Tim Gosling in Prague -

Hungarian Prime Minister Viktor Orban is set to meet with Russian President Vladimir Putin on January 14, with the expansion of the Paks nuclear power plant top of the agenda. Reports in recent weeks have hinted Budapest may be ready to ditch plans to run a tender in order to hand the contract to Moscow as part of a wider energy package.

"At the invitation of Vladimir Putin," a statement issued by Hungary's Government Information Centre on January 13 reads, "Prime Minister Viktor Orban will tomorrow review the results of the past year of Hungarian-Russian economic cooperation with the Russian President. The government will make an official statement following the meeting."

The PM's press chief, Bertalan Havasi confirmed Orban will travel to Moscow for a "scheduled visit," according to Portfolio.hu.

However, as the statement makes abundantly clear, energy - and the Paks contract in particular - is top of the agenda. That has sections of the Hungarian media fretting that the Fidesz government - which has seen its direct energy relations with Moscow hugely expanded through the last 12 months by the take over of utilities responsible for gas imports and the South Stream pipeline project - is set to scrap plans for a tender for the expansion of the nuclear plant.

Indeed, the government statement reads: "On 17 December 2013, Minister of State Heading the Prime Minister's Office János Lazar informed the Economic and Information Technology Committee of Parliament that advanced negotiations are underway and nearing completion between Hungary and Russia on the continuation of cooperation within the field of nuclear energy."

The same statement also opens by recalling recent discussions with Russia over nuclear cooperation, in particular the last meeting of the two leaders almost exactly one year ago, where they "reviewed issues relating to the several decades old Hungarian-Russian economic and nuclear cooperation."

During that January 2013 visit, Orban suggested Russia would be a natural partner to expand Hungary's only nuclear power plant. That was despite claims from Budapest at the time that it planned to launch a tender for the construction of two new reactors by March of the same year, and that four or five potential contractors had indicated interest. Since, news flow on such a competition has come to a halt.

"The Hungarian government's statements and Rosatom's activities in Hungary show that it is the Russian company which is most likely to expand the nuclear power plant in Paks," analysts at OSW wrote following the January 2013 meeting. "In the opinion of the Hungarian government, the current use of Russian technology and nuclear fuel in Paks is the best justification for this. The Russian company was the first to declare its readiness to take part in the project, and it has opened an office in Hungary. Nuclear power was the main topic of conversation during both Orban's current visit to the Kremlin and his previous one (which took place in November 2010)."

The government statement announcing this year's meeting suggests nothing has changed, and that Budapest could now be ready to seal the deal. "The next step in relation to the matter will be the signing of a bilateral agreement between Hungary and Russia, which must be adopted by the National Assembly," the statement adds. An unnamed "diplomatic source" told Reuters an agreement would "probably be signed". A contract has been drawn up in Moscow and could be signed "if all goes well", the source added.

Energy package?

Located around 100 kilometres south of Budapest, Paks currently uses four Russian-made VVER reactors for a total capacity of 2,000 megawatts (MW), producing close to 45% of Hungarian power overall. The upgrade would replace the four 500MW blocks currently operating, and double capacity at an estimated cost of HUF4 trillion (€13.4bn). The life of the existing units was recently extended by 20 years, but they will still need to come offline between 2032 and 2037.

Like many of its peers in the region, and in contrast to the likes of Germany, Hungary's response to the economic crisis and EU pressure to reduce pollution has been to put greater emphasis on nuclear capability. In addition, the Fidesz government has been pushing its way into strategic industries, with energy top of the list. It is also forcing lowered energy bills for households ahead of elections set for this spring.

"At the committee's session, the Minister of State stressed, among others, that 'Hungarian citizens and households require affordable electricity prices, but the question of what kind of electricity it is able to provide and at what price is at least as important from the perspective of the Hungarian economy. The Paks Nuclear Power Plant is an unavoidable factor in this issue.'" the government statement added.

That push to take over the country's utilities puts the Hungarian state - and therefore the Fidesz government - into direct negotiation with Moscow. Taking its cue from Russia's giant "state champions," Hungary is building state-owned energy group MVM via forced acquisitions from foreign and local operators. The same company runs Paks, but declined to comment to Reuters on a possible contract with Russia's state nuclear agency Rosatom.

In January 2013, MVM was in the midst of buying out Hungary's main importer of Russian gas from E.ON. It also attended the Moscow meetings held at the time, at which senior officials from Gazprom were also present. With the current gas contract set to finish in 2015, MVM officials have recently said talks on a new deal will be opened soon. Meanwhile, Hungary has taken on a notably more enthusiastic role on Russia's giant South Stream gas pipeline project, via which it hopes to increase its grip on European markets. MVM controls the company in charge of construction of the Hungarian stretch.

On the one hand, the growing energy relations between Budapest and Moscow reflect Orban's confrontational stance towards the EU and attempts to diversify his options. That has seen the Hungarian government develop the concept of "opening up to the East," during which Budapest has been lunging to increase partnerships outside the EU - and especially amongst cash rich emerging market giants such as China - during the economic slowdown in the Eurozone.

On the other, Budapest and Moscow could be set to announce an energy package. A Kremlin statement pointed out that Russia provides around 75% of Hungary's gas, meaning a good price on the new contract could significantly help Orban extend his populist agenda by helping to cap energy prices for Hungarian households.

Meanwhile, Moscow is pushing hard against EU obstacles to build South Stream. Brussels has said that host countries must renegotiate the contracts on the project; Moscow will likely welcome Hungary's willingness to fight the European Commission head on.

At the same time, nuclear energy is a central plank for the Kremlin. It remains the one significant success in the Russian government's dismal and hugely expensive efforts to diversify the economy and make it high tech, and Rosatom has seen no little success in hawking its wares across global emerging markets in recent years.

The prospect of a contract with Hungary - over and above the more parochial transparency issues of avoiding a tender - offers to extend Moscow's reach into Central Europe's energy mix; a battlefield of increasing intensity with Brussels. Rosatom is also fighting hard to secure the contract to expand the Temelin nuclear power plant in Czech Republic.