TOPIC OF THE WEEK: The debt implications of upgrading Armenia's nuclear industry
Armenia and USA signed this month a joint statement of cooperation on the peaceful use of nuclear energy. The government and newswires have hurried to conclude that the USA would provide US$9bn as part of the deal, which ultimately results in constructing a small modular (nuclear) reactor (SMR). Bloomberg even referred to these funds as "investments", but this could not be farther from the truth. A nuclear deal would most likely involve a substantial increase in sovereign debt for a country that already "boasts" the highest public indebtedness in the Caucasus and Central Asia and the highest interest payments as a proportion of government spending in Europe and Central Asia (according to the World Bank).
Strictly speaking, the PM is still publicly arguing that, while Armenia has already decided that the new nuclear power plant will be modular, the country is in ongoing discussions regarding nuclear reactor initiatives with Russia, the United States, France, China, and South Korea. My analysis indicates that, given existing international practices, the sovereign debt implications would be most preferable for Armenia if it chose a BOO (Build-Own-Operate) model typical for Russia's Rosatom. Such schemes are currently used in Hungary, and there are some quasi-BOO elements in Egypt and Bangladesh. A Russia state loan would put a moderate burden on external public debt given its concessional nature. Finally, a US/Korea type of export-financing for nuclear power plants (NPPs), typically done on commercial terms, would weigh most heavily on Armenia's public debt, which could rise by as much as 30 percent of GDP (in the worst possible case).
If Armenia opts for the U.S. SMR technology, as now appears increasingly likely, the decision should be read predominantly in the broader geopolitical strategy of Pashinyan (and, more broadly, that of Azerbaijan, Turkey, and the US) to wean Yerevan off Moscow's sway. Moreover, no U.S.-designed SMR is currently operating commercially anywhere in the world, so Armenia would also be banking on a new and untried technology. Ultimately, Yerevan will trade higher cost and an untested scientific approach for lower strategic dependence on Russia. Given the current utility function of the government, it is most likely to choose the more burdensome financial weight in order to lessen Kremlin's geopolitical clout. The cost implications for Armenia's sovereign debt should not be then disregarded by the market.
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