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Russian gas flows across Ukraine jeopardized in transit fee spat

A war of words between gas companies in Ukraine and Russia is threatening gas transit to the EU.

Ukraine’s Naftogaz and Russia’s Gazprom are at loggerheads over payments for gas shipments through pipelines across Ukraine — a trade that has continued despite the war between the two countries.

But that deal is starting to fray.

Under a 2019 transit agreement, Moscow is on the hook to pay for 40 billion cubic meters of gas to flow through Ukrainian pipelines this year — whether it actually sends the gas or not. In total, Ukraine expects to earn $7 billion from the deal that runs to 2024.

Gazprom currently sends 42.4 million cubic meters of natural gas through Ukraine per day — about 17 percent of the line’s capacity. But this month Naftogaz sued for arbitration, claiming the latest bill to ferry that gas on to Europe was “not paid by Gazprom, neither on time nor in full.”

Late on Tuesday, the Russian export monopoly warned: “Services that have not been provided by the Ukrainian party should not and will not be paid for.”

It also said that taking the dispute to arbitration would be seen as “an unfriendly step” that could lead to Moscow sanctioning state-backed Naftogaz. “In practice, this will mean a ban restricting Gazprom from fulfilling its obligations … including financial [payments]” under the multi-year transit agreement, Gazprom said.

Naftogaz fired back on Wednesday, saying Gazprom “distorts information and manipulates facts.”

The risk is that already diminished flows to the EU across Ukraine could fall to nothing. Russia, which traditionally supplied about 40 percent of the EU’s gas imports, has seen that dwindle to only 9 percent after halting or limiting sales to more than a dozen countries.

Gazprom earlier this month halted shipments on the undersea Russia-to-Germany Nord Stream pipeline. Both it and the parallel Nord Stream 2 pipelines were hit by explosions on Monday.

If deliveries across Ukraine end, that would leave the only Russian gas flowing into the EU coming via a branch of the TurkStream pipeline landing in Bulgaria and then heading to Hungary, Greece and the Balkans.

The transit fee spat began in early May, when Ukrainian gas grid operator GTSOU warned that Russian gas destined for European customers was being illegally siphoned off when passing through the Russian-occupied Luhansk territory in eastern Ukraine.

GTSOU stopped offering transit through that route, and Naftogaz proposed that the Russian supplier instead transfer those volumes over to a second transit line not passing through occupied territory. Gazprom is using that route to a lesser extent — meaning the overall volumes transiting through Ukraine have dropped.

Each side is now accusing the other of breaching the terms of the initial agreement, which details specific transit routes and volumes for each. They’re also sparring over where any arbitration hearing should be held, with Gazprom complaining that venues in Sweden and Switzerland are now out of the question because both “have moved into the category of countries unfriendly to the Russian Federation.”

That’s not going to stop Naftogaz from pursuing arbitration, said company CEO Yuriy Vitrenko: “The arbitration will proceed to an award irrespective of Gazprom’s participation.”

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