Mol-affair: Foreign policy coup with potentially risky consequences

On May 24, Prime Minister Viktor Orbán unexpectedly, although not without preliminaries, announced: the government acquired the 21.2% stake of Russia’s Surgutneftegaz in MOL for EUR 1.88 billion. While the acquisition is a foreign-policy success for the Hungarian state, it poses risks in domestic politics and may even undermine Mol's market position.

Background: prolonged stalemate

• A few weeks before the Gyurcsány-Bajnai change of guard, in 2009 Surgut managed to acquire OMV shares above the market price after the Austrian oil company failed in its takeover bid for Mol.The Russian giant with murky shareholder background invested in the Hungarian company mainly to tap the company’s strong regional position, production potential and its role played in the Nabucco-project, i.e.,  instead of short-term business objectives, it was motivated by long-term strategic thinking.
• In 2009 Mol management successfully defended the company against the Russians, essentially resulting in a two-year stalemate: despite being the largest shareholder, Surgut failed to exercise its rights while it had no intention to exit either.
• In the past two years there’ve been regular, primarily government-level discussions looking for a solution. Based on leaked information, the Bajnai-cabinet also planned to repurchase the Surgut stake, and following the change of government minister of national development, Tamás Fellegi has been the most active leading negotiations. The Orbán-government has declared its intention to increase state assets and consolidate strategic Hungarian companies.

Foreign policy coup carrying economic and political risks

• The agreement is a foreign policy coup for the government as the Russians tried to secure Surgut's shareholder rights and the profit realised on the current transaction is not seen as genuine victory.At the diplomatic level the conclusion of the deal is all the more important because the impasse in the Mol affair got in the way of resolving other issues, such as the position of Malév, long-term gas delivery agreements and the expansion of the nuclear plant at Paks. While the current decision doesn’t necessarily constitute part of a larger package, a settlement of the above issues cannot be neatly separated one from the other.
• Since so far Surgut has been unable to influence Mol decisions, in theory the acquisition will have no immediate and direct effect on corporate strategy although, thanks to the transaction the Hungarian state became Mol's largest shareholder, not to mention that in connection to the nationalization of private pension funds the package will increase by an additional 2.4%. As a result, the government will exceed the 25% business share and thus would have to make a purchase offer to other shareholders. However, in a more likely scenario, it will put some of its shares on the market. At the same time, the government’s increased stake in the company also poses the risk that it will have a direct influence on management decisions, i.e., aside from business considerations, in the future Mol's strategy may reflect political thinking as well.
• The transaction may also have an impact on Mol's Croatian subsidiary. Following reports of the agreement, the Croatian media presented the Hungarian government’s action as something to emulate by the Croatian leadership, suggesting that strategically important INA should be protected along the lines applied by the Hungarian government in respect to Mol. Incidentally, following the  upcoming elections in Croatia Mol can expect to face strong attacks as the likely winners, the Social Democrats plan to review a number of decisions passed since 2003 by succeeding cabinets led by the right-wing HDZ, even as the first privatization agreement with Mol had been signed by an earlier left-wing government.
• According to a statement by Tamás Fellegi, the government finances the EUR 1.88 billion acquisition with unused tranches drawn from the IMF loan. Indeed, in theory the transaction does not affect the budget deficit or public debt, although this is only a question of accounting: the IMF loan will also have to be repaid in the coming years, i.e., the transaction is certain to slow the rate of public debt reduction.
• Domestically, the takeover can be communicated to the public as a success story as the largest Hungarian company has been protected from the Russians, to this day far from popular in Hungary. At the same time, the opposition can exploit the affair in its attacks of the government:
  • In the opposition camp, criticizing the government’s spending cuts LMP and MSZP can set up the amount spent on the Mol buy-back scheme against the pain suffered by broad strata of society afflicted by the cuts.
  • One year ago Fidesz had claimed time and time again that the previous governments had spent the entire IMF-loan, and now they admit financing the investment using the very same funds and discredit their own arguments promoting the need for austerity measures.
  • In the past year the government has constantly emphasized the need to break away from the IMF, yet in this instance the latest effort in the direction of regaining independence is financed with a loan from the International Monetary Fund.