COMMENT: Is the Balkan Silk Road a force for good (governance)?

COMMENT: Is the Balkan Silk Road a force for good (governance)?
Chinese Premier Li Keqiang with Serbia's then prime minister (now president) Aleksandar Vucic in Belgrade in 2015.
By Adam Urosevic of ViennEast March 7, 2018

Primarily interested in the Western Balkans’ geographical position as a gateway to the European market, China has over the past few years become a prominent player in the region through its state-led loans and investments in large infrastructure projects. Despite being much welcomed by a region in urgent need of capital, Chinese investments and policies along the “Balkan Silk Road” not only risk public resentment and unsustainable debt on local governments, but could undermine political determination for crucial reforms required for EU accession. Since it is in China’s own economic interest to ensure political stability in the Western Balkans, it should cooperate with the EU’s reform agenda and improve transparency and accountability along the Balkan Silk Road. 

With an export-driven economy and more than $3 trillion in foreign exchange reserves, China is aiming to offset slower economic growth and overcapacity at home through its Belt and Road Initiative (BRI) — a mixture of infrastructure networks, land and maritime routes from China across the Middle East, Africa and Europe. The Balkans represent, in this respect, a passage to the final and potentially most lucrative destination of China’s modern-day Silk Road: the Western European market. Brussels has already responded to China’s increasingly significant foreign direct investment into member states with a call for EU-wide investment screening procedures. China thus views the so-called Balkan Silk Road as a logistical back road to the EU and has accordingly become a prominent player in the region through its state-led loans and investments in large infrastructure projects (primarily in transport and energy). 

Although the European Commission increasingly perceives China as posing a normative challenge, Beijing has, unlike Moscow, no interest in sabotaging the EU accession process as this would weaken the region’s stability and potentially undermine its logistical link for Chinese exports from the Greek port of Piraeus to Europe and jeopardise a later access to the EU single market.

Much-needed economic boost with strings attached

China’s investment spree is welcomed in one of Europe’s poorest regions given that it lacks crucial infrastructure, is not a prime investment destination and has difficulty implementing the strict and costly requirements required by international lenders such as the European Investment Bank (EIB) and European Bank for Reconstruction and Development (EBRD). Beijing’s loan-based financing, however, risks heavily burdening the region with debt. The most telling example of this has been Montenegro’s decision to cut back on its social welfare plan for families with multiple children due to Chinese loans limiting the fiscal space. Moreover, these loans usually come with strings attached such as nominating Chinese companies as contractors. The Chinese financing of the highly symbolic Friendship Bridge in Belgrade demanded that 60% of the construction be carried out by Chinese contractors. Such conditions not only deny cash-strapped governments the chance to find potentially better and cheaper contractors, but limit positive economic effects in the country and potentially create resentment in a region with high unemployment rates.

Deficient governance: jeopardising an EU future?

While China may not aim to export its ideology, Beijing inadvertently disseminates its preference for state-led investment decisions, which lack accountability and transparency. China’s way of doing business is reflected in the fact that Balkan governments have in most cases so far directly awarded contracts to Chinese firms in diplomatic negotiations rather than through competitive bidding processes that include feasibility studies. In some cases, ad hoc legislation was even introduced in order to facilitate Beijing’s demands. China, of course, is not solely responsible for this. Southeast Europe’s increasingly authoritarian political elites embrace the flexibility, swiftness and top-down nature of Chinese investment decisions. Politicians can align projects with political cycles, serve patronage networks and increase electoral support. 

Consequently, this lack of transparent and open bidding spurs a range of adverse trends such as less efficient public spending due to distorted investment decisions, a weaker legal system due to various exceptions and high-level political corruption. A particularly troubling aspect is the gradual undermining of the region’s reform agenda, especially in the areas of competition policy and governance, and hence the likely delay in the region’s attainment of EU norms. What is more, Beijing’s state-led model, coupled with local decision-makers’ harmful self-interests, could go as far as weakening the governments’ political determination to follow the EU’s lead and jeopardise the region’s eventual EU accession.  

Why improving governance is in China’s interest

Chinese investors may well prefer a lack of regulation and oversight as it allows for more and cheaper work to be done. However, it is in China’s own interest to follow the governance standards set by the EU, as the bloc’s presence and reform agenda are fundamental safeguards of political stability necessary for China’s long-term strategic investments and plans in the region. 

Public opinion in the Balkans is already worsening due to the lack of visible spillover effects from Chinese projects. Complying with EU standards by competing in open bidding processes, which include feasibility studies and allow stakeholders to express concerns through formal channels, will ensure that citizens are not forced to express their anger by causing various problems during the project implementation phase (as has already happened in other countries along the Belt and Road initiative). 

China also risks undermining its strategic aim of creating a transportation corridor. The most glaring examples so far have been China’s infrastructure project bids in Macedonia, which have been marred by allegations of corruption from the outset. These events not only contributed to the country’s political crisis and fall of former prime minister Nikola Gruevski, they also led to the new government blocking any further work on the Kicevo-Ohrid highway amid accusations of a €150mn loss to the state budget. 

China should work together with the EU to improve its investment agreements and financing methods along the Balkan Silk Road. The EU, for its part, should further recognise the high cost of compliance with EU standards and continue to help increase the capacity of local administrations. After all, it is in both their interest to fuel economic growth and maintain political stability in Southeast Europe.

Adam Urosevic is a risk analyst at ViennEast, a business intelligence company specialised in Central and Eastern Europe (CEE).