The route of the new Silk Road

C. Ioana*

On the occasion of the parliamentary elections of April 3, 2022, important not only for Hungary, but also for Romania and the European Union, LARICS started an extensive series, spread over several episodes, about the political and strategic realities of the neighboring country. We will try to understand the recent developments in Hungary, with a focus on the main characters and the team around them. In this issue we will present the file of the relationship between Budapest and Beijing, about the presence of Hungary on the new Silk Road. The first part of this series can be read here, the second part here, the third here, the fourth here. The English version of this episode can be read HERE, and the Hungarian version HERE. (LARICS).

  1. East West Gate – the gate of the Silk Road

The East West Gate terminal in the Hungarian town of Fényeslitke was born out of the “clear need for an alternative route between Europe and China“, according to East West Gate CEO Tálosi János.

The report on the East West Gate / EWG terminal, prepared (January 26, 2022) by Magyar Logisztikai Egyesület / Hungarian Logistics Association / MLE, shows that a technical delivery will take place at the end of March 2022, and the first container train will arrive in East West Gate terminal in Fényeslitke (a village in Szabolcs-Szatmár-Bereg county), in April 2022. East West Gate has an estimated capacity of 1 million TEU.

One of the main advantages of this terminal is that it facilitates both the wide gauge railway lines (of the CIS countries) and the standard lines (of the European countries). The wide gauge service of the terminal is offered on the Ciop-Záhony-Komoró route, and the standard gauge service is provided directly by the Fényeslitke railway station, served by a new railway line.

Although the terminal has a capacity of 4 million tons per year, it currently handles 2.1 million tons of goods.

According to Tálosi János, there are not many overlaps between the East West Gate terminal in Fényeslitke and the port of Záhony. While the former focuses on container traffic, the latter focuses on bulk freight.

  1.  Port of Trieste – Italy
  • Hungarian investments

Hungary will set up a port and a logistics base in Trieste (here, here, here, here și here) to give Hungarian companies easy access to export markets, announced (July 4, 2019) the Minister of Foreign Affairs and Foreign Trade of Hungary, Szijjártó Péter, at the opening ceremony of the V4 + Logistics Forum / V4 + Logisztikai Fórum. The official also stressed that the port and the logistics base will be located on an area of ​​32 hectares, and the investment, worth 60-100 million euros, will create the conditions for an optimal infrastructure for Hungarian companies, namely access to the sea by road or rail, within 24 hours.

In this context, it was also mentioned that due to the intensification of the Polish-Hungarian economic cooperation, the Polish airline, LOT, chose Budapest as its second air base, and as a result of a series of ongoing negotiations, LOT will launch a direct flight between Budapest and Seoul.

At the same time, four areas of strengthening the logistical competitiveness of Hungary were highlighted:

  • development of north-south infrastructure;
    • increasing cross-border and rail links;
    • the construction of the high-speed railway, which is still missing in Central Europe;
    • reaping the benefits of China’s Eurasian trade initiatives.

Regarding economic opportunities in Eurasia, Szijjártó Péter said that Hungary should take advantage of China’s trade plan for Europe and Asia and provide the fastest rail transport from Greek ports to Western Europe. Therefore, the government is particularly interested in the construction of the Budapest-Belgrade railway line.

At the joint press conference (July 5, 2019), Szijjártó Péter and his Italian counterpart signed the 60-year concession agreement for the establishment of the port and logistics base in Trieste, on the basis of which Hungary acquired a 32-hectare plot of land, of which 300 meters to the sea (13 m deep), for the amount of 31 million euros. In addition, investments of about 100 million euros will be allocated to the construction site. The traffic through the port is expected to reach a share of about 2 million tons per year, respectively 78,000 containers.

  • Italian-Russian investment agreement

In November 2013, the Russian private investment equity fund – Russian Direct Investment Fund / RDIF, supported by the state and the state strategic investment fund of Italy – Fondo Strategico Italiano / FSI agreed on an agreement to invest up to 1 billion ($ 1.35 billion) in companies and projects in the two countries. According to the agreement, signed at the Italian-Russian summit in Trieste (November 26, 2013), the two funds will invest up to 500 million euros each, mainly in companies and projects that promote the development of foreign trade between Italy and Russia.

The Russian Direct Investment Fund / RDIF was established in June 2011 to perform co-investments in equity mainly in the Russian Federation, along with established foreign financial and strategic investors. Based in Moscow, RDIF’s management company is a wholly owned subsidiary of Vnesheconombank / VEB (established in 2007).

Fondo Strategico Italiano / FSI is a holding company whose strategic control shareholder is Cassa Depositi e Prestiti SpA.

When Russia signed the € 1 billion investment deal with Italy, it was seen by some officials as a welcome boost to the Italian economy, while economic observers voiced fears about the Kremlin’s growing influence in Europe and opportunities for promoting corruption. Following the Trieste summit, Vladimir Putin left Italy with a total of 28 agreements signed with Italy.

By investing in the Italian economy, Russia is gaining a foothold in the European economy.

Bill Browder, CEO of Hermitage Capital Management (a London-based investment fund specializing in Russian markets), said that this was worrying for both Italy and the EU: “Russian investors who deposit their money in Europe often co-opt European investors in their money laundering exercises. Russia is much more corrupt than the most pessimistic expectations of the people. Everyone should be worried about the infiltration of Russian mafia money in Europe. “

The question is, in the face of the tragic realities in Ukraine: How many of these similar agreements signed with the aggressor Russia are still functional or valid in the context of the current European sanctions against the oppressive Putin regime? …

We repeat, again, that it turns out that the Orban regime has invested and is investing in a dead horse like the Trieste Project; most of the contracts signed by Russian companies or funds have already been or will most likely be terminated…

  • Memorandum of Understanding between Italy and China on the port of Trieste

The Italian media reported that on March 23, 2019, Italy and China signed, in Rome, the “Memorandum of Understanding between the Government of the Italian Republic and the Government of the People’s Republic of China on the cooperation within the Silk Road Economic Belt and the Silk Road Initiative of the 21st century”.

The cooperation envisaged in this Memorandum of Understanding covered: transport, logistics and infrastructure – including ports, railways and roads, energy and telecommunications supply, public and private investment and financial participation, as well as public tenders and concessions.

Italian sources said that this cooperation under the Memorandum of Understanding does not concern regular reciprocal trade, but involves control over port, transport and communications infrastructure in both the ItalianPeninsula and Sicily, where they are of paramount economic and strategic importance for Europe, as well as for the Euro-Atlantic and Mediterranean balances.

The strategic risks of this Memorandum stem from Italy’s political and economic weakness and from the enormous pressure that China can exert to impose and expand its economic, political and military influence, going beyond the line of agreement with the US and Russia.

  • The strategic role of the Free Territory of Trieste

According to local observers, the Italian government, as administrator of the port of Trieste, has no right to allow Chinese state-owned companies and state investors to take over strategic port facilities and railways in the current Free Territory of Trieste, where the Italian government exercises only temporary civil administration, based on a special administrative mandate, which was entrusted to it by the United States and the United Kingdom, as primary managing authorities, on behalf of the UN Security Council (October 5, 1954).

On March 11, 2019, the International Provisional Representative of the Free Territory of Trieste / IPRFTT addressed an official note of protest to the Italian Government, signaling  the illegitimate inclusion of the International Freeport and the customs port of Trieste in the current politico-economic negotiations between Italy and China.

Michele Geraci, a former Italian undersecretary for economic development, said  (2020): “When we hear warnings that the Chinese should not invest in Italian ports, it is too late. China has already invested in all major European ports and handles about 15-20% of the European traffic. “

  1. Chinese interests in the economy of Central and South-Eastern Europe

Experts from the Carnegie Endowment for International Peace think tank, in the analysis   entitled “China’s Influence on Southeast, Central and Eastern Europe: Vulnerabilities and Resilience in Four Countries” (October 13, 2021), state that: “China’s presence brought socio-economic opportunities to Georgia, Greece, Hungary and Romania. However, it has exacerbated governance shortcomings, it undermined elements of political and economic stability and complicated the European Union’s ability to reach a consensus on key issues.”

According to analysts, China’s rapid global growth has created new challenges for the US, the EU and independent European governments, as Beijing offers an alternative for the West and optimal solutions for countries seeking economic development.

However, in order to exert its economic, political and soft power influence, China is taking advantage of local vulnerabilities and weaknesses:

  • fragile state institutions, which make it more difficult to verify or monitor China’s economic or political activities;
  • captured/capturable states and systems, in which the political apparatus / civil society are easily subjected to foreign influence;
  • weak civil society, with relatively few independent voices, and independent media do not have the power to expose corruption cases.

The region in which Beijing has made significant inroads is Southeast, Central and Eastern Europe.

For China, this region is particularly important as a gateway to the rest of Europe for the Belt and Road Initiative / BRI, with growth opportunities for Chinese companies and much more favorable regulatory and economic conditions than in Western Europe.

Analysts have identified three targets for China’s operations in Georgia, Greece, Hungary and Romania, which are part of the massive Belt and Road Initiative:

  • boosting Chinese exports and investments;
  • exercising political influence;
  • promoting a positive image of China and of the relations with China.
  1. Expanding China’s key position in the port of Piraeus – Greece

The company China COSCO Shipping / COSCO, owned by the Chinese state and China’s largest shipping company, has increased its stake to 67 percent in Greece’s largest port, tightening control over a major link of the  Belt and Road initiative, according to Nikkei Asia (October 26, 2021).

On October 25, 2021, the transfer to COSCO of an additional 16% package from the Port of Piraeus on the Mediterranean Sea, respectively a container hub for Europe, the Middle East and North Africa, was completed.

The Chinese presence in the port remains controversial, both among locals who accuse COSCO of failing to meet its obligations and among countries such as the United States who have expressed concern about possible military uses.

In 2016, COSCO purchased a 51% stake in the Piraeus Port Authority for about 280 million euros ($ 326 million) and did not provide further details on this additional investment.

Piraeus residents have filed lawsuits accusing COSCO of failing to comply with environmental protocols and of harming the local marine environment, according to the Financial Times (October 19, 2021).

Local interest groups claim that investments that have not faced legal challenges have remained incomplete. “They did not spend any money here; even when they have to change a lamp, they bring it from China”, said Vassilis Kanakakis, chairman of the Greek Union of Shipbuilding and Repair Contractors.

This agreement with Cosco is worrying. Not only do we now have a much clearer perspective on the risks that such Chinese investment in strategic infrastructure entails for the EU, but we also know that China through COSCO is not fulfilling its contractual obligations“, said Raphaël Glucksmann, Member of the European Parliament, chairing a committee to assess foreign interference in EU democratic processes.

(to be continued)

* C. Ioana is a graduate of the Master of Security Studies at the University of Bucharest and a LARICS expert on Hungarian issues.