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A section of a highway connecting the Montenegrin city of Bar to Serbia under construction in 2019, financed by the Exim Bank of China. The Montenegrin finance minister said US and French banks had agreed to refinance the debt the country faces in paying back the loan. Photo: AFP

Montenegro reaches deal with Western banks to restructure Chinese debt

  • US and French banks help Balkan state refinance nearly US$1 billion in loans from Exim Bank of China, dropping interest rate to less than 1 per cent
  • Move is seen as bid to counter Beijing’s attempt to build influence in the region

Montenegro, a tiny Balkan state of just 620,000 people, has become the centre of a geopolitical battle between Beijing and Brussels – and has also sucked in the US.

On Thursday, the Montenegrin government secured a deal with two banks from the US and one French bank to restructure its Chinese loan of nearly US$1 billion — equivalent to about a fifth of the nation’s GDP in 2019.

With the help of American and European partners, “Montenegro managed to reduce the interest rate on the Exim Bank of China loan from 2 per cent to 0.88 per cent through a hedging arrangement”, Finance Minister Milojko Spajic said in the capital Podgorica.

The deal will help Montenegro save up to €8 million (US$9.5 million) a year – an amount that Spajic said would go into development projects and help the government respond to rising food prices.

Montenegrin Finance Minister Milojko Spajic said a restructuring deal struck with three Western banks would provide relief his country needed on a nearly US$1 billion loan from the Exim Bank of China. Photo: Reuters

“Negotiations on refinancing and optimising the public debt of Montenegro continue, and this arrangement gives much-needed time to do so in the best possible way,” Spajic said Thursday evening. He declined to identify the banks that had helped restructure the debts.

In 2014, Montenegro borrowed funds from the Exim Bank of China to finance the first stretch of a planned highway connecting its port city of Bar to Serbia, after the World Bank and the International Monetary Fund both deemed it not commercially viable. Principal payments for the loan were due to begin this month but Montenegro had warned it would have difficulties in servicing the debt. China was reportedly willing to defer Montenegro’s first payments until the end of 2022.

Even so, analysts said, Montenegro sought more help than that to reduce its loan costs. The deal with the banks was announced a few hours after Spajic met with US deputy assistant secretary of state Matthew Palmer in Podgorica.

Palmer said that Montenegro’s future is with the European Union, and “urged caution” in its business deals with China, the US Embassy in Podgorica posted on Twitter.

The country’s indebtedness to China has been a hot issue, including at the European Union, when Montenegro’s deputy prime minister, Dritan Abazovic, sought the EU’s help in refinancing the Exim Bank loan – or risk losing influence to China. Montenegro is not part of the 27-nation bloc, but has applied for membership.

EU officials declined to directly help with the loan but Brussels agreed to use a combination of Germany’s Reconstruction Credit Bank, the French Development Agency and Italy’s CDP investment bank to provide financial aid and help Montenegro with refinancing, Reuters reported last month.

Montenegro – a member of Nato with a coastline on the Adriatic Sea – has played a strategic role in Beijing’s bid to build its influence in Europe through its Belt and Road Initiative. But critics have raised concern over Montenegro’s increasing financial dependence on Beijing, in what analysts said could complicate its ambitions to join the EU.

Montenegro in ‘final phase’ of talks with Europe to refinance China debt

Stefan Vladisavljev, an analyst at the Belgrade Fund for Political Excellence, said that it was not clear whether EU played any role in the latest agreement, “but at this moment it looks like the main partners were not found in Brussels”.

“This will not help EU’s attempts to challenge the Chinese presence in the region,” Vladisavljev said.

He said that the EU had missed the opportunity to publicly support Podgorica and to show that the western Balkan region is a primary sphere of interest outside the EU itself.

However, Vuk Vuksanovic, a researcher at the Belgrade Centre for Security Policy, said that the decision to restructure the debt — both by Montenegro and the EU — was absolutely motivated by China’s efforts to build influence on Europe.


G7, Nato rhetoric mark ‘seismic shift’ between China and the West

G7, Nato rhetoric mark ‘seismic shift’ between China and the West

Vuksanovic said that if the EU had not assisted Montenegro with its debt, it would have sent a signal to the Balkans that the region is not a priority for Brussels, leaving Montenegro as low-hanging fruit for China.

“The EU acted because they saw that the consequences would be too dire for their interests in the region in case of inaction,” Vuksanovic said.

Scott Morris, a senior fellow at the Centre for Global Development think tank, said the motivations for all parties went beyond the financial.

“The G7 countries last month signalled pretty clearly that they want to counter China in the financing sphere as a strategic matter, so I expect the Europeans see an opportunity here,” he said.

Morris added that China has not been particularly generous when it came to debt rescheduling in situations like Montenegro, as has occurred in Africa; in some cases the rescheduling ended up costing the borrowing country even more.

Montenegro’s planned 165km (102-mile) highway would not only help its economy, it would also facilitate China-Europe trade via the Balkans. So after the World Bank and the International Monetary Fund turned Podgorica down, Beijing stepped in to finance the first 41km stretch of the project through the Exim Bank of China.

The US$944 million loan came with a 2 per cent interest rate along with a 20-year repayment schedule and a six-year grace period.

Construction of the first section of the road, which began in 2015, was expected to be completed two years ago; it is now scheduled to be finished by the end of November.

A bridge section of the highway, shown in 2019. Construction of the roadway, which began in 2015, is expected to be finished by the end of November. Photo: AFP

Principal payments were supposed to start this month, the end of the grace period. (The 20 year repayment schedule starts now, and ends in 2041.) But, blaming the loss of tourism revenue because of the pandemic, Montenegro said it would have trouble servicing the debt.

Local media in Montenegro reported that in May, Chinese President Xi Jinping told Montenegro President Milo Djukanovic in a telephone call that “China is ready to negotiate with Montenegro on an extension of the grace period” of the loan until the end of 2022.

But Vladisavljev said that the agreement struck with the Western banks was better because it could be a long-term solution.

“The rumours that China is willing to extend the grace period would not resolve the problem – it would just postpone it,” he said.

“And the solution that was reportedly found in cooperation with the US and French banks will help the mitigation of the rising Chinese interest in the country and potential harmful consequences that Montenegro could experience if the loan is not paid in time and in full.”

EU Special Representative Johann Sattler (left) pictured with the US Special Representative for the Western Balkans Matthew Palmer, told Montenegro officials the nation’s future was with the EU. Photo: EPA-EFE

Vuksanovic said there were two options open to China if Montenegro failed to repay the loans: seize assets in Montenegro, or reprogramme the debt.

“Both Brussels and Podgorica perceived that even the second option would be a major strategic score for China, as it would put an EU membership candidate in a major political dependency on Beijing,” Vuksanovic said.

However, Vuksanovic said that China was not a loser either – since it will get paid.

“The local nations will not entirely close doors for China, as the EU enlargement is frozen for the foreseeable future. The Balkan nations will continue eyeing opportunities to collaborate with China as long as the risks are not too high and manageable – until there is a better counter-offer from the West,” Vuksanovic said.

This article appeared in the South China Morning Post print edition as: Tiny Montenegro centre of tug of war between EU, China