Sanctions hinder Russian efforts to build power plant - sources

A state tender for a company to build and operate a power plant in southern Russia attracted no bids partly because firms feared falling foul of EU sanctions should any electricity be diverted to nearby Crimea, industry sources said.

The planned plant is primarily designed to supply power to the Krasnodar region of southern Russia, but according to an energy ministry document published last year it could also divert some of its electricity to Crimea, the Ukrainian region that Russian annexed in 2014.

That prospect, the sources said, was enough to alarm some of the potential bidders, which included Russian units of Germany's E.ON, Italy's Enel and Finland's Fortum .

Some of the potential bidders felt it might put them at risk of being caught up in the sanctions imposed on Russia over the annexation, which prohibit individuals or entities under EU jurisdiction from investing in infrastructure projects in Crimea in the transport, telecoms and energy sectors.

"From a political point of view it's a very risky project," said an energy company source, who spoke on condition of anonymity to discuss confidential internal company deliberations. "The financial terms just didn't justify that kind of risk."

By the July 1 deadline set for the tender, no companies had submitted a bid for the contract. Sanctions risk was not the only factor. The industry sources said some were also put off by tight completion deadlines and the financial terms of the deal, which would see firms investing in the project in return for revenue they earn from power generation.

Fortum's Russia unit, Enel Russia and the Russian energy ministry, which ran the tender, all declined to comment. E.ON's Russian unit Unipro referred Reuters to comments made by its Chief Executive Maxim Shirokov to Interfax news agency this month, when he said the timescale for the plant was not realistic.

A spokeswoman for Fortum in Finland declined to comment on the group's reasons for not participating in the project. Enel in Italy also declined to comment while Uniper, the Germany-based division of E.ON that oversees its Russian operations, said it decided not to take part for economic reasons.

The failure of the tender shows how the sanctions could be making it harder for the cash-strapped country to attract investment in infrastructure projects, even in cases where the projects are not directly linked to Crimea or Russian companies or individuals blacklisted under Western sanctions.

Foreign direct investment in Russia fell to $6.5 billion in 2015, from $70 billion in 2013, the year before sanctions were imposed.

A company that took on the power plant project might also have to explain to Western suppliers and shareholders - who too may be wary of falling foul of sanctions - why they were building generating capacity that could support supplies to Crimea, according to the energy company source.

A second energy company source said that Western suppliers of some of the utilities interested in bidding had warned the firms about the sanctions risk from involvement in the project.

PENINSULA

The planned site of the power plant is on the Taman peninsula, the part of mainland Russia closest to Russia and also the point from where Russia this year built an undersea electricity cable to Crimea.

The plant is one of the last in Russia to be offered under a special financial arrangement, now being phased out, where the operator receives a guaranteed profit margin for 15 years, protecting them from market fluctuations.

As late as the end of last year, Maxim Bystrov, head of the Market Council, an association of power industry companies, said of the Taman tender: "There is interest."

The list of interested parties, according to company announcements and official statements, included the E.ON, Fortum and Enel units, Russian state power firm InterRao, the Tekhnopromexport unit of Russian state conglomerate Rostec, and an unnamed Chinese investor.

The tender was declared null by the energy ministry, which tends to prefer bringing in private companies to build power plants.

Several industry sources said the timetable - two-and-a-half years for completion, with fines payable if an overrun exceeds six months - was too tight. Four utility company sources said that on closer examination the financial terms were not as favourable as they had seemed to be initially.

The energy ministry has not said how, with the tender having failed, it plans to choose an operator for the plant.

Bystrov, the head of the industry body, said the government was considering awarding the contract without a competitive tender.

Sources familiar with the situation said the option under consideration was to award the contract to Tekhnopromexport, which is already building new power plants in Crimea itself. Its parent, Rostec is already under Western sanctions.

"Why not, if the construction technology has been worked out here, and we're on schedule?" said Vladimir Golubnichy, head of the Tekhnopromexport unit in Crimea's capital, Simferopol, when asked about the firm taking on the Taman plant.

"The questions about sanctions issues have already been worked through. Why not take on the project there as well?" he told Reuters in an interview.

Bringing in a state-owned firm would likely mean that the Russian government, struggling to fill gaps in its budget because of an economic crisis, misses the opportunity to attract private investment to the project.

 Reuters