foreign companies

An optimistic prediction: The Orbán regime’s inevitable demise

I would like to report on a lengthy article that appeared on on September 18, 2014, written by someone who calls himself “Nolite Timere,” “don’t be afraid” in Latin. The piece has the upbeat title “The NER’s coming demise.” An optimistic title, that is, for those who are opponents of the Orbán regime. It is a prediction few people believe today in Hungary. In fact, an increasing number of editorial and op/ed pages forecast exactly the opposite. So, let’s see on what basis Nolite Timere makes his prediction.

Before I attempt to summarize his argument, let me remind everybody that NER is the abbreviation of Nemzeti Együttműködés Rendszere or, in English, the System of National Cooperation. In the first few months of the Orbán administration one could hear a lot about NER, but by early July I wrote that, despite Péter Szijjártó’s best efforts, the designation had disappeared from usage. Well, the name may have disappeared, but Viktor Orbán’s proclamation of NER signaled the beginning of a new era and a new political system. The text of the proclamation can be found in the above cited post.

Nolite Timere begins his argument by saying that NER rests on shaky foundations. Its support comes exclusively from Fidesz voters. The graph below shows the tight correlation between those Hungarians who support Fidesz and those who are satisfied with the performance of the government.

Therefore, opposition to the government automatically means opposition to the regime. Once this government loses power, the new government will most likely try to dismantle the NER. A lot of economic and political players may even find themselves in legal trouble. Therefore, maintenance of the Orbán system is of vital importance to those in power today.

Blue: the country is moving in the right direction. Orange: voters' support of Fidesz Source:

Blue: the country is moving in the right direction. Orange: voters’ support for Fidesz

The graph shows how the population reacts to financial fluctuations. At the beginning of 2012 only about 17-18 percent of the population was satisfied with the government’s performance, but as soon as utility prices were lowered and the impoverished population got a few thousand extra forints a month, they were once again ready to support Fidesz and its government. Conclusion? Viktor Orbán must make sure that he can reduce the number of dissatisfied voters for twenty or thirty years by increasing the well-being of the population. Nolite Timere’s prediction is that he will not be able to pull this off. At least this is what earlier efforts tell us.

All regimes since 1919 attempted to do two things simultaneously: continuously raise living standards and at the same time satisfy the expectations of their own base. The Horthy regime failed because it was unwilling to break up the large aristocratic and church estates; Mátyás Rákosi favored those who came from the working class and the peasantry to such an extent that by 1952 there was widespread hunger in the country; János Kádár refused to give up the primacy of the communist party in economic matters and therefore could maintain the modest but steady rise in living standards only as the result of  cheap Soviet energy and foreign loans. Once there were no more loans and no cheap oil the regime collapsed. The slow economic growth that began in 1995-96 lasted only as long as there were state-owned companies to be sold. After 2002 the economic growth could once again be maintained only through indebtedness. In 2008 that came to an end.

Hungary’s perennial problem ever since modern capitalism arrived in the region is a lack of capital. Since 1990 almost all capital came from abroad, and this has at least two serious drawbacks: it is expensive and it can be moved at any time. However, a country without its own capital must first rely on foreign sources. This was the case in Hungary between 1867 and 1914. Originally 60% of all investment came from Austria and Germany, but over the next 35 years a new generation of Hungarian capitalists grew up who learned from their foreign colleagues and amassed capital of their own. By 1914 only 25% of investment came from outside of the country. (Note that Viktor Orbán wants to achieve the same shift in the source of investment in a few years. Failure is guaranteed.)

Nolite Timere is convinced that in a country short on capital it is dangerous to build a regime that has only shaky legitimacy, as NER does. “The trick can be achieved only with foreign help … the regime survives only as long as foreign capital is coming in.” There was no appreciable economic growth in Hungary, yet the government lowered taxes, raised pensions, built stadiums. Where did they get the money? In part from foreign companies, in the form of extra levies, the lowering of utility prices, and many other tricks that took away large chunks of these companies’ profits. In some cases the companies even had to dip into their own capital to satisfy the Orbán regime’s appetite.

The second source is naturally the European Union. Between 2007 and 2012 Hungary received subsidies equivalent to 21% of the country’s GDP. In 2013 monies coming Brussels amounted to 5% of the GDP. In 2014 it will most likely be higher. In brief, “the future of the regime depends on the availability of foreign capital.”

The author is convinced that the end is nigh. All the money taken from foreign firms and received from the European Union was only enough to raise real wages modestly in the second half of 2013 and early 2014 in preparation for the coming election. As a result of the large amount of capital pumped into the economy, GDP growth in 2014 is expected to be substantial. Government propaganda points to this as a great success that will continue into the future. This is unlikely, claims our author.

Banks and other foreign companies are at a breaking point; they can absorb no additional levies. Bayern LB, owner of MKB, is a case in point; it threw in the towel and sold its Hungarian holding to the state rather than pay all the debts it accrued as a result of the government’s interference in its business activities. It is very possible that others will follow. If the state then sells these banks and other concerns to its supporters, it will be difficult to extract more taxes from them or even to maintain the low utility prices. After all, there will be no foreign money coming in to replenish the losses.

The leaders of the regime might try to attract foreign companies, especially German and Austrian businesses, to Hungary, but such recruiting has its limits. After all, the government wants to strengthen those Hungarian capitalists who are friends of the regime. That’s why the government makes a distinction between “good” and “bad” foreign investors, thereby limiting their number. Of course, the question is how long a foreign company can remain a “good company” and when Viktor Orbán will decide that, after all, he made a mistake. Moreover, Nolite Timere thinks that unless some kind of miracle happens, the amount of money coming from Brussels in 2016-2017 will decrease sharply as a result of the very nature of the system of disbursement.

And so Viktor Orbán needs capital from outside the European Union and the United States. Hence the “Eastern Opening,” which up to this point has not brought real results. That’s why Orbán turned to Vladimir Putin last year and signed a 10-billion euro secret agreement for a Russian company to construct a new atomic reactor in Paks. Most of that money will not add to Hungary’s GDP because once construction actually begins on the reactor the lion’s share of the work will be done by the Russian company that “won” the contract. In comparison to the EU subsidies, this Russian money is small potatoes, 120 billion euros a year as opposed to the 30,000 billion coming from Brussels. Of course, it is possible that Orbán is hoping for very inexpensive gas from Russia, which would add another 50 billion euros worth of capital a year.

The maintenance of the Orbán regime in the long run needs all three sources of financing: the EU, Moscow, and Western capital via government bond purchases. If any one of these three falters, the regime itself might be in danger. Brussels must pay without delay. Withholding money might upset the delicate financial balancing act of the Orbán government. As far as Paks is concerned, the Russian-Ukrainian crisis came at the worst possible time from Orbán’s point of view. Even before the crisis Brussels was not exactly happy either with the building of the Southern Stream or with the secret Russian-Hungarian agreement to have Russia build a nuclear reactor inside of the European Union. In addition, one never knows what may happen in the internal financial markets that might weaken the forint further. Hungarian bonds might be less attractive to foreign investors if the United States raises its interest rates in the future. All this could have disastrous effects on the Hungarian economy. This is especially so because the capital that is coming into the country is not being used to lay the groundwork for further economic growth. Instead it is being used to artificially raise living standards, lower utility prices, hand out higher pensions, maintain the flat tax, buy companies to be passed on to friends of Fidesz, and erect state-financed projects like stadiums and renovate state-owned buildings. With such a strategy no country ever became highly developed.

Hungary managed to lock itself into a position of total economic dependence. At this stage the regime no longer cares from whom the money comes or how much it costs in the long run; what counts is that comes and that it comes fast. When foreign capital dries up, this regime will inevitably fail.

Viktor Orbán’s letters to the Hungarian people: An expensive habit

After the citizens of  Esztergom voted Tamás Meggyes, the long-standing Fidesz mayor of the city (1999-2010), out of office, the Fidesz-majority city council brought the normal functioning of city hall to a virtual standstill. Starting with preventing Éva Tétényi, the new mayor, from occupying her office, they did everything under the sun to paralyze the governance of the city. Articles appearing in the media often called attention to the fate of the city that had the temerity to drop a Fidesz official who also serves in the Hungarian parliament. They predicted that if by some miracle Fidesz loses the next elections this is the fate that will befall the new government.

Less attention was paid to the city of Pécs which had held a municipal by-election a year and a half earlier. Pécs was unlucky with its MSZP mayors. One died as the result of a car crash and his successor died of cancer shortly after he took office. Thus in May 2009, a year before the national election in which Fidesz-KDNP won a two-thirds majority, a Fidesz candidate, Zsolt Páva, decisively beat MSZP’s Katalin Szili, who was at the time the speaker of  parliament.

More attention should have been paid to this by-election in Pécs. With hindsight we can see that the city was in many ways Fidesz’s laboratory for its national election campaign. Moreover, once the new Fidesz mayor occupied his office, his political strategies also foreshadowed what was to come after the party’s landslide victory in 2010.

It was in Pécs that Gábor Kubatov, the party’s campaign manager, put into practice what American advisers taught him about grass root campaigning. The lists his activists compiled became infamous when his bragging about his knowledge of all the “communists” in Pécs became public. But once Fidesz found out that this new campaign style worked splendidly on a small scale, the party decided to apply it nationally.

I’m almost certain that during his first days in office every step Páva took was dictated from above. Otherwise, it seems unimaginable that the mayor of a city of less than 200,000 would on his own initiative forcibly oust a foreign company from the city (and hence the country as well). I think we can say with some degree of confidence that Viktor Orbán had already formulated his plan to nationalize utility companies. What strengthens this hypothesis is that shortly after the expulsion of the French company in Pécs, János Lázár, then still mayor of Hódmezővásárhely, population 40,000, uttered similar threats. Lázár’s threats never went any further, most likely because of the very strong reaction of French president Nicolas Sarkozy to the assault on French companies.

At any event, immediately after he was ensconced in his office Páva began writing letters to the citizens of the city, asking their opinions on various matters. They were supposed to register their views and send back their answers. At the time I thought that this was a very clever way of engaging the citizenry. Not that I thought the answers had much significance or effect, but I considered it a clever political move.

One of Viktor Orbán thirteen letters

One of Viktor Orbán thirteen letters

It seems to me that the barrage of letters with which the new Fidesz mayor in Pécs surprised his voters was again a test. If these letters had a positive impact, perhaps the practice could be adopted once Viktor Orbán became prime minister of Hungary. And indeed, the Pécs experiment worked. At the regular municipal elections the once solidly socialist city switched sides. Fidesz gained an overwhelming  majority on the city council and naturally Páva was reelected.

And so Prime Minister Viktor Orbán began his “correspondence with the Hungarian people.” His first letter was sent out in September 2010 followed by eleven or twelve more since, to the tune of 3.4 billion forints (taking the total number of letters to be twelve) according to an estimate by Index.  Népszava calculated on the basis of thirteen letters that 4.4 billion forints were spent on the letters themselves in addition to the cost of their accompanying ad campaigns. They estimated that about 5 billion forints were spent on Viktor Orbán’s penchant for “direct communication with the people.” The journalists of Népszava also figured out what kinds of  sorely needed goods and services this sum could have purchased. For example, 900 ambulances or the salaries of 350,000 people employed in the public works program.

In the beginning some of the more naive souls actually sent back their answers, and the government proudly announced the success of their solicitation. But as time went by fewer and fewer letters were returned. The overwhelming majority ended up in the garbage. On at least one occasion one of the trade unions organized a campaign to collect the letters and sell them for recycling, giving the proceeds to charity.

One of these letters was sent to inhabitants of towns with populations of fewer than 5,000. It explained to them in what manner and to what extent the central government would finance these smaller boroughs. Here it seems that the soothing explanations actually presaged drastic cuts. Just the other day Róbert Molnár, mayor of Kübekháza (population 1,600), received 3,480 forints for the month of July. This is not a typo. Kübekháza needs about 5 million forints a month just to meet its critical expenses. The electric bill alone is about 40,000 a month. Róbert Molnár with the full support of the town council sent the 3,480 forints back to the government. They found the sum insulting. And Molnár is a Fidesz politician who in fact was a member of parliament between 1998 and 2002. Naturally he made quite a splash since he made sure that the media outlets were informed.

The latest missive was a thank you note straight from Viktor Orbán to those who allegedly signed one of the two million petitions Fidesz received in support of  lowering utility prices. A nice gesture, one could say. But it seems that among those being thanked, according to more and more Hungarians who are speaking out, were family members long dead. One becomes a bit suspicious. Suspicious about Fidesz’s lists in general, about the number two million, and about the whole phony pen pal game.

Bálint Magyar: Viktor Orbán’s post-communist mafia state, Part II

We left off yesterday at the point that the concentration of political power and organized corruption cannot be divided because they are both part of the very essence of the system. The mafia state has a distinct advantage over traditional mafias. Whereas the latter must reach their goals either by blackmail or by intimidation, a mafia state by definition has the power of the state behind it. Therefore it can “adjust” laws according to its needs. In brief, the “organized upperworld” makes its own illegal activities quasi-legal. Acquiring ill-gotten riches no longer must be hidden.

The new mafia state is different in this respect from both the Horthy regime and the Soviet system. The Hungarian ruling elite between the two world wars didn’t want to change the “economic elite”–with the notable exception of the expropriation of Jewish property in its last phase; it only wanted to enrich the already existing Christian middle class. In the Soviet Union the communists nationalized all private property. Both decisions were merely political decisions fairly uniformly applied. The situation is different in a mafia state. Instead of a uniform political will, decisions are individual and random. “What they like they take.”

An old picture of the Fidesz family, 1999 / cover page of HVG

An old picture of the Fidesz family, 1999 / cover of HVG

As for the comparisons between Hungary’s mafia state and that of the former Soviet Union and its successor states, although the final result is the same, the road to it is different. In Russia and elsewhere east of Hungary the members of the former party elite managed to “privatize” state property. In Hungary economic power ended up for the most part in the hands of technocrats. In Russia the few non-apparatchiks who managed to get into the select circle of economic moguls were eventually sent packing or ended up in jail.

In Hungary, when Fidesz appeared, “the field” was already taken. In order to change the current state of affairs Fidesz either has to get rid of members of the economic elite or make them part of the “family”  or “service nobility”.  Fidesz’s misfortune is that in Hungary, as opposed to Russia and its satellites, a true democratic process had already begun. In order for Viktor Orbán to reach his final goal, the very institutions of Hungary’s fragile democracy must be eliminated. We are not at this point yet and it depends on the Hungarian voters whether Orbán can succeed or not. In Poland there was a similar attempt by the Kaczynski brothers but their attempt failed.

How is Hungary’s current political elite handling this takeover of economic power? The ideology behind the process is a “national war of independence.”  The first step is trying to achieve a certain percentage of Hungarian ownership in the various business sectors. Next, the government begins to force out legitimate owners of enterprises by levying extra taxes, forbidding the construction of new malls, imposing impossible requirements to obtain a building permit, or as in the case of the French firm Suez in Pécs, by simply taking over the company by force. Often the state itself buys the foreign-owned company and after a short while the company is sold to a friend of “the family.” There have been cases (notably MOL and E.ON) where the elite at public expense purchased large blocks of stock  or buy entire companies at prices way above their market value.

One of the most brazen takeovers of a business sector is the tobacconist shop tenders. This time the mafia elite decided to change the law in order to create a state monopoly by which it impoverished forty or fifty thousand small businessmen. Why did they have to deprive relatively poor mom and pop store owners of their livelihood? Because the “the family” must be continually extended outward, giving gifts to the small fry in the organized “upperworld.” By making tobacco products a monopoly, additional revenues will reach the treasury while those relatively few shops that can sell cigarettes will be owned by “clients” who will have a guaranteed income. Killing two birds with one stone.

Although it is becoming crystal clear that the selection of the future tobacconists was fraudulent, there will be no legal consequences. By now both the police and the prosecutor’s office are part of the organized “upperworld.” We already know that these cases will never reach the courts because the prosecutors announced that there is nothing to investigate.

Analysts often talk about certain Fidesz moves as irrational and self-defeating. The tobacconist shop scandal is one of the examples. Magyar thinks that, according to Fidesz logic, the creation of a monopoly and its distribution to clients is a perfectly rational move. “I can do what I want and therefore I go ahead.” Of course, not all Fidesz moves work out, and we will see whether the tobacco affair does or doesn’t hurt the party and Viktor Orbán personally. For the time being it has not. According to the latest polls Fidesz’s lead is assured. What helps the Orbán government survive these scandals are the limits the central power puts on information flow through its stranglehold on public television and radio and other media outlets.

According to Magyar, the mafia state is waging a national war of independence against its own citizens by taking away their wealth and freedom. It is eliminating the sanctity of private property. It is introducing the right to collect taxes before anyone else. It talks about Christianity but takes care of only its “adopted family”; it is cruel to those outside the charmed circle. It preaches about family but what it actually means is the family adopted by the organized “upperworld.” It heralds a society based on work when it receives its income from “protection money” taken from others. “The mafia state is a privatized form of a parasite polity which preaches work but ‘drinks’ dues. But it is no speculator. It goes for the sure thing.”

To be continued