This article continues the analysis of changes taking place in the Russian nuclear complex that was begun in the February 2006 issue of WMD Insights with the article Appointment of New Head of Rosatom Marks Changes in Russia Nuclear Complex.

On March 14, 2006, several months after the appointment of Sergey Kiriyenko as head of the Russian Atomic Energy Agency (Rosatom), President Vladimir Putin announced Russia’s plan for the reform of the non-military activities of the agency at a special meeting held in the Kremlin. In a short opening statement, Putin characterized nuclear industry as a “priority sector” of the Russian economy. Russia, he stated, has a technological advantage in that area, which should increase the country’s competitiveness, but investment in new technologies is needed to maintain that lead. Putin also set a task of increasing the share of nuclear power in the country’s energy balance from 16 percent to 25 percent by 2030. He also cautioned that, without major investment in the development of the industry, that share could instead dwindle to 13 percent. [1] In addition to increasing the role of nuclear power domestically, however, the expansion of Russia’s nuclear sector will create an impetus for Russia to increase its export of advanced nuclear technology, with possible consequences for both nonproliferation efforts as well as the global nuclear technology market.

In his remarks, Kiriyenko declared that Russia will need to add new nuclear generation capacity capable of producing 50 gigawatts of energy, which translates into building on average two new nuclear power reactors each year. In total, the program is to build 40 new reactors by 2030. According to Kiriyenko, VVER-1000 reactors based on current models will be constructed initially and until the larger VVER-1000+ reactor (i.e., those capable of producing more than 1,000 megawatts of electricity) becomes available. Development of the VVER-1000+ reactor is to begin in 2006. This will be followed by the development of a fourth generation of nuclear reactors, namely fast breeder reactors, which would be more ecologically friendly and would not be usable for military purposes. [2] Such a development would accomplish the transition to fast breeder reactors which Rosatom has been promoting as the future path of nuclear energy in Russia.

New Corporate Structure
On the surface, the program presented at the Kremlin meeting is a more ambitious version of the 2003 “Strategy of Development of Nuclear Energy in Russia.” That plan provided for the construction of 30 new reactors by 2020, and, like the new plan, anticipated the construction of two new reactors each year between 2010 and 2020. The true innovation of the new program is the reorganization of Russia’s nuclear industry along the lines of a large state-controlled corporation, whereas previously Rosatom (like its predecessor, the Ministry of Atomic Energy) was run essentially as a governmental agency. Under the previous model, the agency relied almost exclusively on appropriations of public funds, while profit-generating activities (such as the production of nuclear fuel or construction of nuclear reactors, both in Russia and abroad) were split off into separate entities. Some key elements of the industry, such as the production of turbines, were privatized.

The new plan envisages the reconsolidation of the nuclear industry into a vertically integrated structure similar to Gazprom, the Russian supplier of natural gas. Although Rosatom will remain a governmental entity, it will be run as a private corporation capable of attracting investment from both domestic and international sources. A new unit, RosatomProm will sit at the top of the new corporate-style organization and will oversee several large holding companies, each in charge of a particular area. These holding companies will consist of smaller stock companies, which will replace existing federal unitary enterprises. Some of these enterprises may be sold to private owners, though in most cases the stock will be owned by the Russian government.

The draft law on the reorganization of the nuclear industry has been submitted by Rosatom to the Presidential Administration, and it may be introduced in the Duma (the lower house of the Russian parliament) as early as the summer of 2006. According to initial reports, the law will prohibit the leasing or sale of nuclear reactors and spent fuel storage areas to private owners.  It will also stipulate that, during emergencies, the government will be able to take full control of all nuclear industry enterprises. [3] The chairman of the Energy, Transport, and Communications Committee of the Duma, Valeriy Yazev, has already promised to put the package of bills on nuclear industry on a fast track. [4]

Changes Already Begun
The first steps in shaping the new government-owned corporation have already been undertaken. For example, Rosatom has regained control over AtomStroyExport, the company that constructs Russian nuclear reactors abroad, by buying an additional 14 percent of the shares of that company from GazPromBank. The reversal of the trend toward divestiture highlights the importance that the Russian government attaches to its new organizational vision for the nuclear industry.

The next step on Rosatom’s agenda is the acquisition of United Machine Building Plants (Ob’edinennye Mashinostroitelnye Zavody), also from GazPromBank. United Machine Building Plants, which produced, among other equipment, turbines for the Bushehr nuclear power station in Iran, previously belonged to Kakha Bendukidze. A well-known entrepreneur, Bendukidze sold the firm in 2005 as he was leaving Russia to become a minister in the government of Georgia under its new president, Mikhail Saakashvili. (According to rumors that circulated at that time, the sale was not entirely voluntary.) [5]

Kiriyenko has also been replacing key managers within the nuclear industry. The previous management team was selected according to Soviet tradition: all top managers began as engineers and gradually rose to managerial positions; their strengths lay in their detailed knowledge of technology and production processes. New appointees are, in contrast, professional managers. Among the most visible recent personnel changes is the appointment of Sergey Obozov as Director General of RosEnergoAtom, the enterprise responsible for operating nuclear power stations within Russia. Obozov was formerly Kiriyenko’s deputy when the latter served as governor of the Volga Federal District. In February, Kiriyenko appointed Anna Belova, former vice-president for corporate management and reform for Russian Railroads, as his deputy. Belova was known as the main author of the plan to reorganize Russian Railroads along the lines of a modern corporate structure. In addition, Kiriyenko has appointed Artem Butov as the head of RosAtomStroi. [6] These appointments demonstrate Kiriyenko’s desire to change the corporate profile and culture of Rosatom.

At the same time, Kiriyenko has intensified efforts to restore guaranteed supplies of uranium for Russia’s nuclear industry. At the March 14 meeting in the Kremlin, he noted that Rosatom had recently completed negotiations with Kazakhstan on increasing the volume of uranium ore extracted from the Zarechnoe deposits there, which contain reserves of 40,000 tons of uranium ore; the plan for 2007 is to extract 1,000 tons. Rosatom has also signed a protocol with Uzbekistan on conducting geological surveys to find new uranium deposits.

Domestic, International Sources of Funding
The key to implementing the ambitious reform of Russia’s nuclear industry is funding. The plan is quite costly: construction of one reactor costs about $1.5 billion, which means that the plan to add new power stations alone will require at least $3 billion each year. At the March 14 Kremlin meeting, Putin rejected continued reliance on the state budget for such funds, and stressed that additional sources of investment are of utmost importance. According to expert estimates, construction of two reactors each year is feasible because the Soviet nuclear industry, whose core has been preserved, has the capacity to construct up to ten reactors each year. Thus, investment is needed only to “revive” the Soviet-era enterprises, rather than create them from the ground up. [7]

Some internal sources of investment have already been identified. For example, Gazprom has reportedly expressed interest in providing financing to Rosatom, with the expectation that investing in the production of nuclear energy may yield a greater return than selling gas to domestic customers at artificially low prices. According to Gazprom’s calculations, investments in Rosatom’s nuclear energy enterprises could pay off in as little as four years. Severstal and other steel producers are also discussing possible participation in Rosatom projects. In addition, Rosatom is considering inviting investment from foreign countries, including Sweden, which might participate in order to ensure stable energy supplies in the future. [8]

Selling reactors in the international market is another potential source of significant funding. Speaking at the March 14 meeting, Kiriyenko said that Rosatom planned to expand construction of nuclear power stations abroad beyond the five reactors now under construction (two in India, two in China, and one in Iran). He identified Southeast Asia as a potential high-priority market. Rosatom is also bidding on a tender for the construction of a nuclear power station in Bulgaria, and has plans for new contracts in Hungary, India, and Vietnam.

In addition, sales of enriched uranium nuclear power reactor fuel are expected to generate considerable revenue. In January 2006, for example, Rosatom recalculated the price of nuclear fuel sold to Ukraine, based on world uranium prices.  This could increase revenue from such sales threefold. The plan to create international uranium enrichment centers to produce fuel for countries that do not have domestic enrichment capabilities is also part of the vision for the restructured Russian nuclear industry; the first prototype center of this kind, intended to produce fuel for Iran, has already been created. [9] This facility, however, has not begun operation due to Iran’s refusal to accept the Russian proposal for Iran to conduct its uranium enrichment activities on Russian soil.

Rosatom has been actively pursuing its export agenda with a number of other countries. Recently, Kiriyenko visited China to discuss possible new contracts for the construction of new reactors and other “technological cooperation.” The results of his trip have not been disclosed. [10] Rosatom also has strong hopes for increasing nuclear reactor sales to India, if pursuant to a current U.S. plan, the 45-member Nuclear Suppliers Group ends its embargo on civilian nuclear trade with New Delhi. (see Special Report: International Reaction to U.S.-India Nuclear Deal - Some Strong Support, Much Caution, A Few Surprises
in this issue of WMD Insights.) In addition, Rosatom has plans for joint research and development projects with France, focused on creating new fast breeder reactors (which produce more nuclear fuel than they consume) and on the introduction of fuels based on plutonium extracted from spent uranium fuel. [11]

Implications of Change
The large-scale reorganization plan for the nuclear industry suggests that Russia’s leaders have decided to shift the nation’s economic strategy away from the more traditional, though still lucrative, trade in oil and gas, to focus on exports of more technologically advanced products in the nuclear sector, which may prove more stable revenue-generators in the long term. This shift, which may see Russia promote nuclear energy to additional states in the Middle East or into additional regions, such as Southeast Asia, deserves close monitoring.  Depending on the states that Russia targets for sales, its drive for nuclear exports could put added pressure on global efforts to curb the proliferation of nuclear arms.  Another important consequence of the Rosatom reorganization is the high likelihood of increased competition between Russia and the United States in international nuclear markets, particularly in India and China. Indeed, Russia’s efforts to build closer nuclear sector ties to France, with the possibility of developing joint projects, may be an effort to strengthen Russia’s competitive position vis-à-vis the United States.

Nikolai Sokov – Monterey Institute of International Studies