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The Russia Factor

Hungary’s energy deal with Moscow is suspect for its secrecy but in some ways makes sense.

by Martin Ehl 8 April 2014

The weekend elections in Hungary turned out as expected. Fidesz, Prime Minister Viktor Orban’s party, will rule the country for the next four years with the support of a two-thirds majority in parliament. Most of the initial, post-election reactions centered on the 20 percent of the vote that the extremist party Jobbik acquired. But there is one more topic that, especially for neighboring states, is as notable as rising support for the extreme right: the government’s cooperation with Russia in the construction of a nuclear power plant in Hungary.


The center-left opposition tried in vain to use the surprise contract between Budapest and Moscow to damage the ruling party.


The deal has Russia building two new blocks for the Paks nuclear power plant, financed by a 10 billion euro ($13.7 billion) loan from the Russian government. The details of the agreement are secret in Hungary, and as I found out for myself last week in Budapest, various high-ranking government experts are studiously avoiding the topic.


Announced early this year, the deal came at a sensitive time for relations between the West and Russia and thus garnered general condemnation from abroad. But for Hungarians, the deal has its logic and could become a lesson for all who are planning soon to build a nuclear power plant in Central Europe – therefore for Czechs, Slovaks, and Poles.


First of all, the question in Hungary is not whether or not to have nuclear plants. In 2009, under then-Prime Minister Gordon Bajnai’s half-technocratic government, a resolution on the further development of nuclear energy passed through parliament with the support of all parties including Fidesz, which was then in the opposition.


But that does not mean Hungary has not sought to secure other sources of energy. Many Hungarian experts spent the last decade urging the diversification of gas supplies, on which Hungarian households are the most dependent in all of Central Europe. Construction is lagging on the North-South gas corridor, which would ease dependence on Russian supplies for the entire region. Budapest is also engaged in a major dispute with Croatia, where the Hungarian energy giant MOL controls the local oil and gas company, INA, and has been battling with the Croatian government over INA’s management. At threat is not only the connection of their pipelines, but especially the construction of a southern terminal for liquefied natural gas on the island of Krk.


The Hungarian economy, which is only slowly digging itself out of the worst, does not, therefore, have the best energy prospects. That was, according to pro-government experts, the main rationale for the deal with Russia. The agreement is criticized for two reasons: no discussion took place beforehand (with the exception of the parliamentary consensus of 2009) and the details of the contract remain unknown, making it impossible to assess whether it will make the Hungarian state too indebted.


Last week Russia revealed several of the numbers. The loan would be for 10 billion euros but no one knows in what currency the deal was closed and how the exchange rate risks will be minimized, given the now weakening ruble and the long-term weakness of the forint. And it isn’t clear why Moscow would make an agreement in euros.


The second key detail is the interest rate of the loan. According to information from the Russian side, it will be 3.95 percent until the blocs are put into operation (in 2026 at the latest); then the rate will increase to 4.95 percent. Hungary will be paying off the loan until 2046.


According to economist Zoltan Pogatsa from Corvinus University in Budapest, the loan could be a positive in the long run. Hungary still has difficulty borrowing on the open market and only a loan from the IMF could have been considered for a similar project, which would have probably have had an interest rate of around 4.5 percent. So for Pogatsy interest rates below 5 percent make sense.


The Hungarians claim that Russia needed to secure a nuclear construction contract with an EU country to serve as a reference for any future deals within the bloc, so Moscow was accommodating when it came to the technical and financial details. But nothing is known about the political conditions, written or unwritten. To receive loans from the IMF Hungary would have had to, for instance, implement some reforms. But Orban’s government would prefer not to borrow money with such strings attached, and, in fact, repaid its loans to international institutions last year with great ceremony.  


In a way Hungarians have fallen victim to the failure of the EU to create and implement a common energy policy. They found a long-term solution, but it is still uncertain what they will have to pay for it apart from interest. Despite all the secrecy it is clear that in the government offices along the Danube there is uncertainty whether the Russians will really deliver what they promised.

Martin Ehl
 is the foreign editor of the Czech daily Hospodarske noviny, where this column originally appeared. He tweets at @MartinCZV4EU.
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