporters. 
 
LABOR SHORTAGES FOR MOST SKILLED 
 
¶5. (U) Bulgaria's labor costs are cheap enough -- reflecting 
relatively low productivity and salaries -- to attract new foreign 
companies.  The Bulgarian economy can capitalize on this competitive 
edge for some time, but the need for high-skilled workers and 
mid-level managerial staff has become a problem already for some 
high technology and innovative companies.  Excess demand has pushed 
company owners to significantly increase remuneration packages and 
recruit qualified personnel from abroad.  Tourism, construction, and 
retail have also started to report shortages of trained staff. 
Given the already large movement of labor out of Bulgaria in the 
 
SOFIA 00000593  002 OF 002 
 
 
past 15 years, the gradual liberalization of the EU labor market is 
not expected to lead to another mass migration of domestic 
specialists.  But some sectors, such as health and textile, could 
lose qualified workers to other EU countries due to higher wages. 
 
GRADUAL, BUT UNEVEN, INCREASE IN PRICES 
 
¶6. (U) Economic and monetary convergence with the EU will likely 
lead to an increase in domestic prices, but their rise will be 
gradual, reflecting a relatively low base of household incomes and 
purchasing power, according to the National Statistics Institute. 
The duty-free import of fruit and vegetables from the EU and their 
seasonal domestic supply will keep prices relatively low.  Prices of 
meat and milk will see some increase in the short run due to the 
shortage of domestic supply (for meat) and quality (for milk) and 
the increasing cost of modernization to meet EU standards.  Prices 
of some industrial goods (clothing, home appliances) will fall due 
to reduced tariffs and third-country competition (China, India). 
Prices in education and healthcare, the two most unreformed public 
realms, will increase.  The 4.2 percent rise in prices since January 
suggests that control over inflation will remain the government's 
major economic concern prior to adoption of the euro.  The 
government will be keeping a close eye on reports from private 
sector analysts that the economy is heating up too quickly. 
Pensioners, on fixed-income, and those in small rural settings will 
particularly be hard hit as inflation eats at their small monthly 
intake. 
 
¶7. (SBU) Bulgaria is expected to hew fairly close to the EU party 
line on issues such as the Doha round, Common Agricultural Policy, 
and geographic indicators.  Although the current center-left 
government (and most of the non-reactionary rightist opposition) 
tends to be more liberally-minded on economic issues than some of 
the more senior Member States' leaders, Bulgaria - as the poorest EU 
Member State - will not be biting the hand that feeds it.  We are 
trying, however, to encourage Bulgaria to take a more active role on 
energy security issues, taking advantage of their location as a gas 
and oil pipeline crossroad, and their historical, cultural and 
business relationships with Russia. 
 
¶8. (SBU) Uliana Bogdanska, the head of the Foreign Ministry's EU 
directorate, told us recently that energy issues are a high priority 
for Bulgaria and that Sofia is trying to be an active participant in 
forming the EU's common energy policy.  She said Bulgaria agreed 
with most of the decisions taken at the GAERC meeting in March, 
which focused on a forging a common energy strategy.  Bulgaria was 
particularly happy to see that nuclear energy was recognized as 
reducing greenhouse gases given the large role nuclear power plays 
in the country. Vladimir Stariradev, the Director for Energy 
Strategy at the Economy and Energy Ministry, explained to us that 
Bulgaria welcomes "in principle" the EU's target of using 20 percent 
of renewables by 2020, but believes this should be done in a 
"cost-effective" way.  Stariradev expressed Bulgaria's concern that 
an excessive share of renewables could reduce the country's economic 
growth, noting that such targets should not be binding "because 
different countries are starting from different places."  According 
to Bogdanska, Bulgaria was pleased the Nabucco pipeline was 
identified as one of four key priority projects that the EU intends 
to explore for increasing energy diversification.  Bogdanska 
expressed hope that the EU will put funds forward for the project. 
 
 
¶9. COMMENT: (SBU) Bulgaria's stable macro-economic indicators, 
low-risk profile, and mainly successful transition to the European 
market will benefit U.S. investors who are increasingly eyeing the 
Balkan state following its EU accession.  But Bulgaria's economy 
will suffer competitive pressure long after its accession due to low 
productivity and relatively low export level.  Key to a successful 
export promotion strategy will be the use of high-skilled and more 
efficient labor, now producing at only a third of the EU average. 
EU accession can be a great opportunity for Bulgaria if it takes 
full advantage of improved oversight, EU support mechanisms, and the 
real chance to show its citizens that there are better, cleaner and 
more efficient ways to improve their quality of life.  They won't be 
leading the charge in Brussels, but they will work on a few issues, 
some of which dovetail with our interests.  END COMMENT 
KARAGIANNIS