Russia, Hungary, Win US$1 Billion Tender To Supply Egyptian Railways As Brussels Is Left Out Of The Loop

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Op/Ed by Chris Devonshire-Ellis 

Serbia Joining The EAEU And EU-Russia Sanctions Are Having Knock-On Implications For Ex-Soviet EU Members 

The joint bid of a Hungarian and Russian company has won a tender worth over US$1 billion to deliver rail carriages to Egyptian Railways, the Hungarian Minister of Foreign Affairs and Trade Péter Szíjjártó has stated in Moscow. It is one of the biggest contracts ever for the Hungarian transport industry – which dates back to the 1850s, while the project will increase Egyptian Rail’s capacity by 34%.

The implications for this new contract however go far beyond the improvement of Egyptian railway infrastructure. They will go to the heart of the EU itself, as well as demonstrate how closely the Chinese and Russian governments are aligning methodologies in terms of providing debt financing for developing infrastructure projects with key client states.

Like China And Its Belt & Road Initiative Financing , Russia Is Funding The Egypt Rail Project
Eximbank of Russia will be signing an agreement to provide a loan agreement on the sidelines of the up-coming Russia-Africa Economic Forum, Russian Minister of Industry and Trade Denis Manturov said yesterday. “This document will also be initialed by the Eximbank of Russia and the Egyptian National Railways shortly, within the framework of the Russia-Africa Economic Forum.” Manturov said. This illustrates that Russia is also following the same loan mechanisms for overseas partners along its Belt & Road Initiative – lending money to friendly and strategically important Governments in return for infrastructure projects.

EU Sanctions Against Russia Have Cost Hungary US$8 Billion.  
Szíjjártó also said that as the European Union’s sanctions against Russia had caused a loss of US$8 billion of Hungarian potential exports to Russia, the two countries had been working together to offset that loss in bilateral trade areas not affected by the sanctions, such as expanding the reach of Hungarian pharmaceutical companies with a manufacturing base in Russia.

Resurgent Hungary-Russia Trade & Energy Ties 
Consequently, Hungary also reached an agreement with Gazprom that the Russian gas company will begin deliveries of natural gas for the 2020-21 winter period next April. Szíjjártó added that thanks to an earlier agreement, Hungarian gas storage facilities were fully stocked for the first time in their existence, meaning nearly 6.5 billion cubic meters of natural gas, covering Hungary’s needs through next autumn.

Szíjjártó added that the plans for the expansion of the Paks nuclear plant – to be carried out by Russian firm Rosatom – have been approved, meaning that the cheap and reliable electricity supply of Hungary will be covered well into the future. Hungary signed the deal to expand the capacity of its only nuclear plant in Paks, central Hungary to 1,200 megawatts from the current 500 megawatts back in 2010, at a price of HUF 2,000 billion at the time (EUR six billion at current exchange rates). Szíjjártó also said that during Russian president Vladimir Putin’s visit to Budapest scheduled for October 30th, the two sides will also sign a number of important bilateral agreements.

Russian Overseas Free Trade Zones
There are a number of significant points arising from these developments. First of all, the developing impact of Russian investment into Egypt, where Russia has established a Free Trade Zone in Port Said. That facility, in a model that can be expected to be rolled out by Moscow across Africa and Asia, looks to capture low cost wages for the Russian domestic market and maintain year round production for Russia and the EAEU, where productivity typically drops during the winter months. India has also expressed interest in providing Russia with a Free Trade Zone as have several ASEAN nations. Such zones may also be used for joint projects – as has happened with Budapest in this case. This is in contrast to the EU. The European Union is solely based upon internal trade and has not invested in any Free Trade Areas outside of its membership base. That is now restricting the capability of EU businesses to invest in Free Trade Zones outside the EU and remain protected by EU standards and regulations. It is a fundamental weak point within the Union and is only going to become more apparent.

Eurasian Economic Union vs. European Union Membership 
The fact that Budapest has agreed this joint venture with Russia to service demand in Africa will alarm Brussels. Hungary, an EU member, and Serbia, which was a potential EU candidate member, were highly upset with Brussels over sovereignty and interference issues concerning Brussels insistence it alone was responsible for monitoring the tender process for a proposed high speed rail link that Budapest and Belgrade had put up for tender. The project did not call on EU funding, and a Chinese contractor won. However, Brussels stepped in and asserted authority, demanding the tender be re-issued under EU guidance. This held up the project for three years until it was eventually awarded – to a Chinese contractor. With such behavior, Brussels managed to upset a full member state, a prospective member state, and China simultaneously.  There has been fallout. Serbia has ditched prospective EU membership and signed a Free Trade deal with the Moscow backed Eurasian Economic Union instead. As is now apparent, an EU member state in the form of Hungary is now opting to look for investment and trade opportunities outside the EU and becoming closer to Moscow now than Brussels. Just over a year ago I wrote an article, Leaving The European Union And Joining The Eurasian Economic Union which is becoming more pertinent. Brussels will be asking for larger contributions from member states as the United Kingdom’s contributions disappear as a result of Brexit, while the issues with Serbia and now Hungary point to a closer examination of where EU members may be better off in coming years.

The Hungary-Russia joint winning of a US$1 billion bid to service Egyptian Rail is unusual, and it diminishes Brussels in favor of Moscow. It is a trend I suspect may well accelerate. Brussels needs a rethink over what it offers members and it needs to consider members business needs as how to access overseas markets in a rather more supportive manner. If not, then the alternative is already on the horizon – EU member states will leave.

 

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Russia Briefing is written by Dezan Shira & Associates. The firm has 27 years of operations in China and assists Russian and Foreign investors establish operations into the country. Please contact us at russia@dezshira.com or visit us at www.dezshira.com

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