Nabucco’s bubble bursts

Death is now amongst us. Stalking the Nabucco partners… watching as they each pull away. RWE is prefering to get away from the corpse. Death was not the result of a lack of gas, lack of finance or lack of political will: death came from reality. The broader social-political and economic reality that security of supply is not worth $10 billion.

Nabucco rose on the 2009 gas crisis between Russia and the Ukraine – the only viable long term option to for Southeast and Central Europe to diversity away from Russia. The timing was right for the plans and the consortium, the shutting off of gas and the impact it had on countries largely reliant on Russian gas spurred a great impetus to diversify.

Nabucco’s bubble grew with the momentum built on the concept of security of supply for Europe. For companies and governments who supported the project, their commitment and involvement meant that the momentum needed to be maintained. The competition against the Russian backed South Stream, meant there was a race occurring and neither Nabucco’s supporting companies or governments could be seen as folding to the demands – or in the face of Russia’s demands. The hot air continued to be pumped into the bubble as the company executives and politicians spoke.

But now it is done. The decision is made – now the companies and governments have to think of how to exit. I know the feeling. On this topic, I’ve had writer’s block for three months. I couldn’t figure out what was going on. In a previous post, I tried to make sense of it- tried exploring in my writing what was going on. But I just ended up with a feeble post. My friend at Natural Gas for Europe asked for something. I couldn’t deliver, was my explanation…. maybe if I had known my feelings more, I would have known I was watching my prized project – the one I invested so many hours analyzing, die. Like a football fan watching his winning team go down to an inferior team, the impossibility of it all means the mind can’t process the events. Nabucco is dead.

The popping of Nabucco’s bubble was not done in dramatic fashion. Death did not come from the lack of finance, lack of supply or lack of political support. Each of these factors other analysts have claimed would be the reason for Nabucco not to be built. I always argued otherwise; my reasoning was based on the trued concept of Earth, Wind and Fire. Man’s desire for the Earth’s mineral riches is too great, so geology (Earth), finance (Wind) or politics (Fire) could not stand in the way. My argument rested on the nonsensical argument that gas can be created, money spent with flimsy conditions and politicians can all get along. And this is all still true – Man (and I am being sexists in my use of the term) can make anything stupid happen.

The death of Nabucco was caused by a ‘holy shit moment.’ We all have these. Doubts stir, finally they emerge, not just in strong terms, but through clarity. The shift of US support in November 2011 to commercially viable projects that delivers gas to the CEE/SEE region marked an important point. While the other smaller pipeline projects were getting attention and it was ‘out there’ that these could become viable, it was all noise. (That’s all I could hear for the past few months – noise.) But now with the reduction of support from RWE, and the broader shift in the economic conditions in Europe and the world, air is seeping from Nabucco’s bubble. People and companies are ready to buckle down and see how the next few years go.  The importance of security of supply is now reduced. We are all back to comfort foods.

Death did not come about by alternative gas sourcing either. Shale gas did not kill Nabucco. Just as Nabucco went through a three year bubble of irrational discourse, so too is shale gas.  Pipelines did not kill Nabucco. There are two proposed smaller pipelines that would see the Turkish system beefed up, the Turkish and Azerbaijan TANAP project, and now the strong contender, South East Europe Pipeline project, each delivers less gas for lower cost to Europe – and from available reserves in the region. While these now appear to be commercially viable – it was never realistic that Nabucco could compete – or be built – with small capacity and a short term time horizon for payback. Nabucco was a large long-term project that was on the point of visionary –  smaller does not win in the long-term. And so Europe will not either from Nabucco’s demise. Political rationality helped kill Nabucco. The apparent rapprochement, or entrapment –  between the Ukraine, EU and Russia over the Ukrainian transit system, means that reality has also returned to the most financially viable method of transferring Russian and Central Asian gas to Europe. (Can the Ukraine afford to have South Stream built?) In an age of comfort food and ‘STOP – what’s rational?,’ then the continued use of the Ukraine for transit is also smart.

The public death of Nabucco will continue for sometime now. It won’t be fast. But for me, Nabucco is dead. South Stream, will be analyzed in a later post, but what killed Nabucco can also kill South Stream. They are the same creature. But just as one is at a loss after a death, I’ll have to search for a new way to perceive the EU- Russia gas relationship. Pipelines are so 2010’s; now we all have to understand and reconceptualize what the new energy relationship is between the EU and Russia – now the fun begins again.

 

Hungary’s Viktator crashes against the new global order

The crash of the Hungarian forint had us all on edge this week. The ripples went out to neighboring countries and the Eurozone as a whole. The Hungarian Prime Minister, Viktor Orban became globally known by his local name, ‘Viktator.’ With these economic waves, the international press woke up to the disappearance of democracy and failed economic policies in Hungary.

The currency collapse and the removal of checks and balances between government institutions, along with the high speed erratic-drunken-like policy making that marks the Orban regime, is nothing new to us locals. But what is so great about Orban taking Hungary over the cliff of rationality is what it exposes for the modern state system: Erratic dictators are controlled by an international regulatory regime that requires stability, predictability and fairness. Orban went against every tenet of this system in his nationalistic power grab. Foreign companies and Hungarians themselves are all paying more for Orban’s ‘rebirth’ as Hungary’s nationalistic savior.

The politicization of key government and regulatory institutions (judiciary, finance, energy, media, etc.) and the removal – or simple lack of professional knowledge, erodes these key tenets and forces the country into a downward spiral of economic and political demise. In short order Orban himself caused the currency to collapse. He failed to restructure the state to meet modern economic challenges – instead restructuring it to meet his vision of a nationalistic ‘independent’ state. He did this through the  politicization of economic and social policy, and the cementing of these failures into the country’s constitutions. Collectively, these changes doom the country for generations to come. Regardless of what international institutions can force Hungary to change under the pressure of complete economic collapse – a collapse Orban may even accept with his North Korean style nationalistic ideology.

Orban drives the Hungarian economy off the road.

Others will point to the Eurozone crisis as playing a part for Hungary’s economic collapse. If a drunk driver hits a person crossing the street, is it the pedestrian’s fault – or the drunk driver’s? A sober driver may be the  most boring person at a party, but at least they will get you safely home. And that is why we need professional regulators sitting in independent regulatory institutions. The key players in the Eurozone are financial regulators and central banks – each a professionally managed and independent institutions buffered in various forms from political interference. These are the ‘guys’ you want to drive you home.

More broadly the European Union and global modern governance is based on independent regulatory institutions. There independence is secured through how directors are removed or term length, there mandate is to serve the people. Because of this mission, their appointment process should be as depoliticized as possible. They should also reflect local characteristics of each country’s political and historical system (appointments by monarchs are possible). But since Orban is not officially yet the King of Hungary, we can view him as a political actor.

Theory

The global regulatory regime, or ‘regulatory capitalism,’ for David Levi-Faur, holds distinctive characteristics separating it from previous regulatory eras:  stronger autonomous agencies, new technologies of regulation, new national and international regulatory layers. The “hegemony of neoliberal ideology” is more discursive, as capital is constrained through a regulatory regime (Levi-Faur 2005, 27). While Levi-Faur looks at the role of capital we can use Hungary to help us make the link to the political actions of the state.

The charts below demonstrate the rise of regulatory institutions in the EU. These were created to provide a professional policy environment in increasing complex fields that require complex understanding of each sector. This also corresponds with the integration of the EU (or previously the European Community). Globally, the rise of regulatory institutions is mirrored – therefore we can can describe the rise of a global regulatory system.

Can Orban go against the rise of the European regulator? (source: Gilardi 2005)

Regulatory regime saves democracy

The Viktator of Hungary has decided to stand up against these international and national regulatory institutions and politicize the depoliticized technocratic regulatory institutions (i.e. serving the bankers alcohol). He is taking the rug out from under global regulatory capitalism, and forcing it to operate within an unpredictable policy and regulatory environment. The leaked conditions that the IMF has proposed Hungary follow to secure a new financial agreement represent not just  good economic practices but re-enforcing and re-institutionalizing a more stable regulatory order.

– restoring the central bank’s independence;
– reinforcing the Fiscal Council;
– stricter fiscal policy, especially on the expenditure side;
– considerable reduction to crisis taxes and their eventual phasing out;
– putting a stop to implementing ad-hoc economic policy measures;
– seeing through the previously announced reform measures;
– overhaul of the system of social transfers;
– restructuring of public transport companies;
– introducing the institution of consumer bankruptcy

The IMF conditions in blue represent the conditions necessary for global regulatory regime to operate. (As a daily rider of Budapest’s public transport company, BKV, and as such a consumer of carbon monoxide inside the bus, I welcome a long-term vision of financial stability and investment in public transport too.) These conditions lay bare the role that independent financial institutions play in overseeing a country’s economy. They also indicate the areas where the Orban regime has failed to provide professional leadership.

Reinforcing the failure of abiding by the rules of the regulatory regime – in the social sphere is Hungary’s year old media law,  completing Orban’s control over public discourse. Even here, in an in-depth comparative  report on Hungary’s media law done by Central European University, shows the new media regulator fails in every respect to uphold the public good and emerges as a political tool of the Orban regime – and is not an independent regulator.

The former PM Viktor Orban puts out an engine fire on his bus. After being ousted as PM in 2012, Orban became a bus driver at BKV.

In an article that I’m writing on the diffusion of regulatory practices in the energy sector, I emphasize how international best practices that guide regulatory making are localized within social, institutional and political arrangements within each country. This must occur in order for these institutions to be effective and to reflect the needs of citizens. There is a strong debate that these regulatory institutions are anti-democratic and remove democracy from key social and economic actors.

What is clear in the case of Hungary, it is this global regulatory regime, and even international capital, are saving Hungary’s democracy. Or at least attempting to save it. For as much as the IMF can impose financial conditions necessary for Hungary to be bailed out, it is the political support and demands of the EU that will serve the citizens of Hungary in supporting to have democracy partly restored. Maybe the laws on media, judiciary and finance will be amended in the short-term. However, Hungarians will still need to remove the Viktator and his regime from power and re-institute the broader system of checks and balances. Hungarian voters themselves must re-establish democracy in the country. No global or international coalition of institutions and governments can provide the localized and contextualized institutional and social arrangements that a national civil society can develop. So while Orban has given the finger to the international regulatory regime, it is the actors in this regime and the Hungarian people that will have the last word.

 

A picture of Orban running from a BKV Kontroller -Not even the Viktator can ride for free

 

The Orban Regime: Sails Hungary onto rocks – killing democracy

Why do so many lawyers become politicians? Because they don’t know what to do in the courtroom. Well, the same can be said for why politicians don’t set utility rates, because they don’t know economics. Unfortunately, for the Hungarian populace, Prime Minister Viktor Orban and his Fidesz autocratic government their inability to grasp basic economics is turning Hungary into the failed state of Europe.

The failure of the Orban regimes economic policy were most eloquently on display this past Friday (Dec. 30, 2011) when parliament passed two laws that will allow political commissars (as described the by central bank president) to work in the central bank, and to effectively remove the current head of Hungary’s central bank. The Hungarian forint dropped more than 1% in minutes. A post I saw on Facebook, had a financial trader, saying that was a very expensive lunch for him. The political grab for the central bank – and its foreign currency reserves demonstrates why the money is protected from politicians. The reduction of political influence into core monetary policy is a mark of modern global economics – one born of past economic disasters.

However, for Orban, there is no reason to have the central bank independent from government policy making “It is a European fashion that the central bank must be in a sacred state of independence,” Mr. Orban said. “Every time there is a hint of government influence, the nerve endings jerk, sending a signal all the way to Brussels.” And as we know, European fashions come and go, so certainly these trends shouldn’t be paid too much attention to.

Politicians are more trustworthy than bankers

Unfortunately, for Hungary and the rest of Europe, the man challenging current fashion trends is an autocrat that has now removed Democracy from Hungary and is intent to instill the state into many spheres of economic activity. Currently, I’m writing an article on the decline of the political state and the rise of the regulatory state. The regulatory state represents the increased technocratic nature of policy making. That is, independent government institutions, like the central bank, or energy regulators (the Orban regime took away the powers from the energy regulator in 2010) that are highly professional organizations produce professional decisions based on an in-depth understanding of certain issues. For the central bank, the knowledge and understanding of a particular countries economic situation is balanced with how markets and government policies interact. This is why Orban is so annoyed by Hungary’s central bank, because it has to continuously balance out the horrible economic policies of the government that has caused the currency to fall 15% in the second half of 2011.

The rejection by the Orban autocratic regime, which believes in political control over every aspect of Hungarian economic, social and even educational lives (now political appointees will appoint heads of schools), the relegation of independent regulatory institutions goes against the grain of European (and global) governance. Government – the strong political state taking action in all areas of the economy, is giving way to cooperative relationships between diverse stakeholders and in independent government institutions that act as regulators not just on price, but as a regulator in an engine, that balance the political pressure on economic actors. This creates a long term stable environment where private investment can occur and is buffered from constant shifts in political winds. Orban’s removal of independent institutions opens up the economy to strong political winds that whip the economic actors in the country. The shifting winds unsettle investors and raise the risks of operating in Hungary.

The analogy of a sailboat in high winds works well. If the captain of the ship can’t steer the vessel in a predictable path, but must contend with constantly shifting winds, he will be forced to slow down to deal with unpredictable nature. The Orban regime is worse than political winds – winds you can count on being there, rather the regime is akin to Moby Dick swallowing up the profits, whole businesses and even the passenger’s money in high winds. Over time this ‘strategy’ leads to the destruction of more and more sectors of the Hungarian economy.

Viktor - did you take out the life jackets again?

The passengers of the destroyed boats look to the IMF and EU for a lifeline but Moby Orban (who really is Ahab -I just needed to tie ‘Dick’ and ‘Orban’ together), tells the drowning passengers they should swim faster – they don’t need IMF life jackets – “faster, faster!” he yells. “I will save you, just give me power and the money from the central bank!!” In an attempt to motivate the drowning flock, he proclaims, “The problem is not that you are drowing, it’s you haven’t given me enough money to save you. Your pension wasn’t enough – agree to give me your life savings in your bank accounts, and then swim quickly to me, I promise this will be enough to save you.” Under this scenario, the people still drown, the leader didn’t understand (or did he?) if you are drowning staying calm and remaining still will save you. Moby Orban insist on fighting against the capitalist system in a raging storm, his flock of sheep in parliament obey, while the villagers, out on the water for a days sail, are swindled of their money while drowning.

Autocratic regimes are not pretty.  The destruction of the Hungarian economy and the draining of the pension funds and citizens pockets (Hungary now has 27% VAT), must be constantly justified with louder and louder political rhetoric. Action is taken by the regime to demonstrate where they problem lies. For the Orban regime, the problem lies with the bankers, foreign investors and even tax payers that benefited from private pension fund management. None of the capitalist system that flourished over the last 20 years can survive. For Orban and his regime, the failure of current economic policy is not due to their ignorance of how to navigate a boat, but rather the previous crews course the boat sailed on. Somehow for Orban and crew, Democracy and Capitalism are un-Hungarian. The Hungarian nation – is a self sustaining entity that sails its own course. Unfortunately, as much as Orban yells against the waves, howling wind and makes the IMF into Moby Dick, the boat continues to sink and he purposefully left the life jackets on the dock. The drowning passengers, unknowingly have foregone their lifelines and now must entrust their lives and life savings to a man that sails towards the lighthouse light, rather than away. The lighthouse keeper sees the impending crash, but can do nothing to stop the loss of life.