Russia and Ukraine End Five Decades of Gas Transit to Europe

(Bloomberg) -- Russian gas stopped flowing to Europe via Ukraine, closing off a route that’s operated for five decades after Kyiv refused to allow any transit that funds Moscow’s war machine.

Both sides confirmed the halt Wednesday after a key transit deal expired. The stoppage means central European countries that have relied on the flows will be forced to source more expensive gas elsewhere, compounding pressure on supplies just as the region depletes winter storage at the fastest pace in years.

While the route accounts for just 5% of Europe’s needs, nations are still reeling from the aftershocks of an energy crisis triggered by Russia’s invasion of its neighbor. Gas prices are up 50% year-on-year, getting a boost in recent weeks from the looming cutoff in supply. The continent is now increasingly exposed to market volatility as it becomes more reliant on global liquefied natural gas.

For Russia, the loss of one of its two remaining gas-pipeline routes to Europe will slash revenue by about $6 billion a year, Bloomberg calculations show. Ukraine will also miss out on transit fees and give up its long-held strategic position as a conduit of affordable energy for Western allies.

“This termination of gas transit is not just a supply-chain adjustment — it’s the symbolic collapse of an era,” said Tatiana Mitrova, a researcher at the Center on Global Energy Policy at Columbia University. “A significant part of the Soviet-built gas-pipeline network, which once brought Siberian gas to Europe, is now a shadow of its former self.”

Most central European customers of Russia’s Gazprom PJSC have managed to source alternative supplies, but at a higher cost. 

Slovakia’s largest gas utility, Slovensky Plynarensky Priemysel AS, said it will pay about €90 million ($93 million) more a year to guarantee stable imports through different routes. It also warned that in the event of a cold winter, all of Europe has been left more vulnerable. 

Deal Ends

Gazprom halted supplies on New Year’s Day after the five-year transit deal expired, citing a lack of “technical and legal opportunities” for shipments amid “repeated and explicit refusal of the Ukrainian side to extend these agreements.” The stop was confirmed by Ukraine’s Energy Ministry, which said Russian flows across its territory ceased as of 7 a.m. local time.

While there’s no risk of an immediate shortfall in Europe, the stoppage may make stockpiling more challenging ahead of the next heating season. The region’s inventories have been shrinking rapidly and are now below 75% full.

With Russia’s piped flows to Europe diminished, President Vladimir Putin will likely double down on efforts to boost LNG shipments — long a personal ambition.

Despite calls by some European countries to ban liquefied gas supplies from Moscow, the region is buying record amounts. Russia’s further LNG expansion faces a wall of Western sanctions, though US President-elect Donald Trump may seek to alter penalties amid any potential efforts to end the war.

Across Europe, the loss of some crucial Russian piped gas threatens to drive up bills for households and industry as they strive to recover from the worst cost-of-living crisis in decades.

Slovaks ‘Hardest Hit’ 

Several nations have waged a bitter campaign to keep the fuel flowing. 

Slovak Prime Minister Robert Fico last month implored European allies to find a way to keep the gas coming, saying his country earns as much as €500 million in transit fees a year. He even threatened Ukraine with a possible power cutoff, raising questions about broader energy security in the region. On Wednesday, he said the gas halt would have “drastic impacts on all of us in the EU.”

For his part, Ukrainian President Volodymyr Zelenskiy has rejected any arrangement that would ultimately send money to Russian coffers while the war continues. Putin said last week that any new deal for transporting gas through Ukraine would be challenging.

“We knew that the transit agreement would not be renewed,” said Jonathan Stern, a distinguished research fellow at the Oxford Institute for Energy Studies. “The question is whether anybody in Europe — but especially the Slovaks, who will be hit the hardest by this — will be successful in making an agreement” to continue receiving some gas.

European Commission President Ursula von der Leyen has set a political objective to phase out Russian fossil fuels by 2027, and has said previously that the end of transit will have little impact on regional energy markets.

“The stop of flow via Ukraine on Jan. 1 is the expected situation and the EU is prepared for it,” a European Commission spokesperson said. The commission, the EU’s executive arm, has been working with member states for more than a year to prepare for such a scenario, it said.

Serbia, Hungary

Russia still supplies gas to nations such as Serbia and Hungary via another pipeline, TurkStream, which bypasses Ukraine. But that link isn’t sufficient to fully compensate for the loss of the Ukraine route. Another pathway, across Poland, is now closed. The Nord Stream pipeline linking Germany to Russia was damaged in explosions in 2022, and the newer Nord Stream 2 link has never been authorized by Berlin.

Austria had also been a customer of Gazprom, but its main utility, OMV AG, terminated their long-term supply contract last month, saying the Russian company hadn’t supplied gas since mid-November.

Disputes between Moscow and Kyiv have previously disrupted gas shipments to European customers in winter months. 

In 2009, Russian flows via Ukraine to Europe stopped for almost two weeks, with more than 20 nations affected amid freezing temperatures, until Moscow and Kyiv signed a deal ending their disagreement. A shorter disruption occurred in 2006. 

The agreement that’s just expired, set in 2019, was also a result of last-minute negotiations. Yet the war — and the EU’s general reluctance to buy Russian gas — makes a quick resolution unlikely for now.

(Updates with comment from researcher in fifth paragraph.)

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