Hungary is not following a state capitalism model. It is not the state itself that owns most strategic assets, but businessmen close to the party in power, Fidesz. One might say this is closer to the Putin playbook, creating a class of oligarchs that controls the commanding heights of the economy (banks, telecom interests, utilities, highway concessions, waste management, etc.) right down to an enormous network of small to medium-sized enterprises (SMEs). Public assets, such as universities, have been rolled into foundations which are controlled, once again, by parties close to and dependent on Fidesz, for the very long-term, compromising their independence.

Let us look at the pros and cons of the oligarch versus state capitalism model, from the perspective of Fidesz.

Should Fidesz lose power, under a state capitalism model, it would lose control over these assets. Under the oligarch model, presumably most oligarchs would remain loyal to Fidesz and could continue to provide a significant economic hinterland to Fidesz, from campaign financing to jobs and contracts to loyalists. Even more significant, should Fidesz lose an election, these companies could withhold service and create disruption in the economy, bringing into question the economic competence of a successor government, thereby exercising a profoundly anti-democratic effect.

Let’s now look at the downsides. What happens if an oligarch goes rogue? Or through succession, assets fall into unfriendly hands?

The most notable example of the former was Lajos Simicska, who according to Stefano Bottoni’s book, fell out with Orban in 2015 when Orban decided to permit direct enrichment of oligarchs, rather than just filling Fidesz coffers. Simicska switched his allegiance to Jobbik, a far right political party at the time, which frontally attacked Fidesz (“We work, you steal!” was their main slogan). A resolution was reached in 2017, a few months before elections, when a buyout of Simicska’s assets by former gas equipment service man, Lorincz Meszaros was arranged, including the purchase of construction company Kozgep, and key media assets, for HUF 45 billion (over $300 million).

According to HVG magazine, in 2017, Mr Meszaros sued a political party that accused him of being Orban’s strawman, and lost both the lawsuit and appeal.

An example of potentially losing oligarch assets via succession was the death of world-famous movie mogul Andrew Vajna. Normally, a simple estate procedure takes a year or more in Hungary. Somehow, Vajna’s casinos were transferred to an investor group close to Istvan Garancsi, another businessman close to Fidesz, with unusual speed.

This process of oligarchization of the Hungarian economy is still proceeding rapidly.

·        Interests close to the government are negotiating for the purchase of Budapest Airport, a strategic asset worth a few billion euros. Rumour has it that French Vinci will co-invest and manage the asset.

·        Interests close to the government have recently purchased a majority interest in Auchan, a supermarket chain, and I understand at least one other international supermarket chain is bracing for an “irresistible offer”.

The creation of Magyar Bank Holding (MBH) from the merger of three nationalised banks (Budapest Bank, Takarekbank, and MKB Bank) to create an oligarch super-bank, offers the potential of accelerating this process of oligarchization, providing cheap and easy financing for oligarchs to buy and leverage assets. 4iG, a technology holding firm close to Fidesz, recently raised over EUR 400 million from MKB, with a state guarantee to boot, to buy Vodafone Hungary.

The oligarchization of the economy, in my opinion, is much broader than most Hungarians realise. Last week I visited the founder of a Hungarian company, whose brand is extremely well known among Hungarians. He confessed to me that over 10 years ago, he succumbed to pressure to allow an outsider into his company, who went on to take control, and has caused billions of forints in damages to him. He is a broken man, showing no resistance to this process, rather grateful that he has his health and enough money to live comfortably. The oligarch in question has an extensive Facebook following, and via LinkedIn is even linked to several acquaintances of mine, who I am quite sure have no idea of the nefarious role played by this oligarch.

I recently met the CEO of a foreign construction materials company. The government passed legislation which turned the company from major profitability to loss. Interests close to the government are now negotiating for the acquisition of the company. Lack of profitability will no doubt influence price.

So where does this all lead? Probably not a good place:

·        Productivity growth of Hungarian companies (0.8% per year) is less than half of the European average (2%) over the past decade.

·        Many SME owners are not willing to grow their businesses beyond a certain point for fear of becoming a target for oligarchs.

·        There comes a point when confidence of investors, domestic and foreign, may diminish or evaporate.

Irrespective of morality, this is not a sustainable path.

Les Nemethy is the CEO and founder of Euro-Phoenix Financial Advisors Ltd and a former official at the World Bank.