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States within states: how corruption in the Baltic transport sector perpetuates Russia’s economic influence

Author(s):
Laurynas Keturakis

Since Russia’s incursion into Ukraine in 2014, the Baltic States have kept an especially watchful eye on the Kremlin. Recently, aside from voicing concerns about the joint Russian-Belarusian Zapad 2017 exercise and Iskander deployments in Kaliningrad, Baltic countries have taken steps to consolidate their defenses and prepare their institutions for a similar hybrid Crimea scenario.

Both Latvia and Estonia have organized several cyber defense and red-teaming exercises within the past six months. The exercises involved not just the respective countries’ defense forces and cyber response teams but also the Maryland Army National Guard stationed in Ämari, as well as public and private telecommunications companies. On 28 February 2018, Lithuania held its first and largest exercise imitating a hybrid attack. Hybrid Wind involved 16 different strategic institutions in the communication and transport sectors and had the aim of testing and improving coordination between them. The scenarios featured a massive cyberattack disabling mobile networks, a plane full of Russian conscripts landing at Vilnius airport, a military column moving towards the port city of Klaipėda, as well as several railway incidents including derailment and mined tracks – all taking place in different parts of the country.

The protection of critical infrastructure as well as of key supply and manoeuvre routes plays a central role in any military conflict. An unnerving headache for the Baltics, however, is that such exercises might not be enough to maintain their security. Today, many associate “hybrid warfare” with either the scenario of Hybrid Wind and the Crimea occupation — a fast-paced operation involving special forces with0ut insignia and cyberattacks on a country’s main institutions — or a prolonged low-intensity conflict such as the one in Eastern Ukraine. Both scenarios, however, are only the final—and often desperate—course of action in the Kremlin playbook. What often isn't seen in the headlines and think-tank reports is Russia’s creeping or lingering economic subversion that mixes private business with public affairs, spills over into politics, and undermines states’ ability to respond to foreign influence.

Corruption scandals in Baltic transport sector

In the past four years all three Baltic countries have been hit by corruption scandals that one way or another involved figures holding power in the transport sector. All the scandals drew broad national media attention and reactions from local politicians, which prompted initiatives for reforms.

In Latvia a corruption scandal involving the head of Latvian Railways, Ugis Magonis, seemed too unrealistic even for a film. Magonis was detained by Latvian police after a high-speed car chase that was brought to a halt by roadworks on the Tallinn-Riga highway. In the boot of his vehicle he had a briefcase containing €500,000 in cash. According to the authorities, this was a bribe related to the 8m-euro purchase of locomotives from Estonian businessman Oleg Ossinovski’s Skinest company.

In a similar fashion, Lithuanian Railways came under fire in late 2016 after local news media portal 15min published a report uncovering the company’s shady business dealings with Russian rail manufacturer Transmashholding. According to the press investigation, Lithuanian Railways worked around the public acquisition law to set up multimillion euro contracts with a Russian subsidiary, TMHB. As railway board resignations and further news reports revealing a much bigger picture followed, the Special Investigation Service[1] opened an investigation into Lithuanian Railways' activities.

Estonia has not been immune to a series of similar events either. If in the other two Baltic countries railways took centre stage, in Estonia it belonged to the Port of Tallinn. Here, in 2015 the Internal Security Service, responsible for high-profile corruption cases, had arrested former CEO Ain Kaljurand and management board member Allan Kiil for accepting bribes.

None of these scandals came out of nowhere. If anything, the series of events in 2015 and 2016 was rather the culmination of a long-running story. The indictments brought forward against Kaljurand and Kiil stated that port authorities accepted bribes in the period from at least 2009 onwards. Magonis of Latvian Railways has been involved in scandals in 2010 and 2012. Likewise, Lithuanian Railways was a long-known bastion of corruption, prompting President Dalia Grybauskaitė to brand the company “a state within a state”.

More importantly, however, is the fact that all of these stories had a connection with influential political elites in the respective countries, and were linked in one way or another to Russia. For instance, Lithuanian Railways had long-standing informal ties with the then ruling Social Democratic Party, while maintaining business relations with Transmashholding – a company which itself has strong links with the Russian defence industry. The Latvian Railways' chief, for his part, was close to then head of Russian Railways Vladimir Yakunin. In Estonia, the Russian link was not as obvious; however, as the investigation progressed it implicated Tallinn’s pro-Russian mayor Edgar Savisaar.

 

Undermining state cohesion: what corruption means for the Baltics

In the aftermath of the Port of Tallinn officials' arrest, Estonia’s Prime Minister Taavi Roivas called the scandal a “security issue”. His statements underscore the importance of the transport sector for the Baltics and its continuing susceptibility to corruption. Besides the economic significance, the transport sector has two other important elements to it.

First, there is the military-logistics side. Russia’s campaign against Ukraine has prompted messages of reassurance from many Western leaders seeking to prevent a similar scenario in the Baltic States. Despite diplomatic reaffirmations of Article V, however, there is the issue of an actual capability to deter or repel an incursion. The Baltics are in a precarious geographical position. The only land link connecting them with the rest of the Alliance is the short 70km border between Poland and Lithuania, the so-called Suwalki Gap. Transport links between the Baltics and rest of the alliance are therefore crucial to ensuring that reinforcements reach the area smoothly in times of emergency.

Second, full integration of the Baltic infrastructure into the European network remains a key political goal in Vilnius, Riga, and Tallinn. For the three Baltic States infrastructure dependence on Russian (or Russian-built) railroads, electricity lines and pipelines has been the principle Achilles heel since the restoration of independence. Because of the Kremlin’s inclination to use them as leverage to exert political pressure, infrastructure reform and reorientation became a political question for Baltic leaders. Although recently there has been significant improvement in some areas such as energy dependence (partly thanks to Lithuania’s LNG terminal), railway transport remains largely integrated into the west-east line to Russia.

Bearing these circumstances in mind, it must be evident that the Baltic States' infrastructure projects such as Rail Baltica are much more than economic development initiatives, while the obstacles in their way – such as corruption – are more than just symptoms of weaknesses in public finance policy. More than that, individuals or institutions with murky financial links with Russia often start acting against the interests of the state itself. A series of annual reviews from Estonian intelligence service have argued that corruption in the management of strategic state-owned enterprises (such as energy and transport) renders them exposed to hostile actors due to greed or vulnerability to blackmail. The Lithuanian State Security Department annual review of 2015 also identified corruption as a tool of hostile influence.

The arrested CEO of Latvian Railways, Ugis Magonis, maintained a close relationship with the CEO of Russian Railways Vladimir Yakunin. Both men celebrated Magonis’s 50th birthday at Rundale palace in Latvia. Yakunin was placed on U.S. blacklist as part of the post-Crimea sanctions package. He was not, however, on the European Union’s list of sanctioned people because of intensive lobbying by Latvian politicians. Similarly, some Lithuanian MPs of the National Security and Defense Committee had expressed their concerns about Lithuanian Railways’ business links with Transmashholding which was deeply embedded in the Russian military-industrial complex, while many other similar Western companies have distanced themselves from Russia after the occupation of Crimea. One parliamentarian accused the company of conducting “its own foreign policy”.

In short, Russia has successfully managed to enlist key figures as local power-brokers in the management of two state-owned railway companies. Per the CSIS “The Kremlin Playbook” report, power-brokers – influential businessmen and former or current high-ranking public officials – are one of the ways Russia channels its economic influence. Power-brokers are usually enlisted using the “carrot”: the heads of Lithuanian and Latvian Railways were enticed by seemingly profitable deals. The Magonis-Yakunin relationship meant that coal transport flowed from Riga ports to Russia and back; Lithuanian Railways meanwhile worked around legal procedures to maintain their relationship with Transmashholding. When these relations were somehow threatened – either because of EU sanctions or public scandals – respective local actors would strive to protect them, arguing that this relationship was beneficial for the country. In other words, Magonis and Lithuanian Railways would effectively advance Russian interests and/or undermine the foreign policies of their respective countries.  

One interesting detail here is that the Russians also attempted to exploit that link even in the face of Magonis’s arrest and the fallout of the corruption scandal. Days after the arrest, Russian Railways announced railway repairs which reduced Latvian cargo transit, an action similar to Gazprom’s political manoeuvres in reaction to policies that the Russian authorities do not approve of.

Even if corruption cases are not directly attributed to Russia’s economic influence actions, nine times out of ten they work in Russia’s favor. If anything, they interfere in Baltic infrastructure integration efforts as they undermine trust both in neighboring countries and the European Union in common transnational projects like Rail Baltica. Moreover, they provide fuel for Russian propaganda narratives aimed at the Baltic States, with Russian officials claiming that they are failed states with corrupt elites which cannot take care of their citizens. As Emmet Tuohy of Tallinn’s International Center for Defense and Security points out: as Russia loses energy as a tool of manipulation, it will leverage other means such as the transport industry in its efforts to maintain influence over the region.

Conclusion: looking outside the Baltics

The story of the Baltic transport sector is an important one, for it paints a more complete, albeit grimier, picture of the Kremlin’s involvement in countries it considers adversaries. Russia’s actions during the U.S. presidential election and many other European votes have forced many out of their state of managed complacency. If the events of 2014 put Russia on the spotlight, many Western policy-makers and the public tried to convince themselves that they were spectators and what they saw on the stage would not directly affect them. The year 2016 turned on the lights in the auditorium. Russia’s use of espionage and disinformation to turn elements of free society against each other has become a prominent topic of public conversation, just like the Crimea annexation previously did for the phenomenon of hybrid warfare.

Nevertheless, there is still much going on behind the scenes, as this article has shown. Russian influence operations entail more sophisticated efforts to spread and amplify false news on the internet or wage undeclared wars on neighboring countries. Efforts to capture countries’ economic elites and project power through non-transparent private business activities are part of the game as well, and not just in the Baltics. In Germany, it is Russian pipeline politics; in London – illicit oligarch money. All with the same intended effect of undermining the cohesion of a state as it scrambles to respond to open hostility.

The Baltic story may be nearing a happy ending. All of the cases mentioned here have been dragged out into the light after one or two of the main characters in the play were led “off the stage” in handcuffs. In the face of public pressure, Baltic governments have initiated reforms in these sectors that are still ongoing but show the potential for change in this 25-year old story.

 

 

[1]      A special law enforcement agency established in 1990 to combat corruption.

 

Laurynas Keturakis is an Associate Analyst at Vilnius Institute for Policy Analysis.

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