Czech PM rejects nuclear option on Russian sanctions

By bne IntelliNews March 4, 2014

Tim Gosling in Prague -

The Czech Republic could oust Russia from the €8bn-10bn tender for expansion of the Temelin nuclear plant, the country's defence and human rights ministers said on March 3, in reaction to Moscow's military intervention in Ukraine. However, reflecting the wider economic challenges to any hard-hitting sanctions within the EU, the prime minister quickly moved to stamp out the suggestion.

Defence Minister Martin Stropnicky was quoted by AP as saying that under the current circumstances he could "hardly imagine" that Russia would be chosen to run the project for state-owned utility CEZ. "Russia has disappeared from the group of predictable, democratic countries. What it is doing is unacceptable," he added, according to Reuters.

Jiri Dienstbier, minister for human rights, backed his cabinet colleague up. "There has been talk about sanctions against Russia. Personally, I cannot imagine that Russians will continue to take part in the tender to expand Temelin because a country that uses military aggression in foreign policy is a security risk for the Czech Republic as well."

However, reflecting the country's heavy reliance on Russian energy - as well as growing investment from Russian firms and a strong lobby in the country - Prime Minister Bohuslav Sobotka responded that "Czechs can't stop business with Russia on Ukraine".

While the PM condemned Russia's actions, he insisted the Czech Republic cannot break off economic ties. He also said the government could not step in to exclude the Russian bid for the Temelin contract. "Although the Czech Republic clearly views what is going on in Crimea negatively, there is no reason for us to scrap all of our business relations," Sobotka said, according to Reuters.

A consortium led by Russia's Atomstroyexport is bidding against Japan's US-based Westinghouse Electric to build two new reactors at Temelin. However, the tender has been delayed and the project is seen as economically unsound. CEZ has recently reiterated that it will not go forward without government support - which looks unlikely to turn up.

On the other hand, that could push CEZ into Russia's hands should it feel compelled to press on with the project. Moscow said last year that it is prepared to become a full partner in Temelin, and provide financing. Earlier this year, Hungary surprised with a sudden announcement that it had agreed a €10bn loan from Russia as part of a deal that will see Atomstroyexport expand its Paks nuclear plant. Budapest cancelled plans for an international tender on the project in the process.


The contrasting statements from within the government of the Czech Republic - based in the eastern end of the EU where a stiffer resistance to potential Russian expansion persists due to recent history - mirrors the difficulties across the EU in finding a concrete response to Moscow's actions. Russia is a major trade partner for the country and has seen its investment in the region rise in recent years. For instance, in 2013 Russian banking giant bought a network of Central European banks from Austria's Volksbank.

In addition, Czech President Milos Zeman favours strengthened ties with Moscow. Although he has spoken out against the incursion into Ukraine, speculation has persisted for years that Russian lobbyists helped fund his political campaigns.

Yet, as in the rest of Europe it's reliance on Russian energy that is the lynchpin. The Czech press is already reporting that petrol and diesel prices are set to rise as soon as the middle of March due to the standoff in Crimea. Analysts pointed out to Czech newswire CTK that crude prices have jumped on the back of the Ukrainian crisis. Akcenta analyst Miroslav Novak said fuel prices could rise by CZK1 per litre within the next fortnight.

More specifically, the Czech Republic saw serious shortfalls of oil last year as deliveries through the mainline Druzba pipeline dropped markedly. Traders claimed at the time that the difficulties were a tactic by Russian state companies to test the appetite for raised prices in Central Europe, as they have expanded export options via the Baltic. Prague responded by pushing the country's integration into European pipeline networks to raise purchases from alternative routes, but remains exposed should it antagonize Moscow greatly.

Others in the region are also struggling to come up with a response. Poland has played a leading international role in the Ukrainian crisis, but faces similar challenges to the rest of Europe. Economy Minister Piechocinski highlighted on March 3 that Russia and Ukraine account for 8% of Polish exports (5% to Russia, 3% to Ukraine) and warned this component could decline 30%-40%.

Analysts at Commerzbank suggest the region will see little immediate impact in terms of sanctions, but that the fallout will hit later. "We see more second-round effects on CEE from the Ukraine crisis (higher food and energy prices, wider spreads etc.) than tangible, first-round impacts," they write.

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