By Neil Buckley in Moscow and George Parker in Brussels
Financial Times, London, United Kingdom,

Friday, December 30 2005

President Viktor Yushchenko of Ukraine last night rejected an offer of a
$3.6bn (£2bn) loan from Russia to pay for a big increase in gas prices by
Gazprom, the Russian energy company.

President Vladimir Putin had earlier said Moscow was ready to extend a loan
to Ukraine in an attempt to resolve a damaging dispute three days before a
Russian deadline to turn off gas supplies to Ukraine.

“We are very grateful for the proposed large credits, but Ukraine does not
need them,” Mr Yushchenko said, according to Reuters. “Ukraine will pay with
its own money at a price set in a comprehensible, objective fashion.”

Russia has demanded that Ukraine pay nearly five times as much for Russian
gas – part of a wider move by Moscow to end subsidised supplies to former
Soviet republics. The move has provoked the biggest rift between the two
neighbours since last year’s “Orange Revolution” in Kiev. Mr Yushchenko has
turned Ukraine towards the European Union and Nato and wrenched it out of
Russia’s orbit.

The dispute could cause shortages in western Europe if Russia carries out a
threat to reduce the gas it pumps into the huge export pipeline that crosses
Ukraine from January 1. By doing so, however, Russia would risk damaging its
claim to be a reliable energy supplier, just as it takes over the presidency
of the Group of Eight industrialised nations with energy security as a main

The European Commission said yesterday the reliability of Russian supplies
was “of the highest priority” and it was watching the Russian-Ukrainian
dispute closely.

Mr Putin, in televised remarks, told Ivan Plachkov, Ukraine’s energy
minister, that Russia was prepared to lend “a huge sum” to Kiev to ease the
shift to market prices. “We are ready to provide a loan on commercial
conditions directly to [Ukraine’s national gas company] under the guarantee
of one of the international banks, European or American,” the Russian
president said.

Mr Putin added that subsidised gas had been acceptable while Russia and
Ukraine were part of a planned economy but no longer reflected economic

Mr Yushchenko has said Ukraine is ready to move to market prices over a
period of years. But he said yesterday that Kiev would “never accept” the
price of $220-$230 per 1,000 cubic metres Russia is demanding for next year,
up from $50 this year. “This price is a provocation,” Itar-Tass news agency
quoted him as saying.

Gazprom, Russia’s natural gas monopoly, earlier said it had signed a deal to
buy more gas from Turkmenistan, the second-biggest producer among the
former Soviet republics, by more than 50 per cent to 30bn cu m next year.

Analysts said that would leave less spare Turkmen gas available to Ukraine
to cover any reduction in Russian supplies. Ukraine, which uses about 80bn
cu m of gas annually, buys 25bn cu m from Russia and 36bn cu m from
Turkmenistan, which all flows through Gazprom’s pipelines. But Ukraine said
it already had a contract with Turkmenistan to buy 40bn cu m of gas next
year. -30-


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