hungary braces for economic impact as ukraine halts gas transit

Viktor Orban has already realised what a threat it is to base supplies of key raw materials on a single source. To maintain the delivery of Russian oil, he is willing to pay more. He resolved this crisis but is inevitably facing another. In just a few months, Ukraine is set to cut off Russian gas.

Dark clouds have been gathering over Hungary for months. The country's difficult economic situation has been worsened by successive crises. In July, the cut-off of Russian oil transit by Ukraine threatened a serious fuel crisis, and now the deadline for cutting off cheap Russian gas supplies via pipelines through Ukraine is approaching relentlessly. By the end of the year, Russian gas transit through its territory will be halted. This could be a blow to Hungary, Slovakia, and Austria, which still benefit from these supplies being excluded from sanctions.

Kiev has repeatedly stated for months that the agreement with Gazprom regarding 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 through the southern "Friendship" pipeline. The pipeline, which can pump up to 40 million cubic metres of gas daily, will be closed to Russian raw material.

The Orban government not only failed to use the time granted by the European Union to find an alternative to Russian gas but further tied the country's energy policy to Moscow. Let's recall that Russia and Hungary are linked by a 15-year contract for the supply of 4.5 billion cubic metres of natural gas annually.

During the European Parliament session on Wednesday, the Hungarian Prime Minister argued that "by disconnecting from Russian energy, the EU lost economic growth and had to allocate a significant part of funding for energy subsidies and infrastructure to import liquefied natural gas".

- The debate in the European Parliament has become a vivisection of the rule of law and the condition of Hungary itself - comments Dominik Héjj, a political scientist and expert in Hungarian issues, a senior analyst at the Institute of Central Europe, in an interview with money.pl.

Hungarians blame EU policy and sanctions not only for the decline in competitiveness of the entire Community. According to Orban, the trade war with Russia and China is putting Europe into a cold war that the EU will not win. Despite the overwhelming criticism he faced in the European Parliament, it does not seem to have made an impression on Orban, and it certainly won't influence his policy - notes Héjj.

The only operating 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 forces - reminds the Centre for Eastern Studies. The second point of receipt of Russian gas - Sochranivka - was closed back in May 2022.

Now Ukraine will turn off the tap again. At the end of 2019, Kiev and Moscow signed a five-year transit contract. Under its provisions, Ukraine earned from the transmission of raw material to the west and additionally negotiated that Russia would write off almost £2.5 billion in Ukrainian debt. After the full-scale invasion of Ukraine, Kiev could have broken the contract with Russia, yet decided to maintain the gas transmission until its expiration. The contract expires precisely on 1 January 2025.

One of the reasons for maintaining uninterrupted supplies was that some countries in Central Europe were dependent on raw material from Russia. However, in a July interview with Bloomberg, Volodymyr Zelensky clearly indicated that after the expiration of the current contract, there would be no new one.

Ukraine's decision was understood by the European Commission and most EU countries. It fits into the strategy of moving Europe away from Russian hydrocarbons. For obvious reasons, Hungary, Slovakia, and Austria - countries that benefit from access to cheap gas or earn from its transit, such as Slovakia through the operation of the Transgaz pipeline - oppose this.

According to Serhij Makogon, the former head of the gas operator OGTSU (Ukrainian Gas Transmission System Operator), by transporting about 12-14 billion cubic metres of gas through the Ukrainian system, Gazprom earns approximately £4 billion. Meanwhile, Ukraine receives £650 million annually from transit fees, but only £80-160 million goes to the budget; the rest goes towards handling transport.

Will closing the possibility of Russian gas transit through Ukraine equate to cutting Hungary off from gas? Not necessarily. Firstly, as we have already explained on money.pl, to deliver gas to customers in Europe, Moscow cooperates with Turkey via the TurkStream pipeline.

Already in 2023, a large portion of Russian gas flowed via this route. However, the pipeline's capacity is limited. Through two export lines, TurkStream transports 14 billion cubic metres of gas to Europe. The capacity of this route is 32 billion cubic metres. However, deliveries from other directions other than Russia are also made via the Black Sea.

Reserving additional volumes for Slovakia and Austria via Gazprom may prove to be exceptionally difficult - explained Dr. Szymon Kardaś, an expert with the European Council on Foreign Relations, in an interview with money.pl. However, Hungary is secured.

The second issue is negotiations over gas from Azerbaijan. Despite numerous controversies related to using Russian systems for its transport, Kiev is considering possibly allowing its transit.

As OSW analyst Kamil Rudnik writes in his analysis, there is also the option of buying gas at the border. "Also, the head of Naftogaz, Oleksiy Chernyshov, admitted in an interview on 6 August that talks are underway with the Azerbaijani company SOCAR regarding the transmission of raw material (he did not specify its volumes). He also allowed the possibility of EU companies purchasing fuel from Gazprom at the Ukrainian-Russian border.

A similar "maneuver" was applied to solve the oil crisis. - The Hungarians reached an agreement with Belarus, whereby Russian gas becomes Hungarian gas. The Russians agreed. In this whole story, Orban still blamed Ukraine and thanked Russia for freeing Hungary from the Ukrainian vise - comments Dominik Héjj.

The Hungarian energy company MOL has reached agreements with oil suppliers and operators of the "Friendship" pipeline for the continuous transport of 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. Thus, oil will continue to arrive in Hungary and Slovakia in the same quantity as before. This, however, will mean an additional cost for MOL due to insurance - £1.20 per barrel.

If a similar agreement is reached for gas supplies, Hungary will maintain deliveries but will pay more for them. This, in turn, will benefit the Hungarian Prime Minister, who will directly point out those responsible for the more expensive gas - Kiev, and of course, Brussels.

- What in Poland is interpreted as Kremlin propaganda constitutes the official government narrative in Hungary. Budapest will not decide to leave the EU, as they see economic benefits from the free market. For Orban, however, it has always been a business deal, not a community of values - summarises Héjj.

Przemysław Ciszak, journalist of money.pl