James de Candole of Candole Partners -

There are many remarkable insights offered in “On the Edge of the Cold War”, the definitive study of the failure of US diplomacy and intelligence in post-war Prague by Professor Igor Lukes of Boston University. Perhaps the most instructive is the way in which Washington’s economic diplomacy turned a means of bolstering the Czech democratic system into a means of accelerating its destruction.

The US offer of reconstruction aid, originally conceived as a way to help Czech democrats steer a middle course between the Soviet Union and the West, became instead Washington’s way to punish the Communists. This had the effect of driving the democrats into Communist hands and, in all too many cases, to their deaths as well.

The root cause of American mishandling of its economic support to Prague was an argument over how to extract compensation from the Czechs for the US-owned properties and assets, whose value was estimated at between $30mn-50mn, that had been expropriated by the Czech state in October 1945.

The demand for compensation soon became a reason not to grant the Czechs’ request for reconstruction aid in the form of US loans and credits. The US State Department was split between those who wanted to separate the two issues, and those, like Ambassador Laurence Steinhardt, the US ambassador to Czechoslovakia, who insisted that they be joined, with no aid offered without a Czech commitment on compensation. Many of these expropriated properties were owned by Steinhardt’s clients – he ran a law firm in New York.

The matter was fudged, with the State Department finally offering Prague a watered-down package of aid, the effect of which was to weaken their democratic friends in the Klement Gottwald government and to embolden the Communists.

The fatal blow came in August 1946 at a gathering of US, Soviet and European foreign ministers in Paris to discuss US aid for European reconstruction. The Soviet deputy foreign minister denounced it as an attempt to "bring about the economic enslavement of Europe." The Czech delegation, led by then foreign minister Jan Masaryk, applauded these provocative remarks.

Washington was outraged. In a public statement soon after Masaryk’s fateful applause, then US secretary of state James Byrnes declared that no more aid would go to Eastern European countries that, “vilified the US and distorted its motives and policies.” American aid, he declared, should be used to help its "friends" and not to subsidize "Communist control of Czechoslovakia."

But Czechoslovakia was not yet under Communist control in the summer of 1946. However, what the US did next helped to ensure that it soon would be. The State Department broke off negotiations, rejected Prague’s request for a $50mn loan and conditioned all future help on a reduction in the number of Communists in the Gottwald government.

The Communists were jubilant, having brought about through provocation and threats just the result they had been hoping for. (For a comprehensive review of "On the Edge of the Cold War", see the article by Benjamin B. Fischer, the former chief historian of the CIA, in the International Journal of Intelligence and Counterintelligence, Volume 26, Number 2, June 2013. Another review can be found here.)

Remove the Czech desire, you remove the Russian opportunity

65 years later and there is no doubt that the Czech political and business elite has fallen back under Russian influence. The attraction today is not ideological, though: it is driven by vanity, personal greed and a pragmatic recognition that business dealings with Russians are free of the burdensome bribery measures imposed by their own governments on Western corporate executives operating abroad.

The single most important vehicle driving Czechs into the embrace of Vladimir Putin’s Russia is the persistent desire of the Czech politicians and industrialists to build more nuclear reactors. This desire is being fuelled not only by the Kremlin, but by Washington and London as well.

The foreign expansion of Russian nuclear holding Rosatom, lavishly funded by the state, is an integral part of Russian foreign policy. Winning a Czech nuclear contract would please Rosatom’s Yuri Ushakov, who served as Russian ambassador to Washington and is today one of Putin’s closest aides. But more important than installing a MIR1200 reactor in southern Moravia is the opportunity that the Czech desire affords Russia to co-opt Czech politicians and businessmen to the Kremlin’s cause of weakening Nato and the EU.

The ability of Czech politicians to resist Russian offers of nuclear assistance is in inverse proportion to their desire to have more reactors. And it is being steadily undermined by the West.

British economic diplomacy towards Prague is heavily influenced by Rolls-Royce’s business partnership with Rosatom and by its ambition to see Rosatom’s MIR1200 consortium win in Prague. Likewise, US economic diplomacy towards Prague urges the Czechs to build more reactors.

This is short-sighted in the extreme. Consider the consequences of a Czech failure to select the bid in any fresh nuclear tender from rival nuclear firm, the US’ Westinghouse. How would Washington react if Prague were to follow Hungary and sign up Rosatom without holding a tender? Would it take umbrage, as Secretary of State Bryne took umbrage in 1946?

Would Washington complain, as the recently departed US ambassador in Prague Norman Eisen complained when the Temelin tender was cancelled earlier in 2014, that: “as close friends and allies, we are concerned about the signal this may send to US investors.” Indeed, would Washington seek to ‘punish’ the Czech Republic for its decision, and how would this help those few public figures left in Prague opposed to Putin’s spreading influence in the city?

A wiser reaction would have been for Washington to acknowledge that the official reason for abandoning the nuclear tender (an unwillingness to burden Czech households with much higher electricity bills) was commendable, and then to focus its diplomatic efforts on removing the Czech desire for more nuclear reactors altogether. In this way, Washington might manage to derail the best vehicle that Russia has for extending its influence over Prague.

The great concentration of economic and political power that would result from expanding the Czech nuclear fleet can hardly be in US interests given the near certainty that much of this power would end up in Russian hands. Much wiser would be for US diplomatic efforts to be directed at encouraging the Czechs to pursue a policy of de-concentrating its electricity generation sources on nuclear, and embrace a broader mix including renewables.

Instead of playing nuclear ‘tug of war’ with the Russians on Czech soil, the Americans should accept that this is a war that Russia wishes them to fight – and not only because Russia is more likely to win. Even if no new reactors are built, for as long as the Czech desire remains, so does the Russian opportunity.

In general, the political and economic well-being of the Czech Republic, and therefore US interests here, would be better served by US diplomatic efforts to shore up the country’s demoralized and brittle political institutions. It is very much in Russia’s interest to keep Czech democratic institutions weak.

It is a startling measure of the failure of US (and European) diplomacy towards the Czech Republic that there remains only one outstanding local politician left in Prague who dares publicly to criticize his colleagues for their pro-Russian sentiments, and that this person is in every other way discredited. Miroslav Kalousek’s anti-Russian outbursts have become so vociferous these days that one could be forgiven for thinking that he is a provocateur, working to bring about exactly what he claims to want to avoid.

Who needs enemies when the US has friends like these? The Russians must be jubilant!

Wishful thinking turns to wounded pride, and wounded pride to revenge

Professor Lukes in his book professes astonishment at the glibness of US diplomats in post-war Prague, pointing out that none seems to have anticipated the Communist coup in February of 1948, believing until the last moment that the democrats, with whom they associated, would prevail.

Ambassador Steinhardt’s opposition to extending credit to the Czechs without a commitment on compensation for seized US properties backfired horribly. It contributed directly to the Communist seizure of power in 1948 and the loss of those properties until their partial return in the years after 1989.

That glibness remains. What is obvious to all Czechs – that Rosatom is a vastly more attractive partner for the class of politicians and businessmen running their country today – appears to be lost on the US diplomats that inhabit Prague’s splendid Schönborn Palace. The last thing the Czech nuclear lobby wants is a US corporation, hamstrung by anti-graft laws, breathing down their necks.

If US diplomats want to help US firms win business in this country, they must ‘allow’ them to operate according to local, unwritten rules and run the risk of going to jail back home. Hypocritical perhaps, but effective and certainly not naïve. And impossible. Instead, US diplomats are encouraging the Czechs to build more nuclear reactors in the hope that the country’s politicians will run a transparent tender leading to the selection of Westinghouse. This is as foolish as Ambassador Steinhardt’s assumption that Klement Gottwald would honour his promise to uphold Czechoslovakia’s democratic system in 1946.

In short, US economic diplomacy today, by feeding the Czech desire for more nuclear reactors, actually serves the Russian purpose well, because it will only deepen American frustrations with the Czechs.

This is how to lose Prague for the second time.