Authoritarian states like Russia and China use the capital to increase their political clout. However, their investments and the loans they grant are not as advantageous as they are advertised, and one of their hidden costs is the undermining of democratic values and standards.
The corrosive capital of autocracies
The growing rivalry between the West and Russia on the one hand and China on the other, and the new approaches of regional players such as Turkey and the UAE, have consequences for Western Balkans countries with still weak institutions and unconsolidated democracies. Countries like China, Russia and Turkey are not so interested in democracy or democratic values and standards and their deployment in partner countries. Moreover, in some cases democracy is an obstacle to achieving their interests and goals.
To project their influence, authoritarian states use the various options available to them, including capital flows. This capital is usually placed as aid, direct investment, and even more often in the form of loans. China and Russia, whose banks and companies are either directly state-owned or under direct or indirect state control, have greater opportunities to use capital flows for their political purposes. Their capital is mainly placed in developing countries with weak economies and weak democracies, which further undermines the efficiency of domestic democratic institutions and the values on which they are based.
The effects of so called ‘corrosive capital’ can be enormous, from corrupt practices and embedding in projects funded by foreign institutions to comprehensive undermining of standards and practices established precisely so that foreign direct investment and its capital flows have the best possible effect on the citizens of the countries in which they are placed.
When domestic institutions and their practices are weak, when control mechanisms are primarily defined through the separation of powers and the independence of the media in decline, when markets are still underdeveloped, the roads are open to the influence of corrosive capital. Corrosive capital exploits shortcomings in the functioning of institutions, erodes the rule of law and affects free market competition. As they need fresh capital and fast results that they can present to domestic voters, political elites often opt for this type of corrosive foreign capital.
Domestic corrupt practices are very susceptible to corrosive capital, which in its most developed form undermines the effects of domestic laws, practices, and the independence of institutions. For example, loans, which are granted on commercial terms, are often declared as investments. Often these loans are related to certain infrastructure projects, the implementation of which requires special treatments that deviate from the solutions provided by law, such as transparent and controlled tender procedures for procurement. If there are no clear and transparent tender procedures, controlled by institutions and the public, the way is opened for a multiple increase in the price of such projects, which in the end is paid exclusively by citizens. Many of these "parts" also contain provisions on the obligation to participate in the implementation of the project exclusively by companies from the country that approved the loan, so there are no spilling effects of the implementation of the infrastructure project on the domestic economy.
Investments from China, Russia and other countries, including Western partners, do not have to be corrosive, if there are control mechanisms that prevent negative effects.
Experience shows that, especially in countries with weak local institutions, foreign countries through capital investing can use domestic deficits to increase their own profits, but also to achieve various forms of political influence.
The Chinese investments spelling disaster for the environment
In the past few years, Chinese investments in Serbia have intensified, strengthening the economic and strategic cooperation between the two countries. From 2010 to 2019, the value of Chinese investments amounted to 1.6 billion euros. However, in addition to investing in production, new technologies, servicing old debts, some of these investments have brought with them harmful effects on the environment, but also further collapse of the legal order and institutions.
At the same time, the Development Agency of Serbia emphasizes the successes in attracting foreign direct investments, stating that, thanks to demanding economic reforms, Serbia has positioned itself as one of the most important investment destinations in Central and Eastern Europe, and that since 2007 it has attracted over 34 billion euros.
Contrary to these optimistic announcements about the success of the Serbian economy, there is a gloomy picture of the devastated and polluted environment in those cities and regions that have hosted some of the largest foreign investments. Sulfur dioxide emissions in Bor, the city where the Chinese company ZIJIN MINING GROUP CO. LTD invested, in 2019, exceeded the limit values dangerous to human health 13 times, and it happened as well, several times, in 2020 and 2021.
Automatic air-quality measuring station in the Smederevo village of Radinac, near the ironworks owned by the Chinese company HBIS GROUP Serbia Iron and Steel d.o.o. Belgrade, worked for only 15 days in December 2019 and regularly recorded very high exceedances of PM particle emissions. After 15 days, the measuring station stopped working and no longer displays data in the automatic monitoring system of the Environmental Protection Agency.
The realization of one of the largest foreign investments in Serbia, the tire factory of the Chinese company Linglong, started without a proper assessment of the impact on the environment, and recently the construction inspection determined that the investor built facilities within the complex without a building permit.
Russia's support in the Kosovo case, paid by Serbia with facilities on the energy market
In 2008, Serbia was shaken by Kosovo's unilateral declaration of independence, which resulted in its mass recognition by countries around the world, mostly Western allies and their partners. During the same period, the Serbian government made strategic political and economic decisions that were related to resistance to Kosovo's independence. One such decision concerned the sale of 51% of the shares of the Oil Industry of Serbia (NIS) to Russian Gazpromneft for 400 million euros.
The majority ownership of NIS thus belonged to Gazpromneft, a subsidiary of the Russian oil giant Gazprom, while a small part of the company's shares was bought from small shareholders, employees and citizens, so the Russian co-owner increased his ownership percentage even more. That ownership in 2021 is just over 56%. The Republic of Serbia still owns about 28% of this company.
Moreover, it is estimated that NIS was privatized below the market price, which was up to four to five times higher than what the Russians paid. In this way, Serbia lost hundreds of millions of euros, while Russian partners got a return on their invested money after only a few years. The assumption is that NIS was under evaluated as part of a political trade-off that involved a budget sale in exchange for the Russian Federation's support in the fight against Kosovo's independence on the international stage. Leaving aside for a moment the negative economic consequences of such a deal, one may wonder to what extent did this move actually paid off politically, and whether Russia's support on that issue could have been secured without such a gift.
However, the controversial relations between Serbia and Russia in the energy sector do not end with NIS.
Serbia is at the top of European countries that are almost completely dependent on imported Russian gas, as it meets only about 13% of its needs from domestic production. In the context of this economic dependence, which inevitably has political implications, the question of diversification of gas sources arises, which has not been resolved for a long time.
It is important to note that Serbia pays perhaps the most expensive price of gas in Europe. This can be partly explained by the huge debt of Srbijagas to Gazprom, but also to NIS, and partly to the corrupt affairs of political elites and negotiators. For example, in 2013, Serbia paid Russia $ 720 per 1,000 cubic meters of gas, which is significantly more than the average price paid by much more developed and richer European countries, such as Germany, France, the Netherlands and others. Also, Serbia is the only country that does not import gas directly from Gazprom, but through the intermediary company Jugorosgas. This intermediary company was formed under an interstate agreement with Russia in 1996; half of its shares are owned by Gazprom, while the other half by Srbijagas and another company believed to be a subsidiary of Gazprom.
Finally, the question remains why Serbia pays too high a price for gas imports. Additionally, and not less importantly, the development of the market is prevented, which is then used not only to pursue political interests, but also someone's personal interests. The 1996 agreement expires in 2021, so the next steps of the Government will be key for the direction in which the accumulated challenges regarding the import of gas and Srbijagas itself will be solved.
Military cooperation and Serbia’s massive arms pucrchases
In the past few years, there has been an intensification of military cooperation between the two countries through the purchase and donation of helicopters, fighters, armored combat and reconnaissance vehicles, missile systems and the like.
During 2019, Serbia increased defense expenditures by almost a third (28.7%), which ranked it at the very top of European countries in terms of defense budget growth. A significant part of this increase is focused on military equipment from Russia, partly based on the agreement from 2019. The purchase of five Mi-17V-5 helicopters, the Pancir S1 missile system or the donation of six MiG-29 fighters, are just some of the forms of the economic dimension of the military cooperation between Serbia and Russia in the last few years. However, the lack of transparency regarding these and similar procurements through the budget of the Republic of Serbia indicates that everything is not going so smoothly. Namely, during 2019, after a series of media inquiries about the price of procurement of military equipment and weapons from Russia, the Ministry of Defense of the Republic of Serbia responded to the inquiry by declaring data on donations from Russia and Belarus secret, despite the decision of the Commissioner for Information of Public Importance and protection of personal data that the Ministry of Defense is obliged to provide data to applicants.
The non-transparency in the spending of funds and the enormous increase in the defense budget, despite the opposing views of the relevant institutions, point to harmful practices arising from this military cooperation. Lack of transparency always opens space for corruption, but also for other negative phenomena that further undermine trust in domestic institutions.
At the end of the day, the highest price of such investments is paid by the citizens of Serbia, who will have to repay unfavorable Chinese loans, while the institutions in Serbia will be in an even worse position than they are today. In the last twenty years, Serbia has failed to consolidate itself as a democracy with independent institutions, while today it is moving further away from the values and institutions that exist in Western Europe. If this economic trends and cooperation with China, Russia and other Eastern partners continues, Serbia will further look like some Eastern despotisms.