In less than six months, Ukraine will face a momentous choice: End its role as Europe’s historical corridor for Russian gas and sever another link with the aggressor, or extend the transit deal and remain entangled in a vicious relationship, marked by political manipulation and corruption.
The stakes are high. The Ukrainian transit decision will affect not just that country’s long-term security, but also the whole of Europe’s future energy policies and ultimately the fate of the Russian gas business itself.
Keenly aware of this, Russia’s gas giant Gazprom, a catspaw of the Kremlin, is already offering discounts reportedly amounting to at least 10% to buyers in Central and Eastern Europe, hoping to lure the continent back into its addiction to cheap energy that ended so disastrously in 2022.
Since Russia’s full-scale invasion of Ukraine in February of that year, European Union (EU) states have gone from a debilitating dependence on Russian gas to almost full substitution through deliveries from other sources.
The remarkable U-turn was prompted by a Russian miscalculation — it chose to cut supplies expecting that the West’s support for Ukraine would collapse.
Instead, the decision backfired almost immediately.
Within a year of losing most of its European market share, state supplier Gazprom posted its biggest financial loss in 25 years, while output fell to record lows as it failed to secure alternative markets.
Russia’s gas transit deal with Ukraine, which has continued to supply countries like Slovakia and Hungary despite the war, ends early in the morning on January 1. Its expiry would inflict further pain, depriving Russia of most of its remaining gas revenue and pushing Gazprom to the verge of bankruptcy.
Ukraine’s pipelines are one major route for Russian gas delivery, while the other runs through Turkey, which has taken enormous amounts of gas from Russia in recent months. It sells this onto EU countries, which can pretend they are ignorant of its origins.
Given the significant discounts now being offered on Russian gas, buyer interest is picking up. Slovakia and Hungary for example, have made plain they want Ukraine’s energy infrastructure to be used, allowing has to continue along that route. Austria too is interested.
The price difference and a variety of routes to deliver it, offers European companies big potential profits. It might cause a rise in the transit of current volumes, effectively helping Gazprom to rebuild its lost market share.
The volumes that currently reach consumers in the three countries mentioned above were just shy of 15 billion cubic meters last year. All three acknowledge they have been in talks with other international producers to secure additional supplies.
Meanwhile, traders have also seen new opportunities emerging through alternative routes through Southern Europe. The suggestion is that Russia may have been using Turkey to flood the region with discounted gas which is then sold at a premium on western European hubs.
In fact, the price of gas sold in Bulgaria has been so low in recent months that it made the country around €6 ($6.40) per megawatt hour (MWh) cheaper than other European markets and incentivized exports all the way up to Slovakia or Poland. Price differences among EU gas markets rarely exceed €3/MWh.
Since Turkey’s export capacity is limited for now, and the Ukrainian transmission system can transit more than 100billion cubic meters annually, buyers no doubt see a chance to replicate the model on a much larger scale.
This ought to be ringing alarm bells in Western Europe, but instead senior politicians like Germany’s Economy Minister, Robert Habeck, are tempted by the prospect of an extended transit deal, claiming it would not fill Putin’s war coffers.
In contrast, Ukrainian politicians have so far been more reserved, insisting the country would not renew the contract. Nevertheless, some arguments are now being made in private in favor of the transit and potentially the purchase of gas for internal Ukrainian needs.
Russia’s devastating attacks on Ukraine’s energy infrastructure since March have wiped out most of its coal-fired electricity production, leaving it particularly vulnerable this winter.
Although engineers have been fighting heroically to rebuild power plants, their work remains pointless as long as the infrastructure continues to be exposed to further drone and missile attack.
One line of argument is that Ukraine could build small-scale, gas-fired generation which would be easy and cheap to build. According to some estimates seen by the author, Ukraine could install three gigawatts (GW) of gas-fired capacity which would require just over two billion cubic meters of gas annually.
Even if this capacity was fully deployed, the amount of gas needed to power it is small enough to be covered either from internal production or imported from neighboring countries such as Poland, which has been able to secure gas from a diversity of sources.
Accepting a new and dubious transit agreement would not only extend a lifeline to Russia’s regime’s finances, it would extend Ukraine’s security risks by keeping it entangled with Russia long after the war ends.
It would also leave Europe unable to turn the page and devise sound energy policies that would respond to security challenges and align with ambitious energy transition goals to phase out fossil fuels by 2050.
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