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.
BLUF (BOTTOM LINE UP FRONT)
Welcome to TDP’s fourth newsletter of 2024!
Last week ended on a somber note with the news of the death of Alexey Navalny. The Russian opposition leader and anticorruption crusader was (almost certainly) murdered by the regime of Russian President Vladimir Putin in the Siberian prison where he’d been an inmate since 2021. He is only the latest of a countless number of victims of Putin’s violence stretching across the globe, but his symbolism as one of the last hopes for a democratic future for Russia makes his passing especially tragic – and a critical test for the Administration of US President Joe Biden, which in 2021 promised “devastating” consequences if he died. We go into more detail in the digest and will continue to monitor this evolving story closely.
For our in-depth coverage, however, we turn West from Russia to look at corruption and authoritarianism closer to home: a deep dive into the underreported story of Hungarian Prime Minister Viktor Orbán’s choice to serve as China’s avatar inside NATO and the EU. While Orbán has built a following among American conservatives for his blunt attacks on liberalism as a “virus” and by standing up to woke Eurocrats, and has been criticized by liberals on both sides of the Atlantic for his friendliness to Russia and Putin, his relationship to China, which has been a cornerstone policy since 2010, is actually far more important. Our research suggests Orbán is China’s most committed partner in Europe, allowing projects that sometimes benefit him personally while potentially harming Hungary’s long-term interests. We’d like to thank Szabolcs Panyi, an investigative journalist with VSquare (a TDP network partner) for sharing his valuable time and expertise on Hungary. Any errors are solely our responsibility.
In the Digest, after a look at Navalny’s legacy, we also look at the results of a major investigation of Russia’s drone procurement network published in The Insider (a TDP network partner). While it is infuriating to see how Russia’s largest drone producers continue to source Western components, this report names specific procurement companies in the network that the US and its allies can target with sanctions.
In Qui Custodiet, we ask why the Biden administration decided to pause the issuance of new LNG export licenses, potentially giving Russia a major opportunity to take back the European market share lost after the invasion of Ukraine. We propose a compromise approach that would ensure our allies have gas supplies while minimizing the environmental impact. We also look at FinCEN’s move to close a long-standing loophole that has allowed cash buyers of US properties to avoid disclosing beneficial ownership and source of funds. In Around the World, we read the work of a French government agency set up to combat disinformation as it disclosed the existence of a major European network dubbed Portal Kombat. We look at recently disclosed official Chinese figures that show that foreign investment collapsed in 2023 and look at how a crackdown on consulting firms and data collection is driving companies out of the market.
HUNGARY’S LONG MARCH
In mid-February European Union foreign ministers were rushing to approve the 13th sanctions package against Russia by February 22 – the highly symbolic second anniversary of Russia’s full-scale invasion of Ukraine. Reports emerged that Hungary was blocking the sanctions, which require the assent of all 27 EU member states. Was this a further sign of what America’s ambassador in Budapest has dubbed “a deepening relationship” between Hungary and Russia? Apparently not, according to a Financial Times diary piece citing diplomatic sources. Hungary was blocking the sanctions because they targeted four Chinese companies. It was a reminder that Hungary, while a member of the EU and NATO, is also China’s closest partner in the European Union.
These ties go beyond economic cooperation. On February 16, Hungarian Prime Minister Viktor Orbán posed for photos with China’s minister of public security, Wang Xiaohong, in Budapest. According to the Chinese readout of their meeting, the countries pledged “to make law enforcement and security cooperation a new highlight of bilateral relations.” Allying himself with Chinese policing was a striking gesture on the heels of massive protests in Hungary that have targeted Orbán’s governance following the resignation of the president, a close ally after she pardoned a man who helped a pedophile cover up his crimes. More broadly, for an EU country to pledge close security cooperation with China is unprecedented.
It is readily understood that Viktor Orbán leverages ties to Russia and American conservatives to give Hungary outsized influence in the European Union where a country of 9.5 million can block EU policies that require approval by all 27 member states. Orbán made a point of meeting Vladimir Putin at the Belt and Road Forum in Beijing in October 2023 (Orbán was the only European leader in attendance) and Hungary has remained a key buyer of Russian oil and gas in Central Europe even as other countries have sought alternative supplies since the full-scale invasion of Ukraine. It should be noted that Orbán’s government has routinely obstructed and delayed European sanctions and aid packages to Ukraine but ultimately relented in each case. To most observers, Hungary’s obstructionism looks like a negotiating ploy rather than a deep loyalty to Russia.
Orbán remains a rock star of US conservative politics, hosting his own annual Conservative Political Action Committee (CPAC) conference in Budapest while his government sponsors The Danube Institute to promote what it dubs “respectful conservatism” and the primacy of the nation-state as “ the only sure foundation for democracy”. It’s easy to see why conservatives like Orbán. He refers to liberalism as “a virus” and has vocally opposed immigration and gay rights, and in a sprawling interview with Tucker Carlson last August, the prime minister said that re-electing Donald Trump was the only way to bring an end to the war in Ukraine – no doubt music to the ears of the former president and his followers.
He has repeatedly decried Western backing of Ukraine as a “spectacular failure” and his government and parliamentary allies pointedly snubbed a bipartisan Congressional delegation that visited Hungary last week to press for ratification of Sweden’s membership in NATO. This behavior has resonance among a subset of American conservatives who see the alliance as the US underwriting the defense needs of wealthy countries that don’t pay their share.
Eastern promises
Yet this vision of Orbán as a Hungarian Trump battling the European superstate to defend traditional values ignores the depth of Hungary’s engagement with China, the nemesis of American conservatism. In terms of substance, this relationship far outweighs energy trade with Russia and ideological engagement in America. In less than 15 years, Hungary has become a hub for Chinese economic and geopolitical influence in Europe.
When Orbán returned to office in 2010 after an eight-year hiatus, he made engagement with China a centerpiece of Hungary’s foreign policy with the explicit aim of reducing Hungary’s reliance on the European Union for trade and investment. By 2022, China had become the largest foreign investor in Hungary. Major Chinese-financed projects in Hungary now include the Hungary-Serbia railway, the Kaposvar solar power station, and the Debrecen battery factory. Notably, the Hungarian branch of the Bank of China became the first yuan-clearing bank in Central and Eastern Europe.
Crucially China also provides Hungary with a host of alternative international institutions that do not make judicial independence or take in asylum seekers’ criteria for membership. The 16+1 format is a classic example. Launched in Budapest in 2012 by China, it originally brought together 16 Central and Eastern European countries and provided funding for regional projects as part of China’s wider Belt and Road Initiative (BRI). By design, it circumvents EU institutions. Lithuania pulled out of the initiative in 2021 amid a diplomatic dispute with Beijing and dubbed the format “divisive”. Notably, the Heritage Foundation published a paper in 2022 calling for the 16+1 project (now the 14+1 project) to be “put out of its misery” amid reports of predatory lending and failed projects.
Hungary has also played an outsized role in the BRI, becoming the first European nation to participate through a cooperation agreement in 2015. Following its entry into the BRI, Hungary emerged as a key hub for freight trains traveling between China and Europe, especially for services originating from Chinese cities like Changsha, Xi’an, Chengdu, and Chongqing.
This partnership has significantly deepened trade relations between the two countries. By 2022, the bilateral trade volume soared to US$15.52 billion, marking an 84% increase from 2013. Additionally, from 2019 onwards, the annual growth rate of trade between China and Hungary averaged 15%, outpacing China’s trade growth rates with other EU countries.
The Hungary-Serbia Railway project is a flagship BRI project involving China, Hungary, and Serbia. Financed by a Chinese loan, this project marks the first use of Chinese railway technology in an EU country. Described as the BRI’s most important project in Europe, its construction began in Hungary in July 2020, with an expected completion by mid-2025. The railway is designed to streamline the movement of Chinese freight goods from Greece’s Port of Piraeus to Central Europe. While strategically vital for the BRI, its sole emphasis on cargo transport has prompted doubts about its direct advantages for Hungary, suggesting that it mainly serves to boost China’s trade routes.
Under the BRI, China has also significantly increased its involvement in Hungary’s heavy industry and has been supported by the Hungarian government’s provision of tax breaks and favorable regulations. Projects include the construction of the largest solar power plant in Central and Eastern Europe, a 100-megawatt photovoltaic station in Kaposvar, developed by the China National Machinery Import and Export Corporation. In another major investment, Contemporary Amperex Technology Co., Limited (CATL), a Chinese battery company, has committed EUR7.34 billion to build the largest battery plant in Europe and it is the biggest greenfield investment in Hungary’s history. Further expanding China’s industrial presence in Hungary, BYD, a Chinese electric vehicle manufacturer, is setting up its first European car production facility in Szeged.
Of particular note, Hungary also hosts Huawei’s largest logistics center in Europe and a major R&D facility. During a 2023 visit to China, Hungary’s Minister of Economic Development and the company signed a memorandum of understanding, further deepening the strategic cooperation between the Hungarian government and Huawei that began in 2013. At the same time, Vodafone Hungary, which runs its 5G network on Huawei equipment, has been owned by the Hungarian state and an Orbán-linked firm called 4iG since January 2023. In 2019, then Secretary of State Mike Pompeo expressed alarm about the scale of Huawei’s presence in Hungary and warned that the US would not allow its equipment and facilities in the country to be “co-located” with Huawei equipment, complicating security cooperation.
China has also invested in cultural exchanges, and Hungary now hosts five Chinese state-funded language and cultural centers, known as “Confucius Institutes.” In addition, the Hungarian government has supported plans to establish a Shanghai Fudan University campus in Budapest. However, when these plans were reported, they sparked significant public protests. The US embassy in Hungary expressed concerns through a public letter, and the initiative was labeled by some, including the mayor of Budapest, as a security risk and an example of a Chinese influence operation.
Leverage
The Orbán government sees clear advantages in its deepening relationship with China and the perceived unconditional nature of Chinese funds in contrast to the EU. And it can leverage its closeness to China as a bargaining chip in negotiations with the EU. Concerns in European institutions and among the Hungarian opposition about the country’s deepening ties with China include a lack of transparency in the approval and funding of large projects, corruption risks (according to TI’s Corruption Perceptions Index, Hungary is perceived as having the worst level of public corruption in the EU), rising debt, and the impact on EU policymaking. Hungary’s veto power in the EU is seen as a significant draw for China.
A central critique of China’s BRI is that it is designed to create a debt trap for participating countries, giving China vital leverage, while focusing on projects that favor Chinese rather than local interests. These concerns were raised in 2022 when Hungarian energy giant MVM announced it was borrowing EUR250 million from the Austrian branch of Chinese state-owned bank ICBC. A lack of public consultation about several large projects has provoked backlashes, including protests about the environmental impact of the giant battery plant. Another project, reported by VSquare – an indispensable investigative media outlet focused on the region – envisages shipping dangerous chemicals to battery factories without apparent plans for public consultation.
There have already been instances where Hungary appears to have acted in China’s favor within the EU. In 2016, Hungary, along with Croatia and Greece, blocked an EU statement on China’s maritime claims in the South China Sea, insisting on a more neutral tone. In addition, Hungary remained notably quiet regarding the 2018 arrest of Michael Kovrig, a Canadian-Hungarian dual citizen, in China. Later in 2021, Budapest initially agreed to EU sanctions against Chinese officials for their role in the Uyghur minority’s persecution under the EU Magnitsky Act, only to later criticize the EU’s decision. That same year, Hungary also vetoed an EU statement condemning China’s imposition of the Hong Kong security law.
Orbán’s Western admirers take him at his word that he is a Christian conservative standing up to woke European bureaucrats. But a review of the past 14 years suggests that his government’s most consistent policy direction has been embracing China. For Orbán, it seems to be a straightforward transaction: a source of money and outsized influence as China’s leading partner in the region. In the meantime, Chinese companies can build factories in the heart of Europe with little apparent oversight. This deal has led to Hungary becoming the Chinese leadership’s most dependable ally in Europe, with economic ties evolving into common security interests. This raises deep concerns about Hungary’s dependability as a member of NATO and issues such as intelligence sharing.
Regarding the Russian sanctions package, Hungary eventually backed down following a conclave of EU foreign ministers on February 19. But the question is whether Hungary will back down when the stakes for China are much higher, such as a shooting war over Taiwan. These are the risks of having an autocratic and kleptocratic state with veto power in the heart of Europe.
Judging by Hungarian Foreign Minister Péter Szijjártó announcement today of a new strategic economic cooperation agreement with Tehran, Orbán intends to double down on the strategy of selling Western influence to members of the Axis of Authoritarianism.
Navalny’s legacy
On February 16th, imprisoned Russian opposition leader Alexey Navalny was (almost certainly) murdered by the Russian state on one of the islands of what Alexander Solzhenitsyn called the “GULAG archipelago” of prison camps where millions have died since the 1930s. Navalny was not merely an opposition figure, but he was also an anti-corruption campaigner. His Anti-Corruption Foundation (known by its Russian acronym FBK), led by Vladimir Ashurkov, has exposed the dealings of dozens of senior Russian politicians and officials, and, of course, Putin himself, including his palace and yacht. The investigations not only exposed the grotesque corruption of the regime but also its moral squalor – officials and their media emissaries who threaten nuclear annihilation of the West while they maintain apartments in London or Paris and send their kids to elite private schools.
In 2021, President Biden warned of “devastating” consequences if Navalny was killed. The Hill reported on February 17 that the White House was considering its options. While additional sanctions may be the quickest tool to reach for, the most impactful response would be to transfer the US share of Russia’s US$300 billion in frozen assets to Ukraine. President Biden can act now under his existing authority to do this. He does not need new authorities to do so, according to a broad spectrum of legal commentators. Like Solzhenitsyn, Navalny was a nationalist, even an extreme one in the past. Masha Gessen wrote with great care in 2021 about his political evolution. While many Ukrainians understandably mistrusted him because of past statements about Crimea, Navalny denounced the 2022 full-scale invasion from his prison cell. So perhaps it is fitting that giving Ukraine Russia’s frozen sovereign assets and the arms it needs to win is the surest way to bring an end to the regime that killed him. As Yulia Navalnaya said at the Munich Conference just hours after learning of her husband’s death, “Putin and everyone around him…will be held accountable. That day will come soon.”
Targeting Russia’s drone supply chain
Russia’s largest drone producers continue to procure critical components from the West. Writing in the Insider, Nikolay Staykov details how Special Technology Centre (STC) and Zala Aero – two of Russia’s largest drone producers subject to international sanctions – use a network of around 70 unsanctioned companies to maintain production of unmanned aerial vehicles and loitering munitions. As a result, the two companies were able to supply a combined US$730 million worth of equipment to the Russian military in 2023. Using leaked financial records, Staykov was able to reconstruct the supply chains for both manufacturers.
The good news is that this network mapping reveals chokepoints that the US can sanction. One example is Energon, a St. Petersburg-based company that emerged from obscurity to become a key supplier of microelectronics and composite materials to both companies last year. The company imported US$7.3 million worth of products in 2023, mostly from two firms, one in the UAE and the other in Germany. According to the article, a wider analysis of other Russian drone manufacturers has shown that Energon is potentially a single point of fragility that could be targeted to deny both Zala Aero and STC access to the materials necessary to build their drones. Another St. Petersburg company, Studio Pixagio, is also a potential chokepoint that has operated until now under the radar. Targeting the network has the potential to disrupt Russian drone production and this is critical. As the article notes, without unmanned aerial vehicles like the Orlan-10, Russian forces would struggle to observe and adjust their artillery fire, which caused 70% of Ukraine’s casualties in 2023.
LNG permit freeze boosts Russia
One of the geopolitical miracles to emerge from the war in Ukraine has been two winters without gas shortages or massive price hikes in Europe, in defiance of Russian threats. US liquefied natural gas (LNG) exports have proved to be a major stabilizing factor in the market. Hence there was consternation this month on both sides of the aisle when the Biden administration took the decision to pause the issuance for new export licenses, while also pledging to meet supply commitments to our allies. The issue has become crowded with talking points, both from industry and partisans and a group of Republican state attorneys general are suing to overturn it. Writing in the Hill, FPRI’s Stephan Blank put it bluntly: “We are forcing our allies and partners to relinquish [US] market share and instead turn to Moscow, subsidizing Vladimir Putin’s war and regime.” Around one-half of the US’s total 2023 exports of 86 million tons went to our European allies, mostly replacing Russian gas. As the Natural Resources Defense Council notes, the move appeals to environmentally-minded voters in a crucial election year. But the reality is that blocking US LNG permits clears the field for Russian LNG growth. The debate indicates the political tightrope of balancing policy responses to two concurrent existential threats: the climate crisis and the rise of the Axis of Authoritarianism. Luckily, there is a way to limit LNG gas emissions while also aligning America’s gas producers behind of policy of stopping Putin: Maintain limits on future US exports while also pledging that the US will issue an LNG export permit for every ton prevented or knocked offline from Putin’s vanity project, LNG-2. Impounding Russian LNG is a security goal but can also be a market incentive and good for the environment.
FinCEN moves to close real estate loophole
Real estate has long been the money laundering vehicle of choice in the US. If you make certain transactions through your bank, it can file a suspicious activity report (SAR) with FinCEN, the financial crimes investigation unit of the US Department of the Treasury. But if you pay cash for a house, as do 20-30% of homebuyers in the US, there are no questions asked. Unlike bank personnel, professionals involved in real estate closings and settlements have long been exempt from the anti-money laundering reporting obligations of the Bank Secrecy Act. Now FinCEN is moving to close this loophole. It would require certain real estate professionals to flag potentially suspicious transactions and provide information about the beneficial owners of the real estate. The information would be stored in a non-public database available to law enforcement. Still, the move is not retroactive and there are billions of dollars of almost untraceable money tied up in US real estate. It will take many years to flush the system.
France exposes Portal Kombat network
On February 12, France’s Viginum agency published an investigation of the Portal Kombat network of nearly 200 coordinated websites publishing Russian disinformation to Western audiences. The investigation showed how the network pushed content originally generated by Russian news agencies and social networks that glorified Russia’s “special military operation” in Ukraine and denigrated Ukrainian leaders. The report chronicled how a Russian website development company, TigerWeb, based in occupied Crimea, either built the network or served as cover for its developers. It also described how it used bot networks to amplify its messages, such as fake stories about pro-Russian rallies in European capitals. That the network exists is not surprising. But the existence of Viginum – founded in 2021 to combat disinformation – and its publication of detailed findings provides a pathway for identifying Russian networks. As the report notes, Portal Kombat is part of a much larger ecosystem. This ecosystem has been at work in the US, according to a Wired investigation, “using everything from bots to lifestyle influencers to powerful state-run media to sow division” over the immigration crisis. The modus operandi changes little, unfortunately, because a “flood the zone” approach will eventually convince some people.
Foreign investment in China collapsed in 2023
The numbers are startling. Investment by foreign businesses in China was a mere US$33 billion in 2023, down 90% compared to its 2021 peak, according to official statistics, and the lowest level since 1993. Foreign companies are responding to China’s faltering markets, but they are also spooked by China’s heavy-handedness, including crackdowns on foreign consulting firms that provide market insight and an expanded definition of espionage in Hong Kong that could make sharing market data and insights on technology a criminal offense. The US and EU are also tightening export controls amid rising tensions. In sum, after three decades of rapid economic growth, China is finally learning that authoritarianism can exact a significant price and that tightening the screws as the domestic economy is already faltering can have serious consequences. If the Chinese economy continues to falter, most observers expect the government only to double down, driving more foreign companies from the market.
