10/11 – International News Story & Economic Piece

Since Russia’s invasion of Ukraine in February 2022, most European nations have realized that the contracts and reliance on Russian gas is problematic, and that the supply is replaceable. 

Many European officials are even more prepared to move on as the multibillion-dollar agreement allowing Russian gas to flow through Ukraine to the EU approaches its expiration at the end of the year. The data supports their stance as the EU largely has alternatives for this gas.

However, for countries like Austria, Slovakia, and Hungary, this situation presents a costly challenge with potential repercussions across Europe. These nations remain heavily reliant on Russian gas, benefiting both politically and economically, as the Ukraine pipeline has been a crucial link. [Politico] 

With that connection at risk, these countries may soon need to find alternatives. While options exist, moving away from the current arrangement will come with financial costs.

Europe’s energy landscape has shifted since Russia’s invasion of Ukraine, demonstrating that while the EU no longer relies on the once-essential pipeline, it can’t completely avoid the financial impact of cutting off these flows.

In response to the 2022 invasion, Europe’s dependency on Russian gas quickly became a problem as Moscow cut supplies through key pipelines like Nord Stream and Yamal-Europe. The EU adapted by increasing liquefied natural gas (LNG) imports, mainly from the U.S., and signing new contracts. By 2023, Russian pipeline gas accounted for only 8% of the EU’s imports, down from over 40% in 2021. Nonetheless, a few pipelines, including one through Ukraine, remained active under prewar agreements. [Politico] 

For most of the EU, this pipeline is no longer crucial, providing only about 5% of its 2023 gas imports. However, Central and Eastern Europe depend heavily on it, as countries like Austria, Slovakia, and Hungary didn’t transition to LNG as quickly and continued relying on Russian gas.

Although it’s a small part of Europe’s overall gas supply, it remains vital to these nations. Austria, for example, was still 98% dependent on Russian gas in 2022, much of it coming through Ukraine. Slovakia also received billions of cubic meters through the pipeline, and Hungary, though less reliant on the Ukraine route, remains deeply connected to Moscow for its energy. [Politico] 

The International Energy Agency recently highlighted the potential shutdown of the Ukraine pipeline as a major uncertainty for Europe, especially for Central and Eastern European markets and Moldova.

These countries currently benefit from relatively cheap Russian gas, avoiding intermediaries who charge higher prices. However, if the gas supply from the pipeline is cut, they would need to tap into Europe’s broader gas market, which could be more expensive and less accessible. New contracts and routes would be required, increasing costs.

Liquefied natural gas is expected to be more expensive than the Russian pipeline gas, which has been a cost-effective option for Europe. While Austria and Slovakia have begun securing alternative supplies through deals with nearby nations, Hungary may continue relying on Russian gas via Serbia. But all alternatives will come at a price.

Though the effects would be felt most strongly in Central and Eastern Europe, the entire EU could experience “ripple effects.” As existing gas infrastructure becomes more strained, the market will tighten, leaving less room for supply disruptions.

The Ukraine pipeline could continue operating, with discussions underway for Azerbaijan to take over the contracts. Yet, there’s uncertainty about whether Azerbaijan has the production capacity to replace all Russian exports or whether it would simply rebrand Russian gas as Azeri gas. This scenario would still result in higher prices, with Russia continuing to profit.