Hungary Is Helping Putin Keep His Chokehold on Europe’s Energy

Hungary Is Helping Putin Keep His Chokehold on Europe’s Energy

Europe and the United States are trying to build a common front to push back against Russian aggression, and especially to pry the energy weapon out of Russian president Vladimir Putin’s hand. But one member of the team seems to be switching jerseys.

Hungary, under the leadership of Prime Minister Viktor Orban, has increasingly hewed to a more pro-Russian policy in recent months by doing huge deals with Moscow and criticizing Western sanctions on Russia, which is prompting angst from Brussels to the Beltway. The tilt toward Moscow is especially apparent when it comes to energy, which is itself at the root of European fear about what Russia has done in the past and could do again.

Hungary’s latest move was to authorize construction Monday of the South Stream pipeline, a pet project of Putin’s which is meant to offer an end-run around Ukraine for Russian natural gas exports headed for Europe. In the wake of the annexation of the Crimean peninsula and Russian armed disturbances in the eastern part of Ukraine, Europe slammed the brakes earlier this year on the $70 billion project. Europe is afraid the pipeline violates EU competition law and will only serve to increase reliance on Russian gas.

South Stream is meant to pump gas from Russia under the Black Sea through Bulgaria, Serbia, Slovenia, Hungary and eventually to Austria. The project is meant to provide another alternative pipeline from Russia to Europe while bypassing Ukraine.

This week, though, Hungary’s parliament rammed through legislation that overrides European objections and would pave the way for South Stream to start construction, involving energy firms such as Gazprom, Eni of Italy, EDF of France, and Wintershall of Germany.

Orban’s support for the project is especially noteworthy because he denounced the South Stream deal with Russia as tantamount to a "coup" against Hungary when he was still in the political opposition in 2008. Since then, though, he has taken to denouncing Europe and the West while championing "illiberal" states from Russia to China as role models for Hungary.

"Clearly there is a pro-Russian shift in Hungarian energy policy," said David Koranyi, the deputy director of the Eurasia Center at the Atlantic Council and former Hungarian government adviser.

The support for South Stream brought a yelp of dismay from the European Union, which asked Hungary for clarification. U.S. diplomats have also been warning Budapest about the folly of continuing to rely on Russia for energy supplies. "Diversifying sources is what’s important," said Andre Goodfriend, the top U.S. diplomat in Hungary late last month (the U.S. currently has no ambassador in Hungary).  

"Orban increasingly believes that a closer energy relationship with Russia is a much better guarantee for Hungary’s energy security" than seeking security through a more robust European Union, Koranyi said. "It’s a major about face from the role that Hungary used to play. Hungary can be a major stumbling block in what the European Union wants to achieve" in terms of building a single gas market in Central Europe, he said.

When it comes to South Stream, some energy experts think Orban may genuinely see benefits for Hungary of shepherding gas to the West. Transit countries make money off the energy trade, and a new pipeline would remove legitimate fears of Ukraine’s reliability as an energy-transit country. In 2006 and 2009, when Russia cut off gas exports, Europe concluded that Ukraine had dipped into transit gas to meet its own needs, leaving millions to suffer downstream.

Others think that multi-billion dollar projects are appealing because they offer a way for Hungary’s political leaders to distribute money, largesse and cement political loyalty. Last month, the Obama administration slapped travel bans on six Hungarian government officials for alleged corruption.

Hungary itself has said it is in favor of European cooperation on the energy front, and Foreign Ministry officials have stressed the benefits that would come from closer trade ties with the United States, especially when it comes to energy.

But it has also defended South Stream as vital to Hungary’s own energy security–and hinted that, when push comes to shove, Europe won’t be able to come to Hungary’s rescue.

"Hungary will construct the South Stream gas pipeline because it will improve the security of our energy supply," Orban said in July. "We do not want to find ourselves in a situation in which Hungary’s gas supply is dependent on what happens in Ukraine."

"Those who are opposed to the South Stream today only want to take away our right to energy supply security, but without doing anything in exchange," Orban continued.

But Hungary’s two-finger salute to Brussels on the pipeline isn’t an isolated incident. In September, just after a visit from Gazprom boss Alexei Miller, Hungary suddenly suspended its own shipments of natural gas to Ukraine, which had been without Russian gas since June and relies on European countries to supply it through the back door. Hungary also locked up additional gas supplies to top up its own dwindling reserves of fuel before winter.

This spring, Hungary put the final signatures on a $14 billion deal to buy nuclear reactors from Russia’s Rosatom — financed by Moscow — even as concerns abounded about Russia’s use of energy to hold European countries hostage to its whims.

And throughout, Hungary’s state-owned energy firm MOL has been in talks to sell its shares in a Croatian energy firm to Gazprom, brushing aside pleas by European and U.S. officials not to because of the key role that Croatia plays in southeastern European energy security. State Department officials asked Sen. Chris Murphy (D.-Conn.), the chairman of the European affairs subcommittee of the Senate Foreign Relations Committee, to bring up the issue on his recent European trip.

President Barack Obama and top U.S. diplomats have steadily amped up their criticism of Hungary, which is a member of NATO and has traditionally maintained close ties with the U.S.

During a September speech in New York, Obama lumped Hungary with Venezuela, Russia, and Egypt among countries that are stifling dissent and civil liberties at home. In October, Victoria Nuland, the State Department’s top official for Europe, blasted Hungary’s stance at a speech in Washington.

"Even as they reap the benefits of NATO and EU membership, we find leaders in the region who seem to have forgotten the values on which these institutions are based," Nuland said. "How can you sleep under your NATO Article 5 blanket at night while pushing ‘illiberal democracy’ by day; whipping up nationalism; restricting free press; or demonizing civil society? I ask the same of those who shield crooked officials from prosecution; bypass parliament when convenient; or cut dirty deals that increase their countries’ dependence on one source of energy despite their stated policy of diversification," she said.

Hungary bristled at the criticism, rejecting the notion that it has moved away from democracy. But other Europeans are worried they will be tarred with the same brush thanks to Orban’s lurch toward Moscow.

"The biggest threat I see is that we get a perception in Washington that the whole region is going in a weird direction, and that’s not true. Hungary is really an outlier," one Central European diplomat told Foreign Policy.

Some energy experts see Hungary’s support for South Stream, in particular, as a reflection of Orban’s statist approach to economics. The European diplomat likened Orban’s economics to former Italian dictator Benito Mussolini’s corporate statism.

"Orban does not think in terms of markets or consumer choice; his administration thinks and acts in terms of state ownership and control," said Andreas Goldthau, who studies the geopolitics of energy at Harvard University’s Belfer Center. "From that perspective it makes sense to close long term deals, put state-owned MOL in charge, and build the pipe," he said.

At the same time, massive energy deals, especially with Russia, offer the lure of billions of dollars sloshing around an opaque political system.

"Corruption is, I believe, a defining factor in the decision of the prime minister and his inner circle to go that route" on the nuclear plants and the new pipeline, the Atlantic Council’s Koranyi said.

Since the Ukraine crisis exploded in earnest one year ago, it has become increasingly apparent that Russia is finding it difficult to use energy as a stick. It has proven tough, not to say impossible, to cow countries such as Ukraine, Poland, or the Baltic states just with threats of energy cutoffs or jacking up prices. Indeed, Russia’s heavy-handed approach has sparked a scramble across Eastern Europe to line up alternative sources, such as the first natural-gas import terminal in the Baltics, or the Polish prime minister’s grandiose plans for a European energy union.

But as Hungary’s evolution under Orban appears to show, for countries already leaning east, Russian energy can seem if not a stick, then most certainly a tasty carrot.