„Business as usual” – on Orban’s energy policy and Russia

11.02.2017 | By Bartosz Bieliszczuk

In Poland, the conservative circles’ initial sympathy for Viktor Orban turned into a great disappointment, after he made a series of pro-Russian gestures. However, Orban’s stance on Russia is more of pragmatic than ideological necessity. One of the most significant examples is energy policy.

Viktor Orban’s initial goal was to implement a “sovereign agenda” and – at the same time – protect his fellow-countrymen from the costs of his reforms. With his national and right-wing agenda he had to take into consideration and ultimately face the antipathy of the European Union and the International Monetary Fund. Naturally, this made Hungary less attractive for EU and IMF investments, loans and other financial support. Seeking for alternative resources he focused on cooperation with the East.

His energy policy emphasizes, among other things, an interesting trend in Europe’s “conservative turn”: the role of the state in national economy. Not only did he try to recover the assets of Hungarian companies and infrastructure (while in Slovakia or Czech Republic the role of foreign companies grew) from foreign businesses, but also made them pay for his comprehensive and costly social reforms.

Orban: „we will not be a colonial state”

In the fall of 2010, Orban announced new taxes for foreign companies, including energy entities. The costs of his reforms were to be borne by foreign firms (energy, telecommunication) and the banking sector. The Hungarian society and smaller family businesses would avoid these financial burdens. A year later, a new energy strategy was drafted. It called for an increased role of nuclear energy in domestic supply, investments in trans-border energy links, expanding the role of the state in energy policy and protecting consumers from increases in energy prices.

The strategy was also enthusiastic about a European Southern Gas Corridor. However, Budapest’s stance was ambiguous, as it did not precisely point out whether it would be Nabucco, The Azerbaijan–Georgia–Romania Interconnector (AGRI) or Gazprom’s South Stream.

Orban’s social policy quickly turned into a showdown with energy companies. In Hungary around 75% of households use natural gas for heating, while the energy bills account for approximately 20% of an average citizen’s earnings. As the parliament introduced special taxes for energy companies, it also passed a bill, forbidding them to increase prices. Later on, the government also forced the companies to lower the gas, power and heating bills for households.

In 2010, Orban started negotiations to buy back 21% of MOL’s shares from the Russian Surgutnieftiegaz. The agreement was concluded next year and Budapest quickly took over the shares. However, it was the MVM company, not MOL which was meant to become a national champion and Orban’s main energy policy tool. Since then MVM has been actively participating in some of the most important energy projects.

MVM in Orban’s policy

After the new taxes were introduced, the German giants, RWE and E.ON announced reducing their investments in Hungary and started auctioning off their assets. MVM, which had been previously focused mainly on power utilities, took over some important E.ON and RWE enterprises: 100% of shares of Foldgaz Trade (entity responsible for importing Russian gas) and Folgaz Storage (the owner of gas storages with 4.2 bcm capacity) and 49.8% of interests in Fogaz, a distributor of natural gas for the Budapest municipality.

It was MVM which was given the task to establish the Hungarian natural gas exchange, CEEGEX. It was opened at the beginning of 2013 and is controlled by the subsidiaries of MVM. MVM’s subsidiary was also chosen over MOL’s daughter company to finish the Hungarian-Slovak gas link (the project was started at March 2010). Completed in 2015, the interconnector has a capacity of 4.5 bcm on the Slovakia-Hungary direction and 1.8 bcm in the opposite way. During Viktor Orban’s rule the investments like gas links with Romania and Croatia were finished as well. All of the above takeovers and investments, the interconnectors, gas storage facilities, natural gas exchange, were designed to make Hungary a regional gas hub, which was one of Orban’s strategic goals.

However, the most spectacular project endorsed by the Hungarian leader was probably the Russian South Stream pipeline.

Orban on South Stream

Orban’s stance on the Russian southern pipeline was not so ambiguous at the beginning. MOL’s subsidy, FGSZ, was once part of the Nabucco consortium, which competed against South Stream. Interestingly enough, Fidesz as an opposition party, heavily criticized Hungary’s left-wing government for supporting the Russian pipeline. After Nabucco had encountered significant obstacles (e.g. skyrocketing project costs), the European Commission gradually withdrew its support for the pipeline. At the beginning of 2012 one of the main investors, the German RWE, started to consider dropping the project. This was soon followed by MOL, which also abandoned the initiative.

Orban quickly realized that the South Stream pipeline would be a more reliable and beneficial alternative. The Hungarian part of the planned pipe would be build by MVM. What were Orban’s motivations behind such a change of mind? To better understand them, one should consider the following factors:

1) gas transit means income (transit fees) and South Stream seemed to be more a feasible and possible project;

2) as per 2014 data, Russia has delivered 5.3 bcm of natural gas to Hungary, while the total gas consumption stood at 8.4 bcm, making Gazprom a heavyweight player on the Hungarian market;

3) a contract for natural gas deliveries from Russia was about to expire in 2015 – supporting the South Stream project could be leveraged in the negotiations of new gas prices;

4) such close cooperation with Russia could be the first step for attracting more Russian capital and investments in the Hungarian energy sector – for instance a nuclear power plant.

The above-mentioned factors explain, why Orban remained a loyal supporter of the South Stream project, just months before Gazprom’s decision to shut it down. At the end of 2014, in the face of Bulgaria’s and European Commission’s opposition to the pipeline, the Russian company announced its plans to build Turkish Stream (running through the Black Sea to Greece-Turkish border), Orban immediately gave his support to the new endeavor.

Orban on Nord Stream 2

Orban has also demonstrated his pragmatism and will to switch sides in his approach to the Nord Stream 2 idea. Together with the Visegrad countries, Hungary appealed to the European Commission to rigorously examine the project. Poland’s motivations were revolving around geopolitical and security concerns, while its Visegrad counterparts were apprehensive about its economic consequences to the region.

However, Orban’s stance changed at the beginning of 2016, when he openly supported Nord Stream 2 after visiting Moscow. If there were any doubts about Orban’s motivation, they should disappear after Putin confirmed Russia’s involvement in the Paks investment and backed the recently negotiated gas contract that was extended to 2019.

Paks II – South Stream bis?

Hungary was also hopeful about Russia’s participation in one of its most important domestic investments. The Hungarian national energy strategy from 2011 emphasizes the importance of the expansion of the Paks nuclear power plant. The utility, owned by MVM, delivers around 50% of power to domestic consumers.

MVM was struggling with acquiring enough funding to conduct the investment. It was already financing some of the most important infrastructural projects and takeovers. Additionally, the energy giant took a hard blow from the energy prices discounts, imposed by the parliament. At the beginning of 2014, it was decided without a tender that the Russian Rosatom would invest in the Paks plant. Rosatom would cover approximately 80% of the costs, with the initial plan to finish the project in 2018.

After two years the future of the project looks very grim, as Moscow was hit hard by sanctions imposed after its aggression on Ukraine and low oil prices. Even Sergey Lavrov, Russian Foreign Minister stated that “Russo-Hungarian relations are not dependent on Paks II”. Whatever the future of the investment, Paks II remains a clear example of Orban’s approach to Russia.

Dr Jekyll and Mr Hyde?

Having the above-mentioned “pro-Russian decisions” in mind, there is a number of examples where Orban’s actions hardly fit this “pro-Russian” pattern.

Despite the apparent Polish-Russian conflict, Orban tries to maintain close relations with both Warsaw and Moscow. He appealed to Poland to become a regional leader on several occasions. Moreover, he also adamantly opposed the attack on the Polish conservative government initiated by Martin Schulz, Guy Verhofstadt, Frans Timmermans and Jean Claude Juncker on the EU forum. Simultaneously he is criticized for being Putin’s ally within the European Union.

Hungary has been also playing an important role as a gas supplier to Ukraine in the face of the Russian aggression. Last year the gas operators from both countries signed an agreement to improve gas shipments between these two states. In 2016 the gas imports to Ukraine from Hungary have increased, hitting 1.6 mcm per day in July.

However, strengthening ties with Russia comes at a nasty and unpopular price. Viktor Orban opposed sanctions against Moscow on numerous occasions. His stance seems to be in line with the policies of Slovakia and the Czech Republic, but utterly opposite to Poland’s. Orban also supported cooperation between NATO and Russia.

Russian “Trojan Horse in Europe” or just a pragmatic leader?

Some of Orban’s actions and statements regarding Russia might seem controversial if not outright shocking. However, those can be rationally understood when we examine Orban’s economic policy and energy policy in particular.

Trying to find its own path and seeking leverage in the European Union, Hungary looked to the East. It tried to attract Russian and Chinese investments. An example of the Chinese involvement is acquiring Borsodchem by the Chinese Wanhua Industrial Group, which was approved by Viktor Orban.

It seems that Orban is not unequivocally pro-Kremlin (as depicted by some Western media), but rather presents a pragmatic approach. Viktor Orban fights to remain in power to serve his nation and implement a conservative and sovereign agenda. With or without the West.

International_Visegrad_Fund,_emblemo_bluaThis text was created thanks to support of International Visegrad Found.