CHINA IN THE WESTERN BALKANS December 2020 Issue

Table of contents

Watching and Waiting 3

1.0 The Regional Picture 5 1.1 Main Projects 6 1.2 Political Influence 7 1.3 Outlook and Factors to Watch 8

2.0 Albania 10 2.1 Main Projects 10 2.2 Political Influence 11 2.3 Outlook and Factors to Watch 13

3.0 Bosnia and Herzegovina 14 3.1 Main Projects 14 3.2 Political Influence 16 3.3 Outlook and Factors to Watch 17

4.0 Kosovo 20

5.0 North Macedonia 21 5.1 Main Projects 21 5.2 Political Influence 22 5.3 Outlook and Factors to Watch 24

6.0 Montenegro 26 6.1 Main Projects 26 6.2 Political Influence 28 6.3 Outlook and Factors to Watch 30

7.0 Serbia 33 7.1 Main Projects 33 7.2 Political Influence 36 7.3 Outlook and Factors to Watch 38 About 42 Contact 42

2 Watching and Waiting

The efforts of the EU and the US to check Chinese influence in the Western Balkans continue. For a long time, much to the confusion of foreign policy experts and diplomats in the region, the EU and US seemed to stand by and watch as China extended its soft power across the region. The days of watching idly and doing little more than issuing the odd cautionary warning about the dangers of getting too close to China seem to be over.

To date, Washington seems to have moved much more forcefully in its efforts to check China’s expansion into the region. US efforts have primarily been focused on preventing Huawei and other Chinese equipment from being used to roll out 5G network coverage in the region. Albania was the first country in the region to sign up to the Clean Network initiative in August. As part of the Washington Agreements, both Kosovo and Serbia pledged to exclude ‘untrusted vendors’ from the roll-out of their 5G networks. Despite this, Serbia has – to date – evaded formally joining the Clean Network Initiative.

However, on October 23rd, the US managed to sign up Bulgaria, Kosovo and North Macedonia to the Clean Network Initiative. This leaves Bosnia-Herzegovina and Montenegro as the two countries in the region which have not taken a clear stance on which suppliers of equipment will be able to take part in the roll-out of 5G networks. For different reasons, it seems unlikely that either country will sign up to the Clean Network Initiative any time soon. In the case of Bosnia, internal political divisions are likely to prevent the country from achieving consensus on this, along with many other issues of importance. Bosnia may well decide – by not deciding. On the other hand, the situation in Montenegro is very different. With its public debt well over 90% of GDP by any measure – and close to 100% by some – in part thanks to a huge loan taken out from Chinese lenders to construct a section of motorway through the country, Montenegro is the country most vulnerable to facing a Chinese ‘debt trap’ in

3 the region. Given Beijing’s debt leverage over Podgorica – and the need to potentially renegotiate the dynamic of repayment for existing loans – it seems unlikely that the new Montenegrin Government will be in a position to rush to sign up to the Initiative.

The key missing piece of this geopolitical jigsaw is how China will react to these efforts. So far, it seems to be considering its response still. The rising power is not known for its rash or rapid reactions. Yet it is also unlikely to sit by and watch its efforts at deepening relations with the countries of the region stopped in their tracks. The stage seems set for a protracted cold war of attrition.

4 1.0 The Regional Picture

The Western Balkans once again finds itself in the well-known role of a proxy stage for a geostrategic confrontation of the major powers. On the one hand, there is the re-emerging interest of the United States in the region, which was at first focused almost solely on telecommunications, intent on preventing Chinese companies from supplying equipment for the roll out of 5G networks across the region. However, Washington’s involvement has recently grown into a comprehensive strategy of political pressure and economic incentives to regain the regional initiative from Beijing. The blueprint was established through the Washington Agreement on economic normalization of relations between Kosovo and Serbia, which offered intensified bilateral economic relations and investment finance in return for support on political issues. A similar strategy has most recently been deployed in Albania, the first country to join the Clean Network Initiative, which directly led to an upgraded bilateral economic agreement with the US, but also demands for Tirana to leave the Chinese-led 17+1 initiative and replace it with the Three Sees Initiative.

On the other hand, China also has some strong cards up its sleeve to hold on to the influence it has attained in the region over the last years. In particular, some infrastructure projects financed by Chinese loans and implemented by Chinese companies are still ongoing and several new ones are on their way. The economic leverage Beijing has throughout the region is often translated into the political arena, where local actors often keep silent or even express their full support for Beijing’s internal and external actions, such as in the case of the state officials of Serbia or the Republika Srpska.

The role that the EU plays in this dynamic is not to be underestimated either. Large investment funds for the region are intended to pull candidate countries away from Chinese money, while political initiatives such as the Joint Statement on the Human Rights Situation in Xinjiang and Recent Developments in Hong Kong – presented to

5 the UN by Germany on behalf of 39 countries - apply diplomatic pressure on candidate countries to align their China foreign policies with EU positions. In the context of the still raging COVID-19 pandemic, with the full extent of the economic crisis at its doorstep and the scramble for large supplies of vaccines expected to reach its peak next year, countries of the region that until recently could take a balanced approach to competing powers are finding themselves pushed ever more vigorously to choose sides.

1.1 Main Projects

The disbalance in the distribution of Chinese projects and investments among countries in the region is widening. There seems to be an increasing correlation between political proximity to Beijing and the level of bilateral economic cooperation. The best example is Serbia, the most prominent partner of China in the region, where several future projects have been announced over the last few months – the company Powerchina has signed a contract to build a metro in Belgrade, while the China Road and Bridge Corporation has been awarded the construction of the Fruskogorski road corridor, as well as the project of modernization of the railway between Belgrade and Nis.

On the other hand, in countries that have supported the US-led Clean Network Initiative, there are no new major Chinese projects on the horizon. In North Macedonia, the highway Kicevo - Ohrid has been the only ongoing capital project over the last year, and there is no promise of future cooperation with Albania, which has led official Tirana to publicly weigh the request from outgoing US President Trump to leave the 17+1 initiative.

However, there have lately been breakthroughs on several major projects which have been stalemated for a while. After three missed deadlines, the documentation for the construction of the Banja Luka-Prijedor highway in the Republika Srpska has entered into the final stages, with expropriation expected to start during the next

6 year. Moreover, in the Federation of Bosnia and Herzegovina entity (FBiH), the preparatory works for the construction Block 7 of the thermal powerplant in Tuzla are finished and the construction site is ready to be taken over by the main contractor, Gezhouba Consortium. Although the deadline for the finalization of the Kicevo-Ohrid highway on Corridor 8 in North Macedonia will have to be extended, there is finally some positive development concerning the state of construction works.

1.2 Political Influence

Over the last months, two initiatives dominated the regional political landscape, shaping the new geostrategic dividing across the Western Balkans. The more important of the two is the Clean Network initiative established by Washington, whose goal is to prevent Chinese companies such as Huawei or ZTE from providing technology and equipment for the roll out of 5G networks abroad. On one side are countries that have fully endorsed this US-led initiative. Following Albania, which was the first country in the region to join the initiative in August, both North Macedonia and Kosovo have signed the memorandum of cooperation for the creation of a secure 5G network in late October. On the other hand, neither Montenegro nor Bosnia-Herzegovina have adopted this initiative yet, and although Serbia has pledged in the Washington Agreement to prohibit the use of 5G equipment from untrusted vendors, cooperation with Huawei has not shown signs of slowing down since. Nonetheless, the auctioning of 5G network licences is just around the corner in each of these countries, and the decisions they make will have a major effect on their geostrategic positioning.

The second initiative which has seemingly drawn less attention is the Joint Statement on the Human Rights Situation in Xinjiang and Recent Developments in Hong Kong, presented by the German Ambassador to the UN Christoph Heusgen, which condemns Beijing for arbitrarily detaining members of the Uighur minority

7 and suppressing the opposition in Hong Kong. The Joint Statement was signed by three countries from the region – Albania, Bosnia-Herzegovina and North Macedonia - while the others remained neutral. This move has provoked strong criticism from Beijing, with warnings it could adversely affect the cooperation Beijing has with these countries. Furthermore, the decision of the Foreign Ministry of Bosnia-Herzegovina to sign the Joint Statement has revealed a clear political divide within the country on China, as it was met with harsh reactions from the officials of the Republika Srpska.

1.3 Outlook and Factors to Watch

The issue of how 5G networks will be rolled out is expected to remain high on the regional political agenda in the upcoming months. Countries that have not revealed their positions on the Clean Network Initiative are expected to make this decision at some point next year. Even North Macedonia, which is among the countries that have signed the initiative, still has a somewhat uncertain situation when it comes to deciding on possible suppliers of 5G equipment.

As mask diplomacy gives way to vaccine diplomacy, China will be eager to enter the regional market for both economic and political reasons. For now, the US pharmaceutical company Pfizer has a pole position as the only producer whose vaccines have been formally approved by some of the countries in the region. Nonetheless, the demand for vaccines is enormous, so it is more than likely that countries will consider every possible supplier. For example, Serbia has already announced it has agreed to purchase vaccines from the Chinese company Sinopharm, alongside Pfizer and Russian Sputnik V.

Finally, as the economic recession looms large, potential economic benefits from collaboration with China may become even more important. In addition, the public debt of countries like Montenegro is projected to reach critical levels next year, threatening to push Podgorica into Beijing’s debt trap. These developments could

8 have long-term effects on the regional balance of power, as China could try to utilize the approaching instability to re-emerge as the most dynamic foreign actor on the regional stage.

9 2.0 Albania

2.1 Main Projects

The most important developments concern the growing problems of the Chinese-owned oil company Bankers Petroleum, the country’s largest exporter that holds a monopoly position on the Albanian oil production market. The public company Albpetrol, which oversees oil concessions, has sounded the alarm that Bankers Petroleum is transferring money out of Albania, at a time when its domestic debts are rising rapidly. Bankers Petroleum officials have admitted the transfers of money to the parent company, but without disclosing the amounts involved. According to their statement, the purpose of this transfer was to pay interest on loans or other expenses of the parent company. Based on the Albanian media reports, during the period June 2018-December 2019, Bankers Petroleum Albania has transferred an estimated $60 million to the parent company Bankers Petroleum LTD.

In Albania, as elsewhere, companies have the right to transfer their profits freely to their countries of origin, but only after paying off all debts and liabilities in the country where they operate. Albpetrol claims that this type of practice raises doubts about a fraudulent scheme where profits are transferred abroad while domestic debts pile up until the company goes bankrupt. For two years Bankers Petroleum Albania has not published its financial statements, although it has a legal obligation. According to correspondence with Albpetrol, Bankers admitted that at the end of April its debts reached $70 million, primarily towards subcontractors but part of this debt is unpaid obligations to public or state-owned institutions, especially Albpetrol and the Municipalities of the Fier Region where the largest oil fields are located. Due to the rapid growth of debt, in April this year the largest subcontractors officially informed the Ministry of Energy (AKBN) and Albpetrol that Bankers has accumulated

10 large debts to them endangering the existence of these companies. In addition to debts to subcontractors, Bankers Petroleum has a $110 million loan from a Chinese investment fund. This loan should have been repaid in December last year, but Bankers failed to repay it on time.

In October, Bankers sent an open letter to the country’s top officials urging them to launch an inquiry into the abuses committed by former directors and staff of Bankers. According to Bankers’ claims, an internal audit has revealed fraudulent activities and theft by the former director Leonidha Cobo. The company accuses Cobo of transferring sums of money to family members, turning the company owned by his wife into one of Bankers' largest contractors. Bankers have also sued him for violating the confidentiality clause causing damage to the company's financial assets in the market. Cobo is currently under investigation by the Fier prosecutor's office for abuse of office, forgery of documents, and theft by abuse of office. Nonetheless, the company fears that Cobo is still using his corruptive and criminal sources of income to gain political immunity.

2.2 Political Influence

In the letter sent on October 1st, the US President Donald Trump thanked Prime Minister Edi Rama for "Albanian leadership in the Balkans region and throughout Europe in exposing China's malignant influence, human rights abuses, and predatory lending practices." Trump added that Tirana’s support for secure telecommunications networks is setting a strong example that paves the way for others in the region to do the same. As a reminder, Albania was the first country in the region to sign the Clean Network Initiative, signing the agreement in August in Tirana. Furthermore, Trump expressed his content with Albania's involvement in the Three Seas Initiative, describing it as a "transparent, market-based, and fair alternative to China's 17+1 format, which I urge you to exit."

11 The US Under-Secretary for Economic Growth, Energy and the Environment Keith Krach visited Albania the day after the letter was sent to Rama. The immediate cause of the visit was the signing of a Memorandum of Economic Cooperation between the U.S. and Albania. In his statement, Krach draws an explicit connection between Tirana’s decision to side with the US on the Sino-American rivalry over technological dominance and the upgrade of bilateral economic relations between the two countries. "Albania has joined the tide toward the Clean Network, and we are excited about continuing to expand our partnership in many areas of economic collaboration. That’s why today, I am also thrilled to witness the signing of an agreement between America’s largest construction company Bechtel and Albania for the construction of the Skavica hydropower plant." Immediately after this statement, the Chinese Embassy in Albania reacted by condemning Krach’s "malicious and baseless attacks and slanders against the Communist Party of China, the Chinese Government and Chinese companies", claiming that the true goal of his visit was to deliberately create frictions in relations between China and Albania.

So far, Prime Minister Rama did not respond directly to Trump’s call to leave the 17+1 initiative, stating that Albania will "treat this issue very carefully and decide at the right time, always in the service of Albania's strategic interests, not forgetting that we are a strategic ally of the US and the EU." Rama has also refused a public request from President Trump to move the Albanian embassy in Israel from Tel Aviv to Jerusalem, reaffirming that Tirana will continue to follow the lead of Brussels on the matter, respecting the principle of harmonization with the foreign policy of the EU. His statement came just days before the Annual report on candidate countries, in which the European Commission criticized Albania’s decision to exempt Chinese nationals from visa requirements with no time limit, stressing that Tirana needs to ensure full alignment with EU visa policy.

Albania has also signed the Joint Statement against the persecution of Uyghurs, demanding that Beijing refrain from arbitrarily detaining this minority group. Of the 39 countries on the list of states supporting the Joint Statement against the

12 persecution of Uighurs, only Bosnia-Herzegovina and Albania have sizeable Muslim populations. This decision will further deteriorate bilateral relations already shaken by Tirana’s decision to be among the first countries to sign the Clean Network Initiative.

2.3 Outlook and Factors to Watch

The most prominent question in the next year is will the Government in Tirana further distance itself politically from Beijing under US pressure and decide to step out of the 17+1 initiative. Albania did not profit much from this format since it was not involved in any major projects when compared to other countries in the region. The biggest benefit achieved under the 17+1 platform is the commitment to the creation of the Secretariat for Youth, and the visa waiver for Chinese passport holders in Albania, resulting in the number of Chinese tourists visiting the country increasing by 48% from 2018 to 2019.

Another issue to follow is what will be the immediate reaction of Beijing regarding the role Tirana plays as the regional pioneer for several initiatives that are endangering the Chinese position in the Western Balkans. From signing the Clean Network initiate and political Joint Statement against the persecution of Uyghurs to the threats of leaving the 17+1 framework, Albania has made the sharpest political shift against Chinese interests of all the countries in the region. Of course, Beijing does not have quite the same economic nor political leverage to pressure Tirana as in the case of its neighbours. Therefore, some of the moves China will make in the next few months might be indicative of the long-term direction China will take regarding very fragile bilateral relations.

13 3.0 Bosnia and Herzegovina

3.1 Main Projects

After a delay which lasted for most of the year, the construction of the Tuzla 7 powerplant is finally on its way despite protests from the European Energy Community. In October, the public company Elektroprivreda BiH announced that the preparatory works on the land on which Block 7 of the thermal powerplant in Tuzla will stand were finished, and the construction site was ready for Chinese partners to take over. In the statement, Elektroprivreda BiH pointed out that the members of their expert team were working together with the representatives of the Chinese-led Gezhouba Consortium on the development of the basic design of the project. "After the completion of this activity, Chinese experts and engineers will start drafting the main project and obtaining the necessary permits for the construction of Block 7," said Senad Salkic, Executive Director for Capital Investments of Elektroprivreda BiH. According to the Agreement signed with the Chinese Gezhouba Consortium, Block 7 will be financed by a loan from the Chinese Import and Export Bank worth €641 million, while the rest of the funds will be provided by Elektroprivreda BiH from its budget and other sources. The state guarantee for the loan was given by the House of Representatives of the Parliament of the Federation of Bosnia and Herzegovina in 2019.

The Secretariat of the Energy Community has announced possible sanctions for Bosnia and Herzegovina over the financing model since the guarantee approved is considered to be illegal state aid, so it initiated a dispute settlement procedure in March last year. If it is proven that Sarajevo has breached the state aid acquis regarding the Tuzla 7 project, the country’s rights deriving from the Energy Community treaty such as the right to vote or attend meetings could be limited.

14 Furthermore, the director of the Energy Community Secretariat Janez Kopac claims that it would have a lasting negative effect on the country’s aspirations to join the European Union. Commenting on Block 7 in Tuzla, Special Representative of the EU Delegation to Bosnia and Herzegovina Johann Sattler said that the EU "does not look favourably on this project because it is a wrong approach at a time when Europe is leaving coal." The EU is currently planning to introduce a customs tax on imports from countries that do not have a CO2 payment system, and the Energy Community is exploring the possibility of introducing a CO2 trading system in the region.

Another large project in the field of energy facing a legal process in front of international bodies is the Ulog hydropower plant, whose construction is being carried out by the Chinese company Sinohydro. A group of local environmental organizations claims that Bosnia-Herzegovina has violated several provisions of the Berne Convention for the Protection of European Wildlife and Natural Habitats by granting permits for the Ulog hydropower plant and the Gornja Neretva mini-hydro power plant in Herzegovina. In line with those allegations, they have filed an official complaint against the state to the Secretariat of the Bern Convention on the Protection of European Wildlife and Natural Habitats at the Council of Europe. The planned projects in the area are the large hydropower plant Ulog and a system of seven small hydropower plants, which make up the Gornja Neretva hydropower system. The permit for the construction of hydroelectric power plants was given by the Ministry of Physical Planning, Construction, and Ecology of Republika Srpska. The construction is currently in the preliminary works phase. The contract for the design and construction of the hydropower plant between local EFT Group and the Chinese company Sinohydro entered into force in December 2019. Initially, EFT planned to fund the construction work on the hydroelectric plant with a loan from the China Development Bank, but negotiations with creditors did not yield results. Consequently, EFT is funding the construction work with its own funds.

Major progress has been made on Corridor Vc in October when it was announced that excavation work on the Pocitelj tunnel was completed. The works on this part of the highway on Corridor Vc are being performed by the Chinese company China State

15 Construction Engineering Corporation Ltd., and the subcontractor of the works on the tunnel is the domestic company Euro-Asfalt. The construction contract was signed in June 2019, and the cost of the project is €56.5 million. The construction of the Pocitelj-Zvirovici sub-section is financed from funds provided under a loan agreement concluded with the European Investment Bank, and the deadline for the completion of works is planned for September 2021.

On the other hand, a bypass around Banja Luka on the Gradiska–Banja Luka highway will finally be built, but it will not be financed from Chinese loans as was initially intended. This idea, active four years ago, was dropped because the Chinese loans in question required state guarantees, which were not forthcoming at the time. In the meantime, European funds have become available for the project, both from the EU and European Banks.

3.2 Political Influence

The internal political confrontation between Bosnia’s two entities - the Republika Srpska and the Federation of Bosnia and Herzegovina - which often spills over to the arena of international affairs is becoming ever more visible in their differing positions towards China as well. While political leaders from Banja Luka use every opportunity to reassure the Chinese Government regarding their firm support for Beijing’s positions, officials from Sarajevo have a more restrained approach.

On October 1st, the Bosnian Serb member of the Presidency of Bosnia-Herzegovina, Milorad Dodik, congratulated Chinese President Xi Jinping on the 71st anniversary of the founding of the People's Republic of China. In his letter, Dodik thanked Xi Jinping for the help that China provided to Bosnia and Herzegovina through the experiences and knowledge that Chinese experts shared in the joint fight against the spread of the virus. He also expressed faith in the further development of economic relations between the two countries, stating that the Belt and Road Initiative provides an institutional framework for strengthening bilateral cooperation in all fields.

16 However, the biggest political development for bilateral relations has been the decision of Bosnia and Herzegovina to support the Joint Statement on human rights violations in China, accusing Beijing of arbitrarily detaining members of the Uighur minority and suppressing the opposition in Hong Kong, becoming the only Western Balkans country besides Albania to sign it. In response to this, the Chinese Embassy in Sarajevo sent a letter to the Minister of Foreign Affairs in the Council of Ministers, Bisera Turkovic, expressing concern over the decision of B&H to support the Joint Statement. The letter from the Chinese Embassy points out that Bosnia and Herzegovina, as a co-signatory of this statement, seriously undermines common political interests, which adversely affects the cooperation between the two countries, and asks the Ministry of Foreign Affairs to take immediate measures to withdraw it.

In the first reaction to the action of the Ministry of Foreign Affairs, Milorad Dodik's cabinet unequivocally distanced itself from this decision. Dodik strongly condemned the uncoordinated and arbitrary accession of Bosnia and Herzegovina to the statement on human rights, stating that "the Presidency did not consider the situation in the mentioned Chinese regions, nor did the Ministry of Foreign Affairs in the Council of Ministers request an official position from the Presidency as the only institution that has the mandate to create the foreign policy of Bosnia and Herzegovina." Dodik further accused Minister Turkovic, claiming that she continues with the practice of implementing private policy, violates the agreed implementation of B&H's foreign policy, and disrupts good relations with countries that are its strategic partners.

3.3 Outlook and Factors to Watch

According to the latest announcements, the stalemate over the construction of the Banja Luka–Prijedor highway could finally be broken next year. Dusan Topic, the director of the public company Autoputevi Republike Srpske, stated that the project

17 documentation for the Banja Luka-Prijedor highway is in the final preparations and that the expropriation should start during the next year. "Chinese partners from the company SDHS-CSI BH will be prepared to start construction work as soon as the expropriation ends," Topic noted. As a reminder, the start of work has been delayed three times for more than a year because the Chinese company did not fulfil the conditions of the concession agreement, namely to complete the conceptual design, the environmental impact assessment, to obtain location conditions, and to prepare a feasibility study.

Like several other countries in the region, Bosnia-Herzegovina is also expected to implement all the necessary legal regulations for introducing the 5G network during the next year. Already facing strong political pressure from both sides of the geostrategic struggle over telecommunication, the country is bracing for a decision on the possible suppliers of equipment. Two of the three telecommunications companies in Bosnia, the BH Telekom and M:tel, already use Huawei equipment, while Eronet uses Ericsson's infrastructure.

The US Embassy has made a statement appealing to the state officials and companies operating in B&H to join the Clean Network Initiative, specifying that "allowing unreliable, high-risk providers, such as Huawei and ZTE, to become part of any network, whether 5G or another, makes key systems susceptible to interference and manipulation, and sensitive government, economic and personal information is at risk." The statement also reads that if a country decides to allow an unreliable company to build its 5G network, the United States will have to re-evaluate how it exchanges information and how it connects with that country.

In its response, the Chinese Ambassador Xi Ping has accused the US of abusing the concept of national security and its national power to oppress Chinese companies without any evidence, while "openly forcing, or even threatening other countries to take a stand." Huawei has also adopted a more proactive strategy in Bosnia-Herzegovina over the last few months. In November, Jasmin Tinjak, Key Account Director of Huawei Technologies Bosnia, presented the company's vision for

18 Bosnia and Herzegovina at the panel of the Sarajevo Unlimited 2020 online conference entitled ‘5G Network in BiH’. Furthermore, the program for young talents of the company Huawei Technologies "Seeds for the future" intended for students of info-communication engineering was held in November for the first time in Bosnia and Herzegovina. The young talents were trained on the 5G network, artificial intelligence, and cybersecurity, and also had the opportunity to learn about leadership theories and Chinese culture.

19 4.0 Kosovo

In late October, the Prime Minister of Kosovo, Avdullah Hoti, and the member of the US State Department for Economic Development, Energy and the Environment, Keith Krach, signed a memorandum of cooperation for the creation of a secure 5G network. The agreement was signed at the Kosovo Embassy in Skopje, in the presence of American officials. After the agreement was signed, Hoti declared that he believed this agreement would be a big step towards increasing security in the field of cybersecurity, adding that "Kosovo is taking on its state obligations to be on the side of our strategic partners, such as the United States."

This deal comes as a follow up to the agreement on economic normalization, signed in Washington in September when state officials of both Kosovo and Serbia pledged to ban the use of 5G devices provided by untrustworthy sellers in the presence of US President Donald Trump. In the introduction to the signing in Skopje, Hoti stated that Kosovo is "willing to fully implement the historic agreement signed in the White House." Krach said the declaration between the United States and Kosovo showed that Kosovo is a very honest strategic partner and described the ceremony as strong proof of the friendship between our two countries. This decision comes as no surprise, concerning how strongly Kosovo relies on the support of the United States, but also because Kosovo has no Chinese projects nor political relations with Beijing. Therefore, for the Government in Pristina this decision was an easy opportunity to reaffirm themselves as the stable US partner in the region, but also to put pressure on Serbia to follow through with the Washington agreement.

20 5.0 North Macedonia

5.1 Main Projects

The dynamics of the Kicevo–Ohrid highway construction works remain the question on top of the economic agenda in North Macedonia. During his visit to the construction site in November, the Minister of Transport and Communications, Blagoj Bocvarski, did not want to predict when the highway would be completed, but he asserted publicly that the project is rapidly progressing: "We are ready to enter into legal changes due to expropriation in some parts, but 58% of the work is completed, especially the unforeseen junctions." Bocvarski reminded that the highway Kicevo-Ohrid is one of the problematic projects inherited from the former Government since the original project did not foresee necessary junctions and had a lot of technical inconsistencies throughout. The Minister claims that in the meantime "all problems have been solved, all additional projects for 8 junctions have been completed, 25% of the route was redesigned and the finances necessary for the implementation of the project are ready."

He added that the costs for the construction have been reduced compared to those agreed by the former Government of Prime Minister Nikola Gruevski, claiming that the savings of this Government are up to €95 million. At the same time, implementation of the project during this year has been rather slow - according to the semi-annual report for 2020 published by the public enterprise State Roads, only €5 million were spent from the beginning of the year until the end of June. These are funds spent from the loan from the Chinese Exim Bank, while the public company claims that they additionally support the project with their own funds. The price of the highway was supposed to be €374 million, but with additional annexes, its value rose to €598 million.

21 The State Roads public company is currently working on an analysis of how long the deadline for construction of the Kicevo-Ohrid highway on Corridor 8 should be extended. The current deadline for its completion is the end of June next year, but it is already certain that the entire 57 kilometres long section will not be ready by then. The breach of the deadline for completion of works is due to the covid-19 pandemic, which resulted in the Albanian subcontractor during the spring not being able to fulfil its obligations because the borders were closed and workers from Albania could not enter the country. Another reason for the delay is the increased volume of work needed to be completed once the previously unforeseen junctions were added to the project.

The issue of the Kicevo-Ohrid highway was also the topic of the meeting between Deputy Prime Minister Artan Grubi and the Chinese ambassador to North Macedonia, Zhang Zuo, held on September 21st. At the meeting, Grubi had expressed interest in the highway and asked for all obstacles to be overcome for the project’s swifter completion. Considering the political and economic importance that this project has gained over the years, the finalization of the highway will remain among the top priorities for the Government in the foreseeable future.

5.2 Political Influence

In late October, North Macedonia signed a declaration with the United States on the security of 5G wireless communications networks, joining the Clean Network Initiative alongside Bulgaria and Kosovo who signed the declaration on the very same day. U.S. Secretary of State Mike Pompeo, who took part in separate signing ceremonies by videoconference from the State Department, stated that this treaty will allow "all interested operators to be trained to work in such a way as to ensure secure networks not only for countries in the region but also for EU and NATO member states."

22 North Macedonia's Prime Minister, Zoran Zaev, said the document was very important to the country since Skopje as a candidate for EU membership "must align its telecommunications development policies with those of the EU, as well as to align the security aspects of the implementation of the 5G network with our strategic ally, the US." Zaev also announced that the Parliament would change the electronic communication law and other accompanying legislation by the end of the year to embed stricter rules against acquiring 5G equipment from untrusted vendors.

Following the signing of the Clean Network Treaty, Deputy Prime Minister Artan Grubi discussed this issue with the Chinese ambassador, Zhang Zuo, pointing out the obligations that North Macedonia has as a NATO member country towards its strategic partners. Chinese ambassador Zuo made his unhappiness on the decision clear, accusing the United States of trying to suppress China’s development by finding excuses to sanction Chinese companies like Huawei which had operated successfully in North Macedonia for years. The Ambassador claimed that "China hopes for cooperation with all the countries, including with North Macedonia, not only for constructing 5G networks but also in the area of network security."

Another important motive for this decision derives from the fact that North Macedonia became the youngest member of NATO in March this year. The London Declaration from December 2019 requires NATO members to secure their 5G networks and recognize the challenges thrown up by China. NATO’s Secretary-General, Jens Stoltenberg, has been clear that all member states need to align themselves on the issue and exclude suspicious tech companies providing 5G equipment. "We are the newest NATO member and will act according to NATO’s security standards," said Zaev. NATO has also warned Skopje of fake news coming from Russia and China about the assistance and medical supplies these countries are sending to help combat the coronavirus. The US Representative to NATO Kay Bailey Hutchison made a statement that "the Alliance expects more info from Skopje on setting up a team in North Macedonia, aimed at preparing media in the country on how to deter these disinformation campaigns."

23

5.3 Outlook and Factors to Watch

Given that North Macedonia has joined the Clean Network Initiative, it remains to be seen how this will influence ongoing procurements for equipment for the new 5G networks. The majority owner of North Macedonia’s largest telecom operator, Makedonski Telekom AD, is the Hungarian firm Matav, which in turn is part of Deutsche Telecom – a company that has cooperated extensively with Huawei. At the start of this year, Makedonski Telekom had begun preparing a tendering procedure to acquire 5G equipment, and Huawei was seen as an important possible supplier. As only a minority owner of Makedonski Telekom, with its 35% of ownership in the company, the Government has limited influence in any decisions on the choice of equipment suppliers.

However, this would change in the event that Parliament adopts changes to the electronic communication law and accompanying legislation, as announced by Prime Minister Zaev so that the state Agency for Electronic Communication can launch a tendering procedure for offering 5G bands to telecom operators under the new, stricter rules. According to the media reports, after receiving information that Huawei was the best-positioned company to win the Telekom tender, the state representatives on the Telekom board last month raised this issue within the company, calling for restraint until the new, expected legislation is passed.

It is also worth following what effect the recent political decisions such as the signing the Clean Network Initiative will have on bilateral relations between the two countries. On the one hand, it could negatively impact both current projects, such as the construction of the Kicevo-Ohrid highway, but also future ones. On the other hand, China could decide to utilize the disappointment in Skopje regarding the EU’s inability to open official accession negotiations despite all the efforts over the past years to solve issues with Greece and Bulgaria. In that case, Beijing could willingly

24 accept to become North Macedonia’s bargaining chip in talks with Brussels and use it to reinforce its presence in the country.

25 6.0 Montenegro

6.1 Main Projects

In late September, the China Road and Bridge Corporation announced the deadline for finishing the first section of the Bar-Boljare highway from Smokovac to Matesevo, set for September 30th, will once again be breached. The first deadline for the completion of works on this section of 41 kilometres was May 11th last year, but due to a large number of unforeseen works as well as delays at the beginning it was postponed to the end of September. During the visit to the construction site in March, former Prime Minister Dusko Markovic had insisted the coronavirus pandemic would not derail the government’s strategic projects, adding that the highway will be finished by the end of the year. Yet already in June, the Minister of Transport in the previous Government, Osman Nurkovic, had admitted that the target date for completion of the first phase would be missed, claiming that the construction work will most likely end in June 2021. According to him, the reason for such a delay is the pandemic, since for a certain period Chinese workers could now not enter the country. In May, the CRBC asked for extra payments to cover the restrictions on continuing their work during the pandemic, but Minister Nurkovic declined these demands, stating that the Chinese demands were not based on contractual obligations.

Now it is up to the newly formed government in Podgorica to decide what will be the new deadline for finishing the first section of the highway. The Ministry of Transport did not announce so far when a new annex to the contract for the construction of the first section will be signed with the Chinese company. Jonuz Mujevic, the executive director of the state-owned company Monteput, which is one of the subcontractors, claims that the priority section from Smokovac to Matesevo could be finished by the

26 beginning of August next year, given that almost 93% of the works is already completed. However, the supervisory body did not decide yet on the request of the Chinese CRBC Company for the new deadline. The supervision is entrusted to the French-Italian consortium, Ingerop Geodata.

Another open question is whether the new government will be able to negotiate a postponement of the loan payment to the Chinese Exim Bank concerning delays in the construction of the highway and whether the grace period, which expires in 2021, will be extended. Economists warn that Montenegro will most likely have to refinance current loan instalments. The initial construction value was €809 million, but with the additional unforeseen works, the first section is expected to cost around 895 million euros, based on media reports. As a reminder, Montenegro has tried and failed twice to secure funding from the European Investment Bank for the second section of the highway. Two feasibility studies conducted by international consultancies in 2009 and 2012 found that projected traffic volumes did not justify the outlay.

Similar to the Kicevo-Ohrid highway in Macedonia, the accusations of corruption did not bypass the Bar-Boljare highway project either. A prominent local NGO has revealed that the largest share of contracts awarded to Montenegrin subcontractors was awarded to a company that is closely linked to the (now formerly ruling party) DPS. Bemax company had secured deals worth €240 million euros with CRBC, which is over a quarter of the total cost for the first phase of the highway, while all the other subcontractors got jobs worth €180 million.

According to the annual Central Bank of Montenegro report, China has practically overnight become the biggest investor in Montenegro. With €70 million euros worth of direct investments in the first half of this year, China has surpassed Italy with €43.3 million euros invested, and last year's biggest investor Russia with €42.5 million. This is the first time that China has been mentioned in the annual Central Bank report as a major foreign investor since in previous years it was not mentioned among the top 50 countries putting money into the country. The report suggests

27 these Chinese investments include investments in companies in Montenegro or their purchase, the purchase of real estate, as well as so-called inter-company debt, which means that companies from Montenegro are borrowing money from Chinese companies. However, specific investments are classified as confidential in the report.

6.2 Political Influence

The regime change in Podgorica has brought along many questions about the future foreign policy of Montenegro, including its relations with China. In his first official statement regarding foreign affairs, the newly elected Deputy Prime Minister of Montenegro Dritan Abazovic stated that Montenegro should have the best relations with everyone, and especially with great powers, such as China. "The new Montenegrin government should be committed to that cooperation, so we must find models that will satisfy the interests of both countries. I hope that China, as an extremely powerful country, which is increasing its influence all over the world, will be interested in improving cooperation with Montenegro." Abazovic underlined that all mechanisms within the 17+1 initiative that contributes to the mobility of the economy are acceptable, as well as the possibility of involving more international actors in increasing Montenegro's gross domestic product. As potential projects upon which the two countries should cooperate, he especially emphasized large infrastructure projects but also projects that are important in the regional context, as well as every initiative that is in the function of improving labour mobility.

One of the most important political tools for augmenting Chinese influence in the previous period has been the so-called mask diplomacy, which has achieved significant results in building up the Chinese profile abroad. In the response to the congratulatory message from the President of the Congress of China, Li Zhanshu, the President of the Parliament of Montenegro Aleksa Becic pointed out that China is a friend of Montenegro and its people, which is evidenced, among other things, by China's help during the pandemic. Becic expressed special gratitude for the donation

28 of medical devices and equipment, which he believes has significantly helped Montenegro and its health workers in dealing with the coronavirus. A similar message came from the Montenegrin Ambassador to China, Darko Pajovic when he visited the state-owned pharmaceutical and medical company Sinopharm. At the meeting with the company's deputy director Ian Bing, Pajovic thanked Sinopharm for helping Montenegro in dealing with the pandemic and congratulated the company's advanced results in researching and developing a vaccine against the COVID-19 virus.

Another project which aims to promote Beijing’s soft power in the country is the reconstruction of the bridge on Djurdjevica Tara, which has a historic significance and is among the top tourist attractions in Montenegro. The People's Republic of China will donate over seven million euros to Montenegro for the long-announced reconstruction of the bridge. The plan is for the reconstruction to be realized by the end of 2021. The donation agreement stipulates that the Chinese side will provide the required number of administrative, engineering and technical staff and workers, for the organization of construction and management of the project in Montenegro. Alongside the non-refundable funds from China, the Government will provide the rest of the necessary means for the project from the state budget, but it is not yet specified in what amount.

Finally, it is worth mentioning that since its launch in 2019, the Montenegrin passport-for-investment program has become the third most popular scheme among Hong-Kongers, after similar offerings from Malta and Portugal. The so-called passport-for-cash incentive, usually in the form of investments or property purchases, is often used by small nations to lure foreign investments. In the case of Montenegro, the scheme is set up to only accept 2000 applicants and will run for three years and requires a €100,000 donation to the state. In terms of investment options, the minimum is €450,000 in an approved real estate project in Podgorica or the coastal region of Montenegro.

29 6.3 Outlook and Factors to Watch

The approach that the newly elected Krivokapic Government will take in the negotiations with CRBC about the new deadline for the completion of the first phase of the Bar-Boljare highway remains to be seen. Based on the political statements of the highest officials in Podgorica, the list of topics on the negotiation agenda might include topics broader than the technical discussion about the realistic timeline for the continuation of the project. The new Prime Minister, Zdravko Krivokapic, has announced multiple times that his Government will conduct a thorough control of the contract on the construction of the highway and the way the Chinese loan is being spent. Milos Konatar, a senior official of the Civic Movement URA, the smaller partner in the new parliamentary majority, has also stated that the contract will no longer be secret, emphasizing that "citizens have paid dearly for all contracts declared secret by the previous Government." One of the options Podgorica has to pressure Chinese partners and reduce both political and economic pressure might be to charge penalties for delays in completing the work. Nonetheless, the leverage that the Chinese side will have in these negotiations should not be underestimated, especially concerning the political importance that the project has, and even more importantly the extensive loan from Exim Bank that makes for a large part of the public debt of the country.

In early October, the World Bank has forecasted that the public debt would equal 93% of GDP at the end of the year, only to reach a peak of 98% of GDP in 2021. With China holding 25% of the debt, the potential construction of a second section of the national highway is singled out as the greatest risk to the serviceability of the debt. The World Bank forecasts that the first section of the highway will be finished in 2022. In the Annual report, it was also estimated that the Montenegrin economy would experience the biggest recession in the Western Balkan region this year, dropping by 12.4%, mainly due to the country’s high dependence on tourism.

30 The next large-scale project in Montenegro which will include Chinese partners concerns the reconstruction of thermal powerplant Pljevlja. The state-owned electric utility power company Elektroprivreda Crne Gore has signed an agreement on the implementation of the project of ecological reconstruction of Block 1 of the thermal powerplant in Pljevlja with the consortium led by the Chinese company Dongfang Electric International. This project aims to carry out a complete technical and environmental rehabilitation of a facility nearly 40 years old. The project worth more than €54 million will be predominantly financed from the funds of Elektroprivreda Crne Gore and should be finished by 2023. Besides Dongfang Electric, the consortium is comprised of Bemax, the same company involved in the aforementioned corruption scandal over the construction of the Bar-Boljare highway, and BB Solar co-owned by Blaz Djukanovic, son of Montenegrin President Milo Djukanovic.

In September last year, the Government announced that it had given up on the construction of the second block of the Pljevlja thermal powerplant, which it had insisted on for years. Then-Prime Minister Markovic announced that "a transformation has been made in energy towards renewable sources." The director of the directorate of the European Energy Community, Janez Kopac, welcomed the decision on the ecological reconstruction of the first block of Pljevlja. After the signing of the contract, the director of the project for the ecological reconstruction of the thermal power plant, Ji Hongchun, pointed out his belief that "we will provide cleaner air and cleaner water, bring more job opportunities and that people will live more comfortably here." However, in light of the dedication for rapid decarbonization among members of the European Energy Community, the question of the cost-effectiveness of such a large investment in a thermal powerplant with a limited lifespan remains open.

Another major issue coming up is the public bidding process for a 5G network operator which is planned for the second half of next year. According to the plan which has entered the parliamentary procedure, the Agency for Electronic Communications and Postal Services will announce a competition for the allocation

31 of free radio frequencies, which includes the implementation of 5G mobile networks. With the due date approaching, the position that Montenegro will take regarding the clash over Chinese vendors in the field of telecommunications remains unclear.

32 7.0 Serbia

7.1 Main Projects

In October, the representatives of the Government and the Chinese company China Road and Bridge Corporation signed an agreement on the design and construction of the highway Fruskogorski corridor which will connect Novi Sad to Ruma. The works are planned to start next year. The 47.7 kilometres long expressway will be worth €606 million, and it will have a 3.5 kilometres long tunnel through Fruska Gora mountain, making it the longest tunnel in Serbia, as well as a 1.8 kilometres long bridge over the Danube. After the signing, President Aleksandar Vucic stated that the Fruskogorski corridor will be open for traffic by March 2024. Chinese Ambassador to Serbia Chen Bo pointed out that this agreement is another contribution to improving cooperation between the two countries, which are initiating large infrastructural projects despite the coronavirus crisis. Vucic also announced that he would negotiate with CRBC on the construction of another highway in Vojvodina, which would connect the region horizontally and therefore complete the road network in the northern Vojvodina province.

In early December, the Minister of Finance Sinisa Mali met with the representatives of the company Powerchina and with the Ambassador of China in Serbia, Chen Bo, to discuss the project of building a metro in Belgrade. After the meeting, Mali has announced that the Memorandum of Cooperation between the Chinese and French sides will be signed in January, and the construction work on the first line of the subway should begin by the end of next year. The Deputy Mayor of Belgrade Goran Vesic stated that the construction of the Belgrade metro will begin in December 2021. Vesic claims that the financing scheme has been completed and that the construction will be a joint effort by a French and a Chinese company. According to him, French

33 company Alstom will work on electronics, trains, wagons, rails, and complete power supply, while the construction works which represent approximately 70% of the value of the work will be done by a Chinese company. "The French government has provided finance for the work done by their company, and the Chinese government will provide funding together with its company Powerchina for the other part," Vesic said. The Belgrade metro project is worth €4 billion in total - the first line will cost €1.8 billion, and the second €2.2 billion. The structure of the project was defined in a draft contract agreed by Minister Mali with the ambassadors of France and China to Serbia.

The same Chinese company is experiencing delays on another major infrastructure project it is involved in - the construction of the Belgrade bypass road which connects pan-European corridors X and XI on the territory of Serbia. During the meeting with the new Minister of Construction, Transport and Infrastructure Tomislav Momirovic in early November, Powerchina agreed to intensify works to compensate for delays in the project and complete the construction in the next two years. Powerchina and Azerbaijan's engineering company Azvirt started construction works on Section B of the road in July 2018. In April 2019, Serbia signed a Memorandum of Understanding with the two companies for the construction of the Bubanj Potok-Pancevo stretch of the Belgrade bypass road, known as Sector C.

The project of modernization of the 240 kilometres long railway between Belgrade and Nis has been awarded to the Chinese company China Road and Bridge Corporation and will be financed with the use of Chinese loans. According to the Ministry of Construction, Transport and Infrastructure, the estimated value of the project is around two billion euros. President Vucic has announced the works should start soon. The decision was made to carry out the modernization with Chinese partners, as their reconstruction plan would result in trains on this section reaching the speed of up to 200 km/h, in comparison to the 160 km/h offered by EU partners who have previously prepared technical documentation for the reconstruction work.

34 For the most part, China and Russia have taken over the projects on which Serbia was previously collaborating with the EU. In a media statement, the EU Delegation in Serbia claimed that the project of the railway between Belgrade and Nis was among the key initiatives that had been recognized as part of the EU Economic Investment Plan for the Western Balkans. According to this plan, presented in Belgrade in early October, the EU would have designated nine billion euros in grants for the reconstruction of Serbia’s dilapidated railway system. The EU has so far allocated seven million euros in grants for the preparation of the project, most importantly the technical documentation for the 130 kilometres long subsections on the Belgrade-Nis route. Over the last 11 years, the European Union has financed various railway modernization projects in Serbia with more than €143 million in grants. Also, the European Investment Bank and the European Bank for Reconstruction and Development have expressed interest in financing the Velika Plana-Nis section, which would include a significant amount of EU grants and cover up to 50 percent of the value of the investment for the projects of modernization of the railway infrastructure.

As a reminder, Chinese companies are also involved in the reconstruction of the Belgrade-Budapest railway. Two sections - from Belgrade to Stara Pazova and from Novi Sad to Subotica - are being built by the Chinese company CRSC and Serbian subcontractors, while the section from Stara Pazova to Novi Sad is constructed by Russian Railways. The modernization of three parts of the existing single-track railway is financed by loans approved to Serbia by China and Russia - two sections by Chinese, and one by money from a Russian loan.

There are also new developments concerning the Linglong tire factory that is being built in Zrenjanin. According to details of the document published by a local media outlet, the Government has decided to grant financial incentives worth €83.5 million to this Chinese company, which makes up for more than 10% of the total investment. Of that amount, around €7.5 million is the value of the land that was donated to Linglong, and the rest of the non-refundable state aid will be paid in the period until

35 2026. The document also shows that the total cost of salaries in Linglong will amount to slightly more than €16 million, which means that the non-refundable aid of Serbia exceeds the incentives for creating new jobs. In the explanation of this decision, it is stated that it is a project of state importance. Despite the large participation, Serbia did not receive any ownership share in the future factory. On top of that, the construction began without the necessary permits, such as the Environmental Impact Assessment study. Due to its location it could potentially endanger the nearby nature reserve Carska Bara.

Finally, Huawei became a commercial user of the State Data Centre in Kragujevac in December, after signing an agreement on the placement of equipment. The Director of the State Office for IT and eGovernment Mihailo Jovanovic emphasized the importance of signing the contract, claiming that this signing is "the proof of how much a large global IT company such as Huawei believes in Serbia, that we are reliable and secure." Serbia has already cooperated with Huawei on the city data centre in Kragujevac, which was put into operation in March this year, and China donated two million dollars for its construction. Nonetheless, the fact that this development is unfolding in December, might be yet another signal proving that, despite the Washington Agreement, Huawei does not intend to reduce its strategic presence in Serbia.

7.2 Political Influence

The highest-ranking Serbian officials have maintained an exceedingly positive tone on the state of Sino-Serbian relations. In the statement given during the visit of the Chinese Communist Party Central Committee Politburo member, Yang Jiechi, who visited Belgrade in mid-October, Prime Minister Ana Brnabic said that Serbia would continue to develop a well-founded comprehensive strategic partnership with China, as well as hope to expand cooperation on infrastructure, economy, and technological innovation projects. Brnabic assured Jiechi that the new Government will continue to

36 work on further improvement of overall relations with China as one of the main foreign policy priorities, because "all-time steel friendship is not only politically important but speaks of the high degree of mutual understanding that will contribute to the economic development of the country and improve the quality of life of all citizens of Serbia." The Prime Minister also expressed gratitude for the support and assistance that China had provided during the ongoing coronavirus pandemic, as well as for the fact that the works on some of the most important infrastructure projects were not stopped in that period. Brnabic thanked the Chinese companies that invested in Serbia, emphasizing that, thanks to them, tens of thousands of jobs were saved and thousands of new ones were created.

Jiechi also met with President Vucic, who underscored that it is not always easy to preserve the friendship with China in the face of pressure from other great powers, alluding to the Washington agreement which he signed with President Trump, but added that Serbia would continue to build its friendship with China and developing cooperation in all areas. Vucic said that bilateral trade in the first eight months of this year exceeded last year’s result for the same period, assessing it an incredible achievement in conditions of the global crisis due to the coronavirus pandemic. The Serbian President praised Chinese investments in Serbia, stating that "we will not forget the visit of President Xi to Smederevo when he personally saved the jobs of 5,000 workers, and indirectly 10,000 or 12,000 people. Smederevo is one of the examples of a joint victory." He further thanked President Xi Jinping and the Communist Party for their support for the territorial integrity, independence, and autonomy of Serbia. Jiechi confirmed that Beijing attaches great importance to practical cooperation with Serbia and encouraged more Chinese companies and enterprises to invest in Serbia.

Vucic also spoke via a video link at the opening of the International Expo in Shanghai at the beginning of November, where he declared that Serbia is "China's best friend in Europe, but we are also happy about the fact that we have a great and sincere friend in China." He said that Serbia wholeheartedly supports and believes in the Belt and Road Initiative. Vucic expressed gratitude to President Jinping for using his

37 authority to help Serbia in the most difficult moments, "sending his investors, people who today take care of the Serbian Ironworks from the company HBIS group, as well as the company Zijin, who take care of our copper mine."

Serbian Defence Minister Nebojsa Stefanovic met with the Chinese Ambassador to Serbia Chen Bo on November 26th. He thanked China for its support in preserving the territorial integrity of the Republic of Serbia and its national interests. Stefanovic confirmed once again that Belgrade principally supports the of One-China policy, recognizing Taiwan as part of China. The Minister also expressed gratitude for the help China provided to Serbia since the beginning of the pandemic. Ambassador Bo on the other hand confirmed "China's strong support for Serbia in its legitimate demands for the preservation of national sovereignty and territorial integrity."

The close political ties between Belgrade and Beijing did not pass unnoticed in Brussels. In the Annual report on candidate countries, the Commission warned Serbia to align its foreign policy with the EU, including when it comes to relations with China. The report noted that the areas in which Serbia had further strengthened its economic, political, and security relations with China included major joint infrastructure and greenfield projects, joint drills of special police units, procurement of substantial video-surveillance equipment, and arms and security systems purchases. It is especially highlighted that the cooperation with China increased during the COVID-19 crisis and was marked by pro-China and EU sceptical rhetoric when the assistance provided by China at the start of the COVID-19 outbreak in Serbia was particularly emphasized by Serbia’s political leadership. Moreover, a high-level government official publicly praised Chinese policies in Xinjiang province.

7.3 Outlook and Factors to Watch

When it comes to the import of vaccines, the Government is keeping the doors open for producers from both the East and the West. On December 1st, Prime Minister Ana Brnabic stated that it will be up to the citizens to choose which vaccine against

38 COVID-19 they will receive - American, Chinese, or Russian. She has announced that Serbia had signed bilateral agreements for the purchase of vaccines with Pfizer, the Russian producer of Sputnik V and Chinese Sinopharm and that according to the delivery plan, part of those vaccines are expected before the end of the year. Pfizer was the first one to send a small batch of vaccines, which arrived in Belgrade on December 22nd. While Prime Minister Brnabic was among the first vaccinated by Pfizer’s vaccine, she has announced that President Vucic will most probably receive the vaccine produced by Chinese Sinopharm.

Concerning the roll-out of the 5G network - the most pressing geopolitical question facing countries of the region - based on the latest developments Serbia seems to be buying valuable time. In early November, a former advisor at the Ministry of Trade, Tourism and Telecommunications Irina Reljin stated that Serbia was fully prepared for the introduction of the 5G network. She pointed out that the conflict between China and the United States does not affect Belgrade, since equipment is selected according to the principles of technological neutrality and the procurement procedure is organized by the operators and the state does not influence their choice, except that all required quality conditions and security must subsequently be checked by the regulatory body for electronic communications. Reljin also announced that the first auction for the allocation of 5G frequencies is expected to be announced during 2021 and that the first 5G network in Serbia will almost certainly be launched by the end of next year. Nonetheless, in the statement on December 21st, Prime Minister Brnabic has announced that the plans for setting up a 5G network next year have been postponed. According to her, the Government and mobile operators agreed that the development of the 4G network in all parts of the country should take priority. Brnabic further said that ordinary citizens currently have no need for a 5G network, since it is mostly intended for the scientific community and those who use supercomputers for artificial intelligence, and that Serbia is not behind others in this regard since many countries in Europe still have not introduced 5G networks. However, the Minister of Trade, Tourism and Telecommunications, Tatjana Matic, claims that the reasons for the postponement of the auction for the

39 allocation of 5G frequencies are economic rather than political since operators currently do not have the money necessary to invest in 5G technology.

Finally, according to media reports, Beijing is interested in one of the three largest Chinese state airlines - Air China, China Southern Airlines or China Eastern Airlines - buying the package of Etihad shares in Air Serbia. By buying a package of 49% of shares, Chinese companies would enter the European aviation market through the back door, but also further increase Beijing’s leverage in Serbia. Allegedly, official Beijing has already informed the Serbian Government that the Chinese companies are ready to take the position of Etihad. The partnership between the company from the United Arab Emirates and the Serbian carrier has been unstable for some time, which is why it is speculated that Etihad wants to exit the loss-making company. In early December, Etihad Airways indefinitely terminated flights between Abu Dhabi and Belgrade and will seemingly end its codeshare partnership with Air Serbia next year, indicating its part-ownership of the company will also come to a close. The Government seems to be preparing for such a scenario, which is why in October they adopted a decree which enables recapitalization of Air Serbia, allowing the state to increase its share in the company, which it can later sell. Furthermore, President Vucic stated that if Etihad would withdraw from the ownership of the company, another strategic partner could be brought in: "We might introduce some other strategic partners, but we will continue to hold a majority stake. Air Serbia will be our flagship carrier and it will be stronger than it is today."

In case the Government is left without a partner for Air Serbia, this would be both politically and economically very costly. It would hardly be feasible to fund such a large company exclusively from the state budget, especially with the recession in the aftermath of the coronavirus pandemic. However, a potential decision to accept any possible offer from the Chinese company to become a new partner would not come without a price for Belgrade, since it could seriously threaten its relations with Brussels. Last year, the European Parliament adopted new regulations establishing a framework for screening foreign direct investments into the EU that target Europe’s strategic assets, including aviation, and Serbia as an aspiring member is expected to

40 comply. Therefore, Belgrade might have yet another difficult choice to face soon - accept Beijing's offer and disapproval of Brussels, or leave Air Serbia without a business partner, which would probably be the end of that company. Considering how much political capital has been invested in the Air Serbia project by this Government, leaving the national flag carrier to fail does not seem like a conceivable option.

41 About

The China in the Western Balkans report series is produced by BIRN Consultancy, part of BIRN Ltd. BIRN Consultancy is an independent analysis, advisory and corporate investigation consultancy with a regional focus on the Balkans. Our mission is to help our clients better understand both the opportunities and challenges facing them in the south-east Europe. Often, our clients already have a degree of familiarity with the region. They turn to us for more detailed analysis of developments and trends or to investigate a particular problem, because our unique mix of knowledge and expertise gives us a competitive edge over others.

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