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Business Week
May 12, 2003
Springtime for Russia's Nuclear Industry?
United Heavy Machinery wants to take on Western contractors
By Paul Starobin in Moscow

Russian nuclear power? To most people, that means one thing: Chernobyl. But this popular association is misleading. Industry experts say human error and an unusual design were to blame for the explosion of the Soviet-made reactor in Ukraine that in 1986 sent a lethal radioactive cloud over Europe. Russians generally make sturdy, efficient reactors -- as shown by the European Union's acceptance as safe 14 Soviet-made pressurized-water reactors currently operating in the EU accession countries of Czech Republic, Hungary, and Slovakia. What the post-Soviet Russian nuclear-power industry really lacks is sophisticated financial management.

That's about to change. On completion of a due-diligence audit by Ernst & Young in the second half of May, United Heavy Machinery, a well-regarded Moscow-based shipbuilder and manufacturer of oil-drilling equipment for global customers, is expected to acquire a controlling stake in state-controlled Atomstroiexport, Russia's monopoly exporter of nuclear power equipment and services. The planned acquisition is an ambitious play by UHM, already a prime subcontractor of Atomstroiexport, to pull the Russian nuclear power export industry alongside Western giants General Electric Co. and France's state-controlled Framatome. UHM's CEO, Kakha Bendukidze, 47, is convinced that the long, post-Chernobyl "dead season" in new nuclear construction is over. "There will be increasing demand for nuclear power" as the environmental and health hazards of coal-fired power plants become better recognized, he says.

If Bendukidze is right, a modernized Russian nuclear export industry would be well-positioned to go up against Western rivals. "The Russians have good designers, excellent scientists, and great technology -- they just need to get organized," says Ann MacLachlan, European bureau chief for Platts Nucleonics Week in Paris (published by The McGraw-Hill Companies, which also publishes BusinessWeek). Top-notch Russian nuclear scientists, engineers, and other technical personnel can be hired at rates one-third of those in the U.S. or Europe. "They can certainly do it a lot cheaper than GE can, and can probably do just as good a job," says financial analyst Rob Edwards of Moscow brokerage Renaissance Capital.

There are certainly no complaints from the Finns, for whom the Russians in 1977 and 1980 built reactors still operating in the town of Loviisa. "These two units are among the best in the world for safety and performance," says Peter Gango, chief engineer at the Loviisa reactors.

What's more, foreign customers should be comfortable dealing with UHM, which is regarded as one of Russian industry's more transparent companies. George Soros, with a 10% stake, is the second-biggest shareholder after Bendukidze. The company has access to the Eurobond market and is planning a listing on the London Stock Exchange in September. In 2002, it reported $6 million in profits on $400 million in sales. Its Russian-listed shares have outperformed the Russian Trading System index by 133% since January, 2001. "We will open doors for Atomstroiexport for financing, and we can deliver better management," says Alexei Shavrov, UHM's deputy general director.

UHM's first big test is in Finland, where Atomstroiexport is bidding for construction of the country's fifth nuclear reactor, a prize project worth as much as $3 billion. The Russians are in the running. "They come in very strong," says industry analyst Adrian Collings of the London-based World Nuclear Assn., a trade group for nuclear power vendors and utilities.

UHM will need to move fast, though, to overhaul stodgy Atomstroiexport. That company operates under the umbrella of the state's Ministry of Atomic Energy (MinAtom), an opaque, Soviet-style behemoth over which even the Kremlin has limited control. The takeover will be a big gulp: Atomstroiexport's $800 million in expected export revenues this year will exceed UHM's expected sales of $450 million to $500 million. General Director Viktor Kozlov, 58, an engineer who cut his teeth in the Soviet nuclear power industry -- as did most of his 800 employees -- says that Atomstroiexport is profitable, but declines to say by how much.

Political risk also needs to be managed. UHM will inherit a dispute with the Bush Administration over Atomstroiexport's contract to construct the Bushehr nuclear reactor in southern Iran, due to start operating next year. The Administration strongly opposes the venture for fear that Russian transfers of materials, fuel, and know-how could assist Iran in obtaining a nuclear bomb. But Bendukidze, who has met with Bush Administration National Security Council officials, says their concerns are groundless. "This project is open, transparent, controllable, and safe," he says.

Other target export markets are China and India, where demand for electricity is growing fast. "I'm not sure it [nuclear plant construction] can be done a lot cheaper," says John G. Rice, president and chief executive of GE Power Systems. But "we certainly appreciate the Russian technology, and we welcome the new competition." The Russians are coming.

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