Austria: a weak link in Europe or historical ally of Ukraine?

Statue of Pallas Athene Parlament. Vienna, Austria 

Analysis & Opinion, International

Article by: Daria Gaidai

Western Ukraine was once part of the Austro-Hungarian empire. Today, the former unity seems obsolete, as Austria shows itself to be closely aligned with Russia. This abridged version of a report by Daria Gaidai from the series Audit of Ukraine’s foreign policy from the Institute of World Policy examines where Ukrainian-Austrian relations stand and what Ukraine should do to improve its relations with its former metropoly. 

“Did you know that Vienna is closer to Ukraine than to the Austrian border with Switzerland?” Almost every discussion on Ukrainian-Austrian relations begins with this phrase. Then the interlocutors mention that only a century ago the western regions of modern Ukraine were a part of the Austro-Hungarian Empire.

However today the multiple cultural, political, and economic connections that united the two nations in the past now are almost forgotten both in Ukraine and in Austria. Until 2014, the Austrians, as, indeed, a large part of EU citizens, often confused Ukraine and Russia, because they knew almost nothing about the former.

The memory of some Ukrainian regions belonging to the Austro-Hungarian Empire in the past was only an interesting fact in the bilateral relations, but not their foundation. And, unfortunately, it was sometimes even used as a pretext for neo-imperial jokes.

For example, President of the Austrian Federal Economic Chamber Christoph Leitl called Ukraine an area of common interests during a visit of President Vladimir Putin in 2014, saying that “in 1914, Ukraine was a part of Austria, and now, one hundred years later, Ukraine ….”I am afraid of what you are going to say,” Putin stopped him.

The friendly exchange of jokes on dividing Ukraine in less than four months after the annexation of the Crimea did not cause any adverse reactions of Austrian businessmen who attended the meeting.

Today Ukraine for Austria is a region which is close geographically but is quite distant politically.

Currently, Austria, with its close ties with Russia, is considered mainly as a barrier to Ukraine’s rapprochement with the EU. But there is “another” Austria that saw and sees Ukraine’s considerable economic potential, wants to be a mediator between East and West and that is not afraid of difficulties of doing business in post-Soviet realities.

In the short- and mid-term perspective, Ukraine’s interests regarding Austria are centered around two things: sanctions and investments.

Today, Kyiv’s key interest is in preserving the unity of the European Union in its support for Ukraine and the continuation of sanctions against Russia until clear progress is achieved in the implementation of the Minsk Agreements. Ukraine’s second key interest is increasing Austrian investments in the Ukrainian economy.

Other interests include the joint fight against economic crimes, particularly money laundering and tax evasion.

Particularly, Austria has become a favorite holiday and even residence destination for dozens of Ukrainian politicians and businessmen. Most paradoxically, those who have taken root in Vienna are representatives of the so-called Ukrainian elites that are critical of Ukraine’s European integration, of the Euromaidan etc. (Oleksiy Azarov, son of ex-prime minister Mykola Azarov, Dmytro Firtash, a known oligarch who is under investigation by the FBI, Serhiy and Andriy Klyuyev).

An “economized” foreign policy

The Austrian foreign policy can be described as inert, which is still strongly influenced by the experience of postwar Austria. Observers point to the lack of ideals, resources, and clear guidances in the formation of the country’s foreign policy.

Nevertheless, Austria’s lack of foreign policy ambitions is compensated by powerful economic interests. In fact, the objective of the Austrian diplomacy today is to promote Austrian exports abroad, explore new markets, and make Austrian business participate in profitable investment projects.

It is Austria’s high economic performance that provides it an important voice within the EU and influence on the international stage, despite being a small Central European state.

According to Eurostat in 2015, Austria ranked fifth in the EU in terms of GDP per capita.

The Western Balkans is a region of special interest for Austria. Its integration into the EU became Austrian foreign policy priority. Today, Austria, which actively helped Slovenia and Croatia to gain the EU membership, has expanded its area of interests to rest of the Balkans and now Austria’s interests include all the republics of the former Yugoslavia and Albania.

After the fall of communist regimes in Eastern Europe, Austria, not being yet an EU member, assumed the role of a mediator between West and East Europe; Vienna wanted to become a kind of hub for the democratic transformation of states which had been beyond the Iron Curtain.

Thus, thanks to the active assistance of their former metropolis, the nations which once had belonged to the great Habsburg Empire were “returning” to the European family.

Ukraine was also a part of this process until the situation in the Balkans has fully absorbed the Austrian leadership’s attention. By 2018 Austria intends to launch a diplomatic mission Georgia and to close its Embassies in the Baltic states.

At the same time, Austria seeks to differentiate its relations with different countries, keep clear of any confrontation and maintain contacts with a wide range of partners.

This intention to “make friends with everyone” is a practical expression of the central element of the Austrian vision – neutrality.

The Austrians consider neutrality to be a key to success in today’s globalized world. Moreover, neutrality is seen as a prerequisite and guarantee of Austria’s independence and sovereignty. It was the neutral status enabled the Austrians, sandwiched between the military power of the Warsaw Pact and NATO, to restore their statehood after World War II .

The Austrian approach is sometimes described as “realistic neutrality,” highlighting the Austrians’ pragmatic approach to foreign policy issues and their focus on national interests.

The debate on possible Austria’s membership in NATO that took place after the collapse of the Soviet Union shook the internal political stability in Austria.

Now there is a negative consensus on Austria’s NATO membership, and on the Alliance itself. Austria perceives Kyiv’s course to deepen cooperation with NATO and the issue of EU membership as a destructive and dangerous position.

Since the beginning of protests in 2013, Austrian representatives at different levels strongly advised Ukraine to become a neutral state in order to avoid conflicts. As a Ukrainian diplomat said, Austria respects the political choice of the Ukrainian nation, but, by and large, it does not coincide with the Austrian political choice.

However, a feature of the Austrian neutrality should be pointed out: it does not mean that Vienna avoids important international issues. Austria is ready to participate in military operations abroad if there is a UN mandate.

The pragmatic approach of the Austrian government is usually interpreted as disadvantageous for Ukraine, as a losing one due to differences in economic opportunities of Ukraine and Russia.

Investor №5 for Ukraine

For last several years, Austria has been one of the main investors in the Ukrainian economy. In late 2014, Austria ranked fifth among all countries in terms of investing in Ukraine ($2.7 bn or 5.5% of total investments).

Austrian businessmen, unlike their colleagues from Germany and other EU countries, shows more “understanding” concerning the “ways” of doing business in former Soviet countries.

Since 2004, Austria had continuously increased its economic presence in Ukraine, which was considered as one of the main markets for further expansion. Austrian banks (Raiffeisen Bank International AG, UniCredit Bank Austria AG, Erste Bank) were the first to surge to the country. In 2012, the share of Austrian financial institutions in the banking sector of Ukraine was 15%.

Today Austrian analysts recognize that at that time the risks of doing business in Ukraine were largely underestimated and the shortcomings of the institutional sphere were simply ignored. Early and big scale involvement of Austria financial sector in Ukraine has strongly contributed to help transform Ukrainian banking sector.

In 2010, in an assessment of prospects for foreign investors, Austrian analysts noted a promising combination of two factors in Ukraine: the proximity to the EU market, cheap and skilled labor and significant industrial and agricultural potential.

Seeing large opportunities in Ukraine, the Austrian business was ready to take certain risks and pay “additional” costs.

It should be noted that this process was bilateral. Ukraine was the country which most actively used the mechanism of the Oesterreichische Kontrollbank AG (OeKB), which served as a kind of insurance for foreign entrepreneurs seeking to establish cooperation with Austrian investors. In 2012, 8.54% of the EUR 34.8 bn guarantees issued by the OeKB accounted for Ukraine.

During the first year of Russian aggression in Ukraine, the volume of Austrian investments in the Ukrainian economy decreased by $500 mn and the trade turnover between Ukraine and Austria – almost by one half. It should be noted that raw materials (ore and steel) are still the basis of the Ukrainian export to Austria (about 60%).

Ukraine risks losing its fifth investor that has long been working here and is ready to expand its presence in the Ukrainian market if provided with favorable business climate. While ten years ago Ukraine was assessed by investors as a country with great potential, now they estimate it as a country with high political and geopolitical risks.

Those Austrian investors who already have assets in Ukraine do not hurry to curtail their business. According to experts, Austrian investors are well aware of the mood in the Austrian business circles and today they are at “crouch start” and look forward to concrete progress in deregulation, anti-corruption, and judiciary reform areas.

A weak link of European unity

Austria is often referred to as a member of the “Russian club” in the EU.

Vienna was the first European capital that hosted Vladimir Putin after the annexation of the Crimea. Austria was also among those EU member states that expressed the greatest skepticism concerning the introduction of sectoral sanctions against Russia.

Vienna’s support of the sanctions policy concerning Russia and European unity concerning Ukraine is a priority interest of Ukraine with regard to Austria.

Until recently, the Vienna only expressed doubts about the expediency and effectiveness of the sanctions, but now strong statements about the need to lift the sanctions are heard more and more often.

The President of the Federal Economic Chamber, Leitl, openly said at the already mentioned meeting with Putin that economic issues are more important than political differences. In February 2016, Reinhold Mitterlehner, Austrian Vice-Chancellor and Chairman of the People’s Party, visited Moscow where he said that the EU had not achieved political progress in applying its sanctions policy, while both parties suffered economic losses.

However, the issue of sanctions is not as simple as it might seem at first glance.

Although the Austrians oppose radical actions in regard to Russia, the majority (53%) supported the sanctions in 2014. Only about a third of the Austrians (28%) believed that a diplomatic solution to the conflict must be used instead of sanctions. At the same time, only 9% said that the EU sanctions are too soft, and called for tougher sanctions, while 40% rated the sanctions as sufficient and 38% as too rigid, causing harm to Austria.

The Austrian-Russian friendship is based on three pillars: economic interests, energy, and similar views on international politics.

Austrian investments in Russia amount to about EUR 8.5 bn; in turn, Russian investments in Austria reach EUR 10.15 bn. For comparison, the Austrian investments in Ukraine are about EUR 2.3 bn.

The turning point in the Austrian-Russian business cooperation was the Winter Olympics in Sochi. The total volume of orders, developed by the Austrian business in Sochi exceeded $1.65 bn. Active negotiations have been conducted since 2012 on the participation of Austrian companies in projects related to the preparation of the World Cup 2018 that will exceed in scope the Sochi Olympics.

Austrian banks have EUR 36 bn of outstanding loans issued to Russian borrowers. However, although a collapse of the Russian market will definitely cause substantial losses for Austria, analysts note that, currently, the reason for the Austrian resentment (both in 2014 and in 2015) is not current losses but the inability to implement new beneficial joint projects.

The second powerful factor is energy. Austria imports over 70% of gas from the Russian Federation. In 2010, Russia and Austria signed an intergovernmental agreement on construction of the South Stream gas pipeline. Russian Gazprom and OMV (an Austrian energy company) signed a basic agreement on cooperation.

The state company OMV invited Gazprom to invest in local infrastructure, hoping to become the Central European distributor of Russian gas. In addition, Austrian officials promised their Russian partners to use all their influence to launch the project North Stream-2.

At the same time, opposing certain decisions made in Brussels, Austria tries to avoid open confrontation with its EU partners and follows the lead of Berlin; therefore, it is unlikely that it will dare to be the one who will break European unity. Instead,

Austrian politicians, under pressure from the business, will insist harder to persuade their colleagues, particularly the Germans, that sanctions are hazardous.

In the absence of active hostilities in Donbas, it will be more and more difficult for Kyiv to convince the key EU states of the opposite.

Groups of interests and influence

In the political sphere, Austria is going through a critical period related with the end of the so-called “era of big coalitions.” The fall in ranking of the two major parties — the People’s Party and the Social Democratic Party is accompanied by the growing popularity of the radical right Freedom Party.

Having recognized in time fears and preferences of the electorate, a former secular political force, the Freedom Party, headed by a new leader Heinz-Christian Strache, began to appeal to traditional Christian values with harsh criticism of the EU, anti-NATO, and anti-immigrant messages.

Such rhetoric, backed, in the opinion of many observers, by significant financial injections, turned the new Austrian far-rights into loyal allies of the Kremlin.

Before 2014, the party had invited Russian politicians and nationalist activists (Konstantin Malafeev, Aleksandr Dugin) to its meetings. In 2009, a scandal broke out in Austria involving a former far-right leader Jorg Haider, who allegedly received a bribe of almost EUR 1 mn to help two Russian businessmen obtain citizenship.

The Freedom Party popularity is growing against the background of the Austrians’ discontent with the influx of immigrants and Brussel’s politics. In the parliamentary elections of 2013 the far-rights won 20.5% of vote, and in the elections in some federal states the Freedom Party came second. In October 2015, the extreme rights got more than 30% of vote in Vienna.

The change of political discourse affects the rhetoric of major political parties — the Social Democratic and People’s parties. The low level of knowledge about Ukraine, in combination with traditional Austrian anti-Americanism and Euroscepticism, was the main reason for hasty conclusions on the Ukrainian-Russian relations and the impact of the EU and the US on the events in Ukraine. Most of Austrian politicians, businessmen, journalists, as well as ordinary citizens, tend to consider the confrontations in Donbas a “civil war,” not a war with Russia.

In 2014, when asked who should be blamed for the crisis in Ukraine, 44% of the Austrians chose the joint responsibility of Ukraine and Russia. About a third (28%) put the responsibility on the leadership of Russia, 7% — on the leadership of Ukraine, and 21% were undecided. The Ukrainian diaspora in Austria is too small to influence public opinion in the country. However, their actions and initiatives, as well as activities of the Embassy of Ukraine (and personally the Ambassador, Olexander Scherba), help to keep the Ukrainian issue on the agenda and undermine the Russian discourse monopoly. Austrians sorely lack positive information about Ukraine, especially about its progress in reforming. In rare articles not related to the war, the leading topics are corruption, ineffective governance, and political instability.

Author: Daria Gaigai, Analyst at the Institute of World Policy

This report was conducted within the project of the Institute of World Policy “Ukraine’s Foreign Policy Audit”. This project is implemented with the support of the Black Sea Trust for Regional Cooperation of German Marshall Fund (GMF). 

The contents are those of the Institute of World Policy (IWP) and do not necessarily reflect the views of the German Marshall Fund (GMF).

Other materials from this series:

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