Infrastructure development opportunities in the CEE region in the context of US–China rivalry

Infrastructure development opportunities in the CEE region in the context of US–China rivalry

 

24 March 2021

Márton Fenyő, Dorina Kirtág (MNB)

“The Chinese are unable to effectively exist on the west coast of Eurasia without a strong presence and cooperation in CEE, and the US is unable to maintain its influence in Europe and the Middle East without this strategic region.” – Warsaw Institute Review

In recent years, the Central and Eastern European region has gradually become a battlefield of the power struggle between China and the USA, which is aptly illustrated by the formation of two multilateral cooperation platforms aiming the region’s development. On the one hand, there is the “17+1” cooperation (China-CEEC), which seeks to deepen economic relations with China, while in terms of infrastructure developments there is also a great potential in the Three Seas Initiative (3SI), established in 2016 as a counterpole to the former.

As also highlighted in the MNB’s Competitiveness Programme in 330 points, the existence of traditional and modern infrastructure, coupled with energy efficiency, is an absolute prerequisite for Hungary’s long-term economic competitiveness in particular, and for the CEE region in general. A similar direction has been set by Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), who, praising the Three Seas Initiative, pointed out in September 2020 that every single additional percentage point of GDP spent on infrastructure development may increase economic output in the region of Central, Eastern and Southern Europe by 0.5 to 0.75 per cent in the short term, and by 2 to 2.5 per cent in the long term, and that rate could be driven even higher by region-wide investments in infrastructure. A related study by the International Monetary Fund on the subject also highlights the need for Members States joining the EU in 2004 and afterwards to allocate 3 to 8 per cent of GDP to catch up with the EU15 in infrastructure terms, or even larger amounts, if requirements for climate resilience and green investments are taken into account.

The Three Seas Initiative specifically aims to bridge the development gap between the 12 states of the Baltic Sea, the Black Sea and the Adriatic Sea, and the rest of the EU Member States, by promoting investment in cross-border energy, transport and digital infrastructures. At the 2018 Bucharest Summit, where – among other achievements – a decision was adopted for the establishment of a joint development fund (3SIIF, Three Seas Initiative Investment Fund), along with the definition of 48 projects for the initiative under three pillars, to which another 28 projects were added in 2020. Among the major projects, prominent roles are played by the creation of the Via Carpatia transit corridor, as well as by the Rail Baltica and Via Baltica projects, designed to improve the logistics interconnection between the countries concerned.

Within the funding mechanism, private sector investments will hopefully help to supplement the Three Seas Initiative Investment Fund, and several EU financial instruments are also available that are consistent with the objectives of the Three Seas Initiative. The initiative enjoys strong political support from the USA, which made a USD 1 billion pledge at the 2020 Munich Security Conference to finance infrastructure projects under the initiative. A specific decision has already been adopted concerning the first tranche of that funding.

Beside the explicit commitment of the previous Trump administration to the region and the success of the initiative itself, there is also strong bipartisan support in the US Congress concerning the infrastructure investments under the Three Seas Initiative. Overarching US support for the initiative across the Republican and Democratic parties may also set the direction for Joe Biden. Even if less vehemently, the new US president is likely to carry on with his predecessor’s foreign policy on the CEE region, which – apart from ensuring the prominence of US economic and superpower interests – openly seeks to counterbalance the influence of Beijing and Moscow in the region. A major difference between the Three Seas Initiative and the 17+1 cooperation is that while the scope of the latter includes the Balkans where there is strong demand for infrastructure investments, participation in the former is strictly limited to countries that are also EU Member States.

The keen interest shown by the USA well reflects the primary geopolitical objective underlying the Three Seas Initiative: to keep China from gaining a foothold in the region and to drive a wedge between Russia and its former sphere of influence in Central and Eastern Europe. Additionally, the initiative may have extra benefits for the USA as far as strengthening its trade and other economic interests are concerned. As the USA became a net petroleum and gas exporter, Central Europe has emerged as one of its potential export markets for energy vectors and the technologies needed for their transport and storage. However, that requires a better pipeline and distribution network, making the development of a new north-south gas pipeline infrastructure one of the focus areas of the initiative.

Although China does not export energy vectors to Central and Eastern Europe, in areas associated with the other two pillars of the Three Seas Initiative, i.e. in transport infrastructure and digital transformation, it has major vested interests across the region. Although China’s primary interests lie in infrastructure investments for logistics, it is also seeking to gain a foothold in energy and certain technology sectors within the region. The motivation underlying logistics developments is easy to understand, as one fundamental element of Beijing’s “New Silk Road” plan is the exploration and exploitation of new alternative transit routes that put the Asian country in a more advantageous strategic position, primarily in terms of access to target markets.

Additionally, the projects implemented in 17 CEE countries may serve as credentials to support further Chinese investments across the wider region, particularly in Western Europe. At the 17+1 Summit, held in February 2021 for the ninth time already, the parties agreed to extend their cooperation to new areas including education, healthcare and scientific research. At the Summit, which focussed on post-pandemic economic recovery and was held less than one month after US President Biden took office, China sought to demonstrate that its relations with the CEE region continue to rest on solid grounds and would not be affected by the change in the US presidency. From the next year onwards, investment activity may even receive a boost from the EU-China Comprehensive Agreement on Investment (CAI).

Accomplishment of the plans for the infrastructure and economic development of the region may otherwise bring about results such as enhanced potential for science and education, as pointed out at the Tallinn Summit of the Three Seas Initiative by Bulgarian President Rumen Radev, in the context of the region’s future. Ultimately, this may yield other benefits such as reduced dependence on supply chains. At the same time, effective manoeuvring in the available diplomatic space may become challenging amid the typically conflicting superpower interests, which, however, can facilitate the establishment and strengthening of strategic alliances in order to enable the Central and Eastern European region to serve as a real bridge between the Atlantic and Eurasian spheres.

The authors are staff members at the Magyar Nemzeti Bank.