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Hungary & Russia Reached New Agreement for Gas Supply

Source: The Wall Street Journal 2/17/2015, Location: Asia

Russian President Vladimir Putin offered Hungary’s Kremlin-friendly government more favorable terms for natural-gas supplies during a visit to Budapest that underscored Europe’s challenge in defying Moscow over Ukraine amid reliance on Russia for energy.

Under a new deal, Hungary will pay Russia only for the gas it actually consumes, as opposed to the volume it contracts, lowering costs for Hungarian authorities. Hungary relies on Russia for 70% of its gas, supplied under a 20-year contract that expires this year.

Hungarian Prime Minister Viktor Orban said a political agreement on the gas deliveries had been reached, though technical details needed to be completed. He made a joint appearance with Mr. Putin in Budapest, a public-relations victory for a Russian president who has found himself unwelcome in other European capitals due to the conflict in Ukraine.

“I have made it clear [to Mr. Putin] that Hungary needs Russia,” Mr. Orban said.

Mr. Putin’s visit to Hungary comes as the Kremlin tries to widen cracks in Europe’s united front over the Ukrainian crisis, taking advantage of Russian economic leverage and European political divides. Russia has reached out to France’s far right, made overtures to Greece’s far left and dangled energy incentives for countries such as Austria and Hungary, where leaders already have voiced skepticism over European Union sanctions against Moscow.

For Mr. Orban, welcoming the Russian president is part of an East-West balancing act. For years, the Hungarian prime minister has angered Brussels by centralizing government power, rewriting Hungary’s constitution and praising “illiberal” democracies, including Russia, as an inspirational model. At the same time, he has affirmed that Hungary, which shares a border with Ukraine, remains dedicated to its membership in the North Atlantic Treaty Organization and the EU. He toed a cautious line on Tuesday.

“There is lots of speculation in the media that Europe should be afraid Hungary is drifting towards Russia,” Mr. Orban said, addressing criticism that his government has become a Kremlin pawn. “European unity can be created in parallel with cooperation with Russia.”

The Hungarian prime minister appeared to question an EU strategy to reduce reliance on Russian energy supplies, describing any exclusion of Russia as “not rational.”

That stance contrasts with plans for an energy union for the EU strongly supported by Poland. Also heavily dependent on Russian gas and oil, Poland has taken steps in recent years to reduce its reliance on its communist-era overlord. Warsaw has proposed that the EU buy gas from Russia’s OAO Gazprom as a single customer, doing away with individual country deals akin to the one Mr. Orban struck on Tuesday.

Mr. Orban has reaped other benefits from warm relations with Russia. Last year, Hungary signed a contract with Russian state energy giant Rosatom to receive two new reactors at its only nuclear power plant. Russia agreed to provide a 30-year loan covering 80% of the €12 billion, or more than $13.5 billion, project, Mr. Putin said Tuesday. The deal provoked controversy in Hungary because it was secret and not subject to a public tender.

Hungary is also aware of the penalties of bad relations with Russia. In early 2009, the country was forced to reduce natural-gas supplies to its major industrial clients, after Russia turned off the flow of gas through Ukraine amid a spat with pro-Western leaders in Kiev.

Budapest would have benefited from Gazprom’s planned South Stream pipeline, a Russian plan to bypass Ukraine and deliver gas to Europe through countries including Hungary. But the Hungarian government was left flat-footed in December, when Mr. Putin announced surprise plans to scrap the project, in part a victim of deteriorated EU-Russian relations over Ukraine.

Russia formally abandoned the project because of Brussels’ concerns over the EU’s antimonopoly rules. It announced an alternative pipeline through Turkey. On Tuesday, Mr. Putin dangled Hungary’s possible participation in that project.

Though Russia provides the bulk of Hungary’s gas and oil, Germany remains the nation’s number-one foreign trade partner and provides roughly a quarter of its foreign direct investment.

Earlier this month, German Chancellor Angela Merkel visited Budapest, where she clashed with Mr. Orban over his interpretation of democracy, even as she pressed for his support on foreign policy.

Hungary has upheld European sanctions against Russia, but Mr. Orban has criticized the strategy, saying last August that the European Union was “shooting itself in the foot.” Last spring, as the separatist conflict erupted in Ukraine’s east, Mr. Orban fueled the flames by calling for more autonomy for the roughly 200,000 ethnic Hungarians in Ukraine’s west.

But the renegade Hungarian leader has also made shows of loyalty to Europe. In November, Mr. Orban described Germany as at times a “compass” for Hungary in matters of foreign policy and expressed support for Ukrainian sovereignty. Still, he said Hungary would choose its own path in relations with Russia and defend its national interests.

Mr. Putin laid a wreath Tuesday at a memorial for fallen Soviet soldiers, a cemetery that included monuments for Red Army servicemen who lost their lives in World War II but also one for those who died subduing Hungary’s 1956 uprising against Moscow’s rule.

It was a twist of fate for Mr. Orban to appear alongside a Kremlin leader there. The Hungarian prime minister made his name in politics in 1989 as a 25-year-old youth leader when he delivered a passionate plea for the end of communism in Hungary and the removal of Moscow’s troops. His fiery demand was delivered during a reburial ceremony for former Hungarian leader Imre Nagy, who was executed on the orders of Soviet authorities after the 1956 uprising.

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