Russian contractor seeks withdrawal from $1.2bn thermal power project in southern Vietnam over US sanctions

A Russian company that is the main contractor of a US$1.2 billion thermal power plant in southern Vietnam is seeking to pull out of the project to avoid losses brought about by U.S. sanctions.

The construction site of Long Phu 1 thermal power plant in Soc Trang Province, Vietnam

Power Machines Company attributed its decision to the inability to implement the contract due to sanctions imposed by the U.S., a representative of the project management board told Tuoi Tre (Youth) newspaper on Tuesday, March 08.

Located in Long Phu District, Soc Trang Province, Long Phu 1 plant is designed with a capacity of 1,200MW and projected to cost about $1.2 billion. Power Machines and PetroVietnam Technical Services Corporation (PTSC) – a unit of Vietnam Oil & Gas Group (PetroVietnam) – previously established a joint venture to become the engineering, procurement, and construction (EPC) contractor of the project.

According to their contract signed in late 2014, the plant’s first and second turbines must be put into commercial operation in October 2018 and February 2019, respectively. However, Power Machines was subject to U.S. sanctions following the annexation of Crimea by Russia in 2018. The Long Phu 1 project was about 72 percent complete at the time.

The sanctions also disrupted transactions between the project management board and the Russian firm, thus work on the thermal power plant came to a standstill after reaching 77.56 percent completion. The project is still on hold at present, prompting relevant parties to carry out the maintenance of materials and equipment to avoid damage.

In February 2019, Power Machines announced the termination of the contract for ‘force majeure’ reasons, but the Vietnamese project developer did not accept the U.S. sanctions as the ‘force majeure’ instance.

Equipment imported from Russia at the construction site of Long Phu 1 thermal power plant in Soc Trang Province, Vietnam

In September the same year, the Russian enterprise sent a notice saying that it had filed a lawsuit against the project developer and PTSC to the International Arbitration Center in Singapore.

Power Machines also proposed a negotiation so that it could withdraw from the project with zero losses, stating that the Vietnamese side had to pay back all the costs the Russian company had incurred. “Such a termination of the contract is not satisfactory,” the management board representative said.

The Vietnamese side can only consider paying $113 million worth of goods and materials at the construction site, as well as $93 million worth of contract performance guarantee, which in total is much lower than the amount demanded by Power Machines.

As certain Russian banks have been removed from the SWIFT international payment system due to the ongoing Russia-Ukraine military conflict, it is also impossible to make the payment for Power Machines even if both sides agree to the compensation, the representative continued.

Russia began attacking Ukraine on February 24, saying it wanted to demilitarize and denazify the neighboring country. In the meantime, the management board suggested that relevant parties look for a new contractor and restart the project as soon as possible. The Vietnamese side has so far invested nearly VND13 trillion ($569 million) in this plant.