Category Archives: Popular

Fukuyama gets a letter from paranoid Hungary – but why not me?

He got a letter and I didn’t. What does Francis Fukuyama know about Hungary? What does Francis Fukuyama have to do with Hungary? What does Francis Fukuyama get for writing a blog post about Hungary? A letter. A letter sent from Zoltan Kovacs, Ph.D. of the State Secretary for Government Communication. Dr. Fukuyama wrote one blog post about how Hungary provides an example of why state institutions don’t really matter, because “bad actors can undo even the best-designed institutions.” And the Hungarian Prime Minister Orban emerges as the bad apple leading the bunch.

The letter even came with the Hungarian shield and underneath the “Ministry of Public Administration and Justice.”

Not strong enough to stand against the new Hungarian state
Democracy is crushed, just as Communism was crushed by right-wing state actors

Sometimes life really is unfair. How many blog posts about the autocratic nationalistic anti-Western views of Orban, do I have to write to get noticed by the Hungarian State? Not to mention the fact that I wrote BEFORE Fukuyama about Orban upending the current international technocratic governance regime and the repoliticization of technocratic state institutions. All I got a few months ago, after writing about the Hungarian state’s nationalistic energy strategy was an email from the lawyer of the state owned energy company, MVM, to not use their logo (that was pretty cool too). But a letter from a state organ, now how cool would that be? That is like reaching the blog-o-sphere!

But there are two reasons I have not gotten a letter. First, my wife is Hungarian and I live in Hungary (I’m assuming Fukuyama’s partner is not Hungarian). Because I live here, the Hungarian government knows they got me. Having an Hungarian wife means I have an Hungarian mother-in-law  I’ll never be able to leave Hungary. Also, the last letter I got from the state, was to tell me they were taking away my private pension money. Overall, there is plenty of time and multiple ways they can get me.

Second, I am always right. I have not gotten a letter, Paul Krugman has and now Fukuyama has as well. I only wish those two popular authors could be as exact as me.

Now that I’ve gotten over my jealousy, let’s examine the letter. It is fairly clear from the letter that Dr. Kovacs sent, that Dr. Fukuyama was totally wrong and misguided on four very important points. 1) Retirement ages for Constitutional judges – Z.K. says all judges above 62 must retire (reduced mental capacity??); 2) Hungary has not infringed on the independence of the Central Bank (they are trying, but haven’t been able to do it yet); 3) the new constitution is very good for debt reduction (self-denial); and finally 4) the new electoral law is great for candidates (failed to say for which party).

Be exact!

Ah, Fukuyama didn’t cross his ‘T’s’ and dot his ‘I’s’. For anyone following the constant flow of ‘corrections’ sent out by the Hungarian government this is where they get everyone. When authors try to simplify what is going on in Hungary, sometimes they brush over an item – but this is where the State Secretary for Government Communication – and other state institutions get these authors, and try to make them look ignorant. They get letters like from Dr. Kovacs pointing out their missing ‘periods.’ But like all state bureaucrats, and even like the Communist censors of the past regime, they miss the point of the article, thereby confirming and reinforcing the message. (Maybe it is here that Kovacs was trying to demonstrate that institutions don’t matter).

The point of the blog post that Fukuyama was driving home – and stated – was that Victor Orban is a bad man. Within the structure of the state it doesn’t matter how the state is set up, with checks and balances or rigid regulatory structures, if there is a lack of mature democratic political culture within a country and in political parties, then the state structure, which is weak, will crumble when a bad person, like Victor Orban comes along. “If the political will exists to do something even in a system with a lot of veto players, it will happen.”

Fukuyama was not worried about a slash or a dot, rather he states, “The new Hungarian constitution is bad not so much for what it is, but what it reveals about the long-term proclivities of its authors.” The letter sent by State Secretary Kovacs re-enforces the point and demonstrates that Kovacs indirectly accepts Fukuyama’s perspective and argument. It does this on two points.

 

A worker performs his duties in the Hungarian Ministry of Public Administration and Justice

First, by sending a letter attempting to clarify minor ‘inaccuracies’ the institution of “Ministry of Public Administration and Justice” does not challenge Fukuyama on his argument that Orban is bad and the ‘spirit’ of the new constitution indicates this. The Hungarian state engages at the wrong level. When Fukuyama ends with “Maybe institutions don’t matter, after all.” He becomes right (I actually disagree that institutions don’t matter). Fukuyama becomes right, because Kovacs demonstrates what a bureaucrat he is by becoming a cog in the state machinery sending out letters to blog posts pointing to technical inaccuracies while being oblivious of the main argument.

Second, Kovacs’ letter is an example of the the “proclivities of [the constitutions] authors,” or rather the proclivities of state leaders and how they have employees of the state engage the public. State institutions, have people like Kovacs (and those that work for him) combing every minor detail on a published article or public comment and then writing a letter to defend the current autocratic regime of Victor Orban. This is done by state institutions, instead of accepting and encouraging an open media space in Hungary where a diverse exchange of views occurs without crippling fines for owners of media outlets. Prosecution remains possible if you use the words from the new national anthem in a rap song, as the Hungarian rapper Dopeman did. It is those people that are beyond the reaches of the Hungarian state, that receive such letters. Fukuyama’s makes the point in his blog post, Orban is “grabbing control of the media regulator,” well, Kovacs in his finely crafted and detailed rebuttal did not disagree, thus we can only guess that Kovacs also agrees – or at least accepts this point.

Watch a crime being committed: “Gabriella Skoda, spokesperson of the Attorney General’s Office has previously told the press that „the district attorney has viewed the music video and based on its contents contended that a misdemeanor crime against a national symbol has been committed and the suspicion of crime has been ascertained, therefore an investigation was initiated”.

Restraining of state institutions – including secretaries and prosecutors, should occur, rather than media outlets, so the state does not issue a letter over every little criticism. A country with an open democratic system, does not have the state attacking every criticism in the public sphere – it only makes the state look paranoid – it shows the proclivities of the state machinery. And if they are an open and democratic country, why would they be paranoid? Unless almost every international institution is examining your country for undemocratice practices, then you might be paranoid, as is the case with Hungary. Institutions don’t matter, but for people in Hungary that have their pensions taken away; companies that accrue losses, due to nationalism; and the lack of media plurality, due to government fines and prosecutions – the importance of institutions, and the views and actions of international institutions do matter – (and this, Fukuyama would agree with – added Feb. 8, 2012).

My favorite video, that sadly describes so well the views of people in Hungary – even more now after Hungary has crawled back to the IMF. (click on captions for English subtitles)

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.

 

Why Hungary’s revisionist energy strategy will fail

The involvement of the state in the energy sector is based on generating the economic conditions necessary for broad economic growth thereby benefiting society. This includes regulating the activities of the monopolistic portions of the energy sector and providing effective policies and regulations that further ensure sustained technological evolution. The Government of Hungary is now in danger of impaling the Hungarian populace and its industry onto a costly misguided energy strategy that favors ill-conceived expansionist plans based on nationalistic interests rather than national interest.

[Image taken down by the author after a request was made to remove it, November 22, 2011. It displayed the logo of MVM on the background of an Arpad flag. The author has replaced the image with a previously displayed one depicting Hungarians selling bread in Tajikistan, because either way, it is the Hungarian rate/tax payer that has to pay for bad government energy policy.]

Hungarians in Tajikistan selling bread to pay for their MOL shares (click on picture to find out my past analysis wasn't too far off the mark)

To reach my point about the ill-conceived effort by the Hungarian state to not only take a large interests in the Hungarian oil and gas group, MOL, and now to buy gas assets of E.ON in Hungary – which includes the gas import and trading arms as well as the more lucrative gas trading division, I’ll have to cover some brief history of state involvement in the energy sector and the rhyme and reason for privatizing energy companies. After this, I’ll be able to properly explain the disadvantageous that Hungarian rate and tax payers will now endure for a very long time. The pain of state ownership will only grow over time.

Examples from elsewhere

First, all states support and seek to give their own industries, and even energy companies an extra advantage. As I have established in my research (described next), this happens in the EU and in the United States – and no doubt occurs in other regions of the world. My first example is from the US. The ‘deregulation’ of the electricity distribution companies, the companies that delivery the electricity to the consumer, can be seen to be partly a myth. The largest push for deregulation occured in the US Midwest, in the economically faltering rustbelt.

In my PhD thesis I examined the deregulation process and why it occurred in Michigan and Wisconsin. Without going into a long painful explanation it was down to making each state more competitive against other states. Michigan for example, didn’t even create a competitive marketplace, while Wisconsin which went the furthest to promote competition, politically stated they did not want deregulation.

Now, turning to Europe, the role of the state emerges as essential in both the efficiency of energy companies, and even the operation of the market itself. For privatizations this includes the how and the whom energy companies are sold to and under what conditions the new owners are allowed to participate in the market.

There are two key studies I’m drawing from here to make my point.  One examined the privatization processes in Bulgaria, Macedonia and Romania. The other examined the expansion of mainly German and French utility companies (including E.ON) into the CEE/SEE region. There are a number of lessons that these studies highlight, but there are three overarching key lessons most relevant here. They are:

  1. An effective expansion strategy does not only depend on the willing buyer, but the selling country – and their economic and energy strategy.
  2. State run energy companies are HIGHLY inefficient – at least in Eastern Europe (this also applies to Michigan and Wisconsin case studies of protected monopolistic private companies).
  3. The success or level of participation of privatized energy companies is significantly influenced by governmental decision making – regardless of the conditions offered before privatization.

Squeezing the gas from the foreigners

These three points bode ill for the Hungarian government’s domestic and regional expansion strategy. The purchase from Russian Surgetneftegaz and the (stealing from HU private pension fund money) MOL shares taken from private pension fund, now gives Hungary’s government – a 25% stake in MOL. The purchase of E.ON’s gas assets in Hungary, if it does come to fruition will mark another very expensive buy for Hungary’s nationalistic energy strategy.

"Any advice on dealing with foreign energy investors?"

The price is high. In two transactions, 3 billion Euros will have been spent by the Hungarian government to involve the state into gas assets that do little to reduce the country’s dependency on foreign (Russian) gas supplies, or offer much overall security of supply improvement. The E.ON transaction still must be realized, but it is fair to say that this will occur and that the government owned ‘electricity’ company, MVM, will take ownership.  This means another 1 billion Euro, on top of the 2 billion purchase price of MOL, will be spent consolidating the Hungarian government’s ownership in the country’s gas sector – for which they still haven’t made a strong argument explaining how all this money actually improves security of supply. Does Hungary really have to worry about the German’s threatening to cut off gas supplies or unilaterally raising gas prices (which they could not do anyway)? With further analysis, this nationalistic plan becomes even more absurd.

All this buying activity led the Fidesz parliamentary leader to state,

“We want to establish a competitive state player in the energy sector,” Janos Lazar, head of the parliamentary group of the Fidesz party, said in an interview. “I see great potential in MVM, in building it up, on the national and regional level. There’s a lot of money to be made here, a lot of money,” said in a Bloomberg interview.

First, let’s have a good laugh. “a competitive state player.” While this is an oxymoron, the state can’t be a ‘competitive’ player in a game when it is also the referee. Do we really expect that the market that was once dominated by E.ON, (to the point that the EU Commission forced them to have yearly gas auctions), will be just as competitive with new government ownership?  With government ownership in the only other viable competitor – MOL, there will be no competition. The crushing dominance of the MVM and the Hungarian state, will mean only small and limited competition that exists now will continue. Squashing it out would look too bad and bring unnecessary investigations from Brussels, better to have a few ants dancing about.

The losses that the Orban Government has forced onto gas companies, by stipulating the consumer rate, which is lower than the import/market price, is a key reason that E.ON is willing to sell. The screws will only be tightened if they do not sell. In my Energy Policy article, it is clear E.ON was here for the long term. What is ironic is while MOL is justifying its participation in the privatization in Croatia’s oil and gas group, as an effective and stable investor, at home the Hungarian government is running out foreign energy investors.

Now with the Hungarian government in control of gas imports and the wholesale price, it can continue to squeeze other foreign gas firms, like GDF Suez. By forcing losses on these companies, they will – just like E.ON – pressure these companies to sell their business for a cut rate. For the parent company that must make up the losses, Orban’s offer will begin to sound better as the losses and pressure mounts up. Selling to the Hungarian government becomes the only way out – no other foreign investor will want to buy their assets.

It is important to note, that foreign energy companies will feel the bite, not only in their gas distribution businesses (which the government is concentrating on now), but in their electricity generation businesses too, that rely heavily on imported gas to power the turbines. It is important to keep in mind what I wrote in December 2010:

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.

Well, I may have felt crazy writing that, but I was right. The Hungarian government has no respect for foreign investors and will do whatever it can to drive them from the country. A strong statement, but one that is backed up by the facts. But here is where the Hungarian Government strategy will fail.

Regional expansion

To break out of the Hungarian market, and begin to make the ‘huge amounts of money’ that it foresees, it will need to finance this expansion. The ability to finance this through bank loans or bonds is limited due to the current financial difficulties in the country – and around the world. Therefore, it will rely on the trusted method of having the home market – i.e. Hungarian ratepayers finance this expansion strategy. Past expansion strategies are based on the ratepayers in secure markets paying for the risky expansions of energy companies. This happened in the US in the 1990s when those companies went to South America, and in Western Europe, when French, German and Austrian companies expanded into Eastern Europe. Only after the expansion into Eastern Europe and these companies had built up a considerable base, did the home markets begin to open up as well. Also, as a result of pressure from the EU Commission.

Foreign ownership in privatized electricity distribution companies

If Hungary will be out seeking to buy up assets or finance expansions in other countries through MVM or MOL, which may be loss making for a long-time, they will need high capital to finance. The continue tussles in Macedonia, Bulgaria and Romania between the private owners of distribution and power plants with the regulatory commissions and governments demonstrates the protracted fights and losses that can occur. Deep pockets are needed to weather these storms.

The inefficiency of state owned energy companies in Eastern Europe is legendary. And not just for the number of employees that state owned companies employ, compared to their private counterparts (direct comparisons can be made in the Romanian market where private distribution companies operate along with state owned private distribution companies). The losses that the state is willing to incur, through private deals to certain companies, or sectors, or portions of society are also high. The biggest hurdle to moving to a privatized market in Bulgaria, Romania and Macedonia was raising the below market rates for industry and households.

The rates for consumers did not just have to be raised, but had to be maintained at a ‘market’ rate. This is where the investors begin to lose because the rates after privatizations are then forced below the market rate – as just has happened in Hungary. It is important to note, that it is not just the rate that is important but collecting past dues (money owed) from companies, particularly state owned industries. They may be charging a market rate, but if the consumer is not paying or paying fully, then the state, may over the long term, subsidize the consumer.

Would Marx support the nationalization of energy companies for nationalistic ends?

 

And finally, points 1 and 3 are combined here. Just as the Hungarian government has been vicious to foreign energy companies in Hungary, so can other governments make life hell for MVM-MOL. Breaking into a foreign market – whether it is your neighbor or not – is highly dependent on how much the government is willing to accept the presence of particularly energy companies. The continued dominance of Bulgarian state owned energy companies and the fight the Macedonia government continues to engage with EVN (distribution company), demonstrates how the energy market can have favorites and threaten investments of those that the government does not approve of. The nationalistic expansion strategy of Hungary, I believe, will not be received well in other countries.

While Orban and his ministers, may think they are creating the next CEZ (the Czech power company with broad regional holdings), they are wrong. The expansion of CEZ was done with acute market and business insight (along with support by the Czech ratepayers/taxpayers). The problems the Hungarians have is their energy policy is wrapped up in rabid revisionists doctrine that seeks to control and extend the Hungarian state’s influence throughout the region. I don’t think if MVM-MOL invest in Georgia there will be much regard given by the Georgian government. However, if MVM-MOL move into Slovakia, Romania or other countries  (who are now becoming weary of the revisionist discourse emanating from Hungary), they will be sure to maintain tight control over market conditions to ensure domestic firms or less politicized energy companies are favored over a nationalistic Hungarian gas-electricity group.

Conclusion

Forcing out foreign energy companies from Hungary to build a ‘competitive state player’ will only increase electricity and gas rates for Hungarian consumers. The resurrection of state owned energy companies will only bring along with it inefficiencies and favoritism to specific companies. Corruption may even increase, placing legitimate business at an economic disadvantage.

The expansion of a MVM-MOL group/partnership with nationalistic and power overtures will only continue the logic of governments to maintain tight lopsided controls in their energy sectors. Competition will be limited and new entrants -whether Hungarian or not – will continue to face difficulties competing against already favored firms for access to gas or electricity contracts. Cross-border energy trading in the region will continue to be muted. But just as the Hungarian government is abusing foreign investors in Hungary, so too can other governments abuse a Hungarian supported energy firm – with even more justification.

 

After Fukushima: Assessing nuclear power projects in CEE/SEE

The critical situation at the Japanese Fukushima Daiichi nuclear power plant has already influenced European energy policies but may have limited impact in Central Eastern Europe. The Japanese nuclear crisis is in its early days, but is characterized by the attempt to prevent massive amounts of radiation being unleashed from damaged nuclear reactors, destabilized by two cataclysmic natural disasters. Whether a third man-made calamity, can be prevented remains to be seen. In Europe the political response was swift. Germany shut down seven nuclear power plants and is conducting a full scale review, while the European Commission is developing common EU nuclear standards to be issued in a Directive in the summer. In Central Eastern and Southeast Europe the disaster will have a limited impact on the already faltering efforts to build new nuclear power generation.

The social and political tensions over nuclear power center on the dangers of harnessing an inherently harmful energy source to produce ‘clean’ electricity. Despite these misgivings, the necessity for low carbon energy sources is critical. The projected ‘renaissance’ of nuclear power was seen as playing an important role that could contribute to producing sufficient quantities of power with zero carbon emissions. In Central Eastern and South East Europe, most countries have a long history with nuclear power. They now have plans to expand the amount of nuclear power, however these are faltering due to the significant upfront costs. Any reconsideration of expansion plans in this region due to events in Japan will be minimal.

Projects throughout the region can be seen to be far from being developed. Romania has long considered adding additional nuclear capacity to use for electricity exports and to replace aging coal fired generation. In January 2011, the consortium that was to build two nuclear reactor blocs in Romania fell apart; structuring the financing for the facility was a continuous problem. In March 2011, Bulgaria began to reexamine the cost and viability of a 2,000 MW nuclear power plant to be built by Russia’s Rosatom; disagreement over the price and financial conditions are the main points of contention. The Czech Republic and Poland both have plans to build new reactors but deadlines are continuously missed. Hungary remains committed to replacing its present nuclear capacity by 2030; the bidding process for building another bloc is to begin in 2013. Financing is expected to come from the private sector but Hungary is strongly politically committed to nuclear power and with a lack of natural resources for low carbon generation, the state may finance portions of this project. For all these projects, like in Hungary, it will have to be determined whether it is in the national strategic interest to build these plants as they will need to shoulder more of the financial risks to make the projects viable.

Pressure to actually build these plants in the CEE and SEE region may increase after 2013. This is when the EU’s Emissions Trading System will require power plants to purchase carbon allowances. The cost of producing electricity from coal will increase and be felt by consumers. As one utility executive stated in an interview (drawn from a recent research project by this author), “In Europe they push for dramatic and rapid CO2 targets, but no nuclear, no coal, whatever technological mix is left is costly and will not support European industry” (Energy Utility Executive 2009).  This is the crux of nuclear power: What are projected high costs today may be low in 2030 when carbon based energy will be substantially more expensive.

The safety issues of nuclear power will always surround the technology. Events in Japan, presented in dramatic helicopter water drops, demonstrate the failure of the technology. However, the countries in the CEE and SEE regions are geographically close to the last nuclear disaster of Chernobyl, the experience of nuclear failure is not new. While there has been considerable activity over the past week in Western Europe and at the EU level, suspending and reconsidering nuclear projects, none of these projects in the CEE and SEE region have received similar treatment. In fact Reuters reported on March 17, 2011, the Czech Republic’s Prime Minister, Petr Necas stating, “There is absolutely no reason to limit (Czech nuclear power plants). The government would have to be a bunch of fools to take such a step.” The region remains dedicated to nuclear power.

The current impediments to nuclear power projects in the region are numerous enough, new safety concerns may add an additional variable in decision making, but will not sink the projects. Over the long term, the necessity of having affordable base load generation will prompt the building, of what could be described as, ‘debt prone and day-late’ nuclear power plants. The present EU energy strategy is focused on stopping the much broader disaster of climate change. Nuclear power will remain a central pillar for CEE and SEE countries to reduce their carbon emissions.

The False Energy Accomplishments of Hungarian EU Presidency

Things are super busy here at Limax Energy, so all I have time to state is a simple observation.  It appears that Hungary’s EU Presidency and focus on energy is  shaping up to simply confirm the plans that are already on the drawing board for gas interconnectors in the CEE region.  Check out the below video of Hungarian Prime Minister Viktor Orban laying out this interconnector priority ( at 10 minutes in) and  on arrangement for an energy summit.

It seems like the Hungarians have taken an easy issue that was already moving along after the 2009 Russian/Ukraine gas dispute and put it out there as one of their key accomplishments. Maybe this is why there were rumors before that MOL was being told by the Hungarian government not to rush into constructing the gas interconnector with Slovakia late in 2010. And  here I was thinking it was because of the Russians – but as I said then, it still didn’t make sense. But I think it does now, they are using this already agreed upon interconnector as proof that they have advanced energy security of supply in the CEE region. Nothing like claiming credit for stuff that is naturally happening.

Also, in the video, PM Orban points out that they are waiting for the Poles to move ahead with the interconnector to Slovakia. Well, here is the press report detailing that this is already moving ahead, regardless of Hungary’s EU presidency.

It appears that Orban will proclaim success in June for uniting Central Europe’s gas infrastructure through a grandiose interconnector plan. Too bad it was already well underway before he took over the Presidency.

If he was a true ‘revolutionary’ as he proclaims himself to be, then he might create some goals that are harder to achieve, like ensuring the success of increasing  energy efficiency in the EU – which also appears to be on the plate for diplomats at the upcoming EU energy summit. Decreasing energy demand is equal to, or even more important, than building new interconnectors. I just hope that the other priority concerning the Roma people turns out better.

Hungary to follow Tajik model: Forced donations for Surgut/MOL shares

The question extending back to last spring’s election that brought Fidesz to power, is how will they find the money to buy Surgutneftegaz’s 22% shareholding in MOL. Well, since my analysis has been spot on, that nothing is going to happen, because the Hungarians have the Russians pinned.  It now seems the Hungarians are becoming increasingly embarrassed by their strong position over their former rulers – as they are increasingly trying to find ways to let the Russians save face – I have a solution.

I need to preface my solution with a warning, that this wouldn’t work in most democratic countries. But recent legislation by Hungary’s government from killing the independent budget council, changing the constitutions to limit the constitutional court, taking all the pension fund money, passing highly questionable media legislation, placing a huge  revenue tax on utilities, telecoms and retail companies (regardless if they make a profit and from previous year’s filings) and of course passing a 98% tax retroactive 5 years on state bonuses. Indicates that my suggestion just may work.

From these actions a basic statement can be formulated: Hungary right now may become the first post-soviet country to pursue alternative democratic measures. That is, in Chinese, there are different democratic models that can be used by the state. Hungary, it can be said, is embarking not just on an ‘unusual economic experiment’, as Prime Minister Orban and others in his cabinet have said, but they are also starting an experiment in representational democracy.

Due to these existing conditions, my suggestion to solving the MOL/Hungary -Surgutneftegaz/Russia situation is all the more applicable.

Recently, I have been involved in separate projects that have allowed me to study the energy sector in Central Asia. It really is fascinating – while at the same time sad when you consider the actions of the political leadership and the impact their decisions have on the economically starved citizens (I won’t yet draw parallels with Hungary here). It is through this research that I found the following solution to funding a hyrdopower project in Tajikistan.

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?!

With Hungarians increasing their savings (no doubt related to uncertain times), it only becomes a matter of time before the government taps into this pile of money to finance current operations – or to ‘ensure the security of the country’s energy supply’.  MOL will then have to wonder whether it is better to have the Russians as a shareholder or the unpredictable Hungarian government.

If this scenario does play out then we can only hope it ends up like the Tajik experience, with the IMF/EU stepping in to stabilize the Hungarian economy and putting the kabash on the further ‘reallocation’ of money for energy projects. Or maybe we can look forward to a third ‘special’ tax on the energy sector….

Would Surgut investment in MOL save CEE oil flow?

The question should be asked whether an emerging decline in oil being shipped to  Central Europe could be stopped if Russian investment took place in the region’s refinery sector. And more pointedly, whether Surgutneftegaz’s investment in MOL could save the CEE region from declines in Russian oil shipments. According to this well written analysis from EurActiv.com,

Russia’s growing oil exports to Asia and the Baltic have unsettled European traders and refiners, who fear shortages on the Black Sea and in Central Europe should Russian output stall or decline.


The point that makes this report credible is that the decline is not from a coordinated policy, but one that is emerging gradually over time, due to new supply routes and customer base. While, shifting the supply of Russian energy sources have been threatened in the past, it appears that a coordinated strategy has yet to be implemented. This decline appears to be emerging from the gradual growth, from more localized and less coordinated infrastructure building.

The northern European markets and the Asian markets, with new pipelines and oil terminals coming on line, may reduce the flow of oil through the Druzhba oil pipeline, the article states.While the analysis on EurActiv concentrates on the impact on Poland and Germany and forcing traders in these countries to buy through Baltic ports, there may be a more severe impact on more landlocked countries of Central Europe that are more highly dependent on Druzhba for oil.

The other oil import options open to Slovakia and Hungary are primarily through the existing pipeline connected to  Krk in Croatia. However, a trial of this a few years ago, showed that the oil was more expensive to import than through the Druzhba pipeline which Hungary is (basically) totally dependent on. This make sense even when you consider the lower cost involved in pipelines.

But then we have the obligatory quote concerning the death of Druzhba.

“With the Chinese pipeline due to start any day and the launch of Ust Luga, I’m wondering if we will witness the death of Druzhba. Merkel should call her ‘friend’ Putin to figure out what’s going on,” one trader with a Russian major said.

The slow decline, or rather, slow drying up of Druzhba may occur because of a lack of interest of Russia into the region. While it is unfathomable to think that Russia would let the grapes wither on the vine in Central Europe, forcing them to seek energy resources away from Mother Russia; this may happen through unprepared policies or a lack of foresight into the oil sources necessary for the delivery to Central Europe. Overtime a slow shift may occur.

The fact that Russia/Surgutneftegaz is interested in operating through/with MOL by owning 20% of the company may have secured the region against this slow decline. The involvement in the refinery of the oil produced from Russia adds the value-added and profit level that would maintain Russia’s interest in the region. This does not mean that Russia will pull back ‘purposely’ from the region, but rather if the oil does fetch higher prices through other routes, then a reduction of flow to the region cannot be ruled out.

Hungary and MOL have blocked the investment avenue that Moscow and Surgutneftegas were seeking in the region. There is no doubt that the Russians maintain a strong interest in the CEE/SEE region and for operating more in the refinery sector (and gas is of course always an interest). But reduced oil flows to Hungary and Slovakia will not necessarily increase the countries’ security of supply by forcing them to diversify to a more expensive source. The fact that the pipeline already exists to Croatia adds the necessary security of supply element, expensive oil does not have to be shipped through it to actually improve supply diversity. The higher price to be paid for shipments through Croatia, and the fact that in this one area, Russia has been a reliable supplier, may just mean consumers will have to get used to higher oil prices.

In providing analysis on the CEE/SEE region, I usually try to take a conservative approach. One of my underlining understandings of how energy markets work, and even life, is that sustained change, is usually not brought about by one purposeful action, but smaller actions that culminate into something big. In the case of oil shipments from Russia, through Druzhba, we may, have an uncoordinated and gradual decline. While this allows the region time to prepare, (if anyone notices) it also means this will come at a much higher cost. For Hungarians, the price for blocking Surgutneftegaz may be higher than whatever they now find under the carpet to give to the Russians.

Hungary’s Dual Monarchy Turns into Dual Pipelines


Note: I’m reposting this as it originally appeared in the Energy Security blog, Feb 3, 2010. It still remains relevant in light of the appearance of yet another pipeline project
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The roll-out of the gas pipelines continued last week as Hungary sought to add diversity to its gas supply. Diversity in this term refers to diversifying away from the Ukraine as a transit country, but not from Russian gas. The fifth Hungarian-Russian intergovernmental joint committee meeting resulted in Hungary progressing further in its balancing act of supporting both South Stream and Nabucco. The Hungarian state owned development bank (MFB) with Gazprom set up a joint company to begin pipeline preparations. Hungary may soon be bursting at the seams with gas – but why support both pipelines?

The geopolitical balance that Hungary must strike between competing pipelines results in it choosing a dual pipeline approach: a national compromise of sorts that balances the need to anchor it with neighbors for gas supply diversification and its pragmatic trading relationship with Russia. The Austro-Hungarian Compromise of 1867 attempted to balance the need for Hungarian independence and statehood with Habsburgian dominance and, in the age of Bismarck – realpolitic.

Under the Compromise of 1867, Austria and Hungary each had separate parliaments that met in Vienna and Buda that passed and maintained separate laws. Each region had its own government, headed by its own prime minister….The suggestion for a dual monarchy was made by the Habsburgs but Hungarian statesman Ferenc Deák is considered the intellectual force behind the Compromise….He also felt that Hungary benefited through continued unity with a wealthier, more industrialized Austria (Wikipedia).

The fact that the Russian army effectively put down the 1848 Hungarian revolution combined with Hungarian ties to the Habsburg European monarchy were large influences on the Compromise of 1867. The dual monarchy, as is the dual pipeline, is a reflection of Hungary’s continual balancing act. Unable to break free from Russian influence yet striving to be ‘in’ economically successful Europe, Hungary steers a path that reflects east-west relations. The choice between South Stream and Nabucco gas pipelines reflects this same dual approach.

The support given to both projects by Hungary is genuine. The country can benefit from not just diversity of supplies (routes and sourcing) but also from transit and storage fees that both pipelines can bring to the country. In the age of financial meltdown, social tensions and falling revenue streams Hungary is ill placed to deny additional revenue. Hungary’s oil and gas group MOL, last week reaffirmed an agreement with Gazprom to begin the development of an underground gas storage site at the depleted Pusztafoldvar-Dus gas field– which can/will be utilized by South Stream. Thus even in the case of MOL which is a key partner in the Nabucco project, benefits from participating in the South Stream project can be had. In addition, the Hungarian feasibility study for South Stream will be carried out by MOL within a joint venture MOL-Gazprom company. There should be no illusions, even Hungary’s premier Nabucco partner is set to gain from the Hungarian section of South Stream. Whether MOL would also participate in the actual building of South Stream is unknown, but no other company in Hungary has the expertise.

Therefore, whether one or two pipelines are built in Hungary, MOL may also be positioning itself to be involved in these dual projects. Therefore, without undermining MOL’s position and economic interests, the Hungarian government (with MFB) has stepped in to support the ‘competing’ or ‘complimentary’ pipeline (depending on ones perspective). Politically, Hungary can maintain its international relations, balance neighborhood policy and diversify its gas supply by moving forward in a dual manner.

According to Sergei Kupriyanov, Gazprom spokesman in a March 2009 interview with a Hungarian radio station, “South Stream will be built to supply Russian gas to European consumer. The two projects are totally incomparable; Nabucco and South Stream are not rivals.” And this is where the solution for the Hungarian government may lie. Diversification for security of supply concerns, as both South Stream (non-Ukrainian transit) and Nabucco (non-Russian supply) provide justification for the acceptance and support of both pipelines.

This ‘dual pipeline’ approach allows Hungary, as it has in the past, to walk a fine line between supporting the Russian position and economic interests while also showing support to the ‘neighborhood’ pipeline which seeks supply diversification. The dual monarchy that Hungary participated in, was not the ideal solution, nor the full expression of national sentiment – what it did, through Deák’s statesmanship, was satisfy the competing demands of the nation from internal as well as external tension. The failure of the 1848 revolution firmly placed the future state of Hungary within the Russian sphere of influence – along with the reaction (or lack thereof) of England and France – thereby relegating Hungary to the margins of Europe, where to this day, it still relies on realpolitic for economic and social development.

The acceptance of both South Stream and Nabucco demonstrates the continual balance Hungary, and its companies, play in advancing economic development and their security of supply in energy. The participation of France in South Stream while the demands of the EU (including Austria) lie with Nabucco symbolizes the geopolitical fate of Hungary.