Gazprom will cut off gas supplies to Ukraine in January if the former Soviet republic fails to settle a $2.4 billion (£1.6 billion) bill, the Russian utility said on Thursday.

The threat to Ukraine emerged as signs of economic distress multiplied in Moscow and in Kiev, where Ukrainians protested against the rampant inflation caused by the collapse of their currency.

In Moscow, the Russian Government hinted that public investment programmes would be affected by the worsening economic climate and a deputy minister admitted that the Russian economy was shrinking, with recovery not forecast before the second half of next year.

Gazprom is Russia's cash cow, providing most of its income. It is enjoying bumper revenues because of high European gas prices, but these are set to fall sharply next year because long-term contracts are pegged to oil prices.

Gazprom said that Ukraine had paid $800 million of arrears, but a spokesman said: “If the debt is not paid and no other decision is found, we will not be able to sign a new contract and will have no legal grounds to supply Ukraine with gas starting from January 1.”

Officials of the European Commission in Brussels expressed concern about the threat to shut down transit pipelines linking Siberian gasfields to Europe that cross Ukraine. “It's been happening every winter since 2005,” a Commission spokesman said.

Viktor Yuschenko, Ukraine's president, said that his country would pay a further $200 million of its arrears soon. He said that the gas debt had accumulated because of the replenishment of reserves by Naftogaz, the domestic utility.

Ukraine accuses the Russians of seeking to exploit the arrears issue as a means of gaining control of the country's gas network. Ukraine is a weak link in Gazprom's transport network as the main trunk lines to Central Europe cross the former Soviet republic.

Ukrainians protested in the streets on Thursday over price increases and delays in the payment of wages. Ukraine's currency, the hryvnia, has lost half of its value since September and has fallen by more than a fifth against the dollar over the past week. The country is burdened with huge debts in foreign currency and the value of Ukraine's exports, notably steel, have decreased because of falls in commodity prices and the weakening global economy.

Meanwhile, the Russian economic outlook has worsened with the expectation that the number out of work could rise by a million next year to 5.6 million.

Andrei Klepach, Deputy Economy Minister, admitted on Thursday that Russia could be entering recession, contradicting previous government statements. “Based on our pessimistic scenario, the fall of gross domestic product will last for three quarters,” he said. Mr Klepach said that his ministry's worst forecast was that Russia's economy will contract by 0.5 per cent in 2009 while the base case predicts that it will grow by 2.4 per cent.

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