OGZPY PJSC Gazprom (PK)

By Emre Peker in Brussels and Georgi Kantchev in Moscow 

Russia and Ukraine clinched a transit agreement for gas deliveries to Europe, warding off massive disruptions in the new year and securing steady supplies, even as U.S. sanctions temporarily halted work on a new gas pipeline from Russia to Germany.

Officials from Ukraine and Russia's state-run energy giant PAO Gazprom unveiled details of their five-year contract on Saturday, after crunch talks and last-minute compromises by Moscow and Kyiv led to a protocol late Friday. The new contract, to take effect Jan. 1, will replace a decade-old deal expiring Dec. 31.

The European Union, which relies on Russia as its top natural-gas supplier, helped broker the deal to prevent a cutoff that 10 years ago had crippled southeastern Europe midwinter. Ukraine remains the primary artery for Russian gas exports to the EU, despite Moscow's push for alternative routes that would sideline Kyiv amid a five-year conflict.

President Trump, meanwhile, approved on Friday sanctions on the Nord Stream 2 pipeline as it nears completion, potentially bedeviling the Russian push to double its direct gas sales to Germany, Europe's biggest buyer. The U.S. measure highlights Western efforts to support Ukraine against Russian aggression and stymie the Kremlin's attempts to isolate and economically hurt Kyiv.

Following Mr. Trump's sanctions, Swiss pipe-laying firm Allseas said Saturday it suspended all activity on Nord Stream 2. Gazprom's wholly owned pipeline company, which is also based in Switzerland, has repeatedly said it would complete the project, without providing details.

The EU, which imports almost 80% of the gas it consumes, walked a tightrope in more than a year of negotiations. Mr. Trump has been pressuring European NATO allies to stop filling Moscow's coffers by curbing their dependency on Russian gas, which accounts for some 40% of annual EU imports.

At stake for the EU was safeguarding critical energy supplies that power European industries and homes, while maintaining pressure on Moscow and backing Ukraine in peace talks.

"I welcome this well-balanced agreement," said Maros Sefcovic, a top EU official who mediated the gas talks. "Russia remains a reliable supplier to European markets and Ukraine maintains its role as a strategic transit country. At the same time, Europe proves its solidarity with Ukraine."

The agreement guarantees 65 billion cubic meters of Russian gas deliveries via Ukraine next year, and 40 bcm annually from 2021 through 2024. Ukraine's Energy Minister Oleksiy Orzhel said at a news briefing Saturday that the deal could be extended to 10 years, which would help protect a steady revenue stream for Kyiv.

Russia and Ukraine's contract will also settle a long-running legal battle between Gazprom and Kyiv-based Naftogaz over supply and transit breaches. Under the accord, the Russian gas exporting monopoly will pay the Ukrainian gas company almost $3 billion in fines imposed by an international arbitration. In exchange, Naftogaz will drop a recent $12 billion claim against Gazprom.

"As a result of complex and difficult negotiations, a package of understanding has been reached," Mr. Orzhel said. "There will be gas transit."

Gazprom's CEO Alexei Miller confirmed the details of the deal, according to Russia's state-run TASS news agency.

The breakthrough followed efforts by France and Germany to re-energize discussions toward a settlement to the Eastern Ukraine conflict. Russian President Vladimir Putin and Ukraine's President Volodymyr Zelensky agreed on steps to de-escalate tensions during a summit in Paris earlier this month, following goodwill gestures including a prisoner exchange in September.

North Atlantic Treaty Organization members have long been concerned about the Kremlin's efforts to use energy as a political weapon. The U.S. and Poland have led the charge in recent years, particularly warning Germany against strengthening Moscow's hand by increasing its dependency on Russian gas.

"We have no desire to exacerbate the situation in the energy sector or use this to influence the situation in Ukraine itself," Mr. Putin said Thursday at his annual press conference, as negotiators were reaching an agreement in principle in Berlin.

Still, Washington and many EU members wary of the Kremlin's intentions have been fighting efforts to bypass Ukraine. That, some observers say, would return Eastern Europe back into Moscow's clutches. To prevent that, some EU members and the U.S. have been trying to halt the construction of Nord Stream 2, the Baltic Sea pipeline to Germany that would bypass eastern transit routes.

"Completing the project is essential for European supply security," Nord Stream 2 spokesman Jens D. Mueller told the Journal after construction was halted Saturday. "We together with the companies supporting the project will work on finishing the pipeline as soon as possible."

German Chancellor Angela Merkel said in parliament last week that she would raise the sanctions with Mr. Trump, as the pipeline was of strategic importance for Germany and Europe.

"The federal government rejects such extraterritorial sanctions that affect German and European companies and interfere in our internal affairs," a spokeswoman for Ms. Merkel said in a statement issued in reaction to the stoppage of the work on the pipeline.

Even with Nord Stream 2, which could double Russian gas deliveries to Germany to 110 bcm annually, Gazprom would need additional capacity via Ukraine to maintain its record high exports to Europe -- which topped 200 bcm for the first time in 2018. Naftogaz's network has the biggest capacity among all of Russia westward links, and has carried as much as half the gas exports in recent years. Russia's desire to safeguard billions of dollars in revenues, therefore, also depended on securing a deal with Ukraine.

"This reflects the fact that Russia needs Ukraine," even if Nord Stream 2 comes online and reduces some of Moscow's dependency on Kyiv, said Timothy Ash, an emerging-markets economist at BlueBay Asset Management in London. "Russia is not giving up that much, but perceptions in the West matter -- and Putin is plying a line that Russia is being reasonable."

Bojan Pancevski in Berlin contributed to this article

Write to Emre Peker at emre.peker@wsj.com and Georgi Kantchev at georgi.kantchev@wsj.com

(END) Dow Jones Newswires

December 21, 2019 10:14 ET (15:14 GMT)

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