Ukraine ends Russian gas transit to Europe and Slovakia clashes with Ukraine - resorting to brazen blackmail.

Happy new year and thank you for reading!

• This is the end of an era - after five decades, as of January 1, 2025 the Russian gas supplied directly to Europe via pipelines is no longer a thing.

• (side note: there is still an indirect pipeline route via Turkey/Turkstream pipelines to southern Europe.)

• That the Ukrainian government was going to put an end to Russian gas transits was telegraphed for some time now - for months, Kyiv refused to renegotiate an extension of the deal.

• (side note: yet in spite of this ample notice, some countries have been caught off guard - more on that later below.)

• For Ukraine, the rationale is clear - depriving the Kremlin of additional $6.5bn a year from gas exports that transit through Ukraine.

• As the war enters its third year, the Russian economy is facing a slowdown in growth, increased inflation, and declining state revenue.

• Already, there are signs that the Kremlin is under a significant fiscal strain.

• For example, reportedly, starting on January 1, 2025, the Kremlin will now go back on its word and end one-time enlistment bonuses for prisoners who volunteer to fight in Ukraine.

• Naturally, prisoners aren’t the most favorable demographic with a strong political voice - it is easier to start with those.

• But the direction is clear: as the politically palatable avenues of fiscal cuts narrow down further, the Russian government will have no choice but to introduce politically unpopular cuts affecting more ‘‘normal’’ constituents of the society.

• As such, it is very reasonable for Ukraine to try to expedite this process by introducing fiscal strain wherever and however possible.

• But the fact that it took three years for Kyiv to arrive at this decision reveals high costs of ending all Russian gas transits.

• For Ukraine, there will be a number of political/diplomatic, financial, and strategic costs.

• Three stand out:

• 1) Worsening relations with the EU states (like Slovakia and Hungary) reliant on Russian gas.

• And these countries can use their EU/NATO membership status to impose diplomatic costs on Ukraine;

• 2) Practical financial costs: Ukraine itself earns $1bn a year from transit (although only around 20% of it are gross profits - so the fiscal loss is not enormous.);

• 3) Strategic costs: with Russian gas absent in Ukrainian pipelines, Moscow will now have even lesser incentive to not target all possible gas pipelines in Ukraine - worsening the already dire energy crisis.

• This is indeed the most immediate and pressing concern.

Among the three most impacted countries, Slovakia stands out as uniquely unprepared.

• The three countries most affected by this change are Austria, Slovakia and Hungary.

• Out of these three, Hungary and Austria have prepared better for the eventual end of direct Russian gas supply.

• Prime Minister Viktor Orbán has sought alternative solutions to maintain Russian gas imports.

• His government has explored routing gas via Ukraine while simultaneously turning to Turkey's pipeline network and neighboring Romania to secure additional supplies.

• Austria continued to import Russian gas throughout 2024 but has begun diversifying its energy portfolio.

• In December, energy giant OMV ended its long-term contract with Gazprom due to a legal dispute.

• The country is now increasingly relying on liquefied natural gas (LNG) imports as it moves away from dependence on Russian supplies.

• And when it comes to LNG, the EU did work on infrastructure projects to 1)help all EU countries in general, and 2) help most affected countries like Slovakia in particular.

• As we shall see Slovakia had plenty of notice and enablement - its hysterics and blackmailing of Ukraine (more on that later below) are therefore completely unfounded.

How the EU prepared for this inevitable scenario.