Russia reconquers Eastern Europe via business

Russia's Kremlin-backed businesses are snapping up assets in former Eastern Europe, though governments are still wary.

More than 20 years after Soviet tanks and soldiers pulled out of then-Czechoslovakia in Eastern Europe, Russian influence is on the rise in what was once its imperial backyard. Where guns and bullets failed, rubles are succeeding.

Local governments are selling off state assets to plug gaping budgetary holes as the global financial crisis bites. Western corporations are tightening belts and selling off some assets in the region. Stepping into the void are eager Russian businessmen, some backed by the Kremlin, as money trumps lingering suspicions from decades of Moscow-led Communism.

From the downfall of the Soviet Union in 1991 until 2008, Russian investment to Eastern Europe totaled a paltry $2.4 billion over 17 years, according to the United Nations Conference on Trade and Development (UNCTAD). The total for just the past three years has already reached $2.8 billion.

"These firms are highly profitable now, and they've realized the Russian market is not enough," says UNCTAD researcher Kalman Kalotay. "They're looking elsewhere to grow their businesses. Plus they're getting support from the Kremlin, which realizes Russian business can help pursue the state's strategic interests."

Vaclav Petricek, the chairman of the Czech Cham­ber for Economic Ties with the Commonwealth of Independent States, says the Czechs and other Eastern Europeans have put aside grudges to pursue business interests.

"It's the free market at work," Mr. Petricek says. "Rus­sian investors are benefiting from the current global financial crisis, which has caused problems to some European firms. Of course, we have to watch to make sure no one comes to dominate sensitive sectors, like energy."

Shopping spree

Russians have been on a shopping spree in the region.

In July, Russia's largest state-run bank, Sberbank, which has close ties to Prime Minister Vladimir Putin, bought out the Eastern European division of an Austrian bank. Announcing the acquisition, German Graf, a former economics minister, boldly stated: "This is our first step in transforming Sberbank into a global bank."

Another state-held Russian bank is reported to be courting Czech magnate Petr Kellner to buy a 10 percent stake in one of the Czech Republic's very successful credit agencies.

Russia's second-biggest bank recently paid some $141 million for a majority stake in Bulgaria's state tobacco company. And Russian Railroads is eager to buy out rail-cargo businesses in Poland and Slo­vakia, according to Bloomberg. The Rus­sian oil concern in Poland is in the running to buy the government's majority stake in a refinery in the Baltic port of Gdansk.

Spreading clout

Russians are also using their vast oil and gas reserves to spread clout. At the forefront is Gazprom, one of the world's largest energy companies. The Russian gas giant supplies about 25 percent of the natural gas sold in Western Europe. In Eastern Europe, the percentage is higher: Bulgaria and Slovakia alone depend on Gazprom for 90 percent of their gas.

Gazprom is also buying up energy infrastructure in the region. Through a subsidiary, Gaz­prom has bought a Czech natural-gas supplier and is expected to use its network to heat Czech homes.

A battle royal is brewing in the nuclear energy sphere, pitting Moscow against Washington for a project billed as one of Europe's biggest and most lucrative: The Czech Republic is planning to build more reactors at one of its two nuclear power plants.

Washington and Moscow are eager to win this deal. When President Obama visited Prague in 2010, the deal was high on the agenda of his talks with Czech officials.

The nuclear deal promises high financial gain. US diplomats in Prague reportedly put the value of the Temelin contract at $27 billion, and it could create up to 9,000 jobs in the United States, according to a leaked US diplomatic cable from 2009. (Bidder Westinghouse Electric Co., while based in the US, is owned and operated by Toshiba of Japan.)

Despite Japan's recent nuclear disaster, Eastern Europe still appears eager to tap the atom for power. Poland, especially, has ambitious plans to build nuclear power plants, and winning the Temelin tender could open doors there and elsewhere.

Tough competition

The Russian consortium may have an edge over Westinghouse and French competition.

A Russian engineering conglomerate owns a key Czech nuclear supplier. And last year, the Russians beat out Westinghouse as suppliers of nuclear fuel to the Czech Republic's two nuclear power plants.

"Purely on economics, the Russian bid will be tough to beat," says Petr Kratochvil of Prague's International Institute of International Relations.

"It is expected the Russian bid will be the lowest, plus the Russians are promising 60 percent of the work will be carried out by Czech subcontractors. However, politics may mean the Russians lose," says Mr. Kratochvil.

It is the fear of giving away too much control of a key energy source that could ultimately sour the Russian bid, says Kratochvil.

Similar sensitivities prompted Hungary recently to reexamine its energy relations with Moscow.

Budapest used some $2.7 billion of its bailout from the International Monetary Fund to buy out a Russian stake in Hungary's largest oil refiner.

Announcing the deal in May, Prime Minister Viktor Orban said, "a country can't be strong if it's completely dependent for its energy needs." It wasn't the first time a European leader has cited security concerns to rule out the Russians on a business deal.

In 2010, Russian airline Aeroflot was rebuffed from participating in the privatization of the Czech airline CSA. Prague feared handing over to the Russians a key industrial player.

And the Czech Republic's main security agency, Security Information Service, or BIS, has warned of growing cooperation in the Czech Republic between Russian intelligence agents and that country's business elite. BIS says Russian spies are the most "active" ones on Czech soil.

But, insists a BIS spokesman, "If any business activity is suspicious or could threaten Czech national interests, we will inform the gov­ernment."