1.7 billion dollars – this is the amount the former Soviet Union owed the Hungarian Government as of the spring of 1994. At the then prevailing exchange rate, this amount was equivalent to 180 billion Hungarian forints, and its collection is associated with one of the largest political and economic scandals of the past decade – the so-termed Oilgate Case. According to the Opposition of the time, it was entrepreneurs close to the Hungarian Socialist Party and their companies that took advantage of their political and personal connections to make a financial profit out of this debt. Although Fidesz, who made the case public at that time, promised an itemized accounting and the full clearing up of the process when it took over the Government, it has not yet taken place so far. Although the activities of Nádor ‘95 Rt., one of the participants, are under investigation by a parliament committee, what happened to these 180 billion Forints still remains a mystery. This report consisting of three parts is the final result of our study of publicly available documents and the nearly fifty background interviews we have conducted with players affected by this case. First, we describe the process lasting until the middle of the nineties that led to the accumulation of the debt, and the steps governments made collect this amount.

On 6 March 1995, Monday, Gyula Horn was welcomed by a dense fog at Moscow Sheremetyevo Airport. When the Hungarian Prime Minister stepped out of the plane, he only saw one man standing next to the runway instead of the usual guard of honour and reception committee: Viktor Chernomirdin, his Russian colleague. Its reason was that due to the horrible weather, the Russian delegation waiting for the populous Hungarian deputation was unable to arrive at Sheremetyevo from Vnukovo Airport where the Hungarians should have landed according to the original plans. However, after this brusquely performed welcome, everything went in line with the scenario. The Hungarian mission arrived at Kremlin at the same time with the Russians, where official welcome took place at last, and then the plenary session began. “It was a beautiful room with carved white furniture”, recalled a participant of the negotiations. In the way accustomed to in international diplomacy, the delegations were sitting on the two sides of a long table covered with green cloth, with mineral water and candy in front of them.

The Russian Prime Minister “outlined a long-spanning historical treatise” in which he primarily mentioned the friendship of Russians and Hungarians and their mutual interdependence. As members of the Hungarian delegation remember, Horn, who did not like lengthy welcome speeches, took advantage of a pause of breath to politely but very firmly interrupt his Russian colleague thanking him for the kind words but it is high time to talk about specific things. Next, he put a list of more than ten items on the table, including the touchy question of decomposing the Russian national debt. “Although there were some problems among the ones raised by the Hungarians at which it was apparent that Chernomirdin had no idea what Horn was talking about, but the issue of the national debt was not among them”, said an expert participating in the negotiations. According to recollections, Chernomirdin nodded to indicate his knowledge of the point: hardly a year before, it was him who signed the agreement with the Hungarian Prime Minister Péter Boross in which Russia admitted its debt of more than 1.7 billion dollars and which specified the method of payment. However, for almost a year since then, nothing noteworthy happened concerning the settlement of this debt. The nod of the Russian Prime Minister meant politically that the decomposition of the Russian national debt might start in practice as well.

Air Show

Various Government bodies, committees and negotiating delegations had been struggling over the way the Russian Government should pay back its debts. Although the two Governments entered an agreement in November 1992 on the repayment of the debt, they were unable to perform a simple multiplication for a long time. Its essence would have been to convert the outstanding debt of 1.8 billion transferable rubles to dollars using the mutually specified multiplier of 0.92 (see the part titled Debt, History for more details). The performance of the seemingly simple operation was mainly hindered by the fact that Hungarians insisted on immediate cash payment saying “the Russians have already eaten the salami without paying its value”, while Russians considered a payment term of at least ten years and did not even want to hear about cash payment. There were different opinions on the amount of interest payable upon the debt as well: Hungarians would have charged three percents more than the London interbank offered rate (LIBOR), while Russians insisted on the two-percent interest rate standard in COMECON.

Negotiations at expert level were further hindered by the chaotic situations then prevailing in Russian government offices. According to one of our sources, at this time, “only we went to Moscow because the employees of the Russian Ministry of Foreign Trade were so much anxious for their jobs that they were afraid of leaving their offices.” According to recollections, the parties to the negotiations stopped going out to have dinner together at that time, “they brought some sandwiches to the meetings at most.” The Russians were unable to get accustomed to the rules of new times; therefore they kept calling the Hungarians comrades for which they apologized all the time.

The situation was further complicated by the fact that the Russians offered nothing but military technology products, and they firmly rejected to settle their debts with the shipment of energy carriers (crude oil, natural gas) that were vitally important for the Hungarian economy. The Russian military industrial lobby did not care at all about the complications related to accounting and conversion because, according to our sources, they were interested in keeping the enormous military industrial capacity of the former Soviet Union alive with various purchase orders for as long as possible. In this situation, even shipping goods to reduce the national debt would have been acceptable for those concerned. According to one of our sources who participated in the negotiations, the Russian party offered all products “ranging from tanks to coffee grinders” that were in connection with military industry in any way.

Finally, it was the Hungarian Government that finally made concessions in the situation becoming increasingly tense, and at an inter-governmental committee meeting in December 1992, it accepted the offer that MiG-29 (Fulcrum) airplanes were to be shipped to the Hungarian armed forces – at a value of 800 million dollars set in the agreement entered into a month earlier (see the part titled Debt, History for more details). The planes were taken from the factory by Russian pilots; according to one of our informants, its reason was that the Russian party would have been under replacement obligation in the event they had crashed on their way. According to a ministry memorandum got into the possession of our paper, these airplanes arrived all right in 1993 and 1994. However, the currency and the exchange rate of this settlement still remains a mystery because the books of the National Bank of Hungary (MNB) kept a record of the debt in transferable rubles, while they calculated in dollars with the Russian supplier whereas the Russian Government continued not to admit its debt in dollars officially.

Hunting Season

This act took place only on 1 April 1994, at Viktor Chernomirdin’s aforementioned negotiations in Budapest. The Russian Prime Minister’s visit did not lack symbolic elements: he arrived at the same time when the Minister of Foreign Affairs, Géza Jeszenszky, submitted Hungary’s formal admission application to the European Union, which provided a favourable negotiation situation with the Russians. Chernomirdin arbitrarily lengthened its visit, originally planned for two days, with a day so that “(…) the issues of the two countries’ economic cooperation could be discussed with the Hungarian Prime Minister more deeply and thoroughly.” (Magyar Hírlap, 6 April 1994) According to our sources, the two Premiers did it during a shooting organized in Telki. At any rate, Péter Boross and Viktor Chernomirdin left the table after performing the multiplication that had been due for one and a half years.

Pursuant to the agreement, the exact amount of the Russian national debt became 1.703 billion American dollars, and the interest rate became an annual 3.5 percents, payable from 1 January 1994. At the same time, the Russian party undertook to fully settle this debt within three years, until the end of 1997. However, the Boross-Chernomirdin agreement continued to exclude the settlement of the debt with cash, oil or gas. They only stipulated that the settlement shall take place “(…) with the shipment of military technology, participation of Russian organizations in the building of objects to be constructed in the territory of the Hungarian Republic, the shipment of machine industry products, non-commercial services, and the handover of properties and property rights of the Russian party in the territory of the Russian Federation to the Hungarian party in the person of authorized organizations.”

According to our sources, it was due to the persistent lobbying of one engineer-entrepreneur called Ottó Hujber that the agreement contained last two options as well. He became a main hero in later stages of the story because he was firmly convinced that “the military technology shipped by the Russians is nothing more than rusty iron, and the deepening of economic relations on the account of the debt would serve the interests of the two countries better.” To our knowledge, at a reception held at the Government Residence in the Buda hills, the entrepreneur explained in fluent Russian the mutual benefits of the Hungarians’ participation in Russian privatization, then he handed over a folder containing the concepts of Hungarian entrepreneurs relating thereto.

Otto Engine

Ottó Hujber had already been motivated by the issue of the Russian national debt to Hungary for at least two years. The railway engineer graduated in Moscow made business mainly in the territory of the former Soviet Union: having privatized the Budapest Tool Machine Factory, his company called Intertraverz Rt. was among the few foreign businesses that supplied the Siberian sites of Russian oil companies with machinery, equipment, moreover, often food as well. Hujber, who had comprehensive market knowledge, and who even became a member to the Club of Russian Oil and Gas Industrialists, soon realized the significance that for under-capitalized Hungarian businesses, this debt “offered a once in a lifetime opportunity to concrete themselves into vitally important Russian industries still before the arrival of foreign multi-nationals.” And when in the autumn of 1992, he read in the newspaper that the Russians are willing to pay only with military technology, he made up his mind to act.

He visited one of his former colleagues at the Hungarian Railways, who was organizing the entrepreneurial section of the Hungarian Socialist Party (MSZP), and with the participation of the Socialist Member of the Parliament, Béla Katona, he managed to gain admittance to Béla Kádár, the Minister of Foreign Trade at that time. The parties “had a very merry conversation” during the meeting, but the Minister of Foreign Trade “was sceptical as to anything else than military technology can be received from the Russians in exchange of their debt.” Nevertheless as a result of the meeting, Hujber received a letter of credence with the signature of Béla Kádár, which authorized him to conduct negotiations in Russia on the utilization of the national debt. (To our knowledge, such letters of credence were received by other people as well, including – among others – Gábor Széles, the President of Ikarus Rt., as well as – according to the 16 December 1995 issue of the Heti Világgazdaság magazine – András Patkó, President of the American company called HFT, later playing an important role in the Oilgate case.)

In possession of the letter of credence, Hujber started organizing at full blast. First, he established a social organization under the name of Eastern Markets Society Association (TKPE) – also playing an important role in the further stages of the history. On 26 October 1993, the Association started its inaugural meeting with the participation of almost all large enterprises having interests in Russian markets in some form. Among others, founding members were Sasad Rt., MÁV Transped Rt., Bábolna Rt. and Mol Rt. Apart from them, the Entrepreneurial Section of MSZP was also admitted as member. Ottó Hujber was elected president of the Association, who said the following in his speech according to the minutes on the inaugural meeting: “This period of history is one in which Central Eastern Europe and Russia rediscover each other. Both parties have understood who are their natural allies. Russia have understood that the West does not know and understand them. On our part, we understood that the West is not grateful for anything.” The Association’s Deed of Foundation set the preservation of remaining economic relations and the research for new markets as main goal. At the inaugural meeting even proposals were made for specific projects, such as the creation of the Northeast Hungarian economic zone, the Hungarian-Ukrainian metallurgy cooperation, and the foundation of a Russian-Hungarian joint bank.

As a second step, on 1 December 1993, Hunga-Rus Rt. was established with a capital of two hundred million forints to implement grandiose projects, in the 99.5-percent ownership of Intertraverz Rt. and 0.5-percent ownership of TKPE. According to the Deeds of Foundation, the company’s “profile is basically wholesale activity. We founded Hunga-Rus Rt. when we thought that the Russian national debt will be given in one sum to an investment company that unites all the companies affected by privatization we thought that Hungarian companies bidding for the Russian companies to be privatized in connection with their national debt will charge Hunga-Rus Rt. with administration.” The use of conditional mood proved to be a wise foresight because the company realized very few of these goals. Nevertheless, several ideas were recorded at the time of foundation (such as the establishment of a strategic crude oil storage capacity, purchase of combine harvesters and agricultural machinery, acquisition of railway goods wagons, and acquisition of share in opencast coal mines in Russia), which were later realized – although by different companies.

Inter-Department

Hujber handed over these proposals in a leather-bound folder to Viktor Chernomirdin at the reception held in late March 1994. Apart from that, the two men have already met each other several times in Russia, in the Club of Russian Oil and Gas Industrialists, since previously, the Russian Prime Minister used to be the President of the Gazprom gas industry enterprise. However, no response to the proposals came for a long time, although the Russian Prime Minister, in his own way, later sent a message to his Hungarian partners from home. When he arrived home from the negotiations, he held an exclusive press conference for Hungarian journalists in Moscow where he caused a general surprise when he stated, “(…) with such a government, we can realize what we have just signed. I do not wish to interfere with domestic matters, but I note that it would be good if the current situation continued. Based on our experiences, every change would cause years to pass when the relations gain momentum.” (Magyar Hírlap, 6 April 1994)

Viktor Chernomirdin did not prove to be a bad prophet because after the clean sweep of the Hungarian Socialist Party at the 1994 elections, the process of debt payment practically came to a standstill in spite of the signed agreement. However, Ottó Hujber did not give up: as one of our sources from the Ministry of Finance appointed at that time told us: “we hardly arrived at József nádor tér when he called by phone” to ask the assistance of the financial Government to establish the joint bank and to prepare the acquisition of Russian property for Hungarian companies. At the time of the Boross-government, it was even talked about that Hunga-Rus Rt. would purchase the debt, which shrank to about 900 million dollars after the shipment of the MiG 29-s, from the Hungarian Government. Based on the preliminary offer of the Ministry of Finance (PM), the purchase price would have been 40 to 60 percent of the original value. According to minutes of TKPE meetings, Ottó Hujber would have preferred the discount price of 40 percent, but the transaction was taken off the agenda around the change of the Government, and although the entrepreneur wanted to revive his idea after the elections, he could not find any favourable reception because at Government level, they were examining how they can nominate two commissioners – a military and a civil one – to conduct the decomposition of the national debt. To our knowledge, Hujber was invited to be the commissioner responsible for the shipment of civil goods, but later he did not receive this position.

Its reason was that in the end of September 1994, the Government decided that instead of the positions of commissioner, they create an inter-departmental committee with one member delegated from each of the ministries affected by the decomposition of the debt (Ministry of Industry and Commerce, Ministry of Finance, Ministry of Agriculture, Ministry of Transport, Communication and Water Management, Ministry of Interior, and Ministry of Defence). The prevailing Minister of Industry and Commerce became the Chairperson of the committee, and the political state secretary of the Ministry of Finance became his deputy. The Government Regulation also contained that “(…) the delegate of the business sphere recommended by the Chairperson of the inter-departmental committee” may also participate in the committee’s work. This was announced by the Minister of Industry and Commerce László Pál at the general assembly of TKPE on 22 September, but according to the minutes, he did not mention that business sphere was to be represented by Ottó Hujber in the committee. The excuse of Pál’s “forgetfulness” could be that he was going to leave for Moscow within two days to fuse new life into the stopped settlement of the debt.

Pál’s ways

The negotiations of the Minister of Interior resulted in a decisive turn because it turned out within a short time that Hungarian companies have approximately as much chance to obtain property in Russia in exchange of the debt “as if they wanted to buy land on the Moon.” It is because the Russian privatization law did not allow anyone to obtain property without cash, practically in exchange of a promissory note. The general practice was that buyers decided the ownership of a property item by way of a bidding process. On the other hand, there was no legislative provision that Hungarian companies can receive cash from the Russian Government to use it in bidding. Although, according to our sources participating in the negotiations, the Russian party liked the idea, but “the mechanism could not be put together in such a way” that it would be in harmony with all legislative provisions, and the Russians did not dare to bear the odium of the legislative amendment due to its consequences in internal politics.

With this, the parties practically arrived back from where they started before the Boross-Chernomirdin meeting: the shipment of military technology remained the only way of paying back the debt. Thus, from the factory in Yoshkar Ola in the Marial Republic, the Hungarian army would have received S-300 anti-aircraft missile systems in exchange of the debt, which is even capable to shoot SCUD missiles. This possibility, however, according to our sources, was not very attractive to the Hungarian Government, on the one hand because the supreme command did not want to take over any more Russian weapon systems – due to Hungary’s planned joining to the NATO – and on the other hand because the Government budget would have no direct revenues from the shipment of weapons, and the country was already in a deepening financial crisis.

László Pál, conducting the negotiations in fluent Russian, without interpreter all along, began “tricking on how to reconcile Hungarian budgetary interests with the objectives of Russian employment policy.” First, he inquired the Russian Defence Ministry on what weapons received from them could be resold to third parties because “the Hungarian budget needed cash.” When, however, according to our sources, it turned out that the Russians would not issue re-exporting licence for any weapon, the Minister of Industry changed his strategy and proposed for the military industry struggling with employment problems to manufacture goods for civil purposes that can be capitalized later. By the end of the negotiations, this concept was also adopted by the Russian Ministry of Finance, thus – although no specific agreement succeeded to be signed with the Russian partner – László Pál, when arrived home, could announce that a move forward was managed to be realized in the issue of the Russian national debt of 900 million dollars (Magyar Hírlap, 30 September 1994).

The Rostov Conqueror

In spite of the high-sounding announcement, nothing took place for half a year. Although the inter-departmental committee was formed in the autumn of 1994 and it had two meetings, the only thing that happened was that on the proposal of László Pál, Minister of Industry, Ottó Hujber was delegated to the committee as representative of the business sphere. At this time, the entrepreneur was the chairman of the Entrepreneurial Section of the Hungarian Socialist Party as well. These meetings did not provide any other tangible results, and according to our sources, the participant only “fabricated ideas” at that time.

The most promising concept – throwing the press of the time into a fever – seemed to be that the Russian underground railway company would have bored the tunnels necessary for the planned 4^th underground line in exchange of the national debt. However this solution was not supported by the Municipal Government – with reference to the interests of the Hungarian construction industry –, as well as the idea had several opponents within the Government. As opposed to László Pál, certain members of the Government feared that in the event the Russian budget meets problems, Hungarians would have to pay the Russian tunnel boring workers arriving in Budapest. According to a regular participant of the Government meetings of the time, “we expelled underground.”

In the meantime, entrepreneurs grouping together in TKPE also manufactured ideas. In January 1995, Ottó Hujber also told publicly that the entrepreneurs would purchase the debt at fifty-percent discount price, and would pay the purchase price to the central budget during six years under a delayed payment scheme. They would be willing to pay an annual interest of 3.5 percents, but they requested two years of grace for payment. According to the concept of the association, buyers would provide deposit and a first-class bank guarantee before the transaction to the Government.

However, these concepts continued to be realizeed on paper only since Russian partners “did not take the slightest notice” until the Hungarian Prime Minister’s visit in the spring of 1995. The value of Viktor Chernomirdin’s nod in Kremlin is characterized the best by the interplay that happened during Gyula Horn’s visit to Rostov. Initially, the Hungarian Prime Minister took a trip to Rostov because he had he graduated there and his former university awarded him with the title of honorary doctor. However, during his trip, he found time to visit Rosselmash, largest factory of the city, manufacturing agricultural machinery. In his book titled “Those nineties”, published last year, Horn writes on this visit that he was amazed on the method this factory was privatized without the involvement of operating capital. However, this amazement did not prevent the Hungarian Prime Minister to conclude an agreement straight away concerning the manufacturing of one thousand “DON” agricultural combine harvesters on the credit of the Russian national debt. Practically, this was the beginning of paying the Russian national debt with civil goods.

For the first time, it was in 1986 that the balance of Soviet-Hungarian goods relations indicated excess towards the Hungarian partner. Until then, the Hungarian economy, traditionally shipping machine industry products and food in exchange of energy carriers (mainly crude oil), mostly was a debtor of the Soviet Union. The crude oil value of each product was calculated at a fixed SUR/HUF (ruble/forint) rate. However, when the world market price of crude oil started to fall in the middle of the eighties, the settlement system used until then was overturned. The ruble price of crude oil also started to decrease, resulting in the reverse of the former process: the Soviet Union should have shipped increasingly more crude oil in exchange of Hungarian goods, but it was unwilling to do so. According to an expert interviewed by us, “… oil could be sold in the world market for dollars. The end of the situation was that they did not deliver even the quantity allocated in annual agreements.” For this reason, the trade deficit kept growing from 1986, and in the beginning of the nineties, the books of the National Bank recorded a Soviet debt of nearly two billion rubles, while the Government Budget paid the value of the shipments to Hungarian companies.

It is for this reason that late at night on 21 March 1990, the Minister of Economy Tamás Beck headed for the Soviet embassy located in Népköztársaság útja. He arranged a meeting at ten o’clock with Stepan Sitaryan, his partner staying in Budapest, since they did not manage to sign the exchange of goods minutes for 1990, although more than two months had passed from the year. During the long decades of planned economy, Hungarian economy specialized on mass production for the Soviet market; therefore the then leaders of economic policy did not have the slightest idea as to how to convert Hungarian companies to production for the world market. For this reason, it seemed crucial that Soviets – in spite of the debt having been accumulated since 1986 – take over the products of the Hungarian industry. However, Tamás Beck strove in vain: he was unable to reach an agreement with the Soviet delegation having their dinner at the appointed time. Although negotiations continued in the Parliament next day, the parties finally left the table without signing any agreement. Then, according to our sources, the Deputy Prime Minister Péter Medgyessy “… rushed into Miklós Németh’s office who said he’d rather be withholding the airplane but the Soviets must not be let go home without an agreement.” Medgyessy and three others got into a taxi and at Ferihegy airport, they finally signed a minutes containing several compromises. It stipulated not only the list of nearly two hundred machinery industry products for the year but also the dollar conversion rate to be applied in order to establish the Russian debt accumulated in transferable rubles. Although the accepted rate of 0.92 was lower than that of 0.95 preferred by Hungarians, but according to one of our informants, “… then it was considered an achievement that the Russians signed something at all.”

Formerly, Károly Grósz managed to agree with Mikhail Gorbachev that the two countries settle their exchange of goods in dollars instead of rubles, which was also confirmed by the Minister of Foreign Trade Béla Kádár with the Russian Minister of Economy, Konstantin Katushev on 11 December 1990. These minutes became famous under the name of “agreement signed on the aircraft wing” and it meant the first step in the settlement of the debt. Its reason is that the Soviets, by accepting the rate, practically agreed that the accumulated debt should be converted into dollars. However, its exact amount was set forth on 11 November 1992, after the dissolution of the Soviet Union in the end of 1991, when Boris Yeltsin visited Budapest. To our knowledge, Yeltsin linked his visit to several criteria such as, among others, being able to sign at least six agreements. Finally, he put his name on nine agreements during one day, including the one on the acknowledgement of the national debt. The amount of the debt was determined to be 1.8 billion transferable rubles, which should be converted into dollars until 30 December 1992 the latest, using the previously accepted rate of 0.92. At the same time, the agreement signed by Yeltsin also contained that the Russian party would pay 800 million dollars with the shipment of military technology.

(In the next part, we reveal facts that have never been published yet, concerning who had a share in the Russian national debt at what percentage. We describe the activities of Nádor ‘95 Rt., which became famous for importing telephone tapping equipment, and also the work of the parliament committee examining the Oilgate Case, as well as what has been left out from the committee’s report.)
 
 

1.7 billion dollars – this is the amount the former Soviet Union owed the Hungarian Government on the spring of 1994. At the then exchange rate, this amount was equivalent to 180 billion Hungarian forints, the collection of which being associated with one of the largest political and economic scandals of the past decade – the so-termed Oilgate Case. According to the Opposition of the time, it was entrepreneurs close to the Hungarian Socialist Party and their companies that took advantage of their political and personal connections to make a financial profit out of this debt. Although Fidesz, who made the case public at that time, promised an itemized accounting and the full clearing up of the process when it took over the Government, it has not yet taken place so far. Although the activities of Nádor ‘95 Rt., one of the participants, are under investigation by a parliament committee, what happened to these 180 billion forints has still remained a mystery. This report consisting of three parts is the final result of the nearly fifty background interviews we have conducted with players affected by this case, as well as our study of publicly available documents. The second part of our series details who had a share in the Russian national debt to what percentage. We describe the activities of Nádor ‘95 Rt. separately, which became famous for importing telephone tapping equipment, and also the work of the parliament committee examining the Oilgate Case.

On 5 December 1995, Tuesday, Imre Dunai received an assault fire in the Parliament. In the hour of immediate questions and answers, six members of the opposition – Ervin Demeter and István Varga (MDF), Mihály Varga and Lajos Kósa (Fidesz), Terézia Szilágyiné Császár and Miklós Gáspár (KDNP) – bombarded the then Minister of Industry with questions by shouting “let the oil gate open, let the Oilgate start!” They mainly pursued the participation of Government officials and entrepreneurs close to the Hungarian Socialit Party (MSZP) in the Russian-Hungarian oil trade and the breaking down of the Russian national debt. Among others, they objected to “why they want to press companies with private interests into intergovernmental relations.” In his initial reply, Dunai talked about “fatal error”, and later, according to Parliament minutes, he stated: “The truth is that I did not want to answer because it is not worth answering fake questions. But the honourable representative poured such a heap of phrases on me that it speaks for and answers itself.”

However, the rows of the Opposition were in full swing at this time, and next day, media reported at length on the conflicts of interests and possible abuses in the Russian-Hungarian inter-governmental relations raised by the two Members of Parliament. An especially high level of interest surrounded the activities of the US-based Hungarian Finance and Trade (HFT) designated to coordinate Russia’s crude oil shipments to Hungary, owned 51% by OTP Bank and 49% by András Patkó, the Deputy Minister of Finance of the former Németh Government. At that time, the Moscow office of HFT was managed by András Dunai, the son of the Minister of Industry, which gave grounds for the suspicion of conflict of interest in their case. László Pál, former Minister of Industry dismissed in June, who was then the President of MOL Rt., was charged with involving a company (Agroil Rt.) into the Russian-Hungarian oil trade that belonged to Ottó Hjber’s sphere of direct interest. As for the Chairman of the Entrepreneurial Division of MSZP, he received attacks in abundance, which is well indicated by István Varga’s (MDF) speech, according to which Hujber “collects and maintains sponsors for his businesses in Government Offices outside the Socialist Party, among whom he is practically moving ahead on an information superpath, and not on Ho Chi Minh’s path.”

Therefore, it was due to the person of Ottó Hujber that the breaking down of the Russian national debt came to the centre of interest, and it was – otherwise erroneously – associated with other interweaves of interests revealed in the field of oil trade, not examined by this report of ours. The reason is that as we already put down in the first part of our series (ÉS, 18 February 2000), the Boross-Chernomirdin agreement excluded the possibility that the Russian Government settle its debts with energy carriers. Although later we shall see that some practical entrepreneurs found the back door to evade this clause, the communiqué of István Tamás, Head of Division of the Ministry of Industry and Commerce (IKM) concerning the Russian national debt was true, saying, “There is no oil in the oil case.” (Magyar Hírlap, 12 December 1995).

Rate Exchange

By the way, István Tamás knew it so exactly because, in representation of the Industry Department, he was the secretary of the inter-departmental committee that was established by the Horn Government in October 1994 to administer the breaking down of the Russian national debt. However, the committee grouping the the representatives of six ministries – László Pál, then Imre Dunai (Industry and Commerce), László Akar (Finance), Ferenc Kovács (Transport, Communication and Water Management), Károly Janza (Defence), Jenő Rednágel and György Borók (Agriculture), József Thuma, then later József Lajtár (Interior) – and the “delegate of the business sphere”, Ottó Hujber, was practically in a seemingly dead state until the Moscow negotiations of Gyula Horn (ÉS, 18 February 2000), dealing with nothing but the development of its own rules of operation.

At these negotiations conducted in March 1995, the Russian Government – with the symbolic nod of Prime Minister Viktor Chernomirdin – approved the settlement of Russian debt, shrunk to 900 million dollars by then, not only by supplying military technology but civil products as well. There have been several concepts conceived on its method, but no decision was taken in any matter due to the wait-and-see behaviour of the Russian side. However, following Chernomirdin’s approval, the irregularly working machine was set to motion, and at the meeting of the inter-departmental committee dated 4 April 1995, decision was taken saying that entrepreneurs may purchase the Russian national debt from the Hungarian Government at a predefined rate and with delayed payment. Initially, the condition of the transaction was that buyers should submit 7.5% of non-refundable deposit, as well as first class bank guarantee. (Later, the deposit was reduced to one percent because it turned out that the majority of applicants are unable to deposit such an amount in one.) If they complied with the guarantee elements, the entrepreneurs received a “stamped paper”, i.e. entitlement to purchase goods or non-commercial services in Russia on the credit of the debt in such a way that the manufacturer would receive their value from the Ministry of Finance of the Russian Federation. The Hungarian entrepreneurs were allowed to import the goods in exchange of the debt duty free into the country, and then sold it domestically or abroad. Next, the two countries settled their balances with each other, and the value of purchased goods reduced the amount of outstanding debt.

The committee members, the entrepreneurs and the experts had had debates over the method of selling the Russian national debt. According to one of our sources in the Ministry of Finance, “there was an insane pushiness to determine the value of the rate” and in the second half of 1994, “a representative of western financial institutes turned up every month to make an offer for the purchase of the debt.” However, the Hungarian Financial Government never considered it seriously to sell the entire stock of debt for cash. One the one hand, its reason was that western financial institutes did not offer more than 25-30 percents (according to our sources, and American bank called Salomon Brothers made the highest offer at 34 percent), and the other reason was that there was no guarantee that Russians would get talking to a western buyer.

Nevertheless, the experts of the ministries continually negotiated on the amount of the realistic discount value at which the debt could be sold. However, nobody had courage to say an exact figure; according to one of our sources – an expert of inter-governmental debts – its reason could be that “traditional money market techniques are not worth shit when determining the value of the debt inherited from the former Soviet Union.” Most market players wrote off claims of this kind by saying “be happy if you get something back” since these claims can only be collected “if you know someone with whom you spent your summer holiday in Sochi.”

According to our information, the Gordian knot of rate determination was cut by László Pál, who, at the aforementioned 4 April meeting of the inter-departmental committee, “looked at the ceiling” and said that this value should be 58 percent. Practically, it meant that the entrepreneurs could buy each dollar of the Russian debt for 58 cents from the Hungarian Government. According to certain of our sources, the principle behind Pál’s calculations was to be “less than sixty but more than fifty percent.” According to others, the Minister of Industry endeavoured to jack up the offer of the Eastern Markets Society Association (TKPE), led by Hujber, moving around 40-50 percent (ÉS, 18 February 2000). At any rate, five weeks later (on 11 May 1995) the conditions of the breaking down of the debt and Pál’s 58 percent were stipulated in a Government Decision under 3053/1995. The Hungarian entrepreneurs started their match for the Russian national debt promising millions of dollars.

Hungarian Marco Polo-s

However, this match – as found later by the parliament committee formed to investigate the Oilgate Case – was played behind closed doors and only the really well informed could enter the field. According to some sources, Ottó Hujber took an expressly great advantage of his position of – as the leader of TKPE – being member of the inter-departmental committee determining the conditions of breaking down of the debt. Others “pushed forward on party lines”, but there were some who “brushed up their Russian relations of long ago” in order to be able to participate in the breaking down of the debt. However, the public knew hardly anything about it, and as stated by the report of the Oilgate Committee dated 27 December 1996, “due to the lack of tendering, applicant companies were in a limited competitive situation (…) by excluding the competitive situation, the breaking down of the national debt created opportunities for illegal advantages.”

However, according to parties concerned and interviewed by us, this statement is fundamentally erroneous: the Hungarian Government and the inter-departmental committee had hardly any effect on the breaking down of the debt because it primarily depended upon the Russian Financial Department the manufacturing of what Russian products it was willing to finance and when on the credit of the debt. It depended partly on the “ability of Russian factories to enforce their interests” and partly on the prevailing status of the Russian budget. Moreover, it especially depended on the “leading wind” of the factories what rate the Russian Ministry of Finance paid for the products manufactured by them. To our knowledge, Russian companies received 30 to 90 percent of the value of a dollar of the debt – in rubles. On average, the factories received eighty percent of the value of their products manufactured to the credit of the debt, calculated in rubles, According to one of our sources dealing with the sale of the debt, the Hungarian inter-departmental committee only offered the opportunity to “chase the handle of the lost axe” instead of the Hungarian Government. Its reason was that according to those interviewed by us, it depended basically on the skilfulness and relations of the entrepreneurs how much money their partners were able to squeeze from the Russian financial department. According to one of our sources making business in the Russian market, the whole procedure “absolutely needed a system of connections and local knowledge because the Russians started with not giving anything that could as well be sold in the world market. That is why Hungarian Marco Polo-s were needed who could arrange all this and bribe everyone around.”

According to the special situation, it would have been “completely futile to announce the public tender for the debt”, because it is in vain someone can offer 90 cents for a dollar of the debt if he cannot have goods manufactured in Russia to the credit of it. One of our sources in the financial marked added another point saying that the purchase of inter-governmental debts has always been a very confidential business where “discretion is a basic requirement.” Nevertheless, sources close to TKPE asset it even today that the doors were open to every entrepreneur wishing to participate in the breaking down of the debt. According to minutes of the meetings, Ottó Hujber stated several times that “the association is open towards any member and non-member; the aim is not to exclude anyone from the opportunity.”

Despite, different secret government decisions and the general obscurity covering the case made outsiders feel that there is “some Commie shuffling” going on around the breaking down of the Russian debt. It was intensified by the person of the participating entrepreneurs each of who were associated with the Hungarian Socialist Party in some form. Later, the report of the parliament investigation committee found that eighty percent of the contracts concluded during the breaking down of the debt “are connected to unambiguously definable economic interest groups.” (See our table titled Track runners for more details.)

The Ace of Burstin

System Consulting (SC) Rt. owned by László Kapolyi, however, is an odd one out among them, since the former Minister of Industry is still engaged in politics as the President of the Hungarian Social Democrat Party (MSZDP). Nevertheless, he has never made secret of his left-wing convictions, and his business motto is still “we have to make business in the west while leaning upon the east with our backs.” From the end of the eighties, System Consulting has been an active player in the eastern-western exchange of goods: initially, it mainly shipped computer products to the territory of the former Soviet Union, as well as provided expert advice. However, the tactics has been changed since 1991, and he has mostly filled the “gaps” of inter-governmental relations – with success.

In this spirit, Kapolyi and his colleagues developed a model of Russian-Ukrainian-Hungarian cooperation that – according to independent experts – “has been unique in the region to date.” Its essence is that System Consulting acquires cheap energetic coal in Russia, which it resells to the Burstin power plant – partly in exchange of electricity. Then, SC sells the electricity produced this way to the Hungarian Electric Works (MVM), according to our sources, much cheaper than the market price. The seemingly simple construction, however, has complicated details behind because Ukraine is not a member of Western Europe’s Union for the Co-ordination of the Production and Transmission of Electricity (UCPTE), thus electricity produced there theoretically does not meet the standards adopted here. However, together with the Ukrainian energy company (Ukrinterenergo), SC Rt. built a special transformer into the Ukrainian electricity system, and László Kapolyi managed to achieve that four from the ten blocks of the Burstin power plant supply the UCPTE network with electricity meeting the standard. The transportation of electricity was not easier too, since formerly, the Burstin power plant had not been connected to the main line between Vinnitsa and Albertirsa through which electricity arrived from Russia. For this reason, SC Rt. operates a 400 kW line until Mukachevo (Munkács) in a so-termed radial mode through which the Burstin electricity is able get to Hungary. System Consulting did not even spare funds on establishing a high-tech coal purification plant in Chervenograd to convert the energetic coal arriving from Russia to an acceptable quality. The nearly six-million-dollar project is characteristic to the business philosophy of SC Rt. The equipment was designed by the Hungarian Tatech, manufactured by the German Bird Humboldt Wedag and installed by the Ukrainian subsidiary of SC Rt.

According to one of our sources knowing the operation of SC Rt. from close, it is still Kapolyi’s conviction that “much of former COMECON cooperation could be continued on a business basis.” Apart from expertise, however, it requires special knowledge and system of connections due to the easily changing economic and political situation of the region. Kapolyi lacks none of them: the former Minister of Industry – who is, by the way, member of the Energy Section of the Russian Academy of Sciences – knows many people in the territory of the former Soviet Union. For instance, he acted as a host to Viktor Chernomirdin in the eighties, who was Minister of Gas Industry then, and he is said to be a close acquaintance of Ukrainian Deputy Prime Minister Viktor Pezenik, said to be “the Ukrainian Bokros”, who visited the Budapest meeting of the Roman Club in 1993 on Kapolyi’s personal invitation. In early 1995, it was Pezenik who signed the guarantee letter to Kapolyi that had been stipulated by the Russians as a condition of the operability of the threefold cooperation outlined above to the credit of the Russian national debt as well. According to it, the Russian Government paid the price of the coal from which the Burstin power plant produced electricity, which was sold by Kapolyi to MVM for dollars. At the end of the chain, SC Rt. paid the purchase price of the debt to the Hungarian treasury. Kapolyi’s profit appeared only thereafter, which was estimated to be 5% by one of our sources.

It happened despite the Boross-Chernomirdin agreement in the spring of 1994 excluded the possibility that the Russians pay their national debt with energy carrier. However, Kapolyi found the back door. He wrote letters to several leading Russian politicians arguing that there comes a time when Russian energy companies have to enter the European market, therefore it is their interest as well to operate this construction “pointing towards the future” to the credit of the national debt. This idea was so much adopted by Minister of Economy Shokhin that in his letter wrote to IKM in the end of 1994, he proposed to reduce the national debt with 300 million dollars using the coal supplying cooperation developed by SC Rt. Finally, it became 120 million dollars, since at its meeting on 16 November 1995, the inter-departmental committee – after some struggling – decided that SC Rt. can reduce the Russian national debt in two stages with only 60 million dollars each. According to our information, this construction is still operating, and 100.7 million dollars of coal has been transported to Ukraine. It means that the 900 million dollar debt has been reduced with this amount, while the Hungarian budget has had revenue of about 58 million dollars. To our knowledge, SC Rt. fully paid this sum amounting to about 14 billion forints to the Government treasury until September 1999.

A Matter of Gesture

In spite of all appearances, Ottó Hujber, the “father of debt collection”, has been far from administering so successful businesses. However, many thought that the entrepreneur “caught God’s foot” following Gyula Horn’s visit to Russia in March 1995, where the Chairman of TKPE travelled with the Government Delegation at his own cost. In Rostov, the Prime Minister signed an agreement on the production of one thousand combine harvesters (ÉS, 18 February 2000), and – on their way home in the airplane – he personally trusted László Papócsi, then CEO of Bábolna Rt., and Ottó Hujber with elaborating the details.

Finally, the interested parties solved the importing of the combine harvesters – the process of which was characterized by one of our sources as a “coitus interruptus” – that they found a corporation on 10 April 1995, under the name of Agrolízing, capitalized at 10 million forints. The owner of the company were Bábolna Rt. (34 percent), Intertraverz Rt. owned by Hujber (33 percent), the Russian Traktoroexport Company (20 percent) and Finex Inc., a Delaware corporation with Russian interests (13 percent). In the Deed of Foundation, they did not even make it secret that “the foundation of the Company was motivated by the fact that Prime Minister Gyula Horn visited Rostov-na-Donu on 10 March 1995, and agreed with the combine harvester factory on the shipment of 1000 combine harvesters on the credit of the Russian national debt. Bábolna Rt. and Intertraverz Rt. were trusted with the administration of the deliveries. However, it did not proceed particularly seamlessly. Although the offer of Agrolízing, in the process of being established, was accepted by the inter-departmental committee at its already mentioned meeting on 4 April 1995, Government Regulation 3053/1995 setting the details of bidding and adopted on 11 May however “set conditions that were unacceptable by the company.” Similarly to the rest of the bidders, Agrolízing was unable to fulfil the requirements related to either the 7.5 percent deposit of the first class bank guarantee, while the first shipment of DON-1500 combine harvesters had already arrived from the Russian factory. Further complications resulted from the fact that the Ministry of Finance levied fees on the arrived combine harvesters at a total amount of 14 million forints under various entitlements (costs of storage outside the customs warehouse, environmental fee, VAT). According to data available at the Court of Company Registration, at the special assembly of Agrolízing Rt. dated 29 June 1995, László Papócsi acting as the President of the Board of Directors stated that “the difficulties brought about by the Ministry of Finance and the National Customs and Finance Authority have been resolved after a lengthy efforts, to the intervention of the Prime Minister.” According to one of our sources knowing the deal, the Prime Minister intervened in the process because “he wanted to make a gesture to the peasants.” Later, prerequisites concerning financial conditions and considered overly strict by the entrepreneurs have been modified.

Nonetheless, it did not help the fact that, according to minutes, the quality of combine harvesters received “meet the expectations only after repairs, due to problems of assembling.” Therefore, it was in vain that Agrolízing organized a national network of dealers and servicing after overcoming bureaucratic obstacles, the professional press tore the combine harvesters into pieces within seconds. As it was stated at the special assembly of the company dated 15 November 1995, “slowly advancing sales made room for the press attack of the competition aiming at the uselessness of the DON combine harvesters. As a result of this campaign, quite a panic broke out in the Ministry of Finance managing the debt that the harvesters cannot be sold and the claim cannot be collected.” Regarding the first business year of Agrolízing Rt. these fears were not without grounds: until the end of 1995, as few as 46 combine harvesters were sold (from this, six in Bulgaria), resulting in a net profit of less than 6 million forints, which amount was consumed by the costs of the bank loan of 50 million dollars taken for the costs of incorporation, the organization of shipment, and the payment of levies. Accordingly, Agrolízing Rt. closed its first business year with a deficit of 108 million forints with a shareholders’ equity of 98 million forints. However, the tables were turned during the next years: although the Rostov combine harvesters continued to be unsuccessful in Hungary – according to our sources, mainly due to its high price (7.5 million forints) as opposed to their quality and the lack of financial constructions helping the buyers –, 160 of them were managed to be sold in other countries of the region (Bulgaria, Ukraine, Rumania). It could be seen on business results as well: in 1996, the balance-sheet profit and loss figure toned positive with a revenue of 447 million forints in 1996. The company even had resources to start the payment of its debt of 4.9 million dollars (886 million forints) outstanding towards the central budget, which, according to our information, shrank to 300,000 dollars by June 1998.

Wagon balance

Hujber’s other two interests, Petroltank Rt. and Vagon Lízing Pénzügyi Rt. (Wagon Leasing Financial Co. Ltd.) did not prove to be so successful in the breaking down of the debt. Essentially, these two companies were established in 1995 to realize the goals formerly formulated in the Deed of Foundation of Hunga-Rus Rt. (ÉS, 18 February 2000). In the case of Petroltank Rt., it was motivated by the perception that Hungary imports 75 percent of its oil need, therefore the storage of approximately 480,000 cubic metres (10.5 million gallons) of oil should be provided for until 1996. Our aim is to construct new storage spaces to the credit of the Russian national debt. We wish to acquire the raw material of the tanks and part of the preliminary products necessary for this from Russian companies.” Finally, this plan had such a success in the inter-departmental committee that the company received authorization to reduce the Russian debt with 80 million dollars in two stages instead of the 10 million originally applied for (see our table titled Track runners for more details). In the first stage, so-termed tank mantles necessary for the construction of overground tanks were shipped at a value of 4.6 million dollars, which, according to our information, were sold successfully to an unspecified Hungarian private company later. To our knowledge, the remaining limit of 75.4 million dollar has been left unfulfilled so far. Although tube ingots were delivered to the Csepel Tube Factory at a value of one million dollars, this transaction proved abortive. According to Court of Company Registration data, “the goods arrived in the country, the Hungarian buyer fell in default with financing and was unable to provide an acceptable bank guarantee.” According to one of our sources being acquainted with the deal from another side, “the Russian partner delivered late, therefore the buyer did not take the goods over.” At any rate, Petroltank has still not paid 58 percent of these 75.38 million dollars, i.e. 42.9 million dollars to the central budget.

Vagon Lízing Rt. has not met much more success either. According to our sources, Ottó Hujber, who graduated as a railway engineer and has a history with the Hungarian Railways, intended this company “to acquire railway carriages for the state-owned railway company that it rents for a high price otherwise.” He primarily meant this as the importing of the so-termed basket-type carriages suitable for the transportation of grains. Initially, the company bid for the breaking down of 180 million dollars with two grace years and five years of payment period, from which the inter-departmental committee finally accepted 80 million in two stages. According to our information, Vagon Lízing Rt. delivered freight carriages at a value of 30 million dollars, but they were not taken over by MÁV Rt., therefore the wagons were finally sold to the Russian state-owned railway company. Nevertheless, Vagon Lízing Rt. paid 58% of this amount, i.e. 17.4 million dollars due to the Government to the central budget. The destiny of the 50 million dollar debt remaining with the company is still unsettled, and as it has been recorded at every shareholders’ assembly since then, “no step forward has been managed to be taken in the realization of the breaking down of the national debt.”

For this reason, Vagon Lízing Rt. had not paid 58 percent of this amount, i.e. 28.7 million dollars to the central budget. Despite all this, Intertraverz Rt., the “flagship” of Hujber’s company group did not make a bad deal with the breaking down of the national debt: according to Court of Company Registration data, both Petroltank Rt. and Vagon Lízing Rt. concluded a service contract with it “pursuant to which 4.85 percent of any completed deals is the value of the work of Intertraverz Rt.” All this means that it was Intertraverz Rt. that skimmed the profit of the two companies – nearly 1.5 million dollars, i.e. 400 million forints – generated from the breaking down of the Russian national debt.

Family Circle

Some of our sources are still convinced that the initiators of the Oilgate Case are those “whose eyes were struck by the amount Kapolyi and Hujber made on the Russian deal.” During the background interviews, many talked about the role played by László Máté, former cashier of MSZP. According to one of our sources closely monitoring the events, the cashier saw much in the breaking down of the Russian national debt; therefore he joined the process relatively early. In fact, it is evidenced by minutes taken on the meeting of TKPE dated 18 October 1994, Máté, acting in representation of Kossuth Trading House, proposed that during the breaking down of the national debt, “a few large enterprises should be concentrated upon (…) since if many small companies apply, the Ministry will be unable to process them.” Therefore, according to them, “advertisement should be disregarded since we know Russian companies, thus TKPE should collect the bids and submit them to the Government.”

However, since the breaking down of the debt did not proceed according to the scenario he proposed, the cashier of MSZP gradually kept away from the meetings of the association, according to one of our sources, considering it as dealing with unimportant matters. Despite, Máté also belonged to the well informed, and “had a share in the Russian cake” among the first ones. Famáka Kft. founded by him – described as a family business by one of our sources – applied at the inter-departmental committee for the importing of ZIL lorries at a value of 10 million dollars and a term of 2 years. In our information, this deal was put together by András Szász, its managing director at the time; Máté got acquainted with him at a reception before the elections of 1994. Having a technical degree, Szász worked for Intranszmas until 1982, then, until the political changes, he was active abroad as an employee of an Austrian electronics company (among others in the Soviet Union and in the Middle East). According to one of our sources closely knowing him, his excellent Russian relations come from this period, for example he knew Yevgeny Brakov, the CEO of the Moscow ZIL factory, and also Mayor Yuri Luzhkov called “Moscow’s Prime Minister”. The possibility to start the production lines to the credit of the Russian debt came just in tome for the Moscow factories (ZIL, Moskvich) struggling with the lack of purchase orders, and they found an appropriate Hungarian partner in the person of Szász. It is well indicated by the fact that as far as we know, Famáka Kft. started the shipment of ZIL lorries already in March 1995, although the government regulation on conditions of the breaking up of the debt was adopted two months later (on 11 May 1995). However, there were several quality problems with the arriving ZIL’s because according to one of our sources, “they manufactured so trashy lorries that they did not even work.” Using his Moscow connections, it was also Szász who put together the 10 million dollar business for the shipment of Aleko passenger cars submitted by Bertinus Kft. as its own bid to the inter-departmental committee. The Managing Director of this company dealing with passenger car sales (György Rieb) was an old acquaintance of Szász. Later, this debt consisting of two items was taken over by Lorry Kft., the successor of Famáka Kft., and it also undertook to pay the 11.6 million dollar debt of the row companies outstanding towards the Government. Similarly, Lorry Kft. also undertook obligation concerning the payment obligation of Ples Rt. (See our table titled Track runners for more details.) In our information, Lorry Kft. paid 5.8 million dollars to the central budget. At this time, however, László Máté was not an owner and Managing Director András Szász also left the company.

This latter founded a company on 20 January 1995 under the name of Nádor ‘95 Rt. with Delbár Bartha, who, according to press information, was then the wife of Imre Szokai, President of ÁPV Rt. (Napi Magyarország, 21 May 1998). The Chairman of the company’s Supervisory Board was György Matyók, László Máté’s brother-in-law. Nádor ‘95 Rt. also “demanded slices from the Russian cake”, not small ones at all. First, on 29 March 1996, it submitted a bid to the inter-departmental committee for the breaking down of 200 million dollars with vehicle purchases and reexporting. According to our information, the background of the deal was again the “Moscow lobby” connected to Szász, which managed to achieve that the Russian Finance Department would finance the production of ZIL’s, Moskviches and Ladas at this value. Finally, the deal was not realized; our sources gave contradictory information as to its causes. According to one version the reason was that Szász failed to submit the declaration on the payment of the deposit and he did not have a first-class bank guarantee. According to another version, the deal was stopped by high politics because due to the approaching elections, Russians stopped the payment of their debts. However, Nádor did not fall out of favour: the inter-departmental committee approved the 50 million dollar underground carriage project that would provide a financial background for the acquisition of secret agency tools (see the part titled A Hungarian Nádor for more details). After a long struggle, the Russian partner of Nádor manufactured underground carriages ata value of 10 million dollars, but they have not yet arrived in Hungary to date.

Under Overpressure

Nevertheless, the “outbreak” of the Oilgate in the Parliament on 5 December 1995 cast full light on the process going on in total obscurity until then. The Administrative State Secretary of the Prime Minister’s Office announced two days later: Prime Minister Gyula Horn received documents that justify the ordering of a strict internal investigation. According to the main findings of the investigation conducted at forced pace – within two weeks – “(…) the lawful nature of the work of the inter-departmental committee should be created, the possibility of selecting bidders from the widest range should be ensured, and it should also be ensured that the role of personal interests be excluded from the taking of decisions.” Simultaneously with the completion of this investigation, the Parliament created a parliamentary committee of investigation, which, among others, examined “(…) what tenders were announced by the Inter-Departmental Committee established for the breaking down of the Russian national debt, how they were assessed and what conflicts of interests existed during the selection of partners for the said transactions.”

After one year of work and interviewing the parties concerned, the investigative committee found on 27 December 1996 that the “(…) Inter-Departmental Committee did not comply with that provisions of the Government Decision 1090/1994 (IX. 29.), and operated disregarding it, under disorderly circumstances.” They supported the opinion of the Government’s examination that due to the lack of tendering, applicant companies “were in a limited competitive situation”, but they also indicated at the same time that no subsequent tender was announced for the breaking down of the national debt. Furthermore, the report found in the case of several ministry officials participating in the work of the inter-departmental committee (László Tímár, György Borók, Balázs Erdey-Grúz) that they hold incompatible positions in companies – primarily belonging to Hujber’s sphere of interests – that participated in the breaking down of the national debt. Later, the parties concerned defended themselves by saying that it was “an efficient method to control the handling of national wealth”, but the committee did not accept this argument. Before the closing of the examination, Ottó Hujber wrote a letter to the committee members, in which, referring to “the High Tribunal”, he drew the attention that “the committee members – several of them unwillingly – are participants of a show trial. ‘Show’ from the aspect that it is built on unsteadily fabricated charges the most of which proved to be devoid of merit.” Later, the Parliament accepted this argument and half a year later, with the votes of the coalition majority, adopted a meaningless decision saying “the examination revealed no violation of law in the case of entities and private persons charged in the case.”

At the same time with the Parliament committee, the State Audit Office also closed its investigation on the Financial and Economic Audit of the Chapter on International Settlements, in which it practically scrutinized the collection practice of the national debt. Roughly, it came to the conclusion that “too many cooks spoil the broth”, and it did not find it realistic that the debt can be broken down until the end of 1997 as per the original agreement. The auditors did not calculate badly: in the middle of 1996, Russia practically froze the settlement of its debts entirely, thus the process started again after nearly a year’s delay, only in the last year of the Horn Government.

(In the final part of our series, we are demonstrating who wanted to raise the capital of Postabank to the credit of the Russian national debt and how. We set forth the investigations conducted by the Orbán administration following the elections and the steps taken during the last one and a half years to collect the still outstanding debt of nearly 400 million dollars.)

A Hungarian Nádor

From 1991, the National Security Service (NBSZ) conducted negotiations with international companies on how to replace its nearly twenty-year old tapping equipment with more up-to-date devices that are capable to detect radio waves apart from telephone conversations. Primarily, it was a demand of the internal security bodies (police, frontier guards) due to the wave of crimes following the political changes. In our information, NBSZ established contacts with several foreign manufacturers and during the discussions, it turned out that the total value of the equipment demanded by Hungarian secret agencies would be at least 30 million dollars irrespective of the manufacturer. However, such an amount was not available in the state budget, and, according to our sources, in the country’s deteriorating financial state “it would have been difficult to explain away the demand of nearly ten billion forints of cash without revealing the real intention.” Finally, the Horn Government solved the dilemma dragging on for years that it ordered this equipment using an intermediary company (Nádor ‘95 Rt.) to the credit of the Russian national debt.

Since the Government wanted to conceal the original purpose at any rate, the inter-departmental committee issued a 50 million dollars’ worth of negotiation licence to Nádor ‘95 for the shipment of underground carriages. According to original plans, the underground carriages would not only have been “fig leaves” to hide the construction but also served as a financial background for purchasing the tapping equipment. The Metrovagonmas company, Nádor’s Russian partner, was also treated as a special “partner” by their Finance Department because the immense factory near Moscow manufactured not only underground carriages but also self-propelled anti-aircraft missiles, thus it was classified as a military industry company. The Russian Finance Department displayed willingness to pay rubles amounting to 90 percent of the 50 million dollars to the company, which planned the production of about one hundred carriages for this cash. Nádor wanted to sell the underground carriages abroad, and, according to our sources, it found buyers in Helsinki, Kiev, Prague and Moscow. Although, as opposed to the other “debt downbreakers”, Nádor received a grace period until 2000 to pay 58 percent of the revenues to the state treasury because the company could spend this exactly 30 million dollars on the acquisition of tapping equipment, which would have been delivered to NBSZ under a special renting construction. In the budget of the Service, rents were inconspicuously spread over 4 years in equal instalments – about an annual 2.2-2.3 billion forints.

However, according to our sources, this underground carriage business “stopped due to the impotence of Hungarian and Russian offices.” The Hungarian Ministry of Industry and Commerce, for example, – despite the construction worked out jointly with the Russian manufacturer – did not issue the negotiation licence to Nádor ‘95 Rt. without a bank guarantee, and in lack of it, the Russian Finance Ministry was unable to finance the production. By the time deficiencies were eliminated, the Russian government froze the payment of debts on the excuse of financial difficulties. Therefore, “the cash was only in the window” when Nádor already entered into agreements with the French Thomson, as well as the Israeli Efrat and Teliran companies for the production of the tapping equipment. According to information received by us, the cash payable by Lorry Kft. to the budget after the imported vehicles would have served as collateral for the staring of the production. However, it was spent soon, therefore the Government had to interfere: in the summer of 1996, the construction was reshaped in such a way that “until the arrival of the Russian money”, a commercial bank was also involved as creditor. It provided a dollar loan to Nádor ‘95 Rt. in such a way that “the collateral of the deal was to be the revenue received from renting the equipment purchased for the loan amount, which, at the same time, was to be the source of the fulfilment of the obligations.” In plain: the rent paid by NBSZ was received not by Nádor Rt. but by the financial institution, and the Ministry of Finance undertook a special guarantee for the payment of the rent as well.

These transactions were also scrutinized by the so-termed Nádor Subcommittee of the Parliament’s National Security Committee. The subcommittee consisting of three members – Zoltán Kovács (Fidesz), István Nikolits (MSZP), Károly Tóth (MSZP) – mainly investigated whether any financial abuse took place during the acquisition of the tapping equipment. Former Government investigations found that NBSZ paid 1.2 billion forints more to Nádor ’95 Rt. without any justification. According to one of our sources knowing the case from close and not wishing to disclose his name, this statement is not true, which is also proved by the agreement signed last year by NBSZ and Nádor. According to it, the two parties’ “accounts are identical”, and there is no debt. According to our sources, the dispute stems from the fact that during the acquisition of the equipment, NBSZ subsequently ordered services that significantly raised the originally calculated costs. However, Nádor ’95 Rt. delivered a memorandum to NBSZ on it saying “an additional budgetary frame of 15-17 million dollars will be needed due to the delay of the Telecommunications Act, the ordered construction works, and emerging technical problems.” However, according to our knowledge, the leader of the Finance Department rejected it at a Government meeting saying “let them wait until the results of the elections.” After the elections, NBSZ, “referring to the new minister and the new cabinet leader, was unable to take a position on the continuation of the project and the additional budget.” In connection to this matter, Prime Minister Viktor Orbán said, “we are not in the paying mood.” (Népszabadság, 13 October 1998) Since, according to our source, expenditures exceeded the contractual frames in the first half of 1998, Nádor ‘95 Rt. first slowed down the shipments, and then suspended them after several attempts to negotiate. According to our information, the system capable to tap cellular phones and the system monitoring the national telephone network were at a technical readiness state of 90 and 60 percent respectively when shipments were suspended. There is no reliable information on whether the new government completes the started projects. According to unconfirmed information, NBSZ, after several negotiations, bought the equipment stored in Thomson’s Paris warehouses undelivered, but none of our sources have knowledge of additional payments since then.
 

Track runners Participants in the breaking down of the Russian national debt
Company name	Owners*	Interest group	Subject matter of tender	Amount of tender (M USD)	Amount of contract (M USD)	Imported civil goods	Status
System Consulting Rt.	System Consulting Inc. (USA), László Kapolyi	László Kapolyi	Coal	300	120**	Electricity
Agrolízing Kereskedőház Rt.	Bábolna Rt., Intertraverz Rt., Traktoroexport (RU), Finex Inc. (USA)	Ottó Hujber	Combine harvester acquisition	19	9	DON-1500 combine harvesters	Completed
Tér és Forma Rt.	AVA Kft., Farabi Foundation (LI), György Benza, Katalin Pfandler, Gábor Koltai	Unknown	Lorry reexporting	20	50	GAZ lorries	Unsettled
Famáka (Lorry) Kft.	ALTRO GmbH (AT), Qwertel Rt., Ferenc Zilahy	László Máté	Lorry importing	10	10	ZIL lorries	Unsettled
Bertinus Kft. ***	György Rieb, Györgyné Rieb, Edvin Bachmann	László Máté	Car importing	10	10	Aleko cars	Unsettled
Ples Rt.	PLES GmbH (AT), Wheel Impex Ltd. (GB)	László Máté	Purchase of railway freight carriages	51	51	Textile machines	Unsettled
Vagon Lízing Pénzügyi Rt., (Machinetrade Rt.)	Intertraverz Rt., Hunga-Rus Rt.	Ottó Hujber	Purchase of railway freight carriages	30	80	Railway freight carriages	In progress
Petroltank Rt.	Intertraverz Rt., Hunga-Rus Rt.	Ottó Hujber	Acquisition of raw material for crude oil storing tanks	10	80	Tank mantle, tube ingot	Unsettled
Mahart Rt.	ÁPV Rt.	Hungarian Government	Acquisition of ships	44.7	44.7	5 sea ships	In progress
Nádor - ‘95 Rt.	András Szász, Delbár Bartha	László Máté	Car purchasing and reexporting	200	50	Underground carriage reexporting	Unsettled
Speed-Ex Kft.	István Travnik, Zsuzsanna Farkas	Unknown	Tractor importing	0.5	0.5	Tractor	In progress
André Central Europe Kft.	André et CIE S.A. (CH), Scheftsik István	Unknown	Importing of steel products	50	50	–	Unsettled
Swell Kft.	István Travnik, Zsuzsanna Farkas	Unknown	Tractor importing	0.5	0.5	Tractor	In progress
* According to currently effective Court of Company Registration data; ** 60 million USD in two stages; *** Taken over by Lorry Kft.

1.7 billion dollars – this is the amount the former Soviet Union owed the Hungarian Government on the spring of 1994. At the then exchange rate, this amount was equivalent to 180 billion Hungarian forints, the collection of which being associated with one of the largest political and economic scandals of the past decade – the so-termed Oilgate Case. According to the Opposition of the time, it was entrepreneurs close to the Hungarian Socialist Party and their companies that took advantage of their political and personal connections to make a financial profit out of this debt. Although Fidesz, who made the case public at that time, promised an itemized accounting and the full clearing up of the process when it took over the Government, it has not yet taken place so far. Although the activities of Nádor ’95 Kft., one of the participants, are under investigation by a parliament committee, what happened to these 180 billion forints has still remained a mystery. This report consisting of three parts is the final result of the nearly fifty background interviews we have conducted with players affected by this case, as well as our study of publicly available documents. In the final part of our series, we are demonstrating who wanted to raise the capital of Postabank to the credit of the Russian national debt and how. We set forth the investigations conducted by the Orbán administration following the elections and the steps taken during the last one and a half years to collect the still outstanding debt of nearly 400 million dollars.

On 12 November 1998, Tuesday, at the usual press conference following the meeting of the Orbán Government, Government Spokesman Gábor Borókai announced to the gathered journalists that “the subject of the Government meeting was the investigation of the Government Controlling Office (GCO) ordered by the Prime Minister to examine the situation of the decomposition of the Russian national debt.” He added, “GCO examined a part of civil contracts and found irregularities that require additional examinations to be ordered – and the Prime Minister will ask the competent bodies to do so.” The spokesman did not reveal details about the case, but according to one of the participants of the Government meeting, the reason behind further investigation was that Orbán did not find the report “strong enough.” Despite, President of GCO Tamás Sepsei – who, according to the minutes, was not present at the Government meeting – said in the programme titled “Kormányváró” (Government Lounge) of the Hungarian Television that “during our investigation, we found several new facts that can be classified as anomalies, which testify the presumable interlocking of the political and economic forces of the past period.” He also stated that “we dealt with the cases already investigated by the so-termed Oilgate Committee led by the MDF MP Ervin Demeter, and I can say that we found the majority of their findings entirely well-grounded.” According to him, it has been proven that MSZP-related businesses participated in the collection of the national debt. Then, he added that companies participating in the decomposition of the debt, although not named, failed to account for 19 million dollars to the Budget.

Similarly to its predecessors, the Orbán Government promised the investigation of suspicious economic transactions when it took office, among which the case of the Russian national debt to Hungary regularly received mention. Although, the Government meeting of 12 November was almost the only occasion where representatives of the bodies investigating the practice of the debt collection also spoke publicly about it. In his interview to the public television, Sepsey made reference to the role of Nádor ’95 Rt., the activities of which were examined separately as well, and which served as a basis of a criminal procedure – terminated without any results last Friday. Soon, a separate parliament committee started to investigate the importing of secret agency equipment (ÉS, 25 February 2000), and the issue of the collection of the national debt was taken off the publicly known agenda. However, in the background, the Orbán Government has taken serious efforts to breathe new life into the process that halted in the spring of 1996 and revived only for a short period later.

March at pace

After the initial impetus, the collection of the Russian national debt was stopped for a longer period in the spring of 1996 for the first time when the Russian Government – on the primary excuse of the miserable state of its budget and the economic crisis – practically froze the payment of its foreign debts (ÉS, 25 February 2000). As assumed by many, the Oilgate Case that, burst at the end of 1995, also played a role in this step, during which much information on the relationship of the two countries, classified as secret until then, was revealed publicly. In the spring of 1997, Ildikó T. Asztalos, Political State Secretary of the Ministry of Industry and Commerce (MoIC) even stated in the Parliament that “the agreement” with the Russians “was also hindered by the fact that a parliament investigation committee was established to reveal the possible abuses related to the repayment.” (Magyar Hírlap, 28 March 1997)

However, everyone who knew the process closely agreed on that the payment was much more dependent “more upon the willingness of the Russian party than the internal situation of Hungary.” Their right is proven by the fact that when the Russian delegation led by Mikhail Kasyanov, then Deputy Minister of Finance of Russia (today its Deputy Prime Minister), restarted the negotiations in March 1997; they only wanted to achieve the rescheduling of the debt. According to one of our informants, the only reason it took place is that the three-year limit set for the payment in the Boross-Chernomirdin agreement expired (ÉS, 18 February 2000). According to a participant of the negotiations, these discussions were conducted in an “extremely calm and diplomatic atmosphere”, although in the beginning, they “resembled to the conversation of deaf people.” It was nearly for a year that Russia had not paid a penny to its creditors. Before his arrival here, Kasyanov agreed upon the rescheduling of the Russian national debt with the Paris and London Clubs grouping the creditors. At the same time, in the contracts they undertook obligation not to grant better conditions to any other creditors. In both cases, the Russian Government undertook to pay back its debts within 25 years by receiving a grace period of six and seven years to start repayment.

Although prospects were not very rosy, Kasyanov’s Budapest negotiations still brought about a turn concerning the Russian national debt to Hungary seeing that the Russian party accepted the Hungarian argument that “this debt is to be regarded as a forced credit, therefore it falls under different assessment than loans disbursed by western states and financial institutes.” According to a ministry memorandum, however, Kasyanov also said that “he cannot undertake obligation for to following years at the moment, and he only has competence to negotiate on projects that have so far been officially accepted on the part of Hungary and Russia.” Since the Russians paid nearly 60% of their debts pursuant to the Boross-Chernomirdin agreement, they did not request a grace period but delayed the final deadline of the deliveries with four additional years. Once the Russian delegation had left, György Gilyán, Administrative State Secretary of MoIC announced: “the rescheduling proposal made by the Russian party (…) concerning the payment of their debt seems acceptable for Hungary.” (Magyar Hírlap, 29 March 1997) Finally the proposal – according to which “the fulfilment deadline” of the obligations stipulated by the Boross-Chernomirdin agreement “shall be delayed to 31 December 2000. Otherwise, other articles shall remain unchanged” – was finalized via correspondence on 8 June 1997.

The heat is on

However, it was in vain that this document reinforced the Boross-Chernomirdin agreement regarded as the starting point if decomposition the national debt, in the background, both parties breached it well before the rescheduling. In spite of the fact that Russians originally excluded the possibility to reduce their debt with energy carrier or cash (ÉS, 18 February 2000), the list of common projects included a “financial construction concerning gas deliveries”, in our information, on a Russian proposal. According to a Ministry memorandum, the deal “was characterized by the Russian Deputy Minister of Finance as a special item that requires individual assessment.” To our knowledge, this special item requiring individual assessment was one hundred million dollars’ worth of natural gas, delivered by the Russian Gazprom gas company to MOL Rt. in the course of 1997. We understand that it was the Russian company that managed to get this possibility for itself in exchange of releasing part of its public debts at home. During the deal, the national debt was assigned to a foreign offshore company of the Gazprom-owned Hungarian General Banking and Trust Co. (GBT) with similar conditions as the rest of the “debt decomposers” had. At that time, Lajos Kósa (Fidesz) challenged this deal in the Parliament: “Since when has natural gas selling activity been registered with this commercial bank?” He also asked the question “does this one billion cubic metre of natural gas not cause additional losses for MOL, because MOL makes losses on natural gas sales due to the Government’s pricing policy? Finally: Is it good for the country that natural gas has to be fired instead of petroleum derivatives, and does not it have an adverse effect on Hungary’s interests of energy policy and energy strategy?” In her response, Ildikó T. Asztalos, Political State Secretary of the Industry Department only said “under compulsion, we acknowledged that the offers of the Russian party are authoritative as starting points of subsequent debt management. (…) On Hungary’s part, having regard to the interests of national economy, we endeavoured to achieve the highest possible level of repayment. (…) The Russian partner undertook it in the form of gas deliveries in such a way that it will pay part of its Hungarian revenues to the Hungarian State Treasury as repayment. On a Russian part, they even specified the bank that administers the financial transaction. With this, they undertook repayment exceeding the plan for this year.” In our understanding, this repayment exceeded 58 million dollars (12 billion forints) that GBT finally paid to the Hungarian budget in the course of 1998.

Bear in the raspberry field

Similarly, Gazprom would have been the main hero of another deal aiming at the capitalization of Postabank, staggering towards bankruptcy. It would have violated another provision of the Boross-Chernomirdin agreement that excluded cash payment. However, according to someone knowing the case closely, “the Russian financial oligarchy was not very much interested in inter-governmental agreements, but they also bent down to pick up one hundred million dollars.” According to government sources, it happened when the Russians, via intermediaries, unexpectedly announced that they would be willing to pay cash to reduce the national debt still uncovered with goods delivery contracts. However, from then on, threads became confused, which, by the way, was the interest of all players participating in the transaction.

Nevertheless, it was revealed from the background interviews conducted in this matter that the offer – which, in the beginning of 1997, concerned only half of the three hundred million dollars uncovered with contracts but later the entire amount – was mediated by Nádor ’95 Rt., which became notorious for the importing of tapping equipment (ÉS, 25 February 2000). András Szász, the owner of the Hungarian company involved the London-based Singer & Friedlander (S&F) banking house, and, according to unconfirmed sources, the Russian side an American company called New Alliance Corporation into the transaction. According to original concepts, Nádor ’95 Rt. would have applied for the purchase of the debt, and the Ministry of Finance (MoF) even concluded a preliminary agreement with it on 6 February 1998. The Hungarian company would have sold the debt to Gazprom via the S&F – New Alliance channel of transmission for 70-75% of its nominal value, and the Russian gas industry company would have reduced its public debts with the entire amount of the debt purchased by it at discount value. Practically everyone would have benefited from the deal: intermediaries would have had am honourable revenue of 2-3 percent, Gazprom could have written off its outstanding tax debts, and the two states would have got rid of a problem dragging on for a long time, caused by the stock of debt uncovered with civil contracts.

However, administration met technical difficulties: Nádor was unable to provide the deposit of 1 percent of the debt and the bank guarantee. Although they finally collected the cash, but MoF demanded collaterals from the intermediaries to avoid the Hungarian budget to be left on the shelf at the end of the deal. According to unconfirmed information, S&F offered a portfolio of Spanish real estate as collateral, which later became known as the Telnan case during the increase of Postabank’s capital (Ban Bank – Part IV - ÉS, 18 June 1999). Finally, the transaction still came to a dead-end because it turned out that purchasing receivables is classified as a financial institute activity for which Nádor ’95 Rt. has no authorization.

On the other hand, the Russians’ willingness to pay came just in time for Gábor Princz, the first man of Postabank. At this time, he desperately sought an investor who would be willing to inject fresh capital into the trembling financial institution (ÉS, 18 June 1999). According to our informants, Princz had equally good relationships with András Szász, the owner of Nádor ’95 Rt. and László Máté. Although the only formal connection between the Vice President of MSZP and Nádor ’95 Rt. was that his brother-in-law, György Matyók was the president of its Supervisory Board, we understand that Szász and Máté “often moved about in business affairs.” “While eating cookies and goose liver sandwich,” the three of them conceived the construction “how to put the Russian deal into Postabank.” In a memorandum written for the MoF on 25 March 1998, they outlined: “The Hungarian State Treasury should sell the Russian national debt to the London based Singer & Friedlander bank group at a rate of 58 cents/USD, with LIBOR interest rate and delayed payment until 22 December 2000. As security for the payment, the bank group should be obliged to provide the Hungarian Government with 18 billion of Postabank capital investment and also 110 million dollars’ worth of real estate collateral (…) The portfolio exchange would be performed in such a way that the Postabank portfolio in the monitoring category would be placed out to the company to be specified by Singer & Friedlander, then the real estate portfolio offered ac collateral in connection with the settlement of the Russian national debt would be added to the stock of Postabank. Then, the stock of Postabank shares together with the (…) portfolio taken out from Postabank would constitute the necessary collateral of selling the national debt required by the State Treasury. There are strong reasons to assume that the value of the stocks of Postabank, fully cleaned and capitalized this way, could reach nearly 300% of their value until 22 December 2000, in which case the Government receives the revenue due as a result of selling the national debt at a value of 58 cents + interest.”

It is still obscure why the deal failed to work out. According to one of Princz’s close acquaintance, “the boys were unable to put together the construction normally”, but according to others, the top management of the finance department put its finger in the pie because “they wanted to see a professional investor and real capital in Postabank at any price.”

The beam of the balance

Disregarding the successfully administered gas delivery and the finally failed Postabank deal, the collection of the Russian debt did not get out of the stall. After the change of government, in August 1998, Viktor Orbán immediately ordered an investigation saying: “We are convinced that the reason why suspected corrupt cases multiplied is that a good deal of businesses are determined by old-new connections instead of competition.” (Magyar Narancs, 19 February 1998) Accordingly, GCO primarily investigated whether any financial abuse took place during the process and whether anyone is personally liable. However, when the investigation was terminated, GCO President Tamás Sepsey made a surprising statement: “We know very well that there are always some who try to fish in troubled waters, but the decomposition of the debt in itself can be classified as appropriate for Hungary. Therefore, apart from these anomalies, the overall picture of this process did not cause any economic harm to the country.” (MTV, Government Lounge, 12 November 1999)

A ministry memorandum answered to what the GCO President exactly understood by this. According to it, the decomposition of the debt “has improved the balance of the Hungarian budget with 147.3 billion forints so far.” From this, 116.3 billion forints were represented by military technology shipments, consisting of two main items: the MiG-29 (Fulcrum) aircrafts (ÉS, 18 February 2000) and BTR-80 wheeled armoured personnel carriers. The central budget received additional 31 billion cash revenue from the payments of companies that decomposed the Russian national debt with the shipment of civil goods (ÉS, 25 February 2000). According to the memorandum, “in the event the repayment is completed until the end of 2000, the interest on the amount of the debt – according to the National Bank – will be 180 million dollars (…) Apart from that, the progress of certain projects have been halted for various reasons (pending amounts that can be re-tendered in the case of contract termination amount to 160 million dollars), moreover, there is a project the completion of which has not even been started (50 million dollars), thus further opportunities can be considered in decomposition a total debt of about 390 million dollars.”

However, as we shall see later, after the consideration, neither the Orbán administration went any farther than its predecessor: it established a committee from representatives of ministries – named not “inter-departmental” but “operative” committee –, which also tried to charge private companies with the collection of the debt.

Familiar faces

Nevertheless, on 18 August 1998, the Russian economy collapsed after a long agony, thus ministry experts fabricated plans to start the process in vain, and Russia froze the payment of its debts again. Minister of Economy Attila Chikán raised the subject again half a year later. However, his visit to Moscow on 18 January 1999 brought about a disappointing result because “the Russians classified the situation as serious and they did not even exclude additional dramatic developments.” At the discussions, the Russians said that they suspended the payment of foreign debts inherited from the USSR, and since negotiations with international creditors had not been completed, the earliest time when they could negotiate on the merits of the repayment to Hungary was in May. One of our sources in high positions who was present at these negotiations all along said on this same matter: “In the language of diplomacy, the Russian party told us something like that Hungarians had already received a lot of cash, and they also have to satisfy the Czechs and the Poles.”

An additional six months passed until the Government – after expert level negotiations – managed to place the issue of additional decomposition of the Russian national debt on the agenda. On 1 June 1999, the Government issued a decision that public tender had to be announced and the Minister of Economy must report on its result. The entire text of the tender was published in the 20 July 1999 issue of the Foreign Trade Bulletin, and the Economic Department published announcements in several national daily papers as well. In our information, finally eight companies participated in the tender with a deadline of 6 September, submitting bids for purchasing 330 million dollars’ worth of national debt. The operative committee assessed them at its meeting on September 17, and found that the “amount intended to be purchased does not reach the remaining debt frame.” However, the committee highlighted that a part of bidder companies submitted their bids at less “disagio”, which means that they would have paid a higher percentage to the central budget than the previous 58%. But finally, only two companies met the tender criteria, one of them – according to our information – was Kapolyi’s System Consulting Rt., bidding for the purchase of 40 million dollars. The other winner was Speed-Ex Kft., formerly participating in the debt decomposition, which made an offer to purchase one million dollars’ worth of debt.

To our knowledge, the operative committee already prepared the Government Regulation approving the amount claimed by the two winners, but it did not even get to the Government Meeting because, according to one of our informants, it “got stuck somewhere in the sphere of real decision.” Our sources made contradictory statements on what exactly this means. According to some, it was the decision of Viktor Orbán and his innermost circle, while others say that the management of the Prime Minister’s Office (PMO) torpedoed the submission. However, they all agreed that the current government “had not regarded the winners politically neutral.” Additionally, Chikán’s economic department considered Kapolyi a “harmful man”, first and foremost due to his activities as Minister of Economy, including the development of the Eocene Programme.

At any rate, it became clear – according to our Government sources – that “public tendering did not meet the expectation according to which Hungarian entrepreneurs wishing to participate in the decomposition of the debt would turn up in crowds.” Mostly, bidders were from those who had already participated actively in the process over the previous years. As one of them said, decomposing the debt requires special technical skills, and it does not go like “you go to Moscow with a suitcase and you bring back millions of dollars right away.”

Underground stop

The situation was further complicated by differing opinions within the Government as to what should be done in this stalemate situation. Although the economic department endeavoured to keep the issue afloat, but according to someone knowing the situation well, “we also know that it is not worth forcing it.” However, both the MoF and the PMO urged the department to do something because the budget for last year planned 22.5 billion forints of revenue coming from the collection of foreign debts.

Nevertheless, at Mikhail Kasyanov’s new visit last autumn, soon it became clear that in vain did the Hungarian budget planned revenues, everything depended on the Russians’ willingness to pay. According to participant of the negotiations – who described the Russian Minister of Finance as a well-prepared and fair negotiating partner – Kasyanov, in the language of diplomacy – stated very politely but firmly that “they did not wish to pay those days.” However, he displayed willingness to settle pending matters. By this, he meant the shipment of several hundred Lada Niva all-terrain cars promised for the frontier guards and the underground carriages ordered by Nádor ’95 Rt. (ÉS, 25 February 2000). Concerning this latter, it turned out then that the Russian financial department had already pre-financed the originally 50-million-dollar production at an amount of 10 million dollars, and completed carriages “were rusting in the factory courtyard.” This metro carriage deal finally “became the obstacle” of the entire process since, to our knowledge, Russians stipulated the takeover of these ten carriages as condition for additional negotiations.

Already in March 1998, the managers of Nádor ’95 Rt. and the Budapest Transportation Company (BKV) agreed that the Transportation Company was going to buy the carriages for the forint equivalent of 2.8 million dollars. However, according to our information, Nádor did not receive the licence necessary to import the metro carriages; therefore, when the delivery deadline was over, BKV indicated that it regarded the contract null and void. According to one of our informants, “Russians swore all along the production” because they did not understand why an intermediary company needed to be included between BKV and the carriage manufacturer Metrovagonmas that had had a long business relationship with each other. After some half a year, a new intermediary company, Eastern European Market Kft. turned up and, referring to a negotiation licence received from the economic department, they offered their services to remove the underground carriage business from the stall. With the mediation of the company, they finally agreed that BKV itself would enter into a contract with the Treasury, and it would pay the originally agreed price of 2.8 million dollars during 4 years with delayed payment, the reason of which being, according to those knowing BKV well, that the company “simply does not have cash, and the Treasury can be happy to receive something at all from the ten million dollars’ worth of national debt written off this way.” According to our information, the carriages are arriving in Hungary during the next weeks.

Friendly loans

The consequence of disputes within the Government and the “lukewarm attitude” of the economic department was that on the initiation of the Prime Minister’s Office, matters related to the decomposition of the Russian debt were removed from the competence of the operative committee. To our knowledge, this task was assigned to the “secret ace of Fidesz”, Csaba Faragó, who, acting as Functional Deputy CEO of the State Privatization and Holding Company (SPHC), is primarily responsible for personnel matters and the utilization of real estate. Our informants characterized Faragó – who, as we know, has technical education and worked for OTP Real Estate Co. for a short time – as the trusted man of Fidesz politicians Viktor Orbán and László Kövér, and the reason of his involvement was that “he is a tough guy who is good at negotiating with mafia people.” On the other hand, those knowing the process of debt collection received Faragó with scepticism since, according to them, “everything depends on the willingness of the Russian party and not on shuffling in Hungary.”

At any rate, Faragó, who initially had no legitimacy, was officially installed by the State Budget Act adopted this year after amending the act as follows: “The Minister of Privatization shall perform the tasks of managing foreign receivables via the State Privatization and Holding Company. The competent Minister shall receive authorization to sell foreign receivables under the amount of 100 million US dollars, as well as to develop and implement constructions with the purpose of their decomposition and in connection therewith, to announce tenders and reschedule foreign receivables as possible, with the agreement of the Minister of Economy. All this indicates that from this year on, the matter of not only the Russian but also all national debts was assigned to SPHC. They include several receivables that have been accumulated back in the Socialism towards “friendly” countries such as Cuba, Albania, Laos or Kampuchea. According to our information, their total value is near three hundred million transferable rubles, equivalent to about 250 million dollars. An additional three hundred million dollars are represented by government loans Hungary disbursed to developing countries, for example Algeria, Vietnam, Iraq and Yemen. Therefore, Csaba Faragó received authorization to collect nearly one billion dollars’ – about 250 billion forints’ – worth of debt altogether with the receivables from the Russians amounting to 400 million dollars.

To the question concerning the form in which the current Government imagines the collection of this debt, we received the official response from the Holding Company that “the order of procedure in accordance with which the handling and collection of foreign national debts should be administered will be completed by the end of March.” By that time, we assume it is seen whether SPHC will break the tradition of its predecessors to manage public money in the frame of public tenders or goes on the track surrounded by secrets and lies that were treaded by the Horn administration in former years.

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