Russia’s Loans as a Means of Geoeconomic Competition in Africa and Latin America

ABSTRACT

Based on the evidence of Russia’s activity in Latin America and Africa, the paper explores the country’s lending policies as part of the country’s economic statecraft. Russia joined the group of countries that provide loans to other governments only quite recently, using the flow of resources from oil sales. As a latecomer, Russia and its companies target states with markets unoccupied by Western competitors. Russia even supports regimes with low credibility and provides them with political and economic support. Because of this high-yield but also high-risk strategy, it faces problems and losses in countries such as Venezuela or Libya.

Introduction

The world financial crisis of 2008 intensified the interest of non-Western powers in entering into global geoeconomic competition with their adversaries from the Western world. Providing credits to capital-strapped borrowers, most often in the non-Western world, became one of the means of shaking previous Western dominance and promoting their own economic interests, including those of their state-owned enterprises (SOEs) (Andreff 2016; Cuervo-Cazurra 2018, 5; Roberts, Armijo, and Katada 2018). For instance, Brazil has lent heavily to African countries, mainly in the fields of natural resources extraction and infrastructure. China became even more active worldwide, seizing opportunities that stemmed from problems the West was facing (Bräutigam 2011; Norris 2018; Prysmakova 2016; Wang and Qiu 2018; Reilly 2021). It comes as no surprise that Russia did not abstain from this process and began to operate actively in the credit markets as a lender (Kheifets 2013). On top of the post-Soviet space, where the potential for expansion was low, and Western Europe, where Russian capital still played a minor role due to high competition, Russia promoted its firms through loans to other parts of the world, including Latin American and African countries. The most notable cases of Russia’s crediting operations fall on countries whose leaderships had questionable reputations, as in Venezuela or Zimbabwe, where, for political and risk assessment reasons Western and, in the case of Venezuela, even Chinese firms are reluctant to invest (Cardozo Ucátegui and Mijares 2020; EIU 2021). This fact raises questions about the logic behind Russia’s lending policies: is politics playing the main role or is it still economic motivation that drives Russia to these countries? The paper argues that, aside from geopolitical considerations, which are extensively discussed in academic literature, supporting even unstable or authoritarian regimes has an economic logic for the Russian side. Close political ties with regimes with weak reputations bring significant economic concessions for Russian firms.

Naturally, the connection between politics and economy in interstate relations is not new. Albert Hirschman (1980) studied the establishment of economic ties between Nazi Germany and weaker satellite states. Those ties in turn created dependence of the weaker partner on Germany. It may not even have been dependence of the whole economy, but of specific sectors, that subsequently constituted a “fifth column.” The primary motivation was not necessarily political but economic, yet the implications are always political as well, because politics is always present in international trade. Blanchard and Ripsman (2015) add to the discussion by analyzing the conditions under which economic statecraft is successful by looking at the internal situation of the target countries. According to them, statehood, the degree of which determines the ability of a state, is defined by autonomy, that is, the ability of the government to act independently of circumstances, the legitimacy of the ruling group, and capacity, which represents the government’s ability to act.

As a result, regimes with weak statehood are the most susceptible to economic coercion from their political counterparts. Their autonomy to choose otherwise is constrained by pressure from Western states; the legitimacy of the ruling class is weak due to the absence of confirmation in elections; and capacity is severely limited by economic problems and a concentration on maintaining power within the country. In such a situation, they seek help from countries that do not criticize their internal arrangements, and this creates a window of opportunity for Russia. Such regimes are appropriate, from Russia’s perspective, because its financial weakness compared to other participants in the geo-economic competition precludes it from competing effectively for more creditworthy clients.

The paper covers Russian lending policies toward African and Latin American regimes ranging from openly authoritarian, such as Zimbabwe or Cuba, to regimes that had been democratically elected but tend to slide toward authoritarian rule, for instance Bolivia or Tanzania after the 2015 elections. To avoid possible arbitrariness in selecting the populist/authoritarian regimes, the author used international comparisons such as Transparency International’s Corruption Perception Index, the Economist’s World Democracy Index, or the World Bank’s Worldwide Governance Indicators.¹ None of these indicators can be taken absolutely, however; only their combination gives a solid basis for establishing a list of countries with weak stateness in the chosen regions for the purposes of this paper.

The paper argues that Russia, through its loans to countries with weak stateness, pursues economic aims of its, often state-owned, firms and state corporations.² Russia and its firms, due to their relative economic weakness compared to competitors from the West or China, look for opportunities in countries where other investors go only reluctantly because of political risk assessment or economic reasons. With this all in mind, by using the Russian case, this paper contributes to the discussion about economic statecraft, adding the perspective of loans as one of the means of economic influence over other countries, namely countries with weak state institutions (Blanchard and Ripsman 2015).

The data were compiled from various sources including official documents of the client countries, specialized daily press (Vedomosti, RBK), analytical reports, or investigative journalism. Each of the sources was further cross-checked against other independent sources. This approach was partly inspired by papers dealing with environments with limited accessibility of data, as, for instance, China (Gallagher and Irwin 2015, 103). Similarly to the situation in China, the information about Russian credits provided to other states is secret. The Program for Provision of Government Loans by the Russian Federation to Foreign Countries, part of the state budget, was classified in 2008, and yearly reports on state credit policy are provided as secret amendments to the state budget. Furthermore, operations of Russian SOEs in African and Latin American countries are often labeled as “secret,” or with zero volume, despite the obvious massive presence of Russians in the country. Part of the investment made to Africa is hidden behind other offshore zones. Thus, statistical accounts are helpful, but limited, sources of information (Weiner 2020, 4).

Russian loans and their role in promoting the interests of Russian SOEs have not received significant attention in academic literature. Current research on the expansion of SOEs through loans is highly focused on China and its “go global” policy (Jingjing and Jongchul 2021), with other emerging great powers having significantly lower coverage. However, these studies are particularly useful from a methodological point of view. Gallagher and Irwin (2015) propose an analytical framework for researching the motivation behind Chinese loans to Latin American countries based on the conditions of the loans. As they conclude, Chinese loans are primarily oriented toward economic gains, while two other motivations, resources and political aims, remain secondary. Only recently, with Russia’s declarations of returning to Africa and with the upheavals in Venezuela, have its policies in further parts of the world received more attention. In general, three streams of thought may be noted in current research on SOEs and their expansion abroad. Political scientists see a prevalence of political motives behind Russia’s intensified geoeconomic activity in Africa and Latin America, stressing the economic irrationality and high risks of these policies (Orttung and Overland 2011; Lucas 2014; Stulberg 2015; Wigell and Vihma 2016, 617). Academic accounts with this focus depict Russian offensives outside its previous areas of operation with a range of explanations including neo-colonialist behavior of the Russian Federation under Vladimir Putin; a quest for a great power status (Nygren 2007, 59; Krickovic and Bratersky 2016); efforts to undermine the world order; natural cooperation among autocracies; or reflections of Putin’s personal preferences (Mearsheimer 2001; Nolte 2010; Kaczmarski 2017; Libman and Obydenkova 2018). Those who see economic motivation in these policies underline logical ties between Russia and its partners inherited from the past, synergy effects, or soft power that makes trade easier (Vlcek and Jirusek 2015). International business studies (Musacchio, Lazzarini, and Aguilera 2015), on the other hand, underline the role of Russian international firms such as Rosneft or Gazprom, or even of informal structures (Marten 2015). Moreover, some authors stress the patrimonial nature of Putin’s regime and the personal interests of diverse actors from Putin’s entourage as the main drivers of the country’s foreign operations (Dawisha 2014; Aslund 2019).³ While this paper fully acknowledges the role of politics in Russia’s lending policies, it argues that the primary motivation is economic, with politics supporting the expansion of Russia’s SOEs. Economic considerations in the form “Russia pays more than it gets” therefore fail to address the role of substate actors, the SOEs.

The paper is organized as follows. The first part offers a view of Russia’s credits abroad with an emphasis put on the problem of conditionality and the institutional framework of foreign crediting. The second part of the paper explains the popularity of Russian credits among internally weak states as well as Russia’s interest in these countries. The third part explains Russia’s failures in the strategy of lending to weak and authoritarian regimes.

Russia’s Credit Diplomacy

Russia is not a complete newcomer to the sphere of lending competition for non-Western countries. The practice has its roots in the Soviet era, when the Soviet leadership credited Third World countries or movements of different varieties of socialism, often regardless of the client’s ability to repay the debt. Rather than actively offering its credits, the Soviet Union responded to requests from local rulers (Sanchez-Sibony 2017). On top of that, the Soviet Union also maintained close personal contacts with people such as Nicaragua’s Daniel Ortega or South Africa’s Jacob Zuma (Blank and Kim 2015; Weiss and Rumer 2019).

Russia, as part of the Soviet legacy, inherited a significant part of these credits. The overall sum of these assets reached USD 145 bln in 1991. However, their quality varied significantly due to political over economic motivations for the crediting policies. As a result, Cuba, Mongolia, Vietnam, India, and Syria were Russia’s largest debtors, owing more than USD 10 bln each, while many sub-Saharan Africa or Latin American countries held lower, but still meaningful debts (Hudson 2002, 305; Kheifets 2017).

Soviet loans were in many cases unrepaid, which, nevertheless did not prevent Vladimir Putin from calling this experience an example of “effective policy” despite its largely political motivation (TASS 2019). His accession to power in 1999 as prime minister and later as president coincided with an economic upswing, which gave new impetus to Russian economic activities abroad. Russia became internally consolidated and, with a windfall of oil money, it acquired the means to advance its perceived interests abroad. Putin did not challenge the credit policy of the Soviet Union per se but he demanded a parametrical change toward better hedging of the loans, and Russian companies became more active in the world.

The activization of Russia’s crediting operations abroad went hand in hand with another Putin policy, when he set the task for state-owned enterprises such as Gazprom and Rosneft and state corporations Rostec or Rosatom to become the world leaders in their industries (Balzer 2005, 219). For the Russian president, the growth of Russian multinationals, primarily in the mineral and energy fields, played an important role in the geoeconomic competition with other great powers and their multinationals, be they from traditional key players like the United States or European countries or from emerging great powers such as China, India, or Brazil (Gertz and Evers 2020). The Russian policy of supporting international expansion of its state-owned companies resembled China’s “go out” policy; in 2008, then president Dmitry Medvedev appealed to Russian companies to copy their Chinese peers (Andreff 2015; Weiner 2020). Russian state-owned multinational companies received preferential access to state financing, which, along with other support (political, diplomatic), helped them to offset the risks existing in the host countries (Götz and Jankowska 2016). Loans were provided by several channels, including the state bank Vnesheconombank, to Russian exporters or the state budget.⁴

The more active role of the Russian state in providing credits abroad was reflected in the strategic documents of the Russian Federation. Most prominently, the Foreign Policy Concept of the Russian Federation adopted in 2013 directly called for expansion of the presence of Russian companies in energy, transport, communications, and industry in Latin America (Kontseptsiia 2013, 92). The Long-term Concept of Social-Economic Development of the Russian Federation until 2020 adopted in 2008 called for active usage of tied credits and other crediting means in promoting Russian goods and services. The document also names Latin America and Africa as regions with a huge potential for Russian companies (Kontseptsiia 2008). In line with this document, tools for financing foreign operations of Russian companies such as the state corporation VEB.RF (formerly Vnesheconombank) or the state guarantee company EXIAR emerged. Consequently, Russia aimed to use credits and other financial instruments for promoting its companies, mainly in mining and energy, but also in nuclear power technologies and manufacturing, where the chances for Russian companies are higher than in Western markets.

While state-owned enterprises are all fully or partly owned by the state and hence seem to enjoy the same level of support, the personal side of Russian crediting policies should not be ignored. The expansion often represents a wish of the head of the company rather than a state-designed policy. Easy credits are not provided for all the SOEs in the same degree. Support for the largest companies, such as Rosneft along with its chief Igor Sechin, is provided automatically; smaller companies, even state-owned ones such as Zarubezhneft, must use their personal connections in the presidential administration or VEB.RF (Opdahl 2020, Tepavcevic 2015, 49). Such personal significance was particularly evident in Rosneft’s favorable conditions when it was leaving Venezuelan operations.

The situation with Russian credits, at least up to the beginning of the Covid crisis, could be called “loan pushing,” when easy money provided by the state was given for various projects, even those that were very risky for the state (Liao and Katada 2021). The Russian state therefore holds a great deal of trade risk for the policy of promoting its SOEs (Weiner 2020, 6). Due to the Russian political system’s specific features and the secrecy of its loan operations, possible losses do not pose a political issue as they would in democratic societies. While financial loans often prepare the environment for the activities of Russian companies, the link leads directly to these companies in the case of export credits. According to Sergei Storchak, deputy minister of finance responsible for interstate credits, Russia currently holds around USD 35 bln in its credit assets (Grinkevich 2020a).

Russia presents its loans as a relatively easy source of money and a viable alternative to international financial institutions. This is in some contrast with China, which adopts a relatively more cautious approach and stresses the role of the International Monetary Fund conditions for its loans (Voltz 2014, 128; Wexler and Bario, 2015; Roberts, Armijo, and Katada 2018). Russia, in line with other BRICS countries, has rejected an approach that goes beyond strictly economic conditions and impacts even internal politics of the client country. Russian representatives claim their full respect for the target state’s choice of its own economic policy and, more broadly, the internal political regime. While international financial institutions (IFI) request painful reforms, such as decreasing energy intensity or social payments to the population, and to be provided with complete information about the economy of the debtor, Russia does not raise such demands (Stone 2008; Beazer and Woo 2016; Hernandez 2017).

In addition to comparing itself to IFIs, Russia does not hesitate to use the experience with Chinese credits in the targeted countries as a deterrent example. Thus, it underlines the harsh conditions posed by China in these deals, such as the takeover of an airport in Zambia resulting from the country’s failure to pay its debt, and stresses Russia’s more “understanding” approach (Lenta 2020). But even this does not mean that Russia is providing completely uncovered loans. Client states usually provide their state-owned companies or raw materials as collateral. However, Russia’s funding may be undergoing a change. In early 2019, to give an example, Russia proposed a rescue plan for the Venezuelan economy, although without providing any details, stating that it was only an informal proposal (RIA 2020).

It could be expected that, if the motivation for the loan was political, Russia would offer substantially milder conditions to its clients. However, Russian loans do not claim to be and are not cheaper than those provided by international financial organizations, but they are cheaper than those provided by commercial banks, especially in the case of troubled countries (TASS 2019). The main advantage of Russian loans, beside this soft conditionality, lies in the fact that the money is provided with a relatively stable interest rate. Russia’s loan interest rate and other conditions depend on Russia’s credit rating rather than on the reliability of Russia’s partner (Deak 2016). For instance, in 2016, Russia provided a loan to Egypt with the declared rate of 3 percent, which roughly corresponded to LIBOR+1.75% as applied to a similar project in Bangladesh. The rate was significantly below the rate of Egyptian bonds, but in line with other lenders (Gallagher 2015, 105).

The low conditionality of Russian loans offers an attractive alternative for countries such as Bolivia, Venezuela, or Ecuador, but also some African countries and populist regimes stressing their anti-Westernism. After the elections in 2020, when supporters of the former president Evo Morales returned to power, Bolivia rejected and returned a loan from the IMF with the explanation that the measures surrounding the loan were harmful to its economy, and then turned to other sources. Although Russia and China were not mentioned, it may be presumed that they will serve as a source of money due to the relative unconditionality of their loans. Ecuador under Rafael Correa asked Moscow for a loan for the purchase of Russian arms, and Moscow saw an opportunity for Zarubezhneft in the country in 2009 (RBK 2009).

Diplomatic and political support to Moscow is rather implicit than conditioned by Moscow’s loans. It is predominantly driven by internal motives of the African and Latin American countries. Deeper economic ties did not bring meaningful political concessions for Moscow, such as recognition of the de facto republics Abkhazia and South Ossetia. From the countries under scrutiny, only Nicaragua and Venezuela recognized the two entities in 2009. Others maintained the principle of territorial integrity of Georgia or, despite some contacts with the two entities, did not recognize them officially (Gerrits and Bader 2016).

Channels of Crediting

Russia has several tools that it uses for its credit policy, ranging from debt write-offs, and interstate and export credits, to credit provided directly by its state-owned companies. It made use of addressing the problem of unpaid Soviet claims to African and Latin American partners in the last 10 years. It agreed to forgive or restructure around USD 100 billion of these old debts (RT 2017), at least partly re-capitalizing them to investments into new assets. Most of the debts were held by countries such as Cuba, Afghanistan, Iraq, and North Korea, and some African countries, such as Ethiopia, Chad, and Tanzania Therefore, holding these loans in accounts does not hold any rationality and Russia was not the only country that decided to redesign them.

Naturally, Russia adopted a write-off and recapitalization scheme for a wider range of countries, typically but not exclusively the poorest ones. In 2013, Putin wrote off 90 percent of the USD 32 bln Cuban debt, with the remaining part to be paid in 10 years in half-year tranches. The repayments of the Cuban debt were agreed to go to projects of Russian companies such as Rosneft and Zarubezhneft on Cuban territory. Previously, Cuba declined to recognize the debt and raised counterdemands. Although Cuban demands were absurdly based on quantification of the loss of a privileged partnership after 1990, the discussions led nowhere (Kheifets 2013). On top of forgiving the debt, Russia began to finance its exports to Cuba.

Russia apparently made use of the opportunity and good relations with the Cuban government for advancing Rosneft’s interests. In 2017, the company obtained a 49 percent stake in the Cienfuegos oil refinery. The refinery, accustomed to operations with heavy Venezuelan oil, had been left by Venezuela. After the Cuban side took over the stake in the refinery as a repayment of Venezuelan debt to Cuba, it may be presumed that the refinery finally went to Russian hands as a part of the write-off of Cuba’s debt. The price remained unknown, but Cuba, itself under US sanctions, had no other option than to sell the stake to Rosneft (EIU 2018).

VEB.RF is a key institution in loan issuing and in promoting the interests of Russian entrepreneurs. Its subsidiary, the Russian Agency for Insurance of Export Credits and Investments (EXIAR), from the Russian Export Center group, adds to the institutional system of Russia’s export and investment promotion activities in non-commodity areas, including those on the African and Latin American continents. AFROCOM, the Coordination Committee on Economic Cooperation with African Countries, was established in 2009 as the main forum for addressing political obstacles to Russian entrepreneurs in Africa. In 2019, Sberbank, a Russian state-owned bank, the Russian Export Center, VEB.RF, and Gemcorp Capital LLP founded a USD 5 billion fund that provides African countries, primarily Angola, Ethiopia, Mozambique, and Zimbabwe, with credits for purchasing Russian goods (Lenta 2019).

In addition to capitalized debts and multilateral and state-to-state loans, SOEs serve as a source of credits. One of the ways of crediting regimes such as Maduro’s Venezuela or Mugabe’s Zimbabwe has been pre-payment for local natural resources. Rosneft made pre-payments in the sum of USD 6 bln to secure its supplies in Venezuela before it left the country. This strategy proved to be quite risky, since Maduro’s regime had been struggling for survival due to economic problems and protests since 2018. It comes as no surprise that Moscow supported its client during the January 2019 protest wave in Venezuela. The Venezuelan case also showed the nature of the investments of Russian SOEs. After the United States imposed sanctions on Rosneft in 2020 due to its operations in Venezuela, the Russian state took over Rosneft’s Venezuelan projects and accepted the risks stemming from the unstable situation in the country. The company was freed from sanctions, while Roszarubezhneft, the new owner of the assets, was a company established in 2004 only to hold stocks of Rosneft, Inter RAO, and Gazprom. Hence, it was relatively immune to possible sanctions.

Sectoral Division

African and Latin American countries are not among Russia’s main partners in terms of trade or investment. Overall Russia’s outward foreign direct investment (FDI) reached USD 23 billion in 2019, a significant decline from USD 36 billion in the preceding year according to the UNCTAD World Investment Report. Most of Russia’s outward FDI flows went to Commonwealth of Independent States countries. At least declaratively, Russia intended to diversify its portfolio of customers, aiming at other parts of the world in addition to its traditional partners. The 2019 Russia–Africa summit was a key initiative in this strategic direction, with projects at an overall value of USD 10 billion announced, a sum roughly comparable to the United Kingdom’s announced investments, but far outpaced by the United States’ and China’s USD 60 billion packages (UNCTAD 2020, 60). The trade turnover is negligible. With Africa, it is only 2.5 percent of Russia’s overall trade, mostly represented by trade with Egypt and Algeria. In Latin America, Russia’s pool of contacts expanded beyond the traditional Cuba, Venezuela, and Bolivia to Argentina and other new markets. As in Africa, Russia competes with other countries in these markets; its investments in Latin America do not exceed USD 360 mln a year (Piatakov 2020).

Russia concentrates on a limited range of fields in its credits, whether for purchases or investments: arms export and mineral resources (Götz and Jankowska 2016, 65), and machinery exports, including nuclear energy equipment (VEB 2019, 32). In these schemes, financing is provided in the form of loans or insurance for the deals. Russia secures not only the economic effects of the trade in terms of profit from sales and interest rates, but also the effect of securing jobs in factories within Russia. A typical example is the Komsomol-on-Amur Sukhoi plant from the Rostec consortium. Sales of the Sukhoi aircraft are supported with loan provisions. A USD 1 billion loan to Angola for purchasing Russian helicopters and SU30 fighters was agreed in 2013 (Veebel 2020).

The arms trade is a special case of Russia’s policies, at an approximate volume of USD 13 bln in 2019 (Tkachev and Sidorkova 2019), with most of the trades supported by some sort of loan arrangement. Loans for arms exports, which are demanded in unstable or even war-torn countries, are riskier than others if for no other reason than that they are not recognized by the Paris Club of Creditors (Kheifets 2013, 28). As an example, Russia exported modernized T-72 tanks, Yak-130 fighters, and other military equipment to Nicaragua in 2016, taking advantage of the fact that 90 percent of the equipment used in the Nicaraguan army was of Soviet provenance. Furthermore, since Nicaragua pursues an anti-American policy, it was not deterred by US sanctions, as was the case with Peru and its failed purchase of Russian arms (Piatakov 2020).

On top of “simple” sales of arms, Russia provides military services to its clients including private military companies or other military establishments. Russian military companies have reportedly been active in Russian loan-recipient countries such as Zimbabwe, Libya, the Central African Republic, Sudan, and Venezuela, among other states (Rabin 2019; Marten 2019, 182).

Nuclear energy is at the center of Russia’s efforts to demonstrate its technological advancement. Accordingly, Russia offers financing through loans, most typically at the volume of 80 percent of the overall cost of a project. Russian Rosatom has 35 projects abroad, ranging from nuclear power plant construction in larger countries such as Egypt to research centers as in Bolivia. The most notorious example is the project of a nuclear power plant in South Africa in 2014. That deal, with an enormous expected cost of USD 100 billion, was signed secretly with President Jacob Zuma. The overall sum exceeded the country’s capacities, as was confirmed by a court decision in 2017. The initial deal was surrounded by accusations of bribery (Weiss and Rumer 2019).

Russia provided Cuba with credit of Euro 1.2 billion for the construction of thermal power infrastructure in the country that involved Inter RAO on the Russian side. The project entailed the enlarging of two Soviet thermal power generation stations, one in Havana and the other 40 kilometers away from the capital city. The facilities were supposed to be able to switch between oil and gas, depending on market conditions. Even though the two sides declared that they hoped for domestic supplies of oil and gas, it is not obvious that they are sufficient—imports from Venezuela are more likely. Likewise, the financial side of the project should be noted. The interest rate was 4.5 percent a year with ten years for repayment, similar to other Russian projects. As the two sides claim, the loan should be repaid through energy savings based on enhanced technologies (Argus 2015).

Russia aims at replacing the dominance of the US dollar as the main currency for international clearing with a pool of currencies including the Russian ruble (Roberts, Armijo, and Katada 2018, 3). In 2019 Russia announced its plan to provide member countries of the Eurasian Economic Union with more credits in rubles. The aim was to establish the ruble among internationally accepted currencies, which could also help to offset Western sanctions imposed on Russia (Grinkevich 2020b). Venezuela made a partial repayment of its debt to Russia in rubles in 2019. The country was unable to obtain dollars because of US sanctions, so it paid a tranche of the interest on USD 3.15 bln debt in Russian currency, leaving the principal of the debt for 2023–2026 as had been agreed during the debt restructuring. As the Russian Ministry of Finance stated: “Any debtor of Russia has the right to choose in which currency to make the current urgent payment. Our strategic choice is to actively promote the ruble in international settlements” (Korsunskaya 2019).

Upholding Authoritarians

Similarly to China, Russia does not challenge the legitimacy of ruling powers and even provides support to openly authoritarian regimes under the pretext of “stability.” Political support in unstable or unpredictable environments together with the financing of SOEs’ projects in such countries amounts to a key comparative advantage for Russian companies (Cuervo-Cazurra 2018). Authoritarian regimes that take an anti-Western stance typically represent an ideal target, since their leaderships’ options are limited to only a few potential lenders such as China or Russia. And yet, the main benefactors are Russian companies, not the Russian state. For instance, in the case of Venezuela under President Maduro, the most prominent role was played by Rosneft and personally by Igor Sechin (Blank and Kim 2015).

Unstable and authoritarian regimes in countries with limited constraints from public opinion serve as ideal targets for SOEs. Such regimes targeted for offers of loans are internally weak without any possibility to turn to other sources of financing (Blanchard and Ripsman 2015). To put it simply, they need Russian money for survival. Nonetheless, Russia’s strategy of supporting struggling regimes often leads to a situation where the government is toppled and the new government refuses to pay the debt.

Africa, which suffers from constant instability and authoritarianism, represents a relatively unoccupied field for Russia’s loans policy despite the massive presence of Chinese and Western competitors (Maplecroft 2021). Supporting the local regimes is twofold: it can be done officially through diplomatic channels such as UN Security Council voting or non-officially through security services and arms supplies. Russia, through different proxy companies, Yevgeny Prigozhin’s M-Invest being the most prominent example, has increased its activities in countries such as the Central African Republic, Chad, Sudan, Madagascar, and Zimbabwe.

In Sudan, Russian companies are interested in mineral resources, such as oil extraction and gold mining, although the deals between Sudan’s president Omar al-Bashir and Vladimir Putin were kept secret. Sudan asked for a loan to purchase two million tons of grain, which it received. In 2017, Sudan was the first African country to buy modern Russian Su-35 jet fighters. The whole deal was estimated at USD 1 billion, far beyond the possibilities of the defense budget of Sudan. Obviously, Russia provided the country with a loan, while Sudan provided M-Invest with concessions in mineral resources and oil extraction. A similar scheme had been used a year before, when Sudan bought 170 Russian T-72 tanks (Ramm and Surkov 2016). Omar al-Bashir, under prosecution by the Hague Tribunal for genocide since 2009, obviously could not turn elsewhere for help, but the Russian side provided him with military and economic support. As in other cases, the military support was officially presented as the services of instructors, presumably from the ranks of private military groups, Wagner Group being the most notorious of them (Marten 2019; Nikolski 2019; Tsvetkova 2019). Following Bashir’s fall in April 2019, Russia, after hesitating briefly, recognized the new military government, which naturally was not interested in challenging the previous contracts.

Zimbabwe likewise plays an important role in Russia’s activities involving countries with an unclear political situation. In 2000, the country was put under sanctions by Western powers because of continuous abuses of human rights under President Robert Mugabe. In the face of a worsening economic situation in the country, Mugabe sought financial resources from alternative sources, namely from China and Russia. First contacts were made in 2007 by the Russian private company Renova, which, nevertheless, left a platinum project in a preparatory phase because of political risks in the country. In 2014, the Russian state-owned company Rostec signed a USD 3 billion deal on creating a consortium for the development of platinum mines near Harare with its Zimbabwean partner. The deal, in which the Russian Vneshtorgbank was also involved, and which planned to exchange mining assets for Russian arms, did not materialize because of technical problems. Russia got back to this project only after Mugabe was removed in 2018 (Dzirutwe 2018). The Russian company ALROSA became involved in diamond mining projects signed with the new government (Alrosa 2020).

ALROSA is also active in even deeply disorganized countries such as the Central African Republic (CAR), mainly in its mining sector. News about a loan of USD 12 bln provided by the Russian VTB bank in 2018 was declared to be the result of a mistake on the Russian side, since the sum went far beyond CAR’s payment capabilities. However, this does not mean that the country did not receive any money from Russia. In its statement about the case, the Russian bank rejected exposure of this magnitude to the Central African Republic market, but it did not reject loan operations altogether. This case is typical in many respects. After the withdrawal of French and US forces in 2016 and 2017 respectively, CAR’s president Faustin-Archange Touadera became more vulnerable to threats from rebel militias. Russia quickly replaced Western powers in providing Touadera with military “instructors.” The chief of Touadera’s security, Valerii Zakharov, reportedly maintained contacts with the main rebel groups as well. Although information is scarce, this was presumably a type of hedging of Russia’s interests in the country in the event of Touadera’s downfall. Russia deployed “military instructors,” but they were to secure Russian interests in the country rather than the interests of Touadera (Dukhan 2020).

Weaknesses of Crediting Autocrats

However profitable the interdependence between an autocrat and Russian companies may seem, especially for the latter, it can easily turn into a financial trap. Most prominently, the policies of the autocrat may bring chaos or even his downfall. Involvement in the political process on the side of the selected individual plays a vital role in securing Russian money and consequently SOE investments. Yet, even this support may not suffice to outweigh countering forces, whether from inside or outside of the country.

Venezuela under Hugo Chavez and especially under Nicolás Maduro serves as a perfect example of the weakness of the Russian strategy of supporting autocrats (Petlevoi and Starinskaia 2017). Russian credits are provided by the state company Rosneft to Venezuelan oil company PDVSA in the form of pre-payments for Venezuelan oil deliveries. Russia’s role grew even stronger in 2016, when China declined to issue new credits to Maduro’s regime on top of previously provided USD 18 bln (Corrales 2020). Venezuela needed Russian credit and Rosneft to replace Chinese money, because the Russian company had become the only foreign company operating in Venezuela. Venezuela offered Rosneft a 49 percent stake in its CITGO company for an initial loan of USD 1.5 bln. But this was only the beginning. According to CEO Igor Sechin, Rosneft had provided its Venezuelan partner with around USD 6 billion in these pre-payments by August 2017 (DW 2017). Reuters in 2019 estimated that Russia and Rosneft together had provided at least USD 17 billion in loans to Venezuela since 2006 (Reuters 2019). This money, together with money for the sale of Venezuelan oil deposits, was largely used for the country’s social programs. As a result, the loans influenced Venezuelan internal politics as they enhanced the popularity of President Hugo Chavez and later President Nicolás Maduro. Thus, Russia finances the survival of Maduro’s regime and receives energy assets in return (Negroponte 2018).

US sanctions imposed on Venezuela in January 2019, together with chronic inability of Maduro’s regime to put the country’s finances in order, further deepened Venezuela’s dependence on Russian and Chinese loans. This dependence created a somewhat paradoxical situation. In order not to lose previously lent money, Moscow needed to uphold Maduro’s regime, politically, militarily, but also financially. This led to Russia’s further involvement in the Venezuelan case, something hardly desirable for Moscow. Furthermore, the oversupply in the oil market during late 2019 and early 2020 had grave consequences for the Russian side. In March 2020, Rosneft pulled out from its Venezuelan activities and sold its assets to the state-owned and newly established Roszarubezhneft (Korzhova, Starinskaia, and Petrova 2020). The deal was extremely favorable for Rosneft since it sold valueless assets for a 9.6 percent package of its own shares from the 50 percent share of Rosneftegaz with an estimated value of UD 3.78 billion (TASS 2020). As a result, Rosneft and Igor Sechin received valuable assets in the form of the company’s shares while Russia received shares in Venezuelan companies that were worthless in the context of the US sanctions and chronic Venezuelan mismanagement of oil affairs.

Bolivia represents a case of troubled investment, where Russian interests are being subjected to constant challenges. Russia, specifically Rosatom, faced serious problems in its bet on Evo Morales in Bolivia in February 2020. Morales had been toppled by popular protests after his effort to get reelected for a fourth term. A contract on the creation of the Russian–Bolivian nuclear research center in El Alto was signed in September 2017 (St John 2019, 179). It was a time when Morales had already lost a referendum on his new term. Only the controversial ruling of the Bolivian constitutional court that the constitutional limit of consecutive two terms for any public post, including that of the president, violated the American Convention on Human Rights, saved him in power, but not for long. In 2019, he was forced to step down by street protests. The new government put a moratorium on the creation of the research center, questioning the sum of USD 351 mln that Morales had invested in the project without obtaining consent of the Bolivian parliament.

The research center was by no means the only contract between Russia and Bolivia. Facing a possible crisis, Morales had visited Moscow in July 2019 and signed several contracts with Vladimir Putin. Besides the mentioned nuclear research center, other contracts included arms sales, namely for the purchase of jet fighters and helicopters. Russia nevertheless faces competition in the arms trade with another latecomer, China, which has become the principal supplier of arms to Bolivia, substantially narrowing Russia’s room for maneuver.

Russian Gazprom has also cooperated on several projects with the Bolivian gas company Yacimientos Petroliferos Fiscales Bolivianos (YPFB) since signing a USD 4.5 bln gas exploration agreement. Together with YPFB and Total, Gazprom created a joint venture for exploring gas in the Azero area with a combined investment of USD 130 mln (Evan Elis 2015, 66). Bolivia has obviously represented a less painful experience for Russia compared to Venezuela. Russian investments did not reach sums of billions of US dollars and Bolivia did not get a loan before the fall of Morales. As a result, Moscow did not have reasons to step out and support Morales. On top of that, there was a general belief that the new government might not repudiate the agreements concluded in Moscow (Razumovskii 2019). After the new elections and the victory of Luis Arce, who was a Morales ally, plans for cooperation were resumed. Although this may be interpreted as a victory for the Russian side, the instance of power swings clearly revealed the uncertainties of investing in politically unstable countries.

In Libya, for instance, the strategy did not pay off and Russia had to seek a way to secure its economic interest. Initially, things looked favorable for Russia, when it joined the Western turn toward Muammar Gaddafi’s Libya and canceled the country’s debt of USD 4.5 billion in 2008. In return, Russian companies profited. For example, Gazpromneft, a Gazprom subsidiary, signed contracts in the energy sector. The Russian company Rossiiskie zheleznye dorogy (RZhD—Russian Railways) began to construct a railway connection between Benghazi and Sirte in 2008 under a Russia–Libya contract. The railway contract equaled the size of the debt (Krylova 2017, 586). Russia began to write off the debt when it received the first payments for the railway’s construction. Last but not least, Russia sold arms to Libya for USD 4 bln in several deals during Gaddafi’s reign (Soldatkin 2010).

All the advantages of these contracts were lost, however, after Gaddafi was toppled in 2011. Contrary to expectations, Russia declined to support Gaddafi either militarily or politically. According to the then president Dmitry Medvedev, Gaddafi’s regime had lost its legitimacy and had to fall. But Russian representatives also rejected military intervention by Western powers. Such an approach was later criticized, for instance by Vladimir Putin, as the reason for the loss of Russian positions in the Near East, be it in politics or the economy, particularly in energy and arms sales (Lefèvre 2017).

The politics of using opportunities provided by internal developments in the country of interest also presupposes keeping open as many choices as possible. Russia tried to reestablish economic ties with Libya, but with only minor success due to the situation in the war-torn country (Krylova 2017). Russia, like Egypt, the United Arab Emirates, and France, put its bet on Khalifa Haftar, the leader of one of the strongest groups in the country between 2014 and 2015. Haftar, based in Benghazi, in the oil-rich part of the country, challenged the Government of National Accord based in Tripoli, which is supported by Turkey and unofficially by Italy. Russia reportedly sold Haftar weapons for the sum of USD 2 bln (Lefèvre 2017). When Haftar’s ability to defeat his opponents proved to be under question, Russia moved to more balanced positions, leaving all possibilities open (Malsin 2020).

Russian state-owned banks have also suffered losses resulting from the country’s non-moralist policy. Mozambique’s “tuna bond” saga offers a prime example of this. In 2013 Russia’s VTB bank, together with Credit Suisse, provided a USD 2 bln credit to Mozambique’s government for projects related to maritime security and tuna fishing. When the whole venture went bankrupt, the guarantees proved to be fake, and both creditors were left with massive losses. The failure of the project was the result of corruption schemes in the country; the banks had simply ignored proper risk-assessment procedures (Cotterill, Seddon, and Croft 2020).

Sudan represents a case where Russia’s policy of crediting authoritarian regimes met its limits. Although Russia had negotiated with the new government a treaty on setting up a naval base in the country, it soon became clear that the situation had changed since Bashir’s rule. After conclusion of the treaty, the United States came in with the offer of a loan of USD 1.15 bln. Between April and May 2021, several sources announced that the deal on the Russian naval base was annulled. This news was never confirmed officially, but it does show that once an autocrat is toppled, Russian investment may soon be in danger, as Sudan now has more options of where to turn for money. Russia offers projects in energy (Rosatom), arms, civil aircraft (Sukhoi Superjet-100), and agricultural production. It will necessarily also provide the financing options to the cash-strapped country. Nevertheless, the competition with stronger rivals, whether the United States or China or a European country, will be more intense than under the isolated Bashir (Sukhankin 2021).

The policy of refusing to set conditions such as economic reforms leads to debt write-offs on top of the previously solved old Soviet assets. For example, in September 2018, the Accounts Chamber of the Russian Federation (Schetnaia palata) reported an increase in delayed payments from other states by 35 percent, to USD 13.5 bln (Schetnaia Palata 2018). The information about the countries in debt is, however, secret. As a result, Venezuela is the only known instance of a country delaying debt repayment to Russia. The country received credit for the purchasing of Russian arms in 2011, before Venezuela’s biggest economic problems emerged. Russia agreed with restructuring of its South American partner’s debt in 2017. The agreement included milder conditions for Venezuela, primarily delaying the payments. Yet, the agreement is conditioned on the country’s one-time large payment of a “meaningful” part of the sum (Vedomosti 2017a, 2017b). The Venezuelan case reportedly led Russia to harden its stances in relation to its problematic debtors.

Conclusion

The paper dealt with the issue of creating ties between a dominant state and its prospective partners. It deliberately focused on countries in Africa and Latin America where Russia either never had ties or lost them with the collapse of the Soviet Union. Authoritarian countries, in line with geoeconomic theory, represent the easiest but most risky targets for Russia. At the same time, the strategy of lending to such countries at this early stage is not necessarily politically motivated; however, as the dependence of client countries on Russia grows, so do the political ties. Russia thus uses the political setting of the target country to advance its own economic interests, which in turn leads to deepening political ties. Politics and economics are thus complementary and mutually reinforcing.

Russia’s support for authoritarian and other types of weak regimes is not accidental, nor is it a matter of political preference. Russia, under Vladimir Putin’s leadership, is pursuing an aggressive and highly opportunistic policy of seizing markets where competitors refuse to operate or where their presence remains low. This low presence, especially of Western companies, is most often due to the instability of the country, be it the authoritarian and anti-Western nature of the regime, questionable leadership, or even a civil war taking place in the target country. Russia fills these “unfilled territories” despite the higher risks compared to lending to Western countries. However, such risks have led to significant losses in the cases of Libya and Venezuela.

Nevertheless, supporting regimes that are on the verge of collapse or whose reputation is extremely low may, paradoxically, represent a logical step for Russia’s geoeconomics. Such regimes are dependent on foreign aid. The IMF or Western countries make their loans conditional on structural changes in the target country’s economy. However, such reforms would threaten the power of leaders such as Nicolás Maduro or Robert Mugabe; that is why they choose the cheaper option offered by Russia (or China). Since they have no other alternative, Russia can demand concessions for its companies without facing competition. However, as with any other investment, the high risks are offset by the low prices of the assets being acquired.

As the analysis has shown, the terms on which a loan is granted are based on the target state’s dependence on Russia rather than on the degree of “friendship.” Given the low level of concern for issues such as democracy or human rights in its foreign policy, Russia has established friendly relations with even the most odious regimes. These friendly relations then provide Russian companies with the support they need. As a result, Russian companies have a much easier environment with less competition, which allows them to demand better conditions for themselves. While this does not invalidate the perception of loans as political, the terms are always set to maximize the Russian side’s profit. And in distinguishing between the interests of Russian companies and the Russian state, the former have the upper hand.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The research was funded by the Czech Grant Agency (GACR) – project No. 21-23328S; Czech Science Foundation.

Notes

1. See Worldwide Governance Indicators: https://info.worldbank.org/governance/wgi/Home/Reports.

2. For the purposes of this paper, I make no distinction between state corporations, parts of the state machine, state-owned enterprises, relatively independent entities, and enterprises that are 100 percent owned by a state company. Therefore, Rostec as a state corporation, Sberbank as a state-owned company, and Rosneft, held by the state indirectly, are lumped together.

3. Such confusion is not surprising: Alrosa, the main diamond producer, is led by Sergei Ivanov, the son of a long-term collaborator and the head of the defense ministry, first deputy prime minister, and head of the presidential administration, Sergei Ivanov. On top of that, Rostec, Rosneft, and Gazprom are led by Putin’s close collaborators from St Petersburg, Sergei Chemezov, Igor Sechin, and Aleksei Miller. All these people, except for Miller, are regarded as members of Siloviki group within the Kremlin.

4. The resources of the National Welfare Fund could be used for export credits only in 2020. Therefore, their use is not reflected in this paper.