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Jan 16, 2014 | 19:53 GMT

5 mins read

The Political Economy of Russian Loans

Russia's President Vladimir Putin (L) and Hungary's Prime Minister Viktor Orban (R) speak during a meeting at Putin's residence outside Moscow, on January 14, 2014.
(YURI KOCHETKOV/AFP/Getty Images)
Summary

Despite its strained economy, Russia is reverting to its common tactic of issuing loans to achieve some of its diplomatic and political goals. On Jan. 13, former Russian Finance Minister Alexei Kudrin warned that the government's decision to extend a $15 billion loan to Ukraine from Russia's National Wealth Fund poses a risk to Moscow's portfolio, noting that without economic reform, Ukraine will find it difficult to repay the loan. The day after his warning, the Russian Finance Ministry announced that Russia's Reserve Fund lost 25.57 billion rubles (some $765 million) in December, while the National Welfare Fund lost 22.15 billion rubles. Though lending money to neighbors may appear financially irresponsible at this time, it is actually a calculated move by Moscow to compel countries in Central and Eastern Europe to comply with its wishes.

Over the past several years, the Russian government and state-owned entities such as Gazprom have committed to providing Central and Eastern European states with a variety of loans. While many of these are unlikely to be repaid in full as scheduled, the Kremlin is not making such deals for financial reasons. Instead, Russia is using its vast financial resources to further its geopolitical goal of expanding its commercial and political influence in the European Union's borderlands. The following countries have benefited most significantly from Russia's lending strategy.

Belarus

Belarus remains one of Russia's closest allies and a critical part of the Kremlin's geopolitical strategy. The two countries cooperate closely through the Russia-led Customs Union and within the framework of the Collective Security Treaty Organization. The recent increase in security cooperation among Baltic and Nordic states makes Belarus more important for Russia as both a buffer for NATO and a base for Russia's military activities in the region. Russia regularly supports Belarus financially to guarantee continued cooperation from Belarusian President Aleksandr Lukashenko. In late December, Russian President Vladimir Putin said that Russia would grant Belarus a loan of up to $2 billion in 2014, with a repayment period of 10 years.

Russian Loans to Europe

Russian Loans to Europe

Ukraine 

Putin is committed to maintaining Ukraine as a buffer between Russia and the European Union. Moreover, Ukraine continues to serve as a major thoroughfare to Western Europe for Russian energy exports. In December, Russia offered to purchase $15 billion of Ukrainian debt and give Kiev a 33 percent cut in natural gas prices after Ukraine froze negotiations with the European Union over  an association agreement. Moscow has already purchased the first tranche of Ukrainian bonds for $3 billion and is expected to continue buying bonds in early 2014. The loan, which is drawn from Russia's National Wealth Fund, aims to help Ukraine finance its large current account deficit, boost Ukrainian President Viktor Yanukovich's domestic standing and discourage the country from pursuing further integration with the European Union.

Bulgaria 

For Russia, the South Stream pipeline remains at the center of a long-term strategy for ensuring that natural gas diversification, in the form of shale gas exploration and new supplies from Azerbaijan and the Middle East, do not dramatically reduce Russia's market share in Europe. Bulgaria is the most critical transit state for the Gazprom-led South Stream pipeline project because its position on the Black Sea and its friendly relations with Russia and Central European countries enable it to connect the pipeline's undersea section to European markets. Construction formally began on the Bulgarian section of the pipeline in November 2013, though the selection process to find the company that will build it continues. Gazprom will provide its Bulgarian partner, state-owned energy company Bulgarian Energy Holding, with a loan of 620 million euros ($843 million) for a 22-year term to help cover the costs of construction. 

Hungary

Putin has welcomed Hungarian Prime Minister Viktor Orban's "Eastern Opening" policy, meeting frequently with Hungarian officials over the past few years. Orban's strategy of balancing Brussels' influence by pursuing stronger ties with Russia has opened new commercial opportunities for Moscow in Hungary. While the details have yet to be published, Putin and Orban signed a deal Jan. 14, whereby Russia will reportedly lend Hungary up to $13.7 billion to upgrade the Soviet-era Paks nuclear power plant. The loan will be repaid over a 30-year term and will likely allow Russia to play a much larger role in Hungary's energy sector. The liberal opposition coalition in Hungary has criticized the deal, suggesting that it was reached without a formal bid. 

Serbia 

Historical ties, economic cooperation and opposition to secessionist movements have contributed to Russia's close relationship with Serbia. Moreover, Moscow aims to secure Belgrade's cooperation in the construction of the South Stream pipeline. Serbia has historically strived to pursue cooperation with both Europe and Russia, continuing to balance its interest in EU membership with its vision of becoming Russia's gateway to the Balkans and Central Europe. In April 2013, Russia agreed to lend Serbia $500 million to help finance the country's budget deficit. The first tranche of $300 million was delivered immediately. In January 2013, Russia agreed to make a five-year, $800 million loan to Serbia to assist with the modernization of its transportation system, primarily focusing on railways. Furthermore, in the first quarter of 2014, Serbia's state-run oil company Srbijagas is expected to receive a loan of 175 million euros from Gazprom to help finance the Serbian section of the South Stream pipeline.

Cyprus

Cyprus' role as a financial haven for Russian depositors has presented a challenge for Russian policymakers. Before Cypriot banks were forced to temporarily close and wait for an international bailout in March 2013, conservative estimates put the value of Russian deposits in the island's banks at anywhere between 5 billion and 10 billion euros. Furthermore, Russia is interested in playing a role in the Eastern Mediterranean natural gas sector. While the Kremlin declined to bail out Cypriot banks in April 2013, Russia restructured its 2.5 billion euro loan to Cyprus from 2011, extending it by two years and lowering the interest rate from 4.5 percent to 2.5 percent, thus aiding the international effort to stabilize the island's financial sector.

Although criticism from a previous finance minister can seem like an indictment of Russian fiscal policy, the employment of loans appears to be part of a calculated maneuver on the part of the Kremlin. Moscow has always been willing to use threats to achieve its geopolitical goals (from military intimidation to restriction of energy supplies), but offering financial incentives serves as a tool for currying favor in Central and Eastern Europe while possibly providing significant means for enforcing compliance with the Kremlin's wishes in the future. 

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