By Kate Nwachukwu
Hungary is clearly in an inflationary period, which may be directly related to the energy crisis caused by the Russia-Ukrainian War, with inflation reaching 25.80% in February 2023, up from 26.2% in January. While prices continue to rise, Hungarian Prime Minister Viktor Orbán continues to blame the high inflation rate on “misguided EU sanctions” against Russia, despite the fact that he voted in favor of those economic measures.In this article, I will assess the economic effects that Hungary would suffer if it officially cut ties with Russia, as well address and portray the country’s economic forecast for 2023.
What do Russia and Ukraine bring to the table?
Due to the fact, that the EU relies on Russia for one-third of its gas supply, it was not surprising that one of the major consequences of Russia’s invasion of Ukraine was increasing gas and oil prices. This is because Russia and Ukraine produce 30% of the wheat, 71% of the sunflower seeds, 26% of the corn and barley, 11% of the vegetable oil consumed worldwide. Russia also supplies 85% of Hungary’s gas supply and 60% of its oil.
Hungary’s geopolitical and energy position
Hungary, being a landlocked country, is heavily dependent on Russian gas and oil because it lacks a seaport through which oil could be transported in large scales, making the country overly reliant on gas pipelines. However, even if Hungary attempted to convert its current pipelines to process oil from sources other than Russia, it would still require a significant investment as well as at least 5 years to complete the adjustments. This would cause energy prices to rise beyond their current levels, forcing private businesses to close and, ultimately, resulting in mass unemployment.
However, what would happen, if Russia decides to cut off gas, which Hungarians utilize at 1.1 million terajoules per year (4,055 kWh per capita)? The answer is simple: Hungary would face unbearable economic consequences, especially because the country would be unable to supplement the quantity of energy required for large companies and its citizens. Yet, despite the fact that EU sanctions against Russian oil and gas have visibly devastated Hungary’s economy, the country’s government continues to vehemently oppose any gas imports from countries other than Russia. This is due to the existence of the largest national oil corporation, MOL, as the government claims that MOL refineries can only refine Russian oil and that switching from Russian resources to others would take a long time and money (estimated at €100 million or more).
Moreover, in 2021, Hungary purchased gas at a higher price than it sold it to its citizens, causing the government to operate at a huge loss, while also requiring cheap Russian oil and gas, in order to maintain a price cap on energy prices. However, with the outbreak of war, the price of natural resources skyrocketed, rendering the government’s policy of low household energy prices untenable. As a result, the previous utility reduction program proposed by the government was suspended, and a new, reformed system was introduced in its place, in which the government continues to maintain the discounted price for both electricity and gas up to a fixed amount, but requiring over-users to pay market prices.
The government’s plan worked to some extent, since it was able to buy gas over the recent winter, albeit at a higher price for a lower amount. Regardless, the government was unable to meet its original target of 700 million cubic meters of gas, even though Russians appear to be capable of delivering that amount to Hungary. In addition, Hungary also requested for a temporary payment assistance due to rising prices. As a result, Russia’s Gazprom agreed to let Hungary pay a fixed sum for gas until the end of March 2023, but if gas prices continued to rise, they would have to pay in installments with interest later on.
To deal with the energy issues, Hungary spent 1.1% of its GDP (2.7 billion euros), despite of the total government debt reaching 88.8% of the GDP, and the budget deficit being 4.3 billion euros, as of February 2023. And, while Hungary continues to act internationally in favor of the Russian leadership, by claiming to prevent Russian President Vladimir Putin from being arrested as a war criminal, or by rejecting sanctions on influential figures such as Viktor Rashnikov, Pyotr Aven, and Alisher Usmanov, the relationship between Hungary and Russia still looks “sour.”
The EU and Hungary’s relationship
But if the relation between Hungary and Russian is “sour,” then with the European Union is even more bitter. In 2022, for example, the EU decided to withhold approximately €15.8 million funds promised to Hungary within the framework of the COVID-19 Recovery and Resilience Facility (RRF), citing a violation of EU principles and the country’s failure to curb corruption. Hungary has also been said to have drifted towards autocracy as the government suppressed media and freedom of speech, restricted the rights of LGBTQ+ people, and forcefully took control of the country’s justice system – all of which helped to further damage the relationship. The EU also proposed freezing €7.5 billion of funds for Hungary under the rule of law conditionality mechanism, in December 2022.While the EU has stated that it is willing to assist countries that rely on Russian oil in transitioning to alternative energy sources, Hungary appears to be uninterested.
Paks II Power Plant
On August 2022, the National Atomic Agency granted the license for the construction of the Paks II Nuclear Power Plant. Originally contracted with the Russian Federation, the expansion of this nuclear power plant was delayed following Russia’s invasion to Ukraine. Hungary additionally borrowed €10 billion from Russia to finance the €12.5 billion development, with a 4.9% interest rate being paid back by March 2022.