(Bloomberg) -- When the European Union was cobbling together a ban on Russian oil, Hungary was offered replacement supplies that would have ensured energy security for Budapest and shown Moscow a unified front over the war in Ukraine.

Instead, Prime Minister Viktor Orban decided he’d rather keep getting cheaper crude through Hungary’s Russian pipeline, leveraging his veto power to win an exemption from the embargo and drawing cries of blackmail from EU countries, according to people familiar with the matter. 

The EU nations had been so keen to maintain their unity and prise Orban away from Russia that they had even been prepared to pay the cost of transitioning Hungary away from Russian oil. Orban’s shifting demands and hardball tactics baffled and outraged national officials, with some warning it could lead to repercussions for Hungary, the people said.

Orban was also successful in a last-minute push to get Patriarch Kirill, a supporter of President Vladimir Putin’s war who heads the Russian Orthodox Church, removed from the EU’s proposed list of sanctioned individuals, the people said.

Hungary’s intransigence may have destroyed any remaining goodwill with the other 26 members of the EU and has left Orban more isolated than ever, said one diplomat, who asked not to be identified because the discussions are private.   

Hungary imports about 9 million tons of Russian oil every year through the Druzhba pipeline and was offered a solution that would have met its needs using supplies from Croatia, one of the people said. A refinery in Rijeka, Croatia, which has a capacity of 11.4 million tons per year, could supply Hungary with about 8 million tons a year and could boost its capacity with minor interventions to infrastructure to as much as 15 million tons in a matter of weeks, the person said. 

A new pipeline from a refinery in Sisak, also in Croatia, could be completed in less than five years and bring capacity to 20 million tons, helping Hungary, Slovakia and the Czech Republic with their supplies. The seaborne crude would have been sourced from elsewhere in the world. 

Hungary said earlier that the cost of the new pipeline would be 220 million euros ($236 million) and that it would need another 550 million euros to overhaul its refineries. The EU indicated that investments of up to 2 billion euros were available to guarantee the oil supplies of nations most reliant on Russia, suggesting those costs could be met.

Rather than pursue the offer of oil from Croatia, Orban pushed for an exemption that would allow Hungary to keep getting cheaper energy from Moscow. Continued access to Russian oil is seen as crucial to Hungary, where Orban has capped fuel prices -- at one of the lowest levels in Europe -- and maintained lavish household utility measures.

Sanctions Weapon

Hungary has challenged the idea that sufficient volumes of oil could flow from Croatia to meet its energy needs without the expansion of the pipeline connecting the two countries. It has also said the price wouldn’t be competitive with the Russian crude it currently buys at a discount.

Since his return to power in 2010, Orban has cultivated the closest relations of any EU leader with Putin during an unprecedented wave of power consolidation that saw the Hungarian leader extend his influence over the courts, media, business, culture and education.

The EU approved sanctions on Thursday that will ban Russian seaborne oil by early next year while sparing pipeline imports, effectively cutting 90% of the crude imports from Moscow. The compromise agreement was only made possible after it received Orban’s blessing at a meeting of EU leaders on Monday. 

The text of the sanctions agreed by member states makes clear that Hungary’s waiver on Russian pipeline oil will stay in place until EU leaders -- including Orban -- say so. In a further concession to Orban, Hungary will also be allowed to source Russian oil from anywhere in the world should its pipeline deliveries be disrupted. 

Religious Exemption

Hungary’s intervention to get Patriarch Kirill removed from the proposed sanctions list mystified some in the EU. While Hungary had raised the issue before, Orban had not mentioned it to EU leaders earlier this week when a political arrangement was reached on the package.

Diplomats are at a loss to understand precisely why Orban has been so determined not to sanction Kirill despite Budapest’s official explanation putting it down to wanting to keep religion out of politics. Two of the people suggested Orban’s approach was driven by a mix of only caring about Hungary’s national interests and wanting to keep relations with Russia warm.

Diplomatic notes seen by Bloomberg show that envoys felt they had no choice but to accept the request in order to green light the oil ban. One western European ambassador told colleagues that Hungary had lost credibility for re-opening a deal already agreed to by the bloc’s leaders, while another noted that there would be consequences over Budapest’s decision to block Kirill from being sanctioned.

Germany, Italy and Spain were among the member states to put their displeasure on record. Greece, one of the EU countries where the Orthodox Christian faith is strongest, noted during one of the meetings that it was in favor of sanctioning the Russian Patriarch.

Even Hungary’s relationship with its closest ally in the EU, Poland, is increasingly falling apart over the two nations’ very different approaches to Russia. Hungary is also locked in a separate dispute with the EU over democratic backsliding and graft concerns, with Budapest blocked from getting as much as 7 billion euros from the bloc’s pandemic recovery fund, helping push the Hungarian forint near a record low this week. Orban will need a lot of goodwill to unblock that crucial funding.

Budapest had also demanded it be able to sell Russian oil that it refines and tried to wriggle itself out of measures that will prohibit countries from re-exporting any pipeline oil they import, the people said. That request was rejected by EU leaders, the people added.

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