The Saudi Arabia of Gas

In its recent dealings with Hungary, Russia has continued to exploit divergent energy strategies among EU countries as its energy dominance encircles Europe. 

Earlier this month Hungary's embattled socialist government, headed by Prime Minister Ferenc Gyurcsany, agreed to Russian gas monopoly Gazprom's offer to build an extension to the Russian-Turkish Blue Stream pipeline which would allow it to pump Russian gas to Hungary via the Balkans.

This extension, the Russians assured Gyurcsany, would go a long way towards making Hungary a hub for Russian gas in Central Europe, a generous offer which the Hungarian government was loath to ignore.

Faced with violent street riots and mounting discontent, the Hungarian socialists were becoming desperate and needed to show voters that they were capable of leading Hungary out of its economic doldrums.

The Hungarian budget deficit had grow to massive proportions-10.1 percent of annual GDP while economic growth was predicted to slow from 4 percent in 2006 to 2 percent in 2007.

The Russian offer was an answer to their prayers.

Gazprom hinted that if the Hungarian government accepted the deal, it might reciprocate and give Hungary preferential gas prices, and while there were no guarantees on this backroom offer, the Hungarians apparently believed that Gazprom would not renege on this promise.

To sweeten the deal, Gazprom promised to construct a 10 billion cubic meter gas storage facility, which, Gazprom managers swore, would help improve Hungary's faltering economy (as well as raise the approval ratings of the socialist government). Hungarians stood to benefit from such Russian largesse.

The ruling party in Budapest could not overlook such a generous offer and, despite its EU membership, domestic politics and the national interest took precedence over EU unity.

Hungary, in the eyes of Russian policy planners, was the perfect location for a Central European gas hub-far better than Austria which was also seeking this role, albeit without Russian gas.

Given Hungary's past links to the former USSR, Kremlin planners felt they could do business with Budapest without too much concern for the pesky interference of EU energy commissioner Andris Piebalgs, who has a reputation of telling things as they are.

The Russian's were also keenly aware that Europe had no unified energy policy.

The EU energy summit, which took place in Brussels on March 8, convinced the Kremlin and Gazprom that, despite European Commission President Jose Manuel Barroso's call for unity, or as he put it to speak with "one voice when we talk to our international partners", each member country, following Germany's lead, was determined to make the best deal for itself, including Hungary.

For Moscow this became the optimum moment to make its move and bring the Hungarians over to their side and use the occasion to flex its energy muscles to intimidate the EU.

Hungary's energy sector had always tempted Gazprom. For years Gazprom had been using all the tricks up its sleeve to take control of MOL, the main Hungarian energy company. But by 2007 the situation no longer needed semi-criminal methods since the Hungarian government was now willing to go along with Russian demands peacefully.

The Blue Stream extension into Hungary was a high priority item for the Kremlin. This was evident when Russian President Vladimir Putin visited Budapest in March 2006 and forcefully lobbied the project with his Hungarian hosts.

Putin continued his hard sell in Sochi in September 2006 during Gyurcsany's visit to the seaside resort.

During the talks in Sochi, Gyurcsany, never regarded as a Hungarian version of Germany's Gerhard Schröder, finally gave in and adopted a conciliatory position towards Russian energy policy. "Those who do not understand something here will sooner or later go bust. We, Hungarians, do want to understand Russia", he told a press conference as Vladimir Putin, standing by his side, delightfully listened.

The Hungarian gas hub was vital for Moscow in its plans to supply the Balkans and southern Europe with long-term gas contracts as well as to by-pass Ukraine in gas deliveries to Hungary, but the real motive for its creation was geopolitical and was linked to two other projects the Russians were intent on realizing.

The most immediate one was to derail what is known as the Nabucco pipeline project.

The Nabucco pipeline was initiated by the European Parliament and the Council of Europe on June 26, 2003, in order to provide an alternative gas supply for Europe. Upon completion, which is estimated to be in 2012, Nabucco would carry at least 30 billion cubic meters of gas from the Caspian and Middle East to the EU's 27 members.

Nabucco's strategic and economic significance is that it offered Europe an alternative to Russian gas and a market for Caspian gas producers.

The founders of Nabucco envisioned the pipeline being filled with gas from Azerbaijan and Kazakhstan, but the lion's share of it, about 50 percent, was to come from Iran and this is where problems emerged.

The European parliament and the Council of Europe knew that by adding Iranian gas to the Nabucco pipeline they would be inviting American opposition to the project, yet they decided to go ahead with their plan, creating a dilemma for the United States.

Washington did not want to be perceived as opposing European energy security, but it also did not cherish the idea of Iranian gas replacing Russian gas in Europe at a time when Tehran was busy building a nuclear reactor and developing the capacity to build a nuclear weapon and was subject to UN sanctions.

"If a country is going to fall under sanctions and if the sanctions will be strengthened, do you really want to do business with it?" Undersecretary of State for Political Affairs Nicholas Burns said February 14 at the Brookings Institution in Washington. "There are alternatives", such as Kazakhstan, if a country is "looking for energy relationships", he said.

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