Dr. Ken Rietz
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Western media has hammered on the sanctions against Russia so much that few people realize that natural gas has been flowing from Russia, through Ukraine, and into the EU steadily despite Russia’s invasion of Ukraine. In general, the sanctions against Russian energy were directed against crude oil, and not natural gas. The reduction of natural gas supplied to the European Union (EU) were partly self-imposed by Russia (according to the Atlantic Council), and partly by the destruction of the Nord Stream pipelines. The incursion of Ukraine into Russia complicates the issue of natural gas. Here is a map of oil and gas pipelines from Russia to Europe. We will be interested only in the orange lines, the natural gas pipelines. |
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Figure 1: Gas and oil pipelines from Russia into Europe We need to fill in background material first. The price of natural gas in the EU was very stable up until Russia invaded the Ukraine. Here is a graph of those prices. |
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Figure 2: Natural Gas Prices in the EU, in 6 month intervals It is very clear when Russia invaded Ukraine, in 2022S1 (or 2022 H1 in American notation). This is what set off a shock and concern about the natural gas cost and supply during the winter of 2022. In December of 2019, a 5-year contract was established between Gazprom (Russian) and Naftogaz (Ukrainian) that would allow Russia to run natural gas through a pipeline that crossed Ukraine and went to Ukraine’s neighbors, Slovakia and Hungary (and through Hungary to Austria and other places). Ukraine was paid for the right to pump the natural gas over its territory, $1.54 billion in 2023. And of course, Russia was paid for the natural gas by the countries receiving it. The 5-year deal ends this December, and Ukraine has repeatedly denied that the contract will be extended past its end. Russia has insisted that Ukraine siphoned off some of the natural gas, which Ukraine emphatically denied. Russia and Ukraine, together with part of the EU, profit from the arrangement, so this is a factor favoring the contract to continue at least until the contract does end. The next major event was Russia’s invasion of Ukraine. Immediately, sanctions were levied against Russia, but they were directed against Russian crude oil, but not against Russian natural gas, which continued to flow, at least to Slovakia and Hungary. Russia did, however, shut down (see Atlantic Council link, above) most natural gas lines to the EU, but not the one still operating. (Hungary and Slovakia have a pro-Russian political stance, and this was certainly a factor in Russia’s decision to keep that pipeline open.) This left a lot of the EU struggling for natural gas during the winter of 2022. Milder-than-normal weather allowed the EU to survive. Finally, we get to the Ukrainian incursion into the oblast of Kursk in Russia. It was a surprise to the rest of the world, including Russia. So far, Ukraine has captured, by its own estimates, 487 square miles, including the city of Sodzha. That is potentially significant, since Sodzha is the last Russian processing point for the natural gas pipeline that flows through Ukraine to Slovakia and Hungary. Ukraine claims that it has complete control of the pipeline station there, but Russia disputes that. Radio Free Europe/Radio Liberty have taken pictures that show considerable damage to the station. However, neither Slovakia nor Hungary indicate that there has been any disruption in the flow of natural gas. There are several arguments against Ukraine intending to shut the natural gas off at Sodzha. First, Ukraine benefits from the flow of the natural gas. Second, if Ukraine wanted to shut the gas off, it could easily do so within its own borders. The capture of Sodzha is more likely a psychological victory. How is this likely to end? In terms of natural gas supplies to the EU, the current situation is remarkably stable, despite substantial political and military upheaval, and should continue at least until December 2024. A large part of that stability is the public appearance of being a reliable neighbor to the EU, especially for Ukraine. One likely path from there is a continuation of the status quo, since it is genuinely a win-win situation, but likely with no contractual foundation. That makes the stability much more fragile. As long as the war continues, there will be no long-term solution. |