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China In Eurasia

Saturday 17 April 2021

A van drives along the first section of a highway connecting the city of Bar on Montenegro's Adriatic coast to landlocked neighbor Serbia, near the village of Bioce, north of the capital, Podgorica.

PODGORICA -- Montenegro says it needs help from the European Union to pay off a whopping $1 billion Chinese loan for a controversial road project that has left the Balkan country in a dire financial situation.

But EU spokeswoman Ana Pisonero told RFE/RL that the bloc "does not repay loans from third parties," though she added that Brussels did have concerns over "the socioeconomic and financial effects some of China's investments can have," as well as the risks of economic imbalances and "debt dependency."

She did say, however, that the EU was willing to offer support through its $10 billion Economic and Investment Plan for the Western Balkans. "The Economic and Investment plan will help leverage funding from other public and private investors, including from the European Investment Bank at very favorable conditions," Pisonero said.

The long-delayed and still-incomplete highway finds itself at the heart of a wider geopolitical contest on the EU's doorstep, where China's influence in the Balkans has expanded dramatically in recent years.

The rebuffed call to Brussels for assistance comes as Montenegro faces a looming repayment deadline for the highway -- which is being built by the China Road and Bridge Corporation (CRBC) -- and is grappling with a host of political and financial challenges, including a tourism-dependent economy that has contracted significantly due to the pandemic and weakened its repayment ability.

China holds approximately one-quarter of Montenegro's total debt, which reached 103 percent of GDP last year, and if Podgorica defaults on its loan the contract for the road project gives China the possibility to access land and assets in the Balkan country as collateral.

According to the current contract with the Export-Import Bank of China, the first loan payments are due in July.

The stakes are now high for both Brussels and Podgorica.

Montenegro must now search for other options for its financial future, while the EU must look for a way to shore up its standing in the Western Balkans, a region where China continues to improve its ties amid the pandemic by strategically donating vaccines and providing aid in a time of crisis.

"It's not a surprise to see where the project ended up, it was trouble in the making from the start," Vuk Vuksanovic, a researcher at the Belgrade Center for Security Policy, told RFE/RL.

Debt Politics

With debt help from the EU not on the table, the new Montenegrin government that was narrowly voted into power in December must find a new solution. The loan was taken out by a previous government led by current President Milo Djukanovic, who continues to be a long-term force in the country's politics.

Milo Djukanovic (left), then Montenegro's prime minister, shakes hands with Chinese Premier Li Keqiang during their meeting at the Great Hall of the People in Beijing in November 2015.
Milo Djukanovic (left), then Montenegro's prime minister, shakes hands with Chinese Premier Li Keqiang during their meeting at the Great Hall of the People in Beijing in November 2015.

Montenegro, which became an independent country again when it broke away from Serbia in 2006, joined NATO in 2017 and is working to get the green light to join the EU. Like many countries in the Balkans, it also has strong ties to Russia and has increasingly looked to China -- under the guise of Beijing's Belt and Road Initiative -- for infrastructure and investment.

The current government of Prime Minister Zdravko Krivokapic has tried to distance itself from the highway project, raising concerns over being able to meet its debt obligations and tying the loan to its predecessors, who signed the deal in 2014.

Deputy Prime Minister Dritan Abazovic first publicly raised concerns in March, when he told Montenegrin lawmakers that the EU should help refinance the loan to protect the country from becoming dependent on China.

Montenegrin Finance Minister Milojko Spajic also joined the public effort, telling the Financial Times on April 11 that the EU helping the country with the Chinese loan was an "easy win" and "low-hanging fruit" for the bloc.

A Winding Road

Accepting the loan from the Export-Import Bank of China and building the highway was controversial from the very start. The project was designed to link the port of Bar on Montenegro's Adriatic coast to landlocked neighbor Serbia. The highway itself is divided into three sections, with the Chinese loan only covering the first 41 kilometers.

That stretch, which passes through mountains north of the capital, has been the most demanding, with an estimated 60 percent of it made up of bridges and tunnels. The first section of the highway is not yet completed, having faced planning problems and delays due to the pandemic. The government recently said it intended for the first section to be complete this year.

The highway has proved to be extremely expensive, with an average estimated cost of $23.8 million per kilometer.
The highway has proved to be extremely expensive, with an average estimated cost of $23.8 million per kilometer.

When the current government was the opposition it criticized the government for agreeing to the loan, raising concerns over the cost, a lack of transparency in the tender process, potential corruption, and the long-term economic risk it brought to the small Balkan country of 620,000.

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Doubts about the highway first surfaced after two feasibility studies, conducted in 2006 and 2012, showed it was not economically viable. Montenegro had tried and failed to secure funding from European sources before it turned to China.

"Some projects haven't been built for a reason," Jonathan Hillman, the director of the Reconnecting Asia Project at the Center for Strategic and International Studies, told RFE/RL. "Just because financing becomes available it doesn't mean that it should be accepted."

MANS, an EU-financed anti-corruption watchdog, also pressed the government at the time to provide lawmakers with data to support its vision and how the project would generate revenue before a vote to approve the Chinese-funded highway in 2014. But the government refused to do so and many details around the contract for the loan remain hidden.

Even before the current problems posed by the debt repayment deadline, the Chinese loan caused economic pain to the country, forcing the government to raise taxes and partially freeze public-sector wages in order to get its finances in order.

Because the government did not hedge against currency swings and failed to include a turnpike in its original plans, the cost of the project continued to soar, pointing to a looming debt problem. The highway itself proved to be extremely expensive, with an average estimated cost of $23.8 million per kilometer.

In 2018, the Center for Global Development, a Washington-based think tank, listed Montenegro as one of eight countries at risk of a debt crisis after receiving a Chinese loan.

"The risks around this highway were clear at the beginning," Hillman said. "This shows what can happen when there isn't proper accountability and effective oversight for these big infrastructure projects."

China In The Balkans

In addition to the economic problems it poses to Montenegro, the current saga also puts the EU in a difficult position in regard to China in the region.

China continues to loom large in the Balkans, deepening its footprint through infrastructure and energy projects. Beijing has also begun to build up stronger political ties in the region, forging a comprehensive partnership with Serbia that has allowed it to expand out to neighboring countries.

Montenegrin President Filip Vujanovic (second from left) and his wife, Svetlana (left), greet Chinese President Xi Jinping as his wife, Peng Liyuan, looks on during a reception for country leaders and officials at the Purple Palace ahead of the 2014 Nanjing Youth Olympic Games.
Montenegrin President Filip Vujanovic (second from left) and his wife, Svetlana (left), greet Chinese President Xi Jinping as his wife, Peng Liyuan, looks on during a reception for country leaders and officials at the Purple Palace ahead of the 2014 Nanjing Youth Olympic Games.

Montenegro is potentially attractive to China for a number of reasons. It gives Beijing a European presence on the Adriatic coast and closer political ties and heightened influence within the country could prove useful if Podgorica joins the EU.

For Brussels, how it decides to navigate this situation will impact its credibility in the Balkans, which has been negatively affected during the pandemic over problematic episodes involving the supply of medical equipment and vaccines.

Still, the EU is the region's top investor and main market and is exploring other avenues to assist Podgorica.

On April 12, French European Affairs Minister Clement Beaune tweeted that Paris was working with the European Commission to find a solution to Montenegro's debt problem and "reduce the dependence on China in the Balkans."

"This is a rare opportunity for the EU to step up in its backyard and push back against China," Vuksanovic said.

"But it also wouldn't be the first strategic opportunity that the bloc has squandered in the Balkans," he added. "Doing so would be a bad signal to the region and a green light to Beijing."

Reid Standish and Asja Hafner reported from Prague, Gjeraqina Tuhina from Brussels, and Slavica Brajovic from Podgorica
A giant outdoor screen shows Chinese President Xi Jinping attending the closing session of the National People's Congress in Beijing on March 11.

Welcome back to the China In Eurasia briefing, a monthly RFE/RL newsletter tracking China’s resurgent influence from Eastern Europe to Central Asia. I’m RFE/RL correspondent Reid Standish and here’s what I’m following this month:

Welcome To The New Era

China owned the global stage in March. The month kicked off with the annual National People’s Congress, with Beijing charting its future course, and culminated in a series of diplomatic wins and setbacks that point to China’s steady, but uneven, rise in the world.

Finding Perspective: Beijing is eager to project that it is a true global power. That was the message of the National People’s Congress, as I reported here.

Chinese President Xi Jinping and other senior officials touted China’s ascent at the political gathering, setting up declared victories at home over the coronavirus and extreme poverty as a blueprint for future engagement around the world.

Across Eurasia, Chinese diplomats have already taken to promoting these narratives and Beijing’s “vaccine diplomacy” continued to make inroads, especially in developing nations. But China’s rise is also not without its growing pains.

The pandemic is forcing Beijing to adapt its flagship Belt and Road Initiative and the country found itself in a tough diplomatic dispute after tit-for-tat sanctions with the European Union and other Western nations over China’s rights abuses in Xinjiang.

Why It Matters: China is still learning how to be a world leader, but it is becoming increasingly confident in its moves.

This means that Beijing’s rivalry with the West, particularly the United States, is set to intensify, as highlighted by the fiery exchange between high-ranking U.S. and Chinese officials in Alaska.

As I discussed in an article in late March, Eurasia won’t be the focal point of superpower tensions, but it will be far from immune.

Read More

  • RFE/RL’s Hungarian Service reported that Chinese Defense Minister Wei Fenghe visited Budapest on March 25 as the first stop on a tour of southeastern Europe that took place shortly after the EU imposed sanctions on Chinese officials.
  • Few details about Fenghe’s visits have been made public, as my colleagues at RFE/RL’s Balkan Service reported, looking at the lack of transparency during stops in Serbia and North Macedonia.
  • Simultaneous Western pressure on Beijing and Moscow is pushing the two countries closer together, as evidenced by a March 23 press conference where Russian Foreign Minister Sergei Lavrov and Chinese Foreign Minister Wang Yi jointly bashed the United States.​

Expert Corner: Just How Close Are Beijing And Moscow?

Readers asked: "Relations between China and Russia are about to enter a new phase, but where exactly is this relationship going?"

  • “Beijing and Moscow increasingly need each other, but Russia needs China more than the other way around -- so in the future, China can use its growing leverage to get concessions from Russia on commercial deals or some policy issues that don’t cross the Kremlin’s red lines.” -- Alexander Gabuev, senior fellow at the Moscow Carnegie Center
  • “There are real fissures between Russia and China, but the persistence of the factors driving their partnership mean they will challenge the United States and Europe for the foreseeable future. Their alignment increases the risks that both countries pose. Together, they are a more potent force that can oppose both the United States and Europe.” -- Andrea Kendall-Taylor, senior fellow at the Center for a New American Security and former senior U.S. intelligence analyst
  • “A full alliance between China and Russia is not coming, but both Beijing and Moscow feel united in their confrontation with the United States. Despite potential areas of limited confrontation in Central Asia or growing competition in the arms trade, the reasons to work closer and minimize tensions so far outweigh concerns for future disagreements.” -- Anton Barbashin, editorial director at Riddle Russia

Do you have a question about China’s growing footprint in Eurasia? Send it to me at StandishR@rferl.org or reply directly to this e-mail and I’ll get it answered by leading experts and policymakers.

Three More Stories From Eurasia

1. What’s In A Deal?

Beijing inked a long-rumored 25-year strategic pact with Iran on March 27 that could greatly expand its influence in the Middle East and set China up to reap a diplomatic boost if the nuclear deal with Tehran and Washington can be revived.

Digging Deeper: China has its sights on the future. Part of the motivation of the agreement is to reassure Iran as the Biden administration looks to rekindle nuclear talks with Tehran.

The 25-year pact itself outlines broad economic, military, and political cooperation, but there is plenty of reason to be skeptical about it, as I explored here in my article.

There have been reports of the deal being worth $400 billion, but no figure has been confirmed. A draft seen by RFE/RL doesn’t mention any amount. Future investment likely won’t be possible unless Tehran returns to the nuclear deal and sanctions placed on Iran by the Trump administration are lifted.

The View From Home: China also has a spotty track record of not following through on its deals with Iran. Moreover, the Iranian public remains highly suspicious of the agreement.

My colleague Golnaz Esfandiari looked at Tehran’s efforts to reassure the public after it signed the pact with Beijing.

2. Buyer’s Remorse

Dritan Abazovic, Montenegro’s deputy prime minister, made headlines on March 26 when he said that the EU should help the small Balkan country repay a $1.18 billion loan to the Export-Import Bank of China for the construction of a highway.

The Tightrope: Abazovic has since tried to walk back his remarks, my colleagues at RFE/RL’s Balkan Service told me, after the comments attracted international attention to the massive debt Montenegro owes to China.

The first tranche of repayment for the 2014 loan is reportedly due this year and the road is still under construction.

3. Broken But Not Dead

Government pressure in Kazakhstan has nearly silenced the guerrilla activism that turned the country into an unlikely window on China’s human rights abuses, Aigerim Toleukhanova from RFE/RL’s Kazakh Service and I reported in an article in early April.

Demonstrations against the internment of Uyghurs, ethnic Kazakhs, and other Muslim minorities in neighboring Xinjiang are ongoing, with a small but persistent picket outside the Chinese Consulate in Almaty.

The protests, however, are a far cry from the activism in the country over the issue in 2018 and 2019, which has been effectively quelled by a Kazakh government eager to preserve ties with Beijing.

The Human Toll: Perhaps the individual toll of the camps is best exemplified by Qalida Akytkhan, a 67-year-old grandmother whose three sons are interned in camps in Xinjiang.

“At night, I take a photo of my three sons and hold it to my chest,” she said during an interview. “I can't sleep without it. I put it next to my head on my pillow. Sometimes I can't fall asleep until 5 a.m.”

Across The Supercontinent

Shifting Course: Ukraine plans to nationalize Motor Sich, an aerospace manufacturer that is majority-owned by Chinese companies, due to its strategic importance to national defense. My colleague Ievgen Solonyna from RFE/RL’s Ukrainian Service has a good breakdown of the saga (in Ukrainian.)

Cooled Off: Despite warm public rhetoric of close ties, Beijing is keeping its distance from the embattled regime of Belarus’s Alyaksandr Lukashenka, as I focus on here in my article.

On The List: Ilhan Kyuchyuk, an ethnic Turkish Bulgarian deputy at the European Parliament, was among those targeted by Beijing in response to sanctions brought by Brussels over Xinjiang. Kyuchyuk told RFE/RL’s Bulgarian Service that he believes he was included because he helped an imprisoned ethnic Uyghur economist receive the Sakharov Prize for Freedom of Thought.

Diplomatic Booster: Budapest approved emergency use of China's CanSino Biologics coronavirus vaccine on March 22, RFE/RL’s Hungarian Service reported.

It is the first EU country to do so. Hungary was already an outlier, granting use to Russia’s Sputnik V and China’s Sinopharm, despite neither being approved by Brussels.

One Thing To Watch This Month

The United Nations has begun negotiations with China for a visit “without restrictions” to Xinjiang to see how Uyghur and other Muslim minorities are being treated in the region, according to Secretary-General Antonio Guterres. Negotiations will likely be slow. In the meantime, expect more efforts from Beijing to try and change the global narrative around the internment camps.

If you enjoyed this briefing and don't want to miss the next edition, subscribe here. It will be sent to your in-box the first Wednesday of each month.

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