Gazprom

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

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.

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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

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

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.

Péter Szijjártó’s trip to Israel

I often wonder where Viktor Orbán manages to find the characters he surrounds himself with. A former auto repairman is apparently the brains behind the Fidesz propaganda machine. Another new star is a man who knows practically nothing about either economics or business practices but who expounds daily about the blessings of lower utility prices. A former pastry chef is the chief spokesman for the party. The auto repairman is practically invisible, but the others are very much in the limelight.

Stars come and go in the world of Fidesz. Orbán often has a sudden new favorite who catches his eye, and in no time this person finds himself in a very important position. The former favorite is unceremoniously dropped. The chief is, however, generous with those who fall from grace. An important position in some office or state company is normally awarded as a consolation prize.

It was perhaps the rise of Péter Szijjártó that was the most spectacular. At the age  of 20, straight out of high school, he became a member of the Győr City Council. A year later he established the local chapter of Fidelitas, the youth organization of the party. At the age of 23 he acquired a high position in the party hierarchy on the county level. During these years he also attended Corvinus University. Straight out of college he became the youngest member of the Hungarian Parliament in 2002.

After 2006 he was promoted to occupy the important position of Fidesz spokesman. He headed the “parrot commando,” as the Fidesz communication team was called by the party’s critics. He became Viktor Orbán’s voice since  Orbán himself rarely spoke or gave interviews in those days. Szijjártó also often acted on behalf of the party chairman. For example, he was entrusted with answering a letter from Gordon Bajnai to Viktor Orbán, inviting him to discuss the economic program he was planning to introduce after he agreed to serve as prime minister. It was a rude, impertinent response to Bajnai’s polite letter. I suggest you take a look at that exchange because it tells a lot about Szijjártó, Orbán, and Fidesz. The picture is not pretty.

Once Fidesz won the election, Szijjártó became a personal spokesman for Viktor Orbán. Szijjártó accompanied Orbán everywhere he went. You could see him in Brussels as well as in Moscow, sitting right next to the prime minister. Obviously, he proved to be indispensable as a kind of negotiating partner because in May 2012 at the age of 33 Szijjártó was basically entrusted with Hungary’s foreign policy and trade relations. Foreign Minister János Martonyi is a figurehead; Szijjártó, by contrast, seems to spend more time on airplanes than on the ground. He is in charge of Orbán’s pet project: the opening to the East.

It is hard to tell how successful he is at convincing Far Eastern, Central Asian, and Near Eastern countries to extend trade relations with Hungary. Lots of travel, lots of boasting, a great forecast but apparently the results are meager. His age (after all, he is by now in his mid-thirties) shouldn’t be an obstacle, but unfortunately he looks a great deal younger and doesn’t give the impression of a serious and knowledgeable man. He looks like a punk and I fear he is a punk.

szijjarto frizura

So, let’s see how Szijjártó operates on the ground. He just spent a couple of days in Israel where he gave an “exclusive” interview to The Jerusalem Post. It turns out that Szijjártó, in a meeting with Finance Minister Yair Lapid, “offered Israel access to Hungary’s 7 billion cubic meters of state-owned gas storage.” I assume he was talking about the storage the Hungarian government just bought way above market value from the German company E.on. And then came the usual boasting and exaggeration: “we could be a central European distribution hub for Israeli gas.” While at home the state-owned company just signed an agreement with Gazprom, Szijjártó in Israel complained about dependence on Russian gas which “means that we’re quite defenseless.”

While there, Szijjártó met with executives of Teva Pharmaceutical Industries Ltd., including the recently ousted CEO of the company Jeremy Levin who was awarded the Officer’s Cross of the Merit Award, one of the highest civilian awards in Hungary. Bad timing, I would say.

I am not sure why Szijjártó felt it necessary to inform the Israeli public and perhaps even the government that Hungary often goes against the policies of the European Union. For example, on the issue of nuclear energy. While the rest of Europe wants to lower or even exclude nuclear energy by 2020, Hungary is moving in an entirely different direction. Right now 43% of electricity comes from nuclear energy in Hungary, and the Orbán government wants it to be 60-70%. Thanks to Szijjártó’s “exclusive” interview, at last the Hungarian people and politicians could learn about Viktor Orbán’s plans, which he hadn’t bothered to share with anyone at home.

He also told the reporter that “while the EU pushed a platform of human rights and diversity, Hungary was forcefully embracing its Christian heritage.” I bet that made a real impression in Israel, especially when in Eastern Europe the largest Jewish community can be found in Hungary. It is not terribly difficult to come to the conclusion that if a nation forcefully defines itself as Christian, the non-Christians might not be considered part of that nation.

Before the rise of Szijjártó to his current position of roving ambassador, Orbán tried to impress China and Russia without much success. The emissary then was Tamás Fellegi, Viktor Orbán’s senior adviser in law school. At least Fellegi looked like a serious negotiator with academic credentials and business experience in the United States and in Hungary. But he failed miserably and was packed away in Washington to head a Hungarian government lobbying group. Then came the “wonder boy.”  I wonder how long he will last.

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

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

Deli Aramlat

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

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

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

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

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

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

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

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

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