The national security dimensions of global economic and financial (E&F) relations are more apparent in our highly interdependent world than ever before. Our newsletter aims to illustrate instances of this intersection not only in the Czech Republic, but other EU and NATO member states. An integral part of this effort will be updates on the latest developments in strengthening security-minded investment screening mechanisms and other regulatory and private sector initiatives.
OVERVIEW ■ Outline of Czech Investment Screening Mechanism Emerges
■ “Czech” Company Škoda JS Wins Nuclear Power Plant Bid in Ukraine
■ International Investment Bank: A Trojan Horse at EU’s Gates?
■ China National Petroleum to Connect Greece and Bulgaria?
■ Sanctions Expanded, but Russian Funds Keep Flowing to Crimea
Newsletter from February can be found here.
Outline of Czech Investment Screening Mechanism Emerges
On January 29, another meeting of the inter-ministerial working group took place to discuss the creation of a Czech investment screening mechanism.
On March 4, the government discussed progress of the working group, which was set up in June 2018 by the Czech National Security Council. Thus far, the inter-ministerial working group has met three times.
Due to different sensitivities among the sectors affected, it was agreed that a national screening mechanism will be based upon two regulatory regimes (investment screening in Germany is a reference model for the group):
(1) Mandatory approvals will be required for a narrow list of foreign direct investment areas, which are critical to Czech national security (e.g. critical infrastructure, defence industry); and
(2) Potential screening of other investments deemed risky may be allowed, especially in designated priority areas (e.g. artifical intelligence, nanotechnology, robotics). In this regime investment screening would be possible for up to 5 years once the transaction is concluded. In order to receive “legal certainty”, the investor may voluntarily ask for investment screening.
Selected experts from various government agencies have until now also weighed in on possibilities for cooperation among their agencies or the timetable needed to conduct a thorough investment screening. Simultaneously, the Ministry of Industry and Trade has begun to prepare a legislative framework, which will serve as a basis for the creation of a Czech investment screening mechanism. Once concluded, it will be presented to members of the inter-ministerial working group for comment.
If a certain transaction does raise security concern and no mitigation measures are found as part of the investment screening process, final decision would be taken by the government (based on experiences from other EU member states). Based on estimates from the Ministry of Industry and Trade, it is assumed that up to 300 transactions would potentially be screened every year. However, less than 10 of them would undergo a thorough investment screening investigation. Thus, the vast majority of screened transactions usually do not raise any red flags.
“Czech” Company Škoda JS Wins Nuclear Power Plant Bid in Ukraine
According to an investigation by RFE/RL Radio Svoboda, Czech engineering company Škoda JS, which is ultimately owned by Russia´s state-owned Gazprombank, has been selected as the contractor for a project worth $2.5 billion to build two new reactors at the Khmelnitsky nuclear power plant in Ukraine, located some 300 kilometers west of Kiev. The Russian-owned firm was reportedly chosen “without an open tender” process, meaning no other supplier bids were considered.
Due to Gazprombank´s connection to the firm, in early 2016 Škoda JS was placed on the list of companies subject to Ukraine-related sanctions. This effectively restricts the ability of Škoda JS to borrow money for its operational needs.
Since 2014, Škoda JS has been implicated in an ongoing corruption scandal for providing bribes to former Ukrainian MP Mykola Martynenko to win contracts for the supply of equipment for nuclear power stations. Radio Svoboda cited Lenka Bradacova, Chief of the Czech´s High Prosecutor's Office, who has claimed that criminal proceedings were opened against six former representatives of Škoda JS.
International Investment Bank: A Trojan Horse at EU’s Gates?
On February 5th, the Russian-led International Investment Bank announced that it would be relocating its headquarters from Moscow to Budapest, Hungary. According to its website, the bank was founded in 1970 as a “multilateral institution for development” focused on investments in small and medium enterprises and “socially significant” infrastructure in its “member states”, though it appears to have been dormant between 1992 and 2012.
The bank’s membership is comprised of former members of the Soviet-era “Council for Mutual Economic Assistance (COMECON)”, and includes EU members Bulgaria, the Czech Republic, Hungary, Romania, and Slovakia, as well as Cuba, Mongolia, Russia and Vietnam. The bank currently claims approximately $1 billion in assets, which would make it only the 17th largest bank operating in Hungary. This decision, however, raises concerns that as an EU-headquartered institution it might serve as a vehicle for Russia to access European capital markets, a discreet means of channeling Russian investment funds to European entities, a new platform for espionage and as a safe haven for Russian nationals’ offshore accounts. These concerns are elevated by the fact that the bank will apparently enjoy a variety of legal protections comparable to the immunities normally granted to diplomatic missions, based on its status as an international institution. These include a restriction on Hungarian authorities’ rights to enter the bank’s headquarters and a general exemption from Hungarian financial oversight and regulatory law, among others. The bank is not currently subject to EU sanctions, falling under an exemption granted to “Russia-based institutions with international status established by intergovernmental agreements with Russia as one of the shareholders”.
China National Petroleum to Connect Greece and Bulgaria?
On February 7, the Greek-Bulgarian Joint Venture ICGB (Interconnector Greece-Bulgaria) shortlisted five entities bidding for the construction of a new natural gas pipeline between the two countries. Four of the five entities involved are wholly based in the EU: Greek firm J&P Avax, a Franco-Bulgarian consortium, an Italo-Bulgarian consortium, and a joint venture between German Max Streicher GmBH and the Greek firm Terna. The fifth entity, however, is a joint venture between Greek firm Aktor and China Petroleum Pipeline Engineering, a subsidiary of Chinese state-owned enterprise China National Petroleum Company (CNPC), recently listed as the world’s fourth largest corporation by size of revenue.
The interconnector pipeline is intended to connect Bulgaria to gas brought into Greece from Azerbaijan via the Trans-Adriatic Pipeline, itself part of a larger project called the Southern Gas Corridor (SGC). The SGC is currently under construction and expected to come online in 2020. The purpose of the SGC is to connect natural gas sources in Azerbaijan with markets in Turkey and southern Europe through a mix of overland and undersea pipelines. Much of the incentive for the project came from a desire among EU member states to reduce dependence on gas imports from Russia.
While there are no EU laws barring entities from China or other third countries from bidding on projects connected to the SGC, there are security concerns regarding an entity like China National Petroleum which could undermine the basic goal of increased energy security. The joint venture may face further scrutiny under the EU’s emerging Union-wide investment-screening network, should it prevail in the bidding process. According to Bulgarian energy minister Temenuzhka Petkova, "the project has already received a grant of 45 million euros under the European Energy Programme for Recovery (EEPR) and about 39 million euros from the European Structural and Investment Funds for Bulgaria”, suggesting the EU may be particularly sensitive to third-country involvement in the project if the CNPC joint venture wins the bid.
Sanctions Expanded, but Russian Funds Keep Flowing to Crimea
On February 15, diplomatic representatives declared that the EU would place eight more Russian individuals on its sanctions “blacklist” in connection with Russia’s recent dispute with Ukraine over control of the Azov Sea, which culminated in a violent confrontation last November in which 24 Ukrainian sailors were taken captive by Russia and have yet to be released. EU blacklisting entails freezing of financial assets held in EU member states and restrictions on travel within the Union. These eight would be added to the list of 163 private persons and 44 business entities scheduled to have their EU sanctions extended early next month.
Meanwhile, earlier in February the government of Russia earmarked an additional $4.7 billion in investments in Crimea over the next three years, to be directed primarily towards expanding infrastructure and tourism on the peninsula. Since its annexation in 2014, Crimea has become heavily reliant on federal transfers from Moscow to maintain itself, and this pattern shows no sign of abating despite the overall weakness of the Russian economy.
Significant funds were also allocated for the construction of the Kerch Strait Bridge, opened in 2018 to connect Crimea to mainland Russia. The bridge has, no doubt t intentionally, created a barrier to Ukrainian shipping in the Azov Sea due to its unusually low vertical clearance. The Azov Sea has been recognized by the international community as constituting part of Ukraine’s Exclusive Economic Zone by virtue of Crimea being Ukrainian territory.