Montenegro

Montenegro

Shortly after gaining independence in 2006, after failing to secure funding from other sources, Montenegro turned to China to finance some contentious projects. These include a priority section of the planned Bar–Boljare Highway, for which the Montenegrin authorities took a Chinese loan that has since become the centre of heated international controversies.

Montenegro

Written by Mladen Grgic.

Historical Background

As a republic within the Socialist Federal Republic (SFR) of Yugoslavia, Montenegro had limited direct contact with the People’s Republic of China (PRC). Within the so-called socialist bloc, relations between the PRC and SFR Yugoslavia had their ups and downs, conditioned as they were by the ties each country had with the Soviet Union, as well as their differing views of the global socialist movement. Yugoslav liberal communist practices were often denounced in China, and the Balkan country frequently received negative coverage in the Chinese press, which portrayed it as a traitor to and ‘knife in the back’ of socialism.

In the post-Mao period, as China embarked on its path of Reform and Opening Up, bilateral relations between the PRC and SFR Yugoslavia were normalised. In 1978, the Chairman of the Chinese Communist Party Hua Guofeng became the first Chinese leader to visit the Balkans. In 1986, the Socialist Republic of Montenegro and China’s Guizhou Province established regional cooperation, with bilateral visits and agreements. At the time, Yugoslav communism was perceived positively by the Chinese leadership, which was then putting all its efforts into modernising China’s economy and discovering a new path to development.

Soon after regaining independence in May 2006, Montenegro established diplomatic relations with the PRC. In 2007, Montenegro opened an embassy in Beijing, while the Chinese consulate in Montenegro’s capital, Podgorica, was elevated to the level of an embassy. The two countries were moving towards relations that were friendly and polite but without much substance. Economic relations were dominated by trade, with a substantial trade deficit for Montenegro and no concrete measures or efforts to increase the country’s exports to China.

In the 2010s, Montenegro turned to the Export–Import Bank of China (China Eximbank) to finance some controversial projects. In 2010, the Montenegrin authorities set up the first credit arrangement with China: the Montenegrin state-owned shipping company Crnogorska Plovidba AD signed a loan agreement with China Eximbank to purchase two ships from a Chinese shipyard. In 2012, another partially state-owned Montenegrin shipping company, Barska Plovidba AD, utilised a similar arrangement to acquire two bulk vessels.

The two countries also began to cooperate on developing new infrastructure. This cooperation culminated in 2014 when Montenegro took a now notorious loan of 943.9 million USD—which, including the interest rate, was equivalent to 25% of the country’s annual gross domestic product (GDP) at that time—to build a 41-kilometre section of the planned Bar–Boljare Highway[IF1] . As the loan was issued in the form of export credits, it required the contractor to be a Chinese company—in this case, the state-owned China Road and Bridge Corporation (CRBC). Since then, even though bilateral relations have remained cordial and friendly, with limited economic cooperation and few strategic considerations from the Montenegrin side, this controversial loan arrangement has come to dominate public discussions of China’s engagements in Montenegro.

In August 2020, Montenegro experienced the first democratic regime change in its history, ending three decades of rule by the Democratic Party of Socialists (DPS), which had governed the country since 1990. The new government announced its willingness to disengage from ‘loans for infrastructure’ practices with China and to redefine its foreign policy priorities, openly seeking help from the European Union (EU) to refinance its credit arrangements with Chinese institutions. The European Commission (EC) initially rejected the proposal to refinance Montenegrin loans. However, Montenegro’s call for help provoked a wide debate across Europe, leading to some members of the European Parliament publicly asking EU institutions to help Montenegro. Eventually, the EC softened its stance and announced it would consider ways to assist Montenegro in its financial commitments to China—not to refinance the loans, but rather to help with financing the construction of the remaining sections of the highway.

On 7 July 2021, the Minister of Economic Development Jakov Milatovic revealed to Reuters that the negotiations with European and US banks regarding refinancing the highway loan are progressing well, and that a deal could be closed in a matter of weeks. He added that he is sure that the conditions of the loan will be much more favourable for Montenegro, with an interest rate around 1%.

Only one day later, the Minister of Finance and Social Welfare Milojko Spajic announced that his government, with help of the US and European institution, managed to perform a hedging of the highway loan, and thus reduced the interest rate from 2%to just 0.8%. This move was praised by the US Embassy in Montenegro, which in a tweet congratulated the Minister on his efforts to improve ‘Montenegro’s financial stability by partnering with the US banks.’

The events took place during a visit of the US Deputy Assistant Secretary Matthew Palmer, who used the occasion to suggest to his Montenegrin counterparts to be cautious when dealing with China. The comment provoked a reaction of the Chinese Embassy in Montenegro, who urged the United States to ‘[focus] on promoting US-Montenegro relation properly, rather than trying to damage China-Montenegro relations and slander China’s image in the name of doing good to Montenegro’.

BRI Status

In May 2017, during the Belt and Road Forum for International Cooperation in Beijing, the Montenegrin Government signed a memorandum of understanding (MoU) to join the Belt and Road Initiative (BRI), however, there have since been no major developments. Montenegro is also part of the 16+1 cooperation mechanism between China and 16 Central and Eastern European (CEE) countries—a platform launched in 2012 and renamed the 17+1 after Greece joined in 2019. Montenegro participated in all its summits and sent high-ranking representatives to its meetings. Within this initiative, Montenegro hosted the forum of the capital cities of China and the CEE countries in 2017; in 2018, it also organised and hosted in Podgorica a conference titled ‘Legacy of the Future’ at which participants adopted a document on environmental cooperation and established a cooperation mechanism. Although it was formed slightly before the BRI was launched, the 16(17)+1 mechanism has now been de facto subsumed under the BRI and serves to facilitate regional cooperation within the BRI.

Current Economic Relations

Trade: Chinese imports to Montenegro have grown continuously since Montenegro regained independence, increasing from approximately 56 million EUR worth of imports in 2006, to 221.9 million EUR in 2019, while exports went from only 62,000 EUR in 2007 to almost 20 million EUR in 2019. In 2019, China was Montenegro’s third-biggest trading partner in terms of imports after Serbia (500 million EUR) and Germany (244.2 million EUR), but did not even rank among Montenegro’s top-three export destinations.To put matters in context, Montenegro is not an exporting country (exported goods represented 3.2% of its GDP in 2019), and its economy consists mainly of services, dominated by the tourism sector. Its main exports to China are primary resources such as ore, slag, and ash (15 million EUR of its total exports of 17.5 million EUR are to China), while the rest mainly consist of wine and alcoholic beverages.

Investment: Since regaining independence in 2006, the Montenegrin economy has attracted significant inflows of foreign direct investment (FDI)—mostly in the form of intercompany loans, takeovers, mergers, and deals in the real estate sector. In 2007, total FDI stock in Montenegro reached 1 billion EUR—an amount that remained relatively stable in the following two years, before dropping significantly during the Global Financial Crisis. FDI inflows had an important role in covering a chronic deficit in Montenegrin current accounts.

The country’s major investors varied through the years with one constant being the Russian Federation, which has figured among the leading sources of FDI in Montenegro in the years since the country’s independence. EU countries are another significant source of FDI, especially Italy, Germany, Hungary, and the Netherlands. Over the years, there were also significant inflows from the United Arab Emirates, Azerbaijan, Switzerland, many island nations, in addition to regional countries like Serbia.

According to official data, Montenegro is not a priority destination for Chinese FDI. Between 2009 and 2019, total Chinese FDI in Montenegro was less than 10 million EUR. In that decade, China rarely appeared on the list of the largest investors in Montenegro, and never in the top ten. The situation changed markedly in 2020, when the Montenegrin Central Bank recorded 70 million EUR worth of inflows from China, bringing China among the top foreign investors for the first time. However, the bank chose not to disclose details of the investments.

While Chinese citizens did not previously figure among significant investors in Montenegrin real estate, this changed in 2019 when Montenegro introduced the Citizenship by Investment Program (CIP), which created the possibility of receiving a passport after investing a significant sum in real estate projects.

Source: Chinese Ministry of Commerce.

Aid: There is no official registry of foreign aid in Montenegro, which makes tracking and keeping an accurate database very difficult. The main sources of information are donors who keep track of their aid and media outlets. The European Union is by far the largest donor to Montenegro, providing more than 610 million EUR between 2007 and 2020. After the European Union, the main aid providers are individual EU member states.

The PRC has implemented various small projects in Montenegro, such as installing public lighting to municipalities, donating information communications technology equipment to military, educational, and medical institutions, and providing drone equipment for national parks. The health sector also features prominently in Chinese aid to the country. In 2017, China donated 12 specialised ambulance vehicles to Montenegrin health institutions. During the COVID-19 pandemic, China donated medical equipment, protection kits, and ventilators to Montenegro, not to mention 30,000 doses of one of the Chinese-developed vaccines, which was the most generous shipment of vaccines to Montenegro at the time.

Other finance: The most important aspect of bilateral relations between Montenegro and China is related to credit arrangements. The first such deal was stipulated in January 2010, when Crnogorska Plovidba AD, a company founded and majority-owned by the Government of Montenegro, took a loan of 47.4 million USD from China Eximbank to cover 85% of the value of two cargo ships to be built in China by Poly Group and Shanghai Shipyard. The loan arrangement had a 3% annual fixed interest rate, 15-year repayment period with a five-year grace period, and was backed by a state guarantee.

A similar agreement was signed in August 2012, when another majority state-owned shipping company, Barska Plovidba AD, signed a loan arrangement for 46.4 million USD, backed by state guarantees, for the purchase of another two ships. The loan duration was set at 20 years with a five-year grace period, and the interest rate was 2%.

In 2014 Montenegro signed another agreement with China Eximbank. This loan was worth 943.9 million USD, with a 2% annual interest rate, 20-year repayment period, and a six-year grace period. In this case, the aim was to finance 85% of the estimated cost of 1.1 billion USD for the 41-kilometre Smokovac–Uvač–Mateševo Highway, which would have connected the Port of Bar to the Serbian border and from there on to Belgrade.

Key Controversies in Bilateral Relations

Controversial loans: The two loans for the cargo ships in 2010 and 2012 were criticised by local shipping experts and the association of sea captains. There were also controversies regarding an ‘unsigned’ feasibility study and open opposition within one of the companies, Barska Plovidba AD, the CEO of which warned about negative aspects of the deal. In the case of Barska Plovidba AD, the issue was further complicated as 36% of the company was owned by private shareholders, who were not consulted about the deal. The government was accused of breaching the Law on Business Organisations when it failed to call for a shareholders’ meeting to decide about the loan.

As soon as the grace periods expired, the loans became problematic for both Montenegrin companies. It was revealed that the monthly instalments were higher than the actual revenue from renting out the ships. When a new government took office, it was discovered that the previous government had been unlawfully repaying the loans. The Agency for Protection of Competition—a body established through the EU integration process with a mandate that includes assessment of restrictive agreements between undertakings, investigation and establishment of potential abuses of dominant position, and assessment and control of mergers and acquisitions—ruled that the loan repayments represented unlawful state subsidies, and the smaller shareholders of Barska Plovidba AD announced they would go to court to protect their interests.

Debt trap allegations: In March 2021, Montenegro’s Deputy Prime Minister Dritan Abazovic asked the European Union to help repay the Chinese loans. During his visit to the European Parliament, he warned MEPs of the possible political implications of the Chinese loans related to the highway project. The move provoked discussion within the European Union and forced the Chinese Embassy in Montenegro to release a public statement defending China’s involvement in the highway project.

The Deputy Prime Minister’s statement brought international attention to Montenegro and its financial dealings with China. International media framed this story as a dramatic cry for help from a small country on the verge of falling into a debt trap with China. However, such a dramatic narrative seems exaggerated, given the Montenegrin authorities never officially said they were having problems meeting their loan obligations and the Minister of Finance even explicitly stated that Montenegro had no issues with servicing its credit obligations. The core of the Montenegrin problem lies in the fact that the loan was taken for a project that was considered unfeasible and has since been significantly delayed, meaning the country will have to start its repayments before receiving any revenue from the highway. Finally, its high indebtedness for such a small section of highway will limit its future capacity to build strategic infrastructure or to finish the remaining section of the Bar–Boljare Highway.

Problematic megaprojects: The Smokovac–Uvač–Mateševo Highway project has been controversial since its inception in the early years after Montenegro’s independence. As studies showed the project was economically unfeasible, Western financial institutions refused to finance it, and initial public calls for tenders for its construction fell through after the contractors failed to deliver completion guarantees. Only after Montenegro took its now notorious loan from China Eximbank in 2014 did the project begin to move forward. Because a condition of the loan was that the contractor had to be a Chinese company, the project was pushed through lex specialis to avoid public tenders. This led to an outcry about the lack of transparency and increasing costs. Contractual disputes related to complementary access roads, delays in licensing and permit procedures, and land-related controversies led to significant delays in the construction process, which at the time of writing is still under way. Environmental issues regarding damage to the River Tara, a UNESCO World Heritage Site, have also been reported, fuelling popular discontent with the project (for further details, see the relevant project profile).

International crime: In 2017, the famous Maltese journalist Daphne Caruana Galizia was assassinated in Malta, which created outrage in Europe. An investigation by Reuters and a consortium of journalists linked the murder in part to corrupt business dealings in Montenegro. Prior to her assassination, Caruna Galizia had reported on Chen Cheng, a Chinese executive at a global consulting firm who was negotiating an investment in a Maltese energy company by the Chinese state-owned Shanghai Electric Power Company. Chen and one of Malta’s richest businessmen, Yorgen Fenech, established companies in Panama, which, according to documents seen by Reuters, were used to make payments to politicians in Malta and siphon off profits for themselves from this and other deals. Fenech is now in jail awaiting trial for the journalist’s murder. The Reuters investigation also found that Fenech made 5 million USD from a wind farm deal in Montenegro also involving Shanghai Electric Power, which led to negative media coverage of Chinese engagements in the country.

Key Sources

News Outlets

  • Balkan Insight (regional news and insights)
  • CDM (a portal owned by a Greek businessman and close to the former government, with a version in English)
  • Dan (the most widely read print newspaper in Montenegro)
  • Monitor (independent weekly magazine)
  • Radio Free Europe
  • Vijesti (Montenegro’s most influential newspaper, and the most read online portal)

NGOs:

Articles

Gray, Emily. n.d. ‘The European Silk Road: Montenegro’s Decision to Build a New Highway.’ Stanford, CA: Freeman Spogli Institute for International Studies, Stanford University. Link.

Grgić, Mladen. 2019. ‘Chinese Infrastructural Investment in the Balkans: Political Implications of the Highway Project in Montenegro.’ Territory, Politics, Governance 7(1): 42–60.

Multimedia Materials

Deutsche Welle. 2019. ‘Montenegro: China’s Belt and Road to Nowhere in the Balkans.’ YouTube, 12 May. Link.

NVO Mans. 2021. ‘Road without End: Construction of the Bar–Boljare Highway.’ YouTube, 13 February. Link.

Reuters. 2018. ‘Chinese “Highway to Nowhere” Haunts Montenegro.’ Reuters, 17 July. Link.

VICE News. 2018. ‘China’s One Belt One Road Could Make or Break this Poor European Country.’ YouTube, 14 June. Link.

Cover Photo: Flag of Montenegro over Kotor Bay. Credit: (CC) Lassi Kurkijärvi.

Updated on 30 July 2021.


Mladen Grgic is a PhD candidate at the University of Pompeu Fabra in Barcelona, and an associate of the European Institute for Asian Studies in Brussels. He previously conducted research at the University of California, Berkeley, and Xiamen University. He writes in the field of international political economy, with a focus on Chinese infrastructure investments in Eastern Europe and the Balkan region and their impact on internal political dynamics and foreign policy. In parallel, he works as an executive manager of international companies and as a consultant for private enterprises in various sectors.

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