Associated Press (AP),
Kiev, Ukraine, Tue, December 20, 2005

KIEV – Ukraine’s prime minister said Tuesday it may seek international arbitration over Russian attempts to sharply raise natural gas prices, if negotiations fail in a bitter dispute that could threaten Russian gas exports to Europe.

Yuriy Yekhanurov told reporters Kiev might challenge Russian demands at the Arbitration Institute of the Stockholm Chamber of Commerce, although parties to a dispute must both agree for the institute to examine their case. “We have a contract in force. If there are problems, all disputes can be solved in the courts,” Yekhanurov said.

Russia is seeking to more than quadruple the price it charges Ukraine for gas to bring it to European levels of between $220 and $230 a 1,000 cubic meters. Kiev, which had been paying $50, asked for the increase to be phased in over five years to give energy-inefficient industries time to adjust.

Moscow, however, rejected the request and has threatened to close the taps if a deal isn’t signed by Jan. 1, a move that would halt the substantial Russian gas supplies to western Europe that pass through Ukraine.

The dispute has highlighted a deepening chill in Russian-Ukrainian relations that set in with last year’s Orange Revolution and the pro-Western President Viktor Yushchenko’s rise to power.

Yekhanurov went to Moscow Monday to meet his Russian counterpart, Mikhail Fradkov, to solve the dispute, but no compromise was found. Yekhanurov nonetheless expressed hope the problem would be solved through negotiations between the Ukrainian state-run energy company Naftogaz (NGAZ.YY) and Russia’s state-run natural gas monopoly OAO Gazprom (GSPBEX.RS).

“Gazprom is a reliable institution, which provides gas for almost all of Europe,” he said. “I think it will not use wild methods.”

President Viktor Yushchenko again insisted on a gradual increase of gas prices and criticized Gazprom for what he termed its “irresponsible approach” – pointing to Gazprom’s decision to increase prices for other former Soviet republics by far less, and in the case of Belarus, not at all.

Georgia, a country where, as in Ukraine, pro-Western leaders have come to power, agreed Tuesday to pay nearly double the $63 a 1,000 cubic meters of gas it pays now.

Yushchenko also suggested Ukraine might retaliate by hiking the rent Russia pays to keep its Black Sea fleet based in the Ukrainian port of Sevastopol. He said the arrangement should be switched onto a “rational basis.” Russia pays about $93 million a year to Ukraine for use of the Sevastopol port.

Russia supplies almost half the European Union’s gas imports, sending some 80% of that through Ukrainian pipelines, and the spat has raised fears supplies could be interrupted.

Gazprom’s deputy board chairman Alexander Medvedev warned only days were left to resolve the dispute and accused Ukraine of abusing its position as a key energy transit point for European gas.

“This is impossible to interpret any other way than an attempt to pressure Russia and Europe to receive preferential treatment for Ukraine’s own gas needs,” he said in a statement.

Russian Foreign Minister Sergey Lavrov, however, assured Western European countries that Russia’s gas deliveries would not be interrupted.

Germany, Russia’s biggest energy customer in Europe, gets around 30% of its gas supplies through Ukraine and the head of the German Ruhrgas company expressed concern at the weekend at possible disruptions to supply.

Poland, another big market for Russia, gets around a sixth of its gas supplies from Russia through Ukrainian pipelines and has recently vowed to accelerate efforts to diversify Poland’s gas imports to reduce dependency on Russia. -30-

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