Russian investments in the range of € 5.1 billion and € 7.5 billion (including foreign direct investment from offshore destinations owned by Russia indirectly) have entered the region since 2006. 

Russia has been very apt in employing strategically its economic resources to exert pressure abroad, which has been a particularly visible strategy in Southeast Europe (SEE). [1]However, Russia’s economic influence goes well beyond what the official statistics tell. In fact, looking only at the official statistical data, Russia’s presence in SEE has declined across the region since the imposition of U.S. and EU sanctions following the annexation of Crimea in 2014. Russian companies control directly or indirectly between 5 and 10% of the regional economy down from around 15% on average in 2006[2]. Russian investments of between EUR 5.1 billion and EUR 7.5 billion

 

Figure 1. Operating Revenue (Turnover) of Russian Controlled Companies as a Share of Total Operating Revenue for the Economy in Selected Balkan States (%)

Note: There is no reliable data available for Albania and North Macedonia.

Source: CSD calculations based on statistics from national and international corporate databases.

(counting indirect Russia-owned foreign direct investment from offshore destinations)[3] have entered the region since 2006. This represents less than 5% of the total FDI stock.[4]10 Similarly, the significance of the region’s bilateral trade deficit with Russia, largely driven by oil and gas imports, has declined since 2008 from 5.6% of GDP to 1.4% on the back of lower prices and more diversified trade.

Still, Russia-controlled capital has been heavily invested in targeted strategic sectors including energy, infrastructure, communications, finance and retail. In these sectors, Kremlin-related firms have acquired some of the biggest enterprises in the region including Bulgaria’s largest telecom, BTC (operating under the brand name Vivacom), Serbia’s oil and gas company NIS, and the Western Balkans’ most significant retail chain, Agrokor. Russian oil and gas companies have continuously hampered the diversification of energy supply and the liberalization of energy markets in the region. They have successfully cemented their control over the largest refineries, fuel distribution networks and gas transmission and storage facilities across the region. They have also locked in the region in costly and economically questionable large-scale projects such as the Turkish Stream gas pipeline that have been used to feed networks of domestic and Russian businesses with significant leverage over policy-makers and institutions.

 

Figure 2. Model of Russia’s Use of Turkish Stream as a Capture Tool

Source: Center for the Study of Democracy

To exploit the existing governance loopholes in the region, Russia’s strategy has been to capture powerful local brokers through providing them with government sponsored business opportunities at premium returns[5].Through the country’s security apparatus, the Kremlin under president Putin has gained an increasing grip over Russia’s public and private majors and even over less important business interests[6]. This has increased the risk of the Kremlin exploiting opportunistic or strategic business interests abroad for furthering its foreign policy goals. The lack of capacity and willingness among financial regulators and security services in Europe, and in particular in Central and Eastern Europe, to investigate Russian business interest for meddling in local markets and politics has increased the opportunities for these risks to materialize further.

A common way to implement Russia’s strategy in the region has been to use former security officials with significant influence over parties, businesses and institutions to act as intermediaries boosting Moscow’s interests where necessary. The reverse has also been happening in the region when local powerful economic groups leverage their Russia links to secure capital and political backing to acquire assets and invest in large projects. Sometimes domestic interests have vied for and received the economic and political support from Russian companies to engage in rent seeking with their national governments, exploiting the lack of oversight and rule of law. In exchange for providing their brand name or capital (fronting), Russian companies have taken nominal share in lucrative domestic businesses, and gained access to strategic assets in telecommunications, finance, and most often in energy.[7]

 

Amplifying Russian Economic Influence Through Sharp Power Tools

 

There are different mechanisms that Russia uses in order to amplify its economic influence in SEE, [8]including:

  • Leveraging structural economic vulnerabilities (most effectively in the energy sector) to achieve an outsized political influence in seemingly unrelated decision-making areas.

  • Developing state capture networks by incorporating influential power brokers through corruption or intimidation and by pulling old-time security networks’ strings.

  • Exploiting the lack of independence of regulators and the widespread deficits in the management of state-owned enterprises in the energy sector to enable lucrative deals, prevent competition on energy markets and guarantee the country’s support for Russia-led infrastructure projects.

  • Supporting both mainstream and fringe political parties often having effective channels of influence over the whole political spectrum, which is especially true for Bulgaria, Serbia and Montenegro.

  • Aligning official Russian government narratives with disinformation and propaganda channels through media capture and other forms of influence.

 

Figure 3. How the Kremlin uses state capture to achieve political influence

Source: Center for the Study of Democracy.

One of the most effective mechanisms for amplifying the state-capture-based Russian economic influence has been the activating of sharp power instruments such as media capture, cultural and religious ties and sponsoring of civil society activities. [9]On the surface, these tools can be seen as part of the soft influence toolbox as they harness a specific exchange of ideas about the role Russia plays in Europe. But underpinned by targeted economic presence in the media sector and aggressive military and geopolitical posturing, in practice they have successfully changed socio-cultural narratives in many SEE countries. Russia has actively sought to undermine societal perceptions about Western values, national policy objectives and cultural-historical realities by openly questioning facts, on the one hand, and by pushing forward narratives not grounded in evidence, on the other. The outcome of this strategy has been an increase of social tensions and political instability in SEE driven by Russia’s exploitation of existing divisions in society. The most visible fault lines on which the Kremlin has put further pressure have been the growth of ethnic nationalism in Bosnia and Herzegovina, the anti-NATO protests in Montenegro and the political turmoil in North Macedonia following the 2016 elections. Russia-supported groups have played a key role in fomenting internal conflicts with the objective of changing strategic national decisions.

One of the key channels of Russian sharp power in SEE has been the Orthodox Church. It plays the role of a key spiritual intermediary for the spread of the Russian agenda in SEE, organizing various initiatives under a religious veil. Paradoxically, the Russian and many SEE orthodox churches have been bastions of former security services, further strengthening the Kremlin’s influence. Another channel of sharp power is the saturation of the regional media space with Russian propaganda and disinformation narratives. Russia has exploited financial problems in content provision and the low level of media freedom in SEE to push forward Kremlin favorable free content, reinforce media economic dependency through direct capital ownership or advertising flows, and foster (in)formal political links of media outlets to pro-Russian groups and interests. The lack of transparency of media ownership, combined with weakly enforced conflicts of interest and ethical provisions, has been reinforced by the dependence on large commercial advertisers in small advertisement markets as well as by the oligarchization of the media markets in SEE. [10]Russia has also secured political influence not only by directly supporting mainstream and fringe political parties alike, but also by fomenting popular discontent and exposing the vulnerabilities of the liberal democratic system of governance through the following set of enablers:

  • Civil society organizations and quasi-political parties receiving direct official or hidden financing from Russian foundations or local Russia-proxy funders, including banks.

  • Protest and pressure groups mobilized on an ad-hoc principle to sow confusion and push back against specific government decisions. These have often been linked to football clubs, combat sport clubs, etc., which have received support from Russian businesses.

  • Internet trolls, bloggers, talk-show hosts and creators of obscure news websites aiming to amplify certain disinformation narratives.

 

[1] Vladimirov, M. et al. 2018. Russian Economic Footprint in the Western Balkans: Corruption and State Capture Risks. Sofia: Center for the Study of Democracy.

[2] The numbers indicate the share of Russia-controlled companies’ turnover in the total turnover of all companies in the economy. For a more detailed methodological description see: Vladimirov, M. et al. 2018. Russian Economic Footprint in the Western Balkans: Corruption and State Capture Risks. Sofia: Center for the Study of Democracy

[3] The actual Russian investments in the region could be much higher, though, if all Russia controlled investment flows channeled through offshore areas such as Cyprus or the use of preferred intermediate investment countries like the Netherlands, Luxembourg, and Austria, could be considered in full. These countries are among the largest foreign investors in Serbia and Bulgaria, for example. Russian final beneficial ownership of such investments cannot always be accounted for.

[4] One notable exception is Montenegro, where Russian FDI stock has reached its peak at 13% of the total and close to onethird of the country’s GDP. The Montenegrin economy is also heavily dependent on the export of tourism services to Russia, which made up 22% of GDP in 2013 before falling to 8% in 2016. On the opposite spectrum from the analyzed countries are Albania and Kosovo where Russian economic presence is marginal, although there have been some indirect channels of Russian capital influx through local and regional intermediaries.

[5] Shentov, O., Stefanov, R., and Vladimirov, M. (Eds.). 2018. The Russian Economic Grip on Central and Eastern Europe. Routledge

[6] Conley, H. A., Ruy, D., Stefanov, R., and Vladimirov, M. 2019. The Kremlin Playbook 2: The Enablers. Rowman & Littlefield

[7] Stoyanov, A., Gerganov, A., and Yalamov, T. 2019. State Capture Assessment Diagnostics. Sofia: Center for the study of Democracy; Shentov, O., Stefanov, R., and Vladimirov, M. (Eds.). 2018. The Russian Economic Grip on Central and Eastern Europe. Routledge

[8] Vladimirov, M. et al. 2018. Russian Economic Footprint in the Western Balkans: Corruption and State Capture Risks. Sofia: Center for the Study of Democracy

[9] Cardenal, J. P. et al. 2017. Sharp Power. Rising Authoritarian Influence. National Endowment for Democracy, International Forum for Democratic Studies.

[10] Filipova, R. et. al. 2018. Russian Influence in the Media Sectors of the Black Sea Countries: Tools, Narratives and Policy Options for Building Resilience. Sofia: Center for the Study of Democracy.

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