Bankruptcy of Emfesz will ‘Justify’ Hungarian State Intervention

If there is ever an excuse that could be used for greater government intervention it is the bankruptcy of a company. I don’t think I need to go into great detail, but only to refer to the current players in the economic crisis. The pending bankruptcy of Emfesz gives the Hungarian government the excuse for further involvement in the energy sector.

"Any advice on dealing with foreign energy investors"

The insolvency of Emfesz, as reported, was widely assumed to be coming, since the inability of Emfesz’s previous owner Dmytro Firtash to access his cheap gas stored in the Ukraine in January 2009. Before then, he was undercutting retail market prices by around 10%. However, in April 2009, he then lost his company to RosGas through a Swiss engineered corporate takeover for $1.00.  It is speculated that Gazprom was behind this takeover. This last statement maybe should be rephrased to consider that maybe it was just a faction in Gazprom/Russian oligarchy circles that pulled it off. Because it is clear now, the move was unsustainable (I think parallels could be drawn with the Russian takeover/near bankruptcy of MALEV).

After the Rosgas takeover, it was unclear where Emfesz would buy gas. But then, as media reports show, a new deal was struck between Emfesz and E.On in which the gas would be purchased from E.ON’s Hungarian gas storage company, E.ON Földgáz Trade Zrt. However, the delivery of gas from the upstream supplier Gazprom would be carried out by the previously established Panrusgaz. This company is a joint venture of Gazprom Export (including its subsidiary Centrex Hungaria Zrt.) and E.ON Ruhrgas. Therefore, it seemed that everyone could be a winner. However, it then became clear that the price Emfesz was paying for the gas was essentially the same price as other market participants – even E.ON itself. But Emfesz was still offering lower prices. Not even Russian or Hungarian accounting tricks could make this company viable with this strategy.

So we end up with Emfesz owing several billions of Forints. There are two things to consider, first, the Hungarian authorities were probably letting this drag out to see how negotiations with the Russians went this past November. Since nothing happened (as I predicted in October 2010),  the Hungarians are now taking the logical step that a government and regulator must take. Revoke the license.  This of course, can also be used to send a signal to the Russians, as the Hungarians are probably mad that nothing did come out of the November meeting between the Prime Ministers Putin and Orban. In a way it is a pithy response, if it is one at all, just as shooting a lame horse is sometimes the only response.

The closing down of Emfesz and using it to send a message to the Russians is probably not the best way to capitalize on the bankruptcy of an already weak company. Rather, the Hungarian government (and here is another prediction) will be using this event to highlight the dangers of allowing private companies to operate in the energy sector. Of course there are some inconsistencies in this, since they have imposed the tax on energy company revenues and labeled it a ‘temporary crisis tax-which-soon-will-be-a-permanent-tax,’ due to the profitability of energy companies. But this is unimportant.

Energy companies in Hungary are already on ‘no investment mode’ after the imposition of  the ‘crisis tax’ and because of the inability to raise rates to match commodity and wholesale energy price increases. Therefore, the government is undermining necessary infrastructure investments and the basic financial health of energy companies. Why should a German firm (or any company) incur losses because they cannot even pass along wholesale market price increases? Particularly, when the increase is partially the result of a weaker Forint and the rise of government risk ratings.

The government will spin the bankruptcy of Emfesz as an indication that private investors threaten the countries security of supply, and if they are not being paid high profits for their services then they are not interested. When the current private energy companies try to leave Hungary citing ill financial health, the government will engineer their exit on favorable terms for the state (there are some international treaties that protect private investment and these have to be softly walked over).

With some (not all will be able to leave) significant government ownership, the Orban government will realize its objective of imposing state ownership over the countries energy assets – and somehow keep prices low. (I actually feel crazy writing this as a government objective – but it is logically based on actions and statements of this government). As owners, the government can figure out how to pay for gas at higher market rates and the lower rates that homeowners and (SME) businesses pay. But by then, the pension money will be spent and Hungary’s credit rating will be in the garbage.

With the removal of foreign owners, control over the media cemented, Hungary will (somehow) be a strong country. However, just as the Russians in Emfesz couldn’t figure out how to break a fundamental economic rule of profits and losses,  the Hungarian government won’t be able to break this rule either. It is just too bad that the Hungarian people will have to deal with the aftermath.