The growth of Serbia's debt to China: 'Steel friendship' with interest
From 305 million euros to 3.7 billion. Serbia's debt to China has increased 12 times in the last ten years, according to data obtained by Radio Free Europe (RSE) from the National Bank of Serbia (NBS).
In the period of the past ten years, loans were taken for infrastructure projects, which, due to the lack of transparency from the very beginning, are still under the scrutiny of the European Union (EU).
According to Branimir Jovanović from the Vienna Institute for International Economic Studies, this situation is not yet worrying, but as he said - "you need to be careful".
"The main problem with Chinese loans are certain hidden clauses that can have a high price," Jovanović told RSE.
The EU is the largest investor and the most important foreign trade partner of Serbia, which has been a candidate country for membership in the European bloc since 2012.
In parallel with its European path, Serbia laid the foundations for a strategic partnership with Beijing - through loans for roads, railways and other facilities that citizens will repay over decades.
The share of Chinese loans in Serbia's foreign debt
The largest part of the debt is due to loans from the Chinese Export-Import Bank.
Chinese loans currently, according to NBS data, make up 8.4 percent of Serbia's total foreign debt. This means that for every 100 euros owed to foreign creditors, the state owes eight euros to China.
What can be seen on the website of the Public Procurement Authority is that, for example, Serbia's debt to the European Investment Bank (EIB) as of May 31, 2023 is 1.8 billion euros, twice less than the debt to China.
According to the same data, the debt to the European Bank for Reconstruction and Development amounted to 435 million euros, and to the German Development Bank (KfW) 174 million.
Serbia is part of the Chinese state initiative "Belt and Road" with the countries of Central and Eastern Europe (17 + 1) to reopen trade channels to the West.
The corridor follows the ancient Silk Road to power China's economy.
Cooperation with that Far Eastern country, which Serbian President Aleksandar Vučić describes as "steel friendship", Serbia intensified in 2016 after the visit of Chinese President Xi Jinping.
What is Serbia paying off loans for?
Serbia, as can be seen from the budget, is currently paying a loan for the Zemun-Borča bridge in Belgrade, the ring road around Belgrade, the highway that will connect Belgrade and Čačak in central Serbia, the new block of the Kostolac B thermal power plant and the high-speed Novi Sad - Ruma highway, known as "Fruškogorsk Corridor".
As can be seen from the budget, until 2039, the section of the highway Preljina - Požega and the section of the railway Novi Sad - Subotica within the international railway Belgrade - Budapest will be paid off the longest.
The authorities in Serbia justified taking Chinese loans instead of European loans with flexibility and easier availability.
The price of easier getting a loan
The fact that Chinese loans are easier to obtain has its price, explains Branimir Jovanović from the Vienna Institute for International Economic Studies for RSE.
"They are not cheaper, and that is well known. Chinese loans usually have a slightly higher interest rate than European ones, although not too much," said Jovanović.
What can be problematic about Serbia's borrowing from China, he pointed out, is that the loan agreements state that the Chinese arbitration commission is competent for arbitration.
"This practically means that if a dispute were to arise, Serbia would have limited possibilities of action because the arbitration would be under the jurisdiction of Chinese institutions," said Jovanović.
As an advantage of Chinese loans, Jovanović stated that they have "fewer conditions and rules for spending money, reporting and other aspects related to the realization of the project". However, as he clarified, this is not necessarily a good thing.
"European loans are more complicated and stricter in this regard, because they have precise rules regarding project documentation, tenders, transparency and similar things. Those strict rules have a good side, because they reduce the space for corruption and problems during project implementation," Jovanović concluded.
What do the citizens say?
The citizens of Belgrade with whom the RSE team spoke were familiar, as they stated, with Serbia's borrowing from China.
"A disaster, what can I say. I am aware of everything, they all give us loans, we pay for it all. Half of the citizens are not aware that it is from loans," said Slađana Popović in an interview with RSE.
Dobrislav Drakul assessed that the fact that the state is taking on additional debt is not good for the citizens of Serbia.
"I view all loans negatively, whether from China or Russia. Borrowing is not good at all," said Drakul.
The solution, in his opinion, is to start domestic production, in order to build the infrastructure with one's own money.
Dragan Balać is a native of Belgrade. He has lived in Germany for more than thirty years. As he told RSE, he believes that loans are a necessity.
"We are a small country, we wouldn't be able to function if we didn't borrow," said Balać.
He argued his position:
"Before, you didn't have debt, but you had potholes on the road, you didn't have bridges, railroads... Now we have that, but normally we also have credit."
When asked if he thinks there is additional borrowing with China, in relation to the EU as a traditional partner of Serbia and a bloc whose membership Serbia aspires to, he said:
"You have to work with everyone."
Italy is considering the possibility of leaving the Belt and Road Initiative
Italian Defense Minister Guido Crosetto said in mid-July in an interview with the Corriere della Sera daily that the country must withdraw from China's "Belt and Road" initiative.
Crosetto stated that over the past four years, the initiative has only helped to increase Chinese exports to Italy.
Italy, a member of the EU, is the only developed economy that is part of the Chinese initiative. It joined in 2019, for which it was criticized by Western allies.
New projects, new borrowings
One of the most extensive Chinese projects in Serbia, "Clean Serbia", was agreed in August 2021. It involves the construction of a sewage network at 77 locations in Serbia.
The contract was signed by representatives of the Government of Serbia and the Chinese company China Road and Bridge Corporation (CRBC).
The authorities in Belgrade, announcing the project, stated that it is worth 3.2 billion euros.
Funds should be secured through loans from China. This is almost the same amount that Serbia already owes to China. The main contractors will be Chinese companies.
The loan for the first phase of the project in the amount of 203 million euros was approved in 2022 by the members of the Parliament of Serbia.
The work was concluded without a tender, through a direct contract with the Chinese company China Road and Bridge Corporation (CRBC).
Serbian-Chinese affairs outside European regulations
As a rule, Chinese projects in Serbia are negotiated directly, without tenders, and Chinese companies are hired as contractors.
Calling for a tender for works to select the best bidder is part of European regulations, which are not respected in this and other Serbian-Chinese projects.
The domestic Law on Public Procurement also stipulates mandatory tendering.
However, Serbia and China have signed interstate agreements, which have stronger force than law
On the other hand, for projects financed by loans from European institutions, as previously explained by the European Investment Bank for RSE, the EU very often provides grants.
Thus, the project is partly financed by loans paid by the citizens of Serbia, and partly by EU money.
Transparency and tendering for contractors are mandatory in those cases.