THE MACROSCOPE REPORT HUNGARIAN ECONOMIC OVERVIEW Q3-Q4 2022
A Tale of Two Wars and an Energy Crisis While the physical war in Ukraine still rages on, the economic war between Russia and the West reached a more intensive and devastating stage in the late summer. In the longer run, the Western sanctions against Russia will seriously impair its economy. However, the short-term energy scarcity and the following massive increase in energy prices have put a significant burden on the economies of EU countries. A recession in the winter of 2022-2023 is hardly avoidable in the most exposed Central European countries, including Hungary. Even if the region can overcome the supply issues and secure sufficient natural gas (where the bottleneck is the most severe due to the reliance on pipeline gas imported from Russia), the price issue will have a devastating impact on energy-intensive sectors, households and the public budget. The silver lining is that most of the EU will be detached from Russian energy imports by the following winter. This is less so in the case of Hungary, something that might partly explain the country’s outlier stance vis-à-vis Russia. There is a tightrope for Hungarian politicians to walk as the country is a member of the Western political block (a member of EU and NATO, something that positions Hungary in the enemy camp from the viewpoint of Russia), while it simultaneously aims to maintain both oil and natural gas energy imports from Russia. It has also contracted a Russian partner in Rosatom for its milestone nuclear power plant development (Paks II). Consequently, Hungary is not fully committed to backing all Western sanctions, which may erode its image as a reliable partner within that camp. At the same time, the security of Russian energy shipments cannot be fully guaranteed, and it could utilize energy shipments as a weapon against Hungary. The difficulties embedded in such an awkward position severely impact the economic outlook and impose certain risks should things work out badly; nevertheless, this might also pave the way for a hefty recovery when the energy crisis eases, potentially starting as early as mid-2023.
WESTERN SANCTIONS ON RUSSIA, RUSSIAN COUNTERACTIONS As Europe is facing an energy crisis, it is worthwhile looking at how we got here. Energy prices started to increase in late summer 2021 (i.e., well before Russia launched its invasion of Ukraine) due to supply issues. On the one hand, global LNG shipments were being hoovered up by Asia (where the region experienced a fast post-COVID recovery and an increase in its energy demand; therefore, its countries were ready to pay a premium to secure LNG shipments). At the same time, Gazprom announced some temporary gas shipment problems. 1