Gas Supply Disruption: The Geopolitical and Economic Consequences for Europe

Context: On New Year’s Day, Russian natural gas exports to Europe via Soviet-era pipelines through Ukraine were stopped as the transit agreement expired, with no agreement reached between Moscow and Kyiv. This marks the end of Russia’s oldest gas route to Europe. The Ukrainian government justified its decision as necessary for national security amid the ongoing military conflict with Russia. Below is an overview of the key aspects surrounding this energy disruption.

Urengoy-Pomary-Uzhgorod Pipeline Overview:

• The Urengoy-Pomary-Uzhgorod pipeline has historically been a major route for transporting natural gas from Siberia to Europe.
• It passes through Sudzha, in Russia’s Kursk region, which is currently under Ukrainian military control.
• The pipeline continues through Ukraine to Slovakia, from where it branches out to Austria and the Czech Republic.
• Transdniestria, a breakaway region of Moldova bordering Ukraine, also receives Russian gas via this route.

Decline in Russia's Gas Exports to Europe:

• Since Russia’s invasion of Ukraine in February 2022, gas exports to Europe have significantly dropped.
• Moscow's share of the European gas market, which was 35% before the conflict, has fallen to just 8%.
• This reduction in exports has been accompanied by a sharp drop in revenue for both Ukraine and Russia.

Diminished Gas Transit via Ukraine:

• By December 2024, the European Union received fewer than 14 billion cubic meters (bcm) of gas via Ukraine, compared to 65 bcm per year in 2020.
• Ukraine had earned between $800 million and $1 billion annually in transit fees, but this revenue has diminished due to the halted exports.
• Russia, through Gazprom, stands to lose nearly $5 billion in sales from gas exports via Ukraine in 2024.

Europe's Energy Diversification:

• In response to the loss of Russian gas, the European Union has diversified its energy sources, turning to liquefied natural gas (LNG) and non-Russian pipeline imports.
• Major competitors like Norway, the United States, and Qatar have increased their market share, while Russia's dominance in Europe has waned.

Impact on Russia and Gazprom:

• Economic Losses:
  • Ukraine faces an annual loss of up to $1 billion in transit fees.
  • Gazprom is projected to lose around $5 billion in gas sales from the halted pipeline exports.
• Decline in Gas Exports:
  • Gas transit through Ukraine fell from 65 bcm in 2020 to about 15 bcm in 2023.
• Market Share Collapse:
  • Russia, which once controlled 35% of the European gas market, has seen its market share diminish significantly due to the war and the suspension of gas exports.

Impact on the EU:

• Countries Affected:
  • Austria and Slovakia were among the most reliant on Russian gas via Ukraine.
  • Austria relied heavily on this route, while Slovakia depended on it for about two-thirds of its gas needs (3 bcm per year).
  • Slovakia has stated that it can manage without Russian gas, as it has diversified its supply contracts.
• Market Impact:
  • In 2022, European gas prices reached record highs, but this is unlikely to happen again due to the significantly reduced volumes of Russian gas.
  • The EU has adjusted by importing more LNG and gas from alternative pipelines, mitigating the impact on gas prices.

Alternatives and Adjustments:

• Shutting Down Other Pipelines:

  • The Yamal-Europe pipeline, which passed through Belarus, has been closed.
  • The Nord Stream pipeline, a key route for Russian gas to Germany, was severely damaged in 2022.

• Alternative Routes Still Operational:

  • TurkStream Pipeline: This pipeline remains a crucial route for Russian gas exports, supplying Turkey, Hungary, and Serbia.
  • EU's Energy Shift: EU countries have diversified their energy sources, with Slovakia, Austria, and the Czech Republic seeking gas from alternative suppliers like Hungary, Austria, the Czech Republic, and Poland.

• Moldova's Challenges:

  • Moldova, which receives about 2 bcm of gas annually from Russia via Ukraine, plans to cut its gas consumption by a third starting January 1, 2025.
  • Moldova has diversified its energy sources and aims to reduce dependency on Russian gas.

Conclusion:

The cessation of Russian gas exports via Ukraine marks a significant shift in European energy dynamics. While this disruption presents challenges, especially for countries that were heavily reliant on Russian gas, it also highlights the European Union’s efforts to reduce dependence on a single energy supplier. By diversifying energy sources and securing alternative pipeline routes, the EU has taken important steps toward energy security. Meanwhile, Russia’s diminished role in the European gas market reflects the broader geopolitical and economic consequences of its ongoing conflict with Ukraine.