Despite substantial EU pressure as well as the broad consensus among political parties and voters that graft remains the main issue holding back convergence and improving living standards, the ruling Bulgarian Socialist Party (BSP) led coalition has failed to indict a single senior public official. The judiciary is at the heart of the problem, with many magistrates linked to crime groups, preventing the successful prosecution of gang members. With public discontent over graft-ridden institutions growing and with relations with the EU starting to show signs of stress, the government's handling of corruption will have a significant impact on Bulgaria's political and economic direction going forward. The business-as-usual tone is only reinforced by the rejection on 4 July of a motion calling for Prime Minister Sergey Stanishev to account for spiralling inflation, and to outline the government's plan for reining in rampant price growth.

The motion had been proposed by the Democrats for Strong Bulgaria Party, a minor right-wing party, but was overwhelmingly rejected by Bulgarian MPs. Bulgaria's doubledigit inflation not only poses an increasing risk to macroeconomic stability, but also raises the risks of public protests should food and energy costs rise much higher. Bulgaria suffers from few direct security threats, either internal or external, and has no international border disputes or conflicts with other countries. Bulgaria’s terrorist risk ratings remain positive and is unlikely to change in the near future as Bulgaria has no known internal terrorist groups and the risk from contemporary international terrorist groups is low. Rather, the threats come from organised crime groups. Bulgaria is a major transhipment point for drugs coming from Central Asia and the Caucasus and as a result suffers from associated crime, trafficking in human beings and money laundering.

Organised crime is pervasive, and in 2004 a turf war broke out between mafia groups involved in Sofia’s drug trade. During the Cold War, Bulgaria’s defence industry and the technology and structure of the militaryindustrial complex were driven by the country’s position in the Warsaw Pact. During this period, the arms trade (worth several hundred million dollars annually) formed an important part of Bulgaria’s economy, employing between 110,000-115,000 people. An estimated 90% of these products were exported. Today, reports suggest that many of the defence equipment companies are hardly breaking even. Bulgaria’s lack of R&D-related spending means that the country will continue to focus on its traditional production of small arms and light weapons, an increasingly competitive market. It will struggle to profit from the armed forces modernisation project, which has a focus on high technology systems.