Hungary's plan to nationalise E.ON is the latest instance of the Orbán administration's efforts to consolidate control over the country's energy and utilities sector. The operation is expected to cost nearly €2 billion at a time of challenging economic problems for the country, writes Stratfor.
Stratfor is a Texas-based global intelligence company.
"E.ON controls more than 65% of Hungary's natural gas storage capacity and is the largest distributor of household natural gas in the country. Hungary's plan to nationalise E.ON is the latest instance of the Orbán administration's efforts to consolidate control over the country's energy and utilities sector.
In 2009, Hungary unilaterally municipalised the shares of France's Suez Environment in a water service contract for the city of Pecs, sparking a minor diplomatic incident with Paris.
Similarly, in 2011, Hungary bought back a 21% stake of its national oil and gas company MOL from Russia's Surgutneftegaz, citing strategic concerns over the ownership of Hungary's energy supply.
Most of Hungary's population has responded positively to the repeated nationalisations in the utilities and energy sector. The moves are seen as a push back against the disadvantageous terms to which Hungary had to agree during its privatisation drive in the 1990s.
Orbán has framed his nationalisation campaign as a way to root out alleged corruption and overpricing among these multinational operations.
E.ON's nationalisation will likely give Orbán a popularity boost – something he needs after several unpopular measures (such as the nationalisation of the country's pension fund) tarnished his image at home. His party, Fidesz, is attempting to gain a significant advantage over its Socialist rivals ahead of the 2014 general elections.
The parties are in a virtual tie in the polls – a stark difference from the last elections, in which Fidesz won a two-thirds majority of parliament seats, allowing it to enact constitutional changes.
E.ON's silence on the matter indicates that the German multinational likely approves of the plan. The move fits with E.ON's drive to reduce its foreign presence and to consolidate its remaining international assets in markets with a more stable outlook – for example, by moving into Poland and out of Hungary.
However, there is some concern over how the Orbán administration plans to pay for the nationalisation. The operation is expected to cost nearly €2 billion. Some experts have pointed out that Hungary might have to use the last of its 2009 bailout reserves.
Orbán also announced a broader plan to transform Hungary's utilities sector into a nonprofit enterprise. The goal would be to provide lower utility prices for economically disadvantaged Hungarians. This populist move clearly is meant to boost Orbán's chances at re-election, but like many of his previous unorthodox plans, it could run afoul of EU regulations.
EU energy liberalisation legislation requires member countries to maintain healthy market competition in their energy sectors in order to prevent state monopolies. For example, Romania currently is privatising a significant portion of its national gas company Transgaz in order to comply with EU membership stipulations.
Hungary is doing the opposite, which could strain the already complicated relationship between Budapest and Brussels. Some of the constitutional and legislative reforms Orbán made last year, especially those concerning the independence of the judiciary and the Central Bank, continue to be points of contention between the European Union and Hungary.
Hungary, the European Union and the International Monetary Fund are engaged in negotiations over granting Budapest a credit line (essentially a bailout). Progress has been slow as the Orbán administration's unorthodox policies have prompted the Europeans to threaten to withdraw assistance.
Orbán pointed out Aug. 27 that a confrontation with the European Union and the International Monetary Fund on the upcoming budget would be unavoidable. Orbán continues to face a difficult balancing act, needing at once to increase his domestic popularity by passing sweeping populist measures, and to appear as a liberal Western leader in order to obtain the much-needed EU and International Monetary Fund bailout.
Failure to receive a bailout would have significant social and economic implications for Hungary, a nation that is already experiencing a restrictive lack of credit availability and fading foreign investment confidence.
While E.ON's nationalisation may not in itself be a cause for further disputes, the still nebulous plan to create a nonprofit and wholly state-run energy and utilities sector is likely to add to existing concerns in Brussels, further delaying a bailout."