At 8 a.m. on January 1, 2025, the supply of Russian gas crossing the Ukrainian border on its way to Europe was turned off, ending a sixty-year era.
The response to the shutoff was notably calm considering that in 2009, a two-week halt in Russian gas supplies to Europe via Ukraine caused panic and a large-scale crisis. This time around, gas prices in Europe rose slightly, and only Moldova had real problems.
As recently as 2015–2019, gas transit was one of the most important issues for Ukraine. In 2018, then president Petro Poroshenko opposed the construction of the Nord Stream 2 pipeline from Russia to Germany via the Baltic Sea on the basis that it would deprive Kyiv of $3 billion a year in transit revenue. The following year, Ukraine insisted on a new ten-year agreement on gas transit, saying it would be a powerful barrier to possible Russian aggression. In the end, Nord Stream 2 was never launched, and transit via Ukraine continued—but that wasn’t enough to prevent a war.
The Impact on the EU
By the end of 2024, Ukrainian transit of Russian gas to Europe was already a fraction of what it once was: 15 billion cubic meters, 13 billion of which went to Slovakia and onward to the EU, with the rest going to Moldova. Europe must now find an alternative to that missing gas, either by purchasing LNG or reducing consumption, including through greater use of coal. There is no surplus to speak of on the LNG market yet and prices are significantly higher than in 2015–2021, but two new LNG plant lines with an annual capacity of 36 billion cubic meters have already been built and are being prepared for launch in the United States. Construction of several more plants is also nearing completion in the United States, Canada, and Mexico.
Slovakia is now losing about 200 million euros a year in revenue from the cancelation of gas transit and will be forced to buy gas elsewhere at a higher price. Still, Slovakia’s main source of electricity is two nuclear power plants, and gas is used only for peak generation, for producing electricity for export, in industry, in public utilities, and heating. The problem could be a lot worse, therefore, though it will still be felt keenly by the small Slovak economy. In addition, the country will lose the income it received from reselling Russian gas (both in the form of gas itself and electricity produced from it) to countries that refused to buy directly from Gazprom.
Russia’s Losses
Three years ago, Europe was the main gas market for Russia and Gazprom, but Russia already sustained its biggest losses on this front back in 2022. The volumes that will be lost as a result of the end of Ukrainian transit are a pale shadow of a once vast portfolio.
In 2025, Gazprom will export 38 billion cubic meters to China, about 25 billion cubic meters to Türkiye, and 15 billion cubic meters to Europe via the TurkStream pipeline across the Black Sea. The 15 billion cubic meters that Gazprom has lost due to the suspension of Ukrainian transit would therefore have made up about 16 percent of this export portfolio: a noticeable but not fundamental volume.
The issue of the lost revenue is more complicated. If Russian gas had continued to flow to Europe, prices would most likely be lower now—not only for that 15 billion cubic meters, but also for the 40 billion that Russia continues to supply to Europe via TurkStream and in the form of LNG.
If we posit that had Ukrainian transit been maintained, gas prices in Europe would have remained at $300 per 1,000 cubic meters, and if prices stay the same in the absence of the transit, then Russia has lost about $4.5 billion per year. If, however, we assume that the termination of Ukrainian transit has raised the price by about $100 per 1,000 cubic meters for the remaining 40 billion cubic meters per year sold to the European and Turkish markets, then Russia incurs practically no losses. Yet such calculations are highly provisory, because the imminent appearance of new LNG volumes on the market will negate the effect of the temporary deficit. In addition, these calculations need to be adjusted to take into account potential revenue from deliveries to Moldova: in reality, this gas went to the breakaway region of Transnistria on nontransparent payment terms that were likely extremely generous to the buyer.
Judging by Gazprom’s IFRS reporting for the first nine months of 2024, this means a loss of about 10 percent of revenue and just under half the profit of the gas division of the Gazprom group. For 2025, the share will be slightly lower due to growth in revenue and profit from increased sales to China. Most likely, Gazprom’s production costs will barely decrease as a result of not having to produce and pump this gas, but the company will make a significant saving by not having to pay the export duty on the lost export volumes, which is 30 percent of the selling price. It is also worth noting that more than 40 percent of the total revenue and more than half of the profit of the Gazprom group is currently generated by its oil division.
Ukraine’s Losses
In recent years, Naftogaz of Ukraine recorded revenues for gas transit of over $1 billion on its accounts, based on the “ship or pay” obligation stipulated in the 2019 contract, under which Gazprom agreed to deliver a certain amount of gas via Ukraine. In reality, however, Gazprom paid about $400 million for reduced volumes sent via Ukraine.
The Russian company circumvented the “ship or pay” requirement by nominating volumes to be sent via the Sokhranovka metering station on a pipeline that entered Ukraine through the Luhansk region, which was seized by Russia back in February 2022. The operator of Ukraine’s gas transmission system was forced to decline that gas, citing a force majeure, and suggested moving the nominated volume to Sudzha, a station on a different line. But Gazprom used this as an excuse to reduce its “ship or pay” levels by the corresponding volume.
Naftogaz considers that difference—a significant amount for the company—to be an unpaid debt and has gone to arbitration over the matter, but even in the event of a ruling in Ukraine’s favor, it is unlikely that the money will be recovered before the end of the war.
In addition, Ukraine has the largest gas storage facilities in Europe, and will now likely lose revenue from them standing idle. Without transit from Russia, gas would have to be transported to them from Baumgarten in Austria and then back again, adding a round-trip cost of about 50 euros per 1,000 cubic meters, rendering the entire operation unfeasible.
Ukraine itself currently imports minimal volumes of gas, because Ukrainian industry and gas-fired power generation have been largely destroyed during the war. Consumption can mostly be covered by domestic production, so the cost of importing gas from Europe is not the most pressing issue for Kyiv right now.
While Ukraine was importing gas, it employed the virtual reverse mechanism: commercially, Ukraine was buying gas from European sellers, but physically it was using the gas that the sellers bought from Gazprom. Thanks to the virtual reverse mechanism enacted in 2019, which made it possible to consume the gas inside of Ukraine and present Gazprom with a purchase receipt instead of proof of delivery, Ukraine could obtain the gas at the price of the Austrian hub minus the cost of transportation via Slovakia, and save on the cost of both transporting the gas from the middle of the country to the western border and back while charging Gazprom for the full cost of border-to-border delivery. In the absence of transit, if Ukraine ever needs to import gas from Europe, it will have to pay the Austrian hub’s prevailing prices, plus pay for transportation via Slovakia to Ukraine and incur the cost of domestic transportation back to the center of the country, where most demand is concentrated.
The Case of Moldova
The party to suffer the most from the transit shutdown is Moldova. Most of the country stopped buying Russian gas back in 2022, but the breakaway region of Transnistria consumed about 2 billion cubic meters of gas per year delivered through Ukraine. To complicate matters further, that gas was then used to generate electricity at the country’s largest power plant (located in Transnistria), providing the rest of Moldova with three-quarters of its electricity. Moldova could now buy gas from Romania via a small pipeline, or via Turkstream, Bulgaria and Romania, but that would be much more expensive.
While Gazprom was able to send gas via Ukraine, it cost the concern next to nothing to extract an additional 2 billion cubic meters per year and pump it through its system to Transnistria, so Gazprom could afford to supply the breakaway region for very low current payment and worthless IOUs. In the absence of the Ukrainian route, Gazprom would have to divert some of the volumes it sells to the EU via Turkstream to Transnistria, and therefore forego the revenue for those volumes. Even that solution would not be straightforward, as the last mile of the Black Sea West Coast gas line passes via Ukrainian territory on its way from Romania to Moldova and Transnistria, and Russian or Russian-origin gas is barred from entering Ukraine.
Ultimately, Transnistria and Russia’s influence in Moldova turned out to be far down Moscow’s agenda. In any case, the energy crisis in Moldova will add to the problems of the pro-European government of President Maia Sandu on the eve of parliamentary elections.
An Irreversible Step?
Gas transit via Ukraine ceased despite the fact that continuing it was in the economic interests of Ukraine, Russia, and Europe—and even after the parties spent all of 2024 looking for an acceptable way to continue the transit. Still, the EU has effectively welcomed the reduction in gas purchases from Russia, leaving Slovakia to try to resolve its gas problems on its own.
Until the fall of 2024, representatives of the Ukrainian side, including Prime Minister Denys Shmyhal, said that transit could continue as long as the shipper and owner of the gas at the time of transit was not Russia. At the very end of 2024, however, Ukrainian President Volodymyr Zelensky said that such window dressing was unacceptable and that any gas allowed through Ukraine would have to be non-Russian in substance, rather than appearance.
Russia and Gazprom feigned indifference, limiting themselves to standard accusations that Ukraine and Europe were prepared to inflict harm on themselves out of pure Russophobia, while Russia was open to cooperation.
Each side could still hope that another party would have such a vested interest in continuing the transit that they would agree to lose face and make concessions. But those calculations proved false. Everyone was prepared to suffer rather than give anything away to the enemy. They had all long been preparing for an end to the gas transit, and had factored the ensuing losses into their strategies.
That is not to say that transit via Ukraine cannot still be resumed. In theory, Kyiv could offer its transportation capacity for use under European rules, without any dealings with Gazprom. European companies would buy gas on the Russia-Ukraine border and hand it over to Ukraine for transportation.
So far, there is no sign of any such plans—possibly because Kyiv considers being able to resume gas transit a trump card in future negotiations with Moscow. But the value of the European gas market for Russia is declining: the REPowerEU plan envisages complete independence from all types of Russian fuel by 2027. Even if the plan’s implementation is significantly delayed, European demand for Russian gas is still set to decline due to the investments already made in low-carbon energy, the closure and relocation of energy-intensive industries as a result of the 2021–2023 energy crisis, and the construction of new LNG terminals.
In the long term, it will be even more difficult to restore transit. Maintaining a large-scale gas transportation system costs money, and Ukraine’s Naftogaz will have little to spare, not least due to the loss of transit revenue. In addition, Ukraine may want to find another use for the over 1 billion cubic meters of line fill gas still sitting in the various pipelines. With reduced utilization, some of the parallel lines could be decommissioned, so part of that line fill could be sold, potentially earning or saving several hundred million dollars. That would, however, create another economic obstacle if transit ever was resumed, since the pipelines would need line fill again.
The names of the Soviet-era pipelines running through Ukraine—Soyuz (Union), Progress, and Bratstvo (Brotherhood)—are an echo of the 1960s and 1970s, reflecting the belief of that time in a bright future. Yet in the early 2000s, the pipelines started being used as instruments in gas wars and weaponized interdependency to put pressure on other countries. Now their names sound like a sick joke, and they have become yet another victim of not just a trade war, but a very real war that was unimaginable just a few years ago.
