Gazprom stopped gas supply to Ukraine on January 1, due to unpaid debt. A quarter of previous year's amount, 400,000 cubic metres, is still passing through Ukraine, as Gazprom has vowed to maintain supplies to Europe.

Both Ukrainian President Viktor Yushchenko and Prime Minister Yulia Timoshenko have appealed to Russia not to cut gas supplies to the country and to continue talks. They've also named the price their country is prepared to pay for the gas: US$201 per 1000 cubic metres, which is almost US$50 below the price negotiated with the Russian side.

Ukraine has also offered guarantees of undisrupted transit of gas to Europe and proposed inviting European partners to the negotiating table.

Earlier Ukraine was threatening to confiscate Russian gas passing through the country, refusing to guarantee supplies to Europe as Russia promises to stop gas supplies to Ukraine due to debts. Gazprom called Ukraine’s reaction ‘blackmail’.

Late on Wednesday Miller stated that talks with Ukraine had failed. He also said that some politicians in Kiev are seeking confrontation with Russia over gas.

Earlier Russia offered Ukraine a preferential price for gas supplies, but Kiev turned it down, that's according to Russia's Prime Minister Vladimir Putin who had briefed President Dmitry Medvedev on talks to find a solution.

Meanwhile, Gazprom says Ukraine is threatening to confiscate Russian gas passing through the country and is refusing to guarantee supplies to Europe – a move the Russian energy giant calls blackmail.

The contract for Russian gas supplies to Ukraine expires on December 31, 2008 but under the agreement, supplies can be cut starting 10 am January 1, 2009.

The Russian gas giant says it has notified the Czech Government, set to become the new President of the EU on Thursday, about what it calls Ukraine’s blackmail.

“Such a position of Ukraine is nothing but blackmail. Russia, Gazprom and Eastern Europe are being threatened. I have already spoken to some of the European colleagues, including the Czech Republic’s ambassador, and informed them that we are dealing with a blatant case of blackmail,” Deputy Chairman of Gazprom’s Management Committee, Aleksandr Medvedev told journalists. “There is no rational explanation to this. It reminds me of an old Russian joke, that says: ”dear neighbours – give me some water, please, though I’m so hungry, that I have no place to sleep."

Naftogaz says it has transferred more than $US 1.5 billion to a mediating company to settle payment for November and December.

The Ukrainian President’s office and the gas monopoly Naftogaz have confirmed that the payment has been made.

“It will be a hard cash payment in accordance with the current debt. This concerns payments for gas from November to December. After that we can say that the debt is settled, proceed with the contract and normalize our relationship with Gazprom,” Valentin Zemlyansky, Naftogaz spokesperson, said.

As the money has not reached Gazprom yet, the Russian energy giant says it is still keeping the decision to cut supplies to Ukraine starting on January 1, 2009.

“Gazprom has already created a command centre. It has started preparatory work for gas a turn-off. In the event that Ukraine goes to the European market price from the 1st of January 2009, then the price for gas will be $US 418 per 1,000 cubic meters,” Gazprom CEO Aleksey Miller, said

Gas supplies to Europe at risk

Earlier Gazprom held several video press conferences, including one with London, warning European consumers of possible gas supply disruption. Spokesman Sergey Kupriyanov then pointed to history, alerting to the possibility of Ukraine siphoning off Russian gas intended for European customers.

“Looking at the way the Ukrainian partners are meeting their obligations on the supply contract, we can’t be 100% confident that they will perform their commitments on the transit contract in full measure. Gazprom will do its best to meet all the obligations to European partners,” said Kupriyanov.

Ukraine’s President Yushchenko, for his part, stated no matter how the situation develops the supplies to Europe will stay unhampered.

Legal issues

Time is ticking away, with no agreement yet reached between Gazprom and Naftogaz. An October memorandum signed between Russia and Ukraine set December 31 as the date by which outstanding debts need to be paid. This must happen before a new contract can be signed.

Gazprom says that cash-strapped Ukraine is unable to come up with the total $US 2 billion it owes, and it has proposed non-financial means to settle its debt. One involves payment with gas in Ukrainian storage. Another involves accepting the debt as prepayment for the transit of Russian gas through Ukraine to Europe, for which Russia pays its neighbour. These options, however, were rejected by Kiev.

Market rumors suggest that Ukraine may be waiting for a better gas price later in the year. It is expected that gas prices will fall in the wake of the collapse in oil prices. Aleksey Bogatirev, Analyst at United Communication, says Ukraine has enough gas in storage to last about four months.

“The current gas price is calculated according to a gas price formula based on the oil price over nine months. It is possible that gas prices will be lower, but to what extent is unknown. And by awaiting better prices, the Ukrainian government may create a disastrous situation in Ukraine, should gas reserves run out,” he said.