The consequences of stopping gas transit by Ukraine are named: who will lose more

At the end of 2024, the contract for the transit of Russian gas to Europe through the territory of Ukraine expires. The EU is not interested in its extension, European Commissioner for Energy Kadri Simson notified Kyiv recently. The official did not specify to what extent the position of official Brussels is coordinated with Slovakia, the Czech Republic, Austria and other member countries of the alliance, whose economies are critically dependent on pipeline supplies from Russia. And in this regard, several questions arise: has Brussels expressed its final position or are there still options? And if transit is finally completely blocked, who will be the biggest loser from this?

Simson, on behalf of Brussels, promised to find solutions for states that receive Russian raw materials via the Ukrainian route. “We will be able to use the gas storage system in Ukraine to store gas and for reverse supplies,” she said. Meanwhile, the reality is much more complex and harsher than the bright, but divorced from life, ideas of European functionaries.

The current five-year contract is the result of negotiations between Moscow, Brussels and Kiev at the end of 2019. But representatives of only two parties – Russia and Ukraine – put their signatures on us (and this is fundamentally important). A package of documents was also signed on the settlement of legal disputes and mutual claims between Gazprom and Naftogaz. Under the terms, Gazprom guaranteed pumping a total of at least 225 billion cubic meters of natural gas: 65 billion in 2020, 40 billion each in 2021–2024.

These volumes were subject to the ship-or-pay rule (“pump or pay”), and Naftogaz booked the corresponding capacities from the Ukrainian GTS Operator (OGTSU) company, created as part of the transition to European rules. The size of the tariff was not announced, but experts estimated the total income at least $7 billion, that is, about $31 per 1 thousand cubic meters. In reality, pumping volumes fell quite far behind the planned ones: for example, in 2020, transit decreased by 38% compared to 2019, largely due to the Covid pandemic.

However, the real problems with transit arose later – almost immediately after the start of the SVO. In response to sanctions, Russia introduced a new system of payment for gas in rubles, a number of consumers turned to alternative sources, and Ukraine blocked one of the entry points to its gas transportation system (GIS Sokhranovka). At that time, the Ukrainian gas transportation system received about 19 billion cubic meters of gas from Russia, and in 2023 – 14 billion. The topic of the transit contract seemed to be closed by the head of the Ministry of Energy of Ukraine, German Galushchenko, saying that Kyiv would not negotiate with Moscow on its extension. But in January 2024, Slovak Prime Minister Robert Fico, after talking with his Ukrainian counterpart Denis Shmygal, allowed the continuation of transit in 2025.

Thus, the very possibility of supplying Russian gas through the territory of Ukraine has not been removed from the agenda. There will definitely not be a new agreement, but with transit everything is not so clear. But why then did European Commissioner Kadri Simson talk about Brussels’ lack of interest in extending the contract? It’s almost like an open secret. We discussed the situation with Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation.

– The European Union doesn’t decide anything at all. It has a very indirect relation to the bilateral commercial counterparty between Gazprom and the Ukrainian gas transportation system operator. So the words of the European Commissioner sound strange. It seems that European officials want to show that they are participating in the process, that something depends on them. In fact, what is important here is rather the position of the United States (with its large-scale LNG exports), which is vitally interested in the final expulsion of Russian gas from the European market. There is a high probability that Washington will urgently “ask” Kyiv to stop transit. As for the current five-year agreement, it is possible to pump gas through Ukraine to Europe without it. Whether it will be extended or not plays absolutely no role.

– Why?

– Since 2019, Ukraine began to switch to the European gas market regulation system. They have implemented EU antitrust legislation, as well as a system of auctions at which pumping volumes are awarded – a day in advance, a week, a month, a quarter. That is, for a short period. Gazprom took part in such an event in 2021. Under a long-term contract, the company agreed to pump 109.5 million cubic meters per day, but in 2021 there was often a need to pump more, and Gazprom took additional volumes at these same auctions. Ukraine is obliged to carry them out by law; accordingly, the Russian side may well return to this practice. Another thing is that the Americans are capable of stopping the transit itself. They will either introduce sanctions against Gazprom themselves, or delegate this task to Kyiv.

-Which side will suffer the most in this case?

– Mainly, that part of Europe that does not have access to the sea and is supplied with gas only through the Ukrainian route: the Czech Republic, Austria, Slovakia, Switzerland. The distribution of raw materials is not entirely uniform. Let’s say Vienna announced that it received all contract volumes from Gazprom for 2023, the rest is unknown. Bratislava will also lose revenue from transit, since the gas delivery and acceptance point, where ownership passes from Gazprom to European companies, is located in Austria – at the Baumgartner gas hub. These countries will have to find gas (liquefied natural gas) somewhere on the world market and pay their neighbors on the continent who have access to the sea. Moreover, it is unknown whether the latter will have enough infrastructure capacity for regasification and transportation to receive the required volumes of raw materials and then deliver them deeper into Europe. In addition, the situation will affect prices: to some extent they will rise for Europeans. Even though we supply little to the EU: in 2023 – 29 billion cubic meters, of which 14.5 billion are via the Ukrainian route. The same amount goes through the Turkish Stream (along one of the gas pipeline branches) to Bulgaria, Greece, North Macedonia, Romania, Serbia and Hungary.

– What will be the losses of Ukraine and Russia if transit stops?

– Kyiv will lose income, albeit not very large – $1.2-1.5 billion a year – from Gazprom. Part of the money goes to support the activities of the Ukrainian gas transportation system, and part goes to the country’s budget. Accordingly, the gas transportation system will have to be rebuilt somehow, and this is a costly undertaking. Plus, stopping pumping to Europe will reduce the role and importance of Ukraine as a transit country. As for Russia, it will lose a large market that is always ready to accept its natural gas and is in dire need of it.