Will another 'gas war' with Russia ruin Ukraine?

What looked like a boring logistical decision to transit Russian natural gas fueled a fierce diplomatic spat between Ukraine and Hungary.

Moreover, the new transit scheme may herald yet another “gas war” that could literally freeze tens of millions of Ukrainians and irreparably damage their nation’s already-troubled economy next to Europe’s hottest armed conflict.

The spat’s premise sounds technical and uninspiring.

On September 27, Hungary and Gazprom, Russia’s natural gas giant, inked a deal to extend the supply of Russian natural gas until 2036, the year Russian President Vladimir Putin’s recently “nullified” presidential term limits expire.

The “blue fuel” will not flow to Hungary via Ukraine the way it had when Budapest was the USSR’s obedient satellite.

For decades, most of the gas from northern Siberian fields went to Europe via what is now independent Ukraine despite the Cold War’s trials and tribulations.

After the 1991 Soviet collapse, the annual transit reached 80 billion cubic meters (2.8 trillion cubic feet), or about four-fifths of all Europe-bound gas.

The transit fees of up to 3 billion a year helped keep Kyiv afloat amid the crises that included two anti-Russian revolutions, Crimea’s 2014 annexation and the Kremlin’s backing of pro-Moscow separatists in Ukraine’s southeast.

Their conflict with Kyiv has become Europe’s hottest conflict that claimed more than 13,000 lives.

But Gazprom, the Kremlin-run gas monopoly, has for years lambasted Ukraine’s non-payment of bills and alleged theft of gas.

The disputes caused two “gas wars” that disrupted the European supply in the winters of 2006 and 2009. The “wars” hurt Gazprom’s reputation, triggered a panic in the EU – and Brussel’s efforts to find other energy sources such as liquefied gas from Qatar, the US and Nigeria.

And Moscow decided to build alternative pipelines that reach Europe via the Black Sea and the Baltic Sea. 

As of October 1, the gas is arriving in Hungary via these pipelines.

'Bankruptcies are just a matter of time'

Kyiv understands that the move could be Moscow’s first step to completely shut off the transit, and its response was indignant.

“We consider this [deal] an exclusively political, economically ungrounded decision made to appease the Kremlin and hurt Ukraine's interests and the Ukrainian-Hungarian ties,” the Ukrainian Foreign Ministry said hours after the transit deal was announced.

“The Kremlin is doing this on purpose. This is not sabre-rattling, this is an apparent use of gas as a weapon," Yuri Vitrenko, who heads the state-controlled Naftogaz energy company, said four days later.

He called on Germany and the US to sanction Gazprom in accordance with the accord Berlin and Washington struck in July to respond to Moscow’s attempts to use natural gas as a political cudgel against Ukraine and other Eastern European nations. 

The deal preceded the completion of Nord Stream 2, an $11 billion pipeline that takes Russian gas directly to Germany via the Baltic seabed – as Berlin is phasing out nuclear energy and coal. 

In response to Ukraine’s demarche and demands, Hungary’s Foreign Minister Péter Szijjártó accused Kyiv of “violating our sovereignty,” and Prime Minister Viktor Orban, the Kremlin’s longtime ally, simply urged Kyiv to “agree with the Russians.”

Budapest and Kyiv have already been at odds over what Orban called “mistreatment” of ethnic Hungarians in western Ukraine. He threatened to block Ukraine’s drive to join the EU and NATO.

The transit’s complete shutoff may devastate Ukraine for years.

While the EU-bound flow keeps the pressure in the pipelines high and its huge underground storages full, part of the gas remains in Ukraine, a nation of 43 million almost the size of France.

Its steel and chemical plants, manufacturers of construction materials and mining companies are energy-inefficient and fuel-hungry, and a fourth of its electricity is generated by power stations that use natural gas.

As spot prices in Europe exceeded $1,000 per 1,000 cubic meters of gas, Ukrainian observers already predict a disaster.

“Ukraine is on the verge of a crisis it has never seen in its modern history," Dmytro Oleinik, head of Ukraine's Employers Federation, wrote on Facebook on Oct. 4 decrying the fate of companies with no long-term gas contracts. “Bankruptcies are just a matter of time.”

More importantly, most Ukrainians live in apartment buildings with Soviet-era centralized heating systems that keep the residents warm between October and April.

Monthly price tags reach hundreds of dollars a month – while an average salary is less than $500 a month.

“They are just robbing us blind with their gas schemes,” retired bookkeeper Angelina Tretyak told TRT World.

Her pension is only $220 – and she paid up to $160 a month for heating her Stalinist-era two-bedroom apartment in central Kyiv last winter.

“They say they’re not buying Russian gas, but in fact they do, and in the end, it is common people who suffer,” said the 71-year-old who depends on her sons’ support to pay her utility bills.

Ukraine announced in 2018 that it “stopped” buying Russian gas – procuring the “blue fuel” in Europe instead, albeit at a higher price.

But Naftogaz uses the so-called “virtual reverse” scheme that still takes the Russian gas from the pipelines – but “virtually” exchanges it for Norwegian or Dutch fuel.

But experts claim that Kyiv’s indignation hides a “schizophrenic” approach to the transit fees Ukraine wants to keep.

Kyiv “thinks that the gas transit is almost Ukraine's holy right,” energy expert Dmitri Marunich told TRT World. “The saddest part is that these policies are counterproductive for the Ukrainian customers.”

The transit shutoff may also result in what experts call a purge of Ukraine’s political elites.

Ukraine extracts enough natural gas to cover its needs, but the exact figures and prices have been kept obscure for years.

And generations of political leaders and energy executives have been accused of tampering with domestic gas prices via non-transparent deals that involved obscure intermediaries.

Yulia Tymoshenko, Ukraine’s former prime minister and heroine of the pro-Western Orange Revolution in 2005, started her political career as head of such an intermediary, and was nicknamed the “gas princess.”

In 2011, she was sentenced to seven years in jail for signing a gas contract with Russia in a trial widely seen as orchestrated by her nemesis, pro-Russian President Viktor Yanukovych. 

When Yanukovych was ousted in 2014, Tymoshenko was freed – but the system remained non-transparent and prone to corruption, experts say.

“The upcoming gas inquisition will only be beneficial,” Kyiv-based analyst Aleksey Kushch told TRT World.

 “Until we stop the virtual reverse, we will never find out how much gas is really mined in Ukraine, and how big our deficit is in reality, not on paper.”