Hungary to quit International Investment Bank, also known as the spy bank

After the announcement of US sanctions on Wednesday, the Hungarian government reviewed the situation of the International Investment Bank, and the decision was made to recall the government delegates from the bank, Világgazdaság reported, and at the same time, the news was also confirmed by the Ministry of Economic Development. Hungary is the last of the EU countries to leave the Russian-influenced group, although by the beginning of this year its stake in the bank had risen to over 25 percent.

On Wednesday, US Ambassador David Pressman held a press conference in Budapest, where he announced that the US had placed the Hungarian-headquartered IIB and its three executives on a sanctions list. Two of them are Russian citizens, but one of them is Hungarian, Imre Laszlóczki, the bank's vice-president.

The Hungarian government has discussed the situation and concluded that although the International Investment Bank played an important role in the development of Central and Eastern Europe in the past, the US sanctions imposed on the bank have rendered its operation meaningless, the Ministry of Economic Development said in a statement.

"Therefore, the government is recalling the Hungarian government's delegates to the International Investment Bank and is withdrawing from the international financial institution."

The Hungarian withdrawal is all the more interesting because just yesterday evening, economist Imre Boros, a minister in the first Orbán government who is a board member of the investment bank, said that Hungary was the bank's number one shareholder, so Hungary's stake now was bigger than Russia's. Even at the time, this seemed to be a mistake, and now it turns out that the government was actually deciding to pull out.

The Hungarian exit may be particularly painful because the bank has been in a particularly bad financial situation since the outbreak of the war in Ukraine. It has previously emerged that Slovakia, for example, would not receive the capital invested immediately after its exit, and would have to wait many years for that, if the bank does not go bankrupt before then. There is no information yet on the conditions under which the Hungarians will now exit.

The soviet legacy, in which Orbán saw potential

The International Investment Bank (IIB) was founded in 1970 by the member states of the COMECON, a group of socialist countries. Like other development banks, its aim was to promote the economic development of member states, mainly through preferential loans to priority companies or projects. The bank was not a dominant player in the decades after its creation, but after the change of regime it became distinctly insignificant, doing almost nothing for years.

Hungary left the bank in 2000, under the then pro-Western first Orbán government, but after a decade and a half and a turn to the East, the country rejoined in 2015. The bank came into the spotlight when it announced in 2019 that it had moved its headquarters from Moscow to Budapest.

This was a strange move, because the Russians have always had the largest stake in IIB, and thus exerted the greatest influence. The question therefore arose as to why the bank would want to move to a country which at the time had a very small stake in the institution.

In 2019, the Orbán government granted the bank tax and contribution exemptions, unrestricted entry and exemption from the control of Hungarian financial supervisory bodies to operate in Hungary (and thus within the EU). The bank's employees and guests were granted diplomatic immunity, and this has been the biggest source of criticism: experts say it could have provided a way for Russian agents and spies to enter Hungary, and thus the Schengen area. It is for this reason that the institution has often been called a spy bank, a claim that has been repeatedly denied.

The bank bought the Chain Bridge Palace at the Buda side of the Chain Bridge as its headquarters, which was handed over in a confident tone in 2021 by Finance Minister Mihály Varga who praised the bank's achievements. At the time, it seemed that the IIB would grow within the EU, and the Hungarian government really believed that by moving the bank here, it could gain regional influence.

Everyone else has already left

On 24 February last year, Russia invaded Ukraine, and a few days after the invasion, the Czech Republic, Slovakia, Romania and Bulgaria announced their withdrawal from the International Investment Bank. According to an investigative article by Direkt36, in the first few weeks the Hungarian government also wavered on the issue – they reportedly consulted the Hungarian Central Bank, which suggested leaving – but in the end, the government decided to remain in the bank.

However, because of the exits, the bank then faced a serious problem: although Russia had always been the majority owner of the institution, its ownership had not reached 50% before the war. However, if the four departing countries were to return their shares and distributed them proportionally among the remaining countries, the Russian share would have risen to over 50 per cent. This would have made IIB a Russian bank, and would thus automatically have been subject to Western sanctions.

To avoid this, according to another investigative article in Direkt36 last year, several plans were worked out, one of which was for Serbia to join the bank and receive some of the exiting countries' shares. This did not materialise in the end, but there was one state that was willing to increase its stake: Hungary.

Apparently, in the end, under pressure from the US, the Hungarian government also decided to leave. This seems a logical decision because Romania and Bulgaria are due to leave the bank in June and August respectively, leaving Hungary as the only member of the EU. For a detailed Direkt36 article on the bank's history over the past year, click here.