Ukraine Monitor

Date: 23 November 2019

Gas Transit Through Ukraine: Gazprom’s New Prohibitive Offer

Ukraine’s Naftogaz has received a proposal from Russia’s Gazprom for gas transit through Ukraine’s transmission networks to European recipients from the beginning of 2020. This is yet another round of difficult negotiations – both the security of raw material supplies to Gazprom’s European customers as well as substantial profits for the Ukrainian budget are at stake here.

SOURCE: GAZPROM.RU

What do the Russians propose? First of all, to either extend the existing gas transit contract, which expires at the end of 2019, for a one-year period or to conclude a new agreement, though also for one year only. Apart from that, Gazprom sets a number of conditions. First, both sides must drop all mutual claims in international arbitration and cease all on-going court proceedings. Second, Ukraine must revoke the decision of its Anti-Monopoly Committee to impose a fine on Gazprom for violating economic competition and withdraw the complaint submitted to the European Commission regarding the actions of the Russian gas monopoly that went against competition rules. The fulfilment of these conditions will secure Gazprom against potentially huge financial losses. As regards the arbitration and anti-monopoly proceedings, in general, the Ukrainian side has gained the upper hand. Therefore, the Russians have long been trying to combine the issue of gas transit through Ukraine with the above-mentioned legal disputes of an enormous financial burden.

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The idea of concluding an agreement just for one year is also an integral part of Russia’s strategy. Initially, Moscow assumed that it would manage to construct the Nord Stream 2 gas pipeline before the current gas transit agreement with Kyiv expires (December 31, 2019). However, over the year, certain obstacles have emerged, delaying the implementation of the project that will allow Russia to bypass Ukraine when delivering gas to Europe. Moreover, another on-going project – the Turkish Stream gas pipeline – will allow Russia to get the possibility to almost completely abandon gas transit through Ukrainian territory. This will not only cause Kyiv to lose almost $3 billion per year in transit fees, but it will also potentially lead to stopping gas supplies from Russia in the future (although Ukraine has not been buying gas directly from its eastern neighbour for a few years now, it still remains a possibility in the future). Thus, it is not even surprising that the Russians will strive for such an agreement that will allow them to maintain gas transit through Ukraine for the shortest period of time possible after launching Nord Stream 2.

The latest Russian offer is clearly a tactical move, meaning that the Kremlin is playing for time. Gazprom knows that the Ukrainian side cannot agree to such an unfavourable scenario. It seems that the issue of gas transit will most likely be settled during the upcoming Normandy Four summit in Paris on December 9 and may turn out to be part of a broader package of agreements between Russia and Ukraine.

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