Gazprom stores some of its natural gas in Hungarian facilities

I guess it is high time to talk about Vladimir Putin and natural gas.

First, Putin’s trip to Serbia. Serbia and Russia have had close ties for more than a century. The only exception I can think of is the 1948-1954 period when Tito was considered to be the “chained dog of the imperialists.” But otherwise in all conflicts Russia stood by Serbia. Serbia’s financial situation is pretty grim at the moment, and I understand that without Russian help Belgrade would be in even greater economic and financial trouble than it is. The closeness of the two countries is demonstrated by the fact that the date of the celebration of the 70th anniversary of the liberation of Belgrade by the Red Army was moved forward to accommodate Vladimir Putin’s schedule. The military pomp on display to impress the Russian president was noteworthy, especially in view of Serbia’s insistence that she wants to become part of the European Union.

Putin decided to use this opportunity to deliver a stern message to Europe. He warned Brussels that as long as the Ukrainian crisis is not settled, naturally in favor of Russia, gas supplies to Europe might be disrupted just as happened in 2006 and 2009. He said that he himself will do everything to avoid such an eventuality, but if it does happen it will be the fault of the European leaders.

Almost at the same time news reached the West that Hungary will store Gazprom gas. You may recall that Hungary purchased the German-owned E.ON gas storage facilities in 2013 for an incredibly high price. The story of that purchase is well summarized in an article in the Budapest Beacon, according to which the Hungarian state-owned company, MVM, may have lost $2.6 billion as a result of the deal. Given the pervasive corruption in Hungary, analysts were certain that the purchase of E.ON’s business units was “a success story for certain business circles but a huge loss for the national economy as a whole.” This assessment might not be on target. It is more likely that Viktor Orbán’s eagerness to purchase E.ON at whatever price stemmed from a deal with Gazprom to use Hungarian storage facilities. Aleksey Miller, CEO of Gazprom, visited Budapest in October 2012. At that time Miller agreed to such a deal, but only if the storage facilities were in the hands of the Hungarian state. A year later Orbán obliged.

So, what kinds of storage facilities are we talking about? E.ON Földgáz Storage Zrt. has five underground facilities in which it can store 3,740 million cubic meters of natural gas. According to Hungarian sources, these underground storage facilities are the best and the largest in the region and  fourth in size in Europe. As a result, in 2009 Hungarians were more or less unaffected by the gas shortage when Russia stopped the flow of gas through Ukraine to Europe.

I was pretty sure by the end of September that something was afoot concerning Russia’s use of Hungary’s storage facilities, but it was only on October 10 that I read an AFP report which noted that although Hungary is steadily buying gas from Russia, it is also storing Russian-owned gas. The article noted that “it is unusual for the company to store gas still owned by Gazprom, which is locked in a dispute with Kiev that some fear could see transit through Ukraine halted for the third time in a decade.” According to the spokesman of MVM, the owner of the facilities, “with this agreement Gazprom will be able to comply with its long-term contract obligations, should there be problems on the transport routes.”

Kyiv Post tersely noted the Russian-Hungarian deal without adding any editorial comment. But Kiev must see the deal as an antagonistic move because, with it, Russia can supply gas to Europe at the same time that it squeezes Ukraine.

As for the amount of stored gas owned by Hungary, this number is difficult to estimate. Throughout September the Hungarian media was full of complaints about Hungarian tardiness in filling the country’s storage facilities. In mid-September HVG claimed that they were only 58 percent full. Moreover, if one can believe MTI, a month later, on October 16, the situation was exactly the same. Opposition politicians naturally blame the Orbán government for its tardiness and predict terrible consequences come winter. But I suspect that something else might be behind the procrastination of the Hungarians. The Russian-Hungarian deal to store Russian gas in Hungary was signed only at the end of September, and it is very possible that in return for its “generosity” Hungary managed to get a lower price on Russian gas. I can’t think of any other rational explanation for not filling the storage facilities as quickly as possible. Especially since other European facilities are 80-90% full. Perhaps we will eventually learn the real story, although I’m sure that the Hungarian government will do its best to conceal it.

Scandal surrounding the purchase of E.ON gas company

The left-of-center Hungarian media is full of stories about details of  the purchase of the German-owned E.ON gas and electricity company by MVM (Magyar Villamos Művek), a state-owned utility company.

Let’s go back a few years to recall the background of this deal. Rumors of the purchase of the company were already circulating in the summer of 2011 because Viktor Orbán made it clear that he found state ownership of utilities of strategic importance to the country. Not everybody shared the Hungarian prime minister’s view. For example, the Financial Times Deutschland at the time called the idea “madness,” arguing that the price of energy cannot be lowered by nationalizing the utility companies.

It is also important to understand the history of E.ON in Hungary. Originally E.ON bought the company from MOL, the Hungarian oil and gas company, when during the initial tenure of Viktor Orbán (1998-2002) the government set the price of gas so low that MOL suffered considerable losses. For ten years E.ON managed to make the Hungarian business profitable, but in 2010 it suffered a blow when the second Orbán government once again froze the price of gas. As a result, E.ON lost money. The Germans decided to bail and sell the company to the Hungarian state. The deal was closed in March 2013. At the time experts found the purchase price too high.

Because of the controversy over the purchase price, atlatszo.hu  (Transparency), an NGO that receives some funds from the Norwegian Grants, decided to ask for documentation about the deal. Although by law the Magyar Nemzeti Vagyonkezelő/Hungarian National Asset Management, the state organization that handles state properties, was obliged to release the documents, they refused. At that point atlatszo.hu went to court and won. The state appealed but atlatszo.hu won again. That did not deter MNV. They decided to go all the way to the Supreme Court (Kúria). But no luck. After a year and a half of legal wrangling the Hungarian state was forced to release the documents. Atlatszo.hu promptly made them public on its website.

On the basis of the documents now released, it looks as if MVM purchased a company that was practically bankrupt. The purchase price of 251 billion forints was considered too high when critics were unaware of the actual financial health of E.ON. As it turned out, the assessors estimated the value of E.ON to be -355 billion forints. Yes, you read it right: minus. So, with the 251 billion paid by the government, the loss to the country is 616 billion forints.

Viktor Orbán was bent on purchasing E.ON regardless of price. In fact, even before negotiations began he repeatedly announced his absolute determination to acquire the company. Not the smartest move. There was not much haggling over price either. The Germans asked 260 billion forints and, it seems, Orbán was happy to pay.

Prime Minister Viktor Orbán and Chairman-CEO of E.ON

In fact, he was so eager that he wasn’t bothered by the fact that the Hungarians were unable to examine the financial health of the company thoroughly. The German side announced that certain documents would be released only after the deal was complete.

The negotiators from MNV were aware of the riskiness of the transaction and were afraid to go ahead with the deal without appealing to a higher authority. They wanted to submit their findings to the Ministry of National Development for approval. Mrs. László Németh, then minister of MND, did not feel comfortable with the deal either, so in the end it was Viktor Orbán who personally assured MNV of state guarantees for any losses incurred as a result of the transaction.

Apparently the greatest risk for the health of the company is the “take-or-pay contract” that has existed for many years between Gazprom and the E.ON companies. That means that the company either takes the product from the supplier or pays the supplier a penalty. After 2008, in the wake of the global financial crisis, Hungary’s gas needs decreased considerably. And yet the company was obliged to buy gas regardless of need. Some references in the documentation indicate that after the close of the deal the new owners might be able to negotiate with Gazprom concerning the take-or-pay arrangement. Orbán’s cozy relationship with Putin should help in this regard.

Critics also point to legal irregularities. For instance, owners of E.ON shares were not notified thirty days before the deal was signed. There is also the possibility that Brussels will consider the state subsidies to MVM illegal. (Apparently, the socialists already asked the European Union to investigate the case.)

The new division of MVM cannot stand on its own financially. Not only does it need state subsidies to cover its costs, but two of the gas storage facilities bought from E.ON already had to be closed.

Együtt-PM and DK are bringing charges of mismanagement and abuse of fiduciary duties in connection with the purchase of the E.ON gas business by MVM. MSZP was more modest. The party only asked Miklós Seszták, the new minister of national development, to investigate the case. If I were the representative of MSZP I wouldn’t wait breathlessly for this investigation. The ministry already made its position clear tonight. Hungary cannot be at the mercy of foreign interests in the energy sector, and therefore the purchase of E.ON was necessary for the “defense of the decrease of utility prices.” Getting back the gas company is also of inestimable value from the point of view of national security because of the gas facilities where Hungary can store 70% of its yearly gas consumption.

As for the purchase itself. “Several independent assessments showed the economic justifiability of the purchase in the long run.  The state ownership guarantees the secure gas supply of Hungary and it serves as a solid foundation for future economic growth,” reads the statement of the ministry released to MTI. I must say that this is a pretty weak response to the very serious charge of financial irresponsibility with taxpayer money.

In the right-wing media the silence is deafening. The only article I found was in MNO (Magyar Nemzet Online). It was posted at 17:33 and is a bare outline of how the documents were acquired by atlatszo.hu and what the documents show. It seems that, since the Ministry of National Development hadn’t yet responded to the revelations, the paper’s editors didn’t know what the right position was on this particular issue. I guess they will eventually find their voices.

As for the Fidesz-friendly prosecutors, they were quick to charge socialist and liberal politicians with an abuse of fiduciary duty for selling state properties at prices they considered too low. But it is unlikely they will ever charge Fidesz politicians with the same abuse for buying state properties at prices that are too high.

Viktor Orbán and Recep Tayyip Erdogan are the best of friends

Surprise! Yesterday late afternoon when most likely Viktor Orbán and his entourage, numbering some 120 government officials and businessmen, had already boarded the plane to Istanbul, the prime minister’s press department announced his trip to Turkey. The schedule was crowded. That same evening Orbán opened the Hungarian House, a cultural center, and a Hungarian trading center, both in Istanbul. And he still had energy to deliver a speech before Hungarian and Turkish businessmen about the great prospects that Turkish-Hungarian economic relations offered to both countries.

According to the prime minister’s website, Orbán’s speech was delivered in front of about 200 people, which leads me to believe that the Turks were in the minority at the event. However, those present could learn that “foreign capital is arriving in Hungary at an exceptionally fast pace” and that the Orbán government “had already laid the foundations of a successful Hungarian economy of the future.” When I hear such brazen lies from Viktor Orbán, I really wonder whether perhaps his ambitious plans for expanding Hungary’s horizons toward the business world outside of the European Union falter in part because of such claims that lack any foundation whatsoever. Surely, the businessmen who attend these gatherings are well informed on economic and financial matters, and therefore they must know that it is simply not true that foreign capital is pouring into Hungary. In fact, exactly the opposite is the case. The same must be true about the business friendliness of the Hungarian government when all foreign financial papers are full of stories about the incredible governmental attacks on the banking sector and multinational firms operating in Hungary.

This morning he gave another speech entitled “Hungary and Europe in a Changing World” at the Marmara University in Istanbul, where he also received an honorary doctorate for his work on Turkish-Hungarian relations and for his efforts on behalf of Turkey’s quest for membership in the European Union. Here he expounded on his ideas about the future of the European Union which in his view will be successful only if it expands and includes Turkey and the Balkans. At the same time, member countries should have more say in conducting their own economic policy. He also claimed that the European Union’s “relations with Russia must be reevaluated.” Gépnarancs.hu reminded his readers that Gábor Vona was also a guest of the University only a month ago. He didn’t get an honorary degree, however, only a plaque from the dean of the university for his efforts at  reviving Turkish-Hungarian traditions.)

I mentioned only a couple of days ago that Péter Szijjártó, who by the way accompanied Viktor Orbán to Turkey, expressed his hope that the Israelis would take advantage of Hungary’s enormous gas storage facilities. It seems that  negotiations with Turkey to the same end were already under way. Magyar Földgáztároló Zrt. (Hungarian Gas Storage Corp.) and the Turkish Naturgaz signed a letter of intent. A similar agreement was signed between Eximbank, a Hungarian export-import bank, and the Industrial Development Bank of Turkey (TSKB). The Hungarians emphasized that the storage of Turkish gas in Hungary wouldn’t need any further work on infrastructure because the pipeline between Turkey and Hungary already exists.

Today the Hungarian delegation moved on to Ankara where Orbán met Abdullah Gül, the president of Turkey. I do hope that he was well prepped and didn’t praise Prime Minister Recep Tayyip Erdogan, whom he obviously greatly admires. The night before at the opening of Magyar Ház he said: “Thirteen years ago, when I last came to Turkey, there was a different prime minister in the country and different politics. Now 13 years later, I can see huge differences, not only in technical terms, but also developments with roads and bridges, as well as high-speed train projects, buildings, and also the people who believe in their strength.” It is a known fact that Gül’s relations with Erdogan are anything but friendly, mostly because of Erdogan’s authoritarian rule. Only recently Gül hinted that he was prepared to challenge Erdogan, who is contemplating a run for the presidency next year. Erdogan has been prime minister of Turkey since 2003 and under rules adopted by his own party is barred from seeking a fourth term as prime minister. Therefore he has his eye on the presidency.

The joint press conference held by Erdogan and Orbán reflected their mutual admiration. These two are soul mates.

Hungary received a gift from Erdogan: Hungarians no longer need a visa to visit Turkey. In turn, Hungary made it as easy as possible for visiting Turkish businessmen, artists, and athletes to stay in Hungary for extended periods of time. In return, Erdogan promised that the Visegrád countries will be the most important trading partners of Turkey.

A telling picture. Viktor Orbán and Recep Tayyip Erdogan in Ankara
MTI/AP Burhan Ozbilici

Orbán naturally emphasized Hungary’s support for Turkey’s integration into the European Union. He expressed his firm belief that Turkish citizens shouldn’t be required to have visas to travel in countries of the European Union. Such a gesture wouldn’t be a “gift but a sign of appreciation of the fantastic Turkish economic accomplishments.” Again, he went over the top when he announced that without Turkey’s presence in the European Union “it will be impossible to turn around the current economic tendencies” in Europe. Turkey’s message to Hungary is that “one’s own road is always the best road” to success. Finally, the Hungarian government will give 150 scholarships to Turkish students who wish to study in Hungary. One can certainly admire Orbán’s generosity when he vetoed all efforts at giving scholarships to Hungarian students. They can get only student loans.

Members of the two governments conducted the first meeting of the joint council of strategic cooperation just established between Turkey and Hungary.

MTVA, Orbán’s new organ in charge of funneling news to the Hungarian state television and radio, and TRT, the Turkish public radio and television, also signed an agreement. Another was signed by MTI and the Turkish Anadolu Agency. One should note that for the second year in a row Turkey jailed more journalists than any other country (with Iran and China close behind) according to an annual report released by the New York-based Committee to Protect Journalists. Forty journalists are currently in jail in Turkey. In Hungary, at least, no journalist has yet been incarcerated.