Solving the Russia, Ukraine Gas Crisis

Negotiations on the fate of the transit of Russian gas through Ukraine should begin this month. Gazprom will not be able to make agreements that exclude Ukrainian gas pipelines before 2020, or even longer. Given the acute conflict between the Russian Federation and Ukraine and the degradation of the dialogue with the EU, which has traditionally mediated in gas crises, the talks promise to become one of the most difficult in history.

This gas transit contract signed with Naftogaz in 2009 is due to expire in 2019- a problem first realized by the Russian leadership as early as 2014, as even then it was clear that the tough conflict between the two countries would make meaningful dialogue between Moscow and Kyiv almost impossible.

By early 2015, Gazprom had a plan: by building two bypass gas pipelines, Nord Stream 2 and Turkish Stream, it would reduce dependence on the Ukrainian gas transportation system (GTS) to a minimum in order to be able to not extend the contract at all. The plan was based on two key prerequisites: the level of export of Gazprom to Europe and Turkey was to remain approximately at the level of 2014, and both gas pipelines would be ready by the end of 2019. But by the end of March 2018 it became obvious that both these prerequisites were not to be realized, meaning that Gazprom would either have to extend its contract with Ukraine, or initiate the biggest violation of contracts with consumers in history.

In general, considering the low level of trust between the parties, and the inevitable need for Gazprom to agree on transit for 2020, a short annual agreement looks to be the most likely scenario.

The failure of the negotiations threatens losses for all: Gazprom will have to spend additional funds on the construction of gas pipelines in Europe, the EU may face rising gas prices (if it has to attract LNG to cover the import needs), and the Ukrainian GTS, having lost strategic importance, will lead to a new increase in gas prices in Ukraine.

Dimitri Dolaberidze

16 April 2018 18:10