Russian gas could keep flowing into Europe next year under a controversial “swap deal” in which the Kremlin’s fossil fuels would be rebranded as Azerbaijani.
Despite the war, Moscow still pays Kyiv £634 million a year to transmit gas to Europe via Ukraine. However, this agreement is set to expire at the end of next month.
In Azerbaijan, which is currently hosting the Cop29 climate summit, talks are under way that would see its state energy company, Socar, step in as a middleman when the transit deal ends.
Under the proposed scheme – one of several being considered – gas from Gazprom, Moscow’s gas giant, would be rebranded as Azerbaijani, with equivalent volumes of Baku’s gas labelled as Russian.
The scheme would mean that European companies could sign contracts with Azerbaijan for Russian gas, but wouldn’t have to deal with Russians.
Azerbaijan holds significant gas reserves of its own, but, unlike Russia, lacks the infrastructure to send substantial quantities directly to Europe.
Talks over the deal have been ongoing at Cop29 in Baku this week, and come as Russia launched one of its largest missile barrages against Ukraine since the war began.
On Sunday, Russia unleashed a “massive” combined assault of over 200 missiles and drones on Ukraine, killing at least 10 people and damaging energy infrastructure with the freezing winter looming.
Critics say the proposed “gas swap” deal would play into the hands of Putin by indirectly funding the Kremlin’s war on Ukraine, undermining international sanctions and continuing Europe’s dependence on Russian energy.
“This past weekend, we Ukrainians faced one of the largest mass attacks from Russia,” said Svitlana Romanko, director of Razom We Stand, a Ukrainian organisation that seeks a permanent embargo on Russian fossil fuels.
“These attacks were paid for largely by Russian exports of fossil fuels, some of which were sent to European countries, or shipped on European owned or insured ships.”
“Whether the cash sent to fund Russia’s horrific attacks is sent to buy fuels labelled as being from Russia, or from Russia but labelled Azerbaijan, or any other country, we innocent Ukrainians will still be suffering.” Romanko said.
Both the EU and Ukraine are adamant they will not renew the current deal with Russia, which was signed in 2019, when it expires at the end of December.
Ukraine sees the transit agreement aiding Moscow’s war finances, but it stands to lose £634 million a year from transiting fees for a pipeline that connects Russia to Poland, Slovakia, Hungary, Romania and Moldova.
The gas “swap” is one of several possibilities on the table, and Ukraine’s President Volodymyr Zelensky confirmed his government was in talks with Baku on this and other options in an interview with Bloomberg over the summer.
“It’s very difficult to say what the most likely deal will be, but ultimately it is Ukraine who decides. Ukraine has to sign a transit agreement,” said Ugnė Keliauskaitė, an energy research analyst at Bruegel.
He added: “Purchasing Azeri gas only to exchange it for Russian gas would not result in any progress in terms of the EU reducing its reliance on Russian energy.
“Russia would still be able to cut the gas, as it has done in the past, and set a precedent for supplying Azeri gas to the EU, increasing the dependence on Russian gas.
“At the end of the day there would be no change in gas flows”.
Azerbaijan’s president, Ilham Aliyev, also said he had been approached by Ukraine and the EU for assistance in maintaining gas transit via Ukraine.
The swap deal could ultimately give Russia a backdoor to influence European energy markets.
Experts said Europe was “hypocritical” for chiding Russia’s war with one hand, and buying their gas with the other – after almost three years of war, there has been ample time to seek an alternative.
“Europe still does not have the ability, or political will, to move away from Russian gas before 2027,” said Thierry Bros, a professor at Sciences Po Paris and a contributor to Natural Gas World. “Putin still has the ability to create volatility and push prices higher.”
While the UK has sanctioned Russian energy, Europe is yet to, with 17 percent of its gas imports coming still from Russia.
“You can’t just jump on TV and say ‘Russian gas is bad’ without finding an alternative,” said Mr Bros, referring to Brussels. “We’ve delayed our response and sleep walked into a crisis. This winter may be the last that Putin has this hand to play, so he may play it.”
Mr Bros believes there is no clear frontrunner yet in terms of solutions to the problem, even as the deadline for a replacement deal looms.
Russia may delay a deal in order to exert pressure on Europe, or push up prices, he said. But Europe has enough supply to weather the lag without supply cuts.
