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Risk of "gas war" grows as Ukraine halts payments to Russia

Source: Reuters - Sat, 12 Apr 2014 11:34 GMT
Author: Reuters
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* Crisis mounts after Russia's seizure of Crimea region

* Kiev to stop paying for gas pending new supply deal

* Ukraine says Russian gas price hike unacceptable

* Armed men seize police station in eastern Ukraine

* Billionaire energy mogul scoffs at Western sanctions

By Pavel Polityuk and Conor Humphries

KIEV, April 12 (Reuters) - Ukraine said on Saturday it was suspending payments to Russia for deliveries of gas, ratcheting up the tension in a standoff that has the potential to leave European Union states cut off from the Russian gas supplies on which they depend.

In eastern Ukraine, where groups of pro-Russian activists have been emboldened by the Kremlin's annexation of the Crimean Peninsula, a band of armed men in mismatched camouflage outfits seized a police station in the town of Slaviansk.

Russia and Ukraine have been locked in confrontation since protests in Kiev forced the Moscow-backed president from office, and the Kremlin sent troops into Crimea. Now, the gas dispute threatens to spread the impact across Europe.

A large proportion of the natural gas which EU states buy from Russia is pumped via Ukrainian territory, so if Russia makes good on a threat to cut off Ukraine for non-payment of its bills, customers further west will have supplies disrupted.

Andriy Kobolev, chief executive of Ukraine's state-run energy company Naftogaz, said the increased price Russia was demanding for its gas was unjustified and unacceptable.

"Accordingly, we have suspended payments for the period of the price negotiations," Kobolev was quoted as saying in an interview with Ukraine's Zerkalo Nedely newspaper.

In fact, Ukraine has de facto stopped payments already because it failed to make an instalment of over $500 million due earlier this month to Russian state gas giant Gazprom.

But the decision to formally suspend payments shows there is no sign of a compromise with Moscow, and may push the two sides closer to a repeat of past "gas wars", when Ukraine's gas was cut off, with a knock-on effect on supplies to EU states.

Kiev and Brussels have been scrambling to blunt the impact of any decision by Moscow to cut off gas to Ukraine.

In particular, they are working out ways to keep supplies flowing to EU states, and for those countries to then pump the gas to Ukraine by reversing the flow in their pipelines.

Moscow says it does not want to turn off Ukraine's gas if it can be avoided, and that it will honour all commitments to supply its EU customers. Gazprom could not immediately be reached for comment on Saturday.

ARMED MEN

The dispute over Ukraine, precipitated by the overthrow of Ukrainian president Viktor Yanukovich after he rejected closer ties to the EU, has brought Russia's relations with the West to their most fraught state since the end of the Cold War in 1991.

In Slaviansk, masked men armed with pistols and rifles stood guard near the police station as hundreds of locals gathered around, some building barricades with car tyres, according to a Reuters photographer on the scene.

They were wearing orange and black ribbons, a symbol of the Soviet victory in World War II that has been adopted by pro-Russian separatists in Ukraine.

Slaviansk is in the Donetsk region about 150 km (90 miles) from the Russia-Ukraine border. Pro-Russian groups have also occupied public buildings in the cities of Donetsk and Luhansk, and are demanding autonomy from Kiev.

Officials in Kiev's Western-leaning interim government say Russian forces may be preparing to cross the frontier into Ukraine on the pretext of protecting the pro-Russian activists from persecution, though Moscow denies this.

Ukrainian Interior Minister Arsen Avakov said police would deal very firmly with the group in Slaviansk. "There is a difference between protesters and terrorists," he wrote on his Facebook page.

Earlier on Saturday in the nearby city of Donetsk, a group of young people armed with wooden bats briefly took over a floor of the general prosecutor's office. They later left after talks, Donetsk police said in a statement.

Ukrainian Foreign Minister Andrii Deshchytsia said Kiev was ready to listen to the demands of protesters in eastern Ukraine, but if negotiations fail, the police were ready to act.

"We do consider that these actions are inspired and prepared in Russia and encouraged by some of the Russia agents in Ukraine," he told BBC radio.

SCOFFING AT SANCTIONS

The EU and the United States imposed sanctions on Russian officials and leading business figures in response to Moscow's annexation of Crimea, which is home to Russia's Black Sea fleet and was part of Russia until 1954.

Moscow has so far scoffed at the Western measures and warned that, in the long run, the EU and Washington will come off worse by losing out on trade with Russia.

Gennady Timchenko, a billionaire oil and gas trader who is on the U.S. list of people subject to asset freezes and visa bans, joined the chorus of Russian defiance.

"The fact that I was included in the list was a little surprising maybe, but it was quite an honour for me," he said in an interview with the state-run Rossiya television station to be broadcast later on Saturday.

He said growing volumes of Russian natural gas would be sold to Asia, as part of a strategy of turning away from a Europe which the Kremlin considers unfriendly.

"It seems to me they (the Europeans) just don't understand. The politicians are behaving ... in a very short-sighted way." (Additional reporting by Alexei Anishchuk and Alessandra Prentice in Moscow, William Schomberg in London, Lina Kushch in Donetsk, Ukraine and Gleb Garanich in Slaviansk, Ukraine; Writing by Christian Lowe; Editing by Mark Heinrich)

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