Can Russia Use Energy To Renew Its Grip On Bulgaria? – OpEd

By Martin Vladimirov*

“Belene is a totally corrupt deal and a failed project.”

These were the words of Bulgarian Prime Minister Boyko Borissov in an interview with the popular Bulgarian station BTV back in 2014, when his second term in office was just starting.

He was referring to the Belene nuclear power plant project, on which construction had begun back in the 1980s, then was restarted in 2004.

The restart of construction has since cost Bulgarian taxpayers a little over 1.5 billion euros. But nothing has actually been built in the last decade bar the delivery of two 1060-MW VER-1000 reactors by the Russian state-owned Atomstroyexport following a three-year court arbitration process.

The arbitrators ruled in late 2016 that Bulgaria had to pay the Russian company 628 million euros for the reactors that were ordered through several contracts between the state-owned Bulgarian power supplier, NEK, and the Russian nuclear construction company, but were not paid for after the project was halted again in 2012.

Now Borissov’s third cabinet is gearing up to revive the Belene project after tabling a motion in parliament to lift the 2012 moratorium on the plant’s construction.

Meanwhile, Bulgarian President Rumen Radev, who won the 2016 elections while vocally supporting a warming of relations with Russia and a renewal of Russian-led energy projects, was in Moscow on May 21 talking up a restart of Belene and potentially reviving the cancelled Russia-Bulgaria gas pipeline project, South Stream, which he dubbed ‘Bulgarian Stream’.

Prime minister Borissov also visited Moscow on Wednesday and met Russian President Vladimir Putin to talk about energy matters. Although their conversation did not appear to deliver anything new, Putin reiterated his interest in participating in large-scale projects with Bulgaria, including Belene.

“The Russian side is ready to return to the idea of implementing the project for the construction of the Belene nuclear power plant, of course, if the Bulgarian leadership takes the appropriate decision,” the Russian leader told reporters after the meeting.

On the potential revival of South Stream, Putin said that Russia is “ready for the new route”. He also said that the potential passage of TurkStream II through Bulgaria has been discussed with Turkish President Recep Tayyip Erdogan.

However the fear is that, like so many times in the past with such projects, Bulgaria seems to be entering another unvirtuous cycle in which Bulgarian nuclear energy policy is driven not by the public interest but by that of the Russian state and local businesspeople.

The freezing of the Belene nuclear power plant project in 2012 and the cancellation of the South Stream pipeline at the end of 2014 put a temporary halt to the expensive Russian economic influence on Bulgaria.

But it did not stop the oligarchic networks behind these projects in both Russia and Bulgaria that have worked together in the past to penetrate or capture strategic sectors of the Bulgarian economy including energy, telecommunications, banking and construction.

Evidence suggests that Russia has been able to leverage its role as the main energy supplier to manipulate state-owned companies, public institutions, and influential members of Bulgaria’s economic and political elites to its own benefit.

As the Kremlin Playbook report by the Center for the Study of Democracy (CSD) and the Center for Strategic and International Studies (CSIS) showed in 2016, Russian entities have controlled on average close to a fifth of the revenue flows of the Bulgarian economy over the last decade, either directly or via local proxies.

This makes Bulgaria the most vulnerable country in Central and Eastern Europe to Russian meddling.

To amplify its economic influence, Russia has deployed a range of soft power instruments such as political party support and media propaganda, and has sought to exploit governance deficits and the lack of strong institutional memory to exert geopolitical pressure to attain its strategic goals in south-east Europe.

Belene and South Stream have been vivid examples of how Russia tries to lock countries in the region into inflated mega-projects through long-term debt-financed deals that do not make much economic sense.

Take Belene – not only would the completion of the power plant cost another 10.5 billion euros, but it would also generate losses for the first three decades of its existence.

CSD estimates that at the current cost structure, the Belene plant would break even only at wholesale electricity prices of more than 80 euros/MWh compared to the current regional levels of between 35 to 40 euros/MWh.

Based on data and modelling used by the European Commission, a 2017 study by CSD and some of the most experienced energy research institutes in Europe revealed that Belene would not be financially sustainable even in 2050 when power prices in south-east Europe are expected to reach around 74 euros/MWh.

An interesting result from the modelling exercise points out that with the expected growth of renewable energy in the electricity system driven by EU decarbonisation policies, by the 2040s even the existing nuclear power plant in Bulgaria, Kozloduy, might become underutilised by around 10 per cent.

Belene’s levelised cost of electricity – the unit-cost of electricity over the lifetime of the generation facility – is projected to be at least three times the current production costs of the Kozloduy plant, so a new nuclear capacity could potentially remain severely underutilised in all scenarios, leading to stranded assets with enormous fiscal and environmental implications.

Economically and socially, the plant could lead to an abrupt end to Bulgaria’s local coal energy industry, as the construction of a new large-scale base-load power-generating capacity would allow the closing of the coal-fired power plants without a significant change in the structure of the electricity supply. This would also mean the lay-off of more than 12,000 workers engaged directly or indirectly in the coal industry.

On top of that, there is the significant financial risk, which will be shouldered by the Bulgarian government.

In theory, the government has pledged that the Belene plant would be constructed only under a market-based framework, in which a strategic private investor would fully finance the construction, while the state would not participate except with providing the two reactors that have already been delivered.

Without a pledge for a long-term power purchase agreement, it seems unlikely that any private company would decide to invest in a project which would have to sell electricity at prices that are twice as high as the current ones on the regional market.

This was also the conclusion of the leaked version of a project feasibility study commissioned to the Bulgarian Academy of Sciences by the state-owned Bulgarian Energy Holding, the principal owner of the project.

However, heavy pressure from vested interests led to a change in the study’s final conclusion. The new conclusion implied that Bulgaria could restart the project under a Paks II financial framework, in which Rosatom provides 80 per cent debt financing, while the state participates with a 20 per cent stake in the form of the reactors themselves.

In practice, Bulgarian taxpayers would have to bear the brunt of the project’s costs by paying back the Russian loan once it turns out that the plant cannot generate the profits to do that on its own.

Meanwhile, Russia would be able to leverage the financial arrangement to pressure future governments on the country’s strategic foreign policy direction or continue feeding local vested interests to prop up Russian state or private interests.

Part of the explanation for the strong influence of Russian interests on the country has been Bulgaria’s structural oil, gas and nuclear dependencies, which have deepened due to a rigid infrastructure, inflexible contractual obligations and an isolated and segmented regional market.

This has been most visible in the natural gas market, where Gazprom enjoys the power of monopoly pricing. In the past decade, Bulgaria has paid on average between 20 per cent and 30 per cent more than Germany for its Russian gas supply.

Gazprom has successfully crippled the liberalisation of regional gas trading through its transit contract with the Bulgarian state-owned transmission company and has sought to stop or at the very least delay any alternative gas infrastructure project to provide security or diversity of supply.

In the most extreme case, according to the former interior minister, Tsvetan Tsvetanov, Russian interests were behind the organisation of street protests against shale gas exploration on Bulgarian territory.

As with Belene, Russia exploited governance deficits to promote the construction of the South Stream gas pipeline, whose price tag of over four billion euros (for the Bulgarian section alone) would have made it three times more expensive per kilometre than pipelines of a similar size in Germany.

Thanks to the EU’s opposition to the project, and in particular to its non-transparent public procurement procedures, as well as the growing rift between Russia and the EU after Crimea, Russia gave up on South Stream in December 2014.

Yet the Bulgarian government has stubbornly clung to the idea of getting through a large-scale Russian gas pipeline through Bulgarian territory.

The reincarnation of the project began as soon as 2015 with the launching of the Balkan Gas Hub concept, which according to the current Bulgarian government’s plans will serve as a trading point for Russian (via a South Stream-light pipeline through the Black Sea), Azeri and LNG gas (via TAP and the Greece-Bulgaria interconnector), as well as potential domestic production from Black Sea offshore reserves.

The Balkan Gas Hub however envisages itself aligning with EU regulations, which makes it an unlikely choice for Russia.

Most of the hub project involves the modernisation of existing gas infrastructure and the construction of a new pipeline along the same route as South Stream.

Bulgaria seems to be either trying to invest in a new version of the South Stream project or to convince the Russian company to propel Turkish Stream II on to a Bulgarian course instead of the original idea of linking it to Greece and via an expanded TAP pipeline to Italy.

In this scenario, Bulgarian thinking is driven by fear – on the one hand that the end of its transit contract with Ukraine from 2019 will take away vital transit fee revenue from the gas transmission system operator, and on the other, with more sinister motives, it is being heavily lobbied by pro-Russian economic and political groups in the country that have been working for decades to preserve the Gazprom monopoly in Bulgaria.

In both cases, Russia has masterfully shown that large-scale infrastructure projects can both serve as carrots and sticks with the ultimate aim of extracting rents for Russian and local elites, solidifying Russia’s energy market dominance and achieving political leverage.

Even if these strategic energy projects are not completed, their zombie life has and will cost the country considerable resources, while at the same time, they will increase the risk of political instability and accelerate the country’s further drift from the EU’s core.

Picking off EU member states one by one in an attempt to sow disunity ultimately seems to be Russia’s strategic objective.

*Martin Vladimirov is an analyst at the Sofia-Based Center for the Study of Democracy. His work at the Center focuses on an analysis of the energy security in Europe and on the Balkans, macroeconomic competitiveness, political risk, alternative energy technologies and stability of financial markets. He holds an International Affairs degree from the School of Advanced International Studies (SAIS) at Johns Hopkins University, where he specialised in energy resources and the environment.

The opinions expressed in the Comment section are those of the authors only and do not necessarily reflect the views of BIRN.