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 Budapest plans to draw on the first tranche of the loan this year,
a Hungarian government commissioner told Reuters.
Officially the loan is to finance the expansion of the Paks nuclear
power plant, Hungary's only atomic power station, which supplies
about 40 percent of the country's electricity. But critics say there
is another motive as well: Russia buying favor with a European Union
(EU) government.
"This Paks deal is camouflage," said Zoltan Illes, a former lawmaker
in the ruling Fidesz party who was a state secretary for the
environment until 2014. "This is a financial transaction, and for
the Russians this is buying influence."
Illes, who opposes the use of nuclear energy, believes the deal is
more about pumping money into the economy of Hungary, where Prime
Minister Viktor Orban faces re-election in 2018, than providing
electricity.
For years, Moscow has used commercial relationships – in particular
gas sales - to exert influence across Europe. Now those methods are
coming under closer scrutiny after the United States and EU imposed
tough economic sanctions on Russia for annexing Crimea and
supporting separatist fighters in the east of Ukraine.
In return, Russia is striving to retain ties, commercially and
diplomatically, from the Baltic states to Europe's southern rim. The
loan to Hungary, agreed last year, is seen by some as part of that
undeclared struggle for influence.
 Government spokesman Zoltan Kovacs rejected such claims. "The
rationale of the Paks investment is not about election campaigns and
chances. It serves the country's long-term energy security," he
said. He added that Russia was helping to build reactors in other
countries and that Russia had less economic influence in Hungary
than in other Western European states.
Officials in Moscow and Budapest say the nuclear deal was concluded
purely on commercial and energy grounds and was good for both
countries.
Hungarian Foreign Minister Peter Szijjarto told Reuters the deal was
"the business (transaction) of the century." Rosatom, the Russian
state nuclear firm, and the Russian finance ministry responsible for
the loan to Hungary did not respond to requests for comment.
Hungary had initially planned to put the contract to expand Paks out
to tender, and some Western firms showed interest, along with
Rosatom. But Reuters found that Hungary abruptly dropped the idea of
a tender. Specialists in the Development Ministry who had worked on
plans to expand the Paks plant were sidelined, said two people
familiar with Hungary's energy sector. Instead, a small group close
to Prime Minister Orban chose to award the contract to Rosatom.
Russia offered a loan as part of the deal.
Kovacs, the government spokesman, said: "The whole project is being
carried out with very serious professional preparations. Decisions
of a political nature are naturally made by politicians."
Since the agreement was struck, Orban has appeared much more
friendly towards the Kremlin than his EU peers have done. He has
said Europe was shooting itself in the foot by imposing sanctions on
Russia, though he did not go so far as blocking sanctions. Orban is
also leading a push for a new pipeline to take Russian gas to
southeast Europe, bypassing Ukraine.
Last month, Orban hosted Putin in Budapest. He is the only EU leader
to invite the Russian president on an official bilateral visit since
Malaysian airliner MH17 was shot down over Ukraine in July 2014.
Western officials say the plane was most likely brought down by a
Russian missile; Russia denies any responsibility.
 Standing alongside Putin in the Hungarian parliament, Orban adopted
a conciliatory approach to Moscow. He said EU governments were
"chasing ghosts" if they believed they could get by without
cooperating with Russia.
Asked whether Hungary was being more friendly towards Russia because
of the Paks loan, Kovacs said: "Russia is important from an energy
aspect, what's more, it is a strategic partner ... But this is not a
question of 'friendship.'"
PRAGMATIC PARTNER
Orban regularly flouts EU rules with policies that critics label
populist. Since he was elected with a two-thirds parliamentary
majority in 2010, Orban has imposed windfall taxes on banks,
telecoms companies and retail firms to keep the budget deficit in
check. He's clashed with Brussels over curbs on the media. And he
has consolidated his power with measures that critics say weakened
democratic checks and balances - an allegation the government
denies.
At the same time, he is not a natural Kremlin ally. As a young
student in 1989, he burst onto the political scene with an
impassioned speech demanding the withdrawal of Soviet forces from
Hungary. He and Putin appear to have little personal affinity; at
their Feb. 17 meeting in Budapest, their body language was stiff.
However, people who know Orban say he is a pragmatist. "I think
power is incredibly important to him per se," said John Alderdice,
who was a leading member along with Orban of an organization called
Liberal International, a global network promoting liberalism. "The
issue (for him) is: ‘How can I get into power, and hold onto
power.'"
In November 2010, soon after he was elected, Orban met Putin in
Moscow for talks on economic issues, including further cooperation
at the Paks plant. The plant is a huge concrete structure built in
the 1970s by Soviet technicians on a floodplain next to the Danube
River. Orban was looking to spur growth in Hungary's economy, and
Russia could help him achieve that.
 The two men talked for hours, including over lunch, said a source
familiar with the discussions. But no decision was taken on the Paks
project.
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Instead, a team of energy specialists at the Development Ministry in
Budapest prepared for an open tender for a contract to expand the
plant, according to a former energy official. In addition to
Rosatom, French company Areva expressed interest in bidding, as did
U.S. firm Westinghouse, according to three people with knowledge of
the preparations.
In early 2013, the plans for a tender were still on track, according
to comments by the chief executive of MVM, a Hungarian state-owned
energy group, published in the journal of the Paks power station.
Bidders were told then that a tender would go ahead, according to a
diplomatic source in Hungary.
SUDDEN CHANGE
Late that year the international context changed. In November 2013,
then Ukrainian President Viktor Yanukovich rejected an association
agreement with the EU and instead signed an aid deal with Moscow.
Thousands of pro-Western protesters camped out in Kiev's central
square, determined to make Yanukovich stick with the EU agreement or
give up power. The stage was set for the biggest standoff between
Russia and the West since the Cold War.
In Budapest, too, there was a change of tack. On Dec. 17, the
parliament's economy committee was convened at one day's notice.
Antal Rogan, a lawmaker with the ruling Fidesz party and head of the
committee, called the meeting.
Orban's chief of staff, Janos Lazar, told the committee that the
government was in advanced talks with Russia on extending the life
of the Paks plant. "It was sudden," said Bernadett Szel, an
opposition lawmaker.
Pal Kovacs, who at the time was state secretary for energy and had a
leading role in preparations for the Paks tender, had not been told
the tender was being scrapped, according to a person with links to
Hungary's state energy sector. The source said the deal with Russia
was concluded by members of the prime minister's inner circle.
Government spokesman Zoltan Kovacs said parliament's approval of the
deal showed it had broad political support.
Asked about the decision to scrap the tender and award the contract
to Rosatom, Westinghouse said the decision was "abrupt." Areva
declined to comment. Government spokesman Kovacs said: "Of course,
the agreement on concrete conditions was made at a given point of
time, but it would be a mistake to say it was 'abrupt.'"
Attila Aszodi, the state commissioner in charge of the Paks
expansion, said the Rosatom deal stood out because the Russians had
offered long-term financing for the entire construction project,
something he said the other prospective bidders would not provide.
He told Reuters in a December interview that a tender is "a good
tool; however, it is not the silver bullet."
The Hungarian government has also pointed out that the existing
reactors at Paks were built with Soviet nuclear expertise.
Critics say the deal's terms are generous. Hungary will begin
repayments on the loan only once the new reactors are up and running
in 2026 and will repay the loan over 21 years. Until 2026 the
interest rate will be just under 4 percent, rising to 4.5 percent
afterwards and 4.8 to 4.95 percent in the final 14 years.
The terms compare well to market rates for financing, although
conditions in every debt deal are different. The Russian loan
finally agreed will cover 80 percent of the construction costs, and
Hungary will put up the rest. Hungary plans to start drawing on the
loan this year to finance planning work for the new reactors, Aszodi
told Reuters.
HUNGARIAN RHAPSODY
Moscow has voiced its happiness with Hungary's recent support for
Russia. In November last year, Russian Foreign Minister Sergei
Lavrov said that Hungary - unlike other ex-Communist states in the
EU - conducts itself "responsibly" and does not succumb to
"Russophobic approaches." At a Kremlin ceremony, Putin called
Hungary one of Russia's most important partners.
Orban's invitation last month added to the mutual appreciation.
During the visit, Putin and Orban agreed that Russia would give
Hungary several years' grace to pay for gas that Budapest had
committed to buy but never used.
For Orban, though, the cost of staying close to Russia has gone up
as the Ukraine crisis has deepened. Some EU governments are
uncomfortable with what they see as a drift by Hungary into the
Kremlin's orbit. The United States has also criticized some of
Orban's policies towards Russia, and one U.S. diplomat said there
had been a lack of transparency in granting the Paks contract.
Illes, the former environment secretary, said the Paks deal was
typical of Orban's pragmatic style of governing. In the short term
he reaped domestic political benefits against opponents, and in the
medium term the project will generate jobs.
But for Orban, he said, "long-term considerations, they don't
exist."
(Additional reporting by Christian Lowe in Warsaw, Karolin Schaps
and Nina Chestney in London, Barbara Lewis in Brussels, Geert de
Clercq in Paris, and Vladimir Soldatkin and Maria Tsvetkova in
Moscow. Editing by Richard Woods and Philippa Fletcher)
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