Russia reduces gas flow to Europe via Ukraine on last day of expiring deal

Russian President Vladimir Putin appears during an October meeting in Moscow, Russia. (Mikhail Metzel, Sputnik, Kremlin Pool Photo via AP)

MOSCOW, Russia — Russian energy company Gazprom said it would pump a reduced volume of gas to Europe via Ukraine on Tuesday, the last day before the expiry of a deal that had kept the gas flowing throughout nearly three years of war.

Barring a last-minute surprise deal, gas flows are likely to stop on Jan. 1 after the expiry of the five-year transit agreement between Russia and Ukraine, marking an almost complete loss of Moscow's once mighty hold over the European gas market.

Russian President Vladimir Putin said on Dec. 26 there was no time left this year to sign a new deal on the transit of gas via Ukraine.

The remaining buyers of Russian gas such as Slovakia and Austria have arranged for alternative supplies and analysts foresee minimal market impact from the Russian gas flow stoppage.

The price at the Title Transfer Facility, a virtual trading point in the Netherlands that is used as a benchmark for European natural gas prices, rose only slightly on Tuesday to 48.85 euros per megawatt hour by late morning.

Stopping the gas flow would have a much bigger geopolitical significance.

Moscow has lost its dominant share of gas supplies to countries in the European Union to rivals such as the United States, Qatar and Norway since the 2022 invasion of Ukraine, which prompted the EU to cut its dependence on Russian gas.

Once the world's biggest gas exporter, state-controlled Gazprom recorded a US$7 billion loss in 2023 alone, its first annual loss since 1999.

For Europe, the loss of cheap Russian gas supplies contributed to a major economic slowdown, a spike in inflation and a worsening of a cost-of-living crisis.

While Europe has been quick to find alternative energy sources, the loss of Russian gas has exacerbated long-term concerns about its declining global competitiveness and in particular about Germany's industrial future.

Impact of Ukraine war

Russia and the Soviet Union spent half a century building up a major share of the European gas market, which at its peak stood at 35%, but the war in Ukraine has all but destroyed that business for Gazprom.

Most Russian gas routes to Europe are shut, including Yamal-Europe via Belarus and Nord Stream under the Baltic that was blown up in 2022.

The Soviet-era pipeline via Ukraine brings gas from Siberia via the town of Sudzha - now under the control of Ukrainian soldiers - in Russia's Kursk region. It then flows through Ukraine to Slovakia. In Slovakia, the gas pipeline splits into branches going to the Czech Republic and Austria.

Kyiv has refused to negotiate a new transit deal.

Ukraine is giving up some US$800 million a year in fees from Russia, while Gazprom will lose close to US$5 billion in gas sales to Europe via Ukraine.

The end of the transit deal is unlikely to cause a repeat of the 2022 EU gas price rally as the remaining volumes are relatively small.

Russia shipped about 15 billion cubic meters (bcm) of gas via Ukraine in 2023 - only 8% of peak Russian gas flows to Europe via various routes in 2018-2019.

Gazprom said it would send 37.2 million cubic meters on Tuesday compared to 42.4 mcm on Monday.

The halting of supplies via Ukraine will be a major blow to Moldova, a country that was once part of the Soviet Union.

Hungary will continue to receive Russian gas from the south, via the TurkStream pipeline on the bed of the Black Sea, although it had been keen to keep the Ukrainian route as well.