It is a cruel paradox of realpolitik. Ukraine continues to transport Russian gas and oil to the European Union through the Ukrainian Transit Gas Pipeline and the Druzhba Oil Pipeline. While Russia bombs its cities every day and occupies a fifth of its territory, gas and crude oil from Siberia, the Caspian Sea and the Urals continue to circulate through an invaded country on the way to the EU.
The gas transport contract signed in 2019 between the Russian and Ukrainian state-owned companies Gazprom and Naftogaz will expire at the end of the year. Those were different times: the relationship between Moscow and Kiev was strained – this has never stopped since Russia's illegal annexation of Crimea in 2014 – but there were still channels of communication. Today, as the full-scale invasion begins in 2022, the Ukrainian government has no intention of extending the agreement. But it opens the door for other European operators to reach agreements directly with Russia over the use of their infrastructure.
The anomaly could last beyond December 31, although Brussels is already sending more or less veiled signals that its first intention is to stop receiving gas via this route, even if that means adding another point to the puzzle of several member states What the Gas deliveries concern: Hungary, the Czech Republic, Slovakia, Austria and even Italy – the euro's third largest economy – continue to rely on Russian gas and oil arriving via Ukraine.
Unlike Russian crude oil, which is transported by sea, crude oil delivered by pipeline is not affected by the sanctions that the EU is using to try to reduce the Kremlin's revenue. When it comes to gas, supply shortages – despite the miracle of liquefied natural gas (LNG) arriving by ship from halfway around the world – have led the EU to avoid the sanctions route. Currently.
Also for Türkiye
The paradox has led to the fact that today, after the explosion of the legendary Nord Stream, the Ukraine Transit – together with the Turkstream, which crosses Turkey and enters common territory via Bulgaria and Romania – is the only gas pipeline through which Russian fuel enters the country EU, the end of the rivers flows through the Yamal, which crosses Belarus before reaching Poland. In fact, Ukraine is now the main entry route: just over 300 million cubic meters per week, half as much as before the war but twice as much as last year.
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If current supply rates are maintained, Russian gas flowing through Ukraine would amount to just over 16 billion cubic meters (bcm) in 2024. An important number – and above all full of symbolism – but small in terms of overall demand. According to the International Energy Agency (IEA), it will be around 500 billion cubic meters this year. The largest source of supply will once again be LNG: the tool that has allowed the Twenty-Seven to overcome the most complex match point in its entire energy history.
A million-dollar agreement that Russia is not keeping
In return for using Ukraine transit, Gazprom is demanding a payment of $7 billion (6.46 billion euros) to Naftogaz over five years. In the case of oil, the transfer of Russian crude through the Druzhba pipeline involves an annual payment of $150 million (138 million euros) from the Russian company Transneft. A contract that, unlike the previous one, is valid until 2030.
Roman Nitsovich, head of studies at the Ukrainian consulting company Dixi, reminds that the Russian gas company Gazprom is not fully complying with the agreed payments and argues that gas circulation is lower. In September 2022, six months after the invasion began, Naftogaz opened arbitration proceedings before the International Chamber of Commerce to claim the outstanding funds.
The governments of Hungary and Slovakia – which depend on Russian energy and go where the Druzhba crude goes – are also the closest to Vladimir Putin. A disruption in Russian oil supplies would be possible, but at the risk of paying a higher price for the product and provoking a diplomatic conflict. This happened in August 2022, when Ukrtansnafta, which manages the Druzhba as it passes through Ukraine, turned off the tap due to differences with payments from the Russian side. The situation was resolved within days, but Hungary toughened its tone so much that its prime minister, Viktor Orbán, urgently convened the Hungarian Defense Council.
“Europe could cover its needs without Russian gas, be it via Ukraine, the Turkstream or by sea,” says Georg Zachmann from the Bruegel think tank. “However, for Slovakia, Austria, Hungary and Ukraine itself, the end of the flow through the Ukraine Transit would force a new regulation and ensure the supply of liquefied gas.” [GNL, el que viaja por barco] The goods processed in distant sea terminals reach them. Technically it is possible, but it would likely lead to higher gas costs in these countries and lead to more demand destruction.”
Henning Gloystein of risk consultancy Eurasia agrees and believes the EU has not yet given up on Russian gas arriving by subway and ship because it wants to end the current winter season earlier. “Brussels is playing with the times,” he says via email. Like many other analysts, Gloystein was convinced that gas transportation through Ukraine would end in the first weeks of the war. “Obviously we were wrong. In retrospect, Russia wants to both protect its income and avoid harming Orbán, who is its only support in the EU. And Ukraine appears interested in continuing to receive Russian payments for transit, which, surprisingly, it continued to do even in the midst of the invasion.”
Ukrainian commitment to the EU
Ukraine does not want to give up its obligations to its partners in the EU. This was highlighted last October by Naftogaz President Oleksii Chernisov, when he confirmed that his company would not renew the contract with Gazprom for gas supplies to Europe in 2024. Chernisov then recognized the moral dilemma of the situation: “The export of natural gas and oil is one of Russia’s main weapons in the war against Ukraine.”
Ukraine is also legally obliged to maintain these contracts due to various legal obligations. The first and most important is the Association Agreement, which the Rada (Ukrainian Parliament) approved in 2017. Also for the European legislation on gas consumption, to which Ukraine has joined, as Nitsovich explains.
In May 2023, it emerged that Ukrainian President Volodymyr Zelensky had suggested sabotaging the Druzhba at a meeting with his military leadership, U.S. intelligence sources told The Washington Post. The Nord Stream gas pipeline, which connects Russia with Germany, was the main access route for Russian gas to Europe until an attack in September 2022 ended its operations. German, Danish and Swedish judiciary – in addition to US intelligence services – suggest that a team of Ukrainian special forces was responsible for the attack.
The Naftogaz president also acknowledged that it “will take time” to end the EU’s dependence on Russian gas: “We are all aware of the capacity and supply limitations, especially of LNG.” At the end of January, the Ukrainian Council of Ministers reported , that although the agreement would not be extended, the door would be left open for negotiations with EU member states “on the use of gas transport infrastructure”. Nitsovich explains that the protocols of the Ukrainian gas pipeline operator GTSOU allow a European company to conclude contracts over the network and negotiate with the Russian side.
100% national production
For the Twenty-Seven, Ukraine's importance in energy – and especially in gas – goes beyond Ukrainian transit. Its huge underground warehouses make this country a kind of Swiss army knife in times of fear: although it now has only a fifth of its capacity – for obvious reasons: it no longer receives Russian gas for internal consumption and storage – it can accommodate three times more fuel underground than, for example, in Spain or Poland. A powerful weapon against future Kremlin blackmail.
All of this comes at a historic moment for Ukraine, according to Prime Minister Denis Shmihal, as in January this year the country's gas consumption became entirely domestically produced for the first time. Naftogaz assures that Ukraine, with the third largest gas reserves in Europe, aims to become an exporter in order to break Europe's dependence on the Kremlin.
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