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Russia, Ukraine Reach Five-Year Gas-Transit Deal


Ukrainian Energy Minister Oleksiy Orzhel (left) and Yuriy Vitrenko, executive director of Naftogaz, attend a news conference in Kyiv on December 21.
Ukrainian Energy Minister Oleksiy Orzhel (left) and Yuriy Vitrenko, executive director of Naftogaz, attend a news conference in Kyiv on December 21.

Russia and Ukraine have signed a five-year, $7 billion deal on the transit of Russian natural gas to Europe following intense negotiations ahead of a year-end deadline.

The deal, negotiated in Vienna, was confirmed by the respective Russian and Ukrainian state gas companies, as well as Ukrainian President Volodymyr Zelenskiy in a social-media post on December 30.

The current agreement was set to expire on December 31, risking Europe's vital link to billions of cubic meters in gas from Russia via Ukrainian pipelines in the depths of winter.

About 40 percent of the 200 billion cubic meters (bcm) of gas that Russia has sent to Europe annually has been transmitted via Ukraine's vast network of pipelines.

Energy relations between the two neighboring countries are part of bigger geopolitical tussle involving military occupation -- Russia invaded and annexed Ukraine's Crimean Peninsula in 2014 and has backed separatists in the eastern part of the country -- alleged cyberwarfare, propaganda, and international lawsuits on human rights abuses and misappropriated assets.

Russian Prime Minister Dmitry Medvedev described the deal as "a compromise that had to be reached" in comments posted on his VKontakte page on December 31.

"The signing of these documents indicates that it is possible to discuss and reach an understanding even on the most difficult issues," he added.

'Pump Or Pay'

Under the new contract, Kyiv next year is expecting to ship a minimum of 65 bcm, or about 22 bcm less than it did in 2018. Minimum volumes will decrease further to 40 bcm in 2021-24.

The new deal has a "pump or pay" clause, meaning Russia must pay the minimum gas-transit fee even if it doesn't pump the contracted volumes through Ukraine, said Yuriy Vitrenko, executive director of Ukrainian state-run Naftogaz, on Facebook.

Russian state Gazprom CEO Aleksei Miller described the set of agreements as a "big package deal that restored the balance of interests between the parties."

Additionally, according to Vitrenko, transit fees for additional volumes beyond the minimum amount "would substantially increase."

Russia has twice cut off gas supplies to Ukraine -- in 2006 and 2009, leaving households and businesses there and in countries farther west out in the cold.

But as Russia has moved closer to completing a second underwater gas pipeline project to feed Germany, known as Nord Stream 2, Ukraine's role as a vital gas-transit country for Europe has been imperiled.

Russia has 10 percent left to complete the 2,460-kilometer pipeline project, which would in effect dispose of Ukraine's transmission network.

However, U.S. sanctions earlier in December forced underwater pipe-laying work to stop because they target companies involved in the project, the main one of which is a Swiss-Dutch company.

As a result, completion of Nord Stream 2 could stretch to 2023 or beyond, Aleksei Rakhmanov, president of Russia's United Shipbuilding Corporation, said on December 24. It would take Russia two years to design the ships needed for the project, and even more to build, he said.

Some Legal Disputes Settled, But Not All

The new deal, according to Zelenskiy, stipulates that "both sides reserve the right to extend the contract for another 10 years" after its expiration.

Also part of the new contract is Russia agreeing to pay $2.9 billion to Ukraine as part of a Stockholm arbitration court ruling, which Moscow did on December 27.

In turn, Naftogaz has promised to release seized assets belonging to Gazprom in Europe and both parties have agreed to drop reciprocal court claims that haven't concluded and sign an out-of-court settlement.

However, lawsuits on a state level, particularly Naftogaz's claims against Russia for seizing the company’s assets during its annexation of Ukraine's Crimean Peninsula, aren't affected by the new transit contract.

On December 21, Gazprom and Naftogaz said that they had reached a preliminary agreement on the new deal to ship Russian gas through Ukraine's pipelines.

But technical and other talks on specifics continued until the announcement of the signing.

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