Tsarizm
Analysis

Russia-Ukraine Gas Deal: How The Kremlin Capitulated

Natural gas pipelines from Russia to Europe

Moscow and Kyiv reached an agreement on gas transit to Europe after Russia made significant concessions to Ukraine and the European Union. Russian energy giant Gazprom and Ukrainian Naftogas still have not signed a contract on direct gas supplies from Russia to Ukraine, but it is expected that the Kremlin will soon give preferential treatment to Ukrainian customers.

Originally, Moscow offered a short term gas deal to Kyiv, as it hopes to finish the Nord Stream 2 and the TurkStream pipelines that should bypass Ukraine. The authorities in Kyiv, on the other hand, insisted on a 10 year contract with Gazprom. The two sides made a compromise. The new contract will ensure gas supplies to Europe for the next five years, and the deal might be further prolonged for another ten years. According to the agreement, 65 billion cubic meters of gasoline will be sent through Ukraine in 2020 – which is what the European Union and Ukraine insisted on –and 40 billion cubic meters in the years following. The Kremlin initially proposed the transit of not more than 15 billion cubic meters through Ukrainian territory. In other words, the Kremlin agreed on terms and conditions that the EU proposed. 

The deal also requires Russia to pay $2.9 billion to Ukraine in order to settle an arbitration claim arising from previous transit disputes. Kyiv, in exchange, agreed to drop existing arbitration and legal claims that did not result in final decisions, and not to open new ones. However, there is no guarantee that Ukraine will actually withdraw its $7.4 billion anti-monopoly claims against Gazprom. Since the Kremlin showed weakness by accepting all of European and Ukrainian conditions, it is expected that Brussels and Kyiv will keep pressuring Moscow. The deal that Russia and Ukraine reached does not mention Naftogaz’ claims for compensation for its assets in Crimea, and it is more than probable that Ukraine will continue its legal fight against Russia. Apart from that, Kyiv will likely increase gas transmission tariffs, even though Russian officials recently complained that the tariffs proposed by Ukraine are unacceptable and too high. 

It is expected that the two countries will sign a new contract on direct gas supplies from Russia to Ukraine by the end of the month. Russia will likely provide 25 percent discount to Ukraine. In that case, Kyiv will be the absolute winner, as it got a long-term contract for gas transit, $2.9 billion from Gazprom, guaranteed minimum of 65 and 40 billion cubic meters of gas that should go through Ukrainian territory, as well as a significant discount for Ukrainian customers. Russia, on the other hand, lost not only $2.9 billion that it should pay to Ukraine, but also huge amount of money that it invested in the Nord Stream 2 and TurkSteam pipelines. Since the United States imposed sanctions against corporations involved in the Nord Stream 2 project, Swiss company Allseas already suspended its work on this pipeline. It remains to be seen what additional concessions Russia will have to make in order to complete the Nord Stream 2.

Moscow also spent at least $14 billion on the TurkStream pipeline, but that project is far from finished, as it currently connects Russia and Turkey, but not the rest of Europe. It is unclear when, and if at all, planned follow-on projects to bring Russian gas from TurkStream into Europe will be implemented. The United States might also impose sanctions or simply put pressure on countries like Bulgaria or North Macedonia, and full realization of the TurkStream will be highly uncertain. 

It is worth mentioning that Turkey’s natural gas imports from Russia declined by 36 percent on an annual basis to 8.1 billion cubic meters in the first half of 2019, according to data published by Gazprom. It is expected that the overall European gas import from Russia will decline in the next five years, even if the Nord Stream 2 is completed. For example, Poland, which is the biggest market for Gazprom in Eastern Europe, already announced that it plans to completely stop importing Russian gas as of January 1 2023. According to Polish authorities, they will start importing liquefied natural gas (LNG) from the United States. It is expected that Ukraine and the Baltic states will also start buying significant amounts of the LNG from the US. That, however, does not mean that they will completely squeeze out Gazprom in favor of LNG. Since Russia demonstrated its weakness during gas talks with Ukraine, Poland and the Baltic states will likely insist on better gas deals with Gazprom. At the same time, these countries will tend to reduce their heavy dependence on Russian gas. 

There is no doubt that the Kremlin propagandist will portray the gas deal with Ukraine as another geopolitical victory. In reality, however, Ukraine will remain a strategic transit country, and Moscow will unlikely be able to bypass gas transit through Ukrainian territory at least in the next five years. 

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1 comment

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PermReader December 23, 2019 at 1:50 pm

“Capitulation” is the irreversible action,while the gas treaty is quite a reversible one.But the gas pipe line is irreversible too after its building. Who won,just a future will show.

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