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Russian gas deliveries through Ukraine are set to stop on Wednesday when a transit agreement between the two countries expires following Moscow’s all-out invasion.
The pipeline was one of the last two routes still transporting Russian gas to Europe almost three years after it was fully developed War. EU countries will lose about 5 percent of gas imports in the middle of winter.
While traders had long expected a halt in gas flows, the end of the pipeline route through Ukraine will impact Europe’s gas balance at a time when demand for heat is high. Slovakia is the most affected country.
“While one would assume that the loss of these volumes is priced in, a strong price reaction is not initially ruled out,” said Aldo Spanjer, senior commodities strategist at BNP Paribas.
The deal, allowing Russian gas to transit through Ukraine, was agreed at the end of 2019 and signed a day before the previous 10-year contract between the national gas companies expired. At that time, the European Commission campaigned strongly for the agreement.
However, after Russia’s large-scale invasion of Ukraine in 2022, the Commission encouraged member states to look for alternative supplies as the bloc wanted to move away from Russian imports of fossil fuels. The pro-Moscow governments of Hungary and Slovakia have opposed this change and sought to extend the agreement beyond January 1.
The Ukrainian government had telegraphed months in advance that it was unwilling to negotiate an extension of the agreement because it wanted to deprive the Kremlin of its revenue from gas exports. According to Brussels-based think tank Bruegel, ending the inflows would result in a $6.5 billion loss for Russia if it could not redirect them.
But it would also be a financial blow to Ukraine, which collects about $1 billion annually in gas transit fees, although only about a fifth of that is gross profits. Analysts say Ukraine’s vast gas pipeline infrastructure could face increasing Russian attacks if Russian gas stopped flowing through it.
Slovak Prime Minister Robert Fico visited Moscow on December 22nd to discuss the gas transit contract. He criticized Ukraine’s intransigence towards the deal and questioned whether the country had “the right to harm the economic national interests of an (EU) member state.”
Fico said on Facebook shortly before the contract expired that “other gas transit Options The Ukrainian partners were presented with more than Russian gas, but these were also rejected by the Ukrainian president.” In retaliation, the Slovakian prime minister also threatened to cut off the emergency power supply from Slovakia to Ukraine.
Hungarian Prime Minister Viktor Orbán has also tried to find a workaround to allow Russian gas imports via Ukraine. His government has also drawn on the last remaining pipeline carrying Russian gas via Turkey and neighboring Romania to supplement supplies.
Austria, which was still importing Russian gas in 2024, has switched to alternative sources such as importing liquefied natural gas. His energy company OMV terminated its long-term contract with Russia’s Gazprom in mid-December due to a legal dispute.
The disruption of gas supplies will also have a significant impact on neighboring Moldova, which declared a state of emergency in the energy sector in mid-December due to uncertainty over Russian gas transit.
The halt to Russian gas flows through Ukraine is likely to increase European demand for more expensive LNG, which Asia is also competing for.
EU officials insist the bloc can do without Russian pipeline supplies, even if that means accepting more expensive gas from other countries.
The European Commission said on Tuesday it did not expect any disruptions. “The European gas infrastructure is flexible enough to supply Central and Eastern Europe with gas of non-Russian origin via alternative routes,” it said. “Since 2022, it has been reinforced by significant new LNG import capacity.”
The Turkey pipeline, which still carries Russian gas to Europe, contributes about 5 percent of the EU’s imports. The US recently imposed sanctions on Gazprombankthe main channel for Russian energy payments.
But in order to mitigate the impact of the sanctions, Russian President Vladimir Putin at the beginning of December waived the obligation for foreign buyers of Russian gas to pay through the bank. Countries such as Turkey and Hungary also said they had received exemptions from the sanctions from the US.
“Sanctions had created additional uncertainty about the fate of remaining Russian gas supplies in Europe at the start of the new year and helped keep gas prices volatile,” said Natasha Fielding, head of European gas pricing at Argus Media Agency. The US waiver means that “buyers of Russian gas delivered via the Turkish Stream pipeline can breathe a sigh of relief,” she said.
Traders do not rule out a future increase in Russian gas flows to Europe. European companies, suffering from high gas and energy prices that are forcing them to cut production, will again buy Russian gas, which is inherently cheaper than LNG, a senior trader said.
“At some point there will be a peace agreement. . . People will want to end the war, so they must sign a peace agreement. “One of the things Russia will get is its ability to supply gas to Europe again,” the trader said.
While European governments could impose restrictions to prevent the continent from becoming too reliant on Russian gas again, the trader said: “You would expect some Russian gas to arrive in Europe again because fundamentally the geography has not changed changed.”
Additional reporting by Andrew Bounds
