Hungary faces energy crossroads as Ukraine cuts Russian supply
Viktor Orban has already recognized the threat of relying on a single source for key resources. He is willing to pay more to maintain supplies of Russian oil. This crisis has been resolved, but he is inevitably approaching another. Ukraine is set to cut off Russian gas in just a few months.
For months, dark clouds have been gathering over Hungary. Successive crises are further straining the country's challenging economic situation. In July, the interruption of Russian oil transit through Ukraine threatened a significant fuel crisis. Now the deadline for the cessation of inexpensive Russian gas supplies through pipelines via Ukraine is inexorably approaching. By the end of the year, the transit of Russian gas through Ukraine will be stopped. This could be a blow for Hungary, Slovakia, and Austria, which still benefit from the exemption of these supplies from sanctions.
Kyiv has repeatedly stated that the agreement with Gazprom for the transit of Russian gas through its territory expires at the end of 2024, and there will be no further negotiations with the invader. This means that gas from the east will not flow to Slovakia, Hungary, Austria, and the Czech Republic via the southern "Friendship" pipeline. The pipeline, capable of transporting up to 1.4 billion cubic feet of gas daily, will be closed to Russian resources.
Orban's government not only failed to use the time the European Union offered to find an alternative to Russian gas, but it has also tied the country's energy policy more closely to Moscow. It's worth remembering that Russia and Hungary are bound by a 15-year agreement to supply 160 billion cubic feet of natural gas annually.
During Wednesday's session of the European Parliament, the Hungarian Prime Minister argued that "by disconnecting from Russian energy, the EU lost economic growth and had to allocate a significant portion of funding to energy subsidies and the construction of infrastructure for importing liquefied natural gas."
- The debate in the European Parliament became a dissection of the rule of law and the condition of Hungary itself - commented Dominik Héjj, a political scientist and expert on Hungarian affairs, senior analyst at the Institute of Central Europe, in a conversation with money.pl.
Hungarians blame EU policy and sanctions not only for the decline in the competitiveness of the entire Community. According to Orban, the trade war with Russia and China is leading Europe into a state of cold war, which the EU cannot win. Despite the overwhelming criticism he faced in the EP, it does not seem to faze Orban, and it certainly won't influence his policy - notes Héjj.
Ukraine will shut off the tap
The only currently operational border point between Ukraine and Russia, through which - despite the war - gas still flows to Europe, is the Sudzha station in the Kursk region. When the Ukrainian army entered the southern part of the Kursk region at the beginning of August, the gas transmission station came under the control of Ukrainian troops, according to the Centre for Eastern Studies. The second point of receipt for Russian gas - Sochranivka - was closed back in May 2022.
Now Ukraine will shut off the tap again. At the end of 2019, Kyiv and Moscow signed a five-year transit contract. According to its terms, Ukraine earned revenue from the transmission of resources to the West and negotiated for Russia to forgive nearly $3 billion of its debt. After the full-scale invasion of Ukraine, Kyiv could have broken the agreement with Russia, but it decided to maintain the gas flow until the contract's expiration. The agreement ends exactly on January 1, 2025.
One reason for maintaining uninterrupted supplies was some Central European countries' dependence on Russian resources. However, in a July interview with Bloomberg, Volodymyr Zelensky clearly indicated that no new agreement would follow the expiration of the current one.
Ukraine's decision has been met with understanding by the European Commission and the majority of EU member states. It aligns with Europe's strategy of departing from Russian hydrocarbons. For obvious reasons, Hungary, Slovakia, and Austria oppose this - countries benefiting from access to cheap gas and Slovakia profiting from its transit (by operating the Transgas pipeline).
According to Serhiy Makogon, former head of the gas operator OGTSU (Ukrainian Gas Transmission System Operator), Gazprom - transporting about 420-490 billion cubic feet of gas via the Ukrainian system - earns around $5 billion. Ukraine, on the other hand, receives $800 million annually from gas transit fees, but only $100-200 million goes directly to the budget, with the rest going towards transport operations.
The gas vise. Orban will find scapegoats
Will the closure of Russian gas transmission through Ukraine mean Hungary will be cut off from gas? Not necessarily. Firstly, as we explained on money.pl, to fulfill gas deliveries to clients in Europe, Moscow cooperates with Turkey via the TurkStream pipeline.
Already in 2023, a significant portion of Russian gas was flowing through this route. However, the pipeline's capacity is limited. Through the two export lines, Turkey transports 490 billion cubic feet of gas to Europe via TurkStream, which has a capacity of 1,130 billion cubic feet. However, deliveries through the Black Sea are also made from sources other than Russia.
Gazprom reserving additional volumes for Slovakia and Austria could prove exceptionally difficult, as Dr. Szymon Kardaś, an expert at the European Council on Foreign Relations, explained in a conversation with money.pl. Hungary, however, is secured.
The second issue involves negotiations over gas from Azerbaijan. Despite numerous controversies regarding the use of Russian systems for its transport, Kyiv is considering the possibility of allowing its transit.
As OSW analyst Kamil Rudnik writes in an analysis, there is also the option of purchasing gas at the border. "Naftogaz chief Oleksiy Chernyshov also admitted in an interview on August 6 that discussions are underway with Azerbaijan's SOCAR regarding the transmission of resources (though he did not specify their volumes). He also allowed for the possibility of EU companies purchasing fuel from Gazprom at the Ukrainian-Russian border".
A similar "ruse" was used to resolve the oil crisis. - Hungarians struck a deal with Belarus, under which Russian gas would become Hungarian gas. The Russians agreed. In this whole story, Orban still blamed Ukraine and thanked Russia for freeing it from the Ukrainian vise - comments Dominik Héjj.
The Hungarian energy company MOL has entered agreements with oil suppliers and operators of the "Friendship" pipeline for the continuous transportation of oil from Russia through Belarus and Ukraine to Hungary and Slovakia. According to these agreements, MOL becomes the legal owner of the oil at the Belarusian-Ukrainian border. The oil will therefore reach Hungary and Slovakia in the same volume as before. However, this will mean an additional cost for MOL due to insurance - $1.50 per barrel.
If a similar agreement is made for gas supplies, Hungary will retain its supplies but at a higher cost. This, in turn, will be fuel for the Hungarian Prime Minister, who will explicitly blame Kyiv and, of course, Brussels for the higher gas prices.
- What in Poland is decoded as Kremlin propaganda is, in Hungary, the official government message. Budapest will not decide to leave the EU because they see economic benefits from the free market. For Orban, however, it has always been a business deal, not a community of values - he concludes.
