MOL and Hungarians Lose – Surgetneftegaz and Orban win! (and I predicted this)

My wife came back from the children’s hospital the other night after the doctor unclogged the poo that was a major discomfort for our young son. “You would think that they could spend some money on soap in the hospital,” she said. Any hospital that we have been in Budapest does not have soap in the public areas, including the bathrooms. When my wife gave birth – no soap, when I go to the doctor – no soap. But I’m not a medical doctor, just a doctor of the books, so maybe it is alright to be in a hospital and not wash your hands.What could happen?

Exposing your backside

Oh – energy security. So the Hungarian government spent 1.9 billion Euros of the IMF money that was meant to save Hungary from economic ruin. They did this to take control of their energy security so the Russians couldn’t threaten to take over one of the few companies that is economically successful and is an integral part of the Hungarian economy. The reasoning, as stated by Prime Minister Orban, and reported by Portfolio.hu:

The PM said the government “fought a tough battle in the past year”, but Hungary has managed to “bring to safety” its national company that has a key importance for the country. One of the keys to success in the region is the reduction of its energy dependence and the revival of national industries, he said, adding that the Hungarian government must always stand up to defend its interests. “No country can be strong if its energy supply is exposed,” Orbán added.

It was a good thing that Orban didn’t turn around while stating this because Hungary is still hugely exposed to the ‘whims’ of Russia. Most – if not all – of Hungary’s oil and gas comes from Russia.

There are a lot of aspects to this story to explore, and as with the aftermath of any big game, it will take awhile to analyze it all (I’ll have another post later on this). But it is fair to state, that I predicted that this would happen, as it was previously proposed in Tajikistan. Forcing the Hungarians to pay out money for a questionable increase in energy security (you think Orban reads my blog?). It is the citizens of the country that are being forced to pay for this stock buy, over more effective investments in either the economy or social programs.

Hungarians in Tajikistan selling bread to pay for their MOL shares

I questioned following this Tajik model, because it does not improve Hungary’s economy, society or energy security position. Rather, it becomes more state owned, as in the good days of Communism. The energy security argument that the government is spinning for MOL, is there should not be Russian ownership, or even a foreign government’s ownership in a nationally important energy company. This is one of the arguments that successive Hungarian governments have used for protecting MOL. However, it is now the case that the Hungarian government also owns, through MOL, almost a majority of the Croatian oil and gas company, INA. This should really strike some pride into Hungary’s right wing – including Fidesz. But it is questionable as to how much Hungary’s energy security is undermined if is already supply dependent on the Russians.

It is also stated that relations with the Russians will now improve, since ownership in MOL was a major sticking point in any negotiations between the two countries.  Development Minister Tamás Fellegi stated that this was a major hindrance in Russian-Hungarian relations, but the buy-back was connected with no other developments. There is no doubt Surgutneftegaz’s ownership in MOL did cause friction between the Hungarians and Russians, but it is also a fact that Hungary’s relations even with EU neighbors is at historic lows due to their inept handling of foreign and domestic policies.

The fact that the Hungary could not connect the buy-back with any other projects with Russia indicates the lack of effective negotiating position that the Hungarians deployed. This is a major win for the Russians (as they made a 500 million Euro profit), and if part of this was to improve relations between the two countries, then at least there should be a symbolic cooperative development that both countries could show demonstrating that things are back on track. Essentially, if you hand over 2 billion Euros there should be some room for smaller cooperative projects to be at least publicly announced – demonstrating a new period in Hungarian-Russian relations. The fact that this did not occur, does indicate the continuing tension between the countries.*

Finally, MOL should be worried. As the Development Minster indicated, the government has plans to increase its shares in strategically important sectors. With this hefty bit of MOL, combined with the shares from the pension funds that were nationalized at the start of 2011, the government has a nice chunk of MOL. If MOL management was worried about Austrian or Russian influence in company operations, it should be equally, if not more concerned about the Hungarian government becoming involved in its operations. The success of MOL is down to it withdrawing from the gas retail sector and focusing on transportation and storage. E.ON and others, are now losing money because of the price pressures placed on them by the government. MOL, has made clear in Croatia – through INA, that losses in this distribution sector will need to be covered by the government or they will sell it –  like in Hungary.

It is too early to tell, how the government will begin to impact the operations of MOL. But the infusion of politics into company operations could be expected. If Orban’s and Fidesz’s proclamation to the nation that is now posted in every public office makes its way into MOL offices and refineries, then we will know the new owners have something planned. Essentially, if the government pays out 2 billion Euros out of the rainy day fund, and walks MOL home, they are expecting more than a kiss at the door.

The explanation that the Hungarians wanted to sooth relations with Russia for the price of 2 billion Euros, doesn’t really stand up. We took our son to the underfunded hospital because his poo was causing a big discomfort to him. Did the Hungarians really pay out 2 billion Euros to ease their discomfort? Or did they really pay that amount to begin their path at gaining ownership in strategically important industries? This last point is only half true. As I wrote previously,

With some … significant government ownership [in private energy companies], the Orban government will realize its objective of imposing state ownership over the countries energy assets – and somehow keep prices low.

As I said before, and even in my Tajik commentary, I feel absolutely crazy for writing these statements. But this is what has now transpired, and as the government continues to consolidate its ownership – in a Hugo Chavez style, the Hungarian taxpayers citizens (there are only 2 million taxpayers in Hungary), will fail to realize the benefits of either a market economy or democracy. This is how high the stakes are now becoming. So Hungarians (and foreigners) should not expect any soap in the hospitals in the foreseeable future, while they pay off their IMF loan that financed the purchase of a minor amount in Central Europe’s most successful energy company.


*note: yesterday was the first day that the metro arriving at Moskva ter that it was announced it had reached “Szell Kelmen ter.” The reaction of people in the carriage was not positive, maybe the Hungarian government could keep Moskva ter to foster better relations with the Russians. But then, they also got rid of Roosevelt ter – the Orban government really is not concerned with improving relations with any country.