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10 November 2016

What are the Kremlin's next moves with Kiriyenko on board?

Why does the Kremlin need Kiriyenko now? and What are the consequences of his appointment? 

The recent appointment of Sergey Kiriyenko as the Kremlin’s First Deputy Chief of  Staff prompted a tide of contradictory opinions. Some observers believe he is capable of offering a more meaningful and rational agenda to the Kremlin in terms of domestic policy. Others feel that the country is about to enter an insane era of “methodologists”. As most people are well aware, pseudo-scientific divination remains a favorite pastime of Russia’s spin doctors, but I would like to look at this issue through the eyes of an economist.

Kiriyenko was plucked from the deep periphery of Russian politics by the late Boris Nemtsov. Kiriyenko has worked opposite Nemtsov’s home for the last eleven years and will now have to pass the scene of his assassination regularly en route to the Kremlin. Kiriyenko is remembered first and foremost for the 1998 default which marred his reign as Prime Minister. As he was rightly accused of at the time, Kiriyenko “framed-up the president” who had announced just three days prior to the default and devaluation that nothing of the kind was on the horizon. Kiriyenko returned to “big business” in 2005 having served as the presidential plenipotentiary envoy to the Volga federal district for several years; he became the head of the Rosatom State Atomic Energy Corporation – perhaps the most inefficient state-owned company in the country. As the CEO of Rosatom, at the ceremonial switching-on of a Rostov nuclear power plant (NPP) reactor in 2010, Kiriyenko managed to make President Vladimir Putin promise that from 2012, Russia would be in a position to produce an additional 2 GW of nuclear power annually and would launch 26 power-generating units “in the coming years”. Given that Rosatom only managed to put into operation 3 units over the next six years (the 4th at Kalinin NPP, the 3rd – at Rostov NPP and the 4th at Beloyarsk NPP) with a cumulative capacity of 2.9 GW, Putin’s promise of 26 units ranks alongside Yeltsin’s assurance of financial stability in terms of credibility.

 Eleven years, or one third of the adult life of the former prime minister, was sufficient time for him to gain a reputation for his work at Rosatom as “a successful manager”. And so, what speaks in favor of Mr Kiriyenko’s effectiveness?

Three nuclear power-generating units with a total capacity of 3.4 GW were put into operation in Russia during the 11 years preceding his appointment. During the 11 years “under Kiriyenko“ a further 3 units were launched in Russia and 5 units were put into operation abroad (2 at Tianwan NPP in China, 2 at Kudankulam NPP in India and 1 at Bushehr NPP in Iran). The prime cost of the projects was mind-boggling. For example, the estimated cost of the uncompleted Kaliningrad (Baltic) NPP is $7.6 billion - $3.25 thousand per kW of the projected initial power output at the design stage (more than 50 billion rubles have been spent on it altogether and the work has been suspended). (Note that the average price globally for new reactors from 2008-2015 was $2.4 thousand per kW, less than $1.6 thousand for coal power plants and up to $1 thousand for gas plants.) Naturally, a return on investment was given no consideration with respect to these projects (most remain uncompleted despite the years that have rolled by at Bolshaya Ordynka Street (Rosatom’s headquarters) and Kiriyenko promised 40 nuclear power-generating units to the country over 25 years early on). 1.28 trillion rubles (or $40.6 billion at the average exchange rate over the corresponding years) was entrusted to efficient managers from Rosatom from the Russian budget in 2009-2014 alone. Let me reiterate that this money was used to put 3 new power-generating units into operation during that time. Moreover, the units were built on the sites of plants constructed during the Soviet era (the history of the Rostov NPP dates back to 1977, Kalinin NPP – 1974, Novovoronezh NPP – 1958). Some would say that the amount spent on pointless and underperforming projects by Gazprom is far greater than that wasted on long overdue construction projects implemented by Rosatom. However, at least Gazprom is one of the major taxpayers in the country and not the greatest beneficiary of budgetary funds (besides, most of its extraction and transport endeavors succeed and pay dividends).

Maybe Rosatom has become the flagship of the global nuclear industry and is now flying the Russian flag to the world? This seems unlikely as, out of the 77 reactors launched since 2000 worldwide (according to IAEA reports), 22 were constructed by two Chinese state-owned enterprises (SNPTC and CNNC), 16 – by the American company Westinghouse, 14 – by the French company Areva and as few as 9 reactors were built at the former workplace of the newly appointed Kremlin official. Apparently, Rosatom’s orders exceed 20 units and value $101.4 billion. However, it should be noted that this huge amount of money will probably never enter the Russian economy but will rather leave it since no country is likely to order Russian NPPs unless they come free-of-charge. The construction of a nuclear power plant in Belarus (with a total capacity of 2.4 GW at a cost of $6.4 billion) is to be paid for in full (with plenty leftover) with a Russian loan of $9 billion allocated to Minsk in March 2011. Construction of the 5th and 6th reactors at the Paks NPP in Hungary with a capacity of 2.4 GW worth €12 billion is being paid for using a Russian credit guarantee of €10 billion. And, as they say, the list goes on. Russia’s good friends are notorious for being less than forthcoming when it comes to repaying debts as Moscow has written off liabilities of its allies in one form or another to the tune of $143 billion since 2000.

Since Rosatom is even more costly than the meaningless Sochi Olympics and the equally “useful” APEC summit combined, maybe the company, headed by Kiriyenko until recently, can boast of its phenomenal efficiency or the unprecedented transparency of its financial operations? Not in the least as financial voluntarism has flourished and continues to thrive in the company. In 2010, in the aftermath of Rosatom’s failed forced takeover of Izhora Plants (Izhora Plants is the largest producer of equipment for nuclear power generating facilities in the USSR and Russia), all orders were quickly rerouted to the Petrozavodskmash factory which had been purchased by a Rosatom-associated company. Petrozavodskmash has so far failed to supply a single fully-equipped reactor (despite having incurred costs totaling dozens, if not hundreds, of billions of rubles). When the Chekhov plant Energomash changed hands in 2014 and Kiriyenko developed a dislike for the owner, the most technically sophisticated boiler parts needed for power plants started to be imported from China. Less sophisticated parts were produced on site and the label of the very same Chekhov plant was emblazoned on them. As regards construction workers who won contracts at Bolshaya Ordynka Street, one can judge the quality of their work by the 12-meter-long load-bearing unit housing wall under construction at Leningrad NPP. The wall “spontaneously self-destructed” in 2012 during the erection of the body of the power plant.

Paradoxically, Rosatom proved a significant step forward for Kiriyenko in terms of his career advancement. $4.8 billion of the IMF stabilization loan disappeared during the hot summer of 1998. The money was spent in a matter of weeks prior to the outbreak of the financial disaster. This amounts to no more than the 2010 price of one shelved nuclear reactor for Rosatom. Whether you are a prime minister or the manager of a little-known state-owned company – money can easily compensate for a lack of publicity.

However, the most vital questions which remain unanswered today are: Why does the Kremlin need Kiriyenko now? and What are the consequences of his appointment? The Kremlin’s First Deputy Chief of Staff is traditionally a post too high to simply be filled by a person whose position in Rosatom seemed appealing to someone else. So should his promotion be seen as a compulsory measure by Sergey Chemezov, who could not disregard a vacancy? Or is it that the president’s circle is indeed hoping that the former prime minister will reform domestic policy? Is there any certainty that Kiriyenko and his “methodologists” are indeed professionals, like Vladislav Surkov and Vyacheslav Volodin were? Don’t forget, “methodologists” managed the failed election campaigns of Arseniy Yatsenyuk and Mikhail Prokhorov. Kiriyenko’s talents have not surfaced in either of the places occupied by Sergey Vladilenovich – should one hope that the Kremlin will help develop previously hidden talents? The Kremlin’s towers will instead begin to crumble should they be entrusted to a man incapable of preventing the collapse of a power-generating unit’s housing walls.

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