Moscow, Kiev Reach Breakthrough in Gas Pricing Row

Officials from Russian energy giant Gazprom and its Ukraine counterpart Naftogaz said Wednesday they had agreed on a five-year deal under which Kiev will buy gas at the Russian border at a rate of $230 (191 euros) per 1,000 cubic meters (35,315 cubic feet) of gas.

The new price amounts to a huge rise from the $50 that Ukraine had been paying until now, a remnant of the subsidized Soviet-era pricing system. Gazprom has argued that the price hike is necessary to keep up with international market rates.

Speaking in Moscow, Alexei Miller, head of Gazprom, told a news conference the deal was effective from Jan 1.

"We have reached a final agreement, It is successful for Gazprom and we are satisfied," Miller told reporters after talks with Oleksiy Ivchenko, head of Naftogaz. "This agreement will ensure stable supplies to Europe."

Ivchenko said the deal would settle all sticking points.

"We have reached an initially acceptable agreement which gives us the possibility to meet the gas needs of Ukraine and the transit of Russian gas to Europe," Ivchenko said.

Deal to Ukraine's advantage?

After bitter wrangling over the gas prices for months, the final deal actually seems to have worked out in Ukraine's favor.

Ivchenko told the news conference that -- after mixing in supplies from Turkmenistan and Kazakhstan -- Kiev would actually pay $95 per 1,000 cubic meters at the Russian border.

The Russian-Ukrainian agreement also foresees an increase in fees for gas transit rights that Russia pays Ukraine for its pipelines bringing gas to European countries. About 80 percent of Russian gas pumped to European consumers takes that route.

Thus, Ukraine will receive $1.60 instead of the current $1.09 for 1,000 cubic meters per 100 kilometers for gas transportation to western and central Europe.

Wilfried Jilge, an expert on central and eastern Europe at the University of Leipzig told Deutsche Welle the deal showed that the European Union, which had invited both Gazprom and Naftogaz for talks on Wednesday, had played a positive role in the dispute.

"Russia apparently developed cold feet in the face of a looming "Europe-ization" and hit the emergency brake," said Jilge.

"The Russians could just about save face. Ukraine realized how to represent its interests through the clever intervention of the EU," Jilge said, adding that Kiev's stance was an indication that it wasn't just symbolic policy, but rather substantial progress and results that mattered to Kiev on its much-touted "way to Europe."

Europe's heavy reliance on Russian gas

The accord settles a rancorous dispute between Moscow and Kiev that saw deliveries to Ukraine cut off Sunday, a move which had the knock-on effect of reducing supplies to the key European market which relies on Russia for a quarter of its gas needs.

The dispute has also highlighted Europe's growing reliance on Russian gas. Gazprom is the world's largest gas company and controls a third of all global natural gas reserves, and the vast majority of deliveries to Europe -- where Germany is the biggest importer and France, Poland and Italy also heavily reliant on it -- pass through Ukraine.

The face-saving deal also comes hours before an EU emergency meeting in Brussels in response to the supply crisis and how to deal with potential future supply threats.

The European Commission, the bloc's executive arm, had called on both Ukraine and Russia to return to the negotiating table.

"We expect to also establish some form of community solidarity mechanism in the case if there is a gas disruption. I don't mean in this particular case, but in general," EU Energy Commissioner Andris Piebalgs told Reuters.

US concerned by dispute

The United States also expressed its concern over the dispute and said US officials were in contact with Moscow on the crisis.

State Department spokesman Sean McCormack said that the situation raised questions not only about European energy security but whether Russia was using supplies as a political sledgehammer with Ukraine's pro-Western president, Viktor Yushchenko, who was swept to power in the popular "Orange Revolution" of 2004.

"It's something that we have raised with the Russian government," McCormack told reporters at the State Department's daily briefing.

"It ... raises concerns about the use of energy to exert political pressure."