Hungarian Gas Delivery and Pricing Take on Geopolitical Implications for Ukraine

In a series of events that unfolded rapidly, on October 1, Ukraine called on the United States and Germany to impose sanctions on Russian gas company Gazprom. Shortly before that, Hungary and Gazprom had reached a long-term deal for gas shipments.

Hungary’s Minister of Foreign Affairs and Trade Péter Szijjártó trumpeted that, under the agreement, Hungary would be able to import gas at lower prices. But the deal also affects Ukraine, as Gazprom will start shipping via Serbia and Austria, bypassing the Ukrainian pipeline it previously used. Kyiv now accuses Gazprom of using energy as a weapon, given that the new deal with Hungary deprives Ukraine of substantial transit revenues.

Meanwhile, Gazprom’s prices are rising, adding to the inflation that is already burdening Europe. With the heating season closing in, residential gas consumption will start growing, while households will face significantly higher gas and electricity bills. The gravity of the situation is indicated by the sudden convening, on October 4, of the Eurozone finance ministers to discuss the deepening crisis facing not only Eurozone countries but the whole continent.

The “America First” policy advocated first by U.S. President Woodrow Wilson was revived by Donald Trump after he took office in 2017, taking unilateral actions in foreign policy, often disregarding the interests of traditional allies, including the European Union.

One of the main areas of friction between America and the EU has long been gas imports from Russia. In November 2018, U.S. Secretary of Energy Rick Perry met Szijjártó in Budapest. At the press conference after the meeting, Perry emphasized that Washington opposed “both the Nord Stream 2 and the multi-line TurkStream natural gas pipelines, both of which would extend and deepen Russia’s energy dominance in the region.”

Both TurkStream and Nord Stream pipelines aimed at bypassing the transit of Russian gas via Ukraine. North Stream 2, designed to transport gas from Russia to Germany via Denmark, was seen as especially problematic by the Trump administration. So much so that it even gained the support of the U.S. House and Senate to impose sanctions on companies involved in the construction of the two pipelines.

European politicians reacted angrily, Germany’s Foreign Minister Heiko Maas stating, “European energy policy is decided in Europe, not in the U.S. We reject external interference.”

Joint Statement

Since then, relations between the United States and the EU have softened with the advent of the Joe Biden administration. In July this year, German Chancellor Angela Merkel made her last visit to Washington before leaving office. Shortly afterward, the two countries released a joint statement, basically a compromise over the North Stream II pipeline.

The document expressed the need for both the United States and the EU to remain alert to “Russian efforts to use energy as a weapon.”

Further, “should Russia attempt to use energy as a weapon or commit further aggressive acts against Ukraine, Germany will take action at the national level and press for effective measures at the European level, including sanctions, to limit Russian export capabilities to Europe in the energy sector, including gas, and/or in other economically relevant sectors. This commitment is designed to ensure that Russia will not misuse any pipeline, including Nord Stream 2, to achieve aggressive political ends by using energy as a weapon.”

The wording of the statement may seem harsh, given that only months before, Russia and Ukraine had signed a transit deal to keep gas flowing to Western Europe. The contract would expire in 2024, but Gazprom had already signaled that it would gradually reduce the amount of gas flowing through the transit line by half between 2021 and 2024.

Until recently, Hungary was receiving its gas from Gazprom via Ukraine. On September 27, Alexey Miller, the president of Gazprom, arrived in Hungary. During his visit, an agreement was signed with MVM CEEnergy Zrt., based on which Gazprom will deliver to Hungary 4.5 billion cubic meters of gas.

Of that, 3.5 billion will arrive via Serbia and one billion via Austria, meaning the Ukrainian transit route has been excluded. Apparently, Hungary had not notified Ukraine about the deal, which, Szijjártó said, secured gas prices for residential consumers at the current level.

Ukraine reacted immediately, quickly followed by an escalation of diplomatic tensions, with the ambassadors of both countries summoned to the respective Ministries of Foreign Affairs.

Critical Situation

But what seemed to Ukraine like an unfriendly gesture from Hungary quickly turned into a critical situation: as of October 1, Gazprom shut off the gas flow to Hungary via Ukraine. This measure not only affected Ukraine’s revenues from transit agreements. Kyiv has been buying gas from Hungary, but in effect, the gas from Russia did not physically leave the territory of Ukraine.

By shutting off the gas flow to Hungary from Russia, Ukraine is now forced to buy directly from Gazprom, which represents a significant vulnerability for Kyiv, given that its country has been in conflict with Russia since the latter’s 2014 annexation of Crimea.

Ukraine is now invoking the idea of Russia “using energy as a weapon,” therefore soliciting that the United States and Germany take action, as laid down in the joint statement. As for the Hungarian-Russian gas agreement, Szijjártó said it is Hungary’s sovereign right to decide whom it makes deals with, so Ukrainian protests are unfounded.

It seems, though, that Europe is facing much bigger problems than Ukraine’s transit revenues dropping. Gas prices are soaring, and while many fingers are pointing at Gazprom, the reasons are multiple, experts say. On the one hand, industries across Europe, picking up after the pandemic lockdown, are demanding higher gas supplies. Demand is high not only in Europe but also in the Asian market, and notably in China.

The natural gas market is very hectic, and its tendencies are not linear, but instead follow the laws of complex networks and adaptive systems, says Máté Tóth, head of energy at Rátky and Partner Attorneys Law Firm (Hungary).

Tóth summarizes factors impacting the energy market right now as including rising electricity prices and

This article was first published in the Budapest Business Journal print issue of October 8, 2021.