Russia and the European Union on a collision course over the South Stream pipeline

It was a week ago that the European commission told Russia that the “South Stream” pipeline, already under construction, and the contracts between Gazprom and six members of the European Union, including Hungary, violate European Union law. Klaus-Dieter Borchardt, director for energy markets at the European Commission, told the European Parliament on December 4 that the “intergovernmental agreements are not in compliance with EU laws.” The EU countries that signed agreements with Gazprom were told that “they have to ask for re-negotiations with Russia, to bring the intergovernmental agreements in line with EU laws.” The countries in question are Bulgaria, Hungary, Greece, Slovenia, Croatia, and Austria, as well as Serbia, which is a member of the Energy Community, an EU-backed international agreement covering former communist countries in Eastern Europe.

Deli Aramlat

The European Commission identified three major problems with the South Stream. First, Gazprom is in violation of the so-called ownership “unbundling” rules, according to which a company cannot be both a producer and a supplier of gas. It cannot own production facilities and transmission networks. Clearly, Gazprom does. Second, according to EU law, non-discriminatory access of third parties to the pipeline must be ensured. In other words, Gazprom cannot have the exclusive right to supply gas through the pipeline. Finally, the Commission found problems with the tariff structure.

If these treaties must be renegotiated, there will be a delay of not months but, according to Borchardt, at least two years. Bulgaria has already protested. Bulgarian foreign minister Kristian Vigenin, who used to be a member of the European Parliament, made it clear that his country is not happy with Brussels’ decision. “It is not a nice move to slow the construction, because the parties to the track area are already in readiness to kick off.” He emphasized that “this is a very important project” for Bulgaria and expressed his hope that the European Union will not “stop the South Stream project.” Bulgaria already began construction of the South Stream at the end of October.

Brussels, however, seems to mean business. Borchardt said “in all openness and frankness that the South Stream pipeline will not operate on the territory of the EU if it is not in compliance with our energy law.” The Russians seem to be as resolute as the European officials are. A representative of Gazprom who was present at Borchardt’s announcement stressed that “nothing can prevent the construction of South Stream.” Russia’s position is similar to that of Viktor Orbán: EU law cannot prevail in EU-Russian relations, which are governed only by international law.

The Hungarian media covered the news coming out of Brussels, but the Hungarian government offered no response to the rather harsh verdict of the European Commission on the bilateral treaties that had been negotiated with Russia. Although here and there one could read about visits of Gazprom officials, nothing was known about the actual state of the negotiations and their particulars. Only yesterday Világgazdaság, a normally well informed paper dealing with economics and finance, reported that perhaps in the next week or so Orbán and Vladimir Putin will talk about the EU objections. Apparently Mrs. László Németh, the minister in charge of national development, was charged with preparing the prime minister’s visit to Moscow. I’m not sure, however, whether this meeting will actually take place. Because, as we just found out today, an agreement has already been signed.

As usual, details of Hungary’s negotiations with foreign powers came from the other side. The Hungarian public learned today that Aleksei Miller, president of Gazprom, paid a visit to Budapest yesterday and signed an agreement concerning the construction of the South Stream pipeline. Journalists immediately bombarded the head of Orbán’s press department for details. They were told that the prime minister and the head of Gazprom didn’t sign any agreement. He added that negotiations between Mrs. László Németh and Gazprom will proceed according to plans.

So we had two versions of the story. Someone was not telling the truth. At least this was the conclusion journalists of opposition papers came to. Stop, an online site, asked its readers whom they believed, the Hungarian government or the head of Gazprom. A relatively new online paper whose political views seem to me to be close to the Demokratikus Koalíció talked about the “selective memory” of the officials of the Orbán government.

It turned out that the spokesman for Viktor Orbán didn’t lie outright. It is true that Orbán himself didn’t sign anything. But something was signed all right: an agreement between Gazprom and MVM (Magyar Villamos Művek/Hungarian Electricity Ltd.), a state-owned company. As I understand it, MVM and Gazprom established a joint company called Déli Áramlat Zrt (South Stream Corporation), each with a 50% ownership. It is a large, expensive project that might pose serious financial risks to MVM, especially if the EU stands fast.

Experts figure that the Hungarian part of the project will cost around 300 billion forints, for which MVM will be responsible. Today’s Népszabadság points out, however, that MVM will be able to borrow such a large amount of money only if the project has the European Union’s blessing and financiers feel safe lending so much money to the Hungarian company.

I have the feeling that this is just the beginning of an extended imbroglio. Viktor Orbán is ready for his next battle with the EU, Hungary’s enemy.

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19 comments

  1. Echoes of the Ukrainian situation here.

    I understand why Putin wants Ukraine, but Hungary? What’s in it for him?

    Or is this just Orbán thinking he can use Putin for his own ends? One hell of a tiger’s tail to try to hold on to…

  2. @Paul – Putin has his own Trianon-type complex. All the territories that were lost at the collapse of the Sovjet Union must be taken back. Greater Russia must be reestablished.

  3. “We got rid of the title of the happiest barracks of the Soviet system, so they [Gyurcsany government] should not make Hungary the happiest barracks of Gazprom”

    V. Orban on the Blue [or South] Stream, March 2007

  4. Paul: Putin wants potentially everything, everything counts. Russia has core markets, which it could control through various ways. Hungary is one of those, though arguably it is not as core as Serbia, Ukraine or Turkmenistan are. Russia supplies Hungary with oil which then gets refined here, supplies the natural gas, on which energy resource Hungary is dependent like no other country in the world (Orban’s utility rate cuts are based on that fact) and Russia supplies the refined uranium which goes to Paks. This is the ‘energy reality’, as they call it politically.

    Natural gas and oil cannot reasonably come from anywhere else in great enough quantities, given geography.

    Paks II – assuming that it is needed at all, which is more than questionable – could well be an opportunity to turn to alternative sources but Russia is using its leverage re oil/gas to ensure it could continue to have control over Hungary also through Paks II. Plus, as it was mentioned it is the interest of all political constituencies to go with the Russians, who really, badly want the deal as opposed to the French or Americans who would be too fussy. What is more, the bipartizan political interest is to build it, no matter what, regardless of any calculation or rational consideration.

    Orban cannot use Putin to his ends, this is ridiculous. He has zero leverage. He can, as I am sure he did, offer Paks II to Putin (which any way would have gone to the Russians, and since Paks I is a Russian technology, if Paks II gets to be Russian too, the status quo will not get any worse), but whether Orban won anything in terms of cheaper natural gas prices, it is highly questionable. The Russians badly need all money and they can sell the gas to China too, so they will not offer significant discounts. What I can imagine – strictly in return for Paks II (as Hungary cannot reasonably offer any goodies which would interest Russia) – is that the gas will be somewhat cheaper than it is now, but will not be as cheap as for the Germans, who obviously have to feel that since they buy in bulk, they get more discounts, plus Putin can show to the Germans that Germany is an important trading partner. Hungary is not really, so simply Putin can be tougher.

    The problem with Paks II is that as in the UK, and now in the Czech Republic the future operator will want to conclude an agreement with the state so that if the plant is built then electricity could be sold at profitable rates. And if such agreement was necessary in the UK, one can imagine that in Hungary (rated junk) where everything depends on the word of one dictator that agreement will be even more important. Problem is that even before starting construction that rate, I understand, is some 3x times the current electricity rate in the Czech Republic, and we know that project budgets tend to balloon as construction goes ahead (and not even counting the cost of dismantling, which will be as expensive as construction, given the handling of the by then radioactive parts). In addition that concluding such guarantee agreement by the state might be counter to EU law, politically it would be difficult in Hungary: Orban signing a 200-300% price in increase for the future? It will be pretty ugly, although I am sure Orban will ensure that media coverage would be muted and it would be in the far future, perhaps 15-20 years when Paks will be operational if they started construction now.

  5. There is is little understanding of the power of Russia in the the USA in relation to energy. My understanding is that at least Romania is now extracting via Fracking considerably more oil. Is that potentially a route to energy independence to Russia? Is that a realistic perspective?

  6. Istvan: fracking is very controversial, France banned it. It uses enormous amounts of water, (by the way, the biggest oil companies even under traditional technologies are the biggest water companies as well) which gets compounded by hundreds of carcinogenics and effectively gets pumped back into the underground water reservoirs. Plus, a huge portion of the gas just directly leaks into the atmosphere, in addition to a host of other serious issues. Moreover, the productive life a fracking well is much shorter, decline of production starts earlier and is more dramatical, than in the case of a normal natural gas well, which means that production levels can only be maintained by drilling still more wells, essentially ad infinitum. Fracking is really a no-go. In Hungary Exxon made a couple of drills, but abandoned the project. I understand there are still efforts being made, but I say that it is a good idea that it does not work (for example the rock is too hot in Hungary for current technology), the economics do not add up, besides the enormous environmental costs, although politics do not care about those that much. Fracking is just not an alternative in Hungary. Hungary had traditional natural gas wells, still has some own production, but the wells got almost completely depleted over the last couple of decades, the relative low price levels and political directives did not help. Anyway, I am doubtful about Romania’s success, but do not forget that they always had more oil production to begin with, so they can still extract a lot from their old fields using new technologies such as fracking — and we know that they do not really care about their own environment. So, all in all, there is no independence form Russia. To a certain extent there is though: Hungary imports increasing amounts of electricity from abroad (in summer it was a staggering 40%). In other words, we use less Russian natural gas to produce electricity, but now rather depend of Czech, Slovak, Austrian electricity, which is another kind of dependence of course. But electricity, under the current Hungarian legislation, cannot be produced competitively (compared to import electricity). The bottom line is: Russia is a reality and there is no escaping it for the foreseeable future.

  7. SzaSza – ” Hungary with oil which then gets refined here, supplies the natural gas, on which energy resource Hungary is dependent like no other country in the world (Orban’s utility rate cuts are based on that fact)” – Is this why energy company opposition to the utility cuts is so muted, they are getting cheap gas as part of the deal?

  8. Regarding the South Pipe Line (SPL). What have all these parties done the last couple of years? Nobody asked if the SPL is in line with the laws of, and treaties between countries? It does not make sense to me.

  9. Sophist, no, they will not get any cheap natural gas, especially because whatever price they will pay will be determined by Orban and such price will have nothing to do with the price for which the Russians will sell it to the Hungarian wholesaler in the future. (And this applies to those foreign owned energy companies which will not be purchased back by Orban. Főgáz of Budapest is just being purchased by Hungary from RWE.)

    Energy companies are owned by European corporations. They, like the EU, are just not tough enough. It is not in their culture to openly fight a government. A government is a ‘serious thing’ in their view, they are gentlemen and European corporations know their place (although they started to lobby more aggressively in Brussels, which I believe sooner or later will be captured like DC is).

    The only American energy company (which are usually more aggressive) which used to be active in Hungary was AES and it indeed started legal proceedings, but as far as I know, it lost before the ICSID. I think the French, German or Italian governments have better things to do than to protect the Hungarian interests of their national champions, after all these hundreds of euros, call them a couple of billions, mean nothing in the greater scheme of things (when compared to the bailing out Greece, Spain etc.), so they do not even waste time on it. Also, as Orban showed it, nobody can do anything against them, all is legal and in line with EU laws. The Western governments made the laws of the EU and they must live by them. So it is a self-reinforcing issue, these companies are mute so Orban feels even more empowered to castrate them.

    In addition, I guess they soon realized that Orban wants to purchase these companies back and thought that it was gonna be better to maintain a friendly relationship with him. Was it worth it? I am not sure. Probably not, but Europe will not change, Europeans do not fight and do not like conflicts, appeasement is always the answer (whether it is the US, like this week the People’s Party’s efforts to disinvite Snowden, to prevent him from making statements before the EU Parliement by video, or Hitler or Orban or whoever else) and Orban can use this out. He understands the Western-European psyche just like he understands the average uneducated Hungarian. After all, the formula is not so complicated.

  10. Intriguing story. Can the EU stop buying GAZPROM gas? Does the existing North Stream pipeline fulfil the purported EU rules? After the Ukrainian blockade of the pipeline is it not sensible to let Gazprom own the pipeline and be solely responsible for the delivery?

  11. Dear Éva,

    Congratulations on reaching one million hits as of today.

    And here’s to your getting your one thousandth subscriber by year’s end!

    Thanks for the important service you are rendering to Hungary and all those who love it.

    Yours,
    Mark

  12. THere is evidence that the fidesznik head of the Hungarian IRS has stopped several investigations against large corporations.

    http://hvg.hu/gazdasag/20131213_NAVbotrany_dokumentum_van_arrol_hogy_viz

    ————-

    Another thought. European Union gives 5 billion euros a year to Hungary. Fidesz channels the money through Fidesz enterprises, they take, say 1 billion from the money.

    That is 4 billion in 4 years from the EU taxpayers only.
    Add the money they take from Hungarian taxpayers.

  13. Eva S. Balogh :
    Dear Mark, I didn’t even noticed that we reached the magic 1 million hits. Well, something nice happened on Friday, the thirteenth. Thank you for the compliment.

    Dear Éva, let me join Mark. Today for the first time I gave a try to the blog’s Google Custom Search — since when does the Spectrum have it? I just did not notice? — , and it revealed again the invaluable wealth of this source. Keep the spirit! Miklós

  14. Miklós Haraszti :

    Dear Éva, let me join Mark. Today for the first time I gave a try to the blog’s Google Custom Search — since when does the Spectrum have it? I just did not notice? — , and it revealed again the invaluable wealth of this source. Keep the spirit! Miklós

    Thank you very much. Actually, the number is most likely much higher than 1 million because it was only a couple of years ago that I switched the site from Typepad to WordPress. Considering that I started the blog in July 2007 this 1 million is most likely only a fraction of the total. I must admit that I never dreamed that Hungarian Spectrum will be one day such important source of information on Hungary. Of course, I’m gratified.

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