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Sparring Russia, Ukraine Inch Toward Gas Deal

Europe receives one-quarter of its gas from Russia, mainly through Ukraine.
MOSCOW (Reuters) -- Russia and Ukraine are locked in intense gas supply talks amid signs they are inching toward a deal ahead of a January 1 deadline when Moscow has said it will cut off its neighbor, possibly disrupting flows to the EU.

Hopes of an agreement rose after Russia's Interfax news agency quoted a Ukrainian government source as saying approval had been given to a Russian proposal to offset Kyiv's estimated $2 billion-plus debt against future income from the fees that Russia pays to transport gas through Ukraine to western Europe.

But Ukrainian state energy firm Naftogaz denied the report.

"We are saying that this option is not being considered," spokesman Valentin Zemlyansky said.

Executives from both Naftogaz and Russian state gas monopoly Gazprom were holding marathon talks in Moscow and said that, with the deadline set by Russia for Ukraine to pay less than 36 hours away, there was still no deal.

Gazprom, which said earlier on December 30 that it had refinanced part of its own foreign debt at the highest interest rates it had faced since July, had put the chance of a January 1 supply cut at 50 percent.

But Ukraine, mired in a mounting financial crisis that has not been resolved by an International Monetary Fund loan, seems unlikely to come up with the cash by then.

Fourth Dispute In Four Years

The two countries have been trading accusations daily in what is their fourth gas row in as many years, with Ukraine saying it owes less than the $2 billion Russia is claiming and that the price of gas that Russia wants to set for 2009 is too high.

Europe, which receives one-quarter of its gas from Russia -- mainly via pipelines running across Ukrainian territory -- has called on both sides to reach a compromise.

A supply cut in January 2006 after a similar row between Kyiv and Moscow briefly affected European consumers.

"The situation with Ukraine's debt has not yet been solved," Gazprom's spokesman Sergei Kupriyanov told a news conference. "Talks are continuing. Our chief [executive Aleksei Miller] is sitting with [the head of Ukraine's state energy firm Naftogas Oleg] Dubyna -- both in the direct and figurative meaning [of the word]," he said.

In Russian, "dubyna" means truncheon or blockhead.

"We hope that today will bring some results," said Kupriyanov.

Gazprom has already warned European customers it fears Ukraine could resume what it has in the past described as siphoning gas from transit pipelines. Kyiv says it will respect all its obligations and that it has enough reserves in underground storage to withstand a cut.

The dispute is being played out as the economies of both countries grapple with the effects of the global financial crisis.

Gazprom, which on December 30 reported its results for the second quarter, said it is being forced to refinance foreign debt with new, more expensive loans.

With total outstanding loans of $60 billion, Gazprom is Russia's most indebted company, and an inability to refinance as easily as in the past would put additional pressure on the gas behemoth to demand Ukraine pay up.

Russia and Ukraine have yet to agree on the 2009 price of gas. Kyiv pays $179.50 per 1,000 cubic meters compared with $500 in Europe, where gas and oil prices are set to decline.

Miller warned Ukraine on December 29 he could start charging market prices from 2009, which would result in a price jump to $418. Ukraine wants to switch to market prices gradually, but in exchange Gazprom wants concessions from Kyiv.