Milton Friedman Society
China’s growing influence in Eastern Europe
By Francesco De Luca
Although Chinese funding in Africa is well-received to the general public, the motives that encourage such generous investments are opaque. Many factors drive the Asian power to invest so heavily in the continent, from extending its geopolitical influence to emerging powers in Africa to reaping the fruits of an underexploited market, taking advantage of the abundance of natural resources and cheap and young labor. However, Africa is not the only continent on which China is focusing its attention: the Celestial Empire is also seeking to extend its soft power – a country’s capacity to appeal and attract allies and shape their political choices while avoiding the use of brute force – to Asia and Europe.
In order to achieve this goal in 2013 Xi Jinping launched the One Belt One Road Initiative, a multi-dimensional project whose final goal is to broaden China’s projection of power and create a different international order in which Beijing plays a more decisive role through a grand plan of infrastructural investments in Asia and Europe. The project is two-pronged: on land, through the construction of roads, airports and railways, it wants to foster tighter economic and diplomatic relations between China and Europe, passing through Central and Minor Asia; on water, a series of ports is going to build the Maritime Silk Road, which will connect China to South-East Asia and East Africa. The two routes should be connected to six minor “economic corridors”.
Most of the investments in Asia are made through the Asian infrastructure investment bank and the Silk Road Fund. Through these two tools, China has invested $770 billion from 2013 to 2020, most of which in Asia (49%), followed by Sub-Saharan Africa (21%) and Arab and Middle East (14%). However, even though promises of great investments may appeal to some players, others are wary of the political influence China could gain through tighter economic ties. Brussels, for example, is opposing Chinese investment proposals to retain its impartial position on China's policies, as the EU is the end destination of the One Belt One Road Initiative.
Aware of this, China sidesteps the Western European market to attain its goals of gradual political expansion in Europe. Since the region is developed enough to not be enticed by inflated promises of wealth, China targets Europe’s Achilles heel, namely the small central and eastern European countries. These countries, unlike Germany or France, lack solid economies, and some are not even part of the European Union, which in similar cases protects its members from the international actors who leverage their earnings at the expense of other countries’ resources.
China’s first official attempt to improve diplomatic and economic relations with eastern Europe traces back to 2012, when, under the push of the Chinese Ministry of Foreign Affairs, China and 17 Eastern European countries founded the “17+1” initiative, which aimed at fostering cooperation among the nations involved. Since then, China has financed the construction of many key infrastructures in this region, from the Budapest-Belgrade-Skopje-Athens railway, which will connect the Chinese-controlled port of Piraeus in Athens to central and eastern Europe, to Bosnia’s largest coal-fired plant, which is going to be renewed and expanded thanks to Chinese funds, a large coal-based electricity plant in Serbia and many more.
However, even though the demographic giant has marketed its action in the region as a win-win initiative, it failed to disclose the downsides that tagged along with it. China has given out huge credit to small countries, burdening them with debt obligations that, according to some analysts, are simply unsustainable for them. As a result, their economies will become too dependent on China’s loans, which strengthens its influence over countries that are either very close to the EU borders or within them.
The Asian giant followed the exact same strategy to gain geopolitical power in South-East Asia and Africa. One example is that of the Sri Lankan port of Hambantota, which is just a few hundred miles off the coast of India. To fund the construction of the port the Sri Lankan president Mahinda Rajakapsa took out two loans from the Chinese Eximbank, the first amounting to $307 million and the second to $757 million. However, the investment did not prove itself profitable and by 2014 the port was operating at a loss; at the same time, the country’s foreign debt was increasing steeply, therefore the president Maithripala Sirisena, in a desperate attempt to raise some money and avoid default, resolved to lease out the underperforming asset to China Merchants Bank for 99 years.
Another obscure aspect of this initiative is that Chinese-backed projects are typically awarded to Chinese companies that are suspected of receiving financial support from their government and lack transparency when it comes to revealing financial statements and sources of funding for the infrastructure in the aforementioned areas. Moreover, in China the line between public and private enterprise is, to put it mildly, blurred. Since Xi Jinping took power in 2012, the government has considerably increased its presence in the boardroom of major companies. An important tool through which the government can influence private organizations are the so-called Party committees, which have the specific role of sitting at the table when the managers are making a big decision, helping them to keep in mind the big picture and to allocate resources appropriately, while leaving day-to-day activities for the executives to manage.
However, Chinese investments could also have an immediate positive economic impact by fostering infrastructural development and, therefore, by helping this region’s economy converge with the rest of Europe. After all, Chinese actions in Eastern Europe apparently resemble under many aspects Biden’s ambitious investment plan in the US. According to the American president with this “once-in-a-generation investment” decades of federal investment stagnation will be ended by fixing thousands of roads and bridges and by promoting the shift to cleaner energy sources. However, looking further into the matter, the differences between the American and the Chinese initiatives become very clear. The former aims at fostering “The green transition”, while the latter is funding the construction of coal-fired power plants; moreover, the scale of the two investment plans is extremely unbalanced: the White House’s proposal is to try to revolutionize the US economy through a colossal campaign of investments which should carry a total cost of $2 trillion. Compared to this figure, the magnitude of China’s initiative seems limited: the sum of its investments in the 5 CEE countries with the highest level of Chinese presence amounts to $22.5 billion: while Eastern European countries could benefit from this amount of funds, it is also true that these funds are not going to be enough to substantially boost their economies and end the strong infrastructural deficit that this region suffers.
An example of a country weighed down by foreign debt is that of Montenegro, a small Balkan country that decided to take out a massive one-billion-dollar loan from China in order to build a highway. However, due to the mountainous nature of the terrain, the actual cost of building the road turned out much higher than expected: 44 million dollars per mile of road. On top of that, COVID-19 hit Montenegro’s already fragile economy, and the country is currently unable to repay its debt. In the case of default, Montenegro may be forced to cede sovereignty over portions of its own territory to China, allowing it to extend its control over a region that is, essentially, in the EU’s backyard. To avoid this, Montenegro – which is not an EU member but is nevertheless an official candidate – is asking the EU to help repay its debt, but the response so far has been pessimistic.
As China strives to manipulate ECC’s internal affairs through geopolitical meddling, their stability and decision power crumbles. What’s Eastern Europe’s destiny? Will this region be able to remain economically and politically independent or will it be increasingly in the power of bigger actors? Is joining a bigger organization the only way out? Moreover, what does the European Union want to achieve with Europe? Will it keep neglecting a region that is strategically vital to its stability? The answers to these and other important questions depend on where member countries will decide to stand when it comes to deal with China’s aggressive policies.