HUNGARY

A Hungarian power play Inside Budapest’s 10 billion euro nuclear deal with Moscow, and why some see it as the Kremlin trying to buy influence in Europe

BY KRISZTINA THAN

SPECIAL REPORT 1 A NUCLEAR DEAL WITH RUSSIA

BUDAPEST, MARCH 30, 2015

ts currency is wounded and its economy besieged by sanctions, yet Russia still has moneyI to spare for potential allies over- seas. Even as it scrabbles for foreign funds, Moscow is poised to make a 10 billion euro loan to Hungary, one of the European Union members most sympathetic to it. Budapest plans to draw on the first tranche of the loan this year, a Hungarian government commissioner told Reuters. Officially the loan is to finance the ex- pansion of the Paks , Hungary’s only atomic power station, which supplies about 40 percent of the country’s electricity. But critics say there is another motive as well: Russia buying favour with a NUCLEAR MISSION: Inside the turbine hall and, below, operations centre of reactor four at the Paks European Union (EU) government. atomic power station in Hungary. Russia is to help expand the plant. Cover: Prime Minister Viktor “This Paks deal is camouflage,” said Orban of Hungary, right, with Russian President Vladimir Putin at a news conference in Budapest in Zoltan Illes, a former lawmaker in the rul- February. REUTERS/LASZLO BALOGH (3) ing Fidesz party who was a state secretary for the environment until 2014. “This is a financial transaction, and for the Russians this is buying influence.” Illes, who opposes the use of nuclear en- ergy, believes the deal is more about pumping money into the , where Prime Minister Viktor Orban faces re-elec- tion in 2018, than providing electricity. For years, Moscow has used commercial relationships – in particular gas sales - to exert influence across Europe. Now those methods are coming under closer scrutiny after the United States and EU imposed tough economic sanctions on Russia for long term energy security,” he said. He add- and the Russian finance ministry respon- annexing Crimea and supporting separatist ed that Russia was helping to build reac- sible for the loan to Hungary did not re- fighters in the east of Ukraine. tors in other countries and that Russia had spond to requests for comment. In return, Russia is striving to retain ties, less economic influence in Hungary than in Hungary had initially planned to put commercially and diplomatically, from the other Western European states. the contract to expand Paks out to tender, Baltic states to Europe’s southern rim. The Officials in Moscow and Budapest say and some Western firms showed interest, loan to Hungary, agreed last year, is seen by the nuclear deal was concluded purely on along with . But Reuters found some as part of that undeclared struggle for commercial and energy grounds and was that Hungary abruptly dropped the idea influence. good for both countries. of a tender. Specialists in the Development Government spokesman Zoltan Kovacs Hungarian Foreign Minister Peter Ministry who had worked on plans to ex- rejected such claims. “The rationale of the Szijjarto told Reuters the deal was “the pand the Paks plant were sidelined, said Paks investment is not about election cam- business (transaction) of the century.” two people familiar with Hungary’s energy paigns and chances. It serves the country’s Rosatom, the Russian state nuclear firm, sector. Instead, a small group close to Prime

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Hungary’s reliance on Russia

Moscow RUSSIA

HUNGARY UKRAINE Budapest

Paks nuclear power plant

TURNING POINT: In November 2013, protesters gathered in Kiev after Ukraine signed an aid deal with Russia. A month later Hungary was in advanced talks with Russia over expanding the Paks power station. REUTERS/GLEB GARANICH

Minister Orban chose to award the con- Hungarian parliament, Orban adopted a Electricity generation tract to Rosatom. Russia offered a loan as conciliatory approach to Moscow. He said The Paks nuclear plant, built with part of the deal. EU governments were “chasing ghosts” if the help of the former Soviet Kovacs, the government spokesman, they believed they could get by without co- Union, is the country’s single said: “The whole project is being carried out operating with Russia. biggest source of electricity. with very serious professional preparations. Asked whether Hungary was being Decisions of a political nature are naturally more friendly towards Russia because of made by politicians.” the Paks loan, Kovacs said: “Russia is im- 42% 31% 17% 7 Since the agreement was struck, Orban portant from an energy aspect, what’s more Nuclear Natural gas Coal has appeared much more friendly towards it is a strategic partner ... But this is not a Renewables the Kremlin than his EU peers have done. question of ‘friendship.’” He has said Europe was shooting itself in PRAGMATIC PARTNER the foot by imposing sanctions on Russia, though he did not go so far as blocking Orban regularly flouts EU rules with poli- Gas supplies sanctions. Orban is also leading a push for a cies that critics label populist. Since he was 63 percent of the natural gas used new pipeline to take Russian gas to south- elected with a two-thirds parliamentary ma- in Hungary comes from Russia, east Europe, bypassing Ukraine. jority in 2010, Orban has imposed windfall mostly imported via Ukraine. Last month, Orban hosted Putin in taxes on banks, telecoms companies and re- Budapest. He is the only EU leader to in- tail firms to keep the budget deficit in check. 63% 24% 5 vite the Russian president on an official bi- He’s clashed with Brussels over curbs on the lateral visit since Malaysian airliner MH17 media. And he has consolidated his power Russia Domestic was shot down over Ukraine in July 2014. with measures that critics say weakened France Western officials say the plane was most democratic checks and balances - an allega- likely brought down by a Russian missile; tion the government denies. Russia denies any responsibility. At the same time, he is not a natural Sources: IEA; OECD Standing alongside Putin in the Kremlin ally. As a young student in 1989,

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he burst onto the political scene with an impassioned speech demanding the with- Under EU scrutiny drawal of Soviet forces from Hungary. He European officials are examining whether and Putin appear to have little personal af- the Paks project meets EU rules on state finity; at their Feb. 17 meeting in Budapest, aid and the supply of nuclear material their body language was stiff. from Russia. The EU sets limits on state However, people who know Orban say subsidies, and has rules designed to prevent he is a pragmatist. “I think power is incred- EU countries becoming over-dependent on ibly important to him per se,” said John Russia for . Alderdice, who was a leading member The Euratom Supply Agency (ESA) has along with Orban of an organisation called sought changes to the Paks supply deal Liberal International, a global network asking that non-Russian organisations be promoting liberalism. “The issue (for him) allowed to ship fuel to the plant, the Hungarian is: ‘How can I get into power, and hold onto government said earlier this month. The power.’” government said talks with the EU about fuel In November 2010, soon after he was INFLUENTIAL: Janos Lazar, chief of staff supply were not blocking the project. elected, Orban met Putin in Moscow for to the Hungarian prime minister, pictured here in A Commission spokeswoman has also talks on economic issues, including further 2013. Lazar addressed a parliamentary committee confirmed that the EU was looking into the cooperation at the Paks plant. The plant is summoned at short notice to discuss the Russian fuel supply deal, but was not blocking the Paks a huge concrete structure built in the 1970s nuclear deal. REUTERS/LASZLO BALOGH construction. The EU has not yet commented by Soviet technicians on a floodplain next on the state aid aspects of the project. On to the Danube River. Orban was looking March 24, Janos Lazar, chief of staff to the to spur growth in Hungary’s economy, and President Viktor Yanukovich rejected an as- Hungarian prime minister, said all hurdles to a Russia could help him achieve that. sociation agreement with the EU and instead fuel supply deal had been removed. The two men talked for hours, including signed an aid deal with Moscow. Thousands Talks with the EU about fuel supply over lunch, said a source familiar with the of pro-Western protesters camped out in discussions. But no decision was taken on Kiev’s central square, determined to make are not blocking the project. the Paks project. Yanukovich stick with the EU agreement or Hungarian government Instead, a team of energy specialists at give up power. The stage was set for the big- the Development Ministry in Budapest gest standoff between Russia and the West “There are very strict rules governing prepared for an open tender for a contract since the Cold War. state aid and the single market, and I think to expand the plant, according to a former In Budapest, too, there was a change of this project as we know it now goes against energy official. In addition to Rosatom, tack. On Dec. 17, the parliament’s econo- them,” said Andras Perger, an energy analyst French company Areva expressed interest my committee was convened at one day’s at independent think tank Energia Klub in in bidding, as did U.S. firm Westinghouse, notice. Antal Rogan, a lawmaker with the Budapest. according to three people with knowledge ruling Fidesz party and head of the com- Attila Aszodi, the Hungarian of the preparations. mittee, called the meeting. commissioner in charge of the Paks project, In early 2013, the plans for a tender were Orban’s chief of staff, Janos Lazar, told said the project did not contravene state still on track, according to comments by the the committee that the government was in aid rules because the rate of return is high chief executive of MVM, a Hungarian state- advanced talks with Russia on extending the enough that, theoretically, private investors owned energy group, published in the jour- life of the Paks plant. “It was sudden,” said would get involved if they had the chance. nal of the Paks power station. Bidders were Bernadett Szel, an opposition lawmaker. Since Hungary and Russia agreed the told then that a tender would go ahead, ac- Pal Kovacs, who at the time was state original deal to develop the Paks plant, the cording to a diplomatic source in Hungary. secretary for energy and had a leading two countries have signed three further role in preparations for the Paks tender, agreements setting out details of the project. SUDDEN CHANGE had not been told the tender was being Despite the EU Commission’s concerns and Late that year the international context scrapped, according to a person with links Moscow’s financial difficulties, Hungarian changed. In November 2013, then Ukrainian to Hungary’s state energy sector. The source officials say the deals are not in jeopardy.

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said the deal with Russia was concluded by members of the prime minister’s inner circle. Government spokesman Zoltan Kovacs said parliament’s approval of the deal showed it had broad political support. Asked about the decision to scrap the tender and award the contract to Rosatom, Westinghouse said the decision was “abrupt.” Areva declined to comment. Government spokesman Kovacs said: “Of course, the agreement on concrete condi- tions was made at a given point of time, but it would be a mistake to say it was ‘abrupt.’” Attila Aszodi, the state commission- er in charge of the Paks expansion, said the Rosatom deal stood out because the Russians had offered long-term financing for the entire construction project, some- thing he said the other prospective bidders DEPENDENT ON MOSCOW: Most of Hungary’s gas comes from Russia. Hungary’s pipeline system, would not provide. He told Reuters in a including the Kiskundorozsma distribution centre above, also transmits gas to Serbia and other December interview that a tender is “a good countries. REUTERS/LASZLO BALOGH tool; however, it is not the silver bullet.” The Hungarian government has also pointed out that the existing reactors at Paks Minister Sergei Lavrov said that Hungary - pragmatic style of governing. In the short were built with Soviet nuclear expertise. unlike other ex-Communist states in the EU term he reaped domestic political benefits Critics say the deal’s terms are generous. - conducts itself “responsibly” and does not against opponents, and in the medium Hungary will begin repayments on the loan succumb to “Russophobic approaches.” At term the project will generate jobs. only once the new reactors are up and run- a Kremlin ceremony, Putin called Hungary But for Orban, he said, “long-term con- ning in 2026 and will repay the loan over one of Russia’s most important partners. siderations, they don’t exist.” 21 years. Until 2026 the interest rate will be Orban’s invitation last month added to just under 4 percent, rising to 4.5 percent the mutual appreciation. During the visit, Additional reporting by Christian Lowe in afterwards and 4.8 to 4.95 percent in the Putin and Orban agreed that Russia would Warsaw, Karolin Schaps and Nina Chestney final 14 years. give Hungary several years’ grace to pay for in London, Barbara Lewis in Brussels, Geert The terms compare well to market rates gas that Budapest had committed to buy de Clercq in Paris, and Vladimir Soldatkin and for financing, although conditions in every but never used. Maria Tsvetkova in Moscow. Editing By Richard debt deal are different. The Russian loan fi- For Orban, though, the cost of staying Woods, Philippa Fletcher and Simon Robinson nally agreed will cover 80 percent of the con- close to Russia has gone up as the Ukraine struction costs, and Hungary will put up the crisis has deepened. Some EU governments FOR MORE INFORMATION rest. Hungary plans to start drawing on the are uncomfortable with what they see as a Krisztina Than, chief correspondent, loan this year to finance planning work for drift by Hungary into the Kremlin’s orbit. Hungary the new reactors, Aszodi told Reuters. The United States has also criticised some [email protected] of Orban’s policies towards Russia, and one Richard Woods, Senior Editor, Enterprise HUNGARIAN RHAPSODY U.S. diplomat said there had been a lack of and Investigations, EMEA Moscow has voiced its happiness with transparency in granting the Paks contract. [email protected] Hungary’s recent support for Russia. Illes, the former environment secretary, Michael Williams, Global Enterprise Editor In November last year, Russian Foreign said the Paks deal was typical of Orban’s [email protected]

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