Hungarian government confirms decision to pull out of sanctions-hit IIB

Hungarian government confirms decision to pull out of sanctions-hit IIB
International Investment Bank (IIB) chairman Nikolay Kosov (left) and Hungarian Finance Minister Mihaly Varga sign agreement on relocation of IIB's HQ to Budapest in 2019. / bne IntelliNews
By Tamas Csonka in Budapest April 13, 2023
The Hungarian government has confirmed media reports that it will withdraw from the International Investment Bank (IIB) after US sanctions were imposed on the Budapest-based, Russia-controlled development bank on April 12.
The decision to withdraw by the bank's second-largest shareholder implies that Hungary will refuse to take part in any attempt to rescue the IIB, which had been rumoured to be in crisis even before the imposition of sanctions. Western financial institutions such as the Belgium-based Euroclear network, which settles securities transactions, have reportedly refused to deal with it. The IIB's bonds have been downgraded to junk status by ratings agencies.
IIB told bneIntellinews it would make no comment until it later issued an official statement, which had still not been issued by press time.
The withdrawal of Hungary ends Moscow's dream of building a European-focussed international financial institution such as the EBRD or EIB, leaving it as the last significant shareholder.
The decision also marks a humiliating defeat for Hungarian Prime Minister Viktor Orban's project to attract the IIB to Budapest in 2019 and thereby forge closer financial ties with Moscow and strengthen Hungary's role as an international financial centre. Hacked documents sent to the investigative CEE media network VSquare showed how Budapest had desperately tried to lobby inside the EU for the bank not to be frozen out of European financial networks, and had schemed to hide the bank's Russian dominance by keeping Moscow's stake under 50%.
Hungarian Economic Development Minister Marton Nagy said the government had come to the conclusion that participation in the bank no longer made sense, as US sanctions have rendered the bank's operations meaningless. The government hence decided to withdraw its representative from the board, although IIB has played an important financing role in Central and Eastern Europe, Nagy told state news agency MTI on Thursday afternoon, a few hours after the news first leaked by pro-government business website Vilaggazdasag.

Hungary is the last EU member state to leave IIB. The Czech Republic, Bulgaria, Slovakia and Romania announced their decision to quit both the IIB and the International Bank for Economic Cooperation (IBEC) following the Russian invasion of Ukraine. Poland already quit the IIB in 2000. The IIB has refused to repay the equity capital invested by the exiting countries.

As of Thursday afternoon, the Hungarian government had not officially reacted to the announcement made by US Ambassador to Hungary, David Pressman to sanction IIB, along with three executives resident in Hungary, Nikolay Kosov chairman, Georgy Potapov deputy chairman and Imre Laszloczki, deputy chairman in charge of strategy and policy. The 62-year-old banker, a former ambassador to Kazakhstan and Azerbaijan, is the only Hungarian national on the list.

The US diplomat, some nine months in office, told the international press at the Budapest embassy that Washington had repeatedly raised concerns  concerns about  how Russia could use the bank to expand its influence in the region, but that these had been ignored. 

“Unlike other Nato allies previously engaged with this Russian entity,” Pressman said, “Hungary has dismissed the concerns of the United States government regarding the risks [the IIB's] continued presence poses to the alliance.”

According to the statement released by the US Department of the Treasury's Office of Foreign Assets Control (OFAC), the IIB's presence in Budapest enables Russia to increase its intelligence presence in Europe, opens the door for the Kremlin’s malign influence activities in Central Europe and the Western Balkans, and could serve as a mechanism for corruption and illicit finance, including sanctions violations. The US has accused the bank of co-ordinating its policy with the Kremlin.

At the end of the press conference, Pressman struck a conciliatory tone, leaving the door open for talks with the government. "The United States is committed to a close and constructive relationship with Hungary, our valued Nato ally", he added.

While  Orban has reluctantly approved sanctions against Russia and acknowledged Ukraine's right to territory integrity, he drew criticism from its allies for his pro-Kremlin narratives during the war and for strengthening economic ties with Moscow in the face of bloody conflict.

Budapest has done little to reduce its dependence on Russian energy imports, and just this week Foreign Minister Peter Szijjarto signed new energy contracts earlier in Moscow that will cement Russian influence for decades to come.

Hungary's isolation among its regional allies, the Visegrad Four, has also deepened since the outbreak of the war and regional cooperation is now all but dead.

At the time the US ambassador was providing details of sanctions against Russian interests in Hungary, the country's foreign minister hosted his Belorussian counterpart in Budapest "to keep the channels of communication" open for peace. A day earlier in Warsaw, US Vice President Kamala Harris and Polish PM Mateusz Morawiecki discussed the “importance of a shared commitment to democratic values” and the two country's strategic partnership.

Hungary, together with Turkey, is also still blocking Sweden's application to join Nato, to the frustration of its allies

“We have concerns,” Pressman said, “about the continued eagerness of Hungarian leaders to expand and deepen ties with the Russian Federation.”

The IIB was originally established in 1970 as the Comecon bank serving the then Soviet bloc’s economic area and third-world countries and was revitalised in the early 2010s under Putin.

Hungary renewed its membership in IIB in October 2014 after a decade-long absence, and four years later IIB member states unanimously voted for the proposal to relocate the bank's HQ to Budapest from Moscow.

According to the blog of a leading Hungarian geopolitical analyst, this was proposed by Orban's former chief foreign adviser, Janos Balla, a former career diplomat, born in Moscow.

The government argued that moving IIB's seat to Budapest will strengthen Hungary's role as an international financial centre and it fitted into the government's Opening to the East policy, which aimed to bolster economic ties with Russia, China and other emerging markets outside the EU.

The United States expressed reservations over the relocation from the onset. Washington successfully blocked the lender to have its HQ established alongside the US Embassy in Hungary at the landmark Freedom Square, close to the Parliament building. It also successfully pressured Hungary to reduce the number of officials at the bank with diplomatic immunity.

In an interview on Wednesday, the Hungarian government’s delegate to the board, Imre Boros raised eyebrows when commenting on the latest sanctions on IIB, saying "the US was trying to strike at Russia while attacking one of Russia's allies, Hungary". This was the first time that a leading public figure close to the government called Russia Hungary’s ally.

The 75-year-old former minister in the first Orban cabinet also said that Hungary is the number one shareholder in the bank, a claim that is not backed up by official data from IIB.

The latest data shows that Russia is currently the largest owner in the bank, holding 45.44% of the shares, followed by Hungary with 25.27%, while Cuba holds 2.83%, Mongolia 1.8% and Vietnam 1.26%.