China faces uphill battle in Montenegro

Montenegro’s pro-Euro-Atlantic government takes office

On 31 October, nearly five months after Montenegro’s parliamentary election in June, a new government was finally approved. Serving as Montenegro’s new Prime Minister is Milojko Spajić, who served as Minister of Finance and Social Welfare from December 2020 to April 2022.

Spajić leads the Europe Now Movement and formed his government with members from both pro-EU and pro-Serbia / Russia parties in Montenegro.

What will China’s relations with Montenegro’s new government look like?

Spajić has already stated that two of his foreign policy priorities are full membership of the European Union (EU) and an active membership in the North Atlantic Treaty Organization (NATO). Montenegro submitted its application for the EU in 2008, and joined NATO in 2017.

Just days after taking office, Spajić met with US Ambassador Judy Rising Reinke, where he said that "[t]he Government of Montenegro is completely pro-Euro-Atlantic, and the United States of America is our key partner and ally".

Therefore, it will be difficult for China to convince Spajić’s government to pursue any policies that may jeopardise Montenegro’s relationship with the US, NATO or the EU. Spajić is also likely more familiar with China than his predecessors, having lived in Asia for many years, studied for a semester at China’s prestigious Tsinghua University and passed the HSK 5 (upper intermediate) Mandarin language proficiency exam in 2011.

For China, Montenegro is important for the Belt and Road Initiative (BRI), as it has plans to have the country act as a link into Europe via the - partially completed, controversial, and costly - Bar-Boljare highway.

The project will eventually connect Montenegro’s port on the Adriatic coast with Serbia, providing the country a connection to the Trans-European Transport Network through Pan-European Corridor X, linking “ports on the Adriatic Sea to those on the Danube”.

Montenegro’s participation in the BRI has likely become even more critical following Italy’s decision to withdraw from the initiative. Montenegro officially joined the BRI in 2017.

In recent years, there have been concerns that China’s influence has grown in Montenegro, due to debt owed to Export-Import Bank of China (China Exim Bank) for help financing the first phase of the Bar-Boljare Motorway through a €687 million in 2014 loan.

The first section, which was finally opened in 2022 after many delays, is a 41-kilometer road between Smokovac and Mateševo built by the China Road and Bridge Corporation (CRBC), which reportedly has “20 bridges on the main route, two overpasses, eight underpasses, 7,2 kilometers of concrete walls, and 16 double-tube tunnels”. Montenegro’s terrain made this section of the road complex to design and expensive to build.

After beginning the project, unfavourable currency volatility with no hedge, alleged local corruption, and issues with the original plans led to costs spiralling out of control, with one official later estimating that the true cost of the first phase might have been as high as €1.2b. These extra costs are not owed to China Exim Bank, however.

That being said, as of 30 Sept 2023, Montenegro’s debt stock owed to the bank was valued at €711m, 17.85% of total central government debt.

The project has been cited as an example of China’s so-called “debt-trap diplomacy”, due to the incredible burden the loan has put on Montenegro’s finances. A 2018 report released by the Center for Global Development listed Montenegro as one of eight countries with high risk of debt distress that could be exacerbated by future BRI loans.

NPR reported that not only does the loan contract allow for China Exim Bank to seize land in Montenegro should the government fail to repay the loan, but also that Chinese courts would have the final say on the contract’s execution.

Reuters reported in 2018 that the IMF had estimated that it would cost another $1.2b to complete the rest of the Bar-Boljare Motorway and that the then-Prime Minister Dusko Markovic had said that it will be finished at any cost.

It is unlikely that Spajić will seek to complete the project “at any cost”, especially if that means similar loans from China Exim Bank or other Chinese banks. Indeed, it was during Spajić’s time as Finance Minister that Montenegro formally sought help with its debt to China from the EU. He also once called the first section of the project “the most expensive highway in the world”.

Eventually, Spajić was able to help secure a currency hedging deal with Societe Generale, Deutsche Bank, Merrill Lynch and Goldman Sachs, which was said to have “reduced the interest rate on debt to China’s Exim Bank from 2% in dollars to 0.88% in euros”. The deal didn’t last, however, as Spajic’s successor at the Ministry of Finance, Aleksandar Damjanović, decided to exit Montenegro from the hedging deal earlier this year.

Nevertheless, Spajić will likely be very hesitant to expose Montenegro to more Chinese debt, especially since he worked for several years as a Distressed Credit Research Analyst while at Goldman Sachs in Singapore. He certainly will be aware that debt distress will hinder Montenegro’s EU ascension process, which Spajić wants to speed up.

Regardless of these conditions, Chinese Ambassador Fan Kun has not wasted time seeking out members of Spajić’s government to promote relations with China.

As of 11 Dec, Fan has met with thirteen of Spajić’s Ministers and Deputy Prime Ministers, as well as the State Secretary of the Ministry of Foreign Affairs, the President and two Vice Presidents of the Montenegrin Parliament, as well as Spajić himself. Fan used these meetings to advocate for closer China-Montenegro relations.

Interestingly, Fan’s first meeting was on 7 Nov with the newly appointed President of the Montenegrin Parliament, Andrija Mandić, who is a leader of the pro-Russian political alliance Democratic Front. Whilst this was likely not intentional, it is possible Fan believes Mandić will be his closest ally moving forward.

On 4 Dec, Fan Kun also published an article in Radio and Television of Montenegro, the country’s public service broadcaster, titled “New opportunities for cooperation between China and Montenegro”, where he stated that

“China is willing to work with Montenegro to deepen cooperation in the field of traditional infrastructure, … [and] to actively explore new opportunities for cooperation in the field of new infrastructure, including electric vehicles, new energy, ultra-high voltage transmission and digital economy”.

Clearly, China is not discouraged by Spajić’s pro-Euro-Atlantic policy platform.

Whilst it is unlikely that China will be able to expand its influence in Montenegro under the new government, it is likely that China will be able to maintain its involvement with Montenegrin infrastructure projects.

Indeed, earlier this year, a Memorandum of Understanding between Montenegro and a Chinese consortium was signed for the construction of a €54m highway connecting Budva and Tivat on Montenegro’s coast.

In addition, the China Road and Bridge Corporation (CRBC) has expressed an interest in building the second and third stretches of the Bar-Boljare Motorway. Whilst funding for the further phases of the project have not yet been secured, options include grants and loans from European institutions - which the Ministry of Capital Investments had been negotiating before the election - or a private-public partnership model, as the CRBC suggested.

It will be interesting to see how China-Montenegro relations develop moving forward, and whether Montenegro will be able to secure more funding from European and American banks, thus avoiding the need to seek out more Chinese loans in pursuit of economic development.