Russian Gas Shall Not Come!

Halting Russian gas transit through Ukraine on January 1, 2025, when the transit agreement between Naftogaz and Gazprom expires, will reduce Gazprom's gas export revenue from the European market by approximately 6 billion USD, or by 50%.

This development is clearly in US economic interest. As long as the possibility of continued Russian gas imports exist, LNG terminal developers, in the European Union (EU) and globally, faced with uncertainty, will be reticent to invest. Ukraine is still technically capable of transiting about 89 billion cubic meters (bcm) of gas to Eastern and Southern Europe. With such a huge amount of Russian gas ready to re-enter the EU market at any moment, LNG developers may prefer to hold off on investments until there is greater certainty about the future of Russian gas supplies to the EU.

Now is the time when Ukraine, together with Europe and the United States, should make a final decision to prevent Russian gas from entering the EU through Ukraine.

The Decline of Ukraine's Transit Role

Despite being in the third year of war, Ukraine still allows approximately 15 bcm of Russian gas to transit through its territory each year. This transit generates about 12 billion USD for Russia's war effort. On January 1, 2025, the current gas transit agreement is due to expire.

Ukraine was historically a major transit route for Russian gas exports to Europe, with an annual capacity of around 145 bcm. However, this situation changed in the late 1990s as Russia constructed alternative pipelines, such as Yamal-Europe through Poland and Nord Stream 1 and 2 via the Baltic Sea directly to Germany. By 2020, Russia was transiting only about 58 bcm of gas through Ukraine. Following Russia's aggression against Ukraine, Europe significantly cut back its imports of Russian gas.

Currently, with the Yamal and Nord Stream 1 pipelines no longer open for transit, Ukraine remains the only direct route for Russian pipeline gas to Europe, transporting approximately 14.5 bcm annually—primarily to Slovakia and Austria, with smaller amounts reaching Italy. The other operational route for Russian pipeline gas is TurkStream via Turkey, which supplies roughly 15 bcm annually.

EU: No Sanctions and No Dependence (on Russian Gas)

The EU has not yet imposed sanctions on imports of Russian pipeline gas and liquefied natural gas (LNG) because sanctions require unanimous consent from all member states, and Hungary has consistently blocked such measures. Nevertheless, Russian gas imports in Europe have dropped from 40% to less than 15% of total supply even without official sanctions. 

While most EU member states have successfully diversified their energy sources, a few—particularly Austria, Slovakia, and Hungary—remain dependent on Russian energy and favor continuing transit through Ukraine. Despite having other options, Austria still relies on Russian gas for 98% of its energy needs, even after three years of war. Slovakia has also continued to receive several bcm of gas via the Ukrainian transit route, while Hungary remains heavily dependent on Russian oil flowing through the Ukrainian territory.

Russian gas transiting through Ukraine accounts for only 5% of European gas imports. Halting transit would not create a significant crisis in the European gas market, as it could be compensated through alternative sources—and serve as a testament that EU countries have the political will to pursue these options. The termination of transit will not pose significant risks to European countries, including Slovakia, Austria, or Ukraine.

The European natural gas market is one of the largest globally, with an annual consumption of approximately 400 billion cubic meters (bcm). Recent diversification efforts have significantly reshaped the market, particularly with a growing share of LNG imports. LNG imports have risen sharply, with the United States increasing its exports to the EU from 18.9 bcm in 2021 to 56.2 bcm in 2023. Despite this growth, LNG still does not dominate the market, as pipeline gas from Norway, which rose from 79.5 bcm to 87.7 bcm during the same period, and other sources remain important.

This diversification, combined with increased competition, has created a resilient market structure where Europe is no longer dependent on any single supplier. Imports from various “smal” partners have also risen, from 41.6 bcm to 62 bcm, further strengthening the supply mix. 

Ukraine is ready to stop transit

For Ukraine, the continuation of Russian gas transit brings little benefit. Ukraine has not imported gas from Russia since 2015, instead relying on gas deliveries from Western suppliers and growing local gas production. Since the start of the war, industrial demand for gas has dropped by approximately 40%, enabling Ukraine to cover nearly all its gas needs through domestic production (around 20 bcm annually), thereby minimizing its need for imports.

By 2020, Ukraine was fully prepared to operate its Gas Transmission System (GTS) independently of Russian transit flows and can transport gas bi-directionally. At that time, the previous transit agreement was nearing expiration, and Russia intended to abandon the Ukrainian route entirely in favor of Nord Stream 2. The imposition of U.S. sanctions on Nord Stream 2 in December 2019, however, forced Russia to continue using Ukraine for gas transit from 2020 to 2024. This agreement is set to expire on January 1, 2025. At present, Ukraine is using only 10% of its transit capacity (14.5 bcm out of 145 bcm). Therefore, losing the remaining transit flows will not pose significant risks to Ukraine's GTS.

Financial factors are not critical anymore. Russia pays approximately 800 million USD annually as a transit fee, representing just 0.46% of Ukraine's GDP. Most of this revenue is used to cover the costs of performing the transit, meaning it only partially contributes to the state budget. With proper optimization of the GTS, revenue from domestic gas suppliers could be sufficient to maintain the GTS, making the loss of transit income less consequential for the national budget.

Moreover, gas transit does not contribute to gas supply for Ukrainian cities for heating purposes. The current transit flow runs in an almost isolated manner through the "Progress" pipeline, which extends from the Ukraine-Russia border to the Slovakian border. Ukrainian cities are supplied with domestic gas through other pipelines, sourced either from production fields in the eastern part of the country or from storage facilities in the central and western regions. Ukraine's gas compression stations ensure that gas can be delivered to any part of the country.

Potential Risks of the "Azeri Gas" Scheme

Ukrainian leaders have already decided not to extend the transit agreement with Russia. Meanwhile, Ukrainian officials have discussed the possibility of transporting Azerbaijani gas instead of Russian gas. However, Azerbaijan cannot fully substitute for the Russian gas from its domestic production and would have to source additional volumes elsewhere–namely Russia. Thus, the proposed scheme would effectively involve relabeling Russian gas as Azerbaijani through swap deals, allowing Russian gas to continue flowing to Europe while Russia receives billions of dollars from exports.

Such a scheme risks circumventing Western sanctions and could set a dangerous precedent for other countries. For instance, Germany could use a similar arrangement to transport "Azerbaijani" gas via Nord Stream 2, which has an annual capacity of 27.5 bcm. Germany's right-wing populist Alternative für Deutschland (Alternative for Germany) party has already begun lobbying for the return of Russian oil and gas imports.

A transition away from Russian gas is critical in ensuring Europe’s energy security and reducing the funding of Russia’s war effort. By halting the transit of Russian gas through Ukraine, European nations can send a decisive message, reducing Gazprom’s revenue and eliminating one of the Kremlin’s key tools of geopolitical influence.