In the history of this blog, under the Orban government, I have never been able to take seriously the official relationship between Hungary and Russia . This is despite both countries having significant areas for economic relationships, particularly in energy and other areas. The reason for my jilted attitude stems from the passing off of the relationship of one of equals that engage in mutually beneficial energy projects. When Hungary discusses energy with Russia it only means greater dependence on a country that plays politics with energy resources. So when it comes to official visits between the two countries, instead of just discussing Hungarian exports of salami and apples to Russia, we engage in this charade of energy equals.
Today Russia’s Foreign Minister, Sergey Lavrov is in Budapest to meet with his counterpart and with Prime Minister Viktor Orban. The expansion of Paks Nuclear Power Plant is on the agenda and how Budapest is spinning its ‘non-state’ aid and ‘transparency’ argument with the European Commission. There already is a very good study on the non-viability of Paks II, so my comments will focus more on the increasing disparity between government projections of the price of nuclear power and the decreasing cost of alternative energy technologies.
In the world of renewable technology, particularly in the area of solar and wind power, the set rate of the feed-in tariff is now out of fashion. Instead an auction based system is now in place. This provides the chance for project developers to line up their financing and bid on how much their project will cost in comparison to other projects along the same parameters. This gives us a good idea of what the cost is for particular projects and their associated technologies. And the latest projects (albeit in sunny locations) drives the price of Paks II into the ground. Particularly when the life span of Paks 2, from 2026 to 2085 is taken into consideration.
The cost of solar power fell 50% in the past 16 months. It is now at USD 3 cents per kWh in sunny Dubai for 800 MW of solar power, and with favorable financing from Abu Dhabi. In comparison, Paks II will have the capacity of 2400 MW at a cost of USD 9 – 12 cents per kilowatt hour (kWh) for the first 21 year period – when the loan to Russia will need to be paid, and with a cost of USD 3 – 4 cents per kWh afterwards (at today’s HUF/USD exchange rate). And this is with a ‘favorable’ Russian loan.
In the opinion of Attila Aszódi et al., power prices of HUF 28.74-35.56/kWh, depending on the various scenarios, would have to be attained in the 21-year period of the repayment of the Russian loan taken out in relation to the investment, for the power plant to be able to cope without any further financial support. The authors firmly believe, on the other hand, that the project might be a good investment despite the above as, after repayment of the loan, the power plant would generate power at a price of HUF 8.05-11.09/kWh, which will result in a good average price over its entire lifetime (Source: Felsmann, Balazs, 2015).
If we look at the US, then we can see that the price of 5 cents per kWh is achievable now without government subsidies. No doubt the price for solar will continue to drop, so much so, that in ~2026 when Paks II (if it is ever built) will open in a electricity market, which takes no stretch of the imagination, will have the cost of solar even lower than the price of nuclear (Southern Hungary is actually pretty sunny). According to the author of the chart below, southern an central Europe will have solar prices at 6.5 cents/kWh by 2020/2021. Even Steven Chu, the former US energy secretary and supporter of nuclear power stated, “Clean energy is actually getting much cheaper than even I, as a perennial technical optimist, thought it was going to be.”
Some might say I’m comparing apples and oranges, that is baseload power to ‘unreliable’ variable solar power. But when we take into account the developments in energy storage technology and other renewable energy sources, combined with the longer term operation of Paks I (with near 2000 MW), then it can be confidently stated that by 2026 – in just 10 years, storage technology, that is already being deployed around the world, will be even more competitive.
In addition, solar should be seen as a ‘bridging’ fuel in Hungary’s nuclear transition. That is, as Paks I units are decommissioned, solar and other renewables can begin to replace them from (earliest) 2036 and onwards. That is right, the current plant and all its units operates until 2036. It is projected between 2024/2026 and 2036 the output of Paks will be over 4000 MW – Hungary will need to dump this electricity outside of its own borders. Solar can easily be a cost effective source of bridging while either newer nuclear power technology is developed or alternative sources are integrated. In any case, the cost will need to be less than the current Russian offering.
Hungary’s energy relations with Russia is not one of equals. The country is being saddled with an outdated and expensive technology that even today (the day when Russia’s foreign minister is in the country), that is more expensive than alternative technologies. This summer Budapest takes delivery of the refurbished Soviet era metro carriages from Russia (as part of the Paks II deal, us citizens of Budapest had to accept these outdated models), let’s hope that Paks II is not delivered on the citizens of Hungary, the bill is already too high, in 2026 it will be astronomical.
The global fall in oil prices and the shaking foundation of Russia’s economy has analysts and the media questioning Russia’s commitment to financing and building Hungary’s expanded Paks II nuclear plant. On February 17, Hungary’s Prime Minister will be in Moscow for a meeting with Putin – almost a year to the date Putin visited Hungary. Top of the agenda is energy. In this short analysis, I’ll simply be stating the importance of energy projects and the historical commitment both Russia and Hungary hold to supply side economics of energy resources. Their common energy policy is: Immediate cash is more important than long-term energy reduction methods. This is in contrast to more advanced countries which are moving to tackle demand side inefficiencies and rolling out low cost distributed generation technologies.
The autocratic habits of Putin and Orban make them susceptible to stick with supply side economics. Pushing out natural resources and producing more and more energy to grow an economy is straight from the Politburo playbook. Or more accurately, Gosplan’s book.
To frame my discussion on supply side history of energy resources let’s go back to the 1980s, when the Soviet Union’s organization of Gosplan set the five-year plans. And let’s frame this discussion within the general economic difficulties the Soviet Union found itself in the 1980s. Energy investments were planned to increase 50% between 1981 and 1985. More broadly, this “implied that energy was to absorb fully two-thirds of all new Soviet investment during the coming five-year plan…. [With] the share of energy in the planned increment of industrial investment came to a whopping 85.6 percent.” This means, almost all of the money meant to build the Soviet economy was going towards energy projects. Much of this was down to the increasing costs of extraction and expanding the energy network from Siberia (Gustafeson 1989, 36). We can also insert gas pipelines to Eastern and Western Europe. In short, the energy sector was the primary recipient of financial resources for the Soviet Union. The sector held both domestic and foreign political-economic dimensions.
Just to bring us back to the era of Soviet energy policy and the Politburo
Wrapped in the Soviet energy strategy was rolling out nuclear reactors across the Eastern bloc. Hungary was a recipient of this push with the building of Paks in the 1970 and early 1980s. But Hungary pursued Paks only after it became clear that oil was going to be very expensive over the long term for producing electricity. Paks II represents the continued economic investment abroad for political-economic influence, and this supply side ideology.
There was a moment of rationality, by 1983, Gorbachev recognized the need to re-orientate, at a significant scale, capital onto energy conservation measures. Nonetheless, by 1985, global oil prices plummeted along with the dollars fall against other currencies. Oil profits were wiped out in the Soviet Union (Gustafeson 1989, 36, 46 -48).
It is important to pause here, I’m spending time on this, as it reflects our world today – in 2016, low oil prices and external conflicts (even down the the Syria/Afghanistan comparison). The push for conservation was a watered down for the five-year plan starting in 1985, investment into energy supply would continue at a high pace – the money was needed, while energy conservation was given lip-service (Gustafeson 1989, 36, 46 -48).
Russia is built on an export hand-to-mouth energy system. Political influence and immediate cash needs supersede long-term planning for efficiency and effectiveness of energy resources. Putin is lucky to find a friend like Hungary’s Orban who also understands the benefits of supply side energy for political and economic purposes. Cash generated from consumers helps to finance government expenses.
Hungary holds no ambition to reduce its raw energy needs. The solution of the Orban government since 2010 is to take money from foreign and domestic energy companies to reduce household’s energy bills by 25 percent. I’ve outlined how unsustainable this is before. The drop in oil and gas prices over the past few months, has seen households in Bulgaria pay less for their gas, but the same has not happened to Hungarian households. Essentially, either the financial losses in the system are being paid off, or the money goes into the ether.
Under the Orban government, over the long-term, Hungarian households are no better off than the foreign energy companies. The dramatic reduction in investments into the energy sector means fixing things as they break will cost more money. In addition, there is almost no money to invest into energy efficiency. If a large number of Hungarian households have trouble paying their energy bills – and this is the rational used for nationalization and reducing bills 25 percent – then they don’t have money to invest in energy efficiency which will reduce their bills more than 25 percent. Thus over the long term, Hungarian households will pay more for an energy system with spot repairs and for leaky windows and walls.
Demonstrating the common perception in Hungary of corruption at the highest levels, the government is reallocating EU funds of HUF 309 billion meant for energy efficiency measures in 50,000 homes. The money will now be used only in public buildings. In my opinion this is an attempt to satisfy the EU’s energy efficiency directive. This stipulates that governments must renovate three percent of the buildings they own per year. Just like other large scale projects in Hungary (notably LED street lighting by Orban’s son-in-law), these government controlled projects are susceptible to corrupt tendering practices. Or in the eyes of the government, they can meet the EU energy efficiency directive while also channeling money to selected companies. They also do not need to finance this three percent goal from the state budget.
Just like the government of the Soviet Union, both Russia and Hungary place supply side energy economics ahead of demand side efficiency measures. Even if these measures cripple and stunt the economic growth of each country. Supply side measures are only short term building projects pumping out more and more natural and financial resources. Only the companies and individuals vested into building the infrastructure and selling energy resources make money. The financial resources of households are degraded over the long term because they must pay more for emergency repairs and inefficient homes.
Hungarian gas bills represent a simple wealth transfer to Gazprom and both the Russian and Hungarian governments: Twenty-percent of every gas bills goes to pay Hungarian VAT (this is higher than in 2008 – and even higher than Norway’s VAT), around 70% of householders bill payments go to the (mostly) Russian entities that sell the gas, including Gazprom Export. Thus, Hungarian households do a wealth transfer to Russia and to Hungarian government approved entities involved in the gas business. Only a small percentage of the bill actually covers the network costs – which the government waged the war against foreign utilities over. The increase in corruption in Hungary and the endemic corruption levels in Russia means Hungarian households are forced to pay for energy services that may also be involved in corruption. The costly expansion of Paks II, also fits into this narrative. If investments into energy efficiency (both electricity and gas) were carried out households could reduce this wealth transfer to Russia and the Hungarian government.
The original push for energy conservation by Gorbachev in the mid-1980’s was also a push for increase resources to benefit consumer goods and the lifestyles of Soviet citizens. In the end, the financial resources went into expanding the energy sector to underpin an inefficient industrial sector. Immediate cash was the main concern. This is the same concern that underpins the operations of Hungary and Russia – thus they maintain a supply side energy system with high taxes. It would be useful if Putin and Orban spoke together about improving the lives of their citizens through energy efficiency efforts – and not expanding the profits of Gazprom and intermediaries involved in the gas business or large government projects meant expand energy production (Paks) or steering energy efficiency contracts to approved companies. Hungarian household should not subsidize the supply side energy interests in Russia and Hungary. It would also help if Putin and Orban stopped acting like members of the Politburo in 1985.
European Commission. “Energy Prices and Costs in Europe,” 2014. https://ec.europa.eu/energy/en/publications/energy-prices-and-costs-europe.
Gustafson, Thane. Crisis amid Plenty: The Politics of Soviet Energy under Brezhnev and Gorbachev. A Rand Corporation Research Study. Princeton, N.J: Princeton University Press, 1989.
A battle of ideologies is underway in the energy sector of the South and Central Eastern Europe. Just as the ushering in of democracy after 1989 was viewed as a done deal, infusing market mechanisms into energy system was also viewed as an obvious choice. In Hungary, preparing energy companies for privatization began in 1989. However, just as democracy is now eroding in the region, so are the neoliberal energy market mechanisms. State ownership in energy is maintained, while formerly privatized companies are bought back. A new era exists of state owned utilities, politicized energy regulators and retreat of private investors marks the EU’s eastern energy markets.
The cost is high for the energy systems of Bulgaria, Hungary and Poland. State ownership in Bulgaria results in failed strategic endeavors and huge debut (Belene NPP and NEK). In Hungary the repurchase of MOL shares, EON Foldgas transit and storage, gas distribution from RWE and now the take-over of electricity distribution obligations. These are all funded by taxpayer money, most of the endeavors in Hungary affecting end-user pricing are done by their development bank, with the potential to cover losses.
In Poland, large state ownership exists while the failure to launch a shale gas industry partially stems from the inability and the lack of experience to work with foreign investors [each of these three countries and these issues will be discussed in other blog posts, along with costs]. The financial cost of mismanagement and cancelled projects stymies efficient, secure and lower cost energy systems from developing. The once hoped flow of private capital in the region is in retreat.
My bias on the issue of state ownership is clear, I do not favor mismanaged state owned companies or overtly politically shaped utility rates. In the US government ownership exists, and there is political influence in rate setting and market structure. However, in our three countries examined, political influence prevents the system to function in both an environmentally and economically sustainable manner. Electricity and gas rates are cut across the board, benefit even those that heat their swimming pools in the summer, rather than those stuck in energy poverty. Investments into energy efficiency are neglected in favor of maintaining lower electricity and gas prices. Corruption and favoritism often floats around state ownership. From the favored gas trades with MET, in Hungary to selling yearly capacity in a no-bid sale to a private company in Bulgaria; the exclusion of transparency and competitive bidding for capacities stymies fundamental components for a market based energy system from developing.
Excluding the air of favoritism, the political view in all three countries is clear: State ownership (or deals with favored companies) protects the natural resources of the country and provides social benefits that private companies do not. This contradicts the neoliberal competitive market agenda and cross-border operation of energy companies instilled into EU institutions and treaties. The past Communist system held development of the energy infrastructure central to social acceptance. The panel house (with a lifespan of 30 year) may be badly insulated but at least the central heating is cheap. Centrally controlled pricing is still linked to income levels.
Universal access to electricity was the last great global energy project. The goal was clear, provide access to electricity – almost at any cost. This agenda drove the development of energy systems in North America and Europe. Communism accepted the same mantra, thus we should not view some central tenets of political-economic systems as exact opposites. But there are fundamental differences in financing system expansion and operations. The Communist state, as compared to users, pays the overall bill. For example, wages, in the factories of Eastern Europe, may not have been high, but nor were daily living costs. The district heating facilities of Dunaujvaros (previously Stalin City) are connected to the town’s main employer, Dunaferr steal mill. Shutting down certain parts of the steal mill requires a new cogeneration facility – based on full market pricing. Just as universal access was an engineering and political project (hydroelectricity in America), integrated energy and socio-political systems are integrated.
The full commodification of the energy services, electricity and gas, in the household is a market mechanism. Private owners of generation and distribution facilities need to be reimbursed, and with a profit margin, to provide ‘efficiently’ managed services. The energy value chain in both Capitalist and Communist systems holds the fundamental flaw of incentivizing energy production and not demand reduction.
Despite great strides in Western Europe reducing energy intensity of economies, full commodification of energy efficiency does not exist. In Eastern Europe, energy efficiency programs are usually funded by EU funds without governments viewing efficiency as reducing gas imports or improving people’s living conditions. It is still more ‘efficient’ for politicians in Hungary and Bulgaria to sell discounts on people’s utility bills than to provide them with better living conditions in the form of insulation and new windows.
The incentives for supply side, while existing in both neoliberalism and Communism, plays out despite both sitting in contrast to each other. Neoliberalism is inherently an economic project. It was developed by the Chicago School of economists and is often linked to the privatization of energy companies in Latin America and Pinochet’s regime of oppression and rise of Neo-Marxist guerrella fighters. In general, the shift towards global capitalism took off in the 1980s and early 19990s. Neoliberalism, viewed as a project by academics focus on the inherent evil obliterating state support and jobs for three quarters of the world’s poor. Economic shock therapy, eloquently described in Naomi Klein’s ‘The Shock Doctrine’. Neoliberalism, privatization and the market economy rob the factory workers of their jobs, heat and wages.
In Eastern Europe, Communism and political suppression of free speech and religion were just a few ‘costs’ that were paid for living in a utopia – a non-market economy. Now the Communist days of low cost utilities and relatively low cost living standards are now fondly recalled in Hungary, Bulgaria and Poland. Marxist economists trained in Moscow guided the broken and inefficient economies of these countries. While the engineered infrastructure of these countries were designed with efficiency and rational engineering principles in mind, operating them created a different level of engineered and economic inefficiencies. Such as opening windows to regulate heat and an economy based on bartering.
Five year plans favored the academic discipline of engineering for developing the energy system of Eastern Europe. Markets worked according to the infrastructure, rather than the markets dictating what infrastructure would be built. The failure of the EU to integrate its energy system lies more with the market policies that must underwrite new infrastructure, with short pay back periods and avoidance of state aid rather than a lack of engineering skill to integrate the markets.
Even from a market perspective, infrastructure projects planned out over a five year time horizon (or longer) hold significant financial savings for companies supplying the energy and for consumers consuming. The failure of the Nabucco and South Stream pipelines are partially attributable to the conflicting demands of open market access and infrastructure ownership. Energy regulators are meant to create these efficiencies in a market based system. Their role is negated when decision making is politically influenced and returns on private investments are not realized. Thus Bulgaria, Hungary and Poland cannot secure long term advantages from a market based system.
The higher risk for investors and the inability of the state to secure long-term private financing for large infrastructure projects opens the door for Russia to have it’s way (this is less relevant for Poland). The ability for Russia to finance large pipeline projects (North Stream, South Stream, Turk Stream) and nuclear power projects (Bulgaria and Hungary) demonstrates the strength the Russian state has (paradoxically) in financing energy infrastructure in the EU. Thus while the EU’s energy market is based on economics it can’t compete on financial terms.
The market approach also can’t compete when political involvement overrides long term private investments. Political interference pushes these countries closer to Russia as the availability and interests of private companies shrinks. In an environment with politically influenced energy prices, realizing returns on investment becomes more and more challenging. In Hungary, the response has been clear. Private distribution companies, paid out high dividends thereby removing capital from the companies while slashing investments. With the rejection of a market based approach, a financing gap emerges. Russia is happy to fill this by offering its former satellites a one stop shop for finance, infrastructure, technology and the potential for politically favorable pricing.
It is no coincidence that the biggest supporter of Putin and Russia in the EU is Hungary’s Prime Minister, Viktor Orban. After securing a secret late night deal to expand Paks nuclear power plant with Putin, Orban now acts as Putin’s European cheerleader for building Turk Stream. The ultimate goal is political support for Orban and his 25% utility price cuts – that must be maintained.
The clash occurs in South and Central Eastern Europe between former Communist systems and the neoliberal regulatory approach to EU energy markets. The two overriding academic disciplines of engineering and economics only realize their potential with political permission. While these two approaches are reconcilable, politically, past and current adherance to one or the other approach dominants. Favoring a market orientated approach relies on trust in market forces that efficiency will be introduced to the energy market. Trust in engineering enables political involvement to set energy prices – rather than the market.
After the fall of Communism trust was placed in the neoliberal market approach, after 25 years of playing with economic markets, politicians are no longer willing to place significant trust in markets. Thus the crisis of the energy system in the region is set to escalate between the neoliberal market approach required by EU membership and a politically guided market price resting on centrally controlled and engineered large energy systems backed by Russia.
Of course, having said that I want to spend just 15 minutes reflecting on the anti-immigration rants and policies Hungary’s government is pushing. Because, well… I’m an immigrant in Hungary. I think overall my ‘assimilation’ as Orban pointed out is what good immigrants do, is progressing well. I have developed an appetite for fish soup (usually made from carp) and Hungarian pastries (can anyone do poppyseed ‘mak’ better than the Hungarians!? – I think not).
Nonetheless, the current anti-immigration billboard campaign the government has launched is particularly stupid. The thing is – in my 10 solid years of living in Hungary and my frequent visits since 1998, I have never been treated in a rude way because I’m a foreigner. If I’ve been ripped off or cheated it was because I am human. Those people cheating me also cheat Hungarians (kind of like the political class of Hungary). Once I even survived a train trip in the biking car of a train to Balaton with a member of Jobbik. We had a great conversation – in Hungarian.
A few months ago, just as the hate campaign by the government was beginning I was getting ice cream with our children (dual citizens of America and Hungary) and I met a mother from my son’s ovi (nursery). I was giving her my impressions of Hungary and how I like it. But then it felt weird, because Orban was just coming out with his hate campaign against foreigners. I told her that I really felt the government no longer represents the people of Hungary. Because from my experience Hungarians are really open to me, my kids and to the other foreigners I know. They are also strongly aware how other countries treated Hungarians fleeing the Communist regime in 1956. Countries like Germany, UK and the US took them in.
Thus the ‘counter’revolution to Orban’s current billboard campaign against Hungarians is the true Hungary I know. The ground swell to deface and tear down the anti-immigrant billboards is the Hungary that I know and love. These are true Hungarians that are open, hospitable and want their country to be part of Europe. The Orban government is an anomaly that does not represent the best, or even average, of what Hungary is. Hungarian’s accept a lot of shit, but just like Turkey’s Erdogan just lost his election because he did not accept or align with the majority of Turks (which I also know well), Hungarians know that Orban represents the same political and economic regime that they sought to get ride of before 1989.
The thing is, my Hungarian is far from perfect, I can figure most things out, but I can’t even understand what is written on these billboards. Sometimes I’m such as stupid immigrant. Looks, like I need to keep studying Hungarian to understand what I should do to please Orban and stay in Hungary. To understand the posters better I’ll have my daughter and son help me with the translation. But then I’ll have to explain to them how their father is not a burden on Hungarian society and that maybe I should just go back to America. But then I wouldn’t be able to write about Hungarian and European energy policy. Looks like I’ll be staying here, paying taxes and putting up with my ‘burden’ status.
There is a delicate and blurred line between investments into the sustainable energy technologies and security of supply. Both are overreaching concepts that describe a multitude of approaches. At the core is the attempt to upgrade technologies with a low environmental impact while ensuring energy resources (primary and secondary) are secure. Creating a sustained momentum of investments through a clear trajectory is core to an efficiently managed system. The sustained trajectory towards a more secure and environmentally sustainable energy system is where countries in Central Europe fall short.
In Europe, there is a clash of how embedded energy systems contribute to energy security. There are two distinct approaches, one in older member states (UK, France, Germany) and one in newer eastern member states (e.g. Poland, Hungary, Bulgaria). Some countries transformed their energy systems in a rapid manner, like Germany and Spain, where solar and wind received a tremendous boost through feed-in tariffs. This transition is now self-sustaining due to the drop in the cost of technologies and a mature domestic service industry. While Spain cut off financing the industry became well established. In Germany, support remains and the renewable sector will continue to grow.
More broadly, the transformation boosted both countries’ energy security while moving them towards a sustainable energy system. Both environmental and commercial reasons (being leaders in energy technology) fueled this conversion. Spain reduced its oil imports while Germany reduced coal (temporarily) and nuclear power in their energy mixes. Social support existed in both countries for this transition.
Energy technologies in the SCEE region
Building a sustainable technological trajectory to transform energy systems is not occurring in South and Central Europe. Some countries, like Poland, Hungary and Bulgaria have not noticeably altered their energy systems. In fact, these countries are marked by a reassertion of their older technologies. Renewable energy technologies are kept to the minimum EU requirement which is below 20%, and little or no government financial incentives. Instead, these countries are clearly reliant on extending and expanding their current energy technologies. Poland will maintain a high mix of coal in electricity generation, currently this is near 90%. The overall 2050 energy mix is projected to have 60% from coal, 20% from gas and 20% from renewables. Thus a rough projection can see electricity generation from coal being around 70%, while boosting gas and renewables in electricity generation.
Hungary is set to increase nuclear power to over 70%, by expanding its nuclear plant. If life extensions are done for current reactors, then by 2050, this 70% ratio could remain in place. Electricity generation from coal and gas and some renewables will remain. Thus, Poland and Hungary pursue a 70% mark for their electricity systems based on previous technologies. This percentage, when combined with gas, effectively locks out renewable energy to any meaningful degree.
Poland’s Electricity Generation Mix
The energy mix of Bulgaria, from the outside, is diverse. It is a net exporter of electricity and has hydro, nuclear and renewable energy (wind and solar). However, as I will explore elsewhere on this blog, there are systemically high costs associated with Bulgaria’s solar feed-in tariffs, expensive long term contracts for coal-fired power plants, and the general overcapacity of nuclear power, which means even this ‘cheap’ source of energy either needs to be exported or (at times) taken off line due to the oversupply from solar and coal. The future of the Bulgarian energy system, while on the face of it, appears nuclear and centralized, consistent mismanagement may result in technologies with shorter payback periods dominating the energy mix, such as gas and renewable technologies.
Bulgarian Electricity Generation Mix
Technology and Resource Dependency
The choice of Poland and Hungary to maintain their future energy mix at 70% based on technologies from the previous energy era are directly connected to the perceived final price of electricity, gas and energy supply security. Bulgaria continues to debate and engage with reliance on Russian nuclear technology and gas pipelines – on the same level as Hungary. Bulgaria lacks the momentum to diversify away from Russian resources and technologies. All three countries are affected in their choice of energy systems by Russian control of resources and technologies. New investments fall into one or both of the categories of resource in/dependency and technology in/dependence.
The future energy systems in these countries are based on the previous Communist energy technologies and resources. This is not a trajectory that moves these energy systems towards being both sustainable and secure. Rather, ‘cheap coal’ and ‘cheap nuclear’ are perceived to provide the affordable energy that the citizens of these countries accept. The competitive advantage deriving from ‘cheap’ resources and technologies rests on the previous Communist energy complex. Today, these facilities are built under considerably different market conditions than what we have today or in the future.
It is the difference between the old political-economic regime and the one that exists in the EU that is a source of friction today. Financing of the expansion of Hungary’s Paks NPP is now provided by Russia. Russia attempts to influence the future energy choices of the region by extending the previous political-economic system of resource and technology dependency. This will be discussed in the next blog post.
The Magyar came next, and by incessant raiding from his steppe base in Hungary increased the significance of the Austrian outpost, so drawing the political focus of Germany eastward to the margin of the realm.
Projecting Power from the Gas Heartland
What provides the best strategic advantage: Mobility upon the ocean or mobility across the stepped lands of Eurasia? The question was examined by Joseph MacKinder in 1904 before the calamities of the 20th century. Applying MacKinder’s treaties to Europe’s energy landscape of today provides important insights into sphere’s of influence. Today, we can draw on MacKinder and apply the sea vs. land argument for control and influence in Central and Southeast Europe.
In this post I will update a single key underpinnings of Mackinder’s consideration of spheres of influence, drawing from the concept of controlling the resources of the Euroasian landmass (Russia) compared to European counties with access (and control) of the seas. I do not address the historical role and influence of Mackinder’s writings. Reflecting on MacKinder is important because it serves as an important vehicle to understand current debates around Russia’s involvement in Central and Southeast Europe. By updating and re-positioning gas within Mackinder’s framework an assessment of the position of countries between Russia and Western European countries demonstrates important political and economic considerations in the price of gas. In this analysis I’m largely referring to EU member states Poland, Slovakia, Hungary, Romania, Bulgaria.
Thus marginal ocean-fed commerce… form[s] a zone of penetration round the continents, whose inner limit is roughly marked by the line along which the cost of four handlings, the oceanic freight, and the railway freight from the neighbouring coast, is equivalent to the cost of two handlings and the continental railway freight.
If we update this cost of handling – not freight – but natural resources, such as natural gas, oil and even nuclear fuelrods, we begin to see that the past price of freight is still relevant for our discussion. The zone of penetration of ocean freight benefits those countries in Western Europe. While the countries in Central Eastern Europe receive lower priced gas piped across the continent from Russia. While countries in Northern Europe benefit from the piped gas from the North Sea – acting as a ‘land’ source for their energy needs – however, bringing that same gas to much of Central Eastern Europe is constrained by continental infrastructure and increased cost competition for network access in mainland Europe.
The price differentials are first evident in the border prices for networked gas between markets. Hungary’s estimated Russian border price for gas imports for June – August 2014 are at 22.18 Euro/MWh, while the better interconnected network of Germany has a hub price of 18.33 Euro/MWh. While Bulgaria shells out 28.12 Euro/MWh for almost total reliance on Russian gas.
LNG is the seabased routing of natural resources. LNG cannot compete against European and Russian sourced gas for Central Eastern Europe. And here I’ll keep my analysis at a pan-European level to demonstrate even with liquid Western European markets, Russia hold significant competitive advantage. In a direct comparison against global gas prices, Russian gas prices historically come out competitive. In the chart below, the main lines to observe are the Europe Oil Indexed Contracts [after concessions (BAFA)] these include Russian contracted gas, NBP which is a basket of gas prices (including Norwegian gas). Even US exported gas, represented by the Henry Hub price, needs to be doubled for US LNG export.
The regional price for cooperative regimes, we see that deals can be struck. In February 2015, on a to Hungary Putin gave the cooperative Hungarian Prime Minister, Viktor Orban a discount for his friendly attitude towards Russia. In renegotiating a gas import contract Budapest achieved a price of $260 tcm (thousand cubic meters) as compared to a European average of $270 tcm. Similar price adjustments, reflecting changes in international gas and oil prices, were also achieved for Austria earlier in 2015 and Bulgaria in 2012. The takeaway is Russia is competitive and willing to adjust to international shifts in gas and oil prices.
Adjusting wholesale gas prices is essential for influencing the political landscape in Central Europe. Household gas prices are politically important in the region. I discussed above the competitive wholesale market prices in Europe, but divergence is strongly apparent at the household level. Politically, this is where results are achieved for politicians.
The map below shows the price difference for households. Ultimately, as discussed elsewhere on this blog and in other writings by myself, it is the consumer price that helps direct political control and strategy in the energy sector. In the pricing map we have a clear division between those countries reliant on Russian piped gas for consumer prices and those reliant on sea based sources – even underwater pipelines from the North Sea and from Russia (Nord Stream).
When we draw in this information, and the map (above) represents a clear division between how energy markets and geopolitical influence can be exerted. The household price of gas is significantly different in Central Eastern Europe and proportionally lower than the wholesale price difference. In this ‘flash’ analysis I won’t average out the household price difference between the two regions, but eyeballing it there is a clear difference – particularly if the information on the higher wholesale price, European averaged gas price are contrasted with the lower household price. In my opinion there is a significant story of why these price differences exist.
Nonetheless, for our discussion here this gets to the heart of our MacKinder hypothesis. That control of the heartland – the pivot region (Euroasia), the “vast area of Euro-Asia which is inaccessable to ships… and is to-today about to be covered with a network of railways….[with conditions of] mobility of military and economic power…” lends itself to a comparison of gas pipelines, LNG, market structures and geopolitical influence. Events in Ukraine underscore the military might, while differential in household gas pricing underscore the economic might of today’s Russia.
Objections to both a MacKinder view and regional pricing differential views, I believe would have two points. First, they would say that the underdeveloped interconnector network lends itself to isolated markets. A Gazprom position, is that Central European isolated markets consume less gas and therefore are more costly to service, price adjustments just represent market trends. Second, both the break-up of the Soviet Union and the loss of Ukraine of Russia actually weakens the application of MacKinder and the Pivot region. My response to both of these arguments is that if gas prices are non-political then household gas prices would reflect the wholesale market price. However, the dramatic difference between EU household prices indicates elements of political and manipulated economic interests.
Pricing differences between EU member states falls along an important geopolitical fault line. Control of the Eurasian continental heartland and the natural resources, delivered via pipeline, provides a competitive pricing advantage over LNG and even delivery from more volatile regions like North Africa or from politically contentious and higher priced technologies like hydraulic fracturing. Continued reliance and even promotion of options to increase Russian gas into the SEE and CEE regions underscore the political importance Russia holds in securing and dominating these gas markets. As long as household energy prices are a dominant political issue, Russia will continue to hold sway in the regions’ energy markets by projecting its power through political leverage.
Mackinder, H. J. “The Geographical Pivot of History (1904).” Geographical Journal 170, no. 4 (December 2004): 298–321. doi:10.1111/j.0016-7398.2004.00132.x.
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.
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].
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.
The apparent creation of an energy czar for the European Union signals a harder line against Russia. A move from the days when Germany’s Chancellor, Gerhard Schroder moved from the chancellor’s chair to a Gazprom chair – represented the ‘tight’ relationship between Germany and Russia. Akin to marriages between European monarchies. (I’ll leave it to you to develop the image of Schroder marrying into a Russian oligarch family.)
The revitalization of the eastern European countries is now represented by the appointment of Prime Minister Donald Tusk of Poland to lead the other European leaders in the EU Council of Europe. Tusk earlier this year championed a call for an EU gas union that was widely acceptable as a great idea – and has pushed forward the long simmering discussion of a closer EU energy union. In 2010 former European Commission President Jacques Delors and Polish MEP Jerzy Buzek, floated the idea to build an EU energy community – drawing from the founding structure in the European Coal and Steel Community.
It is now the Polish contingent that is pushing for a ‘high official’ to coordinate all external energy policy. The EU Parliament’s Foreign Affairs Committee overwhelming adopted the proposal to create an energy czar to represent a common EU energy position in the foreign policy realm. Adopting a common energy foreign energy strategy and representation – no matter how muddled by diplomatic niceties, is stepping in the right direction to address the tremendous energy security gulf between ‘old’ member states and the states joining since 2004.
As I’ve written before, there is a huge gap between the development of the energy systems in the west and east. Both financially the western EU members are able to invest and upgrade their energy systems, while the east are stuck attempting to keep prices extremely low, with limited upgrades throughout the system. This applies to rolling-out more energy efficiency measures and renewable energy. The east becomes stuck in this pipeline dependency. Unable – and in some cases – unwilling to finance their way to a new energy system.
Independence from Russia is a nice dream, but energy is the way Russia projects its power. For some politicians, like Hungary’s Prime Minister Orban, staying within the Russian sphere of influence holds financial and political benefits. For the Poles, they gain politically moving away but are so wedded to the Russian gas system, and reject significant upgrading to their energy system, such as getting off the carbon road, that they remain tied.
An EU energy Czar able to counter the Czar of Russia (Putin) must be given legitimacy from EU members.This means both the Germans and the Hungarians – much line up with the Poles and seek greater independence from Russia. However, as the building of the South Stream pipelines shows, Hungary and Bulgaria are willing to move forward with Russia on the pipeline despite strong resistance from Brussels. Unilateral agreements and development projects – at the expense of the overall long term EU energy security – will fail to elevate the Czar to a meaningful position. European countries must line up, and even lend some sovereignty to an EU high representative for energy. The foundation of the EU is based on coordination of energy and industry, let’s ensure this remains central to keeping Europe strong.
Just as surely winter comes every year, so does the heating season. However, if the justification from Hungary’s TSO, FGSZ is to be believed, they need to stop gas shipments to Ukraine to prepare for this winter. The Hungarian Prime Minister, Viktor Orban appears to be the grasshopper in Aesop’s fable. The Grasshopper and Ant story is about a grasshopper that plays all summer while the ants work – in preparation for winter. Well, in the cartoon version, it only takes the fall leaves to be blowing for the grasshopper to get cold and regret that he didn’t work harder. In our version today, it is the Hungarian government who didn’t work hard enough in the summer. Although on a state radio news broadcast last Friday night, Orban was credited with ensuring the country has enough gas for the winter – the announcer just didn’t mention this was at the expense of Ukraine.
If we can piece together events, on September 25th it was Naftogaz of Ukraine that suddenly found out, through an email from Hungarian TSO FGSZ, the counterpart was halting deliveries to Ukraine. Media reports imply this was after pressure from Gazprom’s head Alexei Miller met with Orban. However, I do not agree. Hungary is on too good of terms to be threatened by Russia – unlike Poland which disrupted flow for a few days after Russian pressure in September.
The reason Russia refrains from threatening Hungary is the Hungarian Prime Minister is at the forefront in Europe arguing against sanctions over Russia’s involvement in Ukraine. In addition, Orban spearheaded and flew in secret to Russia to sign a deal with Putin to expand the existing nuclear power plant. A big win for Russia to get an EU member to sign up to Russian nuclear technology. Hungary has secured a Russian loan to build the plant, despite having no discussions with the Hungarian public or any feasibility studies. Orban is in charge of Hungary’s energy policy – and representing Russia in the EU. He also pushes to restrain Ukrainian western leanings. Pushing for great autonomy for ethnic Hungarians in Ukraine matches Orban’s nationalistic zeal and his regional agenda; autonomy for ethnic Russians also matches Putin’s agenda in Ukraine. Hungary turning off the taps to Ukraine benefits both Russia and Hungary, by keeping Kiev under pressure.
Technically speaking, Hungary halted deliveries to Ukraine to receive significant quantities of western bound Gazprom gas to be stored in Hungary. The history here is on September 16th Hungary’s Development Minister Miklós Seszták received Russian deputy Energy Minister Anatoly Yanovsky. They discussed the ability for Hungary to store gas for Russia, around 500 million cubic meters. This would take 15 – 20 days to transfer into Hungary’s underground storage. In a scenario that gas flows from Russia, traversing Ukraine, are cut off then Gazprom’s gas would be available to European consumers – and to Hungary. Importantly, it helps Hungary because as of September 27th, the storage capacity was at 62%. It is, however, no accident that Hungary’s capacity is this low at the onset of autumn.
In May 2014, at an event hosted by Central European University the issue of Hungary’s ill preparedness was discussed. A now former manager at Hungary’s state owned Hungarian Gas Storage company, stated that the biggest issue facing Hungary was the low reserves and the financing of gas purchases. The reserves then were at 25% capacity. In short, money to buy gas was inhibiting Hungary’s ability to prepare for the coming winter. Therefore, the current low gas levels of 60% should not be seen in isolation. The lack of gas is a result of the lack of stable state finances for the energy sector and Orban’s energy ‘war’ waged against foreign owned energy utilities. The energy sector is now showing the stresses of heavy state ownership. The flooding of gas into the Hungarian system is at best a result of poorly managed state energy assets, at its worst, it is a calculated move against Ukraine.
Since 2010 Orban has put energy assets under state ownership and driven utility prices lower. Now, the utility sector, and particular retail gas companies, are deeply in debt, they are incurring huge losses to pay for the Fidesz government’s more than 25 percent reduction in electricity and gas bills instituted a year ago. The Orban government is now laying out a plan to have ‘non-profit’ utilities. This is hard to see how the sector can shift from horrific losses to a non-profit-chartable-status without increasing consumer costs. The cost reduction and continued nationalization of assets are set to continue.
The story of Hungary cutting off gas supplies should not be seen as Hungary bending to Russian pressure, rather Russia is helping out Hungary. Central to Orban’s grip on elections is ensuring Hungarian’s feel benefits. Whether this is in the form of retroactively changing mortgage loans between banks and their clients – forcing the banks to payback money in cash, or buying E.ON’s gas storage unit – for energy security reasons – Hungary needs to project power and responsibility over its own fate – and at the same time, deliver cash into the pockets of Hungarians. Russia can help finance and make life more comfortable for Hungarians. Ensuring the Hungarian energy system functions is now dependent on Russian short and long term investments into the country (gas and nuclear).
Hungary needs more gas in its storage in case there is an interruption between Russia and Ukraine. Russia is more than happy to store gas in Hungary, this deal does the following four things to benefit Russia and Hungary: 1) Russia stores gas in Hungary and not in its normal location in Ukraine, giving it European market access and depriving Ukraine of the chance to siphon any off; 2) Previously stored gas was ensured by E.ON Foldgaz Storage, but storage is now owned by the Hungarian state- which lacks the funds to buy large quantities of gas; 3) Hungary boosts its gas reserves with no money down, it only buys from Gazprom if there is an emergency and needs to use it; and 4) Hungary gives the elbow to Ukraine (like it has throughout the entire Ukraine-Russia conflict) but doesn’t inflict significant pain, just cuts off gas for a few weeks proclaiming its own security as more important. Nowhere in this analysis is the assumption that Russia threatened Hungary with a gas cut-off for supplying Ukraine with gas.
Hungary could have – and should have, bought sufficient amounts of gas over the summer. Instead, the country’s leadership were playing with grasshoppers. Back in the spring or early summer the Hungarian government could have struck the same storage deal with the Russians. Instead both Russia and Hungary have waited until the last minute to unroll their ‘technical’ response to Hungary’s low storage capacity. By Russia flooding Hungary’s gas system, Ukraine is deprived of valuable and necessary capacity to help mitigate their looming winter gas shortage. In a generous reading, Hungary is an unprepared neighbor. In a bad reading, Hungary is colluding with Russia to short Ukraine of gas. Let’s hope Hungary is a grasshopper.
The time has come for the European Union to morph into a strong international force representing democratic rights and international stability. Acting softly does not work. The confluence of aggressive Russian tactics to take more territory from Ukraine and Hungary’s rose-tinted glasses on the authoritarian political-economic model of Russia and China – and rejection of EU liberal values, threatens Europe’s founding principles and its territorial integrity.
Peace is threatened on Europe’s edges. It’s time to reach back to the values and wisdom for the founding of the European Union, when it was the joining of the European coal and steel industries, with Germany and France uniting for lasting peace in 1951. Economic dependence would unify the continent and prevent war.
The annexation of Crimea by Russia is now an accepted territorial change. Russia got it for free because the international community didn’t stand up for Ukraine. Now Russia is expropriating more territory to serve Russian President Putin’s political and nationalistic ambitions. Continual instability on Russia’s fringes can help keep not just his popularity up, but keep Russians together rallying for another war. At this point a victory is necessary for Putin. If annexation of eastern Ukraine is not the ultimate end, then instability and projection of an independent Russian enclave inside Russia will do. Control of Russia’s political system, state apparatus, the media, and clamp down on NGO’s all serve to ensure Putin’s power remains unchallenged, ultimately serving his aggressive foreign and military policy. Manufactured crisis ensures domestic support and keeps institutions and the populace toeing Putin’s line.
In Hungary, the parallels are apparent. Orban has waged his own one-sided war against the EU, IMF, US, NGOs and almost every foreign government. The Orban government is actively inciting irredentism in Romania. Instability, created by Hungary, provides the government a platform to ‘represent’ Hungarian interests internationally. The ‘rational’ goes, sins between 1989 and 2010 of liberal economics and communist political maneuvering must be wiped out. However, for most people, this was the democratic period that Hungary had. Nonetheless, democracy, as stated by Orban, doesn’t really work well; now we can watch as Orban consolidates his personal power further by rejigging the whole state institutional structure, and improving upon his (essentially) unlimited authority. In two to three years time we will soon have President Orban to call the leader of the country. Echoing Putin’s back-and-forth between prime minister and president.
Fidesz and Orban have a false mandate. No government can be claimed legitimate when election rules are changed and when the OECD finds the elections unfair. The current two-thirds control in Parliament would not have happened if the elections were fair. Currently, the current local elections are under way, Fidesz wasn’t going to win (or by much), so the rules were changed at the last minute. In a few weeks, they can claim a ‘democratic’ mandate to continue their illiberal and illogical policies of modeling Russia, China and India – and not European countries.
Autocratic leaders are challenging the values and the founding principles for the European Union. For these autocratic leaders nationalism can replace economic growth along with illogical economic and foreign policies. The ‘nation’ also also replaces liberal democratic institutions and individual rights.
The 2008 economic crisis resulted in a delayed and inept EU handling by failing to foster economic cooperation between members states. The current democracy and territorial crisis caused by Putin and Orban, pose a deeper threat to the stability of the EU. Orban and Putin both disparage and dishonor the democratic principles and right for economic freedom: they both reject international stability done through common economic and political values. The expression of the nation is more important than economic growth or individual rights. Instability and security concerns are necessary to project an ‘us’ or ‘other’ mindset. Components needed to maintain unlimited power.
It is now time for the EU to solidify and project its unified strength against aggressive rulers with territorial ambitions and authoritarian power. Not standing up for the founding principles of the EU threatens unleashing the same violent forces the charter was established to contain. The EU must now escalate the cost for Russia to maintain its outpost on Ukrainian territory. Through both economic means, and in human life, through increased military aid to Ukraine to maintain eastern Ukraine. Russia won’t know the EU is serious about territorial integrity until it actively works to keep it. In addition, Hungary may be Russia’s outpost in the EU, but that does not mean the EU must accept or maintain the outpost. Appeasement for authoritarian leaders threatens the political, social and economic founding principles of the EU, and its territorial integrity. The EU needs to act.