Russia's Gazprom cuts all gas supplies to Ukraine

Russia's gas monopoly Gazprom cut all natural gas supplies to Ukraine on Thursday morning after talks broke down over payments for past shipments and a new energy price contract for 2009.

Gazprom officials said the cuts began as planned at 2 a.m. ET and the Ukrainian gas company Naftogaz confirmed a steady drop in supplies.

The festering dispute between the two uneasy neighbours raised fears that a cut-off could lead to repetition of the January 2006 gas crisis, when a similar dispute between Russia and Ukraine briefly interrupted gas shipments to many European countries.

Europeans get about a quarter of their gas from Russia, and Ukraine controls the pipelines through which Russia supplies most of its customers in Europe. Natural gas is used for heating and to generate electricity, and the cut-off to Ukraine comes as Europe approaches the depths of winter.

While cutting gas to Ukraine, Gazprom said it also increased the amount of gas pumped through pipelines that mainly serve Europe.

Russian Prime Minister Vladimir Putin has warned Ukraine against diverting gas intended for other customers, saying that could have "quite serious consequences for the transit country itself" by damaging relations with Europe.

Ukraine's president and prime minister issued a statement saying they would guarantee the uninterrupted transit of natural gas through Ukrainian territory to Europe.

However, the Ukrainian president's energy adviser said it appeared Gazprom had reduced supplies by more than Ukraine's quota of the deliveries, and was not shipping enough to satisfy European customers. Despite this, Ukraine was fulfilling its obligations to deliver gas westward, Bohdan Sokolovsky said Thursday.

It was not possible to confirm his observations.

Gas storages built up

Naftogaz director Oleh Dubina has said Ukraine has enough gas in reserve to last it through early April.

European countries also have built up their gas storage since the 2006 crisis and would be unlikely to see any disruption for several weeks, said Chris Weafer, chief strategist at Uralsib bank.

The deadlock over gas supplies reflects the deep political split between Moscow and Kiev.

Ukrainian President Viktor Yushchenko has angered the Kremlin through his efforts to build ties to western Europe and his support of Georgia in its August war with Russia.

Ukraine's position in the dispute is further complicated by divisions in the country's leadership. Yushchenko and Prime Minister Yulia Tymoshenko, bitter political rivals, are at odds over gas policy and relations with Russia, among other issues.

Gazprom had warned it would cut gas supplies unless Ukraine paid off all of a $2.1-billion US debt and signed a deal setting prices for 2009 deliveries by midnight. Neither was done.

Naftogaz paid $1.5 billion to the Swiss-based gas trader Rosukrenergo, which it says covers the debt. But Gazprom CEO Alexei Miller said late Wednesday that Gazprom had not yet received the money. Gazprom claims Ukraine owes $600 million more in fines for late payment.

Rosukrenergo is half-owned by Gazprom. It was not immediately clear why the money had not been transferred to Gazprom.

"This is an issue of Gazprom's dealings with Rosukrenergo," Naftogaz spokesman Valentyn Zemlyansky said. "Naftogaz has fulfilled all its obligations."

No contract for deliveries

The other stumbling block was the failure to sign a contract for 2009 gas deliveries.

Gazprom had first insisted that Ukraine pay $418 per 1,000 cubic metres of gas in 2009, more than double the $179.50 it paid the previous year.

On Wednesday, Gazprom offered a contract with gas set at $250, which Ukrainian officials said was still too high.

Yushchenko and Tymoshenko offered early Thursday to pay Russia $201 per 1,000 cubic metres of gas if Russia agrees to raise the future price it pays to use Ukraine's pipelines to $2per 1,000 cubic metres per 100 kilometres.

Russia has said the $250 offer is contingent on the current transit fee of $1.70 remaining unchanged.