THE DEKLEPTOCRACY REPORT
MAY 30, 2024
Welcome to The Dekleptocracy Report! The Dekleptocracy Project (TDP) is a 501(c)(3) based in Virginia. We’re on a mission to show how existing levers of accountability can protect democracy and prevent authoritarians, their networks, and enablers from exploiting or circumventing the US system. As always, please sign up and forward this newsletter.
BOTTOM LINE UP FRONT
Welcome to our 11th newsletter of 2024! This week we take an in-depth look at Serbia’s relationship with Russia. We consider how the US and EU can engage with Belgrade and its authoritarian president with an anti-corruption agenda that offers Serbs a pathway, accompanied by clear and fair conditions, to European integration and a departure from the paramilitarism and graft that has blighted the country’s development since the end of the wars of the 1990s.
In the Digest, we talk about an important Washington Post investigation of the disturbing rise of assassinations by India’s intelligence services of Sikh activists abroad, including a failed plot to allegedly kill a US citizen in New York City. In Canada, the killing last year of a Sikh activist in British Columbia has poisoned Canada’s relationship with India, and puts the world’s largest democracy in the questionable company of Iran and Russia as a state willing to carry out politically motivated killings on foreign soil. We also look at Russia’s latest steps to seize Western assets in anticipation of US and EU efforts to give Ukraine income earned by frozen Russian state assets abroad.
In Qui Custodiet, we read with interest an interview in the South China Morning Post with Daleep Singh, the US deputy national security adviser for international economics, who put needed perspective on the Russia-China relationship, noting the profound power imbalance favoring China. As he points out, the US and EU have a trade turnover roughly seven times that of Sino-Russian trade volumes, which translates into significant risks for China, especially Chinese banks, in defying Western sanctions. We also noted the first concrete US response to Georgia’s foreign agent law, the introduction of visa restrictions on certain officials, and the expectation that a meeting this week of EU foreign ministers is likely to produce moves from the EU, including a potential suspension of the visa-free travel regime currently in place.
In Around the World, we look at research suggesting that most multinationals in Russia have stayed put since the full-scale invasion of Ukraine in February 2022, but the risks and costs continue to rise, albeit driven almost exclusively by Moscow’s predatory approach to foreign companies rather than threats of sanctions enforcement. And we talk about a bizarre but deadly serious accusation by the French government that Azerbaijan fomented violence in the overseas territory of New Caledonia early this month as a form of payback for France’s allegedly pro-Armenian stance on the decades old Nagorno-Karabakh conflict.
SOFT POWER AND HARD REALITIES
A well-known billboard in the center of Belgrade features intertwined Serbian and Russian flags with the caption “Zajedno” (“Together” in Serbian). For Russia, Serbia remains its closest ally in the Balkans and, after Belarus, its closest partner in Europe. Two members of the current Serbian government are under US sanctions for their ties to Russia. Beyond soft power, it remains reliant on Russian energy. Graft is another bond: Serbia’s corruption perception index score, a Transparency International barometer, reached a record low (lower scores reflect higher perceived corruption) in 2023. And last May, the New York Times Magazine wrote about alleged links between international drug traffickers and the country’s political leadership. In the meantime, Serbia’s practical dependence on EU trade and domestic pressures to remain on a membership track for the bloc offers the US and its allies opportunities to cut deals with Serbia and blunt Russia’s economic and intelligence efforts in the country, while forcing steps against graft and paramilitary gangs.
No one should mistake Serbian President Aleksandar Vučić’s willingness to cut deals as cool pragmatism, however. Florian Bieber, the head of the Center for Southeastern European Studies, outlined in an important 2022 editorial in Foreign Policy how the authoritarian and nationalist Vučić remains a “threat to Europe.” This is due in part to his ability to act via Serbian political parties in Bosnia and Herzegovina, Montenegro, and Kosovo. Bieber also rightly flags his use of Serbian media to promote both Chinese and Russian disinformation in the region. Rather, for the West, there is a benefit to understanding the practical limits of Russian influence on Serbia, especially in the economic sphere, and its need to co-exist with the European Union and NATO. For instance, while Serbia has not adopted EU sanctions against Russia, it also has not recognized the annexation of Crimea, Donbas, or other temporarily occupied territories in Ukraine.
Moscow’s reach
Russia’s soft power – an assertion of cultural affiliation and solidarity against enemies past and present – should not be underestimated. It has endured, even grown since the full-scale invasion of Ukraine, in contrast to most of Europe. For example, polling at the end of 2023 showed nearly 63% of respondents blamed the West for the war in Ukraine. This contrasts with Bulgaria, another Orthodox Balkan country with pro-Russian political factions – there 62% of people polled earlier this year, expressed disapproval of Vladimir Putin.
Another notable aspect of Russian influence in the country is the presence in the current government of Aleksandar Vulin and Nenad Popović in Serbian politics, despite OFAC’s sanctioning of both individuals. As previously reported, Popović has owned a technology holding company in Russia that makes the Kometa-M adaptive antenna array system used in Russian drones, glide bombs and other critical weapons systems. In addition, Popović has allegedly utilized his Kremlin ties to secure business opportunities that involve embezzlement and tax evasion schemes. For his part, Vulin, now a deputy prime minister, and former head of the Security Intelligence Agency, has been linked to transnational organized crime, illegal narcotics operations, and misuse of public office, allegedly using his influence to support Russian interests. Notably, he received a public award from Russia’s FSB for fostering cooperation between the Serbian and Russian intelligence services
As Vulin’s award suggests, Russia and Serbia have long cooperated on intelligence issues. In 2018, Vučić hosted Sergey Naryshkin, the head of Russia’s SVR in Belgrade – a rare occurrence for a sitting president to formally receive a foreign intelligence chief. The collaboration reportedly extended into regional activities where Serbian intelligence officers acted on Russia’s behalf to instigate unrest in Macedonia in 2015-17. Additionally, Russian intelligence services allegedly utilized Serbian and Montenegrin nationals, including some with backgrounds in Serbian military and police institutions, to orchestrate an attempted coup in Montenegro in 2016.
Russian intelligence activities in Serbia have also reportedly extended to covert operations through NGOs and other organizations. The Serbian-Russian Humanitarian Center in Niš, established in 2012, is alleged to have served as a Russian intelligence base. In 2016, Russia sought diplomatic immunity for the center and its staff. Another example is the Russian Institute for Strategic Studies (RISS) in Belgrade, founded in 1992, which has been implicated in SVR-led initiatives in the region. The former head of RISS, Reshetnikov, a Lieutenant-General of the SVR, openly supported the Montenegro coup attempt, according to reports.
Russia and Serbia have engaged in joint military exercises, and there have been numerous reports of Russia actively recruiting Serbs to support their military efforts in Ukraine. In 2013, Serbia became an observer to the Collective Security Treaty Organization (CSTO), a Russian-led security bloc. In 2018, Russia was accused of training paramilitary formations among Bosnian Serbs. The Russian mercenary group Wagner has reportedly recruited in Serbia (the Serbian authorities moved publicly to ban this amid Western condemnation), while, in 2022, a group of Serbian radicals visited Wagner’s headquarters in Russia. Notably, the Serbian military reportedly acquired a Russian anti-drone system following the full-scale invasion of Ukraine.
It’s the economy
In the meantime, Serbia’s relationship with its largest trading partner, the EU, remains complicated. The country has been a candidate member for more than a decade, but the timeline for accession remains murky, with impasses on issues such as the status of Kosovo suggesting membership is unlikely this decade. Yet, as a Bloomberg analysis of state-organized polling from last year suggests, while only 43% said they would approve EU accession in a referendum, a whopping 65% favored the structural reforms required for membership, which are “seen as beneficial in fighting graft, improving health care, education, the judiciary and agriculture.” Notably, the University of Belgrade conducted a poll a few months earlier that showed that 47% of respondents prioritized economic interests, while only 23% considered political interests, including issues related to Kosovo and Republika Srpska, as more important.
These economic priorities underline why Vučić, and his government, often appear pragmatic in policy terms, or, more cynically, activate and then tamp down conflict in the region. For its part, the EU has not withdrawn Serbia’s candidacy despite, for example, what the German Council for Foreign Relations described as “evidence of unprecedented manipulation and voter fraud” committed by the ruling party in the December 2023 legislative and local elections. The reality for Serbia is that 66% of its exports went to EU countries and 52% of its imports came from the bloc in 2022, according to the European Commission. In short, four of Serbia’s immediate neighbors are now EU members and it needs market access.
On the economic side, Russia’s influence is largely confined to Serbian energy. Gazprom’s Turkstream pipeline provides Serbia with enough gas to cover domestic requirements as part of a pact through 2025. Russian entities currently have significant control over Serbian energy infrastructure, including gas resources and the transmission system, and own half of Serbia’s only gas storage facility in Banatski Dvor. Moreover, Gazprom Neft, the oil arm of the Russian gas monopoly, acquired NIS, Serbia’s largest oil company, back in 2008, although Western sanctions have forced it to cut its stake to 50% from 56%. Yet even Russia’s energy dominance may be under question. Serbia signed a gas deal with Azerbaijan at the end of 2023 to supply around 0.4 billion cubic meters a year, roughly a fifth of annual demand.
One additional factor is China. As we wrote in a recent newsletter, it’s striking that Chinese President Xi Jinping chose Serbia, along with France and Hungary, for his recent European tour. Chinese economic and political support, including a free-trade deal, provides Belgrade with another axis of development – alongside Europe and Russia – and gives Beijing another loyal ally in the neighborhood. As in Hungary, China provides an alternate source of funding from the EU or Bretton Woods institutions, with fewer and different strings attached, and supports Serbia’s export-driven manufacturing sector.
Peace through strength
For Serbia’s president, the economy and EU candidacy are likely what keeps him up at night. Serbia’s recent economic performance has been resilient, with the International Monetary Fund (IMF), in October 2023, praising its resilience against energy market uncertainty and other headwinds, with a US$2.6 billion standby facility put in place in November. The IMF projected GDP growth of 3.5% this year, following 2.5% growth in 2023 amid inflation of around 7.8%.
The bottom line is that Serbia’s economy is already deeply embedded in the EU, and it works with Western institutions, such as the IMF, not Russia, on economic policy. In terms of alternative sources of strategic investment, Serbia is now far more likely to turn to China than Russia. Its most dynamic sectors include information and communication technology products, where its highly educated population and relatively low costs have made it a significant player in recent years (boosted, ironically, by an exodus of thousands of programmers from Russia evading conscription who have resettled in the country). Meanwhile, Serbia exports nuclear reactor equipment, fruits and nuts and clothing to Russia, while imports from Russia consist overwhelmingly of oil and gas products, according to 2022 trade data.
The US and the EU bring significant leverage to their relationship with Serbia today. In January 2024, the US approved the potential sale of Javelin anti-tank systems to Kosovo’s security forces for US$75 million, a move that followed violence last fall linked to an ethnically Serb paramilitary force alleged to have trained in Serbia. For the US and NATO, hardening Kosovo as a target builds on existing deterrence measures and can raise the cost of additional provocations in the region.
For the EU, setting clear lines for the Serbian president and government – coupled with credible threats of sanctions up to and including withdrawal of candidate status – should make it clear to Vučić that Serbia needs the bloc more than the EU needs Serbia. Adopting EU sanctions policy on Russia needs to be part of this conversation. However the EU itself may be polling in Serbia, an indefinite closure of the door to Europe would likely set off a firestorm in Serbia like that seen in Kyiv in 2013 and Tbilisi in recent weeks. Large and prolonged demonstrations against alleged vote rigging in Belgrade in December 2023 underlined that Serbs, especially young ones, will take to the streets if sufficiently provoked and are serious about democratic institutions.
For both the US and EU, aside from energy, fighting corruption provides another way to create distance between Russia and Serbia. Concrete steps against organized crime, drug and paramilitary gangs and the kleptocratic ecosystem that sustains them should be part of the diplomatic conversations. The emergence of a narcostate in Europe should not be tolerated. Russia and China ignore graft because corruption is a feature, not a bug, of their international alliances because it secures elite buy-in, as in Georgia at the moment. But a strong anti-corruption message sends Serbia’s youth a clear signal about a potential future inside Europe without the constant specter of conflict. And as Phil Wasielewski of the Foreign Policy Research Institute wrote last year: “Russia’s political warfare operations have a major flaw; they only offer people the past and not a future.”
India’s North American assassination plots globalize authoritarian strategies
When President Gerald Ford signed Executive Order 11905 in 1976 as part of a broader effort to curb abuses by the intelligence community, he committed to the following: “No employee of the United States Government shall engage in, or conspire to engage in, political assassination.” Although updated, the ban on targeted political killings has remained in place for almost five decades, albeit stretched almost to the breaking point during the Global War on Terror. Today a handful of mostly authoritarian states, including Iran, Russia and Turkey, have engaged in systematic overseas assassinations of dissidents and even foreign critics. But, more recently, India, the world’s largest democracy, has been caught plotting assassinations around the world, including in Canada and the US, worrying indications that Indian Prime Minister Narendra Modi, in power for a decade, is willing to use his intelligence services to kill opponents abroad, even risking relationships with long-term allies and partners.
In April, the Washington Post published a harrowing investigation into a plot to kill a Sikh activist even as Modi was feted in the White House during a state visit in June 2023. Citing an indictment, the Post chronicled the conspiracy to target New York-based Sikh activist Gurpatwant Singh Pannun, a US citizen. A multi-agency investigation traced the plot to the head of Research and Analysis Wing (RAW), India’s spy agency, and Modi’s inner circle. According to the Post investigation, it was one of numerous RAW plots around the world against Sikh “extremists,” including the killing in the same month of Sikh activist Hardeep Singh Nijjar in British Columbia, Canada. The latter has led to deep tensions between Canada and India, amid incredulity that India would risk key geopolitical relationships by bringing political violence to the streets of North America. Modi’s tilt towards international assassinations puts him in the same camp as authoritarians. There is also an element of strategic corruption in some of these foreign plots. In 2019, a federal jury found that a co-founder of a consulting group founded by former White House national security adviser Mike Flynn acted as a foreign agent for Turkey to push for the extradition of Fethullah Gulen, a Turkish cleric and regime opponent based in New York state. Lobbying may be just one intermediary step – it was alleged (but, importantly, not proven) that Turkey had sought to pay Americans to carry out the more direct rendition of the cleric.
Russia moves to seize Western assets
The Russian authorities have moved in recent days to seize Western assets in the country, in what appears to be a step to pre-empt a deal by Western countries to seize profits from Russian assets frozen abroad, primarily in Europe. As we noted in an update on our website last week, a Russian court has ordered the seizure of assets belonging to Deutsche Bank, Commerzbank, and UniCredit. The first two seizures were related to the withdrawal of the German company Linde, which had been involved in Russia’s LNG-2 project, and which was alleged to have significantly contributed to the project following the imposition of Western sanctions, while UniCredit was a separate case. Earlierin May, Austria’s Raiffeisen Bank International (RBI), whose exposure in Russia TDP previously covered, was warned by the US over its continued operation on the Russian market. Notably, to date, the Russian authorities have not targeted RBI. Meanwhile, in another move against Western assets, on May 23, the Russian president signed a decree setting out procedures for seizing the Russian assets of US persons.
As is often the case, the scope of the move against US assets in Russia is not clear from the language of the decree. In a commentary, law firm Morgan Lewis noted that “it is unclear whether these mechanisms may be applied to (1) securities held by foreign investors through foreign nominee accounts and (2) shares held in depository receipt (ADR) program accounts.” In the case of the latter, the nominee holders are US-based depository institutions, but the beneficial owners of many of the shares may, in fact, be citizens of other countries who invested in ADRs as a more convenient way to access the Russian market. In any case, as we wrote back in February, Russia has claimed to be able to seize up to US$288 billion in Western assets, but in reality, this figure includes a large portion of Russian money reinvested via the Netherlands and Cyprus, while many Western institutions, unable to get money out of the country or sell the underlying shares from Russian companies that have delisted from Western exchanges, have likely already written off at least a portion of these assets. To watch: research by the Kyiv School of Economics published by the Financial Times this week (see separate story below) found that around 2,100 multinationals have stayed in Russia since the full-scale invasion of Ukraine. Will Russia retaliate against these companies as retaliation, potentially disrupting critical domestic markets like retail and FMCG? Such a step could prove tempting. Beyond the propaganda value, the seizure of Western assets to date has been a bonanza for Kremlin cronies.
Senior US official pushes back on China-Russia ties, hints at further steps against foreign banks
A senior architect of the Biden administration’s Russian sanctions policy, Daleep Singh, the US deputy national security adviser for international economics, said in an interview this week that the main causes for growing Sino-Russian ties are Moscow’s “utter reliance” on Beijing for key goods and “China’s choice to enable Putin’s war.” His remarks, in an interview with the South China Morning Post, followed Vladimir Putin’s visit to Beijing earlier this month and represent a blunt rebuttal to the idea that Western sanctions have led Russia and China to pursue deeper ties as relatively comparable great powers. Rather, Singh noted: “Now it is utterly reliant on China, giving Beijing enormous leverage over Russia’s ability to project power and to exert influence.” He noted that most of Russia’s imported semiconductors and microelectronics last year were shipped via China. Singh also underlined that the US and EU have a trade turnover roughly seven times that of Sino-Russian trade volumes, which translates into risks for China, especially in the aftermath of Executive Order 14114 from late 2023, which explicitly empowers the US Department of the Treasury to pursue sanctions against foreign financial institutions (FFIs) for aiding transactions that support the Russian war effort. He noted that this step had already reduced trade volumes and that the administration was contemplating additional steps to target FFIs in this area.
US and EU tee up sanctions on Georgia’s ruling party over “Russian law”
The US has taken its first step to sanction members of Georgia’s ruling party over a law targeting “foreign agents” that was formally approved after parliament overcame a presidential veto earlier this week. The law — dubbed the “Russian law” by the opposition due to similar legislation adopted by Russia in 2012 – requires organizations receiving more than 20% of their income from foreign entities to register with the security services as foreign agents. Many Georgians see the law as an attempt by the ruling Georgian Dream party to bring the country closer to Russia, leading to weeks of protest. The first concrete steps by the US, announced by Secretary of State Antony Blinken, were visa restrictions that “will apply to individuals who are responsible for or complicit in undermining democracy in Georgia, as well as their family members.” Last week Rep. Joe Wilson (R-SC) called for sanctions on Georgian officials in the wake of the passage of the law, as reported by The Hill. For its part, the High Representative of the European Commission said that the EU and member states were “considering all options to react to these developments. Reporting last week in the Financial Times, citing unnamed sources suggested that Estonia, the Netherlands, the Czech Republic and Sweden were planning to push at a ministerial gathering this week for restrictive measures, including visa requirements for Georgians and a freeze on EU funds. Rather than tackle graft or other badly needed reforms, the Georgian law appears explicitly designed to frustrate the European aspirations of Georgians, putting the country and its ruling elite into the camp of Russia, a country that invaded it in 2008 and continues the decades-long occupation of two of its provinces. The Western reaction appears predictable yet necessary, although denying ordinary Georgians visa-free travel to the EU is a bitter pill.
Multinationals opt to stay in Russia despite backlash
Hundreds of Western companies that had indicated in the first months of the full-scale war in Ukraine that they would exit Russia are still there more than two years later, according to research by the Kyiv School of Economics featured in a Financial Times investigation published this week. This is despite significant operational challenges and the potential for backlash from consumers, activist investors and, in many cases, Ukrainian customers and employees of subsidiaries in that country. According to the research, around 2,100 multinationals have opted to stay in Russia, compared to 1,600 that have exited or significantly scaled back. Part of the reluctance to withdraw is that the Russian economy, boosted by record arms spending, has performed far better than most observers expected when the full-scale invasion began (whether this is sustainable is another question). Russia has also made exiting very costly, applying a 50% discount on assets, a 15% “departure tax” and the Kremlin must approve the deal and the Russian buyer. Companies like Danone and Carlsberg saw their assets seized after they announced their intention to leave. Staying has its risks too, of course. As noted above, Russia is likely to expand the scope of its recent asset seizures if and when the US and EU agree to seize at least the profits from Russia’s state assets frozen abroad. Capital controls make it very difficult for companies to repatriate profits. And there’s the risk of falling afoul of sanctions. What if a multinational finds out local managers have been supplying a Russian arms plant, for example? In a real world example, Le Monde and The Insider reported last year how products sold by French retailers Auchan and Leroy Merlin – owned by Mulliez Group – were reportedly supplied to Russian troops fighting in Ukraine. However, given that the US and EU have never prosecuted a large Western company for Russian sanctions violations since the February 2022 full-scale invasion, it appears that most multinationals are betting that the returns of Russia’s war-addled economy are worth the risk. And this far down the road, because of choices made over the past two years, there are no easy outs for Western companies.
Did Azerbaijan foment unrest in the South Pacific?
You can be forgiven if your 2024 forecasts did not include Azerbaijan’s meddling in a French overseas territory in the South Pacific. Yet a picture of a protestor in New Caledonia with a picture of Azerbaijan’s president with a raised fist in front of the Azeri flag amid the violent disorder in the country suggests that Baku may have played some role. With seven dead, dozens injured, and a security crackdown, the stakes could not be higher for this island of 270,000 people. The claim of Azeri meddling reflects a longer-term spat between Paris and Baku over the perception that France, with a significant and influential Armenian diaspora, has taken sides in the Nagorno-Karabakh conflict. With Azerbaijan’s reconquest of the territory in a series of offensives in 2020 and 2023, President Ilham Aliyev has sought to exclude France from the peace process and leaned on Italy, a significant investor in the country, and, arguably, Azerbaijan’s strongest friend in the EU. Other steps appear designed to tweak France, such as the founding last year of a working group against “French colonialism.” France’s interior minister has claimed that Azerbaijan has promoted targeted disinformation aimed at the indigenous Kanak population, whose anger at voting reform measures that eliminated structural preferences led to the riots earlier this month. He specifically claimed that Azerbaijan had cut deals with some of the Kanak leaders to lead the uprising. The episode reflects Azerbaijan’s ability to wield outsized influence through money and persistence, as reflected in our recent analysis of Baku’s influence machine in the US. Beyond the South Pacific, this influence has allegedly overspilled into political corruption, as in the case of Congressman Henry Cuellar (D-Texas). For the US, France and other democracies, the question is whether Azerbaijan’s authoritarian government feels it can call the shots around the world to achieve its narrower set of strategic aims.
AMLO poised to install handpicked successor as Mexican democracy is on the brink
On June 2, Mexicans will head to the polls for an election that feels like a rewind to Mexico’s past of dominant and corrupt party machines. If the past five years of Andrés Manuel López Obrador’s (universally dubbed AMLO) rule have seen democratic backsliding in Mexico, the coming election appears poised to install a government that Denise Dresser writing in Foreign Affairs characterized as “a refurbished autocracy disguised as a democracy.” For those who have not followed the last years of AMLO’s rule, the military has become a major economic player and acts as a national police force against a background of rampant crime. At the same time, “he [has] consolidated his control of state institutions, pushed forward legislation that violates the constitution, and carried out an assault on the judiciary and the agencies that oversee elections,” sought to degrade Mexico’s electoral watchdog, the INE, and has reportedly used Pegasus software to spy on domestic critics. It appears that the current frontrunner, ruling party candidate Claudia Sheinbaum is intended to be a placeholder until he can return to office.