Identifier
Created
Classification
Origin
07BUDAPEST1350
2007-08-17 14:27:00
SECRET
Embassy Budapest
Cable title:  

HUNGARIAN FOREIGN POLICY DRIFTING TO THE EAST

Tags:  ENRG ECON HU 
pdf how-to read a cable
VZCZCXRO3223
RR RUEHAG RUEHROV
DE RUEHUP #1350/01 2291427
ZNY SSSSS ZZH
R 171427Z AUG 07
FM AMEMBASSY BUDAPEST
TO RUEHC/SECSTATE WASHDC 1764
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHMO/AMEMBASSY MOSCOW 0612
RUEHKV/AMEMBASSY KYIV 0078
RUEHKB/AMEMBASSY BAKU 0106
S E C R E T SECTION 01 OF 03 BUDAPEST 001350 

SIPDIS

SIPDIS

EUR FOR A/S FRIED, DAS BRYZA AND NCE

E.O. 12958: DECL: 08/10/2017
TAGS: ENRG ECON HU
SUBJECT: HUNGARIAN FOREIGN POLICY DRIFTING TO THE EAST

REF: A. BUDAPEST 01190

B. BUDAPEST 01140

C. BUDAPEST 00666

Classified By: P/E COUNSELOR ERIC V. GAUDIOSI; REASONS 1.4 (B) AND (D)

S E C R E T SECTION 01 OF 03 BUDAPEST 001350

SIPDIS

SIPDIS

EUR FOR A/S FRIED, DAS BRYZA AND NCE

E.O. 12958: DECL: 08/10/2017
TAGS: ENRG ECON HU
SUBJECT: HUNGARIAN FOREIGN POLICY DRIFTING TO THE EAST

REF: A. BUDAPEST 01190

B. BUDAPEST 01140

C. BUDAPEST 00666

Classified By: P/E COUNSELOR ERIC V. GAUDIOSI; REASONS 1.4 (B) AND (D)


1. SUMMARY: In over a month since PM Gyurcsany's pledge to
demonstrate his commitment to the Transatlantic relationship,
the GoH's actions continue to give us cause for concern
regarding a drift to the east in its policy. Gyurcsany's
recent travel to Russia and Ukraine -- in both cases
featuring discussion of energy cooperation - and his
statements regarding an "emerging Russia," reflect a
different perception of strategic advantage and strategic
risk. Hungarian officials overemphasize the economic
advantages of commercial ties with Russia, and we suspect
Budapest's elite business circle -- many of whom seek to
establish or expand their presence in Russia (and Ukraine) -
favor a closer relationship with Russia, leading the GoH to
proclaim its "Western values" even as it pursues its
perceived eastern interests. In short: the PM can no longer
claim that he has not heard our message, but we cannot yet
say that he is listening intently. END SUMMARY.

MISSING THE POINT


2. (S) In his July 10 meeting with EUR A/S Daniel Fried, PM
Gyurcsany said he had "missed" the strategic challenge posed
by Russia's "growing assertiveness" but underscored his
"unequivocal commitment" to "serving our common values." He
stated explicitly that "we don't need to play games: we are
on the same side." (ref B)


3. (S) Yet less than 10 days later, Gyurcsany met with Putin
in a late-night airport bilateral on the margins of a
"Finno-Ugric Summit" to discuss economic cooperation, energy
and Kosovo (ref A). In what was Gyurcsany's third
face-to-face meeting with Putin over the past year, he agreed
to convene a bilateral Joint Economic Committee in Budapest
on September 18. (Note: Post notes that September 18 is the
Monday following Minister Koka's September 14 Nabucco
Conference, a conference to which the GoH may invite Russian
representatives.)


4. (S) And roughly ten days after his Putin meeting,
Gyurcsany announced on July 30 that he is prepared to sign an
agreement with Ukraine for one billion cubic meters (bcm) of

gas storage. The PM claimed to represent the interests of
state-owned electricity company MVM, but industry insiders
have suggested the storage would benefit directly Emfesz,
which plans to build an enormous 2400 MW gas-powered plant on
the Hungarian side of the border. Emfesz's parent company --
RosUkrEnergo -- is owned half by Russian organized
crime-linked Ukrainian businessman Dmitry Firtash and half by
Gazprom.

THE EASIER WRONG


5. (C) Gyurcsany and others in his government also seem to
magnify the importance of Russian-Hungarian trade relations,
often suggesting that the relationship is symbiotic. As one
might expect, however, Hungary actually suffers a huge trade
deficit vis-a-vis Russia, with agricultural exports failing
to balance out energy imports. At the same time
underestimating the value of top investors like Germany, the
Netherlands and Austria. According to the Investment and
Trade Development Authority of Hungary, the cumulated FDI of
those three countries from 1990-2004 accounted for 29, 20 and
11 percent, respectively, of foreign investment in Hungary.
Similarly, Hungary's Central Statistics Office reported this
month that Hungary-EU trade accounted for 81 percent of
Hungary's exports and 73 percent of its imports. Though the
black market undoubtedly plays a large role in
Hungarian-Russian trade relations, thus inflating officially
reported figures, much of the GoH's focus on Russian trade
seems rooted in a comfort with old networks -- both personal
and commercial.


6. (C) For many Hungarian industries -- banking and
construction, for example -- the competitive advantage lies
in expanding East, with a focus on Russia and the Ukraine and
without the perceived strings Western investors attach with
respect to transparency. Center-left daily Vilaggazdasag has
noted that "as a number of Hungarian industrial companies are
preparing to expand their markets in Russia, some backing
from the government might do them good." For example:

-- In late June, local property magnate Sandor Demjan -- who

BUDAPEST 00001350 002 OF 003


is known to have the PM's ear -- signed an agreement with the
governor of St. Petersburg that will make his company
TriGranit the largest real estate developer in Russia's
second largest city. The St. Petersburg deal will be in
addition to TriGranit's existing projects under its
partnership with Gazprominvest.

-- Similarly, OTP Bank CEO Sandor Csanyi -- whose business
interests in Hungary span agriculture, viticulture and
energy, in addition to banking -- has invested in Russia,
with the purchase of Investerbank in June 2006, and in
Ukraine, where he announced in the days surrounding
Gyurcsany's recent visit (ref A) that OTP would build more
than 300 branches by 2010.

-- The richest member of Hungary's Parliament and a leading
player in the country's energy sector, MSZP MP
Laszlo Kapolyi - not incidentally the chair of the
legislature's sub-committee on energy - accompanied Gyurcsany
to his latest meeting with Putin. Opposition sources allege
that Kapolyi is among the leading proponents of the Ukraine
deal, which they charge will provide gas to a power plant he
plans to build in eastern Hungary.

-- Finally, even MOL CEO Zsolt Hernadi, despite cries of
Russian involvement in OMV's takeover attempt, has forged
strong ties with Gazprom, cooperating on the feasibility
study for the Blue Stream extension and inviting the Russian
company's cooperation in the strategic gas storage facility
MOL will build for the GoH. With Hungary's leading business
and opinion makers seeking their fortunes in the east,
perhaps we should be unsurprised that Gyurcsany would take
his cues from the private sector, where he made his own
fortune.

DESPERATELY SEEKING . . . SOMETHING


7. (C) Gyurcsany's private questions as to "who the hell
would want to rely on Russia" contrast with his public
comments. His recent statements on Hungary's role in the
Euro-Atlantic community -- themselves a welcome departure
from his long silence on this front but a curious statement
from an EU member -- lack the personal enthusiasm so evident
in his remarks on the "new Russia." Addressing the Hungarian
Ambassadors and the diplomatic corps on July 30, the PM
emphasized the dynamism of the "emerging Russia,"
underscoring its lack of dependence on foreign investment and
describing what he perceives as an historic shift of power
from the West and toward the East.


8. (C) There is also, we sense, something more personal.
Gyurcsany has returned repeatedly to the issue of Putin's
popularity, including a reference in his July 30 remarks that
"Russian women are begging Putin to stay." Under Putin's
doubtless careful management of their relationship, Gyurcsany
has been made to feel welcome -- something he has not been on
the European circuit given his domestic baggage and what one
Western Ambassador here described as a woeful lack of
preparation for high-level meetings. Although upcoming
meetings with Merkel, Sarkozy, and Prodi may help address
this sense of isolation, Gyurcsany may also have come to see
Putin as many things he himself is not -- secure in his
domestic position and "confident" in his international
acions.

"WESTERN VALUES" ... AND EASTERN INTERESTS


9. (S) COMMENT: Over a year of effort including direct
outreach to the Prime Minister, we have made clear our hope
that Hungary will "find its voice" - and reaffirm its place -
in the West. As one Western Ambassador here commented, with
its long-standing political, social and economic ties to
Hungary, Russia seems intent on winning the race for "most
favored" status in Hungarian foreign policy. Despite
Moscow's considerable historical baggage, it is often the
perception of second class treatment from the EU15 (as well
as perceived double-standard that allows other European
states to pursue deals with Moscow) that rankles Hungarians
most. As a result, one contact has commented that Hungary is
"officially part of the EU." But an ambivalent part, and
this conflict has left the door open for Putin. Gyurcsany
and others continue to assert that the problem is one of
communication (as he has done with his reform agenda),but
even his recent statements reaffirming Hungary's alignment
have emphasized "Western values" ... while making clear
Hungary's attachment to what it regards as its eastern
interests. END COMMENT.


BUDAPEST 00001350 003 OF 003


FOLEY