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Ukraine's Naftogaz said in a letter addressed to energy giant Gazprom
Ukraine's Naftogaz said in a letter addressed to energy giant Gazprom on Wednesday it could start confiscating Russian natural gas meant for European consumers after January 1 if no new contract is agreed for 2009.

Ukraine and Russia's Gazprom have been holding last-ditch talks in Moscow on Ukraine's gas debt and a 2009 gas price. The talks have apparently failed after President Viktor Yushchenko reportedly ordered Naftogaz delegation chief Oleh Dubyna to halt negotiations in Moscow and immediately return to Kiev.

"Today, Ukraine's Naftogaz sent an official letter to the management of Gazprom. The letter states that unless gas transit and supply terms are agreed in the near future, and should the relevant documents not be signed, Naftogaz has no legitimate grounds to accept into Ukraine's gas transportation system Russian natural gas and move it via Ukraine's customs border," a source in Kiev said on Wednesday.

A first deputy CEO of Gazprom said on Wednesday the letter from Naftogaz puts into question whether Kiev would honor its transit contract on supplies of Russian gas to Europe.

"The Ukrainian side today placed a question mark over the current contract on Russian gas transits to Western Europe, threatening us 'in black and white' with confiscating gas," Alexander Medvedev told a RIA Novosti press conference, adding that Gazprom had "made Ukraine an extremely good [price] proposal."

Gazprom, who reiterated its demand that Kiev repay a $2 billion outstanding debt before a new contract could be signed, confirmed it had received Ukraine's warning over gas transits to the European Union. Gazprom has said that if the outstanding sum was not paid it would start reducing supplies as of January 1, 2009.

Although Medvedev said Ukraine had transferred $1.5 billion of its debt to intermediary trader RosUkrEnergo, Gazprom had not yet received the money.

Gazprom described Kiev's threat to confiscate Russian gas bound for European customers via Ukraine, tantamount to blackmail of Russia and European consumers.

Spokesman Sergei Kupriyanov said: "This is a grave violation of the existing agreement on Russian gas transits to Western Europe, or simply put, blackmail by Ukraine of Russia, as well as Western European countries."

Kupriyanov said the existing contract for natural gas supplies to Ukraine will expire at 10:00 a.m. (07:00 GMT) on January 1, 2009. "It expires today [December 31]. But in accordance with the agreement, the calculation is based on the designated 24-hour time frame from 10 a.m. to 10 a.m.," he said.

Russian President Dmitry Medvedev and Prime Minster Vladimir Putin on Wednesday evening discussed the situation regarding the gas talks as reports emerged that Kiev had rejected Gazprom's latest offer for a gas price in 2009 of $250 per cu m.

Last year Ukraine paid $179.50. Putin said that talks would continue.

Vladimir Putin noted during the discussion that "the consequences could be dire for Ukraine if it annuls its gas transit contract with Gazprom." He also informed Dmitry Medvedev that "the present contract is valid until December 31, 2010, and cannot be changed."

Putin said that as Russia buys gas from Turkmenistan, Uzbekistan and Kazakhstan at some $340 per 1,000 cu m for transit through Ukraine, which receives transit fees, then Kiev should pay around $380 for its gas. The low price of $250 had been made by Gazprom as a "humanitarian gesture," he said.

The Russian president said that the Ukrainian government was being taken "hostage by clannish interests" in Ukraine.

"The Ukrainian ruling authorities are hostage to clannish interests and, unfortunately, their abilities are not high," the Russian president said. "Interests... of European consumers are being sacrificed for short-term political expediency, which undoubtedly does not benefit the country's image of a state seeking full-fledged relations with European states and the European Union."

Ukrainian Prime Minister Yulia Tymoshenko was prepared to fly to Moscow for gas talks; however, her trip was cancelled as it would have undermined the Ukrainian president's position.

"Tymoshenko was ready to fly to Moscow...to protect Ukrainian interests and to solve the gas issue in talks with Russian participants," the source said. "The prime minister's trip to Moscow undermined the Ukrainian president's position," the source said.

The 2006 gas row between the two former Soviet states resulted in a brief cutoff in supplies to Ukraine. When shortages were reported in some Eastern European countries, Russia accused Ukraine of siphoning off Europe-bound gas. Ukraine transits about 80% of Russia's gas to European consumers.

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