Czech building company PSG withdraws from major Russian contract

Czech construction company PSG reportedly has revoked its contract to build a gas-fired power plant in sub-Arctic Siberia with the state-controlled Czech export bank and insurer looking at what could be a major hit from the project.

Photo: archive of PSGPhoto: archive of PSG Exports to some countries is a risky business and that’s the reason why the Czech Export Bank and Czech Export Guarantee and Insurance Corporation (EGAP) are around. The first makes loans helping Czech companies secure business in countries where other banks might fear to step and the second provides the insurance if everything goes pear-shaped.

Pear shaped is exactly what has happened to a major project for the Czech firm PSG to build a 268 MW gas fired power station near Salekhard, Siberia. The Otrokovice-based construction company was the major contractor for the Poljarnaja project awarded in 2011 with just over half the value of the overall work. And to smooth things along the company awarding the contract, dominated by local oligarch Vladimir Belevich, was given a loan of 335 million euros by the Czech Export Bank. Around two third of that sum have been paid out but the construction project, which was supposed to be completed according to the original deadlines this year, ran into problems.

One of the main problems appears to be that Czech firm PSG agreed to sub-contract a lot of the construction and building work to Russian-Ukrainian company Sojuz. It employed a series of other companies which all drew cash for their services but the main company doing most of the work on the ground received less than a tenth of what it was owed. The result is a partially completed power plant which for the last 18 months PSG has been paying to try and maintain in a reasonable state in sub-Arctic conditions as both it and Czech financial authorities try to sort out the financial mess.

Czech president Miloš Zeman made personal approaches to his Russian counterpart Vladimir Putin to try and resolve the fraught construction project. Top level approaches have also been made to the Russian regional authority, all it seems without clear results. The business daily Hospodářské Noviny reported Monday that PSG has finally decided to withdraw from the power plant project to cut its ongoing losses. It will be on standby to restart its activity if the crucial project for the Russian region is sorted out.

The Czech Export Bank, which froze payments to the project two years ago, now faces the severe headache of trying to recover its substantial loans. Worse, its insurance coverage from fellow sate owned EGAP might not be valid. The original deal surrounding financing of the power plant was based on the business model that the Russian government would pay higher prices for the electricity generated for a certain period to cover the high construction costs. But that fundamental deal never found its way into the final contract and that could provide a reason for the insurer to refuse to make any payouts, according to the business daily.