Russia Cuts Gas to Ukraine Over Unpaid Bills

Russia cut natural gas deliveries to Ukraine today after negotiations failed to resolve a dispute over unpaid bills and the price for supplies this year.

Gazprom, the Russian state-owned gas provider, lowered pressure at 7am GMT in pipelines to Ukraine which also carry in transit about 80% of Russian gas consumed by other countries in Europe.

Ukraine said yesterday that it had paid $1.5bn (?1bn) in debts for supplies in November and December but Gazprom said it had not received that money from RosUkrEnergo, an intermediary company. It is also demanding a further $600m in fines which Ukraine said it is not yet prepared to pay.

The last time exports were terminated - in January 2006 - there was an immediate impact elsewhere in Europe as Ukraine allegedly siphoned off gas meant for onward transit. But the Gazprom chief executive, Alexei Miller, said it would continue full shipments to the European Union, which gets about a quarter of its gas from the Russian company, most of it through pipelines that cross Ukraine.

The row is politically tinged because Moscow and Kiev have been at daggers drawn since 2004 when popular protests over a rigged election set Ukraine on a course to European integration.

Russia is implacably opposed to its neighbour joining Nato and accused Ukraine of sending military advisers to Georgia last August, when Russia and Georgia went to war over the breakaway republic of South Ossetia.

Talks went to the wire last night, but the two sides could not resolve the debt issue or agree on a new price for gas supplies this year. Miller said: "The debt to Gazprom for gas supplied earlier was not paid. Despite verbal statements from Kiev, Gazprom did not see any money in its account."

Ukraine paid $179.5 per 1,000 cubic metres of gas in 2008. It has refused a Gazprom offer of $250 for the same quantity in 2009, which the Russian company says is half the European market rate.

Kiev's ability to negotiate has been weakened by political turbulence in Ukraine where the president, Viktor Yushchenko, and the prime minister, Yulia Timoshenko, are in open dispute over policy.

Analysts say Ukraine has enough of its own gas in storage to meet internal demand for about three months.

Gazprom, which has its own troubles due to very high debt levels, has accused Ukraine of trying to hold Europe to ransom by saying there could be shortages if the taps were turned off again, but Kiev has denied making such a threat. Russia denied any political motive behind the row, saying it was purely a business dispute and it would do all it could to maintain smooth supplies to Europe.

Europe depends on Russia for a quarter of its gas supplies, with Germany's BASF and E.ON, which supplies UK consumers, plus Italy's ENI being among the biggest customers. Russian gas supplies to Britain are limited but any reduction in European supplies could cause shortages and force up prices.

Gazprom said it had received a letter from Naftogaz stating that if Russia turned off the gas, Ukraine could confiscate Russian fuel bound for western Europe. "We cannot describe this position from Ukraine as anything other than blackmail," said Alexander Medvedev, head of Gazprom's export arm. "And they are blackmailing Gazprom, Russia and western Europe."

In Kiev, Naftogaz declined to comment on the letter but President Viktor Yushchenko's first deputy chief of staff, Oleksander Shlapak, said Ukraine guaranteed uninterrupted transit of Russian gas to Europe through its territory.

Gazprom saw second-quarter profits almost triple on the back of high commodity prices in the middle of the year but its fortunes have waned since. Its declining stock price has taken it from being the world's third-largest company at the start of 2008 to the 47th and it must repay $10.6bn of debt by the end of June.