Nadia Damon in Sofia -

A serious case of wishful thinking, a cunning extortion plot, the victim of a hoax, sheer incompetence, or even a cynical stunt to boost foreign investment? That is the question. And the subject of such speculation? None other than Bulgaria's government.

Whatever lay behind the recent release of an official statement from the Bulgarian Ministry for the Economy claiming that it had inked an agreement with the Emirates Associate Business Group (EABG) to build a Formula 1 circuit outside the Bulgarian capital Sofia, there can be little doubt that the furore it subsequently unleashed came as quite a shock to its authors.

The presence of fundamental inaccuracies within the announcement - not least that the aforementioned EABG is a state-owned company comprising members of Abu Dhabi's royal family - oh, and the small matter of EABG denying any such deal has been done, meant that within a day or two of this triumphant announcement, Prime Minister Boyko Borisov found himself squinting under the glare of the media spotlight as the world's press made an attempt to get at the real story.

What has amazed many about the entire affair is that Bulgaria's PM has stubbornly refused to apologise for any errors, opting instead to indulge in a blame game with his ministers over who actually heard the word 'sheikh' being bandied about, while serious accusations of endemic corruption at the heart of his administration have been left to fester.

Such a show of defiance appears all the more foolhardy in light of an official response from EABG - via Bulgarian newspaper Sega - which detailed the inaccuracies and promised that it would not be doing business in Bulgaria or recommending that any of its own partners do so either. Matters were made even worse when EABG advisor Anwar Badwan personally showed the press two threats he had received via email. The first message demanding $94m to clean up the mess; the second warning him to stay out of Bulgaria.

Thankfully, these messages were later attributed to some US-based Bulgarian pranksters. But while Borisov was able to enlist the help of the FBI in dealing with these jokers, it seemed there was little he could do to stem the tide of negative publicity flowing his own way.

Damage limitation

Borisov's government has now been officially absolved of responsibility by a decidedly belated letter from the head of the Bulgarian Motorcycling Federation, Bogdan Nikolov, insisting that the whole 'misunderstanding' is down to him. Whether investors will see it that way is a different story.

The government on July 7 announced a host of amendments to the country's Investment Encouragement Act as a way to boost ailing levels of foreign direct investment (FDI) within the country. Bulgaria's National Bank figures show that the level of FDI between January and June had plummeted some 78% over the same period in 2009. Falling from €1.6bn, or 4.8% of GDP, to just €358.5m, or 1% of the GDP.

Yet there is little about 'F1-gate' - as it has been dubbed - that casts the government in anything but a poor light. At best, it looks seriously inept, having failed at the very least to carry out some rudimentary checks on a potential investor or have the necessary paperwork in place before making such a public announcement.

For his part, Roger Leboff, an analyst at London-based Edison Investment Research who specialises in Bulgaria, is inclined to believe that the Economy Ministry's announcement was simply a gaffe that illustrates the risks of leaking news of a sensitive negotiation too early - a move that is unlikely to do lasting damage.

"I suspect this kind of thing happens every week somewhere in the world, so the news impact may blow over pretty quickly," he tells bne. "Nonetheless, where a mature economy or one of the larger emerging markets, like the Brics (Brazil, Russia, India, China), would be rapidly forgiven, smaller economies countries are arguably more vulnerable to bad publicity."

Ultimately, Leboff does not believe that F1-gate will impact FDI levels in Bulgaria. "It's unhelpful if it looks unprofessional," he concedes, "but I doubt that an investor in a specific project where Bulgaria could prove it had a strong competitive advantage would be put off by this. This kind of investment requires years of negotiation, due diligence, detailed investigation of the business case. It's not clear how well progressed [the EABG deal] was."

He makes the point, however, that politics still play their part in any decision. "A stable political backdrop is certainly an important component of any territory's appeal to an overseas investor," says Leboff. "EU membership provides some sense of the direction in which the country's heading, but Bulgaria needs to set the pace and provide assurances that it is as good a proposition as its peers."