As a consequence of its aggression against Ukraine, the imposition of EU/G7 sanctions, and the EU’s decarbonisation policies, Russia has largely lost access to the European oil and gas markets.
Moscow’s effort to implement its ‘pivot to the East’ policy, which intensified after 2022, has not yielded the expected results. Asian markets have proven inadequate to fully compensate for the loss of European markets.
Meanwhile, Russia’s war budget increasingly depends on revenues generated from oil, petroleum products, and natural gas exports. This creates a ‘perpetual motion machine’ driving both Russia’s continued aggression in Ukraine and its destabilising activities in Europe.
The Chinese demand for gas at domestic Russian prices, which is unacceptable for Moscow, has motivated the Kremlin to develop a strategy aimed at re-entering the European Union energy market.
Recognising that a direct return is not feasible, Russia has explored hybrid methods to covertly reintroduce its oil and gas into the EU market, disguising them as resources from non-Russian origins.
Currently, three potential avenues for this disguised return are being observed: “Hungarian oil” and “Azerbaijani gas” for Central Europe, transited through Ukraine, and, in the future, “Qatari oil” for Germany, transited via Poland.
On the Current Situation of Russian Oil and Gas Imports to Central Europe via Ukraine
During wartime, a nation facing external aggression must prioritise cutting off financial support to the aggressor. This includes halting the flow of revenue from the European Union to Russia generated through the export of oil and gas. Stopping this financial lifeline is crucial in minimising the inflow of funds into the Russian budget.
1.1. Oil Transit
Russian oil is transported through the Druzhba pipeline, which passes through Belarus and Ukraine, primarily serving Hungary and Slovakia. The oil refining facilities in these countries are owned by Hungary’s MOL Group, while the Czech Republic’s refinery is controlled by the Polish company Orlen.
Following the introduction of the EU’s sixth sanctions package on May 30, 2022, imports of Russian oil to the EU saw a marked decline. However, exceptions were granted to three Central European countries for pipeline deliveries through Ukraine via the southern Druzhba pipeline.
Hungary, receiving the largest volumes of Russian oil, became a focal point. Given Hungary’s political alignment with Moscow and MOL Group’s control over Slovakia’s oil refineries, Hungary was strategically selected by the Kremlin as a testing ground for maintaining and potentially expanding Russia’s pipeline oil exports to the EU through hybrid methods.
In a press release, MOL Group stated: “MOL Group has concluded agreements with crude oil suppliers and pipeline operators to secure the continuous transportation of crude oil through the Druzhba pipeline via Belarus and Ukraine to Hungary and Slovakia.
Following these agreements, MOL Group will assume ownership of the crude oil at the Belarus-Ukraine border, effective from 9 September 2024.” This arrangement effectively rebrands Russian oil as Hungarian, with transportation through Ukraine paid for by a Hungarian entity, while Russia continues to earn export revenue from the oil.
For reference: A 10-year contract, signed in 2019 between Ukrtransnafta (Ukraine’s oil transit operator) and Transneft (Russia’s operator), stipulates that Ukraine receives $165.6 million annually for its transit services. According to Russian news agency Interfax, the total value of the agreement over its 10-year duration is 106.7 billion rubles, with payments calculated at the exchange rate of 64.41 rubles per US dollar on the date of signing, December 3, 2019.
Based on data from the Centre for Research on Energy and Clean Air (CREA), it is estimated that, in 2024, the revenue generated from the export of oil transited through Ukraine to Hungary, Slovakia, and the Czech Republic could reach a minimum of $6.6 billion.
Thus, for every US dollar earned by Ukraine from transit fees, Russia could potentially generate nearly $39.8 in revenue from the sale of oil to these three countries via the southern Druzhba pipeline in 2024.
1.2. Gas Transit
To regain access to the European gas markets, Russia is pursuing two key scenarios:
Scenario 1: The reopening of the last functional Nord Stream pipeline, which has an annual capacity of 27.5 billion cubic metres.
Scenario 2: The continuation of gas supplies through Gazprom via the Ukrainian gas transmission system, disguised as non-Russian (Azerbaijani) gas.
An active information campaign is underway to push for Scenario 1. On September 5, during the Eastern Economic Forum in Vladivostok, President Vladimir Putin stated: “Both pipes of the Nord Stream and one pipe of Nord Stream 2 were blown up… However, one remains in working condition.
What is stopping the German government from pressing the button, agreeing with us, and turning it on? If the surviving Nord Stream 2 pipe is activated, 27.5 billion cubic metres would immediately flow to Europe.” According to forecasts by the Russian Ministry of Economic Development, based on a price of $340 per 1,000 cubic metres for Europe, this would generate $9.35 billion in revenue in 2025.
Ukraine’s Naftogaz receives approximately $890 million per year from Gazprom for gas transportation services. In 2024, gas is being transported through Ukraine to several EU countries, including Slovakia, the Czech Republic, Austria, and Italy. From January 1 to September 13, the average daily flow was 43.64 million cubic metres, translating to around 16 billion cubic metres annually.
This volume would enable Gazprom to generate at least $5.4 billion in export revenue in 2024, at an average price of $337 per 1,000 cubic metres, according to the Russian Ministry of Economic Development. This means that for every $1 paid to Ukraine for gas transit services (via the Sudzha-Uzhhorod route), Russia could receive nearly $6 in export revenues.
Scenario 2 focuses on the use of Azerbaijani gas as a cover for Russian supplies. Azerbaijan has long-term commitments to export gas to Europe, Turkey, and Georgia, as outlined in agreements that are reflected in the financial statements of Azeri companies.
However, due to existing obligations and limited gas production growth, Azerbaijan is unable to fully replace the 14.6 billion cubic metres of Russian gas that entered the European market in 2023 through Ukraine. Estimates suggest that Azerbaijan could supply no more than an additional 2 billion cubic metres of gas in 2024. As a result, there is speculation that SOCAR, the Azerbaijani state oil company, will simply rebrand certain volumes of Russian gas allocated by Gazprom, allowing Russian gas to be sold as Azerbaijani.
Several events support this interpretation:
A) During a visit by Slovak Prime Minister Robert Fico to Azerbaijan on May 7, 2024, Azerbaijani President Ilham Aliyev stated: “We plan to transport 20 billion cubic metres of gas to the European Union by the end of 2027, and I believe we will achieve this.”
In response, Fico remarked, “For obvious reasons, Russia and Ukraine can no longer export gas to Europe. Naturally, we are interested in large volumes of gas for Slovakia—about 20 billion cubic metres per year.” It’s worth noting that Slovakia’s annual gas consumption is less than 4.5 billion cubic metres.
B) On July 20, 2024, at the 2nd Global Media Forum in Shusha, President Aliyev mentioned: “…we’ve been approached by Ukrainian authorities and the European Union to facilitate the extension of this contract. Both sides seem interested in this because Ukraine itself needs this gas, and countries like Austria and Slovakia could face serious difficulties without it.”
C) At the International Černobbio Forum in Italy on September 6, 2024, Aliyev remarked: “… we have been approached by Russia, Ukraine, and European institutions to assist in the continuation of gas transit through Ukraine.”
While Aliyev’s claims regarding the EU and Ukraine’s interest in his country’s involvement in gas transit have not been officially confirmed by Kyiv or Brussels, Ukrainian President Volodymyr Zelensky did note on July 3 that Ukraine is exploring different options for its gas pipelines once its contract with Gazprom expires at the end of 2024.
This indicates that both the President of Azerbaijan and the Slovak Prime Minister are actively lobbying for the reintroduction of Russian gas into the EU market on a larger scale, despite political complexities.
Consequently, total Russian revenues from oil and gas exports transited through Ukraine are projected to exceed $12 billion in 2024, while Ukraine’s transit revenues will amount to no more than approximately $1.1 billion. This disparity highlights that Ukraine’s role in maintaining transit flows of Russian oil and gas allows Russia to earn around 11 times more than Ukraine, which provides the transportation services.
For reference: Russia’s unprecedented combined attack on August 26, 2024, involving 109 UAVs and 127 missiles (including Kh-101, Kh-59/Kh-69, Kh-22, Kalibr, and KN-23/Iskander-M) targeted Ukraine’s electricity and gas transport infrastructure, causing an estimated $1.26 billion in damages.
Russian analysts close to the Kremlin have candidly acknowledged that the model used for “Hungarian” oil could likely be replicated for gas. According to their assessments, European gas companies could purchase gas at the Russia-Ukraine border (at the Sudzha gas metering station), effectively making this gas “European.”
Various sources in Moscow have also suggested that the best outcome for Russia would be a formal agreement between Gazpromexport and an EU-authorised company from one of the European nations. This company would purchase gas at the Russian-Ukrainian border and pay for its transit through Ukraine’s gas transmission system.
2. “Qatari” Oil for Germany
Rosneft Deutschland GmbH and RN Refining & Marketing GmbH, both subsidiaries of the Russian state-owned oil giant Rosneft, played a key role in expanding Russian influence in the German petroleum market until September 16, 2022.
On that date, the German energy regulator Bundesnetzagentur placed the companies under fiduciary management due to concerns over energy security amid rising tensions with Russia.
Rosneft Deutschland GmbH supplied substantial volumes of crude oil to key refineries, including PCK Raffinerie (Schwedt), MiRO (Karlsruhe), and Bayernoil (Vohburg), while also managing the sale of processed petroleum products both within Germany and internationally.
Rosneft Deutschland GmbH holds significant stakes in several major German refineries:
- 54.17% in PCK Raffinerie GmbH (Schwedt)
- 24% in MiRO (Karlsruhe)
- 28.57% in Bayernoil Raffineriegesellschaft GmbH (Vohburg)
Additionally, it holds shares in several pipeline companies across Europe, including German Deutsche Transalpine Oelleitung GmbH, Austrian Transalpine Ölleitung in Österreich GmbH, Italian Società Italiana per l’Oleodotto Transalpino SpA, and French Société du Pipeline Sud-Européen SA. RN Refining & Marketing GmbH, a service company, holds shares in AET Raffineriebeteiligungsgesellschaft mbH, which in turn holds shares in PCK Raffinerie.
Following the fiduciary management decision, Rosneft initiated legal action challenging the takeover but eventually agreed to sell off its assets, valued at approximately $7 billion. In September 2024, the German Federal Ministry for Economic Affairs and Climate Action extended fiduciary management until March 10, 2025.
The ministry also welcomed Rosneft’s decision to withdraw its legal complaints and confirmed its support for Rosneft’s efforts to find a buyer for the assets by the end of 2024. Germany, while considering the nationalisation of these assets, opted to pursue their sale to a third party, preferably outside the EU and less susceptible to international sanctions against Russia’s oil sector.
A potential buyer could be the Qatar Investment Authority (QIA), which already owns an 18.53% stake in Rosneft, following a 2016 deal. Notably, three out of 11 members of Rosneft’s board of directors, including the Chairman, ex-Qatari Energy Minister Mohammed Bin Saleh Al-Sada, are representatives of Qatar. QIA officials Faisal Alsuwaidi and Hamad Rashid Al-Mohannadi also sit on the board.
Qatar exited OPEC in 2019, making it an independent player in the global oil market. If QatarEnergy acquires control over Rosneft Deutschland GmbH and RN Refining & Marketing GmbH, it could officially become the supplier of oil to German refineries.
However, no actual supplies from the Persian Gulf to Germany would take place. Instead, under an agency agreement, Rosneft oil would be supplied as “Qatari” oil via Poland, using the northern branch of the Druzhba pipeline.
3. Ukraine’s Obligations Regarding Oil and Gas Transit to Central Europe
The Association Agreement (AA) between the EU and Ukraine addresses energy product trade and transit. Article 272 of Title IV, Chapter 11, “Trade-Related Energy,” stipulates that both parties must facilitate transit in line with the principle of freedom of transit.
However, Article 276(3) specifies that neither party is liable for disruptions or reductions in energy supply caused by third-country actions. This applies to the current situation, where Russia’s aggression against Ukraine makes it impossible to ensure uninterrupted transit. Furthermore, Article 472(c) on “Measures Related to Essential Security Interests” allows either party to take actions it deems necessary for its own security in times of war or serious international tension.
In light of Russia’s ongoing military aggression, including attacks on Ukraine’s gas infrastructure, continuing gas transit through Ukraine’s gas transmission system (GTS) after the current contract expires in 2024 is considered unreasonable.
On March 22, March 29, and August 26, 2024, Russia launched strikes on Ukrainian gas compressor stations in an attempt to damage gas transportation infrastructure, despite Ukraine continuing to transit Russian gas under the existing agreement. Notably, Ukraine’s armed forces have so far refrained from targeting Gazprom’s gas infrastructure deep within Russian territory.
Given these circumstances, Ukraine has no obligation to ensure the continued transit of Russian oil and gas to certain EU countries. Hungary, Slovakia, and Austria, in particular, have the technical capability to diversify their energy imports. They could follow the examples set by the Czech Republic and Poland, both of which have established alternatives to Russian oil and gas. Polish Oil Concern Orlen has significantly expanded its options to halt the import and processing of Russian oil, and Poland has also completely stopped importing Russian gas.
Over two years have passed since the temporary derogations on oil supplies through the Southern Druzhba pipeline were introduced as part of the EU sanctions regime. However, both Hungary and Slovakia have recently announced their intention to continue importing Russian oil via Druzhba. These countries have had sufficient time and opportunities to replace Russian oil and adjust their supply routes.
By allowing Russian oil and gas transit through Ukraine, Kyiv is effectively facilitating an 11-fold increase in Russian export revenues compared to what it earns from providing transit services. This situation underscores the importance of aligning transit policies with Ukraine’s national security interests and ensuring that the actions of certain EU states do not inadvertently undermine sanctions against Russia.
Proposal 1: The European Commission should submit an amendment to the Council of the EU regarding Regulation 2022/879 of June 3, 2022. This amendment would remove the provision in Article 3m, paragraph 3(d), which allows for the temporary import of Russian oil by pipeline. The deadline for this exemption should be set for January 1, 2025.
Although Russian gas is not currently included in the EU’s official sanctions list, the EU has adopted a long-term policy to end dependence on all Russian fossil fuels, including gas. The REPowerEU plan, introduced on May 18, 2022, outlines measures to achieve this, but no firm deadlines have been set for phasing out Russian oil and gas. In contrast, there is a growing trend of increased imports of Russian liquefied natural gas (LNG), as well as the continued supply of pipeline gas to certain Central European countries. This inconsistency undermines the EU’s energy security strategy.
Proposal 2: The European Commission should draft and present to the Council of the EU a decision establishing firm deadlines for the complete substitution of Russian fossil fuels. This decision should include a prohibition or restriction on the import of LNG and pipeline gas originating from or exported by Russia, regardless of the transportation route.
Final Remark: As the second anniversary of the Nord Stream 1 explosions and the damage to one of the Nord Stream 2 pipelines approaches, it is expected that renewed efforts will be made to discredit Ukraine through media channels, alleging its involvement in the sabotage.
Such claims align with Russia’s hybrid strategy to re-enter the EU gas market, portraying both Russia and Germany as victims of third-party actions. This narrative could be used to push for the activation of the surviving Nord Stream 2 pipe, reinforcing Moscow’s attempts to maintain influence over European energy supplies.
Russia’s hybrid strategy to return on oil and gas markets of Europe
Expert group of the CGS Strategy XXI:
Mykhailo Gonchar, Oksana Ishchuk, Andrii Chubyk, Igor Stukalenko
© Centre for Global Studies Strartegy XXI
More about Centre is here: https://geostrategy.org.ua/en
Disclaimer:
This paper used solely information from open mass media sources, as well as some discussions and interviews conducted under Chatham House rules.
Conclusions, made in the study, are solely of the Centre’s experts and do not reflect the position of state authorities of Ukraine, energy network operators, EU or any member state institutions.
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