Tag Archives: Putin

Putin-Orban Politburo Meeting: Cash and energy co-dependency

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).

An energy conservationist?

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.

Source: European Commission, 'Energy prices and costs in Europe' 2014, https://ec.europa.eu/energy/en/publications/energy-prices-and-costs-europe
Source: European Commission, ‘Energy prices and costs in Europe’ 2014, https://ec.europa.eu/energy/en/publications/energy-prices-and-costs-europe

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.

Additional sources:

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.

Russia and Mackinder’s reach into CEE Gas Markets

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.

H.J.Mackinder 1904

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.

Historical Reflection

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.

–H.J.Mackinder 1904

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.

Price Differences

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.

Source: Market Observatory for Energy DG Energy, https://ec.europa.eu/energy/sites/ener/files/documents/quarterly-gas_q3_2014_final_0.pdf, pg 26
Source: Market Observatory for Energy DG Energy, https://ec.europa.eu/energy/sites/ener/files/documents/quarterly-gas_q3_2014_final_0.pdf, pg 26

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.

Source: “Reducing European Depedence on Russian Gas: Distinguishing Natural Gas Security from Geopolitics.” The Oxford Institute for Energy Studies, October 2014. [http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/10/NG-92.pdf.] pg 31
Source: “Reducing European Depedence on Russian Gas: Distinguishing Natural Gas Security from Geopolitics.” The Oxford Institute for Energy Studies, October 2014. [http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/10/NG-92.pdf.] pg 31
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).

Source: Market Observatory for Energy DG Energy, https://ec.europa.eu/energy/sites/ener/files/documents/quarterly-gas_q3_2014_final_0.pdf, pg 30
Source: Market Observatory for Energy DG Energy, https://ec.europa.eu/energy/sites/ener/files/documents/quarterly-gas_q3_2014_final_0.pdf, pg 30

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

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.

Conclusion

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.

Key Sources:
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.

Market Observatory for Energy DG Energy. Quarterly Report on European Gas Markets. European Commission, Directorate-General for Energy, 2014. [https://ec.europa.eu/energy/sites/ener/files/documents/quarterly-gas_q3_2014_final_0.pdf.]

“Reducing European Depedence on Russian Gas: Distinguishing Natural Gas Security from Geopolitics.” The Oxford Institute for Energy Studies, October 2014. [http://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/10/NG-92.pdf.]

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.

————————————-

References:

^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.

EU Needs to Protect Founding Principles: Threats from Russia & Hungary

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.

Hungary's political-economic model, as perceived by a street artist.
Hungary’s political-economic model, as perceived by a street artist.

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.

 

Street Art: The Russian Mafia State in Hungary

You know all the things I write about on my blog, sometimes I feel I’m a little lost in my own thoughts. But then I came across one of the prolific billboards in my neighborhood before and after the April 6th elections. As you can see from the photos someone else in the neighborhood feels the need to publicly express themselves. I think it is important to deconstruct what the street artist is saying here.

Here in the first photo, taken before the elections, you see the artist is expressing the often used phrase ‘Mafia State’ used to describe how Hungary’s Prime Minister has built a very ‘corporatist’ state. Or rather, the intermingling of state and business.

The word ‘Maffia’ here may also  imply the use of force or coercion if a citizen does not comply with the ruling oligarchs or party line of thinking. While it is normal for the state to use force to enforce order, here we have also a reference to financial means to maintain order. For example, if one is aware of the huge amount of advertising in the Fidesz campaign in Budapest, one may observe other money was used besides that allocated by the state and political parties for financing their campaigns. Also, all the many companies the state has nationalized or bought out over the wishes of its owners, then these could be interpreted as mafia-like actions.

Later, the “Maffia” was painted over.

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However, in the next photo taken on April 10th, after the election, you see the street artist is expressing an even stronger opinion of Hungary’s tie to Russia. Here it is the ‘Russian Mafia’. No doubt this is reference to the many economic and ideological ties the government holds with Russia. The need is now greater than ever for Orban to promote the Russian line in the EU.  The recent Paks deal with the Russians, means Fidesz must serve the Russians. Period.  This leads the artist here to imply Fidesz is a tool of the Russian Mafia State. Often comparisons are drawn between Orban’s governing style and that of Russia’s Putin.  Just today, the government is attacking the Norwegian Fund, as privately financed social activities, which the Hungarian state wants to control. A line out of Putin’s playbook. In our interpretation of the graffiti here, the artist may also be making this statement that Fidesz and Putin are mafia brothers.

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All in all, it is encouraging to see public art work in Budapest which is not all state sanctioned.

Is Orban riding with Putin?

I actually had a mouthful of apple juice when I read the following. “You will be surprised; the Russians will help Hungary,” Hungrian PM ‘heir designate’ Viktor Orban told MTV on November 25th. This is after his return from Russia where he met Prime Minister Putin.

I managed to not spit out the juice all over my computer, but where’s Orban’s new found love of Russia coming from? Or is he just jealous that Gyurcsány was invited to a private dinner with Putin on Tuesday night? Seriously, I assume that isn’t the case, but Orban also positively mentioned Russian assistance in building and refurbishing Paks nuclear power plant. While it is true Hungary is heavily reliant on Russia for its energy supply (gas supply and nuclear technology) the question becomes why this discovery of Russia as a long lost love? (Why he’s on Putin’s scooter?) Or should we just assume it is diplomatic niceties? Does Orban figure he has more to gain by just being nice to the neighborhood boss? Either way we won’t have that long to wait, the elections are expected in the spring.