Russian Gas Contracts End in Ukraine
What? Why were the contracts even honored?
As with many aspects of the Ukraine War, asking more questions leads to fewer answers and more questions. The disruption of the energy economy in Russia, Europe, and the world is one aspect of the Ukraine War. Attacks on each other's energy distribution, infrastructure, and production facilities are a priority target for both Ukraine and Russia, particularly Russia. These targets are considered significant in the pursuit of a total war strategy, a hallmark of large-scale military operations theorized in the interwar years of the 1920s and 1930s. The announcement this week of the end of Russian gas contracts between Russia and Ukraine raises the question of why Ukraine was still honoring those contracts.
Russia is a major energy producer in the international gas and oil markets and is a member of OPEC+. In the pre-war 2020s, the energy markets experienced sharp price increases due to changes in U.S. energy policy, geopolitical tensions between the U.S. and Saudi Arabia, the traditional swing producer in the oil market, and the start of the U.S. inflation cycle, which began prior to the invasion of Ukraine and escalated thereafter. U.S. dollars are primarily used for the trade oil, and the U.S. inflationary cycle devalued the currency, making the price of oil more expensive compared to the inflation-weakened dollar.
Following the start of the Ukraine War, the West imposed a series of retaliatory sanctions aimed at weakening Russia, specifically targeting the Russian oil and gas trade. The issue was that Europe, especially Germany, had become dependent on cheap Russian gas as a means of offshoring its energy production, a move meant to demonstrate its commitment to carbon reduction. The issue of Russia producing German energy and shifting the carbon impact from Germany to Russia was not solely a German problem, but rather a Russian one within the walls of the Chancellery in Berlin. The already sharp increases in crude oil prices also meant that the West could not completely remove Russian oil from the world market, as it would cause a significant economic shock to Western economies and the electorate.
Despite severe restrictions, Europeans could still purchase Russian gas, and despite distribution restrictions and price caps, Russian energy remained available on the market. Both gas and oil are fungible products, so the direction of energy demand was shifted, but the energy pie and Russia’s share of it remained only slightly reduced, with a greater Russian administrative cost assigned to it. The implementation of the sanctions was truly halfhearted, yet it would have a long-term impact, especially on energy-dependent countries.
The West half-assed the sanction regime for its own electoral purposes, but one would expect Ukraine to be much more aggressive in its approach to cutting off Russian energy supplies. Gas and oil pipelines run throughout the nation of Ukraine, with nearly all of them leading back to Russia. As the Russians attacked the energy sector with bombs and missiles, they purposefully avoided their pipelines in Ukraine. These pipelines were still brimming with Russian gas, supplying customers in Europe and receiving payments back into Russian coffers. The most shocking aspect of it all is that Ukraine was essentially allowing this to occur unhindered.
Observers legitimately question why this is occurring. They were probably even amazed that this was still happening after the gas was cut off in the Nord Stream pipeline and Nord Stream 2 had a bunch of holes put into it by someone’s bombs. The evening news in nearly every Western country did not report on it; they were not hiding it, but they just whistled past the graveyard of sweet Russian gas flowing westward. Would it be that popular support for the war would falter if it was found out that Ukraine was allowing its existential enemy to use its territory to flow gas to Europe so Russia could fund its war against Ukraine while at the same time Western governments were flowing arms and economic aid to Ukraine?
Maybe the "powers that be" could explain why they let this happen. These arguments may even make sense in a vacuum. However, if Russia's initiated war poses such a significant threat to Ukraine (which is undeniable) and to the liberal western democracies (which is debatable), then why is there such a weak sanction regime against Russia? If the war is an existential threat, the energy markets should be damned, and Russian energy should have been taken off the international market to be traded, and the energy potential of the U.S. and Canada should be used to supplant the gap of the Russian energy. Indeed, the transition would have been gradual, causing pain on both sides of the Russian border.
The gas has finally stopped flowing, and the Russians blame the Ukrainians for not allowing it to flow and renegotiating the contracts, but why would they want to help the Russians? The Western media gloats about something that hurts Russia, which it will, but Western leaders are less gleeful as they see the cost of energy going to skyrocket, especially in Germany. Transnistria, Slovakia, and Hungary, who still rely on Russian gas for their energy needs, stand to suffer more than Germany.
The other headscratcher is that Slovakia produces more electricity than it needs and sells this surplus to Ukraine due to its war damage on its energy production. Slovakia primarily uses nuclear power, gas, and oil to produce electrical power, part of which it sells to Ukraine. Russia provides Slovakia with the nuclear fuel, gas, and oil needed to generate this electrical power. Slovakia’s prime minister, Robert Fico, is not hiding this fact and is not acting duplicitously, as he has been a long critic of the West’s Ukraine War policies.
At this point, it's unclear how the gas cutoff, caused by the expiration of contracts that Ukraine no longer has to fulfill, will affect Russia's war effort. It will be an economic impact to Russia, and it is unlikely that Russia can find enough demand to pick up the demand until it can complete constructed pipelines flowing to Asia. Elections in Germany in February 2025 are likely to focus on this issue, but it's uncertain whether this will alter Germany's stance on Ukraine. The more important question that both supporters and detractors of the Ukraine War should be asking is why this policy was allowed to continue. Why did Ukraine feel obligated to honor pipeline contracts with Russia while at war? We may not like the answer to that question.
Image: https://www.bing.com/images/search?q=ukraine+gas+pipeline&FORM=HDRSC3
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References:
https://www.msn.com/en-us/news/world/russian-gas-crisis-deepens-transnistria-freezes-europe-braces/ar-AA1wUt47?ocid=msedgntp&pc=HCTS&cvid=0e19d2a553bb497f89421d4dfa4e14a6&ei=13
https://www.msn.com/en-us/money/companies/slovak-state-energy-company-to-continue-supplying-electricity-to-ukraine-despite-fico-s-threats/ar-AA1wX9s3?ocid=BingNewsSerp