No, it’s not what you think.

Croatia is a small country in southeastern Europe, at the westernmost end of the Balkans. Its GDP is about half of Mr Bezos’ total worth, and apart from a beautiful coastline, it has no natural resources to speak of.

But from Kremlin’s perspective, since it joined NATO and the EU, it has something more important than oil or uranium – The Vote. Russia’s trouble with both organisations are well known. As long as they were confined to gas wars with Ukraine and more aggressive posturing in its immediate neighborhood, the situation was more or less contained on both sides. But after Russia invaded Ukraine to annex Crimea and support the rebels in East Ukraine, the EU and the US introduced sanctions, and NATO took a much more serious stance bringing back on line almost forgotten capacities. But the important thing in both NATO and the EU are the member states votes. On some issues, such as sanctions, the EU requires unanimity¹. And one vote is enough to break it.

Croatia is certainly not on the top of Kremlin’s list. There are other EU and NATO countries where Moscow is vying for influence, more or less successfully. But Croatia was a cheap and easy target, and it would have been foolish to pass it up. Whatever the Russian Government is, foolish it is not.

Yesterday, the Croatian Government announced that a deal has been reached on the future of Agrokor. Agrokor was the largest privately-owned company in former Yugoslavia, created in the early 90’s through crony privatization. Ivica Todorić, the owner of the conglomerate, was at one time partner with the daughter of the omnipotent first Croatian President, Franjo Tuđman, and preserved this connection until Tuđman’s death. This was enough for him to buy up a number of companies through the privatization process, and in the early days of the 21^st century start expanding to neighboring countries, starting with Bosnia and moving on to Serbia and Slovenia. All in all, Agrokor came to employ some 27,000 people in Croatia and around 30,000 in other countries. The bggest portion of its revenue came from general stores called Konzum, and its downfall is reported to have started with its acquisition of Merkator, a Slovenian retail chain that was Konzum’s main competitor in Croatia and Serbia. Apparently, too much money went into transaction on unfavorable terms, and little by little it drowned the giant conglomerate. Be that as it may, Agrokor quickly had to find large amounts of money and at some point it turned to Sberbank and VTB bank for support. Both were happy to oblige, and Sberbank extended some EUR 1.1 billion in various loans. The biggest individual tranche came in 2014 when the bank granted Agrokor an EUR 600 million loan² with much fanfare.

The VTB lent Agrokor some EUR 300 million. At the height of its glory, Agrokor revenue amounted to 12-15%³ of Croatia’s GDP in 2016.

Then in 2016 Agrokor started collapsing. In fact, the Russian ambassador was the first one to say something publicly, when he stated that his government will no longer bail out Agrokor. But Sberbank approved one more EUR 100 million loan in early 2017, just weeks before the Government pushed through the new law and introduced a special administration in Agrokor.

Although the Croatian Government initially did extend a helping hand in the form of a loan from the state-owned development bank, at some point in February 2017 it decided to change course and let the conglomerate sink. After some back and forth on what to do, the Government introduced a special administrator under a new law similar to the American Chapter 11 bankruptcy. The main difference is that the receiver is appointed by the Government and not by the owner, and this difference has caused a heated debate on whether the Government would ultimately be liable for any open claims once the process ends⁴.

At the very beginning of the process, Sberbank was offering to get involved with more financing if the Government–appointed Administrator would only give its latest EUR 100 million loan a super-seniority status. The Administrator flatly refused, and Sberbank moved out of the process and instigated several proceedings against the company in Slovenia, Serbia, England and possibly other places. Slovenian and Serbian courts sided with it almost immediately, and the bank confiscated some 18% of Merkator shares, which was apparently used as collateral.

The Government’s Administrator arranged a roll-up loan almost immediately, providing new creditors with the status that Sberbank was requesting for its latest loan, giving them priority for their old debt over other old debt. VTB participated in that arrangement but Sberbank did not. In effect, primacy in the process was given to an American vulture fund, Knightshead Capital Management Fund, which bought up Agrokor’s bonds in the junk market, and as the largest holder participated in the new roll-up scheme as the largest single creditor.

Then in the fall of 2017, Croatian President Grabar Kitarović visited Russia. She was, among others, accompanied by the State Attorney, Mr Cvitan. The reason given for his visit was signing of a cooperation agreement with his Russian counterparts for the next couple of years. However, it seems he joined the President in her meetings on Agrokor. Details on his participation were not released, but after Christmas and school holidays. Mr Ramljak was brought down by a scandal, and Mr Peruško, current Special Administrator, stepped in. Two weeks later, the press was full of headlines about Sberbank returning to the process on reaching a settlement, and recently some local press of ill repute⁵ started speculating that Russia is supporting Mr Cvitan for another mandate. All of this makes it sound as if his presence in Grabar Kitarović’s meetings with Mr Putin was required for his expertise, not decorative value, and his ability to confirm or deny certain consequences. But no details were disclosed by any party so far.

As the final deal announced, Sberbank and the VTB are slotted to become owners of 39% and 7.5% respectively, and the press speculates that Sberbank is negotiating a possible swap of its Merkator shares for an increased share of New Agrokor. Sanctions against Russia apparently preclude 50%+1 Russian ownership of Agrokor (or at least make it bad for business), but as the largest single shareholder the Sberbank is almost certain to have the final word when it comes to Agrokor. And, depending on developments in Serbia, Bosnia and Slovenia, possibly on Agrokor’s holdings in other countries, too⁶.

At the time the Special Administration was brought in, Sberbank and the VTB held EUR 1.1 billion and some EUR 300 million of Agrokor’s debt, respectively, making for a total of EUR 1.4 billion, or Kn 10.5 billion. According to Mr Ramljak⁷, the total debt of the company at that time was around Kn 58 billion. So the total Sberbank and VTB-held debt made up around 18,1% of the total, give or take a penny or two. Considering that, the fact that the two banks ended up holding almost a clean half of the conglomerate looks like a good deal.

Ownership structure of Sberbank, as published on its pages, indicates that the Russian Central Bank holds the absolute majority and therefore the full decision-making authority. The Russian Government control over the VTB is even more straightforward, with several government entities holding well over 80% of the shares.

Bearing in mind the Russian Government propensity to use economy as a foreign policy tool⁸, it seems at least possible that the Kremlin will treat Agrokor in a similar fashion.

And then there is INA. INA was a typical socialist giant of the 60s – it was one of the two main national oil companies of former Yugoslavia, and the bigger of the two by far. In fact, towards the end of 80s, it was the largest company of former Yugoslavia. It employed myriads of engineers, economists, laborers, receptionists and more; it owned oil fields, gas stations, hotels, tourist companies and other “non-core businesses”; it had lucrative research and exploitation contracts with various non-aligned allies, such as Syria and Gabon, to name just a few, and it was, in general, the most important company in Croatia since the 1970s. Although its revenue in the best of days (at Kn 24 billion in 2007) did not match Agrokor’s numbers, it was still consistently considered as the motor of Croatia’s economic development and the backbone of its GDP, apparently accounting on average for 7-10% of the GDP. And then, in 2003, the Government sold a quarter of its shares to Hungarian MOL, after a tender in which Rosneft and OMV expressed interest but dropped out in the end (Rosneft due diligence team allegedly getting into a quarrel with INA over treatment of confidential information). There were constant speculations of undervaluation, but the deal went through. The Government appointed the majority of the board and there were the usual clauses stipulating investment and other positive things that MOL must do as the new partner.

Then MOL bought up a lot of privately-held shares, ending up with slightly more shares than the Government. A new management agreement was drawn up, with MOL this time appointing the majority of the boards. And this took place amidst a corruption scandal involving no less than the Croatian Prime Minister, whom the prosecution accused of accepting an EUR 10 million bribe to allow MOL to gain full control over the company. The PM was sentenced, but the sentence was later overturned by the Constitutional Court on several matters of procedure.

Successive governments also quarreled with MOL, to the point where some MOL’s managers were formally indicted in Croatia, and the whole thing started festering on the prime minister level. When in 2016 Croatia lost an arbitration against MOL, the current PM Plenković publicly announced that his government intends to buy back MOL’s share of INA, which he at that time valued at approximately EUR 2 billion. This immediately created pressure on the Government because it was unclear how the transaction would be paid for. Also, apparently unrelated to this announcement, MOL started publishing record results for INA, raising revenue profit levels to almost the pre-crisis times.

But the most interesting news came from the sidelines, with Hungarian and Croatian media speculating that Rosneft could be interested in buying INA from MOL. Rosneft confirmed⁹ this, making all the usual positive noises about modernizing INA’s refineries, making INA into a regional hub for its activities, and other things governments and voters like to hear. At the moment, it is not clear where this issue stands. Local press in Croatia speculates that INA was the real target of Russia’s financial involvement in Croatia, and Agrokor just a means to an end. Most of the speculations include some variant of South Stream revival theories, Russia’s general interest in energy markets in SEE countries as a bridge to central Europe and the like. So far, no further details are being released by anyone.

But should Rosneft, owned by the state, succeed in obtaining the controlling package of INA, there are several things that are likely to happen. First, Rosneft is not likely to be bogged down in petty negotiations and will use the full political power of its Kremlin backing to achieve whatever ends it has in mind. Second, in a wider Russian energy expansion, Croatia is unlikely to be an end in itself. INA was a good company, but no comparison to the Russian giant, and is now apparently somewhat tired, and Croatia is a market the size of a Moscow suburb. Whatever is involved, Rosneft is likely to turn at least some attention to INA’s assets in other countries (such as Bosnia, or perhaps even reviving interest in INA’s former holdings in Kosovo). Third, Rosneft is also likely to concentrate on INA’s gas interests, and there is a possibility that those be spun off to some other company (not necessarily Gazprom, but not entirely unlikely).

But the main consequence would be that two Russian banks and one Russian company, all majority owned and directly controlled by the Russian government, would own approximately a quarter of Croatia’s GDP. For comparison, in the United States, this would be a value of slightly over four trillion dollars, almost four times as much as China’s holding in US securities. Each year.

Since Croatia’s economy is not very diversified, several branches and these two companies make up the majority of the GDP. Once INA and Agrokor are controlled by a foreign entity, Croatia will be left with tourism and government spending. Tourism accounts for an amount about equal to a sum of INA and Agrokor’s revenue, and central government spending makes up for around a third of the GDP. Given the sensitivity of tourism as a market to any disturbances, whether in Croatia or in the general area of the Western Balkans, Agrokor and INA might just turn out to be the main motors of Croatian economy. Any major fluctuations in their operations might tilt the entire economy. And, as Mr Putin apparently said to Ms Grabar Kitarović¹⁰, one billion Euro is not much for Sberbank to lose. It makes many times that each year. So for around two billion to buy INA, and the 1.4 billion already spent which will allow Russia to gain control over Agrokor, Russia will effectively control Croatia’s economy (and, lest we forget, make some money off it, which is always a welcome side effect).

Perhaps Minsk or Kyiv could offer some pointers to the Croatian Government how to handle that kind of situation, but if history is any guide, it is likely that Kremlin would use the economic leverage for political purposes. Perhaps not immediately, and perhaps not in the most obvious manner, but use it nevertheless it will.

Can this be countered in some way? Perhaps, but not immediately. For now, Kremlin simply holds all the trumps.

Is it going to be harmful? Not necessarily. There are quite a few scenarios in which Kremlin would not need to use this leverage, Croatian economy would outgrow its dependency on these two companies, and the companies themselves would benefit from partnership with some of the world’s largest corporations.

But there will be a potential for Kremlin to influence economy of a NATO and EU member state to the point that it might bend it towards its political aims. And all of that for under 3.5 billion. That is good business indeed.