Hungary braces for energy crunch as Ukraine shuts gas tap
Viktor Orban already understands the threat of relying on a single source for key raw materials. He is willing to pay extra to keep Russian oil flowing. While he has resolved this issue, another challenge looms. In just a few months, Ukraine plans to cut off Russian gas.
8:02 AM EDT, October 14, 2024
Dark clouds have been forming over Hungary for months. Ongoing crises further exacerbate the country's tough economic situation. In July, Ukraine's halt of Russian oil transit posed a significant fuel crisis, and now the deadline to cut off cheap Russian gas supplies via pipelines through Ukraine is approaching. By the end of the year, Russian gas transit through Ukraine will cease. This could be a significant setback for Hungary, Slovakia, and Austria, which have benefited from excluding these supplies from sanctions.
Kyiv has consistently stated that the agreement with Gazprom regarding the transit of Russian gas through Ukrainian territory expires at the end of 2024, and there will be no further negotiations with the invader. This means Russian gas will not continue to Slovakia, Hungary, Austria, and the Czech Republic through the southern "Friendship" pipeline. The pipeline, capable of transporting up to 1.4 billion cubic feet of gas daily, will be shut off from Russian resources.
The Orban government failed to use the time given by the European Union to seek alternatives to Russian gas and intensified its energy policy's ties with Moscow. It's worth remembering that Russia and Hungary have a 15-year contract to supply 159 billion cubic feet of natural gas annually.
During Wednesday's European Parliament session, the Hungarian Prime Minister argued that "by disconnecting from Russian energy, the EU lost economic growth and had to divert significant funding towards energy subsidies and infrastructure for importing liquefied natural gas."
The debate in the European Parliament has become an analysis of the rule of law and Hungary's condition, comments Dominik Héjj, a political scientist and expert on Hungarian issues and a senior analyst at the Institute of Central Europe.
Hungarians blame EU policy and sanctions not only for reducing the competitiveness of the entire Community. According to Orban, the trade war with Russia and China is ushering Europe into a cold war that the EU cannot win. Despite intense criticism in the European Parliament, it appears to have little impact on Orban, and it certainly won't alter his policy - notes Héjj.
Ukraine turns off the tap
Despite the war, the only active border point between Ukraine and Russia through which 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 in early August, the gas transmission station came under Ukrainian control, as the Center for Eastern Studies reminded us. The second entry point for Russian gas, Sochranivka, was closed in May 2022.
Now Ukraine will shut the supply again. At the end of 2019, Kiev and Moscow signed a five-year transit contract. Under its terms, Ukraine profited from the transmission of gas to the west and additionally negotiated for Russia to write off nearly $3 billion in Ukrainian debt. Despite the full-scale invasion, Kiev maintained gas transmission until the contract ends. It expires precisely on January 1, 2025.
One reason for maintaining uninterrupted supplies was some Central European countries' dependency on Russian raw materials. However, in a July interview with Bloomberg, Volodymyr Zelensky clearly indicated that there would be no new contract after the expiration of the current one.
The European Commission and most EU countries have understood Ukraine's decision. It aligns with the strategy of moving Europe away from Russian hydrocarbons. For obvious reasons, Hungary, Slovakia, and Austria - countries benefiting from cheap gas access or profiting from its transit, such as Slovakia via the Transgaz pipeline - oppose this.
According to Serhij Makogon, the former head of OGTSU (Ukrainian Gas Transmission System Operator), Gazprom earns approximately $5 billion by transporting about 423-494 billion cubic feet of gas through the Ukrainian system. Meanwhile, Ukraine receives $800 million annually from transit fees, with only $100-200 million going to the budget; the remainder is used for transport handling.
The gas vise: Orban will find those responsible
Does closing the route for Russian gas transit through Ukraine mean Hungary will be cut off from gas? Not necessarily, as Moscow cooperates with Turkey via the TurkStream pipeline to deliver gas to European customers.
In 2023, a significant amount of Russian gas flowed through this route. However, the pipeline's capacity is limited. TurkStream transports 494 billion cubic feet of gas to Europe through two export lines, with a total capacity of 1.13 trillion cubic feet. However, other deliveries not originating from Russia also occur via the Black Sea.
Reserving additional volumes for Slovakia and Austria through Gazprom might prove exceptionally challenging, as explained by Dr. Szymon Kardaś, an expert with the European Council on Foreign Relations. However, Hungary is assured.
The second issue involves negotiations for gas from Azerbaijan. Despite controversies about using Russian systems for its transport, Kyiv is considering possibly allowing its transit.
As OSW analyst Kamil Rudnik notes in his analysis, buying gas at the border is possible. "The head of Naftogaz, Oleksiy Chernyshov, mentioned in an August 6th interview that discussions are ongoing with the Azerbaijani company SOCAR about the transmission of resources (though he did not specify volumes). He also suggested that EU companies could purchase fuel from Gazprom at the Ukrainian-Russian border.
A similar "maneuver" was applied to resolve the oil crisis. The Hungarians reached an agreement with Belarus, where Russian gas was reclassified as Hungarian gas. The Russians agreed. In this whole scenario, Orban continues to blame Ukraine and thank Russia for releasing Hungary from the Ukrainian grip, comments Dominik Héjj.
The Hungarian energy company MOL has reached agreements with oil suppliers and operators of the "Friendship" pipeline to continuously transport oil from Russia through Belarus and Ukraine to Hungary and Slovakia. Under these agreements, MOL becomes the legal owner of the oil at the Belarusian-Ukrainian border, allowing oil to continue reaching Hungary and Slovakia in the same quantities as before. However, this comes with an additional cost for MOL due to insurance—$1.5 per barrel.
Hungary will maintain deliveries but incur higher costs if a similar agreement is reached for gas supplies. This situation will benefit the Hungarian Prime Minister, who will likely blame Kyiv and Brussels for the higher gas prices.
In Poland, what is decoded as Kremlin propaganda is the official government narrative in Hungary. Budapest will not exit the EU, as it sees economic benefits from the free market. For Orban, however, it's always been a business arrangement, not a values-based community—sums up Héjj.
