The Energy Lie that Moscow Sold Europe

According to a handwritten note posted online by Hungary’s Prime Minister Viktor Orbán, President Donald Trump was “very angry” at Ukraine last month. The cause of the president’s ire was a Ukrainian strike on the only Russian pipeline still delivering oil to its remaining Eastern European customers: Slovakia and Hungary. But the impact of Ukraine’s strike goes beyond the dent it put in Moscow’s war chest. It also served as a wake-up call to European countries still clinging to the myth of cheap Russian energy and a warning as to the cost of continuing to do so.

Confusingly, only a few weeks later, the President lambasted European allies for buying Russian oil, calling the practice “shocking” and promising “major sanctions” on Russia if the practice stops. President Trump himself was also an early critic of Europe’s energy ties with Russia, calling Germany “a captive to Russia” when it resisted his calls to scrap the Nord Stream 2 pipeline project.

At times, it is not easy to parse the administration’s policy on Russian energy exports. If Russia is a threat to European security and US interests in Europe, then putting pressure on its main customers is justified. Yet, that makes the administration’s free passes—and even expressions of support—to Hungary and Slovakia puzzling. What is even more dumbfounding is the discussion about American oil companies possibly returning to Russia, bringing with them technological cooperation that would facilitate Russia’s full participation in the world’s liquefied natural gas (LNG) markets. These mixed signals create consternation for US allies aiming to support Kyiv and provide opportunities for Russia to fund its war efforts.

If Russia is a threat to European security and US interests in Europe, then putting pressure on its main customers is justified.

For Russia, fossil fuel sales have accounted for 30–50 percent of its budget revenue over the past decade and are thus central to its war against Ukraine. While Western sanctions and the EU’s (incomplete) decoupling from Russian sources have not stopped the trade in Russian fossil fuels completely, they have eaten into the profits the Kremlin derives from its extractive industries. For one, the sanctioned oil being sold to customers such as China and India is sold at steep discounts. Russia would rather sell oil cheaply than sell none at all, but it longs for the day when it can peddle full-price energy on the global market. And while some European countries continue to buy Russian LNG, its liquefaction and maritime transport are reducing the Russian margins compared to transporting natural gas (in gaseous state) via pipelines. A strong ruble, the low price of oil, and Ukrainian strikes have dramatically reduced the profits of key Russian oil companies in the first half of this year, putting pressure on Russian public finances.

If the collective goal of the United States and its European allies is to dissuade Russia from pursuing its war effort by depriving it of its fossil fuel revenue, we ought to welcome disruptions to Russian oil and gas infrastructure, whether or not they are inflicted by Ukrainian drones. We should seek to increase the costs of Russian maritime transport by cracking down on its shadow fleet and maritime insurance providers and keeping Russia away from Western technologies that would make drilling, natural gas liquefaction, and other operations more cost-efficient.

Slovak and Hungarian leaders claim that cutting their energy ties to Russia would lead to substantial hardship. According to Hungary’s Foreign Minister Péter Szijjártó, such decoupling would mean that households would end up paying “two, three, or four times as much for utilities as they have done so far.” To be fair, an immediate switch to alternatives to Russian fuels, as implemented by several European countries after Russia’s full-scale invasion in 2022, was neither easy nor cost-free. However, even in the heyday of Europe’s energy ties to Russia, Russian fossil fuels were not the only or even the cheapest way of providing for Europe’s energy needs—and they are even less so today.

At its peak around the time of the completion of the Nord Stream pipeline in 2017, Russian natural gas accounted for some 37 percent of all European demand. As Mike Fulwood of the Oxford Institute of Energy Studies shows, this economic relationship was never about low prices. Initially, Russian natural gas prices were indexed to oil prices, making them significantly higher than the traded benchmark prices (or “hub prices”), which tied the prices of Russian natural gas to European supply and demand.

At its peak around the time of the completion of the Nord Stream pipeline in 2017, Russian natural gas accounted for some 37 percent of all European demand.

In fact, this pricing, together with price discrimination between different European customers and restrictions on reselling gas, led the European Commission to launch an investigation, somewhat reluctantly, into uncompetitive practices by Gazprom, Russia’s state-owned energy company. Such coercive methods were shelved in 2017 when Gazprom was forced by European regulators to abide by hub pricing. “Russian gas was priced,” Fulwood notes, “largely at the same as other sources of gas, whether pipeline or LNG, and so was neither cheaper nor dearer.”

As a result, Gazprom’s profits peaked in the early 2010s, fell, and never recovered—mainly because of European pressure to abandon its bullying methods of dividing and conquering European markets. Once the most profitable Russian company, Gazprom did not even make it to the country’s top 100 in 2023.

While Russian gas was not inherently cheap, its pipeline infrastructure, much of which dated back to the Soviet era, meant that it could be transported to European customers at a low cost. Yet, most of those savings were captured by Gazprom itself and the Russian state, particularly before the advent of hub pricing. Thanks to hub pricing, numerous interconnectors built between European countries in recent years, and the rising price linkages between Europe and Asia, Europe is at far less risk of being hooked on Russian natural gas again.

Yet, most of those savings were captured by Gazprom itself and the Russian state, particularly before the advent of hub pricing.

Why are the Hungarian and the Slovak governments making such a fuss about the prospect of being cut off from Russian supplies? Contrary to Szijjártó’s extravagant claims, hub pricing means that the two small economies are not saving anything by buying Russian pipeline gas. In fact, last year, Slovakia had some of the highest industrial prices of natural gas in the entire EU—higher than Germany, Denmark, or the Netherlands—despite continuing to buy from Russia. Bulgaria, which stopped buying Russian natural gas practically overnight in April 2022, has the lowest industrial price of natural gas in the EU.

Robert Fico’s government in Slovakia, meanwhile, has rolled out a system of expensive subsidies—worth hundreds of millions of euros—to shield households from the impact of higher gas prices. He even redirected some EU funds away from investment projects toward the scheme. This summer, Slovakia attempted to block the EU’s 18th sanctions package, seeking an exemption from the EU’s plan to require member states to end imports of natural gas from Russia by the end of 2027. While Fico eventually relented, he is now threatening to sue the European Commission for any costs Slovakia might incur for breaking its current contract with Gazprom.

Yet, it is Gazprom that has found itself repeatedly in breach of contract since the full-scale invasion. In the neighboring Czech Republic, the energy company ČEZ has been awarded damages in its arbitration case against Gazprom over reduced supplies in 2022.

Hungary and Slovakia’s intransigence is thus not about the substantive merits of continuing to buy Russian pipeline gas, now brought by the TurkStream pipeline (transiting neighbors like Bulgaria, which collects some of the transit fees). Instead, it is political. Continuing the commercial relationship with Moscow enables the two governments to mobilize their supporters against Ukraine and the EU as the culprits of their countries’ energy insecurity and high energy prices. This deflects blame from Hungary’s and Slovakia’s governments, each in power for the better half of the past two decades.

Continuing the commercial relationship with Moscow enables the two governments to mobilize their supporters against Ukraine and the EU as the culprits of their countries’ energy insecurity and high energy prices.

Working with Russia also creates returns that may not be offered by Western partners. Because pipeline gas and oil are delivered at a low cost, the Russians might offer local authorities in transit countries, like Slovakia and Hungary, a sliver of the revenue, either directly through transit fees or in less transparent ways.

Hungary’s oil company MOL and MOL’s Slovak subsidiary Slovnaft count among the two countries’ most profitable corporations and maintain close connections to each other’s governments. Slovnaft’s CEO Oszkar Világi, for example, is a close friend of Orbán and is involved in his soccer diplomacy—purchasing soccer clubs in ethnic Hungarian areas of nearby countries. Moreover, Hungarian purchases of Russian natural gas were channeled for a number of years through an intermediary, MET Ltd., an opaque company under Russian and Hungarian ownership with connections to Vladimir Putin’s regime and Orbán’s inner circle. More recently, MET has also been involved in supplying gas to Transnistria, an internationally unrecognized Russian breakaway state in Moldova.

While some stubborn customers of Russian energy remain in Europe, larger trends, including the damage to Russian pipeline infrastructure, the existing oil sanctions, the EU’s scrutiny of its gas market, and the proliferation of interconnectors between European countries, militate against the Kremlin’s ability to capitalize on its oil and gas industry. A coherent US policy that seeks to deprive the Kremlin of resources used to fund its war of aggression against Ukraine is impossible to square with any form of normalization of the business relations that once tied the Russian oil and gas industry to the West. Moreover, such policy cannot turn a blind eye to the cozy nexus of relationships that exists in the heart of Europe between local oil and gas monopolies and their Russian patrons.

Dalibor Rohac is a senior fellow at the American Enterprise Institute in Washington, DC.  Follow him on X at @DaliborRohac.