Russia and Ukraine reach gas deal

By LYNN BERRY, Associated Press Writer

MOSCOW – Negotiations dragged into the early hours Sunday, but in the end the prime ministers of Russia and Ukraine announced a deal to settle the gas dispute that has drastically reduced supplies of Russian gas to Europe for nearly two weeks.

Russian Prime Minister Vladimir Putin said Ukraine will pay 20 percent less than the European price for this year. This means a substantial increase for Ukraine in the first quarter but the price could fall significantly later in the year as gas prices are expected to drop.

"The negotiations were difficult but we reached an agreement that will allow for a contract to be signed," Ukraine's Prime Minister Yulia Tymoshenko said, standing by Putin's side.

Tymoshenko said natural gas supplies would resume once the two countries' gas companies sign a contract. It was not clear how soon this would happen. But Russia's Gazprom and Ukraine's Naftogaz, both state controlled, were told to prepare the documents by Monday, she said.

Before walking out, Putin promised that gas supplies would be restored soon. Both countries had blamed the other for the shutoff of European-bound gas.

The two leaders reached the agreement in talks that stretched into the early hours of the morning after a meeting Saturday with leaders from the 27-nation European Union ended without a resolution.

The EU normally receives about one-fifth of its gas supplies through Ukraine. Nations in eastern Europe that rely on Russia have been left with virtually no new supplies.

The EU threatened to review its relations with both countries if their dispute is not resolved this weekend. EU spokesman Ferran Tarradellas said Saturday that the EU delegation was "encouraged by the discussions" because Russia and Ukraine were seeking solutions rather than just blaming each other, but "what matters are results."

Ukraine paid $179.50 per 1,000 cubic meters of gas in 2008, less than half the price paid by European countries. The European price for the first quarter of 2009 is about $450, but is expected to fall to reflect the decline in world oil prices from more than $140 in July to below $40 in recent trading. Gas prices fluctuate more slowly than oil because gas is generally sold under long-term contracts.

Before talks broke down on Dec. 31, Russia had offered Ukraine a price of $250 for 2009, which Ukraine refused.

The two countries also reached a deal Sunday on the price Russia will pay Ukraine for transporting gas to Europe through its pipelines. Ukraine had insisted that if it paid more for gas, Russia should pay market prices for transit.

But Putin said Sunday that Russia offered Ukraine the "20 percent discount" on the condition that the discounted transit price remain in place for 2009. Beginning on Jan. 1, 2010, however, Ukraine will pay full price for gas and Russia will pay market prices for transit, he said.

Russia currently pays $1.7 to transport 1,000 cubic meters of gas for 100 kilometers (62 miles), which last year amounted to close to $3 billion. Putin has said the market price is about double this.

The global economic crisis has hit Russia hard. With the dramatic fall in the price of oil — the country's main source of revenue — Russia is facing a budget deficit this year for the first time in a decade. Industrial production has slowed and the ruble has come under huge pressure, losing nearly 30 percent of its value since the summer.

Ukraine's economy, however, is in much worse shape. It has been battered by the drop in world prices for steel, the heart of its export-oriented economy, and is heading into a painful recession this year.

Ukraine is heavily dependent on Russian gas and it is not clear how it will manage to pay for the huge amount needed to run its outdated heavy industries and heating systems.

Putin and Tymoshenko made no mention of the more than $600 million that Gazprom claims Ukraine still owes for 2008 supplies.

Russia stopped shipping gas to Ukraine for domestic use on Jan. 1 when the countries could not agree on a price. It then accused Ukraine of siphoning off gas bound for Europe and turned off the taps entirely on Jan. 7.

Russia resumed piping a limited amount of gas toward Ukraine on Tuesday after the EU secured a deal for its monitors check flows, but the gas did not reach Europe. Russia says Ukraine is blocking shipments to European consumers, while Kiev says Russia wants to send gas along a route that would disrupt supplies to Ukrainian consumers.

Geopolitical struggles over Ukraine's future and export routes for the energy riches of the former Soviet Union underlie the commercial dispute.

Russia and Ukraine have been at odds since the 2004 Orange Revolution brought Yushchenko to power. His avid push for Ukraine to join NATO and the EU has angered Moscow.