Montenegro Looks to Refinance Chinese Debt Trap Loan Used to Build ‘Road to Nowhere’

An aerial views shows a part of the new highway connecting the city of Bar on Montenegros Adriatic coast to landlocked neighbour Serbia, (Bar-Boljare highway) on May 11, 2021, near Podgorica, which is being constructed by China Road and Bridge Corporation (CRBC), the large state-owned Chinese company. - Two sleek …
SAVO PRELEVIC/AFP via Getty Images

Montenegro is negotiating with “a number of Western banks from Europe and the United States” to refinance almost a billion dollars in loans taken out from Chinese banks to finance a lavish road construction project, the country’s economy minister, Jakov Milatovic, said Wednesday. 

Milatovic did not name any of the banks in question, but said he is “very optimistic” a deal will be reached within “weeks” to refinance Montenegro’s two-percent Chinese debt at one percent or less.

“There are two options: the first is to refinance, the second is to swap the loan, or the third option is to do part of the first one and part of the second one. We believe we can get much better terms,” he insisted.

Milatovic’s optimism is difficult to reconcile with Montenegro’s repeated failures to convince Europe to rescue it from the Chinese debt trap that Europeans strongly urged Montenegro to avoid.

In April, as the first titanic payments to China loomed, Montenegro appeared convinced the European Union would bail it out, because the EU would never let a prospective member – especially its gateway into the Balkans – get dragged into Beijing’s sphere of control by loan defaults.

The EU took a long, hard look at the pile of bad Chinese debt heaped atop Montenegro’s tiny economy and decided not to get involved, although it did offer to help finish the overpriced, underperforming road project China convinced the previous Montenegrin government to build under the aegis of China’s Belt and Road Initiative (BRI).

In June, Montenegro took another pass at tapping into EU credit by selling off state assets so it could pay down the Chinese loans before pitching a refinance deal. The new pitch to the EU suggested that lower debt service costs through refinancing would give Montenegro more money to invest in revitalizing its coronavirus-ravaged tourism-based economy. 

Finance Minister Milojko Spajic said in June that a “strategic overview of our state-owned sector” is underway to determine which assets could be sold for debt relief. Potential sales items include the state-run power company, two airports, a seaport, and Adriatic beachfront property.

Bureaucrats in Brussels talked about putting together a consortium of German, French, and Italian banks to take over the Chinese loans, but to date no firm offer has been announced in public and Milatovic’s talk of looping American banks into the deal suggests European bankers remain reluctant to swallow Montenegro’s debt.

Another stumbling block is that China might well refuse to agree to a refinancing deal. Beijing continues to insist the bloated BRI road project is good for Montenegro’s “socio-economic development” and Beijing wants to develop even closer ties (meaning even greater control) over the tiny Balkan nation. China agreed to defer Montenegro’s first loan payment to late 2022 when panic about missing the payment settled in.

“This cooperation is mutually beneficial and win-win. If someone puts negative labels on China’s investment, it is not only unfair to China, but also disrespectful to the countries of the western Balkans,” the Chinese embassy to Montenegro sniffed when asked about debt trap allegations. 

Montenegro took out a $944 million loan from China in 2014 – a sum that approaches 20 percent of the entire Montenegrin economy, even before the Wuhan coronavirus pandemic – to build a 25-mile highway that would eventually be part of a road network connecting the port city of Bar to land-locked Serbia.

The deep-water port at Bar is now one of the assets Montenegro might have to sell to pay down the debt it incurred to build its Belt and Road highway. China might be able to seize the port, which it deeply covets, if its loan goes into default. BRI loans frequently contain secret clauses that forfeit the sovereignty of smaller countries to China if payments are not made.

The project was dubbed the “Road to Nowhere” and the “Highway to Hell” by critics of former President and Prime Minister Milo Djukanovic. Everyone Montenegro’s new administration is trying to refinance the loan with, including the European Investment Bank, the International Monetary Fund, and a slew of analysts in the United States, warned Djukanovic the road was too expensive, construction was too risky, and projected revenues would not justify the expense.

Djukanovic resolutely ignored their advice to take money from Beijing. After a string of feasibility studies from various countries said the project was a disaster in the making, China’s state-run Export-Import Bank paid some professors at the University of Montenegro to concoct a secret study that concluded it was somehow viable. Both Chinese and Montenegrin officials refuse to let outside observers see that document.

Massive corruption scandals caused piles of that expensive Chinese loan money to disappear without a trace. The project, which required building some 40 bridges and 90 tunnels to get across Montenegro’s mountains and valleys, faced a string of construction delays without good explanations from the Chinese construction company Djukanovic hired with the money he borrowed from China.

As with most of China’s debt-trap Belt and Road projects, almost all of the “good jobs” promised from the Road to Nowhere were snapped up by Chinese companies rather than Montenegrin firms. Local subcontractors were accused of funneling kickbacks to government officials, including Djukanovic, and delivering substandard work.

“There was no public procurement procedure for the subcontractors. Most of the project was declared as a state secret. All the benefits that [China’s] CRBC receives, such as not paying VAT [Value Added Tax], or no taxes on labor, or no customs on imported goods, was also applied to the subcontractors with absolutely no control,” an unhappy resident whose property was seized for the road told EuroNews in May.

The road project also became an environmental nightmare, with devastating impacts on the Tara river valley and its fish stocks. Construction debris may have irreversibly damaged the riverbed. Djukanovic and his Chinese business partners apparently failed to notice their planned highway would compromise a UNESCO World Heritage Site, Tara Valley’s Durmitor National Park.

Milatovic claimed on Wednesday that a strong recovery is forecast by the end of 2022, notoriously corrupt and incompetent state agencies are being cleaned up and reformed, and Chinese control can be resisted with a little help from the West, so Montenegro is a good investment for Europe and the United States.

The new administration of Prime Minister Zdravko Krivokapic, which includes many opposition leaders who pleaded with Djukanovic not to borrow money from China, appears determined to escape from the debt trap. Krivokapic has pledged to address widespread corruption and repair ties with the EU.

Skeptics note the cost of the Belt and Road highway is running at about $40 million per mile, making it one of the most expensive roads on the planet, and the recovery promised by Milatovic remains in doubt. Montenegro’s economy contracted over 15 percent during the pandemic and its public debt now exceeds 103 percent of GDP, a balance that will probably get even worse when the economic fallout from the pandemic year is fully factored in.

Paying off Chinese loans could be politically difficult for many Western leaders. Key terms of Montenegro’s loan from China remain secret, making European bankers nervous about buying the debt. 

The dire revenue projections Djukanovic resolutely ignored to get his bags of money from Beijing are not looking any better seven years later, as analysts see no way the BRI road could ever generate enough income to cover its annual maintenance costs, let alone repay that billion-dollar loan. It won’t generate much revenue at all until the entire road network to Serbia is complete, and that could be many years away, if completion is even possible.

As slow as progress has been thus far, it might get even slower once the EU standards and environmental regulations that were cheerfully disregarded by Chinese state-owned construction companies are enforced against European replacements. The highway looks to apprehensive Euro bankers like a money pit that cannot be filled by simply refinancing the billion-dollar Chinese loan.

“There is a big question about how they complete it. Their fiscal space has shrunk enormously. They have strangled themselves. And for the time being this is a highway to nowhere,” an EU official sighed to Reuters in 2018, after American company URS estimated the highway would have to beat revenue estimates by over 400 percent to become financially viable.

After a good deal of public pleading with the EU for help in the spring, the Montenegrin government suddenly went silent at the end of June, leading some analysts to suspect they were quietly negotiating with China to restructure its debt at the same time. New talk this week from government ministers about last-ditch attempts to refinance with Euros and U.S. dollars looks suspiciously like Montenegro trying to play the East and West against each other.

The EU might be getting tired of this game, suspecting the threat of falling into Beijing’s sphere of influence will be employed to squeeze money and political concessions out of Europe indefinitely. There is no shortage of European officials telling reporters how the EU cannot possibly afford to let the gateway to the Balkans fall into Chinese hands. Surely those comments have been heard by Krivokapic and his ministers.

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