Deputy PM denies Russia would cut energy supplies

A new row over gas supply payments burst into the open on the eve of Ukrainian President Viktor Yushchenko's visit to Russia, threatening to complicate attempts to consolidate ties between Moscow and Kiev.

The pro-Western leader's talks with outgoing Russian leader Vladimir Putin in Moscow, which he visits tomorrow, will also expose the growing differences he has with Ukraine's Prime Minister Yulia Tymoshenko.

The rare talks between the presidents of two Slav nations that once formed the backbone of the Soviet Union were to have focused on strategic issues.

But a sudden new threat by Russian gas giant Gazprom to cut gas over payment arrears is certain now to take centre stage.

"Gazprom is flexing its muscles ahead of President Yushchenko and Prime Minister Tymoshenko's planned visits to Moscow," said Alexander Burgansky of Moscow-based Renaissance Capital brokerage.

"We do not believe the current stand-off should lead to any supply cuts to Europe and expect the matter to be swiftly resolved."

A row over gas supplies between the two countries in 2006 disrupted supplies to parts of western Europe.

Russian First Deputy PM Sergei Ivanov told reporters in Munich: "the payments were to be made on a monthly basis and since then we've been expecting those payments".

"We are just going to withdraw (the amount of gas supplied by Gazprom to Ukraine) because we will not engage in billions of dollars in charity anymore. At the same time it will have no consequences for other consumers of Russian gas or Asian gas.

"I hope very much that this problem will be solved and that the debt will be eliminated," he said."

Gazprom says it will cut off some supplies from Monday if what it describes as arrears of $1.5 billion are not paid by Ukraine's state energy firm Naftogaz which says it owes nothing.

"The Russian side is using all its might to try to drive Naftogaz, and Ukraine, into a corner," Naftogaz head, Oleh Dubyna, told the weekly Zerkalo Nedeli. "And all this is happening right before President Yushchenko's visit to Russia."

This year's contract, negotiated before Tymoshenko returned to office in December, set the gas price at $179.50 per 1,000 cubic metres, a 38 percent rise but still lower than most nearby countries.

Tymoshenko, due to visit Moscow on February 21, says intermediaries in the supply system are to blame for rising prices and wants them removed.

But Yushchenko urges caution against this, saying Ukraine enjoys the region's most favourable terms for gas.

"He's been fairly clear that it's the best deal in town. I'm not sure what he could actually do. Russia says it has a cast- iron contract," said Tim Ash of Bear Stearns brokerage.