The Russian Economic Grip on Central and Eastern Europe

Ognian Shentov

• Publisher: Routledge
• Year: 2018
• Topic: Social Sciences
• eBook ISBN:
  9781351109376
• Subtopic: Ethnic Studies
• Index: Social Sciences

This book is about the use of economic and state capture levers for achieving political clout. It details how Moscow has been able to exploit governance deficits and influence decision-making in the countries of Central and Eastern Europe through a range of economic means. The comparative country by country perspective on Russia's corporate presence, trade, and investment in particular sectors of the region, especially energy, shows the patterns of the Kremlin's use of economic presence and state capture tactics to amplify political and social leverage. By collating economic data with an analysis of governance loopholes and the political process, the authors reveal the Kremlin's methods for swaying national policies, especially through the exploitation of governance failures in these countries. The book thereby highlights how Russia's economic power is related to its wider strategic goals. It concludes that Russia's economic grip, both direct and indirect, is tighter than official statistics imply.

Part I

Russian influence root causes

1 Reassessing Russian influence

Economic and governance underpinning

Martin Vladimirov

For a period of around 15 years after the end of the Cold War, the US and the EU enjoyed unprecedentedly close relations with the Kremlin. Russia’s new political elite established trusted relationships with Western leaders that matched the country’s gradual economic integration in the global financial and trade system. Both processes were consistent with the predictions of the end of history theory proclaiming that liberal institutionalism has won the ideological struggle, making future conflicts between great powers highly unlikely.¹ The academic consensus had been that we were living in a unipolar moment in which the US hegemonic power underpins peace, stability, and the spread of the liberal order to every corner of the world.^2,3,4 An expanding European Union (EU) seemed to fit perfectly in such an inspiring vision as the embodiment of a continent-wide experiment in overcoming a long tradition of nation-states conflicts in favor of a borderless normative community. Brussels’ role in the democratic transformation of an array of post-communist states in Eastern Europe was straight out of the liberal playbook and was deemed both indispensable and irreversible.

It was logical to presume that authoritarian countries such as Russia and China would fold into the pack with the former expected to opt for liberal democracy, with the latter encouraged to further advance on the path of reforms that would inevitably undermine rigid communist rule, as both already seemed to have embraced enthusiastically the age-old tenets of capitalism. Consequently, the West adopted policies aimed at ever-increasing integration of Russia and China and were caught by surprise by the developments of the first two decades of the 21st century, which bore striking resemblance to a return to great power games in an increasingly contested international order.

Unlike the other former communist countries, Russia did not have a nation-state antecedent, nor past democratic traditions. The dissolution of the Soviet Union in 1991 did not terminate Moscow’s imperial temptation, and with Vladimir Putin at the helm Russia reached out to its “near abroad” (i.e., the former Soviet republics), to Central and Eastern Europe (CEE), and to the Western Balkans using all the available channels to expand its influence. Although in some instances the Kremlin’s revanchist drive took the shape of territorial incursions and annexation (as is the case of Crimea), it mostly relied on recreating the traditional Russian and Soviet spheres of influence in competition with the West (and to a lesser extent with China and Turkey in Central Asia).

Such a surge in Russian power projection abroad after a decade of retrenchment was conditional on domestic recovery and robust economic performance after 2000 when petroleum prices reached their highest levels. It was largely unanticipated by foreign observers. To start with, the troubled transition of Russia to democracy and capitalism, marred by the lack of rule of law and market economy institutions, as well as an external anchor similar to the EU, initially resulted in economic chaos. Moreover, the semi-criminal transition allowed the creation of a class of “oligarchs,” who used the ill-defined privatization process to capture enormous assets that were syphoned off abroad to Western banks and properties, bringing further misery to ordinary Russians and debilitating the local economy. During the final years of the increasingly erratic Yeltsin presidency, these post-communist boyars seemed to acquire further influence and were viewed as the puppeteers of post-communist politics and the Kremlin’s kingmakers. The net result was a largely diminished Russian Federation on the road to losing not only its super-power status, but its internal integrity as well.

All this was bound to change with the advent in the year 2000 of Vladimir Putin as the KGB trusted figure, chosen to restore order after a chaotic if economically opportunistic period. His rise to power coincided with the emergence of the so-called siloviki, or the group of former security sector politicians and businessmen who gradually got hold of some key industries – forming the closed ring of Mr. Putin’s supporters and allies. Their capturing of nominally private enterprises and the state-owned behemoths in energy and banking was at the source of both the renewed Russian etatist drive and of its economic expansion in CEE and the Western Balkans, especially in the energy sector.

Such an economic and political outreach is consistent with the Kremlin’s broader strategic goal to restore the country’s standing as a major player in global affairs competing with the West (both the US and the EU) on a wide range of critical international and regional issues and acute crises from Ukraine to Syria, and from Iran to North Korea.^5,6,7,8 Russian revisionism was vividly contained in Vladimir Putin’s speech at the Munich conference in 2007,⁹ when he defined the Western expansion in Eastern Europe as undermining the Russian national interest. Russia perceived the 1999 and 2004 enlargement of the North Atlantic Treaty Organization (NATO) that integrated ten CEE states and the plans for deployment of anti-ballistic missiles in the region as a direct threat to Russian security.¹⁰ This explains Mr. Putin’s growing irritation at further attempts by the West to squeeze Russia’s sphere closer to the metropole. The Kremlin reacted firmly against the alleged Western involvement in pro-democracy movements in Georgia, Ukraine, Kyrgyzstan, Moldova, and Belarus.¹¹ By using both coercion and soft power through cultural and ethnic affinities, Russia has supported authoritarian leaders emphasizing the need for domestic stability, sovereignty, and regional security.¹²

Concerning the CEE countries, the Kremlin has aggressively deployed its resource-based economic power in combination with old-time security networks and skillful use of cultural ties against the backdrop of increasing military power demonstrations to exploit and further strategic vulnerabilities across these countries. Unsurprisingly, as will be substantiated later, there is a clear causal linkage between the newly assertive Russian economic policies and some of the negative trends in these countries in both the economic and governance sphere. A vicious circle was enacted with Russian economic levers used to undermine the EU integration of the former communist countries, which in its turn exposed their economies to further entanglement with the Kremlin’s interests. To add insult to injury, this Russian assertiveness in CEE countries coincided with the period of economic recession and institutional crisis of the EU with the onset of the euro and later on of the migration crisis.

The tools Russia has used in expanding its influence in critical economic sectors are not new to the region – political corruption, corporate raiding, acquisition of strategic assets, financing of political parties, and organizing of mass media campaigns; they are all part of the Russian government policy toolbox in Europe. A mixture of corruption, media propaganda, and geopolitical pressure has swayed governments in the region, including those of some NATO members, to adopt policies that are not consistent with their national security strategy. These tools have compounded typical economic levers, such as acquiring critical (energy) sector companies, expanding investment, and maintaining a dominant position on wholesale energy markets.¹³

Three key gaps can be discerned in the research on Russian economic influence in CEE: (a) Russian presence in trade and investment has been juxtaposed to that of the EU as a whole, without taking into consideration the lack of coherent union policies in many areas; (b) economic influence has been regarded in isolation from other levers of pressure; and (c) the focus of analysis has been primarily on the Russian economic strength as an underlying factor to super-power aspirations, while neglecting the effect of the two decades of integration of Russian capital in the European economic networks, which can serve as yet another component of hybrid warfare. This analysis tries to fill in these gaps by adding to the already well-explored factors disentangling Russian economic influence from the direct and indirect corporate ownership, and looking into the factors from the wider Russian influence toolbox amplifying their impact.

Figure 1.1 The driving forces of Russian economic influence in Europe

This chapter analyzes the main rationale behind the rising Russian economic influence in Europe based on three levels of analysis:

• Systemic: where Russia is regarded as a revisionist power aiming to overturn the existing European economic order by creating divisions within the EU allowing the Kremlin to reinstate its sphere of economic influence in CEE.
• State: where Russian foreign policy in Europe, at least to a degree similar to that of other great powers including the US and China, is mercantilist in nature, driven by its attempt to preserve its dominant position on energy markets, guaranteeing the stability of the domestic political and economic system in Russia.
• Individual/business: where the actions of Russian companies and Russian officials should be seen as a struggle for influence of different economic and political groups in Russia (often with direct ties to the security services) vying to capture a lucrative asset or enter a strategic European market, with the Kremlin being able to opportunistically control or use to its benefit such ownership.

The three levels of analysis try to answer the question What is the rationale behind Russia’s quest of greater influence in the region? The rest of the study is about how Russia does it with a specific focus on the economy. By sketching Russia’s different motives for its foreign policy in CEE and the Western Balkans, the analysis can then better understand the tools Russia is using to accomplish its objectives.

Reclaiming former spheres of influence

The new revanchist course taken by Russia under Putin puts a particular focus on Russia’s near abroad as not only existential for its survival,¹⁴ but also a natural part of a long-standing empire, the roots of which can be found in the Middle Ages related to the idea that Russia is the guardian not only of russkie (Russians by ethnicity), but also rossiyane (citizens of multi-ethnic Russia beyond the borders of the present-day state).¹⁵ This is also a reflection of an established perception in the Russian leadership of the current structure of the international system, in which there are different poles of power, dominated by a regional hegemon. For Russia, the current distribution of power in the international system has created strategic vacuum spots in Latin America, the Middle East, Africa and East Asia, which could be filled by a regional power. The logic also goes that to prevent the expansion of the US (and more broadly) the Western global order closer to Russia’s borders, Russia needs to carve out a safe space, a sphere of influence, where it is the sole gravitational force. Russia seems to have also adopted the regionalist perspective to international politics, in which the region becomes the primary level of analysis of conflicts and cooperation between states, and not only in the area of military or security, but more broadly encompassing different elements of interaction.¹⁶ With this aim Moscow enacted new regional power structures like the Eurasian Economic Union and the Collective Security Treaty Organization, coined after the EU and NATO.¹⁷

For obvious reasons, such a strategy could not possibly be applied to the CEE region – Russia could not hope to integrate CEE within its Eurasian framework, not to mention reviving the Soviet-era Council for Mutual Economic Assistance and the Warsaw Pact. It was more realistic for the Kremlin to press for the achievable aim of regaining a dominant position in some key sectors of the economies of its former allies, which in turn would give Russia a back-door access to European politics as well. Although it seems to be a lesser ambition when compared to the integration drive in Russia’s neighboring countries, this economic and political agenda is far from being peripheral to Russia’s revanchist agenda.

Accordingly, the Kremlin used this newly acquired economic leverage in the CEE region to take advantage of the growing discord between Western and Eastern European states to further undermine the diminished credibility of the EU and NATO. Russia has driven a wedge, for example, in the EU common position on key socio-economic issues such as migration, energy market liberalization, and trading rules with EU’s external partners or in the common response to external threats, most vividly in the case of sanction...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of figures and tables
• List of contributors
• Acknowledgments
• List of abbreviations
• Introduction
• Part I Russian influence root causes
• Part II The national specifics of Russian economic influence and state capture
• Index