Russia Set to Grab Economic Foothold in Reluctant EU Member

(Bloomberg) -- Two Russian banks are on the verge of taking a substantial equity stake of Croatia’s biggest retailer, expanding Moscow’s reach in a corner of the European Union that has for years tried to fend off Russian investment.

State-owned Sberbank PJSC and VTB Group are set to convert claims of about 1.4 billion-euros ($1.7 billion) in debt to equity in Agrokor d.d. after it tumbled into insolvency last year amid allegations of accounting fraud. The deal was made possible after Sberbank dropped a raft of lawsuits in a bruising battle to have its claims recognized. The stake, which has yet to be determined, will dwarf Russian investment into Croatia since its independence from Yugoslavia.

It will also give Moscow a new avenue to expand its clout in a region that, even before the fall of communism, has tried to escape its orbit for higher living standards and a more democratic system. Sberbank has insisted that it’s simply protecting its investment, saying it’s not in the business of taking over failed companies. Russia’s ambassador to Zagreb, however, didn’t miss the opportunity to note the political significance.

“I wonder why your Western friends, your strategic partners, didn’t come to you to help with Agrokor,” Anvar Azimov told reporters on Tuesday. “Russia has once again proved that Russia is a reliable friend of Croatia, and whatever we should do here, we should do to promote the stability of your country.”

With relations between Russia and the West at their worst since the Cold War, each move by Russian companies to increase investment, military or other ties in the EU’s eastern members has drawn close scrutiny from allies. Hungary’s government, which has clashed with the EU over democratic values, drew criticism in 2014 when it awarded Russia’s Rosatom Corp. the contract for a 12.5 billion-euro nuclear plant expansion just as President Vladimir Putin’s government annexed Crimea from Ukraine.

Backed by the U.S. in its war for independence, Croatia is a strong supporter of EU sanctions against Russia. And while Russian investment has poured into neighboring Serbia and the ethnic-Serb dominated part of Bosnia Herzegovina, in Croatia it has so far been limited to hotels, gas stations owned by Lukoil PJSC, and stakes in a handful of other companies.

Zagreb also declined to take part in the Moscow-led South Stream gas pipeline and has long shunned interest from Russian gas companies in refiner INA Industrija Nafte d.d. Robert Kohorst, the U.S. ambassador to Croatia, said in February it would be a “mistake” to sell INA to a Russian company, criticizing what he called Russia’s “disruptive role” in the region.

A spokesman for Sberbank declined to comment. Last year, the lender distanced itself from comments from Azimov that Russian assistance was contingent on cooperation with Moscow. Sberbank Chief Executive Officer Herman Gref said at the time that the bank requested that the Foreign Ministry clarify Azimov’s statement and was told he was expressing his personal opinion.

The Russian banks entered the scene when Agrokor owner Ivica Todoric needed to borrow to purchase the Slovenian rival chain Mercator Poslovni Sistem in 2014. Todoric, who had built Agrokor into the largest company in the Balkans, was charged in October with fraud after an audit found hundreds of millions of dollars of hidden liabilities. He denies wrongdoing.

“Russia will be a big investor in Agrokor as a result of business circumstances, even though this comes as a surprise to many,” said Andrej Grubisic, an analyst at Zagreb-based financial consultancy Grubisic & Partners. “There should be no fear here, the Russians were only trying to invest their money.”

While write-offs have yet to be determined before the planned debt-for-equity swaps, Agrokor said in March there may be as much as $4.7 billion in value available to creditors in the restructuring, which should conclude by July 10. When the banks convert their debt, their new holdings will be the single biggest combined stake in Agrokor, although Croat Economy Minister Martina Dalic said this week that lenders do not usually remain long-term owners of companies.

“Croatia has always been a good pupil of the United States and the European Union, but here the market trumped politics,” said Zarko Puhovski, political science professor at the University of Zagreb. “The paradox is that these Russian banks may also be political players too, to some degree.”

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