Montenegro Must Escape its Dangerous Dependence on ‘Corrosive Capital’

The weakening influence of the European Union and the West in the Western Balkans in recent years has created new opportunities for authoritarian states to increase their own influence in the area.

Researchers dealing with this phenomenon used to focus mainly on analysis of political and media influences. In recent years, however, research has concentrated more on their economic impact and specifically on “corrosive capital”.

The term was coined by the Washington-based advocacy group Centre for International Private Entrepreneurship, CIPE, to describe “financing which lacks transparency, accountability, and market orientation, coming from authoritarian regimes to new and transitional democracies”.

This research reveals that the capital that comes from authoritarian states almost never means only “business”; it makes fragile states vulnerable to political influence, endangering their democracy in the process.

Montenegro is no exception, compared to the rest of the Western Balkans. It is far from being the most interesting country for corrosive capital, keeping in mind its small size and limited resources. However, its example serves as an illustration of how, through a couple of wrong moves and the assignment of a few resources, a small economy can jeopardize its sovereignty.

Since the restoration of its independence in 2006, the inflow of Foreign Direct Investment, FDI, has been an important driver of Montenegro’s economic growth. This, and its high reliance on tourism, makes the Montenegrin economy extremely vulnerable to external shocks.

In recent years, Montenegro has experienced how high exposure to capital from an authoritarian country can affect internal stability and the foreign policy agenda.

Russia has been the largest investor in Montenegro for years, and by 2018, its investments amounted to $1.27 billion, 13 per cent of all FDI in the country.

The largest inflow of Russian capital occurred on the eve of independence, in 2005, when Russian oligarch Oleg Deripaska bought the country’s largest company, the aluminium plant Kombinat aluminijuma Podgorica, KAP, which then accounted for about half of Montenegro’s exports.

One can only speculate what would have happened if parliament had stopped the sale of key energy resources to Deripaska, and whether Montenegro would then have escaped the Russian zone of economic and political influence.

KAP was followed by many other Russian investments and projects, mostly in tourism and real estate.

When investing in Montenegro, numerous Russian investors took advantage of key management failings, such as the lack of an investment verification mechanism, weak controls on the allocation of state aid to strategic companies, disputed tenders, and the lack of supervision of privatization processes.

In various corrupt deals with local powerbrokers, some of the most grandly announced projects ended up as abandoned construction sites, or as cases with the Prosecutor’s Office for Organised Crime.

This economic and political free-for-all lasted until Montenegro decided to join NATO and also joined European sanctions imposed on Russia for its annexation of Crimea, thus articulating its specific foreign policy orientation.

By that time, there was a significant Russian infrastructure in Montenegro in politics, media, and business, which had the strength to stall the achievement of those goals.

This was followed by campaigns to discourage Russian tourists from traveling to Montenegro, by closing the Russian market to some of Montenegro’s most important export products, and by supporting individuals who disrupted the country’s internal security and political stability.

Russia’s corporate presence has declined dramatically since the beginning of the conflict, primarily due to the bankruptcy of KAP and Deripaska’s own departure.

However, despite much worsened bilateral relations, Russia is still among the top five investor countries in Montenegro. Further strategic diversification of foreign direct investment is, therefore, needed to prevent the concentration of capital coming from only a few foreign countries and primarily in one or two economic sectors.

One might naively think Montenegro had learned a thing or two from this dangerous episode with Russia, and that it has since taken measures to ensure it never again enters into such a risky economic dependence on a great power.

However, Montenegro still needs money for development, which can often only be found in Eastern countries with serious deficits in democracy and the rule of law. Western sources of financing have stricter borrowing policies, which the Montenegrin government has been unable to satisfy.

This is how a new player, China, came to the fore in Montenegro, providing the missing funds for infrastructure projects. But it comes at a price. External debt owed to China, obtained to construct the Bar-Boljare highway, will burden Montenegro for years, if not decades.

International financial institutions have warned of the economic and fiscal unsustainability of the highway project, and the IMF stressed that caution was needed in implementing the next phases of the project until feasibility, cost-benefit and financing studies were fully conducted. In the context of the crisis caused by the COVID-19 pandemic, which has seriously affected Montenegro, the highway project is in a new state of uncertainty, and there is no sign of its successful completion.

In the context of minimal financial resources from the wider market, Montenegro must not allow large authoritarian states quick, cheap, and aggressive access to its limited resources.

Economic dependence threatens to create political dependence and thwart desired democratic development. A fragile transitional democracy cannot strengthen itself under the economic and political influence of a society that is essentially undemocratic.

This kind of influence should be countered by strengthening democratic institutions. In addition to its declared determination of belonging to Western political and cultural patterns, Montenegro must accept all the features of these patterns in practice as well – and act in line with the rules of democratic and orderly societies.

Suspicious capital seeks suspicious destinations. Only with the strengthening of democratic institutions will Montenegro be less part of the sphere of interest of those countries from which corrosive capital tends to come.