SCENE-SETTER FOR ASSISTANT SECRETARY FRIED'S VISIT

UNCLAS BUDAPEST 001096

SIPDIS

SIPDIS

DEPARTMENT FOR EUR A/S FRIED AND NCE

E.O. 12958: N/A
TAGS: PREL PGOV KDEM HU
SUBJECT: SCENE-SETTER FOR ASSISTANT SECRETARY FRIED'S VISIT
TO HUNGARY JULY 11 - 12


1. (U) Embassy Budapest warmly welcomes the visit of A/S
Fried to Hungary.

SUMMER OF NO LOVE LOST


2. (SBU) Your trip comes at the beginning of the summer
"cucumber season," and an exhausted Gyurcsany government is
taking a much-needed (if not particularly well-deserved)
break after a year characterized by inertia in the domestic
reform agenda and drift - often toward Moscow - in foreign
policy. The PM is on the defensive personally and
politically: the opposition continues to press him on all
fronts, and he is increasingly embattled within the coalition
and isolated even within his own MSZP. Although a single
rival has yet to emerge, Gyurcsany's poll numbers remain
mired at 20% and his departure has become a possibility.
Hungarians inside the government and out are tired of
Gyurcsany's high-handed but unfocused approach, and his
government is being criticized for combining the mistakes of
a novice government with the exhaustion of a lame duck
administration.


3. (SBU) This has been particularly evident in foreign
affairs, where Gyurcsany's comments on key issues including
Energy Security and Missile Defense have been ambiguous at
best. His tendency to extemporize on foreign policy has been
compounded by a dysfunctional bureaucracy and, we hear from
multiple sources, the unwillingness of their embassy in
Washington to report bad news. The result has been a
government that often appears to be a "neutral ally."

FIDESZ: SAYING NO ... BUT MAKING EYES


4. (SBU) By contrast, FIDESZ is working hard to repair its
relationship with us. Whether through calculation or
conviction, they have aligned themselves with us on key
issues. While other and more moderate voices are being heard
within FIDESZ, it is still Orban's party. Although he has no
immediate constitutional means to force Gyurcsany from
office, he clearly senses the government's vulnerability on
foreign policy and is playing the transatlantic card to the
hilt. We recommend that you meet with FIDESZ
representatives, both to support our active but non-partisan
approach and to build multipartisan consensus on foreign
policy. We're in touch with Orban's staff regarding a
potential meeting, but want to be sure that the scheduling
does not poison the well for your session with Gyurcsany.

GETTING ATTENTION


5. (SBU) Although insiders tell us the PM rarely focuses on
foreign or security affairs - and then usually to view the
issues through the prism of domestic political calculation -
we believe we now have his attention. His first reaction
(as always) has been to blame others, but the personal
intervention of Tom Lantos and Charles Gati has made the PM
aware that he has a serious problem. He knows that we are
looking for clear statements and clearer actions, and the
challenge now will be getting him to focus on strategic
rather than just tactical concerns.

GETTING RESULTS


6. (SBU) We believe he is making an effort to do so. The
GoH has announced a slight increase in defense spending to
signal their commitment to NATO and the transatlantic
relationship, and the MOD has been aggressively pressing its
bid to host the C-17s of NATO Strategic Airlift Consortium at
Papa Air Base. Gyurcsany will travel to Russia again later
this summer for a "Finno-Ugric Cultural Summit," but is
considering a stop in Tallinn to offset the optics of his
meeting with Putin (and the Finnish President). He made his
first appearance at our July 4th reception this week as a
clear signal of his desire to mend fences with us.


7. He has also engaged personally to contest the ongoing
effort of Austria's OMV - likely fronting for Moscow - to buy
out the Hungarian oil company MOL. MOL stock has skyrocketed
in the past week, potentially ruining the economics of the
takeover bid, but we suspect the takeover bid is motivated by
more than economic advantage. The government is also
considering legislation to introduce a review system for
foreign acquisition of strategic industries akin to our CFIUS
regulations. We are standing by to support them in this
regard, and will need to increase the level and frequency of
our engagement in order to match Russia's activism.


8. (SBU) Poland's PKN Orlen is a potential white knight, but
Warsaw is extremely mistrustful of Budapest and could drive a
hard bargain politically and economically re any cooperation.
Significantly, the government and the opposition here are

cooperating in MOL's defense: both understand that the loss
of MOL would be an irreversible defeat, and all appreciate
our active engagement. We are working to arrange a meeting
with MOL CEO Zsolt Hernadi and, time permitting, a session
with Janos Koka, the young, intense, and Western-oriented
Minister of Economy and SZDSZ party president, who has been
the GoH's leading voice on Nabucco and on transparency. He
has pushed Gyurcsany hard on these issues, using his small
party's asymetric leverage within the coalition to maximum
effect, but has also emphasized to us the importance of
"making the relationship with Gyurcsany work."

KEEPING IN TOUCH


9. (SBU) Gyurcsany has repeatedly appealed to us for
enhanced consultations to avoid further "misperceptions."
Rightly or wrongly, Hungarians perceive our level of
engagement declining, and your visit - well-timed to review
the Kennebunkport meetings and the way forward on Kosovo -
will help ensure that they have no pretext to question our
commitment or our policy.


10. (SBU) The PM is also taking steps to improve
coordination within and without, taking on highly-regarded
diplomat Karoly Banai as his Foreign Policy Advisor. (Banai
has been at pains to emphasize his commitment to the
transatlantic relationship, pledging to "never surprise and
always deliver." He has also asked to get together with you
on the margins of your one-on-one with Gyurcsany.) FM Goncz
will be out of the country during your visit but has been
living on borrowed time for months; many expect a change at
the MFA by year's end. Speaking of changes, our contacts
throughout the GoH are looking forward to Ferenc Somogyi's
arrival in Washington, commenting that it ensures an embassy
that "conveys guidance faithfully and reports reaction
factually."


11. (SBU) We have confirmed appointments with Somogyi and
with MFA State Secretary Laszlo Varkonyi, who holds the
Americas account (and will want to focus on the bilateral
relationship, Afghanistan, and Cuba),as well as a meeting
with Ivan Udvardi, the MFA PolDir (who will be primarily
interested in Russia and Kosovo). We are also working to
pull together a meeting with Parliamentarians from the
Foreign Affairs and European Affairs committees, although the
summer vacation season has depleted their ranks. At a
minimum, we have you scheduled to meet with Matyas Eorsi, the
SZDSZ parliamentary faction leader and chairman of the
European Affairs Committee. There will be positive issues to
discuss throughout your meetings, including Hungary's
leadership of a PRT in Afghanistan, their participation in
the NATO Training Mission in Iraq (NTM-I),and their cautious
engagement to promote a democratic transition in Cuba. There
will also be frequent references to what Gyurcsany calls the
"evergreen issue" of the Visa Waiver Program.

SEASONAL AFFECTIVE DISORDER ... ALL YEAR-ROUND


12. (SBU) The high coefficient of friction has left the
average Hungarian "grumbling all the way to Lake Balaton."
Although the macroeconomic indicators have by and large held
steady and the financial community continues to focus on the
stability of the forint and the signal successes in reducing
the deficit, there are serious concerns regarding both
competitiveness and transparency. Hungary is also losing
ground relative to its neighbors. Politically, opinion
leaders tell us they are "always pessimistic ... but finally
correct" in their concern over the extent of Hungary's
integration into the transatlantic community, the maturity of
its parties, and the flexibility of its institutions. Our
challenge is to convince them that the process - and the
promise - you will recall so well from the 80s and 90s has
not ended. This will be a key theme of your meeting with
local think-tankers and your media round table on the morning
of July 12.


13. (U) We look forward to welcoming you in person.


FOLEY