Russia-Ukraine deal on gas for Europe hits trouble

MOSCOW/KIEV Sun Jan 11, 2009 5:41pm EST

1 of 8. Pipelines are seen at a gas compressor station in Sudzha in Russia's Kursk region January 11, 2009. International monitors arrived on Sunday at a gas compressor station near the Ukrainian-Russian border to observe gas flows to Europe, a Reuters photographer said.

Credit: Reuters/Gleb Garanich

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MOSCOW/KIEV (Reuters) - A deal to restore Russian gas supplies via Ukraine to Europe appeared on the verge of collapse after Moscow rejected additions by Kiev as a 'mockery of common sense'.

Russian President Dmitry Medvedev appealed to EU leaders late on Sunday to exert influence on Kiev to withdraw the annotations. Government sources said Prime Minister Vladimir Putin had proposed sending officials to Brussels on Monday for emergency talks.

Ukraine, its own supplies cut off in a dispute with Moscow over the price it pays for Russian gas, signed an agreement on Sunday allowing monitors to check gas flows across its territory to Europe and assuage Russian fears Kiev would siphon off gas for itself. But it appended its own declaration to the deal Russia had signed a day earlier.

The European Union was also party to the deal and EU monitors had already begun arriving when the new dispute flared.

"I cannot call such stipulations and additions other than a mockery of common sense and violation of earlier achieved agreements," Medvedev said of the Ukrainian terms.

"These actions, in fact, aim to disrupt the existing agreements on monitoring gas transit and are clearly provocative and destructive in essence ... I therefore order the government not to implement the document signed yesterday."

His statement sparked a new flurry of diplomatic activity. The European Commission said its chief, Jose Manuel Barroso, and Ukrainian Prime Minister Yulia Tymoshenko had agreed to address Russia's concerns.

BROADER TENSIONS

The commercial dispute over gas prices has played out against a background of broader tensions between Ukraine, seeking to join the NATO alliance, and its giant northern neighbor.

Russia cut off all gas via Ukraine to Europe last week. The EU, which gets a fifth of all its gas supplies via that route, has found itself playing arbiter in a bitter power-play between two ex-Soviet states still acting out a separation.

Putin has accused the pro-Western Ukrainian leadership of President Viktor Yushchenko, facing a deepening economic crisis, of being corrupt and inept. It wants Kiev to move to market prices for its gas, after years of subsidized pricing.

A copy of the monitoring agreement, seen by Reuters, has the handwritten words "with declaration attached" next to the signature of the Ukrainian government's representative.

The declaration, a copy of which has also been seen by Reuters, stated that Ukraine had not siphoned off any transit gas and that it had no outstanding debts to Russian export monopoly Gazprom -- a central bone of contention between the two countries.

It said Russia must supply volumes of "technical" gas, at no cost, to Ukraine to maintain pressure in the pipeline system -- a demand Gazprom described as "an attempt to legalize the theft of gas."

Gazprom said Ukraine was demanding 21 million cubic meters of technical gas per day -- enough to meet the daily needs of a country like Austria.

"Ukraine has again taken a destructive position," a Gazprom statement said.

DIPLOMATIC MOVES

By late Sunday there were suggestions of a possible move toward a diplomatic solution.

A Putin spokesman said Czech Prime Minister Mirek Topolanek had told the Russian premier in a telephone conversation: "Ukraine's declaration is not part of the (main) protocol and only represents the opinion of the Ukrainian side."

The European Commission said it still believed the Ukrainian statement had no effect on the validity of the deal.

"Mr Barroso has called Mrs Tymoshenko and has agreed with her to separate the two documents. They are working out how to make a new terms of reference without a link to the (Ukrainian) declaration," the Commission said.

Valentin Zemlyansky, spokesman for Ukrainian state energy company Naftogaz, said: "Ukraine continues to guarantee its openness and is ready to ensure 100 percent transits of Russian gas across its territory."

Eastern and central Europe have borne the brunt of the gas supply disruptions, with Bulgaria shutting schools because it could not heat them and Slovakia saying it would re-start a nuclear reactor which it shut down last year.

In the Bulgarian capital Sofia, residents expressed anger.

"Half of Europe has become a hostage of the squabbling between Russia and Ukraine. This is pure blackmail, totally unacceptable and we should demand financial compensations," said Krasimira Dimitrova, 56.

Energy companies in the Balkans, where overnight temperatures reached as low as -17 degrees Celsius (1.4 Fahrenheit), have switched to alternative fuels and other suppliers to restore heating to hundreds of thousands of homes.

Russia says it has been subsidizing fuel supplies to Ukraine for years and now wants it to pay $450 per 1,000 cubic meters of gas. That is roughly in line with the price EU customers pay but a huge increase on the $179.5 Kiev paid last year.

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