Kyiv and Brussels Weaponize Oil, Use Other Tools in Bid to Force Hungary and Slovakia into Supporting Project Ukraine 

As part of its turn at holding the rotating EU Council presidency, Hungary held a health ministers meeting on July 25. Only three EU countries (Italy, Bulgaria, and Malta) sent their ministers to the gathering to discuss cardiovascular health and organ donation.

The absences are part of the EU’s punishment of Hungarian Prime Minister Viktor Orbán for having the gall to try to save the EU from itself — by meeting with the leaders of Ukraine, Russia, China, and GOP presidential nominee Donald Trump to feel out peace options for the Ukraine war. Volodymyr Zelenskyy, who remains Ukraine’s president after canceling elections, strongly criticized Orbán for meeting with Russian President Vladimir Putin.

Next month, EU foreign ministers will skip a scheduled meeting in Hungary and meet in Brussels instead. Some EU diplomats even supported the idea of holding the meeting symbolically in non-EU Ukraine, but that is not currently on the agenda.

Orbán could likely care less about EU nation ministers skipping meetings in Budapest (as they plan to continue to do) during Hungary’s rotating presidency, but Kyiv recently cut off a sizable volume of Russian oil that flows to Hungary through Ukraine, which ups the stakes considerably.

Now Budapest is threatening to retaliate by holding up more EU funds to Kiev and cutting off electricity that flows from Hungary to Ukraine. Meanwhile, the EU is largely backing Ukraine over its own bloc member.

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In June, Kyiv decided to block the transit of pipeline crude sold by Moscow’s largest private oil firm, Lukoil, to Central Europe. Coincidentally, the two big customers on the receiving end were Hungary and Slovakia — the two EU countries opposed to the bloc’s ongoing support for the war in Ukraine.

Lukoil supplied Hungary and Slovakia with Russian crude via the southern arm of the Druzhba oil pipeline that runs through Ukraine. The EU exempted pipeline supplies of Russian oil from its sixth package of Russian sanctions passed on December 5, 2022.

Fast forward to the 11th sanctions package of June of last year: that’s when Brussels banned the transportation of oil from Russia along the northern branch of the Druzhba pipeline to Germany and Poland. Oil supplies along the southern branch of Druzhba towards Hungary were exempt, however, as the EU’s stated goal was to give Russian-reliant countries extra time to find new supplies. Kyiv is now announcing that time is up.

It’s not good news for Hungary, which relies on Russia for 70 percent of its oil imports — and Lukoil for half that amount.

The country also continues to import Russian gas via the Turkstream pipeline, and its citizens over the second half of 2023 had the lowest household electricity and gas costs in the EU.

That could now change — quickly. From Politico:

“The Ukrainian measures could create a severe situation,” Ilona Gizińska, a researcher and Hungary expert at the Centre for Eastern Studies think tank, said. She added that Hungarians could face sky-high energy prices and electricity shortages in just “weeks” unless it finds a solution.

Budapest and Moscow are reportedly working on finding alternative supply routes for Russian, but matching the cost-effectiveness of the Druzhba pipeline will obviously be hard to find.

In the meantime, there is “significant risk” for Hungarian and Slovakian refineries, according to Fitch Ratings:

These volumes primarily serve the Hungarian and Slovakian markets and, while immaterial to the overall European supply balance, could significantly impact energy supply in Hungary and Slovakia over the medium-term…

Both Hungary and Slovakia maintain strategic oil and oil-products reserves of at least 90 days’ worth of average net imports, which can be used to provide additional headroom in case of a protracted interruption of supply. MOL also maintains a very strong financial profile to help cushion the impact of a temporary interruption in access to Russian crude, but long-term solutions will be needed if the situation doesn’t ease in the near term.

So far both Slovakia and Hungary have managed to bridge this supply interruption with additional volumes from other sources, however a broader and longer-term interruption of Russian supply could pose a significant risk to refining operations and energy supply.

Slovakia is more exposed than Hungary owing to physical constraints on alternative supplies. There are also technical limitations on substituting Russian crude oil with other grades of oil, owing to the configuration of the refining systems and associated infrastructure. We do understand however that Russian crude can be shipped via waterborne vessels to other offtake points in the absence of Druzhba pipeline supplies, and affected refineries can operate on other crude grades at a reduced level of utilisation and profitability.

Other Russian producers, such as Rosneft and Tatneft, can continue to deliver crude oil along the pipeline as of now. However it is not clear whether additional sanctions on these entities will be forthcoming from Ukrainian authorities.

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Ukrainian officials are saying that part of the reason they cut Lukoil supplies off from Hungary is because Budapest does not support Ukraine enough as evidenced by, among other items, its opposition to increased weapons deliveries and Kyiv’s accession to the EU. Kyiv has not sanctioned other Russian oil firms that continue to ship crude via Ukraine, including Rosneft and Tatneft, but officials say those are coming too.

Rather than force Hungary to cave to Kyiv’s demands for more “support”, however, the opposite is happening. Hungary is now threatening to hold up EU money to Ukraine.

“As long as this issue is not resolved by Ukraine, everyone should forget about the payment of the €6.5 billion of the European Peace Facility compensation for arms transfers,” said Hungarian Foreign Minister Peter Szijjarto. He also noted how Hungary supplied 42 percent of Ukraine’s electricity in June. Slovakia, too, has been helping Ukraine with the reverse flow of gas and sending electricity to the country. Those helping hands will be withdrawn should a resolution to the Lukoil holdup prove elusive.

Hungary and Slovakia filed a complaint with the EU, which said it was “ready to negotiate.” On Saturday, an EU spokesperson downplayed the whole affair, saying that the Ukraine cutoff  would have no direct impact on the EU’s oil supply as a whole — a response that was either tone deaf or intended to send a message to Budapest.

“There is also no immediate problem for the two countries concerned,” he added. That’s because both countries have a 90-day reserve thanks to EU regulations. Lastly, he promised that the European Commission would seek a solution acceptable to all parties.

The spokesperson dodged a question regarding talk that Hungary could retaliate by cutting off its electricity supply to Ukraine by stating that there is currently no adequate information available on such a scenario.

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Among the ironies of the situation is that one of the big reasons the EU claimed it needed to stop buying oil and gas directly from Russia (they still buy it through third parties) is that Moscow would “weaponize” it. Instead it is Kyiv that is doing so, probably with a wink and a nod from Brussels.

A second irony is that the EU and the US have also been critical of Hungary for its increasingly close ties with China — ties that are only growing stronger due to the EU withholding funds from Budapest and the bloc shooting itself in the foot economically. Stunts like the one Ukraine is pulling with Brussels’ declaring it’s no big deal are only likely to increase Hungary’s ties with Russia and China.

It was reported by the Hungarian financial news site Portfolio last week that Hungary took out a three-year, floating-rate $1.1 billion loan from Chinese banks back in April. More from Euractiv:

“The one-billion-euro loan agreement with the China Development Bank, the Export-Import Bank of China and the Hungarian branch of the Bank of China Limited will finance infrastructure and energy development, among other projects,” the agency told AFP in a statement.

The borrowing came just eight days after the government announced that it was postponing a significant amount of public investments against a backdrop of sluggish growth and withheld EU funds.

Brussels has frozen around 20 billion euros in EU funds over the Central European country’s backsliding on the bloc’s standards. Hungary’s deficit now stands at 4.5% of GDP, above the bloc’s three percent limit. In June, the European Commission opened the way for an “excessive deficit procedure” against Hungary…

On the issue of Hungary’s “backsliding on the bloc’s standards,” Brussels makes a lot of noise about the rule of law, but really it’s about supporting the anti-democratic, mostly lawless Ukraine in the West’s proxy war against Russia. In circles that believe the true mission of the EU is to advance towards some liberal utopia there have long been grumblings about Hungary’s divergence from that goal due to Orbán’s conservative nationalism.

Orbán, who led Hungary from 1998-2002 and has been prime minister since 2010, has frequently clashed not only with EU liberals but also with foreign investors in the banking, media, and energy sectors. At the same time, his governments also paved the way for transnational manufacturing corporations – especially German ones. As Bloomberg puts it, “German companies have long treated Hungary like their backyard. Carmakers Mercedes Benz AG and BMW AG and Volkswagen AG’s Audi continue to expand their footprint, driving the country’s exports, while weapons producer Rheinmetall AG is building a handful of new factories.”

So German companies might get hurt yet again in the service of Ukraine if Kyiv continues cutting off Russian energy to Hungary. Orbán, likely playing to industrial bigwigs in Germany, brought up on Saturday the strong possibility that the US is the culprit behind the destruction of the Nord Stream pipelines. From The Kyiv Post:

Addressing an audience at a camp in Baile Tusnad, Romania, Orbán chastised Europe for heeding Washington’s demands. He said that Europe has left behind its own interests, claiming that sanctions have damaged Europe while high energy prices harm the economy.

“The fact that we are silent about the undermining of the Nord Stream gas pipeline, that Germany itself is silent about the obvious act of terrorism carried out under American leadership against its property, and that we do not investigate, do not try to find out, and do not raise this issue legally (…) is nothing but an act of humility [sic],” Orbán said.

Last year after Orbán called the US a “main adversary” in a political strategy session, the CIA labeled it “an escalation of the level of anti-American rhetoric in his discourse.” Will Langley consider his latest on Nord Stream another escalation, and if so, what will that mean?

The US embassy in Budapest already engages in blatant acts to undermine Orbán like posting the following video quiz:

In recent weeks, several senior Hungarian government figures and government-funded commentators have made harsh anti-Western and anti-American statements. Hungary and the United States are Allies. As Russian aggression threatens us all, we must stand together, not move apart. pic.twitter.com/lG1Rmi74tc

— U.S. Embassy Budapest (@usembbudapest) October 17, 2022

The US also excluded Hungary from its past few “Democracy Summits,” and the US sanctioned the Russian-controlled International Investment Bank (IBB) in Budapest last year; Hungary was forced to withdraw one day later.  The chairman of the influential Senate Foreign Relations Committee is now calling for imposing sanctions on Hungarian officials and removing the country from a favorable visa regime to punish Orbán for “weakening NATO unity.”

Back in Brussels, the European Commission just released its latest “Rule of Law” report and is once again going after Hungary (as well as Slovakia and, somewhat surprisingly, Italy). That likely means that will again be an excuse to hold up funds for Hungary until it adequately supports Ukraine. It’s all quite the turn of events from a mere five years ago.

As recently as August 2019, then-German Chancellor Angela Merkel praised how EU funds were spent in Hungary: ‘If we look at Hungarian economic growth rates, we can see that this money has been well invested by the country, that it benefits the people, and Germany is happy to be able to participate in this growth by creating jobs in Hungary.’

Merkel was key to holding the “rule of law” disputes at bay and keeping Orbán and German manufacturers happy. She brokered a deal in 2020 that kicked the can down the road and temporarily unblocked EU pandemic funds to Hungary. As political economist and Orbán foe Gabor Scheiring notes, a few days later, the Hungarian government announced it would cover 30 percent of the cost of a new Mercedes car plant in Hungary. The very same week, the Orbán government said it would build a factory manufacturing German Lynx tanks, continuing Budapest’s enthusiastic purchases of German military exports under Orbán. Scheiring adds:

Besides showering them with money, Orbán’s government also invests heavily into maintaining excellent connections with influential German business circles. Klaus Mangold, a former top manager of Daimler, is a crucial ally of Orbán. Guenther Oettinger — a CDU member — also plays a crucial role in German-Hungarian business diplomacy. Nominated by the government, he recently became the co-chair of Hungary’s new National Science Policy Council.

Members of European People’s Party (EPP) — the chief political instrument of European economic elites and the party of Ursula von der Leyen and Donald Tusk — had long helped shield Orbán from more forceful measures, likely because of his friendliness towards just enough transnational corporations.

The EU’s accommodating attitude began to change in 2022, however. Merkel was gone as the crisis manager, the war in Ukraine took precedence over all else, and the Commission began withholding billions in euros from Hungary – money it used earlier this year to bribe Orbán into relenting on held up funds for Project Ukraine. It looks like we’ll now likely get a sequel to that whole affair.