Ukraine's economy, already heading into its worst recession for a decade, can ill afford a steep rise in gas prices and investors are closely watching the impact of the New Year's Day severance of Russian gas supplies.

'We have asked chemical producers to cut gas consumption by 50 per cent. That cut is about 15 million cubic metres of gas a day,' Volodymyr Trikolich, deputy head of state-run Naftogaz, told reporters in Kiev.

'They started to reduce consumption after lunch yesterday. I hope we will resume gas supplies tomorrow,' he said.

Ukraine's largest chemical producer, the Odessa Port Chemical Plant (OPZ), said it had completely stopped production due to reduced gas supplies. OPZ is a major producer of ammonia and fertilisers.

'The enterprise was fully halted on Wednesday. We are now waiting for the gas,' an official from OPZ said by telephone.

Sinking world demand has hammered Ukraine's steel and chemicals sectors, which account for more than half of exports, and ended a domestic consumer boom.

Chemical producers make up 12 perc ent of exports and investors are focused on the worsening current account deficit after the hryvnia currency hit historic lows in mid-December.

Naftogaz has said it also planned to reduce supplies to metals companies, though no reductions have been reported yet.

In a sign metals companies may be seeking alternative energy sources to replace gas, the Association of Ukrainian Coke Producers said coke production had risen to 38,000 tonnes a day from 32,000 tonnes a day in December, Interfax reported.

The economy is set to contract by 3 to 5 per cent in 2009 and many indebted Ukrainians are now facing rising unemployment after industrial output sank 20-30 per cent towards the end of 2008.

Kiev heating
With factories facing less gas, the gas cut-off may now be starting to have an direct impact on ordinary Ukrainians.

Many blame their own politicians for failing to resolve the gas dispute with Russia, though Ukraine has been celebrating New Year and Orthodox Christmas for most of the past week.

The main heat and electricity producer for the capital, Kiev, said on Thursday it had started using fuel oil to compensate for falling gas supplies, and residents reported a drop in temperature in their apartments.

It was not clear whether gas deliveries fell because of the dispute with Russia or a long-standing local row over bills.

Some residents said temperatures in their apartments had fallen noticeably. The temperature in Kiev was about minus 8 degrees Celsius on Thursday morning, warmer than the day before, when temperatures fell to lower than minus 20.

Ukrainian towns and cities are heated by central utilities which pipe hot water into flats and houses, while villagers make use of wood and coals.

'We are able to keep the water temperature at 64 to 68 degrees Celsius by using fuel oil, the reserves of which are intended for emergency situations,' Kievenergo said, adding that its gas supplies started falling on Jan 6. -- REUTERS