Kyiv and Moscow they did not renew the Russian transfer agreement natural gas through Ukrainian pipelines to the EU. What does the end of the deal mean for European gas markets? Until the turn of the year, Russian natural gas was still passing through the Ukrainian network and through it reaching the EU. The agreement on natural gas was a source of sufficient income for Moscow, which, despite the invasion of Ukraine, had to transfer money to Kiev at the same time.

On December 31, however, Ukraine decided not to renew the agreement – as President Zelensky had already announced on December 19: Ukraine refuses to allow Moscow to take “a few more billions” while continuing to invade the country.

President Putin confirmed the end of the deal saying he is confident Gazprom will be able to cover the losses. “We will survive, Gazprom will survive,” Putin said.

The question raised is probably more about the eastern countries of the EU and how they will manage to procure natural gas, since they are landlocked and therefore cannot import LNG by sea. Austria, Hungary and Slovakia still received Russian gas from Ukraine. And as for the governments in Bratislava and Budapest in particular, they both want to keep buying Russian gas.

A story that lasts for years

Until the start of the war in Ukraine, Russia was the world’s largest exporter of natural gas, and Europe was the most important customer. Access to cheap energy was far more important than any second thoughts there might have been about doing business with President Putin.

50 years ago the Soviet Union urgently needed money and equipment to exploit the natural gas fields in Siberia. At the same time, Germany needed cheap energy for its growing economy. In 1970 Moscow and Bonn signed the Gas Pipeline Agreement, and under this agreement German factories provided hundreds of kilometers of pipelines to transport Russian gas to Western Europe.

This interconnection in the energy market still exists today because countries that import gas to Europe are often bound by long-term contracts, from which they cannot easily exit. A restructuring would cost a lot because available natural gas reserves on the global market will remain tight for at least another year according to Bloomberg. Much of the natural gas available for import into Europe is claimed by countries that have shut down coal-fired or nuclear power plants.

Long term dependence

According to the Bruegel think tank, Russia’s fossil fuel imports into the EU were at around $1 billion a month at the end of 2023 – up from $16 billion a month at the start of 2022.

European Commission figures indicate that in terms of natural gas imports to the EU in 2023, 30% of these came from Norway, 19% from the US and 15% from Russia. Much of Russian gas is transported via pipelines to Ukraine and Turkey.

Most of the natural gas is sent to Austria, Slovakia and Hungary, while countries such as Spain, France, Belgium and the Netherlands still import Russian LNG by sea. A part of this can be mixed with natural gas of various origins in the European pipeline network. In this way it probably also reaches Germany, although the latter wants to completely stop the consumption of Russian natural gas.

Gas prices are up

In 2022 the price of energy rose significantly – at times even by 20 times according to Bruegel. Some European factories were forced to reduce their production while several small businesses were forced to close. Prices have since fallen again, but are still higher than before the energy crisis – which is why energy-intensive European industries like Germany’s are struggling to stay competitive.

Expensive energy is of course also a significant problem for households, which are looking for ways to reduce their energy consumption. According to the European Commission, around 11% of EU citizens in 2023 could not adequately heat their home.

Brussels is in turmoil

In Brussels, however, there does not seem to be much confusion. European gas markets have already factored in the end of the deal between Ukraine and Russia according to an analysis by the European Commission, Bloomberg reported in mid-December. This analysis should reassure member states and markets – the Union will be able to find alternative suppliers to meet its natural gas needs.

“In an annual global production of more than 500 billion cubic meters of LNG, the replacement of around 14 billion cubic meters of Russian gas transported through Ukraine will have a rather limited impact on the price of natural gas in the EU,” the Commission report states.

The EU has long argued that member states still importing Russian gas from Ukraine – notably Austria and Slovakia – would be able to get by without Russian supplies. For this reason, the Commission is not going to enter into negotiations for the preservation of the Ukrainian route.

In addition, according to the European Commission’s report, in the period from August 2022, the consumption of natural gas in the EU decreased by 18%. Over the next two years, the US will increase LNG exports, and these supplies could help the EU deal with any price fluctuations or supply problems. “The realistic scenario is that no more Russian gas passes through Ukraine,” a possibility for which the EU is “well prepared.”

Is Eastern Europe forging its own path?

Especially the governments of Hungary and Slovakia are quite worried, both about natural gas supplies and about their close relations with Russia. A few days ago, Prime Minister Viktor Orbán said that Hungary would seek to maintain gas supplies through Ukraine, even though Russian gas currently goes through the Turkstream pipelines.

Orbán also has another idea: what if Hungary buys Russian gas before it leaves the borders of Russian territory? According to Reuters, Orban characteristically said that “we are trying a trick. What would happen if the gas arriving on Ukrainian territory is no longer Russian, but already belongs to the buyer? In this case, the gas that would pass through Ukraine would not be Russian, but Hungarian.”

Ficho on Putin’s side

Slovakia on the other hand takes it… a step further and threatens Kiev with countermeasures. In a video posted on Facebook, Slovakian Prime Minister Robert Fico said he was considering cutting off emergency electricity supplies to Ukraine after January 1. “If it is deemed unavoidable, we will stop the supply of electricity that Ukraine needs whenever there are outages in its grid. Or we will agree on a different approach.”

In his post on X, President Zelensky accused Fiko of being a proxy for Russia, adding that it was as if President Putin had ordered Fiko “to open a second energy front against Ukraine at the expense of the interests of the Slovak people.” Only in this way could Fico’s threats be explained.

Fico is one of the biggest enemies of Ukraine’s military support to the EU. In December, Fico visited Moscow in a surprise move – where Putin reportedly confirmed to Slovakia’s prime minister that Russia intended to resume gas deliveries to Slovakia.

Edited by: Giorgos Passas