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PP RUEHAG RUEHROV RUEHSL RUEHSR
DE RUEHUP #0030/01 0211136
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P 211136Z JAN 10
FM AMEMBASSY BUDAPEST
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C O N F I D E N T I A L SECTION 01 OF 02 BUDAPEST 000030 
 
SIPDIS 
 
STATE FOR S/CEE FOR AMB MORNINGSTAR AND REBECCA NEFF, 
EEB/ESC FOR DOUG HENGEL AND ALEX GREENSTEIN, EUR/CE FOR 
JMOORE, EUR/ERA FOR SJOHNSON, AND EUR/RUS. COMMERCE FOR 
HILLEARY SMITH. ENERGY FOR MAPICELLI AND MCOHEN. PLEASE 
PASS TO NSC JHOVENIER. 
 
E.O. 12958: DECL: 01/21/2020 
TAGS: ENRG ECON EPET PGOV RU HU
SUBJECT: GOH SOON TO ENTER SOUTH STREAM JOINT VENTURE WITH 
GAZPROM 
 
REF: A. 2009 BUDAPEST 195 
     ¶B. BUDAPEST 26 
     ¶C. 2009 BUDAPEST 843 
 
Classified By: Econ Officer Jeffrey M. Jordan, reasons 1.4 (b),(d) 
 
¶1. (C) Summary:  Hungarian officials will soon sign a set of 
agreements to establish a Russian-Hungarian joint venture to 
commence work on the feasibility study for the Hungarian 
segment of the South Stream pipeline project.  This will set 
the project in motion after nearly a year of apparent 
stagnation, which included an apparent Russian overture to 
Croatia as a potential partner, instead of Hungary.  The 
Hungarian government and main opposition party support the 
project as a means to bolster Hungary's energy security by 
diversifying the routes by which it receives gas imports. 
End Summary. 
 
RUSSO-HUNGARIAN JV TO PURSUE SOUTH STREAM 
 
¶2. (SBU) The GoH has announced that it will soon sign 
agreements with Russian energy giant Gazprom to establish a 
jointly-owned (50-50) project company, South Stream Hungary 
Zrt. (SSH), to undertake the Hungarian stretch of the South 
Stream pipeline.  The state-owned Hungarian Development Bank 
(Hungarian abbreviation MFB) will represent the GoH in the 
joint venture and MFB Chairman Janos Eros will serve as the 
Chairman of SSH for one year.  Gazprom Deputy Chairman 
Aleksander Medvedev will serve as Deputy Chairman of SSH. 
After an initial capital contribution of 5 million HUF 
(roughly $27,000), Gazprom and the MFB will increase the 
company's capital to 50 million HUF ($270,000). 
 
¶3. (SBU) SSH's primary function at this point will be to 
commission a feasibility study for the Hungarian stretch of 
the pipeline, eventually leading to a 2011 decision point on 
whether the Hungarian segment should be built.  According to 
the March 2009 Basic Cooperation Agreement between Gazprom 
and the MFB (ref A), SEPCo, a joint-venture between Gazprom 
and Hungarian energy giant MOL, will complete the study. 
Upon completion, SSH would also retain 100 percent ownership 
of the Hungarian segment of the South Stream pipeline. 
 
¶4. (SBU) MFB Chairman Eros explained to Econoff on January 15 
that MFB's primary role is to represent the Hungarian 
government's interest in South Stream.  He admitted that it 
probably would have been "more logical" for MOL to represent 
Hungary in the joint venture, given that it had already been 
tipped to do the feasibility study, but he posited that the 
GoH may have designated the MFB as the partner based on its 
probable role as a financier of the roughly $1.5 billion 
Hungarian segment.  If/when the pipeline is completed and 
ready for operation, Eros said, the government in power may 
decide to replace MFB with an energy company in the joint 
venture. 
 
PM BAJNAI CALLS A BRIEF TIME-OUT 
 
¶5. (C) Prime Minister Bajnai has indicated to us that he 
intends to pursue the project more cautiously and 
transparently than his predecessor did.  On June 12, the day 
that the Hungarian press initially reported that the signing 
would occur, the Prime Minister's Office placed a "heads-up" 
phone call to the DCM to outline the general parameters of 
the agreement.  Later in the day, however, Prime Minister 
Bajnai opted to postpone signing the documents until a 
Hungarian-Russian intergovernmental meeting scheduled for 
late January, at which Hungary will be represented by Finance 
Minister Peter Oszko.  (Note: Janos Eros expects this to take 
place on January 28 or 29.  End Note.) 
 
¶6. (C) In his January 14 introductory meeting with Ambassador 
Kounalakis (ref B), Bajnai explained that he wished to study 
the agreement further to better understand "the whole Russian 
 
BUDAPEST 00000030  002 OF 002 
 
 
position," without further elaborating any specific concerns 
about the draft agreements as such. 
 
¶7. (C) The Bajnai government, nonetheless, places importance 
on South Stream as part of its energy security strategy 
(diversification of supply routes).  Under last year's Basic 
Cooperation Agreement, Gazprom and the MFB agreed to 
establish SSH and complete the feasibility study during 2009. 
 MFB Chairman Eros told Econoff that "Gazprom is about 85 
percent responsible" for the delays in establishing SSH. 
 
¶8. (C) Of greater concern to the GoH, but probably related to 
these delays, are Gazprom's efforts to strengthen its 
position in the West Balkans and the possibility that South 
Stream could follow a route that excludes Hungary (ref C). 
Bajnai briefed the Ambassador on recent Russian moves to gain 
influence in the Croatian energy sector and then on January 
18 traveled to Zagreb to meet with Croatian Prime Minister 
Kosor to discuss, among other things, energy security. 
(Note: Following their meeting, Bajnai and Kosor announced 
that the 6.5 bcm gas interconnection between the two 
countries would be completed by the end of 2010, providing an 
eventual link to the proposed Krk Island re-gasification 
terminal.  End note.) 
 
RUSHING TO SEAL THE DEAL BEFORE ELECTIONS, DESPITE POLITICAL 
CONSENSUS 
 
¶9. (C) Despite its earlier rhetoric to the contrary, main 
opposition party Fidesz seems to agree with this approach, or 
perhaps it no longer finds South Stream a useful front on 
which to attack the current government.  Fidesz leader and 
probable future Prime Minister Viktor Orban has admitted to 
us that he would pursue a similar policy on South Stream (ref 
C), and Fidesz' studious silence on this latest announcement 
stands in stark contrast to its combative responses to 
previous such agreements. 
 
¶10. (C) Notwithstanding the likelihood of policy continuity 
on South Stream after Hungarian parliamentary elections in 
April, both sides are reportedly in a hurry to do a deal 
before then.  Daniel Kaderjak, staff assistant to 
Parliamentary Nabucco Chairman Janos Koka told econoff of 
rumors around Parliament that the Hungarians were the ones 
pushing hardest to reinvigorate the South Stream Hungary 
project.  Janos Eros, however, said that the Russians, 
despite nascent talks with Fidesz leader Orban on the issue, 
were in a hurry to sign the deal before the election. 
 
¶11. (C) Comment: Bajnai's desire to ensure the security of 
his country's future gas supply through alternative routes 
such as South Stream is understandable.  Hungary depends on 
natural gas for about 40 percent of its primary energy 
supply, 80 percent of which comes from Russia.  While 
energetically supporting the Nabucco pipeline project, 
Hungary has always been concerned that South Stream would 
move forward without it.  Even considering the long-shot that 
the pipeline will ever be built, it makes sense to retain 
good working relations with the country's most important 
energy supplier.  End Comment. 
 
 
KOUNALAKIS