VIENNA/BRUSSELS -- The European Union will not shoulder the $1 billion debt Montenegro owes China for a still-to-be-built highway, a move that adds a wrinkle to the contest for influence being waged in the Balkans.
Montenegro, a small country of less than 1 million people and NATO member that has a coastline on the Adriatic Sea, is considered a front-runner to join the 27-member bloc, which is looking to bolster its geopolitical sway as it increases its rivalry with countries to its east, including China and Russia.
Montenegro sent out a call for help last month, with Dritan Abazovic, the deputy prime minister, asking the EU to refinance the loan or risk losing influence to China.
That call was rejected this week when the EU's executive branch, the European Commission, said it would not pay off loans from third parties. However, it said it could provide assistance through other means, including helping provide cash for part of the highway project through its Economic and Investment Plan for the Western Balkans.
A commission spokesperson said the bloc was concerned about the impact of Chinese influence in the region.
"The EU has concerns over the socioeconomic and financial effects some of China's investments can have," the spokesperson said Monday. "There is the risk of macroeconomic imbalances and debt dependency."
The debt predicament stems from a plan to build a 165 km highway connecting the port city of Bar to Serbia. Construction of the first portion began in 2015.
The expressway was anticipated to spark economic vitality. But the project drew criticism over the financial feasibility for such a large-scale project in a country with a population of just 620,000 people. European lenders had balked on financing the project.
China stepped in when the state-backed Export-Import Bank covered most of the construction costs of the first portion through a dollar-denominated loan. The debt carried a 2% interest rate along with a 20-year repayment schedule sweetened by a six-year grace period, according to Reuters.
The deferment has expired, however, and Montenegro will need to start paying back the loan by the end of this year. In the event Montenegro fails to turn in a payment, China reserves the right to take over land and assets according to the agreement entered by the previous Montenegro government.
As the result of Chinese financing, Montenegro's public debt is believed to have ballooned to over 90% of the gross domestic product last year. The coronavirus pandemic struck a blow to the mainstay tourism industry, putting the country in dire straits to repay debt.
The highway project itself has been burdened with massive delays, and the date of completion is uncertain.
The Balkans remains a powder keg of competing interests between the complex mix of ethnic and religious groups. This is compounded by the entanglement by the EU, China, the U.S. and Russia.
The EU is in talks with Balkan nations, such as North Macedonia and Albania, to have them join the common market. Brussels is also providing assistance in democratization and anticorruption efforts in the hopes of bringing those nations to its side.
Montenegro shares deep ties to the EU. Not only is the nation one of the closest to the EU geographically among the Balkans, the country has essentially adopted the euro as its default currency.
In 2017, Montenegro joined NATO. The move drew the wrath of Russia, which is set on maintaining influence in the Balkans, mainly through the supply of energy. Last year, Serbia and Kosovo agreed to normalize economic relations in a deal brokered by the U.S.
China meanwhile is extending its influence over the Balkans through its Belt and Road infrastructure initiative. The effort is headlined by the support for the development of a high-speed rail network connecting the Serbian capital of Belgrade to the Hungarian capital of Budapest.
Serbia has adopted Chinese-made coronavirus vaccines. President Aleksandar Vucic has called China "a friend indeed" to Serbia's needs. If a Balkan nation falls victim to one of China's debt trap, it risks damaging the EU's quest to expand its reach.