The Ukrainian government has stated that it will not renew its gas transit agreement with Russia when it expires in January 2025. This decision comes as the European Union is also preparing for a reduction in Russian gas supplies and aiming to phase out Moscow’s supplies. The Ukraine transit system is crucial for Russia, as it is used to send about 50% of all its pipeline gas exports to Europe, including Turkey, and about 10% of Moscow’s total gas exports. The journey of the gas pipeline starts at Russia’s Urengoy gas field, enters Ukraine through the Sudzha gas metering station in the Kursk region, and eventually branches off to Austria and Hungary.
The Ukraine transit pipeline is one of the two remaining gas pipeline connections linking Russia to Europe, the other being through Turkey. However, the Ukraine transit pipeline has been facing challenges since the start of Russia’s invasion of Ukraine, and it is not operating at full capacity. Under the current agreement, Russia is supposed to pump 40 billion cubic meters of gas per year, but due to various issues and halts in transit, the current volume is significantly lower. EU countries, especially Hungary, Austria, and Slovakia, will be the largest losers from the end of the Russia-Ukraine transit agreement, as they still rely heavily on Russian gas supplies with no direct access to LNG ports.
Hungary, which imports around 80% of its gas from Russia, may be in a better position to cope with the disruption as it can continue to receive Russian supplies through Turkey. On the other hand, Austria and Slovakia are more exposed to the Ukrainian transit shutdown, with a high percentage of their gas imports coming from Russia. The EU is exploring alternative sources of gas, with the easiest being increased LNG imports from countries like the US. Despite the potential challenges, the high storage levels in Europe and the relatively low capacity of LNG regasification terminals may help offset supply losses from the closure of the Ukrainian transit.
Moldova’s Transnistria region is likely to continue receiving Russian gas supplies after January 2025, as Moldova and Ukraine have reached informal agreements to ensure gas flows to the region through alternative routes. Ukraine’s decision not to renew the gas transit agreement with Russia is aimed at limiting Russia’s gas revenues and ending economic ties with Moscow. While Ukraine will lose annual transit fees, it does not rely heavily on imported gas due to the decrease in energy consumption amid the ongoing war. However, modifications to the pipeline system may be necessary as the Ukrainian economy recovers and energy demand increases.
Russia’s Gazprom stands to lose a significant portion of its revenues if the Ukrainian transit is shut down, which may further strain the company’s finances. Russia is looking to realign its gas exports towards domestic consumption, as well as exports to Central Asia and China. Negotiations are ongoing to potentially keep the Ukrainian transit open through a swap deal with Azerbaijan, but the complexity and challenges remain. While there are potential solutions to avert the situation, it remains to be seen how all parties involved will navigate the changes in the gas transit landscape between Russia, Ukraine, and the EU.
