The deadline you didn’t know was looming

Nobody likes end-of-year deadlines: yes, diplomats also get mandatory annual online HR training, and yes, we absolutely phone it in. But it’s not every year your deadline also gets sprinkled with a bit of energy insecurity and war.

We’re talking about the Russia-Ukraine gas transit deal that’s set to expire on January 1 — just days from now — unless the two warring neighbours agree on a renewal.

Some quick context:Ukraine’s Soviet-era pipelines connect cheap Russian gas to terminals in Poland, Slovakia, Hungary, Romania, and Moldova, from where the gas is sold onto the wider European market. Moscow and Kyiv signed the current deal in 2019, allowing Russian gas to keep flowing through Ukrainian territory for another five years.

And yes, despite Russia’s invasion of its smaller neighbour, Russian gas has continued to flow through Ukrainian pipes, though at lower volumes than originally negotiated. 

As odd as that might seem, all sides had reasons to honour the deal:

• Kyiv didn’t want to risk the ire of its EU and NATO backers by cutting off their gas cold turkey, plus it needed the transit fees to finance its self-defence, and didn’t want to play into Kremlin propaganda about its own trustworthiness, while
• Moscow needed the export revenue, yes, to finance its invasion of Ukraine.

Unsurprisingly, however, Ukraine says it won’t now renew the deal. And here’s what that means for all: 

🇺🇦 Ukraine 

Kyiv will lose around $800M in annual transit fees from Russia, which accounts for around 0.5% of its GDP. That’s not chump change for a wartime economy. You could also argue Kyiv might now lose influence over Europe given the continent’s semi-reliance on Ukraine’s pipeline, though that’s fading fast (see below).

Another argument is that Russia — no longer a beneficiary — might now therefore target Ukraine’s gas infrastructure, which Ukraine also uses to pump its own gas to its own people. Though it’s not like Russia has been restrained in its targeting to date.

Anyway, Ukraine has clearly decided that any costs are ultimately worth the benefits of further squeezing and isolating…

🇷🇺 Russia 

State-owned gas giant Gazprom has already rung in its worst loss in at least a quarter century ($6.9B), and losing this pipeline will cost it another $6.5B billion annually. Then even if there’s a peace agreement one day and Western sanctions get lifted, Russia’s EU customers will likely have moved on, signing long-term contracts with other suppliers.

Meanwhile, Russia doesn’t have many other buyers: even if its planned new pipeline to China happens (big if), it’d carry only a fraction of what Russia has already lost in Europe — and anyway, China is pausing that project while it stiffs Russia on prices.

So this all explains why Putin keeps saying he’s happy to keep sending gas through Ukraine: he’s directing blame at Ukraine’s decision not to renew, rather than his own decision to invade.

🇸🇰 Slovakia / 🇦🇹 Austria / 🇭🇺 Hungary

While the EU has cut its reliance on Russian gas, it hasn’t kicked its habit. Russian pipeline gas has now dropped from 40% of EU pre-war supplies to 8% today, but LNG imports (via ships, trucks, and trains) are up from 14% to 20%.

And while the EU rushes to cut Russian gas completely by 2027, some members have been doubling down (not all via Ukraine): last year, Hungary got half its gas from Russia, Slovakia got 89%, and Austria got as much as 97%. This is all due to an interlinked mix of geography (they’re landlocked), commerce (they’re on long-term contracts with Russia), and geopolitics (they’re among the EU’s more Russia-friendly members).

But importantly, they’re also plugged into the broader European gas network and can use it like everyone else. The issue is it costs more, plus Slovakia stands to lose $1.5B in annual transit and resale fees.

🇲🇩 Moldova

The situation is a little trickier for neighbouring Moldova, which is in the process of joining the EU. Russian forces actually occupy its breakaway region of Transnistria. And guess where Moldova gets 80% of its electricity from? Yes, a gas-fired plant located in… 🥁🥁🥁 Transnistria. So Moldova’s parliament just declared a 60-day state of energy emergency.

INTRIGUE’S TAKE

There were three main pre-war routes for Russian gas to reach Europe: one (Nord Stream) got blown up and now sits unused and re-sanctioned. The second (Ukraine) is about to close. So that leaves only the third: TurkStream and its Balkan Stream leg.

And so now, after years of breathlessly analysing the leverage that gas gives Russia over Europe, it’s now Turkey (Russia’s remaining route) that ends up with leverage over an increasingly squeezed Russia. That’s gotta be one reason why Erdoğan has become so assertive towards Putin lately, including effectively screwing him out of Syria.

Interestingly, this arrangement also leaves Ukraine with more leverage over Russia in any post-war recovery negotiations: Kyiv could, for example, tax any future resumed Russian gas flows to pay for the vast rebuilding effort that lies ahead.

Also worth noting:

• Only 5% of the EU’s total gas imports now transit through Ukraine (down from 11% pre-war). Of that, around half flows through Russia’s terminal in Sudzha, which (plot twist) is now controlled by counter-attacking Ukrainian troops.
• There are rumours Ukraine could quietly allow re-badged Russian gas (eg, as “Azerbaijani” gas) to flow, but Kyiv seems pretty firmly against.
• Trump has promised to remove the moratorium on new US LNG export permits, further expanding US supplies to Europe. A new report from the outgoing Biden administration warns this risks higher emissions and US prices.