Country:

Hungary, European Union

Subject:

Implications of the Russian-Ukrainian gas dispute

Introduction:

The year of 2009 started with a crisis of gas supply that was more
serious than ever before. As of 6 January 2009 throughout almost two
weeks Hungary did not see any of the average 37 million cubic meters of
gas per day arriving at its territory. Not even the 2006 crisis
produced such a precedent: at that time the worst fall-out did not
exceed 57 percent. The situation thus created will hopefully prompt the
European Union as well as the Hungarian Government to undertake genuine
action both in the short and the long run. This crisis has revealed
better than ever the unilateral import dependency of the new EU Member
States, the total or partial absence of interconnections between the
networks of certain countries and the lack or insufficient degree of
appropriate crisis management mechanisms.

Analysis:

If an order of relevance was to be established among the lessons
learned the very first could be the same as it was in 2006, namely that
the exclusive dependence on Russia constitutes a serious security
policy threat for Hungary and the region. While in the EU Member States
the proportion of the average use of gas within the overall energy
consumption is only 24 percent, in the case of Hungary this rate is
more than double (42 percent). The scale of Russian gas import in the
EU-27 is 42 percent, whereas in Hungary it is 80 percent, while the gas
coming from Austria is mostly of Russian origin too. Still, it is not
Hungary in the region which is the worst off. However, due to the high
level of gas use within the overall energy consumption we could be much
more sensitively hit by the lack of import.

This situation could be improved by investments aiming at
diversification of both the sources and the routes of gas import. After
the Russian-Georgian crisis, now there is a new argument that can be
lined up in favour of constructing the Nabucco gas pipeline and in face
of eventual misgivings. The realisation of Nabucco - besides being a
symbolic outcome - could reduce to a certain extent the unilateral
dependence (while, of course, it would not completely solve the
problem). It would also establish a connection between the increasing
European demand and the stocks of resources held by the Caspian
Region.

Special attention should be paid, however, to another problem, that is
the need to complete the interconnections between the European gas
transport systems, as well as to create a common EU energy policy. All
the thinking which sees the construction of Nabucco as the sole
solution is misleading. It is only 6,5 percent of the EU's primary
energy supply that is provided by Russian gas(!). The EU's gas import
from Russia has been reduced from a level of 80 percent in 1980 to 42
percent at present and, contrary to some false suppositions, it is not
expected to increase.

The greatest problem in the European Union's gas supply is not so much
the lack of diversification of sources but the divisions among Member
States. The European gas market is dysfunctional and segmented. The old
Member States - like Germany, Italy and France - import much more
Russian gas (about 65 billion cubic meters per year) than the new
Member States together (around 40 billion cubic meters). The dependence
of the countries on Russian gas, in turn, shows the opposite picture:
the joint figure for the new EU-12 is 60 percent (for some of them it
is even 100 percent), whereas for the EU-27 this rate is 25 percent,
and for the old EU-15 it is 20 percent. The priority would obviously be
to establish a common energy market and an interconnected gas
transmission network which would significantly reduce the dependence
and vulnerability of the Central and Eastern European countries. The
common EU energy policy would be necessary also to put an end to the
blackmailing potential of the Gazprom that is based now on bilateral
agreements. (Source: P. Noel, Beyond dependence: How to deal with
Russian gas? European Council on Foreign Relations.)

Diversification of gas sources and routes could be guaranteed by the
LNG terminal in Croatia too, which could - after connecting the
Croatian and Hungarian systems in the future - provide, in similar
situations, a more stabile supply from other regions of the world.

As for the second most important conclusion we have to examine the
ability of and the possibility for the EU to act. In such cases the
European Union should act immediately. As in 2006, now too, the EU put
off taking appropriate measures, mainly because there is no legal basis
for that. While pointing at the bilateral contracts, the EU was not
willing to interfere in sorting out this issue. It is also true that
none of the Member States turned to the EU for help, nor did the Early
Warning System set up at the EU-Russia Summit of Autumn 2007 indicate
any problem, although it should call the attention of those concerned
to any threats to the security of supply. (This is the reason why the
operation of this system should be extended beyond the EU-Russia
relation to the transit countries as well.) Brussels has not braced
itself up to act until the taps were turned off, obviously thinking
that, like in 2006, the problem will be solved by itself.

At this point we should turn to the short term measures taken by the
Hungarian Government and draw the conclusions from that too. The delay
in the action of the EU is partly due to the fact that the most
interested parties, including the Hungarian Government, did not speak
up forcefully enough, either. It should be recognized that Hungary was
not hit by the crisis completely unprepared thanks to having enlarged
its storing capacities in recent years. The companies concerned acted
in a responsible way and within the limits of their room of manoeuvre
they handled the situation well. So did the system pass the exam
successfully.  However, as a result of the not entirely truthful
communication of the Government and of the absence of action the only
strategy we had, beyond exhausting our reserves, was a sort of waiting
for a wonder - notably for the conclusion of an agreement between the
Russian and the Ukrainian parties.

Although Russia demonstrated that it can hold half of Europe in check
by using its gas weapon and that it can still divide the EU Member
States through the system of bilateral agreements, the consequences of
the crisis could nevertheless turn out to be very grave for Moscow. The
level of trust in the Russian export has further deteriorated which
will presumably make the parties on the other side come up with
alternative solutions. The material losses - toppled with the financial
crisis and the enduring low level of the oil price (it has not reached
for month the level foreseen in the Russian budget) - have dealt
another heavy blow to the Russian economy and will continue to do so.
The loss of prestige of the country which less than half a year ago was
planning to build several gas pipelines (only in Europe three more
pipelines were foreseen: the North Stream and the South Stream as well
as the extension of the Blue Stream) has become so severe that more and
more observers start questioning the existence of the amount of
resources necessary for the Russian gas export. The lack of
infrastructure, technical developments and professional training gives
rise to further concerns. The Russian economy should undergo a
structural reform in order for it to become less vulnerable to the
effects of the global market. The direction of the development has long
been given: transparent involvement in the commercial and economic
transactions and agreements, ratification of the Energy Charter and
membership in the WTO.

Ukraine's international standing has declined a lot too, in the wake of
the crises. Although the EU has not yet turned away from Kyiv, the
chances of the country's integration aspirations have by all means
deteriorated as a result of the events, because the confidence in
Ukraine has been impaired too. The difficult economic situation and the
deep fall in the national currency value might lead to a domestic
political crisis which in turn could mean a U-turn from the Orange
Revolution. This could by no means be in the interest of the European
Union!

Conclusion:

In Europe a concerted thinking has begun about the possible solution
and it could gain momentum in the wake of the present situation. The
European Commission's strategic energy review published in November
2008 set out a number of forward-looking proposals, putting a special
emphasis on the construction of a southern gas corridor (especially the
Nabucco pipeline) and the interconnection between the European gas
networks (including the NETS initiative which is very important for
Hungary too). With the adoption of the climate package in December the
renewable energy resources could gain further ground. This could also
mitigate Europe's vulnerability. It is in the primary interest of
Hungary that these projects enjoy the greatest support possible and
that they become the cornerstones of a functioning and reacting common
energy policy.

It is a fundamental issue for Hungary to find alternative solutions.
One of them could be energy efficiency itself. The present Hungarian
Government has not been capable of a conceptual thinking in this field
either. Besides constructing strategic gas storages, significantly
bigger support should be provided for energy investments both from EU
and domestic resources, in accordance with a strategy with clear
objectives and a transparent support system. Hungary needs a strategy
with new foundations and clear priorities, as well as an energy policy
built on this strategy whose main feature would be a multifaceted
energy management with multiple elements.