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Gazprom preparing to turn off gas to Ukraine

Gazprom Chief executive Alexei Miller told state television news Vesti-24 that "the countdown" in negotiations to avoid the cutoffs and ensure safe flows for supplies to Europe had "ground down to mere hours."

If Russia shuts of the taps in pipelines to Kiev, gas deliveries to Europe could well suffer. Over 80 per cent of Russian gas exports to European markets are shipped via Ukraine.

"If by the end of December 31, Ukraine does not make good on its debt, then there will be no basis for Gazprom to continue gas deliveries in 2009," Miller said, amid last-ditch negotiations with Ukrainian officials in Moscow.

Officials for Gazprom's counterpart in the negotiations, Naftohaz said there was still hope for a deal with the Kremlin before the year was out.

"We have not given up hope," Valentyn Zemliansky, a Naftohaz spokesman, said. "We (Ukraine) think we can get a new contract signed in time."

The current contract between Moscow and Kiev for gas deliveries and on-shipment to Europe expires with the New Year. The countries' negotiators are according to Ukraine's Channel 5 televison still miles apart on gas pricing for 2009.

While Gazprom refuses to discuss a new contract until its debt is repayed, the company's spokesman said Tuesday. It claims over 2 billion dollars for previous supplies to Kiev.

Gazprom has sent a letter of warning to European clients, launched a website and held regular press conferences to provide updates on the gas talks in an effort to reassure European clients.

In a similar dispute in 2006, Moscow blamed Kiev for siphoning off gas to European customers - sparking fuel shortages and price spikes as far away as Paris.

Ukrainian negotiators in recent weeks have asked Gazprom to adjust the future price of gas downward, and accept delayed payment of the debt Kiev has already run up - terms rejected outright by the Kremlin, according to a Zerkalo Tizheden' newspaper report.

Analysts say the country's crushing economic problems make it unlikely Kiev can reimburse the debt. Ukraine was recently forced to seek 14.5 billion dollars in credit from the International Monetary Fund.

Conditions applied to the money means it cannot directly be used pay for Russian gas arrears.

Gazprom spokesman Sergei Kupriyanov said Tuesday last-minute talks had turned to other possible forms of payments, such as future transit fees fees for gas to Europe.

Miller said Gazprom would ask for 418 dollars per 1,000 cubic metres from Ukraine under a new contract in 2009, if the two countries switch to market terms in gas trade. Kiev now pays 179.5 dollars per 1,000 cubic metres.

Ukrainian President Viktor Yushchenko's comments Saturday on the UT-1 television channel suggest a price of 200 dollars per 1,000 cubic metres was the maximum Ukraine could pay.

If Russia wanted Ukraine to pay international market price for gas, he said, then Russia should pay Ukraine in kind for pumping its gas through Ukrainian pipelines to European consumers.

European customers now pay a higher price to Gazprom, industry analysts expect the cost of gas to drop in coming months following the slump in global oil prices.

Oil prices respond faster to market changes because they are based on spot prices rather than long-term contracts. Gazprom, the world's largest gas producer, reviews gas prices to market every quarter under its European contracts.

In a report Tuesday, Gazprom announced profits for its second quarter nearly tripled on higher prices and sales.

But Gazprom's shares have plunged almost 75 per cent since their peak in mid-May amid the global financial crisis.

The company's report said it had downgraded projections on future cash flows in response to the "deteriorated operating conditions."