The transit pipeline and what it was worth

The Soviet-built pipeline network across Ukraine was for decades the principal route by which russian gas reached European customers. Understanding what that meant economically explains a great deal of the politics that followed.

What transit was worth

A substantial annual fee, paid in hard currency, for moving somebody else's gas across the country. It was one of the largest single sources of foreign exchange the state had, and it required no extraction, no processing and very little labour.

It also gave Ukraine a form of leverage, since the same infrastructure that earned the fee could in principle be interrupted.

Why that leverage eroded

Because the counterparty built alternatives. Successive pipelines were constructed specifically to reach European markets without crossing Ukraine, and each one reduced both the fee and the leverage.

That is the general lesson about transit rents: they are only durable while no bypass exists, and a determined counterparty will build one.

The system itself

The network is enormous, includes very large underground storage in the west, and is maintained by an operator that was separated from the gas trading company under the unbundling rules.

The storage is the part with a future independent of transit: it is among the largest in Europe and sits next to the European market, which makes it valuable as a regional balancing asset.

What comes after transit

Storage services, reverse flow to bring gas in from the west, and the possibility of moving hydrogen or biomethane through parts of the same network. A pipeline system is an asset even when the original cargo stops.

Revenue that depends on one customer or one line looks like strength on a balance sheet and behaves like weakness in a negotiation. I learned that in distribution: if half your turnover comes from one brand, you do not sit down with that brand as an equal. Transit revenue was exactly this for Ukraine for thirty years — leverage and leash at the same time.