Russia cuts off gas supplies to Ukraine as talks collapse

Natural gas trade between Russia and Ukraine broke down on Wednesday after talks between the two sides aimed at keeping supplies flowing for the coming three months collapsed in acrimony.

Naftogaz, Ukraine's state energy company, said that in the absence of an acceptable gas trading agreement with Russia for July-September 2015, it had suspended gas imports from its main energy supplier.

Gazprom, the Russian state gas monopoly, said it had halted gas exports to Ukraine after Naftogaz missed a July 1st deadline to pay for this month's deliveries.

Alexei Miller, the chief executive of Gazprom, said Russia had turned off the gas tap to Ukraine at 10am local time on Wednesday morning. “Gazprom will not supply gas to Ukraine at any price without pre-payment,” he said.

Energy relations between Moscow and Kiev have grown increasingly hostile since Russia annexed Ukraine's Crimea last year. The EU has a vested interest in ensuring the smooth transport of Russian gas exports to Europe through Ukrainian gas transit pipelines and has been mediating in fraught gas pricing talks between the two countries.

Trilateral talks in Vienna ended in deadlock late on Tuesday after the Russian and Ukrainian energy ministers failed to reach an agreement on gas prices for the third quarter of the year.

Russia proposed to charge Ukraine $247 per 1,000 cubic metres of gas in July-September leaving prices at the same level as in the previous quarter. However, Ukraine rejected Russia’s offer, holding out for a price of $200 per 1,000 cubic metres.

Another sticking point in the talks was Russia’s refusal to negotiate a longer-term, six-month gas deal that would provide Ukraine with more predictability and cover supplies into the cold winter months.

“The parties are still far apart,” the EU said in a statement issued on Wednesday. Negotiations are expected to resume in September.

Although Gazprom plays hardball in talks with Naftogaz, its room for maneuver is constrained by Ukraine's control of transit pipelines that funnel about half of Russia's lucrative gas exports to the European Union.

When Russia cut off gas supplies to Ukraine during price disputes in early 2006 and 2009, several countries in eastern Europe were left without heat in the depth of winter.

Ukraine reassured European energy consumers on Wednesday that they would not be affected by its latest gas spat with Russia. “The delivery of Russian gas via Ukraine to Gazprom’s clients in the EU and Turkey will continue in full accordance with the existing transit contract,” Naftogaz said in a statement.

Analysts said Ukraine had enough gas in storage to make do without Russian supplies in the summer months, but would face problems if the stand off continued into winter.

Against the backdrop of tense relations Ukraine has been stepping up efforts to reduce dependence on Russian gas sourcing alternative supplies from Poland, Hungary and Slovakia.

Gazprom has pledged to build new export pipelines to Europe bypassing Ukraine that, if they materialise, would deprive Kiev of substantial gas transit revenues and its main bargaining chip in Russian energy talks.