RUSSIAN energy COMPANIES AND THE ROSATOM-Hungary DEAL: MARKET OR geopolitics?

Abstract. The agreement between Hungary and Rosatom of 2014 sends troublesome signals to NATO and the European Union. The participation in the negotiations of the Prime Minister Viktor Orbán and Prime Minister Vladimir Putin is an important signal. This perspective is the start to formulate the hypothesis that describes the goal of this article: “Russian energy companies, as Rosatom, act not only to maximize their market share but also to strengthen Russian geopolitical influence and leverage in the CEE and disrupt the functioning of the EU common energy market as is proven by the ROSATOMHungary deal”. 

Rosatom and Central Eastern Europe: between Aggressive Expansionism and Institutional Constraints

The nuclear energy sector has certain important differences in respect to the natural gas, crude oil or coal; it is not dependent on infrastructure, as pipelines or LNG terminals and there is no need for the constant flow of energy supplies, moreover there is the need to ensure safety and other issues of exquisitely technical nature. All these elements influence the behaviour of the commercial actors and make difficult to recognize geopolitically motivated choices.

The Russian Federation’s answer to the collapse of the Soviet Union in the nuclear sector was to concentrate all civil and military nuclear activities under the Ministry of Atomic Energy of the Russian Federation alias Minatom. The Federal Agency on Atomic Energy substituted Minatom with similar strategic goals in 2004. In 2007, the agency became a state corporation with its own ad-hoc legislation that was renamed the Russian State Atomic Energy Corporation, alias Rosatom. Today, Rosatom owns most of the Russian civil and military nuclear functions [1]. Rosatom controls and operates Russia’s nuclear power plants, is responsible for nuclear reactor exports, the development of nuclear technology, nuclear icebreakers, nuclear medicine, nuclear weapons production companies and related research institutes, nuclear waste storage and disposal, plutonium reprocessing plants, uranium mining and enrichment and nuclear fuel production.

Russian Government and the Russian President have a direct control over the activities of the company because 100% of shares are owned by the state. In fact, Rosatom’s Director General and all members of its Supervisory Board are directly chosen by the President [2]. It should be clearly understood that the Russian government is in charge of setting company’s long-term objectives. Moreover, it also provides funding from the Russian federal budget for military and civilian operations. It is worth to mention the mix between Russian government officials and political elites within the members of the Supervisory Board of Rosatom. For example, the Rosatom Director General is the former Prime Minister of Russia under Eltsin’s administration, Sergei Kiriyenko, appointed in 2005. The Supervisory Board consists of the Russian Minister of Energy and a number of security officials and personal advisors to President Vladimir Putin [3].

Rosatom has a completely unique legal status within the Russian government which provides special protections in respect to the open market. Russian federal authorities, authorities of the constituent entities of the Russian Federation or local authorities have absolutely no legal right to oppose the Rosatom’s activities, except in special cases, as stated by law. Rosatom is always by legal authority exempted from obligations to make public its activities, expenditures or use of property. The Director General also has the legal right to classify information as state secrets, as provided by the Russian Federal Law [4].

Rosatom main objective is aggressive international expansion both through procurement contracts and through the ownership of foreign nuclear generating assets. The main export model used by Rosatom is called “Build-Own-Operate”. The contractor builds the plant and operates it, being its principal owner. Rosatom’s plans are to achieve orders 80 international reactors by 2030 [5] and it is currently in negotiations or at some stage of planning and building for 19 reactors outside Russia [6]. The huge costs and limited numbers of NPP construction projects make this type of business particularly relevant for contractors. To win such type of tenders there is need for low-cost and large scale financing packages that Russia is ready to offer to small countries as Hungary that cannot afford multi-billion-dollar investments. Rosatom’s capacity to compete is deriving from its flexibility and ability to adapt to the precise conditions and needs of the client country. In fact, one of the main strengths of Rosatom is to be the first contractor to be able to arrange payment for the entire phase of building phase of a NPP project. It is important to understand that one of the most important characteristics of the CEE countries in the nuclear sector is the path dependency. Bulgaria, Czech Republic, Romania, Slovakia and Hungary are conditioned by the historical experience with Russian technology; commissioning, construction, operation of reactors, education and training systems are all important elements that influence tender decisions. Historical legacy is the starting point for Rosatom’s strategy.

The nuclear sector offer limited opportunities for geopolitical influence because the delicate nature of the industry affect the behaviour of the actors and guarantee a precise framework for interactions as a rule. Nevertheless, the mentioned enormous costs and the longevity of the projects, decades long, give Russia particular and specific advantages. Few companies can finance and build an entire nuclear power plant. The initial bidding process becomes the key passage for Rosatom to achieve overreaching influence through “offers that cannot be refused”. Still, it is important to underline that use a nuclear contract as a way to influence a country is very risky on a reputational level, because of the limited amounts of contracts worldwide [7]. To easy these risks, and as consequences of particular economic, country legal framework and EU regulations specific limitations, Rosatom’s numerous subsidiaries are used [8].

CEE region’s main strategic issue for Rosatom, despite a historic enmity of countries such as Poland, is that the region is in fact part of EU’s procedures, policies and structures that make saliently problematic to offer convenient to Rosatom deals [9]. “Acquis communitaire”, the complex correlations between EU procedures and documentation that are particularly precise and well formulated in respect to laws and regulations that favour fair competition do not encourage these all-comprehensive bids that Rosatom offer. In fact, Russian company is forced to collaborate and seek to work bilaterally through favourable business and political environment that after successful deals can show all the potential benefits of collaboration. The Hungarian case is perfect to illustrate this “modus operandi”.

ROSATOM-Hungary: “the deal of the century?”

In 14th January of 2014 Rosatom and the Minister of National development of Hungary signed an intergovernmental agreement in Moscow to continue the cooperation on the peaceful uses of nuclear energy, signed in 1966, and to build two 1200 MW nuclear units at Paks in Russian with the original language of the agreement in Russian. Moreover, Rosatom also offered to provide nuclear fuel for 20 years for units, one of the main reasons of the opposition by the European Commission in the last year [10], and offer the possibility to take spent fuel for reprocessing and storing. The draft was sent to the European Commission under article 103 of the EURATOM treaty on December the 10th of December 2013. Hungarian Parliament voted on it positively on the 6th of Febraury. On 14th of January, three other framework agreements were signed by Rosatom and Mvm Paks II Ltd. on the construction, operation and fuel supply [11].

It is interesting to notice that already in 2009 Viktor Orbán, then in opposition, said in an interview: “it is a Russian-type power plant. Thus in my opinion neither we conduct the reconstruction without the Russians, nor we can leave them out of building a new one. Thus Russians are likely to participate in one of the great national endeavors of becoming independent of natural gas” [12]. Develop the only Hungarian power plant is a life-ordeath issue for Fidesz government since the deadline for decommissioning the four reactors currently in operation will expire between 2032 and 2037 and it produce 40% of Hungarian electricity [13].

Orbán’s government officials commented this deal positively; government’s spokesman Zoltan Kovacs words were: “the rationale of the Paks investment is not about election campaigns and chances; it serves the country’s long term energy security” [14]. Moreover, Peter Szijjarto told Reuters that it was the “deal of the century” [14]. These words were caused by the details of the financing agreement signed always in Moscow on 31st of March of 2014 and published in Russian by the Russian Government a couple weeks before on 13th of March. The main issue is the 10 billion euros loan for building the two units, available between 2014 and 2025 and which should be repaid during 21 years after the two unit’s starts to operate but not later than 15th march 2026. These favorable terms were described by Zoltan Illes, a former lawmaker in the ruling Fidesz party that was also a secretary for environment until 2014, with harsh words: “this is a financial transaction and for the Russians this is buying influence” [14]. It is interesting in fact to evaluate the financial matters of the deal. The Hungarian government refused to make all background information, documents and analysis public for ten years. No official calculation on economic matters like finance or rate of return is neither available. “Asymmetry of information” is one of the main elements of the Russian strategy on the financial side to ensure that the proper monitoring from the European Commission organs will be difficult to achieve; the control over the process in organizational politics in fact is a clear source of power [15].

The importance of the relationship between Premier Minister Orbán and Premier Minister Putin is also relevant as they met already in November 2010, shortly after Orbán election. The meeting was on economic issues but more importantly further cooperation on Paks plant was discussed in a “personal style” that so fits both heads of state. No concrete result was achieved but instead an open tender for the contract was prepared in Budapest with several companies as the French Areva and U.S. Westinghouse. The breakthrough happened also because of the overall geopolitical situation when in November 2013 the Ukrainian President at the time Viktor Yanukovich rejected EU association agreement that resolved in Maidan protests; on Dec. 17 as reported by Reuters, there was a “sudden change of track”. Janos Lazar reported in fact that the talks on the Paks plant were at an advanced stage to the parliament’s economy committee. Premier Minister Putin saw a rapid worsening of the situation in Ukraine and the perception of the Russian actions in the International Community needed as counterbalance to “show that he still has friends even within the European Union” [16] as the following visits to Budapest in critical moments will prove. Acquire influence and symbolical capital in exchange for investments is paramount for Russia to weaken and divide the common stance of EU on Russian foreign policy.

The Russian Federation and the European Union: a clever “asymmetrical” offensive “The aim of energy security is to ensure adequate reliable energy supplies at reasonable prices and so as not to jeopardize the main national values and objectives” [17]. As communicated in the letter to the president of the European Commission Barroso by the Prime Minister Orbán, rising energy costs and the historic legacy are the main two “official” reasons for the deal with Rosatom [18]. The Hungarian foreign policy strategy is oriented towards achieving a difficult balance. The progress in bilateral relations between Hungary and Russia can be useful in the broad EU-Russia framework but without endangering Hungarian position in EU and NATO. Hungary opposes the sanctions on the rhetorical level against Russia but voted for their introduction at the EU summit. Obviously, the EU and NATO membership remains a serious limitation of the Hungarian sovereignty even if these organizations are security, economic and political stability providers. Orbán can attack Senator McCain [19] for example but will continue to repeat that Hungary is a solid US ally and that Russia-Hungary relationship is a normal bilateral partnership; an ambiguous and dangerous but an effective stance for the Hungarian government. Thus, Hungarian energy policy in the EU broad framework is following a “smart small state ideal behavior as lobbyist, self-interested mediator and norm entrepreneur” as was possible to observe during the current refugee crisis.

The conflict in Ukraine and the rise of the level of confrontation between West and Russia greatly complicates Hungarian position, due to its dependence on Russian energy, geographical position and as a member of both EU and NATO. Moreover, “Orbán matters more because he heads a strong government with an unassailable two-thirds parliamentary majority and no opposition to worry about”[21]. As former Hungarian Foreign Minister Navracsics underlined in an interview, “Hungary had bad experience from 1945 to 1956 when it came to Western solidarity”[22]. The EU can oppose such deals in the future through examining of three possible issues. First, an investigation of the tender process before the contract was signed as the decision on the Russian reactors can be defined as purely political. Second, the absence of competition is a serious element as in the official plans the Russian credit will go in to the Hungarian state budget from which the new reactors will be financed therefore presenting a case of state aid. Third, the Russian credit will affect the structure of the national debt.

The Rosatom’s strategy in Hungary is connected to many different issues and not only to the deal itself [23]. As it was underlined, the Russian federation’s strategy is always linked to a package it can offer Hungary “various sweeteners”. First of all a new gas contract for Hungary is on the table. The price of natural gas is of strategic importance for Orbán for domestic support: his main political achievement that ensured his 2014 electoral victory was the utility price reduction, “rezsicsőkkentés”. There are officials on the highest level of the Hungarian government that have revenues from Ministry of Foreign Affairs and Trade as an intermediary; the profitability depends on the price of the Russian gas implicitly. Moreover, the Paks agreement itself is a lucrative opportunity for the Hungarian construction companies that are in the project and several oligarchs around Orbán would like to get their “slices of the pie”[24]. These bonuses that the competition simply cannot provide make Rosatom more attractive to smaller countries, even if on non-market terms that clearly violate the common EU energy market. To resist such approach only a firm “united voice” approach from the EU can be a viable answer. In fact as Peter Kreko wrote in 2014 in the Economist, Orbán “needs EU money and does not want to leave the EU but he also wants to send a message to EU and USA that if they don’t take Hungary seriously, it has another ally, Moscow”[25]. The main issue is the comprehensible opposition that Hungary faces when it comes to such bilateral deals with Russia. The latest development on the Rosatom-Hungary deal in fact is the launch of the infringement procedure against it by the European Commission in 19 November of 2015 that clearly shows the opposition of the EU decision-making center and the challenges that are in front of Hungary on these issues in the future [26].

In fact, as it is possible to notice in the Hungarian case, commercial and financial ties foster political penetration and are connected to the rightwing rise in Hungary. Energy sector is a clear example: “Russian company buyouts and ownership of key oil and gas infrastructure in Eastern Europe, such as pipelines, refineries, and storage sites enables Moscow to uphold additional leverage” [27]. Hungary is one of the main objectives for Russia in the CEE region, for its membership in NATO and EU, ambiguous foreign policy and relatively easier to influence than countries like Italy or Germany. To quote Anita Orbán: “After its diplomatic failures to contain NATO’s spread in the mid-1990s, the Kremlin has developed a new strategy calling for economic expansion in the region to counterbalance Western influence” [28]. Russian economic expansion threaten also democratic practice even in a consolidated EU and NATO country, as G. Schopflin, a Hungarian member of the European Parliament, cleverly underlined: “the chances are high that the authoritarian assumptions of the state of origin will be transmitted to the democratic economic space abroad in which it is seeking to operate”[29].

Orban maintains in its “pendulum foreign policy” the possibility to use the European far-right, as Jobbik or Front National, in the European Union’s political spectrum has offered space for Russian foreign policy to pursue a “two track policy” in this sense; hostile ideologically, cooperative in business. Three functions can be found: a) destabilization, both on national and supra-national levels b) legitimization for the Russian ideological stance c) provision of information and spread of disinformation [30]. In fact, “although the party does not back the classification of the agreements related to the planned Paks Nuclear Plant extension signed with Russia, Jobbik is very much in favor of the project as such” [30]. The use of a strong political national actor that have political ties with Russia to win favorable business tenders is an important element in the energy foreign policy strategy of the Russian Federation globally.

Hungary seems, for now, still firmly anchored to NATO and the EU; nonetheless it would be over-optimistic for Western policymakers undervalue the many social and political forces influencing the country economically and domestically. Kremlin’s strategies are flexible and pragmatic, through a clever “asymmetrical” offensive on both political and economic level. It is probable that even if EU and NATO will be able to politically and economically provide enough security to the country and demonstrate firmness of will, Hungary will still remain a “friendly pragmatist” [31] towards the Russian Federation.

 

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Year: 2016
City: Almaty