A cutoff of fuel shipments to Ukraine could have a ripple effect across Europe, because Russia supplies a quarter of the gas that the continent uses, and most of it is delivered through Ukrainian pipelines.
Russia briefly followed through on a similar threat in 2006. Fuel shortages resulted as far away as Italy, and concerns grew about Europe's dependence on energy controlled by the Kremlin.
The current dispute centers on Russia's desire to charge higher prices for gas next year and collect more than $2 billion in debts run up by Ukraine for gas this winter. But as in previous years, the commercial issues have been complicated by Moscow's tense relations with Ukraine's fractured, pro-Western government.
Alexei Miller, chief executive of Gazprom, Russia's state-controlled gas monopoly, announced the collapse of talks and said the company planned to halt supplies for Ukraine at 10:00AM (2:00AM New York time).
"All responsibility for the situation rests on the Ukrainian side," he said.
Gazprom warned two weeks ago that it would suspend gas supplies if Ukraine failed to pay off its debts and sign a contract for next year's deliveries by midnight Wednesday. As the deadline approached, Miller said Ukraine had met neither requirement.
Russia stopped sending gas to Ukraine for three days in January 2006, but the current standoff could be more severe because the global financial crisis has left both countries more desperate for funds. Ukraine is struggling to avoid an economic meltdown, and Russia has been hit hard by falling energy prices.
In a news conference before the talks unraveled, Gazprom officials accused Ukraine of trying to "blackmail" Russia and the European Union, saying its state energy firm had threatened to confiscate gas intended for European customers if a contract with Russia could not be drawn.
Russian Prime Minister Vladimir Putin warned on state television of "quite serious consequences" for Ukraine's relations with Russia if Ukraine acted on that threat. He said that Ukraine signed a deal last year to deliver Russian gas to Europe and that the agreement remained in force until December 2010.
"We can recommend only one thing to our Ukrainian partners," said Russian President Dmitry Medvedev. "To make a reasonable decision quickly instead of dooming their own citizens to very great trouble."
The Ukrainian government, which says it has enough reserves to meet domestic demand for three months and has repeatedly promised safe transit for gas to Europe, denied it was trying to blackmail Russia. President Viktor Yushchenko "is calling for every effort to be made for the earliest possible signature of an agreement with Russia," said Bohdan Sokolovsky, the president's energy security representative.
Yushchenko issued a statement Tuesday saying that Ukraine had paid $1.5 billion to an intermediary firm and that the payment covered the cost of all gas deliveries in 2008. But Gazprom said it had not received the money and added that Ukraine owed $600 million more in late fees.
The two sides also appeared far from agreeing on a 2009 price for gas. Gazprom had demanded that Ukraine pay as much as $418 per 1,000 cubic meters of gas, more than double the $180 Gazprom charged this year. On Wednesday, it offered a contract with a price set at $250, which Putin described as a subsidized rate and a "humanitarian" gesture to a neighbor.
But Ukraine said the price was still too high, given declining energy prices around the world. Sokolovsky said Ukraine could accept the 40 percent price increase only if Russia also agreed to increase what it pays to use Ukraine's pipelines.
Some Ukrainian politicians have accused the Kremlin of trying to use the gas dispute to exploit Ukraine's economic crisis and weaken its Western-leaning government, which is seeking NATO membership and backed Georgia in its August war with Russia.
The gas standoff has contributed to a widening rift between Yushchenko and Prime Minister Yulia Tymoshenko, his former ally in the 2004 street protests known as the Orange Revolution. The two are expected to compete for the presidency next year, and each has accused the other of mishandling the dispute.
Tymoshenko has sought to position herself as the candidate better able to negotiate with Russia, and she struck a gas deal with Putin in October that she said would remove the influence of "corrupt" middlemen with ties to the president. Analysts say Moscow may be taking a harder line in negotiations in an attempt to undermine Yushchenko further.
Source: Washington Post