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Russia Steps Up Gas Pressure On Ukraine

An opposition rally on Independence Square in Kyiv drew tens of thousands last week.

An opposition rally on Independence Square in Kyiv drew tens of thousands last week.

KYIV/MOSCOW (Reuters) -- Russia has threatened to fine Ukraine for failing to buy enough gas in the first quarter, increasing pressure on its neighbor at a time when the World Bank said Kyiv's economy was contracting fast.

Aleksei Miller, chief executive of Russia's state-run gas giant Gazprom, told Reuters the corporation was in talks with Ukrainian counterparts over possible sanctions over lower than agreed gas imports.

"We are discussing this with our Ukrainian colleagues. This is spelt out in our agreements," he said.

The threat dealt a further blow to Ukraine, which is facing growing anger sparked by the authorities' handling of the economic crisis and political wrangling over the date of the next presidential election.

Gazprom had previously said it would not impose fines, in recognition of Ukraine's dire financial plight.

Russia's apparent rethink comes after Ukraine's leaders -- squeezed between traditional loyalty to former Soviet master Moscow and a desire to move closer to the West -- angered the Kremlin by signing an agreement in Brussels to overhaul Ukraine's ageing pipeline network.

Russia, which supplies a fifth of Europe's gas needs through Ukraine's pipelines, was furious that it had not been consulted.

Ukraine's state energy company Naftogaz said on April 7 it had paid its March gas bill to Gazprom.

Analysts believe that although the gas bill is set to decline as gas prices get adjusted to oil with a lag of six to nine months, it is only a matter of time before cash-strapped Ukraine runs out of the money it needs to pay Gazprom.

Downside Risks

Adding to Kyiv's woes, the World Bank predicted on April 7 that Ukraine's economy would contract by 9 percent this year, rather than the 4 percent it had forecast before.

Things could get worse, it added.

"We...still see downside risks to this forecast should the external environment deteriorate further and/or the authorities delay critical anti-crisis steps...." the bank said.

"To face the current economic downturn, slow the trend of rising unemployment, and lay the foundations for a quick economic recovery, a comprehensive, interlinked and consistent anticrisis urgently needed in Ukraine."

The bank also predicted that inflation, fuelled by a big devaluation of the hryvnya currency, would spiral to 16.4 percent this year against an earlier forecast of 13.6 percent. Inflation last year was even higher at 22.3 percent.

Ukraine's fractious politicians have yet to agree on putting in place a comprehensive anticrisis program quickly. Its leaders cannot even agree when to have the next presidential vote -- whether to hold it in October or January.

The International Monetary Fund has promised to send a mission this week to discuss the resumption of crisis lending, suspended after Kyiv's failure to enact sufficiently comprehensive anticrisis measures.

The main opposition party held its biggest rally in two years on April 6 in the capital, demanding the resignation of the country's leaders for failing to tackle the crisis.

Meanwhile, Russia sees an opportunity to increase its leverage in its former Soviet vassal.

Moscow has been dangling the prospect of a $5 billion stabilization loan to Ukraine but told Kyiv last month it would not negotiate further until the Brussels gas deal was clarified.

Moscow has been also working hard to persuade the European Union to rethink the pipeline overhaul deal with Kyiv.

"I think what was recently agreed upon in Brussels should once again be reexamined critically. We must find a solution that includes Russia," Germany's Economy Minister Karl-Theodor Zu Guttenberg told reporters on a visit to Moscow on April 7.