Ukraine Against Renewing Deal to Supply Russian Gas to EU

The European Union’s (EU) decision to stop all Russian gas imports for ever by 2027 received an impetus with Ukraine announcing not to renew a major agreement allowing Russian gas to transit through the country to some European nations from beginning of next year.

The agreement, which was signed between Ukraine’s Naftogas and Russia’s Gazprom, is set to expire on 31 December 2024 and is expected to have a significant impact for the Russian gas exports to some of the EU member states.

Despite its war with Russia since February 2022, Ukraine, which currently accounts for half of Russia’s remaining pipeline gas exports to the EU and a third of total Russian gas exports including LNG, did not disrupt the gas supplies to EU.

As per the existing agreement, Russia’s Gazprom was obliged to pay Ukraine for the transit of 65 billion cubic metres (BCM) of gas to EU in 2020 which fell to 40 BCM per year until 2024, whether or not Gazprom actually shipped the agreed amount, and further down to around 16 BCM in 2024.

Russia will be losing $6.5 billion every year on account of Ukraine’s decision unless it can redirect these flows to other pipelines or LNG terminals.

Even Ukraine will also be impacted financially as it will be losing fees equivalent to about 0.5% of its GDP ($800 million in 2023 and $1.2 billion in 2022) by not reviving the gas transit contract and also diminishing its role as an energy partner for Europe.

Among all countries, it is the Russia-friendly Hungary and Slovakia (the main entry point of Russian gas into EU), Moldova, and Austria to some extent, which will suffer economic losses due to Ukraine’s decision compared with other member-states of the Eurozone. These countries want the gas supplies to continue as they are apprehensive that they may not have access to Russian gas forever.

The non-supply of gas will not hit Austria, Hungary and Slovakia in any way for the time being as these countries more than 90% of the full storage capacity to meet the domestic demand till next summer.

Azeri Gas to EU

On the other hand, Azerbaijan, has announced that it will double its gas exports to EU by 2027 and Ukraine could replace transiting ‘Russian’ gas with Azeri gas.

Till Azerbaijan steps up its gas production, Russia will supply its gas to the Central Asian nation, which in turn, will send it to Ukraine for transiting to the EU, and there will not be much change in the gas prices supplied to the EU nations.

By supplying Azeri gas to Europe to ensure its energy security, Ukraine will become an ally of these countries and it can improve its relations with Hungary, Slovakia and Austria, which are depend on energy supplies via Ukraine.

For Azerbaijan, which has signed a Memorandum of Understanding (MOU) with EU in July 2022, supplying gas to Europe via Ukraine can realise its long term strategic goal of becoming a key player in the European energy market.

Meanwhile, in an interview with Financial Times, outgoing EU energy commissioner Kadri Simson said that such a “swap” would simply result in Russian gas flows continuing but “pre-labelling” them as Azerbaijani. The arrangement was totally unnecessary as it was possible for European companies to buy Russian gas at the Ukrainian border themselves, she added.