Russia, Ukraine trade insults in gas dispute

MOSCOW - Russia's gas deliveries to European customers returned to normal overnight (NZ time), as it traded insults with former ally Ukraine over who was to blame for supply disruptions across the continent.

Russian energy officials were set to meet counterparts from Ukraine earlier today to discuss the dispute, but there was no sign of a softening of tone on either side in a dispute with clear political overtones.

Russia switched off Ukraine's gas when Kiev rejected a big hike in prices. It was forced to turn the taps back on after key European partners complained their supplies had been hit too and chided Moscow for using energy as a political tool.

Relations between the ex-Soviet allies, already strained after Ukraine elected a West-leaning leader a year ago, have now hit a new low with the gas dispute.

Russia has accused Ukraine of stealing gas intended for other European countries. Ukraine says Russia is lying.

The crisis has lent new urgency to efforts by European states to reevaluate their energy policy to ensure supplies are secure. EU energy officials meet for emergency talks on Wednesday.

Italy, Germany and France said their gas supplies from Russia were back to normal after Russia's state-run Gazprom pushed extra gas into the system to make up for the earlier shortfall.

However, Gazprom warned there was still a risk of supply disruptions to Europe if Ukraine continues to steal gas.

"There is still a danger that the situation could develop in such a way that we are not going to be in a position to compensate," Gazprom deputy CEO Alexander Medvedev tolds Reuters in an interview.

Ukraine has said it will help itself to Russian gas piped across its territory if temperatures dip below freezing.

MEETING PLANNED

Senior officials from Gazprom and Ukraine's state Naftogaz company were to meet later on Tuesday for the first time since negotiations collapsed in the final hours of 2005.

But the gulf between them was huge. In Moscow and Kiev, everyone from gas executives, television anchors, prime ministers and foreign ministry spokesmen lined up to blame the other side for the crisis.

Russia said it was Ukraine's fault by refusing to pay the same prices as its European neighbors, rejecting a last-minute compromise offered by Putin and then stealing Europe's gas when Gazprom, in exasperation, finally turned the taps off.

Ukraine was just as vehement. "The fact is that Gazprom officials are lying," said Naftogaz Ukrainy spokesman Eduard Zanyuk.

Ukraine said the Kremlin was punishing it for daring to pull away from its sphere of influence.

The Kremlin has made no secret of its dislike of the West-leaning stand of Ukraine's President Viktor Yushchenko who rose to power a year ago after mass protests forced a rerun of an election initially won by a Moscow-backed candidate.

Moscow is demanding an increase in the price Ukraine pays for its gas to $230 per 1,000 cubic meters from the current $50 price that is rooted in Soviet-era subsidies.

Ukraine says such a big hike will badly damage its economy.

Ukraine's gross domestic product may fall by 5 per cent and inflation rise to 27-30 per cent in 2006 if the price for Russian gas increases to $230, a senior government official was quoted as saying on Tuesday by Unian news agency.

ENERGY RETHINK

The wobble in gas supplies sent a chill through capitals and energy markets, with some analysts saying the disruption had hurt Russia's credibility as a dependable supplier of energy.

Prices for oil -- Russia's other major money earner -- jumped a dollar to just over $60 a barrel as consumers feared the row could yet crimp fuel supplies to Europe. In Britain -- Europe's only major, freely traded gas market -- wholesale prices rose as much as 8 per cent on Tuesday.

Tony Blair's spokesman said the British Prime Minister has long believed the EU needed a more coherent energy policy to meet the challenges of energy supply and security.

"These events have underlined the Prime Minister's thinking in making that argument," said the spokesman.

Noe Van Hulst, a director with energy watchdog the International Energy Agency, said Russia was playing a risky game.

"From the Russians' perspective, it's not in their long term interest to put their reputation (as a reliable energy supplier) ... at risk. It's dangerous," Van Hulst told Reuters.

It was unclear how the row would play out politically for Ukraine's Yushchenko.

His supporters say by cutting off gas Moscow had tried to put his administration in a bad light ahead of a March parliamentary election, when his biggest challengers will be the pro-Moscow parties.

But some analysts said the crisis would cost the pro-Moscow opposition support if voters view Russia's actions as aggressive and unfriendly.

(Additional reporting by Dmitry Zhdannikov in Moscow, Olena Horodetska in Kiev and European bureaux)

- REUTERS