Viktor Orbán strengthens his crony state capitalism

Vodafone’s announcement of the €1.8bn sale of its Hungarian business to two state-linked holding companies this week said strangely little about the rationale for Vodafone, but a lot about what it meant for Hungary. The Budapest government, it noted, has a “clear strategy to build a Hungarian owned national champion” in telecoms. There is no indication Vodafone was lent on by Budapest to sell, unlike in some other cases; the disposal fits with its strategy of simplifying its structure, and it received a generous price. But the deal is the latest step in the construction by Hungary’s premier Viktor Orbán of a state-dominated crony capitalism.

Orbán’s Fidesz government has been on a mission since coming to power in 2010 to return key foreign-owned parts of the economy to Hungarian control, using often sharp-elbowed tactics. After facing a variety of regulatory pressures including special taxes and utility price caps — presented by the government as in consumers’ interests — some foreign owners pulled out, helping to bring domestic control of the banking, energy and media sectors back above 50 per cent. Three banks are being merged into a state-linked Hungarian Bank Holding.

Now, as Hungary’s economic development minister declared this week, the Vodafone acquisition creates a chance to “step up as an important player in the telecoms market”. The leading operator, Magyar Telekom, has long been majority owned by Deutsche Telekom.

Hungary’s premier is not alone in such ambitions. Especially after the financial crisis, many central European states fretted that sales of communist-era assets in the 1990s had left their economies too much at the mercy of foreign owners. In the US, Orbán’s brand of political and business nationalism has made him a favourite of “America First” Republicans. But for Orbán, repatriation of ownership is part of a broader effort to extend his political dominance into the commercial sphere — and to create a socio-economic system that endures even if Fidesz loses power.

Part of that has involved channelling funds and opportunities to loyalists, in some cases childhood friends of the premier. A state-linked business elite of “Orbán oligarchs” has emerged, more akin to models in ex-Soviet republics but inside the EU. Indeed, these tycoons often owe much of their fortunes to winning state contracts financed in part by EU funds. In the Vodafone Hungary deal, one buyer, 4iG, is headed by an ex-lieutenant of Orbán’s closest business ally; the other, Corvinus, is one of several holding companies created to manage state assets.

The pitfalls of such a model are plenty. Businesses can become government servants. Part of the motivation for squeezing out foreign control of media outlets was to turn them into Fidesz mouthpieces. Basing financing decisions on closeness to power leads, too, to inefficient allocation of capital. In theory, a Hungarian strategic bank could be a good thing, but finance professionals say its books are full of loans to businesspeople tied to the regime.

Such crony capitalism also risks institutionalising graft, which a weakened Hungarian judiciary is ill-placed to police. The EU is withholding €15bn of pandemic recovery funds over rule of law concerns; EU officials fear, too, that as Orbán moves closer to a “Putinism-lite” political and economic model, Budapest — already a holdout over an EU oil embargo — will be an impediment to further sanctions on Russia.

Current high inflation and a gaping fiscal shortfall may yet force Hungary’s premier into some tactical concessions to Brussels in hope of unlocking EU funds. But this week’s telecoms deal suggests the key features of Orbánism are becoming ever more entrenched.