Russia and Ukraine reach gas deal

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Russia and Ukraine announced a deal today to end the bitter dispute that has blocked Russian natural gas from Europe for nearly two weeks.

The early morning agreement between Russian Prime Minister Vladimir Putin and his Ukrainian counterpart Yulia Tymoshenko came after intense negotiations.

But relief for millions of frustrated consumers and businesses could be days away. The deal on 2009 gas prices is not likely to be finalised until at least tomorrow when Tymoshenko returns to Moscow. If Russia turns on the taps immediately after the signing, it could take another day for the gas to travel hundreds of miles through Ukrainian pipelines to eastern Europe.

The European Commission welcomed the announcement cautiously.

"We have seen many false dawns in this dispute, and the test in this case is whether the gas flows to Europe's consumers," the commission said.

Russia stopped selling gas to Ukraine for domestic use on January 1 in a dispute over prices. On January 7, Moscow then halted all shipments to Europe via Ukraine, alleging that Ukraine was siphoning off Europe-bound gas. Ukraine disputed this, claiming that Russia was not sending enough "technical gas" to push the rest further west.

Europe gets about 20% of its total gas needs from Russia via Ukraine's sprawling pipeline network, but countries such as Bulgaria and Slovakia are totally dependent on Russian gas.

The Czech gas company RWE began sending emergency gas shipments today to neighbouring Slovakia, where over 1,000 businesses have been crippled by gas rationing.

The conflict has been further complicated by geopolitical struggles over Ukraine's future and over lucrative export routes for the energy riches of the former Soviet Union.

Under the terms announced today, Ukraine will pay 20% less than the European "market price" price for gas this year, which Russia says is 450 US dollars per 1,000 cubic meters. That's more than twice as much as the 179.50 US dollars Ukraine paid in 2008.

However, natural gas prices for Europe are expected to fall sharply later this year, due to the fall in oil prices. By midsummer, Ukraine could be paying as little as 150 US dollars for 1,000 cubic meters, said Ronald Smith, a strategist at Moscow's Alfa Bank.

Russia has won a key principle, however, that Ukraine must pay more for its energy supplies. In the long term, it is not clear how Ukraine will pay for the huge amount of Russian gas needed to run its outdated factories and heating systems.

Moscow and Kiev, which spent the last two weeks blaming each other for the energy debacle, managed to wound both their images.

"The best part for Russia is they get the gas to the customers. This has been pretty damaging to Russia's reputation as a reliable energy partner," Smith said today.

"(Ukraine) probably lost as well, because the European Union was looking at them as a possible member and may now be wondering if it's worth the effort."

Russia also emerged without having to pay a higher gas transit price in 2009.

Putin said today that Russia offered Ukraine the "20%" on the condition that the gas transit price does not change for 2009.

Beginning next January 1, however, Ukraine will pay full price for gas and Russia will pay market prices for transit, he said.

Putin and Tymoshenko made no mention of the more than 600 million US dollars that Russia's state-run gas monopoly Gazprom claims Ukraine still owes for 2008.

Sergei Kuriyanov, a Gazprom spokesman, told state television that documents on the agreement were being prepared. There was no immediate comment from Ukraine's state-run gas company Naftogaz.