Lacking economic purpose, Hungary's embrace of China's Belt and Road central to Orbán's foreign policy manoeuvres

D MTI20190425007
2019.06.03. 14:00

For years, the Hungarian government has been trying to forge a closer partnership with China, yet it has very little to show for it. The latest ‘flagship project’ of Hungary-China cooperation, the planned modernisation of the Budapest-Belgrade railway is a prime example of the reasons: huge delays, skyrocketing costs and the lack of clear purpose mar China's first foray into the EU railway market. While it does not make sense from an economic perspective, the project might be better understood as one of PM Viktor Orbán's unorthodox foreign policy moves.

Not many eyebrows were raised at the annual Belt and Road Forum for International Cooperation in Beijing in late April when Hungarian FM Péter Szijjártó announced that the public procurement contract for the modernisation of the Hungarian section of the railroad connecting the Hungarian and Serbian capitals, Budapest and Belgrade, had been awarded to a Chinese-led consortium. 

The project has been in the making for years: China, Serbia and Hungary signed a memorandum of understanding on upgrading the rail route in December 2014, emphasising that it will serve as “a corridor between China and Europe”. It was clear from the start that as with other projects of the Belt and Road Initiative (BRI for short), the construction was to be financed with Chinese loans, and Chinese companies were expected to do the majority of the work.

Nevertheless, the project is peculiar for a number of reasons.

  • It is shaping up to be the first major Chinese railway project within the European Union, a market as of yet untouched by emerging Chinese railway companies.
  • At an expected cost of 750 billion forints (2.3 billion euros), it is also the single most expensive infrastructure project ever to be undertaken by Hungary, even as the country has been spending billions of euros of EU structural and cohesion funds on public works in recent years.
  • And while the costs are extraordinary, the potential benefits appear to be meagre: traffic between Budapest and Belgrade is scarce, the modernized rail route will have no connections to the European mainlines, and the government’s publicly stated reasons for the modernisation do not make economic sense.

Yet all these shortcomings are indicative of the larger issues of Hungary’s China-policy. While the Hungarian government has been investing considerable diplomatic (and in case of the railway project, also fiscal) resources to woo China, it has very little tangible results to show for it; not least because its official aims are severely limited by structural mismatches between the two countries. But despite being short on successes, the Hungarian government appears to double down on strengthening its ties with Beijing, even as its Western allies and regional neighbours are becoming more wary of China’s increasing global clout.

The latter was in full display at the BRI forum in Beijing: after announcing the deal, Szijjártó and PM Viktor Orbán praised the aligning interests of Hungary and China, covertly condemned the United States, held talks with Russian President Vladimir Putin, spoke about supporting China's ‘digitalisation efforts,’ and attended the signing of a memorandum of understanding on research cooperation between a Hungarian state university and Huawei, the Chinese tech company recently chastised by Washington. Orbán proclaimed in Beijing in a slight snub to the US that

Hungary "does not accept any foreign, ideological pressure in connection with its participation in the Belt and Road Initiative."

Eastern Opening

Lavishing praise at Beijing is nothing new for the Hungarian PM. The Orbán government launched its ‘Eastern opening’ policy in 2011, emphasizing the need to forge closer business ties with emerging East Asian economies. In 2012, it had hosted the first summit among 16 Central and Eastern European (CEE) countries and China, which later became the so-called 16+1 initiative, the main forum for dialogue between China and the region. In 2015, in a widely cited speech, Orbán declared that instead of following in the footsteps of Western liberal democracies, Hungary should pay attention to ‘illiberal’ success stories like China.

More recently, Budapest’s support of Beijing took more direct forms. In 2016, Hungary sabotaged an EU joint statement on the South China Sea dispute, where regional states accuse China of grabbing up territory in defiance of international law. Last year, the Hungarian ambassador to China refused to sign an EU declaration highlighting the pitfalls of the Belt and Road Initiative and Chinese foreign policy in general. In the latter case, Hungary was the only member of the EU not to endorse the statement. In early 2018, amidst allegations of widespread corruption and the misuse of EU funds, Orbán went so far as to suggest that if the EU was not willing to finance infrastructure development in Hungary, Budapest will turn to China instead.

Hungary is certainly not alone in trying to woo China. The Belt and Road Initiative, China’s and Chinese president Xi Jinping’s premier foreign policy project launched in 2013, counts over 120 participating states, among them 13 EU members. The latest BRI summit in Beijing was attended by representatives of 150 countries, including the British and French Foreign Ministers. A few weeks before Szijjártó’s announcement in Beijing, populist-led Italy has become the first G7 country to sign up to the initiative. Even in Europe, very few countries can afford to shun Beijing.

Sharing successes

On the one hand, this is hardly surprising. In China’s narrative, the BRI is about win-win cooperation: the project aims to increase the connectedness of China, South- and South-East Asia, the Middle East, Africa and Europe through large-scale infrastructure development, financed by Chinese loans. So far, the initiative gave rise to 3116 projects worldwide, and agreements concluded within the BRI framework are valued at around $500 billion. Chinese experts tend to emphasise that China shares its economic achievements with the developing world, and satisfies developmental needs that thus far nobody else was able or willing to satisfy, said Tamás Matura, Assistant Professor and China-researcher at the Corvinus University of Budapest.

As China is ramping up its overseas investments, there is no shortage of countries (and political elites) eager to profit from it.

On the other hand, many Western analysts see the BRI as a vehicle of China’s increasing economic and political influence. Focusing on the geopolitical reasons behind the BRI, an increasingly common narrative in Western media paints China as trying to "buy" the developing countries and chain them to itself through debt. This narrative highlights that the infrastructure projects are built by Chinese companies, financed with Chinese loans, and usually employ Chinese workers, therefore a disproportionate amount of the benefits are reaped by China itself.

Matura said that these two narratives are not mutually exclusive, but merely focusing on different aspects of the BRI. There are least eight separate motivations behind the Belt and Road Initiative: utilising China’s excess industrial capacities; utilising excess Chinese financial capital; developing China's Western provinces; improving China's geopolitical situation; satisfying Xi Jinping's personal political ambitions; gaining economic and political influence; developing international institutions; and countering other emerging institutions that exclude China, such as the Trans-Pacific Partnership (albeit such initiatives have largely broken down since the election of Donald Trump as US President).

Matura said that even though Western media tends to focus excessively on the negatives of BRI, there is a real danger that political elites could drag their countries into disadvantageous deals with China for personal gain. 

Trouble in paradise

Even in Asia, international scepticism towards the BRI is on the rise, as expectations and reality often clash when it comes to turning the agreements into reality. Numerous Chinese infrastructure projects have been facing severe delays and cost overruns, and those which are completed produce much more meagre economic benefits than expected. In certain places, the Chinese loans taken without due diligence contributed to unsustainable debt levels and even some small debt crises.

Sri Lanka has emerged as a prime example of such missteps, but there are many other places where voters and politicians are souring on BRI, including Malaysia, the Maldives and Pakistan. Problems are emerging even in Hungary’s immediate neighborhood: Montenegro is facing tax raises and a partial public sector wage freeze to pay for the vast infrastructural development.

Beijing is aware of these problems: much of this year's BRI forum dealt with remedying the debt problem and offering a better model of financing. Xi Jinping emphasised the goal of creating "good quality, sustainable, risk-resistant, logical and inclusive infrastructure".

This quote summarises all the criticism against BRI: the exploding prices, the unchecked risks, the lack of sustainability, the ecological impact, and the lack of inclusivity that characterise the initiative. 

The current state of the Chinese economy adds further impetus for rethinking the BRI: as growth is slowing and domestic corporate debt is soaring, it is becoming more challenging to finance the construction binge. Two recent reports, one published by the Institute of International and Strategic Studies at the prestigious Peking University and another by the influential China Institute for International Studies think-tank both recommend scaling back the BRI, partly to allay the aforementioned Western fears, and partly to ease the financial burden. 

Slower, more expensive, and delayed

The generic problems of the BRI are evident in the case of the Budapest-Belgrade railroad. According to the original schedule, the railroad was to be completed by mid-2017 for around 1.5 billion euros. Since then, the costs have increased, the proposed speed of the railway service on the to-be-modernized line has decreased (from the planned 200kph to 160kph), the planned start of the construction was pushed back—the work is currently scheduled to be completed in 2023. Most importantly, it is still unclear how Hungary would profit from the rail line.

According to the Hungarian government, the project could see Hungary become a cargo and customs hub for Chinese goods. Modernising the rail route would provide a faster connection with the Greek port of Piraeus, which is owned by Chinese investors. From there, Chinese goods could be transported to Hungary to be processed and exported to Western European markets.

However, these goals appear to be unrealistic. The Chinese project aims to upgrade the current single-track railroad to a double-track one to increase its capacity, and modernize the tracks to allow higher speeds. Yet the current rail link between Budapest and Belgrade is not short on free capacity: it is underused as it is, and observers are unconvinced that raising maximum speeds on the line would in itself attract more cargo traffic. Cargo containers travel for up to a month between Chinese and European ports, and could take another week or so to reach their final destination within Europe. The journey between Piraeus and Belgrade alone takes two-to-four days, hence travelling faster on the last 370km stretch to Budapest would not make much difference. 

As a representative of COSCO, the Chinese company operating the Piraeus port, previously told Index: the railroad modernization do not matter for their calculations.

Customs fairytale

A more recent argument put forward by the government is that Hungarian customs procedures are more efficient than in other regional countries, which would make Hungary an attractive option for Chinese exporters (exporters to the EU can choose to process their goods in any member state, regardless of the port of entry). Yet, according to the World Bank’s Logistics performance index, the efficiency of the customs clearance process in Hungary is around the EU average, and well below the values for Germany and the Netherlands, where the majority of European container traffic is handled. 

Another issue which makes Hungary’s aim of becoming a Chinese cargo hub more problematic is that rail line capacity is scarce to the West, and there are no known plans for expansion in that direction. This means that even if Chinese companies would flock to Budapest to process their cargo, they would have a hard time moving the goods to the Western markets they are trying to reach.

Even if cargo traffic would significantly increase, the hefty price tag still questions the utility of the project: Index previously calculated that based on the best-case-scenario (which assumed that Hungarian shipping container traffic would roughly double in a couple of years), the rail line may break even in 130 years, not accounting for repair and maintenance costs. The government’s calculation are not known: the feasibility study of the project was classified, apparently due to national security reasons.

Reference work

At the end of the day, it is hard to fathom how an Eastern, landlocked country could compete with the established trading ports of Western Europe. As one observer, who wished not to be named, put it: even though a number of Eastern EU members are vying to be the ‘gateway of China to the EU’, China already has access to the European markets through dozens of ‘gateways’.

In other words, the problems of the railway project are reflections of a structural mistmatch between Chinese and Hungarian goals.

Central Europe "could have learned in the past eight years that Chinese offers of infrastructural development are unattractive to the region," Tamás Matura said. The loan-based BRI is not a particularly attractive funding option for most CEE countries, since the majority of them have access to nonrepayable EU grants. Moreover, infrastructural development is less of a pressing issue for the higher-middle-income countries of the region than for poorer and much larger African and Asian countries. 

People with knowledge of Hungary-China relations who wished to remain anonymous offered a more cynical view of the Budapest-Belgrade project. One persistent theory is that the sole aim of China is to provide work for its railway companies as they face limited domestic opportunities for their expansion. Another narrative is that the Budapest-Belgrade rail route is meant to serve as a reference work for Chinese companies eager to enter EU railway markets. The common point is that the economic merits and potential benefits of the project are secondary. The main point is to accommodate Beijing's wishes.

Party financing

Chinese infrastructure investment poses another domestic problem. EU-financed infrastructure projects have traditionally been seen as cornerstones of political financing in Hungary. Lajos Simicska, Orbán’s former right-hand man built his (and through him, Orbán's) media empire from the proceeds of a construction company which was unusually successful on public tenders.

After falling out with Simicska, Lőrinc Mészáros, the prime minister's childhood friend and a former gasfitter has become Orbán’s main lieutenant; unsurprisingly, his recently established construction firm is now a heavyweight in the sector, profiting from a sudden public works bonanza. Hence Hungarian and Chinese interest clash when it comes to infrastructure investment: both sides are interested in giving the job to their own companies.

FM Szijjártó previously hinted at this problem by stating that Hungary might need to pay a higher interest rate on the Chinese loan financing the railroad project in return for a more meaningful role for local companies in the construction. According to a source who did not want to be named, the huge delays partly stem from the lengthy negotiations over the participation of Hungarian firms.   

In the end, these problems have been dealt with: Index found out that a firm within Mészáros’s construction empire ended up as the local partner in the winning consortium. Curiously, the Foreign Minister and the government were unwilling to name the participants of the winning bid, which is a highly unusual move given the cost of the project. Just as unusual as the Foreign Minister announcing the winner of a public procurement deal on foreign soil: it is usually neither the FM's duty nor their authroity to deal with such issues.

Structural forces

More mundane structural issues limit Hungary-China economic relations at large. In Beijing, FM Szijjártó proudly proclaimed that bilateral trade values reached an all-time high in 2018. However, he conspicuously omitted the fact that this is due to the significant increase in Chinese exports to Hungary, while Hungarian exports to China declined in 2018. More importantly, China's weight in Hungarian goods trade has been stagnating for the past six years: its share in Hungarian imports is stable at around 5%, while only about 2% of Hungarian exports end up in China.

Investment is a similar story. Although the Ministry of Foreign Affairs claims that Chinese companies have invested $4.5 billion in Hungary, official figures from the Hungarian National Bank show a direct investment stock of $1.8 billion, while the Mercator Institute of China Studies, a Berlin-based think-tank places the number around the €2.4 billion mark. (Part of the reason is that the ‘nationality’ of companies tends to be hard to pin down in a globalized world economy).

To put that into perspective, the entire stock of foreign direct investment in Hungary is €106 billion, so China's share is merely a couple of per cents. Moreover, around half of the Chinese investment stock in Hungary is made up of assets of subsidiaries of foreign firms which were acquired by Chinese investors. In other words, Chinese investors did not actually invest money in Hungary; they purchased investment stock from other foreign investors. 

The relative insignificance of Chinese investment is a region-wide phenomenon: only 2% of Chinese direct investment into the European Union ended up in Central and Eastern Europe in 2018, 3% the year before. The large majority of Chinese investment is realized in Germany, France, and the UK. The reason is rather simple: while Hungary and other CEE countries seek greenfield foreign direct investment in export-oriented industrial sectors, China is mostly interested in acquiring foreign market share and technology through mergers and acquisitions. 

One of the prime exceptions is Huawei: Hungary is one of the main European bases of the Chinese telecom company, and has a sizeable manufacturing base here run by Flex, an American firm. Huawei has been a  strategic partner of the government since 2013, and while the US and its allies are cracking down on the Chinese firm, the Hungarian government signalled that it welcomes Huawei to take part in the development of local 5G mobile networks. 

Curious manoeuvres

Although the aim of the ‘Eastern opening’ policy was to boost trade and investment flows between China and Hungary, it has failed remarkably. Yet the diplomatic grandstanding of the Hungarian government has also led to Hungary increasingly being portrayed by Western diplomats as a Chinese stooge, doing Beijing’s bidding within the EU. The Western European countries which profit most from trading with China have been accusing Hungary of selling out to Beijing.

Given Orbán’s fondness for ‘unorthodox’ foreign policy moves, that might not be an unintended consequence.

In a 2016 speech analysing the potential effects of Donald Trump’s election as US President, the outspoken Hungarian prime minister has already hinted that he envisions Hungary to manoeuvre around world powers instead of relying on a limited set of traditional allies. The recent couple of months provide ample examples.

  • During his trip to Beijing the end of April, ago Orbán spoke ill about the US and the EU, courted China, and indirectly voiced his support for the embattled Huawei.
  • Yet only a couple of weeks before the BRI forum, Hungary signed a Defense Cooperation Agreement with the United States that allows US troops to move freely on Hungarian territory without the need for approval from Budapest, which essentially means surrendering some of the most important parts of Hungarian sovereignty to Washington.
  • Some weeks after his appearance in Beijing, Orbán visited the White House for a brief meeting with Donald Trump, where he said Hungary was "proud to stand together" with the US. According to Direkt36, a Hungarian investigative portal, Orbán is prepared to cement the alliance with a multibillion-dollar arms deal.
  • In March, the Hungarian government aided Russia's International Investment Bank to relocate its head offices to Budapest, which, according to intelligence experts speaking to Index, is being used for financial and intelligence manoeuvres by Moscow.
  • Russian President Vladimir Putin is a frequent guest of Orbán, and the Hungarian PM has downplayed Russia’s threat to Europe on many occasions. Yet, at other times he said that the EU should strengthen its resolve vis-a-vis Moscow; appears willing to support US moves to lessen the regions reliance on Russian gas imports through purchasing American liquified natural gas; and Hungary has been voting for the extension of EU sanctions on Russia related to the war in Eastern Ukraine numerous times.
  • While the Hungarian government has been waging a propaganda war against EU institutions, accusing them of trying to flood Hungary with illegal migrants, and Orbán has been glad to appear alongside anti-establishment far-right party leaders such as Italy's Matteo Salvini and the disgraced Austrian ex-vice-chancellor Heinz-Christian Strache, as of yet, he is unwilling to leave the centre-right European People's Party, even after it suspended his Fidesz party's membership recently due to its far-right rhetoric.
  • More importantly, as the overwhelming majority of Hungarian trade and investment is reliant on Western Europe, the government is making sure to satisfy the needs of foreign, mostly German, investors. At the same time, these investors are increasingly worried by the emerging Chinese competition, and are urging the EU to stand up to Chinese trade practices and economic policies they deem unfair.
  • Yet at the same time, Hungary has shown an uncanny willingness to hinder the forging of a common European China-policy, seemingly going against its economic interests. Orbán also openly boasted about China being a viable alternative to European investment; yet according to people familiar with the matter but wishing to remain anonymous, the powers-to-be in Beijing are not comfortable with Orbán 'playing the China card' in the EU, and have been trying to relay this to the Hungarian government through informal channels.

Based on Orbán's previous speeches, one could infer that the aim of dancing around world powers in such a manner would be to strengthen Hungary's political autonomy, weaken the constraints its foreign alliances have placed on it, and acquire a larger wiggle room in international affairs. One reading of Orbán's and Szijjártó's stlye of foreign policy posits that they have been remarkably pragmatic and successful in appeasing the US, Russia, China and the EU to a sufficient degree, while neutralizing foreign efforts to constrain their foreign and domestic agendas.

Another reading is that throughout this manoeuvring, the Hungarian government has to appease actors whose goals and interest differ; and which actors are not blind to what Orbán is trying to do. Consequently, the Hungarian government might find itself in a spot where keeping an equal distance to all four poles of power would be untenable; or at least would involve increasing costs both in political and financial terms. 

The problem with embracing China in this manner then is not only that Hungary is about to spend an astronomical amount of state funds on an unfeasible railroad built by Lőrinc Mészáros and Chinese companies; but also that there is no way to foresee how many bad deals Hungary will be dragged into by these peculiar foreign policy manoeuvres. 

In any case, there is no sign of a rethink. Not long after his meeting with Donald Trump, and just a couple of days after the US President announced sweeping sanctions on Huawei, Orbán welcomed Li Zhanshu, the effective head of China's rubber stamp legislature, the National People's Congress, and praised the BRI, Chinese companies operating in Hungary, and voiced his support for China's foreign policy agenda.

This article is a composite of Index's previous reporting on the Budapest-Belgrade railway and Hungary's China-policy.

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