China Power | Economy

In Serbia, China’s Digital Silk Road Might Be in Trouble Very Soon

A breakthrough agreement signed between Serbia and Kosovo could spell the end of Huawei’s thriving presence in Serbia.

By Vuk Vuksanovic for
In Serbia, China’s Digital Silk Road Might Be in Trouble Very Soon

President Donald J. Trump participates in a signing ceremony with Serbian President Aleksandar Vučić and Kosovo Prime Minister Avdullah Hoti Friday, Sept. 4, 2020, in the Oval Office of the White House.

Credit: Official White House Photo by Joyce N. Boghosian

On September 4, Serbian President Aleksandar Vucic and the prime minister of Kosovo, Avdullah Hoti, signed an economic normalization agreement in the presence of U.S. President Donald Trump. No one expected that China would be mentioned, let alone that it would be impacted by an agreement addressing the Balkan dispute.

China was not mentioned in the deal by name, but it did not have to be. One of the provisions of the signed agreement states: “Both parties will prohibit the use of 5G equipment supplied by untrusted vendors in their communications network. Where such an agreement is already present, both parties commit to removal and other mediation efforts in a timely fashion.” The “untrusted vendors” were not identified. Still, there is no doubt that the phrase referred to the Chinese tech giant, Huawei, and that it targets Serbia, which has a partnership with Huawei. Consequently, the fate of China’s digital juggernaut in Serbia is uncertain and dependent on U.S. policy toward Belgrade.

In the past decade, the Chinese presence in the Balkans has gradually increased, and partnership with Serbia has been its cornerstone. This partnership has also involved the technological domain. Huawei established a strong presence in Serbia, giving Belgrade a special place on what is called “the Digital Silk Road.” The foundation for this partnership was set in 2009 when Serbia and China signed an Agreement on Economic and Technical Cooperation in the Field of Infrastructure.

More recently, the Serbian Ministry of Interior selected Huawei as its partner for the “Safe City” project, where 1,000 Huawei-made surveillance cameras equipped with advanced facial and license plate recognition software will be installed across Belgrade. The locations of most of these cameras are undisclosed. The Serbian Ministry of Interior provided to the public a list of some sites in Belgrade where surveillance cameras are placed, but Huawei is not mentioned. In implementing the Safe City project, the Ministry of Interior will also rely on eLTE, an advanced wireless broadband system supplied by Huawei.

In 2018, the Serbian Ministry of Finance signed an agreement with the Chinese company on the provision of Huawei traffic surveillance systems, including for Chinese infrastructure projects. Huawei is also Serbia’s partner on the “the Smart City” project planned for the cities of Belgrade, Novi Sad, and the city selected for the pilot project, Niš. In March 2020 Huawei helped another Serbian city, Kragujevac, launch the City Data Center. There are also plans for Huawei to construct in Kragujevac a regional data center for South and Southeast Europe, making it a third regional data center for Huawei in Europe, after the ones in Netherlands and Germany.

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The state-owned telecommunications operator, Telekom Srbija has a 150 million euro ($177 million) project with Huawei on the establishment of high-speed broadband internet, which might be a springboard for future 5G infrastructure in Serbia. Beyond the state-owned firm, a private telecom company, Telenor Serbia, formerly owned by Norwegians and now by a group from the Czech Republic, also has a partnership with Huawei.

Based on the above, it’s no surprise that Nenad Popovic, Serbia’s minister for technological development, said in May 2020 that “Huawei has arrived in Serbia to stay for a long time.”

Now, this elaborate list of cooperation projects is in jeopardy as President Donald Trump and the United States have Huawei and China in their crosshairs again. In May 2019, Trump imposed sanctions against Huawei, banning U.S. companies from selling technology to the Chinese company and putting Huawei in the heart of what is usually referred to as a U.S.-China tech war. A reprieve was provided to some technology sales, but now Trump is escalating again. After the U.K., the United States’ primary European ally, banned Huawei from its 5G network, Trump is pressuring other European allies to do the same. In August 2020, the Trump administration mandated that manufacturers globally cannot use U.S. technology and software for the production of Huawei semiconductors.

As Trump faces low re-election odds amid the COVID-19 pandemic, Trump sees punishing China for the outbreak as part of his electoral strategy, and Huawei is also on the hit list. But the strategy is not a hard sell politically. According to the Pew Research Center surveys, 73 percent of U.S. adults have an unfavorable view of China and countering China (and Huawei specifically) is one of the rare issues of bipartisan agreement between Republicans and the Democrats.

Thus it was only a matter of time before Serbian ties with China would put Serbia on the United States’ radar. Trump’s reengagement with the Kosovo dispute was motivated by the desire to score a foreign policy win for his re-election campaign. However, resolving what is for most Americans an obscure Balkan dispute is not enough in the world of COVID-19. So Trump’s mediation in the Kosovo dispute was directly linked with his China policy.

Now, Belgrade is caught between Washington and Beijing. For Serbia and Vucic, Trump might be the best bet to get a less painful settlement to the Kosovo dispute. Indeed, after the White House meeting, Vucic told the Serbian public that Serbia had finally managed to open the door to the White House. However, it will not be easy or cheap for Serbia to give up on its partnership with Huawei. Indeed, a decision to remove Huawei from its telecommunications system will cost a much larger and wealthier U.K. 2 billion pounds. No similar calculations exist on how much it would cost Serbia to sever its extent cooperation with Huawei. Even without 5G stations, getting rid of Huawei’s technology will doubtless be expensive.

Serbia is uneasy about its options. One week after the White House meeting, Vucic had a meeting with Chinese Ambassador to Serbia Chen Bo, where the president explained that the agreement signed in Washington would not impact Serbia’s partnership with China, including in telecommunications. Three days later Chen, alongside Serbian Prime Minister Ana Brnabic, opened Huawei’s Innovations and Development Center. On that occasion, Brnabic said: “Serbia is not interested in unreliable technologies either; on the contrary, it is in the interest of the tender for the introduction of the 5G network to be open and transparent, while respecting international standards, which includes the agreement from Washington.”

For the time being, Serbia will continue being evasive about Huawei as none of the current collaboration projects relates to the construction of 5G infrastructure. But this reprieve is only temporary. The public auction for the 5G spectrum in Serbia will be held during the first quarter of 2021. Moreover, while the formal date has not yet been set, Chinese President Xi Jinping agreed to visit Serbia back in April.

Meanwhile, the Serbian economy is expected to experience a sharp contraction as a result of the COVID-19 pandemic. The Serbian Fiscal Council predicts a 6.5 percent drop in Serbia’s GDP as well as job losses, and that same body believes that Serbia will have to ask for 6.5 billion euros in international loan. Serbia has already shown uneasiness with loans and aid from institutions like the European Union and International Monetary Fund because of their liquidity and transparency criteria. China, with its more secretive way of doing things, might be more appealing. However, what happens if the potential bailout loan from China gets negotiated during Xi’s visit to Serbia and Beijing conditions the loan on the construction of the 5G network in Serbia by Huawei? Serbia and Vucic would truly be in a tough spot.

The document signed in the White House is not legally binding. Still, Vucic knows the political and strategic weight of signing a document in the Oval Office next to the U.S. president. The United States will undoubtedly be in the mind of Vucic while he talks about 5G projects with Xi, regardless of whether Trump is still in the White House in 2021. The one thing that Belgrade cannot afford under any circumstances is the prospect of U.S. financial sanctions. This became obvious in December 2019 when Serbia stopped military purchases from Moscow to avoid U.S. sanctions. For now, Serbia is buying time, but if Washington decides to lash out against Huawei with economic sanctions, Belgrade’s technological partnership with Huawei is dead, and so is the Balkan route of the Chinese “Digital Silk Road.”

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Vuk Vuksanovic is a Ph.D. researcher in international relations at the London School of Economics and Political Science (LSE) and an associate of LSE IDEAS, LSE’s foreign policy think tank. He writes widely on modern foreign and security policy issues and is on Twitter @v_vuksanovic.