Analysis – China lends money to forward interest in Belgrade-Budapest railway, a key New Silk Road link

Budapest, Hungary (Ports Europe) May 25, 2020 - In 2013, Hungary, Serbia and China signed a Memorandum of Understanding (MoU) to build a railway that would connect Belgrade to Budapest, but numerous delays have been encountered. The proposed new railway link is not just a future connection between the two European capitals, but a link in the Chinese transport network that comprises the European arm of the new Silk Road. The railway will eventually be part of improved land connections with the Greek port of Piraeus, a port operated by Piraeus Port Authority SA (PPA), which is part of China’s COSCO Shipping Ports Limited. Beijing sees it as a key link in the Land-Sea route for goods manufactured in China and being transported to European markets for sale. The link already exists today but older rail infrastructure cannot cope with the cargo capacity forecast. Since COSCO took over PPA in 2009, Piraeus port has expanded its container traffic to become the leading Mediterranean port and the leading access point for many Chinese and Asian companies seeking export markets in Europe. The Belgrade to Budapest railway is a logical extension of this success – land links heading to central and northern Europe, but implementation has experienced numerous delays. Last improved in the 1960s, infrastructure such as track, rolling stock and railway bridges all need replacing. The railway would be 350 km long, with 184 km in Serbia and 166 km in Hungary. Maximum speeds would be around 200 kph in Serbia and 160 kph in Hungary, acceptable for freight transfer by rail, its primary purpose being cargo not people, and a way to limit costs. Total costs will be around €3 billion, 85% of which would be loaned to the countries by China (Serbia €1.3 billion, Hungary €1.8 billion). The delays include EU regulations, which calls for member state infrastructure tenders to be public, which hindered plans of the Hungarian government, as well as an EU requirement for Budapest to reduce state debts, hard to achieve with the additional debt of a massive loan from China. Budapest has declined to be transparent in both instances. In April this year, the Hungarian and Chinese government signed for the loan, with global news agency Reuters reporting a 20-year, $1.855 billion loan, an annual interest rate of 2.5%, an early repayment option and a five-year grace period on the principal repayment. Progress has been no smoother in Serbia where Belgrade signed a construction contract not only with China Railway International (CRI), but also with RDZ International of Russia, a result of its intention to try and please both Beijing and Moscow. The companies will each construct one of three sections, with the third being built by a joint venture of CRI and China Communications Construction Company (CCCC). In March, 2019, RZD Holding and Serbian Railways Infrastructure signed an agreement covering various projects in Serbia. Russian loans of around $800 million are needed to finance the costs. The project has also been delayed by contract and finance negotiations, institutional red tape, and allegations of corruption. Add the complication of a project involving state-owned Chinese and Russian companies and backed by state loans, and it’s difficult to see the 2025 completion target being realistic - there are too many competing interests. Hungarian Prime Minister Viktor Orban uses China as a tool to chasten the European Union and has been accused of awarding contracts to his friends. Serbia wants to please Beijing and both countries seek high-profile projects, whilst China looks for credibility for its railway construction prowess as well as access to new markets. Belgrade and Budapest would like transport hub roles in the new Silk Road project, and will, of course, be supported by Beijing. On the other hand, Moscow seeks renewed political influence in the two former Warsaw Pact states, not wanting to see Beijing control trade routes from China to Europe at the expense of its current and future rail and sea capacities. There are also other factors to be considered. The EU’s opinion of Hungary was lessened with Budapest’s flaunting of its Chinese interests, and its constant challenging of EU rules and regulations. The EU’s view of China is also changing, as well as the ongoing China-U.S. trade conflicts. In March last year, the EU failed to create an “EU national champion” in the field of railways, but recently changed circumstances could renew this intention. This was the failed merger of Germany’s Siemens' mobility business, including its rail traction drives business, with Alstom of France, which would have created a global leader in the industry able to compete with Chinese companies, such as those operating in Serbia and Hungary. And last but not least, the economic fallout of the Covid-19 coronavirus crisis may become an issue. Nevertheless, China sees the railway as a key link in the future success of Piraeus port and the New Silk Road, and it will be keen to take the required measures to achieve this. One interesting detail of the whole saga is, in what direction is the new railway going to continue after Belgrade? The most likely scenario is to cross the border with North Macedonia and from there to enter Greece. But the railway infrastructure in North Macedonia is in even worst condition compared to Serbia and Hungary. The alternative is a link via EU member Bulgaria, but this route is not in accordance with Serbian foreign policy. Bulgaria also has outdated “Soviet” railway infrastructure. It remains to be seen where the China’s preferences lie, which will undoubtedly trigger new Chinese investments in the poorer Balkan countries. Also, an investment in Bulgaria would be beneficial for the creation of a North-South rail corridor linking three EU members from the Eastern flank of the block – Romania-Bulgaria-Greece. Ports Europe Note: China’s strategy to win business and influence in central and eastern Europe has been through the “Cooperation between China and Central and Eastern European Countries (China-CEE, China-CEEC, also 17+1, formerly 16+1) initiative, used by the Chinese Ministry of Foreign Affairs to promote business and investment relations between China and 17 countries of CEE (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, North Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia and Slovenia). The initiative is considered deliberately divisive in some Brussels quarters. The new Silk Road (part of the Belt and Road initiative - BRI), also known as One Belt, One Road - OBOR), is a Chinese economic strategy to seek better access for Chinese-made products in European markets, which includes acquiring stakes in ports and other transport facilities, and cooperation agreements with countries along the Silk Road routes. Copyright (C) Ports Europe. All Rights Reserved. 2020.

Analysis – China lends money to forward interest in Belgrade-Budapest railway, a key New Silk Road link

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Analysis – China lends money to forward interest in Belgrade-Budapest railway, a key New Silk Road link

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