On 4 August, the EU, on Berlin’s initiative, added three more citizens of Russia and three companies to its sanctions list, due to a breach of the Russian Ministry of Energy’s agreement with German company Siemens.
When it was announced that the German industrial giant planned to sell gas turbines to Russia, many analysts had warned that Russia would use them for a power plant in Crimea. The peninsula is in desperate need of energy since it was cut off from mainland Ukraine following the Russian annexation. Siemens’ management claimed that the equipment would not be delivered to the occupied territory. Despite these hopes, the analysts had correctly predicted the Russians’ behaviour.
This is not the first instance of large Western corporations being duped by the Russian state. What follows is a tale of how Russia exploits its connections to big business in order to ensure the sustainability of its economy.
British Petroleum and Lufthansa
On March 19, 2008, officials from the Russian Interior Ministry raided the offices of Russo-British oil company TNK-BP (a joint venture between the Tyumen Oil Company and British Petroleum). The CEO of the company was forced to leave Russia and the company’s energy consultant was charged with espionage. This episode was a result of growing tensions between the British and Russian stockholders, with the Russian government deciding to intervene on the side of the latter.
There was also a deeper significance behind this action. One of Vladimir Putin’s closest allies, Rosneft’s CEO Igor Sechin, used the opportunity to further integrate the oil market in Russia. The series of transactions that followed led to Rosneft acquiring control over TNK-BP. In exchange, the British company bought 19.75% of Rosneft, becoming the second biggest stakeholder of the company after the Russian government.
The Russian side, apart from money, received access to extraction technologies. And BP is still yet to receive what Russia promises them regularly: direct access to oil and gas resources. The biggest current project, extraction in Siberia, is to be conducted by joint companies with the majority of shares belonging to Rosneft.
In October 2007, Lufthansa’s cargo flights in Russian airspace were banned. Initially, it seemed that this was an effect of differences of opinion about the cost of flying over Russian territory. Again, the real reason was slightly different from that which was given officially. The ban was intended to force Lufthansa to move one of its regional cargo hubs from Astana in Kazakhstan to Krasnoyarsk in Siberia.
The ban was quickly removed; an apparent indication of both sides’ agreement. Two years later, the German company relocated its hub to Krasnoyarsk, officially claiming that, “with the relocation of our operations, we are realising a long-planned optimisation of the routing.”
Access to elites
When the public debate turns to discussion of how to deal with Russia, one popular argument for adopting a more conciliatory approach to the Kremlin concentrates on the need to maintain economic cooperation. This line of thinking is present in a recently published report prepared by the Centre for Strategic and International Studies and the Russia International Affairs Council. It is also used by some European politicians, especially in France, Germany and Italy. Supporters of this approach point to the importance of the Russian market to western companies.
Nonetheless, looking at the export numbers for the two countries, it is evident that even before the sanctions, the Russian market was far from crucial to them. According to Eurostat data in 2013, the majority of British and German exports went to the EU – €177 billion and €618 billion respectively.
Exports to Switzerland were valued at €52 billion and €46 billion respectively, while exports to Russia were a mere €4 billion and €35 billion. Both Germany and the UK mostly export cars, vehicle parts and pharmaceuticals, whilst importing oil. The nature of these industries means that large companies dominate economic relations.
At the same time, the health of European economies lies in Small and Medium Enterprises (SMEs). According to Eurostat, in Germany they employ 60% of the workforce and are responsible for 53% of gross value added. For the UK, these percentages are 53% and 50% respectively. In both countries, SMEs make-up 99% of all companies.
So why, despite problems with doing business in Russia and questionable gains for citizens of European countries for this cooperation, do businessmen and politicians continue to talk about the importance of economic cooperation with Moscow?
One explanation is that the Kremlin knows how to access the managers of large companies and high ranking officials in European countries. Former German Chancellor Gerhard Schröder is a classic example. He has been an active supporter of the Nord Stream project, which seeks to build a gas pipeline from Russia to Germany, bypassing Ukraine and the Baltic States.
After stepping down as chancellor he accepted Gazprom’s nomination for the post of the head of the shareholders’ committee of Nord Stream AG. Recently, he was also nominated as a director of the board of Rosneft.
And he is not the only European former politician involved with Nord Stream. The project required the agreement of some Baltic Rim nations under the Espoo Convention, a UN agreement that seeks to mitigate the environmental impact of large scale projects. To achieve this goal in Finland, Nord Stream AG hired former Finnish Prime Minister Paavo Lipponen as a consultant, meaning that Schröder and Lipponen were rewarded for their support of Nord Stream pipeline project, which in turn was financed mainly by companies and banks from Europe.
A model built on loyalty and stability
By suggesting future gains to businessmen Russia is able to draw resources for current needs of the government in Moscow. European businessmen are usually concentrated on economic gains for their companies and are therefore susceptible to promises of profit. Further, the more these large corporations invest in a given country, the harder it is for them to cancel the project into which they have invested so much time and money.
As B. B. de Mesquita and A. Smith demonstrate in “The Dictator’s Handbook” one doesn’t need to convince the majority to gain power: all that is necessary is a small but loyal group of supporters. This works well in influencing both democracies and businesses, and the Kremlin has known this for a long time. It mastered the art of involving a small group of supporters that then helps to convince respective governments that economic cooperation with Russia is important.
Internal reforms, a reduction in corruption, an increase in transparency and the de-politicisation of the Russian economy would lead to stable economic cooperation between Russia and the West as it would be based on small and medium enterprises. Instead, the Kremlin prefers to concentrate on informal influence. This lies in the nature of crony capitalism which dominates the country. However, it should not rule in the decision-making process of democratic countries.
This publication expresses only the opinions of the author himself and cannot be considered the official position of the Ministry of Foreign Affairs of the Republic of Poland.