The Kremlin’s Economic Grip on Europe

Russia’s economy may be struggling, but its economic influence in Central and Eastern Europe is undiminished. Here’s how it wields its power.

On the eve of Bulgaria’s accession to the European Union in 2007, the Russian Ambassador to Brussels, Vladimir Chizhov, declared that “Bulgaria would be Russia’s Trojan horse in the EU.” Though he added that he meant this “in a good sense,” his words ended up being disturbingly prophetic. Over the last ten years, all the countries of Central and Eastern Europe have felt the chill wind from the East.

Ultimately, Russia’s goal is to weaken the credibility and moral authority of the EU, particularly among aspiring members such as Serbia, Ukraine, Moldova and Georgia. Moscow pursues this goal through several channels. Vladimir Putin’s support for illiberal political parties in Europe is well-known. The Kremlin has also been able to deploy — most notably in Serbia — its considerably under-appreciated soft power resources, such as a robust media presence, cultural and religious foundations, and academic exchange programs. But perhaps one of the most powerful levers Moscow has at its disposal is money. Since 2008, Russia has deployed its economic footprint in Europe with increasing aggression. Unless the EU and its individual members improve their anti-corruption efforts and halt the backsliding of governance institutions, Russia will be able to turn its economic power into direct influence over their decision-making.

These are some of the conclusions reached by a ground-breaking 16-month joint study on Russian influence in Central and Eastern Europe. It found, in part, that Moscow’s economic influence in the region remains surprisingly large. On average, Russia’s economic footprint in the five countries studied in the report (Serbia, Bulgaria, Latvia, Hungary and Slovakia) has ranged from about 11 percent of the economy (in the cases of Hungary and Slovakia) to an astonishing 22 percent in Bulgaria over the last decade.

Of course, in principle, there is nothing wrong with Russian capital. The problem is what Russia does with it. In the first place, Moscow has become adept at using its influence to buy still more, preserving and expanding its dominance of the oil and gas markets, exploiting governance loopholes to manipulate top-level decision-making, and capturing regulatory institutions to prevent market liberalization and competition. Secondly, it has become abundantly clear that Russia is not interested only in business. In fact, it seeks to use its considerable and growing resources to undermine Europe’s established liberal-democratic consensus and to elevate the Russian “power vertical” as an acceptable alternative.

Because the region is disproportionately reliant on Russian oil and natural gas resources, the energy sector has been Moscow’s main channel of economic influence. During the past decade, the share of Russian gas in the domestic consumption of the five countries included in the study has never fallen below 60 percent, and since 2004 has usually remained above 80 percent. Because of this energy dependence on Russia and their insufficient integration into EU markets, the Central and Eastern European countries have paid between 10 percent and 30 percent more for their Russian natural gas imports than Germany over the past decade. Bulgaria’s state-owned gas company, for example, will overpay Russian gas giant Gazprom about 1.1 billion euros over the next five years if the price differential persists. Russia also uses Gazprom to punish or reward its clients depending on their foreign policy stances. For example, the Kremlin aided the rise of Victor Orban in Hungary, rewarding the president’s affection for Russian-style illiberalism with a drop in gas prices ahead of his April 2014 reelection.

Of course, energy also has a political component. Suppliers of Russian gas — either Gazprom subsidiaries or independent companies controlled by Russia — have often served as political envoys, pressuring the Central and Eastern European governments on issues of strategic economic importance to Russia. In the case of Bulgaria, Serbia and Hungary, these gas intermediaries were instrumental in promoting large-scale Russian-led energy projects such as the South Stream gas pipeline and the Belene and Paks nuclear power plants. These nuclear projects, in turn, have allowed Russia to lock these governments into long-term finance deals worth billions of euros. These projects pose a long-term threat to their host countries’ financial stability, which Russia can use to manipulate their governments’ decision-making. As the Belene case has proven, large-scale Russian-led projects in this part of the world fuel corrupt networks of contractors and exacerbate deficits of governance.

Apart from the energy sector, since the 2008 financial crisis, Russia has sought to expand its corporate presence in finance, media and telecommunications, transportation, construction, industrial, and real estate. Taking into account the companies’ ultimate owners, Russia is among the largest investors in Bulgaria, Serbia and Latvia, where its investments make up about 10 percent of the GDP. Close to a tenth of all the revenues generated in these three countries either directly belong to Russian companies or are indirectly controlled by intermediaries.

Examples of Russia’s muscular exploitation of its economic influence abounds. Dusan Bajatovic, the deputy leader of Serbia’s pro-Russian Socialist party, is also the CEO of Srbijagas, the state-owned gas company that helped prevent Serbia from diversifying its gas supply away from Russia. In Latvia, Russia has sabotaged multiple attempts by successive governments to open up the gas market by threatening to divert the transit of Russian exports to Latvian ports, which would cripple the transportation sector, a backbone of the economy. Bulgarian officials have openly voiced their suspicions that Russian energy companies financed the 2012 and 2013 street protests against shale gas exploration and rising electricity prices. These protests ultimately toppled a government that had just halted the Russian-backed Belene nuclear power plant project and the construction of a pipeline that would carry Russian oil from Bulgaria to Greece.

Russian companies have also invested in sports and cultural activities to expand Russia’s soft power in Latvia, Serbia and Bulgaria, pressured local governments not to investigate non-transparent mergers and acquisitions, adopt preferential tax regimes and forestall market liberalization reforms. For example, thanks to clever transfer pricing schemes and permissive tax authorities, Lukoil, the largest Russian oil company in Bulgaria, has managed to report zero profits since 2008 (and thus to pay no profit taxes) despite controlling vast swaths of the market. Russian businesses have also financed media outlets in Serbia, Bulgaria and Latvia that have on many occasions taken a pro-Russian stance.

So far, governments in the region have consistently backed the EU’s sanctions against Russia, and Slovakia and Hungary have supplied Ukraine with gas even after Russia threatened to turn off the taps in retaliation. However, the recent rhetoric of Hungary’s Prime Minister Orban and Slovak Prime Minister Robert Fico has been noticeably pro-Russian, both in terms of emulating Putin’s governance model and of reflecting their approval of Russia’s foreign policy. The CEE countries have also significantly delayed liberalizing their energy markets, opposed EU migration policy, and expanded ties with Ukraine, in many cases adopting arguments voiced by Russia. Had Slovakia and Hungary not been EU members, and had they not been host to a number of Western multinational corporations, their political systems would probably have gravitated more towards oligarchic control linked to Russian influence, similar to Ukraine prior to its 2014 revolution.

In countering Russian influence in Central and Eastern Europe, EU institutions and member states should substantially enhance anticorruption and development assistance mechanisms to help the most vulnerable countries build greater resilience to Russian influence. EU governments should make a practice of disclosing the beneficial owners of companies registered in offshore havens to strengthen transparency and increase their understanding of any Russian influence. Also, they must diversify their economies, especially by increasing the availability of alternative energy sources and strengthening their connections with the EU energy market. Last but not least, closing governance loopholes such as their lax anti-monopoly regulations, the ability of well-connected companies to use opaque transfer pricing schemes to avoid paying taxes, would make it much more difficult for Russia to use its economic muscle to promote its political interests. The Baltic countries’ successful anti-corruption efforts and the effective counter-intelligence work of the Czech national security agency, which publishes an annual report analyzing Russian influence) are good examples to follow. Ultimately, what will work best at limiting Moscow’s malign influence is a firmer commitment to the values of liberal European governance: transparency, independent regulatory oversight, rule of law, and economies diversified away from Russian energy flows.

Photo credit: ALEXANDER NEMENOV/AFP/Getty Images

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