RUSSIA'S ATOMSTROYEXPORT CANNOT FULFILL EXISTING

UNCLAS SECTION 01 OF 03 MOSCOW 000851

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: KNNP BTIO ETRD ETTC ENRG TRGY PREL ECON RS
SUBJECT: RUSSIA'S ATOMSTROYEXPORT CANNOT FULFILL EXISTING
INTERNATIONAL NUCLEAR ENERGY CONTRACTS, BUT SEEKS NEW ONES

REF A: ANKARA 111, REF B: 08 YEREVAN 1049, REF C: 08 MOSCOW 908

MOSCOW 00000851 001.2 OF 003



1. (SBU) Summary: Russian policymakers are relying on Russia's
competitive advantage in civilian nuclear power to help it diversify
its natural resources-based economy. Atomstroyexport, Russia's
international nuclear power plant constructor is diligently pursuing
construction contracts for 11 new nuclear reactors in India, Iran,
Bulgaria, and Ukraine. It is in active discussions on another six
reactors (two in China and a Build-Own-Operate plant with four
reactors in Turkey). At least four other countries have stated
their interest in having Russian-design reactors as their entry into
the nuclear power arena. However, the crunch on credit,
insufficient machine-building infrastructure, and a paucity of
trained specialists make it unlikely that Atomstroyexport will be
able to realize all of these plans soon. End Summary.

International Civil Nuclear Projects on the Books
-------------- --------------


2. (U) Atomstroyexport (ASE),Rosatom's international nuclear power
plant (NPP) construction arm, is working on the 11 units to which it
has committed:

-- (U) India - Kudankulam (two units under contract; four more
being discussed): India's Kudankulam nuclear power plant (NPP)
units 1 and 2 are almost finished, with projected first criticality
expected in early 2009 and end of 2009 respectively. (Note:
Initially, units 1 and 2 were expected to be commissioned in 2007.
Delays in equipment delivery pushed dates for first criticality into

2009. End Note.) The December 2008 umbrella agreement signed with
India puts four more reactors in the queue. The contract that is
now under consideration will cover the delivery of design
documentation and equipment only, with local Indian workers
executing the construction. The Russian government has announced it
will provide loans for this contract.

-- (U) Iran - Bushehr (unit 1): One load of nuclear fuel was
delivered to the plant in early 2008 and is stored on site under
IAEA monitoring controls. The date of commissioning has been
postponed many times. Although it is hard to predict when first
criticality will occur, most projections are for late summer or
early fall 2009. It is most likely the reactor will be operated by
Russian personnel during first year of operation. There are no
indications of any Russian interest in building additional NPPs in
Iran.

-- (U) Bulgaria - Belene NPP (two units under contract): Russia
won the tender in October 2006 and a 'turn-key' contract was signed
in 2008. The cost is currently estimated at 3.997 billion Euros
($5.4 billion). Construction is scheduled to begin in spring 2009.

-- (U) Ukraine - Khmelnitskaya NPP (two units under contract to be
completed): The GOU approved the tender committee's decision in
October 2008. ASE will finish the construction of two units,
stopped in the 1990s due to economic reasons, that is at 75 percent
and 28 percent complete respectively. Russia has announced it will
provide a loan equal to 85 percent of the contact cost.

Not Yet Decided - But Probable
--------------


3. (U) ASE is aggressively pursuing new agreements and contracts in
South America, the Middle East, and South Asia. It continues to
expand its market in China, a long-term buyer of Russian nuclear
goods and services, and is floating tenders in Turkey. If both the
China and Turkey projects come to fruition, it would add another six
NPPs to the 11 that are on the books.

-- (U) China: Russia and China began negotiating a contract on the
further ASE construction of Tianwan NPP units 3 and 4 after units 1
and 2 were commissioned. The two sides are close to resolving
pricing and technology transfer issues and the fuel delivery terms.
Prime Minister Vladimir Putin and Chinese Premier Wen Jiabao signed
a memorandum on cooperation in nuclear arena on October 28, 2008 on
constructing these two additional units at the Tianwan site, a fast

MOSCOW 00000851 002.2 OF 003


breeder reactor, and a fourth centrifuge enrichment facility in
China.

-- (SBU) Turkey: ASE was the only company that participated in
Turkey's tender for the construction of its first NPP. Turkey's
specialists are assessing ASE's proposal. Following the February
12-15, 2009 visit of Turkey's President Abdullah Gul to Moscow, ASE
First Vice President Timur Ivanov on February 16 proposed a
Build-Own-Operate (BOO) arrangement for four more reactors in
Turkey. If the BOO model were followed, ASE would be plowing new
ground because no country has ever entered into a BOO arrangement
for an NPP. Director of ASE's External Affairs Division Leonid
Yanko told EST on February 17 that not only would it be a first BOO,
but that Russia would retain ownership for the lifetime of the
reactor. The initial agreement would specify the price per kilowatt
(Kw) for the first 15 years, with the follow-on period pricing
negotiated on a market price basis. (Comment: If Russia owns the
plant and runs it for the entire lifetime, Turkey would have little
negotiating leverage to use in price negotiations after the 15-year
point. End comment.) Former MinAtom Deputy Minister and now First
Deputy Director General of the Institute of Natural Monopolies
Problems Bulat Nigmatulin told EST on March 3 that such a BOO
arrangement could hardly be profitable with the 15-year set price
per Kw. He saw this as a showstopper. (Note: Practically all of
Turkey's natural gas comes from Russia. This arrangement would
deepen Turkey's dependency on the Russian energy sector, which some
in Turkey oppose (Ref A). End note.) Nigmatulin told us that the
tender could be cancelled for one of several reasons; the most
likely being the high cost per Kw that Russia would charge for the
electricity generated by the NPP and the uneconomically sound
fifteen-year pricing scheme.

Pre-tender status and announced plans
--------------


4. (U) Belarus: Rosatom announced its participation in a tender
for the construction of a NPP, the results of which should be
announced shortly. Belarus received preliminary proposals from ASE,
China, Westinghouse-Toshiba, and Areva. Belarusian officials
claimed preference will be given to Russia as it is the only country
which proposed units that already have a "documented operational
history." The project is expected to be executed using a GOR loan.
(Comment: The loan probably has more to do with the decision than
operational histories. End Comment.)

-- (U) Egypt: During his November 13, 2008 visit to Moscow,
Egyptian Prime Minister Ahmed Nazif invited Russia to participate in
the construction of an NPP. In March 2009, Russia and Egypt signed
a Civil Nuclear Cooperation Agreement (123 Agreement).

-- (U) Venezuela: In September 2008, Prime Minister Putin
announced that Russia was ready to build a NPP in Venezuela. During
his visit to Venezuela, President Dmitriy Medvedev on November 26,
2008 signed a 123 agreement. On November 18, 2008, Venezuelan
President Hugo Chaves announced that that a construction site had
been selected for the NPP potentially to be constructed by ASE.

-- (U) Libya: On November 1, 2008, Russia and Libya signed an
agreement on cooperation in the area of the peaceful use of nuclear
energy, with emphasis on reactor design, construction, and nuclear
fuel supply. The agreement did not specify what types of reactors
(research or energy-producing) were agreed upon or when such work
might be discussed.

-- (U) Mongolia: On March 17, 2009 Interfax reported that
negotiations between PM Putin and Mongolian Prime Minister Sanjaa
Bayar would result in Rosatom and the Mongolian nuclear energy
administration signing an agreement on the peaceful use of nuclear
energy. No specifics were given. However, ITAR-TASS reported on
May 26, 2008 that Mongolia has forecasted uranium reserves of 1.3
million tons and that uranium mining, not selling nuclear power
reactors, seems to be Russia's interest in Mongolia.

-- (U) Hungary: On March 10, 2009, ITAR-TASS reported that Prime
Minister Putin and Hungarian Prime Minister Ferenc Gyurcsany

MOSCOW 00000851 003.2 OF 003


discussed long-term cooperation between Russian nuclear fuel
fabricator TVEL and Hungary's Paks nuclear plant. If the contract
is concluded, TVEL would provide fuel through at least 2032.
Additionally, ASE would implement a program to upgrade the Paks NPP
to increase its output from 1760 to 2000 megawatts.

-- (U) Armenia: There are also rumors of possible deals in Armenia
(Ref B). Since 2007, Russia has repeatedly indicated interest in
competing in a tender for construction of a NPP, which the Armenian
government has indicated will be issued later in 2009. On February
5, 2008, Armenia joined Russia's International Uranium Enrichment
Center (IUEC) in Angarsk. After February 6, 2008 talks between
visiting Russian Prime Minister Viktor Zubkov and Armenian Prime
Minister Serzh Sarkisyan, Rosatom and the Armenian Ministry of
Ecology signed a protocol on joint geologic exploration, uranium ore
mining, and processing.

Atomstroyexport's Future
--------------


5. (SBU) ASE's Yanko told us that while the economic situation
isn't affecting ASE yet, i.e. no one has been laid off; there is a
danger in the longer term because of the number of construction
projects depending on GOR loans. When asked if ASE could cover all
of its current and projected projects, he said that the China, India
and Bushehr projects were "no problem." As for the other projects,
Yanko commented, "well, maybe if all goes well." Yanko stated that
the Middle East was shaping up as a good market, ripe for expansion,
especially the United Arab Emirates, Bahrain and Qatar. He added
that cooperation agreements and national legislation will have to be
in place before anything can go forward.


6. (SBU) Yanko said two pathways are being explored to address
insufficient Russian machine building capacity and related
infrastructure needed to realize the projects. The first is to
recreate the former Soviet nuclear mega-entity, Atommash. This
would put the manufacturing of all the main components, such as
reactor core pressure vessels and high-pressure pumps, under the
Rosatom umbrella. Nigmatulin separately told us that this is
impossible economically because the few remaining components of
Atommash are literally in ruins. The other approach is to invest in
existing companies, but not attempt to own the entire process.
Yanko cited the Izhora steel fabrication plant in St. Petersburg as
an example of this. Izhora is currently able to produce only one to
one and one-half reactor pressure vessels per year. Yanko could not
(or would not) say which solution the Rosatom hierarchy favors.


7. (SBU) Floating NPPS are another drain on ASE's expertise and
materials. While the first two floating NPPs now under construction
are for domestic use, Yanko did allow that financing and building
floating NPPs could be an issue down the road. Although ASE isn't
responsible for constructing them, it is the Rosatom responsible
agent for floating NPPs sold internationally.


8. (SBU) Bulat Nigmatulin, Rosenergoatom Deputy Director Vladimir
Asmolov (Ref C),and others have told EST that the lack of skilled
nuclear construction personnel is the primary choke point for
Russia's civil nuclear expansion plans. Nigmatulin noted that in
the 1980s, Soviet Russia had as many as 55,000 skilled workers
active in nuclear construction. Today, the number of Russia's
skilled nuclear construction workers is closer to 5,000.

Comment
--------------


9. (SBU) Even without the crunch the financial crisis could put on
GOR loans, the lack of sufficient nuclear industry infrastructure
and trained specialists will make it hard for ASE to fulfill
existing contracts on time. It is extremely unlikely that ASE will
be able to complete many of the NPPs in contracts it is currently
negotiating within the timeframes being discussed. Even so, ASE
continues to seek still more new contracts. As Nigmatulin declared
bluntly, "these plans are a fantasy."

BEYRLE