Gas Tantrums, Episode III

Hungary, Ukraine, and the Follies of Transatlanticism

In a recent post, I related the German side of the current energy conundrum, and now, as promised, it is time to discuss the implications of the recent deal agreed upon a few days ago by Hungary and Gazprom.

First, relevant background information is required, and our story begins in post-Maidan Ukraine.

Citing Russian ‘aggression’ in the Donbass region, the government in Kiev announced in 2015 that Ukraine would no longer buy natural gas from Gazprom. Instead, it was announced that ‘European’ gas would be preferred.

If you’re asking yourself: who’s selling in Europe, especially since its gas reserves have been declining for years, this announcement translates into the following practice:

Ukraine serves as a ‘middleman’ for Russian gas that’s flowing to European customers. Right after crossing the Ukrainian-Hungarian border, the same (still technically Russian-provided) gas is turned around after a brief stint on E.U. territory and returned to Ukraine. This is called ‘reverse gas flow’, and while these practices are widely known outside western media for years, Reuters is catching up, as reported on 1 Oct. 2021:

Under the terms of a long-term supply deal with Budapest that kicked in on Friday, Gazprom will no longer ship its gas to Hungary via Ukraine, but will send it via Serbia and Austria instead.

That deprives Ukraine of transit revenues and also means it can no longer import reverse flow gas via Hungary, which it has been doing since 2015 as a way of not buying gas directly from Russia.

The authors, Natalia Zinets and Andrew Osborn, conclude their piece as follows:

The row over the gas deal has spilled into a bilateral dispute between Kyiv and Budapest, which are already at odds over the use of the Hungarian language in Ukrainian schools.

Hungary accused Ukraine of meddling, and Prime Minister Viktor Orban on Friday dismissed Ukraine’s criticism of the gas supply agreement.

Let us unpack this briefly.

Since 2015, Ukrainian energy company Naftogaz has been buying reverse gas from ‘European’ providers, by which are meant businesses incorporated in the E.U. According to a long interview with Aleksandr Onishenko, adviser to former Ukrainian president Petro Poroshenko (in office 2014-19), conducted by independent journalist Thomas Röper, the following was revealed:

Naftogaz ‘earned’ a surcharge of up to 100$ per 1,000 cubic metres of ‘European’ gas, which resulted in handsome ‘profits’ worth many billions of $ over the years. The key players behind this ‘business plan’ were, according to Onishenko, Ukraine’s new ‘best friends forever’, Amos Hochstein in his capacity as then-VP Biden’s energy advisor and Victoria ‘F*** the E.U.’ Nuland. On Naftogaz’s side, the key factor was Andrej Kobolev, in whose portfolio fell oversight over these lucrative shenanigans.

Onishenko later fell out of Poroshenko’s favour (during the latter’s power struggle with then-PM Arseni Jazenjuk) and had to leave Ukraine in 2016. After Trump became president in 2017, Mr. Hochstein too changed his job—and joined the board of Naftogaz, of all companies.

Fast-forward to early 2021. Mr. Hochstein had re-joined the U.S. government after the election of his prior benefactor and returned to the scene, this time as special advisor for energy security (read: contra NordStream 2), as reported by Russian media. His former partner, Mr. Kobolev had remained in place to ensure compliance of the Ukrainian government.

Now, on 28 April 2021, Ukrainian President Zelensky fired Mr. Kobolev, triggering the most recent iteration of the clusterf*** masquerading as U.S. policy in Eastern Europe. Andrej Kobolev has had quite a reputation, mainly due to his ‘disagreements’ with former president Poroshenko. Since he was ‘the U.S. man at Naftogaz’, however, he was virtually untouchable.

If you know about these ‘entanglements’, it is all the more surprising as to why Zelensky fired Kobolev—for the Ukrainian president must have known that the masters on the Potomac won’t stand for it (and if he didn’t anticipate it, he probably shouldn’t be running the country in the first place, isn’t it).

Even before Zelensky fired Kobolev on 28 April, U.S. Secretary of State Anthony Blinken announced, on 27 April, his intent to travel to Kiev. Calling this ‘a dumb idea’, here’s Röper’s take on this:

Joe Biden has probably been raging with anger. Zelensky wasn’t beyond reproach for Biden, because when he came into office, he wanted to take action against Poroshenko’s corrupt machinations and even worked for some time with Trump’s lawyer Giuliani…the result was the first impeachment trial against Trump, which U.S. Democrats used to prevent anyone from digging into Joe Biden’s Ukrainian past.

Zelensky then changed course and has since sworn his allegiance to Biden, but who believes a word Zelensky says after first going against his sponsor Kolomoisky [the oligarch who had been funding Zelensky’s rise to the presidency] and then temporarily working with Trump? Zelensky’s attempts to make his own policy have failed and he no longer has powerful supporters, because everyone has seen that gratitude is not his strong point.

Now, concludes Röper, Zelensky has ‘likely fallen out of favour with all powerful actors both inside Ukraine and in Washington’, in addition to have ‘personally angered Joe Biden with his dismissal of Kobolev’.

Now, if you read all of the above, we may turn to the initial issue, the Hungarian gas supply.

Take a look at the map, in particular the pipelines that connect Russia, via Ukraine, to Hungary. Remember the reverse flow gas? That works, from the Ukrainian perspective, as long as there is gas flowing through pipelines that connect Russia to Hungary.

This is no longer the case, for as of 1 October 2021, Hungary is obtaining its Russian gas via other neighbouring countries, in particular Austria (Transgas) and Serbia (South Stream).

Here’s the Russian news agency TASS on this:

Given that the import of natural gas from Hungary is through a virtual reverse [flow], there is no possibility for imports from Hungary without transit [via Ukraine]. The company confirmed that gas transit to Hungary has been interrupted since 07:00 on Friday. "No bookings for gas transit have been received, although the capacity from Ukraine to Hungary for the entire gas year (from 01 Oct. 2021 to 30 Sept. 2022) is contracted in the amount of 24.6 million cubic metres per day.

A couple of hours later, the Ukrainians confirmed the Russian version cited above.

And here, in nutshell, we are able to see and understand why the Ukrainians went ballistic: their gas supply is interrupted, which has the nasty side-effect of further compounding the financial worries of Zelensky.

The ball is now in Amos Hochstein’s court.

As far as Hungary is concerned, this move proverbially kills two birds with one stone: Ukraine’s mistreatment of its minorities is well known, which has made Orbán’s government unhappy in the past (also, Kiev isn’t singling out its Hungarian minority here). Obtaining Russian gas via other routes is a sure-fire guarantee to cause Zelensky major troubles, both domestically in terms of his dependence on the reverse flow gas for cash, as well as in terms of the Americans’ cut.

Only time will tell how this will play out.

As an aside (for later consideration), look at the map again: notice that to bypass Ukraine, Russia now as a number of options beyond NordStream 2. Hungary does virtually the same as Germany, which suggests that the U.S.-German row over the Baltic pipeline doesn’t derive exclusively from Washington’s Russophobia (doh). There’s quite certainly another story to talk about in the near future…