Political and financial conditions for infrastructure investments of China and EU in the Western Balkan countries

This contribution is part of the book “The Dragon at the Gates of Europe: Chinese presence in the Balkans and Central-Eastern Europe” (more info here) and has been selected for open access publication on Blue Europe website for a wider reach. Citation:

Stojadinovic, Sonja, Political and financial conditions for infrastructure investments of China and EU in the Western Balkan countries, in: Andrea Bogoni and Brian F. G. Fabrègue, eds., The Dragon at the Gates of Europe: Chinese Presence in the Balkans and Central-Eastern Europe, Blue Europe, Dec 2023: pp. 125-156. ISBN: 979-8989739806.

1. Introduction

The beginning of the Chinese mega project entitled One Belt One Road initiative (OBOR), or Belt and Road Initiative (BRI) in 2012, announced a new era of Chinese presence on almost 4 continents and in 70 states. In addition to investments in construction of road and railway infrastructure, oil transportation and maritime connections between Asia and Europe, China has also increased its presence in Africa and South America. The financiers of the Silk Road Economic Belt and the 21st century Maritime Silk Road are the state Asian Infrastructure Investment Bank (AIIB), Silk Road Fund and EXIM Bank (Export Import), China Development Bank (CDB), all of them owned by the Chinese state. Most of investments are executed by Chinese state-owned enterprises (SOE) (Zweers et al., 2020)^[1].

China’s presence in the European Union (EU) and in the Western Balkans (WB) is most visible in its major investments. The most outstanding among the EU investmenst are those in the Greek sea ports of Athens and Thessaloniki and the Italian seaports of Trieste and Genoa. China has also expressed interest in the Croatian shipyard Rijeka and invested in the construction of the bridge Peljeshac in the southern part of Croatia. In the Western Balkans, it has invested in the Serbian steel company Zeljezara Smederevo, in RTB Bor copper mine in eastern Serbia, in the railway line Belgrade-Budapest, and several motorways in North Macedonia. The investment in the Greek ports as crucial transport hubs is part of the Chinese network Land and Sea Express Route (LSER) Europe, which has the goal to connect these Greek ports with the Western and Central European markets (Charokopos, 2021)^[2]. There is also a Balkan Silk Road initiative to connect Beijing with Athens, as well as with Belgrade, Sarajevo, Skopje, Budapest, and Tirana thereon (Dimitrijević, 2017)^[3].

The conditions that China sets in order to engage in investments are not only financial, but political too. Because it realizes these investments mostly through State Owned Enterprises (SOE), the engaged states have to accept Chinese capital, machinery and labor. The political conditions include the requirement that the engaged states are members of international organizations and that they respect the “One China” policy that dismisses the recognition of Taiwan as sovereign state independent from China (Vangeli, 2019)^[4].

The approach that China implements with its new economic allies, especially with the African countries, is the so-called ‘five NOs’ approach. This includes a set of principles of political non-interference in the internal affairs of the countries recipient of finances, no political strings attached to the Chinese assistance, no selfish political gains to be pursued via the investment and financing cooperation. Furthermore, China follows these principles, not only in the bilateral and multilateral cooperation of China with African countries, but also in its relations with Western Balkans.

The WB countries enjoy different status with respect to their EU membership aspirations. Serbia and Montenegro have opened their accession and negotiations chapters, while the negotiations with Albania and North Macedonia started in July 2022. Bosnia and Herzegovina has a candidate status and Kosovo is a potential candidate country. In order to achieve full EU membership, WB countries have to fulfil a long list of standards, both political and economic, organized in clusters. Some of these EU conditions, coupled with the EU’s principle of consensus among its member states for decisions on the status of (potential) candidate countries, leave ample space for a practice of nationalism and political degradation in the negotiation and integration process. Blatant examples are the requirements imposed on Republic of Macedonia to change its name into Republic of North Macedonia to resolve the decades-long issue with Greece and the Western countries insisting on Serbia recognizing Kosovo’s independence. The failure to fulfil these imposed political requirements has negative implications on the EU membership path of the WB countries and on EU’s investments in the WB. On one hand, as Stamouli (2021)^[5] observes, some high-level WB politicians argue that China is actively filling this void created by EU by providing the much-needed funds for infrastructure investment. On the other, the limited or no access to the EU structural funds and the complicated terms and conditions for loans from the EBRD have also been pushing the non-member states into Chinese hands (Bastian, 2017)^[6].

The comparison between the Chinese and EU approaches to their political relations with other countries and the manners in which they, as global forces, view international and internal relations, leads to the conclusion that their views are quite different. When Chinese talk about democratization, they focus on the responsibility, responsiveness and accountability of the government authorities. When it comes to Europeans, their view is quite the opposite. For Europeans, democratization entails free civil society, rule of law and respect for civil rights. While China promotes the principle of state sovereignty and non-interference, the EU lays emphasis and relies on economic sanctions, obligation to protect rights, and humanitarian intervention. This is the fundamental difference between the EU view that the purpose of institutional engagement is the harmonization of norms, rules and legal order, and the Chinese view that norms are specific and the purpose of institutional cooperation is the mutual benefit (Christiansen, et.al, 2013)^[7].

The Chinese approach of establishing bilateral and multilateral cooperation is primarily executed via the 17+1 initiative, through which China cooperates with and invests in the Central and Southern European countries. It is important to note that China does not have open questions with any of these countries and cultivates mutual cooperation (Mitrović 2019)^[8]. The norms promoted by Chinese regional platforms reflect the ongoing effort to unify the Third World as a community with shared interests. This narrative can be followed back to Bandung 1955, when the Non-Aligned Movement was founded and the Five Principles of coexistence were established (Kowalski, 2017)^[9]. As some of the 17+1 countries were members of the Non-Aligned Movement (the former Yugoslav countries), they are familiar with these principles and therefore find it easy to connect with China.

Despite the efforts to invest and establish a fruitful cooperation with the Central Eastern, and Southern European countries, including the WB countries, the Chinese capital in forms of loans and investments has been labeled “corrosive” capital and “debt trap”. An anti-China campaign was launched, stepping up a hysterical drama that China will confiscate property of the states that receive Chinese finances if they fail to repay their loans. This myth has since been debunked (Brautigam, 2020)^[10], but another situation has arisen due to this Chinese financial activity. The projects financed by China are perceived as attractive and less time-consuming because of the lack of checks and balances. Their absence, however, leaves room for corruption and misuse of funds, which is a downside of the Chinese approach in general, with its non-interference policy that exempts the country from any responsibility in all cases of misuse of funds (Krstinovska, 2021)^[11]. Additionally, the failure of the Chinese companies to implement environmental standards in their investments in Serbia lead to worsened air and soil pollution. The copper mine Bor acquired by the Chinese Zijin Mining and the steel mill in Smederevo acquired by Hesteel in 2016 have been listed as dark examples of high-profile polluters (Prelec, 2012)^[12].

Although the status of the WB countries is different, regarding their EU membership aspirations, they all have to fulfil a long list of political and economic requirements and they have to achieve complete alignment with the EU legislation. The challenging EU membership conditions in several cases have been made even harder with the addition of bilateral political disputes between some EU member countries and those that are still in the association or negotiation procedure. The fusion of political and financial requirements, such as the requirements for rule of law, environmental standards, fiscal responsibility with bilateral political issues has created a situation that has made WB countries shirk from their EU membership aspirations. Such was the case with the name issue between North Macedonia and Greece, or the pressure on Serbia to recognize Kosovo as an independent state, or Bulgaria’s denial of Macedonian identity (Krstinovska, 2021)^[13]. Furthermore, since 2007, WB countries can access the IPA funds (Pre Accession Instrument) that offer loans and grants for infrastructural investments, but the complicated procedure for applying and the lack of professional staff to plan and implement the projects have contributed to a very low utilization in the two cycles (IPA I and IPA II) (Knežević, Kacarska, Jurukovski)^[14],[15].

In other for these WB countries to achieve further progress in their EU negotiation and association process, some academics have recommended that the Chinese projects comply with the Berlin process (Svilanović, 2020)^[16]. The aim of this recommendation is to help make the agreements with China more in line with the EU standards and legislation. Some alternative solutions have been offered in a form of a better access for the WB countries to EU structural funds and funds that are now available only to EU members, increased cooperation with China and creation of an alternative for BRI, something like an “European Silk Road” (Grievson, 2020)^[17]. Another fact that EU has to take into consideration when it comes to the Chinese presence in Europe and WB is the general approach of EU institutions in relation to WB. The Chinese approach revolves around terms such as partnership, togetherness, mutual future, and establishes bilateral relations, unlike the more general and regional EU approach that is more paternalistic and “one size fits all” oriented (Pavlićević, 2019)^[18]. Additionally, in its approach to WB countries, China elevates them to its level and sees them as equal partners. Such relations are not yet possible between the WB and the EU (Vangeli, 2019)^[19].

2. Chinese infrastructure investments in WB and their political and financial conditions

The WB countries are the main destination for the Chinese infrastructure investments. They make up 79% of the total funding in the Central, Eastern and Southeast European countries. All WB countries, with the exception of Albania, have implemented Chinese projects through concessional loans and grants, funded by the Chinese Exim Bank and Chinese Development Bank (CDB). Some governments have marked these projects as matters of national significance, including the construction of highways in Montenegro and North Macedonia, or the construction of thermal power plants in Bosnia and Herzegovina and Serbia (Krstinovska, 2021)^[20]. However, the implemented Chinese grants in WB are still less significant in comparison to the EU grants implemented in a course of a period of two decades (2000-2020). The amounts granted by China can be measured in millions of EUR, while the amounts granted by the EU can be measured in billions of EUR (Krstinovska, 2022)^[21].

The cooperation between North Macedonia and China started long before the launching of the BRI, in 1994, with the Chinese loan of USD 80 million for the construction of the thermal power plant Kozyak. In 2013, North Macedonia borrowed EUR 714 million from China’s Exim Bank for the construction of two motorways: Miladinovci – Štip and Kičevo – Ohrid. The full amount of loans for the construction of these two highways was USD 10 billion. This amounts to almost 14 percent of the current 2020 level of government debt, which stands at EUR 5.2 billion (Zweers et al., 2020)^[22]. The constructor engaged to build these highways was the Chinese company Sinohydro. The motorway Miladinovci-Štip is in use, but the motorway Kičevo-Ohrid, some 57 km in length is only half-finished. These Chinese investments were overshadowed by a huge corruption scandal in which the government of VMRO-DPMNE (2006-2016) was embroiled and during whose term these loans were purchased. The scandal was related to the government’s decision behind closed doors to assign the construction of the motorways to the Chinese company Sinohydro instead of previously selected companies and in breach of the Macedonian legislation that is largely harmonized with the EU legislation. To support its decision, the government adopted three special laws that regulated construction of these two highways (Official Gazette, 2013)^[23].

As a member of BRI and the 17 + 1 Initiative, North Macedonia is an important hub for the Chinese Land-Sea Express Route that will connect the Greek port Piraeus in Athens with Budapest via highways and expressways. To contribute to this plan, the company Sinohydro was engaged in the construction of the Kočani- Krupište Expressway. In 2014, North Macedonia bought six electric trains from the Chinese CRRC Corporation Ltd for around 25 million euros (about USD 29 million) in order to advance its railway infrastructure facilities. The purchase agreement was supported by loans from the EBRD (Rail Journal, 2015)^[24]. In 2017 in North Macedonia four diesel multiple unit trains and two electric multiple unit trains arrived in the state. Both types of trains were purchased from the Chinese Company CSR. Additional data shows that in the 2019-2021 period the Chinese company PEARL CA became the biggest client of the Macedonian state-owned company in the logistic sector. This company is owned by the Chinese state-owned mega-company COSCO (Metamorphosis, 2023)^[25].

The Chinese presence in Bosnia and Herzegovina is exercised through the Chinese construction company Sinohydro, engaged for the construction of Banja Luka-Mliništa highway. A loan to the amount of EUR 600 million was contracted for this purpose in 2016, but the construction is yet to begin. In addition to this investment, Bosnia and Herzegovina has received loans from China for two energy projects, the Stanari coal plant and the Tuzla lignite power plant, which amounts to a total debt of EUR 1.1 billion. This is 13 percent of Bosnia’s total external debt. In May 2020, the government of Republika Srpska (one of the two political entities that constitute Bosnia and Herzegovina) signed an agreement with China Gezhouba Group, part of the Chinese state-owned conglomerate China Energy Engineering Corporation (CEEC), to build a large-scale hydro power plant in the south of Bosnia and Herzegovina (Zweers et al., 2020)^[26].

The first more significant Chinese infrastructure investment in Serbia was the construction of the bridge “Mihailo Pupin” on the river Danube in the City of Belgrade. The Exim Bank granted a loan for 85% of the costed project value (assessed at USD 260 million) with 3% interest rate and with a repayment period of 15 years. The construction of the bridge lasted from 2011 to 2014, executed by the Chinese SOE Bridge and Road Corporation (Xinhuanet, 2020)^[27].

An additional loan of EUR 1.08 billion was raised to invest in the construction of the two sections of the Belgrade – Budapest railway, EUR 538 million were borrowed for the construction of the Kostolac B3 coal power plant. This amounted to 7.91 per cent of Belgrade’s EUR 24.5 billion government debt, which is almost equal to what Serbian government owes to the EIB, or to half of the Serbian debt to the International Bank for Reconstruction and Development (IBRD) (Zweers et al., 2020)^[28]. Other Chinese loans were used for infrastructure investments. Miloš the Great Motorway (Corridor 11 – sections Preljina-Požega-Boljare-Valjevo) 2013-2019: this project is now completed at a cost of EUR 2,628 million. The modernization of landline network for Telekom Serbia in the period between 2016-2017 was completed at a cost of EUR 128 million and realized by Huawei. The Belgrade bypass (Ostružnica-Bubanj Potok) was completed in the 2018-2021 period with a loan of EUR 184 million and constructed by Sinohydro. The modernization of railway sections along Corridor10 was contracted in 2020 and is ongoing, with a loan of EUR 760 million, constructed by Chinese CRBC. A motorway in the Fruška Gora corridor (Novi Sad-Ruma), is contracted for the 2020–2024 period, with a loan of EUR 606 million, and the construction company is Chinese CRBC (Krstinovska, 2022)^[29].

The membership in NATO has not been an obstacle for Albania to cooperate with China and receive loans. The Albanian debt to China was EUR 13.7 million in 2010 and EUR 1.6 million in 2019. The most important project was the agreement to construct a new hydroelectric plant known as the Bushat Hydro power plant on the Drin River in northern Albania. For the construction of the plant, China gave USD 126 million to Albania under a bilateral financial agreement as a loan to be repaid over 12 years with 3.5% interest rate (AidData, 2020)^[30].

Montenegro’s sovereign debt to China is the highest in the region. China’s Export – Import (Exim) Bank financed the construction of the Bar–Boljare highway and purchased a loan for four ships in the 2010-2014 period to the amount of 89.5millions EUR. As of 2019, Montenegro’s debt to China is EUR 671 million, which is 22 percent of its total foreign debt of EUR 3.1 billion, its total foreign debt standing at 63 per cent of its Gross Domestic Product (GDP). China is the second largest lender to Montenegro and it is the single largest bilateral lender (AidData, 2020)^[31]. Although in many research papers and analyzes Montenegro has been labeled a victim of of the Chinese debt-trap diplomacy, Brautigam (2019)^[32] dispelled this myth. She and her team created a database for more than 3000 projects financed by the Chinese banks, listing that only the Hambantota port in Sri Lanka^[33] as an example of a defamatory campaign against BRI. Furthermore, China’s non-interference approach leaves the accountability for its funding to the governments that accept Chinese funds (Krstinovska, 2020)^[34].

The political requirements of Chinese loans and investments are deeply rooted in the non-interference policy and the approach leading to mutual benefit and cooperation between the world and China (Krstinovska, 2021)^[35]. Although China leaves the impression that it is a passive lender not insisting on great controls over its money with its non-interference approach, Chinese officials hold the officials of the cooperating countries in all the continents where the BRI is present in high regard and apply strict control over their finances (AidData, 2020)^[36].

When it comes to the financial requirements, the list is slightly longer. The agreements set the requirement to have the projects realized by Chinese companies that employ Chinese workers and use Chinese materials (Zeneli, 2019)^[37]. The lending conditions of the Chinese state-owned lenders differ depending on the loan. The China Exim bank loan conditions for concessional loans are in the line of 2-3% of interest, a 20-year maturity, a 5-year grace period, while the conditions for buyer credit loans are the standard LIBOR rate plus 3-4%, 10–15-year maturity, a 3–5-year grace period. For both types of loans, the governing law is the Chinese law and the creditor’s policy can change in and event of default. The conditions that the CDB are different from those that China Exim bank offers. The interest rate is the standard LIBOR rate plus 2-3%, a 15-year maturity and a 3-year grace period, while the governing law is the English law and the creditor’s policy falls under the condition of Force majeure in an event of default and a broad cross-default clause. The conditions offered do not differ much from the conditions of the European Investment Bank (EIB and the IBRD)^[38]. These two Chinese banks are listed as an example for their lending conditions because they offer the majority of loans in the WB countries.

The BRI loans tend to reflect the Chinese policy of non-interference and no loan documentation has imposed any political, governance or economic requirements as conditions for financial assistance. Furthermore, the analysis showed that Chinese official financing is less concessional than the World Bank financing although they have less generous grace periods and shorter maturity lengths. Again, the Chinese loans have some degree of concessionality that explains their attractiveness in comparison to the other financial sources on the market (Morris, Parks and Gardner, 2020)^[39].

3. The European Union infrastructural investments in Western Balkan and their political and financial conditions

Although WB countries have different status and speed in their path to full EU membership, this path is neither steady nor smooth. Unfortunately, this accession process starts slowly and painfully and not all WB governments are prepared for it. In 2014, in order to speed up the accession process, the Berlin process initiative was established. The aim was to improve regional cooperation among the WB countries, to solve the existing issues concerning infrastructure and economic development, and to introduce a new practice of the EU enlargement process. The Berlin Process proceeded with summits in Vienna in 2015, Paris 2016, Trieste 2017, the UK 2018, Sofia 2019 and Zagreb 2020. The Berlin Process, as a new enlargement instrument, worked as a radar that offered solutions for the infrastructure gaps and economic vulnerabilities of the WB countries. The EU supported the development of infrastructure in the region with its IPA II for the 2015-2020 period. The IPA II funds earmarked EUR 1 billion for co-financing of infrastructure investments. Additional funds, mostly loans are available from a number of international financial institutions (IFIs). The WB countries are also integrated in the Trans-European Network plans (TEN-T) (Holzner & Schwarzhappel, 2018)^[40]. These plans cover the infrastructure in the entire EU, including the investments in the WB countries. Additionally, the WB countries have access to EU funds via WBIF (Western Balkan Investments Framework) where several different banks offer loans and grants for infrastructural investments. The banks that cover the WB countries within this Framework are EBRD, KfW, EIB.

Compared to the EU members, the WB countries have a low or average range of motorway density. Only North Macedonia has achieved a level that can compare to that of the Czech Republic. As EU member states, Croatia, Slovenia and Hungary have higher motorway density than the rest of the WB countries (Holzner & Schwarzhappel, 2018)^[41].

Although this data leaves the impression that WB have a dense road network, the data also indicates that WB has 54km per 100 sq. km of land. This is low in comparison to the 126km in other Central and Southern European countries. (WeBalkans, n.d.)^[42].

This situation of underdeveloped roads in the WB clearly demonstrates the necessity for planned and mutually connected and beneficial investments. As part the Berlin Process, the infrastructure investments are to be realized via the Western Balkan Investment Framework (WBIF). The main corridors that will connect WB with the EU are the north-south corridor X that will connect Croatia with Greece, going through Serbia and North Macedonia, and will have additional stretches to Hungary and Bulgaria (Xb and Xc). The next important corridor is the east-west corridor VIII that will connect Albania with North Macedonia and Bulgaria with a motorway. This connection, called Via Carpatia, is financed with EUR 22.9 million (Lachert and Kaminski, 2019)^[43].

WBIF also finances the construction of Route 7 connecting the southern Serbian town Nish with Kosovo and Albania. The EU support for Serbia generated around EUR 41.4 million allocated for the construction of a motorway to Kosovo as part of the Eastern corridor. Additional EUR 13.7 million have been granted for Eastern railway link between Montenegro and Serbia. Other routes that have been financed through this financial instrument are Route 4 in Montenegro and Routes 1 and 2 connecting Croatia and Albania via an Adriatic-Ionian highway. This highway costs EUR 42.1 million. Route 6 has been financed in Kosovo to connect Prishtina to Skopje. Other routes and corridors financed by the WBIF are Corridor Vc and Route 2a in Bosnia and Herzegovina to the amount of EUR 27.7 million (European Commission, 2020)^[44]. The total cost of the project is estimated at around EUR 155 million (excluding taxes and VAT), for which sum two loans have been obtained from the EBRD (EUR 72 million) and EIB (EUR 80 million). The railway sector participates with the Rehabilitation of the Rail Route 10 project as part of its comprehensive network. The overall cost of the project is EUR 194 million, of which 50 percent financed by the WBIF, starting from the N. Macedonian border to the Serbian border. It will allow for an increase in the speed of travel up to 100 km per hour and will provide safe conditions for passenger and freight traffic (Lachert & Kamiński, 2019)^[45].

The political and financial requirements of the EU for WB countries regarding their infrastructure investments are closely intertwined. The political requirements that the WB countries need to fulfill to be eligible for loans from the EU’s financial institutions are closely related to the harmonization of their national legislation with acquis communitaire (the body of the EU laws that must be adopted by the candidate countries as a prerequisite for their accession). In addition to the general political requirements issued by the EU regarding legislative harmonization, in its document on the ‘Political aspects of the mandate of the EBRD’^[46], this institution furtherly specifies its purpose: “The purpose of the Bank shall be to foster the transition towards open market-oriented economies and to promote private and entrepreneurial initiative in the Central and Eastern European countries committed to and applying the principles of multiparty democracy, pluralism and market economics.” Additionally, the Board of directors of EBRD holds a right to suspense or cancel the financial services if the country recipient does not comply with the political aspects of the Bank^[47]. This is one of the examples of strong connection between the political and financial conditions for infrastructure investments in forms of loans and grants from the EU banks and institutions.

The financial terms and conditions for the loans issued to the WB countries vary and depend on the financial institutions that are granting the loan. In order to offer a clearer picture of the lending conditions, the analysis focuses on each bank and financial institution separately. However, as the banks are not obliged to disclose information on the financial terms and conditions of specific contracts with external entities, the data presented here is collected from the lenders’ websites.

The EU banks that offer grants and loans for WB countries are EBRD, KfW and EIB. The conditions of EBRD are as follows: Euribor regulates the interest rate plus 1.3%, 30-year-long maturity determines the duration of the loan, and the governing law is the borrower’s law. According to the data from the EBRD’s official website, the bank finances the private sector under the following lending conditions: a minimum sum of EUR 5 million; a fixed floating rate; short-term to long-term maturities from 1 to 15 years; project specific grace periods where necessary. EBRD’s policy of lending stipulates that the projects have to contribute to the improvement of the quality of life of the country’s citizens. As far as the guarantees requested from the beneficiary countries are concerned, the terms and conditions are as follows: if it approves the loan, EBRD usually demands from the company to secure the loan, because of the large amounts of the approved loans and their relatively long repayment periods. The securities can include mortgaging of immovable property, land, facilities and other buildings, lien on movable property, equipment and other business assets, lien on the company’s deposits in hard currency and earnings in the local currency (Hadžić & Košutić, 2019)^[48]. In any case, it is clearly stipulated that the detailed loan conditions are always bilaterally negotiated with the borrower country. This means that the terms and conditions vary from country to country and that they are not fixed conditions like the conditions of the Chinese loans. Furthermore, the loan contracts are not always publicized by the borrower country, while the banks (this applies to EBRD too) are not bound to exercise this form of transparency.

The conditions offered by the EIB differ slightly from the conditions offered by EBRD and the interest rate is 2.25%; the maturity period of the loan is 25 years; the grace period is 5 years; and the governing law is the French law. The EIB’s official website lists the following conditions: all loans offered to the public sector entities are for financing of single large investment programs. The loans must amount to at least EUR 25 million and have to be in line with one or more EIB priorities. The EIB priorities are the climate and environmental sustainability, infrastructure, innovation and skills, small and medium sized enterprises, cohesion and development. As far as the interest rate is concerned, it may be fixed or floating, and it can be fixed at the signing or later with each individual disbursement. All contracts with the borrower countries are negotiated and signed bilaterally and the conditions vary from country to country. This leaves room for different conditions and interest rates for different countries, unlike in the case of the conditions of the Chinese banks (AidData, 20202)^[49].

When it comes to the conditions of the German KfW bank, they also differ from the conditions of the banks discussed earlier. The primary recipients of the grants are low-income countries (LIC) while the standard loans are pure budget fund loans. Their aim is to finance development projects lower middle-income countries (LMIC) and upper middle-income countries (UMIC). KfW issues these loans under special and internationally agreed low interest terms and conditions specified by the International Development Association (IDA). The IDA terms stipulate those countries with a current income of up to USD 1,985 per capita are eligible for loans with an interest rate of 0.75% per year and a 38-year maturity with a 6-year-long grace period. Developing countries with higher per capita annual income get 2.0% interest rate per year with 39-year maturity and a 10 year-long grace period (KfW Development Bank, 2015-b)^[50].

4. Conclusion

China’s political conditions are minimal in comparison to the political conditions demanded by the EU. China does not interfere in the domestic affairs of the WB countries, nor does it allow interference in the Chinese domestic affairs. This is formulated in the “One China” foreign policy and the principle of “five NOs” of political non-interference in the development that is appropriate for national circumstances. This includes non-interference in the countries’ internal affairs, that is to say, no country will be submitted to Chinese dictates. No political strings are attached to the Chinese assistance in every country and no selfish political gains pursued via the Chinese investments and financial cooperation with China.

The EU has a long list of political requirements that the WB countries have to meet in order to gain access to financial support in forms of grants and loans from the EU financial institutions. This list includes the resepect for human rights, free public elections, and shared foreign policy. Sometimes they go as far as to demand a resolution of the country’s regional and cross-border problems with its neighboring countries.

Additionally, the EU requires from the candidate countries to follow the foreign policy of EU and imposes political pressure on them. China on the other hand does not impose any requirements that are against their partner countries’ foreign policy, not demanding their full support or war alliance, while the EU insists on taking sides in the international relations and on strict alignment with the EU’s foreign policy.

The Chinese control over the finances offered to the WB countries in the form of loans is regulated by many clauses “concealed” within the non-interference approach, but the Chinese banks remain the stable and preferred lending institutions among the WB countries.

When it comes to the EU control of their loans and grants, they demand greater fiscal responsibilities and political stability in the borrowing country. Although EU demands control over the foreign investments in the candidate countries, especially with respect to the Chinese capital, they are yet to install a control mechanism for foreign capital on an EU level, which is a situation comparable to the lack of control of the foreign capital in the WB states.

The financial conditions, and especially the lending period and interest rates, of the Chinese and EU banks can vary, but as far as the conditions and lower interest rates are concerned, the comparison is in favor of the EU. They offer better financial conditions than the strict Chinese banks, but a problem may arise in the realm of political conditions that can be imposed in equal measure by individual EU member states (insisting on their own internal political agendas) and by the EU banks like EBRD. Furthermore, the financial and political requirements of the European financial institutions are closely entwined, and a bank can revoke their finances if the receiving country has made political decisions that are not in the interest of the bank or are not in line with the politics of the EU.

Although China exercises control over its financial instruments, its companies have been involved in corruption scandals, such is the case with their investments in North Macedonia. They are also often accused lacking transparency. Additionally, many Chinese projects often fail to meet the environmental standards of the recipient country, but the institutions of the recipient country should also be held accountable with respect to this problem. Chinese have introduced a clause that protects the Chinese loans in an event of a cancellation of the loans and it demands full repayment ahead of schedule. This clause limits the borrower’s options to cancel the loan if the Chinese companies or creditors violate environmental regulation, and consequently ties the hands of the borrowing country, preventing it from forcing the Chinese companies to obey their environmental regulations.

The overall conclusion is that the EU imposes far too many complex political conditions for their grants and loans, on all levels and in all areas of cooperation with the WB countries. This burdens the applicants with conditions that are not always crucial for the realization of the infrastructure projects that are of great interest to the WB citizens. The understaffed institutions authorized to supervise and implement projects financed with EU funds are also a major obstacle for the WB countries. In this situation, the less demanding standards and the less time-consuming Chinese loans and grants are more attractive than the bureaucratically complicated EU financial instruments.

On the other hand, the clauses in the Chinese bilateral agreements that bypass the environmental standards of the recipient countries pose a threat for the environment and quality of life of the citizens in the recipient countries. The Chinese system that demands engagement of Chinese SOE constructing companies denies the local construction companies the right to participate in the public tenders and the Chinese system of importing Chinese workers has a negative impact on the constructing business in the WB countries.

The infrastructure projects are of great interest and they are a bare necessity for the WB countries as they serve to connect them with the rest of the world. All three sides in this analysis should take a step back and revise their requirements and conditions. EU should revise their overwhelming and far-reaching political conditions; China should address their circumventing of environmental standards; while the WB countries should address their shortage of professional staff and revise their lenient attitude towards the environmental pollution caused by the Chinese projects.

References

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3. Duško Dimitrijević, “Chinese Investments in Serbia- a Joint pledge for the future of the new Silk Road”, (2017), Baltic Journal of European Studies, Tallinn University of Technology (ISSN 2228-0588), Vol. 7, No. 1 (22), doi: 10.1515/bjes-2017-0005 ↑

4. Anastas Vangeli, (2019)“Diffusion of ideas in the era of the Belt and Road: Insights from China – CEE think tank cooperation.” Asia Europe Journal, 17(4), p. 428. https://doi.org/10.1007/s10308-019-00564-0 ↑

5. Nektaria Stamouli, (2021): “North Macedonia PM: EU risks losing sway in Balkans”, in: Politico, 19 May; https://www.politico.eu/article/north-macedonia-pm-zoran-zaev-eu-risks-losing-ground-in-balkans-membership-talks/ (last accessed 28.12.2022) ↑

6. Jens Bastian (2017), “The Potential for Growth through Chinese Infrastructure Investments in Central and South-Eastern Europe along the “Balkan Silk Road”.” EBRD. www.ebrd.com ↑

7. Thomas Christiansen, Emil Kirchner, and Philomena Murray, (eds.), “The Plagrave Handbook of EU Asia Relations,” Houndmills, Palgrave Macmillan, 2013, p.498 (ISBN 978-0230-37869-8). ↑

8. Dragana Mitrović, (2019), “From Socialist Modernization to Chinese Dream.: Institute for Asian Studies, Belgrade, ↑

9. Bartosz Kowalski, (2017), “China’s foreign policy towards Central and Eastern Europe: The ‘16 +1’ Format in the South – South Cooperation Perspective”. Cases of the Czech Republic and Hungary. Cambridge Journal Of Eurasian Studies 1. ↑

10. Deborah Brautigam, (2020), “A Critical Look at Chinese ‘Debt-Trap Diplomacy’: The Rise of a Meme.” China Global Investment Tracker, Area Development and Policy, 5(1), 1–14.doi.org/10.1080/23792949.2019.1689828 ↑

11. Ana Krstinovska, (2021), “Western Balkans’ cooperation with China and its potential implications for the EU.” Konrad-Adenauer-Stiftung e. V. ↑

12. Tena Prelec, (2021) “Eco monsters & eco fighters: China’s investments in Serbia’s heavy manufacturing industry as seen through environmental lens”, Published by the Prague Security Studies Institute, Prague ↑

13. Ana Krstinovska, (2021), “Western Balkans’ cooperation with China and its potential implications for the EU.” Konrad-Adenauer-Stiftung e. V. ↑

14. Ivan Knežević, (2018) “Assessment of IPA II absorption capacities in Serbia, in Instrument of Pre-Accession Assistance and the countries of Western Balkan”, p.107 publisher European Movement in Montenegro, ↑

15. Simonida Kacarska, and Riste Jurukovski, (2013) “Analyses of the use of IPA funds”, Publisher: European Policy Institute, EPI, Skopje, N. Macedonia ↑

16. Goran Svilanović, (2020), “The New Geopolitical Challenge in the Western Balkans: China, in Investment and Finance for the Post-Covid Recovery in Eastern Europe: The Role of Banking, Insurance and Finance”, P.Garonna, F.Delneri. F.Seganti (eds.), Luiss University Press ↑

17. Richard Grieveson, (2020), “The Western Balkan between the UE, US, Russia and China: the Role of Finance and Investment, n Investment and Finance for the Post-Covid Recovery in Eastern Europe: The Role of Banking, Insurance and Finance, “P.Garonna, F.Delneri. F.Seganti (eds.), Luiss University Press ↑

18. Dragan Pavlićević, (2019), “Structural power and the China-EU-Western Balkans triangular relations”. Asia Europe Journal, 17(4), p.460. https://doi.org/10.1007/s10308-01900566-y ↑

19. Anastas Vangeli, (2019) “Diffusion of ideas in the era of the Belt and Road: Insights from China–CEE think tank cooperation.” Asia Europe Journal, 17(4), p. 428. https://doi.org/10.1007/s10308-019-00564-0 ↑

20. Ana Krstinovska, (2021), “Western Balkans’ cooperation with China and its potential implications for the EU.” Konrad-Adenauer-Stiftung e. V. ↑

21. Ana Krstinovska, (2022) “China’s Aid in the Western Balkans: Supporting development, undermining good governance”, China Observers in Central and Eastern Europe (CHOICE), https://chinaobservers.eu/chinas-aid-in-the-western-balkans-supporting-development-undermining-good-governance/ ↑

22. Wouter Zweers, Vladimir Shopov, Frans-Paul van der Putten, Mirela Petkova, Maarten Lemstra, (2020), China and the EU in the Western Balkans A zero-sum game?” Clingendael Report, p.5, ↑

23. Law on infrastructure realization of structural projects for the construction of Miladinovci road section -Stip and road section Kicevo -Ohrid Official Gazette of the Republic of Macedonia No.149/2013 Law on Guarantee Act of the Republic of Macedonia loan war for a “project on Highway “Miladinovci-Stip “who will conclude between the CI Export-Import Bank of China and PE for state roads Official Gazette of the Republic of Macedonia No.149/2013 Law on Guarantee Act of the Republic of Macedonia loan for a” project on the highway-section Kicevo -Ohrid” which will be concluded between the Export-Import Bank of China and PE for state roads, http://www.slvesnik.com.mk/Issues/cb8788d0ddd347f29eb80699945fcd3a.pdf ↑

24. International Railway Journal, “Macedonian Railways launches Chinese trains”, (24 November, 2015), https://www.railjournal.com/regions/europe/macedonian-railways-launches-chinese-trains/ ↑

25. Metamorphosis Foundation, (2023)“Behind the scenes: Chinese influence in North Macedonia”,https://globalvoices.org/2023/03/09/behind-the-scenes-chinese-influence-in-north-macedonia/ ↑

26. Wouter Zweers, Vladimir Shopov, Frans-Paul van der Putten, Mirela Petkova, Maarten Lemstra, (2020), China and the EU in the Western Balkans A zero-sum game?” Clingendael Report, p.5, ↑

27. Xinhuanet. (2020, September 25). “Serbia looks to attract leading Chinese companies to new high-tech park:” Xinhuanet,. http://www.xinhuanet.com/english/2020-09/25/c_139397194.html(last access 14.01.2023) ↑

28. Wouter Zweers, Vladimir Shopov, Frans-Paul van der Putten, Mirela Petkova, Maarten Lemstra, (2020), China and the EU in the Western Balkans A zero-sum game?” Clingendael Report, p.5, ↑

29. Ana Krstinovska, (2022) “China’s Aid in the Western Balkans: Supporting development, undermining good governance”, China Observers in Central and Eastern Europe (CHOICE), https://chinaobservers.eu/chinas-aid-in-the-western-balkans-supporting-development-undermining-good-governance/ ↑

30. Data on Chinese loans retrieved from AidData official web page. https://www.aiddata.org/datasets ↑

31. ibid ↑

32. Deborah Braugiam, “Misdiagnosing the Chinese infrastructure push”:, April, 2019,: https://www.the-american-interest.com/2019/04/04/misdiagnosing-the-chinese-infrastructure-push/ (last access 15.01.2023) ↑

33. Deborah Brautigam and Meg Rithmire, “The “Chinese debt trap” is a myth”, February 2021, The Atlantic, https://www.theatlantic.com/international/archive/2021/02/china-debt-trap-diplomacy/617953/ ↑

34. Ana Krstinovska, (2020), “The place of North Macedonia in China’s strategy for Western Balkans”, Konrad Adenauer Stiftung ↑

35. Ana Krstinovska, (2021), “Western Balkans’ cooperation with China and its potential implications for the EU.” Konrad-Adenauer-Stiftung e. V. ↑

36. Data on Chinese loans retrieved from AidData official web page. https://www.aiddata.org/datasets ↑

37. Vlora Zeneli, (2019). “Chinese Investment Could Become a Challenging Factor for the European Future of the Western Balkans.” The Globalist. https://www.theglobalist.com/balkans-china-fdi-belt-and-road-eu/ (last access 10.01.2023) ↑

38. Data on loan conditions retrieved from AidData official web page. https://www.aiddata.org/datasets ↑

39. Scott Morris, Brad Parks, Alysha Gardner, (2020). “Chinese and World Bank Lending Terms: A Systematic Comparison Across 157 Countries and 15 Years.” CGD Policy Paper 170. Washington, DC: Center for Global Development. https://www.cgdev.org/publication/chinese-and-world-bank-lending-terms-systematic-comparison ↑

40. Mario Holzner, & Monika Schwarzhappel, wiiw. (2018). “Infrastructure Investment in the Western Balkans A First Analysis”. The Vienna Institute for International Economic Studies Wiener Institut für Internationale Wirtschaftsvergleiche, available at: https://wiiw.ac.at/infrastructure-investment-in-the-western-balkans-a-first-analysis-p-4621.html ↑

41. ibid ↑

42. WeBalkan web site on WB investments, year non disclosed (n.d), WeBalkan/transport, https://webalkans.eu/en/themes/connectivity/transport/ ↑

43. Jakub Lachert, & Krzysztof Kamiński, (2019). “Western Balkans: Infrastructure and Energy From a Geopolitical Perspective”. Warsaw Institute. ↑

44. European Commission. (2020). An Economic and Investment Plan for theWestern Balkans. European Commission.https://neighbourhoodenlargement.ec.europa.eu/system/files/2020 ↑

45. Jakub Lachert, & Krzyisztof Kamiński, (2019). “Western Balkans: Infrastructure and Energy From a Geopolitical Perspective”. Warsaw Institute. ↑

46. EBRD “The Political aspects of the mandate of the EBRD”, available at https://www.ebrd.com/news/publications/instituational-documents/political-aspects-of-the-mandate-of-the-ebrd.html, page 3 ↑

47. ibid ↑

48. Miroljub Hadžić, & Aleksandar Košutić, (2019). “Investments of the EBRD in the infrastructure sector of Serbia”. International Review 2019, pp.39-63 ↑

49. Data on conditions of EU banks retrieved from AidData official web site, https://www.aiddata.org/datasets ↑

50. Financial products of FC Promotional loan, KfW Development Bank. (n.d.-b). . Retrieved, February 12, 2022, from https://www.kfw-entwicklungsbank.de/PDF/Download-Center/PDF-Dokumente-Finanzprodukte/Merkblatt_F%C3%B6rderkredit_EN.pdf ↑