Hungary wins huge loan as it hands nuclear deal to Russia

By bne IntelliNews January 15, 2014

bne -

Russia is to hand Hungary funding of up to €10bn as part of a deal struck on January 14 giving Moscow the contract to upgrade the Paks nuclear power plant without a tender. It remains to be seen what other energy deals were discussed during Hungarian Prime Minister Viktor Orban's meeting with President Vladimir Putin.

A late announcement that Orban would likely sign a deal on the upgrade and expansion of the plant during his trip was made on January 13. Moscow didn't disappoint, with MTI reporting numerous papers awaited the PM on his arrival, suggesting the inter-governmental agreement on Paks could be followed by other high-profile deals.

The two leaders observed Sergei Kiriyenko, head of Rosatom, and Hungarian Development Minister Zsuzsanna Nemeth sign off on a deal that will see the Russian state nuclear corporation build two new 1,200-megawatt (MW) capacity blocks at a cost of €10bn-12bn. Putin claimed the contract will help "improve Hungary's energy independence and help solve issues associated with energy security," according to AFP. Orban labeled it an "excellent professional deal".

Suspicion that Hungary was preparing to scrap plans to run a tender for the project had been building again in recent weeks, as officials in Budapest hinted at deepening energy ties to Russia on the back of the state's takeover of Hungarian utilities. The offer of cheap Russian cash appears to have sealed that new mood of cooperation.

Kiriyenko said the final volume of funding has not been defined, but that it would be below the project's minimum cost of €10bn. The exact amount will depend on power prices and the plant's technical parameters. The preliminary agreement covers three areas, he added, according to MTI: construction of the new blocks, fuel supplies, and servicing.

Orban's chief of staff, Janos Lazar, told Reuters that the loan will have a 30-year maturity and will cover 80% of total costs of the project. The new blocks, he added, are unlikely to come online before 2023.

He also pointed out that the plan to expand Paks has been approved by the EU. However, Brussels will likely be less impressed by Budapest's decision to hand the country's biggest contract ever without holding a formal bidding process - which contravenes the bloc's rules.

Some suggest Orban et al will look to dodge this via a loophole, and claim the contract is not affected by such regulation. "In this case," an unnamed source told, "we are only talking about the expansion of an existing plant and not the construction of a new one. Based on this, we can hope that the EU leadership will not have substantial complaints about the tender's annulment."

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. 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's January 13 statement said.

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.

In January 2013, MVM bought Hungary's main importer of Russian gas from E.ON. With the current gas contract set to finish in 2015, MVM officials have 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 the giant South Stream gas pipeline. Brussels has said that host countries must renegotiate the contracts on the project; Moscow will welcome Hungary's willingness to fight the European Commission head on.

Father Christmas

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.

Securing the contract on Paks - 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. Russia's huge cash pile is key to winning that fight.

France's Areva and US-Japanese corporation Westinghouse were reported to have expressed interest in the proposed tender for Paks. However, according to daily Nepszabadsag, Rosatom was the only potential bidder willing to offer pre-financing. The actors and the script are exactly the same in the Czech Republic, where state owned CEZ is struggling to put together the cash to expand the Temelin nuclear power plant.

"Is it Christmas still?" asks Tim Ash at Standard Bank. "Putin is like Father Christmas at the moment, splashing the cash across the region to "win friends and influence" people. €10bn for the Hungarians, €15bn for the Ukrainians, €2bn for Belarus. At this rate Russia will need to come to market to replenish the National Wealth/Research Fund."

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