Politics

Russia’s Economic Levers of Influence in Europe

Davit Batashvili
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It is no secret that the key priority for Russia’s foreign policy is to maintain control over the post-Soviet space. This has been manifested in, inter alia, forcing Armenia to join the Customs Union; pressurizing Moldova to halt its process of European integration; adopting a hostile policy towards Ukraine and Georgia; and the project of establishing and expanding the Eurasian Union.

In conducting its aggressive policy towards post-Soviet states, Russia wants minimal opposition toward its expansion from European countries and, moreover, for Europe not to develop a common position as a whole. In this respect, Russia views not only the position of the larger European countries as important, but also the stances taken by the smaller countries, almost all of which are member states of the European Union (EU) capable of influencing Europe’s attitude towards the politics of Russia to a greater or lesser extent.

To achieve this goal, Russia exploits economic levers. Apart from Europe’s dependence on Russian natural gas, other important levers include the purchase of shares in European companies by Kremlin-controlled Russian companies and the issuance of loans by Russia to European countries. Naturally, such levers do not automatically provide the Kremlin with the possibility of determining the foreign policy of this or that country and, in the case of European states, the Kremlin has no possibility to achieve such a result. Yet another lever that Russia actively applies is information warfare, though this is not always sufficient. Economic “expansion,” however, gives the Kremlin an additional chance to somewhat soften the stance of certain European countries towards Russia’s aggressive and unfair actions in its neighborhood.

At the same time, Russia has the opportunity to gain larger economic influence in small and, in certain cases, poor Eastern European countries, which is something that it is less likely to achieve with Western European countries.

Russia applies economic levers against post-Soviet countries too. There are many such examples: the purchase of 100 percent of the shares of the Belarusian energy company Beltransgaz by the Russian Gazprom company in November 2011, as a result of which Russia took over the pipelines of the country; the purchase of 100 percent of the shares of Armenia’s natural gas distribution company in January 2014; the Kremlin-established joint stock company Russian Railways taking control over the Armenian railway; the financial support given to Tajikistan, et cetera. Yet another important example of such politics is the agreement signed between Vladimir Putin and Viktor Yanukovych on 17 December 2013, under which Russia pledged a loan of 15 billion USD to Ukraine and a substantial decrease in the price of natural gas. It is abundantly clear that this agreement is linked to Yanukovych’s rejection of Ukraine’s European integration – a decision that triggered the grave ongoing crisis in the country. The dependence of Belarus, Moldova, Armenia, Lithuania and Latvia on Russian natural gas is, however, a separate issue; the topic of this article is Russia’s economic leverage on Europe. Various examples of such levers are provided below.

Austria: Russian energy giant Gazprom has control over several gas trading and marketing companies. In February 2012, the Russian Sberbank purchased 100 percent of the shares of the Austrian VBI bank, which included VBI’s branches in Bosnia, Serbia, Slovenia and Croatia. Russia is a key supplier of natural gas to Austria.

Apart from Europe’s dependence on Russian natural gas, other important levers include the purchase of shares in European companies by Kremlin-controlled Russian companies and the issuance of loans by Russia to European countries.

Bulgaria: Gazprom controls the natural gas trading and transportation company Topenergo and the natural gas distribution company Overgas. In terms of gas supply, Bulgaria totally depends on Russia.

The financial system of Cyprus is under huge Russian influence. This country is a key offshore destination for Russians. The scale of this phenomenon is so huge that, according to official data for the period 2005 to 2011, Cyprus was third placed country in terms of the amount of foreign direct investments made in Russia – a result of the flow of Russian money to this country and back to Russia again. In general, Cyprus has a long history of relations with the Kremlin. One of most recent manifestations of this came in January 2014 with Cyprus allowing Russian military forces to use a military airbase near Paphos as well as the port of Limassol.

Poland largely depends on the supply of energy resources from Russia, though it has been taking steps to change this situation by building a liquid gas terminal and developing a shale gas extraction project.

Serbia: in January 2013, Russia issued a five-year loan of 800 million USD to the Serbian transportation system, primarily for railway modernization. In April of the same year, Russia extended a 500 million USD loan for financing Serbia’s budget deficit, of which 300 million USD was given at once. In November 2012, Russia and Serbia made an agreement on the production of motor cars with the aim of their further export. Moreover, Gazprom controls the natural gas distribution company Yugorosgaz and Serbia totally depends on the supply of natural gas from Russia.

Hungary: In May 2011, Hungary bought back its stake in the oil and gas company MOL, which was previously owned by the Russian energy company Surgutneftegaz. This led the Prime Minister of Hungary Viktor Orban to announce back then that his government had managed to place one of his country’s most important corporations “in safe hands.” It seems that more recently Orban has changed his attitude towards Russian economic influence because on 14 January 2014, he signed an agreement with Putin on Russia’s issuance of a 13.7 billion USD loan to Hungary for the renewal of a nuclear power plant. The maturity of the loan is 30 years. Russia is also the main supplier of natural gas to Hungary.

Montenegro: Russian business dominates the Montenegrin economy, whilst a large part of the real estate in the country is owned by Russian citizens. Montenegro also depends on Russia for the supply of natural gas.

The Czech Republic: Gazprom controls the gas distribution company Vemex. In September 2011, Gazprom purchased 51 percent of shares in the Czech company RSP Energy – one of the companies supplying electricity and gas to Czech customers. The Czech Republic is mainly supplied with natural gas from Russia.

In addition, Russia is the main gas supplier to Turkey, Macedonia, Greece, Slovakia, Slovenia, Finland and a significant supplier to Germany, Italy, Romania and Croatia.

The significance of Russian natural gas may decrease in the future alongside the development of alternative ways of supplying Europe, the transportation of liquid gas and shale gas extraction technologies. But so long as Russia holds its energy resources as a trump card, it will try to use this to the maximum extent. In a medium-term perspective, in the event of the South Stream pipeline project being implemented, the dependence of Europe on Russian gas may actually increase. According to the plan, this pipeline will run though the territories of Bulgaria, Hungary, Slovenia and Austria.

That Russia’s foreign policy and financial operations are closely interlinked with the interests of the Kremlin is clear for everyone. A good example of this is the case with Iceland in 2008. Due to the global financial crisis of the time, Iceland was on the verge of financial collapse. In the autumn of that year, Iceland started negotiations with Russia about taking out a 4 billion USD loan. As it later transpired by means of WikiLeaks, a segment of US diplomats were concerned about the possible implications of Iceland accepting a loan from Russia. They were worried that the loan would give Moscow leverage to use the former US air base at Keflavik and might give Russia access to Iceland’s gas and oil fields. The Russia-Iceland negotiations ultimately failed and Iceland managed to obtain financial assistance from other sources.

Yet another example is the rumors about Gazprom’s intention to take over the British natural gas and electricity supply company Centrica in 2006. That information caused an uproar in the British media, with the majority of them voicing protest against such a plan.

Moscow also exploits other forms of economic activity to secure support for its political interests – for example, the arms trade. Interesting illustration of this fact can be seen in the list of those countries that have, in recent years, voted against the annual UN resolutions on the issue of the return of refugees to the occupied territories of Georgia. The countries on that list, such as Sudan, Bolivia, India, Ecuador, Zimbabwe, Iran, Vietnam, Syria and Venezuela, have no links to Abkhazia and, in most cases, no links to each other either. What these countries do have in common is the purchase of Russian military products or negotiations to that effect.

The forms of Russia’s economic activity in Europe vary and are expressed in the actions described above. At the end of the day, it is difficult to accurately assess just how effective the Russian strategy of using its economy for political aims in Europe is. The fact remains, however, that in its foreign operations, Russia extensively applies economic leverage along with its political, intelligence, military and information levers.

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