Having significantly reduced its dependence on Russian energy, the EU must now instigate a full embargo on Russian gas, rendering transit via Ukraine unnecessary, writes Sergiy Makogon.

Sergiy Makogon is a senior energy expert and former CEO of Ukraine’s gas transmission system operator (2019-2022). 

On June 2, Russia’s Deputy Foreign Minister, Mikhail Galuzin, underscored Russia’s desire to uphold gas transit via Ukraine past 2024, when the standing contract concludes. He postulated, “Ukraine, by refraining from extending the gas transit agreement with Russia beyond 2024, will both inflict substantial damage on the EU and ‘shoot itself in the foot’.”

Along these lines, Gerhard Roiss, former CEO of Austria’s energy titan OMV, warned during ORF’s “ZIB2” show that the termination of the 2019 transit contract between Kyiv and Moscow would suspend the transportation of Russian natural gas through Ukraine to Austria starting late 2024.

However, these assertions weave a misleading narrative, inaccurately portraying Ukraine as the pivotal actor in determining whether to perpetuate the transit of Russian gas to the EU. This misrepresentation inaccurately depicts Ukraine as applying undue pressure on Europe in this sensitive matter.

Contrarily, since the genesis of the conflict, Ukraine has unswervingly advocated for a comprehensive embargo on Russian energy exports, aiming to stem the war-fueling revenues that Russia gleans from these energy transactions. In a show of solidarity, Ukraine has sustained the transit of gas to help Europe navigate the acute energy crisis of 2021-2022 engineered by the Kremlin.

This provided Europe with a crucial respite to lessen its gas consumption and establish alternative supply channels.

Having significantly reduced its dependence on Russian energy, the EU must now instigate a full embargo on Russian gas, rendering transit via Ukraine unnecessary. Transit is simply a service that can only be executed if there is a demand for it on the EU side. Thus, it falls upon the EU to determine when to extricate itself from Russian gas dependency and wholly halt imports of Russian gas – a narrative that aligns more coherently with the intricacies of this geopolitical energy dynamic.

As per Bruegel, in the year succeeding Russia’s invasion of Ukraine on February 24, 2022, the European Union disbursed nearly €140 billion to Russia for fossil fuels, comprising €83 billion for oil and €57 billion for natural gas. In the ensuing 12 months, EU payments for Russian gas could fluctuate from €21 billion to an eye-watering €55 billion.

Conversely, Ukraine procures a meagre €0.8 billion from transit, with most of these funds earmarked for operational costs. With Ukraine enforcing cost-reflective tariffs in line with the European tariff network code, net profits are minimal, hence the loss of transit revenue would exert a minimal impact on Ukraine’s national treasury.

Presently, Gazprom channels approximately 35 million cubic meters of gas daily via Ukraine to the EU, chiefly to Austria, Slovakia, and Italy. Italy has avowed its goal to sever ties with Russian gas by the end of 2023. Concurrently, Slovakia’s SPP has diversified its sources, acquiring around 70% of its consumer supply from non-Russian origins. In addition, the Slovakian TSO has recently completed an interconnector with Poland, enabling access to Polish LNG terminals. Austria, however, remains circumspect regarding its plans, although, theoretically, it could rely entirely on infrastructure in Germany devised for the NS-2 expansion (e.g., OPAL).

As Russian aggression persists, it is imperative to thwart Russia’s capacity to bolster its military coffers through energy exports. Now, with gas prices at a two-year low and storage levels above average, it presents a unique opportunity to make such a decisive decision.

However, post-conflict scenarios may arise in the aftermath of a Russian defeat, where gas trade between the EU and Russia resumes, potentially as a means to secure reparations for Ukraine and assist in its post-war reconstruction, reminiscent of the UN’s “Oil-for-Food Program” for Iraq in 1995.

The future of gas transit from Russia to the EU via Ukraine is steeped in complexity, and a comprehensive reevaluation of this energy nexus is crucial. To cultivate a balanced, secure, and competitive gas market for years to come, the EU must revamp its collaboration model with Russia, curbing its market influence and countering its monopolistic practices. Here are four pivotal steps to actualise this transformation:

1. Exclusion of Russian Affiliates in the EU: The presence of Russian corporations controlling critical energy infrastructures, such as gas storage and pipelines within the EU, poses strategic risks and could jeopardise the EU’s energy sovereignty. The EU should promulgate stringent policies that prevent Russian affiliates from dominating vital energy infrastructure.
2. Border-Based Gas Trade: Historically, the gas trade has served as Russia’s conduit to influence political decisions within the EU. With gas prices often incorporating “discounts” linked to political loyalty, this mechanism has been leveraged to sway political entities across numerous countries. Gazprom, by selling gas directly to EU companies (and governments) at delivery points embedded deep within the EU, furnishes Russia with considerable influence over the European gas market and local politicians. A transition towards a system where Russian gas is exclusively sold to EU traders via an open, competitive mechanism at the borders of the Energy Community, encompassing Russia-Ukraine, could effectively dismantle this level of political influence from the Kremlin. Additionally, this transition would foster market equilibrium and deter manipulative pricing tactics.
3. Dismantling Gazprom’s Export Monopoly: Gazprom’s exclusive control over Russia’s pipeline gas exports has enabled it to penetrate and dominate the European market. Abolishing Gazprom’s state-sanctioned pipeline gas export monopoly and insisting on the autonomy and separation of Russia’s Gas Transmission System Operator from Gazprom (unbundling) would instigate a more open and competitive gas exports. This, in turn, would stimulate fair competition among Russian gas producers.
4. Free Transit of Central Asian Gas: Central Asia, home to some of the world’s largest gas reserves, offers a viable alternative to Russian gas. By ensuring the free transit of Central Asian gas via pipelines traversing Russia, the EU can diversify its energy sources, mitigate its reliance on Russian gas, and counteract escalating dependence on Turkey as a transit country.

In conclusion, the EU’s energy landscape stands on the brink of a critical transition. The strategic steps delineated above would undermine Russian market dominance and energy corruption practices, foster competition, and guarantee a stable and competitive gas market for the EU. By embracing these measures, the EU can achieve its ambitious energy and climate objectives while preserving its energy sovereignty.

The moment is ripe for the EU to redefine its energy relationship with a post-war Russia, and the roadmap for such a redefinition is increasingly evident.