DAS MERKEL SCENESETTER FOR BUDAPEST

C O N F I D E N T I A L BUDAPEST 000891

SIPDIS

DEPARTMENT FOR EUR DAS MERKEL AND EUR/CE JAMIE LAMORE

E.O. 12958: DECL: 09/07/2013
TAGS: PREL PGOV ENGR HU
SUBJECT: DAS MERKEL SCENESETTER FOR BUDAPEST

Classified By: Pol/Econ Counselor Eric Gaudiosi; reasons 1.4 (b and d)


1. (SBU) Welcome to Budapest. Your visit comes as the
Hungarian Government slowly re-engages following the long
summer "cucumber season" and offers an excellent opportunity
for discussion of Georgia, energy security and the way
forward on relations with Russia. While Hungary remains a
committed partner in the trans-Atlantic relationship -
providing forces in Afghanistan, Iraq, and Kosovo - its
economic problems, reform fatigue and sharp political
divisions have resulted in gridlock, while its Russian energy
dependence limits its ability to engage in foreign affairs.
Prime Minister Gyurcsany is on the defensive personally and
politically: the opposition (Fidesz) continues to press him
on all fronts, and he is increasingly embattled and isolated
even within his own socialist party(MSzP). With the
dissolution of the MSzP-Free Democrats (SzDSz) coalition last
spring, the Government is now feeling its way forward without
a Parliamentary majority and faces its most important test of
survival this fall when it presents the annual budget. As a
minority Government, its major preoccupation will be
remaining in power until the 2010 elections.



2. (C) Foreign policy issues remain largely fire-walled from
the domestic political tension, with consensus holding on
Hungary's engagement in Afghanistan - despite the recent
deaths of two bomb disposal troops in Baghlan Province - and
its recognition of Kosovo. That said, Georgia has opened a
sharp rhetorical rift between the Government's moderate
response (the Prime Minister commented publicly for the first
time on September 1; the Foreign Minister has stuck tightly
to the EU-NATO statements) and Fidesz,s strong condemnation
of Russian activities (which has engendered sharp attacks by
the Russian Ambassador here). Fidesz has also called on the
Government to suspend negotiations on the South Stream
project. On Russia, throughout the course of recent
briefings, GoH officials have changed their tune slightly
with regard to Hungary's Russia policy. Increasingly, their
approach appears to be one which admits Hungary's economic
interest in expanding business relations but which
underscores Budapest's enduring commitment to the West. This
attempt to distinguish between business partners and
strategic allies represents a new approach but not
necessarily a real change, especially when the traded
commodity is energy. Although Medvedev's comments regarding
a "privileged sphere of interest" should help focus the GoH
on the strategic challenge we face, ultimately, only
Hungary's actions will demonstrate whether this is a
rhetorical or a practical shift in its policy.


3. (C) For Hungary, energy security remains a crucial issue.
Your schedule begins with the Director of Strategy for MOL
(Hungarian Gas Company) Laszlo Varro. Over the past two
years, we have focused on positive outreach to the GOH and
MOL, offering assistance whenever possible. However, with
the GOH seemingly looking first to Moscow (and second to
Brussels) on energy issues, and with MOL promoting
Gazprom-centric projects over Nabucco, we have adopted a more
cautious approach in recent months.


4. (C) Varro likely will assure you of MOL,s commitment to
energy diversification, but we also know that MOL has been
offered access to sought-after fields in Russia if Nabucco is
undermined. Similarly, Austria's OMV recently dropped a
hostile takeover bid for MOL, but rumors of a Russian role in
the attempt continue to fuel concerns that Gazprom has its
sights set on key energy infrastructure assets. With the
right offer - and the removal of the rival OMV middleman -
MOL may find a Russian offer difficult to resist. Your visit
provides an opportunity to press Varro on his views vis-a-vis
Nabucco, South Stream and MOL,s relationship with Gazprom.


5. (SBU) Following the meeting with MOL you will have a
joint meeting with the Chairman of the Foreign Affairs
Committee, Zsolt Nemeth, and the Chairman of the European
Affairs Committee, Matyas Eorsi. Nemeth is a member of the
opposition Fidesz party and he is outspoken in his criticism
of the Government's response to Russia's actions in Georgia.
He and several members of his committee will travel to the
U.S. the week of September 15 for meetings at the Department,
to include one with you, and at the NSC. Eorsi, a member of
the SzDSz, went to Georgia a week after the Russian
intervention and provided public criticism of Russia in a
follow-on press conference as well as an article in a
Hungarian weekly.


6. (C) At the Foreign Ministry you will meet Political State
Secretary Gabor Szentivanyi and Gyorgy Gilyan, State
Secretary responsible for Russia - and reportedly their next
Ambassador to Moscow. Your trip is an important signal of
our responsiveness to their repeated desire for more
consultations to avoid "misunderstandings," and an excellent
opportunity to convey the depth and breadth of our concerns
regarding recent developments vis-a-vis Russia. In a meeting
with Ambassador Foley in July, Giljan began his overview of
Hungary's Russia policy with the frank statement that "our
focus is on implementing our interests - especially those of
our business community." Exports to Russia have increased
seven-fold within the past five years, now representing six
percent of Hungary's total export volume with an estimated
value of USD 3 billion. But Hungary's trade deficit remains
enormous given its energy dependence on Russia. Russia
supplies over eighty percent of Hungary's gas, providing
opportunities for both subtle and blatant influence on
Hungarian policy. The way forward on South Stream (SS) is a
particular concern, especially following the events in
Georgia, and we need to question their decision to continue
South Stream negotiations in light of the recent
Russian-Georgia conflict. Russian actions in Georgia
undermine the GOH,s characterization of the GOR as a
"reliable partner," Budapest,s favorite fall back in
explaining its unwillingness to oppose Moscow on energy
decisions. Szentivanyi was typically cautious in meeting
with Ambassador Foley in July, outlining Hungary's commitment
to continued engagement in Afghanistan and the Balkans but
avoiding definitive commitments on NATO enlargement.

Although he stated that Hungary believes in "no Russian
vetoes," he hastened to add that Budapest must "recognize
that this is a consensual decision" for the Alliance. In
principle, they support Membership Action Plans for both
Georgia and Ukraine, but from a foreign policy perspective
their stronger political and geographic ties to Ukraine make
an invitation to Kyiv more important. The Foreign Minister
has publicly supported the sovereignty and territorial
integrity of Georgia but believes communication with Russia
must be maintained.


7. (C) Your meeting with the Prime Minister's Foreign Policy
Advisor, Karoly Banai, offers an opportunity to address the
Hungarian/Russian relationship, in particular the South
Stream project. In an August 26 meeting with the Ambassador,
Banai commented that despite political difficulties
associated with Georgia, the GOH would still like to develop
economic relations not linked to politics. Banai stated they
are still working on SS negotiations but he has "serious
doubts" about any declaration on SS or signing any agreement
this year. Still, given this administration,s historic lack
of transparency on energy negotiations, we are concerned that
Hungary is currently negotiating a more substantive South
Stream contract, which could include murky intermediary
companies. Finance Minister Janos Veres continues to lead
South Stream negotiations for Hungary.


8. (C) Meanwhile, the Government has shown much movement but
little progress on Nabucco. The appointment of Nabucco
Ambassador Mihaly Bayer seems to have been aimed largely at
appeasing Washington and, to a lesser extent, Brussels. To
that end, Bayer has been charged with organizing a Nabucco
summit to be held in Budapest in early 2009 but has not been
empowered with more strategic decision-making authority. The
GOH should be encouraged to do more - concluding, for
example, a purchase agreement with a Central Asian supplier.


9. (SBU) We have scheduled press availability with one of the
Hungarian daily newspapers.


10. (SBU) Ambassador Foley will host a dinner on Wednesday
evening with members of the Prime Minister's Foreign Policy
Advisory Board to hear their views on energy as well as other
foreign policy issues.


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