Russia and Ukraine negotiate solution to gas dispute

Eds: Leads throughout to UPDATE with Gazprom CEO saying new middlemen companies to be formed, ADD context, EU reaction, UPGRADES attribution. Moving on general news and financial services.

By JIM HEINTZ

Associated Press Writer

MOSCOW (AP) -- Russian and Ukrainian leaders on Tuesday agreed to settle a dispute over Ukraine's gas debt, avoiding a threatened cutoff in supplies that had rattled consumers in the European Union.

"We have agreed that Ukraine will start paying off the debt starting Thursday," Ukrainian President Viktor Yushchenko said at a news conference after four hours of talks at the Kremlin.

The agreement was announced a few minutes after 6 p.m., the time Russia's state-controlled natural gas monopoly Gazprom had set for cutting off Russian gas to Ukraine if the dispute was not settled.

Gazprom said Ukraine owes $1.5 billion for gas. Ukrainian Prime Minister Yulia Tymoshenko acknowledged Monday that Ukraine had a gas debt, but gave a figure of $1.07 billion.

Ukraine currently buys all its natural gas imports through RosUkrEnergo, a middleman company half-owned by Gazprom. Tymoshenko claimed that such intermediaries exist to siphon money into private hands and has pledged to cut them out of the Ukrainian gas trade.

Yushchenko said after the talks that the two countries agreed to set up a working group to discuss ways to streamline their gas trade. Oleh Dubina, the head of Ukraine's natural gas company Naftogaz, told reporters that will mean making arrangements for Gazprom to supply gas to Naftogaz directly.

But Gazprom CEO Alexei Miller said later in a televised statement that new intermediary companies would be set up for the Ukrainian gas trade, both of them to be half-owned by Gazprom and Naftogaz.

Tuesday's agreement brought an end to a dispute that had the potential to tarnish the images of both countries.

Russia is often criticized for allegedly using its natural resources to bully countries that have political differences with the Kremlin. Western Europe worries about Russia's reliability as an energy partner. In turn, the dispute underlined Ukraine's dependence on Russia even as Yushchenko tries to move the country closer to the West.

It was unclear how much a cutoff would have affected Ukraine, which gets most of its gas from Central Asia. Both Gazprom and Ukrainian officials had pledged that a cutoff would not affect Western countries that get gas through pipelines that cross Ukraine. But a cutoff to Ukraine in January 2006 in a price dispute led to disruptions downstream.

Ukraine gets its Central Asian gas through Gazprom-controlled pipelines crossing Russia. However, it was forced to buy additional Russian gas in recent months because an unusually cold winter in Central Asia reduced supplies.

Yushchenko said the two sides agreed that Ukraine would pay the current price of $179 per 1,000 cubic meters for Russian gas through the year's end -- the same price Ukraine pays for Central Asian gas. That appeared to be a victory for Ukraine, because Gazprom had sought to charge Ukraine $314.70 per 1,000 cubic meters for the gas it supplied this year.

Putin said Gazprom was satisfied with the Ukrainian proposals on settling the gas debt, adding that formal agreements will be signed within the next few days. "We hope that all agreements will be fulfilled," he said.

EU Energy Commissioner Andris Piebalgs welcomed the deal, expressing hope that it will "facilitate the smooth resolution of similar commercial differences in the future."