Ukraine ends Russian pipeline gas transit for the time being

Background

For many years, Ukraine’s pipeline network has served as a key corridor for Russian gas exports to Europe, making it critical for the continent’s energy needs but simultaneously also exposing it to dependence on Russia. Transit relations were often strained, with conflicts over pricing of imports, transit, unpaid debts, metering and unauthorized gas flows. These disputes underscored the vulnerabilities of Europe’s dependence on a key transit route. Between 2009 and 2019, the gas transit contract included take-or-pay principle and fixed transit volumes for Ukraine, and the commissioning of Nord Stream had only a minor impact on volumes. With Russia occupying Crimea and starting the war in the Donetsk/Luhansk Oblast in 2014, Russia continued to develop new gas pipelines to bypass Ukraine’s territory. However, the gas transit services continued as US sanctions and EU regulations delayed alternative pipelines, with average annual transit volumes of 80 bcm, leading to cumulative transit revenues of USD 14 bn for Ukraine between 2014 and 2019.  During that period, the gas transit was Ukraine’s main export service sector.

Key features of the 2020-2024 agreement of Vienna

At the end of 2019, the ten-year agreement expired. Negotiations on the terms of the new contract were influenced by various geopolitical factors. On 28 February 2018, the Stockholm Arbitral Tribunal ruled in favour of Naftogaz in a dispute with Gazprom, deciding that Gazprom had defaulted on its obligations regarding transit volumes. Additionally, the US imposed sanctions on entities cooperating in the construction of Nord Stream 2. Finally, the EU and Germany played a key role as a mediator in the negotiations. On 30 December 2019, representatives of the Ukrainian and Russian gas companies signed an agreement in Vienna to continue the transit until the end of 2024 (5 years). Under that agreement, in spite of a significant ship-or-pay mechanism, the gas transit volume continuously declined, reaching just 15 bcm in 2023 and 2024 – another arbitration procedure has thus been initiated.

Between 2020 and 2024, Slovakia was the main destination country, importing 73% of the total transit volume. Hungary imported 11% and Moldova imported 9%. The remaining share went to Poland and Romania.

During its duration, the agreement generated USD 6 bn in transit revenues for Ukraine. These funds represented a source of foreign exchange earnings. However, they accounted for just 0.6 to 0.7% of GDP per year and amounted to just half of the revenues Ukraine received between 2014 and 2019. To note is that these transit fees were not a net profit: Ukraine had to face growing opex expenses in maintaining an oversized system for such low volumes.

Furthermore, the ICT sector has overtaken pipe transit services as the most important export service sector. In 2021, the ICT sector accumulated export revenues almost three times the transit revenues.

Gas transit revenues kept flowing to Ukraine despite Russia’s full-scale war occupying a key gas entry point in the Luhansk Oblast.

In the EU, the energy prices increased strongly during 2022, and a decrease in gas transit flows would have led to further significant price increases. Nonetheless, the war led to a significant shift in Europe’s natural gas trade flows: Germany and Poland were cut off from Russian pipeline gas imports altogether. Right Bank Moldova stopped all imports from Russia after December 2022. Hungary bypassed this transit corridor and has primarily relied on Turk Stream since October 2021. Slovakia and the breakaway Transnistrian region of Moldova however remained highly dependent on imports covered by the transit agreement.

Vienna agreement expired: Implications

In 2019, during the previous extension negotiations, Russia refused a ten-year contract, which would now have been useful. For Ukraine, the end of the contract may represent a small dual victory. Firstly, the end of the transit does not represent a critical loss of export revenues, as those have been decreasing since 2019. Secondly, Ukraine has stopped a tool of revenue accumulation for Russia’s war economy – Gazprom’s exports are taxed at ca. 30% of export value. Furthermore, there seem to be no adverse impacts of the cessation of gas flows on Ukraine’s gas grid for the time being, meaning that energy security has not been compromised either.

As far as Slovakia and the Transnistrian region of Moldova are concerned, the expiration plays a critical role in the political debate. For example, Slovakia’s diversification effort was slow, though the largest gas supplier concluded gas import agreements with Norway in 2022. However, Slovakia remained short of the gas consumption reduction target outlined by the EU. While Slovakia saved 1%, the target set a 15% decline for the period August 2022-March 2023 as compared to the average of the same period of the five previous consecutive years (Eurostat). However, under the new Slovak Government, diversification effort did not continue. According to political statements by the current Government, the end of the agreement provides a critical situation for energy supply security. Nevertheless, as of end of January 2025, Slovakia’s gas storages are filled at 62%, (Gas Infrastructure Europe), showing no immediate threat of gas supply shortage in the short-term.

The most significant impact has however been felt in the breakaway Transnistrian region of Moldova, and indirectly also in Right Bank Moldova. The region has been receiving all its gas, 2 bcm per year, from Russia completely for free, enabling extremely low energy prices and very cheap generated electricity for households and for a variety of energy-intensive industries. Russia has effectively cut the breakaway Transnistrian region off, plunging it into an extreme, and still ongoing, energy crisis where district heating and hot water flows have been dramatically reduced or fully cut-off. Despite some indications of resumed flows through Turk Stream, so far, no Russian gas has been transited to the Transnistrian region, with both the Moldovan Government and the EU now looking to provide support. Right Bank Moldova has been impacted indirectly through higher electricity prices, as the Transnistrian region uses the free Russian natural gas to produce electricity at the MGRES power plant, which it then sells to Right Bank. These flows have stopped, forcing Right Bank Moldova to import electricity from ENTSO-E at much higher prices. Nonetheless, in a recent press conference President Zelenskyy of Ukraine and Sandu of Moldova have discussed the possibility of sending Ukrainian coal and technical assistance to MGRES to resume electricity supply to Moldova and start flows to Ukraine.

Summary and outlook

Gas transit used to play a significant role in Ukraine’s economy for many years. Transit revenues accounted for 2.5% of GDP in 2017 and dominated the export service statistics. Yet, Ukraine’s economic policy has been on a transition path. The ICT sector became the main export service sector and exceeded transit revenues significantly since 2020. The latter one declined to just 0.6% to 0.7% of GDP during the Vienna Agreement. So, the end of the agreement does not provide any significant economic challenges for Ukraine. While some of Ukraine’s neighbours have reduced their dependency on Russia’s natural gas supply, the situation in Slovakia as well as the breakaway Transnistrian region of Moldova remains complicated.

Nonetheless, the end of the transit does not mean a full stop of imports of Russian gas. Several European countries partly substitute Russian pipeline gas imports with Russian LNG or fertilizer imports. However, the energy transition and energy security aspects provide a path to the same direction – reducing all forms of gas imports from Russia once and for all, even if this process is challenging and may well still be bumpy down the road.

Dr Marc-Antoine EYL-MAZZEGA is the Director of the Center for Energy & Climate at the French Institute of International Relations (Ifri)

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