Russia’s Economic Grip on the Western Balkans

Russia’s Economic Grip on the Western Balkans

The Kremlin uses its influence in the region to try to divert it from Euro-Atlantic integration


The increased meddling of countries like Russia, Turkey and China in the Western Balkan politics was one of the main reasons why Bulgaria chose the region as a key priority of its Presidency of the Council of the EU. The European Commission then used the same argument to convince the skeptical public opinion, wary of the previous EU enlargement rounds, of the need of new strategy for the Western Balkans. Without any doubt, Russia is the player that has the strongest influence in the region. Even though it is not a big investor like the EU member states, it has a much bigger soft power influence and experience in much of the region. And Moscow has proved that it can use them, interfering in Macedonia in 2017 to support a nationalistic government defiant to the EU, or allegedly orchestrating a failed coup d'etat in Montenegro in 2015.

This article is an excerpt from a longer study, Assessing Russia's Economic Footprint in the Western Balkans, in which the authors attempt to weigh up Moscow's economic influence in Serbia, Montenegro, Macedonia and Bosnia and Herzegovina. The assessments were developed by the Center for the Study of Democracy (CSD), a Sofia-based European think-tank, together with experts from the Western Balkans. The assessments build upon CSD's previous work, The Kremlin Playbook, which analyzed Russia's influence in Central and Eastern Europe.

The Western Balkans have become one of the regions, in which Russia, among others, has increasingly sought to (re)assert its presence in the past decade. Thus far, Russia has not succeeded to divert the countries from their chosen course of Euro-Atlantic integration towards market economy and democratic transition. However, Russia has tried to take advantage of the economic and governance vulnerabilities of the countries in the region allowing for the penetration of capital from authoritarian states and democratic backsliding.

The Russian economic footprint in the four assessed countries has noticeably expanded in absolute numbers between 2006 and 2016. Between four and five billion euro have been invested directly or indirectly by Russia in the 10-year period. Russia has grown from a peripheral economic power to a significant player in the region. In terms of share of the economy, the Russian presence has remained more or less stagnant amid the continuing moderate growth of the four economies. In some countries, Russia's economic footprint has shrunk in the wake of economic recession and international sanctions following Moscow's annexation of Crimea. Yet, in others, it has deepened and has even amplified rising political and soft power, including over media.

The Russian corporate footprint or the share of Russian companies' revenues of the four economies' total turnover hovers between as low as 1.5 percent in Macedonia to as high as 13 percent in Serbia. Russia's economic presence is highly concentrated in strategic sectors such as energy, banking, mining and real estate. Although it has been most significant and most diversified in Serbia, until Oleg Deripaska's 2013 withdrawal from the KAP aluminum plant in Montenegro close to one-third of that country's economy was under the direct and indirect control of Russian firms. Even today, Russian FDI stock in Montenegro is close to 30 percent of the country's GDP. In Bosnia and Herzegovina, Russian FDI is concentrated in Republika Srpska, where in 2014 - according to the latest available data - Russia-owned companies controlled 39 percent of the total corporate turnover in the hands of foreign companies.

The indirect footprint of Russian companies generally goes through several channels, including 1) the dependence of local companies on imports of Russian raw materials such as natural gas; 2) debts accumulated for gas supply; and 3) the dependence of domestic companies on exports to Russia or loans provided by Russia-controlled banks, for example the subsidiaries of Croatia's Agrokor.

An overreliance on Russian energy imports, coupled with an expansion of Russian capital, has made the governments of the Western Balkans particularly susceptible to pressures on strategic decisions related to not only energy market diversification and liberalization, but also Russian sanctions and NATO and/or EU integration.

Russian state-owned and private energy companies dominate the region's oil and gas sectors. These firms have gained influence through a series of non-transparent privatization deals for lucrative assets, such as the Serbian companies NIS and Beopetrol, the Brod refinery in Bosnia and Herzegovina, and Skopje heating company in Macedonia. These countries remain almost entirely dependent on supplies of Russian gas, allowing Gazprom to charge some of the highest prices for gas in Europe.

Russian companies have also taken advantage of the closed nature of the regional oil and gas markets to solidify their dominant position, successfully exploiting governance deficits, such as delays in market liberalization, a reliance on intermediaries for wholesale supplies of gas, and an unwillingness to advance diversification projects. Furthermore, Russia has locked regional governments into costly energy projects, such as the South Stream pipeline, overwhelming poorly resourced regional governments' administrations, and exposing the Western Balkan nations to fiscal risks.

Non-transparent privatization deals, in which asset valuations did not stem from objective economic assessments, have enabled Russian businesses to expand their economic presence in a number of key industries to the detriment of the host countries. Too often, these companies have received preferential treatment, including tax regimes and energy subsidies, but rarely complied with the terms of their privatization agreements, leading to losses for taxpayers and state budgets alike.

To exploit these governance gaps, Russia has captured local power brokers by offering government-sponsored business opportunities at premium returns. The case of the management of Srbijagas and the associated gas selling Russian-Serbian intermediaries is a stark example. These intermediaries in turn have benefited from further business opportunities or Russian support for their political objectives. Ultimately, the concentration of power in small influential economic-political networks creates vulnerabilities that Russia can exploit to affect public and private decision-making.

Finally, to amplify the effect of its economic footprint, Russia has deployed an array of traditional soft power instruments, including through media, support for pro-Russian non-profits and political parties, as well as high-level political visits and statements. These tools have been used to leverage both current governments and opposition groups, depending on which means suit Russia's ends.

Photographer: Marko Djurica

The increased meddling of countries like Russia, Turkey and China in the Western Balkan politics was one of the main reasons why Bulgaria chose the region as a key priority of its Presidency of the Council of the EU. The European Commission then used the same argument to convince the skeptical public opinion, wary of the previous EU enlargement rounds, of the need of new strategy for the Western Balkans. Without any doubt, Russia is the player that has the strongest influence in the region. Even though it is not a big investor like the EU member states, it has a much bigger soft power influence and experience in much of the region. And Moscow has proved that it can use them, interfering in Macedonia in 2017 to support a nationalistic government defiant to the EU, or allegedly orchestrating a failed coup d'etat in Montenegro in 2015.

This article is an excerpt from a longer study, Assessing Russia's Economic Footprint in the Western Balkans, in which the authors attempt to weigh up Moscow's economic influence in Serbia, Montenegro, Macedonia and Bosnia and Herzegovina. The assessments were developed by the Center for the Study of Democracy (CSD), a Sofia-based European think-tank, together with experts from the Western Balkans. The assessments build upon CSD's previous work, The Kremlin Playbook, which analyzed Russia's influence in Central and Eastern Europe.

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