Russia's Economy Is Set To Lose Another Source Of Income That Ukraine Controls

Russian leader Vladimir Putin has acknowledged that his country's natural gas transit deal with Ukraine will not be renewed.

Sergei Guneyev/Pool/AFP via Getty Images

• Russia's natural gas transit deal with Ukraine is set to expire soon, which would cut billions in revenue.
• The deal's possible end affects European countries relying on Russian gas via Ukraine.
• Russia has shifted much of its energy exports to India and China amid Western sanctions.

Russia is set to lose yet another source of income for its war chest in days — and it's Ukraine calling the shots.

An agreement to let piped Russian natural gas transit via Ukraine to Europe is set to expire at the end of the year, depriving Moscow of billions of dollars in income for its wartime economy.

European countries receiving gas from the pipeline have voiced concerns about the end of the supply, but Ukrainian President Volodymyr Zelenskyy has repeatedly said that the five-year agreement will not be renewed.

Meanwhile, Russia has said it's ready to extend the agreement — although President Vladimir Putin said last week it's "clear" there wouldn't be a new contract.

Still, the situation could change.

Zelenskyy said last week that Ukraine could consider continuing the arrangement if Russia doesn't receive payments for the fuel until the war ends.

On Monday, Kremlin spokesperson Dmitry Peskov said the gas transit was complicated.

"The situation here is very difficult, requiring greater attention," Peskov said, according to TASS state news agency.

Russia is likely making $5 billion in gas sales via Ukraine this year

The end of the five-year transit deal would be a blow for Russia, which could make about $5 billion from gas sales via Ukraine this year alone, according to Reuters' calculations based on Moscow's gas price forecast.

It would also impact several European countries that still depend on Russia for gas, including Slovakia, the Czech Republic, and Austria. There are alternative energy sources and pipelines available, but they could be pricier.

Ukraine could lose hundreds of millions of dollars a year in transit fees — a Kyiv consulting firm told Bloomberg in September that this amounts to about $800 million.

But Ukraine's $800 million revenue from transit would just be a "paltry 0.5% of the country's annual GDP," wrote analysts at the Center for European Policy Analysis, a think tank, in a report last week.

They argued it's "simply preposterous" to think that continuing the transit deal would offer Ukraine a security guarantee, as Russia would want to preserve its gas flows to Europe.

This is because "Russia always put itself first," the analysts added.

Russia diverts energy flows away from Europe

The end of the Ukraine transit route for Russia's gas would put more pressure on Putin's wartime economy, which has plummeted because of sweeping Western sanctions targeting its massive oil and gas trade.

Energy accounts for about one-fifth of Russia's $2 trillion GDP. The country's energy revenue fell 24% last year on the back of sanctions and continues to be under pressure this year as Europe weans itself off Russian gas.

Russia once accounted for as much as 40% of Europe's gas market, but the EU has cut its reliance on the fuel since the Ukraine war.

In response, Russia has diversified its energy customer base, diverting most of its previously Europe-bound oil to India and China.

On December 20, Russian energy giant Gazprom said in a Telegram post that it delivered a record amount of gas to China via an eastern Siberian pipeline. It didn't specify the volume of gas it delivered, but said it was above its contractual obligations with the state-owned China National Petroleum Corporation.