Image: Russia's natural gas pipeline
Sergei Chuzavkov  /  AP
A gas pressure gauge on Russia's main natural gas line is seen through two stockpiled pipes near Kiev, Ukraine. Russia cut all natural gas supplies to Ukraine after talks broke down over payments for past shipments and a new energy price contract for 2009.
updated 1/1/2009 3:32:46 PM ET 2009-01-01T20:32:46

Russia made good on its threat to cut off all natural gas supplies to Ukraine on Thursday — but the two uneasy neighbors took great pains to make sure their contract dispute would not leave Europe short of gas just as winter set in.

Overshadowing their confrontation was the specter of 2006, when a similar dispute interrupted gas shipments to many European countries for three days. But both Russia and Ukraine now have strong interests in proving to Europe they can be reliable energy partners, and they assured other European nations they would not be affected.

The cutoff was being closely watched in the European Union, which depends on Russia for about a quarter of its gas — with some 80 percent of that delivered through pipelines controlled by Ukraine.

"I believe we are close to accepting a compromise solution," Ukrainian President Viktor Yushchenko said in a statement Thursday. He said he expected talks to resume in the next day or two and to be concluded by Orthodox Christmas on Jan. 7.

White House spokesman Gordon Johndroe urged both sides to keep in mind the humanitarian implications of any interruption of gas supply in the winter.

"The predictable flow of energy to Ukraine and the rest of Europe under market-based, transparent conditions is essential for stability and reliability in regional and global energy markets," Johndroe said in a statement from Washington.

Russia's gas monopoly Gazprom shut off gas supplies after talks broke down over Ukraine's payments for past shipments and a new price contract for 2009.

In 2006, much of the blame for the supply disruption fell on Russia, which was accused of using its energy resources as a political weapon to punish Ukraine's Western-leaning government. European countries then began to question Russia's reliability as an energy partner and look for ways to diversify their supplies.

On Thursday, Gazprom said it had boosted natural gas deliveries through other pipelines to Western Europe.

Internal Ukraine divisions
Ukraine's reputation suffered less in 2006, although it was accused of siphoning off gas intended for Europe. This time, though, Ukraine's position has appeared weaker, in part because of the failure of its president and prime minister, bitter political rivals, to agree on a common negotiating position.

But early Thursday, Yushchenko and Prime Minister Yulia Tymoshenko issued a joint statement with a new pricing offer. They said Ukraine has enough gas in storage facilities to meet its own needs "for a long time" and stressed that they would guarantee the uninterrupted transit of natural gas through Ukrainian territory to Europe.

Since the 2006 crisis, European countries have built up their gas reserves and would be unlikely to see any disruption for several weeks, said Chris Weafer, chief strategist at Uralsib bank.

The deadlock over gas supplies reflects the deep political split between Moscow and Kiev. Yushchenko has angered the Kremlin through his efforts to build ties to Western Europe and his support of Georgia in its August war with Russia.

But the division within the Ukrainian leadership has proved a bigger obstacle.

"A big reason we got to this point is that there has been no clear management of the situation in Kiev," Weafer said.

The president had wanted to avoid a conflict so as not to risk losing good will with the EU, Weafer said, while the prime minister seemed inclined to push the dispute to the point where she could intervene at the last minute.

European Commissioner for Energy Andris Piebalgs said the situation will be monitored closely.

"The EU trusts that we can count upon assurances given that gas supplies to the EU will be unaffected," he said.

Gazprom had demanded Ukraine paid off all of a $2.1 billion debt and sign a deal setting prices for 2009 deliveries by midnight Wednesday. Neither was done.

The Ukrainian gas company Naftogaz said it covered the debt when it transferred $1.5 billion on Tuesday. Gazprom, however, claims Ukraine owes $600 million more in fines.

Stickier issues are how much Ukraine will pay for natural gas in 2009 and if Russia will pay more to use Ukraine's pipelines.

After first insisting that Ukraine pay $418 per 1,000 cubic meters of gas in 2009, more than double the $179.50 it paid the previous year, Gazprom offered a contract Wednesday with gas set at $250.

Ukrainian officials countered early Thursday with an offer to pay $201 if Russia agreed to raise the price it pays to use Ukraine's pipelines from $1.70 to $2 per 1,000 cubic meters per 100 kilometers.

Later Thursday, Naftogaz director Oleh Dubina said Ukraine was willing to pay $235, with a transit fee of $1.80.

But Gazprom CEO Alexei Miller then issued a statement saying since Ukraine had rejected the $250 offer, it would be charged the current European price of $418.

The price most West European countries pay, however, is set to fall sharply in the spring as a result of the steep drop in the price of oil.

Volodymyr Soprykin, energy analyst with the Razumkov center in Kiev, predicted the dispute would be solved in the coming days.

He said Ukraine was forced to rely on its reserves, which were running out, while Russia would eventually have too much gas in its pipelines and would have to shut down or put its gas exploration wells on standby, a technically complicated and costly ordeal.

"Gas wars are highly bad for both sides, a compromise will be found," Soprykin said.

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