Last updated: June 16, 2014 3:50 pm

Russia cuts off gas supplies to Ukraine

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epa04260564 (FILE) A file photo dated 16 December 2008 of a Ukrainian worker turning of a tap at the gas-compressor station 'Bobrovnytska' in Mryn village, about 130 km of Kiev, Ukraine. Russia has stopped delivering gas to Ukraine, but the country has enough reserves until December, the country's energy company said 16 June 2014. Ukraine is asking the EU to allow a reverse flow of gas from Slovakia, Naftogaz Ukraine CEO Andriy Kobolev said. EPA/SERGEY DOLZHENKO©EPA

Russia cut gas supplies to Ukraine for the third time in eight years on Monday, adding an economic dimension to an already worsening security crisis between Moscow and Kiev.

Gazprom, Russia’s state-controlled gas company, said it would now only supply Ukraine with gas paid for in advance after a weekend of round-the-clock negotiations failed to secure a compromise deal.

The supply shutdown came as tensions between Kiev and Moscow were already running high following the killing of 49 Ukrainian servicemen by pro-Russia separatists over the weekend – the single deadliest rebel strike since Ukraine launched a security crackdown in its restive eastern provinces in April.

Ukraine has blamed Russia for fanning the violence. On Monday, Arseniy Yatseniuk, Ukraine’s prime minister, said during a cabinet meeting that Gazprom’s move was “part of the general plan of Russia to destroy Ukraine”.

“Ukrainians will not pull $5bn out of their pockets a year so that Russia can use this money to buy arms, tanks and planes and bomb Ukrainian territory,” he said.

Petro Poroshenko, Ukraine’s new pro-western president, is to propose a “peace plan” later this week in his most extensive effort to contain the crisis since taking office earlier this month.

The plan will include a near-term ceasefire if separatist rebels in the eastern Donetsk and Luhansk regions put down their arms as well as constitutional changes to give greater authority to regional governments.

But the rebels pressed their campaign on Monday, paralysing the regional financial system in Donetsk by seizing the regional central bank, treasury and tax collection offices, according to the government.

Previous “gas wars” between Russia and Ukraine in 2006 and 2009 resulted in disruptions in supplies to Europe, which receives some 15 per cent of its imported gas through Ukraine.

Analysts said an immediate energy crisis was unlikely because both Ukraine and gas buyers in Europe have built up plentiful stocks after a mild winter. Benchmark spot gas prices in Europe, which have dropped by almost 40 per cent this year, rose just 2 per cent on Monday.

Gazprom – which relies on exports to Europe for a large share of its revenues – has stressed that it will continue to deliver gas to European customers, including increasing supplies through routes that bypass Ukraine, if necessary.

The Russian company’s decision to turn off the taps marks the culmination of a financial dispute that has been simmering for months. Gazprom had threatened to require advance payment for gas deliveries last month after Kiev racked up billions of dollars of unpaid debts, but delayed the move amid EU-brokered talks to find a compromise.

Those talks ended in the early hours of Monday morning with both sides intransigent.

“In fact we couldn’t really discuss because Ukraine insisted only on one position,” said Alexei Miller, chief executive of Gazprom, referring to several recent rounds of negotiations aimed at resolving the deadlock.

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Gazprom: In the pipeline

March 2014: Lex on the Russian gas group’s Ukraine exposure.

Gazprom said it was willing to resume talks if Ukraine paid all of the $4.5bn it says it owed. Ukraine insisted it would not pay until it has a deal for long-term lower gas prices.

“We have almost 14 billion cubic metres of gas stored. We have time and the opportunity to solve this issue, in the very least before December,” Andriy Kobolyev, the head of Naftogaz, Ukraine’s gas company, told the cabinet in Kiev on Monday.

Günther Oettinger, European energy commissioner, said that Gazprom had refused to accept a European compromise proposal under which Ukraine would have paid $1bn of its debts immediately, with the rest to be settled over the year.

In a further escalation, both sides filed multibillion-dollar legal claims. Gazprom said it had filed a complaint in Stockholm over the $4.5bn debt, and its chief executive Alexei Miller added he did not exclude the possibility of filing more law suits against Naftogaz, Ukraine’s state energy company.

At the same time, Naftogaz said it had filed a claim against Gazprom seeking $6bn reimbursement for overpriced gas purchased since 2010 and “a fair and market price” for future supplies.

Vahram Chuguryan, of Eustream, the Slovak gas company, said that no reduction in gas pressure or supply to the EU had been recorded at Velke Kapusany, the point where four pipelines come into the bloc from Ukraine.

Additional reporting by Kathrin Hille in Moscow, Stefan Wagstyl in Berlin and Neil Hume in London

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