Gazprom Says Kiev Must Sign Contract

The risk that Ukraine might see its gas supplies cut off next year re-emerged Saturday as Gazprom warned that time was running out for a bilateral gas contract to be signed.

Gazprom halted its gas deliveries to Ukraine in 2006, which, in turn, led to a reduction in the supplies that reached Europe. It sends 80 percent of its European exports via Ukraine.

"We would like to avoid such a development. We would like to agree on everything in the days remaining before the new year, but, as you understand, we cannot supply gas without a contract," Gazprom spokesman Sergei Kupriyanov said on Vesti-24 television.

The European Union's envoy to Russia, Marc Franco, said the bloc remained confident that the countries would find a solution without disrupting transit supplies.

"I would hope that both partners are wise enough to avoid an open conflict on this. Nobody has any interest in a conflict," he said, Reuters reported.

The EU, after its gas inflow slipped in 2006 in the aftermath of Gazprom's cut to Ukraine, responded by calls to seek more alternatives to deliveries from Russia.

Shortly after, Moscow decided to build undersea routes to bypass Ukraine and the other transit country, Belarus. Preparations are still going on to start construction on both routes, the Nord Stream in the Baltic Sea and South Stream in the Black Sea.

Contract negotiations between Gazprom and Ukraine appear to have stumbled on the outstanding gas bills that Ukraine has run up this fall.

President Dmitry Medvedev, who was previously the chairman of Gazprom's board, demanded on Thursday that Gazprom recover Ukraine's debts.

Ukrainian President Viktor Yushchenko on Friday ordered the government to settle the arrears for gas imports, blaming Prime Minister Yulia Tymoshenko, a former ally turned rival, for the problem.

Also on Friday, Tymoshenko said she was confident that Ukraine and Russia would sign the supply contract under the conditions set down in the memorandum. This will happen within "the next few weeks," she said during a visit to Sweden.

Gazprom chief executive, Alexei Miller, estimated Ukraine's debt at $2.4 billion, but Ukraine's national gas company, Naftogaz Ukrainy, said it owed just $1.27 billion. The amount is owed to RosUkrEnergo, the intermediary in the gas trade between Russia and Ukraine, rather than Gazprom, the Ukrainian company said.

Gazprom owns half of RosUkrEnergo. The other half belongs to Ukrainian businessmen Dmytro Firtash and Ivan Fursin.

Kupriyanov said the Russian figure included penalties and the debt Ukraine would have amassed in November. Naftogaz named the figure for September and October, he said.

Naftogaz said Friday that it would pay back the debt as soon as possible.

If the debt remains outstanding, Gazprom will consider itself free from a promise to sell gas to Ukraine at a discount to the prices that it charges in the EU, Kupriyanov indicated.

The promise, included in a memorandum of understanding signed by Prime Minister Vladimir Putin and Tymoshenko last month, granted Ukraine a transition period through 2009 and 2010 before it would pay on par with the rest of Europe.

Ukraine pledged to pay back the debt as part of the deal, Kupriyanov said. If it does not make good on its part of the agreement, gas prices for Ukraine will jump to more than $400 per 1,000 cubic meters in January from the current $179.50, Kupriyanov said.

The memorandum also said RosUkrEnergo would stop being an intermediary, but Gazprom will not honor that condition if the debt is not paid, Kupriyanov said, despite Tymoshenko's fierce objections to the middleman's role in the bilateral gas trade

Gazprom offered to pay Naftogaz in advance for the transit to Europe and helped arrange talks between Naftogaz and Deutsche Bank in an effort to assist the Ukrainian company in raising funds, Kupriyanov said. The efforts did not lead to any progress with the debt recovery, he said.

The International Monetary Fund said earlier this month that the Ukrainian economy was under significant stress when it approved a $16.4 billion loan to the country. Some of the hardest-hit areas were the banking system and steel exports, which deteriorated because of falling demand.

But Naftogaz's inability to pay should not be attributed to the global financial crisis because Ukraine never lowered its demand for gas, Kupriyanov said. "Gas continues to burn in Ukraine's furnaces as it did before," he said. "This means the crisis has nothing to do with it."

The fresh round of arguments between Gazprom and Ukraine puts gas deliveries to Europe,at risk while the strength of Gazprom's demand for repayment indicated that it has problems with cash collection amid falling demand, Alfa Bank wrote in a note to investors Friday.

Gazprom said last week that it would produce less gas this year than it planned because buyers had been showing less demand because of a warm autumn and the global financial crisis.