CIPE Experts discuss Effects of Governance Gaps and Corrosive Capital in Balkan Countries

01.19.2018 | CIPE in News | Martina Hrvolova, Eric Hontz

Mind the (Governance) Gap

This article first appeared in European Western Balkans and was written by Martina Hrvolova and Eric Hontz

Over the past decade, Russia and a number of other countries have sought to play a larger role in the Western Balkans. The tools that these countries have used are not new, but the extent of their involvement certainly is. These include not only instruments of soft power, such as cultural, religious and media campaigns, but increasingly also, in the case of Russia in particular, economic interventions. Slowly but surely, Russian state-owned and state-affiliated businesses are taking possession of key sectors of Balkan economies, transforming Russia into a significant power in the region.

At the U.S.-based Center for International Private Enterprise (CIPE), we term the proliferation of inflows from countries such as Russia into countries with weak governance “corrosive capital,” because of the nature of its interaction with local economies and detrimental effect on democratic institutions. In important ways, these inflows of capital – including debt, equity and even loans – are different from healthy foreign investment, which furthers inclusive economic growth.

In the Balkans, through backchannels and the exploitation of so-called “governance gaps” – including weak policies on procurement, anticorruption, privatization and antimonopoly, as well as non-independent judicial systems and the like – Russia has deepened its economic engagement. As a result, in many cases, governments have taken decisions that not only lack commercial logic, but that seem inconsistent with their national interests. Further, local elites have benefited from their connections, at the expense of average citizens. As a result, citizens’ frustration with market democracy grows, Balkan entrepreneurs struggle to compete, and Western investors do not find a level playing field. This dynamic further undermines democracy and the potential for Euro-Atlantic integration in a region where democratic transitions are still woefully incomplete.

To address these challenges, CIPE launched a project to pioneer a new methodology to quantify Russia’s economic presence in the Balkans, with a particular focus on the issue of corrosive capital, analyzing how this capital interacts with local governance. This is the first time that foreign economic engagement in the Balkans has been studied in such a comprehensive manner. A series of upcoming reportswritten by CIPE partners, including the Sofia-based think tank Center for the Study of Democracy and a network of local experts in Montenegro, Serbia, Macedonia and Bosnia and Herzegovina, will show how governance gaps create opportunities for the inflow of corrosive capital, and how such capital exacerbates these governance gaps.

These experts have found that Russian companies, many of them state-owned or state-controlled, have invested close to €2.5 billion over the past decade in the four countries covered in the study. The capture of the region’s oil and gas sectors by Russian state-owned and ostensibly “private” firms has been noted as a particular problem. The reports also look at Russia’s engagement in the region’s banking, mining, pharmaceutical, and real estate sectors. The effect on regional attitudes is clear: when Gazprom charges Balkan citizens more than Germans to stay warm, it is no wonder that many in the Balkans believe that democracy has not delivered prosperity.

Building on its partners’ studies, CIPE plans to engage with local business communities in the Balkans to advocate that governments and policymakers close the identified governance gaps allowing for the inflow of corrosive capital. By encouraging greater transparency in investment, and more responsible policymaking, Balkan economies can become more resilient to corrosive capital. These countries can ensure that all entrepreneurs and investors in the region who play by the rules have the chance to succeed; in other words, they can democratize economic opportunity. This will help counter the widespread misperceptions about the failings of liberal democracies and market economies in the Balkans, and restore the region’s eventual Euro-Atlantic trajectory.

Martina Hrvolova is a Program Officer for Eastern Europe, and Eric Hontz is a Program Officer for Eastern Europe & Eurasia at the Center for International Private Enterprise (CIPE).