Transit of Russian natural gas through Ukraine ended in the early hours of January 1, depriving the EU of about 5% of its gas supply, after last-hope efforts led by Slovakia to ensure continued flow failed.

Ukraine has served as a critical route for Europe’s gas supply for many decades. Flow through Russia’s oldest pipeline route to Europe has now ended.

Expectations had been growing through late 2024 that Russia and Ukraine would not extend their five-year gas transit deal beyond the end of last year, as Kyiv had repeatedly insisted it would not agree to an extension and EU authorities, which played a critical role in brokering the previous agreement, ruled out an extension as unnecessary. These expectations stoked a growth in gas prices over the last few months.

When it became increasingly clear that the deal would not be renewed, gas prices surged in the final days of 2024, with the front-month TTF contract closing the year at €48.9 per MWh ($542 per 1,000 cubic metres).

Ukraine transited 14bn cubic metres of Russian gas to the EU in 2023, which was roughly the same as 5% of its overall gas consumption that year. In such a tight energy market, this will cause Europe pain, but considerably less than the pain it suffered when Russia dramatically cut supply in 2022 after its invasion of Ukraine, in a failed attempt to force concessions from Ukraine’s European allies. Prior to the war, Russia supplied more than a third of the continent’s gas.

Only losers

Everyone loses from the halt in gas transit. Russia’s national gas champion Gazprom will lose around $5bn in revenue, having already suffered its first annual loss in decades in 2023 as a result of Moscow’s weaponisation of gas supply. Gazprom now faces an existential crisis. It no longer makes the Kremlin much money, and is unlikely to do so for many years to come. Russia’s efforts to clinch a new deal with China for 50bcm  of gas per year – twice the pipeline shipments that it had been sending to Europe before the Ukraine cut-off – have so far received a cool response from Beijing.

Ukraine will lose around $800mn in annual transit revenue. Unless flow is resumed, Kyiv will retire most of its transit pipelines as they will be too costly to maintain without any revenue, eating up about $1bn a year in maintence costs. Ukraine's total pipeline capacity stands at over 140bcm - far in excess of what was needed even before the end of the transit deal.

Slovakia has lobbied hardest to avoid a halt, as it is more dependent on Russian gas through Ukraine than any other EU country, with flow through the country accounting for about 60% of its gas supplies last year. Slovakian Prime Minister Robert Fico said on December 13 that his government was holding “very intense” negotiations on continued transit through Ukraine, adding he was “confident that a solution can be found.” He later flew to Moscow to meet with Russian President Vladimir Putin for talks on December 22 without result.

Other affected countries in the EU include Hungary and Austria, although both have access to more alternative supply that Slovakia does not. Hungary can still import Russian gas via the TurkStream, the last remaining Russian pipeline route to Europe, while Austria can access German imported LNG and Norwegian pipeline gas. Slovakia’s options are more limited, although it can also pipe in some gas from Germany and Hungary.

Russia’s Gazprom also announced on December 29 it would be halting gas supply to Moldova, depriving of fuel a key power station in the breakaway region of Transnistria that supplies the bulk of all Moldova’s electricity. The Moldovan government has implemented emergency measures to curb power use and switch to alternative fuels to natural gas.

Despite efforts by Slovakia and others, the writing was on the wall when Putin said on December 26 that it would be impossible to agree a new transit deal before the end of the year. 

"There is no contract – and it is impossible to conclude it in three-four days, no way," Putin was quoted as saying by Russia’s TASS news agency. However he said that it might still be possible to arrange contracts for gas delivery through third parties, noting as examples intermediaries from Turkey, Hungary, Slovakia or Azerbaijan.

"The problem is that Gazprom has long-term contracts, until 2035, until 2049, and in order to change the situation with transit, these contracts need to be dissected," he said. "This is a complex procedure."

What next?

No such contracts have since been announced, which would presumably involve European buyers purchasing Russian gas at the Russia-Ukraine border and then taking responsibility for its transit through Ukrainian territory, limiting the need for direct interaction between Moscow and Kyiv. However, this option would still need Russia and Ukraine first to sign a border interconnection agreement, which is yet to be announced.

Gas flow may well resume, if such arrangements are made. A lot will depend on the outcome of peace talks on Ukraine, in which the actions of the incoming Trump administration will play a critical role. For the time being, Europe’s weak energy security has been made even weaker, and its economy will suffer.