Today, we will explore Russia’s efforts to reclaim its gas market share and reintegrate Gazprom into the European energy sector. Gazprom’s financial troubles are well-documented.

The company has lost approximately 150 billion cubic meters of gas exports, predominantly to the European market. Exacerbating the situation, Chinese partners have refused to purchase additional volumes of Russian gas at acceptable prices.

This has forced the Kremlin to increase domestic gas tariffs, marking a significant departure from the long-standing narrative of the Putin era, which promoted Russia’s cheap energy resources as a major social benefit for Russians, in contrast to Europeans who pay high tariffs for natural gas.

Now, these myths of the Putin era are crumbling. Gazprom is compelled to resort to complex schemes to re-enter the European gas market.

Direct re-entry is virtually impossible, despite the European Union not having officially imposed gas sanctions. While there are sanctions on oil, a specific gas sanction package has not been implemented yet. Current debates are focused only on restricting the supply of liquefied natural gas (LNG) to the European market, which primarily does not involve Gazprom.

Clearly, having received directives from the Kremlin, Gazprom is trying to devise an effective strategy to re-enter the European gas market. Direct access is not feasible because Gazprom remains under the scrutiny of European and Western sanctions authorities. Moreover, the well-known McFaul-Yermak plan from 2022 explicitly lists sanctions against three major Russian state companies: Rosneft in the oil sector, Gazprom, and Rosatom.

What scheme has the Kremlin devised, and what is Gazprom currently doing to stay under the radar? This strategy is referred to as “Azerbaijani gas in Europe.”

Suddenly, there has emerged a demand for Azerbaijani gas in Europe.

It is not as if Azerbaijani gas is entirely new to the European market.  The state-owned company of the Republic of Azerbaijan, SOCAR, together with the Turkish company BOTAS, successfully implemented the construction of the Trans-Anatolian Natural Gas Pipeline (TANAP).

This pipeline transports gas from Azerbaijan through Georgia and Turkey to the European coast, where it then continues its journey via the Trans-Adriatic Pipeline (TAP) to southern Italy.

This infrastructure has been operational since 2020, consistently supplying Azerbaijani gas to Europe. Moreover, discussions are ongoing about expanding this route. Azerbaijan possesses certain capacities to enhance this route and increase the volume of gas transported specifically to the European market.

However, a new idea has surfaced.

Azerbaijani gas could potentially enter the European market via an alternative route, supposedly in response to European demand. This route, however, was never considered by the Azerbaijani side, as President Ilham Aliyev had prioritized expanding the existing TANAP and TAP routes. These pipelines have been delivering Azerbaijani gas to the European market for several years, particularly to the markets in southern Europe.

This development is crucial. In the past, Gazprom made concerted efforts to ensure that Azerbaijani gas, which sought access to the European market, remained directed towards less central areas of Europe. Ideally, Azerbaijan aimed for its gas to reach Baumgarten in Austria, a central hub for European gas distribution. Gazprom understood the significance of this potential competition in the European market and thus worked to divert Azerbaijani gas towards southern Italy instead, where the demand is comparatively lower.

Indeed, the strategic significance of Baumgarten in Austria, a key gas hub in Europe, cannot be overstated. Gazprom was well aware that the emergence of Azerbaijani gas in this central distribution point would signify the arrival of a new competitor in the European market.

Although Azerbaijan does not possess the same volume of gas reserves as Gazprom, making them different players in terms of scale, the mere presence of another supplier was a matter of concern for Gazprom. Consequently, Gazprom exerted efforts to divert Azerbaijani gas towards the southern regions of Europe, particularly to southern Italy.

Southern Italy, specifically the region of Apulia, is predominantly agricultural and lacks significant gas consumption. There is no substantial market for gas in this area.

Similarly, the southern European countries that also receive Azerbaijani gas, such as Bulgaria, present limited demand. For instance, the Bulgarian market consumes only about 3 billion cubic meters of gas annually, providing little room for Azerbaijani gas to expand its footprint.

However, it is essential to note that SOCAR, the state oil company of Azerbaijan, also has its own expansionist plans.

As a state monopoly responsible for gas exports, SOCAR aims to increase its presence in the European market. The Kremlin and Gazprom have identified an opportunity to leverage these ambitions to their advantage. The idea is to expand Azerbaijani gas exports beyond the established TANAP and TAP routes to southern Europe, by creating a new transit route through Russia and Ukraine to Central Europe.

This proposal raises several immediate questions. Despite claims in Azerbaijani media about a direct pipeline from the South Caucasus to Ukraine, no such pipeline exists.

Thus, Azerbaijani gas cannot be directly transported through Russia to Ukraine and then to Europe via a straightforward route. The logistics of such a route necessitate the creation of a complex swap arrangement, whereby Azerbaijani gas is delivered to Russia, and an equivalent amount of Russian gas is then sent through Ukraine to Europe under the guise of being Azerbaijani gas.

Thus, it is essentially about a swap scheme, a substitution scheme. Azerbaijani gas would be delivered, for example, to Russia in the North Caucasus region, while an equivalent amount of Russian gas from Gazprom would be transported through Ukraine’s main gas pipelines to Europe as Azerbaijani gas. From a technical standpoint, this scheme is not particularly surprising.

But what lies behind this?

Formally, Azerbaijani gas would be sent to Europe. However, another question arises: where does Azerbaijan get the extra gas to both transport through the TANAP-TAP route and plan to expand this route while also launching a new route? The reality is that SOCAR, Azerbaijan’s state oil company, does not have excess gas reserves for this purpose.

This scheme has evidently been approved at a high level. It is no coincidence that discussions about the potential export of Azerbaijani gas to Europe via Russia and Ukraine emerged from the office of President Aliyev rather than SOCAR. Therefore, it can be concluded that high-level contacts took place, leading to a general endorsement of the scheme, leaving the implementation to technical details.

Why has this scheme become relevant now? Because the five-year agreement between Naftogaz and Gazprom is coming to an end. The 2019 agreement, which involved the transit of Russian gas to the European market through Ukraine’s gas transportation system, had its complexities. Now, the question arises: what next?

The European Commission understands the situation Ukraine is in due to Russian aggression. Although the agreement included a provision for extension, it cannot realistically be prolonged because Russia is an aggressor state, and Ukraine has every right to terminate such relations with a state company of the aggressor country.

Furthermore, since the contract between Naftogaz and Gazprom cannot be renewed, the transit cannot continue as there is no formal legal basis for it. Moreover, Ukraine is not interested in allowing Gazprom to continue selling its gas in Europe and receiving, if not directly funding the war budget, at least supporting itself.

However, the situation is complicated by the fact that several countries in Central Europe wish to continue importing Russian gas. Unlike Poland or Germany, which were heavily dependent on Russian gas but took significant steps in 2022 to eliminate this dependency, these countries have not been as proactive in diversifying their gas supplies.

Countries like Hungary, Slovakia, and Austria have traditionally been oriented towards Moscow and have shown less interest in diversifying their energy sources. Consequently, they are still keen on maintaining their gas supplies from Russia. For them, the consistent supply of Russian gas is not just about securing energy but also maintaining various economic and political advantages that come with it.

This is where the proposed scheme of routing Azerbaijani gas through Russia and Ukraine to Central Europe fits in. The idea is to meet the demands of these Central European countries while bypassing the direct purchase of Russian gas, which faces significant political and ethical opposition. However, the logistical and strategic feasibility of this scheme remains highly questionable, and its potential implementation would require careful navigation of both technical and political challenges.

Poland has been systematically working over the past decade to eliminate its dependency on Russian gas imports. In contrast, countries like Hungary, Slovakia, and Austria, whose regimes have traditionally been aligned with Moscow, have not prioritized diversification.

Consequently, these nations are now keen on maintaining their gas supplies from Russia. For them, continuing to receive Russian gas is not just about securing an energy source. Leaders like Viktor Orban in Hungary, Robert Fico in Slovakia, and the Austrian government understand that receiving Russian gas comes with additional perks and political leverage, which their regimes rely on.

Putin’s Trojan Horse.

This relationship creates a symbiotic connection between Moscow and Budapest, with Hungary acting as a sort of Trojan horse for Russia within Europe. This alliance benefits both parties, as Hungary continues to receive favorable terms for gas and, in return, supports Kremlin-favored policies.

Slovakia’s government shares similar motivations, following closely in Hungary’s footsteps. Thus, these countries are interested in continuing to receive gas from the east. However, the European Union as a whole, through statements from Energy Commissioner Kadri Simson earlier this year, has made it clear that Ukraine will decide on its future transit arrangements.

The EU, in general, does not need Russian gas transiting through Ukraine anymore.

This solidarity with Ukraine is crucial, as the EU supports Ukraine against Russian aggression.

While the EU’s unified stance is clear, some Central European countries still wish to secure their gas future with Russia. However, they realize that the straightforward method of direct imports is no longer viable due to the political and logistical complications. Hence, the idea of using Azerbaijani gas emerged.

This concept did not arise spontaneously. It followed high-level discussions and meetings involving the leaders of these countries and Azerbaijani President Ilham Aliyev. This triangular dialogue between Moscow, Baku, Budapest, Bratislava, and Vienna led to the formulation of a scheme whereby Azerbaijani gas would be transported to Europe via Russia and Ukraine.

Initially, it would be Azerbaijani gas. However, as demand for Azerbaijani gas grows, Russian gas would essentially fill the gap, masquerading as Azerbaijani gas.

The problem here is Azerbaijan’s limited gas reserves.

The country produces around 36 billion cubic meters annually, exporting approximately 24 billion cubic meters and consuming the remaining 12 billion cubic meters domestically. While Azerbaijan might slightly increase its export volumes, this would only account for an additional one to two billion cubic meters, which is insufficient to meet the large-scale export demands.

Therefore, the question arises: where will the gas for large-scale exports to Europe come from?

To meet the demands, around 10 billion cubic meters of gas is needed. This scheme, while appearing feasible on paper, faces significant challenges and raises questions about its long-term sustainability and the geopolitical implications of such a plan.

If we consider the gas consumption of the mentioned Central European countries, they are not particularly large consumers compared to Germany, which has historically been a giant in gas consumption. The consumption volumes of these countries are not comparable to those of Germany.

Nonetheless, there is a clear intention to increase the demand for Azerbaijani gas in Europe.

The Azerbaijani state company can indeed turn to Gazprom, which has an excess supply of gas. As mentioned earlier, Gazprom lost the European market for 150 billion cubic meters of gas and was forced to reduce production accordingly.

Gazprom has surplus gas resources, making the scheme straightforward: the Azerbaijani state company purchases this Russian gas. Not even directly, but through its trading subsidiary registered in Geneva, Switzerland, it buys the excess gas from Gazprom and transports it through Russia and Ukraine to the markets of these three Central European countries.

From a formal legal perspective, the scheme appears quite elegant. However, it bears a striking resemblance to the well-known RosUkrEnergo scheme, where Turkmen gas was initially delivered to Ukraine and then transited to Europe.

This was essentially a substitution scheme because Turkmen gas rarely made it directly to Europe. Instead, it was replaced by Russian gas transported through the Central Asian pipeline system to Russia, and then Gazprom supplied its gas to Ukraine and further to Europe, labeled as Central Asian, primarily Turkmen gas.

Eventually, Turkmenistan was completely excluded from the scheme, and what flowed was purely Russian gas. The crucial point here, as I noted, is that there is no direct pipeline for Central Asian gas or Azerbaijani gas to travel through Russia to Ukraine and then to Europe.

Therefore, a substitution scheme was in place and would be implemented again if this plan goes forward.

A critical element of this scheme is related to transit.

The transit fees will be paid as if the gas physically flows through the pipeline, although it does not. This creates a facade of legitimate gas transit while, in reality, it serves as a cover for Russian gas entering the European market under the guise of Azerbaijani gas.

This situation raises significant questions about transparency, accountability, and the geopolitical implications of such a scheme. It highlights the lengths to which Gazprom and the Kremlin might go to maintain their influence in the European energy market amidst a backdrop of sanctions and a shifting geopolitical landscape.

Well, the surplus that arises from this arrangement essentially becomes a foundation for various types of corrupt deals. These deals are used to persuade all parties involved to ultimately agree to the scheme.

Is such a scheme acceptable for Ukraine? Certainly not. For Ukraine, any continuation of relations with Gazprom is entirely unacceptable, and this stance seems to be shared by the government.

However, according to Azerbaijani sources, there are still ongoing discussions, suggesting that there might be efforts to devise an optimal-looking scheme to preserve transit through Ukraine. This would be in the form of Azerbaijani gas transit.

How could this look? Quite elegant? Of course not!

There will likely be no agreement, contract, or any sort of deal between Naftogaz and Gazprom, nor with Azerbaijan’s SOCAR. Instead, Ukraine’s gas transmission system operator, in accordance with European legislation, which is also implemented in our gas sector laws, would deal directly with European buyers of Azerbaijani gas, providing them with the necessary transport services.

This means that Azerbaijani gas will be purchased directly by Austrian OMV, Hungarian MOL, or Slovak SPP at the Russia-Ukraine border. Then, Ukraine’s GTS operator will transport it as Slovak, Hungarian, or Austrian gas. Formally, this means we would not be dealing with Russian gas sent to Europe as Azerbaijani. The Ukrainian GTS operator would only deal with European companies.

But what’s wrong with this picture?

First of all, if this scheme is implemented, significant volumes of Russian gas could be transported. Once again, Gazprom would profit from this, which is against Ukraine’s interests. We need to minimize Russia’s budget for the war effort.

Furthermore, the implementation of this scheme might not just serve as a financial boon for Gazprom but could also undermine the European Union’s broader strategic objectives.

By maintaining a flow of Russian gas into Europe under the guise of Azerbaijani gas, Gazprom can circumvent sanctions and continue to exert its influence on the European energy market. This would not only provide Russia with the financial resources to sustain its activities but also keep European countries dependent on Russian energy supplies, albeit indirectly.

For Ukraine, allowing such a scheme to proceed would be counterproductive. Our primary goal should be to reduce Russia’s economic power and ability to fund its aggressive actions. Therefore, any strategy that inadvertently strengthens Gazprom’s position is contrary to our national interests.

Additionally, the potential for corruption in the proposed scheme cannot be ignored. The complex logistics and financial transactions involved create ample opportunities for illicit activities. Ensuring transparency and accountability in such a scenario would be a significant challenge, potentially compromising the integrity of Ukraine’s energy sector.

In conclusion, while the formal aspects of the scheme may seem legally sound, the underlying implications and potential risks make it unacceptable for Ukraine.

We must remain vigilant and proactive in safeguarding our national interests, seeking energy partnerships that align with our strategic goals and contribute to the broader stability and security of the region. The focus should be on genuine diversification and independence from Russian energy, rather than temporary and potentially harmful fixes.

Thus, we are not interested in this scheme working in any form. However, as it is now, when Russian gas is still being transported through our territory, we are not doing this to fulfil obligations to Gazprom.

We are fulfilling our commitments within our relations with the European Union. We are not just an associated partner of the European Union; we are a candidate country with ongoing accession negotiations. Therefore, we must pay attention to the needs of the European Union.

As I mentioned, the EU as a whole does not need Russian gas and its transit through Ukraine. There is already a sufficiently diversified supply system in place, but certain countries still require it regardless of their motives. Therefore, we need to work on this, focusing on converting these requirements into benefits for us, rather than simply satisfying the demands of Russia’s Trojan horses in Europe.

What is at stake here? Can we agree, for example, to maintain transit through Ukraine in some Europeanized form just to earn a small amount of money? Although, if we are talking about insignificant volumes, the income will also be negligible.

Or should we just reject these proposals outright?

Evidently, some discussions, consultations, and negotiations are taking place behind the scenes. There seems to be some alignment of positions. No one wants to lose face, and, naturally, financial considerations are also at play. Of course, corruption risks need to be considered.

However, from a strategic perspective, it is crucial to approach this by recognizing that if someone wants to continue receiving gas from the east, whether Azerbaijani or Russian, they must take into account Ukraine’s interests.

For instance, there should be a condition from the Ukrainian side that any form of gas transit from east to west through Ukrainian territory should be accompanied by concessions benefiting Ukraine. Ukraine must also put forward corresponding counter-conditions.

Primarily, this means addressing the acute energy issue of Russian control over the Zaporizhzhia Nuclear Power Plant, which poses a threat to both Ukraine and Europe with the risk of a nuclear incident, an issue that Russia has been exploiting since 2022.

If there are those who wish to continue receiving Russian gas, or Russian gas disguised as Azerbaijani gas, they must work towards compelling the Kremlin to relinquish control of the Zaporizhzhia Nuclear Power Plant and transfer it entirely to Energoatom’s control. Ensuring a demilitarized zone around the plant would enable discussions about securing gas supplies through Azerbaijani gas for the needs of these Central European countries.

Naturally, discussions should include guarantees that Ukraine’s gas transportation system and underground storage facilities will not be targeted by Russian missiles. This is critical for ensuring the safety and integrity of our energy infrastructure.

We must maintain a firm stance that our national interests come first, and any energy agreements must be framed within this context. The broader European community must also recognize and support these priorities to ensure a stable and secure energy future for all parties involved.

However, discussing this against the backdrop of Russian attacks on gas storage facilities, which have been ongoing since spring of this year, seems somewhat futile. The current agreement between Naftogaz and Gazprom has not yet expired, and the Russian side has explicitly targeted Ukraine’s gas storage infrastructure.

Therefore, those in Central Europe who wish to receive gas from the east must also work with the Russian side to ensure it halts its attacks on Ukraine’s energy infrastructure.

Thus, transit through our territory should not be discussed without our involvement, just as nothing about us should be decided without us. In this context, we must demand the utmost and scrutinize the intentions of our Azerbaijani partner. Despite their portrayal of acting in Europe’s interest and supposedly coming to Europe’s aid, the reality is quite different.

It is crucial to consider the geopolitical alliances that Azerbaijan is part of.

A closer look reveals that Azerbaijan’s partners are not necessarily our friends. Turkey, a strategic priority for Azerbaijan, can be considered a conditional ally.

However, Azerbaijan also engages with Russia, China, which recently signed a strategic partnership declaration, and Iran. Together, Russia, Iran, and Azerbaijan are working on the strategically significant North-South Corridor project, crucial for Russia.

Therefore, Azerbaijan is deeply embedded in an anti-Ukrainian configuration of partnerships and cooperation, reflecting the interests of these countries. At least three of these countries, Russia, Iran, and China, form the coalition opposing Ukraine.

In this context, it is essential to remember that any negotiations regarding the transit of Azerbaijani gas must be framed within a broader scope.

This is not merely a commercial deal. Under the current circumstances of Russian aggression against Ukraine, it cannot be viewed solely from a commercial perspective. National interests of Ukraine must take precedence over commercial or corrupt interests of individuals or entities seeking to exploit the situation for their gain at Ukraine’s expense.

Therefore, the principle “nothing about us without us” must be strictly applied to discussions about the so-called “Azerbaijani gas.”

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