When a court in South Africa torpedoed a $76 billion deal to build 10 nuclear reactors with Russia’s Rosatom because the arrangement reeked of corruption, it seemed like the project was kaput.
At issue to the court was the fact that Rosatom was given the lucrative contract behind closed doors without any competing tenders, and that the company had been granted “special favors.” South Africa’s president, Jacob Zuma, even sacked his finance minister for opposing the deal.
The high court demanded that a contract of such breathtaking magnitude – representing a quarter of South Africa’s gross domestic product and $24 billion more than its state utility, Eskom, has in the bank – be approved by parliament.
Hanging over the deal, and numerous others like it, is the degree to which Rosatom seems to be pursing not just energy dominance in a world trying to wean itself coal, but political influence as well by putting its customers in long-term hock to Moscow.
The South Africa deal may yet come off, but it’s also surprising that it got so far in the first place.
It began as one of Rosatom’s handshake “memorandums of understanding” that the company is using to blanket the nuclear construction market and squeeze out competition. The company says it has 27 of these MOUs and other arrangements, amounting to $135 billion in incoming business, a claim that invites skepticism.
Many of the counties Rosatom counts among that number – like Jordan, Algeria, Nigeria and Bolivia – won’t be ready for nuclear for decades. Others where Rosatom builds are already underway – like India’ Kudankulam, Iran’s Bushehr, China’s Tianwan and Belarus’s Ostrovets – are already familiar with Rosatom’s typical cost overruns and delays.
Rosatom’s approach to marketing its VVER-1000 and VVER-1200 reactors is unique because it offers to finance, build and operate its plants. These generous terms come thanks to the enormous state subsidies it receives, and which it can then funnel into loans that boost its profits on paper. With government subsides set to decrease or dry up in 2020, however, Rosatom seems desperate to announce ever more MOUs.
While the terms of the financing for the South Africa deal never got spelled out, it’s clear from Rosatom deals in other countries that the terms are often steep.
To build Hungary’s controversial Paks-2 plant, Rosatom gave Budapest an $11 billion loan spread out over 30 years. Hungary has to start paying that back even if the plant is not completed on time. The interest Moscow could collect from Hungary is unclear, but a similar 30-year, $11.4 billion agreement with Bangladesh inked last year could result in $8 billion in interest. A $25 billion deal Rosatom signed with Egypt could, over 35-year term of the loan, swell to $71 billion.
And that’s if everyone behaves. The plant Rosatom is building in Turkey offers an indication of what happens when they don’t.
In 2013, Rosatom won $20 billion contract to build four reactors in Akkuyu in what was to become Turkey’s first nuclear plant. But late last year, Rosatom halted construction following the downing of a Russian jet flying sorties over Syria near the Turkey-Syria border.
Construction has since resumed, but Turkey seems to understand that political differences would have left it with an inoperable nuclear power that it was still getting billed for. Since April, the government has reportedly been in talks with a Turkish construction firm to reduce what Ankara has to borrow from Rosatom by half, according to Reuters.
This should heighten fears among potential customers that Rosatom’s deals are potent tools of political influence.
In 2006 and again in 2009, Russia choked natural gas supplies running to the European Union because of disputes over Ukraine.
In 2014, it went nuclear. At the height of EU-Russia tensions over Moscow’s annexation of Crimea, the Kremlin threatened to cut nuclear fuel supplies to Ukraine’s Soviet built reactors, raising the specter of Moscow forcing a nuclear accident. Rosatom eventually walked the threat back, but the lurid message was clear.
The EU seemed leery of Kremlin influence in the deal Rosatom offered Hungary for Paks-2, and it launched an investigation into whether the deal violated procurement issues, and whether the colossal loan for the plant constituted illegal state funding.
There’s little doubt in the near term that the right wing government in Budapest can manage to stay on the Kremlin’s good side. But a nuclear power plant built by Rosatom would still be around after a major political shift – and so too would a lever of Moscow’s policy.
Hungary and other customers will be dependent on the Kremlin’s good will to handle spent nuclear fuel, refinance debt, and deal with potential radiological accidents for decades to come. Both Turkey and Ukraine can show how fragile that trust is – and that appears to have been on the mind of South Africa’s high court as well.