Russia splits off Hungary as it tries to halt European gas re-exports to Ukraine

By bne IntelliNews September 29, 2014

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Hungary suspended gas deliveries to Ukraine on September 25, extending Moscow's success in picking off EU states.
The move came just a day after Russia's Gazprom agreed with Budapest to boost supplies, and hours ahead of  tri-party talks on gas supplies to Ukraine that reached an interim agreement. It was also accompanied by a threat from Moscow to others re-exporting gas to Kyiv that they face being cut off.
Hungarian pipeline operator FGSZ Zrt announced in a statement  that it halted gas deliveries to Ukraine on the afternoon of September 25 for an indefinite period. The company said the move was prompted by a scheduled increase in shipments coming from the opposite direction — from Ukraine to Hungary — starting on September 26.

Russian state-owned Gazprom Russia switched off gas supplies to Ukraine in June, claiming Kyiv owes $5.3bn in unpaid bills. The likelihood that Russia will cut winter gas supplies to Europe passing through Ukraine is “over 70%”, according to Andriy Kobolev, head of Ukraine's gas pipeline monopoly Naftogaz. Hungary and Poland - and more recently Slovakia - have been sending gas bought from Russia by EU states to Ukraine on pipelines that have had their flow reversed for several months.

However, with the weather turning colder and the September 5 ceasefire in eastern Ukraine holding, Russia, Ukraine and the EU held talks on finding a solution to restart Russian gas deliveries to Ukraine on September 26. In the run up to the talks, Gazprom has been applying pressure on the countries feeding Ukraine. Poland and Slovakia have both reported reduced gas deliveries from Russia in September compared to the requested amounts.

Hungary, meanwhile, at a meeting with Gazprom on September 22 secured an agreement to boost gas deliveries. Prime Minister Viktor Orban said on September 26 that Gazprom CEO Alexei Miller agreed to increase supplies to allow Hungary to top up its storage facilities. The fear in CEE states to the west is that deliveries through Ukraine will be interrupted this winter, cutting them off as happened in 2006 and 2009.

Divide and conquer

Speaking on public radio, the PM insisted Hungary’s energy supplies cannot be jeopardised because of the Russia-Ukraine conflict. Orban said that Hungary’s natural gas stock stands close to 60% of capacity, and added that the government would speed up the purchase of further reserves. “We will need a large amount of gas to further increase the gas we have already on stock. We will get that amount, as agreed with Alexei Miller,” Orban said, according to MTI. 

The Hungarian PM has been wary of criticising Russia's actions in Ukraine through the crisis. Meanwhile, Budapest has boosted economic ties with Moscow. This year, Orban has agreed a €10bn loan from Russia to expand Hungary's Paks nuclear plant, while Hungary continues to plow ahead with preparations for its section of Gazprom's planned South Stream pipeline, despite orders from Brussels that the project must be stopped and contracts adapted to EU regulations.

Many of the CEE states that rely so heavily on Russian energy have also fought against tougher action from the EU, as well as heavyweights such as Germany, which is hungry for Russian gas and has huge investments in the country.

Kyiv, of course, protested loudly at the halt of reverse flows from Hungary. State-owned gas utility Naftogaz denied it plans any increased gas shipments to the west. "Neither European Union countries nor Ukraine should be put under political pressure through energy blackmail," the company said in a statement. It urged its "Hungarian partners to respect their contractual obligations and EU legislation." FGSZ retorted that its agreement with Naftogaz is conditional and without guarantees.

Cut off

Moscow isn't prepared to cease battling a trade it insists breaks its contracts in Hungary however. Russian Energy Minister Alexander Novak warned in comments published in the German press on September 26 that EU states which re-export gas to Ukraine could be cut off from Russian supplies.  Speaking to Handelsblatt he said: "The contracts signed [between Russia and EU clients] do not have any provisions for re-exports ... We hope that our European partners respect the past agreements. That is the only way to guarantee uninterrupted supplies."

Novak threw out the threat as he was on his way into a tri-party meeting with Ukrainian Minister of Energy and Coal Industry Yuri Prodan and EU Energy Commissioner Guenther Oettinger. The talks, long delayed, reached a preliminary agreement but there is still a lot of work to be done in hammering out the details  over the coming days and weeks, and plenty of room for hidden disputes to trip up the understandings reached. w

Without a resumption of deliveries from Gazprom, the country may not have enough gas to get through the winter without cutting consumption and buying some gas from Europe, according to recent studies.

Europe is especially keen to see the issue resolved as it will also suffer if a new deal cannot be reached. Ukraine is still shipping Russian gas to Europe via its pipelines, which transport around 80% of Russia's gas supplies to Europe. 

"They want us to freeze," Ukrainian Prime Minister Arseniy Yatsenyuk said earlier this week at the United Nations General Assembly. "This is the aim and this is another trump card in Russian hands."

Moscow is sensing it now holds the upper hand - aside from the coming heating season it looks to have achieved its ambition of a frozen conflict in eastern Ukraine while the EU's support for Ukraine has been receding. 

Adding leverage to its hand as it walks into the meeting can only improve its bargaining position. "Who was it spoke about using "divide and rule" in Europe? asks Tim Ash at Standard Bank. "Moscow appears to be using every card in its hand over Ukraine." 

Meanwhile, Orban - who has been moving further into confrontation with the EU since he secured a second landslide election win in April, including taking state control over Hungary's gas industry - appears only too willing to help the Kremlin in splitting the bloc. On top of the cut to Ukrainian deliveries from his country, the Hungarian PM also took the opportunity on September 26 to call for autonomy for Hungarian communities in western Ukraine.

While Gazprom's threats are likely to be thrown back in its face by Poland, which is a leading hawk within the EU on the Ukraine crisis, Slovakia leans the other way ( Bratislava - which like Budapest has recently secured control of the country's main importer of Russian gas - delayed opening reverse flows to Ukraine for months claiming it would break its contract with Gazprom. It finally agreed to a limited route after gaining a gas price discount from Russia and several shoves from Brussels and even the US. 

That will only further pile the pressure on Kyiv. Analysts say that if Ukraine cuts consumption by 20%-30% and Europe re-exports about 10bn cubic meters over the course of winter, then Ukraine can squeak through without buying any gas from Russia. Naftogaz says Ukraine imported 798m cm from Europe between September 1 - when Slovakia began deliveries - and September 24.

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