Moscow cuts off Ukraine gas in price row

Russian relations with Ukraine's "orange" government sank to a new low yesterday when Moscow first stopped deliveries of natural gas to Kiev indefinitely because of a bitter price row and later accused Ukraine of stealing its gas.

Moscow's decision to get tough with Ukraine appeared to disrupt Russian gas supplies to western Europe, much of which is piped across Ukraine. In the first sign that the switch-off was having an effect further west, Hungary's gas wholesaler, MOL, said the pipeline pressure of its Russian supply had fallen by 5 per cent.

Officials from Gazprom, Russia's state gas monopoly, claimed Ukraine had started to dip into exports earmarked for other customers.

"We have information from the ground that shows Ukraine has started illegally siphoning off Russian gas destined for European consumers," Sergei Kupriyanov a spokesman for Gazprom, said. He added that Russia intended to fully honour its export commitments.

The EU relies on Russia for about a quarter of its gas needs, with countries such as Austria almost entirely dependent on Moscow. EU energy experts are due to meet on 4 January to discuss what could rapidly become a serious problem.

The dispute comes at a sensitive time for Russia, which assumed the G8 presidency yesterday, a role it hopes will enhance its international prestige. Moscow does not want its year-long presidency to be spoilt and is keen to be seen in the West as a reliable energy partner.

With the world's largest gas reserves and its eighth biggest oil reserves, Russia believes it can regain some of its lost Soviet-era power by carving out a new role for itself as a natural resources superpower.

The dispute with Ukraine erupted after Moscow demanded that Kiev foot the bill for a nearly fivefold increase in the price of Russian gas in 2006. It said the price Ukraine paid in 2005 - $50 (£29) per 1,000 cubic metres - was an outdated Soviet-style subsidy and that it was time Ukraine paid the full market price, which Russia said was closer to $230 per 1,000 cubic metres. However, Ukraine balked at the price rise, which it said would devastate its economy and suggested the move was driven more by Moscow's dislike of its pro-Western government than by free-market economics. Other former Soviet states pay far less for Russian gas, with Moscow-friendly governments getting particularly good deals, Kiev said. Belarus now gets the cheapest natural gas in the Commonwealth of Independent States, paying just $47 per 1,000 cubic metres. But Russia, which supplies around 30 per cent of Ukraine's gas, says Kiev no longer deserves special treatment.

Ukraine's desire to join the EU and Nato has irked Russia - as has President Viktor Yushchenko's victory at the end of 2004 over a pro-Russian presidential contender. Ostensibly keen to depoliticise the issue, Russian President Vladimir Putin has gone out of his way to be seen to be dealing fairly with the Ukrainians.

He offered a multibillion- dollar loan to help pay for the gas, and when that was refused offered to delay the price increase to the second quarter of this year provided Kiev signed a new annual contract.

However, negotiations went nowhere as Mr Yushchenko insisted his country was willing to pay a maximum of $80 per 1,000 cubic meters and said Russia was exerting unacceptable "economic pressure". Though the dispute is essentially about money, it is also political. Ukraine faces parliamentary elections in March which could alter the balance of power there.