On February 17, Vladimir Putin, the President of Russia is traveling to Hungary, as part of an official visit, to meet with the Hungarian Prime Minister, Viktor Orbán. According to official statements, they are going to discuss the two countries’ economic and political relations, as well as energy security issues.
What should we expect from this encounter? One of the concrete goals of the visit could be to renew the long-term gas supply contract with Russia, and –although Hungary is not in a particularly bad negotiating position– the short-term interests of the government will force Hungary to renew this contract under very humiliating conditions. This would not be the first time for Viktor Orbán to take a decision in energy policy matters that goes against common sense, a decision, which enables a small number of people to make huge gains, while the rest of the population can only lose.
The Hungarian energy strategy has numerous controversial elements. What is most disturbing is the fact that, in the last few years, Hungarian energy policy wasn’t determined by internal capabilities, external constraints and by keeping pace with changes in energy technology. Instead decisions were based on choices made due to “superior” goals that had nothing to do with experts’ opinions: the government’s goal was to reward people loyal to Orbán, build a new clientele (using taxpayers’ money), and replace some people at the top of the pyramid of Hungarian oligarchs. These were supposed to strengthen the political power of Orbán.
Orbán and his oligarchs
The first two-thirds majority of Orbán (in 2010) would have been impossible without his long-time friend, and former treasurer of the Fidesz-party, Lajos Simicska. The political and the economic arm of the party were codependent at that time, and the support of oligarchs was necessary to receive the amount of votes needed for the kind of success Orbán was hoping for. The second two-thirds majority in 2014, however, was different: now keeping the oligarchs around was too costly, and by far not as helpful as before. Thus, it was about time to get rid of the boundaries and dependencies Simicska and other oligarchs meant to Orbán and his government. But creating a new clientele – one whose members don’t behave like the kinds of all-powerful oligarchs as Simicska, and are absolutely loyal to and dependent on Orbán – can be just as expensive. Thus, the energy industry is one of the few industries that can provide sufficient funds for this project.
In the past few years we have seen many obvious signs of the industry being corrupted and put under the direct influence of the government. A good example is the increasingly important role of MET Holding. MET is an energy trading company – owned by a number of off-shore firms, related to, among others István Garancsi, a businessman with close ties to Orbán – that is in a privileged position due to some well thought out decrees and contracts: the company can use the 2,2-2,9 billion square meters of gas coming from Austria, without competition, thanks to the state-owned MVM Electricity Ltd.
MVM earns nothing on transporting the gas from Austria to Hungary. MET, on the other hand, is getting richer and richer. The owners of MET’s Hungarian subsidiaries have earned millions of Euros in the last few years. In 2012, the owners have received dividends worth HUF 55 billion (approximately EUR 180 million). But MET’s activities extend to much more than just the import of gas, it has also bought a power plant, and is about to overtake the natural gas trading activities of GDF Suez, a French multinational electricity company, on the Hungarian free market.
The incredible success of MET, and Orbán’s close friendship with Putin is no coincidence.
Orbán obviously needs Putin – a person who has great influence on his country’s energy exports – in order to make the corrupt Hungarian energy system work, and in order to make profits on the country’s natural gas transactions. From this meeting with Putin, he expects a political deal that can further increase his share of profits in the energy sector, and will thus help him further pursue his power interests.
A top priority
Not so long ago, Orbán has called the new, long-term gas supply contract with Russia a top priority of the country. Assigning it such a high importance, however, seems to be irrational: a 2013 study by the Regional Centre for Energy Policy Research (commissioned by the government) has shown that a new contract, right now, would not make too much sense, unless it would require Hungary to buy a much smaller amount of gas than before, and to do that for a much lower price than it currently does. This is not the case: the contract will be about an increased amount of gas, which means that Hungary has to buy more gas than it would normally consume. And it will also pay a higher price than necessary.
Given that the surplus of the previous years will be able to cover the energy needs of the next few years, Orbán is wrong to say that the new long-term contract is badly needed.
On the contrary, in the light of the current natural gas market developments, Hungary could have relatively large margin of maneuver. The Russians would benefit from a long-term gas contract, since the revenue would improve their unstable budgetary position and improve their regional position. The gas market is currently supply-driven and in the coming years is likely to remain so. In a supply-driven gas market the customer is the one who’s in a good bargaining position, this is what Orbán is giving up for pennies in his oligarchy fighting spirit.
Don’t trust the short-term benefits
The Orbán-Putin meeting is likely to yield a more political bargain and as a result – according to internal sources – Hungary will receive Russian gas cheaper below market price, at least in the short term. You can cut utilities in the coming years and possibly provide for the 2018 election campaign financing. In addition, the price difference between the contracted and the marketed price enriches the new oligarchs. However, the agreement does not serve a healthy functioning energy market or the long-term interests of Hungarian consumers.
Russia will, for sure, ask a high price for this deal. There are two possible scenarios:
(1) In exchange for the current short-term reduction, we might, in the long-term, be forced to buy natural gas for a price above the market price. If we look at the neighbouring countries, it becomes quite obvious that all the countries who have signed long-term contracts with Russia, around 2005, are now paying a much higher price for gas as does Hungary at the moment.
(2) Putin might as well ask for a political favour: a consistent pro-Russian stance in the EU. The Russians badly need a disagreement inside the EU, so that it cannot act in a unified manner when it comes to Russia. A veto on sanctions against Russia can be very valuable for Putin.
Angela Merkel has visited Budapest less than two weeks prior to Putin. During her visit she made it clear to Orbán that Hungary cannot have a Russia policy that is not in line with the EU stance: the Union has to act in a unified way when it comes to Crimea or the conflict in Eastern Ukraine. Orbán, however, defended Hungary’s relations with Russia, on their press conference. This lets us infer that he won’t say no to Putin. He will rather pick a fight with the EU. Especially when the EU’s warnings seem to be so distant for Orbán. Russia in the meantime seems to be quite sure that Hungary can be the partner it is looking for, in order to mess with European unity.
I believe that nothing will stop Orbán from selling the country and the future of its people to Russia.
This article was first published in Hungarian on Benedek Jávor’s blog.