I was so F%@$ing right!: I predicted Orban’s current energy policy in 2010, oh – and welcome to Orbanistan

There are days when I question how far I push my ideas in my blog. How close to reality am I really? Using my wild imagination it turns out I actually predicted two key developments in the Hungarian energy sector – back in 2010 and 2011. These have now come true.

The first relates to what Prime Minister Viktor Orban stated today. He said what is unfolding today in Hungary was what he stated would happen in 2010 (i.e. mass nationalization of everything, either directly or indirectly). This includes lower the fixed costs for households, which also includes the price of energy. The path is to continue lowering energy prices in Hungary and forcing the private energy companies to swallow the price reduction. To match Orban’s words and his intent, shoving householders’ energy bills down the throats of the energy companies.

In his regular biweekly interview with public radio MR1 Kossuth, Orbán said “we have come to this at last”, adding that he already had a plan how to go forward step by step when his party came into power in 2010.

“I’ve never made it a secret, only no one remembers it now…” (Portfolio.hu).

But back in 2010 I already said this would happen. I was drawing from the collapse of the gas distributor Emfesz, but the intent is there and has morphed into something else. Rather than security of supply being used as the reason, it is the protection of the Hungarian household and the country’s economic health that will be used to drive the energy companies to scream, ‘uncle’.

“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.”

"And if there is no co-operation we will forcefully lower tariffs further to below the European average." What PM Orban said while wrestling with foreign energy companies
“And if there is no co-operation we will forcefully lower tariffs further to below the European average.” What PM Orban said while wrestling with foreign energy companies

The sadly funny part about the above quote from 2010, is when I wrote it I felt crazy, I have no such feelings now. But I’m not sure the intent is to buy back the companies. I think the intent now is just have the foreign owners loose a ton of money. Orban doesn’t care about the ownership or whether the whole energy system collapses or not. Since there is no investment into the energy sector the whole system will begin to fail in a few short years, and then who will pay for the repairs and more importantly who will be to blame for the failing system? Why the privately owned energy companies. The recent snow storm this past week only heaped more shit on the energy companies for not keeping their network in order, who will be to blame when the lights go off on a normal summer day? The government doesn’t want to be blamed for this. But once the network is run down and the companies don’t want to inject the money to modernize it then the Orban government (yes, even 5- 10 years from now) will be ready to buy the worthless assets.

The second area that I was right on was the parallel that I drew between Turkmenistan and Hungary. This was written at the time that Hungary was buying back the MOL shares of Russian owned Surgutneftegaz. Below is what I wrote in January 2011.

“Tajikistan is seeking to complete its unfinished 3,600-megawatt Vakhsh River Rogun hydroelectric dam, begun in 1976. In December [2009] the Tajik government issued Rogun stock and made it compulsory for citizens to purchase nearly $700 worth of shares, a sum exceeding most Tajiks’ annual income, in order to collect $600 million for construction to continue. After IMF Tajikistan mission head Axel Schimmelpfennig stated that the mandatory forced donations would destabilize the Tajik economy and that returns would be “negligible,” Tajik President Emomali Rakhmon suspended the campaign on 12 April as his administration negotiated with the IMF” (Central Asia-Caucasus Institute)

Now it remains to be seen where Hungary could get the money to buy out the MOL shares from Surgutneftegaz. Particularly since funding is becoming more expensive for Hungary – with the constant downgrading and negative outlooks by ratings agencies a further indication of funding access in the future. Therefore, how best to finance a purchase of MOL shares valued at more than EUR 1.4 billion (the price paid by Surgut to OMV)? And since it has been stated by Hungary’s leadership that ownership in MOL (and other energy companies) is connected to national security than what better way of financing the purchase then to force Hungarians to pay for it themselves?!

Hungarians in Tajikistan selling bread to pay for their MOL shares (what I wrote back in Jan. 2011)
Hungarians in Tajikistan selling bread to pay for their MOL shares (what I wrote back in Jan. 2011)

Not only has Hungary bought back the MOL shares, but its spending spree on energy – and specifically gas assets has not stopped there!

Hungary’s Prime Minister Viktor Orbán and Johannes Teyssen, Chairman-CEO of E.ON signed a Letter of Intent on 30 November 2012, under which state-owned energy firm MVM will buy the German utility’s local gas wholesale unit, E.ON Föoldgáz Trade Zrt. and storage unit E.ON Földgáz Storage Zrt.

With no official price revealed speculation ensued in the press as to how much the state could pay for the assets. The estimates ranged from EUR 600 m to over EUR 1 bn. According to press reports, the Hungarian Electricity Works (MVM) was authorized to pay up to EUR 875 m. PM Orbánconfirmed the acquisition on 1 February but said the contract was yet to be signed. (Portfolio.hu)

 

And how is Hungary paying for these purchases of energy assets? Why a financial transaction tax done through all banks, this includes the savings and purchases of Hungarians and anyone else in Hungary that buys anything or transfers money to someone or withdraws money from an ATM. And how much is this tax bringing in? Now according to my conversion (I usually don’t convert billons) the expected revenue from the transaction tax is 301.1 billion HUF. This (according to today’s exchange rate) comes out to be 981,382,727.883 EUR, or just 981 million Euros. Which means then the government may have some spare change left over after buying EON’s gas unit. So what to do with the spare money? Why buy MOL’s gas storage unit!! Which the Hungarian Development Ministry just announced they are going to do!

 

301,100,000,000.00 HUF = 981,382,727.883 EUR

State to take over MOL gas storage
The government has authorised Development Minister Zsuzsa Németh in a decree to start negotiations with MOL on purchasing a 51% stake in the energy company’s gas storage subsidiary MMBF Földgáztároló.(Hungary Around the Clock, March 22, 2012

So my prediction that Hungary would turn into Tajikistan is true. Not only on the financial and energy side, but also on the political side. Hungary now has all the official characteristics of a Central Asian authoritarian state. There is one difference, Orban was successful in taking the money from Hungarian savings accounts. Welcome to Orbanistan! Let’s change the name of the country again!

 

Hungary morphes into a high risk environment for energy companies

The invitation to Budapest business conference on March 22 reads, “Is it easy to do business here? Regulations, laws, bureaucracy, improvements. Regional outlook.” My response for the energy sector is, ‘no’. The EU requirement for an independent energy regulator, the right to judicial appeal and even access to an independent judiciary are violated by recent moves by the Hungarian government. The investment environment for energy companies in Hungary has turned from a well organized place with low risk, to a high risk environment where investors are fleeced for the lint in their pockets. My argument is supported by my past research on the Hungarian energy sector.

In the case of energy companies we only need to look at the research I conducted back in 2007 and the headlines over the past two weeks. It is hard to believe it is the same country.

In this article for the Journal Energy Policy, I published interviews with the top management of energy companies in Hungary and other CEE countries. This is what they had to say:

‘‘For (our company) in the Central and Eastern European region it is now a core region, like Germany. For example, we have no higher risk ratio for these companies. If we invest in Poland, Slovakia, the Czech Republic or Hungary it is like Germany’’ (interview Brenner, 2007).

It is hard to see how these companies can have the same view of Hungary today. In fact, I would argue that Hungary has left these Visegrad countries and other countries who joined the EU in 2004. Hungary is now classified as a high risk country that can be compared to Bulgaria, Macedonia, and Albania. These countries are currently embroiled in politicized court cases, threats by the energy companies to go to international fora and other public arguments.

In December 2012, the Hungarian Parliament passed a law cutting electricity and gas prices 10%. The Hungarian Energy Office tried to justify this 10% reduction in prices, along with other taxes placed on the energy companies, thus forcing the companies to swallow the cuts. The energy companies challenged that all these additional taxes could not be taken into account when setting rates. In a lower court ruling the gas companies won (with the expectation that electricity distributors would also in another ruling).

 “In their claim the companies said new burdens stemming from regulatory changes, such as the public utility infrastructure tax, the financial transaction tax and the hike to the Robin Hood tax were all duly justified costs that the HEO failed to take in to consideration when setting the tariff” (portfolio.hu).

The reaction from Hungary’s Prime Minister was vicious.

“Prime Minister Viktor Orbán in Parliament called the court ruling “scandalous”, adding that companies profiting billions (of forints) have joined forces against Hungary, but the cabinet will not accept the current situation. He underlined that the retail energy tariff cuts will be even bigger and the companies will be earning even less in Hungary” (portfolio.hu).

Not only in retaliation, but to cement  his political rule, Orban and his party Fidesz, in a matter of days abolished the energy regulator Hungarian Energy Office and replaced it with Hungarian Energy and Public Utility Regulation Office. This office will now have stronger legislative authority and the utilities will able to lodge their appeals to the Fidesz stacked Constitutional Court – bypassing the lower courts. Through other legislative means, the ruling party has now put in place legislation which cements the 10% utility cuts. In addition the head of this new body will be appointed by the Prime Minister, which means it is a political appointment and not based on professional competency with a view of balancing the demands of the industry with those of the political environment. Long term investments can loose out to short term politics. (If the appointments to all the other Orban created institutions and high office, e.g. Central Bank, Media Authority, then there will be no politically neutral appointee to this new institution).

On one hand, the recent moves are not that new. The HEO, as a regulatory institution, had its independence and authority removed by a parliamentary committee that determined the rates (in crude regulatory speak, its balls cut off). The difference now, is that the utilities loose their recourse to any meaningful legal remedy to unlawful government action. In short, when this action is combined with other actions against an independent judiciary in Hungary then there is no longer any protection for investors in Hungary. The utility companies are now at the political whims of the Orban autocratic government. Their only avenue to protect their investments are international courts. The domestic judiciary can no longer be seen as an impartial arbitrator of legitimate complaints (The fact that the Parliament, nor the Cabinet, did not respect the decision of the lower courts, and changed the law and the HEO within a week is evidence of this).

I won’t be attending the investment conference this Friday that is supported by the Ministry of National Economy. I also see from the list of speakers that no one from the energy sector was invited to speak. But a notable speaker is, Péter Szijjártó State Secretary, Prime Minister’s Office, with his presentation titled, ‘Strengthening competitiveness of Hungary’s Economy’. It is too bad that the economic backbone of a country, which is the energy sector, which powers the factories and the computers have cut almost all of their investments in Hungary. I’m not sure how Hungary will power the offices and factories when the grid begins to fail.

Cut Orban off at the Soup Kitchen: Suspend EU Funds

The suspension of EU structural funds to Hungary should happen on Monday, March 11, 2013. This is if the Hungarian Parliament approves the fourth round of revisions to the Hungarian Constitution. Actually, it should happen anyway, as there is no real difference in the state of affairs today and what it will be Monday. But deadlines are useful and it seems that Brussels and the rest of the world woke up again to what is happening in Hungary. My argument for suspension of funds is focused on the role of state institutions. High quality and non-politicized state institutions must ensure the transparent spending of EU money. If these do not exist, the state is open to corruption.

I wrote before about Prime Minister Viktor Orban’s distaste of state institutions that are professional and align with common EU norms. With the placement of former Economics Minister Matolcsy to head the Central Bank and the demotion of two deputy governors, and the expected gutting of staff from the Bank, along with the finalization of the stacking of the Constitutional Court and planned retirement of the remaining hold-outs of non-regime judges, the institutionalization of regime supporters is almost complete. My call for suspension of EU funds rests on the need to remove the financial support of the consolidated Hungarian state under the Orban regime. If Orban’s and Matolcsy’s economic policies are such a success then they should stand on their own two feet. The longer the game of calling Hungary a democracy only perpetuates the regime resulting in the long term decline of the country’s professionally organized institutions and the rule of law. The door of the country is now open to ingraining corruption even deeper and allowing special groups to control whole sectors of the economy – including energy.

The Bulgarization of Hungary

The best example to give is a meeting I attended about six years ago in Athens with South East European countries. It was a technical working committee and most of those in attendance had the authority to agree to changes in how their electricity systems were operated. The only one that couldn’t do anything was the high ranking delegation from Bulgaria. They either sat there and opposed everything or said they didn’t have the authority. The problems with Bulgaria’s energy system are showing themselves from frequent black-outs due to lack of investment to protests erupting over the electricity bills. Snap elections are now underway. Representative of the problems in Bulgaria was the selling of cheap electricity abroad while Bulgarians were forced to buy expensive generation. The long fight between Brussels and Sophia over organized crime in the country – and the failure of Bulgaria to tackle it, demonstrates what can happen when  gutted and powerless state institutions exists and crime/special interests control the state.

I was a co-author of a study in 2009 on the privatization of the state owned electricity distribution companies in Bulgaria. It turns out that the privatization process or the new private owners were not the source of the problem. Rather the shifting politicized regulatory environment and the actions, or rather in-actions, by state owned energy companies is the source of much of the problems. Thus the fault lies with the state – demonstrating the importance of effective state institutions, with a professional work force to oversee the energy system.

Hungary's future 'regional' cash cow - maybe a little too fat to make it out of the country
Hungary’s all purpose state vehicle. From pipelines to mobile phone operators. The cow should be the symbol of the Orban regime. From milking private companies to producing milk for the Hungarian nation.

Economic Corruption 

One of the biggest complaints since the fall of the Communist regimes was how leaders of state owned companies financially benefited from the privatization of their units. The Hungarian economy is becoming more state owned, centralized and controlled by political connections by the day. Certain companies are ‘lucky’ enough to continually win government tenders while tenders that should be public are placed behind the curtain of state security (like a swimming pool or a parking garage) thus allowing certain firms connected to the government to be selected. At the same time, the Hungarian economy falters due to the lack of investment by established international firms. The cracks in Hungary are now appearing for organized crime and ‘opportunistic’ individuals to begin their investment cycle in Hungary.

The great thing about living in a failing state is I can watch it unfold and talk to people that are adjusting real-time to the economic and social changes. A few months ago I was in the gym and a business executive told me now was the time to begin investments in the country because when the regime falls then it will pay to be in the right position to pick up the pieces. His business, from what I know of it, is fairly legitimate. However, (representative of my movement between locker rooms and conference rooms) I recently met someone and his comments and interests in Hungary put me on guard. His business could be questioned as legitimate or not. Hungary for him was viewed as a great opportunity. He has money and wants to invest in Hungarian projects where most established players are pulling out and where any investment outcome is questionable or offers returns only in the far distant future. I question his motives for investing in Hungary and I view it as representative of broader interests in the country by ‘non-transparent’ businesses.

Once the dots are connected, a failing state, teetering on economic collapse, controlling special interests, Putinized democratic elections and state institutions that are under the direct control of politicians where professional decision making is given over to political and personal interests, then the recipe is set for Hungary to become a country ripe for economic corruption and pillage. Long term investments by established and stable national and international companies are replaced by white elephant investments given to government selected firms. EU subsidies are directed to political and economic allies (such as the recent agricultural land give away to connected individuals over local farmers). Hungarian nationalism is used as an excuse to ensure selected firms and individuals profit for their loyalty to the government. In this environment it won’t matter the character references of individuals or companies – if they support the regime then they are friends of the regime.

EU scapegoats – or Orban at the soup kitchen

The decision for the EU is simple. Does the European Parliament and the European Commission want to support the long term gutting of state institutions in Hungary? Certainly democracy and the right to vote is important, but the Orban regime can play soft with what democracy is in Hungary – values can be debated. Professional and institutional competence are inherent to the EU structure. Orban and everyone else may hate the bureaucrats in Brussels, but it is these bureaucrats in both Brussels and Budapest that disburse the funds and underline the democratic order. If funds could be suspended for Bulgaria and Romania over this point then they should be suspended for Hungary.

The suspension of funds for Hungary would drive the country into a greater recession, Orban will lash out at Brussels and blame the collapse of the Hungarian economy on the EU. But why should the EU fund a regime that doesn’t believe in democratic principles and effective, independent state institutions. These are the pillars of the EU. In a country where the rule of law is politicized businesses and EU funds cannot be spent effectively. Control over the Central Bank is only the most recent case of politicization. The longer the Orban regime stays, the less professional and more corrupt state organs become.(The greater the juiciest pieces will be picked over at the time of collapse). As economic decline takes hold (as it already is) the more desperate people will become to stay in their jobs and accept corrupt practices. Passivity and acceptance allows the erosion of democracy. It appears now, only the EU has the power to say no to Orban. And they should say no to his outstretched hand. If begging and homelessness is now illegal – according to Monday’s  constitutional revisions, Orban should be turned away from the soup kitchen.