RUSSIA’S TOOLKIT IN THE BALKANS
ECONOMICS, ENERGY, AND INVESTMENT
Energy is the primary economic tool of Russian influence in the region. Moscow’s proven ability to transform energy into a diplomatic tool reflects the dominant role hydrocarbons play in the Russian economy. Moscow has long hoped to reduce its reliance on Ukraine as a transit state for gas exports by utilizing Southeastern Europe instead, while making several midsize European countries dependent on Russian gas.
Russia’s most ambitious project was the South Stream gas pipeline, which was to stretch from Russia across the Black Sea into Bulgaria, Greece, Hungary, Serbia, Slovenia, and Austria. Proposed in 2007, South Stream was the hallmark of Russian energy diplomacy, but it failed—in part, because it was more of a geopolitical project than a commercial one. The pipeline was not economically viable, experienced long-delays, and ultimately was deemed in violation of the EU’s Third Energy Package, which mandated increased competition within Europe’s gas and electricity markets. These regulations hampered South Stream’s potential profitability and its ability to raise financing. After Crimea’s annexation and the imposition of sanctions on Russia made financing even harder, South Stream was shelved and was later replaced by Turkstream, another ambitious gas pipeline across the Black Sea from Russia to Turkey. This, too, is a geopolitical project, highlighting the growing ties between Ankara and Moscow. Moscow continues to tout the possibility of involving other Balkan states in Turkstream through pipeline spurs—Bulgaria and Serbia, in particular, remain receptive to this idea.
Beyond pipelines, Russian companies have had more luck penetrating energy markets with less ambitious projects in Bosnia and Herzegovina (hereafter Bosnia), Bulgaria, Romania, and Serbia, where Russian firms have gained stakes in or control of electricity generation, nuclear power projects, refineries, and gasoline sales. In 2008, Russia’s Gazprom Neft, a subsidiary of Gazprom, took a controlling stake in Serbia’s Naftna Industrija Srbije (NIS) oil and gas company, a deal worth over $450 million, and committed to invest at least $600 million more in the company. Critics at the time claimed the price was far too low and that Belgrade was paying back Moscow for Russian diplomatic support over Kosovo, which declared independence earlier that year. Russia’s willingness to block UN recognition of Kosovo and to provide diplomatic backing for Serbia in other international organizations appears to have facilitated Russian energy companies’ entry into Serbia’s energy sector, giving Moscow greater leverage.
Through its investment in NIS, Gazprom Neft gained assets elsewhere in the region, including subsidiary enterprises—gas stations, storage facilities, drilling and exploratory rights, and representative offices—in Bosnia, Bulgaria, Croatia, Hungary, and Romania. These facilities give Russian commercial entities a visible presence throughout the broader region and create affinities in provincial communities where Russian entities own—either directly or indirectly—stakes in important local employers.
Russia also expanded its hold on the Serbian energy sector with indirect investments channeled through Russian-owned companies operating in the EU—vehicles that Russian commercial entities frequently use to invest in the Balkans under the radar. Russian energy investment conveys Russian influence and helps build soft power, even if an investment is never fully realized. Russian investments in Bosnia, for example, are channeled through the Republika Srpska (RS), the Serb-dominated entity through which Moscow tries to influence Bosnia’s political trajectory. Investments there have made Russia the fifth-largest investor in Bosnia. Yet, not all of Russia’s pledged investments are implemented or profitable. Russian oligarch Rashid Sardarov pledged to invest 800 million euros in the Republika Srpska in 2011 and his Cyprus offshore holding company controls at least five energy companies in the RS, but one of his promised thermal power plants, originally scheduled to open in 2017, appears delayed indefinitely. Russia’s Zarubezhneft controls oil refineries in the Republika Srpska towns of Brod and Modria, Russia’s largest realized investment in Bosnia. Although these refineries have cost investors around $60 million since 2016, they continue to operate. This suggests that economic profit is less important than leverage over the RS. These investments keep Bosnian Serb refinery workers employed, build goodwill toward Russia, and allow the Republika Srpska leadership to highlight its partnership with Moscow.
Beyond energy, Russia is often presented in the region as the financial lifeline for the Bosnian Serb entity. Senior Russian officials and former Republika Srpska president Milorad Dodik—now the Serb member of Bosnia’s tripartite presidency—have held multiple rounds of high-profile negotiations. Russia has pledged several loans to prop up the Republika Srpska’s state budget—according to Dodik, Russia promised at least $625 million in 2014—but there is little evidence that Moscow has in fact delivered the money to Banja Luka. Dodik readily admits this. Yet, perception matters more than reality. From Moscow’s point of view, these pledges help keep Dodik in place as a lever inside Bosnia. And after the imposition of Western sanctions for pushing forward a 2016 referendum in defiance of the Bosnian Constitutional Court, Dodik has few options besides Russia.
Russia has also invested in other sectors across the region: banking, retail, real estate, and tourism. In 2012, Russia’s state-owned Sberbank purchased Volksbank International, formerly the Eastern European subsidiary of an Austrian banking group, now called “Sberbank Europe.” The acquisition gave the Russian bank a relatively large retail and commercial banking presence in Southeastern Europe, with assets in Bosnia, Croatia, the Czech Republic, Hungary, Serbia, Slovakia, and Slovenia. Sberbank’s purchase of Volksbank International also highlights how Russia’s economic presence in the Balkans is channeled indirectly either through European corporate subsidiaries or even less transparent offshore means. Sberbank’s corporate lending activities over time have transformed it into one of the largest creditors in the region. Its loans to Croatia’s Agrokorfood group, one of the largest private companies in Southeastern Europe with over 50,000 employees, are notable given Agrokor’s recent bankruptcy protection filing. As part of a debt-restructuring deal, Sberbank and Russian state-owned VTBBank are poised to gain close to a controlling stake of the new company, with Sberbank gaining direct control of several Agrokor subsidiaries. Due to Agrokor’s size and its links to Balkan food supply chains, farmers, restaurants, retail, and other fields, the restructuring deal could enhance Russian commercial clout in multiple sectors from hospitality to agriculture across several Balkan states. It also underscores Russia’s growing economic interests in Croatia—a member of both NATO and EU—which include a recent deal to supply the country with 1 billion cubic meters of gas each year. Whether Russia’s growing economic footprint will translate into broader political influence
is unclear, particularly after a Sberbank executive claimed in January 2019 that the Russian bank intends to sell its stake in the Croatian company later in the year. Croatian Prime Minister Andrej Plenkovi, however, indicated that he had no knowledge of any such plans.
Russian entities enjoy influence in several Balkan countries’ real estate and tourism markets, particularly in Montenegro and Bulgaria. Russia’s Novaya Gazeta claimed in 2012 that Russian citizens own about 40 percent of real estate in Montenegro, particularly along the Adriatic coast. Visa liberalization, which gave noncitizen landowners visa-free access to the country for up to a year, led to a spike in Russian visitors and potential investors to the country. By 2016, roughly one-third of all foreign companies registered and operating in Montenegro were Russian owned, making it the Balkan country with the greatest Russian investment. Actual Russian investment in Montenegro may even be higher, given the large presence of offshore investments. Similarly, Bulgaria has also become a top destination for Russian tourists, with the country capitalizing on its proximity to Russia, Black Sea coastline, and cultural and religious ties. Bulgaria’s tourism minister claimed during a 2018 trip to Russia that over 400,000 Russian citizens own second homes in the country, and the Bulgarian National Bank estimates that Russian investment into the Bulgarian real estate sector has exceeded 1 billion euros. Bulgaria is attractive to Russian real estate investors because of its relatively easy visa procedures for foreign owners of Bulgarian property and the eventual ability to obtain a residency permit in an EU state—an appealing option for middle-class Russians who are priced out of more expensive EU countries. In addition to the financial flows, tourism and real estate also bolster Russian soft power efforts by facilitating people-to-people connections and making key Adriatic and Black Sea resort towns dependent on Russian visitors.