Ukraine Turns Off Russian Gas Supplies To The EU On January 1. This Is What That Means.

Ukraine has refused to continue acting as a European gas supply chain transit agent from Russia and is to terminate gas supplies to the EU from Russia from January 1^st. Kiev’s contract with Gazprom finishes on December 31. Affected by this decision are the EU member states Austria, Hungary, and Slovakia which have long relied on Russian gas transit through Ukraine and are especially vulnerable as they are all landlocked countries.

As an alternative, Ukraine’s largest private energy company DTEK, has instead contracted to receive deliveries of liquefied natural gas (LNG) from the United States. This first consignment arrived by ship to the Greek Port of Revithoussa on December 27. From there, it will be processed back into gas and distributed through EU and Ukrainian gas networks. One network, the Vertical Corridor, will transmit US sourced LNG deliveries between Greece, Bulgaria, Romania, Hungary, Slovakia, Moldova, and Ukraine.

This new American LNG delivery amounts to 100 million cubic meters of gas (1 TWh of energy, or 3,530,000 MMBtu), and was purchased by D.Trading, DTEK’s pan-European trading subsidiary. However, LNG sourced from the United States is currently 30-40% more expensive than pipeline gas from Russia.

In addition, Ukraine is likely to pay more for LNG coming through the Greek Revithoussa LNG terminal than for Russian pipeline gas, as the Greeks will also require processing and transit fees. The move also makes part of the EU longer-term dependent on Ukrainian-controlled LNG routes.  

This creates financial challenges for Austria, Hungary and Slovakia in particular, as being landlocked, access to LNG delivered to marine terminals is far more costly. It also changes their energy diplomacy needs to having to deal with Kiev instead of Moscow. 

Previously, longer-term contracts with Gazprom had allowed these three countries to buy Russian LNG at lower costs than EU gas spot prices. For example, Austria had been receiving Russian gas at a price almost three times cheaper than EU spot prices. While these developments may unify European LNG prices across the EU, it is likely to do so at the cost of significantly increasing productivity and cost of living expenses in these countries, while supressing their economies to be more dependent and under the influence of Ukraine. We can compare their economies as of 2024 as follows (IMF data):

This effectively means that these three EU economies in particular will be indirectly, and partially subsidizing the Ukrainian economy from 2025. While Ukraine’s economic performance may increase, the three Eurozone economies can be expected to decrease at a similar rate until an overall fiscal parity with Kiev is reached. At that time, Ukraine would have a better economic chance of joining the European Union.

Meanwhile, after selling gas at €11.32/MMBtu in October, European gas prices rose to almost €14.4/MMBtu on November 22. On December 27, benchmark futures rose further by 5% on the news of halted Russian gas transit through Ukraine. According to the Slovakian Prime Minister Robert Fico, the country is reliant on Russia for around 85% of its gas demand, primarily through pipelines transiting Ukraine, while substituting the supply of Russian gas through Ukraine for United States gas supplies in this manner increases European Union LNG prices by about €120 billion per annum.

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