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Tuesday, January 20, 2009

Russia, Ukraine sign gas deal, end standoff

By Nataliya Vasilyeva, Associated Press Writer
Monday January 19, 5:38 pm ET

Russia, Ukraine sign gas deal, paving way to end cutoff of natural gas shipments to Europe

MOSCOW (AP) -- Russia and Ukraine pledged to restore natural gas supplies to Europe after signing deals Monday to end a bitter dispute that led to a chilling two-week cutoff of shipments.

Europeans, who normally get about one-fifth of their gas from Russia via Ukrainian pipelines, anxiously awaited for the fuel to start flowing.

Russian Prime Minister Vladimir Putin and his Ukrainian counterpart Yulia Tymoshenko signed the documents at Putin's government headquarters on the Moscow river. They resulted from an outline agreement they had clinched in late-night talks Sunday as heads of Russia's state-run natural gas monopoly Gazprom and the Ukraine's Naftogaz.

"As a result of intensive and lengthy talks we have reached agreement on all issues concerning natural gas supply to Ukraine and its transit to Europe," Putin said. He said Gazprom had been instructed to resume shipments bound for Europe that had been halted since Jan. 7 as Moscow and Kiev argued over 2009 gas prices and allegations that Ukraine was stealing gas destined for Europe.

Tymoshenko said the gas would be pumped toward Europe as soon as it enters the Ukrainian pipes. But neither official said exactly when the gas would begin flowing.

Officials said the restored gas shipments could take up to 36 hours to cross Ukraine, which is the size of France, and reach European customers.

EU officials were taking a wait and see attitude.

"We now need an indication of the precise time that gas deliveries will be resumed. Our monitors will verify when the gas actually starts to flow," the European Commission said.

Europe gets about 20 percent of its total natural gas needs from Russia via Ukrainian pipelines, and the cutoff hit hard at some countries, such as Bulgaria and Slovakia, that rely almost entirely on Russia for gas. In the Balkans and other eastern European nations, the crisis has shut factories and left millions of people to shiver in unheated homes.

The confrontation has deeply shaken Europeans' trust in both Russia and Ukraine as reliable energy suppliers -- something each has repeatedly insisted it is, while blaming the other for the supply cutoff.

More than 15 nations have been forced to scramble for alternative sources of energy. The dispute was further complicated by geopolitical struggles over Ukraine's future and over lucrative export routes for the energy riches of the former Soviet Union.

Before dawn Sunday, Tymoshenko and Putin negotiated a preliminary deal for Ukraine to get gas with a 20 percent discount from this year's average European price, which Russia says is $450 per 1,000 cubic meters. That would double the price Ukraine paid in 2008.

However, natural gas prices for Europe are expected to fall sharply later this year, due to the reduction in oil prices. By midsummer, Ukraine could be paying as little as $150 for 1,000 cubic meters, said Ronald Smith, a strategist at Moscow's Alfa Bank.

Russia, meanwhile, will not have to pay Ukraine higher transit prices to use its pipelines this year. Putin said in 2010, Ukraine will have to pay full price for Russian gas, and Russia will pay market prices for transit.

Tymoshenko said the deal would save Ukraine billions of dollars. But there was no celebration in the camp of her political rival, President Viktor Yushchenko.

Citing Monday's deal, Yushchenko's energy adviser Bohdan Sokolovsky said Ukraine will pay $360 per 1,000 cubic meters in the first quarter of this year, and then a lower price. He said the average price for 2009 should be $235-$240 -- still a significant increase from the $179.50 it paid last year.

Sokolovsky said Ukraine was giving more than it was getting out of the deal. He said that by continuing to pay last year's transit fee of $1.70 per 100 kilometers, Russia was getting a 60 percent discount -- as opposed to a 20 percent reduction for Ukraine.

"This is not a symmetric approach," he told the AP.

Sokolovsky said Ukraine will face major economic difficulties as a result of the price increase. "This will be a difficult phase, but I hope a temporary one."

Associated Press writers Yuras Karmanau and Maria Danilova in Kiev, Ukraine, and Jim Heintz and Steve Gutterman in Moscow contributed to this report.

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