Hungary’s gas flirtation (Part 1): EU, US and the Caspian [NGW Magazine]

Hungary’s increasing flirtation with Moscow mirrors its alienation from Brussels. Like Poland, Hungary has had a bad press in the European Union as a country run by a populist regime.

The end of the Cold War had negative consequences for industry and living standards generally in former Soviet bloc countries. That led eventually to a hankering after the ‘good old days’ particularly in Poland and Hungary, where president Victor Orban has increased the state’s control over the economy.

But unlike Poland, Budapest has the cultural framework to negotiate with Moscow as an alternative to Brussels. Hungary has a legitimate list of complaints against Russia, but given increasing tensions with Brussels, it nevertheless turned to Moscow, which Orban visited for the first time in 2013.

Of all the reasons for friendliness, the most important point is that Hungary imports gas from Russia, by way of Ukraine. Moscow’s plans to stop, or at least diminish that flow, make Orban apprehensive. But Russia’s president, Vladimir Putin, assured him then that Hungary would be able to receive gas from TurkStream, regardless of Russia’s relationship with Ukraine. Foreign minister Peter Szijjarto said Hungary would benefit, since it would provide an alternative supply through the south of the country, which now receives its gas from Ukraine. But TurkStream’s construction is not progressing smoothly.

The potential problem with TurkStream

The first string of TurkStream is to be finished soon and it will supply gas for Turkish consumption. But the price for the gas has not been fixed. In his meeting with Turkey’s president Recep Erdogan, Putin complained that Erdogan demanded low prices, whereas the price of gas is determined by the market. Erdogan may have held out on the grounds that Putin needs him more than he needs Putin. Turkey is essential to Putin’s plans to reduce flows through Ukraine but Erdogan has other options for gas, including an easily-accessible and now cut-price LNG market. Turkey is also among the very few nations which are willing to buy Iranian gas and oil, and Turkey could expect a big discount.

So Ankara might need TurkStream less for the molecules than what it represents: a chance to diversify its gas supply routes; strengthen its hand in gas contract talks; and reminding the US that it does not need its support, as it has a friend in Russia.

But this does not mean that Ankara will not try to buy Russian gas as cheaply as possible.

The situation with the second string, TurkStream 2, is even less clear. It will provide gas for the European market, through the problematic Balkans.

There is no clear-cut agreement between Russia and any of these Balkan countries that ensures Russian gas will reach central Europe through the second string, although Bulgaria and Serbia – the most obvious intermediaries for selling gas to central Europe – cannot import gas from TurkStream before 2022.

Gazprom, bearing in mind its losses on South Stream, has made it clear that without a strong guarantee from Bulgaria and the European Union, it will not undertake pipeline construction in Bulgaria.

Orban turns to Baku

The Bulgarian case shows how the EU approaches countries that deal with Russia against Brussels’ will. Brussels may be unhappy with Germany’s support for Nord Stream 2, but small, east European countries who depend on EU subsidies, including Serbia, which wants to be part of the EU, are a different matter.

A contributor to Foreign Policy made the point clearly enough: “The EU may be willing to allow Berlin to break the anti-monopoly rules for Nord Stream 2 – Russia will own those pipelines and the gas in them… but it appears ready to be much more stringent in enforcing its law in the Balkans. It could, for instance, take Serbia to task for striking a deal in which Gazprom would control 51% of TurkStream. Although Serbia is not yet a member of the EU, it is negotiating its accession. The Energy Community, a Vienna-based watchdog tasked with bringing candidate countries’ legislation in line with European rules, has already warned that TurkStream plans break EU rules. Serbia may thus risk a slowdown in membership talks.”

Belgrade does not seem to know what to do. On one hand, it wants to benefit from TurkStream and it has announced that it will start construction. On the other hand, it wants to avoid Brussels’ ire. A few days before the announcement that Serbia was going to participate in TurkStream, Belgrade representatives noted that it could still delay construction of its part of the gas line.

Thus, the second string of Turkish Stream might even be less commercially viable than the first, a point appreciated in Budapest. Orban’s critics present him as a pro-Russian authoritarian figure, but, like many other small countries, Orban has proceeded with ‘multi-vectorism’: that is, proceeding to maintain acceptable, if not good, relationships with several countries and organisations in an attempt to maximise benefits for Hungary – and his regime. While cosying up to Moscow, for example, Orban voted for sanctions against Moscow, and hoped to receive a generous grant from the EU. He also knows that Brussels will never expel Hungary from the EU, however much it may loathe his autocratic rule.

Lure of the Caspian

And Orban has also been fairly sceptical about Putin’s assurances that Russia will be a stable supplier of gas even when the contract with Ukraine ends this year. To be sure that no problems emerge in the future, Orban has turned to Azerbaijan’s gas reserves. Almost a year ago, Germany’s chancellor, Angela Merkel, visited Baku, exploring the possibility of importing Azerbaijan’s gas.

Italy is especially excited by the prospect of receiving Azerbaijani gas: in order to be sure that the southern gas corridor reaches Italy, Rome promised Azerbaijan a solution to the problem of Nagorno-Karabakh and pressed Armenia to return it to Azerbaijan. Even the US treats Azerbaijan favourably, thanks in part to its gas supplies to Europe which erode Gazprom’s potential market. For example, it turned a blind eye to Azerbaijan’s friendship with Iran at a time when Washington wanted to isolate Iran as much as possible. Washington sees Azerbaijan as an essential gas supplier to Europe and, thus, one of the major alternatives to Russia; and US officials have strongly discouraged Hungary from buying Russian gas.

Reuters reported that US energy secretary Rick Perry told Hungary to reject Russian gas pipelines such as Nord Stream 2 and a multi-line TurkStream as Moscow was using them to try to solidify its control over the security and the stability of central and eastern Europe.

Implicit American and EU support therefore encouraged Budapest to turn to Azerbaijan, whose gas will fill out the last segment of the Southern Gas Corridor by 2020. At the same time, the TransAnatolian Pipeline, the other segment of the southern corridor, is already operational, and Hungary clearly sees Azeri gas as essential for Hungary. In February 2018, Hungary’s ambassador to Azerbaijan said Azerbaijan and Hungary were “strategic partners.” Later, in the autumn of 2018, he noted that the “SGC, which envisages transportation of Azerbaijani gas to Europe, is important for Hungary in terms of diversification…” In March 2019, Szijjarto said: “Hungary is interested in participating in the SGC project.”

Moscow, sensing that if it cannot beat the competition then it had better join it, has proposed its own gas for the SGC in past years. But Moscow can do nothing to stop Hungary shopping around for its gas.

So Budapest can secure Azerbaijan’s gas if Russian gas proves difficult, and in the case of delivery of both, Budapest can enjoy the benefits of competition. Moreover, even if Russian gas arrives, nothing is stopping Hungary from buying LNG, Romanian pipeline gas and Azerbaijani gas and becoming an important gas hub in southeast Europe. This, at least, is Orban’s dream.