Multinational Monitor

MAY 2002
VOL 23 No. 5


East Meets West: European Union Expansion and the Troubled Former Communist Countries
by Tony Wesolowsky

Chernobyl Fallout: The Uncertain Future of Ukraine’s K2/R4 Nuclear Project
by Olexi Pasyuk

Pipeline Dreams: The World Bank, Oil Development and Environmental Protection in Georgia
by Manana Kochladze

Bank Accountability Redux: The Campaign for Compliance and Appeal Mechanisms at the European Development Banks
by Petr Hlobil

Fate of the Forests: Will the World Bank Replicate Amazonian Failures in Central and Eastern Europe?
by Jozsef Feiler


Countering the New Masters: Central and Eastern European Workers Struggle to Hold Their Ground in Hard Economic Times
an interview with
Jasna Petrovic


Behind the Lines

Restraints for the World Bank and IMF

The Front
Shredded: Justice for BAT - Enron Associates

The Lawrence Summers Memorial Award

Names In the News


Chernobyl Fallout: The Uncertain Future of Ukraine’s K2/R4 Nuclear Project

by Olexi Pasyuk

Kiev, Ukraine — The March 2002 parliamentary elections in Ukraine gave a mere 12 percent support to the party of President Leonid Kuchma, with a plurality of 45 percent going to the reformist bloc led by ex-prime minister Victor Yushenko. While many are celebrating Yushenko’s political victory as offering Ukraine hope that its 11-year economic collapse may come to an end, his political gains may also revitalize Ukraine’s controversial nuclear power program. Because Western governments and international financial institutions view Yushenko as virtually the only person in Ukraine they can seriously talk to, his victory may breathe life into a project which many would prefer to consider dead: the nuclear reactors known as K2/R4.

The Deal, The Concerns

A 1995 Memorandum of Understanding between the G7 (the group of seven leading industrialized countries), the European Commission and the Ukrainian government promised support to the country suffering from the consequences of the world’s worst nuclear catastrophe. Ukraine promised to close the Chernobyl power plant in exchange for financial support to mitigate the consequences of the radioactive disaster and to build compensating facilities.

Kuchma has sought to use the money to complete the Soviet-designed nuclear reactors Khmelnitsky unit 2 and Rivne unit 4 (K2/R4). Construction on these units began in the 1980s and was about 80 percent complete in 1992 when building stopped due to a funding shortfall and parliamentary opposition.

Energy experts, public interest groups and some government officials and parliamentarians have questioned the need for the nuclear energy system, its potential profitability and its safety.

The K2/R4 project poses many serious safety problems, most of which are due to structural flaws in the original Soviet design. The International Atomic Energy Agency has identified a wide range of problems, including an increased risk of fire due to improper cable layout, faulty steam generators, reactor containment vessels which are susceptible to rupture, faulty control rods and poor and obsolete instrumentation and control. Standard probabilistic safety analyses for the reactors have not been performed, and will not be performed until after plant start-up. Also, serious safety issues regarding human error and safety culture have not been addressed.

The reactors at K2/R4 are far from meeting international safety standards and would not be allowed to operate in any Western country. Furthermore, Energoatom, Ukraine’s state-owned nuclear energy company, is planning to begin operation of these reactors before remedying acknowledged safety problems, and it will only correct some of the known safety problems at the first refueling. The plant will not achieve even the Soviet-designed safety level until after three years of operation.

“It does not make sense to waste public funds investing in two unsafe reactors when almost half of Ukrainian power plants are unable to get enough money even to operate,” says Yury Urbansky of the National Ecological Center of Ukraine. “Ukraine has tremendous potential for energy efficiency, and that is where investments should go.”

The dramatic decline in economic activity in the Ukraine in the 1990s led to a significant drop in energy demand, leaving installed capacity at double the peak load demand. Over the last decade, many Ukrainian power plants have closed and been neglected due to a lack of demand. Throughout much of the 1990s, only about 30 percent of consumers were paying their bills to Energoatom in cash. Today, only about 60 percent pay in cash — many are not paying at all, and others are paying with bartered goods, such as tomatoes.

Foreign donors — the source of monies for any new nuclear construction — agree that the yet-to-be completed units must be upgraded to meet minimum safety standards. Doing so will require the involvement of Western companies like Raytheon, Framatom of France and Siemens of Germany. The fact that the units are so near completion complicates the challenge of combining Soviet and Western technologies, however. Many design deficiencies are already implemented in concrete and installed equipment. Some experts argue that starting construction from a greenfield site would be cheaper than rebuilding the existing structure to meet internationally accepted standards.

The Blackmail

Following the Memorandum of Understanding, the G7 and the European Commission chose the European Bank for Reconstruction and Development (EBRD) to be the leading institution to develop and support the K2/R4 project. The London-based multilateral development bank was created to support Central European and former Soviet states as they transitioned to market-based economies. Although the Bank was expecting to provide only $215 million — the biggest single loan EBRD had ever provided — out of a $1.4 billion package, it was chosen to be the principal K2/R4 decision-making institution. Other funders included Euroatom, Russia and export credit agencies (ECAs) of the United States, France, Spain, the UK and the Czech Republic.

Although a governmental institution, the EBRD is still a bank and is expected to make a profit. But the profitability of K2/R4 has always been doubtful. In 1996, an independent panel of experts hired by the EBRD concluded that K2/R4 was not economical. “Completing these reactors would not represent the most productive use of $1 billion or more of EBRD/EU funds at this time,” the panel concluded. A 1999 PriceWaterhouseCoopers audit concluded that Energoatom is virtually bankrupt. However, within four months of the PriceWaterhouseCoopers report’s submission to the EBRD, political pressure forced the project through the final review of the Bank’s Operations Committee.

Ukrainian President Kuchma has sought to blackmail international donors into supporting K2/R4. He argued that Chernobyl’s remaining reactors would not be closed until the money for K2/R4 was provided. The Ukrainian government also threatened Western leaders with a plan to complete K2/R4 on their own, with Russian support, in conformity with the archaic safety standards of the 1970s. That pressure successfully led the EBRD to agree to fund K2/R4.

Mindful of the bad economics and safety concerns, the German government attempted in 1999 to convince Kuchma to stop the K2/R4 project. Ukraine has tremendous potential in energy saving and more efficient energy production and transmission, the Germans pointed out, since Ukraine is one of the least efficient countries in the world. The Ukrainian economy uses seven times more energy per dollar of GDP than Japan. On a trip to Kiev, German Chancellor Schroeder also proposed revisiting a proposal to build a modern gas-fired power plant in which Chernobyl staff could be employed.

U.S. President Bill Clinton undermined this initiative, however, declaring U.S. support for the K2/R4 project in return for Kuchma’s promise to shut down the last remaining operational Chernobyl reactor by the end of the year 2000.

The Closure

On December 15, 2000, people around the world watched international networks broadcasting from Kiev the Soviet-style ceremony of Chernobyl’s permanent closure. President Kuchma gave the order to turn the key to shut down the reactor.

Closure required little political sacrifice from Kuchma. It was simply no longer possible to run the reactor. Even the license for the remaining unit 3 had expired one month before the official closure. Kuchma put pressure on regulators to allow another month of operation, but it was not possible to give an order to outdated equipment. The reactor was actually shut down in an emergency about two weeks before the planned closure. Thus, on December 15, Ukraine shut down a reactor which in fact was not producing electricity.

Holding up its end of the bargain, on December 7 the EBRD board voted in favor of the K2/R4 proposal. It was a difficult and unusual vote. Nineteen countries did not support the project on a board where decisions are almost always made unanimously. The EBRD decision was followed by a European Commission vote in favor of a Euroatom loan for the project.

EBRD attached a list of conditions to the loan, giving Ukraine up to one year to meet them. The four major conditions were: permanent closure of the Chernobyl power plant, agreement to meet International Monetary Fund-imposed conditions, ensuring the independence of the nuclear regulatory authority and confirming the support of other donors involved in K2/R4. Further conditions covered a wide range of improvements in the nuclear and energy sectors of Ukraine, including improvement of bill collection and an increase in electricity prices.
EBRD president Jean Lemierre called for an EBRD board meeting for final approval of the project in November 2001, just before the confirmation deadline on December 7. In his letter to board members, he argued that Ukraine had met all of the conditions. He recommended giving the project the final go.

However, environmentalists and others raised questions. In particular, the independence of the Ukrainian nuclear regulator was doubted. Although granted the status of a state committee and independent on paper, the authority did not have sufficient resources even to keep its qualified staff from leaving. According to the deputy chair of the state nuclear regulatory committee, the regulatory agency’s average salary is one sixth that of Energoatom.

More questions were raised regarding confirmation of participation in the K2/R4 project by export credit agencies (government agencies that make loans or provide loan guarantees in foreign countries to fuel purchase of home country products). The EBRD president received letters from senior management of all involved ECAs shortly before the meeting, declaring that they would “consider the project favorably.” Many found these letters surprising, since most ECAs grade the Ukraine as a country where they do not work due to high economic and political risk. Moreover, most of the ECAs had not even received applications for guarantees, so they did not review the project through normal procedures.

Kuchma’s Misstep and the Future

The EBRD Board never voted to confirm the loan, however. Just prior to the scheduled board meeting, Kuchma decided to refuse the loan because of the conditions attached. He had apparently been unaware of the conditions agreed to by the previous government. The letter from the Ukrainian government to the EBRD stated, among other things, that it would not be possible to raise electricity tariffs in view of the upcoming parliamentary elections and asked for renegotiation of the loan.

In Moscow on an official visit at the time of the EBRD board meeting, Kuchma said that the EBRD had been cheating Ukraine for five years and that “accepting the loan would mean slavery for Ukraine.”

“Russia,” he said, “will help to complete the reactors at a lower cost.”

But negotiations with the Russian government ended up less successfully than the Ukrainians expected. Russia proposed a $300 million loan to Ukraine — in equipment, not cash. Russia is eager to get rid of 1980s-vintage nuclear power equipment. But the Ukrainian nuclear regulator had already expressed its concerns regarding the quality of equipment manufactured some 15 years ago. And even if Ukraine had accepted the Russian offer, it would need cash to assemble the equipment, and Russia could hardly provide that.

Back in Kiev, President Kuchma realized that the Russian option was illusory — only to discover that the EBRD opportunity had disappeared as well. As one EBRD Director put it: “K2/R4 is no longer an EBRD project.”

“I was not aware of the agreement between Yushenko’s [the prime minister’s] government and the EBRD. I am ready to apologize to the EBRD if it helps,” said the president, as he desperately sought to get the project back on track.

But Kuchma appears to have missed his chance.

Theoretically, K2/R4 can be proposed to the EBRD again, but it would require another couple of years to again go through EBRD procedures, with the EBRD holding to the position that reapplication for the loan “would require full review of all terms and conditions.”

Still, ECAs have supported similar projects in Central and Eastern Europe in recent years, and one or more might still come to K2/R4’s rescue. For example, the French government is poised to order COFACE, its ECA, to release an export guarantee for the project even as it notes the “high risk profile of the country’s economic and political environment.” The COFACE guarantee would be used to buy equipment from the French nuclear industry, which is suffering from diminished national and global demand for its equipment.

So the saga of K2/R4 is not over. Having been close to death, the project could again become a project for the EBRD and/or ECAs. The March 2002 elections has installed a new government perceived to be concerned about the fate of the country, rather than the whim of the president.

Rather than fall into the trap of supporting K2/R4, say environmentalists, the G7 should use the opportunity to step forward with new initiatives to support non-nuclear energy alternatives for Ukraine.

“We are appealing to the common sense of the European Commission and the EBRD,” says Yury Urbansky. “By keeping K2/R4 as an option, we simply delay implementation of safer, more economically sound and publicly acceptable projects in the energy efficiency field.”

Olexi Pasyuk works with the National Ecological Centre of Ukraine. He is international energy coordinator for the CEE Bankwatch Network.


Mailing List


Editor's Blog

Archived Issues

Subscribe Online

Donate Online


Send Letter to the Editor

Writers' Guidelines