Dec 27, 2013 | 11:09 GMT

9 mins read

Hungary's Motivation in an Energy Dispute

Hungary's Motivation in an Energy Dispute

The long-running dispute between Hungarian oil and natural gas group MOL and Croatian energy firm INA is more than a simple battle of attrition. Full control of INA is a key component in Hungarian Prime Minister Viktor Orban's plan to give his country greater latitude in the delicate balancing act it must maintain with Russia and to develop Budapest's role as an emergent leader in Central Europe.

In the cataclysm of World War I, Hungary lost a significant portion of its territory in the Pannonian Plain. Perhaps more strategically damaging, it lost direct access to the Adriatic when it was stripped of the territories that roughly correspond to modern Slovenia and Croatia.

The importance of Hungary's sea access cannot be overstated. By 1914, Hungary had invested the equivalent of nearly $4 billion to develop the coastal city of Fiume into a port that could rival Trieste, the Habsburg Empire's largest seaport. The port of Fiume was to be Budapest's gate to the Mediterranean — and thus to modern Europe. Today, Fiume is called Rijeka and is Croatia's largest port and one of the Balkans' largest oil import terminals. Trieste is firmly Italian and an established energy import hub for the country.

Map of Croatia and Hungary

Map of Croatia and Hungary

Without its Adriatic port, Hungary's only viable maritime route follows the slow and meandering course of the Danube, through Croatia, Serbia, Romania, Bulgaria, Moldova and Ukraine, emptying into the Black Sea. The realignments that followed World War I brought Hungary closer to the impoverished Balkans and deeper into the Russian sphere of influence. Hungary found itself on the eastern side of the Iron Curtain in 1946 — the final cleaving blow that sequestered Budapest from the West for nearly 50 years.

Croatia's path following World War I was markedly different from that of Hungary. After a short-lived stint as an independent nation, the country was integrated into Yugoslavia alongside a good part of the Western Balkans. Croatia went from a small province of a flourishing empire to a major constituent member of a stagnating non-aligned socialist bloc under the leadership of the Croatian patriarch Josip Broz Tito.

The break in Stalin and Tito's relationship in 1948 drove Croatia and Hungary further apart. The eventful construction of the Adria oil pipeline linking Croatia's oil terminals to the Hungarian heartland provides an illustrative example of the countries' relationship. The pipeline was first planned in 1965 yet became operational only in 1995. Moscow fended off U.S. and non-aligned movement countries' support for the Adria pipeline to force the puppet Hungarian socialist government to support the Russian Druzhba pipeline in a bid to maintain its strategic control over energy in Central Europe. The Adria pipeline had to wait until both Hungary and Croatia were freed from their respective geopolitical blocs.

After breaking out from under the control of the Soviet Union in 1989, Hungary, like many of its neighbors, immediately shifted its gaze back to the West. In less than 10 years, Budapest was negotiating its membership within the European Union — a process that culminated with Hungary's accession in 2004. After the implosion of Yugoslavia in 1991, war-torn Croatia also reoriented toward the West but struggled for two decades to stabilize its economy and undergo the painful financial and political reforms needed to be eligible for EU membership. In 2009, Croatia acceded to NATO, and it became the European Union's 28th member in 2013. After nearly a century, Zagreb and Budapest are back within the fold of a Western alliance, yet they still find themselves on diverging geopolitical currents.

Current Geopolitical Issues

Hungarian Prime Minister Viktor Orban's controversial policies frequently make European headlines, but these stories often belittle Hungary's delicate geopolitical position. On its western flank, the escalating economic and social crisis within Europe is leading Brussels to focus its attention and resources on stabilizing the eurozone core, increasingly leaving Central European countries that have not yet adopted the common currency to their own devices.

The crisis in Europe is compounded by the emergence of a more internationally active Russia, even as Moscow has been forced to deal with growing challenges at home. Unable to obtain concrete financial and security guarantees from the West since the European Union is increasingly bankrupt and the United States is focused on the Middle Eastern and East Asian theaters, Hungary has been forced into caution with regard to Russia, whose energy and investment it desperately needs. Orban's careful rapprochement with Putin has, among other deals, resulted in Hungary's support for Russia's South Stream pipeline — a project connecting Russia and south-central Europe that the European Commission has already deemed illegal in its current form. Orban is set to fly to Moscow for the second time this year to discuss issues concerning the pipeline.

While closer relations with Moscow are definitely on Orban's agenda, he is also striving to keep Hungary from falling too much under Russian influence. By concentrating as much political, legal and economic power as possible within his hands (and those of his party), Orban is giving himself maximum leverage to negotiate with Russia. A key example has been Hungary's repurchase of natural gas storage facilities from foreign companies and Budapest's plan to nationalize all utility providers in the country.

For Croatia, the choices after 1991 have been less stark. Since its opening to the West, Zagreb has continued to capitalize on Croatia's prime geographical position to develop both a very profitable tourism economy and, more strategically, jockeying to become the gateway for energy into the Balkans and Central Europe. In addition to being a substantial refiner and importer of oil, Croatia has been pushing for the construction of a liquefied natural gas import terminal next to the existing oil import terminals in Rijeka. The Adria liquefied natural gas terminal is still under consideration and likely would not be complete until 2017 at the earliest. Croatia's plans fit within the broader EU strategy of curbing member states' dependence on Russian natural gas imports, thus weakening Moscow's leverage on the region. Recently, Croatia signed a series of deals and memorandums of understanding with Qatar, the world's second-largest exporter of natural gas after Russia.

The energy and banking industries have been the centerpiece of the relatively small Hungarian-Croatian economic relationship. Trade between the two countries has slowly been growing and hovers at around half a billion euros annually. Budapest is the fourth-largest investor in Croatia, mainly because of Hungary's significant presence in the Croatian energy sector — a position it developed over the past five years.


It is within this context that the current spat between MOL and INA must be examined. MOL is Hungary's largest company and one of the main sources of revenue for the Hungarian state. It is also the largest stakeholder in INA, with a 49.1 percent share, compared to the Croatian state's 44 percent stake. The Hungarian state controls a 25 percent stake in MOL.

INA was a wholly state-controlled company until 2009, when Croatia had to privatize its energy sector as part of the EU membership application proceedings. MOL ended up buying the majority of stakes up for sale, a position it strengthened over the years. As part of the privatization agreement, INA retained conditional management control over certain parts of the company, particularly its natural gas business, as long as they were profitable. As the economic crisis in Europe continues to take its toll on energy and utility providers, the assets under INA management have been underperforming since the privatization.

Earlier this year, MOL demanded broader management powers from INA and the Croatian government. The latter responded by issuing both an Interpol and European arrest warrant for MOL's chairman and CEO, Zsolt Hernadi, in October for his involvement in a bribery case in which former Croatian Prime Minister Ivo Sanader was convicted in 2012.

In turn, MOL filed a request for arbitration with the International Center for Settlement of Investment Disputes and threatened to sell its stake in INA — after receiving authorization from the Hungarian government — either to Croatia or to any other interested party. MOL's threat to sell its stake in INA is very problematic for Croatia; the country can ill afford the several billion dollars needed to buy back its shares in INA, while so far only Moscow-controlled energy companies have shown the interest and the resources for such a purchase. Having one of Croatia's most strategic assets fall into Russian hands would be a grave step backward for Zagreb, whose policy has to remain firmly aligned with the West and the European Union in particular. On the other hand, giving control of those assets to MOL is also a less than attractive option, especially as Hungary becomes increasingly isolated from Brussels. 

However, the sale of INA shares would probably not benefit MOL either — about a quarter of MOL's revenues come from INA. Also, MOL would have a problem figuring out what to do with the cash it would generate from the sale. The Central European energy market (upstream and downstream) where MOL is most competitive is saturated and would provide no meaningful return for that magnitude of investment. Many of MOL's periodic attempts to increase its upstream presence abroad have been met with disappointment or outright failure because the company lacks the necessary experience and expertise to compete in serious international ventures. This seems to strongly suggest that MOL's threats to sell INA are mostly pressure tactics to gain an even greater hold on the Croatian company.

Hungary's True Intent

MOL's sudden renewed interest in gaining more operational control of INA takes place as Orban's government is seeking to obtain as much leverage as it can in its discussions with Russia. With full rein to operate in INA, Hungary would have a greater say in the shaping of Croatia's energy future and a wider portfolio of options as it carefully maneuvers with Russia and the European Union. Budapest wants to be able to negotiate from a position of strength in either relationship.

Should relationships with Moscow improve, Budapest could help create obstacles to the construction of energy infrastructure that would threaten Russia's dominance in the Central European natural gas market. INA is expected to be one of the Croatian companies with a combined 25 percent stake in the Adria liquefied natural gas project, a position Hungary could leverage in exchange for lower natural gas prices and other much-needed forms of economic relief from Moscow by posing as many obstacles as possible to the construction of the terminal.

However, if relations with Russia do sour or take a backseat to a more assertive European Union that is willing to have deeper involvement in Central Europe, Budapest's control of INA would enable it to expedite projects that would significantly lessen its reliance on Russian hydrocarbons and even put Hungary in a position to become a profitable energy hub for the region.

Negotiations between INA and MOL are set to reopen later this month, and Hungary's pressure is unlikely to decrease. However, we also do not expect MOL to sell its shares in INA, especially not to a Russian third party. The impasse is expected to continue in the short term, especially as Moscow's relationship with the European Union is still in question following Brussels' active involvement in the Ukrainian pro-EU and anti-Russian protests.

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