China’s Expanding Reach And Growing Influence In Central & Eastern Europe

For the past couple of years, while everyone has been watching Vladimir Putin’s moves in Eastern Europe, China has been making increasing economic inroads on Russia’s periphery. Its economic dominance of Moscow’s traditional backyard, Central Asia, is well known, but less well known is its growing presence in other areas of Russia’s periphery, such as the Caucasus and Central and Eastern Europe (CEE). Beijing is pledging tens of billions of dollars of investment and aid and signing major cooperation agreements with everyone from the Republic of Georgia to Romania to Belarus, and in the process is gaining political influence and beginning to reshape the geopolitics of the region. This influence will come at the expense both of Russia and of the West.

The post-Soviet space has long been viewed as an intermediate zone between Russia and the West, and, given the renewed conflict between those protagonists, continues to be viewed as a field of great power interaction and conflict more than as a region important in its own right. The region’s “in between” status is particularly accentuated at present, and the interposition of a major external actor taking up a significant, independent role will undoubtedly add geopolitical complexity to the region, even if the interests of the powerful third party are purely economic. In the case of China, it is doubtful that its ambitions are limited to purely economic concerns, nor that China will be overly deferential to the interests of its erstwhile partner, Russia, when the interests of the two conflict.

Chinese investment from the Caucasus to the CEE states has been warmly welcomed. Georgia and the countries of Central and Eastern Europe have heretofore been highly dependent on investment and political support from Western Europe and the United States. The inflow of capital and technology from the West has been critical since the end of the Cold War. The economic downturn of 2008 and 2009 illustrated the vulnerability of these economies to such a high level of dependence upon the West – as Western economies struggled, trade and investment dropped significantly. Since then, Western European budgets, which have been significantly constrained by austerity measures, have not allowed for more than a trickle of the massive amount of infrastructure and other investments needed by CEE states, whose economies generally lag far behind those of their Western European partners. Lastly, Russian economic stagnation has also proved a drag on CEE economies. This situation has left the door wide open to Beijing.

In addition to the economic uncertainties, there are also political and security considerations that have made the region open to developing a strong relationship with a powerful external actor such as China. For those that seek EU membership, such as Georgia, there is concern that the EU may never ultimately allow Georgia to join, at least partially out of a Western desire not to further antagonize Moscow. Georgia feels that its longstanding aspirations to align itself more fully with the West are being stymied at a time when concern about aggressive Russian nationalism and revanchism is growing, underpinning Tbilisi’s search for powerful external partners with an obvious strategic logic. Enter China, which, in contrast to the West, has made Georgia feel wanted as a hub for China’s New Silk Road, and has doubtless provided hope that billions of dollars of Chinese investments will give Beijing an interest in supporting Georgian territorial integrity as well as stability in the region more broadly.

China’s investments and interest have been just as warmly received further west. In addition to the contrast between the meager trickle of infrastructure and other investment from their Western partners and economic largesse of Beijing, among CEE states which have in the past few years become EU members, resentment exists caused by the perception that Brussels sees them as decidedly junior partners and does not respect their views. The sense of marginalization within Europe stands in stark contrast to the expression of solicitous interest from Beijing. Signaling the importance Beijing places on its relationships in the region, the Chinese Foreign Ministry created a special secretariat for Central and Eastern Europe in 2012, and each year since 2012 China and its new CEE partners have held a summit in which Chinese investment in the region is discussed, known as the CCEE (China, Central and Eastern Europe) forum, facilitating China’s engagement with the region. At the first summit, held in Warsaw in 2012, China pledged a credit line of $10 billion for projects in central and Eastern Europe. Since then the amount of funding has grown substantially, and along with it, Chinese influence.

Beijing has multiple goals in this massive influx of investment. One is the extension of its New Silk Road economic belt to Europe, which is to facilitate the movement of Chinese exports to Europe. Another is to gain access to Western European technology and R & D through the EU’s back door, Central and Eastern Europe. China is also interested in energy resources, as well as in agricultural resources, given China’s lack of arable land. And given how deeply China is tied to the United States economy, and the sense of vulnerability this creates in Beijing, China sees its growing economic ties with Europe as a hedge against its over-dependence on Washington – hence the large purchases of European sovereign debt to balance Beijing’s massive holdings of US debt.

Chinese investment pledges are steadily transforming the economics and trade flows of the region, with China becoming an increasingly important trade partner. The EU has been China’s largest trade partner for some time. Research by both Chinese and American institutions estimate that investments from China globally will be somewhere between $1 and $2 trillion over the next decade (assuming that China does not experience a particularly hard landing in the meantime and remains capable of sustaining the level of investment it envisions). That number dwarfs investments from the US, Europe, or Western-led multilateral institutions, such as the World Bank and the IMF. China has already spent more than $2 billion in the small country of Serbia alone, mostly in infrastructure and energy.

Romania is symptomatic of both a lack of faith in Western European partners and of the appeal of China in the region. Because Bucharest feels ignored, and even mistreated, by Brussels, it recently signed a deal to sell raw materials and petroleum to China which many say sold itself short, largely in order to show its Western European partners that it has other options. Chinese investments into the energy sector alone in Romania (primarily nuclear power) are slated to be around $8 billion, with further massive investments to be made in energy and infrastructure. And seeking to build its soft power on the back of its economic penetration, China is opening “Confucius Institutes” throughout the region. Romania’s Prime Minister Ponta has opened some Confucian Institutes personally, and has publicized the fact that his son is studying Chinese.

Everyone wants to be a primary transit point for China’s New Silk Road to Europe, and there is a race to enter agreements with Beijing that will enhance each Central and Eastern European country’s status in that regard. Chinese Foreign Minister Wang Yi visited Budapest in June in order to sign a memorandum of understanding formally tying Hungary to the New Silk Road, and others are scrambling not to be left behind. In Hungary China is building a railway path, known as the V0, around Budapest which will enable train traffic to transit the country in much less time by not having to transit the congested area of Budapest itself – a project that Hungary asked the EU to help undertake but was refused as Brussels did not see such a project fitting into the long-term EU development plan. China stepped into the gap. Hungary is also making itself a distribution hub for China’s Maritime Silk Road, through which Chinese goods will be brought into ports in Greece and transferred to Budapest as part of the distribution process. The infrastructure projects, including rail lines, are aimed at facilitating the transfer of Chinese goods into Europe. As part of that goal, China is also constructing and funding a high-speed rail from Budapest to Belgrade, which is later to be expanded to Athens. It is estimated that the rail line will shorten travel times from Budapest to Belgrade from the current 8 hours to less than two and a half hours.

While CEE states are thrilled with these Chinese investments, Western Europe is not altogether happy about China’s growing investments and influence in the region. There are concerns regarding the dumping by China of subsidized Chinese products on the European market, about intellectual property rights protections, about the well known lack of transparency among Chinese state-owned firms (See the following Transparency International Report that discusses the lack of transparency among Chinese firms here.) , and concerns that projects such as the Hungarian railway project may not be undertaken in line with EU guidelines or meet EU standards. Former EU Trade Commissioner Karel De Gucht, in particular, has been quite vociferous in his criticism of Chinese actions on a number of trade and investment issues related to Europe.

There are also concerns that the more closely China becomes engaged in the continent, the more it will seek to benefit (and given Beijing’s track record will seek to benefit as much throughout outright theft of advanced European technology as through legitimate trade relationships) from Europe’s advanced research and development networks. R&D is an area in which China lags far behind both Western Europe and the United States, and Beijing likely expects closer Sino-European economic cooperation to yield benefits to China in this area. Chinese acquisitions in Europe have focused heavily on new technologies and advanced manufacturing.

Most important among the EU’s concerns is that its eastern members are forging an independent relationship with the Chinese economic superpower that shares few values with Europe, and the long-term effect that this growing relationship will have on the continent. With so many eastern EU members and Eastern Partnership states working so closely with China with little or no reference to Brussels’ views, many in Western Europe see Chinese interaction in the region as being “detrimental to Europe’s credibility as an international actor.

Ultimately, the spread of China’s influence westward through Eurasia to CEE will likely serve to undermine the values of transparency and rule of law, to weaken the appeal of democratic ideals, and to strengthen more authoritarian and less transparent impulses in this post-Soviet space still trying in many ways to deal with the crippling legacy of communism. And as  the appeal of the EU’s system is blunted by the nearly constant economic and political crises that call the very rationale of that project into question, the “balance of forces” (to borrow an old Soviet term) are likely to increasingly tilt against the forces of democracy, transparency, human rights, and the rule of law that the EU’s Eastern Partnership Programme have aimed to spread eastward.

Earlier this summer, Freedom House put out a report which argued that democracy was on the defensive and authoritarianism on the rise in Europe and Asia. And despite the admittedly positive developmental impact of Chinese investment on CEE countries, China’s authoritarian tendencies and “no strings attached” aid that stands in such stark contrast to investment from the West, which investment is often tied to demands that progress be made in such areas as combatting the corruption endemic in the region, means that this trend is likely to only worsen as China’s influence grows.

 

Text: Forbes by Paul Coyer 02-08-2015

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