Ukraine’s Gas Pipelines: an Opportunity to Reflect on Europe’s Energy Politics
By Elek Krizsán
As 2024 came to a close, a chapter in Europe's energy politics also ended with the expiration of the five-year gas transit deal between Russia and Ukraine, thus ending the decades-long flow of Russian gas to Europe through Ukraine.
This article explores the implications of the deal's expiration, examining its impact on Europe's energy strategy, the economic implications for Russia and Ukraine, and the responses by various European nations. By reflecting on these developments, we gain a deeper understanding of the intricate dynamics at play in Europe's ongoing effort to reduce its dependence on Russian energy.
The Deal’s Expiration: What is the State of Play?
Russia and Ukraine’s five year deal to transport Russian gas through Ukraine’s two pipelines to Europe expired at the end of 2024. Both parties had previously indicated they intend to let the agreement lapse, though last-minute negotiations by some impacted European countries made this outcome less certain. Ultimately the agreement did lapse, eliminating one of the three remaining routes through which Russian gas arrives in Europe, the others being the TurkStream pipeline and LNG shipments.
Europe has long relied on Russian energy, a fact that Russia has previously attempted to weaponize. In retaliation to initial sanctions following the 2014 annexation of Crimea, Russia raised gas prices in Ukraine and reduced exports to Eastern European countries. It continued this strategy after the 2022 sanctions. In a bid to pressure Europe to soften its sanctions policy, Russia significantly cut natural gas flowing through Nord Stream. Meanwhile, in March 2022 it required unfriendly countries to pay for Russian gas in rubles, suspending exports to countries that refused to comply. Though Europe certainly felt the bite, it has been able to weather such weaponization in the long-term.
Following Russia’s invasion, Europe sought to dramatically cut dependence on Russian gas. While in 2021 Russia supplied 47% of Europe’s gas supply, that fell to around 18% in 2024, which amounted to €8.7bn in revenue for Russia in the first half of 2024. Europe’s imports of Russian gas are driven by Austria, Slovakia, and Hungary’s continued reliance on the country’s supplies.
Before 2022, Europe had imported Russian gas through Nord Stream, Yamal, Ukrainian pipelines, TurkStream, and Russian LNG, with most of that transiting through the Nord Stream and Yamal pipelines. After Nord Stream and Yamal ceased operation, absolute imports of Russian gas decreased significantly. Since then, imports of Russian gas have been sourced about evenly between Ukrainian pipelines, TurkStream, and LNG. Gas flow through Ukrainian pipelines has fallen significantly since 2021 (from 11% of Europe’s total fossil fuel imports in 2021 to 5% in 2024), while gas sourced from TurkStream and LNG have risen slightly. On aggregate, these slight upticks have not made up for gas flowing through Nord Stream and Yamal, considering the significant reduction in total gas source from Russia. This indicates that the gas is unlikely to be redirected to alternate routes, meaning that the deal’s lapse will help Europe continue to wean itself off Russian gas.
While it has seen significant success, Europe has been unable to entirely eliminate Russian energy imports, reliance on its gas has remained, constituting most of the remaining fossil fuel imports from Russia. This is in large part driven by previously established contracts, meaning that with the deal’s lapse, the EU is much further along in its quest to eliminate all Russian energy sources. [EK1]
Many investigations reveal that an arsenal of circumventions has allowed Europe to remain hooked on Russian energy while maintaining the appearance that it is weaning itself off. Through Russia’s shadow fleet and indirect purchases facilitated by countries like Azerbaijan and Turkey, Russian energy continues flowing into Europe.
Why did Russia and Ukraine let the deal continue?
With oil prices falling since the war’s outbreak, gas exports to Europe through Ukraine have provided an important source of revenue for Russia’s coffers. The deal’s lapse will cost Russia’s Gazprom $6.5bn in foregone annual revenue during a year of significant losses. Meanwhile, though Russia has managed to shift sales to third countries like China and Turkey, Europe remains the largest buyer of Russia’s natural gas exports. With Russia’s inability to find substitutes for the European market, despite some reorientation of its gas supplies to third buyers like China and India. This development will leave Russia at the mercy of China and Turkey in the short-term, as the lack of open markets leaves the country without much negotiating power.
The pipelines’ operation has also allowed Ukraine to raise revenue amounting to $800mn annually, or 0.5% of GDP, through transit fees, though much of this is spent on operating costs. Meanwhile Ukraine has been drawn on the gas flowing through the pipelines to support its own economy through “virtual transportation”. Allowing gas to transit its pipelines has also allowed Ukraine to avoid angering EU nations unable or unwilling to fully eliminate reliance on Russian gas.
Thus both countries have benefitted from the deal, though Ukraine’s calculus appears to have shifted, with the goal of denying Russia revenues to finance the war.
How have third actors responded?
Slovakia relies significantly on Russian gas for domestic consumptions, which constituted 89% of its 2023 consumption[EK2] . It also earns a hefty $1.5bn from reselling and transiting the pipelines’ gas. As such, Slovakian PM Robert Fico pushed heavily for a renewed deal, going as far as meeting with Putin and threatening to cut emergency power supplies to Ukraine. Zelenskyy said Ukraine would be willing to allow the transit of Russian gas as long as buyers promise not to pay Russia, but would not be complicit in the flow of Russian gas relabelled as Azeri. Fico has remained committed to Russian gas, ultimately meeting with Putin a second time to secure alternative flows.
Austria, which relied on Russia for 98% of its gas supplies, and on Ukraine’s pipelines for 65%, has butted heads recently with Russia as it halted gas supplied following an arbitration ruling in favour of OMV against Gazprom. Austria did not push intensely for the deal’s renewal as Slovakia did, and has been able to replace the gas with flows from Italy and Germany on top of its reserves.
Hungary, which got half of its gas from Russia last year, has been shifting to greater supply of gas from TurkStream, bypassing Ukraine’s pipelines. While it has supported Slovakia, it has not been as determined to push for the deal’s renewal.
The European Commission has expressed its willingness to allow the contract to lapse, citing availability of alternative supplies.
With the incoming administration’s determination to increase LNG exports, the US may emerge a winner from this ordeal, contingent on sustained European demand for natural gas and a positive reaction from US producers. Alternatively, intensification of efforts to replace gas with cheap, illicitly sourced Russian oil could further undermine the EU’s efforts to damage Russia’s economy. However, a sudden uptick in imports from already suspicious channels could help clarify where illicit activity is occurring.
Conclusions
As the deal’s end looms, we can take the opportunity to reflect on the role of natural gas in bringing Russia to heel. The EU has mostly pivoted away from Russia, but has been unable to fully quit as a result of a number of factors that prevent states from taking quick and decisive action on geopolitically sensitive sectors like energy.
Meanwhile some countries have been reluctant to give up cheap Russian energy, while others have been restricted by long-term private sector contracts for its procurement, with some firms having binding contracts to source Russian gas until 2040. It is ultimately not countries that trade, but firms. In the era of globalised supply chains, firms wield the power to decide who they conduct business with. Thus governments must work to align the private sector’s incentives with policy if they are to expect quick action.
Due to political misalignment within the EU, preexisting private contracts between European companies and Gazprom, lack of alignment between private and public interests, and inertia, it has been impossible for Europe to shift its supply chains entirely. One of the final blows to the EU’s reliance on Russian energy is a result of a contract’s expiration rather than political action. In an era of global interlinkage, policymakers should expect quickly disentangling strategically important supply lines to be impossible. This will prevent disentanglement from being used as a tool of economic statecraft, while leaving opponents with the ability to leverage weaponize such reliance. Policymakers must prepare for such possibilities well in advance.
