Hungarian Energy Policy: Alarm Bells are Ringing

Recently, the Hungarian government passed a law to enable it to push ahead with building the Hungarian section of the Russian South Stream natural gas pipeline project. The day after, Hungarian Prime Minister Viktor Orbán said his country would press ahead with the project, despite objections by the European Union, signalling Hungary's increasingly close ties to Moscow.

“If I had to use one word, I would use 'alarming,'” says the Atlantic Council's Dávid Korányi, Director, Eurasian Energy Futures Initiative, in describing Hungary's new, eastward-looking energy policy.

A Hungarian himself, and a former foreign policy advisor of then Prime Minister Gordon Bajnai, Mr. Korányi possesses keen insights into his homeland's geopolitical situation.

He says, “It is quite remarkable how Hungarian energy policy has transformed in the past 4 and a half years from something that was very constructive - pro western, pro European, transatlantic, pro diversification – to turning the country's energy security into an opaque and ominous direction.”

It's that direction that's cause for concern, contends Mr. Korányi, who says it builds upon an alleged strategic relationship with Russia that is in stark conflict with Western attitudes these days, in the wake of the Ukraine crisis and Russia's destructive behavior on the international stage.

Moreover, he says, he's concerned that Hungary can be a weak link in a strategy that the European Union seems to be serious about: reinforcing its energy security, lessening natural gas dependence upon a single supplier and lessening exposure for countries in Central & Eastern Europe to monopoly supply.

According to him, the Hungarian government's pursuit of building the South Stream pipeline as well as commitment to Russia's Rosatom building two new reactors at the country's Paks nuclear facility without a tender and against market signals, go contrary to Hungary's strategic considerations, both in Brussels and Washington. “That's not just contrary to the interests of the NATO alliance, of the European Union in general, but contrary to the strategic interests of Hungary,” he says.

“We definitely have a broader relationship with the Russians,” observes Andras Deak, Senior Research Fellow at the Hungarian Academy of Sciences' Institute of World Economics, who is responsible for post Soviet countries and energy issues.

“We have a nuclear plant, a pipeline, gas contract – we had a gas supply cut to Ukraine, which was also part of the deal. So in the last year we have established a full-fledged relation with the Russians: quite a business-like relationship. I don't see it as a love affair; it's give and take,” he explains.

It's a difficult position to defend, adds Mr. Deak, given the current high level of tensions between Russia and the West. Part of the problem, he says, is that, the actions in the energy sector have not been transparent, and Prime Minister Orban has turned Hungarian policy into an ideological issue.

He explains, “From the highest levels we hear harsh anti-EU, anti Western rhetoric; maybe it's not related to Russia, but the Prime Minister has been speaking of illiberal democracy and Russia is one of the models for Hungary, according to him.”

Many critical mistakes have been committed, he says, making it difficult to understand why Hungary has engaged the Kremlin and what the motives behind it are.

Mr. Korányi opines that Hungary would be ill advised to follow a “grand bargain” logic and enter into another all-encompassing, long-term, oil-indexed gas contract with Gazprom. Ditching the market logic would undermine Hungary’s positions and competitiveness in an increasingly unified and liquid European gas market, where over time hub pricing becomes more dominant even in the east.

He acknowledges the pragmatism involved on the part of Hungarian policymakers to guarantee supplies of natural gas if, for example, Russian supplies are cut for deliveries running through Ukraine this winter. He and others, he admits, have been in favor of South Stream as a route diversification project before, but in a dramatically different geopolitical context.

“I would be in favor of South Stream should it actually comply with European legislation – the Third Energy Package – and thus it becomes a pipeline not just for Russian gas but one that also accommodates other sources, potentially coming from the Caspian, Eastern Mediterranean, perhaps one day Iraq and Iran.

“In a way, if you think about it, if there were third party access for South Stream and it gets built, you've essentially got the Russians building the Nabucco pipeline for Central and Southeast Europe, because you'd have a major trunkline into which additional sources of gas could be fed into,” he offers.

“But South Stream in its current form does not comply with European regulations. For Hungary or any other country to go bluntly against an adopted European policy is self-defeating."

He adds, “We've seen what happened in Bulgaria, how the European Commission and the major European states as well as the United States reacted to Bulgaria proceeding with South Stream, regardless of all these issues and concerns at the European level. I expect the same happening to Hungary and rightly so.”

Now, he contends, it is important for Europe to seriously consider the role of Russian gas in the overall energy mix.

“While Russia will inevitably remain an important gas supplier for Europe for the foreseeable future, we have to make sure we decrease our dependency levels and create competition, not lock ourselves into a vulnerable position for another 15-20 years,” he says.

Prime Minister Orban, meanwhile, says he's not choosing sides, but protecting Hungarian interests.

Mr. Korányi observes, “There is high level political pressure on the government, but Orban rarely listens these days. Meanwhile, the relationship between Russia and the West will likely further deteriorate. The government’s eastward leanings and even open admiration for Putin’s regime will have repercussions within the alliance.”

He opines that recent sanctions against a handful of top civil servants in Hungary's public administration are undoubtedly connected with Hungary's overall strategic direction, as well as the rampant corruption. “They are a strong signal that Orban’s direction does not conform with the strategic intentions of the transatlantic alliance and Europe.”

As for the prospect of other countries involved in the South Stream following Hungary's lead, he says it's unlikely given the backing down of Bulgaria and Serbia in the wake of pressure from Brussels.

According to Mr. Deak, Hungary's pursuit of the South Stream investment can be understood in two ways: that they have a very firm commitment to the Russians, as part of some sort of deal; or simply the Hungarian government has a broader agenda with the EU, even with the US, and would like to use this as a bargaining chip.

He adds, “You've got to think seriously about a pipeline that has no connections at either end – this is a big commercial, regulatory and political risk for anyone, so I don't see any kind of benefit from this action.”

Given what is known about the intergovernmental agreements with Hungary and others regarding South Stream, and Russian-style contracts, he says maybe it make sense to build the pipeline as the Russians would like, as Gazprom has all the capacity. “The only problem with this is that the European Commission can fine us and launch a quite serious investigation into this issue, because DG Energy and DG competition possess all of the instruments to penalize MVM for this section,” he remarks.

This, he says, mandates an agreement between the European Commission and Russia. Moreover, rather than build the pipeline in separate sections, Mr. Deak opines that a framework is needed for the entire project.

Last week, Hungary's prime minister hosted his Azerbaijani counterpart and the two discussed the prospect of delivering Southern Corridor gas to Hungary and its neighbors in Central & Eastern Europe.

Mr. Koranyi comments: “Azerbaijan will hopefully become a major player in European diversification efforts by the mid-2020s. But expectations have to be managed: the initial 10bcm of Azeri gas from Shah Deniz 2, he notes, has already been locked in by contracts to Italy, Greece and Bulgaria. Declarations of “strategic partnership” won’t bring a single molecule of gas to Hungary anytime soon.

“The countries which are located on the South Stream route are all in a very difficult position,” observes Tatiana Mitrova, Oil and Gas Department head at Energy Research Institute RAS, of Hungary, Bulgaria, Serbia and Austria.

She explains, “They are trying to avoid making this choice between Russia and the European Union, but they are being forced on both sides to take more clear positions.”

It's a huge challenge for their governments and populations, she says, because on the one side there is “European solidarity” - a bit of an unclear sentiment.

“If the European Commission says that several rules on South Stream are not desirable, then the countries have to comply with that; on the other hand, member states or member potential candidates can see quite well the potential benefits, quick benefits from the construction and operation of this pipeline.”

This, according to Ms. Mitrova, makes for a very difficult choice. She says, however, she finds it surprising that the Commission is refusing a project which provides additional energy security, lowers transit risk and would be completely financed by the supplier, Gazprom.

“Europe is not taking any financial or other risk at all,” she remarks. “The distribution of risks and benefits is very asymmetrical, in favor of the European Union, but the EU says the project is not desirable.”

-Drew Leifheit