By Gregory ELICH
As work nears completion in the first phase of an ambitious project in Montenegro to develop a highway that will connect the Adriatic port of Bar with Serbia, Western officials and mainstream media are ramping up attacks on the endeavor. Western commentators are united in condemnation, ranging from fear-mongering over China’s role to disparaging the plan’s viability. Consistently, they dismiss it as “the highway to nowhere,” implying foolishness on the part of Montenegro and presenting it as a cautionary tale on the dangers of doing business with China. The theme fits neatly within the framework of Washington’s campaign to economically isolate and cripple China, its main competitor in the global economy.
“One of the world’s most expensive roads,” the New York Times informs us, has reached “its destination: a muddy field outside a hamlet with a few dozen houses, many of them empty.” [1] It is an image meant to invite contempt. Never mind that this is the endpoint of one stage of the project, and the plan is to continue construction of the highway; it is better to repeat as a mantra, “the highway to nowhere.” Like a steady drumbeat, Western ridicule is relentless and unvarying: Montenegro has launched a “megalomaniac project” that serves no useful purpose, taking on debt of monstrous proportions in the process.
Western officials warn that China has captured Montenegro in a “debt trap” that will allow it to wield undue influence over Montenegro’s policies and seize control of territory or infrastructure. Moreover, it is argued that the debt to the Export-Import (Exim) Bank of China is unsustainable. The New York Times reports that Montenegro “is now saddled with debts to China that total more than a third of the government’s annual budget.” [2] The impression given is one of unsustainable excess, and that would be so were the entire debt due to be repaid in a single year. A closer look at the details of the loan shows how misleading the Times article is.
The initial interest rate on the Exim Bank of China loan was 2%, and former Montenegrin President Filip Vujanović reports that the loan terms “were by far the most favorable, and no bank or financial organization could match them.” [3] However, Western media warn that the loan totals $1 billion, which is due and cannot be repaid.
Although Montenegro is not a member of the European Union, it relies on the Euro for its currency. However, Exim Bank of China’s loan required payments to be denominated in U.S. dollars. To be precise, the agreement that Montenegro signed in 2014 with Exim Bank of China covers up to a maximum of $944 million, which is €796 million at today’s exchange rate. The contract established between the Chinese construction company building the highway and the Ministry of Transport and Maritime has a fixed conversion rate. However, the fluctuating value of the Euro against the dollar has added to the cost. [4] The loan is in the form of a draw-down, which means that the government can access money in installments on an as-needed basis while construction proceeds.
The latest Montenegrin government statistics show that the actual loan balance, as of the end of 2020, is €640 million. [5] Under terms of the 2014 loan, Exim Bank is responsible for financing 85 percent of the project’s first phase. A six-year grace period was provided, which Montenegro took advantage of, and a 20-year repayment schedule. This year, Montenegro made its first annual loan repayment, amounting to €27.79 million. [6] Far from having a ruinous economic impact that is destroying the economy, that amount accounts for a mere 1.5% of the government’s annual budget of €1.88 billion.[7]
Objections are also expressed over the amount of the Chinese loan relative to the size of the national economy. It is said that the loan has sent the nation’s GDP/debt ratio “soaring” to stratospheric levels, far beyond the norm. The latest figure for Montenegro’s GDP/debt ratio stands at 103%. [8] That is, the nation is carrying more debt than its gross domestic product. Taken at face value, this would seem an unsustainable burden, as Western reports would have us believe.
A comprehensive comparison reveals a different picture, though. On the international scene, Montenegro’s GDP/debt ratio is not unusual. Statistics for 2020 show Japan leading the pack at 266%, and several other countries exceed Montenegro’s standing, including the United States at 131%. [9] When only Montenegro is singled out, a different impression is given than reality suggests.
One question never asked is to what extent the loan from Exim Bank of China is responsible for Montenegro’s supposed predicament. We are led to believe that this loan is single-handedly responsible for a mountainous debt load. You will never see it pointed out in mainstream media, but the Chinese loan accounts for only 15% of Montenegro’s GDP/debt ratio. Montenegro’s Eurobond debt is more than triple that. There are also several loans from Western financial institutions, which cumulatively easily surpass the amount of the Chinese loan. [10]
Is it plausible to claim that there is something uniquely unsustainable about 15% of Montenegro’s debt because its origin is Chinese? Or that concern over debt should focus on that single loan while ignoring the primarily Western loans comprising the remaining 85%? It would appear that Western resentment over Chinese competition is driving this narrative.
Whether the impact of the loan is measured against the national budget or the GDP/debt ratio, the standard narrative is misleading either way. So in the latter case, the €27.79 million that Montenegro paid this year to Exim Bank of China amounts to less than one percent of its GDP, hardly a crushing weight. [11]
An oft-repeated canard is that China seized the port of Hambantota as collateral when Sri Lanka ran into difficulties in making loan payments. The lesson imparted is of the danger involved in taking out a loan from a Chinese bank. But, as usual in Western reports, assertion substitutes for evidence. Chinese banks have never grabbed an asset from another country and have often reduced interest rates or written off debts when a nation has run into difficulties. Nor is it true that China grabbed the port of Hambantota. [12]
Montenegro’s government was eager to modify the loan terms, and Exim Bank of China generously agreed to reduce the interest rate to 0.8%. [13] Montenegro also struck a hedging deal with Deutsche Bank, Société Générale, Merrill Lynch, and Goldman Sachs that provides a cross-currency swap, allowing the nation to make loan payments in Euros rather than dollars to eliminate the potential impact of fluctuating rates.[14]
U.S. Deputy Assistant Secretary of State Matthew Palmer regularly visits the Montenegrin capital of Podgorica, urging the government to exercise “caution” in its dealings with China. [15] In an interview on the Montenegrin news station Televizija Vijesti, Palmer praised the hedging deal the nation reached with Western firms as a demonstration of “fiscal responsibility” and progress on “limiting the ability of outside actors, in this case China in particular, from making mischief.” He added, “China around the world employs this kind of debt-trap diplomacy to get countries on the hook for obligations that they’re not in a position to finance and then use that as leverage to extract political concessions.” [16] American officials are prone to such wild accusations, which generally serve as imprecations rather than statements of fact. Responding to Palmer’s defamations, Chinese Foreign Minister Spokesperson Zhao Lijian pointed out, “The true intention behind the false accusation of ‘debt trap’ is to sow discord between China and relevant countries.” [17]
The United States and European Union sense an opportunity to muscle in on China’s presence in Montenegro, thereby sending a message to the rest of the Western Balkans. A source familiar with the debt negotiations reveals that the plan is that once the hedge agreement was reached, talks would likely continue with the aim of having Western financial institutions refinance the entire loan and take Exim Bank of China out of the picture. [18] Montenegrin Finance Minister Milojko Spajić says that the hedging deal “was an intermediate step towards refinancing.” [19]
It seems unlikely that any Western loan could match Exim Bank of China’s reduced interest rate of 0.8%. But then, Montenegro may not have much maneuvering space if it wants to remain on the path to EU membership.
Although Montenegro is the only European country without a highway, we are taught that this endeavor is unnecessary, and money is being thrown away. Construction of the road is proceeding in three phases, the first of which is scheduled to be completed by the end of November. When the final phase is done, a modern 164-kilometer highway will connect Montenegro’s port of Bar on the Adriatic coast with the Serbian village of Boljare on the border. From there, Montenegro will link to the rest of the Balkans and Central Europe.
The China Road and Bridge Corporation is leading the first phase, the 41-km Smokovac-Mateševo section, which is the most technically difficult. The cost-per-kilometer is often disapprovingly remarked upon in Western reports. We are led to question why this section of highway should be expensive. However, this is no ordinary road. The terrain the builders must contend with is suggested by Montenegro’s name — Crna Gora, meaning ‘Black Mountain,’ and known in the English-speaking world by the Spanish equivalent.
Tunnels had to be blasted through mountains and bridges built to span deep chasms. In all, bridges and tunnels account for 60% of this section of the road.[20] The Moračica Bridge is one of the tallest in the world, [21] requiring 100,000 cubic meters of concrete, 15,000 tons of reinforcement, and 2,000 tons of cables. [22] It makes for an imposing sight.
The Vjeternik tunnel presented a particular challenge. According to engineer Lazar Smolović, “Half a million cubic meters of earth and stone were excavated.” [23] Chinese engineer Wang Xinwei explains that the greatest difficultywas dealing with around one hundred karst caves discovered during tunneling. [24] According to an observer, these subterranean caves had to be filled with concrete. He noted the difficulty the construction team faced in working at high altitudes and strong winter winds. As he rather poetically put it, “Across the mountains and karst, and through the canyons and plateaus, where only goats and donkeys could fight their way through the centuries, today’s Chinese builders are building” the first section of the highway. [25]
When completed, the road will include 48 tunnels and 107 bridges and viaducts, traversing some of the most challenging terrains in the Balkans. [26] View this engineering marvel or even the Moračica Bridge alone, and ask how intellectually honest Western reporters are when they jeeringly question why this highway should have a price tag on the higher end when ordinary roads cost so much less.
The remaining two sections of the highway will be considerably easier and cheaper to tackle. Despite the New York Times sarcastically describing the initial section as “petering out in the middle of a largely uninhabited forest,” implying that it serves no purpose, it will be put to immediate use all along its 41 kilometers. This section of the road will also enable the government to launch its plan to develop the northern region, where plentiful natural resources have been essentially inaccessible up to now. [27]
It is incorrect to suggest that the first phase of the highway is any measure of the costs to be expected going forward. Nor is it accurate to maintain, as the New York Times does, that there are “no funds available to extend it” while the first phase is still underway. On the contrary. Finance Minister Milojko Spajić has announced that funds are available to continue the project, and Montenegro plans to call a tender for the two easier sections by the end of this year. [28]
Another charge frequently hurled at the China Road and Bridge Corporation is that it missed the deadline for completing work on the Smokovac-Mateševo section, resulting in a contract extension that demonstrates the unreliability of China as a business partner. Unmentioned is any indication of the reasons for the schedule change. Covid-19 severely hampered progress in terms of labor shortages and supply disruptions, not uniquely so on the world stage. [29] Also, as work progressed, the need for additional construction, water, and electrical supply was discovered. [30]
We are told that the China Road and Bridge Corporation is taking all the money back to China, while Balkan companies and workers are excluded from involvement. This is yet another accusation made without foundation. The Montenegrin civil engineering firm Bemax plays a significant role, as do other companies, including the Serbian firm Titan Cement. As for the exclusion of local and regional workers, the contractor’s report from May shows that of 1,131 personnel, only 34% are from China. [31]
Western reports argue that the highway makes no economic sense for Montenegro, as tolls from anticipated traffic from Serbia and elsewhere cannot possibly compensate the project’s expense. Montenegro has never claimed otherwise. An international bond prospectus issued by the government of Montenegro on the London Stock Exchange declares, “It is expected that in the longer term, approximately half of the [highway] project’s expenditures will be covered from road toll fee revenues.” [32] This is not negligible, but the highway has far broader significance for Montenegro and the Balkans.
Indeed, one could argue that toll fares comprise the least of considerations. Montenegro’s economic development is heavily concentrated along its coastal region, leaning heavily on the tourist trade. Due to the pandemic’s near-total elimination of tourism, the economy contracted by 15 percent last year, illustrating the nation’s need for economic diversification. [33] Moreover, the lack of adequate roads has a disparate impact in the country’s northern region, where the unemployment rate is more than six times that of the coastal area. [34] Completing the highway, the government reports, should more evenly balance economic development and reduce the heavy population outmigration from the northern region. [35]
Improved transportation should also accelerate agricultural development in the mountainous area, where market access is constrained. [36] The European Project management Journal reports, “In the north, the road from Podgorica to Kolašin through the Morača canyon and continuing onto Serbia is considered the bottleneck of Montenegrin road network, as it is a curvy mountainous road, often unsafe during the winter.” Completing the highway, it continues, “will result in more equitable development of Montenegro” and “enable greater and safer mobility of people, goods, and services.” [37]
Montenegro will also more fully integrate with the rest of Europe. Associated plans include the modernization of the Bar-Belgrade railway, which is currently in poor condition. [38] Additional rail projects are envisioned, and Montenegro intends to increase capacity at the port of Bar and develop the port industrial complex. [39] The government says that the highway is expected to “allow for increased exports from the landlocked countries in the region (such as Serbia, Montenegro’s largest trading partner)” and significantly increase the amount of freight passing through the port of Bar. It is also anticipated that “facilitating access to regional markets and decreased direct purchase costs” should improve the business environment. [40]
The Bar-Boljare highway links Montenegro to the Pan-European Corridor XI, running from the Adriatic port of Bar to Belgrade and Bucharest, Romania, and including a ferry connection to Bari, Italy. In addition, the corridor will connect with Pan-European Corridor X, involving several Balkan nations and running from Salzburg, Austria, to the Greek port of Thessaloniki on the Aegean. [41] According to the European Union’s Western Balkans Investment Framework, the Bar-Boljare highway “will link the ports on the Adriatic Sea to those on the Danube” and provide “the shortest connection from Hungary and Romania through Serbia and Montenegro to southern Italy and Albania.” [42] The potential economic benefits, not only for Montenegro but the region as a whole, are enormous. To reduce the question of profitability, as Western critics do, to a simple matter of toll revenues on Serbia-Montenegro traffic is misleading in the extreme. The impact of the highway and related enterprises promises to be nothing less than transformational. Washington cannot be happy about any of this and has repeatedly advised Montenegro against the highway or doing business with China.
Western lending institutions have been resistant to providing support. Having failed to prevent Montenegro from starting construction, advisors are trying to convince the government to set aside plans to proceed with the subsequent two phases. The IMF is typical in warning Montenegro “that caution is needed in implementing the next phases of the Bar-Boljare highway project until feasibility, cost-benefit analyses, and financing issues are fully addressed.” Moreover, public-private partnership arrangements “should be approached with caution to reduce the risk of assuming significant contingent fiscal liabilities.” More bluntly, the IMF advised Montenegro that it has better things to do with its money and to “weigh the benefits of the Bar-Boljare highway project,” with its “low economic return on the overall highway, based on limited potential for toll revenues relative to cost.” [43] The focus on tolls alone is so wrong-headed that one wonders if Western financial institutions are being deliberately obtuse as a means of discouraging Chinese involvement. Similar admonishments from Western financial institutions preceded the launch of the first phase of highway construction. Montenegro’s challenge may be in finding a willing partner that Washington finds acceptable. The United States can be counted upon to exert every effort to block Montenegro from continuing its partnership with China. Whether the United States can succeed in stopping the project altogether or limiting its scope remains to be seen. The Montenegrin government is keen on joining the European Union, and numerous conditions have been put in its path. However, the highway could potentially prove to be another hurdle.Shortly after last year’s election in Montenegro, but before the new government took power, U.S. diplomat Matthew Palmer stated that among other things, “we expect the next government…to cooperate well and closely with the United States.” [44] Neither a partnership with the Chinese nor completion of the highway fits in that picture. Montenegro is ensnared in the U.S. war on China. By around the end of the year, the first phase of the highway will become operational, and Montenegro will stand at a crossroads. The Bar-Boljare highway project has advanced too far, and the potential benefits are too great for it to be readily abandoned. At the same time, imperialism has many ways to inflict pain on a small wayward nation. Will Montenegro leap into the future and see the highway project through to completion, or will it bend to pressure and allow Washington to hinder its development?
Notes.
[1] Andrew Higgins, “A Pricey Drive Down Montenegro’s Highway ‘From Nowhere to Nowhere’”, New York Times, August 14, 2021.
[2] Andrew Higgins, “A Pricey Drive Down Montenegro’s Highway ‘From Nowhere to Nowhere’”, New York Times, August 14, 2021.
[3] Filip Vujanović, “Accusing China of Creating ‘Debt Trap’ for Montenegro Groundless,” Belt & Road News, April 22, 2021.
[4] “Although the loan facility does not include a fixed U.S. Dollar/euro exchange rate, the construction agreement between the CRBC and the Ministry of Transport and Maritime includes a fixed U.S. Dollar/euro exchange rate of $1.3718 to €1.00.” https://www.rns-pdf.londonstockexchange.com/rns/2057L_-2018-4-17.pdf
[5] “Report on the General Government Debt of Montenegro, as of December 31, 2020,” Montenegro Ministry of Finance and Social Welfare.
[6] Radomir Ralev, “Montenegro Pays First Installment of China’s Exim Bank Loan – Report,” SeeNews, July 21, 2021.
[7] Radomir Ralev, “Montenegro’s Govt Adopts 2021 Draft Budget with 3%/GDP Deficit,” SeeNews, March 31, 2021.
[8] “Report on the General Government Debt of Montenegro, as of December 31, 2020,” Montenegro Ministry of Finance and Social Welfare.
[9] https://www.gfmag.com/global-data/economic-data/public-debt-percentage-gdp
[10] “Report on the General Government Debt of Montenegro, as of December 31, 2020,” Montenegro Ministry of Finance and Social Welfare.
[11] “Report on the General Government Debt of Montenegro, as of December 31, 2020,” Montenegro Ministry of Finance and Social Welfare. Note on bottom of page 3 provides the GDP for 2020 as 4,193 million Euros.
[12] Kevin Acker, Deborah Brautigan, Yufan Huang, “Debt Relief with Chinese Characteristics,” China-Africa Research Initiative, Johns Hopkins School of Advanced International Studies, June 2020. Deborah Brautigan and Meg Rithmire, “The Chinese ‘Debt Trap’ Is a Myth,’ The Atlantic, February 6, 2021.
[13] Predrag Milić, “Spajić: Vlada Sa Kineskom Bankom Dogovorila Smanjenje Kamate Na Dug Za Autoput,” Voice of America, July 8, 2021.
[14] Nikola Đorđević, “Montenegro Narrowly Avoids Chinese Debt Trap, for Now,” Emerging Europe, August 9, 2021.
[15] https://twitter.com/usembassymne/status/1413142985210941448
[16] https://ms-my.facebook.com/montenegro.usembassy/videos/das-palmer-tv-vijesti-interview/514085246479986/
[17] “Foreign Ministry Spokesperson Zhao Lijian’s Regular Press Conference on July 13, 2021,” Ministry of Foreign Affairs of the People’s Republic of China,” July 13, 2021.
[18] Guy Faulconbridge, “Montenegro Close to Deal on Lifting Chinese Debt Burden – Minister,” Reuters, July 7, 2021.
[19] “Montenegro Agrees Hedging Deals to Ease Chinese Debt Burden – Report,” Reuters, July 21, 2021.
[20] https://www.crbc.com/site/crbcEN/77884/info/2015/46840520.html
[21] http://www.highestbridges.com/wiki/index.php?title=Moracica_Bridge
[22] “Спојен мост Морачица, завршетак до марта 2020,” Politika, October 11, 2019.
[23] Veliša Kadić, “Морачица мост за понос,” Večernje Novosti, July 14, 2017.
[24] https://m.cdm.me/english/1600-metres-vjeternik-tunnelled/
[25] https://alexsrb.livejournal.com/396102.html
[26] https://waytomonte.com/en/n-615-novost-47
[27] Filip Vujanović, “Accusing China of Creating ‘Debt Trap’ for Montenegro Groundless,” Belt & Road News, April 22, 2021.
[28] “Montenegro’s Chinese-funded Highway to Replace ‘Death Road,” Reuters, June 1, 2021.
[29] https://www.cdm.me/english/bar-boljare-motorway-project-380-chinese-workers-returned-to-montenegro
[30] Z. Zorić, “ПЕНАЛИ ИЛИ ПРОДУЖЕТАК: Кинези поднели захтев да им се одобри одлагање завршетка ауто-пута,” October 6, 2020.
[31] “ЗАВРШЕНО 95 ПОСТО РАДОВА: За ауто-пут Бар – Бољаре до сада плаћено 700 милиона евра,” Večernje Novosti, June 25, 2021.
[32] https://www.rns-pdf.londonstockexchange.com/rns/2057L_-2018-4-17.pdf
[33] “Western Balkans Regular Economic Report No.19: Subdued Recovery,” World Bank, Spring 2021.
[34] “Montenegro 2020 Report,” European Commission, October 6, 2020.
[35] “Detaljnog Prostornog Plana Autoputa: Bar-Boljare,” Montenegro Ministry of Economic Development, August, 2008.
[36] “Detaljnog Prostornog Plana Autoputa: Bar-Boljare,” Montenegro Ministry of Economic Development, August, 2008.
[37] Sanja Međedović and Michael Ellis, “A Project Management Approach to a Highway Construction in Montenegro,” European Project Management Journal, Volume 7, Issue 1, December 2017.
[38] “Bojanić: Crna Gora će Predložiti Srbiji Zajedničku Gradnju Autoputa,” Vijesti, April 12, 2021.
[39] “Detaljnog Prostornog Plana Autoputa: Bar-Boljare,” Montenegro Ministry of Economic Development, August, 2008.
[40] https://www.rns-pdf.londonstockexchange.com/rns/2057L_-2018-4-17.pdf
[41] https://www.worldhighways.com/wh8/news/serbia-and-china-discuss-preljina-boljare-section-corridor-xi
[42] https://www.wbif.eu/project/PRJ-MNE-TRA-006
[43] “IMF Country Report No. 19/293: Montenegro Article IV Consultation,” IMF, September, 2019.
[44] https://m.cdm.me/english/palmer-about-montenegro-we-expect-people-who-are-committed-to-the-nato-agenda-to-be-in-key-ministries/
