Russian gas flows through Ukraine will be halted on Wednesday when a transit agreement between the two countries expires, following Moscow’s full-scale occupation.
The pipeline was one of the last two routes still carrying Russian gas to Europe nearly three years after the full-scale war. EU countries will lose about 5 percent of gas imports in the middle of winter.
While traders had long expected the flows to stop, the end of the pipeline route through Ukraine will affect Europe’s gas balance at a time when demand for heating is high. Slovakia is the most affected country.
“While one would assume that the loss of these volumes (is) priced in, initially a strong upward price response is not ruled out,” said Aldo Spanjer, senior commodities strategist at BNP Paribas.
The deal to allow Russian gas to pass through Ukraine was agreed in late 2019, signed a day before the previous 10-year contract between the national gas companies expired. At the time, the European Commission strongly promoted the agreement.
However, following Russia’s full-scale invasion of Ukraine in 2022, the commission encouraged member states to seek alternative supplies as the bloc moved to wean itself off Russian fossil fuel imports. The Moscow-friendly governments of Hungary and Slovakia have resisted the change and have sought to extend the deal beyond January 1.
The Ukrainian government had telegraphed months ago that it was unwilling to negotiate an extension of the deal, as it wanted to deprive the Kremlin of its gas export revenues. Ending the flows will result in a loss of $6.5 billion for Russia unless it can redirect them, according to Brussels-based think-tank Bruegel.
But it would also be a financial blow to Ukraine, which earned about $1 billion a year from gas transit fees, although only a fifth of that was gross profits. Analysts have suggested that Ukraine’s vast pipeline infrastructure could face a growing Russian attack if there were no Russian gas flowing through it.
Slovak Prime Minister Robert Fico visited Moscow on December 22 to discuss the gas transit contract. He criticized Ukraine’s non-compliance with the agreement, questioning whether the country had “the right to harm the national economic interests of a member state (EU)”.
Fico said on Facebook shortly before the deal expired that “other gas transit options than Russian gas were presented to Ukrainian partners, but these were also rejected by the Ukrainian president.” The Slovak prime minister has also threatened to cut off back-up electricity supplies from Slovakia to Ukraine in retaliation.
Hungarian Prime Minister Viktor Orbán has also sought to find a solution to allow Russian gas imports through Ukraine. His government has also turned to the last remaining pipeline carrying Russian gas through neighboring Turkey and Romania to supplement supplies.
Austria, which was still importing Russian gas in 2024, has shifted to alternative sources such as liquefied natural gas imports. Its energy company OMV in mid-December terminated its long-term contract with Russia’s Gazprom due to a legal dispute.
The gas cut will also have a significant impact on neighboring Moldova, which in mid-December imposed a state of emergency in the energy sector due to uncertainty surrounding the transit of Russian gas.
Stopping Russian gas flows through Ukraine is likely to increase European demand for more expensive LNG, for which Asia is also competing.
EU officials have been adamant that the bloc can live without Russian pipeline supplies, even if it means accepting more expensive gas transported from elsewhere.
The European Commission said on Tuesday it did not expect disruption. “The European gas infrastructure is flexible enough to deliver gas of non-Russian origin to Central and Eastern Europe via alternative routes,” he said. “It has been reinforced with significant new LNG import capacities from 2022.
The Turkish pipeline that still carries Russian gas to Europe contributes about 5 percent of EU imports. The US recently imposed sanctions on Gazprombank, the main conduit for Russian energy payments.
But to soften the impact of the sanctions, Russian President Vladimir Putin in early December dropped a requirement that foreign buyers of Russian gas pay through a bank. Countries such as Turkey and Hungary also said they have received US exemptions from sanctions.
“Sanctions had previously added an extra layer of uncertainty over the fate of Europe’s remaining supplies of Russian gas as we enter the new year, helping to keep gas prices volatile,” said Natasha Fielding, head of European gas prices. at Argus Media, an award. agency. The US withdrawal would mean “buyers of Russian gas shipped through the Turkish Stream pipeline could breathe a sigh of relief,” she said.
Traders do not rule out the possibility of increasing Russian gas flows to Europe in the future. European companies reeling from high gas and power prices, forcing them to cut production, will return to buying Russian gas, which was substantially cheaper than LNG, a senior trader said.
“At some stage there will be a peace agreement. . . People will want to end the war, so they should sign a peace agreement. One of the things Russia will take away is its ability to resupply Europe with gas, the trader said.
While European governments may impose restrictions to prevent the continent from becoming dependent on Russian gas again, the trader said, “you would expect to see some Russian gas in Europe because basically, the geography has not changed.”
Additional reporting by Andrew Bounds
