Putin $14 Billion Nuclear Deal Wins Orban Alliance

President Vladimir Putin has ways of convincing even Russia’s staunchest critics.

For Hungarian Prime Minister Viktor Orban, who as opposition leader in 2007 railed against turning his country into the “happiest barrack of Gazprom,” the persuasion took the shape of an offer to lend the country as much as $14 billion. Orban trekked to Moscow yesterday to hand Rosatom Corp., Russia’s state nuclear holding company, a deal to expand Hungary’s lone nuclear power plant using that loan.

The deal shows Putin’s ability to use Russia’s control over energy resources to extend his sway beyond the former Soviet Union. Last month, he pledged a $15 billion bailout and a cut in the price of natural gas to Ukraine and promised to lend as much as $2 billion to Belarus.

“This is a marriage of convenience that’s working better and better, and which both sides are enjoying more and more,” Janos Lazar, Orban’s chief of staff, told reporters in Budapest.

While all marriages take work, this one is the fruit of a tumultuous courtship. The meeting at Putin’s palatial residence capped a 25-year journey for Orban. He burst into politics months before the fall of the Berlin Wall in 1989, when as an anti-communist student leader he called on Soviet troops to leave Hungary. For two decades, he remained suspicious of Russian motives, warning against the dangers of the influence of the country that supplies 80 percent of Hungary’s gas.

Orban’s Warning

In 2007, Orban as opposition leader told the magazine Magyar Demokrata that the Hungarian government failed to see the risk of “returning to the Russian sphere of influence,” which he said would come in the form of economic dependence “rather than military occupation.”

The administration of then-Prime Minister Ferenc Gyurcsany sparked a clash with its coalition partner and came under fire from the opposition for supporting South Stream, a pipeline project of Russian gas export monopoly OAO Gazprom. (OGZD)

Orban said in 2008 that the decision amounted to a “coup d’etat” because Gyurcsany bypassed parliament, according to the transcript of a speech posted on his website.

He struck a different tone after meeting Putin yesterday, saying Hungary is “committed” to South Stream, designed to bypass Ukraine and carry Russian gas through Hungary. The plan drew European Union objections over management, third-party access and pricing.

Scrapping Plans

In handing the nuclear contract to Rosatom, Orban scrapped earlier plans to invite bids for the project. Following meetings in 2012 with executives from France’s Areva SA (AREVA), a potential bidder, the Development Ministry said it would organize a competition for the contract in 2013.

While Economy Minister Mihaly Varga said on state radio today that Hungary received EU approval from the deal, the bloc hasn’t in fact reached a decision, with experts only now preparing to examine the deal, Chantal Hughes, spokeswoman for European Union Internal Market Commissioner Michel Barnier, said in an e-mailed statement.

“Contrary to some reports, the commission has not made any statement on whether the Hungarian authorities should or not scrap a tender for the nuclear project,” Hughes said.

At home, Orban sought to allay concern over his handling of the nuclear contract by saying Hungary’s government will retain the power plant’s ownership and that parliament will have to ratify any agreement. The ruling Fidesz party has a two-thirds majority in the legislature.

Orban’s U-Turn

Those assurances fail to change the picture of a leader making a u-turn on his approach to Russia, according to Andras Deak, an associate fellow at the Hungarian Institute of International Affairs.

“There was no indication at all before Orban assumed power that the policies would be anything but staunchly anti-Russian,” Deak said by phone. “Suddenly, the big enemy is the best business partner. It’s a 180-degree turnaround.”

Orban’s decision to “single-handedly” decide on the nuclear deal without consultation was tantamount to a “coup d’etat,” Attila Mesterhazy, president of the biggest opposition party and the premier’s challenger in elections this year, said to reporters today, according to MTI news service.

Rosatom’s Opportunity

Orban’s reversal is an opportunity for Rosatom, increasingly part of Putin’s arsenal for economic diplomacy as it builds nuclear power plants from Bangladesh to Iran. The Hungarian deal helps the company strengthen its toehold in the EU, where its activity mostly consists of fuel supplies to Soviet-era reactors across eastern Europe.

Hungary’s Paks plant is among them. Built between 1969 and 1987, it now supplies about 40 percent of the country’s electricity. Rosatom will build two new reactors at the Danube-bank complex 115 kilometers (71 miles) south of Budapest.

To finance the 12 billion-euro ($16 billion) project, the equivalent of about 13 percent of Hungary’s gross domestic product, the Russian government is offering as much as 10 billion euros in a 30-year loan at below-market rates, Lazar said. Hungary, the most indebted country in the eastern EU, would pay the remainder, he said.

The loan amount may fall short of 10 billion euros, with the Russian government still negotiating the terms and expecting to make a final decision in the first half of the year, Finance Minister Anton Siluanov told reporters at Putin’s residence near Moscow today. The credit facility is a “good investment,” he said.

Best Deal

“It’s Hungary’s best business deal in a decade,” Lazar said, citing the loan’s terms. He also said the fact that Paks was built by Russians made it risky to hand the contract for its expansion to another country using different technology. The investment will create as many as 10,000 new jobs, he said.

Paks also supplies the cheapest electricity for Hungary, which helps keep the the country’s companies competitive, Lazar said. Daimler AG (DAI)’s Mercedes-Benz, Volkswagen AG (VOW)’s Audi AG (NSU), Suzuki Motor Corp (7269) and General Motors Co. (GM)’s Opel unit are among car manufacturers with factories in Hungary.

The nuclear plant’s expansion, to be completed in 10 years, may boost economic growth by 1 percentage point and increase budget revenue, Varga said today.

Even as the nuclear deal strengthens Hungary’s dependence on Russia, its position is different from the former Soviet republics, said Lilit Gevorgyan, a senior economist at IHS Global Insight in London.

‘Sounder Finances’

“Hungary’s current economic and political position is not comparable to that of Ukraine as Hungary is part of the European Union and has much sounder finances,” Gevorgyan said in a telephone interview yesterday. “This is ultimately a commercial deal and sounds like a good one for both sides.”

Hungary became receptive to stronger ties when Orban won the 2010 parliamentary election in a landslide, inheriting an economy ravaged by the financial crisis and the struggles of the euro area, the country’s biggest trade partner. He embarked on a policy of “eastern opening,” seeking to fortify relations with countries from Russia to Azerbaijan, Kazakhstan and China.

“We would very much like to increase our exports to Russia,” Foreign Minister Janos Martonyi, who served in the same capacity in Orban’s first administration 1998-2002, told reporters on March 26. “Politically, yes of course, Fidesz’s positions were slightly different a couple of years ago. Things change and when things change you have to change your mind, don’t you?”

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; Paul Abelsky at pabelsky@bloomberg.net

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