US sanctions hit actors of Russian influence in Europe
The United States recently announced a new round of sanctions targeting Russian financial facilitators and sanctions evaders, including a development bank in the European Union that is seen to pose espionage risks. Among the sanctioned entities were two subsidiaries of Rosatom, Russia’s state nuclear corporation, and the International Investment Bank (IIB), a Russia-dominated, small international development bank operating currently from Budapest.
Even though the sanctions did not hit a single Hungarian entity, the measures were announced somewhat unusually by the US Ambassador to Hungary David Pressman in a dedicated press conference on April 12 in Budapest. This made clear that their effect was intended for Hungary as well as Russia. The goal was to force the Orbán government to change its stance toward the IIB. In his speech, the ambassador explicitly stated that “Hungary has dismissed the concerns of the United States government regarding the risks its [the IIB’s] continued presence poses to the Alliance.”
The IIB as a source of tension
The IIB is a special international development bank founded originally in 1970 by Comecon, the organization for economic integration in the former Soviet bloc – mainly Eastern Europe. Established by international treaty, the bank has member states. A shortage of capital and structural economic problems in the Eastern bloc kept the bank from fulfilling its role, and it went dormant after the collapse of the Soviet Union. Nevertheless, with the exception of Poland and Hungary, most countries retained their membership. This left eight members: Russia, Czechia, Slovakia, Romania, Bulgaria, Cuba, Vietnam, and Mongolia. Russia reactivated the bank in the mid-2000s for use in various, small-scale financial maneuvers. The most important feature of the IIB is its very special legal status: it is registered with the United Nations and is thus exempt from most national legislative or oversight authorities. The original headquarters of the bank was in Moscow, its working language is Russian, and Russia has always been its biggest shareholder. Moreover, the bank’s decision-making system ensured that Russia remained in full control. Hence, the IIB has always been predominantly a former Soviet, and therefore Russian, political-economic tool.
Hungary rejoined the IIB in 2015 and allowed the bank to relocate its headquarters to Budapest in 2019. The idea was to relocate to an EU country in order to attract more investors. An initial attempt to set up in Slovakia was blocked by then-President Andrej Kiska, so the IIB chose Budapest. In addition to a centrally located, opulent palace, which Hungary gave the IIB free of charge, the bank also received expansive privileges and immunities from the Hungarian government. These included diplomatic immunity for the bank’s director and for its headquarters. Most importantly, the bank was allowed to invite an unlimited number of guests and experts, to whom Hungary was obliged to issue visas without any background checks, in line with the law on relocating the bank to Budapest. Moreover, the Orbán government agreed to the Russian request to completely exempt the bank from the jurisdiction of any Hungarian authorities, including financial and banking oversight institutions.
Visa privileges raise EU, NATO concerns over covert Russian intelligence entry.
The visa-related privilege induced widespread concern both within the EU and NATO, because it opened the door for Russia to send a substantial number of covert intelligence operatives into the Schengen zone using the IIB as an entry channel. In addition, its widespread immunities also posed money laundering risks. These immunities, and especially the unlimited influx of “guests and experts,” have become a long-standing bone of contention in Hungary’s relations with several NATO allies, particularly the US. The US has repeatedly asked the Hungarian government to address the risk of malign influence posed by the bank, but Hungary did not react. Notably, the IIB has played only a minimal role as a financial institution, with a modest overall capitalization of less than 2 billion euros combined in 2021, i.e., before the escalation in Ukraine.
The demise of the IIB is not yet complete
Since February 2022, the bank’s financial situation has worsened considerably. In response to EU sanctions, several European financial institutions blocked access to their holdings of IIB assets. Based on leaked internal IIB documents, the bank was near bankruptcy by the beginning of 2023. Thereafter, with the exception of Hungary, all of its EU members – Czechia, Slovakia, Romania, and Bulgaria – declared their wish to leave the bank. Hungary was the only EU member state that still supported the bank and intended to maintain membership.
The present round of sanctions has further worsened the position of the IIB. The US sanctioned not only the bank itself, but also three of its top leaders, two Russians and one Hungarian. The latter, Imre Laszlóczki, is a Moscow-educated career diplomat who served in various positions in the Hungarian foreign ministry before he was appointed as Deputy Chairperson of the IIB’s Management Board. As a shareholder ex officio, the Hungarian government delegated a number of other officials to the managing bodies of the bank, including Minister of Economic Development Márton Nagy as a member of the Board of Governors. However, these officials were not sanctioned, only Laszlóczki. From this perspective, the US signaled restraint in its sanctions vis-à-vis Hungary, sparing government officials and targeting only the bank’s Hungarian top manager.
Just one day later, on April 13, the Hungarian government said it would leave the IIB. This was in sharp contrast to Budapest’s previous steadfast support for the bank. The government likely assessed this round of US sanctions as the beginning of more punitive measures, possibly also against Hungary, and chose a preventive move. This assessment was strengthened by rumors that the US was preparing to sanction Hungarian officials on corruption-related charges. Once Hungary’s exit comes into force, six months after submitting a request to leave, the IIB will have no members in the EU. Apart from Russia, only Cuba, Mongolia and Vietnam will remain. It is not yet clear whether Hungary will get its paid-in capital back once it leaves the bank. Past precedents show that exiting countries could not retrieve their money.
But there is a surprising hitch that blunts the effect of the sanctions. Hungary’s exit does not force the IIB to leave Budapest, nor does it mean that the bank’s privileges will be revoked. Remarkably, Hungary’s Law No. XI/2019, which governs the relocation of the IIB headquarters to Budapest and grants its privileges, is not conditioned to Hungary’s membership in the bank. Instead, the law stipulates that the agreement between the IIB and Hungary can be terminated only if the bank’s Board of Governors agrees to start such negotiations with Budapest. In other words, the bank could stay in Budapest and keep operating from there de jure even after Hungary ends its membership. Only a change in the law could compel the IIB to leave Budapest if it does not do so freely.
Lessons for the EU
The most important lesson for the EU is that transatlantic coordination can be effective when some member states endanger the core security interests of other EU and NATO members. In other words, close EU-US cooperation can indeed limit Russia’s potential malign influence in Europe. Meanwhile, why the EU has failed to tackle the IIB issue since it arose in 2019 deserves further research. This applies particularly to the IIB’s broad exemptions and privileges.
In this case, the US acted decisively to improve the security of Europe, aiming to reduce the risk of espionage related to the presence of the IIB and to weaken Russia’s potential to bring spies into the Schengen area. But this effort will only be successful if the Orbán government revokes the IIB’s privileges and forces the bank to leave Hungary. Hence, the second lesson is close monitoring to ensure change. This is in the interest of all EU member states, including Germany, as the IIB’s wide privileges put their security at risk.
Close EU-US cooperation crucial to limit Russia's malign influence in Europe.
In addition, the speed at which the Hungarian government moved to quit the IIB is evidence that hard pressure may work when diplomacy fails to evoke policy change. The Orbán government managed to change its stance 180 degrees in a few days’ time, despite its previous intransigence against alleged interference from abroad. The government even managed to save face at home by exploiting its pervasive influence over Hungarian media to convince supporters that a shift was necessary.
The US sanctions constitute a new level of escalation in relations between Washington and Budapest. Even though they did not hit a single Hungarian elected official, their result inflicts political and also possibly some financial damage on Budapest. Hence, the US measures constitute a shift in US policy toward Hungary, with Washington showing it is prepared to take action beyond diplomatic warnings. Moreover, with the 2024 US presidential campaign slowly starting and Viktor Orbán clearly rooting for the Republicans, it is neither likely that Washington will soften its stance toward Budapest, nor that Orbán will seek a more cooperative relationship. Hence, tensions are here to stay and may even worsen. This could affect NATO as well, as Budapest sees its spoiler potential within the alliance as a bargaining chip.
