A SHOWDOWN between Russia and Ukraine that threatens supplies of fuel to Western Europe escalated yesterday when Gazprom, the utility giant, demanded that the former Soviet republic pay sharply higher prices for its gas.

The Russian company, which has given warning that European supplies could be threatened if Ukraine fails to agree a higher price by January 1, said that it was losing patience with the pace of talks as it called for a fourfold increase in what the country pays.

Gazprom is demanding tough commercial terms from former Soviet satellites that no longer pay tribute to the Kremlin. Ukraine is key because it is the main conduit for Gazprom’s gas exports to the European Union.

Gazprom’s head of exports, Alexander Medvedev, demanded that Ukraine pay a price equal to Gazprom’s European customers, some $220-$230 per thousand cubic metres (MCM).

Ukraine, which is heavily dependent on the Russian company for gas, pays a heavily subsidised rate of only $50 per MCM. Previously, Gazprom had asked for a price of $160 per MCM but Mr Medvedev said that Gazprom was losing patience.

“The talks with Ukraine have dragged on for more than nine months . . . Ukraine has wasted time in these talks, and now there can be no talk of $160,” he said.

Gazprom supplies a quarter of Europe’s gas, of which 80 per cent is shipped via Ukraine and the heightened tension provoked an anxious response in Brussels. “We hope they will reach an agreement,” an EU energy spokesman said.

Gas is the main source of fuel for heating homes and generating power in Ukraine but its dependence on Gazprom has become a hot political issue since the Orange Revolution that brought the pro-Western President Yuschenko to power last year.

Gazprom continues to sell gas at cheap rates to Russian consumers but argues that it can no longer be expected to do the same in a foreign country. Moreover, cheap gas provides a subsidy to Ukrainian industry.

Pointing to the EU’s decision to grant Ukraine “market economy” status, Mr Medvedev said: “We have no reason whatsoever to subsidise the Ukrainian economy and damage our own production.”

Both sides accuse the other of playing politics and resorting to blackmail tactics. In Kiev, suspicion points to a Kremlin hand behind the row. With parliamentary elections looming in Ukraine, a soaring gas price might encourage voters to side with pro-Russian candidates.

Christopher Granville, an analyst at United Financial Group, the Moscow brokerage, said Gazprom was presenting a stark choice to the Ukrainians: “If they want to be a European market economy, they must pay a European market price. It’s like what President Gorbachev once said: ‘Do you want sovereignty or sausage?’” Gazprom accuses the Ukrainian side of holding it to ransom, using the threat of blocking Gazprom’s exports to Europe as a lever to secure an agreement for cheap gas.

The Russian utility pays for transit through Ukraine’s pipelines in kind, supplying the country with some 25 billion cubic metres per year in lieu of cash payment. However, Gazprom wants to move to a cash basis, paying a market tariff for transit in return for a market price for gas.

SCHRÖDER POST

Protests erupted in the European Parliament over the appointment of Gerhard Schröder to the board of a Russian-German pipeline company controlled by Gazprom. Herr Schröder is to join the supervisory board of North European Gas Pipeline only weeks after stepping down as Chancellor of Germany and three months after celebrating with President Vladimir Putin the launch of the pipeline project. Some MEPs suggested a conflict of interest.

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