By Neil Buckley in Moscow, Raphael Minder in Brussels
and Roman Olearchyk in Lviv, Ukraine
Financial Times, London, UK, Saturday, December 31 2005

Russia was last night preparing to turn off gas to Ukraine tomorrow for the
first time since the collapse of the Soviet Union, posing a threat to the
stability of supplies to western Europe.

Moscow stuck to demands yesterday for a nearly five-fold increase in the
price Ukraine pays for Russian natural gas in a move to eradicate subsidies.

But Ukraine insisted it needed a period of transition to market prices to
avoid huge damage to its industry and economy. It was expected to present
a new proposal last night to try to defuse the acrimonious row between the
former Soviet neighbours.

The dispute has demonstrated Russia’s increasing self-confidence as one of
the world’s biggest energy suppliers, but has provoked alarm in western
Europe, which gets 25 per cent of its gas from Russia – most of it through
the huge Brotherhood pipeline across Ukraine.

The European Commission said it would host an emergency meeting on
Wednesday of energy officials from the 25 EU states to discuss possible
sharing of gas reserves and other contingency measures, should Russia
carry out its threat.

Russia showed no sign of backing down from the threat to stop pumping the
portion of gas usually taken by Ukraine into the export pipeline
from tomorrow, if Kiev does not agree to a price rise from $50 to $230 per
1,000 cubic metres. Viktor Yushchenko, Ukrainian president, said last night
the maximum Kiev was prepared to pay next year was $80.

Alexei Miller, chief executive of Gazprom, Russia’s state-run natural gas
company, said its actions would be “clear and resolute”, if no agreement was
reached. He rejected a proposal from Mr Yushchenko to freeze current prices
for 10 days while independent experts assessed a fair price – although
Russian president Vladimir Putin had last night given no formal response.

“If Ukraine does not sign a gas delivery contract with us before the
beginning of 2006, all gas shipments from the territory of the Russian
Federation to consumers in Ukraine will be stopped at 10am Moscow
time on January 1,” Mr Miller said.

Russian television is preparing to broadcast live the turning off of
supplies at Gazprom’s Moscow control room.

Both sides suggested yesterday gas exports to central and western Europe
would not be affected. But Ukraine said earlier this week it had the right
to take 15 per cent of gas passing through the export pipeline as a transit
fee. Gazprom said in a letter to European customers it “could not exclude
the risk” that Ukraine would take gas from the pipeline.

Ukraine gets about 25bn cu m of its 80bn cu m annual consumption from
Russia, with 36bn cu m coming from the former Soviet republic of
Turkmenistan. Officials said yesterday Ukraine had enough gas in
underground storage to enable it to meet its needs through the winter.

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