Competition between Russia and China is driving tens of billions of dollars of investment into the hydro sector across the former Soviet republics. Peter O'Neill reviews the potential benefits and risks as the two giants compete to set up alliances for raw materials and the power to mine and process them
Kipling’s book ‘Kim’ should now be essential reading for any engineer looking at electro-political power in the East. A fanciful suggestion? Kim inspired a youthful Stella Rimington who was to become MI5 intelligence supremo. She says she was recruited in New Delhi. KGB Colonel H.A.R. Philby, born in India, was nicknamed after Kim. Kim’s mentor was horse trader Mahbub Ali and the latter’s ‘controller’ was imperial British officer Colonel Creighton. The francophone steel and aluminium world has also done battle over Indian and former Soviet assets with steel emperors such as Lakshmi Mittal.
There is a major cast of actors and as many hidden agenda in the latest great game, including ‘Western’ oil and gas majors, Russian and Central Asian petro resources and cash profits. There are environmental lobbyists contesting investment projects, from Sakhalin to the mountains of Georgia. The moneymen, bankers private and public, pore over the credit and eco ratings of the mining engineers and surveyors, the road construction companies, the transmission grid and pipeline firms. While football clubs change hands for the same cost as a small hydro station, CEOs are chilled at the imprisonment by the state of oligarchs, and the September assassination of the Russian Central Bank’s deputy chairman. The latter, Andrei Kozlov, had shut down dozens of Russian banks, some set up simply for money laundering. He was assassinated while leaving a football match between bank employees. The stage is set. Let us examine the stakes.
The great shift
This autumn saw the signing of a loan for HydroOGK, the autonomous hydro division of energy group Unified Energy Systems (UES), Russia’s biggest energy operator in water, thermal and nuclear. The twist, as the Russian business newspaper Kommersant [Trader] reported jubilantly, was that it was the biggest loan ever won by a private Russian company. And the loan was in roubles, to protect against foreign exchange risks said UES Chairman and former Deputy Prime Minister Anatoly Chubais, and certainly to boost the Kremlin’s desire to promote a respected, now convertible, rouble.
Led by the European Bank for Reconstruction and Development (EBRD), the nine-bank, syndicated, 6.3B rouble loan (US$240M) will allow HydroOGK to mastermind a rouble 10.9B (US$410M) rehabilitation of the 10,000MW Volga-Kama hydro power cascade in the Urals, for completion by 2020. Prequalification and tenders for works are due in 2007.
This is not a one-off, but part of a much bigger shift which has been gathering momentum as Russia, China and India have expanded their industries and needed more power. China has coal and not enough oil and gas. Oil and gas producers have made big cash returns from rocketing prices. But it has been the foreign markets which have been providing company profits. Russian citizens have faced serious social and infrastructure decline on the home front, from the notorious May 2005 power cut in Moscow to the near collapse of cities’ district central heating systems right across the region.
Hydro winning this big first loan is a clue to the importance of a key decision this summer by the board of governors of EBRD at its annual meeting (EBRD-AM) in London, England. That decision was linked directly to investment in socioeconomic development and infrastructure across more than a dozen countries where the Bank has operated since 1991 to help them ‘transit from socialism to capitalism’.
As a backdrop to this, EBRD President Lemierre invited Nobel Laureate for Economics Joseph E. Stiglitz to make the EBRD-AM keynote speech. His message shocked bankers and businessmen. He said most privatisations had been more or less inflicted on the people of the transition countries. They had done little good for the public who had to watch asset-stripping; quasi-legal or clearly criminal. Transition in the former USSR has ‘led to unprecedented increases in poverty and inequality’ he said. ‘Most countries are barely better off than they were 15 years ago; many are worse off.’ The fact is, he pointed out, China and Vietnam are far better models on how to bring in change which benefits the majority not simply the oligopolies.
It was in this climate that the board formally announced it was switching its lending focus from Central Europe and the Baltic to the southern Balkans, Central Asia, Russia and its eastern neighbours and the Caucasus. Countries such as Poland, Hungary and the Baltic States who joined the EU in May 2004 would all graduate from the purse strings of the EBRD, by 2010, Lemierre told IWP&DC.
This meant the EBRD would have around Euro 4B (US$5B) in EBRD loans each year for the next five years for all sectors in the newly-focused countries. For each 40 Euros the EBRD puts up it attracts another 60 Euros in matching state and/or private cash. That gives the new great game figure of at least Euro 64B (US$81B) and raises the question of: ‘Who will get what to do what’?
The winners will be those who can offer sustainable, ecologically-sound infrastructure with a social face. Countries with hydro and other energy resources are in a position now to offer their ‘natural riches’ in return for packages linked to infrastructure. The EBRD will back that. So, power companies must also think laterally – about new ports, airports, rail and pipeline networks, power stations and their transmission links, city district heating systems, gold mines and minerals, raw materials and transport for consumer goods’ transport by new roads, sea, rail and air.
China vs russia
The most interesting hydro prize may lie in Kyrgyzstan, in the heart of the region surrounded by China, India, Pakistan and Afghanistan and potential power evacuation routes out through Kazakhstan and Uzbekistan. The previous president, Askar Akayev, fled in March 2005 after demonstrations against the government and Kurmanbek Bakiyev was elected after the ‘Tulip Revolution’ for five years to head this tiny nation of five million.
Small powers often survive by playing their big suitors off against each other. At the EBRD-AM Kyrgyzstan’s special presentation on hydro included a detailed technical report (in Russian) by a senior executive from Russia’s HydroOGK. The Kyrgyzi also said ‘We have discussed our debts with Russia in the energy sector and we hope by autumn the government will have implemented measures to make our energy sector more attractive to investors and we are talking with companies about finance and concessions.’ A sweetener from Moscow is a deal to build a new tourist airport at the second highest navigable lake in the world, Lake Isykul.
The Kyrgyzis also said they were working closely with China to modernise the railway system (with an implicit quid pro quo for power). In 2004 Chinese Premier Wen Jiabao signed a deal in the capital Bishkek ending their border dispute and announcing collaboration on hydro, raw materials and telecoms. This summer, Kyrgyzstan’s Electric Stations Company and the National Electric Grid of Kyrgyzstan signed letters of intent on power production and transmission lines with the State Grid Corporation of China (SGCC). The Chinese said they want to build and refurb hydro plants in Kyrgyzstan.
In return for power, the Kyrgyzis want to capitalise on their central location and be a transit country and are budgeting for 1000km of new roads (including to China). They are also offering access to more gold mining deposits and other minerals. EBRD officials also said the Bank was ready to support any gas pipeline or energy projects.
President Bakiyev has also visited Turkey and suggested they cooperate on hydroelectric production. Belarus was reported in August as saying it was interested in building new hydro power stations in Kyrgyzstan. In September, Putin made another move when he told Bakiyev in Moscow there were no obstacles to joint projects. Bakiyev specifically mentioned Russian help with building the Kambar Ata 1 and Kambar Ata 2 hydro schemes.
The Kyrgyzi hydro offer is big. They said they are producing 14BkWh (8% of a potential 142BkWh of hydro). Hydro accounts for 90% of power generation. There may be enough hydro on offer for everyone to pile in with their money and that way the Kyrgyzi will not have to choose sides.
Funding russian hydro
There was much grumbling in the past by ministers and central bankers from the states which are now the focus of increased EBRD lending. They felt they were getting too little money from the Bank while Moscow was getting too much.
So why was petrocash rich Russia now going to get up to 40% of the new focus money? Lemierre’s response to IWP&DC was that it was the regional parts of the Russian Federation which needed the investment and new EBRD regional offices would be opened. What he was clearly implying was that Moscow would not be the only conduit to funding.
But how does that square with a literally power-hungry and centralising Kremlin rolling out again across the steppes and mountains? Western companies, used to offering credits to get their hands on power projects in developing regions, are now in direct competition for resources and power with Beijing and Moscow. The Central Asians are keeping their supply and evacuation route options open by doing deals with other countries from Japan to Turkey. But they and Moscow speak a common language still – Russian. Bureaucrats and technocrats in control today often studied together at the most prestigious Soviet institutions in Moscow – this writer also studied at one of them, and has seen the reach of the resulting networks.
Gazprom in the late 1990s clawed back a fair length of the Soviet continental pipeline gas networks. It did this by secretly buying local shares as former satellites, such as Poland, privatised transmission pipelines across their territory. It would now seem to be trying to do the same on hydro and other power. It has, for example, bought up a number of power assets in Armenia (and caused some disputes).
It also had its eye on Georgia, Armenia’s neighbour. IWP&DC questioned Zurab Noghaideli, Georgia’s prime minister, about the Georgian power situation. Noghaideli told IWP&DC there were now regular power supplies, thanks to a grant of Euro 9.4M (US$12M) from Brussels and US$38.75M from the EBRD for part refurbishment of the key Enguri hydro plant. Water had also reduced Georgian tension with Abkhazia as the plant is inside their border and a deal was struck for access by Georgian engineers to Enguri with the barter of free electricity.
Recently, the word was that the EBRD is ready to lend more cash to restore the whole of Enguri, which is the number one power source for Georgians.
But all is not well. The Georgians have been funded by the World Bank to study the potential 700MW Khudoni hydro project whose costs have been put at between US$500M to US$780M. Both the World Bank and Georgia are now under attack by powerful financial NGOs, particularly the Bankwatch Network. It says ‘new Georgian dam plan poised to hit the environment and people’s pockets’ because of alleged excessive unit cost price proposals, plus eco complaints about its location in remote, mountainous upper Svaneti. The NGO has also criticised plans for big dams at Tobari and Nenskra upstream on the Enguri river (600MW Tobari; five small and medium on the river Nenskra).
The bypass route
Georgia’s rolling privatisation of everything from ports to power has also produced a way to bypass the Russians to reach Turkey and beyond with power. The go-between in this instance is the Czech Republic. The Czech Energo-Pro in June beat Russian UES/HydroOGK (and others) to pay US$312.35M for two Georgian distribution networks and six hydro power plants (1.58BkWh capacity). The company has estimated the refurb costs at US$40-50M.
All tenders in the new EBRD eastern portfolio are open and global. Tiny Energo-Pro or a China power giant could bid, for example, for part of the Volga-Kama work. Further, they might be able to mobilise money from the European Investment Bank. For the Czechs, their funding support for Georgia came from the home-grown state-run Czech Export Bank and the Export Guarantee and Insurance Corporation.
These Georgian-Czech moves may be mirrored elsewhere. The EBRD is already putting extra money into Romania and Bulgaria. While Energo-Pro operates a dozen hydro plants at home it has acquired eight in Bulgaria (total 100MW) since 2000 and this April won the contract (US$26M) to build two hydro plants in southeast Turkey. The key is that Turkey borders Georgia, so power can be evacuated to Turkey and beyond.
Complaints and risks
So how safe are the Russians? Their gas manoeuvres are still reverberating. During the EBRD-AM, they told investment sessions how financially respectable they now were, with US$15B of foreign debt paid back, US$22B ready to hand over and promises to settle old Soviet sovereign commercial debts by the year’s end. They said Russia’s US$70B Stabilisation Fund was ring-fenced to prevent day-to-day use by government, and Deputy Finance Minister Sergey Storchak added, revealingly, that this buffer meant they could plan changes ‘to make our economy less dependent on other foreign markets’.
The EBRD-AM is open to businessmen and there were lots of verbal punches thrown at country panels of ministers, heads of investment agencies and spokesmen of ‘friendly’ companies who have ‘done well’. Sebastian Vladescu, Minister of Public Finance, said Romania was unhappy about Public Private Partnerships (PPP – which Lemierre said the EBRD wants to promote). Vladescu said governments were forced to pay out high costs for these while the investors made high profits.
Foreign investors and big, foreign, operational companies also complained about operations in different countries involving long legal delays over disputed tenders, disinterested and blocking bureaucrats, delays in clearances and corruption pressures. There were also accusations from the floor about state agencies backtracking on agreed rates of return. Operators and investors were first hooked then the rates were upped and terms changed.
Smell of gas
While plenty of NGOs will remain critical of new, big dam projects, they are arguably going to support refurbishment across the board, because the EBRD and other multilateral agencies insist on 21st century impact assessments and value-added provision for local populations. Hydro will also gain where oil and gas in certain places fall foul of eco-pressures and political correctness. NGOs, highly critical and effective over the Sakhalin Island oil and gas energy development project, have wanted the EBRD not to finance Sakhalin. One NGO, Global Witness also launched a 64-page, detailed attack on a lack of financial transparency entitled ‘It’s A Gas – Funny Business in the Turkmen-Ukraine Gas Trade’.
The Turkmen politico-gas scenario is important because it may be a factor in persuading potential investors in the region to go for hydro in areas such as Kyrgyzstan and avoid gas and oil-based energy tieups with states which are under close scrutiny and unstable. Total control, by President Nyazov and his family, of Turkmenistan, has led the EBRD (backed by other multilateral institutions) to say in September the state would get no loans until there was a major improvement in political, legal, social and transparency areas. Only private investment will be supported. Such concerns have not stopped the Chinese doing a deal to cooperate on one of Turkmenistan’s biggest projects – a pipeline to connect the two states and service countries along the Silk Route.
Next door, Uzbekistan’s President Karimov has also consistently been criticised for the country’s poor human rights record and muzzling of the media and the opposition.
Foreign companies also need to keep their reputation clean, and of course it takes two to tango. The UN Development Programme recently estimated that ‘The average bribe tax in the region has been estimated to be around 5%; in Kazakhstan, Kyrgyzstan and Tajikistan more than one-half of the firms reported paying at least some bribes (in Uzbekistan this number is just below 50%)’.
Water vs o&g for metals
The other, and probably most important, boost for hydro comes from demand in the metals sector and involves the Russians again who are competing with China and Europe for raw materials and power. India has massive ore reserves but needs more power.
Oleg I. Mukhamedshin, Deputy Chief Financial Officer of aluminium giant RUSAL, told the EBRD-AM the Russian metallurgical sector ‘could become a real competitor to the oil and gas sector’. RUSAL is tackling higher fuel prices by mining more Russian bauxite and developing cheaper hydro and nuclear electricity. It is also moving into gas, oil and gold extraction and exploiting massive timber resources in Siberian Krasnoyarsk, a region which tops the league for many Russian energy and metal reserves.
RUSAL has gone global, buying mining assets in Africa and Latin America, Australia, Ukraine and Armenia. The metals industry, Mukhamedshin said, was in second place for Russian taxes paid, was the largest source of Russia’s foreign currency and accounts for 20% of all Russian industrial manufacturing. RUSAL’s August move on Russian rival Sual and Swiss Glencore’s alumina assets, with a potential price of Euro 23B, would make RUSAL world number one in aluminium.
To power a multi-million tonne production expansion, RUSAL has struck supply deals and agreed joint projects with Russia’s state nuclear energy body and the UES-HydroOGK. HydroOGK, with a target of 23.3GW, claims it will be running second to Hydro-Quebec. RUSAL says it has new technology using less energy for smelting. It will build its own transport infrastructure to handle the extra tonnage. It has EBRD and International Finance Corporation support for that.
As the EBRD exits centre stage left towards the East, perhaps the Euro 64B (US$80.2B) question was implicitly raised by Nobel Laureate Stiglitz: Do we follow the heirs of Thatcher or those of Mao in order to turn a fair social and economic profit? The answer? Good old-fashioned, naturally sustainable hydro may show the road to renewal.
Peter O’Neill, Editor of TW : EEC press agency, has reported on Asia and the former USSR since 1970.