Russia Wins the Energy Race and Captures the Crimean Prize

The occupation Ukraine’s Crimea peninsula by unmarked Russian troops brought Russia’s energy dominance over Europe back into headlines. Europe ‘appears’ constrained in a strong response because its reliance on Russian gas. Strong economic sanctions against Russia could start a trade war, with Russian sourced gas spiking in price leading to higher European electricity and heating bills.

"Any advice on dealing with foreign energy investors?"
“So what’s the price for ‘cheap’ energy?”

The debate around potential sanctions is framed as the EU versus Russia. But this is Europe, the inter-factional fighting within Europe actually leads countries allowing Russia to walk away unmolested with the Crimea Peninsula. There is an unreported race in Europe: the energy price war. In each country this plays out differently, for those in the west of Europe it is the result of the high initial cost of shifting towards renewable energy, for those in the east, it is reliance on Russian gas.

Spain, which once offered ‘you can’t loose’ subsidies to anyone hooking up solar panels to the grid have now removed all incentives and are looking for ways to claw back previous financial commitments. From Germany, the Czech Republic to Bulgaria the standard feed-in tariff, which paid a premium on every kilowatt produced, has fallen out of favor due to consumers opening electricity bills and dying of sticker shock. Or so it seems.

The high cost of electricity in Europe is now a constant topic of discussion for European leaders. Europe has a disproportionately high priced gas and electricity system compared to the United States.  Politicians are scrambling to find ways to reduce the bill in Europe. Hungary, in the run-up to next month’s elections, has reduced electricity and gas prices by 25% over the past year. Losses for the energy providers are mounting and investments have significantly dropped. Even in the UK, the idea is floated to freeze electricity bills.

utility investments in Hungary

The energy price war is as much internal as external. The external is the low priced shale gas that has flooded the US power market. Making cleaner burning gas more feasible than coal power stations, and pushing cheap, and easily transportable coal into the European market. As the price of gas has dropped in the US, EU external dependency on imported gas has increased between 2001 and 2011 by almost 20% according to Eurostat’s dependency barometer, with Germany increasing imports by 10%. The global price of gas is relevant for Europe’s economies.

Importantly, the price war is also between Central Eastern European countries like Poland and Hungary against the perceived high priced countries of Germany and France. The drive for shale gas in Poland is an attempt to drop the price to bring the chemical and manufacturing industry from next door Germany. The recent agreement between Hungary and Russia, has Russian Rosatom building two new nuclear blocs is fueled by Hungary’s Prime Minister’s belief that nuclear in Hungary will be cheaper than heavily renewable based electricity in Western Europe. Not even the Russian invasion of the Crimea, which others compare to the Russians stomping out Hungary’s 1956 revolution, has shaken the Prime Minister’s decision – nor his support for Russia and Putin (I don’t strongly agree with this simplified comparison, but honestly, it is really disgusting that Orban doesn’t personally come out with stronger opposition to Russia and Putin’s move – this really exemplifies what kind of person and leader he is.  But I digress).

Any economic sanctions against Russia for invading the Crimea holds the potential for higher gas prices in the European market. Despite recent efforts to diversify away from Russia, the price of gas in the EU is of national economic and political importance. Voters and industry expect the cheapest energy prices possible. Economic stagnation on both sides of the Atlantic forces politicians to look at how they can cut costs, increase economic activity, and compete against each other. Lowering energy prices can be equivalent to lowering taxes, providing an economic wallop. The message is clear, Russia wins the Crimea, but Europe needs Russia’s help to compete against the US – and with each other.

Orban will choose Russia over Ukrainian Pro-European Supporters

The (r)evolution in the Ukraine is speeding towards Hungary. Prime Minister Orban in his recent trips to the Ukrainian-Hungarian border plays up his ‘commander-in-chief’ credentials just as he did in last year’s floods when he took personal control of the country’s disaster response. In this role of commander of the nation Orban portrays a deceive figure able to command his men to plug gaps in any defense. It is as close to being a military commander as Orban gets, but it is a role he relishes, soon he will need to lead his country into a real battle.

Orban gets to choose his country’s path

The Hungarian nation

As the Ukrainian situation heads towards a confrontation between the Ukraine and Russia, Orban will need to decide to sit in Putin’s camp or the EU’s camp. Whether this is a full military war, or ‘just’ an energy war, Orban will need to decide which side to support. In consideration of Orban’s revitalization of historical Hungarian figures who wrongly chose the path of dictatorship, I have no doubt he will also choose to align Hungary in the wrong camp.

The situation is fluid between the Ukraine and Russia, but what is apparent is gas will become a weapon for Russians to use against the Ukrainians. Whether this is cutting off of supplies or raising the price; the price of energy is a weapon to be used in any nation’s arsenal. Events may also be developing much further and faster in the realm of military confrontation. In either scenario, Hungary will be a key player in supporting or punishing the Ukrainian democratic movement.

If there is a cut of gas supplies or a hike in the price, Hungary can help mitigate the impact. Hungary is able to send gas to the Ukraine. Militarily, Hungary is a NATO member and in the EU, thus its military and political obligations will need to be fulfilled. Thus, in the original intent of NATO, Hungary may have to act against Russia by supporting the new Ukrainian government.

Action, in any form, to support the Ukrainian democratic forces is counter productive for Orban’s strong Russian alignment.  Politically and economically Orban relies on Russia to support his regime.  The signing of the deal with Russia for a loan to build new reactors in the country, will according to Orban, pump huge amounts of money into the country. Much of this money will go to the construction businesses already aligned with the Organ regime. The rest that ends up in state coffers can be used just as it is now, such as in selected media and state employment for supporters and family members. The all encompassing state continues its growth and control over society.

The long-term viability of the Orban regime relies on the in-flow of foreign money, but large private investors no longer touch Hungary, so the Russians, Chinese and other autocratic regime are necessary for the economic health of the country. Therefore, Orban must align himself with these political-economic systems and act both in their economic interests and as their political representation in the EU.

Russia is essential for the long-term political, social and economic control of the Orban regime. The lines have already been drawn by the Fidesz crowd: The EU is bad, manipulative and demeaning towards the Hungarian nation while Russia is a clear supporter and offers political and economic freedom to the nation. In the next few months Orban will get his chance to choose whether to stick with the EU or go with Russia and act against the Ukraine. From the Fidesz resurrection of the Horthy regime and his irredentist policies, we can see Orban continuing to move in Horthy’s nationalistic shoes, which have already been placed in front of him by right-wing supporters. Orban will choose to go with Russia. It is a stark statement to write, but at no time in the past four years of Orban’s reign is there any indication that he would choose the EU over Russia. Orban, time and time again, holds Russia up as the shining star of the East, while stating the moral and financial bankruptcy of the EU. It really isn’t a stretch of the imagination to state Hungary will align itself with Russia, it is stating the reality.