Ukraine has repeatedly insisted it has no intention of renewing its gas transit contract with Russia that is due to expire at the end of this year. If Kyiv refuses to come to the negotiating table, it may have important implications for the European energy market – particularly those countries that are still heavily reliant on Russian gas.

It took great pains for Moscow and Kyiv to reach the current agreement in 2019, with the EU heavily involved in pushing negotiations towards a resolution. Back then, Russia was eager to bypass Ukraine as a route for its gas supplies into Europe altogether. It had hoped the Nord Stream 2 pipeline would be ready by the end of 2019, forgoing the need to enter a new transit deal with Kyiv altogether. But US sanctions prevented Nord Stream 2’s timely completion, bringing construction work by Western contractors to a halt. Russia then had to deploy its own vessels to finish the job.

So it came to pass that Moscow and Kyiv settled on a five-year contract, covering smaller transit volumes. Under the ship-to-pay agreement, Gazprom was required to pay to pump 60bn cubic metres of gas via Ukraine in 2020 and 45 bcm annually between 2021 and 2024, regardless of how much it actually shipped.

Nowadays Russia is sending far less gas to Europe than it used to, primarily because Moscow withheld supply to try to put pressure on EU leaders to ease support for Ukraine in the war. Rescued by a mild winter and EU efforts to stockpile as much gas as possible, these efforts failed. But even though Gazprom is now only sending 10-15% of the gas it did before the war, Ukraine remains a significant transit route despite the ongoing fighting.

That is partly because there are fewer routes that Russia can use. The Nord Stream 1 and 2 pipelines were sabotaged in September 2022, taking three out of four of their 22.5 bcm per year strings out of action. Those strings are increasingly unlikely to ever be used again. And the remaining fourth Nord Stream 2 pipeline cannot flow gas until it is certified for operation by German regulators. Berlin put a stop to that process in February 2022.

Meanwhile, the 33 bcm per year Yamal-Europe pipeline has been rendered incapable of westward gas flow because of sanctions imposed by both the Russian and Polish governments. 

The only other option open to Ukraine is one of the 15.75 bcm per year strings of the TurkStream pipeline, with the other dedicated solely for supply to Turkey. Around 12.2 bcm of gas was delivered to Europe via TurkStream in 2023, meaning there was limited spare capacity – nowhere near enough to handle the 13.7 bcm sent via Ukraine during the same year. 

Many of Gazprom’s former biggest customers in Europe such as Germany no longer receive any Russian gas. But some are still heavily dependent – namely Austria, the Czech Republic, Hungary and Slovakia.

Stated intentions

Ukrainian authorities have said repeatedly that they will not negotiate a renewal of the transit contract. The latest statement to that end came only on January 25.

“The position of the Ukrainian side is clear: the transportation contract ends at the end of this year; we are not going to negotiate with the Russians and extend the contract,” the government said in a press release.

As for the EU, there is no official confirmation of its position. However, Bloomberg reported on January 26, referencing sources, that the European Commission was preparing to rule out a renewal of the contract. Those countries that still buy a lot of Russian gas, the EU executive concluded, would be able to make do with alternative sources of supply. The EC plans to discuss the topic in February with member states and present an official plan to energy ministers on March 4, according to the news agency.

Meanwhile, the Russian side has said it is ready for talks if the EU side has interest in them, but that it has not yet received an indication of that interest.

"If the other party wishes, we are ready to discuss,” Russian Deputy Prime Minister Alexander Novak was quoted as saying by the RIA news agency on January 27. “So far we don't see such a desire.”

The stakes

Pragmatically, all sides would stand to gain from the renewal of the contract, including Ukraine. But political realities are likely to make a deal elusive, and if it does materialise, it could arrive at the eleventh hour, as was the case with the 2019 transit contract.

In the case of a deal, Ukraine would continue to receive transit revenues from Russia, which are still paid in spite of the war. The lack of a deal would mean Ukraine having to physically reverse-flow gas imports from its EU neighbours at a higher cost. Currently it buys gas from European traders, purchasing no gas itself from Russia. But this gas does come from Russia and never actually leaves Ukraine – traders simply deduct it from Russian gas they would have received. Essentially, then, the trade is virtual.

As for the EU, its policymakers may well consider that the bloc can do without Russian gas in light of reduced demand, high inventories and increased supply from the likes of the US and Qatar over the coming years. Doing so would, after all, deprive Russia of revenues it can use to finance its war.

However, in the interests of energy security, particular in those countries that still use a lot of Russian gas, it may be prudent to push Ukraine to enter negotiations so that the gas keeps flowing. After all, while Europe has enjoyed two mild winters in a row, the next one could well be much colder. 

As for Russia, it has little to gain from further reductions in gas flow to Europe. It tried to force the EU to make concessions in the Ukrainian conflict by drastically cutting supplies already and that strategy failed. While terminating gas deliveries via Ukraine would make the European market tighter, it would not be catastrophic for Europe in the event of a very cold winter, and so would not represent any leverage for Moscow.

Furthermore, Gazprom would miss out of billions of dollars of revenues. Soaring high gas prices in 2022 led to the company enjoying bumper profits, but prices are now much lower, albeit still high compared with the pre-war level. They are no longer high enough to offset the steep drop in volumes, in any case. Gazprom is looking to offset this with increased sales to Azerbaijan, Central Asia and Turkey, but the incremental volumes are modest. Longer term, it wants to deliver much more gas to China, but doing this will take considerable time.

What next

Circumstances are of course evolving rapidly, making it difficult to determine whether a transit deal will be reached or not. As long as conflict rages in Ukraine, beginning the negotiations will be tough. Neither Moscow nor Kyiv have expressed an inclination to seek peace talks, and it remains to be seen whether Ukraine will continue receiving foreign aid, especially in the event that Donald Trump is elected as US President this November, 

Absent a deal, European customers of Gazprom could agree to receive Russian gas at the Russia-Ukraine border, potentially forgoing the need for a transit deal. But it is unclear whether Kyiv would be able to accept this.

In theory, the remaining Nord Stream 2 pipeline could be commissioned, and the legal hurdles removed to allow Yamal-Europe to once more pump gas eastwards, but this would likely require even greater changes in the political landscape than a renewal of the Ukrainian transit agreement.

What is certain is that there are sure to be more twists and turns in developments as the topic of the transit deal is discussed over the coming months.