Gas price talks resume, Kiev rejects latest Russian offer

Wed Jun 11, 2014 7:26am EDT

* Gas central to relations between Russia, Ukraine and EU

* Gazprom extends payment deadline to June 16

* Ukraine says Russian offer is "a trap"

By Barbara Lewis and Natalia Zinets

BRUSSELS/KIEV June 11 (Reuters) - Russia and Ukraine resumed efforts to settle their gas price row on Wednesday after Kiev rejected a proposal that would have cut its gas bill by around a fifth and averted a possible suspension of supplies that would also hit the rest of Europe.

The dispute is part of a broader stand-off between Ukraine and its former Soviet master, as Kiev's new West-leaning leadership struggles to contain a pro-Russian separatist rebellion in its eastern provinces.

Arguments over the price Russia charges Ukraine for gas have rumbled on for years and led to supply cut offs in 2006 and 2009. The latest crisis began with the overthrow of Ukraine's Moscow-leaning president Viktor Yanukovich in February, after which Moscow annexed its neighbour's Crimea region and nearly doubled the price it charged Kiev for gas.

Russian gas exporter Gazprom had been charging a preferential rate as part of Moscow's effort to keep Ukraine from drifting into the orbit of the European Union.

The European Commission, the EU executive, took on the role of brokering trilateral price talks after Russian President Vladimir Putin suggested three-way negotiations, but five rounds so far have failed to get a deal.

Arriving for Wednesday's talks at the European Commission in Brussels, EU Russian envoy Vladimir Chizhov hinted that Ukraine was the obstacle.

"These negotiations stand a good chance of success, but this particular tango takes three," he said. Asked who was out of step, he said: "No prizes for guessing."

Ukraine's Prime Minister Arseny Yatseniuk at a cabinet briefing on Wednesday made clear Ukraine rejected Russia's offer to lower gas prices by removing export duty, a measure that would not be written into the contract and was therefore at the whim of Moscow.

"I want to say that we know these Russian traps; the discount is set by the Russian government and cancelled by the Russian government," he said.

Ukraine instead wants to change a 2009 contract that locked it into buying a set volume of gas, whether it needs it or not, at $485 per 1,000 cubic metres.

That level is the highest price paid by any customer in Europe, but a $100 drop would take it into the EU market range.

Negotiators hope that Wednesday's talks between the two energy ministers, the Commission and the CEOs of Gazprom and Ukraine's Naftogaz will build on progress over eight hours of talks that broke up in the early hours of Tuesday morning in Brussels.

But they are likely to stop short of a full deal after Gazprom extended until Monday a deadline for Kiev to switch to prepayment or face a supply cut-off.

If supplies are cut to Kiev, there could be knock-on disruptions to the European Union as roughly half of the gas it receives from Russia - about 30 percent of its gas demand - is shipped via Ukraine.

MULTIPLE TALKS

The talks between Russia, Ukraine and the EC have been going on while Kiev, Moscow and the Organization for Security and Cooperation in Europe discuss peace proposals put forward by Ukraine's new president, Petro Poroshenko, to settle an armed stand-off in the east.

Those talks have produced what Kiev says is a mutual understanding on key aspects of the peace plan, intended to end the insurrection by rebels who want parts of Russian-speaking eastern Ukraine to join with Russia.

Analysts say resolving the gas row would go a long way to taking the heat out of the wider conflict.

Moscow dropped Ukraine's gas price from $485 per 1,000 cubic metres to $268.50 after then-President Viktor Yanukovich turned his back on a trade and association agreement with the EU last year, but reinstated the original price after he was ousted.

Since then, Moscow says Ukraine has stacked up more than $4 billion in debts to Gazprom and must pay off some of that before a new price deal can be reached.

Kiev paid off $786 million at the start of last week but has since said it will only pay more when an overall deal is struck. (Additional reporting by Timothy Heritage, Elizabeth Piper and Vladimir Soldatkin in Moscow; Editing by Will Waterman)

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