Possibly the biggest question around Hungarian business in Ukraine is why there isn’t more of it.
Sharing a 137-kilometer frontier with Ukraine, relatively little of Hungary’s comparatively booming economy makes it across the border, with Hungarian direct investment totaling only $561 million – 1.3 percent of total FDI in the country – in 2015, according to Ukraine’s Ministry of Foreign Affairs.
But certain areas see a thriving Hungarian presence. The country’s west exports tens of millions of dollars worth of electricity to Hungary each year, while Hungarian contractors build factories for some of the country’s largest companies and largest foreign investors.
The Hungarian Embassy declined to provide any information or make any of its representatives available for this story.
Energy
After the start of the Russia-orchestrated war against Ukraine in 2014, the government made it a priority to wean the country off Russian gas.
Kyiv has trumpeted the move as a success in its effort to claw its way out of Russia grip. Hungarian gas supplies have played a significant role in the project, providing reverse gas flow to Ukraine since April 2013.
In 2014, Hungarian gas imports accounted for nearly half of Ukraine’s European gas imports to Ukraine, at 5.2 million cubic meters of gas each day.
In 2015, Ukraine received roughly 500 million cubic meters of gas from Hungary.
But this is a small part of the overall total that Ukraine receives from the EU, with Ukrtransgaz recording 9.7 billion cubic meters of gas coming in from Slovakia.
So why the low amount?
The gas delivery relationship between Ukraine and Hungary has been strained since the EuroMaidan Revolution. In September 2014, Hungary stopped delivering gas days after Gazprom CEO Alexei Miller visited Budapest.
Hungary restored deliveries to Ukraine after an outcry. But the relationship has sputtered, with Ukraine’s western neighbor periodically cutting off supplies, often citing a lack of payment – in spite of there being EBRD funding for Ukraine’s gas purchases from Europe.
Some accuse Russia of being behind the issue.
“I think it is exaggerated,” said Tamas Pletser, an energy analyst at Erste Bank in Budapest. “Gazprom tries somehow to include in the agreements that you cannot resell the gas to third parties, but after they’ve sold it they cannot really control it.”
Pletser added that a significant portion of the gas that transits through Hungary originates in Russia.
“The gas gets mixed in the pipes, so we never know the source for sure,” Pletser said. “Most likely it’s Russian.”
The gas element of the business would be unlikely to benefit anyone in western Ukraine. Rather, traders in Vienna or Budapest profit as the EBRD funds Naftogaz to pay higher prices for gas that often winds up being Russian anyway.
“That definitely is a big business for some traders – they buy the gas in Hungary or Austria, and then they deliver it via Hungary to Ukraine,” Pletser added.
Ukraine’s west also has a power surplus, allowing it to export electricity to Hungary.
The Burshtyn coal plant in Ivano-Frankivsk oblast has been separated from the main Ukrainian power grid since 2002. Instead, the plant has been linked to the European grid via a substation in Mukacheve.
Hungary buys around 75 percent of Burshtyn’s energy exports, with Ukraine earning around $56 million from electricity sales to the country in the first six months of 2016, according to the State Fiscal Service.
Building
The largest Hungarian companies operating in Ukraine focus on two sectors: building and banking.
Many of these businesses are concentrated in the country’s west, where proximity to Hungary and the west’s current economic dynamism are assets.
One company, Kesz, has been operating in Ukraine since 2005. Kesz was one of the main contractors for President Petro Poroshenko’s candy company Roshen in the early 2010s. Kesz built a number of factories for Roshen, including the company’s main plant in Vinnytsia.
Now, the company focuses more on working with foreign companies operating in Ukraine. Kesz will open a cable-making factory for German firm Leoni in the Ivano-Frankivsk town of Kolomyia in 2017, for example.
“Our activity is across Ukraine,” said Yurii Zinchenko, Kesz CEO. “But we work in the west partly because our clients want it, partly because of the workforce there.”
He added: “We don’t work very closely with our Hungarian parent company, but the Hungarian Embassy helps us with information, networking, with meeting international companies working in Ukraine.”
Banking
Following Ukraine’s 2014 economic collapse, OTP Bank, Ukraine’s 13th largest bank, with assets of $1.47 billion, faced many of the same problems as its Ukrainian competitors, with non-performing loans and declining deposit rates. Its Hungarian backers were not fairing much better, with more than 11 percent of the bank’s loan portfolio allegedly not being serviced – a percentage that, while normal for Ukraine, is dangerous for a Western bank.
OTP’s Ukraine branch lost $40 million in the first quarter of 2015, the financial institution’s toughest period.
But the bank now claims to have turned a corner.
“There is growing demand based on stable, well-grounded economic growth,” said OTP Deputy CEO Laszlo Bencsik at the Eastern Europe Investment Summit.
The bank’s Ukrainian operations have benefitted from the lack of confidence of the Ukrainian public in its local competitors, with OTP seeing $3.2 million in profits in the first quarter of 2016.
Correction: An earlier version of this story said that a Leoni factory had opened recently, when in fact it is scheduled to be opened in 2017. The article has been updated to reflect this error.
