Foreign Minister Péter Szijjártó does not usually skimp on optimistic statements when it comes to projects that are important to the government but in recent months even he admitted that there were problems with the construction of the new nuclear power plant called Paks II.

At a press conference in February, for example, the minister said that some of the sanctions imposed on Russia by the previous US administration “make it more difficult for the Paks project to progress.”

In reality, however, he could have used much stronger words.

According to a Direkt36 investigation, the sanctions have had more serious consequences on the investment than previously reported. Although the expansion has not been completely stopped, several important works have been delayed, and according to one source with close knowledge of the situation, it is currently a stalled project.

The biggest obstacle is caused by the fact that the US placed Russia’s Gazprombank on a sanctions list last November. This bank performs key financial tasks around the project to be implemented with a Russian investment.

As a result, the Hungarian side has not approved any payments related to the project since the end of last year. Therefore, several subcontractors of the Russian investor Rosatom, including Hungarian companies, have not received their money after they finished their work.

The sanctions also had an impact on the transparency of the investment. Recently, we have found several public procurements related to the Paks expansion, where Rosatom has not published neither the names of participating nor winning companies in the tenders.

By anonymizing the tender documentation, the Russians are trying to protect their own suppliers. In the current sanction environment, Rosatom wants to avoid its partners being disadvantaged by doing business with them.

We sent several questions to the Hungarian state-owned company implementing the Paks project, the Ministry of Foreign Affairs and Trade supervising the project, and Rosatom. Only Rosatom responded, by giving a general statement saying that it was committed to the construction of Paks II and that the “production of the main units” for the two new blocks was “in full swing in Russia.”

Orbán immediately called Putin

Democrat Joe Biden’s administration announced at the end of last November that it would put several Russian financial institutions, including Gazprombank, on a sanctions list. For Hungary, which continues to receive a significant part of its energy sources from Russia, this decision posed multiple problems. The Hungarian state pays the Russians for the natural gas it buys through Gazprombank, and the bank also plays an important role in the financing of the Paks expansion.

The problem was so serious that prime minister Viktor Orbán had a phone call about it with Russian president Vladimir Putin on December 11 last year. In a statement issued after the meeting, the Kremlin also revealed that the phone call was made at the initiative of the Hungarian government. Foreign Minister Szijjártó said that Orbán and Putin negotiated for more than an hour, and the meeting focused on “the security of Hungary’s energy supply.”

A few days later, the situation was somewhat settled. In mid-December last year, the US allowed several countries, including Hungary and Turkey, to continue paying for Russian natural gas through Gazprombank.

However, Paks II was not exempted from the sanctions. Although the US has also made exceptions in relation to nuclear energy, the US Treasury Department’s announcement on December 18, which specifically mentioed the Paks project, made it clear that the sanctions on Gazprombank concerning Paks II would remain in force.

Payments stopped

All this was a serious blow to the Paks project. According to sources familiar with the expansion process, Gazprombank has a key role in financing the investment: this financial institution provides the so-called performance guarantee.

In practice, this means that if the Russian main contractor Rosatom fails to comply with the terms of the contract (for instance, it does not perform a specific work process or does not perform it as agreed) the Hungarian party will receive financial compensation. The performance guarantee is one of the most important safeguards during the project. On the one hand, it imposes responsibility on Rosatom, encourages it to comply with the contract. On the other hand, it reduces the financial risk for the Hungarian party.

Groundworks are already underway in Paks. Source: Paks II Ltd.

Until now, it was not known that Gazprombank would provide this guarantee during the investment. This information is presumably contained in the non-public parts of the contract about the expansion project. And after the sanctions against Gazprombank, government statements were vague about the exact role of the Russian bank in the expansion.

Although government representatives did not go into details in public, the consequences of the sanction soon became clear in the background. Further cooperation with Gazprombank would have entailed a risk of sanctions. However, on the other hand, if the works continued without the bank, it would have made the Hungarian party financially vulnerable by losing the performance guarantee, should Rosatom not fulfil the terms of the contract.

According to sources closely familiar with the project, the managers of the Hungarian state-owned company responsible for the project, Paks II Ltd., wanted to avoid these scenarios. Therefore, since the announcement of the sanction, no payments related to the project have been approved. As a result, the Russian general contractor has lost access to these money sources, which makes it difficult to pay its subcontractors and suppliers.

Even in this situation, the government wanted the work to continue in the usual way. According to one of the sources familiar with what happened, the government tried to persuade the Paks II. Ltd. to approve the payments despite the sanction imposed on the bank providing the guarantee.

According to the source, Paks II Ltd. withstood the pressure and convinced government actors that it was impossible to continue the work due to the sanction. The company argued that they would be able to authorize payments if the Russians appointed another financial institution not on the sanctions list as a guarantor bank instead of Gazprombank. The Russians, however, have not replaced the bank yet.

Unpaid subcontractors

All this had a practical impact relatively quickly. According to a source with close knowledge of the project, several of Rosatom’s subcontractors, including the companies performing field works at the Paks site, submitted their invoices for the work performed, but they did not receive their payment. And the operator of a workers’ hostel complained to an expert working in the nuclear field that the Russians owed him around 100,000 euros.

Opposition MP Ákos Hadházy also referred to similar problems when he wrote in one of his Facebook posts at the beginning of January that hundreds of workers had been laid off from the Paks construction site. Hadházy also mentioned that he was informed by the workers that one of the companies carrying out the field works left the construction site because the Russians did not pay him. However, the MP had no information on whether this was due to sanctions or quality problems.

In response to Hadházy’s claims, Paks II Ltd. told the business news site Portfolio that the state-owned company responsible for the project said that workers were laid off because some of the field works were completed in the meantime. The question of whether the sanctions cause payment difficulties was answered in general terms but without specifics.

The problems were further compounded by the fact that the Biden administration imposed new sanctions targeting the Russian energy sector in its last days in office. As part of the package announced on January 10 of this year, several Rosatom executives, including CEO Alexey Likhachev, were placed on a sanctions list.

Likhachev has visited Hungary several times in recent years due to the Paks expansion, for example in June 2023 when Orbán received him in his office. According to a source with insight into the matter, these sanctions made it difficult to maintain contact between the Hungarian and Russian parties, as official or business cooperation with the persons concerned is prohibited under US sanctions regulations.

This did not mean that the expansion process had come to a complete halt. Foreign Minister Szijjártó announced at the beginning of April this year that Rosatom had started manufacturing one of the most important parts of Paks II, the reactor vessel of one of the units under construction, at its plant in Russia. A government source with insight into the project explained all this by saying that Rosatom is a financially strong company and can perform certain services in advance. “Work is still underway, but the sanction makes the construction more difficult,” the source said.

Anonymized tenders

The effects of the Russian-Ukrainian war had already left their mark on the Paks project before the leaders of Gazprombank and Rosatom were placed on the sanctions list. This was evident, among other things, from the public procurements of the investment carried out by the Russians.

In the period before the outbreak of the war, Rosatom published tenders for nuclear power plant projects, including Paks II, on a separate website, in a format that is difficult to search but is relatively transparent. Documents were uploaded for each step of the public procurement, based on which it was possible to track how many companies applied for a given tender, which of them did not meet the prescribed conditions, and which bidder finally won.

This practice has changed since the spring of 2023. Direkt36 noticed that from then on certain tenders of the Paks investment were anonymized. For example, one tender worth EUR 12.9 million was for the purchase of trestle cranes for the operation of the nuclear power plant. In this case, the Russians only announced that five companies applied for the tender, but these companies were only listed as “bidders” in the documentation, without concrete names. In the end, the winner of the competition was announced as “Bidder 4,” without publishing the name of the company nor the country in which this company operates.

One of the sources with insight into the project explained all this with the sanction environment. The sanctions do not prohibit various companies from applying for Rosatom’s tenders but due to Russian connections these companies can easily lose their Western partners or be excluded from international cooperation. According to the source, Rosatom is protecting its partners and suppliers with secrecy so that they do not end up in a disadvantageous position in the future.

Trusting in Trump

The Orbán government is confident that the Paks construction can be accelerated with the help of the Trump administration which took office on January 20 and takes a much friendlier approach to them. Members of the government have repeatedly asked for exclusions from sanctions that have adversely affected them in their talks with their US counterparts in recent months.

Speaking to Hungarian state media ahead of his meeting with the new US Treasury Secretary Scott Bessen in February, Foreign Minister Szijjártó elaborated on the topics he wanted to address at the meeting. This was one of the few speeches in which he described the sanctions against Gazprombank concerning Paks II as extremely serious. He said that “the placing of the Paks nuclear project on the sanctions list” would be on the agenda.

In addition, Szijjártó also mentioned sanctions against PM Orbán’s Cabinet Minister Antal Rogán among the topics to be discussed. Rogán was added to the US Treasury Department’s sanctions list during the final days of the Biden administration early January this year, citing corruption issues.

Two months after Szijjártó’s meeting, Rogán was removed from the sanctions list. However, sanctions against the Gazprombank regarding the Paks project are still in force.