Weekly Geopolitical Report By Kaisa Stucke, CFA December 8, 2014 assess its bargaining power with Europe and Russia, taking from each the most for Hungary’s PM: Madman or Geopolitical Hungary while keeping both at arm’s length. Genius? Historically, Hungary has tried to pre- emptively align itself with regional powers that are gaining strength. Hungary’s current Hungary has seen increasing domestic civil foreign policy shift toward Russia could be a unrest over centralization of power and signal of changes in Eastern European international criticism over potential geopolitics. changes in its democratic process. Hungary’s Prime Minister Viktor Orban In today’s geopolitical commentary, we will supports the creation of an “illiberal explore the differences between the rules of democracy,” noting that countries with the geopolitical game that is played by restricted democracies have been the rising Hungary, the West and Russia. We will also stars on the international front. He is also describe the history of Hungary’s balancing one of the first European leaders to turn act between the powers of the East and the friendly toward Russia, noting that West and how this history has affected the geopolitics are changing and that Eastern current politics of Hungary. We will discuss European countries should redefine their the most likely outcomes and the international policies according to these international significance of these outcomes. changes. As always, we will conclude with market ramifications. His actions have caused many Western leaders to call Viktor Orban an autocrat, a Brief History dictator and a destroyer of democracy. We Hungary is a land-locked country in do not believe that autocracy is the ultimate southern Eastern Europe. The country has goal of Viktor Orban, but that he is historically been a crossroads country, attempting to secure the best outcome for meaning the region has been ruled by Hungary under a set of changing various European and Asian powers. As a geopolitical circumstances that he believes crossroads country without strategic are forthcoming, while making sure his significance or rich natural resources, Fidesz party stays in power. Orban believes Hungary has had to make deals with that Russia will become increasingly whichever power has been the hegemon in belligerent and the West will be too the region. Throughout its history, the entangled in its own crises to turn its full country has been attacked by a multitude of attention to its Eastern front. All of Eastern powers from the East and the West. As a Europe has also watched the West’s result, Hungary has mostly attempted to handling of the Ukraine crisis and the lack placate its more powerful neighbors, not of response is making the regional powers aligning strongly with anyone and being ask, “What will the West fight for?” As a quick to change policies according to result, Hungary has pursued a multi- changing geopolitics. dimensional foreign policy, trying to re- Weekly Geopolitical Report – December 8, 2014 Page 2 reduced the size of the country, cutting it down to one-third of its original land mass and reducing its population by half. As a result, many Hungarians still believe that the land taken from the country in 1920 should be returned. Hungary was allied with Germany and Austria in WWII, declaring war on the (Source: University of Texas, www.utexas.edu) Soviet Union. As the war wore on and it became clear that Germany was weakening Presently complicating the matter for and the Soviets were likely to take the Hungary is that it has seven neighboring Hungarian region, the country’s leaders countries; six of them are relatively new and secretly met with the Soviets, attempting to are still trying to figure out their own foreign create friendly relations ahead of the policies. anticipated Soviet takeover. Through an interesting turn of events, Hitler found out The Kingdom of Hungary was established in Hungary’s plans and, since the country was the year 1,000 AD. During the 11th century, essential in the defense of Austria, moved to the kingdom was attacked by the Mongolian occupy Hungary, instilling local Hungarian empire twice, with the first attack resulting Nazis in the new government. in half of the Hungarian population being killed or sold as slaves. The Turkish This history of foreign invasion has instilled invasion during the 16th century divided the in Hungarian people a distrust of foreign country into three parts—the Hungarian powers. Oftentimes, the country’s leaders kingdom, the Turkish empire and the have blamed all Hungarian misfortunes on Habsburg empire. The country remained foreign involvement, ridding themselves of divided for 150 years, after which it was responsibility. controlled by the Habsburg empire in its entirety. In 1848, Hungary attempted to After the Soviet Union fell in 1989, Hungary regain its independence, but the Habsburg re-oriented itself toward the West. The empire suppressed the movement. country joined NATO in 1999 and the EU in However, in 1867, the Austro-Hungarian 2004. Hungary thrived economically and empire was established via a peace treaty, enjoyed a balanced political system, with which granted more autonomy to the both the center-left and center-right parties Hungarian segment of the empire. enjoying equal representation in the parliament. However, a series of corruption Hungary was highly involved in both world scandals involving the center-left party led wars. As is well known, WWI began with to the emergence of Orban’s Fidesz party as the Austro-Hungarian empire declaring war the dominant party. Fidesz came to power on Serbia after the assassination of as a center-right party, a party with Archduke Franz Ferdinand of Austria. nationalistic tendencies but still appealing to WWI also ended the Austro-Hungarian the popular vote. The center-left opposition empire, after which Hungary became continues to be divided and disorganized, independent. The peace Treaty of Trianon, but more recently an extreme-right fascist signed in 1920, established Hungary but political party, the Jobbik party, has gained Weekly Geopolitical Report – December 8, 2014 Page 3 support among the young, Eurosceptic member states should have. From the population. Jobbik stands for nationalism, West’s point of view, democracy is the one centralization of power and anti- and only governance structure that works globalization. In fact, the incumbent Fidesz and every country should work toward party faces more threats from the extreme- achieving it. On the other hand, Orban, right Jobbik party than from the center-left. along with some other foreign leaders, These threats from the extreme-right have believes that an “illiberal democracy” may moved the incumbent party’s stands further achieve the maximum benefit for a country. right in an attempt to gain votes from He admires the emergence of China, India, Jobbik. Singapore, Turkey and Russia, which he points out either adhere to a “special kind of Geopolitically, after the fall of the Berlin a democracy” or are not democracies at all. Wall, the U.S. played a crucial role in Hungary’s transition to a market economy in In the game of geopolitics, Putin has often terms of funds and expertise. However, the been said to approach foreign relations as if whole Eastern European region is aware of it were a judo match, often weighing the the reality that the ex-Soviet Union ceased relative power position of the players and to be a priority for Washington in recent creating distractions to take home a victory. years as America’s foreign focus has shifted Along the same line of thinking, one could to the Middle East and East Asia. Of the ex- say that the West approaches geopolitics as Soviet countries, Hungary is the first a chess game, assuming that all players are, country to change its own foreign policy in or at least should be, gentlemen. If Putin is response to a more aggressive Russia and a playing judo and the West is playing chess, withdrawn West, but others may follow then Hungary seems to approach its foreign soon. relations as a multi-player mud-fight. Orban is trying to stand back and provide enough Current Situation vague signals to the other sides, not creating Since Orban’s government came into power, complete enemies but aligning itself with the the Fidesz political party has introduced side that seems to have the upper hand at more government control over many areas any given time, while not kicking mud in the of the economy, instituting strict controls face of the losing side in case its position over media and most recently attempting to improves. introduce an internet tax, which was widely viewed as a further restriction over free As long as these sides are playing different speech. games, an understanding between them is not likely to emerge. The government has also criticized the EU over its austerity measures, the sanctions it Additionally, it also seems that Hungary has has imposed on Russia and, most accepted that the best foreign policy is to significantly, the advancement of EU- align with the stronger regional players centered governance of what Hungary views given its position as a land-locked country as its own sovereign matters. with no significant natural resources that lies between greater geopolitical forces. Thus One of these central issues for Hungary is throughout its history, the country has whether the EU should have the right to hitched its wagon, sometimes willingly, dictate what kind of a democracy its Weekly Geopolitical Report – December 8, 2014 Page 4 sometimes unwillingly, behind the greater NATO membership offers Hungary a political forces that are on the rise. promise of protection. However, Hungary, along with the rest of Eastern Europe, has Possible Outcomes closely followed the West’s handling of the Hungary, like many other Eastern European Ukraine conflict.