The Western Balkans, China’s backdoor to Europe

Where most investors shy away from the cash-strapped Western Balkans, China is finding the road it needs to build closer trading ties to Europe. The strategic entry is key to seeing its Belt and Road Initiative succeed.  

By: /
August 17, 2018
A tunnel construction site of the Bar-Boljare highway is seen in the village of Vilac, Montenegro, June 11, 2018./Stevo Vasiljevic

The Western Balkans have a new suitor lavishing the region with attention and flattery, one that is winning the hearts and minds of its people and politicians. It’s not the European Union, nor the United States, not even Russia.

Quietly and with little fanfare, China has been enlarging its economic footprint and strengthening political ties with roads, rail and easy money. Yet the newfound friendship comes at a cost that few local politicians are willing to admit, jeopardizing their countries’ sovereignty and accession to the EU, and saddling them with debts they might not be able to repay. 

In July, the heads of state of 16 central and eastern European countries gathered around Chinese Premier Li Keqiang in Bulgaria’s capital, Sofia. In its seventh iteration since 2012, the ‘16+1’ summits are ostensibly aimed at “intensifying and expanding” multilateral relations between Europe’s east and China. In large part, the summits are a platform for the Chinese state to promote its Belt and Road Initiative (BRI), the ambitious cross-continental network of infrastructure linking Beijing commerce to the heart of Europe unveiled by President Xi Jinping in 2013.

The states of Serbia, Montenegro, Bosnia and Herzegovina, Macedonia and Albania are part of the 16+1 summits, but last February they received the official nod from Brussels to begin the accession process to join the EU as early as 2025 (a date that most experts say is unrealistic). They share many things in common, most of them hurdles: as the poorest countries in Europe, they are mired by anemic economies, high levels of unemployment, corruption, and weak democratic institutions abused by their political elite. Many of these ailments are vestiges of the Yugoslav Wars of the 1990s and their communist legacies.

But for China’s ambitions, the desperate conditions signal opportunity. 

In the last few years, China’s state-owned shipping behemoths, COSCO Shipping company and China Merchant Port Holdings, have been snapping up ports around Europe, such as Italy’s Vado Ligure, Notaum Port in Spain, and Belgium’s northern port of Zeebrugge. These acquisitions fall under the BRI plans but they also underpin China’s geopolitical strategy to increase its influence around the world while decreasing its dependency on foreign elements.

In 2016, COSCO completed its purchase of a majority stake in the Greek industrial port of Piraeus, one of the busiest in Europe. With a port in Europe’s soft Mediterranean underbelly, China gained a strategic foothold in a major global trade hub along the final stretch of the BRI route. “If the Chinese control a port, they can prioritize their own shipping and favour their state-owned companies, granting the owners some control over access,” said Timothy Heath, a senior international defence researcher at the RAND Corporation. According to the port’s annual report, Piraeus’ shipping volume increased over 70 percent in 2017 alone, a figure bolstered by new Chinese and Asian traffic. 

To move the massive amounts of new volume north, China is looking to the Western Balkans as the main corridor for transportation. Where most investors have shied away from the region, the investment-starved Western Balkans are embracing Chinese infrastructure projects, accepting cheap credit and making deals with the new eastern partner to build roads, rail, highways and power plants that China needs to drive the flow of trade to the heart of Europe.

However, unlike EU investments, which still constitute the majority in the region, Chinese credit is not coupled with any environmental, labour or rule of law requirements, nor does it have a development component. It’s quick and easy, which allows for politicians to unveil grand projects and score points with voters. Conveniently, it can be used without restrictions, including lining the pockets of corrupt officials. 

“It’s superficially appealing,” notes Heath. “The advantages are attractive to these governments because [the funding] can be readily implemented, it is readily available with few strings attached, and no cumbersome approval process.”

The downsides to the Chinese approach can prove risky for the region, however — problems that the EU would inherit if the Western Balkans were to join the union down the road. According to Heath, the lack of oversight means that there are few guarantees that projects funded by the Chinese are well thought out, neither in the building process nor in the economics behind them. “There’s a risk that some of these Western Balkan governments could be saddling themselves with major debts they can’t afford,” he said, “signing onto provisions that are not necessarily in their own interest, such as starting work with very weak oversight, high risk of corruption, lax labour and environmental standards.”

"The downsides to the Chinese approach can prove risky for the region — problems that the EU would inherit if the Western Balkans were to join the union down the road."

One of the few conditions of accepting Chinese money is that the projects must be contracted to Chinese construction companies, effectively repatriating the money back to China. These deals are negotiated in backrooms and lack transparency, often negotiated with payoffs to officials and local businesses. Such scenarios have prompted warnings from within other countries, including Canada and the United States, about doing business with China. 

Heath suggests that the fragile democracies and rampant corruption in Western Balkan countries make it easier for China to negotiate these kinds of favourable — some say exploitative — deals for itself. “China is more comfortable dealing with illiberal or authoritarian governments in general because that’s how its own state is organized,” said Heath. “It has very little scruples to enacting deals with weaker environmental and labour provisions and little accountability.”

Set up to fail?

The lack of accountability extends also to these projects’ financial viability. Montenegro, for example, was lured in by cheap Chinese loans and much needed infrastructure projects. To finance a Chinese-built highway intended to connect its coast to landlocked Serbia, Montenegro’s debt is expected to balloon to nearly 80 percent of its GDP in 2018, up from 62.5 percent a year before. 

One significant concern is what happens if these countries can’t repay their debts to China. “It’s very tempting to take all that Chinese money available now,” said Thomas Eder, a China expert at the Mercator Institute for China Studies. “But if the economic benefits don’t actually make up for such a big increase in the debt levels, then this could lead to economic instability.” According to the IMF, Montenegrin debt levels are unsustainable for the country’s small economy, giving China room to come up with more creative ways for repayment.

This scenario has already played out in South Asia along the maritime route of the BRI. Sri Lanka took on large amounts of Chinese credit to develop the port in Hambantota on the southern tip of the island. Struggling to make payments, China negotiated a debt-for-equity swap in 2017 that saw the port and 15,000 acres of surrounding land leased to China for 99 years, a move that critics say threatens the country’s sovereignty. “The danger is that [Western Balkan countries] might develop a certain dependency on China, which could also be used to demand political payback,” warned Eder. “When you look at tiny economies like Montenegro or Macedonia, the Sri Lankan example should really be in their governments’ mind.”

In Europe, China’s economic heft has afforded it another kind of political clout that has already borne fruit. “On issues that require consensus, China can use [that clout] to pressure the right governments on issues it cares about,” said Heath. In 2017, Greece blocked an EU condemnation of China’s human rights record at the United Nations, the first time the EU failed to make such a statement. A year earlier, Greece and Hungary (which also relies significantly on Chinese investment) blocked a strongly worded EU Council declaration on Chinese militarization in the South China Sea. Such divisions could become more frequent on other controversial issues like Tibet, or even in the event of confrontation with the United States as China becomes more assertive on the international stage.

Neither the Western Balkans nor the EU can take a stand that shuts out China entirely, but EU lawmakers have been slow to respond to growing concerns. EU Commission President Jean-Claude Juncker has recently warned of the risks of foreign purchases, pushing to toughen up screening mechanisms to review foreign investments on the grounds of “national security and public order.” The new legislation, set to take effect at the end of 2018, is in all but name a response to China’s acquisitions in Europe. French President Emmanuel Macron reiterated the sentiment by calling for greater unity among Europeans to guard their assets and interests against Chinese commercial expansion. 

“It’s in the interest of all European countries to work together and present a unified front — one that avoids a problem of China practicing a divide-and-conquer approach [to get] what it wants,” said Heath.