With the help of Chinese loans, Hungary plans to upgrade a 160-kilometer railway line from the capital of Budapest south to the Serbian border at a cost of 2.89 billion dollars. Basic questions about the project’s purpose and feasibility have many asking: Who is this really for?
This article was originally published by Echowall and is republished with permission.
On a snowy January morning, I arrive at Budapest’s Keleti Station, one of the capital’s busiest, just in time to catch the morning train to Kelebia, the last stop along Hungary’s border with Serbia. The journey is just 160 kilometers, but I settle into my seat in a frigid passenger car knowing the journey will take more than three hours. The single-track line, last renovated half a century ago, logs an average speed of just 30 kilometers per hour.
I will have to endure, in the meantime, the stale cigarette smell that rises from the upholstery — even years after smoking aboard Hungary’s trains was forbidden. According to a label, faded but still visible, this particular car was manufactured in the bygone Socialist Federal Republic of Yugoslavia. Mercifully, I am not traveling on to Belgrade, the end of the plodding line.
But if the promises of the Hungarian government come to pass, this stretch of rail will be transformed by China through its multi-billion dollar investment and infrastructure program, the Belt and Road Initiative (BRI), and the sluggish train journey between Budapest and Belgrade will pick up pace. For now, though, these changes are only promises for down the line — meanwhile, the doubts and questions are coming fast.
The renovation of the Budapest-Belgrade railway was announced with great fanfare back in November 2013, when Chinese Premier Li Keqiang was joined by Hungarian Prime Minister Viktor Orbán and then Serbian Prime Minister Ivica Dačić for a press conference in the Romanian capital of Bucharest. The line was billed as a “flagship project” of BRI in Europe. The renovation would involve installation of an electrical double-track lane reaching maximum speeds of 160 kilometers per hour, meaning it could get me to Kelebia in just around an hour.
Work on the line was supposed to have begun in 2015, making it operational by 2017. But delays meant that by December 2017 only the section between Belgrade and Stara Pazova about 100 kilometers to the north was under construction, the work being done by China Communications Construction Company (CCCC) and China Railways International (CRI). Work on the section to the north in the direction of Hungary, from Stara Pazova to the border town of Novi Sad, is expected to start sometime this year, with participation not only by Chinese companies but by the Russian RZD International.
The official investor for the Hungarian section between Kelebia and Budapest is a joint venture called China-Hungary Railway Nonprofit Limited (中匈铁路非盈利封闭股份有限公司), or “Kínai-Magyar Vasúti Nonprofit Zrt,” which was formed in 2016 between the Hungarian railway company MÁV Group and both China Railway International Corporation (CRIC) and China Railway International Group (CRIG).
But up to now, practically nothing has moved on this part of the “flagship” BRI project. And as details of the investment have unfolded, more doubts and questions have been raised about the purpose and practicality of the renovation.
One nagging question is evident from the fact that there are just a handful of other passengers on board my train. This is not an exception for the Budapest-Kelebia line, which generally experiences low traffic in terms both of passengers and commerce. Hungary’s principal trading partners are still off in western Europe, and so the vast majority of goods are flowing in from the west, not from the south.
There is another point of perplexity. The southern part of Hungary, down south of the country’s capital, does in fact have major cities that are hubs of commercial activity — places like Pecs and Szeged. But the corridor through Kelebia actually manages to steer well clear of all of these hubs.
The above questions naturally raise concerns about the project’s commercial viability in light of its costs.
If realized, this will be the most expensive railway-related investment in Hungary’s history, with an estimated total cost of 750 billion forints, or 2.89 billion dollars (2.6 billion euros). Of this amount, 85 percent will come from a 20-year loan extended by the Export-Import Bank of China (Eximbank), the remainder being provided by the Hungarian government.
Based on what we know, the terms of the loan ensure that China will be repaid, with interest, even if the railway operates at a loss. But key details of the loan agreement have been classed as state secrets, as has been the feasibility study conducted by the Hungarian government. No one can explain why the costs for the project are so high. The line, after all, is just 160 kilometers long, and runs across flat terrain free of natural obstacles, such as major rivers.
My repeated e-mail requests for comment from the Hungarian government about the loan terms and feasibility findings have gone unanswered. It remains a mystery how the Hungarian government has rationalized this project and its benefits.
And what of China’s reasons?
Rails and Rationalizations
The railway actually makes good sense from China’s perspective. The financial terms favor China, and the contractors will be Chinese state-owned firms — which means of that funds for the project cycle right back to China and help it deal with its over-capacity in engineering and construction. Some experts have suggested that this sort of “exporting” of China’s industrial overcapacity is an important part of Beijing’s objective in pushing its Belt and Road Initiative.
Another key BRI objective, however, is to build Chinese trade routes, and this is one theory to explain the thinking behind China’s renovation of the Budapest-Belgrade railway.
The Greek port of Piraeus, which has become the Mediterranean’s second-largest since it was taken over by China’s state-owned China Ocean Shipping Company (COSCO Group) a decade ago, lies more than a thousand kilometers to the south across the Balkan Peninsula — on the European Union’s southeastern flank.
For China, then, the line from Budapest to Belgrade might serve the dual purpose of exporting Chinese overcapacity and facilitating a new path of arrival for goods reaching Europe via the Chinese-owned harbor at Piraeus.
But even this thesis has its problems.
In an interview with a Hungarian news site in December 2017, Gábor Nagy, the Hungarian representative of China Ocean Shipping Company Limited, or COSCO, the company operating the harbor at Piraeus, said renovation of the the Budapest–Belgrade railway was not a priority. Nagy was quoted as saying that while he was aware of the talk about conquering logistics to northern Europe through Piraeus, he “considered these dreams stupid.” Even if the current renovation brings the total journey time on the line itself down from the current eight hours to three or four hours, he said, other issues of poor infrastructure in the Balkans, for example in Serbia and Macedonia, would still mean that goods would require four full days to arrive in Budapest from Piraeus. The few hours of time savings that resulted would not change the overall logistics picture.
“COSCO has no reason to do this,” Nagy said of the double-tracking of the Budapest–Belgrade line.
His statement contradicts the official messaging in Chinese government news outlets such as China Daily, which reported during a visit by Premier Li Keqiang to Budapest in November 2017 that the upgrade of the line was about building a “China-Europe land-sea express line.”
Beyond the argument about exporting overcapacity, which may hold some water, and the logistical benefits, which remain a huge question mark, there is a third reason for China to be interested in the renovation of the Budapest–Belgrade line: politics and symbolism. If the renovation is ultimately successful (meaning in this case that it is finished at all), it will be the very first Chinese-financed construction project to be realized inside the European Union. That could open the doors to the European construction market for China as it demonstrates that Chinese companies can work to EU standards. Or so may go the strategic thinking.
But that train, so to speak, may already have left the station.
In a September briefing on China, the European Parliament noted that in some instances, Chinese infrastructure projects in Central and Eastern Europe “produced a negative impact within an existing weak governance and rule-of-law.” “Attempts to circumvent EU rules requiring open tenders for infrastructure construction with regard to China’s flagship Budapest-Belgrade railway project,” the briefing said, “have triggered investigations at the EU level and have entailed delays and cost overruns.”
Setbacks and increased scrutiny do not seem to have dampened Chinese enthusiasm. In March this year, a researcher from the International Department of the Chinese Communist Party said that China’s Belt and Road Initiative now had “full coverage” in Europe, and he listed the Budapest-Belgrade railway project as one of its successes.
Budapest or Bust?
Hungary’s enthusiasm for the Budapest-Belgrade railway project is more difficult to understand. To be sure, Hungarian railways are generally in poor condition, and there are many lines where renovation is rather urgently needed. But for most, the Budapest-Kelebia section of the southbound line to Belgrade would not top the priority list — not even close. The line through Kelebia may be the shortest option to Belgrade, but it avoids every important city in Hungary, which helps to explain why virtually no one is onboard.
Almost any way you look at the project for Hungary, you come to the conclusion that it is investment nonsense. The Hungarian business magazine Figyelő calculated in 2015 that even without consideration of interest payments on the project loan from China — which remain unknown — it would take roughly 2,400 years for Hungary to pay the loan back, even assuming the line could transport 1.6 million tons of goods each year.
Agnes Szunomár, a research fellow at the Academy of Sciences in Hungary, says that the strategic role of Hungary has been exaggerated within the overall vision of the Belt and Road Initiative in order to rationalize the railway upgrade. “According to former statements, the official explanation is that this project will give a strategic role to Hungary when China wants to expand in Europe,” Szunomár says. This would mean Chinese-made goods entered the European Union once reaching Hungary — Serbia not yet being an EU member — and that might translate into customs duties paid on entry, and bring new logistics centers built along the line. “So the new railway,” says Szunomár, explaining the reasoning, “would have a spillover effect and would bring capital and create new sources of employment in the country.”
But this is thinking is probably premised on an exaggerated view of the importance of Budapest as a key pivot in the overall framework of the Belt and Road Initiative. “The Budapest-Belgrade line would be only one tiny piece of the whole BRI project, and Budapest will be definitely not be the center of it,” says Szunomár.
Moreover, she adds, there is little prospect for increased bilateral trade as a result of the line, an argument often pushed by Chinese official sources. So far, trade between China and Hungary is mostly a one-way affair.
In 2017, Hungary’s total exports to China (2.7 billion) were less than three percent of total exports to Europe, which came in around 96 billion, according to figures from the World Integrated Trade Solution (WITS) service. Hungary’s biggest export destinations were Germany (30 billion), Romania (5.9 billion), Italy (5.8 billion), Austria (5.5 billion) and the Slovak Republic (5.4 billion). Even the Netherlands, with a population of just 17 million — about a quarter less than that of Shanghai — purchased about 70 percent more from Hungary than all of China.
These export numbers hardly suggest the likelihood that Budapest will become a new hub for goods heading off to markets in China. Hungary is a small country, with a population of just 9.8 million, and has no advanced technologies that might drive exports in the direction of China.
“I can’t imagine,” says Szunomár, “what trains will bring from Europe to Piraeus.”
Needs, Priorities and Politics
While work for the upgrade on the Serbian side of the border, extending from Stara Pazovato to Belgrade, has already begun, another vexing question for the envisioned line from the Greece is when and how the section of railway from Piraeus to Belgrade will be built. But this question does not, in point of fact, concern larger questions of trade, access and logistics — for China or for any other country. Chinese goods can already reach Europe more cheaply and efficiently through other ports in the Adriatic, including the harbors of Koper in Slovenia, Trieste in Italy, and Rijeka in Croatia, all of which are nearer to the heart of the Europe.
The fact is that Hungary urgently needs investment in infrastructure. But according to Tamás Matura, an assistant professor at Corvinus University of Budapest and founder of Central and Eastern European Center for Asian Studies, this particular railway upgrade — which bears high financial risk and brings negligible economic reward — is nowhere on the list of projects from which Hungary could really benefit.
“Hungary takes all the risks of this investment and China has all the gains,” says Matura. “Even engineers working on the project know this is nonsense.”
As is the case with China’s interests in the project, a political rather than an economic reading of the rationale behind the Budapest-Belgrade railway is probably far more instructive.
The Politics of Divisiveness
Division and conflict have been central to the way Hungary’s prime minister, Viktor Orbán, has operated since coming to office in 2010. Orban, who has steadily consolidated power since that time, has won praise from right-wing parties in Europe for his constant opposition to Brussels on issues such as migration. Orbán has earned condemnation from many in the EU for the deteriorating rights situation in Hungary, and for his actions against refugees and migrants, including his installation since 2015 of razor-wire fences along sections of the southern borders with Serbia and Croatia — ostensibly to defend the EU against what members of his government have called “the flood of illegal migrants.”
The upgrade of the Budapest-Belgrade railway, even in the face of huge costs and questionable viability, is Orbán’s way of signaling his goodwill to China, and making the point that he is a strong political partner in Europe. Engagement with China provides Orbán in turn with apparent support and alignment with a major power that can hedge against the criticism and opposition he faces in Europe as he advances his illiberal policies at home. He can dangle his close strategic relationship with China before European leaders and Brussels bureaucrats, as though to say, “Look, I have big friends.”
Since 2010, the government of Orbán’s Fidesz Party has taken continuous measures to establish his one-man rule and to restrict democracy and rule of law. The populist government now regards all autonomous organizations as a threat and is bringing them under tighter control, even in some cases making their operation impossible. Hungary’s Constitutional Court, which should provide independent judicial review on key issues such as corruption, the right to protest and electoral law, has since last year been brought under the control of Orbán’s government. A new election law has already tipped the scales in the favor of Fidesz, leading one prominent expert to say that Orbán’s government “has fixed the rules of the game and the environment in which the elections take place.” New media rules introduced under Orbán have also seriously jeopardized media freedoms in the country. While pro-government media have expanded, more independent outlets have faced relentless pressure.
Orbán has declared himself proud of his illiberal views and actions. “I don’t think that our European Union membership precludes us from building an illiberal new state based on national foundations,” he said in one well-known speech in 2014, during which he praised countries with non-Western and non-democratic systems that he called “successful.” Included on that list were China, Russia and Turkey, as well as Singapore.
Shortly after returning to power in 2010, Orbán announced a new economic policy called “Eastern Opening,” which was meant to reduce Hungary’s dependence on the economies of the West. This was in part a response to the global economic crisis of 2008, during which Hungary proved one of the most financially fragile countries in Europe. The thesis was that Asia, and especially China, was in economic ascendance and could offer newer and more diverse trade and investment partnerships. “We are sailing under a Western flag, though an Eastern wind is blowing in the world economy,” Orbán declared as he sold the policy in 2010.
By June 2011, as then Chinese Premier Wen Jiabao made a stop through in Budapest, Hungary’s ambition was to become China’s “gateway to Europe.” Since introducing the Eastern Opening policy, Orbán has made six visits to China, the latest being his trip to Beijing in April this year to attend the Belt and Road Forum. In 2017, bilateral relations between Hungary and China were elevated to a comprehensive strategic partnership.
The primary drive, initially at least, was trade and investment. “Between 2010 and 2014, Hungary’s motivation was purely economic,” says Tamás Matura. “It was the time of crisis in the European Union so it was logical to go looking for new partners in the East.”
But the policy shift has not drawn significant Chinese capital, Matura says. At present, Chinese foreign direct investment in Hungary stands at between two and three billion US dollars. While not an insignificant sum, this still lags behind investment from both Japan and South Korea. “China is only third among the Asian investors,” says Matura.
The government’s earlier approach to China was based on a simple hope, in the absence of a real economic strategy, that better relations with China would translate into more investment and trade. While good relations are important, however, real opportunities are what ultimately matter to Chinese businesses. “If Chinese businessmen don’t see the opportunity for profit, they will not invest,” says Matura.
But the failure of new investment and trade opportunities to materialize has not dampened Orbán’s enthusiasm for closer political relations with China. As Orbán’s increasingly authoritarian actions at home cause diplomatic friction within the EU, Orbán still hopes that closer political engagement with China can offer him political leverage in managing Hungary’s relations with the EU and its member states. China, which hopes to make political and economic gains in Europe, and which does not share the EU’s concerns about deteriorating rights or rule of law in Hungary, is only too happy to reciprocate.
When the lack of real trade or investment gains or incentives are stacked up against the enormous costs of the Budapest-Belgrade railway and an extreme lack of transparency, this naturally invites questions about corruption.
Fast-Track to Cronyism?
A decade of restrictions on democracy and oversight has brought a corresponding rise in corruption. According to the latest report from Transparency International, Hungary is at the “tail-end” within the European Union and in Central and Eastern Europe when it comes to corruption, with only Bulgaria ranking worse among EU members. In its report, the organization said that “the country’s poor rule of law and democracy performance are unable to effectively curb corruption.”
As Orbán has sealed the political dominance of his Fidesz party since 2010, the Financial Times noted in 2017, “a circle of wealthy businesspeople has arisen around the party and the prime minister — in essence, a group of loyalist ‘oligarchs.'” A majority in the parliament and dominance of national and regional institutions has enabled Fidesz to lend a strong hand to business interests it favors, and state contracts have frequently gone to Orbán’s close associates.
One of the most prominent successes under Orbán’s leadership has been Lőrinc Mészáros, a businessman who from the 1990s ran a small gas-fitting company in the Hungarian village of Felcsút, where Orbán grew up. Mészáros and Orbán are known to be close childhood friends. Mészáros’ gas-fitting company had nearly gone bankrupt by 2007, but since Orbán returned to the office of prime minister in 2010, Mészáros’ fortunes have soared. Over just a few years, Mészáros managed to become one of the top-ten richest individuals in Hungary.
An investigation by the transparency website Átlátszó revealed that companies owned by Mészáros and members of his family received HUF 476 billion, or about 1.7 billion Euros, in EU funds from public procurement projects in the seven years from 2010 to 2017. This accounted for 83 percent of total earnings from all Mészáros-related companies.
The Mészáros-Orbán Railway?
The Belgrade-Budapest railway project came under closer scrutiny in January 2017, as it was revealed that the European Union was investigating the 2.89 billion dollar project to assess its viability and its compliance with EU law. One apparent problem for the EU was the extreme secrecy of the agreement for the Hungarian section of the railway, which had reportedly been signed at the 2016 China-CEEC Summit, known as “16+1”, held in Latvia on November 4, 2016— but which was not made public. As a member of the EU, Hungary is subject to European laws on procurement.
As Jakub Jakóbowski, of Poland’s Centre for Eastern Studies, wrote in an assessment of the 2016 “16+1” Summit, the Belgrade-Budapest railway project had been a bone of contention at the meeting. “Suspicions towards the Chinese activities were voiced by EU representatives during the Riga Forum,” Jakóbowski wrote, “with particular focus on fair competition in public procurement and lack of transparency.”
Facing pressure from the European Commission, Hungary issued a public tender for the Budapest-Kelebia section in November 2017, during the China-CEEC Summit held in Budapest. That original tender closed without any clear result, the Hungarian government claiming that only two credible bids had been submitted, but that these were far too high. Then, in December 2018, the government launched an entirely new public procurement process for the railway upgrade. As the public procurement process went ahead quietly in Hungary earlier this year, the European Commission told me they had no ongoing investigation into the project, but that they were closely following developments.
Finally, in late April, the news broke that the Hungarian-Chinese consortium that won the bid for the railway upgrade included RM International Zrt., a company controlled by Orbán’s friend and ally, Lőrinc Mészáros.
The closeness of Mészáros to the Orbán family has naturally led to speculation that he is in fact the prime minister’s front man, the keeper of Orbán’s own vast and growing fortune. Compelling evidence has been highlighted by a number of reports, including from investigative journalist Krisztina Ferenczi, from the Reuters news agency, and others. And that could mean that Orbán also has a personal stake, beyond the political, in the upgrade of the Budapest-Belgrade line.
That, says Tamás Matura, of Corvinus University, is one of the clearest explanations for the government’s insistence on the project. “This investment will never achieve returns,” he says. “Corruption is the only explanation for this very high cost.”
It is a challenge to get to the bottom of such questions. Information is increasingly scarce in Orbán’s Hungary, where until recently the Mészáros media empire encompassed the majority of regional newspapers, the Echo TV news channel, and even Hungary’s only economic weekly, Világgazdaság.
But even if the Mészáros consortium with Chinese companies manages to get the project on track, the lingering questions and lack of transparency could have ripple effects for China. “China wants to have a good relationship with the European Union,” Matura says. “If one member state has problems with the EU over China, it worsens China’s position as well.”
Back to Budapest
Having reached Kelebia at last, I have an hour and a half before my train lumbers back to Budapest. I enter the restaurant in front of the railway station, which doubles as a pub. It is early afternoon but there are already drinkers at the bar. Perhaps they are wearied, like me, by the interminable journey.
But fortune smiles on me. The train back to Budapest is newer and cleaner, and it pulls out of the station with just a 30-minute delay. “Usually it’s at least one hour late, and a two-hour delay isn’t uncommon,” a middle-aged passenger in my carriage explains. I ask if he’s heard about the renovation plans. Will it happen? Don’t hold your breath, he says. “And if it does, what then? Their idea was never to improve the railway or anything like that,” he says.
“They just want to steal public money. That’s what will happen. You’ll see.”