Russia cuts gas to Ukraine

By Dmitry Zhdannikov and Sabina Zawadzki

MOSCOW/KIEV (Reuters) – Russia cut off the gas to its neighbor Ukraine on Thursday after a contract dispute but increased supplies to other European states to try to reassure customers worried about possible disruptions.

The European Union, which receives a fifth of its gas from pipelines crossing Ukraine, urged further negotiations to resolve the dispute and said all supply and transit commitments must be met.

A delegation from Ukrainian state-run gas company Naftogaz plans to travel to Moscow on Thursday evening for talks, a source close to the negotiations told Reuters.

Moscow and Kiev say they will honor their contracts to supply gas to European customers, who analysts say have enough reserves to manage without Russian supplies for days, not weeks.

The EU is keen to avoid a repeat of a January 2006 row when Moscow cut off supplies to Ukraine causing a brief fall in gas deliveries to other parts of Europe in mid-winter.

Russian gas export monopoly Gazprom halted supplies to Ukraine on Thursday morning after a failure to agree terms for 2009.

"We have fully cut off supplies to Ukraine as of 10:00 a.m. (2:00 a.m. ET) today," an official at Russia's Gazprom told reporters at company headquarters in Moscow.

Ukraine's Naftogaz said it had seen a reduction of pressure in its pipelines, and was pumping gas from its reserves.

Ukraine's pro-Western leaders, who have clashed repeatedly with the Kremlin over their ambition to join NATO, say they have enough gas stocks to last for months.

Gazprom said it had stepped up volumes for European consumers beyond Ukraine.

"Deliveries for export have been increased to 326 million cubic meters per day," Gazprom spokesman Sergei Kupriyanov told a news conference.

EU GAS SUPPLY

Ukraine's President Viktor Yushchenko has asked European Commission President Jose Manuel Barroso to get the EC to mediate, the Ukrainian mission in Brussels said. However, a Commission spokeswoman could not confirm the request.

The EU urged further negotiations. "All existing commitments to supply and transit must be honored," EU president the Czech Republic and the Commission said in a joint statement.

Pipelines that cross Ukraine carry about one-fifth of the EU's gas needs and are a major source of foreign currency revenue for Gazprom, Russia's biggest company.

The cut-off could tarnish Russia's reputation as a reliable energy supplier to Europe just several months after a war with Georgia pushed relations with the United States to the lowest level since the Cold War.

Although the cut-off does not apply to shipments to much of Europe, there could be a knock-on effect if it causes a drop in pressure in the transit pipelines or if Kiev halts flows to Europe to use them as a bargaining chip.

Germany's E.ON and BASF and Italy's ENI are among the biggest customers for Russian gas.

Countries in eastern and central Europe are likely to feel any disruption first because they are closer to the potential bottleneck in Ukraine. However, there were no reports of disruption on Thursday morning.

The reliability of energy supplies from Russia to Europe is likely to top the agenda of a meeting of EU ministers to be held in the Czech Republic next week.

A prolonged row could further undermine Ukraine's crisis-battered economy and politicians may be forced to take unpopular decisions, such as raising gas bills, as they gear up for a presidential election in 12 months.

Talks between Russian and Ukrainian officials failed to settle a dispute over the $2 billion Moscow said Kiev owed it in arrears for gas deliveries, and over the price at which Ukraine will buy Russian gas next year.

Gazprom had offered gas at $250 per 1,000 cubic meters, a steep rise from 2008's $179.50 but still around half the current European market price, albeit one that is set to fall sharply.

Ukraine's leaders have said they were prepared to pay $201 per 1,000 cubic meters.

Kiev is also proposing raising the transit tariffs that Russia pays to transport gas to Europe to no lower than $2 per 1,000 cubic meters of gas for 100 kilometers.