Early Promise in Ukraine Gas Talks

NOVO-OGARYOVO, Moscow Region — Russia and Ukraine reached a preliminary agreement Thursday night on a gradual rise in gas prices over the next three years, in talks overshadowed by political infighting in Kiev and Ukraine's support of Georgia in its August war with Russia.

"We came to the conclusion that our countries don't need price shock therapy," Ukrainian Prime Minister Yulia Tymoshenko said after six hours of talks with Prime Minister Vladimir Putin at his official residence outside Moscow.

Tymoshenko and Putin said the meeting had produced a broad agreement that could lay the foundation for a final deal later.

They did not provide any details of the new pricing scheme, but the deal might include subsidies on Central Asian gas purchased by Russia and then sold on to Ukraine.

"As expected, there was no agreement on price levels, but nevertheless, these agreements in principle are positive news for the Ukrainian economy," said Irina Yelinevskaya, an analyst who covers the Ukrainian oil and gas market for Renaissance Capital. Russia might have cut a special deal with Central Asian nations on gas for Ukraine, she suggested.

The two also agreed that Gazprom and Ukraine's Naftogaz would explore opportunities for joint gas exports from Ukraine to Europe.

With global energy costs on the rise, Gazprom has warned that the current price of $180 per 1,000 cubic meters that Ukraine currently pays could more than double next year to $400. Kiev has said such a steep increase could cripple the Ukrainian economy.

On the eve of Tymoshenko's arrival, Gazprom CEO Alexei Miller said prices for Russian gas in Europe had topped $500 per 1,000 cubic meters.

Tymoshenko said the agreement was also "very important" for Europe, which saw gas supplies fall when a pricing dispute in January 2006 led Gazprom to stop deliveries to Ukraine for three days. Russia supplies nearly 75 percent of Ukraine's gas, while 80 percent of all Gazprom's shipments to Europe travel across the country.

Putin said the details for the deal would be complicated, as Central Asian nations have raised their prices.

He also made it clear that Ukrainian President Viktor Yushchenko's support for Tbilisi in the military conflict in South Ossetia in August and political infighting in Kiev would factor in the talks.

"It's very regrettable that Ukraine considered it acceptable to supply arms in the conflict zone," Putin said at the start of the talks. "That is a special case, and in such situations states should demonstrate restraint."

Pro-Kremlin newspaper Izvestia led its Thursday issue with a report that Yushchenko had personally overseen arms supplies to Georgia.

Putin said political turmoil in Ukraine would also hinder reaching a final deal on gas.

"In this case, agreements that might be reached today could be called into question tomorrow," Putin said.

A sign of the difficulties came Thursday as Tymoshenko prepared to fly out of Kiev, only to discover that her plane had been commandeered by Yushchenko, she told reporters. Her own departure ended up being delayed.

Asked to comment on media reports that Tymoshenko's presence in Moscow, among other things, was a sign that the Kremlin's hand was playing a role in Kiev, Putin answered that it would be a "hand with a worker's calluses, as it was the hand of the Russian people."

Naftogaz spokesman Valentin Zemlyansky, speaking earlier in the day, said the most important task was to switch to long-term contracts and exclude intermediaries from gas sales. He indicated that Ukraine, at least for now, wasn't prepared to pay full market price for the Russian gas, as its draft budget for 2009 was based on a price of $250 to $260 per 1,000 cubic meters.

"The problem is that, before they agree between themselves," Yelinevskaya said, referring to Tymoshenko and Yushchenko, "they can't expect to reach an agreement with the Russians."

Vyacheslav Bunkov, an energy analyst with Aton, said it was not in Gazprom's interests to agree to long-term contracts with Ukraine, as "gas prices will only be rising for the foreseeable future."

Staff Writer Anatoly Medetsky reported from Novo-Ogaryovo.