Putin’s Economic Push Revives Former Soviet Ties in East Europe

Photographer: Andrey Rudakov/Bloomberg

One of Russia’s weapons is OAO Sberbank, its largest state-controlled lender. Close

One of Russia’s weapons is OAO Sberbank, its largest state-controlled lender.

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Photographer: Andrey Rudakov/Bloomberg

One of Russia’s weapons is OAO Sberbank, its largest state-controlled lender.

A quarter of a century ago, when the communist regimes in central and eastern Europe tumbled one after another, the economically devastated Soviet Union could do nothing but watch.

The USSR fell apart, and eastern Europeans rushed to join the North Atlantic Treaty Organization and the European Union. In its former sphere of influence, instead of sending troops like it once did, Russia is now building a web of economic ties with its old satellites. Whether it’s bankrolling a Hungarian nuclear power plant or the South Stream pipeline in Bulgaria, Russian money is buying leverage in eastern Europe, Bloomberg Businessweek reports in its July 7 edition.

Some countries in the region find it increasingly counterproductive to act against Russia’s interests, even as the nation tangles with Ukraine. Hungarian, Slovak, and Czech politicians have openly opposed stricter EU sanctions against Russia, as they seek to preserve access to its energy resources and consumer market of about 140 million people.

“The Russians are playing a classic game of divide and conquer with the EU,” said Otilia Dhand, an analyst with Teneo Intelligence, a political risk adviser. “They’re making sure that the national interests of individual members have bigger weight in their decision-making than the common EU interest.”

Sberbank Loans

One of Russia’s weapons is OAO Sberbank, its largest state-controlled lender. In the past few years, with almost 12 billion euros ($16 billion) in assets, Sberbank Europe has built a presence in central Europe and throughout the Balkans. Besides expanding its branch network, it’s providing hefty loans to companies in former communist Europe.

In March, the bank agreed to lend $820 million to Agrokor d.d., a Croatian company that’s now acquiring Slovenia’s rival Mercator Poslovni Sistem. The deal will create the top food retailer in the Balkans.

Russia’s main focus is energy. Early this year it secured a presence in the industry in the EU when it agreed with Hungary to build two nuclear reactors. To finance the project, the Kremlin offered the Hungarians as much as 10 billion euros in a 30-year loan at below-market rates—conditions no western European commercial bank could match.

In June Sberbank announced it would provide a $1.2 billion credit line to Slovenske Elektrarne AS, the Slovak power company controlled by Italian utility Enel. Slovenske Elektrarne has been struggling to finish the country’s Soviet-designed Mochovce nuclear power plant.

‘Money Talks’

Enel’s Chief Executive Officer, Francesco Starace, says his company is considering selling its Slovak operations as part of a program to reduce debt. Russia’s state nuclear agency Rosatom is among the potential buyers, according to media reports including Slovakia’s Sme and Hospodarske Noviny newspapers. Enel declined to comment.

Russia’s policy of loans is “a concerted effort to gain economic and geopolitical influence and clout, and arguably that policy has been pretty successful,” said Timothy Ash, chief economist at Standard Bank Plc (STAN) in London. “Small countries like Hungary, Slovakia, or Serbia need foreign investment. Money talks.”

Eastern Europeans are hardly alone in looking after their own economic interests, according to Ash.

France was criticized by the U.S. and its EU counterparts in May after it decided to push ahead with the sale of two Mistral helicopter carriers to Russia. Italy and Austria have declared their support for Gazprom’s South Stream pipeline project, designed to bring natural gas to Europe while bypassing Ukraine.

Baltic Unease

This willingness to accept Russian money doesn’t sit well with Poland and the Baltic nations of Estonia, Latvia and Lithuania, the only ex-communist EU countries sharing a border with Russia. Unlike their central European peers, they want tougher sanctions against Moscow and more NATO troops in their territories.

The Czechs, Slovaks, and Hungarians say there’s no need for NATO soldiers on their soil. They stress the importance of business relations with Sberbank and other Russian companies. These nations are pursuing “opportunistic policies toward Russia during the Ukrainian crisis,” says Jiri Pehe, director of New York University in Prague and former adviser to late Czech President Vaclav Havel.

Opportunism is exactly what Russia is counting on, according to Dhand of Teneo Intelligence. That’s why it pays for Russia to build economic ties with European countries that are poorer and smaller than the rest but still have a voice in EU affairs. “For Russians, it’s about effectiveness,” she says. “They invest a billion dollars in a small country, and that country is bought. It’s a completely rational business decision.”

To contact the reporters on this story: Peter Laca in Prague at placa@bloomberg.net; Ladka Bauerova in Prague at lbauerova@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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