Amid Russia’s full-scale war against Ukraine—marked by huge human losses, the destruction of infrastructure and a multitude of war crimes— a paradoxical situation persists: Russian gas is still piped through Ukrainian territory to Europe. Despite Ukraine’s declarations that transit will cease once the current contract expires in 2024, the future of transit remains the arena of complex political negotiations. These talks involve not only Ukraine and Russia, but also countries that are heavily reliant on Russian gas, such as Hungary and Slovakia. Additionally, Azerbaijan plays a distinctive role in this scenario as a potential alternative gas supplier.
Political negotiations on the future of gas transit: Russia, Ukraine, EU and Azerbaijan
The prospects for the transit of Russian gas through Ukraine beyond 2024 remain uncertain, affecting not only both countries involved but also the recipient countries. This issue underscores the deep interdependencies and contradictions between the countries of the region while presenting European stakeholders with new challenges, necessitating a rethink of their energy strategies. Let us examine the positions of the negotiators and explore potential future scenarios.
In 2023, Ukraine made its position clear: extending the contract for the transit of Russian gas through its territory is not part of its plans. Both Ukraine’s Minister of Energy German Galushchenko and the CEO of Naftogaz head Oleksiy Chernyshov emphasised in their statements that the country’s strategic course is aimed at reducing dependence on Russia. However, the decision to terminate transit is not solely a domestic matter for Ukraine, but also one that affects its relations with neighbouring countries. Kyiv is acutely aware that its actions directly affect the interests of EU member states such as Hungary and Slovakia, whose economic interests depend on the transit of Russian gas through Ukrainian territory. For example, in 2023, Slovakia received 12.67 billion cubic metres of Russian gas via Ukrainian transit, while domestic consumption accounted for only 4.3 billion. Additionally, Slovakia earned hundreds of millions of euros in 2023 from the transit and re-export of Russian gas to other countries. Hungary, on the other hand, sources most of its gas from Russia via the TurkStream pipeline, which delivered 5.6 billion cubic metres in 2023, compared to no more than 1 billion cubic metres transported via Ukraine. Hungary intends to increase gas imports via TurkStream in 2025.
The situation is further complicated by the European Union’s need to adapt to these evolving circumstances. EU Energy Commissioner Kadri Simson urged EU member states to reduce their consumption of Russian gas in anticipation of a potential cessation of transit. A number of countries that were previously significant consumers of Russian gas, such as Austria and Germany, have declared their readiness to cut off supplies from Russia. In Austria, Russian gas accounted for approximately 80% of its consumption in 2024. When Gazprom ceased supplies to Austria in mid-November, the country’s authorities announced they were prepared for this development, with gas storage facilities reportedly 90% full. In Germany, the share of gas supplies from Russia in the energy mix now ranges from 4% to 13.7%, according to various estimates. By contrast, Russia accounted for 55% of Germany’s gas imports in 2021. The country has not accepted pipeline gas from Russia since 2022 and currently does not purchase Russian LNG either. Today, Norway has become Germany’s largest gas supplier, accounting for 46% of its imports.
The situation is different for Hungary and Slovakia, which openly advocate for continued gas transit through Ukraine. Hungary, for instance, has reached agreements with Russia to increase gas supplies, and its Foreign Minister Péter Szijjártó emphasised that stable supplies are crucial for the country’s economy. Slovakia, on the other hand, has urged Ukraine to reconsider its decision, highlighting the importance of transit for the region’s energy security. These countries are trapped in contradictions: on the one hand, pressure from the EU to reduce reliance on Russian gas, and on the other hand, real threats to their energy security.
Ukraine has actively sought alternative transit routes, also by discussing gas supplies from Azerbaijan. At the same time, negotiations with Azerbaijan have touched not only on transit, but also on the storage of gas in Ukrainian underground facilities. Thus, Ukraine seeks to strengthen its role as a key energy player in the region. However, it remains an open question whether Azerbaijan can fully replace Russian gas volumes, given its commitments to other partners and its limited capacity.
Azerbaijani President Ilham Aliyev has confirmed that both the EU and Ukraine have approached Baku for assistance in negotiations with Russia. Here lies a dilemma: while Azerbaijan is willing to support efforts to ensure stable gas supplies to Europe, doubts remain as to whether Azerbaijani resources are sufficient to channel gas through Ukraine. According to Ukrainian energy experts’ calculations, Azerbaijan produces 36 billion cubic metres of gas annually, of which 24 billion are exported and 12 billion are used in domestic consumption. Moreover, exported volumes are primarily delivered through the TANAP pipeline, which runs through Turkey to Europe. This leaves little spare capacity for Azerbaijan gas transit through the Russian pipeline. In this context, experts have raised concerns that under the guise of Azerbaijani gas, Russian gas may be entering the market. Azerbaijan’s state gas company SOCAR could potentially buy Russian gas ‘in the pipe’, rebranding it as ‘Azerbaijani gas’ before moving it through Ukraine. This raises critical questions as to whether such a scheme aligns with the EU’s policy of reducing dependence on Russian energy resources.
Russia’s reaction to these developments has also been very revealing. Moscow demonstrates its willingness to continue gas transit through Ukraine despite the obvious challenges. Vladimir Putin has repeatedly emphasised that Russia could redirect its gas supplies to other regions, primarily Asia. However, even Russian analysts acknowledge that in the short term, Russia will struggle to fully offset the losses from reduced supplies to Europe. The main hopes are pinned on long-term growth in gas demand from China, the development of LNG projects, and expansion of deliveries to Central Asia. However, even if all the plans are fulfilled, the volumes of gas supplied to China and other countries will remain significantly below the levels previously exported to Europe. Compared to 2021, gas export volumes are expected to shrink by about 100 billion cubic metres by 2024−2025.
The capture of the Sudzha gas transport hub by Ukrainian troops in August 2024 demonstrated the fragility of the transit infrastructure amidst the ongoing conflict. Nevertheless, Russia is ready to maintain transit, but demands legal guarantees from European countries demonstrating their interest in continued transit. This adds further complexity for Brussels and Kyiv.
The situation around gas transit through Ukraine is becoming increasingly multilayered and contradictory. Ukraine, striving for energy independence, is attempting to minimise Russia’s role in energy supplies. At the same time, part of the supply still indirectly originates from Russia. In 2023, Ukraine imported 4.5 billion cubic metres of gas from the EU and Moldova, most of which was actually Russian gas returned to Ukraine via reverse flows. At the same time, total gas consumption for 2023 was 19.6 billion cubic metres. Ukraine’s decisions regarding Russian transit have a direct impact on the stability of supplies to Europe. The EU, meanwhile, is in the process of rebuilding its energy infrastructure. Russia, Hungary and Slovakia are seeking to protect their respective interests in a highly uncertain environment. The Azerbaijani option could provide a solution, but its implementation is also fraught with risks and limitations.
At the heart of this complex mosaic of interests lies one crucial question: can Europe achieve sufficient diversification of its gas supplies by the time transit through Ukraine ceases entirely? The answer to this question depends not only on technical and economic factors, but also on the ability of regional players to negotiate and find compromises, balancing mutual interests and the desire to achieve energy security.
Energy security challenges
For Europe’s energy security, the cessation of Russian gas transit through Ukraine will not be catastrophic. Most European countries have already significantly reduced their reliance on Russian natural gas. Thus, according to a report by the European Commission, by September 2024, the EU reduced the share of Russian gas imports from 45% to 18% by increasing imports of pipeline gas from Norway, as well as LNG shipments from other countries, primarily the United States. For countries that are still heavily dependent on gas piped from Russia via Ukraine (primarily Austria, Hungary and Slovakia), alternatives are available.
Firstly, these countries can import gas from neighbouring EU countries that have actively developed infrastructure to receive liquefied natural gas (LNG). Between 2021 and 2023, the EU increased the share of LNG in its total gas imports from 20% to 41%. In 2023, almost half of the EU’s LNG imports came from the United States, with 13% each from Russia and Qatar, and the remainder from Algeria, Nigeria and other countries. However, the share of Russian LNG in the EU’s imports has risen since 2022, totalling 20% of all supplies in the first half of 2024. Secondly, some countries may continue to receive piped Russian LNG via alternative routes. Hungary, for example, receives it via Turkey. Thirdly, the EU has undertaken substantial efforts in recent years to fill its gas storage facilities, which also reduces the risks of gas shortages.
In June 2022, the EU adopted the Gas Storage Regulation (EU/2022/1032), which mandates that, starting from 2023, EU gas storage facilities must be at least 90% full by 1 November each year. This measure was part of the response to the energy crisis triggered by the outbreak of Russia’s full-scale invasion of Ukraine. This year, the 90% threshold was exceeded on 19 August, over two months ahead of schedule. As of 10 November 2024, EU gas storage facilities were more than 93% full. Typically, storage facilities cover 25−30% of the EU’s winter gas consumption.
The potential stoppage of Ukrainian transit was recently ‘rehearsed’ in Austria. In November, Gazprom stopped gas supplies to Austria. The reason for this was that OMW, the only Austrian company purchasing Russian gas directly and distributing it to Austrian consumers, successfully sued Gazprom for compensation for gas supply disruptions after the outbreak of the full-scale war. However, Austria has already made efforts to increase gas imports from other countries, particularly Norway. Notably, Austria was one of the first Western countries to begin importing gas from the USSR in 1968.
As for Ukraine itself, it appears fully capable of managing without Russian gas altogether. Following the invasion, Ukrainian demand for gas dropped by nearly a third. As a result, the country now requires significantly less gas than before and is almost entirely self-sufficient. According to the available data, Ukraine did not import natural gas for the 2023−2024 heating season, and no imports are expected in the current heating season either. Ukraine currently relies on its own gas as well as gas from storage facilities.
Economic consequences of transit interruption
All parties involved in the transit of Russian gas through Ukraine will face economic losses from its cessation, at least in the short term.
For the EU, there is a risk of yet another rise in gas and electricity prices. One illustrative example is the case of Austria’s OMV winning a legal dispute against Gazprom, as announced on 13 November. Gazprom notified OMV of a halt in gas supplies on 15 November, and deliveries stopped as early as on 16 November. From 13 to 22 November, gas prices in the EU rose by 12% (to EUR 48.9 per MWh), setting an annual record. Although European gas prices have long since moved away from their 2022 highs, they are now still about twice as high as in the last pre-pandemic years, and Europe has grown weary of expensive energy. However, the cessation of Russian gas transit through Ukraine will certainly not trigger a repeat of the 2022 energy crisis. The transit of Russian gas through Ukraine is not that significant for the EU: in 2023, it accounted for about 5% of the EU’s total gas imports (compared to 11% in 2021).
For Ukraine, the question arises of how to finance its gas transport system (GTS) and to what extent it can be utilised once Russian gas transit ceases. However, over the past two years or so, Gazprom has not fully met its payment obligations for Ukrainian transit. Under the last contract signed in 2019 with Ukraine’s Naftogaz, valid for five years, Gazprom committed to abide by ‘pump-or-pay’ terms. Gazprom had to pay for the transit of certain volumes of gas (65 billion cubic metres in 2020, and 40 billion cubic metres annually from 2021 to 2024) even if the actual volumes pumped through Ukraine’s GTS turned out to be lower. In May 2022, Ukraine stopped receiving Russian gas through the Sokhranovka gas metering station (Rostov region) after losing control over gas transport infrastructure on the Russian-occupied territory in the Luhansk region. Since that time, transit has been carried out only through the Sudzha station (Kursk region), which came under the control of the Armed Forces of Ukraine (AFU) in August 2024. The transit of Russian gas through Sudzha was not interrupted. Ukraine proposed redirecting the volumes formerly handled by Sokhranovka through Sudzha, but Gazprom rejected the offer. At the same time, Gazprom started to transfer only a part of the transit fee to Naftogaz. In 2023, Gazprom paid only about USD 800 million, while the amount should have been higher by a factor of 1.5. Most of the money received was spent on GTS maintenance and repairs.
Ukraine’s ability to transit gas from other countries to Europe (e.g. from Azerbaijan) remains uncertain. Another option being discussed in Ukraine is to increase its own production in order to export its own gas to Europe. However, the solution to this problem will take years, and its feasibility cannot be fully assessed as long as hostilities continue in Ukraine.
Another significant economic aspect for Ukraine is that Gazprom pays taxes from the revenues earned from the transit of Russian gas through Ukraine, thus supporting the Russian budget, which is increasingly being used to finance the war in Ukraine. This, of course, is causing serious criticism in Ukraine. According to Bloomberg, gas accounted for approximately 6% of Russia’s federal budget revenues in 2023 (with 24% coming from oil). In 2023, Gazprom provided 8% of the Russian treasury revenues, paying USD 27 billion, not only from gas sales, but also from other activities, in particular from oil sales.
The issue of further security of the Ukrainian gas transport system also arises. Halting transit increases the likelihood of Russian attacks on Ukraine’s GTS. This entails, among other things, the risk of new losses for Ukraine. However, it should be noted that such attacks have already occurred, including strikes on gas storage facilities in western Ukraine.
Russia will also incur significant economic losses—arguably more than anyone else. If transit ceases, Gazprom could lose between USD 4.5 billion and USD 6.5 billion in annual revenue. Given that the Gazprom’s revenue from gas exports in 2023 was USD 33.3 billion, these losses could amount to 20%. Some of the lost volumes could be redirected to Europe via TurkStream, but this will take time. Additionally, TurkStream’s spare capacity is limited, capable of handling at best a third of the gas currently flowing through Ukraine. According to available estimates, declining gas sales to the EU and lower gas prices in 2023 have already reduced Gazprom’s revenues by USD 50−55 billion. Moreover, by the end of 2023, Gazprom reported a loss of USD 6.9 billion for the first time in more than two decades. The loss of Ukrainian transit in such a situation, of course, is no longer something out of the ordinary, but it would drive another nail in Gazprom’s coffin.
Preliminary conclusions
The future of Russian gas transit through Ukraine remains uncertain. Perhaps the most likely scenario is the cessation of transit. This would entail economic losses for all parties involved. However, continued cooperation with Russia does not guarantee that European countries will receive Russian gas, nor does it ensure that Ukraine will receive the agreed transit fee. Moreover, transit revenues contribute to financing Russia’s war in Ukraine. That said, last-minute agreements cannot be ruled out, following the ‘Azerbaijani scenario’. In 2019, for example, the transit agreement was extended just one day before a potential shutdown, i.e. on 30 December.
