Dodik's plans lead to China

What is it that the Republika Srpska (RS), as an entity in Bosnia and Herzegovina, could give as a guarantee to receive money from China to maintain financial stability, and how capable would it be to repay the debt without becoming dependent on China?

This is mostly how economic analysts react, after the President of the RS Milorad Dodik announced that China could accept RS bonds as instruments of financial guarantee.

It is also assessed that this is another step by Dodik towards the East, after the RS terminated cooperation with the diplomats of Great Britain and the United States due to alleged "interference in relations in Bosnia and Herzegovina".

In 2023, the RS is facing a major financial challenge, because claims based on the bonds and other international loans issued so far in the amount of more than 1.1 billion marks (about 650 million euros) are coming due.

Dodik: We cannot remain closed

On March 31, Dodik stated that he "has assurances" that China has decided to accept RS bonds as guarantee and financing instruments.

"Usually, everyone is focused on the West, but since two days ago, we have assurances that the Chinese state and authorities have decided to accept Republika Srpska's bonds as guarantee and financing instruments," said Dodik.

He also added that China is offering highway construction works, and that RS is issuing bonds for that.

He also stated that they are trying to enter the Chinese market and create an alternative for everyone.

"Obviously, our choice has to be both one and the other side, we cannot remain closed," Dodik pointed out.

Dodik did not provide details about the value of the bonds, under what conditions they would be issued, and what would be the guarantee for the value of the bonds.

Neither the RS Ministry of Finance nor the Embassy of the People's Republic of China in Bosnia and Herzegovina answered these questions for Radio Free Europe (RSE).

What do the official data show?

According to the official debt plan for this year, in 2023 it is planned that the RS can borrow 1.9 billion marks (about 970 million euros) in the long term, short term and through guarantees.

The RS authorities plan to seek about half of these funds on foreign financial markets.

The RS has been issuing bonds since 2021, and in that year alone it borrowed about 300 million euros on the London Stock Exchange.

According to the latest data from the Ministry of Finance and Treasury of Bosnia and Herzegovina, at the end of the third quarter of 2022, RS has about 6.2 billion marks in public debt.

What kind of creditor is China?

Professor of economics Admir Čavalić for RSE assesses that the path taken by the RS towards China for obtaining loans is not a good one.

He points out that this country "is not recognized as a grateful creditor", unlike Western countries and other international financial institutions.

"This is visible when there is a breach of deadlines or simply the impossibility of repaying certain loans. Not only in the region, there were examples around the world, from Africa to Asian countries, of confiscation of property, even ports and so on," Čavalić reminds.

Čavalić points out that Dodik "wobbles" in his decisions, because a political risk could very easily turn into an economic risk.

"It is important to state that this year is decisive for the RS, understanding that there is indeed a collection of previously issued claims, primarily bonds. The RS is in a significantly less favorable position than the other entity, the Federation of BiH. The RS issues bonds under significantly less favorable conditions and mainly costs are growing," said Čavalić.

He is of the opinion that credit arrangements, which are more favorable, should still be sought through state institutions from verified international organizations, such as the International Monetary Fund (IMF).

Otherwise, as he points out, the budget of the RS will be used less and less for public services to citizens, and more and more for debt repayment.

Regarding whether China could be in a situation to look for property in the RS, Čavalic points out that it will depend on what will be part of the guarantee in addition to the bonds.

How did it get here?
Until now, the Republika Srpska sold bonds on the Vienna Stock Exchange in addition to the London Stock Exchange.

Economist Zoran Pavlović points out that the Vienna Stock Exchange, in the prospectus about the RS, pointed out quite precisely what the guarantees are and what this BiH entity loses if it does not return the money.

"The prospectus of the Vienna Stock Exchange on the RS states that, if funds are not returned to bond owners, the bond owner has the right, based on ownership, to privatize any company in the RS in which the Government owns more than 51 percent," states Pavlovic.

"This is a very serious element of a guarantee or mortgage, bearing in mind that forests, water, electricity distribution are public enterprises managed by the Government of the RS," he warns.

According to Pavlović, China has so far insisted on state guarantees for financing in Bosnia and Herzegovina, as it was in the case of the construction of Block 7 of the Thermal Power Plant in Tuzla, in the northeast of Bosnia and Herzegovina.

"We are in a position where they (China) have obviously assessed that for the sake of such a form of guarantee, it is possible to enter into the financing of a project which, on the other hand, only has bonds as a guarantee, but with such conditions as were defined in Vienna," said Pavlović.

Perhaps the negotiations with China on the loan are one of the reasons for RS's struggle for state assets, foreign economic analyst Igor Gavran says for RSE.

Republika Srpska persistently strives, by passing laws, to register state property in the ownership of entities.

The Constitutional Court of Bosnia and Herzegovina has so far confirmed in several decisions that the state, and not the entity, is the owner of property in BiH. Such a point of view is supported precisely by the representatives of Western countries in Bosnia and Herzegovina.

"The key question is what will be given as a guarantee, we have heard that China or someone else would accept guarantees from the RS. The RS itself does not have many assets except, for example, Elektroprivreda as one capital owned company," says Gavran.

"What else could be a guarantee - that is an important question, whether it has anything to do with these conflicts over state property and in general what is taken as a guarantee", asks the foreign economic analyst.

Gavran is of the opinion that one of the reasons for turning to China could be the weak rating of the RS on the western financial scene, but also the tightening of relations with western countries.

Chinese investments

Bosnia and Herzegovina is included in the Cooperation 17+1 initiative, which is the result of the Chinese government's efforts from 2012 to promote and improve business relations with the countries of Central and Eastern Europe.

The cooperation is part of China's broader Silk Road revitalization project, which is officially called the "Belt and Road" initiative.

So far, almost all Chinese investments in Bosnia and Herzegovina have been in the field of energy and infrastructure.

According to the data of the Foreign Investment Agency (FIPA), their value is between 1.9 and 2.9 billion euros.

China implements most of the projects in Bosnia and Herzegovina in the RS.

The key objection to Chinese affairs in BiH refers to insufficient transparency, that is, keeping away from the eyes of the contracts concluded on affairs with Chinese creditors and companies.

Examples of Chinese borrowers

The most famous case of over-indebtedness in the Western Balkans region is the Chinese debt of Montenegro.

That country is the only country in Europe and the only member of NATO that was allegedly at risk of China's debt trap.

In 2015, Montenegro took a loan of 944 million dollars from the Chinese Exim Bank. With that money, the Chinese company CRBC built part of the highway.

The planned 14-year repayment was supposed to start in 2021 without currency risk protection.

Due to difficulties in repaying the loan, there was a danger that China would become the owner of part of the highway, some other facility or territory in Montenegro.

Chinese officials have repeatedly expressed their interest in the port of Bar.

Due to the danger to state finances, the European Commission helped the Montenegrin Government, with the help of two American and two European banks, to protect itself from currency risk, because the loan with the Chinese was taken in dollars, the value of which varied in relation to the euro.

Four installments of this loan have been paid so far.

Djibouti took a $1.4 billion loan from China in 2013 from China's Exim Bank, which doubled public debt to 71 percent of the African nation's gross domestic product by 2018. The railway and port were built with that money.

In 2018, China took over the management of part of the Port of Doraleh in Djibouti. In 2017, it opened its first military base abroad in the same port.

Sri Lanka also took about one billion dollars from Exim Bank in the period from 2007 to 2016. Chinese companies built the port of Hambantota with that money in 2012.

Since Sri Lanka could not repay the loan, it ceded the same port to China in 2017 for 99 years.

What are China's total loans?

One of the latest studies showed that from 2008 to 2021, China spent 240 billion dollars in aid to 22 "Belt and Road" countries that could not regularly repay loans for various projects.

The study was carried out by researchers from AidData, the World Bank, the Harvard Kennedy School and the Kiel Institute for the World Economy.

The study was published on March 28, which the British newspaper The Financial Times said was the first attempt to establish China's total global aid loans.

According to that study, China provided almost half, $104 billion, of bailout loans to developing countries between 2019 and the end of 2021 alone.

Some of the 22 countries to which China gave bailout loans - including Argentina, Belarus, Ecuador, Egypt, Laos, Mongolia, Pakistan, Suriname, Sri Lanka, Turkey, Ukraine and Venezuela - also received IMF assistance.

However, the Financial Times points out, there are big differences between the IMF program and Chinese aid.

One is that Chinese money is not cheap - the study states that a typical IMF bailout loan comes with an interest rate of two percent, while the average interest rate attached to a Chinese bailout loan is five percent.