Ukraine and Russia tackle gas crisis as tensions spike

Russia's Prime Minister Vladimir Putin (right) and Gazprom CEO Alexei Miller attend a gas pipeline opening ceremony in Russia's far eastern city of Vladivostok, in this Sept 8, 2011, file photo. Ukraine and Russia were set on Wednesday to resume
Russia's Prime Minister Vladimir Putin (right) and Gazprom CEO Alexei Miller attend a gas pipeline opening ceremony in Russia's far eastern city of Vladivostok, in this Sept 8, 2011, file photo. Ukraine and Russia were set on Wednesday to resume crunch EU-mediated gas talks aimed at ending a months-long supply cut that threatens to hit swathes of Europe this winter. -- PHOTO: REUTERS

KIEV (AFP) - Ukraine and Russia were set on Wednesday to resume crunch EU-mediated gas talks aimed at ending a months-long supply cut that threatens to hit swathes of Europe this winter.

The latest negotiations in Brussels come a day after Russia stirred tensions with its war-torn neighbour still further by announcing plans to recognise the disputed leadership polls pro-Kremlin insurgents in eastern Ukraine intend to stage on Sunday.

Russian Foreign Minister Sergei Lavrov's comments drew a sharp rebuke from US Secretary of State John Kerry and coincided with a decision by EU leaders to keep sanctions in place against Moscow for its alleged meddling in Ukraine.

The former Soviet nation staged its own general election on Sunday that saw pro-European forces score a decisive victory at the expense of parties that once backed closer ties with Russia but now prefer to tread a more centrist course.

The parliamentary polls saw Western-backed President Petro Poroshenko's political bloc and a party led by Prime Minister Arseniy Yatsenyuk come close to grabbing 50 per cent of the votes needed to form their own government.

Poroshenko is busy negotiating the makeup of a new coalition that is all but certain to keep Yatsenyuk as cabinet leader - an outcome cheered by Western lenders who view him as a market-friendly proponent of economic change.

The consultations also include a new pro-European party called Samopomich (Self-Reliance) that finished third thanks to strong backing from the more nationalist and conservative voters in Kiev and western Ukraine.

Several acrimonious rounds of gas talks have failed to resolve a dispute stemming from Kiev's refusal to pay a higher rate imposed by Moscow in the wake of the February ouster of Ukraine's Kremlin-backed president.

Russia's state energy holding company Gazprom cut Ukraine's gas deliveries in June - the third such interruption in less than 10 years.

The halt did not immediately impact European clients that receive about half their Russian shipments through Ukraine.

But EU nations fear that Ukraine - its fuel supplies running critically low heading into the winter - may be forced out of desperation to tap into the gas it transports westwards.

The two sides have reached a tentative price deal that would see Russia lower its rate by about 20 per cent to US$385 (S$481) per 1,000 cubic metres for the coming six months.

But there is still no agreement over Ukraine's debt repayments or the charge for gas deliveries in future years.

Ukrainian Finance Minister Oleksandr Shlepak said Russia's refusal to budge from its demand for immediate cash payments reduced the chances of any firm agreements emerging on Wednesday in Brussels.

"I have the impression that no one wants an agreement - I mean, first and foremost, the Russian side," Ukranian media quoted Shlepak as saying on Tuesday.

Europe imports slightly more than a third of all the gas it consumes from Russia - a figure that has held steady for the past decade despite EU efforts to find a way to reduce that dependence.

And analysts warned that the threat of a gas cut would hang over Europe - clouding still further its prospects for economic recovery - until a final agreement between Moscow and Kiev is reached.

"A gas deal is critical. Until a deal has been formally agreed the risk of failure and the threat of disruptions to EU customers remain," said Chris Weafer of Moscow's Macro-Advisory consultancy.

"The issue for Moscow is who will pay both the arrears of US$1.45 billion immediately and a further US$1.55 billion by the year-end, and the upfront winter gas supply cost of approximately US$2.0 billion."

The European Commission said last week that Kiev had requested a further 2 billion euro (S$3.24 billion) loan from Brussels to help cover its Moscow gas debt.

EU leaders are expected to approve the additional assistance after voicing growing concern over the lingering spat.

Germany Chancellor Angela Merkel called on Russian President Vladimir Putin on Friday "to firmly support the search for a swift solution before the approaching winter".