Despite war, Ukraine allows Russian oil and gas to cross its territory

Despite war, Ukraine allows Russian oil and gas to cross its territory

KYIV, Ukraine - Despite a brutal Russian invasion that has killed tens of thousands of Ukrainian soldiers and civilians and laid waste to swaths of the country, Ukraine continues to allow Russian oil and gas to cross its territory to serve its European neighbors - generating revenue for Kyiv and Moscow and illustrating how hard it is for the bitter enemies to cut ties.

Senior Ukrainian officials have demanded that their Western partners impose tougher sanctions and cut virtually all economic ties to Russia, saying "more must be done" to cripple Moscow's war machine. But as surreal as it might seem, Ukraine insists that it has virtually no choice but to maintain its own commercial deals and has lobbied to preserve them, arguing that they provide some leverage over the Kremlin and help constrain where the Russian military carries out airstrikes.

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Oleksiy Chernyshov, the chief executive of Ukraine's state energy company Naftogaz, conceded the bizarre optics of Ukraine still doing business with Russia. "It is for me, it's impossible, as a Ukrainian citizen - that is my first reaction," Chernyshov said, adding that this was a personal and emotional response.

But Naftogaz - and senior political leaders - insist that Ukraine cannot and should not shut the pipelines, both to lay claim to residual revenue (although the amount Moscow is paying, if anything, is not public information) and because some of Kyiv's European supporters are still dependent on Russian oil and gas.

Russia's continuing profits, and Kyiv's frustrations, were spotlighted recently in classified U.S. intelligence documents leaked on the Discord messaging platform, which said that Ukrainian President Volodymyr Zelensky considered blowing up the Druzhba oil pipeline earlier this year.

According to the document, which was obtained by The Washington Post, U.S. officials questioned the seriousness of the threats, which may have been an outburst of frustration at Hungarian Prime Minister Viktor Orban, who has voiced pro-Kremlin positions and insisted on an exemption from a European Union effort to end purchases of Russian oil.

Moscow sent about 300,000 barrels of oil per day last year through the Druzhba - or "Friendship" - pipeline, which crosses Ukraine. Russia is also obligated to pump some 40 billion cubic meters of gas annually through Ukraine's gas transit system because of supply agreements that predate the full-scale invasion in February 2022.

Ukrainian officials say they are in a quandary. Russian hydrocarbons crossing their territory earn the Kremlin millions of dollars and help fund its war machine. But Kyiv also needs the money it earns on transit and wants to be a reliable economic partner to European nations, some of which could face destabilizing price increases if Russian energy supplies were suddenly cut off.

Chernyshov said Kyiv must uphold its contractual obligations, and the decision to end the deliveries lies with the countries on the receiving end, such as Hungary, which need Russian oil and gas for heat in the winter. "This stream has not been stopped in order not to make other countries that are supporting Ukraine freeze," he said.

The Kremlin has used energy supplies as a weapon, including in the 2000s when it twice cut off supplies to Europe.

But Kyiv has also insisted that Russia's gas must continue to flow, even in the years since Moscow illegally annexed Crimea in 2014 and fomented a separatist war in the eastern Donbas region. Ukraine insisted that it should sustain its role as a transit country, while also demanding that countries like Germany not help Russia build new pipelines - a view critics called hypocritical. Now, Ukraine says all of its supporters should reduce or eliminate their use of Russian energy.

A working group on Russian sanctions, chaired by Andriy Yermak, the head of the Ukrainian presidential office, and Michael McFaul, the former U.S. ambassador to Russia, published an "action plan" last month that laid out additional steps that should be taken to punish Russia - but the plan pointedly called for preserving the transit of Russian energy across Ukraine.

It also called for suspending "all remaining Russian-controlled pipeline routes" taking Russian gas to the European market, as well as the TurkStream pipeline through Turkey. "End the direct supply of Russian gas to the European Union, except through Ukraine," the action plan said.

Anders Aslund, an economic expert focusing on the former Soviet Union who was part of the sanctions working group, said the logic of maintaining transit across Ukraine was clear: Gas would go to European markets regardless, because the E.U. included several exceptions, or "carveouts," to its embargo regime for countries like Hungary.

What's more, Russia is committed to paying Ukraine a total $7 billion dollars over a five-year contract signed in 2019, called a "pump or pay" agreement, which requires Moscow to pay whether it ships any gas. "So why not get the money?" Aslund said. "The contracts have been agreed with the European Union for these carveouts."

The goal of the sanctions is not to introduce "a general ban against trade with Russia," Aslund said, but "to cause Russia maximum damage without causing Ukraine more damage than necessary."

On May 10, E.U. envoys met in Brussels to discuss a new package of sanctions against Russia, its 11th so far. Previous measures targeted individuals, businesses and sectors of the Russian economy, and restricted exports and imports.

European Commission President Ursula von der Leyen, at a news conference with Zelensky in Kyiv the previous day, said the E.U. would "continue to do everything" in its power "to erode Putin's war machine and his revenue." Zelensky praised the E.U. proposals, which he said would hit Russia's atomic energy sector. But he and other officials have said this is still not enough.

Under its gas contract with Kyiv, Russia is obligated to pay Ukraine some $1 billion to $1.5 billion annually. After the war began, one key entry point for Russian gas in occupied territory in the east was shut down, with conflicting claims over who was responsible. saying Ukrainian officials insisted there was capacity to send all Russian gas through another entry point. However, Russia drastically reduced the amount of gas that it pumped through Ukraine.

In September, Naftogaz filed a case at the International Court of Arbitration in Paris, saying that "funds were not paid" by Russian state gas company Gazprom "neither on time nor in full" under the terms of the contract. Naftogaz declined to specify how much was missing from payments, however.

"We will make Gazprom pay," said Yuriy Vitrenko, the head of Naftogaz at the time. Gazprom, in response, said there were no "appropriate reasons" to pursue the case and threatened to impose financial penalties against Naftogaz.

Gas has been at the center of Russia and Ukraine's troubled relationship for decades. At one point, Russia sent more than 80 percent of its gas across Ukraine to European countries.

Russia hoped to bypass Ukraine by opening two gas pipelines across the North Sea to Germany. As the second, called Nord Stream 2, was being built, Ukrainian officials argued that some of Russia's gas should continue to traverse Ukraine as a way of preventing a full-scale war. Nord Stream 2 was built but never used. The war happened anyway.

Still, Nataliia Shapoval, vice president for policy research at the Kyiv School of Economics, said Russia's use of Ukrainian pipelines "creates some additional protection" and has appeared to limit Moscow's airstrikes. "During their campaign against the energy sector this winter, gas transportation and storage were not their primary targets, for sure," Shapoval said.

The Druzhba oil pipeline has likewise been spared, halting operations for only "a couple of days, when they didn't have the power to run the pumps," said Matthew Sagers, an energy transport expert at S&P Global Commodity Insights in London.

Sagers said Druzhba carried about 80 percent of oil for Hungary's largest oil company, MOL, last year and is supposed to carry between 50 and 55 percent this year.

In addition to Hungary, the Czech Republic and Slovakia depend on oil shipped through Druzhba. Plus, Ukraine earned close to $180 million on transit fees from Druzhba last year, Sagers said. "Money is money."

In the end, Sagers said, the Ukrainians "don't need to blow up the pipeline - they could just simply stop doing business if they wanted to."

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