Political Risk Monitor for Southeast Europe: September 2019
The current political map of Southeast Europe provides a growing trend of institutional deterioration.
Sep 04, 2019
Note from CountryRisk.io: It is our pleasure to bring you this political risk assessment for Southeast Europe by Xavier Palacios. Xavier is a seasoned political risk analyst for the region who combines deep local knowledge, a wide network and rigorous analytical mindset. Xavier has degrees in international relations, history and Middle East politics from SOAS University of London, Institut Barcelona d’Estudis Internacionals and Universitat de Barcelona. A more detailed biography can be found further below and link to his LinkedIn profile here.
This is the inaugural report for South East Europe that will be updated on a regular basis and be complemented by reports covering special topics.
The current political map of Southeast Europe provides a growing trend of institutional deterioration and low levels of government transparency. During these last five years, political leaders in this region have used a nationalist and ethnic-centred political discourses to legitimise their power, ultimately rising political and security tensions that had been buried for decades.
The establishment in power of populist political leaders in this region has been partly caused by the political erosion of European Union (EU) institutions suffered since the 2008 economic crisis. EU’s political ethos based on concepts such as welfare state, rule of law, or fair distribution of wealth has been challenged by nationalist and conservative voices. This has been the case of the “Brexit” movement, which has based its rhetoric on portraying the EU as an inefficient institutional system ruled by a corrupted bureaucratic elite. Before the establishment of these populist political actors, Brussels’ economic policies to mitigate the 2008 financial crisis triggered social unrest, and paved the way for the rise of anti-EU political parties. A decade after, these parties have been able to govern or to influence government decision-making, legitimising regressive policies wrapped with nationalist political discourses. This situation is ultimately threatening political stability in Southeast Europe.
Within this political context, state apparatuses in this region are more exposed to personalised political agendas and captured by loyal government officials, ultimately favouring interests of nationalist-populist political leader. Personalisation of politics is also weakening (already weak) checks and balances democratic system. These countries are characterised by politicised judiciary systems, where anti-corruption bodies are usually exposed to the political agenda of the ruling elite. Moreover, other accountability bodies, such as media and civil society organisations are usually under high levels of political pressure, diminishing their effectiveness when fighting corruption or human rights violations. In sum, arbitrariness and unpredictability are becoming major issues in Southeast European markets.
Based on these premises, this forecast highlights the main political trends of sub-regions within Southeast Europe.
Although during this last decade several legal reforms have been adopted by Balkan countries to fight political and business corruption, this region is known for its high levels of government opacity and corruption. The decrease of EU’s political influence in this region has given space to new international political actors, such as China, Russia or Turkey, countries that do not demand higher transparency and democratic reforms in exchange for investments. Several countries in this sub-region will hold elections in the coming months, although any major political change is unlikely to take place.
One of the main factors that threaten political stability in this region is the political phenomenon of state capture, whereby political parties have been able to capture key branches of the executive power. This mechanism ultimately allows political leaders to govern without state contestation.
State capture has been partly facilitated by the arrival of populist and nationalist political leaders. This has been the case of Serbia, where the current President, Aleksander Vucic, indirectly controls with limited accountability the most important branches of the state, such as the judiciary power, police, secret services and armed forces. The informal use of the Serbian security apparatus, has allowed Vucic to minimise dissenting voices, by limiting political space to critical media and civil society. With no upcoming elections, Serbia is likely to remain in this political path of further personalisation of power, diminishment of rule of law and increase of corruption/illicit activities under governments’ acquaintance.
This is also the case in Romania, where the shadow government leader, Liviu Dragnea, is considered the most powerful person in this country. Dragnea has recently received a three year prison sentence for corruption, and he is likely to see his political influence diminished. Since 2015, this politician has led a reform of the Romanian judiciary system, which if totally approved, would increase its exposure to the executive power. The Romanian government is trying to modify legal provisions to place public prosecutors under direct control of the Ministry of Justice while diminishing Presidential powers to appoint them. These reforms do also consider empowering a special institution linked to the government, and designed to investigate judges and prosecutors.
The EU has been pushing through the Venice Commission and through its anti-corruption body (GRECO) for the suspension of these reforms, but its final outcome is still unclear. In a recent interview to the Brussels-based news portal Politico, the current Romanian PM, Viorica Dancila, believed to have been informally appointed by Dragnea, stated that her government is willing to stop this judiciary reform without specifying a clear timeline.
Although these reforms were rejected by Romanian voters on a referendum celebrated this past May, it is still unclear how and when the current government is going to undo these controversial judiciary reforms. After the jail sentence, Dragnea appears to have lost his influence, and his political archenemy, the President of Romania Klaus Iohannis, is becoming the anti-corruption victor, legitimised by the May referendum results. This trend will have to be confirmed in the upcoming November 2019 presidential elections.
One month after these elections, Croatia will hold as well presidential elections. This country is still facing several challenges on anti-corruption legislation, but its political class does not appear to be working towards this direction. According to the latest GRECO report on Croatia, this country still needs to implement a clear code of conduct for parliamentarians and keep its progress on limiting parliamentarians’ conflict of interest rules. Moreover, the appointment system of high-level judges has still to be reformed and make it more autonomous from the Presidential office.
The results of the upcoming presidential election will also dictate power accumulation in hands of the popular President of Croatia, Kolinda Grabar-Kitarovic. This political leader is using populist and nationalist mechanisms to legitimise her power. She has intentionally romanticised the 1940s Nazi-affiliated government of Croatia and her political discourse is waking up national emotions believed to had been buried after the 1990s wars.
Despite this nostalgic political stance of Croatia’s President, Grabar-Kitarovic has also posed alongside the Russian President, Vladimir Putin, normalising diplomatic relations between these two countries. Although Russian economic interests have lost weight and influence in Croatia, Moscow is seen by EU and US governments as a destabilising factor in the region.
Alongside EU’s influence decline, Turkey, Russia and China have become new preferential partners for national governments. While the EU has momentarily frozen its enlargement policy in the Balkans, new international actors are filing this vacuum by investing in these countries that have significant needs for foreign capital.
Countries like Serbia, Bosnia and Herzegovina, Montenegro and Bulgaria are benefiting from a renewed interest of China in modernising and building new infrastructure. Russia instead, is focusing in gaining ground in the Balkans through the commercialisation of natural gas and military equipment. Despite providing economic life vests to impoverished economies, these investments entail high political costs for these countries. Generally, Chinese, Russian and Turkish investments are carried out under opaque circumstances with few or no open public biddings.
For example, a highway construction project in North Macedonia led by a Chinese company triggered a national political crisis in this country. In 2015, two years after this project was signed by the government, North Macedonian political opposition revealed a series of phone conversations between the Chinese company directors and some government members. This scandal triggered a judiciary investigation revealing that €120 million of this project had been illegally used to pay politically connected businessmen as well as to allegedly pay kickbacks to government officials, including the then Prime Minister, Nikola Gruevski. This case illustrates China’s modus operandiin the Balkans.
With few political incentives to carry out further democratic reforms, eastern investments are likely to underpin illiberal and corrupted governments in the Balkans, containing future EU democratic demands in these countries, and ultimately increasing political risk for international investors in this region.
Latest developments in the East Mediterranean area are increasing old political disputes between important countries, such as Turkey, Greece, Israel and Egypt. Cyprus maritime natural gas fields are triggering a political, military and economic (energy) race between these regional actors. This race is part of a larger political regional scenario, with further political conflict ramifications.
For example, the EU has recently suspended a series of funding programmes in Turkey as a response to Ankara’s policy in Cyprus. On June of this year, the government of Turkey sent one of his exploration vessels to Cypriot waters, and claimed that Turkey and the Turkish Republic of Northern Cyprus (TRNC) were legitimised to exploit part of these natural resources. In July Turkish military presence increased around Cyprus, triggering a negative reaction from the EU.
Political instability and conflict appear to be part of the current and near future political scenarios in this region. As has happened in the Balkans, EU’s political fatigue is also reinforcing autocratic and corruption practices in national governments, ultimately escalating political conflicts, such as the case of Cyprus.
One of the main actors involved in the East Mediterranean energy race is the Republic of Turkey. This country is considered by several international organisations, such as International Transparency, Freedom House or GRECO as one of the most corrupted countries in this region. Government accountability has sharply declined after a new presidential system was established in 2018, when President Recep Tayyip Erdogan won the presidential elections and implemented this new system that had been voted in 2017 through a popular referendum. This new political system has diminished checks and balances system, since the Turkish parliament has lost political weight and is not legally empowered to hold accountable the President. Power accumulation in hands of the President has made of Erdogan the most powerful man in Turkey, and, among other developments, he can now appoint the majority of top judges.
Moreover, independent press and civil society organisations have been marginalised. Most of media groups in Turkey now fall under the control of businessmen with alleged direct exposure to the President. These media groups secure a positive coverage of the Turkish government who in exchange pave the way for successful investments of these business conglomerates.
Finally, state capture levels in Turkey do also reinforce opacity in decision-making. The security apparatus falls directly under the Presidential control, which makes sure that no dissenting voices within the state apparatus influence public opinion.
Despite this total political control, the latest local elections in Turkey have threatened the current political status quo. The party of President Erdogan lost key cities in Turkey against political opposition.
These latest results have undermined the government political party, and after almost two decades the figure of Erdogan is being challenged by a strong political opposition leader, Ekrem Imamoglu, the new mayor of Istanbul. Besides political opposition, Erdogan will also have to deal with his political succession, as intra-fighting within his party (the AKP) is likely to increase during following months.
Despite this political context the general outlook of Turkey is unlikely to radically change. While there are no scheduled elections until 2023, Erdogan is likely to find new sources of political legitimacy lost during these latest local elections. Besides a possible early election call, Erdogan has already announced different military operations in Turkey’s southern borders. Besides sending military vessels to Cyprus, Erdogan has recently announced the preparation of a new military operation in Syria, which has been criticised by Western powers. Furthermore, Erdogan has also reinforced his political isolationism from the West by acquiring S-400Russian missiles.
These operations and movements can limit Erdogan’s influence in the region, but more importantly, these operations can limit his levels of popularity among fatigued Turkish voters. Further political hostility against Erdogan’s political opponents is expected.
Greece, by contrast, appears to be reinforcing its political ties with East Mediterranean partners and Western historical allies. This path is likely to be reinforced by the newly elected Prime Minister, Kyriakos Mitsotakis, who is also giving priority to other policy fields, such as economic growth, through cutting taxes and giving facilities to international investors.
Mitsotakis is likely to keep improving bilateral ties with key partners in this region, such as Israel and Egypt, focusing on security and energy cooperation, and reinforcing its interests in the Cyprus energy race.
Still, corruption and conflict of interests are important issues in Greek politics. Although Mitsotakis has promised fighting nepotism and state corruption, this politician has not specified how he is going to address these issues. Moreover past corruption scandals linked to Mitsotakis and his family do not portend crucial reforms for higher transparency in Greece. Therefore, low transparency levels in the Greek market are likely to remain, and further cases of corruption could increase risk for international investors in this country.
Corruption is also one of the main social and political problems in Cyprus. This country has not carried out deep reforms in fighting government and business corruption. According to GRECO’s latest reporton Cyprus, during these last two years the government of Cyprus has had only applied two legal recommendations out of 14 done by this organisation. This leaves Cyprus as one of the worst EU countries in relation to anti-corruption legislation.
This opaque legal framework eases corruption activities in government institutions vis-à-vis private interests. One of the latest surveys carried out by the Eurobarometer, showed that 87% of companies operating in Cyprus agree on using bribes for securing their business interests. Furthermore, 68% of respondents mention corruption as a major issue when conducting business activities, when EU’s average is 37%.
Lack of transparency is therefore a key issue to take into account when analysing risk levels in Cyprus, and although recent judiciary investigationshave reinforced rule of law, political and executive powers need to adopt further reforms and diminish corruption levels in this country.
In sum, political risk levels in SEE remain high, as most of the ruling elite of countries in this region still operate under significant opacity levels. This political context taints the private sector, which is likely to have higher political exposure and therefore higher chances to incur into illicit activities (bribery) to secure their business interests.
Signs of improvement are unlikely to appear, and the region is likely to remain under current levels of political and business corruption. As stated throughout this analysis, increasing influence of autocratic global powers such as China and Russia in SEE deter further democratic and transparency reforms. Additionally, EU’s lack of a clear policy in the region is also discouraging national governments to seriously tackle rule of law and corruption problems. This situation is ultimately encouraging strong political leaders to amass power, while diminishing the effectiveness of accountability mechanisms, such as parliaments, media or civil society.
Bio: Xavier Palacios
Xavier Palacios is a political risk analyst specialised in emerging markets. Xavier has developed an international career, studying and working in different countries like Turkey, Italy, Spain and the UK. Before working as a freelance analyst, Xavier worked for two years at the international consultancy firm West Sands Advisory, based in St Andrews, Scotland, under the supervision of top political analysts. Xavier’s worked has been published and quoted by international media and political analysis platforms.
Xavier also provides insightful analyses on specific topics concerning political risk in Southeast Europe. He conducts commissioned analyses on specific cases, such as private firms, markets and country studies. Using a contrasted methodological framework, Xavier can help you to understand emerging markets political dynamics and foresee possible risks for your interests.