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. Last Updated: 07/27/2016

Gas Talks Come Down to The Wire

Emergency talks between Gazprom and Ukraine failed to resolve a simmering debt dispute Monday as the possibility of a mid-winter shut-off of gas supplies to the country inched closer.

Gazprom moved its cut-off deadline back eight hours, saying after the talks that it would give Ukraine's state gas firm Naftogaz until 6 p.m. Tuesday to pay in full a debt it says totals $1.5 billion.

Gazprom CEO Alexei Miller and Naftogaz chief Oleh Dubyna held three hours of talks as officials in Kiev and Moscow traded barbs over who was to blame for the dispute and what the actual size of the debt was.

Officials on both sides insisted that Gazprom's supplies to Europe through Ukrainian territory would not be affected.

Talks would continue until the deadline Tuesday, Gazprom spokesman Sergei Kupriyanov said, after which Gazprom is threatening to shut the valves to Ukraine. The current spat is reminiscent of a similar standoff in early 2006 that first called into question Russia's reliability as an energy supplier to European markets.

A two-day visit by Ukrainian President Viktor Yushchenko, which had already been scheduled for Tuesday, will now likely turn into a last-ditch effort on Kiev's part.

Analysts said the debt dispute masked a deeper tussle over the role of RosUkrEnergo, a trading company owned 50-50 by Gazprom and a pair of Ukrainian businessmen. The company mixes Gazprom supplies with cheaper gas from Central Asia to keep prices low.

Gazprom insists that Naftogaz owes it $1.5 billion -- $1 billion in unpaid bills from 2007 and $500 million since the beginning of this year -- because Gazprom has boosted its share of supplies to Ukraine as shipments from Turkmenistan, Kazakhstan and Uzbekistan have dwindled during an unusually harsh winter there.

Ukrainian Prime Minister Yulia Tymoshenko put the debt at $1.1 billion on Monday and said it was owed to RosUkrEnergo, blaming the build up of arrears on her predecessor, Viktor Yanukovich, and former energy minister Yuriy Boiko.

"As the Yanukovich government and Boiko left this debt, I believe Boiko, who now represents RosUkrEnergo, must do all he can so this debt can be restructured over a long period," she said, news agencies reported from Kiev. "Ukraine will not pay this debt all at once."

In a suggestion that Ukraine was looking for ways to stretch repayment of the debt over a longer period, Kommersant reported Tuesday that Naftogaz was negotiating with Deutsche Bank for a $1 billion loan, citing senior officials with the company.

Tymoshenko also said that, in calculating the debt, RosUkrEnergo had applied the price agreed for 2008 -- $179.50 per 1,000 cubic meters -- to November and December 2007, when the price stood at $130. Ukraine will not "fall victim to blackmail," she said.

RosUkrEnergo, which took over the murky Russian-Ukrainian gas trade following the 2006 dispute, remained defiant Monday.

"I don't think it is standard global practice to receive a product and not pay for it," spokesman Andrei Knutov said by telephone.

Tymoshenko once held close links to former intermediary company Itera, which handled the Russian-Ukrainian gas trade before 2002. She has long been pushing for the dissolution of RosUkrEnergo and said Monday that she would use a visit to Moscow later this month to urge direct sales from Gazprom to Naftogaz.

Ukraine, with an annual demand for gas of 75 billion cubic meters, buys 55 bcm from RosUkrEnergo and covers the rest with domestic production. Under normal conditions, the bulk of RosUkrEnergo's supplies -- 41 bcm -- comes from Turkmenistan, with the remaining 25 percent supplied by Kazakhstan, Uzbekistan and Gazprom, Knutov said.

If Gazprom and Naftogaz failed to resolve the dispute by 6 p.m. Tuesday, Gazprom would halt only its supplies to Ukraine, which currently comprise 25 percent of RosUkrEnergo's shipments, Kupriyanov told Ekho Moskvy.

The 2006 dispute saw Gazprom cut all gas shipments to Ukraine, prompting a drop in supplies across Europe, which relies on Russia for one-quarter of its gas imports. Around 80 percent of Gazprom's supplies to Europe cross Ukraine.

To counter the effects of a price rise that would likely result from direct sales from Moscow to Kiev, Ukrainian officials are believed to be seeking a hike in gas transit payments.

"Transit costs are a separate issue," Gazprom Export spokesman Ilya Kochevrin said. "That's about European gas supply; this is about local Ukrainian consumption." Gazprom currently pays $1.7 per thousand cubic meters of gas for every 100 kilometers it travels.

RosUkrEnergo's Knutov said Ukraine had a contractual obligation to continue using RosUkrEnergo. Reports at the time it was signed said the contract was for five years.

"Today is a moment of truth for Ukraine," Tymoshenko said, The Associated Press reported. "Either it manages to get rid of all these gas tumors and manages to cut this Gordian knot, or RosUkrEnergo and UkrGazEnergo, these twin brothers, will make us dependent for many, many years."

Gazprom sells its gas to RosUkrEnergo, which then resells it to another intermediary, UkrGazEnergo. That company sells the gas to Ukrainian industrial consumers and Ukraine's national energy company, Naftogaz, which supplies households and other consumers.

The dispute's escalation came as Gazprom was due to hold a huge 15th anniversary bash in the Kremlin. President Vladimir Putin congratulated the firm on its anniversary in a letter on Monday, saying, "The company's strategy is built on the principles of uninterrupted, reliable and maximally efficient supplies to consumers in Russia and abroad."