Russian-Ukrainian Gas Deal Is a Trilateral Victory

Russia, Ukraine and the EU all benefit.

Kiev Ukraine
Skyline of Kiev, Ukraine, January 15, 2015 (Sergey Galyonkin)

Russia and Ukraine have agreed to secure the flow of natural gas into Europe for the next five years. A deal between the two countries satisfies the economic needs of all three parties involved. Russia guarantees the export of its gas, Ukraine continues to benefit financially from transiting the gas, and the EU receives a steady supply of gas for the immediate future.

Gazprom, the Russian gas monopoly, will pipe 65 billion cubic metres of gas into Europe in 2020. The amount will fall to 40 billion over the next four years. The agreement mentions the possibility of extending the contract by another ten years upon maturity.

Ukraine will receive up to $7 billion in transit fees, which would be around 5 percent of its national budget.

An agreement has not (yet) been reached on direct gas supplies to Ukraine. For the time being, it only stands to benefit financially.

Naftogaz, the Ukrainian gas company, will also receive $2.9 billion from Gazprom in overdue transit payments following an arbitration court ruling in Sweden. In return, Ukraine has agreed to drop $12.2 billion in additional legal claims.

Who benefits?

Nick Butler, an energy commentator for the Financial Times, suggests Russia benefits the most. Its gas will continue to flow into Europe and the rapprochement between Russia and Ukraine will make it harder to maintain the argument for sanctions on Nord Stream 2, the almost-finished Baltic Sea pipeline between Germany and Russia.

I would argue the agreement reflects a pragmatic reconciliation rather than a genuine attempt at rapprochement.

The conflict in eastern Ukraine is ongoing. Russia is not giving up Crimea. With the delay of Nord Stream 2, Russia needed to secure a route to Europe. This agreement gives it one. Ukraine used the timely imposition of American sanctions to its advantage, extracting financial benefits, although the extent to which the sanctions influenced Russian policy is unknown.

Russia’s gap

They probably played a small role. Russia’s main concern is that it is still unable to bypass Ukraine.

Nord Stream 2 will allow it to pipe an additional 55 billion cubic meters of gas into Europe, doubling the capacity of the existing Nord Stream pipeline. Ukraine still transits 93 billion cubic meters.

TurkStream, a new pipeline in the Black Sea, can deliver another 31.5 billion cubic meters to Turkey and Southeast Europe.

Ukraine will remain a transit point for the immediate future, even if its importance to Russia will decrease in light of the two new pipelines to the West and a third new pipeline to China.

This Power of Siberia pipeline gives Russia entry into the Chinese energy market. But the 38 billion cubic meters of gas it can transit pales in comparison to the 162 billion cubic meters Russia sells to Europe and Turkey every year.

In another hopeful sign, Russian president Vladimir Putin has proposed to give Ukraine a 20 to 25 percent discount on gas, which could clear the way to a resumption of Russian gas sales to Ukraine — and perhaps, eventually, a normalization of relations.