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China Returns to the Western Balkans

Nine years after Montenegro committed to constructing an expensive Chinese-built highway – which nearly bankrupted the country and remains unfinished – it has announced another highway project with a Chinese firm.  

Several countries in the Western Balkans have waited for decades for the European Union to get serious with their accession and investment. But some much-needed infrastructure projects have not been able to wait, and with apparent disinterest from Brussels, Beijing has emerged as a major source of funding for the region’s projects. 

There are obvious advantages to working with China. The European Investment Bank (EIB) requires years of documentation and proof of a project’s economic viability, but China is happy to work with Balkan politicians eager to announce projects ahead of elections, even if they may not prove profitable. Beijing does not publicise the terms of its involvement, and deals are made directly between governments. 

Beijing’s flexibility means that projects that may never otherwise see the light of day can get built. However, these projects are not cheap, and small countries can quickly take on more debt for economically questionable projects than the EIB would ever allow. 

As China doled out loans for its Belt and Road Initiative, Western media and hawkish officials accused it of using predatory lending practices to trap developing countries in debt to be leveraged for political allegiance. This has been termed ‘debt trap diplomacy’. 

However, there is increasing consensus among think tank and academic researchers that ‘debt trap diplomacy’ is either an outright myth or more complicated than it seems. Between 2000 and 2019, China cancelled at least 3.4 billion US dollars of debt, restructured or refinanced another 15 billion US dollars of debt, and did not seize any assets. It is true, however, that many of its projects lack transparency and are often greenlit by client countries without proper due diligence for political expedience.  

Projects in Montenegro and Bosnia 

Montenegro’s stalled toll highway—meant to connect the coastal city of Bar to Serbia to make travel through the country’s interior easier for tourists and locals alike—is seemingly a textbook example of this.

The project failed several feasibility studies, and the notion of its profitability was met with scepticism, but in 2014, then-prime minister Milo Đukanović took on an almost one billion US dollar loan from China’s Export-Import Bank and construction contract with China Road and Bridge Corporation (CRBC).  

After years of setbacks and delays, the first 41 kilometres of the highway opened last July. Cutting through mountains and ravines, 60 per cent of the highway is comprised of tunnels and bridges, and it is one of the world’s most expensive roads.  

The rest of the 122-kilometre highway remains unfinished, and it is unclear whether it ever will be.  

With only 620,000 people, Montenegro is a small country and has struggled to service its debt— which comprises more than one-third of its annual budget. In 2021, Podgorica was able to secure a deal with two US banks and one French bank to restructure the loan and save Montenegro 9.5 million US dollars a year.  

“Montenegro managed to reduce the interest rate on the Exim Bank of China loan from two per cent to 0.88 per cent through a hedging arrangement,” says Finance Minister Milojko Spajić. “Negotiations on refinancing and optimising the public debt of Montenegro continue, and this arrangement gives much-needed time to do so in the best possible way.” 

Emboldened, Montenegro announced on March 29 that it would again partner with a Chinese firm, this time the Shandong International Economic and Technical Cooperation Group, to build another new highway.  

This project, however, is much smaller in scale and cheaper in cost—it will run 16 kilometres between the tourist cities of Budva and Tivat and cost 53 million euros. Rather than being financed with a loan from a Chinese bank, it will be paid for from the county’s budget and with 14 million euros of credit from the European Bank for Reconstruction and Development (EBRD). 

“This is only the first in a series of projects concerning the coast, which should facilitate traffic. This construction was urgent, as in the summer tourist season more than 30,000 vehicles daily pass between those two towns,” said outgoing-prime minister Dritan Abazović in March.  

The Shandong International Economic and Technical Cooperation Group is involved in a number of projects throughout the Western Balkans. It has helped lay tram lines in Bosnia and Herzegovina’s capital Sarajevo and signed contracts to build two highways in Republika Srpska, but investigative reporters have critiqued the lack of transparency and public oversight of its deals with the Bosnian government.  

Close ties with Serbia 

Serbia has also contracted the Shandong International Economic and Technical Cooperation Group to build a highway corridor. 

Serbia is perhaps China’s closest partner in the Balkans and all of Europe. While Serbia is a candidate for EU membership, it has long diverged from the bloc in its foreign policy of maintaining favourable relations with Russia and a “steel friendship” with China. Even as EU states in Central Europe and the Baltics suspend cooperation, China and Serbia officially opened negotiations for a free trade agreement last month. 

Direct flights between Beijing and Belgrade were cancelled in 2018 due to a lack of passengers but resumed last summer as Serbia courts Chinese tourists and business leaders. 

“The [re]opening of the direct route is the result of the rapid realisation of a significant consensus between presidents Xi Jinping and Aleksandar Vučić for a continuous improvement of the cooperation between our two countries,” said the Chinese ambassador to Serbia upon the landing of the first Hainan Airlines flight in Belgrade in four years. 

Between 2009 and 2021, approximately 32 billion euros flowed from China into the Western Balkans, and of this, 10.3 billion euros went to Serbia.

Source: emerging