High stakes as Hungary eyes Russian oil ban exemption

AFP , Friday 27 May 2022

With EU leaders set to meet Monday to try to seal a sixth Russia sanctions package that includes an oil embargo, Hungarian Prime Minister Viktor Orban has mounted his latest show of defiance.

Druzhba pipeline of petroleum
The receiver station of the Druzhba pipeline of petroleum between Hungary and Russia with a memorial plate of its construction at the Duna (Danube) Refinery of Hungarian MOL Company located near the town of Szazhalombatta, about 30 km south of Budapest on May 05, 2022.


The package proposed earlier this month by the European Commission, the bloc's executive arm, requires unanimous backing from all 27 EU member states.

But the combative Orban, elected for a fourth straight term last month, has described an embargo as "a red line" and an "atomic bomb" that would destroy the central European country's economy.

Budapest -- which under Orban sought close ties to Moscow until the invasion of Ukraine -- insists a ban would spark recession, shortages and rocketing prices, and undermine Hungary's energy security.

In a letter last week, Orban told EU chief Charles Michel that bringing up the embargo at the leaders' summit would be pointless.

'Solutions before sanctions'

"Solutions must come before sanctions," said Orban, who has often been the odd-man-out in EU decision-making and currently is at loggerheads with the bloc over rule-of-law issues.

Orban has dismissed the EU's compromise offer of a short exemption of a few years, and insists that the package exempts imports through pipelines like the "Druzhba" (Friendship) which delivers the Urals crude brand that meets around 65 percent of landlocked Hungary's oil demand.

Alternatively, it wants a longer exemption and transition period of at least three and a half to four years, and at least 800 million euros ($860 million) in EU funds to re-tool refineries for non-Russian crude oil processing and boost the capacity of a pipeline to neighbouring Croatia.

Faced with the stand-off, voices abroad, including German economy minister Robert Habeck, have called for the EU to launch the embargo regardless.

"If the 26 of us consent to it, even if with the exception of Hungary, it's a path I would always support," he told German public radio.

'Big money at stake'

Some experts are sceptical about the official claims of alarm over a Russian oil ban.

"It would be difficult for the economy but not an atomic bomb," Zoltan Torok, an economist at Raiffeisen Bank in Budapest, told AFP.

"Although costly, potentially leading to some shortages, and not solvable from one day to another, it's a challenge that can be managed," he said.

Hungarian energy conglomerate MOL operates a refinery near Budapest and another in Slovakia, both considered among the EU's most modern and adaptable.

Most experts say refinery redesigns for different types of crude oil processing can often be made within six to eighteen months not many years.

In fact, Hungary's resistance more likely stems from a "windfall situation" currently enjoyed by MOL due to the war, said Tamas Pletser, an energy analyst with Erste Bank in Budapest.

Run by a close Orban ally, MOL usually bought Russian crude oil at around one to three dollars (0.90 to 2.80 euros) per barrel cheaper than Brent oil.

But due to fear of the embargo that difference is now up to 30 to 40 dollars per barrel.

"MOL is now gaining on both sides, buying cheap crude oil from Russia and selling it at a good price on the free market, it's making an estimated additional $10 million a day," Pletser told AFP.

Windfall tax

On Thursday Budapest announced a windfall tax aimed at raising 300 billion forints (760 million euros, $820 million) from "extra profit" earned by energy companies, mainly MOL.

The tax bonanza could help shore up Orban's economic campaigns like caps on petrol pumps and household utility prices, says Attila Holoda, a former state secretary under Orban and ex-MOL employee.

"The embargo refusal is only about the money: protecting MOL's profit, and indirectly windfall tax revenues," he told AFP.

Populist measures like the petrol price caps helped Orban win reelection by a landslide in April, and cheap Russian energy is seen as a cornerstone of his strategy for keeping power.

Hungary signed a long-term gas contract with Gazprom last year, and just three weeks before Russia's invasion of Ukraine Orban discussed the deal in Moscow with Russian President Vladimir Putin.

Orban has to tread a neutral line so far during the war, not blaming Putin for starting the war, and sending humanitarian aid but no weapons to Ukraine.

With Hungary depending on Russia for 85 percent of its gas its oil veto is also "because of the danger an EU gas embargo could be next which really would be an economic atomic bomb," said Zoltan Torok.

Short link: