European solidarity is facing a slippery test in Bulgaria, where a caretaker government is ready to ignore hard-fought sanctions on Moscow to extract millions in tax revenues from a Russian oil giant.
Sofia has made a verbal pledge to work around the EU embargo on Russian crude oil that comes into effect on December 5 in order to allow LUKoil to exploit a two-year exemption that will fill the state coffers.
EU officials quickly objected to the tentative deal, which was being discussed as the bloc braces for its most challenging winter in decades due in part to an energy crisis stemming from Russia's invasion of Ukraine and with EU and G7 debates raging over price caps to fortify sanctions on Moscow.
In June, Bulgaria received a requested exemption allowing it to import Russian crude oil and petroleum products via maritime channels to its Black Sea coast until the end of 2024. There was no exception, however, for exporting Russian oil or products derived from it.
On November 21, LUKoil announced after talks with Bulgarian Deputy Prime Minister Hristo Alexiev that the NATO and EU member state will permit the Russians' biggest Balkan refinery to keep operating and -- more controversially -- to export oil products to the European Union through 2024.
In turn, Alexiev said, LUKoil will eliminate the transfer pricing that has allowed it to avoid Bulgarian taxes for decades on billions of dollars in revenues and will instead "transfer all production, revenues, and taxes to be paid in Bulgaria, and not, as before, in the Netherlands or Switzerland."
Alexiev predicted that the deal would contribute an additional 350 million euros ($365 million) to the Bulgarian state budget.
LUKoil's management, meanwhile, pledged to "make the decision" to locally report the profits from the LUKoil Neftohim Burgas refinery's operations within a week if Bulgaria passes legislation to lift any ban on oil exports. The company also publicly laid out other conditions, including macroeconomic and production targets, and the use of the Urals-grade oil that has made Russia a major exporter.
But RFE/RL's Bulgarian Service has confirmed that no deal has been officially signed between the Bulgarian government and LUKoil and the plans on each side -- for now -- remain objects for further discussion rather than binding commitments.
But the specter of such a loophole has alarmed Brussels, which has struggled to overcome resistance to fuel embargoes from heavily Russia-dependent members like Germany and Hungary.
The European Commission has challenged Sofia's intention, arguing that Bulgaria's two-year exemption from the EU-wide ban on Russian crude-oil imports doesn't extend to exports produced from the stuff.
LUKoil Neftohim Burgas CEO Ilshat Sharafutdinov (left), a consultant of LUKoil Bulgaria, Alexander Velichkov (center), and the director of LUKoil Bulgaria, Andrei Matyukhov.
The European Union has already imposed eight rounds of sanctions to punish Russia for its unprovoked full-scale invasion of Ukraine, but the bloc has labored to forge consensus on politically sensitive cutoffs in energy imports, including coal, gas, and now oil.
The June EU sanctions package banned the purchase, import, or transfer of Russian crude oil from December 5 and on anything refined from such oil from February 5, 2023.
Meanwhile, a plan among G7 countries to avoid undermining the EU embargo should take effect on December 5, capping the price at which seaborne shipping providers can deliver Russian oil.
"It will no longer be possible for Russian companies to operate in Europe and trade in Russian oil," Georgi Angelov, a senior economist for the Open Society Institute-Sofia, says of the new embargo. "So they have to find somewhere else to base themselves. And Bulgaria, as the only one that can import Russian oil to Europe, is perhaps the logical destination."
A Sofia-based financial adviser, Yevgeny Kanev, offered another factor that makes Bulgaria ripe for helping a Russian oil giant skirt the EU sanctions. "The second reason is that, unlike everywhere else in Europe, here they have a friendly government that helps them," Kanev said.
Bulgarian Deputy Prime Minister Hristo Alexiev (left) with LUKoil Neftohim Burgas CEO Ilshat Sharafutdinov (file photo)
A centrist, pro-Western governing coalition collapsed in June, and Bulgaria's fourth elections in just 18 months resulted in a hung parliament. Coalition talks remain bogged down, leaving a caretaker government installed by President Rumen Radev in power with limited parliamentary oversight.
The notion of wriggling LUKoil Neftohim Burgas, Bulgaria's only oil refinery, out of the EU ban emerged after caretaker Prime Minister Galab Donev, an independent, took over in August.
LUKoil Neftohim Burgas's billions of dollars in oil sales and other revenues make up nearly 10 percent of Bulgaria's economic output. In addition to its dominant position on the domestic fuel market, it employs thousands of Bulgarians.
CEO Ilshat Sharafutdinov told journalists at a press conference on November 21 with Alexiev that LUKoil Neftohim Burgas might be forced to shut down if it is not allowed to export.
But LUKoil has spent decades transferring Burgas revenues abroad and posting losses in Bulgaria, with a few exceptions.
It did that, in part, through LUKoil Neftohim Burgas's majority owner, a LUKoil subsidiary in Switzerland called Litasco. While Switzerland is not an EU member, Bern has tied Litasco's hands by committing itself to the bloc's embargo on Russian oil.
On November 21, LUKoil announced Bulgaria will permit the LUKoil Neftohim Burgas refinery to keep operating and -- more controversially -- to export oil products to the European Union through 2024.
As of early this week, there was no sign that LUKoil had officially transferred any additional activities to Bulgaria where they might be taxed. "Nothing is clear yet. These are intentions," Krasimir Parvanov, the Bulgarian state's representative at LUKoil Neftohim Burgas, told RFE/RL's Bulgarian Service.
He said there had been no decision by supervisory organs to reorganize or even to convene.
"I will talk to the minister of energy [Rossen Hristov], who is the principal, to invite the management of LUKoil for talks," Parvanov added.
The refinery declined to provide more information to RFE/RL's Bulgarian Service, and instead shared a link to the November press conference with Deputy Prime Minister Alexiev.
The purpose of the derogation is for Bulgaria to supply itself with oil due to its specific situation, and not to sell it to other member states or to third countries, including if it is reprocessed."-- European Commission
Bulgaria's Energy Ministry has said the Economy Ministry was responsible for the LUKoil deal. Acting Economy Minister Nikola Stoyanov has suggested that exports of petroleum products from the Bulgarian-based refinery won't be subject to EU sanctions because they fall under the exception, known as a derogation, that was granted to Sofia by the bloc in June.
Deputy Finance Minister Lyudmila Petkova publicly asserted this week that "the oil products derived from [Russian] Urals oil will originate from Bulgaria and can be exported."
A response, however, to RFE/RL's Bulgarian Service from a European Commission spokesperson flatly rejected such an interpretation.
"The purpose of the derogation is for Bulgaria to supply itself with oil due to its specific situation, and not to sell it to other member states or to third countries, including if it is reprocessed," the spokesperson wrote.
The head of the European Commission representation to Bulgaria, Tsvetan Kyulanov, echoed that restriction and said the commission had no plans -- and "no need" -- to revisit the topic.
Economists stress that neither the pronouncements so far by LUKoil and Bulgarian officials nor the purportedly ongoing talks have any binding value.
"For this change to be stable, it must [be in the form of a] legal regulation," Angelov said. "It's not just the company voluntarily saying, 'Well, I'll start paying taxes here.'"
After all, he added, LUKoil could simply change its mind months down the road and take those revenues elsewhere.
Martin Vladimirov, an analyst at the Center for the Study of Democracy in Sofia, told RFE/RL that LUKoil's Bulgarian operations appear to generate an annual profit of about $3 billion. "At a 10 percent corporate tax, this means about $300 million should go into the treasury this year," he said.
Bulgarian Deputy Prime Minister Alexiev said he expected LUKoil Neftohim Burgas to pay roughly $50 million in taxes for 2022 alone under the proposed scheme.
Bulgaria's caretaker prime minister, Galab Donev, an independent, took over in August.
Vladimirov said that LUKoil, in the weeks ahead of the EU oil embargo, appears to have been producing and exporting about one-third more fuel than normal, much of it to European markets.
"It is becoming abundantly clear that the entire [Bulgarian] state and its institutions are currently trying to serve a private interest," he said of the LUKoil proposition.
Prime Minister Donev said in early November that he was taking steps to ensure that LUKoil could continue to export its local output.
Several Bulgarian parties responded with counterproposals to either nationalize control of LUKoil Neftohim Burgas's operations or legislate a unilateral ban on its exports.
"It can't be done voluntarily -- for someone to give up billions in profits. There just has to be pressure," said economist Angelov.
Analyst Vladimirov, for his part, said: "It should be clear to everyone that on December 6, LUKoil will stop exporting fuels to the European Union, unless Bulgaria wants to really risk its reputation as a reliable ally and risk [criminal] proceedings against the country."
He said LUKoil Neftohim Burgas could avoid such a risk by processing and exporting only non-Russian oil, something the company has said is not viable.