A brief summary of the Russian-Hungarian agreement on the Paks nuclear power plant

The sharp-eyed reporters of vs.hu, a fairly new site favored by younger readers, discovered on http://www.pravo.hu.ru the Russian text of the Russian-Hungarian loan agreement in connection with the extension of the Paks nuclear power plant. Although some Hungarian media outlets claim the text is no longer available, it can still be downloaded from the link vs.hu provided. Here are a few details I gleaned from summaries of the Russian text.

There were rumors earlier that Viktor Orbán had originally turned to the Russians for a general-purpose loan but that in the end he had to be satisfied with a loan earmarked for Rosatom to build two new reactors in Paks, which will double the capacity of the Hungarian nuclear power plant. It looks as if the Russians tried to ensure that the Hungarian government can use the loan of up to 10 billion euros only for Paks. Moreover, the loan will cover at most 80% of the total cost. The remaining 20% (and all cost overruns) will have to be paid to Rosatom by the Hungarian government in euros.

From the text it appears that the Budapest team involved in the negotiations didn’t tell the whole truth about the details of the agreement. They repeated several times that the Hungarian government’s 20% contribution will be due only at the very end of the twenty-one-year period during which the loan must be paid back. This is inaccurate. Every time Rosatom submits a bill, it seems, Hungary will have to pay 20% of it from its own coffers, not from the loan. And the bill will have to be paid within 15 days. If Hungary can’t pay within 15 days, there will be a heavy penalty: 150% of the original sum. If Hungary can’t pay for an extended period (to be precise 180 days), the Russians can cancel the agreement and demand repayment in full. As some people have already pointed out, such an eventuality could bankrupt the country.

Beginning this year, Russia will grant Hungary an interest-only loan at an annual rate of 3.9%. Once construction is completed in 2026 (or presumably even if it isn’t), the principal balance will be amortized over 21 years, with an interest rate of 4.5% for the first seven years, 4.8% for the next seven, and 4.95% for the final seven. Every year there will be two payment dates: March 15 and September 15. Happy March 15th, Hungary!

As of now, only LMP responded officially to those details of the agreement that the Russians decided to make public. According to Bernadett Szél, co-chair of the party, there are several points that are unacceptable. One is that Hungary will have to start paying on the loan’s principal in 2026 even if the plant is not completed by that time. The Hungarian government until now had insisted that loan payments could be made from the sale of additional energy that the expanded Paks would produce.

No wonder that Putin looks so pleased / Photo AP

No wonder that Putin looks so pleased / Photo AP

I’m sure that within days experts will figure out how much this loan will actually cost Hungary and that the number will be staggering. As it is, Hungary’s indebtedness is large. Much larger than it was  in 2010 when Viktor Orbán became prime minister. According to the latest estimate, it is 30% higher today than it was four years ago. And one must keep in mind that in the interim the savings of millions of people were used to lower Hungary’s indebtedness.

Oh, and by the way, only a few days ago I read claims that the extension of Paks cannot take place without building a dam on the Danube. Well, that would add a few forints to the bill.

All of these calculations may be academic, however. The EU might scuttle the power plant expansion altogether. It could object to the state subsidies that would implicitly be provided to MVM (Hungarian Electricity Ltd.) since Paks provides energy to the utility company. Such an arrangement would give an undue advantage to MVM vis-à-vis its competitors in Europe. And then there are the strained relations between the European Union and Russia as a result of Russia’s attack on Ukrainian sovereignty. With the EU outlining possible sanctions against Russia, it will be difficult for Orbán to sell the idea of initiating such a cozy relationship with Putin’s Russia. Mind you, I think that a EU veto would be a blessing in disguise because this deal should never have been made in the first place. Hungary’s financial situation at the moment is so shaky that such a major investment is out of the question. (I opted for the word “shaky” to reflect Reuter’s claim that “Hungary has made a particularly convincing case for turning the ‘fragile five’ [Brazil, India, Indonesia, Turkey, and South Africa] into a ‘shaky six’.”) I’m not saying that Paks shouldn’t be enlarged eventually, but not now and not with Putin’s Russia.

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39 comments

  1. Even if there is no cost overrun or delay in the construction, Hungary has to pay 9 billion euros in interest on the 10 billion euro Russian loan. Hungary has to take another 2 billion loans by the agreement from the market.

    I have not calculated the numbers again, just used the estimates from
    http://www.portfolio.hu/deviza_kotveny/akk/igy_fizetjuk_vissza_az_orosz_gigahitelt.196494.html

    The total gross debt of Hungary stood at 75.35 billion euros on February 28, 2014.

    Thus the extra 23 billion or so euros to build Paks-2 increases the national debt by 30% at the minimum.

  2. tappanch :
    Even if there is no cost overrun or delay in the construction, Hungary has to pay 9 billion euros in interest on the 10 billion euro Russian loan. Hungary has to take another 2 billion loans by the agreement from the market.
    I have not calculated the numbers again, just used the estimates from
    http://www.portfolio.hu/deviza_kotveny/akk/igy_fizetjuk_vissza_az_orosz_gigahitelt.196494.html
    The total gross debt of Hungary stood at 75.35 billion euros on February 28, 2014.
    Thus the extra 23 billion or so euros to build Paks-2 increases the national debt by 30% at the minimum.

    Sochi aside, has anyone seen Russia’s performance record on longterm projects?
    Try this on: the refurbishment of the Bolsoi was ticketed at $700million–that’s right, $700 million dollars! Five years later, the project was unfinished but the cost had sped past
    $7 BILLION DOLLARS.

  3. One other issue. The loan amount will only anchor the costs of the project. There has never been a project loan in history which was not spent entirely.

    So the EUR 10 billion (which tappanch correctly sees works likes so that that even the our own 2 billion part will have to come from new forex debt) will be spent completely. Hey, we get this money now, so let’s spend it until we have it ‘cos we are anyway heading towards bankruptcy.

    Then comes any cost overrun over this EUR 10bn.

    Then comes the price of dismantling/decommissioning of the old Paks reactors (no budget yet, never happened anywhere), plus later cost for these new ones.

    Then comes the price of the final depository of the highly radioactive stuff, they have not even started, there is only a vague idea about the location (about 10 kilometres from Pécs).

    Then comes the price of the dam (possibly two more) on the Danube to ensure cooling water, as we already have problems with enough water in summer.

    Then comes the cost of operation, which is impossible at current electricity prices. Hungary will have to subsidize energy from the budget as no politician will dare to increase prices by 200-300%. It’s suicidal, forget it.

    Hungary will end up where Greece is now.

    At one point the normal debt will not be financeable any more, Hungary will default and we will have a half-ready reactor.

    And note that Jobbik fully supports the project and they will be extremely popular in the coming years.

    Default is coming.

    But the international finance works so that there is always money to countries like Hungary or Ukraine or Central African Republic, until there is really a genuine default situation.

    So debt will inevitably increase in the coming years (especially as GDP will have to stagnate given the subpar investment figures of the last 4-5 years).

    But hey, people like that: Fidesz and Jobbik are very popular.

    People know that all these things are funny stuff, and the politicians always sort these out, right?

  4. Since there are never guarantees for the cost of any constructions (and I do not see that in this contract either), who would finance, and where would the money come from for the project cost overruns?
    ” If Hungary can’t pay within 15 days, there will be a heavy penalty: 150% of the original sum” Is the penalty 150% on top of the original sum or 50% on top of the original sum?

  5. I just noticed that the interest is compounded daily, see Articles 4.5, 5.5 in the Russian original.

  6. tappanch :
    I just noticed that the interest is compounded daily, see Articles 4.5, 5.5 in the Russian original.

    Nice. For those of you who needs a little brush up on the difference between daily, monthly, half-year compounded interest, here is a handy tool. You can play around with $1,000,000 just to see the difference http://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php

    I think the opposition now, just have to print out the main points of this contract wit the main numbers. What I do not understand is what Fidesz considered in this contract National Security issue.

    Also, I wonder if the Russians put up the contract to be found… I am not sure if the Russians are so flimsy that by accident they published this. But why did they put it up?

  7. The gross debt of the central government reached an all-time high in HUF on March 7, 2014.

    The new number is 23,406.5 billion HUF or 75.5 billion euros.

  8. tappanch :
    The gross debt of the central government reached an all-time high in HUF on March 7, 2014.
    The new number is 23,406.5 billion HUF or 75.5 billion euros.

    We will be breaking records every month in the coming decade or two.

  9. “According to the latest estimate, it is 30% higher today than it was four years ago.”

    In HUF, if we include the wasted private retirement funds. The exact number is 30.25%, 2014-03-07 vs 2010-05-31.

    In EUR, the increase is 15.72%.

  10. AT this instant, the MOL is @12,380 HUF, at a multi-year minimum.

    The unrealized loss from Orban’s purchase stands at 223.7 billion HUF, or 44.9% of the purchase price.

  11. tappanch :
    AT this instant, the MOL is @12,380 HUF, at a multi-year minimum.
    The unrealized loss from Orban’s purchase stands at 223.7 billion HUF, or 44.9% of the purchase price.

    Since MOL is a Gazprom-controlled unit, isn’t it odd that every time the Hungarian government takes it on the chin–I’m thinking of Malev (twice)–it’s our ‘cousins’, the Russians, who profit thereby…?

  12. petofi:

    MOL is not controlled by Gazprom. Not in any way.

    In a strange way, through various complex schemes (which are public by the way) MOL itself controls almost half of its shares.

    Then the state controls an additional 20something percent. There are other long-term shareholders (which cannot really exit their investments given the low share price compared to where they bought), so actually the free float is minimal.

    Gazprom is not in the picture.

    MOL sold its gas business to the state last year.

    What cannot be excluded, (or rather what is almost certain), is that the management of Gazprom and certain people close to MOL’s management and Hungarian politics have joint businesses through the likes of MET Ltd. (in which MOL also has some legal interest) about which there were posts on this blog. But these are the usual Easter-European money siphons, ie. private businesses, it does not imply control over MOL.

    Gazptom is a very powerful company, a Russian weapon of sorts, but it does not control MOL.

  13. Poll is right, MOL is not controlled by Gazprom; Gazprom got out of MOL shares at an opportune moment and above the market price, making a bundle at the expense of the Hungarian people. The important question here is: Did anyone in the Hungarian government made money for themselves off the deal? There are only two possible answers, neither one of which makes the government look good. The first is that someone made a lot of money, we’re talking billions, not the paltry hundreds of thousands of a MSzP functionary, and that is simply criminal, a violation of securities regulations, a violation of the public trust, and a theft of national assets. The second possibility is that no one in Hungary made money, and the government deal makers were simply stupid, to a degree of stupidity possibly unmatched in the recent chronicles of international corruption. So, criminally corrupt or criminally incompetent, that’s the choice. The difficulty here in establishing exactly what took place is that the entire transaction was done off the public record, and even it were less transparent, Fidesz spin, spineless state-owned journalists. and the economic illiteracy of the Hungarian people alongside a justice and financial oversight system that is entirely in the hands of Fidesz keeps the topic off the table. The Hungarian people were robbed blind, but worse than that, they are not allowed to know that fact, let alone pursue the robbers.

  14. No kidding that Orban and his friends will fight tooth and nail this election. We are talking about misappropriation of Hungary’s money. He and his friends could go to jail so fast, and for so long. They put up the road shows about casino land sales and such, while in the background…. actually it was not even n the background, it was right in front of the public eye they rubbed Hungary empty. There are three more weeks until the election. Why on earth the opposition does not start to give out flyers with all the real numbers?

  15. @GW:

    Did I get this right?

    The Hungarian government bought those MOL shares from Gazprom?

    They’re now worth about half of what has been paid for them …

    All these transactions seem rather strange to me – Malév (and other companies to?) were sold to the Russians, MOL is bought from them, MOL might be forced to sell INA to the Russians again?

    But of course that’s the idea behind it all: Addle, bemuse the people so they don’t understand what’s going on and how much money is siphoned off …

  16. @GW & Wolfi

    ” The second possibility is that no one in Hungary made money, and the government deal makers were simply stupid, to a degree of stupidity possibly unmatched in the recent chronicles of international corruption. So, criminally corrupt or criminally incompetent, that’s the choice.”

    Corrupt or incompetent? What bothers me is why the benefits accrue to Russians in every case? Twice from Malev, and now from MOL. Why is a rich, giant country like Russia
    continuously siphoning funds from little Hungary? And, why is this allowed to happen?

  17. Here’s something to make people think about Oszod, corruption, MSZP & Fidesz, and the Russian connection: from Kitekinto, 2011, Sept. 17—

    “majd azt a 2009-es ügyletet is, melynek során egyetlen éjszaka alatt, Gyurcsány Ferenc távozásának zűrzavarában orosz kézre játszották át a Mol 21 százaléknyi részvénypakettjét, melyet végül 2011-ben vásárolt vissza az Orbán-kormány mintegy 500 milliárd forintért. I. rész.

    (rough translation: In the wake of Gyurcsany’s departure in 2009…seemingly overnight, in the confusion of the moment, 21% of MOL shares ended up in Russian hands…only to be bought by Orban’s government in 2011 for 500 billion HUF (or about 2.5 billion dollars).

  18. Some1, “roadshows” about the Casino/land deal is absolutely right. Remember, the previous government actually stopped the deals, they never went through, no one made any money and the national treasury probably lost significant tax revenue.

  19. Gabor Simon the recently imprisoned MSZP leader was a member of the Gyurcsany government in 2008. Gabor Simon was also a member of the Bajnai government in 2009.

    Government members are required by law to undergo vetting process Type C. This is done by
    the internal security and secret services. These were at this time fully controlled by the Gyurcsany
    and then the Bajnai government.

    At this time the MSZP politician, Gabor Simon already had his infamous secret accounts
    in Wien with the hundreds of millions hidden in them.

    Possibility #1. the Bajnai and Gyurcsany government got reports about
    this activity and covered it up for Simon. Or
    #2 they were completely incompetent and idiotic that and did not even manage to detect
    obvious illegal activity in the middle of their own government

    Remember that the Simon account was in his own name, a few KMs from the HUngarian border!!!

    http://mandiner.hu/cikk/20140314_simon_ugy_nemzetbiztonsagi_vizsgalatot_kezdemenyez_a_fidesz

  20. ?? (ALERT: MLK–possible fresh Troll material)

    For the Nth time–Gyurcsany got dumped by his party because of his relentless efforts to reform it. Those who maintain the Fidesz party line are probably Fidesz apparatchniks!

  21. “He and his friends could go to jail so fast, and for so long.”

    The Orban Mafia will not go to jail because they now control 90% plus of media output and have cowered the judiciary into cowardly submission. Make no mistake they will walk the election by hook or by crook.

    But also make no mistake whilst they may be cunning slime with lawyer brains and have the morals that would allow them to sell their granny to a brothel, economically they are brain-dead illiterates- their grasp of economic knowledge belongs in the socialist dictatorship failures of the 80s.

    Slowly but surely they are bankrupting the country and when the logical outworkings of that fact hit the population at large then we will see this immoral regime ousted from power- it won’t be at the ballot box, that’s for sure as Orban will not permit it.

  22. tappanch :
    I just noticed that the interest is compounded daily, see Articles 4.5, 5.5 in the Russian original.

    Daily compounded interest is like playing Russian roulette with a fully loaded gun.

  23. Funny thing that we are calculating the astronomical costs as this technologically outdated dinosaur-project in Euros, while the official currency still HUF and remains in the foreseeable future, – just look into the Fundamental Law for help – and the income of the state is in Forint too.

    I remember, when a former mediocre soccer player blamed personally Gyurcsány allowing the population borrowing on foreign-currency basis, so, how is it now?

    Just to make the picture even prettier, nobody has the slightest clue, how the Forint will perform even in the next week, let alone during the coming decades when we will indebted to our dear Russian friends up to our noses.
    Imagine, our talented Matolcsy goes to dine with someone again, or the other brainy one Kósa coming out with another of his learned opinions, say right before due payment time, and consequently the Forint will take a deep dives usual, and suddenly we are off only with a few percent – and then you should start to think and count.
    With the dire consequences too.

    Illustrating just how stupid the Orbanian decision really is, not only for selling out our future for short-time gain, but particularly for doing it by forcing us to go along and struggle with obsolete technology in the coming half century or more, just watch this:

    http://www.nanoflowcell.com/en#home

    I kindly call your attention to read the last words too: salt water!
    If someone interested about the technology as well, here is another link, giving you some insight. I guess, even spoiling the surprise effect outweigh this information:
    “We’re told that the two-door model can go up to 100km/h (62mph) in just 2.8 seconds, and reach a top speed in excess of 380km/h (236+mph).”

    Well, it’s a car folks, which goes on (kind of) salt water which used to produce electricity, ready and working already today!

    And our beloved leader sell the country for a nuclear power plant.
    Or, as I rather convinced what he really is doing, for keeping up appearances of his home-brewn success story, the “potemkin” economical facade.

    Before I forget, the link:

    http://www.carscoops.com/2014/03/new-nanoflowcell-quant-e-sportlimousine.html

  24. oneill :
    But also make no mistake whilst they may be cunning slime with lawyer brains and have the morals that would allow them to sell their granny to a brothel, economically they are brain-dead illiterates- their grasp of economic knowledge belongs in the socialist dictatorship failures of the 80s.

    This is precisely why they concentrate on taking over either monopolistic or regulated businesses so they do not have to compete in the market place. The other businesses they thrive on are those dependent on the state.

    Local public utilities such as water, sanitation, heating are marvelous for the local mini oligarchs (they have to receive crumbs of the spoils) because there is a captive customer base, price is fixed by regulations and if it is too expensive for the population, then there are ways to channel subsidies from the local or central budget. Those entities have substantial maintenance and investment requirements, which are used for siphoning money to selected contractors.

    We haven’t seen them take over a manufacturing business in a competitive or international environment. They just could not handle it.

  25. ps to the previous post: What is described applies equally to all political parties that are/were in a position of power. Fidesz only reached the stratosphere

  26. MLK :
    …………

    zip-a-dee-doo-dah
    and you are saying?
    Do you want a full list of Fidesz politicians who underwent the Fidesz vetting process and low and behold are incompetent BUT they are still in Fidesz?
    Let start with Schmitt (OK he is not in Fidesz any longer or is he?). Pal Schmitt who Fidesz put in as the Premier of Hungary was found committing fraud by using the title of phd he acquired through plagiarism.
    Matolcsy has no clue about the basic ways how market works, and kind of just admitted contributing to insider trading.
    But you know what.. I am not got going to continue with he list as if anyone reads simply this page they can find how the politicians of Fidesz lied about the Paks deal, how they actually spent the HUngarian people’s money and I think as we type here bankrupting the country.
    MLK, please read this blog with full of facts that are backed up with data, and not with hot air.

  27. Two things:

    1) It’s a given that 98% of Hungarian politicians would sell their mother into slavery for cash.

    2) Are we so sure that Orban does NOT want to bankrupt the country?

  28. I am puzzled by the logic behind the Paks 2 project from Orbán’s point of view.

    Firstly, this all ,apparently, started out as a way of getting a general purpose loan out of the Russians, but, now that the loan can only be used for the specific purpose of Paks 2, how does that satisfy Orbán’s original needs? He is still going to have to borrow money from somewhere else.

    Secondly, it’s going to be a long time before Paks 2 starts making any money (or its coming on-stream can be used as a reason for reducing electricity prices). So, in the meantime, a lot of money is paid to Russia just to build a new nuclear plant. Orbán gets nothing from it for years (other than the money made by his friends in the construction industry).

    I doubt if even Orbán is betting on still being around by the time Paks 2 starts making money. He’s been in politics long enough to know that, even if you’ve just won a two-thirds majority for the second time, there is no guarantee things will continue to go smoothly. Politicians traditionally think only in the short-term – for very good reasons. Also, Orbán is 51 this year, he could easily be retired by the time Paks 2 generates any money. And, if I were him, I’d have my ‘plan B’ (cut and run before the country completely collapses) based on the assumption that I’d be getting out before then.

    So, what’s in it for Orbán? Is it just the money his mates are going to make, and the kick-backs? I find this hard to believe – after all there must be many much easier ways for them to get rich on the back of Orbán’s government than this long-term, risky, caper.

  29. Well, I think that that someone should explain who this guy is. I wrote about him a couple of times. See:

    https://hungarianspectrum.wordpress.com/2013/12/01/the-hungarian-far-rights-attack-on-the-united-states/

    https://hungarianspectrum.wordpress.com/2013/03/15/official-prizes-for-far-right-neo-nazis-and-members-of-the-lunatic-fringe-in-hungary/

    He is naturally a nut and he is an extremist but he has a weekly program on Echo TV which is a shame and tells a lot about today’s Hungary. I think it was a year ago that the Fidesz government gave this guy the highest state prize for excellence in journalism. You might recall that it was such a scandal that Szaniszló was forced to return the prize.

    In fact, a couple of people asked me to talk about this guy again because he openly demands territorial revisionism. The funny thing is that this guy received his degree from the University of Moscow.

  30. Eva S. Balogh :
    Well, I think that that someone should explain who this guy is. I wrote about him a couple of times. See:
    https://hungarianspectrum.wordpress.com/2013/12/01/the-hungarian-far-rights-attack-on-the-united-states/
    https://hungarianspectrum.wordpress.com/2013/03/15/official-prizes-for-far-right-neo-nazis-and-members-of-the-lunatic-fringe-in-hungary/
    He is naturally a nut and he is an extremist but he has a weekly program on Echo TV which is a shame and tells a lot about today’s Hungary. I think it was a year ago that the Fidesz government gave this guy the highest state prize for excellence in journalism. You might recall that it was such a scandal that Szaniszló was forced to return the prize.
    In fact, a couple of people asked me to talk about this guy again because he openly demands territorial revisionism. The funny thing is that this guy received his degree from the University of Moscow.

    However, everybody knows that chauvinist came to power in modern ukraine, who denies the minority rights. (not only the Russian)

    Even the Hungarian liberal intellectuals call the new Ukrainian regime as “extreme chauvinist”

    Watch the liberal thinkers about the situation:

  31. Wuldozer, you couldn’t have come up with a worse example as far as I’m concerned. I have a very bad opinion of Henrik Havas. I don’t have any trust in his opinions.

  32. Eva S. Balogh :
    Wuldozer, you couldn’t have come up with a worse example as far as I’m concerned. I have a very bad opinion of Henrik Havas. I don’t have any trust in his opinions.

    It was a talkshow with many many liberal thinkers, and Havas is just a famous liberal “celeb” :)))

  33. Wuldozer :

    Eva S. Balogh :
    Wuldozer, you couldn’t have come up with a worse example as far as I’m concerned. I have a very bad opinion of Henrik Havas. I don’t have any trust in his opinions.

    It was a talkshow with many many liberal thinkers, and Havas is just a famous liberal “celeb” :)))

    There are but he is not one of them. As far as his being a celeb, it just shows that Hungarians have bad taste.

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