Russia Plays Hardball with the Czechs

Below is an exclusive translation of long feature article on Russia-Czech relations quoting RA from the Prague-based magazine Týden. The Possible Results of Upsetting a Russian By Daniel Deyl, Týden weekly Czech businesses on the rocks, deserted hotels, rationed energy… This is one of the visions of how the Russian retaliation for placing the American anti-missile radar base on the area of the Czech Republic may end up if it actually would come to it. The problem is that the Czech dependence on Russia is deepening in every respect – and as far as it seems, it will keep deepening in the future.

Photo: Reuters

When Václav Klaus was leaving for Russia in late April, he indeed was not in the mood of confrontation. The party of entrepreneurs that accompanied him expected lucrative commissions from the trip and, at the same time, kept a lesson from the past on their minds. Sixty years ago, Jan Masaryk returned from Moscow as a “Stalin’s groom”, and in 1968, the Czechoslovak delegation headed by Alexander Dubček spent considerable part of their Russian sojourn in handcuffs. Klaus thus got off of the plane on the Moscow Vnukovo airport in a helpful, accommodating spirit. This is how his gesture of rejecting interpreters and ordering obligatory Russian even to his entourage can be explained. Because it works well in Russia to bet on this card: for those who speak Russian well, many doors are open. On the other hand, a man in question finds himself in a diplomatic defensive because, first, he does not have too much time to think his answers over, and second, he always speaks worse than his host. “We have the right to retaliate” Although the Czech president might have conceived his Russian-language gesture as an expression of helpfulness, the Kremlin ruler Vladimir Putin did not reciprocate. When the negotiations hit the most sensitive topic of the visit, i.e. the anti-missile radar base which the Americans plan to build in the Czech Republic, the Czech president tried to reassure the Russians of the best intentions, saying that, “The radar will not be directed against Russia in any case.” Putin replied that he believed him with the greatest pleasure but that the Czechs would definitely have no say as to the purpose of the given device. Klaus later claimed that Putin could not have spoken otherwise; nevertheless, the words of the Russian president that his country “has the right to retaliate” were registered on a global scale. Klaus continued in his journey and his delegation brought the contracted tens of billions back home, but there remained the question: How would such a Putin’s retaliation for the radar be and what kind of nuisance would it mean for the Czech Republic? If the Russians wanted to fulfill their threats, they have three main channels to manifest their dissatisfaction at disposal: a diplomatic one, an economic one and, in the extreme case, also the military channel. Putin made it clear how these three are interconnected, sending a message to the West after the negotiations with Klaus, that Russia considers the possibility of withdrawing from the treaty on reducing the number of conventional arm forces in Europe (see the subhead “Where Putin has his nuclear arguments“ below on p. 22). That would bring a surprising twist even into the unpredictable conditions of the Russian post-Soviet policy. Friends from Germany Putin thus de facto told Berlin, Paris and Brussels to calm down the anti-Russian sentiments in the new post-Communist members of the European Union. If the issues remain reserved to only a diplomatic pressure, their impact on the life in the Czech Republic will “solely” be of transferred character. The position of Czech politician in Brussels can weaken into such an extent that they find themselves unable to effectively enforce their interests. For example Vlastimil Tlustý, the former Czech Minister of Finance, vetoed higher taxation of beer, and thus the increase of beer prices in Brussels in the period when he still held the post. As soon as the Czech priority in the EU is to advocate the construction of the American radar, such step can definitely turn much more troublesome. The Russian pressure thus may indirectly reflect itself in the arbitrary sphere of dissention within the EU. All those who think this is only a “grey theory” can look for the living examples of Estonia and Poland. The local politicians in Tallinn made it hot for themselves when they decided to play on the Russian card in their pre-election campaign and to remove the sculpture of a member of the Red Army, liberator from Nazism and Stalinist occupant. Moscow dispatched a delegation to Estonia whose members proclaimed even before their departure that the Tallinn government should resign. However, if the Estonians expected the EU support at that moment, they waited in vain: the German Chancellor, Angela Merkel, whose country holds the half-yearly chairmanship of the Union, sent a message to both sides, asking them “not to escalate the tension.” After deciphering the diplomatic jargon, the message for Tallinn is clear as a day: Berlin is not going to come out against Russia. The Poles, then, were banned to import Polish meat by the Russians in 2005, reportedly due to hygenic reasons. Warsaw subsequently vetoed the ratification of the new treaty on the mutual relations between the EU and Russia. The situation is now blocked up for as long as seventeen months and Polish exporters, who became accustomed to find a decent market in Russia, are out of the game. “The Russian tactic makes sense,” said the ex-Polish Minister of Foreign Affairs, Radek Sikorski, to the International Herald Tribune daily. “The opportunity to set the old and the new Europes against each other was too alluring for the Russians to resist it and to make use of it.” “It has become vitally important for Poland to receive stronger support from the countries of the Union,” said the Canadian lawyer, Robert Amsterdam – a person intimately familiar with the Russian conditions and, amongst other things, the former attorney of the once richest Russian, Mikhail Khodorkovsky – to the Týden weekly (Khodorkovsky, the former boss of the oil company, YUKOS, today serves his eight years’ sentence in Siberian prison, and the state prosecutor’s office prepared yet another charge against him which may bring him the threat of another 15 years’ imprisonment.) “Kremlin is aware of its own weaknesses in both domestic and foreign policies. That’s why it is dangerous and that’s also why it performs its policy in the divide and rule style in order to prevent the whole of the European Union to oppose it,” Amsterdam opines. The Brussels response to the Polish problem is approximately the same as to the case of the Estonians. The EU’s aversion to confront Moscow is demonstrated by the planned program of the EU vs. Russia summit that begins on 18 May. Its organizer, Merkel, plans to devote most of the time there – guess! – to the global warming. She wants to do so at the moment when the non-ratified treaty on mutual relations lies on the table, when the worries of the energy dependence of Europe on Russia are on the rise (this will be discussed later), and when the Russians threaten to re-launch massive armament after the twenty years’ break. “For Russia, the radar in the Czech Republic means the same as the deployment of the Pershing missiles once did,“ claimed Putin, referring to the American-Soviet argument from the 1980s. He, moreover, encouragingly added that the intercontinental Topol class ballistic missiles, capable of carrying nuclear charge, “represent a significant step towards reinforcing Russian security system.” The future of the American radar nevertheless remains utterly uncertain. Last week, the corresponding committee of the House of Representatives of the American Congress proposed to turn down President George Bush’s plan to spend 310 million USD on building a strategic system in Europe. On Friday, in the first reading, the Czech left wing in the Parliament enforced the draft of the law which would open the way to the referendum on the radar’s construction. If the law is passed (which is more than improbable), the chances that the Czechs reject the radar are rather real. The latest polls testify that about 70 per cent of Czechs are against the radar. The Russian combative rhetoric at the same time does not mean that the inhabitants of the Brdy townships and villages should necessarily expect a blitz of the Russian Tupolevs or a blow of the eulogized Topols, although such words were in fact heard from the Russian generals. Detrimental dependence The clearest explanation of the above-mentioned is that Moscow simply does not need this, because it has another, almost equally effective weapons at hand: oil and, especially, natural gas. The Czech Republic depends on the Russian supplies more than it’s good for its healthy development. While Western Europe takes approximately 30 per cent of its overall consumption from Russia, the Czech Republic must import as much as 74 per cent. This is a security danger in the full sense of the word. “The disruption of the natural gas supplies to a European country in the midst of winter would result in life casualties and economic damages comparable to a military attack carried out by conventional weapons,” claimed the American Senator, Richard Lugar, at the recent conference of the German Marshall Fund. Let us add that Lugar is in no way either a grim Russia-phobiac or an extravagant neo-conservative; he deserves credit for many sane parts of the American policy directed towards both Soviet Union and Russia and is, for example, the co-author of the successful program of the Russian nuclear disarmament. And indeed, if the flow of Russian natural gas was cut off from the Czech Republic, either for political or other reasons (see the subhead “How much dependent we are“ below), we would feel the impact of this situation quickly and quite palpably. One of the reasons is that the highest percentage of people employed in the industrial sector on the European scale can be found in the very Czech Republic. The hangover of the Communist enthusiasm for industrial production could have severe consequences in the case of energy conflict with Russia (but also in the case of a successful terrorist attack on the gas pipeline). “Many businesses have dual source of energy, gas and electric power,” as the power engineer, Pavel Janeček, said to the Týden weekly. “If the gas supplies are disrupted, these companies will to for electricity. And it is for certain that the electricity network would be unable to survive this. The result would be the domino effect. As soon as one part of the network collapses, the remaining ones will follow automatically, since the entire system thus loses its stability. It would simply be a decent blackout, similar to that which was recently experienced by the States.” The strong Russian card Such a scenario, however, is blacker than black. The Czech Republic has strategic supplies of natural gas for 110 days (while the law requires 90 days’ supplies). Therefore, if Gazprom tries to employ the last year’s Ukrainian model and turns the natural gas tap to the left, the collapse would not come about that easily. “The problem is that if electricity was to substitute natural gas, the necessary capacity of the network cannot be built in three or four months,” Janeček explains. “The Energy Regulatory Office would have to implement drastic regulation of gas consumption.” This would, of course, most affect the companies for whom gas is indispensable. Many of them would be forced to either limit or completely stop their operation. The damages caused by such a situation to the entire Czech economy – from mass dismissals of employees to countless bankruptcies – could easily amount tens or hundreds millions Czech Crowns. As concerns the energy dependence of the Czech Republic on Russia (and we haven’t discussed the Russian oil and fuel for the Temelín nuclear power plant yet, let alone the pro-Russian orientation of the ČEZ management), it is quite obvious that the Russians hold a very powerful card in their hands. And this is not only the case of the Czech Republic. Putin declared that, “Gazprom represents the most effective tool of foreign policy,” and decided to codify its position of a monopoly exporter of natural gas. But if he succeeds to control the infrastructure in the client countries – i.e. something that he endeavors vehemently – he will get even more effective weapon. He already owns 35 per cent of Wingas, the German natural gas distributor; he owns part of the Baltic-region infrastructure; he owns 10 per cent of the gas pipeline that connects Belgium and Britain, and he strives for a similar share in the gas pipeline leading from the Netherlands to Britain. “It does not suffice us to supply a quarter of the entire global gas consumption,” the British weekly The Economist quoted Alexander Medvedjev, man no. 2 in the Gazprom hierarchy. “We want to become the largest company in the world.” The natural gas market therefore finds itself in an unenviable situation: the total of 60 per cent of global gas production is controlled by Russia, Iran and Qatar. The Gazprom expansionist policy moreover brings along side risks; one of them being that foreign investments of the company prevent it from modernizing its production. This, paradoxically, results in the lack of natural gas, and Gazprom is thus forced – also due to the increasing local consumption – to replenish its reserves via supplies from Turkmenistan. The ambition to become the largest company in the world does not come for free. The Russian way to the eventual “retaliation” for the radar, however, is far from solely leading through energies. The volume of Czech trade with Russia (see the subhead “Volume of trade between the Czech Republic and Russia” below on p. 20) is on constant increase and no twist of the trend can be expected. It is quite logical: Czech companies find their sales outlets more easily in the East than in Western Europe, since the competition in the latter is harder, the economic growth is slower – 2.2 percent in average as compared to the Russian 6.6 per cent in the past decade – and the markets are more saturated. It is thus apparent that the economies of the Czech Republic and Russia are going to become more and more interconnected, or, “to establish closer ties“, as a Communist rhetorician would put it. However, to do business in Russia and to make money there can mean two completely different things. The most simple step by which Russia can make the life of Czech businessmen more difficult is, for example, to increase the import taxes on the local products (or, eventually, to increase some other type of taxation). This can pay off to Moscow well in the market segments where the Czechs have dominant or at least strong market position. If, for example, the PPF group – with its Czech leadership, although it is, nominally, Dutch – succeeds with its instalment sales similarly as the Home Credit did, it can expect worse tax rates if it comes to the disfavor of the Russian authorities. At that moment, the overall Czech investments in Russia (see the subhead “What Klaus brought back from Russia” below on p. 17) would be endangered into much more substantial measure than they have hitherto been. One of the commonplace ways of bullying entrepreneurs is changing the norms. Consider the Škoda company from Mladá Boleslav, producing cars in Russia for the local market. It is not a single problem for the Russian authorities to adjust the technical norms to the needs of other – and, preferably, local – producers. Good illustration of this “policy” is the above-mentioned issue concerning the Polish meat. But the strategy of a “silent order” is yet more effective than taking the official routes. Putin succeeded in gaining the authority to personally appoint all governors who thus have lost the measure of autonomy against Kremlin which they got used to under the reign of Boris Jeltzin. A single phone call is enough to arrange the desirable trouble to Czech companies. “There are always loads of certificates, the necessary bumfs, which you are obliged to have as an entrepreneur,” says power engineer Janeček, who can pride himself of countless experiences with entrepreneurship in Russia. “You can get the necessary certificate, a document, in a week, but you also may get it in two years. No company is able to last that long.” Tightening the visa policy If the dissension with Moscow was to end up with what one is and has, the consequences will of course affect many other fields as well. For example, the contemporary boom of Russian tourists (see the subhead “For how long they stay in our country” below on p. 18), who sojourn to the Czech Republic the longest from amongst all foreign guests, can easily be suffocated. It can readily suit the purpose if the Russian side somehow tightens the visa regime. The Czech Republic would thus be forced to react in a similar manner, and the number of tourists would decrease correspondingly. Withal, the Russians keep a good number of Czech entrepreneurs in the travel business afloat. “Our country is visited by nothing but the second-rate guests from the Western Europe. Those who think that we are able to attract jet-set guests are wrong,” opines Jiří Milský, director of the Imperial hotel in Carlsbad. “The Russians are those who are willing to spend their money here.” Not everybody shares Milský’s opinion, though. “Since the Russians have become to come here in droves, my customers are unsatisfied,” claims the female owner of a Carlsbad travel agency which exclusively focuses on Western-European clientele. “The Russians behave dreadfully, and are arrogant. The hotels increase their capacities because of them in order to keep the pot boiling, but the other guests do not like them at all and there is a threat that they start frequenting other destinations.“ This is also why the Russians in Carlsbad form as much as 42 per cent of the total of the spa guests (the Germans with their 30 per cent occupy the second position, and there is only 9 per cent of the Czechs). This sole fact represents a risk: if the Russians decide to spend their dollars elsewhere similarly as the British did, while the latter began to visit the Baltic region instead of Prague, the spa entrepreneurs are done for. The analogy with power engineering is in no way accidental here. “We know we should do something about Russia but we have no idea as to what it should be,” said a “high rank” from the EU who, understandably, wished to stay anonymous. His words sound like a motto of the entire problem. However, it definitely is not too encouraging to hear this from a representative of an institution which, as practically the one and only, should be capable of a more tangible reaction.