Russian gas flowing to Ukraine is set to stop on Wednesday when a transit deal between the two countries expires in the wake of Moscow’s all-out invasion.

The pipeline is one of the last two routes still carrying Russian gas to Europe nearly three years after its full size. WAR. EU countries will lose about 5 percent of gas imports in the middle of winter.

While traders have long expected the flow to stop, the end of the pipeline route through Ukraine will affect the gas balance in Europe at a time when demand for heating is high. Slovakia is the country most affected.

“While one would expect the loss of volumes (priced in), a sharp rise in price in response is initially not out of the question,” said Aldo Spanjer, senior commodities strategist at BNP Paribas.

The agreement to allow Russian gas to pass through Ukraine was agreed at the end of 2019, signed a day before the end of the previous 10-year contract between the country’s gas companies. At the time, the European Commission strongly promoted the deal.

After Russia’s 2022 full-scale invasion of Ukraine, however, the commission encouraged member states to seek alternative supplies as the bloc moved to wean itself off Russian fossil fuel imports. The Moscow-friendly governments of Hungary and Slovakia resisted that move and sought to extend the deal beyond January 1.

The Ukrainian government telegraphed months in advance that it did not want to negotiate an extension of the deal, because it wanted to deprive the Kremlin of its revenue from gas exports. Ending the flows will result in a $6.5bn loss for Russia, unless it can redirect them, according to the Brussels-based think-tank, Bruegel.

But it could also be a financial blow to Ukraine, which earns about $1bn a year in gas transit fees, though only about a fifth of that is gross revenue. Analysts have suggested that Ukraine’s vast gas pipeline infrastructure could face an increased Russian attack, without Russian gas flowing through it.

Slovak Prime Minister Robert Fico visited Moscow on December 22 to discuss the gas transit contract. He criticized Ukraine’s hostility to the deal, asking whether the country had “the right to undermine the economic interests of a member state (EU)”.

Fico said on Facebook before the end of the deal that “other gas transit options than Russian gas was presented to Ukrainian partners, but it was also rejected by the Ukrainian president”. The Slovak prime minister also threatened to cut electricity supplies from Slovakia to Ukraine in retaliation.

Hungarian Prime Minister Viktor Orbán is also looking for a solution to allow Russian gas imports through Ukraine. His government also restored the last remaining pipeline that sends Russian gas through Turkey and neighboring Romania to supplement supplies.

Austria, which still imports Russian gas throughout 2024, has switched to alternative sources such as importing liquefied natural gas. Energy company OMV in mid-December terminated its long-term contract with Russia’s Gazprom due to a legal dispute.

The gas cut-off also had a significant impact on neighboring Moldova, which in mid-December introduced a state of emergency in the energy sector due to the uncertainty surrounding Russian gas transit.

Stopping the flow of Russian gas through Ukraine is likely to increase Europe’s demand for more expensive LNG, with which Asia is also competing.

EU officials remain adamant that the bloc can survive without Russian pipeline supplies, even if it means accepting more expensive gas shipped from elsewhere.

The European Commission said on Tuesday that it does not expect disruption. “European gas infrastructure is flexible enough to provide gas of non-Russian origin to central and eastern Europe via alternative routes,” it said. “This is underpinned by significant new LNG import capacities from 2022.”

The Turkish pipeline that still carries Russian gas to Europe contributes about 5 percent of EU imports. The US recently imposed sanctions on Gazprombankthe main energy payment channel in Russia.

But to ease the impact of the sanctions, Russian President Vladimir Putin in early December dropped a requirement for foreign buyers of Russian gas to pay through a bank. Countries such as Turkey and Hungary have also said they have received US exemptions from sanctions.

“The previous sanctions added an extra layer of uncertainty over the fate of Russia’s remaining gas supplies going into the new year, helping to keep gas prices up,” said Natasha Fielding, head of the gas prices in Europe by Argus Media, a price. agency. The US waiver means “buyers of Russian gas delivered through the Turkish Stream pipeline can breathe a sigh of relief”, he said.

Traders are not ruling out an increase in Russian gas flowing to Europe in the future. European companies reeling from high gas and energy prices, which have forced them to cut production, will return to buying Russian gas, which is actually cheaper than LNG, a senior trader said. .

“At one stage there was a peace treaty . . . People want to end the war, so they should sign a peace treaty. One of the things Russia will gain is its ability to resupply” Europe with gas, the businessman said.

While European governments may impose restrictions to prevent the continent from becoming overly dependent on Russian gas, the trader said, “you would expect to see some Russian gas back in Europe, because basically, the geography has not changed”.

Additional reporting by Andrew Bounds