A van driving along the first section of a highway connecting the city of Bar on Montenegro's Adriatic coast to landlocked neighbour Serbia, (Bar-Boljare highway) near the village of Bioce, north of Montenegrin capital Podgorica, which is being constructed by China Road and Bridge Corporation (CRBC), April 9, 2019. Photo: AFP/Savo Prelevic

PRAGUE – The European Union (EU) on Monday rejected a plea by Montenegro’s government to help refinance a Chinese loan, a denial which could result in the small Balkan state handing over land to Beijing as collateral if it cannot make its first repayment in the coming months. 

In 2014, Montenegro accepted a US$1 billion loan from China’s state-run Export-Import Bank of China (EXIM) that covered roughly 85% of the costs for a quixotic highway project that has been blighted by delays and cost overruns since construction began in 2015. The EU had advised against taking on the loan at the time.

Montenegro’s new government, which took office in December and has openly questioned its predecessor’s close links to Beijing, has spent months appealing for assistance from the EU, with Finance Minister Milojko Spajic being the latest to make a request on Sunday.

Montenegro’s appeal was for the EU to help refinance its debt via a new loan it could use to pay off its Chinese creditors. 

“The EU is already the largest provider of financial assistance to Montenegro, the largest investor and the largest trade partner,” the EU’s foreign policy spokesperson Peter Stano said at a press briefing this week after the bloc rejected Montenegro’s petition. 

“We continue to stand by them, but we are not repaying the loans they are taking from third parties.”

The first link of the Bar-Boljare motorway, which plans to eventually link Montenegro’s Adriatic coast to neighboring Serbia, one of Beijing’s main allies in Europe, is being built by the China Road and Bridge Corporation, a state-run construction giant. 

But costs have skyrocketed from around $800 million when construction began to potentially $1.3 billion by the time it is completed, whenever that may be. Construction has been consistently delayed for years.

The loan is no small sum considering Montenegro’s gross domestic product (GDP) was around $5.5 billion in 2019. 

A bridge section of the Bar-Boljare highway connecting the city of Bar on Montenegro’s Adriatic coast to landlocked neighbor Serbia, which is being constructed by China Road and Bridge Corporation (CRBC), April 9, 2019. Photo: Savo Prelevic / AFP

Montenegro, which split from the state of Serbia and Montenegro in 2006 after an independence referendum, has long applied to become an EU member, which is expected to happen in 2025. 

Its former government aligned closely with Beijing and in return was a large recipient of Chinese investment, though often for financially-questionable development and infrastructure projects. 

China Road and Bridge Corporation was finally awarded the contract to build the first installment of the highway in a private tender, the content of which has never been made public. The new government threatened to do so when it entered office in December but to date hasn’t revealed the deal’s terms and conditions.  

The former government dubbed the highway the “Project of the Century”, although critics of the deal refer to it as a “Highway to Nowhere.” 

The first repayment of the $1 billion loan is due in July, but the Montenegrin government expressed concerns that it won’t be able to pay amid a pandemic-hit economy, which contracted by around 15% in 2020, according to the International Monetary Fund (IMF). 

According to information provided last year to the European Parliament, “in the event of a default on that debt, the terms of the contract would give China right of access to the territory of Montenegro.”

To some, this is the latest example of China’s alleged “debt-trap” diplomacy, in which Beijing is accused of extending high-interest loans to foreign governments for dubious development projects in order to then exert control over recipient nations’ finances and assets when it fails to repay timely the debt.

According to EU figures, Montenegro’s national debt could soar from 65% to around 80% of GDP once its loan from China is fully repaid. In 2018, the former government raised its non-tourism-related value-added tax (VAT) to a consumption-killing 21% to boost revenues. 

Beijing has increased its influence in the Balkans in recent years, particularly with the region’s wealthiest state, Serbia. 

Serbian President Aleksandar Vucic (L) walks with Chinese President Xi Jinping before a meeting at the Great Hall of People in Beijing on April 25, 2019. Photo: AFP / Kenzaburo Fukuhara

In February, Australia’s Sydney Morning Herald alleged that the new Montenegrin president, Milo Djukanovic, had appealed to Chinese investors for leniency on the loan at a forum between China and 17 Central and Eastern European states, known as the “17+1.”

The article asserted that Djukanovic had quoted ancient Chinese strategist Sun Tzu to the Chinese delegates: “If there is no skill in planning, it is difficult to achieve, and if there is no skill in planning, it will fail.”

China’s hyper-nationalistic tabloid Global Times responded in a commentary that Djukanovic had not critiqued Beijing’s lending practices and that Montenegro-China relations have not been impacted by the change in government in Podgorica, the Montenegrin capital.  

In most alleged cases of “debt-trap” diplomacy, a Chinese bank has often stepped in at the last minute to offer up the funds for a financially dubious project that no other lender will touch. 

Indeed, the European Bank of Reconstruction and Development and the European Investment Bank rejected offers to finance Montenegro’s highway project nearly a decade ago. It was only then that it turned to China. 

The Financial Times has estimated that the cost of the initial part of the Montenegrin highway is around $23.8 million per kilometer, making it one of the most expensive road developments in the world. Meanwhile, its economic utility once completed is questionable. 

Chinese lenders have also provided finance for Montenegro’s other questionable economic activities, including a failed attempt at reviving its dying national shipping company.

Last year, before its defeat in a general election, the previous government signed a 54 million euro ($66 million) deal for a Chinese-Montenegrin consortium to build a thermal power plant in the north of the country.

Against EU advice, the former Montenegrin government also provided state guarantees to China’s EXIM bank as collateral for the loan, which means Chinese entities could claim Montenegrin land in lieu of failed repayments. 

Montenegro’s President Milo Djukanovic addresses the media in front of a polling station in the capital Podgorica on August 30, 2020 during parliamentary elections. Photo: AFP/Savo Prelevic

However, it remains to be seen whether Chinese lenders would even want this collateral if Montenegro struggles to repay its first installment of the loan this year. Instead, Beijing will likely partly refinance the loan in order to maintain its leverage over the Montenegrin government for the foreseeable future. 

One well-worn “debt trap” allegation is that Beijing implicitly intends to gain control of land, ports and state-owned businesses that foreign governments offer up as collateral on ill-considered loans. 

However, this collateral often has no real or strategic value for China, especially if foreign state-run firms are saddled with debt and unprofitable. Beijing’s interests are usually better served by maximizing the length of the loan in order to keep the foreign state tied to China through debt obligations. 

Montenegro’s change in government last year — the first peaceful transfer of power in its history, which saw a disparate coalition of opposition parties prevail — has given rise to a more skeptical official view of China’s intentions.

For the EU, its decision not to help Montenegro refinance the debt is more prosaic. On the one hand, it has historically been adverse to bailing out member states — and even more hesitant for non-members like Montenegro — if their governments made poor economic choices. 

Indeed, doing so would set a potentially troubling precedent and motivate regional governments into taking even greater risks if they believe that Brussels will bail them out in the end.

In Montenegro’s case, the $1 billion Chinese loan only pays for the first 44-kilometer installment of the 165-kilometer motorway, with the rest to be financed by the EU through its 9 billion euro ($10.7 billion) Economic and Investment Plan in the Western Balkans. 

On the other hand, by rejecting Montenegro’s appeal for help the EU has squandered an opportunity to roll back Chinese influence in its own backyard in the Balkans, an area of heated EU debate about Beijing’s ultimate intentions.

The $1 billion loan is a proverbial loose change for Brussels, and helping a European state free itself from the often perceived as usurious lending practices of China would have jibed with the EU’s agenda for autonomy from both US and Chinese influence.  

That’s how Montenegro’s politicians view it. “This is a small but easy win for them. It’s low-hanging fruit,” Finance Minister Spajic commented referring to the EU in an interview with the FT on the weekend. 

An under-construction section of the Bar-Boljare highway being constructed by China Road and Bridge Corporation (CRBC), April 9, 2019. The project has been plagued by delays and cost overruns. Photo: AFP/Savo Prelevic

It would also have sent a signal to Beijing of the EU’s interest in guarding its own “sphere of influence” as tensions with China escalate on various fronts. 

In December, the European Commission controversially agreed to terms on an investment pact with Beijing despite internal criticism and appeals from the incoming Biden administration to wait until it took office the following month so the EU and US could cooperate on gaining maximum concessions from China. 

On March 22, however, Brussels imposed sanctions on several Chinese officials relating to their alleged complicity with the “genocide” of ethnic Uighur Muslims in China’s western Xinjiang state. 

Beijing responded within hours by sanctioning several senior EU politicians as well as European academics, a decision that gave ammunition to European “hawks” calling for closer relations with Washington at the expense of Beijing. 

Yet Brussels’ decision to deny assistance to Montenegro points to the EU’s inability to put geopolitics above other concerns, namely its fixation with financial prudence. One can not imagine Washington or Beijing making the same decision if they were in Brussels’ shoes.