    [Joint House and Senate Hearing, 115 Congress]
    [From the U.S. Government Publishing Office]

    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

                          [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                    JANUARY 30, 2018

                                    Briefing of the
                  Commission on Security and Cooperation in Europe
    ________________________________________________________________________

                                     Washington: 2018

                           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                                      SENATE
    CHRISTOPHER H. SMITH, New Jersey         ROGER WICKER, Mississippi,
      Co-Chairman                              Chairman
    ALCEE L. HASTINGS, Florida               BENJAMIN L. CARDIN. Maryland
    ROBERT B. ADERHOLT, Alabama              JOHN BOOZMAN, Arkansas
    MICHAEL C. BURGESS, Texas                CORY GARDNER, Colorado
    STEVE COHEN, Tennessee                   MARCO RUBIO, Florida
    RICHARD HUDSON, North Carolina           JEANNE SHAHEEN, New Hampshire
    RANDY HULTGREN, Illinois                 THOM TILLIS, North Carolina
    SHEILA JACKSON LEE, Texas                TOM UDALL, New Mexico
    GWEN MOORE, Wisconsin                    SHELDON WHITEHOUSE, Rhode Island

                           Executive Branch Commissioners

                            DEPARTMENT OF STATE
    			DEPARTMENT OF DEFENSE
    			DEPARTMENT OF COMMERCE

                                 [II]

    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: .

    ABOUT THE ORGANIZATION FOR 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: .

                                    [III]

                      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 Kovacevic� ..................................................    36
    Prepared Statement of Nemanja Stiplija ...................................................    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

                                                 [IV]

                             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 Kovacevic,
    President, Montenegrin Center for Democratic Transition; Nemanja
    Stiplija, 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 co-chairman 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
    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. 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 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, 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 6\1/2\
    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.
        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.
        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 Kovacevic. Milica is president of the
    Center for Democratic Transition in Montenegro. Welcome. We look
    forward to your statement.
        Ms. Kovacevic. 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 Russian 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
    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 Stiplija, who's the editor in
    chief of ``European Western Balkans,'' a web portal focusing on the
    European integration of the Western Balkans.
        Nemanja.
        Mr. Stiplija. 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, long-term 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 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 state-owned 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.
        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 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.
        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 vis-a-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.
        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. Kovacevic. 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.
        Mr. Stiplija. 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
    Vucic 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
    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 decision-making.
        Mr. Hand. Thank you.
        Paul?
        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.
        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.
        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 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 high-risk 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 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 Erdogan 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. Kovacevic. 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--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. Stiplija. 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----
        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. Stiplija. 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.
        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.
        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?
        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, 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. Kovacevic. 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.
        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.
        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 so-called
    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 Erdogan to resolve their issues, but I
    guess the message from Erdogan 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.
        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.]

                              A P P E N D I X

    =======================================================================

       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 decision-making, 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.

        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.

    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 one-third of that country's economy was under
    the direct and indirect control of Russian firms. Even today, Russian
    FDI stock in Montenegro is close to 30 percent of the country's GDP.
        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
    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
    economic-political networks creates vulnerabilities that Russia can
    exploit to affect public and private decision-making.
        Finally, to amplify the effect of its economic footprint, Russia
    has deployed an array of traditional soft power instruments, including
    through media, support for pro-Russian non-profits and political
    parties, as well as high-level political visits and statements. These
    tools have been used to leverage both current governments and
    opposition groups, depending on which means suit Russia's ends.

    Recommendations

        Based on the findings of our study, we have made a number of
    targetted policy recommendations:

          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.

    PREPARED STATEMENT OF MILICA KOVACEVIC� , 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.
        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 ethno-nationalist 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.

    ---------------------------------------------------------------------------
    \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 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, non-profits, 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 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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