Péter Szijjártó, Hungary's Minister of Foreign Affairs, recently acknowledged complications surrounding the construction of the Paks II nuclear power plant.

During a February press briefing, he noted that sanctions imposed by the previous U.S. administration against Russia were hindering the progress of the investment.

Reports indicate that the situation is more dire than initially described by Szijjártó.

The sanctions have led to significant delays in several crucial aspects of the expansion project, which is said to be "stagnating" from the perspective of insiders closely tied to the initiative.

A major issue arose when, in November 2022, the U.S. added Gazprombank to its sanctions list.

The bank plays a vital role in the financial operations related to the project, thus halting any project-related payments from the Hungarian contracting party since late last year.

Consequently, numerous subcontractors working with Russian state nuclear company Rosatom—including Hungarian firms—have experienced delays in receiving payments for completed work.

Additionally, the sanctions have resulted in decreased transparency surrounding the project.

Instances have surfaced of public tenders related to the Paks II expansion where Rosatom has failed to disclose the names of both bidders and winners.

This move towards anonymity appears to be a strategy to protect the Russian suppliers involved, as the current sanctions environment may place them at a disadvantage.

In a response to inquiries, Rosatom reaffirmed its commitment to the Paks II construction, emphasizing that manufacturing for key components is actively proceeding in Russia despite the sanctions.

However, no official commentary has been provided by Hungary's state company overseeing the project or the Ministry of Foreign Affairs.

The sanctions' implications extend beyond operational difficulties; they have placed Hungary in a challenging position, particularly as it relies heavily on Russian energy supplies.

The country typically pays for imported natural gas through Gazprombank, which also plays a critical role in the financing of the Paks II project.

Following the U.S. sanctions announcement, Prime Minister Viktor Orbán engaged in discussions with Russian President Vladimir Putin on December 11, 2022, to address the impacts on Hungary’s energy security.

Soon after, limited leeway was granted by the U.S. government, permitting Hungary and Turkey to continue payments for natural gas through Gazprombank.

However, no exemptions were provided for the Paks II project, with sanctions against the bank remaining in force and complicating the project's financing.

The importance of Gazprombank’s involvement cannot be overstated, as it provides performance guarantees essential for securing funds and ensuring compliance with contractual obligations.

The absence of this guarantee potentially exposes the Hungarian side to financial risks if Rosatom fails to meet its project commitments.

In practice, this situation has already begun affecting subcontractors significantly.

Contractors on-site in Paks have reported that many invoices submitted for completed work have gone unpaid, with claims of substantial debts accumulating without resolution.

Legislative assembly opposition member Ákos Hadházy highlighted this development, noting layoffs amid construction work and attributing them, in part, to payment issues.

The Biden administration’s latest round of sanctions, announced on January 10, 2023, further targeted the Russian energy sector, including leading Rosatom executives, compounding the challenges for cooperation between Hungarian and Russian entities due to the prohibitions on engaging with these individuals.

Despite these setbacks, Szijjártó confirmed earlier this year that Rosatom had commenced production of a reactor vessel for Paks II at its facility in Russia, albeit with stipulations indicating that the execution of the project remains severely hindered by the sanctions.

Moreover, alterations to public procurement practices have emerged since the onset of the Russia-Ukraine conflict.

Previously, Rosatom transparently published procurement announcements for its projects, including Paks II. However, recent practices have favored anonymization of tenders, obscuring the identities of participating firms to mitigate risks associated with Western sanctions.

The Orbán government has shown optimism regarding potential relief from sanctions under the new U.S. administration led by President Donald Trump.

Officials have engaged in discussions with American partners to request exemptions from the burdensome sanctions impacting the Paks II project, with Szijjártó highlighting the urgency of addressing the sanctions during his recent meetings.

Despite some positive developments in negotiations, substantial barriers remain as the Gazprombank sanctions continue to impede financial flows critical for advancing the Paks II nuclear power expansion project.