Croatia

International pressure on Viktor Orbán: Russia, Putin, and Gazprom

There is real concern among former Hungarian diplomats and foreign policy experts that Hungary’s isolation is practically complete and that she may remain the only “strategic ally,” to use Viktor Orbán’s favorite term even in connection with China, of Vladimir Putin’s Russia. And if the Orbán government does not try to extricate itself from this situation, the consequences can be serious. Although Fidesz supporters are convinced that the United States has embarked on the destabilization of the country with the goal of removing Viktor Orbán from power, this cannot be Washington’s intent. After all, the opposition is in disarray and replacing Orbán with another Fidesz politician would not accomplish anything. A new prime minister would be merely a figurehead; the real power would remain in the hands of Viktor Orbán.

Admittedly, on the surface this conspiracy theory finds some support in the coincidence of the American move to ban six corrupt officials and businessmen from the United States and the massive demonstrations against the internet tax that soon enough became a protest movement against the whole regime. But the latter wasn’t the U.S.’s doing. It was the folly of the Hungarian government that seems to commit more and more mistakes lately. Did Viktor Orbán lose his magic touch, or has he navigated himself into an impossible situation in which the “peacock dance” is no longer possible? He is increasingly being faced with a stark choice: either total commitment to the side of Russia or capitulation and acceptance of the rules of the game within NATO and the European Union.

Orbán might be a good politician–if we define a good politician as someone who can play one person against another, who can fool his allies, who disregards the law, and who within a few years manages to institute a one-party system, because that is what we have in Hungary. But his track record shows that he cannot govern, that he cannot run a country successfully. We who watched his first four years between 1998 and 2002 with growing concern knew that already, but it seems that in the eight years that followed his disastrous rule the Hungarian people forgot why they went out in record numbers to make sure that this man and his regime don’t come back.

The situation today is ten times worse than it was during his first administration. He has transformed the country into an illiberal democracy, and his pro-Russian policies have alienated Hungary’s allies. Viktor Orbán is considered to be a pariah and someone who is toxic because of his potential influence on some of the other countries in the region. Western politicians look upon him as a fellow traveler of Vladimir Putin. And, indeed, they seem to borrow each other’s ideas. Orbán copies Putin’s attacks on NGOs, while, it seems, Putin was inspired by Orbán’s nationalization of the textbook industry, reported just yesterday in the western press.

During his first administration Orbán was fiercely anti-Russian, and it seems that he didn’t change his mind on that score until lately. In December 2009 a Hungarian foreign policy expert and obvious admirer of Orbán described the forthcoming Fidesz victory as “Moscow’s nightmare.” Early in his second administration he worked furiously on a quasi-alliance system from the Baltic to the Adriatic in which Hungary would have a leading position. But his fellow prime ministers in the region wanted nothing to do with Orbán’s grandiose plan. He made every effort to dislodge Surgut, a Russian company that had a 21.2% stake in MOL, the Hungarian oil and gas company. By May 2011, after lengthy negotiations, the Hungarian government bought out Surgut, paying a very high price. At that time Hungary was no friend of Russia. Not yet. However, according to Fidesz sources, Orbán decided to radically change course sometime in early 2013.  He spent about six months pondering the issue and came to the conclusion sometime during the summer of 2013 that he would turn to Russia for an expansion of the Paks nuclear power plant. According to the same sources, his decision was based on his belief that the Czech Republic and Germany would need cheap energy which Hungary would be able to provide.

Since then, with the outbreak of the Russian-Ukrainian conflict, the political climate in Europe has changed dramatically. Orbán’s flirtation with Russia is looked upon with more than suspicion. The West considers Viktor Orbán and Hungary a liability. Soon enough, I believe, he will have to show his true colors. No more peacock dance. But it seems that Orbán by now is embroiled in all sorts of machinations with Russia in general and Gazprom in particular. The current setting for Hungarian machinations with Gazprom is Croatia.

Just a few words by way of background. In 2008-2009 MOL acquired a 47.47% stake in INA, the Croatian oil and gas company. In 2011 a Croatian newspaper reported that Zsolt Hernádi, CEO of MOL, had been accused by the Croatian prosecutor’s office of bribery. Naturally, the Hungarian prosecutor’s office found nothing wrong, but the Croats eventually went so far as to hand the case over to Interpol. As a result, Hernádi couldn’t leave the country; otherwise he would have been subject to immediate arrest. More details can be found in a post I wrote on the subject in October 2013. The decision was eventually made to get rid of MOL’s share in INA, but the Croatian government does not have the kind of money needed to buy MOL’s stake. Lately, there has been talk in the Hungarian press that MOL will sell its shares to a Russian buyer, most likely Gazprom itself. So, Gazprom will not only store gas in Hungary but might even control almost half of INA in Croatia.

INA: Managed by MOL

INA: Managed by MOL

And now let’s return to American-Hungarian relations. According to some observers, “the highly unusual step of blacklisting six people with ties to the government in Hungary, a NATO ally and European Union member,” also has something to do with the “growing closeness between Hungary and the Kremlin over energy that could undermine Western attempts to isolate Russian leader Vladimir Putin over his intervention in Ukraine.” So far there is not much new in that assertion, published in an article by Reuters. We have known all along that, in addition to Orbán’s domestic policies, his relations with Russia were a serious concern to the United States and the European Union. What is new in this revelation is that Washington is apparently keeping an eye on the possible MOL-INA deal with Gazprom. According to the article, Chris Murphy, U.S. senator from Connecticut, was dispatched to Zagreb “to lobby the government … on the issue.” Another interesting piece of information gleaned from the article is that State Department official Amos J. Hochstein, Acting Special Envoy and Coordinator for International Energy Affairs, met Hungarian Foreign Minister Péter Szijjártó and had a “productive meeting during Szijjártó’s recent visit to Washington about MOL’s stake, the South Stream, and Hungarian gas deliveries to Ukraine.”

All in all, it seems to me that Viktor Orbán is in over his head, especially with a foreign minister with no diplomatic experience. Szijjártó was an excellent spokesman for Viktor Orbán as the head of the “parrot commando,” but he is not qualified to be foreign minister, especially at such a delicate juncture.

It is hard to tell what Orbán’s next step will be. Fidesz media attacks on the United States are fiercer than ever, and its admiration of Russia is frightening. But more about that tomorrow.

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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.

MOL’s CEO, the Croatian courts, and Viktor Orbán

It’s time to turn our attention to the woes of MOL, the Hungarian oil refining company, in Croatia where the company owns 49.1% of INA (Industrija Nafte), its Croatian equivalent, and has management rights. MOL acquired this holding in 2009.  A couple of years later, in the summer of 2011, the leading Croatian paper, Večernji list, reported that MOL’s CEO, Zsolt Hernádi, was accused by the Croatian prosecutor’s office of bribery in connection with the privatization of INA. According to the paper, Hernádi paid Ivo Sanader, Croatian prime minister at the time, €5 million for a favorable deal. As a result, MOL received a 47.47% stake in INA while the Croatian government held on to 44.85%. Sanader abruptly resigned on July 1, 2009 and fled to Austria from which he was eventually extradited. Following a long legal procedure he was sentenced to a ten-year jail term, which he is currently appealing.

Several times Croatian prosecutors tried to question Zsolt Hernádi, to no avail. Eventually the Hungarian prosecutors decided to investigate on their own but found no grounds for the charges. It is a long story, which I tried to summarize back in November 2012.

A few days ago the case took a much more serious turn. HVG reported already in July that the Croatian authorities planned to issue an international arrest warrant that would force the Hungarians to hand over Hernádi to the Croatian prosecutors. It took a little while, but on September 27 Hungarian papers reported that Hernádi’s picture is the first among several Hungarian nationals who are being sought by Interpol. Hernádi was supposed to appear at a Zagreb court on September 25 and, when he didn’t show, the judge ordered his arrest. Hungarian legal experts on international law, by the way, cannot decide whether or not Hungary is obliged to hand Hernádi over to the Croats.

It was at this point that Viktor Orbán decided to interfere. With that interference the longstanding feud between MOL and its business partner, the Croatian government, moved to a political level. The Hungarian government pointed out that “the developments of the past few days … made it clear to the [Hungarian] government that the dispute is no longer an economic conflict between co-owners and shareholders.” It noted that there is a concerted Croatian effort “to exert pressure [on MOL] outside the economic sphere.” The communiqué added that “these methods are unacceptable in the European Union and therefore Hungary cannot leave these measures unanswered.” For good measure the government cancelled Hungarian participation in a summit organized for October 3 in Dubrovik and asked MOL’s management to review the company’s portfolio and if necessary prepare the sale of its INA shares to the Croatian government or a third party. The cabinet also authorized “the Minister of Justice and the management of the Hungarian Asset Management company [that handles state assets] to examine what civil and criminal action would be possible to resolve the damages to MOL and Hungary.” Viktor Orbán showed that he is a tough guy who doesn’t allow anyone to treat an important Hungarian company this way.

The answer of Croatia’s prime minister, Zoran Milanovic, was conciliatory, but he pointed out that “Croatia’s government has no influence over the decisions taken by the country’s judicial bodies.” The Croatian president, Ivo Josipovic, was less charitable, saying that Orbán doesn’t seem to realize that Croatia is not Hungary where the government can instruct the judiciary.

Orbán is not changing his stance on the issue. Today during his usual Friday morning interview he reiterated that “coercion outside the economic realm does not make it possible and justified [for MOL] … to remain in the Croatian energy market.” He gave advice to the Croats: the state should get their energy sector back. Buy the MOL shares just as Hungary bought the gas storage facilities from E.On. That’s the civilized way, he added.

MOL3

As far as the Croatian government is concerned, the solution is not that simple. According to Croatian papers, the government doesn’t have the €7.8 billion necessary to buy MOL’s stake at market value. But who else would be foolish enough to buy into INA given the murky purchase of the MOL stake? If it turns out that Hernádi is implicated, the entire original agreement of 2009 might be deemed null and void and the ownership of the MOL shares might be transferred to the Croatian government.

I’m also not at all sure whether MOL would consider selling its rather large holding in INA at this juncture. Apparently in the last three years the company invested a great deal of money into INA, and it is unlikely under the circumstances that MOL would receive a fair price for its stake. INA is a large chunk of MOL’s total wealth: about a third of all its assets. MOL’s importance as the region’s largest oil refinery would be jeopardized, especially if we consider Croatia’s access to harbors and pipelines necessary for MOL’s future expansion.

Orbán’s interference might also impact the price MOL can get for INA as a “state-ordered decision doesn’t bode well, even if selling the stake would be the economically reasonable step for MOL.” Meanwhile, MOL stock has dropped 4.6% in the past three days and is heading for its lowest close in sixteen months.

Sooner or later one will have to ask what actually happened in 2009 when MOL acquired its INA holding and its management. Until now no one in Hungary questioned Hernádi’s innocence, but lately there are more and more voices raising the issue of possible wrongdoing. As the argument goes, if Hernádi is innocent why isn’t he ready to face his accusers? Why does Viktor Orbán insist on MOL’s divesting its Croatian business? Is it perhaps because this way the Hungarian government hopes that the case against Hernádi will be dropped and therefore Hungary will not be obliged to extradite him to the Croatian authorities? There are just too many questions and at the moment no answers.