A Belated Emergency
- Dmitriy Genchev
- 22 hours ago
- 13 min read
How Bulgaria’s Lukoil sanctions predicament sheds light onto the limitations of domestic and European energy policy
“We have enough fuel deliveries ensured, not just until the end of the year, but even after it”, Bulgarian minister of energy, Zhecho Stankov, told a group of journalists as he participated in a joint-inspection of the new gas pipeline, Rupcha-Vetrino. Only a few days earlier, on October 23rd, the United States announced new sanctions against two of Russia’s primary oil companies- Rosneft and Lukoil- both of which continue to operate refineries and gas stations across a number of European countries. However, it is likely that, by November 21st at latest, these refineries and gas stations will cease their operations, unless emergency actions are undertaken.
The news provoked panic in Bulgarian political and business circles. After all, the Lukoil-operated refinery, Neftochim, is the country's sole provider of petroleum. Additionally, Lukoil has for decades been the primary player on the Bulgarian fuel market, running a chain of gas stations across the country. Disruptions to the operations of the refinery will likely cause volatility on the Bulgarian energy market, just as the country is about to enter the Eurozone.
Yet, three years after the Russian invasion of Ukraine, and at least two years after the topic of Lukoil’s status was raised, the question of whether this situation could have been averted carries strong implications for an assessment of not just post-communist Bulgarian energy policy, but the general approach the European Union has had to energy security.
A brief history
Russia’s role in the Bulgarian energy sector can be traced back to Bulgaria’s time as part of the Eastern block. During this period, Bulgaria imported oil, gas and other fuels primarily from the USSR, who supported the construction of the “Neftochim” refinery in Burgas. The refinery, which started to operate in 1963, experienced severe difficulties after the fall of Communism in 1989. Projects that started in the late 1980s were halted, while the volume of oil delivered to the refinery continuously declined.
In 1998, the reformist Ivan Kostov government authorised Lukoil’s purchase of the majority of shares in the refinery. Lukoil was a product of the volatile economic reforms which followed the collapse of the Soviet Union, being a merger of three regional oil production companies in 1991. Initially state-owned, the company was privatised in 1993, successfully courting new investors and often being classified as one of Russia’s energy companies least subject to state intervention. Simultaneously, the company’s leadership continued to be composed of primarily Soviet-era managers, which allowed for the maintenance of a close relationship with government officials. By the mid-1990s, Lukoil had begun an aggressive campaign to expand into foreign markets, having started joint-exploration projects with Egypt in 1995 and purchasing their own tanker fleet in 1996. Consequently, Lukoil’s interest in the purchase of the refinery is to be understood as a pivotal part of its broader corporate strategy.
Internally, the acquisition was justified by a lack of foreign interest in the refinery, and the increasingly unsustainable debts of the enterprise. In order to further calm public fears, the state retained a “golden veto” on any decisions taken by Lukoil that might threaten the “national security or strategic interests” of the country as part of the contract.
Lukoil undertook large scale renovations of the facilities, investing up to 20 million euros within the two decades after its entrance. Along with the refinery, Lukoil acquired a chain of gas stations across the country, becoming the primary provider of petroleum. Through this strategy, Lukoil’s Bulgarian affiliate was ranked as Bulgaria’s highest grossing company by revenue according to the financial newspapers Capital “Top 100” ranking from 2006 until 2021.
Yet, questions about the business practices of Lukoil quickly appeared. Beyond political considerations coming from the company’s dependence on Russian oil, Lukoil was accused of tax evasion. In 2015, the think-tank "Risk Management Lab", affiliated with former Prime Minister Ivan Kostov, published an investigation alleging that Lukoil had artificially inflated its expenditures by reporting oil purchases from Russia as on average 13.7% higher compared to the market price, thus creating profits for the domestic company at the expense of the Bulgarian branch. These findings were re-affirmed by the report “Runaway Taxes”, published in 2017, which found that despite being the largest company in Bulgaria by gross revenues, Lukoil had not paid taxes since 2008.
Additionally, Lukoil was accused of using its market position to obstruct competitors and charge higher prices for end-consumers. In 2016, Lukoil was designated as a “dominant company” within the Bulgarian market for petroleum by the Commission for the Protection of Competition, meaning that Lukoil could leverage its market position in order to obstruct new entrants. In 2021, for the first time the CPC fined Lukoil for obstructing the entrance of new fuel providers onto the Bulgarian market by creating “a strategy to prevent the import of fuels into the country”.
Despite these accusations, Lukoil’s relationship with a number of Bulgarian governments remained relatively stable. A sign of this trust can be observed in 2011, when the company acquired a 35 year concession for a terminal in the port in Rosenec. While parliamentary commissions of enquiry were routinely opened to consider allegations of tax evasion, they were typically organised by the opposition and lacked results.
In part, the stable position of Lukoil can be explained by the close relationship that the long-time CEO of its Bulgarian affiliate, Valentin Zlatev, had with the two parties which dominated Bulgarian politics in the 2010s: the center-right GERB and the Socialists. Zlatev had been a regular guest at events hosted by President Georgi Parvanov, an influential figure within the Bulgarian Socialist Party and was classified as a “friend” by Prime Minister and GERB leader, Boyko Borisov. Additionally, Lukoil was a major provider of employment opportunities and a driver of economic growth in one of Bulgaria’s largest cities, Burgas. Finally, the company’s strong lobbying network, and presence in a number of European industrial associations, such as FuelsEurope, made them appear more integrated within the broader European economic system compared to other Russian companies. Yet, even Lukoil’s position was fundamentally challenged after the Russian invasion of Ukraine.
The long withdrawal
The Russian invasion of Ukraine was accompanied by sanctions targeting the Russian energy sector, including a ban on the import of Russian oil passed on the 3rd of June, 2022. Yet, like a number of other Eastern European member-states, Bulgaria received an exemption for the continued import of Russian crude oil until the end of 2024. Crucially, the Bulgarian port, Rosenec, became one of the few European ports which retained the right to re-export Russian petroleum and other refined fuels.
The political logic behind the exemption was sound. Bulgaria, which was in a cycle of irregular elections and ruled by caretaker cabinets appointed by pro-Russian President, Rumen Radev, was unlikely to undertake serious reforms to its energy sector. Additionally, the disruptions caused by a severance of oil imports from Russia would have likely boosted support for far-right, Euro-sceptic parties like Revival, which had already gained from anti-government sentiments throughout 2022 and 2023.
From the standpoint of Bulgaria’s energy security, however, it can be argued that the exemption only served to prolong dependency on Russia. Rather than divesting from Russian oil, Lukoil increased its use in its refinery. By 2023, 100% of all oil deliveries to the refinery at Burgas came from Russia, whereas in 2022 it had been 85%. Additionally, the percentage of refined fuels entering Bulgaria from Russia continued to make up around half of total imports in the first quarter of 2023.
Lukoil justified their decision by stating that the “Neftochim” refinery could only process Russian oil; independent investigations have dismissed their statement. Instead, it is likely that the continued purchase of Russian oil was guided by pressure from the parent company in Russia, rather than by practical limitations. This view is supported by the findings of the newspaper “Politico”, which estimated that the Russian economy may have gained up to 1 billion euros in 2023 as a result of the “sanctions loophole” created by Bulgaria’s exemption. The increasingly negative implications of the continued exemption led to EU concerns, specifically after allegations that the port in Rosenec was being used to smuggle Russian energy products into European markets.
Domestic Context
The election of the Denkov government in June 2023 as a pro-European compromise between domestic rivals PP-DB and GERB-SDS was accompanied by expectations of a tougher stance towards Lukoil. In August, 2023, in the most resolute action of the Bulgarian government up to that date, the concession for the port in Rosenec was severed and the terminal nationalised. The action was followed by calls from GERB and the Movement for Rights and Freedoms, a smaller party which supported the Denkov government, for an immediate cessation of all sanctions-related exemptions. However, government ministers cautioned against this, arguing that such a radical move would likely lead to disruptions and higher fuel prices. In response, the parties accused the government of being “pro-Russian” and attempted to force the matter through parliamentary procedures. Ultimately, in October 2023, after meetings with representatives of Lukoil, it was decided to retain the exemption on the import of Russian crude oil until March 2024, provided Lukoil paid taxes on the super-profits it received during the year. Furthermore, the re-export of products made with the use of Russian crude oil was banned.
Although the debate and subsequent abrogation of the sanction exemption may appear as a positive development towards long-term de-coupling from Russia, they must be understood within the Bulgarian political context. GERB, which nominally co-governed with PP-DB, had been practically excluded from government. As a result, MPs from the parties frequently criticised incumbent ministers. These criticisms were likely motivated by the high probability of new elections and the low approval of the Denkov government, both of which GERB sought to gain from. Additionally, both GERB and MRF had an interest in appearing as more pro-European compared to their electoral rivals, PP-DB, in order to maintain strong relations with their respective European parties. The MRF MP and media mogul, Delyan Peevski, in particular was speculated by analysts to have utilised anti-Russian rhetoric in order to restore his reputation after the imposition of financial sanctions against him by the United States.
By March, 2024, the topic of Lukoil had been supplanted in Bulgarian politics following the collapse of the Denkov government and the subsequent snap parliamentary elections.
The Emergency
In January, 2025, the GERB-led Rosen Zhelyazkov government was elected. Despite its generally pro-European nature, the government was reluctant to comment on the future of the Lukoil refinery in Burgas, especially as rumours of a potential purchase continued to circulate.
The inaction of the government was likely motivated by political considerations. The coalition which supported Zhelyazkov’s government included parties of varied ideological alignment, particularly the historically pro-Russian Socialist party. Additionally, the potential sale of Lukoil was likely to be criticised for alleged corruption, as had happened previously with the nationalisation of Rosenec. Finally, the nationalisation of the refinery had been proposed by opposition parties, such as MECh, making support for them politically difficult. Therefore, it was likely that any resolute move to settle the future status of Lukoil in Bulgaria would be accompanied with political troubles for the incumbent government.
In October, the government unexpectedly proposed a new law regulating the potential purchase of Lukoil’s Bulgarian properties. Specifically, the new law created provisions by which any new buyer of the enterprise must be verified by the State Agency for National Security. The sudden introduction of the topic led to speculation by the opposition that business interests associated with the government, specifically oligarch Delyan Peevski, were interested in their acquisition. GERB leader, Boyko Borisov, stated that the law had been proposed due to fore-knowledge of the incoming sanctions.
However, the reaction of the Rosen Zhelyazkov government has thus far demonstrated a lack of any such foresight. In the aftermath of the sanctions on the 23rd of October, Prime Minister Zhelyazkov stated that the government had “one month” to resolve the current dilemma, while underlining that fuel shortages were unlikely. This statement was clarified by the energy minister Zhecho Stankov, who said that fuel deliveries were ensured “until the end of the year”, before clarifying that fuel deliveries would continue “far beyond that”. In terms of the government’s response plan, Stankov discounted the possibility of nationalisation, but didn’t exclude the possibility of appointing an “emergency executive” to manage the refinery until a purchaser was found.
These statements did little to soothe business worries. On the 27th of October, the Bulgarian Association for Petrol and Gas called on the government to ask for an exemption from the United States’ sanctions, which was supported by other associations representing petrol-related businesses in Bulgaria. This demand is understandable, specifically in the context of new emergency legislation, which seeks to temporarily ban the export of petrol from Bulgaria and government evasiveness about the future of the refinery's ownership.
European Context
It can be easy to classify the ongoing situation in Bulgaria as an insular crisis, largely driven by endemic corruption, political polarisation and a lack of regulatory maturity often present in post-Communist states. Such an explanation certainly does have its merits: after all, the growth of Lukoil was largely secured due to government and regulatory oversights, while subsequent attempts at de-coupling have been hampered by political conflict. However, such an explanation ignores the influence that tendencies within European energy policy have upon Bulgaria.
In particular, Lukoil had for a long-time held a “special status” within Europe’s energy markets, driven in part by a strong “network of lobbyists” within both Brussels and national capitals. Additionally, Bulgaria is not the only European Union member-state to have retained oil refineries owned and operated by Russian companies. Germany, for example, retained three refineries operated by Rosneft. Much like Bulgaria, Germany had not prepared for the possible sanctions and was forced to ask for an exemption from them.
Rather than being an isolated situation, the belated emergency caused by the sanctions on Lukoil is indicative of a general trend within European energy policy, which remains largely driven towards decoupling with Russia through external shocks.
Ultimately, it is unlikely that the current sanctions will lead to a significant shortage of fuels in Bulgaria. For one, the internal fuel reserve within Bulgaria should fulfill internal energy needs for at least the next 90 days. Additionally, mechanisms created by the European Union are likely to provide petroleum if the situation with the refinery continues to be unresolved.
However, the case-study of Bulgaria’s management of their relationship with Lukoil is indicative of a wider governance problem. Specifically, the actions of the Bulgarian government are often forced by external events rather than internal agency. Moreover, the decisions taken often seek to address the immediate cause of the problem, rather than the structural conditions which created them. In order to avoid the repetition of a similar situation, it is important that European states review their current energy dependencies and create cogent plans in order to address potential disruptions.
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