Putin’s visit: “Strategic impetus” for future Russian-Hungarian relations?

Yesterday the Russian ambassador to Hungary, Vladimir Sergeyev, when asked about Russian President Vladimir Putin’s visit to Hungary, basically repeated what Prime Minister Viktor Orbán has been telling the Hungarians in the last few days. Putin’s visit to Budapest is nothing out of the ordinary. The main topic of the talks will be “the extension of a long-term contract” that will ensure the uninterrupted flow of natural gas from Russia to Hungary. The contract is due to expire this year, hence the urgency of the negotiations. Sergeyev emphasized that Putin’s visit has nothing whatsoever to do with “the overall situation in the world and the tension we now observe.” In addition to energy questions, the two leaders will discuss “cooperation in tourism and culture.” All this sounds utterly innocent until we get to the last sentence: that the talks are designed “to give a strategic impetus” to the future development of relations.

Viktor Orbán, although he is usually quite tight-mouthed, also indicated, perhaps unwittingly, that “over and above the question of energy, we must strive for a truly balanced relation. That’s why we invited and welcome President Putin.” These sentences indicate that the conversations will go beyond economic relations. Suspicion is growing in Budapest that the “urgent issue of the gas supply from Russia” is only an excuse for a visit by the Russian president. The real reason is what Ambassador Sergeyev called a “strategic impetus” for closer relations between the two countries. And that is a political, not an economic issue.

Let’s return briefly to Lajos Simicska, the oligarch to whom Viktor Orbán owes his rise to power but who is no longer Orbán’s friend. In his interview with Magyar Narancs Simicska told the reporter that after the April elections he had a long conversation with Viktor Orbán, during which the prime minister outlined his “plans,” which Simicska did not like. Among other things, Orbán shared his views of Russian-Hungarian relations, which Simicska found odious. He expressed his disapproval of Orbán’s scheme, saying: “No, I don’t like it at all. I grew up at the time when the Soviet Union was still here and I don’t have pleasant memories of the activities of the Russians in Hungary. I can’t really see any difference between the behavior of the former Soviets and the political behavior of today’s Russians.” I am sure that Simicska’s anti-Russian feelings are genuine. He was known for his intense dislike of the Soviets even as a high school student. This antipathy most likely had something to do with his father’s involvement in the Revolution of 1956 and the reprisals the family suffered as a result. If his old friend Viktor had talked to him only about economic ties and a secure supply of gas, surely Simicska wouldn’t have reacted so negatively.

A Romanian view: “Putin will visit Hungary: A challenge to the United States”
Source: Independent.md

No, it is becoming clear that the urgent negotiations about a long-term gas contract are only a smokescreen. Although it is true that the current agreement will expire at the end of June, the flow of gas will not stop. According to the present contract, Gazprom is obliged to supply gas to Hungary for at least two more years. Perhaps three. Fifteen years ago, when the contract was signed, energy consumption was higher than it is now. The contract specified a certain amount of natural gas between 2000 and 2015, but that amount hasn’t been used up. So why is this deal suddenly so important to Orbán? Why does he think that he will be able to get the best deal from Gazprom thanks to Putin’s good offices? What did Orbán promise to Putin in exchange for cheap gas? Will he get cheap gas and, if so, at what price? Will Rossatom’s building of the two new reactors at Paks be enough for Putin in return? Or will Orbán be ready to sell or rent the storage facilities he purchased earlier from the German firm E-On to Gazprom? Most important, why is Orbán so keen on a special deal with Gazprom when by now Russia’s monopoly on the gas supply to Europe is broken?

Some observers even claim that it is not to Hungary’s advantage to sign a long-term contract with Russia because the current market price of natural gas is actually lower than what Hungary is paying for Russian gas. Hungary is paying between $350 and $400 for 1,000m³ of gas; on the open market it sells for $300. Moreover, as I already noted, Russia’s gas monopoly is a thing of the past. By now there are alternate pipelines through which western gas can reach Hungary. Although it is true that the completion of the pipeline between Slovakia and Hungary has been delayed due to technical problems on the Hungarian side, it should be ready very soon. Meanwhile gas has been steadily coming into the country from Austria and Croatia.

The Orbán government in the last five years or so was not too eager to work either on alternative pipelines or on reducing the amount of gas used by Hungarian households, which is twice that of Austrian households. The reason is inadequate insulation. European Union directives oblige energy suppliers to improve the insulation of buildings, but for some strange reason the Orbán government is in no hurry to change the Hungarian law to allow such a solution. According to experts, people could save 30 to 50% on their gas bills if this essential repair work on windows and doors were done. Definitely more than the much touted 10% decrease in utility bills legislated by the government.

Orbán has exaggerated the danger of running short of gas. He even indicated that if he is unsuccessful in his negotiations with Putin, Hungarians will freeze to death because there will be no gas to heat their houses and apartments. Of course, this is not only an outright lie but a stupid business tactic. If the situation is so desperate, the negotiating partner will have the upper hand in the negotiations, as several people pointed out.

And with that I return to Russian Ambassador Sergeyev’s mysterious “strategic impetus” for future relations between the two countries. Suspicion is growing in Hungary that Orbán is making some kind of a political deal with Putin which may commit Hungary to a closer relationship in the future. Miklós Hargitai of Népszabadság goes so far as to speculate that “it is not the decrease in our utilities bills that will depend on Putin but Orbán’s hold on power.” For whatever reason, the Russian card seems to be of the utmost importance to Hungary’s gambling mini-Putin.

Billions diverted from Hungarian state coffers to natural gas broker

Thanks to Budapest Sentinel, we now have an English translation of an article published on the internet site 444.hu with the title “This is the way to make the most money in Hungary.” Earlier I wrote a post about MET Holding A.G., headquartered in Switzerland. It is partly owned by MOL, the Hungarian oil company, and partly by Hungarian individuals–people formerly employed by MOL and businessmen with close ties to Viktor Orbán. At the time there were a lot of questions about this very successful company, but since then 444.hu‘s journalists managed to ferret out details of MET’s business model. As a result of their work, we now know how the Orbán government manages to divert public money into private hands. We can be certain that this is not the only enterprise that specializes in creating a new business class on taxpayer money. Enjoy!

* * * 

President Vladimir Putin gives Prime Minister Viktor Orbán a knowing wink in January 2014

• MET has made huge profits on natural gas since 2011
• For this it needed the help of the government and state-owned MVM (Hungarian Electric Works)
• Russians are also involved
• Even as MET makes a lot of money, its business partner MVM requires state support

Over the past four years a Swiss-based company partially owned by various off-shore companies was given the opportunity by Hungary to enrich its owners in a totally unique fashion.

The Hungarian subsidiary of MET managed to make a huge amount of money by securing an exceptional place on the domestic gas market thanks to government orders and wonderful contracts.  After tax profits in 2012 alone were nearly HUF 50 billion (USD 225 million).

The government was so generous that all three opposition parties (MSZP, Jobbik, and LMP) filed complaints of misappropriation, fraud, and money laundering.   The National Office for Investigations, however, found no crime and did not open an investigation on the basis of any of the complaints.   Over a year ago MSZP, and now LMP, formally requested the MET gas contracts from MVM.  The parties are awaiting a court decision.

The machination that opened the road

It is not clear whether the elimination of the KÁT (obligatory electricity purchasing system) played a role in MET’s success, or whether one followed from the other, but the story starts here.

The KÁT was a unique kind of state support available in the case of renewable technologies or power plants producing both electricity and heat.  Here the second pillar of KÁT is interesting, which numerous local governments have to thank for being able to obtain heat inexpensively for district heating.   The theory was that the so-called “connected production” producing both electricity and heat was environmentally friendly because it made more efficient use of energy.  In this way the gas-fired power plants also qualified for state support and could supply heat cheaper.

The price of KÁT was built into the cost of electricity.  But in 2011 after a long debate the part pertaining to power producers was eliminated.  There was a big scandal about it.  For example, it was on this matter that former state secretary for energy matters János Bencsik clashed with then Fidesz caucus leader  János Lázár who submitted the bill.  Lázár won the battle and from July 2011 producers of electricity and heat no longer received supports from KÁT, and therefore could no longer provide a discount to many dozens of cities.

It was for this reason that the government issued a decree providing cheap gas to the settlements and institutions that suffered.  585 million cubic meters of gas was released from Hungary’s strategic gas reserve for this.  In this way it was possible to avoid increasing the price of district heating to many dozens of cities.  However, it was necessary to replenish the gas.

We’re replenishing, we’re replenishing

Let’s first look at the replenishment of the gas taken from the strategic reserve because that was the biggest business.

For many years it has been possible to purchase gas less expensively in Western Europe than the gas coming from Russia on the basis of the contract concluded (with Gazprom) in 1995.  (Of course, the gas coming from Western Europe may also have originated in Siberia, it is merely a matter of Russian pricing).

In the hope of obtaining cheaper western gas, the government issued a degree whereby the HAG pipeline between Hungary and Austria could be used free of charge in the interest of replenishing gas reserves.  Under normal circumstances gas traders would compete with one another for the right to use the pipeline, with the one paying the most given the right to use it.  This is a EU requirement, by the way.

However, given the extraordinary need to replenish gas, this obligation was temporarily suspended.   In the name of energy security the government made it possible to access the HAG pipeline without auction for one year between July 2011 and July 2012.  The government was very generous.  Minister for National Development Mrs. László Németh’s pencil cut a thick line.  In the interest of replenishing the 585 million cubic meters of gas used to compensate KÁT victims, it ordered that 2.9 billion cubic meters of gas could be transported without auction, in other words, very cheaply.

Furthermore, the law providing special access was extended from year to year, always with reference to energy security.  The current arrangement is valid through the end of June 2015.

For the past four years it has been possible to import a total of 19.6 billion cubic meters without having to compete for the right to use the pipeline.  All of this in order to replenish 585 million cubic meters of gas.  As the discounted quantity of gas completely used up the pipeline’s free capacity, during this time others could not access the HAG pipeline.  In other words, beyond the fact that the government put someone in a very favorable position, it also removed all competitors from the road.

According to the decree originally two companies were entitled to import gas without auction: the gas trading company (MVMP) owned by state-owned MVM (Hungarian Electric Works), and a small amount by E.on.  The gas business unit of the latter was acquired by the state in 2013 and given over to MVM.  In this manner, since then MVM has been the only beneficiary of this arrangement.

Apart from the long-term contract concluded with the Russians, only the state could import gas cheaper.  However, somebody else also made money off of this.  To be more precise, somebody else primarily made money off of this.

How does MET come into the picture?

Profits arising from the sale of gas imported inexpensively by MVMP could have enriched its owner, the state.  Or it could have sold the gas cheaper to consumers, and in this way help decrease utility costs.  But it did neither.  The arising profits were collected by the Hungarian subsidiary of Swiss based MET Holding.

The model works as follows:

• One of MET’s subsidiaries, METI, bought cheap gas from the west
• It sold the gas at the Austrian-Hungarian border to MVMP
• MVMP imported the gas by availing itself of free access to the pipeline in accordance with the decree on energy security, extended annually
• On the same day MVMP sold the gas at minimal profit to MET
• MET was than free to sell the gas to Hungary for whatever it could

So in practice the state allowed a market player to use the pipeline.  This is indicated by the fact that, according to the contracts, only such cash traded hands as was necessary for MET to pay MVMP a small margin for transporting the gas over the border.   This was HUF 2.50 (USD 0.012) per cubic meter.  Gas purchased from MET was HUF 32 (USD 0.15) cheaper per cubic meter in 2012 than the gas arriving from Russia on the basis of the long-term contract.

A year ago, an unknown individual posted part of the contracts concluded between MVM and MET online, without which no one would have found out what is happening.

And what became of the gas taken from the storage tanks?

The whole matter started when the government released 585 million cubic meters of gas from strategic storage in order to help those for whom district heating became more expensive as a result of the decrease in KÁT. Except part of the gas went to MET.

The official reason for this was that no one else needed the cheap gas.  According to the explanation, by the time the government decree was issued obliging MVM to release the cheap gas, every district heating company and potential beneficiary had already contracted with the market for the gas quantity required for the year.  MVM then decided that if it could not sell directly to those consumers leaving it in the lurch, it would issue a tender to sell the cheap gas.

In September 2013 and February 2014 Hungarian Socialist Party MPs Tibor Kovács and István Józsa posed questions relating to Mrs. László Németh, then Minister for National Development.  From her answers it is possible to figure out what happened.

From the answer given by Mrs. Németh in September, it can be determined that of the 585 million cubic meters of gas, only 270.6 million cubic meters could be supplied indirectly to the beneficiaries.  In other words, half the gas inventory was given over to traders.

And from the answer she gave in February 2014, it turned out that the trader was MET.

All of this the government found to be appropriate considering that by ministerial decree MVMP had to take delivery of the reserve gas.  And if it did not find a customer it was only logical that it sell the remaining gas through public tender with the requirement that the trader sell the gas to the KÁT victims.

Too much money, too little money

In 2012 it was readily apparent who was making money on this.  Even as the gas trading unit of MVM closed the year with a loss of half a billion forints (USD 2.3 million),  MET’s owners were able to take HUF 55 billion (USD 205 million) worth of dividends out of the company.

For a long time MVM was one of the largest revenue generators for the state.  Furthermore, it always had a lot of cash on hand.  It was precisely for this reason that from the first decade of this century it routinely happened that if there was a problem, MVM helped with the budget.   The trick was frequently employed by which the state took a few billions out of MVM if it got into temporary trouble.

Next to the state’s loss, MVM’s losses were negligible.  But one of Mol’s subsidiaries, FGSZ also lost on this construction because for years it could not issue a tender to use the HAG pipeline.  Fortunately, Mol was the 40 percent owner of MET.  (Mol stands for Hungarian Oil Company. -ed.)

But who are the owners?

This is not possible to know with certainty.   Even MET Hungary Zrt. CEO Gergely Szabó wasn’t willing to reveal this information to Figyelő.

What is certain is that MET Holding AG was registered in Switzerland, which has numerous subsidiaries. 40 percent of the holding company is owned by Mol, 10 percent by a Swiss company by the name of MET ManCo AG, in which Benjámin Lakatos has an interest.  The 38 year-old Lakatos, who is also the director of MET Holding, previously worked for Mol and is considered to be a confident of Mol CEO Zsolt Hernádi.

50 percent of the company belongs to WISD Holding, which owns numerous miscellaneous companies via a complicated network of offshore companies.  (Hungarian investigative website) Átlátszó previously unearthed that, among the companies in which WISD has an ownership interest, are companies owned by István Garancsi and György Nagy.  Garancsi is the owner of the Videoton football team and a good friend of Prime Minister Viktor Orbán and Zsolt Hernádi.

In the domestic business world György Nagy is considered an ally of OTP president Sándor Csányi.   Garancsi and Nagy are owners of WISD through their respective Cypriot companies, Inather Ltd. and Westbay.

The third known owner of WISD is Small Valley Investments Ltd., which is registered in the British Virgin Islands.  According to our information the company is owned by Russians, and that altogether they own 20 percent of MET Holding.

The fourth owner of WISD is a Swiss company by the name of Deneb Algedi Invest AG which is also owned by Benjámin Lakatos.

Viktor Orbán comes up

In Autumn of this year a Swiss and a Roman paper published articles claiming that the reason Viktor Orbán traveled to Switzerland may have been to conduct MET business.  A number of Hungarian energy experts are of the opinion that the articles appearing in the foreign papers were a warning on the part of foreign secret services that they were watching the opaque energy deals of the Hungarian government with Russia.  The articles appeared in two relatively minor international papers that are not in the habit of breaking stories of world economic importance.

Even before the Swiss article appeared, there were a lot of rumors that MET was very important to the Prime Minister.  The theory was that the company is an important part of the new economic elite being organized around the Hungarian head of government.

The Russians were also needed

In 2007 Mol founded the company that grew into MET Holding, and which the oil company was the only owner at the beginning.  In 2004 Mol sold its gas unit, but with the establishment of MET retained the possibility of returning one day to the gas trade.

In 2009 a company registered in Belize (Normeston) bought half of MET, at which point the Russians acquired an interest.  Belize is a Central American company where the institution of “introduction shares” exists.  This means that those people receive the dividends who can personally show that the shares are physically with them.  It is not necessary for them to introduce themselves.  That Russians were behind the company was confirmed by Gergely Szabó, MET Hungary CEO to Figyelő.   The company needed the Russians in order to help obtain gas cheaply:  “We also hoped that through its owners MET could obtain gas advantageously”.   That Russians are involved in the company through Small Valley, I heard from person familiar with Mol matters.

As Szabó explained, the Russians can obtain gas inexpensively.  There are those who believe that they are the other leg to MET’s wonderful rise.

Anyway the Russians are willing to sell gas to a given country cheaper than what is provided by the official, long-term contract, and creates various trading companies for the purpose of conducting the business.

This is how the business works

The trade in gas is the most profitable business on this side of Europe because:

• Huge quantities of it are needed, and it is possible to sell it in huge amounts.  Even with small margins it is possible to make huge profits in a short period of time.
• Because it arrives through pipelines, it is easy to establish a monopoly situation with it: only those with access to the pipeline can also sell it.
• The market is influenced by state regulations.  Who obtains the favors of the authorities needn’t be afraid of competitors.
• It is almost impossible to obtain gas that is not Russia.  Whoever is on good terms with them shall be showered in gold.

In these parts nearly all the gas comes from Russia, where the state has a monopoly and where the huge company by the name of Gazprom is responsible for production, delivery, as well as trade.  The Russians like to agree on gas prices separately with countries in this region for long periods, whenever possible.  The last of the so-called long-term contracts concluded by Hungary in 1995 for twenty years expires this summer.  There is no agreement regarding its extension and for this reason there is a lot of movement in the Hungarian gas market these days.

The long-term contracts are always political decisions often determined over the course of negotiations between the Kremlin and the government of the other country.  Gazprom sells the same gas at prices that vary by as much as three-fold.  There were times when Gazprom sold gas to Bulgaria for USD 600 per cubic meter but only charged Belarusian USD 167. There really is not other product on the international market for which there really is no price.  Nobody knows how much it costs to produce gas in Russia, and the Russians sell to their customers based on whatever momentary political interests dictate.

The buyers have little choice in the matter.  For example, in Hungary most households heat with gas, and much of the electricity is produced from gas, which is indispensable for industry.  So gas is required.  And it is difficult to choose among suppliers.   Oil prices exist because it is possible to change sources of supply:  oil comes in a barrel and in containers from just about anywhere.  For this reason oil prices are, for the most part, uniform.  A seller cannot allow himself to play with prices.  However, this is not the case with the delivery of gas, which is tied to pipelines.

There is also a cheaper one

So the gas enters the country on the basis of a price structure contained in the 1995 agreement.  But if the Russians want, they supply the same gas for less.

The Russians anyway created a shadow model as well.  In certain cases, seemingly harmful to their own market, they also sell gas cheaply to certain beneficiaries.  The way the model works is that they set up a trading company that is allowed to purchase gas from Gazprom at a reduced price, and then sell it to the target market for less than what is provided for by the long-term contract, but still with a respectable profit.

The Russians operate such brokerage companies for two reasons: on the one hand it enables them to sideline those among their own people the Kremlin happens to target.

On the other hand, it enables them to create and control the oligarchs and politicians of the target country.  Operating such a brokerage company is not only a good investment from the point of view of bribing oligarchs in the target country.  In general, through these companies it is also able to blackmail the target country even if its partners lose their influence as a result of a domestic political change or domestic showdown.   If a country becomes addicted to cheap gas, then whoever is in power thinks twice before deciding whether to terminate the grey business with the Russians at the price of higher utility costs, or for the new people to take the warm seats of the oligarchs of the previous cycle.

In this manner it is possible to earn a lot of money without effectively doing any work.  The brokerage companies sell the same thing as their competitors from the same sources.  They simply are able to access it less expensively.  Apart from paper work there is no other task.

There is some indication that MET partially works on the basis of this model.  There is no proof of this, but various domestic energy industry experts believe it is likely that the company can purchase Russian gas in Western European less expensively thanks to its Russian owners.

How does a more sophisticated model work?

The largest of such brokerage companies to ever exist was the Russian-Ukrainian RosUkrEnergo, which during its heyday in 2006 was able to make USD 785 million in profits in just under one year (this is about one half of the profits Austria’s ÖMV made in 2013).  Apart from this, neither refineries, nor petrol stations, nor anything else had to be maintained.  All that was required was the work of some lawyers in Switzerland.   RosUkrEnergo bought gas at a discount on the Russian side of the Russian-Ukrainian border, and then sold it on the other side.  Naturally, nothing happened to the gas itself.  The transaction only took place on paper.  Half of the company belonged to Ukraine Oligarch Dmitrij Firtas, the other half belonged to a Swiss subsidiary of Gazprom.

Reuters estimates that Gazprom lost USD 2 billion in under a few years by selling gas cheap to Firtas.  Except Firta was one of the most influential people in Ukraine for a long time.  More than half of the members of parliament literally took instructions for him, and in this way it was possible to manipulate Ukrainian politics to suit Russia’s needs.

For a while in 2009 Firtas was taken out of the business when Yulia Timoshenko became the Ukranian prime minister.  Then they took him back.  And then after (former Ukrainian president) Jankovics’ failure, he once again fell out of the picture.  He is presently under house arrest in Vienna, and most recently called attention to himself by announcing that Hungarian and Romanian paid assassins were threatening his life

However, the Hungarian connection does not only appear with Firtas.  He was the owner of a former Hungarian company by the name of Emfesz which, in its heyday, supplied Hungary with one-quarter of its gas, and which operated according to the same model: it gained a market for itself in Hungary with cheap gas from RosUkrEnergo.   In only a few years, Emfesz became the 27^th largest company in Hungary out of nothing.  This also shows the huge amount of easy money can be found in this business model.

Is MET the new Emfesz?

With the failure of Emfesz Hungary’s shadow model domestic player died out.  But it appears that a new company, MET, was able to step into its place, but just a little differently.   The Russians appeared as owners of MET in 2009.  That was the year when Firtas was pushed out of the gas trade, and with this Emfesz’ fate was sealed.

MET happened to become the large winner of the KÁT gas compensation in spring 2011 when Hungary and Russia opened a new chapter in relation to energy.  At that time the Hungarian government purchased a 21.4 percent interest in Mol from Russia’s Surgutneftegaz.  It is not possible to know who the owners of Surgutneftegaz are, but it is for certain that we are talking about companies that are close to the Kremlin.   This company, for example, supplies petrol to the Russian military.

At the time the purchase of the shares in Mol appeared to be a victory: using state administrative means the Russians were prevented from having a say in the running of MOL, and the government considered the business to be a national security success.  They claimed to have arranged for us not to be at the mercy of the Russians.  However, in retrospect it appears that the business may have been the start of a new Russian-Hungarian energy cooperation involving the political leadership of the two countries.   This is indicated by the fact that until that time Fidesz regarded Russia with suspicion.  However, since 2011 the friendship between the two governments has strengthened, and they are more and more cooperation agreements to show for it.

MET is expanding

These days MET is visibly strengthening, and it is readily apparent that the company’s ambition goes beyond simply bringing gas to Hungary.  Last year it purchased the Dunamenti Power station which produces electricity from gas and which is the country’s second largest producer of electricity.  The power plant almost went bankrupt before MET acquired it.  MET was able to save the power station by acquiring gas less expensively than the French.

In the same way, MET acquired GDP Suez Energy Holding Hungary Zrt. last year, which was the domestic electricity trader for the French company.

Offshore is not a problem

The Hungarian government officially opposes the spread of offshore companies to Hungary.  The new Fundamental Law officially opposes the spread of offshore companies in Hungary.  According to the new Fundamental Law the government of Hungary may not conduct business with companies whose ownership structure is not transparent.   Among MET’s owners are numerous offshore companies which, with powerful help from the state, are able to find fantastic opportunities in Hungary.

 

Another look at the Hungarian-Swiss connection

Ever since yesterday I have been mulling over the mysterious Swiss visits of Prime Minister Viktor Orbán and János Lázár, his chief of staff. As I mentioned yesterday, Demokratikus Koalíció suspects that Viktor Orbán’s recent trip to Switzerland and his stopover in Zurich between Lausanne and Budapest had something to do with banking, perhaps of a private nature. However, we know for sure, thanks to the information released by the prime minister’s office, that János Lázár’s trip to Switzerland at the end of March 2013 was undertaken in order “to have talks with a German citizen” and that the topic of the conversation was “Hungarian-German and Hungarian-Russian relations.” This led me to another angle: the large presence of Gazprom in Switzerland.

Just in Zug, a tax haven south of Zurich, three Gazprom companies have their headquarters, or to be more precise it is in Zug that they are incorporated: Gazprom Marketing & Trading AG at 19 Dammstrasse, the Nord Stream AG at 18 Industriestrasse, and the joint Russian-Ukrainian RosUkrEnergo AG at 7 Bahnhofstrasse. There are hundreds of Gazprom subsidiaries, and it is instructive to take a look at them collected in one place. I went to a few of their official websites. Gazprom Marketing & Trading AG opened for business in February 2012 “aiming to support Gazprom’s international development strategy.” They “trade natural gas, power, liquefied natural gas, liquefied petroleum gas, clean energy and carbon, and oil.” The Gazprom subsidiary Nord Stream AG is an international consortium of five major companies.

And let’s not forget about the Zurich based Gazprom Group, which has several subsidiaries, of which “the most spectacular company is Gazprom Switzerland AG.” The company is situated in the heart of Zurich’s financial district and deals in natural gas from Central Asia. Gazprom Switzerland is a wholly owned subsidiary of Gazprom Germany (Gazprom Germania), which is itself a wholly owned subsidiary of Gazprom Export, Russia. According to TagesAnzeiger of Zurich, this company has about two dozen employees yet in 2012 it generated sales of CHF 7.3 billion and a profit of 76.1 million.

Here we arrive at an intriguing piece of information. The chairman of Gazprom Switzerland is Matthias Warnig, formerly head of the Russian division of Germany’s Dresdner Bank AG, who in his earlier life in the German Democratic Republic worked for the Stasi. Back in 2005 The Wall Street Journal found documents that proved that as a major in the East German intelligence service he developed a close friendship with Vladimir Putin during the time that he worked in East Germany as a KGB agent. Apparently Warnig helped him recruit spies in the West. Warnig is not just the chairman of Gazprom Switzerland but also a director of Nord Stream with headquarters in Zug.

Old friends from Stasi and KGB days: Vladimir Putin and Matthias Warnig
Source http://www.powerpolitics.ro

Warnig is a very powerful man indeed, but the Ukrainian crisis is having a negative effect on his network. He is a member of the board of directors of several Russian banks, including the Bank of Rossiya and VTB Bank, whose assets have been frozen by the United States. Warnig is also a board member of the energy company Rosneft and of Rusal, an aluminium producer. Both are the largest companies in their field in the world. An excellent summary of the history of Warnig’s friendship with Putin can be found in The Guardian (August 13, 2014).

Is it possible that János Lázár talked with Warnig, the “German citizen”? Warnig would have had the clout to deal not only with energy supplies but also with inter-country friendship. It’s possible that Lázár solicited Warnig’s assistance in reaching out to Putin about the future of Russian-Hungarian relations and Paks. The reference to “Hungarian-Russian relations” points in this direction.

The August 2014 trip of Orbán and Lázár in the company of their wives might have had something to do with Gazprom affairs. Someone spotted them on a flight to Zurich on Thursday, August 21. According to Orbán, they spent Thursday night with friends in Germany, but even if this was the case, there was a whole Friday during which the two men could have conducted business with Gazprom officials. Zurich, as we have learned, is the perfect place for such transactions.

Viktor Orbán’s most recent trip to Switzerland followed a different pattern. No serious business can be conducted in a train station during a quick stopover, especially not on such serious matters as Russian-Hungarian relations or energy supplies by Gazprom. Demokratikus Koalíció might be on the right track: it’s possible that Orbán was conducting a different kind of business, very possibly of a private nature.

All this is thoroughly speculative. Perhaps someone with better access to Hungarian and Russian energy providers or government “travel planners” will ferret out the truth.

Mysterious trips of Viktor Orbán and János Lázár to Switzerland

Today I will have to pull up my socks if I want to give even a semi-coherent summary of the growing scandal surrounding a company called MET Holding A.G. with headquarters in Switzerland. The holding company, established only a couple of years ago, is partially owned by MOL (40%) and partially by Hungarian individuals–people formerly employed by MOL and businessmen with close ties to Viktor Orbán.

First of all, it’s hard to decipher the company’s structure which is, as is often the case with enterprises like MET Holding, extremely complicated. Second, since it is likely that MET Holding, in addition to its regular activities, also serves as a money laundering operation for Fidesz as well as Viktor Orbán and his friends, those involved do everything in their power to conceal the company’s business activities, ownership, financials, and so on.

I should go back a few years to February 2010, only a month before the national election and the birth of the two-thirds majority, when the U.S. Embassy in Budapest compiled a report entitled “Allegations of political corruption surround unbundling law.” From the lengthy report we learn that “it is an open secret in Hungary that MVM and MOL provide significant funding to the two main political parties, with MVM rumored to favor the Socialists and MOL favoring Fidesz.”

MET Group predated this U.S. report. According to its promotional material, it began operating in 2007 “in the natural gas retail and wholesale sector benefiting from the market liberalization starting in 2004.” Currently it is active in wholesale gas trading in the European market as well as in the retail sale of natural gas to industrial customers in Hungary, Slovakia, Romania, and Croatia. Five years later, in 2012 MET Holding was established with the objective of being “a central holding organization to manage and support all the subsidiaries of MET Group.” (If you want to know why MET Holding might have been layered on top of MET Group, I suggest you take a look at “How a Holding Company Works.”)

Shortly after the election in 2010 Orbán promised cheaper energy to consumers. In order to lower prices the state-owned MVM (Magyar Villamossági Művek) was allowed to dip into its gas reserves which it could then replenish with cheaper gas from the open market. MVM could have bought the necessary gas directly from Austria, but instead it purchased gas through MET. According to the figures that are available about the transaction, MVM gained little while MET made about 50 billion forints on the deal.

The owners of MET, in addition to MOL, are István Garancsi, a personal friend of Viktor Orbán and owner of Orbán’s favorite football team, Videoton, and György Nagy, one of the founders of Wallis Asset Management Co., a private equity/venture capital firm. Both men have close ties to Zsolt Hernádi, the beleagured CEO of MOL who is accused of bribery in Croatia, and to Sándor Csányi, his deputy and the CEO of OTP, Hungary’s largest bank. Heading MET Holding is Benjamin Lakatos. He expects sales this year to total some 3.8 billion euros.

Most likely nobody would have cared about this Hungarian company with headquarters in Zug, Switzerland, if Hungary’s prime minister hadn’t been so involved in negotiations with Putin as well as with Russian energy companies, in particular Gazprom and Rossatom, the Russian company that specializes in building nuclear power plants. Rossatom was chosen to construct two extra reactors at the Paks power plant. Given the widespread concern over Viktor Orbán’s dealings with the Russian autocrat, Swiss journalists started probing into this mysterious MET. A  well researched article appeared on November 3 in TagesAnzeiger, which was later reprinted in Basler Zeitung. According to the Swiss paper, MET Power, MET Marketing, MET International, and MET Holding all share the same Zug address. Benjamin Lakatos is the CEO of all of them. Zug, by the way, is about 20 km south of Zurich.

I understand that the company’s management is made up of former MOL employees who know the energy business inside out but who found greater opportunities outside of MOL. Lakatos is very proud of his achievement of building MET Holding in two years from practically nothing to a sizable player in the energy business, though one cannot help but be suspicious of a such a sudden rise in fortune. Moreover, given the cozy relationship in the past between MOL and Fidesz, one wonders what role MET may play in the possibly continued reliance of Fidesz and Viktor Orbán on MOL as a source of illicit money. With István Garancsi’s name in the cast of characters, one becomes doubly suspicious since he is often portrayed in the Hungarian press as Orbán’s front man.

Source: http://www.tagesanzeiger.ch

And now let’s move to more recent events that might have something to do with MET Holding. I’m patching the story together from several sources. You may recall that the editor-in-chief of Origo, an online news portal, was dismissed because one of the reporters of the internet site was too curious about a couple of very expensive trips János Lázár, the most important member of the Orbán government after the prime minister, made to Great Britain and Switzerland. Lázár for a long time resisted revealing any details of these trips but eventually after a court order the prime minister’s office released some information. Among the bits and pieces of information that Origo received, there was one item that might be relevant. Origo was informed that János Lázár during his Swiss trip “held conversations with a German citizen about German-Hungarian and Russian-Hungarian relations.”

More than a year later there was another trip to Switzerland. This time it was a private affair. Viktor Orbán and his wife and János Lázár and his wife spent a weekend in Zurich. First they stopped in Germany to visit a “family friend” and then off they went to Zurich, allegedly to attend a concert given by a children’s choir from the Szekler areas of Romania. Quite a lame excuse for traveling to Zurich because earlier this same group gave three concerts in the Hungarian Parliament in Budapest. There was also a side trip to visit a friend in Germany. Is he perhaps the same man Lázár held talks with in March 2012?

About a week ago Viktor Orbán made another trip to Switzerland. This time the occasion was a family visit (including his wife and their two youngest daughters) with Rachel, who is enrolled in a fancy, expensive hotel management course in Lausanne. Since, again, this was a private visit, the prime minister’s office refused to release any information about the trip. However, thanks to an eagle-eyed person, Orbán was spotted at the  Zurich railroad station having a beer with an unidentified man. Since the Orbáns decided to travel back to Hungary by train, a stopover in Zurich was unavoidable since there is no direct train from Geneva, a forty-minute train ride from Lausanne. But why did he choose to go by train from Lausanne all the way to Budapest, a trip that takes altogether 16 hours and 22 minutes? He said that wanted to spend more time with his children. Well, I could imagine many more pleasant ways of spending time with my family than sitting in a second-class train compartment. Suspicious Hungarians already have their own theory: for one reason or other, Orbán chose to travel by train because there is no inspection of either persons or luggage on trains. I find that difficult to believe. I hope that we are not at a point that the country’s prime minister is carrying millions of euros in his suitcase.

Although one can probably discard such speculation, one should take more seriously the information received by the Demokratikus Koalíció that while in Zurich Orbán met representatives of Credit Suisse and Pictet Bank. Pictet is a private bank which in 2012 was the target of a U.S. probe into the use of foreign banks by wealthy Americans seeking to avoid paying taxes. Pictet specializes in “wealth management.” As for Credit Suisse, which is one of the most powerful banks in the world, it also had its problems with the law. In July 2014 Credit Suisse reported a loss of $779 million because of the settlement of a tax evasion case in the United States. Zsolt Gréczy, the spokesman for DK, emphasized that they are not accusing Orbán of anything; they simply want to know whether he met with representatives of these two banks as the prime minister of Hungary or as a private individual.

All in all, the picture that emerges from the few pieces of information we have is not pretty. Orbán has enough trouble as it is. Tonight another 10,000 people demanded Ildikó Vida’s resignation–and his as well.

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

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.

Viktor Orbán picks another fight with the West, this time over the Southern Stream

I know that everybody is intensely interested in the Hungarian government’s latest brainstorm, the introduction of an internet tax, but I would rather wait with an analysis of this latest scandal until it becomes clear what the fate of the proposal will be. So far the reaction to this new tax has been so vehement that the government most likely will have to retreat. When an article in the right-wing Válasz predicts that “if we had an election today Fidesz would lose big,” I think it’s time to order a quick turnabout. I would like to add just one observation on a related topic: the Hungarian budget must be in a sorry state if an additional tax must be levied on soap and detergent, allegedly because they are harmful to the environment. Let’s not contemplate the detrimental effect of curtailing the use of soap because this would take us too far afield.

So, instead of dealing with the effects of an internet tax, I will look at other recent governmental decisions that have been detrimental to Hungary’s relations with the United States and the European Union. What I have in mind is Viktor Orbán’s flirtation with Putin’s Russia, which is being watched with growing concern in Washington and Brussels. Already there have been a couple of moves indicating close cooperation with Russia that raised eyebrows in the democratic world: the building of a nuclear power plant by a Russian firm on Russian money, Hungary’s refusal to support the common European position on the Russian sanctions, a tête-à-tête between Gazprom and the Hungarian prime minister followed by the Hungarian decision to stop supplying gas to Ukraine, and the government’s decision to let Gazprom use Hungarian facilities to store gas in case Russia cuts off the flow of gas through Ukraine.

These moves worried and irritated the United States and the European Union, only compounding their concerns about all the transgressions of the rules of democracy committed by the Fidesz government against the Hungarian people. Years have gone by; at last western politicians are slowly, ever so slowly deciding that they have had enough. After Norway it was the United States that openly showed its dissatisfaction with the domestic and foreign policies of the Orbán government. Yet, as the last few days have demonstrated, Viktor Orbán is not changing tactics. On the contrary, as I wrote yesterday, he is strengthening ties with countries whose relations with the United States and the European Union are strained. Almost as if Viktor Orbán purposefully wanted to have an open break with Hungary’s western allies.

Yesterday one could still hope that Viktor Orbán would  come to his senses and would at least make some gestures, but as yesterday’s meeting between Péter Szijjártó and Victoria Nuland indicated, the new Hungarian foreign minister was sent to Washington without a Plan B. By today, however, most likely in his absence, the government came out with a new idea. What if the Hungarian office of taxation and customs (NAV) announces that in the last several years they have been diligently pursuing their investigation of those criminal elements who through tax fraud unfairly competed against the American company Bunge? Maybe it will work. Mihály Varga, minister of national economy, announced this morning that four of the culprits are already in jail. Very nice, but there is a fly in the ointment. Most likely the U.S. State Department remembers, as I do, that András Horváth, the whistleblower at NAV, months ago gave a detailed description of the ways in which these criminals operated. He asked NAV to investigate and disclose their findings, but the managers of the tax office first fired Horváth and a couple of days later announced that after an internal investigation found everything in perfect order. So I doubt that the Americans will fall for that bogus story.

Yesterday Portfólió asked “how to make the USA more angry with Hungary,” but they “did not have the faintest idea that the government has been holding the best answer to that and it beats every idea [the Portfólió] have ever had.” So, what is it? In order to understand the situation we have to go back to the controversy over Russia’s new pipeline already under construction–the Southern Stream–that would supply Russian gas to Bulgaria, Serbia, Hungary, Austria, Slovenia, Greece, and Italy. The United States and the European Union were never too happy about the project and now, in the middle of the Russian-Ukrainian crisis, they are especially leery of Putin’s plans. In fact, the European Commission asked the Bulgarians to stop the construction of the pipeline in their country. They obliged. The European Union also warned Serbia that they can forget about future membership in the European Union if they agree to support the project right now.

In Hungary construction has not yet begun, but the Orbán government seemed to be afraid that something similar would happen to them what happened to the Bulgarians. They decided to act. Changing the law by now has become a Fidesz pastime. Today Antal Rogán proposed an amendment to a 2008 law on natural gas that will allow any gas company to construct a pipeline. The original law, in harmony with laws of a similar nature in other countries, specified that the company in charge of the construction has to be a certified transmission system operator who must conform to international rules. Since pipelines are transnational projects, the countries involved must coordinate their individual projects. What the Hungarians hope is that as a result of this amendment Hungary will not be bound by any international constraint. Starting the project will depend only on the Hungarian Energy Office, which could give permission to any company it chooses to construct the pipeline. Portfólió suspects that both the European Union and the United States will be “furious” upon hearing this latest Hungarian ruse.

Clever Hungarian lawyers, who seem to specialize in circumventing the letter of the law, might think that this scheme is foolproof, but I suspect that EU lawyers will find the legislation full of holes. Hungarian papers suggest that the Orbán government is playing for time. But the case is settled, they argue; the pipeline will be built. Surely no one will force Hungary to destroy it.

Let’s contemplate another scenario. What if the European Union and the United States in joint action put such pressure on the Hungarian government that the plan must be abandoned? As it is, according to analysts, Budapest is already between a rock and a hard place. When political scientist Gábor Török, who has the annoying habit of sitting on the fence, says that “the Orbán government is in big trouble. It was before but now it is different. It will not fall, surely not now…. But if it does not recognize the fork in the road or if it chooses the wrong road, we will mark the events of today as a definite turning point.” And in an interview this afternoon Ferenc Gyurcsány twice repeated his belief that Hungary is at the verge of leaving the Union and, when it happens, it will not be Viktor Orbán’s choice.

I wouldn’t go that far, but I do predict that the screws will be tightened. Among those who will apply pressure will be Norway since the Hungarian government audit office just came out with its report claiming that Ökotárs, the organization in charge of distributing the Norwegian Civil Funds, has used the money inappropriately. A criminal investigation will be launched.

We know that Barack Obama said that the American government supports NGOs in countries where they are under fire. Today we learned that Veronika Móra, chairman of Ökotárs, was a member of a delegation that visited Washington in late September. During that trip the NGO leaders were received by President Obama in the White House. By contrast, Péter Szijjártó did not get any higher than one of the assistant undersecretaries of the State Department. If I were Viktor Orbán, I would take that as a warning.

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.

Hungary stops supplying gas to Ukraine and makes its own gas deal with Russia

The news of the day is Hungary’s decision to stop the supply of gas to Ukraine despite its pledge to assist its beleaguered neighbor. Although the AFP news service assumes that the decision came after “threats from Moscow,” I have a different take on the matter. To make my case I have to go back a few weeks in time.

It is true that Russia was playing games with its gas supply to Poland and Romania, but Hungary was in no way affected by these Russian measures, most likely because of the cozy relationship that exists between Putin and Orbán. On the contrary, in the last few months large amounts of gas arrived in the country from Russia. Currently, the storage facilities are 60% full, and even larger amounts of natural gas will come from Russia in the next few months. Poland indeed had to temporarily stop its supply of gas to Ukraine on September 10, only to resume its operations two days later when Russia assured Poland that it would send an adequate supply of gas to the country in the future. Romania began receiving less than the usual amount of gas on September 15.

Instead of worrying about natural gas from Russia, on September 18 a very upbeat article appeared in Magyar Nemzet telling its readers that “we can be the gas center of Europe.” The article reported that two days earlier Miklós Seszták, minister of national development, conducted negotiations with Anatoly Yanovsky, Russian deputy minister for energy affairs, concerning the storage of 500 million cubic meters of Russian gas in Hungary “to facilitate the supply of Europe with gas in case of irregular transit shipments through Ukraine.” These plans are not new.  They were apparently first discussed in October 2012 when Aleksey Miller, CEO of Gazprom, had a meeting with Viktor Orbán in Budapest. However, the precondition for such a deal was the nationalization of the storage facilities. The Hungarian government subsequently purchased them from the German company, E.ON, at an incredibly high price. Although auditors warned the government about the pitfalls of the deal, Orbán insisted. It looked as if he did not care about the price. Now we know why.

Yanovsky had barely left Hungary when Aleksey Miller arrived in Budapest. The meeting of Miller and Orbán was kept secret from the Hungarian people, who read about it on Gazprom’s website. This is not the first time that we learn about important meetings and bilateral negotiations from the media of countries for whom close relations with Hungary, a member of the European Union, are important but who are not exactly friends of the West. The Hungarian government would rather not inform the world about its dealings with such countries as Iran, Belorussia, Azerbaijan, and Kazakhstan. According to Gazprom, “the talks were focused on the issues of reliable and uninterrupted gas supplies in the coming winter period. The parties paid special attention to the implementation of the South Stream project and noted that it was progressing on schedule.”

Source: Gazprom.com

This morning, three days after the Miller-Orbán meeting, Viktor Orbán announced that Hungary would indefinitely suspend supplying Ukraine with natural gas. According to Itar-Tass “the decision was made to meet the growing domestic demand for gas,” FGSZ, the Hungarian company operating the pipeline, said. Yet MTI reported today that even Serbia might be able to receive gas from the Hungarian storage facilities. So, surely, there is no shortage of gas in Hungary. The European Union is anything but happy about the suspension. Helen Kearns, a spokeswoman for the European Commission, in an answer to a reporter’s question on Hungary’s unilateral suspension of the gas supply to Ukraine, said that “the message from the Commission is very clear: we expect all member states to facilitate reverse flows as agreed by the European Council.” Naturally, Naftogaz, the Ukrainian gas company, also urged its “Hungarian partners to respect their contractual obligations” and said the Hungarian decision “goes against the core principles of the European Union single energy market.”

After delivering his usual Friday morning radio interview Viktor Orbán left for Berehove (Beregszász), in the area of Ukraine south of the Carpathian Mountains officially called Zakarpattia Oblast, to deliver a speech at the Hungarian-language college situated in the town where about half of the population is Hungarian speaking. Altogether there are three smaller territorial units within the oblast where there are significant Hungarian populations: in the uzhhorodskyi raion (33.4%), in vynohradiv raion (26.2%), and in the area around Berehove where they are actually in the majority (76.1%). Altogether there are about 120,00 Hungarians out of a total population of 1,254,614. The distribution of Hungarians in the oblast can be seen here.

Orbán indicated in his early morning interview today that Hungary will support Hungarians in the neighboring countries who demand autonomy. Although he did not specifically mention the Hungarian diaspora in Ukraine, he was obviously also talking about them. This was not the first reference to possible autonomy for Hungarians in this region of Ukraine. At the outbreak of the Russo-Ukrainian crisis Orbán already mentioned such a demand. He made it clear, again not for the first time, that his main concern in this very serious international crisis is the fate of the Hungarian minority. He promised his audience that Hungary will not do anything that would harm his Hungarian brethren, which I found interesting in light of the decision to cut the flow of gas from Hungary to Ukraine.

While Viktor Orbán was in Berehove, representatives of the European Union, Russia, and Ukraine got together to come up with an energy deal that would ensure the supply of Russian gas to EU members and Ukraine over the winter. In return, Ukraine would repay $3.1 billion of its debt to Russia.  The first installment, $2 billion, would be due by the end of October and the rest by the end of December. If Russia agrees to this deal, it would avert an immediate crisis, although it would not resolve the deeper dispute over what price Kiev should pay for past and future deliveries. The Ukrainian government earlier filed suit with the Stockholm Arbitration Court against Russia for making it overpay for gas since 2010. A decision may be reached by next year.

On the one hand, Ukraine seems to be happy that, after so many unsuccessful attempts, there is hope of an agreement but, on the other hand, it is unhappy that the price of Russian gas “is dependent on the decisions of the Russian government.” According to Kyiv Post, “Ukraine will under no circumstances recall its suit from the Stockholm Arbitration Court.”

If this deal goes through, as it seems that it will, perhaps it was unnecessary for Hungary to unilaterally and abruptly stop the flow of gas to Ukraine. By this decision Orbán further emphasized his pro-Russian sympathies and undoubtedly further alienated himself from Western governments.

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.

Waiting for the Kazakh dictator

It was a few days ago that Vladimir Putin met with his counterparts from Kazakhstan and Belarus in the Kazakh capital, Astana, to form the Eurasian Economic Union as a counterweight to the European Union and the United States. The provisions of the union will give freedom of movement and employment across the three countries.  They will also collaborate on issues of energy, technology, industry, agriculture, and transport.

What does the formation of the Eurasian Economic Union have to do with Hungary, a member of the European Union? Directly not much, but one must not forget that one of the cornerstones of Viktor Orbán’s foreign policy initiatives is the “Opening to the East.” In the last three or four years he has developed good relations with all three countries.

There has been a lot of discussion here and elsewhere in the media about Russian-Hungarian cooperation in the Southern Stream gas pipe project and the recent European Union efforts to block its construction, fearing that Gazprom will not  abide by the Union’s competition rules. Even more time was spent on the Russian loan to Hungary for Rosatom to build two additional nuclear reactors in Paks. What we hear less about are the quiet but very friendly relations between Kazakhstan and Hungary. The same is true about Belarus. It seems that Viktor Orbán enjoys the company of dictators.

In May 2012 Viktor Orbán visited Kazakhstan and gushed over the great achievements of Nursultan Nazarbayev, the president and dictator of the country. He emphasized “the historical and cultural ties that unite our peoples.” He admired the new capital, Astana, which he described as a “symbol of humanity’s new phase of development.” Orbán’s servile performance was disgusting then but now, two years later, Hungarian servility toward Nazarbayev has reached new lows.

Back in March, a journalist from 168 Óra discovered that in Városliget, Budapest’s city park, one of the roads was renamed Astana Road. After some research the journalist discovered that the decision to name a street after the Kazakh capital had been reached already in 2013. Originally, it was to be somewhere in District VIII, a poor section of Pest, but apparently the Budapest city council decided that the district is not elegant enough for the very special relations that apparently exist between the two countries. By the end of April the same city council (naturally with Fidesz majority) voted to erect a statue of Abai Qunanbaiuli or Kunanbayev, the great 19th-century Kazakh poet. Kunanbayev is much admired in Kazakhstan, where many statues commemorate his person and his work. Outside of Kazakhstan he has only one statue, in Moscow. But soon enough there will a second one which Nursultan Nazarbayev himself will unveil on June 4 in Budapest. The statue is a present from the people of Kazakhstan. It is a bust that stands on a three-meter-high platform.

There are other signs of the excellent relationship between Hungary and Kazakhstan. The mayor of Astana offered a piece of real estate gratis to the Hungarian state. The Budapest government can build a structure on the site in which Hungary could hold exhibits about the country and its people. Apparently, this is a very generous offer because real estate prices in Astana are sky high: millions of dollars.

Nursultan Nazarbayev, dictator of Kazakhstan

Meanwhile, the fawning over the Kazakh dictator seems to have no limits. At the end of April, before invited guests in the building of the Hungarian Academy of Sciences of all places, Sándor Fazekas, minister of agriculture and rural development, and János Horváth, the oldest member of parliament and a US-Hungarian citizen, introduced the Hungarian translation of Nazarbayev’s book about his childhood and youth.  Zoltán Balog, minister of human resources, was in the audience.

Naturally, the book was a bestseller in Kazakhstan, though I doubt that it will fly off the shelves in Hungary. Fazekas referred to the Kazakh dictator as “an internationally respected statesman” whose autobiography will help Hungarians learn more about the history of Kazakhstan. János Horváth went even further. According to him, the fantastic achievements of Nazarbayev’s agricultural reform “will one day be taught at universities.” In his opinion, “it is appropriate (helyénvaló)  for the leader of a Soviet-type government to behave like a dictator, but Nazarbayev wants to move away from the practice.” The problem with this claim is that there has been absolutely no sign of Nazarbayev giving up power and contemplating the introduction of democracy. In fact, just lately he got himself reelected with 95% of the votes. Naturally, the Kazakh ambassador to Hungary was present; he compared the Kazakh president’s autobiography to biographies of Gandhi and George Washington. It was quite a gathering.

And last Monday Duna TV showed a Kazakh film, with Hungarian subtitles, based on Nazarbayev’s autobiography. As Cink, a popular blog, reported, “The Stalinist Duna World is showing a film about the Kazakh dictator tonight.” This is how low Viktor Orbán has sunk in his quest for friendship with countries outside of the European Union.