Ukraine successfully avoided another energy standoff with Gazprom, which yesterday signed an agreement spelling out terms for repaying what Moscow said was now $2bn debts for natural gas shipments to Kiev.

The agreement, signed during a trip to Russia's capital by Viktor Yanukovich, Ukraine's outgoing and Moscow-friendly prime minister, aimed to avoid a repeat of the 2006 pricing dispute that saw Gazprom cut shipments to Ukraine, triggering supply shortages in Europe.

"We created a mechanism allowing us to regulate this issue," Mr Yanukovich said.

The agreement was signed by the Russian gas monopoly and its partners in supplying gas to Ukraine - Swiss-registered Rosukrenergo and Ukrgazenergo, a Russian-Ukrainian joint venture. As part of the agreement, Kiev's government agreed to ensure the companies repaid debts by November 1, partially in cash and partially by transferring gas held in vast underground storage facilities.

The announcement follows Gazprom's threat last week to cut supplies if Ukraine failed to settle $1.3bn (€922m, £638m) debts by November 1, raising concerns of new shortfalls to Europe. About 80 per cent of Russian gas exports to Europe pass through Ukraine.

Viktor Zubkov, Russian prime minister, said the debt had risen by early October to $2bn, although Rosukrenergo, monopoly supplier of gas to Ukraine, said its overdue debt to Gazprom stood at only $929m yesterday. Gazprom would not comment on why, how or if the debt had increased from $1.3bn to $2bn.

Mr Zubkov said Rosukrenergo would transfer about $1.2bn worth of gas back to Gazprom. He said just over $900m in additional payment would be paid in cash by the companies involved.

Rosukrenergo currently has 10bn cubic metres stored in Ukraine's underground storage facilities near the EU border.

Kiev admits domestic consumers have been slow in paying gas bills. But it insisted much of the debt was owed not by the Ukrainian state - as Gazprom initially charged - but by two Gazprom-appointed intermediaries in charge of exporting gas to Ukraine and reselling it on the domestic market.

Gazprom owns 50 per cent of Rosukrenergo, which in turn owns 50 per cent of Ukrgaz-energo, the supplier of gas to Ukrainian industry. Both have built massive stockpiles of gas but had trouble paying Gazprom due to the global credit squeeze.

While the debt deal could avoid supply cut offs, observers warned that it significantly boosted Gazprom's leverage in future price talks with Ukraine, whose pipeline system serves as the key artery for Russian supplies to Europe.

Control over this gas held underground could enable Gazprom to squeeze Ukraine by reducing supplies while keeping shipments to Europe stable.

Gazprom's latest threat against Kiev has been viewed as politically motivated, coming after parliamentary elections in Kiev.

James Sherr of the UK's Defence Academy, a research and educational institute for defence staff, said: "Gazprom is squeezing Ukraine and other postSoviet states to get out of a trap of its own making: underinvestment in new production."