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A devastating Russian missile strike on a university and hospital in Poltava has left 50 dead and over 200 injured. Meanwhile, Ukraine's Parliament has approved the creation of a new military branch dedicated to unmanned technologies, signaling a shift in warfare strategy.

Why Russia still rakes in cash transporting gas through Ukraine: What to know in 4 key charts

Why Russia still rakes in cash transporting gas through Ukraine: What to know in 4 key charts

While Russia's deadly war rages on Ukraine's soil, one unexpected aspect of the invasion is that natural gas continues to flow through Ukraine from Russia, with both sides profiting from the deal and – to an extent – financing each other's war machines.

That is expected to change when their deal expires at the end of the year.

Russia has been paying Ukraine transport fees to carry its gas through thousands of kilometers of underground Ukrainian pipelines as part of a 2019 agreement between the two countries. Russia then rakes in billions of dollars of profits selling the gas to European partners.

While Ukraine had the right to halt its gas deal by invoking a “force majeure” clause when the war broke out and deprive Russia of billions of dollars of funding for its war, doing so would have severely hurt Ukraine’s allies and likely created a major energy crisis felt around the world.

Instead, Ukraine has emphasized to its partners that it does not plan to renew the deal past its 2024 expiry, giving them time to find and negotiate alternative sources of energy. It is also working to secure a separate deal to use its pipeline network to bring gas to Europe from Azerbaijan.

Many European countries have already sharply reduced their dependence on Russian gas because of the war, but the region still imports significant volumes of Russian gas to meet its energy needs.

The gas agreement and its vulnerabilities again came to the forefront in the wake of Ukraine’s invasion of Kursk – the remaining border location where gas enters Ukraine from Russia and the site of a critical metering station.

How does the deal work?

Both Russia and Ukraine make money off the deal – though Russia’s revenues from selling gas to Europe far outweigh Ukraine’s income from the gas transport fees.

Why Russia still rakes in cash transporting gas through Ukraine: What to know in 4 key charts
Infographic showing the amounts of the EU's Russian gas that travels through Ukraine. (Lisa Kukharska / The Kyiv Independent)

The former head of Ukraine’s gas pipeline operator, GTS Operator, estimates that Russia earns around $5 billion a year from the deal, while Ukraine received $800 million in 2023. The former GTS Operator head, Serhii Makohon, added that the majority of this $800 million was spent on maintaining and operating the transit, leaving around $100-$200 million left in revenues for Ukraine’s budget. Bloomberg has estimated Russia’s revenues higher, at $6.5 billion dollars a year.

The original agreement guaranteed $7 billion for Ukraine over 5 years, but Russia reduced its gas volumes and payments to Ukraine in 2022 after the invasion shut down one of the routes into Ukraine through occupied territory. Russia rebuffed Ukraine’s offer to reroute the volumes through open pipelines. In response, Ukraine’s state gas company opened up an arbitration case for late and insufficient payments.  Ukraine did not say how much Russia had underpaid.

European partners also benefit from the deal, receiving relatively cheaper Russian gas transported over land rather than by sea.

Meanwhile, the war in Ukraine has roiled the natural gas markets, with key events causing large spikes in Europe’s natural gas prices and contributing to rising living costs in Europe.

Why Russia still rakes in cash transporting gas through Ukraine: What to know in 4 key charts
Key events during Russia's invasion of Ukraine have shocked the European natural gas market. (Lisa Kukharska / The Kyiv Independent)

Who buys the gas?

Central and Western European countries have been relying on Russian natural gas for decades, with the recent Ukraine deal from 2019 only the latest in a series of agreements. The full-scale Russian invasion marked a turning point, forcing an unprecedented shift in Europe’s energy policy.

Europe is now "fully committed" to phasing out Russian gas, EU Energy Commissioner Kadri Simson said on Sept. 11, and is "ready to live without this Russian gas coming from the Ukrainian transit route.”

With European countries taking steps to diversify their energy sources and reduce their dependence on Russia, the share of Russian gas among EU natural gas imports dropped from 45% in 2021 to 15% last year.

Why Russia still rakes in cash transporting gas through Ukraine: What to know in 4 key charts
Infographics of quarterly EU natural gas imports by source. Russian gas has dropped from 45% of EU imports to 15%. (Lisa Kukharska / The Kyiv Independent)

The sharp drop in demand from European buyers has led to Russia’s energy giant Gazprom posting its largest losses in 25 years – with a $5.5 billion loss in the first half of 2024.

While most European nations with maritime access have shifted to buying more liquefied natural gas (LNG) imports arriving by boat, landlocked countries in Central Europe, like Hungary, Slovakia, and Austria, face more challenges.

Austria imports the highest share of Russian natural gas of any EU country, hitting a record of 98% in December 2023 and fluctuating above 80% in recent months. The country has pledged to eliminate Russian gas imports by 2027.

Russian natural gas made up 82% and 85% of natural gas imports in Hungary and Slovakia in the first four months of 2024, respectively, according to a report from Fitch Ratings.

Hungarian Prime Minister Viktor Orban’s government, in contrast with the EU position, has defended the continued use of Russian gas, claiming stable Russian supplies are an economic imperative.

European countries have also reduced their overall gas consumption. According to the Institute for Energy Economics and Financial Analysis, it has decreased by 20% since Russia launched its invasion of Ukraine.

Despite these reductions, the EU still remains Russia’s largest export market for natural gas.

Some countries still have contracts with Russia to purchase their gas beyond 2024 and will need to break or find other ways to fulfill the contract, potentially importing Russian gas through the Turkstream route.

How does Russian pipeline gas reach Europe?

Gas used to enter Ukraine from two points along the Russian border – from the North through the metering station in Sudzha in Kursk Oblast, and from the East through the Sokhranivka metering station, near the border with Luhansk.

Why Russia still rakes in cash transporting gas through Ukraine: What to know in 4 key charts
Map of key gas pipelines from Russia to Europe. Since Russia invaded Ukraine, key gas pipeline routes have been shut down. (Lisa Kukharska / The Kyiv Independent)

Because of the heavy fighting, shelling, and subsequent occupation in parts of Luhansk, Ukraine’s gas operator, GTS Operator, has not been able to operate at the Sokhranivka entry point. It declared a force majeure event in May 2022, halting the flow of gas along that route and rerouting spare capacity through the Sudzha entry point in Kursk. At the time, about a third of gas from Russia to Europe flowed through the Sokhranivka route.  

Since then, the route through Kursk has been the only entryway into Ukraine across the Russian border.

The Nord Stream pipeline, which delivered gas from Russia to Germany, used to carry the largest volumes of Russian gas to Europe of the pipelines. During the course of the war, Russia reduced volumes in transit by Nord Stream, eventually halting them altogether, claiming it was forced to do so in response to sanctions. Germany’s largest gas importer, Uniper, was awarded billions in damages from Gazprom in arbitration in June for Russia’s failure to deliver on its contracts.

After volumes stopped pumping through the Nord Stream pipeline, saboteurs damaged the pipelines in 2022. German authorities issued an arrest warrant last month for a Ukrainian national in connection to the explosions of the Nord Stream pipelines, according to media reports. Kyiv has repeatedly denied connection to the Nord Stream blasts.

The Polish section of another route for Russian gas – the Yamal route – was shut down in 2022 after Poland and Bulgaria refused Russia’s demand to pay for the gas in rubles. Russia had wanted payment in rubles in response to Western sanctions imposed because of its invasion.

What's next?

The Ukraine pipelines may soon be filled with gas from Azerbaijan, replacing the Russian supplies. The Azeri gas would travel through southern Russia before reaching Ukraine.

“Naftogaz will not extend the transit agreement with Gazprom. We are not conducting negotiations and do not plan to,” said Oleksii Chernyshov, the CEO of Naftogaz, Ukraine’s national energy company, in a July interview with Liga.net.

"We are looking for alternative solutions. For example, we have been approached by businesses from Azerbaijan, particularly Socar. But we don't have a ready-made solution yet. It is too early to talk about it,” Chernyshov said.

On Sept. 6, Azerbaijani President Ilham Aliyev confirmed that negotiations are underway with the EU, Moscow, and Kyiv about a potential deal.  

“For several months we have been making great efforts to come to a common denominator,” Aliyev said.

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