11th-Hour Gas Deal Offers Transparency

Gazprom and Ukraine averted a gas shut-off Tuesday, reaching a last-minute deal to settle Kiev's debt to the gas giant and agreeing to push controversial intermediary RosUkrEnergo out of their convoluted gas trade.

"We have agreed that Ukraine will start paying off the debt starting Thursday," Ukrainian President Viktor Yushchenko said after three hours of talks in the Kremlin with President Vladimir Putin.

While praising the gas deal, Putin warned that Russia could point missiles at Ukraine if Kiev joined NATO or took part in U.S. missile defense plans.

Gazprom had threatened to cut gas shipments to Ukraine by 6 p.m. on Tuesday if the country failed to pay a billion-dollar debt accrued since November, when Gazprom started pumping extra gas to the country as supply from Central Asian countries lagged in the midst of an unusually cold winter.

"What our Ukrainian partners proposed suits Gazprom," Putin said at a joint press conference with a visibly tense Yushchenko broadcast on state-run television.

"We hope all our agreements will be put on paper today or tomorrow," Putin said. "We want our cooperation to be as transparent as possible."

The standoff between Russia and Ukraine escalated as Ukrainian Prime Minister Yulia Tymoshenko, who returned to office in December, increased calls to push RosUkrEnergo, a 50-50 joint venture between Gazprom and two Ukrainian businessmen, out of the gas trade.

Yushchenko said a working group to be set up this week would find a "simpler, more direct and more transparent" system to supply Ukraine with Gazprom's gas.

Gazprom chief Alexei Miller went further, saying RosUkrEnergo would no longer handle the trade. Gazprom and Naftogaz, Ukraine's state gas firm, will set up a new 50-50 joint venture to handle the sale of gas, he said in a statement.

RosUkrEnergo spokesman Andrei Knutov declined to comment on the talks or Miller's statement.

RosUkrEnergo has handled the Russian-Ukrainian gas trade since January 2006, when a pricing dispute prompted Gazprom to cut off all gas to Ukraine. A 50-50 joint venture between Gazprom and Naftogaz was initially envisioned, but never materialized.

In the current system Gazprom sells gas to RosUkrEnergo, mainly bought relatively cheap from Turkmenistan, Kazakhstan and Uzbekistan, to top up its own supply. RosUkrEnergo's contract with Naftogaz includes a clause on emergency supplies of Russian gas, priced at a steep $317 per thousand cubic meters, if Central Asian supply runs short, said Jonathan Stern, a gas expert at the Oxford Institute of Energy Studies.

RosUkrEnergo then sells the gas to UkrGazEnergo, a joint venture between Naftogaz and RosUkrEnergo, which then sells it to customers in Ukraine. UkrGazEnergo will also be dissolved in favor of a 50-50 joint venture between Gazprom and Naftogaz, Miller said.

Tymoshenko, who built some of her own fortune trading gas in the mid-1990s, has called the intermediaries vehicles for corruption and pushed for direct sales. She is due to arrive in Moscow for talks on Feb. 21.

Russia supplies nearly 75 percent of Ukraine's gas, while 80 percent of all Gazprom's shipments to Europe travel over Ukrainian territory.

The near cut-off on Tuesday was reminiscent of a pricing dispute in January 2006, when Gazprom shut the valves on its pipes to Ukraine for three days, causing a drop in shipments to Europe and prompting concern over Russia's reliability as one of Europe's main energy suppliers.

Ukraine resisted Gazprom's attempts to raise the gas price drastically that year, and critics called the move politically motivated, coming months after Yushchenko came to power in the Orange Revolution.

Yushchenko said Tuesday that he and Putin had also confirmed that Ukraine would continue paying $179 per thousand cubic meters through 2008.

This week's crisis centered on the debt dispute, including the question of how much was actually owed.

Gazprom insisted that Naftogaz owed it $1.5 billion, while a defiant Tymoshenko said on Monday that Naftogaz owed $1 billion to RosUkrEnergo. All sides refused to comment on the amount agreed to on Tuesday.

The lack of specifics about Tuesday's deal may result, in part, from the fact that many still have to be worked out.

"From the moment Tymoshenko took the role of prime minister, she made it clear that she wanted to renegotiate the whole package," Stern said. "If everything is put on the table -- price, volume, storage, tariffs, direct contracts and intermediaries -- it's going to take months."

Tymoshenko, who as head of United Energy System controlled part of the Turkmen-Ukrainian gas trade in the mid-1990s, has made cutting RosUkrEnergo out of the loop a personal mission, said Dmitry Loukashov, an energy analyst at UBS.

"The existence of an intermediary could be avoided. Someone benefits from it, and that's what bothers Ms. Tymoshenko," he said.