The Court of Justice of the European Union has overturned the European Commission’s decision that allowed Hungary to provide state funding for Russia’s construction of two new nuclear reactors at the Paks nuclear power plant, the only nuclear power station in Hungary. The court ruled that, since the agreement with the Russian company had been concluded without an open tender, the European Commission should have examined whether the construction of the reactors complied with EU public procurement rules.
Background and essence of the deal
On March 6, 2017, the European Commission approved Hungary’s plan to invest in the state-owned company MVM Paks II for the construction of two new nuclear reactors at the Paks nuclear power plant. The new reactors were intended to gradually replace the four existing ones, while MVM Paks II was to receive ownership and management rights for them free of charge. The project was to be financed entirely by Hungary.
Construction was assigned to the Nizhny Novgorod Engineering Enterprise, part of Rosatom. The project was valued at €12.5 billion. In 2014, Moscow and Budapest signed an agreement for a long-term loan of up to €10 billion. The deal was concluded without tenders.
The lawsuit
Austria filed a lawsuit against the European Commission’s decision with the General Court of the EU, but the court dismissed the case on Nov. 30, 2022. Austria then appealed to the EU's Court of Justice, which overturned the General Court’s ruling and annulled the Commission’s approval, concluding that the Commission should have examined whether the direct contract for the construction of the reactors complied with EU public procurement regulations.
The court noted that Russia's construction of the reactors is an intrinsic part of the announced support, since the objectives of the state aid could not be achieved without the contract. Furthermore, holding an open tender could have affected:
- Construction costs
- Future infrastructure characteristics
- The extent of the economic benefits granted to the aid recipient.
The court noted that the European Commission’s justification was insufficient. The Commission merely referred to its 2015 probe into the direct contract with the Russian company, which was closed with the conclusion that the regulations had been observed. The court stated that such a general reference was inadequate, since the Commission had not provided specific arguments as to why concluding the contract without a tender was consistent with EU public procurement rules.
A unique situation for the European Commission
“The future of the project is now up in the air,” says Vladimir Slivyak, co-chair of the Eco-Defense environmental rights group. As Silvyak explains:
“No one can say what will occur to the project because the case is unprecedented. Should Hungary drop everything and announce a new tender? Hardly anyone would go for that. On the other hand, what other choice is there from a legal perspective? The European Commission's future course of action is just as unclear. Most likely, the Paks II project will see more delays. Recently, the Hungarian prime minister joyfully announced that the U.S. had lifted sanctions on the banks that were supposed to handle the funding, and that the project would therefore move forward to the construction phase.
With the EU throwing a wrench in the works, the project, which was formalized over ten years ago as a high-level agreement, will likely face another delay. This ruling will have a significant impact on the potential construction of nuclear power plants within the EU, and not only by Rosatom. Following this decision, it will be clear that such projects cannot proceed without a tender.”
At the same time, Hungary still intends to connect the two new nuclear power plant units to the grid in early 2030, Foreign Minister Péter Szijjártó said following the announcement of the court’s decision.
Russia’s stake in the project
Again according to Silvyak, the Kremlin’s interest in nuclear power plant projects abroad is geopolitical:
“Russia is the only country that covers almost the entire cost of these projects through state loans. This has been the case with every deal throughout the post-Soviet period. In doing so, it creates dependency in other countries because a nuclear power plant is a very large source of energy. If you fall out with Russia, you are unlikely to want to shut down its nuclear plant on your territory in the absence of alternative energy sources. This kind of dependency can last for a hundred years.
It takes 10-15 years to build a reactor, then it runs for 60 years, and afterwards it takes another couple of decades to decommission it. Throughout this entire period, you will be dependent on fuel supplies, which cannot simply be bought on the open market. This kind of economic bond gradually turns into political dependence. Hungary is the clearest example of these geopolitical games.”
Throughout the war in Ukraine, Hungary has been working to block as many sanctions against Russia as possible. Hungary is heavily dependent on Russia, and once it has two new 1,200 MW reactors, it will not only cover its own energy needs but also sell electricity to the European grid at relatively high prices. For Hungary, there is a significant economic benefit, while for Putin, the project provides a means of exerting control over Hungary, creating a dependency so significant that Budapest could be left unable to make policy decisions without taking Russia’s position into account.