Russia’s wartime economy has been sustained, in part, by oil and gas revenues as Europe has relied on it for several decades. Key to that arrangement is Ukraine, the country Russia is at war with, as the countries have a deal in place to allow Russian gas to transit via Ukraine and reach Europe.
The deal is nearing expiry when the year ends, and Ukrainian President Volodymyr Zelensky has resisted renewing the contract on the same terms even if the Kremlin wants it to. This could create a worry for Russia amid the plunging value of the ruble and a protracted war.
Russia’s gas revenues from supply sent via Ukraine to Europe will be worth $5 billion this year, according to Reuters estimates. In 2023, Russia shipped about 15 billion cubic meters of gas—only a fraction of the supply to Europe pre-pandemic.
Meanwhile, Ukraine makes just $800 million from facilitating the transit of gas to Europe, the Center for European Policy Analysis (CEPA) said last week.
“Despite reams of evidence that Russia uses gas exports to inflict harm on Europe, buyers in Moscow-friendly countries are now pressuring Ukraine to continue the transit from 2025,” CEPA experts wrote.
The dependence on Russian oil and gas supplies has built up over time. In 2022, much of that reliance needed to be rethought following the invasion, forcing gas prices to shoot up. However, governments slowly began decoupling from Russia’s gas supplies, which had a direct impact on Gazprom's revenues as a state-owned energy supplier.
While Russia has lost its gas market share in Europe to the likes of Qatar and Norway since it invaded Ukraine, some countries like Slovakia and Austria still rely heavily on the supplies. Moreover, because of sanctions, Russia has already taken a big hit on energy-related revenues, which still account for a fifth of its GDP.
Kremlin spokesperson Dmitry Peskov admitted to the impending fallout on the gas transit contract as being "very difficult, requiring greater attention," on Monday.
A sharp energy-price spike because of the gas transit contract is unlikely. Still, given that transit fees are much higher in other European countries, it could add to uncertainties, ruling them out as viable options for countries such as Hungary.
Russia’s economy has shown some cracks owing to inflation and overexposure by military-adjacent industries. But in sum, it has remained resilient despite the war being dragged on for three years.
For instance, Russia has built trade relationships with allies elsewhere in the world, such as China and India. “The Russian economy has adapted, and key industries have found ways to get the goods and components they need from alternative suppliers or via more circuitous trade routes,” Sergey Vakulenko, a senior fellow at Carnegie Russia Eurasia Center, wrote earlier this year.
