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State Capture and Government Integrity: Democratic Resilience against the Kremlin Playbook in the Balkans

Can Europe prevent its weakest links from breaking ranks on sanctions and democracy?

The ongoing war in Ukraine and Europe’s self-made Russian gas trap are stark reminders that the European Union is still incapable of protecting its geopolitical and geoeconomic interests alone. If the EU wishes to prove its viability as a global geopolitical actor, it must close the book on an issue 20 years in the making – the Balkans’ accession and further integration. Can European institutions persuade reluctant political leaders in Southeast Europe to advance anti-corruption and rule of law reforms in the face of state capture and aggressive Russian influence? The jury is still out in both the EU member states and hopeful applicants in the region.

Russia’s war of aggression in Ukraine threatens the economic and political security. The principles of good governance are crucial for maintaining resilience and unity in the face of Russian military aggression and energy blackmail. that The greatest danger facing European governments now is a collapse of their united response, due to short-term political pressure created by rising energy prices and mounting  losses in their voters’ economic prosperity. Southeast Europe is the continent’s weakest link due to its susceptibility to Russian influence, persisting ethnic and societal fissures, and consistently high levels of corruption and state capture in the region.

The current security, energy, and health crises could overwhelm democratic institutions in Europe. The Italian government crumbled in July amid its attempt to ease rampant inflation; Southeast Europe is even more vulnerable by comparison. On 22 June 2022, the Bulgarian government fell to a  vote of no confidence for the first time in the country’s modern history. And although the reality is more complex, the vote certainly marked an apparent moment of unity between a group of establishment parties with a longstanding reputation for failing to act on corruption and a rising pro-Russian fringe. On the other hand, Russia-friendly governments in the region have used the crisis to crack down on opposition and attempt to leverage their close ties with the Kremlin into economic gains. The Hungarian government declared a state of emergency in energy, and urged the EU to lift its sanctions on Russia. The Serbian government refused to apply sanctions and attempted to use its strategic position as a bargaining chip to win concessions from Moscow, all while cracking further down on opposition at home. Polarized public attitudes, war anxieties, and dissatisfaction with rising costs of living have all pushed European societies towards anti-establishment and extremist political parties, and driven a rise in political protests.

Within the Balkans, energy prices have already spurred disruptions and civic protests in Albania. In March 2022, when fuel prices in the country first rose steeply due to the invasion of Ukraine, activists, civil society organizations, and opposition parties organized large-scale protests, blocking vital roads such as the highway connecting Albania to Kosovo. The Skeptical of the government’s explanations, the public has blamed  the price hikes on the oligarchic monopolies which control energy resources in Albania. Similarly, drivers protested soaring fuel prices in Bosnia and Herzegovina in March 2022, demanding immediate government action  to ease the spike in fuel costs, which has directly harmed t their businesses. However, there is a glaring lack of political will to mitigate the situation ; European leaders have demonstrated that they lack both the decisiveness to act and the creativity to design effective solutions. Public discontent in the region has also been fueled by the general public perception that Southeast European energy monopolies are exploiting the crisis for windfall profits. Public accountability deficits in state-owned energy enterprises allow for political and oligarchic networks to wield undue influence over decision-making for their own financial benefit, further exacerbating the effects of Europe’s ongoing energy crisis.

The Russian energy entrepôts in SEE

Dependence on Russian resources and technologies in SEE’s energy sector has persisted for decades, , steadily eroding the region’s resilience to Moscow’s political and economic pressure. The energy sector represents a critical governance vulnerability prone to significant waste of public resources, opportunities for illegal financing, and foreign malign influence. The governments in Southeast Europe have frequently been rightly criticized for delaying or blocking the liberalization of  energy markets in favor of local oligarchic corporate networks and Kremlin-controlled providers.

The SEE energy sector suffers from a lack of solid legal framework (e.g. OECD’s corporate governance guidelines for state-owned enterprises), which leads to has limited financial transparency and enabled widespread political interference in the companies’ management. There is also a a high degree of financial vulnerability, especially in the enterprises dealing with raw materials, which are struggling with the rising prices of coal and natural gas. SEE governments’ efforts to avoid public discontent by maintaining artificially low energy prices damage the financial health and political independence of the SOEs, while the regulatory authorities provide further inroads for undue outside interference.

Unregulated public procurement – a road to state capture

The average loss of value in public procurement due to corruption (favoritism and clientelism) is between 10% and 25%, with SEE likely falling towards the higher end. For example, half of the winners of public procurement tenders in Croatia are partially or fully owned by the state, with connections to high-ranking public officials. In Hungary, the leading party has formed a new economic elite in the last 11 years, whose corporations received a the lion’s share of state subsidies. Approximately  90% of Hungarian public procurement contracts are overestimated by around 25%. Similarly,  in North Macedonia, there are significant discrepancies between the market prices and the prices stated in procurement contracts for identical products. Other practices such as overly detailed specifications in tenders, closed public procurement procedures, and amendments to the contract during the implementation phase, are also common in the region.

What’s next: Tackling the Kremlin Playbook in SEE through integrity

Increased European and U.S. financial and technical support, would benefit the SEE region’s efforts recover and match pace with more developed EU economies. However, the lack of reliable transparency and accountability measures could result in the abuse of this support, hindering the effective implementation of recovery and resilience measures. Thus, SEE governments should:

  • Take strong and concerted measures towards accelerating their integration with EU supply chains;
  • End their stances of geoeconomic ambiguity, especially regarding energy, and form a united front against foreign autocratic influence; Ensure the strict implementation of sanctions against Russia;
  • Reexamine their bilateral investment treaties and international agreements to conform with EU regulations on investment screening;
  • Investigate controversial agreements and contracts in large-scale public procurement and introduce regular red-flag monitoring and investigations of identified high-risk tenders;
  • Ensure the independence of national energy and competition regulators.

 

This blogpost is based on the findings of the report “Public Procurement Integrity for Southeast Europe”, developed by the CSD-led Regional Good Governance Public-Private Partnership Platform (R2G4P). The report covers the following countries in Southeast Europe: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Hungary, Montenegro, North Macedonia, Romania, and Serbia.

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