Russia Cuts Gas Supply to Ukraine, Europe at Risk

MOSCOW - Russia cut gas supplies to Ukraine on Sunday in a dispute that appeared to hit deliveries to a wintry Europe just as Moscow takes over as chairman of the Group of Eight hoping to showcase its reliability as an energy source.

The Russian state monopoly, Gazprom, said it had cut supplies to Ukraine by a quarter -- the level of Ukraine 's own imports -- after Kiev refused to sign a new contract requiring it to pay four times as much.

The switch-off already seemed to be making itself felt further west, with deliveries down in Hungary and Poland.

Western Europe imports 25 percent of its gas from Russia and most of that is delivered by pipelines running across Ukraine . The European Union said it did not expect shortages but was concerned by the standoff.

Ukraine 's Naftogaz energy company accused Russia of brinkmanship that was jeopardising Europe's supplies. European gas demand is near peak levels because of freezing weather.

Gas Weapon

Though Russia says it is purely a business dispute, the row has fed concern that the Kremlin is prepared to use its vast energy resources as a political weapon.

Ukraine 's Western-leaning president, Viktor Yushchenko, has irked Moscow by trying to take his ex-Soviet state on Russia's western border into NATO and the European Union.

Ukrainian officials say that is why the Kremlin is punishing Ukraine with such a huge price increase while letting more Moscow-friendly ex-Soviet states such as Belarus pay far less.

Russia took over the annual presidency of the G8 club of industrialised democracies for the first time from Britain on New Year's Day, and its tenure will come under close scrutiny.

"Russia wants to make energy security its key message to the G8 community, and simultaneously it is becoming a source of danger," said Valery Nesterov, energy analyst at the Troika Dialog brokerage in Moscow.

French Industry Minister Francois Loos told Reuters Russia had given assurances about its gas exports, and that its G8 presidency meant it would act with a "sense of responsibility".

Blame Game

Yushchenko stuck to his position that Ukraine was prepared to pay Moscow's asking price, but not immediately.

" Ukraine is ready to move to a market price from 2006. We do not need loans, we are ready to pay ... But it should not be a virtual price but a real price following the European model," he said after a 3-hour crisis meeting with top officials.

Moscow wants to raise the price of gas it sells to Ukraine to $230 per 1,000 cubic metres from the current $50 -- a level that reflects Soviet-era subsidised rates.

Gazprom spokesman Sergei Kupriyanov said enough gas was still being piped via Ukraine to maintain deliveries to other countries, and if they were not getting all their gas, it meant Ukraine was tapping into it.

Eighty percent of Russian gas exports to western Europe pass through Ukraine .

"We have information from the ground that shows Ukraine has started illegally siphoning off Russian gas destined for European consumers," Kupriyanov said.

The chief European importers of Russian gas are Germany, Italy and France, which would have to draw down reserves or seek alternative supplies if there was a major supply disruption.

Energy ministers of Germany, Italy, France and Austria have made a joint appeal to Moscow and Kiev to ensure a steady flow of gas despite the stand-off. Energy officials from EU member states hold an emergency meeting on Jan. 4.

Hungary's gas wholesaler MOL said its Russian deliveries via Ukraine had fallen by more than 25 percent, forcing it to order big consumers to switch to oil where possible.

Poland's supplies were down by 14 percent, but officials hoped to make up for lost pressure from the Ukrainian supply point by increasing the amount gas flowing in from Belarus.

Homes and businesses in Ukraine were still receiving gas on Sunday thanks to reserves and the country's own modest output. But it was expected shortages would begin to bite within days.

Officials say Ukraine has enough in reserve to see households through the winter, but are making no comment on the security of supplies to industry.

Yushchenko, propelled to power in the "Orange Revolution" a year ago, has linked the gas switch-off to the start of campaigning for a parliamentary election on March 26 in which he faces a tough challenge from pro-Moscow parties.

Ukraine has threatened to retaliate by raising the rent that Russia's navy pays to use the Ukrainian port of Sevastopol as headquarters for its Black Sea fleet.

Additional reporting by Anatoly Titkin, Dmitry Zhdannikov and Meg Clothier in Moscow, Olena Horodetska in Kiev, Jeff Mason in Brussels, Mark Heinrich in Vienna and Balazs Koranyi in Budapest