Three Seas Initiative: High ambitions and limited capabilities by Antall József Tudásközpont

ANTALL JÓZSEF RESEARCH CENTRE

THREE SEAS INITIATIVE: HIGH AMBITIONS AND LIMITED CAPABILITIES

PÉTER STEPPER

2 Czuczor Street, 1093 Budapest +36 20 310 8776 ajtk@ajtk.hu | www.ajtk.hu/en

ANTALL JÓZSEF RESEARCH CENTRE

AJRC-Analyses Series of the Antall József Knowledge Centre

Publisher-in-Chief: Péter Antall Managing editor: Péter Dobrowiecki Editorial office: Antall József Knowledge Centre H-1093 Budapest, Czuczor street 2

Contact: H-1093 Budapest, Czuczor street 2 Phone: +36 20 310-87-76 E-mail: ajtk@ajtk.hu Web: ajtk.hu/en

2 Czuczor Street, 1093 Budapest +36 20 310 8776 ajtk@ajtk.hu | www.ajtk.hu/en

THREE SEAS INITIATIVE: HIGH AMBITIONS AND LIMITED CAPABILITIES PÉTER STEPPER

EXECUTIVE SUMMARY The establishment of Three Seas Initiative (TSI) has been suggested by Croatia and Poland in 2014, in order to develop transport, energy and digital infrastructure of the Central and East European region (CEE). The Baltic-Adriatic-Black Sea region is underdeveloped regarding infrastructure and primarily dependant on the will of Russian energy suppliers. After the US administration gave permission to export gas and crude oil, business interest to import American LNG and oil products increased significantly in Central European countries. The US government also expressed several times its worries about the increasing Chinese influence in transport infrastructure business and dependency on Russian energy resources. Hence, TSI can be considered as a domain, where US national security and business interest collide. However, we should not forget, it is a Central European project, per se. The primary goal of member-states is to harmonize their interest in a way, which neither opposes EU activities, nor harms their own sovereignty. TSI is a platform for regular presidential meetings, which can facilitate negotiations, and helps stake-holders to come together and discuss. The Bucharest Summit proved to be a huge boost for cooperation in 2018 with the announcement of financial pledges, creating a business forum and suggesting the establishment of an investment fund. A lot of priority projects have been approved during the next two years. The budget seems to have a more sustainable structure, where the private equites and external sources are constantly rising, comparing to public sources. Public money, especially the pledges from the US reflects upon the increasing geopolitical rivalry in the region. However, infrastructure projects being so large, cannot be built only on good-faith and political pledges of governments, first and foremost it needs a strong business background with a huge amount of private financial sources.

HISTORY OF TSI The start of Three Seas Initiative has been announced on the margins of the UN General Assembly meeting in New York in 2014 by Poland and Croatia and brings together 12 EU member countries. It is considered to be a platform for informal meetings of the heads of states. The main aim is to enhance cooperation in three sectors, namely transport infrastructure, energy and digital agenda. Similarly, an important priority is to strengthen the internal market of the EU, without averting further differentiation within the union. The name Three Seas Initiative has led to connotation with the interwar Intermarium project and naturally triggered some concerns about the intensions behind this initiative. The US has become an exporter of oil and gas, and the permission to sell fossil fuels abroad, resulted in a new effort to transport energy supplies and technology to Central Europe. This business requires a better pipeline distribution system, not dependant on Russia. thus,

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the focus of TSI is on north-south interconnectivity and the plan to link the liquid natural gas (LNG) terminal of Krk and of Świnoujście with territories lying across the Baltic Adriatic and Black Seas region.1 An anti-EU character of TSI was also mentioned by some observers. However, already the first TSI summit in Dubrovnik strengthened the pro-EU character of TSI, which is also demonstrated through the engagement of the wide range of countries in the initiative. Nevertheless, closer ties to the EU need to be repeatedly confirmed in order to avoid any political speculations about the future character of TSI.2 In 2018, Romania hosted the third TSI Summit which led to the adoption of 27 priority projects in three key areas transportation, energy and digital area. The participation of representatives from the European Commission, Federal Republic of Germany and the United States of America showed the increasing importance of the format. The members identified major regional problems, like demographic decline, small sized markets and energy dependency. All of these areas can be addressed by initiatives like TSI, aiming primarily at the increase of interconnectivity, competitiveness through digital transformation, and attracting investors.3 Participating countries share some similarities, but are also to significant extent different in their structural characteristics, as well as in their priorities. In fact, TSI has been a multispeed initiative since the very beginning of its existence, just to mention the fact that some of the participating countries are Eurozone-ins, other are Eurozone-outs. An informal character of the whole initiative, with only a few commonly shared priorities seems to be an adequate response to this challenge at the moment. As already mentioned above, TSI is considered to be an informal initiative of the heads of states. Presidents can certainly put additional political weight to some projects, however, their competencies are limited and their powers vary from one country to another. The implementation of bigger regional projects would therefore require the involvement of other stakeholders, including the governments.4 The member-states might see the future of TSI differently—while some of them, including the Czech Republic, Hungary and Slovakia—perceive TSI more as an informal discussion platform serving for the exchange of ideas, Poland, Croatia but also Romania assign more importance to it. Germany would like to see TSI as a European regional platform with an Atlantic profile, while the US waits for an autonomous CEE economic community, attractive enough for American business to invest into the region. On David Morris: The Three Seas Initiative: A European answer to China’s Belt and Road?, Lowy Institute. 26 October 2020. <https://www.lowyinstitute.org/the-interpreter/three-seas-initiative-european-answer-chinas-belt-and-road > Accessed: 14 December 2020.

2 Tomas Strazay: Regional cooperation formats in CEE and their Relation to the V4. In: Stepper Péter (ed.) Central Europe and the Visegrad Cooperation: Historical and Policy Perspectives. Antall József Knowledge Centre, Budapest, 2018. 3 Oana Cristina Popovici: Romania External Relations briefing: Romania was the host of the Three Seas Initiative Summit in September, China-CEE Institute. 12 October 2018. <https://china-cee.eu/2018/10/12/ romania-external-relations-briefing-romania-was-the-host-of-the-three-seas-initiative-summit-in-september/ > Accessed: 14 December 2020. 4 Tomas Strazay: Regional cooperation formats in CEE and their Relation to the V4. In: Stepper Péter (ed.) Central Europe and the Visegrad Cooperation: Historical and Policy Perspectives. Antall József Knowledge Centre, Budapest, 2018.

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the margins of the Bucharest Summit, a Business Forum has been also organized, which enjoyed over 600 participants. Six of the twelve members also signed a letter of intent to establish an Investment Fund in the near future.5 Besides Poland and Romania, Baltic countries also put a special emphasize on developing TSI further, because they see it not just an economic, but also a geopolitical project, which can boost their security by strengthening the transatlantic alliance. Energy security of Poland are self-evident, their primary goal is to reduce dependency on Russian sources. Tallinn offered to organize the next TSI Summit, thus, after 2019 Summit in Ljubljana, the members had a mostly virtual meeting hosted by Estonia on 19 October 2020. Lithuania also declared the intention of deepening the engagement with this multilateral cooperation platform during the 2019 summit in Ljubljana, where also the then EU President Jean-Claude Juncker, the president of Germany Frank-Walter Steinmeier and the US Energy Secretary Rick Perry took part. President Gitanas Nausėda who took part in Tallinn followed in the footsteps of his predecessor, reiterating the importance of the geopolitical aspects.6 Poland and Romania pushed forward the idea of an investment fund, and together they pledged 500 million euros for the budget of the TSI Investment Fund at the TSI Virtual Summit. Nine of the participating countries also offer 20-20 million euros to show their commitment to the idea of the investment fund, hence the fund currently stands at 913 million euros. These positive steps from Central Europe convinced the United States to support the idea on a greater extent. Keith Krach, Undersecretary for Economic Growth, Energy and the Environment announced a US pledge reaching up to one billion dollars (850 million euros), if the contribution from the 12 nation achieves 3.4 billion euros eventually. “The more each country invests, the more we invest,” said Mr Krach.7 The fund is being managed by London-based investors Amber Infrastructure. It’s CEO, Gavin Tait also took part in the summit, has been manager of the fund since March 2020, which also delivered 10 million euros for the sake of budget.

COMPLEMENTARITY OR COMPETITION? At the end of 2020 we can evaluate the past five years of the cooperation to draw some conclusions. During its history, there were five presidential summits, organized in the framework of TSI, with the participation of twelve member-states, two visitor countries, and a pledge of 1 billion euros to start an investment fund for implementing

5 Oana Cristina Popovici: Romania External Relations briefing: Romania was the host of the Three Seas Initiative Summit in September, China-CEE Institute. 12 October 2018. <https://china-cee.eu/2018/10/12/ romania-external-relations-briefing-romania-was-the-host-of-the-three-seas-initiative-summit-in-september/ > Accessed: 14 December 2020. 6 Linas Eriksonas: Lithuania external relations briefing: Lithuania explores the deepening cooperation through the Three Sea Initiative, China-CEE Institute. 16 November 2020. <https://china-cee.eu/2020/11/16/lithuaniaexternal-relations-briefing-lithuania-explores-the-deepening-cooperation-through-the-three-sea-initiative/ > Accessed: 14 december 2020.

Nikola Đorđević: Three Seas Initiative Investment Fund gets US boost, Emerging Europe. 20 October 2020. <https://emerging-europe.com/news/three-seas-initiative-investment-fund-gets-us-boost/ > Accessed: 14 December 2020. 7

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infrastructure projects. It is more than nothing, but still very far from being a key factor of large infrastructure building projects, known to be very expensive. These projects primarily need to attract private investors, hedge-funds and banks to start growing big. For investors from the US or China, the Visegrad region has always been too small, therefore they prefer looking for bigger formats. In this particular case, TSI can be of the added value. In relation to the V4, it might be worth to look for possible synergies with TSI with the aim of strengthening cooperation in concrete sectoral projects. The V4 countries can also consider using the existing V4 and V4+ infrastructure for the sake of joint projects.8 It is also a question, what kind of role TSI could have in the light of other alternatives. It has been highlighted several times, TSI is complementary to European projects (TEN-T), but is not self-evident in the case of China. Beijing made serious efforts to gain influence in regional business. Hence, 16+1 (later on 17+1) cooperation was funded in 2012 in Budapest to promote the Chinese Belt and Road Initiative and enhance trade cooperation and infrastructure development of the region. Chines FDI is increasingly important in certain Western Balkan countries as well. In Montenegro and Serbia, Chinese FDI as of GDP is more than 20%. Furthermore, it is also above the 4-5% threshold in North-Macedonia, Slovenia and Hungary. It is not surprising that such a huge infrastructure project like BelgradeBudapest railway is economically and politically important for the countries of concern. Chinese FDI in Serbia totals at the level of 10.67 billion dollars and reaches 5.88 billion dollars in Hungary. It is 2.11 billion dollars in Romania, and 2.28 billion dollars in case of Poland and only 700 million dollars in Croatia.9 It could be interesting to compare these numbers to US foreign direct investment in the region. In Serbia, the amount of US FDI stock does not exceed the level of 200 million dollars per year.10 In Hungary, FDI stock reached 7.1 billion dollars according to US Department of State.11 It is approximately the 10% of the total FDI flowing into Hungary in a single year. Comparing to Romania, which is probably the most pro-American country politically, FDI from the US was only 3.6 billion dollars in 2017,12 but in the case of Poland—the largest country in the region—American FDI was 12 billion dollars in the same year.13 83.4 million dollars from the total of 1.2 billion dollars of FDI comes from US investors in the case of Croatia. 8 Tomas Strazay: Regional cooperation formats in CEE and their Relation to the V4. In: Stepper Péter (ed.) Central Europe and the Visegrad Cooperation: Historical and Policy Perspectives. Antall József Knowledge Centre, Budapest, 2018. 9 Moldicz Csaba: Hungary external relations briefing: The emerging alternative to the 17+1 cooperation? The Three Sees Initiative’s role in the Hungarian Foreign Policy, China-CEE Institute. 4 November 2020. <https://china-cee.eu/2020/11/04/hungary-external-relations-briefing-the-emerging-alternative-to-the-171cooperation-the-three-sees-initiatives-role-in-the-hungarian-foreign-policy/ > Accessed: 14 December 2020.

2019 Investment Climate Statements: Serbia. US Department of State. <https://www.state.gov/ reports/2019-investment-climate-statements/serbia/ > Accessed: 14 December 2020.

2019 Investment Climate Statements: Hungary. US Deptartment of State. <https://www.state.gov/ reports/2019-investment-climate-statements/hungary/ > Accessed: 14 December 2020.

2019 Investment Climate Statements: Romania. US Department of State. <https://www.state.gov/ reports/2019-investment-climate-statements/romania/ > Accessed: 14 December 2020.

2019 Investment Climate Statements: Poland. US Department of State. <https://www.state.gov/ reports/2019-investment-climate-statements/poland/ >

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Looking at the numbers, it is not so surprising, why Poland, Croatia and Romania are the most enthusiastic players to attract American business into this region, and why the significance of such diplomatic efforts is not so self-evident in case of Hungary, Serbia, and other Western Balkan countries. The future of the political commitments depends on how serious the financial pledges will be in the long-run. The first billion dollars for the investment fund looks promising. It is still a question however, if it is followed by the other 3 billion dollars in the upcoming years, while this decision in now in the hand of a new administration in Washington DC.

AMERICAN INTEREST TO DEVELOP THREE SEAS INITIATIVE Central Europe has never been in the forefront of US foreign policy. The Obama administration followed the tenets of defensive realism,14 focusing on key regions, like Eastern Europe, the Persian Gulf, and East-Asia, but withdraw from regions, seemed to be non-existential threats to US national security like Syria, Libya, or Afghanistan. As the result of pivot to Asia, European affairs has become less and less important gradually. Two key areas remained important, defense issues and energy security. Obama started to address the issue of burden-sharing in NATO and put pressure on Allied countries to reach the 2% threshold of defense budgets as of GDP. These efforts brought results under the next administration, and European countries indeed started to deliver, especially countries with obsolete Soviet equipment, necessary to modernized15 in the Eastern flank. Baltic states and Poland started military development first, followed by Hungary, launching the long-term army modernization program, Zrínyi 2026.16 The Trump administration has preferred another type of foreign policy, as the president preferred day-to-day business benefits over long-term prudence. In a Machiavellian sense this is the ideal behavior of a political leader from the perspective of ‘political morality.’ Trump struggled to make America great again, thus constantly pushed the members of international community, even its allies, in a direction to do more in favour of his goals. This message alienated some traditional allies (like Germany), but it was more than welcomed in Central Europe. Hungary has been neglected for a long time by US Presidents in the past, and Budapest could use this new American perspective on international relations to benefit from it. Revival of geopolitics put Eastern countries in the center of gravity.17 Trump preferred national interest over values of cosmopolitan liberalism, which characterized the Obama administration. Budapest and Washington could start new negotiations related to various

Thomas Juneau: The Obama administration, defensive realism, and American foreign policy in the Middle East, Comparative Strategy. 2020/4.

Rada Péter–Stepper Péter: The Hungarian Perspective on NATO, in: Baranyi Tamás Péter–Stepper Péter: NATO in the 21st century: A Central European Perspective, Antall József Knowledge Centre, Budapest, 2019. 172-194.

Stepper Péter: Magyarország hozzájárulása a NATO működéséhez, Fókuszban. 2019/2. 115-119.

Rada Péter–Stepper Péter–Vladár Veronika: A regionális biztonság összefüggései, Biztonságpolitikai Szemle. 2020/2. 1-6. 17

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matters on this new basis. Prime Minister Orbán visited the White House in 2019,18 and high-level American diplomats had meetings in Budapest frequently. Even if Hungarian diplomacy has only limited capability to influence the American stakeholders, at least the voice of Budapest has been heard in Washington. All of these diplomatic courtesies reflected upon business interest. An American-Norwegian joint venture, KongsbergRaytheon was awarded a 410 million euro contract from Hungary for NASAMS (National Advanced Surface-to-Air Missile System). Hungary also decided to increase its support in terms of the Three Seas Initiative Investment Fund, and made pledges for contributing 20 million euros in its budget. Until the NATO accession of Poland, Germany has been the Eastern flank of Europe, but it has changed drastically after 1999. Today, Warsaw feels, they deserve the attention and support of Washington, being the new frontier of Europe, and facing the Russian threat. President Trump showed full support for Poland, visiting Warsaw in 2016, and welcoming President Duda in the White House right before the Polish Presidential elections in 2020. It is clear that Europe has remained important for Obama to a certain degree, mostly because of alliance politics and premises of defensive realism. They frequently intervened however into political matters, and their judgement has been influenced more by democratic principles and ideas, rather than questions of stability and security. We can expect something similar from the next US administration, and President-elect Joe Biden. However, it is in the very interest of Biden, to keep the security and stability of Europe. Therefore, it is important for him to counter Russian and Chinese efforts to gain more influence in our region. Certain Central European projects helped this effort, particularly those, which decreased reliance on Russian energy sources and helped infrastructure building without involving China and the Belt and Road Initiative. Therefore, we can expect, that Three Seas Initiative will have a bipartisan support in the United States House of Representative, which recently adopted a resolution for an additional 300 million dollars financial support for energy and infrastructure projects. TSI can help to start a process and is able to kick-off, but infrastructure business needs much more FDI, thus it needs to attract private investment companies in the region.19 The TSI Investment Fund is financed by the 12 member-states and the United States also made a political pledge to reach a 1 billion dollars20 of federal financial support, if Central Europeans are able to raise their public investment level accordingly.

18 Budapest Business Journal: Trump receives Orbán in White House. Budapest Business Journal. 15 May 2019. <https://bbj.hu/politics/foreign-affairs/visits/trump-receives-orban-in-white-house > Accessed: 14 December 2020.

Central European Visions conference organized by Antall József Knowledge Centre available at <https://www.youtube.com/watch?v=RI9wWMEMn6o > 19

20 Atlantic Council: US commits $1 billion dollars to develop Central European infrastructure. Atlantic Council. 15 February 2020. <https://www.atlanticcouncil.org/news/press-releases/us-commits-1-billion-dollars-todevelop-central-european-infrastructure/ > Accessed: 4 November 2020.

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CENTRAL EUROPEAN INTEREST TO DEVELOP THREE SEAS INITIATIVE Central European countries are traditionally underdeveloped infrastructure-wise and dependent on energy import. Chinese investments can help to develop railroad infrastructure, if such a construction work can enable the further transport of Chinese products, shipped to Constanta port, to European territories via the New Silk Road. North-South connectivity might be in the interest of Central European states, but the vulnerabilities caused by longterm Chinese financial debt conditions might be against the advancement of these projects. Russia can offer relatively cheap fossil fuels, especially natural gas from different kind of sources. Serbia opened the Balkan partition of the Russian “Turk Stream” gas pipeline on 1 January 2021. Turks Stream connected Russia and Turkey, transporting gas along a route avoiding Ukrainian territories from the south. The new pipeline called Balkan Stream has been constructed on the territory of Bulgaria and Serbia. US leadership heavily criticized both of these projects, highlighting their exclusionary geopolitical nature and arguing that there is no direct economic benefit from increasing the number of gas import routes using Russian sources. However, it seems the geopolitical narrative and the references to national security issues are not necessarily the primary concerns of many Central European allies. Their concern is to maintain a stable and secure flow of natural gas, and to build new highways and railroads with a reasonable price tag. However, it is in its very interest to see the US changing its course in a way to return to Europe economically, in order to compete with Chinese and Russian offers. Realistic and sustainable projects implemented in a framework of a Western framework is more reliable for every countries of concern.21 It explains the increasing interest in the development of TSI Investment Fund and the dozens of pilot project started since 2018-2019. For most of the Central European states the main problem is the pace of the development. Via Carpathia is supported politically by the participating countries, alas Poland still needs more time to finish its own part. Other V4 countries, namely Hungary, Slovakia, and the Czech Republic finally decided to support TSI fund in an amount of 20-20 million euros, and they are waiting for the first pilot projects to be completed. Regarding the status of the projects, only 3 from the 49 priority projects has been completed so far. 1. Table Number of TSI priority projects per country Hungary

Croatia

Poland

Latvia

Slovenia

Romania

Estonia

Rada Péter–Stepper Péter: A geopolitika újraéledése és a Három Tenger Kezdeményezés, Biztonságpolitikai Szemle. 2020/2. 1-7. 21

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Lithuania

Slovakia

Bulgaria

Czechia

Source: https://projects.3seas.eu/report

Croatia, Poland, Latvia, Slovenia and surprisingly Hungary applied for the most priority projects, while the Czech Republic, Bulgaria and Slovakia remained restraint. Priority projects have a total budget of 62.87 billion euros, which comes from different places. 4% of the budget is provided by Three Seas Investment Fund, 4% by the EBRD, 7% form the EIB, 12% comes from additional EU funding, 16% from other sources, and 31% from CEF. National funding consists 27% of the budget, being one of the most important source of money. 2. Table Proposed financing of priority projects

Source: https://projects.3seas.eu/report

Transport infrastructure development (57%) has been dominant in the case of priority projects, followed by energy projects (27%) and digitization (16%). The role of Three Seas Investment Fund proved to be more important in the case of the 28 new projects, announced in 2020. These projects have a budget of 22.62 billion euros, with the participation of Hungary, Latvia, Slovenia, Lithuania and Poland.

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3. Table Number of new projects per country Hungary

Latvia

Slovenia

Lithuania

Poland

Source: https://projects.3seas.eu/report

40-40% of the new projects focuses on energy and transport, while 20% is connected to the digital agenda. The financing of the budget differs from the priority projects, national funding is lower (20%), other (mostly American) sources (27%) are higher, as well as the importance of 3SIIF is greater (20%). 4. Table Proposed financing of new projects

Source: https://projects.3seas.eu/report

POLICY RECOMMENDATIONS Since 2014, TSI has developed from a vague idea of political negotiations into a real opportunity of doing business. Central European countries still have a lot of tasks ahead, if they are serious about continuing this journey. Primarily they • need to continue attracting as many stake-holders as possible, such as the European Investment Bank, European Bank of Reconstruction and Development etc; • should support the idea of Three Seas Investment Fund with providing more funds to achieve the overall amount of 3 billion dollars, necessary to ensure the arrival of the 1 billion dollars pledge from the US Treasury; • need to pay attention to the broader context of geopolitical rivalry and understand the merits of US concerns about Russian and Chinese influence; • shall remain realistic in terms of the ambitions and the time frame of implementing projects;

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• need to provide a series of visible success stories, thus shall rather focus on small and medium scale projects than huge investments doomed to be fail at an early stage. Three Seas Initiative has a potential to achieve its original goals in the long run, but it • needs a bipartisan support of the US Congress; • cannot alienate Western European partners during the process; • shall be communicated properly in order to show that it is not a political tool against Russia and China, but an economic initiative for the development of Central European infrastructure.

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