THE VIEW FROM MITTELEUROPA: Austria and Russia – ending the ‘special relationship’?

Back last April, Austrian Chancellor Karl Nehammer met with Russian President Vladimir Putin in Moscow. It was an impromptu visit. Nehammer had been in Kyiv with Volodymyr Zelenskiy when two of his closest advisors – namely, his wife Kathi and former Bild editor Kai Diekmann – encouraged him to play the archetypal Austrian role of bridgebuilder. Ever impulsive, Nehammer became the first (and as yet only) European leader to meet with Putin since the beginning of the Russian invasion of Ukraine.

The visit did not go down well in any quarter. It was uncoordinated with the Ministry of Foreign Affairs, whose diplomats were unsurprisingly furious. The European Commission stated through gritted teeth that it had been informed of the trip but only at the last minute. Domestic as well as international media reacted variously with befuddlement and anger.

Even in Moscow, Nehammer was received with disdain. Seated at the far end of a long table, Putin was cold. Russian media ridiculed Austria as a Western lapdog cynically simpering in pursuit of its material interests. Austria was designated as an “unfriendly nation”. Any hint of the “special relationship” between the two countries was entirely gone. From that perspective, the trip was instructive in itself.

It was also symptomatic of the muddle in which Vienna finds itself in its policy vis-à-vis Russia. This is compounded by mealy-mouthed messaging. Indeed, the trip was not as cynical as it appeared. Nehammer was trying to ensure the continued flow of Russian gas to Austria; but the former soldier was also genuinely wanting to play the hero, pushing Putin to enter peace negotiations while confronting him over the war crimes committed by the Russian military in Bucha.

This confused approach continues to undermine Austrian policy towards Russia – or at the very least how it is perceived from outside. The impression is that Vienna is struggling to decouple its interests from Russia, if not actively avoiding doing so.

Heads in the sand?

Commercially, Austria punches above its weight in Russia, with its inward investment stock in 2021 amounting to some €6 billion (1.3 percent of the Russian total) versus the €18 billion of Germany (4 percent), despite the German economy being ten times larger in total GDP terms. Austrian investors are particularly active in the banking, timber, paper, construction, food as well as the energy and automotive sectors. Some are embedded in strategic sectors: for example, Raiffeisen Bank International (RBI) is classified as a systemically important credit institution.

Austrian companies appear to have been loath to abandon their Russian interests. According to the Kyiv School of Economics (KSE), of the 63 Austrian companies in its database, 69 per cent continue to operate in Russia, with only 3 per cent having already exited. A further 14 per cent are planning to leave, with the remaining 14 per cent having partly suspended their activities.

The contrast with the international average is stark. The KSE data shows that 40 per cent of foreign investors have stayed, 5 per cent have already exited, while 38.5 per cent are planning to do so.

A more comprehensive survey conducted by the University of St Gallen in November produced similar findings. Of the approximately 650 Austrian companies with operations in Russia, only 4 per cent had exited the Russian market, compared with an international average of 8.5 per cent. No data on planned withdrawals was provided, but the Austrian Chamber of Commerce (WKÖ) estimates that 20-30 per cent of Austrian investors plan to exit Russia.

Companies that have already exited Russia include brickmaker Wienerberger, packaging group Mondi, gas extraction company Petro Welt Technologies, engine producer AVL as well as construction giant Strabag – which is currently attempting to eject Russian oligarch Oleg Deripaska as a nominal shareholder.

Many companies that remain have nonetheless scaled down their operations or delayed any new investments, such as Red Bull, timber group TS Timber, national energy company OMV and RBI. Those that have continued with business as usual, in as far as that is possible, include wood manufacturers Kronospan and Egger, oil equipment company Schoeller Bleckmann, Raiffeisen-owned fruits producer Agrana, glass manufacturing machinery company LiSEC and logistics company Lassmann.

Old habits die hard

The failure of Austrian companies to exit the Russian market at the same rate as their Western counterparts reflects two factors. First, they were slower to respond when the war began, reacting first with denial rather than anger or fear. The initial hope was that hostilities might come to an end, but by autumn there was a grim acceptance that no such outcome was foreseeable – while in the meantime, the situation in Russia had worsened to the point that the process of divestment was much more difficult. Austrian businesses froze for too long before attempting flight.

Indeed, RBI – despite generating up to 60 per cent of its profits in Russia in 2022 – is stuck. It cannot access these profits due to a ban on the payment of dividends by companies from unfriendly nations. Likewise, foreign companies may not divest from Russia without the signoff of Putin himself, who would likely ensure that any sale by RBI of its Russian subsidiary is deeply discounted – assuming he permits its sale at all, given the usefulness of having a Western bank handling the international payments that most of its Russian counterparts may not. In effect, RBI’s Russian assets have been provisionally expropriated.

Second, Austrian companies have a different understanding of foreign investment and the associated risks than many of their Western counterparts. As an Austrian-Serbian manager of a financial advisory told me in 2018, “[Austrian businesses] see political risks in Central and Eastern Europe completely differently from someone in New York or Madrid, assuming they see it at all, as they are familiar with the region … they understand the mentality and built special relationships.”

A retired senior Austrian banker likewise said, “Decades before the Iron Curtain fell, a very dense network of business relationships was formed, we knew the people and the standards, so we felt at ease.”

In this sense, divestment from Russia is a different cultural question for Austrian companies than many of their Western counterparts. The attitude of businesses has been that Western sanctions are designed to penalise and stymie those responsible for the Russian war effort. Therefore, many companies do not have a broader ethical objection to doing business in sectors of the Russian economy that are unrelated to the war.

For example, the CEO of Agrana, Markus Mühleisen, described the invasion of Ukraine as a “Russian colonial war”. However, he added that “[although] we do not want to support the Putin regime in any way […] we don’t produce any defence or lifestyle products, only fruit.” Mühleisen further emphasised that the Russian military is not a client of Agrana.

Thus in this view business should theoretically be able to continue as normal. In practice, this attitude can come across as tone-deaf if not outright morally questionable. For example, in January, the WKÖ announced that it would hold a cross-country skiing event in Moscow for Austrian businesses.

A problem with this approach is that, although it proved possible in 2022, it neglects risks in the longer term. As the Russian state increasingly organises the economy on a wartime basis, it is entirely possible that Austrian companies operating conscientiously in sectors such as food and wood are suddenly required to support the Russian war effort. RBI already discovered this the hard way, having been required to extend favourable credit terms to Russian servicemen.

On the other hand, it is an overgeneralisation to claim that all Austrian investors think this way. Those that were still in the Russian market in February 2020 are anyhow those with a higher risk appetite by Austrian standards. Indeed, following the interventions by Russia in Ukraine in 2014, Austrian inward investment stock

in Russia halved to €4.3 billion, only finally beginning to recover in 2021. This was in stark contrast to Germany, the inward investment stock of which nearly increased by 66 per cent to €18.5 billion between 2014-2021.

The Austrian soul?

It is cliched but not unreasonable to say that Austrian culture – fittingly, as the cradle of psychoanalysis – is characterised by ambivalence. Unsurprisingly, this is evident in public opinion towards Russia and Ukraine, where surveys capture mixed signals.

Whereas a majority (approximately 60 per cent) of Austrians have consistently supported EU sanctions on Russia – even through the economic hardships – a similar proportion believe that Ukraine must cede territory to Russia. There are two reasons for this ambivalence.

First, Austria has a cultural affinity with Russia, which is regarded with fearful fascination. Indeed, Austria has historically regarded itself as equidistant between Russia and the USA. This is mostly a legacy of the Cold War, when the newly reconstituted Republic of Austria secured its independence conditional on it maintaining a policy of neutrality. Vienna became a hub for international diplomacy as well as espionage and was able to regain a geopolitical profile.

Although Austria regarded itself as part of the West, it cultivated robust relations with its former Soviet enemy. In 1968, Austria became the first European state to sign a long-term gas supply contract with the Soviet Union. For much of the period until 2022, Moscow was deemed to have proven itself to be a reliable partner. Until recently, surveys indicated that Austrians even viewed Russia as a more trustworthy partner than the USA – although the difference was very marginal and up from a very low bar of 17.5 pe rcent.

It is little wonder that a Russian lobby formed in Austria. Cosy commercial relationships, supported by state institutions such as the WKÖ, were formed. Former senior politicians took up handsomely paid positions on the boards of Russian state companies with few moral quibbles. As successive scandals have demonstrated, the security and defence apparatus, in particular, were vulnerable to Russian influence, if not infiltration.

At the same time, Moscow is regarded with fear. Austria was nearly swallowed up into the Eastern Bloc, becoming the only occupied state to escape Soviet clutches territorially unscathed. Even then, there were periodic reminders of its vulnerability, such as the brutal Soviet interventions in Hungary in 1956 and Czechoslovakia in 1968. The Russian invasions of Ukraine vindicated this sense of residual threat.

Second, there is a hardcore block of Russian doves on the far-right and, to a lesser extent, the left. They are an outsized minority ranging from 25-40 per cent of the electorate and have a considerable presence in public discourse.

The opposition Freedom Party (FPÖ), which until recently had a cooperation agreement with Putin’s United Russia party, has corralled many of these voters, pretending to champion peace and economic normalcy while quietly being sympathetic to Russian interests – and it has led the polls since December. However, the largest opposition party, the Social Democratic Party (SPÖ), while supporting sanctions, has proven especially mealy-mouthed on the war.

Invisible leadership

National characteristics, in as much as they are either accurate or meaningful, are seldom innate. Austrian society mainly exhibits ambivalence on account of confused leadership.

In many respects, the coalition government between the centre-right People’s Party (ÖVP) and the Greens has pursued a consistent line on Russia and Ukraine. Its condemnation of the invasion has been unequivocal, a position which has not softened despite the economic hardships.

President Alexander Van der Bellen – the former Green party leader who was re-elected to a second term in October – even went as far as to imply that he would not necessarily mandate the FPÖ to initiate coalition negotiations if it came first in an election, citing its anti-Europeanism and failure to condemn the Russian invasion of Ukraine.

Furthermore, in a recent interview, Foreign Minister Alexander Schallenberg poured cold water on the idea that peace negotiations could be held any time soon: “Russia is seeking a decision [on the conflict] on the battlefield, and it would be very dangerous to say that Ukraine must relent for the sake of peace and give up certain parts of its territory. For me, it’s clear: there can be no decision about Ukraine without Ukraine.”

And while the government has refused to supply weapons to Ukraine on account of Austria’s military neutrality, it has provided €600 million in humanitarian support, the fourth highest in the world after the USA, EU and Germany. In relative terms it is leading in this category, outstripping the USA and Germany in GDP terms six- and twofold, respectively. Furthermore, Austria has spent the largest share of its GDP on support than any other EU member state outside of CEE, barring Denmark, the Netherlands and Portugal.

Not that the government has marketed this in any way. The same is true of Austria’s progress in reducing its dependence on Russian gas, which made headlines in recent months when it transpired that it had imported 71 per cent of its supply from Russia in December, up from a low of 17 per cent in October. The impression was that Vienna was quietly reversing decoupling efforts.

But this was not the case: the volume of Russian imports was at around the same level as in July, when it accounted for 44 per cent of the total mix. The share of Russian gas jumped to the extent it did because of a sharp reduction of purchases from non-Russian sources owing to storage facilities having reached maximum capacity. Although it is true that Russian gas imports increased somewhat, Austria is more limited in its diversification options than Germany, which was quickly able to establish an entry point for liquified natural gas.

Furthermore, the government succeeded in reducing gas consumption by 18 per cent between August and January, putting it in a position to exceed the target of 15 per cent stipulated by the European Commission for the August-March period.

Avoidance coping

From this perspective, Austria is far from an outlier in the EU regarding Russia and Ukraine. It is safe to say that the government has pulled its weight in most areas, while exceeding expectations in others.

Yet there are few signs of a wider strategic rethink taking place within the Austrian establishment following the events of 2022, despite petitions by prominent public figures for it do so. Indeed, the government is largely going through the policy motions – albeit quite effectively – while studiously avoiding engagement with

the contradictory assumptions that underpin the geostrategic profile of the Austrian state.

The elephant in the room is that Austria’s post-war policy of neutrality is no longer fit for purpose. It made sense during the Cold War when it was a crucial means through which the viability of the newly reconstituted Republic of Austria was guaranteed. It even allowed strategically minded politicians to carve out a unique geopolitical profile for Austria, which was – and to some extent remains – a competitive advantage.

But since 1989, neutrality has been gradually hollowed out as a concept. Accession to the European Union in 1995 effectively abolished the political neutrality of Austria. Even its military neutrality is questionable by virtue of the participation of the Austrian military in European battlegroups – not to mention the fact that the EU treaty implicitly provides for its defence by Nato member states in the event of an invasion. Given the chronic underfunding of the Austrian military, the neutrality of the country would in effect have to be defended by Nato.

At the same time, in attempting to balance neutrality with the commitments to the political alliance of which it is a member, inadvertently Vienna too often precipitates a torrent of international criticism. Chancellor Nehammer’s visit to Moscow was a point in hand.

More recently, in February, the government ruffled feathers by agreeing to waiver a travel ban to permit a Russian delegation to attend a summit of the Organisation for Security and Cooperation in Europe (OSCE), which is headquartered in Vienna. The government emphasised that it was simply fulfilling its legal obligations under the OSCE treaty and therefore had no choice. But this did not fly with some of its allies, with Ukraine and Lithuania boycotting the summit as a consequence.

The tough reality of Austria’s security policy, let alone neutrality, has not been communicated to the public in a way that is either candid or systematic. That is reflected in the polls, where neutrality remains a sacred cow, with 71 per cent of the population supporting it. Another poll found that 63 per cent of respondents felt that Austrian politicians do not act neutrally. There is a fear of confronting the issue because of its ostensible unpopularity.

Yet Sweden and Finland demonstrated that if politicians have the courage to confront these questions, they can precipitate a landslide shift in public opinion. Within months of the Russian invasion of Ukraine, support for Nato membership among the population of both countries swung from strong opposition to strong support.

Learning to walk

That said, there is perhaps a deeper attachment to neutrality. Austria is a relatively new state, one that failed before being exhumed and resuscitated after the Second World War. Its ability to survive consisted in avoiding the taking of sides, at least explicitly. Confrontation was to be avoided, not least because this tendency had fatally undermined the First Republic in the interwar years. In keeping quiet both at home and abroad, the prosperity integral to the sustainability of the Second Republic could be assured.

In this sense, neutrality became the crutch on which Austria relied to walk again. Confronting the issue more generally – let alone, say, abolishing it – entails a confrontation with Austria’s own fragile post-war identity.

Marcus How, Head of Analysis at VE Insight

This article is cross-posted with BNE Intellinews.  Image shown used in the article.