RWE to slash Hungarian investment in face of "virtual expropriation"

By bne IntelliNews March 25, 2013

bne -

RWE plans to slash investment in Hungary by 50% this year, a senior company official said late last week, citing the government's "completely unacceptable" policy moves. The German utility is the second major foreign investor to suggest in as many weeks unhappiness is turning to fear as Fidesz tightens its grip on the levers of power ahead of elections next year.

Speaking at a conference in Prague on March 21, Martin Herrmann, CEO of RWE Transgas, put the blame on the Budapest's recent measures, and voiced hope that the European Union would put an end to what he saw as a violation of its regulations.

"What is happening in Hungary is unprecedented and completely unacceptable," Herrmann said, according to MTI. Suggesting other companies could follow suit, he insisted investors "can not invest in such an environment that de facto you are very close to being expropriated."

The Hungarian government has forced energy distributors to pay special crisis taxes and new infrastructure taxes since it came to power in 2010. Starting in January, the regulator cut tariffs by 10%, and it has been suggested that another 20% trim is in the works before next year's elections.

Those price cuts are part of Prime Minister Viktor Orban's professed target to make energy distribution to households a "non-profit" business. The government has also introduced legislation insisting that gas storage and distribution assets must be owned by the state, thus putting the government in charge of potentially lucrative negotiations over gas imports with Russia's Gazprom.

Orban made his most openly aggressive threat to the energy sector on March 22, as he spoke on public radio. "These service providers have joined forces against Hungarian families, turned to court and are collaborating against those from whom they are making a living," he thundered. "These service providers are making a living from us. Since the privatisation they have booked hundreds of billions of forints in profits."

"I do want to co-operate with the service providers but the basis to our co-operation is that now we cut retail tariffs by 10% and will carry out further reductions," he added. "And if there is no co-operation we will forcefully lower tariffs further to below the European average."

RWE's compatriot E.ON agreed to sell the state its gas assets late last year. Meanwhile, the government said in a March 22 decree ordering the purchase, that MOL is set to sell it 51% in its gas storage company MMBF. The deal ensures that the state can guarantee the lowest possible price for households even in winter, allowing it to lower utility prices, the development

ministry said.

While MOL is partly state-owned Hungarian company - and therefore has few options to leave - as RWE's claim shows, others are increasingly coming to the realization that Orban and friends are unwilling to listen to words of caution from anyone, including the likes of the EU. That appears to have them reconsidering earlier assessments that they could ride out a few bumps; turning instead to a view that the small Hungarian market may simply not be worth so much trouble.

With the constitutional changes forced past objections from Brussels and Washington earlier this month, the sole remaining shackle on the government's "unorthodox" policy appears to be the high level of foreign currency debt in the country. After many months of pushing for easing of monetary policy, Orban's architect of economic policy, former economy minister Gyorgy Matolcsy took over as head of the central bank on March 4, and stands ready to cut rates further, once the forex debt issue is solved.

The battered banks were already hit hard on that issue once in 2011, and are increasingly nervous of what may happen this time around. For the first time, on March 12, one of the major European groups that dominate Hungary's banking sector admitted it could cut and run.

The CEO of Italy's biggest bank, Intesa Sanpaolo, became the first to break rank on March 12, suggesting the lender could cut its presence in Hungary, which he said has turned into a "nightmare" for the financial services sector. His words came as Orban called for Hungary to nationalise "at least 50%" of the banking sector.

"It's an unhealthy situation that foreigners have such a high degree of ownership in Hungary's banking system," the PM told a conference. "While respecting international treaties and relevant economic norms, we must strive to increase the Hungarian ownership ratio within the Hungarian banking system. The government has a target number - we would like at least 50% of the Hungarian banking system to be in Hungarian hands."

RWE holds a majority stake in electricity distributor Elmu-Emasz and the Matra Power plant, while on the gas market it holds minority stakes in distributors Fogaz and Tigaz. Reports in mid-March said RWE has agreed to sell its 45% stake in Tigaz to majority shareholder ENI, due to increased losses expected at the unit due to the tariff cut.

According to, investment in Hungary's energy sector dropped from HUF247bn in 2010 to below HUF150bn last year.

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