Russia cuts Ukraine's gas supply over nearly $4.5B debt

Russia on Monday cut gas supplies to Ukraine as a payment deadline passed and negotiators failed to reach a deal on gas prices and unpaid bills amid continued fighting in eastern Ukraine.

The decision does not immediately affect the gas flow to Europe, but could disrupt the long-term energy supply to the region if the issue is not resolved, analysts said.

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Ukraine's Naftogaz company head Andriy Kobolev said Russia had cut the supply of gas to Ukraine, but that Ukraine can manage without Russian gas until December.

Gazprom spokesman Sergei Kupriyanov said that since Ukraine had paid nothing for the gas by Monday, from now on the company would demand that Ukraine pay in advance for any future deliveries.

Ukraine has been chronically behind on payments for the gas needed to heat homes and fuel its industries. The gas conflict is part of a wider dispute over whether Ukraine aligns itself with Russia or with the European Union. It comes in the midst of the severe crisis in relations between the two countries that has followed Russia's annexation of Crimea in March. Ukraine accuses Russia of supporting a separatist insurgency in its eastern regions, which Russia denies.

The pipeline to Ukraine also carries gas meant for Europe, but Kupriyanov said that the supply to Europe will continue as planned. Ukraine has the obligation to make sure the gas will reach European customers, he said.

However, Gazprom has notified the European Commission of "a possible disruption in the gas transit" in case Ukraine decides to siphon off the gas, the company said.

EU winter gas supply threatened

Analyst Tim Ash at Standard Bank PLC said Russia was likely to cut off only the gas meant for Ukraine, but that Ukraine could in theory simply take what it wants since the gas is intermingled. That would result in a shortage in pipelines to Europe that could hinder the buildup of stored gas ahead of the winter heating season when demand is higher.

"So the message is that this is unlikely to bring a short-term hit to gas supply in Europe, but it will build up problems for the winter unless a deal is reached quickly," he said in an email.

Bulgaria, Slovakia and Hungary get 80 per cent or more of their gas from Russia, while Poland, Austria and Slovenia get around 60 per cent.

Sabine Berger, an European Union spokeswoman, said in Brussels there was no official information as to changes in gas supply to the EU, and that as far as she knew, the flows remained "normal."

Amid mounting tensions between Russia and Ukraine, Russian Foreign Minister Sergey Lavrov said Monday he will never again speak to his Ukrainian counterpart, who showed up at a weekend protest in Kyiv and used a four-letter word to denounce Russian President Vladimir Putin.

Ukrainian demonstrators spattered the Russian Embassy in Kyiv with paint and eggs Saturday after pro-Russian separatists shot down a Ukrainian military transport plane, killing all 49 people aboard. In Moscow, police detained several men who were throwing flares at the Ukrainian Embassy.

Ukrainian President Petro Poroshenko said he will propose a detailed peace plan this week, the Interfax news agency reported him as saying at the start of a meeting of the country's national security council.

The plan will include a ceasefire with separatist rebels in the country's east.

Ukraine owes $4.458B for Russian gas

In December, Russia offered the previous Ukrainian president, Viktor Yanukovych, a discounted price of $268.50 per thousand cubic meters after he backed out of an economic and political agreement with the EU under pressure from Moscow.

Russia annulled all price discounts after Yanukovych was chased from power in February following months of protests, raising the price to $485 per thousand cubic meters starting April 1.

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Amid the talks, Russia has offered $385, the price that Ukraine was paying until December, but Kyiv insisted on a lower price.

Gazprom chief Alexei Miller scoffed at the demand, saying that it's unclear why Ukraine is asking for the price, which is significantly below European market prices.

Gazprom has tolerated the late payments but now says Ukraine owes a total of $4.458 billion for gas from last year and this year.

Russia wanted a payment of $1.95 billion for past-due bills by 9 a.m. Kyiv time Monday.

"Ukraine will get as much gas as it pays for," Miller said. He emphasized that to buy any gas from Russia, Ukraine first has to settle the $1.95 billion debt.

Ukraine seeks $6Bfor alleged overpayments

Gazprom announced on Monday that it is suing Ukraine's state energy company Naftogaz in an international court for the $4.5 billion. Naftogaz said it has also filed a suit against Gazprom, seeking a "fair and market-based price" for gas, as well as a repayment of $6 billion for what it said were overpayments for gas from 2010.

Ukrainians will not take out five billion dollars per year to let Russia spend this money on weapons, tanks and planes to bomb Ukrainian territory.-Ukrainian Prime MinisterArseniyYatsenyuk

Ukrainian Prime Minister Arseniy Yatsenyuk angrily rejected the Russian position, putting Gazprom's move on par with the annexation of Crimea and the pro-Russian insurgency in eastern Ukraine.

"We won't subsidize Russian Gazprom company," he said. "Ukrainians will not take out five billion dollars per year to let Russia spend this money on weapons, tanks and planes to bomb Ukrainian territory."

In Moscow, Russian Prime Minister Dmitry Medvedev said at a meeting with the Gazprom chief and other officials that the Ukrainian position was "absurd" and amounted to blackmail.

"We stand ready to act as a mediator in these talks to facilitate a compromise, but for the moment, there are no new dates set," Berger said.

One reason for EU involvement is the current state of Ukrainian gas reserves. Berger said they now stand at around 13.5 billion cubic meters. For the EU to be assured to enough gas for the coming winter, those reserves should be at 18-20 billion cubic meters at the end of the summer, Berger said.

Ukraine's energy minister, Yuriy Prodan, said that "the Ukrainian side is prepared for such a turn of events and we are providing reliable transit of gas and supplies to domestic consumers." He said Ukraine could do that because of lower seasonal demand and gas that had been stored.

Berger said that the European Union was working toward a deal that would allow shipments of gas to Ukraine via Slovakia.