04 April 2019

The Silk Road passes through the Western Balkans

Stelian Teodorescu

Image source: Mediafax

The European Union (EU) is Kosovo’s largest investor and trade partner. Turkey stays among Serbia and Bosnia and Herzegovina’s top trade partners. Russia’s investments have a significant rate in key sectors, like the energetic one, from Serbia, Montenegro and BIH. Still, as the days go by, China becomes a stronger and stronger investor in region’s economic-financial field.

Comparing to Russia and Turkey, China does not base its strengthening of influence on important historical, cultural and ethnical connections with states/ entities from Western Balkans region.

The “Belt and Road” (BRI) initiative, known also as “One Belt, One Road” (OBOR) is considered by many as an ambitious change of Beijing’s plans to project its economic and political influence at a global level. Even if, in geographical terms, this initiative is related to Eurasia and East of Africa, Beijing’s attitude and the ambitions manifested in other regions of the world as well, like the Western Balkans, makes us believe that this initiative crosses the old Silk Road because of the following reasons:

  • Because for a state like China, with an economy which is mostly based on exports, it emerges the necessity to reduce the transport costs for the beneficiaries from different areas in the world;
  • Having some outsized production capacities in distinct areas of the Chinese economy, like the steel and cement production industry, makes necessary the continuous identification of opportunities for selling products abroad;
  • The stringent need to stimulate and shape economies’ development from the states in the interest areas, especially those placed on BRI routes and, implicitly, to stimulate the increase of goods and services demand from China;
  • China’s strong desire to invest its huge retained foreign currency reserves (estimated to more than $3 trillion by the end of 2016);

Given these circumstances, the economic-financial connections between China and Western Balkans states have intensified a lot, starting with 2012, when it started to work the so-called “16+1” format, which includes Albania, BIH, North Macedonia, Montenegro and Serbia, except for Kosovo, an entity whose independency is not recognized by Beijing.

China, a new actor, but a more and more effective one in Western Balkans

If a decade ago China was not manifesting its interest for investing in Western Balkans states, at the moment, Beijing stays among the top economic investors from some states in the region.

China’s actions have had a substantial intensification between 2015-2017, mostly in Albania, BIH, North Macedonia, Montenegro and Serbia’s infrastructure. This economic “offensive” has increased their pressure over EU and has intensified the integration actions of the Balkan states in the European community space.

Starting with 2015, through the “16+1” cooperation format, China has created an investment fund worth of $10 billion for funding different projects in Central and South-East Europe (CESEE), cooperation becoming more and more institutionalized and planned, especially by signing some bilateral agreements, probative examples to that end being the ones with Albania, Montenegro and Serbia. Besides creating the investments fund, Beijing has created a secretariat to ease the cooperation and has encouraged the trade development with the partner states.

Therefore, China has introduced Western Balkans in the Silk Road. Everyone expects the transport infrastructure financed by China to go beyond South-East Europe, connecting with vital ports, capitals and economic knots from other parts of Europe.

With such a behavior it is easy to understand that Chinese authorities’ strategy is, actually, based on the hypothesis of the exploitation of Western Balkans states’ integration process in EU, the main objective being for this region to become a connection bridge for the Chinese companies with the main EU markets.

Not least, the Chinese producers could see the Western Balkans region as one to offer the opportunity and the favorable framework for relocating some production capacities close to EU’s markets, because, politically speaking, the area is still facing high instability and, implicitly, it proves that it is ready to accept any other businesses partners which are accepting the security risks, especially those to have their own financial potential.

The Chinese state stays among the top investors from some countries in the Western Balkans and it becomes more and more clear that the partnerships made by China with states from this region is indirectly offering access to a European free trade area with around 550 million potential consumers.

As for the materialization of the projects, Serbia seems to be Beijing’s key partner in the region. China has already invested more than $1 billion, but these financial resources are offered especially as loans, money being dedicated to transport, but also energetic, infrastructure projects. The acquisition by Hebei Iron and Steel company (now the Hesteel Group) of a steel factory from Smederevo, for 46 million euro, was 2016’s biggest foreign investments in Serbia. Beijing has also signed an agreement for the construction of a Belgrade-Budapest railway, for high speed trains. Such a favorable environment proves to be the best opportunity for the Chinese companies to be part of the privatization process from Serbia, where more than 500 companies are for sale.

The trade between China and Serbia has trebled between 2005-2016, up to $1,6 billion, but the relation between these two states remains unbalanced, because meanwhile China is exporting in Serbia goods worth of $1 billion, the Serbian state is exporting to China goods worth of $ 1million.

We can notice the same interference coming from Beijing in Montenegro as well. The China Civil Engineering Construction Corporation construction company is modernizing a 10 km segment of the railway connecting Bar city (Montenegro), a port at the Adriatic Sea, with Belgrade (Serbia), meanwhile China Pacific Construction Group has signed an agreement for the construction of a highway between Montenegro and Albania.

We should also mention the 689 million euro loan offered by Exim (Export-Import) Bank from China for the construction of the Podgorica-Kolasin highway section, as well as for the traffic connection from Bar up to the border with Serbia, but also a loan that Exim Bank gave for the construction of new ships, by the China Poly Group Construction, worth of 56 million euro.

Not least, in Bosnia and Herzegovina (BIH), the construction of a highway is funded through loans given by Exim Bank from China, and other Chinese companies are currently developing two power stations based on carbon, one in Stanari (Republic of Srpska) and the other in Tuzla (Bosnia and Herzegovina Federation).

China is involved also in North Macedonia, a state to be in straight line towards the NATO integration process and in an advanced phase for the EU accession, with the construction of two highways, the Skopje-Stip section, in the Eastern part of the country, and the one from Kichevo-Ohrid, in the West. Ensuring a cooperation with North of Macedonia it is very important given the BRI strategy from China, because the landlocked country stays on a potential trade route which connects the port facilities the Chinese are exploiting in Piraeus (Greece) and Budapest (Hungary), this transport hall being an access door towards the Central and West Europe markets.

 In December 2014, Exim Bank has agreed also with Albania’s government over the deadlines on the construction of Arber highway, a section which goes towards Republic of North Macedonia and Bulgaria, connecting the Ionian Sea and the Bulgarian side of the Black Sea coast. Not least, two Chinese companies, China Everbright and Friedmann Pacific Asset Management, have announced the acquisition of Tirana International Airport SHPK, which works with the airport from Albania’s capital. The group will lead it until 2025, with a two years extension, until 2027, under Albanian government’s approval reservation.

Albania is an important piece for China in the Western Balkans puzzle, thanks to its position on the Adriatic Sea and its important energy resources, having a key position on the “New Silk Route”/NSR maritime part. For example, Geo-Jade Petroleum Corporation from Shanghai has bought the control rights over two Albanian oil camps from a Canadian company for $442 million. Furthermore, Albania has an important place over the Trans-Adriatic gas pipeline, which is now under construction. Once completed, it will be used to distribute gases from the Caspian Sea through Turkey, Greece and Albania towards Italy and the rest of West Europe.

If we analyze the activities developed across the “16+1” format in education, culture, research and development, it becomes clear that the “Belt and Road” initiative is not limited to economic investments. This shows that Beijing is slowly building a different “soft power” in Western Balkans region, becoming an important player on the chessboard in the competition with EU, Russia and Turkey.  

Basically, Beijing’s objectives and influence are totally different comparing to Moscow’s ones, because China, unlike Russia, can win more from stabilizing the region and continuing the integration process of the Western Balkans in EU, the biggest trade partner of this areas.

In such a context, the Balkan market is extremely important for the Chinese companies when it comes to trade and investments. Western Europe is more interesting for the Chinese companies, but Western Balkans are more tied to Beijing’s objective to develop economic relations with Western Europe. 

Given that the full integration of the Western Balkans in the unique European market is in line with China’s interests, theoretically, Beijing’s role should not be a threat for the integration process of Western Balkans states in EU. However, some European leaders, among them Angela Markel (Germany) and Emmanuel Macron (France), have expressed their concerns on China presence that could destroy EU’s efforts to democratize the region. According to such an argument, states in the region which are receiving Chinese investments could be tempted to defend Beijing’s interest across EU when approaching the economic-financial issues and even the political ones at a European level, especially regarding issues connected with human rights and commerce. Even if the financial-economic projects China has assumed in Western Balkans are seen as lacking of political objectives, however, as Michal Makocki[1] was noticing, “with every large project its state-led model spills over and, in the Balkans, it also increases the risk of undermining the EU’s reformist agenda”.

As Moscow has developed region’s energetic dependency on the Russian oil and gases resources, Beijing is working more and more to develop and consolidate Western Balkans dependency on the Chinese financial resources. It seems that accomplishing such an objective is part of a large strategy that allows China to get political concessions at an international level on sovereignty. The positions of other states related to Taiwan, Hong Kong, Tibet, Xinxiang and South China Sea are extremely important for Beijing, and the Chinese leaders will never tolerate any action coming from a foreign country which could be at odds with China’s official policy. In the Western Balkans, Beijing’s authorities’ policy has the largest support from Serbia, as the Belgrade’s authorities are supporting China’s interests regarding Tibet, as well as the autonomous province Xinxiang. Serbia’s behavior is partially motivated by the fact that China is also supporting Serbia’s policy on not recognizing Kosovo’s independency, but it seems to be more connected by the economic support it is receiving from Beijing.  

Even if the financial and economic connections between China and the Western Balkans countries have significantly intensified starting with 2015, according to the conventional mensuration on direct foreign investments in the region, the statistics are underestimating the involvement of the Chinese state, because, in many of the cases, this involvement is structured more like a funding through debts for the large transports and energy infrastructure projects. An eloquent example to that end is that the Chinese state banks, like Exim Bank, are usually funding 85% from the “New Silk Road” (NSR) / “Belt and Road Initiative” (BRI) projects, and the 15% difference must come from national sources. As consequence, sceptics are afraid that this will lead to Western Balkans states’ debt and to a larger economic and political dependency on China in the future.

It is already known that the bank sectors from the Western Balkans states are still dominated by foreign capital banks, mainly from Austria, Italy, Germany and France. This is why the Chinese participation on the bank market from Western Balkans states is still limited to the opening of the first branch of Exim Bank in Serbia, in 2016 (the market share is smaller than 1% from all the 2017 bank assets). All in all, the Chinese banks are not currently targeting the financial transactions market, but they are aiming at loaning directly to the governments in the region for investments in infrastructure, highways and railways (Serbia, Montenegro, North Macedonia) or in energy and utilities (BIH and Serbia). Usually, loans from Chinese banks are loans offered based on some conditions mentioned in contracts and on a base rate between 2%-3% for a 20-30 years period.

Meanwhile the conditions imposed in the contract can seem attractive, the effects on the economy are seen as limited, because the Chinese companies are usually using, in the projects they commit to, their own workers and materials, rarely relying on local resources exploitation. A study made on the loans offered between 2013-2015 shows that 70% from the loans had the condition for at least one part of the funds to be used for the acquisition of Chinese equipment and for the use of China labor force.

Hence, China’s economic influence in Western Balkans could generate some risks also for EU, especially by increasing the dependency on Chinese loans, an aspect mentioned also in Munchen’s Security Conference report, from 2019. Given this context, there were highlighted the debts four Balkan states have, Montenegro being in the top of them, to China, which was estimated to 39% from the total foreign debt. An 809 million euro loan dedicated to extend a highway towards Serbia has determined the Montenegro’s debt increase to 80% from GDP.

North Macedonia has the second place regarding the debts on Beijing, one fifth from its foreign debts coming from loans from China. The other two Balkan states to have debts to China are Bosnia and Herzegovina, with 14% from the total foreign debts, and Serbia, with 12%.

In such circumstance, it is important to highlight that, with the influence Beijing has in the implementation process of different projects that need important investments, it can convince the leaders of some Western Balkans states to direct their hopes towards China, instead of focusing on increasing the EU strategies implementation for a concrete European future.

Conclusions

China’s role increase and consolidation in Western Balkans is creating multiple and different consequences for EU. Therefore, the European leaders must carefully work on EU’s strategy in Wester Balkans and offer governments in this region the certainty feeling regarding integration, but also to act in order to increase the certainty and predictability feeling for all countries in the Western Balkans.

EU must reconsider its policy for the Western Balkans to combat China’s increasing influence, considering many aspects:

  • Balkan states must be supported and counselled in order to have a clear and concrete vision on the EU accession, including the political conditions and obligations, as well as the EU political, and economic-financial norms and tools they must assume. It became really clear that part of the Chinese financial resources are tempting and uppermost accessed because countries in the Western Balkans do not have many opportunities to access EU cheap funding (even non-refundable) for the infrastructure projects, despite that certain pre-accession funds should be made available and be effectively used to that end;
  • It is necessary for the European companies investments to be uppermost promoted in the Western Balkans, because with the contribution they get for the labor force in the region and the use of some material resources made by local factories it can be stimulated trust’s growth and EU’s image improvement for the societies in the area;

EU must intensify the concerns not only about how China will use the Western Balkans region as an entry to the European market, but also about how and how fast could Beijing try to promote its own political model in countries to have a certain instability and vulnerabilities level in the governing process, a promotion which could disfavor EU’s liberal democracy model.

Given that EU will be more and more divided and will need to solve many domestic issues, the integration process of the entire Western Balkans region could become unrealistic, which would be an opportunity for China, and not only, to occupy an unstable space to have also a lot of weak points and vulnerabilities.


[1] Michal Makocki, a former senior analyst across EU Institute of Security Studies, in charge with China’s issues.