Strategic Analysis: Russian Business Activity in the Czech Republic (Abstract)

The Czech Republic has had a mixed history with regard to its relationship with Moscow due to fundamental differences in the way Russia has been perceived by leading politicians and by the Czech people themselves. The array of factors at play in this relationship include cultural affinities, historical bonds and strong economic ties, but also deep distrust emanating from the Soviet period. In the period since the Velvet Revolution and the end of the Cold War, when leadership was, in general, inclined toward moving away from Russia and toward the West, business leaders in the Czech Republic including a collection of local oligarchs that stood to benefit from maintaining special trade and investment relationships with Russia have largely succeeded in ensuring that these economic and financial ties have remained in place and continued to grow.

According to the Czech Ministry of Foreign Affairs and the head of the Czech Chamber of Commerce for the CIS, Moscow prefers to conduct its business in the country through less scrutinized offshore companies, particularly those located in Cyprus. In 2010, the former head of the Czech intelligence service noted, some of the biggest Russian companies operate through a dizzying web of shell companies nominally owned and operated by Czechs, but actually controlled by Moscow. 

Current President Milos Zeman is of the view that commercial ties to Russia are vital for the Czech economy and has premised much of his positioning vis–vis Russia on this perspective. These ties, however, have suffered from a lack of transparency, and the benefit from them has been reaped primarily by a select group of connected business leaders. Zeman has also been a leading critic of Western sanctions on Moscow. Many have also singled out Zemans personal network, which encompasses active relationships between his associates and the Russian business elite that currently surrounds the Kremlin.


ExcerptedDeals & Transactions:

  • In April 2015, Unipetrol completed the purchase of the remaining 32.4% of the shares of esk Rafinrsk, the countrys only crude oil processing company and operator of the two refineries in the Czech Republic located in the towns of Litvnov and Kralupy nad Vltavou. The company accounts for roughly 70% of all fuel supplies on the Czech market. Unipetrols Czech assets also include the countrys largest network of petrol stations. Unipetrol is 63% owned by PKN Orlen, which has expressed an interest in selling its shares. The other shareholders of Unipetrol presently consist of J&T Group (23.7%) and Slovakias Potov Banka (10%). In July 2015, two similarly connected companies, EP Holding and PPF Investment Group (both with extensive business connections with Russia) submitted a joint bid for these assets at $1.2 billion.
  • The control over strategic assets and infrastructure in the state by Czech-based PPF, EP Holding, J&T, Penta Investments and Potov Banka is notable, given their Russian relationships. EP Holding is the Czech Republics largest heat supplier and second largest electricity supplier, its operation of wind power and photovoltaic plants and its ownership of an underground gas storage facility. The other entities have a broad portfolio of investments touching nearly all aspects of Czech industry and business. These companies have been looked at with suspicion by experts.
  • Natural gas represents about 17% of the countrys energy mix, with around 60% of supplies imported from Russia. Systemic exposure to gas disruptions led the Czech Republic to support the creation of a NorthSouth Gas Corridor, meant to allow countries in Central Europe to source their natural gas both from a new port terminal in the northern Polish city of winoujcie (to be ready for commercial use in May 2016) and from Croatias Krk terminal. As part of the project, in April 2015, the Czech Republic and Poland signed a declaration of support for the construction of Stork II, or the second bidirectional Czech-Polish interconnector (that will complement Stork I, a small gas pipeline that has connected the two countries since 2011).
  • The Gazela gas pipeline, which was also built specifically to reduce the Czech Republics dependence on natural gas supplies coming through Ukraine, became operational in January 2013. The pipeline is still filled with Russian gas, drawn from the OPAL pipeline (Olbernhau-Brandov Interconnector), which, itself, connects with the Nord Stream pipeline. Gazela forms the third segment in an arc of pipelines (i.e., Nord Stream to OPAL to Gazela), through which Gazprom can circumvent Ukraine to deliver supplies to Western and Central Europe coming in from the north. The pipeline is significant in that it makes the Czech Republic potentially complicit in supporting the expansion of Nord Stream 2.
  • Russian state-owned enterprises have also moved aggressively in recent years to exert influence over the Czech nuclear industry. koda JS, a Pilsen-based (i.e., Czech-based) nuclear engineering and supply firm, has been majority-owned by Russias OMZ (in which Gazprombank holds a controlling share) since 2004. The company has participated in nuclear power plant construction in the Czech Republic, Slovakia, Hungary, Bulgaria and Germany. In June 2015, koda JS was awarded a $107 million tender to supply the Temeln nuclear power plant with containers for spent fuel. In September 2011, Atomenergomash purchased a 51% stake in Gardea, the sole owner of Chladc ve Praha (Cooling Towers Prague PLC), one of Eastern Europes largest producers of cooling towers for nuclear and thermal power plants. Several years prior, in October 2007, Atomenergomash (through its subsidiary Intelenergomash) had purchased 51% of Arako, the Czech manufacturer of valves and valve fittings for nuclear and other industrial plants.
  • There has been a significant rise in the number of pro-Russia propaganda outlets in recent months and years. The frequent and most visible disseminators include: multiple pro-Russia outlets; informal groups and communities on social media; several printed periodicals; and non-governmental organizations. Many of these outlets have an opaque ownership structure that raises questions over their financing. Russian propaganda in the Czech Republic capitalizes on the fact that around 25% of the Czech public harbor negative attitudes towards NATO and oppose U.S. foreign policy. In November 2014, Sputnik the name for the Kremlin-sponsored Voice of Russia, which has now expanded to 34 countries and is available in 30 languages registered its Czech branch. Sputnik published its first Czech-language news articles in March 2015. According to the website, its aim is to offer Czech readers alternative views on international issues.