For some time now, Romania has been in the grasp of an illusion. It is based on the assumption that countries such as China or the Gulf states have so much cash available that their investment criteria are extremely loose. Much more than the European requirements for granting development funds. To put it differently, they offer a free lunch with no strings attached. This is a huge illusion because, in point of fact, these countries choose very carefully their investment destinations depending on the objectives they have set.
For years we have been hearing about Chinese investors coming in to build roads, viaducts, high-speed railways, ports, nuclear power plants and so on. Nothing has yet come to pass as Chinese investments entail a clear set of benefits: high returns on investment and/or geopolitical advantages to match. Romania`s obsession with Chinese cash seems to bypass the questionable experiences that countries resorting to it went through.
In this context, a recent analysis by the Foreign Affairs magazine shows that the Silk Road Initiative (also known as the “One Belt, One Road Initiative”) is starting to lose its appeal with countries already on board. Since 2017, China has poured over USD 700 bn into over 60 countries for major infrastructure projects or as loans. On the record, the goal of the project is to drive international trade and regional cooperation. Between the lines, though, the clear implication is increased Chinese clout in recipient countries.
Romania’s perception that China’s requirements on the transparent use of money, democratic standards and financial sustainability are not as stringent as in the Western is correct and has already been demonstrated in a series of countries. The issue is that as Foreign Affairs found, that indulgent behavior has fuelled corruption and allowed governments to burden their own countries with unsustainable levels of debt.
Malaysia, Pakistan, the Maldives, Kenya, Uganda or Zambia are countries which, after using funds worth tens of billions of dollars, realized the trap that they were about to fall into by becoming indebted to China beyond any sustainability and by financing corrupt political elites. Some politicians lost elections due to a rise in Anti-Chinese sentiment, while others changed their strategy as they went along, restricting or dropping the Chinese funding altogether.
Foreign Affairs explained how we got to this point. Initially, developing countries showed a great deal of excitement as Chinese investors proved to be less fussy than organizations such as the IMF, the World Bank or USAID, which use financial sustainability criteria, environmental impact studies or anti-bribery filters. Moreover, the cost of Chinese capital was seen as very low.
In reality, however, the cost was higher than that of the aforementioned international financial institutions which indeed were increasingly reluctant to lend amid concerns of excessive debt levels in those countries. The initial thrill gone, the target countries started to become more and more worried about China’s investment behavior manifested as: pushing for dedicated contracts, imposing Chinese business partners, requesting sovereign guarantees.
One of the most noteworthy cases is Sri-Lanka’s which, unable to service its debts, leased its port to China for 99 years. Such developments serve perfectly well China’s intentions to increase its presence in African ports. Early this year, the government in Djibouti abruptly ended a contract with a Dubai operator to run its main port in order to hand it over to China to expand its military footprint in an important geostrategic area, as the Horn of Africa and the Indian Ocean are.
There is now an attempt to replicate the African model in Central and Eastern Europe. The preferred destinations so far have been the countries of the former Yugoslavia some of them, as non-EU states, being under no obligation to hold public tenders. Serbia has made full use of Chinese money. Montenegro, on the other hand, seems to have bitten off more than it could chew. It already owes USD 1.1 bn for a stretch of motorway through the mountains and unless it comes up with another USD 1 bn it risks having the road stop in the middle of nowhere.
China`s strategy in the region has clear-cut objectives which involve an enhanced presence on the outskirts of Europe where plenty of governments foster a nationalist or anti-EU agenda. As the Wall Street Journal noted, we could picture a future where China-made cellphones or cars are shipped by sea and unloaded in a port run by a Chinese company in Greece. They could then be carried up north through Macedonia and Serbia on Chinese motorways and bridges to later end up on high-speed trains built by china in Hungary. Poland, Lithuania and Belarus have already been presented with the idea of having warehouses built run by Chinese businesses. The products could later be bought on Alibaba, the Chinese online commerce company which has expanded its cloud services to Europe using Huawei technologies, an increasingly important presence in the region.
Looking back at the African lesson, Central and Eastern European countries should ask themselves whether they are not just in the initial stages of excitement and whether they, too, will wake up to more corruption and unsustainable debts.
As far as Romania is concerned, disregarding EU funds and looking for outlandish funds in the Middle or Far East does not make sense. At the end of the day which Central and Eastern European countries have developed and achieved headway of at least ten years on Romania with money coming from the Middle or Far East? None. They have all grown first and foremost on European cash.
Which means that our new financing strategy is nothing more than a utopian experiment. In vivo…
Have a nice weekend!
