Opinion piece by Dr Theodore Karasik

Croatia’s claims that it is reforming are paper thin. What’s more, endemic corruption not only plays a key role in its financial woes but it has facilitated Russian efforts to infiltrate the Balkans Dr Theodore Karasik Non-Resident Senior Fellow at the Lexington Institute and a national security expert

The last time a high-risk economy joined the Eurozone, it resulted in the Greek bailout. But with growing demands from its youngest members, Brussels is exploring the Eurozone’s continued enlargement. The problem is that this could jeopardize not just the stability of the eurozone, but quite possibly the very future of the EU itself.

Among the latest in line is Croatia, also the EU’s latest member. In May 2018, Prime Minister Andrej Plenkovic declared the euro might be adopted in just 7 to 8 years. By last December, the governor of the Croatian National Bank, Boris Vujčić, announced plans to formally kickstart the process by sending a letter of intent to introduce the euro as Croatia’s official currency. And just last week, Croatian Central Bank Governor, Boris Vujčić reiterated Croatia’s position, saying that staying out of the euro for Croatia ‘doesn’t make sense:’

But Croatia’s adoption of the euro would be an unmitigated disaster, punishing a country whose judiciary suffers from entrenched corruption that is being exploited to extend Russian influence.

In 2017, the EU narrowly escaped ‘Greece 2.0’ in Croatia, where the country’s biggest multi-billion Euro company, Agrokor, received a government bailout to avert collapse. Agrokor’s revenues accounted for some 15% of Croatian GDP – the same percentage the City of London represents relative to UK GDP. The company’s collapse could have swiftly destroyed Croatia’s economy. With about 60,000 employees in south-eastern Europe and annual sales of €6.5 billion, Agrokor’s disintegration could have triggered a domino effect of financial instability around the region.

This didn’t happen, thankfully – well, thanks to Putin. The Croatian government’s bailout ended up granting two Kremlin-backed banks, Sberbank and Vneshtorgbank, a 47% stake in Agrokor. In short, the deal gave Putin indirect leverage on the Croatian economy and on the largest firm in the former Yugoslavia.

Shortly after the bailout, Gazprom exploited the Russia-friendly political climate by signing a 10-year contract to deliver 1 billion cubic meters (bcm) of gas to Croatia every year. With 70% of its gas market covered, Croatia had no need for further imports. The country was dissuaded from pursuing an alternative US and EU-backed gas supply route through the port of Krk, that could have undermined Russia’s tightening energy stranglehold on Europe.

The Agrokor bailout itself was riddled with allegations of corruption. According to opposition parties, emails leaked in 2018 revealed that senior Cabinet ministers had foreknowledge of the company’s financial irregularities and pre-arranged the bailout to trigger lucrative pay-outs to their business friends under corrupt consultancy deals.

The government denies wrongdoing, but according to a study by the Institute of Public Finance in Zagreb funded by the European Commission, Croatia is “fertile ground for corruption” due to a “chronically inefficient and corrupt legal system.” This corruption has undoubtedly empowered Putin in other ways.

While Croatia’s state anti-corruption watchdog, USKOK, turns a blind eye to the Agrokor corruption allegations implicating Plenkovic’s government, it has meanwhile pursued a high-profile case against Zsolt Hernadi, the chairman of Hungarian national oil company MOL – despite a lack of evidence against him.

In 2013, the Croatian government accused Hernadi of bribing former Prime Minister Ivo Sanader to push through a deal whereby MOL purchased a major stake in Croatia’s national oil firm INA.

USKOK then backed Croatia’s demand for an Interpol warrant for Hernadi’s arrest. But, as argued in the Wall Street Journal by international relations expert Kamran Bokhari, this was “despite already being exonerated of those very same changes by the United Nations’ most senior trade-arbitration court in 2017.”

Russia’s interest is hardly a secret. The year after Croatia voiced its bribery claims against Hernadi, Gazprom offered to buy MOL’s shares in INA. In 2017, it received a similar offer from Russian oil giant Rosneft. The Croatian gambit appears to be part of Putin’s grand strategy to use energy as a weapon to encircle Europe, according to the Atlantic Council think tank.

In other words, Croatia’s claims that it is reforming are paper thin. What’s more, endemic corruption not only plays a key role in its financial woes but it has facilitated Russian efforts to infiltrate the Balkans.

Putin’s strategy is coming to fruition in Croatia, where judicial corruption has paved the way for Russian financial and energy dominance. But the EU has remained surprisingly sanguine about the danger that Croatia’s ascension to the Eurozone will only strengthen the ticking time-bomb of Putin’s creeping subversion of the EU.

At a time when the unity of the Union is being sorely tested and Eurosceptic parties are experiencing popularity across the continent, it could jeopardise the future of the EU project itself.

Dr Theodore Karasik is a Non-Resident Senior Fellow at the Lexington Institute and a national security expert. He worked for the RAND Corporation and is widely published in international media outlets

Opinions expressed in View articles are solely those of the author.