Goulash and Gas

solyom070109.jpgA friend of mine sharply rebuked me the other day for not writing enough on my blog.  While I can assure you all I haven’t exactly been napping in the recliner, I will do my best to start picking up the slack while still juggling my legal workload (which lately consists several sharp knives, a hot potato, a bowling ball, and a nuclear warhead – let’s hope I don’t drop anything).  To begin with, why not revisit one of my favorite subjects:  the murky machinations of Gazprom-related business in Hungary, where the goulash state corporatism and Russia’s most cheerful barracks live on despite the ravages of the economic crisis.  Although much of this story is background for the initiated, there is some wild news about Emfesz uncovered by Roman Kupchinsky that merits discussion.

The last few times I have checked in on this story, we’ve seen the Austrian company OMV backstab the Hungarians (with Russian help) in an attempt to take over MOL, South Stream vs. Nabucco continued to roil Hungarian politics (while Russo-skeptic Viktor Orban’s party Fidesz made big advances in the EP elections), and lastly the tricksters behind the much maligned RosUkrEnergo trading company dissolved this shadowy group only to replace it with another proxy, known as RosGas.

It is difficult to overstate Hungary’s critical strategic role inRussia’s plans to influence European natural gas supply.  By luck ofgeography, the country occupies a critical doorway for the energycorridor to South Eastern Europe, sandwiched between Romania andAustria, and offering the best alternative routes to take Ukraine,Belarus, and Poland out of the picture.  Theoretically, if the South Stream is combined with the North Stream, you have in effect a Russian state controlled noose encircling the EU member states of the East, where the Kremlin can shut off the lights and cripple industry without disrupting supplies to the influential member states of Central and Western Europe.  Russia sees this area as its own stated “sphere of influence” where its preferences can be imposed, state businesses integrated and absorbed, while democracies are disrupted and replaced with loyal governments (it is entirely unclear to me why there are no democracies on Russia’s borders which maintain good relations with the Kremlin – some would say that the siloviki do not want the citizens to see positive examples of alternative models of governance). 

I will take a moment to note here that not many people believe that both Nord Stream and South Stream will be completed anytime soon, especially with their mutual problem of ballooning budgets and the better-late-than-never political awakening to the threat of supply monopoly.  Gazprom’s Alexei Miller has promised that South Stream will be online by 2015, providing Europe with 35% of its natural gas.  He even has said that the pipe will reach Serbian territory by the end of this year.  If this has happened by Jan. 1, 2010, someone please remind me and I will publish a sincere apology for my skepticism.  However, deadlines or not, the strategic beauty of these Stakhonovite pipeline projects is that Russia still wins even if they aren’t completed – the main purpose of all these announcements and foreplay is to make sure that other competing projects are not financed and are derailed.  The status quo suits Gazprom quite well.

Coming back to Hungary, the energy diplomacy is not so clear cut as Romania and Serbia (though these countries have had their problems with Russia also).  Prime Minister Ferenc Gyurcsany has formally signed onto the South Stream and has embraced Gazprom at great personal political costs in the past, though this past January tempers flared during the last Ukrainian gas war when the Hungarian PM suddenly talked about energy security and the “childish games” of those involved in the gas trade. 

In a split with the state, the Hungarian company MOL has stayed loyal to the Nabucco project, and is unlikely to be wooed back to the Russian side after the shady transaction by the Austrians to send the largest minority stake in the company to Surgut Neftegaz.  If Russian-related owners can claw away more stakes to gain majority control of MOL, then it’s all over.  As Camilla Hagelund writes in the Journal of Energy Security, “It seems particularly disturbing that Russians are gaining a say inMOL’s initiative for enhancing Central European energy security the NewEurope Transmissions System (NETS), which is intended as a mechanismfor sharing gas supplies in case of emergencies by creating a singleregional market. In other words, an initiative aimed at counteractingconsequences of Russian actions, such as the cut-off of January 2009,will now come under Russian influence. Russia is effectively jumpingpast transit countries into the heart Europe thereby increasing itsleverage over these very transit countries, particularly Ukraine.

So this all brings us back to the role in Hungary of Russia’s semi-official gas trading proxies, who for decades have controlled this trade from Swiss-based companies with as much accountability and transparency as an underground mafia casino.  According to Roman Kupchinsky’s article, an investigative piece in Vedomosti has uncovered new information about the sudden acquisition of Emfesz, Hungary’s largest independent gas supplier, for the price of $1.00 to a company called RosGas with unknown owners and a fake Swiss address.  Istvan Goczi, the CEO of Emfesz, told Vedomosti that in previous years the co-owner of RosUkrEnergo, the Ukrainian Dmytro Firtash, was paying hundreds of millions of dollars every year to cover Emfesz’s annual gas purchases directly out of RosUkrEnergo’s dividends, while sending the Hungarian profits offshore to Mabofi Holdings in Cyprus.  According to Vedomosti and Goczi, this highly controversial arrangement was allegedly not only approved by some of Gazprom’s highest ranking executives but also arranged and structured by them to avoid legal and tax complications.

Kupchinsky has also secured access to a leaked memo (of unconfirmed authenticity) which hints at a possible attempt by Gazprom to cover up the scheme, involving debts of some $1 billion from Firtash to Gazprom and the jailed mobster Semyon Mogilevich, who is currently undergoing a closed-doors trial:

In early September 2007, a meeting took place in Moscow betweenMogilevich, an unnamed prominent Russian businessman, and VladimirNekrasov, an associate of Mogilevich and his organized crime gang…Mogilevich called the meeting in order to discuss the situation inRosUkrEnergo and specifically Dmytro Firtash, the owner of 45 percentof RosUkrEnergo. Mogilevich complained that Firtash had defrauded himand Gazprom to the sum of about $1 billion and it was time to get himout of the business. He stated that Firtash had stopped paying him hisshare of the profits and his intention was to take over Firtash’sHungarian operation, Emfesz Kft …Mogilevich stated: ‘I am close toPutin and the Kremlin is very upset with Firtash and will move againsthim as well.

In short, these new reports provide the first indication of exactly how high up in the Russian government the approval and involvement in these energy corruption scandals may reach.  The quantity of graft we are talking about here is breathtaking, the geopolitics – in Hungary and beyond – affecting millions, and the possibility that so many high ranking officials may have direct financial interests in the outcomes of these kinds of important transactions is very worrying.  Hungary is one of those critical transit points where we should all be watching closely to see what comes next…

Photo: German President Hoest Kohler (C) and his Hungarian counterpart LaszloSolyom (L) attend an open-air exhibition entitled ’20 years free:Germany says thanks’ in downtown Budapest on June 27, 2009. Western andeastern European leaders celebrated the 20th anniversary of the fall ofthe Iron Curtain in Hungary today which divided the continent duringthe Cold War. The heads of state and government of a dozen Europeannations gathered in the Hungarian capital to mark the event thatpreceded the collapse of the Berlin Wall. (Getty Images)