Winners and losers in Ukraine's gas transit gamble
Within a few hours, Ukraine’s long-running transit agreement is set to expire but (at the time of writing) we are still none the wiser whether it will continue beyond 1 January 2025 or not.
Ukrainian proponents fear the loss of transit revenue, claiming other countries would pick up the slack.
On closer inspection, their argument is tenuous to say the least.
Turkey, the only remaining transit country for Russian pipeline gas does not collect transit fees since the operational rights of the offshore and onshore sections of TurkStream2 belong to Gazprom. Furthermore, the available capacity that could be used to transit additional gas is limited, covering less than a third of Ukraine’s 14bcm/year transited this year.
Meanwhile, global Russian LNG exports amounted to 33 million tonnes (45.5bcm) in 2024, more than 2mpta short of Moscow’s base scenario. Considering Russia fell short of its own target this year, it’s questionable whether it would reach the 40mtpa target next year particularly if US sanctions against the Arctic LNG 2 project are upheld.
While the loss of transit would deprive Ukraine of around $800m annually (at this year’s tariffs), Russia’s losses would be much more significant not only as far as its $6.5bn revenue from gas sales is concerned but also in terms of inflicting further financial pain on Gazprom.
The producer reported a nine-month loss of $3.2bn year on year in 2024 and the financial damage would widen further if Ukraine pulled the plug on the transit deal from 1 January 2025.
Russia has been historically relying on a complex cross-subsidies scheme to underwrite end consumer tariffs, whereby Gazprom was using its high revenue raked in on European markets to partially offset the cost of domestic supplies, appeasing domestic consumers.
Starved of European revenue and saddled with multi-billion dollar arbitration claims awarded to European buyers after unilaterally stopping supplies in 2022, Gazprom and the Kremlin would struggle to uphold its subsidies system. Rising taxes may lead to internal social discontent but also force the government to consider reforming the sector.
One would think the prospect of further weakening the enemy who continues to wage war on Ukraine would offer a great opportunity for Ukrainian decision makers to call the shots and inflict more pain on Russia.
Instead, there are some supporters in Ukraine who cling on to the idea of continuing the transit even if they understand that by lobbying for its extension, Ukraine will lose any credibility to ask other countries to sanction Russia or block them from restarting Russian energy imports.
It’s true the loss of transit would also come with higher transmission costs incurred mainly by Ukrainian industrial consumers for the next regulatory period.
This is a problem facing all countries which have historically depended on Russian gas but one they should have been preparing for since at least 2022 when the EU announced plans to phase out this resource by 2027.
As the clock ticks on the Ukrainian transit they are caught unprepared for a new reality that may dawn on them on 1 January 2025.
Leaving aside the fact that continuing the transit deal with the very aggressor who bombs Ukrainians day in, day out, is morally repugnant, rushing into signing an agreement without ensuring it brings maximum benefit to Ukrainians is short-sighted to say the least.
Instead of engaging in fabricating tall stories about ‘Azeri’ gas transiting Ukraine when it was obvious all along that the source would be Russian gas, proponents should have provided a more mature vision on how to use the transit as a lever to obtain maximum benefits in their negotiations both with Russia (when the time comes) as well as with Hungary and Slovakia, which need to be persuaded to back Ukraine’s EU accession bid.
Ukraine does not need the transit and neither does Europe, as explained in an earlier blog post.
Nevertheless, it appears there is a critical mass of supporters in Ukraine who are prepared to gamble, pushing for its continuation even if there may be a temporary halt after 1 January 2025.
Without a proper strategy on how to use this transit to extract maximum benefit and an honest public debate explaining to the wider population and its foreign supporters why such a deal is sought, Ukraine would lose not just its moral standing but also a historic opportunity to serve the interests of its people.
It sounds like Gazprom’s 9M loss of $3B is due to them selling gas to domestic customers at below production costs. Is that the case? If so, can you give us an idea of the subsidies involved?