ARMENIAN-RUSSIAN JOINT VENTURE TO BUILD NUCLEAR

C O N F I D E N T I A L YEREVAN 000851 SIPDIS E.O. 12958: DECL: 12/08/2019 TAGS: ECON ENRG RU AM SUBJECT: ARMENIAN-RUSSIAN JOINT VENTURE TO BUILD NUCLEAR PLANT Classified By: Acting DCM John Maher. Reason 1.4 (b/d). SUMMARY -------------- ¶1. (C) The GOAM has announced plans for construction of a new nuclear power plant with Russian involvement at every phase: an Armenian-Russian joint venture will partially finance construction; Russian state-owned Atomstroyexport will serve as general contractor; and Atomstroyexport will hire itself to construct the plant, which will make use of a Russian reactor. Observers question the Russian state enterprise's incentive to contain costs as general contractor when it will be receiving the checks it writes, casting doubt on the attractiveness of the project for other investors. Experts also wonder why the GOAM rushed the announcement when the feasibility study for the proposed plant has yet to be completed, and question whether the extensive Russian involvement is quid pro quo for discounted Russian gas deliveries announced earlier this year. END SUMMARY. RUSSIAN PARTNER...AND REACTOR -------------- ¶2. (U) On December 3, Minister of Energy Armen Movsisian announced the creation of a joint venture with Russian state-run Atomostroyexport, a division of Rusatom, to finance and build the new nuclear power plant intended to replace the aging Armenian Nuclear Power Plant (ANPP) at Metsamor. At a cabinet meeting the same day, GOAM ministers also approved the overall design and main technical parameters of the plant's reactor, a Russian AES-92 pressurized light-water reactor that Movsisian described as having a "European safety certificate." Movsisian told fellow cabinet members that the decision is based on the recommendations of Worley Parsons, the Australian engineering firm that the GOAM engaged in May to manage the project. Prime Minister Tigran Sargsian was quoted at the same meeting as saying "We are making a political decision here today," in agreeing to the joint venture. (Note: As project manager, Worley Parsons is responsible for preparing the feasibility study, preparing documents for potential investors, and overseeing the construction process. It will not be constructing the plant itself. End Note) ¶3. (C) According to our sources, the agreement includes the following elements: - Atomstroyexport and the GOAM will each own 25 percent plus one share of the joint venture, with to-be-determined investors providing the remaining financing; - Russia will likely loan Armenia the money for its 25% 1 share stake. --Atomstroyexport will serve as the general contractor on the project; - Russia will supply the "nuclear island" (reactor) for the nuclear power plant, with the remainder (controls, turbines power equipment) likely to be provided by western firms. The announcement appears to confirm long-held expectations that Russian companies would play a major role in the development and financing of the new nuclear power plant, consistent with their dominant position in Armenia's energy sector. Russian firms already control Armenia's gas pipelines, the Hrazdan Thermal Power Plant Fifth Unit, and the country's electricity distribution network. Armenia has also received deeply discounted natural gas from Russia (as much as 50 percent less than what Gazprom charges other customers in the region) for the past several years. CONTRACTOR AND CLIENT -------------- ¶4. (C) The arrangement raises concerns about possible conflicts of interest. Atomstroyexport as general contractor is responsible to the joint venture partners for controlling costs of construction. But as the construction firm, Atomstroyexport would be the 100-percent beneficiary of any "cost over-runs," while as only a 25 percent owner, would suffer only a quarter of those losses. Under these circumstances, observers worry that costs could spin out of control, and question whether any other investors would be willing to risk their money on this project given this ownership structure. The GOAM has still not indicated how it plans to raise financing for a project estimated to cost at least $5 billion (double Armenia's annual budget). RUSSIAN REACTOR THE BEST OPTION? -------------- ¶5. (C) Although Minister Movsisian claims that Worley Parsons had recommended the Russian AES-92 reactor, Worley denied it made any such recommendation. A Worley Parsons representative told Econoff that the strongest statement they made was that this type of reactor "is suitable to be considered pending completion of the feasibility study." They also say they have made no public announcement about this issue, contrary to what had been reported in the Russian press. (Note: In meetings several months ago, Worley officials told Econoff that they expected the plant would ultimately employ a Russian reactor, with western control systems. This appeared largely an acknowledgment of economic and political realities, though they did praise the quality of current Russian reactor technology. End Note) QUID PRO QUO? -------------- ¶6. (U) The announcement of the Russian joint venture and selection of a Russian reactor has renewed speculation that the deal represents a quid pro quo for GazProm's late-October agreement to reduce the price of natural gas to Armenia, starting April 1, 2010, from $200 per thousand cubic meters to $180. Although such a reduction is justified by a changing energy market that has seen GazProm in recent months reduce contract prices to all of its customers, press reports nonetheless suggest that the selection of a Russian reactor was reciprocation for a reduced gas price and possibly other concessions to Russian interests in the energy sector. COMMENT -------------- ¶7. (C) The GOAM has not yet addressed how it plans to fully finance a project estimated to cost over $5 billion (double Armenia's annual budget). With a sovereign debt rating below investment grade, the GOAM is unlikely to borrow in the commercial market. This new arrangement may portend extensive Russian involvement in financing this project as well as overseeing its construction. Energy Ministry officials have indicated to Emboffs that they plan to obtain western control systems for this new facility. This will require signing of a 123 agreement if a U.S. firm is to be a supplier for the project. END COMMENT. YOVANOVITCH