Russia cuts off gas supply to Ukraine, threatening flows to the European Union

Russia cut off gas to Ukraine on Monday in a dispute over unpaid bills that could disrupt supplies to the rest of Europe and set back hopes for peace in the former Soviet republic.

After weekend violence that included the loss of 49 troops in the downing of a Ukrainian plane, Russia said Kyiv missed a deadline for a $1.95 billion debt payment and it would now only get gas paid for in advance. It insisted that Ukraine must also ensure that it lets Russian gas flow through its international pipelines to Moscow's clients in the European Union.

Kyiv and Moscow blamed each other for the failure to agree overnight on the price of future gas deliveries and refused to abandon well established positions: Russia offering a discount and Ukraine rejecting that as a tool for political manipulation.

The talks are bound up with the worst crisis between Russia and Ukraine since the Soviet Union collapsed and rising tensions over Saturday's shooting down of the aircraft by pro-Russian separatists in the east, an attack on the Russian embassy in Kyiv and Western charges that Russia is arming the rebels.

More from GlobalPost: 5 political crises that are threatening to wreck the global economy and life as we know it

"Thanks to the unconstructive position of the Ukrainian government, today a prepayment system was introduced," Alexei Miller, the chief executive of Russian state exporter Gazprom, told Prime Minister Dmitry Medvedev during a somber meeting at a government residence at Gorki, outside Moscow.

He said Ukraine had "adopted a position that can only be called blackmail", adding: "They wanted an ultra-low price."

Gazprom had asked Kyiv to pay almost half of a total debt which Moscow puts at more than $4 billion by Monday morning or face supply cuts and the prospect of paying up front. Ukrainian Prime Minister Arseny Yatsenyuk accused Russia of deliberately blocking a deal to cause Kyiv supply problems next winter, when temperatures plunge and heating needs increase.

"But it is not about gas. It is a general Russian plan to destroy Ukraine," Yatsenyuk told a news conference in Kyiv. "It is yet another step against the Ukrainian state and against Ukrainian independence."

Supplies in storage

A source at Gazprom said supplies to Ukraine had been reduced as soon as the deadline passed and Ukrainian Energy Minister Yuri Prodan said the country was receiving no gas.

Ukraine has almost 14 billion cubic meters of gas in underground storage, enough to meet its needs until December, the chief executive of state gas company Naftogaz said.

A long-term reduction of supply could hit EU consumers, which get about a third of their gas needs from Russia, around half of it through pipelines that cross Ukraine. Earlier price disputes led to the 'gas wars' in 2006 and 2009, and Russian accusations Ukraine stole gas destined for the rest of Europe.

"The gas for European consumers is being delivered at full volume and Naftogaz Ukraine is required to transit it," Gazprom spokesman Sergei Kupriyanov told reporters.

EU Energy Commissioner Guenther Oettinger, who brokered the failed talks overnight, said in Vienna that the European Union might have a problem and urged Russia to reconsider a compromise.

He said he was confident of gas supplies and also held out the prospect of further talks to solve the row.

But with both sides filing lawsuits at the Stockholm international commercial arbitration court to try to recover billions each says they are owed, any quick agreement seems a way off.

Russian premier Medvedev said talks could start only when Naftogaz had paid its debt in full.

Shares fall

Russian shares fell on the talks' collapse, which is likely to increase tensions between Moscow and the West and could make it harder to arrange a truce in east Ukraine, where Ukrainian troops are fighting pro-Russian rebels, some of whom want the region to be absorbed by Russia, as Crimea was in March.

At 05.50 a.m. EDT, the dollar-denominated RTS index had pared some of its losses and was down 1.2 percent at 1,358 points, while the rouble-based MICEX was down 0.5 percent at 1,493 points.

Western countries saw the talks as a gauge of Russian President Vladimir Putin's willingness to compromise and had been looking for signs that he was trying to avert the threat of the West adding to sanctions imposed after Russia seized Crimea.

That move came after Moscow-leaning Ukrainian president Viktor Yanukovych was ousted by street protests in February and pro-Western leaders took over power in Kyiv. Russia denounced that as a Western-backed fascist coup.

Tensions rose further at the weekend. Protesters ripped up Russia's flag outside Moscow's Kyiv embassy after the loss of the military plane in the east. NATO released satellite pictures that it said raised suspicions about Russia's role in moving military equipment into eastern Ukraine.

The gas talks broke down in Kyiv in the early hours of Monday, with the sides unable to reach agreement on price and on changes to a 2009 contract that locked Ukraine into paying the highest price in Europe.

Kyiv wants to pay $268.50 per 1,000 cubic meters of gas — the price it had been offered when Yanukovych was in power. But, in a compromise last week, it said it would agree to pay $326 for an interim period until a lasting deal was reached.

Moscow had sought to keep the price at the 2009 contract level of $485 per 1,000 cubic meters, but had offered to waive an export duty, bringing down prices by about a fifth to $385, broadly in line with what Russia charges other European states.

Kyiv says that waiving the duty rather than agreeing a new contract price means Moscow could use the threat of cancelling the waiver to keep Ukraine under its thumb.

Oettinger said Moscow had declined a compromise proposal under which Kyiv would pay $1 billion immediately and then make monthly debt payments to Gazprom. Ukraine would also pay $385 per 1,000 cubic meters in winter and around $300 in the summer months.

(Additional reporting by Maria Kiselova and Denis Pinchuk in Moscow and Michael Shields in Vienna; Writing by Elizabeth Piper; Editing by Alastair Macdonald)