Russian gas set to stop flowing through Ukraine

Russia’s gas flow through Ukraine will cease on Wednesday when a transit agreement between the two countries expires in the wake of Moscow’s full-scale aggression.

The pipeline was one of the last two routes still in full-scale nearly three years into transporting Russian gas to Europe war. EU countries will lose around 5 percent of gas imports by mid-winter.

While traders had long expected the flow to stop, the end of the pipeline route through Ukraine will affect Europe’s gas balance at a time when heating demand is high. The most affected country is Slovakia.

“Although one would assume that losing those volumes [is] In terms of prices, a strong upward price reaction is not initially out of the question,” said Aldo Spanzer, senior commodity strategist at BNP Paribas.

The deal to allow Russian gas to pass through Ukraine was agreed at the end of 2019, signed a day before a previous 10-year deal between national gas companies expired. At the time, the European Commission strongly promoted the agreement.

Following Russia’s full-scale invasion of Ukraine in 2022, however, the commission encouraged member states to seek alternative supplies as the bloc moved to end Russian fossil fuel imports. The Moscow-friendly governments of Hungary and Slovakia resisted that change and sought to extend the deal beyond January 1.

The Ukrainian government telegraphed months ago that it was unwilling to negotiate an extension of the deal, as it wanted to deprive the Kremlin of its revenue from gas exports. According to Bruegel, a Brussels-based think-tank, ending the flows would cost Russia $6.5 billion, unless it can redirect them.

But it would also be a financial blow to Ukraine, which earns about $1 billion a year in gas transit fees, though only a fifth of that was gross profit. Analysts have suggested that Ukraine’s vast gas pipeline infrastructure could face increasing Russian attacks, if no Russian gas flows through it.

Slovak Prime Minister Robert Fico visited Moscow on 22 December To negotiate gas transit contracts. He blasted Ukraine’s reluctance to the deal, questioning whether the country “has the right to harm any country’s economic national interests? [EU] Member States”.

Shortly before the contract expired, Fico said on Facebook that “other gas transit alternative More than Russian gas was presented to the Ukrainian partners, but the President of Ukraine also rejected it. The Slovak prime minister has threatened to cut off back-up electricity supplies from Slovakia to Ukraine in retaliation.

Hungarian Prime Minister Viktor Orbán has similarly tried to find a solution to allow Russian gas imports through Ukraine. His government has also focused on neighboring Romania, the last remaining pipeline transporting Russian gas through Turkey, and supplementing supplies.

Austria, which still imports Russian gas through 2024, has shifted to alternative sources such as liquefied natural gas imports. Its energy company OMV canceled its long-term contract with Russia’s Gazprom in mid-December due to legal disputes.

The gas cut will also have a significant impact on neighboring Moldova, which imposed a state of emergency in the energy sector in mid-December due to uncertainty over Russian gas transit.

Stopping the flow of Russian gas through Ukraine will increase demand for cheaper LNG in Europe, for which Asia is also competing.

EU officials were adamant that the bloc could survive without Russian pipeline supplies, even if it meant receiving more expensive shipped gas from elsewhere.

The European Commission said on Tuesday that it does 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,” it said. “This is reinforced with significant new LNG import capacity from 2022.”

Turkish pipelines still contribute about 5 percent of EU imports by transporting Russian gas to Europe. The US recently imposed sanctions on GazprombankMain conduit for Russian energy delivery.

But to mitigate the impact of the sanctions, Russian President Vladimir Putin in early December waived the requirement for foreign buyers of Russian gas to pay through banks. Countries such as Türkiye and Hungary have also said they have received US exemptions from sanctions.

“The sanctions previously added an extra layer of uncertainty over the fate of Europe’s remaining Russian gas supplies as we enter the new year, helping to keep gas prices volatile,” said Natasha Fielding, head of European gas pricing at Argus Media, a pricing firm following the U.S. waiver. “Buyers of Russian gas delivered through the Turkish Stream pipeline can breathe a sigh of relief,” he said.

Traders are not ruling out an increase in Russian gas flows to Europe in the future. European companies that have been suffering from high gas and fuel prices, forcing them to cut production, will return to buying Russian gas, which is inherently cheaper than LNG, a senior trader said.

“At some stage there will be a peace agreement. . . People want an end to the war, so they have to sign a peace treaty. One of the things Russia will gain is the ability to resupply Europe with gas, the trader said.

While European governments may impose restrictions to prevent the continent from becoming overly dependent on Russian gas again, the trader said, “you would expect to see some Russian gas return to Europe, because fundamentally, the geography has not changed”.

Additional reporting by Andrew Bounds