The national security dimensions of global economic and financial (E&F) relations are more apparent in our highly interdependent world than ever before. Our newsletter aims to illustrate instances of this rapidly evolving trend, not only in the Czech Republic but in all EU and NATO member states. An integral part of this effort will be updates concerning the latest developments in investment screening mechanisms, problematic transactions/projects, fundraising by “bad actors” in Western capital markets and related regulatory initiatives.
OVERVIEW ■ CITIC Europe is increasing its capital to complete takeover of CEFC's assets and fund further expansion
■ Europe Divided over Huawei Security Concerns
–> Vodafone Spain: Huawei will play significant role in 5G network construction
–> Polish government is preparing analysis concerning 5G development and the extent of security risk related to Huawei's participation
–> The Italian government remains divided on this question
■ EU Investment Screening Approved by Council, Moves to implementation
■ Serbia, China, and the EU: Balancing Act or Barrier to Accession?
Newsletter from March can be found here
CITIC EUROPE IS INCREASING ITS CAPITAL TO COMPLETE TAKEOVER OF CEFC'S ASSETS AND FUND FURTHER EXPANSION
The full takeover of Chinese energy conglomerate CEFC's assets in the Czech Republic by China’s state-owned CITIC Europe has been completed by the end of March. CITIC Group stepped in to bail out the embattled company subsequent to its founder being placed under arrest in early 2018. CITIC Europe is also planning new projects in several priority areas, including the financial sector, aviation and tourism, food industry, agriculture and industry, according to Jan Tvrdík, member of the supervisory board of CITIC Europe.
According to the portal Neovlivni.cz, the suspect Czechoslovak investment group Penta is apparently committed to selling a smaller airport in Vodochody to CITIC Europe. After taking over CEFC’s assets, CITIC now holds a 50% ownership stake in the Czech airline Travel Service, which, in turn, owns a majority stake in the Czech national airline company, CSA.
These engagements are relevant due to the existing direct flights from the Czech Republic to four cities in China, namely Beijng, Shanghai, Chengdu and Sian. In addition, according to the Czech Statistical Office, in the last three years the number of Chinese tourists has more than doubled from 285,000 in 2015 to 620,000 in 2018.
EUROPE DIVIDED OVER HUAWEI SECURITY CONCERNS
In February of this year, US Secretary of State Mike Pompeo warned EU member states and other allies about the risks of allowing Chinese telecommunications giant Huawei to play a role in their national 5G network development initiatives. A senior US official stated that giving Huawei market access in these countries “makes it more difficult for America to be present”, stressing that “if [Huawei’s] equipment is co-located where we have important American systems, it makes it more difficult to partner alongside them”. The central security concern about Huawei is that its 5G network equipment could be readily instrumentalized by the Chinese government to monitor private communications.
The EU Commission announced on March 26 that all EU member states will be expected to scrutinize Huawei and other foreign firms via their domestic security structures, and to share information about 5G security threats to help other EU members manage the potential risks. It will not, however, seek an EU-wide ban on Huawei’s 5G network activity, leaving this choice up to each member state.
While a number of EU and NATO governments have indicated their intentions to follow the US lead and either bar Huawei from 5G involvement or increase scrutiny on the firm’s activities, subsequent market developments suggest that some countries remain unconvinced or hesitant to declare Huawei a threat to their national security, in some cases because their various national diligence processes are still ongoing.
Vodafone Spain: Huawei will play significant role in 5G network construction
On February 22, Vodafone Spain, one of the country’s largest mobile operators, announced that Huawei would be responsible for developing 65% of the network’s 5G capacity, with the remainder to be built by Swedish telecommunications firm Ericsson. On the same day, Vodafone Spain made the world’s first calls over a small-scale 5G network connection in a public demonstration of the new technology using a terminal designed by Huawei.
Polish government is preparing analysis concerning 5G development and the extent of security risk related to Huawei's participation
In contrast with Spain, the government of Poland appears to share US security concerns about Huawei, having arrested a Huawei employee on suspicion of espionage on January 11th. Nonetheless, on March 1st, HAWE Telekom, a Polish firm providing mobile network capacity to operators in Poland and neighboring countries, announced their “in-depth cooperation” with Huawei on the development of backbone bearer networks capable of delivering 5G network traffic in Europe. In this context, a backbone bearer network is essentially the infrastructure for aggregating and transporting digital traffic on a massive scale within and between countries. The decision suggests Huawei will play a significant role in modifications of the basic architecture of mobile network connectivity in Poland and several other EU member states.
The Polish government is still playing catch-up in developing its policy on 5G network construction and Huawei's participation in it. Karol Okonski, Deputy Head of the Ministry of Digitalization and Poland's plenipotentiary for cybersecurity, suggested during an interview in March that the Ministry is currently preparing an analysis which will evaluate 5G network construction, including the extent of the security risk represented by Huawei. While he was not keen to prejudge the result of analysis, he indicated that this could either be a decision imposed on all market participants as a way of dealing with Huawei, which would amount to changing Polish law, or individual decisions made on a case-by-case basis. This comes despite the agreement for a “5G Strategy for Poland” already having been signed in June 2017. Huawei Polska and ZTE Poland were among the signatories (together with over 40 other parties).
The Italian government remains divided on this question
The position of the Italian government with respect to Huawei remains uncertain. Italian Deputy Prime Minister Luigi Di Maio, of the country’s 5 Star party, is leading an effort to reach agreements with China securing a role for Italy in the Belt and Road Initiative. But Matteo Salvini of the Northern League party, who is concurrently acting as a deputy prime minister, has issued a warning against allowing Huawei to participate in the country’s 5G network development on security grounds.
The Italian Ministry of Economic Development refuted claims in February by the Ministries of Defense and Foreign Affairs that the country was set to “nullify contracts already signed with Huawei to build 5G networks”. This confused approach to Italy’s economic relationship with China may reflect a split between the 5 Star and Northern League parties, who have jointly governed Italy in a majority coalition since March 2018.
On March 23, Italy signed a €2.5 billion agreement with China covering natural gas, finance, industry and tourism during a state visit by Chinese President Xi Jinping. Italy also signed a preliminary accord on its participation in the Belt and Road Initiative, making it the first large West European economy to do so. However, no agreement has yet been reached on Huawei.
EU INVESTMENT SCREENING APPROVED BY COUNCIL, MOVES TO IMPLEMENTATION
The process for the European Union’s new investment screening mechanism was approved by the European Council on March 5, 2019, and investment screening will begin in April of this year, though member states have been granted 18 months for full implementation of the mechanism.
The investment screening framework was introduced to improve EU members’ national security by standardizing and strengthening the process of weighing the economic benefits of investments by non-EU countries against their potential security risks. It will also serve as an international forum for member states to exchange information and security concerns, create requirements for the national screening mechanisms of member states (where present), and as a cooperative framework for interaction between the member states and the European Commission.
The mechanism leaves the final decision on whether or not to allow an investment to be made up to the member state(s) that are directly affected by the investment. That said, the increased scrutiny of foreign firms associated with the process may have implications for the capacity or willingness of outside countries to court EU member states for future investment projects. In addition, the Commission is permitted to issue an opinion on any investments affecting multiple member states or those deemed to be of Union-wide significance.
SERBIA, CHINA, AND THE EU: BALANCING ACT OR BARRIER TO ACCESSION?
The EU’s new investment screening mechanism will apply to all countries that accede to EU membership in the future and may have significant implications for some EU candidate countries. Serbia’s ongoing process of EU integration is complicated by several issues connected to the country’s international relations. The most commonly cited are the traditionally close relationship between Belgrade and Moscow and the unresolved conflict over the recognition of Kosovo’s status as an independent state. Serbia’s budding dependence on Chinese investment may come into conflict with the EU’s new screening mechanism, which has been interpreted as specifically targeting Chinese investments for increased scrutiny. In recent years, China has made major investments in Serbia, including:
-Purchase of a 63% stake in the copper mining complex RTB Bor Group by Zijin Mining in December 2018;
-Purchase of the Smederovo Steel manufacturing complex by Hesteel for $52 million in July 2016, with a pledge to invest an additional $300 million;
-Construction of a new 350-megawatt unit at Serbia's Kostolac-B coal power plant. It was negotiated in November 2017 as part of
-Construction of a high-speed rail connection between Belgrade and Budapest The long-term economic effects of these investments are still uncertain, but it is clear that Chinese investment is perceived by many in Serbia as an opportunity for finally bringing an end to the country’s economic malaise which has spanned the last decade. EU membership would not necessarily halt the flow of Chinese investments, but the new screening mechanism may push Serbian leaders to re-evaluate the priority attached to the relationship.
Serbia is planning to serve as a major land route connecting the Greek port of Piraeus with Central Europe, and several additional Chinese investment projects are slated for the future. With EU membership still a driving concern for the Serbian government, Chinese efforts to make Serbia its entry point into Europe and an investment hub for the western Balkans region may be hamstrung by the EU’s investment screening mechanism in coming years. Serbia and any other accession countries would be obligated to comply with the mechanism upon entering the Union. In short, Serbia may have to accept that EU membership could mean somewhat more restricted access to Chinese investment capital.
