115th CONGRESS Printed for the use of the 

2nd Session Commission on Security and Cooperation in Europe

Foreign Meddling in the Western 

Balkans: Guarding Against

Economic Vulnerabilities

JANUARY 30, 2018

Briefing of the 

Commission on Security and Cooperation in Europe

Washington: 2018


CSCESeal.EPS
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Commission on Security and Cooperation in Europe 

234 Ford House Office Building 

Washington, DC 20515

202–225–1901

csce@mail.house.gov 

http://www.csce.gov 

@HelsinkiComm

Legislative Branch Commissioners

HOUSE 

CHRISTOPHER H. SMITH, NEW JERSEY

Co-Chairman 

ALCEE L. HASTINGS, FLORIDA

ROBERT B. ADERHOLT, ALABAMA

MICHAEL C. BURGESS, TEXAS

STEVE COHEN, TENNESSEE

RICHARD HUDSON, NORTH CAROLINA

RANDY HULTGREN, ILLINOIS

SHEILA JACKSON LEE, TEXAS

GWEN MOORE, WISCONSIN

SENATE 

ROGER WICKER, MISSISSIPPI, 

Chairman 

BENJAMIN L. CARDIN. MARYLAND

JOHN BOOZMAN, ARKANSAS

CORY GARDNER, COLORADO

MARCO RUBIO, FLORIDA

JEANNE SHAHEEN, NEW HAMPSHIRE

THOM TILLIS, NORTH CAROLINA

TOM UDALL, NEW MEXICO

SHELDON WHITEHOUSE, RHODE ISLAND

Executive Branch Commissioners

DEPARTMENT OF STATE

DEPARTMENT OF DEFENSE

DEPARTMENT OF COMMERCE

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ABOUT THE ORGANIZATION FOR SECURITY AND COOPERATION IN EUROPE 

The Helsinki process, formally titled the Conference on Security and Cooperation in 

Europe, traces its origin to the signing of the Helsinki Final Act in Finland on August 

1, 1975, by the leaders of 33 European countries, the United States and Canada. As of 

January 1, 1995, the Helsinki process was renamed the Organization for Security and 

Cooperation in Europe (OSCE). The membership of the OSCE has expanded to 56 participating States, reflecting the breakup of the Soviet Union, Czechoslovakia, and Yugoslavia. 

The OSCE Secretariat is in Vienna, Austria, where weekly meetings of the participating States’ permanent representatives are held. In addition, specialized seminars and 

meetings are convened in various locations. Periodic consultations are held among Senior 

Officials, Ministers and Heads of State or Government. 

Although the OSCE continues to engage in standard setting in the fields of military 

security, economic and environmental cooperation, and human rights and humanitarian 

concerns, the Organization is primarily focused on initiatives designed to prevent, manage 

and resolve conflict within and among the participating States. The Organization deploys 

numerous missions and field activities located in Southeastern and Eastern Europe, the 

Caucasus, and Central Asia. The website of the OSCE is: <www.osce.org>. 

ABOUT THE COMMISSION ON SECURITY AND COOPERATION IN EUROPE 

The Commission on Security and Cooperation in Europe, also known as the Helsinki 

Commission, is a U.S. Government agency created in 1976 to monitor and encourage 

compliance by the participating States with their OSCE commitments, with a particular 

emphasis on human rights. 

The Commission consists of nine members from the United States Senate, nine members from the House of Representatives, and one member each from the Departments of 

State, Defense and Commerce. The positions of Chair and Co-Chair rotate between the 

Senate and House every two years, when a new Congress convenes. A professional staff 

assists the Commissioners in their work. 

In fulfilling its mandate, the Commission gathers and disseminates relevant information to the U.S. Congress and the public by convening hearings, issuing reports that 

reflect the views of Members of the Commission and/or its staff, and providing details 

about the activities of the Helsinki process and developments in OSCE participating 

States. 

The Commission also contributes to the formulation and execution of U.S. policy 

regarding the OSCE, including through Member and staff participation on U.S. Delegations to OSCE meetings. Members of the Commission have regular contact with 

parliamentarians, government officials, representatives of non-governmental organizations, and private individuals from participating States. The website of the Commission 

is: <www.csce.gov>. 

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Foreign Meddling in the Western Balkans:

Guarding Against Economic Vulnerabilities

JANUARY 30, 2018

Page 

PARTICIPANTS 

Robert Hand, Senior Policy Advisor, Commission for Security and Cooperation in Europe .... 1

Andrew Wilson, Managing Director, Center for International Private Enterprise ................... 3

Ruslan Stefanov, Director, Bulgarian Center for Study of Democracy ...................................... 4

Milica Kovac ̆evic ́, President, Montenegrin Center for Democratic Transition ........................... 7

Nemanja S ̆tiplija, Founder, ‘‘European Western Balkans’’ media outlet ................................... 9

Dr. Dimitar Bechev, Research Fellow, Center for Slavic, Eurasian, and East European 

Studies, University of North Carolina-Chapel Hill .................................................................. 11

APPENDIX

Prepared Statement of Andrew Wilson ......................................................................................... 31

Prepared Statement of Ruslan Stefanov ....................................................................................... 33

Prepared Statement of Milica Kovac ̆evic ́ ...................................................................................... 36

Prepared Statement of Nemanja S ̆tiplija ...................................................................................... 38

Center for the Study of Democracy Policy Brief: Assessing Russia’s Economic Footprint in 

Macedonia .................................................................................................................................... 41

Center for the Study of Democracy Policy Brief: Assessing Russia’s Economic Footprint in 

Serbia ........................................................................................................................................... 57

Center for the Study of Democracy Policy Brief: Assessing Russia’s Economic Footprint in 

Bosnia and Herzegovina ............................................................................................................. 78

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Foreign Meddling in the Western Balkans:

Guarding Against Economic Vulnerabilities 

January 30, 2018

Commission on Security and Cooperation in Europe

Washington, DC

The briefing was held at 9:59 a.m. in Room 385, Dirksen Senate Office Building, 

Washington, DC, Robert Hand, Senior Policy Advisor, Commission for Security and 

Cooperation in Europe, presiding. 

Panelists present: Robert Hand, Senior Policy Advisor, Commission for Security and 

Cooperation in Europe; Andrew Wilson, Managing Director, Center for International Private Enterprise; Ruslan Stefanov, Director, Bulgarian Center for Study of Democracy; 

Milica Kovac ̆evic ́, President, Montenegrin Center for Democratic Transition; Nemanja 

S ̆tiplija, Founder, ‘‘European Western Balkans’’ media outlet; and Dr. Dimitar Bechev, 

Research Fellow, Center for Slavic, Eurasian, and East European Studies, University of 

North Carolina-Chapel Hill.

Mr. HAND. It’s getting quiet, so I think we can start. Usually, I have to step in and 

get everyone to tone down, but now everybody’s anxious to go. Maybe that’s a sign in the 

interest in the subject matter today. 

So let us start. And as moderator, let me welcome the panelists, as well as the 

audience, to today’s briefing. My name is Robert Hand. I’m a policy advisor at the U.S. 

Helsinki Commission. Our chairman is Senator Roger Wicker of Mississippi, and our cochairman is Representative Christopher Smith of New Jersey. 

This is the third commission briefing on the Western Balkans in three months. That 

fact underlines the ongoing concern of the Helsinki Commission for this region in Europe, 

despite many other issues which require so much attention. 

Today’s turnout for this briefing I think demonstrates that the commission is not 

alone in its concern for the Western Balkans. Let me, nevertheless, start by stressing why 

we are having this briefing, and why the stability of the Western Balkans and the democratic development and economic prosperity of the countries of the region remain so 

important to us, two decades or so after devastating conflict. 

First, we have already devoted significant effort—political, economic, even military—

not just to stopping those conflicts, supporting recovery, and preventing new conflicts. It 

only makes sense that we should complete this job. It’s a commonsense argument and 

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probably means greater commitment than we see now from United States as well as the 

European Union, but nothing near what was required in the past. 

Second, these countries are next in line to each other as future aspirants to join the 

European Union. And most are similarly in line to join the NATO alliance. Indeed, some 

have already done so in the region. They each can make a small contribution, but collectively far from an insignificant contribution to both collective security and common prosperity in Europe. Being next in line, but still outside the safety of the club—especially 

at this time of uncertainty, conflict, and confrontation in Europe—may be the toughest 

place to be, accentuating the internal and external threats these countries face. As the 

foreign minister of Macedonia, Nikola Dimitrov, recently said on the matter: ‘‘Those on 

the inside tend to forget how cold it is outside.’’

Expectation can encourage reform, but reform generates expectation as well. If not 

met, internal reversals are sure to come. By external threats, or outside sources of instability, I mean those that seek to divert the Western Balkans from what otherwise seems 

to be a natural and genuinely popular European path, and also to seek opportunities for 

mischief that is far from innocent. Russia comes immediately to mind in this regard, and 

the attempted coup in Montenegro in 2016 as the country was finalizing its NATO bid 

is only the most blatant of many manifestations of these outside sources of instability. 

Moscow’s attempts to steer public opinion in Serbia away from Europe and to encourage 

recalcitrance in the Republika Srpska entity of Bosnia-Herzegovina have also received our 

attention. The Kremlin also took interest in Macedonia during the course of the political 

crisis there. 

This, of course, makes the Western Balkans more important, as the countries there 

are a stage on which a much bigger issue is playing itself out—namely, Moscow’s aggressive behavior throughout Europe. As one expert witness told the Helsinki Commission last 

year at a hearing on Russia’s threat to European security, the Western Balkans are in 

Russian crosshairs. We continue to read about Moscow exerting a malign influence in 

Europe and elsewhere. And considerable attention has been given to that issue here in 

the U.S. Congress. Turkey, various countries in the Middle East, and now China have also 

developed a presence in the Balkans, with some reason for concern regarding the implications for stability. 

Our briefing today focuses on foreign meddling and, more specifically, how the 

absence of good governance and strong adherence to the rule of law give outside actors 

an opportunity to develop an economic footprint that can be used for political purposes. 

The four countries of primary focus this morning are Bosnia and Herzegovina, Macedonia, 

Montenegro, and Serbia. Of course, there may be some commonalities throughout the 

region, including countries not the focus of this morning’s briefing. And we may comment 

on those as well. 

And although the focus is primarily on Russia’s economic footprint in these countries, 

the reform shortcomings that create vulnerabilities are of concern to the extent that they 

also slow the process of European integration and, let’s remember, rob the citizens of the 

countries of economic opportunity and of increasing prosperity. 

This is, of course, yet another reason why the Balkans are so important, beyond the 

concern about foreign meddling. The people of the region have already been traumatized 

so much by conflict that they deserve better from their own political leaders. Indeed, their 

political leaders have committed themselves in the OSCE to develop good governance, to 

adhere to the rule of law, to operate with greater transparency, and to combat corruption. 

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At the 2012 meeting of foreign ministers in Dublin, Ireland, for example, the OSCE 

adopted a declaration on strengthening good governance and combating corruption, money 

laundering, and financing of terrorism, which best expresses the commitment of all OSCE 

States in this regard. 

We have an excellent panel today to discuss this important topic. You have their biographies. They were handed out to you as you signed in this morning, so I won’t detail 

them here. Let’s just start by thanking them, again, for coming. And let me particularly 

thank the Center for International Private Enterprise (CIPE) for taking its leadership role 

in working with partners in the region on this issue. 

And so let me start with Andrew Wilson, the managing director of CIPE, to introduce 

the issue. Let me say how much I value CIPE’s work. We deal a lot with other organizations dealing in the political affairs. But just as we know that we need free and fair elections in these countries, we also need to have free and fair markets, and that’s where 

CIPE plays such an important role. 

And then after we hear from Andrew, we will listen to some of the partners in CIPE 

who are visiting Washington, coming in from their home countries. And then we’ll finalize 

with Dr. Dimitar Bechev, who will put it all together and give some comments and analysis on the region. 

So with that, let me turn it over to Andrew and we’ll start the presentation. When 

everybody’s done, we’ll then go to a question and answer period. 

Andrew. 

Mr. WILSON. Thank you, Bob, and thank you for the kind introduction. I’d like to 

thank Bob and the Helsinki Commission for his leadership on this important initiative, 

and welcoming the participants and attendees of this timely briefing. 

Over the past decade, there has been an increase in the flow of funds from a number 

of non-democratic countries into emerging democracies. While in many cases, this might 

represent wholly legitimate investment, in other cases there are signs that governments 

have specifically sought to direct this capital to achieve purposes other than purely economic. At CIPE, we define this issue as corrosive capital, equity, debt, and aid that takes 

both advantage of and exacerbates weak governance in emerging democracies to the detriment of their democratic and market development, as well as to influence their geopolitical orientation. Corrosive capital can distort policymakers’ incentives and decisionmaking, privileging the political influence of foreign governments over local citizens’ 

voices. 

CIPE welcomes the partnership with the Helsinki Commission and the opportunity 

to present today these knowledgeable panelists who will be speaking on how to respond 

to this challenge in the Balkans in particular. As we know, in the Balkans, despite the 

passage of nearly two decades since the end of armed conflict, democratic transitions 

remain woefully incomplete. Against that backdrop, in recent years external actors have 

reasserted their role, diverting the Balkans from a trajectory of Euro-Atlantic integration. 

As the panelists will explain, corrosive capital has emerged as a key element of that 

approach, posing a major challenge for governments, business communities, and civil societies across the region. 

In response, in 2017, CIPE embarked on a unique project in pioneering a new comprehensive methodology to analyze, first, how what we call governance gaps, such as loopholes in anticorruption policies, nontransparent procurement policies, and a lack of strong 

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competition policies create in the Balkans opportunities for the inflow of corrosive capital. 

And, second, how that capital widens those governance gaps and potentially undermines 

the consolidation of democracy in the region. A network of CIPE partners represented by 

the panelists today from across the region—Bulgaria, Montenegro, Serbia, Macedonia, and 

Bosnia and Herzegovina—have identified specific governance gaps and, in particular, have 

examined the extent and impact of Russia’s economic footprint in the region. 

Now, we recognize that in recent years the countries of the Balkans have made 

important progress. But as the panelists will discuss, judicial and executive institutions 

are still not sufficiently independent, efficient, or accountable. Implementation and 

enforcement of legislation is often weak and inconsistent. And further efforts are needed 

to tackle corruption and to make public budgeting, procurement, and privatization more 

transparent. We’re honored that the Helsinki Commission has invited CIPE’s partners 

here to inform a U.S. audience about these issues, just as they are raising awareness in 

their own countries. In addition, working with local business and civil society leaders, 

they are seeking to create greater transparency about foreign investment in the Balkans, 

and to advocate with policymakers to close those identified governance gaps. 

By so doing, they aim to ensure that local businesses can compete on an equal footing 

and that all investors enjoy a level playing field. This, in turn, will make markets and 

democracies in the Balkans more resilient to potential untoward external influence and 

help ensure inclusive economic growth. This effort can contribute to democratizing economic opportunity in the Balkans, and countering the worrying spread of a perception in 

the region that democracy and markets have failed average citizens. 

We note that the European Commission plans to adopt a new strategy to boost democratic transition and economic reforms in the region. By tackling the challenge of corrosive 

capital in the Balkans, CIPE is also developing tools and approaches that can benefit 

other emerging democracies worldwide, including across Asia, Latin America, and Africa. 

We look forward to future opportunities to share the results of that work with you as well. 

Finally, I’d like to close by thanking the National Endowment for Democracy for its 

support of the CIPE program that engages today’s panelists. Of course, such projects are, 

in turn, made possible thanks to the critical commitment of the U.S. Congress to funding 

the NED. 

Thank you. 

Mr. HAND. Thank you, Andrew. Our next speaker is Ruslan Stefanov. He is the 

director of the economic program at the Sofia-based Center for the Study of Democracy 

(CSD). 

Ruslan. 

Mr. STEFANOV. Thank you. Let me start by thanking the Center for International Private Enterprise and specifically its executive director Andrew Wilson for the partnership 

of the past more than 25 years, the National Endowment for Democracy for its support, 

and, of course, the Helsinki Commission for taking the time and leadership to examine 

the issues that are key to the security and prosperity of the Balkans region. 

The Western Balkans have become one of the regions in which Russia, among others, 

has increasingly sought to assert its presence in the past decade. Thus far, the region has 

remained on its chosen course on Euro-Atlantic integration toward market economy and 

transition. But the countries from the region need to not just recognize their vulnerability, 

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but know their level of the vulnerability and work to close existing governance gaps which 

allow the penetration of corrosive capital and democratic backsliding. 

To improve the understanding of the interplay of existing governance gaps and corrosive capital from non-democratic countries, we at the Center for Study of Democracy, 

together with CIPE and experts from the Western Balkans that you will hear from, have 

embarked on an assessment of Russia’s economic footprint in Serbia, Montenegro, Macedonia, and Bosnia and Herzegovina. The assessment builds on previous work of CSD that 

you might have seen, the Kremlin Playbook, which analyzed Russia’s influence in Central 

and Eastern Europe. 

The Russian economic footprint in the four assessed countries has notably expanded 

in absolute numbers over the past decade. Russia has grown from a peripheral economic 

power to a significant player in the region. In some countries, though, Russia’s economic 

footprint in the Western Balkans has shrunk in the wake of economic recession, international sanctions following its annexation of Crimea. Yet, in others, we’ve seen that it 

has deepened and has even amplified rising political and soft power, including over media. 

The Russian corporate footprint, or the share of Russian company revenues of the 

four economies’ total turnover hovers between 61⁄2 and 10 percent. 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, notably, until 

the withdrawal of Deripaska in 2013 from the KAP aluminum plant in Montenegro, close 

to one-third of that country’s—Montenegro’s—economy was under the direct or indirect 

control of Russian firms. Even today, Russian FoFDI stock in Montenegro is close to 30 

percent of the country’s GDP. 

The Russian footprint is least pronounced in Macedonia, while Russian FDI tops out 

at only 1 percent of GDP. In Bosnia and Herzegovina and Serbia, the footprint is about 

equal. Russia exerts direct and indirect control over about 10 percent of the economy in 

Serbia, primarily in energy and banking. In Bosnia and Herzegovina, Russian foreign 

direct investment (FDI) is concentrated in the Republika Srpska, where in 2014—which 

is 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 general goes through several channels 

including, number one, the dependence of local companies on imports of Russian raw 

materials, such as, most notably, natural gas. Debts—number two—debts accumulated for 

gas supply. Number three, the dependence of domestic companies on exports to Russia, 

or loans provided by Russian-controlled banks. For example, the subsidiary of Agrokor, 

which drama we have seen play out in the past year. An over-reliance 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, 

notably, NATO and 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 nontransparent 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. 

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Russian companies have also taken advantage of the closed nature of regional 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 huge fiscal risks. 

Nontransparent privatization, 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 subsides, 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. 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 and 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 

nonprofits and political parties, as well as high-level political visit and statements. These 

tools have been used to leverage both current governments and opposition groups 

depending on which means suits Russians best. 

Now, based on the findings of our study we have made a number of targeted policy 

recommendations that you could find in the papers outside or also the website of CIPE 

and CSD.bg. But let me just sort out some of the most important one. First, there is a 

strong need for diversifying foreign direct investment away from an over-reliance on corrosive capital from non-democratic countries. The corporate governance of state-owned 

energy companies should be depoliticized and improved because otherwise they can be 

decapitalized in long term deals granting preferential treatment to clients that enjoy special status from the government. All infrastructure projects should be in compliance with 

the high standards for transparency and competitive tendering. Independent institutions 

for privatization and follow-up monitoring should be strengthened by the appointment by 

parliament of staff free from any influence. 

Similarly, countries should enhance the investigative capacities of their financial 

intelligence to institutions, tax administration, and anti-money laundering institutions to 

identify the ultimate beneficial ownership of foreign investors, in order to prevent tax evasion and money laundering. The EU and its member states, as well as the U.S., should 

substantially enhance their assistance mechanisms, particularly to counter corruption to 

help the most vulnerable countries in the region build greater resilience to corrosive capital inflows. 

[Background buzzer.] Is that for me to end? [Laughter.] 

The U.S. and EU should work together on joint coalition building mechanisms in the 

Western Balkans to support the capacity building of civil society and independent media 

to monitor and expose corruption, state capture, and external risks. 

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And finally, something we’ve been doing with our partner from CIPE for the past 25 

years, private sector in the region, through it support organizations, should engage in a 

constructive dialogue with the national government on shaping a corruption-free business 

environment and open, competitive markets in line with the best international standards, 

such as the laws developed by the Organization of Economic Cooperation and Development and/or the European Union. And with that, I’d like to thank you. 

Mr. HAND. Thank you. And, no, that buzzer was not a response to your comments. 

Since we’re here in the Congress, we do have these bells or buzzers that go off when one 

or the other chambers goes into session, when there’s votes, et cetera. And so if it happens 

again, just ignore it. I should have mentioned it earlier to our visitors. But it’s just the 

way that we keep our Members of Congress aware of what is happening on the floor and 

when they need to go for votes, et cetera. 

Our next speaker is Milica Kovac ̆evic ́. Milica is president of the Center for Democratic Transition in Montenegro. Welcome. We look forward to your statement. 

Ms. KOVAC ̆ EVIC ́. Thank you. And thank you very much for having us here to share 

our thoughts on the challenges facing the Western Balkans and our countries. 

I’d like to start with a historical reference that I find really illustrative. During the 

Cold War, back in 1956, Yugoslav ambassador to Moscow, Montenegrin Veljko Micunovic, 

wrote to Yugoslav President Tito that history of our economic relations with Russia is not 

less dramatic than the history of our political relations. For Russia today, as in the past, 

every trade is a direct means of politics, he wrote. Even today, this sentence continues 

to remain valid, and the playbook for our region was always the same. 

In the last decade, we saw a significant level of economic engagement by Russian 

companies and individuals in Montenegro. And in addition to economic relationships, 

Montenegro and Russia used to have sparkling political ties. Political relations, however, 

deteriorated since 2013, as Montenegro moved forward with its NATO integration. And 

so far, by the data that we have, this change in the relationship has not yet affected the 

economic ties between two countries. But there have been some warnings coming from 

senior Russian officials. 

For example, in March 2017, Russian Foreign Minister Sergey Lavrov said that Montenegro has sacrificed its economic relation with Russia by joining NATO. The dependence 

of Montenegrin economy on Russian investment in real estate and in tourism still raises 

the possibility that further deterioration in bilateral relations could pose a risk to our 

economy. Ruslan already mentioned, today Russian foreign direct investment in Montenegro makes up close to a third of the country’s GDP. Russia is the single largest indirect 

investor in Montenegro, with almost $1.3 billion U.S. of cumulative investment, which is 

equal to 13 percent of all foreign direct investments to the country. A majority of this FDI 

is concentrated in the real estate and the tourism. 

The number of Russian tourists in Montenegro has consistently increased in the last 

10 years. Russian tourists, according to the official data, make around one-quarter of the 

total number of country’s visitors. And this is really important, because tourism is the key 

sector of Montenegrin economy, and the most powerful generator of economic growth. 

Today, it makes around one-fifth of Montenegrin GDP and over 54 percent of all exports. 

However, on the other side, Russia’s share of the overall Montenegrin economy 

significantly shrank in recent years from almost 30 percent of total revenue back in 2006 

to around 5.5 percent in 2015. And this is largely a result of the withdrawal of the RusVerDate 0ct 09 2002 12:29 Apr 11, 2018 Jkt 000000 PO 00000 Frm 00011 Fmt 3194 Sfmt 3194 X:\_HS\WORK\29391.TXT NINA
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sian capital from Podgorica’s aluminum plant, KAP, one of the largest companies in the 

country. Similar trends are observed in the analysis of the number of the employees 

working for the Russian-controlled entities, which fell from over 14 percent in 2007 to just 

2.3 percent in 2015. And, again, primarily because of the loss of the control of KAP. 

Based also on the experience of some other countries in the region, where some of 

the initial Russian investment in the energy sectors spilled over to a number of other economic sectors, we can now only contemplate what would have happened if the parliament 

of Montenegro hadn’t stopped the acquisition of country’s energy resources by KAP’s 

owner, Oleg Deripaska, in 2007. The government of Montenegro also rejected Russian 

request to use Montenegrin port of Bar for military purposes, despite the fact that Russia 

allegedly had a multibillion proposal, worth at least half of country’s GDP. In 2014, Montenegro also aligned with the EU sanctions following the Russian annexation of Crimea. 

Well, obviously prior to the admission to NATO, Russian Government condemned 

Montenegro’s membership aspirations, but also actively worked to prevent it, in particular 

by backing up the nationalist groups whose policy platforms are at the odds with Western 

values. Russian Deputy Foreign Minister Dmitry Rogozin went even further when he said 

that Montenegro will regret joining NATO. In parallel, the Russian media started to run 

a negative campaign aimed at preventing Russian tourists from coming to Montenegro, 

describing it as a dangerous place. 

Montenegro has accused the Russian Federation of meddling in the 2016 parliamentary elections by attempting to overthrow the government to the strongest opposition 

coalition in Montenegro, the Democratic Front. There is an ongoing court case for the coup 

attempt against some of the DF leaders for acting against the country’s constitutional 

order. The indictment also includes two Russian military intelligence officers and several 

Serbian nationals, mostly members of the right-wing organizations and groups. Furthermore, another Democratic Front leader is being charged with participation in a money 

laundering scheme during the 2016 election campaign. Allegedly the DF used funds of 

criminal origin, provided in large amounts by Russia to offshore accounts and then split 

into small installations and sent to individuals who later donated the money to the party. 

Nevertheless, Montenegro managed to resist the allegedly Russian-orchestrated use 

of both hard and soft power, joining NATO in 2017. But even NATO admission has not 

completely brought Montenegro out of the danger zone. Russian interests in the Western 

Balkans has never been to annex the region, but to keep it unstable and as far from the 

Western integration as possible. And many analysts in the region, and followers of the 

region would agree that the region’s integration in the EU will be the next target of these 

campaigns. EU integration is supported by the overwhelming majority of the citizens of 

Montenegro, and by all key political actors. 

The report that we prepared also examines the governance gaps that have been 

exploited for the intrusion of the corrosive capital, and offers recommendations how to 

close these gaps to prevent further deterioration. Addressing these gaps is essential for 

our democratic reforms, inclusive economic growth, and EU integration. In order to succeed, we remain determined to advancing the progress we made so far. And we would welcome even more international support. 

At the end, I would like to thank you, the commission, and everyone here for the 

ongoing support and commitment to the region. The West should be persistent in 

demanding real democratic progress in our countries, because it’s the key for a country’s 

stability, security, prosperity, and resilience to harmful foreign influence, both in the 

9

region and beyond its borders. Civil society in the Western Balkans looks with hope at 

the United States enhanced diplomatic engagement, and relies on your help in ensuring 

that the region remains on its Euro-Atlantic integration path. Thank you. 

Mr. HAND. Thank you very much. 

Our next speaker is Nemanja Todorovic S ̆tiplija, who’s the editor in chief of ‘‘European Western Balkans,’’ a web portal focusing on the European integration of the Western 

Balkans. 

Nemanja. 

Mr. S ̆ TIPLIJA. Thank you, Mr. Hand. Dear guests, thank you for the opportunity to 

appear before the commission today. Allow me to thank also the Center for International 

Private Enterprise, and the National Endowment for Democracy for their support and the 

opportunity to present our views here in Washington. We very much appreciate the 

interest of the Helsinki Commission in issues that are of the great importance of the stability and the future of the Western Balkans. 

Serbia is one of the key countries where Russian influence is the most obvious. Since 

2008, it has been based on two pillars. First, the issue of Kosovo. And the second, the 

Russian engagement in Serbian energy sector, which dates back to the South Stream 

construction deal, and the below-price purchase of the Serbian oil industry, shortly NIS. 

Furthermore, following particularly the global economic downturn in 2014 and 2014 

Ukrainian crisis, the Russian influence has slipped over to the key economic sectors, such 

as the financial sector and the infrastructure. The economic engagement, high-level political visits, and strengthening cultural and religious ties mutually reinforce each other. 

While most research has focused on the outright political influence, it has often disregarded the sophisticated networks in nation economics that exploit the democratic deficits in Serbia, and throughout Western Balkans. Despite the fact that South Stream was 

discredited, Russia still dominates Serbia’s oil and gas sector. Through NIS, Russia almost 

completely runs oil production, refining, and retail. Serbia imports more than 70 percent 

of crude oil consumption, and close to 65 percent of its natural gas needs from Russia. 

What’s more, Russia is the only importer of gas in Serbia, and it favors inflexible, longterm deals. 

Through those deals, it has gained the eminent influence over a state-owned wholesale gas supplier, Srbijagas, which has, as a result, accumulated debt affecting Serbia’s 

financial health. Srbijagas, the state-owned company, holds a dominant position on the 

national gas market. An intermediary, YugoRosGaz, which is owned by Gazprom, receives 

around 4 percent premium on the gas resales to Srbijagas. Besides Srbijagas, Russians 

generally do a lot of business with state-owned companies, and those with close connections to politics. 

That is why the country needs to advocate the reform on its public administration 

as soon as possible. Gas diversification is long overdue. Furthermore, steps are needed to 

tackle the restructuring and privatization of Serbia’s enterprises. Based on our analysis, 

lowering the budget deficit and reducing the high public debt level, including debt generated by companies of strategic importance, also remain a challenge. 

With regard to the private sector, Russians fully or partly opened approximately 

1,000 companies in Serbia. They control revenues of close to 5 billion euros, or 13 percent 

of the total revenue generated by the country’s economy. Russian companies are also 

almost the major employers in the country, directly employing approximately 2 percent 

10

of total labor force, and indirectly employing 5 percent. What is important is that such 

employment is concentrated in just a few industrial enterprises. 

Export to Russia has become an important aspect of the economic relationship 

between Russia and Serbia, particularly following the expansion of free trade agreement 

in 2009 and 2011. Russia’s 2014 embargo on imports of EU agriculture or food products 

has provided a boost to export in non-EU countries in the Western Balkans. Nowadays, 

Serbia’s export to Russia is highest by volume in the Southeast European region after 

Greece. 

Russian foreign direct investment remained relatively small, amounting to 4 percent 

of all FDI stocks in Serbia, according to data available from 2005 to 2016. Should we 

account also investing—following from third states, but still attributed to Russians, along 

with their reinvestment from profit, the total Russian FDI would be around $2 billion, 

or 6 percent of country GDP. 

During Serbia’s fiscal crisis, Russia further deepened its engagement with the Serbian economy by adding loans to the array of other tools deployed to promote its interests. 

Some of these loans reportedly stipulate less favorable conditions than those of the international financial institutions, and even granted preferential status to Russian stateowned contractors for the infrastructure modernization projects. 

While Russia’s presence in the finance sector is somewhat limited, borrowing loans 

from Russian banks may involve risks, as shown in recent Agrokor crisis. Relying heavily 

on bank loans, this retail has recently expanded into almost all countries of the Western 

Balkans, including Serbia. In early 2017, not only Agrokor employed more than 60,000 

people through the region, but also accumulated debt totaling around $6.4 billion, or 6 

times its equity. Sberbank, the Russian state bank, owns around 18 percent of it. Despite 

the debt, Agrokor remained relatively stable until the statement of Russian ambassador 

to Croatia sent shockwaves through the market. 

Again, in Russia’s mind, the economic engagement and other tools manually reinforce 

each other. Russia attempts to widen influence also through initiatives in the spheres of 

media, culture, church, nonprofit and academia. It provides support, including financial, 

to organizations, groups, and individuals that promote Russian interest in foreign countries. In Serbia, Russia has supported development of several media enterprises and 

information initiatives of major Russian media outlets. For example, the state-owned news 

agency Sputnik opened its regional editorial office in Belgrade in 2015. They seek to disorient the local audience by offering narratives that exploit Serbia’s weak spot and promote the Russian interests. 

To conclude, I would like to stress that all relevant actors—whether Serbian, regional 

or international—need to recognize the potential costs of the inflow of corrosive capital 

which the region is facing. They should press for democratic progress, which is the real 

key to regional security and long-term stability, inclusive growth, and countering negative 

foreign influence. Based on the analysis I conducted together with the research director 

of ISAC Fund, Dr. Igor Novakovic, and in addition to the regional report presented by 

the Center of Study of Democracy, we made country-specific recommendations. And if 

you’re interested, I can share this with you during the questions. 

Thank you so much. 

Mr. HAND. OK. Thank you. 

11

And then, last but not least, we have Dr. Dimitar Bechev, who is at the University 

of North Carolina in Chapel Hill, I believe, but also a nonresident senior fellow at the 

Atlantic Council. 

Dimitar? 

Dr. BECHEV. Thank you so much. First of all, let me extend my warmest gratitude 

to the U.S. Helsinki Commission, as well to the Center for International and Private 

Enterprise. It’s a great occasion and we need to have more of those gatherings to put the 

Balkans on the map, but also to discuss the region in—there’s some broader processes and 

events. Russia is obviously very relevant on a number of counts. 

What I’d like to do here, just to complement what Ruslan and his team across the 

region have done in terms of collecting the data and putting a lot of flesh to the discussion, is to give some general views on what Russia is doing in the region. It echoes arguments I’ve developed in a recent book I published with Yale University Press called ‘‘Rival 

Power: Russia in Southeast Europe.’’ And I have three points to make. I’ll be very brief, 

because I know you guys are itching to ask your questions to the team here. 

First point is what Russia’s strategy looks like in Southeast Europe, but perhaps 

even more broadly in Europe as a whole. And second of all, how Russian foreign policy 

squares with Russian business or corporate interests in the region and beyond. And 

finally, how Russian policies intersect with what regional elites, institutions, political 

players are up to domestically—in other words, the supply and demand. What is the 

demand for Russian policies in the region? 

First of all, a lot of people discussing Russia almost come to this easy line: Russia 

is back to the region. Well, guess what? It is not back. It has been there for a long time. 

And much of what we discuss now is a legacy of the 2000s, when Russia was resurgent. 

It was—flowed with cash because of the high oil prices. And it was on a shopping spree 

in the region. Many of those privatization deals date back to the 2000s—the Beopetrol 

sale, even NIS in Serbia, the oil industry of Serbia that Nemanja discussed, Lukoil’s 

expansion on the region. 

But back then, Russia was having a much more cooperative relationship with the EU, 

in the early 2000s, even with the U.S. So economic profits and co-opting local elites was 

much more of an overarching objective than disruption. And I’d suggest that what happened with the Ukraine crisis is that Russia has shifted gears from co-optation or 

expanding its footprint to disruption. And you see it not just in the world of business, but 

more prominently in the world of politics with the Russian-affiliated political players, civic 

actors, political movements, media playing a role. 

In the old days, Russia wouldn’t argue against EU membership, EU expansion in the 

region. Now EU, along with NATO, has become a problem and challenge. So that’s this 

shift of gears. Russia is pursuing disruption. The logic in Moscow, if I allow myself to 

think like Mr. Putin or his close entourage think, is we are under siege. The West is 

encroaching our near-abroad in Moldova, in Georgia, and Ukraine. Well, guess what? We 

can do the same in the Balkans, which is the vulnerable part of the West, an enclave that 

is not subsumed into NATO and the EU, and where we have traditionally our economic 

and political allies. 

It’s a tit-for-tat strategy. And as long as you maintain pressure on the Western alliance, you can have a bargaining chip in the greater dynamic between Russia and the 

12

Western actors—the U.S., but also European allies. So I think that’s my rough version 

of what Russian foreign policy is about, maintaining pressure. 

Now, Russian business. Many of those people and economic agents, they’re after 

profits. They’re not necessarily proxies of the Russian regime. They came to the region 

because there are opportunities to make cash and to get assets, very often in 

untransparent ways. Some of them parked money because—in jurisdictions like Montenegro, like Cyprus, like Bulgaria, you could have the right conditions. Nobody would be 

asking questions about the origins of your money. And you could launder money. You 

have lots of people close to the regime, but also post-Soviet elites from other places like 

Ukraine, Armenia, and so forth, buying property, investing in Southeast Europe, in the 

Western Balkans. 

But—there is always a but—the lines between foreign policy, the political establishment, and the business establishment are blurry in Russia. In other words, if you are the 

owner of, say, Lukoil, and you are summoned to the Kremlin, and you are reminded of 

how much your business depends on the good graces of the political leadership—of Putin 

and the people close to him—you will be giving back services. So all those business entities, although they might be primarily motivated by economic profit and gain, are potentially exposed to pressure from the state, and can very easily turn into elements of Russian foreign policy. 

But it’s constructive or disruptive, as I believe is the case right now. The formal—

any formal in Russia, this boundary’s always blurry. Many of the big political leaders are 

also prominent business people, and so on and so forth. So this ambiguity plays, and is 

very much present, in Russia policy in the Balkans. And I think that’s reflected in the 

reports with very interesting detail. 

Finally, supply and demand. We always tend to see Russia involved. But one thing 

that’s really valuable in the research and the projects, and also—and I call it in my 

book—is very often we have to look at what are the local conditions that make Russian 

interference, Russian meddling possible? And very often in the sphere of economic governance you see lots of sectors that have been poorly managed, exposed to high-level corruption, political meddling. That creates the right conditions for Russia to throw its weight 

around. 

And Serbia, being a very prominent country in the Western Balkans, provides the 

best illustration to me. Nemanja gave you some observations about Srbijagas. Well, 

Srbijagas has been a political fiefdom since the times of Milosevic, with different parties 

shifting. There is the intermediary company that charges some premium. And I could 

argue that this is a slush fund—and this is not a scheme that is not seen elsewhere in 

the post-Soviet space, but also in Eastern Europe—you could very well hypothesize that 

some of this money finds its way back into party coffers and buys political influence. 

But the real root cause of the problem is why you have state monopoly, why gas is 

overpriced, why there’s no competition or transparency in the gas sector. And you can 

envision a scenario—and I’m just moving here to the last bit of my remarks which is the 

political recommendations, where the Serbian energy sector and the natural gas is much 

more competitive, we have rival suppliers, where the final—the consumers and households 

and industries are given a choice. And actually, gasification of Serbia, which doesn’t consume that much in absolute terms, might be a good thing, because it also will lead to 

lower carbon emissions. It’s a problem across the region. 

13

So what we need to have in the Western Balkans, but I would argue also in Southeast Europe, including countries that are already NATO and the EU, is much more robust 

reform agenda to ensure that sectors that are exposed to proliferation by Russia and political manipulation are scrutinized, are open to market competition and, also, you have a 

vibrant civil society, including think tanks and critical media investigative journalists, 

that break through the floor of those networks, and dependencies between local elites—

be it business elites or political elites—expose the state capture that is providing the fertile ground for the Russians—or, for the Kremlin to interfere in the region. 

Well, thank you so much. 

Mr. HAND. OK, thank you. Excellent presentations from everybody here at the table. 

And it’s made me think of several questions that I would like to ask as a follow-up. 

Looking out in the audience, however, I see quite a number of experts on Balkan affairs 

here today. And hopefully they’ll be able to ask some of those questions for me. 

I will ask one question to give people time to come to either one of the standing 

microphones. I’ll ask my question and people can answer and then I’ll turn to whoever 

is at the microphones to ask their questions. When I do, if you could please identify yourself and also state your affiliation. And then when you ask your question, if you could 

clarify whether you’re asking it to a particular panelist or to the panel as a whole, or just 

one or two of them, however you see fit. But please clarify. And please try to keep your 

questions short and to the point. You can make a brief comment, but let me lay stress 

the word ‘‘brief,’’ from the standing microphones. 

While people get up and prepare to ask their questions, let me ask all of the panelists 

here a question, to the extent that they want to respond. You’ve talked about the threat 

to stability in the region that is posed by Russia’s economic footprint. And you’ve 

expressed the views of civil society, I think probably reflective of civil society as a whole 

in terms of what needs to be done regarding the greater transparency, greater freedom 

for investigative journalism, perhaps judicial reforms and other efforts that would 

enhance the rule of law, and could hopefully tackle corruption. And these are very good 

things. And I think you have friends here in the United States and probably in Europe 

who can help in that regard. 

But I was wondering if you could specify a little bit on how the political leaders themselves in the region see it, the ruling parties. Do they see Russia’s economic footprint as 

a threat, or do they see it as something that gives them leverage that they can use visa`-vis the West? Or are they somewhat oblivious to it? Are they actually personally benefiting from it? I assume that the answer will be different in each one of the countries in 

this regard, as well as to the extent which they each view Russia’s economic footprint as 

a threat that determines how open they are to various reform efforts. 

For example, I can imagine in Montenegro it’s quite stark, the Russian influence. And 

now that it’s a NATO member, there’s serious concern. But has that made the Montenegrin government, Montenegrin authorities, more open to some of the fundamental things 

they need to do in their country in terms of transparency, rule of law? And I give Montenegro just as an example. I don’t mean to focus just on Montenegro. I think it applies 

to all other countries. In Serbia I can see where there may be more of a balancing act. 

And in all of these countries, certainly probably in Republika Srpska, in Bosnia and 

Herzegovina, you can see how they can actually personally benefit from it or take advantage of it. 

14

So I was wondering if you would like to comment on how the prime minister or president and the ruling party of a country might view the Russian presence in the region? 

And how does that shape their willingness to engage in these reforms that could try to 

lessen the malign influences that come with the investment from Russia, or from other 

countries that tie it to the political issues? Who would like to go first? 

Milica. 

Ms. KOVAC ̆ EVIC ́. OK. I can say that we had totally different situation 10 years ago. 

And probably, if I was doing this research at the time, it would be difficult even to gather 

the data. Even at that time, there was a criticism coming from investigative journalists, 

from media, over some concrete investments that later on appeared to be connected with 

corruption. Some of them are under investigation. For some cases there are already 

criminal verdicts, judgements. And the government was actually replying to us that the 

money doesn’t have nationality and that we are stopping the reforms and stopping the 

progress. And I would say that there was no basic understanding of this phase that we 

are describing today, which is corrosive capital. 

I have to admit that these things have changed. But I would say that we learned 

that a more difficult way. During the research—and I’ve been exchanging that with all 

the colleagues in the region, we really have the openness of the institutions to share all 

the available information and data with us—but what I believe is the most important is 

the recommendations that we are offering, that we should use this as a lesson learned 

and that we should fix these governance gaps in order that we are not surprised again 

in several years when maybe some other foreign country decides to use economic influences, leverage in political relations. 

Mr. HAND. OK. All right. Thank you. 

Ruslan, would you like to—make sure the light is on. 

Mr. STEFANOV. Yeah, it says so. [Laughter.] Well, thank you for that question. And 

I’d like to address it also from the wider perspective of Europe. And I think it’s one 

distinctive feature when you ask about these attitudes, the leadership of the countries, 

it’s the silence that you usually get on this topic. And I think that speaks volumes. Of 

course, this has changed in the past year and year and a half. But I would say that this 

is the case also within Europe. And this—I fear that we will be witnessing this. And of 

course, it’s not a secret that there are certain people also in Europe who like Mr. Putin’s 

model, like the illiberal model, and that somehow hasn’t been dealt with. 

Now, if you look at the region, we’ve worked on the past five years on these topics, 

and including tackling very much governance and corruption problems. And one continues 

to see people that do not want their names appearing openly in the public. And I should 

say that in this regard, I’d like to mention that the U.S. role in the region remains 

indispensable, which is why we actually value very much, very highly Congress’ and hopefully the U.S. administration’s engagement. 

But what we wanted to create with these reports is exactly this discussion space that 

would allow people to assess the size of the threat, the vulnerabilities that are out there. 

And I think it’s exactly this type of diagnostics that actually should serve as a background 

for creating the—for designing the policies and the measures to tackle this footprint—or 

vulnerabilities of the footprint, including the entourage of Mr. Putin. 

Mr. HAND. OK. Go ahead, Nemanja. 

15

Mr. S ̆ TIPLIJA. Thank you. You ask about political leaders, but I want to stress something about citizens. Perception of citizens in past several years is that Russia is the biggest investor and biggest donor, at least in Serbia. So can you imagine, when—in recent 

surveys in past three years, we have this situation that citizens, on question who is the 

biggest donor or biggest investor in Serbia, it’s always Russia in the first place, then 

China, and then Turkey. And reality is totally opposite. We don’t have Russia in first 10 

countries when we took account investments. So first is, of course, European Union, 

together with Germany and Italy. And then United States and other countries. We even 

have Japan on the ninth place, and Russia is somewhere below. 

And the point that we need to have this role of media to think about these strategic 

economic sectors and to speak more about this influence and how this influence has happened. Also, governments should ensure that media outlets operate in safe environment, 

which is not the case now. And also, full access to data and information regarding these 

things. 

Thank you. 

Dr. BECHEV. Just a brief remark, both on the motivations of political elites and, of 

course, I’m generalizing because there are differences from place to place. But my impression is that the bulk of political elites are risk averse. I mean, we tend to think about 

Putin as a poker player. He makes risky decisions. Just the opposite in Southeast Europe, 

where people don’t want to rock the boat, get into conflict with vested interests, or push 

too far against Russia because it might create blowback. 

In the case of Serbia, there is an additional dynamic. President Vuc ̆ic ́ I think has 

encouraged his friendly media to inflate the image of Russia and its presence, it also 

reflects in the polling data, because it provides a very useful smokescreen. Anytime you 

cooperate with NATO and you build up the relationship with the U.S., that potentially 

is diverted by the media into how great Russian-Serbian relations are doing. It’s a 

Machiavellian strategy of putting Russia first in order to avoid criticism over Serbia’s 

dealings with the West and potential attacks from more radical voices, what Serbia is prepared to do in Kosovo as well, or is prepared to do with NATO. I think that’s at

play too. 

But again, the question we should be asking ourselves is why governments in the 

region have managed to quell the media and silence critical voices, why they have all 

those subservient media outlets and there is precious little critical scrutiny in the public 

sphere. 

Mr. HAND. Andrew? 

Mr. WILSON. Yes, I think we have to look at this, too, in a broader political context, 

not just within the context of the governments in the region, but I think within a European context to truly understand this. 

I don’t think there really was a lot of concern from the rest of Europe about the 

nature of Russian investment or the scale of Russian investment in Southeastern Europe. 

But I think with the rise of euroskepticism within Central Europe, the questioning of 

globalist institutions that has occurred as a result of in the last two or three years, I 

think—and sort of the resurgence or the surge of both Russia and China, for that matter, 

filling a gap, whether it’s the Russian move towards sort of this disruptive foreign policy 

or whatever, I think that’s focusing people now. And I think that focusing by European 

16

governments on these issues is starting to force the attention of local political leaders as 

well. 

I think it’s probably—you know, has the horse fled the barn and we’re trying to close 

the door—I don’t think so. And I think there is certainly a rethink within Europe, because 

of things like Brexit, about the nature of European investment, the nature of European 

governance. And I think this fits into that broader debate in terms of rule-of-law issues 

and who’s putting pressure where. 

Mr. HAND. All right. So now you have had time to think of the questions you’d like 

to ask. Let me first call on this gentleman here, and if anybody else wants to ask a question, just feel free just to come up to the microphone. 

QUESTIONER. Actually, I will make a short comment. I’m Igor Novakovic and I’m one 

of the contributors in the project run by the CSCE and CIPE. And I would also like to 

stress that there are other issues that local private enterprises are facing in Serbia, but 

also throughout the Western Balkans. 

What actually makes these countries so exposed to the foreign meddling influence? 

I have a short list here and I will just read it: So there is an excessive state influence 

in the economy. Weakened energy and transport infrastructure. Inefficient markets. Only 

partially restructured public utility companies. Difficult access to finance; red tape; large, 

informal economy. 

Of course, in Serbia, but also in other countries, employment is rising, but still large 

portions of the population remain unemployed and this especially affects younger population. So all of the states have a huge brain drain in particular towards the EU. And 

finally, state subsidies are usually directed towards the public inefficient and unprofitable 

companies instead of towards other objectives, like the small-to-medium enterprises and 

development and research. 

Thank you. 

Mr. HAND. Thank you. Does anybody want to follow up on what he said, since that 

was just a comment? 

Mr. WILSON. I will. I think the reports highlight this already, but I think I would 

sort of just like to restress certain strategies that need to be put into place in this regard. 

And I think the NED in itself has been doing some very interesting work on kleptocracy, 

et cetera, about flows of capital once they leave the country. But our argument has been 

you really need to focus on, what are the conditions that allow the loss of money from 

state budgets and other things to occur? And focus on public procurement policy in the 

region needs to be reinforced. 

Corporate governance, I think it was said in one of the reports, is very important, 

especially within the state-owned sector, to make sure that enterprises aren’t politicized 

or bad decisions are made. Budget transparency—and, again, the importance of competition policy in this area, so these monopolies where they occur in energy or other things 

can be combated. And if we are able to introduce greater competition into the region, into 

the economies of the region, I think that’ll go a long way towards ameliorating the influence of any one single economic player or group of players to shape political decisionmaking. 

Mr. HAND. Thank you. 

Paul? 

17

QUESTIONER. Well, thank you all very much for this great panel. My name is Paul 

Massaro. I’m the anticorruption advisor for the entire region, a functional portfolio at the 

Helsinki Commission. And I had a question. It’s rather long, so please bear with me. 

In a number of countries surrounding the Balkans, we are witnessing the development of kleptocratic governance structures when corruption is used to ensure the loyalty 

of cronies as well as to influence the politics of neighbors and rivals. 

The Global Magnitsky Act, which contains provisions to sanction individuals engaged 

in grand corruption, is a powerful tool for combating these sorts of regimes by enabling 

the United States to name and shame kleptocrats enjoying impunity in their own countries. Any such sanctions should be based on strong evidence and target individuals who 

are demonstrative of the problem so as to serve as a warning sign to others. To what 

extent are there states in the Western Balkans that could be described as kleptocracies 

or are on their way to becoming kleptocracies, which may contain individuals who would 

be appropriate to target under the Global Magnitsky act for grand corruption? 

Mr. HAND. OK, thank you, Paul. 

So the question is that of kleptocracies, but then also of the U.S. Global Magnitsky 

Act as a tool, in addition to supporting civil society efforts, reform in these countries to 

actually sanction offending individuals. Who would like to respond to Paul’s question? 

Mr. STEFANOV. I can take that. 

Mr. HAND. OK, respond. 

Mr. STEFANOV. Thank you very much for that question. Indeed, we have—we at CSD, 

together with other partners in the region, have been following as civil society the corruption and anticorruption developments in the past 20 years. And let me underscore that 

definitely the EU, including its current efforts during the Bulgarian and the Austrian 

presidencies, have made a difference. So we’ve seen corruption victimization, so the level 

of corruption and bribery in the region decreased. But it’s still at levels that are systemic. 

And probably the single-largest contribution and reason why this is so is the impunity that you have mentioned. Clearly, the judicial systems in the region have not been 

able to tackle particularly high-level corruption and links between politics and business, 

which is part of the reason why there’s been the possibility of such corrosive capital to 

enter in the region and to actually exert its bad influence. 

So we think that—and what I mentioned earlier—that the Magnitsky Act is a really 

powerful and needed tool. And that I think that our reports and the reports that we’ve 

produced both for the region, Central Europe, but also the individual reports are a very 

good starting point as a background to not just target individual politicians or rotten 

apples, as we say, but give a wider perspective as to the needed policies. And Andrew 

just mentioned a number of them that we think need encouraging. 

And I think that this year we’re going to see a lot of that coming, you know, with 

the renewed European strategy for enlargement. And hopefully we’ll see more and more 

focus on the issues of good governance. 

QUESTIONER. Could I just follow up and ask for clarification? Would you see the targeting of a basket of individuals emblematic of the impunity enjoyed by corrupt actors in 

the region as a helpful move or as an unhelpful one? 

Mr. STEFANOV. I see it as a helpful move as part of a larger basket of policies. And 

definitely, I think we’ve seen this in the past, we’ve seen it act in the previous European 

enlargements, we’ve seen it in the case in Ukraine. So, yes, the short answer is yes. 

18

Mr. HAND. Andrew? 

Mr. WILSON. Yes, just a couple of thoughts. And I completely agree with what Ruslan 

has said. I think one of the issues I’ve got is, how do you define a kleptocracy? And I 

think a lot of people have been kind of struggling with this. How do you separate a 

kleptocratic state from something that’s just very, very corrupt? 

And I use a loose definition that, if by some means you’re able to wave a magic wand 

and corruption went away immediately, could the state still function within its economic 

and political structures? I think you could make the argument, if you waved your magic 

wand at Russia, the state would probably collapse. Corruption is the way of life and business in Russia. I’m not so sure states in the Balkans are corrupted to that extent. Certainly, we have a lot of corruption, but I would fall short of calling them kleptocratic 

states. 

That being said, I think the power of the Global Magnitsky Act and the ability to 

sanction individuals is a very important part of a broader anticorruption strategy. But I 

think, while we may be able to single out individuals in a region to say, you know, you’re 

a thief, you’re doing your country bad, I think we also have to put pressure on groups 

like the EU to step up and say, OK, you’re doing wrong, what can you do right? And I 

think, frankly, the EU is awash in its own problems right now. But I think if you look 

at what they’ve done with Article 7 in Poland and the issues with the judiciary in Poland 

where they have finally put the foot down and said, OK, no more of this, I think to the 

extent that we can—if we could encourage the European Union, which is one of the 

largest investors in the region, to put its foot down and to say we’re not going to tolerate 

this anymore—and by the way, the individuals on these lists are ones we’re going to 

watch closely, too—would be very helpful. 

But if we don’t have a strategy that addresses both the policy remedies and the 

criminal approach, we’re only—naming and shaming will only get you so far. 

Mr. STEFANOV. Well, let me just say that I completely agree with Andrew on the 

kleptocracy thing. I don’t think any of these countries could be named as kleptocracies. 

But there are certain sectors, there are certain sectors, there are certain trends that have 

been visible and that could be labeled as kleptocratic trends or kleptocratic deals, you 

know, and we’ve mentioned these in the reports. You know, looking at the energy sector 

in particular, looking at large scale infrastructure projects. 

And actually the EU—you’re right, Andrew—the European Commission actually, I 

think, is trying to put its foot down, like mentioning in its last progress report on Macedonia, for example, that there are certain trends, certain areas that look like a captured 

state. 

We’ve certainly had—and I think Dr. Bechev mentioned the captured media—that’s 

a huge issue and needs to be tackled effectively. 

Thank you. 

Mr. HAND. Anybody else like to make a comment before we go to the next question? 

No? 

Ma’am? 

QUESTIONER. Hi, Robin Brooks from the State Department. And I’d like to thank the 

organizers of this conference and all of the speakers for very interesting reports. 

I have a question that I’ll start with, and then give some background and then ask 

again. My question is to Ruslan. 

19

In the first Q&A, you mentioned that the U.S. role is still critically important. And 

I want to ask you what the U.S. should do—and I say this as someone who, as you know, 

has worked in the Balkans and will work in the Balkans again. What I think the U.S. 

does do is say things like, hey, don’t do that Russian project, instead take this American 

project, and say, hey, don’t violate sanctions or more sanctions, Global Magnitsky. But I 

think what we haven’t done very effectively is request and demand an interest-based, 

transparent approach. You know, why do you want a nuclear reactor? Why do you want 

this project? Why are you having a tender for this infrastructure project at all? Explain 

to us and your own people why you need it and where the money needs to go. 

And I think there’s—you know, there’s two interests here at stake, right? There’s if—

and I think every single one of the speakers mentioned debt as one of the most important 

ways that Russia maintains its influence in the Balkans. If you’re indebted to Russia, they 

can’t kill you, right? Venelin Ganev said that in his book ‘‘Preying on the State.’’ They 

can’t kill you if you owe them money because they have to wait for you to pay them back 

and you never will. So there’s a very strong interest in choosing the Russian project so 

they can’t kill you. 

But what can the U.S. do to make the U.S. project make more sense? And I think 

Ruslan and also the first questioner had some good points about sort of the background 

that builds resilience—you know, a strong education sector and health care sector that 

reduces brain drain and causes good people to stay in a country and actually hold their 

government accountable and be journalists to hold their government accountable for 

journalists’ safety and so on. 

So what more could the U.S. do to actually make a difference beyond sort of contributing to think tanks and saying, hey, don’t get in bed with sanctions? 

Mr. STEFANOV. Thanks, Robin, good to meet you again. Let me underscore that I 

think both the U.S. and Europe have done a lot to improve transparency in the region. 

And that cannot be denied. And we’ve had, with CIPE and Andrew, countless discussions 

in the past three years about corporate governance, about the facts of capital that’s 

coming from Europe or the U.S., about improving the local business environment so that 

this capital actually delivers to the people and that also the democracy and institutions 

that we have been building actually deliver to the people. 

And I think the real question is that, as I mentioned, the silence among the leaders. 

You know, there is—people have never been shy to discuss certain deals in which the U.S. 

or European countries, European investors have been involved, including in cases of Foreign Corrupt Practices Act and so on and so forth. But Russia appears as the elephant 

in the room, you know, nobody wants to speak about it for some reason. 

Now, when—and I think there are a lot of issues that have been discussed in terms 

of potential policies. You know, one is, I already mentioned, I think, the focus on media 

capture. That is definitely something that we need to do. 

Andrew already outlined a very good list of policies we’ve had. I mean, one sees the 

difference between, for example, Bulgaria and the Western Balkans in terms of the level 

of transparency. And that has also affected the European Union integration that is much 

higher in Bulgaria. 

But at the same time, you look at certain, we call them switch projects, like, for 

example, the interconnectors in the energy sector because energy is critical. You know, 

like the IGB interconnector in Bulgaria or like the Bulgaria-Serbian interconnector. These 

20

are very straightforward, very clearly beneficial to the countries and to the people and 

to the prices they’re going to pay. And yet, they don’t happen for some reason. So I think 

these are the switches that the U.S. and the EU could help push a little bit forward. 

And we could—we could talk, of course, in many more different such aspects, but I 

think this gives an example. You know, we keep—I think there has been a lot done on 

the overall environment on transparency, on the capacity-building of public administrations and on keeping that pressure in a way. I mean, I think somehow with the EU accession we’ve been somewhat complacent, saying that once a country is in that’s it—

[inaudible]. But that’s not the case. Actually, I think people in Europe start realizing that 

it’s a constant work that we need to deliver. 

Mr. HAND. OK. 

Dr. BECHEV. Yes, the U.S. has one advantage that it has more of a strategic 

approach. It’s a nation state. What we have with the EU is very often speaking with different voices. All those governance issues, the pressure for human rights is sometimes 

outsourced to the European parliament which ends up being a huge talking shop. And 

there are very good people there and they say the right things, but when it comes to the 

nitty-gritty, it’s the member states who decide and very often it’s the lowest common 

denominator, it’s always the same, you know, it’s worse. 

When the U.S. speaks, for all the dysfunctionalities you sometimes encounter, you 

have more of a unified voice and pressure. So America carries some weight in the region 

still—that’s important on this score. 

And just to echo what Ruslan said about the energy sector—energy security has been 

high on the radar of U.S. diplomacy, but it’s the State Department’s policy, there is very 

little by way of private investment to follow up. So U.S. diplomats pursue some objectives, 

but it’s very rare that you see private business prepared to invest there, which is probably 

fair from their perspective because the profits are not short term. You have to make a 

case for the economical nature of those ventures. But that’s where it’s lacking with the 

U.S. approach, the money, which Europe does have, but it doesn’t have the vision. 

Mr. HAND. Sir, go ahead. 

QUESTIONER. Hello. I’m from the House Foreign Affairs Committee, and I have a 

question for all of you. 

You’ve talked a lot about the extent of Russian meddling in the West Balkan region. 

You also mentioned earlier that China and Turkey were putting corrupt capital into these 

countries. Could you talk more about specifically what these two countries are doing in 

the region and what are some tangible effects of their influence? 

Mr. HAND. Who would like to start on that one? 

Andrew? 

Mr. WILSON. I think we need to make a distinction, first off, between types of corrosive capital, if you will. So if we look at Russian capital and the way it’s tied to foreign 

policy objectives as opposed to maybe easy capital, you know, which might be something 

from Turkey or others, which is just capital, in our minds, which tends to flow into highrisk environments, the nature of the investment becomes much more short term and it’s 

quicker to flow out. It’s not the best kind of capital you can get, but that’s a premium 

for being in a high-risk place. 

If I was to look at, say, Chinese projects in the region, the Chinese were able to buy 

the Port of Thessaloniki a while back and it’s part of their Belt and Road strategy. And 

21

I think if you look at the construction of the railway line, the proposed railway line 

through Serbia into Hungary to link Thessaloniki with the European rail infrastructure 

in a better way, that’s one area. 

Should we look at how that deal was made in Serbia? The Hungarians, because 

they’re under EU policy, have yet to commit to building their stretch of the track. But 

I think we could look to say, what was the nature of the deal that’s getting the dual 

tracking being built in Serbia as part of that. 

You know, Chinese investment, Chinese aid, Chinese projects are a completely different area of focus, one we’re working on as well at CIPE, you know. But I think, you 

know, the questions need to be asked. The same types of weakness in government that 

allowed in the 2000s Russian investment in private enterprise or privatization in the 

region are the same basic weaknesses that we’re seeing now that might allow governments to take dubious loans from the Chinese or allow dubious construction projects. 

Frankly, you know, Chinese financing and Chinese foreign aid is kind of like the payday loan version of lending. You know, you can take a lot of risk there, they’ll take a lot 

of risk with you, but when it comes time to pay the debt you’re collateralized and they’ll 

seize it. And that’s how doing deals with the Chinese is very different from doing deals 

with, say, the World Bank or the IMF when it comes to these types of aid projects. And 

I think there’s not enough scrutiny in regards to how these deals get made in the first 

place. 

Mr. HAND. Thank you. 

Somebody else would like to speak on China, but also Turkey? And I would actually 

add also the presence of Gulf states from the Middle East to the extent that they can be 

compared and contrasted to what we’re talking about in terms of the Russian economic 

footprint. 

Dr. BECHEV. Maybe just a word on Turkey. There’s a spectrum of Turkish investment 

over the past 25, 30 years, all the way from small-medium enterprises based on diaspora 

networks. I mean, let’s not forget that Turkey is not exactly an external power. Just look 

in a place like Sanjak in Serbia and Montenegro, how many of their relatives live in Turkey and there is human connectivity. So there is that. I mean, it’s money. 

There is a vibrant business sector as well, so some of the investment is always—also 

may be beneficial. But certainly, there is politically correct capital, especially in the 

construction sector with the AKP government. All those people have made money because 

of their proximity to Erdog ̆an and his family, so we’re likely to see those. 

But I think the dynamics are more in the mold of the Turkish state lobbying for its 

investors to get market openings relevant to seeking to employ economic connections to 

push governments in one direction or another. So I think there is something different 

between Russia and Turkey. The Gulf is a different story as well, somebody might want 

to comment. 

Mr. HAND. Milica? 

Ms. KOVAC ̆ EVIC ́. It wasn’t part of this very research, but actually the patterns, the 

problems, the governance gaps can also apply to some other investors as we see in civil 

society. And I would agree with Dimitar what he said on Turkey, but I would say that 

civil society, at least in Montenegro—but also I’m talking to the rest of the region—is recognizing the problems that we recognized 10 years ago with huge Russian investments, 

now with the Chinese investments, especially because they are using the same ways—

22

like, for example, bilateral agreements to avoid public tenders, to avoid Freedom of 

Information Act. So we are ending up like it was back in 2005 and 2006 with Russian 

investments without knowing what’s behind these deals. So we don’t know now and I can’t 

say anything about that. 

But I’m hoping that we will continue working exactly on this, and not because of 

Russia only, but because of all the potential risks and, you know, we are endangering our 

economy by not knowing about these important problems. 

Mr. STEFANOV. Just very, very briefly. As Milica said, this was not a focus of our 

research. I’d say the worrisome thing is the integration between politics and business. And 

if—and this is clearly—I mean, Russia, in this respect, has presented the most assertive 

threat in the past years. But if there’s one country that combines the same level of control 

over business and coordination of political strategy, that’s probably China and we’ve seen 

this. I mean, talking to stakeholders in the region, we’ve seen this worry of similar 

impacts. 

But the real issue is that we don’t know—really know—what are its business 

opportunities they are after, or rather, the suspicion is we don’t really know what their 

political goals might be. So, again, this is my take on this. 

Mr. HAND. Thank you. 

Sir? 

QUESTIONER. Hi. I’m Marko Durovic, I work for a congressional office here, but I lived 

in Belgrade all my life. 

I don’t know where to start. And I’m sure you feel that way, too, sometimes. But I 

guess the first part would be about the media. And I feel like the media at this point 

is essentially state owned, except for maybe N1. So how do you put pressure on the 

government to move away from that? Because without an impartial media there’s no way 

to change public opinion and public opinion is not in favor of what people in this room 

think should be the solutions. 

And then secondly, how do you put pressure, in general, on a government that that 

is playing this balancing act between the West and the East and that could, if you put 

too much pressure on them, they might go further towards Russia than you would like 

and that could lead to some even worse problems? And I don’t know—I have so many 

questions that I could ask. 

Mr. HAND. Well, why don’t we get answers to those and then maybe we can go to 

a round two. 

Mr. S ̆ TIPLIJA. So basically, the media situation has become very complicated from 

2012 in Serbia, but, you know, throughout Western Balkans, especially, in the first place, 

in Macedonia was the worst example. Media are not owned by the government, but just 

influenced by the government, so it’s very, very, very big topic. Like, if we speak about 

how government influences media through advertising to controlling some other aspects 

or their work, et cetera, et cetera, even controlling owners of media. 

In Serbia, this is several, of course, free media. And maybe for some part of civil 

society it’s the only way to influence. But still, influencing through just media cannot 

affect the broader population. That’s true. 

QUESTIONER. Exactly. Sorry. But I think that a lot of the population literally looks 

at television, like N1, and thinks, oh, American propaganda. And I’ve heard this because 

I’m——

23

Mr. STEFANOV. Yes, yes. 

QUESTIONER. So how do you practically change that? Because there’s a lot of solutions 

that in theory are great, but there’s just too many powerful actors with no real incentive 

to change the status quo. 

Mr. S ̆ TIPLIJA. You know, like, we try to work with the, in the first place, European 

institutions, through the—because in this stage of enlargement we have something which 

is called Chapter 23 and Chapter 24, which are chapters dealing with basic rights and 

also the rule of law and, at the end, media freedom. So by—and these are crucial chapters 

for Serbia and Montenegro in this phase of European enlargement. So pushing the government through this is one of the things we do. 

Mr. HAND. Ruslan? 

Mr. STEFANOV. There are no silver bullets. And I understand how you feel. And we’ve 

been facing this situation time and again, but we’re very positive about the future, you 

know. And there is one kind of unique disinfectant and that’s sunshine. You know, 

knowing the ownership structures and not allowing concentration is the good old principle 

of not having a monopoly on media distribution or media ownership and, of course, 

knowing who owns the media. Because in many cases in the region and actually throughout Central and Eastern Europe, you don’t exactly know who owns—who’s the official 

owner of the media and how they respond to the different ethical standards that are in 

these countries. 

So I think it won’t happen overnight. But at the end of the day, a combination 

between, as Nemanja said, the European integration process, local civil society, including 

through an approach like this, you know, where you create this discussion space, you 

create the opportunity for other people to contribute, and I think this is the way forward. 

Thank you. 

QUESTIONER. Yeah. Thank you, Bob. My name is Reuf Bajrovic, and I’m the former 

minister of energy in Bosnia and Herzegovina. I really didn’t want to say anything, but 

I have to just make two short comments and ask a question for your excellent panelists. 

First is a response to the question by the gentleman here about the Chinese. The Chinese are extremely interested in the energy sector. They have lined up two very big 

investments in Bosnia in two thermal plants. They love coal, as we all know, unfortunately, and there’s a very good possibility that they’ll do the same in Montenegro, in 

Pljevlja actually. 

They’re doing a number of other things. Their influence, unlike the Russian influence, 

is far more under the radar and, in many ways, I’d say a more strategic one. They have 

a much—in my view, their window of sort of how they view their investment is much, 

much more—much longer. 

Regarding the corruption, I was very surprised by Mr. Stefanov’s response, because 

as somebody who actually resigned because of the endemic corruption, it is my impression 

that, I mean, we’re dealing with probably the most corrupt countries in Europe. I mean, 

I could be wrong. I’ve never actually worked in Russia in any capacity, but corruption is 

absolutely everywhere. And since the U.S. has essentially sort of let the Europeans take 

over the region, as we used to call it, ‘‘lead it from behind,’’ you know, in the last several 

years, at least seven, eight years, corruption is not really something that people want to 

deal with. 

24

The judiciary is completely penetrated by the ruling parties. And there’s absolutely—

and my view is that the Magnitsky Act can do more good to the Balkans than probably 

any other part of the world that I know of. Because unlike other big countries where, you 

know, if you really, as the gentleman there said, if you push too hard, they might go in 

the very wrong direction, I think in the Balkans it would actually make a difference if 

some of these people were actually named and shamed. 

And the EU, in my view—I hope that I’m wrong—the EU is not going to do it. I 

mean, the EU simply, for example, refused to impose sanctions on Mr. Dodik after the 

U.S. did last year, because the EU just doesn’t want to, as your panelists have said, 

doesn’t want to deal with the region, period. 

My question is for the panelists. And it is, do you—is the—I’ve read the report and 

I think the reports are excellent. I’ve read every single one of the papers that you’ve been 

publishing them consecutively. Do you actually—what you don’t say there and what I 

would like you to share with the audience here—do you think that the Russians are getting a good return on their investment in the Balkans, because nobody really wants to 

talk about that, you know, people say they don’t make profits, they don’t make money. 

But overall, do you think that the money they’re spending is, from their point of view, 

a well-spent dollar? 

Thank you. 

Mr. HAND. Thank you, Reuf. 

And before we turn to his question, I’d just like to reinforce the point that he had 

made in terms of initiatives the United States can take in terms of sanctioning individuals, but that we certainly need the support of Europe which is currently very much 

unwilling to do the same type of thing. If there was a united front in that regard, I think 

it could make an enormous difference in the region. So I just wanted to reiterate that. 

But return on investment for Moscow, who would like to start with that one? 

Ruslan? I always go to you first. You’re always ready. [Laughter.] 

Mr. STEFANOV. No, I can actually respond because it was a direct comment on what 

I said. We actually have in the regional report, that you can download at CSG.bg, we have 

this perspective. And indeed, Bosnia and Herzegovina is the one country from the four 

that has stayed above the regional average in terms of corruption and victimization, so 

probably your feeling is right. 

But at the same time, we’ve seen a decline in the past 20 years and that we have 

registered through a victimization strategy. And I also have brought here a couple of 

copies of ‘‘Shadow Power,’’ a regional report that I can distribute. 

But let me say that the level of corruption indeed that we’re seeing and I mention 

is really systemic and it requires further concerted action, including, as you mentioned, 

through the Magnitsky Act at the highest level. 

Now, we’ve also wondered about a return on investment, but then you have to 

acknowledge as to how does an investor define that return on investment, whether it’s 

just the monetary value or whether it’s something more. And I should say that if you look 

at the—in the number of cases that we’ve looked into, profit is not usually shown on the 

balance sheet. So if you look at just the numbers, probably the answer would be no. But 

the question is, are we certain? And rather, we’ll say we’re certain that this is not, in 

many of the cases, this is not the ultimate or the only criteria that the investors themselves are looking into. 

25

So I should say that that’s exactly the point that we’re making, you know, that return 

on investment and how the investor feels, it depends on their goals in the first place. And 

we’re not sure actually, sure that in many of these cases it has not been entirely commercial. 

Thank you. 

Mr. HAND. Dimitar? 

Dr. BECHEV. Yes, I guess the answer varies from place to place. In some cases, there’s 

been a lot of betrayed expectations. When Oleg Deripaska bought into KAP, he was 

counting on continued support and subsides from the Montenegrin Government, so his 

accounts didn’t prove right. And, I mean, ultimately, he was burned. And that’s his 

perspective, I’m sure. 

In other cases, if you think about the NIS sale, they have very different accounts. 

The Serbian viewpoint is that they sold their family silver to the Russians and didn’t get 

much back. The Russians will say that we bought an underperforming company with a 

lot of liabilities and hidden problems that we needed to sort out, and we did the Serbians 

a favor, but there is no way to bail out now. And what we wanted to get at the end of 

the deal, South Stream, didn’t happen. So it doesn’t—or it’s not very clear what the balance is. 

But you have, certainly, cases where Russian businesses with political cover, or 

krisha in Russian, did very well. I guess Macedonia might be a case. Mr. Samsonenko 

has a thriving gambling empire being in cahoots with the previous government, and I’m 

sure has connections with the business establishment. 

So I think the answer varies from place to place and from business to business and 

there is a whole new level when it comes to geopolitics. My gut feeling is that—yeah, I 

mean, and the other thing is some of the people involved in those deals, packages, geopolitical, have their personal interests at stake. Gennady Timchenko, Stroytransgaz, 

involved and on the sanctions lists, I should add, involved in South Stream, he has done 

very well. Even if the project was canceled, the amount of services he delivered to South 

Stream and construction, but also pipes have generated profit. So at the different levels, 

the geopolitical level, the business level, but also the state capital level, the answer varies 

from what is the dimension you are looking at. 

Mr. HAND. Anybody else? 

We have time for one more question if there’s anybody out in the audience who would 

like to come to the microphone. OK. Or we could do two if they’re quick. 

QUESTIONER. Hello, everyone, Boris, Macedonian Information Agency. 

I just wanted to ask about or focus on the Macedonian report, on the report from 

Macedonia. You guys have put scrutiny on the energy sector, basically, but we—I don’t 

see any other parts of the economy, like investments of the Russian capital in, for 

example, in food sector or agricultural sector, because I have information that the Russians are investing in these sectors as well, as well as in real estate. So have you seen—

have you—do you know any information about that? I mean, I have information that Russian security services, individuals from Russian security services, they used their capital, 

they are getting capital to invest in these parts of the economy. So maybe you have put 

this perspective more on the energy, and why is it like that? 

Mr. HAND. OK, thank you. Why don’t we go to this side and ask both questions 

together? 

26

QUESTIONER. Thank you, Bob. I’d like to salute Bob Hand today for his longtime 

involvement. 

Mr. HAND. If you could identify yourself, please. 

QUESTIONER. Yes, sorry. Joe Foley ? 

Mr. HAND. Before you salute me. [Laughter.] 

QUESTIONER. Giving out the accolades early. But I’m Joe Foley with the National 

Federation of Croatian Americans here in Washington. And I wanted to thank Bob again 

for his longtime expertise in the Balkans and for his excellent assembly of this expert 

panel on the basis of the commission. 

The Croats in Bosnia are the smallest of the three constituent peoples as designated 

by the Dayton Peace Accord, as we all know. The NFCA has viewed Bosnia as a frozen 

state for some time and that the current and future treatment of the Croats in Bosnia 

is and will be an indicator of the success of this new nation state. In other words, the 

treatment of Bosnian Croats equally along political, economic and religious lines, this 

matter remains an Achilles heel in Bosnia and, in effect, the Croats and their equal treatment may be the glue that will hold the Bosnian nation state together. 

Does the panel agree or have additional thoughts on this? And will Russia continue 

to pick at this seeming political scab via the statelet of Republika Srpska and/or in the 

parallel statelet of the Federation? Or should we be more worried about Turkey in Bosnia? 

Thank you. 

Mr. HAND. OK, thank you. 

And there’s one last question that we’ll add to this group and then I’ll ask each of 

the panelists if they want to answer the questions, but then make a quick concluding 

remark, then we’ll wrap up. 

QUESTIONER. Yes, well, that will be my question actually. Good morning, everyone. 

I’m Jovana Djurovic, a journalist from Serbian service of Voice of America. 

So my question is basically, what is the conclusion—what could U.S. and EU do 

towards decreasing this malign Russian influence? Because we have heard a lot of times 

on hearings like this that there should be a stronger engagement. But, you know, 

regarding this economic influence, which is very concrete, we are talking about money 

here, what could be done instead of, of course, what has been done already in terms of 

fortifying civil society and, you know, justice? 

Thank you. 

Mr. HAND. OK, we’ve had three questions: just to summarize, not do them justice, 

but to summarize the questions—sectors other than energy, the issues in Bosnia, and 

then, again, the U.S. and what it can do. 

Why don’t we start, go in reverse order from the way that we started and you can 

make any concluding comment that you want as well. And we’ll start with Dimitar. 

Would you like to make any comments on any of these things? 

Dr. BECHEV. Well, just to say a few words about Bosnia that we sometimes assume 

that the Russians are bound by their alliance with local Serbs, Serb nationalists. But in 

reality, Russian foreign policy has been very versatile. There are no commitments, no 

permanent allies. They can do business with pretty much everyone, so you could see with 

the change of tone by Croatia’s president, Ms. Grabar. Mrs. Grabar-Kitarovic, so she is 

one of the people who argued that Russia was waging hybrid warfare in Bosnia. But since, 

27

she has softened her rhetoric, she went to Sochi, had a face-to-face with Mr. Putin. I think 

Agrokor made a difference. 

And in order to disrupt U.S. policies, I think the Russians are prepared to align with 

extreme factions of Bosnian Croats as well, without going as far as upending Dayton. So, 

yes, the Croatian issue is crucial, but my sense is that Russia can exploit this line of confrontation as well, if it suits its interests. And we have to be mindful of that. 

Mr. HAND. Milica? 

Ms. KOVAC ̆ EVIC ́. Oh, I think that Jerusalem can provide Macedonia and Bosnia 

answers for this question whether the EU and the U.S. can—I mean, we have been frequently asked this question, and—obviously it’s not a simple answer, and it requires a 

strategy for this region. And I am actually happy to hear that there are some developments. 

So I will just try to be as simple—though I will say that the U.S. should continue 

what it is doing right now because, for many years before I was screaming and yelling 

at my friends from Western Europe and primarily from the U.S. that once they lost 

interest to the region, once they got out, the gap was left, and the vacuum couldn’t stay 

because we are not in the space because there is always someone to fill in that gap. And, 

unfortunately, we were—for all the mentioned reasons that include both good governance—well, actually deficiencies of the governance and poor economy, we were not always 

able to really be choosy. 

But this new engagement and diplomatic presence and efforts in the Western Balkans, I would—civil society in the Western Balkans really looks at that hoping that it can 

help because we already see that it is giving some motion to the processes that were quite 

stagnating due to the different reasons in Europe. 

Mr. HAND. Ruslan? 

Mr. STEFANOV. Thank you. 

On Macedonia, this was a country that was most difficult to get data from, so—and 

many of the investments there come from offshore jurisdictions, so there wasn’t a way to 

actual verify whether they were actually with Russian origin or not. 

So that would be my answer on Macedonia, and we’ll continue this as a pilot—I 

mean, we’ll continue to research that, and as information becomes publicly available, 

would be able to of course deepen and expand that analysis. 

On Bosnia, I’d like to underscore that the real issue that we’re looking at is our 

governance gaps. I do not think that Russia or anybody else that wants to exert malign 

influence would look at the really historical or cultural links. I would rather—we would 

rather think—and this is what the research shows—that they are actually using any 

governance gap that they can, and in that respect, they could actually—as Dimitar mentioned, could go into any different kind of—through any different channels—channel of 

influence. 

Now—and final remarks—I think with—we have a more detailed section on recommendations in each of the reports and also the regional one. I would like to underscore, 

again, that we think that the U.S. remains the indispensable nation for the development 

of the region. We think there’s been a very good development in the past year, and Congress has been leading that on the side of the U.S. We think that the EU is also 

increasing its focus on the region, including on good governance. We’ve seen that in the 

past. 

28

We would like to see a little bit better kind of joint voices on the side of the EU from 

the different from different EU institutions like the Commission, the Council, the delegations on the ground, the different political party families—would like to see a coherent 

message. I think that the real issue with the EU approach has not been the approach 

itself or the amount of time or focus that they spend, but the coherence of the message, 

and we hope that this will continue to improve in the future. 

So, with that, I would like to conclude. 

Mr. WILSON. I’ll comment on the question on land ownership in particular. I’m 

personally not as troubled about land ownership as I am about other assets. You know, 

land is not going anywhere. You might own a piece of land, but it’s not like you are going 

to take it away to Russia if you don’t get your way. It’s stuck in the country. It’s a fixed 

asset; therefore, your ability to influence of land ownership I think is a little more restrictive. 

And I think we also have to look at why are people in the secret services, for 

instance, buying land versus the other nature of Russian investment in, say, energy 

sector. I would posit that if you are buying land somewhere—if I’m a criminal buying land 

somewhere and I reside in Russia, I’m essentially trying to move my money to someplace 

where it’s more secure. My intention there is to get it out of the country. It’s not to try 

and influence a decision made elsewhere, whereas buying a stake in a gas company is 

something that you can directly use for political ends in the longer term. So I think you 

need to distinguish between the types of ownership. 

In terms of final thoughts of—you know, I think why we haven’t been talking about 

this more and investigating this more is that I think this idea of corrosive capital is not 

one that people have paid a lot of attention to until recently. And I think we all are just 

starting to understand, as we start looking at these connections between governance failures and governance weakness and the nature of investment, that we’re starting to put 

these pieces together. 

So if we’re going to move forward and have an idea about, OK, what do we do about 

this, I think I’d go back to what Ruslan was saying earlier about sunshine. I think the 

better we understand things, the more information we can get to the public that helps 

people draw the line between investment decisions being made or accepted and the potential outcomes—whether it was the decisions on South Stream or something else. 

So we need to understand the nature of ownership. We need to point out the nature 

of the consequences of this type of ownership—you know, this investment was made and 

it was used to influence a decision here or there—and then to say what are the policy 

remedies that need to come from this. That doesn’t necessarily mean that the United 

States or the EU needs to shift its policies or reinforce policies. I think that what that 

really means is we need to encourage groups like these at the table to undertake this kind 

of research. We need to enable them, civil society, independent media, and others—and 

I think it has been said here at the table—to start looking at this as an issue. And that’s 

certainly what we, at CIPE, are trying to do. It’s not to really, you know, in single cases 

try to point these things out, but to say, hey, look, there’s a connection here that needs 

to be made. There is a cause and effect here that’s out there, and we need to better understand that, especially because of the changing nature of globalization and how the 

economy is working in the world, and the nature of how norms, moving forward in the 

economy, are going to change. 

29

Corrosive capital is here. It’s not going to go away. So the issue is how do we provide 

governments and people in emerging markets with the tools they need to understand the 

potential impact that’s going to have on them, and I think we have a lot more work to 

do in trying to understand the basic nature of the problem, in the first place, and then 

to understand what the policy remedies are moving forward. 

Mr. HAND. OK. One additional person has come up to the microphone. I never like 

to say no, so I’ll allow the question. But after Ajla’s question, the microphones are closed 

and I’ll conclude the briefing. 

Ajla? 

QUESTIONER. Thank you, Bob. I’m sorry, everyone. This will be very quick. 

My name is Ajla Delkic, and I’m with the Advisory Council for Bosnia and 

Herzegovina. We advocate for a united multiethnic and democratic Bosnia. 

My question is for Dr. Bechev. Why is the Croat question crucial when it comes to 

Bosnia? Would you not say that—well, first of all, Croats have equal rights under the law 

given that they are one of three constituent peoples, according to the Dayton Peace 

Accords. And it’s actually Bosnians themselves that would be the more crucial question 

because if you identify just as a Bosnian, you can’t run for presidency, as we all know. 

And another question is, my colleague, Mr. Foley, talked about Russian and Turkish influence in the region, in Bosnia in particular. But what about Croatia’s influence? 

Those are my two quick questions. 

Thank you. 

Mr. HAND. Quick response? 

Dr. BECHEV. I need a disclaimer of amended—the kind of dynamic between Croats 

and other groups. It’s important, which doesn’t mean to say that other questions are not 

equally pressing in Bosnia. Unfortunately, we have a whole list of concerns and the socalled Croatian question might be one of them, along with many. 

On Croatia, I will just say it—absolutely its role is important because at times the 

governments since I grew up have played constructively, Bosnia has benefited. And sadly, 

when they played a disruptive game, consequences haven’t been good for Bosnia, but 

arguably also for Croatia. 

I’m not as concerned about the role Turkey plays in Bosnia because, I mean, there 

is this claim that Turkey is reconquering the region, having new Ottoman ambitions, and 

what I see in the Turkish case—and that is the last thing I will say—is that they have 

actually downscaled their objectives because their foreign policy is elsewhere, their concerns are elsewhere. 

Back in the day, Ahmet Davutoglu wanted to be the power broker in Bosnia. He 

didn’t go very far. Nowadays, it’s Izetbegovic and Vucic going to Istanbul to talk to 

Erdog ̆an to resolve their issues, but I guess the message from Erdog ̆an is, you guys sort 

out the issue of the highway yourselves. Turkey will probably support you, but we’re not 

there to knock heads. 

And think about it. Now Serbia thinks that Turkey is an ally on the issue of where 

the highway should go through. It’s a reversal. Belgrade thinks that Ankara is on its side, 

not on the side of Sarajevo, which tells us that things are not fixed in the region, and 

there are new phenomenons, new processes at play. 

Mr. HAND. OK. Thank you. 

30

At this point let me just wrap up the briefing with a comment or two. A lot of specific 

recommendations or suggestions have been made here. The thing I take away—and I hear 

this other places where the Balkans are discussed in Washington—is that, on this issue 

as in so many others, the United States does need to play a leadership role, and by leadership role, it’s not lead by behind, as Reuf Bajrovic said, but also to take some initiative 

and to promote some of the things that have actually made this country as good as it is: 

individual enterprise, openness, transparency, accountability. We have our faults, but we 

try very hard, and we also try to correct the faults that we have as we promote some 

of those things and be more active and engaged in the region. 

And it’s not just in the economic realm; I think it is across the board. Looking at 

some of the larger political issues, having followed the Balkans for 30 years now at the 

Helsinki Commission, the United States has always championed those that are vulnerable, whether it’s the populations as a whole, this or that ethnic group, or this or that 

country in the region, to make sure that everybody shares in a brighter future. I think 

that would apply in Bosnia and elsewhere, trying to preserve the equalities of the people 

at the same time promoting what is an American ideal of stressing individual human 

rights over collective ethnic privileges generally. 

I know some people in the audience will probably say, here goes Bob again, but it’s 

something that I think we will continue to need to advocate, to push for alternative ways 

of thinking than the way so many of the people in the Balkans have been thinking over 

these years, and to realize that there’s alternatives to those ways. So I take that away 

from this briefing, and I think the Helsinki Commission will continue to maintain its 

focus on the Balkans and pushing these issues throughout the rest of 2018. 

Let me just conclude by again thanking the Center for International Private Enterprise, CIPE, for bringing our panelists here. I’d like to do a specific thank you to Martina 

Hrvolova for helping with this. Martina and I, I think, first spoke about this subject a 

year or so ago, and I said I’d love to have a briefing on it, and CIPE has delivered very, 

very well in helping me do that. 

I’d like to also thank Lauren Meyer and our interns at the Helsinki Commission who 

came over here and got everything done. After 30 years, I’m more nervous about organizing one of these things than our interns, who just started this semester. They just get 

it all done very well—thank you—and let me thank as well Stacy Hope and Jordan 

Warlick and my other colleagues at the Helsinki Commission who helped make this 

happen, get the word out and make sure the room is set up the way we want, correct 

it when it’s not, microphones working, and recording it. 

I should mention this has been live streamed, and it will be available on the commission Facebook page and website, as well all the written submissions. I’ll include the statements that were made today as well as the reports, and there will be an unofficial transcript originally, but then it will be printed in a final form. 

And I hope to see you all again at a future commission event, and enjoy the State 

of the Union address tonight—[laughter]—and have a good day. [Applause.] 

[Whereupon, at 12:03 p.m., the briefing ended.] 

(31)

APPENDIX

PREPARED STATEMENT OF ANDREW WILSON, MANAGING DIRECTOR, CENTER FOR

INTERNATIONAL PRIVATE ENTERPRISE

Chairman Wicker and Co-Chairman Smith, Distinguished Members of the Committee, Senate and the House of Representatives, 

Good morning. My name is Andrew Wilson, and I serve as the Managing Director 

of CIPE, the Center for International Private Enterprise. 

I wish to begin by thanking Bob Hand of the Helsinki Commission for his leadership 

on this important initiative, and welcoming the participants and attendees of this timely 

briefing. 

Over the past decade, there has been an increase in the flow of funds from a number 

of non-democratic countries into emerging democracies. While in many cases, this might 

represent wholly legitimate investment, in other cases, there are signs that governments 

have specifically sought to direct this capital, to achieve purposes other than purely economic. 

At CIPE, we define this issue as ‘‘corrosive capital’’—equity, debt, and aid that both 

takes advantage of, and exacerbates weak governance in emerging democracies, to the 

detriment of their democratic and market development, as well as to influence their geopolitical orientation. Corrosive capital can distort policymakers’ incentives and decisionmaking, privileging the political influence of foreign governments over local citizens’ 

voices. 

CIPE welcomes the partnership with the Helsinki Commission, and the opportunity 

to present today these knowledgeable panelists, who will be speaking on how to respond 

to this challenge in the Balkans in particular. 

As we know, in the Balkans, despite the passage of nearly two decades since the end 

of armed conflict, democratic transitions remain woefully incomplete. Against that backdrop, in recent years, external actors have reasserted their role, diverting the Balkans 

from a trajectory of Euro-Atlantic integration. As the panelists will explain, corrosive capital has emerged as a key element of that approach, posing a major challenge for governments, business communities, and civil society across the region. 

In response, in 2017, CIPE embarked on a unique project, pioneering a new, comprehensive methodology to analyze:

• first, how what we call ‘‘governance gaps’’—such as loopholes in anticorruption policies, non-transparent procurement practices, and a lack of strong competition policies—create in the Balkans opportunities for the inflow of corrosive capital; and

• second, how that capital widens those governance gaps and potentially undermines 

the consolidation of democracy in the region.

32

A network CIPE partners, represented by the panelists today—from Bulgaria, Montenegro, Serbia, Macedonia, and Bosnia and Herzegovina—have identified specific governance gaps, and in particular, have examined the extent and impact of Russia’s economic 

footprint in the region. 

We recognize that in recent years, the countries of the Balkans have made important 

progress, but as the panelists will discuss, judicial and executive institutions are still not 

sufficiently independent, efficient, or accountable; implementation and enforcement of 

legislation is often weak and inconsistent; and further efforts are needed to tackle corruption, and to make public budgeting, procurement and privatization more transparent. 

We are honored that the Helsinki Commission has invited CIPE’s partners here to 

inform a U.S. audience about these issues, just as they are raising public awareness in 

their own countries. In addition, working with local business and civil society leaders, 

they are seeking to create greater transparency about foreign investment in the Balkans, 

and to advocate with policymakers to close identified governance gaps. By so doing, they 

aim to ensure that local business can compete on an equal footing, and that all investors 

enjoy a level playing field. 

This, in turn, will make markets and democracies in the Balkans more resilient to 

potential untoward external influence, and help ensure inclusive economic growth. This 

effort can contribute to democratizing economic opportunity in the Balkans, and countering the worrying spread of a perception in the region that democracy and markets have 

failed average citizens. We note that the European Commission plans to adopt a new 

strategy to boost democratic transition and economic reforms in the region. 

By tackling the challenge of corrosive capital in the Balkans, CIPE is also developing 

tools and approaches that can benefit other emerging democracies worldwide, including 

across Asia, Latin America, and Africa. We look forward to future opportunities to share 

the results of that work with you as well. 

Finally, I would like to close by thanking the National Endowment for Democracy for 

its support of the CIPE program that engages with today’s panelists. Of course, such 

projects are, in turn, made possible thanks to the critical commitment of the U.S. Congress to funding the NED. Thank you.

33

PREPARED STATEMENT OF RUSLAN STEFANOV, DIRECTOR, ECONOMIC PROGRAM, CENTER

FOR THE STUDY OF DEMOCRACY

ASSESSING RUSSIA’S ECONOMIC FOOTPRINT IN THE WESTERN BALKANS: UNDERSTANDING

THE NEXUS BETWEEN CORROSIVE CAPITAL AND GOVERNANCE DEFICITS

January 30, 2018 

Chairman Wicker and Co-Chairman Smith, Distinguished Members of the Committee, Senate and the House of Representatives, Your Excellencies, Dear Guests, 

I wish to begin by thanking the Center for International Private Enterprise, and its 

Managing Director Andrew Wilson, for the partnership; the National Endowment for 

Democracy for its support, and the Helsinki Commission for taking the time and initiative 

to examine the issues that are key to the security and prosperity of the Balkan region: 

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, the region 

has remained on its chosen course of Euroatlantic integration towards market economy 

and democratic transition. But the countries from the region need to not just recognise 

their vulnerability but also know their level of that vulnerability, and work to close 

existing governance gaps, which allow the penetration of corrosive capital and democratic 

backsliding. 

To improve the understanding of the interplay of existing governance gaps and corrosive capital from non-democratic countries, we, at the Center for the Study of Democracy 

(CSD), a Sofia-based European think tank, together with the Center for International Private Enterprise (CIPE), and experts from the Western Balkans developed an assessment 

of Russia’s economic footprint in Serbia, Montenegro, Macedonia, and Bosnia and 

Herzegovina. The assessments build upon CSD’s previous work—the Kremlin Playbook, 

which analysed Russia’s influence in Central and Eastern Europe. 

The Russian economic footprint in the four assesed countries has noticeably expanded 

in absolute numbers over the past decade. 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 in the Western Balkans 

has shrunk in the wake of economic recession and international sanctions following its 

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 6.5 and 10 percent. 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 

Deripaska’s 2013 withdrawal from the KAP aluminum plant in Montenegro, close to onethird 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. 

The Russian footprint is least pronounced in Macedonia, where Russian FDI tops out 

at only 1 percent of GDP. In Bosnia and Herzegovina and Serbia, the footprint is about 

equal: Russia exerts direct and indirect control over about 10 percent of the economy of 

34

Serbia, primarily in energy and banking. 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 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 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, 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. These intermediaries 

in turn have benefitted from further business opportunities or Russian support for their 

political objectives. Ultimately, the concentration of power in small influential economicpolitical 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.

Recommendations

Based on the findings of our study, we have made a number of targetted policy recommendations:

35

• There is a strong need for diversifying foreign direct investment away from an 

overreliance on corrosive capital from non-democratic countries that is concentrated 

in one or two industries.

• The corporate governance of state-owned energy companies should be depoliticized 

and improved because otherwise they can be decapitalized through long-term deals 

granting preferential treatment to clients that enjoy special status from the government.

• All infrastructure projects should be in compliance with the highest standards for 

transparency and competitive tendering, and subject to independent cost-benefit 

analysis.

• Independent institutions for privatization and follow-up monitoring should be 

strengthen through the appointment, by parliament, of staff free from any influence.

• Similarly, countries should enhance the investigative capacities of their financial 

intelligence institutions, tax administration, and anti-money laundering institutions to identify the ultimate beneficial ownership of foreign investors in order to 

prevent tax evasion and money laundering.

• The EU, its member states and the U.S. should substantially enhance their assistance mechanisms, particularly to counter corruption, to help the most vulnerable 

countries in the region build greater resilience to corrosive capital inflows.

• The US and EU should work together on joint coalition-building mechanisms in the 

Western Balkans to support the capacity-building of civil society and independent 

media to monitor and expose corruption, state capture and external risks.

• The private sector in the region, through its support organizations, should engage 

in a constructive dialogue with the national government on shaping a corruption 

free business environment and open, competitive markets in line with international 

standards, such as the ones developed by the Organisation of Economic Cooperation and Development and/or the EU.

36

PREPARED STATEMENT OF MILICA KOVAC ̆ EVIC ́, PRESIDENT, MONTENEGRIN CENTER FOR

DEMOCRATIC TRANSITION

ASSESSING THE RISKS OF THE RUSSIAN ECONOMIC FOOTPRINT IN THE WESTERN BALKANS: 

GOVERNANCE VULNERABILITIES AND RUSSIAN FOOTPRINT IN MONTENEGRO

January 30, 2018

Chairman Wicker and Co-Chairman Smith, Distinguished Members of the Committee, Senate and the House of Representatives, 

Thank you very much for having us here, to share our thoughts on the challenges 

facing the Western Balkans. 

During the Cold War, in 1956, Yugoslav Ambassador to Moscow, Montenegrin Veljko 

Micunovic, wrote to Yugoslav President Tito that history of our economic relations with 

Russia is not less dramatic than history of our political relations. ‘‘For Russia, today, as 

in the past, every trade is a direct mean of politics,’’ he wrote. Even today, it has continued to remain valid. The playbook for our region has always been the same. 

In the last decade, we saw a significant level of economic engagement by Russian 

companies and individuals in Montenegro. In addition to their economic relationship, 

Montenegro and Russia had sparkling political ties. 

Political relations have however deteriorated since 2013, as Montenegro moved forward with its NATO integration. So far, this change in the relationship has not yet significantly affected the economic ties between the two countries, but there have been some 

warnings coming from Russian officials. Russian Foreign Minister, Sergey Lavrov, stated 

in March 2017 that Montenegro sacrificed its economic relations with Russia by joining 

NATO. The dependence of Montenegrin economy on Russian investment in real estate and 

Russian tourism raises the possibility that further deterioration in bilateral relations 

could pose a grave risk to our economy. 

Today, Russian foreign direct investment (FDI) in Montenegro makes up close to a 

third of the country’s gross domestic product (GDP). Russia is the single largest direct 

investor in Montenegro, with USD 1.27 billion in cumulative investments—equal to 13 

percent of all FDI stock in the country. The majority of the FDI is concentrated particularly in real estate and tourism. 

The number of Russian tourists in Montenegro has consistently increased in the last 

ten years. Russian tourists make around one quarter of the total number of country’s visitors. This is very important because tourism is the key sector of Montenegro’s economy 

and the most powerful generator of economic growth. It makes up around one-fifth of the 

Montenegrin GDP and over 54 percent of all exports. 

It is however true that Russia’s share of the overall Montenegrin economy significantly shrank in recent years, from 29.4 percent of total revenue in 2006 to around 5.5 

percent in 2015. This is largely a result of the withdrawal of the Russian capital from 

the Podgorica Aluminum Plant (KAP), one of the largest companies in the country. 

A similar trend can be observed in an analysis of the number of employees working 

for Russian-controlled entities in Montenegro, which fell from 14.2 percent in 2007 to just 

2.3 percent in 2015. Again, primarily because of the loss of control of KAP. 

37

Based also on the experience of some other countries in the region where some of the 

initial Russian investment in energy for example spilled over to a number of other economic sectors, we can now only contemplate what would have happened if the Parliament 

have not stopped the acquisition of country’s key energy resources by KAP’s owner Oleg 

Deripaska in 2007. 

The Government of Montenegro rejected a Russian request to use the Montenegrin 

port of Bar for military purposes, despite the fact that Russia had allegedly proposed payments worth at least half of the Montenegrin GDP. In 2014, Montenegro also aligned with 

the EU sanctions following the annexation of Crimea. 

Prior to NATO admission, the Russian government condemned Montenegro’s membership aspirations and actively worked to prevent it, in particular by backing ethnonationalist groups whose policy platforms are at odds with Western values. Russian 

Deputy Prime Minister Dmitry Rogozin went even further when he said that Montenegro 

would regret joining NATO. In parallel, the Russian media started to run a negative campaign to prevent Russian tourists from coming to Montenegro describing it as a dangerous 

place. 

Montenegro accused the Russian Federation of meddling in the 2016 parliamentary 

elections by attempting to overthrow the government through the strongest opposition 

coalition in Montenegro—the Democratic Front (DF). There is an ongoing court case for 

the coup attempt against some of the DF leaders for acting against the country’s constitutional order. The indictment also includes two Russian military intelligence officers and 

several Serbian nationalists. Furthermore, another DF leader is being charged with 

participation in a money-laundering scheme during the 2016 election campaign. Allegedly, 

the DF used funds of criminal origin, provided in large amounts by Russia through offshore accounts, and then split into small installations and sent to individuals, who then 

donated the money to the party. 

Nevertheless, Montenegro managed to resist the allegedly Russian-orchestrated use 

of hard power as well as soft power, joining NATO in 2017. Yet, even NATO admission 

has not completely brought Montenegro out of the danger zone. Russian interest in the 

Western Balkans has never been to annex the region, but to keep it unstable and as far 

from the Western integration as possible. Many analysts agree that the region’s integration in the EU will be the next target. 

EU integration is supported by the overwhelming majority of citizens and key political actors in Montenegro. The report that we prepared examines the governance gaps 

that have been exploited for the intrusion of the corrosive capital, and offers recommendations on how to close these gaps to prevent further deterioration. Addressing these gaps 

is essential for our democratic reforms, inclusive economic growth, and EU integration. 

In order to succeed, we remain determined to advancing the progress made so far and 

would welcome even more international support. 

Mr. Chairman, 

I would like to thank you for your ongoing support and commitment to the region. 

The West should be persistent in demanding real democratic progress in our countries 

because it is the key to security, stability, prosperity, and resilience to harmful foreign 

influence both in the region and beyond its borders. Civil society in the Western Balkans 

looks with hope at the United States’ enhanced diplomatic engagement and relies on your 

help in ensuring that the region remains on its Euroatlantic integration path.

38

1 These findings are part of the project implemented by the Center for Study of Democracy, Sofia, Bulgaria, and a group of Balkan experts. The findings and opinions expressed are those of the CSD and experts 

and do not necessarily reflect the views of experts’ employers. 

PREPARED STATEMENT OF NEMANJA S ̆ TIPLIJA, FOUNDER, ‘‘EUROPEAN WESTERN BALKANS’’ 

MEDIA OUTLET 1

January 30, 2018

Dear Mr. Hand, Dear Guests, 

Thank you for the opportunity to appear before the Commission today. Allow me to 

thank also the Center for International Private Enterprise and the National Endowment 

for Democracy for their support and the opportunity to present our views here in Washington. We very much appreciate the interest of the Helsinki Commission in issues that 

are of great importance for the stability and future prosperity of the Balkans. 

Serbia is one of the key countries where Russian influence is most obvious. Since 

2008, it has been based on two pillars. First is the issue of Kosovo (Russia is perceived 

as the main supporter of Serbia in the international arena). Second is the Russian engagement in Serbia’s energy sector, which dates back to the South Stream construction deal 

and the (below price) purchase of the oil industry of Serbia (NIS). 

Furthermore, following particularly the global economic downturn and 2014 Ukraine 

crisis, the Russian influence has spilled over to the other key economic sectors, such as 

the financial sector and infrastructure (railways). The economic engagement, high-level 

political visits, and strengthened cultural and religious ties mutually reinforce each other. 

While most research has focused on the outright political influence, it often disregards the sophisticated networks in nations economies that exploit and exacerbate the 

democratic deficits in Serbia and throughout the Western Balkans. 

Despite the fact that the South Stream was discarded, Russia still dominates Serbia’s 

oil and gas sector. Through NIS, Russia almost completely runs oil production, refining, 

and retail. Next, Serbia imports more than 70 percent of its crude oil consumption and 

close to 65 percent of its natural gas needs from Russia. What’s more, Russia is the only 

importer of gas to Serbia and it favors inflexible long-term deals. Through those deals, 

it has gained control over a state-owned wholesale gas supplier, Srbijagas, which has, as 

a result, accumulated debt effecting Serbia’s financial health. Srbijagas, the state-controlled Serbian company, holds a dominant position on the national gas market. An intermediary (Yugorosgas), which is owned by Gazprom, receives around a 4 percent premium 

on the gas it resells to Srbijagas. Besides Srbijagas, Russians generally do a lot of business with state-owned companies and those with close connections to politics. That is why 

the country needs to advance the reform of its public administration as soon as possible. 

Gas diversification is long-overdue. Furthermore, steps are needed to tackle the restructuring and privatization of Serbia’s enterprises. Based on our analysis, lowering the 

budget deficit and reducing the high public debt level, including debt generated by companies of strategic importance also remain a challenge. 

With regard to the private sector, Russians fully or partially own approximately 1,000 

companies in Serbia. They control revenues of close to EUR 5 billion, or 13 percent of the 

total revenue generated by the country’s economy. Russian companies are also amongst 

the major employers in the country, directly employing approximately two percent of the 

39

total labor force and indirectly employing around 5 percent. What is important is that 

such employment is concentrated in just a few industrial enterprises. 

Export to Russia have become an important aspect of the economic relationships 

between Russia and Serbia, particularly following the expansion of the free trade agreement (in 2009 and 2011). Russia’s 2014 embargo on the imports of EU agricultural and 

food products has provided a boost to exports in non-EU countries in the Western Balkans. Nowadays, Serbia’s export to Russia is the highest by volume in the Southeastern 

European region after Greece. 

Russian foreign direct investment (FDI) remained relatively small, amounting to 4 

percent of all FDI stocks in Serbia according to date available for the period from 2005 

to 2016. Should we account also for investment flowing from third states but still attributable to Russians along with their reinvestment from profit the total Russian FD) would 

be around USD 2 billion, or 6 percent of the country’s GDP. 

During Serbia’s fiscal crisis, Russia further deepened its engagement with the Serbian economy by adding loans to the array of other tools deployed to promote its interests. 

Some of these loans reportedly stipulated less favorable conditions than those of the international economic institutions and even granted preferential status to Russian state 

owned contractors for the infrastructure modernization projects While Russia’s presence 

in the finance sector is somewhat limited (through three banks that occupy a small portion of the market), borrowing loans from Russian banks may involve risks as shown by 

recent Agrokor crisis. Relying heavily on bank loans, this retail has recently expanded 

into almost all countries of the Western Balkan, including Serbia. In early 2017, not only 

Agrokor employed some 60,000 people throughout the region but also accumulated debt 

totaling around USD 6.4 billion or six times its equity. Sberbank owns around 18 percent 

of it. Despite the debt, Agrokor remained relatively stable until a statement of Russian 

Ambassador to Croatia sent shockwaves through the market. Again, in Russia’s mind, the 

economic engagement and other tools mutually reinforce each other. Russia attempts to 

wield influence also through initiatives in the spheres of media, culture, church, nonprofits, and academia. It provides support, including financial, to organizations, groups, 

and individuals that promote Russian interests in foreign countries, including in Serbia. 

In Serbia, Russia has supported development of several media enterprises and information initiatives of major Russian media outlets. For example, the state-owned news agency 

Sputnik opened its regional editorial office in Belgrade in 2015. They seek to disorient 

the local audience by offering narratives that exploit Serbia’s weak spots in and promote 

the Russian interests. 

To conclude, I would like to stress that all relevant actors, whether Serbian, regional 

or international, need to recognize the potential costs of the inflow of corrosive capital the 

region is facing. They should press for real democratic progress, which is the real key to 

regional security, long-term stability, inclusive growth, and countering malign foreign 

influence. Based on the analysis I conducted together with a Research Director of ISAC 

Fund Igor Novakovic and in addition to the regional report presented by the Center for 

Study of Democracywe would like to make the following country-specific recommendations: 

Serbia should ensure that infrastructure projects funded by foreign governments are 

not exempt from the EU’s and national laws on public procurement and transparency and 

are in accordance with relevant international rules. Hence, Serbia’s energy infrastructure 

40

projects should follow the country’s obligations on the European level, including in the 

areas of ownership of gas transmission, supply, and production. 

Serbia should explore it’s the possibility of completing its natural gas interconnections with Bulgaria and Croatia to allow for diversification of the gas supply. 

Commission for Protection of Competition should prevent the concentration of ownership in strategic sectors such as the oil and gas sector and monitor possible market collusion that hinder competition and lead to monopoly. 

There needs to be a clear separation of the management of state-owned energy 

companies and politics. Government’s nominations of professional management should be 

considered by the parliament to ensure its independence from external pressure. 

Serbia should ensure that the sale of distressed companies and assets is transparent 

and should be careful about potential concentration of capital in the hands of a small 

number of politically-connected businesses. 

Media and communications regulators, the Republic Broadcasting Agency and the 

Republic Telecommunications Agency, should investigate ultimate beneficial ownership of 

media and alert counterintelligence in cases of foreign covert operations involving 

disinformation campaigns in the country. 

Finally, the media should play a critical role in objectively informing (even educating) 

the public about how strategic economic sectors, such as energy, function to debunk 

existing misconceptions and expose those decisions that harm Serbia’s public interest. In 

this respect, the government should ensure that media outlets operate in a safe environment and are granted full access to public data and information.

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