Russian gas no longer flows through Ukraine to EU states after a five-year deal expired, cutting off an energy route that has existed since the collapse of the Soviet Union in 1991.
President Volodymyr Zelenskiy said the move made sense. Russia “Can’t make billions on our blood” anymore.
His Energy Minister Herman Hlushchenko confirmed on Wednesday morning that Kiev had stopped the flow of gas “in the interest of national security”.
“This is a historic event,” he wrote on the social media platform Telegram. “Russia is losing the market and will suffer financially.”
The agreement allowed Russian gas to flow through Ukraine’s pipeline networks to European countries, primarily Hungary, Slovakia and Austria.
Its termination will not cut off all Russian gas. Europebut reduce it significantly. Gas can still flow from Russia to Europe via the TurkStream pipeline, but no longer through Ukraine, which will reduce EU gas imports by about 14 billion cubic meters.
The European Commission has said that this volume could be replaced by pipeline imports from liquefied natural gas (LNG) and other sources such as Norway and the US.
However, the impact is already being felt in parts of EU candidate country Moldova, which has been receiving Russian gas via Ukraine.
The Russian-speaking region of Transnistria, home to about 45,000 people, cut off supplies to households. “There is no warm or hot water here,” said a worker at the energy company Tirasteploenergo.
Financial implications
Although Ukraine received financial benefits of $800m (£640m) a year from the now-expired deal, the gas itself was not imported to Ukraine.
The latest estimates show that Russia expects to lose €5bn (£4.14bn) a year from gas flowing through Ukraine to Europe.
According to its own reports, Gazprom’s market capitalization is around £22bn (3 trillion roubles).
Gazprom is Russia’s largest company, and has the largest gas reserves in the world. Since the invasion of Ukraine, his business has suffered several setbacks.
By the end of 2024, Russian gas exports to Europe through Ukrainian pipelines alone have already fallen by 78 percent since the deal began in 2020.
And for the first time since 2001, after falling gas sales, Gazprom reported a net loss of £5.5bn (629 billion roubles) in 2023.
Until then, the gas giant has consistently raised billions every year. Also included is £14bn (1.9 trillion roubles) in 2022 during the first year of the war.
Revenues are set to fall by around 27% to £61 billion in 2023, with gas sales in particular falling by 40%.
In this context, a loss of £4.14bn in gas sales without the Ukraine transit deal could lead to a further 6.7% drop in revenues for Gazprom and Russia.
Russian oil and gas war chest
Gazprom is majority state-owned, which means the Russian state receives a large portion of its profits.
Russia relies on the oil and gas business to finance its ongoing war in Ukraine. According to the Oxford Institute for Energy Studies (OIES), with revenues accounting for 30 to 50 percent of Russia’s federal budget. Outside the EU, Russia’s largest pipeline gas exports go to Turkey and Belarus, while LNG exports rely mostly on sales to China and Japan.
According to BloombergRussian gas exports to China are heavily discounted by -28 percent compared to European exports, meaning they are less profitable for Russia overall. But ultimately, according to OIES, the bulk of Russian state oil and gas revenue comes from oil sales rather than gas sales.
Although the EU has imposed a ban on oil imports from Russia, several reports suggest that Russian oil is still reaching the EU through back channels.
Oh Global Witness Investigation It found that 130 million barrels of refined products from refineries processing Russian crude were imported into the EU in 2023, worth an estimated €1.1bn in tax revenue to the Kremlin.
Russia is the largest supplier of crude oil to China and India. Britain and EU countries import billions worth of refined oil from these two countries. Part of which probably originates from Russia. Despite the restrictions.
The Russian gas problem
In addition to the sanctions imposed by the invasion of Ukraine, European countries’ dependence on Russian gas has been a difficult challenge.
Russia has historically used its gas pipeline exports to exert political control over dependent countries from Ukraine to Armenia.
To date, Gazprom is weaponizing the same tactic in Moldova, cutting off gas supplies. Reportedly $709m (£565m) in debt.
Even so, the decision not to expand gas transit through Ukraine has faced some pushback.
Prime Minister of Slovakia Threatened to cut off electricity supply to Ukraine In retaliation, as he said, ending Russian gas transit would raise energy prices.
However, gas deliveries through Ukrainian pipelines have now stopped.