China Funds a Trip to Autocracy in Europe

China needed to pass through Europe. Hungary needed to bypass it. Here is the story of the Hungarian-Chinese partnership to renovate the Budapest-Belgrade railway route.

At a glance:

• The Orbán administration has been trying to score a partnership with China for nearly ten years, mostly to spite the EU.
• A number of partnerships fell through due to Hungary’s inadequate economic diplomacy efforts.
• When Xi Jinping came to power, China launched the Belt Road Initiative, the most ambitious infrastructure project in modern history.
• As part of the Belt Road Initiative, China was shopping for a way to connect a Greek port with Western Europe.
• Hungary’s illiberal democracy became the perfect partner to carry out the project.
• The project costs nearly doubled during the negotiation.
• Today, renovating the underutilized Budapest-Belgrade railway is the most expensive infrastructure project in Hungary’s history.
• The partnership with China allowed the Orbán administration to inflate project costs, put the Prime Minister’s friend in charge of implementation, and then classify the details.
• All evidence indicates that the project will not break even in the next 100 years. If the government believes it will, their reasons are classified for the next 10 years.
• The lack of transparency around the China deal allowed the Orbán regime to take authoritarian governance to a new level.

On May 19, the Hungarian government passed a law to expedite a Chinese-Hungarian partnership to renovate the Budapest-Belgrade railway route, and classify its project details for ten years on the grounds that their disclosure could expose the country to a risk of foreign interference. The details may be classified, but here is what we do know: at HUF 750 billion (over USD 2.4 billion), the Budapest-Belgrade railway renovation is the most expensive infrastructure project in the history of Hungary; it is at least three times overpriced, and it is going to be implemented by a close friend of the Hungarian Prime Minister who amassed a fortune implementing previous public infrastructure projects.

The way the project was conceived, negotiated, and then classified makes this story a perfect case study of how the Orbán administration has been using procurement-related corruption to consolidate the regime, and engendered a political culture that cannot imagine a world without corruption. Here is what happened.

“Ladies and gentlemen! The Hungarian model rests on four pillars:
political stability; fiscal rigor; a work-based society; and
a policy of Eastern Opening.” 

Hungarian Prime Minister Viktor Orbán, 2017

The history of Hungary’s Eastern Opening rhetoric dates back to 2011, when the newly elected Orbán government began to communicate that Hungary would look to Asian countries and Russia to diversify its economic and political relations. At the time, squarely in the middle of the recession that followed the Eurozone’s financial crisis, the country was locked in a difficult negotiation with the IMF about a bailout loan.  

To aid communication at home, the Hungarian government framed international organizations and the EU as oppressive powers that trample on sovereignty, and dictate impossible economic terms for poorer countries. Orbán coined the phrase “Brussels is not Moscow” in an attempt to frame the EU as equally oppressive as the Soviet Union that had occupied Hungary for 45 years. A partnership with China would have been a major political win for Orban’s government. 

For years, the policy remained within the realm of high-level promises and government propaganda. Among other ideas, the Orbán administration tried to sell 5 billion dollars of government bonds, a failed airline, and several railway construction projects to China — all to no avail. As Tamás R. Mészáros notes in a really comprehensive longform explainer of the era of Eastern Opening, there were a number of reasons why these projects kept failing. For one, Hungary kept proposing projects to China that completely misread Chinese interests in the region. Chinese policymakers were working to buy access to European markets, not to anger them. Bailing out Hungary in its negotiations with the EU and the IMF was not of strategic importance to China.

Hungary also proved painfully inept with following up on high-level negotiations with diplomatic groundwork. Hungary’s Economic Mission to China was understaffed and reeked of inexperience. Máté Pesti, the Hungarian Ambassador to Beijing, only spent five years in the foreign service before he was appointed. Most consuls in the country were similarly inexperienced. Despite all the rhetoric of Eastern Opening, Hungary was scaling down the department in charge of economic negotiations with China. When Orbán and his ministers struck a high-level deal, there was no one to follow up with the less glamorous paperwork. 

Finally, when the Budapest-Belgrade project surfaced, there was a real alignment of interests between the two regimes, and in 2016, a contract was signed about renovating the railway route between Budapest and Belgrade, to help China gain access to EU markets. 

“China is a North Star that will guide the world economy for decades to come.” announced Hungarian Prime Minister Viktor Orbán in a 2017 keynote. “Without China,” he went on, “Europe won’t be able to grow. As a fellow society of discipline, Hungarians understand and respect the country better than most.” “Ladies and gentlemen!” he concluded, “The Hungarian model rests on four pillars: political stability; fiscal rigor; a work-based society; and a policy of Eastern Opening.” Chinese relations were elevated to be a defining feature of the Orbán regime’s identity.

Meanwhile, China launched the most ambitious development strategy in modern history.

The timing of Hungary’s Eastern opening could not have been luckier. Shortly after Xi Jinping took office as Secretary General of the Chinese Communist Party in 2012, he announced history’s most ambitious plan to exert Chinese influence around the world. The plan included foreign aid spending, private investments and acquisition of new technologies, investments in security, surveillance, and the funding of multilateral organizations, among others. 

The country had over 3.8 trillion dollars in reserves and considerable extra construction capacity thanks to an earlier infrastructure boom. It was time to invest some cash in promoting China’s goods and influence around the world. A familiar strategy: the United States and the Soviet Union heavily invested in building infrastructure around the world to access markets and spread political influence. The Chinese plan was far more ambitious than either of those two ever was.

A cornerstone of China’s bold new foreign policy was the Belt and Road Initiative (BRI), the most expensive foreign infrastructure project in modern history. According to some estimates, China was looking to spend a trillion dollars on building infrastructure like bridges, railways, and ports, primarily in emerging markets. As Evan Osnos notes in the New Yorker, the plan is seven times more expensive than American reconstruction of post-War Europe. (With no exact numbers, Jonathan Hillman argues in the Washington Post, it is closer to USD 400 billion — still more than twice as much as Hungary’s total GDP.) The Council of Foreign relations reports that more than sixty countries have signed on to the project by 2020, accounting for over two-thirds of the world’s population. 

The Belt Road Initiative has two pillars: the Silk Road to expand maritime trade, and the railway Belt to connect ports to landlocked areas. On land(“belt”), the Chinese government planned to create a network of pipelines, railways, and highways, extending from China to South Asia and towards former Soviet republics in Central Asia. On sea (“road”, as in the New Silk Road), they planned port developments from Southeast Asia to East Africa and Europe.

China needed a way to bring goods into mainland Europe, and Hungary held the keys.

Finding a way to bring Chinese goods to European markets at cheaper rates was very much part of this plan. A Chinese shipping company already licensed, and very successfully operated a port in Piraeus, Greece, which became a major hub for distributing Asian export goods in Europe. Now China was looking to invest in transporting these goods from Greece to the center of Europe. Going through the Balkans and Budapest was going to be a good way to do that. An agreement was signed between Hungary, Serbia, and China in 2013; building plans were settled in 2015. The Budapest-Belgrade Railway Project became China’s flagship project in Europe.

The project took almost seven years from the first conversation in 2013 until the parties reached an agreement in 2019 and construction could start in 2020. Negotiations advanced so slowly that given the history of botched partnerships between Hungary and China, there was a fair chance that the plans would fall through. Chinese partnerships in the Belt Road Initiative are typically built on loans; Hungary would have preferred grant financing. China likes to be in charge of implementing these projects, since the whole point is for the country to deploy its excess infrastructure building capacity. That is not how development projects are done in the EU: a Chinese company would have to win a public tender in order to be trusted with implementation. 

Still, seven years after the first conversations, the developers finally signed a contract in 2019 and the two countries agreed on loan financing in 2020, shortly before the COVID-19 pandemic hit Europe. The Chinese Export-Import Bank was going to finance 85 percent of the project with a 20-year loan; Hungary would put up the rest. The deal was adopted into Hungarian law and classified on May 19, 2020. Earlier in May, the government also allocated HUF 82 billion (or about USD 260 million) from the coronavirus economic crisis response fund to the project.

Belt Road projects often help corrupt political elites consolidate power because they are expensive and lack transparency.

As China’s new Silk Road project advanced around the world, critics warned that the project exploits dysfunctional regimes through a mix of inflated costs and a lack of transparency. In 2019, Foreign Policy published an essay to show that Belt Road Initiative countries were especially prone to bribery, and the country exploited this vulnerability to exert influence over specific country elites by making backroom deals. 

Chinese investments in Central Asia have allowed authoritarian regimes to thrive, while creating an illusion of economic growth and progress in those countries. In Laos and Sri Lanka, corrupt elites deployed misused funds from the project to advance political campaigns. Officials in Belt Road Initiative projects were publicly linked to corruption in Bangladesh, Ethiopia, Kenya, Sri Lanka, the United States and Zambia. 

A Malaysian railway project was so expensive that the finance minister suspects an artificially inflated budget. The contract was a red file: classified and only available to the highest echelons of Malaysian leadership. 85 percent of the project was financed by China’s Export-Import Bank; 15 by the Malaysian state. 

If the story sounds familiar, that is because the Malaysian deal is almost identical to the Budapest-Belgrade railway project — at least as far we know.

In many of the countries that participate in the project, the Chinese investment fills gaping holes in the country’s infrastructure. Hungary is not one of them, but it happens to be a country where the elites welcome an artificially inflated public infrastructure project. The country ranks the absolute lowest among comparable post-Communist EU countries by any corruption or bribery measure. Hungary is number 96 on the TRACE bribery risk matrix, which puts the country between Albania and Kenya, while its fellow Central European EU members like Slovenia (32), the Czech Republic (34), Poland (40), the Slovak Republic (46) all ranked between somewhere between 30 and 50. Transparency International’s Corruption Perceptions Index tells a similar story.

Like in Malaysia, the project is incredibly overpriced and artificially inflated. Originally, expenses of renovating a 160-kilometer, (non-high-speed) railway stretch in Hungary were estimated at HUF 400 billion (USD 1.3 billion). When the Chinese-owned CRE and the Hungarian-owned RM International signed a contract on the details of implementation in 2019, expenses snuck up to HUF 590 billion (USD 1.5 billion). Finally, when Hungary signed the loan agreement with the Chinese Export-Import Bank this year, the stated expenses were HUF 750 billion (over USD 2.4 billion) — or nearly twice as much as the originally proposed budget. 

The Budapest-Belgrade developer is a member of the elite who solidified illiberal democracy in Hungary. 

RM International, the Hungarian holding company behind the project, is owned by Lőrinc Mészáros, a childhood friend of the prime minister and a gas pipe fitter by profession, who happens to have doubled his fortune every year since 2010. (When asked to clarify how he was able to grow his fortune faster than Mark Zuckerberg, he famously replied: perhaps I’m smarter.) A billionaire in US dollars, he is the most influential and wealthiest Hungarian today, who built his wealth from skimming state infrastructure projects. And while he will be spotted on the occasional Croatian yacht party, he also used much of this wealth to buy up the free media and weaken Orban’s opposition. 

The project costs are several times more expensive than similar railway renovations in neighboring countries. Remember that unlike some of these neighboring countries, Hungary does not have a single mountain that would require building a tunnel, and this is not going to be a high-speed track. Even staying within the universe of already overpriced and presumably corrupt Hungarian projects, this railway renovation costs about three times as much on a per kilometer basis as the last one by the same Hungarian developer.

The only rationale imaginable behind this project is that the project further fortifies the regime’s economic underpinnings. There is absolutely no way that renovating the currently underutilized Budapest – Belgrade route can return the investment for the Hungarian state in the traditional, financial sense of the word, and it is not about satisfying a real infrastructure need. It involves taking a 20-year loan with a 2.5 percent interest for a project that will take at least 130 years to break even according to critics. It is a 160-kilometer cargo trail that slaloms among sparsely inhabited towns and farmland, so there is no hope that the project will attract additional investment and economic activity along the way. Hungary’s 20-percent share of Chinese customs paid to the EU will not come close to covering project expenses. 

If the government was acting in good faith, there is no public proof of their thinking behind the deal. The increased trade flow with China could bring additional benefits to Hungary or the region that are not accounted for in these estimates, but if such compelling arguments exist, they are classified.

‘What makes this deal truly suspicious is that there is no publicly available feasibility study that would list compelling arguments in favor of the project’

says Sándor Léderer, executive director of K-Monitor, a tech-enabled anti-corruption watchdog in Hungary. 

Why not partner with the EU for railway renovation?

Yes, Hungary fits the mold of countries like Malaysia where China’s Belt Road Initiative can be used as a vehicle for corrupt elites. But much of the Orbán regime’s financial capital comes from previous infrastructure projects financed by the EU, which are also regularly overpriced and centrally artificially inflated. That’s right — EU projects are well known to have contributed to corruption in the country. In fact, development funds are so frequently misused in Hungary that this became a plot line in an HBO drama series about a Hungarian mafia family. (The show, called Golden Life, is available to stream on HBO, and if you have read this far, you should probably watch it.)  

Still, there are many reasons why it would make more sense to partner with the EU in building railways. For one, the EU provides grants and cheaper funding for infrastructure projects. Specifically, the Budapest-Belgrade railway route is right along Pan-European Transportation Corridor X, which means that renovating it could have qualified for a loan from the European Bank of Reconstruction and Development, presumably under significantly better conditions, based on a recent Serbian example. 

For another, partnering with out-of-EU developers involves some implementation risks. Any new infrastructure in the European Union needs to meet the complex standards and regulations of the community. When Hungary partners with non-EU countries, these requirements can cause complications. A Hungarian-Russian partnership to expand a nuclear plant in Paks ran into this exact problem, where designs needed to be retrofitted to meet EU standards. (That is not to say that Russian or Chinese designs are poor quality by default — but adjusting them to EU standards is cumbersome and resource-intensive.) 

Favoring a specific company in a tender also goes against EU regulation. Like in the Chinese case, these partnerships also tend to involve no-bid contracts with outside partners that go against state aid rules in European Union. However, the Russian precedent suggests that EU concerns over these digressions disappear when German and French companies are involved in project implementation, presumably thanks to the backroom deal making of a German businessman called Klaus Mangold.

In the absence of the classified feasibility study and project details, the only plausible explanation is that partnering with another authoritarian regime allowed the government to go much further in inflating costs for personal gain than previously, and it also allowed the regime to deal a significant blow to transparency efforts in a way that would not have been possible working within the EU framework. As we have noted in this post, corruption connected to EU-backed procurement has significantly decreased over the past couple of years after the European Anti-Fraud Office (OLAF) started an investigation in 2016. 

The lack of transparency around the China deal allowed the Orbán regime to take authoritarian governance to a new level.

Hungarians do not seem to care much about corruption, which explains how the rampant misuse of funds could solidify the Orbán regime over the past decade. In the entire European Union, Hungarians are most accepting of corruption  and least capable of imagining a world without it, according to EU data from 2019. So far, the administration simply did not need to classify suspicious government contracts, because even when they were public, Hungarians did not care, and there were fewer and fewer independent journalists to report them because corruption-sponsored oligarchs bought the Hungarian media.

In the vacuum left by the disappearing media, transparency activists emerged as a force to reckon with. The government responded by a series measures to starve transparency efforts of data. For years, this process was organic — and Kafkaesque. In a recent interview, investigative journalist and Atlatszo.hu founder Tamás Bodoky gives some graphic details.  Administrators took their time to respond to information requests. Instead of handing over electronic documents, they would sometimes hand over boxfuls of paperwork to sabotage searching and systematizing the data. Some would even go to the length of photocopying photocopies of documents until numbers were illegible. These low-level officials were validated when the Prime Minister personally warned Atlatszo.hu that the administration was coming after investigative journalists because of a 2018 story on how a number of Hungarian prominent oligarchs (and the head of the Hungarian Railway Company) took private jets to a yacht party on the Adriatic sea.

Partnering with China allowed the Hungarian government to deal a blow to transparency movements. The decision to classify the Chinese-Hungarian contract came in a series of recent anti-transparency measures. The infamous Coronavirus Law, which we have covered here, included a threat to journalists and an amendment to the Criminal Code with the possibility of a jail sentence for spreading fake news during the State of Danger. Less widely reported: the mandatory time to respond to public information requests was tripled by decree for the duration for the crisis. The details of the largest infrastructure project in Hungarian history were classified. And while the first two measures have since been revoked, details of the railway project remain secret. 

Procurement-based corruption is the fifth pillar of the Hungarian model. 

Ironically, the details of the Budapest-Belgrade project were classified on the grounds that they may expose the country to foreign interference. Of course, the circumstances of the project are by themselves exposing the country to foreign interference. While China’s economic rationale behind the megalomaniac railway expansion are somewhat mysterious, it has been argued that it is an investment in the foreign debt; and a political investment in corrupt elites who can become personally indebted to Chinese leadership after they artificially inflate project costs. This is exactly what happened in Hungary. Whatever the details of the incredibly overpriced deal, the Chinese partners are aware of them.

Corruption is the economic foundation of the Orbán-regime. To keep channeling funds to loyal allies whose investments lack market logic, the regime needs to keep inflating procurement costs. When this became harder within the EU framework, Hungary partnered with China, which also allowed the Orbán administration to classify the project details. The project will never break even. If the government earnestly believes that it will, we will not know why for the next ten years.

In the meantime, the Prime Minister’s friends keep winning contracts: just during the Coronavirus pandemic, a handful of oligarchs including Mészáros and his family were involved in HUF 253 billion (nearly USD 800 million) in new public contracts. Some experts believe this is related to the fact that many of the regime’s investments to date have been in tourism and real estate, industries that are likely to be severely hit by the crisis. New contracts can serve as a bailout or a rainy day fund for the government to recoup losses before the next elections.

The utter lack of long term economic rationale behind a regime built on inflated procurement is cause for concern. Public funds that are not being spent on schools, health care, or economic recovery are channeled into projects that will never turn a profit, and laundered through senseless portfolios — for example, an overpriced railway renovation that Hungary did not need and cannot afford but took a 20-year loan to carry out.

Contributed by Lili Török.
Illustration by István Gábor Takács.

Writing this article would not have been possible without the great work of activists at Atlatszo.hu and K-Monitor. If this post helped you understand something, please consider supporting their work.

As we were about to publish this post, Index.hu published an editorial letter warning readers that the paper’s independence was under threat. Their articles referenced throughout this story are an important reminder that this is a great blow to quality journalism in Hungary. If you read Hungarian, please read this longform piece by Tamás R. Mészáros.