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Russia and Ukraine strike gas deal

RUSSIA and Ukraine announced a deal yesterday to end the bitter dispute that has blocked Russian natural gas from Europe for nearly two weeks and deeply shaken Europeans' trust in the two countries as reliable energy suppliers.

The early morning agreement between Russian Prime Minister Vladimir Putin and his Ukrainian counterpart Yulia Tymoshenko came after intense negotiations.

Still, relief for millions of frustrated consumers and businesses could be days away. The deal on 2009 gas prices is not likely to be finalized until later today, when Tymoshenko returns to Moscow. If Russia turns on the taps immediately after the signing, it could take another day for the gas to travel hundreds of kilometers through Ukrainian pipelines to eastern Europe.

The European Commission welcomed the announcement cautiously.

"We have seen many false dawns in this dispute, and the test in this case is whether the gas flows to Europe's consumers," the commission said.

Russia stopped selling gas to Ukraine for domestic use on January 1 in a dispute over prices. On January 7, Moscow halted all shipments to Europe via Ukraine, alleging Ukraine was siphoning off Europe-bound gas. Ukraine disputed this, claiming Russia was not sending enough "technical gas" to push the rest further west.

Europe gets about 20 percent of its total gas needs from Russia via Ukraine's sprawling pipeline network, but countries such as Bulgaria and Slovakia are totally dependent on Russian gas. The Czech gas company RWE began sending emergency gas shipments yesterday to neighboring Slovakia, where over 1,000 businesses have been crippled by gas rationing.

The conflict has been further complicated by geopolitical struggles over Ukraine's future and over lucrative export routes for the energy riches of the former Soviet Union.

Under new terms, Ukraine will pay 20 percent less than the European "market price" for gas this year, which Russia says is US$450 per 1,000 cubic meters. That's more than twice as much as the US$179.50 Ukraine paid in 2008.

However, natural gas prices for Europe are expected to fall sharply later this year, due to the fall in oil prices. By midsummer, Ukraine could be paying as little as US$150 for 1,000 cubic meters, said Ronald Smith, a strategist at Moscow's Alfa Bank.

Russia has won a key principle, however, that Ukraine must pay more for its energy supplies. In the long term, it is not clear how Ukraine will pay for the huge amount of Russian gas needed to run its outdated factories and heating systems.


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