Ukraine leader to seek gas deal in talks with Russia's Putin

Mon Dec 17, 2012 12:36pm EST

* Ukraine needs lower gas price to secure IMF deal

* Not clear what Kiev will offer in return

* Past disputes disrupted onward flows of gas to Europe

By Olzhas Auyezov

KIEV, Dec 17 (Reuters) - Ukraine will try to resolve a gas price dispute with Russia in presidential-level talks on Tuesday, heading off any danger of an escalation in the row that could threaten supplies of the fuel to Europe.

The Kremlin said President Vladimir Putin would receive Ukraine's President Viktor Yanukovich in Moscow, and political sources said the Ukrainian leader hoped to secure an agreement for Kiev to pay a lower price for Russian gas.

There is no sign of the tensions that prompted Russia to cut supplies to Kiev during earlier price rows in 2006 and 2009, a move that led to disruption of flows to other markets in Europe because Russian gas exports go through pipelines across Ukraine.

But Kiev is struggling to afford its fuel bill to Russia under the current terms, which stem from a 2009 agreement over which Ukraine's former prime minister, Yulia Tymoshenko, was jailed on charges of abuse of office.

Kiev says the price of $430 per 1,000 cubic metres it is paying this quarter is draining its budget, although it has balked at demands for big concessions to Moscow to achieve a reduction.

Russia has, in particular, said it wanted to buy into Ukrainian gas pipelines which pump much of the Russian gas bound for Europe. Kiev refuses to sell the assets, considering them to be strategic.

But pressure is mounting on the former Soviet republic to reach a deal because the International Monetary Fund says it must cut generous subsidies on household gas and heating prices to secure a new loan package that would help it pay its debts.

"Some move to resolve the stalemate is expected and it could happen tomorrow," Ukrainian political analyst Mykhailo Pohrebinsky said.

"Ukraine faces the need to find huge sums of money in order to repay foreign debts, including to the IMF. This leaves Ukraine without a choice - they have to go to Moscow and reach an agreement on gas prices."

LOOMING DEBT PAYMENTS

Ukraine must repay about $9 billion in debt to foreign creditors next year, including $6.4 billion to the IMF. Two agencies, Standard and Poor's and Moody's, have cut Ukraine's ratings this month, citing increased risk of default.

The Fund halted lending to Ukraine in early 2011 after the government backtracked on its promise to cut household energy subsidies because of what analysts said were fears of a domestic political backlash.

The IMF says Kiev must eliminate or at least reduce subsidies to bring its budget deficit down to a manageable level. But Ukraine hopes that, if Russian gas becomes cheaper, subsidies well become either unnecessary or insignificant.

Kommersant-Ukraine newspaper quoted a government source on Monday as saying Ukraine might invite Russian nuclear company Rosatom to take over its turbine maker Turboatom in exchange for a new gas supply agreement.

A source in the Russian Energy Ministry said talks would focus on Russia's desire to bring Ukraine closer into its orbit and lure it into a customs union trade bloc led by Moscow.

Although Yanukovich has sought to align Ukraine's foreign policy with that of Russia since becoming president - for example, by abandoning the goal of joining the NATO military alliance - he has said European integration remains Kiev's priority.

But the European Union has shelved agreements with Ukraine on free trade and political association in response to the jailing of his rival, Tymoshenko, in October 2011.

Some analysts say Yanukovich's government wants to play off Russia against the West to try to win concessions from both.

The supply disruptions of 2006 and 2009 caused severe energy supply problems for countries such as Bulgaria and Slovakia in the depths of winter.

New disruptions would undermine Ukraine as it tries to dissuade Moscow from building alternative pipelines along different routes which could eventually make the Ukrainian pipelines redundant.

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