Deal of the Century

Orbán and Putin shake on the Paks deal.

Orbán and Putin shake on the agreement

On January 14, 2014, National Development Minister Mrs. László Németh of Hungary and CEO Sergey Kiriyenko of Russian state-owned nuclear-energy company Rosatom signed an interstate agreement stipulating that Rosatom will build two new reactors at the Paks Nuclear Power Plant in south-central Hungary at a cost of between 10-12 billion euros, representing one of the biggest investments the government of Hungary has ever made (source in Hungarian).

Rosatom will build two new 1,200-megawatt reactors at the plant to replace its four existing 500-megawatt reactors due to be decommissioned between 2032 and 2037. The Orbán government says that the two new reactors will generate about 50 percent of the total demand for electricity in Hungary, compared to the current total of 40 percent (source in Hungarian).

The agreement calls for Rosatom to build the reactors with 10 billion in loans from Russia to cover 80 percent of the investment, while the government of Hungary will pay for the remaining 20 percent of the cost of the project and begin repaying the loan when the reactors are scheduled to open in 2025 (source in Hungarian).

National Economy Minister Mihály Varga announced on February 5 that the government of Hungary would repay the 10-billion-euro loan to Russia over a period of 21 years from the completion of the first reactor in 2025 through 2046 at an interest rate of 3.95 percent for the first eleven years, 4.5 during the second phase of repayments and 4.9 percent during the third phase of repayments (source in Hungarian)

State Secretary Lázár announces the Paks agreement.

State Secretary Lázár announces the agreement.

After announcing the signing of the agreement, State Secretary in Charge of the Prime Ministry János Lázár called it “the deal of the century” (see source A and B in Hungarian).

The Orbán government did not call a tender for bids to build the reactors, claiming that this was not necessary because the pact represented an extension of the 1966 Soviet-Hungarian agreement calling for construction of the original reactors at the Paks Nuclear Power Plant, not a business deal (source in Hungarian).

Hungary’s National Assembly approved the agreement on February 6, 2014 by a vote of 256 to 29 with two abstentions, moving the vote up one week earlier than planned at the recommendation of the Fidesz caucus. Representatives from the FideszChristian Democratic People’s Party alliance and the radical-nationalist  Jobbik party voted in favor of the agreement, while representatives from the democratic-opposition parties voted against it (source in Hungarian).

The most powerful members of the government—Prime Minister Viktor Orbán, Deputy Prime Minister Zsolt Semjén, Minister of Justice and Public Administration Tibor Navracsics, State Secretary Lázár and National Economy Minister Mihály Varga—did not participate in the vote (source in Hungarian). 

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LMP National Assembly representatives protest the Paks deal.

LMP National Assembly representatives protest the agreement.

There are very few people in Hungary who argue that the country does not need to build new reactors at the Paks Nuclear Power Plant. National Assembly representatives from all parties voted nearly unanimously in favor of a resolution to expand the plant during the final days of the Hungarian Socialist Party-led government of former Prime Minister Ferenc Gyurcsány on March 30, 2009 (source in Hungarian).

Among democratic opposition parties in Hungary’s current National Assembly, only the green party Politics Can Be Different (LMP) and its offshoot Dialogue for Hungary opposed the deal on the grounds that the government should invest on development of renewable-energy sources rather than expansion of nuclear-energy capacity.

LMP representatives blasted megaphones in the legislature’s session chamber to delay formal approval of the agreement to build the reactors (while Fidesz-KDNP representatives attempted to silence the devices by stuffing wads of paper and pouring glasses of water into them): the Hungarian Socialist Party and the Democratic Coalition rejected the agreement because they said that the government had concluded it unilaterally, without prior consultation with the National Assembly or the Hungarian people.

The Paks Nuclear Power Plant.

The Paks Nuclear Power Plant.

Orbán government officials claim that the deal with Russia to build new reactors at the Paks Nuclear Power Plant will increase Hungary’s energy security over the long term and provide the foundations for the government’s cuts in the cost of household electricity (source in Hungarian).

However, the government has classified as confidential until the year 2024, one year after the scheduled completion of the two new reactors, the reports containing the data and analysis upon which it based its decision to sign the agreement with Russia (source in Hungarian).

Many of the main consequences and possible drawbacks of the agreement are nevertheless clear:

Indebtedness to the State of Russia

The government of Hungary will be heavily indebted to the state of Russia for the next 32 years, until Prime Minister Orbán is well into his 80s. The opposition newspaper Népszabadság has estimated that the agreement will cost the government of Hungary an average of 300 billion forints per year during the 21-year repayment period (source in Hungarian), equivalent to just under 18 percent of the government’s total 2014 budgetary expenditures and just over 10 percent of Hungary’s 2012 GDP (source A and B in Hungarian).

Russian Influence over the Price of Electricity 

The text of the agreement states that the “cost connected to generating electricity” at the new reactors “will be acceptable of to the Designated Russian Organization” (source in Hungarian). The agreement stipulates that the Russians will choose this state-controlled Designated Russian Organization [Orosz Kijelölt Szervezet] (text of agreement in Hungarian and Russian).

Cost Overruns

The cost overruns that have occurred in connection to all three nuclear power-plant expansions currently taking place in Europe suggest that the Orbán government’s estimated cost of 10-12 billion euros for construction of the two new reactors at the Paks Nuclear Power Plant may be much lower than the actual cost of the project.

The estimated cost of a new reactor under construction at the Olkiluoto Nuclear Power Plant in Finland has risen from an original 3 billion euros to 8.5 billion euros (source in English). The estimated cost of a new reactor being built at the Flamanville Nuclear Power Plant in France has risen from an original 3.3 billion euros to 8.5 billion euros (source in French). The estimated cost of two new reactors under construction at the Mochovce Nuclear Power Plant in Slovakia has risen from an original 1.6 billion euros to 3.7 billion euros (source in English). Former Orbán government.

Deputy State Secretary in Charge of Energy Affairs Attila Holoda believes that the actual cost of building the two new reactors at the Paks Nuclear Power Plant could be up 20 billion euros (source in Hungarian).

The interstate agreement between Russia and Hungary contains no reference to this issue of which country will pay for possible cost overruns. State Secretary Lázár said during his announcement of the agreement on January 14 that the governments of the two countries would share the burden of paying for any excess costs connected to construction of the reactors. In response to a question about stipulated guarantees that the Russian government would help pay for any cost overruns, Lázár said that “We demanded legal guarantees and we will receive them. We are not even considering relinquishing anything from the Hungarian position,” though offered no specific proof that such guarantees existed (source in Hungarian).

Conformity with European Union Tender Regulations

The sole contender: Rosatom headquarters in Moscow.

The sole contender: Rosatom headquarters in Moscow.

The European Union may challenge the Orbán government’s claim that the agreement is not subject to EU tender regulations because it represents an extension of the 1966 pact between “The Revolutionary Worker-Peasant Government of the Hungarian People’s Republic and the Union of Soviet Socialist Republics” to build the original reactors at the Paks Nuclear Power Plant.

Evidence suggests that the government was, in fact, planning to call such a tender until at least the second half of 2013. On June 4, 2013, National Development Minister Mrs. László Németh announced that the government would issue a tender for the construction of the new reactors at the plant before the end of the year (source in Hungarian).

Evidence also suggests that several western companies were interested in submitting bids in a possible tender. On June 5, 2012, CEO István Hamvas of plant operator Paks Nuclear Power told the Hungarian News Agency MTI that “organizing the tender is an extremely important task, which must by all means be issued so that we can choose the contractor that will build the reactor in Paks.” Hamvas said that he expected five companies, including Rosatom, the U.S. company Westinghouse, the French company Areva as well as companies from Japan and Korea, to submit bids in the tender (source in Hungarian). A spokesman for Areva told the British news agency Reuters that the company was interested in participating in the expansion of the Paks Nuclear Power Plant (source in English).

The spokeswomen for European Commissioner for Energy Günther Oettinger and European Commissioner for Internal Market and Services Michel Barnier both said that European Union specialists were examining the Hungarian-Russian agreement to determine if EU regulations would have required that the government of Hungary call a tender for construction of the new reactors (source A and B in Hungarian).

Constitutionality

The Fundamental Law that came into effect on January 1, 2012 prohibits the National Assembly from adopting a government budget the raises state debt to over half of gross domestic product or, in the event that debt is already over half of GDP, from adopting a government budget that does not reduce state debt in proportion to gross domestic product.

Hungary’s state debt was just below 80 percent of gross domestic product in 2013, thus all Hungarian governments for the foreseeable future will be constitutionally obligated to adopt budgets that reduce debt in proportion to GDP (source in English).

The Orbán government has not said how repayment of the cost of building the reactors beginning in 2025 can be achieved without violating this constitutional stipulation. In response to a question regarding this issue, State Secretary Lázár said “When will this situation arise? We are not yet receiving the loans and when we do it will just be gradual. . . . We will pace the drawing down of loans for the investment, paying attention to preserve the long-term declining trend of the debt, thus conforming to the constitutional regulations” (source in Hungarian). Lázár did not provide further details regarding how a future government could stagger the repayment of 10 billion euros in loans plus interest over a period of 21 years without raising debt. 

Conclusion

The Orbán government’s decision to have Rosatom build new reactors at the Paks Nuclear Power plant with at least 10 billion euros in loans from Russia has in political terms moved Hungary closer to Moscow and farther from Brussels. The government concluded the agreement with Rosatom without offering western companies the chance to submit bids to build the reactors. Nor will it make public the background studies and analysis upon which it based its decision to select the Russian state-owned company public until after the scheduled completion of the investment. The Fidesz National Assembly caucus furthermore stifled all potential parliamentary debate on the issue by moving voting on the agreement up one week earlier than scheduled.

Foreign Minister János Martonyi of Hungary told Foreign Minister Frank-Walter Steinmeier of Germany that the agreement was not based on geopolitical considerations, stating that “It is out of the question that with this Hungary is turning toward Russia” (source in Hungarian). However, the lack of transparency, openness and meaningful debate that have surrounded the pact indicate that the Orbán government is attempting to obscure evidence that it is, in fact, the natural culmination of four years of conflict with the European Union, the International Monetary Fund and the West in general and simultaneous rapprochement with Russia, China and other semi- or fully authoritarian states.

Perhaps State Secretary Lázár’s post-agreement characterization of Russian-Hungarian relations as “an increasingly smooth marriage of convenience that is offering greater and greater pleasure to both parties” (source in Hungarian) most accurately describes the emotional impulses that prompted Prime Minister Orbán to look toward Russia rather than the West in his search for construction and financing of the new reactors at the Paks Nuclear Power Plant—impulses that will almost certainly cause him to move Hungary farther into the anti-democratic Eastern political orbit during his next term in office beginning this spring.

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