A foot in the door? Russia’s International Investment Bank moves to Hungary

On 14 March 2019, a Hungarian law on moving the headquarters of the Moscow-based International Investment Bank (IIB) to Budapest came into force. In its current form, the law could create serious security problems for not only Hungary but every member of the European Union and NATO.

The bank was founded in 1970 with the objective of fostering trade and other economic cooperation within the Soviet Council for Mutual Economic Assistance. However, due to the peculiarities of the planned economy, the IBB could barely fulfil its core objectives: fostering competition for loans and reviewing economic projects. Nevertheless, as the bank had a wide-ranging and well-functioning international network, the KGB frequently used it as a cover organisation.

 In theory, the bank could host hundreds of foreign citizens who would be able to move freely within the Schengen Area. 

Although the IIB survived the dissolution of the eastern bloc, it was left without any meaningful role for more than a decade. Hungary even withdrew from the hibernating bank under the 1998-2002 government of Prime Minister Viktor Orbán, citing its lack of transparency. However, Russian President Vladimir Putin reinvigorated the IIB in the early 2010s. In 2015 the bank opened a foreign office – in Bratislava – for the first time since the end of the cold war. Hungary rejoined the organisation the same year.

At present, the IIB has nine members: Russia, Bulgaria, Hungary, the Czech Republic, Romania, Slovakia, Cuba, Mongolia, and Vietnam. The bank’s top three shareholders by paid-in capital are Russia, Bulgaria, and Hungary, with 46.03 percent, 12.95 percent, and 12.27 percent respectively.

The IIB is registered among the official state organs and governing bodies of the Russian Federation. This means that the bank is an integral part of the Russian state administration. Thus, pro-Orbán media outlets’ argument that the IIB is “partly Hungarian” – due to Budapest’s investment in it – are unfounded.

The IIB’s immunity

Hungary’s draft law provides the IIB with a wide range of immunities and exemptions. Under the legislation, neither the bank nor its transactions or operations are subject to financial or regulatory oversight. Meanwhile, the law also permits the bank to provide investment, banking, leasing, and other financial services. This allows the IIB to handle the assets and deposits of even Hungarian state companies, and provide loans to pro-government oligarchs, without official oversight.

Under the law, people operating from the IIB headquarters building will be covered by diplomatic immunity. Indeed, the law explicitly stipulates that the IIB “may establish any regulations necessary for the exercise of its functions therein” in the building. In other words, the Hungarian authorities will have no right to enter the building or perform any official duties there, unless the bank waives its immunity.

Similarly, the bank’s governors will have diplomatic immunity, while its chairperson and directors will be eligible for numerous benefits, including full tax exemption. Many such perks are available to high-ranking personnel at other multilateral investment banks, but IIB staff will receive several exceptional forms of protection. The law stipulates that the Hungarian government is obliged to facilitate the entry, residence, and freedom of movement of all IIB leaders, employees, advisers, and experts, as well as their dependent relatives and all guests of the bank. The Hungarian authorities have no right to approve such activities, only an obligation to provide these people with appropriate documentation.

Moreover, the law sets no limit on the number of IIB employees or guests in Hungary. In theory, the bank could host hundreds of foreign citizens who would be able to move freely within the Schengen Area. The same applies to IIB-owned vehicles, which will be protected from search, expropriation, seizure, and disposal.

Interestingly, the IIB originally planned to simply move its Bratislava office to Budapest, because the Slovakian government was unwilling to provide the kind of immunities it sought. The Hungarian government has no such reservations, despite the evident risks of providing a Russian state organisation with unlimited immigration, residence, and travel opportunities within the EU – without any official control or oversight.

Budapest's justifications

The Hungarian government argues that moving the IIB’s headquarters to Budapest will boost the national economy. However, a closer look reveals an imbalance between Hungary’s contribution to the IIB and the resources it has acquired from the institution so far. Although Hungary is the third-largest contributor to the bank by paid-in capital, it has received only 5 percent of loans from the IIB – the smallest proportion of any shareholder. Even Vietnam and Mongolia have received more loans from the bank – 6 percent and 10 percent respectively – despite the fact that their shares of paid-in capital are just 1.13 percent and 1.04 percent respectively. In other words, Hungary has been much less successful in mobilising IIB resources than any other member of the bank.

The IIB funds Hungary has received so far include a €20 million loan to MOL Hungarian Oil and Gas Company, as well as a €15 million loan to MET Group – a gas trading company that was owned partly by MOL and partly by Orbán-linked oligarch István Garancsi until May 2018 – for the acquisition of regional gas company Tigáz. This suggests that the IIB could be involved in similar transactions in future, supporting the operations of pro-government business interests without any transparency or public oversight.

None of these problems is certain to threaten European security by itself. However, Budapest’s new law on the IIB seriously undermines the Hungarian authorities’ capacity to take action should a threat arise. Therefore, it poses serious risks to both internal security, not least counter-intelligence, and financial security. These risks extend beyond Hungary to the rest of NATO and the EU.

 

András Rácz is an associate professor at Pázmány Péter Catholic University in Budapest, and a security policy researcher at the Political Capital Policy Research and Consulting Institute. He is also a non-resident fellow at the Estonian Foreign Policy Institute in Tallinn.