Oil War: How Kyiv Outsmarted Hungary’s Viktor Orban

Ukraine's sanctions against the Russian company Lukoil have created a lot of noise in Hungary and Slovakia. The two central European countries are trying to maintain a more loyal course towards Russia than other EU members.

Landlocked, Hungary and Slovakia still use the Soviet Druzhba oil pipeline, which runs from Russia through Ukraine. In view of this, they were granted exceptions in the sixth sanctions package, which allowed them to exclusively continue importing Russian oil through Ukraine.

Ukraine's core position is to reduce oil consumption from Russia, which would otherwise be helping to support Russia’s economy, in turn financing its on-going war against Ukraine. At the same time, according to Hungarian Foreign Minister Péter Szijjártó, Ukraine’s new package of sanctions has led to the suspension of oil transit, which “fundamentally threatens the security of energy supply to Hungary and Slovakia.”

Slovak Prime Minister Robert Fico said: “Slovakia does not intend to be a hostage to Ukrainian-Russian relations, and the decision of the Ukrainian president means that the Slovak oil refinery Slovnaft, part of the Hungarian MOL Group, will receive 40 percent fewer oil products than it needs for processing.”

It got to the point that Fico threatened to respond to Ukraine’s alleged action of stopping transit, by ceasing the supply of Slovak-made diesel to Kyiv. This diesel equates to about 10 percent of Ukrainian consumption.

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Let’s examine what’s really happening in more detail.

Ukraine has not stopped transit

According to sources and experts interviewed by Kyiv Post, officials from Bratislava and Budapest are exaggerating. There is understood to be no shortage of oil supply, and Ukraine has neither stopped nor reduced transit.

According to Mykhailo Honchar, former deputy chairman of Ukraine’s oil transportation company Ukrtransnafta: “If Ukraine thought to do this, it would immediately warn the EU about it, following paragraph 26 of the association agreement with the EU. This did not happen, and the European Commission sided with Ukraine, simply because the amount of oil in the pipe did not decrease. Ukraine has not violated any agreements with either the EU or EU members.”

Prime Minister Denys Shmyhal stressed on the evening of July 31 that transit is taking place as agreed: “Ukraine remains a reliable transit country for all countries that value freedom and the rule of law. We are unquestioningly implementing the association agreement with the EU. This will continue in the future”.

The wrong oil: Kyiv's tricky move

The truth may lie in a circumstance that is little mentioned by all parties to the dispute. Kyiv imposed sanctions on the Russian company Lukoil, including on the transit of the company’s oil. However, the same sanctions were not imposed on two other Russian companies – Rosneft or Tatneft.

“The bottom line is that the transit network operator doesn't care whose oil goes through the pipe. It can be Lukoil, Rosneft, or even Lukoil Oil issued through another company,” Shmyhal said. “So, Ukraine does everything that needs to be done – Lukoil Oil has been replaced with other oil and it continues to flow to the EU.”

However, the devil lies in the detail. According to Kyiv Post sources, it was Lukoil's oil that generated the biggest discounts for Hungarian importers.

“This is a big discount, about 20 percent. There are also discounts on oil from other Russian companies, but not so large. The replacement of Lukoil's oil will lead to Hungary paying more than expected,” a Slovak oil trader said.

In other words, Ukraine dealt a blow to the oil transit of the company that had the most favorable agreements with Hungarian counterparties.

“The details of the contracts are closed, so it is difficult to say how much Lukoil's partners will overpay, but we are talking about hundreds of millions of dollars,” the source said.

Several experts interviewed by Kyiv Post say that, in this way, Kyiv has found a sore spot through which it is possible to put pressure on Hungarian President Viktor Orban and Fico, who are increasingly taking pro-Russian positions.

Fico strikes back

Fico's promises to cut off diesel supplies to Ukraine look intimidating because supplies from Slovakia cover more than 10 percent of Ukrainian consumption. The Armed Forces of Ukraine (AFU) also consumes a lot of diesel. But, according to Kuyun, the situation is not so problematic.

“Now we have a surplus in the market of 10-15 percent, which will cover the possible shortage from Slovakia.  In addition, we can import fuel from Poland now, the fuel market in Ukraine is diversified,” Kuyun said.

Honchar believes that there are no reasons to block supplies – transit has not stopped, and Ukraine has not violated its obligations.

“Hungary and Slovakia have their own alternative system for delivering oil from the Mediterranean region, called atria. It has long been said that it can be used, and these countries were given time until 2025 to abandon Russian supplies and finally stop financing the aggressor country. But judging by their actions and statements, they are not very eager to take this step,” Honchar noted.

Meanwhile, Shmyhal’s office reported that Ukraine is ready for consultations both with Hungary and Slovakia over the oil deal, but still – the lifting of sanctions on Russian oil is not open for discussion.