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!

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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 corrupt official: The minister of national development and his “businesses”

Today’s scandal involves the newly appointed minister of national development. In case you get confused with all the “national” stuff, this is the ministry that was led in the last couple of years by the mysterious Mrs. László Németh. The one nobody had heard of before and the one who had only a high school education.

In 2010 when the ministry was created it looked as if the minister initially appointed to head this new ministry was destined to play a major role in the affairs of the Orbán government. Viktor Orbán appointed his former professor and senior adviser Tamás Fellegi to the post. Fellegi, especially at the beginning, traveled madly back and forth between Beijing, Moscow, and Budapest. It was also this ministry that was supposed to handle the subsidies coming from the European Union. After a few months, however, Fellegi’s job of dealing with China and Russia was taken over by the prime minister himself and Péter Szijjártó, the young “genius” of Orbán’s inner circle. Fellegi resigned or was let go. Then came Mrs. Németh and with her a total lack of transparency about the activities of the department. She was presumably unable to handle such a high position in a “key ministry.” She was the only minister whose tenure Orbán decided to terminate this year.

The new minister is Miklós Seszták , a member of the Christian Democratic People’s Party (KDNP). The appointment raised some eyebrows for at least two reasons. One was Seszták’s lack of any background in economics, finance, or administration. He is a small-town lawyer. Actually the only one in his hometown, Kisvárda (pop. 16,000), 22 km from the Ukrainian-Hungarian border. And the second problem was Seszták’s less than sterling record as a lawyer; he has been linked to some very shady business ventures.

Viktor Orbán had to be aware of Seszták’s participation in suspected corruption cases because at least since January 2013 his name had been all over the newspapers. Miklós Seszták was involved with an EU financed venture which the European Commission’s European Anti-Fraud Office (OLAF) found fraudulent. This was not the first time that the EU questioned the allocation of grants, but the Hungarian government normally protested or at least tried to explain them away. This time there was no question and the Orbán government did not contest the allegations.

The story goes as follows. There were five companies that received 21.25 billion forints from the EU to develop broadband internet access. But there was a bit of a problem. All five companies were established only a couple of weeks before they applied for the grant and some of the owners overlapped. In addition, Seszták happened to be a member of the board of one of these companies, Enternet Invest Zrt.

Miklós Seszták / Photo MTI

Miklós Seszták has considerable experience in establishing companies; as it turned out, his services were used to set up over 800 bogus companies in the last decade. The story goes back to 2005 when Figyelő, a respectable paper dealing with business and finance, reported that these companies were all registered under two addresses in Kisvárda where Miklós Seszták had his law office. When the reporter visited the two family houses, they found a middle-aged woman, Erzsébet Kovács, who hailed from Ukraine. When asked, Kovács announced that she is handling an international business venture that concentrates on direct marketing. The business has partners in ninety different countries and for easier communication and flow of goods it was necessary to register these foreign nationals in Hungary just as the Hungarian companies are registered in those countries where they have business interests. When the reporter inquired from APEH, the tax office, he was told that everything was in perfect order with these companies. Nothing illegal was going on. It seems that APEH did not find it odd that all the owners of these companies were citizens of countries outside the European Union. Russians and Ukrainians.

By 2009 Index found that the largest “company cemetery” was in Kisvárda. Why are they called “company cemeteries”? Because not long after their establishment and registration they disappear. In one of the Kisvárda addresses four-fifths of the 550 companies were already liquidated while at the other address three-fourths of the 201 companies were gone.

According to Index‘s updated account, 700-800 companies were registered at three different addresses in Kisvárda. Index claims that the “company cemeteries” were still functioning between 2007 and 2009, by which time four-fifths of them were liquidated, leaving substantial debts behind. All three buildings belong to Miklós Seszták. In one of them, in addition to the phony businesses, one could find until recently the local Fidesz office.

Establishing phony companies must have been a lucrative business. At least Seszták did very well financially in the last decade or so. It was only in 1996 that he opened his law office in Kisvárda, and he couldn’t have amassed a fortune from an ordinary small-town practice. Yet today he is one of the richest members of parliament.

LMP, Együtt-PM, DK, and Jobbik are demanding Seszták’s resignation. MSZP has said nothing as yet. What will happen? I assume what normally happens when a Fidesz scandal hits the newsstands. Fidesz acts if nothing has happened. They are sure that eventually the noise will die down and everything will go on its merry way, including Seszták’s appointment. And they are right. In any other country such scandals would have brought down the government years ago. But not in Orbán’s Hungary. I don’t know what is needed for the Hungarian people to wake up and say: no more!

Viktor Orbán is getting ready for a fight

If anyone thought that a second victory, especially with two-thirds parliamentary majority, would slow Viktor Orbán down, he was sadly mistaken. In fact, if it is possible, since his reelection he has been surpassing his own past performance as far as attacks on the European Union are concerned.

In the last few weeks numerous articles have appeared, especially in Népszabadság, on the possible shape of the third Orbán government. Most of the reporting is based on hearsay, but a couple of personnel changes seem to be certain. First, Rózsa Hoffmann, undersecretary for public education, has finished her controversial activities in the Ministry of Human Resources. Second, the mysterious minister of national development about whom nobody knew anything turned out to be a flop. If you recall, no one knew her first name for weeks because she was introduced to the public only as Mrs. László Németh. By the way, she was the one who signed the agreement on Paks with Gazprom. And then there is János Martonyi, the one cabinet member in whom European and American politicians still had some trust. Mind you, his words didn’t mean much because he was stripped of practically all power to conduct Hungary’s foreign policy. According to the latest, it looks as if his replacement will be Tibor Navracsics.

I consider Navracsics’s move to the foreign ministry a demotion for the former close associate of Viktor Orbán. By now the foreign ministry is largely impotent, and I hear rumors to the effect that it might be further stripped of its competence. Earlier Navracsics had a position of real power. He was entrusted with the position of whip of the Fidesz parliamentary delegation. The ministry of administration and justice, which Navracsics headed during Orbán’s second term, had a dual mandate. On the one hand, it was supposed to oversee the restructuring of the entire public administration and, on the other, it was responsible for preparing bills for parliament. At least in theory. Most of the hundreds of bills presented to parliament in the last four years were in fact proposed by individual members. Their authors were most likely outside law firms. It seems that the ministry’s chief job in the legal field was not so much drafting bills as battling with Brussels over legislation the Hungarian parliament enacted.

In the third Orbán government the ministry of administration and justice will be dismantled. In its place there will be a separate ministry of justice, and the section of the ministry that dealt with the country’s territorial administration will be transferred to the prime minister’s office. This ministry’s chief job will be, according to Viktor Orbán, to concentrate on future legal battles with the European Union. He already warned his people that the European Union will try to force the Hungarian government to undo the lowering of utility prices which assured Viktor Orbán his resounding victory at the last election.

Hungary seems to lose one legal battle after the other in the European Court of Justice and the European Court of Human Rights, which functions under the jurisdiction of the Council of Europe. The latest is the question of  life sentences without the possibility of parole. The European Court of Human Rights, in a unanimous ruling, found the law inhumane and degrading. The court is not against life sentences as such, but they held that courts should be allowed to review life sentences in order to assess whether prisoners had made such significant progress toward rehabilitation that their continued detention might no longer be justified. There are perhaps 40 such cases in Hungary at the moment, and if all the “lifers” turned to Strasbourg it could be a very costly affair for the Hungarian state.

Viktor Orbán remains adamant in the face of the court ruling since he knows that, if depended on the Hungarian public, the majority would be only too glad to reintroduce the death penalty. Therefore, Orbán fiercely attacked the ruling and blamed the European Union for preventing Hungary from having its own laws. He repeated his favorite claim that in the European Union “the rights of those who commit crimes are placed above the rights of innocent people and victims.” Friday morning during his customary interview on Magyar Rádió he elaborated on the theme and went even further. He said that the European Union forbids capital punishment, although he personally is convinced that it is a serious deterrent.

In cases like this, one is not quite sure whether Orbán is ignorant of the facts or for political reasons is simply lying. It is not the European Union that forbids the death penalty. Article 1 of the Convention for the Protection of Human Rights and Fundamental Freedoms specifies that “The death penalty shall be abolished. No-one shall be condemned to such penalty or executed.” The Council of Europe is a signatory to this convention. Moreover, the European Court of Human Rights functions not under the European Union but under the Council of Europe of which Hungary is a member. And quite aside from all this, the Hungarian Constitutional Court on its own volition abolished the death penalty in 1990. So, either Orbán doesn’t know any of this or he for political reasons is trying to turn his people against the European Union while he is campaigning for the European parliamentary election. He must know that the reintroduction of the death penalty in Hungary is out of the question.

But before his fight against Brussels and Strasbourg on utility prices, pálinka distillation, acacia trees, and life sentences without parole, Orbán has another fight ahead of him which he may easily lose. It is his opposition to the election of Jean-Claude Juncker for the presidency of the European Commission. Juncker is the candidate of the European People’s Party, which currently has the largest caucus in the European Parliament. It has been clear for some time that Juncker is not the favorite politician of Viktor Orbán. Already on Friday in his interview he mentioned that just because Juncker is the head of the 212-member EPP caucus it doesn’t mean that the Christian Democrats have to nominate him. Juncker is far too liberal for Orbán, who would prefer the far-right Joseph Daul, the Alsatian farmer who is an admirer and defender of the Hungarian prime minister. Orbán thus made up his mind that he and the Fidesz MEPs will try to prevent the election of Juncker in the likely event that EPP is again the largest bloc in the European Parliament.

Jean-Claude Juncker and Martin Schulz

Today he announced his decision to try block Juncker’s nomination and/or election. I myself doubt that he will succeed at the nomination level. As for the election, currently EPP has 212 seats and Fidesz’s estimated 10-12 MEPs will vote against him. Juncker will have to get at least 376 votes to be elected, so he will need supporters outside of EPP. The socialist Martin Schulz will also look for supporters outside of the socialist caucus. It looks as if the Fidesz group will lobby against both Juncker and Schulz in favor of some other EPP politician. I’m sure that Orbán’s favorite would be Daul, but I think he is too far to the right to have a chance at either the nomination or the election.

So, what will happen if Juncker wins? Orbán, even if Fidesz MEPs were to support Juncker, would have a harder time with him than he had with Barroso. The same is true if Schulz becomes president. Actually the two men’s views are rather close. Both are miles away from Viktor Orbán’s worldview. In either case, Orbán will be even more unhappy with Brussels than he has been until now.

New details on the Russian-Hungarian agreement on Paks; Kim Scheppele’s “Hungary, An Election in Question, Part 2″

I’m returning briefly to the secretive Putin-Orbán agreement on the addition to the atomic power plant in Paks. Shortly after the news of the agreement became public, I heard rumors to the effect that what the Orbán government actually wanted was not so much a new power plant built by Rosatom but an outright loan of 5 billion dollars. The Hungarian media spent a few lines on this rumor, but the topic was dropped soon enough. Most likely the rumor couldn’t be substantiated. But now Népszabadság has returned to the topic. In a fairly lengthy article the reporter who has lately become a kind of Paks expert unearthed a number of new strands in the story.

The information comes from “an expert who is an adviser to the government with knowledge of the details” who asserted that the original rumor about the loan the Orbán government wanted so badly was in fact true. The government wanted a loan that it could use as it best saw fit. The Russian partner, however, wanted to link the loan to the extension of the Paks power plant. Although negotiations went on for about a year, the two sides couldn’t come to a satisfactory agreement. At this point István Kocsis, former head of Paks and later of MVM (Magyar Villamos Művek/Hungarian Electricity Ltd), was asked by the government to use his good offices with the head of Rosatom. It didn’t seem to bother Orbán that Kocsis had been charged with embezzling billions, a case that is still pending.

Apparently Kocsis achieved miracles and in no time Rosatom had a contract ready to be signed. Népszabadság‘s informant claims that the Hungarians couldn’t change a word in the terms of the contract. There is, in fact, the suspicion that the reason the Hungarian text is so awkward is that most likely it was a translation from Russian. Earlier difficulties arose as the result of Hungarian insistence that the loan be extended to Hungary even if for one reason or another the power plant couldn’t be built or the project were protracted. At the beginning Rosatom insisted that the money would be lent to Hungary only as the work progressed. We still don’t know exactly what is in the agreement but, as Népszabadság‘s informer said, we may find out that “in the final analysis the Orbán government didn’t bring two reactors but ‘a new IMF loan’ from Moscow.”

The way the Orbán government spends money every penny will be needed. As it is, the national debt is higher than ever. It is over 80% even with the large infusion of money the government laid its hands on from the private pension funds. If we discount this “stolen money,” the national debt would be over 90% of the GDP. The government so far has spent more than 600 billion forints buying up private utility companies and is embarking on very ambitious plans to create a so-called “museum quarters” in Pest, which will accommodate the museums and Hungary’s National Library that are currently housed in the Royal Castle. This project is necessary because Orbán wants to move the entire government to the Castle District. The president’s office would move from the Sándor Palace to the Royal Castle and Viktor Orbán would presumably move into the Sándor Palace.

Yesterday another interesting tidbit about the Putin-Orbán agreement saw the light of day. An LMP member of parliament, Bernadett Szél, initially demanded access to the document but her request was refused. LMP will sue the government on that issue. She was, however, granted a half-hour interview with Mrs. László Németh, who admitted to her that the Orbán-Putin agreement was signed before the Hungarian government had a chance to authorize the deal. Lately, it seems, Fidesz politicians often slip and tell the truth by mistake. Like Lajos Kósa about the tape of Ferenc Gyurcsány’s speech at Őszöd. The next day he had to “correct himself.” That was the case with Mrs. Németh as well. Her ministry immediately corrected her. The ministry’s spokesman claimed that it is clear from the January 31 issue of the Official Gazette (Magyar Közlöny) that the authorization was dated January 13 and it was on January 14 that the agreement was signed. My only question is: why did they publish the text of the authorization only on January 31?

Finally, let’s not forget about the Holocaust Memorial Year. András Heisler, president of Mazsihisz, decided to step down from the advisory board of the House of Fortunes. Since Mazsihisz (Federation of Hungarian Jewish Communities) opposes the establishment of this new museum, Heisler saw no reason to remain a member of the board. Moreover, as he said, the board is totally inactive. Mária Schmidt, who is the government-appointed director of the project, called the board together only once.

* * *

Hungary: An Election in Question

Part II: Writing the Rules to Win – The Basic Structure

Professor Kim Scheppele, Princeton University

How did the governing party Fidesz stack the deck so much in its favor that the upcoming Hungarian election’s results are not in doubt?

Fidesz started immediately after its election victory in 2010 to reshape the electoral system to ensure its hold on power. The Fidesz parliamentary bloc, which enacted constitutional changes without including or consulting any opposition party, slashed the size of the parliament in half, redrew all of the individual constituencies unilaterally, changed the two-round system to a single first-past-the-post election for individual constituencies, and altered the way votes were aggregated.

Moreover, Fidesz has granted dual citizenship and therefore voting rights to ethnic Hungarians outside the borders who are overwhelmingly Fidesz supporters, while at the same time maintaining a system that makes it comparatively harder for Hungarian citizens living or working abroad to vote.

The media landscape and campaign finance rules overwhelmingly benefit Fidesz and a series of last-minute changes to the law just before the campaign started put the newly united center-left opposition at an even greater disadvantage. In addition, the governing party has captured the election machinery which is now staffed with its own loyalists.

The sum total of all of these changes makes it virtually inevitable that Fidesz will win.

The devil is in the details, so let’s walk step by step through these various ways that the governing party has changed the rules in its favor.

As one of its first acts in office, on 25 May 2010, the Fidesz parliament amended the constitution it inherited to cut the parliament’s size in half. This was a move lauded by all sides of the political spectrum, as the old 386-member parliament was widely perceived as too large to be effective and too expensive for a small country in debt. The new 199-member parliament that will be seated after the 2014 elections will represent new electoral districts that had to be newly drawn to accommodate this new, smaller parliament. Redrawing the districts was not only widely welcomed, but also required by the Constitutional Court, which had ruled (first in 2005 and again in 2010) that the old districts had become too unequal in population size to give all citizens an equal vote.

The old districting system already favored Fidesz because the larger districts were in the urban strongholds of the left and the smaller districts were in the rural districts of the right. As a result, rural conservative votes were given more weight because it took fewer of their votes to elect an MP. But the way that Fidesz redrew the districts for 2014 gave their party an even greater advantage than they had before.

Without any consultation with opposition parties, Fidesz enacted a new “cardinal law” in 2011 that simply set the boundaries of the districts (Law CCIII/2011). While most election laws provide principles for drawing districts and assign some neutral or at least multi-party body to actually draw the boundaries, the borders of the districts in Hungary are now written directly into the law. Moving a district boundary by even one block requires a two-thirds vote of the parliament. The districts are therefore heavily entrenched and were not the result of either a public or an inclusive process. No justification for these districts was offered by the governing party.

Of course, not all districts in any electoral system have identical numbers of voters. But how much can districts vary before they deny equality of the vote?  The Commission for Democracy through Law (the Venice Commission), recommends no more than 10% variation as the international standard. The Venice Commission is not terribly clear about what this means, but given that the Venice Commission is working with a principle that demands that votes be weighted as equally as possible, one can guess that this means that districts should not vary by more than 10% in population overall.

The Hungarian law is fiendishly clever in appearing to come close to that standard while being miles away from it. The Hungarian Election Law (Act CCIII of 2011 – section 4(4)) mandates that the districts should not vary by more than 15%. The Venice Commission was not thrilled with the difference, but let it pass. They shouldn’t have.

A closer reading reveals the trick. The Hungarian law requires that districts vary by no more than 15% calculated from the mean number of voters in the district. This is not an overall 15% deviation, as the Venice Commission presumed, but is instead a standard that permits districts to vary by 15% below the mean and 15% above it.

An example demonstrates what a huge difference this makes. To aim at an average district containing 100 voters, a 10% overall deviation would permit districts to vary between 95 and 105 voters. (Divide 95 by the 10 voters that separate the largest and smallest districts and you get about 10%). The Hungarian law would permit districts to vary between 85 and 115 voters – 15% above the mean and 15% below the mean of 100. The gap between 85 and 115 voters in a district would be 35% overall! (Calculated the same way as above: 30/85 = 35%.) This is a huge difference that the Venice Commission did not seem to see.

In the actual districts were constructed as a result of the new election law, the variation became even larger than that. As you can see in the chart below, the smallest districts in Hungary now have about 60,000 voters while the largest districts have nearly 90,000 voters, roughly a 50% gap. (The horizontal axis shows the number of eligible voters in the new constituencies based on voter data from 2010, and the vertical axis shows the number of districts in the new scheme with that number of voters.) Not only are the actual districts highly unequal, but this variation has no apparent justification.

The Size of Parliamentary Districts in Hungary after Redistricting
Source: Calculations by Gábor Tóka, Central European University

Hajdú-Bihar County, in the eastern part of Hungary, provides a case in point. A last-minute amendment to the 2011 election law divided the city of Debrecen into two districts of highly unequal size. Now, one district has 87,278 voters and the other, right next to it, has 60,125 voters. These are very nearly the largest and smallest districts in the country, side by side, without official explanation.

The government may have given no reasons for its districts, but this huge variation in district size is not random. As Political Capital shows, the left-leaning districts are systematically 5,000-6,000 voters larger than the right-leaning districts, which means that it takes many more votes to elect someone from a left-leaning district than to elect someone from Fidesz.

The borders of these new districts also appear to be drawn to Fidesz’s advantage, since they just happen to break up the areas where the opposition alliance voters have traditionally been strongest and they scatter these opposition voters over a new Fidesz-majority landscape. Historically left-leaning districts were partitioned and blended into historically right-leaning districts, creating fewer districts where left-leaning candidates are relatively certain to win.

One of the most obvious gerrymanders occurred (again) in Hajdú-Bihar County. In the 2006 election, which went nationally by a wide margin to the Socialists, the county voted three of its nine districts for the Socialists and six for Fidesz, as you can see in the chart below, on the left. If the results from the 2006 election were tallied in the newly drawn six districts for that country, as shown on the right, Fidesz would now win every district. The map reveals that this all-Fidesz result was accomplished by drawing the districts to divide up the compact concentrations of Socialist voters so that they would become minority voters in Fidesz-dominant districts.   Examples like this one can be found all over the country, as left-leaning districts were partitioned to break up clusters of opposition voters to mix them with even more conservative voters from neighboring areas.

The US may have invented the gerrymander, and so it may seem presumptuous for an American to complain about the new districts. But the Hungarian gerrymander is different from the (also outrageous) American type. In US national elections, gerrymanders occur at the state level, which means one party cannot redistrict the whole country at once. In the US, districting plans are also subject to judicial review to check the worst self-dealing. In Hungary, however, the whole country was redistricted by one party all at once so the Hungarian gerrymander is far more decisive. And there is no judicial review to correct excesses. In addition, unlike in America where the governing parties in the states get a new shot at gerrymandering every 10 years, after each census, it will take a two-thirds vote of the parliament to change any district in Hungary’s future.

Hungarians don’t just cast votes for individual representatives in districts of the sort we have just seen, however. Hungarians cast two votes in national elections. In addition to casting ballots for representatives in the voters’ individual constituency, voters cast second ballots for party lists. Those votes are aggregated across the country and additional parliamentary seats are awarded to parties based on these results, above and beyond the seats won in the individual districts.

In the new parliament as in the old one, MPs elected both ways sit together with equal status. While this dual system of MP elections appears to mitigate the effect of the gerrymander, the new parliament, unlike the old, allocates more seats to the individual constituencies than to the party-list mandates. The new parliament features 106 district mandates and 93 party-list mandates. Since individual constituencies are awarded on a winner-take-all basis, this tilts the system toward an even more disproportionate distribution of mandates than in the prior also-disproportionate parliament.

Individual constituencies in Hungary were allocated from 1990 to 2010 in a two-round run-off system. Unless a candidate won 50% or more in the first round, a second round would be held between the highest vote-getters to determine who won the mandate. This system meant that many political parties would field candidates in round one, and then form coalitions before round two after the relative viabilities of the individual candidates could be assessed. Hungarian political culture grew up around this system so that parties were not accustomed to bargaining before any votes were cast.

The new electoral system in Hungary eliminates this second round, benefiting Fidesz, as the largest single party. It can now win districts outright without needing majority support because it only has to get more votes than any other party on the (single) election day to capture the constituency. Given that the districts have been drawn to give Fidesz an advantage overall, one can imagine other parties will have a hard time winning constituencies which have been constructed precisely so that Fidesz is the largest party.

The design of the new system means that the democratic opposition would only have a chance to win individual constituencies if the various opposition parties of the left could create a grand coalition before the election so that they didn’t run candidates against each other. But this was a result that everyone familiar with politics in Hungary knew would be hard to accomplish. The parties in the “democratic opposition” (excluding Jobbik) are sharply divided both by ideology and personality. But unless these parties could set aside their differences to unite, they would surely lose.

The announcement on 14 January that five parties in the opposition had managed to agree on a single list of candidates for the single-member districts as well as a common party list was therefore something of a political miracle.

But can the party leaders of the Unity Alliance bring all of their voters along with them? Many voters for the smaller parties on the left often don’t trust the larger Socialist Party which now dominates the coalition.  And some personalities in the mix are popular only within their own parties and unattractive to the others in the coalition. As a result, it cannot be assumed that votes for the five parties can simply be added together to produce a united whole that is the same size or even larger than the sum of the parts.

Because voters cast two ballots on election day, the individual constituencies are only part of the story, though they are the largest part. Parties will also run national lists to compete for voters’ second votes. The new conditions that came into effect since the last election actually make it easier than it was in 2010 to nominate candidates for the individual constituencies and to register parties with national lists, something that is consistent with a dominant-party strategy to divide up the opposition as much as possible.

But the party-list system also builds in incentives for small parties to join together to form a larger alliance. To be approved to run a national list, parties must field candidates in at least 27 individual constituencies in at least nine of the 19 counties plus Budapest. While this guarantees that parties are truly national, it also aggravates the problems created by the loss of the second-round runoff in the individual constituencies. Any new national list adds to the “clutter” of individual candidates in the individual constituencies and further fragments the vote.

So it makes sense, under these rules, for small parties to form a common national list. To avoid competing head-on and perhaps pushing each other below the 5% threshold for entering the parliament, small parties on the same side of the political spectrum are pushed by the logic of the system to join forces. But as soon as they do so, they run into another problem. In all elections since 1994, parties have had to meet a 5% threshold of the popular vote to gain a fraction in the parliament. For two parties that run together, the threshold rises to 10% and for three or more parties, the threshold is 15%.

If the smaller parties were going to unite for 2014, then, they ran the risk of together missing the higher threshold required of joint party lists. The rules of the game have therefore pushed the small parties of the “democratic opposition” to do what they did – which was to join with the Socialists to form Unity. Only an alliance with the larger Socialist party guaranteed that these smaller parties would be able to enter the parliament given the higher thresholds for joined lists. Because many of the smaller parties were created precisely to distance particular groups of voters from the Socialists, however, this is an uneasy alliance at best.

So that is where we were as the campaign was launched, witnessing a democratic opposition alliance whose members do not like each other much but who have to work together if they are to have any hope of ousting Fidesz given the way that the rules are structured. The public squabbling that occurred as the grand coalition went together belied the name of Unity Alliance and weakened their electoral position. They have the campaign period to convey a new unified message, but – as we will see – that is going to be very hard.

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.

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.