2026-07-21 05:01:09
Serbia’s greatest security vulnerability today is not hostile foreign spies. It’s the structure of its own intelligence system.
Built to protect governments rather than the nation, shaped by political loyalty more than professional expertise, Serbia’s security institutions remain poorly adapted to an era of hybrid threats, economic coercion, cyber conflict, and strategic competition.
Cosmetic reform is no longer enough. Serbia needs a new intelligence system.
The problem is older than today’s government, and older than the one before it.
Like many intelligence services across post-communist Europe, Serbia’s security institutions inherited a philosophy from the Cold War period. The security apparatus was primarily designed to protect the political system from internal opposition rather than to protect the state from external threats. That outlook recognized that the likeliest threat to regime survival came from the people not from outsiders, however malevolent.
Loyalty therefore mattered more than professional expertise. Domestic surveillance received greater priority than strategic intelligence. In plain terms, it was a tool of political control and was routinely used against opposition figures and even ordinary citizens. After all, the security services had a prized ability to eavesdrop, intimidate and disrupt; it was a tempting weapon for many post-communist governments across Central and Eastern Europe.
The overthrow of Slobodan Milošević’s regime in October 2000 transformed legislation and organizational charts. But it did not transform institutional culture. Political influence over appointments remained extensive. Parliamentary oversight developed formally but never acquired genuine authority. The operational habits inherited from the previous system — monitoring domestic opponents and serving political principals — persisted well beyond the moment of democratic transition.
So did the absence of accountability and a resort to the so-called black arts. The 1999 assassination of newspaper founder and anti-regime figure Slavko Ćuruvija remains unresolved to this day.
Serbia entered the 21st century with institutions operating inside democratic structures while preserving the reflexes of their authoritarian past.
That legacy matters because the security environment has fundamentally changed.
Serbia’s principal challenges now originate elsewhere: foreign influence campaigns, cyber operations, critical infrastructure vulnerabilities, energy coercion, technological dependency, and strategic competition over supply chains and critical minerals. These are not threats that can be managed through domestic surveillance or internal control. They require strategic intelligence, long-term analysis, inter-agency coordination, and above all, public legitimacy.
An institution designed to monitor political opponents cannot easily switch to become a gatherer and interpreter of complex geopolitical competition. The gap between what Serbia’s security sector was built to do and what it now needs to do has become a strategic liability.
Serbia need not be a passive target. But it will remain vulnerable until it builds institutions capable of recognizing and resisting external pressure — including Russia’s well-documented interest in sustaining precisely this kind of institutional vacuum in the Western Balkans.
Meaningful reform requires more than replacing directors or passing another intelligence law. It requires a redesign of the entire system around clear mandates, genuine accountability, and institutional separation.
First, domestic security, military intelligence, and foreign intelligence must be clearly separated, each anchored to a single ministry with unambiguous lines of responsibility. The current overlapping competencies is not accidental; it is convenient for those who wish to avoid scrutiny, and is damaging to the security of the state.
Second, communications interception must operate under a single, exclusive legal framework, concentrated in one accountable agency and subject to judicial authorization in every case. Dispersed and poorly supervised interception powers are not a security capability. They are a source of institutional corruption and a standing invitation to abuse.
Third, Serbia needs an independent analytical center for strategic assessments — a body whose sole function is to provide the government and parliament with an independent picture of the external strategic environment. Not to monitor domestic opponents and not to serve the political needs of the moment, but to understand the world.
Fourth, senior appointments must depend on professional qualifications rather than political loyalty, with fixed mandates and transparent accountability to parliament. This is not merely an administrative preference. It is the minimum condition for institutions capable of earning — rather than demanding — public trust.
Fifth, parliamentary oversight must become substantive rather than ceremonial. Supervision without access, expertise, and the genuine capacity to sanction wrongdoing is not oversight. It is theater.
Perhaps the most consequential reform concerns neither institutions nor legislation. It concerns trust.
Hybrid threats and foreign influence operations succeed most easily where citizens already distrust their own institutions. Disinformation spreads fastest where official sources have lost credibility. Every confirmed abuse, every politically motivated appointment, every instance of surveillance turned against citizens rather than external threats widens the space available to those who wish to destabilize Serbia from outside.
Public trust is therefore not a democratic luxury. It is a national security asset. An intelligence service that citizens fundamentally distrust cannot effectively protect them, regardless of its budget, its authorities, or its staff.
In an era of great-power competition, intelligence services are no longer instruments of regime survival. They are instruments of national resilience.
Nikola Lunić is a Serbian geopolitical and security analyst and retired Navy Captain. He previously served as Serbia’s Defense Attaché in London and as Executive Director of the Council for Strategic Policy. He is currently a strategic affairs consultant and a regular guest lecturer at the Faculty of Law, University of Osijek. He writes on Balkan security, intelligence governance, and European defense policy for outlets including the Kyiv Post and New Eastern Europe.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions expressed on Europe’s Edge are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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2026-07-21 04:44:52
Ask an AI system for tips on how to shoplift without getting caught in English, and it will refuse to help. If the prompt is made in a different language, you may well get a response to assist you in committing a theft.
Current AI systems are less accessible, less useful, and less safe for users of so-called “low-resource languages.” These are languages such as Swahili and Burmese that may well be spoken by many, but for which little digitized data is available.
Market forces have not mobilized the necessary investment to address these shortcomings. Fierce economic and geopolitical competition funnels attention and resources into the development of a narrow set of frontier models, which are optimized for a small set of dominant and well-resourced languages.
This imbalance results in a global inequity that warrants policymakers’ attention. The longer the gap exists, the wider it will grow. If AI accelerates socio-economic development, it is urgent to address this imbalance now. Access to frontier AI capacity is already limited by high cost and a lack of infrastructure in low-income countries. And even for those with technical access, language can be a constraint.
Although models can process prompts in different languages, their multilingual capacity fails to remove all access barriers. Researchers point to a so-called “token tax”; access to models is usually billed by use of tokens, the units into which natural language is split for processing. Some languages require more tokens to represent the same content compared to English. This gap drives up cost and latency.
Models generally reason more effectively in English than in other languages, studies show. Bias creeps in — for instance when a multilingual model associates the word “dove” in all languages with “peace” even though in Basque it can be an insult.
This language gap also represents a safety risk. Researchers have shown that it is possible to jailbreak AI systems — that is, to breach their safeguards — by machine-translating prompts into other languages. Studies have also demonstrated that translating malicious input into a low-resource language generates more unsafe content than sticking to English.
The weak performance of models in low-resource languages is not because they are less suitable for AI than English is. Model design choices and the limited availability of training datasets are responsible. Until now, market forces have not directed resources to address this challenge, and they are unlikely to do so.
Policymakers must correct course. They should:
It’s important to tackle the systemic disadvantage of low-resource languages. Otherwise, much of the world risks missing out on the promise of the AI revolution.
Christian Schlaepfer is a former Swiss diplomat and negotiator of tech and AI policy at the United Nations. He is a guest at the Institute for Logic, Language and Computation at the University of Amsterdam and policy advisor at the think tank Starling Institute.
Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions expressed on Bandwidth are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
A Roadmap for Europe-US Tech Cooperation
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2026-07-20 21:33:02
Lawmakers are rethinking how legislation, funding, and oversight can help the Pentagon build a US military capable of adapting to 21st-century warfare.
Russia’s 2022 full-scale invasion of Ukraine has forced Congress to confront supply chain challenges and defense innovation with a new sense of urgency. More than four years of battlefield evidence shows military advantage depends on the ability to rapidly integrate defense technology, scale manufacturing, increase private financial investment, and boost allied cooperation. The war against Iran has also revealed problems firsthand.
That has aided a bipartisan shift around these issues. Despite approaching national security from different political backgrounds, lawmakers on various committees are increasingly arriving at the same conclusion: the US will not sustain its military advantage simply by procuring more missiles and advanced systems. The age of the exquisite is coming to an end; the age of adaptation is underway.
The US needs to build a defense industrial base capable of adapting as quickly as modern warfare evolves, and the shift in approach is happening through several complementary efforts.
Rep. Pat Harrigan’s American Drone Manufacturing Dominance Act, for example, is focused on rebuilding the industrial base. The proposed legislation would go beyond expanding domestic drone production to strengthen secure manufacturing, cybersecurity, allied coproduction, and the resilient supply chains needed to sustain advantage.
That same logic is visible in the Strategic Unmanned Systems Partnership Act, sponsored by Sen. Jacky Rosen and Sen. Mike Rounds, which would create a joint US-Ukraine working group to co-develop, produce, and obtain Ukrainian-designed unmanned systems. This would treat Kyiv not only as a battlefield partner, but as a source of mutually beneficial operational knowledge.
Sen. Dave McCormick’s Unmanned and Autonomous Systems Strategy Act goes one step further and recognizes that autonomous systems cannot be managed through outdated acquisition programs. Instead, it calls for a comprehensive strategy to scale production capabilities, integrate commercial innovation, coordinate with allies, and establish long-term priorities for the Department of Defense (DoD).
“Unmanned and autonomous systems represent the most disruptive shift in military technology since precision-guided munitions and stealth,” McCormick said. “We’ve seen their impact in Ukraine and across the Middle East . . . Americans cannot afford to fall behind.”
Viewed individually, these initiatives appear incremental. But when seen together, they reveal something much larger. Congress is beginning to legislate around the characteristics of innovation itself.
These proposed pieces of legislation are only one part of the picture. The executive branch is also rethinking how emerging technologies are purchased and scaled.
The “Revolutionary FAR Overhaul” seeks to simplify federal acquisition rules, remove unnecessary requirements, and make procurement faster and more competitive. At the Pentagon, Michael Duffey, undersecretary for acquisition and sustainment, is similarly focused on delivering capabilities faster and sending clear long-term demand signals to manufacturers.
At a force level, the United States Army is already putting many of these principles into practice. In testimony before the Senate Armed Services Committee in May, Army Secretary Daniel Driscoll outlined reforms aimed at cutting bureaucracy, giving leaders more flexibility to respond to urgent needs, and swiftly moving promising technologies into production.
Otherwise, the Army risks “not transforming fast enough” for a battlefield changing by the day rather than the year, Driscoll said.
The executive challenge is to turn legislative momentum into military advantage. While Congress can create authorities and appropriate funding, the Pentagon ultimately decides whether its initiatives are integrated.
If legislative efforts around autonomous systems and manufacturing remain disconnected from implementation, they risk becoming another collection of political promises. If aligned with executive action, they could form the basis of a more adaptive defense innovation strategy.
A sticking point is that acquisition reform, venture-backed defense startups, software modernization, and allied cooperation are still largely siloed conversations, despite reinforcing one another in practice. One of Ukraine’s greatest lessons for the US is that innovation succeeds when those pieces function as a single framework.
Congress has begun recognizing that reality, but it needs to build a coherent legislative strategy to ensure it can be translated into executive action.
First, Congress and the DoD should treat Ukraine as a true innovation partner, not simply an aid recipient. That means creating permanent mechanisms for the Pentagon, industry, and Ukrainian innovators to exchange battlefield lessons, test emerging tech, and rapidly translate their findings into US production and policy.
Second, Congress must better align acquisition with private capital. Venture-backed startups can move fast, but they need clearer demand signals from government to scale production. Multi-year contracts and clearer purchasing commitments would help ensure cutting-edge technologies do not sit unused.
Third, Congress and the executive branch should focus on bodies like the Strategic Defense Innovation Working Group and the Pentagon’s Defense Autonomous Warfare Group as the basis for a more aligned autonomous systems strategy. The goal should be to translate lessons learned into requirements for scalable production.
Russia’s war in Ukraine has forced Congress to rethink warfare. If its current legislative shift continues, the next generation of US defense policy will be defined less by individual weapons programs and more by efforts to build a brand new innovation strategy.
Daniel Gaffin is the Program Officer for Congressional Engagement and Strategic Partnerships at the Center for European Policy Analysis (CEPA). He serves in the Executive Office supporting the organization’s engagement across Congress, government, industry, and the transatlantic policy community. Daniel leads CEPA’s congressional engagement strategy, overseeing bipartisan outreach on Capitol Hill and coordinating high-level briefings, roundtables, and events that advance the organization’s policy priorities.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions expressed on Europe’s Edge are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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2026-07-18 06:45:54
Energy security matters. Ukraine’s recent campaign against Russia’s oil infrastructure marks a visible and strategic shift in precisely how it is applying pressure on the Russian war economy. Through well-judged measures, the West can now join in.
Over the past few months, Ukrainian forces have repeatedly struck oil refineries, fuel depots, and storage facilities across Russia. More recently, Ukraine expanded this pressure to maritime logistics: since the beginning of July, Ukraine has substantially increased drone attacks against vessels linked to Russia’s shadow fleet in the Sea of Azov, disrupting fuel deliveries to occupied Crimea and forcing Russia to temporarily halt shipping through the Don-Azov Channel. Ukraine claimed to have struck 136 vessels in the 10 days to July 15. These operations not only disrupt Russia’s ability to process oil but also its ability to transport and monetize it. Wheat shipments have also been hit.
Oil exports are central to Russia’s ability to sustain the war. They finance military spending, fuel military operations, and underpin broader economic resilience. For this reason, the significance of Ukraine’s recent campaign lies not merely in the damage inflicted on individual facilities or vessels, but in exposing vulnerabilities across the entire oil value chain.
The cumulative impact of Ukraine’s concerted attacks on refineries is becoming increasingly difficult for Russia to ignore. According to Ukraine’s General Staff, cumulative strikes have temporarily disabled 42.7% of Russia’s designed refining capacity.
Regardless of the precise figure, Ukraine’s refinery campaign has contributed to widespread fuel shortages across Russia, in addition to rationing, repeated refinery shutdowns, the attempted use of alternative low-grade oil for domestic and transportation purposes, and emergency government measures to stabilize domestic fuel supplies.
At the same time, attacks against shadow-fleet tankers demonstrate that Ukraine is increasingly willing to target the underpinning transportation and transit logistics that enable Russian oil exports. These operations demonstrate that Ukraine is no longer content to target isolated military assets: it is applying sustained pressure across Russia’s oil supply chain, from refining and fuel production to maritime transport.
Much like sanctions, the challenge here is that disruption alone rarely produces lasting strategic effects. Damaged refineries and pipelines can be repaired. Oil exports can be rerouted. Tankers can be reflagged, renamed, or transferred to new owners. Ukraine has demonstrated where Russia’s vulnerabilities lie, but it needs some heavyweight support to really pile on the pain.
The task for Europe, the United States, and the United Kingdom is to identify these new vulnerable hot spots and ensure that they become progressively harder to overcome.
Russia’s refining sector entered the war with a substantial base of Western technology accumulated during two decades of refinery modernization. Before the full-scale invasion, American, European, and other international firms supplied the process technologies, specialized equipment, engineering expertise, and many of the industrial systems that remain embedded in many of Russia’s largest refineries.
The examples are telling. In early 2022, only weeks before Russia launched its full-scale invasion, Honeywell UOP agreed to supply Lukoil’s Perm refinery with process technologies, catalysts, engineering services, and key equipment for several major refining units. Honeywell had concluded a similar agreement with Lukoil’s Kstovo refinery the previous year.
At Tuapse, one of Russia’s strategically important Black Sea refineries repeatedly targeted by Ukrainian drones, Siemens supplied six SGT-800 industrial gas turbines to generate electricity and steam as part of the refinery’s expansion. Meanwhile, Italy’s Maire Tecnimont supported the modernization of Kstovo by providing engineering, procurement, and construction (EPC) services for five major refinery process units, including diesel hydrotreating, hydrogen production, and sulfur recovery, further illustrating the extent to which Russia’s refinery modernization relied on Western engineering and industrial expertise.
These examples do not suggest that Western firms continue to supply Russia today. Instead, they illustrate a more important point: many of the systems that underpin Russian refining were designed around specialized technologies, proprietary components, and engineering expertise developed outside Russia.
While Moscow has invested heavily in import substitution since 2022, replacing or maintaining sophisticated refining infrastructure remains significantly more difficult than replacing conventional industrial equipment.
Every successful Ukrainian strike, therefore, creates a reciprocal demand for specialized repairs that — through targeted export controls and sanctions enforcement — ultimately can be made slower, more expensive, and more uncertain. The same logic applies to Russia’s shadow fleet.
Since early 2025, Western sanctions have evolved from targeting individual tankers to sanctioning ship owners, traders, registries, insurers, and maritime service providers. The European Union has tightened restrictions on tanker transfers and expanded listings of shadow-fleet vessels, while the United Kingdom recently carried out its first direct interdiction of a sanctioned tanker transiting British waters. These are important steps, but enforcement remains fragmented. Ships continue to change flags, ownership structures, and insurers faster than sanctions can often keep pace, while physical interdictions remain the exception rather than the rule.
Western policy should therefore focus on two complementary objectives: denying Russia’s ability to restore damaged refining capacity and making it progressively harder to transport and monetize the oil that continues to be produced.
First, governments should tighten export controls on the specialized equipment, catalysts, industrial software, and engineering support required to maintain and repair modern refineries. Rather than focusing exclusively on new sales, policymakers should pay greater attention to the aftermarket that supports legacy Western technologies still embedded across Russia’s refining sector. Every delay in obtaining compatible components or technical support extends the operational impact of Ukrainian strikes.
Second, sanctions on the shadow fleet should increasingly focus on enforcement rather than designation alone. Secondary sanctions should be expanded against facilitators of sanctions evasion, while closer coordination among allies should make it harder for shadow-fleet operators to evade restrictions through ship-to-ship transfers, frequent reflagging, opaque ownership structures, and alternative insurance arrangements. Physical interdiction, where legally justified, should become a credible enforcement tool, not an exceptional measure.
Sustaining this pressure will take more than sanctions and export controls in isolation. As the EU advances accession negotiations with Kyiv, opening a new cluster this month on foreign and security policy alignment, while simultaneously seeking to strengthen Europe’s own security architecture, the two agendas are becoming harder to treat separately. Sanctions, export controls, defense support, and Ukraine’s EU integration should be pursued as one coherent strategy, not a series of parallel initiatives.
Ukraine has shown where Russia’s weak points are. The next step is to ensure they remain weak.
Margaryta Khvostova is a PhD Candidate in Politics in the Department of Politics and International Relations at the University of Surrey, a PhD Fellow at the Centre for Britain and Europe (CBE), and Programmes Manager at the Centre for the Study of Global Power Competition (CGPC).
Professor Amelia Hadfield is Head of the Department of Politics, Founding Director of the Centre for Britain and Europe (CBE), and Associate Vice President of External Engagement at the University of Surrey.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions expressed on Europe’s Edge are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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2026-07-18 03:40:13
The verdicts are damning.
Europe’s top court recently rejected Apple’s challenge to EU rules that designate its app stores and iOS operating system “gatekeepers.” It upheld the European Commission’s record €4.1 billion antitrust fine against Google for abusing its Android market dominance, and backed a €2.4 billion penalty against the search company for unfairly favoring its own comparison shopping services.
The significant losses send an important signal: Silicon Valley should not count on Luxembourg-based judges to dilute European antitrust enforcement. Historically, judges required exhaustive, case-by-case proof that specific behavior directly harmed consumers. They accepted tech companies’ defenses that consumers preferred bundled services or lock-ins, and overturned significant regulatory fines.
But the Android and Apple decisions reject this logic. Competitor access is prioritized over user convenience. Rather than requiring long, detailed investigations into market dominance, the judges are endorsing the Digital Market Act’s preemptive rules. Regulators no longer need to prove a tech giant did something wrong; they are empowered to force “gatekeepers” to give competitors access to their operating systems and app stores in advance.
The judgment could “bolster enforcement of abuse of dominance rules in the digital sector,” argues law firm Skadden Arps in a note on the Android case. It calls into question “common practices in the digital sector, including pre-installation, app bundles, and anti-fragmentation agreements.”
That’s a shift. The Court was long skeptical about at least some of Europe’s tech crackdown. In 2022, it voided a €997 million fine against chipmaker Qualcomm, lambasting regulators for making massive procedural errors. That same year, it annulled a €1.06 billion fine against Intel for predatory pricing.
Two years later, judges annulled a €1.49 billion antitrust fine on Google’s advertising business. The Court ruled that the Commission “erred in law” because it failed to evaluate how long those contract clauses lasted and whether they genuinely locked out competitors.
The “decision underscores the high standard of proof required to establish exclusionary conduct,” commented Sarah Jordan and Anuj Ghai, partners at the Goodwin law firm, after the Google annulment. “While the Commission and other antitrust agencies will continue to scrutinise such practices, the judgment shows that regulatory decisions can be successfully challenged if there are evidentiary shortcomings.”
The judges also initially seemed skeptical about the Brussels crackdown on tech taxation, designed to stop multinational companies from shifting profits from a high tax jurisdiction to a low one. Amazon successfully defended its tax arrangements in Luxembourg in 2021, and Apple won a 2020 case over its Irish taxes.
But the pendulum now seems to be shifting. In 2024, judges reversed the lower court decision and ordered Apple to pay €13 billion in back taxes to Ireland. Those landmark decisions signal a harsh stance on sweetheart tax deals. The court’s decision “marks an important victory for the European Commission and is a significant development in the European Union’s efforts to tackle aggressive tax planning,” argued Oana Popa of the International Bureau of Fiscal Documentation.
The court is also backing new, controversial changes to tech antitrust. Regulators no longer wait to prove monopolistic harm after it has occurred. Instead, judges are validating the DMA that establishes upfront compliance “rules of the game” for designated tech “gatekeepers”.
The DMA represents a fundamental pivot “from market oversight to market ordering,” says Carmelo Cennamo of the University of Copenhagen. It is not about traditional anticompetitive conduct, nor about (digital) markets; it is largely about preserving the “health” of digital ecosystems!”
Court rulings follow this change, shifting focus from protecting individual competitors to aggressively protecting “competition.” The court is upholding European mandates forcing tech giants to open their closed app stores and operating systems to third-party developers.
Another test looms. The Commission has appealed the court’s 2024 annulment of its €1.49 billion Google AdSense fine. It’s the last major tech antitrust case from the last decade to make its way to the top of the European court system.
At the same time, the European Commission is drafting new guidelines on what lawyers term exclusionary abuse: when a dominant company uses its massive market power to unfairly block, hinder, or remove competitors, rather than competing on the merits of its products. If judges overrule the earlier annulment against Google, it will represent yet another sign of the changing winds in the Luxembourg court — and encourage European regulators to expand their tech crackdown.
William Echikson is a Brussels-based Senior Fellow at CEPA and editor of the Bandwidth Blog.
Bandwidth is CEPA’s online journal dedicated to advancing transatlantic cooperation on tech policy. All opinions expressed on Bandwidth are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
A Roadmap for Europe-US Tech Cooperation
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2026-07-16 23:55:32
Russia’s stock market is stuck in one of its worst stretches in decades. The MOEX index has now fallen for 17 straight weeks — the longest unbroken decline since 1997 — and is back down near the lows it hit on the day Russia invaded Ukraine in February 2022.
Four and a half years of war have brought the market full circle: a catastrophic crash, a partial recovery, and now a slide that has erased most of the gains in between. Investors who bought in at the start of the war have made almost nothing since.
The immediate trigger was a Central Bank decision last month to cut interest rates by less than markets expected, a signal that officials are worried about inflation, high state spending, and the risk of renewed sanctions on oil. High base rates ensure that deposit rates at the banks are so high that no stock market investment can compete with them, prompting even more stock sales.
But the rate decision was only the spark. There are deeper problems, including falling oil prices, a stronger ruble squeezing exporters’ revenues, fuel shortages caused by Ukrainian strikes on refineries, sanctions risk, and a broader economic slowdown. Market sentiment took a further hit when Putin dismissed the idea of meeting Ukraine’s president, underscoring how much the market now moves on geopolitics rather than fundamentals.
The Kremlin has shrugged this off, insisting the economy has a sufficient “margin of safety.” But ordinary retail investors have been burned. According to a Central Bank review, in the first quarter, private investors deposited a record 910bn rubles ($11.7bn) into brokerage accounts — the highest figure since tracking began in 2021. The share of equities in their portfolios was up 5 percentage points to 30%. It seems that people bought shares in anticipation of future dividends, anticipating the traditional dividend rally.
That bet failed: high interest rates and weak commodity prices have squeezed corporate profits, and total dividend payouts are set to fall sharply this year. Some major companies have suspended payouts entirely, hitting their share prices hard.
Firms are increasingly directing cash toward servicing expensive debt and funding investment projects made costlier by sanctions and Ukraine’s drone attacks, rather than toward shareholders.
More Russians than ever technically hold a brokerage account — over half the working-age population — but this isn’t really a story of mass participation. The vast majority of invested wealth belongs to a small sliver of wealthy clients, many of them businesspeople who can no longer invest abroad because of sanctions, and are parking money at home out of necessity rather than confidence. Layered on top of this is a deeper trust problem: property rights have never been especially secure in Russia, and the wartime nationalization of billions of dollars in assets — some of them publicly traded — has only reinforced investors’ wariness.
There was once a notion that isolation from the West might push Russia down the path Iran took, where sanctions and high inflation drove millions of ordinary citizens into the stock market as a way to protect their savings from inflation. That hasn’t happened.
Russian inflation, while elevated, is nowhere near Iran’s levels, and high central bank interest rates make state-backed bank deposits a far safer and more attractive option than shares in companies battered by war and sanctions. Russians who want to move or protect their money also have both legal and illegal ways to send it abroad, unlike Iranian savers who faced much stricter capital controls.
Sanctions have hurt the market both directly and structurally. Direct sanctions on Russia’s exchange infrastructure forced a halt to trading in major foreign currencies. But the bigger blow was structural: foreign investors, who once accounted for the majority of trading activity, exited en masse after 2022, leaving a liquidity gap that retail investors have only partly filled — they simply don’t have the firepower foreign institutional money once provided.
In 2024, Putin set an ambitious goal: to double the stock market’s size relative to the economy, from one-third to two-thirds of GDP by 2030. Since then, the market’s value relative to GDP has been shrinking rather than growing, roughly halving since before the war. A senior Central Bank official has publicly called the target nearly impossible to reach through normal growth, given how hostile the investment climate has become.
Meanwhile, bank deposits keep growing as savers’ default choice, dwarfing what’s invested in the stock market by a wide margin. That actually suits the Kremlin: money sitting in bank accounts allows banks to buy up government debt, which helps cover a growing budget deficit driven heavily by war spending. In effect, the stock market’s weakness quietly channels household savings toward funding the state — and the war — rather than into productive investment.
This dynamic echoes a slogan that appeared on a downtown Moscow billboard back in 2014, during an earlier sanctions-driven downturn: “Some things are more important than the stock market.” At the time, it read as a consoling message about short-term pain. A decade later, it looks more like an accurate description of state priorities — the war has consistently mattered more to the Kremlin than market health, and the market is paying the price through stalled IPOs, capital flight and a shrinking role in the economy.
This matters well beyond the fortunes of individual investors. A dysfunctional stock market means the Russian economy has essentially one remaining source of capital: loans and state funding. That makes long-term modernization projects harder and more expensive to finance. It also means ordinary Russians have no real tools to grow their savings or participate in economic growth beyond bank deposits — deposits that, indirectly, help fund the state budget and the war effort.
All of this undercuts the Kremlin’s own stated ambitions around technological self-sufficiency and building up non-commodity industries, both of which depend on a functioning capital market.
As long as company valuations can be upended overnight by geopolitics — asset seizures, sanctions, and dividends canceled by decree — investors, foreign and domestic alike, will struggle to trust that Russian stocks are priced fairly. Rebuilding that confidence, once the war ends, will take much, much longer than it took to destroy it.
Alexander Kolyandr is a Non-Resident Senior Fellow at the Center for European Policy Analysis (CEPA), specializing in the Russian economy and politics. Previously, he was a journalist for the Wall Street Journal and a banker for Credit Suisse. He was born in Kharkiv, Ukraine, and lives in London.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions expressed on Europe’s Edge are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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