assessments

Russia Eyes Nuclear Energy in Central Europe

5 MINS READJun 6, 2012 | 10:05 GMT
Russia Eyes Nuclear Energy in Central Europe
Russian President Vladimir Putin (R) with Hungarian Prime Minister Viktor Orban in Moscow
DMITRY KOSTYUKOV/AFP/Getty Images
Summary

Russia's state-owned nuclear energy company Rosatom announced June 5 that it would compete for the contract to expand Hungary's Paks nuclear power plant. Rosatom offered to finance the project's entire construction cost, which is expected to exceed $12 billion. Rosatom's offer comes as funds for costly energy infrastructure development in Central Europe have become scarce because of the European financial crisis. Furthermore, Central European energy diversification and liberalization efforts have threatened Russia's traditional leverage as the region's natural gas supplier.

Central Europe's electricity consumption is increasing, but the condition of its Soviet-era nuclear infrastructure is in decline. This means Russia could use atomic energy projects to extend its influence in the region's energy sector. Although initiatives like Rosatom's offer do not carry the same strategic weight as Russia's control over Central Europe's natural gas, the bid indicates Moscow's awareness of important shifts in the region and its willingness to seek alternative inroads into the Central European energy sector. 

The Paks plant, Hungary's only nuclear power plant, was built by the Soviets in the early 1980s and has four 500-megawatt reactor stations. It produces 15.8 billion kilowatt hours per year, or 42 percent of Hungary's annual electricity consumption, making it the largest component of Hungary's electricity production. Hungary wants to expand the Paks plant by installing two 1,000-megawatt reactor stations (the four reactors online now are expected to be taken offline starting in 2030). Hungary also wants to reduce its dependence on natural gas and coal for electricity generation in the next two decades, eventually making nuclear power account for 60 percent of its electricity needs.

To reach these goals, Hungary's parliament has pushed for the expansion and refurbishment of the country's nuclear facility and is expecting contract bids from four companies other than Rosatom, including France's Areva and Japan's Mitsubishi. The details of the competing bids are unclear, but they almost certainly will not include the financing offer included in Rosatom's.

Russia's Proposition

Rosatom's offer is notable because Hungary cannot hope to muster the funds needed to construct the two new reactors; Budapest is seeking an $18.6 billion bailout from the International Monetary Fund and European Union to rescue its economy. Furthermore, the European financial crisis has significantly reduced the EU funds normally allocated for large infrastructure projects in the recently integrated Central European countries. For example, the Baltic countries have been unable to secure funding for liquefied natural gas facilities, and Bulgaria abandoned its Belene nuclear power plant project after failing to receive EU financing. Additionally, Budapest is in a dispute with Brussels over a series of controversial reforms curtailing the independence of its central bank, judiciary and media.

It is unclear whether Moscow would actually be willing to commit the full amount Rosatom has offered, since the Kremlin typically avoids getting involved in costly financing projects in other countries. However, Russia is flush with oil and natural gas revenues and is not likely to care about Hungarian Prime Minister Viktor Orban's political philosophies. Moscow is also the only regional player still able to fund the construction of costly nuclear infrastructure in Hungary (and in most of Central Europe).

Moscow's Interests

Russian exports amount to 70 percent of Hungary's annual natural gas consumption. Since Russia's natural gas exports to Central Europe have given it a great deal of clout in the region in the past decade, Moscow's interest in funding Hungary's attempt to reduce its dependence on natural gas seems counterintuitive. But Russia is aware of ongoing shifts in the Central Europe energy sector. In light of EU initiatives to foster the liberalization of natural gas markets, Central European states' efforts to diversify their natural gas sources and a possible upcoming influx of inexpensive U.S. natural gas via LNG facilities, Russia sees its leverage over the region's energy sector threatened. These factors have prompted Russia to offer some Central European countries concessions, particularly on pricing for Bulgaria and unbundling for Lithuania.

While Central Europe seeks to diversify its energy sources, Russia is attempting to diversify the ways in which it can retain some influence on the region's energy sector. Rosatom's offer to finance the Paks nuclear plant expansion shows that Moscow sees atomic energy as a possible avenue of influence and is at least nominally willing to make a substantial investment to maintain its strategic position in Central Europe's energy sector. Moscow has made similar offers to Bulgaria and the Czech Republic and is working on increasing its supply of nuclear fuel and uranium to Europe (it already sends considerable supplies to Switzerland and France).

Challenges and Opportunities Ahead

Russia has little choice but to pursue strategies such as this to counter the diminishing importance of natural gas. However, sponsoring costly nuclear power projects is not likely to give Moscow the same kind of influence it enjoyed earlier in the decade as Europe's chief energy supplier.

Moscow controlled the flow and price of natural gas, but nuclear power plants are located in and controlled by client nations. Russia would retain a measure of control over the reactor's fuel supply, but alternatives are much easier to obtain. Additionally, the target Central European countries are not likely to allow Russia to set many conditions in exchange for the construction of nuclear facilities. For example, in Bulgaria, Sofia refused Rosatom's offer to pay for the now-scrapped Belene nuclear power plant because it thought the deal gave Moscow too much influence within its energy sector.

Budapest is similarly adamant about retaining as much control as possible over its energy sector and has been very active in pursuing natural gas supply diversification. Hungary's parliament also repeatedly protected the national natural gas company MOL from partial acquisition by Russia's Gazprom, citing concerns over increased Russian control of one of Hungary's most strategic sectors.

But Hungary faces stricter constraints than Bulgaria; unlike Sofia, Budapest does not yet have viable alternative natural gas suppliers. This, along with the slight chances Hungary has of receiving funding from the European Union, means that Hungary will have to be more open to Russia's offer if it hopes to achieve its goals for nuclear development.

As EU funds dwindle for expensive energy projects in Central Europe — along with the relevance of Russian natural gas — Russia is likely to continue seeking alternative ways to use its funds to maintain a foothold in Central Europe's energy sector. These efforts, which likely will meet only modest success, are indicative of the challenges Russia will face in the region in the coming decade. 

Editor's note: An earlier version of this analysis misstated the name of the Bulgarian nuclear power plant project. The correct name is Belene.

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