December 31, 2005

Russia says it will cut off Ukraine gas

By Dmitry Zhdannikov and Ron Popeski

MOSCOW/KIEV (Reuters) - Russia said on Sunday it would cut
off gas supplies to Ukraine within hours over a price row that
strikes at the heart of relations between the two ex- Soviet
states and could affect deliveries to western Europe.

A declaration by the Russian gas monopoly Gazprom, likely
to be viewed with concern from Washington to Berlin, came soon
after the apparent collapse of talks at President Vladimir
Putin's residence outside Moscow.

"As a result of a meeting held by President Putin, Gazprom
sent a signed contract for gas supplies to Ukraine for 2006,"
Gazprom spokesman Sergei Kupriyanov told Reuters.

"The new contract contained everything suggested by Putin
-- supplying gas to Ukraine in the first quarter at old prices
and switching to European prices from the second quarter.
Ukraine has turned our proposal down. It means the plan to cut
supplies from...10 o'clock (0700 GMT) is still in force."

A spokesman of Neftogaz Ukraine, giving some measure of the
confusion of the day, had said moments before that the talks
had ended with Moscow agreeing to continue deliveries at
present prices for the first quarter of the year. He made no
mention of any conditions or Russian objections.

Russia, which supplies 25 percent of western European gas,
is due to take over chairmanship of the G8 in January and one
of the main themes of its tenure will be security of energy
supply. Any suggestion of Moscow using gas supply as a
political weapon will cause alarm in the West.

West European states, drawing 80 percent of their Russian
deliveries from the same pipeline crossing Ukraine, have
expressed concern.

The danger, in theory, is that Ukraine could nonetheless
tap off gas to which it feels it is entitled, thus effectively
reducing the flow onwards to western Europe.

Kiev says it would not draw on west European supplies, but
says Russia must maintain sufficient pressure, or a high enough
gas flow, in the system to keep it operating. Moscow insists it
can cut Ukrainian gas while safeguarding supply to others.

Moscow seeks a rise in prices to $230 per 1,000 cubic
metres from the current $50 -- a level that reflects Soviet-era
subsidised rates. Ukraine agrees in principle but wants a
transitional period and suggests the Kremlin approach mirrors
disapproval of Kiev's pro-Western government.


Moscow says it will cut only that element of supply that
would have been destined for Ukraine itself. Deliveries meant
for Europe would continue at agreed levels.

Earlier in the Day, Putin, whose increasingly assertive
foreign policy appears aimed at regaining some of the influence
Moscow has lost in former Soviet republics since the collapse
of the Soviet Union in 1991, seemed conciliatory. Russia and
Ukraine formed the industrial axis of the old Soviet superpower
and ties between the two remain key to regional stability.

"Above all Ukraine is a brother nation and we must think
about the whole relationship between Russia and Ukraine,"
Putin, betraying no emotion, told a meeting of his Security

"Should there be no clear reply we will consider that our
offer has been rejected," he said.

Ukrainian officials accuse Moscow of using the issue to
punish Kiev for its drive to join both the European Union and
NATO a year after mass protests helped propel Yushchenko to an
election victory -- beating a Kremlin-backed candidate.

A statement on Yushchenko's website (
said he believed the two sides were ready to negotiate, but
made no reference to the Kremlin proposal.

The president has put $80 as a fair price and says Gazprom
varies rates considerably -- $120 for the Baltic states, $110
for ex-Soviet Caucasus states and $47 for pro-Russian Belarus.

Italian oil and gas firm Eni said it had been warned by
Gazprom that supplies could be disrupted. Central European
states set up contingency plans. Poland said it had at least a
week's reserves of gas to guard against supply interruptions.

The EU has called a January 4 meeting of energy officials
from its member states to work out a common approach.

(Additional reporting by Meg Clothier in Moscow, Olena
Horodetska in Kiev)