Impending End of Key Gas Agreement Raises Concerns for Europe
As 2024 draws to a close, a significant gas supply contract between Ukraine and Russia is set to expire, prompting concerns across Europe. This agreement, which has facilitated the transit of Russian gas through Ukrainian pipelines to European markets for the past five years, will not be renewed, according to statements from Ukrainian President Volodymyr Zelenskyy. This decision, motivated by ongoing Russian aggression, has sparked panic among several European nations.
Countries such as Moldova have already declared a state of emergency, while Hungary has issued warnings about a potential energy crisis. In response to the looming cessation of gas deliveries, the Slovak Prime Minister, Robert Fico, recently traveled to Moscow to discuss the future of Russian gas supplies to Slovakia and other parts of Europe.
During their meeting, Fico reportedly received assurances from Russian President Vladimir Putin that Russia is prepared to continue supplying gas to the West, including Slovakia. However, the feasibility of this arrangement appears questionable, given Ukraine's refusal to allow any further Russian gas transit after January 1, 2025.
With Ukraine's decision to halt gas supplies, affected countries are now scrambling to identify alternative sources. Azerbaijan has emerged as a possible substitute supplier, although no formal agreements have been established yet. Recent reports indicated that negotiations between Moscow and Kyiv regarding a new deal involving Azerbaijan had collapsed.
One potential solution for maintaining gas transit through Ukraine involves a 'swap' agreement with the Azerbaijani state-owned energy company SOCAR. Under this arrangement, SOCAR could enter into a contract with Ukraine to transport Azerbaijani gas through Ukrainian pipelines instead of Russian gas. However, analysts have expressed skepticism about whether Azerbaijan possesses the capacity to supply the approximately 16 billion cubic meters that Russia has historically sent through these pipelines.
For this swap to be viable, Azerbaijan would need to negotiate with Russia to exchange specific volumes of gas at the Ukrainian-Russian border, thereby allowing Russian gas to be labeled as originating from Azerbaijan. This complex arrangement could potentially involve Azerbaijan selling its gas to Russia before it is sent through Ukraine, only for Russia to buy back the same amount at the border.
The economic implications of the impending gas supply cessation are significant. According to research from the think tank Bruegel, Ukraine's transit revenues from Russian gas amounted to $1.2 billion in 2022, dropping to $800 million in 2023, representing a mere 0.5 percent of the country's GDP. In contrast, Russia stands to face much larger financial losses, estimated at $6.5 billion annually, if Ukraine halts all gas transit to Europe.
As the deadline approaches, the focus remains on finding solutions to maintain energy stability in Europe while navigating the complex geopolitical landscape shaped by the ongoing conflict in Ukraine and the region's reliance on Russian gas.
