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The Day Hungary Cleaved from Europe: The true cost of Russian gas

The visit of Russian President Vladimir Putin to Budapest on February 17th, 2015 marks the day the Hungarian government voluntarily returned to the Russian sphere.

The outcome is three-fold: First, Hungary’s Prime Minister Viktor Orban openly rejected the EU path of energy market transparency and integration. Second, Hungary accepted ‘cheap’ Russian gas in exchange for a Ukraine-like gas arrangements which depend on Orban’s political fortunes at home. Third, Hungary operates its gas network for the benefit Russian geopolitical aims.  This arrangement threatens both Europe’s  and Hungary’s drive for energy independence, system stability, and European energy security underpinned by interconnection between countries.

A great friendship

The Cost of Cheap Gas

The Hungarian movement into Russia’s embrace was done in the name of ‘cheap’ gas. Reportedly, the price dropped from the oil-indexed price of $440 per thousand cubic meters (tcm) to $260 tcm, against a European gas-on-gas average price of $270 tcm. Bingo! Nonetheless, the drop is significant when you consider this post listing previous 2013 prices in the EU (before our recent oil and gas price decline). Importantly, the deal renegotiated Hungary’s previous long-term contract with Gazprom enabling it to utilize its previous unused gas on the take-or-pay scheme. Although, this supply extension (from a trusted source I’m told) was already agreed to back in 2008 when E.ON owned the import rights. Thus in short, Hungary received very little from Russia for all the political and economic favoritism listed below.

But first let’s put these numbers into a regional perspective. The new price is based on non-oil based pricing, thus hub price. Bulgaria, for example in 2012, renegotiated its long-term contract between Bulgargaz and Gazprom increasing the gas hub based pricing to 20% from 10% previously.  While OMV in January of this year, shifted to hub based pricing with Gazprom. Thus Hungary simply follows on this regional shift that began in 2008 and gets a somewhat lower price for being a good customer.

This temporary arrangement, rather than going with a new long-term contract, was done under the reasoning that current volatile gas and oil prices means Hungary may see further price drops in the future (er, or Russia might increase the price?). It is also enough time for Hungary and Russia lay plans for a gas link to Turkey. Importantly, for this article, election years in Hungary may occur in 2018 and 2022. Any change in government after 2018 will need to deal with the Russians at that point. Cooperation on gas and nuclear will need to continue.

Nonetheless, let’s not think in terms of only open market pricing – which Gazprom is not noted for. Particularly, when Putin shows up on your door. Rather let’s consider that Hungary’s European Union membership was openly sold for gas necessary to prop up artificial utility price cuts and for a trip wire gas deal – any shift in the governing party will result in more expensive gas. Cheap gas and political trip wires are key reasons for the past political instability in Ukraine, in other measures Orban is also shifting Hungary to the Ukrainian gas model.

The overall actions of the Hungarian government during Putin’s visit demonstrate Hungarian historical values are neither respected nor honored. Rather, shameful Hungarian historical political tendencies bared themselves by Putin and Orban’s negation of the living memories of Hungarians break from the Soviet sphere in 1956 and 1989.  But Hungarian society, the one that I know, is waking up. The Hungarian people reacted to Orban’s governing style, and no doubt Putin’s visit, by taking away his two-thirds majority in Parliament in a local by-election this week, February 23rd.  There is no social return to Russia’s barracks.

The Hungarian populace is firmly in the EU. In contrast Orban openly embraces Russia in the pursuit of cheap energy sources, in the form of gas shipments and new nuclear power plant agreement. This pursuit belies a more efficient scenario where Hungary’s EU membership serves as a basis for a more secure  and interconnected system that provides sustainable priced electricity and gas. EU presence in negotiations can also boost Hungarian gas deals. Following the EU path both honors Hungary’s European membership and advances national and EU energy independence.

Political reasons are behind Orban’s friendship with Putin. Hungary has cut electricity and gas prices more than 25% since 2012. During the 2014 local elections advertisements existed across the country proclaiming the energy price cuts; in 2013 there was an open government funded PR war against foreign owned utilities – even a petition drive! The price cuts, while good for households in the short term, have significant impacts on the energy system.

These prices are resulting in private gas and electricity companies hemorrhaging cash for residential customers. Eni, the Italian gas and oil company Hungarian gas subsidiary, TIGAZ, is accumulating financial debts nearing its capitalization.  The Hungarian government is racing to set up its own for profit service provider in 2015 (although they say it is non-profit, it is registered as for-profit). This is necessary to take over the universal consumer obligation. The private distribution companies, owned by ENI, RWE, E.ON do not need to file again to be universal service providers to supply electricity and gas at a loss on the regulated market to households. Nonetheless, to be fair to the Hungarian government, these and other companies did have years to foster a competitive market for households and they never did. The question though is how to foster a  fair market price without bankrupting companies.

The losses on the regulated market can be taken over by the Hungarian state, which has conveniently placed the ‘non-profit’ entity in the Hungarian Development Bank. However, the placement of many energy entities – such as a gas trading entity, into the bank raises red flags.  The potential exists for capital injections into the bank, by the government  to result in cross-subsidized losses. The bank incurs losses, through its ownership of the service provider, but the government makes up for these losses by capital infusions into the bank. However, under the gas agreement the current 25% cut likely be maintained without losses, thus Putin delivered Orban a golden egg – with Putin keeping the goose.

(In the past few months I have submitted questions on this topic to the Hungarian government and state owned companies but my requests for interviews were all declined. The Hungarian energy regulator did speak to me about the technical reasons for cutting gas off to Ukraine in September 2014 – a contract from Naftogaz was never returned).

The Hungarian energy system now operates under the same politically driven concerns as the bankrupt Bulgarian energy system. As a starter, under Orban and the Fidesz super majority in Parliament, the operating profits of the Hungarian utility sector as a whole flipped from a profit of HUF 224 billion in 2009 to HUF 119 billion loss in 2012.   Bulgaria is at least attempting to dig itself out of these past practices, which has placed the Bulgarian state owned energy company, NEK in debt of €767 million in the past four years. (well, it now recognizes these losses, so maybe it will act). Hungary is just lowering the ladder to go down this hole.^ Orban is right, he does need Russian gas to have cheap energy for consumers. The significant losses by utilities and the re-organization of the Hungarian energy market demonstrates this.[For more on information on the similarities of Hungarian and Bulgarian energy systems see this (draft) co-authored article].

Putin’s Pipelines

Driving further dependence on Russia is Hungary’s reduction of interconnector capacity between Hungary – Austria (HAG), and Hungary – Slovakia. The HAG has 3 bcm, but Hungarian state owned MVM holds a monopoly on the capacity granted by the Hungarian Parliament in 2011 citing energy supply security as justification. Capacity is extremely limited and widespread media coverage given to a partially Russian owned firm, MET, holding a special arrangement with MVM on importing and reselling gas into Hungary through HAG. The other owners are reported in the Hungarian media as being politically connected in Hungary.

The story of the Hungarian-Slovak interconnector is short. Meant to open in January 2015, ‘technical reasons’ keep this 5 BCM pipe closed. In addition,  operating rules are delayed while they are being modified. The importance of the SK-HU pipeline is viewed by the fact that German Chancellor Merkel in her February visit with Orban, brought up the use of this interconnector by RWE. As is clear, Putin has Orban’s ear, not Merkel. It remains unknown when this pipe will open.

Constraining Hungarian import and export capacity also constrains volume and price liquidity on the Hungarian market. This would erode MVM’s and Gazprom’s lock on the Hungarian gas market and even allow export to Ukraine. Evidence of this can already be seen in the relatively huge profits booked by MET through its deal with MVM shipping gas from Austria. In 2010, MET had HUF 44 billion revenue in 2010, by 2012, the company had  HUF 280 billion in revenue and “paid 60 billion in dividends to its owners, 2.5 times more than the overall dividends paid by the whole group of foreign incumbents in the same year.”* Or as mentioned above, the utility sector as a whole experienced a  HUF 119 billion loss in 2012. Other market players receive no such treatment, instead they are burdened by both special sectoral taxes and regulated utility rates. The losses in Hungary may only be comparable to Bulgaria – not a model energy system, plagued by riots and constant court battles between utilities and governments.

In terms of the SK-HU interconnector, RWE would benefit by both exporting to Ukraine and servicing Hungary’s industrial sector, which are stuck with Russian gas. In addition, Orban promised Putin not to re-export Russian gas to Ukraine, further restricting gas that could flow to Ukraine.

Market liquidity enables Hungarian industry to build managed gas portfolios enabling them to leverage a variety of gas trading mechanisms to hedge and play with market pricing. These should be done on a liquid Hungarian gas exchange which is operated by MVM’s CEEGEX. Instead, western European gas is limited in Hungary.

Under current rules, Hungary operates a ‘free trade zone’ for gas in its state owned gas storage facilities. Gas traded between entities is confidentially reported to the Hungarian energy regulator.  No tax is paid until withdrawal happens. Thus, Gazprom is able to ship gas to Hungary, the gas can be traded multiple times, and only once it is withdrawn from storage does the price become known. Non-transparency is a friend of Gazprom. Just as huge profits are booked from imports from Austria by the selected MET, who buys and trades with MVM, the stored gas remains opaque. Bi-lateral contracts while legal, should be pushed towards the exchange. Hungary already has CEEGEX  where all free-trade zone gas should be openly traded and would serve Hungary and the region well. Orban has a vision to develop Hungary as a gas trading hub. Restricting imports and exports reduces Hungary’s regional potential.

The necessity to increase Russia’s gas storage in Hungary was prevalent last fall when Hungary needed Gazprom to store gas in Hungary  because it did not purchase enough over the summer months. After Hungary purchased the storage company from E.ON in 2013, the new owners in their first year were waiting for market participants to fill up the storage. With the Hungarian energy system already running a huge deficit, and the Hungarian government slapping taxes on everything from coffee beans to maintaining its 27% VAT,  the country is hard pressed to pay for gas.

One of the key outcomes of the recent Putin-Orban deal was Hungary now only pays for stored Russian gas once it is used. This means Hungary does not need to pay for gas sitting unused in its storage facilities. Security of its gas supply is now handled by the Russians. This is important, as was the case this past year, where Hungary had expensive Russian gas sitting in its storage while the hub price next door in Austria was significantly lower. This may be one reason, the HAG interconnector has a stuffy nose.

This agreement for storage between Putin and Orban also validates my previous argument explaining why Hungary stopped gas shipments to Ukraine and was not able to fill-up its storage during summer. By September 2014, it was clear the Hungarian government needed Moscow’s help. Thus the gas storage deal was struck in September and shipments to Ukraine blocked to make way for the deluge of Russian gas into the Hungarian gas system – or so the official explanation goes. (Coincidentally shipments stopped after Orban met with Gazprom CEU Alexei Miller in September 2014, previously I gave Orban the benefit of the doubt, no longer).

The agreement over flexible storage amounts and timing of payments is also reminiscent of Ukrainian dependency on Russian gas. In the past, Ukraine’s inability to pay for gas placed it under the thumb of Moscow. When Ukrainian political leadership changed, it also meant a significant price increase  for the European friendly government. The new flexible agreement with Putin and Orban further opens the way for any post-Orban political era – which the Hungarian people are beginning to contemplate. Future gas negotiations will need to occur in 2019-2020, time enough to check in on Hungary to see how well Paks is progressing (the start of construction), gas price shifts, Hungary’s stance on EU energy integration, and after the 2018 elections.

The impact that Orban’s embrace of Russia is already apparent. Neighboring Slovakia is planning EuStream which seeks to build an interconnector with Romania and routing the gas via Bulgaria to the Southeast market. This avoidance of Hungary goes against Hungary’s historical attempts to unify both the CEE and SEE region into a tightly integrated gas market. In 2007, Hungary’s MOL took the initiative in its New European Transmission System (NETS) to lead the way. I personally sat in one of the first meetings and it was clear while MOL was taking the lead, it was political resistance in the other countries that held back the concept.  Now we see Hungary attempting to maintain its political control and influence over the region, with neighboring states planning to avoid Hungary.

The pipelines leading into Hungary from Austria, Slovakia and Ukraine, under current operations, should be viewed as strongly influenced from the strong friendship that exists between Orban and Putin. It is apparent from many of Orban’s public statements that he views Hungary being under the tutelage of Russia. Despite calls that Hungary’s energy sovereignty must be protected at all costs. The cost is a battle with the EU over Hungary’s low energy prices, not with Russian energy dependency.

Quixotically, the result is reliance on Russian gas and nuclear technology. The definition of ‘sovereignty’ in recent history holds its place in the last great international relations era when the Soviet Union existed. Thus for this argument of energy sovereignty to even make sense, it must be defined as energy dependence with political and economic sovereignty at home. Unfortunately, if we look at Ukraine, not only have they lost territorial sovereignty, political sovereignty was violated when Russia increased their gas price as retribution for being EU leaning.

When Orban speaks of sovereignty he speaks of his own political sovereignty – retribution will come for new political leadership not aligned to Russia. Putin’s pipeline’s are no longer just transit pipelines.  Hungary maintains energy security restrictions on the HAG, flips on and off the tap to Ukraine, and has technical difficulties with getting its interconnector up and running with Slovakia. All these align with Russia’s aim of restricting regional gas flows. In the past I have usually given Hungarian authorities the benefit of the doubt on these technical matters. Sometimes, it is good to question authority.

The Message: Orban left Europe

The stern and cold messages sent by both Chancellor Merkel (before Putin’s visit), who didn’t know what to make of Orban’s admiration of ‘illiberal democracy’, Polish Prime Minister Ewa Kopacz who held, “honest and difficult talks” with Orban (after Putin’s visit), Slovakia routing neighboring pipelines around Hungary, Romania’s intelligence chief considers Hungary untrustworthy, and Ukraine invites the regional heads of state for a commemoration, but not Hungarian, these all send a clear message: Orban cleaved Hungary from Europe.

The European project founded on energy security and dependency is firmly rejected by the current Hungarian government. All European energy systems are nationally focused, but only those systems most open to corruption and voter manipulation, like the case of Bulgaria or Ukraine, firmly reject integration, transparency, and cooperation with neighboring countries. The European energy system pushes market transparency and integration in the pursuit of prices that sustain and develop the energy system.

In contrast, secret middle of the night nuclear deals, opaque financing of energy utilities, state controlled pricing, coincidental limitations on imported gas,  all underpinned by a hotline friendship – with a leader of a country that formerly occupied your own country, and  just invaded your neighbor, but who gave you some ‘cheap’ gas, to help your politically controlled energy system, reads like a Russian novel, with things never ending well for the main characters.

On top of our Russian novel,  none of Orban’s actions can be labelled as energy sovereignty. Rather, as we can see from Ukraine, energy dependency creates political instability, under investment in the energy system, corruption and the maintenance of a political distance from Europe. Stepping out of Russia’s line results in swift reprisals.

February 17th, 2015, Orban was the lone man out in Europe for opening Hungary to Putin.  The pursuit of cheap gas, the rejection of Europe’s new Energy Union and embrace of a former occupier signals Hungary’s political, economic and energy dependence on Russia. This new relation is dependent on Hungary’s nuclear power deal withstanding EU scrutiny, sustained ‘cheap’ Russian gas and Hungary threatening to block EU diversification efforts  through the Energy Union.  Hungary stands with the opaque political governance model of Russia, not the transparent governance model of the EU.

Nonetheless, as Hungary’s long history shows, the Hungarian people do kick the Russians out. The price Orban got for gas is already too much for most Hungarians.



^LaBelle, Michael, and Atanas Georgiev. “The Socio-Political Capture of Utilities: The Expense of Low Energy Prices in Bulgaria and Hungary.” University of Eastern Finland, Joensuu, Finland, 2015.
 *Felsmann, Balazs. “Winners and Losers on the Liberalized Energy Sector in Hungary: A Co-Evolutionary Approach.” Budapest, 2014.

A strong Hungary is Independent from Russia, not from EU

We have a date. January 1, 2015 when the gas can start to flow from Hungary to Ukraine. This according to reports from a meeting held between Hungary’s Prime Minister Viktor Orban and Germany’s Chancellor Angela Merkel. Hungary needs until then to keep pumping gas from Russia, through Ukraine into Hungary – thus it can’t do any reverse flow to help the Ukrainian’s out.

I think I was too charitable on a piece I published a few weeks ago about Hungary suspending gas to Ukraine. I said this would only take a few weeks – this assumption was from earlier reports stating this was the time needed to ship gas to Hungary.  Magically, that’s not the case. I always try to take the conservative view and be generous to the Hungarian position, but I see this may result in under emphasizing Hungary’s dependency on Russia.

The gas that will be shipped to Ukraine in January 2015 will come via the new pipeline with Slovakia – which Orban emphasized will need to be non-Russian gas. Although, it remains a question of why the current (artificial) arrangement of gas coming from Austria being shipped to Ukraine does not work. Mind you, it is hard to separate gas molecules, so it becomes a technical (or even a slight-of-hand) question of who’s gas ends up in Ukraine. If Hungary is stopping reverse flows to Ukraine for this long of a duration, to accept Russian gas, then the capacity used should be reduced in order to facilitate west-east reverse flows. But apparently, this was not part of the deal between the Russians and Hungarians.  This longer duration amplifies my earlier comments of Hungary being constrained by the Russians.

The question remaining unresolved is whether Hungary is punishing Ukraine on purpose, or the Russians  forced Hungary to stop  assistance to Ukraine. Since my last article I’ve had conversations with people that brings up this dilemma, but my original analysis still stands. In either case, significant explanations must be given – beyond putting Hungary first, as claimed by Orban, as to why Hungary does not assist Ukraine.

If my assumption in my first article on Hungary still stands, a financially weak Hungary is dependent on Russian good will, then the EU must shape its internal policies to account for Hungary being in the Russian camp.

I recently was asked by a Hungarian official why everyone thought Hungary was doing what Russia wanted in the EU. He simply refused to accept this and viewed Russia as a threat to Hungary. I have no doubt his comments and belief were genuine. However, there are two levels of cooperation with the Russians. The first is ‘positive’ in building an energy system. This includes South Stream and expanding Paks – both highly promoted by the Orban government. The second level is ‘negative’ and actively works against EU positions. This means punishing an enemy of Russia (Ukraine), in both of its support against sanctions on Russia and cutting gas off to Ukraine. Since this is the case, it is fair to ask how Hungary is meeting its EU commitments. Because at the end of the day – the Hungarian people still view the EU as a more positive partner than Russia. Thus it is the Hungarian government that pursues, for its own agenda, alignment with Russia.

But even if we consider there is a grey area in Hungary cutting off gas to Ukraine, the main question is whether Hungary was forced into this position, so Russia could advance its position in an EU member state, or does Hungary have another agenda in using its gas and its interconnector pipelines for political and economic ends? In either case, the position Hungary has taken projects weakness and not strength which Orban constantly promotes. A weak Hungary is a danger for both the EU and its neighbors. Its now time for Hungary to get back in line with the EU energy security policy and not be the outlier. And here is why:

If Hungary is forced/willing to use its geographic position in east-west gas transit for political and economic means what other components of CEE/SEE energy security apparatus will Hungary use to project its power? At CEU we recently had Radu Dudau from Bucharest University give a lecture of energy in the Black Sea region. He pointed out that the Hungarian government with its large holding in MOL, and its ownership stake in Croatia INA provides a leverage point the Russians can play.  Thus, if Russia can pressure and/or Hungary willingly blocks gas to Ukraine, how will other energy projects be treated by Budapest.

I think this Moscow-Budapest-MOL-INA connection was a great point. Because as Professor Dudau stated, if Russia has influence through Hungary and MOL, then any LNG terminal in Croatia, whether INA or MOL owned, becomes operationally dependent on Moscow and Budapest deals.  Thus Russia indirectly controls the gas market in the Southeast and in Eastern Europe. Any efforts to build gas independency from Russia is thwarted because Moscow has leverage in Budapest which is willing/forced to accept how the network and the Croatian LNG terminal operate. Russia has been actively seeking to secure control in Croatia’s energy sector for years, and now it may have a willing partner.

It may be more profitable for the Hungarians to  be reimbursed by Russia for any LNG losses (or preventing it being built). The huge debt Hungary is taking on to expand Paks nuclear plant with the Russian loan, already places Hungary into a weaker position.  Russia can leverage this over Croatian LNG. In addition, the constant drive for lower electricity and gas prices in Hungary only feeds the country’s vulnerability to Russian influence. Hungary is dependent on cheaper and cheaper gas to keep consumer rates low. To get lower rates, it becomes more servile towards Russia to get it. Not the strong and proud Hungary Orban claims is being built. The emerging energy and economic weakness of Hungary undermines attempts to increase energy security and independence from Russian gas.  All of the southeast and eastern Europe are exposed to Russian influence through Hungary – if Hungary chooses to support Russian policies in the region. The gas wars can spread beyond the Russian/Ukraine border and enter the EU. I believe this has already happened. Hungary needs to resume gas exports to Ukraine, and stop supporting Russia’s position.


As a concluding note (because this is very cool), I’ve written this in Lesvos, Greece while at the University of the Aegean. I’m looking right now across the Aegean Sea to Turkey. I can see it on the horizon. A revised Nabucco is essential for breaking the Russian grip. The EU needs to be very clear in sinking South Stream and building alternatives to Russian gas. Both Turkey and Greece are essential in making this happen. But more importantly, a strong and independent Hungary is the most important. It should be made very clear to the Hungarian government, just as my Hungarian acquaintance told me, that Hungary does not serve Russia. It is up to the Hungarian government leadership to ensure its independence and alignment with EU policies. Being a good neighbor would be a good first step to rectify poor policy choices. Let the gas flow to Ukraine!


Hungarian Politics Torpedoes Nabucco Participation

The analysis of energy policy goes to the heart of a countries political and economic system. The statement by Hungarian Prime Minister, Viktor Orban that MOL, the Hungarian Nabucco gas pipelinepartner, was pulling out, can only be seen as a politicization of Nabucco and MOL decision making. It is no secret that Orban has a testy relationship with the European Union. But has he really removed a diversification option from the table? Despite increased regional options Hungary only perpetuates its present day dependence on Russian upstream supplies. Now Orban has thrown the country solely into supporting South Stream – diversifying to more Russian gas does not constitute noticeable diversification.

Continued on Natural Gas Europe…

Energy will liberate Hungary from Neoliberal and Western Shackles

The energy sector in Eastern Europe benefited from the central planning efforts of the communist era. The oil, gas and electricity networks built during this time were robust and based on a high level of security of supply. While the oil and gas transit networks may have resulted in dependence on Russian sources, they were nonetheless robust and served to drive national economic activity. In 2004 when many countries in the region joined the EU their interconnected electricity network were more robust than most systems in Western Europe.

The days of central planning, when state owned energy companies were strong

The privatization efforts that begin in the mid-1990s and carried through the mid-2000s (see my Energy Policy article) were marked by selling electricity and gas distribution companies. This corresponded to the establishment of energy regulatory authorities to oversee the activities of these private companies, ensure the public good is fulfilled and keep prices in check while increasing reliability. This regulatory system, when allowed to function, can serve the interests of consumers and ensure private companies make investments while receiving a fair rate of return for their efforts.

Some would mark this last period as neoliberalism with the introduction of private capital and withdrawal of the state from the direct provisioning of public services in energy. A more accurate term would be the rise of ‘sectoral governance’ (Bulmer et al 2005), that is occurring globally. (But that is for another post and the basis of my next journal article). ‘Some’ (bad term to use, but I’ll do it here), consider private ownership in the energy sector, which is the driver of economic activity and has a direct impact on household budget and inflation as an essential state function. State ownership, it could be argued, is important to provide stability, long-term planning and investment to serve the national economy.

In Hungary, ‘the state’ is now in a process of reclaiming ownership rights lost during the ‘neoliberal era’. The need to reclaim ownership in the energy sector is about building up a strong industrial base for the country nation, as pointed out by Peter Szijjarto, the Hungarian Prime Minister’s Spokesman.

“We do not have a serious national industry so in order to reanimate the national industry we need to take such tough steps as for example reclaiming MOL…. In order to make Hungary strong again, we need to eliminate energy dependence, and we need to restore the national character of our strategic companies in parallel with their international operation,” Szijjarto said (Reuters, and my take on it).

Hungary enters a new era with reclaiming ownership in energy companies. The sweeping election of Fidesz, according to Prime Minister Orban allows them to finally end the communist era in the country, thus the need for a new constitution and to reshape the country according to their ‘post-communist vision. The introduction of high taxes on sectors of the economy that are privately held, like banking, energy and retail that were done to save Hungary from economic ruin, as it was explained at the time, now begin to appear as part of a broader reworking of the economic order in Hungary. Orban is leading the Fidesz-KDNP coalition in the process of not just transforming the country from a communist-socialist-private capital haven, which is represented in its own local form, but slaying the broader global order of neoliberalism. Hungary is now, according to Orban, leading the world into a post-neoliberal order.

“While we have put an end to the basic principles of a neoliberal era, we have yet to build up the non-liberal economic policy of the 21st century, in terms of planning, coordination and practices,” he said, adding that because there had been no planning in the real economy, financial planning was askew.

“The old world order is on the verge of collapsing; we have no reason to wait for the advice and opinions of opinion-shapers stuck under the rubble,” Orban said.“We say, however, calmly, politely and unflinchingly: this is none of your business; this is the business of Hungarians,” the prime minister said (MTI, my take on it).

The end of Neoliberalism and American post-war capitalism

It is this new “non-liberal economic policy”  that Hungary will be leading the region and the world in. While Romania and Poland pursue privatization of part of their energy sector, under the old way of thinking that private capital can modernize the sectors and lift some of the economic burden from the state, Hungary views the energy sector not as a burden, but as the fundamental building block of a state owned industrial complex (haven’t we seen this before?).

But what is the post-neoliberal era that Orban describes he is putting in place? Well, this is a huge question that only quoting Gramsci, Polanyi and the like can answer fully – or only partly. But essentially, don’t expect the worker or the tax payer to be better off. The 2 billion euro price tag of MOL demonstrates that it is the taxpayer/worker/citizen that will be paying for this new order, through higher taxes and services (i.e. feed through of ‘crisis’ taxes in inflation) while also having their working rights eliminated, as demonstrated by the total elimination of worker rights in Hungary over the past year. In fact, the post-neoliberal era looks like it is described in this excellent article by Elmar Altavar as presented at a conference in Venezuala in 2008.

The crisis of neo-liberal ideology does not necessarily result in a post-neoliberal order which aims at social forms beyond capitalism. In the contrary, post-neoliberalism in finance can result in new forms of capitalist hegemony which again include a stronger role of the state. Contrary to ‘old Keynesian’ state interventionism, the new interventionism – including austerity with regard to the social wage – will not be designed in favour of workers’ interest and the environment, but in an undisguised political support of financial interests.

Understanding Capitalism takes Marxism

National solutions become the way out of the current neoliberal crisis of capitalism. According to Altavar the state comes back into the economy to provide support to the faltering capitalist system. But while Altavar describes a heavy burden being placed on the taxpayer to finance capitalism to save it from drowning, Orban uses the public monies, not to save the banks and the capitalists which traditionally drive growth, but uses the cash, along with the capitalist’s money, to finance state acquisition of companies for the purpose of reintroducing the state into the market based economy. This occurs in strategic sectors to benefit the Hungarian nation – and state. In this case, the energy sector.

Under Hungary’s new post-neoliberal energy order, energy companies will be used to extend the Hungarian nation-state into domestic and foreign economies. Under this nationalist guise, this may include active participation in former Hungarian lands (Romania and Croatia). The Hungarian territorial state is only a core vessel for the economic activities of the Hungarian nation. If growth and economic prosperity, under this line of thinking, is to occur then the whole Hungarian nation throughout the Carpathian Basin needs to benefit.

The re-industrialization  of the Hungarian nation will be led and financed by the Hungarian people and companies. The logic continues, that MOL, with the help of state owned electricity provider MVM, will lead this economic revival. Along the way, Hungary will boost its energy security through diversification of energy sources (although this remains dubious if  100% of oil is from Russia). The Hungarian nation will become strong by energy, industrial and financial diversification. Those leaders and financiers in America and Europe that Orban scorns, will hold little sway over how Hungary carries out its economic and social post-neoliberal revolution.


The rebirth of Hungary and the fall of Neoliberalism

I thought I would post a few interesting statements by Hungarian political leaders I came across this week, along with a brief personal reflection.



“We do not have a serious national industry so in order to reanimate the national industry we need to take such tough steps as for example reclaiming MOL,” Peter Szijjarto told private broadcaster HirTV in an interview.

“In order to make Hungary strong again, we need to eliminate energy dependence, and we need to restore the national character of our strategic companies in parallel with their international operation,” Szijjarto said.

He did not elaborate on the possible further steps or the areas of industry involved.


Neoliberalism is over

Prime Minister Viktor Orban told a conference assessing the first year of the centre-right government on Tuesday.

“While we have put an end to the basic principles of a neoliberal era, we have yet to build up the non-liberal economic policy of the 21st century, in terms of planning, coordination and practices,” he said, adding that because there had been no planning in the real economy, financial planning was askew.

Orban went on to reject the idea that Hungary should listen to foreign criticism.

“It is worth listening to ourselves and we should not wait for either approval or the contrary,” Orban said.

“In the past we have often abandoned important plans just because someone in America, Paris, Berlin, Brussels or London didn’t like it and let ourselves be discouraged, only to give up on the whole thing in the end,” he said.

“The old world order is on the verge of collapsing; we have no reason to wait for the advice and opinions of opinion-shapers stuck under the rubble,” Orban said.

He said Hungary was still likely to come under attack for various reasons, including the new constitution and economic policy.

“We say, however, calmly, politely and unflinchingly: this is none of your business; this is the business of Hungarians,” the prime minister said.


The Internet:

They fought for freedom to join the West

Towards the end of the Second World War, Hungary is occupied by the Soviet army and all streets, squares, institutions are renamed. People who continue to use the old names are arrested and beaten up by the communists.

Immediately after the occupation, an old man from a village, visit’s the country’s capital, Budapest.

He gets lost. Not knowing that the streets have been renamed, he ask people for various place names.

Old man: “Excuse me, sir, where is the “Heroes’ square”?

Pedestrian # 1: “No, old man, don’t use that name! It’s “Stalin Square” now!”


Old man: “Excuse me, sir, where is the “Chain Bridge”?

Pedestrian # 2: “Oh my God! Don’t use the old name of the bridge! It’s “Red Army Bridge” now! If you say that once more, you could get into jail, be careful!”

The old man gets terrified and takes a walk on the bank of river Danube.

He’s spotted by a soviet officer who shouts at him with anger.

Soviet officer: “‘Ay, old komrade! What ‘r’ ya lookin’ at?”

Old man: “Nothing! I’m just admiring the Volga!”


Hungary after the fall of Neoliberalism

Hungary continues to suckle from Mother Russia

The price the Hungarian government has placed on energy security for the country is 1.9 billion Euros. The price the Hungarian government paid to the Russia’s Surgetneftegaz for buying  21.2% of MOL shares, the Hungarian oil and gas group. The move was promoted by National Development Minister Tamas Fellegi, as a radical move towards energy independence, re-balancing the countries security of supply. It would also allow the country to be more competitive and enable it to hold more economic weight in the region. These two points do not hold up when Hungary’s – and the region’s energy  supply sources are examined.

First, let’s define energy security.

“Energy supply security in fact is very close to the notion of the ‘sustainability’ of the energy system. In conformity with the precautionary principle, investing in supply security implies to incur current costs in order to avoid greater future cost…. This reinforces the demand for active, forward-looking, even if costly risk management” (Directorate-General for External Policies of the Union, Policy Department 2007, 22).

Does the 2 billion Euro purchase of MOL shares improve sustainability of the energy system? No. Hungary, and the CEE region are highly dependent on oil imports from Russia. Hungary and Slovakia are 100% dependent on the oil from Russia. As the graphic below demonstrates, no where else in the world, are two countries so highly dependent on one supplier. Hungarian Prime Minister Viktor Orban and his Government are making false claims if they say that owning a quarter of MOL improves the countries security of supply.

(This shows the dependency between oil importer (down) and exporters (across). The darker the square, the more dependent an importer is of an exporter.  Importing countries are listed from most dependent to one single source to least dependent. Exporting countries are listed form most likely to cause dependency to least likely. Eastern European countries depend a lot on Russia, for instance. A few countries rely on Libya, such as Ireland, Austria, Switzerland or Italy. Countries like USA, Spain or France have very diverse sources of supply.) Source

Hungary, is around 80% dependent on Russian gas. While there are plans for gas diversification (Nabucco, South Stream, etc.) there is no discussion of oil diversification from Russia. As I wrote about before, Hungary and other CEE/SEE may become more squeezed in the future as production falls off in Russia and any additional/remaining supllies are redirected to more lucrative markets.

Follow the oil

Government ownership of a quarter of MOL shares (add in nationalized pension fund shares) does not seem to improve Hungary’s long term sustainability in energy security. When you are essentially 100% dependent on one country for your long-term oil and gas supplies, along with 50% of electricity from Russian nuclear power technology, then significantly high vulnerabilities remain in the short and long term.

The purchase of MOL shares does not improve security of supply within this assessment. In fact, it may undermine it further by politicizing the operational management and strategic focus of MOL. Further government meddling may financially weaken the company making it easier for another attempt of a hostile take-over. But then the state can step in and purchase more shares, so don’t let this fact keep you up at night..

The second argument put forward that this move will make Hungary (and the region?) more competitive falls flat. It is important to consider for a moment, the deregulation of electricity companies in the US in the 1990s. The US Midwest was one of the most active regions to deregulate their electricity markets. This was mainly prompted by the effort to reduce electricity prices by inducing competition which would offer manufacturers lower electricity prices, making them competitive against other states and regions in the US. This was the exact spark that started it in Michigan (see my PhD thesis). Hungary is claiming that the synergies between the bloated state owned electricity intermediary, MVM and MOL can create an energy powerhouse that will propel Hungary forward in the region, and no doubt, move these companies more actively into other countries in the region. MVM-MOL becomes a CEZ on state supplied steroids.

This argument is undermined again, by the fact the Hungary and the region are so heavily reliant on the raw energy commodities supplied by Russia. CEZ runs on coal and can source gas from both Eastern and Western European gas markets. Can the operational and management costs be squeezed so low as to reduce consumers costs? MOL is already the most efficient oil and gas group in Europe, while MVM is non-transparent government owned elephant and no doubt could lose a few pounds.

Finally, The idea that purchasing the MOL shares improves Hungary’s security of supply and fosters a more sustainable energy system, by reducing risks in the short and long-term, proves elusive. Essentially, if Surgutneftegaz’s voting rights, if they were ever allowed to be exercised, were capped at 10%. Over 50% of the companies stocks were held by MOL or friendly investors.  MOL was not in impeding danger of becoming part of the Russian energy empire. If this was the case, then there could be some justification for spending 2 billion Euros, but it is clear that Surgutneftegaz was only a minor shareholder with limited voting rights.

Hungary has not improved its energy security of supply with this purchase. In fact, by introducing state ownership and talking about how MOL fits in with a national energy company, the independence and operational efficiency of MOL are already  becoming eroded. Hungary can only improve its energy security by diversifying supplies and reducing demand for Russian sourced oil and gas. Until it develops and begins to implement a long term strategy of energy reduction and diversification, Hungarian security of supply is dependent on the decisions made by Russian companies and their government.

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

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

Exposing your backside

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

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

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

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

Hungarians in Tajikistan selling bread to pay for their MOL shares

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

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

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

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

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

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

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

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

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

Fishing for boots: My lens of change on the energy sector

The interest in the current gas market in Central Eastern Europe demonstrates the increasing knowledge about our energy sources. Over the past few weeks I have answered a lot of questions from students and journalists about the gas pipeline projects and energy security in the region. I’ve never considered myself an expert on these topics, more a student myself. The energy sector is so multidisciplinary it takes knowing (and even mastering) several topics to begin to be a true expert on the overall subject. It is important though to have a base, or a prism, that the wider changes or processes involved in the energy sector can be seen through. For me, it comes from researching and analyzing change in the policy and regulatory environment in the energy sector and how this is connected to the local. This is the basis of my approach to analysis how markets and regulations interact to diversify energy supplies by fostering investment, or more broadly improving security of supply.

The solitude of thought

The history of energy is filled with transition periods, and if you take the long view, constant change and technological evolution becomes the norm rather than the exception. But all this change occurs within systemic parameters. Due to the significant capital investments and tight legislative and regulatory conditions that are infused into every activity of the energy sector, change is gradual. Transition from one technology to another is gradual, and altering habits, industrial processes and financial regimes all takes a very long time. This is why, as described elsewhere, the transition to a low carbon economy will take a long time unless, these systemic parameters can be altered and streamlined (here is the long journal article version of this argument).

Gas and electricity diversification, or energy security, therefore does not emerge from the sudden need to alter long established trade patterns. Crises no doubt can and does play a part in this, but the constant transition that occurs is partly the result of purposeful actions by stakeholders and broader inertia of regime change. Regulatory regimes, provide the context to frame the need to create specific change, whether for market liberalization or carbon reduction. Within this regime are broader societal, governmental and scientific thoughts that make an immediate impact and hold the potential for long term impact on the energy system. An example is the reduction in car use during high gasoline prices while long term is the increase of alternative energy inputs or alternative modes of transport.

Appreciation of the political-historical context also allows a framing of today’s energy battles. A recent conversation with a reporter, had him fishing for a quote that would describe a new period of relations with the Austrians and Russians. This stemmed from the establishment of a joint company to build 50 km of South Stream in Austria by OMV and Gazprom. Do I perceive a new era in the strong historical relationship between Austria and Russia? No, not really. My Hungarian history book has a few examples of cooperation between the Austrian and Russian monarchies and the squeeze that they put on the Magyars. Should we be surprised when two state owned oil and gas companies seek to pressure the main Hungarian oil and gas company. It was only the failure of OMV and Surgetneftegaz executives to understand historical context that led to their failed attempts to storm the battlements of MOL.

Hungarian Husars - just add a suit and tie for our modern day politicans and company executives protecting energy supplies

My main contextualization of the current transition efforts to reduce carbon stem from the study of the deregulation efforts in the US and the creation of regional markets. What I discovered was the actual deregulation had nothing to do with the perceived political actions for deregulation. In two case studies, of Michigan and Wisconsin – the first deregulated and the second didn’t – it was clear that the public understanding and the technical conditions for public choice of suppliers didn’t exist. Michigan while offering choice of suppliers for consumers, did not lay an effective foundation for competitors to compete with Michigan’s existing utilities. While Wisconsin politicians made it clear there would be no deregulation. However they took strong steps to separate the Transmission System Operator from the vertically integrated utilities, and began integration into a regional market. Essentially laying the basis for competing generation companies to enter the market. This is similar to the current EU attempt in market liberalization.

Underlining these two examples is the role of the local. Local control and local attempts to position their own energy companies to remain strong in the face of competition and possible take over. The laws and new rules instituted to keep MOL Hungarian correspond with the steps in Michigan and Wisconsin. Underlining the restructuring that occurred in Michigan and Wisconsin was fueled with the idea that local manufacturing needed to have competitive electricity rates, but the electricity companies needed to be pushed into offering lower priced electricity, while also protecting them from out of state corporate take overs. It is strongly felt, and the history of electricity in the US reflects this, it is through local control or local/state ownership of electricity companies that results in the ‘best interests’ of the community being fulfilled. Companies will have vested interests in the communities and therefore will act on behalf of the local.

The lens that can be used to analyze energy policy and markets needs to account for the local. It is the local leaders and their local energy companies that will work together to ensure a locality has sufficient levels of security of supply. Within this local formula of measuring security of supply is price, local control and technologies that are used. Crises, or external knowledge, along with new regulatory regimes (i.e. thoughts on how markets and society should be organized) all influence the pace of change. Stagnation of technology or the regulatory structure will impact the ability of the system in the medium and long term to adapt to external ‘threats’. This may be shown in a single large or a series of events. It is through this prism of the historical local political-corporate interests and the role of  technology that my analysis is based. Fishing for the ‘new’ in energy will only land you with an old boot.

Why V. Socor is wrong. Or Austrians show their small size

Following the gas sector in Europe can be exciting, particularly watching the marathon-like stamina of the backers of South Stream and Nabucco. But the emergence of obstacles, or the use of strategic moves, should come as no surprise to spectators. Wrapped up in the Great Gas Game, are geopolitics and individual tactics. Russians like to strong arm their way through, while the Europeans like to appear business like. But what happens when the participants start to draft off the backs of the other competitor? Should we be shocked? There is no rule book, so we shouldn’t be.

The news that the big Nabucco leader, OMV is establishing a joint company with Gazprom to build and operate a section of South Stream in Austria was big news. One of those remarking on this is the highly respected commentator, Vladimir Socor of the Jamestown Foundation. In commenting on this development he states,

The Gazprom-OMV agreement raises at least theoretically the possibility that the South Stream pipeline could outrun and overtake Nabucco in Austria, with Gazprom reaching Baumgarten ahead of the EU-backed project….

Gazprom’s move in Austria forms part of its general mobilization of business and political allies in Europe to stop the Nabucco project.

The explanation and the possible reasoning that Socor gives for Gazprom’s move and the potential impact that this has on one level are correct. But deeper down, the analysis falls short for three reasons. The news that a joint venture between Gazprom and a Nabucco member was established are indicative of things to come, and shouldn’t really be unexpected.

First, Despite what the European countries think of themselves, they have small companies. And in Central Eastern Europe, where the two big gas pipeline projects pass through, is it even theoretically possible that Nabucco and South Stream will be built without the participation of each countries’ main gas company? Such as OMV for Austria and MOL for Hungary. In Hungary, the Hungarian government hides behind the large state owned electricity company, MVM to play with the Russians. However, the technical studies for the joint Russian-Hungarian South Stream project company are being conducted by MOL (a Nabucco member). When it comes to expertise there is no real alternative than the ‘private’ companies that are already in the Nabucco Consortium.

Second, so far Nabucco is the commercial pipeline and South Stream is the political one. In this piece a while ago, I stated the hard decision making the Hungarians would have to make in eventually choosing South Stream or Nabucco. Will it be political or commercial interests that drive participation in ONE gas project? Because ultimately, the Hungarian government (like the other governments) is going to need to pump some money into these projects. And things are tight, so tough decisions will need to be made. Not just hand shakes and saying, “sure, let’s do lunch next week to discuss it- again.”

As I wrote before, Bulgaria is already ahead of the game, telling the EU, “if you want us to participate in Nabucco, then don’t count our government debt that we’ll have to take on to finance it.”

The third reason Socor is wrong to be paranoid about this Russian/OMV deal is – it is old news. (I say paranoid, because one of the great things Socor does, is to draw on paranoia of Russian intentions – I think he does this well, since those not living in these region do under estimate/not understand, the Russian energy moves in the region). Yes, OLD NEWS. Maybe I over estimate the knowledge that people have about these projects, but for the bankers, politicians and those in the gas sectors, the strategies and approaches of Nabucco and South Stream partners have been on display for a few years now. Those following these projects should not be surprised by some consolidation/cooperation of the projects. The Austrians and Russians are old friends, therefore, it is easier for them to go first, than the Hungarians and Russians, who currently have some strained relations (particularly over MOL/Surgetneftegaz shares).

The marathon is now turning into a grueling marathon with strong head winds. Now Nabucco won’t be operating until 2017. The necessity of participating companies and governments to begin to show a few cards should not be unexpected. Can Nabucco or South Stream really be built in Austria or Hungary without OMV or MOL? No. The finish line is a  long way off, but what is unknown is for how long the game that both of these gas pipelines will be built independently of each other will go on. In Austria, the OMV/Gazprom section is only 50 km. However, for the Hungarians both pipelines traverse large sections of the country. The choice between the political South Stream and the (somewhat) commercial Nabucco will need to be decided closer to the end. As in a marathon, if you set a quick pace at the beginning you just may be crawling to the finish. The question is will both projects being crawling or will they be standing and supporter each other at the end?

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….