For all Russia-watchers, oil and natural gas usually dominate the media discourse on Russia’s energy policies and the role they play in the country’s foreign policy deliberations. From the European perspective, this is entirely understandable, keeping in mind the paramount importance of Russia as a supplier of the blue fuel for a major part of the continent. I have myself many times written on the dimensions of Russia’s gas policies in the European Southeast. Tracking the development of major pipeline projects under the Black or Baltic Seas and the squabbles around the gas transit through Ukraine, one could fairly easily neglect another pivotal industry, under Moscow’s control – the nuclear one.
As the low oil and gas prices globally have squeezed Russia’s fossil fuel export revenues, an integral part of the country’s income, the nuclear industry has been looking for a worldwide expansion. Rosatom, Russia’s state-owned nuclear champion, has in the recent years set an ambitious course to deliver Russian nuclear power generating technology to both traditional partner countries as well as to new “developing “economies. Such new cooperation contracts and business opportunities are potentially worth billions of dollars and certainly provide another playing field for Russia’s energy diplomacy.
Russia has currently 35 nuclear reactor units in commercial operation, generating roughly 25 gigawatts (GW) of electricity annually. This covered about 19% of Russia’s total electricity production in 2015, according to the International Atomic Energy Agency (IAEA). Additionally, Russia is building six new conventional nuclear reactor units with combined capacity of over 6 GW and two smaller “floating” reactors, to be mounted on barges. The bulk of Russia’s reactor fleet in operation has been commissioned in the 1970s and 1980s and has already been through lifetime extensions beyond the initial 30 years of service.
Russia’s traditional market for nuclear technologies and nuclear fuel has been in Central and Eastern Europe and the post-Soviet space. Bulgaria, Hungary, the Czech Republic and Slovakia (at the time Czechoslovakia) have all built and commissioned a number of Soviet-designed pressurized water reactors of the VVER type while they were virtual satellites of the Soviet Union (USSR). Ukraine, Armenia and Lithuania were the only ex-Soviet republics to inherit nuclear reactor fleets (VVERs, but also the “Chernobyl type” – RBMK) after the USSR collapsed in 1991. Lithuania’s two RBMK reactors have been permanently shut down before it joined the European Union (EU) in 2004 and the country is now nuclear-free. Ukraine remains the second largest operator of Russian-designed rectors in the world with its fleet of 15 VVERs. Six VVER units have also been built and operated in the former East Germany, but all of them are now closed. Finland was the only country on the other side of the Iron Curtain to build and commission two VVER reactors during the Cold War – still operational today at the Loviisa site.
Poland, Romania, and ex-Yugoslavia were the only “non-Western” countries during the Cold War not to have used Russian reactor technology for power generation. In 1975 Yugoslavia opted for a US-procured single Westinghouse reactor which is now operating in Slovenia, while Romania started building two Canadian-designed units in the 1980s, only completing them in 1996 and 2007. Poland has just a single Russian-designed research reactor and operates no other reactor units commercially. For ex-Yugoslavia and Romania the reasons to avoid Russian nuclear technology were political – the precarious “balancing act” played between West and East. Poland was actually close to having its own VVER reactors when the aftermath of Chernobyl disaster caused plans to be dropped in the late 1980s.
Beyond Europe, Russian-designed nuclear reactors are being operated in India, Iran, and China.
Over the past decade state-owned nuclear corporation Rosatom and its network of subsidiaries have made direct or indirect commitments to build nuclear power plants in Argentina, Bangladesh, Belarus, Brazil, Bulgaria, China, Egypt, Finland, Hungary, India, Indonesia, Iran, Jordan, Slovakia, Turkey, Ukraine, and Vietnam. Furthermore, Russia has also been interested in examining the options for developing nuclear energy partnerships with African countries like Algeria, Ethiopia, Kenya, Nigeria, and South Africa. Civilian nuclear cooperation agreements have also been signed with Laos, Malaysia, Myanmar, and Thailand. By the words of a Rosatom official in a recent interview, Russia has signed intergovernmental agreements for the possible construction of 36 nuclear reactors overseas and is holding “active and consistent” tendering negotiations about 21 others.
The agenda is really ambitious and it is hard to believe that all these commitments will go along smoothly. However, it is apparent that Russia seems to be looking away from Europe and its traditional markets in the search of new business opportunities for its nuclear industry.
During the Russia – ASEAN (Association of Southeast Asian Nations) summit held on 19 and 20 May in Sochi, Russia’s president Vladimir Putin said his country is “ready” to provide the Generation III nuclear reactor technology to countries in Southeast Asia. Last year a Rosatom official told a conference in Malaysia that Russia can help ASEAN countries with the financing, skills transfer, regulatory and infrastructure management of their prospective nuclear projects. At a similar event in Singapore in November, a Rosatom regional director was reported as saying that the construction of nuclear stations can serve as a stimulant for whole branches of growing economies in Southeast Asia. Another Rosatom official called for Africa to invest in nuclear during an annual energy forum in Johannesburg in February 2016.
The overall expansion agenda seems really impressive, but in fact only some of the projects are in an active construction phase – those in Belarus, China, Finland, India, and Slovakia (construction began in the 1980s and was restarted in 2009). The projects in Egypt, Hungary, and Vietnam are also likely to get the go-ahead in the near future. For the rest, the picture has not been looking so rosy.
Bulgaria scrapped its Belene power plant project some years ago over financing uncertainties and the lack of transparency in the intergovernmental agreements. Turkey’s Akkuyu project is becoming increasingly bogged down after the relationship between Moscow and Ankara embittered last November. Ukraine has denounced an agreement with Russia on the construction of two units at the Khmelnitsky site as the two countries have become increasingly hostile due to the looming Donbas and Crimea crises. China appears to have taken over the project for the expansion of the Atucha plant in Argentina. The construction deadlines in Algeria and Indonesia have constantly been pushed forward in time. And nuclear development on the African continent (except for South Africa and Egypt) is nowhere closer to reality in the near future due to a variety of political, institutional, infrastructural and technical challenges.
Looking back at Europe, both Finland’s Hanhikivi and Hungary’s Paks 2 nuclear new build projects have come under scrutiny by authorities. In the Finnish case, the main condition set by Helsinki to allow the project was for 60% of the ownership of Fennovoima, the company building Hanhikivi, to be held by investors from the EU. This meant Rosatom could only be a minority owner with its 34%. As with Hungary, the European Commission (EC) has launched two procedures against the government in Budapest looking into the legality of the state aid and public procurement conditions around the Paks 2 project. The EC has expressed its doubts on whether the deal with Russia fully meets EU regulations and has been concluded on market terms. The EC said it would assess if a private investor would have financed the project on similar terms or whether Hungary’s investment constitutes state aid.
Economics and Geopolitics
From an economic point of view, nuclear projects are specific with their high upfront capital costs. This fact often creates major hurdles for countries or companies looking to build nuclear capacities. On the flip side, these high costs for the investors are good revenues for the equipment suppliers, like Rosatom.
Costs of nuclear projects vary around the world. However, it is safe to say that the construction of a single reactor could be estimated between €3.5 bn and €8 bn on average, depending on local market conditions. For example, the abovementioned two-unit Paks 2 project’s projected cost is €12.5 bn. Russia’s Egyptian investment is valued at €22 bn for four reactors at Daaba. In another example, Hanhikivi’s cost is estimated at roughly €6 bn for a single reactor. Clearly, despite regional variations, new build investments are valued in the billions.
Apart from the initial investment, which is undoubtedly good business for Rosatom, even more attractive is the possibility for nuclear fuel supplies which the Russian-designed reactors will be using over their operational lifetime. As this is on average 30-50 years, it is a brilliant opportunity for continued revenue over a very long period of time. Reactors need to be refueled approximately once a year depending on how intensively they are operated. Additionally, Russian VVER reactors require exclusively one type if nuclear fuel produced and delivered primarily by TVEL, Rosatom’s fuel manufacturing subsidiary. When taking into account the regular annual maintenance outages and refurbishments, done also mostly by Rosatom subsidiaries, it becomes clear that a single nuclear power plant using Russian technology creates an almost secure flow of revenue over a period of at least 30 years. Perfect business and close to ideal monopoly, which does not depend on any transit routes unlike Gazprom’s natural gas.
In this line of thought, it is not difficult to see that nuclear energy investments abroad can be attractive from Russian government’s perspective. Large nuclear projects and all the encompassing infrastructure, refueling and maintenance mean that a country deciding on its nuclear technology provider does in a sense make a geopolitical choice. Rosatom, just like Gazprom, is controlled by the Russian state. This makes it hard to believe that the company’s investment decisions are disentangled from Russia’s state interest and foreign policy goals. History shows that most operators of Russian nuclear reactors today have been geopolitically aligned to the Soviet Union in some way in the past. The trend seems to be going on today as many of the countries that would like to host Russian-built nuclear units have some sort of foreign policy agenda vis-à-vis Russia or do not completely align with the Western camp when it comes to national interests (think of for eg. Iran, China, Belarus, Vietnam, even Egypt).
Globally, there are just a handful of nuclear mainstream technologies that compete for customers. A country considering building nuclear capacities can sometimes prepare its policies for decades before finally giving the green light. Under such circumstances, there is a spirit of a zero-sum calculation when it comes to nuclear export competition, particularly true for smaller countries.
In Europe, energy security became a hot topic since the Russia-Ukraine gas wars of 2006 and 2009 disturbed the flow of the blue fuel to large parts of the EU. The escalation of tensions between Western governments and Moscow in the wake of the disputed annexation of the Crimean peninsula in 2014 and the ensuing Russia-backed insurgency in the Donbas region has reinvigorated geopolitical deliberation in many capitals. Russia has come to be seen as an aggressive rather than stabilizing actor in the European region. Naturally, energy security has increasingly become a top priority from the Baltic to the Black Sea. For many capitals in Central and Eastern Europe, depending for the majority of energy imports – gas, petroleum products, and nuclear fuel – on what is seen to be an aggressive monopolist Russia became a primary security concern. The implications of energy security when it comes to the nuclear energy sector have to do with nuclear fuel supply – its availability, pricing, and contracting. The EC has been trying to boost the energy market environment in the EU even prior to the Ukrainian crisis. The events of 2014 and 2015 just served as a catalyzer for often delayed projects on energy diversification.
Largely, the nuclear sector seemed to be on the sidelines of these developments. However, it was not entirely omitted by the footprints of geopolitical, and more specifically geoeconomic, competition. Of course, the topic will always remain speculative due to the lack of clear publicly available information, but often what appears to be economic competition is closely shadowed by geopolitical competition when large capital is involved.
Let’s look at some facts. Russia’s long-hailed pilot nuclear project in Turkey – Akkuyu – appears to have fallen victim to the worsening of relations between Ankara and Moscow. Ukraine has made public announcements that it is looking to reduce the dependency of its nuclear sector on Russia. A two-reactor construction project at the Khmelnitsky plant has been cancelled and three Ukrainian rectors already use new Westinghouse-made nuclear fuel designed for use in Russia-designed VVERs. According to recent reports, tensions between Ukraine and Russia over nuclear fuel continue to flare. In 2016, the Czech Republic has also purchased Westinghouse-made fuel for its VVERs at Temelin. Bulgaria has discontinued the Belene nuclear station project, which was to be almost entirely financed by the Russian side, and is currently looking for an investor to build a Westinghouse reactor on its existing Kozloduy site. As already mentioned in this text, the EC has been investigating Hungary’s Paks 2 project over financing by Russia. Finland has found a way to limit Russian participation in its energy sector by limiting Rosatom’s ownership share in the Hanhikivi new build project.
At the same time, Russia has firmly entrenched its presence in the nuclear sectors of Iran, India, Egypt, and Vietnam. China is a whole other story since it is building reactors of almost all available designs and rapidly expanding its own nuclear expertise and export capabilities. Having all these problems and obstacles in Europe, it was only natural that Russia will be looking to the East for the realization of its ambitions. It has done it with gas, when in 2014 at the height of the stand-off with the West it announced its “pivot to Asia” and sealed a gas pipeline deal with China in a hope to diversify its customers’ list. It is largely evident, that Rosatom has similar ambitions in the nuclear field – away from troublesome, anti-nuclear and Russia-weary Europe towards Southeast Asia, Africa, and the Middle East.
Business as usual
That said, it is easy to imagine that the civilian nuclear market worldwide is not free of competition and Russia remains a major player in that field. Although it may be experiencing some breaks to its expansion in Europe, still 5 of the 14 EU member states operating nuclear power rely on Russian technology and will do so for some decades to come. The essential question that Rosatom needs to answer is where the potential for large-scale expansion lies. This paper has so far argued that this appears to be Asia. In truth, the same market has been eyed by major competitors to Russia like the US, Korea, China, and the EU. India, whose most recent reactor to become operational was supplied by Russia, announced a few days ago progress on a deal to build six new Westinghouse reactors in the near future.
In terms of energy security, it is fair to note that no reports of “weaponizing” nuclear technology and nuclear fuel supply dependency on behalf of Russia have made it to the public. In the past, there have been no thug-o-wars like the sort we have seen around gas supplies during the European winters of 2006 and 2009. Nuclear fuel long term contracts bring steady reliable cash flow and present attractive commercial opportunities. Disturbing trust between buyer and seller in the way seen with gas deliveries would be highly detrimental to Russia’s image as a reliable supplier at a time when some of its competitors make gains on the VVER fuel market.
As important, the nuclear sector worldwide enjoys a high degree of internationalization due to its safety aspects and risks of dual-use. The IAEA hosts all nuclear countries and provides a framework for dialogue and cooperation. The Nuclear Suppliers Group oversees the export of materials, equipment and technology, which could be used in making nuclear weapons.
In the EU, the Euratom treaty has established the Euratom Supply Agency (ESA) whose mission is to provide oversight and ensure a regular and equitable supply of nuclear fuels to EU users. ESA shares responsibility for the continued and uninterrupted operation of nuclear power in the EU and monitors nuclear fuel contracts. All bilateral nuclear fuel supply agreements signed by member states must obtain ESA’s approval before coming into force. In a sense, Euratom has accomplished what the EU’s Energy Union initiative is trying to work out today for the oversight of intergovernmental gas supply contracts. Under the Euratom system, there is very little space for Russia to use its market leverage and manipulate its counterparts via bilateral agreements, even if it wanted to do so.
Forced to play by the common rules, Russia has to accommodate to open competition on EU terms. Therefore, it is looking for an ambitious expansion of its nuclear exports around the world, striving to “conquer” market shares as a first mover, while major nuclear industries in Europe and Japan are plagued by shrinking business opportunities, financial problems, and negative public opinions. The real contenders to Russia’s nuclear expansion in the short and medium term will become China and the US. It only remains to be seen where business ends and geopolitics begin.
Image: Russia’s Kalinin power plant; Source: Wikimedia commons