The Western Balkans with Chinese Characteristics

In 2012, China and 11 EU countries from Central and Southern Europe and 5 non-EU members from the Western Balkans met in Warsaw, Poland for the first time in a “16+1” format to deepen economic cooperation in the areas of infrastructure as well as information and green technological development. The occasion was marked by the signing of “China’s Twelve Measures for Promoting Friendly Cooperation with Central and Eastern European Countries” and the official launch of the 16+1. Seven years later in Dubrovnik, Croatia, the format has now grown to “17+1” with the inclusion of Greece. Nearly 40 bilateral deals were announced between China and partner countries, which included the opening of credit lines between the China Development Bank and Hungary worth €500 million, Croatia worth €300 million, Romania worth €100 million, Bulgaria worth €300 million, and Serbia worth €25 million.

It could be suggested that this region was in fact an early test case for the Chinese government’s 2013 announcement of its global Belt and Road Initiative (BRI), which envisions land and maritime transportation corridors stretching across and around the Eurasian landmass to Europe. Certainly, there was a strong infrastructure demand signal emanating from the region, which grew frustrated when its needs for new roads, modern ports, and high-speed rail went unmet by Western investment. Having developed the unique, mixed EU and non-EU 16+1 structure, Beijing could claim to be helping to “bridge” the EU and non-EU divide. It also gained a high-profile vehicle to channel a portion of the BRI’s $1 trillion in promised infrastructure investment.

Even before the 16+1 format was created, EU member states in Central Europe have had mixed experiences with Chinese infrastructure investment. The quality of the Chinese materials and construction have been mixed, and local suppliers and labor have not received economic benefits. An example that still resonates within Poland is the failed construction of the A2 motorway by the China Overseas Engineering Group, a Chinese construction giant known as the COVEC Group. More recently, Chinese investment in telecommunications (e.g., Huawei) in this region has been more successful and substantive (including a recent announcement to invest nearly $793 million in Poland in the next five years) but faces increasing skepticism after two individuals, including the Chinese regional director of Huawei in Poland, were arrested and accused of spying for China.

Creating a Chinese Investment Anchor in Serbia

The non-EU Western Balkans members are increasingly targeted for BRI-related projects with the epicenter of Chinese investment being Serbia. In 2009, a “strategic partnership” between the Chinese and Serbian governments was officially established to include economic cooperation. In 2014, Serbia and China signed 13 agreements on technical and economic cooperation, which focused on financial, infrastructure, telecommunications, agriculture, and transport sectors. A decade later in 2019, the China Development Bank concluded an agreement with Serbia’s Postal Savings Bank for €25 million with two further memorandums of understandings between Belgrade and Beijing signed for further construction of road links. In total, infrastructure projects in Serbia are estimated to be around $10 billion.

China’s flagship investment project in Serbia is a €3 billion high-speed railway connecting Belgrade to Budapest, which was awarded to a Chinese firm without open competition. An hour east of Belgrade, China financed and expanded a coal power plant that environmental and health advocates warn will saddle Serbia with a polluting power source for decades. Moreover, Serbia is fast becoming a favored stop along China’s digital silk road, the BRI’s digital dimension. In 2017, the Huawei signed an agreement to set up its “Safe City” surveillance equipment in select Serbian cities. In Belgrade, a surveillance system consisting of 1,000 high-definition cameras across 800 locations will use facial and license plate recognition software linked to a central database for law enforcement.

China’s push into Serbia is about more than hard infrastructure. Complimenting Huawei's expanding relationship with Serbia is the One Thousand Dreams program, which will train 1,000 students across the 16 participating countries. There are currently more Chinese nationals in Belgrade than there are in most European cities, including tourists, businessmen, and employees of major Chinese companies. Chinese language schools are also present, including two Confucius Institutes in Belgrade and Novi Sad University. As part of the Safe City Solution , Belgrade will also host the Huawei Innovation Center for Digital Transformation, making the city a regional leader in digitization and focal point for future Huawei initiatives.

Clearly, China has made Serbia its “anchor” investment in the Western Balkans, and its efforts to create other regional investments are gaining momentum.

What Does This All Mean for the Western Balkans?

Why was Beijing so interested in Central and Southern Europe and the Western Balkans and why were the majority of Chinese infrastructure and technology investments concentrated in the five non-EU countries of the Western Balkans? To better understand China’s position, it is helpful to break this analytical question down into means, motive, and opportunity.

The ability for China to pursue these large investment opportunities lies in both the poor investment climate in the Western Balkans as well as in the shifting geostrategic environment. The Western Balkans represent fertile soil, characterized by economic stagnation, weak governance, corruption, and high unemployment rates on which BRI and Chinese state-owned companies can easily put down roots. According to Freedom House measurements, Serbia, Montenegro, and Bosnia and Herzegovina all saw a decline in their freedom index from 2018 to 2019. Only North Macedonia and Kosovo earned small improvements, but all 5 countries scored between 53 and 65—with 100 being the freest and 0 the least. Similarly, youth unemployment in the region was 35 percent in 2018, more than twice the EU average. While some EU member states in Central Europe also share these characteristics, the EU can be selectively more bureaucratically intrusive in member states.

From China’s perspective, these conditions represent opportunity. The need for significant investment combined with a lack of competition from other foreign companies who are deterred by the questionable business environment and practices favors China. The fact that China has 7 out of the 10 largest construction contractors in the world, many of which benefit from state subsidies and scale, is an advantage. Additionally, China benefits from its large banks including the Export-Import Bank of China and the China Development Bank, which are willing to engage in riskier economic and political environments.

Although Western Balkans states want to join the European Union, they know this path is far off, but elections are always near. In other words, there is an even greater need for economic renewal and an economic injection particularly for those leaders who have been in office for long stretches and require new political legitimacy. Chinese investment often does not require environmental assessments, transparency, or market viability, which are Western criteria for investment.

Geopolitically since the 2008 global economic recession and subsequent migration crisis, leaders in the Western Balkans perceive that the West is internally focused and consumed allowing China to assume a more prominent global economic role. However, economic data does not bear this out. The European Union remains the largest provider of assistance to the region, and since 2007, the European Investment Bank has financed projects totaling €7 billion. Ultimately, Beijing reaps the commercial and political rewards of lavishing attention on an important but often-neglected region.

While exporting industrial overcapacity was a strong motivation behind BRI’s global design, it provides avenues for Beijing to exercise political influence, crowding out the United States, the European Union, and potentially in the future, Russia. In the longer term, Chinese engagement with the region and EU candidate countries may prove to be strategic should it produce greater future access to the European market. But with China’s growing economic role comes a political price for the bilateral relationships. For example, states were pressured by Beijing not to attend the State Department’s Ministerial to Advance Religious Freedom or support an effort to criticize Beijing’s treatment of its Uyghur population.

China’s opportunity to take meaningful diplomatic and economic steps toward Serbia and the region began in the 2009 timeframe with the onset of the global economic crisis. A decade later, China has substantially enlarged its infrastructure and technology footprint across the region, which increases Chinese market access to approximately 18 million people. This growing economic footprint also allows for a dramatic increase of Chinese nationals and tourists travelling to the region and encourages greater cultural ties with university scholarships and other people-to-people exchanges. Although citizens in the region are beginning to ask questions about China’s growing economic and tourist presence, Serbian government officials in particular do not yet share their concerns. Officials need the investment and the technology to demonstrate economic vitality and diplomatic relevance without Western strings attached. Among regional leaders who are vulnerable to domestic political rivals, China could be seen as a safer and more reliable interim partner unless and until the geopolitical winds shift again toward the West.

Through means, motive, and opportunity, China's expanding economic footprint and political avenues of influence in the Western Balkans have deepened, widened, and continue to emanate from Serbia with profound implications for the region’s economic development and long-term dependency.

Heather A. Conley is senior vice president for Europe, Eurasia, and the Arctic and director of the Europe Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Jonathan E. Hillman is a senior fellow with the Simon Chair in Political Economy and director of the Reconnecting Asia Project at CSIS. Matthew Melino is a research associate with the CSIS Europe Program.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2019 by the Center for Strategic and International Studies. All rights reserved.

Heather A. Conley

Jonathan E. Hillman

Matthew Melino