Czech Republic struggles to contain risks from Russian companies – DW – 19-09-2024

Research by the international rating agency Moody’s shows that the Czech Republic — home to just 2.4% of the EU’s population — is home to more than a quarter of the roughly 46,000 Russia-linked companies operating in the 27-nation bloc.

Bulgaria, with 9,500 companies, is the second most favorite place for Russian companies to stay. Germany, whose economy and population exceed those of the top two, is in third place with 4,200.

Russians have long wanted to do business in the Czech Republic. It’s a trend that has flourished despite the dramatic cooling of relations between Moscow and Prague that began in 2021, and has only deepened since the invasion of Ukraine.

The political and business ties established during communism, the linguistic proximity and the loopholes in the Czech Republic’s evolving regulatory environment have encouraged Russian investors to use the country as a route to EU markets.

Meanwhile, Russia’s war in Ukraine has helped boost the number of Russian entrepreneurs, said Pavel Havlicek, an analyst at the Prague Association for International Affairs. A business project or real estate purchase is now “the easiest route for Russians to get a Czech residency permit,” he told DW.

Spies, sanctions and money laundering

Data from the Ministry of Industry and Trade A study shows that in the first quarter of 2022, 4,303 Russian entrepreneurs were registered in the Czech Republic. Two years later, their number had grown to 5,218.

“We cannot avoid a deeper debate on how to deal with countries where Russian influence has reached a level that threatens not only the unity of the EU or NATO, but also our security,” Czech Prime Minister Petr Fiala warned in late August.

However, the Czech counterintelligence service BIS has long been warning of the threat from within and recently told local media that the large number of Russian companies “does not contribute” to national security.

A major concern, analysts say, is that there are undoubtedly spies or subversives lurking among many real companies and individuals. The likelihood that Russian intelligence would pursue such paths increased in 2021 when Prague expelled about 100 Russian embassy employees, claiming they were intelligence agents.

The threat of sanctions violations is another major headache. Amid complex global trade and financial networks, the EU is struggling to control the flow of money and equipment to Russia, and the Czech Republic has uncovered several breaches.

There are also concerns about criminal gangs originating from beyond the EU’s eastern borders.

According to Transparency International CR“The Czech Republic remains a country with favourable conditions for money laundering, especially for persons from the former Soviet Union and its satellite states.”

And the Czech National Centre against Organized Crime (NCOZ) warned in July that the significant relocation of criminal organizations from the former Soviet Union and increasing efforts to circumvent sanctions have contributed to the deterioration of security in the Czech Republic in 2023.

Lukas Kraus says laundering billions of dollars “helps to disrupt the economy.” In an interview with DW, the lawyer for the Czech non-governmental organization Reconstruction of the State pointed out, for example, the negative effect on the Czech housing market, where house prices are unaffordable for many.

Increasing calls for government to take action

The risks arising from this mass of Russian economic interests do not affect only the Czechs. An economy heavily populated by foreign capital and dependent on exports helps to spread it. Ties with Germany are particularly strong.

“The risk for the economic partners is very clear for the Czech Republic,” Havlicek said, adding that “Germany now of course realizes this.”

Prague-based think tank Datlab has reported that Russian companies – including many with ties to sanctioned individuals – won government contracts worth €2.5 billion ($2.76 billion) across the EU last year despite sanctions.

Since that investigation was published in 2023, the Czech government — one of Kiev’s most ardent supporters — has sought to take a tougher stance, winning praise for setting up its own sanctions regime that allows it to go beyond EU restrictions.

However, critics say there are still regulatory issues surrounding transparency, enforcement and other challenges.

Efforts to end anonymous corporate ownership have made progress, but weaknesses – apparently fueled by vested interests – make it particularly difficult for authorities to investigate the opaque ownership networks behind which many Russian interests operate.

Datlab estimates that only 35% of companies likely to be Russian-owned are correctly registered in Czech registries.

Havlicek says a thorough overhaul is needed to improve the state’s capacity to monitor and systematically screen companies and analyze complex ownership structures.

Rebuilding the state requires tougher penalties for violating sanctions and stricter measures against money laundering.

Ondrej Kopecny, head of Transparency International CR, told DW that Fiala’s government is failing to find strategic and effective long-term solutions or improve enforcement of existing rules in the name of promoting transparency.

Asked by DW about the planned measures, a spokesperson for the Ministry of Industry and Trade said only that it is “monitoring the situation … in the long term” and that in cases “where transactions pose a potential security risk, the ministry reviews these investments.”

Edited by: Uwe Hessler