[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
                                      [email protected]
                                      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?evicï¿½, President, Montenegrin Center for Democratic Transition ..............     7
Nemanja S? tiplija, Founder, ï¿½ï¿½European Western Balkansï¿½ï¿½ 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 Kovacevicï¿½ ..................................................    36
Prepared Statement of Nemanja Stiplija ...................................................    38
Center for the Study of Democracy Policy Brief: Assessing Russiaï¿½s Economic Footprint in 
 Macedonia ...............................................................................    41
Center for the Study of Democracy Policy Brief: Assessing Russiaï¿½s Economic Footprint in 
 Serbia ..................................................................................    57
Center for the Study of Democracy Policy Brief: Assessing Russiaï¿½s 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 RUSSIAï¿½S 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 KOVACEVICï¿½ , 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, ï¿½ï¿½EUROPEAN WESTERN BALKANSï¿½ï¿½ 
                       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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